Budget Statement

Baroness Lawlor Excerpts

Thursday 16th March 2023 Lords Chamber

[Baroness Lawlor (Con)]

My Lords, I welcome the chance to speak in your Lordships’ House in the debate on the Spring Budget. I particularly welcome my noble friend Lady Moyo and congratulate her on an excellent maiden speech. I am very grateful to all your Lordships who have spoken in this debate. This is a subject dear to my heart, one on which I have worked for decades at my think tank, Politeia, with economists from Britain, Europe and indeed the United States.

I welcome the Chancellor’s determination to focus on tackling inflation, as I do the Budget and OBR forecasts that inflation in the UK is due to fall from 10.7% in the last quarter of last year to 2.9% by the end of 2023. I also welcome his determination to reduce debt as a proportion of GDP, and the forecast—with all the caveats your Lordships have given about forecasts—that the underlying debt to GDP ratio is due to start falling in 2027. However, I am a little concerned that until then, debt is due to rise from 92% of GDP to almost 95%. It is also heartening to hear that borrowing is due to fall each year, from 5.1% of GDP in 2023-24 to 1.7% in this five-year period.

However, I would like to encourage my noble friend the Minister and the Government to focus on a third problem, to which my noble friend Lord Bridges and other noble Lords have referred: the overall levels of UK public spending as a proportion of GDP. Among the G7 countries, the UK’s public spending, at 48% of GDP, may be smaller than that of other European economies, which ranges from 51% for Germany to 59% for France, but it is still more than the US economy, at 44.9%, and Japan, at 44.1%. We should not take comfort from such figures. The evidence is that economies that significantly reduce levels of public spending and debt and return to sound public finances can boost jobs and enhance growth, countering any effects of cuts. They do not necessarily result in lower outcomes for healthcare or education.

Over the last two decades, the evidence from a number of economists has been compelling. Schuknecht and Tanzi, very early in this millennium, identified expenditure-based consolidation, as did Schuknecht in a later study in 2020. It can have positive effects on the real economy and is more likely to lead to higher growth and lower debt. Antonio Alfonso, in a pre-pandemic analysis—albeit in a period when general levels of public spending across the G7 were much lower than now—showed that countries which kept public spending under 40% of GDP had among the best government performance.

Top of Alfonso’s table came countries with public spending at what now seems an almost magical figure of 32% to 33% of GDP: Switzerland and Austria, which performed well above average. Second, with slightly above average performance, came the next rank of countries: Japan, Canada and the US, whose public spending then was 37% to 40% of GDP. Germany belonged in that group in terms of performance, but its spending was slightly higher at 44%. Third came the UK, with below average performance, yet it spent about as much as Germany did at 43% to 44%. We can, however, take comfort from the fact that we still were ahead of the French, both in performance and public spending; their pre-pandemic figure was 55%.

In the same G7 economies, taking account of measures other than overall government performance, we can take heart from the evidence in areas such as economic stability, administrative performance, income distribution and social expenditure, public infrastructure—where Germany is usually top—health performance and education performance. While some countries did better and some less well, the overall message was equally encouraging: higher public spending does not necessarily lead to better performance in these areas.

It is therefore sensible that public spending plans after 2025 remain by and large unchanged, other than being topped up to reflect the defence spending and childcare changes on which your Lordships have commented with some knowledge. We will also see departmental budgets rise by 1% a year in real terms during this period. Sticking to such levels of public expenditure while raising the NHS and defence budgets will mean squeezes in other areas.

There is much to play for in adopting a more active approach to cutting overall levels of public spending. Not only has Britain’s economy prospered when government spending levels as a proportion of GDP have been kept reasonably controlled at approximately 40%; now, post pandemic, post Brexit, it is even more urgent that we encourage higher growth using the surest tool in our armoury: reducing public spending.

The UK is a market economy which benefits from freedom and competition under the rule of law. It does not prosper, as recent decades have shown, with high spending, high taxation and unnecessary regulation: it misses out on that elusive growth which successive Chancellors have chased and which has featured prominently in your Lordships’ debate today.

This economy prospers as a challenger economy into which new entrants and entrepreneurs can come and take pride, being rewarded, not penalised, for success. The high-tax, high-spending economy must be reversed. The Budget, which is to be welcomed as a step in the right direction, should be seen as work in progress. I hope that my noble friend the Minister and the Government will take a lead from the evidence that we must cut overall public spending to the 40% of GDP level, or less, if this country and its people are to use their talents and flourish, and exploit the freedoms they now have.