The Senior Minister of State, Department for Communities and Local Government & Foreign and Commonwealth Office (Baroness Warsi): My Lords, we will continue to encourage others to recognise Kosovo, using opportunities in bilateral and multilateral fora, and we will provide support to the lobbying efforts of the Kosovo Ministry of Foreign Affairs. The Government are also part-funding a project to deepen Kosovo's links with EU member states that do not recognise it, and to improve Kosovo's image abroad through public diplomacy.
The Earl of Sandwich: My Lords, that is a very encouraging Answer. The only problem is that this Government do not take enlargement seriously enough. I looked all through the Prime Minister's speech and I could hardly find any mention of it. He mentions the Second World War and the fact that we brought peace and stability through enlargement. However, is there not much more than that? Should we not take a much closer interest in the dialogue between Serbia and Kosovo, which are to become independent European states?
Baroness Warsi: The noble Earl raises an important issue, and I can assure him that we are steadfastly supportive of EU enlargement. We think that it is crucial, as he said, to bringing security and prosperity to the western Balkans and to wider Europe. The Prime Minister's speech, which talked about a more diverse, competitive and flexible Europe, relies on an ever-enlarging Europe.
Lord Anderson of Swansea: My Lords, I hope that the Minister will agree that those countries, particularly the EU countries, which have so far failed to recognise Kosovo, have done so for good-or at least for domestic -reasons, be it Catalonia, the Basque country, or Northern Cyprus. It is most unlikely that there will be any fundamental change by those countries unless and until Serbia and Kosovo itself reach an agreement. Therefore, the talks led by the noble Baroness, Lady Ashton, and brokered by the EU, stand the very best chance of resolving this problem of recognition.
Baroness Warsi: I congratulate the noble Baroness, Lady Ashton, on her work in securing discussions between Serbia and Kosovo. She has personally led great efforts to secure these further discussions, supported of course by us and many others. Whatever individual countries' reasons are for not recognising Kosovo, the UK's position is very clear. We support Kosovo's progress as an independent state which we recognise, and recognise that the independence of that state is irreversible.
Lord Dykes: My Lords, does my noble friend agree that this imbroglio has gone on far too long already? Are the British Government capable of persuading Serbia that the recognition of Kosovo would be a spur to its own EU membership and would be the best result for both countries? Will she personally, and other Ministers in government, support the respectable lobbyists in this country and elsewhere, who are now pressing hard for Kosovo's recognition and independence?
Baroness Warsi: The noble Lord is, of course, aware of the discussions with Serbia about its aspirations for EU membership. It is not being discussed as a precondition at the moment but, of course, Serbia recognises that stability in the region has to be the way forward in ensuring that every country can make its own individual journey towards further involvement in the EU.
Lord Foulkes of Cumnock: My Lords, when the noble Baroness and other Ministers go around Europe steadfastly supporting European enlargement and encouraging other countries to join, as she put it, at the same time as Ministers are talking about the possibility of the UK's withdrawal from Europe, does it not cause some confusion?
Baroness Warsi: My Lords, it certainly does not cause confusion on this side of the House. However, if I can assist noble Lords opposite in the confusion that they may have, of course we believe that a reformed EU-a much more flexible and competitive EU-is better. That message is completely consistent with having an enlarged EU. The noble Lord's confusion may well be in relation to some of the briefings that he has been getting from his Front Bench.
The Lord Bishop of Wakefield: My Lords, what assurances can the Minister give the House that the opening of accession negotiations between the EU and Serbia will not be considered by the European Council until such time as Serbia has achieved a necessary degree of compliance with the membership criteria, in particular the key priority of taking steps towards a visible and sustainable improvement of relations with Kosovo in line with the conditions of the stabilisation and association process?
Baroness Warsi: I can inform the right reverend Prelate that the UK is not asking Serbia to recognise Kosovo at this stage but we are making it clear that the future of Serbia and Kosovo lie in the European Union, as independent states, and that Serbia must accommodate itself to this reality before it joins the
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Baroness Royall of Blaisdon: My Lords, in response to the exchange between the noble Baroness and my noble friend about the European Union, I can assure noble Lords that we, too, seek a reformed European Union but wish to do so in co-operation with colleagues rather than by threatening them. We, too, believe that peace and stability in the Balkans is a matter of the enlargement of the European Union but, on the current enlargement, I wonder when the Government will publish their figures in relation to those people who may come to this country from Bulgaria and Romania at the end of the transition period.
Baroness Warsi: The Government are making appropriate preparations in relation to people from Bulgaria and Romania who may wish to come to the United Kingdom. As the noble Baroness will be aware, the transition provisions for Bulgaria and Romania come off for the rest of the European Union at the same time, so the option for Bulgarians and Romanians to travel elsewhere in the European Union will also be open. I hope that the mistakes that were made-this is not a political point-in relation to Poland's accession will not be made this time, because of the way in which we implemented the transition provisions.
Lord Browne of Belmont: My Lords, can the Minister confirm that the Government welcome the resolution passed by the Serbian Parliament on 13 January 2013, which calls for talks with the interim institutions of self-government in Pristina with the aim of securing security, peace, stability and better living conditions for the Serb community and for all other national communities in Kosovo and Metohija?
Baroness Warsi: I am not familiar with the specific resolution to which the noble Lord refers but I can assure him that in our discussions with Kosovo we regularly talk about the issue of minorities there, and we ensure that all such discussions cover the views of the minority communities, including those of the Serbs.
The Parliamentary Under-Secretary of State, Department for Communities and Local Government (Baroness Hanham): My Lords, the new homes bonus is not a regional grant. It is allocated to individual local authorities based on increases in their housing stock. Councils that build more new homes receive more funding. My department no longer produces regional statistics, not least because policies such as the new homes bonus do not operate on a regional basis.
Lord Greaves: My Lords, I thank the Minister for that practical Answer. It is the same one that she gave me on a Written Question on the same issue. I was appalled to find that the Government no longer keep regional statistics and therefore do not know the regional impact of their policies. If the Government do not know, then I will provide the information.
Is the Minister aware that in relation to the new homes bonus, which is a grant given to local authorities, the three northern regions of England, the north-east, the north-west, and Yorkshire and Humberside, get on average per head of population £8.78 new homes bonus in the current year, and that the four southern regions, the east, London, the south-east and the south-west-
Lord Greaves: This is a question. The four southern regions get £15.07 per person in their regions, which is getting on for twice as much. Is it fair that this particular system is resulting in a movement of funding from the north to the south of England?
Baroness Hanham: My Lords, I am a little bit surprised by the noble Lord's statement, and particularly his suggestion that there is a per person sum involved in this. The new homes bonus is paid against the background of new homes. It is based on the number of homes that are provided in any particular area and on the average of the council tax base across the country. Where there is a number of band A properties, a certain amount of money will be produced, across the country, and bands G and H will produce the same. If I could just correct the noble Lord, in the top 30 recipients of the new homes bonus, there are seven in the north. Bradford, Durham, Leeds, Manchester, Salford, Sheffield and Wakefield are working hard and doing well.
Baroness Hanham: I cannot say specifically for a new home, but if new homes were being provided for Travellers, the new homes bonus would be paid. To the specific question about numbers, I will have to write to the noble Baroness.
Baroness Hanham: My Lords, I think that they are all more than aware. The new homes bonus has been an extremely important contribution to ensure that councils willingly accept new housing in their areas. This supports them, at least in terms of the housing provided, and gives them an incentive to ensure that new homes are built.
Lord Bates: Is my noble friend aware that in the north-east of England, the North Tyneside Council has used the new homes bonus to undertake a welcome £3.1 million refurbishment of a public library in North Shields? That is welcome, but is not the point of the new homes bonus to act as a catalyst for the construction industry? Will she therefore join me in welcoming the news that in the north-east of England new housing starts increased by 25% over the previous period last year, which is an increase of 47% over the period in 2009?
Baroness Hanham: My Lords, I am always grateful to my noble friend, because he knows the figures, and he has given them on several occasions. They show that the north-east is in fact working very hard to produce new housing. Of course, he is right: the new homes bonus is not specifically given for housing; it is given as a contribution to areas where new housing has been built. Refurbishing a new library to help with the increased population seems to me to be a perfectly acceptable use of that money.
Baroness Royall of Blaisdon: My Lords, the noble Baroness said that the Government hold no national statistics on the impact of the new homes bonus. I wonder whether they have any statistics that show the impact on housing associations, region by region, of the bedroom tax. I speak as someone who lives in the Forest of Dean, and my own housing association, Two Rivers Housing, is being severely impacted by the bedroom tax.
Baroness Hanham: My Lords, I have said that we do not keep regional statistics. We do not have regions any more; we have local areas. The regions are not recognised. We work on local areas now, which is far more exact and precise. I do not know the exact answer to the noble Baroness's question about bedroom tax, but I am very happy to write to her.
Baroness Farrington of Ribbleton: My Lords, I am fascinated to discover that part of the country I live in is no longer recognised by the Government, but I am not surprised. Will the Minister accept that I live in the north-west of England, as does the noble Lord, Lord Greaves? Would she care to provide the House with figures on the impact of the RSG, plus the housing association grant, plus the new homes allowance, across the area which the noble Lord, Lord Greaves, and I live in?
Baroness Hanham: My Lords, the Department for Communities and Local Government works on the basis of areas. There might be other parts of the Government that work on a regional basis, but the DCLG does not.
Lord Greaves: My Lords, is it not the case that the south-west gets twice as much per head of this new homes bonus as either the north-east or the north-west, and that London gets more than twice as much? These are the facts, and the Government cannot deny that there is a transfer of resources from the north of England to the south of England through this bonus. Is that not right?
Baroness Hanham: My Lords, I am afraid that the noble Lord is not correct about the basis of the new homes bonus. I have explained to the House that the bonus is based on the average across the country of council tax bands. In the north of England, the chances are that the councils provided are in band A, and in the south of England it is very possible that they are provided in bands E, G and H. Consequently, of course, the sums will be larger in some areas than in others, but then, of course, the cost of living is different across this country.
To ask Her Majesty's Government what plans they have to co-ordinate their response to the recommendations of the Better Communication Research Programme; and how they plan to ensure that those recommendations are reflected in local authorities' local offers.
The Parliamentary Under-Secretary of State for Schools (Lord Nash): My Lords, my department and the Department of Health are working with the Communication Trust and its partners to disseminate this excellent research, and I am grateful to the noble Lord, Lord Ramsbotham, for giving the House the opportunity to discuss this today. The research will help those who plan, commission and deliver support for children and young people with speech, language and communication needs to improve the way they identify those who need help and the effectiveness of the support they provide. We will take account of the findings of the research in developing plans for the local offer.
Lord Ramsbotham: My Lords, I am grateful to the Minister for that reply. We have been waiting for the government response to this quite excellent programme since last June, and I remind the House that it consists of a report, two volumes of findings, four thematic reviews and 10 technical reports, which have been drawn up by experts over a considerable period and represent an absolute mine of evaluation, information and advice. I feel that we have not yet heard who will actually be responsible for driving the whole thing forward. The Minister mentioned the Departments of Education and Health, but there is also the Department for Communities and Local Government, the Ministry of Justice, the Department for Work and Pensions and others whose contribution must be aggregated to make the best of what is in this report for all the children in this country.
Lord Nash: My Lords, I agree with noble Lord, Lord Ramsbotham, that this is landmark research which is undoubtedly the most extensive of its kind into the subject. The issues that it raises are so wide-ranging that they are clearly not the province of one agency or government department, as the noble Lord says, which is why we want to make sure that the research is widely available and disseminated as widely as possible. My department and the Department of Health are working closely with the Communication Trust to co-chair the communication council which the Communication Trust is facilitating. The council brings together representatives from government, local authorities, health agencies, the Royal College of Speech and Language Therapists, early-years settings, and schools, parents, young people and the voluntary sector. The council will keep up the momentum by developing a comprehensive dissemination plan for the research, sharing learning about effective approaches to supporting children with SEN and promoting better awareness of speech, language and communication needs.
The Better Communication Research Programme places great emphasis on regular monitoring of children's language development over time so that when they need support, they can get it in the right way. How will the Government ensure that the need for regular monitoring is reflected in local authorities' local offers?
Lord Nash: We regard the solution to this issue as a local one. That is why we will be setting up the local offer involving children and young people with SEN and their parents and we will publish details of where parents can find all this available in one place. As young people will have an education, health and social care plan which will be reviewed every year, this will monitor the issues to which the noble Baroness refers.
