Baroness Penn
That this House takes note of the Autumn Statement 2022.
The Parliamentary Secretary, HM Treasury (Baroness Penn) (Con)
My Lords, it is a privilege to open this debate on behalf of the Government and to set out today our plan to tackle the cost of living and to rebuild our economy. I start by welcoming the noble Baroness, Lady Lea of Lymm, to the House, and I look forward to hearing her maiden speech. I congratulate all noble Lords on their dedication to this debate over other, footballing matters that may be happening this evening.
The Government’s priorities in this Autumn Statement are
“stability, growth and public services”.
We have been honest about the challenges we face and fair in our solutions. We have taken difficult decisions to tackle inflation and to keep mortgage increases down but, in doing so, we have protected the most vulnerable. Our plan will lead to a shallower downturn, lower energy bills, lower interest rates, higher long-term growth and a stronger NHS and education system.
I turn to the first priority in the Autumn Statement: stability. High inflation is the enemy of stability. The Office for Budget Responsibility confirms that “global factors” are the primary cause of current inflation. The world is still dealing with the fallout from the Covid pandemic: furlough, vaccines and the response of our NHS protected us from the worst of the pandemic, but they all need to be paid for, and the lasting impact on the supply chains has made goods more expensive. This has been made worse by an energy crisis made in Russia. Since Putin’s invasion of Ukraine, wholesale gas and electricity prices have risen to eight times their historical average. The OBR forecast the UK’s inflation rate to be 9.1% this year and 7.4% next year. However, inflation is higher in Germany, the Netherlands and Europe, and the OBR has confirmed that our actions in the Autumn Statement will help inflation to fall sharply from the middle of next year.
Higher energy prices have fed through to forecasts for growth. Overall, this year, the economy is still forecast to grow by 4.2%. GDP is then forecast to fall by 1.4% in 2023, before rising to 1.3% in 2024, and 2.6% and 2.7% in the following years. This has also impacted our public finances, so we need a clear plan to support our economy and to restore our public finances.
The decisions that the Chancellor made in the Autumn Statement mean that, over the next five years, borrowing will be more than halved. This year, we are forecast to borrow 7.1% of GDP; next year, it will be 5.5% of GDP; and, by 2027-28, it will fall to 2.4% of GDP. The Chancellor also confirmed two new fiscal rules: first, that underlying debt must fall as a percentage of GDP by the fifth year of a rolling five-year period, and, secondly, that public sector borrowing over the same period must be below 3% of GDP. In short, as growth slows, we will use fiscal policy to support the economy; then, once growth returns, we will increase the pace of consolidation to get debt falling. With just under half the £55 billion of consolidation coming from tax, and just over half coming from spending, this is a balanced plan for stability.
I turn now to our plans for tax. Our decisions on tax have been guided by two broad principles: we are asking those who have more to contribute more, and we will avoid the tax rises that most damage growth. On personal taxes, we are reducing the threshold at which the 45p rate becomes payable from £150,000 to £125,140. At the same time, we are maintaining at current levels the income tax personal allowance, the higher rate threshold, the main national insurance thresholds and the inheritance tax thresholds for a further two years, until April 2028.
We are also reforming allowances on unearned income, something that we have discussed many times in this House. The dividend allowance will be cut from £2,000 to £1,000 next year and then to £500 from April 2024. The annual exempt amount for capital gains tax will be cut from £12,300 to £6,000 next year, then to £3,000 from April 2024. Those changes still leave us with more general core personal allowances overall than countries such as Germany, Ireland, France and Canada.
On business taxes, we have decided to freeze employers’ NICs thresholds until April 2028, but we will retain the employment allowance at its new, higher level of £5,000. That means that the smallest 40% of businesses will still pay no NICs at all. On VAT, we already have a registration threshold more than twice as high as the EU and OECD averages, but we will maintain it at its current level until March 2026. We will implement the internationally agreed OECD pillar II global corporation minimum tax rate and take further steps to tackle tax avoidance and evasion. Together those measures will raise an additional £2.3 billion by 2027-28.
We will also increase the energy profits levy from 25% to 35% from 1 January until March 2028, and we will introduce a new temporary 45% levy on electricity generators, reflecting the fact that the structure of our energy market creates windfall profits for low-carbon electricity generation too. Together those taxes will raise more than £14 billion for the public purse next year.
