Lords Sitting of 5 March 1997

Preamble
The House met at half-past two of the clock: The LORD CHANCELLOR on the Woolsack.
Prayers—Read by the Lord Bishop of Southwell.

Earl Howe: Personal Statement
The Parliamentary Under-Secretary of State, Ministry of Defence (Earl Howe): My Lords, with the leave of the House I should like to make a personal statement.
On Thursday of last week I was telephoned in the House by a journalist who told me that his inquiries had led him to believe that my Written Answers to the noble Countess, Lady Mar, on 4th June and 5th July last year about the deaths of animals during the Gulf War were incorrect. I immediately set in hand an investigation. Early yesterday evening I received departmental advice that there is now considerable doubt about the accuracy of my Answers. This is a serious matter about which I feel it right to inform the House at the earliest opportunity. I shall report to the House as soon as the full facts are clear.

Young Voters
2.38 p.m.
Lord Northbourne Lord Northbourne asked Her Majesty's Government:
What percentage of 18 and 19 year-olds who were eligible to vote at the last general election in fact cast a vote.
Baroness Miller of Hendon: My Lords, in the 1992 general election the total number of votes cast was 33,511,442, or 76.9 per cent. of registered electors. No record is kept of voting by particular groups of the electorate. The only information about the age of voters is that which appears on the register each year showing the date on which an individual will attain the age of 18 and is therefore eligible to vote.
Lord Northbourne: My Lords, I am grateful to the noble Baroness for her reply. Unfortunately, it does not give me much assistance in the argument that I propose to advance. However, undaunted, I shall carry on. I have some figures which reveal that in the 1992 election 45 per cent. of young people under the age of 25 did not vote, whereas in the previous election 31 per cent. of people of that age did not vote. Does the Minister agree that it must be a cause for concern that so many people show an increasing alienation from the democratic and political process? Further, if the Government were re-elected would they commit themselves to ensuring that in schools all young people received citizenship education and were given
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opportunities to learn about making choices and decisions so that they could become effective, useful and helpful citizens?
Baroness Miller of Hendon: My Lords, I cannot confirm the figure of 45 per cent. of young people who failed to vote in 1992, because the ballot is secret. Other opinion polls have shown that many more people vote. One cannot obtain any expert evidence upon it because the vote is secret. I assure the noble Lord that we will win the next election, but I cannot provide the rest of the assurance that he seeks. As the noble Lord is already aware, there is a moratorium on curriculum change until the year 2000. Ministers have yet to decide whether or not the national curriculum will be different after that date. Their decision will be taken in the light of information gained by the School Curriculum Assessment Authority. However, the Government agree with the noble Lord that everyone should use their vote.
Lord Merlyn-Rees: My Lords, will the noble Baroness ask the noble Lord, Lord Northbourne, to explain to the Home Secretary that he has figures that that department does not have? It is not a question of the Home Office misleading anybody; the Home Office does not have the information that the noble Lord, Lord Northbourne, has in his possession. The Home Office would find it most valuable to have that information.
Baroness Miller of Hendon: My Lords, the noble Lord, Lord Northbourne, has heard exactly what the noble Lord opposite has just said, but the reality is that it is a secret vote. Although surveys and research have been carried out, no one can confirm the accuracy or otherwise of the figures. The position is that we do not know.
The Earl of Clancarty: My Lords, does the Minister agree that the current frustration with party politics shown by the people—I use the word "people" rather than "electorate"—is a symptom of a party political system that allows an essentially voyeuristic relationship to develop between the people and central government and party politics; that is to say, it is a one-way relationship? Does the Minister recognise the principle of extension of government, as distinct from devolution of power, which is not so much about central government involving people but, rather, to use a specific phrase, is to say that central government needs to go out and find the government that already exists in the people?
Baroness Miller of Hendon: My Lords, the noble Earl's question sounded very interesting but I did not get all of the points that he made. I believe that it would be better for me to read his words in Hansard tomorrow. When I have read it I believe that I shall be in a very much better position to answer the noble Earl.
Baroness Carnegy of Lour: My Lords, are the Government aware that the British Social Attitudes Survey published by Dartmouth Publishing in 1995 indicated that whereas one in three people over 25

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expressed a strong interest in politics only one in seven people aged 18 to 25 expressed such an interest? Does not that indicate that the problem is not just with schools but also with politicians?
Baroness Miller of Hendon: My Lords, it may be that we have all to do a little better to ensure that we inform young people of what is necessary and important. People such as myself who worked for years to try to persuade women to become more involved in politics will agree with everything my noble friend has said.
Lord Taylor of Blackburn: My Lords, is the noble Baroness aware that many local authorities throughout the length and breadth of the country have been doing that for many years by informing youngsters aged 18 of what are their rights, how they vote, how a local authority is run and how government is run. In many sixth forms that I have had the privilege of visiting over the years the same course has been held. It has been going on for many years. Young people are aware of their entitlements and they are encouraged to vote.
Baroness Miller of Hendon: My Lords, I am most grateful to the noble Lord for bringing those facts to the attention of the House. Last year £750,000 was spent by national government trying to do the same through advertisements on the television and so forth. Local government and registration officers have been doing that for a very long time. I remember full well—it is a strange memory because it is a long time ago—that when I was at school we had school councils, and we went through the whole of the democratic process. I believe that many schools still do that.
Lord McNally: My Lords, is the noble Baroness aware that nothing is more likely to turn young people off our political system than the feeling that it is corrupt? Is she further aware that we are about to embark upon the most expensive election campaign in British history? Does not she think that it is time for all parties to endorse transparency in election funding and some cap on election expenditure, since otherwise we shall go down a slippery and dangerous slope?
Baroness Miller of Hendon: My Lords, my view, and I think that of Her Majesty's Government, is that transparency and encouraging young people to vote are good ideas. The noble Lord said that he believes that it is because there is corruption—I believe that is the word he used. He may say that, but noble Lords would not expect me to comment.
The Earl of Lauderdale: My Lords, does my noble friend believe that the sometimes biased and snippety-snap coverage of Parliament by television and the media has done a great deal to make the country bored stiff with politics?
Baroness Miller of Hendon: My Lords, that may be the case in respect of what goes on in the other place,
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but I should have thought that anyone who watches the debates in this House and hears the questions and answers will be enthralled.
Lord Morris of Castle Morris: My Lords, can the noble Baroness tell the House, since this is an important and serious issue, what percentage of the 18 to 19 year-old age cohort at the last election was registered to vote?
Baroness Miller of Hendon: My Lords, at the last election 2.62 per cent. of registered electors, which amounted to 1,145,400, were registered to vote. That was 2.62 per cent. of the total turnout.
Lord Morris of Castle Morris: My Lords, perhaps I did not put that question clearly. This is a tricky question which the noble Baroness may not be able to answer. If that is so, I should be grateful if she would write to me. What I asked was what percentage of the 18 to 19 year-old age cohort, about which the noble Lord, Lord Northbourne, has been asking, was registered to vote.
Baroness Miller of Hendon: My Lords, the last figures I have from the census validation survey estimate show that in 1991 unregistered 18 to 19 year-olds amounted to 12.1 per cent. I shall read Hansard, and if there is anything more that I can add I shall certainly write to the noble Lord.
Lord Stoddart of Swindon: My Lords, does the noble Baroness agree that young people these days are intelligent and discerning? May it not be that they are not voting in parliamentary elections because they have perceived that a good many duties and powers of Parliament have been removed elsewhere, particularly to Europe? Might they not also perceive that the parties are now in so much agreement about so many things that it is hardly worth voting because they cannot distinguish between them?
Baroness Miller of Hendon: My Lords, I must confess that I wondered whether someone would manage to ask a question like that indicating that the lack of interest was to do with Europe or various other things. I could not comment on that. I do not know.

The Post Office: Future
2.50 p.m.
Lord Ezra Lord Ezra asked Her Majesty's Government:
Whether they have any plans for the privatisation of the Post Office.
The Minister of State, Department of Trade and Industry (Lord Fraser of Carmyllie): My Lords, the Government have no such plans. However, the

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Prime Minister has said that further consideration would be given to the future structure of the Post Office in preparing the election manifesto.
Lord Ezra: My Lords, does the Minister recall that on 11th May 1995 a new regime was meant to have been introduced for the Post Office, announced by the then President of the Board of Trade, which stated that in future the Government aimed to set the EFL, which means the dividend, at no more than 50 per cent. of the post-tax profit of the Post Office? Is he aware that since then the EFL has been set at 75 per cent., and that in some previous years at more than 90 per cent. of its post-tax profit, thus preventing the Post Office from reinvesting adequately and leading in one case to putting up the cost of postage stamps?
Secondly, in the Green Paper of 1994 two options were proposed; one for privatisation and one for giving the Post Office under public ownership greater commercial freedom. The latter proposal was then rejected but plans for privatisation failed. Are the Government looking once again at the possibility of giving the Post Office greater commercial freedom under public ownership which has successfully been carried out in a number of other countries?
Lord Fraser of Carmyllie: My Lords, while that is correct, it has not been possible to make progress with the external financing limits for the Post Office that we would have wished, as indicated in May 1995. We have abolished some restrictions on capital expenditure, a new corporate planning process is in place and we remain open to proposals for new business within the agreed guidelines. We have also been able to give the Post Office significant new end-of-year flexibility on its finances. However, as regards our future intentions, I repeat that the noble Lord must await the manifesto.
Lord Haskel: My Lords, is the Minister aware that the external finance limit, which is paid by the Post Office, is arbitrarily fixed at short notice according to the Treasury's needs? Does he agree that that is a totally unsuitable way for a business to work? Will he join me in welcoming Labour's undertaking to agree that the negative EFL will be fixed for a number of years so that the Post Office can operate in a much more businesslike way?
Lord Fraser of Carmyllie: My Lords, no public body can be immune from pressures on public finances. The noble Lord tells me that the Labour Party has made such a proposal and I should welcome the opportunity to hear him elaborate on it. As he appreciates, the EFL is a procedure by which the Post Office makes a contribution to public expenditure. If the noble Lord is now signalling that there is to be a decrease in what will go to the Treasury, it would be extremely helpful if he would spell it out.
Lord Clark of Kempston: My Lords, does the Minister agree that the Labour Party has always opposed any privatisation measure taken by this Government? Does he also agree that whereas when the now
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privatised industries were nationalised they cost the British taxpayers some £50 million per week, now the Exchequer receives £60 million a week, which is a turnround of £110 million?
Lord Fraser of Carmyllie: My Lords, my noble friend is correct in saying that there has been a dramatic turnround in the performance of the industries which were previously nationalised. I do not believe that there has been a single privatisation which at the time of introduction was not characterised by the party opposite as being a privatisation too far. Yet, not a single one of those privatisations is proposed to be reversed.
I agree with my noble friend that there are a number of other areas at which we might look for privatisation; but I repeat that, as regards the Post Office, he must await the election manifesto. As I answer the question, the name of the Secretary of State for Health seems to come into my mind.
Lord Jenkins of Putney: My Lords, is the Minister aware that not all privatisations have been successful and that there are considerable complaints that in some cases the services have declined? Is he further aware that I believe that the Post Office service is extremely good and I should be glad for it to remain in public hands? I believe that that sentiment is widely supported.
Lord Fraser of Carmyllie: My Lords, the experience in this country and in other countries which have followed us down the privatisation route has been that where industries have been nationalised their performance has been much better. Not only have services improved but, as my noble friend pointed out, far from being a drain on the public purse once they have been privatised, significant revenues have been paid over to the Exchequer. It is interesting to note that the recent so-called Green Paper on the Post Office, published by the CWU, recognised that if it is to succeed, a greater commercial freedom is necessary.
Lord Ezra: My Lords, following the question asked by the noble Lord, Lord Clark, is it not a fact that the Government's plans to privatise the Post Office, in particular the Royal Mail, failed because of opposition within the Conservative Party? It was not entirely to do with the Opposition at that stage. In those circumstances, and given the fact that the Minister has referred to the need for greater commercial freedom, will the Government now seriously consider the other alternative put forward in the Green Paper?
Lord Fraser of Carmyllie: My Lords, the noble Lord is correct in saying that there was not a sufficient majority to support the original proposal. However, the alternatives which might exist for the Post Office in the future will no doubt be eagerly read by the noble Lord in the manifesto once it is published.
Lord Haskel: My Lords, will the Minister remind his noble friend Lord Clark that reading out one side of a set of figures leads to bankruptcy? The figures which the noble Lord mentioned did not include the subsidies

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which are paid and the loss of assets to the public sector. It is all very well to comment on one side of the accounts, but one must also take into consideration the other side.
Is the Minister aware that 90 per cent. of the Post Office turnover comes from business mail? Most of it is generated on the computer screen. The Post Office is allowed to receive that mail electronically and distribute it the following morning on paper. In fact, it is one of the Post Office's major growth areas. However, it is unclear whether the Post Office is allowed to deliver that material electronically. When will the Government clear up that matter so that the Post Office can get into the electronic mail business?
Lord Fraser of Carmyllie: My Lords, as I indicated in my earlier answer to the noble Lord, we recognise that changes are taking place in the delivery of mail and in other electronic forms. We remain open to proposals for new business. However, as I have said on more than one occasion, I am not prepared to indicate what new proposals we might bring forward. The noble Lord, like others, must wait for the manifesto.
Lord Monkswell: My Lords, will the Minister advise the House of the connection between the Secretary of State for the Department of Health and the Post Office?
Lord Fraser of Carmyllie: My Lords, I sought to indicate that during the past weekend my right honourable friend the Secretary of State for Health was criticised for going into areas which were considered by some not to be part of his ministerial responsibilities. I wished to indicate only that I would in no sense be tempted to cover matters which were not within my responsibility.

Business of the House: Debate this Day
The Lord Privy Seal (Viscount Cranborne): My Lords, I beg to move the Motion standing in my name on the Order Paper.
Moved, That the debate on the Motion in the name of the Lord Prior set down for today shall be limited to five hours.—(Viscount Cranborne.)
On Question, Motion agreed to.

The Economy
2.59 p.m.
Lord Prior Lord Prior rose to call attention to the state of the economy; and to move for Papers.
The noble Lord said: My Lords, I begin by declaring my business interest in GEC, but I also declare at the start my paramount interest to see the policies of this Government—my Government—carried forward for many years, particularly with the success of the past four years in mind.
It is a great privilege to introduce this debate. I gather that it is the last occasion for a Back-Bencher on this side of the House to have such an opportunity before the election. It provides time to review the work of the Conservative Government over the past 18 years, both in the general thrust of their policies over the period and in particular the success attained by them under the present, much maligned, Prime Minister and his very able Chancellor, Mr. Clarke. I am delighted that two former Chancellors of the Exchequer—who both received fair commendation in Lord Edmund Dell's book—are to speak in the debate this afternoon. I used to have my disagreements with both of them from time to time, but nowadays I find myself very much in agreement with them. I wish that I could say the same for all my colleagues who have served in past Cabinets.
I suppose that we must accept that most of the electorate has forgotten how bad was the state of the economy some 18 years ago. When we came to office inflation was rife and rising; public servants were in revolt as a result of pay policy; the unions had so much favourable legislation they did not know what to do with it—who remembers now the ill-fated Dock Work Regulation Bill; and our basic industries, mostly nationalised, were over-manned, unproductive and in many cases loss-making.
I remember witnessing a scene with Mr. Sidney Weighell, the very amiable general secretary of the National Union of Railway Workers, as it was at the time, coming out of No. 10 one afternoon with a broad smile on his face, having just concluded a wage settlement of well over 20 per cent. He had a microphone thrust in his face and the interviewer asked, "Can you say after this award, Mr. Weighell, that the social contract is still working?". "Certainly", said Mr. Weighell, "I am a great supporter of it". I am not the least bit surprised that he was a great supporter of it.
Also, I remember Mr. Weighell coming to see me one day. I asked him whether he thought it was necessary to have trade union directors on the board of British public companies. In this case it happened to be the Post Office. Mr. Weighell said that he thought it was absolute nonsense and he never encouraged his members to go on boards. He said, "What I do with the Railways Board is I let them have their meetings and I let them take their decisions, and then I tell them afterwards whether they can implement them or not". That was the sort of near-anarchy that existed in the days before we came into office in 1979.
It is difficult to imagine now how bad the industrial scene was in 1979, how much we were slipping as an industrial power and the very real fears at that time that this country was becoming ungovernable. Perhaps the two most important changes in policy of the 1980s were successive trade union reform and privatisation. As we have heard this afternoon, each part of the process of privatisation—this also applies to trade union law—was fought bitterly by the Labour Party, who prophesied dire consequences and of course at past elections have always urged repeal—but have now come round to the view that all should be left in place. But listening to the discussion and observing the body language this afternoon, I wonder whether they would reintroduce

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nationalisation. It is quite remarkable how things have changed in the past few years. Even the privatisation of the railways is to be left in place, although their spokesmen cannot yet bring themselves to the same inevitable conclusion on London Underground.
The path of privatisation has not always been smooth, although the policy pioneered here is now pursued relentlessly throughout the whole world, from South America to South Africa, and even China in its own characteristic way is now engaged in taking things out of the public sector. No one can defend the capital profits made by some or the over-inflated salaries paid to others. But those are of minor consequence compared with the overall benefit to the economy.
The Opposition have done their best in this House and in the other place to give privatisation a bad name. But it has been an enormous success story. What is the benefit? I should like to quote from the Economist, which is not always a magazine that lauds the present Government. It states:
"Between 1980 and 1982, nationalised firms together received an average of £300 million a year of subsidy. From 1987 to 1995 these same firms after privatisation contributed £4.8 billion, mostly in corporation tax, to the public purse. Efficiency is up. Prices are down. Industrial gas prices have fallen by nearly 50% in real terms since privatisation; telecoms prices by over 40%".
There are other points which are just as important. Domestic gas prices have fallen by 8 per cent. in real terms and electricity prices by 5 per cent. That includes the VAT which was imposed on electricity. Also, there has been a £50 million rebate for every customer from the National Grid. All those matters have contributed enormously to the wealth of Britain.
This afternoon we heard from the noble Lord that not all privatisations have been successful. As in any business, some businesses are more successful than others. But, taken as a whole, it has been a dramatic success for the Conservative Government. Not only that, but at last too we are seeing improvements in our infrastructure, in particular rail and water. That would never have been forthcoming through the public sector.
Manufacturing industry will benefit from a more regular and certain stream of tenders and orders. I welcome the order announced today by Prism Rail for the Tilbury line. I wish that my own company had got the order, but that is another matter. The Tilbury line has been called the "misery line". There was never any question but that there would have been a wait of many years under public ownership before money could have been made available for it.
The Labour Party now threatens those companies with a windfall tax—uncertain severity on an undefined group of companies. That could penalise efficiency and investment and undoubtedly put up costs and hence put up prices. It would be a typical piece of socialist mismanagement that, if the Labour Party should come to power after the election, it would penalise the water companies as they face up to drought conditions of great severity caused by past years of under-investment, now being put right by privatisation. Even the noble Lord, Lord Howell, would not be able to save them in those circumstances, as he did when he became the rainmaker in, I think, 1976.
It is commonplace nowadays to talk in terms of a global economy. But I doubt whether many people understand the dramatic changes of the past 10 years. My company is engaged mostly in capital goods. We have to compete throughout the world in very competitive markets. For the most part, our competitors still have considerable advantages over us; for example, aid in the form of subsidies to the customer is used on a massive scale by France, Japan and Germany. Chancellor Kohl never makes a foray into a foreign territory without a sack of deutschmarks on his back.
Prototypes of new machines are discreetly bought and tested by nationalistically inspired and aided customers. Monopolies legislation here and Europe is now outdated and superfluous as far as capital goods are concerned because we are in a world-competitive market. Prices for turnkey projects like power stations in the Far East, in China and in other countries have fallen by 30 per cent. in the past three years. A modern deal now involves much more than just selling the equipment: it involves finance, long-term maintenance and operation and specific guarantees for performance over many years.
However, despite the fact that we do not get subsidies, we have some advantages over our European competitors. It is all the more important that we do not throw these away now. A recent survey in a medium-sized engineering company has given comparisons of labour costs between us and our European competitors. I should like too give your Lordships just two examples. For skilled workers, the hourly rate in Britain is £6.46, in Belgium it is £9.5, in Switzerland £18.95 and in France £6.82. But the on-costs—that is, the social charges—bring the figures up to £7.48 in Britain, £18.15 in Belgium, £24.25 in Switzerland and £9.89 in France.
If we take a graduate engineer of two years' experience, the average salary in this country would be £18,000, with total employment costs amounting to £20,880. In Belgium he would earn £25,507, with on-costs bringing the figure to £38,644. The salary in Switzerland would be £47,400, with on-costs bringing it up to £60,672; and in France the salary would be £28,834, with the total employment costs amounting to £41,233. For every £100 paid out in wages, employers must add £31 in Germany, £41 in France, over £44 in Italy but only £15 here, although some of that disparity is taken up by the lower productivity which still exists in some industries.
I have no doubt that part of the conversion of the Labour Party and the unions to the European Union and monetary union is a belief that our wage rates and labour costs here will begin to rise towards the levels on the Continent. That is why moves towards a social chapter and a minimum wage need to be resisted. It is no use talking about greater prosperity, employment and efficiency and then promptly reducing our competitive position and advantage. The fact that 40 per cent. of world investment in the European Union has come to Britain in the past few years is the best testimony to the success of government policies—as much in the 1990s as Germany, France and Italy put together. The impact of that investment, in order of magnitude, is similar to

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that of Marshall Aid to Germany in the post-war period. It has created 850,000 pretty good jobs in Britain during that period.
I have always believed—and, indeed, I still do—that there are great political and economic advantages for Britain within the European Union. I cannot believe that any serious industrialist would advocate withdrawal. However, the top priority for industry is to get the single market working properly. I can assure my noble friends and noble Lords that it is a long way from that at present. I believe that the Government's negotiating position on monetary union is absolutely correct as it is. There are important considerations on both sides of the argument: it makes a mockery of any negotiation if you disclose your decision in advance.
We approach a general election with the economy in better shape than at any time since the war: a combination of healthy, steady growth and low inflation. The OECD forecasts that the UK is set to be the fastest growing major European economy again this year and in 1998, as, of course, it was in 1995. It is against this background that the Opposition have announced that they would leave tax rates and public expenditure programmes untouched. There cannot be a much bigger tribute to the Chancellor of the Exchequer than for an Opposition to say that they will come into government and really not change anything at all.
By so doing, the Opposition have accepted the argument that it is essential to pursue a policy of work incentives, low taxes and low labour costs. It also means accepting that the money available for health, social services, housing and education will not allow the increases and improvements that they constantly and consistently demand. It is dishonest to complain that the policies of this Government have resulted in the rich getting richer and the poor poorer and then adopt precisely the same policies. Government is about making very hard and sometimes harsh judgments. If you restrict the economy by increasing tax and expenditure, unemployment will almost certainly rise, as has happened on the Continent.
The best way to reduce poverty is by growing the economy and allowing the benefit to flow down in terms of more employment and better services. We are told now that the aim of Mr. Blunkett is a trickle-up policy of improving wealth and standards by better training and education. Of course, that is quite right; but this and the trickle-down factor have a part to play and, indeed, have been playing a part, because it is happening now and living standards in this country are rising. We have a higher proportion of working age population in work and a lower unemployment rate than any other major European Union country. Over the period 1982 to 1993 we created more jobs than France and Italy combined. According the OECD, real take-home pay of UK production workers, adjusted for cost of living differences, is similar to that of Germany and above that of France and Italy. The increase from one-tenth to one-third of young people attending university is another indication of rising standards. The degrees may not be of Oxbridge standard, but opportunities are being created for them and by them, of which I find they are
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intensely proud and would have been beyond their dreams only 10 years ago. If we can do more to train for higher and scarce skills it will help considerably.
New Labour strikes me as being like a miscreant who, after many years, has made a big effort to go straight. He does not really believe that he can and inwardly is waiting for the first chance to revert. The temptations to return to the old ways are too great to resist, and only a temporary loss of speech is holding him back. With our economy at last, after many years of decline, set on a favourable course, this is a risk that we cannot take. It will take many years of sustained improvement if we as a nation are to raise the standard of living for all our people to match their aspirations. This Government have a good record: they will need to unite and fight and put over their successes if we are to sit on these Benches in the next Parliament. I beg to move for Papers.
3.18 p.m.
Lord Eatwell: My Lords, the whole House will be grateful to the noble Lord, Lord Prior, for introducing this debate on the state of the economy. Many noble Lords will recall that, in his memoirs, the noble and learned Lord, Lord Howe of Aberavon, whose speech we look forward to hearing this afternoon, described the views of the noble Lord, Lord Prior, on economic policy as, "most interestingly incoherent". However, I am sure that the noble and learned Lord will take a kinder view today.
Debate on the economy tends to go through cycles. It swings from complacency to despair and back to complacency, while seldom ever encountering the long-term facts in between. The Government at the moment are in a complacent phase. This afternoon we have the opportunity to confront the long-term facts. It is particularly pleasing to have the noble and learned Lord, Lord Howe of Aberavon, and the noble Lord, Lord Lawson of Blaby, participating in today's debate. The noble and learned Lord, Lord Howe, and the noble Lord, Lord Lawson, were the Chancellors who bestrode the 1980s. Their experience will enable them to confront the longer term factors underlying today's economic performance.
I am sure, for example, that the noble and learned Lord, Lord Howe, will draw on his experience in the early 1980s to advise us on the likely impact of the rising pound and the current rate of inflation. Under his chancellorship the combination of a 10 per cent. rise in the pound and an inflation rate that was 50 per cent. higher than the G7 average resulted in the destruction of a fifth of British manufacturing industry. Despite the considerable improvements which have been made in the quality of British manufacturing, our industry today is still too small and continues to lose world market share.
How can we compare the policy of the noble and learned Lord, Lord Howe, with what is happening today? In the past six months the Government's monetary policy has resulted in a 23 per cent. rise in the exchange rate against the deutschmark and an inflation rate that is 20 per cent. higher than the G7 average, and rising. It is a re-run of the policy of the noble and

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learned Lord, Lord Howe, and the results are the same too. Two weeks ago BOC, the industrial gases group, announced that the rising pound had knocked £5 million off its profits. Last week the CBI cut its growth forecast because of the strong pound and this week British Steel pointed out that it loses £100 million in profit for every 10 pfennig rise in the pound, and stated that it will he forced to accelerate job cuts.
To the experience of the noble and learned Lord, Lord Howe, must be added that of the noble Lord, Lord Lawson. He presided over one of Britain's most dramatic consumption booms when consumption expenditure grew so rapidly that personal savings approached zero. The spending boom inflated tax revenues and the Government actually ran a surplus. Perhaps when the noble Lord speaks later he will confirm that in 1988 he told another place,
"The strength and durability of the economic upswing … compares favourably not only with our own past, but also with the economic performance of other countries".
He will confirm that in his Budget speech of 1989 he said,
"Our economic performance has been transformed: so have our prospects for the future".
Indeed they had. The consumption driven boom of the noble Lord, Lord Lawson, precipitated the longest recession this country has endured since the war. The experience of the noble Lord, Lord Lawson, should be invaluable today, for once again consumption is growing nearly twice as fast as output. Once again we have a Chancellor who declares, as Mr. Clarke did in November,
"I expect consumers' expenditure to be the main engine of growth next year".
So today's Chancellor is clearly the offspring of the noble and learned Lord, Lord Howe, and the noble Lord, Lord Lawson. Unlike Dolly the sheep, who is the product of a single cell, he is a dual clone. He embodies in one person the economic policy genes of them both. The Howe of Aberavon gene produces a high exchange rate and a high inflation strategy that is pricing British goods out of markets at home and abroad. The Lawson side of his personality revels in consumption driven growth.
However, the noble Lord, Lord Lawson, can fairly claim that when he stoked up his consumption boom at least investment grew too. Today investment in the British economy is actually falling, not just as a share of GDP but in absolute terms. Manufacturing investment was 9 per cent. lower in 1996 than it was in 1995. Business investment as a share of GDP is now the lowest in the major economies of Europe. How would the noble Lord, Lord Prior, explain the fact that investment, the commitment of business to the future, is actually falling? For an explanation may I recommend that he turns to the latest issue of the Economic Bulletin published by Lloyds Bank? This is the bank's view of what is going on:
"Over the period since 1980, the UK has the worst record for economic instability amongst the 14 largest industrial countries … Economic instability is doubly damaging to economic well-being, directly by encouraging uncertainty and indirectly through lower investment in physical capital and in training and education, thereby depressing sustainable economic growth".
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So there we have it. An authoritative source confirms that the Tory policies of boom and bust, of go and stop and stop again, have created such an all-pervasive aura of uncertainty that even in the rosy scenario painted by the noble Lord, Lord Prior, investment falls. And not only investment in physical capital, but investment in training and education too. It is a striking fact that since the general election of 1992 there has been no increase in full-time employment in this country. The instability in employment, the fear of temporary jobs with no job security, the morale destroying part-time jobs with no prospects, all discourage people from investing in themselves. And all these are not merely the outcome of the Government's policies; they are actually the objective of the Government's policies. It has been the Government's goal to create that sort of labour market in which the poor churn between temporary low paid work and the misery of impoverished unemployment. This policy has undoubtedly succeeded.
No consideration of the state of Britain's economy today can possibly ignore the fact that one of the undoubted outcomes of the policies of the past 18 years has been the creation of an underclass in this country. Your Lordships will recall that the Government's own latest figures show that a fifth of all British citizens have levels of real income which are no higher, and are often significantly lower, than their incomes in 1979. They have not shared in the growth of the past 18 years. Every year half the poorest escape from grinding poverty by getting a temporary job, making enough perhaps to buy a television, the cheapest of all sources of entertainment, or a washing machine, or something like that. But next year a third of them drop back into the poorest groups. The majority oscillate from being very poor to being merely poor. Very few ever escape the underclass that this Government have created. The underclass is a permanent feature of the state of the British economy under Conservative rule. What is extraordinary is that the Government boast about it. They boast about the so-called flexibility they have introduced into the labour market, without understanding the long-term damage they have done, just as they jeer at the economic performance of our European partners, without understanding the long-term damage done by their instability on Europe.
In this case it is a sort of emotional instability of course. How else can you explain a Secretary of State for Health who declares at lunchtime that Britain will certainly not enter the single currency in 1999, and then issues a grovelling retraction in the afternoon? How other than in terms of some collective emotional instability can you understand a Cabinet in which the Foreign Secretary declares that he is "hostile" to a single currency, and the Chancellor asserts that this was a "slip of the tongue"?
In the face of all this emotional instability it is no wonder that on the most important economic decision facing this country the Government provide no leadership at all. They provide no leadership because they have no leadership. Does the Prime Minister support the Foreign Secretary? No. Does he back his Chancellor? No. The Prime Minister declares that in his view we should enter the single currency if it were to

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be "positively beneficial" for Britain. Let us consider that statement. Can we imagine the Prime Minister saying that we would enter the single currency if it were not beneficial for Britain? Can we imagine the Prime Minister saying, "OK, I know it is harmful but I think we should do it anyway"? Of course not. The Prime Minister's statement is meaningless. It is the statement of a man who does not lead his party, but follows it. It is the statement of a Prime Minister with no policy other than procrastination. He is the Micawber Prime Minister, hoping for something to turn up to rescue him from the Conservative Party.
Well, something is turning up; it is the general election. At the general election the British people will have the opportunity to assess the impact of the Conservative Party on the economic state of the nation—the Conservative Party which has given Britain, as Lloyds Bank says, the worst record for economic instability; the party which has presided over boom and bust and bust again; the party which has created the underclass and neglected education and training; the party which is emotionally unstable over Europe.
And they will choose a Labour Government committed to economic stability, a government which will put investment first, a government which will attack poverty by creating opportunity, and, most important of all, a stable government that British business and the British people can trust.
3.30 p.m.
Lord Ezra: My Lords, like the noble Lord, Lord Eatwell, I express appreciation of the noble Lord, Lord Prior, for having introduced the debate on the economy. We have recently had two major debates on the subject, on 30th October and 20th November last. Nonetheless, it remains a vital issue. I am glad that we have the opportunity to discuss it today.
I have a great respect for the noble Lord, Lord Prior, I knew him when he was in Government. He has also pursued a distinguished career in industry. However, I was sorry to note that in his preliminary remarks he joined with views previously expressed from the other side of the House of unqualified criticism of the nationalised industries. I served in a nationalised industry for 35 years. I have been serving subsequently in the private sector for 14 years, so I have had experience of both. For the record, I should like to make these points.
First, I do not believe that there is any difference between the abilities and the skills of the managers in nationalised industries and the private sector. Indeed, as industries have become privatised, the same managers have carried on. They have the same skills. During my time in the coal industry, British mining engineers were regarded as leaders of the world in deep mining and were employed in all other countries where such mining was carried out.
Secondly, there is no doubt that in financial terms the nationalised industries' performance was bad. And why was it bad, my Lords? It was bad because of the constant intervention of Government. On every single aspect of
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the affairs of the coal industry—and it went through all the other industries—whether it be wages, prices, investment or anything else, there was government intervention. And we have had evidence of that today in the Question that I asked about the Government's intervention regarding the Post Office. Although publicly owned, the Post Office happens to be a very successful enterprise—which perhaps disproves the point that no nationalised industry can be successful. But the Government are making sure that it cannot work effectively because despite a government commitment that a dividend of no more than 50 per cent. should be taken, it has been laid down that 75 per cent. will be taken. In some years past it has been 90 per cent. In those circumstances, how can the industry continue to work effectively? I do not suggest that we put the clock back, but I wanted to get the record straight.
I turn to the subject of the debate. I, too, like the noble Lord, Lord Eatwell, wish to look forward rather than back. We are at a stage in the development of our economy when I freely accept that things have been going much better for some years. As I am sure the noble Lord, Lord Mackay of Ardbrecknish, will remind us—he has done so on many occasions in the past when we debated the subject—we are in the fifth year of a recovery. The question we must ask ourselves, however, is this: how long will this recovery last? Going back as far as we can recall, the whole of our past economic history has shown that like other economies throughout the world we are subject to economic cycles. Economies do well at certain periods; and they do less well at other periods. How long, therefore, will the present recovery last?
The specific problem we have had in Britain in recent times is that when the economy moves in a down cycle it is more serious and the difference is wider than elsewhere; and that has certainly been the case in the past two recessions. The challenge is not only to estimate how long the present recovery might last, but how to ensure that when there is some degree of downturn, as seems 90 per cent. likely, it is minimised.
In preparation for the debate, like many other noble Lords who will participate, I have done a little research. I have looked at the year 1988. That was a year in which the British economy was doing particularly well. The noble Lord, Lord Young of Graffham, who sat in the seat of the noble Lord, Lord Mackay, was telling us how well it was going. Indeed, if one were to read the speeches of that time, one would probably find the wording to be almost identical. The Red Book of that year estimated that the growth in consumer expenditure in the forthcoming financial year would be of the order of 4 per cent.; and the growth in GDP would be of the order of 3 per cent. In the event, consumption increased by 7.5 per cent. and GDP increased by 5 per cent. I do not criticise the Treasury, which made those estimates, because all other pundits, including perhaps the noble Lord, Lord Desai, if he had been following the subject at that time, were taking the same view. However, one can go wrong in these estimates. It was that underestimation which led to the pressures on inflation which in turn led to the recession to which the noble Lord, Lord Eatwell, referred.

