A longer read for the weekend: Baroness Kramer on how to kick-start economic growth

Earlier this week, Baroness (Susan) Kramer moved a debate in the House of Lords on UK economic growth. Her speech covered the  background to the UK’s current economic position as well as a number of suggestions of what the government can do to encourage growth. Below is a slightly edited version of the speech.

In 2010 the coalition inherited a badly damaged economy. The previous Government had built their boom on the back of tax revenues pumped up by false profits from the banks – a bubble that burst in 2008 – and on the back of consumer spending pumped up by excessive consumer credit and a huge bubble in asset prices, particularly house prices. I remember that in the other place my colleague Vince Cable pressed the need to deal with excessive public and private debt but was generally treated with some scorn. However, public spending spiralled out of control in around 2004. Even before the bank crisis struck, the UK had the highest budget deficit in the G7. The country had no cushion at all with which to deal with any economic shocks, and the shock came spectacularly in 2008. I think most would argue that devaluation of the pound and ongoing public overspending helped to provide an initial cushion, but by the 2010 general election the UK was on track to have the highest deficit in the G20 and Liam Byrne was not kidding when he left that note saying “There is no money left”.

However, the fundamentals were worse. According to The Plan for Growth, under various Governments the UK had “stopped saving, investing and exporting”. Savings rates had declined to some of the lowest in the developed world. Manufacturing had fallen sharply as a share of the economy. The UK’s share of the global exports market had declined, largely due to our inability to succeed in exporting to high-growth markets. Some of your Lordships have often remarked with astonishment that Belgium exports more to China than we do. Only 6.5% of our exports are to the BRIC countries. The economy had become dangerously unbalanced by both sector and geography. It was far too dependent on financial services, far too weak as regards manufacturing and economic prosperity was concentrated largely in London and the south-east.

Since then we have made some progress. The Government have taken a grip on the structural side of the deficit, using both tax increases and spending cuts. The talk is of austerity but the truth is a far more measured pace of deficit management. In some ways it suits my Conservative colleagues and the Labour opposition to overegg the reality of the rate at which the deficit is being tackled. We will not see deficit reduction in real terms until 2014 at the earliest. It is quite a measured programme and, ironically, if you were to look at the Labour programme outlined by Alistair Darling and the current programme laid out by George Osborne, you would not find a significant difference. I understand that it suits the parties to highlight the difference, but the reality is that we are moving in a fairly measured way.

It also pleases me that the burden has fallen most on the wealthiest 20%, as it should do. A good example is that while corporate tax has been cut to competitive rates, the starting point of income tax has been increased to take more than a million low earners out of tax altogether. This Government have put forward numerous schemes for growth, which include a boost to the enterprise investment scheme, enterprise zones, a doubling of apprenticeships to revive our skill base, £1 billion committed to the Youth Contract, £1.4 million invested in the regional growth fund, half a million pounds invested in the Growing Places Fund, and investment in the green investment bank that will reach £3 billion in this Parliament. The list is long and I suspect that I can rely on the Minister in his closing speech to add significantly more detail to it. The financial markets have responded and shown sufficient faith that long-term borrowing for the UK has fallen to lows unheard of in recent history. Most recently, one is looking at a rate of something between 1.5% and 1.7% for long-term borrowing.

Unemployment has been an ongoing concern, especially youth unemployment, and I suspect that Tuesday’s report of improvement, especially in the full-time jobs figures, will have pleased all noble Lords. I quote Brendan Barber of the TUC who said that it was “some long overdue good news”.

However, much more remains to be done, and it would be sad if we became in any way complacent. Whatever the outcome of the euro crisis, it will continue to be a drag on our economy for some time to come.

Like others, in responding to the issues that have been created in our economy, I have been interested to look at lessons from the 1930s. Recovery from the 1930s recession was not based on fiscal stimulus; and I say that because sometimes there is a myth that fiscal stimulus was the answer. That did not really occur until rearmament in the second half of the 1930s.

Instead, devaluation and cheap money were key to recovery. In the UK, they led to a surge in housing construction. That strikes me as a useful lesson. Fiscal discipline has allowed the Bank of England room to use monetary policy, with significant QE so far, and I hope there will be more to come.

The equivalent today of cheap money has been quantitative easing and, to some extent, credit easing. As a consequence, we have had a weak pound, which, along with devaluation, has played a significant role in boosting manufacturing and exports that have carried us through several years at least, although they may not look quite as strong as they initially did. However, that played a definite role, and I am not trying to score party-political points but get back to how we deal with the issues.

However, I am very concerned that in attempting to access opportunity for growth, small businesses have found it extremely hard to get credit and lending from the banks. It is noticeable that in 1932, the banks worked and provided that credit flow to business. I would argue that we do not have that in the same way today. Effectively, we are looking at a banking system that is broken.

