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Economy

My Lords, I congratulate my noble friend Lord Forsyth on securing this well-timed and important debate, and also on his excellent speech in opening it. Much has already been said, and I should like simply to make the most fundamental point: that confidence is the key to recovery. This is, in essence, a balance-sheet recession. It was triggered by the banks which, perhaps misled by the Government’s changes to regulatory mechanisms, by their injunction to the regulators to regulate with a light touch, by the expansion of public borrowing and by low interest rates focused only on the inflation rate, the banks increased their loan-to-capital ratios by irresponsible amounts. Banking remains the major problem, and the imperative is not for distractive witch hunts, but the restoration of confidence to the banking sector. Only then will it be able to lend again. It is nearly two years since Northern Rock set off the alarm, and there has been an astonishing delay and complacency on the Government’s part in responding to that growing crisis. When the storm broke last year, they should have acted with speed and force to identify the extent of the toxicity problems and to separate them from the healthy parts of the banks. Nearly 20 years ago, Lloyd’s of London, the insurance market, had a toxicity problem which nearly brought it to its knees. The Council of Lloyd’s addressed it by setting up Equitas to take over the toxic assets. Here I declare an interest, which is happily now almost extinct, as a participant in Equitas. Brokers, underwriters, underwriting agents, the Council of Lloyd’s and all other interested parties came together to co-operate in solving the problem, and Lloyd’s continued as a healthy financial institution. Of course, the comparison is not exact, but that kind of example could have been followed if there were sufficient drive and purpose. Even today in the banking sector, treatment by the Government of toxic assets has been slowly and hesitantly designed and slowly implemented. The Government’s broad approach to the crisis has been, first, to flood the economy with money—money borrowed, money promised, money printed—hoping, no doubt, in the process to wash away the trail of their past record of mismanagement. Now they are relying on the Bank of England to print money to buy gilts from the banks. Prices go up, yields go down and thereby companies’ pension-scheme deficits go heavily into deeper deficit. That, in turn, reduces companies’ capital for new investment and slows recovery. The banks’ first priority is, sensibly and understandably, to restore their balance sheets. When do the Government expect the banks to use the proceeds of quantitative easing to lend to industry? Will the Bank of England also buy corporate bonds to help businesses more directly? The formula MxV=PxT, with which the noble Lord, Lord Myners, is very familiar, has several variables. It is a risky business. Will the Minister tell your Lordships what estimate he has of the impact of this policy of quantitative easing on the velocity of money and what impact he anticipates it having on the recovery? Nothing has damaged confidence more than the recent Budget. There is a bad record of past predictions and, on top of that, a worse record of future projections and no coherent plan for the future. It is perfectly clear that the Treasury’s future growth figures were chosen and inserted in the Budget tables only once it knew what was needed to give some fig leaf of balance. They bear no relation to reality, and the IMF, the IFS, the European Commission and other independent bodies have rapidly demolished them. Having brought the country to its knees by excessive borrowing over the past decade and some £600 billion of debt racked up in the good years, the Prime Minister was forced back, in the words of the most reverend Primate the Archbishop of Canterbury, ""like an addict returning to the drug"," and now hopes to raise some £700 billion of debt over the next five years. I do not believe that there is another country in the world that will have to borrow more in proportion to its GDP. With other major countries seeking to raise more than $2 trillion this year alone, and with sterling devalued by some 30 per cent, there must be a very real danger, as my noble friend Lord MacGregor pointed out, of a gilt strike and the loss of our triple-A credit rating. Our Prime Minister likes to think of himself as King Midas. On coming to power in 1997, he set down what he called his "golden rules", and proceeded to break them all. Two years ago, he spoke in the Mansion House of, ""a new golden age for the City of London"." That claim lies in tatters. But 12 years ago he inherited an economy that constituted, by common consent, a golden legacy, and he destroyed it; 11 years ago he sold almost half the nation’s gold reserves at the bottom of the market, and put the money into euros. We can only be thankful that he did not leave them in sterling. That is the record of a King Midas in reverse. It was Warren Buffett who said: ""Only when tide goes out do you discover who’s been swimming naked"." This Budget reveals that the United Kingdom, after 12 years of Labour government, is less well prepared to withstand recession than almost any other country. What we need urgently now is a plan to reduce debt. We need plans to get spending down. Why did the Government scrap the three-year spending review this year if not to funk the difficult decisions? Above all, we need to restore confidence that this can never happen again. In the past, the Prime Minister would move the goalposts and change the dates of the economic cycle. Well, this economic cycle will run for a generation. But he cannot change the dates of the parliamentary cycle, and soon we can elect a Government who will get a grip and start the painful task of rebuilding this country.