Motion to Take Note
My Lords, last week in the other place the Chancellor set out a Budget to continue the UK’s economic recovery. It was a Budget which responded to the global economic uncertainties that have grown in recent months, and made appropriate choices to insulate ourselves from those risks as much as possible.
There are many positive stories to tell about the UK’s economy. For example, last Wednesday the employment statistics showed yet another boost to employment, with 150,000 more jobs than the Office for Budget Responsibility expected just four months ago. This means that employment is at the highest level ever, and the proportion of people on the claimant count is the lowest it has been for over four decades. Last year also saw the highest annual growth in nominal and real earnings since 2008. Meanwhile, the fiscal deficit as a share of GDP is forecast to be cut this year by almost two-thirds from its 2009-10 post-war peak—from 10.3% to 3.8%. The OECD has forecast that the UK will be the fastest-growing major advanced economy in 2016.
However, there are still significant economic issues that need to be addressed. The Office for Budget Responsibility has forecast a deterioration in the fiscal position between 2016-17 and 2020-21, largely driven by lower tax receipts—particularly as a result of a weaker productivity outlook and a weaker outturn for nominal GDP. This reflects a common recent phenomenon of low productivity growth across the western economies, but it also comes at a time when economic turbulence worldwide has led to weaker growth forecasts for the global economy and, importantly, for global trade.
I observe that there have been three specific developments in global markets since the Autumn Statement that are material. First, until this month, there had been evidence of the US economy slowing. Secondly, as is well discussed, commodity prices and inflation expectations have continued, or did continue, to drop, resulting in nominal GDP in many places, including the UK, being weaker than previously thought. Thirdly, while in my judgment Chinese activity data has not deteriorated much further—remember that this is since November—additional policy uncertainty has raised risk premia in markets exposed to China. Against that, I would note that, in the context of the revised OBR forecasts for public sector finances, it is interesting to observe that there have been signs of reversal in all three of these trends in recent weeks. None the less, there remain many global risks—these and others—and, as an open trading economy with extremely strong links worldwide, we are by no means immune from them.
At the same time, domestically our productivity remains too low, as we have discussed many times in this House. I have spoken at length about tackling the UK’s productivity challenge. These issues have existed and been debated for decades and the solutions and better outcomes will not necessarily materialise in a matter of months. Nevertheless, the measures set out in this Budget take further important steps which, as well as helping us stick to our path for running a budget surplus, will secure growth and promote productivity increases over the long term.
With noble Lords’ permission, I will first discuss the revised fiscal figures for the next five years and then move to specific measures introduced in this Budget. In the face of the new assessment of productivity and the slowing global economy, the OBR now forecasts that UK GDP will grow by 2% this year, 2.2% again in 2017 and then 2.1% in each of the three years after that. The Government have responded to the deterioration in the OBR’s fiscal forecast and are taking new measures to ensure we keep living within our means. To help us achieve this, the Government will make further savings of £3.5 billion from departmental spending, following an efficiency review.
Although debt as a percentage of GDP is above target this year, compared to the forecast, importantly, the actual level of our national debt in cash is around £9 billion lower. In the future, debt is forecast to continue to fall as a share of GDP each year to the end of the forecast period. In 2009-10, the deficit was forecast to reach 10.3% of national income. Thanks to sustained action, the deficit is forecast to fall by almost two-thirds by this year, reaching 3.8% of GDP. The deficit is now forecast to continue to fall across this Parliament and, because we have taken decisive action to control spending and make savings, in 2019-20 Britain is set to run a surplus.
When the forecasts change, of course our plans also have to change. However, the decisions made in this Budget ensure that our fiscal mandate will be met, meaning greater resilience for our economy in uncertain times. Importantly, we have set out how to achieve this in a fair way. HM Treasury analysis published alongside the Budget shows that, as a result of actions taken, the proportion of taxes paid by those on highest incomes will increase, while the poorest and most vulnerable will continue to be supported.
In parallel, I also welcome this opportunity to listen to Members’ views on the information that will be provided to the Commission this year under Section 5 of the European Communities (Amendment) Act 1993. As in previous years, the Government will inform the Commission of the UK’s economic and budgetary position as part of our participation in the EU’s stability and growth pact. The Government plan to submit their convergence programme, with the approval of both Houses. The convergence programme explains the Government’s medium-term fiscal policies as set out in the 2015 Autumn Statement and Budget 2016, and also includes the OBR forecasts. As such, it is based entirely on previously published documents that have been presented to Parliament.
The UK economy is deeply intertwined with the economies of other EU member states. In 2014, 44% of total UK exports were destined for the EU 28, so it is in our interests that the European economy is successful and stable. It is therefore important that we participate in the EU’s macroeconomic co-ordination processes to continue to drive important messages about sound economic policy and further development of the single market. With the Budget on 16 March this year, I appreciate that the time to prepare for this debate has been particularly tight. Against that background, the Treasury has made every effort to provide early copies of the convergence programme document in advance of the debate today.
Before I turn to the measures contained in the Budget, I would like to make a few comments on one now key and topical aspect of the fairness agenda: namely, disability payments. The focus of the Government has always been on strengthening the economy in order to create a fairer society. As a result of the Government’s policies, unemployment is at a four-decade low, wages are higher, inequality, child poverty and pensioner poverty have fallen, and the gender pay gap is at an all-time low. These have not happened by chance but because of deliberate strategies to fix the economy, back business, control spending and reform welfare by incentivising the reasons to work. So although there have been controversies, the results have helped to build a stronger society.
We have also significantly increased our support to disabled people. Indeed, the sums are considerably greater than those under the previous Labour Government. However, it was clear that the reforms proposed to personal independence payments, although they drew on the work of an independent review, did not command support. That is why they have been withdrawn. Over the coming months, the Government will be working to build a system of disability support that is stronger, fairer and better integrated with our health and social services. And, to be clear, there are no plans to make further welfare savings. But there remain strong reasons to keep the welfare budget under control. Strong leadership demands taking difficult decisions—decisions that may not always be popular, but which will make the country stronger.
The measures set out in this Budget will make the country fundamentally stronger. They will encourage growth, savings and investment, boost productivity, invest in our skill base, ensure that the tax system is fair as well as being competitive, rebalance the economy, and help people’s well-being. We know that, in order to strengthen our economy, our businesses have to be as competitive as possible because that increased competitiveness will be a driver of long-term growth.
It is for this reason that the Budget cuts the rate of corporation tax even further, to 17% in 2020, giving us the most competitive rate in the G20 and benefiting more than 1 million businesses. The Budget also cuts the burden of business rates by £6.7 billion over the next five years, taking 600,000 of our smallest firms out of business rates altogether. Through a £1 billion North Sea oil and gas package, this is a Budget that helps Britain’s largest industry succeed in difficult economic times. Through cuts to both the higher and basic rates of capital gains tax, it encourages investment, which is the lifeblood of Britain’s businesses. And through the abolition of Class 2 national insurance contributions, it creates a simpler tax system and a tax cut of more than £130 for the 3 million-plus self-employed people in Britain.
Tax should not merely be competitive; it also has to be fair. The Budget sets out a series of measures designed to ensure that multinational companies pay their fair share of tax by introducing restrictions on the use of internet expenses, strengthening the rules on hybrid mismatch agreements, preventing property developers shifting payments offshore and taxing royalties payments where these are used to avoid tax. Important measures are also taken to simplify the tax system, including modernising the climate change tax system, updating corporation tax rules on losses and reforming stamp duty land tax on residential properties.
This is also a Budget that helps incomes and savings. It raises the tax-free personal allowance to £11,500 from next year, and the higher rate threshold to £45,000. It freezes fuel duty, helping families and businesses keep costs low every time they fill up. For the first time, it creates a lifetime ISA, helping people to buy their first home or save for their retirement—potentially one of the most exciting savings tools for a generation.
In this Budget, we have taken further important steps to boost our productivity, adding to those announced in the summer of 2015. On education, it commits a further £1.6 billion to education spending, gives more schools the opportunity to extend the school day, drives forward the academies programme, creates the first national funding formula for schools, boosts sport in schools, helped not least by the soft drinks industry levy, and, crucially—I am particularly pleased about this—fires a starting pistol for transforming education in the so-called northern powerhouse.
On our transport infrastructure, this Budget tackles some major existing barriers to growth: the green light to so-called HS3 and, in particular, a commitment to a Manchester to Leeds train time reduction to 30 minutes; a national plan for developing the Thames Gateway; major motorway improvements in the north, including working up a plan for a trans-Pennine tunnel; the start of the Crossrail 2 development; and two new subjects for the independent National Infrastructure Commission to study—5G and developing the Cambridge to Milton Keynes to Oxford corridor.
This Budget also continues the Government’s devolution agenda through: new devolution deals with Greater Lincolnshire, East Anglia, the West of England and the Cardiff Capital Region; the start of negotiations with Edinburgh and South East Scotland; further devolution to Liverpool city region and to Greater Manchester; and an accelerated launch of the 100% retention business rates pilot.
Over the past six years, this country has grown and strengthened its economy in precisely the way that we need if we are to continue succeeding in an uncertain world. Global circumstances have the power to blow any country’s economy off course. It is for this reason that it is so important to redouble our efforts to build economic security through sustainable growth and sensible public spending decisions. But living in a changing, uncertain world creates opportunities as well as threats. I want the UK to be in a position where we can focus on making the most of those opportunities, both here and around the world. That is what this Budget helps us do. It prioritises stability, security and sustainable long-term prosperity, and I commend it to your Lordships.
My Lords, before the Minister at least notionally sits down and before I begin my speech, I listened very carefully to what he had to say about disability payments. He failed to explain how the budgetary position set out in the Red Book is to be restored, given that the payment cut has been rescinded. It will be very difficult for this Grand Committee to evaluate the Budget unless he provides this essential piece of information. I am happy to give way for him to do so.
My Lords, I am planning to talk about that more. I anticipate that that will not be the only comment on this topic, and I plan to respond when I hear other noble Lords make their comments. It needs to be said in exactly the right context rather than for me to respond right now.
Very well, we will wait with interest.
My Lords, in opening his Budget speech in another place just six days ago, the Chancellor of the Exchequer declared:
“The British economy is resilient because, whatever the challenge … we have held to the course we set out”.—[Official Report, Commons, 16/3/16; col. 951.]
This is a remarkable statement, because neither part of it is true: the British economy is not resilient and he has certainly not held to the course. The story of a vacillating Chancellor is told in wonderfully subversive terms in table B.2 of the OBR’s Economic and Fiscal Outlook. The author of the OBR report explains the Chancellor’s reaction to revised OBR forecasts of changing economic fortunes:
“On some occasions, the Government has chosen to offset the effects of our underlying revisions – e.g. in November 2011, when they would otherwise have led to a target being missed. On others it has chosen to accommodate those changes – e.g. in December 2012, when despite our forecast revisions implying that the debt target was set to be missed, it decided not to offset their effect”.
So much for “holding the course”. These vacillations have not been trivial. They go a long way to explaining what has happened to the economy in the past six years, and why it is not resilient. They also help us to anticipate the consequences of the Chancellor’s last remaining target: a budget surplus by 2020.
Let us recall the economy that the Chancellor inherited from the noble Lord, Lord Darling, whom I am delighted to see here in his place. There was a fiscal deficit of a little under 8% of GDP—down from more than 10% the previous year—and the real economy was growing at 3% a year. In May 2010, Mr Osborne’s new austerity killed that growth performance stone dead. The squeeze reduced growth to zero by early 2012 and the deficit had started to tick upwards again. Something had to be done. The response, as we have heard from the OBR, was what the Chancellor calls in his speech a short-term fix. He stopped squeezing. Austerity was quietly shelved for a while. In technical terms, the cyclically adjusted budget deficit was left unchanged instead of being cut further as the growing deficit would have demanded if the Chancellor had held to the course. What was the result? The removal of the deadweight of Osborne’s austerity led to a return to growth and a falling deficit once more.
Now the vacillating Chancellor plans to return to austerity, even though, interestingly enough, that word failed to appear in the budget speech. He plans to cut the cyclically adjusted budget deficit every year for the next five years, with a huge fiscal tightening in 2019—the content of which is unspecified—all in the search of that dogmatic objective of a budget surplus by 2020. We can only expect the same outcome as that of Mr Osborne’s previous bouts of extreme austerity.
While the Chancellor has vacillated in practice, the underlying theoretical belief that drives his policy has remained constant: first, that a balanced budget is the foundation of economic growth; and, secondly, that a tight fiscal policy is necessary to provide the opportunity for an expansionary monetary policy that will stimulate the requisite growth. It is this policy mix—Mr Osborne’s policy mix—that is the source of much of the “turbulence” that he blames on others, and it is this policy mix that has seriously weakened the foundations of the British economy.
What are the markers of this weakness? The first is low productivity growth—the spectre that dominates this budget. Since 2010, the UK has suffered the largest fall in growth of output per worker hour in the G7, and now we have the lowest rate of productivity growth among the advanced countries. It is attributable, perhaps, to many factors, but predominantly to an investment rate still 20% below the pre-crisis level, with low wages and ever more easily disposable workers creating an incentive to hire cheap labour rather than invest in labour-saving capital. Low productivity growth not only undermines the possibility of raising the standard of living but undermines the competiveness of the economy.
The second indication of weakness is the UK’s sharp fall in our share of world markets since 2010. The impact of slow-growing world markets is, for the UK, doubly severe. Our markets may be growing slowly, but our share of those markets is becoming smaller, delivering what I believe in the Conservative Party is called a double whammy. The result is a record for Mr Osborne in 2015—the largest current account deficit, relative to GDP, since the early 19th century. That means that our standard of living is now funded by the accumulation of foreign debt.
In his Budget speech, Mr Osborne boasted that,
“we have doubled our foreign exchange reserves”.—[Official Report, Commons, 16/3/16; col. 952.]
He failed to point out that Britain’s foreign debts have risen much faster, so that our net international investment position has deteriorated from around minus 2% of GDP at the end of 2010 to in excess of minus 25% today. This growing international indebtedness exposes the UK to the vagaries of the international money markets. That unhappy situation is not resilience.
What then of the expansionary monetary policy that was supposed to be one of the goals of fiscal austerity? There has certainly been monetary expansion—not just the historically low interest rates but quantitative easing, too. But apart from funding the growth in consumer demand and hence in household debt that has been the main driver of growth over the past three years, monetary easing has not produced the expected increase in investment. Instead, it has fostered the financial turbulence of which the Chancellor complains in the Budget speech. The old adage that, in the absence of the prospect of growing demand, cheap money amounts to pushing on a string has once again been confirmed. Instead of funding real investment, monetary expansion has resulted in a boom in asset prices—not just in houses and equity markets, but in the flow of funds into emerging market corporate bonds in the search for higher yield.
All these asset markets have the potential for extreme instability, as is all too evident today, and, as has been amply demonstrated in the last seven years, financial instability leads to substantial real economic loss—loss that overwhelms any positive impact that cheap money may have had. This financial fragility is the third marker of economic weakness. Very low productivity growth, deteriorating international competitiveness and severe asset market distortions that can only lead to further financial instability—that is what the Chancellor calls resilience. Yet in the face of evident policy failure, the response of the Chancellor and of the monetary authorities is more of the same: more austerity, more QE.
It will be up to future generations of economic historians to examine exactly how George Osborne managed to get things quite so wrong, but it is possible to say today why fiscal austerity and cheap money have not produced the results that were expected. In both cases, the Chancellor was expecting behavioural responses, particularly the responses of business investors, that simply did not come to pass. The proposition that a balanced budget is the foundation of economic strength and that cheap money will stimulate recovery both rely on the belief that the economy is essentially a self-adjusting system. There may be unexpected shocks, there may be what the Chancellor refers to as “a dangerous cocktail” of risks, there may be time lags and mistakes, but in the long run, markets will revert to an equilibrium of steady growth. Nothing else needs to be done. That belief was tested to destruction in the 1930s. Mr Osborne has tested it again and it has failed again. The economy is not, in any significant sense, self-adjusting. Businessmen do not respond to the stimulus of cheap money by increasing investment if they see no prospect of a future of growing demand.
So what is to be done? How is the trend to low productivity, decreasing competitiveness and financial fragility to be reversed? Here I agree, in part, with the Chancellor. We do not want “short-term fixes”, as he put it. We certainly do not need what we are offered in the Budget, described by the OBR as,
“near-term giveaways followed by long-term takeaways”.
