Surplus Target: Corporation Tax

Debate between Lord Forsyth of Drumlean and Lord O'Neill of Gatley

Monday 4th July 2016 Lords Chamber

[Lord O'Neill of Gatley]

My Lords, I notice to my right some noble Lords with strong views on and experience of these kinds of events. Let me just reflect on my own judgments, including some from my past life. Let me also quickly state that in the last week our long-term borrowing costs have gone down. It is the job in terms of policy to focus on doing what is right in the circumstances. I do not believe that we should react to or be excessively focused on what a rating agency may say one way or another. It is important that we do the right thing.

[Lord Forsyth of Drumlean (Con)]

My Lords, can my noble friend help those people in the country who might be a bit puzzled as to why the Chancellor said a few days before the referendum that if we voted to leave the European Union interest rates and taxes would have to go up? Now we are faced with the proposition that taxes should be cut and interest rates might go down. Why did that strange transformation take place over such a short time in the Treasury?

[Lord O'Neill of Gatley]

My Lords, forecasts are forecasts and I have spent a considerable part of my life having that dubious challenge. We are dealing with an outcome as opposed to a forecast. From what I remember of the specifics, I do not remember a statement that interest rates “will” rise, I thought it was more that they “could” rise. Importantly, while the Chancellor has responded with the appropriate flexibility for the new circumstances we may find ourselves in, based on what the OBR comes up with in its new forecasts for the Autumn Statement, it may well be that there are still difficult choices to be made.

The Economy

Debate between Lord Forsyth of Drumlean and Lord O'Neill of Gatley

Thursday 28th April 2016 Lords Chamber

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

My Lords, it is an honour for me to lead this debate today on the economy and our prospects. Let me add that I am glad to see that the topic of economics is as stimulating as always. The purpose of this debate is partially to give noble Lords an opportunity to contribute, in view of the fact that the Budget debate was held in the Moses Room, given the heavy legislative agenda. With this in mind, as many might have participated there, my opening remarks will be offered in a slightly different style so as not simply to repeat much of what I offered that day.

I also take this opportunity to pay tribute, on the sad news of his recent passing, to the remarkable contributions made by Lord Peston to this House and our country as a whole.

Since this Government came to power, the economy has made good progress: no other G7 economy has grown faster; we have record levels of employment; our fiscal deficit has declined considerably; and we have a clear path to the goal of a fiscal surplus and reduced government debt. Nevertheless, we face a considerable period of uncertainty around the world and, as an open economy, we live in that world with consequences for us from what happens to the rest of the world and the actions we may take in engaging with it. With this in mind, I will make some comments about the EU referendum and its possible interplay with two of our ongoing economic challenges: our low recorded productivity performance and our large external deficit.

It is a fact that for a long time, the UK has experienced much weaker levels of productivity than our G7 neighbours. It is apparently also the case that since 2010, our productivity performance has been weak compared to the pre-crisis period, as is seemingly true for the rest of the G7, but with ours deteriorating more than others. We have spent time debating the causes, and in the past year we have introduced a range of policies to remedy some of these challenges, but I will present some further aspects of this complex and challenging issue today.

Interestingly, there is no real evidence that financial markets are especially troubled by this—at least yet. Since 2010, our trade-weighted exchange rate—the average of our exchange rates against all our neighbours—has risen by around 6%, while those of five of our G7 partners have declined. Since 2015, our trade-weighted exchange rate has indeed declined, by just under 5%, which is more than the rest of the G7, but this only takes back some of the rise since 2010.

If there were concerns around the world about our ongoing productivity performance, you might expect a larger sustained weakness. It is also evident from other key financial indicators—be it our appropriate measure of equity indices or our gilt market performance compared to elsewhere—that there are no signs of structural underperformance. This is gratifying and could be read as suggesting that markets do not entirely believe the accuracy or importance of the reported productivity data, or that there are much important influences at work, including perhaps our strong GDP and employment performance. None the less, we cannot take this “kindness of strangers”—to paraphrase the Governor of the Bank of England—as a given, and if our productivity underperformance persists or deteriorates further, and/or other, strong aspects of our economic performance reverse, then markets might behave differently. I shall return to this later, but as the Treasury has shown recently, a vote to leave the EU might be regarded as a negative productivity shock.

If you adjust our reported productivity data for their employment strength, and again compare them with the rest of the G7, our underperformance does not look quite so bad. Although the link between productivity and employment is uncertain, recent work by the French academics Bourlès, Cette and Cozarenco—apologies for my pronunciation—has identified a relationship between the employment rate, the number of working hours and the level of productivity.

