Budget Statement
(11 years, 8 months ago)
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Lord Deighton
To move that this House takes note of the Budget Statement and the economy of the United Kingdom.
The Commercial Secretary to the Treasury (Lord Deighton)
My Lords, yesterday’s Budget was extremely clear on the two issues which it set out to address: first, the challenges facing the UK economy; and, secondly, the Government’s response to these challenges. On the first, we are all very familiar with—and should never forget—how we got here. There was a massive financial crisis which has turned out to have even more serious consequences than we thought at the time; and after that bubble burst we were left with the record and unsustainable debt levels unwisely accumulated during the boom years. The recovery from this trauma is slower than any of us would have liked or, in fact, have anticipated. It has left us with both deficit and debt levels that are still far too high.
On the second point, the Government have been consistent in basing their policy response on their three key pillars: an unwavering commitment to the fiscal responsibility which is at its heart, reinforced both by monetary activism to support demand and keep interest rates low and by a reforming agenda of supply-side measures aimed at ensuring that the UK is one of the best places in the world to do business. This strategy has been pursued with careful consideration of the cost of living pressures on ordinary people, and the Budget therefore took measures to mitigate some of those pressures.
If there is an underlying mission statement or ideology to this strategy, it is one of economic realism. If our economy is to succeed in the global race over the medium and long term, we must have businesses that are world beaters. That must be supported by first-class infrastructure and a tax and regulation environment that fosters enterprise. These businesses must be able to draw on a highly educated workforce which is motivated to succeed because hard work is incentivised. That is consistent with what my right honourable friend the Chancellor described yesterday as the “aspiration nation”. I will expand on these individual components of policy and how they have evolved, which will, I hope, provide a framework for the contributions that follow.
First, on fiscal policy, there should be no doubt that the Government are committed to reducing the deficit. This commitment is key to retaining the market’s confidence—confidence which is measured daily through the record low interest rates that we currently enjoy. We should not take this confidence for granted: at our current levels of debt and borrowing we would be vulnerable to the potential fickleness of the markets if our commitment to fiscal consolidation wavered. It is like stretching a piece of fabric: you never know when or where it will split but the risk is always there. We hear arguments—as I am sure we will later this afternoon—for borrowing more, and opposite arguments for harsher spending reductions. I think that we have the balance about right and that we have adapted to the worse than anticipated economic environment in which we find ourselves.
The Office for Budget Responsibility—another of the Government’s important and brave innovations in the interests of transparency, so that we can all agree on what the numbers really are—is extremely clear on the reasons why our recovery is slower than it originally forecast. Unfortunately, none of these factors is within the control of any Government. Those reasons are, first, that the financial crisis was deeper and its consequences more pernicious than was originally understood; secondly, the depth and continuation of the well advertised eurozone crisis; and, thirdly, the impact of commodity price inflation, particularly in 2011.
That, if you like, is the bad news. However, there is also some extremely good news about how our economy is responding to these challenges, and I do not want to pass over that. In particular, our private sector has created 1.25 million new jobs. These are real jobs for real people, making a real difference to their lives and prospects. To put that into context, for every job lost last year in the unavoidable shrinkage of a bloated public sector, six new jobs were created in the private sector. It is a crucial success, and very good evidence that a vital element of what is described as rebalancing is, in fact, proceeding to plan.
An important ingredient in prosecuting this fiscal consolidation plan—particularly when growth and the tax receipts which flow from it are elusive—is the effectiveness of the Government’s spending controls. We must manage well the things that we do have some control over. That is really how our effectiveness as a Government should be measured.
Yesterday’s Budget was fiscally neutral despite the many stimulative measures it included. This was due to the rigorous financial management by my right honourable friend the Chief Secretary to the Treasury, who resisted the traditional final-quarter Whitehall spending splurge. That is precisely the sort of discipline that you see every day in the private sector and I am delighted that it is now being applied in the public sector too. We are focusing government departments on meeting targets that are consistent with our consolidation plan. We are keeping the lid on public sector pay, which is important. We are also continuing to extract further reform efficiencies in how we run government. However, we are still making space for a very valuable additional £3 billion per annum of capital spend from 2015 onwards.
I turn to monetary policy. We in this House have engaged in a very active and expert discussion about the role and efficacy of monetary policy—which was another big topic yesterday. Some of the subsequent analysis has said that monetary policy has not really changed anything while, on the other hand, other analysis has said that it has been a revolution. So, clearly, it is worth clarifying the policy.
I think that the Government’s thorough review of our monetary policy is most welcome. It was exactly the right thing to do in view of all the surrounding discussion and was very thorough. The updated remit has also been agreed by both the present and the next Governor of the Bank of England. The important points are as follows. First, we are retaining the existing model of flexible inflation targeting. Secondly, we have reaffirmed the primacy of the 2% inflation target. Thirdly, the updated remit provides for a much more explicit discussion of the trade-offs involved, particularly when monetary policy is responding to the kind of severe economic shock that our economy has suffered. Fourthly, the Government have requested that, by August, the Monetary Policy Committee assess the potential of so-called intermediate thresholds, the technique which has been utilised by the Federal Reserve in the US. The Government want to build on good practice in monetary policy both here and around the world in order to develop a best-in-class framework. We should therefore welcome it. It is transparent and includes the appropriate governance.
On a slightly more practical and specific level, there is also a clear determination to drive ahead with the implementation successes that we have had in monetary policy, particularly, for example, with the Funding for Lending scheme, which is transmitting the concept and goal of monetary activism into the real economy. We are seeing its impact on funding costs.
This is probably the right point for me to discuss the home-buying initiatives, which were an important part of the announcement yesterday. One of the obvious challenges for any Budget is how to create a meaningful stimulus to the economy and make a meaningful difference to people’s lives and aspirations, within the confines of extraordinarily tight fiscal management. I believe that the two help to buy schemes, as they are branded, are an extremely effective and creative way of responding to this challenge. The equity loan scheme will provide £3.5 billion to invest in approximately 74,000 new homes, while the mortgage guarantees will support a potential total of £130 billion of mortgages. These are bold and innovative policies but they will also require careful risk management.
Our focus on the deficit should not and does not mean that we cannot have a strong and reforming growth strategy. In fact, much of yesterday’s Budget was devoted to just that: how we can help business. In my own relatively short time at the Treasury, I have been extremely impressed by the attentiveness with which this Government listen to what business is asking for and the urgency with which we try to press forward with the corresponding reforms.
In my own area of focus—delivering our economic infrastructure quickly, well and cost-effectively—I have enjoyed the total support of my right honourable friends the Prime Minister and the Chancellor. That is why we have pushed through this plan to increase capital spending by £3 billion a year; why we are working on a significant upgrade of the capability within the key Whitehall departments responsible for the economic delivery of infrastructure; why we are focused on the delivery of the biggest 40 projects under our control; and why we have made available a very significant guarantee facility, which takes advantage of the strength of our credit, to be able to guarantee projects that need that one extra shove to move from conception into execution. Very importantly, we are also translating our policy of electricity market reform into a set of financeable contracts so that we can set about building the new electricity-generating capacity we require.
Overall, our supply-side reforms—I am not going to list them—have significantly improved our ranking in international competitiveness league tables. This is particularly true in tax, where we are now right at the top. Let us give credit: bringing corporation tax down to 20% from 28% in 2010 makes us the most competitive in the G20. When we look in the Treasury at the different ways to stimulate the economy, there is nothing that is more immediately impactful than reducing the rate of corporation tax, which is why my right honourable friend the Chancellor has focused on it. The introduction of the £2,000 employment allowance benefits smaller businesses and reinforces the positive employment momentum that has been established successfully in the past few years.
I believe that this Government have got the tax mood music just right. Lower tax rates for companies and individuals are essential for a successful enterprise economy, one that concentrates on growing the size of the cake so that we can have much easier discussions about how we share it. In return, however, we expect taxes to be paid, and we are right to push through strong tax avoidance and evasion measures domestically and I praise my colleagues in the Government for taking a lead in co-operation to address this subject internationally.
Ensuring that taxes are paid is one element of how this Government ensure that their policies are deployed fairly. Once again, this Government have led in transparency in setting out the distributional implications at each fiscal event—another innovation—demonstrating that those who can afford the most have also contributed the most to our deficit reduction. I also point to pensions and welfare as examples of good administrative reform that simplify and improve overly complex systems. Similarly, the simplicity and power of moving to a £10,000 personal allowance takes 2.7 million people out of the tax system altogether.
In conclusion, I fully accept that this country is facing a highly challenging economic situation. The slowness of recovery has left both debt and deficit at levels which still expose our economy to substantial risk. This has much to do with the precarious levels of public and personal debt that were the legacy of the financial crisis, and the continuing recession in the EU, our principal trading market. This Government are focused on fixing our debt problem and are utilising our relatively limited room for manoeuvre to support businesses and individuals who want to get on and succeed. It will take time. In a global economy, we are not entirely masters of our own destiny. But I believe, as does my right honourable friend the Chancellor, that we have the right mix of policies to address the challenges we face.
Lord Eatwell
My Lords, I am grateful to the noble Lord for introducing this debate on the Budget Statement. He demonstrated that it was not a boring Budget. Indeed, the Budget was—let us say—revelatory. It revealed that, try as you might, you cannot spin economic failure.
Two weeks ago the Prime Minister declared that,
“there are signs that our plan is beginning to work”.
The reality is that the economy is stuck in recession—or as near recession as makes no difference. Just three months ago the OBR, an organisation that always looks on the brighter side of life, was forecasting growth of more than 1% this year. Now it has had to face up to reality and halve its growth forecast.
The Budget Statement also revealed that austerity does not cut deficits. Despite all the Government’s efforts, the deficit is not falling. Taking out special measures, in 2012 it was £121 billion; in 2013, £120.9 billion—a lot of work must have gone into shaving off that £100 million—and in 2014, £199.8 billion, all within the slightest margin of error. The reason deficits are not falling is obvious to all: no growth in output means no growth in tax revenues and significant pressure on social spending.
There was one further major revelation. This Budget of no growth, stagnant deficit and falling living standards revealed that the Treasury has run out of ideas. It does not have a clue what to do next so it is handing economic policy over to the Bank of England in the hope that it might think of something, even though all the evidence at home and abroad suggests that monetary policy is ineffective in the face of prolonged recession.
The scale of our problems is indeed daunting. They will not be solved by a £3 billion infrastructure programme, postponed for two years. In his Budget speech, the Chancellor boasted that,
“we can provide the economy with the infrastructure it needs”.
The noble Lord has special responsibility for the infrastructure programme. Will he tell us how much was actually spent on infrastructure projects in 2012, and how much will actually be spent in 2013—not allocated, not “in the pipeline”, but actually spent? More generally, will he offer his diagnosis of why the Government’s infrastructure policy has so far failed so dismally?
The growth problem will not be solved by policies, postponed to 2014, designed to pump money into the housing market. The shared equity scheme will only partially offset the deep cuts in capital grants for social housing in the previous spending review, and the new mortgage guarantee, available for new-build and existing properties, is more likely to give a further twist to the house price spiral than provide the major new-build stimulus that the construction industry needs. Perhaps when the noble Lord sums up, he will tell us the Treasury’s estimate of the impact of the guarantee scheme on house prices, how much of the expenditure will be a dead weight loss—funding purchases that would have taken place anyway—and the Treasury’s estimate of the cost of this scheme.
The growth problem will not be solved by the cut in corporation tax to 20%, another measure postponed to 2015. As for business investment, the Government just do not seem to understand that the key stimulus to investment is the prospect of demand for the goods and services that the investment will produce. It does not matter how low taxes or interest rates are if investment does not result in a marketable product for which there is growing demand. Yet, as the Chancellor himself admitted, this Budget does nothing to stimulate overall demand in the economy. The OBR forecasts that real wages will fall in 2013 and not recover for two years thereafter. The continuing squeeze on households severely curtails the prospect of any growth in demand, a fact to which our increasingly devastated high streets are an eloquent testimony.
I return to corporation tax. The Chancellor boasted that “headline” UK corporation tax will be far lower than headline corporation tax in Germany or the United States. Did not this boast give him some food for thought? Has he not noticed that the US economy, despite political problems between President and Congress, has sustained its underlying dynamism through the crisis and has already grown to levels of output way above the pre-crisis peak, while UK output languishes 3% below the peak? Has he not noticed the superior industrial performance of Germany, even among the difficulties of the eurozone? Has he not thought to ask himself, “If their taxes are so much higher than ours, how come they are doing so much better than we are?”.
The British economy is in dire straits. What is needed right now is a radical policy of expanding demand, financial reform and investment in the well-springs of growth. In the housing market, the Chancellor has accepted the argument for a boost to demand. Why has he not followed the logic of his expansionist policies in housing and stimulated demand on a wider canvas by cutting VAT and channelling more funding to the poor, who possess the great economic virtue of spending every pound that they receive?
