Lord Higgins
Main Page: Lord Higgins (Conservative - Life peer)
Lord Barnett
My Lords, I add my congratulations to those already given to the noble Lord, Lord Ryder. I think he said he made his maiden speech 36 years ago on a Finance Bill and, for his sins, got put on it again either for five years or five times—I am not sure which he said. For my sins, as Chief Secretary I took those Finance Bills all the way through the House, whether it was for five years or five times, and there were often two a year in those days. I cannot remember what I said so I hope he will forgive me if I cannot remember what he said at that time.
I will not speak about the Finance Bill this year. I want to speak to speak about the central economic forecasts of the present coalition Government. The central policy, as expressed in the emergency Budget, was reducing the deficit. The only other major policy, described as a new policy, was the Office for Budget Responsibility. Unlike 1997, when the Monetary Policy Committee was a genuinely new policy given real powers, the Office for Budget Responsibility has powers only to forecast, and those forecasts can, of course, be ignored. The OBR’s independent forecasts have been semi-criticised by many as not necessarily being so independent. The criticism of Sir Alan Budd was much overstated. He himself admitted that he was a little naive. Perhaps he should learn that he should never be naive about the Treasury and its forecasts. Otherwise, I would not doubt his integrity or his honesty, either on this occasion or on any other.
There is no shortage of independent forecasts, as the noble Lord, Lord Sassoon, will know. The Treasury itself in most, if not all, of its documents constantly quotes independent forecasts. It seems a little insulting to suggest that the Treasury’s civil servants were so lacking in independence that they were not really independent at all and allowed Chancellors over the years to override what they were saying in their published documents.
The noble Lord said that one of the benefits is greater transparency. I am sorry to see that the noble Lord, Lord Sassoon, is not transparent on every occasion. In answer to a Written Question from me, asking him for various discussions that the Chancellor may have had with the Governor of the Bank of England, he said:
“As was the case with previous Administrations, it is not the Government’s practice to provide all details of such discussions”.—[Official Report, 21/7/10; col. WA 220.]
So the noble Lord, Lord Sassoon, is not transparent on all occasions, even if he is now telling us that the OBR is.
What is clear from the OBR’s forecasts is that, unlike what was said in the emergency Budget about there being no alternative to the Government’s Budget policy, there clearly is an alternative and it was shown in the pre-Budget forecasts. In the pre-Budget document we were told that if the pre-Budget forecasts had been based on the predecessor Government’s policies, the deficit would come down to 3.9 per cent of GDP in 2014-15. In the June Budget document, we were told the Budget deficit would come down to 2.1 per cent. Even if it were to come down to zero, the difference is not so huge as to warrant such major cuts as are proposed in the emergency Budget. In any event, huge uncertainties underlie those forecasts. On page 7 of the pre-Budget forecast, under the heading, “Constructing the forecast”, we are told of the uncertainties five times within some five lines. Even the OBR and its forecasts, therefore, are massively uncertain. Despite that, a substantial programme of public expenditure cuts is now being planned, based on all those uncertainties in the OBR’s forecast.
It is clear, then, that there is an alternative. Not only is the pre-Budget forecast of the OBR not so different from the Budget forecast for 2014-15, but page 99 of the Treasury’s Red Book shows net debt remaining in 2014. Total net debt is expected to be 69.4 per cent of GDP; it would have been 74.4 per cent under the pre-Budget forecast. Although the Government’s Budget anticipates the public finances being in better shape—in their terms—than under the previous Government’s forecast, the previous forecast could by no means be described as disastrous. In any case, as I have said, there are huge uncertainties in anybody’s forecasts.
Much depends on the assumptions made. For example, the pre-Budget forecast took the predecessor Government’s growth forecasts, which many thought were too optimistic. I agree that they seemed too optimistic, although I am bound to say that the figures for the latest quarter, showing 1.1 per cent growth—which is the equivalent of nearly 4.5 per cent per annum—suggest that I was being too pessimistic. Perhaps the previous Government’s growth forecasts were accurate and would have helped cut the deficit rather faster than the present Government’s plans. However, it is much too soon to suggest that growth next year will be that high. I would not suggest for a minute that it is likely to be, because none of us knows—the uncertainties remain. The forecasts may have been reasonable—it may even be that the inheritance of the Government is rather better than they have been telling us—but the figures do not provide certainty, and it is planning major policy on the basis of such uncertainty that is so wrong.
