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House of Lords Hansard
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Economy: Currency Fluctuations
17 November 2016
Volume 776

Motion to Take Note

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That this House takes note of the impact on the economy and investment of fluctuations in the level of the pound sterling.

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My Lords, I am delighted to have secured this debate and look forward to contributions from my noble friends and noble Lords across the House who have worked at the coalface in business and bring real experience to this debate. I welcome my noble friend the Minister to the Front Bench and look forward very much to his response.

Fluctuations in the level of the pound are not unusual, but the recent collapse in the pound sterling in October was remarkable, with a fall of 16% taking it to its lowest level for more than 30 years. For a while the pound has been stubbornly low, with stocks and shares relatively high. This has made for challenging and uncertain times for savers and investors. I declare an interest as a modest saver and investor.

Standard & Poor has already downgraded the AAA rating of sterling and has raised concern about the pound sterling losing its status as a reserve currency—a possibility which must be taken seriously. What has the impact been on various categories of economic activity, more particularly in rural areas where I have my roots? North Yorkshire and other rural areas attract many older people who live, work and retire there. Those who have saved in cash ISAs and bank savings—often older people who live prudently and put money aside—are often disappointed to find that their savings are worth substantially less almost overnight owing to a currency fluctuation. In any event, with such low interest rates as at present, they are receiving a much lower return on their deposits.

Pensioners and older savers are precisely the category of people who spend and put money into the economy in good times, so the current level of the pound discourages those savers from spending money, which rebounds on the economy. A low level of pound sterling against the euro and the US dollar means that the pound in your pocket is worth less and buys less in the shops. Spending by tourists now appears to outstrip and exceed that by locals. For UK holidaymakers visiting Europe and the United States, the pound will not go so far and holidays will cost more. Wine imports cost more, whereas English wine sales are booming—and exports of Scotch whisky, too. While this might be good news for exporters, the costs of imported materials used in goods made here go up. Latest figures show only a small reduction in the UK’s trade deficit over the months since June.

We are only 62% self-sufficient in food production. That makes us very reliant on food imports, which in turn pushes up the cost of food in shops. Government measures to boost exports are welcome and are already producing results in countries such as China, but these take time. Until the imbalance in food imports and exports is redressed, there will be an ongoing trade deficit. In the short term, the low value of the pound has meant an increase in basic farm payments for UK farmers, but these will cease when Britain leaves the EU in 2019. In any event, the cost of animal feed for their livestock will have increased incrementally.

Price increases will of course fuel inflation. Currency is important to farmers as it affects their ability to compete internationally, as well as their agricultural support and profitability. A year ago, £1 was worth around €1.35. It is now worth around €1.11. Some forecasts suggest that the pound will reach parity with the euro by the end of 2017. While a weak pound helps to support prices for farm outputs, the impact of exchange rate fluctuations on the agricultural sector has many layers. The pound/euro exchange rate impacts greatly on the value of support payments received by farmers in the UK. A weaker pound sees an increase in the value of basic payment scheme support payments, whereas when the pound strengthens the reverse is true. It is ironic that at the moment farm profitability depends almost entirely on the level of the currency.

Currency value is only one part of the equation for farming, alongside the vagaries of global markets and convoluted supply chains, so imports of fuel, fertiliser and machinery will negate many of the benefits of currency changes. In 2013, the UK’s trade deficit with other EU countries in raw materials amounted to €12 billion. The UK’s food and drinks industry, employing 400,000 people across the UK and contributing £21.9 billion to the UK economy, has seen significant increases in the prices of imported raw materials. Cocoa is up 50% since 2013 and skimmed milk powder is up 55% since April this year, and there have been steep increases in the cost of butter and coffee beans. The Food and Drink Federation envisages three possible outcomes if these extremes of price volatility persist: retailers will put their prices up; manufacturers and/or retailers will absorb the costs; or UK consumers will simply lose the choice when those products are taken off the shelves.

With a low pound, the cost of industrial component raw materials also becomes much higher. Only where there is substantial added value to the products will these products from the UK become more competitive. The weaker pound helps only the manufacturing companies that export, which is probably only about 10% of all those companies operating in this country. That means that 90% of UK businesses face increased costs from a weak pound sterling and no benefit whatever.

What has the impact been on pension funds? They are coming under increasing pressure with the low level of the pound combined with low interest rates. Pension funds are facing a potential deficit, compounded by a poor return on gilts.

Household budgets are also being squeezed. There are more young people living at home, and less income in households means that people are more wary of spending money. We have seen Marmite wars in the supermarkets, with Marmite jars costing over 10% more owing to the value of the pound. That took the country by complete surprise. More recently, the manufacturers of crisps made entirely in this country with UK products, and the manufacturers of fish fingers, have been saying that the costs will rise by 10% or more. We must wait to see what happens at Christmas, which is a time of major expenditure for hard-pressed families. What bought 12 mince pies last year may buy only six this Christmas.

It is understood that market forces will prevail and that the pound will find its own level. What would help would be for interest rates to rise before Britain leaves the European Union, yet the Bank of England appears to be focusing more on those in work and keeping employment high. If anything, looking at the figures today, unemployment is at record low levels. The main concern of employers across the country is a shortage of much-needed skilled workers. Sectors facing skills shortages include farming and horticulture. Horticulture alone requires some 80,000 seasonal workers a year to hand-pick fruit and vegetable crops.

When Alabama, as an exercise in trying to go it alone, put Alabama first and tried to get Alabama people to pick their fruit and vegetables, the fruit and vegetables rotted in the ground. This is a feature that the industry in this country wants to avoid. Currently, around 90% of those working in horticulture come from abroad, of which the majority are from EU countries. Their status post-Brexit is causing great uncertainty, and every effort must be made to encourage these workers to stay—to both live and work in the UK.

Shortages are seen also in industrial units in small market towns in north Yorkshire and elsewhere. Areas of the economy such as the NHS, the care sector, light engineering and mobile phone networks, as well as farming and other sectors, depend on EU and other non-British workers.

Another consequence of the lower level of the pound is to see inflation rising. The Bank of England forecasts that inflation will almost triple in the next three years to reach 2.75% by the end of 2017, before falling to 2% by the end of 2019. The governor, Mark Carney, predicts that inflation will rise owing to an increase in the cost of the production of food and other items caused by the weakness of the pound. The Bank must decide whether to dampen inflation and slow any level of wage growth or allow inflation to rise and manage the consequences. A worrying sign at present is the decline in business confidence across the board in most sectors and businesses of all sizes. The pace of change and the nature of the challenges ahead are huge. The growth forecast of 1.4% and the 2018 forecast are down. Again, the level of exports to EU markets is predicted to reduce sharply from 2019. Although the independence of the Bank of England enjoys cross-party support, this leaves government with few tools to manage the economy.

I will conclude, if I may, on an optimistic note. Looking ahead to the Autumn Statement with great interest, I think that one area of spending which would boost the economy and economic growth while easing the pressures on the low pound is that of infrastructure—in particular, flood protection and flood defences. Small flood protection measures are already happening using CAP money to retain flood water temporarily on farmland, to plant trees and to encourage natural flood defences to slow the flow of flood waters, as has been so successfully engineered in Pickering. Water companies have a role, too, as well as internal drainage boards doing key, regular maintenance, delivering local solutions to flood risks.

A game-changer would be either pump-priming or the insurance sector and pension funds making a return on investment in flood defences on a grand scale. One alternative would be to reward insurance firms for investing in those areas most at risk of flooding, which, in turn, could save the insurance sector huge losses—approaching £1 billion for one flood event and often £3 billion in insurance costs in one year alone in the wake of major floods. Local communities, as well as the national economy, would benefit, and good use could be made of this with regard to even a small percentage of the flood insurance premium tax we all pay, which was increased at the last Budget. In my view, it would be hypothecation at its very best.

The model that comes to mind is that associated with shadow tolling for roadbuilding, known as design, build, finance and operate, or DBFO. My noble friend the Minister will be familiar with this model from his days as Secretary of State for Transport. I hope it is a model that the Government will look to, either in the Autumn Statement or the Budget, to protect the country and boost infrastructure spending and economic growth.

The contribution that rural businesses, including farmers and growers, make to employment and economic growth has long been overlooked, yet they are the drivers of the local economy in rural areas. Perhaps the current economic climate, along with currency fluctuations, will encourage them to take more control of their own destiny.

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My Lords, like the noble Baroness, I too would like to keep the exchange rate steady. There used to be an idea that a managed exchange rate could benefit the economy—that there was a direct cause and effect. If only life were so simple. Chancellors thought that a strong currency would create a large balance of payments deficit and so some tried to manage it down, only to find that that resulted in rising domestic prices and low investment. A lower exchange rate may make some of our exports cheaper, as the noble Baroness said, but as the November Bank of England inflation report points out, we have become increasingly integrated into global supply chains. That makes imports more expensive, and alternative UK suppliers need time to gear up, by which time the customers may have gone elsewhere.

An added complication is that the current uncertainty over Brexit and world trade does not encourage the necessary investment to replace imports. Also, we are very reliant on exporting services. Services are less price sensitive and frequently themselves require some overseas investment—investment which becomes more expensive.

