UK Economy: Growth, Inflation and Productivity
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The Parliamentary Secretary, HM Treasury (Baroness Penn) (Con)
My Lords, I thank all noble Lords for their contributions to this timely debate, in particular the noble Lord, Lord Eatwell, who has brought us here today. In the face of rising inflation, we continue to take the action necessary to shelter the most vulnerable, get inflation under control and set our country up for long-term, sustainable economic growth.
Before I turn to some of those matters, I shall address some of the gaps in the review of the noble Lord, Lord Eatwell, of this Government’s record. He noted that the previous Labour Government left government debt too high as a result of intervention in the banking sector and their response to the accompanying recession. He neglected to say that Labour inherited a surplus of £66 million in its first full financial year in government and that, when it left office, the deficit was almost £160 billion, the largest since the war.
The noble Lord, Lord Eatwell, also neglected to mention employment. I do not know whether that is because all Labour Governments have left office with unemployment higher than when they entered it or because this Government’s record on employment and jobs does not accord with his narrative on our economic decision-making.
Two of the biggest gaps in the noble Lord’s assessment of this Government’s record were our responses to the crises of Covid and Russia’s war on Ukraine. The response to Covid was, in fact, a massive public effort to protect lives and livelihoods. The noble Lord did not mention the provision of more than £400 billion of support during the pandemic, including paying 11 million people’s wages, and that we had one of the fastest and most successful vaccine rollouts in the world.
Our response to Ukraine has not just been to be their most steadfast ally, providing equipment, training and financial support; we have also taken action to protect people at home from the price shocks that we have experienced in the invasion’s aftermath. We have put in place the energy price guarantee to protect people from the worst of the energy cost increases, we have increased benefits by over 10% this year and we have put in place extensive cost of living support payments for those least able to cope. In total, this year and last, our support has been worth £94 billion. This support will help the most vulnerable weather the current storm, but the real answer to the current economic challenge must be to bring down inflation.
The UK is not alone in facing high inflation. UK inflation was lower than in nine EU countries in May, and over half of the EU had higher core inflation in the same month. The primary drivers of high inflation are international: the supply chain shocks in the wake of Covid, followed by food and energy price shocks as a result of Russia’s invasion of Ukraine.
However, it is right to say that domestic inflationary pressures have also risen in recent months. To address one of the questions from the noble Baroness, Lady O’Grady, the UK is in a position of having a very tight labour market—as they face in the US, but with less pressure on the energy bills—with pressure on energy bills that is more akin to that which we see in our European partners. That means that we need to be even more determined than ever to get inflation down.
Let me reassure my noble friend Lord Griffiths of Fforestfach that, to do this, first and foremost, the Government remain steadfast in our support for the independent Monetary Policy Committee at the Bank of England and its target to return inflation to 2%. I agree with the noble Lord, Lord Whitty, that it is vital that monetary and fiscal policy work together in this respect. That is why we are making difficult but responsible decisions on tax and spending, to manage our borrowing and get debt falling. Increasing borrowing at this time would simply be adding fuel to the fire. Thirdly, we are taking long-term action to address some of the underlying drivers of inflation, investing in our long-term energy security and energy efficiency, and working to boost labour supply, with interventions to support people back into the workforce and remove barriers to returning to work, such as through the extension of free childcare to parents with children from nine months and upwards.
We know that, as the Bank of England increases interest rates to bear down on inflation, this puts upwards pressure on mortgages. While mortgage arrears and defaults remain at historically low levels, with just under 1% of residential mortgages in arrears in 2023, and at a lower level just before the pandemic, we want to support those who find themselves in a challenging position—but, again, as my right honourable friend the Chancellor has made clear, without adding further fuel to the inflation fire. That is why my noble friend Lord Lamont is right that we cannot take action such as providing tax relief on mortgage interest payments, or other support of that nature. We can work with lenders, as we have, to provide more support for people through flexibility in how they manage these costs. That is what the mortgage charter, negotiated last week, will do: it will help give people peace of mind about extending an existing mortgage or moving to an interest-only mortgage for six months.
Let me reassure the noble Baroness, Lady Thornhill, that there will now be a minimum 12-month period from the first missed payment before there is repossession without consent. The noble Baroness also touched on renters, and we recognise the need for more support there. The recently introduced Renters (Reform) Bill includes a ban on Section 21 no-fault evictions. There is an extensive package of measures there to improve security and quality in the private rented sector.
I agree entirely with my noble friend Lord Lamont that tackling inflation must be the immediate priority. It is also the essential precondition for sustainable economic growth. High growth needs businesses, investors and consumers to all have confidence, which is not possible with high levels of inflation. In January, the IMF said that the UK was taking “the right approach” and, in its recent visit to the UK, said that the UK authorities had taken “decisive and responsible steps” which have had a “favourable impact” on the economy. The measures announced in the Spring Budget deliver the largest permanent increase in potential GDP that the OBR has ever scored in a medium-term forecast.
I must disagree with some noble Lords on this Government’s record on growth. The UK had the fastest growing economy in the G7 last year, growing by 4.1%, following a 7.6% increase in 2021. Since 2010, we have grown more than major countries such as France, Italy and Japan, and about the same as Germany. Where we find more common ground—as we have in past debates on similar subjects—is that, in our economy, we have a need for greater productivity and investment. My right honourable friend the Chancellor at the start of the year set out his approach to the four pillars that we need to support to increase productivity in our economy.
