Lord Frost (Con)
My Lords, before looking at what we have to do to get growth back, perhaps we should consider where we are and why we are here—not just in this country but across the West. We are in a very difficult position. As has already been noted by the noble Lord, Lord Agnew, GDP is falling. GDP per head, which is the only thing that matters, has begun to fall again. It is at the same level that it was in 2019. It is no wonder that people in this country do not feel better off; they are not better off.
This is not just in this country; it is common across the West. If you compare the pre-financial crash growth figures to the post-financial crash figures, only America and Australia have maintained even half their growth rates. Most of the Europeans are down 20% or 25% on their previous levels. Famously, Tolstoy wrote in the beginning of Anna Karenina:
“All happy families are alike; each unhappy family is unhappy in its own way”.
The same is true of most western economies; we all face different sets of problems. The specifics are different, but I do think we are all facing a variant of the same very deep-seated set of problems that we have to be honest about and grapple with.
First, the end of the Cold War—I think we have to go back that far—removed the pressure to remain productive and constantly demonstrate superiority of the western free-market model, and we got complacent. Secondly, what happened is what always happens when there is no counter pressure: collectivism. Intellectually bad ideas started to set in and go down the path of least resistance.
Thirdly, we saw economic policy follow that intellectual trend, with an expansion of government, more regulation and more state intervention. All that inevitably led to worse economic outcomes, more social conflict and a political environment that got worse. In the end, political choice accommodated itself to this environment. Most western electors faced the choice between two different versions of international progressivism and social liberalism—one supposedly on the right, involving international economic institutions, trade liberalisation and international business, and one conventionally on the left, involving redistribution and a lot of “woke” politics. Neither aspired to change the fundamentals; both involved high levels of migration, weakening social bonds and the nation state still further.
This system now has its own internal dynamism, and it looks very difficult to break out of it. The result is what we are seeing—the collapse in growth and zero-sum conditions. The economy is ceasing to grow, we cannot afford things that we have got used to having, social conflict is growing and crisis is near. Doing more of the same is not going to help—it will just make things worse. We have to face this reality and we need to do two very difficult things. First, we must make a huge attempt, much bigger than anything that is being contemplated at the moment, to reverse the trend of economic collectivisation and regulation from the past 30 years. There needs to be a determined attempt to end deficit financing; shrink state and taxation; recreate incentives; reverse the net-zero policy and produce cheap and more abundant energy; remove the vast corpuses of legislative regulation that dominate economic activity; intensify competition in the economy; sort out public services; conduct painful reductions in welfare transfer programmes; and look at investment in infrastructure, housing and so on, in many places.
However, it is not only this. As my noble friend Lord Farmer has set out, we need to look at the social environment too. We need to make a major effort to repair the sinews of social fragmentation, to reconnect and rebuild politics by consent. If we cannot do this, we will never get the consent for the economic changes that are necessary. Here we are going with the flow of electorates; there is a greater emphasis on culture, the nation and social conservatism. We need to go with that, which means cutting migration, controlling borders, getting an effective Government, getting out of the web of binding international agreements, killing off wokeness, getting serious about defence and thinking of investing in the family much more.
We need to do both those things, which requires making a series of correct choices, many of which are going to be unpopular—but it still has to be done. I finish by quoting the great man Sir John Hoskyns, who was behind the Stepping Stones report in the late 1970s. He said:
“It is not enough to settle for policies which cannot save us, on the grounds that they are the only ones which are politically possible or administratively convenient”.
We have to do better than that. The British people want better than that—they know something is going wrong—and it is for us, the politicians, to provide it.
Baroness Neville-Rolfe (Con)
My Lords, creating the right conditions to promote growth is a critical challenge that we must address. I am grateful to my noble friend Lord Farmer for initiating this debate so thoughtfully, and for bringing in social and cultural factors that are important to growth as well.
Thanks to the last Conservative Government, this Government inherited the fastest-growing economy in the G7. They pledged that their first priority would be to increase economic growth. However, growth has since evaporated, and that follows the recorded 0.7% growth in the summer. During the UK investment summit, the Prime Minister said:
“You have to grow your business”.