A high exchange rate has been partly blamed for business migrating, leaving low-paid jobs with no future in the old manufacturing areas. Again, it is not as simple as that. Other businesses have shown that investing to raise productivity with new innovation and new technology demonstrates that the so-called high rate of exchange is not a barrier to a successful business. Manipulating the exchange rate does not compensate for low investment and poor business management.

New technology in all its forms affects our exchange rate. There is the potential of technology to invent new currencies. Technology can enable firms to trade without the intermediation of banks. Then there must be the possibility of massive cyber intervention in the exchange rate markets, causing the pound to fluctuate and draining confidence in the reliability of our currency. Then there is the matter of a fluctuating exchange rate through competitive devaluation. That is the kind of thing that the Bretton Woods agreement tried to eliminate, but was unsuccessful. The next President of the United States has called China an exchange rate manipulator and will impose tariffs on trade with China. China, a country that holds much US dollar debt, will in turn retaliate. In effect, that becomes a race to the bottom.

The noble Baroness spoke about the impact on farmers. According to a recent CBI survey, the pound’s recent drop is a mixed blessing. A third of manufacturers said that it helped exports, but nearly half said that the impact on their business had been negative because of the higher cost of imports. The rest said that the effect was neutral. The general public, too, are apparently sceptical about currency fluctuation. Apparently, the consumer thinks that as the currency goes down, prices go up immediately, but when the currency goes up, prices come down very slowly.

Some years ago, a member of the editorial staff on the Financial Times pointed all this out and proposed that much of the responsibility for the exchange rate should lie with an independent Bank of England. That became law in 1997 and the journalist became the Chancellor’s economic adviser, which led to a distinguished career in Parliament. He is now stepping out to even greater things. Mr Ed Balls is a contemporary of the noble Baroness. I note that today he has called for central banks to “sacrifice some … independence”. I am not sure how independence can be nuanced; you are either independent or you are not. The Bank needs independence to carry out its purpose, and the purpose of that independence is to maintain a long-term stable but floating exchange rate without fluctuations so that business and the public sector can take a long-term view with less uncertainty about short-term fluctuations.

During the uncertain days just after the referendum, it was the governor and the Bank of England that kept the exchange rate far more stable through their technical intervention than it would have been if it had just been left to politics. The criticism made of the governor for warning that Brexit would damage the economy is mistaken. It was entirely in his line of duty, and it is certainly no reason why monetary policy should be handed back to politicians. Our exchange rate must not be politicised. It is part of the mechanism of adjustment, as the governor said recently.

Certainly the remit can be looked at, but less so the mechanics. Holding the exchange rate steady while allowing it to float is a technical and complicated manoeuvre requiring a lot of experience, skill and knowledge—expertise which some have ceased to value. However, others like me think that these skills have a value and I would like to see the exchange rate managed using a kind of Haldane principle where specialists place the national interest before sectional interests, particularly when economic data will be evaluated in the uncertain light of Brexit.

Of course, decisions on interest rates have a major effect on the exchange rate of the pound. Again, we have taken this out of the hands of politicians for the same reasons, but some politicians have said that the Bank of England is wrong to rely on ultra-low interest rates and have called for its independence to be taken away unless it raises interest rates soon. They were at it again last Tuesday. Yes, experts get it wrong sometimes and forecasts are uncertain—that is why they are forecasts. People have to make a judgment.

Where there is a case for political interference is in recognising the danger of another financial crisis because another one must be a danger to the stability of the pound. Take, for instance, the huge financial business conducted in London by banks and Governments on derivative transactions, interest rate swaps and other exotic financial trading—trading that some people call betting. This exceeds by far ordinary banking, insurance, fund-raising and other traditional financial businesses. In fact, London clearing has 90% of this world business. The numbers are huge and greater by far than the balance sheets of the banks that caused the crash. It is a global business conducted by Governments, banks and trading organisations. We are told that owing to the unique expertise found in London, there is no danger to sterling, but once the leverage gets out of hand, as happened in 2008, who knows what will happen? This is where Ministers should be concerned, but are they? Leaving the Bank of England alone to be a stable and independent institution normalises our lives and our exchange rate, and holds it steady. It is an institution that provides stability for our currency.

I thank the noble Baroness for this debate because up until now it has demonstrated that a stable and consistent rate of exchange is central to the success of our economy. Can the Minister tell us how the Government plan to ensure this stability in the promised industrial strategy? Will there be political control or independent control?

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My Lords, I bring to the attention of your Lordships my interests as recorded in the register. I add my congratulations to those offered by the noble Lord, Lord Haskel, to my noble friend Lady McIntosh on obtaining this debate and on its timing, coming as it does when our American friends have thrown yet another spanner into the smooth workings of the foreign exchange markets.

With the Trump victory coming on top of Brexit, the various crises in the Middle East, Chinese expansionism, the continuing inability of the eurozone to resolve its problems and sluggishness in the world economy, perhaps it is not surprising that currencies fluctuate—to use the wording of this Motion—although “dance a jig” might be a more accurate description of the state of the markets.

I want to make only two points. First, a fluctuating currency is a hindrance to business and a bar to investment. It may be self-evident, as has been said by my noble friend and the noble Lord, Lord Haskel, that businesses like certainty. Some companies find irresistible the temptation to make opportunistic profits from currency fluctuations, but most would rather remove the downside risk of the currency moving away from them.

It is not just big businesses; small companies often export and have to do so in their customer’s own currency. Sadly, the days when we could insist on exporting in sterling have long gone. Even if companies do not export, they suffer from changes to their input costs caused by the exchange rate, not least those of energy.

However, this has been so for a long time and most businesses cope well with a floating exchange rate. If they are large companies, they can buy forward in the foreign exchange markets and, at a cost, minimise their exchange rate exposure. Small businesses on the whole control their foreign exchange risk by minimising the length of time of their exposure to currency fluctuations where they cannot exercise a hedge.

There are two problems with this. If you are a small company, finding a bank to hedge your currency exposures is near impossible. If you are Muslim and want to operate your business in accordance with the sharia, you cannot simply remove your currency risk. In these turbulent times, would it be sensible if the Treasury were to help small businesses, and Muslim-owned enterprises, to access solutions to such problems at a reasonable cost? Could it be done by getting the banks and the other parties involved to sit down and work out a solution? Perhaps we could get UK Export Finance, which used to be called the Export Credits Guarantee Department or ECGD, involved, because at present it does not really address those problems.

Secondly, there is very little we can do to stop sterling fluctuating. It has been tried before and has met with very little success. The Bretton Woods agreements and the Gold Standard before them led to the UK having an overvalued currency for many years, which was possibly a principal reason for our industrial decline in the decades after World War 2. But there may be quite a lot we can do to smooth the rapid movements in the foreign exchange markets—the fluctuations that so bob up and down rather than the overall general trend.

Decisions in FX trading are made broadly on two criteria. One is mathematical, the other is sentiment. Not much can be done about the maths, but a lot can be done about the sentiment and the guesswork that goes into forming it. I know that the Bank of England and the Treasury do not target sterling exchange rates, and for understandable reasons. It has not been successful in the past—we have just to remember the problems with the ERM. Inevitably, using interest rates to achieve inflation targets also impacts the exchange rate, so forward guidance, whether done in the way the Governor of the Bank of England used to suggest or, as it is now done, by delphic pronouncements from the MPC members, does have an impact on the sterling exchange rate, particularly when taken together with the views of similar oracles at the Federal Reserve and the ECB.

I am sure that great thought goes into the suggestions made as to the future direction of interest rates, but in times of volatile markets, it might be helpful to businesses struggling to make a profit by exporting if some of the interest rate guidance could be given in such a way as to smooth foreign currency market fluctuations. I am not suggesting reverting to targeting the sterling exchange rate, just a more nuanced approach, with the central bank taking some responsibility to smooth the deeply damaging turbulence in the foreign exchange markets caused by excessive volatility.

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My Lords, I, too, thank the noble Baroness, Lady McIntosh, for making this debate possible. The most dramatic economic effect of the United Kingdom’s Brexit vote has been the collapse of sterling. Since June, the pound has fallen by about 16% against a basket of currencies. Mervyn King, the former Governor of the Bank of England, has hailed the lower exchange rate as “a welcome change”. Indeed, with Britain’s current account deficit in the order of 7% of GDP—by far the largest since records started—depreciation could be regarded as a boon. But is it? That is the subject of our debate today.

There are two things to consider. The first and most urgent is the effect of sterling depreciation on our payments to, and receipts from, the European Union’s budget. The second is its effects on our economy. I do not want to say much about the first, but I think the headline answer is fairly straightforward. As Britain’s contribution is fixed in euros, Britain will have to pay about £700 million more to meet its EU budget obligation next year, but devaluation will also make the British economy smaller in terms of euros, so its required euro contribution based on GDP will go down. The two effects should cancel each other out. On the other side, it will receive fewer pounds from the EU budget, so farming support subsidies, for instance, will go down, as the noble Baroness, Lady McIntosh, pointed out.

