Economic Strategy

HL Deb 20 March 1996 vol 570 cc1278-96

3.7 p.m.

Lord Eatwell rose to call attention to the effect of the Government's economic strategy on the economic and social well-being of the British people, and to move for Papers.

The noble Lord said: My Lords, before I begin, perhaps I may say how much we look forward to the maiden speech of the noble Lord, Lord Sempill. As an expert in advertising and marketing, he may be able to convince the Government that they have a policy that will not sell.

We on this side of the House have called the debate today not for yet another examination of the immediate consequences of the Government's economic policies, but to go further: to consider the substance and objectives of those policies. I hope, therefore, that we will not hear from the Minister the usual dreary litany of statistics which supposedly demonstrates that the economic condition of Britain is the best of all possible worlds. Little information is provided, the House is bored and the Minister's credibility is damaged. Instead I hope—and I am sure the whole House hopes—that the Minister will address himself to more fundamental questions. I shall attempt to do just that myself.

I wish to address the issue of just what kind of society we have in Britain and what is the relationship between that society and our economic performance. I wish to consider the fundamentals of life at work, of relationships within firms and between firms and the role of government in the economy. In doing so, I shall draw heavily on important new work by the distinguished American economist, Professor David Gordon of the New School for Social Research in New York. At the beginning I acknowledge my debt to his innovative thinking.

We can approach the wider economic issues by a simple question which I hope the Minister will answer: namely, "What is the objective of the Government's economic policy?" It may seem odd that we need to ask that question. After all, this has been a government famously driven by a single big idea: that the market knows best. But how do the Government relate their obeisance to the market to the social fabric of Britain? Indeed, do they even care about the social fabric of Britain?

One obvious way of answering that question is to examine the relationship between government Ministers' Statements and their economic achievements. For example, Mr. Norman Lamont, when he was Chancellor of the Exchequer—and I suppose these days the Government try to forget that he was—told another place that unemployment is a price well worth paying. It must be admitted that the Government have indeed achieved that objective. The price of unemployment has indeed been paid by millions of British people. Even on Tory fiddled figures, more than twice as many people have been unemployed year after year than under any other administration since the war.

To take another example, the present Chancellor declared in his 1994 Mais lecture that the widening of pay differentials in Britain is "inevitable and probably desirable". Again, the Government have achieved their goal. In the past 17 years inequality in pay has increased faster in Britain than in any other G7 country, accompanied, as the Rowntree Report on income and wealth revealed last year, by growing poverty in employment.

Or what shall I say of the Deputy Prime Minister's recent professed desire to remove the employment rights of 10 million or so British citizens who work in small firms? His proposals may have been temporarily shelved as a political embarrassment, but look at what the Government have already achieved: wages councils have been abolished; workers' rights of representation have been curtailed; standards of environmental protection at work have been eroded; mortgage protection for those who lose their jobs has been slashed; and one in every 10 workers has lost his job at some time over the past three years.

The result of all that has been the creation of a labour force which is more fearful and more insecure than at any time since the war. Mr. Heseltine is determined to make it more fearful and more insecure. All that Mr. Ian Lang, the Secretary of State for Trade and Industry, can say is that insecurity is a state of mind. Of course, Mr. Lang has to dismiss fears of insecurity, because creating insecurity is this Government's one and only employment policy.

Their policy is to deregulate and privatise. They glory in the so-called downsizing of British industry and then—this is the clever part—they have the nerve to tell the British people that it is all for their own good. The insecurity, the temporary work and the loss of employment benefits and employment rights are not, we are told, the Government's fault at all. They are simply the Government's rational response to today's great threats to our national well-being: the advance of new technologies and competition from the Pacific Rim countries.

Is that true? Is it true that technical change and third world competition are destroying the employment security of the British people? If it is true, the Government may indeed have a point.

Let us begin with technical change. In fact, the rate of technical change today, whether in industry or services, is slower than it was in the 1960s when, under a Labour Government, there was sustained full employment. Moreover, detailed studies in the United States have shown that for the vast majority of workers the introduction of information technology has demanded no greater skill levels in the workplace. Indeed, the skill demands across the entire spectrum of employment have changed little in the past 15 years.

Of course, there are well publicised cases of computers replacing people. But, like all great technological changes in modern history, information technology has, on balance, been job-creating and not job-destroying. People may be changing their jobs, but the new technologies are creating jobs and the new jobs do not have excessive new skill requirements. The threat of the new technologies is a myth.

So, what about competition from the Pacific Rim? Is it the growth of imports from Pacific Tigers that is driving down British wages and eroding British security at work? Once again, careful examination shows the argument to be without foundation. Job losses and poverty wages are as much a characteristic of those sectors of the economy which are not exposed to competition from imports as those which are so exposed. Moreover, if we take all the Pacific Tigers together—Hong Kong, Singapore, Taiwan, Malaysia, South Korea and Thailand—combined they provide just 6.5 per cent. of our total imports. That is less than we import from the Netherlands alone. The truth is that our biggest trade deficits are not with third world countries but with the G7 industrial economies, in all of which wages are higher than they are in Britain.