Then two weeks later, in the Budget, the Chancellor increased national insurance contributions by a whopping £23.7 billion, including a regressive lowering of the threshold at which employer national insurance is paid.
This was widely seen as an attack on business—business is an easy target—and a jobs tax, so not conducive to growth. This week, it was announced that the early estimate of the number of payrolled employees for December 2024 decreased by 47,000 on the month. Then today, Sainsbury’s has sadly announced 3,000 job losses. These may be the harbinger of worse as businesses and social enterprises reduce hiring and increase prices. The debt figure for December was a shock too, especially as every pound of interest paid on debt comes off public services or investment.
I agree with my noble friend Lord Udny-Lister that this has been devastating, because doom and gloom have become the order of the day, and that is a mistake because it dampens the animal spirits that are needed for enterprise and growth. Economic success is heavily influenced by morale. Yet, for six months, the Prime Minister and the Chancellor barely said a positive word about the economy or the fine prospects we believe we have in our country—the optimism that my noble friend Lord Horam called for. Instead, during the second half of the year, we saw the impact on consumer confidence, and the CBI indicated that manufacturers expected their output to fall during the beginning of 2025.
Like the noble Lord, Lord Fox, I like to look forward. Like him, I will try to tackle four areas but with fewer questions, which I hope the Minister will feel able to answer either today or in writing. First, on education and skills, the intrinsic link between improved education and skills and economic growth is widely accepted. Of course, this is a long-term endeavour. The Conservative Government devoted great effort to improving education, and this was reflected in amazing improvements in our PISA scores. However, the new Children’s Wellbeing and Schools Bill will undermine academies and free schools, which have been at the heart of this revolution in standards. The proposed restrictions on academies’ pay, the exclusion of veterans and others bringing their strengths to teaching from other careers and the imposition of a Labour curriculum risk reversing those very improvements. Can the Minister explain how academies will continue to attract the best teachers? The IFS has warned that they may struggle. Is consideration being given to the impact of the new policies on school standards?
Investment in skills, apprenticeships and education is key to promoting both productivity and economic growth, and I am particularly glad that the Government have stated their intention of doing much better on vocational education. My time at Tesco convinced me of this and that there is a snobbery about universities that has held us back in this sector.
Secondly, on productivity, in the long term, the overall rate of growth in productivity is reflected in the rate of growth in the economy. The important metric is GDP per capita, as my noble friend Lord Moynihan of Chelsea explained. Concerningly, in the third quarter of 2024, productivity was estimated to be 1.8% lower than in the previous year—the noble Baroness, Lady Moyo, told us that. The problem is partly cultural, and I believe that working from home and poor management in the public sector have contributed to this. In our Budget debate, I called for an internal productivity and growth assessment, modelled on the equality assessment, of every proposal for a new policy, an SI or a Bill. The Minister agreed to look at this and I wonder what conclusion he has reached. It feels as if its time has come and that it could be useful to the Treasury in prioritising the pro-growth policies that we need.
Thirdly, on regulation, possibly the most powerful contribution to productivity growth is by regulatory reform rather than just by trying to flex taxes. My noble friend Lord Agnew of Oulton made a number of excellent suggestions on trade facilitation, involving things such as trusted trader schemes and getting the single trade window, which I was sorry to hear had got lost, back on track. My noble friend Lord Frost talked about the intellectual case for regulatory reform.
At the UK investment summit, the Prime Minister said he was
“determined to do everything in my power to galvanise growth”,
so I found it particularly baffling that the election manifesto promised to ramp up so many regulations, such as in football and in employment. Then, after figures indicated that the economy had flatlined, the Prime Minister wrote to regulators asking them to go for growth. That is obviously an indication that he fears that the regulators are hampering growth, and I think he is right. Unfortunately, that is a bit like putting the fox in charge of the hen coop. Those bodies need external challenge to tackle what my noble friend Lord Farmer called the “sticky web of regulation” and its negative effect on wealth creation. It is hard to deliver, as my noble friend Lord Hannan of Kingsclere said.
