George Osborne has confidence in Plan C – but do the banks?

John McFall’s article for the Guardian. Read this on the Guardian website.

George Osborne gave his speech at the Mansion House

The magnificent setting of Mansion House is usually a place for gentle self-congratulation from the chancellor of the day on the economic achievements of the government and the financial industry. With the global financial crisis, that hasn’t been the case for the past few years. But on Thursday evening, Mansion House took a further dramatic twist with the pronouncements from the chancellor and the governor of the Bank of England.

Gone was Plan A, the last rites had been read for Project Merlin, and the modest reforms proposed by Sir John Vickers to make banks safer were severely diluted, to the author’s dismay. With what the governor called “dark clouds” on the horizon from Europe and an “ugly picture” in sight for the British economy, the UK’s banks were given their own cash machine on Threadneedle Street with an exclusive and private pin number.

Why this latest panic move by the government? Depressingly, the UK shares with Italy, alone among the Eurozone countries, the distinction of being in recession. With no growth prospects, banks and businesses holding on to their cash, and a million young people out of work, education or training, the government has had to ditch its Plan A for austerity. It was blindingly obvious from day one that no political party could succeed with the “austerity alone” slogan. Inevitably, death follows. The only way that can be avoided is by providing people with hope.

So now, with certainty in society and the economy waning, the government has drawn up a hasty and incomplete Plan C for confidence. It is centred on one idea: that by unshackling the banks, they will surge forward with new lending, spurring the economy on to growth.

If the long-term stability of the banking system is to be secured, the architecture needs to be properly constructed. That was a task that the chancellor gave to Sir John Vickers’ independent commission on banking.

But on Thursday evening the chancellor announced that these modest proposals to ring-fence and stabilise banks would be watered down even further. The proposed minimum level of equity capital for banks was reduced from just over 4%, as recommended by Sir John, to 3%. This may seem an innocuous change but as Martin Wolf, a member of the Vickers commission, has written, this “leaves these institutions horribly undercapitalised”, and means that the taxpayer is still on the hook in the event of a major failure. Excessive leverage was at the centre of the 2007 global financial debacle, and that is why Wolf is sensibly arguing for 10% as the ultimate equity requirement.

Meanwhile, the Bank of England will provide a discreet new credit facility, permitting the banks to withdraw up to £5bn a month on the basis of lower-quality assets than were previously accepted. In addition, a new “funding for lending” scheme will provide an unspecified level of cash for banks to lend to their customers (a vague target of £80bn has been mentioned).

So the focus of the authorities has clearly shifted from the long-term stability of the system to the need to grant the banks immediate room to begin lending. But will this latest strategy work? Have the banks been holding on to their cash and refusing to lend? Or have businesses and others so little confidence in the future of the economy that they are unwilling to borrow any money?

Hector Sants, the departing chief executive of the Financial Services Authority, has said that banks are hoarding cash rather than lending it, such is their lack of confidence in the economy. The banks retort that there is little demand for more credit from households or businesses, again as a result of their lack of confidence. The Treasury and the Bank of England wish the banks to retain the risks of any lending to the real economy, so given UK banks’ track record of holding on to this money, will it get to those who most need it? No doubt the banks will be grateful to the Bank of England for the extra wriggle-room they have been given, but there will likely be no increase in lending unless confidence can be improved.

George Osborne has still to address the growth problem. He will have to come forward with more proposals in the next month or so to stimulate growth. If he is to succeed, he will need to heed the comments of the IMF’s Christine Lagarde that if growth fails to pick up in the UK, the government will have to consider “policies to bolster demand before low growth becomes entrenched”. If he is sensible, he will start with policies that address youth unemployment, investment in infrastructure and temporary tax cuts. This would demonstrate that the government was at last beginning to “get it”.

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Speech: the Government must tackle youth unemployment

Lord McFall’s speech on youth unemployment in the House of Lords.
Read this speech in Hansard, Parliament’s official publication.