Lord Storey: My Lords, the Better Communication Research Programme report looked at speech and language therapy support in schools, and according to
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Lord Nash: My Lords, I know that the noble Lord has vast experience in education and I am grateful for his question. We are sharing widely the good practice in the better communications research where speech and language therapists work with teachers and teaching assistants to provide support. He is absolutely right about a divergence in provision around the country and the shortage of funds, but it must be for local authorities and their partners to assess local needs and to make better use of resources so that they are directed where they are needed. Our proposal for a local offer will do this and will put parents and young people at the heart of decisions.
Lord Howarth of Newport: My Lords, the Minister told us just now that the Department of Health and the Department for Education are working closely together in this area. With respect, for many years the two departments have claimed to be working closely together but when it comes to determining who pays for what, they have been quite unable to agree. Can the noble Lord assure us that he will personally use his own best endeavours to ensure that, in future, there is a proper complementarity of responsibilities in terms of how the funding is found for special needs education and for speech therapy in particular?
Lord Nash: I thank the noble Lord for his question, and he is absolutely right about the poor record in cross-departmental work, particularly in this area. I shall investigate the matter and write to him further about it. I think he will be pleased with what he sees in the forthcoming Bill on this.
Lord Hunt of Kings Heath: My Lords, we have heard from the noble Lord's colleague from the Department for Communities and Local Government that the north-west has been abolished as a region. Does the Minister's department recognise the north-west?
Lord Nash: Not only does my department recognise the north-west but we are working closely with the north-west to try to stimulate activity in academy schools there, and any help that the noble Lord can give us in that regard will be gratefully received.
To ask Her Majesty's Government why the Legal Services Commission has decided to cease funding the Advice Services Alliance, the Law Centres Network and the Royal Courts of Justice citizens advice bureau after 1 April.
The Minister of State, Ministry of Justice (Lord McNally): My Lords, the Legal Services Commission decided to cease the Community Legal Service grants programme following careful consideration of all the issues involved and a public consultation exercise. These grant-funded projects and activities do not necessarily provide direct advice to the individuals eligible for legal aid. Following the Government's legal aid reforms, the commission's focus must be on providing advice to clients who qualify for legal aid through its contracted providers.
Lord Bach: My Lords, I thank the Minister for his Answer, but is it not rather depressing that these three highly respected and proven organisations are no longer to receive any public funding and are being put at some risk, and all for £650,000 per year? I am sure the Minister will agree that they all have a superb record over many years of helping often poor and disadvantaged people to obtain access to justice. Is it just coincidence that these changes to legal aid are coming at precisely the same time as radical reform of the welfare system is about to begin or is it, as seems much more likely to some of us, deliberate government policy to link these two things together so that if mistakes are made as a result of welfare reform-as they will be-there will cease to be any effective legal remedy for many people?
Lord McNally: My Lords, I am always fascinated by the way in which the noble Lord dismisses £650,000 as a mere bagatelle, but let us also look at the facts. This scheme for funding such bodies was introduced in 2000 and the three bodies in this consultation were awarded three-year contracts at the end of the previous Administration. Since then, we have twice extended their contracts by one year so that what was originally a three-year contract became a five-year contract. However, as I have explained to the House before, I am afraid that we have to concentrate limited funds on bodies that are giving sharp-end legal aid advice. These three bodies, particularly the Advice Services Alliance and the local Law Centres Network, are umbrella bodies that do not give such advice. Therefore, although in happier days they could win such contracts and do such work, there is simply no money.
Baroness Butler-Sloss: My Lords, is the Minister aware or does he appreciate the significance and importance of the Royal Courts of Justice citizens advice bureau? Having been a judge in that court for many years, I had personal experience of the advantages of the citizens advice bureau looking after unrepresented families in my court. Does the Minister realise that taking away the core funding at this moment, when the Government are also taking away legal aid for private family cases, is going to leave the public and the courts in absolute disarray?
Lord McNally: The CAB at the Royal Courts of Justice is able to apply for legal aid contracts in the normal way for the part of its work that is directly legal aid work. As regards broader CAB work, the Government have carried out a number of initiatives
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Lord Mackay of Clashfern: My Lords, does my noble friend know of any organisation that provides legal advice more cost-effectively than these bodies do? Has the Legal Services Commission worked out what the effect would be in respect of their former clients if the funding were withdrawn from them?
Lord McNally: My Lords, again, I emphasise that the RCJ CAB was able to apply to the Advice Services Transition Fund and this has helped it to continue. How many times can I say this? I look at a budget each day and I see that hard decisions have to be made. Hard decisions are being made by charities and we have tried to give them help in the transition. Quite simply, the days when large amounts of government funds were available for these bodies are over and we all have to face that fact.
Baroness Hollis of Heigham: My Lords, why do those hard decisions have to be at the expense of the very poor and those needing help and advice? As my noble friend Lord Bach said, from next April, and particularly from next October, a brand new architecture of benefits-universal credit-will roll out to people who will, simultaneously, be losing large sums of money. Moreover, their claims will not be paper-based but will have to be online, even though something like a fifth of claimants do not even have access to a computer. As a result, they are going to need extensive help, support and advice at the very same time as the noble Lord is taking 40% of funding away from CABs across the country.
Lord McNally: The legal aid welfare spend will still be some £50 million. We are also in talks with the legal profession and with charitable organisations to help them with adjustments. The noble Baroness is right that we are talking about the poorest. Two years ago, when I announced this exercise, I said that if you cut a programme designed to help the poorest in our society then you will hurt the poorest in society. We are doing what we can to concentrate limited funds on the needy, but it is simply not good enough for the Opposition continually to be willing to sign every blank cheque and never tell us how they would save the money.
Baroness Garden of Frognal: My Lords, on 14 January, my honourable friend the Under-Secretary of State for Foreign and Commonwealth Affairs gave a Statement in the House of Commons outlining the UK's deployment
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Since the announcement on 14 January, we have decided to extend our support to the continued provision of one C-17 in support of France for a further three months. There are currently around 20 people deployed in Bamako supporting liaison with French forces. Following a French request for additional surveillance support, we have deployed a Sentinel R1 aircraft to Dakar, Senegal, with supporting ground crew and technical support amounting to around 70 people.
EU Foreign Ministers agreed on 17 January to establish an EU Military Training Mission to Mali (EUTM) and work is ongoing to scope that mission. Today in Brussels, representatives from EU member states, including the UK, will meet to discuss the individual member state contributions to the mission. The UK is prepared to contribute up to 40 personnel to the EUTM, either in an HQ or a training team role. We do not envisage UK personnel fulfilling a force protection role, and it is quite possible that 40 personnel will not be required, dependent on the contributions from other member states. However, we will not contribute UK personnel to any mission until we are satisfied that adequate force protection arrangements are in place.
Also, today in Addis Ababa, the African Union is hosting a donor conference to discuss how the international community can support the African-led intervention force, AFISMA. The UK will offer £5 million for two new UN funds to support the strengthening of security in Mali-£3 million of this would be directed to AFISMA, and £2 million to activity in Mali that would facilitate and support political processes for building stability. The UK is also prepared to offer up to 200 personnel to provide training to troops from Anglophone west African countries contributing to AFISMA, though the numbers required will be dependent on the requirements of the AFISMA contributing nations.
In addition, we have deployed a small number of advisers to Anglophone west African countries who will contribute to the AFISMA mission to assess their needs and to gain situational awareness. Ministers in the Foreign and Commonwealth Office will provide an update to the House on the outcome of the discussions in Brussels and Addis Ababa at the appropriate moment.
Lord Rosser: My Lords, I thank the Minister for repeating the Answer given to an Urgent Question in the other place. Under what circumstances would we agree to extend further our military deployments beyond those set out in the Minister's Statement? What is the minimum period of time we anticipate being deployed on our surveillance and training activities? Will any of our resources deployed, whether personnel, aircraft or other equipment, be resources which would otherwise be deployed in Afghanistan? What is the estimated numerical strength of the forces in Mali against whom action is being taken? Will we extend our support operations if those forces move into neighbouring
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Baroness Garden of Frognal: The noble Lord asked a number of questions and I will try to answer them. I may not have noted all of them. As to the question on the combat role, there is no question of our troops being sent out there in a combat role. Their terms of engagement in Bamaco are in self-defence. We are there in support of a French-led operation and in the expectation that the African countries round about will be in a position to pick up any of the military activities that are needed there. There will be a Statement shortly. We have these two conferences going on today and from both of those a Statement will come. We are not anticipating extending our position there but, of course, all these things need to be under discussion. However, we have made sure that this is a finite contribution for a short period in order to ensure that the African countries and Mali have stability. It is in our interests both to support the French in this operation and to ensure that Mali does not become ungovernable. We do not want to leave space for terrorism in this. The noble Lord asked about the strength of the Mali troops in the north. Our understanding is that their numbers are relatively small at the moment. We would hope that the engagement will be short and swift and that following this the Mali community can come together to build itself up.
Lord Craig of Radley: My Lords, can the Minister confirm whether the cost of this additional involvement in Mali is to be met from the contingency fund and whether the Treasury has set any upper limit on the amount of money that may be devoted to these operations?
Baroness Garden of Frognal: My understanding is that this money will indeed come from the contingency fund and that currently no extension or upper limit has been set. However, all these things are under discussion because, at the moment, we are still awaiting the ongoing discussions in that area to find just what the extent will be.
Lord Palmer of Childs Hill: My Lords, as the worry is about mission creep, can the Minister confirm that the training by our troops is going to take place in Bamako or in the countries providing the African forces and that our troops will not be training the Malian troops in the advance guard?
Baroness Garden of Frognal: Our troops will largely be working with the Anglophone nations there: Nigeria, which is taking the lead, Gambia, Sierra Leone and
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Lord Davies of Stamford: My Lords, I congratulate the Government on having taken the right decision. There are always, of course, unpredictabilities and uncertainties in an operation of this kind, but we have the same interest as every other member of the EU in the stability of north and west Africa and in preventing any al-Qaeda-linked regime from turning any country there into a base for terrorist operations to be subsequently directed at us. Does the Minister agree with me that it is very important in these cases that there should be the maximum degree of cohesion and co-operation between the AU and the EU and that developments in that respect have been quite encouraging so far but need to be sustained?
Baroness Garden of Frognal: The noble Lord is absolutely right that this action is in support of stability in that part of the world. It is a well-leveraged contribution in support of the French activity and the French are taking the lead on this. Co-operation between the EU and the African countries is ongoing because there is a mutual interest in ensuring that this situation is contained and stability is restored.
Lord Wright of Richmond: My Lords, does the Minister accept that there is a worrying contrast between the very welcome assistance that she has announced to help Mali confront Islamic terrorism and our behaviour in Syria where we have recognised a national coalition working in cahoots with al-Nusra and al-Qaeda to overthrow what is, for all its faults, a legitimate and secular Government?
Baroness Garden of Frognal: The noble Lord takes me into territory outside the remit of this Question. Obviously, he is a great expert on that part of the world. There are concerns across the countries in north Africa and further into Africa and, with this support for the French, we will certainly wish that to be contained within Mali.
Baroness Garden of Frognal: That is what is under discussion at the moment. The EU is currently meeting to discuss how it can contribute to that. We have said that we will offer up to 200 personnel for training. They may not all be required because other EU countries may submit more. That is what we are waiting to see from the outcome of these discussions, but we have set a maximum on our contribution.
Lord Soley: This has been a very impressive operation by the French and I take this opportunity to thank them. I ask the Minister to be very cautious about statements either for or against putting British troops in there, because, frankly, if we have learnt anything in the past 13 years, it is that you cannot predict the outcome of these situations. It would be wise to be cautious about that. However, I really do think that we need to congratulate the French on the way they have handled it so far.
Baroness Garden of Frognal: I thank the noble Lord for that. Indeed, we need to exercise caution. We are well aware of mission creep and the danger of that. We have learnt lessons from other interventions and are applying those here. That is why we are doing what we can to find out as much as possible about the situation there. For example, CDS and the UK's special envoy on the Sahel will be travelling to the region this week to discuss further with the countries there what form the training could take and to give an assessment of what the threats and dangers are.
Lord Stirrup: My Lords, the Government, like their predecessor, have seen the key response to the risks posed by ungoverned spaces to be an increase in the levels and quality of governance in those spaces. Given the French Defence Minister's reported statement that the aim is total reconquest of that divided country, can the Minister tell the House what structure and system of governance the military intervention in Mali is designed to support?
