As a number of noble Lords have said in this debate, we have not yet seen the expenditure. That £5.5 billion was inside the deficit reduction plan. It is not extra. We have not had any extra. We have not even had the £5.5 billion yet, and I doubt that we are going to get it before 2015, certainly not if HS2 is an example.

I shall not repeat everything that has been said, because my noble friend Lord Eatwell said very concisely and well what is wrong with the whole situation. It is no use blaming anybody. I am not blaming the Government particularly. We should not listen to the chief economist of the IMF too closely. Perhaps we should listen to somebody else in the IMF who arrived fairly recently: the new lady in charge. The fact is that the chief economist of the IMF has told us what the Government should now be doing. The Governor of the Bank of England has even had some new ideas about new supply side measures, and on infrastructure we have even heard that the Deputy Prime Minister did not realise what the Government were doing for

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the past two and a half years. They did not exactly get on with the job of dealing with infrastructure or, indeed, anything else.

Why we do not have money being spent can be summed up by that Answer I have just quoted. It is not being spent, and that is the problem. There is no use talking about why we do not have growth when the money is not being spent today. I know that developing major infrastructure plans is difficult, and it is as much the previous Government’s fault as anybody else’s, but the fact is that we are where we are now, and this Government have unfortunately not been spending money on infrastructure now. With all the good intentions in the world, it has all been allocated, not spent.

The other fine schemes that we have heard of are very good. The Funding for Lending scheme is a very good scheme, but again it is not being taken up to the degree required now for the obvious reason, which has been said, that there is not enough demand to force people to want to borrow. They are being told not to borrow. They should not borrow too much, and they are not willing to borrow. I wish all companies were like those that the noble Lord, Lord Wolfson, was speaking about. His company is highly successful. If every other company in the country was as successful as Next, we would be in a much better position than the one we are in today. Unfortunately, they are not, and they are not willing to borrow, whether guaranteed or not guaranteed. The Funding for Lending scheme is a very good scheme, and I hope it will eventually be hugely successful, but for the moment it is not. Others have been mentioned.

I have always had a great deal of respect for the noble Lord, Lord Heseltine. He did a great deal of work and produced a huge book. The Government support his plan, but he has said that even if all the bids that he advocates are in by this coming April, it will be 2015 before those schemes get off the ground, and I very much doubt whether those bids will be in by April this year. Unfortunately his schemes, although fine on paper, like everything else will not achieve what we require.

What are the other hopes for the economy? One “hope” is Mark Carney, the new Governor of the Bank of England. He said recently that he wants to see his target changed to nominal GDP. Some people do not appreciate that that does not mean dropping inflation but combining it with inflation. My noble friend Lord Peston and I tabled an amendment to the Financial Services Bill, which the noble Lord, Lord Newby, rejected, to delete the three little words in the Bank of England Act: “subject to that”. If the amendment had been accepted, the new Governor of the Bank of England would have had his powers immediately, but that was rejected.

Indeed, the noble Lord, Lord Newby, told us the other day that the Chancellor has rejected the new governor’s proposals, although he did not put it as bluntly as that. He said that they are not changing the target. If I may put it this way, they are typical Treasury words—as the noble Lord, Lord Deighton, is already learning—that do not answer the question. Have they dropped Mark Carney’s ideas? He did not say that they had not dropped them, just that they

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were keeping the same target. So we are stuck with it. My hope for Mr Carney is that he will ignore the target and just do it. The Chancellor cannot sack him because he is now the best in the world, as the Prime Minister has told us. He is unsackable, so my advice to Mr Carney, if he ever hears or reads it, is to ignore the target and just get on with the job of co-operating with the Chancellor and helping him to achieve what we all want to see—growth in the economy. As I said, that in no way means abandoning the idea of keeping inflation under control.

With or without the agreement of the Chancellor, I hope that the co-operation on monetary and fiscal policy that has been referred to will be achieved. I hope so, but I am not terribly hopeful. We are told that what the Government are doing now is because they cannot borrow any more, and that if the previous Government had not borrowed so much they would not be in this difficulty. In 2007-08 the previous Government themselves inherited a global financial catastrophe. It was not made in Downing Street. If the then Government had not borrowed, the present Government would have borrowed not only a huge debt but a recession as well—yet another recession. They saved that. The previous Government did at least leave them growth. That growth has gone and the debt is still there, so the inheritance is not the reason for a deficit reduction plan. Austerity is clearly not an answer. If nobody else can see it, I hope that Mark Carney can and will help the Chancellor to see it as well. The question remains for the Chancellor: what is he going to do about growth now? Is he going to spend any money? He has told us that he will not, that he cannot borrow any more.

In 2010, we were told that the Budget deficit reduction would be brought into balance in five years. The latest figure I have seen is from the Office for Budget Responsibility, which I am bound to say is not the greatest forecaster in the country on any list. The last I saw it was fifth out of 10. It is not my favourite forecaster, but it is the Chancellor’s favourite forecaster, and he said the annual Budget deficit will be down to 1.6% of GDP not in 2015 but in 2018. This was before the latest set of figures that we have seen, so if we are lucky it will be 2020 or beyond. I hope that long before then the Chancellor will be changed. We might even have one in the House of Lords, now that we can discuss these matters, so my noble friend could take over.

We have had lower growth for too long and we need to increase it. I hope, and it is only a hope, that the Chancellor, nearer to 2015, will see that he cannot go into another election with high borrowing and no growth and will do something to resist that policy and change it himself, if he is not changed.

5.44 pm

Lord Lang of Monkton: My Lords, it is a pleasure to follow the noble Lord, Lord Barnett, who has often been a distinguished participant in these economic debates, even though I certainly disagree with what seemed to be the central thrust of his argument today, as so often in the past. Like other noble friends, I welcome my noble friend Lord Deighton to the

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Front Bench and wish him all success. I thought his opening speech was crisp and lucid with a number of very good fours to the boundary.

Before I go further I should like to declare my interests as per the register, with particular reference to Marsh & McLennan Companies Inc, which has a subsidiary by the name of Mercer. Mercer is heavily involved in pensions and I hope to say a word about pensions in the course of my remarks. However, I have had no input from Mercer over this speech and indeed, it does not know that I am making it, which may cause it some concern.

My first point is that the whole debate of austerity versus growth is completely facile and futile. It is totally misguided. The distinction is spurious because austerity is fundamentally a growth policy. It is at the core of our economic management. Unless we reduce the deficit and tackle the debt, confidence will fall, interest rates will rise and the crisis that we have inherited and are emerging from will return.

Like my noble friend Lord Howell, I will not enter into the sterile argument on which the Opposition seem to be salivating about one quarter’s provisional figures on the deficit. For the past year we have been flat-lining—the figures add up to zero. They may be adjusted more favourably once the fourth quarter is studied further. However, it is perfectly normal, after a serious recession, that there is an early bounce back and then a period of flat-lining or even a further fall. It has gone on longer in this case because we inherited a bigger crisis. Our banks are constipated. The continuing euro crisis all last year affected both confidence and our markets. In passing, oil accounted for 0.2% of the deficit in the fourth quarter because production has been substantially lowered, mainly as a result of maintenance programmes which are now being completed. Therefore we may feel a compensating bounce back in the next and subsequent quarters.

I think that GDP is really only one measure of performance and not a particularly reliable one. Here I again agree with my noble friend Lord Howell. However, it is one on which there are grounds for cautious optimism. Some City forecasts expect growth of 1% this year, rising possibly to 1.5% towards the end of the year. That is slower than the United States but faster and higher than the eurozone. Employment, not much mentioned from the Benches opposite today, already gives grounds to support that theory. Indeed, even between September and November, in the fourth quarter, there was an increase of 113,000 jobs. Another indicator, the savings ratio, is now around 7.5% which is higher than at any time since 1997, so the private sector seems to support a tight fiscal policy, although ironically that may in fact slow growth a bit when coming from the private sector. However, with real disposable incomes up by more than 2%, there is now the beginning of empowerment of the housing sector and the private sector generally. The Funding for Lending scheme is widely supported by the banking sector. It is helping to reduce banks’ funding costs and in the past two or three months there has generally been a sharp rise in credit availability, not least with £50 billion worth of guarantees for infrastructure projects.

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Standing firm on our deficit reduction targets is absolutely vital but as progress is made—it is already being made with the deficit down from more than 11% to less than 8%—gradually some leeway will emerge and gradually new policies will be developed. That is as it should be. It does not undermine plan A. It simply builds on the progress that plan A will be delivering. I particularly welcome the way in which my right honourable friend the Chancellor has advanced his policies in reducing corporation tax. At long last we are becoming competitive there and I think that will reap dramatic and relatively early benefits to us —the Laffer curve will kick in. There has been a massive rise in the tax threshold for the low-paid, taking 24 million people out of tax. That is a very valuable growth policy because the money released back into the private sector recycles very quickly.

The focus by many commentators on our austerity programme is actually somewhat misplaced. There is a view among commentators, including those of the IMF, that the impact of tax rises and spending cuts, necessary for other obvious reasons, does not impose a major drag on growth. Other factors do come into play. I believe that lack of credit and liquidity are very serious ones. They are the real problem. Banks, to a unique degree in the United Kingdom, were massively overleveraged and underregulated for the first decade of this century. That was the distinguishing feature of the United Kingdom’s crisis. As they struggle to retrench, their lending is paralysed. They have also neutralised any benefit that quantitative easing might have delivered because they hoard the resources that it has delivered to them instead of getting them out into the economy.

The World Economic Forum competitiveness table shows the United Kingdom climbing to eighth position from the 13th that it occupied under the previous Government. However, overall productivity has still not recovered fully from the decline of those years. In part, I think this is caused by the chilling effect of banks not feeling able to force the issue on their huge portfolios of exposed loans because to crystallise them would severely affect their own balance sheets, as my noble friend Lord Forsyth said. Therefore, those loans are stuck in damaged and unproductive companies instead of being directed to new, more viable growth opportunities. Lack of credit is still a huge brake on growth.

There is another serious problem that many companies face. Quantitative easing has driven down yields on gilts which company pension schemes are obliged to hold in substantial quantities. As a result, the Pension Insurance Corporation tells us that since quantitative easing began British companies have had to pump an extra £150 billion into their pension schemes, denying themselves the use of that money and, incidentally, denying the Treasury some £30 billion in lost taxes.

My noble friend spoke of the need for structural change to rebalance our economy and revive the manufacturing sector. I welcome that very much and have a suggestion to make in the field of pensions. I was glad to hear my right honourable friend the Chancellor say in the Autumn Statement that the Government are determined to ensure that defined pensions regulation does not act as a brake on investment

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and growth. That is a very welcome chink of light but I would like to hear what action is contemplated and when it may happen. I hope that, in winding up, my noble friend may be able to enlighten me.

While quantitative easing is one factor, and a significant one—I hope it will not be resumed—I believe that at the root of the problem was the stealth tax of 1997 that withdrew tax credits from pension schemes, estimated then at around £5 billion per annum. Just as sustained deficits lead to accumulating debt, this revenue raid has by now deprived the trustees of such schemes of some £100 billion of capital. Further imposts have resulted from the levies to the Pension Protection Fund and the introduction of more demanding projected solvency requirements in 2004. Pensions regulators have often obliged trustees against their better judgment to forgo equities in favour of bonds. This toxic cocktail was completed by the credit crunch recession, the lengthening of life expectancy and, as I have mentioned, the impact of quantitative easing on gilt yields, with all the implications for the discount factor in calculating future liabilities.

Most of the burden of meeting the funding demands has fallen on employers dealing with a legacy of departed former employees. If and when interest rates rise, part of those deficits will bounce back. However, at present, many companies, mainly SMEs in manufacturing, are being starved of working capital and the ability to invest by the overhanging shadow of inherited liabilities to their pension schemes. It is no wonder that so many defined benefit schemes have been closed to new entrants. With the dramatic decline in the manufacturing sector in past years, many firms have contracted and have often diversified into specialist sectors with smaller workforces. They have closed their pension schemes but still have the bloated burden of the past and face regulation and enforcement powers that are volatile, onerous and sometimes very damaging.

I do not have time to elaborate more fully on this problem or to list some of the possible measures needed to mitigate this blight, but blight it is. I hope that the point has registered with my noble friend, and I am sure that it has. I am sure that he is already well aware of it and of the fact that things can be done. I hope at least that he may be able to assure the House that relief is at hand.

Lord Forsyth of Drumlean: I am most grateful to my noble friend for giving way. I wonder whether I might tempt him on this very important point concerning how quantitative easing has artificially lowered gilt yields, which are used to calculate the liabilities, and therefore businesses are having to contribute money. Would a simple change not be to take the yields on corporate bonds as the measure instead of gilt yields?

Lord Lang of Monkton: My noble friend is absolutely right. That is one of the possible solutions and I hope that it is being considered. Indeed, there are others as well. This blight engulfs companies large and small, damaging—even destroying—their balance sheets. However, the SMEs that form the core and future of our manufacturing industry are the least able to cope with

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it. Their working capital is diverted, new investment is forgone, innovation and new technology are unaffordable, productivity suffers, credit worthiness is damaged, jobs go and companies subside.

In my past ministerial career, I have always sought to attract inward investment to this country, which is still very important indeed for the future. However, to focus effort and resources on that, while failing at the same time to bring justified and much needed succour to our home-grown existing companies, is surely most unwise. Therefore, I welcome the chink of light that the Chancellor has given us. I hope that the door will be flung open wide and the light will shine more brightly very soon. To relieve the problem would be to reawaken an engine of growth.

5.55 pm

Lord Monks: My Lords, I am grateful to the noble Lord, Lord Lang, for mentioning the pensions issue which is a gathering storm for this country as private sector pensions reel under the present problems. Those problems are complicated for all the reasons that he gave and are intensified by the economic crisis.

Like others, I welcome the noble Lord, Lord Deighton, to his new hot seat. I hope that he enjoys it and that he proves to be as good a student as he was all those years ago in Cambridge. There are many good tutors around the Chamber.

I think we all recognise the difficulty of the situation that we are in. We all agree with the noble Lord, Lord Heseltine, that this is the worst crisis that this country has faced in modern times. I happen to be in the camp—unsurprisingly, perhaps—which believes that austerity leads to more austerity. While we are discussing economic history, I think that President Roosevelt has a better record than President Hoover when confronted with the problems of the time. I think that the chorus of calls for change and greater expansion, which are growing much more widely than on these Benches, are now reaching into the Government. I hope that they will be heeded quickly.