The financial services industry, the mother of the mess that we are in, remains unreformed. The banking Bill that will come before this House later in the year is all about protecting the banks from themselves. There is nothing in it about the sort of banks that we need for Britain’s future. We need a financial system that channels savings to industry, large and small; we need a financial system that understands the needs of local communities and local industry; and we need a supply-side policy that does not just hope that private finance will be seduced into investment in infrastructure, science and technology and skills but actually gets on with the job. In this country, we are blessed with some of the greatest science-based universities in the world, yet, with just a few notable exceptions, we are steadily losing world share in cutting-edge applications across all industries, large and small, traditional and novel. Reversing that downward trend will require a fundamental rethink of company structures, company finances, supply chains and incentives. We need to learn the lesson from the US, Germany and Scandinavia that partnership and a sense of purpose between government and private industry is the bedrock of sustained growth.
The reaction from the Chancellor to these sorts of proposals is predictable. He said in his Budget speech that such ideas are from,
“people who seem to think that the way to borrow less is to borrow more”.—[Official Report, Commons, 20/3/13; col. 934.]
Has he not noticed that it is his policies that are leading to more borrowing and prolonged recession? Did he not read the OBR’s damning assessment of the Budget? It states:
“Given … the fact that the overall net effect of these changes is relatively small, we have not adjusted our overall GDP forecast”.
In other words, the Budget’s contribution to growth is nil and the Budget’s contribution to deficit reduction is nil.
The Prime Minister’s speech on the economy two weeks ago revealed him to be an economic fantasist. The Budget has told us even more about the Chancellor. He declared yesterday:
“We have got a plan to cut our structural deficit. Our … credibility comes from delivering that plan, not altering it with every forecast”.—[Official Report, Commons, 20/3/13; col. 934.]
He cannot admit that no growth and no cut to the deficit is not a forecast; it is reality. He cannot admit failure, face up to the real world and change course.
Albert Einstein defined insanity, as,
“doing the same thing over and over again and expecting different results”.
Well, the Chancellor is not mad—far from it. It is just that he has not a clue about what to do next, and he is willing to sacrifice the British economy on the altar of his own political career.
Baroness Kramer
My Lords, the Chancellor yesterday gave us a Budget that fits the tough economic times that we all acknowledge. I congratulate him on not succumbing to the blandishments of the Opposition. I listened very closely to the noble Lord, Lord Eatwell, and thought that he summarised his own speech by saying that insanity is repeating again and again the failures of the past. He gave us exactly the formula of spend and borrow that the previous Government pursued and that left our economy so structurally weak that, when the financial crisis struck, we found ourselves in dire circumstances, overburdened with debt, and with a structural deficit, no resilience and a fundamental underlying economy that had been neglected for a generation. He now repeats that formula.
The measures in yesterday’s Budget were focused on helping ordinary families with the cost of living, on stimulating new jobs, especially in small and medium-sized businesses, and breathing life into the housing market. Let me make just a few comments on each of the three.
Ordinary families, as we all know, have been feeling the squeeze on their finances. For that reason, I am particularly pleased with a further lifting of the income tax threshold to £10,000 next year. My party promised it and it will be delivered a year early. With this step, nearly 3 million people will be out of income tax altogether; 24 million people will pay £700 a year less in income tax—a genuinely meaningful amount of money; and a person earning the minimum wage will have seen their income tax bill cut in half. I find it frankly extraordinary that, rather than embracing this progress, Labour wishes to substitute a 10p tax band. Under Labour, poorer people would today be paying more income tax than under the coalition. I find that the most extraordinary notion of “fairness”. If one adds to that the measures on fuel duty, childcare and even beer, one sees that ordinary working families now have a little more breathing space.
Childcare is an area where I once worked on Liberal Democrat policy. We made a very difficult decision not to include plans much like those announced this week in our manifesto, because when we looked at the economy that Labour had left us we saw that it was clearly unaffordable in the face of the economic collapse and uncontrolled borrowing environment. But childcare is one of the most challenging issues for working families. I took evidence from many mothers, and sometimes fathers, trying to weigh the long-term financial benefit of growing a career by returning to work against the immediate burden of the most expensive childcare in Europe. The coalition has already made 16 hours a week of free care available to two year-olds in the least well-off families and taken a more intelligent approach to the staff/child ratio in childcare, but we have all known that more is needed and this scheme will make a real difference to working families.
However, I agree that the question of growth is the one on which we have to focus. I looked at Bank of England numbers yesterday which came out ahead of the Budget and the OBR’s forecast. They made it absolutely clear that the most significant cause of undershooting our growth projections is the weakness in the eurozone and the damage it has done to our exports.
Despite that, the private sector has created 1.25 million new jobs, and many of those are in SMEs. Twenty per cent of all the SMEs in the EU are here in the UK. Small and medium-sized businesses are providing more than half the jobs, more than half the exports and, even now, more than half the patent applications. The Government’s employment allowance is therefore just what SMEs need to start adding that “one more job”. Often, that one more job will be a young person, especially if we continue to provide support through apprenticeships and the youth contract. It is right that the employment allowance should become a permanent feature of the structure of British business taxes.
The abolition of stamp duty for AIM will also make a difference, although it must be just part of building a proper framework for raising finance in this country. I have talked now to quite a number of small businesses that simply sold out to the Americans because they could not access the equity that they needed to grow. I have not seen the announcements that my colleague Vince Cable is making today, but if we can combine a revived AIM with the business bank, that, together with proper reform of our still dysfunctional banking system—and I address the noble Lord, Lord Eatwell, who structured this dysfunctional banking system, and the party opposite—we can get a vigorous and rebalanced business base that will provide well paid jobs for our people, especially our young people, who deserve the best.
Earlier in this coalition, we returned large areas of decision-making to local communities but not the funding that would give real power to that decision-making. Last week’s decision to draw departmental money for local growth schemes into a single fund, known now as the Heseltine pot, should overcome that. My noble friend Lord Shipley will speak more extensively for my party on these issues because he is the expert, but I just want to say this, particularly to noble Lord, Lord Deighton, because he is a man of wonderful practicality: I seriously hope that the Heseltine pot will finally release the capacity to get TIF 1 and TIF 2 going—tax increment financing for infrastructure projects, small as well as large, identified by local communities as key to growth.
Of course, though, the big news in the Budget was housing. We have a housing shortage at crisis levels, particularly in affordable housing and especially in London and the south-east. We are building scarcely one-third of what we need. Housebuilding played a key role in enabling the UK to avoid the worst of the Depression in the 1930s, and it has always seemed a no-brainer to drive forward house construction now. I have a strong suspicion that when Vince Cable wrote in the New Statesman that the Government could use their ability to borrow cheaply to support new infrastructure, especially housing, he had this expansion of help to buy in mind.
Help to buy uses existing institutions, so it should be able to take off pretty quickly. It is a massive injection into the housebuilding industry. I am going by the newspaper estimates of £12 billion in total. I notice also that on the back of this announcement, new shares in the housebuilding industry immediately soared—Barratt Developments was up 6.5% by late yesterday—and that response tells you that the market sees this as a way to get construction going. Once again, my noble friend Lord Shipley will say more.
I would very much like the opportunity for a more extensive discussion of monetary policy and monetary activism, because this is a new arena and it cannot be dealt with in the context of a brief debate like this. However, I am so glad that we are engaging in imaginative thinking and opening our minds, not just sticking constantly with conventional wisdom. This is a new opportunity. We are building a stronger economy in a fairer society, and this Budget furthers that goal.
The Lord Bishop of Bristol
My Lords, I recognise the limited amount of wiggle room that the Chancellor of the Exchequer has in the current economic climate, so much of what he proposed yesterday has to be cautiously welcomed. Arguments will continue over whether austerity has yet again trumped stimuli to growth, and will no doubt continue to smoulder for a time to come. I do not myself propose to pitch in on that topic, but I should like to make a few brief comments on one or two aspects of the Budget Statement.
First, and positively, from these Benches—understandably empty today of all days—we welcome the Government’s decision to keep their promises to the world’s poorest by committing 0.7% of our national income to overseas aid. From my own point of view, this is particularly bold in the context of the growth expectations, which have been revised downwards. I hope that this is something that we can all be proud of. Poverty is of course a relative concept but, together with many of my episcopal colleagues, because of our diocesan partnership links, I have travelled to some of the world’s poorest places. I can tell noble Lords that when you stare into the empty eyes of those who are starving to death, the argument that “Charity begins at home” wears a little thin. Through the Government’s commitment to the poor, many millions will benefit.
We are getting better at ensuring that the aid given is kept away from the grabbing hands of corrupt politicians. The distribution of such funding needs to be monitored and held in a framework of accountability. Of course, even though in my own mind this should not be a principal driver of aid, there is a very real sense in a global economy that such aid has an element of investment about it, for today’s aid may well be the foundation of tomorrow’s trade.
Aid is important but, as noble Lords know well, it is only part of the solution. The Government could be doing more to help poor countries to collect more of the tax that they are owed, by requiring multinationals to reveal the tax avoidance schemes that they are using in the developing world. Christian Aid estimates that poor nations currently lose $160 billion a year as a result of tax-dodging by multinationals—far more than they receive in aid from all rich countries. The pronouncements by the Prime Minister and the Chancellor on tax avoidance have so far been commendable. Now we look forward to the Government leading ambitious global action against tax avoidance at the G8 conference in June. That would show that the UK is serious about an international agreement to fight tax avoidance that hurts the poor.
I welcome the plans to invest an additional £750 million into subsidising childcare costs, in a country that has some of the highest childcare costs in the world. However, I want to note the concerns of Barnardo’s, the Child Poverty Action Group and the Children’s Society, which are worried that these changes will fail to help the families most in need of support. The Government’s scheme will assist those on high incomes, potentially up to a joint income of just under £300,000, but will do nothing to help parents working part-time on the minimum wage. In these times of austerity, it feels unjust not to be targeting help at those who are trying to work their way out of poverty.
I am also concerned about the proposal to set a firm limit on certain areas of welfare expenditure as part of controlling annually managed expenditure. Page 26 of the Treasury’s budget report seems very thin on detail, promising an update in June’s spending round. Assuming that these limits are binding, that is likely to put further pressure on millions of low-income families who are already being disproportionately affected by welfare cuts.
There are very good reasons why there is flexibility in this part of the Government’s balance sheet. The need for welfare expenditure varies with the economic cycle and, as the Chancellor has discovered for himself, it is not always easy to predict the future state of the economy. However, I hope that this announcement does not mean, for example, that every increase in unemployment will lead to a corresponding reduction in benefit rates. While I do not wish to overreact to an announcement that is clearly work in progress, I seek the Government’s reassurance that this will not mean further cuts in the real value of benefits and tax credits.
I sincerely welcome this Government’s commitment to overseas aid, and I hope that this bold act of generosity will be extended to ensure greater awareness of the needs of low-income families living in this country.
Lord Flight
My Lords, I believe that this will go down as a successful Budget politically, particularly within the narrow scope for manoeuvre that the Chancellor had. It is perhaps correct that it should have been broadly an unexciting Budget. The one key initiative is the help to buy scheme, which seems to be somewhat the Neville Chamberlain strategy. As the noble Baroness, Lady Kramer, has pointed out, in the 1930s the economy was very much got going by the increase in housebuilding; indeed, few people realise that the most successful period of growth in the 20th century was 1935-40, when the British economy grew at 4% per annum compound. I point out that Chamberlain also addressed the other key problems of the time in that he cut public sector pay, which had got out of line with private sector pay, and he cut taxes substantially as well, generating demand without overborrowing. Perhaps there is a little more to learn from that period. However, these initiatives will have to be managed extremely carefully. They smack slightly of the Clinton measures that caused the housing bubble and all the trouble thereafter to the banking system.
My preference would be, if it were possible, to accelerate the infrastructure projects which the noble Lord, Lord Deighton, is appointed to manage, and I am sure that he will do extremely efficiently. Within the plan, there is about £200 million of investment in roads and other infrastructure and £200 million needed for power generation. That is massive scope to have infrastructure investment that will get the economy moving, but we have to get rid of the planning and environmental red tape, which is delaying that. I am convinced that there is the money for them. We have seen developments such as the recent Qatar involvement, but I am amused to learn that even the new road between Edinburgh and Glasgow is being financed by the Agricultural Bank of China, which has set up in this country to do business in that area.
We have to realise that the fundamental problem is less the banking explosion and more that Gordon Brown created a more than £100 million structural deficit. He relied on frothy income from an overheated financial sector and embarked on spending when there was not regular, sustainable tax income to finance it. We are stuck with that problem, caused by deliberate overspending, rather more than we are the parallel problems of the banking system.
