Queen’s Speech — House of Lords, 2021-05-12
Topic: Macroeconomics
Mervyn King (Crossbench, Unknown): My Lords, after such a long debate, can there be much to say, especially—in deference to the noble Lord, Lord Cormack—on Zoom The gracious Speech contains many items of proposed legislation, but their success will depend on one overriding factor—the economy. As we slowly emerge from the pandemic, I believe there is one key challenge: the need to change the structure of our economy and to shift spending and production from low to high-return activities Last week, some headline writers became rather excited over the latest Bank of England forecast that the growth rate of the UK economy this year would be the fastest in over 70 years. But even if that forecast were to materialise, the level of GDP at the end of this year would be no higher than at the end of 2019. The level of output is far more important than is suggested by excitable comments about record rates of decline in 2020 and then record rates of recovery this year, as the noble Lord, Lord Eatwell, pointed out at the outset of this debate Although levels of GDP are more informative than growth rates, the real challenge ahead concerns the structure of the economy. We need to prepare for and support changes in the composition of total spending and output. For over a decade, an extraordinary degree of monetary stimulus has failed to generate sustained growth, not just in the United Kingdom but in the industrialised economies as a whole. Interest rates close to zero have permitted zombie companies to survive. As a result, excess capacity has built up in some sectors, while others have been held back. In the United Kingdom, the task now is to rebalance the economy away from private consumption and toward investment and exports. That will not be easy in a world still suffering from the economic consequences of the pandemic, and when sterling’s trade-weighted exchange rate is actually higher today than it was a decade ago. In addition, the proportion of our national income that we save and invest remains well below the average for other advanced economies All this was true before the arrival of Covid-19, but the pandemic has underlined the significance of changes in the structure of our economy in two ways. First, we can now see that resilience is just as important as efficiency. We learned that lesson in the banking crisis more than a decade ago, but we did not apply it to the rest of the economy. Resilience of healthcare systems, the risks posed by "just in time" delivery systems and the susceptibility of economies to border closures all suggest that economic activity will be organised differently in future Secondly, the pattern of demand for services, ranging from air travel to hospitality and digital services to entertainment, will change in ways that are simply impossible to quantify today. There will be a period of trial and error before we settle on a new pattern of spending and output. The furlough scheme was crucial to protect viable businesses and jobs in sectors vulnerable to the short-term consequences of lockdown. Retailers, restaurants and entertainment venues forced to close their doors needed fiscal support. But as restrictions are relaxed, so fiscal support should be withdrawn, and we will then discover which sectors will survive and thrive and which will not Aggregate monetary and fiscal stimulus cannot correct a structural misallocation of resources. If the gracious Speech is to achieve its objectives, a much broader range of policies will be needed in the years ahead. Some of the aspirations in the address—to promote research and development, and to support training to enhance lifetime skills—go in the right direction. However, we have some distance to travel, and it is to the structure of our economy, rather than the macroeconomic outlook, that we should pay most attention.