Lord Deighton
That this House takes note of the economy of the United Kingdom in the light of the Budget Statement.
The Commercial Secretary to the Treasury (Lord Deighton) (Con)
My Lords, the case that the UK has recovered strongly from its catastrophic financial state in 2010 is hard to dispute—although I am sure some noble Lords will do so. We are now the fastest growing major advanced economy, growing at our fastest since 2007. Employment is at a record high: nearly 2 million jobs have been created during this Parliament, and the claimant count rate has not been lower since 1975. Inflation is at an all-time low. On Friday, the FTSE broke through 7,000 for the first time—both a sign of confidence and a further boost to it. The eye-wateringly high budget deficit of 2010, which represented over 10% of GDP, is forecast to halve to 5% by the end of this financial year. Debt as a proportion of GDP is forecast to fall in 2015-16, in line with the original target set in 2010 by my right honourable friend the Chancellor.
The evidence that this is a journey from “austerity to prosperity” is provided by the latest projections from the OBR for real household disposable income per head, which show that on average households will be around £900 better off in 2015 than they were in 2010. However, risks remain. The deficit is still too high, and productivity too low—challenges the next Government will have to address. Our fiscal plan is to eradicate that deficit by 2018-19, which will require around £30 billion of further consolidation over the next two years—2016-17 and 2017-18. That was initially laid out in December’s Autumn Statement and was reiterated in last week’s Budget. If the Conservative Party is elected, it would achieve that through reductions in the following three areas.
Some £13 billion—from a total department bill of £365 billion—represents a continuation of the same rate of saving we have achieved in this Parliament, during which, according to independent polls, satisfaction with public services has risen; that is not surprising when, for example, crime is down. We will carry on reforming public services by focusing on achieving outcomes more efficiently. A further £12 billion of savings will be found from our very large welfare budget of over £200 billion this year, which must be managed to control cost, and structured so that it pays to work. Finally, £5 billion will come from a variety of measures to reduce tax evasion and avoidance. Again, we have a proven track record of success here. Every year we have introduced initiatives to tackle evasion and avoidance—most recently last Thursday, by my right honourable friend the Chief Secretary to the Treasury. We should be particularly proud that the Prime Minister has put tackling tax erosion at the top of the G8 agenda, as that can be effectively addressed only through international co-operation.
By following our fiscal plan, in the final year of this decade—2019-20—public spending will once again be able to grow in line with the economy while continuing to pay down the national debt. At that point, government spending will represent 36% of GDP—higher than in 1999-2000, when the spending crescendo started, fed by the illusion that the cycle of boom and bust had somehow been abolished, an approach which left this country so exposed when the financial crisis struck. Our aim is not smaller government per se, just better and smarter government. The discipline of extracting better value for taxpayers’ money is healthy—and government needs to remind itself that it is spending taxpayers’ money, not its own.
We need to build in resilience to our public finances to absorb the shocks that experience tells us will inevitably hit our economy. That involves not only reducing debt in the good times—the right thing to do for future generations—but also reforming and derisking the banking sector, which was our priority early in this Parliament. We are now able to recoup some of the £192 billion spent bailing out the banks, with our ongoing disposals of Lloyds Bank shares and the securitisation of mortgages from Northern Rock and Bradford & Bingley. It is, therefore, appropriate that my right honourable friend the Chancellor chose to use these proceeds to pay down our national debt and not to indulge in pre-election giveaways.
Our unrelenting focus on fixing the economy is right. Without a strong economy, we will not be able to invest in what we care about most—the NHS, the education of our children and the defence of the realm. Without a credible plan for the economy, promises in other areas are meaningless. One of this Government’s most valuable legacies will be our commitment to the transparency and independent scrutiny of public finances. We set up the independent OBR, imposed a Charter for Budget Responsibility and publish, at every fiscal event, a distributional analysis of the effects of policy changes. It is now much harder for a Chancellor to fix a problem by plugging an unrealistic assumption into a forecast or to avoid a genuine debate about the choices he or she has made.
