Budget Statement

Lord Desai Excerpts

Thursday 21st March 2013 Lords Chamber

[Lord Desai]

My Lords, once the Chancellor laid down his strategy for five years, there was not much that he could do in each Budget. That is a consequence of having a long-term strategy. This Budget does not do very much, and I welcome it for that. I do not think that half way through a five-year strategy you should suddenly start listening to people who say, “Cut more”, or “Spend more”, or things like that. If you have a strategy, you stick to it.

Obviously, as many noble Lords have pointed out, external forces and perhaps the miscalculation of the growth process have meant that we are growing at a much lower rate than we expected when the strategy was laid down. I should also say that most other countries have been growing much slower than they thought was possible. So there are structural problems for the economy, as I have said before. We still regard growth as something that will happen automatically, or as something that we deserve. In retrospect, it is clear that some of the growth that occurred between 1992 and 2007 was unsustainable. A lot of it was engendered by easy credit and occurred mainly at the consumption end. Therefore, it was not sustainable. If we are to have growth again, as we will one of these days, let us make sure that it follows structural improvement in the economy and is not credit-driven but genuine productivity-driven growth.

There is not much to say about the Budget because it does not do very much. In the OBR and elsewhere, much emphasis is laid on public sector borrowing and public sector debt. However, we also have the problem of household debt. We have not done enough about the deleveraging of household debt. A chart on page 56 of the OBR report lays down the debt equity ratio of households and the ratio of debt servicing charges to household income. In my view, both those figures show that we are deleveraging far too slowly. Indeed, as the projection shows, the debt equity ratio will go up in the near future. The debt servicing charge income—the income leverage ratio—shows somewhat good results but that is because of QE, which has depressed interest rates, so the cost of servicing household debt is that much lower. That phenomenon should have danger signs attached to it because a lot of households are in negative equity and are just bumping along the bottom thanks to low interest rates.

QE postpones deleveraging. However, we have chosen to concentrate on public sector debt reduction and not to worry about household debt reduction. I hope that the Minister will comment on the fact that the household debt deleveraging problem is not being tackled by the Government to the extent that it should be. In that regard, I am alarmed by the house purchasing initiative. One of the great problems that we have experienced in the British economy, not just recently but for many decades, is that of overinvestment in housing. We have incentivised people to buy houses as opposed to other assets. Like many other economies, we got caught in a housing bubble and have regretted it.

I had hoped that the Government would encourage renting to a much greater extent than they have done. There should be a healthy rented sector for the younger generation and people entering the labour market. However, instead of having a healthy rented sector, we will enter yet another housing bubble. No doubt there will be tears at sunset given that table 4.1 of the OBR report shows the rate at which residential property prices will go up in the next two to three years. That is just a forecast; they may go up at a faster rate than that shown.

Once growth starts, a lot of the money which the OBR has generated, which is lying idle somewhere, will come into play and there will be much greater inflationary pressures for the economy once the recovery begins. There will also be a housing bubble, which will lead to the next financial crisis. I am normally a friend of plan A, but I am worried that there is a temptation for Chancellors to give money away for house purchase. If only we could get people used to the fact that you do not need to own a house and that if you rent one instead you can save your money and invest it in a more productive asset.

I welcome the reduction in national insurance contributions. Some noble Lords may remember that on the previous occasion we debated a Budget, I said that we ought to move away from taxes on income and towards imposing taxes on consumption. National insurance contributions should be abolished forthwith, if possible, and we should shift from income tax to a consumption tax. Further, we ought to have no zero-rated VAT commodities at all—a policy recommendation that got me sacked—and we ought to rely much more on VAT than on income tax for collecting revenue. I do not think that the Chancellor will do that. He is in enough difficulty as it is, and if he follows my policy he will only get into more difficulty, albeit that it would be the correct policy.