Against that uncertain background, the Chancellor has chosen to make the savage public expenditure cuts that he will tell us about after the comprehensive spending review. Even if it is the right policy to cut to that degree, what are the chances of success? The Chancellor is setting about it in the right way—as Chief Secretary, I had to make rather a large number of cuts over many years—and asking the departments to choose their own priorities. They will have to set out public expenditure cuts in their own departments ranging from 25 per cent to 40 per cent, with the Chancellor, or the Cabinet if necessary, deciding. The departments know their own priorities.
Overall, when you are spending £700 billion of public money, I would not deny that there is room for cuts. However, I would not have ring-fenced any department, not even the National Health Service. After all, the National Health Service’s expenditure in 2008-09 was nearly £110 billion—it will be much higher now in real terms. To pretend that there is no room for substantial cuts in administration out of that level of expenditure is surely wrong, so one could have reduced the cuts even more.
Public expenditure can be cut, and it is clear that this was the Conservative Party’s agenda. Indeed, even if there had been no deficit, these cuts would have been proposed so that it could make the tax cuts, which is what it is really about. It is going to have considerable difficulty in making 25 per cent cuts, never mind 40 per cent, in every single department.
I have spoken to a number of other former Chief Secretaries and Chancellors, Conservative ones as well, and none of them thinks it can be achieved. If it is achieved, as the Government seem determined it will be, I am sure they will appreciate, although I am not sure their coalition partners the Lib Dems appreciate, what it will mean to those departments to make 25 per cent cuts in every one of them over a four year period. I hope we never come to it, but I fear we may if the House accepts and the Government accept that what they are doing is right.
The OBR has shown, given its uncertainties of forecasts, that it will no longer forecast what exactly is going to happen, so we should listen to Ben Bernanke in the United States, where they also have uncertainties. Indeed the phrase used by Bernanke was, “unusually uncertain”. Despite all that, we are going to get these massive cuts, come what may. I can only hope that by keeping interest rates low, the Bank of England would offset some of the worst of it.
The Bank of England is truly independent of course. It is more independent than the OBR because it has an Act of Parliament already. We have always known that a senior Treasury official attends the monthly meetings of the Monetary Policy Committee of the Bank of England. What we have never known is whether he sits there saying nothing, because no previous Treasury Minister has ever been willing to say what exactly goes on at those MPC meetings or whether the Treasury official joins in. He is not a member of course. Now we know that he does. We had an answer the other day which I think the noble Lord, Lord Sassoon, may regret, but it is worth quoting. He is shaking his head, but let me quote what he said, because I promise him that it will come back to him. It was on 20 July in answer to a supplementary question from me, in which I said:
“the noble Lord has just said that it is not for him to comment on what the Bank of England does”,
but I pointed out that a senior official from his department attends those MPC meetings. His reply was very interesting.
“My Lords, it is correct that a senior official of the Treasury sits in on the monthly Monetary Policy Committee meetings, but that official is not a member of the committee. I have performed that function myself on one occasion, and I understood that it was my duty to bring to the attention of the MPC anything the Treasury thought it ought to be aware of”.—[Official Report, 20/7/10; col. 908]
I am delighted to hear that, because it is quite sensible. I never really did believe, because it is so important an issue, that the Chancellor never spoke to the Governor of the Bank of England on this and many other matters. The sensible thing to do was to talk to the Governor of the Bank of England. In due course, if, sadly, they go ahead with these policies, will the noble Lord, Lord Sassoon, assure us that the Treasury, if not the Chancellor himself, will, through the senior official at the MPC meetings, tell the MPC the Chancellor’s or the Treasury’s views on the need to offset the worst of the public expenditure cuts by keeping interest rates low, and possibly by increasing quantitative easing? I know that the noble Lord, Lord Higgins, thinks that that is of no use anyway but it is a worth a try. It is better than doing nothing and letting the worst effects of the public expenditure cuts take effect. I have some more written questions—
Lord Higgins
I am grateful to the noble Lord. I did not say what he has just reported me as saying; I said that the quantitative easing is being frustrated, which is not the same thing.