Of course, the least painful way in which to reduce the deficit is to increase tax receipts by growing the economy. At the beginning of this Parliament our recovery was held back by a combination of the profound impact of the financial crisis, the continuing problems in the eurozone, and a bout of commodity inflation. As a result, growth picked up only in 2013, at a rate of 1.7%, improving to 2.6% in 2014. At 2.5% for 2015 and 2.3% for 2016, the OBR’s growth forecast is at the modest end of the range; if we achieved the Bank of England forecast through to the end of 2017, this would represent an additional £25 billion of GDP in real terms, a potential upside for the future. However, there are also significant downside risks to this forecast growth, beyond our control, as the UK is not immune from Greece exiting the euro in a disorderly fashion, the situation in Ukraine and Russia, potential weaknesses in emerging markets, or the market impact of how the US Fed may choose to exit its current low interest-rate policy.
Economists attribute continuing low productivity growth, both in the UK and elsewhere, to the lingering after-effects of the financial crisis. Reigniting productivity growth is essential for our prosperity, and indeed the OBR forecasts a small increase of 0.9% this year, followed by an increase of 2.5% from 2017. This is credible, if you look at the performance of some of our key manufacturing sectors, such as cars, and service sectors, such as retailing, as well as the opportunities for growth spurred by innovation in technologies such as driverless cars, medical diagnostics and 3D printing. An improved outcome depends in part on the continuing recovery of the banks, so we have a fully functioning financial system, lubricating the reallocation of the economy’s assets to their most efficient uses.
This Government have consistently pursued policies to enhance our growth and productivity through an attractive tax environment and investment in infrastructure, education, skills and training. We have introduced a national infrastructure plan, setting out how we will meet our infrastructure needs for the future. At Autumn Statement, the Government laid out the most ambitious plans in a generation for our transport infrastructure, with huge investment in roads and rail. In this Budget, we set out our strategy for our communications infrastructure, building on our current plan to deliver superfast broadband to 95% of the UK by 2017, by investing in clearing more spectrum to improve mobile services, and setting a new ambition for ultrafast broadband to become available for nearly all. We also built on our education reforms at Budget by introducing postgraduate loans for master’s and PhD students, targeted at supplying the high-end skills that employers have specified. I was delighted to see Sir James Dyson’s support for design engineering at Imperial announced earlier this week.
The tax environment is obviously crucial and we have reduced taxes to stimulate business and investment, illustrated in this Budget by our support to the oil and gas industry. We now expect the companies involved to realign their cost bases to a lower oil price to free up capital for additional investment to boost production in the UK continental shelf. The announcement last week that the Government will carry out a wide-ranging review of business rates will ensure that they are modernised to suit the 21st century.
My right honourable friend the Chancellor has personally spearheaded the northern powerhouse, a second great engine alongside London, for the UK economy. This is based on consolidating northern cities into a super-conurbation, bringing them together through investment in transport and exploiting their strengths in, for example, science and advanced manufacturing. The transport strategy being devised by Transport for the North is aimed at improving connectivity across the region, so that it is not only Manchester and Leeds which benefit but Liverpool, Sheffield, Hull, Newcastle and other cities. However, we are, of course, backing all the regions. We would be delighted to see a south-west powerhouse too.
We want more cities and local authorities following in the footsteps of Manchester and West Yorkshire, with local leaders seizing the opportunity to make key decisions and unleashing higher growth in their areas. The simple theory is that if the long-term growth rate of the slower-growing regions was raised to the forecast rate for the UK as a whole, this could add an extra £90 billion to the UK economy by 2030.
Our strategy is working. Current growth is indeed propelled by business investment, not the household debt that has fuelled past cycles. It is well spread across services, manufacturing and construction and it is geographically balanced. The favourable verdict business gave the Budget speaks for itself. However, this confidence, which is built over the long term, is easily lost by ill thought through interventions prompted by perceived political advantage which only damage the health of the British economy. I am afraid that the Opposition’s foray into the energy markets, criticised by the CBI earlier this week, is a perfect example of what not to do. We now have a situation where investors in energy are reluctant to commit to the UK until after the election—they now regard other countries as less risky, undermining the many years spent building our reputation—and where energy companies are incentivised not to pass on current cost savings to consumers now because they may have price cuts imposed on them later. That is not the way to help businesses succeed or the way to increase living standards.
