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Global Economy

Volume 729: debated on Thursday 11 August 2011


My Lords, with the leave of the House I shall now repeat a Statement made by my right honourable friend the Chancellor of the Exchequer in another place.

“Mr Speaker, people will be concerned about the turmoil in the world’s financial markets and what it means for economies here and across the globe. I want to use the opportunity of the recall of Parliament to update the House on what we are doing to protect Britain from the storm and to help lead a more effective international response to the fundamental causes of this instability.

As of this morning, after heavy losses yesterday, markets in Asia and Europe are calmer. But over the past month, the Dow Jones index has fallen by over 14 per cent, the French market is down 23 per cent and the Nikkei by 11 per cent. It is striking that the German market is down 24 per cent and even Chinese equities are down 20 per cent since November. Bank shares in all countries have been hit particularly hard, with French banks the latest in the firing line. Many sovereign bond markets, too, have been exceptionally volatile, with market rates for Italian and Spanish debt soaring before falling back in the last three days.

Sadly, Britain is not immune to these market movements. In the last month, the FTSE 100 is down by 16 per cent and British bank shares have also been hard hit. However, while our stock market has fallen like others, there has been one striking difference from many of our European neighbours. The market for our government bonds has benefitted from the global flight to safety. UK gilt yields have come down to around 2.5 per cent—the lowest interest rates in over 100 years. Earlier this week the UK’s credit default swap spread, or the price of insuring against a sovereign default, was lower than Germany’s. This is a huge vote of confidence in the credibility of British Government debt and a major source of stability for the British economy at a time of exceptional instability. It is a reminder of the reckless folly of those who said we were going too far too fast. We can all see now that their approach would have been too little too late, with disastrous consequences for Britain.

It is not hard to identify the recent events that have triggered the latest market falls. There has been the weak economic data from the US and the historic downgrade of that country’s credit rating. The crisis of confidence in the ability of eurozone countries to pay their debts has spread from the periphery to major economies such as Italy and Spain. But these events did not come out of the blue. They all have the same root cause—debt and, in particular, a massive overhang of debt from a decade-long boom when economic growth was based on unsustainable household borrowing, unrealistic house prices, dangerously high banking leverage and a failure of Governments to put their public finances in order. Unfortunately, the UK was perhaps the most eager participant in this boom, with the most indebted households, the biggest housing bubble, the most over-leveraged banks and the largest budget deficit of them all.

History teaches us that recovery from this sort of debt-driven, financial balance-sheet recession was always going to be choppy and difficult. We warned that that would be the case. But the whole world now realises that the huge overhang of debt means that the recovery will take longer and be harder than had been hoped. Markets are waking up to this fact. That is what makes this the most dangerous time for the global economy since 2008. I think we should be realistic about that. I think we should set our expectations accordingly.

As the Governor of the Bank of England said yesterday, and as the head of the Office for Budget Responsibility has also noted, the British economy is expected to continue to grow this year. Some 500,000 new private-sector jobs have been created in the past 12 months—the second highest rate of net job creation in the G7. But instability across the world and in our main export markets means that, in common with many other countries, expectations for this year’s growth have fallen.

This is what our response must be. First, we must continue to put our own house in order. I spoke again yesterday to Sir Mervyn King and I can confirm that the assessment of the Bank, the FSA and the Treasury is that British banks are sufficiently well capitalised and are holding enough liquidity to be able to cope with the current market turbulence. We have in place well developed and well rehearsed contingency plans. We must also continue to implement the fiscal consolidation plan that has brought stability to our bond markets.

I believe that events around the world completely vindicate the decisions of this coalition Government from the day they took office to get ahead of the curve and to deal with this country's record deficit. While other countries wrestled with paralysed political systems, our coalition Government united behind the swift and decisive action of in-year cuts and the emergency Budget. While other countries struggled to command confidence in their fiscal forecasts, we have created an internationally admired and independent Office for Budget Responsibility. These bold steps have made Britain that safe haven in the sovereign debt storm. Our market interest rates have fallen while other countries’ have soared, and the very same rating agency that downgraded the United States has taken Britain off the negative watch that we inherited and reaffirmed our triple-A status. This market credibility is not some abstract concept. It saves jobs and keeps families in their homes. Families are benefiting from the lowest-ever mortgage rates and companies are able to borrow and refinance at historically low rates thanks to the decisions we have taken. Let me make it clear not only to the House of Commons but to the whole world that ours is an absolutely unwavering commitment to fiscal responsibility and deficit reduction. Abandoning that commitment would plunge Britain into the financial whirlpool of a sovereign debt crisis at the cost of many thousands of jobs. We will not make that mistake.

The second thing we need to do is to continue to lead the international response in Europe and beyond. In the G7 statement agreed between finance Ministers and central bank governors this week, we said that we would take all necessary measures to support financial stability and growth. In the eurozone, there is now a growing acceptance of what the UK Government have been saying, first in private and now in public, for the last year—that they, too, need to get ahead of the curve. Individual countries must deal with their deficits, make their economies more competitive and strengthen their banking systems. Existing eurozone institutions need to do whatever is necessary to maintain stability, and I welcome the ECB interventions through its securities markets programme this week to do just that.

