Budget Statement

Lord Eatwell Excerpts

Wednesday 23rd March 2016 Grand Committee

[The Commercial Secretary to the Treasury (Lord O'Neill of Gatley) (Con)]

My Lords, last week in the other place the Chancellor set out a Budget to continue the UK’s economic recovery. It was a Budget which responded to the global economic uncertainties that have grown in recent months, and made appropriate choices to insulate ourselves from those risks as much as possible.

There are many positive stories to tell about the UK’s economy. For example, last Wednesday the employment statistics showed yet another boost to employment, with 150,000 more jobs than the Office for Budget Responsibility expected just four months ago. This means that employment is at the highest level ever, and the proportion of people on the claimant count is the lowest it has been for over four decades. Last year also saw the highest annual growth in nominal and real earnings since 2008. Meanwhile, the fiscal deficit as a share of GDP is forecast to be cut this year by almost two-thirds from its 2009-10 post-war peak—from 10.3% to 3.8%. The OECD has forecast that the UK will be the fastest-growing major advanced economy in 2016.

However, there are still significant economic issues that need to be addressed. The Office for Budget Responsibility has forecast a deterioration in the fiscal position between 2016-17 and 2020-21, largely driven by lower tax receipts—particularly as a result of a weaker productivity outlook and a weaker outturn for nominal GDP. This reflects a common recent phenomenon of low productivity growth across the western economies, but it also comes at a time when economic turbulence worldwide has led to weaker growth forecasts for the global economy and, importantly, for global trade.

I observe that there have been three specific developments in global markets since the Autumn Statement that are material. First, until this month, there had been evidence of the US economy slowing. Secondly, as is well discussed, commodity prices and inflation expectations have continued, or did continue, to drop, resulting in nominal GDP in many places, including the UK, being weaker than previously thought. Thirdly, while in my judgment Chinese activity data has not deteriorated much further—remember that this is since November—additional policy uncertainty has raised risk premia in markets exposed to China. Against that, I would note that, in the context of the revised OBR forecasts for public sector finances, it is interesting to observe that there have been signs of reversal in all three of these trends in recent weeks. None the less, there remain many global risks—these and others—and, as an open trading economy with extremely strong links worldwide, we are by no means immune from them.

At the same time, domestically our productivity remains too low, as we have discussed many times in this House. I have spoken at length about tackling the UK’s productivity challenge. These issues have existed and been debated for decades and the solutions and better outcomes will not necessarily materialise in a matter of months. Nevertheless, the measures set out in this Budget take further important steps which, as well as helping us stick to our path for running a budget surplus, will secure growth and promote productivity increases over the long term.

With noble Lords’ permission, I will first discuss the revised fiscal figures for the next five years and then move to specific measures introduced in this Budget. In the face of the new assessment of productivity and the slowing global economy, the OBR now forecasts that UK GDP will grow by 2% this year, 2.2% again in 2017 and then 2.1% in each of the three years after that. The Government have responded to the deterioration in the OBR’s fiscal forecast and are taking new measures to ensure we keep living within our means. To help us achieve this, the Government will make further savings of £3.5 billion from departmental spending, following an efficiency review.

Although debt as a percentage of GDP is above target this year, compared to the forecast, importantly, the actual level of our national debt in cash is around £9 billion lower. In the future, debt is forecast to continue to fall as a share of GDP each year to the end of the forecast period. In 2009-10, the deficit was forecast to reach 10.3% of national income. Thanks to sustained action, the deficit is forecast to fall by almost two-thirds by this year, reaching 3.8% of GDP. The deficit is now forecast to continue to fall across this Parliament and, because we have taken decisive action to control spending and make savings, in 2019-20 Britain is set to run a surplus.