Finally, on business rates, we believe that bills should accurately reflect market values and so will proceed with the revaluation of business properties from April 2023. However, we will soften the impact on businesses, with nearly £14 billion of support over the next five years. Nearly two-thirds of properties will not pay a penny more next year.
Just as we want to support businesses, we need to provide a shelter for those most at risk from the economic storm. To do so, we are uprating pensions and benefits by 10.1% next year, and we are accepting the recommendation of the Low Pay Commission to increase the national living wage by 9.7% next year, which is worth more than £1,600 to a full-time worker. We are also providing £55 billion in help for households and businesses with their energy bills, one of the largest support plans in Europe. This includes continuing the energy price guarantee for a further 12 months from April at a higher level of £3,000 for the average household.
Despite some difficult decisions, we are protecting our public services, with funding rising in real terms over the next five years. Overall departmental spending will grow at an average of 3.7% per year over the spending review 2021 period, but departments will be required to find efficiency savings to manage pressures from inflation. After the spending review period, day-to-day spending will continue to grow in real terms at 1% a year until 2027-28.
This does not mean that there will not be difficult decisions. For example, while we remain committed to the 0.7% ODA target in the longer term, the OBR forecasts show the fiscal situation means that ODA will remain at around 0.5% for the forecast period. In the current global context, we recognise the need to increase defence spending, but we must first review and update the integrated review, written as it was before the Ukraine invasion. Until then, we will continue to maintain the defence budget at least 2% of GDP, consistent with our NATO commitment.
We must promote our security abroad, but we also need to invest in priorities at home. Our first priority is investment in our health and care system. To recruit and retain our dedicated NHS workforce, the Department of Health and Social Care and the NHS will publish an independently verified plan for the number of doctors, nurses and other professionals we will need in five, 10 and 15 years’ time—something that I know this House has called for.
I turn to social care. The 1.6 million employees in the sector are working extremely hard. Local authorities have rightly raised concerns about their capacity to deliver the Dilnot reforms immediately, so we will delay their implementation for two years, allocating the funding to allow local authorities to provide more care packages. We also know that we must expand the capacity of the social care system to free up some of the 13,500 hospital beds that are occupied by those who should be at home.
To expand the capacity of the social care system in England, we will make available up to £2.8 billion of extra funding, increasing to £4.7 billion in 2024-25. To deliver ever greater care, the NHS will also need to look at efficiency savings, but we will still need to invest more to meet our aims. Because of the difficult decisions taken elsewhere, we will increase the NHS budget in each of the next two years by an extra £3.3 billion. Taken together, these actions will ensure that up to £8 billion of additional funding is made available for health and social care in 2024-25.
However, a healthy country is not sufficient; we need a skilled one too, so we are not just going to protect the education and schools budget, we are going to increase it. The core schools budget will rise by £2.3 billion in both 2023-24 and 2024-25, restoring 2010 levels of per-pupil funding in real terms, and the Barnett consequentials mean an extra £1.5 billion for the Scottish Government, £1.2 billion for the Welsh Government and £650 million for the Northern Ireland Executive.
I turn to the third priority in the Autumn Statement: growth. As my right honourable friend the Prime Minister set out in his Mais lecture last year, to grow the economy we need to invest in three things: people, capital and ideas. On people, alongside our investment in schools and the health service, Sir Michael Barber will advise the Government on the implementation of our ambitious skills programme. Just as we look to improve opportunities for those in education, we are determined to help people already in work to raise their incomes, progress in work and become financially independent. That is why we will ask more than 600,000 more people on universal credit to meet a work coach so that they can get the support they need to increase their hours or earnings.
On capital, we remain committed to building the roads, rail, broadband and 5G infrastructure we need. To do so, we will maintain our capital budgets at the same level in cash terms for the next three years. We will proceed with Sizewell C and deliver the key Northern Powerhouse Rail, HS2 to Manchester and east-west rail. We are building new hospitals and rolling out gigabit broadband.