But this can only ever be a bridge to a permanent solution. I have said many times before that the eurozone countries need to accept the remorseless logic of monetary union that leads from a single currency to greater fiscal integration. Many people made exactly this argument more than a decade ago as a reason for staying out of the single currency—and thank God we did.

Solutions such as euro-bonds or other forms of guarantees now require serious consideration and they must be matched by much more effective economic governance in the eurozone to ensure that fiscal responsibility is hardwired into the system. The break-up of the euro would be economically disastrous, including for Britain, so we should accept the need for greater fiscal integration in the eurozone while ensuring that we are not part of it and that our own national interests are protected. That is the message that the Prime Minister has clearly communicated in his calls with Chancellor Merkel, President Sarkozy and others this week. I have done likewise with individual finance Ministers, in ECOFIN and in the G7 call at the weekend, and will do so again at the September ECOFIN and G7 meetings.

But this is a global, as well as a European, crisis. At this autumn’s meetings at the IMF and the G20, we need far greater progress on global imbalances. We need an international framework that allows creditor countries such as China to increase demand and debtor countries to make the difficult adjustments necessary to repay them. Everyone knows what needs to be done, but progress so far has been frustratingly slow, with lengthy disagreements on technical definitions, let alone on any concrete actions. The barriers are political not economic, so it is up to the world’s politicians to overcome them. There are no excuses left.

Finally, the UK, like the rest of the developed world, needs a new model of growth. Surely we have now learnt that growth cannot come from yet more debt and government spending. Those who spent the past year telling us to follow the American example with yet more fiscal stimulus need to answer this simple question: why has the US economy grown more slowly than the UK’s so far this year? More spending now, paid for by more government borrowing and higher debt, would lead directly to rising interest rates and falling international confidence that would kill off the recovery not support it. Instead, we have to work hard to have a private sector that competes, that invests, that exports. In today’s world, that is the only route to high-quality jobs and lasting prosperity.

In the developed countries, and especially in Europe, that means making the difficult structural reforms needed to restore competitiveness and improve the underlying performance of our economies. Internationally, we have the greatest stimulus of all sitting on the table in the form of the Doha round—a renewed commitment to free trade across the world—that should be taken up now. Here in Britain, The Plan for Growth has set out an ambitious path. Twenty-three of the measures in it have already been implemented and another 80 are being implemented now. On controversial issues, such as planning reform, we will overcome opposition that stands in the way of prosperity. On tax, we have already cut our corporation tax by 2p, with three more cuts to come over the next three years. In welfare and education reform, we will continue to pursue a radical reforming agenda.

There is much more we can do and much more that we must do if we are to create a new model of sustainable growth. All of us in the House must rise to that challenge in the months ahead and confront the vested interests. They are the forces of stagnation that stand in the way of growth. In these turbulent times for world markets, we will continue to lead the international response, redouble our efforts to remove the obstacles to growth and stick to our plan that has made Britain a safe haven in the global debt storm. I commend this Statement to the House.”

My Lords, that concludes the Statement.

My Lords, I am most grateful to the noble Lord for repeating the Statement made by the Chancellor in the other place and for travelling back to the House to do so. We are living through a grave and difficult situation for the international economy; indeed, for the economy abroad and at home. Many noble Lords will feel that the current situation in the global economy is eerily reminiscent of the early days of the financial crisis in 2007-08. Then, as now, shocks to relatively small entities destabilised financial markets by undermining confidence in the authorities’ understanding of what was happening and hence their ability to do anything constructive. Small events then spread to even larger entities, so that even the most stable and secure institutions were affected. Then as now, fears were stoked up by the grandstanding of the ratings agencies. Then as now, funding dried up and the solvency of major institutions and sovereign states was questioned. Some of the actors have changed, but the play is the same, and those who will suffer—ordinary, hard-working people—remain the same too. As the crisis enters this new phase, are we better prepared? Have we learnt the lessons of the past three years? Does the Chancellor’s Statement represent a new understanding of what is happening?

The first lesson is simply to remember that the object of economic policy is the prosperity of our citizens, not the comfort of the financial markets. Stable financial markets are a means to an end, not an end in itself. That lesson was clearly learnt in the strategy devised by the G20 in 2009. It committed members to halve national deficits in five years by pursuing a concerted growth strategy. Unfortunately, the commitments made in 2009 were abandoned a year later. The growth strategy was abandoned in favour of austerity, imposed either by the markets, as in Greece, or by the Government, as in Britain.