However, my main purpose is to address some of the longer-term problems of the UK economy which have contributed to our being in the mess that we are in. It is very important that when we get through the present problems we do not just slump back to a situation of business as usual. This country is not a basket case—I agree with Boris Johnson on that note of cheer—but it has some long-standing weaknesses which need addressing and which we have been able to put on one side at different times of our recent history. The weaknesses are well known and I will not labour them but the shrinkage of the manufacturing sector has not been fully compensated by the rise in the services sector, with the consequence of a widening balance of payments.

The noble Lord, Lord Forsyth, referred to the record of Mrs Thatcher’s Government but we should remember the costs of some of those changes on the supply side in terms of the action that was taken against trade unions. About 3 million jobs were lost in the manufacturing sector. A heavy price was paid for that in some of the old industrial areas and some of the political ramifications are still very much reverberating.

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Both the noble Lords, Lord Lang and Lord Forsyth, were on the front lines of the battle in Scotland. That battle still goes on, albeit in a different form. Social discord was very high and the costs of all that were borne to some extent—quite a large extent—by the fact that the North Sea oil revenues were flowing and the Exchequer was benefiting greatly from that.

We still have the problem of the shrinkage of the manufacturing sector. We have been consumers and borrowers rather than savers and investors. Too few of our companies think long term and we have a relatively low spend on innovation. Indeed, at present, investment in new machinery appears to be at a lower level than in Austria, Turkey or Mexico. R&D figures are better: the UK is fourth in the EU, but efforts are disproportionately concentrated on defence and pharmaceuticals.

Low productivity levels were referred to by the noble Lord, Lord Lang, and others as reflecting inadequate skills and low capital investment. Industrial relations are still poor in some places and communication at work also leaves a lot to be desired. We must face the fact that a high proportion of our economy—the commanding heights in some sectors—is in foreign ownership. This raises the question of why there are relatively few British entrepreneurs able or willing to take on some of these sectors. We also know that we have a systemic tendency for rewards for top executives to outstrip performance and those of other employees. This inequality can have a downward effect on growth and this is important for this debate, as well as for equality. We have a concentration on traditional markets. As the noble Lord, Lord Howell, said, we have an improving presence in China, India and Latin America but it is still relatively weak compared to our major European competitors. Behind it all, we have the imbalances in our economy between the relatively prosperous south-east and eastern regions and the rest of the UK.

So what can we do about this? We know it is very complicated but there are some glaring weaknesses that the complexities should not stop us from addressing. First, can we learn some lessons from Germany and put an obligation on employers, widely accepted there, to train, not just young people but others as well? Can we not use the public procurement process to encourage all contractors to reach the high standards of training achieved when contracts were awarded for the Olympics, in the human relations side of which huge project the noble Lord, Lord Deighton, was so successfully involved? Furthermore, we know that many in this House would favour deregulation of the labour market and we heard the Prime Minister talk about that in his Bloomberg speech just last week. Why is it that the other economies around the North Sea, if I can call them that, all have regulated labour markets? They did not follow the deregulation, easy hire-and-fire, route of the English-speaking world: collective bargaining is still strong at sectorial level, as are extensive information and consultation arrangements and worker representation in boardrooms. This style of corporate governance has greatly assisted the development of long-termism, a more equal spread of rewards and good economic and export performance.

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We also need to look at management culture and education. The UK often boasts of its world-leading business schools and universities but they often seem to be a transmission belt to put people into the financial services sector. How can they be more like staff colleges for a new North Sea economy and impregnate the other areas of industry and services? The noble Lord, Lord Lang, also referred to taxation. At present, the tax system favours borrowing over savings, debt over equity, capital gains over income and tax breaks for the wealthy rather than help for the poorest. Those emphases need to be changed. Can we restore a requirement in major takeovers to examine the social implications of bids and make takeovers a little harder? Perhaps we could re-examine the scope for the state to take golden shares in key UK companies while we still have some of these left. Every time we devalue, as we are doing now, British companies become cheaper for people in stronger currency zones.

The national investment bank, an idea espoused by the noble Lord, Lord Skidelsky, is clearly a way of trying to produce a more patient and readily available source of capital for research, innovation and SMEs. I would also like to see, as proposed in the report of the noble Lord, Lord Heseltine, regional policy restored and those regions that are particularly hard hit, because they are dependent on the public sector, given some help with new dynamism and entrepreneurial flair which needs to be extended beyond the capital and its favoured environs. I do not expect answers to these questions today, though I am sure we will continue to debate them. I have one particular question: are the Government likely to respond to the report of the noble Lord, Lord Heseltine, No Stone Unturned in Pursuit of Growth? That report got a good reception in the House and it is important that, with all the differences on display in this debate, we find things we can unite around. Many of the proposals in the report are very attractive to very many of us.

6.05 pm

Lord Bilimoria: My Lords, I remember coming to this country as a boy in the 1970s, when my father was posted here as the Indian Army liaison officer with the British Army, and seeing a country on its knees. Just a quarter of a century before that, this country had the largest empire that the planet has ever known but, at that time, the world had written off Britain as a has- been. When I came back to England as a 19 year-old student in the early 1980s, Britain was the sick man of Europe.

I welcome the Minister and congratulate him on his amazing leadership in the Olympics. He has an impressive track record—to use a pun—of delivery, which is what this debate is about. If you fast-forward to today from the 1970s and 1980s, we are a country which is possibly entering a triple dip recession. Yet this country has shown, over the past three decades, that it can completely reform its economy and that, despite all these problems, we are one of the 10 largest economies in the world. With no empire we are still a very wealthy country with so much going for us. So what are we doing wrong? We cannot blame everything on the global situation or Europe. We seem to have come to a binary way of looking at the world: in or out of Europe,

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austerity or spending, tax cuts or tax rises. If only the world was so simple. As the noble Lord, Lord Forsyth, said, we know that public expenditure of 50% of GDP is not only unaffordable but not right. We also know that the coalition Government’s tough talk of austerity seems to mean that we cut everything, including higher education and defence, no matter how vital some of these areas are, as the noble Lord, Lord Skidelsky, said. Just look at what is happening, unpredicted, in North Africa now. How short-sighted are our defence cuts, particularly in regard to troop numbers, now that we are intervening in Mali?

We know that, even with the Government’s tough talk, expenditure is going up not down. As the noble Lord, Lord Forsyth, said, debt is going up, not down. We have heard throughout this debate that austerity may have actually worsened our chances of recovery. At the very least, it has sent out a very negative signal and sapped the confidence of our consumers and our businesses. The only thing this tough-talking austerity has achieved is maintained our triple-A credit rating, but it seems that we might be on the cusp of losing that, too. It is ironic that our current global financial crisis was caused by the lowest prolonged level of interest rates we had known. I am talking about interest rates of 5%. We have now had three years of interest rates 10 times lower at 0.5% and that is what is propping up our economy. What will happen when those interest rates increase?

The Government have, to be fair, tried a great many measures: quantitative easing, injecting liquidity, fixing the regulatory and supervisory banks and putting more power in the hands of the Bank of England. That is terrific. The Government are doing absolutely the right thing on schools and welfare. However, the Government need to be fair and firm and they need to go further in some of these areas. Our welfare bill, including pensions, is over £200 billion a year. There is still a benefits trap and it pays not to work. A trial of a scheme which requires compulsory community service for jobseekers has been successful. Could the Minister confirm that this will be rolled out nationwide? I remember an event organised by the noble Lord, Lord Forsyth, at which I spoke to the former Australian Prime Minister, John Howard, about Australia’s very successful welfare-to-work scheme. He explained that he thought it was going to be very unpopular but it proved to be very popular, including with the jobseekers themselves. That is not austerity—that is the wrong word. It is about being firm and fair, and that would be in the best interests of this country because work pays and it is good to work. Of course, if you genuinely cannot work, the safety net should be there to assist those who genuinely need it.

How do we therefore get this economy into growth? The appointment of the incoming Governor of the Bank of England, Mark Carney, sends a very positive signal—the appointment, for the first time in history, of someone who is not British shows what an open country and economy we are. It is going to bring in fresh thinking. For example, he has suggested that apart from inflation targeting we should have GDP growth targeting. Does the Minister agree?

To get the economy growing, not only do we have to cut wasteful, unfair public expenditure but we need

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to change the mindset and attitude from that of an entitlement culture to an aspirational culture. To generate growth, we need to be competitive. We have a situation in this country in which our taxes, overall, are far too high. Time after time, we have seen that reducing taxes not only increases investment in the form of entrepreneurship and foreign investment but creates employment. Increasing taxes, on the other hand, stifles the economy, jobs and consumers. As the noble Lord, Lord Forsyth, said, just today it has been revealed that this Government have implemented almost 300 tax rises. These increases are harming business. In my industry, the brewing industry, the beer duty escalator has contributed to killing our pubs—the heart of our communities. Our alcohol duties in this country are up to six times higher than in some of our colleague European countries.

As a proud manufacturer in this country, I know the huge potential that manufacturing has to spur the growth in our economy. Manufacturing creates jobs, not only through the people who work in the factories but through the supply chains and the service sector. We face an uphill battle in terms of balance of trade. Manufacturing is key to increasing our exports. My business has exported to more than 40 countries. The noble Lord, Lord Howell, said that the potential for exporting is enormous. At last the Government have woken up to the need to rebalance our economy in favour of manufacturing, but we need to go further. We need an industrial policy that targets a specific level of manufacturing as a percentage of GDP. Does the Minister agree?

It is good that the Government are reducing corporation tax to 21%, but are we being bold enough? What about Ireland reducing it to 12.5% and sticking to it, with all the problems that that country has gone through? Employers’ national insurance is one of the most unfair taxes. We should be offering a break to SMEs that create jobs. We should not be taxing the creation of employment but celebrating and incentivising it. We need to support SMEs, as the noble Lord, Lord Mitchell, said, particularly in raising finance. I have said it before and I will keep saying it: despite all the government schemes intended to encourage SMEs, they are not working. Finance is still very difficult to raise for all businesses, particularly SMEs, as the noble Lord, Lord Lamont, stressed.

We need to do much more to encourage our businesses to engage with emerging markets. I am the founding chair of the UK India Business Council. I have seen what UK Trade and Investment does and I applaud its efforts, but we need to do much more, particularly to correct the negative image of our economy created through the rhetoric of austerity that continues. It is spoiling a lot of the work that UKTI is trying to do.

One of the most important elements of recovery will be the creation of new businesses. If we invest in entrepreneurship, we could create those extra 1 million jobs that we are looking for, with tens of thousands of new businesses—small businesses. They have to employ just a handful of people and one can create a million jobs. Entrepreneurship needs to be celebrated and embraced. Businesses and the whole of Britain needs continually to understand and appreciate, as my noble friend Lord Jones constantly says, that it is businesses

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that create the jobs that pay the taxes that create the growth in our economy. We need policies to encourage optimism among our entrepreneurs, rather than gloomy rhetoric about cuts and tax rises.

One of the reasons that the United States consistently bounces back, year after year, is that it invests much more than we do in research and development. The Minister outlined some measures that the Government are taking to encourage it, but we need to do much more, not only in university research but in helping the private sector. Can the Minister really say that the Government are doing their best on this? Our higher education sector is the best in the world, along with that of the United States, despite our sector being underfunded proportionately by up to three times when compared with America. Just imagine how much more we could achieve if we had the same proportionate level of funding that the Americans put into higher education and research and development.

This has become a bit of a Cambridge University debate, with the noble Lord, Lord Deighton, and his supervisor, as well as the noble Lord, Lord Eatwell, followed by the noble Lord, Lord Wolfson, who was treasurer of the Cambridge Union when I was its vice-president. It goes on. He spoke about the quality of investments. We all know that infrastructure investment must happen, but it has to happen fast. HS2 is going to take 20 years. Is that some sort of joke—a high-speed network being delivered at slow speed? It baffles us all over here. What about airports? What is happening about that strategy? That needs to be implemented fast. These large infrastructure projects are desperately needed for our competitiveness.

The mindset of the Government needs to change and, in the words of our inimitable Mayor of London, Boris Johnson, this Government should “junk talk of austerity”. We need to do that because the Government have to be seen to be firm and fair, and positive and aspirational in their outlook. They need to make the cuts required in areas such as welfare, but they also need to show that we want to be more competitive in cutting taxes. We need to look outwards and work much more with developing nations, such as the BRICS countries. We must be confident that despite all our problems, we have so much going for us. Just imagine what we could achieve. On 26 January, it was India’s Republic Day. I am reminded of the words of Mahatma Ghandi, who said:

“Your beliefs become your thoughts. Your thoughts become your words. Your words become your actions. Your actions become your habits. Your habits become your values. Your values become your destiny”.

The time has come to change our beliefs and to believe in ourselves with confidence. Then we can determine our destiny.

6.17 pm

Lord Higgins: My Lords, it is always a pleasure to follow the noble Lord, Lord Bilimoria, because he always introduces an element of optimism in what has otherwise been a pretty grim debate. Like everyone who has spoken, I congratulate the Minister on his appointment and wish him well. I certainly share the views of those who congratulated him also on his role

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in the most successful Olympic and Paralympic Games ever. I particularly urge him not simply to be a government spokesman in this House but to take an active role in his department. This is not always easy, particularly regarding financial matters, where this House is inhibited in some respects. However, the issue is important because we now have not only a generation of professional politicians in the other place, but we are getting pretty close to a generation of professional Ministers, and an injection of more realism from these Benches on those who are serving as Ministers would be welcome.

One of the curiosities of the present situation is that we have to put the question of growth, investment and so on in the overall economic context. It is true, as all Cambridge economists would say—there are more around the Chamber—that it is difficult not only for economists to forecast the future but to forecast where you are. This is certainly true at the moment because we have the strange situation where we appear to have an economy that we are told is about to have a third dip but, at the same time, the stock market is not doing at all badly and employment is increasing rapidly. The answer to this is probably to be found in the fact that wage inflation is virtually non-existent and it would seem almost that the unions have come to the view that they should go more for an increase in employment, rather than sustaining their members’ living standards. This clearly has serious implications for what might happen in the future, but none the less, this appears to be the case. The trouble is—as the noble Lord, Lord Skidelsky, pointed out—that the implication of that is that productivity is actually going down in the circumstances I have just described, at a time when we certainly, as an economy, want to have productivity going up. Therefore, the answer has to be that we must do something important to encourage aggregate demand.

