Debate on the Address

My Lords, I am very happy to follow the noble Lord, Lord Moser, in this debate. His statistical expertise has had a valuable effect on our economic life over so many years. It is, as he has pointed out, crucial that public trust in government statistics are maintained and improved. Climate change occupied the speeches of the noble Lords, Lord Newby and Lord Vallance of Tummel, and my noble friend Lord Barnett. China puts up a new coal-fired power station every week, while we are responsible for only around 2 per cent of total global warming. Why are we taking such a lead when other countries such as the United States and India expend so much energy? We should be supporting other countries rather than taking the lead ourselves. Other countries may become overheated, but it would be no great disaster to us if the south of England were to become like the Mediterranean. I would be quite happy if Manchester and the north of England were like the south of England. Manchester has had some improvements, but we can still go further. The Intergovernmental Panel on Climate Change anticipates a large range of horrors at the end of the century—a hundred years from now, as my noble friend has pointed out. This is absolute nonsense. A hundred years ago, the question was what was going to happen when the coal ran out. Disasters were forecast, but of course oil, gas and nuclear energy came in to fill the gaps. Other countries, which may be more at risk, should take the lead in reducing fuel use. No one can doubt that technology 100 years from now will be a great improvement. We cannot tell how, but things will not have stood still 100 years from now. There are more scientists and technologists now than there have been in the whole of our history. There are large numbers of them, so there will be enormous changes that we cannot anticipate and cannot know. Our role is not to be the leader here. With 2 per cent of the problem, let us follow, by all means, but others should take the lead. On the economy generally, when the Government gave the Bank of England the power to set interest rates, they did so with the reservation that they could give instructions for a limited period. In the 10 years since then, however, they have never done so. Their confidence has not been misplaced. It was quite important that the Bank of England did well in maintaining the levels of inflation. The Chancellor of the Exchequer took the major decision in 1997 to give this power away. The Government did so, and it has been successful. Inflation has never been under such control. People now regard it as normal. Memories of the years of inflation have faded away. Indeed, many younger members of society have never had them. There was a time when government control of interest rates regularly involved the Prime Minister at a time of crisis. The reputation of the Chancellor of the Exchequer was affected by each crisis and the cause of each crisis. Governments were undone in a matter of days, and it was a long time before any political recovery could be made. We only have to think of Black Wednesday on 16 September 1992 to recall one of the most recent and memorable failures of post-war British economic policy. How is the level of inflation influenced? The Monetary Policy Committee considers the economic and monetary factors and determines interest rates. But any change in interest rates means that a lengthy period—sometimes a year or two—is required to work through to inflation. People need time to adjust to the impact of changing interest rates and its effect on their purchasing, selling and investment decisions. We now have a Treasury participant at the MPC, but it is not clear what his role is. Does he comment or even, to some limited degree, influence the MPC? I must ask my noble friend to inform us of the activity of the Treasury member of the committee. Then there is the question of house inflation. Ideally, if house inflation is very different from price inflation, one wants a system that can deal with each separately. They have moved further and further apart in the past 10 years. Eventually it is hoped that the two might come rather closer together, but hope is a poor alternative to some procedure that could act on both types of inflation. The difficulty is that we have no action that could bring house inflation nearer into line with price inflation. According to the Halifax, house prices have risen by an average of 187 per cent across the United Kingdom since 1996. All we can hope for is that the escalating rise of house prices will meet the difficulty of buyers unable to service their loans. There was a time when house purchases could be subject to capital gains tax, and limited the rise in house prices, but that period is long gone. All this makes it very difficult for the Bank of England to get a proper balance between house inflation and price inflation. The sudden popularity of interest-only mortgages is a striking reflection of the change in the housing market. Three years ago, only 6 per cent of all mortgages were interest-only. Today, the figure is 16 per cent. Interest-only, of course, means that monthly mortgage payments pay off only the interest on the debt. At the end of the term, the capital—the original amount borrowed—is still outstanding. The big advantage for hard-pressed first-time buyers is that monthly repayments are lower. It is clear that an interest-only mortgage can make sense for some, for example for people who plan to move in a couple of years, but not for all. The danger comes when someone goes for an interest-only mortgage purely because it is cheap, but puts nothing in place to pay the capital sum back. They get to the end of their mortgage term, nearing retirement, and they still owe a lot of money. The housing market cannot continue in this way. The only hope is that a collapse might be avoided by a steadying over a period of years. Another issue that I want to discuss is the manufacturing industry, which concerns me particularly. United Kingdom manufacturing does not have the role in our economy that it used to have, but it is still crucial to our country’s prosperity, now and in the future. The problem for our manufacturing industry is the rise of so many industrialising nations, in particular China and India. They have cheap labour, which will continue as there are many people in these countries who can be attracted into the manufacturing cities from outside. Those who hope for an exchange-rate rise in these countries, which will increase the prices of their manufactured goods, are likely to be disappointed. The only certainty of such an exchange-rate rise is when the manufacturing companies find themselves short of labour—a situation that is not likely to occur for a long time yet in these countries. Meanwhile, they are benefiting from western countries supplying technology and investment. Much of that investment comes from this country and diminishes the amount of employment that we can provide here. Globalisation and trade liberalisation mean that our companies face increasing competition from goods and services produced in lower-wage economies. The UK cannot compete on low wages. Nor should we want to. The future of UK manufacturing depends on raising investment, and on applying science and innovation. Even so, successful companies are transferring much of their production to the East. The reality is that manufacturing output still contributes 15 per cent of the United Kingdom gross domestic product and directly accounts for over 3 million jobs with an estimated 3 million further jobs dependent on the sector through related and supplier industries. It is responsible for around three-quarters of all business research and development. It also accounts for 55 per cent of UK exported goods and services and performs a critical role in our balance of payments. Our productivity has closed the gap with Germany on an output-per-worker basis, while the gap with France and the US has also narrowed. The productivity gap is often explained by poor performance in a range of factors, including capital expenditure, investment in R&D, and low-cost economies such as China and India. Last Thursday the House of Lords European Union Committee reported that the addition of a ““high-skilled, low-cost”” workforce from eastern Europe has allowed UK companies to compete with their Asian counterparts. Economic immigrants from recently acceded European Union member states have been entirely beneficial. Immigration from the 10 new EU countries since 2004 has meant the influx of a skilled, low-cost workforce. The UK economy as a whole may have benefited from its policy towards migrant workers, but it is hard to estimate the benefits received. It has been said that European expansion has boosted the UK economy and put it in a strong position to deal with growing globalisation, but that many western Europeans feel that the prospect of cheap labour threatens their jobs. I shall put it this way. The fact is that our economy is enjoying success, but more attention must be paid to our manufacturing industry. It creates the kind of advancement we enjoy throughout our entire economy and it is the sector to which we should now turn our attention.