Financial Markets: Stability

Lord Desai Excerpts

Thursday 3rd November 2022 Lords Chamber

[Lord Desai (Non-Afl)]

My Lords, I thank the noble Lord, Lord Sharkey, for initiating this debate and the powers-that-be for holding it in the main Chamber and not shoving us off into the Moses Room. I have never enjoyed an economics debate in the Moses Room. It is much better in here.

We have already had three overlapping crises. First, we had come out of a pandemic, which had caused us to spend a lot of money and build up a deficit, but that was necessary. Secondly, as I said last time that we had a general economic debate in July, we are in a stagflation crisis as serious as the one we had in the 1970s. That crisis lasted 15 years and we have to take this crisis very seriously. It is partly the result of the Russia-Ukraine war, partly other things, but the shock of energy price rises is going to stay here and not go away any time soon. Thirdly, we had the desire on the part of the then Prime Minister, Liz Truss, to ignore all this and go for growth. I have lived here for nearly 60 years and as a professional economist I have never known any time when the British economy has not been going for growth—not actually getting it, but going for growth. Going for growth is the great thing. “How can we grow faster? How can we be like Germany or America?” That has cost us a lot. This is a very fragile economy. I remember the days of stop-go when the weakness of sterling was causing us a lot of problems and we could never get growth. Then we had the long battle about Europe and we finally Brexited. I think Brexit has done some damage, which the Government still do not admit, but the Office of Budget Responsibility was very clear how much Brexit has harmed us.

Given that these conditions were facing us, during the debate about the Conservative leadership it was quite clear that there were two views. One was of fiscal responsibility and the other was a dash for growth. I think the dash for growth won the support of the Conservative Party members.

The surprising thing about what happened then was the indecent haste with which the dash for growth was implemented. The new Prime Minister had plenty of time: unfortunately, because Her Majesty the Queen had died, Parliament was not sitting. She had a month or two to think about her policy. But no—she was in such a hurry I can only call it Maoist. Mao Zedong, when he became the leader of China, suddenly thought, “Within five years we are going to catch up with the UK in steel production”, and he totally ruined the economy. This economy can be ruined much faster than China’s, and that is what happened.

To propose tax cuts which are not properly funded was such an elementary mistake that it made the financial markets respectable and much loved in this country; for the first time, ordinary people thought, “Well, thank God for the financial markets, because this madness would have cost us a lot”. So in a sense it is quite right that the financial markets offer good advice to politicians: “Don’t do foolish things; try to do better”.

I do not have much time, but let me put it to the Government this way: do not start on the growth run. Please preserve our stability. There is plenty of time—this country is not going to go away. Right now, we are still suffering from the loss of skilled labour due to Brexit, and we need to take care of social care, the health service and so on. Conserve, preserve, and save the economy. We will have enough time to grow later.

Budget Statement

Lord Desai Excerpts

Tuesday 14th March 2017 Lords Chamber

[Lord Desai (Lab)]

My Lords, as the noble Baroness said, this is the last spring Budget. Miraculously, it will stretch into the autumn, because the legislation required to support the tax rises will not be done until autumn. We have a very nice Budget. I like Budgets that are dull, which pass without much notice and stretch out into infinity before we can deal with their consequences. From here on, I hope we will have autumn Budgets which will then go on into the spring to have their tax proposals implemented.

Our problem is that the era of high growth, which lasted from 1990 until about 2008, has gone for ever. It will not come back. All the thinking about spending and taxation is still stuck in the era when growth was robust and high. It will not happen, so we have to find some ways of economising or bring in high taxation. We cannot have a culture in which the self-employed, who are not a poor class, refuse to pay extra tax and make such a lot of noise that the Chancellor has to rethink. Only this morning there was news that the BBC encourages its highest-paid people to become self-employed rather than pay tax. That is the BBC—the paragon of virtue. We know that self-employment is a tax dodge and it has been since my friend Ken Livingstone became a company and started paying himself—a good socialist such as Ken Livingstone discovered 15 years ago that it paid to dodge taxes. We have to stop pretending that the self-employed are the backbone of society and guarantee growth. They are no such things. They are just tax dodgers. Tax dodgers ought to be treated like tax dodgers.

I welcome the fact the Chancellor abandoned his predecessor’s obsession with moving the Budget into surplus, but he is still obsessed with the debt problem. We went through this first with five years of coalition Government, where it was perhaps necessary to be severe about reducing the deficit, which had risen rather highly. It was quite clear that there was not going to be a sufficient multiplier from consumption spending to get growth going. That is fine, but now we have come to the stage where we really ought to ask a fundamental question: is the debt-to-GDP ratio a good indicator of anything? Debt is a stock and GDP is a flow. When you compare a stock to a flow there is no particularly ideal number at which you should stop. What you ought to compare is the cost of servicing the debt with the GDP. It so happens, as the noble Lord, Lord Gadhia, reminded us, that the cost of servicing the debt is 3%. It is one of the lowest costs that there is.