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Let us look at the estimates made for the coming financial year. By coincidence they happen to be in round figures that consumer expenditure will rise by approximately 4 per cent. and that GDP will rise by approximately 3 per cent. The question we have to ask ourselves is this: will that be any more valid than the estimates of nine years ago? I think that everyone is agreed that there is unlikely to be the enormous increase in consumer expenditure that there was then. Nonetheless, I think that there are possibilities that the 4 per cent. could be exceeded. If the growth of the economy continues as it does now—the Government are confident that it will—that will put more money into the pockets of consumers. And there is one other factor. The building societies which will become banks will hand out very substantial sums of money before the year is out. Indeed, we read in the newspapers this morning that the Halifax has a reserve of between £3 billion and £5 billion which it does not know what to do with, and is thinking of handing it back to its members. That will be a massive infusion of money waiting to be spent.
Therefore, we should be cautious about the prospects of consumer expenditure in the coming year. If consumer expenditure substantially exceeds the 4 per cent. estimate of the Government, that will work its way through to the GDP. The general feeling among economists—there are many eminent economists here—is that a GDP increase of over 3.5 per cent. could be inflationary in its impact.
While accepting that the economy has improved and has been buoyant for the past five years, I think that we are justified in asking the Government whether they have given any thought (if they were in a position to do anything about it) as to what could happen next. How long could that buoyancy continue? When could we reach the point at which we move inevitably into a downturn? What can be done to minimise the impact of that downturn?
In that connection, the Governor of the Bank of England recently suggested a modest increase in interest rates despite the dampening effect of the increase in the value of sterling. Was he making a prudent proposition in the light of what might happen? The Government turned it down. We are justified in asking whether that was because there is an election forthcoming, or whether they are convinced that there is no need for such prudent action.
While the economy has undoubtedly improved, on past evidence it is probably nearing the end of the upturn. The downturn could be coming. Can it be expedited by higher than expected consumer expenditure; and in that case what policies will the Government be pursuing in the future to deal with that?
3.40 p.m.
Lord Kingsdown: My Lords, I find it rather challenging to speak so early in this important debate as I have to open with a confession. I recently found myself embarking, albeit briefly but far too late in life, on a new career as an international bond salesman promoting sterling bonds and instruments. It seemed natural to embark upon that with confidence in view of
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the strength of sterling, its prospects for stability and the high yield available on it, about which I shall say more anon. I could not help, however, reflecting on how ironical it was when I thought of the vicissitudes of sterling in the past—not least when I was Governor of the Bank of England and looked likely to be the first one who presided over sterling's slide down to parity with the dollar, which incidentally was narrowly averted by raising short-term interest rates twice by a total of three points to 15 per cent. That would no doubt be a horrifying thought to the modern borrower. I regard it as thoroughly commendable and a tribute to government that we do not have shocks like that nowadays, so destabilising as they were to the real economy.
The strength of sterling is readily to be understood. It has risen 20 per cent. against the deutschmark since last autumn and by 6 per cent. against the US dollar in the same period. These comparisons against the deutschmark show the UK and the US to be in very similar positions in terms of economic fundamentals. Both have a respectable and sustained rate of growth, low inflation, appropriate short-term interest rates, and rising rates of employment unaccompanied by labour cost pressures—a phenomenon recently described by Alan Greenspan as unprecedented in modern memory and colourfully presented by the American markets as the "Goldilocks" scene. The United Kingdom shares the same set of experiences and hence the strength of the currency. That is not, I recognise however, universally welcome, although the rest of the scenario must be. I do not share the view of the noble Lord, Lord Eatwell, who seemed to suggest that the current strength of sterling is in some way a failure.
In my view great credit must go to the Government for their persistence and perseverance through a painful period in the early 1990s of recession and unpopularity in achieving that position. Is it sustainable? I ask the same question as the noble Lord, Lord Ezra. In my view the answer is yes. I realise that we are still subject to the economic cycle. However, I believe that in this day and age of low inflation the cycles will he flatter and longer. I believe therefore that it is possible that we can sustain the present conjuncture subject to inevitable caveats, some within government control and some manifestly not. In the latter category are unforeseen, unforeseeable political changes or exogenous shocks—"events", as Mr. Macmillan put it so succinctly; and not much can be done about them. In the former category—those matters within government control—there will always be persistent pressure from the perception that growth is inadequate and unemployment is not falling fast enough, and the consequent temptation to ease policy too readily, with the potential consequences with which we are familiar. I doubt, however, whether that is in prospect. I hope not. I make that remark in view of the expressed policy statements of both main political parties, and also on account of the pressure under which most, if not all, modern governments find themselves from the international financial markets.
I have heard these markets described recently as the vigilantes of modern financial policy. It is an apt word. These markets are no respecters of persons or governments, as anyone who was involved in the

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events of September 1992 and subsequently will know. They have no sentiment and little loyalty except, understandably, to themselves and, quite correctly, their clients. They control funds which dwarf the reserves of the central banks and modern technology enables them to deploy such funds instantly and on a massive scale—and to punish governments whose policies appear rash, ill-judged, potentially inflationary or fiscally irresponsible. It may be distasteful to contemplate that, especially for those to whom sovereignty is dear—perhaps, above all, sovereignty in monetary policy. But that restraint on action by government has arrived in our globalised world; it exists. And I have to say that I find it salutary.
Do we here in the United Kingdom with our so-called Goldilocks scenario have to fear these vigilantes? I think not at the moment. But there is one respect in which our situation needs improvement. At present, the United Kingdom Government have to offer an interest rate return on their gilt-edged stock of between 1½ and 2 full interest points above that accepted by the markets for the German bund. The UK rate is comparable to that for Italy, and the interest rate is above that for Spain and France. Why is this demand, this interest rate premium, made on us for our government stock, for all sterling bond issues, indeed probably for all sterling borrowers, in spite of the strength of sterling and the soundness of our economy?
I am afraid that this is a visitation of the vigilantes, a perception by the markets that sterling is still vulnerable to devaluation and inflation through deliberate policy or through benign neglect of the exchange rate, which is very nearly the same thing. These vigilantes demand a long track record on the way to credibility, and for all the achievements of the past three or four years we do not yet have the credibility of, say, even those countries that are believed to be going to join economic and monetary union in Europe whose fiscal position is not as sound as ours in GDP terms.
I do not on that account advocate immediate membership of EMU. I believe incidentally, as does the noble Lord, Lord Prior, that the official stance of the UK Government is the correct one and the only one in present circumstances in the interests of the country. I am not necessarily saying that the markets are right. They are not always. However, I would like to see that interest premium disappear, both as a tribute to UK financial soundness and as a means of alleviating the cost to all of us as taxpayers of our government debt—not to mention corporate borrowers or any issuer of sterling instruments or lesser borrowers.
One step could be taken now, quite apart from EMU. As long as the Bank of England Act 1946 gives the Chancellor of the Exchequer, as it does, the right to give directions to the Bank of England, the vigilantes will want that interest rate premium. Why, they ask, otherwise retain that power when governments elsewhere in the world are giving it up or restricting it except to have the option to inflate and devalue at will?
I know that the idea of an independent central bank offends in the eyes of many the principle of democratic accountability, but our cousins in New Zealand—I call
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them our cousins in this context because their constitution and parliamentary traditions are very similar to our own—have worked out a solution to this issue which has been remarkably successful for all concerned in that country. We could, in my view, appropriately crown our present success with a similar move, giving the interest rate reliefs that I have described. I know it may be said, "He would say that, wouldn't he?" Yes, I would, I have, and I believe it.
3.50 p.m.
Lord Lawson of Blaby: My Lords, it gives me particular pleasure to follow my good friend, the noble Lord, Lord Kingsdown. It brings back happy memories of the double act which we performed for seven successive years at the Lord Mayor's Banquet at the Mansion House, the only difference being that on that occasion I used to speak first and he spoke after me. We were always in harmony and I am glad to say that I find myself in harmony with him today.
As he well knows, and as noble Lords may be aware, I came to the conclusion during my time as Chancellor that the conduct of economic policy, which has always been a difficult issue, would be improved and made less difficult with the sort of benefits that he enlarged upon, if we were to have an independent but accountable Bank of England. I proposed that in 1988 to my noble friend the then Prime Minister, Baroness Thatcher. Unfortunately, at that time she was unable to agree with me. I made it public that that was my view in my resignation speech of October 1989 and have adhered to that view with increasing confidence that it is right ever since. In a time-limited debate I cannot go further along those lines but it is an important point which the noble Lord made and with which I entirely agree.
I welcome the very timely debate which my noble friend Lord Prior has introduced. Because of the time limit, I shall not follow up the speeches of the noble Lords, Lord Eatwell and Lord Ezra. The speech of the noble Lord, Lord Eatwell, was quite extraordinary. He made it appear as if all that mattered was the economic cycle and that the cycle under the present administration and its predecessors had been consumption-led. No one listening to him would have realised that during the whole of the 1979 to 1989 economic cycle, investment in this country rose very substantially faster than consumption, by something like 3.9 per cent. per annum as against 2.8 per cent. per annum for consumption, and indeed business investment rose even faster than investment as a whole. That was in complete contrast to the previous Labour economic cycle of 1973 to 1979, when it is true that consumption did not rise as fast as it did under the Conservatives, but investment did not rise at all. I did not want to go over the past but it was raked up by the noble Lord, Lord Eatwell.
I believe that the noble Lord, Lord Ezra, was right to say that we should be cautious. He reminded us that we are five years into a recovery. Five years into the last recovery took us to 1986. It was impossible in 1986 to foresee the credit explosion which caused the difficulties later in the 1980s. There is thus good ground for caution now. He is right, and the noble Lord, Lord Kingsdown, is right, too.

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However, I would rather refer to a noble Lord who is to speak later in this debate, who said:
"Labour's biggest obstacle is the economy. It is in great shape. There is steady growth and low inflation. Compared to Germany and France, it looks the best economy in Europe".
That was said by the noble Lord, Lord Desai, as he will recognise, only a few weeks ago. Unfortunately, because the noble Lord has an understanding of the economy, he was found ineligible to be a Front Bench spokesman for the party opposite.
We are in a benign phase of the economic cycle. But that is not what matters. What really matters is the fundamental long-term improvement in the underlying performance of the British economy during the period since 1979. What matters is why it has happened. It has happened because of the far-reaching programme of economic reform put in place by the Thatcher Government and continued by the present administration: privatisation, deregulation, competition, flexible labour markets, trade union law reform, tax reform and reduction made possible by the most rigorous control of public spending and a whole raft of reforms of that kind. That is why we have had this improvement.
It has been a sequence of governments that has taken a long view. It was set out at the beginning by the promotion for the first time of something called the medium-term financial strategy. No previous government since the war had thought in those medium-term views.
A more striking example, and something of topical interest, is what has come to be known as the pensions time bomb. That is something which the Conservative Government of this country addressed in a way that no other country has yet done but will have to do. Some noble Lords will be aware of a study produced by the IMF last year which looked into what it called the unfunded state pension liabilities of the various G7 countries. It is a very serious and important issue. The IMF tried to make its best assessment of the net present value of these unfunded public sector pension liabilities among the various countries. The result was very interesting.
In France, Germany and Japan the net present value of the unfunded state pension liabilities was over 100 per cent.—in some cases well over 100 per cent.—of GDP, requiring in the IMF's judgment, with whose arithmetic it is impossible to quarrel, either substantial increases in taxation or substantial reductions in benefits, or maybe a bit of both, in order to bridge the gap.
For two other members of the G7 the position was not quite as bad: for Canada and Italy the figure was something like two-thirds of GDP, between 60 per cent. and 70 per cent. That is still quite serious but not as bad as the position in France, Germany and Japan.
For the United States, where a big and agonised debate is taking place because there is concern about this problem and what it implies for future generations, the figure is only 25 per cent. of GDP, but even that is considered serious.
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In the United Kingdom, as a result of the reforms introduced by this Conservative Government and the previous Conservative Governments, according to the IMF figures, the value of the unfunded state public sector pension liabilities is only 5 per cent. of GDP. We are in a far stronger position than any of the other countries of the G7 in that very important respect. Indeed, it would require only a very small increase in the age of retirement to bridge the gap, in the view of the IMF.
There has been a far-reaching range of reforms concerned with the long term, with the Britain of the future, not merely the Britain we are living in at the moment, which has been put through by the Conservative Government since 1979 and which is the reason for this greatly increased underlying performance.
Each and every one of those reforms was fought tooth and nail and bitterly resisted by the party opposite. That is a fact. My noble friend Lord Prior mentioned it in his introduction. Those of us who were involved in those reforms remember it very well. I should like to think that they have changed. They say that they have changed. They say, "Oh, but that was old Labour; new Labour is quite different."
Certainly, Mr. Blair—whom, I must confess, I rather like—is a little different. He is the first Leader of the Labour Party within my lifetime who is not a collectivist. His way of thinking is not collectivist. There have been Right-wing Labour leaders but they have still been collectivist. Mr. Blair is not a collectivist and that is good news. I was delighted—my noble friend Lord Prior mentioned the fact—that Mr. Brown said that the Labour Government, if there is one, will stick rigidly to the Conservative public expenditure totals, and on no account will there be an increase in either the basic rate or the higher rate of income tax. That is remarkable. I introduced the reduction of the higher rate of income tax to 40 per cent., and there was such uproar from the Labour Benches in the other place that the Sitting had to be suspended. It was the first Budget ever during which a Sitting had to be suspended. Moreover, the biggest denunciation came from Mr. Brown. It was said that I had divided the nation and offended the most decent instincts of the British people. They went on in that vein. Now they have signed up to that idea.
There can be conversion. The New Zealand Labour Party genuinely changed. The Australian Labour Party may have changed too—indeed, I believe that it has done so. However, I must say that, although I should dearly love to believe that the Labour Party has changed, nothing that I have heard during three years and more that I have sat in this Chamber or since I last inflicted my views on your Lordships, and nothing that I have heard today from the noble Lord, Lord Eatwell, makes me believe that the change is anything more than skin deep, and even that may be an exaggeration.
I began with a quotation. Let me end with one from the Economist, which, as my noble friend Lord Prior said, is not a paper that supports the Conservative Party or the present Government. It said
"Until about 1979, Britain's economic decline relative to other countries was precipitous; since then, the decline has been arrested, and there are now signs that Britain is improving its position … no other British government in modern times can claim as much".

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That was the conclusion of the Economist's special 34-page survey on this country. Unless and until the Labour Party accepts that that has happened, and unless and until it understands why it has happened, it will not be fit to be entrusted with the conduct of economic policy in this country.
4.2 p.m.
Lord Barnett: My Lords, I hope that the noble Lord, Lord Prior, will not mind if I do not follow his example and make a party political speech. Perhaps I may disagree with him on only one point. He referred to an excellent book on Chancellors by my old and trusted friend and former ministerial colleague Edmund Dell. I had dinner with my old friend on Monday night and I can assure the noble Lord that he did not agree with what the noble Lord said. Neither in his book nor in speaking did he agree that the noble and learned Lord, Lord Howe, and the noble Lord, Lord Lawson, were excellent Chancellors. Indeed, I had to tell him that I hoped his next book would not be about chief secretaries. He was very critical of every Chancellor since 1945, both Labour and Conservative.
But let me say at once that I happen to agree—one cannot dispute it—that at the moment the economy is doing well. I certainly do not dispute that. It is doing well by comparison with Europe now. I do not dispute that and indeed nobody can do so. It is doing well by comparison with the past 18 years here in the UK. I do not think that that can be disputed. But it cannot be said that it has also done well by comparison with Europe over the past 18 years. That certainly would not be true.
The 3½ per cent. growth that the Government have achieved, are achieving or seem to be achieving at the moment, is of course good by comparison with past performance. But, unlike some people, including the noble Lord who is a former Governor of the Bank of England, I do not believe that it will be sustainable. I do not believe that things have changed so much in the management of economies. If one insists on having inflation at 2½ per cent. as the main criterion for achieving such growth and achieving it, I do not believe that that 3 per cent. can be sustained. We shall be back to the old average of 2 per cent. or thereabouts that we have had in the past 18 years and indeed before then under successive governments. I do not believe it for a moment.
Under the noble Lord, Lord Lawson, in 1987 and 1988, there were substantially higher rates of growth. But, as he will be the first to agree, they could not be and were not sustained. The fact is that next year in 1997–98, on present policies, they cannot be sustained. We are told in the Red Book in Table 3.9 that the public sector borrowing requirement will be 2 per cent. of GDP below the Maastricht convergence criteria. When the noble Lord first said that, I was rather pleased to hear it. But I do not believe it. I doubt if the Chancellor believes it. He fudged the figures every bit as much as those in Europe who are accused of fudging their figures. One of the good reasons is also found in that Table 3.9, and the Treasury is very honest about it.
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The average margin of error over the past 10 years—the average, not the worst—on the PSBR has been £11 billion—1½ per cent. of GDP.
One can believe in miracles and believe that that will not happen again and in future there will not be any margin of error. But the Treasury does not believe that; otherwise, it would not have put those figures in the Red Book. I do not blame the Treasury for those forecasts; I do not blame the wise men who give the Chancellor advice; nor do I blame any other economist outside the Treasury. Forecasts are very difficult. In 1987 and 1988 the noble Lord, Lord Lawson, blamed the Treasury and it is worth noting what he said at that time. I quote from the noble Lord's excellent book. Talking about the Treasury forecasters, he said:
"although the forecasters did their best, they let me down badly".
However, he went on honestly to contradict himself, saying:
"I believed them, not because I had any faith in Treasury forecasts as such, but because they reinforced my own instinct".
The noble Lord, Lord Lawson, said that in his book. In fact, it is hard to believe in any forecasts or instincts, even instincts as good as those of the noble Lord, Lord Lawson. The fact is that it is easier to forecast the weather than to forecast the economy and economic effects.
However, the analysis of what is likely to happen shows that public expenditure very much understates the likely outturn. In the current year it looks as though the Government might achieve public expenditure as a percentage of GDP at the same figure that I left in 1979. I am not proud of that. I am sorry that I had to spend so much of my time cutting public expenditure, including that of my noble friend the noble Baroness, Lady Castle.
The reason why I say that the forecasts are likely to be wrong are manifold. But there is one reason in particular. Public sector pay is forecast to be frozen for the third year in succession. Anybody who has worked or is working in the voluntary sector or any part of the public sector will know that that is, to put it mildly, unlikely to be achieved. Inevitably there is likely to be a need for increased expenditure in the health service and in education.
On the revenue side, the Chancellor and the Treasury Red Book have assumed far too much. Perhaps I may again give just one more example: The anti-tax evasion and avoidance measures are scheduled to bring in very large sums of money. I hope that they are successful. But the fact is that it will not happen very quickly. I say that as an accountant, who is, I hasten to add, no longer in practice. The Chancellor and the Treasury underestimate the resourcefulness of accountants in advising clients on tax avoidance—not tax evasion, I also hasten to add.
But I do not believe that the present Opposition, when in government—which I assume will be the case (I know that honourable Members down the Corridor expect a Labour Government)—will do any better. It will need more tax. I know that it has made a firm commitment not to increase the rates but there are many ways of increasing taxation without touching the rates. Indeed, it could always say: "When we opened the

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books we found things much worse than we expected, so we can change the rates", as has been done by Chancellors in the past.
My view is that not only will there be a need for more expenditure, but I hope that there will be a requirement and a desire to increase expenditure. I say that as a former Chief Secretary to the Treasury who sadly had to say no to many of his dear colleagues in areas of expenditure which, when I came into politics, I desperately wanted to see improved. I do not believe that we shall be able to improve the health service, education and other areas without an increase in expenditure; it is not possible. One may be able to do a little about the administrative side of the health service, but that will only be possible on the technology side. It will be tiny in relation to what needs to be done. It will not happen.
I hope that the windfall tax will act as a catalyst to bring relief in the field of unemployment, but I am not too optimistic in that regard either. Maybe being Chief Secretary for more than five years makes one too much of a pessimist. The long-term solution is to go for higher rates of economic growth. That will not be achieved by slavishly following the present Government's policies. I would go for higher rates, even at the risk of slightly higher inflation, and a higher public sector borrowing requirement. I say that despite Maastricht.
As your Lordships will be aware, I want to join a successful single currency. But a disastrous economic and monetary union would be a gift to Eurosceptics. We all agree that we are going to stay in the European Union; it is permanent; it is there not only for this century but also for the next century and many centuries beyond. In those circumstances, 1999 should not be regarded as being written in stone as vital for the success of the European Union.
Stephen Dorrell was right at the weekend in his first statement: neither government will join on 1st January 1999. I do not regret that. I am glad to see my noble friend Lord Bruce of Donington smile—I say I am glad; I mean I am sorry! The fact is that Eurosceptics in Europe will also benefit from a disastrous economic and monetary union and an unsuccessful single currency.
Therefore, despite all that has been said so far by the Opposition, I hope a Labour government will set policies that aim for higher rates of economic growth, even at the expense of a delay in the introduction of a single currency. Such a delay now seems to be crucial to the vital need to reduce unemployment, both in the UK and throughout Europe.
4.13 p.m.
Lord Howe of Aberavon: My Lords, it is difficult—I shall certainly achieve it, notwithstanding the closing observations of the noble Lord, Lord Barnett—to resist the temptation to say any word of any kind about Europe or economic and monetary union.
I begin as others have done by thanking my noble friend Lord Prior for the excellent speech with which he introduced the debate. It is good to hear him offering such unqualified praise for the achievements of the Conservative Government. I should like also to
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comment on the speech made by the noble Lord, Lord Barnett. He had the wisdom and generosity to acknowledge the present healthy state of the economy. I regret the mean-minded, micro-economic, backward-looking terms of the gentleman who opened the debate on behalf of the Labour Opposition. It lacked the generosity which his leaders at least have achieved of being able to acknowledge the huge transformation in the performance of this country's economy so vividly described by my noble friend Lord Lawson. I hope it is the last we shall hear of that kind of commentary from the Benches opposite.
I do not want to rehearse again the areas of success which have been acknowledged on both sides of the House. I want to mention the success being achieved in relation to unemployment. The noble Lord, Lord Eatwell, appeared to brush it aside. But it is an irrefutable fact that, while other economies on the Continent of Europe—with the notable exception of the Netherlands—have been going in the wrong direction, we have seen a dramatic and sustained fall in unemployment by more than 1 million over the past four years. That should be acclaimed and applauded on all sides of the House. It is manifestly, in that respect and others, a huge improvement. The noble Lord, Lord Ezra, was right to ask how far that improvement will be sustained up to and beyond the election. It is a question also asked by the noble Lord, Lord Kingsdown.
The foundation of continued success in that respect is continued success against inflation. As the noble Lord, Lord Barnett, acknowledged, it is also continued success against the ever burgeoning problem of the public sector borrowing requirement. The Chancellor, in a notably optimistic speech to the Retail Consortium on Monday, went so far as to say that,
"Britain has made a clean break with its inflation-prone past".
I wish I could be sure that he is right about that. He is right to acknowledge its importance and has taken important steps towards achieving it. He placed himself under a scrutiny which neither I nor my noble friend Lord Lawson had to face, by initiating the public judgment embodied in the so-called "Ken and Eddie" show. That has been an important additional factor towards the maintenance of proper monetary discipline.
The differences of opinion between the Governor of the Bank of England and the Chancellor on the scale of any possible increase in interest rates—it will surely have to come some time later this year—is a modest one; the difference is only that of timing. I agree with the noble Lord, Lord Kingsdown, and my successor, my noble friend Lord Lawson, in joining those who believe that we should move to achieve independence for the Bank of England. It is a conclusion, as others have pointed out, more easily arrived at by ex-Chancellors than by Chancellors in office. The experience of the United States, the Federal Republic of Germany and New Zealand all supports that conclusion.
The Chancellor also took credit, quite rightly, for the fact that the Government's spending—as a share of national income—has fallen each year since 1992-93 and next year it will be less than 40 per cent. I recognise what the noble Lord, Lord Barnett, had to say about that.

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It is important progress. The future can be judged in the light of that achievement. The real question is whether that too can be sustained. I believe that it can be, as long as discipline by the Government is maintained. Under the present Government, that is something on which the outlook remains good. To repeat the question of the noble Lord, Lord Ezra: how long will that last?
The question I should like to address is what is likely to be the effect on that prospect of the election of a Labour government. If we are to believe the Shadow Chancellor and his leader, the effect will be almost negligible. He has committed himself, so he would have us believe, to the spending plans of the present Government for at least two years; to the monetary and inflation targets of the present Government; and to the tax rates of the present Government, both basic and higher.
As other noble Lords pointed out, it is an astonishing example of political conversion. The crucial question affecting the British electorate in the days and weeks ahead is how far it is credible. The Shadow Chancellor is carrying imitation well beyond the bounds of flattery, seeking to present himself—to borrow a metaphor of the noble Lord, Lord Eatwell—almost as a clone of Clarke. I have to pronounce that the process whereby the Shadow Chancellor would achieve that result is unlawful, unachieveable, and unbelievable. There is only one "Ken"; and he, I am glad to say, is "one of us". Long may he remain in the service of the nation in that capacity.
Even so, Labour's transformation is a remarkable tribute to the success of Conservative governments over the past 18 years in redefining the common ground of British politics. It was an objective set first by my noble friend the late Lord Joseph, but also by my noble friend Lady Thatcher and indeed myself—I see the noble Lord, Lord Harris of High Cross, in his place—and promoted substantially by the advocacy of organisations like the Institute of Economic Affairs. It has been crucial to achieve that redefinition of common ground.
Labour leaders now proclaim their conversion to market-driven economic policy. Nationalisation, despite the plea by the noble Lord, Lord Ezra, has been disowned, Clause 4 overthrown, and trade unions dethroned, in Labour's constitution as well as the workplace. Tax sanity has been embraced, the leader having persuaded the Shadow Chancellor to accept the maximum rate set by my noble friend, Lord Lawson. The beguiling message we now get from the Opposition Leader is, "Life's better with the Conservatives; I won't let Labour ruin it". There is, in fact, a discreet subtext to that beguiling message: "Labour is ready to cherish a land fit even for Lloyd Webbers to live in". That was once my own objective. I consulted closely with Andrew Lloyd Webber, when he was plain "Mr." way back in the late 1970s. It would have been a disaster for this country had we not then set about the fundamental reshaping of our direct tax system. The fact that Lloyd Webber is still not just in this country but now in this place has redounded not simply to his benefit but to the benefit of the country as a whole.
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The question for electors is: why take the risk of making a change? For even a momentary examination discloses how Labour would find it impossible to live within the Shadow Chancellor's constraints. Existing public spending plans and limits depend, for example, upon the continuation of certain policies of the present Government. Further privatisation measures: would Labour continue with those? The continuing expansion of the role of the private finance initiative in the National Health Service: would Labour continue with that? Social policy changes—for example, to lone parent benefits. Would Labour continue with those? If not, Labour's promise is manifestly undeliverable.
Beyond that, Labour would proceed with a whole range of expensive policy commitments of its own. I shall not weary your Lordships with a list of those to which Labour is committed because the best testimony we can have of that conclusion comes from that old reprobate, the noble Lord, Lord Barnett—who appears, for the moment, unable to recognise himself in that guise. But if even a former Chief Secretary moves in the way that he does, what hope can there be for a Labour Cabinet? The most important qualification for leadership of a democratic government, as the noble Lord, Lord Barnett, ought to know, is the ability to say "no"; and in his years at the Treasury he was very good at saying "no". But for every Blair or Brown still ready to say "no" in a Labour Cabinet, there will be half a dozen Prescotts or Harmans competing with each other to say "yes". And so, as so often before, following the banner boldly brandished by the noble Lord, Lord Barnett, they will trace the path of all previous Labour governments back towards higher borrowing, higher taxes, higher interest rates, higher inflation and, then, the IMF—the IMF which was the tutor of every Labour Chancellor in my recollection.
The question I ask the British people to ask themselves is: why should all the young men and women on the Opposition Benches in the other place now lusting for power do any better than their predecessors of now so long ago who still adorn the Benches opposite in this House? How can the British people possibly be confident that spokesmen for New Labour will in the end be any more capable of achieving fiscal responsibility and economic sanity than the distinguished monuments of old Labour, at whom we have the chance of gazing every day?
4.23 p.m.
Lord Bruce of Donington: My Lords, it is a great pleasure to follow the noble and learned Lord, Lord Howe of Aberavon. I remember being on these Benches when he introduced his first Budget as Chancellor of the Exchequer in 1979. He gave a very interesting explanation as to the movements of taxation. He said—and I am quite sure he will agree—that he lowered the rate of income tax to enable people to pay the increased purchase tax that was going to arise in his Budget. I thought that a rather quaint observation at the time and it does not lack its attractiveness even now. All I will say is that to the best of my recollection he inherited a rate of inflation of 10.3 per cent. but by

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January it had gone up to 22.1 per cent. under his Chancellorship, acting on the principle, I have no doubt, "Hit me over the head; it's so nice when it stops".
The debate today is on the position of the economy. You can look at the economy, my Lords, from a number of angles. You can look at it from the point of view of the City of London and corporate finance in the City and elsewhere, or you can look at it from the point of view of the ordinary citizen who tends by and large to be on the receiving end. Very naturally, in view of the fact that the distribution of wealth has shifted in favour of the wealthy to the detriment of the poor over the past 18 years, one can quite understand that the Conservative Party tends to take a rather rosier view about it. In fact, the noble Lord, Lord Mackay of Ardbrecknish, when he speaks periodically on this subject, quotes the statistics, albeit selective, with some relish but without any noticeable effect outside.
The obstinate fact of the matter is that, notwithstanding the eloquence of the noble Lord and his counterparts in another place concerning the virtue of the statistics to which they refer in terms of the rate of inflation, the exchange rate, the balance of payments and all the other various factors that are of interest, there is no feel-good factor. On the basis of the argument that the Government have been putting forward over the past year, the feel-good factor should already be there. Why is that not so, my Lords? Why are people so depressed? Why do they need cheering up and reassuring so much? Surely the very logic of the figures that the Government have been laying before the country from time to time—the strongest economy in Europe, the most prosperous state we have been in over the past century and all the rest of the nonsense that emanates from them from time to time—ought to have had by this time an impact on the population as a whole. That, so far—I do not want to talk about Wirral too much because it may be rather a sore point—does not seem to have shifted public opinion at all. It remains just the same as it has been over the past year; and notably since we were forced to leave the exchange rate mechanism in September 1992. It is since that time that confidence in the Government has begun to waiver.
When the noble Lord, Lord Kingsdown, was discussing the activities of that body of men whom he called the vigilantes he said that they were responsible for forcing a premium in interest rates to be paid by this country. That is not a very good testimonial to the existence of a Conservative Government over the past 18 years. One would have thought that they needed but little reassurance. The fact of the matter is that the economy presents a very different picture from that presented from the Government Benches today.
I wish to touch on two points only. The first point is unemployment itself. There has been a systematic understating and fiddling of the unemployment figure which in 1979, when the noble and learned Lord, Lord Howe of Aberavon, became Chancellor of the Exchequer, was standing at 1,300,000. On the same basis of determining the figure then as compared with now, the unemployment figure is probably between
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4 million and 4.5 million rather than the claimant figures which are periodically trimmed and presented by the Government.
My second point is investment. Whatever the Government may say—I should be interested on another occasion to hear the observations of the noble Lord, Lord Kingsdown, on investment—investment in manufacturing industry in this country has but very occasionally reached the level at which it stood in 1979. There has been a dearth of manufacturing investment. That brings me to the point that is very often made by the noble and learned Lord opposite and by my noble friend Lord Barnett, who has since left his place. The fact that we attract so much direct investment here from overseas is associated with the success of our economy and our position in the European Common Market. What is noteworthy, and what the noble Lord did not touch on at all, is that outward investment by corporate finance in this country is double inward investment.
So whatever corporate finance may say in the City, the fact of the matter is that corporate finance has little confidence in putting its money where its mouth is. Indeed, as I have said, twice as much investment goes overseas than is put into this country. That means that we are not in a very good way for grounding our prosperity on the processing of material things. What we are becoming increasingly good at is what is called in the financial markets "new products". They vary as we found out in the case of Barings Bank. New products, which the financial community is now very adept in offering to the public, comprise the selling or buying of options, the making of loans and mortgages associated in a variety of ways and constituting a variety of products. All those are assumed to be an effective substitute, both in the medium and long-term, for manufactured goods which, as a percentage of gross domestic product in this country, have dropped even more in the past 18 years under the existing administration. That is something which has to be tackled.
So far, the suggested way of tackling the problem has been the offering of inducements. I remember the right honourable gentleman the Member for Bexley referring to this in 1972 when he complained that industry was investing too little in manufacture and finance. He said that he had offered every inducement to corporate finance in this country, including every tax concession, and still it would not invest. That position still maintains.
What we are saying on these Benches is that more encouragement and greater co-operation must be given in order that manufacturing industry receives the amount of investment that it should, but whether or not that will be successful one does not know. One's experience probably suggests that it is going to need a very great deal of effort. The question is whether the country as a whole can be sufficiently united to enable that to happen instead of having a divided society which has been deliberately engineered by the party opposite. The efforts that are required by us in our existing situation need the goodwill and co-operation of every citizen and group of citizens. Before that happens there will have to be a good deal of searching of minds among those who

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at the moment arrogate to themselves the right to think that they and they alone have been right, whereas a small degree of humility and of being prepared to think things out again, is necessary. Certainly, the problems will not be solved by party dogma on either side. The problems will be faced fundamentally in relation to the ultimate regard in which Britons esteem their own country.
4.33 p.m.
Lord Blyth of Rowington: My Lords, first, perhaps I may thank my erstwhile competitor and noble friend Lord Prior for initiating this debate. I declare an interest as chief executive of the Boots company. I suspect that I am relatively unusual in your Lordships' House in that I am under 60 years of age and have run an international business for well over 20 years. That is important because today few, if any, managers under 50 years of age are likely to have run a business pre, per and post the Government of my noble friend Lady Thatcher. So I have seen at first hand the changes in the economy and their effect on business over the past 18 years. I have seen the effect on the competitiveness of our business in this country which is all-important.
What have those effects been? I believe that there has been broad agreement this afternoon that we are much more competitive. The greatest measurement of that, as has been said, has been the levels of inward investment in this country, which are second to none in western Europe. Our labour relations—again, as has been said—have vastly improved. I clearly remember in the late 1970s when I spent 20 per cent. to 25 per cent. of my time attempting to solve labour-relations difficulties, sometimes pretty fruitlessly. I detect in the present state of labour relations in this country some warning signs, some flexing of muscles and the possibility of the resurgence of some of the efforts that we saw in those times.
If we look at our main European competition, especially Germany, we see that unemployment there is at its highest level since the Weimar Government. Germany is moving more and more jobs overseas. Some two years ago my company sold its pharmaceutical business to BASF. One of the great attractions of that deal was that Germany acquired research scientists in this country who cost between two and a half and three times less than the same research scientists in Ludwigshafen. I talk to German businessmen on a fairly regular basis. They admire our success and they envy our freedom of action. It is only their politicians who regard us as the Quebecois of Europe.
Since 1992 we have consistently had a competitive currency. I believe that it is still competitive—it certainly is for my international business. We have had consistently low inflation for longer and our pricing and therefore our competitiveness are the more secure. Policies on government expenditure and the provision of public services are designed to prevent the erosion of competitiveness. That is not always successful, but it is an aim.
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It is the desire to maintain competitiveness that causes most, but not all, businessmen in this country to be opposed to the social chapter and to any sign of a minimum wage. It is also the reason that most businessmen are appalled at the prospect of more bureaucratic incursion from Brussels, even when it comes via our occasionally over-rigorous national agencies. I should make it clear that in the nearly 10 years I have spent with Boots the company has never been in better shape nor more able to compete at home and abroad. We are enjoying steady, sound, if unspectacular, growth on the high street. Our share price is at a near high and our shareholders are enjoying enhanced value. We have excellent relations with our workforce. I do not use that as a commercial. I believe that to be the case for most British companies today.
However, we cannot deny that the need for competitiveness causes real concern for the future among our employees. I believe that to be true almost everywhere in the world. Even among our employees, despite a growth in employment over the period from 67,000 in 1978 to 77,000 in 1996, their wage bill has grown from £131 million in 1978 to all of £767 million in 1996.
Lastly, I share with your Lordships a small look into the future and I would like to stay with the competitiveness theme. I continue to be surprised by the certainty of some commentators, including some of my colleagues in industry, about the future. I have just attended a four-day banking and business conference. I have to confess—and noble Lords can tell from my colour in any case—that it was two days' skiing and two days' banking and business. It was attended by 100 business CEOs from all over Europe and the United States.
One of the main subjects under discussion was EMU. I shall discuss the areas of common ground in a moment. There was huge disagreement and doubt on the following points. First, if EMU did not go ahead, what would happen to the deutschmark? The view, by a narrow majority, was that it would strengthen, render Germany less competitive and increase its unemployment. There was no consensus on who would join the first tier, but no one, including me, believed that the UK would join. There was a great variety of view on whether the UK should join at all. Interestingly, the Swiss to a man hoped that we would go in only when we were absolutely certain that it would benefit our competitiveness. I suspect that a great deal of enlightened self-interest drove that view. There was no agreement at all on whether it would be necessary for competitiveness on our part to go in at all.
I turn to the areas of common ground. EMU would go ahead at pretty much the expected time: 1999. German political will, commitment and need was far too great to be denied. The entry criteria would be fudged by early joiners, despite German objections and legal barriers. The technical difficulties of integration and effective competitiveness had been enormously underestimated by most people involved. Lastly, the overlap with the year 2000 computer difficulties had been hugely underestimated by business and totally uncomprehended by government.

