Second Reading and Remaining Stages (Continued)
My Lords, I welcome the emergency Budget as a whole. The emergency that we face is that, as the Minister said, one pound in every four that we spend is being borrowed. I could not quite believe—if I heard correctly—the remark of the noble Lord, Lord Tunnicliffe, that Labour policies prevented the UK falling into recession. Under Labour, Britain had the longest and deepest recession on record. Britain has had the longest recession in the G20, with six consecutive quarters of negative growth—more than any other major economy. The coalition has inherited from its predecessor the largest budget deficit of any Government in Europe with the exception of Ireland. This is at the very moment when fear about the sustainability of sovereign debt is the greatest risk to the recovery of European economies.
The second quarter preliminary GDP figures published on Friday show that there is some light at the end of the tunnel, but there is still a need for the strong measures proposed in the Budget. The Office for Budget Responsibility has downgraded the previous Government’s overoptimistic growth forecasts to more sensible figures of 1.2 per cent for 2010 and 2.3 per cent for 2011. It has also increased the estimate of the structural deficit.
The majority of debt reduction measures are to come with proposed spending cuts. I welcome the forecast that public sector net borrowing will decline from the horrendous figure of £149 billion to £37 billion by 2014-15. Taking the consolidation as a whole, Table 1.1 in the Red Book—which, as a whole, seems much more straightforward this year—shows that roughly three-quarters of the total cumulatively will be made up of spending cuts by 2015-16. This is where the challenge comes. Paragraph 1.4 of the Red Book says that once you discount the ring-fenced departments, other departments could see average real cuts to their budgets of around 25 per cent over the four years. This is where the coalition must keep its nerve. There is likely to be strong departmental resistance and special case pleading against the 25 per cent reductions to their budgets. There are also likely to be strikes over the proposed pay freeze and reduced pension arrangements for much of the public sector workforce. The general public must continue to be told why these sacrifices are necessary.
I move on the tax measures proposed in the Budget. On VAT, the noble Lord, Lord Tunnicliffe, seems to be unaware of the former Chancellor’s view that VAT had to be raised and has not yet read the third man’s book on the subject. Like Alistair Darling, I understand the need to raise VAT to 20 per cent next January, while not especially welcoming it. I support the new bank levy. Likewise, I back the increase in insurance premium tax. I welcome the reduction in the main rate of corporation tax from 28 per cent to 24 per cent over the next four years, and the plans to reduce from 21 per cent to 20 per cent the small companies corporation tax rather than increase it, as the previous Government proposed, as the Minister stated. I accept the need for an increase in the capital gains tax rate but regret that there is not a lower rate for business assets.
I applaud the increase in the lifetime limit for CGT entrepreneurial relief. However, I feel that it sends the wrong message to our manufacturing companies to cut the annual investment allowance by 75 per cent from 2012-13 and the writing down allowances together with the abolition of the agricultural building allowance to nil by 2011. I declare an interest as a landowner. The situation is well summed up by the accountants Saffery Champness. It says, “It seems that tax relief on investment by businesses is not considered a priority”. How does the reduction in capital allowances square with the Government’s wishes to encourage a more manufacturing-based economy?
In the area of personal tax the situation is more complicated. The 50 per cent higher rate of tax proposed by the previous Government still stands but must be reversed as soon as possible. How much extra revenue does the coalition anticipate it will bring in? With regard to national insurance, despite the current Chancellor’s protestations in the run-up to the election, it is still the case that employer and employee rates are going to rise by 1 per cent with effect from April 2011. This will be mitigated to an extent by the fact that the level at which employers will start to pay NIC will increase by £21 per week above indexation from April 2011. The tax take from national insurance is forecast—per table C11 of the Red Book—to increase from £97 billion in 2008-09 to £128 billion in 2015-16. However, should not the Minister be a little concerned that it sends the wrong signal as a tax on jobs that may hinder the recovery? Would it not have been better to tax alcohol and tobacco more heavily or to consider motorway tolls? But overall, as I said, I support the Government’s decision to take rapid steps to cut the deficit. The dangerous result of doing nothing for a period was demonstrated by what happened in Greece. We could not take the risk of interest rates for our debt rapidly increasing.
Another measure I strongly support is the creation of the Office for Budget Responsibility. This has already brought a more realistic tone to government economic forecasts. However, it must be seen to be independent of the Treasury. First, this means not being in the same building. Secondly, as Sir Alan Budd told the Treasury Select Committee on 20 July, it must be free of ministerial interference. It did not, for instance, look good that the OBR tweaked its budget forecasts at the last minute to erase 175,000 job losses by 2014. Sir Alan also admitted that the OBR does not have its own economic models but uses the Treasury’s. The Treasury Select Committee in a separate report stated:
“It is unfortunate that the independence of the OBR has been called into question. This makes it all the more important to get the structure and the statutory basis of the permanent organisation right, as both the OBR and the Chancellor recognise”.
What progress is being made in finding a new chairman of the OBR?
I welcome another new body set up by the Chancellor, the Office of Tax Simplification. I am particularly pleased that John Whiting, a former tax partner at PWC, has been chosen to lead it. However, two issues are important: first, that it is genuinely independent; and, secondly, that Ministers are prepared to act on its recommendations.
The coalition has produced an interesting document, Tax Policy Making: a New Approach. I highlight two areas here: first, to reconsider the requirement to purchase a compulsory annuity at the age of 75; and, secondly, a review of PAYE to consider how the system could be made easier for employers to operate. My only criticism is that it fails to consider how this House could usefully further scrutinise finance Bills, building on the useful reports of the Economic Affairs sub-committee.
Overall, the emergency Budget puts in place a credible plan as approved by the OECD to eliminate the UK’s structural current budget deficit over the lifetime of this Parliament. The medicine is tough and may dampen growth in the short term but it should help to support a more sustainable recovery in the longer term.
My Lords, I have been in favour of a serious cut in the budget deficit since before the election. When I said that, I had no idea which Government would be in power so my desire for a budget cut had nothing to do with political preferences. We have heard that in his March Budget, Alistair Darling proposed a time-path of cutting the deficit over the course of five years. We even had a debate in your Lordships’ House in which the noble Baroness, Lady Noakes, questioned why the Government had not decided to comply with the Maastricht criteria by 2015. I remember speaking in that debate.
The Chancellor has now proposed his own time-path over the next five years. There are some significant differences but they are less dramatic than people think. It is important to note that we have already had a debate about how soon and how much to cut because of whether the current economy is in a fragile or strong recovery, on the brink of a double-dip recession or whatever. That uncertainty remains despite the fact that for the last three quarters we have had positive growth of output—a small 0.4 per cent in the last quarter of 2009, 0.3 per cent in the first quarter of 2010 and then suddenly 1.1 per cent in the second. We have to average these things out and not take recent numbers all that seriously but there have been three quarters of percentage growth so there is a recovery. We do not know how fragile it is. That is a problem in economics: we do not even know what the recent past is, much less what the future will be.
Given that we have had three quarters of recovery, it is worth examining what the Budget does. It has a mild cut in 2010-11. The numbers are on page 37 of the OBR’s Pre-Budget Report. In table C13 and C14, for 2010-11 the cut is only £3 billion—the current spending is £640 billion as in the Alistair Darling Budget and £637 billion in the Osborne Budget. In terms of investment expenditure, there is a slight difference in the two projections. Alistair Darling projected about 1 per cent real growth in current spending over the next five years. The Chancellor has eliminated that 1 per cent and decided that current spending ought to be constant in real terms.
It is not so much that the cuts in spending will be severe this year and so we may have a double-dip recession, but a political gamble that the size of the cuts grows over the Parliament and that more severe cuts come in the third or fourth year. If the Chancellor wants to a take a political risk, that is his business. As an economist, I note that he has left current spending constant in real terms. That is perhaps the best risk-averse strategy if you are uncertain about growth. If you are pessimistic about growth, it is best to leave current spending constant in real terms so that it grows a little year by year but not much more than that. That requires the Chancellor to do a variety of things, such as freezing public sector pay for those above a certain level, freezing various benefits or indexing them slightly lower, perhaps at CPR rather than RPI, and so on, although I do not wish to go into too much detail on that.
The spending strategy is quite straightforward but current spending should be kept under control. To those who disagree with that and would like spending to be higher, I say that it should be higher only if it is investment spending and not current spending. Even if it were desirable to do so, I do not believe that we would get a revival based on consumption or current spending. A revival has to be based on investment. If the private sector is not ready to invest, the Government can borrow in benevolent surroundings but only if they do so for investment purposes. The markets would probably tolerate that. That, so far as I can see, is the strategy to follow. In my view, the risk is not that there will be a double-dip recession, although no one knows. Indeed, as noble Lords have said, especially the noble Lord, Lord Stern, if we have a double-dip recession, the Government should be ready to relax the constraints —not just through monetary policy, as I think the noble Lord, Lord Razzall, said, but also through fiscal policy.
The advantage of overbidding on the cutting side, if I may put it that way, is that the Chancellor will have some room in the future. If he did not cut too much now, he would not be able to relax later, so I think that he has front-loaded the psychology of the pain so that he will be able to retract if there are problems later. However, I suspect that we will have not a double-dip recession but very weak growth of perhaps 1.2 or 1.3 per cent this year and maybe somewhere between 2 and 2.5 per cent next year. Some of the sluggish growth relates to longer-term problems, as the noble Lord, Lord Stern of Brentford, said in an excellent speech. The sources for rapid growth, or an accelerated 3 to 3.5 per cent growth, are extremely weak in the view of economists. Unless we do something really fantastic by way of green technology or some such innovation, we will face severe competition in the standard manufacturing sectors from Asian economies, which have not suffered a recession. They are growing very fast and are acquiring, through research and development, the kind of industries in which we thought we had a temporary monopoly. There are already complaints in Germany and the United States that various Chinese industries are catching up in relation to some of the capital goods that China used to import but now exports. I think that we will have to be quite organised about a growth spurt, but it will have to come from investment and not from current spending.
I want to say something about taxation. My personal preference would have been for a higher proportion of tax increases rather than spending cuts but that is a judgment which a Government in power have to make. I welcome the VAT rise. I have always been a hawk on VAT and in a speech some time ago in your Lordships’ House I even said that the Chancellor should have taken the opportunity to remove the zero-rating on VAT and go all the way. I do not mind saying that I have been sacked twice from the Front Bench for saying that, but the IMF agreed with me that zero-rating of VAT should be removed and that we should have no sacred cows when it comes to taxation. We have to reduce our consumption and raise our saving and investment. VAT is a tax on consumption. We should think much more progressively about using VAT and not be worried by what I might call the standard economic 101 response that it is a regressive form of taxation. It is not quite true, but we ought to define it.
I am worried that the Government have not taken the opportunity to do very much about taxation of work. I do not know how national insurance contributions got to be where they are, but it is interesting that we tax earned income more than we tax unearned income. Someone in employment pays both income tax and NIC. If I were sitting on my butt at home drawing dividend income I would pay income tax only, not NIC. There is an opportunity for this or any Government to think about integrating income tax and NIC and the real extent of how much we tax earned income will become clear. It is about one-third. Having to pay 30 per cent plus tax on earned income is something that we ought to think about seriously. We should try to reduce tax on work and raise it on spending.
There is a lot of scope for simplification and integration of tax. I do not see why there is an upper limit on NIC. That makes it very regressive and it should be brought into line with income tax. I am not, and never have been, in favour of the Liberal Democrat proposal to increase personal allowances from £6,500 to £10,000. I have spoken about that before. I think that that would be a regressive step. I commend the fact that the Budget limits the regressive effect of that tax cut by not letting the higher income levels earn the benefit of raising the personal allowance as well. There is something else to think about regarding personal allowances. We could make them more into a tax credit rather than maintaining them as they are, but I have spoken before on that so I shall say no more.
I hope that the Government do not adopt a graduate tax. I beseech them not to do that. I would much rather British undergraduates paid the same fee that foreign students pay, which is roughly £10,000. I have been advocating that since 1997. We should allow universities to charge whatever fees they want and remove the subsidy for undergraduate tuition fees. The money saved could be put into research for universities, which would be a much better use of money and more growth-enhancing than having 18 year-olds who have nothing better to do but to go to college. There is no logic in subsiding them up to £7,000 a year over three years—£10,000 would be the right amount. We currently subsidise EU students coming to British universities, and we could eliminate that if all students, from wherever they came, had to pay the same amount of £10,000. I hope that the Government will consider these mild proposals.
My Lords, 36 years ago almost to the day and the hour, I made my maiden speech in the other place. I spoke in the Second Reading of the Finance Bill, and as punishment was put on the Finance Bill Committee for the next five years. Luckily, that cannot happen to me here. It was my first speech in Parliament but it was almost one of my best. Inflation at the time was raging at 20 per cent, which is completely unsustainable and I came to the conclusion and suggested in my speech that it would result in middle-class revolution. I said that middle-class people would be marching on the streets between the fruit-growing areas of Evesham in my constituency and the Malvern Hills. I was completely wrong—they all stayed at home—but it was a magnificent speech.
I am afraid that this one will not be as good for various reasons, not least that it will be short—I have almost finished it already. As I enter my dotage I do not remember or even understand the clever economic arguments that one used in the past. In 1974 I was still running a semi-respectable econometric forecasting company—the noble Lord, Lord Burns, was a part-time member. Terry Burns, as I used to know him, was absolutely brilliant as a computer and econometric programmer. He was working at that time on the London Business School forecasting model, commanded—I think that is the right word—by the inimitable Professor Jim Ball.
The other thing that I have to consider in this speech is not to be controversial. I suppose that means being anodyne. However, I hope that your Lordships will forgive me if I say one thing of substance about the Bill that we are currently debating—I shall be as uncontroversial as I possibly can be in saying it. It is, I assume, a matter of no controversy that there is a debt problem in this country. It is also a matter of no controversy that the coalition Government are adopting a fiscal stance in terms of taxation and public expenditure policy to remedy that situation. I understand that it is, in a broad sense, supported by the Opposition. There is debate about timing and, because it is controversial, I do not intend to go into that.
I simply want to put before your Lordships the point that there is a strategic alternative to what is going on at the moment. It is not one that I support—I have to give an opinion about that—but there is one. The noble Lord, Lord Razzall, hinted at it. In most cases similar to the one we are in with high government debt, there could be a monetary policy aimed at stoking up a bit of inflation to bring down the cost of the debt in real terms. That is quite normal for Governments. It is a perfectly reasonable alternative and may, indeed, come about by default at some point, but the problem with it is that if you have a little bit of inflation, it can, in bad times, become quite big inflation. That was the point of my raising this in my maiden speech when we had 20 per cent inflation. One fifth of people’s savings were collapsing every year. It seems to me that a policy that implicitly or explicitly is based upon inflation, which could be an alternative to what we have at the moment, is not a brilliant idea. Even if you have low inflation, it is not good news for those dependent on savings or on fixed incomes. I hope that it is not too controversial to say that I support the present strategy so far as fiscal policy is concerned.
I have one final, very small, point, which I hope your Lordships will not feel is too sycophantic. This House in its present shape contributes a little bit towards the balance of public expenditure by not paying its Members. If there were to be a change to an elected Chamber where professional Members were fully paid, that situation would alter. I simply make that point. It is a very small point in connection with the revision of this Chamber, and there are much wider issues that I hope noble Lords will allow me to come back to on another occasion, but I would tax noble Lords’ patience and it certainly would not be relevant and would be controversial if I went down that way so, on that basis, I will sit down.