The second lesson was the need for a clear analysis and understanding of what was happening in order to fashion an appropriate response and to generate confidence throughout the economy. Recent events in the United States and the eurozone suggest that this lesson has not been learnt. In the United States, the political wrangling of the past few months, and the intransigence and lack of flexibility of some senior policy-makers, resulted in a loss of confidence in the authorities' ability to deliver an economic recovery and even in their understanding of what needed to be done. None the less, at least output in the US has recovered to pre-crisis levels, while output in the UK is still 4 per cent below those levels. The Chancellor’s cheap jibe about US growth over the past two quarters is a fine example of statistical chicanery. Will the noble Lord explain why the US has got output back to pre-crisis levels but the UK has not?

In the eurozone, it should be clear to all that the institutions of monetary union are perfectly designed to transform economic difficulties into economic crises. The lack of a single eurobond market, backed by an effective treasury function and allied to fiscal transfers that occur as a matter of course in the US and the UK, results in a situation in which growth in weaker economic areas can result only in the accumulation of debt—and accumulation of debt results in the diversion of funding from the weak to the strong. It should be clear by now also that the main beneficiary of this flawed structure is Germany. We can imagine where the German exchange rate would be if it were the outcome of a deutschmark market rather than a euro market. Germany would be being priced out of world markets by its own exchange rate. What would happen to German export-led growth then? Does not the greatest beneficiary have the greatest responsibility to secure positive reform for every nation in the eurozone? Given the importance of the eurozone to the UK economy, we should do everything we can to assist in the creation of institutions necessary to run a successful monetary union. Here, I agree with the Chancellor's assessment of what reforms need to be made. The process will almost certainly require significant revision to European treaties. Will the Government lend their support to treaty revision?

The third lesson that is becoming clearer every day is that austerity alone does not work. The Chancellor has persistently argued that the Government’s austerity policy will, in and of itself, promote confidence in business to invest and in households to consume, thereby rebalancing the economy. Chart 2.7 of the Bank of England’s Inflation Report, published yesterday, shows clearly that the Government will meet their deficit targets only if firms and households start borrowing and spending again—if they borrow to replace government borrowing. However, that is not happening. The austerity policy is not working. Households are saving and companies are not investing. Financial institutions are deleveraging. Growth in manufacturing has ground to a halt and the balance of payments deficit is on the rise again. Real incomes are falling, squeezed by the rise in VAT and by an inflation rate that is twice as high as in France or Germany. The economy is dead in the water, yet the Chancellor’s Statement shows no recognition of what is happening out there in the real world. He repeats his obsession with deficit reduction at the cost of economic growth.

The central message of the Statement is that bond rates are low and the ratings agencies are appeased. But has anyone in the Government noticed that exactly the same was true in the Japanese economy 20 years ago, and has been for the past 20 years? Interest rates in Japan are significantly lower than in the UK, and have been for 20 years, and Japan’s AAA rating is secure. The result is 20 years of stagnation, “lost decades” as they are called, and the Japanese deficit has not fallen. We risk the same fate. Already, with prospective growth in the UK being downgraded by every respected economic agency, the deficit forecast is rising, not falling. The crisis in the financial markets has shifted from fears about deficits to fears about stagnation. The markets have realised that austerity will not fix deficits. Austerity reduces tax revenues and forces the Government into yet further expenditure cuts to hit its deficit targets.

There is no recognition of these dangers in the Statement, and they are dangers not only for Britain but for the global economy, as the obsession with austerity grips policy-makers around the world. Britain’s lead in this respect is doing great damage. What is needed now is a strategy for growth—in the United States; in the eurozone as a whole, not just in the northern states; and in the UK. The Chancellor recognises this and states that Britain needs a new model for growth. We on this side agree, but the plan for growth trumpeted by the Government—and who would not discount a plan that is described as “83 initiatives” rather than having clear content and direction?— was assessed by the independent Office for Budget Responsibility and its conclusion was that it would have no significant impact on growth at all.

What new measures do the Government have in mind to stimulate growth? Now is the time for the Government to back a real growth initiative, one based on investment in infrastructure, productive capacity, skills and new technologies. It should include an accelerated infrastructure programme, a national investment bank to mobilise funds lying idle in corporate balance sheets, and greater incentives for investment in and the expansion of new technologies. Without a commitment to economic growth, confidence will not return to industry or the consumer and deficit targets will not be met.

Policy-makers around the world, most especially the British Government, need to learn the bitter lessons of the last three years—that the object of economic policy is the prosperity of our citizens, not the comfort of financial markets; that a clear and consistent understanding of what is happening is necessary; and that austerity alone does not work. Simply repeating over and again that a policy is working does not make it true. The Government’s austerity policy is not working. It may delight the Chancellor’s friends in the ratings agencies, but it means prolonged stagnation for the British economy and economic misery for the British people. The Government need to face up to the reality of what is happening in the British economy and introduce a truly substantial growth strategy now.

My Lords, I am grateful for the opening remarks made by the noble Lord, Lord Eatwell, but subsequently I heard little that I could recognise as a coherent alternative or even critique of the Government’s policies. On the one hand, the noble Lord talks about the austerity imposed by this Government, which seems to imply that he would like more spending; on the other hand he complains about the dangers of a rising deficit and the forecasts of a rising deficit.