What we need are,
“long-term solutions to long-term problems”. [Official Report, Commons, 16/3/16; col, 951.]
I believe the Chancellor is right that a simple stimulus, whether fiscal or monetary, will not work; it will just lead to further deterioration in the balance of payments and yet more foreign debt. Therein lies the dilemma. To lift the UK economy out of the hole that the Chancellor has dug requires long-term sustained investment in the productive base of the economy—in the supply-side, if you like. That sustained investment would raise the prospect of growing future demand and provide the pull on the string to validate the monetary push. Yet in the immediate future, before it delivers higher productivity and enhanced competitiveness, sustained investment will also result in a further—perhaps short-term—deterioration in the balance of payments, with the potential for yet further financial instability that will blow any business-led investment programme off course.
That is why the Government must take the lead. There are positive noises in the Budget about infrastructure, technology and skills and even a pothole initiative—though only a small one—but there is nothing on the scale required. Given that the cost of funds to the Government is today just about zero in real terms, it is difficult to understand the failure to initiate a major expansion of investment in infrastructure and the other major components of supply-side strength—skills, higher education, R&D, new technologies and creative industries. This failure is resulting in not just loss of output today but a long-term loss of competitive productive capacity.
To fund such a programme while mitigating—though not eliminating—the likelihood of financial instability, there should be a hypothecated, ring-fenced, British reconstruction fund, financed by the sale of long-term bonds either to the private market, or, if necessary, to the Bank of England—quantitative easing with a purpose, if you like. To avoid the fiscal sleight of hand to which Chancellors are unfortunately prone, the objectives of the fund should be clearly delineated and audited.
Of course, the deficit hawks will claim that this is just another government spending proposal presented in attractive wrapping paper. But what the austerity junkies fail to appreciate is that fiscal balance is the consequence of economic growth, not the cause, as the experience of the last six years has clearly demonstrated. Unless we solve the problem of lack of investment, low productivity and declining competitiveness first, the Chancellor’s financial targets will never be met.
Previous Governments have been criticised for failing to fix the roof while the sun is shining. But far from fixing the roof, Mr Osborne has been hacking at the foundations. That is why a new approach is needed, and needed now.
My Lords, there has been much focus on specific elements of the Budget Statement in the week gone by, and rightly so. Each policy should be analysed to discover whether it will be good or bad for businesses, be helpful or harmful to those on the lowest incomes and simplify or complicate the tax system. But amidst the rush to take a scalpel to the Red Book and unearth a hidden nasty, we have to remember an important big-picture fact: the Government have done a very good job of steering the economy through some choppy waters.
The deficit we inherited from Labour has been trimmed back, taxes have been cut and the direction of travel has been very favourable for business, but the job is not yet done. There is no room to be complacent, like at the last Autumn Statement, when the Government found an extra £27 billion to spend over the course of the Parliament. Times are tough, but they are necessarily so because of the mess we inherited from Labour. We have to ensure that we maintain a robust stewardship of the economy to help businesses, taxpayers and those who rely on public services.
That is why I was pleased to see so many good measures in the Chancellor’s Statement. There were welcome moves to encourage enterprise, with a package of tax cuts to boot. Reducing the headline rate of corporation tax shows that we are serious about attracting and retaining businesses. The cuts to capital gains tax will increase economic activity, too, and evidence shows that lower rates of CGT bring in higher revenues because of the additional economic activity. There is a lesson in there for the Government in other areas of taxation, most notably with the additional rate of income tax. Speeding up the increase in the 40p income tax threshold will also encourage those who want to work hard and earn more for their own families.
However, while tax cuts on entrepreneurs and businesses signalled a shift in the right direction, some fiddly changes to the structure of corporation tax and CGT will add more pages to the gargantuan tax code. On the sugar tax, for example, I appreciate that obesity is a problem—I certainly claim that for myself—and I would also say that there is some dreadful obesity in the national debt and some absolutely appalling obesity in the tax code. However, I cannot imagine anything more addictive than offering the Inland Revenue a completely new tax, which is far worse than giving a doughnut to an obese teenager.
It is said that the UK has more accountants than the rest of the EU combined, and their numbers are sure to be bolstered with more tax complexity. I have an affection for the accountancy profession, having once been awarded the “Saying of the Year” in AccountancyAge. However, I am not sure that the number of accountants we have in the UK improves our competitiveness. Changes to business rates seem positive on the surface, but it remains to be seen whether entirely exempting certain businesses simply means that their rent will increase.
There is also a legitimate debate to be had about the Government’s spending priorities. The row over welfare spending has dominated the post-Budget analysis and we should now start to seriously contemplate why we continue to implement spending reductions on in-work benefits but continue to protect all spending on pensioners. We know that it is not right for the richest pensioners in the country to be sent a cheque for their household energy bill, paid from the taxes of a warehouse worker who pulls night shifts to pay the rent. The richest over-75s should not get to watch the BBC for free thanks to the taxes of the cleaner who gets up at 4 am to do her first shift.
A poll for YouGov at the end of last week found that 44% see spending reductions as necessary, against 33% that do not. Despite all the hyperbole about savage cuts and the gloomy warnings of so-called austerity, the truth is that the public gets it. Now is a good time to think about the entire profile of spending reductions. It is not just welfare. The Chancellor’s welcome big-picture strategy is somewhat hamstrung by the decision to ring-fence certain areas of spending. Overseas aid is a perfect example, but we have also protected defence, health and education, quite often putting a wall up around waste and inefficient practices. A move towards pulling down ring-fences should be discussed in the run-up to the Autumn Statement and next year’s Budget.
Having covered the good and the bad, I should continue my homage to the spaghetti western and discuss the ugly—our complicated tax system. Indeed, the Chancellor himself once called the tax rules a “spaghetti bowl”, to stretch the metaphor. Is it a coincidence that the most dense and most incomprehensible legislation is our tax legislation—the stuff that is not improved by the attention of your Lordships’ House? The tax code now reportedly runs at over 21,000 pages, and it is for this reason that nobody trusts it. There is simply no way that HMRC can keep up with such a system, and real tax simplification should now be a strategic priority. I have a small, modest proposal. What would happen if, in another place, we required that the Chancellor of the Exchequer should read out in full the Finance Bill, and only those honourable Members who had been whipped to listen to it would be allowed to vote on it? This would require the Finance Bill each year to at the very least be readable.
The great British public voted for a Conservative Government because we are more reliable stewards of the economy. That much is clear. The last Government—and this one—have seen us through some tough times and the economy has created millions of jobs at the same time as returning to growth. However, there is still an awful lot more to be done.
My Lords, in his Budget speech the Chancellor said that he would eliminate the Liberal Democrats—by midnight. Instead, he managed a direct hit on the Conservative Party. I think he has confirmed his reputation as a man who always misses his targets. The story of this Budget is of missed targets and the utterly unacceptable cuts in public spending on the working poor and disabled people that the Chancellor chose to cover up his failures.
Can we now have an absolute assurance that the Chancellor’s agreement to throw out the £4.3 billion of cuts to PIP will not lead to cuts in other parts of welfare? I notice the phrase “no further welfare cuts”. That needs some confirmation and definition. Will the blow fall on the pensions part of DWP? The new Secretary of State did not address that. Will it mean that public services as a whole have to find the £4.3 billion in cuts? Are we all meant just to forget the £4.3 billion in cuts? In which case the Budget is shot. I wonder if the Minister could offer some clarity.
In the coalition years, the Government worked successfully with the support of a broad majority of the British people to gradually eliminate the structural deficit, better known as the cyclically adjusted current budget—intentionally excluding both cyclical support and capital spending. This is the target that the financial markets require to assure fiscal discipline and fiscal stability. Even with the OBR’s March downgrades in the economic forecast, this measure goes into surplus in 2018. I have no idea how the changes—the mystery £4.3 billion—have impacted that outcome, but I hope the Minister will be able to tell us. Cuts or tax increases beyond balancing the CACB are an ideological choice; they are not required for fiscal discipline or fiscal stability.
Will the Minister finally accept that the Government’s decision to change the whole character of the fiscal target and to require a fiscal surplus in 2020 based on the new, far more austere definition including capital spending was a mistake and should be rapidly abandoned? The contortions in the Budget to hit the self-inflicted target—shifting taxes and capital expenditure quite blatantly between years to manipulate the numbers for 2019-20—are extraordinary. Did the Government think we would not see them? Does the Minister agree that it was utter arrogance for the Chancellor to bind his own hands in a time of global uncertainty by putting his fiscal rule into law?
It was also fundamental in the coalition years that we should be “all in it together”. That is why cuts for the wealthiest, such as cuts to capital gains tax and further cuts in corporation tax, were off the table during the coalition and, while there were cuts to benefits to the working poor, my Liberal Democrat colleagues in government constantly restrained the Chancellor, as is now evident. The Chancellor carries on using the language of “all in it together” but he does not seem to understand the meaning.
Numerous noble Lords will have read the letter of the right honourable Member for Chingford and Woodford Green. I share his outrage about the cuts to disability benefits but, more importantly, the British people share it, too. Those who voted Conservative in the last election thought they were getting a continuation of coalition policies; they did not understand they were getting a hard swing to the right.
We cannot keep slashing the budget for public services and still deliver a civilised society. The UK’s demographic profile now includes so many older people, living longer and in need of healthcare and social care, despite working more years. Ordinary people are still feeling the pressure. The Institute for Fiscal Studies confirms that,
“we should expect much of the recent fall in inequality to be undone over the next five years”,
and this is especially true for those of working age, whose incomes are still below pre-crisis levels, and the young, who have suffered the most.
Some of the worst sufferers have been our public servants—teachers, nurses, doctors, police. Surely as we reach a CACB surplus, we should increase pay for them. They will leave their professions if they know that, every day, they can be paid more and treated better in the private sector. The junior doctors are not alone; it is a straw in the wind and a warning that should be recognised.
Yet as this Budget stands now, we have a £4.3 billion hole which must be filled from somewhere. The Budget includes £3.5 billion in mystery cuts to un-ring-fenced government departments. There is a further £2 billion cut to departmental budgets to fund pension contributions —that, by the way, is a huge blow to the NHS. It is in effect a cut of £650 million from what is supposed to have been protected funding to a department which needs every penny of its promised additional £8 billion if it is to survive. The schools budget does not even rise with inflation, and none of that litany that I have just given includes the plight of local government.
I fully support the cut in business rates for small businesses. My Liberal Democrat colleagues in government fought for the review of business rates and I welcome its conclusions and implementation. But the Budget seems to anticipate that the whole cut, which we estimate will be £2 billion—perhaps the Government will tell us that it is higher—will fall on local government services: the street cleaning, rubbish collection, transport and especially the social care that people rely on for a decent community. Is that true? Is this yet another £2 billion cut to local authority budgets, already slashed in previous years?
I have so many questions. Does the sugar tax come with a proper anti-obesity strategy? Otherwise, it will deliver little. Why are the Government not taking advantage of minimal interest rates to raise their ambition and speed the timing of investment in broadband, housing, renewable energy and lifelong learning—all those foundations of economic growth? Why are the Government being so timid in taxing multinationals, closing loopholes rather than restructuring corporation tax? And who is the lifetime ISA meant to help? It works properly for people who can save £4,000 a year, but there are precious few younger people who have that kind of money.
But, frankly, all that is overshadowed. We need to see a revised Budget. The coalition worked so hard to restore confidence in the British Government’s ability to manage the economy and that is being thrown out of the window. The Government may be mollified by winning the vote in the Commons yesterday, largely—by the way—thanks to so many missing Labour votes, but the public and the markets are tougher and wiser. Especially at a time when we face questions around Brexit, it is crucial that the competence of the British Government in managing the economy is unquestioned.
Pushing through a Budget with a £4 billion black hole, £3.5 billion in mystery cuts, and £2 billion in unexpected pension provisions, including a £650 million blow to the NHS and goodness knows what damage to local authorities, is not the behaviour of a responsible and capable Government. I repeat: we need a new Budget. When will we see it?
My Lords, having read a number of previous maiden speeches in preparation for today, I see that there are consistencies in what an honour and a privilege it is to become a Member of this esteemed House. I share all those feelings and am humbled and, frankly, amazed to be in such a historic place and in the company of so many towering figures, such as my noble friend Lady Knight, whom I look forward to listening to later.
I have been made to feel so very welcome. The doorkeepers have greeted my requests for guidance with patience, smiles and even singing. The Clerk of the Parliaments, Black Rod and their teams could not have been more helpful in preparing my introduction, and noble Lords from across the House have been so very generous with their congratulations, time and support. I single out in particular my noble friend Lord Gardiner, my thoughtful and ever-generous mentor, who, with the noble Lord, Lord Curry, supported my introduction on Monday, my noble friends Lady Stowell and Lord Taylor of Holbeach for the warmth of their welcome, and the noble Baroness, Lady Hogg, for a splendid introductory tea.
Which brings me neatly on to the subject of food. My last nine years have been spent running Waitrose and building an impressive waistline. The founder of the John Lewis Partnership, of which Waitrose is part, said that the quality of the staff dining rooms should be so good that anyone leaving should regret it each meal time. I rather hoped that I would shed a few pounds, but I must compliment Mr Hever and his catering team on providing food of such quality that my hopes are dashed.
From my earliest memory, I have been working in business. My father twice owned his own small businesses, in food retail and wholesale. I worked with him before school and in the holidays and was always aware that there was a direct link between his endeavours and our financial position. He preached on a Sunday, and I learned that in the eyes of God we are all equal, that doing the right thing would bring rewards and that you should stop to help those in need. Therefore, although I dabbled with the idea of a career in archaeology or as a pro golfer, it is not entirely a surprise that I have spent my entire business career—33 years—working for the John Lewis Partnership, with some charitable work and public service liberally sprinkled on top.
As your Lordships will know, the John Lewis Partnership is a unique organisation. Its founder, Spedan Lewis, said that the business was wholly and solely created to make the world a little bit happier and a little bit more decent. In fact, the supreme purpose of the partnership is the happiness of its employees, who own the business. If you own something, you care a little more, and from that flows commercial success. But the partners also have a constitutional obligation to uphold the interests of all their stakeholders, their suppliers, customers and communities where they trade—a balanced and harmonious approach built on collective endeavour. Academic evidence has shown that higher levels of employee engagement lead to high productivity, sales, profit and workplace satisfaction. I believe that driving higher levels of engagement in the workforce is a key way to address the UK’s productivity gap.
After years at the John Lewis Partnership, why then move into government? There are common themes: an appreciation for the good that business can do, a sense of social responsibility and a deep understanding of how much can be achieved by collective endeavour. I believe that business is a force for good. Business makes a key contribution to the Exchequer by paying and collecting the majority of total tax receipts. If we are to have the education, welfare and security that we want for our country, business must be encouraged to thrive, as the Chancellor has tried to do. The success of our country and our businesses are inextricably linked. That is why I am so delighted to take on the role of Minister for Trade and Investment.
During my nine years running Waitrose, we built our export business to 58 countries. We sold noodles to the Chinese, rice to India and croque monsieur to the French. I now look forward to playing my part in helping British companies to export more and bring more foreign direct investment into the country to grow jobs and prosperity.
My Lords, it is a pleasure to follow the noble Lord, Lord Price. We last met a few weeks ago sitting together at a dinner and I do not suppose for one moment that either of us expected to see each other again in this place, but that is life for you. I know, as do other noble Lords, that he was a very successful leader of an extremely successful British business. Perhaps I should declare an interest: there is a Waitrose just round the corner from us in Edinburgh and we have a loyalty card that we keep next to our Labour Party cards. I leave it to others to imagine which one has more use at the present time. I am not planning on giving up any of them.
I wish the noble Lord success in his job. I know, having met several trade Ministers, that the task is difficult, but I am sure that he will throw his wholehearted enthusiasm into the task and I wish him well on that. I particularly look forward to hearing what he might have to say over the next few weeks in relation to what is the biggest political event in this country, which is not the Budget but the referendum on our future membership of the European Union. I am sure that, as a Trade Minister, he will have plenty to say.
Perhaps I should draw attention to my entry in the Register of Lords’ Interests before proceeding further.
