My Lords, it was healthy to see that the gracious Speech put in big letters up front that the key objective was to get the economy growing. That must surely be in the interests of all people. I cannot help thinking that that is not a bad criterion against which to measure individual policies: are they going to be good or bad for economic growth? Perhaps if President Hollande had done that, he would have avoided causing the French economy so much damage.
I add my congratulations to the Chancellor on having got our economy back to decent growth. I well remember that not long ago the IMF was rapping us over the knuckles, saying that we had not got it right. In a sense, you cannot blame the Labour Party for offering criticism; it is its job to oppose. However, three years ago I predicted that growth in the UK would be 3% by the time of the 2015 election. At that time people thought that I was not being particularly sensible, but that is about what it will be. As has been pointed out, this has been achieved while inflation remains healthily under 2%.
In essence, the Chancellor has taught Hayek but mostly done Keynes by printing £180 billion of money and continuing to run a budgetary deficit of well over £100 billion. If that is not Keynes, I am not sure what is, but it is fair to say that that was needed after a 7% crash in the British economy, just as Keynes was needed and was successful in the 1930s. The issue is when you turn down the Keynesian gas and revert to more standard economic management.
I also particularly welcomed in the gracious Speech the incentives for shale gas exploitation, the new collective defined contributions pension schemes and the proposals for streamlining planning approvals. Two of my children and I have been involved in the planning process over the past year. It is a complete nightmare and extremely expensive, involving environmental this and planning that—all for fairly simple and straightforward things. It is blindingly obvious that the problem is lack of supply because of the extent to which our planning system has become so complicated.
I have only one reservation for the near term: I hope that the Bank of England does not leave it too late to start to nudge up interest rates, particularly given that the economy has returned to normal, because the obvious risk is that when rates are increased they will have to be put up by a greater quantum, which would have more of a shock effect on the economy at the time.
However, we are not adequately talking about two big issues. One is that, taken together, health spending and the totality of welfare expenditure are now running at around £350 billion per annum—close to half of all government spending. As Mrs Merkel said in a different way, that expenditure is growing much faster than tax revenues or the economy. It is simply not sustainable in the long term, and it is particularly in the areas of welfare spending and the unfunded costs of ageing that Governments are going to have to think again. If they do not, there will be major economic problems in the future.
This is also reflected by the fact that we currently have a structural deficit of around £100 billion per annum. Although some of that can be addressed—as much as possible, hopefully—by economic growth and rising tax revenues, I do not think it will all be dealt with thus. We have reached the stage of economic recovery where those issues need to be thought about in a little greater depth and the can not kicked down the road.
The second issue is savings and productivity performance. We need a savings rate of around 10%; it is more like 3%. Productivity growth since 2005 has been virtually zero overall. Manufacturing productivity has grown reasonably, but in the service industry—unbelievably—it has declined. The two obviously interrelate, in part because savings equals investment: if we have low savings we are likely to get low investment. However, that is not the only cause. Low levels of saving have been a major cause of poor productivity growth for over a decade. One cannot but observe that this goes back to the introduction of tax credits around 2004. I remember when the Heath Government brought in similar proposals to subsidise employment with their negative income tax proposals. The then leadership of the Labour Party—I use their arguments from 2004-05—warned that, if we do subsidise employment,
we run the risk of having excessive employment in areas that are not growing, of discouraging people from getting skilled up, and of damaging productivity growth, just as the Speenhamland system did in the early part of the 19th century. The whole equation of savings, productivity growth and tax credits needs to be looked at in a little more depth.
Since 1997, the savings rate has also been driven down by the destruction of what was the best pension system in Europe. That destruction has been caused partly by overburdening final salary schemes, partly by the 1997 tax rate and partly by continuous tinkering with the rules. I very much hope that the gracious Speech will mark much more constructive thinking by the Government about pensions and retirement saving. That is how we can practically get the savings rate back up and generate the funds we need for investment in this country.
Again, a by-product of the inadequate savings rate has been, as I think was pointed out by the noble Lord, Lord Adonis, a current account deficit that has now risen to over 5%. For nearly 20 years we have financed that by selling off companies and the family silver. I will not say that that is running out, but there may come a time when it will not be in the national interest to keep on selling assets to pay for current consumption.
I repeat that there has not been in economic policy an adequate focus on the two key areas of savings and productivity growth, but there are three good news territories that I will focus on which I see in the commercial bit of my life. One is a wonderful explosion in entrepreneurship and a new-technology industrial revolution that is going on. I have to admit that a lot of the latter is in London—I will come back to that point—but I do not believe that the figure of 4.5 million self-employed is a reflection on people not being able to get contractual work; I think that a lot of it is voluntary. Something like one-third of young people now want to be entrepreneurs. In my generation everyone wanted to be a civil servant or work for a large corporation. Now, people are much bolder and much more imaginative, and this country, more than any other, is really exploiting the new technology that is coming up. Therefore, I think that there is very good news for the future beneath the surface.
Secondly, I think that we should welcome and not resent the success of London. Jobs in London are reckoned to be 39% more productive than jobs in the rest of the UK. It has more people employed in highly skilled, knowledge-based industries than any capital anywhere in the world. At the end of the day, this is generating the tax revenues that will help stimulate other parts of the country. I find it disappointing when people talk almost in terms of being jealous of London’s success because it is not matched at present by parallel success in other parts of the country. Let us remember that in the 19th century Manchester and Birmingham were doing brilliantly and London was not doing so well. Therefore, things swing to and fro.