Pre-Budget Report

My Lords, the important point in the Pre-Budget Report is that we are witnessing a greater instability than at any time for generations. The real problem is that investors assumed that the considerable and long-term growth rate would continue indefinitely, and so did the banks. That was one of the major problems that we must face, because in their efforts to win much of the business from investors the banks provided loans at exceptionally low rates of interest. As a result, so many investors went much further than they would have done in the past. Thus, together with the sharp rise in unemployment, recent purchasers suffered an important decline in their financial position. A major consequence has been the strong downturn in the housing market. The question facing us is: how long will the downturn last? The Prime Minister has been foremost in anticipating the consequences and size of the economic downturn, and his approach to providing financing was echoed throughout the financial world. Introducing 15 per cent VAT for the current year was an important step in countering the downturn, more so than a number of your Lordships feel. The advantage of that move was its quick injection; there are not many ways of spending money to get the results that are possible in that way. That quick injection into consumer spending was an important factor. It may not have been seen as an important step, but it was a change in the economic situation—one which is difficult to effect quite so rapidly in other ways. Other methods can be introduced, but the delay in their effect on the economy would have limited consequences on the situation. The noble Lord, Lord Newby, pointed out that there were other ways of spending that £12.5 billion and suggested building homes as one of them. Yet a number of things that were mentioned by the noble Lord, and by others, take much longer to produce a result. The great advantage of having 15 per cent VAT was that we got it straight away. The Government’s proposals are to support confidence in the banking system. Their tasks are to protect depositors’ money and to safeguard the interests of taxpayers. The Government are also helping small and medium-sized businesses, through the support of bank lending. They have also brought forward £3 billion of capital spending into the current year; more has been announced today. My noble friend Lord Myners has said that banks, and their ““grossly over-rewarded”” executives, are partly to blame for causing the economic recession. He said that, "““the golden days of huge bonuses””" were over, and that executives had, "““no sense of the broader society around them””." He said that the banking system came close to collapse last October, before the Government’s £500 billion rescue package, and that, "““There were two or three hours when things felt very bad, nervous and fragile””." The point he made was well accepted. He said that major depositors were trying to withdraw and were willing to pay penalities for early withdrawal from a number of large banks. He continued: "““They are people who have no sense of the broader society around them. There is quite a lot of annoyance and much of that is justified. Let us be quite clear: there has been mismanagement of our banks””." That has been one of the fundamental things that no one ever expected. People trusted banks; they gave their money and thought that there would be no problem about getting it out whenever they wanted it, and with interest. To see the banks decline in this way was quite unexpected. The United Kingdom is now in recession for the first time since 1991. Official government figures have confirmed that. Gross domestic product fell by 1.5 per cent in the last three months of 2008 after a 0.6 per cent drop in the previous quarter. That means that the widely accepted definition of a recession—two consecutive quarters of negative economic growth—has been met. It represents the biggest quarter-on-quarter decline since 1980, and a 1.8 per cent fall on the same quarter a year ago. The worse-than-expected contraction sent sterling to a 24-year low against the dollar with £1 buying $1.35. Meanwhile the FTSE 100 index fell almost 2 per cent below 4,000 points. The figures from the Office for National Statistics showed that manufacturing made the largest contribution to the slowdown, contracting by 4.6 per cent despite hopes that the weak pound would help exporters. That was an expectation, and we have the whole of this year to see how much it will lead to an increase in exports. With the exception of agriculture, all elements of the economy shrank from the previous three months. The fall in GDP was slightly steeper than most analysts had been expecting. The downturn was broad-based, and it has been said that the bleak manufacturing data ended any prospect of this being a white-collar recession that would largely escape manufacturers. Chancellor Alistair Darling said that the figures underlined the scale of the challenges the Government faced. He said: "““It’s going to be a difficult year for families in the UK. We need to go about the problem with a sense of purpose””." He said that countries across the globe were facing recession and that the crisis could be solved better and quicker if other Governments also acted to stimulate their economies. We hope to see other countries coming into the same fold. What started as a crisis in the financial sector continues to infect the wider economy. Unemployment is accelerating sharply with large numbers of people now out of work. The housing market remains severely depressed and retail sales are weak. Even though December’s retail figures were better than expected—growing by 1.6 per cent—this was driven by heavy price-discounting and should be treated with caution. Andrew Smith, the chief economist at KPMG, said: "““It is difficult to see why things should improve in the foreseeable future””." Efforts to prevent the recession deepening have been widespread, although critics say they have not gone far enough. The Bank of England has aggressively cut interest rates to 1.5 per cent, which is aimed at driving down the cost of lending and making it easier for consumers and businesses to access credit. However, banks have been reluctant to lend sufficiently, despite a £37 billion injection into major banks, and a scheme to offer insurance to banks against potential losses on risky loans. The interesting question that faces us today is: how is the pressure being put on the banks to carry on the sort of business that they have been producing for so long and so well?