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Lord Northbrook: My Lords, we are all grateful to the noble Lord, Lord Eatwell, for initiating this interesting debate. I very much enjoyed his speech, and found
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I shall focus mainly on the Government’s plans to counter the economic impacts of the financial crisis, as I have more knowledge in this area; I shall leave others to discuss the very important social effects. I wish to look overall at the measures taken by the Government in reaction to the financial crisis.
It is too early to judge how successful the bank bailouts have been. They were definitely necessary, as the banking system was on the verge of collapse last October. It is clear that at the moment the taxpayer is sitting on a substantial loss from the Government’s purchase of RBS shares, which I calculate at being some £10 billion. I wish the Government well on their stimulus packages, but I am uncertain how successful they will be and whether several banks may have to be taken into national ownership.
There have been a plethora of announcements on bank and business bailouts, but an article in today’s Financial Times is interesting, with the headings:
“Uncertainty over £310bn in support”,
“Brussels yet to receive submission”.
“The UK has yet to apply to Brussels for the ... approval required for more than £310bn of promised state support for banks and business—in spite of ministers stressing the urgency of the initiatives ... Businesses warned on Wednesday that the delays and uncertainty surrounding the Treasury and Department for Business support packages were exacerbating the effects of the recession.
Jobs could be lost unnecessarily because of the lack of clarity surrounding the government’s proposals, the leading employers’ organisation suggested.
Government packages unveiled last month that support the car industry, lend to business and bail out the banks for the second time cannot be fully implemented without state aid approval for at least some of the elements.
But the government has yet to submit the notification to the European Commission needed to start the formal approval process for any of the schemes announced recently that need state aid clearance.
Other elements of the government’s recessionary packages are also being hit by delays. The Treasury pledged on January 19 that a £50bn scheme for the Bank of England to buy corporate paper and other assets ‘will come into effect from February 2’. But officials told the FT yesterday that a Bank notice on asset purchase this week will be of a ‘consultative nature’ and the scheme will not start immediately”.
I ask the Minister why the Government are being so slow in implementing their support schemes, which are so vital to the recovery of the economy, and whether all other sectors of the economy, like the motor industry, will be bailed out by the Government.
On the subjects of uncertainty and the banks, I should highlight two areas where government policy appears to be uncertain and contradictory. The Chancellor on Tuesday, in front of the House of Lords Economic Affairs Committee, is reported by the Financial Times to have suggested that a bad-bank approach might be necessary. Yet, as recently as 19 January, he said that the Government favoured an insurance approach. The
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- “we concluded that an asset protection programme, which is sometimes described by the media incorrectly as insurance, was better than a whole purchase of assets—the good bank, bad bank model”.—[Official Report, 27/1/09; col. 240.]
The same confusion has been apparent with the Government’s running of Northern Rock. Last year it was aggressively running down its mortgage book, but now the Government have done a U-turn and encouraged it to lend again. Does the Minister agree that there is no consistency to the Government’s policy on the banks, which is adding to the general financial crisis?
The early Northern Rock management style also ran totally contrary to the £200 million mortgage rescue scheme unveiled in the Pre-Budget Report. The Government also appear to be considering quantitative easing. While I accept that this may have to be done, and I emphasise that I am no economist, it seems very risky and shows how bad things have become.
Next, there have been the Government’s fiscal actions. They are planning to stimulate the economy by £20 billion in the short term but raise revenue by around £40 billion in the medium term.
The lowering of the VAT rate will cost £12 billion in lost revenue and is unlikely to work due to the cautious nature of consumers at present. Leading accountancy firms, Grant Thornton and Ernst & Young, have criticised it. Leading retailers, including the chief executives of Next and Marks & Spencer, have done the same.
Turning to the Pre-Budget Report, the £3 billion advancement of capital spending seems to be a sensible measure, which I can support.
I shall now look at the tax-raising measures that the Government are going to adopt to raise their £40 billion. The big question in my mind is: are they doing this too soon? They are making bold assumptions about the timing of the economic recovery but, if these tax rises are badly timed, they could choke off that recovery. They are planning to collect £20 billion by, yet again, increasing their favourite stealth tax: national insurance. The decision has been made to increase the employee, employer and self-employed contribution by 0.5 per cent from April 2011, but surely it is not sensible to tax business further when times will still be difficult. Our party has put forward more sensible measures to give firms hiring workers who have been unemployed for three months relief from their NI contributions. We have also proposed a 1 per cent cut in national insurance for six months for firms with fewer than five employees.
