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 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.