The noble Lord says we should be spending more. Well, if we did not have to spend £120 million a day on debt interest we could be spending it on more police, schools, hospitals—you name it, we could have it. It is precisely because of the record debt, the largest deficit, that we inherited from the previous Government that we are in the bind that we are. That is the answer to his first question about why the UK growth performance has been so weak. We are struggling under the massive burden of debt that was inherited.

The noble Lord challenges the comparison that my right honourable friend made between the stronger performance of the UK economy in recent months compared with the US economy. I give him another statistic: in the UK we now have unemployment of 7.7 per cent, while in the US it is 9.2 per cent. Again, the idea we can somehow look at some mythical way of stimulating the economy to get us out of the bind that we are in is the stuff of dreams.

There were one or two things on which I agreed with the noble Lord, Lord Eatwell. We share an agreement that the eurozone needs to strengthen its institutions. As my right honourable friend the Chancellor said in his Statement, we would welcome the strengthening of the eurozone’s institutions to have real bite in the fiscal co-ordination that there needs to be. If strengthening the eurozone’s management of its fiscal affairs requires treaty changes among eurozone members, we will look sympathetically at that. But as my right honourable friend made clear, that is for the eurozone; the UK will be supportive of its efforts but we will not directly be part of them.

On growth, the noble Lord quoted various things from the Bank of England’s report. The critical thing in yesterday’s report—this is consistent with the Office for Budget Responsibility’s analysis—is that the Bank of England’s forecast for UK growth is 1.5 per cent this year and 2.1 per cent next year, rising to 2.6 per cent in the year after. Although the economic and market conditions are very difficult and fraught with danger, we must not forget that, provided we hold to our plan, provided we remain the safe haven that the UK has become, provided we continue to give our householders and holders of mortgages the benefits of very low interest rates and we continue to give businesses the ability to refinance their debt at those low interest rates, it is that that will underpin the confidence that business needs to invest and individuals need to spend their hard-earned money. That is the fundamental basis on which growth will come.

As my right honourable friend has said, we had a significant plan for growth six months ago. Within the past six months the Treasury has published a progress report to show how far we are getting, including tackling some of the most difficult issues such as the planning rules in this country. We will come forward with more growth-supporting measures this autumn, and that is what will enable this country to get out of the mess that we inherited from the previous Government.

My Lords, I remind the House that we will now go to a 40-minute session that will follow the precedent of the previous Statement. There will be no immediate answers from the Front Bench but a response at the end. I suggest that we start with my noble friend Lord Oakeshott and then circulate as usual. Forty minutes, even for economists, should be okay.

My Lords, I thank my noble friend Lord McNally for that and for this invitation back to the Front Bench for one day only.

I declare my interest as a pension fund manager for the past 35 years and an active investor in British shares and property. The noble Lord, Lord Eatwell, mentioned rating agencies. I have never taken a blind bit of notice of them in my life, which is probably why I still have a job. I well remember how wrong they were when I was warning about the dangers of Iceland.

We on these Benches believe that the Chancellor is right to stress the need for Britain to stick to a determined deficit-reduction plan and keep interest rates low while we have to keep borrowing so much because of—let us be frank about this—Labour’s legacy. However, I agree with the noble Lord, Lord Eatwell, that low government bond yields are not a guarantee of a strong economy. They can be a sign of weakness, as they were in Japan. I would be interested if the noble Lord, Lord Sassoon, could comment on that. Are we not now in danger of keeping the confidence of foreign investors but losing the confidence of British consumers? Some noble Lords will, like me, be old enough to remember Harold Wilson complaining that his economic recovery plan had been blown off course. That has clearly been happening in this country since the Budget. Even looking through—I am bound to say—the Minister’s rather rose-tinted spectacles at the GDP forecast, does he agree with the Governor of the Bank of England, who said:

“Headwinds to world and domestic growth … are becoming stronger by the day”?

I thought that was a striking comment from him yesterday. I agree with it; does the noble Lord?

Does the Minister also agree with the Business Secretary, the Chief Secretary to the Treasury and all Liberal Democrats that the priority, if and when there is room for tax cuts, is not to help the 1 per cent of taxpayers who pay the 50p top rate, but the millions of ordinary people who will spend any tax cut they get—and desperately need—to boost demand and jobs? Does he also agree with our calls, from Vince Cable and others, for more quantitative easing from the Bank of England to boost growth, so that we do not risk slipping into the Japanese morass, and much more bank lending to small businesses? Royal Bank of Scotland, the bank that we own, has just missed even its own soft Project Merlin target for gross lending to small and medium-sized enterprises by £1.5 million over the first six months. Is it not now time that we seriously considered imposing a net lending target on the nationalised banks, as was flagged up in the coalition agreement, so that they take their foot off the throat of small business?

