That the Virtual Proceedings do consider (1) the economic lessons learned from the COVID-19 pandemic, and (2) the measures necessary to repair the United Kingdom economy.
The Motion was considered in a Virtual Proceeding via video call.
My Lords, Virtual Proceedings of the House will now resume. I remind Members that these proceedings are subject to parliamentary privilege and that what we say is available to the public both in Hansard and to those listening. I remind participating Members that their microphones will initially be set to mute and the broadcasting team will unmute their microphones shortly before we reach their place in the speakers’ list. Members may now need to accept an on-screen prompt to unmute their microphone. When Members have finished speaking, their microphone will again be set to mute.
The Virtual Proceedings on the Motion in the name of the noble Lord, Lord Eatwell, will now commence. This is a time-limited debate. The time is limited to three hours.
My Lords, to repair the UK economy, we must learn the lessons of the past dreadful months. The new normal cannot be the same as the old normal. We are today enduring the second major economic crisis in 12 years. The global financial crisis of 2008-9 saw UK income fall by 5% in one year, and the government deficit rise by £110 billion. In due course unemployment rose to 8%. This year the Bank of England expects GDP to fall by 14% in one year and the government deficit to rise by £250 billion. Unemployment will soar to 10% or more as the furlough scheme winds down; that is about 3.5 million people unemployed.
In 2008-9, thanks in no small part to the efforts of my noble friend Lord Darling, the financial system was stabilised, the decline in GDP was arrested and by the first half of 2010 the UK economy was growing at an annual rate of a little under 3%. We won the war; but we lost the peace. The coalition Government’s austerity budget of June 2010 killed the recovery stone dead.
The past 10 years have been the worst decade for the economy since the war. Productivity stagnated, real household income barely grew at all, inequality rose inexorably, local government and social services were starved of resources, and persistent underinvestment meant that the NHS had to take on the pandemic in a seriously weakened state. Now we are fighting a battle against Covid-19. Talk of a trade-off between beating the virus and boosting economic recovery is seriously mistaken. Without an effective lockdown or an effective “test and trace” system, the economy will not recover. With ineffective measures and many new cases every day, most people will stay at home. The idea of cash-strapped workers being forced back to work in unhealthy conditions is abhorrent. You cannot restart the economy without having the virus under control.
How, then, do we assess the cost of this disaster? The cost is not the £250 billion increase in the budget deficit. That is the financial consequence of government policy; it is not the economic cost to the British people. The real cost of the shutdown is the loss in real GDP, right now and in the medium-term future. It is the loss of the output of goods and services resulting from people being forced to stay at home, retail and hospitality being forced to close, airlines and factories falling idle, the collapse of companies that are vital parts of the supply chain, and so on.
I think that there is a general acceptance that the Chancellor and the Treasury have risen to the challenge posed by the pandemic. I want to make two points.
At the moment, we are borrowing awesome amounts but it is not a unique situation. In 1950, as a result of our efforts in the Second World War, debt was 250% of GDP. That did not prevent Harold Macmillan building 300,000 houses a year in the mid-1950s or, in 1959, winning an election on the slogan “You’ve never had it so good”. In effect, the debt was quarantined—to use an apposite word—and was not repaid for another 60 years. We should do the same today.
There will come a time when tax rises are needed and, when it comes, I hope that we will devise a tax system that is fairer than the one we have at the moment—for example, with the taxation of capital gains and dividends as opposed to wages and salaries—but that point has not yet been reached. Indeed, I think that at the moment there is a case for tax reductions. For example, a temporary reduction in VAT to boost consumption should certainly be considered. I also think that we should relax the social distancing rules, as my noble friend Lord Lamont has suggested.
My final point is that I am very concerned about the post-industrial towns of the north, the Midlands, Wales, Scotland and Northern Ireland. I was born in one of them—Preston in Lancashire. They are proud towns with a proud history but they need help. I am referring to the levelling-up agenda, bringing them more skills and more infrastructure. Therefore, when the Minister winds up this debate, I want him, once again, to give a commitment that the levelling-up agenda will remain at the forefront of, and central to, our economic plans.
My Lords, I am grateful to the noble Lord, Lord Eatwell, for the opportunity to debate the economic issues arising from Covid-19. I thank him for his excellent and powerful speech.