The Government are planning a top rate of income tax of 45 per cent, thus breaking a promise since 1997 not to increase the top rate. They have temporarily deferred, until April 2010, a rise in the corporation tax rate for smaller companies but they still wish to penalise small businesses at the very time that they need help. What signal does this give to that vital sector of our economy, the smaller business?
Our party is offering positive measures: it would help those trying to get on to the property ladder with a stamp duty holiday for first-time buyers on house purchases of up to £250,000; it would help old-age pensioners, as suggested by the noble Lord, Lord
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The Government’s plans to counter the economic impact of the current financial situation are in many ways praiseworthy but I am concerned that they are being implemented in a not very timely fashion and, in many ways, they seem to be contradictory.
12.33 pm
Baroness Kennedy of The Shaws: My Lords, I, too, congratulate my dear and noble friend Lord Eatwell on initiating this debate and I also congratulate him on his speech. I start, as he did, with a quote:
“From time to time in human history there occur events of a truly seismic significance, events that mark a turning point between one epoch and the next, when one orthodoxy is overthrown and another takes its place ... There is a sense that we are now living through just such a time: barely a decade into the new millennium, barely 20 years since the end of the Cold War and barely 30 years since the triumph of neo-liberalism—that particular brand of free-market fundamentalism, extreme capitalism and excessive greed which became the economic orthodoxy of our time ... The global crisis ... has called into question the prevailing neo-liberal economic orthodoxy of the past 30 years—the orthodoxy that has underpinned the national and global regulatory frameworks that have so spectacularly failed to prevent the economic mayhem which has now been visited upon us”.
Those words, said in the past week, came from a Labour Prime Minister—not ours, I regret, but Kevin Rudd, the Australian Prime Minister.
The free-market economic consensus of the past 30 years is crumbling around us. We indeed live in changed times that demand radically different solutions. Already, we can see the consequences of economic recession: people losing their jobs; families facing the loss of their homes; household brands going to the wall; more people in poverty; and, this week, the advent of industrial unrest and increased insecurity. On the economy and the future of our wider society in the months ahead, there will be stark and difficult choices for all of us, including those in government.
However, in all the choices that we make, there can be no going back. We are not in 1979, 1989 or even 1999; this is 2009 and we must never make the same mistakes again. We can no longer afford simply to leave it to the market. Last week in Davos, David Cameron said that we needed a return to a 1980s style “crusade of popular capitalism”. However, it was the pursuit of that popular capitalism of the past that led us to the poor regulation that got us into this almighty mess in the first place. Let us not forget that it was that so-called truly popular crusade of capitalism in the 1980s that sold off our council houses without replacing them, that allowed building societies such as Northern Rock to demutualise to their eventual peril on world markets, and that privatised energy utilities, which now exploit their consumers and employees alike. The country is not bankrupt but the mantra of free markets—the neo-liberal economic consensus of the past 30 years, which I am afraid seduced my Government too—is bankrupt.
I am not against the market but what is government for if it is not to inject the moral component into the market? Just as we witnessed with the Government’s
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This week, following on from the banking crisis, the impact of the recession took an equally ugly turn, with industrial unrest growing across the country. But let us be clear: these strikes are not about xenophobia; they are about global corporations and unfettered free markets gone crazy, and it is that which fundamentally needs to be addressed.
These new times demand a radically different approach in government economic policy. We cannot simply go back to some so-called golden economic age of increasing consumption, spiralling consumer debt, and cheap and increasingly deregulated labour. What our country needs now more than ever as a response to the economic recession is not a crusade of popular capitalism but a new crusade of popular social democracy. We need a bold new economic consensus which promotes well-being, social justice and environmental sustainability, and which takes our country in a new direction towards the good society. I believe that a good economy can deliver a good society. However, that should not mean nationalising our banks on the one hand and privatising Royal Mail and the Post Office on the other; nor should it mean setting ambitious carbon reduction targets and then building a third runway at Heathrow.