Perhaps I might add just one other word in reply to the comments of my noble friend on the Front Bench. He actually referred to a “national infrastructure plan”. Those who have been in this place or another place for a long while have nasty echoes of George Brown and his ill-fated national plan, but I am not clear whether my noble friend will find that this has capital initial letters in Hansard. Perhaps he might clarify whether it is his intention that it should do so. There may be some argument for such an approach in the present circumstances with regard to infrastructure, but it is absolutely clear that the Government must continue to press on with their deficit reduction plan.

I am now rather puzzled by the position of the Labour Party. We were told originally, “Well, the Government are doing it too fast and too soon”—the implication being that something ought to be done. It was clearly the case that one could not go on as one was going on at the time when we came into power. What is the position now? The noble Lord, Lord Eatwell, with his usual reference to Keynesian multipliers and so on, seems to be saying that we should now take fiscal measures to stimulate the economy. In other words, he is saying that we should not cut the deficit but go on increasing it even more. He shakes his head; in that case, I am not clear where he stands on this issue. What does he want to do about the deficit? It is not apparent what he wants to do about the deficit, and

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whether it involves the multiplier as well. We look forward to some clarification in the wind-up speeches from the Front Bench.

The trouble is that if it is not possible to do it by fiscal measures one has to find other means of doing so, and lowering interest rates further is clearly not a possibility. Therefore, one inevitably has to resort to the question of quantitative easing. I share the qualms expressed by my noble friend Lord Lang and others about the effect of this on pension funds. The Treasury Committee is now, I gather, going to carry out a full report into quantitative easing, which will be helpful, but it does not seem to me that there is much alternative for the moment. It is certain that its impact is diminishing, but it seems to have some stimulating effect at the present time, which is something that we need in present circumstances.

Having said that, I am concerned about the fact that our monetary policy is confused and divided between the Treasury and the great Gordon Brown’s invention, the Monetary Policy Committee—a very unaccountable body. I am not at all clear that monetary policy is operating as it should. Until the innovation of quantitative easing, it was not a monetary policy at all: it was a Monetary Policy Committee without a monetary policy. All it had was an interest rate policy involving one interest rate. We are not clear as to how responsibility for overall economic management is divided between the Governor of the Bank of England—now incoming—and the Monetary Policy Committee on the one hand and the Treasury on the other. It is not clear to what extent there is a degree of co-ordination and—as I pointed out as the legislation was going through—they are working on two different forecasts. That is an extraordinary situation to find ourselves in. Having said that, I think it is important that we should continue to cut, but cuts must be made in a sensible way. Yesterday at Question Time, the issue came up about what is happening in south London, and the protests going on there on a large scale because of the proposal to downgrade the maternity unit at Lewisham Hospital. I have an interest in this, because my daughter was born in Lewisham Hospital. We went there because of its high reputation. Even more remarkably, her son was also born in that hospital because events happened much more rapidly than was expected; she had to drive 60 miles to get to the hospital and she and the baby arrived there at the same time. The hospital responded magnificently. To downgrade that hospital now would be a really appalling example of how not to do cuts—cuts made simply because another part of the NHS had overspent. It would be better to fire the people who overspent rather than affect Lewisham Hospital. I have digressed—but I am merely saying that I have a qualification in respect of my views on cuts. The cuts must be sensible and well judged.

On infrastructure, I would like to make two points. First, there is absolutely no point in having totally uneconomic infrastructure projects. In this context, whatever the political arguments may be on global warming and so on, to have a structure where the cost of the investment is to be met by imposing higher costs on existing consumers—some of whom may be dead before the new wind farms come in—is not a sensible way of proceeding. I am sure that my noble friend on

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the Front Bench, with his knowledge of microeconomics, will accept that if the pricing policy was right in the first place, loading the cost of the investment on top of that is certainly not going to give an optimum solution. But that tendency not to carry out a normal investment appraisal but to put the costs on the existing consumers appears to be happening with our normal, rather than high speed, railways. The regulators seem to have changed their view on what is the right way in which to make investment proposals in these large infrastructure areas. I hope that my noble friend in the Treasury will look carefully as to whether the regulators are really doing the job in this respect that they ought to do.

I gather that the Treasury Committee—of which I was chair for many years—has just made a report on the mini-Budget Statement. It says that it is important that the Chancellor should not create uncertainty with regard to his determination to reduce the deficit. I believe that that is the situation that ought to be avoided; it is important that we should remain resolute. At some stage, obviously, it will be possible to reverse the present policy, but that time has not come yet if we want to get growth in the economy.

6.28 pm

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

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

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

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

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

The fallacy of willing providers has been evident in connection with the major infrastructure projects that this country so urgently needs to undertake, if it is to retain its competitiveness in the global economy. There is a further fallacy of economic thinking that is operative in this area. This is a belief that social and national economic decision making can be, and ought to be, conducted within the same framework as commercial decision making and according to the same decision rules. Within such a decision-making framework, one of the essential elements is the commercial rate of interest, which is allied to the concept of the rate of discount. The basic nostrum is that future earnings and economic benefits should be measured and compared via their discounted present values. A pound promised tomorrow is judged to be of lesser value than a pound

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given today, by virtue of the fact that today’s pound could be invested profitably to generate a return that is determined by the market rate of interest. Notwithstanding that the current interest rates are markedly lower, commercial project evaluation continues to be based on a target rate of return of some 6% per annum. This implies a rate of discount that diminishes the value of next year's pound by 94%. Some simple arithmetic will reveal the fact that, in these terms, a pound promised with certainty 15 years hence will have a present value of only 40 pence. At this rate, it is no wonder that commercial enterprises are concerned with the here-and-now at the expense of making provisions for the future.

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

6.35 pm

Lord Northbrook: My Lords, I welcome this opportunity to discuss the UK economy and the Government’s role in promoting growth. Before I do so, I should like to extend a warm welcome to the noble Lord, Lord Deighton, in his new role as Commercial Secretary to the Treasury. His success as the chief executive of LOCOG in delivering the Olympic Games and the Paralympic Games last year deserves high praise. His previous eminent position at Goldman Sachs will also stand him in good stead not only in understanding the UK economy but also globally with his former firm’s contacts in, for instance, the US Government. His role is to lead on infrastructure and economic delivery, but I hope that he will also have time to assist our deliberations on the all-important banking Bill coming before your Lordships’ House later this year. His experience and background will be a vital influence on the success of that legislation. My noble friend Lord Sassoon has set him a high standard to follow, but I know that he will be more than equal to the task.

I move on to examine the state of the UK economy. Clearly, the latest GDP figures were disappointing. According to the FT, it was small and troublesome sectors, such as construction, and North Sea oil, which were particularly affected by maintenance problems, that had a big impact on the quarter. Excluding those, the economy actually grew by 0.7% over the last three months of 2012—a better performance but not a healthy one. However, it is encouraging that, according to the ONS, our volume of exports to

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non-EU countries has increased by around 35% since 2009, and I hope it will continue to be a source of strength.

There are some other, more encouraging signs according to the FT: broad money supply growth is picking up and mortgage rates have fallen as the Bank of England’s funding-for-lending scheme starts to help the flow of credit from banks to the real economy. The FTSE index of leading companies is at its highest level in four and a half years and there are signs of recovery in some major economies. The other bright spot is that people are continuing to find jobs. Half a million more people are in work compared with a year ago and these jobs, according to the ONS, have all been created in the private sector. I am not an economist but I find it difficult to reconcile the continuing poor GDP figures with the continuing good news on private sector job creation. I am not sure whether the diagnosis of the noble Lord, Lord Skidelsky, is correct.

Public sector net borrowing has also fallen from its 2009-10 peak of £159 billion to an OBR forecast of £108 billion for 2012-13. That is a major improvement but the one-off factor of the Royal Mail deficit transfer has helped the figures. However, unless growth picks up, I see that borrowing will decline much more slowly. Table 4.18 in the OBR December 2012 forecasts shows that it is not overall public sector current expenditure that is decreasing but the rate of increase in this expenditure. Therefore, if the economy does not grow, public sector net borrowing will not decrease significantly.

However, the Autumn Statement contained the most encouraging measures that the coalition has produced to encourage growth. The £5.5 billion capital package and support for long-term private investment in roads and science infrastructure is very welcome. The cancellation of the 3p rise in fuel duty was well received, especially by small businesses. The cut in corporation tax and the significant increase in investment allowance will be of great help to companies. The idea put forward by my noble friend Lord Heseltine of devolving a greater proportion of growth-related spending to local areas from 2015 has been welcomed by the CBI. However, I maintain my concern about whether the quality of the local enterprise partnerships, which have replaced the regional development agencies, are up to the task.

Measures to ensure that businesses—particularly smaller businesses—can access finance and support include plans to create a business bank, deploying £1 billion of additional capital. In addition, the Autumn Statement included funding to enable UK Export Finance to provide up to £1.5 billion of loans to finance small-firms exports. Both measures were particularly welcomed by the Federation of Small Businesses.

Looking at Labour’s reaction to the Autumn Statement from Ed Balls, and listening to the noble Lord, Lord Eatwell, I note their criticism, but I have yet to see a detailed Labour Party alternative plan to get us out of the mess that they created. Their general alternative seems to be to spend more. This is a dangerous path to pursue since it could well lead to our borrowing costs going up considerably.

I move on to the second part of the debate—the Government’s role in promoting growth. I am not of the belief that the Government should intervene to

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pick industrial winners. In a paper entitled

Industrial Policy in Europe Since the Second World War

, written last year, Geoffrey Owen of the LSE makes a tour through UK, French and German industrial policy since 1945. His conclusion is that, in the main, government intervention has not worked and that, instead, it would be far better to create the right economic conditions for the industry that I referred to a moment ago. UK government intervention failures included the de Havilland Comet, Concorde, the advanced gas-cooled reactor, British Leyland and ICL. British Aerospace and Rolls-Royce were the major successes. So, with some exceptions, these interventions were generally unsuccessful. Policy- makers tended to overrate the risks and costs of market failures and underestimate those associated with government failures. There is also a mistaken assumption that there were certain technologies that a country somehow needed to have, and that they were more likely to be achieved through centralised direction than through competitive markets. The cost to the taxpayer of ill-judged industrial policy was high.

I believe that it is more important for the Government to create the right business regime to encourage growth through simple and lower taxes, less but sensibly targeted regulation, speeding up the planning application regime—as my noble friend Lord Wolfson mentioned—better business education and encouraging bank lending.

We must not allow ourselves to become too pessimistic. I conclude by giving two examples of company bosses—at completely opposite ends of the spectrum in terms of size—who, despite their concerns, feel optimistic for 2013. Rob Law is a businessman who was turned down by “Dragons’ Den” but has still done well in the field of producing children’s suitcases. He summed up matters well in a recent interview in the Hargreaves Lansdown investment magazine, saying:

“I think the holy grail for government is to simplify the tax system. When you start out in business, unless you have an accountancy background, which most people don’t, it is hugely complicated. I think if you had a simpler tax system, you’d get a lot more multinationals coming here”.

Despite his concerns, his company has done well. He goes on to say:

“We’ve had a brilliant year”—

in 2012.

“We started production in the UK, grew our team to about 30 people and launched a couple of new products. We are now exporting to 97 countries”.

At the other end of the experience scale, Sir John Parker, chairman of Anglo American, has recently made some very optimistic comments. He has said:

“I think we mustn’t become too pessimistic. There are some reasons for optimism ... I think the fundamentals for UK companies are looking stronger than for many years. Non-financial companies have been generating significant cash surpluses over the last few years. Whilst profits have recovered, uncertainty has prompted companies to save rather than invest. But over the next few years I expect this uncertainty to fade, which should encourage companies to start investing again. I regard this as the key to a sustained economic recovery in the UK in the medium term”.

6.45 pm

The Earl of Listowel: My Lords, I also welcome the Minister to the Front Bench and thank the Government for this important debate. I declare my interest as a

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landowner, detailed in the register of interests. I am also vice-chair of the parliamentary group for children and young people in care and leaving care; treasurer of the parliamentary group for children; and a trustee of the Michael Sieff Foundation, a charity promoting child welfare.

I rise in part to take issue with the very interesting speech of the noble Lord, Lord Wolfson. In the detail of it, he rather dismissed the idea of social investment at the current time—I hope that I am being fair in conveying what he said. We must not underestimate the importance of investing in early intervention, even at these difficult times. If we want to have a skilled workforce and if we need to compete with China and other nations around the world, we need to invest early in our children, because what happens in the early days and years of a child’s life is the most important determinant of whether they will do well in education and employment.

I welcome the Government’s commitment to early intervention. The right honourable Iain Duncan Smith has championed for many years this notion of intervening early to get the best outcomes. I was cheered recently to hear Andrea Leadsom, a Conservative MP and vice-chair of the parliamentary group for children’s centres, really highlighting the difference that can be made if one gets in early with children and children’s lives, or indeed in terms of the pregnancy of a mother and at certain times in adolescence as well. There is a flexibility to the mind where the neural pathways are able to be rejigged in certain ways, which can help people to do far better in education, in work and elsewhere.

Of course, there have been some positive outcomes with respect to the 100,000 troubled families that the Government have been focusing on recently and the Government’s investment in health visitors, which is very welcome indeed. However, I repeat that what happens early in life is the determinant, to a large extent, of future employability. Too often business people think, “The education system has failed. We need to put in our skills now at the age of 16, 17 or 18”—but that really is too late. We know from the research on early years education that good-quality early years education gives a huge boost to the educational outcomes of children. Indeed, a good early years experience can protect children against bad later educational experience. For instance, children having good early years experiences going to poor or middle-quality primary schools will do as well as other children going to good primary schools because of that good early experience. China is investing hugely in early years provision because it recognises its importance to its future economy.

