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Baroness Chalker of Wallasey: My Lords, I thank the Minister and the 12 other noble Lords who spoke in the debate. We will inevitably sympathise with the Minister, in trying to sum up such a wide debate. I remember the situation well.
I beg the Minister and the department to consider again how we can achieve better co-ordination and collaboration, not only with other donors but also with governments. I ask DfID not to be cowed by Finance Ministers, who always want to direct everything. That is why I made particular play in my comments on capacity building of extending capacity building in foreign countries to the spending departments, not just to financial management. However good the IFMIS systems are, support will be of value in lifting people out of poverty only if the spending departments get it right, not just the Finance Ministers. I know that the Minister and the department will put special emphasis on trying to get easier trade relations between the developing world and the developed world, but training in those countries to enable growth in their export industry is vital.
It would be wrong to go over the debate, and it is impossible to sum it up in 20 minutes or in two. I take to heart what the noble Baroness, Lady Northover, said about the health issues. Unless we get the health issues right, we undermine so many of the other things that we do. For many years, my companies have trained two people aged 20, in order to have one active and working at 40. That is the scale of the problem. It is not just HIV/AIDS; it is malaria and TB, about which we can take far more preventive action than we, as donors, encourage countries to do.
I thank everyone who has been involved. It has been a good debate. We probably do not have them often enough. I beg leave to withdraw the Motion for Papers.
Motion for Papers, by leave, withdrawn.
Personal Debt
The Earl of Northesk rose to call attention to levels of personal debt, including mortgage debt; and to move for Papers.
The noble Earl said: My Lords, your Lordships will recall the heady days of the last few years of the previous century. The Prime Minister proclaimed a new political order based on new Labour's "Third Way". The Chancellor of the Exchequer, on the back of his
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immediate decision to transfer the setting of interest rates to the Bank of England, claimed the equivalent of economic sainthood. His comments in a Statement on the Government's economic and fiscal strategy in June 1998 give a flavour of the rhetoric that prevailed at the time:
"The spending plans that we set must ensure sustainable finances over the whole economic cycle—rigorous financial discipline that, together with monetary stability, ends once and for all the boom and bust that for 30 years has undermined stability, hindered long-term investment in our public services and prevented this country from achieving its potential".—[Official Report, Commons, 11/6/98; col. 1195.]
That claim of fiscal alchemy—the banishment of boom and bust—dripped from the lips of Treasury Ministers like so much honey.
In terms, the situation that prevails at the moment is one of booms in house prices and consumer spending, both fuelled substantially by debt. Perhaps we should not be surprised that the Treasury has become more circumspect about claiming that boom and bust has been banished. Even the Chancellor's affection for prudence—formerly so strong—seems to have cooled.
Nevertheless, we should give credit where credit is due. Noble Lords on these Benches might wish that the Government had been a little more generous in acknowledging their golden economic inheritance. Despite that, it would be churlish not to admit that the economy has performed tolerably well in recent years. However, although, outwardly, some of the headline trends continue to seem adequately robust, clouds are gathering. We cannot tell how dark they may be or what economic hailstorms they may carry, but of one thing we can be certain: they are gathering. Not least among them are current levels of personal debt.
It is as well to put the matter in context. According to the most recent figures from the Bank of England, net lending to individuals stands at £985 billion. Personal debt is currently rising at the rate of £1 million every four minutes, with the breach of the £1 trillion mark imminent. In common with my right honourable friend Oliver Letwin, I do not suggest that this,
Unsecured personal debt has grown by more than 50 per cent since 1997, twice as fast as incomes, and now stands at £5,330 per person. Total unsecured personal debt stands at £172 billion and is growing at over 10 per cent a year. Credit card lending grew by £963 million in March, the largest increase in two years. As to mortgage lending, this grew by £9.34 billion in March, the highest amount for five months.