My Lords, it is a great pleasure to follow my noble friend. I congratulate him on his fine maiden speech and, in particular, on his words about the dangers of inflation. As he said, my noble friend represented a Worcestershire constituency in the other place for 36 years, and I know he represented it with great distinction. He was a Minister, deputy chairman of the Conservative Party and served as chairman of the 1922 Committee for nine storm-tossed years. It is testament to his admired calm and strength of character that he managed to emerge from this experience with his sanity and humour still intact.
My noble friend is also an author. His books include The Cotswold Murders and The Cotswold Mistress. Disraeli once remarked:
“An author who speaks about his own books is almost as bad as a mother who speaks about her own children”.
What with murders and mistresses, my noble friend’s literary reticence does not surprise me in the least. We welcome my noble friend to your Lordships’ House.
The Chancellor’s Budget deserved praise for its aims, construction and delivery, but of course it was just a June hors d’oeuvre before October’s main course. I favoured broadening the VAT band rather than raising the scales. It would have yielded the same revenue and I fancy that Treasury officials recommended this option. It remains incongruous for the United Kingdom to keep one of the narrowest VAT bands in Europe while espousing the virtues of tax incentives to businesses and preferences for indirect taxes and lower direct taxes.
I supported the establishment of the Office for Budget Responsibility, but it must stay separate from the Treasury and free from ministerial interference, broadly along the lines advocated by the noble Lord, Lord Stern, earlier. It is required because circumstances have changed. During my spell as a Treasury Minister more than 20 years ago under my noble friend Lord Lawson, ministerial tampering with growth forecasts was strictly out of bounds. Yet it became clear each year under Gordon Brown that growth forecasts were manipulated for political purposes. Indeed, the noble Lord, Lord Mandelson, confirms this practice in his memoirs.
During our debates in the past three years, some noble Lords have heard me dissenting from the then Opposition’s policy of sharing the proceeds of growth adhered to by the Conservatives long after it became apparent that the Labour Government’s spending had emptied the kitty. Consequently, and in view of the grave condition of our public finances, I rued the Opposition’s vow to ring-fence the health and international development budgets.
My late noble friend Lord Bauer, a colleague of the noble Lord, Lord Desai, at the London School of Economics, would have raised an eyebrow over protecting overseas aid. He would have reminded us that it is a process by which the poor in rich countries often subsidise the rich in poor countries. Evidence of these government-to-government subsidies, fitting Bauer’s maxim, come from Afghanistan and elsewhere. Apparently, the Dubai construction industry is a beneficiary of siphoned off aid redirected by corrupt rulers. Doubtful schemes said to be assisted by British overseas aid include fraud in the Kenya education sector, 700 “ghost” teachers in Malawi and money spent on strengthening the voices of older people in the Ukraine.
Julian Harris of the International Policy Network, which scrutinises aid, said:
“It is extremely irresponsible to increase … aid … while at least a quarter of projects are failing”.
What provides Britain with better value for money, pound for pound: the ring-fenced DfID or the unprotected BBC World Service? Eight years ago, after the death of Lord Bauer, the noble Lord, Lord Desai, wrote that his views had won the respect of time—but not at DfID. Lord Bauer, a classical Smithian, would have raised another eyebrow; namely, that a Government in office for three months had failed to appoint a trade Minister.
Of course, it is heartening to hear the Prime Minister’s declaration about the need to attract inward investment and explore trade opportunities in emerging markets partly by obliging the Foreign Office to become more commercially minded. Yet can these outcomes be achieved unless the Foreign Office budget is protected? As it stands, the Foreign Office budget is about a quarter of the size of DfID’s. I would merge them, as of old, giving the Foreign Secretary control with a Minister of State responsible for DfID. I understand that up to 27 people are now entitled to sit around the Cabinet table. One fewer would be a start, still leaving no fewer than 18 more table sitters than at the height of our empire. It is right, of course, to reduce the numbers of Members of Parliament, but why not cut the number of Ministers too?
Last week, the Prime Minister spoke about competitiveness with great enthusiasm. His precise words were:
“We have got to fight the battle over free trade all over again”.
I am sure that he is familiar with the name of Professor Paul Krugman, a Nobel prize winner in economics. Krugman, when invited to define an economist’s creed, replied:
“I understand the principle of comparative advantage and advocate free trade”.
I wonder whether the Krugman creed applies to overseas aid or pages 16 and 17 of the coalition’s programme for government devoted to energy and climate change. These pages amount to at least a dozen public spending pledges worth more than £200 billion during the next decade. Ben Warren, a partner in Ernst and Young, said:
“We don’t know how the government intends to raise money, and we do not know the green investment bank is going to leverage in private capital”.
Most of the cost will ultimately fall on consumer bills. Funded that way, boosting the use of renewable energy may prove unaffordable.
Thus I was concerned over the weekend to read the Energy Secretary evangelising about the need to increase subsidised wind turbines when priority should be given to nuclear power. Your Lordships’ Economic Affairs Committee estimated that wind was at least 50 per cent more expensive per unit generated than nuclear. Whatever we think, the renewable targets will not be met. Gas may be the best answer to bridge the gap between 2015 and the new nuclear stations. Both gas-fired power stations and fuel cell technology in urban and rural areas should be studied in greater detail and with greater urgency.
Professor Dieter Helm from the Oxford Energy Institute has calculated that the added cost to business of the coalition’s energy plans could be as high as 25 per cent—hardly a spur to competitiveness. We already know that climate change policies constitute 21 per cent of our industrial bills and last year the burden of green taxes and regulations amounted to £26 billion. The ITEM Club has stressed that recovery will not come from consumers this time but from the business sector. My fear is that yet more additional costs could force manufacturing businesses abroad and limit our growth rate. A danger exists that the energy measures of the coalition as set out could damage our economy far more and far sooner than any projected global warming when the economy is in such a vulnerable state as it is to day.
The same anxieties haunt Congress. It and the president are unwilling to risk higher taxes in order to subsidise China. Even President Sarkozy, never the soundest man on parade, has warned about green protectionism; and Canada, a Kyoto signatory, has increased its emissions more than the USA, a Kyoto dissenter, simply to protect its competitiveness on world markets.
I support the coalition and its general direction, but it must not impose unnecessary costs on British industry in the name of fashionable doctrines, however well intentioned. Otherwise it will find that growth is blunted and our better manufacturers move abroad for fear of lacking competitiveness.
My Lords, I add my congratulations to those already given to the noble Lord, Lord Ryder. I think he said he made his maiden speech 36 years ago on a Finance Bill and, for his sins, got put on it again either for five years or five times—I am not sure which he said. For my sins, as Chief Secretary I took those Finance Bills all the way through the House, whether it was for five years or five times, and there were often two a year in those days. I cannot remember what I said so I hope he will forgive me if I cannot remember what he said at that time.
I will not speak about the Finance Bill this year. I want to speak to speak about the central economic forecasts of the present coalition Government. The central policy, as expressed in the emergency Budget, was reducing the deficit. The only other major policy, described as a new policy, was the Office for Budget Responsibility. Unlike 1997, when the Monetary Policy Committee was a genuinely new policy given real powers, the Office for Budget Responsibility has powers only to forecast, and those forecasts can, of course, be ignored. The OBR’s independent forecasts have been semi-criticised by many as not necessarily being so independent. The criticism of Sir Alan Budd was much overstated. He himself admitted that he was a little naive. Perhaps he should learn that he should never be naive about the Treasury and its forecasts. Otherwise, I would not doubt his integrity or his honesty, either on this occasion or on any other.
There is no shortage of independent forecasts, as the noble Lord, Lord Sassoon, will know. The Treasury itself in most, if not all, of its documents constantly quotes independent forecasts. It seems a little insulting to suggest that the Treasury’s civil servants were so lacking in independence that they were not really independent at all and allowed Chancellors over the years to override what they were saying in their published documents.
The noble Lord said that one of the benefits is greater transparency. I am sorry to see that the noble Lord, Lord Sassoon, is not transparent on every occasion. In answer to a Written Question from me, asking him for various discussions that the Chancellor may have had with the Governor of the Bank of England, he said:
“As was the case with previous Administrations, it is not the Government’s practice to provide all details of such discussions”.—[Official Report, 21/7/10; col. WA 220.]
So the noble Lord, Lord Sassoon, is not transparent on all occasions, even if he is now telling us that the OBR is.
What is clear from the OBR’s forecasts is that, unlike what was said in the emergency Budget about there being no alternative to the Government’s Budget policy, there clearly is an alternative and it was shown in the pre-Budget forecasts. In the pre-Budget document we were told that if the pre-Budget forecasts had been based on the predecessor Government’s policies, the deficit would come down to 3.9 per cent of GDP in 2014-15. In the June Budget document, we were told the Budget deficit would come down to 2.1 per cent. Even if it were to come down to zero, the difference is not so huge as to warrant such major cuts as are proposed in the emergency Budget. In any event, huge uncertainties underlie those forecasts. On page 7 of the pre-Budget forecast, under the heading, “Constructing the forecast”, we are told of the uncertainties five times within some five lines. Even the OBR and its forecasts, therefore, are massively uncertain. Despite that, a substantial programme of public expenditure cuts is now being planned, based on all those uncertainties in the OBR’s forecast.
It is clear, then, that there is an alternative. Not only is the pre-Budget forecast of the OBR not so different from the Budget forecast for 2014-15, but page 99 of the Treasury’s Red Book shows net debt remaining in 2014. Total net debt is expected to be 69.4 per cent of GDP; it would have been 74.4 per cent under the pre-Budget forecast. Although the Government’s Budget anticipates the public finances being in better shape—in their terms—than under the previous Government’s forecast, the previous forecast could by no means be described as disastrous. In any case, as I have said, there are huge uncertainties in anybody’s forecasts.
Much depends on the assumptions made. For example, the pre-Budget forecast took the predecessor Government’s growth forecasts, which many thought were too optimistic. I agree that they seemed too optimistic, although I am bound to say that the figures for the latest quarter, showing 1.1 per cent growth—which is the equivalent of nearly 4.5 per cent per annum—suggest that I was being too pessimistic. Perhaps the previous Government’s growth forecasts were accurate and would have helped cut the deficit rather faster than the present Government’s plans. However, it is much too soon to suggest that growth next year will be that high. I would not suggest for a minute that it is likely to be, because none of us knows—the uncertainties remain. The forecasts may have been reasonable—it may even be that the inheritance of the Government is rather better than they have been telling us—but the figures do not provide certainty, and it is planning major policy on the basis of such uncertainty that is so wrong.
Against that uncertain background, the Chancellor has chosen to make the savage public expenditure cuts that he will tell us about after the comprehensive spending review. Even if it is the right policy to cut to that degree, what are the chances of success? The Chancellor is setting about it in the right way—as Chief Secretary, I had to make rather a large number of cuts over many years—and asking the departments to choose their own priorities. They will have to set out public expenditure cuts in their own departments ranging from 25 per cent to 40 per cent, with the Chancellor, or the Cabinet if necessary, deciding. The departments know their own priorities.
Overall, when you are spending £700 billion of public money, I would not deny that there is room for cuts. However, I would not have ring-fenced any department, not even the National Health Service. After all, the National Health Service’s expenditure in 2008-09 was nearly £110 billion—it will be much higher now in real terms. To pretend that there is no room for substantial cuts in administration out of that level of expenditure is surely wrong, so one could have reduced the cuts even more.
Public expenditure can be cut, and it is clear that this was the Conservative Party’s agenda. Indeed, even if there had been no deficit, these cuts would have been proposed so that it could make the tax cuts, which is what it is really about. It is going to have considerable difficulty in making 25 per cent cuts, never mind 40 per cent, in every single department.
I have spoken to a number of other former Chief Secretaries and Chancellors, Conservative ones as well, and none of them thinks it can be achieved. If it is achieved, as the Government seem determined it will be, I am sure they will appreciate, although I am not sure their coalition partners the Lib Dems appreciate, what it will mean to those departments to make 25 per cent cuts in every one of them over a four year period. I hope we never come to it, but I fear we may if the House accepts and the Government accept that what they are doing is right.
The OBR has shown, given its uncertainties of forecasts, that it will no longer forecast what exactly is going to happen, so we should listen to Ben Bernanke in the United States, where they also have uncertainties. Indeed the phrase used by Bernanke was, “unusually uncertain”. Despite all that, we are going to get these massive cuts, come what may. I can only hope that by keeping interest rates low, the Bank of England would offset some of the worst of it.
The Bank of England is truly independent of course. It is more independent than the OBR because it has an Act of Parliament already. We have always known that a senior Treasury official attends the monthly meetings of the Monetary Policy Committee of the Bank of England. What we have never known is whether he sits there saying nothing, because no previous Treasury Minister has ever been willing to say what exactly goes on at those MPC meetings or whether the Treasury official joins in. He is not a member of course. Now we know that he does. We had an answer the other day which I think the noble Lord, Lord Sassoon, may regret, but it is worth quoting. He is shaking his head, but let me quote what he said, because I promise him that it will come back to him. It was on 20 July in answer to a supplementary question from me, in which I said:
“the noble Lord has just said that it is not for him to comment on what the Bank of England does”,
but I pointed out that a senior official from his department attends those MPC meetings. His reply was very interesting.
“My Lords, it is correct that a senior official of the Treasury sits in on the monthly Monetary Policy Committee meetings, but that official is not a member of the committee. I have performed that function myself on one occasion, and I understood that it was my duty to bring to the attention of the MPC anything the Treasury thought it ought to be aware of”.—[Official Report, 20/7/10; col. 908]
I am delighted to hear that, because it is quite sensible. I never really did believe, because it is so important an issue, that the Chancellor never spoke to the Governor of the Bank of England on this and many other matters. The sensible thing to do was to talk to the Governor of the Bank of England. In due course, if, sadly, they go ahead with these policies, will the noble Lord, Lord Sassoon, assure us that the Treasury, if not the Chancellor himself, will, through the senior official at the MPC meetings, tell the MPC the Chancellor’s or the Treasury’s views on the need to offset the worst of the public expenditure cuts by keeping interest rates low, and possibly by increasing quantitative easing? I know that the noble Lord, Lord Higgins, thinks that that is of no use anyway but it is a worth a try. It is better than doing nothing and letting the worst effects of the public expenditure cuts take effect. I have some more written questions—
I am sorry to misquote the noble Lord. I thought that that was what he was getting at, but never mind. I apologise to him, but I am not apologising to the noble Lord, Lord Sassoon. I want him to give us an assurance. In the event of the cuts turning out to be as bad as many are now indicating, I am not alone in suggesting that that could reduce economic growth, not see it increase. The ITEM Club, which is truly independent, has said the same as the IMF in suggesting, based on Treasury figures, that it would have an effect on economic growth.
Finally, Martin Wolf, in a recent article in the Financial Times, put the arguments well for whether the economy should be tightened in current circumstances. He is a highly regarded journalist, as I am sure the noble Lord will agree, and he put the central issue as follows. If tightening is correct, which is the Government’s policy,
“failure would bring fiscal and financial shocks”.
On the other hand, if tightening is not correct, it might,
“threaten recovery and might trigger further … shocks”.
The consequences of tightening, as I have said, could be very serious indeed. Nevertheless the Government, with Lib Dem support, seem bent on pursuing that policy. I am not sure whether the coalition partners fully appreciated what they were agreeing to. The Government, however, have always said—I started off with this—that there is no alternative. In fact, as I have shown from the OBR’s own forecasts, there is an alternative. I hope that the Government will take it.
