Lord Agnew of Oulton
That the Grand Committee takes note of the economy in the light of the Budget Statement.
The Minister of State, Cabinet Office and the Treasury (Lord Agnew of Oulton) (Con)
My Lords, the Budget and spending review that the Chancellor set out last week delivers a stronger economy for the British people. It shows what this Government are about: investment in a more innovative, high-skilled economy, better public services, backing business, help for working families with the cost of living, and levelling up. It does not draw a line under Covid but it begins the work of preparing for an invigorated economy beyond Covid.
There are reasons for optimism. The Office for Budget Responsibility says it now expects our recovery to be quicker. It forecasts the economy to return to its pre-Covid level at around the turn of the year, several months earlier than it thought last March. In July last year, at the height of the pandemic, unemployment was expected to peak at 12%. The OBR now expects unemployment to peak at 5.2%. That is some 2 million fewer people unemployed than originally feared. Wages are rising. Compared to February 2020, they have grown in real terms by almost 3.5%. In the depths of the worst economic crisis on record, the Government set out a Plan for Jobs. The OBR forecasts confirm that the plan is working.
The Chancellor said last week that he made four fiscal judgments in the Budget and spending review: first, that the Government will meet our fiscal rules with a margin to protect ourselves against economic risks; secondly, that we will continue to support working families; thirdly, that as well as helping people at home, our improving fiscal position means we will meet our obligations to the world’s poorest, with forecasts showing that we are scheduled to return to spending 0.7% of our national income on overseas aid in 2024-25; and, fourthly, that there will be a real-terms rise in overall spending for every department, with an increase in total departmental spending over this Parliament of £150 billion.
At the start of this Parliament, resource spending on healthcare was £133 billion. Last week’s spending review confirms that by the end of this Parliament it will increase by £44 billion to over £177 billion a year. The extra revenue we are forecasting to raise from the health and social care levy is going direct to the NHS and social care, as promised.
As well as funding to deliver the Prime Minister’s reforms to social care, we are providing local government with new grant funding over the next three years of £4.8 billion. We are investing more in housing and home ownership, with a multiyear housing settlement totalling nearly £24 billion.
Last week’s Budget funds our ambition to recruit 20,000 new police officers. It provides an extra £2.2 billion for courts, prisons and probation services. It commits £3.8 billion to the largest prison-building programme in a generation.
We are delivering on our commitment to schools, with an additional £4.7 billion by 2024-25 for the core schools budget in England, over and above the 2019 spending review settlement for schools in 2022-23. Taken together, this is broadly equivalent to a cash increase of over £1,500 per pupil by 2024-25 compared to 2019-20.
As we level up public services, we are also levelling up communities—restoring the pride people feel in the places in which they live. To do that, we are providing £560 million for youth services, over £200 million to build or transform up to 8,000 community football and multiuse sport pitches across the UK, and the funding to turn more than 100 areas of derelict land into new green spaces. The first round of bids from the levelling-up fund have now been allocated. There is £1.7 billion to invest in the infrastructure of everyday life in over 100 local areas, with £170 million in Scotland, £120 million in Wales and £50 million in Northern Ireland.
Levelling up is also about protecting our culture and heritage. This is why we are investing £850 million to protect museums, galleries, libraries and local culture, and why over 100 regional museums and libraries will be renovated, restored and revived.
This is a Budget and spending review for the whole United Kingdom. Through the Barnett formula, last week’s decisions increase Scottish Government funding in each year by an average of £4.6 billion, Welsh Government funding by £2.5 billion, and funding for the Northern Ireland Executive by £1.6 billion. This delivers, in real terms, the largest block grants for the devolved Administrations since the devolution settlements of 1998.
The whole of the United Kingdom will benefit from the UK shared prosperity fund. Over time, we will ramp up funding so that total domestic UK funding will match EU receipts, averaging around £1.5 billion a year.
As we come out of the worst economic shock we have ever seen, the Government must choose whether to retrench or to invest. This Government choose to invest. Infrastructure connects our country and drives productivity. That is why our national infrastructure strategy is investing over £130 billion in economic infrastructure such as roads, railways, broadband and mobile. To connect our towns and cities, we are investing £21 billion in roads and £46 billion in railways. The Prime Minister promised an infrastructure revolution, and this Budget delivers one.
