Finance Bill — House of Lords, 2016-09-13
Topic: Macroeconomics
John Davies (Labour, Centre-left): My Lords, I thoroughly agree with the extremely sensible advice which my noble friend has just given to the Government and his very perceptive view of the state of the City’s status and reputation—sadly, because it is after all our leading industry in this country—among the public at large I want to make four points. First, I agree with the Minister that it is too early to assess the economic results of the Brexit referendum outcome. There has been some evidence that, as one would expect, the international trading sector has been stimulated by devaluation, particularly parts of the sector which do not require lead time, such as tourism. I have bought quite a lot of wine, knowing that the next time I see a sterling price list, the prices will be 18% to 20% higher. I imagine anybody who is thinking of buying a BMW or Mercedes has brought that forward, for the same reason. I have no idea at all whether anticipatory purchases of that kind are statistically significant in aggregate, but I expect the Minister knows the answer. However, it is far too early, of course, to have any perception at all of the impact on what is really significant, which, as we have always known, is investment. You can never calculate exactly what is happening when you are talking about opportunity costs, but in my view it will not be for five or 10 years that we will be able to look back and see what impact this will have had on our rate of growth over the relevant period compared with the preceding period. It is then that we will begin to realise some of the damage that has been done Secondly, of course, the great economic fact since the Brexit referendum has been that devaluation. Nothing surprises me any longer about the British capacity for self-delusion in these matters and for Panglossian optimism. I do not know whether just to be amused or to be amused and deeply concerned when I hear people say or I read in the Eurosceptic press, "Oh, it’s wonderful, the markets have recovered now from Brexit; the FTSE 250 is back to where it was before the referendum vote". However, it is not, of course: it is back to where it was in sterling terms, but it is 18% to 20% below where it was in terms of real purchasing power. Being old enough, I have often had occasion in the last few months to remember the words of Harold Wilson about the "pound in your pocket" not being devalued. The same spirit has prevailed over the last few months. I am sorry to have to say that the same final recognition of reality will hit the British people at some point My third point is that the Government’s response to all this has been rather confused and regrettable, because for all its evils, devaluation could be a basis for attacking what I think is—after productivity, to which it is related—our major national weakness. That is our balance of payments deficit; it has for some time been at very alarming levels of 5% to 6%, which makes us particularly vulnerable to international investor sentiment and should be a great worry to the Government. Devaluation might, in theory, provide the basis for a greater volume of exports and for greater domestic market share for import substitution industries and services in this country. But we are operating quite close to capacity—the unemployment figures which the Minister quoted show that to be the case—and we are clearly not going to have a revolution overnight in productivity. It is a mathematical impossibility for that to happen unless there is some reduction in domestic consumption or investment—and one hopes it will be consumption However, the Government are going in completely the opposite direction by stimulating the economy. The Bank of England is relaxing monetary policy and the Government are relaxing fiscal policy at the same time. The Government have abandoned their programme to restore fiscal balance and go into fiscal surplus before the end of the decade. The statement of policy seems extremely perverse for two reasons: first, it will prevent us achieving the full effect of devaluation on that current account payments deficit, and, secondly, the monetary expansion in particular will mean that the raising of import prices following devaluation will be accommodated, and therefore we will have inflation. When inflation picks up, the Bank of England will have to intervene again—probably in the second half of next year—and put up interest rates to prevent inflation going up beyond the 2% level and higher, which would be contrary to the guidelines by which the Bank is working. We then find ourselves with the prospect of rather volatile monetary policy over the coming period, and that is not a good thing. Above all, it is not good for confidence That brings me to my final point. The Minister said that the important thing was investment and I totally agree with him. I do not think he knows what I am saying because he is paying attention to something completely different, so I shall not be able to refer to this in subsequent debates. I am saying to the Minister that I actually agree with him in the emphasis that he is putting on investment, but investment depends upon confidence. Confidence is undermined by volatility of policy and will be particularly undermined by the tremendous instability that the Government are presiding over at the moment in relation to our post-Brexit prospects. It looks as though it will take not just months but perhaps years of negotiation before we know what our relationship will be with the rest of the EU and the European single market. In my view, that is an unforgivable state in which a Government should never leave a nation for whose fortunes they are temporarily responsible. It would be so easy to completely remove that instability and source of uncertainty. I hardly need to remind the Minister that uncertainty is risk, and risk is a cost—it increases the cost of capital, which increases the threshold rate for investment, so it is an automatic response to uncertainty that there will be less investment After that enormous uncertainty has been created, the Government are doing nothing at all about reducing it. The Government could do something now—literally this afternoon—to make an enormous contribution to reducing that uncertainty and risk and boosting investment, by saying that whatever happens as a result of these negotiations with the rest of the EU we will remain in the single market. It would be perfectly possible and responsible to say that, because one avenue that will always be open to us is the European Economic Area option that, for example, Norway and Iceland have. Maybe the Government will be able to negotiate something better than that—better in their view, anyway. Personally I am not sure about that at all If I were one of our continental partners, I would not want to get involved at all in the negotiating of a bespoke special deal with the UK, for a whole host of reasons. One is that as soon as you start talking about bespoke deals, other members of the existing EU may want a bit of a bespoke arrangement. Secondly, other people with whom the single market already has a structural relationship—EEA members, Switzerland or whoever—may want to renegotiate that to make their own position more equal or more fair in light of what has been agreed with the British. Thirdly, and very importantly for them as for us, the whole thing would go on for years and years. It would be one of those negotiations where nothing was agreed until everything was agreed. That would take the sort of time it normally takes to negotiate an accession agreement to the EU or an international trade or financial agreement—typically, between five and seven years. That would be a complete nightmare for all concerned Personally, I doubt whether the continentals would want to get involved in that sort of bespoke negotiation anyway. But even if they did, it would be perfectly possible to go into that sort of negotiation having said at the outset that whatever happens, we will end up still in the single market. That would be the best possible day’s work that the Minister could do for this country, for British industry, for investment in this country and for the future of our prospects for growth, employment and prosperity. I see him smiling. I hope he agrees with me and that he will do it.