All this will complicate Mr Hammond’s budget arithmetic, but the budgetary problem is a secondary matter compared to the effects of sterling movements on the economy. Larry Elliott, economics editor of the Guardian, argued on 16 October:

“The current account deficit will shrink as a result of stronger exports from the manufacturing and service sectors, the boost provided to the tourism industry, and because cheaper domestic goods and services will be substituted for more expensive imports. To say that dearer imports will make life more difficult for consumers is to miss the point. That's how rebalancing works”.

However, one could say that, in some ways, Mr Elliott has missed the point, because the argument assumes that sterling depreciation will cause an increase in the demand for British exports and holidays that foreigners want to take in Britain. Quite simply, foreigners will have to pay less of their own currency to buy British goods or enjoy holidays in this country. Certainly, consumers and many businesses will take a hit, but this will be offset, it is said in the Elliott argument, by increased export demand, which will increase employment, profits and wages. So the effect on our living standards, on this argument, will be very small.

However, if all that depreciation of sterling does is make imports more expensive, the rebalancing of the accounts works simply by making us poorer. If domestic demand falls sufficiently that we will no longer be able to afford the same amount of imports, that is the way a rebalancing through imports works. There may be some uptake in tourism but we have to recognise that the price effect is partially offset by the weather effect. However cheap we make holidays in Britain, holidays in the Mediterranean will continue to be more attractive. The essential point is that you can always get back to a balanced position by making a country too poor to import on the old scale. That is roughly what has happened in much of the single currency area, with countries such as Greece and others. They have rebalanced their accounts, admittedly under a different exchange range regime, just by reducing their standards of living.

What does the evidence tell us about the effect of exchange rate changes on the economy? It tells us that the effect of sterling depreciation on the demand for our exports is small. On the one hand, demand for our exports and our own demand for imports are price inelastic, as the economists like to say—a fall in sterling means that we spend more money on imports but without increasing our exports; on the other hand, even if the demand for our exports is increased, we do not have enough exporting capacity to take advantage of it.

In 2008-09, when the rest of the world was on the verge of deflation, the UK was experiencing an inflationary recession, with GDP contracting at a top rate of 6.1% annually, while inflation reached 5.1%. This occurred because sterling fell more than 21%—peak to trough—from 2007 to 2008. Moreover, although the current account deficit subsequently narrowed, the improvement was only temporary. After 2011, the current account deficit started to widen again, even though the pound never clawed back its losses.

In fact, this has been a problem ever since the late 1950s. Whenever we get close to full employment, imports start to rise faster than exports. When sterling was fixed to the dollar, Governments reacted to the widening trade imbalance by slowing down the economy for a year or so, causing imports and the trade deficit to fall. Then we took off again and the deficit widened again. That was the pattern of the 1950s and 1960s. Since the pound started floating in the 1970s, a widening of the deficit has been met by currency depreciation, but this has not basically altered the pattern. With short intermissions, the pound has just continued sinking, without the vaunted recovery of competitiveness. Who now recalls that £1 was worth $4.03 in 1967?

It is hard to avoid the conclusion that the basic reason for this pattern of events has been the continued decline in our manufacturing industry. This has accelerated in the past 40 years from around 28% of gross value added in 1978 to less than 10% today. As the economist Nicholas Kaldor pointed out quite frequently in this House, because manufacturing has higher returns to scale than services, manufacturers benefit more from devaluation than services. We have restricted the advantage of devaluation by restricting our manufacturing sector.

In addition, as has been pointed out, structural reforms since the mid-1990s have ensured that British exporters are deeply integrated within global supply chains, As a result, many of Britain’s exports require imported inputs so that when sterling depreciates and import prices rise, the knock-on effect on export prices renders them less competitive. The most recent OECD data show that the import content of UK exports is around 23%, compared with around 15% for the United States and Japan.

For the moment, the UK is relying on capital inflows into the City of London to limit sterling’s fall. But, as the exchange rate collapse of 2008 showed, this source of foreign demand for sterling is highly unstable. When the worm inevitably turns and the flows reverse, both sterling and exports will take another hit. The bottom line is reasonably clear: we cannot rely for continued prosperity on exporting financial services—valuable though these are—the amenities of London and selling attractive old properties to foreigners. A very small country might live off services of this kind, but we cannot.

What is to be done? Here I might step out of line with what other noble Lords think. I think the only rapid government action that will work is to substitute goods currently imported with domestically produced goods. The classic way of doing this is through import controls but other measures less damaging to trade rules and international amity are available. The national investment bank that the Labour Party is advocating could be given a mandate to invest in industries with a high import substitution potential. That is one way. An alternative would be to subsidise such industries directly from the Exchequer, with subsidies tied to the quality-adjusted price of the import being substituted. As the domestically produced goods become competitive with the foreign goods, the subsidies would be reduced and the industry allowed to stand on its own two feet.

There are problems with both solutions, which I would be the last person to want to minimise, but something has to be done. If nothing is done, we risk permanent impairment of prosperity. A depressed economy can be reflated and an inflationary economy can be depressed, but losing access to crucial foreign markets through uncontrollable movements in the exchange rate is largely irreversible.

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My Lords, I thank the noble Baroness, Lady McIntosh, for introducing this debate. It is always an honour and a pleasure to listen to the noble Lord, Lord Skidelsky. I learned a great deal. I declare an interest as chairman of a manufacturing company, Caparo, and chancellor of the University of Wolverhampton.

We face a period of more than usual uncertainty about Britain’s position in the world. As our Government start to tackle the daunting task of implementing Brexit, the world is also trying to guess how the new US Administration will play their part on the world stage when they assume power early next year. Brexit and the US presidential election have been singled out by commentators as leading to significant fluctuations in the exchange rate over recent weeks. We have heard much doom and gloom from survey firms and others, keen for a good story, on the adverse consequences for the British economy that will surely follow. All are now very excited, and this has provided opportunities for the speculators to make money.

At the simplest level, it is easy to accept the received wisdom that wild fluctuations in the exchange rate create uncertainty and will deter investment in the UK. However, I believe that for Britain a fluctuating pound is really just business as usual. Honda, Toyota and Nissan, some of our biggest overseas investors, have all reconfirmed their commitment to car manufacturing in the UK and further investment. Only this week, Google announced a further major expansion in the UK. The Prime Minister’s most recent foreign policy initiative was a trade mission to India, about which I hear good things and must congratulate her; both countries can now look forward to doing more business together.

We need to distinguish between the step changes in exchange rates caused by major world events, of which Brexit may be one—although some would argue that it was merely an event that pricked an already overinflated pound—and the background noise of daily currency fluctuations fuelled by the financial chattering classes. These should be ignored. I come from a background that means I do not think any Government in this day and age can really do anything to control exchange rates.

We should not be frightened of this change. We should reflect on the long history of this country as a trading nation and what that means. I have been involved with international trade throughout my working life, from the 1950s onwards, mainly in steel and manufacturing goods. Over that period, I have seen much change in the world economy and I know from experience that a trader thrives on change, which brings opportunity. Over the years and centuries, change has also brought many opportunities for Britain which were seized by the entrepreneurs of the day. These recent events will also bring opportunities for business and investment in the UK. If they are followed through, they will create jobs and generate tax revenues for the greater good. If I was a younger man, I would love to get involved.

We must therefore do everything we can in this House to enable British business to seize these opportunities as they arise. We need clear regulation and a certain tax regime; we need an educated and skilled workforce; we need modern infrastructure and good transport systems. These, I believe, are the things that matter to investors over the longer term, not the day-to-day noise of the currency markets. After all, if we can get all that right, we will have a strong Britain and a strong pound.

Let us look at the effect of a weaker pound on higher education. A weak pound means that studying in the UK is cheaper. Britain’s international reputation means that it is the number one destination for international students. We cannot afford to lose that status; in fact, we must strengthen it. Universities are looking for an increase in the fee income from overseas students from the present £3.7 billion to £4.8 billion in 2018-19, and a growth in home and EU students of over 10%. This is the time to really encourage overseas students to come here. Not only do they benefit from the experience but our own students benefit by interacting with people from different backgrounds. Bonds forged at university often last a lifetime and will open more doors to further trade and international collaboration in the future. However, encouraging more students is at odds with the current immigration policy, so we have to find ways to make sure that they return to their own countries when their studies end. The University of Wolverhampton, where I am chancellor, is doing all it can to promote these policies.

Let the Government do everything they can to assist our businesses and universities to build a Britain that will be as great in the future as it has been in the past. The world still retains a respect for Britain as a beacon for democracy—a reputation that has been put to the test by Brexit. Personally, I have always supported being in Europe, including joining the euro to gain all its benefits, but the people have decided. Speaking as a democrat, for that beacon of democracy to continue to shine brightly the Government must be seen to act on the wishes of the people by engaging with the EU on implementing Brexit now. Decisive actions on these issues really matter for our businesses and universities in making their investment decisions, not the daily fluctuations in the value of the pound, but this is no simple task. The Prime Minister must now be allowed to move forward with Brexit in an orderly manner, without irrelevant distractions. That in itself will reduce currency fluctuations.