My Lords, the Minister and the Chancellor have prayed in aid of their argument the credit rating agencies. Is it not strange that these credit rating agencies, which downgraded the economy of the United States of America, are private companies—private sector institutions such as Standard and Poor, Fitch, Moody and all the other credit rating agencies. Does the Minister not agree that they have, by their actions, exacerbated the economic crisis and that, as a result, some of their friends and interests have benefited? Would it not be better if our Government and those of other countries, particularly members of the European Union, were to get together and look at ways in which credit rating can be done on a public sector basis in the public interest, and not on a private sector basis in the private interest?

My Lords, I thank my noble friend for repeating the Chancellor’s Statement. I have a copy of it here. One of the things that stands out is:

“We need an international framework that allows creditor countries like China to increase demand and debtor countries to make the difficult adjustments necessary to repay them”.

I should like to ask: what are the chances of this happening? What is the mechanism? Is it the autumn meeting of the IMF and the G20? I come back to my point about what the chances are. There is no question that if we could stimulate China to increase its demand for products from our country and Europe, we would be well on the way to restoring the confidence of our small and medium-sized enterprises to get more involved in that market. Leading directly on from that, my noble friend said that more supporting measures will be produced in the autumn. Can I make a plea on behalf of small and medium-sized enterprises for something to be done to limit the huge burden of regulation, which disproportionately falls on small and medium-sized enterprises? They wish to carry on but find international trade really difficult.

My Lords, the Chancellor’s Statement sustained the spin around the safe haven notion. I wondered whether the Minister has seen the comments of Jonathan Portes, the director of the National Institute of Economic and Social Research. Last week, he said that if you thought that what was driving low gilt yields was us being perceived as a safe haven, you would see a significant rise in the pound and we just have not seen that. He added:

“The reason people are marking down gilt yields is because the economy is weak”.

Is not the problem, as my noble friend Lord Eatwell has said, a lack of growth? Is it not true that, as a result of the decisions that this Government have made, we will see an additional £46 billion-worth of borrowing than was predicted a few months ago, and is it not important that the Government decided to slow down the rate of deficit reduction so that there is room, for example, to spend money on sustaining police numbers and keeping prisons open so that we can deal with the public disorder which we have been debating today?

My Lords, is it not the case that when we hear the Governor of the Bank of England talk about head winds, we need to understand that, although the central projection may still be for growth, there are real risks to that growth? In those circumstances, surely it is possible for the Government to be clear that they will stick by the deficit reduction programme as the target, and that, like any good pilot faced with stormy weather, they will adjust course as necessary? I do not believe that the Opposition are right to say that that needs to be done in some emergency way at the present time, but it is sensible to flag up that that may be necessary if the projections are not met. In those terms, will the Minister endorse the comments by the Deputy Prime Minister that seemed to indicate that the Government would work to stimulate the economy, as and when that proves necessary?

Has the Minister noted a certain irony in the Chancellor’s Statement in that the United Kingdom, which is not a member of the eurozone, is advising the eurozone how to conduct its affairs? Indeed, it is going so far as to suggest that the eurozone institutions are strengthened and that there should be further integration. I happen to agree with the Chancellor, and with my right honourable friend, but I think the Chancellor has a nerve.

My Lords, my questions come against the background of the cuts generally and our perilous economic condition. They also feed in to our previous debate. My first question to the Minister is very simple. Do the Government accept their own figure of £9 billion a year, net cash, which we pay to Brussels, with no conceivable benefit to us? If they agree their own figure of £9 billion a year net, will they agree that that comes to some £25 million every day? The sum of £25 million a day would pay the salaries of 833 policemen every day, or 304,045 policemen per annum. I emphasise that that is net cash. I do not mention the costs of over-regulation of 6 per cent of GDP per annum in food and so on.

My second question is: do the Government admit that there would be no crisis in the eurozone without the euro? Do they also admit that there would be no eurozone without the ill-fated project of European integration? On the Statement, when they accepted the remorseless logic of a federal budget, which they appear to have done, are they convinced that the German people, the Dutch people and so on will put up with this? I think they may be mistaken.

Finally, how can they possibly say that the breakup of the euro would be economically disastrous, including for Britain? Could the noble Lord at least justify that because if we face the reality that the thing is going to break up—and the quicker we face it and the quicker it breaks up, the better—we would all be very much more comfortable?

My Lords, the Minister has rightly drawn attention to the weaknesses, indeed the failures, of the European political institutions in responding to the crisis. Would he care to reflect on the contribution of the political institutions of the United States to the present crisis? Could it possibly have something to do with the fact that they have a political structure based on two elected Chambers, one in which the Executive have a majority and one in which they do not? We have heard that somewhere before.

My Lords, these dark glasses are not for glamour but to prevent me sharing an eye infection. I very much agree with the Minister that the Government, and individuals, have no choice but to deleverage. Many of our large companies are not anxious at this time to invest or borrow significantly because they are doubtful about both the domestic and international economy. Surely, however, one sector has significant capacity to absorb new investment in the form of equity and debt: that of the micro-businesses and very small businesses, because they have been in large part neglected by our banking sector and our financial institutions for years. Would the Minister be willing to look at a programme that specifically targets those kinds of businesses which, culturally, our current institutions usually fail to serve, perhaps building off some of the schemes which are being looked at now to revitalise the high streets which were so badly damaged earlier this week?