Because of all that, I welcome the Chancellor’s announcement of £80 billion for the Bank of England to provide what is now called “funding for lending”. If the banks prove capable of targeting the money at sectors such as small business and at home buyers who have the capacity and the appetite to invest, I think that it can make a difference in stimulating growth. However, my fear – I have expressed this before in this House – is that the banks no longer have that kind of knowledge base, the skills or the capacity effectively to reach small business. It is a custom business and it needs to be designed by people who really understand those to whom they lend. It is not a commodity business, and the banks that we think of as high street banks are essentially in a commodity business. Therefore, I urge the Government to look at RBS and Lloyds to see whether they can push a change in culture and approach so that those mechanisms are used to get the money to the small businesses that need it.

Small businesses provide something like half our GDP, and simply accelerating the plans that they already have for expansion and investment could have a significant impact on jobs and growth. I also say to the Government that, if there is more money for tax cuts, then tax cuts that would impact on the decision of small businesses to invest would be one of the best ways to use that money.

Housing also played a key role in the 1930s and I am sure that it can do so again. Once again – I have urged this before – I ask the Government to set aside a tranche of some of the credit easing for cheap funding schemes for housing associations, especially the small associations that cannot easily go to the market. One million pounds spent on housing repairs creates some 30 jobs. That is an amazing multiplier, and that is the kind of impact that I think we need to see now.

Nearly half a million unbuilt new houses have planning permission but the developers are holding off on construction. We need to tackle this because it could obviously provide a quick win. Land banking at this time is not an appropriate strategy. If financing is the problem, then this is a chance for the Government to tackle it. I am very glad that the Chancellor has now said that he will use the national balance sheet to try to unlock money for housing, as that could make a significant difference.

Pushing the lever on infrastructure spending can also happen through local government. The Local Government Finance Bill is on its way through this House. Tax increment financing is included in the Bill but is so constrained as to be minimal. I ask the Government to look again at tax increment financing, because each local authority has much low-hanging fruit in small infrastructure projects that could unleash new opportunities for growth with a very powerful multiplier effect.

Looking at the list of speakers in this debate, I can see that many colleagues on all sides of the House will be talking about growth in particular sectors – for example, tourism and the creative industries. Again, I think that a sector-by-sector approach to stimulating growth at this point would be powerful in assisting the economy. Therefore, I shall listen to those speeches eagerly to see what lessons can be learnt.

Earlier, we had a debate on social investing, social enterprise and the voluntary sector. That is a neglected area. In a sense, it has been the poor relation so far as concerns financing and investment. Now, there is potential in the City and other places to look at social impact bonds. What is also needed is a willingness by individuals to invest socially, so that, although they want profit, they give up an element of that profit in order to meet a social objective. Tapping into that will start to deal with some of the hardest-to-meet but quickest gains that we can achieve in our economy.

At the bottom of this, growth must be sustainable. It cannot be built on the back of another public spending bubble that will simply burst, and that seems to be the challenge facing this coalition. I shall listen eagerly to all the speeches because I think that it is the responsibility not just of government but of our two Houses more broadly to come forward with ideas that can provide the growth, jobs and prosperity that the country needs. I beg to move.

The full debate can be read in Hansard here, or viewed on the BBC’s Democracy Live site here.

* Nick Thornsby is Thursday Editor of Liberal Democrat Voice and blogs here.

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12 Comments

  • Darren Nelson 24th Jun '12 - 10:32am

    “For every supermarket that opens there is a net loss of at least 200 jobs.Collecting taxes from tax avoiding supermarket/retail/wholesale giants bosses is a must,but it is also as important to create a level playing field for smaller retailers by using a monopoly tax for the company’s who delight in putting small family businesses out of business.Please watch the documentry “Walmart -The High Cost Of Low Prices”

  • Richard Dean 24th Jun '12 - 11:42am

    This does sound desperate. It seems we have already tried the solutions that worked in the 1930’s – devaluation and cheap money – and they don’t seem to have worked. Does that suggest that the problem now is not the same as then? My particular bank is very keen to lend my business money, but I don’t want to borrow until I can see a way of payng the loan back.

  • Richard Dean 24th Jun '12 - 1:02pm

    It’s a bit worrying that the Darling and Osborne plans do not have any”significant difference”. I wonder whether both Chancellors might be making the same mistakes? Maybe the government itself might be the ones who are misunderstanding SME’s. Sure we might provide half of GDP, but do we have the ability to drive a recovery?

    Perhaps not at all. In cases like mine, an SME sells to larger businesses, and no matter how much marketing we do it is the medium-term strategic decisions made by larger businesses that determine whether we can expand or not. For SME’s selling to SME’s it must be worse, since no single SME can have much idea of what all the others in their potential customer base plan to do. And SME’s selling direct to the public are perhaps in a similar situation of relative powerlessness to influence the market.