When the forecasts change, of course our plans also have to change. However, the decisions made in this Budget ensure that our fiscal mandate will be met, meaning greater resilience for our economy in uncertain times. Importantly, we have set out how to achieve this in a fair way. HM Treasury analysis published alongside the Budget shows that, as a result of actions taken, the proportion of taxes paid by those on highest incomes will increase, while the poorest and most vulnerable will continue to be supported.

In parallel, I also welcome this opportunity to listen to Members’ views on the information that will be provided to the Commission this year under Section 5 of the European Communities (Amendment) Act 1993. As in previous years, the Government will inform the Commission of the UK’s economic and budgetary position as part of our participation in the EU’s stability and growth pact. The Government plan to submit their convergence programme, with the approval of both Houses. The convergence programme explains the Government’s medium-term fiscal policies as set out in the 2015 Autumn Statement and Budget 2016, and also includes the OBR forecasts. As such, it is based entirely on previously published documents that have been presented to Parliament.

The UK economy is deeply intertwined with the economies of other EU member states. In 2014, 44% of total UK exports were destined for the EU 28, so it is in our interests that the European economy is successful and stable. It is therefore important that we participate in the EU’s macroeconomic co-ordination processes to continue to drive important messages about sound economic policy and further development of the single market. With the Budget on 16 March this year, I appreciate that the time to prepare for this debate has been particularly tight. Against that background, the Treasury has made every effort to provide early copies of the convergence programme document in advance of the debate today.

Before I turn to the measures contained in the Budget, I would like to make a few comments on one now key and topical aspect of the fairness agenda: namely, disability payments. The focus of the Government has always been on strengthening the economy in order to create a fairer society. As a result of the Government’s policies, unemployment is at a four-decade low, wages are higher, inequality, child poverty and pensioner poverty have fallen, and the gender pay gap is at an all-time low. These have not happened by chance but because of deliberate strategies to fix the economy, back business, control spending and reform welfare by incentivising the reasons to work. So although there have been controversies, the results have helped to build a stronger society.

We have also significantly increased our support to disabled people. Indeed, the sums are considerably greater than those under the previous Labour Government. However, it was clear that the reforms proposed to personal independence payments, although they drew on the work of an independent review, did not command support. That is why they have been withdrawn. Over the coming months, the Government will be working to build a system of disability support that is stronger, fairer and better integrated with our health and social services. And, to be clear, there are no plans to make further welfare savings. But there remain strong reasons to keep the welfare budget under control. Strong leadership demands taking difficult decisions—decisions that may not always be popular, but which will make the country stronger.

The measures set out in this Budget will make the country fundamentally stronger. They will encourage growth, savings and investment, boost productivity, invest in our skill base, ensure that the tax system is fair as well as being competitive, rebalance the economy, and help people’s well-being. We know that, in order to strengthen our economy, our businesses have to be as competitive as possible because that increased competitiveness will be a driver of long-term growth.

It is for this reason that the Budget cuts the rate of corporation tax even further, to 17% in 2020, giving us the most competitive rate in the G20 and benefiting more than 1 million businesses. The Budget also cuts the burden of business rates by £6.7 billion over the next five years, taking 600,000 of our smallest firms out of business rates altogether. Through a £1 billion North Sea oil and gas package, this is a Budget that helps Britain’s largest industry succeed in difficult economic times. Through cuts to both the higher and basic rates of capital gains tax, it encourages investment, which is the lifeblood of Britain’s businesses. And through the abolition of Class 2 national insurance contributions, it creates a simpler tax system and a tax cut of more than £130 for the 3 million-plus self-employed people in Britain.

Tax should not merely be competitive; it also has to be fair. The Budget sets out a series of measures designed to ensure that multinational companies pay their fair share of tax by introducing restrictions on the use of internet expenses, strengthening the rules on hybrid mismatch agreements, preventing property developers shifting payments offshore and taxing royalties payments where these are used to avoid tax. Important measures are also taken to simplify the tax system, including modernising the climate change tax system, updating corporation tax rules on losses and reforming stamp duty land tax on residential properties.