Finally, on ideas, we will continue to support innovation in our economy and remain committed to increasing public funding for R&D to £20 billion by 2024-25. We will also continue our work to support the transformation of scientific breakthroughs into breakout businesses. By the end of this year we will decide and announce changes to EU regulations in five key growth industries: digital technology, life sciences, green industries, financial services and advanced manufacturing. The Chief Scientific Adviser, Sir Patrick Vallance, will also lead new work on how we should change regulations to better support the safe and fast introduction of emerging new technologies.
It has been impossible to condense the full range of action in the Autumn Statement into my opening speech, and I look forward to responding to all noble Lords’ contributions at the end of the debate, but I hope I have been able to demonstrate that in the midst of a global economic challenge, this Government will respond in the way this country does best. United, we will use our resourcefulness and resilience to get through the storm. We will shelter the most vulnerable as we do so. We are taking difficult decisions but, in doing so, we are bringing about stability and security and setting our country up for growth in the days ahead. I beg to move.
Baroness Penn (Con)
My Lords, I thank all noble Lords for their contributions to this debate. Given the range of expertise that has been contributed today, I will spend my time directly addressing as many noble Lords’ comments as possible.
Many noble Lords reflected on the economic circumstances that we find ourselves in. My noble friend Lord Lamont is correct in his analysis that there is no greater enemy than inflation. He reminded the House, as did the OBR, that the inflation we face is predominantly down to global forces, as my noble friend Lord Flight also noted. High inflation puts pressure on households managing those rising costs and, in turn, dampens growth. We have to be honest with people that we cannot shelter them from all of the effects of this economic storm. In our fiscal policy, we must be careful not to stimulate the economy in a way that makes it more difficult for the Bank of England to reduce inflation, leading to higher interest rates. So we have had to target our fiscal policy carefully.
But it is worth reminding noble Lords of the extent of the support that we are providing. Overall policy decisions since the Spring Statement provide support of £64 billion this year and £40 billion next year, which represents a combination of universal support, through the energy price guarantee, and targeted cost of living payments. In response to the noble Lord, Lord Rogan, the Government are working to ensure that the people of Northern Ireland receive energy bills support scheme support as soon as possible. I reassure him and the people of Northern Ireland that support will reach them this winter.
We have also taken action to uprate pensions and benefits in line with inflation, which I note, in the context of the contribution of the noble Lord, Lord Rooker, was a recommendation from Barnardo’s. We have accepted the Low Pay Commission’s recommendation to increase the national living wage by 9.7%.
Some noble Lords, including the noble Lord, Lord Fox, questioned the profile of the Government’s consolidation plans. But, again, we have had to strike a balance, providing support to households and the economy while inflation is high and growth is low—then, once growth returns, we will increase the pace of consolidation to get debt falling. The OBR delivered its verdict on our plans, saying that the recession will be shallower than it would otherwise have been, jobs will be protected and inflation will come down.
I must also correct the assertions of the noble Lords, Lord Hain and Lord Howarth of Newport, the noble Baroness, Lady Jones, and others that these plans are a return to austerity. In 2010, total departmental spending fell by about 3% a year; in this Parliament, it will rise at 3.6% a year in real terms. This is not just more money for public services; it is also considerably more money than the Benches opposite have committed to.
The noble Lord, Lord Hain, also claimed that the Autumn Statement would open the door to a Labour Government, but I remain slightly at a loss as to what Labour’s economic plans are. The noble Lord opposite made a valiant attempt to set some of them out, but I remain unclear: does it sign up to the need to consolidate our public finances? If it does, does it agree that we have taken a balanced approach between tax and spend? If it does not, what would it do differently?
I also profoundly, and perhaps unsurprisingly, disagree with the Benches opposite on this Government’s economic record. Over the last 12 years, alongside EU exit, the Government have had the third fastest growth in the G7. Since 2010, we have grown faster than France, Germany, Italy or Japan, and we have the lowest unemployment in nearly 50 years.
I will correct one further point from the noble Lord, Lord Razzall, and others, on the London Stock Exchange missing out to Paris. We had a Question on this the other week, where we addressed in quite a lot of detail why that is not the case. I also thank the noble Baroness, Lady Kramer, for reminding us of Labour’s own record on the economy.