Sadly, through no fault of the noble Lord, for most of us this is a highly truncated opportunity in which we have just two minutes to attempt to discuss this enormous issue. This follows a debate on 30 April, when Peers were given one minute to debate the impact of Covid on people living in poverty. On 12 May, we had just two minutes to discuss our future relationship with the European Union. Day after day, we have had similar speaking times which do not offer the slightest prospect of properly holding the Government to account. This is the dismal state at which the House of Lords has arrived. Despite repeated requests, 74 days after the lockdown began, the Government have failed to arrange a meaningful debate on the greatest crisis faced by this country since World War II. This is an astonishing state of affairs and, if we allow it to continue, the role of this House will be further diminished.
In the time that I have left, and on a more positive note, I welcome the early and decisive actions taken by the Chancellor to support the economy. Although there are some gaps in support, which my noble friends will highlight, his early action has undoubtedly made the lives of many better than they otherwise would have been. Nevertheless, the hardest part is likely to be in the next phase. It is estimated that between 1 million and 2 million people have already lost their jobs, and many more are likely to follow. In this context, will the Government urgently publish detailed plans for a job-rich economic recovery? In particular, can the Minister indicate if the Government intend to bring forward proposals for a nationwide programme to improve the energy efficiency of existing homes? This could provide tens of thousands of jobs and will be critical to meeting our net zero targets. Will the Government also look at urgent investment to accelerate research into cost-effective production of clean hydrogen, so that it can play an effective part in our decarbonisation plans?
My Lords, I do not believe that the economic lessons to be learned from this distressing time can be separated from wider social and moral issues. The economic health of the country depends significantly on the well-being of society. If people are feeling good about the society they live in, believe it to be fair and are proud to belong to it, this will feed into our economic policies and performance.
The most encouraging feature of this terrible time is the way in which key workers are being properly recognised and valued—first, of course, those in the NHS and in care homes, but also those who work in maintaining transport and other public services. We have experienced the essential nature of their work, but if its value is to be more than a clap once a week, it must take tangible and lasting form. Some in these sectors receive a reasonable reward for their work, but there are others who clearly do not. Care workers, for example, can be paid as little as £7 an hour. We have seen their devotion to duty in recent weeks: many have left their families to live with the residents of the home to cut down the risk of infection. The current national minimum wage is £8.75 an hour. However, the Living Wage Foundation calculates that a real living wage is £9.30 an hour, and £10.75 an hour in London. This is little enough for someone to live on and perhaps support a family. I believe that the Government should at least set a new benchmark of a real living wage, as opposed to simply a minimum wage.
Some inequalities in society are inevitable and may even be justified. What had eroded public confidence before the epidemic were the gross and growing inequalities, with some people receiving vast bonuses even when their companies were clearly failing. This undermines social solidarity. The well-being of a country depends significantly on people feeling confident that it is, in a rough and ready way, a fair one. We have heard that “we are all in it together” in combatting the virus. Let us have a future in which this is expressed in economic terms.
My Lords, I want to follow the noble and right reverend Lord, Lord Harries, in speaking about vision. The word “economy” comes from two Greek words: “oikos”, meaning household, and “nomos”, meaning law. Its literal meaning is “the law of the household”. A good economy is meant to be like a well-run household, where things are shared fairly and where everyone is catered for according to their needs. In a family, it is unthinkable that some are fed while others go hungry. Moreover, each member gladly makes the sacrifices necessary to contribute to the whole. These ideas of a common good, belonging to each other and mutual responsibility were a unifying force in the post-war consensus that created the welfare state. They had their roots in Christian social teaching.
As has been said, our last crisis did not lead to such a vision. After the financial crash 12 years ago, the banks were bailed out with public money, but it was paid for by reducing public services. Now, correctly in my view, the Government are paying for citizens to be furloughed and for increased health measures, but we do not have the unifying vision which will help us rebuild our nation, nor the will to pay for it proportionately.
What can we learn from this crisis? First, we need something more than a safety net. A safety net is not a vision; it is a last resort. We need a vision for a society where everyone is raised up and where everyone recognises their responsibility to the whole, as in a household.
Covid-19 is not indiscriminate. It disproportionately affects the BAME community and the poor, it reduces opportunities for the young and it highlights deepening inequalities in our society. Wealthy people can work from home; poor people cannot. But Covid-19 is nothing compared with the environmental challenge the world faces. Simply getting the economy up and running in the next year might help balance the books, but it will be a disaster for the next generation. We need an economic reset that is based around the common good and the well-being of the planet: anything less will not be economical.