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In conclusion, I suggest that we have an economy today that is in very great shape for business. It is great and it is envied, but the future is worryingly uncertain.
4.41 p.m.
Lord Harris of High Cross: My Lords, I confess that I did not have great relish for this debate, despite my warm affection for my old sparring partner, the noble Lord, Lord Prior. I thought that it might turn out to be a rather tame affair. After all, as we have heard, Labour has at last followed the Tories in embracing at least the rhetoric of the market economy. I look back almost with nostalgia to the 1960s and 1970s when a few of us at the Institute of Economic Affairs had a great deal of fun trying to get across what Enoch Powell—an early convert—called the "economics two times table" to politicians of all parties. I readily join others in paying tribute to the Labour Party under Mr. Blair as promising pupils, although perhaps they promise too much. They have learned a great deal and have left only the Liberal Democrats and Sir Edward Heath still in the duffers' class.
There are many great joys in retirement, quite apart from keeping out of the obituary columns. For an economist there is a special bonus in this blessed state; that is, one does not have to keep up with all the dubious official and unofficial statistics, usually to two or three phoney decimal places, about the GNP, inflation, growth rates, investments and all that stuff that we have heard about from the noble Lord, Lord Eatwell. Nevertheless, from general reading and observation, which highbrows dignify as casual empiricism, I proclaim that the economy is in pretty good shape. Retirement gives one more time to look around and go shopping, to go into pubs and to talk to real people rather than to other economists or politicians. This is referred to as anecdotal evidence. Whenever two or three are gathered together conversation turns to: "How are things?". Increasingly, the answer is that, apart from the weather and other ailments, things are pretty good. If one wants to consult what used to be referred to as a leading indicator, one should ask a taxi driver, "How's business?". Without exception, they will say, "Getting better and doing well".
The noble Lord, Lord Eatwell, contests the trickle-down theory. As always in these matters, he takes too short-term a view of the cascade of benevolent prosperity that comes along decade by decade. Without hilarity, I say that even for the underclass today things do not look quite so desperate from the vantage point of one brought up on a council estate near High Cross, Tottenham, some 50 or 60 years ago. Unfortunately, the bishops and others of the gloomy tendency see none of these good things.
It saddens me a great deal that most of the vocal bishops have given up rejoicing in the truly wondrous achievements of free men in competitive markets and what they have wrought with God's creation. They no longer offer up thanks for the marvellous spread of popular prosperity accompanied by less daily toil, fewer dark satanic mills and an unprecedented enlargement of individual freedom. All of these boons, to which the bishops by their calling necessarily have contributed
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nothing, are taken for granted. They have eyes only for the remaining black spots. Bemused by misleading statistics on poverty and unemployment, they join the party game of blaming the wicked Tories. However high the level of state spending on social policy and social benefits—which is now an astronomic £100,000 million a year—their derisory panacea, like that of the Liberal Democrats, is to spend a paltry 1 or 2 per cent. more on the so-called welfare state, which is and remains a torrent of wasteful, indiscriminate, universal benefits and services.
Another great pleasure of retirement is travelling abroad, especially to what I revert to calling "Europe" and not the politically correct "Continent". I see that the noble and learned Lord, Lord Howe, is watching me. Last year I made several visits to Europe. I visited France, Germany, Spain and Austria for a conference at which I met economists from dozens of other countries. In Vienna I had a sudden revelation. As I looked around and considered the company there I was suddenly struck by the wonderful contrast with travelling abroad in the 1960s and 1970s. In those days one never lightly got into serious conversation with a stranger for fear of being humiliated and treated with pity by the Germans, contempt by the French and sympathy by the Italians, Americans and others. These were the days of the English disease. I shall not embarrass the Labour Party by recalling the repeated strikes in the nationalised industries, borrowing from the IMF, the depreciation of sterling and all of those other matters. Luckily, today one does not need to read OECD reports to count one's blessings for sharing the benefits of the British economy. I have not yet found a good Anglo-Saxon word for schadenfreude, but I am enjoying it.
To top it all, after a great deal of hypocrisy and make-believe on the part of the European Commission, its recent annual economic report, still unavailable at the Printed Paper Office, admits, according to reports in the press, that the employment reforms associated with the name of Margaret Thatcher—importantly contributed to by the noble Lord, Lord Prior, and other former Tory Ministers who have spoken—are a major reason why Britain enjoys a recovery of longer duration than the rest of the European Union. The Commission has suddenly learned to say the words "supply side reforms" which it says have been introduced "since the early 1980s". (That is a bit near the Thatcher bone.) The report goes on to say:
"By increasing competition and flexibility in both product and labour markets, they have enabled both good growth and strong labour market performance."
I have time to consider only one of the novelties of the Labour Party's approach threatened for the future. In its perennial search for a "free lunch", Gordon Brown believes that he has hit on the Crown Jewels: behold, a painless windfall tax to finance an instant cure for unemployment. Alas, he fails to grasp the key distinction which we used to learn in the first year of economics at Cambridge—I do not know whether it is taught in the time of the noble Lord, Lord Eatwell—between the impact and the incidence of a tax.

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The impact of a tax is on the target group who initially pays. But the more important incidence is on the victims who ultimately bear the cost.
The electoral spin on this tax is that "the fat cats will pay". The trouble is that the fat cats have already made off with any swag. So in the standard game of pass-the-tax-buck, those who run privatised utilities would be duty bound to try to recoup any future levy of that kind, by raising prices—if that is not forbidden by the regulator—or by reducing costs, including the wage bill, or cutting investment; or, in the last resort, by reducing dividends. If they take that option of reducing dividends, it must diminish the returns to pension funds and weaken confidence of investors, therefore raising the cost of future borrowing for those industries. There is no free lunch. When the jelly hits the fan, that is the impact. When the jelly hits the bystanders, that is the incidence.
I conclude by saying that, despite past ups and downs, I congratulate the Government on getting the economy in such splendid condition. I wish the Tories well in exposing this typical example of Labour's continued short-term, shallow, sometimes shady promises which I fear would be doomed to early disappointment.
4.52 p.m.
The Earl of Caithness: My Lords, I too wish to thank my noble friend Lord Prior for initiating this debate. It comes at a most interesting time in the run-up to the general election and, as a result, we could not have envisaged the parties opposite saying anything thought-provoking or interesting about the economy. We were not disappointed.
Looking at it from a conventional viewpoint, the economy is in good shape and the Government have done better than most of their counterparts in Europe. We have moved out of recession and on the surface the economy is stronger and people are more confident. There is much that I could say about that. I think the Government have done a very good job.
However, it is also a good time to stand back, to reassess whether our economy is soundly based. I would contest that it is not, not for the reason to which the noble Lord, Lord Eatwell, alluded, which is that it is the Government's fault, but our whole monetary system is utterly dishonest, as it is debt-based. "Dishonest" is a strong word, but a system which by its very actions causes the value of money to decrease is dishonest and has within it its own seeds of destruction. We did not vote for it. It grew upon us gradually but markedly since 1971 when the commodity-based system was abandoned.
Let us look at what has happened since then. The money supply in 1971 was just under £31 billion. At the end of the third quarter of last year, it was about £665 billion. In 25 years it has grown by a staggering 2,145 per cent. Where has the money come from? Interestingly, the Government have only minted a further £20 billion in that time. It is the banks, the building societies and our commercial lenders who have
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created the balance of £614 billion. If this rate of growth is projected over the next 25 years, the money supply in 2022 will be over £14,000 billion.
All that new money bears interest paid either by us as individuals, by companies or by the Government. Today the Government pay over £30 billion annually in interest charges—coincidentally about the same as the total money supply only 25 years ago. Governments since then have abdicated their responsibility for producing new money and controlling the money supply so that now they are marginalised. In 1971 government notes and coins accounted for 14 per cent. of the money supply. Now it is only about 3.5 per cent. "So what?", noble Lords might ask.
The problem is that it is commercial lending that has boosted the money supply, thus increasing debt and, as sure as night follows day, inflation follows growth in money supply of this sort. The only reason that debasement has not flowed into price figures in the last four years is that the high interest rates in the recession gutted businesses and individuals, leaving too many unable to pay the price levels that the debasement requires. But the wall of money is increasing remorselessly. The noble Lord, Lord Ezra, mentioned the Halifax Building Society's latest surplus of about £3 billion to £5 billion.
Since 1991, in a time of recession, it has increased by 32 per cent. and most of that is in the last two years. We must remember that virtually all the increase represents a rise in the burden of debt the economy must carry. The wall of money has already driven the stock market to an all-time high and some are now questioning whether it truly reflects company performances. Recently more money has begun to be channelled into both the residential and commercial property markets. Here I must declare my interest as a residential surveyor in central London who has benefited from that. Our company, Victoria Soames, recorded a hardening of the residential market early last year, followed by a 20 per cent. rise in the last six months. That rise is continuing, if not accelerating. Lenders remain aggressive and, very disturbingly, the proportion of borrowing by individuals is moving up.
When the money supply increases, as it is doing, the previously existing money is debased accordingly. Therefore, either wages and salaries must also increase to maintain parity or those who earn wages and salaries will find that they no longer participate in the national economy to the same extent as they did previously. This exacerbates the growing fragmentation of our society, which cannot go on for ever. I am not advocating high wages but I am advocating less debasement and better control of the money supply.
When wage inflation does happen, it will feed through to all parts of the economy. The result, sadly, will be that the Government have to use the only tool they know—an increase in interest rates. That has happened fairly recently, but it is not the first time that it has happened. We saw it in the 1970s and again in the 1980s. It is a consequence of our debt-based monetary system that it leads inevitably to business and economic cycles.

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Conventional wisdom tells us that in order to create new jobs and boost the economy, interest rates have to be reduced. That has happened. People are encouraged to borrow to invest and spend. That has happened. As the continuing flow of new money finds its way into the economy, inflation will follow and up will go interest charges again to reduce the level of borrowing. In order to pay the increasing levels of interest, borrowers will once more have to reduce expenditure in other areas of economic activity. The cycle will continue, but the next time, as before, we will all start deeper in debt and with a burden harder to carry. Personal debt has already increased by nearly 3,000 per cent. since 1971. How much more can we take? I hope, for the sake of our economy, without which we cannot finance what we want to see—a good health service and a good social security system among other things—we will question this conventional wisdom.
We all want our businesses to succeed, but under the existing system the irony is that the better our banks, building societies and lending institutions do, the more debt is created. The noble Lord, Lord Kingsdown, said that there is little that can be done about debt. No, I do not believe that. There is a different way: it is an equity-based system and one in which those businesses can play a responsible role. The next government must grasp the nettle, accept their responsibility for controlling the money supply and change from our debt-based monetary system. My Lords, will they? If they do not, our monetary system will break us and the sorry legacy we are already leaving our children will be a disaster.
5 p.m.
Lord Currie of Marylebone: My Lords, perhaps I may add my voice to those of other noble Lords in congratulating the noble Lord, Lord Prior, on introducing this timely debate. We have had a number of interesting contributions, some of which I agreed with and understood, and others of which I could not really follow. But there is a danger that the debate polarises between the optimists and pessimists. I fear that we have something of that today. I hope that I can avoid that. The British economy is doing quite well but it is not free from problems. If I err on the side of emphasising the problems, I do not want to take away from the fact that it is performing well.
Over the past four and a half years since leaving the ERM we have enjoyed one of those benign phases, with both growth and inflation between 2.5 per cent. and 3 per cent. Forecasts for the next five years are similarly benign. My colleagues at the London Business School forecast growth and inflation over the next five years as much the same as that over the past five years. They are fairly typical. No signs there of fears of a Labour Government. One has to go back to the 1960s to see a similarly benign combination of inflation and output.
The point one has to make is that we are far from alone in enjoying low inflation. It is a worldwide phenomenon. G7 inflation has been 0.5 per cent. below our inflation rate over the past two years. The pessimist could note that over the past year or so our inflation differential against the OECD average has been
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increasing. The last time that happened was 1987–88. It will be interesting to see how the UK compares in the European inflation stakes when Eurostat publishes the standardised inflation figures on Friday. The latest interim numbers showed the UK with the fourth highest inflation rate in the EU. Eleven countries, including Italy, did better.
Although we are doing well on inflation, on the whole, others, particularly the US and Japan, are doing better. Even our growth rate performance is not dramatic when put in a sensible broad perspective. It should not be difficult to grow at something over 2.5 per cent. after a major recession. Indeed, I often wonder whether the Treasury has a manual on how to create good phases of growth: first, create a major recession. We have grown well, and that is to be welcomed. But it is not surprising. We are in one of those benign phases when it is all too easy for politicians to claim great achievements of economic management, which prove to be hollow since they are based on the transitory, cyclical element. As my noble friend Lord Eatwell observed, the cyclical element in the British economy is much greater than in all major economies. Therefore we are all the more likely to exaggerate the gains in the benign phase.
If we take a longer perspective, we find that the British economy has grown by 2 per cent. a year over the past decade, and, a little less—1.9 per cent.—since 1979. That is in line with French performance over the same period. They have had steady growth on average, but they have done as well. It is appreciably worse than Germany, whether or not East Germany is included, and significantly worse than the US or Japan. Economic historians will reflect that 2 per cent. has been very much the average growth rate of the British economy over many decades this century.
So in a longer perspective, the UK economy is growing reasonably, but no better than that of our competitors. That is more consistent with the facts than the view presented all too often by the Government. How otherwise does one explain that on OECD estimates of GDP per capita on a purchasing power basis we are appreciably behind almost all the economies with which we like to compare ourselves: Australia, Austria, Belgium, Canada, Denmark, France, Germany, Italy, Japan, The Netherlands, Norway, Sweden, Switzerland and the USA? Even the Republic of Ireland overtook us on that basis last year. Is that the vibrant healthy economy that is out-performing everyone else about which we hear so often from the Benches opposite? I do not think so.
Let me mention some other concerns. As has been said earlier, and the national institute has emphasised recently, our public sector finances are not in the good shape with which one would be comfortable at this point of the economic cycle. A 4.8 per cent. general government deficit is larger than we would like, and within the EU it is beaten only by Italy and Greece. Unemployment is low—I welcome that—but a number of smaller European countries, not just The Netherlands, have better unemployment records. The fall in unemployment that we have enjoyed owes much less to the expansion in the employed workforce and more to a reduction in labour market participation. That has

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a great deal to do with the changes in rules entailed in the move to the jobseeker's allowance. That may help to explain why the fall in unemployment has not been accompanied by an improvement in the feel-good factor.
There is then the puzzle about sterling that concerns many businesses, particularly those exposed to international competition. Some can sustain that, but it is an issue. We have seen an 18 per cent. appreciation in the effective rate since last August. Many commentators regarded the rate at which we were in the ERM as excessively overvalued and unsustainable. With sterling at about 2.75 against the deutschmark we are within a whisker of our ERM band. If we take account of the fact that our inflation rate has been higher than that of Germany, our competitive position on the real exchange rate measure is less competitive than it was when we were in the ERM. If it was unsustainable then, is it unsustainable now? Should we be worried about the pound's position?
The Government make a great deal of our position as the enterprise centre of Europe and as a magnet for new investment. I draw attention to the analysis on foreign direct investment published by the national institute. Using IMF numbers, that showed that inward investment into France in the five years 1991–95 exceeded that into this country. On average there was 19 billion dollars into France compared with 17 billion dollars into this country.
There are different estimates. I am aware of the uncertainties involved in estimating those numbers. There are two important points to make about the numbers which I find remarkable. One is that the French economy has experienced a large increase in foreign direct investment—double compared with the previous five years—whereas ours fell by something like 20 per cent. Is that consistent with the story so often advanced of UK success and continental failure? I do not think so.
Moreover, there is another striking fact. Since the numbers on foreign direct investment include as inward investment reinvested profits earned on existing investments in the country, and since the UK has such a large stock of such inward investment already on those numbers, and any other numbers, it must be the case that the French are attracting more new real investment than the British economy. It is a serious issue and one which should be of concern to us.
I shall point also to some other structural concerns. The noble Lord, Lord Prior, referred to the trickle-down effect of economic growth. Perhaps I may remind your Lordships of the excellent Rowntree inquiry into income and wealth of which the current deputy governor of the Bank of England was a member. That inquiry showed no trickle-down effect. It showed that income inequality had grown at a greater extent and at a faster pace since the 1970s than in any other comparable industrialised country, and that the distribution of income is more unequal now than at any time in the post-war era.
The poorest 20 per cent. to 30 per cent. of the population has not benefited from economic growth. Employment is increasingly polarised between two-earner households and a growing number of
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households where no one works. The consequences of that are serious. We are just receiving the results of the studies from the National Child Development Survey which track children through into adult life. What we find is that family financial circumstances have a much bigger impact on employment prospects in later life than we imagined before. They have major effects. That means that financial disadvantage in families in childhood leads to problems later on. We are storing up problems for ourselves in educational disadvantage and economic under-performance. Rising inequality has far reaching and distant economic and social consequences which touch us all. I do not believe that it is consistent with the truly optimistic view that has been presented in the debate.
In summary, the British economy is trying hard but could and needs to do better. I look forward to it doing so in the next decade under a different government.
5.10 p.m.
Lord Trefgarne: My Lords, I join other noble Lords in thanking my noble friend Lord Prior for giving us the opportunity to debate this most important of subjects.
Our debate is particularly timely, coming as it does at the beginning of 1997, which will be an important year for deciding which of our key partner nations, if any, in the European Union have achieved the Maastricht criteria to qualify for entry into the single currency. Inevitably, this focus on the so-called "convergence criteria" will generate a spate of international comparisons not only between ourselves and our European partners but perhaps also between some of the other member countries of the OECD. It is already clear from a number of the contributions made this afternoon that in most international comparisons the United Kingdom is actually doing rather well at the moment.
I would like to concentrate my remarks on one particular good news story; that is on the engineering and manufacturing sectors of our economy. These are sectors in which I must declare a special interest as president of the Mechanical and Metal Trades Confederation, Metcom; chairman of the Engineering and Marine Training Authority, EMTA; a council member of the Engineering Employers Federation, EEF; and also a director of Siebe, one of the largest engineering companies in Europe.
The EEF publishes a regular quarterly survey of business trends in the UK engineering sector and its survey for the last quarter of 1996 made particularly interesting reading. During the middle of 1996 it did seem that some of the momentum had been lost in the pattern of steady recovery that had been evident in the engineering sector throughout late 1994 and 1995. But the fourth quarter of 1996 saw a restoration of that momentum and revealed a very strong picture of renewed growth. The indicators for output, orders, employment and investment were all stronger than in the third quarter and back to the high levels recorded for the same period of 1995.
Growth in output, in particular, accelerated in the fourth quarter, with a very healthy increase in the volume of output. Furthermore, new order intake

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strengthened sharply in the final quarter. The seasonally adjusted figures in December for UK orders were up 15 per cent. and for export orders up 10 per cent. The survey thus indicated that domestic demand is now even more buoyant than export demand.
The trend for employment is also encouraging. The EEF December survey indicates that considerably more engineering firms are now forecasting growth in the number employed in the sector than those forecasting a decline. There were also some very positive signs with regard to capital spending. Overall then it is a very encouraging picture.
Looking into the future, engineering industry sales for 1996 will be about £164 billion and for 1997 are forecast to be £174 billion. That is 17 per cent. higher than at the bottom of the recession in 1992. But there are other indirect indications that our engineering industry is gaining confidence. The Engineering and Marine Training Authority, of which I have the honour to be chairman, monitors closely the trend in investment by industry in the training of the engineering workforce, both for new recruits just entering the industry and for the existing adult workforce. This year we forecast that 12,000 young people will commence a modern apprenticeship in engineering compared with 8,000 in 1996 and a mere 6,000 in 1995.
Additionally, 1996 saw more vocational awards made to workers in the engineering sector than ever before, exceeding the previous peak recorded in 1979, when about twice the number of people were employed in the engineering sector.
Why was that? The explanation is, I believe, twofold. First, vastly improved levels of productivity are being achieved in the engineering sector and these call for a workforce with greatly increased skills. Secondly, the importance of lifelong learning is becoming increasingly recognised. Multi-skilling and new technologies require new skills to be gained by adult workers throughout their working lives. More and more companies are committing to the Investors in People standard and this provides a positive stimulus to lifelong learning throughout the whole of industry and not least in the company which my noble friend Lord Prior leads with such distinction.
The trend is particularly evident in the recent vocational awards made by EMTA. In 1996 42 per cent. of awards were made to over 25 year-olds compared with only 4 per cent. in 1990. It is heartening that our improved economy is giving us the resources to invest in the future and that part of that investment is being made in improving the skills of our workforce.
I began by mentioning the "convergence criteria" which will provide the acid test for membership of European monetary union. It is perhaps ironic that Germany, one of the prime exponents of EMU, a country heralded as an economic miracle for most of the last 40 years, should now be approaching the status of the "sick man of Europe". Weighed down by excessive social costs, a high exchange rate, increasing structural unemployment and massive government borrowing, it seems increasingly possible that Germany itself will fail to meet the Maastricht "convergence criteria".
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How different is the picture here in the UK. Since 1992, the UK has had the strongest economic growth of any major EU country. Both the OECD and the IMF forecast that the UK will grow faster than any major EU economy in 1996 and 1997 and the OECD forecasts that this success will continue into 1998.
As a result of this success, unemployment in the UK is falling steadily. Our unemployment is now well below 8 per cent., compared with 22.3 per cent. in Spain, 12.5 per cent in France and 12.2 per cent. in Italy. In Germany, it is believed that figures to be published tomorrow will indicate that a further 120,000 Germans sadly lost their jobs in February, taking the total unemployed to 4.9 million, or 12.5 per cent.—a truly frightening statistic.
As many of your Lordships will already know, this is an important year for the engineering community here in the UK. Indeed, 1997 has been designated the Year of Engineering Success and it is intended that the whole engineering community will come together to promote the engineering sector and to celebrate the success of the engineering achievements of the United Kingdom.
This campaign for engineering could hardly have come at a better time. Our economy is now in better shape than at any time in living memory. We have low inflation, low taxation, sound public finances and tight control of public spending—a truly exciting combination of factors.
The 1980s proved to be a difficult decade for the engineering and manufacturing sectors as the industry struggled to come to terms with decades of over-manning and under-investment and a worldwide downturn. That period has passed and I believe that we can now look forward to a period of rebirth for our manufacturing and engineering industries which will herald further improvements in our international competitiveness well into the next decade.
The outlook is an exciting one. Let us seize the new opportunity that a strong economy offers us and make 1997, the Year of Engineering Success, just the beginning of a new era for a much strengthened engineering and manufacturing sector here in the UK.
5.20 p.m.
Lord Haskel: My Lords, my noble friend Lord Eatwell spoke of the Government being in a complacent phase. I would rather refer to it as a gleeful or triumphant phase regarding the economy. Frankly, I find that mood rather misleading and somewhat offensive. It is a little offensive because we are in a single market and bad news about the French and German economies is bad news for British companies trading in those countries.
The noble Lord, Lord Prior, spoke of the importance of the single market, and I congratulate him on introducing this debate. The glee about French and German unemployment is misplaced because the unemployment figures do not compare like with like. As my noble friend Lord Bruce told us, our unemployment figures do not include those of working age, who are inactive, who would like to work but are not claiming benefit. Their figures do.

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According to the Government's Statistical Service's Labour Market Trends, the Government do not even know what our employment figures mean. The January edition stated that they did not know how much the fall in unemployment was due to the jobseeker's allowance and how much to job growth. My noble friend Lord Currie referred to that.
Many noble Lords have been gleeful about inward investment. Again, my noble friend Lord Currie explained that recent figures cast some doubt on that and, in any event, it is foolish to assume that the situation is static. The Deputy Prime Minister expressed the matter rather well in an article in The Times on 27th February when he said:
"Past success is pocketed as a restless world moves on".
French and German manufacturers are taking steps to cut their employment costs, some by moving their production overseas. But in recent weeks companies and unions have agreed to patterns of flexible working and longer hours which were unthinkable a few years ago. Noble Lords know that business location does not depend only on hourly labour costs, low taxes and easy hiring and firing. We all know that investment depends also on plant flexibility, closeness to the customers, technology, quality and productivity. We must compete on all those grounds; otherwise, the noble Lord, Lord Prior, would be leading his company to Madagascar where there are no taxes, no labour rights, virtually no social costs and generous grants.
The fact is that most UK outward investment is now going to the European Union, according to a recent table in the Business Monitor, the very place that noble Lords have been telling us is so difficult. But when it comes to Europe, the Government's glee or triumphalism is rather more muted because there is no single vision of where we are going.
Let us take the social chapter. Of course many firms vary in their views, but many companies are now turning to works councils and consultation. The reason is simple: having gone through the phase of achieving cost cutting by redundancies and closures, we have also to reach levels of quality, productivity and customer service which require the full co-operation of all employees. That is precisely the philosophy of the social chapter.
Certainly our economy is doing well because we have some wonderful companies which invest, train and progress and which are world class; and yes, the Government deserve some credit for that. But we have a long tail of poorly performing companies, plus a lot of people who are economically inactive, and we have many poor people. The divisions in our society and economy are greater than ever.
It is that division which has helped us to fall from 13th to 18th in the world prosperity league. Certainly there has been an increase in wealth, but it is unequally distributed. My noble friend Lord Bruce explained that, even among the beneficiaries, the distribution is unequal. The rise in equity values has done a lot more
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to increase the wealth of company directors and pension fund managers and their companies than to increase the wealth of the employees and the pensioners themselves.
That may have delivered the feel-good factor to companies, but it has certainly not done so to individuals. That is because pay and pensions do not reflect the increasing value of the investments. To give people a stake in the future, their benefits need to rise in line with the prosperity of the companies. That has not happened. There has not been a trickle down and that is why the mechanism that transforms economic growth into a sense of well being has broken down. When all that is taken into account, I find the picture more sobering.
Noble Lords opposite have been gleefully telling us that we are on the threshold of the best prospects of a lifetime. I do not agree. In my lifetime, that occurred about 15 years ago when many noble Lords opposite were in government, and I am sorry that many of them are not here for me to congratulate them. As a result of their work in the past 15 years, income from North Sea oil and privatisation has averaged £35 million per day. Those are the prospects which I relished. But where has all that wealth gone? I believe that £6 per person per day should have created a better-skilled and better-educated society with a better infrastructure and less division. It should have lifted us in the prosperity league. Instead, we have gone down. Public finances should have been in surplus but instead we are told that we have a deficit of £26 billion. Instead of glee there should be sadness at the thought of what might have been and we should be determined to make up for that.
There lies the difference between the Government and new Labour. The noble Lord, Lord Prior, told us that the Government are happy to let the prosperous part of the economy thrive in the marketplace and leave the rest to its fate. New Labour too is happy to let the prosperous thrive. But, in addition, Labour is determined to get the best out of the poorer performing parts of our economy. We believe in an inclusive economy which gets the best out of all people.
On 1st March Tony Blair spoke about how we shall restructure the welfare state around the work ethic: where opportunity will go hand in hand with responsibility; how we shall modernise the welfare state; and, yes, we shall use the windfall tax to move 250,000 unemployed young men and women off benefit and into work or training. The option of staying on full benefit and doing nothing will cease to exist. The only way that our companies and country will succeed is by getting the best out of all our people and their potential.
New Labour intends to do that by encouraging investment, promoting competition, improving skills and modernising the welfare state. That is all laid out in Labour's Vision for Growth, of which much is repeated in the Promoting Prosperity Report. Adair Turner said of that report:
"It shows a welcome degree of consensus is emerging over ways in which the UK's economic performance can be improved".
I agree with that.

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Nothing stands still. Those who lived through the boom of the noble Lord, Lord Lawson, only to see it shatter in recession will realise that. My view is rather tempered by the warning in the Bank of England's February inflation report which stated:
"Over the past year there has been a gradual pick-up in the pace of activity in the UK economy. driven by domestic demand".
There is a warning for us.
We have made considerable progress. However, our competitors have been making similar efforts and as regards inflation and growth, they have been more successful, as my noble friend Lord Currie reminded us. We should remember that Britain remains one of the poorer countries of Europe in terms of gross national product per head. We need to do better. For all our success, there is still a long way to go.
5.29 p.m.
Lord Brabazon of Tara: My Lords, like other noble Lords, I am grateful to my noble friend Lord Prior for giving us the opportunity to debate this important subject this afternoon. As has been said, we are in our sixth year of sustained growth; inflation is at its best for nearly 50 years; interest rates are at historically low levels; and mortgage interest rates are close to their lowest levels for more than 30 years. As my noble friend said, the OECD forecasts that the UK will be the fastest growing major economy this year and next, as indeed it was last year. Days lost due to industrial disputes are at an historic low and my noble friend must take some credit for that fact. Moreover, unemployment is down by 1.2 million since 1992, which was its peak in the recession at that time. Our rate is falling and is now among the lowest in Europe at 6.5 per cent., with Germany, as has been said, at over 12 per cent. and France at 12.5 per cent. All the signs are good. We should ask ourselves how we got into that position.
One reason is not perhaps of our own doing; namely, our forced removal from the ERM in September 1992. That may have been critical in getting us into the competitive position in which we now find ourselves. But unless we were able then to take advantage of other steps that the Government had taken in the past 17 years, it would not have been any good. I refer of course to privatisation, competition and deregulation and the trade union reforms that have taken place. They have resulted in lower energy and telecommunications prices which have attracted investment into this country. However, the fact that we have also resisted the temptation to join the social chapter and adopt a minimum wage, both of which are promised us by the party opposite, must also be important factors.
It is small wonder then that we are attracting so much inward investment. I gather that about one-third of all such investment coming into Europe comes into this country and that a higher proportion of investment than that is coming from the United States and Japan. The noble Lord, Lord Currie, who I see is no longer in his place, cast doubt on those figures. But I believe that one needs to look at the practical experience, because we are also attracting inward investment from within Europe. As an example, one has only to look at the enormous investment that Siemens is making in the north-east.
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That company is leaving Germany because of high non-wage overheads and red tape and because of the other matters to which I also referred, such as the social chapter and so on.
Other speakers, especially the noble Lord, Lord Eatwell, referred to the strength of sterling at present. Of course, it is undoubtedly causing concern to some companies. However, a strong currency did not harm other countries like Germany and Japan during the 1970s and 1980s when they had remarkable growth. It does bring down producer prices for imported inputs; indeed, input prices fell for the 16th consecutive month last month, with the sharpest monthly fall since last July.
Why is sterling so strong? That is obviously partly because of the strength of the economy at present. However, I believe that it is also seen as an alternative to EMU and of course we do have high real interest rates of some 3 per cent. The shadow of European monetary union hangs over us, as mentioned by my noble friend Lord Trefgarne among other speakers. The present policy of wait and see is, while admirable, to some extent irrelevant. I cannot see how we might be able to join in 1999 in any event, whether or not we wanted to. There are too many hurdles to be crossed, such as the referendum and other matters.
Of course, one must question whether EMU will take place in 1999. As for the four criteria—deficits, debts, inflation and interest rates—unless the figures are fudged, the leading contenders for membership will fail on at least one count. As my noble friend Lord Trefgarne said, Germany would fail, with its soaring unemployment on debt, France on the deficit and Italy on almost everything. My worry is the fudge. I simply do not understand how the decision on who enters can be taken by majority voting in the Council early next year as regards who has passed the entry criteria. Either a country has passed the test or it has not. It is surely not something that can be voted upon; it is a question of figures. I believe that we will be well out of it, it is to be hoped, for ever, although, curiously enough, we might be one of the few countries which will be able to pass all the tests for joining, with the possible exception of interest rates.
I believe that my right honourable friend the Chancellor of the Exchequer has got the policy right on interest rates. There is no need to put them up at present and further strengthen sterling. As my right honourable friend said on Monday:
"For every commentator concerned about the prospect of too strong growth, another is concerned about the effect of the strong pound on activity. I am happily placed in the middle".
I believe that that is an admirable position to be in.
It is essential for Europe to remain competitive versus the rest of the world. The rest of the world is out there; for example, there is America, Japan and South-East Asia, all of which have booming economies at present. If we are not careful in Europe, we shall find ourselves left behind as a sort of museum. But we must also resist the temptation to gloat over our economic success compared with our European competitors. In that respect, I agree with what the noble Lord, Lord Haskel, said. These are important markets for us. Despite how

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well we are doing, if anything, our economy must be being held back at the moment by sluggish demand from European markets. As the noble Lord, Lord Harris of High Cross, said, the Commission does at least seem to realise that there are failures in its previous policies. So perhaps this country has got a few things right after all.
I gather—and perhaps my noble friend the Minister can confirm this—that the Commission is now expressing doubts about extending the 48-hour week to sectors like the transport industry which is not at present covered by it. I hope that that is correct and that the Commission has now seen the light. However, if the Commission does make that judgment on competitive grounds, then it would rather raise the question of how it managed to enforce that directive upon us on health and safety grounds and why we were not able to use the opt-out that we thought we had in the bag.
Our economy is in good shape. Whoever wins the next election—and I very much hope that it will be the Conservative Party—will inherit a very healthy situation. Let us not spoil it by making increases in either direct or, indeed, indirect taxation. The noble Lord, Lord Barnett, said how difficult it would be for an incoming Labour Government, having committed themselves to no increase in direct taxation, to resist the temptation to raise taxation in another area.
Lord Barnett: That applies to Conservative Governments as well!
Lord Brabazon of Tara: My Lords, that may well be the case. However, the fact is that it would be a powerful disincentive to business and inward investment. That applies especially to the prospect of a windfall tax, which, as has been said, would not only disadvantage consumers but would also put off some of the foreign investors whom we want to attract and who have already invested in some of the privatised utilities in question. We do not want more regulation; we do not want the social chapter; and we do not want European monetary union. We have a good economy. Let us keep it that way.
5.38 p.m.
Lord St. John of Bletso: My Lords, I find it somewhat daunting to be speaking after such a distinguished and noteworthy list of speakers. I say "noteworthy" because there have been some exceptional contributions to today's debate. Like other noble Lords, I am grateful to the noble Lord, Lord Prior, for introducing the debate. Whatever criticisms may be levelled against the Government's track record on education, on the BSE crisis, on law and order or indeed on the National Health Service, I do not believe that anyone can deny now that the British economy is reaping the benefits of the Government's prudent and, if I may say so, sensible monetary and fiscal policies.
Against a raft of good news on the state of the economy, I am baffled as to why the Government are fighting such a negative campaign in the run up to the general election. The economic figures could hardly be better. Many noble Lords have spoken about them
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today. Consumer confidence today is as high as it was in early 1989. I beg to differ with the noble Lord, Lord Eatwell. I believe that people appear less worried now about losing their jobs than at any time since then. However, according to the opinion polls, the economic optimism does not appear to be rubbing off on political attitudes of the voters. There is a simple presumption in economics that it takes a long time for structural adjustments to take effect. The irony is that, at a time when there is so much convincing evidence that the benefits of reforms are coming through, the Government are getting little credit for what is going right and are certainly being lambasted for almost everything they do wrong.
This may sound as though I am making a party political speech. The noble Lord, Lord Barnett, said that he did not intend to make a party political speech. I am proud to be a confirmed Cross-Bencher, but I believe that credit ought to be given where credit is due. Last year there was a steady although unspectacular pick up in economic activity, largely on the back of a revival in consumer activity. The consumer side of the economy remains buoyant. Retail sales, particularly car sales and consumer confidence, are all at fairly high levels. The housing market in many parts of the country, particularly the south east, has improved sharply. Although retail sales showed a sharp and rather unexpected fall in December last year and that made consumer confidence edge down slightly, this confidence, thankfully, has picked up in January and February and in the view of many leading economists it is at its highest level since the late 1980s.
The momentum of the consumer recovery has helped explain the sharp upturn in service sector activity. However, in contrast to the evidence of growing activity in the service and construction sectors, the signs for the manufacturing sector have been fairly mixed. I look forward to the short Question which the noble Lord, Lord Paul, will ask tomorrow at Question Time on this issue. Whilst the consumer recovery has started to filter through to the manufacturing sector on the back of stronger domestic and, to a lesser extent, firmer international demand, sterling's 18 per cent. appreciation against the deutschmark since its low point in 1996 is certainly likely to take its toll on export orders.
According to a recent Merrill Lynch report, among the major economies the United Kingdom is expected to grow at the fastest rate during 1997. In consequence many fear that the United Kingdom may have to suffer a tightening of monetary policy. Fund managers—I say this in my capacity as a consultant to a stockbroking firm in the City—are certainly extremely upbeat on the outlook for the United Kingdom and are forecasting economic growth above the trend. This is reflected in a preference for investments in commercial property and smaller companies, both of which tend to prosper when growth is strong.
As several noble Lords have already mentioned, consumer spending will also shortly be boosted by the windfall gains from building society flotations and by the reductions in income tax announced in the Budget, as well of course by the reduction in unemployment