John McFall, Lord McFall of Alcluith

My Lords, I am privileged to participate in this debate. I congratulate my noble friend Lord Adonis on his compelling and lucid exposition of the problem and the way forward. As my noble friend Lord Giddens said, this is a complex problem, and we have to see it in the wider context of inequality and global unemployment. According to ILO figures, there are 75 million unemployed people aged between 18 and 25. The first thing the Government should do is to look again at growth. That has been missing from this agenda, and it is very important that we look at it.

There have been recessions in the 1980s, the 1990s and now. After each recession, youth unemployment went up, but since this recession youth unemployment-those without work and not in education-has increased by 232,000. Mention has been made of the Labour Government’s target to eliminate child poverty by 2020. That was not fully achieved, but the figures today show that 900,000 young people have been taken out of poverty. That is a cause for some celebration, but there is much to do. I suggest that the Government copy the Labour Government’s 2020 target for child poverty by having a similar target for youth unemployment. The first priority should be to reduce it to pre-recession levels using jobcentres. The Labour Government used jobcentres, when they were revamped, very well to get people into employment. Establishing a youth employment and skills service would be very important in that area.

The Government need to be mindful of the welfare cuts of £2 billion that took place on Good Friday this year. There has been talk of an extra £10 billion of welfare cuts. It is very important that the Minister says that that will not happen, because the cuts that have taken place have already affected low-income families and people looking for jobs. Today’s Daily Telegraph reports the Secretary of State for Work and Pensions saying: “Get a job, IDS tells parents on dole; Working at least 35 hours a week is only way to lift children out of poverty”. We agree, so we are looking for government proposals to see how that is done. The overriding message today has to be that it is not the private sector that is going to do this. We are facing massive deleveraging. As the noble Lord, Lord Giddens, said, this recession is going to take many years to sort out. We are talking about a decade or more, so a government initiative and an active welfare state are very important.

The Government could illustrate their commitment on that by ensuring that each government department-indeed, each government Minister-has a number of such young people. If the Prime Minister were seen coming out of Downing Street into his car with a couple of young unemployed people behind him, it would send a powerful visual message that the Government were taking this issue very seriously. A Minister for Young People, particularly unemployed young people, is very important.

Education has been mentioned. Education is the way forward. I left school at 15 or 16. My second chance came by going back to night school, then to further education and then to university. For me, that was the pathway forward. It was my salvation. We cannot emphasise enough the need for education. The suggestions that have been made to the Minister today should be taken very seriously. We should use further education colleges, particularly in the technical skills areas and local areas, to foster that extra employment for young people. Above all, the economy needs to be rebalanced. There is a growing north-south divide. I know that from representing an area where employment has consistently been relatively high. I suggest that there are still lessons to be learnt from the Mittelstand in Germany and from the Fraunhofer Institute about how they integrate manufacturing and education. A lot could be made of that issue.

We are establishing a forgotten and invisible generation, particularly those without skills or qualifications. I saw that when I was a deputy head teacher in the 1970s in Glasgow. I was put in charge of a truancy unit, as it was called, for children who did not come to school. They were demotivated at such an early age. They were alienated, and it was very difficult to get them to engage. The message is that we should not give up. We need a more intensive approach in education. My noble friend Lord Adonis made a number of very valuable suggestions on education, which I think the Minister has taken on.

As a former teacher, I have also seen the long-term effects when young people leave school alienated and disillusioned. It has been my sad experience to meet some former pupils 10 or more years later. They have a partner or a wife and children, but when you ask them about their job, they say they have never had one. Between 18 and 25 are the precious six or seven years. Experience and statistics show that if we do not get young people at that time, we have possibly lost them for life. That is the message that we have to address today. The overriding question is how we address the insecurity in society. As the right reverend Prelate said, our generation feels that the next generation will not have the same chances. I suggest that economic progress and social stability go hand in hand and, if we do not tackle youth unemployment with vigour, we are destroying the future not only for young people in this generation but for all in society.

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Speech: Improving the culture of finance

Lord McFall’s speech on the second reading of the Financial Services Bill in the House of Lords.
Read this in Hansard, Parliament’s official publication.

