That this House takes note of the low rate of growth of the United Kingdom’s economy, and the rate of core inflation and its differential effects; and of the necessity of increasing productivity.
My Lords, a few days ago there was an historic event: an inflation-busting 9.5% pay demand was submitted by that hotbed of union militancy, the clergy of the Church of England. This is just one further indication of the economic desperation suffered by most of Britain, including the clergy, as average real pay has fallen lower and lower. It is now down to the same level as 2007—and that is even before the impending rise in the cost of mortgages.
The only sustainable way to recover real incomes, and hence cut inflation, is to increase productivity—output per head. Increasing productivity requires investment that expands productive capacity and incorporates innovation. Investment requires the confident prospect of future growth. Achieving that nexus between investment, productivity and growth is the fundamental challenge that we face.
The past 15 years have been tough for the world economy. Every country has endured the shocks of the global financial crisis, the global pandemic, and the devastating impact of the war in Ukraine on energy and food prices. Yet since 2010, in the crucial variables of investment and productivity, Britain has done consistently worse than comparable countries. Since 2010, year on year, investment as a share of UK GDP has been the lowest in the G7 every year. On productivity, the National Institute of Economic and Social Research argued in a comprehensive study:
“In the years leading to the global financial crisis, the UK was closing the gap on its international competitors; UK productivity was growing at a faster pace than the United States in the pre-2007 period. This has changed since 2007, with productivity growth rates collapsing in the UK, more so than in most advanced economies”.
The result of this succession of low productivity and low investment is that, in 2009, typical household incomes in Britain were roughly the same as in France and Germany, whereas 10 years later they are 16% lower than in Germany and 9% lower than in France. The persistent economic underperformance of the past decade is the key to why Britain is today locked into low growth and high inflation, with ever-rising taxes and interest rates, and why the public realm is in an advanced state of breakdown as despairing public sector workers suffer even severer cuts in real income.
Why has this happened? The explanation is not hard to find. In the face of every major shock suffered by the economy over the past 13 years, the Government have time after time taken the wrong decision. In every case, misguided government policies damaged investment, growth and productivity. In the first half of 2010, the UK economy was recovering strongly from the shock of the global financial crisis, but the cost of rescuing the banks and supporting the economy in the downturn had left the UK with a high level of debt relative to GDP.
Any serious study of economic history demonstrates beyond doubt that the only enduring way to reduce the debt to GDP ratio is to grow GDP. Accordingly, in the first half of 2010, the Chancellor, Alistair Darling, had steered the economy on to a steady growth path, approaching an annual growth rate of 3%. In May of that year, the new Chancellor, George Osborne, reversed Darling’s policy and austerity killed the growth rate stone-dead. Austerity was supposed to cut the debt; the trouble was that it cut GDP too. To the Chancellor’s continuing puzzlement, despite his having eviscerated public spending, the debt to GDP ratio did not fall as predicted. He had chosen the wrong policy. The damage that Osborne’s austerity did to the foundations of growth and productivity lives on to this day.
My Lords, I thank the noble Lord, Lord Eatwell, for initiating this debate. It is always very interesting to listen to him; he always makes very thoughtful contributions.
I hope he will forgive me if I do not follow him on the long-term issues he outlined. This is because I want to concentrate on one part of what he talked about: inflation. The immediate problem this country faces is extremely serious. This is not because I want to ignore growth, but because I believe we cannot have sustained growth without first getting on top of inflation. Stability, sound finance and low inflation are preconditions of growth.
It is possible to be too downbeat about the UK’s economic growth. In 2020 and 2021, the UK had the highest economic growth of any G7 country. The eurozone is in recession, as is Germany. It is true that the UK has not recovered to its pre-Covid level, unlike several major European countries, but these are tiny differences in very small numbers. Some people talk about economic growth as though they are the first people ever to have thought of the idea—“With one bound, Jack will be free”. Of course, growth must be the ultimate objective of economic policy, but it cannot just be conjured into existence by politicians snapping their fingers.
Sadly, I do not believe that we can return from the present situation to inflation at 2% without a contraction—not a recession, but some contraction in activity—to realign demand with weaker supply. Of course, we have also to do what we can to increase supply. We need to bear in mind that, in this situation, the UK has a very tight labour market, with unemployment at 3.8%, 1 million vacancies and rising wages. We have a level of wage demands and wage increases that is incompatible with the 2% target set by the Bank of England.