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My Lords, this is a timely debate and we are extremely grateful to my noble friend Lady McIntosh, but I fear that I am going to take a rather different line to hers. The fall in sterling gives us a chance to rebalance the economy and make jobs here, rather than use ever rising borrowing to buy goods from abroad.

How did we become such a heavily indebted nation? We kept borrowing without a care. Today, £730 of every taxpayer’s tax goes to pay interest on our international debts and that is steeply rising. When the history of central bank policies comes to be written, I believe that few economic orthodoxies will appear sensible, years after they were fashionable. We now rightly decry sticking to the Gold Standard in the 1920s and the harmful consequences. We recognise the damage done by sadomonetarism, when Geoffrey Howe put interest rates up to 17%, bankrupting thousands of companies in an attempt to control inflation but in effect setting it alight through wage demands. Incidentally, I agree that the causal relationship between raising interest rates and lowering inflation is highly questionable, though accepted as gospel. Then Greenspan got it wrong when he failed to do anything about fiscal exuberance and the American economy took off.

Today, our economic policy joins that list of follies. Keeping interest rates at 0.5% or less to encourage even more borrowing, when both individually and nationally we are borrowed up to our eyeballs and the mountain of debt is ever higher, must be madness. We should be saving more and using those savings to invest more. Up to now we have done little to correct our massive trade deficit.

How did we get into this problem? It started when we decided to let the pound go free and float in principle but not in practice, muttering, “The market knows best: we should show by example and not indulge in competitive devaluation. If China does it, what does that matter to us?”. We are indeed a trading nation that forgot about the importance of exchange rates during an orgy of credit-fed consumption. Because the Bank of England was mandated to be concerned about inflation, the pound was left to stay high and the damaging effect of that level ignored, making imports easier and exports harder.

There was another reason that the pound stayed high. So much of what is called inward investment was nothing of the sort, though inward investment of a certain sort was unbridled. That investment was not to improve and expand the economy but, often, a straight purchase of assets to secure income for overseas owners. It was still considered beneficial. We have sold hundreds of companies. We have sold not only the silver in this country; we have even started to sell the furniture, turning what used to be valuable foreign income for us into a massive outward flow of cash to others. We effectively rent many of our own businesses and utilities from overseas owners—Heathrow, ASDA, Cadbury, Northumbrian Water, and now ARM, which was sold for £30 billion pounds, to name but a few. But there are hundreds of them, and the effect has been damaging.

Uniquely, Britain—and only partially America—is alone in the belief that it is beneficial to extend the free market in goods and services to include companies. We have got it wrong. That belief is entirely unsupported by evidence, and I am very glad that our Prime Minister has noted it and has begun to be concerned.

The end result of this benign neglect is that the pound was substantially propped up by asset sales well above its fair parity. Its height was welcomed as virtuous and praised for the cheap holidays and imports it encouraged. Few economists thought outside the box or would admit that its height was causing our huge trade deficit, deindustrialisation, too much borrowing, too little investment, unstable, low productivity growth, stagnant wages and too many people losing out from globalisation. We only have to look to Germany, by contrast, to see what a converse economic policy can do. Unfettered free trade has left us in a mess, and I say that as a passionate believer in fair free trade; I declare an interest as someone who has spent a lifetime promoting the market economy. I just hate to see capitalism get it wrong and damage its whole cause.

We must recognise that the correct parity of the pound is essential to a trading nation, and we should make it a key part of our free trade policy. In so doing, we must accept that world prices are not necessarily fair prices reflecting the cost of production but are often, as in the case of Chinese steel, dumped market-clearing prices, lowered to obliterate competition, before raising them again. Reasonable protection against such practices is essential, or it should be, for key capital assets. This is sanity. It is not protectionism but self-preservation.

I realise that this may go against the sacrosanct dogma of the free market purist, but it is a necessity in the real world. Just look where present attitudes have got us. I also accept that this sort of view may not be welcomed by many in the City. Much of its work is beneficial and essential, but, because they are wrongly incentivised, many there would sell their grandmother for a quick gain. This results in much short-term thinking and consequent harm to the economy. The huge tax revenues the City brings to the Treasury have little to do with profit as a consequence of productivity but are mostly gained by a straight deduction from the capital assets the City handles, often through excessive commission. For example, the commission on the takeover of British Gas by Shell was more than £100 million. It could not possibly cost that if it was properly looked at. Such people take the icing off the national cake baked by others, and are overrewarded for so doing. The City makes money, but it creates less wealth. Its contribution is overrated. It also explains why our GNP per head has hardly risen over the years.

If we want true growth, we cannot do it through financial services, but we can do it with a fall in the pound with modern manufacturing, mineral and food production, which the noble Lord, Lord Skidelsky, touched on.

As we reset economic policy to reduce our indebtedness I hope the Chancellor will, apart from other proposals, mandate the Bank of England to keep sterling at fair parity, as best he can, to help rebalance the economy. Secondly, the Bank should get interest rates gradually back to sensible levels that reward saving and make pension provision worth while. For example, how about a 2.5% indexed infrastructure bond, used for that purpose but reserved exclusively for UK pension funds only? Thirdly, the Chancellor—and there are many other things he can do—could stimulate high productivity by letting companies recover the cost of the purchase of capital goods in the same year, not over 10 years or so as is done now. Our productivity is 21% below the G7 average and it is unlikely to be raised by opening ever more coffee shops, which are difficult to automate. Finally, we must accept sensible limitations on free trade, by bringing back the national interest test for mergers and acquisitions and dumping. It was part of the brief of the Monopolies and Mergers Commission and should be part of the brief for the new Competition Commission. I hope the Minister will note that.

The time has come, thanks to devaluation through Brexit, to rebalance and invigorate our inventive, creative and capable nation. I hope we can all grasp it and find a more stable and less indebted way of living with the global economy.

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My Lords, BBC News reports that:

“The pound has fallen about 16% against the dollar and about 11% against the euro since June”—

at one point it fell almost 20%, and that —

“Chris Williamson, chief economist at IHS Markit said that despite October's CPI fall, the trend over the coming months would be upwards as rising factory costs feed through to consumers.

‘It’s … only a matter of time before price hikes in retailers’ supply chains start feeding through to the customer, as retailers seek to protect margins.

Let us not forget what caused the financial crisis in the first place. We have had the longest period of what in those days were perceived to be low interest rates of 5%. That was one of the main reasons for the financial crisis, and we have now had interest rates close to 0% for years and years propping up our economy.

The report goes on:

“Inflation has been below the Bank’s 2% target for nearly three years. Last year it was zero, the lowest since comparable records began in 1950 … Earlier this month, the Bank of England forecast that inflation would rise to about 2.7% by this time next year.”

As a result of the Brexit UK referendum and vote to leave the EU, the pound-to-dollar rate fell to a 30 to 31-year low. The Telegraph reports that:

“The last bout of volatility comes as investors switch their attention to the political risks associated with Brexit”.

It also reports that,

“the underlying cause of sterling’s fall is Britain’s woeful balance of payments position and the fundamental need for a lower exchange rate”.

Is it that, or is it Brexit, or both?

GQ reports that:

“financing a deficit of this magnitude does leave us reliant on the ‘kindness of strangers’ in the words of Mark Carney, Governor of the Bank of England”.

Sky News reports that:

“Sterling has dropped by more than 5% … against the greenback”,

in just one month and it is,

“also weaker against every other currency in the G10 group of industrialised nations”.

I was in India last week when the Prime Minister was on her visit. There were 100 rupees to the pound in June; there are now closer to 80 rupees to the pound. Sky News continues:

“Earlier this month, the deputy governor of the Bank of England, Ben Broadbent said that while the pound's plunge was helping support UK growth, Brexit uncertainty could cause an ‘insidious’ hit on the economy.

Mr Broadbent indicated that it was ‘likely’ inflation would rise over the Bank’s target of 2% over the next couple of years.

The EY ITEM Club”—

I declare an interest as I qualified as a chartered accountant with Ernst & Young and am an alumnus of the organisation—

“said the economy had been more resilient than expected following the vote to leave the European Union but this picture was deceptive.

It predicts inflation—which has been below 1% for nearly two years—climbing to 2.6% in 2017”.

There seems to be some consensus here.

The Telegraph reports that:

“UK is suffering ‘a slow motion slowdown’, says Carney”,

rather,

“than a sharp adjustment to the Brexit vote back in June”.

That is what the Governor of the Bank of England told the Treasury Select Committee. When asked if the fall in the pound was “welcomed”, Carney responded by saying, “It was necessary”, and that the sharp fall in the pound following the EU referendum will play a part in the necessary reduction in the UK’s large current account deficit, but he added that it is unclear if the decision to leave the EU means a sustainable size of UK current account has fallen.

This is much more complicated that a simple drop in the pound having an immediate effect, and I thank the noble Baroness, Lady McIntosh, for introducing this debate.

What about the impact on companies? The Guardian reports that:

“EasyJet suffered a sharp fall in annual profits—its first decline in six years—and expects a further drop this year after the budget airline was hit by the weak pound and was forced to cut prices”.