My Lords, I begin by thanking your Lordships for the many kindnesses and considerations that have been shown to me since my introduction on 13 July. I also thank the members of staff in your Lordships’ House for their very helpful guidance and the tips they that have given me, such as how to find the right corridor to go along. I have sometimes found myself a little lost but they have always shown great concern and been very kind and helpful. I thank them very much. To many outside this Chamber, it may seem quite a simple journey along the Corridor from another place to your Lordships’ Chamber, but there is much to learn here. It is rather nice that, as somebody who would normally be categorised as a baby boomer, for the past two weeks I have felt myself to be a new girl. That has given me some considerable pleasure.
I have also had experience in recent years of working with Members of your Lordships’ House on issues that are very important to me, issues in which I showed interest in another place and issues on which I hope to continue my work here in this Chamber. I was privileged to be a member of the pre-legislative scrutiny committees on the then Mental Capacity Bill, so ably chaired by the late Lord Carter, and on the Mental Health Bill, so ably chaired by the noble Lord, Lord Carlile of Berriew, who brought a great deal of personal experience to his chairmanship in what was a very complicated and difficult piece of legislation. I enjoyed that work and hope to continue it in your Lordships’ House. I have a particular interest in mental health, learning disability and autism, where I have a very personal family interest. I look forward to continuing some of that work not least because much of the legislation in this area is new to the statute book. The Autism Act 2009, which your Lordships dealt with in the last Parliament, has yet to be fully implemented. Perhaps I may say to my noble friends on the Front Bench that I shall be quite vigilant in pursuing that, to make sure that the Government implement that legislation as it was intended by both Houses of Parliament.
I studied in great detail this very short Finance Bill, and I have to say that I could not find anything in it that was non-controversial. I was given some guidance that said, “If you say something in your maiden speech and somebody is tempted to stand up and intervene on you, then don’t say it”. So I have spent the whole weekend studying this very short Bill—probably more time per line than I have ever given to any other piece of legislation. I have to say to my noble friend Lord Spicer that I rather have chickened out. I hope that your Lordships will be relieved that I just want to make two short points which are associated with the Bill. I see them as a backdrop but I am in no way going to venture into any of the taxation legislation that is before us today.
The first point concerns banks. I think we all agree that there is a need for small and medium-sized businesses not only to start up but to grow, and that a lot is vested in this country in their ability to do so, and to do so successfully. I say to my noble friends on the Front Bench that I believe that the Government need to pursue banks to make sure that there is sufficient lending to the small business sector to enable it to make the most of its and the country’s opportunity, not only by contributing to growth but, very importantly, by creating jobs. I know that the Department for Business has today made statements about what it intends to do with the banks, but all of the policies before your Lordships’ House today will benefit from a viable and successful small business sector that can access funding from the banks. Unlike other parts of business—large corporations, for example, and many of the bigger incorporated businesses which have access to other sources of money and borrowing—small and medium-sized businesses are very dependent on the big clearing banks for funding.
On the subject of banks, there has to be a balance struck between their ability to lend and, in the light of our recent experience of the banking sector, the viability of banking both in this country and beyond it as well. I am very concerned that on Friday, when the Committee of European Banking Supervisors announced its assessments of the stress tests of more than 90 European banks, including UK banks, it came out very late in the day. There may have been a very good reason why it felt that it was better to announce the results after the markets had closed, but it took a lot of analysis by people over the weekend to identify that these assessments were in fact made on the banks’ trade books, not on the whole balance sheets. Further, if you dig really deeply into the CEBS website you will find that the sovereign debt of these banks was not taken into account at all. I am raising the issue in today’s finance debate in order to say to my noble friends that I believe that, while we need to make sure that banks in this country can lend, as I have said, we also need to make sure that any assessment of banks, either individually or collectively, is both comprehensive and transparent or we will not have learnt the lessons of what has happened recently in the banking sector.
Finally, there is the question of the deficit. Noble Lords will be pleased to hear that I am not going to venture into the deficit—but it is huge. It is often quite difficult to explain to people what in tangible terms it means to them and to their everyday lives, and the necessary measures that have to come forward. Debt, and interest on that debt, is accruing at a rapid rate—the figure which I was given this morning was £350,000 a minute. In the six minutes that I have been speaking, more than £2 million of debt has accrued in this country. As this is a maiden speech, I am sure that your Lordships are being very polite—otherwise you surely would have said, “Please sit down before it goes up any more”. I will sit down, but I wanted to flag up the fact that this is something that we have to take seriously. It has to be tackled because the money is going out as fast as it is coming in.
My Lords, it is a great pleasure and privilege to follow my noble friend Lady Browning, and I congratulate her on a very eloquent and well judged speech. Her speech illustrated that she brings to this House a huge and valuable breadth of experience on many topics. She served some two decades in the other place, scrutinising legislation, but also spent several years as a Minister—lastly and perhaps most notably at the Ministry of Agriculture, Fisheries and Food, where she made a huge impact. She also spent several years as a shadow Cabinet Minister and vice-chairman of the Conservative Party. Before entering Parliament, she had further varied experiences: as a tutor in adult education; as an auxiliary nurse; in business, as a sales and training manager and as a self-employed entrepreneur; and 10 years as chairman of Women into Business. As she says, she also has a very active interest in mental health and has been an active vice-president of the national Alzheimer's disease society as well as having a personal interest in autism. So it is clear that she has very much to bring to the House on a wide range of matters. We welcome her and look forward to her future contributions.
Before I delve into the Finance Bill, I put on record my interests as a director of a number of businesses affected by the tax provisions in this Bill, and in particular of a life company involved in pensions and savings. I shall touch on some of the issues in the Bill that relate to that. I shall talk about some of the specifics in the Bill but, first, I shall say a few words to put it in context. There has been a lot of discussion about fiscal judgment and the scale of the deficit. That is, of course, important—but it is perhaps even more important to look at the policy in the framework of a long-term policy for stimulating growth and wealth creation in the economy. Economic growth is ultimately not determined by one year’s deficit or tax levels but by the size of the labour force and its productivity, which is driven by the success we have in driving entrepreneurship and innovation in the economy, the level of investment and perhaps also our success in generating an environment of free trade. If you start to analyse those factors and their relationship to the Bill, wealth creation as the starting point derives from enterprise and innovation and is crucially dependent on the stimulation of a low-tax economy.
There are two components of any economy—the component that pays tax and the component that spends tax. It is vital that any economy keeps those two sectors in balance. If we end up with too much tax falling on the sector that pays tax, the consequence is to drive out wealth creation, to destroy growth and reduce the future welfare of individuals and society. At the beginning of any discussion about fiscal policy and public spending, we must ask how much tax we can afford to pay in a modern, competitive economy. That is the starting point—not the shopping list of what we would like to spend the money on.
Since the 1960s, for some 50 years, the UK has only briefly had government tax receipts rising above 40 per cent of GDP. The highest period, when they rose into the mid-40 per cent range, was in the early 1980s, when a previous Government were restoring fiscal balance after a period of spending excesses. But for most of the 50 years since the 1960s, public receipts have ranged in the late 30 per cent range—36, 37 or 38 per cent of GDP. You might think pragmatically, therefore, that experience tells us 40 per cent is something of a natural ceiling on the amount of tax that can easily be raised from the UK economy without damage. There are reasons why that might be true—the need to maintain incentives, the need to maintain international competitiveness, and tax efficiency. Clearly, you get to a point where, as you raise taxes, the tax yield starts to fall rather than rise, particularly as economic growth is depressed. It was perhaps for that reason that the last Conservative Government’s manifesto in 1997 set out a commitment to keep public expenditure at the level it had reached—below 40 per cent—as, if you like, a golden rule.
The actual course of public expenditure since 1997 was that it grew remorselessly as a percentage of GDP almost year by year since 2000, to reach 48 per cent of GDP in 2009-10. Government receipts, however, have stayed at the historic levels or 38 or 39 per cent. It is that 10 per cent gap, between the level of public spending and the level of receipts that the Government can raise through taxation, which has caused the budget deficit and the crisis we are now facing. Whatever the banks have done, it was never sustainable for a Government to believe that they could carry on increasing expenditure to the level they had, up to 48 per cent of GDP, and then to go on borrowing at that level.
The right answer is not to seek to raise taxes to 48 per cent, which would be a level we have never achieved in this country, but to move spending back to an affordable proportion of GDP, to get the balance between the taxpaying and the tax-spending parts of the economy back into a sensible proportion. That is the way to promote growth in a low-tax economy that ultimately creates wealth that we can all share. I therefore welcome the plans set out in the Budget to reduce spending back to below 40 per cent of GDP by 2015-16. That is an essential plank of sound financial management and restoring a growth economy. I also welcome raising tax thresholds to the low paid, as a first step in the benefits of low taxation—it is a policy that I have written about and argued for over many years and I am delighted that it is now part of government policy. I also welcome, of course, the plan to start the reduction in corporation tax rate and the aim to reduce corporate tax rates to 24 per cent.
Many noble Lords have raised arguments about the speed of adjustment and whether the speed of adjustment back to an affordable level of spending is appropriate, but as the noble Lord, Lord Desai, pointed out earlier, these so-called cuts are cuts against planned public expenditure. If you look at the proposed course of public expenditure set out in the Red Book, you will see, as the noble Lord said, that current public expenditure is more or less flat over this period, reducing, I think, by 1 per cent in real terms by the end of the planning period. I have no doubt that there are many opportunities, having had such a large rise in public expenditure in recent years, to create efficiencies, to cut out waste and to find low priorities which can be reduced, which will ultimately benefit the efficiency and productivity of public services.
If there are those who believe that a fiscal stimulus is still required—or a greater fiscal stimulus; the noble Lord, Lord Stern, said that the Government should keep this under review—we should remember that there are two ways of delivering a fiscal stimulus. You can either spend more, or you can reduce taxes. Against the background I have just described, I have no doubt that, if there is need for more fiscal stimulus, it should not be created by carrying on spending at profligate levels; it should be done by taking earlier action to meet the tax objectives that will restore growth in the economy.
At a time when the private sector is struggling in an austerity period, when many in the private sector are suffering low or negative wage rises, reductions in overtime and so on, it seems perverse that anyone should propose that more money should be taken out of people’s wage packets, or VAT raised higher than it has been, in order to carry on subsidising inefficiency or waste in the public sector. It is much better to do what we need to do to create an efficient public sector. If a fiscal stimulus is needed at any point, the Government should move further and faster to reduce taxation.
The second element of driving growth and productivity is investment. The counterpart to investment is, of course, a high-savings economy. High-savings economies are high-growth economies. At full employment, a high-savings economy is one in which more of the output is devoted to investment goods, driving future wealth creation and future opportunities to raise incomes and welfare. Therefore, I welcome the proposals to encourage savings in the Finance Bill. In particular, I welcome the proposal to end the tax penalty for high earners who put money into retirement provision. Like the Minister, I understand and accept the need to limit the tax benefit from pension tax relief for high earners, but I believe that a much more sensible route to go down is to have a limit on the annual contribution, which is fairer and less likely to damage the maintenance of pension schemes for those companies that have schemes covering the whole employee workforce.
I should like to raise a few points that the Minister and his colleagues might consider in the review that they are conducting. The first is whether the annual limit might be smoothed over two or three years so that, when somebody comes into an inheritance, makes a house sale or receives a redundancy payment, for example, they can take advantage of that and put a lump sum in the pension scheme, perhaps spreading the annual allowance over two or three years. Of course, that would be done without an increase in the total amount of money that people could put into a pension scheme. Secondly, I ask my noble friend to consider whether, as part of the reforms, the Government might abolish the lifetime limit on the value of a pension pot. If there is an annual limit on the amount that can be put in, it seems unnecessary also to limit the success with which that is invested. It is quite difficult for people who are near that limit to understand what the investment performance will be and whether they should put more money into the pension. If they happen to be successful, they will be penalised, so it seems to me that we should consider just limiting the amount that is put in, as that would be a fairer system. Finally, I suggest that the Minister might consider removing the distinction between the annual allowance for pensions and that for other forms of tax-efficient saving, such as ISAs. Many people would be encouraged to save more if they knew that they did not have to lock away the money on day one until retirement but could build up sums in an ISA and transfer that to a pension later. However, these are all points to consider and I very much welcome the review that will take place.
My final point is on the importance of free trade in encouraging growth and wealth creation. Free trade is perhaps not directly related to the Bill, but I am encouraged by the emphasis that the Government are putting on encouraging trade between the faster-growing economies around the world. I cannot resist the temptation to say to my noble friend that, when the expenditure review comes out in the autumn, we might look carefully at the amount of money and the priority given to expanding the European Union’s External Action Service and diplomatic posts and compare that with the amount of money that we put into supporting our own commercial embassies and other forms of support overseas.
In summary, I am extremely encouraged by the aims of financial policy set out in the Bill and by many of the measures in it. I believe that the Bill deserves every support.
My Lords, I add my congratulations and welcome to the noble Lord, Lord Spicer, who is an erstwhile tennis partner. More recently, he found himself showing me round the Carlton Club—as much to his surprise as mine, I think. It reminds me of his distinguished service as chairman of the 1922 Committee. I wonder how many years there will be before another revolution, so that the 1922 Committee will be the 2012 committee. I am sure the noble Lord, Lord Spicer, will advise his co-conspirators of how to go about that with his usual courtesy. He is a man of very great courtesy. He could slide a dagger in 16th century Rome and everybody would still be his greatest friend. I say that as a compliment.
I am afraid I will now part company with the noble Lord, Lord Spicer, and all his colleagues by saying that this will be the most disastrous Budget in living memory. First, economic growth will be hit. Secondly, it will be disastrous for employment. Thirdly, it will be disastrous for social cohesion and social justice. Fourthly, it will be disastrous for regional balance. These intertwine in many ways. The Budget is based on an implicit ideology which reminds me of the old Galbraith slogan and, indeed, of George Orwell: private sector good, public sector bad. I will come back to that point.
My starting point must be that the OBR has recently found that Labour’s deficit reduction plans would have more than achieved the target of halving the deficit over four years from 11.1 per cent in 2009-10 to 5 per cent in 2013-14. The OBR has also said that Labour’s plan would have reduced the structural deficit by nearly three-quarters, from nearly 5.2 per cent of GDP in 2010-11 to 1.6 per cent of GDP in 2014-15. That would have met the timetable set out in the G20 communiqué on 27 June. It is about time that the Conservatives—with their rhetoric about the mess that they were left—were shamed into ceasing to make those ridiculous remarks about the legacy.
The real problem with the legacy is totally different. The problem is the hole in the economy caused by the banking crisis. The loss that GDP has to bear is, according to the IFS, 20 per cent cumulatively. That is £300 billion before we get back to where we would have been if there had been no banking crisis. We will not achieve that, but that is the amount of lost output, income and living standards that we have all suffered thanks to the banking crisis. That, in turn, caused the public finance deterioration of about £50 billion. However, logically and arithmetically, rapid economic growth would need to be far more than the trend; it would need to be 4 per cent or 5 per cent per annum to get back up to where it should have been.
Filling the output gap is the only way to produce greater tax income and lower expenditure. Both go together. Tax income would come from the higher output from corporation tax, income tax and so on. Lower public expenditure would come from not having to spend as much on unemployment benefit and social security. Those are the dynamics of economic growth. I am sure that we will hear more about the fundamentals of that from the noble Lord, Lord Skidelsky, who wrote his monumental book on Keynes only recently. The real question, which I rarely hear Ministers comment on, is: what growth rates do they think would be needed to get back to that trend? Do they agree with these figures—not, do they disagree with them?—because that is the territory that we ought to explore?