    So my tentative conclusion is that the government may indeed have it wrong. Supporting small businesses is fine, do do that! But the focus for recovery should be at industry level, or at large-business level. Getting larger businesses to make the strategic decisions that allow smaller suppliers and service companies to expand.

  • Bill le Breton 24th Jun '12 - 1:45pm

    Good day Richard! We have not tried ‘cheap money’. Low nominal interest rates do not mean ‘cheap money’, they mean monetary policy is too tight.

    Despite inflation falling fast and the forecast for medium term inflation well under the 2% target, the Bank of England’s Monetary Policy Committee has not taken the opportunity to loosen monetary policy by cutting the rate to .25% or to engage in further QE.

    In fact at the last meeting of the MPC the Governor of the Bank of England was outvoted when he supported further QE. Yes, our Governor could not get through further easing.

    Susan’s speech is all well and good and at least sees the importance of monetary policy, but when our Coalition Government continues to support ‘tight’ money (the 2% inflation target) and then allows its Governor to be out voted, one wonders why there was no reference to this in her speech.

    We want truly looser monetary policy urgently. Either raise the target to 4% or better still introduce an NGDP growth target. And sack for incompetence the five who voted to keep policy tight.

  • Richard Dean 24th Jun '12 - 2:15pm

    Good day to you Bill! It seems that cheap money may have a few problems of its own. Here is something from http://www.investopedia.com/terms/c/cheap-money.asp#axzz1yiR93wYV. I wonder of the examples suggest that the givernment is presently gettingt cheap money inn terms of debt, and so ought to borrow more?

    What is Cheap Money?

    A loan or credit with a low interest rate, or the setting of low interest rates by a central bank like the Federal Reserve. Cheap money is good for borrowers, but bad for investors, who will see the same low interest rates on investments like savings accounts, money market funds, CDs and bonds. Cheap money can have detrimental economic consequences as borrowers take on excessive leverage.

    When money is cheap, it is a good time for borrowers to take on new debt or consolidate existing debts. However, borrowing more than one can afford to repay was one of the primary catalysts of the 2008 recession. Here are a few examples of cheap money:

    -A credit card with a 0% introductory APR for 12 months
    -A 30-year fixed-rate mortgage at 4% inter
    -An auto loan at 0.5% interest

  • Richard Dean 24th Jun '12 - 2:26pm

    Here are a couple of other suggestions..

    1. Stop creating new businesses that compete with mine. They don’t expand the industry sector, they just make everyone in it poorer

    2. Give the MPC a target of achieving, through monetary policy, a certain low level of unemployment. What they then have to do is find out whether increasing or decreasing the money supply increases or decreases employment, and act on that basis.

  • Bill le Breton 24th Jun '12 - 7:42pm

    Tim, the result of the present ‘set’ for monetary policy will be deflation. In a deflationary climate why buy today when tomorrow everything will be cheaper? Why hire today when tomorrow wages will be lower? Why invest today when a) the capital good will be cheaper tomorrow and b) the customer is postponing his or her purchases anyway.

    Because my pound will buy more tomorrow, I’ll hang on to it – its purchasing power is rising. The demand for money is therefore rising. The velocity of exchange is falling. Aggregate demand is falling.

    As Vince Cable has recently argued, it requires an abrupt change of policy to change this mind set. Something that shocks everyone into believing that tomorrow prices will be higher, purchasing power of my pound lower. I must do something with that pound – spend it or, if I am a firm, invest it.

    If as apart of that abrupt change you advocate public investment, then, that would certainly help – especially if it was part of some initiative carefully communicated.

    (But everyone else, don’t argue that monetary policy is presently lose – as Tim suggests, it is tight to bear down on inflation.)

  • david thorpe 25th Jun '12 - 11:55am

    while much of what susan kramer says is excellent and on the money, I disagree with her about the need for a cheap money policy, cheap money policies fix credit crucnhes, they fo not fix recessions which arrive as a result of credit crucnhes…

  • Bill le Breton 25th Jun '12 - 9:21pm

    Tim, hope you’re still looking in on this. Yes we shall have to disagree. But the reason I mentioned your comment was that at least you appear to recognize that monetary policy is set to bear down on inflation.

    Others argue that it is loose to stimulate growth.

    I may no t be able to persuade you because possibly you consider that a muted recovery is worth it in order to keep inflation under control. In this position, I take it, you would also see any fiscal stimulus as inflationary?

    Personally I don’t see why 2% is a magic number above which inflationary pressures begin to get out of control. Wages are not rising. As it is, the hawks on the MPC seem to be aiming for sub1.5% inflation in th medium term. I think there is a far greater danger that this leads to deflation – a far more worrying fate.

    For those who do want growth, the first task is to change the MPC’s target (and possobly its personel).

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