John McFall, Lord McFall of Alcluith, speaks in the House of Lords Chamber

My Lords, I am delighted to participate in this debate and to welcome the noble Lord, Lord O’Donnell, to this Chamber. He is an individual with whom I have had many formal and informal dealings. He is a person of the highest integrity, respectful of every individual he meets, irrespective of status, and an exemplary model of a civil servant. It is a model that the Government should ensure they get more of in the years to come as the complexity of the financial services dawns on us. So I welcome the noble Lord, Lord O’Donnell, to this Chamber.

I bring to your Lordships’ attention my entry in the Register of Members’ Interests. Like the noble Baroness, Lady Wheatcroft, I was delighted to be a member of the Joint Committee on the draft Financial Services Bill. A number of areas arose during that committee: first, architecture; secondly, complexity; thirdly, accountability; fourthly, ring-fencing; and, fifthly, and most importantly-a phrase to which we all signed up-that to be successful the reforms will have to change the regulatory culture and philosophy. Those should be the guiding principles.

We all agreed that architecture is of secondary importance. The issues that matter are culture, conduct and communication. These issues were key to what went wrong with the tripartite authority. Alastair Darling’s devastating evidence to the Joint Committee brought that out.

On the issue of complexity, we should note that we are moving from a tripartite to a quadripartite system involving Her Majesty’s Treasury, the Monetary Policy Committee, the Financial Policy Committee and the Prudential Regulation Authority, not to mention the Financial Conduct Authority. We have more interfaces, and therefore a higher degree of complexity. It was the interfaces and the information that fell down between them on the last occasion that caused the problem.

The question that bedevilled the tripartite authority when it came before the then Treasury Committee in the House of Commons was very simple: who is in charge? Everyone said that they did their job properly. However, we had to face one of our biggest crises with a vacuum in the making and no clarity for the Chancellor. The Minister rather boldly said at the Dispatch Box that never again would we ask who was in charge. I suggest that those words could come back to haunt him in years to come if the Government do not get the correct legislation.

As other noble Lords have said, at present we have opaque decision-making structures and still require clarity and explicit guidance and information, either through memorandums of understanding or whatever, on the view of the governor and his key deputies. We should remember that on many occasions the governor and his deputies will have contradictory views as a result of the responsibilities they are given and that the Chancellor must have clarity from them. There has to be no hiding place so that we can answer the question about who is in charge, but at present we cannot do that.

I mentioned the issue of regulated culture and philosophy. Business models are the key to understanding the issues within a company, from the policies followed to the individual behaviour of the executives. Auditors are the key to this. A number of years ago I asked auditors what the point of an audit was. It is presently a backward look at accounts. Auditors are doing everything that is required but not much of what is expected. This was illustrated by Northern Rock. In the first six months of 2007, this small building society was responsible for 20 per cent of all new mortgages in the United Kingdom. The chair of the Audit Committee, and not least the auditors, should have asked why the company was doing so well compared to others. However, that question was not asked.

Auditors therefore need to give a realistic view of the state of a company, taking into consideration the present and the possible future risks. I suggest that auditors should report to the Financial Policy Committee so that it understands both the microeconomic and the company landscape environments in an area of no more sensitivity than risk.
At the moment, risk is a black box. This was illustrated in the comments made by Professor John Kay and Professor Charles Goodhart to the Treasury Committee a number of years ago. When asked whether we could evaluate risk, Professor Goodhart said very clearly, “No”. Professor John Kay said, “I have been teaching at Oxford University for 25 years and I have ripped up my notes on risk”. So risk is a black box, and more regulations and rules alone are not the way forward.

We have to recognise that no regulator in the world spotted the problem. The Governor of the Bank of England said that the regulators were like locusts in Citibank. JPMorgan Chase is the latest example in the City, with the “London Whale” and a loss of £2 billion. Ten regulators were sitting in JPMorgan Chase when it happened. The question that arises out of that is: why did Jamie Dimon, someone supposedly alert and cute, need a call from Bloomberg to tell him that there was a £2 billion loss to his company? Jamie Dimon retorted by saying that it was a “tempest in a tea pot”, but if you put your arm right next to a tea pot, you can get a really bad burn. Maybe he did not realise that.