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and rising real incomes. Whilst inflation should stay low on a one-year time horizon, many are concerned about the longer term. One danger is that the tightening labour market could well lead to a distinctive upturn in pay settlement levels through 1998. There can be no denying that a major contributing factor to the drop in the rate of unemployment has been as a result of the relatively free and flexible labour market in the UK which has resulted in the high levels of international inward investment, which several noble Lords have mentioned.
The trend in the past appeared to be that when unemployment fell there was a tightening of labour markets causing upward pressure on wages and ultimately a rising of inflation. One of the main areas, and certainly one of the aims of supply side policy, should be to improve the trade-off between unemployment and inflation. Economists have been surprised how muted labour market wage demands have been over the past year. The hope is that we should aim to avoid the boom and bust scenario of the 1980s and, as my noble friend Lord Kingsdown, the noble Lord, Lord Ezra, and the noble Lord, Lord Barnett, have already mentioned, to work to achieve a sustainable recovery.
If the Labour Party is concerned about the supply side, I query its commitment to the social chapter. The noble Lord, Lord Brabazon, has already made mention of this in the previous speech. Although the Labour Party argues that joining the social chapter would have little effect on United Kingdom competitiveness, excessive labour market regulation has provided a powerful explanation for continental Europe's poor performance on job creation in recent years. By contrast, however, international observers have identified the United Kingdom's labour market policies as being the key reason for its improved economic performance. There is no way of estimating what costs the social chapter may impose in the future. There is a strong likelihood that the European Commission would use the institutions of the European Union to try to standardise social policies along continental lines.
On a range of important issues covered by the social chapter the United Kingdom would have no veto. It would have to accept measures agreed by the majority, just as the current Government are likely to have to accept the European Union's 48-hour week directive. I argue that the social chapter offers no discernible economic benefits to the UK. I was surprised at the statistics given by the noble Lords, Lord Eatwell and Lord Currie, that the level of international investment has fallen in the United Kingdom over the past few years. I believe that by signing up to the social chapter we may well see that level of inward investment fall a lot more over time.
My time is up. I certainly agree with the noble Lord, Lord Barnett, that it is easier to forecast the weather than to forecast the economy. My hope however is that for a sustainable recovery the next government will keep the current winning formula.
5.48 p.m.
Lord Birdwood: My Lords, more than 30 years ago, my work led me into contact with decision-making techniques which were then fashionable, by which companies decided on courses of action. Two of these, I remember, went by the names of Delphi and Monte Carlo. Perhaps they are still around today, but it is a long time since I have heard either of them referred to.
Both techniques called on one's ability to list influencing factors comprehensively, and give them appropriate weights as one moved towards a decision: open a plant, close a plant, use a particular port, stop using a port, start exporting to X, or give it up—that sort of thing. In those simple days—and they seem as far off and innocent as "Mrs. Dale's Diary"—the operational research support in a firm would make certain projections and assumptions based on currencies, markets, labour, innovation and, to a lesser extent, politics.
While I was collecting my thoughts in relation to this challenging and timely debate initiated by my noble friend today, I found myself scanning what expert opinion on "the economy" I could lay my hands on in the shape of recent publications. I have a pile with me. Economists as a breed have always frightened me far more than geneticists, biologists, or any of today's other tabloid bogeymen. When economists write about "the economy", they are so authoritative, so un-tentative.
In the context of the wording of the Motion—my noble friend has carefully referred to "the state of the economy"—the voices of expert economic opinion seem largely to be in accord. Just at this moment, just for the United Kingdom, just in the rosy glow of the longest bull market in history, things seem to be pretty good. As a House here we have exhaustively aired the things that are not so good: education, structural unemployment and welfare costs. But a snapshot of Britain is and should be a source of pride if not complacency.
Our economic cycles seem to be in advance at least of our European cousins: first into recession, first out; and it is a tribute to the economic realism of workers and managers. It is also a tribute to the profound changes in political ideology in the past 15 years or so. Two decades ago we were the closest thing to a command economy outside the totalitarian models. Today, not only are we a model of a demand economy but, with the exception of a handful of countries in permanent political quarantine, so is the rest of the world. The market has won. A little while ago we read about the end of history. And now I am led to the core of my brief and superficial observations today.
In a discussion like this, it is a natural thing to talk about "we". "We" are doing well, we say. What is the "we"? It is the sovereign state which gives us "our" identity. And it is the captive heart, the consciousness of nationhood, which seems to be drifting away from the understanding of what happens next in what the noble Lord, Lord Prior, commends to our attention.

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I yield to no one in the importance I give to academic economic theory. I have infinite respect for the mathematical models which are now the basis for every economic projection, every forecast. But an economy, "our" economy, is only the collective endeavour of people—our people. What, I have often wondered, are the smallest and the largest collective identities in which the individual feels pride? The military worked it out 300 years ago: the section; the platoon; the regiment; the corps; and so on. For ordinary people what is it? Is it the company? Yes. Is it the country? Yes, as well. Is it the Continent? I do not think so.
If I were using that "expert opinion", in the form of the articles and features to which I referred a moment ago, to make decisions about a company or a country, I should be forced to have the deepest doubts about the effect of European financial integration on this our economy.
Perhaps my absorption of the detail has been careless. But one thing strikes me with force about the arguments now being laid before us on European monetary union; and it comes as a paradox. The arguments in favour of EMU are almost shockingly emotional. The arguments ranged against EMU are surprisingly intellectual. I would have expected them to be the other way round.
But why bring up EMU in a debate about the economy? It is just that everything, and I mean "everything" which could influence "our" economy—the Delphi or the Monte Carlo factors—becomes completely trivial compared with the consequences of this politically engineered fiscal tidal wave. We are like children building sandcastles on the beach and the grown-ups are assuring that the 50-foot wave coming towards us will be interesting, a challenge to our competitiveness.
If I were assembling evidence in a court of law, I should be content, or deeply troubled, according to my Euro credentials, on reading articles such as those of Larry Elliott in the Guardian, the noble Lord, Lord Hanson, in last week's Spectator, Mark Archer last October, Charles Goodhart in Prospect this month, and Robert Samuelson in Newsweek. These are grown-up voices too. The noble Lord, Lord Currie, has just had his own ferociously analytical work, The Pros and Cons of EMU, reviewed by the Economist. The reviewer remarks that,
"governments will have to act prudently and far-sightedly … Unless the potential reward is huge (which, in the report's view it isn't), why risk it?".
So do those prudent, far-sighted governments exist but only by the will of the same people who feel they belong in countries, not continents; the same people who are the human engines of this or any other economy?
I feel privileged on many counts to have had this chance to participate, albeit briefly, in the debate initiated by the noble Lord, Lord Prior, on the state of the economy. It could be the last debate that this House can ever have on the subject because the idea of "our" economy could cease to have any meaning after next year. To be sure, there will be economic activity, and plenty of it. People will be richer or poorer. People will
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buy and sell. But to discuss in a national context the concepts of a national economy will have as much meaning as the penguins in the zoo discussing the price of admission.
5.57 p.m.
Lord Borrie: My Lords, six weeks ago, the Deputy Prime Minister, Mr. Michael Heseltine, invited himself to a conference. It was a conference to launch a significant and detailed report on the state of the United Kingdom economy. In the course of his speech to that conference, Mr. Heseltine said that the members of the Commission on Public Policy and British Business were a front organisation for the Labour Party. Many noble Lords may have read the reports of Mr. Heseltine's speech. That seemed to be a singularly inept phrase for the many distinguished people, including distinguished businessmen, who sat on that commission and had worked for some 18 months preparing the report.
The members included the chairman of Legal and General, the chairman of Sainsbury's, the chairman of British Aerospace and the managing director of GEC, the very company of which the noble Lord, Lord Prior, has been chairman for some 12 or 13 years. While we all welcome the debate that the noble Lord has initiated—I do not know whether he agrees with me—I felt that that wide-ranging commission did an excellent job in assessing in a balanced apolitical way the state of Britain's economy today. But obviously it irritated some people, especially current members of the Government who in the run-up to the general election want everyone to imagine that everything is for the best in the best of all possible worlds.
Yet the conclusions of the commission were surely not all that remarkable or novel. They did not relate merely to the past four or five years, the period to which several noble Lords referred, but to longer-term trends, especially over the past couple of decades. The commission, which includes the businessmen to whom I referred, stated that there had been more instability, more volatility, in macro-economic policy in this country than in that of our major competitors. Our recessions have been twice to three times as long as most of our competitors. Businessmen know, better than most, that instability discourages investment and long-term planning and saps business confidence in general.
The commission made the point, referred to by my noble friend Lord Haskel, that the best of British firms are equal to the best anywhere in the world. But, at the same time, there is a "long tail" in this country of under-performing firms, as the commission puts it. It drags down average business performance and is closely linked with under-investment in innovation, physical capital and research.
Of course we in this House, as no doubt do people outside it, all welcome the recent improvements in the job market. We welcome the strength, over quite a long period, of inward investment. The economy is now in good shape, as one noble Lord put it. However, one has to be careful. Worrying about these matters is not just some "nastiness" on the part of the Opposition in this

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House. I refer back to the views of the commission, including those distinguished businessmen. Noble Lords will have noticed last week that, according to the UN Conference on Trade and Development, our share of inward investment in Europe from Asian countries has recently shrunk. It is evident that at least a contributory cause of that is the uncertainty and instability to which those businessmen referred—in this case, in regard to the Government's relations with the European Union. Countries in Asia and elsewhere feel uncertainty as to what will be our relations with Europe in the long term. The divisions within the Government must be a contributory cause. Surely we cannot be complacent when we rank ninth in the European prosperity league; or, as the Conservative Member of Parliament and former Minister, George Walden, put it last week in the Observer:
"Britain remains one of the poorest countries in Europe in terms of gross national product per head".
The commission pointed out that, besides the long tail of under-performing firms, there is another long tail of low-skilled, under-performing and under-achieving people. The CBI's recent policy document on education and training said very clearly:
"although the best in the UK is world class, the tail of education and under-performance is striking".
A particular consequence of the "long tail" problem regarding people in this country, and unskilled people in particular is that part of the tail ultimately becomes quite detached from the body. Some of the unskilled become more or less permanently unemployed. As my noble friend Lord Currie said, rising inequality in this country is connected closely with that. It is wrong to think of this as purely a social problem. It has considerable fiscal and economic consequences. High levels of dependency mean heavy costs to the taxpayer, not just in social welfare but in additional expenditure in numerous budgets across numerous government departments, including those connected with the criminal justice system, the health service and so on. It means that vital public investment in our transport infrastructure, which is called for not merely by my party but by the CBI, businessmen and many others, is inevitably short-changed, to the disadvantage of British business, the British economy and the British people generally.
I would add that the UK economy suffers not just from the considerable gap between the performance of our best firms and that of the worst, or between our best graduates and those people who lack the most basic skills. We should also take into account the unevenness between one region and another. We often find, sometimes in close geographical proximity, contrasting worlds in which there is prosperity and comfort on the one hand and poverty and despair on the other. The economic success of the United Kingdom as a whole depends on the success of all regions of the United Kingdom. If any region is under-performing, then the United Kingdom as a whole is not maximising its economic potential.
The noble Lord, Lord Lawson of Blaby, mentioned competition as being among the Government's successes over many years. I believe that the noble
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Lord was still Chancellor when the Government, in 1989, issued a White Paper advocating considerable improvement in the competition law of this country in order to bring it up to date. I regret to say, as I believe I have on one or more previous occasions in my short time in this House, that the Government have failed time and again over the past eight years to implement those proposals. Even the last Queen's Speech made no mention of bringing our competition laws up to date. Yet surely we all agree that the competitiveness of British firms—ensuring that our policy tries to get people to compete more effectively—requires the updating of competition laws. Surely the tired mantra, "when parliamentary time permits", which was said to me by the noble Viscount, Lord Goschen, in answer to a supplementary question only a few weeks ago, is totally inadequate. Time is running out for the Government. They will never now be able to implement the promises of 1989. That will have to be done by someone else.
6.7 p.m.
Lord Astor of Hever: My Lords, I, too, thank my noble friend Lord Prior for initiating this very important debate. Like my noble friend Lord Lawson of Blaby, I also commend the noble Lord, Lord Desai, on his economic honesty in the article he wrote last month, the more so since his party's message on the economy is all doom and gloom, as we heard today. In his article the noble Lord mentioned job security and the risk that Labour policies on the social chapter might lead to more job losses, as in Germany.
Lord Desai: My Lords, perhaps I may intervene. I did not mention the social chapter in that article.
Lord Astor of Hever: My Lords, with the greatest respect, I have the article here, and it was mentioned.
Certainly Labour's enthusiasm to sign up to the social chapter would open the door to a slippery slope of higher costs, more regulation and renewed union rights which would undo much of the success that the noble Lord, Lord Desai, so accurately described, and which was acknowledged by the noble Lords, Lord Barnett, and Lord St John of Bletso, and even by the noble Lord, Lord Borne.
As a result of the opt-outs secured by the Prime Minister at Maastricht, together with the absence of a minimum wage, employers in this country are not subject to the job destruction measures which have helped to create mass unemployment on the Continent. Europe's heavy-handed labour regulations make it expensive to give someone a job, and the labour market is characterised by the classic combination of high regulation, high costs and high unemployment.
In December 1996 our unemployment rate was 6.7 per cent. and falling. Across the EU the average is 11 per cent., with the French rate a catastrophic 12.5 per cent. As a director of two French companies, I can speak with some experience of how much more expensive it is to employ workers there because of crippling tax and social security costs. Whereas those cost a British employer only an additional £15 for every £100 spent on wages, in France they add £41. It is that

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more than anything else that explains why Britain receives, as my noble friends Lord Prior and Lord Brabazon pointed out, more than a third of all the EU's inward investment as opposed to a tenth in France and a fifth in Germany.
Significantly, we attract more direct investment from Germany than anywhere else in the world. Because of spiralling overheads and red tape, export of jobs is now commonplace there. Already half of the staff of Bosch work abroad and in two years Siemens expects to be in the same position. Maastricht, and significantly the social chapter, placed immense burdens on German employers across the board. Tens of thousands of firms have gone into recievership and tens of thousands of firms have had to shed staff to stay alive. At the time of Maastricht, Germany had 2 million unemployed; today the official figure is 4.6 million.
As the noble Viscount, Lord Chandos, pointed out in his speech on the City of London six weeks' ago, 25 million new jobs were created in the US from 1980 to 1995; a mere 4 million were created in Europe, a paltry growth rate of 0.2 per cent. per annum. The noble Viscount wisely also pointed out that an obvious factor for that disparity was labour-market regulation, a view hardly consistent with Labour's pledge to end Britain's hard won opt-out from the social chapter which contains much more regulation.
Why should important decisions on Britain's employment policy be made in Brussels? No Tory Government is likely to sign up to the social chapter or introduce a minimum wage. Why impose burdensome new social costs on British firms, particularly smaller companies, many of which are still struggling with the after-effects of the recession?
Two industries that will be particularly affected by the social chapter and a minimum wage are the tourist and motorsport industries. The tourist industry, which typically has low wages and flexibility in the use of staff, would be devastated. So too would the British motorsport industry, an industry in which the United Kingdom dominates the world and which last year generated more than £2 billion for this country. I declare an interest as the unpaid President of the Motorsport Industry Association.
Fifty thousand people are directly employed within British motorsport and twice that number enjoy part-time employment in a fragmented industry where small, specialist firms compete fiercely to achieve the results that their sponsors demand. A high proportion of the UK's scarce resource of skilled and creative engineers is engaged in motorsport. The dispersal of the industry into small, specialist sectors is one of the main reasons for its success, allowing for rapid decision-making and a high degree of flexibility.
The motorsport industry in this country has become a world leader through the readiness of its people to work what are often unsocial hours and on a part-time basis to be involved in a business about which most employees are passionate. The social chapter and a minimum wage would open the door to foreign competition, particularly from the Far East where the
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motorsport industry is already blossoming. Our position is threatened. Let us not destroy it with unnecessary legislation.
6.15 p.m.
Lord Monkswell: My Lords, like other noble Lords, I should like to thank the noble Lord, Lord Prior, for introducing this debate. I rather presumed that there would be a fairly one-sided description of our economy from the other Benches and I intended to offer a different perspective. I had not appreciated that virtually no noble Lord would talk seriously about our nation's balance of trade and balance of payments. I think that it would probably be quite useful therefore, particularly following the contribution of the noble Lord, Lord Kingsdown, to say a few words about what I might describe as money-market domination.
One of the difficulties in a debate in which we have contributions from a combination of academic economists and people who might be described as relatively well-off members of society is that they say that the economy is now doing very well. For those people the economy probably is doing very well. But there is another perspective, which the noble Lord, Lord Bruce of Donington, touched on when he mentioned unemployment. We need to recognise that the real economy is the business of the way we organise society to provide the goods and services and the mechanism of exchange that provides the things that we as human beings need and want to enable us to live a decent life. For many millions of our citizens the British economy is not in good shape because it does not provide them with the goods and services that they need and want.
One of the intriguing things about the introduction by the noble Lord, Lord Prior, was that he suggested that the two major good things about the changes in the economy over the last 18 years were privatisation and trade union law reform. He suggested that the trade union law reform provided industrial relations peace. It might be more sensible to recognise that it is the existence of mass unemployment rather than any changes in the rules and regulations that has contributed to the change in labour relations that has typified the last 18 years.
Privatisation is a good thing? The remarks of the late Earl of Stockton come to mind when in his maiden speech in January 1985, on the same day as I made my maiden speech, he talked about selling off the family silver and the problems that that resulted in for what he described as the gay young blades. I am not sure that I would describe Government Ministers as gay young blades. Some of them are, I suppose, but that may be a different story.
One of the reasons that we have had privatisation is that the Government have almost consistently, year on year, determined to spend more than they raised, which means that it is necessary either to borrow or to sell off some assets to bridge the gap. It is intriguing to think that not only have the Government done that and notionally sold off public assets to the British public, but we are now seeing a situation where essential national assets are being sold off to foreign interests.

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In talking about the British economy, we need to recognise that it is ours and something over which we should have control. But if those major elements of our economy are owned by foreigners, then by definition we cannot be in control.
There may be some positive advantages from inward investment as a proportion of a particular industry or service sector. For example, there was the inward investment of the Ford Motor Company, basically the American company of General Motors, or Peugeot in this country when we ourselves had a very large British motor industry. But now virtually all the motor manufacturing undertaken in Britain is carried out by foreigners—the Japanese, Germans, French or Americans—and there is virtually no British-owned element, apart from the racing scene mentioned by the previous speaker, which I suspect will fall to Japanese competition fairly soon and is only a very small part of British motor manufacturing. All the rest is foreign owned. I am not sure that that is good for our economy.
The noble Lord, Lord Prior, did not talk about the balance of trade and the balance of payments. It was probably some academic economist who said that there could not be an imbalance in the balance of payments because it would naturally have to balance. But we can recognise that this country does not produce enough goods and services for our own consumption. We have to buy-in those goods and services from abroad and we have either to borrow money or sell assets to be able to afford them. That has been going on for over 10 years. It started under this Conservative Government when the balance of trade for the first time in our history went into an adverse situation. That leaves the economy of our country vulnerable to what other people think and feel about it.
That brings me to the remarks made earlier in the debate by the noble Lord, Lord Kingsdown, who, in a very telling phrase, referred to the money markets as vigilantes. I do not believe that anybody would argue that we should aspire to, recognise or accept that vigilante law or vigilante justice should determine our future. But that is effectively what is happening. The globalisation of money markets, the billions of dollars, yen and pounds which are whirling around the world's foreign exchanges completely take out of the hands of small, medium-sized or even very large nations the ability to control their destiny. For some people it may be very good to survive in that kind of "casino" operation but the vast majority of people on this planet want to have some control over their affairs. We cannot allow the money markets—the vigilante operations—completely to destabilise economies and human relationships in terms of economic affairs.
It seems to me that one of the difficulties is the fact that the vast sums of money swirling around the foreign exchanges are able to destabilise small, medium-sized and even large countries. There is a need to find some mechanism of control. I suspect that part of such a mechanism of control would be the emergence of three or four major economies in the world. The development of the European Union and the European Monetary System will be part of that.
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In conclusion, I hope that we shall find some way to control the money market vigilantes before they reduce human activity to the chaos of bloody conflict and war which has previously happened in our history and which we do not wish to see repeated. We must find a peaceful way out of the problems that we have created for ourselves.
6.26 p.m.
Lord Stewartby: My Lords, I have not before followed the noble Lord, Lord Monkswell, in a debate in your Lordships' House. I am, therefore, pleased to have this opportunity of complimenting him, if I may put it that way, on a more effective speech than that of the noble Lord, Lord Eatwell, on his Front Bench.
Like many other noble Lords, I am most grateful to my noble friend Lord Prior for introducing the debate this afternoon. It has been an extremely interesting and wide-ranging discussion. I shall not try in any way to repeat what my noble friend and many others have said about the success of the British economy. I simply wish to endorse in particular the point that he made at the outset; namely, that a great deal of the economic performance that we now see in the 1990s derives from the structural changes over a wide area which were undertaken in the 1980s. It is not only a matter of having a more flexible labour force and lower non-wage costs than our competitors. We restructured our economy in a number of ways much earlier than our competitors. That is one of the reasons for significantly improved relative performance now.
The noble Lord has just mentioned privatisation. Earlier, the noble Lord, Lord Ezra, said that there were many people with significant skills in the nationalised industries before they were privatised. That is of course true. But the key fact is that many of those nationalised industries were heavily overmanned and lacked the disciplines of the financial control in the private sector. I believe that the potential of those industries could not have been realised had they not been put into the private sector. The proof is that, instead of year on year being a drag on the taxpayer, they now produce every year large and increasing revenues for the Exchequer.
My other point on the restructuring of the economy concerns taxation. When my noble friend Lord Lawson was Chancellor, I had the privilege of being a member of his team. We not only reduced direct rates of taxation for individuals, which is very important in terms of incentive as high taxation is economically inefficient as well as unattractive to those who have to pay it, but he also carried out a far-reaching structural reform of company taxation. It is hard now to remember the days when corporation tax was above 50 per cent., but it was 52 per cent., with substantial initial capital allowances for investment.
It was quite clear at that time that much of the investment was inefficient. A large part of it was done purely to avoid making such large payments of tax. Although there was much resistance at the time and many said that it would discourage investment and have unattractive consequences for industry and throughout the economy, in fact it has had the opposite effect.

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It has made this country in the corporate sector much more efficient than it was 10 or 20 years ago. That is a reform which is often overlooked when the catalogue of measures of the 1980s is set out. It was an important reform.
The two points on which I particularly want to touch this evening are monetary policy and interest rates on the one hand and public expenditure on the other. I took the precaution of not preparing a speech for this afternoon's debate. It seemed to me that with so many distinguished speakers it would be wiser to listen to what was said and make personal comments in the light of the debate. I particularly want to agree with what the noble Lord, Lord Kingsdown, said in relation to monetary policy and interest rates.
In the past, increases in interest rates were a "shock, horror" affair and often large. They were usually taken rather too late and inevitably had a disproportionate effect on economic activity. The past four years in particular have shown the virtues of conducting monetary policy with a longer view and taking pre-emptive judgment in regard to the appropriate level of interest rates. Of course, we have not abolished the economic cycle. But I agree with the noble Lord, Lord Kingsdown, that if we continue to pursue those policies, then the fluctuations in the cycle are likely to be flatter and the periods of recovery and growth longer.
It is a pity the way in which the tabloids and other commentators tend to dramatise movements in interest rates. I do not know whether in two years' time the present rate of interest will prove to have been correctly set at 6 per cent. or whether it should have been 6.5 per cent. We are not talking about large differences of view between the Governor and the Chancellor. I am quite sure that we will not now see economic developments taking place where interest rate policy lags behind economic developments in such a way that, when changes are eventually made, they have to be more substantial than they would otherwise have been. If they are not sudden and they are not large, then changes in interest rates are really part of a sensible and responsible management of the economy.
If it is necessary in the coming months or over the next year or two for interest rates to rise by 0.5 per cent. or 1 per cent., that will not be an economic and financial disaster; it will be merely a recognition that the policies we have been pursuing have created the conditions in which economic growth can develop strongly. In order to ensure that it does not get out of hand and become too strong, some restraining move may need to be made.
Lord Ezra: My Lords, I thank the noble Lord for giving way. I shall be brief. In the light of what he said, would he agree with the advice given by the Governor of the Bank of England that interest rates should have been increased by 0.25 per cent.?
Lord Stewartby: My Lords, as I said, I do not know whether the present rate will prove, with the benefit of hindsight, to have been correctly set at this level or whether it should be at a slightly different level. The main difficulty in answering the question of the noble
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Lord, Lord Ezra, is that nobody is yet sufficiently able to measure the potential effects of the recent increase in the value of sterling. It will undoubtedly have a significant impact on the degree of activity in certain areas of the economy. But because that is a relatively recent development, the nature of the impact is not yet clear.
I conclude by saying a few words in relation to public expenditure. Long before I became a Member of another place and took an interest in these matters, I was impressed by a remark of Selwyn Lloyd. He said that the pressures on a Chancellor of the Exchequer to increase public expenditure had to be experienced to be believed. What may have been true a generation ago is doubly true today. It is not only the political and economic factors that come into play; there are also demographic issues which mean that any Chancellor, any Chief Secretary, faces relentless pressure to increase public expenditure.
It is difficult enough to control expenditure if the governing party has an instinct that public expenditure should be controlled and contained to a sensible level. In my view it is likely to be impossible if a governing party wish to move in the opposite direction. Therefore, I listened with great interest to what was said by the noble Lord, Lord Barnett, when he implied that, even though Mr. Blair and Mr. Brown may be saying the right things, it is unlikely that they will be able to hold to the public expenditure figures as projected. I agree with my noble and learned friend Lord Howe that it is not credible. It would be difficult for the next government, if they continue to be a Conservative government, to keep that continuous control over public expenditure. In my view it would be impossible if by some mischance the next government were to be formed by a party whose instincts over the generations have been to encourage and not to restrain public expenditure.
6.36 p.m.
Lord Desai: My Lords, first, I apologise to the noble Lord, Lord Astor of Hever, for interrupting his speech. He is quite right; I did make that remark. Unlike the Secretary of State for Health, I repeat what I said and do not say that I was befuddled or it was a breakdown in communications. It is a great honour to be quoted by a former Chancellor of the Exchequer and Privy Councillor. That is the highest state I have attained and I am afraid that from here it is downhill all the way.
When I wrote the article mentioned it was designed to warn my party not to be smug. I believe I succeeded in making the opposite party smug, and that is a good result. The more smug the opposite party becomes, the better we are and the better are our chances of success. I must point out that on our side there is a great division between me and my noble friends. I believe that a Conservative victory is impossible, but not unlikely; they believe that it is unlikely, but not impossible.
I want to take up two issues. First, the noble Lord, Lord Ezra, raised the question of whether the economic recovery is sustainable. Again, I thank the noble Lord, Lord Prior, for giving us the opportunity to discuss this question. I want to discuss it without mentioning the

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election and such matters again because what we have arrived at now is what we arrived at in around the late 1940s.
In the late 1940s we arrived at a consensus about the nature of the economic and social policy—later it was referred to as "Butskellism". That happened when the Conservative Party decided, after its defeat in 1945, to change its thinking on specific issues—and it is nice that it changed its thinking. Then we had around 20 or maybe 25 years of consensual economic policy making. The consensus then broke down. We are now back at a consensus that, given the way the global economy is at present, it is unlikely that any government would succeed by being fiscally irresponsible; that devaluation does not give us any permanent gains; and that we have to keep to a strict spending limit.
I welcome that. Differences still exist between us and, if I have an opportunity, I shall speak about them later. But I welcome the fact that once again we have a consensual, macro-economic framework and within that framework we will conduct policy. It is in nobody's interest that the country does badly in its economy; nobody gains by that. In fact, people only lose by it.
I turn to the question of the sustainability of the current recovery. This is the fifth year of the recovery, but that is not unusual. The last recovery, if we start from the trough of 1981, lasted to around 1990; that was a nine-year cycle. We must not all get carried away. We must make special efforts to sustain the recovery. In that respect the first point I would make, which was mentioned by the noble Lord, Lord Kingsdown, is that we are currently paying a premium of between 1 per cent. and 1.5 per cent. on long-dated government stock. That has been going on for quite some time. Why is that so? It is connected with the current hardening of the exchange rate. Is that a systematic force or is it just a blip? The answer to that question lies in a very simple fact.
Many people emphasise independence for a central bank. The noble Lord, Lord Lawson of Blaby, mentioned that point. The problem of the British economy does not arise from anything the Bank of England has done or not done but has arisen from the fact that we have not had a good record of fiscal responsibility. As I said in the debate on the Budget in November, if at the top of the cycle we are still running a deficit and if the Chancellor says that in the next year he has no hope of producing a surplus, one wonders when the British economy will ever have fiscal responsibility.
I am happy to confess that I was converted to that view about 10 years ago. I was not born a fiscal conservative. What has happened is that, on the one hand, we have narrowed the tax base. Collections have kept up but the tax base has narrowed. On the other hand, the Government, with the best of intentions, are finding it difficult to control spending. The British public like spending. It is not only a matter of political parties. The British public like certain kinds of spending to be undertaken by the Government. They want decent schools, they want good health care and they want law and order. Those are very difficult to resist. What we
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have seen over the past 15 years is a see-sawing of the GDP ratio from 45 down to 30 and the persistence of the PSBR problem, especially if one takes out the privatisation receipts. The treatment of privatisation receipts is a problem in economics.
One ought to worry about this matter rather seriously. We are paying a premium of between 1 and 1.5 per cent. because we are not trusted to be fiscally responsible. We are not trusted to stick to an announced policy. The temptations are rather great. I may not gain the approval of my noble friend Lord Bruce but I would have preferred it had we gone into the ERM way hack in 1985. We did not go into the ERM. We went back and forth for about five years. When we eventually went in, we did so at the wrong rate. There was a possibility of realignment within the ERM but we did not take it, and we went out. Whatever one may think about the ERM, good or bad, if one goes into something one has to show commitment to stick to it and not run away when a crisis occurs. The market quite rightly judged at that time that even after the Government had been re-elected they did not have the courage in a recession to stick to the ERM discipline. That is why we are suffering still.
I am not necessarily saying that I would immediately jump into EMU. I have already said that I am not right now in favour of going into a single currency. But whatever we think about it, if we go in, we should stay. If we do not mean to go in, we have to ask—the question has been asked for the past four years—what is our monetary and fiscal framework or medium-term financial strategy, as was mentioned by the noble Lord, Lord Lawson. A medium-term financial strategy should have not only an inflation target but a much sterner fiscal target than we have been used to so far. In this respect the golden rule of government borrowing is a very good one. We should say that whichever government come to power—it is almost an equivalent of central bank independence—the UK's fiscal policy will be conducted on the basis of the golden rule and that if we seem to be deviating from the golden rule there will be a quick and stern correction the next year. That would be done either by genuinely cutting expenditure or by increasing taxation, whichever was required. No one likes taxation but it is better to have taxation than to run unsustainable fiscal deficits.
I am grateful to the noble Lord, Lord Prior, for giving us the opportunity to speak on the economy. The problem of constructing a sustainable and viable macro-economic framework for British prosperity is one for all of us.
6.46 p.m.
Lord Nickson: My Lords, I should like to apologise to the House, and particularly to my noble friend Lord Prior, for not being here at the start of the debate. I had a meeting I could not avoid which was fixed long before the debate. I was particularly sorry to miss my noble friend's opening speech and also the speeches earlier in the debate of my noble friend Lord Kingsdown, who did me the honour of being one of my supporters when I came to your Lordships' House, and my noble friend Lord Lawson of Blaby, who was always enormously considerate to me during the time he was Chancellor of