There are alternatives to the failed neo-liberal economic policies of the past 30 years. There are better ways. When the wealthiest 1 per cent own 21 per cent of the nation’s wealth, and when the bottom 50 per cent own just 7 per cent, the good economy should ensure tax justice, greater redistribution of wealth and income equality. It should ensure that those at the top pay their fair share. It should also tackle the irresponsibility culture of the super rich, and that could include a new tax on bonuses, with revenues used to fund tax cuts for those on lower and middle incomes. With millions facing the prospect of unemployment, the good economy should be about embarking on a green New Deal to create hundreds of thousands of new jobs in a green industrial revolution and investing in energy for the future. The good economy should be about making sure that businesses pay their fair share of taxes, and we should close loopholes that enable corporations to avoid paying.
With the biggest banking crisis in our history, the good economy should be about setting up a people’s bank, using the existing Post Office network. Now is the time to guarantee every local community access to safe, secure and dependable banking services. We should not be afraid of imposing a maximum APR for loan and credit card companies and ending rip-off credit. Why should companies such as Provident Personal Credit be legally allowed to exploit the poorest in our society and charge 189 per cent APR for a loan of just £50 when the Bank of England base rate is just 1.5 per cent? It is loan sharking and a disgrace.
We should be ending the gender pay gap in a specified timeframe. The good economy should be about insisting on not just a minimum wage, but a living wage for the entire country, just as we have here in London. We should also insist that all companies awarded government public procurement contracts
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With that in mind, we should scrap plans for Trident. Spending £70 billion on a nuclear weapons system designed for the 1980s is not a good use of taxpayers’ money. We should immediately scrap plans for ID cards, which could cost £18 billion over the next decade. When 6 million of us are faced with fuel poverty this year, the good economy should be about imposing a windfall tax on the greedy energy and oil companies to ensure social and environmental justice and to raise £6 billion to enable the Government to honour their commitment to end fuel poverty by 2010. On student funding, it is absolutely right for Labour to rule out lifting the cap on fees. We should instead be looking at introducing a graduate tax that is fair to everyone. In the good economy of the future, we should allow councils to build the millions of new social houses that are desperately required.
The Government need to seize this moment and make the choice fundamentally and radically to renew our country. The opportunity now exists to usher in a new social democratic economic consensus with the values of equality, social justice, security, and sustainability at its heart. If we choose, we can create a good economy and a good society. We can work together to enable greater freedom for all our people by giving real power to the many, not to the few. I hope that we can rise to the challenge.
12.42 pm
Lord Bates: My Lords, I thank the noble Lord, Lord Eatwell, for initiating this debate and for his opening remarks, which I will return to if I can. I want to focus on an area in which I have an interest: the great north-east of England. I declare an interest as I am involved with and a director of a few businesses in that area. They are listed in the Register.
As I was listening to the noble Baroness, Lady Kennedy, I happened to glance at the speech given by David Cameron in Davos. I tried to find the reference to popular capitalism, but could not. The only thing I could find was a headline, “Capitalism with a conscience”. David Cameron said:
“So I think it’s time to update the free market orthodoxy that has dominated the past few decades. It’s time to assert a fundamental truth: that markets are a means to an end, not an end in themselves. Markets are there to serve our society, not to suck the joy out of it or trample over its values. So we must shape capitalism to suit the needs of society; not shape society to suit the needs of capitalism”.
I would have thought that the other side of the House would have applauded those sentiments rather than caricatured them.
There was much that I agreed with in the opening remarks by the noble Lord, Lord Eatwell, but he caricatured the Conservative Benches’ approach as a do-nothing attitude, a desire to let things take their course. Nothing could be further from the truth. It would appear that, had that been the case, the Labour
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There are a couple of points to be made about the system. I agree that it is fundamentally important and that we need to have some understanding of where risk lies. The response to the Asian financial crisis was obvious: the establishment of the Financial Stability Forum. That set up a range of international financial standards and codes that were to be adhered to by central banks. They covered areas such as central banking principles and monetary and fiscal transparency. Had they been implemented and monitored when they were proposed 10 years ago, perhaps some of the Enron economics that have been occurring on our watch might not have happened. The notion that we could get to a situation where financial derivatives are estimated at $863 trillion—about 16 times the value of the world economy—is clearly ridiculous. We need to get back to some sanity. We need to understand where risk is in the market. That has been the uncertainty, so every measure that can be taken to help the market understand and know exactly where risk is held is going to steady the nerves and stabilise the situation. There are some grounds for optimism in the financial markets, the equity markets and the exchange rate markets. There is a growing feeling among investors that they are beginning to get to the bottom of the level of indebtedness and to where the risk is held.