So, deteriorating conditions of employment, low wages and employment insecurity cannot be attributed either to technological change or to competition from the Pacific Rim. In fact, they are substantially the result of concerted policies of the Government. It has been the Government's objective to wield the coercive big stick over the British labour force. Increased poverty and increased insecurity in employment have been the direct and indirect outcome of their concerted attack on the weaker sections of the labour force. It is no accident that some of the biggest cuts in real wages have been suffered by the poorest paid public sector workers.

In addition, government policies have actively fostered a policy of confrontation in industry. They have encouraged a corporate culture of threat and intimidation. All those who try to represent or support workers have been denounced virtually as enemies of the people. The Government have created the divisive adversarial climate which now characterises Britain's workplaces and which the Deputy Prime Minister wishes to enhance.

What has that strategy achieved? It has certainly not made the British people more happy or more secure. But has it, at the very least, created the lean and mean companies which can compete effectively in the tough, competitive markets of the modern world? After all, that was the declared objective.

Has, to take a random example, British Gas become lean and mean? Well, it is certainly mean. A third of the work force has been sacked since privatisation and the company has now admitted that so many workers have been fired that customer services have severely deteriorated. But is British Gas lean? In one vital sense, it is not. As everyone knows, while customers suffer, the executives of British Gas have paid themselves ever more exorbitant salaries. The company is over-burdened with managers and they are over-paid. British Gas is not lean and mean; it is fat and mean.

The same managerial excess is characteristic of our new market-driven health service, where spending on administrators has been the growth area in health spending. But in that respect, British Gas and the NHS are not atypical of British industry as a whole. In Britain, the ratio of supervisory and managerial staff to the production workers who do the work rose from a little over 10 per cent. in 1980 to over 15 per cent. at the end of the decade. By international standards that is a huge managerial and supervisory burden. The ratio of managerial and supervisory staff in the total labour force is just 4 per cent. in Japan, Germany and the Netherlands and only 3 per cent. in Sweden. In those economics, that figure remained unchanged throughout the 1980s.

The burden of excess supervisory workers in Britain is no accident. In a country characterised by adversarial relationships in the workplace and where the economy is based on conflict and insecurity more supervisors and more discipline is required. Those supervisors and managers have rewarded themselves with ever higher salaries for the onerous task of disciplining an increasingly alienated labour force. Corporate Britain has become bloated with ever more highly paid managerial staff. British companies have become fat and mean.

That has not happened in Japan, Germany, the Netherlands or Sweden. They do not suffer that burden of swollen bureaucracies or supervisory staff. They are countries in which society and economy are based on a commitment to consensus. They are societies and economies in which trust and co-operation are the norm, not conflict and insecurity. They typify one of the two dominant approaches to economic policy in the G7 today.

Two quite different philosophies of economic policy are competing in the modern industrial world. On the one hand, there are the "conflict economies", such as Britain and the US, economies based on adversarial relationships with the heavy burdens of highly paid managerial and supervisory staffs and with increasing inequality in living standards. On the other hand, there are the "co-operative" or "stakeholder economies", such as Germany and Japan, economies committed to consensus with huge savings in administrative burdens and with relatively egalitarian distribution of income.

Which works best? Will the Government's fat and mean strategy deliver the goods? The economic performance of the past decade provides an unambiguous answer. If we compare the stakeholder economies to the conflict economies, the stakeholder economies win every time. Stakeholder economies have a sustained record of higher productivity growth. That is underwritten by higher shares and investment in GDP. What is more, despite that high productivity growth, stakeholder economies have lower unemployment and lower inflation. To cap it all, they are typically more profitable, too. These clear empirical facts are confirmed by the well documented result that more egalitarian economies grow faster and have higher rates of productivity growth. Equality is efficient.

Why should that be? The answers are simple. First, co-operation is cheap. Not only is there no burden of bloated managerial and supervisory staff, but in stakeholder economies there is a closer identification of workers with the best interests of the firm, and management is trusted to pursue those best interests. That was confirmed in a radio broadcast just last week by the noble Lord, Lord Lawson. He argued: within the company co-operation is the very essence. No company is going to be successful if the various individuals in the company don't co-operate fully with each other". Would he have said that when he was Chancellor of the Exchequer?

Secondly, co-operation fosters change. The conflict economies achieve change by the bludgeon of fear and coercion. That is just as true of relations between companies, where the ultimate sanction is the hostile takeover, as it is within companies, where the threat of dismissal creates an inbuilt fear of change. In the stakeholder economies, hostile takeovers are rare and active communication within companies promotes a flexible and creative approach to change.

Thirdly, co-operation encourages investment: not just investment in plant and equipment, but investment in skills and ideas. The conflict economies do not trust their workers enough to invest heavily in them. Low investment is the Achilles' heel of the British economy. As noble Lords will know, investment has simply failed to increase since the depths of the 1992 recession. Without investment, the competitive future of Britain can only be bleak.

Any paean of praise for co-operative economies such as Germany, Japan and Sweden has to face up to the fact that, despite their superior performance over the past decade, none of those economies is doing well this year. In the united Germany unemployment is higher than in Britain; in Japan output has been stagnant for nearly three years, though it is expected to grow vigorously this year; and in Sweden a large deficit inherited from a spendthrift conservative government has forced cuts in welfare benefits.

