Autumn Statement: Economy

Lord Hain Excerpts

Tuesday 29th November 2016 Lords Chamber

[Lord Hain (Lab)]

My Lords, it is a pleasure to follow such a distinguished parliamentarian as the noble Lord.

Somewhat to my surprise, I had half-expected to begin my speech by welcoming the thrust of the Autumn Statement with a quote from the arch monetarist Milton Friedman: “We are all Keynesians now”. Those words seemed to fit all the early signals and spin coming from Britain’s new Prime Minister even before she took office: Britain had reached a fork in the road, and the former Chancellor and his failing fiscal policy could fork off.

The signals and spin also matched the £30 billion fiscal boost that the Japanese Government launched in August, as well as the £12 billion of measures to stimulate the UK economy called for by the CBI. They matched the pledges made on the campaign trail by United States President-elect Trump. Candidate Trump was more explicit than candidate May. Of course, the Prime Minister was more Mrs Maybe than Mrs May when it came to clarifying how thoroughly she intended to do away with George Osborne’s austerity strategy. By contrast, Donald Trump made no bones about going for faster growth, promising to boost US growth to 4% a year with a big fiscal stimulus focused on higher infrastructure spending.

I wrote a book published last year calling for the adoption of just such a target for the UK economy. I also proposed pursuing that aim with a £30 billion additional fiscal stimulus in each of the next two years focused on extra investment in infrastructure, housebuilding, education, skills, and a low carbon economy—a £30 billion figure, by the way, which is modest, easily financeable at current low interest rates and supported by many respected economists including Jonathan Portes and Paul Krugman. Such a stimulus could help to boost Britain’s growth rate next year to about 4%, instead of somewhere in the miserable range of 1% to 1.5%, which is what the Bank of England, the National Institute for Economic and Social Research, the CBI, the Institute for Fiscal Studies, the IMF and now the Office for Budget Responsibility all expect.

Having heard the new Tory leadership talk about making budget limits take second place to faster economic growth, and even having read in August a call from the international business editor of the Daily Telegraph, Ambrose Evans-Pritchard, for a £40 billion fiscal stimulus, I wondered whether Tory arch-austerity was being consigned to a well-deserved scrapheap. Was the Autumn Statement to be another shock in a year of surprises? Like Dickens, were hard times to be followed by great expectations? Were we about to witness a strategic Tory masterstroke, designed to appeal to Labour and UKIP working-class supporters feeling left behind by globalisation? Sadly, however, the Autumn Statement makes it clear that austerity has been abated but not abandoned. The deficit targets may have been modified, but the budget squeeze goes relentlessly on and on. The pieces have been moved about a bit, but it is the same old board game—slow as you go. We are still stuck in bleak house.

Few Governments have pursued austerity with more vigour than those led by David Cameron and George Osborne. The former Chancellor claimed to have squeezed the UK economy tighter than any of the other advanced economies. At least that claim was valid. The cuts strategy for this Parliament, which George Osborne announced in March, was a carbon copy of the failed austerity strategy he pursued in the last Parliament. So it was heartening in July to hear the opening words of the new Chancellor, contemplating scrapping any plans for more of the same medicine, hinting at a new fiscal framework, and dropping the completely unachievable but destructive target for a budget surplus in 2020. But the Autumn Statement makes it plain that, instead of ending austerity, the Chancellor is prolonging it. Instead of bringing the budget squeeze to an end, he is giving it a new lease of life beyond 2020.

Deferred debt and deficit targets are only the obvious indicators of an economy in trouble. Some of us on these Benches have been arguing for years that austerity does not work, that slow economic growth brought on by a tight fiscal squeeze leads only to a drop-off in tax revenues and causes debt and deficit targets to go for a burton, as indeed duly happened—a point made by my noble friend Lord Livermore so expertly. All the former Chancellor’s targets on borrowing and debt were missed by miles; he was indeed a serial offender. Shockingly, borrowing will be fully £120 billion higher than forecast in the March Budget just eight months ago. Tory austerity has failed abysmally by its own obsessive objectives, and at terrible cost to the economy and the social fabric of our society.

The key concern today is that economic growth is getting slower and slower. That is what has caused the Government’s fiscal targets to be missed year after year, both before and after Britain’s Brexit vote. That is what has kept real incomes per head below their pre-banking crisis peak and inflicted so much needless suffering on so many for so long. It is why so many industrial jobs have been lost in areas such as Neath in south Wales, which I used to represent and where I live, making them more reliant on welfare benefits and tax credits and adding to the pressures on the public finances. It is what the Autumn Statement should have addressed but emphatically did not.

