Pre-Budget Report

My Lords, that was a fine load of old Schmidthubers to liven us up at the end of a long debate. I hope that the noble Lord, Lord Pearson of Rannoch, will pass on my commiserations to the new treasurer of UKIP, which has really drawn the short straw. We cannot just say that it is all Europe’s fault, as the noble Lord has. The noble Lord, Lord Vinson, started with some very interesting points about confidence and capital but, later in his speech, seemed to follow the line of the noble Lord, Lord Pearson of Rannoch. I start by declaring my interests fully, as they are in the register. I am joint managing director and founder of OLIM Ltd, traditional fund managers for pension funds, charities, investment and unit trusts and private clients in UK equities and commercial property. We are part of Close Brothers; we do not short banks or sell any shares short at all. The noble Lord, Lord Barnett, as so often, put his finger on the key issues of the debate and our economic situation today—the need for capital investment on a major scale and the need to fix the banks. He was absolutely right to focus on whether toxic assets have properly been written off. That is a major reason why the market has recently been very concerned about the Barclays share price, particularly given its enormous exposure to the gambling operations of Barclays Capital. The noble Lord, Lord Barnett, said that he had some bonds. I have news for him: the Government will be pumping out plenty more. There will be no shortage; there is no need to hurry while stocks last. The noble Lord, Lord Freeman, gave a stark and important warning about the plight of early-stage companies. As he says, venture capital funding has virtually dried up. That is very serious and very worrying. On these Benches we are at one with the noble Lord, Lord Blyth, in completely failing to understand why the FSA has decided to end the ban on short-selling in British banks. My honourable friend in another place, Vince Cable, has been taking a lead on this. It is the first serious mistake that the noble Lord, Lord Turner of Ecchinswell, has made, and I hope that it is not repeated. Of course, short-selling is not the only cause of the collapse in bank share prices, but why take the chance in a situation like this? When the fire brigade is fighting a roaring inferno, you do not let people play with paraffin around the flames. I agreed with one part of the speech from the noble Lord, Lord Ryder of Wensum—and he was the only person to raise it—about the increasing and, in many ways, hidden cost of public sector pensions. We need to face up to that, and face up to it soon. The noble Lord, Lord Sheldon, like his noble friend of so many years, the noble Lord, Lord Barnett, was absolutely right to focus on the fact that the present instability is probably the greatest that it has been for many generations. The noble Lord, Lord Higgins, was right to talk about the lack of focus on the exchange rate and, as so many noble Lords have said, to point out that the banking sector is still clogged up. The noble Lord, Lord Northbrook, pointed again in a similar way to exchange rate and funding risk. Perhaps I may say a few words about how I see the current economic situation and the risks. In some worrying ways, the closest parallel over the past century is with 1931. Back then, Britain was, as it is today, the most aggressive major developed country in dealing with deflationary pressures, particularly by a substantial devaluation. In those days it was coming off the gold standard; now, as we have heard, the currency has been sharply devalued. Certainly in the early 1930s our depression was a great deal shorter and shallower than most other main countries; however, the difficulty today is that our banking problems are much more serious than those of any other major country. Obviously there are small countries such as Ireland and Greece that are in a grave situation, but we have a large banking sector in relation to our economy. We have had, more than most other countries, an enormous build-up—an overvaluation in not only the residential but also the commercial property market. That not been talked about so much, but it is in a very serious state. I refer in particular to the two big Scottish banks that were aggressive leaders in commercial property; between them they have £100 billion of exposure to commercial property which they have hardly begun to write off yet, so there are serious losses to come. If we compare Britain and America, the numbers are worrying. The total assets of British and American banks are roughly the same, at just under $2 trillion. If we factor in something like an 18 per cent loss in those assets, which is not unreasonable, the losses in Britain would be about equivalent to the GDP and about twice the public debt, whereas in the United States we would be talking about losses for the same write-down of 10 per cent to 15 per cent of GDP and a third of public debt. Of the five biggest banks in the world, three are based in Britain: the Royal Bank of Scotland, Barclays and HSBC. The other two big international banks in the top five are Deutsche Bank and BNP Paribas. Those pressures are one of the reasons why preference shares in United Kingdom banks yield about 25 per cent. The market is saying that there is serious risk. The other problem is that the economy is falling fast. Looking at the last quarter’s fall on an annualised basis, we are talking about GDP falling at a rate approaching 6 per cent. The retail price index in particular fell 2.5 per cent over the past quarter, although no one seems to have noticed. Again, we are talking about a double figure percentage rate of decline. Everything that I sensed from the high street in January is that retail prices are falling even faster. We are seeing the possibility of a 1930s-type recession. I would like the Minister to take up a problem in the commercial property market: people avoiding their obligations. It is called pre-pack administrations; many companies, retailers in particular, are effectively tearing up their leases, milking their suppliers, going into administration in the morning and buying themselves back out in the afternoon. That is causing great problems to suppliers but it is also seriously undermining the income stream and the security of income for pension funds and life insurance companies. I hope that the Minister will draw that increasingly worrying abuse to the attention of his noble friend Lord Mandelson and to the Insolvency Service. As I have said, the economy is in grave danger of slipping down a black hole. The rising tide of unemployment is only just now hitting consumer confidence and house prices. The house price falls we have seen so far, which in reality are about 30 per cent, have really only been for financial reasons and the unwinding of speculation. Real people losing real jobs in the real economy will make the second shoe drop in the housing market, pushing house prices lower still. I would be very surprised if they did not halve from the recent peak to the bottom of the trough. The banks must start serious lending again to British business, and the Government must face up to the 30 per cent or 40 per cent hole in lending to British business that has been left by the Icelandic, Irish and other foreign banks. That is a major problem. Individual British banks complain they cannot fill the hole. The problem is that they are the only people who can, which is part of the reason there is such a savage squeeze on bank lending. Finally, the Government must inject serious spending power into the economy, not through stunts and wheezes—we have heard all about the VAT cut, which has been dismissed, rightly, around the House—and not by trying to pick winners in individual struggling companies, but by putting money straight into the pockets of pensioners and low-paid people who will spend it because they must. We must build up real national assets, especially in desperately needed areas such as insulation, green power, green projects and, most important of all, affordable housing. We must not leave hundreds of thousands of building workers dumped on the dole—we must get them building again.