But it must be remembered that Germany has been severely weakened by the foolish macro-economic policies of the Bundesbank (policies, by the way, that the Bank of England wants to introduce here). Moreover, Germany has had to absorb millions of people accustomed to the debilitating life of a Communist regime and invest 100 billion dollars a year in rebuilding the east German economy from scratch. And even so, the German standard of living is significantly higher than ours, and German industry commands two-and-a-half times our share of world manufactured trade.

Equally, it must be remembered that Japanese growth has been severely restricted by the extraordinary revaluation of the yen against the dollar. And despite that burden, Japan is still an industrial pace-setter: income per head is higher than in Britain, and the Japanese share of world trade is well over double the size of ours.

So it would be folly to focus on these short-term troubles and ignore the medium-term success of the co-operative economies. If we are to achieve the same success in Britain, I am confident that we must work towards a new social and economic consensus, the consensus of a stakeholder economy.

The essence of the stakeholder economy is that all decisions are based on the recognition that a wide range of interests have a stake in the success of firms, communities and the economy as a whole. Management and workers may have differences over the rigours of work or the level of wages; but they have a mutual interest in the success of the firm. Firms have to make profits out of their customers. But firms and customers have a mutual interest in the customers being satisfied that they have been given a good deal.

Of course, in any stakeholder economy firms will fail or move away, people will lose their jobs and will need to adapt to new ones. That is the inevitable product of the continuous innovation that can be the genius of a market economy. But a stakeholder economy will not have to carry the dead weight of the supervisory burden which crushes the endeavours of the conflict economies. And the stakeholder economy can make a virtue of change. Firms know that they have a responsibility to prepare their workers for change and, in doing so, to prepare themselves for change.

But none of that will happen unless the Government are themselves committed to the ideals of a stakeholder economy. One or two firms may understand the advantages of a more consensual approach. Some of the very best firms in Britain, like United Biscuits, Coats Viyella, Pilkingtons, Nat West Bank and GKN have established works councils, as required by the social chapter of the Maastricht Treaty, and many British companies have fine trading records. But without the support and encouragement of government there is always the prospect that those who invest in their workforces will be undermined by those who poach skilled labour. Those who invest for the long term in new, high-quality products will be undermined by the short-term asset strippers. That is why only a government can provide the framework in which the stakeholder company can throw off the bureaucratic supervisory burden, build relationships of trust with workers, suppliers and customers, and thrive. Only a government can create a national commitment to consensus and trust. Trust is cheap, and it is efficient. But once it is lost, it is enormously difficult to recover.

I can quite understand that everything I have said is virtually incomprehensible to noble Lords on the Government Benches. Theirs is a world view of conflict. They understand only the adversarial economy of ever-growing inequality and ever-growing insecurity. To them, trust and co-operation are soft, weak, ineffectual notions, out of place in the rigours of the modern world. The Conservative Party is committed to a vision of the economy in which the workers are disciplined and directed by the largest managerial and supervisory staffs in the entire G7. That is their big idea. They are hopelessly stuck in the outdated mindset of the 1980s. They are hopelessly committed to the strategy of "fat and mean".

The Labour government which will take office some time in the next 14 months will face the formidable task of building trust in a new stakeholder economy to replace the scorched earth bitterness that the Tories will leave behind. That new economy will depend on the creation of a supportive institutional environment, on the encouragement of co-operation and discouragement of the use of the big stick. The most important task will be that of rebuilding trust among the social partners of the British economy. That means that new measures should not be imposed, but should be negotiated.

At the beginning of my remarks I asked what were the objectives of the Conservative Party's economic policy. I look forward to the Minister's reply. The economic objective of the Labour government will be clear. It will be the economic security and prosperity of all the people of this country, the fostering of opportunity and enterprise and the banishment of insecurity and fear. My Lords, I beg to move for Papers.

3.28 p.m.

Lord Dean of Harptree

My Lords, I am sure the whole House is grateful to the noble Lord, Lord Eatwell, for introducing such an interesting subject for this debate. I have always found his speeches stimulating, and today was no exception. Incidentally, it was not incomprehensible. The noble Lord very understandably, speaking from the Opposition Front Bench, concentrated on some of the bad features of the British economy. I hope in a few moments I shall be able somewhat to redress that balance.

The mark of a sound economy is stable prices and steady growth. Britain has both. There are other encouraging features, too. Unemployment is falling, manufacturing investment is rising, export volumes are up and the majority of people in the country are sharing in greater prosperity. The average family is £80 a week better off in real terms than it was in 1979. That is a very impressive figure. Pensioners have shared in that prosperity. Thanks to the Government's policy of generous tax relief on pension contributions, 66 per cent. of people now retiring have an occupational pension.

There was a time when Britain was the economic sick man of Europe. We are now leading the field. There is faster growth in this country than in all the other major competitive countries in Europe. We are rapidly becoming the enterprise centre of Europe. Why is that? What explains that transformation over a comparatively short period?