I will try to shed some light on the living standards debate that the Budget has stimulated. Let us start with the most important fact: the reason living standards fell was the financial crisis and it is people at the bottom of the income scale, particularly those who lost their jobs, who were hit the hardest. The reason living standards have taken some time to recover was the depth of that crisis. In the long run, only productivity improvements will drive the rise in living standards we all seek. That is why growth policies are key.
During the difficult post-crisis period, the Government intervened in the economy in many critical ways to support living standards. Keeping the banks afloat was step one, accompanied by monetary easing to maintain interest rates at record low levels, protecting people with mortgages. The most powerful support to living standards has been the extraordinary performance of the jobs market. Some predicted that adherence to deficit reduction could only result in a jobs Armageddon. That could not have been more wrong. While 400,000 public sector jobs have disappeared, more than five times as many private sector jobs have been created, mostly full-time and skilled. The number of those on jobseeker’s allowance has fallen by 700,000. The youth claimant count is at its lowest since the 1970s. These are not dry statistics. These are real people whose lives have been transformed, and this is a nationwide phenomenon, with all regions benefiting. Alongside job creation, we have put more cash in people’s pockets.
Lord Lea of Crondall (Lab)
I am grateful to the Minister for giving way but he has just made two comments that are very hard to reconcile. First, he said that living standards depend on productivity growth. He then referred to jobs growth. However, there has been no productivity growth; in fact, the growth in productivity since 2010 has been zero. How does the Minister think that living standards will rise fundamentally if we do not make productivity growth our top priority, as gross national product growth is not the same thing?
Lord Deighton
I entirely agree with the noble Lord. My reference to employment simply acknowledged that having a job enables people to protect their living standards. I acknowledge that productivity has not improved in recent years. That is the focus for the future. I have said that productivity is still too low; I agree with the noble Lord on that. It is the key to raising living standards.
As I said, we have put more cash in people’s pockets. We have consistently raised the personal tax allowance from £6,457. That is set to rise to £11,000 in 2017. That enhances take-home pay—a change that has dramatically improved the incentive to work—and has benefited 27 million people and taken 4 million out of tax altogether. We have frozen fuel duty and council tax as well as reducing energy bills. We protected pensioners with the triple lock, so that pensioner poverty is the lowest ever, as well as introducing radical changes to both pensions and savings, which suffer in periods of low interest rates, to give savers much more flexibility and remove most of them from tax altogether.
At the beginning of this Parliament, inflation was eroding living standards, driven above 5% in 2011 by global commodity prices. This position has reversed with inflation now at zero. Motor fuel prices have fallen by 16% and food prices by more than 3%. This is different from the kind of stagnation we have seen on the continent. As a result, we are today seeing rising wages outpace the level of falling inflation. The OECD and the IFS both endorse the use of real household disposable income per head as the best measure of living standards because it includes the effect of tax and benefit changes and employment. On this basis, the latest OBR forecasts show living standards rising at their fastest rate in 14 years. They are projected to improve by over 3% in 2015, leaving them higher in 2015 than they were in 2010 and set to rise every year this decade.
I am proud of this Government’s record in rescuing our economy from the perilous condition we inherited, and I am excited by the prospects of what can be accomplished if we are given the opportunity to see our plan through.
Finally, noble Lords will be aware that this week the Government plan to submit their convergence programme to the European Commission, setting out our fiscal plans. It makes sense to combine a review of this programme with our Budget debate, given their identical subject matter.
Lord Deighton
I thank noble Lords for an excellent and wide-ranging debate. When I first did a Budget debate, the discussion was all about whether growth would ever return. Today, we are discussing whether having the fastest-growing economy in the world, creating 2 million jobs and having zero inflation is a good thing or not. I will drill a little more into the detail on that.
I had thought that we were talking about this Budget but we have also had an interesting discussion because the party opposite has wanted to wallow in whether it was responsible for the financial crisis, which is an open goal that I can scarcely resist. I think everybody agrees that the recession was caused by the financial crisis, starting off in the American mortgage system. However, as my noble friend Lord Northbrook said, the rate at which public spending had expanded by the time we got to the financial crisis left this economy more exposed than it should have been. This was a problem for all recent Governments, who left us too exposed to the financial sector.