Investment in our infrastructure is just the first step. We will invest more in innovation. The Chancellor last week confirmed that we will maintain our target to increase R&D investment to £22 billion. Combined with tax reliefs, total public investment in R&D is increasing from 0.7% of GDP in 2018 to 1.1% by the end of the Parliament. Our net-zero strategy, meanwhile, is also an innovation strategy, investing £30 billion to create the new, green industries of the future. Innovation comes from the imagination, drive and risk-taking of business.
The Chancellor last week announced that we will consult on further changes to the regulatory charge cap for pension schemes, unlocking investment that will improve member outcomes, while protecting savers. He increased the British Business Bank’s regional financing programmes by over £1.6 billion, expanding their coverage and helping innovative businesses get access to the finance they need across the whole United Kingdom.
If we want greater private sector innovation, we need to make our research and development tax reliefs fit for purpose. The reliefs need to reflect how businesses conduct research in the modern world. The Chancellor last week expanded the scope of the reliefs to include cloud computing and data costs.
Last year, companies claimed UK tax relief on £48 billion of R&D spending. Yet UK business investment was around half that, at just £26 billion. This is unfair on British taxpayers. It puts us out of step with places such as Australia, Canada and the USA, which have all focused their R&D tax reliefs on domestic activity. From April 2023, we are going to do the same and incentivise greater investment here at home.
As well as investing in infrastructure and innovation, there is one further part of our plan for growth that is crucial: providing a world-class education to all our citizens. Higher skills lead to higher regional productivity, and higher productivity leads to higher wages. The Budget and spending review invest in the most wide-ranging skills agenda this country has seen in decades. We are increasing skills spending over the Parliament by £3.8billion—a cash increase of 42%.
We are expanding T-levels, building institutes of technology, rolling out the Prime Minister’s lifetime skills guarantee, upgrading our FE college estate, quadrupling the number of places on our skills bootcamps and increasing funding for apprenticeships. The Government have also announced a new UK-wide numeracy programme, Multiply. Worth £560 million, Multiply will improve functional maths skills to help change people’s lives across the whole United Kingdom.
The Prime Minister said last month:
“We are not going back to the same … broken model with low wages, low growth, low skills and low productivity, all of it enabled and assisted by uncontrolled immigration”.
Achieving greater productivity is not just a job for government. It is a collaborative effort, with the Government providing the infrastructure, employers moving away from relying on low-paid staff from abroad and employees embracing the opportunity to upskill. This Budget commits the Government to delivering on their part of the bargain.
We want this country to be the most exciting and dynamic place in the world for business. For that reason, the Chancellor announced a series of other changes to our tax system, including reforming our tonnage tax regime to make it simpler and more competitive and reducing air passenger duty for domestic flights from April 2023 to support the union. From April 2023, there will be a new ultra-long-haul band in air passenger duty, covering flights of over 5,500 miles, with an economy rate of £91. Less than 5% of passengers will pay more, but those who fly furthest will pay the most.
Our approach to corporate taxation strikes a responsible balance between funding public services and encouraging the investment that we need for a stronger economy. For that reason, the Chancellor announced that the £1 million annual investment allowance will not end in December as planned but be extended to March 2023. He also announced that we will retain the bank surcharge within corporation tax of 3%, meaning that the overall corporation tax rate on banks will, in 2023, increase from 27% to 28%.
Business rates are receiving a significant overhaul. The system will be fairer and timelier with more frequent revaluations occurring every three years. We are introducing support to encourage businesses to adopt green technologies such as solar panels and a new business rates improvement relief. The Chancellor announced that next year’s planned increase in the multiplier will be cancelled—a tax cut for business worth around £4.6 billion over the next five years. To help businesses hardest hit by the pandemic, he announced, for one year, a new 50% business rates discount for eligible businesses in the retail, hospitality and leisure sectors up to a £110,000 per business cap—support worth almost £1.7 billion.