Perhaps it is time for a little more consensus, and, in this debate, I heard more consensus on the need to improve productivity. Many noble Lords—including the noble Lord, Lord Eatwell, my noble friend Lord Horam and others—spoke about the need for greater investment in public sources of growth. The Government agree, which is why public spending on capital investment will remain at the record highs set at the 2021 spending review, delivering more than £600 billion of investment over the next five years. I can only ask the noble Lord, Lord Eatwell, why he could not persuade his own party of the need for this in government, with capital budgets next year being more than double those under the previous Labour Government.
Noble Lords also spoke powerfully of the need to improve private sector investment, and many spoke about the need to support R&D. The noble Lords, Lord Fox and Lord Londesborough, among others, expressed concern about the Government’s planned changes to R&D tax credits for SMEs, and many noble Lords spoke about the importance more broadly of R&D, including my noble friend Lady Blackwood. I assure noble Lords that the Government remain unequivocal in their support for R&D, including recommitting to the largest ever R&D spending increase over an SR period. Our aim is to ensure that the spending is as effective as possible and to do more to work towards a simplified, single R&D tax credit for all.
The noble Lord, Lord Londesborough, asked whether the Government have considered the impact on productivity of the changes that we are proposing. From my experience looking at the R&D tax credit, the officials working on this think of almost nothing other than how we can make the R&D tax credit system the most effective it can be. We must recognise that the SME scheme has become a target for fraud. That is not to say that noble Lords did not make important points on the need to support research-intensive SMEs in particular. Ahead of the Budget, the Government will work with industry to understand whether further support is necessary for R&D-intensive SMEs without significant changes to the overall costs of the scheme. Over the SR period, we also increasing funding for Innovate UK by 50%, and 70% of Innovate UK’s grants benefit small and medium-sized enterprises.
Also on investment, the noble Lord, Lord Bilimoria, asked about doing more regarding small modular reactors. I agree with him that, for Britain to achieve energy security, a pipeline of new nuclear is needed, alongside the large-scale project that we have committed to in Sizewell C. Today, the Government have confirmed their commitment to set up Great British Nuclear, an arm’s-length body which will develop a resilient pipeline for new builds beyond just Sizewell C.
On energy more broadly, many noble Lords, including the formidable noble Baronesses, Lady Hayman and Lady Jones of Moulsecoomb, raised questions about our approach to energy and climate change. I reassure noble Lords that the Government remain fully committed to reaching net zero by 2050, and to seizing the opportunities for growth through that transition.
On specific questions around the energy profits levy, several noble Lords, including the noble Lord, Lord Sikka, expressed concern about the design of the levy and the investment incentives in it. The Government have always been clear that the tax regime is intended to strike a balance between ensuring a fair tax return for the UK from its resources and continuing to encourage investment in the North Sea, supporting jobs and our energy security. I reassure the noble Lord that the Autumn Statement sets out that the Government expect to raise £41.6 billion from the EPL between 2022-23 and 2027-28, in addition to the £39 billion paid through existing taxes, ensuring that oil and gas companies pay their fair share.
The UK will also receive tax revenues from the investments made under the investment allowance, as and when they generate a profit. Given that these companies are mostly the same ones that are innovating and producing renewable energies, their investments will bring wider economic benefits through jobs, a secure supply chain and more progress towards net zero. Conversely, my noble friend Lord Leigh of Hurley voiced concerns about the impact of the EPL on independent UK companies and suggested that we use an approach more akin to the one that we have taken with electricity generators. His concerns are precisely why we have included such a generous investment allowance, which demonstrates our commitment to encouraging investment in the North Sea to strengthen the UK’s vital offshore oil and gas sector, putting more UK gas on the grid for longer and bolstering our energy security.
The noble Baroness, Lady Hayman, was also concerned about investment incentives for renewables under the electricity generators levy. The EGL is charged on a different basis from the energy profits levy and at a lower combined rate; the EPL is applied to total profits, whereas the EGL applies to only extraordinary returns above a given level. I reassure noble Lords that the electricity generators levy is designed in a way that maintains incentives for investment and preserves the effect of existing government support. Renewable generators will be able to deduct investment costs from their corporation tax.
Lord Eatwell (Lab)
I know that the Minister would not want to mislead the House, so I was very surprised by her figures on government investment. I looked up the OBR figures and, as a share of GDP, public sector net investment is now half what it was in the last year of the Labour Government.