Largely as a result of Covid and Ukraine, we have taxes that are far too high—and borrowing, for the same reasons, is also far too high and leaves little fiscal room for manoeuvre. Some suggest that the alternative to present policy is to seek a return to higher real incomes through economic growth and targeted tax cuts—again, with one bound Jack would be free. The hope that tax cuts and growth, if it materialised, would moderate demands for higher pay in the tight British labour market seems to me plainly illusory. If such an approach could ever have been on the cards, it plainly now cannot be after last year’s mini-Budget. Challenging the current approach risks upsetting market confidence.
My Lords, I thank my noble friend Lord Eatwell for this debate and for his excellent opening speech, which I agree with almost every word of. It is also a privilege to follow the noble Lord, Lord Lamont, from whom I always learn a lot, as I did again today on inflation.
I will make a few remarks about investment: how poor our record is, how fuzzy our thinking around it often is, and what we need to do to improve it. I fear that, historically, the left and the right have not served the cause of investment that well. The right tends to assume that investment will flow from lower taxes and a small state, when it does not, and my side of politics is often more enthused by state intervention in the cause of greater social justice than the cause of boosting business investment.
But our economy is in fundamental trouble. We have a strong record on employment, but it is no longer true for millions of families that working hard can keep their heads above water: 15 years of wage stagnation have left households £11,000 worse off each year on average. Productivity remains shockingly poor: the average of all other G7 nations is currently 16% higher. On the eve of Covid, levels of investment were the lowest in the G7, and they have been low for decades. The promise of liberalisation and deregulation has not brought the promised revolution in investment and productivity. Instead, it has brought the expected side-effects of lower wages and higher inequality.
An indicator of the depth of the problems that we face comes from just one statistic: the UK’s year-on-year inflation rate is currently 8.7%, with core inflation rising. This is the highest in western Europe and the highest in the UK since 1990. You would expect the growth rate that goes along with that to be middling to high; instead, UK growth is barely above 0%—we have an economy that is overheating at 0% growth. This tells us that something is fundamentally wrong with our supply side, with the way that the real economy works. Of course, Brexit is a huge part of that. That is the shock we chose to have, rather than the shocks like Covid and Ukraine, which we had to have. I will leave others to debate the Brexit issue, because I want to talk about investment.
My Lords, we heard just now a very authoritative speech by my noble friend Lord Lamont about inflation, which, obviously, is much too high and is a real disease. I think personally that it will take more than one weapon—monetary policy from the Bank of England, right or wrong—to curb the present inflation. Falling global energy prices, as oil and gas are falling fast, will obviously help.
I will concentrate on something slightly different which is mentioned in the Motion and in the speech made by the noble Lord, Lord Eatwell: namely, the productivity puzzle. To my mind, the answer to it is rather simpler than some of the economists and experts would have us believe. Productivity comes from capital investment in machinery and technology. Louis Kelso, the pioneer of thinking in this area, 60 years ago destroyed the Marxian theory of labour value, making it completely redundant. However, he rightly pointed out that, although productivity and rewards come from capital and machinery, the rewards should go much more to workers and wage earners than they have and do now. That is a major problem we should all be facing.
I know the noble Lord, Lord Eatwell, rightly emphasised the investment element, but, with respect, he was looking slightly in the wrong direction. The state can obviously help and underpin, but it is pretty well short of money. Every state is short of money now. The famous phrase,
“I’m afraid there is no money”
came through to us 12 or 13 years ago, and it is not very different now. There is a shortage of state money for various obvious reasons we can talk about; they have heavy political context.
In our case, we should be thinking more about foreign investment funds and the way in which we can reattract those in a way we are not doing now. In the 1970s and 1980s, we achieved huge Japanese investment from the world’s second largest industrial power, as it was then; it is now third. That had a very definite effect on boosting productivity, not least because the Japanese insisted on firmly ending many of the trade union restrictive and demarcation practices which were holding back productivity drastically. In their new plants, they said, “We’re simply not going to have it. We must talk with one union leader, not dozens”, and they sorted all that out. We backed up that growing relationship with all sorts of innovative linkages, including the UK-Japan 20th century group, which our colleague Richard Needham persuaded Mrs Thatcher and Yasuhiro Nakasone to set up. I had the privilege of chairing it for 10 years, and that certainly helped the mood.