My Lords, I am sorry that the Minister has had to break off his holiday reading of your Lordships’ European Union Select Committee’s Sovereign Credit Ratings report. I hope that he will return and study it when he is next on the beach, and reflect on some of the words from the noble Lord, Lord Oakeshott. These institutions exist but a healthier degree of scepticism might inform the City and, indeed, elsewhere to ensure that they are taken for what they are—an educated guess as to the future debt of sovereign nations.

Secondly, would the Minister consult his colleague on the business section about the regional growth fund, which I raised some months ago? I discovered and reported to your Lordships that it was unsuccessful at the moment, especially because of the £1 million bar required for small businesses to make application to that fund. My third point relates to the points made by the noble Baroness, Lady O’Cathain, in the European Sub-Committee B’s report on the single, internal market. Why do we not put greater effort into ensuring that the market comes to fruition, which would surely benefit UK companies perhaps more than any others within the 27 countries of the European Union?

My Lords, I listened intently to the Minister but I did not hear in that Statement what the Government intend to do about inflation. The noble Baroness, Lady Thatcher, believed when she was in the other place that inflation was a danger to savings, to investment and to growth. Inflation is rising; what are the Government going to do to cure that particular problem and difficulty? Secondly, debt in the United Kingdom is not just government debt. The greatest difficulty we have is personal debt. When austerity measures are there to cure the national debt, is it ever wise to then encourage the ordinary person to go out and spend? How can that be right? They, too, ought to have austerity measures for themselves.

Finally, I have listened intently and what I constantly hear is that our difficulty is—and it comes again and again—the mess that we inherited from the last Government. Is that right? They certainly left a big debt, but it certainly was not just that. What about the role of the banks? They got us into a mess, and I never hear it said that the mess was caused not just by the last Government but by our financial institutions that left us in debt. Is it not time to put the blame not only on one foot but on both feet?

My Lords, perhaps I may suggest to the Minister that what is really damaging confidence and what has knocked stock markets is, in fact, the euro crisis. It is the perception that the economies of southern Europe and Ireland cannot recover without substantial devaluation. It is a situation analogous to that of the UK back in 1992. Broadly speaking, markets, because they cannot go for the currency, go for the bond markets. It may or may not be correct that the only solution is pan-European bonds, but the second issue is, if there is to be a pan-eurozone, it will obviously require massive ongoing transfer payments by Germany. Markets do not believe that Germany will be willing to accept such liabilities. That is the big factor damaging confidence and growth. It is the potential further banking and government debt crisis that that represents; it is people understandably moving their deposits out of banks in southern Europe because they fear they may end up with a lira or a peseta. Money supply is falling dramatically, with a 10 per cent reduction in Italy in just the past few months. That is the crisis which is having the knock-on problems for this economy—much more, I suggest to the Minister, than for the US.

My Lords, perhaps I may make two comments and ask two questions. First, it has already been remarked on that the Faustian pact between China and the United States over the past 10 years has been an ultimate, if not the principal, reason for slow world growth. Secondly, although the Minister dismisses so perfunctorily what my noble friend Lord Eatwell said, I suggest that he reads Hansard tomorrow, because my noble friend made a very carefully considered analysis of the world and European situation. I suspect that in terms of economic analysis my noble friend would probably get a higher mark than the Minister on the current situation.

Six months ago, I and many of us were on record as saying that all this would lead to a double dip. It is a quite different scenario from the Thatcher period when there was a reasonably good international position. The prediction of the IFS and others was that if you are going to cut £200 million-worth of output through the crash, the deficit would actually rise from 3.5 per cent in 2008 to something like 11 per cent now. That was without adding to it through austerity measures. We are talking as if austerity measures apply to all circumstances.

My first question is: will the Minister, the noble Lord, Lord Sassoon, consider inviting Chancellor Merkel over here to give her a personal tour of Britain to show her how a modern economy can best succeed—an economy where manufacturing all around works at the rate of Siemens and BMW?

I had better spell it out as sometimes it does not get across.

That tour could demonstrate that the higher economic growth rate in Britain than in Germany could help solve the German problem. I have a second question arising from that. My noble friends will not be aware of this but I asked a Written Question about the relative position of German multinationals and Britain’s multinationals and the proportion of value added in Germany and Britain, the home country. It is pretty obvious from the FT Global 500 employment figures that Germany, which has only about half the number of multinationals as Britain, is miles more successful. Employment in Germany—that is the value added as a proportion of the German economy—is far, far higher than in British multinationals.