We have an ageing population and considerably high demands on social care and health. We ought to stop repeating this cliché that we are not going to burden our future generation with extra debt. What are you going to do about the present generation? Why are you burdening them with bad social care just because you do not want to burden the future generation, who are, if anything, going to be richer than us? We ought to seriously, fundamentally examine whether we should not have different fiscal rules to suit an ageing population in which there is a great reluctance to pay tax, but no reluctance to cut expenditure.

It has been suggested, especially by the noble Lord, Lord Finkelstein, who is not here, that we hypothecate some tax revenue for financing the National Health Service. It is very difficult to find any real numbers in a Budget document; they are all percentages, but there are some real numbers in this one. It just so happens that the contribution made by national insurance to public sector receipts, £130 billion, is not too far away from what we spend on national health, £149 billion. We should think if not about a strict hypothecation then about a marriage of certain items of revenue and expenditure, and tailor our rising taxation to the rise in expenditure required. If we were to tie national insurance to financing national health, as was originally the idea—some people may remember—it would make sense to raise the national insurance target when the National Health Service needed it. That is a much better way of financing national health than any I can think of.

We have a productivity problem because the economy has moved to a low-growth path, but what will happen in the future will be much worse. If our productivity were enhanced by artificial intelligence and such things, the level of employment would be much lower and we would have very different problems in financing our welfare from those that we had previously. So watch out: more changes are coming.

Brexit: Financial Services (European Union Committee Report)

Lord Desai Excerpts

Thursday 9th February 2017 Lords Chamber

[Lord Desai (Lab)]

My Lords, it is a pleasure to follow the noble Earl, and I also thank our chairman, the noble Baroness, Lady Falkner, for guiding us through this extremely complex subject. The more I study the problem of Brexit, the more complicated it appears to be, and I am sure that no one, when they ventured into this territory, knew exactly how complicated it was.

As the noble Earl also said, the City has seen both good times and bad times. The 1950s and the 1960s saw an involuntary exit from the sterling area. I do not know whether noble Lords remember the sterling area, but it was not a great thing after India had become independent and various former colonies began to have their own monetary policy. The City was lucky in then having the Eurodollar market—a result of the folly of American taxation policy—and soon after, when the US renounced its dollar-gold link, a huge market in foreign exchange transactions sprang up and the City was ready for that market.

At about that time—in 1971-72—we entered the European Economic Community, as it then was. In a sense, therefore, we entered the European Economic Community at a time when the City had recovered from its gentle decline and got into totally new activities for which it had, or soon got, the expertise. We know, therefore, that the City can suffer a shock and respond to it.

At the same time, we have to decide among ourselves—or, I hope, the Government will—what is the maximum loss that we could suffer. One of the best negotiating tactics is to figure out the worst-case scenario that we could face, and then find out if there is any way of avoiding it. The worst-case scenario is, obviously—as I said—that if there is not a good deal, we walk away with no deal. A no-deal scenario would mean no passporting, no equivalence and starting from scratch. We should mentally work out what that would mean for the City. Among our witnesses, some were, I would say, rather complacent, saying, “Oh, we are just so good that they will have to come to us”. They say that our eco-system—I was fascinated by that word, because I am sure that most of those people do not like any of this global warming stuff, but they use the word—is so fine and beautifully calibrated that our sheer competitive advantage will make them come to us. I am not so sure about that; it would mean that we do not need to worry about passporting or equivalence and we would still come out on top on sheer competitive advantage. Just as we are willing to suffer an economic loss for the sake of our sovereignty, they are capable of suffering economic loss through their reluctance to come to London. We must not assume that they are going to be terribly rational and will come to us. I keep hearing that, and I doubt it very much.

One advantage for us is that the regulatory system of financial markets is global and not confined to the EU: the EU melds in to the regulatory system headed by the Bank of International Settlements, the IMF, and so on. We have played a major part in the architecture of that system, so, in or out, we shall continue to be relevant to the architecture of the global financial system. To that extent, we ought to be able to put it to the EU that, in or out, the rules that we all have to obey are pretty common, and they are almost the equivalent of equivalence. We all have to follow certain global rules, so there cannot be too much of a disruption between us and them in the area of financial regulation.

I am not worried either that although we may establish equivalence in today’s terms, in the future they might change—and then what will we do? I do not think they will change arbitrarily, independently of the global system, because we will all have to dovetail with each other in that system. The technology is changing so fast that we all have to be ready as new products and technologies come up. The framing of financial regulations will therefore have to be a fast, global and innovative process, and I am sure that we will play our part in that.