My Lords, I declare my interests as set out in the register.
I have three questions for the Minister. First, why does the UK have the highest inflation in the G7? Ministers cannot explain that away with the war in Ukraine and Covid recovery; many other countries face exactly the same challenges but Britain has been much more exposed to high costs of imported energy, and there are domestic policy failings that help to explain it. Secondly, why is investment and growth in the UK so low and our balance of trade so poor? Thirdly, why are real wages still no better than they were before the financial crisis? According to the ILO, only Italy, Japan, Mexico and the UK have real pay below 2008 levels.
The UK economy is not working for working people. From austerity cuts to public services that left us so poorly prepared for the pandemic to Liz Truss’s mini-Budget that caused maximum damage, the Government, as my noble friend Lord Eatwell said, keep making the wrong policy choices. At the start of the pandemic, when the TUC proposed a furlough scheme, the then Chancellor grabbed the idea, but when the TUC then called for a national recovery council, involving business and unions as well as Ministers, to plan and prepare for reconstruction after the pandemic, the same Minister said no. Many had hoped that the Government would build on people’s sacrifice and solidarity throughout Covid to create a stronger society and a fairer economy—surely we could not go back to business as usual. However, it now seems that the Government have given up on growth, on an industrial strategy and on the aspirations of the working people of Britain.
We have an economy that rewards wealth, not work. Of the 15 million people in the UK in poverty, more than half have a job. In contrast, TUC analysis shows that since the global financial crisis financial wealth has more than doubled and shareholder payouts are rising three times faster than nominal pay. Think about what that inequality means for demand in an economy that is now dominated by the service sector. Working families cannot afford to spend on the high street and the growing ranks of the super-rich do not. As economist Matthew Klein put it:
My Lords, I add my thanks to the noble Lord, Lord Eatwell, for securing this important and timely debate. Although I am not an economist nor a financial expert—but feel very much that I am surrounded by them today—I do know housing and am going to focus on the contribution that housing and construction bring to our economy and the housing impact of the current financial crisis on millions of households.
In the longer term, the construction industry can and should be part of the solution to the economic crisis and low levels of productivity. We know we need more homes, though it seems that the nimbys have gone bananas—“build absolutely nothing anywhere near anybody”—and the yimbys’ voice is not being heard loudly enough. It is devastating that progress made in recent years, though still short of the much mentioned 300,000 homes a year, has been slammed into reverse by recent ministerial announcements and proposed changes to the planning framework and the National Planning Policy Framework.
Building homes supports local jobs and apprenticeships, generates billions in economic activity, provides investment for much-needed affordable homes and improvements to local infrastructure, not to mention billions in tax and millions in council tax. More employment means more money cycling through local communities, as well as opportunities for regional growth. The real need is for homes for social rent. Last year, 29,000 were demolished or lost under right-to-buy sales, yet fewer than 7,000 were built as replacements. A nationwide programme would surely kick-start the economy—if only.
In the meantime, millions of people are forced to live in poor-quality, prohibitively expensive private rentals, or are stuck in temporary accommodation or sleeping on the streets. All of these are increasing. Private rents are up; the latest figures from Zoopla see rental inflation running in double digits for the 15th consecutive month. Rents are growing faster than average earnings; rental costs as a proportion of earnings have reached their highest for a decade. Of course, it is the lowest paid, as ever, who are the worst off. Crisis reports from its findings that the poorest 10% of households are spending more than they earn on just rent, food and energy. That is clearly unsustainable.
My Lords, I thank the noble Lord, Lord Eatwell, for securing this debate. I will focus on one item: inflation. When I saw the breadth of this debate, I suspected that we would discuss different things at different times, which we are.
The noble Lord, Lord Eatwell, made some very good points about the relationship between investment, productivity and growth, but the one word I never heard in his speech was “money”. Perhaps that reflects Cambridge economics. There was no mention of it, and yet, as we just heard, we have a central bank that has a target for inflation and uses the instruments at its disposal to control the stock of money, among other things. Inflation is very important to growth because it invariably creates changes in interest rates, tax rates, spending rates and so on, and because of the turbulence that it provides, which is a disincentive to investment—and that business investment is key to growth.