Similarly, the BBC reported that,

“IAG, the owner of British Airways and Iberia, says the weak pound cost it … £145m … in the third quarter of the year”.

According to Reuters:

“British bicycles to car parts retailer Halfords … said the fall in the pound following Britain’s vote to leave the European Union would remain a major challenge after it reported a 12 percent drop in first-half profit”.

Under the headline, “Sainsbury’s profits slump 10% as weak pound causes cost surge”, the Independent reported:

“The Argos owner said it would still reduce shop floor prices but warned the pound’s impact was uncertain as it prepares for more expensive imports”.

Of course, we have already heard in the debate about the battle between Tesco and Unilever over Marmite. Meanwhile, “Eurotunnel cuts profit forecast due to weak pound”, according to the BBC:

“The fall in the pound after the UK referendum on EU membership has forced Eurotunnel to lower its 2016 profit forecast by 4.5% … Shares in Eurotunnel … fell 30% after the EU referendum vote and are still 16% below pre-Brexit levels”.

We have to keep in mind that the biggest UK companies, those in the FTSE 100, derive an average of 75% of their revenue from outside the UK. My own company, Cobra Beer, is in a joint venture with Molson Coors. We manufacture in Burton upon Trent, in Belgium and in India, and we export from Burton upon Trent to about 40 countries around the world. There is no question but that the weaker pound should made our exports more competitive—but does that happen immediately in the real world?

Deutsche Bank, which has just produced a report, believes that, “A weak pound won’t boost Britain because ‘economics have evolved since the Victorian era’”, according to the headline of one media report, citing the bank’s note:

“The rapid drop in the pound’s value since the Brexit vote—around 15%—will hinder rather than help British exports and the British economy, according to Deutsche Bank. David Folkerts-Landau, Deutsche Bank’s chief economist, said in a note circulated … that ‘international economics have evolved since the Victorian era’ and as a result a fall in the pound won’t automatically make British goods cheaper to overseas buyers. The note is a stern rebuttal to Brexit supporters such as … Angela Leadsom who have argued that the weaker pound will actually boost Britain but encouraging exports. Folkerts-Landau … notes that 45% of Britain’s exports are services, which”—

as the noble Lord, Lord Skidelsky, said—

“are typically price inelastic—people are more driven by the quality of the service than its price. 60% of services exported are finance and business related”.

The problem here is that, as the note says,

“relatively speaking financial and other business services exports are likely to be the worst hit by a less integrated relationship with the EU”.

The article continues:

“What about manufacturing? ‘World trade no longer consists of final consumption goods being bartered for raw materials,’ he says. ‘Any economy’s manufacturing exports today contain a significant chunk of value that is added abroad’”—

as the noble Lord, Lord Skidelsky, said.

“The UK specialises in exporting products that have many component parts—nearly 30% of its manufactured exports are machines, engines, vehicles, and aircraft. To benefit from the fall in the pound the profit margins on these exports would have to be able to absorb the big increase in import costs of raw materials”.

The UK, as an economy that,

“adds a lot of domestic value to exports, and depends less on foreign parts, could theoretically benefit from a currency drop”.

So the simplistic thinking of someone such as Andrea Leadsom is not realistic. Our economy,

“adds only 64% domestic value to manufactured products. By contrast, Japan adds 82%, and the US adds 78% … In fact, Britain is getting worse at adding domestic value to products, as it moves towards becoming an ‘assembly line’ economy”.

The bank continues:

“The timing of Brexit is therefore unfortunate from a rebalancing perspective. The 1990s and first half of the 2000s were the golden age of globalization with global trade growing 400% over the period. Today, by contrast, the benefits of a free trade policy look less clear cut, and the UK may struggle to establish the free trade deals it needs to offset a loss of Single Market access”.

The GfK consumer confidence index edged down two points from the previous month to a reading of minus 3 for October, although it remains well above the minus 12 to which it slumped following the Brexit vote. According to the Financial Times, the Bank of England is “cautious” over the weak pound’s likely ability to boost trade, again reinforcing what I have just said. The paper reports:

“‘If devaluation was the great success factor for the UK economy, we should be the most successful economy on earth,’ said Andrew Sentance, senior economic adviser at PwC and a former member of the Bank of England’s Monetary Policy Committee, pointing to the fact that the pound was worth”—

the noble Lord, Lord Skidelsky, referred to this, although I am going to go even further back—

“$5 before the second world war but has depreciated steadily and significantly since, now trading at about $1.24. The bank’s current forecast is for exports to grow by 2 per cent in 2017 and 1 per cent in 2018, while imports will increase by 0.25 per cent in 2017 and then shrink by 1 per cent in 2018. But it noted in its latest inflation report that some manufacturers ‘are particularly integrated into EU supply chains’ and that sectors such as financial services would be ‘sensitive to any changes in trading arrangements’”.

As has been said, demand for services is,

“less sensitive to price changes than demand for exported goods … boosting net trade significantly will require companies to make investments—to ramp up production of exportable goods and services and to reposition themselves as producers of currently imported items”.

Britain’s CEOs, according to a Bloomberg columnist,

“have to see beyond the buddies act and look at cold reality. Trump’s election probably won’t halt the tide of investment being delayed or scrapped, which according to a CEBR/Hitachi Capital survey totals … $82 billion … since the June referendum. They still have unaddressed fears about the U.K. economy, access to the European single market”—

according to the latest survey, 92% of the British public believe we should have access to the single market—

“and the health of global trade … The U.K. economy is forecast to slow down next year while inflation is set to surge … Of the surveyed business sectors delaying investment, the top four are IT, real estate/construction, media and finance”.

We need clear direction on policy, as,

“there’s not much wriggle room … While Farage and Trump arm-in-arm may cheer Brexit’s more zealous supporters, there’s little there to put a smile on CEO faces”.

Under the headline, “The Brexit economy: falling pound and rising inflation fuel fears of slowdown”, the latest monthly Guardian analysis of a dashboard of data points to the UK economy shows that, for October,

“four of the eight categories have performed worse than expected”.

This is not encouraging. According to the paper:

“Writing in the Guardian, a former member of the Bank of England’s Monetary Policy Committee, David Blanchflower, says Britain is heading for a ‘Brexit tsunami’”.

The paper also reports:

“Andrew Goodwin, lead UK economist at the forecast group Oxford Economics, also points to looming upward pressure on prices … Meanwhile the public finances worsened. The government had to borrow £2bn more than expected in September to balance the books … The International Monetary Fund is predicting the UK will be the fastest growing of the G7 leading industrial countries this year, with growth of 1.8%”,

although the IMF also,

“accepted that its prediction of a post-Brexit vote financial crash has proved overly pessimistic”,

which is encouraging.

The noble Lord, Lord Skidelsky, spoke of the balanced economy and of manufacturing going down from 30% to 10%. However, the Prime Minister has an industrial strategy. We are the second-largest recipient of inward investment in the world. One of the reasons for that is the respect for our economy, our rule of law, our institutions and our democracy. But since 23 June there has been a huge lack of confidence in this country because of the uncertainty. We have lost our AAA rating, and the Chancellor has a huge opportunity in the Autumn Statement to lower other taxes, in the way that corporation tax has been, to incentivise exports. I disagree with the noble Lord, Lord Skidelsky, in that I do not think we should tax imports but incentivise exports. We should continue to encourage thriving in a global economy.

I agree with the noble Lord, Lord Paul, that we need to invest in infrastructure. Crossrail is fantastic. Heathrow is great news, although I believe Gatwick should also have been announced. All this will give confidence because the whole world does not want us to leave the EU. When I was in India, no one I spoke to—the Indian Government, civil servants, businesspeople—wanted us to leave the EU. We have to give them confidence.

As an economy, we have to be able to adapt or die. We have to invest much more than we do in our higher education and in our R&D and innovation. We need to encourage international students and academics. We need to appreciate the EU labour that we have, which benefits our economy. Then, if we have a balanced, flexible, adaptive, productive and competitive economy, we can continue, with 1% of the world’s population, to be one of the five largest economies in the world.

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My Lords, this has been an absolutely fascinating debate, with a wide range of views on a wide range of topics. I join in congratulating the noble Baroness, Lady McIntosh, on obtaining the debate.

I begin by disagreeing very much with the noble Lord, Lord Vinson. I feel strongly that devaluation as a route to export increases is a dangerous one to take. The noble Lord, Lord Skidelsky, underscored this, as did the noble Lord, Lord Bilimoria. If we look at our experience of the fairly sharp collapse in the pound since June, we have seen very little increase in exports from the UK. Frankly, most economists are surprised at the relatively modest level of export increases.

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I apologise for asking the noble Baroness to give way so early in her speech, but clearly you cannot expect manufacturing, where it takes three or four years to introduce plant and capital and get people trained, suddenly to fill the gap. It will take five to 10 years for us to rebalance our economy. It is surprising that anything has happened at all in a couple of months.

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I point out that the noble Lord is assuming a permanent devaluation in the pound to the current level. I want to talk for a moment about the consequences that that would have, which was underscored by the noble Baroness, Lady McIntosh, for the standard of living in this country and the experience of very many people if we continue to have an economy where growth is so low that sterling remains at the current level.

