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The noble Lord, Lord Layard, and the Childrens Society report, A Good Childhood, have argued that relative poverty could be equally as damaging to the rich as to the poor. Child well-being is highest in countries such as Denmark, where the disparity is least, and, I am sad to say, it is lowest, at least in western Europe, in Britain, where the disparity is greatest.
Bradford is second to London as the fastest-growing metropolitan district in the country. It is expecting something like a 15 per cent increase in population in the next 20 years. Most of that increase will be among young adults who can and will contribute to the economic and social well-being of our country provided that we continue our efforts to eradicate poverty and continue investing in our young peoples education. We must start now to create jobs that are sustainable for the future.
Lord Eatwell: My Lords, I am delighted to be the first to congratulate the right reverend Prelate the Bishop of Bradford on his excellent maiden speech. As a scientific priesthe has a PhD in chemistryhe will bring a wide range of expertise and experience to your Lordships House, an expertise no doubt enhanced by his enthusiasms for bird-watching and cooking. We look forward to many future contributions to our deliberations.
It is clear that there are sharp differences between the approach of the Government and the Opposition to economic policy. They are differences not just in priorities but real differences in economic analysis and hence in policy conclusions. The Budget Statement made it clear that the Government believe that it is their responsibility to compensate for the fall in private spending by increasing public spending. Savings that would otherwise run to waste as private investment crumbles are borrowed and put to work by the Government. That policy is opposed in its very fundamentals by Mr David Cameron. In a speech delivered 10 days ago, he spelt out the roots of his opposition. He opposed the Governments cut in VAT. He was against any fiscal stimulus. He declared that he wanted spending cuts in 2008 and that he wants more spending cuts in 2010. Should the Conservative Party win the next election, he promised the British people an age of austerity.
He believes that the Governments borrowing, far from offsetting the recession, worsens it. That is the central proposition from which all else follows. It is the defining belief on which Conservative economic policy is based. It therefore merits close examination.
Why might government debt weigh down on our children? First, taxes must be raised to pay the interest on the debt. Taxes raised are then paid on to the holders of the debtthe pension funds, insurance companies and money market funds that have lent to the Government. Our children pay the taxes and their pension funds get the money back. That is not a burden but a redistribution from some of our children to some others of our children.
Secondly, at some time in the future the debt must be repaid. Retiring the debt will necessarily involve the Government running a fiscal surplus. That would make sense once the economy has recovered, when the funds that are returned to the initial lenderspension funds, and so onwill be lent on to support the investment plans of British business and commerce. But once again taxes are raised from our children to pay back to our childrento their pension funds and insurance companies. Once again it is a transfer payment. There is no millstonethere just is not. Funding nationally held debt is a transfer payment from one group of British citizens to another group of British citizens.
Mr Camerons belief in a beneficent age of austerity is not based on any coherent piece of economic theory or economic experience. It is based on an irrational fear of a non-existent threat. It is the same irrational fear that led Herbert Hoover to cut borrowing in the face of the great depression. It is the same irrational fear that condemned Japan to its lost decade and today paralyses the German Government even as German output falls twice as fast as output in the UK.
George Bush Sr had a name for it: voodoo economics. Like all irrational fears, voodoo economics promotes false threats and blinds us to the real problems that we face. Hence, not once in his speech does Mr Cameron mention the only way in which his millstone argument makes sense: when the Government borrow from abroad so that our children's taxes must fund payments overseas. That is a real burden. As a nation, our net borrowing overseas is equal to our balance of payments on current account. In other words, we are forced to borrow overseas, building up burdens for our children because we do not earn enough to pay our way in the world.
What matters is our competitiveness in the global economy. Where the banking system is seriously compromised, where world demand is stagnant and confidence is at a low ebb, the vital issue is how we grasp the opportunity provided by the fall in the exchange rate to build strong trading positions in manufacturing and non-financial services.
Three things are necessary. First, green shoots, when they come, need fertilising by credit. A major priority remains restoring the banking system to health. The Governments cash injections and guarantees have staved off collapse, but as matters stand, it is very doubtful whether the banking system can generate the growing flows of credit necessary to fuel sustained economic recovery. It is likely, therefore, that further recapitalisation will be needed.