The Budget takes a number of other important steps. It includes the most radical simplification of alcohol duties for over 140 years. This includes a further freeze to all alcohol duty rates for the coming year. The cancellation of the planned rise in fuel duty means a saving over the next five years of nearly £8 billion. It announced that public sector workers will see fair and affordable pay rises across the whole spending review period, as we return to the normal, independent pay-setting process. It takes action to help the lowest paid by accepting the recommendation of the Low Pay Commission to increase the national living wage by 6.6% to £9.50 an hour, meaning that a full-time worker will receive a pay rise worth approximately £1,000 a year. Finally, to make sure that work pays, it cuts the universal credit taper rate by 8%, from 63% to 55%. Because the Budget also increases the work allowance by £500 per year, this is an effective tax cut worth over £2 billion next year. Nearly 2 million families will keep, on average, an extra £1,000 a year.
To conclude, this Budget and spending review begins the work of preparing for a new economy post Covid. It helps with the cost of living; it levels up to a higher-wage, higher-skill, higher-productivity economy; and it builds a stronger economy for the British people. I beg to move.
Lord Agnew of Oulton (Con)
My Lords, it is a privilege to close this debate on behalf of the Government. Let me thank noble Lords for the many insightful and considered contributions that we have heard today. Given the number of speakers and the time that I am allocated, I will try to respond to as many of them as possible, but forgive me if I do not cover everybody.
On the economic and fiscal picture, the noble Lord, Lord Fox, raised the issue of inflation. The Bank of England is responsible for controlling inflation, and CPI inflation has averaged around its 2% target rate since the Bank became responsible. The Government are taking targeted action worth more than £10 billion over the next five years to help families with the cost of living, and the Plan for Jobs is helping people get into work and gain the skills they need to progress, which is the best approach to managing the cost of living in the longer term.
The noble Lord, Lord Tunnicliffe, is worried about real wage growth. Wages have continued to grow since the start of the pandemic, which, frankly, none of us would ever have conceived even if we go back a year, but they are now 4.4% higher compared to February of last year.
Looking at the labour market more broadly, the OBR has revised down the unemployment rate peak on at least two occasions, to 5.2% for the end of this year, which is down from 6.5% in the March 2021 forecasts and from 7.5% in the November 2020 forecasts—that is 460,000 fewer people expected to be out of work than in only March this year.
My noble friend Lord Lamont asked about the approach to the quoting of debt figures for the Bank of England. The Government have chosen to focus on public sector net debt excluding the Bank of England because excluding the Bank’s contribution to public sector net debt—for example, through the QE programme —reflects the impact of government decisions. The IFS has said that
“it is often appropriate to focus on debt excluding the Bank of England when evaluating the fiscal situation.”
Public sector net debt is falling and by a larger amount again over the forecast horizon. It peaks at 98.2% of GDP this year and then falls in every year of the forecast to reach 88% in 2026-27. The Treasury will continue to monitor public sector net debt excluding the Bank of England, providing a better overview of the public finances.
The noble Lord, Lord Londesborough, asked about supply shortages exacerbating inflation. The Government are working hard with international partners to tackle this problem. We must acknowledge that this is not a local issue; it is happening across the world. When the whole world has woken up from Covid, the enormous suppressed demand combined with the huge fiscal interventions, with money in people’s pockets, means that people are bursting back into spending much quicker than anyone could have imagined.
We are trying to support those at the more vulnerable end with increases in the national living wage and the Household Support Fund. The fund is ring-fenced so at least 50% will be spent on households with children. The fund has been set at a level that will allow local authorities in England to support, for example, 3 million to 4 million vulnerable households with an average payment of £100 each.
The noble Lord, Lord Eatwell, asked about the increased holding of gilts leading to higher interest rates. Given that I have heard from the noble Lord, Lord Turnbull, that the noble Lord is one of the cognoscenti, I must be careful in how I respond. As I understand it, while debt is forecast to fall over the medium term, it will remain significantly above pre-pandemic levels. That means that we are vulnerable to shocks, which means that we would be spending a lot more money on debt servicing. A 1% increase in both inflation and interest rates would increase spending on debt interest by around £22 billion in 2026-27, which is almost twice the impact than if it had been in 2014.
