Lord John Eatwell, Shadow Treasury Minister Speech to debate on Queens speech (Day 2 of 4) BUSINESS, THE ECONOMY, LOCAL

GOVERNMENT AND TRANSPORT 13 May 2013

My Lords, I am grateful to Lord Deighton for introducing this part of the debate on the Gracious Speech. And, like the whole House, I look forward to the maiden Speech of the Noble Baroness, Lady Lane-Fox. Lady Lane-Fox is an accomplished actress, and it is surely no accident that one of her most successful roles was as Miranda in the Tempest, since Miranda famously hails the Brave New World, that has such people int. Lady Lane-Fox has been a major force in guiding this country into the Brave New World of information technology, and she is one of the most remarkable people int. We are all delighted to see her in this House. My Lords, the whole House knows that the central issue facing Britain today is economic failure: no growth for 2 years, output still 2.5% below the level 4 years ago; a million young people unemployed, productivity below the level of 2008, the banking system still unreformed, and a government deficit that hasnt fallen significantly for 2 years the worst performance of any G7 economy other than Italy. Given the seriousness of our economic problems it has been widely remarked upon that there are no Treasury measures in the Gracious Speech, other than the welcome National Insurance Contributions Bill, and the Banking Bill carried over from the last session. But there should be no surprise at this in-action. It is the very essence of the Governments strategy that the Treasury has a very limited role other than maintenance of the austerity. Active economic policy is left to others. This is made abundantly clear in the recent outline of the Governments economic policy that accompanied the Chancellors letter defining the remit of the Financial Policy Committee: The Governments economic strategy consists of four key pillars: monetary activism and credit easing, stimulating demand, maintaining price stability and supporting the flow of credit in the economy; [all this is the task of the Bank of England] deficit reduction, returning the public finances to a sustainable position and ensuring that fiscal credibility underpins low long-term interest rates; [austerity] reform of the financial system, improving the regulatory framework to reduce risks to the taxpayer and build the resilience of the system; [that refers to the Banking Bill, of which more later] and a comprehensive package of structural reforms, rebalancing and strengthening the economy for the future, including an ambitious housing package and programme of infrastructure investment [predominantly farmed out to other departments]. Since these are the pillars on which the Governments entire strategy is built, its worth considering low sound they are.

First, monetary activism. Theres certainly been plenty of activity, from Quantitative easing and Merlin to the Funding for Lending scheme. The difficulty with this activism is that when there is a lack of demand its very difficult for monetary policy to achieve any traction, so QE2 follows QE1 and there no noticeable effect on lending. Funding for Lending offers banks cheap funds to lend on at highly profitable rates, there is no noticeable increase in lending. Now we have Funding for Lending 2 and, without any prospect of sustained growth of demand the result will be the same no noticeable increase in lending. In his letter defining the remit, the Chancellor appeals plaintively that the FPC takes into account, and gives due weight to, the impact of its actions on the near-term economic recovery. In other words Give me financial stability, but not yet. But what all this activism has achieved is a serious distortion of the monetary system. The rock bottom interest rates of which the Chancellor is so proud has put pension funds under severe strain, and pensioners have no chance of buying a worthwhile annuity. And the excess liquidity, unused for real investment, is funding a bubble in the stock market that bears no relation to Britains real economic condition. Conclusion: monetary activism may help growth a little bit, but fundamentally it doesnt work. Thats one pillar gone. What then of the next pillar: Reform of the Financial System. The key reform is the Banking Bill. But which Banking Bill? The watered down version of the Vickers proposals favoured by the Treasury? Or the beefed up Banking Bill proposed by the Parliamentary Commission on Banking Standards? The Banking Bill has already passed through Committee Stage in Another Place, where any amendments related to the serious criticisms of the Bill in the report of the Commission on Banking Standards published 11th March this year were resolutely voted down by the Government. A further report by the Commission is due at some time in the next 4 weeks or so. Will the Minister tell us how the Government intends to deal with the arguments of these two reports? Will the Government re-commit the Bill in another place? If not, how are the Commissions proposals to be dealt with in this House? Or has lobbying by the banks secured the Governments commitment to ignore the Commissions arguments? That pillar is decidedly shaky. Now let us turn to the ambitious housing package and programme of infrastructure investment that the Chancellor claims are at the heart of his comprehensive package of structural reforms. We certainly need an ambitious housing package. No peacetime Government since the 1920s has presided over fewer housing completions than has this Government in the past two years. And its getting worse - housing starts fell in 2012 by 11% to below 100,000, whilst house prices, particularly in London and the South East, spiral out of the reach of young people attempting to buy a first home. So what does the Government do? Unbelievably, it increases the affordable homes guarantee programme that applies to the existing housing stock as well as new-build, giving its own special twist to the housing price spiral. This British version of Fannie Mae should be focussed on new build that is what is needed.