This is also a Budget that helps incomes and savings. It raises the tax-free personal allowance to £11,500 from next year, and the higher rate threshold to £45,000. It freezes fuel duty, helping families and businesses keep costs low every time they fill up. For the first time, it creates a lifetime ISA, helping people to buy their first home or save for their retirement—potentially one of the most exciting savings tools for a generation.

In this Budget, we have taken further important steps to boost our productivity, adding to those announced in the summer of 2015. On education, it commits a further £1.6 billion to education spending, gives more schools the opportunity to extend the school day, drives forward the academies programme, creates the first national funding formula for schools, boosts sport in schools, helped not least by the soft drinks industry levy, and, crucially—I am particularly pleased about this—fires a starting pistol for transforming education in the so-called northern powerhouse.

On our transport infrastructure, this Budget tackles some major existing barriers to growth: the green light to so-called HS3 and, in particular, a commitment to a Manchester to Leeds train time reduction to 30 minutes; a national plan for developing the Thames Gateway; major motorway improvements in the north, including working up a plan for a trans-Pennine tunnel; the start of the Crossrail 2 development; and two new subjects for the independent National Infrastructure Commission to study—5G and developing the Cambridge to Milton Keynes to Oxford corridor.

This Budget also continues the Government’s devolution agenda through: new devolution deals with Greater Lincolnshire, East Anglia, the West of England and the Cardiff Capital Region; the start of negotiations with Edinburgh and South East Scotland; further devolution to Liverpool city region and to Greater Manchester; and an accelerated launch of the 100% retention business rates pilot.

Over the past six years, this country has grown and strengthened its economy in precisely the way that we need if we are to continue succeeding in an uncertain world. Global circumstances have the power to blow any country’s economy off course. It is for this reason that it is so important to redouble our efforts to build economic security through sustainable growth and sensible public spending decisions. But living in a changing, uncertain world creates opportunities as well as threats. I want the UK to be in a position where we can focus on making the most of those opportunities, both here and around the world. That is what this Budget helps us do. It prioritises stability, security and sustainable long-term prosperity, and I commend it to your Lordships.

[Lord Eatwell (Non-Afl)]

My Lords, before the Minister at least notionally sits down and before I begin my speech, I listened very carefully to what he had to say about disability payments. He failed to explain how the budgetary position set out in the Red Book is to be restored, given that the payment cut has been rescinded. It will be very difficult for this Grand Committee to evaluate the Budget unless he provides this essential piece of information. I am happy to give way for him to do so.

[Lord O'Neill of Gatley]

My Lords, I am planning to talk about that more. I anticipate that that will not be the only comment on this topic, and I plan to respond when I hear other noble Lords make their comments. It needs to be said in exactly the right context rather than for me to respond right now.

[Lord Eatwell]

Very well, we will wait with interest.

My Lords, in opening his Budget speech in another place just six days ago, the Chancellor of the Exchequer declared:

“The British economy is resilient because, whatever the challenge … we have held to the course we set out”.—[Official Report, Commons, 16/3/16; col. 951.]

This is a remarkable statement, because neither part of it is true: the British economy is not resilient and he has certainly not held to the course. The story of a vacillating Chancellor is told in wonderfully subversive terms in table B.2 of the OBR’s Economic and Fiscal Outlook. The author of the OBR report explains the Chancellor’s reaction to revised OBR forecasts of changing economic fortunes:

“On some occasions, the Government has chosen to offset the effects of our underlying revisions – e.g. in November 2011, when they would otherwise have led to a target being missed. On others it has chosen to accommodate those changes – e.g. in December 2012, when despite our forecast revisions implying that the debt target was set to be missed, it decided not to offset their effect”.

So much for “holding the course”. These vacillations have not been trivial. They go a long way to explaining what has happened to the economy in the past six years, and why it is not resilient. They also help us to anticipate the consequences of the Chancellor’s last remaining target: a budget surplus by 2020.

