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Queen’s Speech

My Lords, I believe that there are reasons to be optimistic about economic affairs, at home and abroad. I am optimistic, first, because the past decade has been remarkably successful economically. For the first time in modern history, despite large increases in population, the number of people around the world living in absolute poverty fell below 1 billion. This was possible because the world economy grew at a rate of almost 4 per cent a year, with developing countries expanding at twice the rate of developed countries. It can be done. This successful decade was, of course, brought to a potentially catastrophic end by the financial crisis. Yet even here there is a second reason for optimism. A year ago, the world stood on the edge of a financial precipice, facing the prospect of a great depression. But Keynesian measures in monetary and fiscal policy, and the practical steps taken to recapitalise the banks, have worked. A year ago it would have been impossible to believe that the world would be in the relatively good shape that it is in today. Of course, there is still a lot to do, as was made clear in the gracious Speech. There is a third reason for optimism. The crisis induced a remarkable level of international co-operation. The G20, an organisation thrown together by necessity rather than design, has, so far, developed an unprecedented commonality of analysis and action. But, of course, all these sources of optimism have a darker side. The growth in demand that secured the expansion of real income was fuelled by a financial bubble, originating in global imbalances and driven by financial innovation that piled systemic risk upon systemic risk until the fragile edifice collapsed. Then there are still those who, in spite of the evidence to the contrary, deny the success of the Keynesian measures. Notable among these are the leaders of the party opposite, still trapped by the Neanderthal economics of omniscient, self-stabilising markets. Just this Monday, Mr Cameron reiterated his commitment to an age of austerity by declaring that he would cut the fiscal deficit, starting "now", he said, regardless of the state of the economy. It was heartening for those of us sitting yesterday on the Economic Affairs Committee of your Lordships’ House to hear the Governor of the Bank of England join the managing director of the IMF and the German Chancellor in rejecting that dangerous position. Finally on the darker side, once immediate threats recede, will co-ordinated international action be maintained? Will real steps be taken to address the international imbalances that have been a recurring threat to growth ever since the emergence of the persistent German surplus in the 1960s? Will the common commitment to regulatory reform be maintained in the face of protests that regulation "undermines competitiveness" and of threats to quit any country that dares to propose effective reform? These questions are particularly important for Britain. It has the largest and most successful international financial sector in the world, so it was inevitable that it would suffer disproportionately in an international financial crisis. For the future, two broad areas of action are required: first, to learn and apply the lessons of the crisis by restructuring the financial sector; and, secondly, to rebalance the economy to reduce its dependence on finance and increase overall resilience to financial shocks. On the first—restructuring finance—the City of London is essentially an offshore financial centre, providing first-rate service to the world. An important element of that first-rate service is sound regulation. However, most of this activity has very little to do with the rest of the British economy and it is unforgivable that contagion from international finance has so damaged domestic production. The regulatory authorities are committed to identifying the linkages that propagate systemic risk. It would serve Britain well if some of those linkages were severed and domestic banking insulated, as far as it may be, from international storms. The second area of action is rebalancing the economy. British industry desperately needs a reliable flow of capital to fund new investment. In its current state, much of British banking is incapable of playing that vital role and is unlikely to do so even in the medium term. Not only have the wholesale money markets that funded so much lending contracted but the emergency measures have resulted in an excessively concentrated banking industry with no obvious competitive urge to lend. Major restructuring of domestic banking is necessary to enhance competition and reduce the pernicious influence of "too big to fail". More radical steps are also necessary. Instead of just hoping that lending to industry increases, direct action should be taken to ensure that it does. A national investment bank should be established, funded by the issuance of bonds. At the very least, the existence of a dedicated competitor might stimulate the commercial banks into action. Finally, are there no ways of sustaining the demand that the world economy needs other than by fuelling recurrent credit bubbles? Indeed there are. Addressing international imbalances by increasing the spending of surplus countries will enable worldwide demand to be sustained without erecting a fragile tower of household debt. It is time that policy-makers took on board the fact that countries that run a persistent surplus are beggaring their neighbours and ensured that they are suitably penalised for doing so. However, there is an even more certain method of sustaining demand: redistributing income towards the poor, who possess the macroeconomic virtue of spending everything that they receive. That is exactly the process that is happening internationally as the world relies increasingly on rising incomes in India and China to maintain demand. But it must also happen domestically. The savage 30-year trend towards greater inequality in western countries should be reversed to the benefit of aggregate demand and hence the benefit of all. I had three reasons for optimism, but there is also a fourth. The British Government led the way in devising the means of alleviating financial distress. We are fortunate to have in the Treasury team, in the chairman of the FSA and in the Governor of the Bank of England some of the most creative yet practical policy-makers in the world today. It is their responsibility to think and act radically to create enduring structures that will enable us to emulate the successful, real economic performance of the past decade.