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The Queen’s Speech

June 9, 2010

The Queen's Speech

Parliament has returned to a sea of fresh faces, a transformed party political landscape and a new desire to push Britain forward to brighter horizons. That feeling of refreshed optimism is to be welcomed. But if we do not apply a new way of thinking to fixing our nation’s serious problems, the same old politics may well return. I shall be focussing my observations unashamedly on the economy – primarily in my capacity as the Member for the City of London – and on constitutional reform, which I broadly welcome as a long time and robust supporter of Lords’ reform.

In the run up to the 1979 election, Margaret Thatcher presented a distinctive and radical offering to the electorate. There was then a keen consensus that it was a crossroads election which had the potential to change our entire national direction. Similarly, during the 2010 General Election, the appetite for a new approach was tangible. Yet there was little complementary sense of what our direction should be.

When the Conservative government took control of the public purse in the final year of the 1970s, our nation had been subject to monetarist policies for two-and-a-half years, courtesy of the IMF. In essence, the toughest decisions on public spending had already been made. In contrast this year, while there was a superficial acceptance that the best economic times were over, the sheer gravity of our massive economic problems was lightly skated over during the campaign skirmishes. No sense was there that the electorate was prepared to take a painful personal hit following our collective national profligacy. Indeed it served the interests of all three main political parties to confine any economic discussions to a fatuous battle over public spending cuts of £6 billion – a sum borrowed by government every fortnight over the past year.

The public was ready to embrace change in 1979. Today the electorate has seemed unwilling to grasp the seriousness of our national economic situation. The breathless, relentless media coverage of the past two years, charting dramatic stock market swings, house price crashes and global turbulence, has convinced many that the worst is behind us without the headlines having ever truly translated to the situation on the ground. This makes it all the more difficult to persuade a complacent public that an era of financial reckoning lies ahead.

Finally, the spirit of the past couple of years has been uncompromisingly ugly for those of us who instinctively support capitalism, free markets and global trade. There is widespread, open hostility to banks, bankers, big business, the wealthy, private education, private health and the profit motive. This stands in stark contrast to 1979 when the case for empowering people, the smaller state and individual responsibility had already been made.

The election now behind us, my fear is that we have a coalition government in place that lacks any explicit mandate to make the tough economic decisions required as a matter of urgency to get the public finances back on track. The key problem that faces government is a lack of public support for the urgent reductions in public expenditure now necessary. In large part this is as a result of the reluctance by the entire political class to level with the British public about the economic crisis ahead. We are yet to strike at the core of the erstwhile government’s rhetoric and its narrative remains dominant. Labour will now be able to sit on the sidelines and blame the government for everything they postponed addressing. For instance, we acquiesce in levelling higher taxes on the wealthy without making clear the very practical reasons why, in an age of global mobility, the brightest and best of our young people will simply leave these shores if their plans to create wealth and promote enterprise are stifled.

If the coalition is to be a success, and more importantly, if Britain is to lift itself out of the economic mire, we need first to make the case for a smaller, more efficient state through public spending cuts, and second to be strong enough to make the case for an internationally attractive tax system.

I understand the public appetite for retribution when it comes to the financial services sector, and the sense that the banking fraternity should take the lion’s share of any new taxes, but we must separate sensible measures to curb excess and to share fairly the national burden with punitive measures designed only to twist the knife that have the potential to drive away the wealth and employment creators of the future.

In this sense, while I accept there needs to be some immediate tax rises – higher employee national insurance and VAT will almost certainly be levied – I remain uneasy about prolonged imposition of the 50% income tax and also fear proposed changes in Capital Gains Tax. Income and capital gains are taxed at different rates for good reason. This disparity is by no means an anomaly. Conservatives recognise the need to promote a culture of saving – indeed it is our failure to save prudently that is responsible for the huge deficit we must tackle. Our savings ratio has slumped to around 5% compared to 35% in fast growing economies of future global superpowers such as China and India. Higher levels of Capital Gains Tax will only serve to reduce further the pool of savings available for future capital investment. Capital is also highly mobile which is why our economic competitors – Australia, New Zealand, Switzerland, the Netherlands for instance – have abolished CGT altogether.

Restoring a complicated regime of allowances and reliefs to take account of the effects of inflation and length of time over which chargeable assets have been owned might prove an unavoidable compromise to part-protect the interests of the prudent. But surely it would be better still not to start down the path of ‘equalisation’ between capital and income taxes.

Similarly, we must be careful of other populist measures. The desirability to shift away from an over reliance on the financial sector, for instance, may seem sound. But when we talk of reducing our economic dependence on the City, are we sure that the UK offers the global economy similarly strong sectors to take its place?

There has been much talk of a revitalisation of Britain’s manufacturing and export-led growth. I am afraid this begs the obvious question of just who will be doing the importing. While the UK must be grateful that we remained out of the Eurozone, the tumultuous events on the continent will have a massive effect on us regardless. After all, that the struggling Eurozone accounts for 60% of our export market is very bad news for the UK.