Here, worrying signals are beginning to emerge. At what the Government might call the affordable end of the market, many people with limited experience of the rental sector are entering the buy-to-let market. This is fanning the flames of house price inflation. However, as revealed in last week's Sunday Times, there is growing evidence that people's expectations of the return on their investment are pitched too high. In such circumstances the effect of even a relatively modest increase in interest rates could be profound. As Shelter has observed:
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Shelter's research provides us with an insight into the standing of the unaffordable end of the market by showing that buying a first home is now 33 per cent less affordable than it was 10 years ago, and that first-time buyers accounted for just 29 per cent of all buyers last year—a fall from 50 per cent in 2001. In addition, 55 per cent of all mortgage lending is to homeowners borrowing against the value of their existing homes and, incredibly, that 50 per cent accounts for 50 per cent of the rise in consumer spending. From this we can infer that a sizeable proportion of mortgage debt is being used to fund either day-to-day living expenses or lifestyle choices.
The reverse side of the debt coin, saving, exhibits similar properties. The savings ratio has halved under the current administration. According to the Family Resources Survey, 27 per cent of households have next to no savings at all, and a further 23 per cent have savings of less than £1,500. Charles Bean, the Bank of England's chief economist, has noted that one-third of British households have virtually no liquid assets to draw on if the need arises. In the six years from 1998 to 2003, the household saving ratio has never been higher than 6.7 per cent; in the previous six years to 1997 it was never lower than 9.3 per cent.
By all available measures people are saving less and borrowing more than when the Government came into office, which, as reflected in the statistics, is causing increasing problems. Some 1.5 million new consumer debt problems were brought to Citizens Advice Bureaux during 2001–02, a 50 per cent rise on 2000–01. Inquiries to CAB about consumer credit and debt have gone up 46 per cent during the past five years. Twenty-six per cent of people struggle with debt repayments from time to time, and 11 per cent have more serious problems. Over 3 million households now rely on the services of moneylenders. Individual bankruptcies are at their highest level since late 1993, with those going bankrupt during the past year rising by nearly a third.
What is more, debt is impacting disproportionately on the most disadvantaged. The debt to income ratio is highest for the poorest households, where it has also risen faster than in any other group, doubling between 1995 and 2000. Households earning less than £15,000 are twice as likely to be in arrears than more affluent households.
Despite the commitment of the Chancellor at the 2003 Labour Party conference,
the proportion of pensioners living in households below 60 per cent median income before housing costs in 2001–02 remains relatively unchanged from 1994–95 levels. A MORI survey, published earlier this year, has found that student debt has risen by 74 per cent over the past four years, with students now graduating with average debts of £8,031, as compared with, according to the Government's own figures, £840 in 1995–96, £2,530 in 1998–99 and £3,210 in 1999–2000.
All in all, this is a curious, not to say surprising, legacy of the Government's protestations of "prosperity not for the few, but for the many". It is not as if the Government
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have been suddenly blindsided by personal debt as a specific feature of the economy. As long ago as October 2000, the DTI convened a meeting with various financial institutions, prompted by research from the Citizens Advice Bureaux showing unprecedented demand for debt counselling, to discuss ways of stemming the growth in unaffordable debt. At the time Dr Kim Howells commented: "It's"—that is, personal debt—
"become a major concern to almost everyone, not just the people who are out there trying to give advice".
And yet, judging from subsequent responses, the Government have become ever more reticent, not to say blasé, about the matter. In March of last year, the Treasury Minister Ruth Kelly held out consumer debt as a badge of honour for, and almost a source of pride in, the Government's economic policy, stating:
"Growth in household debt reflects strong fundamentals with a robust labour market, low interest rates and strong gains in housing wealth".—[Official Report, Commons, 10/3/03; col. 21W.]
The noble Lord, Lord Sainsbury, reiterated this sentiment in his response to an Unstarred Question from my noble friend Lady Wilcox:
"Our stable macro-economic framework has delivered sustainable economic growth, with the growth in borrowing reflecting the strong fundamentals of the UK economy".
To be fair, the noble Lord did qualify his comments by stating that,
"this is an issue which the Government take very seriously. We are working to address the problem". —[Official Report, 21/10/03; col. 1582 col. 1582.]
In November of last year the noble Lord, Lord McIntosh, sought to offer a similar reassurance, when he said:
Despite the way in which the figures for debt have surged in the intervening period, he added:
Even the Minister has got in on the act. Last December he offered this analysis of the totality of the debt problem saying that,
"the ratio of debts to assets in the economy is still very healthy among households. The reason why people feel that they can push the boat out with regard to credit cards is because they feel wealthier . . . People feel wealthier because, objectively, they are wealthier".—[Official Report, 2/12/03; col. 184.]