Can we work out what we prize most within our interests in keeping the financial centre in the front? It might turn out that immigration is a crucial topic. It might be that our need to access the best talent internationally, and therefore have flexible immigration rules, will be more central to our position on the financial sector than anything else. In agreeing to whatever we agree with the EU, one thing that we ought to remember is to retain the flexibility of admitting highly skilled global experts in the financial markets, and not make the mistake of going overboard in restricting immigration by not distinguishing between those who are likely to be helpful to us and those who would be less helpful.

In the final analysis, we will have to be ready for the worst-case scenario—a repeat of the sterling area scenario, as it were—and to hope that new markets spring up for us while the damage is minimised. At the same time we ought to try as far as possible, consistent with our general aims of a hard Brexit, not to lose an advantage which we could retain.

Finance Bill

Lord Desai Excerpts

Tuesday 13th September 2016 Lords Chamber

[Lord Desai (Lab)]

My Lords, until about five minutes ago I was very worried for the noble Lord, Lord O’Neill of Gatley, because there was hardly anybody behind him on the Back Benches. When I counted, there was often only one person— probably assigned for that duty—and when they went off, somebody else came in rather morosely. I was thinking of when somebody was to be sacked from the politburo in the old Stalinist days, and that maybe this is the notice the Minister has been given. But now the word has gone out and the troops have come to back him up, although I see that none of them will speak.

As my noble friend Lord Darling said, we are discussing a Budget from so long ago that is not just déjà vu but déjà passé. The issues we have to consider are not so much those in the Finance Bill before us, and on which my noble friend Lord Hollick and his committee have made some useful comments. In the new situation we face of Brexit and its unknown and unestimated effects, however, in which new direction will the economy go?

Let me first take up the issue of monetary policy. Many people have mentioned that we—the Federal Reserve, ourselves and the European Central Bank—have been relying on QE for many years. Monetary policy has now come to the end of its usefulness and there is nothing much that policy can do. Obviously, everyone would now like to have more of a fiscal policy boost. The question then is: does that mean abandoning the strategy that George Osborne set of continually lowering the debt and trying to manage the deficit? Happily, the goal of a surplus by 2020, which I thought was foolish, has been abandoned.

There has been a lot of debate in the blogs about helicopter money. As some noble Lords may be aware, this is being debated among economists: if money has an effect on the economy, how does it transfer itself to the economy? What QE has told us is that money does not transfer to the economy. You can print away and buy as many bonds as you like, but money does not move out of the banks and the corporate cash reserves. Not much investment has taken place, even at very low interest rates. All we have is merger and acquisition activity, buying and selling old capital. No new capital is being generated.

One proposal is that we should have an active spending policy—perhaps for infrastructure, perhaps for other things—that should be financed purely by printing money, so that debt will not go up. There are learned articles that I can refer the noble Lord to. The idea is that if you run a deficit, but finance it purely by printing money, the debt does not go up. Of course, we were told by Milton Friedman and others that the danger was inflation. If there is inflation, every central banker will be relieved because they are hankering for it. In Britain, the figure is down to 0.6%, so if there were to be inflation, which I doubt, it would be welcome. One of the things the new Chancellor may consider between now and the Autumn Statement is some form of helicopter money.

The noble Lord, Lord Skidelsky, and I have been advocating another kind of helicopter money, which is not to waste it on infrastructure and things like that but to give it directly to every person on the electoral roll. Just give everybody £1,000 and see what happens. That would definitely boost the economy. After all, we are giving so much money to the banks and the corporates; we may as well give some money to the punters who have to pay for bank failures. That is not monetary policy or fiscal policy; it is fiscal policy with certain unorthodox aspects of monetary policy. Therefore, it can keep the debt at its current level, or maybe lower, but finance government spending. I know it sounds surprising, but it used to happen all the time before monetary orthodoxy took over.

Turning to productivity, the noble Lord knows that I have grave doubts about the statistical measurement of productivity. I read Robert Gordon’s massive work on why US productivity has gone down and why it is difficult to revive. It struck me that all the notions we have in the economics of productivity, such as total factor productivity, come from a time when manufacturing was dominant: from 1945 to 1975. When manufacturing is dominant and production is in solid commodities, productivity is very easy to measure. We do not have that economy any more. We have a highly service-oriented economy in which one of the ways quality shows itself is by a continuous fall in the price of new products. Every time a new gadget comes out, it is priced lower than the previous edition. We need to think much more radically about what it is we want to achieve when we are trying to measure productivity. Productivity cannot be an aim in itself; it has to be about enhancing welfare. If something is enhancing welfare by improving quality and getting prices down, we are missing something if we go on thinking that productivity is not going up. Some radical thinking is required. Perhaps one of the sacked former Ministers could be employed to think about this; maybe the ex-Chancellor himself, because he is a very thoughtful man.