The situation of JPMorgan Chase and others reflects a systemic breakdown in management and risk control systems. Incidentally, the chief risk officer receives $14 million a year before foreign excises, so I would have thought that the risk officer could take quite a bit of a risk if $14 million is going into a current account as a result. I suggest that the Treasury Committee or other committees of the House should invite Jamie Dimon to explore the concept of risk and ask this question: are the largest banks still too big and complex to be managed safely? Are we now seeing “too big to fail” being followed by “too big to behave” in companies such as this one?

The way forward lies in good corporate governance to tackle these deep-seated problems, not only changing the way people behave but the way they think. We need to promote values and a culture that drives people to do the right thing even when no one-that is, the regulator-is looking. Culture is behaviour and ethics is resolving conflicts of interest. That is what the Government should be promoting. The motto of the City of London is, “My word is my bond”. In a recent survey, over 80% of people working in the City did not realise that. In other words, there is a big repair job to be done in order to restore trust.

I am delighted to see that the departing chief executive of the Financial Services Authority devoted his last speech to culture. That is a small but positive step. If we focus more on these issues, we can hope eventually to realise a market system that is fair to both consumers and businesses, where risk is rewarded, failure punished, and growth and employment are paramount.

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Speech: Why was there no plan for growth in the Queen’s Speech?

Lord McFall’s speech on the Queen’s Speech in the House of Lords.
Read this in Hansard, Parliament’s official publication.

John McFall, Lord McFall of Alcluith, speaks in the House of Lords Chamber

My Lords, I am very pleased to participate in this debate. At the beginning of the day, the Minister said that the debate would be about the kind of society that we want. With that in mind, we should focus on things like character, competence, cuts and confidence, the first two relating to the personalities and actions of the Prime Minister and the Chancellor and the latter two relating to the well-being of society as a result of the Government’s policies. We have seen, even today, that austerity alone has been discredited in Europe and the UK. As a result, we need a new vision and a narrative that have been missing to date. I suggest that it is on that acid test that the Government’s character and competence will be measured.

The truth that is catching up with the Prime Minister and the Chancellor is that the problems in the UK were not exclusively home-made. The proposition that we were like Greece is absurd. The reality is that while the Chancellor has tried to peddle the UK as having been more like Greece, he has made us more like Spain in the process. In 2009-10, growth as a result of Alastair Darling’s stimulus was 3.2% while Spain’s was zero. Now, after six quarters of UK negative growth, we have 0.2% negative growth compared with Spain’s growth of plus 2.4%. What is missing from the lexicon is the “g word”-growth. There were hints before the Queen’s Speech that this would be addressed, but on the day after it the front page of the Telegraph said, in bold:

“Why was there no plan for growth?”,

while the Sun editorial said:

“Plans to boost the economy amounted to tinkering rather than a full-blooded assault on unemployment”.

Those are two comments with which I fully agree.

The Chancellor has to show his character here. Let us forget about him admitting that his strategy is wrong; but he has to address the concept of growth. Without that, confidence in the country is seeping away day by day. Justin King, the chief executive of Sainsbury’s and a member of the Prime Minister’s business advisory group, has said that he has not seen a consistent pursuit of a clear policy. The consequences will be greater inequality, a greater north/south divide, increasing welfare dependence, increasing unemployment and ambition and social mobility checked at source.

On the issue of cuts, the IFS has said that the real-terms spending cuts of £100 billion targeted between April 2011 and March 2017 will see £33 billion of them falling in the final two years of that period. So in 2015, an election year, sizeable cuts will still have to be delivered. If you want to see how austerity measures are killing confidence, look at the company sector, which took £72 billion out of the economy in 2010 and £80 billion last year. Non-financial companies increased their holdings of currency in bank deposits by £48 billion in 2010 and £62 billion in 2011. That takes the total to £754 billion sitting in companies’ balance sheets doing nothing-a staggering 50% of UK GDP-while we have youth unemployment of 1 million. My experience as a teacher in Glasgow in the 1980s was that these young people with no chance end up in a lifetime of penury, social inability and the likelihood of mental health, alcohol and drug problems, and the result is that they have an increasing reliance on the state rather than less reliance on the state.