The other point, which is not often raised, is that we clearly had very poor financial regulation in the financial crisis. That exacerbated the problems with the banks. I am afraid that the previous Government were the architects of a highly flawed regulatory system, which failed to detect many of the problems. While I am not saying that they are completely guilty, I am saying that there are some very serious cases to answer.
Lord Stevenson of Balmacara
I appeal to the noble Lord to move on in this debate because we are going to get nowhere with it. The regulation he is talking about was of course fully endorsed by his party. It was absolutely thrust on us but with pressure on all sides to do it. He cannot evade or duck the responsibility in this. This was something that happened outside the UK. It was brought into the UK and we did our best about it. We have already heard my noble friend Lord Layard and others explain how we managed to get the economy back on track. I think that it would be worth moving on.
Lord Deighton
I am very happy to move on. I did not really bring it up. I was just expanding my perspective on a topic that many noble Lords opposite had rehearsed.
With that incentive, I shall move on to living standards. I think everybody accepts that the financial crisis has created an extraordinarily difficult period. As I said in my opening remarks, it affects people at the bottom end of the income spectrum, people with other difficulties to cope with, more than anybody else. The noble Baronesses, Lady Thornton and Lady Smith, were eloquent on some of those issues.
Lord Lea of Crondall
Would the Minister like us to infer that it did not require any touch on the tiller from the Government for that inequality to increase, and that it was to do only with something inherent in the nature of the economy that we have had this growing inequality? Surely what the Government have done has given a massive boost to inequality.
Lord Deighton
I will try to deal with facts rather than with emotion. I referred earlier to what I think is one of the better legacies of the Government: the transparency with which we measure things. We do it at every fiscal event. The distribution impact of the fiscal changes under this Government has been more favourable to the bottom end of the income spectrum than in any year of the previous Labour Government. That is what the statistics tell you.
Lord Lea of Crondall
Would the Minister like to tell us what has happened to the top-to-bottom ratio?
Lord Deighton
Inequality has not increased at all between the previous Government and this Government. That is not to diminish the problems that people at the bottom end of the scale face. This Government have tried to deal with the root causes of poverty: worklessness, low earnings and poor education. That is where the Government’s premier programmes have been addressed. The number of workless households has fallen by about 600,000 under this Government. Many noble Lords, including my noble friend Lord Shipley, have commented on the situation with respect to employment and the number of jobs that have been created. The noble Baroness, Lady Smith, asked how tax receipts could come down when employment went up. The reason was that we moved up personal allowances and took people out of tax. It is as simple as that.
This Government intervened in many critical ways to protect living standards for people. I shall not go through the list again because we do not have time. The noble Baroness, Lady Thornton, and the noble Lord, Lord Davies, cited zero-hours contracts. They represent just over 2% of the total workforce. Of the jobs created, the majority are at the high or middle end and the vast majority of them are full time. The party opposite should accept that creating 2 million new jobs is okay. It does not have to keep describing what the problems with it are. It is actually a good thing; it is part of the recovery. It is much better to have those people in work. As I have said, the jobs are principally at the middle and high end and they are permanent jobs.
Our focus has been on trying to protect the young and old. We have protected pensioners through the triple lock. The measure again tells us that pensioner poverty is at an all-time low. I listened carefully to the comments made by the noble Baroness, Lady Thornton, about disability. Probably my most rewarding experience in the past 10 years was working on the Paralympics and seeing the difference that they made to people’s perception of the ability in disability. That is a legacy that, on a cross-party basis, we should absolutely build on.
I shall talk about spending cuts as there is significant concern about the potential impact of continuing, in the words of the noble Lord, Lord Layard, the dismantling of public services. That is absolutely not the intention of spending taxpayers’ money more carefully, of looking at ways of reforming public services, of being focused on the outputs and of being more efficient about the inputs that go into them. There is still significant opportunity for reform in delivering public services more efficiently, and that is where the focus of the spending cuts should and will be.
The noble Viscount, Lord Hanworth, asked where privatisation fitted into it. I make no apology for this party being careful with taxpayers’ money. If you really want to look at the record of this Government, we adhered precisely to the spending plan we set out five years ago. We have delivered that in a disciplined way with the public’s view of public services being that they have in fact improved. That is the evidence.