Our European trading partners will not only be importing less, but the likely, rapid depreciation in the value of the Euro will also detrimentally affect our exporters. Indeed one of the most worrying aspects of the UK’s economic performance over the past two years has been the failure to take greater advantage of the significant 20-25% devaluation in our currency to expand our export markets. This augurs badly for the years ahead as sterling appreciates against the Euro. It will likely affect not just our exports but one of the quieter successes of the recession – the recent uplift in tourism, particularly to my own central London constituency, that saw many continentals especially take advantage of what was for them an attractive exchange rate.

Aside from the challenges of diversification to achieve relative strength in other sectors, we should not forget that the presence of our large financial sector gives London the critical mass to attract the best professionals from across the globe; contributes massively to the Treasury’s coffers in terms of tax revenues and employment; plays a critical role in supporting business (whether that be in drawing huge inward flows of foreign capital or in providing British companies access to diversified sources of capital to enable them to invest and expand) and supports complementary industries such as law, insurance, retail and entertainment.

The most pressing task facing this government is the need to make the UK a place of possibilities, enterprise and entrepreneurship, a place that welcomes talented people and their businesses from across the world.

I do not say these things to be unremittingly gloomy and negative, merely to underline the importance of our having a consistent, resolute plan for the next five years that truly looks at the national interest rather than pursues populist and superficially attractive economic policies that disincentivise wealth creation, saving and prudence.

Turning to constitutional reform, I am less a Conservative, more a radical in this area. Indeed in my very first speech in this House some nine years ago, I made clear my support for a wholly elected House of Lords. Indeed a few years back I suggested a set of proposals that would tie up the anomalies left by devolution and the incomplete reform of the House of Lords, [which I shall come to].

It is as a result of this interest that I found very disquieting the recent press reports that the new coalition is proposing (in breach of both election manifestos) to ennoble in excess of one hundred men and women in order to ensure that the composition of the House of Lords is ‘reflective of the share of the vote in the recent General Election’.

Just before the General Election I noted that there would be public outrage if a ‘business as usual’ approach were to be adopted by the political class to House of Lords appointments in the months ahead. In particular I believe it would be totally unacceptable if any retiring Members of the House of Commons who have been reprimanded, obliged to apologise to the House or have had to repay substantial sums following the allowances scandal were now raised to the peerage. The same applies to those former senior parliamentarians from the Commons who led the calamitous efforts to prevent publication of MPs’ expenses through the High Court and the inadequate attempts at reform after the entire scandal broke at the employment of relatives at the beginning of 2008. This may have been ‘the way things were done’ in the past. It cannot be tolerated now.

I was pleased to see in the Queen’s Speech the urgent timetable for determination of the means by which we move to a democratic and accountable House of Lords. As a result the only justification for new appointments on the scale now proposed would be in the event that the existing House of Lords dragged its feet in relation to reform.

If the press reports to which I referred are accurate, I fear we may once again prove to be behind the curve on reform – an especially dangerous position now that we have proudly heralded an age of clean and new politics. Hitherto there has been an uneasy sense that parties are too often reduced to playing catch-up in the wake of every new revelation about parliamentary conduct. I do not wish us to find once again that we wait until media pressure forces us to reform the way we do things.

I am supportive of many other proposed constitutional reforms, such as that for fixed term parliaments which I believe is a sensible initiative. But devolution remains unsatisfactorily unfinished business. The appallingly poor performance of my own Conservative Party in Scotland, where we have now won a total of three parliamentary contests in the last four General Elections, means that the calls for Scottish independence will become ever louder, notwithstanding the fact that the Liberal Democrats hold twelve of the fifty-nine Scottish parliamentary seats.

As a way of solving the twin problems of Lords’ reform and the anomalies left by devolution at the same time, I suggested a few years ago the creation of federal system in the United Kingdom – four, full, national parliaments in England, Scotland, Wales and Northern Ireland with all the existing powers of the House of Commons and over them a federal United Kingdom parliament, which would debate defence and foreign affairs, make treaties and administer a cohesion fund for the poorer parts of the UK. It would be funded by a per GDP levy on the national parliaments. There would be no need for extra politicians, as the national parliaments would send representatives to the UK parliament and meet together for its debates, which could be held in the old House of Lords chamber, perhaps two days per week. Abolishing the House of Lords would mean that the parliaments would be unicameral but that has not proved a problem in Edinburgh or Cardiff over the last ten years.

This proposal cuts the Gordian knot of House of Lords reform and provides an equitable structure that respects national differences, whilst strengthening the ties that unite us as a nation of equals. It removes the growing sense of disgruntlement in England at the perception that the Scots in particular are able to play the system to benefit financially from Labour’s devolution settlement. It also saves the cost of the House of Lords and the Scottish and Welsh Offices and reduces the total number of politicians. We are perhaps in the moment when such a proposal should be looked at afresh.

It would be unwise to underestimate the challenges ahead for our nation. Not only did the previous government leave a dismal economic legacy, but a discredited political system and woefully incomplete efforts at constitutional reform as well. There is a tough road ahead for our coalition government. Its early popularity is likely to prove fleeting, the goodwill towards it temporary. Accepting this, it is wise for us instead to apply integrity, common sense and principle to every political decision. This approach is more likely to receive public support than the pursuit of an agenda set by media and public opinion. In looking at both the economy and constitutional reform, I believe we need only take the past thirteen years as our lesson. Short termist, incomplete and superficially popular measures have a habit of unravelling before our eyes.