Secondly, the competitive industries of the future will be energy efficient. The extraordinary fact about the oil price today is not that it is so low, but that it is
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Thirdly, while rebalancing our economy and curbing the financial excesses that precipitated the recession, we must not forget that this country is a world leader in financial services. It is in the best interests of the whole nation that Britain's competitive position in financial services is sustainedindeed, enhanced.
Rebalancing the economy, rebuilding financial services and securing a flow of credit to industry, and placing energy efficiency at the core of economic policy: that is what the Government are doing to build a secure and sustainable recovery. In these uncharted waters, there are still plenty of unforeseeable events that could blow the British economy off course. Most important of all, we must avoid self-inflicted damage. The greatest danger is, in Roosevelt's words, fear itselfthe irrational fear of mythical millstones.
Lord MacGregor of Pulham Market: My Lords, I, too, congratulate my noble friend Lord Forsyth on his splendid and penetrating speech introducing this debate. I also warmly welcome the right reverend Prelate and thank him for his heart-warming speech. I must say that I profoundly disagree with the noble Lord, Lord Eatwell, but I will come to that later. I agree with him about financial services, but on his major analysis I profoundly disagree.
My charge is not that the Government are solely responsible for the current financial crisis. Of course there are overseas causes such as the US sub-prime securitisations, although we have our fair share of faulty mortgages here, and of course there have been massive blunders in the banks and other financial institutions. The charge is, however, that, as the IMF and others have pointed out, as a result of the Government's handling of the economy since 2000 the UK is the least well prepared of the major developed economies to deal with the crisis. My noble friend Lord Forsyth gave a number of instances of that which I was going to cite, but he has saved me the need to do so. I just say that one of the problems has been that we simply have not been paying our way in the world during those years. The current Chancellor was handed a poisonous legacy from his predecessor, the Prime Minister.
I want to make three points in the time available. The first is about the huge public debt. On the Governments figures, the Budget deficit will hit more than 12 per cent this year and overall public debt as a percentage of GDP 79 per centboth the highest since World War II. Government debt will double over five years and on current trends we will return to 2007 levelsthe former Chancellors much repeated targetin 2032. That is if you believe the Chancellor's figures. They are based on the Government's growth forecasts, and no one from the IMF to the EU to the IFS believes them. No wonder: the predictions for this year in both last years Budget and the PBR were wildly optimistic and wildly wrong.
My nightmare scenario, which I profoundly hope will not happen but is where the Government may be leading us, is what happens if the Debt Management Office fails to raise the huge sums in gilts that will be required. Here I follow the noble Lord, Lord Butler. At September 2008, overseas investors owned more than 36 per cent of all outstanding gilts, compared with less than 20 per cent 10 years earlier. The recent fall in sterling has hit them hard. Already, a lot of foreign bank lending has been pulled back from these shores. There are Chinese warnings about their willingness to finance the deficits. If there is a prospect of gilt auctions failing or continued concern about sterling, yields will have to increase and interest rates rise. There is also the likely increase in inflation in due course as a result of quantitative easing, which will add further to that.
My one question for the Minister is: on what rates of interest was the Budget forecast of £43 billion for interest rate costs this yearwhich is already as large as the school building programmebased, and what would be the effect on that forecast of every extra 0.5 per cent or 1 per cent increase in the cost of meeting those interest rate bills? We ought to know, because that is crucial as we look ahead.
Secondly, the NIESR recently estimated that to restore the public finances, three alternatives were required, or a combination of them: raise the state pension age to 70; raise the basic rate of income tax by 15p in the pound or 8p in the pound if the retirement age was raised; and cut public spending by one-10th. The Treasury Select Committee, with a Labour majority, yesterday made the same point: that only substantial tax rises or unprecedented cuts in public spendingor a combination of the twowill be enough to get Britain's debt back down to acceptable levels. The figures do not include the costs of off-balance-sheet financing, especially huge increases in the PFIs, and public sector pension liabilities, which have been calculated at anything between £650 billion and £900 billion. For a start, the Government should immediately raise the age for all public sector pensions to 65.