The fact that it did not is likely to mean more political upheaval and instability in Britain. Brexit, Trump and maybe Le Pen next year are perhaps only the start of a popular revolt against the smug, self-satisfied political class now ruling the democratic world—including, sadly, here in our country. The British economy grew slower last year than the year before. It is growing slower still this year and, according to the OBR, it is due to grow even slower next year, and barely any better in 2018. Only barmy Brexiteers like John Redwood seriously expect growth next year to get anywhere near the 2.2% forecast in the OBR’s report just eight months ago in March 2016. Like Don Quixote, the Member for Wokingham sees possibilities that are denied to us mere mortals.

The Chancellor began his Autumn Statement with news that the IMF expects Britain to be the fastest growing of the G7 economies this year. This may be true, but the context is one of a slowdown in global growth. We all need to take action to get our economies growing again, not look to the next guy to save us from our own inadequacies. The IMF has been calling on Governments across the world to use fiscal policy to promote faster growth. Feeling pleased about the relative performance of the British economy is like Jasper Carrott’s joke about admiring a Reliant Robin hurtling downhill, slipstreaming a milk float.

HSBC recently cut the interest rate it pays on some of its savings accounts to 0.05%. There is nothing more that monetary policy can do through lower interest rates to encourage spending. The ball was well and truly in the Chancellor’s court to use fiscal policy to stop the slowdown and get the economy moving again. His response, sadly, has been to play a dead bat in his opening innings. The Chancellor intends to ease the squeeze planned by his predecessor by an amount so small that you need an electron microscope to spot it in the Office for Budget Responsibility report—a £2 billion let-up in a £2,000 billion GDP economy. That is how much the change in the structural budget deficit differs under the new Chancellor from the old one. My hopes were confounded. We are certainly not all Keynesians now.

The Prime Minister says she is ambitious for Britain. Well, the Autumn Statement needed to be made of sterner stuff if she is to deliver on that aim. First, the £23 billion extra public investment announced by the Chancellor is spread over five years. The two-year package of extra investment advocated in my book would mean £30 billion more both next year and the year after. The Chancellor’s proposals mean less than an extra £5 billion per year. Even the CBI called for an extra £6 billion a year. It is a small beer budget as far as extra public investment is concerned. Leo Quinn, the boss of Balfour Beatty, also feels that the Chancellor did not go far enough. He summed up Britain’s situation articulately on the Radio 4 “Today” programme last Thursday: our productivity is poor because our infrastructure is poor. Low interest rates allow people to buy bigger houses, he said, so Government should do what business does: borrow money that is effectively free and invest it in assets that have a 50-year yield. Lower interest rates mean we can have a bigger infrastructure which will improve our competitiveness, and help to build a fairer society and a bigger economy. I agree with Leo Quinn when he says that investing in projects today to build the capability for tomorrow is absolutely critical.

Secondly, the Autumn Statement did nothing to invest in social care in our ageing society—the growing nightmare, with almost all families except the very richest facing misery. Stephen Dorrell MP, the former Conservative Secretary of State for Health and former Health Select Committee Chairman, has condemned the Autumn Statement’s failure to provide much more funding for social care. Two weeks ago three health charities—the King’s Fund, the Nuffield Trust and the Health Foundation—all called for urgent extra investment in social care to plug a £2 billion funding gap next year. This would be the single most effective step the Government could take to relieve the pressures on Britain’s hospitals, where bed-blocking is costing the NHS £800 million annually. A £2 billion investment in social care to deliver £800 million of annual savings seems a bargain.

Thirdly, the cuts to further education college funding are diabolical because these institutions provide the very technical skills Britain needs to bridge the massive productivity gap the Chancellor rightly drew attention to.

Eight years ago, President Obama launched an $800 billion fiscal stimulus package days before taking office. It helped to bring the US recession to an end, lessened its severity, saved more than 2 million US jobs and raised GDP by 3% above what it might otherwise have been. It explains in good part why the US budget deficit as a proportion of GDP rose in 2009 to 13% but fell in each of the next six years, to 3.5% last year. It is why I say that higher borrowing today can lead to lower borrowing tomorrow if it causes the economy to grow faster.

Britain’s Brexit vote has hit the public finances hard; we all know that. There is no end in sight for dreadful UK productivity; no end in sight for fraying, second-class UK infrastructure; no end in sight for the UK’s record trade deficit; no end in sight for UK manufacturing decline; no end in sight for ballooning private debt; no end in sight for housing asset bubbles; no end in sight for growing inequality; no end in sight for falling real incomes; no end in sight for job insecurity; no end in sight for sluggish private investment; no end in sight for austerity and no end in sight for the slow to no growth Tory Chancellors have delivered for Britain since 2010. The crying shame is that there was, all along, and still is, an alternative to this failed neoliberal economic agenda. It is called a progressive Keynesian agenda. It is what Labour delivered so successfully before and after the global banking crisis and it is what the Chancellor should have delivered last week.