Baroness Penn (Con)
My Lords, the statistics that I gave referred to overall levels of investment, not expressed as a percentage of GDP. I stand by the figures that I gave to the House.
Lord Hain (Lab)
I am very grateful to the Minister, but can I ask her to correct her statement about the last Labour Government’s record? We had 10 years of consistent economic growth, never surpassed in Britain’s economic history, with low inflation, high employment and massive investment in public services, prior to the global banking crisis, for which we were culpable only to the extent that every Government in the world were culpable. Surely, she should correct what she has said in argument to me.
Baroness Penn (Con)
I am not sure exactly which bit of what I said the noble Lord wants me to correct. I stated the Government’s record on economic growth since 2010, and I simply referred to the comments of the noble Baroness, Lady Kramer, on the recession that was also experienced under the previous Labour Government.
I return to the subject of energy. The noble Baroness, Lady Hayman, asked about energy efficiency. Warmer homes and buildings are key to reducing bills, creating jobs along the way and meeting our targets on climate change. That is why we are committed to driving improvements in energy efficiency, with a new ambition to reduce the UK’s final energy consumption from buildings and industry by 15% by 2030. A new ECO+ installation scheme was announced earlier this week.
I disagree with the analysis that this is jam tomorrow; we have £6 billion of new government capital funding that will be made available from 2025 to2028, but that is in addition to the £6.6 billion allocated in this Parliament. The aim of that kind of longer-term projection of funding is to create consistency and allow businesses and the supply chain to build up and plan for the future, which can be something that we struggle with in the provision of energy efficiency measures. We are also launching the energy efficiency task force and expanding our public awareness campaign to help reduce bills for households and protect vulnerable people over the winter and beyond.
In response to my noble friend Lord Leigh of Hurley, on other tax measures and the taxation of US groups trading in the UK, the UK has long been committed to tackling base erosion and profit-shifting, which is why we introduced the diverted profits tax in 2015 and the corporation interest restriction rules in 2017. I am glad that he welcomed progress on Pillar 2, which we will legislate for in the spring 2023 Finance Bill, but I agree with him that we need to make further progress on Pillar 1. That is why we continue to work internationally on finalising Pillar 1, so that the corresponding multilateral convention can be ready for signature in the first half of 2023, allowing for implementation in 2024.
Other noble Lords noted some strange political alliances that seemingly might have formed in the course of this debate. The noble Lords, Lord Sikka and Lord Howarth of Newport, but also my noble friends Lord Bridges and Lady Noakes raised concerns around the Government’s decision to freeze the personal allowance and other tax thresholds. I say to noble Lords that despite the need to increase taxes—I fully acknowledge that freezing thresholds is a tax increase, I am not trying to hide it in any way—given that the personal allowance nearly doubled across the last decade, it will still be £2,150 higher by April 2028 than it would have been had it been uprated by inflation each year since 2010. The noble Lord, Lord Sikka, also asked about the distributional impacts of tax. I cannot answer his specific point, but on average it is households in the poorest income deciles that are gaining the most next year as a result of decisions taken in the Autumn Statement.
I take seriously the concerns expressed by my noble friends Lady Noakes and Lord Bridges. The Government have had to take difficult decisions and we are being honest about that. We want a low-tax economy, but first must come economic stability, and we need everyone to contribute a little towards sustainable public finances. I know it will be little comfort to them to be reminded that the UK tax system remains competitive, with the tax-to-GDP ratio meaning that we are still in the middle of the pack within the G7 and lower than such countries as France, Germany and Italy. As I say, the Government take their challenge on growth seriously and we have taken some tax decisions to prioritise this; for example, keeping the annual investment allowance level that was set in the growth plan permanently at £1 million, rather than reverting to £200,000 from 1 April 2023.
My noble friend Lord Bridges rightly identified a greater range of actions that we must take to set the conditions of growth beyond tax policy. A key area and opportunity post Brexit is regulation, and I hope he will welcome the action on Solvency II that we have announced and the measures in the forthcoming Financial Services Bill, which we will seek to replicate across other growth sectors across the UK economy, such as life sciences, as spoken about passionately by my noble friend Lady Blackwood. Many noble Lords, including the noble Lord, Lord Shipley, and my noble friend Lord Tugendhat, raised the issue of housing. The noble Lord, Lord Shipley, spoke about the need to build more houses for social rent: that is exactly what the Government are doing, through such measures as removing the cap on councils borrowing against their housing revenue account. I reassure him also that we are still committed to ending no-fault evictions.