Finally, I shall say one thing about Brexit negotiations. Obviously, the priority of the people who voted to exit is migration but, as many of my noble friends have said, the complexity of the negotiations on all the other aspects have to be borne in mind, especially financial services. Financial services are obviously a major part of our economy, and we should try our best to preserve as much as possible of the current portfolio—our passport rights and whatever else we can get.

However, one has to be careful politically, because the City is not popular among people who voted for Brexit. We should remember that. A lot of people are still very angry about the rescue of 2008 and about the bonus culture, to say nothing about LIBOR and all those criminal activities. My advice to the Government and to the City would be: if you are going to defend the City—as you should—prepare the political ground carefully, otherwise the Back Benches in the other place will revolt.

Surplus Target: Corporation Tax

Lord Desai Excerpts

Monday 4th July 2016 Lords Chamber

[Lord O'Neill of Gatley]

Or tomorrow even. The process by which the Government’s fiscal position is influenced by the forecasts of the independent OBR is one of the few things that do not appear to have changed in the past week or so. That will set out the circumstances in which fiscal policy choices will be made by a new Prime Minister and the team under them.

[Lord Desai (Lab)]

My Lords, the Chancellor mentioned in his Answer disenfranchised people in the north and elsewhere. Will he give some thought to the idea that now is not the time to cut taxes, which may lead to loss of revenue, but to increase expenditure inasmuch as the fiscal charter allows us to break rules as long as we break them in the right way?

[Lord O'Neill of Gatley]

My Lords, I was very pleased to hear the Chancellor refer to that. We will indeed endeavour to put even more effort into rebalancing the economy of this country, including in the north, in the Midlands and possibly in other parts of the country as well.

Budget Statement

Lord Desai Excerpts

Wednesday 23rd March 2016 Grand Committee

[Lord Desai (Lab)]

My Lords, normally the Budget is a curiosity for around 24 hours, and by the next day everyone has forgotten about it and we carry on as normal. This is a unique Budget because it refuses to go away and it keeps changing its shape. I follow on from what my noble friend Lord Eatwell said. We would really like to know what the Budget is now. Which calculations are now prevalent since the Government blew a big hole in their own Budget?

The Order Paper suggests that the last business today is something that the noble Lord, Lord Ashton of Hyde, is going to do with the Budget under the European Communities Act. He said that the Government’s assessment is set out in the Budget report and Autumn Statement, but I do not know which Budget Statements he will be talking about, because what we have is now not true. I think that we are owed some kind of explanation.

What I next want to say is this. Given how many times the OBR has had to revise its forecasts, what that reflects is a great deal of uncertainty about the economy, especially when it comes to the numbers. Economics is one of those rare subjects where we do not even know quite what has happened in the past, let alone what will happen in the future, especially when considering the numbers around our real income. We were sure that we had a double-dip recession, but the diagrams suggest that there was no double-dip recession.

My proposal, although it might not be that constructive, is that in future the Government ought to produce fan diagrams of all their Budget calculations. They should show what they intend to spend, but they should also show what they do not quite know and produce their confidence interval both on revenue and on the spending side—in which case you cannot actually make point forecasts of the targets. Point forecasts of targets are just a nonsense. Any statistician will tell you that no such number is completely accurate; it has to have large errors around it. Something that the Government ought to examine, either with the OBR or without the OBR, is a more sophisticated approach, if I can call it that, to Budget making. Ultimately, accountants want numbers to balance, but I think one can say that the deficit would be either this or that or anywhere in between, because that is the best we can say—we cannot separate the numbers.

In the same direction of argument, I lost a lot of friends during the last Government by supporting the Chancellor because I thought he was doing quite well. After all, he was implementing my noble friend Lord Darling’s policies, and he was succeeding in that. Who can blame him? However, I think it was wrong of the Chancellor—I have said this before—to have a budget surplus as a target for the last year of his Government. Apart from anything else, when Roy Jenkins achieved a budget surplus we lost the next election, so having a budget surplus is not a popular policy. Apart from Roy Jenkins, the only other two Chancellors who have achieved a budget surplus are Nigel Lawson and Gordon Brown, but the surpluses were so tiny you could hardly see them without a microscope. This idea of achieving a surplus should be laid aside. The Chancellor’s job is to ensure that the economy prospers and people do not suffer very much. He should not worry about these narrowly defined targets of deficits and surpluses.

One question is worth discussing and perhaps the noble Lord can answer it—how will the Government fill the gap? My own view is that, since they have blown a hole in the Budget, they may have to come out with a slightly new set of calculations. I see that the Minister has a troubled face. If the Government had known that they could not cut off this £4 billion, would they not have raised the fuel duty? Not raising fuel duty is an immoral act, apart from anything else. When the price of oil fell, the Government of India gave only half the gain to the consumer and pocketed the other half. That is a perfectly sensible thing to do. There is no reason why the entire gain from the price cut should be passed on, given that there are other urgent tasks that the Chancellor has to perform. It would be perfectly normal to say, “We had to do something, and this was the least painful”. I declare an interest in that I do not have a car and have not had one for 50 years since I have lived in London. I have absolutely no sympathy with car drivers—I have slightly less with bicycles but I will not go into that. The action I have described would be doable.