The noble Lord, Lord Davies of Oldham, and my noble friend Lady McIntosh are concerned about energy prices. Ofgem’s energy price cap has protected consumers during the recent fluctuation in gas prices. Millions of low-income households will be supported with the cost of essentials through the warm home discount scheme, which helps 2.2 million low-income households with their energy costs, and the winter fuel programme, which provides £200 towards energy bills for households with a member at or above state pension age and £300 for households with a member at or above 80 years of age, a significant £2 billion contribution to winter fuel bills.
The noble Lords, Lord Fox, Lord Desai, Lord Turnbull, Lord Rooker and Lord Tunnicliffe, and the right reverend Prelate the Bishop of Newcastle are all concerned about universal credit and I very much hear their concerns. However, the Government have always been clear that the £20 uplift was a temporary measure to support households whose incomes and earnings were affected by the economic shock of Covid. The taper means that 1.9 million working households will be able to keep substantially more of what they earn. That effectively represents a tax cut worth around £2.2 billion a year in 2022-23 for the lowest-paid in society.
Linked to that is the concern of the noble Lord, Lord Tunnicliffe, that there are many people on universal credit who are not in work. This comes back to the whole jobs revolution. We seem to forget that it is an extraordinary position to have so many vacancies in our economy. The Government are building on the success of the plan for jobs with a total of £6 billion over the SR period providing targeted additional support to help these at-risk groups to find work, including those coming off furlough, younger and older age groups, the long-term unemployed and people with disabilities.
The national living wage is increasing by 6.6% to £9.50 an hour in April next year, which will benefit 2 million people. Since its introduction in 2016 the national living wage has increased the pre-tax earnings of a full-time worker by over £5,000 a year. This increase is consistent with the Government’s target to go even further and raise the national living wage to two-thirds of median earnings for over-21s by 2024, provided that economic conditions allow.
The noble Lords, Lord Davies of Oldham and Lord Londesborough, and the right reverend Prelate the Bishop of Newcastle asked about educational recovery. The SR21 reaffirms and expands the Government’s commitment to helping the most disadvantaged pupils recover learning lost due to the pandemic, bringing total investment to specifically support educational recovery to £4.9 billion since the academic year 2020-21. It provides more than £3.2 billion over the SR period. This includes a £1 billion recovery premium for the next two academic years for schools. Primary schools will continue to benefit from an additional £145 per eligible pupil, while the amount for eligible pupils in secondary schools will nearly double. In broad terms, this will mean an average secondary school could attract around an additional £70,000 a year.
Many noble Lords mentioned skills. I want to provide a bit of detail on the Multiply scheme that I touched on briefly in my opening speech. This will provide £560 million across the SR to give people the opportunity to develop their numeracy skills. We are targeting around half a million adults. What is important about this is that adults with poor numeracy are more than twice as likely to be unemployed at the age of 30 as those with competent numeracy. Getting these numeracy skills is one of most valuable things we can do to help people get on. It is the equivalent of a level 2 numeracy standard. Statistics show that this will increase wages by an average of 14% after seven years, compared with 4% for that wider cohort.
This is one example of dealing with productivity, which the noble Lord, Lord Londesborough, and many other noble Lords raised. Our highest priority is to unlock the addiction we have had in this economy to low wages. I am optimistic that we will, because the ability to take the easy way out by bringing in cheap eastern European labourers will no longer be available. Noble Lords will know that, until a couple of years ago, employers were not even advertising jobs in the UK; they were just using agencies in eastern Europe and bringing people over wholesale. That has now stopped.
Some £1 billion will be invested across the SR to help children and young people get the best start. This includes £500 million for start for life services and family help, including new family hubs, investment in maternity services and infant and perinatal health, and a £200 million increase in funding for the existing Supporting Families programme to reach 300,000 families. There will be 300 new youth facilities as part of the £560 million funding for youth services.
I turn to net zero. The noble Lord, Lord Eatwell, and the noble Baroness, Lady Kramer, raised concerns. The fiscal consequences of the transition to net zero will need to be managed in line with the Government’s broader fiscal strategy. As the economy recovers from the pandemic, borrowing will be reduced to sustainable levels.