As the chair of the CBI, Rupert Soames, explained, government policies, particularly new employment regulations, will bruise businesses. The Government’s own impact assessment on its workers’ rights package estimated that it will cost companies £5 billion a year, and of course that comes on top of the NICs increases, the minimum wage rises and so on, which we have discussed at length—my noble friend Lord Petitgas is right that they were very disappointed by that. There is a real need to restore trust in business so that it can play its part in growth. What assessment have the Government made of the impact on economic growth of all the increased regulations that are coming forward? Does the Minister agree that keeping a tracker as part of his work on growth could be valuable and help us to prioritise the right areas?
My fourth and final area is infrastructure. A number of comments have been made on how we can improve investment, venture capital and so on, but I am going to focus on delivering major national infrastructure projects, because they are essential to the Government’s mission to kick-start growth. Unfortunately, the cost of building delays to projects exceeds those of our international peers. The FT has described modern UK infrastructure projects as containing a bewildering number of contractors, with multiple layers passing down cash and responsibilities protected by complicated legal agreements, and then you add environmental regulations. Spending £100 million on a bat tunnel along the edge of HS2 was ridiculous.
Analysis from BCG of four major projects—Crossrail, the Arundel A27 bypass, Hinkley Point and Royal Liverpool Hospital—has identified several themes that are driving costs and delays. The Government have announced that they are looking at judicial review, and I was glad to hear from the noble Baroness, Lady Lane-Fox, about the BCC list of things that are ready to go. Poorly defined objectives overcomplicate projects, and the UK fails to look at key projects within a wider portfolio setting, identifying the most efficient path.
The Government have also failed to prioritise investment in critical energy infrastructure despite the fact that British companies pay the highest electricity prices in the developed world. The punitive taxes on the North Sea oil and gas industry, in an effort to achieve an ideological target of a decarbonised grid by 2030, will cut tax revenue and jobs and drive up business bills further, as we heard from my noble friend Lord Swire.
Can the Minister confirm how the Government will support nuclear energy projects? Currently the timeframe for grid connections for a new energy project can be as long as 10 years, so will he commit to national grid development? The Government must address infrastructure development delays and costs if they are to achieve their number one mission of growth.
The Financial Secretary to the Treasury (Lord Livermore) (Lab)
My Lords, I thank the noble Lord, Lord Farmer, for securing this debate, and I congratulate him on his interesting and wide-ranging opening speech. I thank all noble Lords for their contributions today. It is of course a pleasure to respond to this debate, and a particular pleasure to hear from noble Lords in the party opposite about how to grow the economy. It is perhaps a pity that they did not take any of their own advice over the past 14 years.
We have heard in this debate from members of the previous Government about how to grow the economy, despite economic growth being one of their greatest failures. We have heard from some of the most prominent supporters of Brexit about how to grow the economy, despite their own disastrous Brexit deal permanently reducing GDP by 4%. We have also heard from some of the most enthusiastic acolytes of Liz Truss about how to grow the economy, despite the Liz Truss mini-Budget crashing it. What we did not hear during the debate, I am afraid, was a single word of humility. We did not even hear the slightest hint of self-awareness and we still have not heard the long-overdue apology to the British people for the previous Government’s record on the economy over the past 14 years.
The reality of the past 14 years is stark. First, there was austerity, which, as my noble friend Lord Davies of Brixton said, took demand out of the economy at exactly the wrong moment. Then a disastrous and tragically misjudged Brexit deal imposed new trade barriers, equivalent to a 13% increase in tariffs for manufacturing and a 20% increase in tariffs for services, reducing total trade intensity by 15%. Finally, as I have said, the Liz Truss mini-Budget crashed the economy and sent the typical mortgage soaring by £300 a month. The combined effect was devastating. Had the economy grown by the average of other OECD countries over the past 14 years, it would be more than £150 billion larger today.