That is why I welcomed the coalition’s commitment that it would adopt the Labour Government’s 2020 target to eliminate child poverty. However, the IFS is saying at the moment that the Government’s spending plans are putting into reverse the progress that had been made no that in the previous few years. I suggest to this House that an increase in child poverty is not an example of the broader shoulders taking the greatest burden. The Government promised that the poorest 10% would lose the least, but the reality is that the poorest 10% are losing more than anyone except the richest 10%.

I have two suggestions for the Government. The first is to postpone the change to the hours rule for couples claiming working tax credit. That was predicated on OBR predictions in 2010 that the economy would swing back to strong growth. That is not happening, and as a result 200,000 low-income families will be affected by this. It will dramatically worsen child poverty in its extent and severity and will create a situation where people will be better off leaving their jobs, to the detriment of the economy. I suggest that the Government’s slogan of “Making work pay” has a hollow ring.

The second issue is rebalancing the ratio of spending cuts to tax rises. The Government have said that that ratio is 4:1. That will dramatically change the situation against people on low incomes. The Conservatives’ approach during the recession of the 1990s was to adopt a ratio of 1:1. It is for this Government to realise that 4:1 guarantees that the distribution of the burden will be skewed towards those at the lower end of the income distribution scale.

The electorate are looking for authenticity and empathy, and those have been missing from the debate just now. If we are looking at what type of society we want, there are a number of fundamental questions that should guide us. Are the increasingly high levels of economic inequality in society a problem? Should the Government be concerned at the high social and economic cost? The Joseph Rowntree Foundation says that child poverty is costing the UK £25 billion per annum. What action should we take to reverse the scandalous situation where the poorest children are likely to live for 10 years less than the more wealthy? Do we have an obligation to tackle this? We do, but it can be done only if the Government demonstrate their character and competence in these bleak times.

The death slogan “Austerity alone” needs discarding. Confidence needs to be restored in order to give individuals and communities hope for the future. Only by doing that will the Government demonstrate the authenticity and empathy suggested by the slogan, “We’re all in this together”. Otherwise it will be seen merely as an empty gesture.

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Lord McFall launches new website

Lord McFall has launched his new website at johnmcfall.com

John McFall, the Lord McFall of Alcluith and the former Chairman of the House of Commons Treasury Committe, has launched this new website at www.johnmcfall.com. The website aims help people learn more about Lord McFall’s work both within and outside the House of Lords.

This new website contains details about Lord McFall, and about the work he does on behalf of the public on the economy, growth and jobs, the future of banking, pensions, financial inclusion and international development.

Lord McFall said,

“In my work as a Peer I continue to focus on the issues affecting the public and to try to enhance links between the public, the authorities and industry. I therefore hope this website is informative and useful for those who wish to know more about my work.”

Lord McFall was made a Life Peer and took his seat in the House of Lords in 2010, after 23 years as the Member of Parliament for Dumbarton and later West Dunbartonshire.

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John McFall: the public need more information on the debate on Scotland’s future

John McFall, Lord McFall of Alcluith, speaks in the House of Lords Chamber

John McFall, Lord McFall of Alcluith, has said that the public is not currently receiving all the information it needs on the debate on Scotland’s future.

Speaking in the House of Lords debate on the Scotland Bill, the former Chairman of the Treasury Committee and MP for West Dunbartonshire called for the temperature of the Scotland debate to be “lowered” and said it was incumbent on the UK Government to ensure that all the necessary information reach the public debate.

He said:

“My Lords … I would say that the debate in Scotland is currently at a high temperature and needs to be lowered so that people can digest the information.

“If one looks at the Calman report, as I have done, and at the reports of the Scottish Affairs Select Committee in the House of Commons-which has had a plethora of witnesses-one will find many profound issues raised which have not yet reached the public level.