I believe that there are four main reasons. The first is good housekeeping on the part of the Government. Noble Lords opposite expect me to say that, but the facts and figures I quoted show clearly that that is the case. The second reason is privatisation. Britain was the first in the field to return the nationalised industries to the private sector. For years they were a drain on our resources. In saying that, I am not in any way criticising the noble Lord, Lord Ezra, who had a distinguished career as a chairman of a nationalised industry. Nor am I criticising my relative, who was at one time chairman of the Scottish Coal Board. The noble Lord and my relative had to work within the system as it was. However, since most of the industries have been returned to the private sector, they are making a big contribution to the revenue and prosperity of our country.

The third reason relates to our labour costs other than pay. We in this country have a big advantage over our major EU competitors. British employers hear extra labour costs of only £18 for every £100 in pay. In the case of German employers, they bear an extra £32 for every £100 in pay; in France it is £41 and in Italy £44. It is no wonder that, with those burdens, famous continental companies are going bankrupt or finding it difficult to keep their heads above water. That is an interesting commentary on the social chapter. I noticed that the noble Lord, Lord Eatwell, did not mention the social chapter this afternoon: it may he that he is getting cold feet on the subject.

The fourth reason why our economy is doing so well comparatively is inward investment. Britain is now a magnet for inward investment from abroad. One third of all inward investment into the European Union now comes to this country; that includes 40 per cent. of investment from the United States and Japan.

It may be asked, if things are looking so good, why the feel-good factor is still so elusive. There are two main reasons for that. The noble Lord, Lord Eatwell, mentioned one; namely, job insecurity. Although unemployment has been falling, many people do not feel secure in their jobs. That applies just as much these days to financial services as to the manufacturing industries. The reason is that we are in the middle of another industrial revolution in which techniques and the way things are done are changing rapidly. We are also in an era of mergers and demergers. No longer can a man or woman expect to spend the whole of their working lives with one company. Those days are gone.

We are experiencing the same problems now that were experienced in the first industrial revolution. I am sure that the reaction of some people at that time, to be Luddite and break machinery, is not the answer. It is true that in the first industrial revolution, as in this one, social problems arose. However, to counterbalance that there was a big increase in prosperity and population. Therefore, we cannot afford to turn our backs on new methods; nor can we blame the Government for them. The Government can certainly do something to mitigate the problems, but they cannot hold back the tide of change if we are to remain a competitive country.

Another reason why the feel-good factor is slow in returning is negative equity in housing. The Government's policy of encouraging home ownership, including the sale of council houses, brought enormous benefits to millions of families. Many more families these days have a pride in ownership and a real stake in the country because they own their own homes. On the other hand, it is easy to see with the benefit of hindsight that in some cases lending was too generous. People were encouraged by had advice to over-extend themselves. As a consequence, we see the heartbreaking situation of people being turned out of their homes because they cannot afford the mortgage.

The Government must do whatever they can to help that situation without distorting the housing market. Heaven forbid that we should return to the bad old days when some bureaucrat told people whether they could have a cat, a dog or a budgerigar and what the colour of their front door should be. Heaven forbid too that we should follow the advice of those who advocate the phasing out of mortgage tax relief. Fortunately, there are now signs that the housing market is picking up. It is encouraging and another sign of the Government's good housekeeping that mortgage rates are now lower than they have been for 30 years.

In conclusion, of course there have been disappointments, failings and mistakes; it happens to all governments. Of course we are not immune from recessions and world conditions. But one can say, by and large—to use the words of the Motion of the noble Lord, Lord Eatwell—that the Government's economic strategy has been good for the economic and social well-being of the British people.

3.37 p.m.

Lord Ezra

My Lords, we are indebted to the noble Lord, Lord Eatwell, for introducing an economic debate in a wider context. He has explained, in his logical turn of phrase, exactly what he feels the economic strategy for the future should be. The noble Lord, Lord Dean of Harptree, as he indicated, sought to redress the balance somewhat. I am obliged to him for his kind remarks about my period at the Coal Board.

It is the nature of debates on the economy, as the noble Lord, Lord Eatwell, pointed out, that we tend to get from the government side, particularly government Ministers, a long list of achievements and an assumption that all that is needed on their part is to carry on as they are doing now and everything will turn out right. From the Opposition Benches we get a long list of weaknesses, all drawn from the same basic statistics. Perhaps on this occasion we could depart from that procedure, and some of the points that we raise, which we feel need to be addressed, could be accepted by the Government as serious issues not to be lightly thrust aside. That would make for a more balanced debate than we have had in the past.

I have not the slightest doubt that when the noble Lord, Lord Mackay of Ardbrecknish, responds to the debate he will say very much what his right honourable friends said in another place on 4th March when a similar debate took place. I took the trouble to read the two speeches and I am certain that the noble Lord will be saying much that they said. Indeed, I am convinced that what he will be saying this afternoon will he very similar to the remarks made on other occasions of this kind by the noble Lord, Lord Young of Graffham, when he was Secretary of State for Trade and Industry. We had debates on the economy in 1986, 1987 and 1988 in which some of us expressed concern about the way things were going but the Government were full of a list of their achievements and of their intention to carry on as they were doing. We know what happened subsequent to those years. So I think it is necessary to consider seriously the potential difficulties that we could be getting into rather than having just a list from the government side of all their achievements.