Together with that was the policy of allowing people to borrow more and more. I remember asking Gordon Brown when he was Chancellor of the Exchequer whether he was concerned about the fact that consumer debt was far too high per person—about £18,000 per couple—and that house prices had gone up too much. His reply was that increasing individual indebtedness was fine because people could afford to service more debt. We have ended up with not only the public sector but the private sector overborrowed. The idea that you can stimulate growth by still more spending is, to my mind, a path to ruin. This economy cannot be turned into a growth economy by yet more consumer debt and more consumer spending.
It is clear that growth must come from either an increase in exports or an increase in capital investment. The scope for exports clearly lies with the BRICs and the Commonwealth. I welcome the Government’s initiatives, but a lot more could be done to improve our trade. We are lucky to have the Commonwealth relationship, which many have ignored or thought little of it, but those countries are substantial conduits to improve trade. There is clearly little scope in the eurozone; the economies are paralysed by the euro. Even if there is no collapse, the problem is not going to be mended easily.
As for the private sector here, in my view, we have an attractive tax regime and we have, broadly, to leave it to private sector companies to invest as and when they are ready. The private sector has built up massive cash reserves over the past three years. Even companies in the small and medium-sized sector have built up about £180 billion in cash reserves. The corporate sector has the money when the time is right for it to invest.
I understand but am slightly cautious about the case for using currency depreciation and higher inflation to ease the problems of overindebtedness, which is clearly what is happening. That needs to be watched very carefully or it could get out of control and worsen the situation. At least, as a result, we are now highly competitive internationally as well as taxwise. There is a huge incentive for companies to come here and do their business from here.
I end by pointing out that the private sector has already done a lot better than people realise. Let us look at the movements since 2010. Taking account of the reduction in the public sector and the significant downturn in North Sea oil output, the private sector has grown by about 4%. That is partly where the extra 1 million jobs have come from. I know that a lot of high-tech business in this country is starting to do very well indeed. I believe that the predictions for the private sector over the next year will turn out to be overcautious. I detect a significant pickup. Of course, North Sea oil output is about to turn in the opposite direction. We may be surprised by an upside to economic growth over the next year.
Overall, the potential is there. The Chancellor has been responsible and, as I said at the beginning, I believe that this will be seen as a politically successful Budget.
Lord Bhattacharyya
My Lords, the Budget Statement was trailed as a Budget for growth. I declare an interest. As chairman of Warwick Manufacturing Group, I work with many international companies on their growth strategies. I have learnt that to achieve sustainable growth, you must think of the long term, not of headlines or short-term profits. The Budget reminded us how difficult things are for the British economy. It did not explain why Britain has found it so hard to recover. Of course there is the global crisis but others are navigating the storm more swiftly than Britain. Whether Germany, the United States, China or the Scandinavian countries, those with a record of long-term investment in R&D have more to offer growing markets.
Unfortunately, Britain’s investment in R&D is lower than the OECD and EU averages. It is even well below our own target. Britain is a small country. In order to survive, we must export. In order to export, we must have products and processes that are internationally competitive. That means that our core innovation implementation has to be very good, but it is very patchy.
Worryingly, the OBR said yesterday that business investment will increase next year by very little, yet it is only by encouraging innovation and investment that we will create sustainable growth. As I said, that requires long-term commitments on capital, research and infrastructure. Of course, there are positive policies in the Budget, from tax credits to corporation tax, but the steps forward are too small, and they do not cover enough ground. For example, the Budget talks about £1.6 billion for an industrial strategy, including the aerospace institute, but when you look at the detail you see that this money is over 10 years, and £1 billion of it is committed to just one sector. Surely an industrial strategy should include other sectors, such as the automotive industry and other key export drivers.
As I said, there are things to welcome in the Budget. Often, they are the signs of the Business Secretary trying to shake off the shackles of the Treasury. I have a very high regard for the Business Secretary and admire his efforts on all sorts of matters, including his recent efforts on apprenticeships. I understand that Dr Cable will seek to undo his ties again today, on the investment bank.
I welcome the news that capital spending is being increased. I also welcome the acceptance of the Richards report, asking Sir Andrew Witty to look at how universities and LEPs can work together, and the endorsement of the report of the noble Lord, Lord Heseltine, No Stone Unturned. However, when we look at the budgets allocated, the stones still seem pretty firmly in place, and even where they are being turned over, the projects will not happen until after 2015.
The Labour Party under Ed Miliband is developing a long-term policy agenda that goes beyond the noise of annual budgets to create a critical mass of policies to support sustainable growth, but it seems a shame that long-termism should have to wait until the next Labour Government. What more could we do to encourage investment today? We need to look at the structures that support commercial R&D in Britain. Offering businesses incentives to innovate is useless if there is no innovation capability for them to invest in.
To grow, you must build on your strengths. In Britain, we have outstanding academic research, so we should use that as our super-magnet to attract industrial R&D spending. We need to shake up the whole system of research funding so that it attracts new business funding from companies large and small. Today, the weight of government R&D funding is completely insufficient to support business innovation. The Technology Strategy Board is an excellent organisation, but its budget is far too small compared with the research councils, while the Higher Education Innovation Fund is nowhere near enough to shape academic research priorities.
Next, we need a procurement strategy that helps smaller companies invest in innovation and hence start-ups. In the United States, that is the biggest spur. How do we get small companies a market in order to grow? It is so very difficult for small companies to grow because the market is not there. The only market you can get is export, so government procurement should be a huge help for start-ups. That means the Small Business Research Innovation Fund must be made to work. The Chancellor’s aim to increase the SBRI budget from £40 million to £200 million by 2015 is welcome, but represents only a tiny shift in overall funding.
Finally, we should establish a “one-stop shop” approach for industrial innovation budgets, with a sectoral or challenge theme. I have long been an advocate for government demonstrators and grand challenges as a catalyst for innovation. The Government have identified eight priority technology areas and have allocated them £600 million of capital funding. However, there is always a temptation for such programmes to minimise industrial partnerships. Businesses are awkward customers for bureaucrats, refusing to fit neatly into boxes. We should make attracting industrial innovation funding central to our grand challenges. I believe all these government funds should require matching financial investment from companies, with a proportion devoted to SMEs, to ensure commercial research partnerships are at the heart of all our innovation policy.
Despite all the publicity, in truth the Budget yesterday changed very little. There was little to spend and no new plan. We saw a few tired rabbits come out of the Chancellor’s hat, but little more. If we are to grow, it is essential that we invest in our long-term future. That is the real agenda for transforming our economy. Yesterday, the talk was of mortgages, petrol and beer. The danger is that we neglect our future for the sake of these headlines. When Governments focus on the short term, Budgets become just another missed opportunity. I fear that after three years of bad headlines, this Budget fits that pattern. Everything worth while has been pushed back to after 2015. Perhaps the Chancellor had a premonition of the future. Despite the fine words, actually delivering sustainable growth has been postponed to the next Labour Government. We are hungry for that challenge.
Lord Higgins
My Lords, myths can be important in politics, and there is now a pretty well established myth that last year’s Budget was a bad Budget. In reality, all the good news came out the day before Budget Day and therefore there was nothing left but criticism on Budget Day itself.
I am sorry that the Chancellor does not appear to have learnt the lesson from that. It is vital that we reassert the convention in Parliament that budgetary matters are first announced to the House of Commons. There are good reasons for that. Obviously it is the right of the House of Commons to receive the news first, but it also prevents the risk of market-sensitive information getting into the public domain and someone making a fortune out of it. I was therefore very concerned by the Evening Standard story last night. I have to say that, obviously in a post-Leveson mood, it made an abject apology in later editions for what was on the front page of the first edition, and that is to be welcomed. It emerged very clearly that it was in receipt of an embargoed copy of the speech. I believe that is totally wrong, not least because it discriminates between some journalists and others, and because it endangers the basic principle. I hope the Minister will give me an assurance that he will speak to his right honourable friend the Chancellor and ensure that that practice is abandoned forthwith and that the traditional view—which was exemplified by Hugh Dalton when he resigned as Chancellor when all he did was to have a quick word as he was going into the Chamber—will prevail.
Lord Eatwell
This side totally support the remarks just made by the noble Lord, Lord Higgins.
Lord Higgins
I am grateful to the noble Lord. I think it should be a unanimous view in Parliament.
I believe this is a very good Budget that does a considerable amount to encourage growth. I particularly welcome, first, the help-to-buy proposals, both of them, which will ensure that there is a higher degree of growth than there would otherwise be. The Minister, in a speech that gave the impression that he wrote it himself, rightly said that there are risks here. It is not clear, if one is going to give guarantees to homebuyers—if one is going to subsidise in this way—that they are really able to meet the responsibilities of taking out a mortgage. We do not want to go back to the disasters of Northern Rock and so on, of which many of us in this House bear the scars, but both schemes are very good and greatly to be welcomed.
I very much welcome the proposal about helping small businesses by removing what the Chancellor rightly described as the jobs tax. Many small businesses are reluctant to take on a few more employees because of the up-front costs. I am sure that the employment allowance will be of considerable help to the state of the economy.
I now turn to the main point with which we are all concerned: the deficit. The Minister referred to it. What was clear from the business about the AAA rating and so on is that we have to press ahead. It is very good news that the slogan that had been emerging, “We have cut the deficit by a quarter”, can now be changed to “We have cut the deficit to a third”, but it still means that we are continuing to borrow more at two-thirds of the rate that the previous, disastrous, Labour Government were maintaining. Therefore, we need to look very carefully at what is being said.
If I may make a rather semantic point, in his speech the Chancellor referred to “cutting borrowing”. He should, of course, have said, “We have been successful in cutting extra borrowing”. Total borrowing continues to go up, and that is of serious concern, not least in relation to monetary policy. It is very important that we look at the new relationship that appears to be developing with the Bank of England. I was always very sceptical of what was always hailed as Gordon Brown’s great achievement of giving independence to the Bank of England because it means that we are handing over more and more power to a small group of people who are totally unaccountable with regard to one of the two main levers of economic management. I hope that we can make progress on this.
On the proposals the Chancellor is making, we certainly need to look at the inflation target and at whether other considerations can be taken into account. Having said that, it would be helpful to move now from what was just an interest rate policy for many years after the Gordon Brown change to a policy that is concerned with controlling the money supply, which is what one really means by “a monetary policy”. I remain a strong supporter of quantitative easing despite the unfortunate side-effects, particularly on private sector pension schemes and so on. If one is not able to do anything because of the deficit problem on the fiscal side, we really must have an active monetary policy. In that context, greater co-ordination between the Treasury and new Bank governor will be of crucial importance. As I have said time and again, and I commend this to my noble friend on the Front Bench, it is absurd that the Treasury is working to one set of economic forecasts and the Bank of England to another. We should have a more unified policy on the link between the monetary and fiscal sides of economic management.
Overall, however, the Chancellor has done everything that could possibly have been done to be helpful, to stimulate growth and to ensure that we continue to do so. However, we must continue to do all that we can to cut the deficit. Immediately after the election and the formation of the coalition, I stressed how incredibly difficult this was going to be on both the tax and expenditure sides. I have been proved absolutely right. We have to go on in the same way. Labour still seems to be saying that we are cutting too much too soon. I am afraid that it is absolutely clear that we have not cut enough fast enough. We must therefore press ahead with that.
Lord Kestenbaum
My Lords, today’s debate in your Lordships’ House increasingly reflects a wider and urgent economic debate in chambers around the world. At one end of the argument, there is a fundamental belief, as we have just heard, that debt reduction for its own sake will eventually clear the path for strong growth. The alternative view is that debt reduction for its own purpose is not only an all too narrow goal but is destined to fail unless economic growth is pursued with equal and relentless vigour.
Although the Minister said that our focus on the deficit does not mean that we cannot attend to growth as well, that focus does not feel equally spread. With yesterday’s slashing of growth forecasts, we are beginning to confront the painful reality that the latter argument prevails. The evidence is sadly clear that the multiplier effect of austerity, its economic misery, let alone the human cost, is more severe than even the Office for Budget Responsibility had warned. In short, austerity as a fixed policy in the sand, and in the absence of a well constructed, ambitious, aggressive tapestry of active government, will never produce growth. However much pain is administered, however deep the incision of cuts, ultimately the failure genuinely and aggressively to grow the economy will lead to the failure to balance the books. The evidence was announced yesterday. At a time of unparalleled spending cuts, paradoxically, the UK’s national debt will rise to 85% of GDP.