The first focuses on enterprise, which means supporting innovation and investment. That is why direct funding for R&D will reach £20 billion a year. Indeed, OECD data shows that, as a percentage of GDP, the UK provides more support for business research and development through tax and spend than any other OECD country. Part of the challenge now is to match that investment from the public sector with investment from the private sector. To support that, we are refocusing R&D tax credits and have introduced full expensing. To the noble Lord, Lord Woods, and the noble Baroness, Lady Bowles, I say that we are looking at how we can further unlock pension fund capital to invest in our future businesses, while of course ensuring that pension funds continue to act in the best interests of their members.
On education, the Government are implementing a significant skills programme, including an expansion of apprenticeships and T-levels and crucially delivering a commitment to lifelong loan entitlements that will allow people to access support for their continued education throughout their lives and careers, not just as a young person leaving school and going on to university. This builds on the sustained success that we have had in improving educational outcomes in our schools since 2010.
On employment, as I have already said, the Spring Budget included a comprehensive plan to address labour shortages, including cutting the cost of childcare by up to 60% and abolishing the lifetime allowance on pensions. The OBR expects that these measures will result by 2027-28 in the labour market directly increasing employment by 0.3% and GDP by 0.2%.
Finally, as the noble Lord, Lord Monks, noted, this growth needs to be felt everywhere across the UK, not concentrated in London and the south-east. I assure the noble Lord, Lord Leong, that we will continue to devolve powers to local areas and to invest in places through our levelling up fund. My right honourable friend the Chancellor has also announced 12 investment zones which will catalyse high-potential, knowledge-intensive growth clusters across the UK, including four across Scotland, Wales and Northern Ireland, bringing investment into areas that have traditionally underperformed economically.
We have also heard from noble Lords about the importance of backing strategic sectors where the UK has a competitive or comparative advantage, and the Government absolutely agree on that. Over the past 13 years, we have become the world’s third trillion-dollar tech economy after the US and China. We have built the largest life sciences sector in Europe, producing a Covid vaccine that saved 6 million lives and a treatment that saved 1 million more.
Our film and tv industry has become Europe’s largest, and our creative industries have grown at twice the rate of our economy. Our advanced manufacturing industries produce half the world’s large aircraft wings. Our green industries mean not only that we are a world-leader in offshore wind but that we have managed to decarbonise our economy further and faster than other major economies.
We are committed to backing these sectors, creating forward-facing policy and regulatory initiatives and providing strategic public investment to ensure that they continue to build on the strengths I have just outlined. To take one example cited by the noble Lord, Lord Eatwell, when it comes to clinical trials, to maximise opportunities in this area, we have commissioned a review by my noble friend Lord O’Shaughnessy into the current clinical trials environment. As a first step after that review, we have made five headline commitments, backed by £121 million, to, among other things, substantially reduce the time taken for approvals of commercial clinical trials, deliver a national approach to contracting commercial clinical trials and deliver real-time data on commercial clinical trials activity in the UK. Our commitment in these areas continues.
The noble Lord, Lord Eatwell, and the noble Baroness, Lady Chapman, touched on the importance of our supply chains and our broader economic security in a changing global environment. That is a picture that the Government absolutely recognise. As announced in the integrated review refresh, the Government will publish a new supply chains and import strategy to support specific government and business action to strengthen our resilience in critical sectors.
That takes me nicely on to the question from my noble friend Lord Howell. I know that economic security and supply chains were a subject of great interest at the G7 recently hosted by Japan. He is absolutely right that Japan is a like-minded partner, and we value our relationship deeply. That is why the Prime Minister Rishi Sunak and Japan’s Prime Minister Fumio Kishida recently signed the Hiroshima accord on 18 May, which includes new agreements on defence, trade and investment and science and technology collaboration. We continue to want to work with our close partners.
My noble friend Lord Effingham is absolutely right that well-being is essential to supporting economic growth and productivity, and we are committed to supporting individuals to live healthier lives. At the heart of this is improving access to and levelling up healthcare across the country. In January, we announced that we will be publishing a major conditions strategy, and an interim report will be published this summer. Interventions set out in that strategy will aim to alleviate pressure on the health system as well as support the Government’s objective to increase healthy life expectancy and reduce ill health-related labour market activity.
To the noble Baroness, Lady Bowles, we had this debate on the Financial Services and Markets Bill, as she noted today. Can I suggest to her that perhaps the best way forward is that we sit down together in the Treasury and go through in detail the points that she has made in this debate?
Today’s debate has been wide-ranging, and it has been impossible to address all the points noble Lords have so thoughtfully made. The noble Lord, Lord Desai, recalled that we have had similar debates before, and I very much hope that we will have more in the future so that I am able to explore further areas that were beyond my reach today.
I think it is right, in closing, to return to the greatest economic challenge before us—inflation—and the Government’s steadfast commitment to bringing inflation down. Without inflation under control, we will not see the growth and productivity improvements that I think all noble Lords in this debate have agreed are needed.