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the Exchequer, except once when he rang me up at four o'clock in the morning in Tokyo under the impression that it was four o'clock in the afternoon in Scotland.
We have heard extremely important speeches from distinguished economists and politicians. I speak as a simple businessman who comes from Scotland. I want to ask your Lordships to walk down memory lane with me briefly and then, with your permission, I would like to be very parochial and talk about a particular worry I have about the economy in Scotland.
Down memory lane I should like to take your Lordships back to the mid-1960s and to the opening of a printing warehouse in Glasgow by the noble and gallant Viscount, the late Lord Montgomery. As was his wont, he spoke a lot about himself and not much about the firm for which I worked, which had just published his memoirs. He said that he had no quarrel with us over that, but as publishers of bibles and hymn books he was always being asked to sing hymns that went, "Oh Paradise, Oh Paradise, How I long for thee". "Well", he said, "I don't, I don't. I would like to sing a hymn that goes, 'Oh Paradise, Oh Paradise, I have a little shop, and just so long as profits last, here I mean to stop'".
Well, my Lords, we moved from that decade of the swinging sixties to the decade, in my terms, of the sad, sad seventies, the most miserable decade of my working life in business. I shall not rehearse to the House all the terrible problems of high inflation, high unemployment, industrial relations conflict—which I venture to suggest few Members of the House can have experienced at first hand in all its unpleasantness and severity—the secondary banking crisis, and so on. Profits did not last and many businesses, including the one to which I refer, were brought to their knees by that sequence of economic events.
My second flashback is to a meeting at which I was a guest where the then Leader of the Opposition was speaking. I am referring to my noble friend Lady Thatcher. She spoke with immense confidence—it was the first time I had seen her or heard her—about her conviction as to what needed doing for Britain. I was totally captivated. I thought I was listening to Don Quixote tilting at windmills because all my experience could not have prepared me for the idea that anything she said was likely to be possible.
The first questioner asked her about proportional representation, to which I was quite inclined myself at that time. She demolished him with withering scorn and, in my opinion, with all the wrong arguments. I said to my host—I was sitting next to him—"She can't get away with that". He said, "Well, if you want to ask a question, you go ahead". He moved a long way from me. I got my first major handbagging from her. She said, "If that's the way you think, you don't understand what needs to be done to change this country. You have no conception of what we have to do. If that's the way you think I don't want your support and I don't want your vote either". I retired duly humiliated.
My third flashback jumps on to the early 1990s and another Chancellor of the Exchequer, the current Prime Minister. I went to see him because at the time
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I was chairman of what was then the Top Salaries Review Body. We had come to the conclusion that what we were paying our public servants in this country was neither fair nor wise. I went to seek the mind of government on that matter. He listened to me with great patience. Then he read me a little lecture about inflation, the state of the economy and what he intended to do about it. Shortly afterwards, of course, he did become Prime Minister. I would only point out that I was very impressed with his earnestness, conviction and determination at that time. Exactly what he said was going to happen has happened. Those are my three little flashbacks.
I hope that I sound neither gleeful nor smug about the state of the economy at the moment. I am firmly of the view that, in the words of another Conservative Prime Minister, so far as the climate for the wealth-creating sector of British industry is concerned, we have never had it so good. I now turn to Scotland. What are my fears? I am talking on a constitutional point. I am deeply, deeply worried about the proposals of the party opposite for Scottish devolution. I am worried on a constitutional level and I am worried on an economic and business level. Why? Because it is not quite as easy in Scotland to be world class as it is elsewhere. It is not quite as easy to attract inward investment—geography is against us. It is always difficult to attract key, crucial executives to run Scottish companies if they do not happen to be Scots. For all those reasons it is very important that the climate in Scotland is at least as good as it is elsewhere.
If we do have a referendum on Scottish devolution and the Scottish people vote for it, in my view that will be irreversible and indisputable. Much as I am against it, I also fear that it will not last because it will not deliver and it is a short cut inevitably—if not in my lifetime, then in that of my children—to separatism.
I have a young friend who is about to stand as a Conservative candidate in the Western Isles. He was greeted with an encouraging comment that Conservatives in South Uist are scarcer than corncrakes. We have many red-listed endangered species in Scotland, but I have to tell noble Lords that Old Labour is not among them. It will dominate a Scottish assembly if it comes. If Old Labour produces a paper on the tartan tax, it will need to say how it will be raised. Is it only on Scottish residents; is it true that it will average out at 3 pence—(£500)—for the average wage earner, £5 per week for the pensioner; £3,000 a year for the middle manager?
The point is that Scotland benefits by about 30 per cent. more spending per capita than the other citizens of this United Kingdom. That is about £8 billion. If the commitments to controlling public expenditure are true, the tartan tax might raise £400 million, not £8 billion. The pressures will come through local authority expenditure. Why? It is because the party opposite has said that it will return the business rate to local authorities. Perhaps I may tell noble Lords what happened in the late 1980s. The rateable value to brew a barrel of beer in Fountainbridge was eight times what it was in Burton-on-Trent. A tourist who laid his head on a pillow in a four-star hotel in Edinburgh paid £3.50 in rates; in London the equivalent

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was £1. Forty per cent. of the total rates of the Central Region come from the BP and ICI complexes at Grangemouth. Jenners in Princes Street paid £1 million—4 per cent. of its total costs—in rates, the same as Harrods, which is eight times its size.
What will happen is that pressure on public expenditure to finance Old Labour's policies in Scotland will be passed back to local authorities and they will immediately be forced to use business to finance those policies. It is business that will pay. The Scottish economy will suffer. I ask noble Lords on the Benches opposite to talk to their colleagues in another place and to express in the most serious way the concerns that I have about devolution and its effects on the Scottish economy.
6.57 p.m.
The Earl of Clanwilliam: My Lords, my noble friend Lord Nickson and other noble Lords have spoken with great experience about the state of the economy. The debate has been cogently introduced by my noble friend Lord Prior. We are indeed fortunate in having an economy which is thriving and is the envy of all Europe.
I wish in particular to refer to the valuable part played by the insurance and investment industry in the City. It has provided vital support for the City in creating an excellent balance of payments. In particular, it has been central in building up pension reserves on behalf of our great industrial companies, greatly to their cost. It has been estimated that the cost to industry of building up these occupational pensions has been in the region of 6 per cent. of its profits. That should be taken in relation to what I am about to say. As is well known, about £600 billion have been built up. That is something which cannot be said too often.
We are doubly fortunate in that we are in a much stronger position vis-à-vis other members of the EU, many of whom have a serious deficit a-building which is not, incidentally, being taken into account in the Maastricht criteria now being judged by the Commission. My noble friend Lord Lawson of Blaby mentioned the factors and I shall repeat them. It is very important to know that the net unfunded liabilities of the present systems amount in Germany to 139 per cent. of GDP; in Italy it is 113 per cent. of GDP; in France it is 98 per cent. Whereas my noble friend Lord Lawson of Blaby mentioned a figure of 5 per cent., I have a figure of 19 per cent. to the year 2070.
Similarly, as regards the percentage of total workers who have private pensions, the best figures are in Switzerland and the United States with over 50 per cent. Ourselves, Norway and Denmark have well over 40 per cent and we are followed by the Netherlands and Sweden. The rest of Europe comes nowhere; some 20 per cent. of those workers have private pensions.
That was to be the import of my speech today but, as noble Lords will know, I have been pre-empted. I had intended to ask my noble friend on the Front Bench what he was going to do about pensions for the young. My right honourable friend Peter Lilley has made a statement on pensions today which has not only pre-empted my call for what represents mandatory
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savings, but has gone further and answered the greater question of how he was going to ask the young of this country to make the contributions.
Perhaps I may take this opportunity of congratulating the Government on grasping the nettle that our competitors in the EU have woefully ignored. This aspect at least must contribute enormously to enhancing the excellent and positive success of the economy of this country in the long term.
7 p.m.
Lord Taverne: My Lords, this extremely interesting debate introduced by the noble Lord, Lord Prior—to whom we are grateful—has to a large extent been a review of the past 18 years of this government. A great many tributes have been paid and it struck me that they were in some ways like the tributes paid during a memorial service, although the Government are not yet dead.
The tributes from the Opposition side were rather less fulsome, as one might expect. One of the questions which was raised from the start was this. Many people conceded and stressed that in many respects we were doing well at present. The question was asked by a number of noble Lords: is the present trend sustainable? My noble friend Lord Ezra was the first to raise the question. I too wish to address it and, like many noble Lords who have spoken, wish to see what lessons can be learnt from comparisons with other countries of the European Union. If it is possible in this pre-election period, I hope to do so in as non-partisan a spirit as I can summon.
There is the Government's view of the path to continued success, as stressed by the noble Lord, Lord Prior, and a number of other noble Lords, including the industrialists who spoke, such as the noble Lords, Lord Blyth of Rowington and Lord Trefgarne. Speakers from the Government Benches have stressed the need for continued deregulation of the labour market. They say: "Essential to our success is that we should have a flexible labour market. If reliance on the market means that there are much greater inequalities, so be it". They claim that it works. "Look at the sclerotic labour market on the Continent of Europe, particularly in Germany, with its high costs and inflexibility, which has driven many of the German companies to invest elsewhere".
I do not believe that there can be any doubt that in the past 18 years the Government have scored a number of successes. To start with, it must be conceded by those who oppose the Government in other respects that large numbers of our top companies are in a much better state than they were 18 years ago. Secondly, many people, certainly on these Benches—the two of us on this occasion—would concede that over the past few years there has been good macroeconomic management by the Chancellor of the Exchequer. However, I believe that he took some fearful risks in the Budget. I agreed very much with the noble Lord, Lord Barnett, that there was a great deal of counting of chickens, particularly when it came to the gains to be realised from anti-avoidance measures.

1901
Further, I feel that great risks are being taken with the money supply. One of the exceptions to the universal chorus of praise and hope for the future was the remarkable speech made by the noble Earl, Lord Caithness. He drew our attention to the increase in the money supply, the increase in the level of debt and the worries which that caused. I too worry about it. I hope that his gloomy predictions are not borne out. I am even more worried about it because his view is strongly supported by Professor Tim Congdon. I differ from him in many ways, but he has a remarkable record as a forecaster. If he warns about the consequences for future inflation of the growth in the money supply, we should take notice.
I am also worried about the pledge made by both the Government and the Shadow Chancellor that there should be no increase in income tax. There will be great difficulties about raising tax generally. Sometimes one wonders what will change if there is a change of government. I am reminded of the poem by Hilaire Belloc, who for some reason took exception to women and did not like champagne. He said:

"The accursed power which stands on Privilege

(And goes with Women, and Champagne, and Bridge)

Broke—and Democracy resumed her reign:

(Which goes with Bridge, and Women, and Champagne)".

So whether there will be any change I am not sure. Nevertheless, over the past four years we have had good economic management.
There has also been a drop in the unemployment figures, of which more later. There has been reasonable growth over the past few years; and more growth is projected, though too much stress is laid on the projections of the OECD, which proceeds largely on the basis of information supplied by member state governments. Particularly important, there has been a catching up in productivity.
However, before we indulge in a mood of self-congratulation, it is also important to look at the qualifications. We are not the biggest and strongest economy in Europe, as a number of noble Lords on the Opposition Benches have pointed out, not even in the past three years where, for example, the record of growth of Ireland has exceeded ours. The noble and learned Lord, Lord Howe, mentioned the record of the Netherlands. It is worth remembering that the Netherlands has had higher growth than we have had, lower unemployment than we have had, lower inflation than we have and, unlike the United Kingdom, it has managed to accompany that success without an increase in the inequalities of salaries and wages. It is also worth remembering that its success has been based on an old-style consensus. Agreement between government and unions and industry has been absolutely central to its success.
The second qualification is one on which I do not need to add to the words of the noble Lord, Lord Currie of Marylebone. It is that our growth rate over the past 10 years has been average. Our productivity is still well below that of Germany, France, the Netherlands, Sweden, Denmark and a number of other EU countries. The third qualification is that while our unemployment
1902
figures are going the right way, it should also be noted that the Government have been rather more successful at reducing the unemployment figures than they have at reducing unemployment. If one considers the OECD comparison of employment, which takes into account involuntary short-time working, participation rates, who is on the register and who has taken early retirement, one must note what the noble Lord, Lord Eatwell, said, that the total number of people employed in recent years has not increased. On that basis, on the modified OECD figures, our record is not that much better over the past few years than the average of most EU countries.
However, I wish to look particularly at the comparison with Germany made by many speakers. First, Germany has problems galore, many of which stem from unification, which led, after all, to the transfer of 4 per cent. of the GDP of West Germany to East Germany. It is worrying that despite that vast transfer, there has been no lessening of East Germany's dependence. Secondly, it was also unification which led to strong deflationary policies from the Bundesbank. There was no restraint in wage claims and it was felt by the bank that there were inflationary pressures which could only be restrained by a very restrictive monetary policy. This affected the rest of the European Union as well. Thirdly, as the noble Lord, Lord Prior, pointed out, Germany has suffered from high social costs which have risen strongly recently. I was looking at them the other day. Social security costs were 26.5 per cent. of wages in 1970, 35.8 per cent. in 1990 and 40.9 per cent. in 1996. That has led to the relocation referred to by a number of noble Lords, particularly relocation of industries which require a low level of skill.
But it is a mistake to assume that the Germans are about to abandon the Rhineland model and go hell for leather for the Anglo-Saxon model instead. That is for good reasons. Despite the high labour costs, the extraordinary thing is that in the past 15 years, while we have lost our share of world trade, they have increased their share. Despite their high costs, they have managed an export surplus; indeed, the French, too, with their high costs have managed it, while we have an export deficit. There is a very interesting balanced analysis in the January edition of the National Institute of Economic and Social Research review. The paper is by Wendy Carlin and David Soskice, who works for an institute in Berlin which looks at the secrets of German success in exports. One of the reasons for this is that the Germans sell on quality. They have a particularly good record in high quality incremental innovation in medium technology industries. This success is based on several factors. There is a very high level of training both in the high technology skills and the less skilled labour force. There has been company-specific innovation which enables particular companies to compete successfully despite their high costs. All of this is based on consensus and a degree of security of employment that is quite incompatible with a hire and fire approach.
Further, in approaching the need for redundancies it is noticeable that there has been an agreement between the unions and management to keep up the training of young workers and concentrate redundancies among the

1903
older workers, who get good unemployment benefit and then become unemployed but treat this as a preliminary stage of retirement. Therefore, one has a low level of unemployment among young workers in Germany and a high level of unemployment of people who are in effect retired and have ceased to work at about the age of 55.
If one compares skills in Germany and the United Kingdom, disturbingly one finds that 61 per cent. of the United Kingdom workforce is low or unskilled, whereas 16 per cent. of the German workforce falls into that category. I do not suggest that we should copy the German solution. I believe that we have many advantages. Our open capital markets make the United Kingdom, like the United States, perhaps a better place for growing new hi-tech companies. Obviously we cannot transplant the German model in any event to very different circumstances. But it is not altogether surprising that in Germany there is no rush to copy the Anglo-Saxon model.
This raises very important questions for us of sustainability in the longer term. What will be the future for employment? So many speakers from the Benches opposite have stressed our low labour costs. Of course, that is a very great advantage, but in the end we cannot beat India or China on low labour costs. In the end we must compete on quality. The future sustainability of our employment depends on the UK being a high technology, high wage, high skill economy. It is not always fashionable to stress the importance of maximising security of employment and the value of involving the workforce in achieving the kind of training that is essential to a high quality workforce. The central factor in training and securing the quality of our workforce is security of employment. It also means that government must play a major role. In the long term if sustainability of prosperity rests, as I believe it does, on the quality of our products, we have no grounds for complacency but much ground for concern.
7.13 p.m.
Viscount Chandos: My Lords, I add my thanks to those of other noble Lords to the noble Lord, Lord Prior, for initiating today's debate even if, not surprisingly, I disagree with much of what the noble Lord has said, particularly in respect of these Benches.
Twelve minutes is a short time in which to try to draw together the debate over the past four hours or more, let alone to attempt an economic assessment of the 17 years and 10 months during which the Benches Opposite have been filled by a Conservative Government. The fin de siècle feeling which, inevitably, hangs over the closing days of this Parliament, led the noble Lord, Lord Prior, in his opening speech, and many other noble Lords to look back over the full period of this Government, as well as at the present position and the performance of the economy since the country last had a chance in 1992 to pass judgment on the Government's stewardship.
Although I am wary of appearing presumptuous to the many noble and learned Lords in your Lordships' House, I can understand the task that faces a distinguished judge in summing up a long and complex
1904
court case and giving appropriate directions to the jury. In this case the jury is not here in your Lordships' House but in the country at large. Even without the benefit in almost every case of having heard this afternoon's provocative debate and of my directions (as it were), the electorate will shortly determine whether the arguments of my noble friends Lord Eatwell—who is absolutely anything but mean-minded—Lord Currie and others on these Benches are fair in assessing the Government's economic record and whether the policies and approach of the Labour Government would be better.
The noble Lord, Lord Harris of High Cross, was more generous than the noble Lords, Lord Prior, Lord Lawson and others on the Benches Opposite, in his acceptance of the Labour's Party's integrity and good faith in its advocacy of a market economy and the consequential framework of policies. I am sorry if the noble Lord, Lord Harris, misses the fun of educating all shades of politicians on the virtues of the market. I hope that he will in retirement come more often to the meetings of the Institute of Public Policy Research and the Social Market Foundation—the think tanks that my noble friend Lord Eatwell and I have respectively played a part in founding—where the next generation of such debates now takes place.
I admire, enjoy and value the views of my noble friend Lord Desai and all my noble friends, even when I do not entirely agree with them or even understand them. The noble Lord, Lord Lawson, knows perfectly well that the noble Lord, Lord Desai, speaks from a more prominent position from behind me because of his irrepressible individuality, and that the similarly distinguished economic credentials of my noble friend Lord Eatwell, along with my own experience (setting false modesty aside) of 22 years as an investment banker and businessman, bestow adequate credibility on our Front Bench in these areas of debate.
There is a fundamental commitment going from my right honourable friend the Leader of the Opposition through every level of the Labour Party to a market economy, and it is one that I have every confidence will be seen very clearly in years to come as different and better than that over which the Conservative Government have presided. The noble Lord, Lord Lawson, and the noble and learned Lord, Lord Howe of Aberavon, may feel uncomfortable at my noble friend Lord Eatwell's dissection of their trial-and-error approach to economic management during the 1980s, but they cannot cover up the facts by pretending that my noble friend Lord Eatwell and I are International Socialist Party entryists to the Labour Party or (in the words of the noble Lord, Lord Prior) miscreants gone straight who will return to our misguided ways on the 2nd May this year or, for that matter, any year hereafter.
The noble Lord, Lord Lawson, suggested that we had to understand what the Conservative Government had achieved before we—or more relevantly, in the case of economic policy in particular, our colleagues in another place—were fit to govern. I find this concept of pre-qualification to form a future government, based on a satisfactory appreciation of the incumbent's achievements, a novel constitutional innovation, but I shall put it down to the desire of the Conservatives to

1905
find at least some initiatives in this area where otherwise they seem uncritically to advocate the status quo—perhaps timed to steal the thunder of the very welcome constitutional package announced today by the combined Opposition Benches.
Of course there have been some improvements in the economic framework of the United Kingdom in the past 18 years, particularly in the area of supply side reforms which were referred to in particular by the noble Lord, Lord Harris of High Cross; it would be an achievement even beyond the grasp of the Benches opposite to have used those 18 years, the £60 billion of North Sea oil tax revenues and similar levels of privatisation proceeds to absolutely no avail. It would be churlish not to recognise even that the Government could take some credit for initiatives in this area. Even my noble friend Lord Eatwell might have done so had he not been limited to a speech two minutes shorter than mine. Nonetheless, your Lordships' House would be in danger of equal and opposite generosity in seeing these changes as deriving solely and exclusively from the actions of the Conservative Government.
As Samuel Brittan has highlighted, the former head of economics at the OECD, David Henderson, has traced the general movement of western governments in a market-oriented direction from the late 1970s onwards, but not with any consistent association with Conservative governments, given the changes in this period in countries such as Australia, New Zealand, Spain, Sweden and even France.
Like Napoleon's generals, successful politicians are lucky, and perhaps they also identify early the trends running through global economic and social developments and hitch themselves and their party to that moving wagon. Despite the more extravagant claims of certain members of the party opposite, whose rewriting of history concerning privatisation, for instance (which was barely mentioned in its 1979 election manifesto) deserves the Booker prize for fiction, the Conservative Government did not single-handedly move the world away from collectivism; nor have these Benches played anything other than a constructively critical role.
Those supply side achievements have nonetheless been against the background of the unparalleled volatility and instability to which my noble friend Lord Eatwell referred, and so strikingly expounded by the Lloyds Bank Review. The noble Lord, Lord Kingsdown, referred to the period when, as governor of the Bank of England and with the noble Lord, Lord Lawson, as Chancellor, the sterling exchange rate fell to near parity with the US dollar. Since that occurred at a time when the tax revenues from North Sea oil were close to their peak of £14 billion in a single year, your Lordships will, I suspect, recognise the extent to which the Conservative Government's economic policies have been based, as I have already said, on trial and error.
In his newly adopted role as an international bond salesman, the noble Lord, Lord Kingsdown, expressed surprise that government bond yields were up to 2 per cent. higher in the UK than in Germany, despite the strength of the currency. Surely it is perfectly clear that
1906
it is the other way around: the current exchange rate is uncomfortably and damagingly high for all exporting industries, except, I suppose, sterling bond trading firms, precisely because of that interest rate premium which is attracting high levels of inward portfolio investment to the UK. There is a real economic and social cost to that: jobs lost unnecessarily and painfully, of which my noble friend Lord Eatwell has already given examples.
Over the past 18 years, the Government have combined those selective achievements with debilitating instability and inadequate investment, both in the physical stock of industry and the nation's infrastructure, but also, and even more damagingly, in the education of the next generations of our workforce. As my noble friend Lord Borrie spelled out, the Conservative Government included in their last two election manifestos commitments to the much needed reform of competition policy and law—action which is central to the achievement of sustainable, non-inflationary growth, and yet no legislation has been introduced.
There need be no doubt that there is much that a Labour Government can do which this Government have ignored or neglected; the country need have no fear that the coming choice is not a real one and a vital one. Education, investment, a constructive but critical attitude towards the EU and EMU can be combined with non-inflationary growth and economic stability, and will be if a Labour Government are elected in two months' time.
7.24 p.m.
The Minister of State, Department of Social Security (Lord Mackay of Ardbrecknish): My Lords, as I have said in your Lordships' House on a number of occasions at the end of a Wednesday debate, this has been a particularly interesting debate. But I believe that this one wins the prize. All of your Lordships who have sat through the debate, as I have done, will agree with me. We have had a number of splendid contributions. The only thing upon which I will agree with the noble Viscount, Lord Chandos, is that it is extremely difficult to sum them up and encompass every one of those contributions. My difficulty is even greater than that of the noble Viscount, because I have listened to all of the speakers in the debate.
Before I come to some of the impressive speeches, I should like to start with the opening speech of the noble Lord, Lord Eatwell. The noble Lord, I thought, was going to give me an introduction to what a Labour Government might do. So I took out my pen. I prepared a piece of paper. I waited, and I waited, and I waited. At the end of the 12 minutes, the paper was blank. Because he did not tell me anything a Labour Government might do if they were to win an election in a few weeks' time. I did learn a few things. He did not like the high rate of sterling. He went on at some length about that. He did not tell me what might he done about that; how we might get it down; what steps we might take. He did not tell me whether we should take any steps to get it down. He did not like the growth in consumption, but he did not tell me whether he wanted to do something to reverse the growth in consumption, although I suspect that the election of a

1907
Labour Government might reverse it pretty smartly without anything else happening. But that is beside the point. That is history being repeated, I should think.
The noble Lord went on a bit about instability in employment. I wonder about that, and want to take it up because it is one of the little fictions that is being pushed around by the Labour Party at present. Yes, I did say a fiction. Widespread job insecurity was a myth. Those are not my words, my Lords, but those printed in Friday's edition of the Daily Mail. They referred to Mr. Frank Field, Labour's very respected spokesman and expert on social security. Mr. Field said that he condemned the doom and gloom analysis of the employment market, supported by his party's leadership. He would have had a pretty troubled afternoon listening to the noble Lord, Lord Eatwell. Mr. Field said that insecurity was no worse than it had ever been. The interesting thing to back that up is that if one looks at part-time and full-time jobs—both have risen significantly since 1992—all the surveys show that 85 per cent. of people with part-time jobs want part-time jobs. As for job insecurity (temporary jobs) in one of my idle moments while reading Social Trends, I came across table 4.11 in the labour market chapter on the percentage of employees with temporary jobs and making an EU comparison.
Your Lordships will be forgiven for thinking that we were in the lead in that table. Our total figure in the UK for males and females in temporary jobs is 7 per cent. In Germany it is 10 per cent., France 12 per cent., Sweden 12 per cent., Finland 16 per cent., Spain 35 per cent., and the EU average is 11 per cent. That is not quite the picture that the noble Lord, Lord Eatwell, was painting. Indeed, anything positive waited until the end. At the end, we had five sound bites from the collective book of sound bites from the Leader of the Opposition but they did not add up to a policy on a single issue.
When my noble friend Lord Prior introduced the debate, he reminded us of the late 1970s. I had almost forgotten the trade union anarchy, the winter of discontent, and, indeed, discontent in the Cabinet of those days, as the noble Lord, Lord Barnett, struggled manfully, as is explained in his interesting book, to contain public spending and the desires of all his colleagues, as my noble friend Lord Stewartby said, to push up public spending.
Indeed, my noble friend Lord Prior reminded us that learned newspapers and journals were asking whether the UK was ungovernable. It was not. It just needed a change of government. What do they say to us now? It is time for a change! Back to that? Back to 1979? Some change! Anyone who wants a change back to that must have forgotten all we learnt in those dreary days in the late 1970s.
In his interesting speech my noble friend Lord Lawson agreed with the noble Lord, Lord Ezra, about the need for caution in watching economic growth, inflation and so forth. He mentioned in particular, unfunded pensions, as indeed did my noble friend Lord Clanwilliam who has taken part in a number of debates on that issue. One of the great advantages we
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have in this country is that we have £650 billion of funded pension provision—more than the rest of the EU put together.
This morning, my right honourable friend Peter Lilley and the Prime Minister announced a policy which will bring for future generations the same strength of funding to the basic pension and to the SERPS equivalent. We will move away from the dangerous pay-as-you-go systems which we have tried to follow in the past.
The noble Lord, Lord Barnett, always makes an interesting speech. He was open in saying that there might be a need for higher taxes if a future Labour Government are to do what they want. In his usual extremely interesting speech, the noble Lord, Lord Desai, suggested a somewhat similar conclusion. The Labour Party is going to put up taxes, together with their Liberal Democrat friends, as my noble friend Lord Nickson explained. However, those who live in England will be fortunate enough to avoid one of their new taxes; the one to which they are pledged. Those of us who are unfortunate enough to live in Scotland will be paying 3 pence in the pound or even more. As my noble friend Lord Nickson said, in Scotland old Labour reigns supreme. Every newspaper in Scotland carries story after story of the demand from local politicians for more spending, regardless of the consequences. Therefore, the party is not reconstructed, and a weekend in Scotland will show any of your Lordships who doubt that that is the case.
The noble Lord, Lord Ezra, mentioned privatisation. I agree with him that not all the management in nationalised industries were bad. Indeed, many were very good, as they proved when their industries became privatised. The noble Lord should have asked why they were not good in the nationalised industries. As he said, it was because of Government intervention and interference, not the market. They were transformed by privatisation and I hope the noble Lord does not believe that we should return to that.
Lord Ezra: My Lords, indeed, no.
Lord Mackay of Ardbrecknish: My Lords, I am delighted to hear that.
The noble Lord, Lord Kingsdown, made an interesting speech. He answered the question, "Is it sustainable?", asked by the noble Lord, Lord Ezra. The noble Lord tends to ask me that question a great deal, so I am grateful to have an answer from the noble Lord, Lord Kingsdown, to which I shall refer the next time that the noble Lord, Lord Ezra, asks me.
The noble Lord, Lord Kingsdown, was interested in the independence of the Bank of England and my noble friend Lord Lawson and my noble and learned friend Lord Howe indicated that they approved of that. However, my noble and learned friend Lord Howe said that it is easier for former Chancellors to approve of the independence of the Bank of England than it is for still serving Chancellors. That is probably right.
My noble and learned friend Lord Howe talked about government spending and tax rates. He welcomed the fact that the Labour Party is saying that our spending plans for the next two years and the tax rates that were

1909
fixed are right. The noble Lord, Lord Borne, did not appear to believe that the figures were right. He appeared to be asking for more government spending; a great deal more than his friend Mr. Gordon Brown believes he would be able to agree to if he were ever to move into Number 11.
The changes that we have made, which were explained by the noble Lord, Lord Lawson, and the noble and learned Lord, Lord Howe, who are distinguished former Chancellors, have been remarkable during the past 18 years. The private finance initiative, for example, is changing the way in which we look at public spending. I wonder whether the Labour Party would continue it if they were to win. One has only to sit in your Lordships' House to know that the party opposite does not like privatisation. Every single Question Time my noble friend Lord Goschen has to come to the Dispatch Box and remind it that in the halcyon days of nationalised railways trains did not always run on time; trains were not always clean; staff were not always polite; and the whole system did not always run brilliantly. To listen to Members opposite one would believe that it did.
The last speech that I wish to mention in particular before I make one or two points of my own is that of my noble friend Lord Blyth of Rowington, who is a distinguished businessman. He made many interesting comments, but one of the most interesting was a quotation from his German business friends. He said, "They admire our success and they envy our freedom of action". No one should doubt that our economy has been transformed over the past 18 years. Indeed, the noble Lord, Lord Barnett, said that the economy is doing well. He went on to say that no one can dispute that, but I am sorry to tell him that someone can; his noble friends Lords Eatwell and Lord Chandos. And they did, as usual.
I shall quote not only the noble Lord, Lord Barnett. The IMF stated in its latest report on the UK economy:
"Recent economic performance has been enviable."
and,
"The strong overall performance is a product of sound economic policies."
The OECD is also an admirer of the UK's recent economic performance. It recently stated:
"Prospects for achieving sustained output growth and low inflation are the best in 30 years".
My noble friend Lord Lawson quoted from the Economist. The noble Lord, Lord Hams of High Cross, quoted from what in my view was unlikely reading material for him; that produced by the European Commission on exactly the same lines about the success of the British economy.
As a number of your Lordships mentioned, during the past 18 years the Government have been determined to bring inflation down and to keep it down. My noble friend Lord Caithness made an interesting speech on how we might continue to do that. Returning to what was said by my noble friend Lord Prior in his opening speech, we saw only too clearly in 1979 that the high inflation of the 1970s, with prices rising at an average of
1910
13 per cent. a year, was bad for Britain. It was distorting economic decisions, it meant that Britain was always struggling to maintain its competitiveness, and it was robbing pensioners of their hard earned savings.
The Government have succeeded in their role in turning the UK into a low inflation economy. Since the previous election in 1992, underlying inflation has averaged just 2.5 per cent. That achievement has been no accident. Our recent success in keeping inflation down at the same time as the economy has been recovering has been due to the UK's new monetary framework in place since 1992. To quote the IMF:
"The inflation targeting framework for monetary policy has delivered impressive results".
That is endorsement indeed.
Thanks to the sound anti-inflationary policies of this Government, the daily economic decisions of people and business all around the country can be made on the basis that low inflation is here to stay. Low inflation is now a way of life in Britain. The noble Lord, Lord Kingsdown, suggested that we might still have to persuade the people whom he called the vigilantes—the bond market—that that was the case. He made a valid point. We must all continue our determination to keep inflation low and never lower our guard against the danger that it can so easily creep up on us again unawares.
I turn to the public finances. We have consistently pursued sound public finances; smaller government, lower taxation. By combining low taxation, low public spending and low debt we are now in a position that is just as good as any in Europe—and better. We intend to maintain this enviable position and we can do that only if we continue to bear down on public spending.
In the 1980s across the rest of Europe the state remorselessly took an ever greater share of the nation's output. The average level of public spending in the European Union rose from 44 per cent. of GDP in 1979 to around 50 per cent. today. Only we in Britain held the line. We privatised loss making nationalised industries. I must say that the noble Viscount, Lord Chandos, amused me when he suggested that his party had co-operated. It resisted every single one of the moves such as privatisation. We cut back on government subsidies and it resisted every single move. We curbed the growth in social security spending. I know that I receive no support from either of the parties opposite when I suggest that we might contain government spending on social security. We bore down on the waste in public services. The proportion of GDP spent by the state in this country is now 8 per cent. lower than the average in the rest of the European Union. If our spending had risen to their levels—in other words, if we had not maintained our vigilance on this front—we would now be having to raise nearly £2,300 a year more in tax from every British household—
Lord Eatwell: My Lords, would the noble Lord agree that the proportion of public spending in GDP today is higher than the level inherited from the last Labour Government?
Lord Mackay of Ardbrecknish: My Lords, is that the best that the noble Lord, Lord Eatwell, can do for an intervention? I rather hoped that he would tell us what the Labour Party is proposing to do.

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When we took over from the last Labour Government, thanks to the major efforts of the noble Lord, Lord Barnett, they had managed to do that. But they left us with very considerable borrowing and a great many wage rises in the pipeline which we then had to honour. My noble and learned friend had to find the money for that. However, the important fact is that other countries in Europe are way ahead of us in what they spend as a percentage of their GDP in the public sector. I welcome any conversion from the party opposite to keeping that down. But when I come to your Lordships' House with proposals to keep social security under control, I do not receive much support from any noble Lords on the Benches Opposite. Perhaps if the noble Lord, Lord Eatwell, were a spokesman for social security matters, I should find it a good deal easier to take our proposals through your Lordships' House. Perhaps I may suggest that as a useful transfer after the next election.
We have said that it is our goal to reduce the share of national income which goes on public spending to 40 per cent. and below. This year, we shall meet our immediate target and reduce it to 40 per cent. In the next parliament, we intend to reduce it a great deal further.
I believe that in the area of public finance, there is a considerable difference between the Government and the party opposite. It is our belief that the state should withdraw from activities which are best left to the private sector. Everything that is said by noble Lords opposite about, for example, the railways leads me to believe that they do not share my view. They instinctively distrust the private sector. If noble Lords opposite do not believe me, I invite them to spend a weekend in Scotland to see the real Labour Party on the ground, at local level. Not just in Scotland but up and down the country Labour local authorities want to spend more money. Without exception, that is what they want to do.
In addition to reducing the state's involvement in the nation's affairs, we are also set apart from many of our European competitors by our vision that we should make this country uniquely competitive and make it an enterprise economy right at the heart of Europe. That vision is rapidly becoming a reality. Over the last complete international cycle, from 1982 to 1993, Japan was the only G7 country to enjoy faster growth of GDP per head than Britain. Since 1993, we have had faster growth of GDP per head than any other G7 country.
Britain is the number one destination for inward investment into Europe. As my noble friend Lord Prior said at the beginning of the debate, inward investment is responsible for more than 850,000 jobs since 1979. According to OECD figures, the UK has attracted as much inward investment as have Germany, France and Italy put together since 1990.
Some doubt was expressed about that. Instead of quoting statistics, I shall give a few examples. Hyundai in Scotland has created 2,000 jobs—investment worth £2.4 billion. These are real projects. LG in Wales has created 6,100 jobs—investment worth £1.7 billion. There is Toyota in the East Midlands and Samsung in the West Midlands. I could go on. There are many
1912
examples in Scotland which I can see with my own eyes. Factories are being built and new jobs are being created. Indeed, at Mossend in North Lanarkshire, close to what was the Ravenscraig steel works, manufacturing plants are being built which will bring more jobs to that areas than were lost when the steel works closed. That is the reality. As my noble friend Lord Brabazon of Tara said, not only is it inward investment from the rest of the world but it is inward investment from other parts of the Union; for example, we are the number one destination for German overseas investment. My noble friend mentioned Siemens coming to the north east of England with £1.8 billion and 1,800 jobs.
It is not just inward investment. It is also home-grown firms which have been successful. My noble friend Lord Prior exhibits that in the work that he does. In 1996, GEC reported another record year. My noble friend Lord Blyth of Rowington, from where he sits, can see also that his company presented very good results recently.
Indeed, that reminded me, thinking about the pharmaceutical industry, that the pharmaceutical and chemical industries have helped the UK to have a trade surplus in 1995 of £2.3 billion and £3.9 billion in their products. We are Europe's biggest exporters of computers, televisions and microchips. Our share of European exports in those products is 24.6 per cent., 22.4 per cent. and 27.7 per cent. respectively. The noble Lord, Lord Monkswell, was concerned about car production. Car production in this country is at its highest level since 1973. As my noble friend Lord Prior said, only today there has been an announcement from a privatised rail company for an order for 44 trains worth £200 million to be placed in Derby.
All those successes show that in our country, inward investors and home-grown companies are doing well. They are doing well because of the policies that we have outlined and fought for. First, there is the UK's flexible labour market. The OECD said in its most recent survey of the UK economy that the UK is one of the least-regulated labour markets of any industrialised country; and, secondly, the UK has one of the most competitive business tax regimes in the G7. Taxes on business in the UK are lower than those in any other major European country. We have the lowest main rate of corporation tax in G7, a point underlined by my noble friend Lord Stewartby. Thirdly, we have the lowest non-wage labour costs in the UK. Seldom has the climate been better than it is now for inward investment, for growth in this country and for a rise in employment.
I wish to look at the employment statistics across Europe. I have made these comparisons before and I should say that I make them using the Eurostat figures based on the ILO measurements, before the noble Lord, Lord Bruce of Donington, jumps to his feet. The figure that I have for this country is 7.5 per cent. while it is 9.3 per cent. in Germany, 12.5 per cent. in France, 12.2 per cent. in Italy and 22.3 per cent. in Spain.
The noble Lord, Lord Taverne, discussed youth unemployment. In that respect, the Germans do better than us and we need to learn from them. The figure for Germany is 9.8 per cent. while we are at 13.1 per cent.