If the urgent national imperative is growth—we are all united in that—and we know that it does not travel through austerity for its own sake, what might we expect from active government? The first thing is to dispense finally with the tired false choice of either a constant flurry of well intentioned interventions or staying, as we have heard in recent years, firmly out of the way. We must lay to rest the myth which says that you have a pro-growth environment only if government leave the stage. We urgently need intelligent and active economic policy which nurtures—indeed, drives—growth. Look at the most imaginative global economies, our real competitors: the United States, Finland, Korea and Israel. They all have large measures of supportive public policy and effective financing mechanisms—in short, active, aggressive, growth-oriented government.
Secondly, we know exactly what the engine of growth will be. We know now how clearly the path travels from innovation to economic growth. We know the facts. Innovative businesses create more jobs and grow faster. Hence, innovation as a national strategy is the most important driver of long-term productivity and prosperity. Yet, despite this, NESTA’s innovation index showed that innovation and investment in innovation declined by as much as £24 billion last year. This was at a time when we also know from the same index that fast-growing, innovative businesses make a disproportionate contribution to our national fortune. Just 7% of businesses in the UK, classified as high-growth and innovative, have been responsible for half of the new jobs in the past decade. The evidence conclusively shows that innovative, high-growth firms will produce the jobs of the future. They will be the productivity drivers of the economy of the future.
If we know that the road to growth travels through innovation, what might we expect from those with their hands on the policy levers, which the Minister dubbed “managing well the things we have control over”? This financial crisis offers the chance to put in place on a serious scale often talked of plans to channel large parts of the £220 billion government procurement budget to innovative businesses. As my noble friend Lord Bhattacharyya said, the announcement yesterday about the SBRI—the programme which drives government businesses to innovation—is certainly welcome and using the TSB as the catalyst is wise. However, the quantum is a pinprick in comparison to the opportunity and the need. The target yesterday was merely £100 million of redirected existing budgets in an annual spend of £220 billion. Consider what a little more ambition could have done at no extra cost. Just 2% of government procurement toward innovative businesses would be nothing short of transformational.
These are very modest steps in transforming government budgets from blank cheques to intelligent, demanding drivers of innovation, but it is on a tiny scale and at a time when new customers for innovative businesses will determine whether they thrive or go bust. My noble friend Lord Eatwell correctly identified the urgent need to stimulate demand. Can we not bring this part of our national effort to real scale, such that active government purchasing will have great and lasting impact on the innovation economy in society more broadly? We know—we have seen it around the world—that government being a lead customer was the major factor in the growth and development in Silicon Valley. It is no exaggeration that whether it is the GPS navigation system that none of us can live without or internet protocol software, government purchasing of these technologies in the United States was the basis of the most transformational global innovations of recent decades. Getting this to scale could be a central plank of the new growth, at no extra cost.
I urge for there to be no more tiny programmes, timid in scale, often initiated with great fanfare and then quietly closed 18 months later. We hope for an aggressive, ambitious, national programme running right through government, perhaps facilitated by the TSB, which does nothing other than force a procurement revolution.
I have made today a particular and practical remark about one of the engines which could power our desperate need to go beyond austerity and from innovation to real growth. It could be an engine which is fired up without any additional cost to the taxpayer and with no increase in the deficit, simply by dramatically, ambitiously redirecting current spend away from unimaginative vested interests and towards making government the most dynamic and effective customer for buying new products from innovative businesses.
The alternative is dire. A commitment to simply reducing national debt has not shown enough signs of enhancing our nation’s prosperity. Our growth programme is looking inferior to so many of our competitors. There may be no plan B, but it is becoming increasingly clear that something else is needed to deliver growth more comparable to the world’s most dynamic economies and, in turn, sustain the society that we must nurture here in Britain.
Lord Bilimoria
My Lords, last year we had the omnishambles Budget, with measures such as a “pasty tax”. Last year we had the Government making U-turn after U-turn, and the criticism that the Treasury had not thought things through or listened. This time, the Budget has so much in it that shows that the Government are genuinely trying to listen. For a long time, many of us have been saying that employers’ national insurance is a tax on jobs and that it should be removed and reduced for new businesses and SMEs, and the Government have listened and shown that in their NI initiatives in the Budget. Of course, they should go further, but this is a great start. Our fuel duties are some of the highest in Europe, and the Government have listened and cancelled the fuel duty rise in September.
In the brewing industry, in which I have declared an interest, we have suffered from beer sales drastically reducing for decades, and we have had the wretched and hated beer duty escalator, introduced by the previous Government, increasing the price of beer above inflation for years. There has been a tireless campaign by the British Beer and Pub Association and the Campaign for Real Ale, and the work of Andrew Griffiths, the MP for Burton, where I was yesterday with my joint venture partners Molson Coors at its the headquarters in the UK. All these campaigns have asked the Chancellor to stop that escalator. Eighteen pubs a week have been closing, with two pubs in London alone closing every week. Jobs have been lost and the average Briton has found that the cost of one of life’s simple pleasures has gone up. I pay credit to the Treasury Minister, Sajid Javid, who has listened to those concerns and not only removed the beer duty escalator but cut the price of a pint by a penny. Of course, the campaigns on both the fuel duty and beer duty were ones that the Sun newspaper got behind. In spite of that newspaper’s criticism of the press reforms, calling the Government the “Ministry of Truth”, it would claim that, “It’s The Sun Wot Won It”.
Could the Minister confirm that the Government have checked that they will be able to go ahead with the beer duty reduction? There have been complaints from organisations such as the WSTA that claim that it breaches EU rules by reducing duties for beer but increasing duties for wines and spirits. Could he confirm that the beer duty reductions could and should go ahead?
On the face of it, the Government have listened to business. They are concerned about business and have listened to consumers, and they are concerned about consumers. They have paid particular attention to the less well off consumers by raising the tax threshold to £10,000, but the reality is that we are two years away from an election, and this was the Chancellor’s last chance. The political reality sadly overshadows everything. We all know that the situation is so bad that we need drastic measures. Getting down to a 20% corporation tax is fantastic news, but we know, for example, that Ireland has gone down to 12.5%, which has made a huge difference in attracting inward investment and spurring growth. It was a bold move. We need to get this into perspective. Corporation tax brings in barely over 5% of tax revenue, but reducing it sends out huge signals.
The reality is that although the Government have reduced the deficit, they promised to eliminate it by the end of Parliament in 2015. We all know that they will be nowhere near achieving that, and the noble Lord, Lord Eatwell, who is not in his place, spelled that out clearly. Public sector net debt is predicted to double from £800 billion at the start of this Parliament to more than £1.6 trillion by 2017-18. Just this year alone, in spite of seeing the lowest ever interest rates, the Government’s debts will cost the taxpayer nearly £50 billion. That is far more than the entire defence budget. The reality is that the Government’s austerity plans for the past three years have not worked, because they were based on projections that showed that the economy would be growing at 3% a year by now. We know not just that growth has been slow but that the economy has been flatlining or been in recession. The reality is that the OBR has halved its growth forecast from 1.2% to 0.6%. In other words, we will be bumping along the bottom once again.
The Government have made a rod for their own back, once again for purely political reasons. I am sorry to say this, but the Opposition would probably have done the same: ring-fencing certain areas of the Budget such as health, international aid and schools. When you add all those ring-fencings together, it makes up well over 50% of the Budget, which means that what you can cut is under 50% of the Budget. In defence, for example, although the Government are helping the Armed Forces by giving the fines raised from the banks’ LIBOR scandal to the Armed Forces charities, which is terrific, and increasing the pay of those in the services by 1.5%, the reality is that in real terms all our workforce is being squeezed. Inflation has been well over 2% for three years, and real wages for all the people in this country will have seriously shrunk over the course of this Parliament. People are worse off, and are going to be worse off. With defence, we have had spending cuts, including nasty cuts in our troop numbers and our capability, when we continue to have black swan and grey swan threats. Yet we continue to intervene globally to the extent that even the current Defence Secretary has spoken out in protest.
Of course, the further good news in this Budget is that the Government are going to give the Governor of the Bank of England flexibility to help to generate growth in the economy, but why have the Government not been more specific about that growth remit? Why have they not set a specific nominal GDP growth target for the Bank of England, for economic growth and job creation, as well as targeting stability?
Of the more than £700 billion of public spending, welfare, social services and the National Health Service account for more than half the amount. Huge savings need to be made in those areas. Public spending as a percentage of GDP has reached 50%. This Government are reducing that proportion, but can the Minister confirm that they have a target of reducing public expenditure as a percentage of GDP to 40%? At that level, this country can still provide the world-class services that a top-10 nation such as ours deserves and still provide the safety net that our people deserve, while still providing the environment to generate growth where we need to invest.
This Budget has saved the Chancellor from his last chance saloon, but it will not have saved the country. Unfortunately, political reality has got in the way. The Government have failed to deliver growth in the past three years and failed on the promise to eliminate the deficit over this Parliament. Yes, there have been external causes, the global economic crisis, the eurozone crisis and the uncertainty of the world in which we live, which would have been challenging for any Chancellor. The previous Government blamed external factors for getting us into this mess, and this Government blame external factors for not being able to get out of it.
We must give credit where credit is due; there is much to be happy about both for consumers and for business. However, in this increasingly global world, there is nothing in the Budget about incentivising and increasing exports and doing business with countries such as India and China: the BRICs. As founding chairman of the UK India Business Council, I know that the good news is that Britain is still one of the top 10 economies in the world. When I accompanied the Prime Minister to India last month, I advised him that the global race is competitive. We need to be bold and optimistic and shout from the roof tops that we have the best of the best in the world, whether it is in education, professional services, accountancy, law, design and high-end engineering. We have the best institutions in the world, yet there is not enough in the Budget, as the noble Lord, Lord Kestenbaum, said, to invest in science and technology, innovation and higher education. We need to be bolder in getting our priorities right and generating growth and confidence for our consumers and business. In the words of the Duke of Wellington, “Fortune favours the brave”.
The Minister said that this was an “aspiration nation” Budget. My great grandfather’s motto was to “Aspire and achieve”, and my business’s motto is to “Aspire and achieve against all odds, with integrity”. That is just what this country needs to do.
Lord Desai
My Lords, once the Chancellor laid down his strategy for five years, there was not much that he could do in each Budget. That is a consequence of having a long-term strategy. This Budget does not do very much, and I welcome it for that. I do not think that half way through a five-year strategy you should suddenly start listening to people who say, “Cut more”, or “Spend more”, or things like that. If you have a strategy, you stick to it.
Obviously, as many noble Lords have pointed out, external forces and perhaps the miscalculation of the growth process have meant that we are growing at a much lower rate than we expected when the strategy was laid down. I should also say that most other countries have been growing much slower than they thought was possible. So there are structural problems for the economy, as I have said before. We still regard growth as something that will happen automatically, or as something that we deserve. In retrospect, it is clear that some of the growth that occurred between 1992 and 2007 was unsustainable. A lot of it was engendered by easy credit and occurred mainly at the consumption end. Therefore, it was not sustainable. If we are to have growth again, as we will one of these days, let us make sure that it follows structural improvement in the economy and is not credit-driven but genuine productivity-driven growth.
There is not much to say about the Budget because it does not do very much. In the OBR and elsewhere, much emphasis is laid on public sector borrowing and public sector debt. However, we also have the problem of household debt. We have not done enough about the deleveraging of household debt. A chart on page 56 of the OBR report lays down the debt equity ratio of households and the ratio of debt servicing charges to household income. In my view, both those figures show that we are deleveraging far too slowly. Indeed, as the projection shows, the debt equity ratio will go up in the near future. The debt servicing charge income—the income leverage ratio—shows somewhat good results but that is because of QE, which has depressed interest rates, so the cost of servicing household debt is that much lower. That phenomenon should have danger signs attached to it because a lot of households are in negative equity and are just bumping along the bottom thanks to low interest rates.
QE postpones deleveraging. However, we have chosen to concentrate on public sector debt reduction and not to worry about household debt reduction. I hope that the Minister will comment on the fact that the household debt deleveraging problem is not being tackled by the Government to the extent that it should be. In that regard, I am alarmed by the house purchasing initiative. One of the great problems that we have experienced in the British economy, not just recently but for many decades, is that of overinvestment in housing. We have incentivised people to buy houses as opposed to other assets. Like many other economies, we got caught in a housing bubble and have regretted it.
I had hoped that the Government would encourage renting to a much greater extent than they have done. There should be a healthy rented sector for the younger generation and people entering the labour market. However, instead of having a healthy rented sector, we will enter yet another housing bubble. No doubt there will be tears at sunset given that table 4.1 of the OBR report shows the rate at which residential property prices will go up in the next two to three years. That is just a forecast; they may go up at a faster rate than that shown.
