Debate on the Address

My Lords, I start by welcoming my noble friend Lord Truscott to the government Front Bench. He opened the debate, which is the easier of the two jobs. I think he will find, when he has to reply to debates in future and has to deal with his supposed ““friends””, such as my noble friend Lord Barnett and me, that life will not be quite as easy. I start with climate change. The Prime Minister said that the Stern report was the most important to appear in his period of office. It is surprising, therefore, that the usual channels have so far not set aside a full day to debate that report. We must certainly have a full day’s debate before we should even remotely consider looking at the proposed legislation. I have two points of substance to make. I say with deep regret that, I think for the first time ever in our period in this House, I disagree strongly with the noble Lord, Lord Newby; I take exactly the opposite view. I apologise to him, of course. My view is that the overarching criterion to be applied in this case must be for the Government to act in the interests of our country. Goodwill gestures will get us nowhere. Being thought highly of by the rest of the world will not buy you a cup of coffee, let alone anything else. The countries that are the main sources of carbon emissions have every intention of carrying on regardless. They will free-ride on any minuscule gains that emerge from our own independent policies, a point that was made by my noble friends Lord Sheldon and Lord Barnett. Those other countries’ industries will flourish, while ours are damaged by so-called ““green taxes”” and all the other measures that are being proposed. Secondly, even if you believe—which I do not for one moment—that a major collaborative international effort will occur, any effects will take decades to appear. That is in the Stern report. Thus, the Government’s duty now is to initiate an optimum response to what is going to happen. That optimum response must be to adapt to the climate change that is going to occur. A strategy of not adapting is simply not one of the available options. I welcome the statistics Bill. Again I have three comments, which largely just underline what the noble Lords, Lord Jenkin of Roding and Lord Moser—my old teacher—have said. Our concern must be with all the relevant statistics and not a narrower set of statistics. As it happens, our economic statistics are as good as any in the world, and probably better than those of nearly any other country, but the same cannot be said for those on health, crime, transport, the environment and so on. Thus it would be a serious error to concentrate on economic statistics as the main point of the Bill. It follows—again, as the noble Lords, Lord Jenkin and Lord Moser, said—that the home for the non-ministerial department should be the Cabinet Office; but, wherever it is, it absolutely should not be the Treasury. Further, parliamentary scrutiny—and I emphasise parliamentary, meaning your Lordships' House—should not be undertaken by the Treasury Select Committee in the other place, although that is up to them, and certainly not by our Economic Affairs Committee. The noble Lord, Lord Jenkin, thinks that we might get a collaborative committee. I do not believe that either—you see that I am in a very negative mood this evening. I think that we must have our own statistics committee in this House that would do the job of scrutiny. I now turn to the economy itself. I speak as someone who bears the scars of advising Governments during the 1960s and 1970s. I can only tell noble Lords that, for the past 10 years, this economy has been almost like utopia. In my notes I used the words ““reasonably good””, but that is very much an understatement. Inflation is at a low and stable level. The GDP growth rate is at its long-term level and the annual GDP rate has been stable, at about that trend. There have been at worst minor recessions, and annual GDP change during the period of this Government has never been negative. I am in difficulty about my next point, and noble Lords will see why in a moment. This morning, again following the GDP point, I wrote that, ““Whole-economy productivity growth is also positive and pretty stable and has been very much at the level of its long-term trend””, which I then added is ““pretty good””. I said it was pretty good because the economy is moving ever more to emphasise the services sector, where we do not measure productivity gains correctly, or perhaps they do not occur—but I agree with my noble friend Lord Haskel that we certainly do not measure them correctly. I thought that that was pretty good. But I then added, and this is my difficulty, ““There has been no productivity revolution””. I thought that my noble friend Lord Truscott, unless I misheard him, said that there had been. I do not like to criticise him or make a problem, but perhaps someone could check whether I misheard what my noble friend said. I looked at the data this morning and there was no sign of a productivity revolution. However, I still think that what has been achieved is very good indeed. Employment has been increased, which is a good thing, but unemployment is too high and appears to be rising. I notice that the noble Baroness, Lady Noakes—I assume as part of the remodelled Conservative Party—laid particular emphasis on unemployment as something we need to look at. I therefore came to the conclusion that it is not so much that Polly Toynbee is now the main source of inspiration for noble Lords opposite as that Karl Marx has replaced Edmund Burke as their most important philosopher. Unemployment is, however, certainly too high. It was generally agreed by economists