“It is important, and incumbent on the UK Government, to ensure that that information is put out to the public, for example in the form of a consultation paper. The UK Government need to engage. There cannot be a passive stance to this. I would leave the Minister with those thoughts as he progresses with the Bill.”

Click here to read Lord McFall’s intervention in Parliament’s official publication, Hansard.

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Lord McFall: Scottish Government is “having its cake and eating it” on university funding

Lord McFall said that a "dishonest conversation" had taken place on the university system in Scotland

John McFall, Lord McFall of Alcluith, has said in the House of Lords that the Scottish Government is “having its cake and eating it” on university funding, and that education must be a “UK-wide initiative.”

Speaking in the House of Lords debate on the Scotland Bill, Lord McFall said that the high level of applications from English students to study at Scottish universities, coupled with the Scottish Government’s cuts in funding to those universities, could “cause chaos” next year.

Lord McFall said that a “dishonest conversation” had taken place in Scotland on the university system and that the integrity of the UK system must be upheld.

He said,

“My Lords, … as Minister for Education in Northern Ireland, I was very aware of the number of Northern Ireland students who went to Scotland for their education and, indeed, stayed in Scotland or in the UK generally as a result. I was left with the lasting impression that education is a UK-wide initiative. In a globalised world where the transfer of wealth and economic power is going from west to east, we have to keep the integrity of the UK education system, but I fear that we are losing it with the current situation in Scotland.

“The noble Lord, Lord Vallance, and Scottish universities have made the point about the stability of the system. In particular, cross-border student flow is given at 24,000 students from England applying to Scottish universities, which could cause chaos for 2013. That is a legitimate argument, but the main issue here is the actions of the Scottish Funding Council, which in a letter in December last year said that £27.8 million was going to be taken off Scottish universities. In the next four years, the sum will be more than £100 million. That is not a capricious act on the part of the Scottish Funding Council; it is because the Scottish Government have stated that that is the case. That will decrease the teaching grants as well as the quality of student experience at Scottish universities.

“We are facing a crisis at the present time and it is appropriate for us to debate this. … Frankly, the Scottish Government are having their cake and eating it. This amendment should be saying to them: “You cannot have your cake and eat it. If you want to provide quality education, then you have to be honest about it”. A dishonest conversation has taken place in Scotland and there is a narrow, introspective approach to education where there should be an inclusive, global approach. If we are making a plea for anything tonight, it is to be honest in our debate and ensure that we will look at the UK as a whole and keep the integrity of the UK education system, so that we have a more prosperous country with increased skills which can accept and face up to the challenges of globalisation in the years ahead. We should not run backwards, as, sadly, I think is happening in Scotland at the moment.”

Click here to read Lord McFall’s intervention in the UK Parliament’s official publication, Hansard.

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Budget 2012: More ‘Robbing Who?’ than Robin Hood

Lord McFall’s article for the Labour Lords website. Click here to read this article on Labour Lords.

John McFall, Lord McFall of Alcluith

The power and influence of Twitter was in evidence minutes after the Chancellor sat down yesterday when he presented his budget to parliament. It was there that George Osborne’s carefully crafted and supposedly voter friendly budget was labelled a “Granny Tax” one.

For weeks the Tory / Lib Dem partners had publically trawled over every dot and comma of the budget’s contents. So there were no surprises – save one.

When Osborne lost eye contact with the House, head bowed to the Despatch Box and sotto voce uttered that he was simplifying the age related allowances for pensioner on the basis that many didn’t understand them. Well they certainly do now.

This is a budget which has raised £4bn for the government with £1.5bn extracted from pensioners – almost half of the total. As a consequence this Granny Tax storm will take some time to abate.

This budget is big on politics and small on economics.

Being fiscally neutral there was little he could play with – hence the political emphasis where Osborne set about positioning himself as the darling of the Tory Right and at the expense of Nick Clegg who inexplicably went along with the 50p tax abolition. But what has it done for jobs and growth? Precious little.