The raising of the threshold for the 40% income tax payment was too generous. There was a time when we had inflation and fiscal drift, as it were, and people thought it was unfair that they should pay extra tax given that nominal incomes were rising but real incomes were not. We do not have high inflation, so I think that going from a £42,000 threshold to a £45,000 threshold—or whatever the Government have done—is far too generous. If they had decided to introduce this over two years or defer it, as with the corporation tax for big businesses, they could have clawed back some money that way.

I very much welcome the sugar tax. I am a friend of high taxes, and the sugar tax is a good thing. I definitely argued for it. Some soft drink producers have asked, “Why us? Why not introduce a chocolate tax?”. I thought that was a good idea and that we should levy the sugar tax on solids as well as liquids and have a progressive sugar tax which would claw back some money. I have argued before in your Lordships’ House that I prefer taxing consumption rather than taxing income because, if you tax people while they are having fun, they do not notice it. Therefore, it would be perfectly normal to introduce a more comprehensive sugar tax. I also welcome the fact that, after all these years of the Treasury not agreeing to a hypothecated tax, we now have hypothecated taxes. Hurrah! Long may we have a practice of saying that this particular tax is for this particular expenditure.

Finally, quite a lot of noble Lords have said that there is a need for infrastructure spending. Fiscal orthodoxy says that we cannot do that because the Budget numbers will go down. I have read Tom Bower’s book on Tony Blair. I think Gordon Brown invented PPP and built 80 hospitals and not a single number showed up in government debt. I think you have to find a similar trick: set up some nice corporations that will build affordable houses and do it in such a way that not a single number appears in the Budget. It cannot be difficult for the Treasury—it has done it before; it can do it again.

United Kingdom: Productivity

Lord Desai Excerpts

Tuesday 8th September 2015 Lords Chamber

[Lord Desai (Lab)]

My Lords, it is a great pleasure to take part in this debate, especially following the noble Lord, Lord Flight. I will not go back to the early 19th century, as he did, but we have certainly been debating the backwardness of British productivity compared to the German for at least 125 years. I have done some work for this debate, and I am very grateful to the Library for having helped me out.

There are two problems. First, as the noble Lord, Lord O’Neill, said, the level of productivity in the UK is low relative to other countries, especially the United States—it could be the size of the domestic market but I am sure that the persistence of that gap is quite an interesting phenomenon. Secondly, we have the problem of growth in productivity. However, these are two separate problems. My own views is that what the Government are proposing is quite rightly taking care of the level of productivity across the economy by dealing with transport, housing and all sorts of other things that are time-saving devices, in a sense—by improving the quality of the input, they will raise productivity generally. But whether there will be productivity growth is a separate issue.

On the level of productivity, as I have said before, the British economy is a 60:40 economy, in that 60% of the labour force is employed in areas that produce only 35% of total output, and 40% is employed in producing 65% of total output. I am not saying that the 60% are unproductive; they are engaged in activities that I have before called welfare producing or happiness producing—or whatever it is. The productivity growth is much more marked and easily measurable in sectors that produce solid, practical things.

What happened during the long recession of 2007 to 2013 made it clear that, when growth collapses, productivity collapses. There is a simultaneity. Not only does productivity help growth, but growth helps productivity. During that period, by and large people went into the 60% of the 60:40 economy, into public and professional services, which sheltered them. The wages did not grow, because people went into low-productivity sectors, but unemployment stayed low. Labour market flexibility helped to absorb people who moved into low-productivity areas, because highly profitable, high-productivity areas had suffered a huge output shock and were shedding labour, especially in financial services. So in a sense, productivity and output were low because, in a sense, the productive sector was shedding labour and the less productive sector was absorbing it. There is nothing new about that, but that is a phenomenon which we have to live with.

Our problem would obviously be, as the noble Baroness, Lady Noakes, said, that we have to concentrate on what I call the less productive areas. It is very difficult to enhance the productivity of health and social workers, but 13% of the labour force is employed in health and social care, which produces 6% of output. It is very difficult to say how you can raise the productivity of a childminder or somebody who looks after the elderly for social care. Obviously, in areas like that it would be about improving the surroundings or the technology available, improving how patients are dealt with, with support services, and so on. But we have to look very carefully at those areas. We often look at the easier areas, the wealth-producing areas, where solid things are produced that can be measured—assembly lines, and so on. No doubt we should invest in that as well. However, our real problem may be that we have to raise the productivity of the areas where the bulk of the employment is, which will be a more difficult thing to deal with than raising growth in wealth-producing areas.

