Economic Growth

Baroness Lea of Lymm Excerpts

Thursday 23rd January 2025 Lords Chamber

[Baroness Lea of Lymm (Con)]

I welcome this opportunity to participate in this most important debate today. It is, of course, a very wide-ranging debate and, rather than try and cover all the points—although a lot of them have been covered excellently already—I shall make some general observations which I trust are relevant.

On the recent economic performance and the main factors which seem to be influencing it, in the first half of 2024 GDP was growing quite strongly, inflation was falling to the 2% target and unemployment was easing to just over 4%. But the economic situation seemed to deteriorate in the second half of the year. Specifically, GDP was flat in the third quarter of 2024 and in the three months to November, which are the latest figures.

One reason for this apparent deterioration, I suggest, relates to the Government’s pessimistic talking down of the economy, with references to the

“worst set of economic circumstances since the Second World War”,

which is clearly not true, and repeated, ominous references to the £22 billion black hole in the public finances. On the latter, it is pertinent to note that the OBR’s chair, Richard Hughes, referring to the OBR’s review of departmental expenditure limits, concluded:

“Nothing in our review was a legitimisation of that 22 billion pounds”.


But such pessimism dampens animal spirits and undermines both business and consumer confidence, which are so necessary for driving growth.

The second reason relates to the October Budget, which was characterised by major increases in spending, taxation—not least of all on business—and borrowing. The numbers are worth repeating. Spending is planned to increase by almost £70 billion a year over the next five years, and the spending to GDP ratio will be around 44% to 45%, compared with about 40% before the pandemic. Of course, this spending is in a public sector where productivity was around 8.5% lower in the second quarter of 2024 than pre-pandemic. Higher taxes will fund about half this increase in spending. They will raise around £36 billion a year, of which well over £20 billion comes from employers’ national insurance contributions, and they will push the tax to GDP ratio to a historic high of about 38% by the financial year 2029. Increasing the public sector’s share of GDP at the expense of business and the private sector is, I suggest, a drag on growth.

The rest of spending will be funded by an average £32 billion a year increase in borrowing, which has to be financed irrespective of any tweaks to the fiscal targets. The debt to GDP ratio will remain at about 100% over the next five years. Talking of fiscal targets, they were met with very modest margins in the October Budget. Given the increased costs of financing debt and weaker than expected economic growth, this has raised many concerns that they will be missed, unless of course there are changes in policy. I await the spring forecast on 26 March with great interest—it is in my diary.

Turning to business—that vital engine for growth—we have already noted that businesses will face a sizeable increase in national insurance contributions. They will also face a sizeable hike in the minimum wage from April. They will also face the costs resulting from the implementation of the Employment Rights Bill, which could be up to £5 billion a year. This is a triple whammy, which damages business confidence and undermines growth. In addition, they face the highest industrial electricity costs of any industrial economy, partly reflecting the additional costs of intermittent renewables. These costs are especially damaging for energy intensive manufacturing, including of chemicals, as noted by INEOS chairman Sir Jim Ratcliffe recently.

Finally, to make a very brief comment on Brexit, the OBR’s hypothesis assumes that Brexit will hit trade intensity, defined as exports plus imports as a share of GDP, by hitting EU trade, not so much non-EU trade. This would lower potential productivity. But EU and non-EU trade have grown at very similar rates since Brexit, suggesting little Brexit impact, if any.