My charge is that the Chancellor simply has not been facing up to those challenges. Micawber-like, everything is put off until after tomorrowthat is, after the general election. If we are to continue to encourage growth in the economy, by far the greater part of the response has to come in cutting public expenditure. Let me make a few points about that. Even in this Budget, there was a litany of new spending commitments, rather like the former Chancellor announcing in every Budget in his grindingly monotonous way, Today I can announce a further £400 million for this, and so on. That is carrying on even now. There should be no more spending commitments this year. The Treasury and the Chief Secretary have simply lost their grip. As my noble friend said, there has been huge wasted expenditure with few beneficial results in recent years.
Many of the cuts written into future figures are to come from efficiency savings. Former Treasury Ministers know that it is easy to get agreement to efficiency savings from departments but extraordinarily difficult to get them to deliver them. Many of them are based
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Finally on public expenditure, my noble friend Lord Lawson, who will speak shortly, refers to the fact that he could make substantial cuts in taxes because we had moved into a budget surplus in 1988. I was proud to play some part in that as a Chief Secretary in the earlier years. If you are to get excessive public expenditure down, sometimes you have to say, as in a family, when you are faced with a huge or even a small spending request, however desirable, I am sorry, but however good the arguments or however much you wish it, I just do not have the money. Former spending Ministers have said to me subsequently that they had no answer to that. You also have to have the support of the Prime Ministerand my goodness we had it then.
Finally, we have often debated the plight of pensioners and how much this Government have eroded our pension system and our pension position. The £150,000 measures, although for higher earners, will have a further effect. Pensioners were told that the new A-Day arrangements, which the Government introduced with such bravado, would be the regime. Within a very short time, that regime has been eroded a lot, which will further cut confidence in private sector pensions.
I wish that I had time to say more about pensioners, but I will say just this; while we are talking about future generations of children and the debt that they will have to pay back, the pensioners are suffering the greatest plight at present, not least with the very low returns on their hard won savings. This Government have been no friend of the pensioners, and the pensioners will not forget it.
Lord Lawson of Blaby: My Lords, it is a very great pleasure to follow my noble friend Lord MacGregor, who was a really excellent and successful Chief Secretary to the Treasury during part of my time as Chancellor of the Exchequer. He really knows what he is talking about when it comes to public expenditure, unlike the noble Lord, Lord Eatwell, in his somewhat ivory-tower, academic contribution.
I am particularly glad, too, that my noble friend Lady Thatcher can be here again. As my noble friend Lord Forsyth said in his excellent speech, which opened this debate, this really is, Here we go again. We face the twilight days of a Labour Government who have got the economy into a most almighty mess, including a massive fiscal deficit. The public finances are in a serious structural mess, leaving aside the amplification through this cycle. It will fall to a Conservative Government once again to clear up that mess.
If we were to listen to the Government, we would believe that the problem was a new kind of flu virusfinancial flu, which came across the Atlantic from the United Statesand that, until then, we were perfectly healthy and fit and there were no problems at all. That is poppycock. If the noble Lord, Lord Myners, refrains from the approach that it was the Americans who started it all, that will be some relief and something at least will be gained from this debate. The fact is that we had a massive and unsustainable housing bubble in
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I was very glad to hear what the noble Lord, Lord Butler, had to say about financial supervision during the Thatcher Governments. I put in place the strengthened system of banking supervision under the Banking Act 1987, which created the Board of Banking Supervision chaired by the Governor of the Bank of England. The boards members had great expertise and really knew what they were doing, but Gordon Brown abolished all that. The Bank of England was taken out of the process, and the Board of Banking Supervision was abolished. It is practically the only board that this Government have abolished, which was not very clever. The responsibility was handed to the Financial Services Authority, which has proved to be completely dysfunctional. That has to change. That cannot be blamed on the Americans.
The Government are forced to rely on what might be termed the Fred Goodwin defence: I conducted my bank with gross irresponsibility, but everyone else was doing the same so it does not matter. That did not wash in the case of Fred Goodwin and it does not wash in the case of Gordon Brown. The important question now is how we get out of the mess. Fundamentally, that means getting to grips with the public finances.