As I say, there has been no dramatic pick-up in exports, and looking at devaluation as a route to increasing exports is a very dangerous one. At best, it has a short-term benefit, and over the long term it imports inflation. We have already seen significant rises in fuel prices, and ordinary people are feeling that. At the moment, though, people are being protected from large increases in retail prices because most major companies have foreign exchange hedges in place to get us at least through the Christmas season and into the early part of the new year. Some industries have not been in that position; we have heard the noble Lord, Lord Bilimoria, talk about the profit warnings that have come from the airline industries, from some of the retailers and, increasingly, from a large number of British companies across the board.

However, it is the small companies that were unable to put hedges in place that are particularly affected. A number of speakers have talked about that particular difficulty. Not only do the banks make hedging pretty much unavailable, it is also exceedingly expensive. I am very worried—I think the noble Lord, Lord Carrington, made this point—about the impact on small businesses. I have talked recently with some small chocolate manufacturers, who said that their import prices are already pushing them to the point where they think they can make it through the Christmas season without pretty significant increases, but they do not think they can make it into the new year season. The consequences for them are significant. I also happened to talk with some of the small wine shops that one sees. One could say that wine is an exotic product, but an increase of near on 20% for many of them on the products that they import is now putting them in a situation where even on modestly-priced wines, which are their meat and drink and their main source of trade, they are looking at having to pass on those increases.

What I have found fascinating in talking to these people is that, if one says, “What about substituting a British-made product?”, first, as others have said, frequently there are not many of those available, but, secondly, British suppliers are using this as an opportunity to increase their prices. Many have been feeling pressure on their profit margins for a long time, and the rise in the cost of imported goods is now putting them in a position to be able to increase their prices as well. So the knock-on effect for the consumer is genuinely a very serious one.

If anyone took a look at the survey done by the HR managers’ group that was made available about a week ago, they will have seen that overall, looking broadly at the economy, the general take is that inflation will be running at close on 3% next year, as several people have said, but on the basis of the surveys the expectation is that the average basic wage settlement will go up by only 1.1%. That is huge pressure in the pocket for ordinary people who have already gone through many years of austerity, and the consequence is really unpleasant and, frankly, very serious.

A big discount on sterling means there is almost a January sale on the price of buying a British company, whether you buy it on the stock market or buy it out from its current private owners. With a 15% discount, we would expect to see a large number of acquisitions of British companies taking place, but we are not. We are seeing some large and important investments—very often, ones that have been planned for a long time and are related not to price but much more to a global strategic move by particular companies. However, I have been looking closely at the fintech industry, where there has been a complete collapse in venture capital and equity available for UK-based fintechs since Brexit. Global investment has gone up significantly; in Europe, the biggest beneficiary has been Berlin. In the UK, though, we have seen that number fall very sharply. Anyone who wants more information about that should take a look at today’s Financial Times. That is just one of many reports coming in from that field.

The noble Lord, Lord Skidelsky, talked about the future. We have to have an economy that has many more roles than just being a financial services provider. Fintech—indeed, tech generally—surely has to be at the cutting edge of that. These are brand-new industries in an area where we have established ourselves as a leader, based on our brilliant universities, our experience in life sciences and our capacity in financial services. In all those areas, we have made extraordinary headway in being at the cutting edge of innovation. Yet this is the very sector that is suffering from a lack of interest from investors at a time when you would have thought they would say, “It’s exceptionally cheap. If we’re ever going to get in, this is the day to do it”. That is largely because of Brexit and, frankly, that worries me because it is the future that is being put at risk.

If British companies themselves thought the future was going to be so exceptional and a great time to advance exports, we ought to be seeing investment rolling into those companies. In fact, we have seen that British businesses have ditched about £65 billion of investment since June. Planned investment is down extremely sharply, some of it perhaps temporary and due to uncertainty but in some cases these are already permanent decisions to take the investment elsewhere. So when people talk about devaluation as offering a huge potential to restart the economy, spark it off and lead it into being an export-led economy, we need to look much more closely at what is actually happening.

Many, including the noble Lords, Lord Haskel, Lord Skidelsky and Lord Bilimoria, have pointed out the integrated nature of our economy today across the EU. I often suspect that, because we never really had any kind of political integration, people think that in the same way the business world stayed distinctly British, French, German, Spanish, Greek or whatever. In fact, what has happened in the last 40 years is that in a sense the business world—the economy—has become thoroughly integrated. It is almost like a piece of crochet; it is almost impossible to separate out the varying strands because it is now such a complex web. I think that is what the Government are finding as they go through the experience of trying to work out how they are going to deal with Brexit: what they thought would be very simple—say, identifying a British company that does imports, exports or whatever else—is in fact not. At every level, big, medium and small, we are in an entirely intermeshed world that is extremely difficult to identify. When you have something such as devaluation, it rebounds quite painfully on many aspects of that business network.

Others have said that one of the good things about devaluation is that it will encourage European workers to go back home, because their remittances will be worth less in their home currency. That has not happened; in fact, we have had the exact opposite, with employers desperately seeking to bring in European workers before what they think will be a gate that slams closed at the point where we actually exit the EU. So we have the opposite effect of the EU threat bringing in workers. As others have said, we are so close to full employment in the UK that that is not surprising, but the hope that devaluation would somehow send people out of the door has, I am very pleased to say, not actually transpired.

When we have inflation brought in through the increased price of imports, what will be the reaction of the Bank of England and the governor? Undoubtedly, at some point, interest rates will have to rise. Some have said that a rise in interest rates will be very good for the economy, but, my goodness, the impact on people who have mortgages, particularly when we are not getting increases in wages, will be really difficult. We are talking about people who have gone through years of austerity now beginning to face inflation in the price of products, then being hit by interest rates impacting on mortgages. Higher interest rates at a time when we need greater economic growth to take ourselves through a period of extraordinary uncertainty and disruption and to try to encourage companies to make a base here seem extraordinarily difficult.

So far, in my view and that of many others, Governor Carney and the Bank of England have managed this process with something of the skill of a tightrope walker, but it will be extremely difficult going forward. I have sympathy with the noble Lord, Lord Carrington, in calling for greater forward guidance to deal with some of the uncertainty. The problem is that I do not think that even someone with a crystal ball could give much guidance at this point, when it seems that the only thing that is expected is the unexpected and a sense of uncertainty is now so deep and prevailing that most forward guidance could not have a high level of certainty attached to it.

I also agree that it is time that UK Export Finance took on some of these issues for smaller companies trying to deal with both exchange rates and simply getting paid for their exports, as they are challenged to try to export much further afield. There is a very important role for UK Export Finance to play to get the banks back on the field in the way that they used to be until about 10 to 15 years ago.

In this area of uncertainty, which the noble Lord, Lord Paul, underscored, the most important thing that the Government could do is provide us with some clarity. By clarity I mean laying out the priorities—the principles on which they will negotiate our exit from the European Union. Companies, instead of finding themselves completely in the dark and having to make decisions on a worst-case scenario because that is all that is left to them to work with, could be provided with that kind of clarity. Will we be in the single market? What is our attitude towards the customs union? What will we do about migration and access to workers, both skilled and unskilled? We need answers; businesses need answers; and with that they could get at least a measure of certainty at a time when uncertainty is being reflected not only in the travails of quite a number of businesses but in this weakness that has driven down the value of sterling.

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My Lords, I join colleagues in congratulating the noble Baroness, Lady McIntosh, both on securing the debate and on producing such a challenging and feisty speech to open it. I had worried that we might be revolving around some narrow technicalities with regard to the exchange rate, but she set the tone by emphasising the impact on the economy and wider society of the depreciation that we have gone through in the past few months. In doing so, she indicated that the situation which confronts us is a real challenge to the Government.

There is no doubt that the floating exchange rate is not an element of policy for government at present. Both the Minister and I recognise that the floating exchange rate is the basis on which the economy revolves, and it is not for the Chancellor or any politician to fix it but for the Governor of the Bank of England and his colleagues. This might suggest that the emphasis on the exchange rate may be misplaced, particularly as a considerable number of specialists have emphasised that the depreciation that has gone on thus far is long overdue. The International Monetary Fund thought that we were due a considerable reduction in our exchange rate some time ago. That is now what we are faced with, but the noble Baroness, Lady McIntosh, said that there were consequences of that—as she mentioned, for agriculture and the food industry in particular—and that contained within the situation was the potential for substantial inflation. I want to comment on that in more detail in a few moments.

A whole range of significant external events impact on the economy, but I do not think that any measure up to the impact of the nation’s vote to withdraw from the European Community. There is no doubt that that is what this depreciation in the currency reflects the most—a point that the noble Lord, Lord Bilimoria, stressed. The impact on companies is of course varied, but we should bear in mind—the noble Lord, Lord Bilimoria, stressed this the most, but he was not the only one—when we talk about our manufacturing industry and our industrial capacity to take advantage of a lower exchange rate and boost our exports, just how complex the ownership of our industry is now and the different factors that come into play. It is not just the British exchange rate which dictates the costs of British companies, given their extensive component parts, often foreign-owned, all building up to the product that they seek to take to the market.