Once growth starts, a lot of the money which the OBR has generated, which is lying idle somewhere, will come into play and there will be much greater inflationary pressures for the economy once the recovery begins. There will also be a housing bubble, which will lead to the next financial crisis. I am normally a friend of plan A, but I am worried that there is a temptation for Chancellors to give money away for house purchase. If only we could get people used to the fact that you do not need to own a house and that if you rent one instead you can save your money and invest it in a more productive asset.
I welcome the reduction in national insurance contributions. Some noble Lords may remember that on the previous occasion we debated a Budget, I said that we ought to move away from taxes on income and towards imposing taxes on consumption. National insurance contributions should be abolished forthwith, if possible, and we should shift from income tax to a consumption tax. Further, we ought to have no zero-rated VAT commodities at all—a policy recommendation that got me sacked—and we ought to rely much more on VAT than on income tax for collecting revenue. I do not think that the Chancellor will do that. He is in enough difficulty as it is, and if he follows my policy he will only get into more difficulty, albeit that it would be the correct policy.
Lord Shipley
My Lords, I was hoping for several measures to be announced in the Budget, and each has been met: initiatives to generate investment to drive growth, particularly growth that can rebalance our economy away from overdependence on financial services and London; initiatives to get Britain building again, boosting the construction industry and getting houses built; action to implement the report of the noble Lord, Lord Heseltine, No Stone Unturned; action to help small businesses to encourage them to take on more people; and raising the income tax threshold to £10,000.
On investment, we must remember that public spending and borrowing can have a positive impact on growth. I refer to transport improvements, school repairs and improvements, water infrastructure, faster broadband, power stations and infrastructure investments that produce an income. It seems to me that borrowing small amounts, particularly at today’s low interest rates, need not cause problems with financial markets. I will come back to this in a moment in relation to housing, but the message is that infrastructure projects do not have to be big national schemes to generate jobs and growth.
First, the announcement on the income tax threshold was very good news because the threshold of £10,000 will be reached a year early. Since 2010, the Government have taken almost 2.5 million people out of paying tax. In my own region of the north-east of England, 106,000 people have been taken out of paying tax. That is a huge achievement for the Government, which directly helps large numbers of people on low incomes and increases their personal spending power.
Secondly, on small businesses, I was pleased to read last night the reaction to the Budget on the part of the Federation of Small Businesses, whose national chairman said:
“The FSB asked for a budget for small businesses and this is what has been delivered”.
The decision on national insurance contributions for small businesses is particularly welcome. I note the success of the Government’s policy on apprenticeships, which has seen 86% growth since 2010. Indeed, in my own region of the north-east, the growth has been 107%: in other words, a doubling over three years. This is very encouraging because it demonstrates the importance of the private sector vis-à-vis training for sustainable employment, in which small businesses play a crucial role.
Eighty-one of the 85 recommendations in the report by the noble Lord, Lord Heseltine, No Stone Unturned, have been implemented. That is very good news because it really matters. GVA per head between 1997 and 2010 grew in London and declined across the north—that is the north-west, Yorkshire and the north-east—against the UK average. In absolute terms, GVA rose in those regions, but in comparative terms the gap widened. This Government’s job must be to empower those outside London—private and public—to do more to drive growth.
For an indication of what has happened in recent years, let us take the contribution by English region to the national non-domestic rate pool. Last year—2011-12—showed the same thing: that every region outside London, including the south-east, contributed less than its share of population, with London contributing nearly 30%. That dependency is unhealthy for our economy and demonstrates clearly why the empowerment of England’s local enterprise partnerships and local authorities through the single-pot mechanism is so important. The crucial point is that devolving power from Whitehall in such key areas as transport, skills, housing and regeneration—building on existing capacities of other organisations such as the chambers of commerce—will drive growth faster than leaving all key decisions centralised in London.
However, it is important that devolution is real. An example of my concern about the impact of centralised power is the Highways Agency. Sometimes it is claimed that planning gets delayed because councils are slow. Actually, the problem often lies with government agencies. As an example, the Highways Agency is not regionally accountable and is charged exclusively with keeping traffic flowing, regardless of wider economic or social issues. It has a power to stop planning permissions. The immediate solution, requiring no legislation, is for the Highways Agency to have to obtain the Minister’s approval before it uses its power to stop a planning application. The real solution is to give the power to localities to decide for themselves on such matters, as part of a general devolution of power.
On getting Britain building again, the help to buy scheme should boost confidence; something needs to. There were only 98,000 starts in England last year and yet 230,000 households are formed each year. The numbers on housing waiting lists, the rise in demand for temporary accommodation and high rents in the private sector also point to the social and economic benefit of building more homes at below market rates. Councils, and their arm’s-length management organisations where they exist, have the capacity to build more homes, given that council housing is now self-financing. They could raise £7 billion and build up to 60,000 more homes over five years, contributing 0.6% to GDP in the process. That could be done very simply if the Government removed the borrowing cap on housing revenue accounts, relying instead on a prudential borrowing code to guarantee that only sustainable investment got the go-ahead.
Council housing has been self-financing since April last year. That is welcomed, but the average debt on a home is just over £17,000. There is scope for additional borrowing against the asset represented by that existing stock. While I understand the need for the Government to be careful about public borrowing levels, relaxing the housing borrowing cap need not be counted as public sector borrowing any longer. The UK uses a much wider measure of public debt than other countries. Council housing is now a trading activity, and international regulations already permit this to be discounted from government borrowing levels. Unfortunately, the UK does not currently adopt such an approach, and I remain puzzled as to why not.
This Budget provides many opportunities for growth. They need to be grasped. We need to manufacture more, export more and build more on our commercial strength. That is why my noble friend Lord Heseltine’s recommendation that LEPs should produce long-term strategic plans for negotiation with government was right. Also right was the recommendation to publish by the summer sector strategies in key sectors for growth—automotive, aerospace, life sciences, agritech, professional business services, information economy, construction, education, nuclear, oil and gas, and offshore wind. Producing these strategies is very encouraging because they cover the UK as a whole and not just London, so growth will be delivered outside financial services and London. There is a vision in this Budget. It points a clear way forward for growth. For that reason it should be commended.
Lord Marlesford
My Lords, I am very glad that my right honourable friend the Chancellor stuck to plan A. It would be unthinkable to abandon it. There was no question that it would be abandoned. Yet there are some dangers. I quote one sentence from the Chancellor’s speech that is very relevant:
“I will be straight with the country: another bout of economic storms in the eurozone would hit Britain’s economic fortunes hard”.—[Official Report, Commons, 20/3/13; col. 932.]
Such a storm may have started in Cyprus. It was absolutely astonishing that the troika—the European Central Bank, the IMF and the Commission—should have agreed a package of measures that involved a levy on deposits in Cyprus’s banks: 6.5% on deposits under €100,000 and 9.9% on those above €100,000. That flew in the face of the EU-wide recognition that deposits in banks up to €100,000 are guaranteed. It was an astonishing thing to happen.
In case noble Lords feel that I am being alarmist, or that Cyprus is a mere minnow and we should not worry about it, I would remind them of a little history. On 11 May 1931, the small Austrian Creditanstalt bank failed. That triggered the financial collapse of central Europe. By 13 July, the German Danat-Bank collapsed and all German banks closed until 4 August. Between 19 and 24 August, we had a major economic crisis in Britain. Five days of Cabinet meetings failed to agree the spending cuts demanded by American bankers at the time, and that led to the collapse of the Labour Government. We cannot play these games with the eurozone trying to have it both ways. Only a few months ago, eurozone Ministers declared that they must absolutely make sure that in future there was no confusion between sovereign debt and bank debt. For Cyprus they have again produced a formula that has done precisely that. It is not surprising that the banks in Cyprus are closed.
What is the answer to that? The Chancellor pointed out that 40% of our exports are to Europe. I suggest that the Government do everything they can—Parliament as well—to focus the eyes of exporters beyond Europe. Let us make much more effort about Asia and probably also Latin America. They should become a real priority. I am not saying that the Government can do that: the Government cannot make exports but they can at least propose that as a strategic aim. We must take advantage of the Asian market. We have the inestimable advantage of having special links with Hong Kong, which is the financial centre of Asia. It is the third most important financial centre in the world after London and New York. That is something we really must look at and quickly.
I will quickly mention one or two other points. The shift in the responsibilities of the MPC is very interesting. It will become much more like the Fed. That is a very big responsibility and I hope it can measure up to that. It was right to stimulate the economy with some extra expenditure, but only £3 billion was given. Why so little an amount?
Here I come to the one mistake that the Chancellor made: the fuel tax. That was tempting politics but damned bad economics. Cancelling the fuel tax increases has already cost, by the Chancellor’s own figure, £6 billion. It looks as though, if it continues at this rate, it could cost up to £20 billion by the end of this Parliament. That is not a sensible way of spending money—the opportunity cost is extremely high—first, because it is being done in little slices of 3p and, as everyone knows, 3p is less than the variation in petrol or diesel prices between pumps. Secondly, all vehicles are becoming much more efficient. A vehicle that previously did 30 miles to the gallon now regularly does 40 miles to the gallon. There is therefore a natural and desirable trend for less fuel consumption as fuel costs rise. The United States would not be having its huge financial problems if it taxed road fuel at a sensible level.
There is also a serious lacuna in the Government’s thinking regarding their unwise energy policy involving massive subsidies for solar and wind power that are being passed straight on to the consumer through the levy on the electricity companies. That is a grave mistake.
I welcome the aim of the housing help to buy scheme and mortgage guarantee, but with some apprehension. As the noble Lord, Lord Desai, said, there are real dangers in the Government introducing or getting involved in subprime lending. There are echoes of Freddie Mac and Fannie Mae in America, which did precisely the same thing and whose collapse cost American taxpayers hundreds of billions of dollars.
We must recognise that you have to be delicate when dealing with the City. It currently produces 13.5% of Britain’s GDP. That does not mean that I am any sort of spokesman for the banks. Bank balance sheets are extremely fragile. The noble Lord, Lord Desai, referred to domestic debt; there is still £55 billion of credit card debt held by British banks. That is not the money that you and I spend each month and pay off; it is overrun debt on which the rates of interest are anything between 17% and 25%. The chance of it being paid back is remote, and the question that one must ask is: at what price do the banks have that debt on their balance sheets? If they have it at anything like par, that represents a serious danger. The banks sold off some of that debt about three years ago at rates of between 8p and 12p in the pound. If the outstanding debt were valued at market rather than nominal value, the banks would be safe.
Lord Haskel
My Lords, many noble Lords seem to agree that we are in a difficult economic situation. Some noble Lords have explained that this is because the Government’s plans to stimulate, rebalance and grow the economy are clearly not working. Yet we are told that there is no alternative and that one day the policy will work—but at what cost? The highly respected Trussell Trust expects the number of people in the north-west using food banks to rise to more than 230,000. That is the cost. Is this the kind of country we want to live in?
The Minister spoke of economic realism. Blaming others and factors outside our control is not economic realism. Adapting to and embracing, not blaming, the changes is realism. Our economic problems are many and complex and each requires realistic attention.
The noble Lords, Lord Flight and Lord Bilimoria, spoke of exports. The Government have tried to help them through devaluation. However, that does not really work any more. A lot of our exports are made up partly of imports and that does little for productivity. According to the Bank of England’s analysis, the major economies in the eurozone have seen their exports grow faster since 2009 than has Britain. Why? It is partly because of the drop in exports of financial services but also because those economies have not been able to devalue because they are tied to the euro. Their only alternative is to produce more goods and services that others want to buy. Here, devaluation allows some firms to stay in business and become “zombies”. Is this why employment is increasing but productivity is plunging?
It could be that some firms are retaining skilled labour in the hope of better times to come. Meanwhile, those people are not as productive as they might be. Also, firms may be investing in things other than plant and buildings—investments that are not being measured. They are so-called intangibles such as investing in business processes and systems, writing new and better software, enhancing their brand and investing in new concepts such as big data. Has the Minister seen the research that shows that this kind of investment is growing but not counted?
The Government also have to be realistic about the fact that the financial sector is changing, not only because of the loss of trust through mis-selling, excessive pay and market manipulation but because much of its business has become trading value. Trading in value is a zero-sum game—some get richer and some get poorer—whereas trading in goods and services that people want and need benefits everyone. Trading value as our major economic activity cannot be the right course, and people have now realised this. As my noble friend Lord Eatwell put it, that is why the Government have to put far more emphasis on trading in goods and services that people want and need. That is where our efforts should be going in this Budget.
The Minister emphasised the cut in corporation tax. Of course that is welcome, but the headline rate does not change things much. It is all the other facets of tax that determine what a business really pays. The cut in employers’ national insurance, when it comes, will affect far more businesses, as will next month’s rise in business rates.