Samuel Brittan, hardly a socialist revolutionary, has quoted Goldman Sachs in a recent article. I do not normally quote Goldman Sachs, but it has carried out work on the output gap and judges potential output to have grown at an annual rate of 2.6 per cent when output was on trend in 2005. On that basis, the output gap is now in excess of 10 per cent. That gap can only grow given that we are now at a lower base. The only scary variation on that is that we are so rapidly destroying potential growth that we will have to stabilise at much lower living standards than Germany because of the collapse of fixed investment, which fell by no less than 14 per cent in 2009. We must avoid that at all costs. People are now assessing what they describe as the sustainable rate of unemployment as 6 per cent, 7 per cent, 8 per cent or 9 per cent. This will be disastrous as it will inevitably exacerbate regional differences and cause dreadful social problems in swathes of Britain, particularly in areas other than the south-east. However, I do not exclude the south-east as there will be growing inequality and poverty in some areas there.
The regional development agencies have delivered for the regional economies. They have been independently evaluated and shown to lever, on average, £4.50 of benefit for every pound spent. The scrapping of the RDAs springs only from the ideological dogma: private sector good, public sector bad. Come back George Orwell, all is forgiven. The RDAs have trained more than 400,000 people and have created 850,000 jobs over the past 10 years. They have started, or rather have helped to start up—my noble friend Lord Myners will correct me if I say “started”—60,000 businesses. Some £100 million of funding has been brought forward by RDAs for regeneration projects to boost the economy during the recession.
All these figures are, of course, the mirror image of those claimed by Mr Osborne. However, the independent OBR has now more or less predicted many of Labour’s figures rather than Mr Osborne’s. It predicts that the Osborne strategy will mean tens of thousands more people in the dole queue and that it will bring employment down by 100,000. The CIPD forecasts that unemployment will increase by about half a million over the next two years to 3 million, and remain at that high level until 2015. A final twist in this jobs question is that George Osborne’s election campaign—a totally cynical campaign —promised to scrap Labour’s jobs tax. I say “cynical” as a rise in national insurance would keep people out of work. However, in the Budget, we learnt that the promised NI cut for employees would not go ahead and that more people would be out of work under the Government’s plans than under Labour’s. So much for George Osborne’s election claim that jobs would be saved under his plans.
Even now the penny does not seem to have dropped in Conservative ranks that public expenditure and private expenditure have a symbiotic relationship. As regards buildings and infrastructure—for example, schools and hospitals—the money is spent by Costain and all the suppliers. You do not need to be Einstein to work that out.
Finally, on the social impact, I follow up on the effect of income distribution. I thank the noble Lord, Lord Razzall, for probing this question after I started it. I was astonished by the flat answer given by the noble Lord, Lord Sassoon, that the whole package is progressive—or certainly not regressive. He does not seem up to speed with the Government’s own line. On 20 July, the Treasury Select Committee published a report on the Budget and its conclusions are quite different from the Government’s. The Government now have a dilemma over what to say to the Treasury Select Committee.
The original hypothesis was, said Robert Chote, Director of the Institute of Fiscal Studies,
“that the Budget looked progressive when assessing whether the lowest income decile paid less than the highest income decile largely because of the reforms that had been announced by the previous Government in its March 2010 Budget rather than the specific measures announced in the June 2010 Budget”.
I underline that with another quote which is even more startling and has not yet been widely understood:
“Mr Chote concluded that based upon the three factors he had outlined—taking out the measures inherited from the previous Government, looking further into the future than 2012-13 and including some of the other measures which the Treasury had chosen not to model in their analysis of tax and welfare changes on households—the June 2010 Budget was ‘regressive’”.
In other words, it is regressive if you take out the measures inherited from the previous Government. It is astonishing to me they were ever there. The Government claim that it is progressive, but only because they embrace the measures taken by the Labour Government in the Labour Government’s Budget. You would be run out of the Monte Carlo casino if you tried that there.
The conclusion is that, now the Government have started to go down this path,
“the Comprehensive Spending Review will [have] effects on different income groups. We recommend that the Treasury builds on the approach taken in the Budget to give information about the impact of CSR changes on different households. We would like the analysis for both the CSR and future Budgets to take two forms: a narrowly drawn set of figures based on those measures most easily modelled”.
This is like the reference of the noble Lord, Lord Sassoon, to all these fancy tables. You have to have a flannel round your forehead to get your brain round them, and now they turn out to be misleading because they include the Labour Government’s measures. They also want,
“a wider analysis using more assumptions, which would allow a fuller set of measures to be included”.
We desperately need to see the economy holistically—that is, public expenditure, the cuts, what you might call the macroeconomic situation and specifically the Budget measures.
The Minister has got himself into slightly hot water on this whole question of income distribution. Will the Government go with the spirit of the Treasury Select Committee and in future do income distribution analysis combining the Budget and the CSR? That will become a key question later in the year. Meanwhile, we are left with the poorest 10 per cent of households seeing an average annual spending cut of £1,300, equivalent to 20 per cent of their household income, whereas the richest 10 per cent of households see an average annual cut of £1,135, equivalent to only 1.6 per cent of their household income. That really needs to be addressed in a proper statistical manner.
My Lords, it is difficult to welcome a Finance Bill which increases taxation, and it will most certainly be unpopular. However, I do not have the slightest doubt that it is absolutely essential if we are to deal with the situation that we have inherited, which requires drastic measures on both taxation and public expenditure.
The Bill is probably one of the smallest that we have had for very many years and, in terms of pounds per page, probably more effective. It is not entirely clear to what extent the Government believe that they will increase revenue in either the current year or next year, but the Minister may be able to enlighten us in that respect. None the less, I think that we are going to see an increase in revenue but it is going to take some time, in the same way that cutting public expenditure takes some time. Therefore, the argument about whether one should make these changes quickly or slowly seems to be largely irrelevant. We know that an immediate impact of any scale is not possible, and the process is therefore bound to take place over a considerable period. However, we need to get on with it as fast as possible and that is effectively what this Finance Bill does.
First, I welcome without reservation the point made in my noble friend’s opening remarks regarding the abolition of the requirement to take an annuity at the age of 75. On at least three occasions from the opposition Front Bench, I moved an amendment to do just that, with suitable safeguards, and I think that the Government would be wise to look at those safeguards. This House, by a very large majority, supported the view that I expressed, but on each occasion the amendment then went to another place, where it was reversed. Therefore, I am absolutely delighted that, despite the arguments that tend to be made within the Treasury, the Government have at long last decided to take action on this. I have only one small caveat, which is that there appears to be some delay in implementing the measure, which means that people who are about to become pensioners will be forced to take out an annuity when annuity rates are so appallingly low. My noble friend shakes his head; if he is right, I should be delighted to hear why.
Apart from that, I want to concentrate on three specific points and then a more general one. The first relates to VAT. I made representations on this to the Chancellor ahead of the Budget because I was deeply disturbed by a recommendation from the International Monetary Fund that we should eliminate our process of zero-rating in order to raise more money. I think that that would have been completely wrong. No tax in our system has ever had the kind of scrutiny that VAT had when I had the task of steering it through the House of Commons. Ahead of the Conservative victory in 1970, we went into it in great detail. It had pre-legislative scrutiny; it had extraordinary examination at Committee, Report and Third Reading in the House of Commons; and the structure that we designed was intended to prevent the change from SET and purchase tax—both of which we abolished—being regressive. I have no idea why the IMF thinks it appropriate to go into detail about taxation in this way but, had the Chancellor gone along with the IMF’s views, the measure would certainly have been regressive.
On the other hand, the Chancellor has found it necessary to increase the rate of VAT to 20 per cent—exactly double the rate that it was when I introduced the tax—and this is going to have a substantial effect. Popular commentators are all saying that it is inflationary. It is, of course, cost inflationary but demand deflationary, depending on what the Chancellor does with the money. Certainly, if he simply puts it in a mattress somewhere, that is substantially deflationary and the overall effect may be in that direction. None the less the step that he has taken to increase the rate to 20 per cent was certainly better than the alternative for reasons that I have just given.
I turn now to capital gains tax. There was huge anticipation during the election that, given the policy of the Liberal Democrats, and so on, it might be raised in line with the top rate of income tax to perhaps 40 or 50 per cent. Again, together with colleagues, I made some representations to the Chancellor and said that it would be totally wrong to increase the rate of capital gains tax without making some allowance for the fact that inflation was built into those gains and therefore it was important to have some form of indexation or other recognition of the length of time that the asset has been held. Alas, in that respect we were not successful in persuading the Chancellor who came up with the rather strange compromise, evidently reflecting the needs of the coalition, that we should have an increase in rate of 28 per cent but no indexation. I think that that is quite wrong for the reason I mentioned—that the Chancellor is taxing again, which is entirely due to previous inflation, and which may stretch back over 20 years. Pensioners and others may be in a very difficult situation because of such a low rate of return on their savings and find it necessary to liquidate some of their assets, so to tax them on that gain without allowing for inflation is wrong. It is effectively a tax on wealth. I therefore hope very much that when the matter is discussed in another place—alas, we cannot do so—allowance will be made for that and it can be changed.
I said that this appeared to be in line with the coalition agreement, and it is crucial in that context to say that we should not go along with proposals put up by either part of the coalition on the basis that it keeps it together or become involved in horse trading rather than saying that it is justified on its merits. In that context, I go along with the noble Lord, Lord Desai, in relation to the student taxation proposals, put forward by Mr Vince Cable. A detailed examination of that shows that it would be a very bad tax indeed and ought not to be proceeded with.
Finally, I want to put the Finance Bill in context. There is no doubt that it represents a very substantial fiscal tightening. It has been pointed out that it may lead to consequences with regard to double-dip recessions and other fashionable ideas of that sort. Against that background it is important to have an appropriate monetary policy, and there seems to be a conspiracy of silence with regard to that. I read some of the papers over the weekend and just before. There were diagrams of every conceivable economic variable but not a single one showing what is happening to the money supply. Pessimistic forecasts were being made by the chief economist of the Bank of England who also did not mention the money supply. I have said before to the noble Lord, Lord Myners, and I say it now to my noble friend on the Front Bench that it is very important to distinguish between the price of money—interest rates—and the quantity of money. Monetary policy, strictly interpreted, is concerned with both, but in fact it is the money supply side that is really important against the fiscal background that I have described.
I think there is a strong case for easing monetary policy further by way of quantitative easing or, alternatively, as I suggested in questions to my noble friend, by the Debt Management Office pursuing a policy of funding that effectively frustrates the effect of the quantitative easing. To make it absolutely clear, I refer to the Bank of England’s 20 July provisional estimates of what is happening to the money supply. Seasonally adjusted provisional figures for June show that M4 fell by £0.7 billion in the month, and if you look at the graphs for growth rates in M4 from December to now, it falls off a cliff, despite quantitative easing. Therefore, despite the efforts of the Bank of England in that respect, we have not succeeded in having a growth of money supply that is consistent with a growth in the economy, but if we are to get out of the hole the economy is now in, it is essential that we should have a fixed plan for increasing the level of aggregate demand.
Of course, there will be queries at that stage. My noble friend Lord Spicer, who I am delighted to see here, referred to the danger of inflation. The level of inflation is much higher than the Bank of England’s target rate, but we need to look at this situation very carefully to see to what extent increasing the money supply in line with the level of growth we would like to see is likely to prove inflationary. This is not a simple issue, but the way the figures look at the moment is being ignored. We are not following a monetary policy that is consistent with our objectives. I have the privilege of being followed by my successor bar two, or perhaps three, as the chair of the Treasury Select Committee in the other place, which I was for 14 years, and I will be interested to know his views on this subject. We need to wake up on this issue because it is being ignored.
It is a privilege to be speaking in a Second Reading debate so soon after being introduced in this House. I congratulate the noble Lord, Lord Spicer, and the noble Baroness, Lady Browning, on their excellent maiden speeches. They were colleagues in the Commons, and I look forward to healthy exchanges in this Chamber.
The noble Lord, Lord Stern of Brentford, was an excellent and regular witness before the Treasury Committee and a fine ambassador for our country. That came home to me very clearly during the visits I made to Africa where the impact of his climate change report had great ramifications. The noble Lord should be proud of his role in the Treasury and as climate change ambassador as a result of that. He mentioned the Office of Budget Responsibility and the need for transparency, clarity and independence. I offer noble Lords the example of United Kingdom Financial Investments, which came before the Treasury Committee and had a disaster on the first day. It was lodged in the Treasury building, and you could not put a piece of paper between it and the Treasury. The relationship between the OBR and the Treasury seems very similar. My advice to the Government is to get it out of the Treasury very quickly so that it can be independent and have that transparency and clarity of message that has, to date, been missing. It is important that we get that.
I wish this Government well for the sake of the country and for the sake of individuals. We are most definitely living in uncertain times. Last week, Ben Bernanke of the Federal Reserve, in his comments to Congress, said that it is an unusually uncertain environment. Last week, comments were made by Spencer Dale, the chief economist of the Bank of England, and a debate took place in the pages of the Financial Times, with comments from Jeffrey Sachs, Paul Krugman and Martin Wolf, who, incidentally, is on the Government’s independent Banking Commission.
When Sam Brittan, a favourite journalist of mine, wrote about this Budget, he asked: “Are these hardships necessary?”. He pointed out that the real argument should be about whether we need this unparalleled fiscal austerity. Mohamed El-Erian, in his column in the Financial Times, made very clear the global nature of this problem, which we have not spoken about enough. He said:
“The world is facing deep structural challenges”,
yet we are witnessing,
“fruitless discussions … and a troubling lack of global”,
The utterances that came out at the G20 in Toronto fill that description aptly. Unless we get on top of this, and look at global imbalances and develop policies for the structural change, we will find ourselves in real problems.
Against that background, what is plan B for this Government? We are living in uncertain times. Therefore, there is no certainty about the proposals being put forward. I followed the deliberations of the Treasury Select Committee in its June 2010 Budget, which was released a few weeks ago. When the Chancellor of the Exchequer was asked about plan B, he said:
“The plan is to have confidence in the British economy and its ability to pay its way in the world”.
That is the sum total of the explanation for plan B, but I would suggest that that is insufficient. The political nature of the debate has made it harder to discuss plan B, but it must be discussed. The noble Lord, Lord Stern, made reference to that in his speech. There is insufficient assurance in these deeply worrying times.
Against that we have had a Budget which has accelerated the fiscal position very tightly. There will be £40 billion of spending cuts and tax decisions, made up of £8 billion in tax and £32 billion in spending cuts by 2014-15, of which £11 billion will be specific measures on welfare. You cannot tell me the implications for poorer people in our society when we have that £11 billion coming directly out of the welfare budget, with suggestions that more is to come. The impact of that will be a massive discretionary tax on £13 billion extra of spending. The Government have 77 per cent of its spending and 23 per cent of its tax rises for their Budget. Martin Wolf, in the Financial Times, said that the adverse impact on the poorest 10 per cent will be harsher than on the most rich groups in 2012-13 and that it will get worse thereafter.
There is a huge gamble at the core of this Budget. Can the Government explain this massive assault and spending cuts adequately to the satisfaction of ordinary people? Can they manage their public relations in this regard? Are these policies being fair on their impact on society? What will they do for long-term unemployment? The ONS June figures show that those who have been unemployed for more than 12 months have increased by 85,000 over the first quarter of this year. Standing at 772,000 that is the highest figure since the first quarter of 1997.