Let us recall the economy that the Chancellor inherited from the noble Lord, Lord Darling, whom I am delighted to see here in his place. There was a fiscal deficit of a little under 8% of GDP—down from more than 10% the previous year—and the real economy was growing at 3% a year. In May 2010, Mr Osborne’s new austerity killed that growth performance stone dead. The squeeze reduced growth to zero by early 2012 and the deficit had started to tick upwards again. Something had to be done. The response, as we have heard from the OBR, was what the Chancellor calls in his speech a short-term fix. He stopped squeezing. Austerity was quietly shelved for a while. In technical terms, the cyclically adjusted budget deficit was left unchanged instead of being cut further as the growing deficit would have demanded if the Chancellor had held to the course. What was the result? The removal of the deadweight of Osborne’s austerity led to a return to growth and a falling deficit once more.

Now the vacillating Chancellor plans to return to austerity, even though, interestingly enough, that word failed to appear in the budget speech. He plans to cut the cyclically adjusted budget deficit every year for the next five years, with a huge fiscal tightening in 2019—the content of which is unspecified—all in the search of that dogmatic objective of a budget surplus by 2020. We can only expect the same outcome as that of Mr Osborne’s previous bouts of extreme austerity.

While the Chancellor has vacillated in practice, the underlying theoretical belief that drives his policy has remained constant: first, that a balanced budget is the foundation of economic growth; and, secondly, that a tight fiscal policy is necessary to provide the opportunity for an expansionary monetary policy that will stimulate the requisite growth. It is this policy mix—Mr Osborne’s policy mix—that is the source of much of the “turbulence” that he blames on others, and it is this policy mix that has seriously weakened the foundations of the British economy.

What are the markers of this weakness? The first is low productivity growth—the spectre that dominates this budget. Since 2010, the UK has suffered the largest fall in growth of output per worker hour in the G7, and now we have the lowest rate of productivity growth among the advanced countries. It is attributable, perhaps, to many factors, but predominantly to an investment rate still 20% below the pre-crisis level, with low wages and ever more easily disposable workers creating an incentive to hire cheap labour rather than invest in labour-saving capital. Low productivity growth not only undermines the possibility of raising the standard of living but undermines the competiveness of the economy.

The second indication of weakness is the UK’s sharp fall in our share of world markets since 2010. The impact of slow-growing world markets is, for the UK, doubly severe. Our markets may be growing slowly, but our share of those markets is becoming smaller, delivering what I believe in the Conservative Party is called a double whammy. The result is a record for Mr Osborne in 2015—the largest current account deficit, relative to GDP, since the early 19th century. That means that our standard of living is now funded by the accumulation of foreign debt.

In his Budget speech, Mr Osborne boasted that,

“we have doubled our foreign exchange reserves”.—[Official Report, Commons, 16/3/16; col. 952.]

He failed to point out that Britain’s foreign debts have risen much faster, so that our net international investment position has deteriorated from around minus 2% of GDP at the end of 2010 to in excess of minus 25% today. This growing international indebtedness exposes the UK to the vagaries of the international money markets. That unhappy situation is not resilience.

What then of the expansionary monetary policy that was supposed to be one of the goals of fiscal austerity? There has certainly been monetary expansion—not just the historically low interest rates but quantitative easing, too. But apart from funding the growth in consumer demand and hence in household debt that has been the main driver of growth over the past three years, monetary easing has not produced the expected increase in investment. Instead, it has fostered the financial turbulence of which the Chancellor complains in the Budget speech. The old adage that, in the absence of the prospect of growing demand, cheap money amounts to pushing on a string has once again been confirmed. Instead of funding real investment, monetary expansion has resulted in a boom in asset prices—not just in houses and equity markets, but in the flow of funds into emerging market corporate bonds in the search for higher yield.