My question, which I shall repeat, asked the Government to give me the statistics. I had the most perfunctory reply in one sentence from the noble Lord, Lord Sassoon, that the Government are not interested in such statistics and that it was not their job to collect them. The Department for Business knows what the figures are, and the relative value added of our multinationals in Britain and the relative value added of multinationals in Germany. Will the Minister today say that he will look at the matter more carefully and give me, the House and the Library a less perfunctory answer?

My Lords, we all recognise the need for growth in the economy. The Statement repeated by the Minister today said that we have to work hard to have a private sector that competes, invests and exports. In the light of that and the need for growth, I refer to a report in the Financial Times today. It indicates there has been a flood of applications from other parts of the country for investment funds backed by the state available in the northern part of England. In some cases, it is one in 10 and in some cases, in Yorkshire, one-fifth. That flood of applications indicates strongly that small and medium-sized businesses are desperate for scarce loans and equity funding, which they cannot obtain because they do not come from that part of the country. Can the Government do more to help?

I ask once again, as did my colleagues and noble friends, Lord Oakeshott and Lady Kramer, whether the Government will take on board that that highlights the struggle that small businesses in particular are having to get funding from banks because of high prices, costs and tougher covenants. This is a nation of small businesses. We read the report in the FT today that there is a great demand and wish for funding but it does not seem to be available.

My Lords, I withdraw entirely the snide remark I made about the long-windedness of economists. May I suggest that we hear from the Minister now?

My Lords, I do not pretend to be an economist. I am sure that if I was sitting an exam paper now, I would fall well short of the mark that the noble Lord, Lord Eatwell, would get. The problem is that we do not live in a pure economics world. A lot of what we are struggling with now is where the world of economists meets the world of markets.

I am not sure where to start with the many interesting interventions that we have had. I go back to the question about the deficit reduction plan: there were some concerns about the size of the deficit rising and others expressed the opinion that we should be investing more and driving borrowing up. It is worth getting a little bit economicsy about this and remembering that there are things called automatic stabilisers, which mean that if the economy does not grow as fast as anticipated there will be additional payments in areas such as welfare, for example. It is worth remembering that the deficit goes up and down. Within the Chancellor's fiscal plans, more money gets pumped into the economy—crudely put—if growth is lower. We should always bear that in mind. There is no absolute rigorous number at which we shoot that does not vary as economic circumstances change.

On the point raised by my noble friend Lord Oakeshott and others about interest rates, of course low bond yields themselves are not a guarantee of growth. Germany has been mentioned, and I will come back to that. Yes, it would be great if we had a deficit as low as Germany and bond yields as low as it does, but the fact is that we have a deficit as high as Greece but interest rates as low as Germany. They are not in themselves a guarantee of growth, but if we divert from the basic course we could very well find ourselves with both a very high deficit and very high interest rates. In those circumstances, growth would be choked off very quickly. That is fundamentally why we have to stick to our plan. My noble friend also talked about tax cuts. To remind noble Lords, the coalition is set out on a track which is significantly raising, and already has raised, the starting level of tax for those at the bottom end of the income scale. That is an important part of the whole rebalancing of the tax and welfare package to get people back into work. Equally, at the other end, my right honourable friend the Chancellor has made it clear that, over the medium term, a top rate of tax of 50 per cent is not conducive to an economy growing consistently and driven by entrepreneurial activity.

My noble friend Lady O’Cathain reminded us of the very big picture and questioned the chances of getting agreement to action on the imbalances. She was right to say that it will be for the autumn meetings of the G7, the G8 and the G20 to make further progress on that. Although there has been considerable frustration about turning good words into action, the latest statements from Ministers are, let us say, modestly encouraging, but it requires a big push this autumn. My noble friend then moved from the very big picture to more micro matters, with the question of regulation and how difficult it is for businesses that want to grow. That is precisely why we have a moratorium on new regulation for micro businesses in the period up to 2014 and that new tests under the “one in, one out” rule are being applied to all new proposals for regulation from Ministers.

My Lords, what about the regulations that come from our friends in Brussels? The Government’s Answer to me recently said that a majority of all our business regulation comes from Brussels, and we can do nothing about it.

If the noble Lord will be a little patient, I will get back to Europe in a moment.

It was nice to have confirmation from the noble Lord, Lord Radice, that we are all on the same side when it comes to wanting to strengthen the eurozone, even if he questions the motives of some of us in wanting to do so. It really is very important that this happens, and we should give it all our support.

On the other European matters raised by the noble Lord, Lord Pearson of Rannoch, his main questions were around the cost of this country’s contribution to Europe. He makes that contribution £25 million a day. I cannot calculate things that quickly, but the fundamental difference between that £25 million a day and the £120 million a day of debt interest that I referred to earlier is that the £25-million-a-day contribution to Europe buys us value for money. Of course we believe that Europe needs to get its budget in hand, that there needs to be much greater fiscal discipline in Brussels and that the proposals for a great expansion of the European budget are unacceptable. Nevertheless, we have to bring ourselves back to the main point that this country gets considerable value from its membership of the European Union, and that that is fundamental to making sure that we have good strong markets for our exports. Yes, there is a burden of regulation from Brussels, and we must make sure that Brussels starts to apply the disciplines that we are applying in this country before it brings forward yet more regulation.