Even this little bit of economic activism on housing is too much for the Treasurys do-nothing sensibilities. The decision on whether the guarantee scheme is to continue in 3 years time is to be handed over to unelected officials at the Bank of England. And what of the programme of infrastructure investment. Well, we were told in the Budget, the Government is planning a 3billion boost in 2 years time. Will the Minister tell us why not now? Why when infrastructure projects are notoriously slow to get started, cant work begin now? The Government has committed to borrow the money in 2 years time, why not borrow it now? As far as the railways are concerned, the paving legislation for HS2, proposed in the Gracious Speech, heralds a change of heart. But the investment in HS2 should not let us forget the damage of the 1.28bn cut in rail investment in the last spending review. The planned spending of 9.2bn for 5 years from next year is clearly needed, but will the Minster tell us how this is to be funded? How much of it is to be paid for by an increase in Network Rails debt, and how much by yet more inflation busting increases in rail fares? The infrastructure pillar will be in place at some time or other, but not today. Finally, My Lords, let us turn to the fourth pillar of the Governments economic strategy, austerity to ensure that fiscal credibility underpins low long-term interest rates. As all noble Lords will be well aware, there is an growing international consensus amongst all serious commentators on economic policy that austerity strategies have failed. The academic work that purported to validate the austerity policy has been demonstrated to be seriously flawed. And as far as Britain is concerned Olivier Blanchard, chief economist of the IMF, said the country was playing with fire if it allowed stagnation to continue. Coalition austerity transformed Britains growth rate from a steady 2% a year into a steady 0% a year, with little prospect of anything over 1% in the near future. The level of output remains stubbornly below the level of output attained in 2008, whilst other countries have, at least, recovered from the worst ravages of the global financial crisis. What is the Governments justification for clinging to this failed doctrine? The Treasury argues over and over again is that any change to the strategy they have followed for the last three years would damage the government's credibility in the financial markets and the subsequent increase in long-term interest rates would outweigh any benefits from cutting taxes or increasing spending. Since this is the only shred of justification for sticking to austerity its worth examining for a moment. First, with whom is the Government seeking the credibility? Answer the markets. Who are they? Well what they are not is some single malevolent force tying George Osbornes hands behind his back as he pleads to be set free to stimulate growth. In fact the markets comprise millions of individual traders pouring over their computer screens, trying to guess how markets will move in the next month, week or even in the next few seconds,

trying to make a secure return. In other words, theyre trying to guess what everyone else will do in response for example, to announcements by firms or governments, or to release of economic date, or to research reports. This isnt easy, but it is made much easier if an authoritative source make statements that every trader believes everybody else will accept. We have had a striking example of this in the Eurozone, where Mario Draghis statement that the ECB would do everything necessary to defend the Euro, convinced each trader that all the other traders would take Draghi at this word and accordingly the markets all moved together in exactly the way Mr. Draghi wanted. Authoritative statements can move markets. So if all traders are convinced that any relaxation of austerity will result in higher interest rates and hence falling bond prices in the UK, then it will. Credibility is a vice tightening around the heart of the British economy. And what do the clowns at the Treasury do about it they do everything they can to reinforce the traders beliefs. They cry from the rooftops that the markets will tighten the austerity vice because its the only justification they have left of a failed policy. At the same time they falsify the arguments for abandoning austerity. Nobody is expecting George Osborne to take himself off to the Tower of London, crying out to the world I was wrong, I was wrong. Though to think of it thats not such a bad idea! What we expect is a steady and careful staged change of emphasis: Bringing forward the increase in infrastructure spending. A British Investment Bank added to a strengthened Banking Bill. A Jobs guarantee to the long-term unemployed. A real new-build housing programme, and, to improve existing housing stock, reduced VAT on home repairs, maintenance and improvements. None of these requires a fanfare announcement. All they need is real activism from a donothing Treasury. So what is left of the four pillars? Monetary activism that doesnt work A Banking Bill that fails to reform the banks in the way that Britain needs. An infrastructure policy that recedes into the future and a housing policy that does precious little for the new build that homebuyers and the construction industry need. And last, but no means least, an austerity policy that isnt cutting the deficit but is cutting real incomes. What this Queens Speech reveals my Lords, is that the Governments economic policy doesnt have a leg to stand on. ENDS