If we do not tackle inflation, I am afraid that we will live with the current stagflation that we are experiencing of high inflation and very low growth. The Bank of England is responsible for a 2% inflation target and, as we just heard, inflation is between 7% and 8%. The Bank has not had an easy task over the last few years. We have had Covid, Ukraine, and half a million people aged between 50 and 65 leaving the labour force as inactive. In addition, like the Bank of England, other central banks forecast that inflation would be transient, and independent forecasters predicted the same thing. But the one equally great shock that the Bank failed to mention was the increase in the stock of money.
Until 2020, the increase in the stock of money—broad money—had been 2% for a number of years. In 2021 it jumped to over 10% and in 2022 it gradually came down, although it was still very high. The shock we have had from this has been enormous. The same effect was felt in the US, Germany and other countries, as we have seen. There was a monetary expansion on the back of Covid in particular—a tremendous increase in public spending to deal with Covid in 2020-21, which was at the heart of money supply creation.
My Lords, I thank my noble friend Lord Eatwell and congratulate him on securing this debate.
Many of us will remember the phrase “broken Britain” being used frequently by the Conservatives in the 2010 election campaign. Few of us welcome the fact that 13 years later, it is one of the very few Tory slogans which we can say they have actually delivered.
Last week’s inflation figures showed that not only is CPI falling less quickly than was hoped but core inflation has risen to 6.5%, as several noble Lords have already mentioned. Economic forecasts for the medium term are being revised down, as interest rates are going up. Growth remains anaemic: almost two years after the pandemic lockdown ended, our national economy is virtually flatlining, and the spectre of recession still looms.
My noble friend Lord Wood of Anfield has already mentioned investment. The UK’s level of investment as a proportion of GDP fell below the median G7 level in 1990 and has been declining in real terms since then. A recent IPPR report, which I recommend noble Lords read, noted that:
“The UK fell to the bottom of the”
G7
“ranking in 2019, but other countries increased their levels of investment after the pandemic faster than the UK, further widening the gap. In 2021, the UK ranked 27th on business investment among the 30 OECD countries”.
These most recent figures show that the only developed countries with proportionately less private investment were Luxembourg, Poland and Greece. We absolutely must address this.
However, no matter how difficult the situation, I do not intend to advocate despair. My noble friend Lord Eatwell so clearly set out the dire set of figures. Therefore, having honestly assessed where we are, let us consider what we need to do to get where we want to be. We want to see a country where all regions and communities have access to the same opportunities and can benefit from economic growth. Part of the problem in the United Kingdom is the dominance of certain sectors, such as financial and professional services, which has led to a disproportionate concentration in London and the south-east.
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The next major economic shock to the UK was the vote to leave the European Union just seven years ago. Following the referendum result, the Conservative Government took the wrong decision once again. Instead of negotiating a close relationship with our largest trading partner post Brexit, they decided on a so-called hard Brexit, raising trade barriers and exiting supply chains. The result has been that, since the referendum, while the value of French exports has grown by 16% and that of German exports by 23%, demand for UK exports has grown by just 6%. The growth of business investment in Britain, which had shown a sharp recovery in the three years before 2016, stopped dead and has never fully recovered to this day. That is what happens when you make the wrong decision and give up the supreme trading advantages of close proximity to the world’s largest free trade area.
Next came the double whammy of the pandemic and the war in Ukraine. The new Government, led by Liz Truss, correctly identified Britain’s fundamental economic weakness—the slow rate of growth. But once again, the Conservative Government chose the wrong policy—in this case, fiscal incontinence. Instead of tackling directly the low-investment, low-growth problem, they sprayed—or planned to spray—tax cuts on the better-off. They ignored the fact that similar tax cuts for the wealthy by Donald Trump had had no lasting impact on US growth. The result of that Conservative mini-Budget has been soaring interest rates and a collapse in confidence, hammering investment and growth yet again.
The 7 million-plus NHS waiting list, the 2 million-plus fall in the labour force, the world-beating rate of inflation and spiralling mortgage rates are all the result of a succession of bad policy choices made by Conservative Ministers at crucial times in the past 13 years. And now the Chancellor is at it again. He tells us:
“We have to do everything we can as a government … to squeeze inflation out of the system”.
