Economic and Taxation Policies: Jobs, Growth and Prosperity

Lord Frost Excerpts

Thursday 13th November 2025 Lords Chamber

[Lord Frost (Non-Afl)]

My Lords, I declare an interest as the incoming director-general of the Institute of Economic Affairs. My proposition today is that we are living through a great refusal when what we need, as this morning’s growth figures show, is a great reversal. In Dante’s “Divine Comedy”, the shade of Pope Celestine V stands on the threshold of hell, judged for his great refusal: his rejection of the burden of the office of Pope. This country stands in a similarly precarious position, because this current Government—indeed, successive Governments—have refused to face up to their burdens and their duties: the difficult but necessary actions to get the economy back on the right track. They have refused to use the regulatory freedom that came with Brexit to deregulate and get markets going again, and now we are paying the price for all this.

We know what brings prosperity to a country: low taxation, property rights, no confiscation of wealth, rewarding of effort, welfare that supports the needy but only the needy, and well-functioning markets with minimum regulation. Sadly, since the 2008 crash, the direction of travel has been in quite the opposite direction. Changing this will not be easy. Indeed, I fear that we are instead seeing something that is very common in human nature: when confronted with something you do not want to change, you find intellectual justifications for why it does not need to change.

A new conventional wisdom has therefore emerged: the belief that those fundamental nostrums that I have just set out are somehow outdated and that the modern way to run the economy is different. Its believers, who are heavily represented in the current Government and in the public sector economic establishment—but not only there—think that high tax and spending are not in themselves bad; that growth can come from more public sector so-called investment, financed by tax or borrowing and a state-run industrial policy; and that these things never squeeze out private sector activity in any way. They think that distributional questions are the most important ones, and that dynamism in an economy is a bad thing because it increases inequality. They think that prices and markets do not have a signalling function but are essentially arbitrary and can be safely manipulated for wider social goals, and much more of the same sort of thing.

Of course. this is how the economy has actually been run—or, rather, run into the ground—for most of this century. That is why GDP per head has gone up by a miserable 0.5% a year over most of this period. It is why taxes are up eight percentage points from the early years of the Blair Government, now at 37% of GDP. It is why spending has gone up 12 to 13 percentage points, now at 45% of GDP—and no doubt later this month all those figures are going to be a couple of percentage points higher still.

We have reached the end of the road for this economic programme. We do not need more of it. What we now need is a great reversal, the renunciation of big-state economics, the undoing and the unwinding of most economic policy measures that have been taken this century: labour market controls, price controls, wage setting by government and judicial fiat, the disastrous net-zero policy, the pensions triple lock, heedless welfare spending and, of course, tax. We need a 10-year programme to get tax, spending and regulation safely back down to those early Blair-era numbers. If we do not do that, we will face another great refusal: the refusal of the markets to finance us and the refusal of our people to stay in the country and be taxed to deliver them.

There is no point in doing things that are popular but do not solve the country’s problems. I would like to hear from the Government that they understand that, and that they need to face up to this as a country and change our ways soon.

National Insurance Contributions (Secondary Class 1 Contributions) Bill

Lord Frost Excerpts

2nd reading
Monday 6th January 2025 Lords Chamber

[Lord Frost (Con)]

My Lords, we have heard a lot from the Minister and just now from the noble Lord, Lord Eatwell, about the alleged terrible situation in which the previous Government left the current Government. I have been known to criticise the previous Government myself, and there is a degree of truth in the criticism that we were too ready to resort to spending and to tax and national insurance increases. Indeed, I spoke in Cabinet against the previous effort to increase national insurance; it was one of the reasons why I left that Cabinet a few months later. However, in mitigation of the previous Government and some of their predecessors, that was not unique; it followed the trend established over the past 20 or 30 years to increase the size of the state, push up taxation and spending, and increase the pressure on the private sector.