My Lords, I thank my noble friend Lord Eatwell for securing this debate. I congratulate him on his wide-ranging opening speech. The Covid-19 pandemic has delivered a shock to economic activity, unprecedented in speed and severity. The OBR’s initial scenario sees GDP fall by 35% in the second quarter, unemployment rise by more than 2 million, government borrowing increase to £273 billion, and debt exceed 100% of GDP. As the IFS has observed, these figures are predicated on a swift recovery. Should the economy fail to bounce back, the picture would worsen further.
The Resolution Foundation has reflected this uncertainty with a range of forecasts, depending on whether social distancing lasts for three, six or 12 months. It estimates that GDP would fall this year by 10%, 20% or 24% respectively, with unemployment rising to 2 million, 5 million or over 7 million. Irrespective of how severe the coming recession turns out to be, this pandemic has exposed significant flaws in the UK economy. It has revealed deep inequalities, with the economic effects disproportionately experienced by the low paid and the young. It risks exacerbating them still further. Unemployment will be concentrated in the lowest-paid sectors. Those soon to leave school or to graduate will enter a very bleak labour market.
Addressing these inequalities will be key to building a stronger, fairer, post-crisis economy, with far greater resilience for the future. As we do so, we will need to see a radically different approach from that of the past decade, when we saw the slowest recovery for eight generations: living standards were undermined, public services weakened, and our welfare system underfunded. As the Government begin to restore fiscal sustainability, ensuring that the burden is borne fairly across society must be paramount. In the previous decade, while money was found to cut the top rate of tax, the poorest families had their incomes cut by more than 15%. As we repair our economy, we must learn the lessons of this crisis and of the past decade, so that we can build a new social contract, fit for the future.
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A fall in output of 14% means that, on average, the income of every man, woman and child will go down by 14%. That is a cut of more than £4,500 in the disposable income of the average family this year. We all know that the cut will not be spread evenly, on average. Unless something is done, even greater costs will be borne by those who, through no fault of their own, have lost their jobs or lost their businesses—everyone whose source of income has disappeared. In these circumstances spending by the Government to sustain demand, support employment and enable firms to survive is not a cost to society at all. If the increase in the national debt reduces the loss of real GDP, that is an economic and social gain. It is not a cost; it is a benefit.
Of course, the Government’s financial measures will not be costless if they in turn have a reverse effect that leads to a reduction in GDP. Given the increase in national debt, the “deficit hawks” will demand a new austerity to pay for it all. They should be ignored. The deficit will fall steadily as production levels are restored. The debt-to-GDP ratio will likewise fall over the years ahead. Further austerity will just add to the terrible cost of the pandemic. Of greater concern is the likelihood of negative feedback from the financial services industry, enforcing bankruptcy, especially on small and medium-sized firms, and further depressing output.
Our financial sector places the highest premium on liquidity—on the ability to get its money back easily. Banking logic will be to foreclose on non-performing loans, forcing viable companies out of business. The measures that have been put in place by the Government to protect industry are a temporary band-aid. The loan schemes are loading up company balance sheets with debt. It is estimated that around half of them will default, deepening the recession. There is no path to recovery that is paved with bankruptcies.
As and when the economy does begin to recover, the Government will be faced with significant fiscal management challenges. It will need to relearn forgotten skills in managing tax-and-spend to secure the largest possible output and the flow of resources to where they are needed most. Carefully sustained demand pressure is needed to provide a profitable platform for reconstruction and recovery, and to leave space for the Bank of England to concentrate on the maintenance of financial stability. We must abandon the pretence that minimal interest rates and quantitative easing stimulate output. Instead, they wreck pension schemes, push up house prices and stimulate the Stock Exchange.
What have we learned about our economy and society in the past four months? We have learned that our NHS is not funded in a sustainable manner so that it can protect us. We have learned that our social care system is neglected, fragmented and underfunded. We have learned that the unemployment and benefits system is unable to safeguard livelihoods when incomes collapse unexpectedly, particularly for those in the gig economy or the self-employed. We have learned that malignant inequality is manifest not only in income, housing, and opportunity, but in death from the virus. We have learned that our system of government and politics fails to produce the co-operation needed to prepare us for the next crisis.