I am afraid that despite the welcome attention from the Government in early intervention, the global picture is worrying in terms of children and family services, and in particular in terms of child protection. The 28% cuts across the board to local authority spending, the cuts in the number of youth workers and the cuts in other services are really impacting on children and families. Local authorities are maintaining their statutory services, so they are ready to protect the most vulnerable children, those harmed the most. However, all those other services around children and families are gradually

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being picked off. Statutory services are moving on to the back foot. Year by year we see more and more children being taken into care. All those good services that could have intervened earlier on are not there. To use an analogy, it is as if this is a football match. Over time, one is seeing one’s forwards being sent off, then one’s mid-field players and then one’s backs. One is left with the goalie at the back—the child and family social worker—trying to step in and feeling overwhelmed.

I have an example to express better what I mean. I draw noble Lords’ attention to the National Grid Transco young offender programme which is closely associated with Sir John Parker, the former chairman of National Grid Transco. In 10 years it has provided the programme to 1,000 young people. It has seen recidivism rates drop from a norm of 70% to less than 4% for those young men and women. Sir John Parker always highlighted—he was a tremendous advocate in business for adopting this programme—the cost to the nation of keeping these adults in prison. The year before last that was about £38,000 each per annum.

Recently, I have been hearing stories about some of the young men who have come through this programme. I heard how well they were doing in their jobs in the utilities. We have an ageing workforce and they were meeting a real need for new men and women in these areas. They were rising up the ranks and taking on responsibility very effectively.

I also heard about a man who got a home for himself so that he could be a lone parent to his two sons. Another man had lost custody and contact with his children but made sure that he quickly got a home so that he could have shared contact with his sons. In my own experience of visiting presentation ceremonies for National Grid in the past, I have been touched to see fathers with their young children. These young children now have fathers. A chief indicator for offending is that one’s parent was an offender themselves. Instead, these infants and young people are now seeing their fathers in a decent job, able to provide income to the family and setting a good example to them.

I hope that that example shows what a difference good social investment can make to the economy. I hope that the Minister will give an ear to the concerns of the chief economist at the International Monetary Fund and others about the risks of making cuts that are too deep. I am no economist, and cuts may be necessary in the current circumstances, but I am very concerned that we have seen this all before in the 1980s and 1990s. Youth services and children's services are cut and cut and we pay the cost in the long term. We will not get the educational outcomes we need for our population if we do not give families the strong support that they need.

The noble Lord, Lord Howell of Guildford, emphasised that one of the strengths of the east Asian economy was the cohesion of its families. In terms of our society, the noble Lord, Lord Alton of Liverpool, emphasises again and again the crisis in fatherhood with so many children growing up without fathers. We cannot overlook the need to support families as best we can, even in these difficult times, if we want the children and young people of the future to be productive citizens and not to end up on benefits or in the criminal justice system at great cost to the taxpayer.

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6.53 pm

Lord Sheikh: My Lords, I am very grateful to have the chance once again to contribute to a debate on what has been and continues to be our Government's number one priority: promoting growth to reduce our national debt and restoring stability to our economy. It is important that we continue to have such discussions in order to continually monitor progress and exchange ideas about how we can assist our recovery further. I congratulate my noble friend Lord Deighton on his excellent speech at the outset of this debate. I also congratulate him on his ministerial appointment.

Concerns were raised last week following Friday's announcement that our economy contracted in the last quarter, so this debate is most timely. The Chancellor was clear in the Autumn Statement that, despite the inevitable blips, our economy is ultimately improving. The deficit has been reduced by a quarter since the Government came to power in 2010, significantly lightening the further pressure on our debt each year. Employment is of course a key driver of growth and recovery and we have seen more than 1 million new jobs created in the private sector in the same period. Unemployment is at its lowest level for 18 months and the number of people in work has reached another record high. Demand for manufacturing orders is also expected to rise in the next quarter. Taking such indicators into account, it is fair to say that we are still on a stable path to long-term recovery.

We also received extremely positive news just yesterday that the FTSE 100 index rose to above 6,300 points for the first time since May 2008. It has now gained nearly 7% since the beginning of the year. The fact that the value of our top 100 companies is at its highest for nearly five years can only be seen as a bold endorsement of the direction in which the City of London and our economy as a whole is heading. Such a rise will only increase investor confidence further and continue to build its own momentum—which in turn allows business to expand, provides further employment opportunities and increases dividends, ultimately giving people more money in their pockets and a greater sense of financial stability.

I refer to an encouraging report recently produced by UKTI which found that 46% of major financial service companies in the UK are actually overseas-owned. In particular, it emphasised how the United States uses the UK as a springboard from which to access the rest of Europe and that we are particularly well placed to benefit from the ongoing boom in the world’s emerging markets. One of the Government's key targets on the economy has been to ensure that Britain is seen as open for business, and this report evidences just how accessible we have made ourselves to overseas investment.

This does of course remind us of the wider global context within which we are operating and to which our own economy is closely linked. In such a globalised economy, we cannot be fully confident of future prosperity unless our neighbours, allies and trading partners are also in positions of reasonable financial health. Just last week, the IMF downgraded its global growth forecast for the next two years, mostly due to the continuing crisis in the eurozone, which is now expected to remain in recession throughout 2013.

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We will continue to be vulnerable for some time and must not be knocked off our disciplined course of austerity. The more severe the illness, the more cautious the treatment will be and the longer it will take to recover. Now more than ever it is important that we have strong leadership. Our Prime Minister was clear last week in Davos that trade, tax and transparency are our economic priorities heading forward. As a businessman, I fully support this approach.

The Government have already been taking numerous measures to stimulate growth: local enterprise partnerships and enterprise zones have been established; our corporation tax is now the lowest in the G7; and just earlier this month the expansion of the start-up loans scheme was announced. In particular, I commend the Government's continued commitment to seeing through the plans for the High Speed 2 railway line. I appreciate that there is some controversy surrounding these plans, but the wider long-term benefits to the United Kingdom simply cannot be underestimated. As the Prime Minister said, this project is an engine for growth in itself, ultimately creating tens of thousands of jobs. Reducing journey times between some of our major cities would be a significant step in addressing the north-south divide that currently exists in our economy and would regenerate regions that are sometimes overlooked.

I think that we would all agree that overseas trade is one of the most important elements to ensuring healthy, consistent growth. The Government understand this—one of their four aims to achieve growth is to encourage investment and exports. This is where we must create and maximise any and all opportunities.

I am concerned by the long-term decline in our share of global exports. We will not reach the great heights that we once did if we continue to buy so much more than we sell. That is why I am so pleased that the Government have developed a renewed focus in this area, with UK Trade and Investment actively encouraging small and medium-sized businesses to increase the exporting of their goods and services, particularly to emerging markets. I also welcome the wider commitment to double British exports to £1 trillion by the end of this decade.

I have previously mentioned in your Lordships’ House that over the past two and a half years I have travelled to a number of countries abroad and promoted trade between the United Kingdom and overseas countries. There are of course growing opportunities in countries such as Brazil, Russia, India and China. There are also prospects to do more business in the Middle East, central Asia and several African countries. I know some of these countries very well.

We should maintain and in fact strengthen our trade links with the USA and with other European countries. I am a great believer in the Commonwealth. We should build stronger trade links with other Commonwealth countries. I totally endorse what my noble friend Lord Howell said with regard to the Commonwealth countries. I believe that we have a good story to tell about provision of our services and manufacture of our goods. We must, however, make sure that our businesses are world-leading and globally competitive in order to attract inward investment and continue to increase further the potential for us to export to the rest of the world.

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Our motor vehicle industry is a good example of where this is already happening. Last year 82% of all cars made in the United Kingdom were exported overseas. The total was 1.2 million vehicles—the highest ever. Britain is set to produce 2 million cars in 2017, following £6 billion of investment in the motor industry in recent years.

We have greatly improved our manufacturing methods and produced impressive vehicles which are now in greater demand. From trade comes growth, and from growth comes prosperity and stability. As a businessman, I have always believed that a successful organisation needs to produce very good products which should be competitively priced. It should then undertake an active marketing campaign. In doing so, it must always keep a close eye on its expenses. The Prime Minister has said that he wants every department in Whitehall to be a growth department, and he insists that every Permanent Secretary has growth as a key objective.

The Government are playing their part by giving business a positive and supportive framework around which to build and project itself. The Government are actively involved in improving infrastructure which will provide employment, attract investment and help businesses. Building up skills is also an important objective of this Government. We all believe in cutting red tape and giving more powers at local levels.

None of us has been naive to the fact that it was never going to be easy and would take some time for our economy to heal. The combination of the previous Government's financial mismanagement and the wider global situation was a mix so toxic that it caused damage on a monumental scale. However, I believe that these measures and a continued ideological drive towards growth as a means of rebalancing our economy will ensure that we continue on our path to recovery. I am confident that we will promote growth and cut the deficit if we maintain the course that our Government are pursuing. It will be a hard task that requires the co-operation of government departments, various sectors of the industry, the business community—in fact, everyone in the country. I am sure that Britain will live up to its name of being great.

7.04 pm

Lord Desai: My Lords, I, too, congratulate the noble Lord on his new appointment. I am afraid I was out of town when the Olympic Games were going on, so I missed the full glory of his achievements, but I am sure that he will match them in his new position.

It is a strange debate in which 25 men and only one woman are speaking. What is wrong with economics that it puts off women? It happened to us last Thursday when we discussed the banking union, and only the noble Baroness, Lady Falkner of Margravine, from the Liberal Democrats was speaking. The noble Baroness is also the only Lib Dem spokesperson, so she is unique in two different respects.

My perspective on this crisis has been different to that of many other noble Lords. It is a much deeper crisis than we think and will take much longer to sort out than we think. The idea that we will get rid of our

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deficit in five years was never on. We will have to work much harder for this because the roots of this crisis go much deeper.

There are three parts to this. First, around the early 1970s we started de-industrialising, losing our industry, and our industry started migrating to Asia. This happened not only to us but to many other European countries. Germany is an exception, to which I will come. Incidentally, Germany has never adopted any Keynesian policies that I know of. It has always been a non-Keynesian-run country and has always taken horrendous cuts in real wages. Even now, its consumption to income ratio is lower than in the UK, regardless of what growth it has. It is a very different kind of economy and we are not about to replicate Germany. We can forget that.

Conservative voters do not like infrastructure development, such as HS2. Forget about Labour; our prosperous people are anti-growth with regard to HS2. Our prosperous people are against the third runway. We have a deeply anti-growth mentality. This is not my main point, but I want to point out that we are somewhat perverse in our desire for growth. When it actually comes to our doorstep, we say, “Take it somewhere else, thank you very much”.

But to go back to my point, we got into de-industrialising early in the 1970s, and this happened to quite a lot of other countries. When we finally lost a lot of industry, some of which we could not keep here because we had priced ourselves out of international markets, we replaced it with a service sector through much of the 1990s. Economics is a strange subject. In neoclassical economics, it does not really matter whether you dig ditches or make a car or make candyfloss. It is all income. If you make candyfloss and not cars, you are still growing. In the 1990s, we had the longest boom, for 15 years, but it was entirely based on the growth of the financial services sector. Our wealth creation was in the financial services sector. I know it is no longer fashionable to like the financial services sector and we find it not socially useful, but we lived off that sector for 15 years. We did not reindustrialise or do anything about upskilling. I have been in this country for 45 years and every year we say, “We should have more apprentices, German-style”. Wow, there we go again. We have not reindustrialised; we have been happy with the financial services sector.

As a part of that, we stopped saving. Households stopped saving, and Governments stopped saving. Our crisis has arisen from over-spending, under-saving and over-borrowing. It was not only us; almost the entire western world under-saved and over-borrowed, and the poor, fast-emerging Asians were lending us a lot of their money. They were not only lending us money, they were also exporting goods to us which we bought with the money they had lent us. So, in a vicious circle, we went on having balance of trade deficits thanks to the money they had given us. It was like a drug dealer giving you money to buy drugs and then you need more drugs.

Getting out of an over-spending crisis is not easy, as the noble Lord, Lord Skidelsky, pointed out. This is a portfolio of a stock disequilibrium crisis, and it will take a long time for our savings to recover to anything like a decent standard. The noble Lord, Lord Lang,

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talked cogently about our problems with the pensions industry, and so on but, given our demographics, we need to get to a level of savings higher than what it was in the 1990s. The question is what we are going to do to get our level of savings higher than it previously was. How are we going to get to that stage?

I know that there is a clear division between Keynesians who think that one more bout of spending will get us out of this crisis. I have studied Keynesian economics and I have been a Keynesian economist, although I am not one during this crisis. Our problems arise from what we did during the prosperous years about spending. It is not what we borrowed after 2008 that is the problem; our problem is that we borrowed at the top of the boom and that our debt to GDP ratio went up in the good years. Had it been the case that borrowing was self-liquidating, we would not have been in this situation. So, to some extent, there is a problem, not about borrowing but what you spend it on. Some spending is self-liquidating, while other spending is not. Obviously, we had a balance between the public sector and private sector or, perhaps, between the wealth-creating sector and the welfare-creating sector. That balance went awry somewhere during the boom years. We started at 36% of GDP being spent by the state in 1997, when Labour came to power; it was 44% by 2007 before the crisis hit us. At the end of all the misery that this is going to cause us, we are going to return to 44%. All the adjustments, no matter how long they take, will only get us back to 44%, and there will still be a lot more structural adjustment to do when we are through with this. After we have eliminated the deficit and stabilised the debt level, we will start rebuilding the economy. This is just patchwork. We have to think about this problem more seriously.

I believe, and have always believed, that QE was a disastrous mistake. When you need to raise your savings, if you cut interest rates you discourage savings, a point made by the noble Lord, Lord Lang. Furthermore, we know that while households and Governments are in debt, corporates are in surplus cash and no one is investing. One reason could be, of course, that there is no demand, but another problem is the uncertainty about interest rates. Everyone knows that one of these days QE is going to come to stop and interest rates are going to go up. Until I see how interest rates are going to go up, why would I invest? Why would I invest now, when interest rates are 0.5%, when I know that they are going to 6% further down the line?

