Infrastructure Bill Speech
| Thursday, October 25, 2012
My Lords, as someone who has never been averse to having a go at the Chancellor of the Exchequer, I start by saying how idiotic and puerile it is for newspapers to make a lead story of which ticket he used for his journey from Chester to London. It is George Osborne's stewardship of the economy, not his travel arrangements, which deserves censure. However, we have an infantile press.
Three big mistakes stick out over the past two and a half years. The first was the belief that cutting down government spending would automatically produce recovery. I know the Government now claim that they never believed anything so simple or idiotic, but they did, and there is plenty of evidence to prove it. Austerity is not a recovery policy.
The second has been the Chancellor's failure to distinguish between current and capital spending. This has made the deficit seem more dangerous than it was. The prime example of this blind spot was the £50 billion cut in capital spending. The consequences of this for the construction industry and for house, transport, education and hospital building have been devastating.
The third was the Chancellor's belief that without a severe fiscal contraction Britain would go the way of Greece: that is, interest rates would go through the roof. This was doubly wrong. First, with an independent central bank able to buy government debt in whatever quantities were needed there was never any chance of gilt yields rising to the levels experienced by Greece, Portugal, Ireland and Spain. Secondly, and perhaps even more importantly, a reduction in the cost of government borrowing is no guarantee of a reduction in the cost of commercial loans sufficient to offset the collapse of the private demand for loans.
All three mistakes were interrelated parts of the wrong theory of the economy. Anyone who is interested in economics must start the analysis there. I am not going to go into it, but it is well known to those who are economically literate. The results have been zero growth since George Osborne took office. That was entirely predictable and was predicted by some of us. I have been saying for two and a half years-and I am not alone-that austerity would not produce growth and it has not produced growth. Now the international agencies are saying the same thing. Slowly but surely, the Government are being driven to plan B, though the Prime Minister prefers to call it plan A-plus.
It is against that background that I give a cautious welcome to the proposals in this Bill. Better late than never, better too little than nothing at all. As I understand it, the Bill aims to do three things. First, it provides for the Government to guarantee up to £40 billion of "nationally significant" private infrastructure investments which have to be ready to start within 12 months of the guarantee. As the Treasury explains it, the aim is, "to kick start critical infrastructure projects that may have stalled because of adverse credit conditions".
That is Treasury language. The guarantees might cover key project risks such as construction, performance or revenue.
Secondly, the Government will lend money directly to private investors to enable 30 public/private partnership projects worth £6 billion to go ahead in the next 12 months; I do not think that has been mentioned yet in the debate. Finally, a £5 billion export financing facility will be available later this year to overseas buyers of British capital goods; in other words, an export credit guarantee scheme of the type we are all familiar with. Having cancelled about £50 billion of certain public capital spending, the Government are hoping to replace it with an equivalent amount of private capital spending, much of which will never happen. That is completely illogical.
The main difference between this Bill and the British investment bank, which I have been urging, is that my bank - I call it "my bank" because I feel a certain sense of paternity in the idea, having been floating it for the last three years - would actively raise money in the private markets for its own investment projects whereas UK Guarantees, the government scheme, merely provides some finance for projects initiated by the private sector. In other words, the government scheme is still governed by the ideology that the private sector is more likely to pick winners than a state investment bank and that that is sufficient justification for waiting for the private sector to produce its projects.
There is no empirical evidence for it being true, as a general proposition, that the state is more likely to pick losers than the private sector. We have had many examples of that not being true. The economic collapse of 2008 is a very good one.
A mere guarantee for privately initiated schemes is bound to be less successful, apart from in the efficiency of the schemes, at securing the required volume of investment than a commitment by the Government to a definite infrastructure programme. So while I wish UK Guarantees well, a certain amount of scepticism is in order.
In the final part of my speech, I want to consider what is happening to the economy. When an economy is crawling along the bottom, any small wave is likely to lift our spirits. Over the past three quarters - that is, the past nine months - the economy has shrunk by 1%. Even if, as now expected, it achieves a positive growth of about 0.8% this quarter, that still leaves it in roughly the same place as it was a year ago. Moreover if, as commentators suggest, this boost is due to the Olympics, it will be in the nature of a windfall. However much we may rejoice in the achievements of our athletes, 28 gold medals is not enough to turn the British economy around.
However, there is still a puzzle, which is that unemployment has been static in the past few months, and even falling slightly, despite the fact that output is flat and the economically active population has increased by 550,000 over the past two years. You would therefore expect unemployment to have increased. Why has it not done so? That is the puzzle. There are several possible explanations, none of them conclusive, because the facts necessary for a convincing answer are buried in a labyrinth of tricky statistics and slippery definitions. It may be that employers have been hoarding labour, but that becomes less plausible the longer the recession goes on. Part of the answer at least must be that productivity - that is, output per hour worked - has been falling. As the Guardian put it, "it now requires many more of us to labour away to churn out the reduced volume of stuff". Falling productivity is just as serious a problem for the economy as rising unemployment, and a greater problem in the longer term.
The Prime Minister claims that 900,000 extra jobs have been created in the private sector over the past two years. I never know how many it is - sometimes it is 900,000 and sometimes it is 1 million; it goes up every day, but I am sticking to the 900,000 figure for the time being. That is not of course the net increase in jobs, given that 400,000 jobs have been lost in the public sector. The net increase in jobs has been 500,000.
Can the Minister tell us how many of the net gains in employment are full-time? Labour market statistics suggest that more than half of them are part-time or self-employed. Can the Minister also say whether those registered on government work programmes count in the Prime Minister's extra 900,000 private sector jobs?
The point is this: if a lot of the private sector job creation consists of part-time low-skilled jobs at the bottom end of the service sector, it would explain the decline in productivity that limits the rise in unemployment, but it is a poor omen for that vibrant, high-value economy that is supposed to secure our future prosperity.
I wish the Government well in these plans because I wish the country well, but we will need much more solid evidence than we have seen so far to believe that we have turned the corner and started to repair the damage of the past two and a half years.