Autumn Statement: Economy — House of Lords, 2016-11-29
Topic: Macroeconomics
Meghnad Desai (Labour, Centre-left): My Lords, of all the things that can beset one when one is the 24th speaker, following the noble Lord, Lord Hennessy, is the worst that has happened to me. But I fully endorse what he has said: suspect all industrial strategies and suspect all looking for champions because the productivity gap between us and Germany goes back to the 1880s; it is not new. I have been waiting to say this for a long time: we should be aware that this country had a financial revolution 100 years before it had the Industrial Revolution and we must not downplay our financial strength, because it has kept us at the top of the tree for all these years while our industrial strength has come and gone. Despite all that, we are still a very rich country, so we must be doing something right I want to concentrate on the forecast made by the Office for Budget Responsibility. I am a little puzzled by it. Making forecasts is a completely thankless job. Economics is a subject where we do not even know with certainty what happened yesterday. Over the five years of the coalition Government we were citing double-dip recessions and crises and so on. But let us look at chart 1.3 in the OBR paper. It shows that throughout the coalition Government’s tenure we had positive rates of growth. The growth rate between 2010 and 2015 is about what the OBR is also projecting for the next five years. I want to pass on that I find that hard to believe, because all the previous forecasts we had were lower than what actually happened. We therefore need to understand these forecasts a little better. I have the greatest respect for the people who do this work and at least two of them are good friends of mine. They are both extremely talented people who are doing their best. But something is missing in our understanding of the British economy. Either we continuously underestimate the growth potential of the economy or we are lucky every time I believe that, just as happened in the two quarters following the referendum, we perform better than most people expect. Indeed I said in this House a week after the referendum result that there was not going to be a recession because we had the same economy on the Monday following the referendum on Thursday 23 June, and there was no reason why it should change. Many people said, "Oh, but there is a lot of uncertainty", but it is not radical uncertainty and people know what to do in the one or two scenarios which might happen. My suspicion is that the OBR is being more pessimistic than one needs to be. If the OBR is correct and we expect low growth for the next two years, the remedy is for the Chancellor to do something about it, now that the fiscal constraint has quite rightly been relaxed. It does not go as far as George Osborne wanted to and rush to a surplus, but the fiscal constraint has definitely been relaxed Because we are borrowing for investment projects, we should borrow. Borrowing is bad if you are borrowing for consumption; it is not bad if you are borrowing for investment. For the time being, interest rates are low and it is a good time to borrow. If Donald Trump succeeds in launching his expansionary strategy, interest rates will harden and go up. The window for borrowing is not that long. At least by the March Budget the Chancellor should do something to speed up and increase the amount of investment he plans. That may correct for the likely shortfall in growth that the OBR perceives. I am not sure it will happen, but if he takes the OBR forecast to heart he should definitely revise his strategy about borrowing and borrow much more now. It will repay him later in the cycle. He would be better off because the growth would be better. A useful aspect of the OBR’s forecast is that it should lead to corrective measures in a Budget, so we do not take for granted that we cannot do better than a growth rate of 1.2% or 1.7%. We ought to do better than that. That is the way to do it I very much liked the emphasis my noble friend Lady Warwick gave to housing. The noble Lord, Lord Higgins, suggested that we might have housing bonds. In the various meetings I go to, I often meet sovereign wealth funds, pension funds and people like that. They are utterly flush with money. Lots and lots of money is waiting for long-term investment, believe me. I can take you to those people. They are looking for an investment, such as housing, where they can have a 50-year payback. They need some sort of instrument: some combination of renting and buying, some kind of steady flow of revenue. The Government could very successfully use some sort of public/private partnership to borrow the money that is around. There is no doubt that the world is flush with lots of money that can be borrowed, especially for longer-term projects such as housing. There are things we can do creatively in that respect I have one more thing to say, partly about investment strategy and partly about productivity. The noble Lord, Lord O’Neill, knows my scepticism about productivity. Robert Baldwin has written a very interesting book on a new interpretation of globalisation. He has said that, in the recent phase we are having, ideas can be costlessly traded across long distances. To begin with, all movement was very expensive. Then with rail, road and shipping it became easier to move goods around. Now it is very easy to move ideas around. That is allowing people to transform industrial processes. Indeed, the whole concept of an industry may no longer be valid, because bits and pieces are being transformed by technology and linked to supply chains across other parts. We need to look at this whole new approach to understanding manufacturing and the role IT plays in it. We therefore need to raise the level of education of people who are already employed in the way they can handle new technology. I therefore welcome the investment the Government plan to make in productivity growth, but most if not almost all of it should go on the IT frontier. I hope that will improve our productivity.