I want to talk today about two aspects of the Budget: the Chancellor’s deficit reduction target and infrastructure, which the Minister said so much about. In relation to the forecasts, we are in the interesting position that we are here discussing the Budget a week after its presentation to the House of Commons, but it is not quite the same Budget that the Chancellor presented—it changed quite dramatically over the weekend. I have to say that it has never been clear to me why the Chancellor has impaled himself on a target to break even in 2019-20 when there is no economic need to do so. I understand the politics behind it, but there is no economic need to do so—all the more given that the target that he set himself in 2010, when the coalition Government was formed, of eliminating the deficit by 2015 was missed by a mile.
As it so happened, what the Chancellor managed to achieve then was exactly what I set out in my last Budget—namely, to halve the budget deficit in a five-year period. I did that because I thought that was realistic, so I was not surprised that that was where the Chancellor ended up. You might have thought that, having got that one wrong, he would have given careful consideration as to whether he wanted to impale himself on a target that the OBR said he has a 50:50 chance of hitting—and that was before the political difficulties that have emerged within the Conservative Party over the past week.
Everybody knows that the figures presented in a Budget in the last three years of a forecast are never going to be the figures that are actually presented when those years come to pass, because so much changes even in stable times. We have seen—as the OBR said apropos the Chancellor’s spending predictions just before the general election last year—a rollercoaster as far as these figures are concerned. When you look at how the Chancellor hits his target in 2019-20, he does so by simply shifting about £10 billion of corporation tax receipts forward a couple of years in order to have a surplus. There is about £8 billion of unspecified public spending cuts in an election year. Is it really credible to believe that any Government will go into a general election saying that they will cut public spending by £8 billion? Governments of whichever political colour do not do that.
All this is being done simply to make the sums add up on this particular presentation. One has to contrast what the Chancellor had to say last week with what he was saying in the autumn, when the sun seemed to be shining with a vengeance, he had money to give away and he was able to buy off the tax credits revolt—which, by the way, has not gone away; it has simply been postponed and we will have to deal with it when it comes back in the future.
It is now becoming clear that we are in a position where we have numbers that we cannot rely on. I know something about fiscal targets, having had to deal with a situation where they could not be met, and I would say that what matters is whether Governments and outsiders believe that the targets are credible and will be met. Over the past couple of years or so, we have seen that these targets are a moveable feast. They are moving around so much that people will begin to doubt whether they can be relied upon in any meaningful way—and that is before we deal with the personal independence payment issue of £4 billion, which will have to be accounted for somewhere else.
My second point, lest anyone misunderstand me, is that I am very clear that it was necessary to bring down the deficit, but I am also clear why it happened in the first place. I understand the rhetoric of the Tory party; the noble Lord, Lord Borwick, who spoke previously and is no longer in his place appeared to be reading a Treasury hand-out on the subject. It has to be remembered, however, that the banking crash that our country and every other developed country in the world had to deal with was more profound and more lasting than anybody thought it would be. I remember saying that at the time—not that I got much gratitude for it. We are now living with the consequences.
I know that, if we had not taken the action that we did in 2008, there was every chance that we could have slipped into a catastrophic depression. It was not just us; the same action was taken by the Americans, by the Chinese and right across the world. Incidentally, it was supported by all parties in the House at the time, though they sometimes forget about that now. It was necessary to get the deficit down, but we had to do it in a way that was consistent with maintaining economic growth and was fair across the whole population. Others have said, and no doubt further contributors will make the point, that that is not happening in the way that it should.
On the question of welfare cuts, as the Committee may recall, I was Secretary of State for what was the Department of Social Security and then the Department for Work and Pensions for some four years, so I know something about how that department operates. There is a long history of Governments coming up with a new plan that is going to be much better and much fairer and save us money, but there is an equally long history of none of that happening. These plans are difficult to implement, and often they end up costing far more than was ever intended. Personal independence payments are an example of that. Clearly, the Treasury had an undertaking from the Secretary of State that he could deliver on these things, but he simply has not done so. It was not surprising that the Treasury was going to come back and ask for more.
Similarly, with the work on universal credit, I looked at this in 1998 when I first became Secretary of State for that department because, like everybody else, I thought, “Surely there must be a better, simpler way of dealing with all these things”. The answer is, “Yes, there is”, provided that two things happen. First, the Treasury must give you enough money to buy out all the losers. If the Treasury does not do that, there will be losers, and we all know that you will hear an awful lot more from the losers, who in many cases will be losing quite substantial sums of money, than those who actually gain. The only time that you can do that is on a rising economic tide, and that is why I was able to consider that in 1998.
Secondly—this is, actually, in some ways equally difficult—you need an IT system that can deliver the universal credit. As everyone who has looked at the IT systems in the DWP will know, there are at least four different systems, which were designed at different times for different reasons and are not very good at talking to each other. You cannot run a single benefit that needs to draw information from sources that are not compatible. Again, that needs not just money but know-how, and no British Government have a good record on that. I fear that universal credit will be years behind schedule, will not be delivered in anything like the way that the Government intended and will be another thing that will come back and bite this Government. I suspect that, unfortunately, there will be others who will suffer as well, if this is not looked at. You need a grasp of detail in that department, and I just wonder who was attempting to grasp the detail at the time—it is very curious.
I also wonder how it was possible to score the savings from PIP, because you can only do that if it is government policy, whereas over the weekend it was not clear at all whether it was the policy—you cannot have it both ways. That is very odd indeed, but perhaps we will hear what happened, if not immediately, in someone’s memoirs in years to come.
On the question of infrastructure, let me say right at the start that I very much welcome all the announcements that the Chancellor has made on the expansion of roads and railways over the last six years—not least because I announced many of them myself when I was Secretary of State for Transport. That perhaps illustrates the problem, because announcing these things is very easy. Indeed, if we could add to GDP for every announcement made, our economy would be motoring at the moment. We are overflowing with announcements, but we are not overflowing with actual spades in the ground and progress.
However—I point this out, because I was a member of the Government at the time—we can actually do it: Crossrail is nearing completion. We signed that off, and it is now being delivered. It took 20 years and was put forward in the teeth of Treasury opposition, until one day the ex-Secretary of State for Transport arrived in the Treasury and said that, no, he would not overturn the decision previously made by the Secretary of State. That is being delivered. The west coast main line has also been delivered, and has made huge differences.
However, if you look at what has been announced over the past few years, road after road has been announced and has not been built; the Midland main line out of St Pancras has been announced, but it is now on hold. So I look at all these northern powerhouse announcements with a degree of scepticism, especially when a lot of the announcements are about money for a feasibility study. Feasibility studies are very easy to announce, but they do not always—actually, in some cases, seldom—result in a tunnel or road being built.
I publicly said a number of years ago that I think HS2 is misguided, and I wholeheartedly endorse the conclusions of the Economic Affairs Committee of this House that the case has simply not been made. What we desperately need instead is to be spending money on what is wrongly described as HS3—the roads and rail links from the north of England to the east of England. That was identified in 2005, but it has not been acted upon. If the Government are going to do it, we need to do it now. The noble Lord, Lord Adonis, is doing a very good job bringing forward these proposals, but we need a delivery mechanism to make sure that they actually happen. Otherwise, when we are debating a Budget in 10 years’ time, we will simply be saying the same things.
Two big infrastructure projects perhaps illustrate the difficulties we have. The first is Heathrow. In 2003, the then Government published a White Paper which said that we should build a third runway at Heathrow. That was 13 years ago, the project is on hold, nothing will be said before the referendum, and by that time we will no doubt be into a leadership contest and we know what the stakes are there—I am not optimistic. However, in the mean time, this country’s future depends upon us having good air links to other parts of the world, and I still believe that Heathrow is the right solution. I know that it is controversial, but we need to act on it.
The other example is nuclear power. Again, in 2006 the Government published a White Paper that advocated a mix of energy sources, and that has been endorsed by successive Governments. The nearest we have got to building a new nuclear power station is Hinkley B. This may run counter to my whole argument so far in relation to delivery, but we seem to have entered into a deal with the French and Chinese Governments, because EDF is the French Government and the Chinese company we are dealing with is the Chinese Government. We will be paying two to three times more for the electricity this thing will produce than what we currently pay, and we are using a design which, once again in the great annals of nuclear history, appears to be breaking new ground rather than using existing technology. Perhaps as a country we need to ask ourselves, “Aren’t there cases where the Government, which is underwriting this risk anyway, might as well do these things itself and take on that risk rather than trying to price a risk which is pretty difficult to price and passing it on to consumers in the future?”. I say that having been a member of a Government who endorsed PFI and who were very happy to do deals with the private sector. However, no one can possibly say that a nuclear power station is an economic proposition—it is not. If we want it, we will have to ask ourselves whether it might be better, cheaper and quicker to do it ourselves.
I will leave it to others to deal with a broader critique of this Budget. I will say only that growth in our economy is welcome; I still think it is fragile but as I said at the very start, the biggest threat to our recovery is the prospect of us leaving the European Union. However, that is for another day.
My Lords, it is wonderful to follow the noble Lord, Lord Darling; this is the first time I have taken part in a debate with the noble Lord since he joined us. I remember very clearly leading a delegation to India as the chairman of the UK India Business Council, accompanying Gordon Brown, who was then Chancellor, and the noble Lord, Lord Darling, who was then Secretary of State for what is now BIS. I remember saying at one of the speeches I made there, “We have with us possibly—probably—the next Prime Minister and the next Chancellor”. Of course, on 27 June 2007 that came true. It is wonderful to have the noble Lord with us as well as the noble Lord, Lord Price, whom we welcome. I say this not just because Waitrose is a very good customer of Cobra beer. The noble Lord is a hugely respected established figure in the food and drink and retail industry—that feeling is unanimous; I have never heard a bad word said about him—and we are very lucky to have him with us.
Looking ahead, there is huge uncertainty. We have the election for the Mayor of London, the EU referendum, the Iraq inquiry report, the decision on Heathrow and Gatwick, which the noble Lord, Lord Darling, mentioned, which has been delayed until after the mayoral election, the American elections, and the Middle East situation and Daesh-IS. There is wretched, awful terrorism in places such as Paris and Brussels. What a backdrop for a Chancellor to produce a Budget against. Just look back to November, when the Chancellor was riding high—there was £27 billion extra and a rosy outlook—then within weeks he was backtracking because the outlook for the global economy was weaker, and the UK is not immune to slow-downs elsewhere.
This Budget has some excellent measures in it. Capital gains tax, which I have talked about time and again—which used to be 18% under the old Labour Government, increased to 28% and should go back to 18%—is down to 20%. That is wonderful news, and with the basic rate going down from 18% to 10%, that will help wealth creation, which I will come back to later. Entrepreneurs’ relief has also been extended, which is also fantastic. On business rate relief, 630,000 small businesses will pay no business rates at all next year, and reforms to national insurance will abolish class 2 contributions. That is all good news.
Cutting corporation tax down to 17% is absolutely tremendous and I will come to that later. Improved loans for doctoral students and loan systems for postgraduate students are also great. They are not quite where they should be but it is great progress. I declare my interest when I say that beer duty being frozen is very good. On a serious note, it is good for the pub industry, jobs and the consumer. There is investment in infrastructure—whether you agree with it or not—such as Crossrail 2 and HS3. I think that is terrific. There is also investment in roads.
However, the Government have made serious mistakes in the Budget, for example with the PIP. The IFS calculated that 370,000 people were affected by the change to the PIP criteria, and that it worked out to an average loss of £3,500 per person per year. The comments of my noble friend Lord Low on this issue have been vindicated as the public have agreed with them and the Chancellor has had to backtrack. As regards our complicated tax system, as a member of the Economic Affairs Finance Bill Sub-Committee, I know that a huge overhaul is needed vis-à-vis tax simplification, and I will come to that later.
The most important point concerns the uninspiring efforts to improve productivity, which was referred to by the noble Lord, Lord Eatwell. The OBR pointed out that productivity will be a serious issue. Chris Giles of the Financial Times said that the OBR had “flip-flopped” by giving the Chancellor,
“a £27bn windfall to play with over five years in the Autumn Statement”,
but that the OBR,
“has now removed £56bn in these Budget forecasts”.
Does the Minister agree with that?
The director-general of the Institute of Economic Affairs, Mark Littlewood, described the Budget as “slow, steady” and “rather unimaginative”. I think that is rather unfair. However, he went on to say that,
“at least the Chancellor hasn’t thrown out his target of a Budget surplus for 2020, even if he has almost no margin for error in hitting that target”.
What he said about the increase in the 40% threshold is very good. However, on the capital gains tax, he says:
“The old top rate of 28% was actually losing the government income—high CGT rates damage economic growth by encouraging individuals to hold on to assets that would be better off under different ownership”.
Therefore, I congratulate the Government on that once again.
KPMG’s chairman referred to,
“a variety of measures aimed at the more traditional butcher, baker and candlestick-maker across the country but also the digital age ‘kitchen table’ entrepreneurs”.
Robert Chote, head of the OBR, says that the OBR has revised down productivity growth, meaning that,
“the cash size of the economy is about 3 per cent smaller … than we predicted in November”.
I ask noble Lords to keep that figure in mind—3% smaller than a few months ago. Robert Chote also said that the public sector net borrowing situation was £11 billion worse than previously forecast, and that weaker GDP growth means that debt to GDP ratio would rise, rather than fall, this year. Does the Minister accept that?
The Institute of Directors—not surprisingly—welcomed the measures that will help SMEs but also questioned how the Chancellor aimed to achieve the budget surplus he has promised by 2019-20 given the downgrade in the economic forecast. Simon Walker, the director-general, said:
“The UK faces risks on many fronts, and much heavy lifting will still be required to get rid of the deficit by the end of the Parliament”.
Does the Minister think that there is a realistic chance of doing this?
The Government have had the guts to do a lot but they have not had the guts to reduce the top rate of income tax down from 45% to 40%. That is what it was under a Labour Government for many years. They have reduced CGT; they should reduce the top rate of income tax down to 40%. That would make us more competitive. Does the Minister agree?
Government spending as a share of GDP touched nearly 50% under the Labour Government. It was at 45% of GDP by 2010. The Government want this to go down to 36.9% of GDP by 2020. Is that realistic? Given that the NHS and so many other areas are ring-fenced, does the Minister really think that we can get government spending down to 36.9% of GDP? The OBR forecasts are changing all the time. The Government are relying on them when it suits them. Now it does not suit them. It is like the Governor of the Bank of England bringing in forward guidance. What a ridiculously ludicrous idea. Of course, he has had to backtrack on that completely.
The Office of Tax Simplification is an oxymoron. The Government should be simplifying tax, not complicating it, but the Office of Tax Simplification does not have the powers it needs. I would ask the Government to look into giving it more powers and consulting it more, which they are not doing at the moment.
I congratulate the Government on security, about which the Minister spoke in his remarks. We have now finally agreed to the 2% defence spending, which is the NATO commitment and is wonderful, particularly given the environment we are in. Also, the SDSR 2015 is a huge improvement on the SDSR 2010.
We should keep things in perspective. This little country comprises less than 1% of the world’s population yet we have 4% of the world’s economy and 7% of the world’s welfare spending. That cannot really go on. We have seen welfare reform that was desperately needed, but on the other hand the reforms need to be fair or we will see headlines like that in the Sun, “Beware the IDS of March”. The disability benefit proposals were a huge mistake on the part of the Government and I think that the Chancellor now regrets that. Reducing corporation tax is great, but capital allowances are not as attractive as they should be. Does the Minister agree that they also need to be more attractive?
I turn to productivity. We are caught up in a short-term, five-year election cycle when what we really need more than anything else to improve our productivity is to invest in our universities. As a percentage of GDP our spend on universities is way below that of the United States, way below the EU average, way below the OECD average, and yet along with the United States we still have the best universities in the world. Cambridge University with its 92 Nobel Prize winners has won more than any other university in the world. Just imagine how much better we could do if we were to spend the equivalent in proportion to our competitors.
Linked to that is investment in R&D and innovation. We have great research papers and amazing fundamental research, and yet as a percentage of GDP we underinvest on R&D and innovation compared with the EU and the OECD average and are way below the United States; even South Korea invests more as a percentage of GDP on R&D and innovation than we do.