Most, if not all, of these pronouncements share an odd feature. Paraphrasing Gordon Gekko in the film "Wall Street", they say, "Debt is good". They translate as exhortations to borrow. In truth, this should not surprise us unduly. As my noble friend Lord Saatchi observed in a similar debate some eight months ago,
"the Government have a vested interest in the continuation of the present build up of debt".—[Official Report, 21/10/03; col. 1580]
Paradoxically, the current booms in consumer spending and house prices are propping up the performance of the economy, and on the basis of the evidence this week from the CBI and the Halifax, neither is showing any signs of slowing. With that in mind, it is perhaps worth contemplating how Government policy interacts with the issue of debt.
I accept that the Government are not in the business of telling people how to run their own finances. Nevertheless, policy has a role to play in establishing the economic climate and sentiment in which they live their lives. Over the past seven years the Chancellor has conspired to introduce a whole range of measures—the removal of advanced dividend tax credit, the introduction of means-testing via the convoluted tax credit system, and so on—which act as disincentives to saving. In conjunction with this, the Government are throwing huge sums of public money at public services.
The Chancellor, far from continuing to ally himself with prudence, is funding today's spending from debt in the expectation of jam tomorrow. Irrespective of current affordability, there is a sense in which the psychology of public policy has shifted from thrift to profligacy. Perhaps we should not be surprised if, learning from the example, the public exhibits the same sort of attitudes towards saving and debt as the Government.
Moreover, if, as seems to be the case, the broad sweep of public policy is predicated on the concept that debt is good, there is scope for suspicion that this is motivated as much by requirements of political expediency as a wish to sustain the economy in robust and vigorous health. We are in a significant electoral period and there are those, not least the Item Club, who suggest that the Chancellor has deliberately engineered the current debt-funded pre-election boom.
The Minister will no doubt insist that Bank of England independence pre-empts this. As we all know, the Monetary Policy Committee is statutorily required to consider interest rate policy within the limits of the symmetrical inflation target. It cannot deviate outside these bounds other than in exceptional circumstances. Accordingly, it is in a somewhat anomalous position: because it is tied to measuring inflation with CPI rather than RPIX, it is obliged to ignore council tax and all other housing costs. House price inflation is, of necessity, a closed book to it.
George Trefgarne, writing in the Daily Telegraph last month, is particularly robust in his criticism. He said:
"Of all the scandals involving this Government and its manipulation of numbers and targets, the fiddling of the inflation target is quite the most reprehensible . . . It is precisely because of this fiddle that the house price and credit spiral has suddenly become so political".
In a subtle and roundabout way, the independence of the committee to set interest rates according to the prevailing circumstances of the economy has been compromised with potentially damaging consequences.
By way of comfort to the Minister, I accept that some of the headlines and media reporting of personal debt in recent weeks have been overblown. Indeed, I have taken
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due note of MORI's report last week on credit card debt. Certainly it is premature to assume that current levels of personal debt presage an impending crisis. Nor do I envy the Government their task. Consumer confidence as a major plank of the economy is a fragile and fickle phenomenon at the best of times. Nevertheless, there does seem to be growing evidence that current levels of both debt and house prices are unsustainable. As Ken Rogoff, the International Monetary Fund's chief economist, has said:
"Forty per cent of all housing booms are followed by busts, with housing price drops that typically average 25–30 per cent".
Nor should we be immune to his explicit warning that,
"the long boom in house prices—up 28 per cent in the US since 1996, and 70 per cent in the UK since 1994, adjusted for inflation—put them in danger territory".
As we all know, other eminent commentators have issued similar warnings, not least Sir Andrew Large, the Deputy Governor of the Bank of England. It would be irresponsible to ignore them. To do so would be to run the risk of engineering the "bust" to the current "boom". How hollow the Chancellor's words would sound then.
My time is up. That being so, I very much look forward to the contributions of other noble Lords during of debate. I have no doubt that they will elaborate on some of the themes—and, doubtless, others—that I have outlined with much more eloquence and expertise than I can muster. I beg to move for Papers.
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