Let us not forget youth unemployment, which, for 18 to 24 year-olds, stands at an unprecedented 17.3 per cent. Since the start of the recession, youth unemployment has risen 5.1 per cent. I remember well as a school teacher meeting former pupils 10 years after they had left school and being introduced to their spouses and children. When I asked them whether they had a job they said that they did not. They were the lost generation of the 1970s and 1980s. Do we want to go back to a lost generation or do something about youth unemployment now, so that when we come out of this recession we will be in a fit and proper position in terms of skills in the economy? That is one issue.
The second issue in the gamble concerns the impact of the fiscal tightening on GDP. The Office of Budget Responsibility has predicted growth in 2010 of 1.2 per cent; in 2011 of 2.3 per cent; and in 2012 of 2.8 per cent. It will need a substantial contribution from business investment and exports in 2012 to achieve that. Indeed, contributions from business investment in that year will have to be 1 per cent and from exports 0.9 per cent if we are to achieve our growth target. That is a big challenge. In order to meet that challenge, the Government will be dependent upon domestic private spending being maintained and spending on UK exports being little affected by the fiscal squeeze which they are presently urging countries around the world to adopt. Something does not add up in that situation. We should remember that the Government’s plans are predicated on a private sector revival, with 2 million new jobs being created over the next five or six years. I have yet to meet an experienced economist who will tell me that that is a feasible outcome. This is a fast adjustment early in the life of the coalition Government and it raises the question of what effect these measures will have on individuals.
That brings me neatly to the Liberals. I held a landmark birthday party at my home on Saturday for one of my offspring. The cake with the candles was brought in and I thought of the coalition Government. Why should I think of the coalition Government when I should have been enjoying myself? It was because I saw the candles as the Liberals and the cake as the Conservatives, the Tories. The candles gave a little glow and a little hope but, as you and I know, they were cruelly blown out by my three year-old granddaughter. We were then left with the Tory cake. The question is whether it is an edible cake; is it succulent? Are we going to ask for second helpings or will it be inedible? I think it will be the latter. That is the issue. It will be hard to digest for many people.
Are the cuts on the cake illiberal? Are they too deep for an economy in the early stages of recovery when some of our trading partners are still very weak? Will the tax changes provide enough private sector investment and job creation after the state withdraws quickly? Will it be fair for all sectors? Is there a coherent ideology? If there is no ideology from the Government then we will have little shape and direction to where we are going. The noise of the cuts will be drowned out by everything else.
However, this is what the Government believe in and demonstrates their aspirations for society, but where is the Liberal influence? Where is the Liberal influence on the acceleration in the fiscal tightening area? Where is the Liberal influence on child poverty? In their manifesto the Liberals agreed with the eradication of child poverty by 2020.
Yes—but it depends for how long the candle exists before it is blown out. That is the issue. I fear that the candles have been blown out already.
In terms of child poverty, the Liberals have signed up for eradication in 2020. The Minister stood at that Dispatch Box last week and said that there are four criteria to the Child Poverty Act 2012. But the Government have given their commitment to one of those criteria only for the next two years and ignored the other three. If I have one criticism of my colleagues on the Treasury Committee for their June 2010 Budget, it is that there was no mention of child poverty. I hope this mild statement here will propel them to ensure that child poverty is taken into account.
I am being followed by the noble Lord, Lord Skidelsky, the expert on Keynes. Keynes did not believe in deficits for the sake of it. Sam Brittan said that the Government’s approach is not like that of households. When households and businesses do not spend, the Government step in. That is why we have had quantitative easing. There is an awful lot in this Budget that we still need to look at. I hope if recovery stalls that the Government will listen and that it will not be too late.
Finally, I note that the Brokeback utterances mentioned at the weekend by my good friend in the Commons, David Davis, took place in the Boot & Flogger pub in London. I would suggest to you that the Liberals will get the boot if they are insufficiently authoritative with their influence and that the Tories, if their PR strategy fails and their narrative is rejected, will be flogging a dead manifesto and will have to live with the consequences. Dealing with those generalities not specific to the Budget, I am delighted to contribute to this debate.
My Lords, the Finance Bill implements the taxation provisions of the emergency Budget Statement of 22 June. These will come to about 20 per cent of the total fiscal tightening which has been planned in this Parliament. So the Finance Bill as we have it before us is part of the Government’s programme for balancing the Budget over the next five years. In his opening speech, the noble Lord, Lord Sassoon, said that a failure to address the deficit is the greatest danger we face. I would say that the failure to address the hole in the economy is the greatest danger we face and that unless the noble Lord is able to demonstrate how cutting the deficit will produce an economic recovery, there is a massive hole in his speech. I listened in vain for any such demonstration by the noble Lord.
In the debate on the Address, I asked the noble Lord, Lord Henley, this question. By what mechanism do the Government believe that fiscal tightening will promote recovery? The noble Lord, Lord Henley, was good enough to write to me, making three points. His first was that public borrowing is only taxation-deferred. The idea is that the public, knowing that they will have to pay for the deficit with higher taxes, increase their saving by the amount of the higher taxes they expect to have to pay. Thus the deficit not only fails to stimulate the economy, it crowds out more efficient private spending. As stated, the argument is simply false. That part of the deficit which brings into employment resources which would otherwise stand idle will be paid off without any need to increase taxes, simply by the growth of public revenue which the rise in national income brings about. I do not know that any serious economist believes this Ricardian equivalence argument and yet it is one of the justifications for the Government’s deficit-cutting programme. So where is the Treasury getting its wisdom from?
The second point the noble Lord, Lord Henley, made was that it would be irresponsible to accumulate substantial debts that would have to be paid off by subsequent generations in the decades to come. The reply to this is that a deficit does not impose a burden on future generations. There is no repayment burden because the Government, unlike private individuals, can and normally do repay their maturing debts by continuing to borrow. As for the interest burden which is said to arise when interest is paid by taxation rather than by fresh borrowing or printing money, it is merely a transfer payment. Income is transferred from taxpayers to bond holders. Since most of the transfer of income is within the United Kingdom, it is therefore a redistribution rather than a loss of income for future generations. Again, these are quite straightforward points once one grasps them, but the Government and many of the fiscal consolidators have gone on and on about the burden which would be faced by future generations, as though there was a net loss to them from an increase in the national debt.
If, however, the public deficit is cut now, there will undoubtedly be a burden on both present and future generations. Income and profits will be lowered straightaway; profits will fall over the medium term; pension funds will be diminished; investment projects will be cancelled or postponed; and schools will not be rebuilt, with the result that future generations will be worse off, having been deprived of assets that they might otherwise have had.
I go back to the letter of the noble Lord, Lord Henley. Of course, this is not a personal attack on the noble Lord, whom I greatly like and admire. He is just acting, as is the noble Lord, Lord Sassoon today, as the unfortunate fugleman of the Treasury. His third point was:
“The higher the level of debt, the higher the interest rate that markets will demand to compensate them for holding that debt. Failure to tackle Britain’s deficit would therefore push up the costs of debt service and risk higher long-term interest, not just for the Government, but also for families and businesses through the higher costs of loans and mortgages”.
Every proposition in that short paragraph is false in the present situation. If the economy were fully employed, it is true that the higher the level of public debt, the more the Government would have to pay for it, which could cause the whole structure of interest rates to rise. But if the private economy is depressed, interest rates on government debt do not have to rise; indeed, they have not risen over the whole of this recession, even though the Government are borrowing almost three times as much as before. Why? It is surely not because of the resolute steps which the Chancellor has taken to reduce the deficit and thus restore confidence, since the Treasury is able to borrow just as cheaply and with the same long maturities as under the previous Government.
The reason that all Treasuries, except the most profligate ones such as the Greek treasury, can get their money so cheaply is that investors demand safety-first investment strategies, or, as Keynes would have said, there has been a massive flight to liquidity. Even as government debt mounts, low yielding bonds are still considered better—because they are safer—than equities. Or, put another way, when there is a dearth of private sector investment opportunities, government borrowing does not “crowd out” private sector investment; it adds to it.
The reason that private sector investment is depressed is not fears about the cost or sustainability of the deficit. Do businessmen wake up in the night, thinking, “God, how large the deficit is! I really can’t do any business now because of the increase in the deficit”? I do not believe that that is the way in which businessmen think about it. They do not invest because they do not see the orders, not because they think that the deficit is running out of control. It is the same with the commercial banks, which still cannot accurately price their assets. It is because they have troubles with their balance sheets and because businesses cannot see where the orders are coming from that there is too little investing and borrowing going on in the private sector.
This explains—I go to a point made by the noble Lord, Lord Higgins—why quantitative easing is not the automatic offset to fiscal tightening that some noble Lords, especially the noble Lord, Lord Barnett, assumed it to be. It is not the printing of money but the spending of money which is important. Quantitative easing, unless it is done in particular ways—that is a subject on its own—is not a guarantee of the spending of money. So how does the noble Lord, Lord Higgins, propose to get a monetary policy consistent with a reasonable level of demand through quantitative easing? That was a missing part of an otherwise very interesting speech. In short, contrary to what the deficit vigilantes say, the deficit is the consequence and not the cause of depressed business conditions.
I believe that a Government who had the courage and intelligence to explain all this properly to the public would have a much better chance of calming jittery markets than the grotesque exaggeration of the dangers of debts and deficits which is now going on.
I agree thus far with the noble Lord, Lord Desai. There is not going to be a repeat of the 1929-31 depression. We have done enough to cut off the slide. There is an anaemic recovery going on. The UK may grow by 2 per cent this year, though I would be surprised if it did. If we look beyond a single quarter’s figures, to the forces of demand in the world, especially as they will be impacted by the rolling out of the cuts in Europe and elsewhere over the next few years, it is hard to see where the sources of robust growth are coming from. In that sense I disagree with the noble Lord, Lord Desai, who made a constructive and well-thought-out speech. I agree with him when he argues that the extra cuts this year are too slight to have any really depressive macro-economic consequences.
The point is that the Government have said that they are deliberately going to take £100 billion of spending out of the economy over the next four or five years, and it is the effect of that determination to do that on business confidence which seems the relevant factor, not the very small amount of cuts that are going to take place this year.
So what would my alternative policy be? One confidence-boosting policy would be for the Government to cut taxes by the same amount as they cut their own spending. This would imply a reduction of taxes by about £100 billion over five years. There is a nod to tax cutting in the Budget in the proposals to reduce corporation tax, but the net effect of the tax policies is to raise taxes and therefore will be deflationary. Also, the effect of tax cutting on demand is subject to quite large uncertainties: how much will be saved, how much will be spent and so on. A far better way would be to offset any cuts in current spending by an increase and acceleration in capital spending. A recession is an ideal time to bring a country up to date, since labour and capital will be cheaper than in boom times.
The £38 billion high-speed rail link from London to Birmingham and beyond, unveiled in March by the noble Lord, Lord Adonis, who I see is in his place, is a perfect example of such a programme, as is the smaller railway electrification programme announced at the same time. This is not all shovel-ready stuff, but a determined Government could get the high-speed scheme going long before the business-as–usual start planned for 2017. It would set up an immediate demand on the construction industries while also offering long-run returns. Former Chancellor Alistair Darling’s scheme for a green investment bank to invest in renewable energy and energy efficiency, is another example. Industry experts predict that up to £37.5 billion will be needed each year for the next 10 years to upgrade or replace our old power plants.
These are examples to develop the capital of this country for its long-term benefit which should certainly be part of any fiscal plan for both the immediate and the medium-term future. Of course it would be better if a large programme of capital spending could be agreed with other governments. But we could still do a lot of it on our own. A Government whose animating spirit was Lloyd George rather than Boy George would ask the public to subscribe to a national recovery loan of £100 billion, to be spent over five years to equip the UK with a modern transport system, an efficient energy system and a modern school system. To advocate capital cutting at a time of recession is the worst remedy that one could possibly have. It is an insane policy and it will not only destroy the coalition, but it will do enormous damage to the country.
My Lords, the financial deficit has to be addressed and it has to be reduced. The question, though, is whether the Budget and this Bill address the deficit in a rational and appropriate manner. The global recession of 2008 was the largest since the end of the Second World War. The global economy fell by 1 per cent, G7 economies by around 3 per cent and world trade by around 12 per cent. It started with a fall in confidence in the American financial system, which led to a collapse in confidence in markets around the world. Since we are a trading nation with a major financial sector, it was inevitable that we would feel the effects more than most.
Despite the difficulties faced, the previous Government took the action to get this country out of the global recession, including steps to ensure that the banking system in this country did not collapse and that, through fiscal stimulus, the impact of the recession on jobs, on homes being repossessed and on businesses going into liquidation was considerably less than nearly all experts had predicted in the light of the depth of the global recession. Unemployment in this global recession is half what it was during the recession of the 1990s, repossessions are 40 per cent lower and company insolvencies are running at about a third of the rate reached in the 1990s recession. The growth figures for the second quarter of this year, published at the end of last week, show that growth in the first quarter—I think that was 0.3 per cent—has been comfortably surpassed in the second, with a figure of just over 1 per cent. In Germany and France, the figures are lower, while some eurozone countries are forecast to see negative growth this year.
The issue is: what will be the impact of the Budget and this Bill on an economy that is beginning to grow its way out of global recession? The omens do not appear particularly good, with significant cuts to public sector jobs on top of reductions in domestic demand—likely under the pending increase in VAT. I was one of those who were sent a letter during the election campaign by Mr Nick Clegg who, under the heading:
“Your choice is between a … Liberal Democrat MP, or the Conservatives”,
told me that:
“Another backbench Conservative MP will simply support VAT increases, an unfair tax rise which hits the poorest hardest, and support cuts in vital services”.
I suppose, in fairness to Mr Clegg, he did not actually say in the letter that Liberal Democrats would not also support them. I suppose that it was just a clever, craftily-worded letter that implied that Liberal Democrats would not, but did not actually make such a commitment.
Already, there are some worrying signs that the Government’s Budget may be putting in jeopardy the recovery in our economy that has been reflected in the growth figures for the past two quarters. If the deficit is cut too fast, output will probably fall and unemployment will rise. If other countries are doing the same, there will also be an adverse impact on the level of earnings and growth from our exports. Indeed, in Germany the Government are proposing a package of budget cuts and tax increases, which will certainly have an impact on their economy. According to the Bank of England, mortgage approvals fell in June, while the consumer confidence index fell and Rightmove has reported that house prices have been cut for the first time this year.
In his opening comments the noble Lord, Lord Sassoon, quoted the Organisation for Economic Co-operation and Development. However, it has also said that it expects the UK recovery to be,
“too muted to result in strong job creation”,
and went on to say that unemployment is,
“likely to recede only slowly”.
In the light of the budget cuts, the International Monetary Fund has downgraded its forecast of UK growth.
The Chartered Institute of Purchasing and Supply’s recent services survey showed that business expectations had dropped to a 15-month low, in the single biggest month-on-month fall ever recorded. Perhaps that is not surprising if we have a Government who spend their time talking down the state of the nation’s economy, promise over-the-top cuts in spending and appear to think our economy is in a similar position to that of Greece and other Mediterranean countries—a view, shall we say, not universally held. Our national debt as a proportion of GDP is below that of, for example, France, the United States and Japan.