I think that the noble Lord, Lord O’Neill, said that when the forecasts change, our plans have to change with them. Perhaps we should rename the noble Lord as John Maynard Keynes:
“When the facts change, I change my mind”.
The facts have changed and they are going to continue to change, but will the Government be able to adapt quickly enough to be able to cope with that? The Minister also mentioned the Oxford-Cambridge corridor. That is brilliant news. The corridor will create a golden triangle between London, Oxford and Cambridge that will help with R&D and innovation and the university excellence that we have.
I conclude by saying that last week I was in Delhi in my new role as a food champion for Britain, having been appointed by Defra. We went to launch a food festival in Delhi. It was a curry festival—taking coals to Newcastle. British curry chefs were flown out to the ITC Maurya, one of the finest hotels in India, to serve British curry—chicken tikka masala and Balti, dishes that do not exist in India—to Indians. In my speech at the opening of the festival I said that we should just look back to the 1980s. Britain was the laughing stock of the world when it came to food. British food was sneered at. Today, this country has some of the finest cuisine in the world, and indeed London is the restaurant capital of the world. In the 1980s, this country was looked upon as the sick man of Europe, but today we are the envy of Europe. In the 1980s, this country looked down on entrepreneurship—Del Boys and second-hand car salesmen—but today we celebrate it because we are one of the centres of the world. We have the best of the best capabilities in every field that can be imagined, whether it be architecture, entrepreneurship, universities, the City of London, the creative industries, or culture and sport, we are the best of the best.
The Budget is there to help us, but Governments make mistakes. I think that the Chancellor has lived up to one of my favourite sayings: good judgment comes from experience and experience comes from bad judgment. So, a fair and competitive Budget.
My Lords, I know that some kind friends have made their way into this Room for this debate and I thank them. I apologise to noble Lords that I did not know that this Committee did not start at 12.30 pm—that was the information I received when I telephoned yesterday. I came here as quickly as I could.
This is my farewell speech. I am conscious of the time as I know that some noble Lords are keen to get away and start the Easter holidays—I do not blame them—and do not want the speeches to go on too long. I also know that some noble Lords want to make their points in a very important debate. I am well aware that time is important and noble Lords have only a few minutes to talk about the facts of the Budget and their opinion of them.
If I may, I want to recall a day that will never go out of my mind, and I think there are some here who feel as I do. That day was 15 March 1979. It followed what we came to call the Winter of Discontent. Some people may remember that. It was pretty much a winter when we were all discontented, but that day will be in my mind for ever. Many will remember the details of the awful Winter of Discontent. Everyone was on strike. Buses and trains ran very slowly indeed, or not at all. There was no rubbish collection—the streets were piled with rubbish, as people remember. Schools were on strike and so were gravediggers. If someone died you had to realise that you had better go out and dig the grave yourself, which was not a pleasant thing
I also remember a man called Red Robbo, who managed to just about finish the car industry in Birmingham. I represented part of Birmingham myself. I knew all about what was going on in Birmingham and some pretty tremendous stories were told. Others will remember them. Car making was really the major industry in Birmingham—although jewellery was a good one—and whether a factory was working or not the council imposed a high charge. We had a terrible time at that time because of trouble in the car industry. Birmingham Council decided that whether you were working or not a tax would be levied and you had better jolly well pay it. Well, they decided that the best idea to keep going was to take the roofs off, so they took the roofs off. I well remember, too, the business of driving around Birmingham, which as a Member I was always doing, even though the sky shone right through those awful missing roofs. They were all gone, and when it rained, it poured in. It was a ghastly sight and it upset a lot of us.
I remember how those roofless ruins upset all of us, but there was not much we could do about that, except Margaret Thatcher, who was on the scene at that time and decided that maybe there was something that could be done. She planned a change of Government. If we could get a general election, and it came out right, we thought that we could change all of this. But the only way for the change to come about was to win a vote in Parliament.
Of course, there was no confidence at that time in the Government. All day there were rumours about what would happen. They were not pleasant rumours. So and so was definitely going to vote against the Government if there were to be a general election. Somebody else who was hardly ever in anyway—he came from Ireland—stood up on the very day of the vote and said, “I’m not voting”, but he turned up on the day and said, “I’m here to show my obvious objection to what’s happened”. He was on the other side, so we were a bit surprised. Although we knew that the Labour Government had a majority of four, there was a good chance of winning any election that happened then because the people were so fed up. He told everybody that he had decided to vote for the other side. Time went on and rumours were all over the place—“I’ve just heard so and so is not coming in”, and “I don’t believe so and so is voting for us, you know”. This went on. Rumours and suggestions came hot and fast.
Anyway, finally the day came when the vote was to be taken. We all rushed to our seats—both sides. It was, as usual at that time, at 10 pm—that was when we voted in those days, more often than at any other time. The vote was soon over. I am glad to say that I managed to get my name down and spoke in that very important debate. When 10 pm came, we rushed to vote and then rushed back to our seats. Our hearts were beating far faster than they normally did as the vote ended. Both sides were so impatient to know what had happened. The minutes crawled by. As we were all watching keenly, Labour’s Chief Whip came into the Chamber with a very happy smile on his face. Margaret, who was on the Front Bench, turned as pale as a piece of paper. We were all thinking, “Now what?”.
About a minute later one of our senior Whips, Anthony Berry, came in. Some noble Lords will remember him very well. Anthony was later killed by the IRA in that terrible trouble at the conference—I know that no one will have forgotten that. As he walked in, we could see that he was holding up the fourth finger of his right hand. We had won by one vote. That was a day that no one who was there will ever forget. The Speaker announced the result: 311 votes to 310. You can imagine what feelings that brought about in the Chamber.
I want to talk about just one more thing. We shall soon have another vote about the European question. What is going to happen we do not yet know, but there is something that I would like to say to my colleagues. Every politician knows perfectly well that when a party quarrels internally, the electorate hates it. It does not put electors in a very good mind. I would ask my colleagues to remember that, because there is no doubt that experience has taught us this. Whatever we think about Brexit, we ought to be together. I hope that everyone will.
If I was not quite together with everyone at the beginning of my speech, it was because I was quite nervous, having called the House on Sunday. I was informed that we would be meeting not at half past 12 as I thought, but at noon. I am sorry that I was a little late. I am sorry to leave all my noble friends because I love you all. Many of my friends are not from the same party as me, but we are good friends. That, too, we should remember. Goodbye to you all.
My Lords, my noble friend Lady Knight of Collingtree and I have been working in this building for 50 years and therefore I regard it as a great privilege to be able to congratulate her on her valedictory speech. But of course, much more than that, I congratulate her on a lifetime of public service both in the House of Commons and in the House of Lords. My noble friend mentioned that people are anxious to get away for the recess. I think that she should look behind her because it is standing room only. Noble Lords have come here to express how very much they honour the way in which my noble friend has behaved as a parliamentarian over many years during a career that has extended across both Houses. My noble friend has played an important role. She referred to a number of events when we were together in the House of Commons. We both served for many years on the executive of the 1922 Committee and I can remember a number of occasions when her point about the importance of being together rather than divided was very relevant—certainly at that time in relation to Europe and now perhaps again.
Having said that, my noble friend has, in some ways, a unique achievement. I did not realise until the other day that she had succeeded in getting through no fewer than four private Bills. All of us know how very difficult it is even to get one through. To get through four, on a range of issues from nationality to copyright and child welfare, is something of which my noble friend can be justifiably proud.
A few days ago, I had the good fortune to meet a number of my noble friend’s former constituents. There is no doubt that they hold her in great affection. It is also the case—as we see by everyone assembled here today—that she is held in very great affection in this House as well. All her friends will miss her very much, but we also wish her a very happy retirement. It could not be better deserved and we therefore join together, I think, in saying that my noble friend should be congratulated and we wish her every success and happiness in the future.
I come now to the Budget. My noble friend and I have survived more than 50 Budgets and a great many of them turned out to be rather controversial. However, it is quite difficult to remember a Budget quite like this one. The late Iain Macleod used to say that a Budget looked good on Budget day but it very rarely looked good by the end of the week. That has certainly proved to be case as far as this Budget is concerned.
I am rather puzzled by the resignation of the former Secretary of State for Work and Pensions. When I first heard about it, I came to the view that he must have resigned because the proposals which he was in favour of were being watered down. I remain unclear as to whether he is in favour of those proposals or not. In all events, it raises a number of difficult issues—referred to by the spokesman from the Labour Party and others—as clearly in the light of these changes we are left with a rather large black hole. Something needs to be done to fill that hole but my understanding is that the Chancellor will contemplate on what has happened and then make decisions in the Autumn Statement.
I want to take up a point made by the noble Lord, Lord Darling. It is important to have targets for deficit reduction because, as he well knows from trying to cut public expenditure in the Treasury, if one does not have a fairly clear view of what one needs to do and achieve, then one will run into real problems in getting anywhere near the target. On a 50:50 basis of being likely to achieve the present target, I think the Chancellor should stick to his guns, but it is going to require a number of very difficult decisions.
In that context, I make just one point. There has been some question lately of whether one should look at the ring-fencing of pensions. It is very important that that framework should be maintained. For many years I represented the constituency of Worthing, where it is said people come to die and forget what they came for. There is a very large number of pensioners there. They have suffered very badly in recent years because of what has happened to interest rates. They have all saved carefully throughout their lives and hoped to have a happy retirement, and then they find that the return they are now getting on their savings is absolutely minimal. Therefore that needs to be taken into account in any question of whether anything should be done on pensions to offset the hole which has been left by the change in policy on welfare payments generally.
I very much agree with what the noble Lord, Lord Darling, said about the general approach to taxation and public expenditure. It is certainly the case that those who lose shout a great deal louder than those who benefit from any change cheer, and that needs to be taken into account. However, we also need to consider not just the fiscal framework but the monetary framework. I am glad to see the noble Lord, Lord Skidelsky, in his place, with all his knowledge of Keynes; for some years we have gone along with the combination of Keynesian views and those of Milton Friedman, or what Paul Samuelson used to call the neoclassical synthesis. We do not have any theory now to deal with a situation where there are negative interest rates. We need some theory for that because the effect of the negative interest rates will be very important. I therefore hope that we will succeed in thinking that through collectively.
The overall situation is very difficult. We will have to contend with a situation where we have to maintain our determination to cut the deficit, otherwise we can never get back to a situation of normal demand management where we run a deficit if the economy is depressed and a surplus if it is overheating. Therefore we have to take a general view on that. Overall, however, as a number of noble Lords have pointed out, the Budget includes a number of very good proposals with regard to reducing taxation. We will need to look at this matter again to see where we go from here. However, the overall approach is right, and the Government should stick to their policy. We should continue to aim at the present target, otherwise we will find ourselves in a situation where the overall balance of the economy has still not been put right. We have a long way to go.
I conclude by quoting from one of my successors as chairman of the Treasury Committee, Andrew Tyrie, who on the question of whether the Chancellor should resign said very clearly that we should be grateful to him for leading us out of the worst economic crisis we have had in modern history. He has done that; he is the right person to continue to manage our economic affairs. While the situation is clearly very difficult, none the less we have achieved a great deal since he became Chancellor and we must continue to pursue the policy he has maintained throughout that time.
My Lords, it is a great pleasure to follow the noble Lord, Lord Higgins, and others. First, I congratulate the noble Lord, Lord Price, on his excellent maiden speech—I do not think he is in his place at the moment—and on his wise stewardship of John Lewis and Waitrose over many years. It is an example of an outstanding business. Like others, I have a vested interest because a Waitrose has opened in Helensburgh in my former constituency. I hope that this message reaches the noble Lord because the supermarket has a two-hour parking waiting limit. My family say that that was totally unsuitable for my wife, who loves to go and meet her friends there. If the noble Lord, Lord Price, could intervene to ensure that her car is not clamped after two hours, it would do me very well.
I congratulate the noble Baroness, Lady Knight, not only on her speech but on her sterling service in Parliament from 1966 to 1997. I shared more than a decade with her in the House of Commons. She was always pithy and relevant in her comments, sometimes rather controversial—but we will leave out the controversial aspects today because it is a lovely day. She served her constituents and Parliament exceedingly well. I think that she is in the record books as being the first Member of Parliament to be succeeded by another woman Member of Parliament for her constituency, so I offer her many congratulations on that, too.
I made a speech on the Autumn Statement in December, just over four months ago, and said then that,
“we have had four Budgets and Autumn Statements but all they have done is to serve to confuse, not clarify. My first plea is: let us stop the nonsense of this plethora of set pieces for the Chancellor and go back to the time when there was one Budget per annum. Then we might have some sense in our debate”.—[Official Report, 3/12/15; col. 1209.]
If the Chancellor had listened to that, we would not have got into the jam that we are in today. My prescience on the matter might best be described as the unimportance of being correct.
One of my favourite authors is Joan Didion, the American author. She wrote a stunning and very moving book, The Year of Magical Thinking—I do not know whether any of your Lordships have read it, but it is a fantastic book. It is focused on the story of a year spent wishing. I thought of the title of that book when we had this Budget because the Chancellor did not get even one week of thinking or wishing as a result of it before the Budget dissolved. Some of his own colleagues have called it nothing other than a fiddler’s charter.
I have been thinking about the Budget in terms of being a customer of a bank, where I would put the moneys into thousands rather than the billions that the Government mentioned. I would walk into my bank and ask the bank manager for £55,000, which is the black hole in the Government’s figures at the moment. But I would tell him, “By the way, I’m giving away £4,000 of that £55,000. And, by the way, my income over the next five years is reducing because the economy is getting smaller. And, by the way, I’ll not be working as hard because my productivity will be down”. That is what the OBR has told us. I feel that a wise bank manager would show me the door pretty readily.
My noble friend Lord Darling has asked already in an excellent speech who would believe that a £21.4 billion deficit in 2018-19 could become a £10.4 billion surplus in 2019-20. Contrary to all recent history, the Chancellor would be inflicting an incredibly painful fiscal tightening one year before an election. It does not make sense. By the way, the national debt at that point is estimated to be £2 trillion. It is okay if the national debt increases when the economy is increasing, but the economy is decreasing. Here we have a debt of £870 billion which the Government inherited from the Labour Government in 2010 which has now increased by 130% to £2 trillion. The IFS is very clear that the economy was £18 billion smaller than expected in 2015. It went on to say that if the forecasts for economic growth and productivity from a few months ago in the Budget are correct,
“we should all be very worried”.
So there is lower wage growth and a smaller economy, and productivity is bombing. In terms of productivity, the ONS is clear that the current estimates suggest that the absence of productivity growth in the seven years since 2007 is unprecedented in the post-war period. That would be okay if it was predicated on sound economic forecasts, but the £3.5 billion tax breaks for small business and higher personal allowances for income tax are based on what the OBR calls “highly uncertain” projected revenues from tax-avoidance measures.
These are measures to collect tax from those funnelling cash into tax havens. The Government estimate for that was £1.05 billion, but the OBR has said that there is a £780 million shortfall because just over £200 million has been collected with 80% of the estimate being uncollected. I suggest that noble Lords would not organise a day at the seaside for their local community club on that basis because if you got to the seaside, you would certainly be hitchhiking on the way back as a result. In the space of four months from November, a £27 billion windfall has become a £56 billion black hole. As Robert Chote of the OBR said,
“for every pound the chancellor found down the back of the sofa in November, he has lost two pounds this time”.
Mention has been made of the fiscal rules. Two out of three have been broken. The welfare cap was broken last year. The rule for debt to be falling every year as a share of national income has been broken. It is only obeyed by the Chancellor bending the rules on corporation tax with a one-off batch of payments in 2019-20. Policy decisions, not changes in economic forecasts, will increase borrowing by £7.5 billion in 2017-18 and by £4.8 billion in 2018-19. Then, magically, policy decisions in 2019-20 will reduce borrowing by £13.9 billion. That wipes out the £13.4 billion deterioration in the underlying public finances created by the OBR’s less optimistic economic forecasts.
The Chancellor should have known better because he unwisely criticised the previous Chancellor, my noble friend Lord Darling, in 2010 when the Labour Government introduced their fiscal rule. What the Chancellor said then is worthy of repeating. First of all, he declared that it was the “biggest load of nonsense”. Secondly, he declared that it was vacuous and irrelevant. He had the temerity to quote Willem Buiter of the MPC. I know the Minister knows him very well. Willem Buiter said
“Fiscal responsibility acts are instruments of the fiscally irresponsible to con the public”.