Baroness Garden of Frognal: The UK troops are there to provide training and not to impose any form of pre-arranged governance. They are to provide training so that they are better able to secure their land and to provide a peaceful resolution to the conflicts that have long pertained between the north and south of the country.
Lord Anderson of Swansea: My Lords, it is surely right that we support our French partners and allies in Anglophone and Francophone Africa. Without that urgent intervention, Bamako would have been taken and there would have been a terrorist base in west Africa. Does the Minister agree that the intervention was wholly in accordance with international law, following the United Nations resolution, and that ultimately there will have to be national reconciliation and some political solution rather than a military intervention against the Tuaregs and others in the north?
Baroness Garden of Frognal: Indeed, as the noble Lord will be aware, there was a draft UN resolution in December, which authorised the deployment of an African-led mission to support efforts by national authorities to recover the north. Events moved more quickly than that, which is why the French intervened in the way that they did and why we are supporting them to try to ensure that stability is restored.
The Commercial Secretary to the Treasury (Lord Deighton): My Lords, as a newcomer to your Lordships' House, I feel an enormous responsibility in opening this debate on one of the most critical issues for our country: the challenges facing our economy. I value this opportunity to draw on the extensive experience of this Chamber.
The trauma caused by the global financial crisis and the ensuing recession required urgent action. This Government responded with a radical programme of reform, designed both to meet the immediate danger to our public finances and to raise the performance of our economy to ensure our competitiveness in a fast-changing, global environment. This programme has four key components and we are driving forward on each one of them. Let me briefly explain.
The first and principal building block upon which all other policies depend is the return to fiscal stability. In 2010, the UK's budget deficit was forecast to be the biggest in the G20 and in our own peacetime history. This record deficit has been reduced by a quarter over the past two financial years, restoring market confidence in the UK and keeping interest rates lower for families and businesses. We have avoided the predicament of such large economies as Italy and Spain by gripping our deficit problem and securing financing rates close to those of Germany. This credibility has been hard won, but would be easy to lose.
Although recovery is taking longer than any of us would like, principally because of continuing problems in the eurozone, the economy is moving in the right direction. According to the IMF, our growth rates for both 2013 and 2014 are expected to exceed those of France and Germany. More than 1 million private sector jobs have been created since 2010-more than 1 million-with 2012 seeing the largest annual increase in jobs since 1989.
We cannot risk this restored confidence by compromising the disciplined management of our public finances. I anticipate many suggestions for where we may productively invest or spend. However, to retain credibility, as it is not possible to borrow our way out of a debt crisis, any extra spending has to be financed either by other spending cuts or by tax increases. As
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The second component of this programme is monetary policy. The Bank of England has maintained a record low level of bank rate and has engaged in significant quantitative easing to stimulate nominal demand. This quantitative easing is estimated by the Bank of England itself to have had a positive impact in terms of reduced gilt yields, higher asset prices and a 1.5% to 2% rise in GDP. Last summer the Government and the Bank of England launched the Funding for Lending scheme, which aims to increase lending to businesses and households by reducing bank funding costs.
The third component involves reforms to our financial system. Many noble Lords present today will have seen the Financial Services Bill receive Royal Assent a few weeks ago. This legislation will strengthen the financial regulatory structure and establish a new system of focused financial services regulators. In addition, the forthcoming Banking Reform Bill will deliver structural measures to reform the banking system and promote stability and competition, including the complex issue of separating retail and investment banking functions. Our aim is to retain a vibrant finance sector, but one structured to avoid the systemic instability that caused the recent crisis.
I will concentrate my remaining remarks on the fourth and final component. That involves a comprehensive package of structural reforms aimed at rebalancing and strengthening the economy for the future, including an ambitious agenda of infrastructure investment. This is at the heart of my new responsibilities in government. These supply side reforms will help British business compete in the global marketplace and will make Britain an even more attractive place to do business. The result will be to draw valuable foreign investment to the UK and drive our competitiveness forward.
Imperative to creating an attractive business environment is the tax landscape. The Government have cut the rate of corporation tax from 28% in 2010 to 21% from April 2014. This is the lowest rate in the G7-significantly lower than in France, Germany and the USA-and will act as a spur for job creation on these shores. Other tax reforms to encourage investment include increasing the annual investment allowance, which will enable firms to invest in new plants and machinery, while increased support through research and development tax credits and legislation for a patent box will give real financial incentives for innovation and creativity. In addition, £600 million has been allocated to the research councils and other projects to drive innovation and science.
Of course, while we want to promote a competitive tax environment for businesses, we must also ensure that multinational companies are paying the right amount of tax. This cannot be done in isolation; therefore
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For small businesses to grow, access to finance is essential. I have already mentioned the Funding for Lending Scheme, which facilitates more bank lending. We have also set up the Business Finance Partnership to improve non-bank lending channels, the Green Investment Bank to accelerate private sector investment in the green economy, and the business bank to bring together all the existing lending schemes under one roof. These are part of a whole array of incentives put in place to support entrepreneurs and small business.
To rebalance our economy, it is also crucial to develop our export markets aggressively and to support those companies with overseas opportunities. Up to £1.5 billion of loans will be made available through direct lending for the purchase of UK exports. In addition, the UKTI programme budget will be increased by £70 million per year, a measure that will help us to deliver services to more SME exporters and will refocus UKTI activities on the highest value opportunities and the key emerging markets. We are reinforcing the success that has recently led to our becoming Germany's chief trading partner and to 2012 setting a record for car manufacturing exports. Rebalancing our economy requires that we support growth in every corner of the UK. In line with the recommendations of my noble friend Lord Heseltine, we will be devolving more spending to local areas.
We are continuing our root and branch reform of the burdensome and costly planning system. We have already cut more than 1,000 pages of planning policy down to just 50. Under our better regulation agenda, we continue to cut red tape in many areas to protect business and society from unnecessary bureaucracy.
Developing our workforce through training and skills is critical to our current and future competitive success. Consequently, we have made sure that our higher education system gives better information about graduate employment prospects, and we have overseen nearly 1 million young people starting apprenticeships.
The final area that I want to address this afternoon and, a key priority, is our economic infrastructure. By modernising the UK's transport, energy, water, waste and digital networks, we will create the right foundation on which businesses can compete and grow efficiently.
Total investment in infrastructure has increased from an average of £29 billion a year between 2005 and 2010, to £33 billion a year between 2010 and 2012. At the Autumn Statement, the Chancellor unveiled a further £5.5 billion of investment including £1.5 billion for our road network. This switch to capital expenditure was financed by reductions in current spending, consistent with our commitment to fiscal discipline.
My focus is on developing and delivering our national infrastructure plan. As I see it we need to do five things. First, get the right projects built that match our sector-by-sector strategy and ensure that these projects are mutually supportive. For example, the conception and delivery of our road and rail networks must be integrated.
Secondly-and I am really familiar with this-we need to build projects on time and on budget. This means that projects must be properly scoped, structured and resourced and rigorously overseen and managed. My Olympic experience over the past seven years has given me clear ideas about what is possible and about how to forge that critical collaboration between the public and private sectors.
Fourthly, we must maximise the flow of private finance to avoid burdening the public purse, while still considering affordability in the long term for consumers. This may involve new government-sponsored programmes such as the up to £40 billion of infrastructure guarantees -the scheme that supports the Northern Line extension which has unlocked the huge development around Battersea Power Station or the recently re-launched PFI initiative; PF2 as it is now called. Alternatively, it requires us to ensure that the policy environment we create allows for sizeable private investment, which is the challenge that we are currently addressing in the energy sector, where a significant amount of this investment needs to take place.
In addition, the pension infrastructure platform has been established to consolidate the efforts of UK pension funds investing in infrastructure projects. The fifth and final point in this infrastructure plan is that we are conducting an infrastructure delivery review within Whitehall because we need to ensure we have the appropriate scale and range of skills in the Civil Service to deliver these major infrastructure projects.
To sum up, the UK is dealing with the consequences of the most severe economic crisis in our recent history. This is a global phenomenon and our room for manoeuvre is constrained. But, despite this challenging backdrop, I know that we can deliver growth. Our policies to stem the initial deficit crisis that would have otherwise devastated our country have worked. The Government have made great strides in getting spending under control, but that is a continuing battle. We have put in place a series of reforms, all within a disciplined fiscal framework, that will support our economy's recovery and contribute to the rebuilding of the confidence necessary to fuel growth. The financial markets are performing strongly because our strategy is working.
Our focus is now on the effective delivery of these reforms so that they are fully realised in the real economy. I emphasise delivery. My Olympic experience tells me that having a good plan is important, but all that matters in the end is the impact of what you actually deliver on the ground. What this country showed this past summer is that we have the people, the know-how, the creativity, the teamwork and the determination to deliver in a way that can take the world's breath away.
I accepted the invitation of my right honourable friend the Chancellor to join this Government to see whether we could apply some Olympic and Paralympic inspiration to our broader economy. I look forward with relish to that challenge and welcome your advice and support.
Lord Eatwell: My Lords, it is a particular pleasure for me to welcome the noble Lord, Lord Deighton, to the Dispatch Box and to congratulate him on his appointment to the Treasury team. It is always a special delight to see one's former pupils do so well. When I marked his economic essays back in the mid-1970s, I never imagined-nor do I suppose did he-that we would find ourselves in this situation. I think it is appropriate to report that his essays were typically examples of excellent economic analysis, and I hope and believe that he will put those skills to good use in re-educating the Treasury. It certainly needs it.
Today, he has been placed in an extraordinarily difficult position. It is rather difficult to defend the Government's growth record when there is none-growth, that is. The latest figures are truly awful, with no growth at all in 2012, despite the heroic efforts of the noble Lord, Lord Deighton, and his team at the Olympics.
Taking the longer view, since the Government's spending review in the fourth quarter of 2010, when it might be said that coalition policies replaced Labour policies, the UK economy has grown by just 0.4% over that entire period. Over the same period, the USA has grown by 4.2%, Germany by 3.6% and France by 1.5%. Accordingly, while the UK economy is now still over 3% below its pre-crisis peak, the USA is 2.5% above and Germany is 2% above.
The question before us today is: in the situation in which we find ourselves, what is to be done? How can we get Britain back on to a secure growth path? Should we follow the recommendations of the Chancellor of the Exchequer that we stick with austerity, accepting his declaration that "Britain is on the right path"? Let us call this plan A. Or should we adopt plan B, following the advice of Adam Posen, former member of the Monetary Policy Committee, and particularly of Olivier Blanchard, chief economist of the IMF, who said last week,
The answer to our question, "What do we do?"-the fundamental issue in this debate-rests on a consideration of three issues. First, how did the Government get into this mess and are they tackling it in the best way? Secondly, what is necessary to restore the UK economy to growth? Thirdly, what is there to prevent us following this path of restoration?
So, first, how did we get into this mess? As the noble Lord said, the Government inherited the terrible economic consequences of the international financial crisis-everyone agrees about that. These consequences were and are particularly severe for a country as dependent on financial services as we are. But then the crucial question is: in the past two and a half years, have the coalition's policies made things better or worse?
The previous Chancellor, my right honourable friend Alistair Darling, had been battling the crisis since 2008, and by the spring of 2010 he had succeeded in
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Recent figures published by the Office for National Statistics show that public sector net borrowing in the first nine months of fiscal 2012-13 was about £107 billion compared with £99 billion in the same period last year-a rise of 7.3%. I repeat: the deficit is over 7% up on the equivalent period last year. So the answer to the first question is that the coalition inherited a very difficult but recovering economic situation and proceeded to make it much, much worse.
What should be done to turn the position around again and to set the economy on a new growth path or, to put the question in a more practical fashion, how can businesses be encouraged to invest? Firms invest because they are reasonably confident in the future demand for their products. Without demand, if they are shackled by a framework of fiscal discipline, as referred to by the noble Lord, it does not matter how much cheap money there is, as no one will invest. That is why monetary policy is not working. Interest rates can go no lower and the first positive announcement effect of quantitative easing has now worn off. Quantitative easing may be inflating asset prices and ruining pension funds but cheap money will not encourage investment when the Government are intent on slowing the growth of demand.
However, if there is a prospect of growing demand then, to invest, firms need finance and access to the very best skills and technologies to secure markets in a competitive world. Demand is the key to making all the measures that the noble Lord referred to as his fourth pillar work.