For all the emphasis on business innovation and investment, the OBR has substantially pruned its forecasts for growth in 2012, following very weak figures for the final quarter of 2011. Even the corporation tax reduction has been described as a zero sum game where the interaction with personal income tax will encourage corporations to retain rather than invest earnings. Thus it will exacerbate the existing black hole with less investment.

Bad news indeed for the 1 million young unemployed with little prospects and an absence of budgetary policy initiatives to assist them into work. Economically, the Chancellor is an onlooker waiting and hoping for good times to come when they are praying for a balanced budget in 2017. Two years into a new parliament and well behind their 2015 target seems it’s a case of more borrowing – £157m and more praying that they reach the sunny uplands.

And all of this is overshadowed by the issue of fairness. Are we all in this together? The omens of this Tory mantra are not good. Whilst 14,000 people earning £1m are receiving a tax cut of over £40,000 each year, a family with children earning just £20,000 loses around £700 a year from this April when one includes the VAT rise alongside the other cuts.

It is without doubt that the winners include rich people who can save lots of money whilst the vast majority of taxpayers gain £14 a month from the LibDems inspired tax threshold initiative. Nick Clegg called it a Robin Hood budget – but far from being the poor benefiting from the rich, it is the other way round.

‘Robbing who?’ will be the question addressed, and many poorer and aspiring citizens will realise that it was them that were well and truly mugged in this budget.

Click here to read this article on Labour Lords.

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Lord McFall: it is not too late to consider a British investment bank

John McFall, Lord McFall of Alcluith, speaks on Budget 2012 in the House of Lords Chamber

Lord McFall, former Chairman of the Treasury Committee in the House of Commons, has called on the Government to think again about the idea of a British investment bank, as UK banks continue to fail to lend to small and medium-sized businesses.

Speaking in the House of Lords debate on the Chancellor’s 2012 Budget, John McFall said that “there is stronger case for fiscal stimulus this year than there was last year”, given the lack of economic growth, the lack of prospects for the million unemployed young people in the country, and the widening north-south divide. He noted that two members of the Bank of England’s Monetary Policy Committee, David Miles and Adam Posen, had called for alternative ways for small businesses to access finance, given the continued reluctance of UK banks to lend to them.

He said,

“I would have liked to see the Government ask in the Budget, “How can we create our own Mittelstand in this country, where we can support small businesses, rebalance our economy and take a renewed, fresh approach to manufacturing?”. I suggest to the Minister that it is not too late to consider the concept of a British investment bank, espoused by the noble Lord, Lord Skidelsky, and others, because banks do not lend to small and medium-sized enterprises because there is not much money in it for them. That is the basic issue that we must face.”

Click here to read Lord McFall’s full speech on Budget 2012.

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Lord McFall’s speech on Budget 2012

Lord McFall’s speech in the House of Lords debate on the Budget, 22nd March 2012.
Read this speech in Hansard, the official publication of the UK Parliament.

My Lords, I am delighted to participate in this debate and particularly to follow the noble Lord, Lord Heseltine, whose civic award this week from Liverpool was richly deserved.

The power and influence of the social media in the form of Twitter were in evidence immediately after the Budget. Within minutes of the Chancellor sitting down after a carefully crafted and supposedly voter-friendly speech, it was labelled a “granny tax” Budget. The Chancellor’s tactical nous, for which he is supposedly famous, has let him down, and I suggest that there is a reason for that; every dot and comma of this Budget was publicly debated with his coalition partners. There were no surprises, save one.

As a keen observer of Chancellors and Budgets, I saw the Chancellor lose eye contact with his audience, bow his head to the Dispatch Box and say sotto voce that he was simplifying the system for age-related allowances for pensioners on the basis that they did not understand it. I along with others said, “Wow”. I suggest to your Lordships that pensioners certainly do understand the system now. Incidentally, the NAO last examined it on behalf of the Government in 2009, so the Government did not base their calculations on real-time information. This is a Budget that raises £4 billion, with £1.5 billion coming from pensioners. Almost half the revenue is coming from pensioners. I suggest that the “granny tax” storm will take some time to abate.