The Chancellor has well and truly conned the public today as a result of that.
The Chancellor’s forecasts rely not on strong growth in the economy but on strong growth in household debt and a buoyant housing market given a further boost by government subsidies. Having warned about the consequences of debt-fuelled growth, the Chancellor is now relying on it. The OBR expects household debt to continue to rise over this Parliament, and in 2020 the household debt to income ratio will exceed its previous peak of around 164%, close to the peak at the 2007 financial crisis. My question for the Minister is this: is this level of debt sustainable in an environment of possible rising interest rates?
This is against the background of a 4.4% savings ratio in the third quarter of 2015. The last time it was so low was when we heard “Blowing in the Wind”—yes, in 1963, when Bob Dylan released his famous song. That sums up precisely what the Chancellor is doing. He is blowing in the wind and his own party is generating a hurricane for him coming from within his Cabinet.
The noble Lord, Lord Higgins, mentioned my successor, Andrew Tyrie. He was scathing in his speech on the Budget last week about the balanced budget rule. In fact, he said quite clearly that this Government’s record is worse than that of any other previous Government. He pointed—this is my last point—to the profound weakness of the banking system.
In the past couple of months I have had the privilege to chair sessions with Martin Wolf, John Kay, Philip Augar and Mervyn King, when he launched his book The End of Alchemy in Glasgow just last week. I have also had discussions with the noble Lord, Lord Skidelsky. To sum up the situation, there is a weak banking infrastructure and these learned individuals are telling us that the Government have sold the pass on reforming the banking system. At best, Martin Wolf has said, it is the old system with a few bells on it. The question now, they say, is that if and when the next financial crisis comes—and no doubt it will come at some time—we have to hope that we have individuals who can tackle the problems correctly and quickly. At the moment, the Government have stood back and the political impetus to change the system has gone. We need to change the system because it is not serving the best interests of the country. I could refer to my successor’s remarks on the Budget last week when he said that the issue of small businesses and banking is still a huge one. Long-term strategic interests are being ignored but, more importantly, the contemporary issues regarding business and growth still have to be addressed. With that in mind, I hope that the Minister will respond to those comments.
My Lords, in contributing to this debate and responding to the Chancellor of the Exchequer’s Budget Statement last week, to the subsequent events and to the debate in the other place, I welcome some proposals, express some surprise, and register disappointment—indeed, shock—at some of the measures announced. First, it is good to congratulate the Chancellor and Government on the intention to raise the tax free personal allowance to £11,500 this time next year. Lifting about 1.3 million people out of income tax is, of itself, welcome, although there are some potential drawbacks to which I will return a little later.
The decision to extend the period in which the 3% stamp duty second-home premium can be reclaimed is a real encouragement to those to whom I have previously referred, particularly elderly people, who want and need to downsize for their own well-being and comfort—and who, in doing this, also release a family home—but for whom the challenge of moving out and in coincidentally, or close to it, is too demanding and stressful. The pay first with reclaim up to three years later approach is not ideal and is hardly an encouragement to downsize, but it deserves some welcome.
The commitment to HS3 between Manchester and Leeds, the road tunnel between Sheffield and Manchester, the widening of the M62 to four lanes, and the backing for Crossrail 2 in London are all to be applauded as significant investments in infrastructure for the country. The announcement of a further £20 million over two years for the First World War centenary cathedrals repair fund has been enthusiastically received. Both my See city’s cathedrals have benefited from this fund already; indeed, 54 of the 59 eligible English cathedrals have done so. A grant of more than £680,000 went to my own Cathedral of St Thomas of Canterbury for essential work on the tower and south transept, in particular.
I was surprised, though, to read in the Red Book’s announcement of an examination of cathedrals’ financial sustainability, that these 59 glorious places of worship are described as a “sector”. Cathedrals are not a sector of the economy like SMEs, banks or the leisure industry, but the vibrant and active heart of dioceses, cities and communities, with growing congregations, witness and service, as the statistics show. They do not form a sector either of the economy or indeed of anything, and while I recognise that a collective noun for cathedrals is not easy to find—suggestions are welcome—it demeans their present and our faith heritage to call them a sector.
My second surprise was the announcement of a consultation on the provision of and facilities at crematoria made in the Budget, of all places. While issues about the number, location and size of crematoria are important, they cannot be addressed in isolation from others involved in ministry and provision at and around death, such as churches, ministers and funeral directors, if the stated aim is to be fulfilled, responding sensitively to relatives and to people of all faiths.
Our surprise at the announcement that all schools must become academies was again that it was made in the Budget, but there is now clarity on the timescale, albeit that it is challenging for everyone. The Church of England, as the provider of 4,700 schools and the largest provider of academies, will use its expertise and its collaborative partnerships to ensure that no one is left behind, especially small rural and coastal schools where the challenge is greatest. Our foundation for educational leadership will help to deliver what is most needed: leaders with vision and skills.
I turn to the disappointments. Sooner or later, a Chancellor must address the issue of pensions. It cannot be skirted, avoided or ignored. In particular, I draw the attention of the Minister to a consequence of the raising of the income tax threshold which, by removing people from paying income tax, also removes the tax incentive to provide for their pensions. These are issues that will not disappear and must be addressed. Ten times in his Budget Statement the Chancellor used the word “generation”. It is clear that he is not unaware of generational issues, but every reference was to the next generation. Intergenerational considerations are ones of morality and equity. Each person in each generation of every age is of value and is a full member of society with privileges and responsibilities. It is not right to ignore the generational issues that confront us not only with regard to our children and their children, but which are the responsibility of those of us who are near or beyond retirement age. We are specifically protected, insulated and exempt from the austerity that has characterised recent Budgets. Protection, insulation and exemption all have their place in national economic policy, but burdens must be borne fairly.
Members of the Government have frequently echoed the words of the present Chancellor in his first Budget—that those with the broadest shoulders would bear the greatest burden of austerity. Not for the first time after recent financial statements I have examined the tables, both official and those in the newspapers, which detail how much various individuals, couples and families would gain or lose from the Chancellor’s decisions. This time, the tables are more striking and chilling than ever. In the Times table, for instance, of 72 different sets of circumstances only eight households face a decline in income, and that of just 37 pence per week. Every other individual, couple or family gains up to more than £400 per year. However, we know that there were, and are, losers.
The outgoing Work and Pensions Secretary, responding to Andrew Marr on his Sunday morning show—I need with haste to clarify that I viewed it on iPlayer, as I was otherwise engaged on Sunday morning—said that he was not in the business of morality; he left that to churchmen. Although I disagree because ethics and morality are for us all, I respond to his challenge and invitation.
It surely behoves us to examine not only the gain and loss tables but our consciences. Given our circumstances and ages, I doubt that many Members of this House will be worse off through the Government’s proposals. The tortuous saga of the last week finally led yesterday to a clarification—that is the politest term I can use—from the Chancellor that the Government had intended that the losers would not be those with the broadest shoulders, but the vulnerable or disabled. That decision was morally indefensible. Having accepted the error, I trust that all of us will be willing to set our course—and the Government their economic course—with a stronger moral compass.
My Lords, I was very impressed with the speech from the noble Baroness, Lady Knight, about her successful career in both Houses. I wish her good luck and a long life. All noble Lords can learn a great lesson from her.
I thank the noble Lord for securing time for this debate. As any businessman will tell you, cutting taxes is one of the best ways of generating growth in small and medium-sized enterprises. I still remember the 1987 Budget from the noble Lord, Lord Lawson, and the positive effect of its tax cuts.
A tax on profits is, in my view, an extremely distorting tax. From the employer paying wages to the profits of a private firm, money is taxed by VAT, income tax, various levies, national insurance, business rates and many other minor taxes. Corporation tax is another unnecessary layer of complexity. Profit is not a dirty word. It allows employers, like me, to invest in more productive capital. It lets me pay wages and take on new staff and cut unemployment. The Chancellor’s consistent cutting of corporation tax is the correct course of action and I can only hope this will continue until the tax shrivels away altogether.
Productivity is another area of concern. Across the rich world, there appears to be a post-crash trend rate of growth well below what would be expected at this point in the business cycle. The easy gains have been made already and the Government will need to do more to generate rises in productivity. Without this, the rapid acceleration of living standards that we have all enjoyed is in danger of shuddering to a halt. I welcome some of the new measures introduced this time last week.
Academisation has a proven track record in improving the standards of schools. I have been a supporter of the devolution agenda for this very reason; namely, that service users and employees often know better than service providers. Allowing headmasters to hire staff and set pay scales is far better than using local authorities. Combined with an extra hour at school, I hope that this will provide employers with a better educated workforce, which is what we need if we are to own the industries of the future, like biotechnology.
I will finish on this point. We have a referendum on the European Union coming up. For all its faults—and there are many that the renegotiation did not address—we must vote to remain. The EU is the biggest single market in the world, with 500 million people to buy our goods and services. Almost half our exports go to the continent. We now have opt-outs from the euro and Schengen. Our European partners have accommodated us to the extreme, and we must appreciate what they have done. It may be the case that we are now the fastest-growing major European economy, but when we joined, we were the sick man of Europe. Times change, and working with allies is the only proven path to achieving success in an ever more globalised world.
My Lords, normally the Budget is a curiosity for around 24 hours, and by the next day everyone has forgotten about it and we carry on as normal. This is a unique Budget because it refuses to go away and it keeps changing its shape. I follow on from what my noble friend Lord Eatwell said. We would really like to know what the Budget is now. Which calculations are now prevalent since the Government blew a big hole in their own Budget?
The Order Paper suggests that the last business today is something that the noble Lord, Lord Ashton of Hyde, is going to do with the Budget under the European Communities Act. He said that the Government’s assessment is set out in the Budget report and Autumn Statement, but I do not know which Budget Statements he will be talking about, because what we have is now not true. I think that we are owed some kind of explanation.
What I next want to say is this. Given how many times the OBR has had to revise its forecasts, what that reflects is a great deal of uncertainty about the economy, especially when it comes to the numbers. Economics is one of those rare subjects where we do not even know quite what has happened in the past, let alone what will happen in the future, especially when considering the numbers around our real income. We were sure that we had a double-dip recession, but the diagrams suggest that there was no double-dip recession.
My proposal, although it might not be that constructive, is that in future the Government ought to produce fan diagrams of all their Budget calculations. They should show what they intend to spend, but they should also show what they do not quite know and produce their confidence interval both on revenue and on the spending side—in which case you cannot actually make point forecasts of the targets. Point forecasts of targets are just a nonsense. Any statistician will tell you that no such number is completely accurate; it has to have large errors around it. Something that the Government ought to examine, either with the OBR or without the OBR, is a more sophisticated approach, if I can call it that, to Budget making. Ultimately, accountants want numbers to balance, but I think one can say that the deficit would be either this or that or anywhere in between, because that is the best we can say—we cannot separate the numbers.
In the same direction of argument, I lost a lot of friends during the last Government by supporting the Chancellor because I thought he was doing quite well. After all, he was implementing my noble friend Lord Darling’s policies, and he was succeeding in that. Who can blame him? However, I think it was wrong of the Chancellor—I have said this before—to have a budget surplus as a target for the last year of his Government. Apart from anything else, when Roy Jenkins achieved a budget surplus we lost the next election, so having a budget surplus is not a popular policy. Apart from Roy Jenkins, the only other two Chancellors who have achieved a budget surplus are Nigel Lawson and Gordon Brown, but the surpluses were so tiny you could hardly see them without a microscope. This idea of achieving a surplus should be laid aside. The Chancellor’s job is to ensure that the economy prospers and people do not suffer very much. He should not worry about these narrowly defined targets of deficits and surpluses.
One question is worth discussing and perhaps the noble Lord can answer it—how will the Government fill the gap? My own view is that, since they have blown a hole in the Budget, they may have to come out with a slightly new set of calculations. I see that the Minister has a troubled face. If the Government had known that they could not cut off this £4 billion, would they not have raised the fuel duty? Not raising fuel duty is an immoral act, apart from anything else. When the price of oil fell, the Government of India gave only half the gain to the consumer and pocketed the other half. That is a perfectly sensible thing to do. There is no reason why the entire gain from the price cut should be passed on, given that there are other urgent tasks that the Chancellor has to perform. It would be perfectly normal to say, “We had to do something, and this was the least painful”. I declare an interest in that I do not have a car and have not had one for 50 years since I have lived in London. I have absolutely no sympathy with car drivers—I have slightly less with bicycles but I will not go into that. The action I have described would be doable.
The raising of the threshold for the 40% income tax payment was too generous. There was a time when we had inflation and fiscal drift, as it were, and people thought it was unfair that they should pay extra tax given that nominal incomes were rising but real incomes were not. We do not have high inflation, so I think that going from a £42,000 threshold to a £45,000 threshold—or whatever the Government have done—is far too generous. If they had decided to introduce this over two years or defer it, as with the corporation tax for big businesses, they could have clawed back some money that way.
I very much welcome the sugar tax. I am a friend of high taxes, and the sugar tax is a good thing. I definitely argued for it. Some soft drink producers have asked, “Why us? Why not introduce a chocolate tax?”. I thought that was a good idea and that we should levy the sugar tax on solids as well as liquids and have a progressive sugar tax which would claw back some money. I have argued before in your Lordships’ House that I prefer taxing consumption rather than taxing income because, if you tax people while they are having fun, they do not notice it. Therefore, it would be perfectly normal to introduce a more comprehensive sugar tax. I also welcome the fact that, after all these years of the Treasury not agreeing to a hypothecated tax, we now have hypothecated taxes. Hurrah! Long may we have a practice of saying that this particular tax is for this particular expenditure.
Finally, quite a lot of noble Lords have said that there is a need for infrastructure spending. Fiscal orthodoxy says that we cannot do that because the Budget numbers will go down. I have read Tom Bower’s book on Tony Blair. I think Gordon Brown invented PPP and built 80 hospitals and not a single number showed up in government debt. I think you have to find a similar trick: set up some nice corporations that will build affordable houses and do it in such a way that not a single number appears in the Budget. It cannot be difficult for the Treasury—it has done it before; it can do it again.
My Lords, I want to address three topics that have arisen from the Budget—the productivity collapse, the overreliance on OBR forecasts and the failure to distinguish between capital and current spending. I know that noble Lords have spoken on the first two but the third one is also important and was briefly alluded to by the noble Lord, Lord Desai.
Productivity is really a disaster. Before the crash, productivity growth was about 2% a year. In the last eight years it has been 0.2%. These figures should alarm the Chancellor. It means that he can expect no help to growth from productivity and that a lot of our present growth is bubble growth, which will subside when the balloon is pricked, together with the bubble revenues it brings him. The belated recognition of this fact has led the OBR to revise downwards its growth forecasts, leaving the hole in the Budget to which many noble Lords have already alluded. Near-zero productivity growth also means we can expect very little improvement in living standards over the next few years. The Iron Chancellor will have presided over Britain’s longest period of stagnation in a century.
No one has a completely convincing explanation of why productivity has been so poor, certainly not the Bank of England, which has written a couple of reports on the matter. In the most general sense it must be because of the way our labour markets and financial system have worked during the recovery from the recession. What new jobs have we created? In his Budget speech the Chancellor claimed that the economy created 2 million “good” jobs in the last Parliament,
“90% … in skilled occupations ... three quarters … full-time”.—[Official Report, Commons, 16/3/16; col. 953.]
The view from chez Corbyn was, understandably, very different. He referred to,
“nearly 1 million people on a zero-hours contract ... the highest levels of in-work poverty on record”.—[Official Report, Commons, 16/3/16; col. 971.]
This means that this has been a jobs-rich, skills-poor, recovery—in marked contrast to both the great depression of the 1930s and the recovery from the 1980s. The labour-intensive nature of the recovery has shown that Margaret Thatcher achieved her goal of creating the flexible workforce dreamt of by the Chicago economists, but only by drying up the springs of productivity and thus real wage growth. From 2008-14, the median real wage, which had been growing by about 2% a year in the 1980s and 1990s, fell by an average of 1% a year. Real weekly wages still have not reached their pre-crisis peak; this is not what a recovery should look like in a “high-wage” economy.