Coming to the latter, obviously, what the document shows is that we have had a slow-down in investment. Not only is the share of investment in terms of GDP lower in the UK than in the OECD generally, but lately during the recession we have had a drop. I know that every time anything happens the first thing businessmen say is, “Cut our taxes and we will give you growth”. I have heard it before, and for a long time. At least as far as econometrics is concerned, the connection between investment and tax cuts is, let us say, fragile—not very solid. Anyway, we have to have happy businessmen, so we can give them a tax cut.

The problem is that we have to find reliable ways of increasing investment, and not just increasing investment but doing so in the newer technologies, where tremendous scope exists for raising output and productivity. In a sense, if you look at some of the stuff which is being said—I am not a very practical person, so I only read this in newspapers—what is going on in the IT revolution will be tremendously important and will fundamentally transform production in the next 10 years or so. As the Minister said in his introductory speech, we have the universities, the young entrepreneurs and the start-ups; basically, now the Government will have to find some trick to connect up the people who are doing the start-ups and those in the universities, with more Fraunhofers—or whatever they are called in Germany—from universities, which will raise productivity.

In the next 10 years, as I said before, GDP growth will not be very high. I am sorry that this is the bad news, but I am giving it now. We are in a downward phase of a long cycle. Output growth will be low, as will inflation. However, we will have to find ways in which we can employ people in productive jobs, because as productivity grows we will have to absorb people into other sorts of jobs. I wish the Government good luck, and I hope that they will raise both productivity levels and the rate of growth of productivity.

Budget Statement

Lord Desai Excerpts

Tuesday 21st July 2015 Lords Chamber

[Lord Desai (Lab)]

My Lords, it is a pleasure to take part in this Budget debate. It is the first one in many years in which the noble Lord, Lord Skidelsky, is not speaking before or after me, so I feel a bit lonely.

I confess that, unlike the distinguished people whom the noble Lord, Lord Taverne, mentioned, I have always broadly supported the Chancellor’s economic strategy. In 2008-09, for whatever reason, the global economy had one of the biggest output shocks in 70 years. The effect was that the debt-to-GDP ratio, which was 37% in 2007, practically doubled in three years. From that point onwards there was a problem, in that output was much below its pre-crisis level, there was a big deficit and one had to find a way out. One way would have been to borrow more and raise the GDP ratio faster. The other was the direction the Chancellor took: to try to cut the deficit and go down the route of austerity. Whatever the earlier debate was, the aim of the route the Chancellor took has more or less come about, and he can now claim that the UK has the fastest growing economy in the G7—which is not saying much because the other G7 economies are not growing very fast.

I am more worried about the next five years over which the Chancellor has drawn his strategy. According to the projections, the economy is not supposed to grow above 2.5%. That is about half a percentage point below our historic growth rate, which means, given that growth in productivity and GDP are connected, that one cannot simply say that productivity will grow. If it is to grow in the way the Government think, where are the results in GDP growth? There is something missing between the growth projections and the hopes for growth in productivity.

Between 2000 and 2007, growth was roughly 3% and productivity grew by just under 2%. The situation will be difficult, and although the announced policies are no doubt very good, they relate to only a small part of the economy—the manufacturing industry. A large part of the economy is accounted for by the care sector and the service sector, which are not marketable services. I am not saying that they are a drag on the economy, but we have to factor that in when we consider why productivity is so low. That is worth doing and we have to devise a way in which the surplus-producing part of the economy can finance the welfare-producing part.

That said, the Chancellor, having succeeded in the first five years, is getting a little too ambitious. There is too great a hurry to move into surplus. He does not need to hurry that much. I hope that somewhere in the Treasury there are contingency plans in case things go wrong. I do not like the way household debt is increasing. According to the projections, if one strips out pension savings, household savings have practically collapsed. We are back to where we were when the seeds of the previous crisis were being sown. Household savings were down, household debt was up, everyone was mad about buying houses—and now, especially given the low interest rates, a new financial crisis might be bubbling up.

That is why I am not happy about the promise not to raise taxes. If you do not want to raise taxes, fine, but do not promise not to raise them. We should remember when President Bush said, “Read my lips”. That is what can happen, and it is no good making promises you do not need to make. It worries me that the Government think that they can get away with not increasing income tax, VAT and so on. They will have to be inventive and find another way to raise money, perhaps by increasing vehicle excise duty or creating something really imaginative such as a tax on haircuts.

Britain has had a low-productivity economy for a long time, when compared with the other G7 countries. There are diagrams in the Budget document showing that every other G7 country except for Japan is ahead of us in productivity. This has been true for at least as long as I have been studying macroeconomics in this country —50 years. We have always had a low wage, low productivity economy. Our productivity is much lower than our wages in relative terms, which is why we have always had inflationary pressures. Low wages remain a problem, and the whole argument about tax credits was that they made low wages respectable. The Chancellor has said, “I am going to limit tax credits”—fine—“and then I will introduce the living wage”. As many noble Lords have said, it is hard to understand the macroeconomic logic in ratcheting up the wage rate. It is a very noble aim, but I like the Chancellor being Gladstone, not Disraeli: I like him as a hard-hearted, not a soft-hearted man. He has made a major macroeconomic mistake in going for the living wage. He will have to carry a larger unemployment burden; I do not see any way in which he can escape it. I wish him luck.

