Budget Statement

Debate between Lord Eatwell and Lord O'Neill of Gatley

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.