It is that reality of the past 30 years that makes what we have heard from the Minister and the Government more broadly—the suggestion that they are fixing the foundations and marking a moment of change—so ludicrous and ridiculous. The Government like to claim that they are marking a different path, when the truth is that they are just doubling down on the path that has been set for the past 30 years. There is no change in this at all other than in size and in the energy driving us to a larger state, with higher taxes and higher spending.

The noble Lord, Lord Eatwell, talked about understanding arithmetic, but the arithmetic that I find hard to understand is why it is thought to be a change of direction when the plan in this Budget is to push up public borrowing £20 billion or £30 billion higher than it would have been under the previous Government’s plan, even though taxation is going up by another £30 billion or £40 billion every year. Despite all that, the deficit is still 1% of GDP higher than it would have been at the end of this fiscal period under the previous Government. How is that fixing the foundations? It is doubling down on the trend and making the situation worse. We know that the consequences will be lower growth, less dynamism and lower wealth for the country as a whole.

The specific tax change that we are looking at in this Second Reading debate is a major part of that problem. It is a well understood principle in economics that if you tax a thing you get less of that thing, and if you tax jobs you will get fewer jobs. Even now, Britain has one of the lowest tax wedges in the OECD—the gap between what employers have to pay employees and what they actually receive. European economies with typically higher tax wedges have many more problems with youth unemployment and long-term unemployment. Countries with very high tax wedges, such as Germany, Spain and Italy, have long-term unemployment more than one-third higher than ours. Spain’s is two-thirds higher, Belgium’s is nearly twice as high and Italy’s is highly still. With these measures—and the new employment regulation that is coming our way soon, no doubt—we are heading the same way too. Hiring is falling already, at 23% lower than a year ago. The OBR forecasts a lower participation rate—the “drag” from employer national insurance contributions, as it puts it, which boosts the decline in the participation rate by 50%.

The Government know perfectly well that this effect exists, even if they do not want to acknowledge it more than they have to. We can tell that they know that it exists because they are having to compensate the public sector to mitigate the problem. In so doing, they are reinforcing a divide that already exists between the public and private sectors. My noble friend Lord Forsyth alluded to this just now. Wages are already higher in the public sector and pensions are much more generous. Now the Government are beginning to establish the principle that the public sector should be protected from the consequences of the Government’s own decisions—just like the French nobility before the revolution, who did not pay the taxes imposed on everybody else. It did not end well for them and it will not end well for the Government, or for this country, if they create a privileged class that does not contribute to economic growth but just feeds off it.

As a result of this, we are seeing much more complexity, yet we need simplicity, not complexity, in the way our fiscal and tax systems work. The principle that is being established means that if you are fortunate enough to be on the payroll of the public sector you are shielded from some of these changes, but if you are unlucky enough merely to supply the public sector—for example, as has been said, a car firm taking special needs patients to hospital—or if you merely carry out public sector functions, such as hospices, then you will be on your own. As a result, we are going to see—indeed, we are already seeing—ever-increasing and, in many cases, entirely reasonable demands for exemptions or changes to the rules from those who happen to fall beyond this boundary. There will be new reasons to lobby, new reasons to generate complexity and new reasons to push up costs over time.

The last thing we need is more taxation. I urge noble Lords to look at the OBR’s fascinating historical public finances databank—I find it fascinating, anyway. It shows that, after the Autumn Budget, we now have public sector spending at around its highest level ever, outside the world wars and the pandemic, and taxation is at the highest level it has ever been in this country, even during wartime.

It is true that we are seeing huge strains on the public sector—courts, schools, roads, transport and so on. That is obvious, but we are seeing those not because taxes are too low but because growth is too low. We are exhausting the capacity of the economy to pay for the public goods that we all want to see. There is only one way to resolve that problem, which is to get the boot off the private sector and allow it to generate wealth. The Minister spoke of stability. We all want stability, but there are different kinds of stability and, if we are not careful, we are going to get the stability of the morgue in the British economy. We need activity, dynamism, change, energy and growth. Reversing the trends that we are on against all those things is of huge importance. That, by the way, is why it is so important that Committee on this Bill should be on the Floor of the House.