The previous Parliament was the worst on record for living standards. Inflation hit 11.1% and was above target for 33 months in a row. The UK was the only G7 economy with private investment levels below 20% of GDP. Productivity had entirely stalled, with output per worker growing more slowly than in every other G7 country bar Italy. We were the only G7 country to have a lower employment rate and a higher inactivity rate compared to before the pandemic. Little wonder then that the previous Government, at the last election, suffered the worst defeat of any governing party in history. I say to noble Lords opposite that they were not rejected so comprehensively because the British people thought they had done a really good job of managing the economy.
It now falls to this Government to clear up the mess that we inherited and to grow the economy once again. The reality is, as my noble friend Lord Chandos said, that we inherited three distinct crises: a crisis in the public finances, a crisis in our public services and a crisis in the cost of living. As noble Lords including the noble Lord, Lord Farmer, and the noble Baroness, Lady Lea of Lymm, have reminded us today, in the public finances we inherited a £22 billion black hole—a series of commitments made by the previous Government which they did not fund and did not disclose. The previous Government made no provision for costs that they knew would materialise, including £11.8 billion to compensate victims of the infected blood scandal and £1.8 billion to compensate victims of the Post Office Horizon scandal. Those sums have to be funded.
It was not just broken public finances but broken public services, with NHS waiting lists at record levels, children in portakabins as school roofs crumbled, and rivers filled with polluted waste. Added to this was a cost of living crisis that had hit working people hard, with inflation at 11% but coupled with a decision by the previous Government to freeze income tax thresholds, costing working people some £30 billion.
This Government have made different choices. At the Budget, we took action to wipe the slate clean, repair the public finances, rebuild our public services after years of neglect and protect working people. This meant taking some very difficult decisions. These were not decisions we wanted to take but they were necessary. I recognise that that has involved asking some businesses to contribute more, but not acting was simply not an option. As a result of the decisions we have taken, we have created a foundation on which we are now able to take forward our agenda of growth and reform.
The noble Lord, Lord Agnew, spoke about living standards as a result of the Budget. The independent Office for Budget Responsibility has forecast that real household disposable income per capita will increase over the course of this Parliament. That compares to the previous Parliament, which was the worst on record for living standards.
The noble Lord, Lord Moynihan of Chelsea, spoke about employment. It is welcome that the number of people in employment is forecast to rise by 1.2 million over the course of this Parliament, but clearly there is more to do. Because of the inaction of the previous Government, the UK is the only major economy where economic inactivity has not returned to pre-pandemic levels. That is why the Government has announced a £240 million package to get Britain working and to tackle the root causes of inactivity, and why we will bring forward a Green Paper this year to reform the welfare system.
At the time of the Budget, the independent Office for Budget Responsibility revised up its growth forecast for the next two years. After the Budget, the Bank of England did the same. The OECD also revised up its forecasts, which now show the UK economy growing faster than the economies of Germany, France, Italy and Japan over the next three years. Last week, the IMF forecast that the UK will be the fastest-growing major European economy over the next two years. The UK was the only G7 economy, apart from the US, to have its growth forecast upgraded for this year. This week, in PwC’s annual survey of global CEOs, the UK has become the second most attractive country in the world for investment, below the US, for the first time. I am sure all these points will be welcomed by all noble Lords and will be the start of the optimistic narrative across this House that has been spoken about in today’s debate.
While the latest ONS figures for November show modest growth, I am under no illusion about the challenge facing us. That is why we need to go further and faster to achieve higher and more sustainable growth. It is why we need to continue to put forward the big ideas that the noble Lord, Lord Farmer, spoke about. It is why the Chancellor will continue to do just that in her forthcoming speech on growth, continuing our growth strategy, built on the three pillars of stability, investment and reform.
As my noble friend Lord Chandos said, stability is at the core of our approach. Here, I disagree with the noble Baroness, Lady Moyo. We cannot deliver growth without first stabilising the public finances and giving businesses the confidence that they need to invest. This Government have a stable majority, which creates political stability, and we respect the UK’s economic institutions, including the independent Bank of England and Office for Budget Responsibility, which instil confidence in our economy but were consistently undermined by the previous Government.