The previous Government’s deficit reduction plan projected that the deficit would be reduced by around £80 million over the next four years. The Office for Budget Responsibility has said that we were on course to deliver that. Part of the deficit was projected to be closed by the economy returning to growth and thus more in tax coming in and less in benefits going out. However, this Government’s Budget is going to have an adverse impact on growth as the Bank of England’s chief economist said, before going on to comment that for the next three, four, five years demand in the economy will be “incredibly anaemic”.
Even the Office for Budget Responsibility is acknowledging that extra taxes or spending cuts will be necessary to make up for lower growth as a result of the Budget. The Office for Budget Responsibility is very much a creature of the Government as it showed when very conveniently press releases on unemployment figures were moved forward to try to bail out the Prime Minister at Question Time after a leaked Treasury analysis did not quite portray the picture the Government would have wanted. That leaked Treasury analysis showed that the Budget would result in the loss of at least half a million public sector jobs and some 600,000 to 700,000 private sector jobs by the end of this Parliament since much private sector employment is dependent on public sector spending.
The Office for Budget Responsibility then proceeded to tell us that the private sector would create about 2.5 million jobs by 2014 when, according to the Office for National Statistics, in the eight years prior to the start of the recession in early 2008 the private sector created a mere 1.6 million jobs at a time when the economy was doing extremely well. Now, of course, Sir Alan Budd is leaving with a certain degree of rapidity. He was the Government’s darling bud of May who failed to bloom in June and is now doing a bunk this month. Let us hope that the current apparent cosy relationship between the Government and the Office for Budget Responsibility is brought to an end.
So why are the Government pursuing tax rises and spending cuts at a greater rate than is necessary and which puts the rate of recovery at risk and will make things even harder for the less well off? This is a coalition Government of shared values and shared philosophy and that certainly seems to be the case in the desire to minimise the role of both national and local government and effect a major reduction in public services spending. Yet all benefit from the services of central government and their agencies, and local government, but it is those on average incomes and below who benefit the most and will be adversely affected the most.
It would not be politically very acceptable for this Government to say that that is what their version of the big society means to them—a substantial cutting back of the services provided by central government and their agencies and local government and from which so many benefit. Much easier then to overstate the country’s current adverse economic situation and use that as the smokescreen to make the cuts in public expenditure that are part and parcel of this Government’s concept of the big society, where power is retained in Whitehall but every effort is made to pass responsibility and accountability as far down the line as possible for the consequences of how that power is used to cut public services spending.
As the Institute for Fiscal Studies has said:
“We are looking at the longest, deepest sustained period of cuts to public services spending at least since World War II”.
As my noble friend Lord Lea of Crondall has commented, the institute also said that the Budget looked “somewhat regressive”. It also referred to,
“the impact of the looming cuts to public services, which are likely to hit poorer households significantly harder than richer households”.
Not quite the rosy picture of fairness that the noble Lord, Lord Sassoon, tried to portray.
The Government claim that we are all in this together, although in what exactly they have never said. Let us just say that thanks to the Budget and this Finance Bill many people are in it rather more than some others and the dividing line appears to be how well off or otherwise people are at the moment. It certainly is not gloom everywhere; the leaders of Britain’s biggest companies have seen their pay and bonuses rise by an average of 5 per cent to more than £3 million over the past financial year, despite a drop in earnings per share. So that is one part of the all that certainly does not seem to be in this together. On top of the extent of the cuts to public services, the rise in VAT, which the previous Government reduced to stimulate the economy, the move from retail price indexation to consumer price indexation and the disproportionate impact of the measures on women and children, to name just three issues, will have much less of an impact on those at the top of the income bands than those lower down. The Budget takes a far higher percentage of income from the bottom 10 per cent than it does from the top 10 per cent.
I hope that the Government will reflect further on this over the summer and at least privately admit, not that no deficit reduction is needed, but that they have gone over the top in the level, speed and nature of the cuts that they have made or are apparently proposing to make and reflect that fact in their decisions on the actual extent of spending cuts still to come. This is no time to take the sort of unnecessary risk with the economy that the coalition Government are taking by seeking to cut the deficit too far, too fast.
My Lords, it is a privilege to contribute to this debate. We have heard two excellent maiden speeches from my noble friends Lady Browning and Lord Spicer. Although their speeches were very different, they were both accomplished parliamentary performances. They will both be a credit to this House, and we look forward to many more of them.
I was particularly interested in the contribution of my noble friend Lady Browning, who drew on her experience in small to medium-sized enterprises. We have heard some wonderful expositions of macroeconomic theory in this debate—and I mean that genuinely. They have been quite astounding and it has been a privilege to listen to them. But there is also another side to this. I wonder what lessons could be learnt from the small business community, which has been wrestling with exactly the same recession that the Government are now wrestling with, and the same problems. They acted more responsibly. They have been controlling costs, which is the first thing that you can do in a recession, since the onset of the financial crisis two years ago. That lost two years of the Government taking responsive action has meant that the delay has increased the severity of the measures that are necessary to correct the problems that we face. Our costs are too high as a country. I cannot quite understand how it is possible to double public spending over the past two years and double the debt over the past five years but somehow not possible to reduce it by 25 per cent or to reduce government borrowing by a similar proportion. One might begin by simply retracing the steps taken to get us into the situation that we are in.
The responses that a small business might have to this crisis might be, first, to control unnecessary costs. What do I mean by controlling costs? One way in which to control costs in a small to medium-sized enterprise is by reducing complexity, which adds to cost. If you take out complexity, you increase efficiency in the business. One thing that I have been delighted about with the Finance Bill is that it runs to only 26 pages, which is terrific. I dug out from the Library last year’s Finance Bill, which was 167 pages long. Just to add to that, in case there might be a worry that it was not complex enough, 156 pages of Explanatory Notes went with it.
Every time you add complexity into the tax system, into government and into regulation, you immediately add to costs and overheads, because there needs to be people sitting in government departments interpreting what it actually means. It is more difficult to collect revenue from a complex tax system, simply because there are people on the other side who are hiring equally qualified accountants and lawyers to navigate through the same complexity that we are facing. So, complexity adds to cost. Simplicity reduces cost and I therefore pay tribute to my noble friend the Minister for introducing such an efficient Finance Bill to this House and I hope very much that this is a shape of things to come. We must be ruthless in cutting down on unnecessary legislation and bureaucracy, not because of some free-market experiment, but simply because that is the way that we can cut the overheads of government and cut the cost of government without cutting front-line services, which is what we all want to do.
There is another thing that we would do. So far in the debate, some comments have suggested that this is a one-gear approach to tackling the deficit; that all it is about is reducing cost. Of course, it is not about reducing cost, any more than in business it is all about reducing cost. It is about reducing cost, taking out cost, simplifying systems, but it is also about increasing sales, increasing revenue into government.
I am delighted to see a number of things in the Bill which are aimed at stimulating the enterprise economy so that we can actually start increasing sales: the reduction in the small companies rate to 20 per cent, instead of the previous Government’s planned increase to 22 percent from April 2011; the increase in the entrepreneurs’ relief lifetime limit for capital gains tax from £2 million to £5 million, effective immediately; the reversal of the most damaging part of the increase in employer national insurance contributions inherited from the previous Government; the raising of the threshold for national insurance contributions by £21 above indexation; a review of small business taxation, including IR35 regulations, to create a simple, more predictable tax regime. Together, I believe that all these measures will increase our sales as a nation and that has to be important.
Some might say that that sounds a bit simplistic, but a very sophisticated organisation, the World Economic Forum, undertakes an annual assessment of the competitiveness of all the economies in the world. I know that it has been a source of concern to the previous Government as well as to the current Government that the level of competitiveness of the UK economy is falling substantially. What are the criticisms that the World Economic Forum find in our economy, the reason we are tumbling down the league tables? There are four. It identifies, first, access to financing. Secondly, interestingly, it identifies inefficient government bureaucracy. Thirdly, it identifies tax regulations. Fourthly, it identifies tax rates.
That is an independent, credible organisation, undertaking an assessment of all governments around the world and coming out with some pretty clear statements about what it thinks the inherent weaknesses of our economy are. That is why the responses which have been brought forward by the coalition Government are interesting; they chime very much with what the World Economic Forum has found. First, I talked about tax rates and the measures which are being introduced there. I talked about the need for tax simplification and less regulation, a new system of regulatory control whereby Ministers must first show how they will reduce the existing burden of regulation before bringing forward new regulations—what a breath of fresh air. Also welcome is a fundamental review of all regulations that the previous Government scheduled for introduction over the coming year. Regulations will cease to be law after seven years unless Parliament has confirmed that they are still necessary and proportionate and they were explicitly set to have a longer timeframe. There will be a review of all the employment law for which each department is responsible, as well as unnecessary health and safety regulations. The gold-plating of EU regulations will be tackled. I am making the point that when an external audit of the performance of our company—UK plc—points out that there is a real problem with the complexity of the bureaucracy, that will help to reassure, as it relates to one of the responses that we are taking. The lower tax rates will help, too.
My noble friend Lady Browning made an impassioned plea about access to finance, which is a major problem. I see it from two sides. I have seen it on the small business side, where things are tightening up dramatically, but I also spare a thought for the banks, although I know that that may not be the most popular thing to say. The banks have said to me in conversation that the problem is not so much that they are refusing to lend now. The problem relates to the level of anxiousness that, unless there is confidence that the deficit will be tackled—I appreciate that this may not fit with economic theory, but it certainly fits with banking practice—there could be an increase in interest rates. The one thing that is keeping UK plc and many homes, families and businesses afloat is the 0.5 per cent base rate—not that you get it, but it is the base rate from which the premium is operated. Low interest rates are keeping people in their homes by making homes affordable and they are keeping people in their businesses and their jobs. If interest rates were to ratchet up to 5 per cent or 10 per cent as a result of international confidence in the economy decreasing—
I would not normally interrupt, but is the noble Lord seriously suggesting that markets are likely to price our government debt at 5 per cent or 10 per cent? If so, does he accept that view of the markets? Does he think that it is binding and that we just have to do whatever market sentiment tells us?
That is a fair point but, in a sense, it does not really matter what the most distinguished economist in the room says about it or what the least distinguished economist in the room—me—says about it. Fitch’s preliminary assessment of the Budget was that,
“it sets out an ambitious deficit reduction path that, if delivered upon, will materially strengthen confidence in UK public finances and its ‘AAA’ status … Taken together, the specific measures announced today are substantial and enhance confidence in the outlook for UK public finances”.
Moody’s Investors Services has said that the UK Budget is “supportive” of the country’s AAA rating. There is that element of international confidence—
I am quoting from the same rating agencies that rate government debt and sovereign debt around the world. That is what results in the prices of those debts being traded on the international money markets. The noble Lord, Lord Myners, knows better than anyone about the global flows of international finance. The rating levels are crucial to this, as we see when we look at the situation in Ireland. To stretch the small business analogy to its absolute limits, you can say that international confidence in the Government’s resolution to get to grips with the deficit is analogous to what many companies will have—
I will just finish this point, if I may. It is analogous to what many companies will find in dealing with their share price. The share price reflects the market’s belief in the Government’s resolution and its confidence in the soundness of the finances. That has a huge impact on the Government’s ability to—
I am grateful to the noble Lord for giving way. I do not think he has answered the noble Lord, Lord Skidelsky, or my noble friend Lord Myners. Would it be too much of a caricature to say that if we have to believe in voodoo economics, which is what the markets add up to, the logic of the noble Lord, Lord Skidelsky, and my noble friend Lord Myners is of no matter whatever? Do we just have to worship the voodoo economics of the markets?
I accept these points. All I am saying is that, by arguing the other way, the noble Lord effectively says that there is not the slightest correlation between the ratings of global rating agencies, the level of debt in the economy and the price that we pay for that debt. I find that a more extraordinary position to argue from. I agree that these are contentious matters. What I have tried to set out through my contribution to the debate is that it is a multi-layered and complex subject but, essentially, we need to control costs; introduce simplicity to the system as a mechanism of doing that; increase sales by driving up enterprise; and repair the balance sheet so that the international lenders who are providing the debt have the confidence to continue doing so. I believe that the Government have done that and they have my full support.
My Lords, it is a pleasure and an honour to speak in a debate which saw the maiden contributions of the noble Lord, Lord Spicer, and the noble Baroness, Lady Browning. They both made excellent maiden speeches and will be considerable additions to House. They come with reputations as fine constituency MPs for Worcester and Honiton, and with specialist expertise in finance and health which will be of great benefit to the House. I crossed swords with the noble Baroness, as she now is, when I was a junior Treasury Minister. She called for my resignation on the grounds that I was slow in answering her letters. I inherited some 3,000 letters when I became a Minister, which I was told was a sign that my predecessor anticipated a forthcoming reshuffle.
The Minister told us that the Budget is tough but fair. Tough it certainly is; fair it is not. The Minister talked about the Budget being progressive but my noble friend Lord Lea of Crondall correctly pointed out that the only progressive elements in the Budget are those which the Government inherited from the previous Administration. As the Institute for Fiscal Studies shows, if you subtract that contribution to the Budget arithmetic from the Budget and the proposals in the Finance Bill, you will find that they are regressive rather than progressive. That trend will continue when we see the forthcoming spending review, to be announced in October. The Minister needs to be careful that he does not represent a Budget as being progressive when it is clearly not the intention of the Government that it should be progressive.
The Minister quoted from my contribution to our last debate on the economy. I stand by my words in that debate. I believe I was summarising what was known at one time as the golden rule, which is that recurrent expenditure by government should be matched by tax revenues through the economic cycle. I believe that that was a good policy. It was unfortunate that, for a period, it was placed in a form of suspension.
The challenge of working out a policy of keeping in balance recurrent expenditure and taxation requires one to look at things from a historic perspective. Therefore, there are always issues of judgment which will be challenging for Ministers. With hindsight, we were perhaps overly accommodating in the Budget strategy in the mid-1990s and failed to recognise the narrowing of the fiscal base. However, I believe that we were right to take the actions which we took once it became clear that the global economy was going into a significant recession, and to promote public expenditure to ensure that the worst effects were ameliorated. I also believe that the previous Administration provided absolutely the right global leadership at the G20 meeting in London in April.
The question the House has to ask itself is whether the Chancellor might now be making mistakes of judgment. The second quarter GDP figures suggest evidence of continuing improvement in economic activity. This is the third quarter during which economic growth has moved forward with developing momentum. Do these figures justify aggressive cutting? The Chancellor may well argue—indeed, he did so on Friday—that the strength of the economy provides further assurance for his programme of expenditure cutting. However, we need to recognise that this recovery is still very nascent. Consumer and business confidence are very low. We are seeing in both consumer and business behaviour a Ricardian equivalent as people again anticipate a setback in economic activity as a consequence of the policies the Government are taking. As a number of noble Lords have mentioned, including my noble friend Lord McFall, Ben Bernanke referred to unusual uncertainty being the prevailing condition in the global economy. That is clearly recognised as well in the minutes of the previous meeting of the Bank of England Monetary Policy Committee. I find it very surprising that the Monetary Policy Committee appears to be considering approaching the Treasury for further support for additional quantitative easing. My understanding is that in the third quarter of recovery it would be most surprising for the Bank of England to consider it necessary to have more quantitative easing. Therefore, I begin to ask myself whether the Bank of England is not concerned about the pace of expenditure cutting which the Government are pursuing, and is seeking to counteract that by a further programme of quantitative easing when we still do not know the true effect of existing quantitative easing.