The Budget was big on politics but small on economics, being fiscally neutral. According to the Government, the extra £150 million of borrowing incurred on their watch left them with no room for manoeuvre: hence the Budget’s political emphasis, with the Chancellor eyeing the leadership and being the darling of the right wing of the Tory party at the expense of Nick Clegg-goodness knows why he went along with it.

Lords spiritual in this House regularly emphasise the concepts of faith, hope and charity. Let us look at those concepts in the context of the Budget. On faith, for all the emphasis on business innovation and investment, the OBR has drastically pruned its forecast for growth for 2012 following very weak figures for the last quarter of 2011. With recovery predicted at 0.8 per cent, the economy is not far from stagnation, so the Chancellor really is left on the sidelines, fingers crossed, and praying for sunny uplands in 2017. He has reduced corporation tax, which on the surface is a good initiative, but as Martin Wolf and others have described it in today’s Financial Times, this could be a zero-sum game, with global competition ensuring a race to the bottom. The interaction with personal income tax would encourage corporate retentions. We might therefore be exacerbating an investment black hole, with corporations hanging on to their money. The big issue is how we ensure confidence among those corporations to invest.

On hope, the issue of jobs and growth has been mentioned, but the Chancellor barely used the word “growth”, which I think was banned in his coverage of the Budget yesterday. However, what are we doing about the 1 million young people who are unemployed to give them any hope for the future? What are we doing about the north-south divide? I applaud the noble Lord, Lord Heseltine, for engaging in that, because instead of coherence between north and south, there is a divergence that will be to the detriment of the country. The prospects for the country will be diminished.

There is stronger case for fiscal stimulus this year than there was last year. Two members of the MPC, David Miles and Adam Posen, are calling for that-indeed, Adam Posen has long been on record as saying that the country needs a spare tyre for lending to small and medium-sized enterprises. I would have liked to see the Government ask in the Budget, “How can we create our own Mittelstand in this country, where we can support small businesses, rebalance our economy and take a renewed, fresh approach to manufacturing?”. I suggest to the Minister that it is not too late to consider the concept of a British investment bank, espoused by the noble Lord, Lord Skidelsky, and others, because banks do not lend to small and medium-sized enterprises because there is not much money in it for them. That is the basic issue that we must face. Therefore, the Government have a job to do to stimulate the economy in that area. We also have the tyranny of the PSBR, which I have cried out for Chancellors to sort out in the past. Why do we not do that, so that we could look at our economy afresh and ensure that it had a social dimension as well as a strict economic one?

On charity, the Budget will be judged on the fairness agenda. The esteemed philosopher, Amartya Sen, came to a Treasury Committee hearing quite a number of years ago and made the point that there is a connection between effort and reward, and that people judge fairness on the basis of that connection. I put it to this House that, while 14,000 people earning £1 million per annum will receive a tax cut of more than £40,000 each year, a family with children earning £20,000 will lose around £700 when the cuts and the VAT increase are taken into consideration. Undoubtedly, the winners from the Budget include the rich people, who can save lots of money, while the vast majority of taxpayers are given £14 a month as a result of the Liberal Democrat-inspired tax threshold initiative. The leader of the Liberal Democrats, Nick Clegg, has called this a Robin Hood Budget. However, far from the poor benefiting, the rich will benefit; it is the opposite way round. I suggest to noble Lords that we look at it as a Robbing Who? Budget. That will be the question reverberating around the country over the coming months.

Aspiring citizens have been hit as well. At a stroke, the Chancellor has just created an extra 300,000 new 40p higher-rate taxpayers, which has gone unnoticed, because he has reduced the tax threshold to £41,450. A family with a few children, having an income at that level, are now in the higher tax band. That will have a very serious effect on family finances. It will be the less well off, the middle-income and the aspiring and upwardly mobile citizens who in this Budget will be well and truly mugged.

There was reference in the past to Mondeo man and woman. What price Mondeo man and woman now? I suggest that with every passing day, the chances of Mondeo man and woman thumbing a lift rather than owning the vehicle will increase.

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