We have also learned the damaging consequences of current economic policies. Governments have steadily removed the regulations and norms that provide protection when the lifeblood of our society is threatened, whether that lifeblood is biological, environmental or economic. In the pursuit of short-term efficiency, we have created a world more easily prone to shocks, but with fewer buffers to cushion those shocks. Pandemics are today not just biological; they are economic and environmental too. In sum, we have learned that our economy and our society are not resilient. Resilience will require a new form of political economy.
Every company manager worth their salt has a disaster recovery plan prepared for his or her firm, but only the state can protect us against the consequences of systemic disasters. We learned that in the 2008 financial crisis, and we are learning it all over again today. We must begin by building resilient social services —notably, but not exclusively, the NHS and social care. That includes restoring the local public health system that has been disabled by the 60% cuts to local authority budgets in the past decade. The Government’s emergency grants cannot re-magic that sort of capacity overnight. No wonder it is proving so difficult to implement an effective test and trace system. Resilient social services will require well-trained, well-paid essential workers. Can the Minister explain why, when Britain was hit by the virus, the NHS was short of 50,000 nurses?
Ensuring a resilient labour force will require short-term and medium-term action. A recent report from the London School of Economics reveals that what it calls the “Covid generation” was already suffering falling real wages, fewer opportunities, and stagnant or declining living standards. Now that the crisis has drastically worsened economic and education inequality, young people are even less likely to climb the income ladder and less likely to fulfil their potential, regardless of their background. Are the Government prepared to introduce a job guarantee scheme for those facing long-term unemployment and catch-up tutoring for disadvantaged youngsters? The Bank of England is the backstop for the financial sector. Will the Minister tell us what will now be the employment backstop for Britain’s youth?
Rebuilding our economy will require a resilient financial system, by which I mean not just stable financial markets but a financial system that does its proper job in funding and supporting industry—supporting the production of the goods and services on which our standard of living depends.
All noble Lords will be painfully aware that the Government’s management of the pandemic compares very poorly with that of Germany. In Germany there have been around 7,500 deaths; in Britain there have been 50,000-plus. The economic comparisons are also disheartening. Similar amounts of government funds were provided in Britain and Germany to support small and medium-sized firms. In Germany the funds flowed readily; in Britain they did not. The reason was the superior German pipeline. The banking system there is accustomed to investing in industry, aided by public institutions. In the UK, the banking system proved once again that it is not up to the job.
What will the Government do to ensure that small and medium-sized industry can invest and grow, confident in the availability of the sustained, resilient financial support it needs? Does the Minister agree that what is needed at all levels of industry is not more debt but more equity? What principles would guide the Government to provide the equity support that British industry, large and small, desperately needs?
Of course, Britain is not alone in facing new economic challenges; the global health emergency is also a global economic emergency. Achieving a resilient Britain demands a resilient international trading system, but world trade is forecast to contract by 34% this year. The pandemic has exposed severe weaknesses in global production and trade, just as the crisis of 2008 exposed severe weaknesses in global financial markets. Countries are turning in on themselves. Facing a hostile United States, the WTO is falling apart, with its director-general resigning a year ahead of time. After the 2008 crisis, a massive international effort, led by Gordon Brown, put in place a regulatory system capable of stabilising international financial markets. How do the Government plan to rebuild Britain’s trading relationships in a more resilient manner?
Finally, we all must recognise that a resilient economy must be a sustainable economy. Just as the pandemic, serious though it is, is but a warning of other potential biological disasters to come, the floods of winter, the heatwaves of summer, the melting of the ice caps and the fires in Australia are but the warnings of environmental disasters to come. We are woefully unprepared. The pandemic is an alarm call—a warning that we must build a more resilient economy. That will not be easy to do or to sustain. Resilience will cost money, and the pressures of competitive markets and short-run economic efficiency will erode our commitment to prepare for the shocks that will occur, at some unknown date in the future.
We must forge a durable public and political consensus behind resilience, otherwise short-term economic priorities and electoral cycles will soon get in the way. As the emergency fades in the memory, the stocks of PPE will again be slowly whittled down, the NHS squeezed again, social care returned to being a national disgrace, local public health officials starved of resource and experts ignored, and inequality will be on the rise. This must not happen again. We must win the war, and this time we must win the peace.
This crisis reminds us how fragile is our control of the environment in which we live. We must use this timely reminder to inspire urgent and concrete action to tackle climate change and protect the future of generations to come.