Yet while the Government tighten their hands around the throat of the British economy, has the Chancellor not noticed that the inflation rate in France is just over 5% and falling and in Spain just over 3% and falling? What did they do? Both the French and Spanish Governments have deliberately targeted support notably on food prices and on the lowest wage earners. In doing so, they weakened the damaging link between the first round of food and energy inflation and the second round of wage inflation. Core inflation has been driven by desperate attempts to protect the standard of living. So, by contrast with the French and the Spaniards, Jeremy Hunt is determined to squeeze working people into accepting a lower standard of living, whatever damage may be done to investment in growth. This string of bad decisions, from austerity to EU trade, to fiscal incontinence, to squeezing the economy, has undermined investment and growth for the past 13 years.
That raises another issue. Why has Conservative economic decision-making been so bad? After all, everybody can make the occasional mistake. But to make decisions that damage investment and growth over and over again is more than just careless. Perhaps the answer lies in the Conservative characterisation of the state as a burden on the wealth-creating private sector, allied with an overarching faith in market-driven private sector efficiency.
All evidence from modern successful economies points to the foundation of investment and productivity growth being the essential complementarity of public and private investment. If we are to build a competitive economy with a high rate of productivity growth underpinning rising living standards for all, Britain needs a new relationship between government and industry, to be consummated in the pursuit of a single dominant objective: investment, public and private.
Public-private complementarity is vital, and not just in the oft-cited examples of education, law and infrastructure. Life sciences, as we know, are the jewel in Britain’s crown, yet the UK’s share of global pharmaceutical research and development has halved since 2012. Why? Quite simply, an overwhelmed, demoralised health service has struggled to prioritise the clinical trials that are a crucial component of pharmaceutical development—a vital complementarity between public and private sectors.
For years, Britain has not had the level of investment it needs because our economic institutions, public and private, have not been up to the job. We have proved unable to capitalise on Britain’s undoubted strengths in artificial intelligence, the life sciences and our research universities. What is needed is a long-term government mission to create a new institutional environment, financial and corporate, that sustains the needed investment with ideas, skills and finance and, crucially, is supported by the confident prospect of future demand. Without the prospect of future demand, including export demand, there will be no investment, however good the projects and however abundant the finance or tax incentives might be.
Britain needs not just to catch up but to use our technological and research expertise to leap-frog our competitors in a world economy that has changed fundamentally since the pandemic. We knew already that the successful economies of the future will be those that secure the lead in green technologies. We also learned that national security will require safe supply chains and strong, home-based industries and services. The globalisation free-for-all is over.
The United States has got the message. President Biden’s Inflation Reduction Act and the CHIPS and Science Act chart a green and secure future. We start from so far behind that we need to do more than the US. At the moment we spend 1.2% of our GDP addressing the demands of climate change; the US spends 1.9%, France 2.5% and Germany more than 5%. Nothing could illustrate more that Britain needs a public/private industrial policy to build the green industries of the future.
I accept—it is well known—that defining a credible industrial policy is much more difficult than focusing on the broad sweep of macroeconomic objectives. Industrial policy consists of a broad range of diverse initiatives: an enhanced British Business Bank, reform of the energy sector, rejoining the Horizon programme, funds for further education colleges, new financial institutions to support SMEs, university industrial parks, a substantially revised trade policy and so on. It even includes investment in the NHS to maintain a fit labour force and support pharmaceutical trials. Crucially, we need a stable macroframework that provides a sustained growth of demand.
The necessary coherence of all this is achieved by focusing all these policies on the common investment objective, bound together by a sustained commitment to the common mission. We have not had that sort of policy for 13 years. I hope that when she sums up the Minister will tell us what the Government have learned from their litany of grievous economic errors. Britain cannot take any more economic blunders. I assure the House that just “holding our nerve” will not do the job. Our future economy needs new management, and it needs it now.
As the noble Lord, Lord Eatwell, said, the latest inflation figures were extremely disappointing and, not to put a fine word on it, bad. Not only did inflation stop falling but core inflation actually increased, as did services inflation and the increase in wages. The UK is now an outlier in inflation, as the noble Lord said. We have a domestically generated element in our inflation. The Bank of England has responded by putting up rates by half a percentage point, and mortgage rates had anticipated that development and already risen in line with the market.
The changes in the mortgage market to more fixed-rate mortgages means that the impact of interest rate changes takes much longer today. The Resolution Foundation calculates that two-thirds of the impact of rising rates since 2021 still has to come through. Some 1.3 million people have fixed-rate mortgages expiring in the 12 months from 1 July. These figures have led to talk of a mortgage catastrophe impacting on the economy but, with a little flexibility and help from the banks, it need not be so. So far, mortgage holders have been remarkably resilient. This generation of mortgages were lent out far more cautiously than in previous cycles; the mortgage affordability tests imposed by the Bank of England mean that many borrowers already have a decent margin to cope with shocks.