That is why my right honourable friend Ed Balls has proposed a temporary cut in VAT to boost family incomes, together with the boost to demand and capacity that would result from bringing forward infrastructure investment, including building thousands of affordable homes. Enhanced demand prospects would then be underpinned by a British investment bank to boost lending to small businesses, complementing fundamental regulatory reform of the banks. To sustain confidence there should be a compulsory jobs guarantee for the long-term unemployed and, further up the employment chain, investment in skills and in transformational science and technology. That is plan B.
Why cannot this be done? "Because", cry the coalition, "it's a policy for borrowing more when debt is the problem", and we heard a similar statement from the
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The answer lies in the relationship between changes in spending and the overall performance of the economy. This is measured by what, in the economics jargon that the noble Lord and I used to discuss, is called the multiplier. If a cut in government spending of, say, £2 billion results, for whatever reason, in a fall of output of just £1 billion, then the multiplier is a half. That is what the IMF believed the multiplier to be back in 2009. The share of taxes in output is about 40%, so if government spending is cut by £2 billion and output falls by £1 billion, tax revenues fall by about £400 million. The fall in tax revenues is much less than the cut in spending, and so the deficit falls by £1.6 billion. That was the policy that the Government thought they were implementing.
However, what if the multiplier happens to be bigger than that? Supposing that it is as large as 2.5, the cut in spending results in a fall in tax revenue of exactly the same amount. You can go on cutting taxes until the cows come home and there will be no change in the deficit at all. All that will happen is that the economy will be driven further and further into the mire of depression.
In acknowledging a previous error, the IMF estimated the multiplier to be a bit less than two, so a £2 billion cut in government spending will drive the economy down by about £4 billion and, when cuts in revenue are taken into account, the deficit will fall by only £400 million. Throw in a depressed European Union and you arrive at our current miserable situation: ever bigger cuts and a growing deficit. But the good news is that what goes down can also go up. What if government spending is increased by £2 billion and the multiplier, optimistically, is 2.5? The economy then grows by £5 billion and the increase in tax revenues pays for the extra spending; there is no extra borrowing at all. I repeat: increased spending results in no extra net borrowing. Plan B is a strategy to cut government spending. And there is more. The government cuts-particularly those disastrous cuts in government investment-not only reduce output now by cutting demand; as the OBR has pointed out, they also cut future output by reducing the real productive capacity of the economy.
Lord Forsyth of Drumlean: My Lords, I am a simple lad. Can the noble Lord tell me what the difference is between his party's policy and that of the government Front Bench? He gave the figure of £2 billion as the extra borrowing and the extra expenditure that would be required. In quantitative terms, what separates the Opposition from the Government? How much money are we talking about?
Lord Eatwell: The figure of £2 billion was purely for illustrative purposes; it was a simple number. I thought that people could do the arithmetic in their heads. The issue is directly whether we continue with a policy of cutting government expenditure or whether we are committed to an increase in expenditure, particularly
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As I was saying, there is more to it than that. As the OBR has pointed out, government cuts in investment cut future output by reducing the real productive capacity of the economy. This long-term loss of output brings with it a long-term reduction in tax revenue, in addition to the medium-term effect that I have just outlined. In other words, the Government are not just failing to cut the deficit now; they are increasing deficits for years to come. By contrast, if the IMF is right, the measures proposed by my right honourable friend will be substantially self-financing in the medium term and will stimulate tax revenues in excess of spending in the longer term. This point has also been argued by the Harvard professor and former US Treasury Secretary, Larry Summers.
Before we sign up to plan B, however, another issue must be confronted. Today, any Government's finances can be devastated by a loss of confidence in the international bond markets. The noble Lord referred to this. After a particularly violent example of sovereign bond market hysteria, James Carville, the political adviser to President Clinton, famously remarked,
Well, the bond market certainly seems to have intimidated the coalition. Whenever its destructive policies are challenged, it argues that unless the vice on Britain is tightened, the financial markets will lose confidence, interest rates will rise and any prospect of recovery will be destroyed.
There are three things wrong with that argument. First, no one is suggesting a spending spree. Plan B is a cautious expansion to begin the task of building the foundations for growth. Secondly, it is austerity that is now undermining market confidence. All three of the main credit rating agencies-Standard & Poor's, Moody's and Fitch-have put Britain on "negative outlook", citing concerns over the weak recovery and the public finances.
Thirdly, let us consider the experience of the United States, which lost its AAA rating last year. Would you rather have our AAA rating and zero growth or the lower US rating and 3% growth in the last quarter? I know which I would prefer.
The noble Lord, Lord Deighton, outlined in his speech a number of desirable measures that the Government can take to help to build productive capacity-the structural measures to which he devoted the majority of his speech. However, the Chancellor's commitment to cutting demand and shrinking the state-less Bullingdon Club, more Tea Party-is eliminating any significant impact of those worthy measures. The Government's attempt to stimulate growth has been a failure; the Government's attempt to cut the deficit is a failure; and, if informed predictions are correct, even the Government's attempts to preserve Britain's AAA rating in the markets will prove to be a failure.
What is it in the word "failure" that George Osborne does not understand? For the sake of this country's economy, it is time for him to run away. He is the living embodiment of plan A and must accept responsibility for its failure. Perhaps I may suggest that an excellent replacement as Chancellor would be my former pupil, the noble Lord, Lord Deighton.
Lord Skidelsky: My Lords, I join the noble Lord, Lord Eatwell, in welcoming the noble Lord, Lord Deighton, to the Treasury Bench; I hope that he enjoyed the experience of renewed contact with the supervision of his former teacher.
When George Osborne took over the controls at the Treasury, he decided that fiscal policy would be governed not by the state of the real economy but by the state of the public finances, as measured by preset fiscal targets, particularly the rate of deficit reduction. Those targets were designed to reassure investors in government debt that the state was solvent and would remain so. Half-way through the life of this Parliament, we can say that the effects of that policy in terms of output and growth have been disastrous. Britain, like the eurozone, remains stuck in the slow lane. We did not grow at all last year, and we enter 2013 with a realistic prospect of a triple-dip recession. Despite our freedom to devalue and massive open-market operations by the central bank, British output is 3% lower than in 2008. The results of the fiscal targets are correspondingly dismal. A state with high debt where no growth has become the new normal will not retain the triple-A rating on its sovereign debt.
What has gone wrong? The central design failure is that the targets were set on the heroic assumption that the economy would recover despite the tightening of fiscal policy implied by the targets themselves. In a balance sheet recession, when the private sector is cutting spending to reduce its overindebtedness, that assumption was just wrong. Put simply, we cannot all deleverage at once. To save more, you spend less, and if everyone does that, including the Government, the economy shrinks. That is lesson number one to which the noble Lord might respond.
George Osborne blames the failure of Britain to grow on the eurozone, but that argument is circular, as it is following exactly the same policy as we are. It is the Chancellor's own policy which explains the stagnation of the British economy, not the eurozone.
Mad economists are emerging from the woodwork to say that George Osborne is not cutting deep or fast enough. For example, Andrew Lilico appeared on the "Today" programme this morning telling us that the reason that the deficit is not going down is that austerity has not started. Apparently we are in the middle of a Keynesian boom. We need more cutting. Cut benefits, cut the welfare state, cut government, cut everything
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The Chancellor can claim that the unemployment figures are slightly lower than they were some months ago. How can this be when output has not grown and may even have fallen? There is a puzzle here, but it is not a large one. The reason is that today, with a more flexible labour market, a fall in output is not necessarily, or immediately, reflected in a fall in employment. It may simply lead to a movement of workers into lower-paid, part-time or intermittent jobs or work training schemes, none of which count towards recorded unemployment. This has certainly been happening. It also explains why the Government can claim success in increasing private sector employment faster than the public sector is shedding employment.
I have no doubt that if the Chancellor continues cutting as hard and fast as Mr Lilico wants, those of us left with decent jobs or incomes will be able to have as many drivers, gardeners, trainers, cleaners, nannies, domestic servants, chefs, butlers and waiters as we can possibly want, and, no doubt, at the equivalent of Victorian wage levels. In other words, back to the world of "Downton Abbey". After two centuries of industrialisation, what a wonderful solution to the unemployment problem.
The obvious alternative to blind faith in fiscal targets is action to restore the economic trajectory that underpinned the targets in the first place. The international organisations are now saying this; the noble Lord, Lord Eatwell, has quoted Olivier Blanchard, who has just said that the Chancellor should "ease up" on fiscal austerity, which is as near as an international civil servant can come to saying that his policy is dead wrong. Even Boris Johnson says we should junk the word "austerity".
In plain English, "easing up" on austerity means stimulating investment. Public capital spending is not included in the current deficit target, so the Government can restart the investment machine without breaching their own targets on current spending. That is the only way to get the deficit down, or to meet their targets.
In this context, I welcome the Government's announcement that they have approved the second phase of High Speed 2. However, I have two questions. Why will it take so long? The first phase is scheduled to be completed in 13 years' time, and the second phase in 2033. Two years ago I asked the noble Lord, Lord Adonis, who had just stepped down as Secretary of State for Transport, how long it would take to complete this project with any sense of urgency. He said that it would take about five years. He is in his place, and I hope that he does not tell me that I have remembered that wrong. As I have said before, if only we had a Lloyd George in charge of this programme, we would get some movement.
Why? Here is an opportunity for the Government to take advantage of the spectacularly low cost of their own borrowing-why it is so low is the subject of another discussion-to finance the whole thing itself. It is a genuine capital investment, which will yield an identifiable rate of return. Perhaps the noble Lord would give us some indication of how the Government will finance this project. I hope that they will not repeat the disastrous PPP schemes which made such a mess of the London Underground and Channel Tunnel projects.
Will an investment strategy such as I have proposed not cause the public debt to increase? This is the crunch question. The Minister said in opening that it would not be possible to borrow our way out of our debt crisis. If indeed the project starts reasonably expeditiously, the debt will go up. There is no doubt that it will be higher in 2015 or 2017 than it would have been otherwise, but so will the capital stock and the economy itself, while the increased output can be taxed to finance the interest cost of the extra debt.
There are, of course, obvious risks. The risk of a pro-growth strategy is that borrowing more than initially planned may spook the bond markets and lead to a rise in borrowing costs. However, it is a much smaller risk than putting one's faith in pre-set fiscal targets which produce a stalling economy, without any guarantee that this will actually deliver on the fiscal numbers. Which strategy does the Chancellor really think is more likely to keep our AAA rating with the credit markets?
If the growth-first strategy makes sense for Britain, it should make sense for Europe as well. This country was a pacesetter in adopting fiscal targets as a guide to policy after the financial crisis. Why not be the first mover in showing how to reset policy and help lead Europe out of self-defeating austerity?
Lord Lamont of Lerwick: My Lords, I join with other Members of the House in congratulating the noble Lord, Lord Deighton, on his maiden speech from the Front Bench. Like other noble Lords on this side, I am delighted to find that he is not entirely still under the spell of his former distinguished teacher.
Growth ought to be the natural state of an economy. Most economies tend to grow over time. Financial crises, bad harvests and various other factors can, of course, delay or obstruct that growth. But growth is the natural order over time, because human beings have a natural instinct to make two blades of grass grow where one grew before and a natural instinct to innovate. Growth, it is worth remembering, does not come from Governments; it comes from individuals.
What, then, should our reaction be to the figures which were released last week and showed a 0.3% drop in GDP in the final quarter? The figures can always be sliced in many different ways. One can portray them, as indeed the noble Lord, Lord Eatwell, did, as saying that four out of the last five quarters have been negative; that the economy was flat all last year; and that the economy is still below the 2008 peak. On the other hand, you can formulate them a slightly different way: the economy grew by 0.3% in the last six months; although the economy is below the peak of 2008, if
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We heard a lot about the views of the IMF, but we have not actually had the views of the IMF; we have had the views of Mr Blanchard. Christine Lagarde, the director-general of the IMF, has been extremely supportive of the Government's strategy and we will only officially hear the views of the IMF in May, when we hear the results of the article 4 consultation. The noble Lord, Lord Eatwell, talked a lot about the multiplier effects. Interestingly, there was a report in the press at the weekend that the IMF has concluded that the multiplier effects, both of austerity or of any deficit spending, are extremely slight in the case of the UK. No doubt we will hear more about that when the article 4 consultation takes place.