One thing that Mark Carney can do—although I do not think he will listen to me, if anyone—is to stop QE. Let us get out of QE as fast as we can. A very loose monetary policy and a very tight fiscal policy have so far not had much effect on the economy. We are bumping along at the bottom. Minus 0.3% is neither here nor there because, in any of these things, the standard error is plus and minus 1%. It is like opinion polls; we are always told that error is plus to minus 3%, so do not take the actual numbers assessed as serious numbers. We have been bumping along at the bottom for roughly three years, as has the eurozone economy. The Americans are doing slightly better. However, relative to their potential growth rate, they are also quite far down, and this is a problem of the entire western world.

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It is not easy to be convinced, and I am not convinced, that a reinvigoration of the Government’s spending programme on the capital side will necessarily lead us out of this problem. This is partly because, if you are going to spend on investment projects, the pay-off is delayed and long. So your spending today is not going to bring economic growth immediately. The IMF studies show that if in one year the multiplier is one-half and in the second year it is two-and-a-half, the model needs re-examination. What sort of model is it? Next year it may be three-and-a-half or one-quarter, I do not know, but it is not a Keynesian problem—it is a very different problem—and we will have to bump along on the bottom.

Many of the policies suggested will not work, partly because of the delays which feature in infrastructure, as the noble Lord, Lord Birt, pointed out, and as we well know. So even if we planned to spend money, even if the Government were to announce £50 billion of investment, that £50 billion is not going to enter the economy at any time soon and, if it does, it will not lead to income growth rates. I am very gloomy about bumping along the bottom until confidence revives in the private sector and it starts investing again. The noble Lord, Lord Sheikh, mentioned that stock markets are feeling very happy. They must know something that we do not, but they are clearly feeling euphorious. People are into junk bonds and equity markets, so maybe there are some undercurrents of optimism, but we do not know what it is.

Everyone else has spoken about infrastructure, so I will not talk about that. One reform that I hope we can accomplish, I do not know how soon, is to start not taxing income but taxing expenditure. It is a long-delayed reform. If you have an economy which needs to save more, you do not tax income, you tax consumption and expenditure. Secondly, I do not think we should tax profits. We should tax material consumption or carbon emissions, but not profits. Nor should we tax employment, as we do with national insurance contributions. We are doing everything wrong. If we are going to permanently change the economy, stop taxing income and tax expenditure; stop taxing profits and tax material consumption; and stop taxing employment, as far as possible. If we begin to make those kinds of long-term changes, perhaps we will get back into the spending habit and, if the savings are there and interest rates fall back into the normal pattern, we will have growth coming from the private sector and not necessarily the public sector.

7.20 pm

Lord Selsdon: My Lords, when the noble Lord, Lord Desai, joined this House in 1991, I always found myself speaking on economic and trade debates from one of these Benches—either this side or that side—but there was something strange about it: he always seemed to be at a much higher level. I thought that perhaps the seats were higher. However, this was part of his life and I learnt much from him. When he first arrived, I wanted to know why we had so many economists. I had already asked the Department of Trade why we needed economists connected with trade, and I found that there were about 230 of them. This started when we had the desire for a relationship with eastern Europe.

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Somehow people felt that economists came from eastern Europe, where they were more intelligent or more highly trained. The noble Lord, Lord Skidelsky, is someone totally different—he is a trader at heart. He has entertained and amused me over a long period of time.

As I stand up to speak today, I am slightly worried. I did not want to insult the noble Lord, Lord Deighton, but I was not sure how to pronounce his name: “i” before “e” except after “c” or before “g”. Although Hansard cannot correct our pronunciation, it would be wrong of us in your Lordship’s House to get someone’s name wrong.

I stand here today to speak on behalf of the remains of my “gang”: the noble Lords, Lord Ezra and Lord Stoddart of Swindon, and the noble Viscount, Lord Falkland, who is in his place. We had the honour of serving on a Select Committee on overseas trade, back in 1985. We are going to make an approach and ask whether that committee can be re-established, and the Chairman of Committees will already have received a message from the noble Lord, Lord Ezra.

I was put on that committee because I would be young enough when it became important to do something serious about everything. This has been much the story of my life in your Lordships’ House. No one realised that I might be able to do something on my own. However, I did write a report. The Select Committee was called the Aldington committee, after Lord Aldington, and it had some quite bright people on it. We had an enormous amount of support and interviewed people from well over 100 companies. Our report asked, “What do we do when the oil runs out?”. This was in the 1980s—the committee was formed in 1985—and the oil was steadily running out. Everybody was spending the money from oil but not investing it. As it ran out, the balance of payments deficit began to grow, because people were not interested in the balance of payments. The deficit soared, particularly on visibles. It became so enormous that we could hardly support it. As we know well, today we have quite a lot of deficits on visibles. The total figure is around £50 billion, although there are some good aspects. In the pharmaceutical field we have a surplus of perhaps £20 billion; in food, excluding alcohol, it is minus £20 billion; with alcohol, it is a little less, because the whisky which my family used to make historically is probably doing quite well abroad.

However, does a balance of payments matter? I think that it does, but it is trade that I am interested in. I sail very happily in the wake of my noble friend Lord Howell in recognising that, if we do not trade with the world, we will no longer have an economy. Your Lordships know well that our visibles deficit with the EU is very significant. We have a surplus with non-EU countries—Egypt and the Middle East are among the greatest—but with that form of deficit and no investment following, we have a certain difficulty.

I declare an interest in that, having been involved in trade and the financing of trade, I do not like economists quite so much as they always find reasons why you should not do something rather than why you should. We have a scenario where we are looking for new

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technological growth and trade which is technology-led. We have forgotten that over a short period of time new technology has been developed in the United Kingdom. Because my father spent most of his life and all our family money motor-racing, I have an interest in cars. The success of Formula 1, which was built and designed over here, led to a revitalisation of the automotive industry. Our friends from India worked that one out, so they came over here and in a relatively short space of time completely revitalised Land Rover and other areas.

The same happened with the Japanese and Nissan. In my early days, surprisingly enough, I was meant to be doing economic, industrial and trade research. We acted for the Japanese. They said that they would like to invest in England, when we were more interested in selling to them. On the automotive front, it took a long time to get the go-ahead. We did a study on cars and forgot that the Japanese drove on the same side of the road as we did. That was quite a problem, but it was one of the reasons why we said, “Why don’t you come and make cars over here, because it will be more economic?”. However, they just wanted to make cars that lasted. So those were two areas of success.

For a while I was rapporteur of the European Council of Ministers of Transport, responsible for the standardisation of heights of bridges, bogie couplings, and so on, and the building of bridges across the Bosphorus, across Sicily and in Denmark. When you are on a committee and are young, the others know that they may have someone who can actually type. One of the things that I learnt in the Navy was to type seven copies and put holes through the a’s and the e’s. So I still believe in the written word.

We have considerable experience in transport. However, if we confine our experience, desires and ambitions wholly and exclusively to our own country, we will have forgotten what my noble friend Lord Howell described—the opportunities in the world and the willingness outside, in the Commonwealth and in a whole range of other countries, to co-operate with us on development. If we look at the mineral sector, it is logical that our Canadian and Australian cousins have experience and knowledge which we could easily put together to create and develop added value and wealth wherever we may be on the face of the earth.

I look back at the old-fashioned maps and charts. To me, Greenwich is the centre of the earth. To get to the west coast of America, you have to go east and right the way round; otherwise you have to go through the Panama Canal or round the south. Looking at our own relationships—not using the British language but the background, trading and culture—I believe that in co-operation with the Commonwealth and with other territories we could succeed very quickly and very well.

I turn to the doubtful area of taxation. I had a great regard for Michael Heseltine—now the noble Lord, Lord Heseltine—not at first, but when he set up the enterprise zones. That was when I went to Toxteth. We looked at what happened in Docklands and the regeneration. Although there were people who normally would never have invested in these sorts of doubtful ventures—we have only to look at the slightly disastrous

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beginning of Canary Wharf and the complete failure of developments of any significance to get off the ground economically in Docklands—it was the ability to claw back tax that permitted people to take an added risk. We should look at this again. Rather than having our foreign friends who want to live in London being told they will have to pay mansion taxes or things of that sort, I should like to set up a fund that would enable them to invest in infrastructure development and claw back that tax for a period of time.

I am not a dreamer. I am quite happy to think that, as age goes by, the things that are happening now will be history. We talk in this House about five, six or seven years before an economic upturn, but to me that is too long. I would rather see it happen at the moment. I should like my noble friend Lord Howell and others to go out in the world and sign the sort of Elizabethan treaties that we used to have, where we would buy the “turds of birds” from South America, as someone said; where we bought things because we needed them or could trade them on. Where are the great trading companies? They all seem to have died. I am happy to admit that I am in trade and that normally I sit below the salt.

7.29 pm

Lord Kirkham: My Lords, I add my rather hoarse voice to other speakers, who, almost to a man, congratulated my noble friend Lord Deighton, and welcome him to the Treasury Bench.

It is probably appropriate and relevant to declare an interest. I am a director of a food retailer that employs more than 24,000 people here in the UK. We trade from almost 800 stores today although, interestingly enough, 40 years ago, we had just the one store—as you can see, from tiny acorns. I am also involved in motivational speaking to new and growing SMEs and I mentor young entrepreneurs, so I see first-hand the vital role that those fledgling and expanding companies are playing in the success of growing the UK economy and dealing with the pent-up demand that my noble friend Lord Wolfson told us about. They create employment opportunities, they pay tax and in many cases they generate exports as well.

For our economy to grow, we have to liberate the energy and creativity of those companies and their people. The Government are able to offer a helping hand here by laying the foundations for lasting prosperity, and of course they are doing that, but in many areas the most useful thing that the state can do is step out of people’s way and allow them to get on with it. I want the Government, wherever they can, to make life as simple as possible for business to do business—particularly those businesses just starting out. They can do that by making the necessary processes of regulation as straightforward and easy as possible.

Bureaucracy and death by red tape have always been the bane of business, particularly SMEs, which are generally time-constrained and which, understandably, want to focus their often limited resources and all their efforts and energies on the prime objective: generating turnover, sales and sustainable profits and, as my noble friend Lord Wolfson said, a cash return. That is the life blood of business. Then the business grows and creates jobs. That is how capitalism works.

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It was good to hear the Minister’s commitment to cut red tape here and now in the UK. I am delighted that the Prime Minister’s approach to our future relationship with the European Union reflects his determination to remove unnecessary regulation by Brussels, but there is still much to do at home. My noble friend Lord Wolfson spoke passionately. He highlighted the ways in which his company’s efforts to create jobs and wealth have all too often been frustrated by the planning system and by officials taking a top-down view of what is best for business and families rather than simply liberating the pent-up energies of the private sector and helping people to live, shop and work where they want to.

I could not agree more strongly that the way to encourage businesses to grow is by making the lives of business people easier and simpler. It is important for those microbusinesses, but it is also important for huge organisations. We need to encourage more people who do not even know that they have it in them to create businesses to realise their potential.

In quiet moments, when we relax and contemplate some of the riveting data on our economy and the global debt crisis, it might seem ludicrous to suggest that any meaningful contribution to solving our problems can be made by encouraging one person to follow their dream and start up in business, whether that business be building a better mousetrap or opening a shop. I speak as someone who spent 42 years building a business that started with just one small shop and ended up employing several thousand people in British retailing and manufacturing. Although I am no longer involved in that company, the other privately owned British retailer of which I am a director employs around 24,000 people. That, too, started as a single shop set up by two young men.

Today, we call such people entrepreneurs, and throughout the country there are potential entrepreneurs, similarly minded young strivers who could lead the way in creating jobs and wealth if we could just give them the confidence that it is worth taking the risk. Confidence, the feel good factor, is vital—as was mentioned by several noble Lords—not only in tempting the consumer to spend but in encouraging business to invest in growth. I meet so many entrepreneurs at conferences, business workshops and networking events that I know that there is a huge pool of talent, energy and enthusiasm out there. We just need more people from that pool to start making a bit of a splash.

It is tremendous that the Government have expanded the pot of start-up loans for young entrepreneurs and that we are helping them to get access to mentoring as well as capital to translate their ideas into action. It is also excellent news that the Government are increasing the annual investment allowance for SMEs and have cut both personal income tax and corporation tax. The many initiatives and incentives, illustrative of the Government’s commitment, are important and very welcome. They are steps in the right direction. We know that they are working because we have seen—I will not put a number on it because so many people have mentioned it—so many jobs created through the private sector. The figures that came out last week show all-time record numbers in employment. They

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are the best sign we have seen so far that the economy is moving in the right direction. To my mind, that is a far better guide than the marginal and so-often revised statistical fluctuations in GDP.

I know from my experience that young people starting a new business venture do not take the decision to push the button by studying learned papers on our economic prospects, whether they come from government experts or investment banks. They rely on their gut feeling; they rely on sniffing the air. The scent that they are hoping to pick up is the smell of confidence—confidence that things are moving in the right direction and that therefore it is a good time to invest.

A lifetime of experience in business tells me loudly and clearly that the elusive feeling of confidence is there. I say that without caveat or reservation. I accept that it is a delicate plant and needs nurturing. We must encourage it to blossom by emphasising the real progress that we are making in cutting the deficit, reducing the tax burden on most people and companies, keeping borrowing costs low and, above all, creating jobs. We need to redouble our efforts to simplify and streamline the workings of the Government, put as few obstacles as possible in the way of those who want to start their own business, and create even more employment.

You know, you do not need to be an international business school professor, a high-flying accountant or a Treasury wizard to recognise that job creation is fundamental to any turnaround. Every job that we can assist our entrepreneurs to create helps reduce the burden on the welfare budget and puts money into the economy. Even more important, it creates in people’s hearts the feeling of pride and self-worth that is beyond price. That has huge spin-off benefits.

I commend the actions of the Government to date and hope that they will do even more in the next two years to provide the incentives, the conditions and the supportive environment to encourage and liberate entrepreneurship. That has the potential to create a truly virtuous circle of job creation, increasing individual prosperity and growing national economic strength.

7.37 pm

Lord Davies of Stamford: My Lords, I begin by adding my voice to the many expressions of congratulation and welcome which the noble Lord, Lord Deighton, has received warmly and genuinely from all sections of the House this evening. It is very good to think that there is now going to be someone in government with an economics background. However, I have to tell him—if it is not already blatantly apparent—that he has joined the board of a company that has been extraordinarily mismanaged over the past two and a half years. The record is extremely bad and was quite unnecessary. In the first two quarters of 2010, our growth rate was 0.3% in the first quarter and 0.7% in the second quarter. Then it just fell off a cliff because of the negative confidence impact of the declarations of the new Government.