Some voices have called for a government mortgage rescue package, but it makes no sense for the Bank of England to bear down on inflation by raising interest rates if, at the same time, the Government are to subsidise rising interest rates. Nor is it equitable to ask those not owning houses to subsidise those already on the ladder. Many renters pay a higher percentage of their income on rent than home owners do on mortgage payments. Regaining control is urgent, the best way to support home owners and essential for getting back growth.
Obviously, I support the independence of the Bank of England, and I supported it when Gordon Brown made that move, but the credibility of the Bank of England is on the line today. In the recent past, it has not sounded or acted as though it was determined to defeat inflation. In the summer of 2021, the Bank refused to halt the quantitative easing programme unleashed during Covid, even when it became inappropriate as prices accelerated and distortions in asset prices were obvious. In November that year, with inflation three times its target, the Bank was content to leave the base rate at 0.1%. If the Bank is to regain the confidence of investors, it needs to focus hard on this one core objective.
In recent years we have been through an extraordinary series of exceptional events. It is hardly surprising that growth, not just in this country but in many countries, has been slower than in the past. Some want to peddle illusory easy answers but, as the Prime Minister said, people know that if something is too good to be true, it is not true. Difficult as it is, I believe that the Government are on the right track, and I urge them not to be diverted.
In my view, the UK political debate around investment and growth suffers from considerable fuzzy thinking. Take the disaster of the mini-Budget last year, which the noble Lord, Lord Lamont, mentioned. It has left us with a national paranoia about the reaction of bond markets to policy changes but also with a misunderstanding about what alarms markets so much. The Liz Truss episode showed not that markets punish Governments who want to tax less or, indeed, borrow more but that, if you do so without setting out the fiscal plans that should accompany these decisions for the medium term, the uncertainty that that creates, for demand and for the anticipated reaction of the bank in interest rate setting, raises the risk premium on UK assets. Investment requires borrowing, of course—for people, families, firms and countries. Borrowing to invest makes sense. Sensibly planned borrowing does not spook markets, only badly planned borrowing.
The fuzzy thinking goes wider. The Government’s fiscal rules make no distinction between investment spending and current spending, which makes no economic sense. I am pleased to say that Labour’s pledge on eliminating the deficit in its own fiscal rules excludes investment spending, as it should, but there is a long way to go in the debate on both sides about a commensurate treatment of debt and targets on debt reduction.
The fuzzy thinking extends also to the relationship between investment and welfare. The health of our welfare state is crucially about the health of citizens, of course, but it also has huge implications for labour supply, as we have discovered with the link between rising sickness leave and labour shortages since Covid. Welfare policies in the UK are also far too little designed to help workers retain the skills that they have acquired when they become unemployed, because, in our country, we prefer instead the philosophy of getting people who are unemployed into any job as soon as possible. Thereby, we contribute hugely to significant skill scrapping over time.
Then there is the fuzzy thinking around how our public utilities work. The experiment of turning public utilities into privatised utilities with independent regulation has many problems, as we can see from today’s news. Chief among them is that the regulatory arrangements for utilities to have investment stimulated have not worked and the investment that has been generated is not consistent with their viability or the public purpose that they are supposed to serve. We need a mindset change, and a long hard look at the way we fail to put investment first: we use rules with contradictory approaches, and we fail to make connections between different policy areas and the drivers of productivity and investment.
So what can we do? I do not think that business investment will be transformed by tax cuts. For much of the last two decades, the UK has combined some of the lowest corporation tax rates in the G7 and the advanced world with one of the worst records in business investment in the advanced world. We need to look at the range of capital allowances; there is much more room to secure long-term expensing arrangements so that companies have certainty in the future. We should strengthen the R&D tax credits system, looking at better incentives for green and digital investment. We should be more courageous about speeding up planning laws and timeframes, especially for infrastructure projects. We also need to work on how to channel the trillions of pounds available in UK pension and insurance assets into UK companies. Currently, only just under 1% of that money goes to UK equities.