There is no doubt that the figures for the last quarter were extremely disappointing, but the idea that some extreme excess of austerity is holding back the British economy seems to me very much open to question. The Government have shown that they are prepared to be flexible in their deficit reduction programme. They have relaxed the programme twice and put back the date at which they expect, and are aiming for, a fall in the total debt-to-GDP ratio. As my noble friend Lord Forsyth said, the difference between the Government and the Opposition is much exaggerated by both sides for the purposes of both sides. I do not think that the noble Lord, Lord Eatwell, is right in saying that the capital expenditure planned under the last Government was higher than that of this Government; in fact, the cuts that Alistair Darling put forward were bigger than those of this Government, some of which have been reversed. Can the Minister comment on that precise point?
Despite the small differences between the planned reductions in expenditure, it is true that if you compare the outcome of expenditure with the original Darling plan for reductions in expenditure, the latter was much tighter and more austere than what the Government have implemented. If you compare our austerity programme to that in other EU countries, it is difficult to argue that these cuts are savage or that this fiscal consolidation is sudden and dramatic. At the beginning of this crisis we had a deficit to GDP of around 12%. That was almost exactly the same as Greece's. I am sorry to say that today Greece has a considerably lower deficit than the UK's. Italy, France, Ireland, Portugal, and Greece all have lower deficits than we do. These have not been caused by growth-a solution somehow magicked out of the air by the party opposite. That is not how they have reduced their deficits. They have done so by making more savage cuts and far severer fiscal consolidations than we have made.
With a debt-to-GDP ratio of around 70% to 80%, which is where it is expected to peak out, if we go on adding to that overall stock of debt at the rate of 12%, as it was when we started off, or 7% or 8%, because the annual deficit is the amount that we add to it each year, we would soon get to a situation in which a debt-to-GDP ratio would be 100%. As economists such as Reinhart and Rogoff have argued, that is the level at which the overall stock of debt becomes dangerous for the long-term growth of an economy. They would argue that that is why Japan has had such a bad time for such a long period. If deficits really solved long-term economic growth, Japan would not have been stranded in the situation in which it has been for such a long time.
If deficits of 7% to 8% per annum have left the country not growing, is it credible that one of 10% or 12% will suddenly cause the economy to leap into life? We hear about the multiplier effects, but never about what is going to happen when these so-called stimuli are withdrawn. Anyone who thinks that this would be the real world experience of deficits ought to read the diaries of Mr Morgenthau, President Roosevelt's treasury secretary, who expressed his disillusionment with the deficits being run in America in the 1930s. He wrote that all the United States had to show for it was unemployment at much the same level and no increase in production. In the UK today we are running deficits that are considerably higher than those run by the Roosevelt administration.
Lord Skidelsky: The noble Lord mentioned a point of history. Of course, American unemployment fell very rapidly in the 1930s, so if he wants to leave the House with the impression that it did not fall, I must say to him that that is just wrong.
Lord Lamont of Lerwick: No. President Roosevelt initiated back to work programmes-that is true-but the private sector, the economy, was not generating growth. If the noble Lord, who is a very eminent historian, wishes to doubt that, just let him read the Morganthau diaries, because they are full of deep disillusionment about the pointlessness of the programme that he himself was implementing and the effect that it was having on the growth of the economy.
I am not arguing that deficit financing can never be of use or play a part in taking up the slack in the economy when the private sector is unable to borrow, but we are in a position where both public and private finances are under pressure at the same time. It is a much favoured parlour game to decide what Keynes would have thought of doing in this scenario today. Of course, the House is very fortunate in having the eminent historian, the noble Lord, Lord Skidelsky, who knows more about this subject than anyone else, to tell us. Indeed, we also have the noble Lord, Lord Eatwell, a most distinguished Cambridge economist-a university that is profoundly affected today by the shadow of Maynard Keynes. I am sure that the noble Lord, Lord Eatwell, remembers Milton Friedman's comment about Cambridge academics and their theories, which have applications within 25 miles of Cambridge University.
This recession is indeed different from a normal cyclical recession. It is, as the noble Lord, Lord Skidelsky, said, a balance sheet recession, but it is a recession that has followed a severe banking crisis. As economists such as Rogoff and Reinhart have shown, I think quite tellingly, such recessions tend to last much longer than normal, cyclical recessions, and are much deeper.
So what can be done to stimulate growth? I believe that there are things on the supply side that can do this-training; lifting and relaxing planning controls, as the Government have done; infrastructure spending, very much as the Minister outlined, although if infrastructure spending is to be financed by cuts in current spending, that will squeeze consumption further, which has been one of the problems of the economy, because inflation has not come down, and it has been inflation that has been squeezing consumption and living standards.
However, the real problem of the economy, I believe, is not fiscal policy but the lack of credit in the economy and the failure of the banking system still to make credit available. The risk is that the new businesses that drive innovation and produce the new products will be strangled because of the lack of credit. The Government have introduced the Funding for Lending scheme. It is too easy to say what the effects of that are, but if it has a good effect, maybe it ought to be expanded further. However, they have been piling regulation upon regulation and demands for more capital from the banks, and that, in the last analysis, is incompatible with more lending and makes more lending more difficult and more expensive for the banks.
The Government have said that they want to see new entrants into the banking sector, which I think would be highly desirable, but I am not sure that that message has got through to all parts, particularly the lower parts, of the Financial Services Authority. I noticed that the chairman of Metro Bank said the other day that if he had known what was involved in starting a new bank in the UK, he is not sure that he would do it again or would have done it in the first place.
We await the arrival of Governor Carney, and there are great expectations of him, but he will not exactly be a man on a white horse, and I think it would be unfair to regard him as that. He has talked a lot already about central banks doing more to promote growth. I hope, however, that the Bank and the Government will be cautious about more quantitative easing. There is in this situation, even now when we do not have growth in the economy, a danger of creating more asset bubbles. We have seen the consequences of the "Greenspan put" in the past, where central bank action has been taken to keep the financial markets buoyant and the result has not been that we have avoided a crisis but that the crises have got successively worse. When I look at the level of the stock market, which of course can be interpreted favourably in one sense, I wonder whether it is reflecting the prospects for the economy or the consequences of quantitative easing.
The Opposition have inevitably been very critical and the Government inevitably are in a difficult situation. I think it was Boileau, the French writer, who once
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Lord Hollick: My Lords, I, too, would like to congratulate the Minister on his leading role in a brilliantly successful Olympic and Paralympic Games last summer. He is the living embodiment of the vital role the Government can play to promote growth in the short term and, thanks to the legacy infrastructure, in the long term too. His appointment provides welcome substance to the Government's claim to wish to boost infrastructure investment but will the Government provide the means to do it? He and his partners at the ODA received £9.3 billion from the previous Government, a level of support that was maintained by the coalition. We must hope that he will be successful in persuading his new boss that the entire economy is badly in need of this kind of commitment to invest in infrastructure.
As we have heard from other noble Lords, the UK economy is profoundly stuck. Real GDP is more than 3% below the 2008 figure and a significant 15% below where it would have been if long-term growth trends had been maintained. This sustained underperformance can be expected to impact adversely on the underlying production capacity of the economy and our skill base. The corrosive effect on the social fabric is high and under-investment in education, housing and public services is all too evident. Unemployment is up from 5.2% to 7.8% despite the recent downward trend and more than 900,000 young people are unemployed with a similar number of the total workforce out of work for more than 12 months. Yet the Chancellor's response to this grim state of affairs was to say in his Autumn Statement that,
Turning back from his failed and indeed nonsensical policy of "expansionary fiscal contraction" would have been a wise choice. Expansionary fiscal contraction works as an oxymoron but not as an economic policy. The belief that cutting the fiscal deficit would boost business and consumer confidence and lead to economic growth and that private sector investment would fill the gap left by the coalition's austerity plan was and remains profoundly flawed. In 2010, the OBR predicted that business investment would grow in real terms by 8.1% in 2011 followed by average annual growth of 9.5% in the following four years. In reality, it grew by 2.9% in 2011, 3.8% in 2012 and is forecast to grow 4.9% in 2013. Many of our larger companies hold high levels of cash on their balance sheets but uncertainty about the outlook for demand-a word that was curiously missing from the Minister's remarks-is proving to be a deterrent to investment. This flawed approach was in part sustained by a naive belief in the sanctity of the UK's credit rating as measured by discredited rating agencies. Markets are sophisticated enough to realise that without growth the deficit will continue to balloon leading to further austerity and further weakness in
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If the Chancellor is to address these deficits, he must first address the UK's dramatic lack of aggregate demand. This is not just the view of his opposite number, my honourable friend Ed Balls, whose analysis has, most gallingly for the Chancellor, proved to be all too correct, but is also the view of the IMF, the World Bank, the WTO and many other major economic institutions which have all warned that austerity was hurting growth and have urged economies-not just the UK-to embrace stimulus.
The Chancellor is, of course, a realist. He knows that he must alter course and boost growth. Over the past year, he has introduced a number of supply-side measures, many good, some less so, but taken together they are unlikely to have much impact in the near term. The Funding for Lending scheme is to be applauded. The 89 steps of the noble Lord, Lord Heseltine, to leave no stone unturned in pursuit of growth are most welcome and were warmly embraced by the Government. However, his principal recommendation to gather together all business funding in Whitehall and pass it to the regions appears, unsurprisingly, to have encountered some resistance at the centre. All these supply-side measures provide evidence of a quickening pace but no real determination to boost demand, which is essential if these measures are to achieve their purpose.
However, I detect a change in the economic weather. Surely the most significant step towards a more balanced policy is the appointment of Mark Carney-not on a white horse-as the next Governor of the Bank of England. The Chancellor was initially rebuffed in his quest to hire Mr Carney but, to his credit, he persevered, upped his offer and landed his man-a man with a record of openness to monetary policy innovation, who has advocated that central banks target both inflation and nominal growth and believes that monetary policy measures to help the economy grow are not exhausted. Last week in Davos he advocated an activist monetary policy with the immediate aim-indeed, priority-of ensuring that the economy reaches "escape velocity". I take this to mean that growth in the economy reaches a sustainable level where increased tax receipts can take over from austerity as the principal driver of debt reduction-a virtuous cycle of growth replacing a vicious cycle of cuts and persistent recession.
Therefore, Mr Carney is part of the plan B that dare not speak its name. He may deploy a range of initiatives such as forward guidance targeting growth and expanding the supply of Bank reserves to purchase a range of long-term assets with the aim of increasing spending. However, monetary policy can, as Mr Carney himself has emphasised, only take us so far. Bold fiscal measures are needed to help the economy move forward. Mark Carney has shown that he is adept at taking full advantage in a sellers' market. I expect that in his discussions with the Chancellor he has emphasised the limits of monetary policy, however innovative, and secured an acknowledgement from the Chancellor that a series of fiscal measures need to be introduced to create the demand the economy so badly needs. It is vital that the Chancellor and his new governor work
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Temporary fiscal measures which boost growth will make it more likely that the medium-term targets can be met and will, I believe, so long as the medium-term framework remains intact, be welcomed by financial markets which have become increasingly concerned about the depressive consequences of untrammelled austerity, as we have heard from other noble Lords. I would like to see the Chancellor introduce a UK version of the successful temporary payroll tax cut in the US and reduce employees' NIC by 2p in each of the next two years. The cost, after taking account of the tax generated by the additional economic activity, will be around £5 billion a year.
This weekend, the Deputy Prime Minister acknowledged that the coalition made a mistake in cutting much of its capital spending. Now is the time to reinstate the capital spending on the school build programme and on social housing. If we are to tackle the growing investment deficit in infrastructure and in energy, estimated to be £350 billion and £175 billion over the next 30 years respectively by McKinsey Global Institute, the Government must take action. Offering loan guarantees is a welcome step but only if it is accompanied by measures, such as the introduction of road pricing on motorways, which can provide private investors with an adequate rate of return.
Funding infrastructure remains a challenge, despite the Government's exhortations to the pension funds to invest. The Government could consider the introduction of tax-free infrastructure bonds for individuals, taking advantage of historically low long-term interest rates and providing hard-pressed savers, who have been badly penalised by low interest rates, with improved returns. Many infrastructure projects are, inevitably, medium-term or long-term in nature and so is their effect on demand. Boosting short-term demand could be achieved by a reduction in VAT on building works at domestic residences from 20% to, say, 5% over the next two years. This would encourage households to invest to improve their properties and utilise the currently under-employed pool of construction skills.
The Government have a vital role to play in promoting growth. The Chancellor made a bold move in appointing an activist and innovator as the Governor of the Bank of England. He now needs to display a similar appetite for activism and innovation by adopting bold measures to promote investment and growth.