Yes, this Government talk about making efforts to adapt and embrace change in their support of our industrial sector, the supply side. The Secretary of State for Business, Innovation and Skills has fought to maintain the size and excellence of our science base. The Technology Strategy Board is being supported and strengthened. That is fine but, as my noble friend Lord Bhattacharyya asked, is it enough? My noble friend Lord Kestenbaum also made that point.
I recently visited Bavaria and learnt that what we spend as a nation to support industry is matched by the single state of Bavaria in Germany, and it shows. What we as a country export to Germany is matched by the exports of the state of Bavaria alone. The reason is that for 50 years Bavaria locally has consistently maintained and supported the fundamental planks of a modern industrial strategy, the strategy that my noble friend Lord Kestenbaum described, involving skills, technology, innovation, procurement, infrastructure, finance and supply chains—a policy that can be roughly described as the Heseltine view. That view was expressed in his report and debated in your Lordships’ House on 6 December last year. In that debate, nearly all speakers welcomed his recommendations, and the noble Lord, Lord Shipley, did so today. They welcomed the active role of the state in promoting economic growth while devolving power to other centres away from London. In his Budget, the Chancellor, too, accepted some of those recommendations. Does this indicate a change in direction?
My noble friend Lord Bhattacharyya told us that rebalancing and growing our economy is a long-term project. It is a project done successfully by building, not destroying. There were many good things to build on in the fields of innovation, science, technology, local funding, skills and apprenticeships. Yet for short-term political gain, Ministers destroyed or talked down much of this. Indeed, they continue to do so.
If the Government want to build confidence—confidence that we can grow our way out of these economic difficulties—they must signal their commitment to continuity by indicating that all these elements, whoever created them, will be tackled and built on in the interests of our long-term economic growth and not talked down in the interest of short-term political point-scoring.
Lord Sheikh
My Lords, I was able to speak in last year’s post-Budget debate. Twelve months ago, we all hoped that we would now be in a healthier economic position. We have admirably cut our deficit by a third and seen more than 1 million new private sector jobs created. However, the wider global situation, particularly in the eurozone, remains such that full recovery is still some way off and the continued growth downgrades have been inevitable. Above all else, what is important in such times is that we maintain discipline and stick to our course of austerity, particularly in the face of the confused calls from the Opposition for higher borrowing. More borrowing is not the answer to our problems.
It is crucial that we are seen to be taking the right decisions for the right people by helping those who genuinely want to get back into work, by nurturing the talent and innovation of our young people, and by helping businesses in need of assistance, as businesses form the backbone of our economy.
I am very supportive of bringing forward the £10,000 income tax threshold to next year, positively impacting on 24 million people. The more of people’s hard-earned money they are allowed to keep, the more empowered and encouraged they will feel to spend it. That will result in greater revenues to those parts of our economy that so desperately need them and, ultimately, in a healthier all-round cash flow to stimulate growth.
The scrapping of this year’s fuel and beer duty rises is also very welcome. Again, it is a measure that will affect the average person in their day-to-day spending and, I believe, provide that small but foundational level of help that people really do notice.
I should also like to express my support for the very difficult decision to cut further the budgets of some of our government departments. Diverting £3 billion per annum from Whitehall departments to the implementation of major infrastructure projects such as roads, railways and power stations will make more of a difference to the everyday lives of working people and create thousands of new jobs.
I also applaud the proposals concerning home ownership. These will help people to buy houses and will assist housebuilders, generate more business activity and create jobs.
I endorse the decision to protect our health, education and international development budgets, as well as the responsible decision to exempt military personnel from the caps imposed on other public sector pay rises. As someone who is interested in humanitarian matters, I am pleased to learn that we will continue to spend 0.7% of our national income on overseas development.
One area where I hold particularly strong feelings is the erosion of our competitiveness, which has without doubt been one of the fundamental causes of our continued stifled growth. This has been due to the red tape and bureaucracy implemented by the previous Government, coupled with the very challenging shift in global wealth from West to East. In short, when this Government came to power, the UK was no longer an attractive place to start a business. Much of this is already being addressed through the Enterprise and Regulatory Reform Bill, and I was heartened to hear of the Chancellor’s decision once again to reduce corporation tax. We already boast the lowest corporation tax rate in the G7, but we can now proudly say that, based on projections, as of 2015 we will also have the lowest rate in the entire G20.
Perhaps one of the most notable announcements made yesterday was the cut in companies’ national insurance contributions, removing huge barriers for smaller businesses and meaning that a third of all employers will not have to make any further national insurance payments.
I support the Government’s announcement that we will be taking forward the recommendations in the excellent report of my noble friend Lord Heseltine, No Stone Unturned: In Pursuit of Growth. I agree with the Government’s policy of taking robust action and improving our system of training and education, particularly in relation to apprenticeships and vocational training. This will enhance our manufacturing base and help in our recovery.
As someone who is widely travelled and has contributed a great deal on trade issues in your Lordships’ House, I shall now focus my remarks primarily on the export-led recovery. There is no more obvious a way to grow a country out of economic turmoil than by increasing trading links—in particular, levels of exports—with other countries. I have been very heartened by the efforts of UK Trade & Investment since the previous Budget. In particular, earlier this month it announced that its Trade Challenge Partner initiative will be implemented, with 99 partners drawn from trade and other membership organisations, with the aim of getting more of the members exporting overseas and further supporting those that already do.
I welcome the appointment of parliamentary trade envoys, who have the potential to make a real difference. I should like to see an expansion of the role and number of these appointments. There are plans to develop British business support networks in 20 priority high-growth and emerging markets, and I know that my noble friend Lord Green led a conference just last week to announce the establishment of the India trade network. These are exactly the kinds of initiatives that I should like to see more of. Anything that we can do to help SMEs to move into emerging markets must be embraced to the point where it is no longer viewed as a challenge for us to increase our exports but it is naturally accepted that it is in our country’s fibre to be a world leader in selling our products overseas. I hope to see this progress continue to develop as we move forward in rebalancing our economy and refocusing our efforts on what made us such a great and powerful manufacturing and trading nation many years ago.
We need to aspire to raise our game in international markets and to support the most vulnerable in our society as the economy charts a course to recovery. We also have to restore order to our public finances. I welcome the Government’s resolve and commitment; it is now time to deliver.
Baroness Worthington
My Lords, yesterday’s Budget speech by the Chancellor contained a number of tax break announcements that are intended to stimulate our economy. These included measures for business, such as reductions in national insurance payments and a cut in corporation tax, and measures for individuals, such as an increase in the tax-free income allowance and tax relief on childcare.
However, hidden in the detail of the Budget but not mentioned by the Chancellor was an announcement relating to a Treasury electricity tax that could significantly undermine money saved by those measures. The carbon floor price was announced in 2011 and will start to be added to electricity bills from 1 April this year. The logic of the tax is to increase the cost of carbon pollution to provide a benefit for lower-carbon sources of electricity. It is claimed to be necessary because the market price for carbon, set by the balance of supply and demand for carbon emissions at a European level, has crashed to very low levels, failing to incentivise investment. To address this, the Treasury has invented a top-up tax, which is intended steadily to increase the cost of carbon pollution over this decade.
Starting in April, UK electricity companies will be required to pay a £4.94 per tonne carbon top-up tax, which is roughly equivalent to adding £2.50 per megawatt hour to wholesale electricity prices. A year later, the level will double to £9.55 a tonne or £4.77 a megawatt hour and in 2015-16 the level that was announced yesterday—or, rather, was not announced—doubles again to £18 a tonne or £9 a megawatt hour. Over the next three years, this single policy will raise the Treasury an estimated £4 billion to £5 billion in revenue. Yet the Chancellor forgot to mention it.
I am not against polluters paying for pollution: in fact, I am all for it. However, in the fight against climate change it is absolutely imperative that when we impose costs on the economy, we do so for very good reason. Sadly, in this case it is so badly thought through that this policy risks holding back recovery, increasing inflation and giving carbon pricing a bad name, undermining our ability to introduce more sensible policies later.
The reasons why the Government’s carbon floor price is such a bad idea are numerous and have been pointed out repeatedly since it was first mooted. Opponents include business groups, consumer groups and green groups. Everyone appears not to like this policy. The first obvious problem is that the tax fails to do anything for the environment. It does not deliver any additional environmental outcomes. The emissions it targets are already capped at an EU level and simply doing something here means that our emissions saved will be traded away across Europe.
The second, blindingly obvious, problem is that being unilateral it damages UK competitiveness at a time when we need to be boosting our competitiveness. Electricity prices are an essential input to virtually all economic activity. Steep rises in prices increase everyone’s costs and are inflationary. It is no wonder that the Budget yesterday appeared to be indicating to the Bank of England to go soft on meeting the inflation target. But the effect of this policy is likely to make it harder than ever to bring it under control.
The third problem is that rather than paying electricity companies when they invest in new low-carbon projects that come on stream, as the renewables obligation does and as the contracts for difference will, the carbon tax simply pushes up wholesale prices of electricity for everyone, rewarding those who have already invested for doing nothing new. It is a huge windfall for projects that have already received generous subsidies, be they existing wind farms or old nuclear power stations. This is of course good news for some generators but bad news for industry and consumers, who are paying twice for no good reason. The floor price is intended in a not-very-clear way to give investors confidence. However, being a finance Bill measure, no investor worth his salt is going to place any confidence in this policy lasting, especially since it has been implemented so appallingly.
Recognising that increases in electricity prices will be damaging to industries which rely on it, the Treasury has pledged to make around £250 million available to certain sectors to compensate them. That is a fraction of the revenue that the policy will raise. However, there is nothing in the Budget to compensate consumers and this comes at a time when public money to help poorer families cope with higher energy bills is at an all-time low, having been slashed by this Government.
Some may argue that the main purpose of the carbon floor price is to disincentivise the burning of coal in existing stations, which would be a noble endeavour. However, this policy is the equivalent of taking a sledgehammer to crack a nut and even then it may not be successful. Coal is experiencing something of a reversal of fortunes thanks to lower global prices as unused coal from the US enters the market. This, combined with high European prices for gas, is causing us to burn more coal. The disparity between the two fuels is so great in cost that even the hefty carbon floor price may not be enough to switch us out of it. It requires something in the region of a £30 a tonne carbon price for us to do that.
What would Labour have done differently? First, we know that investors in low-carbon electricity infrastructure are absolutely necessary for getting this country back to growth. They need policy certainty, which is why we are committed to introducing a decarbonisation target for the electricity sector. The Government have failed to acknowledge this and are proposing to wait until 2016 before doing so. We would also use simpler policies, such as the energy performance standard to secure the steady phasing out of unabated coal and usher in carbon capture and storage. That is simple to understand and unambiguous, and provides the clarity investors need to commit to new projects.
We would also work around the clock to achieve a solution to the low carbon price at an EU level, which is the only level where it matters. Fortunately, we still have some credibility in Europe, unlike the Tories, and we are able to control our MEPs. As we speak, the Conservative MEPs in Brussels are mustering to rebel in a vote in April that would help to rebalance the European carbon market—doing precisely what this heavy-handed policy is intended to do. The Government line is to support it. Yet, disgracefully, the party is not able to persuade its members to vote that way in this forthcoming vote.
In the short time available I have focused exclusively on one measure in the Budget. However, I have done so consciously in order to try to compensate for the Chancellor’s grave and negligent error in omitting to mention it at all. As companies and families sit down this week to try to work out how the Budget will affect them, the hidden electricity tax is unlikely to feature in their assessments. Indeed, it features in scarcely any of the mainstream media’s assessment of the impact of the Budget. Yet it is raising large sums of revenue and has a very material impact on costs.
This makes me fear that either the Chancellor simply is unaware of the detail of his Budget or he is purposefully trying to hide a significant additional cost to the consumer. Will the Minister inform the House what the Government’s assessment of the impacts of this policy are on inflation, competitiveness and the poorer households which currently are struggling to pay their electricity bills?
Lord Dykes
My Lords, like others I am sure, on these occasions one puts one’s name down for a debate and then perhaps regrets it, thinking it probably will be a mistake or gloomy. I was expecting a gloomy debate because of the background to the Budget—although not the individual Budget measures announced yesterday, many of which are very good. I hope that I will not annoy our colleagues in the larger coalition if I say that, self-evidently, the two best single measures are the abolition of taxation under £10,000 for the lowest income tax payers and non income tax payers if they have a really low level of income, and Vince Cable’s suggestion for an expansion of the housebuilding sector being agreed at just a little above the original figures that were promulgated.