This is not the time for me to emphasise from this Dispatch Box the range of policies which we think the Government should adopt. We have the advantage of hearing from the Chancellor next week and we will have a full debate on the economy subsequently. That will be the time when we will test the Government’s intent against the challenges which they face.

My noble friend Lord Haskel emphasised an important point in this debate. It was a Labour Government who placed responsibility for the bank rate on the Bank of England. It is therefore not immediately amenable to action by government, but we know that in fact the Government have to act against that background for us to have a hope of taking advantage of the depreciation in the rate.

But the problem is surely something on which the noble Lord, Lord Paul, put an optimistic dimension when he commented on the position of India. The noble Lord, Lord Bilimoria, who shares some background with him in those terms, was a little more pessimistic. I do not think that, when the Prime Minister visited India, we were able to derive enormous expectations from that. Yet clearly India is an important trading market, and one in which we would hope to realise greater potential. Indeed, we must have greater success with the Indias and Brazils of this world to make up for the very severe changes affecting our major trading market—the European Community.

I know that the Government are reluctant to declare what their hand will be in the negotiations; some have been unkind enough to suggest that that is because they do not have a hand to play—or at least, not one about which they are managing to convince even their own Cabinet with any degree of unity. None the less, it is clear that we are going to have tough negotiations with Europe. We cannot expect that the Europeans will approach our requirements with any great empathy; indeed, they will certainly approach them in terms of their own interests. We all recognise that trade flows both ways, but we are still likely to have great difficulty; consequently we will need many more new trade deals—those which formerly were in the framework of the European Community but which the United Kingdom will now have to negotiate for itself.

That is a pretty challenging perspective in the present world position, but if there is another dimension that might make this situation even more difficult, it is the result of the American presidential election. We all, particularly those of us who have been involved in electoral politics in the past, know the difference between electoral rhetoric and effective action by Governments. Nevertheless, it is clear that the president-elect of the United States has very strong protectionist leanings. He won a lot of votes for suggesting to those who thought they had lost through the development of international trade that it would be America first—and America successfully protected. He identified, as his major element of protective activity, China, which he regards as a manipulator of exchange rates. That should send a chill down the spine of everyone concerned about the development of the British economy. The prospect of our being involved in worldwide negotiations of the greatest significance to secure markets in areas where the largest economic unit in the world, the United States, is arguing the case for protectionism is a profound worry to us all, and shows the dangers we face.

We can face these consequences rather better than we did in the 1930s, when states that engaged in individual protectionism reduced world trade and industry, and increased unemployment, until the only stimulus a nation could produce in response to the collapse of world trade was to spend huge amounts of government money on armaments and the development of the Second World War. That was the greatest factor in reducing the huge levels of unemployment in the 1930s. We can learn lessons from that period and we can avoid that, but it means that the Government must address themselves with great skill and commitment to the negotiations that are necessary.

Another element, which the noble Baroness, Lady McIntosh, introduced first but on which others have also commented, is the threat of significant inflation. We have, of course, had a period in which inflation has been negligible. But it is clear that, as the noble Baroness, Lady Kramer, emphasised, two years or so from now we shall see quite a significant feed-through of external costs into our economy and the development of inflation.

One responsibility that the Government must sustain over this period is clear. The people who spend the greatest percentage of their income on food are the very poor. Those who are low-paid or on benefits spend £1 in every £6 on food. The Government are now pursuing a four-year squeeze on benefits. They cannot possibly sustain that position against rising costs. Otherwise, they will be saying that those who have borne a very heavy burden since 2008 and the financial crisis—no wage increases, seeing others take their jobs and a massive reduction in benefits—will have to bear the largest burden of what will feed through in inflation in 18 months or so. Surely that cannot be sustained.

The debate has ranged widely. It is a precursor to the major debate we must have on the economy shortly, and it has developed from one on the exchange rate to one on the fundamentals of the British economy. I am grateful to all noble Lords who have participated in it.

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My Lords, let me start by echoing the thanks of others to my noble friend Lady McIntosh for securing this debate. Initially I was rather worried about the idea of a two and a half hour debate on an issue on which, as I shall state in a moment, the Government have no policy—but the quality of the contributions has allayed that concern. There have been some outstanding contributions, including the speech that introduced the debate.

The contribution by the noble Lord, Lord Skidelsky, took me back more than 50 years to economics tutorials in Oxford at the feet of Sir Roy Harrod. We also had a heroic challenge to current economic orthodoxy from my noble friend Lord Vinson. There was not a lot with which I agreed, but I did agree with what he said about infrastructure bonds, and he will be pleased that the Government already provide Treasury-backed guarantees for infrastructure bonds and loans. They can provide up to £40 billion-worth of guarantees, and have already supported 10 projects with a total capital value of around £23 billion. So even if I do not follow my noble friend down some of the other avenues he suggested, I hope he will take encouragement from that.

One message that has emerged from the debate is that things are not simple. The straightforward relationships between currency values and imports and exports we may have learned about in economics textbooks simply do not hold today. A number of contributions by my noble friends, and by noble Lords on all sides, have explained how, with complicated supply chains, the responses to fluctuations are not nearly as straightforward as they might have been. We also had some very helpful contributions to assist my right honourable friend the Chancellor of the Exchequer, as he puts the final touches to his Autumn Statement, and some advice to the Government on more clarity as we approach our negotiations on exiting the EU. But I am grateful to everybody who has contributed to the debate, and I shall try to pick up some of the points.

Exchange rate movements, the subject of the debate, attract a great deal of attention and are a topic of economic importance at the moment, both on a national level and for people in communities, as my noble friend emphasised. She mentioned the rural areas of North Yorkshire, which she knows so well. Changes in the value of any currency take place, of course, due to a wide and complex range of factors, both domestic and international. The fluctuations that we have seen following the outcome of the US election last week, not only in the dollar but in the euro, pound and peso in particular, are a clear case in point. It is no surprise that, since our decision to leave the EU on 23 June—one not predicted by the markets—the value of the pound has fluctuated. As of today, it is 15% down against the dollar compared to the start of the year; many observers attribute this to the markets’ response to the inevitable uncertainties during this period of adjustment.

My noble friend Lord Carrington explained how larger companies can hedge against currency fluctuations, but raised the issue also touched on by the noble Baroness, Lady Kramer, about the problems confronting smaller companies that cannot take the same precautions. I shall certainly pass that on to my right honourable friend in the Treasury.

As noble Lords will be aware, it is a long-standing Treasury policy that we do not comment on the level of or fluctuations in the value of sterling, which is allowed to adjust flexibly in response to economic conditions and market forces, as the noble Lord, Lord Haskel, described. Neither the Government nor the Bank of England set a target for the sterling exchange rate, which is a reflection of the UK’s long-standing economic framework—business as usual, as the noble Lord, Lord Paul, mentioned. Our monetary policy, which is set independently, has free-floating exchange rates and free movement of capital, which allows us to focus on targeting inflation. The UK’s inflation targeting framework prioritises price stability, which is a fundamental pillar on which our economic prosperity is based. The noble Lord, Lord Haskel, reminded the House of the risks of fixing the value of our currency. Noble Lords may recall the ERM crisis of 1992, where sterling was pegged to the deutschmark, only to collapse in the face of currency speculation. Noble Lords with longer memories may remember the problems that Harold Wilson had back in the 1960s, to which my noble friend Lord Vinson referred.

But although we do not set any targets for the value of sterling, both the Government and the UK’s financial supervisory institutions monitor closely the effects of any fluctuations in sterling on our economy. The noble Lord, Lord Bilimoria, for example, highlighted the impact that the fluctuations have on particular industries, such as the civil aviation industry. He also made the point that the impact on companies in the FTSE 100 has been slightly more uplifting because of the amount of overseas earnings that they generate. The Monetary Policy Committee took action in August, for example, to give an important monetary stimulus package which helped to ease financial conditions after the referendum, keep consumer confidence high, and return inflation to its target sustainably. The noble Lord, Lord Davies, mentioned inflationary pressures ahead; the MPC judged that there may be inflationary pressures ahead, as the depreciation of sterling may lead to a rise in the prices of imported goods and services, given our globally integrated supply chains. He made a point about the impact that that has on those on low incomes. As for the MPC’s guidance, I shall certainly see that it reads the speech of my noble friend Lord Carrington on his view of how the guidance might be improved.

My noble friend Lady McIntosh highlighted today the impact of the depreciation of sterling on prices, with a seasonal reference to mince pies as one example of the potential impact this could have on household budgets. Six mince pies sounded rather a lot to me, but it was a valid point that we need to keep an eye on the impact on the fluctuation of food prices. The MPC has been clear that the best course is to focus on supporting employment and output, and therefore tolerate a temporary period of above-target inflation, which is expected to return to target in the medium term. In the meantime, the MPC will closely monitor inflation expectations and respond if necessary. It is working closely with the Financial Policy Committee to ensure that any financial stability implications of our monetary policy have been considered and managed. The FPC, for example, has worked to support lending in our economy through this period, by reducing what is known as the countercyclical capital buffer to zero, allowing banks to draw upon the capital buffers they have built up.