Queen’s Speech

Lord Desai Excerpts

Thursday 4th June 2015 Lords Chamber

[Lord Desai (Lab)]

My Lords, I congratulate my noble friend Lord King of Lothbury on his joining the House and on his brilliant maiden speech. I think that we have known each other for more than 40 years, although I do not know the exact figure, so it is good to see him in this place.

I also welcome the Minister, the noble Lord, Lord O’Neill, who made a brilliant maiden speech, as we expected. When I saw him in the Royal Gallery I told him that we intend to give him a very hard time—and I think now is the time to start. Let me say to him first of all that he promised to cut red tape and save £10 billion. I have been here 24 years and I have heard that about 10 times. The gains are illusory and the red tape is seldom cut because the committee appointed to cut red tape does not care to meet as often as the Government would like. Therefore, red tape shall continue to be slashed and cut and we shall go on having fun along the way.

I have been a friend of austerity, much to many other friends’ dismay. I advocated it before the election of 2010 and I stick by that. The debate is no longer about whether or not we should have austerity but about the pace and the size. As the noble Lord, Lord Turnbull, said, he prefers my party’s time shape of austerity and deficit reduction to the Government’s, but we are no longer questioning that the deficit has to be reduced. That is at least one plus. I know that the OECD is saying that the deficit should not be reduced so rapidly, and so is the IMF. When those two agree, I really think something should be done. We have to doubt their advice. It is frequently wrong.

One thing that will determine the time shape of the deficit is not the economics but the politics. Since the Government are going to embark on this EU referendum saga, whatever the result will be—and I believe it will be a decision to stay—the Government’s trouble will start the day they win the referendum because their Back Benches will give them hell. I was here during the Major Government and I remember how much a Conservative Back-Bench rebellion can affect government performance. So I say to Ministers: do what you can do in the first two years and later your lives are not going to be comfortable.

That having been said, I add my words to the warnings other people have given. It is possible to believe six impossible things before breakfast and say many inconsistent things before the election, but once the election is won we ought to pause and say that this mad promise not to raise taxes—income tax, VAT and NIC—is not only irrational and fiscally irresponsible but unnecessary to implement. If the Government are going to implement this mad proposal, they will make their lives much more difficult than before. Again following the speech of the noble Lord, Lord Turnbull, and I think some other noble Lords said this as well, if we revalue properties across the UK—the challenge that the Thatcher Government flunked 30 years ago and we had the saga of the poll tax—the Government could promise to cut the rate of council tax and increase their revenue. That is a combination I do not normally offer to people. It is a real tax-cutting thing but just revalue properties and you will be able to harness the capital gains people have made over the number of years. You can even say, “Thanks to a Tory Government, people have got richer so we are going to tax them”. That may actually reduce your burden.

I have a wheeze, a little scheme—it may or may not work—which is now that interest rates are so low, it will be possible for the Government to issue 100-year bonds like the Spanish Government have done at a 0.5% rate of interest or whatever and repay the existing debt, which has a much higher service charge. I do not know whether it is possible. Some experts may doubt it, but whatever the service charge of that debt is, and I think it is about 4% or 4.5%, you could reduce it much more and release some money for spending on good things such as HS2 or something like that. Maybe the Minister will put me down properly and tell me that my numbers are completely wrong.

I will say something about productivity. This is a snare and a delusion. When we had an economy largely producing solid things—in agriculture, manufacturing or even transport—it was possible to define productivity somewhat precisely. Then we had the sort of growth model where we all got hung up on productivity and total factory productivity and all that. That is no longer the economy we have—not only us, even the US economy is finding productivity growth low. The noble Lord, Lord O’Neill, said that there are statistical problems. They are not statistical, they are conceptual. If a large part of your economy is in services, there is no way of defining productivity. I do not know what the productivity is of a childcare worker or somebody who takes care of the elderly or a physical fitness instructor or your shopping manager or whatever it is. We really have to say that there are jobs which, even if we use the old classical terminology, are surplus-producing sectors and there are jobs that are welfare-enhancing. Only the surplus-producing sector can help productivity as normally defined, and the larger your welfare-enhancing labour force, the lower your productivity level and growth. That is a short lecture. I cannot take another 35 minutes with this.