from about the late 1970s onwards that we had previously given too much emphasis to unemployment and too little to inflation targets, and so we moved over. But if you go over to inflation targeting, it is not surprising in the least that you must accept higher unemployment levels. It is an inevitable consequence of the way that economies work. You cannot wriggle out of that by saying, ““We will go for some microeconomic measures that will make the labour market work better””. I certainly agree that we should go for such measures, but it is a total failure to understand economics if you think that those measures to improve the workings of the labour market can deal significantly with aggregate unemployment. I should like to make a point that no one else seems to have made, which surprises me given that almost everything else has been covered. One surprising feature of what has happened to the economy is that inequality has increased, and the rich in particular seem to be getting very much richer. I understand the case for targeting measures to help the poor, but all targeted measures have very distinctive disincentive effects. As for talk about tax measures, I say to the noble Lord, Lord Marlesford, that I know the story about the 98 per cent tax rate, but no one has ever been able to find anyone who paid it. The reason why that policy might have been mistaken is that accountants did very well out of it, not that anyone ever paid that rate. However, there are people who pay a 98 per cent or 100 per cent tax rate, and they are poor people. If they are very keen to get off benefits and into the labour market, they start to incur taxes. But, more to the point, they also lose benefits on a pound-for-pound basis. They pay 100 per cent tax rates at the margin. My advice to the Conservatives, if they wish to become a progressive party, is to look at that end of the spectrum and forget about the Forsyth report, much as I enjoyed reading it. Another plus point is the balance of payments—at least I think it is a plus point. The current account has been in deficit to varying degrees for the past 20 years. The amazing thing—which shows that, when I taught economics, I really misled the students very much—is that we have been able to finance this deficit year in, year out. That has to be a plus, because we have financed that deficit by people feeling that it is worth while investing in our country. Our interest rates are a bit on the high side, but if the world lost confidence in us, interest rate policy would never offset that. So it has to be world confidence that matters. We want that confidence to continue. I know as a matter of arithmetic that if some countries in the world have massive current account surpluses, others such as our own must have deficits. Equally, if they have those surpluses, they also accumulate finance capital. They have to put it somewhere and we are a place where they are likely to put it. So you could argue that, as long as they have confidence in us, there is no problem. But, deep down, something nags at me, ““Can I be right?””. In other words, I go back to the reason why I became an economist: my innate pessimism tells me that economics is the subject to be in. I have two additional worries. I start with the MPC. I have read the latest inflation report, which as usual offers an excellent account of the recent history and the current state of the economy. I have also read—they have just arrived—the latest minutes of the MPC, which are most revealing. But I do have a serious difficulty. I cannot find any connection either logically or economic-theoretically between what is in those two documents and the policy decision. To quote the MPC’s conclusion: ““Given that outlook””, which is what the whole of the rest of the inflation report was about, "““and bearing in mind the balance of risks, the Committee judge that an increase of 0.25 percentage points in Bank Rate to 5 per cent was necessary to bring CPI inflation back to the target in the medium term””." I can only respond, again following my noble friend Lord Barnett, by saying that I am amazed. Apart from the fact that I cannot see that the MPC’s decision follows in any rational way, I am concerned very much at the risks that it is willing to take with the real economy. My second and final comment—nearly final; there is always an extra one—is on the fiscal position. It is not right to anticipate the Pre-Budget Report, but I am concerned that public expenditure and aggregate taxation are getting close to an upper limit. What worries me even more is that pressures for more expenditure are growing. It is the age-old problem that the Government want this new improvement to be made, that pension to be increased, the nuclear deterrent to be modernised and so on, but they are less inclined to say what expenditure should be reduced to make room for those or what taxes should be raised. The Chancellor’s economic policy depends on a sound fiscal position, with borrowing to be strictly for productive investment. He is entirely right on that. However, it follows that in a few weeks’ time he must give us a tough fiscal package. Wearing my old academic hat, I would tighten the fiscal side to persuade the MPC to see sense, forget about raising the bank rate from now on and start to bring it down again. In conclusion, going back to an earlier point—I know that it is terribly irresponsible to say this in your Lordships' House—I sometimes wish that we had a crisis. We, especially the economics profession, need extreme events both to test our macroeconomic theories and, more properly, to evaluate our policy mechanisms, but perhaps noble Lords should ignore those last few sentences.