I turn to the north-east of England and take probably a counterintuitive view of these things. I have spoken in this House on a few occasions about the tragedy faced by people who are losing their homes. I am particularly concerned about Northern Rock repossessing homes at a rate four times the national average and, despite being in state hands, deciding to award £9 million in bonuses. That is unfair and should have been avoided. I have spoken about the loss of jobs at Nissan and about initiatives that could be put forward to stimulate demand in the car market.
However, an essential ingredient is missing from this debate. As we talk about economics, accountancy and finance, we must not lose sight of the fact that most organisations and people respond on sentiment, on how they feel about their prospects and the market. There is no doubt that we have moved from a period of irrational exuberance to one of irrational pessimism. As we are pummelled by the media every day with more bad news, we fear that things are worse than they are. Do not get me wrong; I am not saying that things are not bad or that there is not more to come, but although unemployment rates in the north-east of England have risen by 40 per cent over the past year—and I do not want to minimise the tragedy for the people involved—it still means that 90 per cent of people, one million people, are in work. People in work are probably finding that their mortgage payments are lower than they were and their fuel costs have come down. Their disposable income is probably better than a year ago, yet their spending patterns are remarkably different. That is something we need to temper.
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We do not want to return to the credit card, debt-ridden culture of the past, but we need to encourage people to return to normal spending behaviour in the markets. That requires something that does not cost billions: leadership. It is called inspiring people and giving them hope. It is something that people desperately need. We have seen the impact of Barack Obama’s election in the United States. It lifted my spirits, and I am in the United Kingdom. It has done immense good globally and in the United States. It shows what leadership can do, what vision can do. Barack Obama was delivering a message captured in the title of his book The Audacity of Hope. He was saying, “Listen. Things are bad; of course things are bad; but we have been through worse”. We have been through the great depression of 1919 to 1931, when the economy contracted by 25 per cent. We have been through tough times, including two world wars, but we have come through and we will come through this.
The question is: what shape of society will we come through with and how can we rebuild our society in a positive way? That sense of optimism and hope is missing in the current public discourse. It may have something to do with the fact that this is the first economic crisis to occur in a media age: 24-hour news demands, consumes and forces things and blows them out of proportion. We need a sense of proportion, a sense of optimism and a sense of hope.
An initiative has been taken by a regional newspaper in the north-east of England, the Journal. Again, it does not cost billions of pounds. It is just called “Think North East First”. No, it is not a call to protectionism; it is simply saying: think about what you can do locally. When you talk to people about trillion-dollar debts and complex derivatives, they feel powerless. You can give people some sense that they can do things to help the local economy by supporting local businesses, buying their food locally, taking their holidays locally, paying their debts to local suppliers on time and encouraging the public sector, which accounts for two-thirds of the economy of the north-east, to ensure that it biases its procurement policy towards the north-east of England. All of those are good, healthy things. Not only do they help local businesses and the local economy, they help the spirit of hope and optimism that we can do something, that sense of community, the sense that we are in this together and can come out of this together stronger.
We need that sense of hope and optimism, which David Cameron has referred to, that sense of a vision for how the economy can be restructured, but also a sense of reality to come through to our consumers through initiatives such as “Think North East First”, practical self-help promotion, optimism-led initiatives. They would do companies and individuals a huge amount of good in the present straitened times.
12.53 pm
Lord Puttnam: My Lords, I, too, thank my noble friend Lord Eatwell for introducing this timely and incredibly important debate. To be honest, when I first heard of it I expected that there would be at least double the number of speakers. However, what we have lacked in quantity I suggest that we
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If I may, I shall start with what I hope will be a bit of helpful context. On 20 July 1957, the then Prime Minister, Harold Macmillan, made a speech during which he claimed that we in this country had,
At the time, the average wage in Britain was £14 a week and the cost of the average house was £2,300—yes, £2,300. Therefore, the average price of a house represented a little more than three times annual income. Last year, the average wage stood at £466.50 per week and the average house cost approximately £225,000, requiring a buyer to stretch to 9.3 times their average annual income to purchase it, well beyond what anyone would have considered prudent 50 years earlier.
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