Lastly, as my noble friend Lord Reid said, we may be on the verge of another big asset bubble and another crash. The merger and acquisition numbers are frightening. Again as my noble friend Lord Reid said, people are buying and selling existing equities and bonds but they are not investing in any new productive activity. This is a classic effect of a sort of Wicksellian cycle in which we have a very low interest rate and any profit rate would make it feasible to borrow. People are borrowing and buying equities back and forth. This will crash, no doubt, and I hope that when it does, the noble Lord, with his expertise in the financial markets, will be able to get us out of it.

Finance (No. 2) Bill

Lord Desai Excerpts

Thursday 26th March 2015 Lords Chamber

[Lord Desai (Lab)]

My Lords, this is the fifth and last time that we are going to discuss a Finance Bill and all that one can say is that, so far at least, the macroeconomic strategy that the Labour Party had laid down before it went out of office has been achieved by the Conservative Party. We are grateful for that. We said that the deficit should be halved. Given the greater ambition of the Chancellor, at least he has managed to achieve half of the job.

I want to concentrate in this debate on lots of things which have not been done. I do so not from a partisan basis but from the point of view of economics. We continue to tax income rather than consumption, and when we tax income we make far too many small distinctions—between married people and this and that—so that the whole thing becomes very complicated. Again and again, we have tried to simplify the tax system. While the raising of the threshold has been very welcome, it really needs thinking out whether we should not just try to find a suitable definition of consumption. I think that would be easier to define than income, which at the higher levels gets to be a very tricky concept. Lots and lots of tax advisers make a fortune out of trying to game the system, so we should think of doing a consumption tax.

To that extent, I am disappointed that the Chancellor, who is a very innovative person, has not put his mind to this sort of thing. Whoever the Chancellor is next time, they may do that. The same argument extends to corporation tax. Again and again, we tax profits, not resource consumption. The important thing is to tax not achievements but expenditure and the consumption of resources, if we could find a way of taxing resource consumption.

My noble friend Lord Haskel talked about productivity. Another aspect of productivity is asking, “Are you achieving an efficient input/output combination? Are you achieving productivity in terms of the non-labour input as well as the labour input in the way that you conduct business?”. We ought to give incentives in such a way that companies economise on resource use rather than just taxing profits. Again, that is an open question for the future; I do not know whether we will be able to achieve it.

Going further along the line, if we can decide early on that whatever we do should encourage work and employment, we ought then to go on to look at the national insurance contribution. I have never understood why we still have that tax. Again and again, promises have been made to merge it with income tax or do something drastic, but we have not had that. In a sense we are stuck in a rut, because it is easier to make marginal changes to the existing tax structure than to review the tax structure itself. I wanted to make that general comment.

One of the things that we are about to face is that the developed economies, which have had the good fortune to grow well and easily over the past 50 years, are about to enter a low-growth economy. Good times are no longer going to be around as they were before. In that sort of situation, we ought to be much more vigilant about achieving growth-enhancing things to the extent that we can. Ultimately, it will be the human resource, the productivity of labour and the way in which we use our resources that will determine the marginal difference between having, as it were, 2% growth or 3% growth.

We need to rejig our thinking. Growth is no longer going to be automatic and natural. We are going to face severe headwinds unless we rethink our economic system. To that extent, while much may have been achieved in the last five years, we have not had time to rethink our economic system. It is about time that we did that, in which case we would not tax income but tax consumption, not tax profits but tax resource use, not tax labour but reward work and, further along, try to find as many other things as possible that could be growth enhancing. We need Budgets that are genuinely growth enhancing and not just tax concessions to businesses. We need better than this.

[Lord Marlesford (Con)]

Before the noble Lord sits down, he raised the interesting question of the expenditure tax. He will remember much better than I do Lord Kaldor’s famous book on the expenditure tax, probably in the 1960s or even earlier. The big problem with the expenditure tax, and I just wonder whether he has taken this into account, was the taxation of the benefit of the ownership of capital. Nicholas Kaldor said that it was necessary to attribute a value to capital as part of the formula under which expenditure could be determined. In other words, the return on capital was part of the income, and then at the end of the year it would be more expenditure that would be counted in. This of course raised the whole problem of the taxation of capital and having a wealth tax, and it foundered on that basis. Does the noble Lord have any view on how he would tackle that problem?

[Lord Desai]

Basically, I would be much more radical than even Lord Kaldor. It is because you are trying to tax income, capital or income from capital that a variety of complications arise in our tax system and our tax code gets ever more elaborate. Beyond the small range of PAYE-type incomes, income is not definable conceptually in economics. Therefore, when you try to tax something called income, you get into complications because people can find ways of redefining whatever it is as not income. The whole approach is really to go down the expenditure tax route—purely expenditure—and not to worry about income of other kinds. If people are deriving income from capital, that is fine. What we would want to know is what expenses they incur in trying to do that, and tax that.

Especially now when we are in a very different dispensation than we have been used to for the past 50 years, we will have to be radical about rethinking our taxation. I would even go further and not worry about considerations like that.