On the concerns raised by the noble Baroness, Lady Kramer, that there were not many initiatives in the Budget, I want to put a few of them on record. For example, there is a much more ambitious focus on nuclear energy, with £1.7 billion direct investment to enable a large-scale nuclear project. We confirmed a £120 million future nuclear enabling fund. There was £155 million for critical nuclear infrastructure; a £385 million advanced nuclear fund; £380 million for the offshore wind sector and for putting in place a more efficient approach to connecting offshore windfarms; and a doubling of the spending on energy innovation with confirmation of a total of £1.3 billion in energy innovation funding. There are similar items on buildings and transport, but I do not have the time to deal with all of them. I think that that we have led the G20 in our carbon reductions in the last 15 years and I feel that the noble Baroness, Lady Kramer, is being a little bit hard on us.
The noble Lord, Lord Eatwell, and my noble friends Lord Naseby and Lady Noakes worried that, even though we are increasing taxation, we will not restore health spending levels to the 2010 inflation-adjusted rate. To fund the significant increase, the Government have taken the very difficult decision of the new 1.25% health and social care levy. We have also increased the rate of dividend tax by 1.25% to support that package. This will allow for around £13 billion average annual investment over the next three years to tackle the elective backlog in the NHS as it recovers from Covid. Alongside this, the Government have reaffirmed their commitment to 50,000 additional nurses and 50 million primary care appointments. We have already seen number of nurses increase by 21,000 since June 2019.
While the Government have taken the difficult decision to raise taxes, the health and social care levy is a progressive way to raise the money for households which will benefit from further investment. Analysis from the Resolution Foundation and the Government shows that our policies are set to boost incomes for those at the bottom of the distribution and that higher taxes will mostly impact middle to higher-income households.
The noble Lord, Lord Fox, had some queries about levelling up. Levelling up means making sure that people’s opportunities are not limited by the areas in which they live. Put simply, we are trying to bring opportunities to talent, which is something this country has been very poor at in the past. We are doing this via targeted action worth more than £10 billion over the next five years, which I referred to earlier. We are spreading opportunity and improving public services by investing £3.8 billion in skills over the Parliament by 2024-25 and providing funding for at least 100 community diagnostic centres. We are boosting living standards by launching the new £1.4 billion global Britain investment fund, which will help spread economic opportunities more evenly across the UK. We are empowering local communities and leaders, for example through the UK shared prosperity fund, which is worth more than £2.6 billion over the spending review period, to help people access new opportunities in places in need, working in partnership with local leaders. The levelling up White Paper will set out further detail on how the Government are levelling up in the UK.
The noble Lord, Lord Razzall, asked about the impact of EU trade. The Chancellor has been clear in his view that the agility, flexibility and freedom provided by Brexit will be more valuable in the 21st-century global economy than just proximity. As noble Lords will know, we are already in discussions with Australia and New Zealand, which form an important part of the CPTPP trade bloc. We aspire to join that trade bloc, which is growing far more quickly than any activity in the EU.
The noble Lords, Lord Fox, Lord Sikka and Lord Londesborough, and my noble friend Lord Risby asked about investment for business. The Government are putting our plan for growth into action. The Budget and SR provide support to the UK’s most innovative firms, leveraging private sector investment and driving innovation to boost productivity across the UK. This includes providing £2.5 billion for Innovate UK core funding and launching the scale-up, high potential individual and global business mobility visas to attract highly skilled people. It also includes funding the delivery of Help to Grow schemes, which will enable more than 100,000 small and medium-sized businesses to boost their productivity, supporting the Made Smarter adoption programme to boost the productivity of manufacturing and SMEs and the £1.4 billion global Britain investment fund, which will support new investment in manufacturing industries.
On R&D tax reliefs, in this SR the Government are increasing direct spending on R&D to record levels, providing £20 billion per year across the UK in 2024-25. On the concerns about Horizon, in the event that the UK is unable to associate to Horizon Europe, the funding allocated to the Horizon association will go to UK government R&D programmes, including those to support new international partnerships.
It is also worth reminding noble Lords that the tax relief granted for EIS investments has become a significant way of investing in early-stage businesses. In 2015-16, around 3,500 companies raised funds from that mechanism, and that rose to 4.200 in 2019-20—which is just under £2 billion for those years.