Lord Wolfson of Aspley Guise: My Lords, I also welcome the Minister and am pleased to see a fellow businessman on the government Front Bench. As a serving FTSE 100 chief executive, employing around 50,000 people, I declare a very real interest in this debate. For the past four years, the economy has felt like walking up the down escalator. You have to work very hard just to stand still, and with real effort you might just move ahead.
The Minister has found himself, as a businessman, in the middle of an intensely political debate with a very simple business solution. To characterise the debate so far, we have, on the right, the belief that any expenditure-capital or otherwise-merely adds to national debt and, as such, undermines the financial health of the Government. It increases debt because you cannot borrow your way out of a recession, particularly a debt-led one. On the other hand, you have the equally misguided belief that all the Government need to do is pull the demand lever, loosen the reins and become the spender of last resort, boosting the economy and lifting it by its boot straps. We are told such spending would be good no matter what it is on. The Government will be the investors of last resort.
If I was a diplomat, I would say that both sides are right. As I am a businessman, I must say that both sides are wrong for one very simple reason. What matters, and will make both arguments right, is not how much is spent but what the money is spent on -that is, the quality of the investment. It is extraordinary to me, when I hear the Government talking about investment plans or the Opposition talking about how much money they would inject into the economy, that they talk about the amount spent, not the return on that money. Ultimately, it is the return on the money that matters. If the Government can invest in infrastructure that provides them with a cash return in excess of the interest on the money borrowed to build that infrastructure, not only will that not increase the deficit, it will actually reduce it because it is a good investment.
There is, however, a word of warning for those who take courage from these words and think that capital investment is all we need. It depends on the type of capital investment. If taxpayers' money is to be invested, it must be invested profitably. I hear the very good point about HS2 made by the noble Lord, Lord Skidelsky. There is a very simple reason why the investment is not being accelerated and that is because, although the cost-benefit analysis currently shows a profitable project, the returns to government are, over 60 years, about one-third of the total capital cost. As far as the Government are concerned, it is a loss-maker. For as long as the Government invest in loss-making assets, their finances will be undermined, wealth will be destroyed and the economy will be pulled back.
How are we to reconcile the very simple principle of profitable investment? I use the word "profitable" in a very special sense-a sense in which it is not often meant, particularly in another House in this great Palace. I do not mean "profitable" in the sense that it is likely to win votes; nor do I mean it in the sense that it will be socially beneficial, but in the sense that it will produce a cash return. Where are such investments to be found? History would say that Governments have not been particularly good at investing in truly profitable assets.
The answer lies in a little story that I should like to share with noble Lords. I recall from my time as a young retail apprentice at the age of 10, being taken out with my dad around the local village. Every Saturday morning at 9 o'clock there was a queue of between 10 and 15 people outside the baker's shop. One day, rather foolishly, I said to my dad, "He must be a very clever baker to have that queue outside". The answer
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If we want to find a queue in this country, we need to look no further than virtually every part of the road network at 8.30 am and 4.30 pm. Here we have a government monopoly-a business that only government can effectively invest in. It would produce, by my calculations, 10 pence of government revenue for every passenger mile travelled. Projects and roads could easily be built that would pay for themselves and therefore fulfil our criteria of truly profitable investments. They would not meet that terrible test of all government ventures: they are not politically popular. None the less, if you need any convincing of the economic potential tied up in our road network, do a little mental experiment-it is always fun. Imagine a London in which the M25, the M1 and the Westway were permanently closed. Imagine the havoc that that would wreak on our economy and very quickly you can see how much damage it would do. Now reverse that concept and ask yourself: why not build more great motorways? A flyover from Croydon to central London could get commuters into London in 12 minutes-that journey takes about an hour and a half today at the wrong time, if you are lucky. Such projects could easily be built and financed. It requires a level of focus and discipline that the Government simply do not have but the answers are there.
Not only are there measures by which the Government could invest profitably in the economy, there are other free ways that they could do so. Legislation is relatively free and it can do much to liberate demand. I take issue with the noble Lord, Lord Eatwell, when he said that there is no demand. As a retailer, I can tell him that there is an enormous amount of pent-up demand in the UK. In my company, we have identified 1 million square feet of trading premises that we would like to open, but this year we will open barely 250,000 square feet. That is not because we do not have the money. We are generating £250 million more cash than we can profitably invest in our business, after paying taxes and dividends. That £250 million cannot be invested because at least 700,000 square feet is tied up in a chronically slow planning system that has no sense of the time value of money. For example, it took us nine months to get planning permission for a stock room for a shop that we wanted to open in Surrey Heath. The opening of the whole shop was held up for that time. There was no sense of remorse. The attitude was, "If we make the decision tomorrow, next month or in nine months' time, it really makes no difference. We will make the decision when we get to it. Wait your turn".
This is amazingly debilitating but, above and beyond that, there is a more profound problem with our planning system. The essence of it is that the shape that our economy should take is determined from the top down, whereby decisions are based on what activities take place in which locations, through a system of zoning and restrictions on use that is, frankly, Soviet in its approach to economic development. I am used
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Our planning system replaces the initiative and intelligence of hundreds of thousands of entrepreneurs with the uncomprehending dead hand of a small number of extremely overworked planners. Since the time of Stalin, the world has lost faith in planned economies. We prefer free markets; we need to take that lesson to county hall. The pent-up demand held back by our planning system runs not into the hundreds of millions but into the tens of billions. The message is very clear: liberate pent-up demand rather than try to push, encourage and incentivise demand that will not happen of its own accord. If we really want to be brave in our economy, we should not just free up use of brownfield sites; we should take a small fraction of the 92% of this country that is greenfield. We should take the ugliest sites closest to London and turn them into beautiful new garden cities, because then those tens of billions will become even more tens of billions.
The potential is there; the Government do not need to spend a penny. It is in the hands of the planner's pen-we can create wealth and stimulate growth in this country. The rules of effective government intervention are very simple indeed, and they come down to one simple, pleasing principle: follow the demand that is already there. We must liberate the demand that is pent-up within our economy and abandon the crowd-pleasing subsidies, pet projects and announcements that we have to endure every two or three weeks about some brand new stimulus for some small part of our economy. We must seize instead the big structural opportunities and liberate the private sector to invest where it wants to and the public sector to invest where it can make money, not just for the taxpayers but for the whole country.
Lord Mitchell: My Lords, I am afraid to say-yet another businessman. It is getting rather dangerous. In many cases anniversaries mean little- just dates in the calendar-but sometimes they are useful moments to take stock. Tomorrow will be the thousandth day that this coalition government have been in office and it is a good moment to take stock of the economy. I must therefore thank the noble Lord, Lord Deighton, for securing this debate. As one of his sponsors at his recent introduction, I feel that I bear a personal responsibility, because for him it is going to be very tough to defend this Government's record.
Any way we look at it, the scorecard on this thousandth day is lamentable. Last week, as has been mentioned by several speakers, we received the GDP figures for the final quarter of 2012. As we all know, growth was minus 0.3%. We are heading for a triple- dip recession-unheard of in modern times. It is no wonder that the
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America is a very pertinent comparison. In many ways, the American economy and ours are parallel. Yet, while we wallow, the Americans are experiencing improving growth. There is no need to take my word for it. Noble Lords should look at the Dow Jones index, which is racing ahead. Indeed, the Nobel laureate Paul Krugman, in a notable column in the New York Times last week, totally debunked the deficit hawks in his own country. The United States did not pursue a policy of austerity, but instead chose stimulus through massive public investment while interest rates were kept at rock bottom. The result is that deficit and public spending as a share of GDP have started to decline of their own accord. Contrast this with George Osborne, who slashed public investment and raised taxes on families. In doing so, he has killed business confidence and growth and we know the result. The deficit has increased as a share of GDP and is up more than 7% on the equivalent period last year.
The facts in America, as they are in our own country, are that, when the financial crisis hit, the economy went into a tailspin, tax receipts fell and unemployment benefits rose. However, unlike us, the Americans held their nerve, re-invested and, as the economy recovers, the deficit as a share of GDP is falling. It is really easy economics to understand, so why does our Chancellor take a totally different position? If our economy were recovering, perhaps it would all have been worth the pain, but it is not. Everything is heading south. Indeed, in America, recent forecasts suggest that the federal deficit will be below 3% of GDP by 2015, a number that I am sure we, too, could live with.
So, where are we on the 999th day of this totally misguided policy? Our economy is static; our people are suffering; our businesses lack confidence; the banks are not lending; companies are sitting on piles of cash instead of investing; and our trade gap is widening. It is a total disaster, much of which could have been avoided were it not for the obsessions of the Chancellor of the Exchequer.
My Front Bench brief is SMEs, an acronym, by the way, that I loathe. Combining small businesses with medium-sized businesses shows how out of touch people are. Small and medium-sized businesses have very little in common, except for the fact that they are not large. But as everyone else uses this definition, I guess I will have to live with it. Interestingly, SMEs have held their own during this economic crisis. Employment figures have been pretty constant over the past five years and so too have export achievements. It has been large companies and the public sector that have shed their workforces. It should never be forgotten that SMEs contribute more than half of the UK's GDP.
This sector should be promoted and helped and it is here that I have some of my greatest concerns. It is absolutely true that this Government have spawned a multitude of financial initiatives to help SMEs. At one point, it seemed like a monthly occurrence that one programme or another was being announced to a baffled world. Although the Government may feel that they are doing well, the fact is that, in the SME sector, the situation is dire. No matter what programmes are announced, very little financial assistance seems to be getting through to the sector.
Many believe that the commercial banks take a significant cut out of government programmes in order to boost their own balance sheets. It is all so complicated and so difficult to understand one programme from another. To me, it all smacks of insufficient thought. I believe that the Government are making a grave mistake in looking to the high street banks to deliver their programmes. The truth is that the banks have forgotten how to relate to the SME sector. Five years of saying no, of being sceptical, of consigning troubled companies to the intensive care unit, now means that saying yes is hard to do.
Last month, I had the opportunity to visit the German Sparkassen banks. I know noble Lords are probably familiar with the German system, but what a contrast? More than 40% of corporate debt in Germany is channelled through these local savings banks. What impressed me was the long-term commitment that these banks have to their business customers, often going back decades. They stand on the touchline cheering their customers on. What a contrast to banks in our country. How many small companies have even met their bank manager? How many loans are accepted or rejected solely based on an online application, with never a human being in sight? In Germany, when a company gets into trouble, it seldom comes as a surprise and, if a banker is close to his customer, he can make an assessment based on something more than a computer print-out. I know some people say that we have had enough banker bashing, but until I see banks offering a real helping hand to SMEs, I will continue to criticise.
I would like to end by referencing my own area of business passion and that is technology. As some noble Lords will know, my whole business career has been in IT services, an area that I really care about. The Prime Minister seems to be captivated by technology, particularly the new business hub at Tech City. I am always sceptical about this. I have seen too many politicians who somehow think that they have become tech-savvy just because they can use the on/off button on their BlackBerrys. It is a lot more than that. We are blessed in this country, especially in London, in having all the constituent parts that are able to feed the new tech revolution-not just in IT but in fashion, media, advertising, pop music, and so on. All these are now converging into a new and very exciting tech revolution, much of it powered by smartphones and tablet devices. Mobile computing is here to stay and is becoming as ubiquitous as the pen and pencil of yesteryear. In addition, we have been swept away in the use of technology. This country does more online shopping than is done in any other developed county.
I end my speech today by asking the Minister a question that matters to the sector that I really care about. The Minister has been given the brief to speed up and manage infrastructure projects. Finally, we have had an announcement on HS2 and HS3, the first and second stages, and no doubt a major announcement on new airports will be forthcoming-if those in government can stop fighting among themselves-although, for the life of me, I cannot understand why it has to wait so long. Of course I know the answer, but why do party politics always have to take precedence over the national requirement?
When the Labour Government left office, we were ready to unroll universal broadband to all households by the end of 2012, but the coalition Government failed to make-good this guarantee. As a result, 5 million people are still denied access to even the most basic broadband coverage. Millions of families and thousands of rural businesses are suffering as a result. We have to be right at the forefront in IT technology, but we cannot do it without superconnectivity. Can the Minister give your Lordships' House assurances on this development?
Lord Forsyth of Drumlean: My Lords, it is a pleasure to follow the noble Lord, Lord Mitchell. I just wonder whether he is a little overenthusiastic in his belief in the Government's ability to pick winners, especially in the IT sector. As I recall, billions were lost in the health service and elsewhere through IT projects that were not properly sourced and not subject to the disciplines of the marketplace-projects that arise from people spending other people's money. It is also a great pleasure to welcome the noble Lord, Lord Deighton, to the Front Bench.