There is no manifesto commitment to this measure and it is right that we do everything possible to reduce its impact. The non-crisis British state is the biggest it has ever been, and any responsible Government will be trying to reduce it—for example, to what some, at least, regard as the halcyon days of the first Blair term, when the state was a whole 10 percentage points of GDP smaller and, not coincidentally, trend growth was a whole 1% of GDP higher. The current route of spending more and producing less will drive people out of work, crush growth and lead this country to penury, and these NIC measures will take us one further step down that road. The Government need to think again.

Budget Responsibility Bill

Lord Frost Excerpts

2nd reading & Committee negatived & 3rd reading
Monday 9th September 2024 Lords Chamber

[Lord Frost (Con)]

My Lords, I find this a peculiar Bill. There are a number of odd things about it.

First, as my noble friend Lady Noakes mentioned, it seems odd that this is a money Bill. I do not challenge the decision, obviously, but it does not seem to affect the Government’s powers to raise taxes or spend in any way. I cannot help but notice that, as far as I can tell, the original Budget Responsibility and National Audit Act, which created the OBR, was not a money Bill, so it is odd that this one is. I do not question the decisions on this point but it does seem odd; I agree that it would have benefited from more scrutiny.

This feels more a constitutional Bill in some ways, but it is weak there too. The Minister billed it as a lock on government actions, and others have described it as such, but it does not actually stop the Government doing anything; it only requires the OBR to write a report if they do so, so it seems misconceived in those terms too. One has to ask what the point of the Bill is. It is, of course, a process Bill, but it is also a political Bill. It is written entirely to give an opportunity for the Government and the Labour Party to contrast their activity with the Liz Truss mini-Budget and the decisions taken in 2022. We have heard plenty of that already in this House today.

I think Labour will find two problems with that. First, as my noble friend Lady Noakes has already mentioned, the Bank itself says that two-thirds of the problem was its own mishandling of the LDI crisis. It is hard to see how, if this Bill had been in force and a report had been required, it would have had any effect on that aspect of the autumn 2022 problems. The other problem that the Government will find is that the world does move on. Their own so-called fiscal black hole, which they have already spent a large time creating, is where attention will move. They may regret this Bill before long, to judge by the Niagara Falls of public money that seems likely to pour out of the Treasury in the months and years to come.

I do not think that we are meant to take this Bill seriously. Outsiders recognise that; the IFS itself says that the proposal is “largely performative”. Even the Resolution Foundation describes its impact as “relatively small”. The real impact of the Bill will be to reinforce the position of the OBR in the constitution, but I am doubtful about that for two reasons.

First, for some of the reasons that have been said, the OBR is not a particularly effective institution. It clearly reinforces the Treasury view of the world. It has a poor record, as others have said and as it itself acknowledges. It is negative about Brexit and it repeats the zombie 4%-cut-to-GDP figure that was produced six years ago on the basis of reports put together before we even left the EU. It is doubtful about incentives and what makes a free economy tick. Forecasting is difficult—people bring their priors to it—but the answer is not to do it better or do more forecasts; the answer is to remove the privileged status of the OBR and the forecasts it gives in our economic decision-making. That is the first reason.

The second is that this Bill forms part of the tendency over the past 20 to 25 years to tie down elected Governments with Platonic guardians who think they know better than Governments. This is an intellectual error that began, reasonably enough, with Bank independence in 1997, but it cannot be extended to every single situation. Just because it is good for running monetary policy does not necessarily make it desirable to have independent controls on fiscal policy, to give independence to one regulator after another or to give independence to institutions with wider economic policy effects, such as the Climate Change Committee and many others. These are very different things. You cannot solve the problems that the country faces by constantly giving further independence to unelected institutions and bureaucratic processes.

I am afraid that this error has time to run yet. It is sapping democracy and will make it more difficult to deal with new economic challenges. I hope that, one day, we will reverse this trend and look at this panoply of constraints on government action with a much more sceptical eye.