In the light of experience, there must be very few people in this country who are not politically signed up to the Government or otherwise engagés in a party-political sense who would not agree that it is

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very regrettable that we did not continue on the trajectory set out by Alistair Darling in his Budget of March 2010 to reduce the deficit on a much slower path. That would have been a much better idea.

Remarkably, those things were predicted by a number of people at the time. Everybody has to pay tribute to my right honourable friend Ed Balls, the shadow Chancellor, who did something which I would never have dared to do as a Minister or shadow Minister, which was to make a very specific economic prediction. He said that the policies adopted by the new Government would bring about a double-dip recession. Sadly, he was all too right. The dangers which the Government were running were quite clear at the time, but so far we have had not a word of recognition of their mistakes. Not only was the basic macroeconomic judgment clearly wrong, but the manner in which economic policy has been adopted has been extraordinarily cack-handed and clumsy over that time. I will give one example in relation to VAT, which I mentioned in this House at the time.

I thought that it was quite reasonable to increase VAT, but not by 2.5% at one go, and certainly not to do so on 1 January. If you want to increase a consumption tax like VAT, and maximise the revenue impact but minimise the negative demand impact, which presumably any sensible person would try to do, the one thing you do not do is to deliver it on 1 January. Any shopkeeper, restaurateur, car salesman or anybody else could have told the Government that that is the lowest seasonal moment in consumer demand in the course of the year. The effect of putting on an enormous consumption tax at that point is to exacerbate the downturn of the economy and increase the volatility of the economy, when the aim of a stabilisation policy should be to reduce it. That was not a very intelligent thing to do, and it is a very bad record. That is the first, and fundamental, mistake. I will list five fundamental mistakes—five stupidities—of which this Government have been guilty over the past two and a half years, and that is the first one.

The second stupidity relates to infrastructure. Of course, it is a rather good thing to spend money on in a recession, because factor costs, labour costs, land and interest rates are lower. I am sure, by the way, that the noble Lord, Lord Deighton, learnt all that when he studied economics under my noble friend Lord Eatwell all those years ago. Indeed, in what he said this evening he showed signs of having done so and genuinely wishes now to put them into effect. I congratulate him on that. Perhaps this is a new broom in the Government, which is very welcome.

He mentioned infrastructure; the trouble is that a lot of opportunities have been lost irrevocably. We should have been spending that money on infrastructure over the last two years, as we have been in recession. It is not much use—or it is better than nothing but very much less use—now to plan to spend more money on infrastructure several years hence. In the case of HS2, that money will not be spent until the 2020s. I hope that we shall be back in power long before then and that the economy will be booming. That infrastructure spending might be contributing to an overheating of the economy, requiring an increase in interest rates. It

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will still be a desirable investment for the long-term productive capacity of the economy, but opportunities have been lost.

Particularly important opportunities have been lost—the broadband plan has been mentioned. They were all ready to be implemented in 2010, but the new Government simply cancelled them. The third runway at Heathrow was all ready to be implemented. Work could have been going on now—we really could have done with that infrastructure spending. Those opportunities have been gratuitously lost by the Government.

The third stupidity perpetrated by the Government relates to monetary policy. I can quite see that with such a very restrictive fiscal policy the Government’s only hope of generating some demand and compensating for the collapse of private sector demand was through monetary policy. Monetary policy obviously cannot be conducted by reducing interest rates, considering the level at which they now stand. A number of people around the world have come to the conclusion that quantitative easing is the best tactic in current monetary conditions, and one can understand that. An argument is to be had as to whether the type of quantitative easing adopted by the Bank of England in this case was the right one, or whether it would have been much better to have bought paper from the non-banking sector, thereby putting money directly in the pockets of the private sector, rather than to buy paper from the banking sector.

Be that as it may, it was completely crazy to pay interest—and as far as I know the Bank of England is still doing this—on the deposits of the Bank of England, which were being inflated in this way. I think that the interest rate that the banks receive is 75 basis points; the Minister can perhaps correct me if I have got that wrong. I should be delighted if the Minister tells me that this particular stupidity has come to an end. It really is quite extraordinary. There is no point whatever in having the banks simply accumulate deposits at the Bank of England. That is not the money supply; it may be a figure included in some of the indices, but it is not conceptually the money supply, it is not at all cash held for the purpose of transactions in the economy, and is absolutely useless from the point of view of investment, consumption or demand. The only purpose of this exercise is to get the banks to leverage on those deposits by extending their lending; by credit creation. The penalty for not doing that is being reduced by paying the banks for keeping those deposits on deposit at the Bank of England, by paying them the 75 basis points. To put it another way round, this is reducing the incentive for the banks to lend. This, therefore, is a question of the Government putting their foot on both the accelerator and on the brake—not perhaps as much on the brake as on the accelerator—but why do that? It is completely crazy.

I see that the Minister is good enough to nod. I hope that one of his early tasks will be to look at what is going on in this particular field, come to the right conclusion and get rid of this particularly foolish policy. That is what I believe it to be.

My fourth example of quite gratuitous stupidity on the part of this Government is, again, a contradiction between two different policies adopted simultaneously by the Government. One is the Government’s desire to

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see the banks lending more; to see greater credit creation, which is a sensible objective. The real problem for credit creation is confidence. The Government are doing nothing to contribute to confidence, so against that background, all these other technical attempts to generate greater bank lending are unlikely to be enormously successful. Nevertheless, the Government are apparently sincerely signed up to the cause of increasing credit creation in this country. However, at the same time, they are telling the banks that they are about to impose on them higher capital adequacy ratios, introducing Basel III.

I had this out several times in this House with the noble Lord’s predecessor, the noble Lord, Lord Sassoon. When I raised it, he said, “Ah yes, but we have had two or three exchanges in this House on this subject in the past two years. These new capital adequacy requirements will not come into force until 2018, so that’s all right”. It is not all right. I hope that the noble Lord will look at this again, because it is certainly not all right. I sat for a number of years on the board of an investment bank, with a lending book of many billions of pounds, and I can assure him that if the regulators—the Bank of England in those days—had said to us, “We want to increase your capital ratios in five years’ time”, we would have had to start right then. At the next board meeting we would have been discussing how to change our policies. In a market in which it is very difficult to raise new capital because the bank shares are on the floor, and for the same reason you cannot really reduce your dividend, and banks, for less estimable reasons will not reduce their bonuses, there is no way of achieving higher capital adequacy ratios other than reducing their lending book.

Banks will, therefore, now be adopting policies that are designed to follow a trajectory to get them to the capital adequacy position they need to get to by 2018. That goes completely counter to the Government’s expressed desire to get banks to increase their lending. It does not make any sense at all. Again, it is a complete and utter contradiction, and I hope that the Government look at that again and not take too long about it.

Finally, the fifth stupidity the Government have gone in for—again, not for very creditable reasons—is the decision to hold a referendum on our membership of the EU. This, of course, is a subject which I know we shall have a chance to debate in greater detail in two days’ time, and I will not trespass on this ground for very long. Nevertheless, it must be brought into an economic debate. This is a way in which a Government, who should have as a priority the creation of the maximum degree of confidence in the economy, reducing the risk of the environment in which investment and consumption decisions will be taken, are doing exactly the opposite. They are gratuitously, deliberately and unnecessarily creating a whole new area of risk, which is about whether or not this country will still be part of the European Union in a few years’ time. In the past three weeks, two Cabinet Ministers have said that from their point of view they can quite easily see their way to our leaving the European Union. You cannot do a worse day’s work in terms of undermining confidence in the economy than to do what this Government are doing on that particular front.

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Once again, just as some infrastructure decisions such as abandoning the third runway at Heathrow were basically driven by party-political considerations, marginal votes and seats in west London and so on, I fear that this decision about a European referendum has been based on party-political considerations such as the need to appease the eurosceptics in the Tory party at the expense of the national interest. It is time that the national interest came first and last, because this economy is in a very difficult situation and we need to get out of this recession as quickly as possible. It is about time that the Government, in addressing that task, make sure that they adopt a position that is purely based on national interest, not on such short-term party-political considerations.

7.50 pm

Baroness Kramer: My Lords, the Minister is going to be tired of being welcomed to his new role, but let me join with others there. I also want to congratulate him on sponsoring what is not an easy debate so early in his ministerial career. It speaks of leadership and this House, on all sides, likes and appreciates leadership. I also want to thank the House for its indulgence. After the first four speeches, I had to join the Parliamentary Commission on Banking Standards or it would not have been quorate. I think we can all agree that getting the banks into a stable financial situation is a priority. Everything else that we may do for growth in the economy will all be reasonably for naught if we cannot sort our banking structure out, so again I thank the House for that.

I was able to hear the first four speeches and was then in plenty of time to hear the noble Lord, Lord Desai. Those speeches were all a sort of tour de force with the combat of different schools of economic thought. I dare not trespass into that territory—that is not where my intellectual capacities are—but I found it fascinating and I suspect, like many people, that I concluded that is very hard to listen to abstract theory and come away with conclusions. I hope that the House will not mind if I try to be simpler and perhaps a little more practical.

I do not think you have to have a grasp of economic theory to recognise that the previous Labour Government hideously overspent from about 2004, ramping up public spending so that when the financial crisis hit in 2008, because of our spending and debt levels we had no resilience and no cushion to deal with that crisis. I do not think you have to come with a background in economic theory to recognise that the very laissez-faire attitude towards the banks essentially led to the booking of absolutely false profits by those institutions and ephemeral tax revenues, which were taken as a permanent tax stream by the Labour Government.

I do not think you have to have an economics background to recognise that over a longer time than the Labour period—over a generation—we allowed our economy to become unbalanced. The noble Lord, Lord Desai, described that exceedingly well. We became overly dependent on the financial services sector. We failed to make sure that vigour extended beyond the south-east and covered the rest of the country. In perhaps the cruellest rub of all, we neglected providing

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the kind of skills to our young people who were not going to take the academic route but needed vocational training and apprenticeships. They could have generated the kind of jobs and economic strength that would come from those skills. We chose to neglect all those things; that whole series of imbalances is now being tackled by this coalition. Taking that long-term view and taking on the challenge of dealing with these absolutely fundamental weaknesses in our economy strike me as being some of the most important measures that this coalition has taken.

I want to name check in some sense Vince Cable—he has not been mentioned, at least while I have been here—for bringing forward, fostering and pushing an industrial strategy, something which we have seriously neglected. He has finally provided sector-specific support to industries that can lead us into growth, whether they are pharmaceuticals, green industries or aviation, and the development of the domestic supply chain—an area that really had no focus in the past. There has been investment in innovation and R&D and there is now an absolute sea-change in capital allowances, to encourage investment in new technologies by business. There is action on finance to deal with absolute market failure, which even those changes that we are making will not address. That is, in the Green Investment Bank, the British business bank and very substantial increases in export guarantees.

When the noble Lord, Lord Deighton, spoke, what excited me the most about his extraordinary speech was his focus on doing and delivering. In that context, I would like to add something slightly different to this debate, because as a doer and deliverer I am going to ask him if he might be willing to think small. We have such a bent in this country for looking at the large—the large business, the grands projets and the big bank—while we neglect the heartland of our economy. SMEs as a sector, not just in the UK but overall in the EU, account for all of our new job creation. That is not just in tough times such as these; it has also been true in the years of prosperity. New start-ups and small businesses are absolutely key to our growth and we have an enviable range of SMEs in the UK. Some 20% of all the SMEs in the EU are in this country. I do not think that registers on the general consciousness.

I recognise that this Government have taken steps to strengthen small businesses, from tax breaks to investors through the EIS, regulatory preferences, new support through UKTI and Funding for Lending. However, let me suggest that it is not enough and it is not brought into a coherent strategy and programme. The problems of SMEs are incredibly granular. I listened yesterday to Xavier Rolet of the LSE talking about the problems of raising equity for SMEs, in large part because all the rules are a scaled-down version of those written for blue-chip companies, rather than being designed for the small players.

I am on the SME Select Committee on exports, where I hear about the problems of protecting intellectual property for small exporters, especially for SMEs that decide to try to export to the BRICs. Again and again, this House has heard the complaint that small companies and microcompanies cannot access credit from the traditional banks. We lack those networks that supply

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such credit in successful countries, such as the community development finance institutions in the USA and the Sparkassen in Germany. This list could go on for several pages; I suspect that in today’s debate many more issues concerning SMEs will have been raised.

There is no point in trying to tackle this as a piecemeal add-on to various different policies in different departments. I wish that the Government would consider having a dedicated team working across departments, going through obstacle by obstacle with the single mandate of releasing growth in our SME sector. Frankly, the big guys can take over themselves; this is where we can make change and with small companies, small changes make an immediate impact. We all know what the impact on jobs would be if SMEs which were planning to expand, perhaps to hire just one more person, did it six months earlier than they had originally planned. The gain that we can get, with its impact on growth, could be tremendous if we agree to focus.

I move into the area of the noble Lord, Lord Deighton, by referring to small infrastructure. I am very supportive of the big infrastructure projects such as HS2. There is a whole range of them. We have neglected infrastructure in this country; I would not argue with that. However, as many people have said, large infrastructure has a long lead time and I want to make a plea for small infrastructure projects. In the Local Government Finance Act 2012, the Government put in place the legal framework for tax increment financing though a structure known as TIF1. This would allow local authorities to receive part of the uplift in business rates resulting from new infrastructure and, on that promise, to obtain the financing to enable those projects to go ahead in the first place. A perfect arrangement, your Lordships might think, for transport links to enable a new industrial park or for an opportunity to finance key housing.

This is not the time to go through the details of the legislation but, in effect, what the Government did was to give with the one hand, by creating the framework for TIF1. They then took away all the potential by severely limiting the period during which local authorities could capture those business rate increases. The argument is about general accounting and the relationship with the Treasury, and whatever else, but given that we need growth this is absolute madness. Just about every local authority in the country will have a few good, but small, infrastructure projects that would stimulate economic development locally. We need those to be breaking ground and I urge the Government to go back and capture that low-hanging fruit of small, local infrastructure projects which could feed quickly into growth.