I have been surprised that, so far in the debate, people have concentrated on the deficit rather than the debt. The noble Lord's predecessor, the noble Lord, Lord Sassoon-whom we miss so much-was subject to regular questioning from me, asking why we continue to refer to reducing the deficit and not the debt, when, of course, the deficit is simply the rate at which the debt is increasing. I never got a satisfactory answer to that. Therefore I ask the noble Lord, in briefing himself into his department, to look at the ComRes ITV poll that was carried out just before Christmas-which may have got lost in the tinsel and bright lights of the Christmas period-where people were asked whether they thought that over the course of this Parliament the Government were going to increase the debt by £600 billion, reduce it by £600 billion, or leave it much as it is. Only 6% got the right answer, which is that the debt will increase by £600 billion. I regard that as a really serious problem, because if you are asking people in the country to make sacrifices and to realise that Governments face difficult choices, first you have to make them aware of the extent of the problem. I really do not think it helps for politicians-from whichever party-to shy away from explaining just how serious a problem we have.
The problem, in short, is that the state is growing and the economy is shrinking. The latest OECD figures show that state spending has now gone up to 49% of our GDP. That is an extraordinary amount. I used to define communist or socialist states as states where the
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The national debt is now 70% and rising. It rose by £15 billion last month alone. I know that we are all supposed to take the line that the Chancellor has cut the deficit by 25%, but the truth is that he met the target last year only by putting in Billy Bunter's postal order, which is the £3.5 billion that will come from the 4G spectrum sale-money that we do not have now and will come around only once-and by throwing in the proceeds from the interest on the bonds that have been purchased by the Bank of England printing money.
We are engaged in a completely new scheme of quantitative easing, which has been done on a stupendous scale. We are now relying on the interest on that money that we have created to say that we are closing the debt cycle. I am profoundly concerned by that. Every time I ask an economist or someone I respect about this, I find it very difficult to get the kind of reassurance to which the country is entitled.
On the Government's policy, if you ask a Minister what they think will happen to the growth in the economy in the next 12 months, they will say, "We are not responsible for that. We have an independent body called the OBR". But the OBR has been consistently wrong in all its forecasts. My noble friend Lord Lamont said quite rightly that all forecasters are consistently wrong. But it is worrying to say the least that this independent body that Ministers now rely on has been so far off the mark.
The truth is that the Government are stuck in a Bermuda Triangle. We have low growth, which means that the Government cannot make cuts in spending, and we have high spending, which is preventing us from getting the growth that we need. People may have forgotten this, but much is due to the efforts that were made by my noble friends Lord Lamont and Lord Baker, my noble and learned friend Lord Howe and others in the 1980s in making supply-side reforms and changes to the trade union law; the changes to our labour market policies. That is why employment has not gone up in this dreadful recession. Workers are now able to make arrangements with their employers to be flexible in the teeth of economic adversity.
The Government have made some mistakes, and we should admit to those mistakes. The noble Lord, Lord Eatwell, sent me a note to say that he had to leave the Chamber so I know that he will read this in Hansard, but it was sheer bare-faced cheek for him to argue for capital expenditure, which is right, and against the
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My noble friend Lord Wolfson made the key point in this debate. You have to look at the return on the money, and, on the whole, Governments are not very good at picking winners. Therefore, to choose a well-known liberal's favourite phrase, if you leave the money in the pockets of he people to fructify, you will get far more growth and far more for your money than if it is decided by committees in Whitehall with one eye to the next election. An example of that is this high-speed train. The high-speed train is the ideal political project. It is absolutely fantastic. It enables a Government to say that they are spending a large amount on infrastructure. It has a visionary appeal about it. And, of course, the planning, the implementation and the execution are so far ahead, you do not have to spend a single penny on it. In doing so, it creates all kinds of difficulties for the local economy and the blighting of property and so on. I would rather see the money being spent now on improving our transport structure and looking, as my noble friend Lord Wolfson said, at issues like road pricing and others that will help to make the changes necessary to get our economy to grow.
Again and again we hear complaints from both sides of this House about the banks not lending money to small businesses. I want to ask my noble friend, who I know has a background in banking and will be turning a fresh eye to this matter: how are the banks supposed to lend money to small businesses when at the same time they are being asked to increase the amount of capital that they have in order to support the lending that they have got? How are the banks supposed to find the money to lend to new businesses when they are being asked at the same time not to foreclose on mortgages and to try and keep businesses going? How are the banks supposed to find the money when there are companies-many of them now-substantial public companies, zombie companies, that are simply kept alive by low interest rates and by the banks not wishing to consolidate the loans on their balance sheets.
Of course, we are very conscious of the banking crisis and the impact that it had on our economy, but are we now not in danger of fighting the last war? Should we not be adopting a counter-cyclical approach to the capital requirements on banks in order to solve the problem? Frankly, producing lots of government schemes is not the answer. Better to have banks making commercial decisions with the balance sheet flexibility to be able to lend to these small businesses. This was a point that my noble friend Lord Lamont touched upon in his excellent speech.
How are the banks supposed to operate when the regulators, as a regulatory requirement, are requiring them to take Government gilts? We all know what is going to happen to Government gilts as the interest rates go up and quantitative easing unwinds. What is going to happen then to the losses being made as a result?
The reason that we are becalmed as a country is because the tax burden has become unbearably high. I am not here making a plea on behalf of people who pay high marginal rates of tax. If you earn between £8,105 and £42,475, taking the income tax and the national insurance payments that you and your employer has to pay, it is no less than 40.25% of earnings. Is it any wonder that we see so many part-time jobs, not full-time jobs? The costs of labour are unbearably high because of the burden of taxation.
For those on the other side who say it is all about tax dodgers and finding rich people, the top 1% of taxpayers now provide 24% of all the income tax but only 10.8% of the income. That is why the tax burden is now hitting people on low incomes and hitting them hard.
Indeed, I had the pleasure of chairing the tax commission for the Chancellor while we were in opposition. I remember that we agreed that we needed lower, fairer, flatter, simpler taxes. What are we doing? According to the TaxPayers' Alliance-an excellent body-we have created 299 separate tax increases and 119 reductions. Whatever happened to that great crusade to have a simpler, flatter, fairer tax system? I tell you this: if we do that, the revenues will go up and the deficit will go down.
I welcome the rise in thresholds. The Liberals claim the credit as their policy. I see my noble friend is nodding with enthusiasm. I refer him to the speeches made while we were on the Benches opposite by the noble Lord, Lord Saatchi. It was also one of our recommendations in the tax commission report in 2006. My cautious right honourable friend the Chancellor felt that our programme of tax changes, which would have amounted to £25 billion, was more than could possibly be afforded in a Parliament where borrowing now goes up by £15 billion every month.
On quantitative easing, I would like my noble friend to explain exactly how it will be unwound. The Bank of England made gains on the gilts which have been bought through this process of about £60 billion a year ago. What is the value today? What will happen when interest rates go up? How will that gap be closed?
My noble friend Lord Wolfson is a grand and successful retailer and I echo what he said about planning. Perhaps the House will allow me one indulgence. My eldest daughter has just started her own business and opened a shop on the King's Road in the worst possible circumstances of recession. Kensington and Chelsea is a Tory council but it took eight weeks to give her planning permission to put her name above the door-eight weeks while she was unable to trade and while it charged her rates for the privilege of waiting on it to give planning permission. It should be utterly impossible to operate in this way in the difficult circumstances that we have in the market place now. We have heard from my noble friend Lord Wolfson of the experiences of big businesses. At least he will have some clever people in his department who will be able to take on the planners. If you are setting up your own business, there is only you. In all the speeches we make about deregulation and supply side reforms, let us get down to the detail that is preventing businesses expanding and growing.
I have said that the economy appears to be becalmed. If you are becalmed, you need a wind of change, and that will come from reducing costs to businesses and reducing costly regulation. I have some sympathy with what the noble Lord said about reducing the cost of national insurance. We should stop thinking of new schemes that make life more difficult for business, such as changing the rules on paternity leave or introducing 1% pension schemes. I read in today's Times that all businesses are to be asked to produce information on the ethnicity of their employees when they want to be out there selling to customers and winning exports.
What is going on in this country when, since 2008, our currency has been depreciating and our exports have gone up by 1% while exports in Germany, France and Holland have gone up by 9%? What is going on? Why are we not more successful in our export efforts?
On energy costs, what are we thinking of? By adding to the cost of energy on business, all we are doing is importing carbon from China, and China is lending the money to enable us to run a deficit while our businesses are disadvantaged as a result.
Lord Forsyth of Drumlean: I have been saying for the past 15 minutes that we need to create an environment in which our businesses can go out and sell and are encouraged to do so. I was not making a particular point about devaluation: I was saying that we are more competitive as a result of the falling value of the pound relative to other currencies.
Lord Birt: It is a pleasure to follow the keenly felt and eloquent speech of the noble Lord, Lord Forsyth. It was not the first in this excellent debate. As the noble Lord, Lord Barnett, has reminded me, I am not qualified to add to the powerfully expressed views of some of our leading economists during the course of the debate, with others still to come. However, I shall offer some perspectives from the front line of the real economy.
I am involved as a director in a number of leading businesses in Europe and the UK, as well as a promising internet start-up. I am also an adviser to one of Europe's leading private equity houses; as a result, I am exposed to a great number of portfolio businesses, chiefly operating in the UK and Europe. Anyone who works in the ever more complex and competitive global economy, or anyone who has ever happened across the rusting industrial archaeology of the old Eastern bloc-I am sure this is common ground on all sides of the House-will testify that government cannot substitute for entrepreneurs or for genuine corporate expertise. The noble Lord, Lord Lawson, reminded us of that at the beginning of the debate.
What can Governments do to promote growth? First and foremost, as others have said, they can maintain a stable economy in which business can plan with confidence-something we have resoundingly failed to do in this last period of our history, as we all recognise, whatever the mix of reasons for that. Surely it is plain that the route back from the dire circumstances we find ourselves in, whether it is route A or route B, is a long one.
Secondly, from Governments, we need tough regulation of our financial institutions-and we are probably about to have it. They have let us down. We need that regulation to ensure that they manage risk responsibly, which they patently failed to do; that they lend sensibly; and that they do not hoard huge rafts of assets-which they are still doing-that they have neither the skill nor the means to develop and grow. That is undoubtedly one of many causes of the absence of growth in the real economy.
Thirdly, Governments need to ensure that the climate for investors is friendly and internationally competitive. In my experience, the incentive regime for business start-ups in the UK works well. But there is a particular failing in the capital markets that I do not understand, and which needs investigating. Investment in start-ups by business angels or small venture capital companies is thriving. As a result, early stage companies in the UK are prospering in large numbers at the moment, particularly in the new technology sector. However, UK capital to grow these successful young companies into major regional or global players appears mysteriously absent. There are many strange failures in our capital markets that we need to work harder to understand. With a lot of these younger companies, highly professional and acute US players fill the void and snap up our best companies before they can grow in a UK or European environment.
There is a further difficulty in attracting substantial global investment into the UK, which I do not think anybody has mentioned so far. Major investors are nervous still about the instability in the eurozone. I am exposed to many of these investors-the giant US pension funds, or sovereign funds in the Gulf-and they have trillions to put to work; there is no absence of funds in the wider world. Rightly or wrongly, they wrap up the UK into their concern. So it is in our interest as a country, though perhaps we cannot do very much about it, to help to accelerate the painfully slow process of resolving the eurozone crisis.
Fourthly, Governments can help to ensure that UK business has access to the right skills, as several noble Lords have mentioned. As we all know, we have some educational institutions of global renown, but we do not begin to produce all the skills that we need for the UK economy. In business meetings in the UK now, I regularly find that I am the only British citizen in the room.
We need to motor our economy to attract rare skills from abroad, but our immigration rules may begin to handicap us. President Hollande's early actions, and the response of France's business elite to them, remind us that talented individuals with rare skills in great demand globally are highly mindful of the overall tax regime when they decide where to settle.
As the noble Lord, Lord Mitchell, noted, Britain is currently the most advanced e-commerce environment in the world. However, we saw the lack of critical skills in areas of rapid development such as mobile and data mining. Without resorting to an entirely directive approach to designing resources within our education system, the departments for business and education need to be more alert and fleet-footed in spotting critical skill shortages and speedily encouraging and incentivising the relevant educational institutions in the UK to meet them.