It is also, of course, the Government’s role to monitor any economic impacts of the lack of sterling on individuals and businesses across the country. My noble friend Lady McIntosh raised the example of the impact of exchange rate movements on farmers. I agree with her that farmers will see the cost of fertiliser and other tradable inputs rise, as a result of the weaker exchange rate, but the impact on other inputs is more lagged, and at the same time they are seeing higher product prices, as well as a 16.5% increase in the sterling value of CAP subsidies—a point made by the noble Lord, Lord Skidelsky—for the 2016-17 payment window, compared to the previous year. So while I agree that a weaker exchange rate is not one-way traffic for farmers, I am sure that overall the farming sector will see benefits from recent movements in the exchange rate.

The Government recognise the impact on the agricultural sector of our withdrawal from the European Union, which is why we have announced that it will receive the same level of funding that it would have received under CAP until 2020. The noble Lord, Lord Skidelsky, made the point about the rising cost of our EU contribution, which we take on board. I agree with what my noble friend Lady McIntosh said on agriculture. We should try to be more self-sufficient and grow more at home, driving up from 62% our current level of self-sufficiency.

My noble friend touched on the impact on savers and pensioners, as did other noble Lords. The Government are committed to supporting savers of all income levels and at all stages of life by reducing the taxes on savings. Savers have benefited, for example, from the new personal savings allowance of up to £1,000 for basic rate taxpayers and up to £500 for higher rate taxpayers. Throughout this period of economic adjustment, we will continue to plot the same course that we have taken from the start—namely, to make sure, as the Prime Minister has reaffirmed repeatedly, that our economy works for everyone.

I return to the question from my noble friend on how fluctuations in the pound have affected our economy since the referendum. Although this is a period of adjustment, there are none the less some heartening signs of the resilience of our economy that we should take note of. I was struck by what the noble Lord, Lord Paul, said about how change brings opportunities. Our financial markets, for example, have continued to function effectively. Employment remains close to a record high, with total pay up, too. Our first official growth estimate in the post-referendum period shows an increase of 0.5% in our GDP for the third quarter of 2016, and there are additional signs of resilience in other data that have come through in the last four months.

Consumer confidence, although it fell in July, has since recovered, and last month returned to the levels we had seen just prior to the referendum. Retail sales have actually grown 1.8% in the three months to September. There are also positive signs that the fall in the pound may have helped to revive tourist spending in Britain. I am not sure that anyone comes to the United Kingdom for the weather, as implied by the noble Lord, Lord Skidelsky, but I think that I read that this is the warmest year that there has been for some time—so maybe the gap between us and the Mediterranean, where the noble Lord may prefer to take his holidays, is beginning to narrow. But the downside is, as my noble friend Lady McIntosh, said, that if we go to the Mediterranean we may be able to buy slightly less abroad. I hope that the impact of a lower pound may help tourist spending in north Yorkshire, which my noble friend directed our minds to today and which I am sure is a fantastic part of the UK for tourists to visit. I understand that Yorkshire’s annual White Rose Awards will take place on Monday in Harrogate.

To return to our theme, the latest manufacturing PMI data also show some positive news, with the suggestion of increased activity in the manufacturing sector, which some have attributed to the depreciation in sterling. Indeed, some exporters are reporting fuller order books. It may be the case, as some in this debate have suggested, that the lower value of the pound could lead to a boost here. But here I agree with what a number of noble Lords said about being cautious about oversimplification. I think that it was the noble Lord, Lord Skidelsky, who referred to the global financial crisis of 2008, when sterling depreciated by 25%. Yet, with weak global growth, UK exports did not actually expand markedly, as exporters boosted their profit margins instead of their market share. Of course, the ability to boost one’s exports depends on the financial position of those countries to whom one is exporting; if they are in a downturn, it obviously makes it more difficult.

Another point that has been made in this debate is that exporters compete not merely on price but on quality and reputation. These are particularly crucial points when it comes to the service industries. It could also take time before demand catches up with our more competitively priced exports—a point made in an intervention by my noble friend Lord Vinson—and as businesses adapt their processes to sell more overseas. In the meantime, the Government will continue to help our businesses, including our agri-food sector, to boost exports. But I have to say to my noble friend—or maybe it was the noble Lord, Lord Skidelsky, who put the position forward—that import controls are not on the agenda.

I will touch on one or two of the other points raised in this debate. One concerns inward investment levels—and investment levels generally—during this period of adjustment and low interest rates. We might expect some potential impact as the UK adapts to new relationships with the European Union and the rest of the world. Anecdotally, as we have heard in the debate, it has been suggested that some businesses are waiting to see what happens in the negotiations with the European Union. None the less, thanks to the combined strengths of British businesses and our wider economy, we remain an attractive place to do business.

Following the referendum, we have continued to see investment into the UK. Immediately after the referendum, for example, we saw the largest-ever investment from Asia into the UK, as SoftBank invested £24 billion into ARM Holdings. Large car manufacturers have expanded their investments: Jaguar Land Rover announced a £500 million expansion in Coventry, Honda confirmed a £200 million investment in its plant in Swindon and recently, of course, we had the Nissan Motor Company announcing that both the next Qashqai and X-Trail models will be produced at its Sunderland plant, which will be expanded through new investment to be a super-plant manufacturing more than 600,000 cars a year. We have also seen investment in the pharmaceutical industry.

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Now that he is on that subject, I wonder whether the Minister would be good enough to answer a question. The Prime Minister has shown considerable concern over the easy way in which our companies can be taken over. It has been suggested, and I put it to him, that the public interest clause should be reinserted as part of the remit of our new competition commission. Would he like to think about that?

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My noble friend urges me to go way beyond my negotiating brief at the Dispatch Box this afternoon, but I will certainly convey his suggestion to my right honourable friend the Chancellor of the Exchequer, or indeed the Prime Minister. I know that there has been anxiety about the ease with which UK companies can be taken over, but I make no commitment whatever in that respect.

I was saying that GlaxoSmithKline recently announced £275 million of new investment in UK manufacturing sites and £540 million in a new company in partnership with Verily Life Sciences. Then came Google’s decision a few days ago to invest in Britain and create 3,000 jobs, which is a big vote of confidence in the UK’s leading position as a global tech hub. So, to put it in context against some of the rather depressing predictions we have heard, we have seen that many companies continue to value the opportunities for business in the UK, which last year saw business investment grow faster than in any other G7 country outside the US—and that should not come as a surprise to any of us.

My noble friend touched on infrastructure spending, which is a really important priority. We have invested more than a quarter of a trillion pounds since 2010 and we are committed to spending more than £100 billion on infrastructure projects by the end of this Parliament. This will contribute to everything from big transport projects such as HS2, to rolling out superfast broadband and improving our flood defences—and I will ensure that the Chancellor of the Exchequer takes on board the proposal made by my noble friend about funding defence protection schemes. It is worth noting that we are investing more than £2 billion in 1,500 flood defence projects to protect our homes and businesses. We are also committed to developing the skills that our businesses need, including in the rural sector.

In conclusion, my noble friend Lady McIntosh is right to draw our attention to the fluctuation in the value of sterling and the effects it may have on people and businesses in this country, particularly in rural communities. The Government share her view on the importance of remaining vigilant to any potential impact of movements in the sterling exchange rate. We will continue to monitor developments closely, as will the independent Bank of England. At the same time, we will continue to use all the tools at our disposal to make sure that our economy is working for everyone across the UK and across industries. This means taking further steps to improve our productivity and to promote economic growth in communities in every part of the UK. It is this approach which will always inform this Government’s work to strengthen the British economy—including, of course, when the Government set out their fiscal plans in the Autumn Statement next week.

I conclude by thanking all noble Lords who have taken part in this debate.

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My Lords, I will take this opportunity to thank all noble friends and noble Lords on both the Front and Back Benches who have contributed to this wide-ranging debate. I thank my noble friend the Minister for his very elegant summing-up of what has been an excellent debate. I pay tribute to my professor at Edinburgh University, Professor Khan, who taught me the fundamentals of international and economic law—although I did not believe that I would be jousting with the noble Lord, Lord Skidelsky, who is obviously a leading expert on the economy.

I think that I am going to have to invite my noble friend Lord Vinson to repair with me over coffee to debate some of these issues, because I believe that we will not understand what the implications of Brexit will be until we finally leave and see what access, if any, we have to the single market and whether we remain part of the customs union or rely on free trade agreements. Who can forecast what the impact on the economy will be at that time? My plea to the Government is that we remain an outward-looking, free-trading nation looking to forge new relationships at that time.

I take comfort from what my noble friend Lord Young said as regards trading bonds—the government-backed bonds—which I hope may release more capital spending on limited capital projects in flood-defence areas. My only hope is that the period of adjustment to which my noble friend referred will be short-lived and defined and that we will not go down the path—sadly recommended by my noble friend Lord Vinson and, I think, the noble Lord, Lord Skidelsky—of protectionism. I believe that we have to be an outward-looking, free-trading nation and be confident going forward.

Motion agreed.