Without swift and appropriate action and a significant contribution from fiscal policies, we would, of course, have experienced a much more significant depression over the past two years than was the case. We intervened to support the banks. I am pleased to note that the surplus which will arise to taxpayers as a consequence of that support continues to increase, as was evidenced last week by the first report from the Asset Protection Agency, which is now suggesting a further surplus for taxpayers of £5 billion. I look across at the noble Lord, Lord Forsyth of Drumlean, who is smiling as he used to ask me how much money was being lost by the taxpayer as a consequence of these interventions. My estimate is that, as a result of the interventions, the taxpayer has a net gain of the order of £15 billion. That is a huge amount resulting from the interventions that we took to support the banking system during a period of acute crisis—and we did so in a way that would deliver value to the taxpayer.
The Government of whom I was part had a plan to halve borrowing as a percentage of GDP over the next four years. We proposed to do that without an unmandated VAT rise and without placing at risk the recovery, the poor, the vulnerable, the unemployed or those who look to the state for assistance and encouragement during a time of global difficulty. This Bill is part of a hair-shirt Budget, but it is not a hair shirt which will be worn by those who buy their shirts in Jermyn Street.
The economy has considerable surplus capacity, as the noble Lord, Lord Skidelsky, observed. We have only to look at the unemployment figures to see that that is the case. Cutting public spending when the economy still has excess capacity and high unemployment is a most unwise thing to do. We as a Government were committed to reducing the deficit but in a way that recognised the risk of setback and was socially just in its implementation. Indeed, the deficit was already falling, as the Chancellor of the Exchequer forecast it would. The cuts the Government propose are borne not out of rigorous economic analysis or designed to produce a better outcome for public finances and the economy but out of political prejudice and a wish to contract the size of the state and its ability to support the wider community.
I have already mentioned declining consumer and business confidence. We also see a slowing in the US and European economy. The banking system is still in poor shape and last week’s EU stress testing will do nothing to restore confidence in it. However, UK banks are well capitalised and we will gain an important inheritance for society in the future as a result of the fiscal consequences of the intervention.
The net effect of the Government’s programmes amounts to a not inconsiderable risk to future economic activity. The first half of this year has seen economic growth picking up. An annualised rate of growth in the second quarter of nearly 4.5 per cent compares with the OBR forecast for this year of 1.2 per cent. Will the OBR issue a new forecast or does it only produce forecasts when asked by Treasury Ministers, and then at short notice if necessary to answer Questions in the other place?
My own view is that quarter 2 GDP figures will be the strongest quarter in 2010. Does the Minister expect economic activity to increase in momentum during the remainder of this year or does he share my view that the quarter 2 figure will be the highest reported? What will the Minister do if things begin to deteriorate and, as a number of noble Lords have suggested, the Government’s policies are seen to be contributing to an economic setback rather than a recovery?
As I have asked before, where does the Minister see the sources of growth for the future? The noble Lord, Lord Skidelsky, shares my view that the argument about squeezing out is simply not economically rational. It is difficult to reconcile the Government’s argument that the public sector is squeezing out private sector investment with the accumulation of a private sector surplus. Businessmen are not concerned about the deficit but with the Government’s withdrawal of support for the economy. The deficit is a consequence, not a cause, of excess capacity.
The Minister needs to address how we exploit comparative advantage. We compete with fast-growing, literate, numerate and young economies in the developing part of the world. Where are we going to compete? The noble Lord, Lord Bates, quoted from the millionaires’ favourite think tank, the World Economic Forum, to suggest that cutting taxes might be the obvious thing to do. We need to identify how we are going to compete effectively in economic terms in the future against these fast-growing economies, in particular those from the eastern part of the world. We need to invest in our workforce and in education and training. We should invest in infrastructure. As the noble Lord, Lord Skidelsky, said, now is the right time to do that because we have excess capacity. We should invest in facilitating the application of new technology and innovation but these are precisely the areas which the Government have picked out for early cuts. The Government are cutting on schools, innovation and technology, and universities. This is absolute nonsense and a huge risk to the economic performance of the country going forward.
I believe that the Office for Budget Responsibility is a commendable idea and it has my support. However, the concept has been damaged by its implementation. I welcome the involvement of the Treasury Select Committee in future appointments to the OBR. I know that the Minister will not make a commitment here in the House but does he believe that the decision that the Treasury Select Committee should have an involvement in appointments to the OBR should be extended to the Monetary Policy Committee and the Court of the Bank of England? If not, why has the OBR been picked out for special treatment and not these other, more important, entities? As my noble friend Lord Barnett pointed out, they have real powers, as opposed to those of the OBR, which are limited to forecasting and commenting on those forecasts.
I invite the Minister to answer a question which I have now been asking him for several weeks: will any action be taken to ensure that those who leave the Office for Budget Responsibility are not allowed immediately to return to the private sector with all the knowledge that they have as a result of their sight of the Government’s economic forecasting and public accounts? I do not suggest for one minute that Sir Alan Budd or anyone else will misuse that information but I am certainly aware that the appearance of the possibility of so doing may further erode what is already a deeply damaged, although good, concept.
There is undoubtedly scope for cutting public expenditure but the proposed level of cuts is draconian. I am not sure that the Liberal Democrats fully understand the extent of those cuts but we have a Liberal Democrat, Mr Danny Alexander, leading the process. In some ways, I wonder whether there might be some method in the Prime Minister’s madness in putting a Liberal Democrat in that position. However, if we are to do this job, why do we not do it well? Why do we not have someone such as Mr Philip Hammond, Mr Michael Fallon or Mr John Redwood as the Chief Secretary to the Treasury, or even the noble Lord, Lord Forsyth of Drumlean, who would bring considerable experience rather than the inexperience and naivety of the present incumbent? I worry that Treasury officials have very little experience in the management of the exercise that they are contemplating, and I also worry that there is very little experience among the Treasury Front Bench in respect of public expenditure. I defer to the Minister, who has considerable business experience, but it is striking that no one else in the Treasury team with responsibility for budget management has any experience at all in business management or in dealing with the sorts of issues to which the noble Lord, Lord Bates, referred earlier.
Finally, I want to mention Dr Cable’s comments today on banking, which I thought were quite irresponsible. To suggest that we should give a financial incentive to bankers to lend against their best judgment borders on the reckless and ill behoves a Government who are supposed to believe in private enterprise. I ask the noble Lord to dissociate himself from Dr Cable’s comments in that respect and to make it clear that in his judgment the problems of bank lending are more to do with demand than supply. Furthermore, I ask him to make it clear that bonuses, on which the right honourable Dr Cable has again spoken, are the responsibility of shareholders rather than of the Secretary of State for business.
My Lords, there is at least one joy in summing up for the Opposition in a debate that has ranged so widely over such an important issue, and that is to congratulate our two maiden speakers, the noble Lord, Lord Spicer, and the noble Baroness, Lady Browning, on their contributions. I noticed that on this occasion they both eschewed controversy and therefore must feel left out of a great dimension of this debate. However, we know that they will bring their experience of the other place to bear in future debates on these and other issues, and we welcome them to this House.
It is a somewhat invidious role to sum up for the Opposition when everything that can be said and presented as a challenge to the Government has been done so ably from the Benches behind me. However, I want to identify one or two points, which I hope the Minister will address. I noticed from his opening statement that he covered with great thoroughness a good deal of what was in the Budget, and I have no doubt at all that he will address the specific points that his noble friends Lord Northbrook, Lord Blackwell, Lord Higgins and Lord Bates put to him. After all, they have given their full support to his Budget, so he owes them a response to their particular points. I am rather more interested in the narrowness of the presentation that the Minister brought to the Budget, and I want a context. It is from our side—the Benches behind me, and exceptionally from the Cross Benches—that we have had a presentation of the context in which this Budget needs to be placed.
First, I shall respond to the noble Lord, Lord Razzall, the only Liberal Democrat who has contributed to this debate from his lonely eminence. I recognise that there was bound to be a parting shot at VAT and the position of the shadow Chancellor and former Chancellor, Alistair Darling, to cover up the obvious continued embarrassment in the Liberal Democrat ranks at that great poster in which their leader condemned VAT as the unfair, regressive tax that a Conservative Government would bring in if elected. However, the noble Lord, Lord Razzall, was a little more constructive than that. He emphasised that we needed context for this Budget. In particular, he referred to process and the rate at which cuts should be introduced. Some cuts are necessary—no one on this side of the House will deny that—but the extent and pace at which they will be introduced worried the noble Lord, Lord Razzall, and by heavens, they worry a great number of distinguished contributors to the debate.
The noble Lord, Lord Stern, raised the issue in the broader context. How can the Minister persist in this position, as the Government continually do, of addressing the economic problem as just a UK issue? It palpably is not just a UK issue. Debt plagues all the significant economies in the world, as the noble Lord, Lord Stern, identified in his thoughtful contribution. What is more, because debt plagues these countries, the Government have to address themselves to that issue as well. If they are to put all their trust in the private sector and insist that manufacture and services delivered by the private sector will bring the United Kingdom rapidly out of the difficulties that we are in, we want to know in which markets we will flourish. Have the Government not recognised that the German economy is in difficulties, and so too the United States economy? Indeed, the United States is pursuing a strategy that is very different from that of our Government. If there is one ray of hope in the present position, it is that there may be some engine of demand from the United States, which may bring benefits to Europe and the United Kingdom to give us a chance but not because of the Government’s philosophy on this matter.
My noble friend Lord Myners is absolutely right. This is not just a question of identifying a problem and applying a possible solution; it is an opportunity for the Conservative Party, which it is seeking to seize with both hands. It gives the party the chance to elevate the nebulous concept of the big society and to seek to decimate the contribution of the public sector. That is what these cuts are really about. Of course, the noble Lord, Lord Ryder, is absolutely right when he says that the Budget is merely an hors d’oeuvre. It may be hard to swallow, but think of the digestion we have to produce when the comprehensive spending review is revealed in the autumn. That is the ghastly feast that will be laid before the nation, and it will lead to exactly the anxieties that the noble Lord, Lord Stern, first articulated and which were brilliantly developed by the noble Lord, Lord Skidelsky, with all his understanding of these issues.
As the noble Lord, Lord Skidelsky, rightly said, the challenge is not the deficit; the challenge is the problem in the economy. Of course, cuts have their role to play, but investment and building up our capacity is of equal, if not greater, importance. We cannot trust a Government to invest who are, on ideological grounds, hell-bent on reducing the role of the state. The only professional economist, the noble Lord, Lord Desai—I think the noble Lord, Lord Skidelsky, probably rates himself as a professional economic historian, but if he wants to be included with my noble friend Lord Desai in this nomenclature, I am quite happy to include him—indicated that cuts are necessary but also indicated that, in fact, they will not have the immediate impact that could otherwise bring disaster upon the British economy.
Are we to rely upon inadvertency or inefficiency by the Government, or a bad selection of targets, for a delay in the savage proposals they have for the cuts? It will not do. My noble friends Lord McFall and Lord Rosser and other noble friends set out to establish the context in which this Budget is being presented to the British people. It is not a Budget that will solve the problems. It will certainly address itself to aspects of the deficit. None of us is against addressing aspects of the deficit, but that one should put as the sole priority the speed with which one can reduce that deficit is to rate the real economy lowly and to rate the concern of the noble Lord, Lord Bates—the irrationality of the markets—as the only driving force of government policy. If that is the only driving force, we do not need a Government, but we do need a Minister to respond to the challenges of this debate.
My Lords, as I conclude the debate on this Finance Bill—and I note that it is a debate on the Finance Bill, although I am grateful to noble Lords who have contextualised it by talking more widely about the Budget—I thank all noble Lords for their contributions, which have played an important part in scrutinising this legislation. I beg to differ from the view expressed by the noble Lord, Lord Tunnicliffe, at the outset, that this debate would be a formality. It has been an excellent debate, and I would like to start by drawing attention to the maiden speeches of my noble friends Lord Spicer and Lady Browning. Their contributions did not disappoint. My noble friend Lord Spicer drew important lessons from economic history. He started a bit of a debate with the noble Lord, Lord Barnett, about who had participated in more Finance Bills. I have to confess that I have only part of one to my name so far, but there will be another one later this year, so I will be trying my best to catch up.
My noble friend Lady Browning talked about the important need for financing for small and medium-sized enterprises, which is one key plank of the Government’s focus at the moment. Attention was drawn to this issue by my noble friend Lord Bates and the noble Lord, Lord Myners. In response to points made by my noble friend Lord Higgins and others about the money supply, the proof of the pudding is in the eating—which is partly whether finance does indeed flow particularly into the small and medium-sized enterprise sector of the economy. I remind your Lordships that today the Treasury and BIS, my right honourable friend Dr Cable’s department, jointly published the document Financing a Private Sector Recovery. The noble Lord, Lord Myners, might like to read that as an exposé of government policy in this important area.
The Government have inherited an exceptional fiscal challenge. Within seven weeks of taking office, we have set out a decisive plan for dealing with this challenge. Within 12 weeks we have our first Finance Act in place, legislation which will help to restore our public finances and confidence in our economy. We have also set up the independent Office for Budget Responsibility, which has been much discussed today. The noble Lord, Lord Stern, has today graphically shown why the OBR is so necessary. He speaks in the very guarded language of a former distinguished Second Permanent Secretary to the Treasury and head of the Government Economic Service. When he talks about the way in which revenue forecasts in particular were previously handled by Treasury Ministers and their advisers, and talks in terms of lack of clarity, hopeful judgments and inflated forecasts, I take that as a damning indictment of the way in which Ministers under the previous regime were able to play fast and loose with the data. That approach has made the OBR necessary, and the OBR will not allow Ministers to take such an approach in future.
I very much take to heart the suggestions that the noble Lord, Lord Stern, made about the conduct of the OBR. I note his well-balanced perspective on these issues of independence which other noble Lords seem to have got excessively fussed about in recent weeks. I also note that even the view of the noble Lord, Lord Barnett, on the OBR may be softening a bit. I think that I heard him talk about semi-criticism. He is shaking his head, but if we have got to semi-criticism, we are making progress, and we might have him fully on board very shortly.
As we are talking about the conduct of fiscal policy under the previous Government, I should point out that the noble Lord, Lord Myners, drew attention to the previous fiscal rules, which were open to all sorts of manipulation. The beginning and end of cycles could be changed at the whim of Ministers, and Ministers did so regularly.
The noble Lord, Lord Barnett, also drew attention to the relationship between the Monetary Policy Committee and the Treasury. Even though he attempted to put a completely false construction on my previous answer on this point, I absolutely stand by what I said. I am sorry to disappoint him on that.
I thank the noble Lord for that. But I did not say that the Treasury intervened at all in the workings of the MPC. It has a representative there to point out policy matters which the Treasury might be aware of or which it thinks the MPC might be aware of. That is not in any sense intervention in the way in which I think the noble Lord means it.
I fear that the noble Lord is moving on from the OBR, so may I ask him again for a simple and straightforward answer? Are the members of the OBR going to be allowed to return to the hedge funds for which they previously worked immediately on leaving the OBR, or will they be subject to a period of purdah?
I thank the noble Lord, although that was a different point from the one that he made previously; the point that he made in his speech was whether members of the OBR would have inside knowledge of the forecasts. The whole point about the OBR is that it will publish its forecasts transparently. I am not sure what the inside information is that the noble Lord is so concerned about.
Perhaps I may help the Minister. In his evidence to the Treasury Select Committee, Sir Alan Budd said that he had seen confidential information which was not in the public domain—information which the Minister, given his past City career as a Swiss banker, would no doubt recognise as price-sensitive information.