Making use of this work, and adjusting our competitors’ employment rate and working hours to match our own, we can generate illustrative estimates of what one might regard as a truer productivity gap. These estimates find that the gap drops considerably with some of our neighbours: approximately 40% with Germany, around 50% with France and over 70% with Italy.

There are also some important facts to highlight from the reported productivity data. For example, and again in contrast to much of the perception, some of our key service sectors have been reporting strong productivity performance: notably, wholesale and retail, which has grown by 11.3% since the start of 2010.

It is not true that, as is often perceived, manufacturing is the source of the strongest productivity performance. As reported—and again, not generally appreciated—in fact, two of our weakest productivity performers since 2010 have been financial services and oil and gas, both reversing previously apparently strong productivity performances. There is a case to be made that the recent weakness might simply be compensating for what was actually, in hindsight, not sustainable productivity. If that is indeed true, this part of our supposed recent productivity weakness is not something to be concerned about. Of course, it might be that these sources of productivity weakness need to be reversed, which, if so, is contrary to much popular perception of our immediate challenges. More analysis on this conundrum is definitely necessary.

Whatever is the case with that interesting challenge, I remain happy in general with our progress in pursuing the policies that deal with our longer held major sources of underlying productivity weakness. An essential part of that plan is to invest in skills and training so that we can meet the needs of employers. That means, for example, making sure that the adult skills budget is protected, or creating a new network of national colleges and institutes of technology.

It also means giving more young people the opportunity to develop high quality skills, and our expansion of apprenticeships is about quality as much as quantity. By 2020, we will have doubled what we spent on apprenticeships in 2010 in cash terms.

We also need to make sure that we have the best possible infrastructure in place. That is why we have established an independent UK Infrastructure Commission and stepped up investment in the road and rail networks we need, such as Crossrail 2 and so-called High Speed 3.

Lastly, we need to realise our vision of a northern powerhouse—something in which I am particularly involved—to make sure that we realise the productive potential of all parts of the United Kingdom. As well as investment, devolution remains a crucial aspect of this.

I turn to the second so-called Achilles heel: our current account balance of payments. This is a perceived weakness which is of course worthy of some concern. The latest data show a sharp deterioration in the fourth quarter of last year to 7% of GDP, and as a consequence of that quarter’s number, for 2015 as a whole the reported deficit was 5.2% of GDP.

As I shall explain in a minute, there are important qualifications that suggest that this external deficit might not be quite as concerning as it might be if it were dominated by a deteriorating trade deficit. But, whatever that explanation, it is also true that if strangers were to become less kind, it could be problematic, especially if it coincides with a new, clear negative productivity shock.

Examining the data in detail reveals that for the past four years, our trade balance has stabilised, albeit with a deficit that is still too high. The actual source of the current account deficit deterioration is in the so-called non-trade accounts. Earnings from our overseas investments have declined—presumably reflecting lower economic growth—while our returns to overseas investors, perhaps reflecting our superior economic performance, have stayed relatively strong. As such, we ran an income deficit—the difference between the two—of nearly 2% of GDP last year. One might imagine that, as the rest of the world economy strengthens, especially in the rest of Europe, those returns should increase as this part of the external accounts improves, possibly significantly.

However, as I personally have discovered in recent discussions with many large foreign investors, including some that I have visited—I was in the Middle East the week before last—if we were to adopt policies that might give rise to increased risk premia in their eyes, they might decide to stop investing here, which would result in an investment shortfall for the UK that would, among other things, immediately require a corresponding domestic rise in our savings rate. This could be translated in a number of different ways, but it would quite possibly be the case that this could be forced through an immediate cut in our consumption, which itself could be forced by an adverse reaction in financial markets.

Against the background of these two issues, let me now turn to the EU referendum. As shown in the document we published on Monday 18 April, a decision to leave the EU would represent a classic trade and productivity shock, and it would occur at a time when our current account requires ongoing net positive capital inflows to maintain financial market stability. This analysis found that a decision to leave the EU would lower GDP by 6.2%, leaving the average household £4,300 worse off, if we assume that the UK would negotiate a bilateral trade agreement such as Canada’s. However—I am sure most noble Lords are more than aware of this, but for those who are not—it is not just the Treasury’s analysis which shows this: the bulk of credible economic analysis, including that produced by the Bank of England, the IMF, the LSE’s Centre for Economic Performance and, yesterday, the OECD, corroborates the broad findings of the Treasury. This seems a very unsatisfactory risk/reward ratio unless there are clear, definable long-term benefits.