We can discern two trends from this: a further shift from manufacture to services; and within the service sector, a shift from higher paid to lower paid jobs—from local government to hospitality, personal services and retail. Our new service economy is starting to look like the Victorian servant economy, with the difference that the services are now outsourced rather than in-house. However, to explain the increase in the labour intensity of employment we also have to look at the financial sector. Capital investment has fallen off, with investment as a fraction of output having been consistently 1% or 2% lower than its pre-crash level. The effects of this continued underperformance of investment, accumulating over time, has left us with an anaemic capital-labour ratio that continues to drag on our productivity.
Why has investment been so sluggish? This, we must remember, has been despite all the efforts by the Bank of England to stimulate fresh investment by keeping interest rates at zero, and, of course, pouring a lot of money into the economy. Is it because we have a damaged banking system or because we have a banking system which is less interested in helping small and medium-sized enterprises than in churning money around itself? Is it because the demand for loans has fallen off? It is probably some combination of the three. Much of the new money has been hoarded. Some of it has gone into asset speculation. Two-thirds of bank lending goes into mortgages to buy existing houses—which is speculation in a fixed asset. All of which is a far cry from the textbook idea of banks as intermediaries which channel public savings into real investment. Therefore, on the one hand an increase in labour intensity and on the other hand an increase in what the noble Lord, Lord Turner of Ecchinswell, calls “financial intensity”—an increasing share of financial actions taking place within the financial sector itself. I argue that the interaction between the two explains our productivity collapse. The conclusion I draw is therefore pretty clear. If the private sector will not invest in the economy, the state has to do it.
My second topic, which has been referred to by the noble Lord, Lord Darling, is about the over-reliance of the Chancellor on OBR forecasts. We know the picture. In November the OBR gave the Chancellor a £27 billion bonus and more recently it discovered a £4.4 billion hole. Targeting deficit reduction over a medium-term period became fashionable in 2010 to give fiscal consolidation credibility. In 2010, the noble Lord, Lord Darling, announced that he would halve the budget deficit over four years. A few months later, the Chancellor said that he would eliminate the “cyclically-adjusted” current spending deficit by the end of the 2010 Parliament. Labour now follows the same path. John McDonnell says that a Labour Government will balance the books every five years. All these targets depend, as noble Lords know, on growth forecasts which are bound to be wrong at the time, bound to be wrong—as the noble Lord, Lord Desai, said—even about the past, and are bound to be even more wrong in the future. Today no one knows how much the economy will grow over the next five years, yet the Chancellor still has a target of an overall surplus in 2019-20. The combination of point targets and variable forecasts is a mad way to do budgeting. No wonder the Chancellor has revived his talk of headwinds. I can see that having these medium-term targets gives some assurance of fiscal discipline. However, it also means that policy is just shuffled around between the front and back of the sofa according to the latest OBR forecast. The one thing this vacillating method fails to provide is a credible policy of fiscal consolidation.
The larger problem underlying all this is that the Chancellor’s Administration has been trying to achieve a balanced budget for a given state of the economy rather than trying to use the budget to balance the economy. Unfortunately, this restricted view is shared by Labour. It means that the current debate largely revolves round the fairness of the cuts—the distribution of the sacrifice—rather than challenging the logic of the cuts in the first place. We therefore need a lot more thought about that.
My final point is about George Osborne’s failure to distinguish between capital and current spending. This goes back some way, and he is not the first to fail to do that. One of Gordon Brown’s achievements was to revive the distinction between debt incurred to finance capital formation and debt incurred to fund consumption. The basic idea is that the Government should cover all current spending by taxes, but can borrow for investment. Had that distinction taken root, the spending that needed to be balanced by taxes would have been much smaller and the budget deficit consequently less alarming than has been shown to be the case in public debate. The problem, of course, is the difficulty of defining investment. Building a new school or hospital is surely an investment, but because it does not produce a calculable prospective revenue to service and pay off the debt, it creates a lot of wiggle room to borrow for current spending.
In reaction, the Treasury now treats all public investment as current expenditure. When the Chancellor says that he aims for a surplus in 2019-20, he means a surplus on public sector net borrowing. Since any investment financed by borrowing increases the deficit, that is in effect a veto on government borrowing for investment in the foreseeable future. We need to do a lot more work on this.
I am reminded of something that Keynes wrote in 1942. He said:
“We need to extend, rather than curtail, the theory and practice of extra-budgetary funds for state operated or state-supported services … [It is important] to associate as closely as possible the cost of particular services with the sources out of which they are provided … This is the only way to preserve sound accounting, to measure efficiency, to maintain economy and to keep the public aware of what things cost”.
I do not deny for a moment that there are some thorny problems here, but unless we make a determined effort to relate the cost of particular services with the sources from which they are financed—I have been a long-standing advocate of a national investment bank—we will never escape from the deficit trap, at least except by destroying what is left of social cohesion. That is the course, I am afraid, on which the Chancellor has embarked. But as the resignation of his Work and Pensions Secretary shows, it will bring him little joy.
My Lords, this Budget promises more austerity. I join my noble friend Lord Eatwell and many others in feeling that we are becoming victims of austerity as practised by this Government. Much of the Budget is designed to put right the low investment in infrastructure, training, the disappointing exports, disappointing tax receipts and poor productivity —caused by austerity. Alan Milburn pointed out in his recent report on child poverty and social mobility that much of this falls unfairly on generation Y. With welfare now added to the many areas of expenditure that are closed to the Chancellor for cuts, he may be forced to find the new approaches suggested by many noble Lords. The noble Lord, Lord Higgins, referred to a rather large black hole.
The Minister spoke of the need for resilience. Economic security is not just a matter of accountancy and government bookkeeping. The Government and other noble Lords continue to tell us that the economic crisis was caused by excessive public expenditure and public debt during the Labour Administration, but endless books, articles, learned papers and research tell us that the crash was all to do with global banks extending huge amounts of credit to inappropriate borrowers—banks with insufficient capital of their own to cover these and their own speculative losses. Internal bookkeeping will not protect us from these pressures. We have to raise our game in the financial industry and a robust and properly regulated financial system is required to protect us from outside financial pressures. My noble friend Lord McFall told us how weak the system is. What are the Government planning to do about it?
In his Budget speech, the Chancellor said that the most significant observation from the OBR was the slow-down in the growth of productivity. The Minister reminded us of this and so have many other noble Lords. The Minister has said that the Government are going to deal with this through investment in education and infrastructure. In support of this the Government speaks of the roads, railways and flood defences that are on the way. My noble friend Lord Darling told us that what the Government do not tell us is that much of this expenditure is on feasibility studies and design, on organisation and preparation—all essential, but not for now. It is for the next generation but one. For the next generation are the many small and local projects that are essential to cut bottlenecks and to help local businesses. But as the noble Baroness, Lady Kramer, pointed out, starved local authorities are struggling to support this. Instead we hear about the promised prestige projects that are a long way off in the future. What efforts will the Government make to help local authorities to carry out these small but urgent projects?
Government investment in science and engineering is key to raising productivity and, yes, there are several welcome signs of this investment all across the country. At last, there is even investment for studying the feasibility of building mini nuclear reactors. Also welcome is the decision to make loans available to many more adults training in further education, particularly for science and engineering. However, as the noble Lord, Lord Bilimoria, pointed out, compared with other areas, this is not nearly enough. Nor is it adequately managed. A few days before the Budget, the National Audit Office was strongly critical of the quality of the information used for the Government’s investments in science capital projects. I hope the Government will pay proper attention to that. These projects must be properly planned and funded from start to finish and not from Budget to Budget.
One of my major concerns is that the Government do not seem to understand the way that the world of work is changing and the impact that this has on productivity. We have long argued that the Government are giving insufficient attention to those less tangible investments. We now have an important ally in Sir Charles Bean. In his recent report he, too, points out that intangible investment is not properly reflected in our figures. He gives some interesting examples: go to a travel agent and book a ticket and that becomes part of our GDP because of the investment in the travel agent, but be more efficient and book it over the internet and it does not appear. If you travel by taxi, this is in our GDP because a taxicab is an investment, but if you travel by Uber it is not, because you are probably riding in somebody’s privately owned car. Many small businesses and self-employed people now use websites, platforms and apps to sell their services and products. Where do they appear? We have to get this right. The Bank of England’s chief economist, Andy Haldane, warns us that up to 12 million jobs in Britain are at risk because of these powerful tools to raise productivity.
I welcome the increased minimum wage. My noble friend Lord Eatwell pointed out that many firms have said that they will pay for the increased minimum wage with less hours, less overtime and fewer benefits. So we are not going to see much growth in earnings. This increase in pay should be financed by increased productivity. If the means of achieving this are not recognised, all we will get is a race to the bottom—as the noble Lord, Lord Skidelsky, indicated—which is an outcome that none of us wants. When will the Government bring us into the 21st century? I put it to the Minister that in failing to understand properly what is going on we are in danger of solving yesterday’s problems, not today’s. The Minister laughs, but I think it is a very serious matter.
Many noble Lords have spoken of our complicated tax system. What this means for business taxation is a lack of a sense of constant strategic direction, and it makes us nervous. The Minister welcomed the cuts in capital gains tax. Like many other noble Lords in this Committee, I spent much of my working life building a business—a business that I am pleased to say supplied John Lewis, so I welcome the noble Lord, Lord Price. During that time—some 30 years—the tax we would have to pay on selling out our businesses varied between 45% and 18%. Indexation was introduced and then withdrawn. From time to time, the definition of business assets was changed. Our strategic concern was to achieve success. The Minister may say that the Government’s intention was to encourage investment, but it has not happened. Others could interpret this as tempting us to enjoy the fruits of success rather than continuing to invest in the business. And yes, in this Budget the rules are changed again, so I put it to the Committee that this is a wrong strategic aim in a country such as ours which depends on people like us building long-term, successful businesses. I agree with others that this is where continuity and reform are needed.
We need Budgets that understand the economy, build a robust and secure economy and which invest in long-term business, industry, the environment and skills and services—not Budgets designed to deal with the self-inflicted damage of the Government’s version of austerity.
My Lords, I want to talk about two matters in the Budget, one of which has had little publicity to date but to my mind signals a significant and welcome policy development. Before doing so, I want to make one general observation and remind the Committee of my declared interest as chairman in Europe of a global corporate advisory firm, some of whose clients may well be affected by the Budget.
In my first few months sitting in your Lordships’ distinguished company in the House, I have come to the conclusion that the opposition parties have learned little from the depressing tale of recent economic history. Reckless mismanagement of the economy in 13 short years, most of those years in the boom period before the crash, brought this country almost to its knees in 2010, requiring the Conservative-led coalition in that year, now a Conservative majority Government, to take decisive action to reduce a double-digit deficit.
It is apparently perfectly acceptable, when we have a deficit still running at more than 3%, to table amendments costing the country literally billions while criticising in a knee-jerk way any tax cut, even when there is good evidence that such a cut may produce more revenue. I am sorry to say that there is something sickening about listening to the sheer hypocrisy of Labour Peers criticising a so-called “black hole” of £4 billion opening up over the next five years on PIP when they dug a 10% deficit cavern in 2010—a Wookey Hole compared to a PIP pothole.
As the noble Lord well knows, the economy is a supertanker that does not turn around in six months, as indeed the evidence over many economic cycles shows. None the less, just to recall, all of that generated in 2010 the famous billet doux from the Treasury: “Good luck. There’s no more money”.
I want to talk about the proposal to cut capital gains tax from 28% to 20% from next month. In 2010, the Adam Smith Institute produced a compelling report on the effect of capital gains tax rises on revenues using data from the USA dating from 1955 to 2006. I apologise in advance for bombarding noble Lords with numbers, but when the tax rate was raised four times between 1968 and 1976 from 20% to 35%, total capital gains tax revenues fell by 21%. When the 35% CGT rate in 1978 was then progressively cut to 20% by 1984, the CGT take rose by 46% to $41 billion. When the rate was increased again in 1986 to 28% from 20%, revenues fell by 13%, and when the rate was cut from 20% to 15% in 2003, CGT revenues almost exactly doubled to $110 billion. Noble Lords will get the drift: there is a clear pattern of inverse correlation between the two. Professor Paul Evans of Ohio State University found in an important piece of research carried out in 2009 that a 1% reduction in the marginal tax rates on CGT in the US might trigger a 10% increase in revenues.
There have been fewer changes to CGT rates in the United Kingdom so it is more difficult to draw evidence-based conclusions, but I note that the rate cut in this Budget is possibly the only cause for my being in agreement with the former Chancellor of the Exchequer, Gordon Brown. He reformed CGT in his first Budget in July 1997, cutting CGT on long-term investments from 40% to 24%, and again in 2003 he cut CGT on business assets to a rate of 10% for assets held for more than two years. Thereafter—guess what?—CGT revenues in the UK increased by 35% to £3.2 billion. Since much of capital gains tax is a voluntary tax in that you can often choose when to realise a profit, this feels intuitively right.
I applaud the cut in the rate of CGT, not least for basic rate taxpayers who will now pay only 10%. With entrepreneurs’ relief at 10% now extended to all long-term investors in unlisted shares—quite often start-ups—there is already anecdotal evidence of a further surge in entrepreneurialism which will, based on strong historical evidence, particularly in the United States, increase revenues from this tax to the Exchequer—and hence my reason for applauding it.
I would also like to say a few words about the introduction of the interest deductability cap which, perhaps unsurprisingly given its name, has had little coverage in the press. The Budget imposes what to my mind is a sensible cap on the amount of interest which can be deducted from taxable profits at 30% of those earnings in the UK with a de minimis threshold of £2 million of net interest expense to avoid harming smaller companies. This represents a very important policy shift. While a key driver of this measure seems to be restraint of tax shifting by international companies away from the UK, sections of the investment community, some of whom I represent in the UK, will no longer have such a powerful personal motive to leverage the companies their firms buy.
This provision will force a change on the private equity business model in the UK, requiring, I believe, greater prudence and greater concentration on genuine business improvement rather than overreliance on pure financial engineering. That is a good thing and I am sure that the private equity industry will rise to the challenge.
The great financial crisis was littered with carcases of companies where the so-called “tax shield” of carefully constructed legal structures with double dipping and excessive debt went wrong when the profits of the company stumbled. From talking this week to some of the major players in the private equity world, my feeling is that this OECD-wide initiative, which our Government are now pioneering, is regarded by them as an inevitability, with the result that lesser personal rewards will be available from what, in aggregate—that is the point: in aggregate—became the taking of major systemic risk through excessive leverage. Excessive, and even abusive, use of interest rate deductions incentivises the use of debt over equity, overleverages corporations, thereby increasing their risk, and increases systemic risk in the UK banking sector as a direct result. Change is long overdue—a fact the Chancellor recognised with prescience when he called for such change in opposition. I applaud this move, with the cautionary note to the Minister that when interest rates eventually rise, the Government may need to be flexible on whether 30% is then the right threshold for the cap.
This is not only a pro-business Budget but one which is pro-market, pro-new entrant, pro-small business and pro-entrepreneur too. Under the bonnet of this Budget, small businesses and entrepreneurs are being helped the most and large companies are being held better to account to behave responsibly and pay their fair share. Growing, successful businesses create jobs. Higher employment improves the economy, reduces the deficit and enables us to take care of the most needy in our country. We should trumpet the success of UK business in recent years. I am confident that this Budget will build an even more vibrant business economy.
My Lords, it feels quite like old times, not just to be sitting alongside my noble friends Lord Eatwell and Lord Desai but to be sitting opposite the noble Lord, Lord Lupton, although previously we did so on other sides of the negotiating table in our roles as corporate finance advisers. I wear as a badge of honour his suggestion that I am a member of the hypocritical group of Labour Peers on these Benches and I will come back to some of the points that he made on capital gains tax changes.
I welcome the chance to debate the Budget measures and the implications they have for the economy, but I regret that this debate is not taking place on the Floor of the House but here in the Moses Room, whatever the charms of this room may be. I regret that particularly in terms of the exceptional maiden and valedictory speeches of the noble Lord, Lord Price, and the noble Baroness, Lady Knight, respectively, and in the context of the separation of this debate from the Motion which will take place as last business in the Chamber today, to which my noble friend Lord Desai referred. Perhaps it is an unworthy thought that this room is being used not just because of the pressure of legislative business in the Chamber but, rather, because the Government remember their good friend and supporter the late Lord Hanson, who made a practice of always holding the annual general meeting of Hanson Trust on one of the days between Christmas and the new year, while denying that that was done in any way to discourage the attendance of troublesome shareholders.