I should like therefore to look at one or two of the short-term issues which could throw the economy off course and one or two longer-term issues. Among the shorter-term issues are some objectives the Government have set themselves. For example, one objective is growth. In his Budget speech the Chancellor indicated that he expected growth this year to be 3 per cent. In fact, towards the end of last year it fell to under 2 per cent. and there is no indication that it is rising above that at the moment. Today, the Engineering Employers' Federation issued a report indicating that engineering recovery, which had been a large part of the recovery since the last recession, is now on a knife edge. So there is uncertainty about the growth factor.

If growth is to achieve the 3 per cent. figure that the Chancellor has been talking about, even recently, there will clearly have to be a substantial increase in growth in the latter part of this year. In order to catch up, around 5 or 6 per cent. on an annualised basis will have to be achieved. That could lead in turn to some overheating in the economy, particularly if that growth were to be reflected in consumer expenditure, which is quite likely to be the case if we are to have that kind of growth. That would have serious implications for the economy.

A related issue which needs to be watched carefully at the present time is the money supply. Watching the money supply has rather gone out of fashion. When the Government came to power in 1979 they were all monetarists. They made it clear that they would seek to control the economy by controlling the flow of money. But, as they found that that was difficult to control, they gradually introduced more and more criteria for the purpose and finally abandoned the system altogether. Nonetheless it is true that the money supply is an important aspect of the stability of the economy of a nation.

At the present time both the narrow money, M0, which represents the cash in circulation, and broad money, M4, which includes deposits, have noticeably exceeded the Government's estimates. There are economists, including Professor Congdon, who is one of the "wise men" advising the Chancellor, who are saying that this is a dangerous sign and that, combined with the way in which the economy might be stimulated to achieve the growth objective, we could be heading for difficulty in the medium term. So it would be useful to hear from the Minister whether he considers that this is something that needs to be guarded against; and if so, how? It would be no good our hearing from him that the Government intend to continue blithely with present policies, which is what we were hearing consistently in the latter part of the 1980s, and then the time comes when the situation gets out of control and it is too late to take reasonable measures to deal with it. These are issues which need serious consideration.

The issue of public expenditure is still with us—the public sector borrowing requirement. It has become an essential part of the Government's short-term policy that the public sector borrowing requirement for 1995–96 shall not exceed £29 billion. But the latest estimates are that there could he an overshoot of around £2 billion to £3 billion. That could be quite serious for the Government's short- and medium-term policies. If that were to he the case it would be interesting for us to know from the Minister what position the Government would take to deal with it.

Taking a longer-term view, I entirely agree with the noble Lord, Lord Eatwell, when he said that relative lack of investment has been the Achilles' heel of the British economy. When we compare ourselves in investment terms with the other countries of the G7, and indeed of the European Union, we find that on almost every basis we are lagging. Unfortunately, we have in the private sector a combination of factors which lead inevitably to short-term thinking and to declaring higher dividends required by the institutions to meet their objectives on which the fund managers are judged by their quarterly results. As a result long-term investment is diminished. In the public sector we know that the Government are cutting back very substantially on investment. The private finance initiative was introduced initially in order to supplement public investment but it is now being used to replace it. Unfortunately, the conditions applied to much of the private finance initiative are such as to delay it coming forward. The net result is that we are falling behind in the investment that should be achieved both in the public and the private sectors.

Much has been made, and rightly, of our lack of investment in people—in education and training. What we need above all in looking to the future is to have a totally new investment strategy. That is easy to say but it will not be easy to achieve because it will require a cultural change. The reason the Japanese have been so successful in some of their major initiatives, whether in the car industry or in other technological fields, is that they have a structure which enables long-term investment to be made, investment which does not look for an instant return but is ready to go for a longer-term return, investment which does not insist on substantial dividends and is not conditioned by that approach. We have to do a great deal of work here—this is not a criticism of the Government but more a criticism of the culture that has built up—to create a long-term investment strategy.

In conclusion, I hope that this debate, so ably and vigorously introduced by the noble Lord, Lord Eatwell, can give us the opportunity on both sides of the House to try to identify some of the problems ahead and to give our views on how those might be dealt with both in the short term and particularly in the longer term.

3.50 p.m.

Lord Monkswell

My Lords, I, too, would like to thank my noble friend Lord Eatwell for introducing this debate in such an exemplary fashion. It gives me great pleasure to follow the measured and deliberative tones of the noble Lord, Lord Ezra. I suspect that my contribution may be slightly less measured, but I hope that it will be as deliberative.

We are discussing this afternoon the Government's economic strategy and its effect on the economic and social well-being of the British people. It is useful to look at some of those economic and social indicators such as crime, family breakdown, unemployment and poverty. I hope to try to emphasise the need for government policies, of whatever party, to have respect for the individuals who make up the population of this country. We should look at what we might do to ensure that we achieve full employment and improved living standards for all.

The Government's economic policies over the past 15 or 16 years, can be effectively summarised by considering two particular aspects. The first is the concept of what I would describe as "sound money". Enormous emphasis is being placed on reducing inflation to the extent that virtually everything else has been sacrificed, including vast numbers of the British people through mass unemployment and the degradation of human existence which has come about as a result.