I speak as someone who, in the early 1960s, studied economics at the greatest single Keynesian school in the whole world in those days—the University of Cambridge—just by chance and good luck. I was heartened today because we have had two outstanding Keynesian speeches. Unfortunately, they came from the other Benches and I wish that it had been from these Benches. We heard the first from the noble Lord, Lord Kestenbaum, who is no longer in his place, and then the second more recently from the noble Lord, Lord Haskel. Both gave an alternative message about what now needs to be done in this country on long-term capital and investment accounts and on the long-term realism that this economy needs, and I agree with them.
On the individual measures, it is very difficult to quarrel with the Chancellor. One newspaper writer rather unkindly said that the unique thing about George Osborne was that he was even more unpopular than the austerity measures that he keeps promulgating, which was an interesting description. There will be a reduction in national insurance and the abolition of national insurance at the relevant level. There is the modest start of the housebuilding programme for the future and the reduction in corporation tax. There are many other examples, too, which are all very good and one commends each one individually.
However, the total picture is a huge problem for this Chancellor because, as we all know, this country is locked into the utterances of the past. One of the mistakes of the coalition Government was the spokesmen from the bigger of the two parties repeatedly recalling the mess left by Labour. I suppose each incoming Government always say that about a previous one. But the previous Labour Government were mostly dealing with the international worldwide financial crisis of 2007-08 and its aftermath. Gordon Brown had to handle it very speedily. The amount of taxpayers’ money was colossal in doing that task, which reduced the funds so much so that the outgoing Chief Secretary said that there was no more money left, which was a realistic description.
There was also the excessive harping on and the hysteria in this country about the eurozone’s problems, saying that they are intractable and insolvable. Indeed, I hope that the noble Lord, Lord Marlesford, will not mind my saying that it was not the Germans or the whole Council of Ministers who insisted on the capital levy for the Cypriots. That was their own part of the transactions when the council said that Cyprus had to respond with an enormous amount of money to reflect the vast amount of money that they were getting in the bailout. Germany did not impose a particular suggestion on Cyprus. The Cypriots decided that themselves. As we know, they have now changed their mind and are doing other things. We are waiting to see the details of that as a result of the non-vote in Parliament.
Lord Marlesford
If I may very rapidly read from the Minister’s statement, it was the eurozone finance Ministers who announced the package which included that. The eurozone finance Ministers, therefore, approved that part of the package.
Lord Dykes
Yes, of course, because the Cypriot Government then submitted those suggestions to them, which were accepted. That was the sovereign decision of the sovereign country of Cyprus, which made its own suggestions in response to the request from the Council of Ministers and the German Government, and quite rightly.
The difficulty now is what we do from now on and where we go. The reality still confronts us in this economy that, to quote another source from many years ago, one has to enlarge long-term public spending on public assets with a high multiplier effect. Government spokesmen in recent years have kept on saying that public sector is bad and wicked, and private sector is good, and that we should rely on the private sector to respond to the inaction of the Government, but that never works. We all know that, and the evidence is there. Huge global corporations will make their decisions irrespective of what national Governments do. Facebook would not be particularly responsive to particular individual national Governments in the world, for obvious reasons, and neither would Microsoft, although the national subsidiaries in different countries respond to some national government decisions, as we know. Equally, sometimes very high-tech innovative companies in different countries themselves make their own decisions and have particularly good fortune such as very strong bank support and other access to capital, which enables them to be free-floating and not respond to government. However, in the vast majority of businesses, whatever their size, and in particular small companies, the reality is that you wait until the Government are expanding the economy. That is not a criticism of the way companies run businesses; if I was running one now as I used to in the old days I would do the same thing.
The noble Lord, Lord Kestenbaum, who is not in his place now, earlier mentioned economies where public sector and private sector activity is mixed up together in a constructive whole. Bavaria, mentioned by the noble Lord, Lord Haskel, is a very good example of that, where a centre-right moderate Government, over many years, never said no to public spending as long as it was on long-term investment assets. It was nothing to do with short-term current account. The British Treasury is still far too short-term obsessed. Therefore, until we change, we will be stuck in that ominous way that was so ably described by the very able business editor of the Evening Standard yesterday, when he referred again to the Chancellor. He wrote that a wiser man, earlier on,
“would have been less aggressive, less dogmatic about the rightness of his policies, so that he would have had room to manoeuvre when they seemed not to be working. But Osborne has closed down all those options so today’s Budget is the work of a man who is in a hole but continues to pretend that the only way forward is to keep digging. The public finances remain in a dire state, and even a bit of sleight of hand with the numbers can’t conceal the fact that we have made absolutely no progress over the last 12 months”.
The terror of the slightest increase in our interest rates in this country will stop further action until there is a big change of heart.
Baroness Browning
My Lords, I sense that I am going to disappoint my noble friend Lord Dykes. I am not going to be gloomy, but I have to say to my noble friend on the Front Bench that my mood today is cautious for the following reasons. My noble friend was not in the House when I made my maiden speech in 2010. I am sure that other Members present recall it very well. That was a joke. At the time, with the help of a friendly app, I gave the account of how much the country’s debt was when I stood up and how much it had increased when I sat down. I do not have that app with me today, but I took a quick look at it yesterday, and I see that we are still escalating, at £500 per second.
My concern today is primarily about the debt. There have been some very good things in the Budget. I support things that others have mentioned today, particularly raising the personal tax threshold to £10,000, and for small business, the £2,000 threshold before NI is paid by employers. I support that even more so than corporation tax coming down. For a lot of very small businesses, it is not quite the same as other companies coming in from outside and choosing to invest here. For small businesses, anything that comes off the bottom line before you make a profit is particularly helpful.
The Chancellor said yesterday that the Budget was,
“for people who realise there are no easy answers to problems built up over many years”.—[Official Report, Commons, 20/3/13; col. 931.]
There has been a flavour today, and it is certainly more noticeable in the House of Commons, that whenever the inheritance from the Labour Government to the coalition Government is mentioned, a sort of groan goes around, as if we really should not mention the problems that we inherited. I use this opportunity to remind the House that a Labour Treasury Minister left that note in the drawer in the Treasury for the incoming Minister that said, “There is no money left”. In fact, that was only part of the story, because it was not only that there was no money left, but there was a huge debt: a debt of such proportions, and rising, that it brought together two political parties which historically had been opponents but which felt that there was a need to work together in order to address the seriousness of that problem.
Now that the Chancellor has come forward with the Budget, I hope that people across the House will recognise that these problems are bigger than many that we have faced in our lifetime. It is as serious as that. It is also important that the Chancellor continues to spell out the size of the problem and what that means. My noble friend Lord Marlesford mentioned Cyprus. I quite agree with the comments he made about the foolishness of what was said about top-slicing bank accounts. If anything was guaranteed to cause a run not only on Cypriot banks but on banks in other parts of Europe, that surely was the trigger. We will see what happens there. However, it is the case that when Governments lose control of the finances of countries, they have no hesitation in popping their hands into the personal assets of the population. We have seen these measures and their effects before.
I was very encouraged that the Chancellor made reference to the work of the Monetary Policy Committee. He said that the new remit,
“makes it clear that the committee may wish to issue explicit forward guidance, including using intermediate thresholds in order to influence expectations on the future path of interest rates”.—[Official Report, Commons, 20/3/13; col. 935.]
I know that my noble friend on the Front Bench is only too aware that, given the state of government borrowing, it will require an increase of just a few points in interest rates for that to give us very serious problems indeed.
I was not looking to the Chancellor to produce an all-singing, all-dancing giveaway Budget, taking lots of risks. He needed to be cautious. However, I have one or two concerns about some areas on which I hope my noble friend will be able to reassure me. I am indebted to an article I read in MoneyWeek which outlined the history of the state pension. The state pension was introduced in 1909. The article states:
“Men aged 70 and above could claim between 2 and 5 shillings per week from the government”.
However,
“because back then the average working man could only expect to live to 48 years of age”,
the Government were not being that generous. Here we are, over a century later, and yet the liability to the public purse on pensions has resulted in an estimated £5 trillion of pension promises. I am not for one minute suggesting that we ban the state pension. However, I am worried about the implementation of Dilnot in putting a cap on the cost of care for elderly people. I know that that is not a popular thing to say. We would all like to do it and I am sure that most noble Lords have been through that situation on a domestic front with elderly relatives. It is very difficult. However, I must say to my noble friend that, rather like the state pension when it was first introduced, I am not convinced that we have the money, and particularly that we do not have the money at this moment, to underwrite that type of benefit in order to preserve the properties of the property-owning democracy. That is a strange thing for a Conservative to say. However, that I have to think twice about this shows the serious position that I believe the finances of the country are in.
I am equally concerned not that the Chancellor introduced measures yesterday to increase the housing stock—we all recognise the problems of the housing shortage—but that the taxpayer, not the Government, will underwrite mortgages for properties up to £600,000 for people who are not able to get a mortgage in the normal way. We know that the money supply from the banks is poor at the moment, and that that is affecting people’s ability to obtain a mortgage, but, as others have said, that will need careful handling if we are not to see some of the problems that we saw over the pond in America with what happened with its housing bubble.
Lord Brooke of Sutton Mandeville
My Lords, I should like to add a few words to this debate in the gap. I spoke for two minutes in a Question for Short Debate on 11 December last year on the impact of multinational companies’ financial practices and UK tax policies. I shall not speak for longer now on the same subject, not least for fear of my noble friend Lady Browning doing her mental arithmetic on my costs.
I support the plea of the right reverend Prelate the Bishop of Bristol earlier on this same subject. In replying to a debate on 11 December, my noble friend Lord Marland, at col. 1050 of Hansard, said that DfID had averaged expenditure of £20 million per annum over five years to support tax regimes throughout the world. He went on to identify specifically DfID spending £11 million in Sierra Leone, £8 million in Tanzania, £8 million in Rwanda, where the tax take rose six-fold, and £21 million in Afghanistan, where the tax take used to be 4% and has now gone up to 11%. DfID is, with the support of HMRC, building up its technical capacity to help further.
At this late moment in the debate I do not expect a detailed comment of any kind in the wind-up of my noble friend the Commercial Secretary, but a reiteration of a continuing commitment to this constructive and productive programme would be both welcome and reassuring.
Lord Davies of Oldham
My Lords, I am grateful for the contribution of the noble Lord, Lord Brooke, and that of the right reverend Prelate the Bishop of Bristol, who emphasised the progress towards the aid target of 0.7% of GDP, which this Government have fulfilled. It was driven towards strongly by the preceding Administration, so at least we have a note of unity across the House on the successful achievement of that position and its ring-fencing.
Another note of agreement—I am certainly happy with it and I get the impression from the debate that this might be so across the House—is that, as my noble friend Lord Desai said, this Budget does not do anything very much. That is certainly the case because the Chancellor has placed himself within a straitjacket and there is not much he can do when he is so constrained by his singular commitment to one objective. Of course, no one underestimates the challenges facing the Chancellor. We all know the difficulties over the debt and that external forces, particularly the difficulties in the eurozone, our largest overseas customer, do not help exports and the potential for an emergence from this crisis through export-led growth.
However, I cannot recall the Government or a government spokesman putting the crisis of 2008 into an international context. I cannot remember them ever since suggesting that there were difficulties other than those attributed to the Labour Administration struggling with the problems of international finance at that time. We all know that the first manifestations of crisis were in the United States, and subsequently in Europe, before Northern Rock reached a pitch at which we had to act. The international context rubs both ways.
We need to recognise from the experience of Northern Rock some of the dangers in the Government’s proposed housing measures. A number of noble Lords emphasised their support for these measures. The noble Baroness, Lady Kramer, quoted the Business Secretary as having expressed these views in the New Statesman, and he certainly did. Why did he choose the New Statesman? It is because he thought it was read by a thoughtful, constructive audience who had already been campaigning for an emphasis on housebuilding to inject some demand into the economy and some earnings into the construction industry. We all know that the construction industry is one of the fastest to regenerate if the demand is there.
I appreciated the point made by the noble Lord, Lord Flight, and the noble Baroness, Lady Browning, a moment or two ago, that we have to be careful with regard to this issue because we know that it was overborrowing for house purchasing that precipitated the crisis in the United States. I hope the Minister will respond to the questions addressed to him by my noble friend Lord Eatwell in his contribution to the debate. What, in the Government’s view, will the guarantee scheme mean for house prices? What is the cost of the scheme over the three-year period that it is meant to obtain? How much dead weight is involved in the scheme? Will there be support for purchases that have already been made? I hope the Minister will address these points, if only because anxieties about this issue were expressed as strongly on his side of the House as on mine.
We have questions as to whether the Chancellor has matched up to the challenge before him. So far, progress has been limited to almost the point of marginality. The Chancellor has failed to hit every target that he identified when he first took office. Of course, I recognise that one or two elements in this Budget have found favour. The noble Lord, Lord Bilimoria, declaring his interest, mentioned that a penny off the pint of beer was most welcome. I cannot think how many pubs will be saved by a reduction in the price of beer by 0.3%. However, I do not have quite the experience of the industry of the noble Lord, Lord Bilimoria.