Mostly, we need a Government who use their fiscal, regulatory and procurement leverage to take a lead in public investment. Every major competitor around the world—from China to South Korea and Taiwan, from the EU to the USA—is using active state intervention on a large scale to promote investment, productivity and growth. The laissez-fairists, I am afraid, have lost the argument. The question is: what form should state leadership on investment take? I am happy that this territory is the area that my party’s shadow Chancellor is occupying at the moment. Whoever wins the next election is going to face very tough times. If Labour is in power, I hope to see a step change in the way that we as a country prioritise the stimulation of investment.
Japanese interest tailed off a bit after that as we entered this century, and it tailed off further after 2010 with the Cameron-Osborne pivot to China. The Japanese were enormously upset; there were almost tearful occasions when they felt that they had been virtually betrayed. That was bad enough but, when we got to Brexit, Japanese interest disappeared almost entirely. They simply could not understand why we had made that decision. They had invested here because it was a launching place to Europe but now suddenly we were going in the opposite direction.
Now, however, Japanese interest is returning. One example of that is the colossal defence project, the Tempest combat fighter, which I see helpfully promoted in advertisements in Westminster Underground station. With that come all sorts of Japanese links and ideas, developing a new relationship. Incidentally, I should declare an interest that I advise two large Japanese firms, Mitsubishi Electric and the Central Japan Railway Company, which runs the best and fastest Shinkansen system in the world.
I ask the Minister what we are doing to deepen relationships with Japan in an innovative way. They go well beyond trade links and beyond even investment incentives. Japan is our best friend in Asia, and Asia is where all the growth is going to be in the next 30 years. We need to be in on that, and Japan is going to be a great help.
How did we get that relationship in the first place? It was always claimed that the huge investment by Sony at Bridgend, which really started the flood of Japanese investment that came in in the 1970s and 1980s, was because Akio Marita had a son at Swansea University. Small things lead to big things. That is an example of all sorts of links, and universities are a part of that.
There is no scarcity of resources outside in the world. With respect, the noble Lord, Lord Eatwell, was looking in the wrong direction. There are billions, indeed trillions, waiting to invest in sovereign funds, pension funds and especially electricity infrastructure. That is the fact that we should now be dealing with.
There are many lessons to be learned from attracting FDI—or not attracting it now. When it returns, productivity will rise again. When other policies across the whole spectrum are regeared to attract FDI—from safe sources, of course—productivity will rise again, real wages will rise, trade deficits will shrink and real growth will resume, but not before we act in the ways that I have indicated.
“You can only throw so many million-dollar birthday parties”.
Our economy does well only when working people do well. Without demand, we cannot grow our economy. Without growth, we cannot repair our public services. Without investment in health, skills and education, productivity suffers. We have to break this doom loop. It is high time that we had a plan for economic security and sustainable growth. AI alone offers the potential of multibillion-pound productivity benefits that if shared fairly—I recognise it is a big if—could turbocharge our economy. An ambitious green industrial strategy with a practical job transition plan would cut carbon and help the parts of the country that need it most.
We desperately need investment in apprenticeships, skills, affordable homes and public services. Instead of making it harder for workers to defend themselves against real pay cuts by attacking their trade unions, let us have a plan to get living standards rising again. Let us be honest about the economic price of a hard Brexit. We need to roll up our sleeves and improve the trade deal that matters most to our economy, the one with our nearest and most important trading partner, the EU. Britain has many strengths that can lift us up the G7 league, not least the ingenuity and talent of our workforce. There is hope in the future, but we need a Government that will make the right policy choices and put the people of this country first.
After the low-waged, who is hurting the most? According to the Institute for Fiscal Studies it is the under-40s and those in London who have been bashed hardest by the mortgage-rise tsunami that is hitting Britain. It estimates that some 1.4 million mortgage holders will see their payments rise by at least 20%. Given that many have borrowed to their maximum, due to an unprecedented period of low interest rates which lulled everyone, especially the mortgage lenders, into lending and therefore borrowing much more, that could mean increases of several hundred pounds a month. Very few people have that kind of headroom in their disposable income simply to absorb these costs.
As a further blow to the economy, the latest figures on GDP growth from the ONS show that monthly construction output is falling. The greatest decrease is in private house repair and maintenance and in new build work, such as extensions and conservatories. That seems to be the first inkling that home owners are putting on hold any repairs or home improvements while times are uncertain. This will surely create a domino effect on employment and jobs and productivity in the sector.