A number of noble Lords, including the noble Lords, Lord Bilimoria and Lord Davies, referred to the defence budget. Let me restate that at £34 billion, we have the second-largest defence budget in NATO. It is the largest in the EU. We are currently spending 2% and we will decide what to do at the next spending round. Again, my preferred approach to spending is that we have to have a plan and understand what we are trying to accomplish, and the budget numbers flow from that. It is about what you are trying to accomplish. I am delighted that the right reverend Prelate the Bishop of Portsmouth was able to acknowledge the tripling of the church roof fund.
Let us switch to the deficit. It is at the heart of the differences in fiscal policy between the parties. We have discussed the case put by the noble Lord, Lord Skidelsky, over the past few years. I was taught Keynesian economics at the feet of the noble Lord, Lord Eatwell, so I certainly understand the theory, but in 2010 this country had a massive, unsustainable deficit and the practical situation was that action needed to be taken to reduce that deficit in order for the public and the markets to have confidence. Frankly, we were faced with no other option but to deal with that as the primary objective and responsibility of government at that time. Had we not dealt with it as effectively as we did, it would have been an irresponsible act and would have left us substantially exposed to future debt costs. It is a bit like a vastly overweight person saying, “I’m going to start a diet in two years’ time, but in the mean time, keep serving me the chips and chocolate”. That is how it would have been.
Lord McFall of Alcluith
The Minister talks about the debt, but let us think of the debt that they inherited in 2010, which was £870 billion. That figure has now almost doubled to more than £1,500 billion. Why has that debt doubled in a period when there has been a mania from the Tory Front Bench about having to pay off the debt?
Lord Deighton
Technically what happened was that we stuck to the spending plans, growth did not recover as we expected, principally because the rest of the world was in recession, so the tax receipts did not come in, and the deficit continued to go up. That is the reality of the situation. If you listen to the two sides on the deficit argument, one is asking why we have not cut fast enough and the other is saying that we have to cut a little slower. I think that, given the circumstances, my right honourable friend the Chancellor has navigated the balance very effectively. My noble friend Lord Flight made that point.
Lord McFall of Alcluith
The Minister has failed to answer. In the light of his failure to answer, will the Government adopt a more modest approach to this situation and recognise their failure on debt over the past five years and the kid on that they are trying to exercise on the British public?
Lord Deighton
The Government’s strategy is crystal clear. The benefit of getting the deficit under control is absolutely worth it in terms of fixing the roof while the sun is shining. That is the philosophy. To do it over a two-year period and to get control of our public finances so that we can then grow and focus on, for example, the productivity argument I shall speak about in a minute is the critical part of the argument.
Lord Skidelsky
Does the noble Lord not accept the OBR’s conclusion that the austerity policy slowed down the rate of growth of the economy in 2011-12 and 2012-13? If that is the case, is it not a bit neglectful of him not to take into account the effects of the spending cuts on the economy?
Lord Deighton
That is consistent with my earlier response, that we did not have that choice because the markets would not have allowed us to continue with the scale of deficit we had.
Many noble Lords made very useful and interesting contributions on the housing market: the noble Lords, Lord McKenzie, Lord Best, Lord McFall, Lord Whitty, the noble Baroness, Lady Valentine, and the noble Lord, Lord Graham, who, with mobile homes, may well have the solution to some of our supply problems. The current status is that over 500,000 homes have been built during this Parliament. Of course, that is also tied to the financial crisis, but planning approval and housing starts are now at their highest for seven years, so they are benefiting from part of the recovery.
I agree with the general sentiment of most noble Lords who contributed on this topic that supply is the principal problem, and that dealing with our planning system, incentivising local authorities to build more, using both sticks and carrots in the process, is absolutely key to the way ahead. The noble Lord, Lord Best, suggested that there was nothing in the 2015 Budget for housing supply, but then referred to all the things in the small print that are going on. The demand-side interventions by my right honourable friend the Chancellor have been very effective; Help to Buy has been a successful policy—more than 80,000 people now own homes who would not have been able to do so before. The OBR and the Bank of England are comfortable that the impact of improving demand in that way has not been highly inflationary to the house price market.