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But we are dwarfed by the French figure of 29 per cent., the Italian figure of 33.6 per cent. and the Spanish figure of 42.9 per cent.
My noble friend Lord Astor of Hever and other noble Lords mentioned non-wage labour costs. I believe that they are relevant. I remind your Lordships what they are. For every £100 of wages in the United Kingdom, it costs an employer another £15 to employ somebody. That figure is £31 for Germany, £33 for Spain, £41 for France and £44 for Italy. I suggest that there is some connection between those high non-wage labour costs and the high and rising unemployment of our Continental friends.
Needless to say, I could go on for some considerable time extolling the virtues of the British economy because I believe that it is right and proper that you should stand up for your country and explain to noble Lords opposite exactly what is going right. However, I wish to leave with your Lordships one further quotation about deregulated labour markets. I do that in order not to miss out the noble Lord, Lord Currie, from my summing up speech. I read with huge interest in a report from the Economist Intelligence Unit recently an article that he wrote about EMU. He said:
"EMU could hinder business: for instance, by encouraging Europe-wide comparisons in wage negotiations, or by promoting further social legislation as part of a broader trend towards federalism. These dangers need to be guarded against".
We intend to guard against them.
What has been achieved, my Lords? Since the current international economic cycle began in 1993, we have enjoyed the fastest growth in GDP per head than any country of G7. Unemployment has fallen continuously over the past four years and now stands at 1.2 million below its peak. New jobs have been created; indeed, 900,000 extra ones since the recovery began. Moreover, we are experiencing the longest run of low inflation for almost half a century. In recent years, we have seen some of the lowest numbers of working days lost due to strikes since records began in 1881, and government borrowing has been restored to a clear downward path, thus allowing us to cut the basic rate of income tax to its lowest level for 60 years. Healthy growth; low inflation; falling unemployment; current account in broad balance; public borrowing shrinking; and living standards rising. That is some record: why change it?
7.50 p.m.
Lord Prior: My Lords, I think we might say that we have had a pretty good debate this afternoon. I should like to thank all noble Lords who took part. I do not suppose that the press or the media will care two hoots about it, but I believe that it has been an important debate. Indeed, many useful comments were made. If I may say so, I particularly liked the speeches made by the noble Lords, Lord Barnett and Lord Desai. I felt that they exposed the need for their side to reconcile their urge to spend more with their master's view that there can be no increase in taxation or spending. I believe that they have a real dilemma in that respect.
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However, the dilemma for us is that we have a strong economy and, when we say so, we are regarded as being smug. Well, we also have a lot to do and I hope that we will get on and do it. But, generally speaking, I hope that the press will pay some attention to today's debate. Again, I should like to thank all those who took part in it. I beg leave to withdraw the Motion.
Motion for Papers, by leave, withdrawn.

Welsh Development Agency Bill
Brought from the Commons; read a first time, and to be printed.

Lloyds TSB Bill [H.L.]
7.52 p.m.
Baroness Hooper: My Lords, I beg to move that this Bill be now read a second time.
The purpose of the Bill is to allow for reorganisation of the group of companies which are subsidiaries of the Lloyds TSB Group plc. I believe that all of us participating in this debate share a wider and a common interest; namely, the success of the UK financial services sector. As my right honourable friend the Chief Secretary to the Treasury said earlier this year:
"London is consolidating its position as the financial services centre of Europe".
As the Shadow Chief Secretary to the Treasury said at the end of last year at the Corporation of the City of London dinner:
"Here we have a world-class financial centre … nowhere else in Europe … can rival it".
The City of London and the United Kingdom as a whole are at the core and cutting edge of the global financial services industry—an industry which generated a massive £20 billion in net overseas earnings in 1994, the equivalent of 3 per cent. of gross domestic product. It employs 920,000 people, which is almost a 25 per cent. increase in the numbers employed in the industry in the early 1980s.
The UK retail financial services environment has changed out of all recognition over the past 10 years. Two words encapsulate that change: competition and technology. The combination of the two is having a profound impact upon the structure of the financial services sector in the UK. All the major players in the sector are striving to use ever more sophisticated technology to tailor their distribution systems as well as their products and services to meet the changing and increasingly sophisticated needs of their customers as well as increasing their market share.
The promoters of the Bill want to be able to offer their customers a service which will allow them to look upon every branch of either brand anywhere in the country as their own branch. Through technology, access to an increasing range of banking services will become available to customers at a time of their own choosing. Cash dispensing machines, credit cards, telephone banking and even personal computer banking

1915
through the Internet have been taken up by customers at an astonishing rate. For instance, in 1996 electronic transaction volumes—by which I mean paperless transactions, which are quicker to process—for the first time exceeded paper volumes through the UK clearing system.
No longer does the customer need, or invariably expect, to go to his or her own bank. In future, the bank must go to the customer. The extraordinary recent advances in technology make that possible. Customers enjoy the benefits of 24-hour telephone banking. In fact, Lloyds TSB is itself the largest telephone banking network provider in the UK. Cash dispensing machines are situated in convenient locations, such as supermarkets and railway stations and, after cash, credit and debit cards are fast becoming the standard method of payment for goods and services.
Increased competition from outside the traditional banking sector has added another dimension to the financial services environment. For example, British Gas recently launched a MasterCard credit card and Sainsbury's has announced a free 24-hour banking service with a high interest bearing instant access savings account for its customers and a full branch network. In addition, the Abbey National, which in February teamed up with Safeway, has demutualised and become a bank. Other building societies are following suit. It is perhaps too early to predict the long-term success of those operations but, since 1995, telephone-based operations such as Virgin Direct Financial Services have added considerably to the diversity of the marketplace.
Similarly, the retail supermarket multiples are rapidly transforming themselves into one-stop shops, with chemists, newsagents and, now, banking services on the same site. These new entrants are playing a crucial role in transforming radically and irreversibly the landscape of the UK financial services sector. They represent a formidable challenge to the traditional providers of retail and financial services which themselves must respond—and respond effectively—if they are to continue to be as successful in the future as they have been in the past. All this follows the trend towards change set by the manufacturing sector in the 1980s.
Perhaps I may now turn to the merger between the TSB Group and Lloyds Bank which was announced by the boards of the two companies on 11th October 1995. It was subsequently approved by the shareholders, the High Court and the Bank of England and became effective on 28th December 1995. Perhaps it would provide a useful and certainly an interesting background to the Bill if I were to say something about the two companies, their respective backgrounds, experience and expertise.
The TSB movement was started in 1810 by the Reverend Henry Duncan in the small Dumfriesshire village of Ruthwell—I hope that I have pronounced that correctly but, if not, I stand to be corrected during the course of the debate—as a means of improving the financial position of what were then termed the "labouring classes". As a result, savings banks were established throughout the United Kingdom. From the
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1840s their funds were secured by the Government: hence the name trustee savings banks. During both world wars, the savings banks served a crucial role in mobilising personal savings in support of the war effort.
Although the savings banks began to explore the possibility of providing commercial banking services in the 1920s, it took over 50 years for the TSBs to come together to form a modern clearing bank in 1976. At flotation in 1986, there was a massive expansion of the company's equity base; indeed, small shareholders, including many staff, began to share in the benefits of the business. In fact, 25,910 staff and company pensioners applied for a staggering 97 million shares. By 1995 the TSB had grown to become one of the UK's leading bancassurers (an integrated banking, life assurance and general insurance business) with branches throughout Britain.
For its part, Lloyds Bank, or Taylors of Lloyds as it was then called, was founded in 1765 in Birmingham. By the 1880s, Lloyds had established itself as a major banking force in the Midlands and looked increasingly towards London. In fact, as long ago as 1771, the sons of the founding Birmingham partners had opened a bank in Lombard Street in the City of London. So it was that, in 1884, this business was combined with the mainstream bank and in 1911 the business took on an international dimension and expanded into France. That was followed by expansion to South America (an area which your Lordships know and have a considerable interest in) and the rest of the world. In 1995 the Cheltenham and Gloucester Building Society joined the group.
Having grown out of different banking traditions and backgrounds, this merger of TSB and Lloyds brings together their respective strengths and maximises the synergies between them. This natural fit is most apparent in a geographical context. TSB has a concentration of branches in Scotland and the north of England while Lloyds is strong in the south and west of England.
However, the logic behind the merger is not just one of geography. Lloyds has a long tradition of providing business services to small and medium-sized businesses, while TSB, with its tradition as a savings institution, has a particular expertise and strong presence in the personal account market. Lloyds is also a strong player in the retail mortgage market while TSB possesses a successful general insurance underwriting business.
Customers are rightly discerning about the quality and competitiveness of the products and services which are available to them. The merger means that Lloyds TSB Group will be a stronger force in the financial services market, providing its customers with an increasingly flexible and wide range of high quality, keenly priced products and services. The merger is not merely good news for Lloyds TSB and its existing customer base; it is also good news for the financial services sector and for consumers generally as it provides an important stimulus to the market as a whole.
The merger of Lloyds Bank and TSB took place in December 1995. Why, you may ask, do we need a Bill now? By the merger in 1995, shareholders in

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Lloyds Bank surrendered their shares in exchange for a 70 per cent. holding in the TSB holding company, which was renamed Lloyds TSB Group plc. By this means the two banks came into single ownership but the main banking businesses were carried on separately by TSB Bank and Lloyds Bank. They have continued as two separate banks with their own branch networks. It is only by means of a Bill such as the one before us that the two banks can be fused together in practice, operating with one board of directors, one management structure and one overall set of accounts.
The recognised way to unite two banking undertakings is to transfer one to the other. The need to have a Bill in these circumstances derives from the fact that a bank may not transfer a customer's money to another body without the consent of that customer. Therefore to unite TSB with Lloyds would require the written consent of most if not all TSB account holders. Parliament has always accepted that such an operation would be wholly impracticable and has therefore approved a number of such Bills over the years. A private Bill is also an extremely practical and cost-effective way of transferring all other legal relationships without any alteration of the terms or any break in their continuity. This includes, for example, transfer of all the employment contracts, although I must emphasise that the Bill does not seek to alter terms of employment.
The reason why TSB is transferring to Lloyds and not the other way round is that Lloyds has many more overseas operations. A transfer of Lloyds to TSB would have entailed the complication and expense of obtaining legal recognition of the process by all the overseas regulators concerned. In short, this Bill provides a mechanism for internal reorganisation and safeguards the rights of everyone affected by that process.
I understand that some of your Lordships may have been advised by the Banking Insurance and Finance Union (BIFU) that it is seeking an assurance on a continuing separate status for the bank in Scotland. Although this is an issue not even touched on by the Bill, I am nevertheless happy to provide comfort and clarity on that. The promoters of the Bill have confirmed to me that TSB Scotland's special and separate status, as provided for in the undertakings given to Parliament by the then TSB Group in 1985, will continue to be honoured in the future as in the past. As Sir Robin Ibbs, the then chairman, said at the first annual general meeting of the new group in Edinburgh in April 1996,
"There will be no change in the status of TSB Bank Scotland. Its chairman will sit on the main group board. The TSB Bank Scotland will remain headquartered in Edinburgh and the Lloyds TSB Group will have its registered office in Scotland and will have its AGMs in Scotland".
Petitions have been lodged against the Bill by the two unions involved, BIFU, to which I have already referred, and the Lloyds TSB Union. The petitioners have raised a number of other issues not raised by the provisions of the Bill itself which are primarily industrial relations matters. The bank entirely understands the need properly and effectively to address the concerns which
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have been expressed. Many relate to matters which are already under discussion and would be discussed irrespective of the Bill.
Your Lordships will recognise that the petitioners will have every opportunity to argue their case directly with the promoters during the Committee stage of the Bill. It may be helpful, however, if I say a few words on some of the issues raised by the petitioners. On the matter of terms and conditions, Lloyds TSB's principal objective has been to bring together the practices of the two banks in a fair and balanced way. As part of this they have been able to give the staff in Lloyds and TSB Bank a 5 per cent. pay increase as a one-off settlement. This represents a pay increase which is approximately twice the rate of inflation. It will be interesting to see whether the other clearing banks can match this level of settlement. It proves, moreover, the importance which Lloyds TSB attaches to its staff as an important business resource.
On staffing levels the aim is to achieve any necessary reductions in jobs through natural wastage, redeployment and voluntary means wherever possible. Compulsory redundancy, which is referred to in one of the petitions, is very much a policy of last resort. Pensions, are of course, always a particularly sensitive issue and, we all recognise, a most important one. The promoters wish me to confirm that the benefits of the separate pensions schemes of TSB and Lloyds remain unaffected by the merger, nor are there any plans to change pensions benefits for existing staff. Both schemes have significant surpluses in assets over liabilities.
The promoters fully accept that the two unions have an important part to play and plan to work with both unions to conclude recognition agreements. The two unions have already been invited to make suggestions on the possible content of such agreements. However, I think we all accept that complexities arise as a result of the merger, including the need to harmonise some of the arrangements which currently differ between the two banks. Lloyds TSB has consulted the unions on a wide range of issues since the merger took effect over a year ago and has every intention of continuing to do so.
This may also be a good opportunity for me to point out that the merger, in creating a much larger company, has simultaneously enhanced the career opportunities within the group. As a result of the merger, Lloyds TSB Group now has almost 15 million customers in the United Kingdom, whom it serves through a wide and well-balanced network of branches. The group is the sixth largest company in the United Kingdom by market capitalisation. It is the third largest bank in the world outside Japan and by market capitalisation. Its total assets are £147 billion, or approximately 55 per cent. of the Government's control totals for 1997–98.
The group contributed an impressive £556 million to public finances last year by way of corporation tax. Outside the UK the group's international banking activities in Europe, Latin America and New Zealand returned a profit of £154 million, benefiting the Exchequer and shareholders alike by way of remittance

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of profit earned abroad. I am sure that many noble Lords will have seen that last month the group announced profits of £2,500 million. Results such as these where all stakeholders gain—and all eligible Lloyds TSB staff will receive an extra 10 per cent. of basic salary this year as their profit share—will be achieved only by continued success in a fiercely competitive marketplace.
I have spoken at some length in order to set the Bill in its proper context. I have no personal axe to grind but I believe that Lloyds TSB is a successful and responsible UK company, winning business globally, a major employer both at home and abroad and a company which also plays a valuable role in the community through the work of the Lloyds TSB Foundations. The Bill before your Lordships this evening is essentially a housekeeping measure which enables Lloyds TSB to get on with what it is good at doing: providing excellent prospects for its customers, staff and shareholders. I commend the Bill to the House.
Moved, That the Bill be now read a second time.— (Baroness Hooper.)
8.10 p.m.
Lord Dubs: My Lords, I thank the noble Baroness, Lady Hooper, for having explained the economic potential of this merger and for having given us some details as regards issues which certainly bothered me and some of my noble friends. Apart from giving the Bill a Second Reading, I understand that one of the benefits of such a debate is that we are able to suggest to the Committee matters which are important and which we hope, therefore, the Committee will take on board as points that it should investigate thoroughly. Unusually, in a sense, I am not using arguments to influence or persuade the Government, but a Committee which will be formed after the Second Reading debate has concluded. As I understand it, that means that the Government are unlikely to have a publicly stated view on the Bill; and the Minister is equally unlikely to feel able to take part in the debate. Therefore we are in the unusual position of not seeking to influence the Government. No doubt the Minister will be grateful for that.
On the other hand, this is a matter of major national importance. It is one of the most significant mergers and will result, as the noble Baroness said, in the establishment of a very large company indeed—one of the largest companies in the country. Without disrespect to the Minister present, I should have thought that the Minister for Trade and Industry might have been interested enough to listen to the debate because the outcome will certainly affect his responsibilities, at least for a few further weeks.
The key issue is not something on the face of the Bill but rather the consequences for the staff of both banks if the merger goes through fully. What is needed is a better understanding between the two banks and their respective staff. As the noble Baroness said, there are two unions involved. The Banking Insurance and Finance Union (BIFU) is a TUC affiliate, which has over 16,000 members at TSB and over 7,000 at Lloyds. BIFU has sole negotiating rights in TSB and joint negotiating rights with Lloyds TSB
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Group Union, formerly the Lloyds Group Union at Lloyds. I understand that that Union has 29,000 members although several thousands of them are pensioners and, therefore, not actively employed at present.
I thank the unions for their help in providing background information. I do not recall having received anything from the bank itself although I have in my hands a briefing paper. It came via a noble friend who obtained it from a shareholder. Unless I have made a mistake, and have received this document without noting it—my noble friends also say that they have not received it—I wonder why the bank did not bother to send us this document. Perhaps the bank has an answer. I should have thought that it would have been helpful to the debate, rather than realising when it was too late to read it that such a document was available.
The merger took place last year. A Private Bill is necessary to merge the two sets of branch networks and to put customer accounts together in one bank. There is a simple need. All that is wanted is an assurance from the new bank management regarding jobs, terms of conditions of employment and customer service, and a willingness by the management to discuss those matters properly and fairly with the unions concerned. That is all that is wanted. I believe that the unions would say that so far such assurances have not been forthcoming, and a willingness to talk and negotiate has not yet been seen.
I shall choose my next words carefully. I have had some experience in the other place of dealing with Private Bills. I know that in the less gentle atmosphere of the other place Members tend to have ways of debating Private Bills which we would not adopt. I have not discussed this with any of my friends in another place. There will certainly be more of them by the time this Bill reaches another place. However, perhaps I may say to the management of the bank that while we may be gentle in this Chamber, I cannot help thinking, on the basis of the way in which my friends have sometimes reacted to Private Bills when finding points of principle to which they objected, that the Bill will not have the easiest of passages in another place unless some agreement is reached.
Let me indicate briefly the issues which I believe the Committee might wish to consider as the result of the debate. First, the noble Baroness, Lady Hooper, has already said that the bank wishes to avoid compulsory redundancies but that those will be a matter of last resort. That is a matter on which there should be frank discussion. It is not for us to negotiate, but at least we can mention the issues on which possibly it would be useful for negotiation to take place.
BIFU has identified 650 bank branches which are at risk due to their close proximity, and possibly up to 10,000 jobs which could be lost as a result of the merger. Since the merger, about 1,000 jobs have already either gone or their imminent loss has been announced. I could indicate other job losses, either actual or potential. Therefore the 10,000 figure is a real danger. It may be that those staff who are not declared redundant or do not have to become redundant in some way will

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find the new set up beneficial in terms of their future careers. I very much hope so. But I am concerned about job losses.
Secondly, I hope that the Committee will ensure that there is proper local consultation over any proposals to close branches. A report of the National Consumer Council published in February this year finds that the axing of bank branches throughout the banking system generally has left some people with no access to savings facilities. One in five adults are without a current account. Consequently they miss out on the best savings and investment offers which require payments by cheque or direct debit. The NCC report claims that some technological developments in banking may discriminate against people on low incomes because telephone and electronic services may exclude them.
Other studies have indicated that businesses are less likely to locate in an area without a bank branch. A study in London found that the rate of branch closures is highest in the most deprived wards of the capital. Other studies have demonstrated that the restructuring of the banking sector has resulted in poorer people getting less access to the formal financial system at precisely the time when it is becoming more important for them in terms of discounts on utility bills or in terms of pay.
I believe that what is needed is a proper system of consultation with the union, customers, local businesses and local authorities before closures take place. In the United States it is not so easy for closures to take place without some agreements being reached with consumer and community groups.
My third main point concerns the stated intention that the bank will choose the best from both organisations. By that I hope that it means the best terms and conditions, including scales of remuneration and pension arrangements from either bank to apply to all staff. The intention to have the best from both organisations was stated by the chairman of the Lloyds TSB Group in the Annual Report 1995. I should have thought that that concept should apply also to terms and conditions for employees. There are certainly doubts as to whether that has applied so far; and in a number of respects there may well have been a deterioration in conditions since 1st January this year.
Fourthly, there should be full trade union recognition throughout the new merged bank. The noble Baroness said that there was a plan by the management to talk to the unions. This merger has been in the pipeline for a long time. I should have thought that the management should have started talking to the unions long ago. Why wait until there is a debate in this House before saying that the bank will talk to the unions. I should have thought that full trade union recognition is an issue which could have been discussed long ago.
I very much welcome the assurance given by the noble Baroness, Lady Hooper, about the continuing separate status for TSB in Scotland. I shall say no more about that.
This is a very significant merger. I am sure it will increase the profitability of the new merged bank. I very
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much hope that it will not do so at the expense of its employees. I therefore hope that, when the Committee comes to examine this debate and consider its responsibilities, it will pay attention to my remarks and those of my noble friends. In that way I hope that the situation for the staff will be significantly improved and that the necessary assurances will be given.
8.20 p.m.
Lord Cobbold: My Lords, I, too, thank the noble Baroness, Lady Hooper, for her detailed explanation of the background to the Bill and for stressing the importance to this country of the financial services industry.
The merger between Lloyds and TSB has clearly been in the best interests of shareholders. It is also very likely that it will prove to be in the best interests of customers of the two banks. However, it is not necessarily in the best interests of all the staff, as the noble Lord, Lord Dubs, pointed out, or indeed of all the pensioners.
In her remarks the noble Baroness alluded to the pension schemes of the two banks. I am grateful for what she said. However, I wish to say a few words on behalf of TSB pensioners and those of Hill Samuel, which was part of the TSB group. Before doing so, I should declare that during my career I have been an employee of TSB and Hill Samuel, and also of the Bank of London and South America (BOLSA), which is now a part of the Lloyds Bank group. However, I am not a member of either of their pension schemes, having contracted out of both.
Former colleagues at TSB and Hill Samuel have pointed out that the TSB pension scheme has a substantial surplus. Indeed, in the accounts of 31st October 1995 the actuarial report notes that no further contributions from the employer will be required until 2009. Given the performance of the stock market since that report, together with the decline in membership of the scheme as a result of branch closures and redundancies, the surplus is likely to have grown considerably larger as of today. The concern of TSB and Hill Samuel pensioners is that, over time, they may lose the security of that surplus as a result of the merger.
Turning to the Bill, I am concerned with Clause 8, which deals with retirement benefit schemes. Subsection (2) provides for the substitution of Lloyds as the principal employer under the TSB pension scheme, without the need for prior agreement of the TSB pension fund trustees. Such agreement is required by Rule 80 of the trust deed of the TSB pension scheme. It is possible that such agreement has been obtained; but if it has, that fact has not so far been communicated to members of the scheme.
The trustees of the TSB pension scheme have a responsibility to protect the interests of members of the scheme. That responsibility appears to be overruled by Clause 8(2) of the Bill. I hope that the noble Baroness will note that point and that at Committee stage the interests of members of the TSB pension scheme may be taken into account so that their protection can be ensured. If necessary, Clause 8(2) might be amended to require the agreement of the trustees of the scheme in line with the requirement of Rule 80 of the trust deed.
8.23 p.m.
Lord Dixon-Smith: My Lords, we are indebted to the noble Baroness, Lady Hooper, for setting out so fully the background to the Bill. I am the more grateful to her since it means that I do not have to make some of the remarks that I might otherwise have made. However, I am rather inclined to take my own line across country. I read the Bill with a great deal of interest. I find it a part of the continuing process of change in which mankind indulges as a result of his intellectual curiosity, ingenuity and constant determination to do things better. It provides a constant stimulus that keeps us all going. Life would be awfully boring without it.
We have heard how banking is changing and becoming more and more competitive. We have all watched the building societies increasingly provide a wider range of financial services. We have seen cashpoints become entirely normal and universally accepted. We have seen the same happen with telephone banking. Supermarkets are climbing into the act and expect to take an increasing share of banking business. The Internet makes it possible to bank in New York or Sydney, Australia, if that is our wish. The world is changing. The banks know that, and know that they have to change or be swamped by the tide of events.
Lloyds plc, together with TSB Bank plc and Hill Samuel Bank Limited, have agreed to unify their business. Their shareholders agreed and have approved a plan of action. That is all in the past. The difficult part of the process as I see it, having read the papers, is how they can individually renew all their contractual arrangements with the new bank's 15.8 million customers. The Bill does that for them. That, it seems, is its main purpose. I must say at this point that I hope the Government receive a suitable facilitation fee for making all of this possible. I am absolutely certain that the bank itself would charge a very large fee if the roles were reversed.
Clauses 7 and 8 of the Bill contain provision for the transfer of employment contracts and retirement benefit schemes relating to the staff of the various businesses. I have to suppose that it is the presence of those clauses that gave rise to the two petitions on the Bill. They are similar in tone and content, dealing as they do for the main part with what I call industrial relations matters. I had not thought that I should see an attempt to use this House to determine a matter that is properly the subject of negotiation between employer and employee. I caution this House against any temptation to follow such a course of action. Such matters can only be dealt with across the table. A third party, particularly one with such power as we have at our disposal, would almost certainly get things wrong, prejudicing the position of one or other party and possibly putting at risk the whole enterprise. In any event, since both petitioners appear to have ambitions to represent all the staff of the new Lloyds TSB enterprise, we could only wholly satisfy one petition at the expense of the other.
That is not to belittle in any way the very real industrial relations problems that are raised in the petitions, and I have no wish to do so. It is merely that
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I do not believe them to be appropriate to this debate. They can be settled only by agreement between Lloyds TSB and their staff and staff representatives. There is no way that we in this House could develop the knowledge required to decide matters that are vital to the individuals concerned. It will inevitably have to depend on the method chosen to bring together disparate past history into a new and unified single enterprise.
I welcome the Bill. It will help the new Lloyds TSB to go forward in a way that is consistent with what I regard as the proper use of the powers of Parliament. To those who are concerned that the merger may lead to unfortunate consequences such as the rationalisation of branches with the possibilities of redundancy, I say two things. I once had in my life the unfortunate and unpleasant task of declaring a man compulsorily redundant. I did not enjoy it. I met the man about a year later and asked him how he was getting on. He looked at me with a broad grin on his face and said: "I have a much better job now; you have done me the best favour that you could have done".
Going back to the point about the clerical branches, I also recall meeting a leader of a council of a southern Midlands town where the main industry was closing down, removing about half the town's employment base. Understandably, he was a very angry man. When I met him again 10 years later, I asked him how he was getting on and again the response was enthusiastic. The town, no longer reliant on a single large employer, now had a diversified economy that was flourishing and at the same time much less vulnerable to the vagaries of the economic cycle.
We should not fear change. This Bill should be passed because without it the future of Lloyds TSB will be less certain.
8.30 p.m.
Baroness Turner of Camden: My Lords, I too should like to thank the noble Baroness, Lady Hooper, for the way in which she introduced this Bill and the explanation that she gave.
Last year saw the merger of Lloyds Bank and TSB to create Lloyds TSB. The bank requires the passing of a private parliamentary Bill in order to reorganise the two sets of branch networks and put customer accounts together into one new bank.
We do not customarily oppose Bills, even private Bills, at Second Reading in this House. However, I must say to your Lordships that I have very grave concerns about this merger. We have seen a number of mergers in the financial services industry in the past couple of years. All of them have resulted in substantial job losses and increasing insecurity for the staff who continue to work in the industry. Your Lordships will recall that I have on a number of occasions sought to draw attention to this development and its anti-social implications. A large and important industry which at one time provided stable and secure employment for whole generations of white-collar employees, many of whom I think probably voted Conservative—whether they will continue to do so is another matter—has been undergoing what amounts to a revolution. We are

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constantly told, as if it were a welcome development, that there are no longer jobs for life, almost as though there were something indecent in expecting any such thing. The widespread feelings of insecurity that have been generated are, more than anything, the reason for the lack of the feel-good factor.
I sat through the previous debate on the economy. Listening to the contribution of the noble Lord, Lord Mackay of Ardbrecknish, in particular, I wondered whether we were inhabiting the same world. My experience is that large numbers of people in employment, whether or not they are facing redundancy, constantly fear that they may face redundancy and unemployment.
Now we have this Lloyds TSB Bill. There is no doubt at all that it threatens the jobs of some people who work in the bank. Quite clearly, attempts will be made to close branches. Six hundred and fifty such branches have already been identified by the union as being at risk, as my noble friend Lord Dubs said. I understand that 500 job losses have already been announced in Birmingham and Bristol and a further 80 in London; in September 1996 the bank confirmed the closure of some 150 branches.
The unions, as we have heard, have sought assurances from the bank that it will protect jobs, terms and conditions of employment and customer services. It is quite right that they should seek to do so; they are seeking to protect the interests of their members. However, I am told that the bank's response has been negative and dismissive.
There are other considerations apart from those affecting staff. There is the matter of consumer services, to which my noble friend Lord Dubs referred. Much of the way in which the financial services industry has developed over the past 10 years has resulted in poorer people having less access to the formal financial system. Moreover, unfortunately, the public image of the financial services industry is not at all good, and everyone in the industry knows that that is the situation.
Many companies are withdrawing from the home-service market in insurance because it is no longer felt to be profitable enough. If local branches close, that will further reduce the access of poorer people to such services. Without easily available facilities, poorer people may, more often than not, turn to loan sharks, who further exploit them. A local bank branch with skilled, trained people available is a vital community service and should not be withdrawn without the fullest local consultation and investigation.
As we have heard, the bank has said that it is its intention to draw on the best features of both organisations. Cannot that philosophy be clearly applied as far as the staff are concerned? The financial services industry is a people business. Skilled, trained staff are vital to success. Lloyds TSB has announced a 52 per cent. rise in pre-tax profits of £2.5 billion for the year to December 1996. However, the bank lost 4,206 staff last year and, as we have heard, other jobs may very well go.
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It is quite true, as the noble Baroness, Lady Hooper, said, that Lloyds TSB has recently instituted a pay increase of 5 per cent. for the remaining staff; and I believe I read somewhere that there may also be bonuses. The unions have naturally welcomed the deal. However, they regard it as to some extent simply sweetening the pill for other measures, such as mass redundancies, which are bound to be a great deal less welcome and should be a matter of anxiety to all of us on all sides of the House who are concerned about unemployment and view with scepticism some of the claims made by the Government in that regard and who, like me, are deeply concerned at the growth of low pay and insecurity affecting a large section of the workforce.
Working in an environment where there has been a merger and restructuring, which everyone knows will produce job losses, downgrading and—to use that awful word—"downsizing" is not a happy situation. A sense of security is essential for good team working, as most personnel managers know. We have yet another situation here where problems are being endured by another group of our fellow citizens. I believe that we in this House are right to demand that before the merger proceeds assurances should be obtained from Lloyds TSB about its future posture relative to its staff and its customers and that the staff should have proper protection, including, as my noble friend Lord Dubs said, the right of representation by their unions, with the right of recognition protected as well.
I believe that a separate situation applies in Scotland, to which the noble Baroness, Lady Hooper, referred. I am glad to hear her assurances in that regard. My noble friend Lord Taylor of Gryfe, who is familiar with the Scottish situation, may well deal with that.
I confirm what has already been said from this side of the House. We regard this matter as an important social question, apart from the issue of the employment of people in Lloyds TSB. This is a major merger, creating a very large financial services complex. We must all be concerned about what happens to the staff and to the customers.
8.38 p.m.
Lord Clark of Kempston: My Lords, perhaps I may add my congratulations and thanks to my noble friend Lady Hooper for giving an excellent résumé of what this Bill seeks to do.
From my experience in the City, the points raised seem to me a tremendous storm in a teacup. The merger has been agreed and approved by the High Court, the Bank of England and all the regulatory authorities. With that all behind them, we are talking here of some £147 billion of assets, over 15 million customers and many staff. BIFU has said that there have been redundancies, and one accepts that: 500 jobs in Birmingham and 80 in London have been lost. It has suggested that another 10,000 people will be unemployed, but it has not explained how that will happen. The present staff of the amalgamated banks is something like 87,000 people.
With regard to pensions, I well understand what noble Lords think following the machinations of the Maxwell case. However, we are here talking about

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two banks, the TSB and Lloyds, whose integrity is unparalleled. There is no way that the amalgamated bank would do anything about reducing what the pensioners should have. Obviously, pension funds, whether the amalgamated bank's pension fund or that of any other large organisation, have sometimes a surplus and sometimes a deficit. In this case apparently there is a surplus. I do not believe that there is any possibility or danger of the amalgamated bank reneging on whatever the pensioners should receive.
We must remember that in the financial world a domestic amalgamation cannot be isolated without taking into account its overseas competitiveness. Overseas competitiveness, particularly in the banking world, is tremendous, as I am sure your Lordships will appreciate. For example, Frankfurt is envious of the London financial centre, which still leads the world. Consequently, the amalgamation of these two banks will mean that we shall in fact retain our competitive position on the international scene.
As for the customers, because of a technicality and the cross-transactions between the TSB and Lloyds there used to be a 1½ per cent. fee and that will disappear. So the emerging bank will in fact gain some advantages not only for itself but also for its customers.
The noble Lord, Lord Dubs, mentioned the profitability of Lloyds. I do not go along with the noble Lord on many matters, but I do so in this case. When there are profitable organisations, whether they are the TSB/Lloyds amalgamation or whatever, any increase in profitability means that the Chancellor of the Exchequer, and therefore the taxpayer, receives more money from dividends or by way of corporation tax.
I agreed with the noble Baroness, Lady Turner, when she spoke about staff. But we cannot have a job creation economy. We are too exposed to competition from overseas, with which we must keep up. We cannot take a Luddite approach. We cannot ignore computerisation and "hole in the wall" banking. There is no question but that electronic advances have meant that we can now conduct our financial transactions by computer rather than manually. Telephone banking, for instance, will increase tremendously.
Consequently, if the UK is to remain the financial centre of the world, as it certainly is at the moment, it would be folly to throw away the advantages of advanced technology. Whether we like it or not, our competitors will accept and introduce that technology. It would put at risk our position as the world's financial centre. As I said earlier, I believe that there is danger of a storm in a teacup. I am absolutely convinced that the Bill should go through.
8.45 p.m.
Lord Whitty: My Lords, I shall speak only briefly because many points have already been covered from this side of the House. I want to put down a few markers. First, I declare an interest in that for many decades I have been a customer of Lloyds Bank, which has looked after my overdraft extremely well. I also benefited greatly from the foresight of the TSB in the 1970s when it was prepared, ahead of many other
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organisations, to give a credit card to someone with no assets. I was, therefore, a great beneficiary of competition between the two organisations.
However, I must say that I do not have the blind faith of the noble Lord, Lord Clark, in the integrity of such organisations, particularly in respect of their staff but also in relation to their customers. There is a wider concern—and I am not ashamed to admit that I have a wider concern as a trade unionist and a consumer. As the noble Baroness helpfully pointed out, there have been massive changes in the financial sector. My noble friend Lady Turner pointed out the downside, both in terms of staff and customer service.
I am glad that we heard some history at the beginning of the debate. In its origins, the Trustee Savings Bank, although not quite the same as a friendly society or a building society, nevertheless came from the same era—an era of mutuality and self-organisation, not one of huge profit-driven corporations. For many decades—in fact, right up to the present day in Scotland and many other industrial and city areas of our country—it was in effect the workers' bank. It was a community bank. It was built up on the savings of £1 or 10 bob a week from apprentices and low paid workers with young families.
It may be argued that that era came to an end in 1985 when Parliament and this House allowed the transformation into what became the TSB. Your Lordships' House had misgivings at that time, some of which are recorded in the debates. The noble Baroness dealt with a particular misgiving about the situation in Scotland and I am glad to accept her assurances on that matter. But at the time it was assumed that another Private Bill would be necessary to undo the assurances that were then given. I should like this Chamber to look at the situation of the assurances that have been given on this occasion.
We may well be in a new era of streamlined banking, direct banking, telephone banking and new technology. I accept that there will be many advantages from the merger. But I cannot accept the closure of branches, particularly local branches in small, less prosperous communities and possibly the loss of thousands of jobs. That must affect the customer service and therefore the very competitiveness of which some noble Lords have spoken. It must reduce access to banks in those communities and diminish personal contact and the flexibility between the bank and its customers. I am not confident that the promises of increased efficiency, even in its crudest sense, outweigh those things.
Other noble Lords cited the studies of the National Consumer Council and other bodies which underline the link between the number of outlets and customer service. They also emphasise that it is poorer people who suffer from a decline in accessibility. Therefore, I argue that the trade union interest and the customer interest in this respect are often as one. But also I am not ashamed of making the trade union case on its own. Even in terms of personnel management and good industrial relations, should we in fact be facilitating moves by this merged bank—we do not oppose the merger as such; it has happened—which destroy jobs,

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fail to give adequate compensation to loyal staff of the two organisations and, according to the trade unions involved, undermine recognised terms and conditions?
I accept what the noble Lord, Lord Dixon-Smith, said. These issues should be settled across a table. I do not accept his philosophy of industrial change but I accept that these issues should be negotiated and change is part of the industrial relations scene. I also welcome the statements by the noble Baroness, Lady Hooper, on recognition and consultation. I hope that they will be reflected in the discussion at Committee stage.
I simply put down some markers this evening. I hope that some of them can be addressed at Committee stage. I support the procedural amendment of my noble friend Lord Dubs and hope that at least its spirit will be accepted by this House and lead to further consideration of these issues in Committee.
8.50 p.m.
Lord Lyell: My Lords, I am glad to follow the noble Lord, Lord Whitty. First, I am grateful to my noble friend Lady Hooper for alerting me to this Bill. I have no interest to declare; I am neither a client of Lloyds nor of the Trustee Savings Bank. The noble Lord, Lord Taylor, will be interested to know that the Trustee Savings Bank has been a staunch pillar of the community in Kirriemuir, which he knows so well, for many years—certainly all of my life.
I am curious about the Bill, not just the merger. As the noble Lord, Lord Whitty, my noble friend and other noble Lords have said, it is a merger of many interests, not least England and Scotland. Lloyds Bank has a tradition of being a commercial bank in England and Wales—not least in the south of England—especially geared and targeted towards one-man businesses. The noble Lord, Lord Whitty, kindly pointed out the Scottish history and roots of the Trustee Savings Bank, which has been directed to what I would call the "couthy" individuals north of the Tweed and north of the Solway.
I had something of a scare six or seven years ago when I went to an institution known and much loved by my noble friend Lady Hooper and myself, only to discover that it had transferred all its financial interests to the Trustee Savings Bank. That institution—in which I declare an interest—had the great motto, "Only the best will do". It started as a fairly small bank and rose to be a top competitive bank, now joining in a merger with Lloyds.
The merger appears to me to be a first-class balance. It gives the customers of the two banks an even wider choice. I understand that there are over 15 million customers involved. The services involve not just drawing money out or paying it in, but what is also referred to as "bank assurance". When one visits the Trustee Savings Bank one visits a bank which has probably given one's family, one's parents and perhaps even one's grandparents an enormous amount of advice on all kinds of financial services. The merger with Lloyds will increase the spread of those services.
I bank in the old way, using cheques—though I find singular difficulty in cashing them these days. Of course, we in this House should declare an interest in
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that not 50 yards from here we can cash cheques easily. But now there are things called "ATMs"—automatic teller machines. I distrust them since I had to have a PIN number and quite often it did not work. The use of those machines has risen by 12 per cent. in the past calendar year. Again, one of the additional services provided by the merger, even in small places like Kirriemuir, will be the installation of ATMs. That will be of enormous help to customers.
I believe that the changes are desired by the customer. The noble Lord, Lord Whitty, referred to "tele" banking and other changes. They are forms of progress wanted by people much younger than me who will continue to use them. The changes in the Bill are not draconian, even for Scotland and for the Trustee Savings Bank. They should be encouraged.
Perhaps my noble friend can give me some guidance. The noble Baroness, Lady Turner, and the noble Lords, Lord Whiny and Lord Dubs, pointed out that there will be a reduction in the number of people employed by the bank. Is that out of line with what has happened in other bank mergers that have taken place over the past 20 years? I suspect not. I suspect that there may be a number of what are called "compulsory" redundancies, but nothing out of line with other similar bank mergers. I believe that there is a constant turnover of staff and, if there are reductions in staff numbers, it will be in accordance with the normal process of turnover.
In relation to the Bill, I was delighted to find enormous safeguards in Clause 7 both for the staff and for the customers of the bank. My noble friend may be able to advise me on one further point. I understand that the Trustee Savings Bank is unique among financial institutions in that it has a large charitable foundation. Apparently a fair sum of money is provided for charities in Scotland and elsewhere, in the region of £10 million a year and increasing. Perhaps my noble friend will be able at some stage to let me have some information on that point. It will alleviate my curiosity.
I apologise to your Lordships for taking up time this evening, especially when I know that the noble Lords, Lord Taylor and Lord Peston, are pining for further information. I shall provide it if I can; but I wish the Bill well.
8.55 p.m.
Lord Monkswell: My Lords, I too thank the noble Baroness, Lady Hooper, for her comprehensive introduction to this debate. I can assure her that we are all engaged in seeking the success of the British financial services industry.
The noble Baroness highlighted the effects of new technology, and there is a general recognition that the financial services industry is restructuring and rationalising. If we walk down virtually any high street we can see the proliferation of banks and building societies that have converted and realise that there is an over-supply in that element of the industry. We are lucky to have the opportunity of a parliamentary debate on this subject. A lot of the restructuring takes place outside of parliamentary scrutiny. In that sense we are lucky to be able to make contributions and points as to how we feel the restructuring should be handled.