We have not heard much about those in shared ownership agreements, who are seeing both their rents and mortgage payments simultaneously go up by 10%—that is not uncommon. It is worth noting that one person’s rent is another person’s mortgage—usually the landlord’s. They too face the same cost of living and mortgage rises, and are choosing either to sell up or to pass them on to their tenants, so those in the private rented sector are suffering considerably.
The average rent in the UK has risen by 11% across all tenures, with rent in the private rented sector rising much higher. Would the Government consider at least unfreezing the local housing allowance, which leaves renters facing an increasing gap between housing benefit and their actual rent? Given that we have yet to see the much-promised end of no-fault evictions, would the Government consider an eviction freeze under certain circumstances, as was seen during the pandemic? The Government have ruled out—rightly, in my view—a rent freeze for the private rented sector, but they have felt happy to impose one on the affordable housing providers. That helps tenants a little, as theirs is a much lower rent anyway, but not the associations whose finances are already challenging.
Perhaps the Minister can assure us that the Prime Minister, in his talks with mortgage lenders, will seek reassurances from them that the stress and affordability tests introduced after the 2008 crash will be stuck to, so that those in arrears will not have their homes repossessed. That would prevent the domino effect that that would then have on an already stretched system, with cash-strapped councils picking up the evicted and the homeless.
For now, the message from the Bank of England—and possibly from the Government—is clear: it is prepared to sacrifice the housing market to bring down inflation. However, there is a very fine line between tackling inflation and pushing people into the red and out of their homes. That has a cost too. What are the Government’s short-term plans for those in immediate crisis? What is the longer-term game plan to get us building, at scale and volume, those much-needed homes?
You do not have to be a monetarist or an ideologue to believe that money matters. One problem we have with the Bank of England at present is that the Monetary Policy Committee seems to feel that it can analyse the problems we have without reference to money.
What should we now do to bring down inflation? It is not something I like saying but, first, interest rates must be raised to a level which reduces overall spending so that inflation will come down. Since December 2021, the Bank has consistently raised rates. However, the Bank rate is only 5%, and the rate of inflation is 7%. That means that real interest rates are minus 2%.
I bring your Lordships’ attention to the following. When Roy Jenkins in the late 1960s had to deal with relatively modest inflation, he raised the interest rate to 8%. When Tony Barber in 1973 raised the interest rate in order to deal with excess money, he raised it to 13%. Healey in 1976 raised it to 15%, Geoffrey Howe in 1979 to 17% and John Major in 1989 to 10%. Therefore, the terrible news is that every other inflation we have had in the post-Second World War years in this country saw interest rates go into double figures, except for under Roy Jenkins.
Secondly, although I sincerely hope that we do not have to go into double figures, 5% is certainly not enough. I think the Governor of the Bank of England said that yesterday in a meeting in Switzerland, and certainly the Bank for International Settlements has said something very similar.
Thirdly, the Chancellor should stick to a 2% price inflation target; fourthly, if the Treasury wants to help borrowers, it should really deal with it through fiscal policy; and fifthly, reflating the economy is at present out of the question. The Government have taken very tough measures, and we should be supporting them in a very difficult economic climate.
With targeted investment and research and development support, coupled with policies that encourage investment, innovation and entrepreneurship, we can create a more diversified and resilient economy. We can unleash innovation and growth in industries such as manufacturing, clean energy, technology and the creative sectors by encouraging economic clusters of interconnected businesses in various geographic locations outside London.
Our devolved nations and metro mayors are bursting with ideas. They have a deep local understanding of the industries and skills in which their areas excel. By fostering collaborative regional partnerships, improving local infrastructure, attracting private investment to emerging centres of excellence and international excellence, we could transform the economy.
Alongside this, we must develop our skills agenda, especially in STEM subjects, which have to be embedded in the school curriculum and extended into lifelong learning. To face the fast changes of the 21st century, workers will need to think about skills for life, rather than jobs for life, to remain resilient and adaptable throughout their working lives in a climate of increasing technological disruption. We need a targeted plan of investment which supports people to return to and remain part of the workforce, which enables them to learn and develop skills leading to well-paid jobs and which reinforces local and regional networks, which deliver the much-needed sustainable long-term growth that we all want.
The people of this country are, and have always been, our greatest asset. Let us invest in them, unleash their potential and hear the British lion roar again.