I have left until last our area of greatest comparative weakness, which many noble Lords have already mentioned: the UK's persistent failure to invest in infrastructure. As others have mentioned, I note that the Deputy Prime Minister acknowledged last week that it was a mistake to cut into the Government's capital investment programme when the deficit reduction programme was first agreed. Mr Clegg may not be aware that we as a country have been here many times before. He should ask his officials to dig out the analysis conducted by the Cabinet Office Strategy Unit during my time at No. 10 on why we had by far the worst transport infrastructure in the developed world. I wholeheartedly support all that the noble Lord, Lord Wolfson, said about that, particularly the wonderful passion that he expressed about our impoverished road system. A large part of the reason for that chronic underinvestment over many decades-indeed, for the past 40 years, as the study identified-was that Governments of all persuasions had cut capital ahead of revenue expenditure when a downturn occurred. This is not just a recent occurrence.
At the time of that study, I concluded that the main root cause was the culture of the Treasury itself, understandably determined at such times of national reverse to rein back public spending. Officials aggressively target the easy wins first, and tomorrow's capital spending tends to carry far less political pain than today's welfare cut. Thus we continually fail to invest in infrastructure to modernise our economy and, as many have said, make it more productive.
Last Friday, I journeyed from Düsseldorf to Frankfurt Airport, a distance of about 120 miles. It took no time at all. I travelled by a high-speed train, which reached a top speed of 200 miles per hour. The train stopped, most conveniently for me, not in the city centre but at Frankfurt airport itself. Frankfurt airport has four runways. Heathrow-our lead airport-is not integrated into our main rail network. As we all know, it has only two runways, and, as we are all painfully aware, it is always-especially in winter-absolutely bursting at the seams.
This month, the Chinese Government announced plans to build a seven-runway airport for Beijing. In the last decade, China has built a fraction under 4,000 miles of high-speed rail track. The UK currently has a paltry 68 miles of high-speed rail track, and we are already experiencing an almighty struggle to build only another 330 miles of track by 2033, in 20 years' time. Why will it take 20 years' time to build that absolutely critical national arterial train line?
We need a considered 20-year plan-we needed it long ago, but we are where we are-for modernising our road, rail and air infrastructure in the UK, and for
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The Minister has resoundingly proved his ability to focus on a big challenge and to deliver it emphatically. Will he offer any hope that in the midst of this intensive and prolonged economic crisis, we can at long last begin a process of focusing systematically on UK productivity?
Lord Howell of Guildford: My Lords, I join in warmly welcoming my noble friend Lord Deighton to his Front Bench responsibilities. I listened with great interest to his opening speech. I must confess, however, that I am reluctant to join in this great argument between austerity versus Keynesian inflation, of which we have heard both sides in this debate. That is not least because both sides are in fact based on a wildly exaggerated view of the degree to which our economy in this country can be steered, manipulated, adjusted, rebalanced or anything else magically, by purely domestic economic actions, somehow to create growth and pull it out of a hat. In fact, I go further and say that the naivety of some of our economic gurus who pronounce on these matters never ceases to amaze me. It really is laughable to see the so-called expert analysts twisting themselves in knots, to coin a phrase, over whether GDP grew in the last quarter by 0.1% or shrank by 0.3% or more, when GDP itself is a questionable and highly inaccurate measure of economic activity and progress. I believe that it was invented only in the 1930s and it has in any case now been distorted beyond recognition.
Now the experts tell us that infrastructure spending can somehow be switched on overnight to "kick-start"-that is the phrase-the economy. I do not know what system they believe they are dealing with. They have obviously never worked in the construction industry or they would know that the rather ugly phrase "shovel-ready" is a meaningless term and that the best infrastructure projects take a minimum of two years to prepare-the best projects, that is-and to wind their way through all the permissions and controls that we still have in this country, even after certain reforms. I note what was said earlier by my noble friend Lord Forsyth, who reminded us that the HS2 scheme announced yesterday will take 13 years to get to its first phase. I am not at all sure where I shall be in 13 years' time, or indeed where even the economy should be. I am not sure that these issues fit into our present concerns at all.
The reality is different. It is that our fate lies very largely overseas and it is our sagging exports, especially to the eurozone, that have hurt us. That is the problem now. That is what the December economic review from the Office for National Statistics emphasises, quite rightly, and the Office for Budget Responsibility also makes that crystal clear. I am sorry that my noble friend does not think they are always right but on this they are pretty clear indeed.
In the past six years, goods exports to the poor old European Union have fallen by 5%, while goods exports to non-EU countries have risen by 65%. Since 2009-that is, just over three years ago-our total exports of goods and services to non-EU countries have risen by 35% and to the EU by 6%. At this moment, 60% of all our overseas earnings come from outside the European Union. That trend will probably accelerate and will certainly continue.
On the domestic front, I am not against more major projects here at home to repair and upgrade our dilapidated infrastructure. On the contrary, we need a bit of the imagination shown by the Victorians and some of what has been called the lunatic optimism of the Brunels-father and son-and other great Victorians. I believe that some of these projects could be financed without spooking the international bond markets.
I see that a certain Professor Pissarides, a Nobel prizewinner, has been telling a Davos audience that good energy and transport projects with a strong payback in return, both in narrow and wider economic terms, can be financed with minimum impact on the public finances if sensible accounting practices are used. Some of us have been touting this idea around for at least the past two years. It is all brilliantly laid out in American Gridlock, a book by one of America's best and most original economists, H Woody Brock, in which he speaks of the need for a completely new capital stock of higher quality. There is nothing very new about these ideas; it merely seems as though economists over here, on this side of the Atlantic, are at last waking up to them. They ought to be ideas that, frankly, transcend party politics and are not turned into a political football.
Still another domestic key to recovery is going for a policy of lower energy and power prices instead of the higher ones that we have at present. Again, my noble friend Lord Forsyth emphasised that. Energy costs here are stupidly high. We may not be able to match America's low gas and electricity prices at present, for obvious reasons, but anyone who doubts that the value of cheap and abundant power supplies is key should look at the industries now flowing back into America-especially petrochemicals-and the hundreds of thousands of new jobs being generated. Britain is in fact superbly placed over the next decade for gas supplies, with both our own substantial resources and half the world trying to sell us more of both piped and frozen gas. It is a true buyer's market and we should be making the most of it, rather than the least.
As I say, the real recovery is in export markets-whatever we do at home-and in our ability to be quick-witted enough, agile enough and far-sighted, innovative and creative enough to adjust to totally new world conditions in a network world. If we are looking for the queues that my noble friend Lord Wolfson, in his remarkable speech, said had to be there for demand, then that is where the queues should be forming for us to perform much better in the export market.
While we must of course remain constructive Europeans in a reformed and redirected European Union-we will be debating that matter in this House on Thursday-and while we remain close but not subservient allies of the United States, which is still a
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We have to recognise that the global energy pattern has undergone two successive and enormous revolutions -the first towards lower carbon and greener energy forms on both the supply and demand sides, and the second towards shale gas and oil, and the associated new extractive technologies-entirely altering the global map of energy resources and the corresponding political significance, influence and market power of many countries, many of them with Commonwealth connections, to which we must have access, as well as being sources of savings and wealth to invest back in this country, as the noble Lord, Lord Birt, referred to just now.
In this new landscape we must deploy with confidence and without apology our exceptional British qualities, historic associations, English-language strengths and worldwide cultural influence to our direct advantage in rising Asia, Africa and Latin America. In doing so, we need to use the full range of soft power techniques, new and conventional, to protect and promote British interests, and to promote the British global reputation and powers of influence and attraction for our goods and services.
The potential is colossal. I wonder how many people know, for example, that the Association of Commonwealth Universities, based in London, connects up to 530 universities across this planet in an amazing network of common interests, services and exchanges. That sort of thing is as important for our prosperity as many a conventional trade mission. It also opens up, though exchange between individuals and scholars, avenues for enterprise for small and medium-sized businesses. I should certainly like to see the chambers of trade play a far bigger role in the international export scene, as my noble friend Lord Heseltine recommends, and I declare an interest as the economic adviser to the British Chambers of Commerce.
There is a hopeful message to be distilled out of this. It is not a disaster at all. The message is particularly and almost uniquely favourable to Britain. The essence of it is that we now live not in a world of power blocks and superpowers but in a world of networks. That is what the microchip and the worldwide communications revolution have brought about, and many economists do not yet seem to understand that. It is not just a question of Asia and the southern world awakening, with their vast cities of the future and their cultures and values-which incidentally are often superior to ours when it comes to family cohesion and education-and generally pulling ahead of us in technology. That is the story of the past 10 years and it is almost over. Those schoolbooks that we had about capital flowing from the West to the developing world are history. The wealth, as well as the research and technological skills, are now flowing the other way. The debt-laden western powers are now turning east and south for desperately needed investment and capital from the massive savings and the huge sovereign wealth funds of Asia. We have
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This time round we also have to get even closer alongside not just the BRICS-Brazil, Russia, India, China and South Africa-but the great new energy powers, such as Australia and Canada, two of Britain's most stalwart friends. They are in the lead, followed by a whole raft of new players such as Mozambique, Tanzania and Kenya in east Africa, and in west Africa Ghana, Sierra Leone and the Nigerian giant, which will soon be overtaking South Africa if it can manage its internal politics. There are also South Korea, where I have just been, with its once direct alliance with the United Kingdom, Turkey, Mexico, Vietnam and other new players and new markets alongside which we must move very tightly.
For Britain, once we have navigated through the present dangerous seas, it means that our luck will be in-unless we screw it up. We will be sitting plum in the midst of the world's best network. We will be, even more than we are now, a safe haven for the world's investors. We will be increasingly well placed energy-wise, as I have described. That is the good story of where we are going as a nation-the purposeful narrative, worth telling, even while the cold wind of recession keeps gusting around us. It means that in the totally transformed world ahead, Britain is promisingly placed to become the networking nation par excellence.
Europe of course remains our region, where we have to step forward and work out how to lead, for once, in the reform of the European Union that half the continent is waiting and longing for, and we shall debate this next Thursday. America obviously remains our close ally and a gigantic market but the evolving Commonwealth network is our family and lucky legacy. We should stake our hopes and future prosperity on the connections and gateways to the great new markets that it offers. That is where the demand will come from. Whatever measures we take here at home, that is the source from which our return to full and sustained economic performance will come.
Lord Barnett: My Lords, like other noble Lords, I welcome and congratulate the noble Lord, Lord Deighton. His predecessor, the noble Lord, Lord Sassoon, and I had many lively exchanges, and I am happy to tell him that although we disagreed most of the time, the noble Lord, Lord Sassoon, and I are now very good friends and we will share a meal shortly.
I agreed with the noble Lord, Lord Deighton, when he said that getting spending under control is difficult. I spent five difficult years as Chief Secretary to the Treasury, and I know from my stress at that time how difficult those years were, so I sympathise with him very much indeed and hope he has a bit of success in that job.
I recognise all that the Government are trying to do on infrastructure and in other areas. Unfortunately they have not yet had great success, according to the levels of GDP and growth that we have seen in the past two and a half years. That said, the best hope is that in the forthcoming year we will not have a recession.
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Despite everything, borrowing has increased, as my noble friend Lord Eatwell pointed out. Despite all the austerity that we have seen over the past nearly three years, borrowing has increased and little or no growth has come of it. I am bound to ask, with all the Minister has told us and all that we have heard, what the Government are doing to get growth going. That is what everybody wants to hear now, not next year, not at the end of 20 or 30 years when we see HS2 going-I may not be around at the time.
Blaming the EU, the eurozone, the world, the snow and everything else does not help us. There are two obvious reasons. The first is the deficit reduction plan. It was inevitably bound to result, as my noble friend Lord Eatwell explained so clearly, in what we have. Infrastructure has been promised. Many Governments, not only my own but many others since, have failed to achieve it. The present Government are doing their best, and I understand that the noble Lord is now the Minister for Infrastructure, so I hope his plans will succeed, but when will they succeed?
We are told that much money has been put into infrastructure. One of the Minister's first Written Answers to me told me about the £5.5 billion that the Chancellor had promised for infrastructure plans. It is worth quoting what he said. Unfortunately he has already learnt from Treasury officials, because I asked,
not spent-this year. That is what it is. When I asked about the spending, he said that he does not hold data about spending. Perhaps he will have a word with his officials and look more closely at the Answers he is given.
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