The second major aspect of government policy over the past few Parliaments has been their tax and benefit policies, which have effectively resulted in increases in taxation for poor people. Noble Lords will remember that VAT was doubled and there was also a reduction in the level of benefits for poor people. We should also look at the current rates of unemployment benefit and the basic old age pension. Both of those have effectively been reduced to half the value they had as a proportion of average incomes in 1979. Alongside that, there have been massive reductions in the tax burden for rich people. The top rate of tax has been reduced from 98p to 40p in the pound. Given the level of tax evasion, I believe that it is well recognised nowadays that rich people do not even pay the 40 per cent. that everyone expects of them.

What is the result of these policies in economic terms? First, there is the effect on individuals and their families and the population as a whole. At least one-third of the population is financially worse off than it was in the late 1970s. Another one-third of the population may have seen virtually no economic change in its circumstances, but it has witnessed an increase in insecurity. Those people cannot guarantee that they will be as well off next year and the year after as this year. It may be that less than one-third of the population is better off; namely, the rich, fat cats about whom the noble Lord, Lord Eatwell, spoke. They too are subject to the degradation of our society which has accompanied this Government's economic policies.

The other factor that we can see as a result of the Government's economic policies over the past decade and a half is the effect on what I describe as the basic economy and the ability of this country to manufacture goods. The result can be seen in the deterioration of our balance of payments. We have been running a deficit on our balance of payments for the first time in over 150 years. It is worth pointing out that that has resulted in a relative decline in our economy compared with our competitors. Year after year we are running a balance of payments deficit in manufactured goods. The goods that we import from overseas have to be paid for and the only way that can be done is by paying excessive interest rates on money borrowed to pay for them. That generates economic activity in our competitor nations and strengthens their economies compared with ours.

I now turn to the results of the Government's running of the economy in social terms. What has been the effect on individuals and how they relate to others; namely, the socialisation of our society? The first result is the alienation of what has been described as the "underclass". Whole swathes of our society are effectively divorced from normal society. They consider themselves as having no part in it. There has been a vast increase in crime. One of the saddest aspects of the results of this Government's economic policies has been the increase in family breakdown. The divorce statistics are only a part of that. The breakdown of family units and partnerships between men and women causes immense grief and suffering in real human terms, not only to the individuals involved but to their children and their wider circle of friends and families. That is one of the most horrifying indictments of this Government's economic policies.

I now turn to what we can do. I hope that some of what I, and I am sure other noble Lords, will say will begin to have some effect on the Government. I fear not, but it is only right that we should try because the stakes are so high. The first thing we should argue for is stimulation of the economy by direct government investment in what I would describe as non-importing, non-inflationary areas. If one looks at the state of our capital fabric such as schools, hospitals and housing there is an immense amount of investment required to bring those buildings in particular up to the state expected in the latter part of the 20th century.

It is worth pointing out that investment in these areas does not necessarily suck in imports. That may happen if the measures are not applied in the right way. Such provision also provides employment, usually in those areas of highest unemployment, and therefore relieves the social burden on individuals and the economic burden on the state.

The second factor that we might begin to address is relieving the disparity in income which has been alluded to before and which has increased under this Government. I hope that even this Government, at this late hour, might think in terms of increasing direct taxation for the very rich people who can afford it. At the same time the Government should reduce the tax burden. We have heard in previous debates that it can amount to 98p or 99p in the pound because of the poverty trap. That tax burden on the poorest members of society should be relieved. The Government should also begin making efforts to increase benefits as a proportion of average income for those who are unemployed and those on the minimum state pension.

It is worth pointing out that those measures—relieving the heavy tax burden on poor people while increasing benefits—will in themselves stimulate the economy in non-inflationary, non-importing ways. When we think of the spending patterns of the poorer members of our society we see that they are not the ones who buy BMW motor cars from Germany; they are not the ones who go on foreign holidays; they are not the ones who have second homes in France or the Low Countries. Improving their economic position therefore benefits the economy of the country.

It is also worth pointing out that the kind of economic scenario that I have painted for the UK economy and its effects on the social well-being of our society can be extrapolated across the world. The same policies that this Government have applied which have impoverished and reduced our society and the relationships between individuals in our society are, unfortunately, the same policies which the industrialised and rich part of this globe has imposed on the poorer and less well developed parts of the world economy. Therefore, if applied in an international dimension, the same actions that we might take in the UK to stimulate our economy in beneficial ways and to improve our society would also help the poorer members of our world economy. They would help to stimulate beneficial economic activity for the betterment of the whole of the world's population.

4.1 p.m.

Lord Sempill

My Lords, it was with a certain amount of awe and trepidation that I put down my name to speak to the Motion tabled by the noble Lord, Lord Eatwell: awe as I have only recently taken my seat, and I am acutely conscious of the traditions of your Lordships' House; and trepidation as I do not profess to be an economist or an expert on today's subject-matter.

I have had quite a varied career, mainly in the area of sales and marketing. I have experienced working for large companies and small businesses. I know what it is like to be unemployed; and I have arrived at an age when, for many companies in Britain, I am past my sell-by date. Therefore, not surprisingly, I am attempting to set up my own business, which is only marginally less frightening than addressing your Lordships.