In the Budget we introduced tough new fiscal rules to ensure that day-to-day spending is balanced with tax receipts, while getting debt down as a share of GDP. As the Chancellor has made clear, meeting those fiscal rules is non-negotiable. As the noble Baroness, Lady Lea of Lymm, said, the independent Office for Budget Responsibility will produce an economic and fiscal forecast on 26 March. This will provide a clear assessment of the performance against those fiscal rules.
To reassure the noble Lord, Lord Horam, we have set a 2% productivity, efficiency and savings target for all departments. The noble Baroness, Lady Neville-Rolfe, asked about productivity assessments. I continue to look at that idea carefully.
The second pillar of our strategy is investment, which is the lifeblood of a growing economy. It is not acceptable that, under the previous Government, the UK was the only G7 economy where private investment stood below 20% of GDP. Neither is it acceptable that the previous Government consistently cut public investment to patch up holes in day-to-day spending. We are taking a different approach.
The Government’s international investment summit last year generated £64 billion of private investment, creating nearly 40,000 jobs across the UK. In the Budget, as my noble friend Lord Tunnicliffe said, we committed £100 billion of new public investment in roads, rail, hospitals and other significant growth projects—including investment in the energy transition, to answer the noble Lord, Lord Moynihan of Chelsea—to crowd in private investment, and create more jobs and opportunities in every corner of the UK. Our approach is supported by the IMF, which has said that it welcomed the Budget’s
“focus on boosting growth through a needed increase in public investment while addressing urgent pressures on public services”.
The noble Lord, Lord Swire, spoke about the importance of inward investment, which I agree with him on very much. Our investment approach will be guided by our modern industrial strategy and the new National Wealth Fund, which will catalyse £70 billion of private investment in high-value sectors. It has already created 8,600 jobs across the UK and secured almost £1.6 billion of private investment. It is why we must invest in innovation and R&D, which we have protected at record levels. We have the highest R&D tax relief in the G7, the importance of which was set out so well by my noble friend Lord Eatwell. As my noble friend said, access to finance is vital, which was an issue also mentioned by the noble Baronesses, Lady Moyo and Lady Swinburne.
The noble Lord, Lord Farmer, asked about investment in family hubs. The Government have increased investment in England in early years and family services to £8 billion in 2025-26; this includes £69 million on family hubs in phase one of the spending review.
The noble Baroness, Lady Lane-Fox of Soho, spoke about the urgency of the industrial strategy, and I agree with her absolutely. We have announced the members of the Industrial Strategy Advisory Council, which is chaired by Clare Barclay, CEO of Microsoft UK, and includes serial entrepreneurs and those with extensive SME experience. As the noble Lord, Lord Udny-Lister, rightly said, they are the backbone of our economy.
The noble Baroness, Lady Swinburne, rightly said that financial and professional services are a key part of the industrial strategy. She set out the huge contribution that they make to our economy and to growth—and I shall pass on her very kind comments to my honourable friend the Economic Secretary.
The industrial strategy also includes the creative industries, as mentioned by the noble Lord, Lord Horam. At the International Investment Summit, we published a Green Paper to inform the development of the industrial strategy. That consultation has closed and we are actively considering the responses. To reassure the noble Lord, Lord Fox, the industrial strategy will absolutely be developed in close co-ordination with all the industries in the sectors that he mentioned in his speech. We will then bring forward the full industrial strategy, including individual sector plans, which will provide all the detail that the noble Lord, Lord Fox, asked for and will be aligned with the multiyear spending review.
The final pillar of our strategy is reform to tackle barriers to investment and unlock the full growth potential of the UK economy, as mentioned by the noble Lord, Lord Horam, and the entrepreneurialism spoken about by the noble Lord, Lord Farmer. That is why we are unlocking £80 billion of investment through landmark reforms to create new pension mega-funds, as set out by my noble friend Lord Eatwell. I look forward to my honourable friend Torsten Bell, the new Pensions Minister, setting the answers to all the questions asked by the noble Lord, Lord Fox. It is why we will shortly set out a programme of welfare reform, as discussed by the noble Lord, Lord Desai.