On tax and business rates, the noble Lords, Lord Fox, Lord Turnbull and Lord Davies of Oldham, and my noble friends Lord Flight and Lady McIntosh of Pickering are concerned that people will be worse off because of tax measures such as the new levy. The highest-earning 15% will pay more than half of the revenue for the new social care levy, while 6.1 million people earning less than the primary threshold—that is £9,880 in 2022-23—will not pay the levy. If we had used income tax rates as the base for the levy, rates would have had to rise by more than 1.25% and therefore the impact on individual taxpayers would have been higher.
The decision to maintain the personal allowance and the higher rate threshold at 2021-22 levels out to 2025-26 was a progressive approach to fund good-quality public services and rebuild the public finances after the huge intervention of the Covid crisis. Nobody’s take-home pay will be less than it is now as a result of this policy, and for most taxpayers any real-terms losses are small next year. The average basic rate taxpayer will be around £75 worse off in real terms in 2022-23.
The Government have raised the personal allowance by nearly 50% in real terms in the last decade. It is the highest basic personal tax allowance of all countries in the G20 and remains one of the most generous internationally. A typical basic rate taxpayer will still be more than £600 better off in 2025-26 than they would have been if the Government had not taken this action to increase the personal allowance above inflation since 2010-11.
We have spent more than £350 billion on Covid mitigation, and freezing indexation is part of the way of addressing this. The income tax system is still highly progressive, with the top 5% projected to pay nearly 50% of all income tax in 2021-22 and the top 1% projected to pay more than a quarter of all income tax in that year. Even with maintaining income tax threshold levels, around 80% of income tax payers will pay no more than the basic rate.
The noble Lords, Lord Fox and Lord Shipley, and my noble friend Lord Flight asked about business rates. The business rates review provides £750 million-worth of support over the next five years for businesses to improve and decarbonise their properties, supporting them to become greener. The review commits to changes to improve the business rates system, such as more frequent revaluations to make business rates more adjustable to economic change and hence fairer for small businesses in the longer term. From 2023, the Government will introduce a new business rates improvement relief, so no business will face higher business rate bills as a result of qualifying improvements to a property they occupy for 12 months. This will enable businesses to adapt to meet rising demand and make improvements to their premises that support net zero and enhance productivity as employees return to the workplace.
On the APD, we have decided to introduce a new reduced domestic band to support regional connectivity. The noble Lord, Lord Balfe, spoke about supporting the industry. Domestic aviation accounted for less than 1% of the UK’s total emissions in 2019, and we have taken considerable action to support decarbonisation of the sector, including investment of £180 million at SR21 for a competition to support the commercialisation of sustainable aviation fuel plants in the UK, the launch of the Jet Zero Council and the inclusion of aviation within the UK emissions trading scheme.
To wrap up, in this debate the Government have been criticised by noble Lords—I was going to say “opposite me”, but we are in a mixed economy today. The noble Lord, Lord Tunnicliffe, is right that I have not been met with universal adulation, but we all know that we do not go into politics for gratitude. My noble friend Lord Balfe and the noble Lord, Lord Rooker, made the very important point that the piece often missing in these debates is how well all this money is spent. If it is spent well, both sides will be wrong; if it is not spent well, everyone will be right and our citizens will lose out twice over, once from the taxes they have had taken and once from the failure of the services to improve.
We have a huge job of work to get the enlarged state to spend money properly. Too often, the default setting is simply to call for more money, not to spend what is available better. If someone can tell me with a straight face, as happened to me a week ago, that it is perfectly reasonable to spend £25,000 moving, not buying, furniture in and out of an office about the size of a one-bedroom flat, we have a problem. Noble Lords know all about test and trace, which was raised by my noble friend Lady Noakes. The total sum spent there in 15 months exceeded what has been spent on building new schools over the past 10 years. We all know that individuals spending their own money almost always achieve far more with it than the state does when spending other people’s money, so my call is to all noble Lords to help play their part in scrutinising the organs of government to ensure that money is spent effectively. The Treasury cannot do it on its own.
I thank noble Lords again for their constructive contributions. As the Chancellor said last week, notwithstanding my comments:
“Employment is up, investment is growing, public services are improving, the public finances are stabilising and wages are rising.”—[Official Report, Commons, 27/10/21; col. 273.]
This is a Budget and a spending review which builds the economy for a new age of optimism. Above all, it is a Budget which delivers a stronger economy for the British people.