My final points are about how we will prevent this sort of thing happening again; the contribution of the noble Lord, Lord Oakeshott, was very much about that. This is not a question of how we can create an additional fiscal boost to end the recession. The recession will end. Cycles come to an end; after all, the Chancellor of the Exchequer in his Budget told us quite clearly that the recession will come to an end and that there will be recovery. The figures, and the reality, might not be quite the same as the ones that he put forward, but he is basically right. The problem is the structural budget deficit. There will have to be a real commitment to getting public expenditure down. This can be done, and has been done.
I speak from some experience, although I must admit that I was greatly assisted by my noble friend Lord MacGregor and other Chief Secretaries to the Treasury whom I had, and of course by the complete backing of the then Prime Minister, my noble friend Lady Thatcher, which was vital. During my six and a bit years as Chancellor, public expenditure, without any credit from privatisation receipts, rose in real terms by only 0.6 per cent a year and, as a result, fell as a proportion of GDP by 8 per cent. That had never been done before and so far has not been done since, but it will have to be done once again.
As I said, there is nothing that we can do about the cycle; it is endemic. Indeed, in a sense there is some benefit from the cycle because of the innovation that comes during the upswing of the cycle and the cost-cutting and efficiency that are driven in during the downswing
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What can we do? We cannot eliminate the cycle, as absurdity under the present Prime Minister, but we can try to ensure that there will not be another banking collapse. We cannot absolutely ensure that, but we must do our best to make it highly unlikely. That means improving supervision by taking it away from the FSA, which can focus on different things such as conduct of business regulation and consumer protection. There needs to be proper prudential supervision, either by the Bank of England or by another body that is closely associated with it. Either will work, but it should not be the FSA.
We must also separate utility banking from casino banking, commercial banks from investment banks. Investment banks are innovative and wonderful, but they are too risky to be bundled with utility banking. We need a form of the Glass-Steagall Act, and I am very glad that the Governor of the Bank of England has said publicly that that needs to be looked into. I know that the Government will have no time for it, but they are wrong on this issue as they are on a number of other issues, I regret to say.
In conclusion, what we must not do is raise the top rate of tax from 40 per cent to 50 per cent. Not only is this highly damaging, again as the noble Lord, Lord Butler, said, but it makes no contribution at allnot even the smallest oneto narrowing the budget deficit or to reducing the problem with the public finances. When I brought down the top rate of tax from 60 per cent to 40 per cent 21 years ago, not only did it bring in more revenue, which can be seen from the figures, but it had a curious result which even I did not expect. The top 1 per cent of households had been paying 14 per cent of the total income tax yield, but 10 years later the top 1 per cent of taxpayers were paying 21 per cent of the total yield. There was a redistribution in taxation.
I am sorry that I do not have the time to continue on that subject, but I think it is quite clear that it is a problem, unlike many problems in government, to which we have difficulty knowing the answer. We know exactly what the answer is to the problem that we are debating and what wants to be done. We need the guts, the resolution and the determination to do it. It was done under the Government led by my noble friend Lady Thatcher, and it will have to be done by a Conservative Government again.
The Lord Bishop of Portsmouth: My Lords, it is a pleasure to take part in this debate, which sometimes feels a little like a seminar in political economics. I congratulate the noble Lord on initiating it and it is a pleasure to welcome my friend and colleague, the right reverend Prelate the Bishop of Bradford. Perhaps I may say that his maiden speech was in the best traditions of these Benches because he brought his diocese with him.
It was out of the experience of the depression and the Second World War that Archbishop William Temple wrote his famous book, Christianity and Social Order.
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Behind the title of this debate about the economic prospects for the United Kingdom are wider questions about the sort of nation we want to see, from where we get our direction, values and ideas, and whether we have had sufficient public debate about it all. As others have noted, we are experiencing a wider and deeper recession than most people ever will have experienced in their lives, although it must also be said that the United Kingdom should fare a great deal better than several other developed countries, such as Japan, Ireland or Germany whose GDPs are expected to contract by a great deal more than ours this year.
There is always a temptation at a point such as this, a risk, that any price will be regarded as worth paying in order to climb into growth, whatever the later cost. But we need to challenge that. We have seen the effects of this in the past, when it was based on debt and was not sustainable. Economic growth at any cost is, we have belatedly realised, a risk too far. We need to have a much better idea about what sort of society we should be living in, not only economically, but socially.
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