My noble friend Lord Tunnicliffe, highlighted skills, and I agreed very much with what he said. We have established Skills England to bring together the fractured skills landscape and ensure that businesses have the right employees they need to grow. Again to reassure the noble Lord, Lord Fox, its work has absolutely begun—in particular, in part of the industrial strategy. It is itself represented on the Industrial Strategy Advisory Council, which he spoke about.
On planning reform, we are overhauling the system with the most significant programme of reform for a generation to speed up exactly the decisions that the noble Baroness, Lady Lane-Fox, spoke about. I assure her that the infrastructure projects that she mentioned are exactly why we want to speed up the system. The noble Lord, Lord Fox, asked about timescales here; the most pressing next step is to get the legislation through this Parliament and this House. Given what the noble Baroness, Lady Neville-Rolfe, said on that topic, I hope that we can now count on her support for that.
We are also working closely with regulators to ensure that we are doing everything possible to reduce the regulatory barriers to growth. As the noble Lord, Lord Farmer, mentioned—and the noble Baroness, Lady Neville-Rolfe, also touched on—the Government are determined to deliver a regulatory environment that champions innovation, attracts investment and drives economic growth. Before Christmas, the Prime Minister, Chancellor and Secretary of State for Business and Trade issued a joint letter to regulators, as several noble Lords have mentioned today, to generate bold pro-growth reforms that can be implemented in the coming year. Of course, that is not the full or sole extent of ensuring that reform is pro-growth, and we will bring forward further reforms in due course.
The noble Baroness, Lady Lane-Fox of Soho, asked about procurement. As she will know, the Procurement Act will go live in February, and ahead of that the Government will publish a new national procurement policy statement, setting out the policy objectives to which the Government expect public procure-ment to contribute. The Government are working closely with stakeholders on the design of this new statement.
The noble Lords, Lord Swire and Lord Horam, spoke about AI and the opportunities that it presents, and I agree with the sentiments that they expressed. The AI Opportunities Action Plan announced by the Prime Minister last week will help us to seize the benefits of this important technology. It takes forward all 50 recommendations set out by Matt Clifford to help transform the lives of working people and drive growth.
To reassure the noble Lord, Lord Agnew, we do of course have a Minister for Trade, and I discussed trade facilitation with him just yesterday. However, reform is needed in our relationship with the EU, as the noble Lord, Lord Fox, said. Following their meeting in Brussels on 2 October, the Prime Minister and President of the European Commission agreed to strengthen the relationship between the EU and UK, putting it on a more solid, stable footing. We will now work with the EU to identify areas where we can strengthen co-operation for mutual benefit, such as the economy, energy, security and resilience.
As the Prime Minister has made clear, we want to work with our European neighbours to reset relationships, rediscover our common interests and renew bonds of trust and friendship. That is why, last month, at a meeting of the Eurogroup meeting of EU Finance Ministers—the first to be attended by a UK Chancellor since Brexit—the Chancellor set out the need for a closer UK-EU economic relationship based on trust, mutual respect and pragmatism. That involves breaking down barriers to trade, creating opportunities to invest and helping our businesses to sell in each other’s markets. We recognise that delivering new agreements will take time, but we are ambitious, have clear priorities and want to move forward at pace.
The noble Lord, Lord Petitgas, spoke about the importance of trade with the US. The UK is of course an open trading economy, and we have over £300 billion in trade with the US. This trading relationship is important to both the UK and US economies, supporting millions of jobs. We will of course continue to make the case for free and open trade.
We have heard much from those in the party opposite about how to grow the economy, but so much of our agenda of stability, investment and reform they unfortunately oppose. They have shown no humility for the economic damage that they inflicted on this country over 14 years, they have come up with no alternative plan and they have provided no apology. It falls to this Government to clean up the mess that we inherited. We are doing that by restoring growth to our economy, rebuilding our public services and making working people better off.