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I was interested in the comparison made by the noble Baroness, Lady Hooper, in relation to the rationalisation of the manufacturing sector during the 1980s. As someone who experienced it in the frontline, I know that it was not a pleasant experience. I have a great deal of sympathy for people working in the financial services industry who are effectively in the throes of the restructuring that is taking place, like that which happened in the manufacturing sector in the 1980s. That is something from which I hope we can all learn. I declare an interest as a member of MSF—the Manufacturing, Science and Finance Union. We can take the experience that we gained in manufacturing as a trade union in relation to the restructuring and, one hopes, use it in the finance sector.
I was interested to hear the contribution of the noble Lord, Lord Cobbold, when he pointed out the implications for the pension schemes of the companies involved. That struck a resonance with me. It is the same sort of situation that applied to many pension schemes in manufacturing companies where, because of changes in the stock market and large-scale redundancies, pension schemes ended up with surpluses. Those surpluses were dealt with differently by different companies. However, predominantly it was the shareholders who benefited from those surpluses and not necessarily the members of the pension scheme who had contributed to them. That is a lesson we can all learn.
I was interested in the contribution of the noble Lord, Lord Clark of Kempston, who pointed out the difficulties of the Maxwell scenario. The intriguing element of that was that Maxwell was using pension fund money to try to keep the companies in his empire going, whereas many people running companies with pension fund surpluses paid those surpluses directly to shareholders and did not invest and contribute to the companies themselves.
Lord Clark of Kempston: My Lords, the noble Lord is wrong. If there is a surplus on a contributory pension fund the employer will have a one-year holiday in paying the contributions. It has nothing to do with shareholders. In no way could one take a surplus from a pension fund and distribute it as a dividend. The noble Lord is wrong.
Lord Monkswell: My Lords, from a sedentary position my noble friend Lord Peston points out that it adds to the value of the business and therefore feeds in directly to shareholders. However, rather than engage in a long debate on that element of the subject under discussion, I wish to put down as a marker that it is an area of business activity where the trade union movement has some experience. I would hope that the employees and the unions involved will welcome advice and share the information that other unions have on how to deal with some of the problems that are emerging.
The experience of the noble Lord, Lord Dixon-Smith, regarding redundancy in the southern part of England may be rather different from mine in the northern part of England. Redundancies and restructuring can decimate whole communities and consign them to poverty and degradation. We need to be aware that significant large
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redundancies in a specific area can have an effect on local communities. There is a need for the company and the workforce to discuss what is happening with leaders of the local community to ensure the best way forward.
There is another difference. The TSB Lloyds group provides retail services to the community. In that sense it is rather different from most manufacturing industries which do not provide a direct retail service. I hope that the Committee dealing with the Bill takes on board the need to ensure that services for particular communities which may not contribute much to the bank's income and profits are not lost.
It may be possible to move amendments to the Bill to ensure recognition of unions and to ensure that there must be negotiations when there are significant changes to the business, but that may not be the road Parliament chooses to take. I hope that as a result of this and other debates the management of Lloyds TSB and representatives of the employees will sit down and negotiate sensible resolutions of any problems that may emerge.
9.3 p.m.
Lord Taylor of Gryfe: My Lords, I declare an interest. I am a very happy shareholder in Lloyds Bank. I was formerly a happy shareholder in the TSB Bank before it was privatised, if that is the word.
We have spread ourselves over a fairly wide range on this matter, which I hope will be satisfactorily resolved by good sense on the part of the bank and the other contending parties. I associate myself completely with what has been said from these Benches not because it is a party matter but simply because it is right that the House should be concerned about the social implications of the matter before us. The social implications in terms of the employment of people and service to people are important. The noble Lord, Lord Clark, seemed to suggest that any consideration in these matters affecting employees would somehow undermine the position of London as a great financial centre. The noble Lord should recollect the experience of Barings, NatWest and Morgan Grenfell, my former employer, in these matters. There is a great deal more than this minuscule matter of good relations in the new merged bank.
I have always believed that successful companies, companies that are going to survive in business, and profitable companies are ones that have good industrial relations. That is important and it is basic to good management. Therefore, I hope that when looking at the matter in the light of the debate the directors of Lloyds TSB will take to heart some of the things that have been said and that the bank will not only survive but will prosper on the basis of good industrial relations. All that is being asked for is trade union recognition, concern about redundancies and so on.
It has been suggested that I might say a few words about Scotland. I propose to do so. In anticipation of this debate, I looked back to a date in 1985, to a debate in a thinly attended House—not unlike the atmosphere in which we are discussing this matter today. It concerned the passing of the TSB, from its somewhat unusual structure, into a bank. I moved an

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amendment on that date and suggested that TSB (Scotland) should be taken out of the Bill. I carried that amendment by 67 votes to 54. I was immediately summoned by the Leader of the House, the noble Viscount, Lord Whitelaw, and the representative of the Department of Trade and Industry in this House, the noble Earl, Lord Gowrie, to meet them the next day. They said, "Do you realise that that amendment of yours means that the Bill will be lost? We have done four years' work on this Bill and you are going to undermine it and make it impossible". I knew in fact that the Bill might be taken back to the House of Commons and the process would continue, but time was running on. The Leader of the House said, "You are preventing the TSB becoming a bank".
I did not persist, but I got certain concessions. The noble Viscount, Lord Whitelaw, said that the merchant bank advisers and the TSB would meet me in my office in Edinburgh the next day to try to hammer out a compromise concerning the future structure of the TSB. There was no time to incorporate the amendment which I had secured into the Bill, but by means of a Written Answer dated 4th July 1985 certain concessions were agreed. I should be glad if the noble Baroness, Lady Hooper, would confirm that all the items referred to in the compromise agreement will be observed in the new arrangements which we are discussing tonight. She has already acknowledged the first item that,
"TSB Scotland can, should and will continue to function as an independently managed Scottish bank".
I presume that she confirms that condition.
The agreement went on to establish that community interests would be recognised on the board of the TSB Scotland because the TSB in Scotland had very deep roots in the community. One in every four households in Scotland had an account with the TSB. It had accumulated very large reserves. I spoke to the noble Lord, Lord Lawson, today who was Chancellor of the Exchequer at the time. He said, "My problem at that time was that I did not know who belonged to TSB Scotland". It was not a mutual, it was not a limited company. He had some difficulty.
Anyway, TSB Scotland became a bank under the new arrangements. It would continue to have deep roots in the community. In addition, it would pass 5 per cent. of its share capital into a charitable foundation, which was a point raised by the noble Lord, Lord Lyell. That has accumulated a fair amount of money. Perhaps the noble Baroness, Lady Hooper, would confirm not only that the structure of TSB Scotland will be preserved, but also that its social obligations will be observed. The agreement continues:
"The directors of each banking company [TSB and Lloyds] will he under a responsibility to take into account not only the interests of its shareholders, but also the interests of its customers and staff".
That again is one of the conditions laid down in that agreement. It is quite consistent with the concern for the welfare of the staff that my noble friends on these Benches have indicated their attitude to the future proceedings on this Bill.
9.12 p.m.
Lord Peston: My Lords, in making some general comments from this Bench, perhaps I may say that, like some noble Lords, I am not one of the 15 million customers and I am not a shareholder of Lloyds or TSB. But I have an interest to declare; namely, that I sat in the TSB box at Highbury earlier this season and had the great pleasure of seeing Arsenal beat Sheffield Wednesday 3:1.
Some remarks have been made about the future of the financial services industry, its economics and technology. These are matters which I am greatly interested in, but I do not wish to weary your Lordships with them tonight. Indeed, I am not at all clear why any of them have been raised, since we are meant to be discussing a Bill. My honourable friends will be in charge of these matters after 1st May and that will give me my full opportunity to get involved in the financial services industry.
Perhaps I may also say by way of a general remark that your Lordships' House is a House of Parliament. I am surprised at one or two of the remarks made, notably by the noble Lord, Lord Dixon-Smith. This is a Bill before a House of Parliament. Your Lordships are rightly sensitive to our rights and privileges. I believe that the points made by my noble friends are not merely proper, but that we have an obligation to examine all these matters in their entirety. It is not a misuse of this House. Quite the contrary; it is a perfectly correct use of the House. When the matter goes to the other place, it will be a perfectly correct use of the other place to examine matters further.
My noble friend Lord Dubs raised what I thought were the relevant matters. It is not a case of rubber-stamping a Bill like this. If Lloyds TSB wanted a rubber stamp, they should have carried this out without a Bill. This is a Bill and it needs to be examined. My noble friend raised certain matters and earlier in the week he put down an instruction to the Committee. For reasons completely beyond me, that instruction has now disappeared from your Lordships' proceedings, but nevertheless he has done his job properly. That job is to indicate to the Committee the considerations we feel it ought to look at. Those considerations are not of the "Let's not help the financial services industry to be prosperous" kind. They are not: "Let's prevent the Lloyds TSB merger succeeding". Quite the contrary. Those of us who are concerned about the staff of the merged business are well aware that central to the welfare of the staff is that the business should be successful. There is nothing that we wish to say to undermine that. But it is quite a distance from the points raised by my noble friends and someone has to raise them.
The noble Lord, Lord Dixon-Smith, is right that we do not wish to become involved in industrial relations here. We want your Lordships' Committee to be aware of our concerns, we want Lloyds TSB to be aware of our anxieties and we wish to see an effective end to what appears at the moment not to be an entirely satisfactory state of affairs. I say to the noble Lord, Lord Clark of Kempston, that I do not believe it is a

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storm in a teacup. I am sometimes troubled by how frivolously noble Lords opposite treat the question of redundancies and such matters. As a university professor, I can say that I have had a job for life all my life and I would never make remarks critical of those who would like the same, but who are told: "You must take your chances and lose your jobs as and when it happens". To me, job security matters a great deal, it is why I went into my line of business. One ought not to make frivolous remarks or engage in "ad hockery". Many men and women in this country over the past few years, perhaps in the interests of economic advance, have lost their jobs. It was not trivial for them—far from it. That is why it is right for us to say how important the problem is.
On the detail of the Bill, our concern is partly about union recognition. The point was made several times and there is a legal side to it of which noble Lords are aware. Secondly, the subject of pensions was raised. Thirdly, the point which I mentioned was made about redundancies and job security. I hope that that is something which Lloyds TSB will deal with. I say to the noble Baroness, Lady Hooper, that, although she introduced the Bill in an excellent fashion, for the record she ought to know that she did not reassure me about any of those three matters. There seemed to me too many blurred edges to what she said about them, edges which in my judgment do not have to be blurred.
One could say in terms—and I hope that it will be said to the Committee—first, that the unions will be recognised; secondly, that it is not merely a matter of saying, "We will try not to have compulsory redundancies", but something much closer to: "We'll do all we can and quantify this voluntarily". Thirdly, I should be interested to know whether other noble Lords have seen the appropriate documentation, because I need to see a more definite statement on the position concerning pensions. As someone who is now beginning to draw his pension, I do not take them as a minor matter, nor do I feel that it does not matter whether one loses £1,000 a year here or there. In my case it did matter and I did not lose the £1,000 but I would not criticise any employee of the merged business or those who have retired who are worried about it.
My hope is that these are purely a matter of worry. What bothers me tonight is that I did not hear from the noble Baroness, Lady Hooper, a strong enough statement suggesting that the relevant people should not be worried.
I end by saying that all we are doing is airing a range of matters. We look forward to the Committee of your Lordships' House meeting. I think evidence ought to be presented to it to give all those who are worried total assurance. To go back to the storm in a teacup analogy, I should like to see it retrospectively as a storm in a teacup and to say it was quite all right. I should like to be able to tell my friends in another place when the Bill reaches them eventually that it is now all right. I try to keep my mind as open as I can, but at the moment I still have doubts and I look for a stronger statement now from the noble Baroness or, even more likely, when the matter is put before your Lordships' Committee.
9.19 p.m.
Baroness Hooper: My Lords, I thank all those who have participated on all sides of the House for their contributions and the concern that they have demonstrated. This voyage of discovery into the world of Private Bills has been an interesting and educational experience for many of us. No doubt that will continue at the further stages of this Bill. Nor do I have any doubt that the promoters will have listened carefully to the points that have been made this evening. Certainly, they have taken the trouble to be here in some force to listen to the comments that have been made. They will also look closely at Hansard; and they may even wish to look again at some of these matters ahead of, as well as during, the Committee stage. By the same token, we can be confident that the Committee will wish to pay due regard to what has been said by your Lordships this evening. I am sure that my noble friends the Ministers in both the Treasury and the DTI and their colleagues will be made fully aware of the points raised by both of my noble friends who were until recently sitting on the Front Bench.
A wide range of markers has been put down tonight. I do not want to detain noble Lords further by responding in detail to each and every one of them in view of the further business in the House this evening. However, I point out that there have been 49 private bank Acts passed by Parliament since 1969, so this Bill is no more unusual than those that have gone before it. But it adds an interesting kick to the suggestion of my noble friend Lord Dixon-Smith that the Government should charge a facilitating fee in this matter.
A number of your Lordships referred to the level of job reductions. Particularly in response to my noble friend Lord Lyell, I point out that, overall, the banking industry has shed 90,000 staff since 1990. Lloyds TSB aims to achieve any job reductions through natural wastage. Approximately 6,000 people leave the group of their own accord each year. There is a general trend in the traditional financial services sector towards reduced workforces, but, in view of the many new entrants into the field of financial services, to whom I referred at some length in my opening speech, overall many new jobs must be being created, bringing with them potential new members for the unions. However, as the noble Baroness, Lady Turner, pointed out, I recognise that change can be unsettling. We cannot and should not avoid change but we can endeavour to make it more acceptable. That is certainly the intention of the promoters, and I believe that the debate this evening has been useful in underlining that point.
Both my noble friend and the noble Lord, Lord Taylor of Gryfe, raised questions about the Lloyds TSB Foundations, of which I know the group is very proud. The foundations combine the charitable activities of both banks. They form one of the largest general grant-giving organisations in the United Kingdom and support a wide range of grass roots voluntary organisations, particularly in relation to disadvantaged and disabled people. The foundations received from Lloyds TSB the equivalent of 1 per cent. of pre-tax profits averaged over the preceding three

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years. On the basis of the company's 1995 level of profitability, the foundations' income could exceed £20 million by 1999. That is a very good story.
The noble Lord, Lord Taylor of Gryfe, asked specifically about the compromise agreement in relation to the Scottish activities. While I do not have detailed information on that matter, I believe that the declaration that I made in my opening speech covers the point. Further, in recognition of your Lordships' concerns in respect of union recognition, which is certainly an important issue, I reaffirm that the promoters are keen to conclude a recognition deal with the two unions. Noble Lords will recall that the unions have been invited to make suggestions in this regard. I hope that that firmer statement satisfies the noble Lord, Lord Peston.
Similarly with regard to pensions—we can all declare an interest in pensions in view of our advancing years—I am grateful to my noble friend Lord Clark for coming to my rescue and responding to points raised by the noble Lord, Lord Monkswell. The promoters wished me to stress that the pension rights of every member of staff remain unaltered by the merger, which took place, after all, over a year ago.
I thank the noble Lord, Lord Cobbold, for raising his specific pension issue. I have no doubt that it will be dealt with in Committee, as he suggested. I have no doubt that the Bill's promoters will wish to look most carefully at each and every point that has been raised this evening, and that those are matters which are properly going to be dealt with in more detail by the Committee. The measure is, as I said, purely a housekeeping measure. I commend the Bill to your Lordships.
On Question, Bill read a second time, and committed to a Select Committee.

Armed Forces: Medical Provision
9.26 p.m.
Baroness Park of Monmouth Baroness Park of Monmouth rose to ask Her Majesty's Government what action is being taken to remedy the serious deficiencies in the provision of medical services, including welfare, for servicemen and their families.
The noble Baroness said: My Lords, the presence of so many distinguished noble and gallant Lords at this hour testifies to the importance of the subject of the debate. I am deeply grateful to them for their support.
The logo of the Defence Secondary Care Agency is "Serve to Care". The business objectives—how typical!—include ensuring timely and appropriate professional development and training, providing the best possible medical care and achieving the highest levels of morale, motivation, health and safety. I could quote many more such politically correct objectives, key targets and operational plans from its literature.
How is it then that the Armed Forces Pay Review Body, as long ago as May last year, was deeply anxious
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about retention, career and promotion prospects in the Defence Medical Services, over-stretch, turbulence and, above all, the,
"unprecedented low morale in the DMS, to the extent that it was difficult to see how the MoD could meet its operational commitments",
and what it perceived to be a growing crisis over retention and morale? The manning problem had, it said,
"deteriorated to the point where it is having some impact on the ability of the Secondary Care Agency to fulfil its task in peacetime".
It placed on record its acute frustration at the slow pace of development in the MoD, particularly in the matter of a new service analogue.
How is it that the Defence Committee in the other place has concluded that:
"The Defence Medial Services are not sufficient to provide proper support for the front line in any realistic planning scenarios and show little prospect of being able to do so in the future"?
It said that the state of morale in the Defence Medical Services was lower than it had ever encountered in the Armed Forces. It recommended that some of the money stripped out of defence medicine by the Defence Costs Study would have to be put back again to repair the damage. It concluded:
"The staff shortages in the Defence Medical Services are so serious that it is not clear whether it will recover. It is possible that the military ethos of medicine in the regular Armed Forces has been destroyed. It seems incredible that the scaling down of the Defence Medical Services has been effected by MOD in such a manner as to allow a major and potential critical staff shortage to develop".
The Army Families Federation testified:
"The provision of secondary health care in military hospitals for UK-based dependants has completely ceased. And in the majority of areas primary health care is also now provided by the NHS. Families are now totally at the mercy of their local NHS facilities and some doctors are reluctant to take on Army families. Should secondary treatment be necessary it is unlikely that consultation and treatment will be commenced, let alone completed, before a posting forces a change of locality and the whole process has to start again. When the military hospitals were available to families this situation did not arise and continuity was assured".
Speaking of the MDHU, the evidence adds,
"These wings are staffed and funded by MOD but priority is not given to the serving personnel, but allocated on clinical need rather than the requirement to get soldiers fit and back to work. A recent survey showed that the average age of occupants of military beds at Frimley Park Hospital was 73".
The British Medical Association has also stated that the DMS has, according to its members, been held together by overstretched doctors, many of whom are disillusioned and many of whom will seek to leave at the earliest opportunity. This cannot be a healthy basis on which to operate what is a crucial front-line service in times of peace and war. The evidence speaks of the turbulence which has been increased by peacekeeping commitments and a general feeling of lack of job satisfaction and diminishing quality of life.
Much of that dissatisfaction, which has led to doctors leaving the services, is coming from exactly the type of person the DMS should be retaining: doctors who have nearly completed their specialist training or new consultants. These people have commented that they see no end in sight. The situation is getting worse, destroying family life. Service life, they say, offers few

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rewards. Life outside, despite the problems in the NHS, seems more stable and satisfactory. The British Medical Association states:
"We believe the DMS is suffering from a lack of perceived credibility among serving officers and the medical profession in general. Until this is addressed, it is unlikely that morale will improve or retention problems will be solved".
The two key issues that lie at the heart of this devastating situation are morale and the service ethos. It is no use treating the DMS as though it were a support service supplying tank spares, or a badly run commercial enterprise where downsizing can be applied without regard to any national commitment to peacetime care for the services on the sole basis that the management's accountants think fit to apply their only principle—save money.
The Armed Services and their families joined one of the three services because of tradition, the desire to serve and a readiness to risk their lives, which is a part of the military ethos. It all breaks down if there is no longer trust and confidence in those who command them, and no belief, as there has always hitherto been, that if things go wrong they will be looked after. That is a far cry from the remark of the chief executive of the agency, speaking to the committee in the other place, saying of service dependants abroad:
"clearly they can be treated in any NHS hospital in the UK because they are EEC citizens".
That is what we have come to. I wonder how long we shall continue to have a magnificent volunteer Army if that is now the chief claim of service dependants to medical care in this country.
I could say much more and quote many statistics. What I want to do is to urge the Government to act before it is too late, not just through better pay and conditions, for they are only a sticking plaster on a serious wound, but by reversing the Defence Costs Study's decision—that swingeing and disastrous series of decisions whose only aim was to save money—and reverting to the widely accepted Options for Change proposals for three single service hospitals. That is the only thing which might retain DMS staff on the point of departure, including those most important people, the nurses; restore morale throughout the services with the return of the service ethos; and could be a perfectly viable financial and professional operation, since the service hospitals have always attracted and served large civilian catchments and the DMS training and skills have benefited accordingly, as they were meant to do. Build at Aldershot; re-open Ely.
It will call for some capital to be put back into the DMS, but I am sure that the Defence Secondary Care Agency's commercial expertise will find PFIs—we have all heard about them. We cannot, incidentally, rely on the reservists to bail us out if there is another Bosnia, for the decision to release them lies not with the NHS but with the trusts, and they have given no hard commitment to do so.
Time does not allow me to quote the very disturbing figures which I have received both from the BMA and from many other quarters, to which I am much indebted, or to discuss other possible palliatives such as a closer integration between the MDHUs and the TA. Radical
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action must be taken now to restore not only the morale of the DMS but also the morale of the servicemen and their families.
The problem of retention is not confined to the DMS. While money, better terms and conditions and early action on a new analogue for the doctors, dentists and nurses are not only desirable but feasible since they can be settled without waiting for the general decisions on pay arising out of the independent review, they are still only a palliative. They will not be enough to stop the voluntary retirements. Most of the DMS and all service families have lost confidence and trust in the ability or even willingness of Ministers to look after their welfare. They believe that they are perceived not as members of a service with traditions of loyalty and professionalism but as, at best, employees in a failing industrial enterprise, at the mercy of the accountants and of no particular value themselves. They joined a proud service, whether it be the RAF, the Army or the Navy, with traditions of caring for both the men and their families. Their lives are now being managed in a way that shows, I submit, a greater command of computerisation, PFIs, charters and benchmarks than the management of men.
Unless immediate action can be taken to revive the military ethos, which is the reason that they join and serve, the consultants will go, the nurses will go and there will be no new generation of either. There will be no one to train those who might, exceptionally, wish to join a service without a soul. I urge the Minister to consider undertaking the one act which could go far to restore confidence, retain waverers and create an effective DMS. I ask him to go back to Options for Change and restore all three service core hospitals. I ask him to forget the tri-service formula.
The Minister will tell us that the MoD is at long last reviewing such matters as the deplorable accommodation for nurses and that interesting military analogue—an MDHU without a mess. However, that review must not be used to delay action on the critical major issue—the survival of the DMS.
9.37 p.m.
Lord Craig of Radley: My Lords, I am most grateful to the noble Baroness, Lady Park, for raising this Question and, my goodness, did she not spell it out well? I support her completely in what she said.
The MoD has created a horrendous problem. The Defence Committee's recent report also makes depressing reading. I hope that the Government will heed it closely. DCS15 is now seen to be in open-heart surgery without the anaesthetic.
The draw-down in medical strength below establishment, particularly the loss of those with the best leadership and medical skills, makes a mockery of claims that there have been improvements in the efficiency and effectiveness of so-called secondary care. I hope that it will occur to Ministers that the lack of information about the way in which pesticides were used in the Gulf could be due as much to under-resourced staff as to any blatant failure of duty.

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But I do not wish to carp. The question is how best to restore medical morale and effectiveness. The MoD appears to be approaching that with a small bag of gold to encourage those contemplating leaving to think again and stay; and that may work briefly. But it is no long-term solution. Service medical students already receive considerable financial incentives to persuade them to join the services in the first place. We cannot expect to have to bribe them to come in and then to stay.
Greater job satisfaction not only as clinicians but as members of Her Majesty's Forces is needed, not just money. Service medical personnel seek to combine two distinct and honourable professions: that of medicine and that of the Armed Forces. When the forces were larger, for most, choice of service was a dominant consideration. Medical personnel experienced daily their chosen service's culture and the camaraderie which at first engaged their loyalty and commitment. Constant exposure provided a feeling of belonging to a family which continued throughout their service, past retirement for the rest of their lives. They were proud of their involvement and contribution to service life.
Against the background of forced reductions and pressures for economies, clinical considerations were judged by outside experts to be more important, even to the extent of proposing an amalgamated "purple" force. The titles—Defence Medical Services and Defence Secondary Care Agency—regrettably underscore that very idea. The distinction between separate services, which was the attraction, and medicine, which was their training, has been blurred by those titles.
We have not sought to lose the individuality of the three services in any other role or branch, but we have foolishly allowed it into the dental and medical branches. MoD needs to think again on the matter. It should drop the Secondary Care Agency for a start. In a thousand years that will never conjure up coping with the wounded from the field of battle under operational conditions. It is an appalling title. It sounds like some temporary nursing agency.
However, titles apart, Ministers repeatedly claim that DMS will provide the Armed Forces with the best that can be found within the National Health Service. I do not wish to disparage the NHS but that is not a satisfactory yardstick. It sets a standard lower than was available to service personnel and their dependants in the past. Servicemen and their doctors recognise that fact. I have had service medical care for nearly 50 years and I have seen it decline. Although still entitled, I now pay for my own BUPA cover. A vital condition and requirement of service has been allowed to melt away.
The MoD claims that DCS15, which scrapped single service hospitals, saves £600 million over 10 years. That is a mere £300, or less, per serviceman per year. Surely that is a worthwhile sum to give them all quick personal medical care in peace and war. BUPA could not match it and the military hospitals provided the heart for each service's medical identity. DCS15's steps sadly cannot be retraced as quickly as they were implemented.
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So the challenge now is to identify a better way to combine the special requirements of military medicine without losing, as we have done, the essential draw and loyalty of doctors, dentists and nurses to the service of their choice. I urge the Government, in their search for a better answer, to give more emphasis to non-medical factors. They should give greater weight to the essential element of loyalty to service and pay a bit more for it. It is the glue on which the whole structure and efficiency of the Armed Forces depend. It is surely the glue for service medical personnel as much as for the frontline.
9.42 p.m.
Lord Lyell: My Lords, I, too, am immensely grateful to my noble friend Lady Park for giving us the opportunity to discuss this most important and vital question. Your Lordships may know—or, indeed, may soon be aware later this evening—that the Defence Study Group made a visit today to Warminster. Once again, we saw the enormously high morale of the British Army. However, I returned to the House and was rather startled to find myself batting at number three in the Speaker's list and placed in a higher position than two noble and gallant Lords. That was an enormous surprise and a very great treat. I hope that I shall surprise your Lordships by being both brief and simple this evening.
I have one particular point to make. My noble friend Lady Park will remember that, when we made a visit to Frimley Park last autumn, both she and I had the chance to listen to a particularly quiet but effective, competent and very experienced warrant officer who was serving in the Royal Army Medical Corps. He was in charge of all the service medical staff at RAMC at Frimley Park. Even allowing for what I call the overspill factor, let alone the, "Thank you Mister. Atkins" factor, we seem to take for granted the enormous service that we have heard about from my noble friend, and indeed we shall hear a good deal more about it during the debate. As I said, even allowing for that factor, I was indignant. So far as concerns my noble friend the Minister, that is particularly rare because I know how hard he works and the huge effort that he puts into his work at the department, not to mention the way that he takes our points on board.
I was indignant in three particular ways regarding service personnel treatment at Frimley. They find it desperately difficult to try to come to terms with the amalgamations and the programmes for secondary care referred to by the noble and gallant Lord, Lord Craig. First of all, personnel in one of the wards found the cleaning and the housework difficult—what I as a young soldier used to call the set drills. In a service ward it was always someone's job to give help at the end of the day, perhaps for two minutes or five minutes. That was, and still is, part of the ethos of the Royal Army Medical Corps. As regards the changeover at Frimley, the outstanding matron in the Queen Alexandra Royal Army Nursing Corps explained to us quietly and with great dignity that she found particular difficulty as regards that vital aspect.
Secondly, the warrant officer talked to us about the accommodation for young single service personnel who had come to work at Frimley. They may have come

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from Aldershot or elsewhere. The story he told me took me back to 1958 when I served in BAOR. I recall the officers' ablutions, as they were tactfully called. It appeared that at Frimley such facilities were just the same as they had always been. There had certainly been no refurbishment, let alone a major refurbishment, since 1958. That is nearly 40 years ago. I hope that my noble friend will be able to examine this matter.
Thirdly, the most important point the warrant officer made concerned the training of the medical personnel at Frimley. He stressed to my noble friend and myself time and time and time again that the service personnel are first and foremost soldiers. Their classification as regards their personal weapons and their fitness had become a complete logistical nightmare for them, their warrant officer and the hospital. As I have said, these are first and foremost soldiers. They are highly skilled. As the noble and gallant Lord, Lord Bramall, may remember from 1944, they are highly courageous.
I conclude by asking my noble friend when he enters his office tomorrow to consider the words of Sir Winston Churchill, "Action this day". Will he consider the point about training and classification for the medical staff? It is not just a matter of Army personnel—I think of the noble and gallant Lord, Lord Craig—but also of Air Force and Royal Navy personnel. Will my noble friend consider that these are first and foremost service personnel but they have huge talents as medical personnel? If my noble friend has any time left over tomorrow, will he also consider the accommodation of the young and single dedicated service personnel at these single service hospitals?
9.48 p.m.
Lord Vivian: My Lords, I am also most grateful to my noble friend Lady Park of Monmouth for bringing this short debate to your Lordships' attention tonight. At this stage I should declare an interest as I am honorary colonel to 306 Field Hospital TA.
I intend to confine my remarks to the problem areas that were identified by the Defence Study Group visit in November when we visited the Royal Hospital Haslar and Frimley Park MDHU, and to inform your Lordships of the action that has been taken by the MoD so far to remedy some of the unsatisfactory points that we found while on that visit.
The main problems that the Defence Study Group identified were shortages of staff as regards consultants, nurses and medical assistants; the failure to retain military ethos; the lack of job satisfaction and efficiency; and the poor standard of single military accommodation at Frimley MDHU. The shortage of welfare accommodation for next of kin when military personnel are listed on the very seriously ill list and the seriously ill list was identified at both those locations.
Shortages of staff make those available work considerably harder and deny them the opportunity to pursue their military skills, and attend upgrading courses, which in turn denies them promotion and increased pay due to the lack of their qualifications. Because of priority nursing duties, military training, military skills and adventure training are not
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implemented and yet those are normally the very reasons why the young joined the Armed Forces as opposed to the National Health Service.
The defence group recommended that, as the shortage of consultants, nurses and medical assistants was reflected in the National Health Service, it would be difficult to recruit those staff from within the United Kingdom for the next few years. It has been proposed, therefore, that these medical personnel should be contracted from overseas, preferably from Australia and New Zealand. If retention and recruitment is to be successful in the future, it is essential that the terms and conditions of service are improved and made attractive and that the pay should be significantly increased.
The Ministry of Defence has confirmed that the shortages of staff are being addressed urgently, and with the forthcoming closure of the British Military Hospital at Rinteln in Germany more consultants and nurses will be available to fill the gaps at Frimley MDHU. In this connection, I have to report that I am aware of two regiments in Germany which find the new appointments system with German hospitals more satisfactory and efficient than the previous system. A study team has now been set up to reassess the Defence Medical Services organisation and the MoD has agreed that the Defence Secondary Care Agency will investigate the possibility of employing nurses from overseas.
The effects of a lack of military ethos lower morale and lead to people leaving the Army. They restrict military personnel from getting together where friendship, team spirit and competition normally occur, and once military training and skills cease a lack of pride in individuals develops.
The defence group recommended that staffing levels at the Ministry of Defence Health Units should take account of the mandatory requirement for military personnel to attend the basic training requirements, sport, adventure training and upgrading courses leading to a proper structured military career.
The concept of small military wings should be investigated and in the short term bays solely for military personnel should be organised within wards. A mess facility should be started and controlled by the Royal Army Medical Corps at Frimley MDHU.
There has been some progress on these subjects, with two extra military administrative posts established at MDHU Frimley to assist with the military aspects of life there including adventure training. There is difficulty over the recommendation of establishing military wings as service personnel are generally young and fit and therefore do not present the variety of patient cases that is vital for medical training purposes to retain accreditation by the appropriate Royal Colleges. However, the DSCA will investigate with the host trusts the possibility of service nurses being dedicated solely to treating service patients. May I ask my noble friend what action has been taken in establishing a mess facility at Frimley MDHU?
Job satisfaction was also identified. That problem is now being resolved as closer working practices continue to be developed. It has been agreed that working rotas between host trusts and the MDHUs are to be reviewed.