My noble friend Lady Cumberlege asked about our commitment to community pharmacists and the issue of funding there. The plan for patients set out the further expanded role of pharmacies agreed in the community pharmacy contractual framework for the next two years, as well as an additional £100 million investment to recognise the pressures facing the sector. The Government have also committed to look further by enabling pharmacists with more prescribing powers and making more simple diagnostic tests available in community pharmacies.
In response to the noble Lord, Lord Rogan, I welcome the 25th anniversary of the Belfast agreement and I am extremely pleased that we confirmed in the Autumn Statement that we are funding the planned trade and investment event in Northern Ireland. DIT will work with local partners as this is taken forward, including with Invest NI.
The noble Lord, Lord Bilimoria, asked about defence spending. As I said in my opening speech, we recognise the need to increase defence spending, but before we make announcements on that, we need to refresh the integrated review, which was drafted before Russia’s invasion of Ukraine.
The right reverend Prelate the Bishop of Gloucester referred to the benefit of women’s programmes for preventing female offending and the savings to the Ministry of Justice as a result. In September, the Ministry of Justice announced that almost £21 million will be invested in women’s services to tackle the causes of female offending and cut crime.
The noble Lord, Lord Livingston of Parkhead, asked an interesting question about the difference between the Bank of England and OBR forecasts. Given the number of recent changes in fiscal policy and the volatility in financial and energy markets, the range of external forecasts is wide. Differences will partly reflect when each forecast was produced and the differences in assumptions about government policy, interest rates and energy prices, but I take his wider point.
I congratulate my noble friend Lady Lea on her excellent maiden speech. I know she brings a wealth of economic experience, not least from her own time working in the Treasury. I look forward to working with her in the future.
We have faced two enormous shocks in the last three years. The pandemic has caused supply chain disruption, slowed growth and increased debt levels, and Putin’s war in Ukraine has caused energy prices to spike. This has added up to inflation at levels not seen in a generation, hitting the pockets of families across the country. That is why tackling inflation is our priority. It makes everyone worse off, especially the most vulnerable, so we have taken difficult decisions that will mean taxes go up and spending will not rise by as much as previously planned. When we take into account the need to invest more in areas such as our NHS, it means hard choices to be made elsewhere.
However, I remind noble Lords that we fight these economic challenges from a position of relative strength. Unemployment is close to the lowest level it has been in nearly 50 years, and the UK is forecast to have had the fastest growth in the G7 in 2022. We also have incredible strengths within our country that aid our mission: our teachers, our NHS workforce, our armed services, and everyone who works in our public sector—day in, day out—to deliver the services upon which we rely.
We are inventive and resourceful, and the innovative, intuitive and ambitious people who make up our private sector will drive our growth. Combine this with the decisions taken over the last 12 years and the results are clear to see: employment is up by millions compared to 2010; we have had the third highest real GDP growth rate in the G7 since 2010; renewable energy production is growing faster than in any other large country in Europe since 2010; thousands more children are in good and outstanding schools compared to 2010; and we have record numbers of doctors in the NHS. Now, because of the difficult decisions we take in our plan, we are strengthening our public finances, bearing down on inflation and supporting jobs—all while protecting public services.
The Autumn Statement is a plan that provides stability. It is a plan for growth and a plan for public services. I beg to move.
Lord Skidelsky (CB)
Before the noble Baroness sits down, could I ask a question, please?
Baroness Penn (Con)
There were many questions that noble Lords asked that I did not get to in the time available. Maybe I should write to all those who have participated in this debate to make sure that I address all the points raised but do not detain noble Lords any further.
Lord Skidelsky (CB)
Could the Minister explain how fiscal consolidation, particularly cutting public spending, promotes growth?
Baroness Penn (Con)
My Lords, there is probably a longer conversation to be had, but I did set out how the profile that we have taken in our approach to consolidation supports growth at this time but also gets our public finances on to a sustainable footing. I am now sitting down; I will take no further interventions.