I look forward to seeing if and when the noble Lord, Lord Myners, returns to the City. There are accepted practices and terms for all who have worked in different parts of the public sector when they return to the City or elsewhere. Perhaps I may move on to talk about the new fiscal mandate.
My Lords, I believe that I have addressed the point. As with any such office, it would be inconceivable if members of the OBR took confidential information away with them. Just as the noble Lord, Lord Stern, has referred to a report which he compiled for Ministers in 2004 but which he left behind in 2007, it would be extraordinary to suggest that those working on sensitive matters in the public sector would take away secret documents.
The OBR receives unpublished information of different kinds and then publishes its forecasts publicly. I should have thought that the information the OBR has is of limited ongoing value. However, I have listened carefully to the points made by noble Lords. As the legislation to set up the OBR on a permanent basis goes through the House, there will be other opportunities for noble Lords to discuss the issue more fully. However, as we are concentrating today on the Finance Bill, perhaps I may move on and discuss matters which are of more direct relevance to that Bill.
I have said, and will return to say again, that the new fiscal mandate will eliminate the deficit in five years and that the bulk of this reduction will come from lower spending rather than higher taxes. However, this autumn’s spending review is not only about cuts and tackling the deficit; it will be a complete re-evaluation of the Government’s role in providing public services. I take the point to which my noble friend Lord Razzall rightly drew attention in our earlier discussions about this. As to the specific point made by the noble Lord, Lord Barnett, even areas which are protected—such as the National Health Service—will be looked at to ensure that administration costs are cut. I agree with the noble Lord that that should be done; the question is where and how such administration cuts should be recycled.
We have set out our steps for tackling the budget deficit and we have done so in a more transparent way than any previous Government. Some noble Lords have argued that, because we have lifted the skirt a bit, they would now like the skirt to be lifted a lot further. However, they do not give us much credit for the greater transparency we have already introduced.
We are on track to have debt falling and a balanced structural current budget by the end of this Parliament. It is only by acting quickly to tackle the deficit and restore confidence in the public finances that we will underpin and achieve economic growth. Action of this kind requires us to take tough decisions. A number of noble Lords have questioned this basic judgment, starting with the noble Lord, Lord Tunnicliffe. I was struck by the intervention from the opposition Benches of the noble Lord, Lord Desai, who did not in any way question the basic Budget judgment and gave a very balanced account. I had a look two or three times at the briefing notes that officials had given me just to check that the noble Lord was sitting on the right Benches, because I thought it was a very balanced account of the judgment that has been taken. And of course there are risks ahead. The basic judgment was questioned by other noble Lords, including the noble Lords, Lord Tunnicliffe and Lord Rosser. We had one quote from the OECD. The one I have to hand is from its Secretary-General, Angel Gurría, who hailed the Budget as a courageous move by the British Government, and said:
“It provides the necessary degree of fiscal consolidation over the coming years to restore public finances to a sustainable path, while still supporting the recovery”.
That is the basic judgment at the heart of the Budget.
The recent G20 communiqué stated that those countries with serious fiscal challenges needed to accelerate the pace of consolidation. The noble Lord, Lord McFall of Alcluith, says that it is the UK Government calling for early fiscal consolidation but it is actually the G20 that is calling for countries such as the UK to get on with it. The noble Lord, Lord Davies of Oldham, says that we are not adopting the same policies as certain other countries. Too right. Different countries need to adopt different policies appropriate to their particular circumstances, and our circumstances are regrettably that we inherited from the previous Government the largest budget deficit in Europe except Ireland, and we have to get on and tackle it. The bulk of the deficit reduction will come from lower spending but given the astonishing size of the budget deficit, we have not been able to avoid the need to raise some taxes. My noble friend Lord Higgins asked what increase of revenue there would be in the current and next year. The figures in the Red Book in Table 2.1 on page 40 show that the amounts raised by tax policy decisions in the Budget represent an increase in revenue of £2.8 billion in 2010-11 and £6.25 billion in 2011-12.
The choices that we have now made are ones that face up to the challenges ahead and do not simply defer them to future generations. There has been precious little from the opposition Benches in the way of alternative plans and thoughts as to how we are to deal with it. I welcome the contribution from the noble Lord, Lord Skidelsky, in one respect and that is that he put up a radical alternative vision. It seemed to be founded on the starting premise or assertion that we can continue to push up government borrowing without limit, although even he went on to recognise that certain Governments have got to the limits of what the borrowing capacity of a country can be.
There was an interesting contrast between the contributions from the noble Lord, Lord Skidelsky, and my noble friend Lord Bates. The noble Lord, Lord Skidelsky, postulated what might cause a businessman to invest, but I heard from my noble friend Lord Bates pretty much what I had already scribbled down as what I thought businessmen wanted, which is that they will increase their investment when they have confidence that there will be increasing orders from their customers. I believe that their confidence in their customers will be founded on the customers’ view of whether there is a grip on the economy. Businessmen will look at the level of interest rates and they will want to see them kept low. They will want and need to see credit continuing to flow. They will need to see that government expenditure is under control. They will want to see that regulation is being tackled. They will want to see predictable and falling corporate tax rates. They will want to see that employment taxes are being cut from where the previous Government intended to take them. They will want to see that the Government, in cutting back expenditure, are maintaining investment in those areas of economic growth. These are all things which I see in the total Budget package. I agree with my noble friend Lord Bates on them.
There was discussion about value added tax and, in that context, whether this a progressive or regressive Budget. We are taking responsibility in this Bill for the financial challenges that we have inherited but in a way that is fair and open. Everyday essentials such as food and children’s clothing will remain zero-rated for VAT throughout the Parliament, protecting those on low and middle incomes. Those most affected by the VAT rise will be those who spend the most. This is clear in both government and independent analysis. If one looks at the impact of expenditure by decile, as is appropriate for a tax on expenditure, one sees that the richest pay the most and the poorest least. These points were questioned by the noble Lord, Lord Tunnicliffe, but were knocked admirably on the head by the noble Lord, Lord Desai, who said that it was wrong to suggest that VAT was necessarily a regressive tax. I do not want bore everybody with more quotes from the IFS, but its view is that total expenditure is the more appropriate guide to lifetime living standards, as households smooth their expenditure over their lifetime. Analysis by expenditure rather than income level is therefore a better measure of the impact of the VAT increase and, on this basis, the VAT increase is progressive.
Other noble Lords made wider points on whether the Budget is regressive or progressive, including the noble Lords, Lord Lea of Crondall, Lord Rosser, and, again, Lord Myners. They questioned whether policies of the previous Government should be included in the assessment. The IFS accepts that, looking at the Budget as a whole, the changes are progressive. It does not make sense, surely, to ignore the policies of the previous Government which the coalition Government have decided to retain and will legislate to implement.
The Minister is rather gratuitously missing the point. The Government have never made that clear when they proclaim that the Budget is progressive. I can make their sums add up to that conclusion only by including the March measures of the Labour Government. That is an astonishing thing to do.
Will the Minister agree to desist from claiming that this Budget has those effects? Does he agree with the Treasury Select Committee that a proper analysis of the income redistribution effects of measures announced this year should include the public expenditure cuts and that they should be looked at together? The noble Lord, Lord Razzall, and I persistently have asked these questions. This is an opportunity for answers. They are serious questions and they need serious answers.
My Lords, given that I have just said that I thought it appropriate for the assessment of the total effect of the Budget to include an assessment of those policies proposed by the previous Government which the coalition Government have decided to retain and will legislate to implement, I am at a bit of a loss to understand the premise of the noble Lord’s question. I am not sure that this stage of the Bill is the point to be going into clarifications of this kind, so, if he will permit me, I will move on.
I turn to the welfare budget. We have to strike a balance between what is right to do with the welfare budget on the one hand and the depth of cuts to public expenditure on the other. If we fully protected the welfare budget, it would force deeper cuts to public spending, which could affect the services on which the most vulnerable in society depend. Refocusing benefits so that they go to those who need them most helps in turn to relieve pressures on front-line spending. I remind noble Lords that 880,000 people on the lowest incomes are being lifted out of income tax entirely.
We also had a certain amount of talk from the noble Lord, Lord Lea of Crondall, about “private sector good, public sector bad”. I want to refute any suggestion that that is the Government’s view. A much more sophisticated and appropriate way to look at it was the approach of my noble friend Lord Blackwell, who pointed out that a situation in which government spending accounted for 48 per cent of GDP was unsustainable. That is the right way to look at it. Private sector growth is absolutely what we need, but the public sector does a very fine job; it is just that we cannot afford a public sector of the size to which it had grown under the previous Government.
Although we probably had enough talk of cake from the noble Lord, Lord McFall, it is a question of the size of the cake, how it is distributed and what we can afford of the cake, not of wholly inappropriate comparisons between one part of it being good and the other part being bad.
On the idea that it is a gross caricature to say, “private sector good, public sector bad”, the Minister’s predecessor on the Conservative Front Bench said that the private sector is productive, the public sector is unproductive. The noble Lord can look at Hansard. I was simply making the point about all the ordering—I mentioned Costain—when it comes to cutting schools and cutting hospitals, and the interdependence of the public and the private sector.
My Lords, I fully accept that of course there is huge interdependence between the public and private sectors.
I stress again that the Government’s aim is to make Britain a place where innovation and enterprise can succeed. This is critical. We want to send a clear signal to international business that Britain is once more open for business. Attracting inward investment will stimulate growth and create jobs, and the Budget provides a springboard for a private sector-led recovery, with measures to support business and restore the UK’s competitiveness. These include not only a reduction in corporation tax to 24 per cent, but a reduction in the small profits rate to 20 per cent, an increase in the national insurance contribution threshold for employers and a wide package of support for small businesses. In answer to the specific point raised by my noble friend Lord Northbrook, on the reduction of capital allowances, I can assure and reassure my noble friend that even allowing for reduction of capital allowances and the decrease in annual investment allowances, the next take from corporation tax will be reduced by £1.3 billion per year by the end of the forecast period.
It is right, as set out in the coalition agreement, that capital gains tax should increase in order to help create a fairer tax system. The approach we have taken balances the competing demands of fairness, simplicity and competitiveness and the increase in the rate of capital gains tax will allow this Government to remove almost a million of the poorest people from income tax.
My noble friend Lord Higgins talked about indexation allowances and taper relief. I should point out that indexation allowance for CGT has a substantial Exchequer cost. It cost £1.4 billion in 1997-98 and indexation would add significant complexity to the tax system. Therefore, we do not believe that indexation is justified when CGT rates are well below the top marginal income tax rate and at a period with lower inflation than at a time that indexation allowance was originally introduced.
On the point about indexation, to say that it would increase complexity when the Explanatory Notes to the clause as it stands run to six pages is perhaps a little strange. May I pursue with my noble friend the broader point that I raised: is it not important to have a monetary policy that is compatible with the cuts being made? Also, in that context, why does he think that quantitative easing appears not to have had a significant effect on the money supply?
My Lords, I am not going to answer for judgments that are fundamentally for the Bank of England. It has a very clear monetary policy mandate, which is around keeping inflation low, and through the combination of monetary policy and confidence in the new Government’s fiscal stance we have seen that UK government borrowing rates have indeed remained low, and that the spread against the benchmark of the German Bund has indeed worked in the UK’s favour since the election. That goes to the heart of the nexus between monetary policy, low interest rates and keeping the flow of credit going to businesses and private individuals. I want to move on—
The Minister spoke on the subject of capital gains tax. Can he confirm whether he stands by his statement, in introducing this debate, that the capital gains tax rate for those on standard-rate income tax will remain at a lower rate of 18 per cent and that a standard-rate taxpayer will not be required to pay a higher rate of capital gains tax?
My Lords, I appreciate the nature of the intervention by the noble Lord, Lord Myners, and the Minister has been generous in giving way. The House will understand that the guidance in the Companion is that speeches are normally not expected to exceed 20 minutes. I also understand that this is an unusual debate, because this House has a great interest in but is not permitted to return to this matter at a future stage. I therefore took, perhaps, a sole decision that matters ought to be allowed to continue so that noble Lords could intervene upon my noble friend. I should perhaps indicate that the patience of the House may soon be extinguished and I therefore advise my noble friend that although he may of course respond as he may feel appropriate to the intervention by the noble Lord, Lord Myners, he should then draw his remarks to a close.
My Lords, I confirm to the noble Lord, Lord Myners, that the proposals are indeed for an 18 per cent capital gains tax rate and for 28 per cent on those who are on the higher bands for income tax. We have no other proposals. I shall respond briefly to the point made by the noble Lord, Lord Desai, about unearned income needing, in his view, to be taxed at rates as high as earned income. Taxing unearned income at lower rates maintains incentives to save and invest, and it is critical that we continue to think about and promote savings and investment in this country. Lower rates for unearned income allow for the fact that income has already been taxed before it is saved. Higher tax rates on savings would lead to high levels of double taxation, which would not be conducive to increasing savings and investment.
One or two comments have been made today about pensions, because the Bill will provide the first step in freeing employers from the complicated and poorly targeted pensions legislation that the previous Government introduced. We will use this power, which expires on 31 December this year, only if a sensible alternative system can be found that provides the same necessary revenue. We will also be clear about the impacts of this alternative, so I am glad that my noble friend Lord Blackwell recognises the benefit of what we are doing. I will certainly make sure that the ideas which he puts forward are fed into our consultation on this issue.
On annuities, the Government, as I have said, will remove the requirement to purchase annuities at 75. In answer, I think, to the point that my noble friend Lord Higgins was making, this Bill brings in transitional provisions that prevent anyone turning 75 on or after Budget day from being disadvantaged by having to make a decision before the new rules are in place. We are consulting on the mechanics of the new system now, and in that context I will make sure that we look at my noble friend’s previous amendments on this subject.
Lastly, I want to do justice to the points that have been made in the debate. If noble Lords will permit me, I will say a couple of words on points that have been raised on the general structure of the tax system. This topic was first brought up by the noble Lord, Lord Stern. The noble Lord, Lord Desai, also made some comments, as did my noble friends Lord Northbrook and Lord Bates. As set out in the coalition’s programme for government, the tax system does indeed need to be reformed to make it more competitive, to make it simpler, to make it greener and to make it fairer.
In addition to structural reform, at the Budget the Government committed to reforming the way in which tax policy is made to restore the UK tax system’s reputation for predictability, stability and simplicity. The Government will consider the conclusions of the Mirrlees review when they are published later this year and, as announced at Budget, the Government are considering improvements to specific green taxes, including changes to the climate change levy and to the aviation tax system. I do not know whether I will be able to get access—I rather doubt it under the arrangements that apply—to the 2004 paper of the noble Lord, Lord Stern, but I hope if he can remember some of the critical ideas in it that he may drop me a line. I remind him and my noble friends Lord Northbrook and Lord Bates that the Office of Tax Simplification has now launched, and it will address the critical issues to which they properly draw attention.
Before we conclude, I will explain briefly how the Government will ensure greater scrutiny of the next two Finance Bills. Given this unusual year, the Government will publish a further Finance Bill in the autumn. I cannot promise my noble friend Lord Bates that it will be as short as this one but it will introduce those measures inherited from the previous Government. For the first time, draft legislation and Explanatory Notes are available on the Treasury website.
To conclude, this Bill sets out our priorities, our vision and a credible path to a sustainable recovery. We are encouraging enterprise and protecting those most in need, yet tackling the stratospheric debt left to us and this country. This Government are taking action where others have not.
Bill read a second time. Committee negatived. Standing Order 47 having been dispensed with, the Bill was read a third time and passed.