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It was reported to the defence group on these visits that the accommodation for single nurses was deplorably bad at Aldershot, as we have heard from my noble friend Lord Lyell. The chief executive of the DSCA has visited the Garrison Commander at Aldershot and it has been agreed that renovation of the nurses' accommodation should start in May. Ten large double rooms will be converted into 20 single rooms and the living-in personnel will be involved in the design and choice of furnishings. These improvements should provide good quality living accommodation.
In conclusion, the nation is in debt to our regular territorial and medical reservists. They have performed in an outstanding manner, with great loyalty and true dedication. They have acquitted themselves in an exemplary manner in the Falkland and Gulf campaigns, and currently in Northern Ireland and Bosnia. The Territorial Army medical units are in good shape and 306 Field Hospital TA is a particularly good example of a unit displaying high morale with a high sense of duty.
Finally, it is vital that the medical services are established and maintained at a level that ensures full support to our Armed Forces in peace and war. I am grateful for the action that the MoD has already taken and look forward to its full progress report in May.
9.55 p.m.
Lord Carver: My Lords, I, too, thank the noble Baroness for asking this Question, on a subject that is extremely important. Like other speakers, I have read the report of the Defence Committee in another place which was published last Thursday. It enhanced the concerns that I already felt and which I expressed, as did my noble and gallant friend Lord Craig of Radley, as long ago as 26th July 1994 in a debate on general defence costs and the Defence White Paper, and recently in relation to a Question raised by the noble Baroness, Lady Cox. I must also say that the report answered many of the questions that I should otherwise have put to the noble Earl this evening.
That report made clear that designing the right organisation for the Defence Medical Services, ensuring that both man and woman power of the right quality and quantity is provided for it and that the organisation works efficiently and smoothly, is no easy matter. There are many conflicting factors to resolve: providing satisfactory health care for members of the Armed Forces and their families in normal circumstances; training and providing a system for health care and treatment of casualties, on operations, including a reserve capacity to meet the worst case—which was the case in the Gulf; and a career for the medical personnel themselves which develops their professional skills while also satisfying their military and personal ambitions and preferences. One example of that conflict which is highlighted in the report is the problem of what is called "skill fade" for specialists serving in Bosnia, where, unless there is a near-disaster, there is little or no opportunity for them to practise their skills.
I am forced to agree with the Defence Committee report that we cannot now reverse the fundamental decisions resulting from Defence Costs Study No. 15:
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that the establishment of uniformed members of the Defence Medical Services should be based on the requirement to cover those operations which could be undertaken without a major call-up of regular or volunteer reservists for the combat units; that any operational requirement beyond that should be met by a combination of regular and volunteer reserves; that there should be only one joint service core hospital and medical college, the prime purpose of both being to train those uniformed members of the Defence Medical Services; and that elsewhere reliance should be placed on co-operation with the National Health Service.
However, I am very afraid that the normal operational requirement has been set too low. That has to be re-examined. There can be no doubt that the change to the new organisation was made much too hastily and without proper preparation and consultation with those concerned. It was a disastrous bit of bad management and bad man-management. The result has been that a large number of members of the service decided that there was no future for them in it, and applied for premature voluntary release or did not sign on for a further term as they might have done, so that there is now a serious shortage of specialists.
A second result has been that, although some doctors are happy with their work in the military district hospital units attached to NHS hospitals, the general terms of service in them for all ranks and skills, as described by the noble Lord, Lord Lyell, are not satisfactory. This must be looked at again and the complaints must be remedied. We have never had that trouble at the Royal Victoria Hospital in Belfast in the past 25 years or more that it has been working. I suggest that the Government take a good look at Belfast to see the way these things should be run.
Urgent action is now needed in two fields: first, to get the agreement of the Armed Forces Pay Review Board to improvements in pay and pensions, especially for consultants; and, secondly, to make it much more certain than it is today that volunteer reservists, or regular reservists who, although not called up, would like to volunteer and who are working in the NHS, will be released when required. I hope that the noble Earl will be able to tell us what is being done about that.
There is no doubt that Haslar is not an ideal site for the core hospital. Aldershot would have been more central; but one has to admit that the old Cambridge hospital there could not have been brought up to date. A completely new hospital would have been needed. Taking a long-term view, that might have been the most cost effective answer, however great the initial cost. A great opportunity was missed a quarter of a century ago, when I was Chief of the Defence Staff, when the Army had to give up Millbank. The Army and Navy then agreed to support a joint service teaching hospital to be established in Regent's Park Barracks, which was ideally sited to take advantage of the medical expertise of London. With my noble and gallant friend Lord Craig of Radley present, I am sorry to say that it was the fierce opposition from the air staff that scuppered it.
There is no doubt that the Defence Medical Services are in a critical state and urgent action is needed to remedy the situation. Unless that action is taken quickly,

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we may face a scandal like that which shocked the nation in the Crimean War, in the first battle of which my great-grandfather died of cholera, far from the tender ministrations of Florence Nightingale.
10.1 p.m.
Baroness Strange: My Lords, we are all grateful to my noble friend Lady Park for introducing this subject with her usual depth of knowledge and clarity of vision.
One of the most important concepts for our Armed Forces is that they should have total confidence in the medical care and back-up that they will be given at all times and their families will receive if they are away. Our dog Bonzo has a trick. It may not sound or look much of a trick, but it is this. You pick him up and hold him upside down and then you drop him over a sofa. He lies totally relaxed and falls without struggling, knowing that he will be cushioned against disaster. He has the same total faith in his back-up team as our Armed Forces need to have in their medical services.
With the end of a permanent threat with the lifting of the Iron Curtain, in theory we should have been able to diminish our Armed Forces and to economise. In fact, with the Gulf, Bosnia, Northern Ireland and other areas, the length between unaccompanied front-line tours has never diminished to the looked-for 24 months and our forces have become so diminished that we are again trying to recruit to make up the gaps. I am sure that the noble Lord, Lord Williams of Elvel, will say that under a Labour Government things would be different. Indeed they would; they would be far worse. If we had had a Labour Government for the past 18 years, we might have had no armed services left at all.
These cut-backs and economies have resulted in the Armed Forces medical services retaining only one, tri-service, hospital, at Haslar, and making some units inside other existing National Health Service hospitals.
I too was one of the Defence Study Group who visited one of these units at Frimley, four wards replacing the Cambridge Military Hospital at Aldershot, which was always also enormously popular with the local civilians who queued up to go to it because the nursing and the facilities were so good. I visited three of the wards—A&E (accident and emergency), medical and pathology. My noble friends Lady Park and Lord Lyell visited the one upstairs. In the A&E ward we spoke to two doctors: one a major who had served eight years on a short-term commission; one a captain who had served 20 years. They said that, because they did not have the requisite pieces of paper or certificates, they were employed in junior tasks unfitted to their military qualifications and experience. The consultant, whom we did not see, was given a consultancy room but it was in another part of the building. Both doctors were leaving.
In the pathology ward, we met a sergeant and also a colonel who had been in charge of 26 people in Germany. Here too their lack of civilian paper qualifications meant that they were not even allowed to write reports.
In the medical ward, we talked to several of the nurses. They were overworked and understaffed. They had come into the Army to nurse military patients. There
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was only one: a corporal, who had a broken leg. The rest were very elderly civilians who required constant nursing. Because of the shortage of staff, they were not able to get time off to pursue their military duties and training. The married accommodation was fine. But, for the single nurses, as noble Lords have heard, after they left at 10 o'clock at night, they had to go to Aldershot, where they were accommodated in rooms with minimal furnishings, one small microwave but no other cooking facilities, not even an electric kettle, or a ring; no comfortable chairs; no television; and next to a lavatory which was in constant use during the night. Some of the nurses were leaving.
There was no central area in the hospital where the military personnel could meet together. They were not happy with the situation. Nor were we, particularly as we were becoming intimidated by the constantly growing number of Defence Agency personnel, which had grown from one at Haslar to at least six at Frimley, who stood behind us like Gestapo. Nor, I suspect, would Florence Nightingale have been happy either, though she would have been familiar with Haslar, which bears a close resemblance to Scutari and which would have been 100 years old in her day.
Haslar is the one service hospital left—a former naval hospital converted to tri-service. It should have been the jewel in the crown; and in some respects it is. It is filled with much of the latest state of the art medical kit, which even I could see was splendid. It is contained in beautiful red brick listed buildings, built as a naval hospital in 1756, and with beautiful lawns and gardens and handy access to the sea for ships to come in with wounded sailors—as is Scutari, which is on a cliff above the Bosporus. To reach Scutari from the Crimea there was a long sail across the Black Sea and down the Bosporus. To reach Haslar it is a two-and-a-half hour journey by bus from central London and the hospital is poorly signposted. There are, we were told, three double bedrooms for the accommodation of families, otherwise they would have to find bed and breakfast accommodation in the town. We did not think that good enough.
Haslar was also suffering from a lack of nurses. Having made many of the naval nurses redundant, they were now finding it difficult to recruit more. Being a tri-service hospital, there were bound to be teething difficulties in settling in. Being the services, I thought that they were all managing extremely well. The naval staff was even calling the galley the kitchen. But the fourth bedfellow was the Defence Agency and the effect was like trying to blend three different sources of water with oil. Left to themselves, the three waters would combine well.
When we visited the Defence Procurement Agency at Abbeywood near Bristol, I could not help but compare it to Haslar. Here, much money has been spent in order to save much. Here, the buildings are modern, custom-built for the 21st century, and beautiful, set in grass and water with trees and much glass. Everyone who worked there really liked it. If Florence Nightingale had seen that, she would have demanded, and got, a new tri-service hospital built at Brize Norton, with proper infrastructure and ease of access. She would have

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moved up all the excellent kit from Haslar. She would have said, "It is never too late to undo a wrong decision. It is never too late to start again. While life lasts, it is never too late."
10.4 p.m.
Lord Swinfen: My Lords, I too would like to thank my noble friend for tabling this Question this evening. I should also declare an interest as I have two daughters who are married to servicemen.
My noble friend Lord Vivian mentioned the use of German hospitals. That made me think, because I recently heard of a case of a serviceman who was taken to a German hospital in an emergency. I had understood that there was supposed to be an interpreter on hand at all times. The Germans naturally spoke German and the British naturally spoke English, sometimes with accents that were not always easy to understand. There was no interpreter for that individual, making it extremely difficult for both the serviceman and the medical staff in the hospital. In some instances that could be extremely dangerous. I hope that my noble friend will be able to assure us that that situation will be looked at and improved for both the servicemen and their families in the future.
The House will be aware that in February I tabled a Question for Written Answer to my noble friend in relation to the immunisation of infants in service families in Hohne. The terms of his answer led me to believe that the correct vaccines were produced extremely quickly—indeed, within 24 hours. However, I know that the series of appointments, when they were refused, took at least two weeks. I checked with my general practitioner at home and I understand that the new vaccines were introduced in March 1996. But there is no reason why the old vaccines, which worked perfectly well and required two jabs instead of one, should not have been used up.
Service families are posted from this country overseas and arrangements should be in place for making certain that the correct vaccines are available for their infants, especially bearing in mind that infants are not vaccinated until they are eight weeks old. That means there are eight weeks in which to arrange for the vaccination. I know that some postings are much shorter than that, but not generally. I hope my noble friend will be able to improve that situation.
With the closure of the military hospitals, Army families in this country have become dependent on the vagaries of their local National Health Service facilities. The average Army family moves house every 15 months. That involves changes of schools, doctors, dentists and so forth. Many National Health Service doctors refuse to take on Army families as patients. I understand that there are instances where the registration process has been stopped once the address has been given. The family has been told, "We do not take on Army families". The family then has to travel further afield. In one instance the nearest surgery was seven miles away. That can cause many difficulties when there are small children involved. The husband
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may be away on duty and the wife, possibly without private transport, may have to take the baby to see the doctor, even for regular immunisation.
I understand also that secondary treatment often takes so long to arrange that, just as the patient is ready to go to the hospital for the treatment, the husband or wife is posted; the family moves; and the whole process has to be started over again. We need to look at the proper integration of medical services in the forces with the National Health Service for the welfare of the families. If families are not happy with their welfare, the person serving will be persuaded to leave. It will be the best ones who leave because they can find jobs in civvy street more easily than those who are not so good.
One other point which could well lead to medical problems also concerns the welfare side and relates to housing. Housing is welfare; it is the welfare of the family. In 1994 the Gas Safety Installation Use Regulations came into effect and were amended last October. I understand that on "march out" a serviceman has thoroughly to clean his gas cooker and reassemble it so that he can hand it over in a clean condition. But servicemen are not qualified, in general, to put together gas equipment. What safety checks are undertaken? A civilian landlord has to have all the gas installations inspected on an annual basis and the tenant has to be issued with a certificate to say that they are all safe. What is the position in the services? Our servicemen and their families are valuable and we want to make certain that they are not damaged by faulty gas equipment, particularly when a previous serviceman has taken to pieces a gas cooker and reassembled it in a dangerous state.
I am very glad that my noble friend has put down this Question and I look forward to the answers. I do not necessarily expect verbal answers from my noble friend the Minister this evening. I should be very happy if he were able to write to me later because I know that some of the answers are probably not in his brief.
10.16 p.m.
Lord Bramall: My Lords, from what all noble Lords have said, it is very obvious that nothing that has been instigated and executed during the whole series of defence reviews, studies, squeezes and cutbacks over the past five to six years has turned out quite so disastrously as these new medical arrangements.
The worst aspect of the whole saga is that it has been almost entirely self-inflicted. Thought up hastily by who knows who in the central staff, against, I suspect, the better judgment of the Chiefs of Staff, and seemingly with an oddly supine attitude being taken by some of the most senior medical officers, this ill-thought through reorganisation was quickly incorporated in the Defence Costs Study, where, by largely destroying the military ethos of medicine among the Armed Forces Medical Services and knocking the stuffing out of them, it has brought about the very exodus and shortages of specialists which Ministers have been claiming are the causes of the present state of affairs rather than its effects. In order to meet the inevitable and insatiable requirement of the Treasury to save defence money in

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the longer term, whatever the cost in other less tangible things, the MoD has tried to pass the buck for medical care of the Armed Forces in peace and, indirectly, through the reserve forces, in war, to the National Health Service, which, because of its own pressures and shortages, was in no position to shoulder them.
Now I am not for a moment saying that there is no benefit in service doctors and nurses extending their knowledge and broadening their experience by a greater clinical contact with civilian patients of all ages and with the latest medical techniques. But the way this particular and worthy aspiration has been implemented, or rather extended, because it already happens, has ended up with, among other things, closing no fewer than six service hospitals, at least some of which were fundamental to the ethos of medicine in the Regular Armed Forces; putting the single surviving hospital in the wrong place in relation to the main concentrations of servicemen and their families; and precipitately integrating the RAMC personnel from the Cambridge at Aldershot into Frimley Park, which has never, for reasons possibly outside its control, had the best of reputations for patient management. In addition, this has been done without creating the proper purpose-built accommodation promised, the military wing, which might have made the whole arrangement more viable. This has led to long waiting times and waiting lists, itself an exacerbating factor in the chronic undermanning in the Army, and the military feeling, or being made to feel, poor relations, with a dramatic drop in morale, highlighted so emphatically by the House of Commons Defence Committee's damning report.
Things may improve—we must hope they will—with a reinjection of much of the funds already, or planned to be, removed, and other suggestions made this evening by noble Lords. But the present situation should never have been allowed to occur in the first place and already the practical repercussions are all too clear. In peacetime the flood of key specialists leaving the service and the lack of regular hospital staff has meant greatly inferior medical cover for service people and their families, thus affecting conditions of service and leading to insufficient training for existing staff and field ambulance personnel and, even in low intensity and humanitarian operations, an excessive reliance for vital medical support on the excellent Reserve Forces, which means the health service, whose reaction to releasing these specialists whenever they are needed cannot always be guaranteed. And, in the event of serious hostilities on the scale of the Gulf War, the defence medical services would not be sufficient, as the Defence Committee makes clear, to provide the proper frontline support in all the realistic scenarios envisaged—a disgraceful state of affairs.
Noble Lords and honourable members in another place have reason to be as angry as they are concerned about this because, not once but repeatedly, at collective and private meetings; in personal letters; in parliamentary Questions and in debates over the past two to three years, Ministers have been warned about what was likely to happen if they scaled down and
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removed money from the medical services as they were intent on doing. But they continued to accept the Treasury-inspired claptrap provided by officials, with the results now so glaringly exposed.
Perhaps the Minister for the Armed Forces should not be held responsible for that Gulf War Syndrome fiasco, but will the noble Earl please say exactly whose fault it is that, far from enhancing the frontline, as was the proud boast of the defence costs study, named catchily Front Line First, the frontline has now been seriously impaired; that the morale of the medical services is lower according to the well-informed House of Commons Defence Committee than ever it had previously encountered in the Armed Forces; and that the ethos of military medicine has virtually been destroyed, possibly irreparably. Someone must be to blame.
10.22 p.m.
Lord Newall: My Lords, a major part of medical work for the forces relies on the proper welfare of the patient, and welfare lies at the heart of morale, which is so vital for our Armed Forces. Even in normal times of peace there are special circumstances for service personnel, not least that they are often a very long way from home and much-needed support. Service people also suffer from additional worries and problems related to their way of life. In many theatres of the world where our servicemen and servicewomen work, their ability to find necessary recreation is often limited and they frequently turn to welfare organisations for assistance. If they have an injury or illness, their needs become greater, as their next of kin is usually a long way away.
The main provider of medical welfare has been, and still is, the Service Hospitals Welfare Department. But at the moment, due to lack of planning and consultation, they find themselves inadequately provided for and are struggling to do a mammoth task against great odds. The recent report by the Defence Select Committee in another place, which has been mentioned by noble and gallant Lords and many noble Lords, appeared on 27th February. Broadly speaking, it catalogued the shortage of medical personnel and the near disaster level of military medical establishments, which have been cut to the bone.
In our one remaining military hospital at Haslar in Gosport they are short of over 90 personnel—about one-quarter of the establishment. The hospital itself, as has already been mentioned, is particularly hard to find. It even needs a ferry to get there.
In the past service families were looked after very well, in the same manner as the servicemen or servicewomen. There were sufficient hospitals with adequate facilities for families to stay near their service relative, especially if the illness or injury was serious. That was good for morale and kept everyone confident that their service would always take care of them and their family.
Now the situation is very different. In our one remaining military hospital at Haslar, there are only six beds for families, as my noble friend Lady Strange said. But somehow, since January, the welfare department has

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accommodated 90 families—134 people. I know because I have seen it happening. Sometimes relatives sleep on window-sills in the hospital because there are no beds for them. Personnel serving in Cyprus, Germany, Bosnia and many other theatres are often sent to Haslar for medical treatment, and a dependant without a home in England has a terrible time, often having to pay for bed-and-breakfast accommodation nearby, with related transport problems.
The welfare people have been remarkably resilient in coping with this situation, both here and in Germany, where there will be no welfare beds for dependants when BMH Rinteln closes at the end of this month. In addition, the hospitals welfare department is still fighting for adequate office space in which to operate. Welfare seems to be permanently at the bottom of the list when funding is being discussed and is often the subject of argument as to whose responsibility it is, even though the services hospitals welfare department comes with the blessing of the Surgeon General.
I have said it before: it is vital that morale is maintained now, when the services are short of manpower and our commitments appear to be growing. Instead, because of uncertainty, and with no sign of things improving, morale is low and people are leaving.
Dependants and ex-servicemen are now subject to normal National Health Service waiting lists and this causes great concern to families, especially the Army. Prior to military hospital closures in 1995, there were five hospitals in Germany, with 15 welfare personnel, providing a 24-hour service. When decisions were made to shut down the military hospitals, there was no provision for welfare and the welfare department was never consulted. It appears to have been done in great haste and with a great lack of forethought.
Often in Germany welfare personnel are actually prevented from having access to patients. There are now seven welfare officers in Germany, where there were 15, after a battle to try to cut them down to four. They cover, over a wide area, five German hospitals which have agreed to take in service personnel. There is a crying need for a tri-service re-statement of welfare policy, as this is long overdue. The situation needs to be sorted out at the highest level, and very soon.
We have been promised that something will be done in the medical and welfare fields. But when? And why is it taking so long? Morale needs an uplift and welfare is a most important part of this. The service hospitals welfare department has trained personnel to deal with medically related problems. Medical welfare is an emotional response and is much more than social or voluntary work. Discontent and disillusionment are often a direct result of unmet expectations in the welfare arena.
These issues could well be contained by affording the welfare department the appropriate terms and conditions and equipment to continue to perform its vital role. Let us hope that happens soon.
10.28 p.m.
Lord Williams of Elvel: My Lords, the House will be grateful to the noble Baroness for putting down her Question today and securing time for it at a rather late stage in the proceedings of this Parliament. I wish also to place on record our appreciation of those in the Defence Medical Services who are trying to adapt to what is obviously a rather difficult new system.
Unfortunately, we meet in rather sombre circumstances in that the House of Commons Select Committee has reported, as the noble Earl will be aware, in fairly dramatic terms. That was referred to by noble Lords who have spoken in the debate. I emphasise that this is not a party political issue; I am not trying to make party political points. I always value the contributions of the noble Baroness, Lady Strange, in this House, but I thought it was somewhere in the further reaches of frivolity to suggest, as she did, that things might have been different if we had been in power. Nevertheless, let us continue with the debate.
It seems to me that your Lordships would wish to consider three points. The first was brought out by a speaker whom I call my noble friend, formerly the noble and gallant Lord, Lord Bramall. It concerned Front Line First and whether it succeeded in doing what the Government pretended it succeeded in doing. In our view, DCS15 did not do so: it destroyed an essential area of what was behind the front line. There was no definition between the front and second lines, and indeed the third line. I am sure that all noble Lords, including the noble Earl, accept that those who risk their lives and bodies in military operations should be offered proper protection. That is not the case at the moment, as the House of Commons Select Committee points out.
Secondly, as the noble and gallant Lord, Lord Carver, points out, it is no good saying that a lot of money should be channelled into this, that and the other medical service. The problem is that civilianisation—the balance between civilian and military care—has been somewhat obscured by the difficulties experienced by those with proper civilian qualifications who go into military operations but have to operate in a military environment. That gives rise to a very severe problem. It is all very well saying that the NHS can cope with this, that and the other. Nevertheless, those who have to operate in a military environment, as the noble and gallant Lord, Lord Carver, points out, must operate in entirely different circumstances. There is no considered time in which to protect the people for whom they have responsibility.
Thirdly, we accept that there must be a flexible structure between civilian and military services, but we believe that there is an imbalance between the two as a result of the defence costs study. The medical services have been run down and morale has been reduced to a point where there is no longer any effective interlink between the Defence Medical Services and civilian medical services; in other words, the two are so divorced and the morale in the Defence Medical Services so bad that the two cannot conceivably work together in any operational situation.

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The noble Earl will be aware that the House of Commons has made a number of serious criticisms. Its firm view is that,
"the state of morale at all levels of the Defence Medical Services is lower than we have ever encountered in the armed forces".
I quote further from the report:
"We conclude that the staff shortages in the Defence Medical Services are so serious"
—the noble and gallant Lord, Lord Bramall, referred to this point—
"that it is not clear whether it will recover".
The report goes on to say:
"The current state of the Defence Medical Services is an indictment of MoD's ability to manage change. No amount of self-justification can disguise the fact that the country does not have a medical service capable of looking after the maximum number of soldiers the UK plans to deploy in a crisis".
That is the most serious indictment of government that I can imagine coming from a committee of a House of Parliament.
The noble Lord, Lord Lyell, asked for action today. I am sure that he is right: there should be action today. But we are still in opposition. We do not know the true facts of the matter. We are not in government. If the noble Earl says that there is going to be action today, tomorrow he will walk into his office and say this and that has to happen, then let him say so; otherwise he will almost certainly have to hand it over to us. I am afraid that it will be a problem, because, as the noble Earl knows, we are committed to a review of the whole range of services and the Armed Forces, and we shall see what results. I leave it with the noble Earl: either he says that the Government are going to take action on the basis of what the noble Lord, Lord Lyell, and the noble Baroness, Lady Park, have said, or else he will have to leave it to us to clean up the mess.
10.35 p.m.
Earl Howe: My Lords, my noble friend Lady Park, has with her customary seriousness of purpose brought to the House an issue of fundamental importance both to the Armed Forces and to the Government. For that reason I welcome the opportunity in the short time available to explain our policy and to bring the House up to date on how we are implementing it. I am grateful to all noble Lords for their contributions this evening and shall do my best to answer as many questions as I can. I shall of course respond in writing to any questions I do not cover.
I should like to make it clear at the outset that the Government are totally committed to providing medical care to UK service personnel to a standard that is second to none. Equally, to the military personnel who make up the DMS, we are determined to provide a career that is professionally fulfilling, fairly paid and properly underpinned by fair terms and conditions of service. Those are our starting points; and, while during the course of what follows I shall readily acknowledge that there are some important issues that need our continuing attention, I shall hope nevertheless to demonstrate that the Government's commitment is absolute and that we
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have in fact made some encouraging progress over the past year or so towards the goals that we have set ourselves.
If I could characterise the tone of this evening's debate it has perhaps had a tone of constructive concern. There is concern that the structure of the Defence Secondary Care Agency is not right; that morale has been damaged in the reorganisation; that military ethos in the Ministry of Defence hospital units is fragile; and, most importantly perhaps, that not enough is being done to address the shortages of personnel in key specialist disciplines. Those issues are indeed of central importance, but the situation as we find it today has to be put into context.
The restructuring of Defence Medical Services was vitally necessary and long overdue. In the late 1980s the National Audit Office criticised the structure of Defence Medical Services and the high level of funding devoted to it. A number of studies, culminating in the Defence Cost Study, recommended a significant restructuring of the medical services. The key to the reorganisation was to provide sufficient rapidly deployable units, primarily manned by service personnel to support forces deployed on operations, and a more efficient and cost-effective support structure, including the establishment of a number of agencies to provide secondary medical care and recognised training for medical personnel.
The review sought to go back to first principles by analysing the number of regular medical personnel needed to support the national contingency force in the light of a completely changed strategic environment. The result of the study was to recommend a secondary care structure based on a single core hospital at Haslar, a continuing military medical presence at The Duchess of Kent's Military Hospital, Catterick, and three Ministry of Defence hospital units located in NHS district general hospitals at Plymouth, Frimley Park and Peterborough.
My noble friend Lady Park has expressed her strong reservation about the MDHU concept. However, we considered then and believe now that it was essential to move Defence Medical Services in the direction of closer integration with the NHS, mainly because the Royal Colleges had made it clear that the separate small service hospitals simply could not provide a wide enough clinical base for accreditation for service medical officers. With advances in medical techniques and the overriding importance of ensuring that our doctors and nurses have the best possible skills to support our forces, it was of the utmost importance that we took steps to improve the training of medical personnel in peacetime, and there is no doubt that DMS personnel now benefit from closer links with the NHS in terms of wider clinical experience and training.
This does not mean that military ethos is no longer important or relevant. We totally support the need to maintain the military ethos within the DMS, particularly at the military district hospital units, which operate within the NHS environment. With this is mind, I can tell my noble friend Lord Lyell that we have already put in place measures to improve the nurses' accommodation at Frimley Park. In May we will start

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converting 10 large double rooms to form 20 single rooms, and the living-in personnel will be involved in the design and choice of furnishings. Similarly, MDHU Peterborough personnel are fully integrated into service life at RAF Wittering and take every opportunity to participate in social and other activities there.
The establishment of agencies within the defence medical services was also a key element of the restructuring; notably the Defence Secondary Care Agency, the Defence Dental Agency and the Medical Supplies Agency, all of which were launched last year. Again, my noble friend has criticised this decision. I believe she feels that agencies with their natural emphasis on budgetary rigour and cost effectiveness fail to take sufficient account of the human element in what is essentially a people-oriented service. I have to say to her that I believe her fears are misplaced. The need for a tri-service structure in secondary care was blindingly obvious to eliminate wasteful duplication, and budgetary discipline is a natural concomitant of this. Each agency is headed by a chief executive who reports to the surgeon general. In that way direct channels of accountability are maintained to the three services and the chief executives know that the wellbeing of the medical staff whom they direct is of critical importance to the delivery of an effective service. It is a measure of the importance that we attach to this that I can tell the House that the chiefs of staff are kept in close touch with progress of the new structure and the service it provides.
We recognise that the changes flowing from the DCS have been unsettling for many personnel. It would perhaps have been surprising had this not been so. That is not meant to sound complacent but if we are to get defence medical services right for the long term we were bound to face a period of adjustment. The most serious problem we face, as my noble friend and others have pointed out, is that of staff shortages in some specialisations. But this is nothing new. We have for many years suffered from shortages among surgeons and anaesthetists, a situation directly mirrored in the NHS. There are also shortages in nursing staff. That has meant, for example, that we have been unable to open some wards as soon as we would have wished. These manning problems cannot be resolved instantly; but what we can do, and are doing, is to devise and implement a coherent strategy to address them.
In the short term, to help overcome a shortage of nursing personnel, the Secondary Care Agency is planning to employ additional civilian staff at Haslar on contract terms. But the real issues are recruitment and retention. This is not simply a matter of finding additional money, although that is certainly part of it. It is about looking closely at terms and conditions of service; examining the rationalisation of career structures across the three medical services; and at a management level looking at such basic needs as accommodation.
Recruiting to the DMS is generally satisfactory, and young officers are being attracted into the DMS on cadet schemes. Early signs are encouraging and an increasing number of them are prolonging their service to take
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advantage of the important facilities and opportunities offered by the new structure. Proposals for improvements in the pay and pensions of medical and dental officers are currently being considered by the Armed Forces Pay Review Body and its report is due to be published in April. The Government will look positively, as they always do, on the AFPRB's recommendations and there is no reason why those recommendations should not be examined on a stand alone basis. They certainly do not depend on the final resolution of recommendations arising from Sir Michael Bett's independent review, as announced the week before last. Some other changes will shortly be implemented. For example, extensions of short career commissions to allow higher professional training to be undertaken—with a concomitant return of service—are currently only permitted in the Royal Air Force, but are now to be introduced in the Royal Navy and the Army.
Despite dwelling at some length on that point, I can tell the House that the staff shortages which we currently face in the DMS are manageable.
A number of noble Lords, including the noble Lord, Lord Williams, have expressed concern about the ability of the Defence Medical Services to provide adequate medical support for military operations. That was an area of concern also for the House of Commons Defence Select Committee in its report published last week. I should say to the noble Lord and other noble Lords that we are confident of the DMS's ability to provide medical support for any likely military deployment involving British troops. Currently, they are supporting military operations in Northern Ireland, the Falkland Islands and Bosnia as well as British air operations over Iraq. We are doing that in the main from regular medical manpower. However, we are also using the Reserves, as we have done for some years, for an element of that medical support, particularly in certain specialties. Even with those deployments continuing, we could still provide the necessary medical support for a simultaneous deployment of the Joint Rapid Deployment Force, such as might have arisen in Rwanda, should such a crisis arise.
The noble and gallant Lord, Lord Carver, referred to the risk of skill-fade. In order to alleviate that problem, which is one which we recognise, surgeons and anaesthetists on Operation Resolute now undertake a three-month rather than a six-month deployment.
I have already touched on the subject of morale. A number of noble Lords have expressed concerns about that. We recognise that because of the reorganisation, morale is fragile in some parts of the medical services. However, that is far from being a universal difficulty. Indeed, in many areas I believe morale to be good and improving all the time as the new structures settle down.
My noble friend Lady Park referred to problems in relation to service personnel obtaining priority treatment. We recognise that there have been such difficulties and undue delays in receiving treatment. Those clearly have an impact on the operational capabilities of the Armed Forces as well as having the potential to damage morale. Waiting lists have been

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caused in part by manpower shortages, but it is also true that a backlog of patients was inherited from the service hospitals on their closure. Urgent steps have been taken by the Secondary Care Agency to reduce waiting lists. I am pleased to report that the agency has already achieved a significant improvement in the waiting time for out-patient appointments. For example, the waiting time for orthopaedic appointments at the MDHU at Frimley Park has been reduced from 35 to 15 weeks. The agency aims to reduce waiting times to four weeks across all specialties.
Lord Bramall: My Lords, perhaps I may ask the Minister to include, before he sits down, a statement about the purpose-built accommodation at Frimley which he has not mentioned. That was part and parcel of the whole exercise, as I understand it, and it would make a very considerable difference to the military wing which does not exist there at the moment.
Earl Howe: My Lords, I am grateful to the noble and gallant Lord. I do not believe that I shall be able to cover that point in the very short time available to me. But I shall gladly write to the noble and gallant Lord and, indeed, to my noble friend Lord Vivian, who raised a similar point.
My noble friends Lady Strange, Lord Vivian and Lord Newall referred to the provision of accommodation for dependants of personnel being treated in service hospitals and MDHUs. All our hospitals in the Secondary Care Agency are able to provide accommodation for dependants of personnel being treated. If there is insufficient accommodation, the Ministry of Defence will pay subsistence allowance to enable dependants to stay in local hotels.
The agency has the provision of such accommodation under regular review and relatives and friends of patients are encouraged to comment. I have to tell my noble friends that I am not aware of any serious deficiencies in the area, but we will always look to improve such facilities where appropriate. For example,
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at the Royal Hospital Haslar, we hope to build and run a 72-bed accommodation facility to cover the requirements of both relatives and service day-surgery patients.
In conclusion, let us not forget one simple fact: our Armed Forces deserve and are receiving the highest possible standards of medical care. I pay tribute to the men and women of the Defence Medical Services who provide it and to their outstanding professionalism. We are confident that the DMS now has a firm basis from which to undertake its operational and peacetime roles. Teething problems after such change and upheaval are hardly surprising and all the time we must keep the operational capability of the DMS under review. The right structures are in place. It now remains for us to ensure that the progress that we have made over the past few months is maintained, built upon and properly funded. My noble friend need be in no doubt that achieving that task is for the Government a very important priority.
Lord Williams of Elvel: My Lords, before the Minister sits down, can he respond to the point that I made when quoting from the report of the Select Committee? I repeat part of that quotation; namely, that,
"the country does not have a medical service capable of looking after the maximum number of soldiers the UK plans to deploy in a crisis".
Can the noble Earl say whether he agrees or disagrees with that statement?
Earl Howe: My Lords, I disagree with that statement. I happen to agree with very many of the conclusions in the report of the House of Commons Select Committee, but that is not one of them. I sought to reassure the House in my speech that, according to our best and most carefully calculated figures, we could support any likely deployment of British troops. I am not clear as to how members of the Select Committee came to that conclusion, but I believe that they are wrong.
House adjourned at eight minutes before eleven o'clock.