I am grateful to the noble Lord, Lord Marlesford, who also indicated that we should have reservations about the intention to freeze taxation on fuel. There will be escalating costs involved in that over time, and the noble Lord identified them very clearly. That aspect may gain the Chancellor a little short-term credibility but it raises considerable problems. The Chancellor will be aware that these little gimmicks to brighten life up for the nation are happening two years before the next election, but of course there is a lot that needs brightening up.
Something that has not featured enough in this debate is what it means for a nation to be told that its living standards, which have already decreased significantly over the past few years, are destined to be reduced over the next two years, if not longer, as well. That shows itself most in the more desperate sections of our community, among the poor, who have of course been subject to the Government’s unremitting ideological onslaught on welfare, but it also reaches right across the community save, perhaps, for those millionaires who stand to see a considerable increase in their incomes from the decision taken last year to cut taxation from 50% to 45%.
We have had some interesting contributions on the question of infrastructure, and I hope that the Minister will respond to the questions put by my noble friend Lord Eatwell. How much has been spent on infrastructure this year? The problem with the Budget is that it is all jam tomorrow—or not tomorrow, in fact, but some 700 days after tomorrow. It is two years before the expenditure on and investment in infrastructure is due to take place. We need to know how much was spent in 2012 and how much will be spent in 2013. I fear that the answers may be somewhat bleak.
Within this framework, perhaps I may also emphasise the anxieties expressed by my noble friend Lady Worthington on the question of electricity prices. There are within this Budget and in the Government’s policies hidden costs that will manifest themselves in the most appalling way; that is, directly on those who are least well able to cope with them. Unless one is in a position to invest significantly, the consumption of electricity is a given cost in bills that have to be met when they are presented.
On my side of the House, my noble friends Lord Kestenbaum and Lord Haskel, along with my noble friend Lord Bhattacharyya in considerable detail, emphasised the fact that we need investment. We cannot get out of this situation without it. The IMF has told the Government that they cannot get out of this situation without paying attention to growth. My noble friends pointed out that at last the penny is beginning to drop in government to a marginal extent, but for the past three years there has been an unremitting commitment to one objective to the exclusion of any considered investment related to growth. That is why we consider that the Government have a difficult case to argue.
I appreciated the contribution of the noble Lord, Lord Shipley, who shifted the debate on to the local and regional dimension and referred to the Heseltine report. It is encouraging that the Government are at least paying lip service to some of the noble Lord’s proposals. When we talk about development in the regions and the problem of the domination of London, it is worth recalling that one of the first acts of this Government was to destroy the regional development agencies. I recognise that the local enterprise partnerships are different and it may be that they are able to make progress, but there is no reason other than the wilful action of the Government at the beginning of their term why things are so very difficult in the regions at this time.
I apologise for slightly overrunning my time. I hope that the Minister will recognise that we want to put this debate in the context of a Government who are failing the nation and causing a great deal of distress among many members of our community.
Lord Deighton
My Lords, I thank all noble Lords for their excellent contributions. I am still new enough in my job to find myself taking copious notes with lots of ideas to follow up on, so I welcome the debate. I may have a bias in my listening, but I have to say that the broad sense of the contributions suggests that this is a well crafted Budget that has delivered very well what can be delivered, given what I think everyone accepts is limited room for manoeuvre. The noble Lord, Lord Desai, said that once you have established a strategy you should stick to it so that people should not expect enormous deviation from one annual Budget to the next. I shall try to address the questions and issues that have arisen, and I shall do that in terms of subject matter so that there is some coherence rather than moving from one contributor to the next. I hope that that is acceptable to noble Lords.
On the deficit, I did not hear a compelling case for an alternative strategy to that which the Government have in place. We have pointed to the many exposures that would occur should we embark on another spending spree without getting the budget under control. I should point out that the OBR borrowing forecast shows a fall in every year of the forecast both in cash terms and as a percentage of GDP, and that is both with and without some of the special one-off changes such as the APF transfers. I concede that borrowing is falling more slowly than we would like, but that is because of the economic challenges and because we are allowing what the Economist has described as the “automatic stabilisers” to operate. Over the past three years, the UK has cut the structural deficit more than has any other G7 country.
A number of speakers such as the noble Lord, Lord Bilimoria, for example, talked about bringing down the level of public expenditure as a proportion of national income. I can confirm that the OBR forecast takes total managed expenditure down to, I think, 40.5% of GDP by 2017-18, which is the same level as it was in 2004-05. Several speakers, including my noble friend Lady Browning and the noble Lord, Lord Bilimoria, asked about the cost of borrowing. I can confirm that a 1% rise in government borrowing costs would add just over £8 billion to the annual debt interest by 2017-18. That provides some perspective on the risks we are trying to manage.
There was a lot of discussion about the impact of our weak export markets, the opportunity to switch into faster-growing ones, and how important conditions have been weighing against us. The OBR expects the euro area to contract by 0.5% in 2013, which follows a decline of 0.5% in 2012. Let me give noble Lords an example. In the year to the fourth quarter of 2012, goods export volumes to the EU fell by 2.5%, while our exports to non-EU areas grew by 1.2%. That gives a sense of the opportunity.
Some mention was made of international comparisons, particularly by the noble Lord, Lord Eatwell. With respect to Germany, I would just point out that the IMF has forecast that the UK will grow faster than Germany in both 2013 and 2014. With respect to the United States, our employment at just over 70% is now higher than in the US, where it is just over 67%. Those are some measures on which we are actually performing more strongly.
On monetary policy, I think the general mood of the debate was that noble Lords welcome a good and thorough review of this important area. I absolutely take on board the observations of my noble friend Lady Kramer, who believes that this is so important that it should be subject to a wider review. I also take on board the observations of my noble friend Lord Higgins that one of the reasons this needs to be managed extraordinarily carefully is the degree of independence that we have vested in the Bank of England, which is why I think we should welcome the clarity with which the new mandate has been defined.
I found particularly useful and interesting the contributions from those noble Lords who talked about what I would broadly describe as our industrial strategy, including, in particular, the speeches of the noble Lords, Lord Bhattacharyya and Lord Kestenbaum, as well as a number of other noble Lords. The Government are extremely interested in trying to get this right. The general sense that I got from the contributions was that while the ideas and policies are right, their scale, urgency and effective implementation need to be addressed with what I would describe as a private sector zeal. That is what I am in government trying to impart. The more we can accomplish that the better it will be. I would point to the money that has been applied to our world-leading sectors, in particular the aerospace industry. A number of noble Lords also referred to the importance of our science and research infrastructure. I absolutely accept those comments. In my own area of trying to define and improve our infrastructure, I am working with my right honourable friend the Minister for Business and Enterprise on incorporating the science base in the same way as we think about our digital or transport infrastructure. The utilisation of the Government’s own purchasing power as a way of incubating promising businesses is also an extremely valuable idea which the Government share and just need to implement effectively.
My noble friend Lord Flight reminded us of the structural change in the UK economy. If you isolate the difficulties that we have had in the financial sector, which was very large and suffered a very significant shock, and in the North Sea oil and gas sector—which is also very large and, certainly in recent years, mainly declining—you can identify in the rump of the economy some extremely promising stories for our long-term industrial future. We should not in any way ignore those.
In talking about our export markets a number of noble Lords said that we should switch to the faster-growing ones. The noble Lord, Lord Kestenbaum, in particular, and the noble Lords, Lord Desai and Lord Bilimoria, asked about our exports to the so-called BRIC economies—Brazil, Russia, India and China—and other strong emerging markets. Between 2009 and 2012 the UK’s exports to Brazil increased by 49%, to Russia by 133%, to India by 59% and to China by 96%. Those are very large numbers but, of course, come off quite a small base. My experience of the co-operation between the business department and the Foreign and Commonwealth Office is that the Government are extremely focused on working with our businesses, both big and small, to develop opportunities in those markets.
I now move on to what I would generally describe as some of the areas relating to fairness. The right reverend Prelate made a compelling case—supported by a number of other contributions from, for example, the noble Lord, Lord Davies, and my noble friend Lord Brooke—in essentially congratulating the Government and everybody who contributed on sticking to their commitment on overseas aid. Doing the right thing can sometimes be difficult but that does not diminish its importance. I think that the House offers its support to that continuation.
There was support for the childcare policies announced yesterday but also interest in how it will work for those at the lower end of the income strata. That is dealt with in the universal credit system, which has funding available to support people there.
There was also a discussion about utilising the new control framework which the Treasury is in the process of introducing on managed expenditure. As my right honourable friend the Chancellor said yesterday, it is really intended to turn unmanaged expenditure into managed expenditure. That will be implemented carefully to ensure that we manage any implications for the impact of our support policies.
The noble Lord, Lord Bilimoria, asked about the beer duty cut. That will go ahead and will come into effect next Monday. I understand from the experts in this area that any EU concerns on comparability should not be an issue.
Another subject that featured in a number of contributions, including from my noble friend Lady Browning, was pension reform and the affordability of the care caps. The Government have made it clear that we would implement those measures only if we could ensure that they would be paid for, and we would utilise some of the changes on national insurance and the three-year inheritance tax freeze to ensure that those are properly funded before they are introduced.
In the interests of time, I will move on to infrastructure. First, I confirm to the House that the Government are taking a long-term approach to capital spending as part of the 2015-16 round. That is why we have set in place the extra £3 billion a year, and we will also plan for a longer period than is customarily the case at the Treasury. In my view, one of the problems with the historical approach to capital spending has been the relatively short periods forward for which it is committed, which does not suit the longer gestation periods of some of the projects that it is intended to support. The plan of this Government is to fix that. Of course, that is on top of additional investments in capital spending in the Autumn Statement.
The noble Lord, Lord Eatwell, asked about the amounts of capital spending, and the noble Lord, Lord Davies, reiterated this question. We do not have the precise numbers for the capital spend for 2012-13 yet, but when we do I will make sure that those are passed on. I can say that public investment as a share of GDP is on average higher over this Parliament and the next than it was between 1997 and 2010.
Other questions were asked about the efficacy of our infrastructure delivery and the challenge of getting it done now rather than being eternally in a planning period. My noble friend Lord Flight referred to some of the red tape delays that we have encountered. We are now in the second phase of our Red Tape Challenge and trying to address some of those regulations that could perhaps reasonably be considered overzealous, which have slowed down some of those plans. For example, something I have been involved in has been looking to get the regulators of these sectors to standardise the approach to infrastructure access charges, which should make these developments much easier.
My noble friend Lord Marlesford asked whether £3 billion a year was really enough. That is £18 billion in capital spend over the next Parliament, and that is while finances are tight. The focus on managing down current spend to accommodate that expansion of capital spend, given the tightness of our fiscal position, is an extraordinary commitment to that level of spend.
The noble Baroness, Lady Worthington, gave a very detailed and passionate speech about the carbon price floor. This is a technical subject that is worthy of a much broader debate. All I can say is that the Government are extremely focused on solving this equation of how to ensure that sufficient electricity is generated in a way that meets our desire to hit our environmental targets, to get it all done on time and to leave our consumers with an affordable result. That is absolutely the intention and I am certainly happy to discuss policies which do not end with that result.
We had some discussion around financial reform and access to finance. My noble friend Lady Kramer very eloquently summarised how it was important to bring together all the initiatives that will compensate for the dislocation in the banking system; for example, through the business bank. The noble Baroness referred to the reduction in stamp duty to stimulate the market, in particular for technology growth companies, so that they can grow here with equity rather than selling out earlier than would be optimal, and I absolutely support that more strategic approach to bunching those initiatives together.
Finally, we had a number of interesting contributions around the initiatives announced in the Budget with respect to housing and the support that the Government propose to give to housing. Those contributions neatly summarised the balance of the argument. On the one hand, I think people accept that this is a critical area; it can and is intended to be highly stimulative to the economy. It is an area where you can get things moving quite quickly so in that respect it is a powerful initiative in the Budget. On the other hand, there was much wise counsel, and I certainly share the caution about how this is implemented to ensure that we both understand and manage the risks involved. In answer to the question from the noble Lord, Lord Desai, about how closely we manage the household debt situation, I would note that household debt in the UK has fallen as a proportion of income from 175% in 2008 to 144% currently, so it is coming down, albeit rather slowly.
In answer to some of the specific questions asked by the noble Lord, Lord Eatwell, I say that the scheme is intended to be self-financing, so the mortgage guarantee scheme will have a price for the guarantee which will be judged to meet the expected level of losses as one would actuarially calculate them. It is intended to be a market instrument in that sense. We have between now and the beginning of next year to work that through in detail with the leading market practitioners.