Lastly, on small lending, this House is well aware that we are quite unique in the developed world in having so much of our banking service dominated by five huge players, all of them so like each other that few individuals or businesses ever bother to move their accounts, despite high levels of dissatisfaction. Everyone recognises that competition for these banks is one of the best ways to challenge what became a tainted culture and a lack of focus on the customer. But while new, big players may have a role, I want to argue for change to include a network of small players. This means community banks, specialist small business banks, crowd funders, peer-to-peer lenders and credit unions—in

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other words, to have real variety and choice capable of meeting much wider needs than our banks currently meet.

A lot of the enabling legislation is now in place, but to take it from a possibility and a theory to reality, recognition, action and support from our Government and our regulators are needed. It makes for a messier world but, I would argue, a more stable, capable and honest one. That is the argument that I would like to put to the Minister. Of course he must act on large projects and, with infrastructure, they would be a large part of his plate. Will he look at the small and the quick? We need economic growth now, not in 10 or 15 years’ time. It seems to me that we have many quick wins of which we are not taking advantage.

8.01 pm

Lord Davies of Oldham: My Lords, this has been a most fascinating debate, which has covered a wide range of issues and it is therefore a testing ground for the new Minister, whom of course I welcome to his place. I am sure that he will enjoy these debates, as we all do, while recognising that replying to a debate with nearly 30 contributions, all of which merit real thought and response, is challenging. This is not least because the Minister is also replying to the debate about the most fundamental issue before the country, which is the present state of the economy.

The Minister will have noted that from the beginning the noble Lord, Lord Skidelsky, from the Cross Benches, wasted no time in emphasising two things. We should not be deluded by false claims on infrastructure, or the way in which the Government are recovering the economy. Mention of HS2 and HS3, which are more than a decade, or certainly several years away, before any work on them is done, scarcely fits into the pattern of the urgency of our need for recovery in the economy. My noble friend Lord Barnett buttressed that position by identifying how little has been done in the specific area of infrastructure investment, on which he had challenged the Government.

The Minister might have thought at that stage that at least we were on home ground in talking about infrastructure. The noble Lord, Lord Lamont, raised the very real and significant issue about regulation of the banking sector. The Minister will appreciate that behind these issues that we are discussing is the financial collapse a few years ago. This has thrust the financial sector into considerable turmoil. For the Government, it has presented a very real challenge in how we seek successfully to regulate the banks, so that nothing like the disaster of the past decade can occur again.

There were other issues in this debate that I hope the Minister will find time to address. In an interesting contribution from the business perspective, the noble Lord, Lord Wolfson, appeared to indicate that one of the best infrastructure projects in which we could get involved was building roads. Behind it he raised, as regards finance for the roads, the possibility of some system of road pricing. I have no doubt that the noble Lord, Lord Deighton, has already been warned about going where others have feared to tread in the past, but he would be wise not to be too enthusiastic about the concept of road pricing in anticipation of where the Government might go in due course.

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The issue of quantitative easing came up. The noble Lord, Lord Forsyth, raised the matter first. He was supported from my Benches by my noble friend Lord Desai. Both of them were really asking what happens when quantitative easing ceases, and we seek to establish a more normal framework for our economy and currency. This is an interesting question, which I hope the noble Lord will recognise as germane and important to this debate.

The noble Lord, Lord Birt, stressed the issue of the development of the right kind of skills in an economy. This is a long-term process. We all recognise that, but we have heard too much analysis of what is wrong with our skills sector without effectively producing the strategy to cope with it. There is no doubt that for the long-term health of our economy we need to ensure that our people are readily skilled for a world in which technical change occurs so quickly. If that was not enough the noble Lord, Lord Lang, brought up pensions and the challenge that they present to the Government, and in this significant issue he was supported by my noble friend Lord Monks. The agenda is moving up, without the noble Lord, Lord Bilimoria, not failing, as he usually does, to give us an overview of the issues that are at stake and how they affect business. He was full of a somewhat doleful message. Of the Chancellor’s targets, which he set two and a half years ago against which his achievements must be measured, only the tattered banner of credit rating 3A remained, and one was not too sure how long that banner would last before it was shredded.

The noble Lord, Lord Higgins, picked up on this debate as having a certain dismal quality. It is certainly one that has raised fundamental issues. The noble Lord introduced a dismal element because he thinks that some of the solutions are difficult to achieve in the time that we need to achieve them. The Opposition agree with him. Meanwhile, my noble friends Lord Hanworth and Lord Hollick emphasised the failings of the Government in relation to the policy that has been pursued so far. I am not sure that the suggestion that the noble Lord, Lord Heseltine, had produced a document to which the Government should give their fullest attention was quite the response that they have so far given. While we know that that document is to be taken seriously, “seriously” is different from “being acted upon”. We await the Government’s indication that they are actually prepared to implement some of the suggested reforms of the noble Lord, Lord Heseltine.

The noble Lord, Lord Sheikh, suggested that the Prime Minister has committed himself to every government department having a growth objective. I do not know all government departments intimately, but I can think of one or two that would resist that concept. There is another challenge for the noble Lord as he beds himself down into Treasury matters. As he will be only too well aware, the Treasury is at the centre of all these issues, and the responsibility that he has taken on needs to measure up to that.

Those are the issues that have been raised in debate, but the fundamental point is the charge that is being made from this side of the House, buttressed by a number of contributions from elsewhere in the Chamber. That charge is straightforward—that we are quite

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possibly on the brink of a triple-dip recession. We are taking longer to emerge from recession than at any time in the past. The objectives and measures that the Chancellor put forward for success in his handling of the economy are all representations of failure.

The noble Lord, Lord Howell, found a glimmer of optimism in opportunities for improving exports. No one doubts the necessity for that, but when the pound is slumping to the extent it is, if we do not capitalise on that to develop our export potential, we are in a very serious position indeed. However, although the noble Lord, Lord Howell, is certainly better informed on these matters than I am, I do not think that exports are based too much on sentiment. I understand the markets that may obtain within the Commonwealth, but I am not sure that we get any favourable treatment as far as those sovereign countries are concerned.

This debate has laid bare the weaknesses of the Government’s present policy. We are at a crossroads because it will not be long before the Government recognise that they cannot pursue these policies for much longer without pushing the country into total despair. One speech was quite enlightening on these things. It was made by the noble Earl, Lord Listowel, on child welfare. I appreciated his contribution. At last we got to the costs which are being born of failure. The cutbacks that are occurring affect our people so grievously, and we have not seen anything yet. The vast bulk of the cuts in welfare are still to be enforced and implemented upon our people. The noble Lord must recognise that this leads to the parlous state which the economy is in. I hope that he will recognise serious authorities, such as the chief economist to the IMF, the chairman of the bank to which he had some connection, who indicated that he thought that the Chancellor is on the wrong path, or Boris Johnson, who takes a rather different view on the policies that are being pursued at present. We are at a crossroads, and the Government had better start making the right choice of route to follow, otherwise the Minister’s role will be less happy than he would wish it to be.


8.12 pm

Lord Deighton: My Lords, I thank all noble Lords for the serial welcome. It was very kind of noble Lords to recognise the extraordinary work that went on to deliver the Olympic and Paralympic Games in the summer. That was a big team effort. In fact, many of the team are distributed around this Chamber. I appreciate all those kind words and receive them on behalf of a magnificent national effort.

I shall clear up a few housekeeping points. My name is pronounced Deighton, as in height, if you want the precedent for the English pronunciation, not as in weight. Thank you for pointing that out. There was also a suggestion that it would be useful to spend as much time as possible in the Treasury. The arrangement with my right honourable friend the Chancellor is that I should concentrate my time at the Treasury, which is why I will be supported very closely by my noble friend Lord Newby in this Chamber.

I found the debate highly stimulating. I will be able to do my job better for having listened to all the contributions. I shall leave this debate feeling hugely

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positive, despite the many challenges that we face with our economy. I propose to make my comments not speaker by speaker but rather consistently against the most important themes in the debate. I shall begin with a review of what I think we heard about fiscal policy—the macroeconomic policy—and I shall then review monetary policy. I shall then talk about reform of the financial sector and finally I shall talk about the selection of things that we discussed that might generally fall into supply-side reforms, including all the discussion around infrastructure and capital projects. If I do not manage to address everybody’s points, I shall certainly write afterwards. I shall also try to focus my comments on what my noble friend Lady Kramer called “doing and delivering”. I think that is what I am here to do, so my focus will be on what we can accomplish rather than on the more esoteric elements of economic theory.

I thought there was a lot that was agreed on. The way I have always operated, particularly in business, is by finding the areas of collaboration and forging ahead on them rather than labouring on the areas of disagreement. However, with respect to fiscal policy, it seemed to me that there was one fundamental disagreement between us, at least in simple theory. I think it boiled down to a very simple question. Should we inject more demand into the economy to boost growth? It is a very fair question. It is quite extraordinary to me that nearly 40 years later we are still arguing about Keynesian economics, how effective monetary policy is and the size of the multiplier. I think that was in the first week. It also convinces me that I made the right choice not to be an academic economist. The debate does not seem to have moved on in those 40 years—we are still talking about the same things—so I am glad that I went out and did something, which I was probably better at because that was not going to work.

It all sounds very easy—we should just go out and borrow more, spend it, and hey presto everything is better. That feels an awful lot like the situation we found ourselves in between 2008 and 2010 when we overborrowed and overspent when the economy was right at the peak of its performance. There has been a lot of discussion about confidence. When deficit levels are at the levels they are, I do not think you reintroduce confidence into the economy by going back on a spending spree. It just does not make any sense to me. I have listened very carefully to what everybody is describing as plan B. I do not think plan B is a plausible alternative. How does it get financed? More borrowing. How does that stack up against the bond markets and interest rates? We have saved £33 billion by being able to borrow at lower rates than had been originally projected because of our success in winning the confidence of the markets. We do not want to lose that. It is absolutely critical.

It is also not entirely clear to me that there is such an enormous difference between us. We were unable to surface just how much extra money the alternative strategy would involve borrowing and whether that would make a huge difference. I was much more persuaded by the argument, which I think matches the analysis in the independent OBR, that the principal problem with demand has been external demand,

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particularly the reduction in demand in the EU. The right strategy in the long term, which is part of the supply-side solution—my noble friend Lord Howell was very clear about that—is all the work being done to switch our focus in markets to the rest of the world— the so-called BRIC economies—where growth is actually occurring.

We also had a lot of discussion around the capital budget and whether it had increased since the original plans of the previous Government. I do not really want to argue about too many statistics because we have had a lot thrown both ways. Essentially the plan we have now is about £10 billion more than the previous Government’s original plan.

I accept the points made by the noble Lord, Lord Barnett, about when the money is being spent but we have to understand that capital spending and infrastructure spending are not, as the noble Lord, Lord Howell, said, a tap you turn on and off. There are long lead times. There are even longer lead times if you want to do this properly. A lot of this capital spending is not a panacea to solve a very short-term problem. In fact, thinking of it that way could create all sorts of difficulties and much more focus should be on ensuring that the projects that are mid-way through their gestation are now delivered into the economy in the right way. They are the ones that are going to have the immediate impact.

My noble friend Lord Lamont mentioned his concern about inflation. That was certainly one of the problems in 2011. The rise in commodity prices pushed our own inflation rate up, I think, above 5%. That had a significant impact on the cost of living. However, all the forecasters are looking at inflation stabilising over 2013-14 down towards the Bank of England’s target rate.

We have all referred to external agencies as supporters of our own cases. One side can produce the economists—the IMF. The other side can produce the chief executive. I could give a quote from the OECD that this is the right plan and we should stick to fiscal stability. We are all capable of producing people to support either argument. It just is not possible to bless your own strategy with the utterings of an external economist.

The noble Lord, Lord Desai, gave a very eloquent exposition of the long-term issues underlying the problems in the economy. I am not going to repeat that. I do not think that anybody particularly disagreed with much of it. However, I have a growth mentality and one of the things that attracted me to join this Government was that the Prime Minister and the Chancellor were very clear in their mandate to me. They said, “We need to deliver growth in this economy. We will support you to get that done in whichever way you can”. They convinced me that they were as committed to performance excellence as any of the other high performing organisations I have worked in. That is really what got me interested in doing this job. I was also very interested in the noble Lord’s comments on welfare. An absolutely key criterion in any of this has to be fairness. We can all argue about marginal decisions but I assure noble Lords that in my work at the Treasury the distribution effects of what we do are absolutely at the top of the criteria for assessing which measures we take.

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On monetary policy, I was delighted to hear what I thought was pretty universal agreement that Mark Carney’s appointment was a good thing, if only because it speaks so highly of my right honourable friend the Chancellor’s recruiting skills. I was also a product of that although I was much cheaper.

We had a very interesting discussion about the impact of quantitative easing. Clearly, the noble Lord, Lord Eatwell, is less convinced about its current efficacy but I think we are all interested in what the new regime will have by way of new ideas. However, we should all be extremely cautious before we suggest that ditching the inflation target is the obvious alternative thing to do. That is far from clear and is certainly not the Treasury’s position. In answer to the question asked by the noble Lord, Lord Davies, I think that the Bank of England is paying 0.5% on the commercial bank reserves held by the central bank.

On banking reform—

Lord Forsyth of Drumlean: I am most grateful to my noble friend. Before he leaves quantitative easing, will he answer the question that a number of us raised about what happens when you unwind it?

Lord Deighton: I thank my noble friend for reminding me about unwinding quantitative easing. In summary, the central scenario predicted by the OBR is that it is expected to make a profit over its lifetime as the scheme is wound down but, as always with these things, that depends on a number of assumptions about the future yield curve, the exit, the pace of that exit, bank rate policy at the time and, of course, any changes to the size. However, those are the variables that go into that decision.

I think that all those who spoke about banking reform agreed that it was important to develop financing, particularly for smaller businesses, and that the Funding for Lending scheme, although in its early days, was showing every sign of being a successful scheme, so we are delighted with that introduction.

On the broader question of structural and regulatory reform, I could not agree more with the comments of a number of my noble friends that although it is absolutely critical to ensure that we have more resilience in the banking system so that the same mistakes are not made again, we have to be extraordinarily careful—I think the timing of the introduction of some of the measures reflects that—that we do not overshoot and significantly damage the banking system which exists to provide finance to the real economy. In my own mind, the real issue with many of these institutions has less to do with capital or liquidity rules and much more to do with the culture of leadership and management in those firms. We are beginning to see some promising signs of improvement there.