A number of questions were asked by my noble friends Lady Kramer and Lord Cotter and the noble Lord, Lord Harrison, about access to various domestic and European funds. All I say as a general point is that I hear very loudly what is being said. The Government’s objective is to make sure that in direct lending by the banks and in other finance—the most reverend Primate reminded us that the banks are far from blameless in the situation that we are in, and my noble friend Lord Oakeshott and other noble Lords reminded us of the importance of the banks—there is a whole range of financing channels. We have the critical Merlin agreement and European funds such as the regional growth fund—

Would the noble Lord be kind enough to write to me on the regional growth fund and update the House on what has happened to it with regard to helping small businesses?

I will take away the noble Lord’s question. Forgive me, but I cannot now remember when we are committed to making regular updates, and it may be that we should wait until the next regular update. I will see whether any more can be said, but maybe we should be patient. I understand that he would like a quiet bilateral discussion, but I cannot promise him early information. The important point that he and other noble Lords make is that we have to work very hard to ensure a suitable range of channels for access to both debt and equity finance.

Incidentally, on the other point made by the noble Lord, Lord Harrison, I was taken away from some European-related reading yesterday. I had just got to the chapter in Edward Heath’s biography on the first negotiations for our European entry, so I have a few years to go before I get to the latest report from your Lordships’ committee. If I am allowed to go back on holiday, I will get there as quickly as I can.

The most reverend Primate the Archbishop of York raised another critically important point, which was about inflation. Clearly, inflation makes an enormous difference to the spending ability of individuals and has a significant effect on the costs for businesses. As we have discussed in this House on many occasions recently, it is critical that the Monetary Policy Committee continues to have free rein and is not constrained by the Government in any way in meeting its mandate. I commend to the most reverend Primate the words of the Governor of the Bank of England in his latest report, issued this week, in which he acknowledges that inflation may go over 5 per cent in the short term but says that he expects inflation to moderate in the medium term and to come down to slightly below the target that the Chancellor has set of 2 per cent. As my noble friend Lord Oakeshott will know, in the context of that discussion the governor made some interesting remarks about the possibility of quantitative easing. No doubt when the MPC’s minutes next come out we will look to see what was discussed at its last meeting, but clearly this is a live topic.

My noble friend Lord Flight gave a perceptive analysis of the markets. I do not think that he asked me a question in that, but I agree with a lot of his analysis.

The noble Lord, Lord Lea of Crondall, raised questions about the UK and Germany and made reference to BMW. All that I would ask him is why BMW has announced in recent months a further massive investment, of hundreds of millions of pounds, in its car manufacturing in this country. I suggest that that is because the best of our manufacturing is at least as good as and in some cases significantly better than the best of manufacturing in Germany, fine manufacturing economy though it is. We have in this country—Mini exemplifies this absolutely—design skills that are second to none. If the noble Lord would like to fire off at me another Written Question or three, I will be happy to try to answer better next time his points on relative added value, but I do not think that we have anything to be ashamed of—far from it—in a comparison between the best of our industry and the best of German industry.

My Lords, will the Minister try to answer the question—I know that it is a difficult one—that I asked about credit rating agencies, which was also raised by the noble Lord, Lord Oakeshott, and by my noble friend Lord Harrison? I know that the Minister has travelled a long way to answer the debate, but I have travelled a long way to ask just the one question, so I would appreciate an answer.

I am happy to answer the question that the noble Lord, Lord Foulkes, asks. I do not believe that nationalised institutions of any kind, including nationalised credit rating agencies, are the best way to go. Europe and the international organisations are looking at the appropriate form of regulation for credit rating agencies. That is ongoing business and it is quite proper that it should be done. Others question whether the whole rating system should be completely liberalised and say that one should not have a small number of institutions running the show. I recognise that that is an important debate and both Europe and the G20 continue to look at the issue.

I am conscious that I should wind up. I just go back to some of the fundamental points that underlie the interesting debate that we have had this afternoon. Noble Lords are well aware that when the coalition Government came into office we inherited the UK’s largest ever peacetime deficit. Tackling that deficit has been and continues to be our number one priority. The recent events that we have been discussing this afternoon vindicate that approach. It is by securing Britain’s AAA rating and the very low bond yields that we now have that we underpin the prospects of recovery. As the Governor of the Bank of England highlighted yesterday, 500,000 UK jobs have been created by the private sector over the last year. We should not forget that.

We have always said that recovery will be choppy but both the bank and the Office for Budget Responsibility forecast growth to continue through this year and the next. The decisive action taken by the Government to deal with the nation’s debts and restore private sector growth has meant that the UK has been in a better position to withstand the very considerable global uncertainties. Abandoning our plans would be disastrous, resulting in rising interest rates, falling international confidence and undermining the recovery.

House adjourned at 3.40 pm.