Economy: Growth

Viscount Hanworth Excerpts

Tuesday 29th January 2013 Lords Chamber

[Viscount Hanworth]

My Lords, I, too, welcome the noble Lord, Lord Deighton. I must also express my condolences to him for the frustrations that he will inevitably face. There is a level of exasperation that is liable to render one speechless and that is how some of us on these Benches have been reacting to the Government’s economic policies. Others have been able repeatedly to highlight the failures and fallacies of these policies, with a seemingly undiminished fervour. The Shadow Chancellor, Ed Balls, is one such person. He has observed what should be clear to all of us, if we are not blinded by ideological preconceptions or by political allegiances.

The policies of the Government have been holding the economy in recession and causing untold misery to great numbers of working people, to people who are seeking to work and to people who, for one reason or another, are incapacitated. Perhaps the first thing that needs to be explained is the insensitivity of the members of the Government to the effects that their policies are having on a multitude of ordinary citizens who fall into the middle and the lower reaches of the spectrum of income and wealth. That such insensitivity is not an inevitable concomitant of Conservative politics is surely indicated by the nation’s experiences under the post-war Conservative Governments which, by and large, shared a consensus on social and economic policies with the Labour Governments. It was well understood by the post-war Conservatives that a necessary condition for the growth in the country’s prosperity was an assurance in the minds of the majority of its citizens that they would profit from their labours within a society that was destined to become increasingly egalitarian. The egalitarian instincts of one Conservative Prime Minister, Harold Macmillan, are deservedly well remembered. As Churchill’s Minister responsible for housing from 1951 to 1954, he was charged with the task of fulfilling the promise to build 300,000 houses per year, and he achieved the target a year ahead of schedule.

The present Government are also mindful of the manner in which a house-building boom can serve to alleviate a recession; and they may have been mindful of the effects of the house-building boom of the 1930s, to which local authorities contributed largely by providing social housing. However, in a manner that seems to be utterly perverse, the Government seek to relieve building contractors of their obligations under Section 106 of the Town and Country Planning Act 1990 to provide a modicum of social housing. Their thought is that the obligations to provide social housing are imposing a constraint on the profits of the building contractors. Here is a prime example of an economic argument, conceived in the abstract, that has no basis in fact and that bears no examination.

There is now a growing recognition, which is reflected in much recent literature, that better national economic performance is correlated with greater social equality. There is plenty of evidence for this among our European neighbours. In Britain, in recent years, the degree of inequality has been increasing rapidly and exorbitant rates of pay have become common in our financial sector. The justification that has been offered for such remunerations is that they provide incentives to effort and that they are necessary for attracting talented people to serve in the financial sector. The Government appear to have accepted such spurious assertions. The Government have gone further in reviving the doctrine of the trickle-down effect. This asserts that the economy is best stimulated when the greed and the enterprise of the rich are activated by abundant rewards. To this end, there has been a reduction in the top rate of income tax.

This Government have been influenced to a remarkable degree by tendentious economic doctrines that they have failed to re-examine in the light of our present circumstances. One such doctrine concerns the supposed crowding out of private economic enterprise by government initiatives that pre-empt the supplies of labour and capital. A misplaced faith in the alacrity of private enterprise has led to the mantra that social provision should be open to any willing provider. The willing providers have not been forthcoming, except where there have been easy pickings, such as in the provision of manpower services and in security. In the case of the private provision of health services, the Government are contemplating tilting the playing field so as to favour private providers.

The fallacy of willing providers has been evident in connection with the major infrastructure projects that this country so urgently needs to undertake, if it is to retain its competitiveness in the global economy. There is a further fallacy of economic thinking that is operative in this area. This is a belief that social and national economic decision making can be, and ought to be, conducted within the same framework as commercial decision making and according to the same decision rules. Within such a decision-making framework, one of the essential elements is the commercial rate of interest, which is allied to the concept of the rate of discount. The basic nostrum is that future earnings and economic benefits should be measured and compared via their discounted present values. A pound promised tomorrow is judged to be of lesser value than a pound given today, by virtue of the fact that today’s pound could be invested profitably to generate a return that is determined by the market rate of interest. Notwithstanding that the current interest rates are markedly lower, commercial project evaluation continues to be based on a target rate of return of some 6% per annum. This implies a rate of discount that diminishes the value of next year's pound by 94%. Some simple arithmetic will reveal the fact that, in these terms, a pound promised with certainty 15 years hence will have a present value of only 40 pence. At this rate, it is no wonder that commercial enterprises are concerned with the here-and-now at the expense of making provisions for the future.

It is precisely in making provisions for the future that the obligation of Governments must lie. It is in this respect that the present Government are in serious dereliction of their duty, which is to initiate and finance the major infrastructure projects upon which our future prosperity depends. Many of these projects must be seen within perspectives of time that extend well beyond 15 years. To finance such projects, which are the only sure way of stimulating the economy and of overcoming the recession, without causing a balance of payments crisis, the Government must borrow from the banks and on the open market, or they must guarantee the borrowing of public bodies. They must also raise taxes from those who can afford to pay them, including from large corporations that have proved adept at avoiding taxation. Unfortunately, it seems that the Government are incapable of contemplating such actions.