I believe that credit should be given to Her Majesty's Government for their management of the economy throughout the 1980s and the 1990s. I returned to Britain only recently, having lived in South Africa since 1980 where I witnessed a dramatic political transformation, in part matched by an economic transformation here. The changes are very noticeable. The cities are much cleaner. Services are better and more efficient. There are many more motor cars, more restaurants, and a lot more people holidaying abroad. That has to mean that there is an improvement in the quality of life. There is no denying that Britain has transformed itself from a decaying industrial power into a modern service economy, and the City of London still remains the financial centre of the world.

However, the nation is not happy, and there is considerable discontent. Too many are mainlining on social welfare. Many would argue that politicians are losing the respect of their electorate; and, judging from the rising figures on juvenile crime, parents are losing control of their children. I have been particularly perturbed by the apparent lack of enthusiasm for the healthy economic climate which we are now enjoying. There is a negative attitude. Britain has become boorishly cynical.

During my 12 years in South Africa, I worked extensively in townships where the quality of life was non-existent. There was an oppressive political regime, no social welfare and appalling levels of violence, and yet a quite extraordinary level of goodwill and optimism existed. That may well change as the country struggles to bring about all the necessary social and economic reforms, but at least their mindset is right for the challenges that lie ahead—challenges far greater than those facing this country.

I suspect that one negative attitude is directly related to the missing feel-good factor among large sections of our population. So where are the economic successes? Not surprisingly, they are at the sharp end of the capitalist market. Look no further than the City of London and the boardrooms of corporate Britain: the level of incomes and bonuses is awesome by most management standards. The recent pay increases awarded to the heads of privatised utilities, some of whom are laying off staff, created a vitriolic outburst of criticism and indignation. I believe that the disparity in incomes between directors and employees has dampened morale in our workforce and that there needs to be a more equitable redistribution of corporate profits.

It is into that arena that the New Labour vision of a stakeholder economy has been proposed as a means of creating a more equitable and egalitarian society. I suggest that a closer examination of recent economic data from Japan and Germany be examined before we get too carried away by that argument. The hard truth is that a combination of high labour costs and strong currencies have made them susceptible to international competition. The German Employers Federation thinks that some 300,000 jobs have migrated abroad in the past five years, and the Nomura Research Institute of Japan predicts that by 1998 almost 40 per cent. of the production of Japan's five major electronics groups will he offshore. Those groups, most of which are household names, are part of a wide circle of truly global corporations, with profits which dwarf the GNPs of many third-world countries.

The growing inability of governments to control their own economies is becoming more evident as global market forces impact on investment and thereby on employment opportunities. I suspect that it is on the issue of employment that the battles of the next election will be fought. The debate of stakeholder versus shareholder is largely irrelevant to the aspirations and requirements of the lower paid.

I believe that what is needed is a far more radical solution, a solution which, on the one hand, breaks the dependency on social welfare and yet, on the other hand, creates an entrepreneurial environment in which people are "incentivised" to set up their own businesses and in which "having a go" is the norm. We need to nurture small businesses because it is they alone which are in the best position to stimulate local economies.

Over the years there has been strong government support for just that solution, but the reality shows that small businesses are fraught by two major obstacles. The first is the reluctance of the banks to loan the necessary capital without sufficient collateral. Any entrepreneurial society has to be prepared to take risks. People who start with nothing are hardly likely to have either the collateral or the experience. The second obstacle is red tape. There are too many regulations and too many inspections. Small businesses need a lot of room to breathe. Too much time is taken up complying with the requirements of banks and bureaucrats.

In conclusion, although I support much of the Government's economic strategy, I maintain that there needs to be a balance between an efficient and a cost-effective welfare state, as well as promoting smaller businesses with more incentives. The principles of self-determination are crucial in evolving a dynamic entrepreneurial society. Both investors and employers need to he incentivised to help to develop the small business environment. Let us allow hard work to be well-rewarded. When that happens, the feel-good factor will return.

4.10 p.m.

The Viscount of Oxfuird

My Lords, we can all agree that the noble Lord, Lord Sempill, is not past his sell-by date. This House looks forward to hearing him again and again on any subject that is associated with his own experience. His speech this afternoon was one that anyone would be privileged to follow. It was full of initiative. It was a wonderful start to the welcome that this House will give him. I knew both his mother and father. I can assure him that he is most welcome here. We thank him very much for his contribution.

The Motion on today's Order paper proposed by the noble Lord, Lord Eatwell, would have been manna to my friend the late Lord Joseph. Last evening I was minded to look at one of his speeches addressed to a university meeting of young students whose cone of recognition was possibly as wide as could be. One of the questions he set was: To consider how do societies escape from poverty, and where does prosperity come from His answer was that it comes from increasing the efficiency of the production of goods and services that customers want by raising average productivity. If you desire the escape of virtually everyone from poverty, and rising prosperity, high employment, good social and public services and individual freedom, then you should leave trade to free enterprise and capitalism, subject to the law and competition.