As the last Back-Bench speaker and having heard so many powerful comments about the macroeconomic scene—I support entirely the contributions of my noble friends Lord Eatwell, Lord Darling and Lord Desai—I propose, even before hearing the speech of the noble Lord, Lord Lupton, to focus on one or two areas of specific tax policy, particularly capital gains tax, relating to entrepreneurial activity.
The Minister referred to the problem of low productivity, as did my noble friend Lord Eatwell and many other speakers this afternoon. Of course, the linkage between productivity and technology, innovation and entrepreneurial activity is complex and what we see in the US reflects many of the issues that we struggle with here. But notwithstanding the suggestions of the noble Lord, Lord Lupton, like all my colleagues on these Benches in both Houses, I strongly recognise the contribution of small and innovative businesses to the increase in productivity.
The Minister referred to the CGT changes as a measure to encourage investment. He also said that tax should be not just competitive but fair. That last statement reminded me of something written by the excellent Financial Times political commentator Janan Ganesh—indeed, the biographer of the Chancellor —when he wrote last year:
“A country’s tax code is not just a mesh of rules and rates—it is a secular bible of moral signals”.
Although Ganesh was writing principally about inheritance tax in that particular article, which I will refrain from addressing at least today, his argument is compelling on a broad view. I will quickly examine the CGT changes and indeed the related pre-existing tax treatment of investment in smaller companies, and ask whether this achieves the aim of stimulating productive investment and at the same time sends the right signal of fairness.
The noble Lord, Lord Lupton, took us through a long history of the changes in CGT rates. He rather glossed over that it was the noble Lord, Lord Lawson, who as a Conservative Chancellor raised the CGT rate to the same level as the marginal rate of income tax, which I think we can see now as a triumph of intellectual purity over practical efficacy. We then went through the period that he described of taper relief. It was then my noble friend Lord Darling who simplified the system, removed in large part the separate taxation of business assets, private company shares and so forth from other assets, and introduced a single rate of 18%. At the same time he introduced entrepreneurs’ relief at a 10% rate capped at £1 million in any entrepreneur’s lifetime. The current Chancellor, both during the coalition Government and subsequently, significantly raised the CGT rate to 28% but at the same time substantially increased entrepreneurs’ relief in two stages to £10 million.
The changes in this year’s Budget Statement bring us back to a basic rate that is very similar to that introduced by my noble friend Lord Darling, but with a further broadening, in effect, of entrepreneurs’ relief and the reintroduction of a two-tier system. There may be a reasonable argument, as is made by Hamish McRae in today’s Independent, that 20% as a general CGT rate may be optimal from the point of view of raising tax revenue. That may have influenced my noble friend Lord Darling when he pitched the rate at 18%. But do we need ever-growing concessions to small and private company investment? In 20 years of advising and investing in early-stage companies, I have never seen any evidence that a capital gains tax as low as 10% makes any difference to the quality or quantity of investment in these companies, let alone the effect of the income tax breaks that apply through EIS and VCT investment. What are the Minister and his colleagues doing to try to assess the total cost of concessions to private company investment, both the pre-existing ones through income tax and other CGT breaks and the newly introduced ones? Will he give an assessment of whether the taxpayer gets value for money from that? If we do not, surely we are falling into the trap that Mr Ganesh referred to in the FT of sending the wrong moral signal.
I should emphasise that these Benches strongly support the activities of small companies. As I have said, I have devoted most of my working life to working with them. But we need to be rigorous in the way that we examine what allowances are really needed as opposed to currying favour with the small business lobby.
My Lords, it is a great pleasure to participate in this debate, not least because it has enabled me to hear the maiden speech of the noble Lord, Lord Price. I was very struck when he quoted the John Lewis motto that its aim was,
“to make the world a bit happier”.
I hope he takes that motto with him into his ministerial role and attempts to fulfil it as successfully there as he has done at Waitrose. It was also a privilege to hear the valedictory speech of the noble Baroness, Lady Knight. It is sobering to think that when she was first elected, I was only 13 years-old. When I think of the changes that I remember in my lifetime, and that she has been an active participant throughout that extremely turbulent and rapidly developing period of our history, she has had a remarkable career. I have one final comment on speeches that do not flow in the main body of my speech. I have a suggestion for the right reverend prelate the Bishop of Portsmouth. I would have thought that a see of cathedrals might be a good collective noun.
The Budget has been a drama in two acts. Act I was the Budget itself and it lasted until about 24 hours after the Chancellor had sat down. The Budget exemplified the aphorism that to govern is to choose because the Government certainly chose a number of very stark priorities. First, they chose to have a budget surplus by 2019-20. Nobody believes that that is necessary for any economic purpose; it is a piece of economic posturing by the Chancellor, which is important to him and his credibility but almost certainly not necessary in terms of the long-term future of the British economy.
Secondly, the Chancellor decided to achieve this by increasing the pace of deficit reduction in the last year of this Parliament. For the next three years, the deficit reduction will go on at a rate of about £17 billion a year, and then suddenly in 2019-20 it increases to £32 billion a year. Can the Minister explain the economic rationale for that acceleration? The Chancellor decided to achieve this Budget surplus largely by regressive measures, from the now disgraced PIP changes to cutting public expenditure by £3.5 billion in 2019-20, in as yet unallocated measures. Whatever they are, given the budgets that are likely to be cut, it is highly likely they will be regressive.
Capital gains tax has been reduced. We can argue about whether the optimal rate in terms of overall revenue is 28%, 20% or something else, but for many affluent individuals that cut is a great benefit.
There are two changes to the ISA limits—the overall annual ISA limit goes up to £20,000, which is greatly above any increase justified by the rate of inflation, and can benefit only extremely affluent individuals. Having £20,000 of free cash to put away a year is beyond the dreams of the vast majority of the population. The lifetime ISA allows young people to put away up to £4,000. I accept that there is a big problem in getting young people to save for their pensions, given the short-term pressures they have with housing costs, repaying loans and many other cash calls. However, we are just in the process of introducing automatic enrolment for pensions across vast swathes of the economy. We are saying to people, “We want you to join your company scheme because if you do the company will then make a contribution and this is a wise way of saving for your pension”. Now, young people are being told, “Hang on a second, you have a new ISA”. What advice would the Minister give young people, such as my sons in their late 20s and early 30s, as to whether they should join an auto-enrolment scheme if they have not already done so or should put any spare cash they might save into a lifetime ISA?
Overall, the effect of these changes is that the poorest do worst and every other group does increasingly better. This was graphically demonstrated by the IFS but not by the Government, whose own distribution tables for the first time did not cover the effects of this Budget. They covered a decade’s worth of effects, which meant that you could not tell what the effects of this Budget were. That was why the Education Secretary was tripped up on television because she had read only the Red Book, which would not tell her that, and the distribution tables produced by the Government. She had not seen the IFS report.
Another feature has been the stunts and smoke and mirrors tricks so beloved of Gordon Brown. Three stand out. The first is deferring bringing forward the payment of corporation tax for large groups for two years, which is revenue neutral over the Parliament but backloads a large amount of cash coming in in the last years of this Parliament. The second is bringing forward capital spending in 2017-18 and 2018-19 and then reducing it by an equivalent amount in subsequent years. Given the problems that the noble Lord, Lord Darling, graphically illustrated of getting this money spent on time, can the Minister first tell us on which projects an extra £760 million is to be spent in 2017-18 and an extra £970 million in 2018-19 and then which projects will have £1,585 million less spent on them in 2019-20? The final bit of smoke and mirrors, which is damaging to the economy and the public sector, is raiding the public sector pension funds at a cost, as my noble friend Lady Kramer said, of £650 million to the NHS and more than £400 million to schools, but which miraculously pops up in the Budget figures as a gain of £2 billion to the Government.
Overall, the Budget as presented is regressive and gimmicky. It is devoid of economic rationale but dripping with political calculation. In the absence of the restraining hand of the Liberal Democrats, the Chancellor has driven a stake into the heart of one-nation conservatism and heralded the return of the nasty party.
But not so quick—that is just the end of Act I. Suddenly, 24 hours after the Budget, the curtain rises on Act II. A Back-Bench Tory rebellion reverses the PIP policy, at a cost of £4 billion, a number of VAT changes are made, IDS resigns, chaos reigns. However, yesterday the Chancellor says that we should not worry, he has seen the error of his ways, he will not make any further benefit cuts, and that IDS was a nice chap really. Can the Minister give any example in the last century when a major plank of a budget has been withdrawn within 48 hours because of a rebellion in the governing party or for any other reason? Where do the Government’s plans now stand, and in particular, to take up the point made by the noble Lord, Lord Desai, given that the Government are now about to send a Red Book to Brussels, will it be amended? We know that the Red Book no longer reflects the Budget judgment of this Government, and there is a legal requirement to send an estimate to the EU jolly quick, so it cannot wait until the Autumn Statement.
On plans unravelling, the Minister will be familiar with the mayoral devolution deal, which the Red Book claims has been agreed for East Anglia. The Minister is no doubt also aware that last night Cambridgeshire County Council rejected the deal by 64 votes to one. It did so because the proposal would have simply dropped a mayor for East Anglia on top of the existing structure of parish, district and county councils and because it believed that this would blur transparency of who was responsible for decision-making. Given this near-unanimous view of Cambridgeshire, on what basis did the Government claim in the Red Book to have got their agreement—the word “agreement” being used? Do other counties in other areas which are to get similar deals share Cambridgeshire’s view, and in the specific case of Cambridgeshire, what plans do the Government have to resurrect the deal?
One lesson from the Budget is, as we have discussed today, that hard and fast fiscal rules are a folly. We remember the painful contortions over Gordon Brown’s golden rule, and the noble Lord, Lord Darling, as he pointed out, legislated to halve the deficit over four years. Given the way the Labour Party excoriated the coalition Government for achieving that, I suspect that had the noble Lord or one of his Labour successors still been in government, that target would probably not have been met and another one would have been required.
The current Chancellor has already broken two of the three fiscal rules he had set. To cap it all, Labour has set a fiscal credibility rule. Leaving aside the fact that you use a word like “credibility” only in a context when you have none, this rule is completely undermined by the views of the Shadow Chancellor, who in the Commons said:
“As someone who still sees the relevance of Trotsky’s transitional programme, I am attempting not to salvage capitalism but to expose its weaknesses ”.—[Official Report, Commons, 4/7/11; col. 1317.]
I am not sure that Trotsky’s transitional programme was very hot on fiscal credibility. The only lesson I learn from all these broken or ridiculous rules is that there should be only one fiscal rule, which says: “You shall have no fiscal rules”.
The final point, which I will briefly touch on, is on the discussion we have had on targets. A number of noble Lords have pointed out that at one level targets which go far into the future are ridiculous because the only thing you know about them is that they will not and cannot be met. The challenge here is that without some kind of quite detailed projections you lose credibility. However, the challenge on the other side is that Chancellors put far too much emphasis on the detail of them and will trumpet the fact that they expect a £10 billion or £20 billion this or that in five or six years as a major triumph of policy-making when clearly, whatever happens, those exact targets will not be met. It may be, as the noble Lord, Lord Skidelsky, said, a mad way to do budgeting, but I think that we need a more nuanced view of the target culture.
When historians look back at 2016, I think that we can be pretty certain that the decision that we take on 23 June will be seen as vastly more important than this Budget. That does not mean that this Budget is not regressive, unrealistic and, now, shot through with holes, but it does put it into perspective.
My Lords, my first duty is to congratulate the noble Lord, Lord Price, on his maiden speech. Had the Opposition had their way, it would have been made in the proper place, in the Chamber, but I hope that he will at least be encouraged by the reception that he has had today to engage in our next economic debate, which will be in the Chamber and which—I understand from the assurances of the Government—will not be too far off. I also could not miss this opportunity to thank him, on behalf of my wife, for opening a small store fairly close to our home. It is close enough for me to be trusted to go on my bike and get the light shopping; I would never be trusted with the more serious shopping that is done on other occasions—so I am grateful to him for that.
Turning to the Budget, what has been laid bare is the Chancellor’s failures over these years: even before the fiasco of the personal independence payment started to unravel, and even before Iain Duncan Smith wrote the first line of his resignation letter, this Budget revealed itself to be a shining example of what happens to an economy when it is deprived of investment. My noble friend Lord Eatwell opened the debate from these Benches by identifying with great accuracy and very fully just why we had suffered such low investment—of course, the cuts are the other feature of this economy which we deplore and which I will come on to in a moment—and just why these have been wasted years and we are doomed. They have been unsuccessful years; we have to remember, after all, that the Chancellor was going to clear his deficit this last year. It will take him twice as long as he said. He is going to go for a surplus almost as fictitious, I have no doubt, as the rate at which he was able to clear the deficit over the previous five years.
There is no doubt that there is only one crucial figure that has come out of the Budget: the Institute for Fiscal Studies emphasised very clearly and several key contributions in today’s debate have subscribed to the point—the noble Lord, Lord Skidelsky, devoted nearly the whole of his speech to it—that we have depressingly low productivity, which lies at the heart of our economic failure. If we are going to progress, it will not be by hitting the targets of a Chancellor who is continually having to row back from very short-term decisions; it will be by how we set about successfully improving productivity in this country. We know the Minister is well equipped to address this issue. We all recognise how difficult the issue is, but it is not helped when the whole direction of policy identified by the Chancellor seems to put such low store by this crucial issue.
The Institute for Fiscal Studies has said that if the OBR predictions on productivity and this low growth come to fruition, we should all be worried. It will lead to lower wages and living standards, not just lower tax revenue to the Treasury. This is lower wages and lower standards of living following on from six years in which the country has suffered from this position. It is also a reflection of the fact that growth is much lower than it ought to be. As my noble friend Lord Darling reminded us, it is lower than the position he achieved two years after the great recession.
As for the contributions which have emphasised how the Labour Government led us directly into these disasters, I cannot remember that it was a socialist Government in the United States under George Bush which produced the first stages of this catastrophe. I cannot recall the fact that the first bank to go down was British—it was American. Indeed, it was also the case that the economies of the whole of Europe fell into the same real decline at the time. So let us not have too much on those lines.
Of course, the Chancellor has just begun to recognise that there are external forces. He actually commented on the fact that there has been a slow-down in the world economy. He is not too confident about the rate of American expansion and he is very pessimistic about the Chinese position. That is just a reflection of a fact that we all know: our economy operates within a wider framework of the world economy, and that is why it is so important that the Budget should be accurate in its predictions and on its strategy. But, of course, this Budget has already unravelled in considerable detail.
The Office for Budget Responsibility has described the UK’s downgraded productivity as the most significant part of its report, and yet the Chancellor seems to be unable to pay attention to that fact. What does it mean in practice? How are people around the country experiencing low productivity? It means that they are going to earn less, they will see their living standards failing to improve, and they will be less likely to be in a job and to pursue a career which utilises their talents. Of course, the strain that is put upon families by these failures is quite enormous, as well as the strain on the economy as a whole.
Let us consider the factors which are crucial to driving productivity—the problem is plain to see. I will take one obvious example. The Government continually boast about their apprenticeship programme and the numbers involved. In many cases the programme is paying little regard to the concept of apprenticeships, which were always used in the British economy in the past. Someone is employed and trained by a company so that they can develop the capacities and skills to do the job for that company. Many of our current apprenticeships are just another word for internships—an introduction into a company and the possibility that one might sustain a role there. As for apprenticeships in more general terms, it is the case that an awful lot of youngsters are going into apprenticeships which are clearly below their educational level. People with degrees are taking up apprenticeships that provide work that is only to A-level standard. Others who have completed their sixth-form education are going into apprenticeships that we used to regard as very low-skilled opportunities indeed.
The economy needs to work better for young people, for households, and of course for our regions. For young people, of course, the Budget merely continues a most depressing scenario. The Chancellor said last week and reiterated yesterday that the Budget was designed to put the next generation first. That is a somewhat late conversion given that the Government have spent the last six years undermining, overlooking and at times even demonising young people. Look at their programme not only in terms of apprenticeships but also in terms of educational opportunities. Further education colleges, which are meant to be crucial to the development of skills in our young people, are closing down. Many of them are facing bankruptcy. Yet the Government dare to suggest that they are offering to young people greater opportunities. This is an appalling track record.