All these asset markets have the potential for extreme instability, as is all too evident today, and, as has been amply demonstrated in the last seven years, financial instability leads to substantial real economic loss—loss that overwhelms any positive impact that cheap money may have had. This financial fragility is the third marker of economic weakness. Very low productivity growth, deteriorating international competitiveness and severe asset market distortions that can only lead to further financial instability—that is what the Chancellor calls resilience. Yet in the face of evident policy failure, the response of the Chancellor and of the monetary authorities is more of the same: more austerity, more QE.

It will be up to future generations of economic historians to examine exactly how George Osborne managed to get things quite so wrong, but it is possible to say today why fiscal austerity and cheap money have not produced the results that were expected. In both cases, the Chancellor was expecting behavioural responses, particularly the responses of business investors, that simply did not come to pass. The proposition that a balanced budget is the foundation of economic strength and that cheap money will stimulate recovery both rely on the belief that the economy is essentially a self-adjusting system. There may be unexpected shocks, there may be what the Chancellor refers to as “a dangerous cocktail” of risks, there may be time lags and mistakes, but in the long run, markets will revert to an equilibrium of steady growth. Nothing else needs to be done. That belief was tested to destruction in the 1930s. Mr Osborne has tested it again and it has failed again. The economy is not, in any significant sense, self-adjusting. Businessmen do not respond to the stimulus of cheap money by increasing investment if they see no prospect of a future of growing demand.

So what is to be done? How is the trend to low productivity, decreasing competitiveness and financial fragility to be reversed? Here I agree, in part, with the Chancellor. We do not want “short-term fixes”, as he put it. We certainly do not need what we are offered in the Budget, described by the OBR as,

“near-term giveaways followed by long-term takeaways”.

What we need are,

“long-term solutions to long-term problems”. [Official Report, Commons, 16/3/16; col, 951.]

I believe the Chancellor is right that a simple stimulus, whether fiscal or monetary, will not work; it will just lead to further deterioration in the balance of payments and yet more foreign debt. Therein lies the dilemma. To lift the UK economy out of the hole that the Chancellor has dug requires long-term sustained investment in the productive base of the economy—in the supply-side, if you like. That sustained investment would raise the prospect of growing future demand and provide the pull on the string to validate the monetary push. Yet in the immediate future, before it delivers higher productivity and enhanced competitiveness, sustained investment will also result in a further—perhaps short-term—deterioration in the balance of payments, with the potential for yet further financial instability that will blow any business-led investment programme off course.

That is why the Government must take the lead. There are positive noises in the Budget about infrastructure, technology and skills and even a pothole initiative—though only a small one—but there is nothing on the scale required. Given that the cost of funds to the Government is today just about zero in real terms, it is difficult to understand the failure to initiate a major expansion of investment in infrastructure and the other major components of supply-side strength—skills, higher education, R&D, new technologies and creative industries. This failure is resulting in not just loss of output today but a long-term loss of competitive productive capacity.

To fund such a programme while mitigating—though not eliminating—the likelihood of financial instability, there should be a hypothecated, ring-fenced, British reconstruction fund, financed by the sale of long-term bonds either to the private market, or, if necessary, to the Bank of England—quantitative easing with a purpose, if you like. To avoid the fiscal sleight of hand to which Chancellors are unfortunately prone, the objectives of the fund should be clearly delineated and audited.

Of course, the deficit hawks will claim that this is just another government spending proposal presented in attractive wrapping paper. But what the austerity junkies fail to appreciate is that fiscal balance is the consequence of economic growth, not the cause, as the experience of the last six years has clearly demonstrated. Unless we solve the problem of lack of investment, low productivity and declining competitiveness first, the Chancellor’s financial targets will never be met.

Previous Governments have been criticised for failing to fix the roof while the sun is shining. But far from fixing the roof, Mr Osborne has been hacking at the foundations. That is why a new approach is needed, and needed now.