There were lots of comments on pensions and savings, from my noble friends Lord Freeman and Lord Flight—who talked about the savings rate in a very interesting and thoughtful contribution about what we need to do about the long-term savings rate and how important it is—and from my noble friend Lord Northbrook and the noble Lord, Lord McKenzie.
One of the key questions all noble Lords asked was about where we are on Pension Wise, which is the service provided by government to provide guidance to people who are now faced with these new flexibilities. There are three potential channels: the digital channel—noble Lords can go home tonight and look at that, as it is up and running—which gives a description of what the flexibilities are; the telephone channel which is managed by the respected organisation TPAS—you can call up a call centre now and book an appointment with TPAS to have a 45-minute telephone session; and you can also call up Citizens Advice, which is the respected brand that delivers the face-to-face service. Therefore, each of those organisations—TPAS and Citizens Advice—has hired and put its people through a training programme so that they are ready to meet the demand. Of course, that is a very challenging thing to work out, because it is very hard to work out how many people will want what kind of advice, and when. However, we have done everything we can to ensure that that service will be available with the right capacity and the right quality—and to take on board my noble friend Lord Freeman’s point, with support from the FCA there will be plenty of opportunities to have a look at how it is working, and there will be a lot of work around making sure that potential scammers cannot be successful.
It is useful to be critical about growth and productivity performance, because it is important to focus on what we can do to make it better. We should remember that we are growing faster than anybody else at the moment, so it is not all bad news.
My noble friend Lord Taverne and the noble Lord, Lord Hunt of Chesterton, talked about the role of foreign capital coming in—hot money, as my noble friend referred to it. Generally speaking, this economy has enormously benefited from being an open economy, with the advantages that come with that. The noble Lord, Lord Hunt, referred to Hitachi, which has come here to assemble the trains, and has also decided to set up in the UK as the base for its European rail business. So, generally speaking, operating as an open economy has been a hugely successful thing for this economy.
Lord Taverne
Would my noble friend deal with the question of the danger of the inflow of hot money, which makes us very vulnerable indeed if there is a crisis of any kind? Is not the deficit on the balance of trade a very serious failure of the present Government?
Lord Deighton
There is a deficit on the balance of trade, although the most recent figures two weeks ago were the strongest that they have been for a very long time. I accept that our relative export and import performances are not as strong as they should be, but I would not put it down to a failure of this Government. It is a chronic long-term challenge, which British industry has to face up to.
Hot money is a complicated subject. In terms of investing and having ownership shares in our big businesses, I frankly do not find that particularly disturbing, because we are in a global market and those ownership positions are traded very actively. As I said, Britain has benefited on a net basis and manages that exposure very effectively.
The noble Lord, Lord Northbrook, asked what the future was for a business rates review and the annual investment allowance. The Chancellor said that that allowance would be looked at in the Autumn Statement next year.
There was a strong consensus for more decentralisation around the House—the noble Baroness, Lady Valentine, for London and my noble friend Lord Shipley, looking at the north-east.
My noble friend Lord Thomas referred to the tidal lagoon in Swansea, and I am delighted that that has moved into the next stage of negotiation. I was also delighted that he pointed out the work that has been done for farmers to help with their volatility by spreading out their taxes over a five-year period.
I am very much in sympathy with the perspective of the noble Lord, Lord Stevenson, on the arts, which is an important part of life and a great national strength. Through the tax system we are doing quite a lot to support the film industry.
In conclusion, I thank noble Lords not just for this debate but over the years that I have been at the Dispatch Box, when we have had very interesting exchanges. I have learnt a lot and improved my perspective from it. I thank my noble friend Lord Newby, who has been my colleague at the Treasury and has been magnificent at the Dispatch Box.
Despite the argument that we have been having, the British economy is in a very different situation five years on from the one that we inherited. We have stabilised the public finances. There is a very valid debate about the pace at which deficit reduction continues from here, but the circumstances of the economy will have a great deal to do with that, as they did over the past five years. For me, the focus is really on two things, both of which I would describe as productivity challenges. One is in the public sector, delivering great outcomes but in a much smarter way with more limited inputs. The same applies to the private sector, where the Government’s job is to create an environment in which we can unleash the inherent dynamism of that sector and, frankly, let them get on with it.