[Lord Forsyth of Drumlean (Con)]

My noble friend referred to the Treasury document and its estimate of the effect of leaving the European Union. It included an estimate projecting 15 years ahead that we will have 3 million more people in this country as a result of immigration. Will he tell the House what provisions are made by the Treasury to fund the health, education, housing and other costs that would arise from that?

[Lord O'Neill of Gatley]

My Lords, I could spend a lot of time specifically wading into this question. I will reflect on other comments I hear and try to incorporate them in my closing comments. In our transparent and clear fiscal policy framework we have committed to a path for all sorts of areas of government spending over the remainder of this Parliament, including protecting those areas that we think most need it.

I will finish my opening remarks as quickly as possible.

[Lord Forsyth of Drumlean]

My noble friend has not answered my question. The Treasury document assumes that there will be 3 million people here as a result of our inability to control immigration. That has huge implications for spending. The document made no reference to that and I can see nothing in any of the Treasury’s plans that indicates how the costs of the schools, hospitals and other infrastructure that will arise will be met in those circumstances. Surely the Minister has an answer. It was his document.

Economy: Productivity

Debate between Lord Forsyth of Drumlean and Lord O'Neill of Gatley

Wednesday 16th March 2016 Lords Chamber

[Lord O'Neill of Gatley]

My Lords, among the many complexities that I hinted at is the separate evidence about the UK’s standing in the world on a number of matters. Particularly in our universities, the UK’s performance in R&D is rising in the relevant tables, which contrasts with some of the measurements of productivity. That is among the many puzzling aspects of ongoing developments here and elsewhere.

[Lord Forsyth of Drumlean (Con)]

My Lords, further to the Question from the noble Lord, Lord Harrison, is not productivity measured in terms of output per head? Therefore, if people are fleeing unemployment in Europe to come to this country in uncontrolled numbers, is it not a fact that, by definition, our productivity will fall?

[Lord O'Neill of Gatley]

My Lords, I suspect that there is a broader theme in that very interesting question from my noble friend. We have to be careful that in the justified and appropriate desire to boost productivity, we do not do anything untoward to reverse the remarkable success in raising employment levels. I say that on a day when we have hit yet another new high. Although people from my background and many others are aware of the importance of productivity, most individuals in our country want to have jobs, and that is what is increasingly taking place.

Budget: Household Impact

Debate between Lord Forsyth of Drumlean and Lord O'Neill of Gatley

Wednesday 16th September 2015 Lords Chamber

[Lord O’Neill of Gatley]

My Lords, I have not had time, given a very busy schedule since returning from Recess, to conduct a personal survey but if the noble Lord would like to join me in such an activity, perhaps we should undertake it together.

[Lord Forsyth of Drumlean (Con)]

My Lords, does my noble friend agree that the policy of subsidising low wages and creating dependency on high welfare payments was instituted by the last Labour Government? Is it not very rich of Labour to criticise this Government for unwinding that by ensuring that people have higher wages and lower taxes, and that their dependency on welfare is reduced?

[Lord O’Neill of Gatley]

My Lords, I thank my noble friend for that important point. As I hoped to suggest at the appropriate moment—it is here—this Government were elected with the clear intention of reducing the burden of taxation and bringing us to a lower-tax and less welfare-dependent society. That is what is being done further in this latest Budget.

Income Per Capita

Debate between Lord Forsyth of Drumlean and Lord O'Neill of Gatley

Tuesday 14th July 2015 Lords Chamber

[Lord O'Neill of Gatley]

I would like to make reference to the presentation of the Budget and the policies included, which, I think I am right in saying, considered many ideas from many people in undertaking its commitments to raise the living standards of everyone in the UK.

[Lord Forsyth of Drumlean (Con)]

My Lords, does my noble friend agree that the way in which we can increase per capita income is by selling goods and services competitively across world markets, and that there is a limit to the good that Governments can do but almost no limit to the harm?

[Lord O'Neill of Gatley]

My Lords, while again I use this opportunity to encourage all Members to read our brilliant document, I shall also make reference to forces that I believe are important from my previous life on the topic of sustainable development and GDP per capita, one of which is indeed the performance of a country’s trade balance, particularly its export performance. That is something that our private sector needs to take the lead on. All that a Government should do is to make sure that it has the right environment to allow it to flourish.