As regards the supply side, we have had many interesting contributions on small and medium-sized enterprises. I apologise to the noble Lord, Lord Mitchell, for the SME labelling, and note the comments of the noble Lord, Lord Birt. The United Kingdom is an extraordinarily successful incubator for small businesses. I absolutely take on board what my noble friend Lady

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Kramer said about thinking small. Two days ago I attended a small business forum. Everybody there was very supportive of all the initiatives that are going on. The discussion was all about implementation and taking advantage of things that are happening.

We have had a number of contributions on planning. No one ever puts forward the case that there should be more red tape, so we are all heroes in terms of our desire to cut it out and to enable faster planning permissions. As I think I mentioned in my opening speech, we have already cut 1,500 pages of planning policy and have speeded up the rate of approval of planning applications. My personal approach to this will be to follow through some of our projects to see where there are barriers and to use those as pilots for seeing where there are thematic problems that are holding up our delivery in the broader economy.

My noble friend Lord Lang referred to the defined benefit pensions issue. Rather than going through the details in my response, I will write to him separately on that. On the question of industrial strategy, I have sat in a number of meetings with my colleagues in BIS and they are absolutely focused on picking out where this country has competitive advantage and reinforcing that advantage in every way the Government can.

There has been a lot of debate on the subject of infrastructure. I want to focus on the fact that our investment in infrastructure is not about pump-priming the short-term economy. It is about modernising and improving our economy so that, over the longer term, its productive capacity is significantly enhanced. If, in the short and medium terms, that has the extremely attractive by-product of generating a significant number of jobs and short-term growth, then that is a dream package. However, that is the way around we should refer to it. There was quite a lot of discussion about roads: the ones that we have announced and have not built yet. There are a very large number of roads that we are currently building that were announced the time before: those are the lag periods. I am very interested in looking at schemes which allow us to take a longer-term perspective on creating the right investment package to support them.

The noble Lord, Lord Mitchell, was rightly concerned about broadband rollout. I have been focused on that as part of our rural broadband rollout and the urban strategy. Last month, the Chancellor announced a further £50 million to help 12 more cities deliver their ambitions for superfast broadband and I am working closely with my colleagues in DCMS and Broadband Delivery UK as well as the Economic Affairs Committee to drive delivery of that important rollout.

I see the value of smaller infrastructure projects, particularly those in local areas. This is highly consistent with implementing the reforms contained in the report by my noble friend Lord Heseltine, No Stone Unturned. For example, we have already launched 27 schemes with local authorities to help deliver that.

Lord Davies of Stamford: Before the Minister sits down, may I thank him for his answer to me that the interest rate paid by the Bank of England on bank deposits is 50 basis points, not the 75 basis points that I thought? Does he agree that any interest rate paid by

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the Bank of England to banks in those circumstances is undesirable, because it runs counter to the whole object of the exercise, which was to maximise the incentive on the banks to lend as much as possible?

Lord Deighton: I thank the noble Lord for the follow-up question. The scheme which we have employed to encourage banks to lend—the Funding for Lending scheme—is a very effective mechanism to improve lending to businesses and households.

Lord Davies of Stamford: That is not an answer.

Motion agreed.

Arts and Culture: Economic Regeneration

Question for Short Debate

8.34 pm

Asked By Baroness Quin

To ask Her Majesty’s Government what is their policy on the future role of cultural projects and the arts in regional and economic regeneration.

Baroness Quin: My Lords, I welcome the opportunity to introduce this debate on a subject which I feel strongly about but which also has great topicality, given the cuts to arts budgets which are taking place, both nationally and in many regions and localities. These are, not surprisingly, the subject of widespread concern.

First of all, may I say what a pleasure it is that the Minister is replying to this debate? I have not previously had the chance to congratulate him publicly on his appointment but I now do so warmly. We have made common cause in the past on agricultural issues, not least in our concern for the survival of the red squirrel. Given that he will have to defend the Government’s record in the area we are discussing, I have a feeling that our former harmony might be temporarily dissonant—but I very much hope that that will, indeed, be only temporary. I am also delighted that my noble friend Lady Jones is on the Front Bench for the Opposition, as I know how much she cares about the issue being raised this evening.

I do not have any financial interests to declare but the register of interests does list that I am president of the Northumbrian Pipers’ Society, an important cultural organisation in the north-east which promotes the playing and appreciation of our own regional musical instrument. I have also for many years been a volunteer tourist guide for the great city of Newcastle upon Tyne and, perhaps most relevantly to this debate, I was also a Member of the other place representing Gateshead. The arts and culture have been hugely significant in that town’s economic regeneration but—through projects such as the “Angel of the North”, the Baltic art gallery, the Sage music complex and the award-winning Gateshead Millennium Bridge; this is not an exhaustive list—the benefits have also been felt throughout the whole of Tyneside, the north-east and the country. I feel hugely proud of Gateshead Council and the

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remarkable way that its members, many of whom come from a traditional industrial background, grasped early on the cultural agenda in the way that they did. I therefore take every opportunity to pay tribute to them and the way that they worked in partnership with other parts of the public and private sectors in the many projects that they pursued.

Indeed, given Gateshead’s record, it is frustrating that in the important Newcastle-Gateshead partnership of recent years, Gateshead’s achievements are often ascribed to Newcastle by those who do not come from the area. I am sure that the noble Lord, Lord Shipley, as a former leader of Newcastle City Council, will understand my frustration, while none the less recognising, as we both do, how important the Gateshead-Newcastle partnership has been in recent years, and how it has promoted economic regeneration..

The wording of the Question for Short Debate speaks of the contribution of the arts to regional and economic regeneration more generally in order to bring in the wider national and UK dimensions to the subject. Many of us believe that the arts, culture and the creative industries are a crucial part of our national economy, and it is my contention this evening, therefore, that supporting the arts and cultural projects nationally and regionally has to be a vital part of our economic growth strategy and policies for national economic recovery.

In documentation produced by the Arts Council, it is pointed out that our creative economy, as a proportion of GDP, is the largest in the world. Our cultural sector accounts for nearly 70,000 businesses and contributes £28 billion each year to the UK economy. The creative industries provide 1.5 million jobs and our arts and culture attract millions of overseas tourists, helping to promote Britain as a world hub of creative talent. However, if arts and culture are important to our economy nationally, they are also vital to our regions and localities and have played a crucial part in the economic successes of many towns and cities in recent years. Examples that come to mind include Liverpool, Birmingham, Bradford, Bristol and east London. Cultural projects and initiatives have also revitalised and reversed the decline of some of our traditional seaside resorts such as Folkestone and Margate, where the Turner Contemporary has attracted approaching half a million visitors since it opened in 2011. In the north-east, the Sage Gateshead has contributed £146 million to the north-east economy since it opened and currently supports 660 or more jobs. In 2011, the entries for the Turner Prize that were exhibited in the Baltic art gallery attracted a record number of visitors and had a positive economic effect. Overall, culture and the arts have contributed to a dramatic growth in the tourist industry in the north-east—a growth rate that has by far outperformed any other sector and brought our tourism industry right into the economic mainstream.

There is no doubt that arts and culture have made a great contribution nationally and locally in recent years. However, there is now considerable concern about the future arising from the Government’s current approach. I, like my party, am concerned that with the arts, as with the rest of the economy—as we have been discussing this afternoon—the cuts are too deep and

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too fast. To begin with, the Arts Council itself has had its budget cut by 30% since 2010. While I applaud the Arts Council in its work and recognise that, in implementing these reductions, it has sought to protect the artistic front line—by which we mean support for cultural projects and productions in some of the least well-off parts of our country—none the less, cuts of the order demanded now and for the future, on top of the economies already made, threaten the front line in my view. This is a view that is shared by many in the cultural sector both nationally and regionally.

My noble friend Lord Beecham had a Written Question on arts funding which was answered by the noble Viscount, Lord Younger, on 8 January, and I would like to ask the Minister some questions about it. My noble friend asked what proportion of central government funding for the arts in 2011-12 and 2012-13 was for capital funding, and what proportion was for revenue funding. The Answer surprisingly began by saying that the Government were unable to provide information on potential funding for the arts across central government because they did not hold the information centrally; it said that the information could be provided only “at disproportionate cost”. This begs the question: if central government spending plans are not held centrally, where are they held? The Answer gave information about the reduction in Arts Council funding and about DCMS funding in addition to Arts Council funding. This showed that the additional funding was being reduced overall from £2.198 million to £1.025 million and that for this year, 2013, no capital funding was envisaged at all in that part of the DCMS budget. Can the Minister explain this?

The Government have claimed that philanthropic giving might help fill the funding gap. The Culture Secretary herself has expressed hopes that this might double over the coming years. However, the figures that I have seen—and I do not know whether the Minister can confirm them—which were released in 2011, show a reduction in corporate giving of 11% and a reduction in individual giving of 4%. Neither of these figures augurs well for the future. Also on this question, I refer the Minister to comments from Sir Nicholas Hytner, director of the National Theatre, who, writing in the Observer, said that,

“80% of philanthropic giving to the arts benefits London, and almost invariably private funding follows public funding”.

If Sir Nicholas is right—and he obviously speaks from great experience—then charitable giving will not fill the gap and will not, in any case, help the regions, about which I will now speak further.

If the reductions in funding at national level are causing concern then the situation is even worse at regional level. As we know, the local government spending review was debated in your Lordships’ House on 17 January. Considerable concern was expressed about the cuts that local authorities were facing overall. The cuts—the result of the squeeze in local government spending—have already been felt in the arts and culture sector, but the likely effect of current and future cuts are even worse. It is not that local authorities want to cut back spending on arts and culture or that they think that such money is unimportant, but they have their overriding responsibility to continue providing

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services such as social care and child protection, waste collection and all the other main areas of service which local authorities have an overriding duty to provide.

I express my sympathy with councils such as Newcastle in the current situation. I think that it really does find itself between a rock and hard place—although I note that the council is continuing to discuss ways forward with arts organisation locally. Instead of cutting Newcastle’s money further, I hope that the Government will work with the city, and with other cities in a similar situation, to ensure that arts spending is not reduced in the way that is currently proposed in the consultation that Newcastle City Council has embarked on. What I say about Newcastle also applies, surprisingly, to places like Westminster, where they are also suggesting a total cut in the arts budget.

Unfortunately, I am rapidly running out of time. I shall conclude by referring to the coalition Government’s recent mid-term review. It is both regrettable and astonishing that the creative industries and culture and the arts have played so little a part in the review. In particular, no goals seem to be set by the Government for arts and culture for the next two years. Of the five commitments that are mentioned by DCMS in the mid-term review document, not one of them mentions culture or the arts. I wonder how the Government can explain that.

It seems to me that the Government need to demonstrate through new words and deeds that the arts, culture and the creative industries are indeed an indispensable part of this country’s growth strategy and that such a growth strategy should extend to all parts of the country. Nothing less than a fundamental change of heart by the Government will do in the face of the current crisis.

Baroness Northover: My Lords, I remind noble Lords that this is a time-limited debate. When the clock reaches 10, noble Lords have had their 10 minutes.

8.46 pm

Baroness Hooper: My Lords, it is a great pleasure to follow the noble Baroness, Lady Quin. We worked together in the early days of the directly elected European Parliament in a number of areas, when she represented Tyne and Wear and I represented the great City of Liverpool. I congratulate her on securing this debate on a topic which is close to my heart.

In the European Parliament and later as a member of the delegation to the Council of Europe, I took a great interest in cultural heritage and arts issues and I have no doubt about their relevance and importance to economic regeneration. It will come as no surprise that I intend to use Liverpool as an example of what can be achieved. As a former trustee of the National Museums Liverpool, I have always been aware of the wealth and diversity of what is on offer there, from the traditional Walker Art Gallery to the very modern Tate and from the Maritime Museum to the International Slavery Museum.

Michael Heseltine’s initiative after the Toxteth riots, way back in the 1980s, the garden festival and various other events led up to 2008 when Liverpool won the

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bid to become European Capital of Culture. Liverpool is one of the great old industrial cities, which has had to come to terms with its past in order to transform itself and to find a new image and identity. As we saw when Glasgow was the European Capital of Culture, there can be no doubt that the effect on Liverpool and the wider north-west region has been substantial. Apart from the many jobs that were created in preparing the infrastructure, thousands of jobs have proved to be long lasting. The Museum of Liverpool project was a physical result of that year, although it was not completed by 2008. However, since it opened fully in July 2011, more than 2 million people have visited it. Those numbers are way ahead of the projection.

I believe that Liverpool’s transformation into an educational and academic centre of learning, with its four universities and other institutions, owes much to its cultural and arts heritage and the way in which that was highlighted during the Capital of Culture year. Certainly the tourist figures are well up and now the port is beginning to revive with cruise ships calling in and finding so much of interest virtually at the foot of the gangway, in terms of the city’s artistic and cultural heritage.

This year, building on that experience, Derry—Londonderry—is the first UK City of Culture and a nationwide competition has been announced to find the UK’s City of Culture for 2017. I hope that my noble friend the Minister will be able to give us more information about these two events and their impact to date on Derry.

I think that we all still share a very warm feeling about the success of last year’s Olympics and Paralympics, and indeed of the Cultural Olympiad, which, apart from anything else, led to the regeneration of Stratford and has an ongoing legacy. I was delighted to learn, as a result of participating in this debate, that the Lord Mayor of the City of London has decided to make arts and culture one of the central themes of his mayoralty and is even now publishing a report on the economic, social and cultural impact of the City’s arts and culture cluster and its effect not only on the City but on the surrounding boroughs. However, I agree with the noble Baroness, Lady Quin, that the importance of government policies must reflect not only what London has to offer but the wider nation and the regions.

Funding is of course important, and the noble Baroness has pressed my noble friend on this score. Much is being done and I hope will continue to be done—and said—to support the work going on in many of the regions. I look forward to hearing the views of other speakers in this debate and, in particular, hearing what my noble friend has to say about future government policy in the area.

8.51 pm

Lord Shipley: My Lords, I thank the noble Baroness, Lady Quin, for initiating this debate. I also extend my welcome to the Minister in his new role and look forward very much indeed to hearing his response.