Young people have been hardest hit by the Government’s dismal record on home ownership. Many know that they will not have the earning power to come anywhere near the deposit level required to make their first step on to the housing ladder. As has been well demonstrated, the Government’s new lifetime ISA will have limited appeal for many people for whom saving at the rate envisaged is not something they can aspire to. What is the Minister’s response to the OBR analysis which states that the new ISA is likely to push up the price of housing and, in so far as it works at all, increase demand against provision which is already part of a most depressing bubble? It is a reflection of the fact that asset bubbles are one of the characteristics of this economy and it is why we remain so very vulnerable. I would be interested to hear from the Minister whether the Treasury has done any analysis about the number of people who think the new ISA will assist them. I put to him that, once one takes into account the amount that many young people have to spend on essential living costs, on rent and on paying off debt, there is not much for them to put aside for saving.
This is also a Budget which is detrimental to households. The Resolution Foundation has found that, by 2020, the poorest 30% of households are set to lose around £565 a year, while the richest 30% of households are set to gain around £280 a year. How can the Chancellor justify this distribution of resource? Has he not come to terms with the gross disparity in incomes and growing inequality that are the feature of the western world? Of course, it shows in our companies; we have all seen the statistics. We know the enormous difference between what is earned by the person on the shop floor and what is earned by those in the boardroom —and particularly the chief executive of a company. And yet the Chancellor has found ways to ensure that those who have resources should be blessed by him and that those who are poorly off get little out of this Budget.
In the last Parliament, cuts to tax credits and benefits meant that low-income households with children were the biggest losers—and the Chancellor had to learn his lesson about that in terms of fairness. This time, we have had it with regard to the disabled. How on earth can the country have confidence in a Chancellor with a record like this?
The Institute for Fiscal Studies has stated that the Government’s tax and benefits changes have resulted in significant losses for those of working age, especially those with children in the bottom half of the income distribution. The Budget does little to break the country’s reliance on household debt as a source of growth, and we know how insecure that base is in terms of the economy as a whole. Let us consider rising levels of household debt alongside the increase in the number of people in insecure employment—and zero-hours is insecure employment all right; it means that the employer tells you the number of hours that you are going to work during a set period, with no guarantee attached beyond it. How can people make intelligent decisions about their very limited resources against a background of such crucial uncertainty?
Finally, on the regional economy and infrastructure, my noble friends have already identified in this debate how many infrastructure projects there are—my noble friend Lord Darling stated that we are still thinking about starting up on projects which he signed off in their origins a decade ago.
Many worthy projects have been identified but so little has been achieved. After all, the biggest single achievement is Crossrail, which was started more than a decade ago by a Labour Government. When it comes to London Heathrow, we cannot make up our mind year after year. We cannot get a decision from the Government. I know the difficulties arising from the politics surrounding Heathrow, but we all know that the south-east must have some increase in airport capacity. However, all we get is dither. Meanwhile, in the north of England—the so-called northern powerhouse —the Government reel off a whole string of wonderfully attractive—even essential—infrastructure projects, but there is no date attached to any of them. Indeed, High Speed 2 will take a decade to get as far as Birmingham. That does not have much to do with a northern powerhouse.
It is also clear that when it comes to the actual distribution of real resources, the northern powerhouse has not made much of an impact on the Government. What we see in local government allocations of resources is that the wealthier counties of the south-east get the lion’s share while the authorities in the north, with their colossal problems in terms of the communities they serve, receive much less. Therefore, it will not do to say that this Chancellor has a grip on the nation’s finances and he knows where he is going. He has missed every target he set in 2010, and some of them by a country mile. The only target we can guarantee that this Chancellor—if he stays in office—is likely to achieve is to reduce government expenditure as a percentage of GNP to below 40%, because if there is one target which an ideologically committed right-wing Government have, it is to reduce the role of the state, essential though it is to some of these big infrastructure projects. That is how they mark out a good society. However, as the right reverend Prelate the Bishop of Portsmouth argued, we should have a concept of morality in what we do. It cannot be right that this Budget increases inequality in our society. It rewards the wealthy and condemns the less well-off to an uncertain position and limited resources. That is why we are critical of it.
My Lords, I do not know whether it is the intimacy of this Moses Room—it is my first time here—but, as with each debate on economic and financial matters in which I have been involved, including the third Budget-type debate within a year, it has been a genuine pleasure to listen to the remarkably insightful and broad comments of noble Lords with their vast experience and wisdom. Again, I do not know whether it is the intimacy of this room, but the debate seems to have come with a lot more humour than I remember from some others I have taken part in. That is also very pleasurable.
I, too, congratulate the noble Baroness, Lady Knight, on her marvellous valedictory speech. I had been thinking until I saw the number of people exiting the Room when she finished that they were all here for the Budget debate, but clearly not. Whatever we think about the complexity of our democracy it is quite extraordinary to be able to celebrate somebody who has been in Parliament for 50 years. It is more than the lives of some of us—I think of the young people sitting behind me in that regard.
The noble Baroness mentioned 15 March 1979, and I have heard a deeply pessimistic tone from many noble Lords. I was coming towards the end of my master’s degree year at Sheffield University around that time. I do not know why I find myself thinking this, but during those days of horrific strikes Orgreave Colliery—as I am sure many people know—was at the centre of many of the disputes. One of the most enjoyable things I have done in my relatively short time as a Minister was, along with the Chancellor, to sign the devolution deal for the Sheffield city region. The deal was signed at its advanced manufacturing centre, which I had to point out to a number of people is on the very same site as that event 50 years ago. It is a sign of the way the world can change.
I also congratulate my new noble friend—but my previous normal friend—Lord Price for his speech. It sounds like there is an enormous amount of support for his preceding life in business. Along with some of the amusing comments, it sounds as if food might need to be an important part of his drive to pursue the simple challenge of boosting our exports. If we can sell curries to India, as the noble Lord, Lord Bilimoria, said, maybe his challenges are not as tough as some people typically presume.
Let me turn to the remarkable substance. Again, I apologise that it is going to be impossible in the remaining 17 minutes I have to respond to everything noble Lords have said. I had planned—as I try to do—to respond to each of the 19 important contributions but I have decided to try to do it on a thematic basis. Having said that, I will start by responding to the interesting comments from the noble Lord, Lord Davies. Briefly, before I do that, I want to respond to the right reverend Prelate the Bishop of Portsmouth. He made a very important comment about simplification and the speed with which words can be used. I will certainly take that note back to my colleagues and I hope that is something we can address in the future. Among many points, the noble Lord, Lord Newby, mentioned devolution and the Cambridge deal. It is not the role of the Government and completely against the spirit of devolution for us to tell any region whether it should be part of it. It is up to them. If Cambridgeshire for whatever reason decides, rather oddly in my opinion, that it does not want to be part of it, then so be it. It would not be first place in the country where that issue is valid.
Let me turn to the broad summary. I do so in response to the comments from the noble Lord, Lord Davies, on the presumption that he reflects a lot of the comments from the opposition. Lack of investment and productivity, of course, is one of my themes and I will come back to that.
As I have said before, if you go to the 40,000-feet level, the big and welcome surprise of the last Parliament and the worst days of the recession was how few jobs were lost, in contrast to the expectations. The noble Lord, Lord Darling, talked eloquently about the interesting days when he was in the middle of before the coalition came in. As I have reminded people previously, nobody would have dreamt of the scale of employment created over the subsequent five years of that coalition. Whatever the ins and outs of the other issues I am going to go on to, we should be careful not to confuse attempts to boost productivity with anything that reduces jobs and opportunities, particularly the number of jobs being created for young people. I say that because, while I do not believe it was in the Government’s manifesto, the decision by the Chancellor to acknowledge the productivity challenge right at the start of this Government, and hence why I was invited to become part of the Administration, is a recognition of its importance.
I want to make two further points in response to the noble Lord, Lord Davies, before I come to the thematic areas. On the topic of inequality, on which I am a little surprised more was not said—in some ways I am pleased about that—and as I tried to address very specifically in an Oral Question recently, based on the existing objective measures of these issues, it is the case that inequality today is less prevalent than it has been for the past decade. What I probably did not say within the considerable amount of evidence that I cited during that brief Question—that is why debates such as this one are much more useful because one can say more that is of real substance—is that while there may have been aspects of rising inequality within different income groups, on all the internationally accepted measures of income both before and after tax, inequality is lower today than at any time in the past 10 years. When it is adjusted for wealth, which is the result of house prices, that is not the case. That is why it is appropriate to put so much effort into trying to do something about the tremendous housing challenge we are facing.
In the spirit of how I began, which is that the world is not quite as gloomy as it seems, something that so many people believe innately in their veins, it is important for everybody to realise that global inequality has declined and continues to decline at a pretty considerable rate. The United Nations achieved its goal of halving world poverty, without even realising it, five years sooner than it originally stated. One has to be careful of making such overwhelming summaries.
Let me turn to the thematic issues. It is most important that we start with the personal independence payment. The noble Lord, Lord Eatwell, challenged me to be clear about it, so it is appropriate that I should start with PIP. The most important thing to say, in my opinion—here no doubt I risk upsetting some of my colleagues as well as many others—this is what I would personally describe as a Q times A equals E problem. Many years ago I learned that if you are trying to pursue an idea or a policy, the quality of the idea times its acceptability equals its effectiveness. I shall come on to this in terms of the frankly quite ridiculous, albeit amusing, things we have heard about black holes. The prime purpose of that policy initiative was to try to stop the degree of gaming and abuse of beneficiaries, which sadly in the way it has been portrayed has not been able to be done successfully. That in my limited understanding is why the issue came to our attention and generated the policy behind it. It comes down to making sure that the people who are in need of government support are those who get it, and rightly so, and those who are not in need do not get it. I am sure that this issue will be addressed again.
On the £4.4 billion, let me first point out that total government expenditure in this year’s Budget will be close to £700 billion, so the idea that £4.4 billion spread over five years is going to put a black hole into the Government’s finances is really not worthy of me pursuing in any great depth. While I am going to come back to this as a separate theme, a number of noble Lords have quite rightly talked about the volatility of the forecasting environment we are in. On the OBR’s forecast change, one noble Lord—perhaps the noble Lord, Lord Bilimoria—referred to the four-month gap since the Autumn Statement but it is actually not much more than three months. The forecast is £55 billion different from what it was. That is the context in which one should think about this so-called black hole. By the time we get round to the Autumn Statement, one of the few things I can guarantee for Members of this House is that the OBR’s forecast will change again, and I suspect that it will be considerably more than £4.4 billion.
Theme number two is on the environment, what I just said about the OBR and on forecasting in general. As noble Lords will know, I spent many years of my life—far too many—in the dubious world of economic forecasting. There is a slight dilemma in that the Government have, very importantly, introduced the power of an independent entity, the OBR, to constrain the actions of the day by providing these forecasts. Partly due to the incredible uncertainties of the world economy in general but also to the circumstances over the past three months, this is a very large change in forecast. In my old life, where I managed a large number of economic forecasters, I would not encourage people to change their forecast that frequently. However, if that is the process which has been brought about by the existence of the OBR, it needs to be respected by the Government. It is an independent entity and we need to set our policies in that framework.
I will finish on that topic, although I could talk about it all afternoon. Robert Chote said to the Select Committee yesterday that he thinks there is a 55% chance that the Government will achieve a fiscal surplus by the end of this Parliament. Again, as someone who has been steeped in economic forecasting for a large part of my life, while many noble Lords might not think it, that is not a bad probability of a good outcome. I used to joke to people that 60% right would allow most people who presided over it to be lucky enough to be well off enough to own their own Caribbean island. I encourage those noble Lords who question the value of such statements—I will come on to that in a second—to think again.
That takes me to theme number three on the issue of fiscal policy and the right framework. A large number of noble Lords have somehow again raised the idea that there is no economic purpose to having a fiscal surplus. Unless international economic theory and best policy has changed dramatically in the three years since I was so immersed in it, on the contrary, it is widely accepted that when countries are at or close to full employment they should run a fiscal surplus or very close to it. One can argue about the dates but the goal of trying to achieve a fiscal surplus in normal times is an extremely sensible economic policy to pursue, not least because if you luckily achieve that in not normal times, it gives you the fiscal leeway to do something about the immediate needs of the weak cycle that one would focus on.
I will go from that theme directly into the very important issue of productivity. I do not at all have enough time to respond to the many powerful things noble Lords have said. To those noble Lords who seem to enjoy a more pessimistic way of thinking, I say that one should not dismiss another reason why it is important to focus on fiscal policy. If the productivity data were genuine—I have considerable doubts which I have expressed before and will do so again in the future—it may well be because of a large level of public debt as a share of GDP that has been accumulated both here and in many other parts of the developed world. To take it back to the purpose of fiscal policy, there is a reasonable amount of evidence that public debt as a share of GDP somewhere below 60% of GDP, and especially if it is below 40%, generally creates a much better environment for private sector productivity. One could argue about the scale of some of these numbers but the notion of not trying to pursue a fiscal surplus in a time of full employment—and we have the highest employment for 40 years—is, in my judgment, mistaken.
There were some very useful comments on productivity more generally, and I apologise that I do not have time to go through them all in detail; I want to focus on one or two areas. I am surprised more was not said about education. I spent a considerable amount of time today, as I have done in the past, looking at globally comparable indicators for factors relevant to productivity. If you try to identify those that the UK seems weaker in as compared with the rest of the world, it is education that sadly comes out as one of the most identifiable. That is why it is a feature of this Budget. The noble Lord, Lord Bilimoria, made comments about higher education and I think other noble Lords made similar comments. My surprise came because in my judgment, doing more about education and skills, particularly for younger people, which is what we have tried to focus on in this Budget, is probably the single most important thing in terms of improving—adjusted for measurement error— our long-term productivity.
On taxes, a considerable number of interesting things were said as time went on, and I want to touch on two or three. First, I personally think that the sugar tax is a very courageous move. As many noble Lords may be aware, in addition to my responsibilities as Treasury Minister, I am chairing a review into antimicrobial resistance where I have to think a lot about the role of taxes, subsidies and incentives. What has been introduced is an important step for policy-makers to think about for further development, as the noble Baroness, Lady Kramer, implied with her question.
More broadly on taxes, some interesting comments were made about taxation with respect to private businesses. This links again to the review that I am leading. A major peculiar aspect of our time is that private sector investment spending both here and elsewhere in the world is very low despite enormous levels of cash. There is quite a bit of growing evidence that private sector entities that are not subject to some of the challenges of public accounting are better at investing. One purpose of the policies taken was to encourage—particularly for start-ups—more risk-taking in an equity sense for private investment. The comments by my noble friend Lord Lupton and others about capital gains tax should be seen in that context. We suffer from weak productivity and investment, and the measures that have been seriously thought about from a micro-economic perspective to try to stimulate them further are very important.
I have run out of time; I knew that I would and I apologise. There are many other things I would like to have said. Let me summarise by saying that I believe the UK still has a brighter economic future than I have heard in the tone of what many have said today, notwithstanding the challenges we face. As we have discussed, this Budget has come at a time of significant downward revisions both here and elsewhere in the world. At some point in the future, who knows when, it is quite possible that those revisions will go in the opposite direction. Against that background, it is important to note that this Budget prioritises long-term growth potential and investment, tries to support business, builds up young people’s skills, gives another tax cut to workers as well as business, and tries to help more people to get on the housing ladder.
The submission of the convergence programmes, which was touched on briefly, should not be affected by the fuss about PIP for the reasons that I have outlined. The submission by euro-outs and stability programmes by euro area member states provides an important framework for co-ordinating fiscal policies. A degree of co-ordination across countries can be beneficial to ensure a stable global economy, which is in the UK’s national interest. The UK has always taken part in international mechanisms for policy co-ordination, such as the G7, G20 and OECD, and it should continue to do so.
The Government’s fiscal strategy remains that the UK should live within its means by running a surplus in normal times, which is a reliable way of ensuring debt reduction that will continue over the longer term, leaving the country better placed to withstand future economic shocks as and when they appear. This Budget sets out the policies that will help our economy to succeed in the long term, and I am delighted to commend it to noble Lords.
Committee adjourned at 3.55 pm.