The reason is that business, in its pursuit of profit, subject to the law and competition, is more likely in its own interest to create the conditions that lead to all of those aims than any other system yet invented. Note the words "in its own interest". I do not say that there is necessarily more virtue in the business world than the world of the nationalised industries but that the former suffers from special constraints. It seeks to make a profit. But it can do so only by identifying goods and services that customers want and providing them competitively and relatively efficiently. The business world is thus led by its own interests continually to improve its efficiency. In so doing it raises the average productivity of its workers and managers and creates more jobs. Only if the workers are paid well enough to keep them and to render them effective customers, and if prices are kept low enough to sell what is provided, can profits be earned.

Therefore, built into the capitalist system are precisely those pressures—to seek out and satisfy customers at home and abroad and raise productivity—that will produce several of our aims: high employment and rising productivity and standards of living. A prosperous nation has money to provide good public and social services.

I quote the words of my late friend, who was possibly more sensitive than any other man I have met to the social needs of the disadvantaged in our society. He made particular mention of those who were temporarily or permanently unable to look after themselves. He stated that there must be safety nets. It is right to be as generous as practicable to those who cannot help themselves. It is destructive to help those who can support themselves. If you do so, you may unintentionally create increasingly large groups of people who have learned to depend on welfare rather than earn for themselves. This is good neither for them nor for those among whom they live. The last line of Lord Joseph's contribution quoted an article from The Times by Alan Ryan in October 1988: Democracy and Capitalism cannot do without each other". We on this side of the House have had to listen to cries of misery, accusations of irresponsibility and slights about failure to provide for the nation since 1979. But it is of interest that when one delves into statistics one discovers that between 1979 and 1994 the Treasury outturn on government expenditure in four major fields of the service economy, namely, defence, education, health and social security, belies the miseries offered to us by the Opposition and media. Expenditure on defence has been minimal. Between 1979–80 and 1993–94 the outturn has been an increase of 1.3 per cent. Over the same period the outturn for education has been something like 30.5 per cent. The outturn for health between 1979 and 1994 has been 57.6 per cent. Over the same period, the outturn for social security has been 76.2 per cent. These figures stand testimony to a Government that have two points in their favour: common sense and control. I admit that the figure for social security brings to mind a quotation from Kipling's The Gods of the Copybook Headings: And that after this is accomplished, and the brave new world begins, When all men are paid for existing, and no man must pay for his sins, As surely as water will wet us, as surely as fire will burn The Gods of the Copybook Headings with terror and slaughter return". All the evidence shows that Conservative policies are succeeding in securing steady growth that can be sustained. With inflation and interest rates low and incomes rising, the prospects for the British economy remain the best for a generation.

Sadly, we do not promote ourselves. Despite all the pleadings of our industrial leaders, we forget that we are a success. It falls to foreign business leaders to acknowledge that our position today is the product of decisions that we took some time ago. It was Hans-Olaf Henkle, head of the German equivalent of the CBI, who said of Germany: We have too rigid labour laws, we have too high social costs and taxes, we work the shortest working week in Europe. The German Government spends 50 per cent. of GDP as opposed to 42 per cent. in Britain. No wonder we have a problem". The economy of the United Kingdom is akin to a 500,000 tonne tanker: you cannot change its direction in less than seven to eight miles. But what does a mile at sea represent in terms of our position over the years, with all the impinging interests of international commercialism? It is a long time. Although it is said that 17 years for one government is enough, we need to remind ourselves that the tanker has changed direction. The objective of this Government is to double living standards over the next 25 years and to increase personal prosperity by making this country the enterprise centre of Europe. Central to that strategy is our resolve not to take risks with inflation and to end those days of boom and bust.

It is the ability of people to spend or save their own earnings which ensures the escape from poverty and the advent of prosperity. It is the Government's intent to reduce even further the burdens on business, to cut red tape, to cut state interference, and to increase further the competitiveness of British industry.

When we consider that unemployment has fallen by 770,300 men and women since its December 1992 peak, and that over the past six months it has fallen by nearly 600 people a day, then progress is the watchword. It is not merely the area of unemployment which is being overcome. There is the creation of new business, new investment. In the first nine months of last year 345,000 new businesses were set up, according to the estimate of Barclays Bank.

One of the figures that emerged from the recent inward investment debate that we had in your Lordships' House was the cost of employing a man with an equivalent take-home pay of £30,000 in this country and in Europe. It was interesting to note that the young man taking home £30,000 cost his company in this country £45,000 in benefits, taxation, national insurance and all the other non-wage costs which are part of our society. The most interesting comparison was made when that young man transferred to the same job with his company in Brussels. The cost to his employer was dramatic. It was no longer £45,000; it was £82,000—an increase of over 80 per cent.

The report by Dr. Eltis, Emeritus Fellow of Exeter College, Oxford, for the Foundation for Manufacturing Industry, dated 21st February, confirms that we in Britain are building the enterprise culture of Europe. It highlights the fact that higher business costs would mean less investment from overseas, and is convincing in its analysis. The Opposition's passion for the social chapter and the minimum wage would hit business and cost jobs.

It is no surprise that the stakeholder economy has been floated. This cloud of mystery and imagination is beginning to form. It is not some light cumulus on a summers day, it is a storm cloud—a cumulo nimbus—which has the violent currents within it of power to the unions, higher taxation, minimum wage, to say nothing of the perversion of the words "United Kingdom". It is nothing short of a tropical thunderstorm—the precursor to a typhoon.