Lord Barnett
I am sorry to misquote the noble Lord. I thought that that was what he was getting at, but never mind. I apologise to him, but I am not apologising to the noble Lord, Lord Sassoon. I want him to give us an assurance. In the event of the cuts turning out to be as bad as many are now indicating, I am not alone in suggesting that that could reduce economic growth, not see it increase. The ITEM Club, which is truly independent, has said the same as the IMF in suggesting, based on Treasury figures, that it would have an effect on economic growth.
Finally, Martin Wolf, in a recent article in the Financial Times, put the arguments well for whether the economy should be tightened in current circumstances. He is a highly regarded journalist, as I am sure the noble Lord will agree, and he put the central issue as follows. If tightening is correct, which is the Government’s policy,
“failure would bring fiscal and financial shocks”.
On the other hand, if tightening is not correct, it might,
“threaten recovery and might trigger further … shocks”.
The consequences of tightening, as I have said, could be very serious indeed. Nevertheless the Government, with Lib Dem support, seem bent on pursuing that policy. I am not sure whether the coalition partners fully appreciated what they were agreeing to. The Government, however, have always said—I started off with this—that there is no alternative. In fact, as I have shown from the OBR’s own forecasts, there is an alternative. I hope that the Government will take it.
Lord Higgins
My Lords, it is difficult to welcome a Finance Bill which increases taxation, and it will most certainly be unpopular. However, I do not have the slightest doubt that it is absolutely essential if we are to deal with the situation that we have inherited, which requires drastic measures on both taxation and public expenditure.
The Bill is probably one of the smallest that we have had for very many years and, in terms of pounds per page, probably more effective. It is not entirely clear to what extent the Government believe that they will increase revenue in either the current year or next year, but the Minister may be able to enlighten us in that respect. None the less, I think that we are going to see an increase in revenue but it is going to take some time, in the same way that cutting public expenditure takes some time. Therefore, the argument about whether one should make these changes quickly or slowly seems to be largely irrelevant. We know that an immediate impact of any scale is not possible, and the process is therefore bound to take place over a considerable period. However, we need to get on with it as fast as possible and that is effectively what this Finance Bill does.
First, I welcome without reservation the point made in my noble friend’s opening remarks regarding the abolition of the requirement to take an annuity at the age of 75. On at least three occasions from the opposition Front Bench, I moved an amendment to do just that, with suitable safeguards, and I think that the Government would be wise to look at those safeguards. This House, by a very large majority, supported the view that I expressed, but on each occasion the amendment then went to another place, where it was reversed. Therefore, I am absolutely delighted that, despite the arguments that tend to be made within the Treasury, the Government have at long last decided to take action on this. I have only one small caveat, which is that there appears to be some delay in implementing the measure, which means that people who are about to become pensioners will be forced to take out an annuity when annuity rates are so appallingly low. My noble friend shakes his head; if he is right, I should be delighted to hear why.
Apart from that, I want to concentrate on three specific points and then a more general one. The first relates to VAT. I made representations on this to the Chancellor ahead of the Budget because I was deeply disturbed by a recommendation from the International Monetary Fund that we should eliminate our process of zero-rating in order to raise more money. I think that that would have been completely wrong. No tax in our system has ever had the kind of scrutiny that VAT had when I had the task of steering it through the House of Commons. Ahead of the Conservative victory in 1970, we went into it in great detail. It had pre-legislative scrutiny; it had extraordinary examination at Committee, Report and Third Reading in the House of Commons; and the structure that we designed was intended to prevent the change from SET and purchase tax—both of which we abolished—being regressive. I have no idea why the IMF thinks it appropriate to go into detail about taxation in this way but, had the Chancellor gone along with the IMF’s views, the measure would certainly have been regressive.
On the other hand, the Chancellor has found it necessary to increase the rate of VAT to 20 per cent—exactly double the rate that it was when I introduced the tax—and this is going to have a substantial effect. Popular commentators are all saying that it is inflationary. It is, of course, cost inflationary but demand deflationary, depending on what the Chancellor does with the money. Certainly, if he simply puts it in a mattress somewhere, that is substantially deflationary and the overall effect may be in that direction. None the less the step that he has taken to increase the rate to 20 per cent was certainly better than the alternative for reasons that I have just given.
I turn now to capital gains tax. There was huge anticipation during the election that, given the policy of the Liberal Democrats, and so on, it might be raised in line with the top rate of income tax to perhaps 40 or 50 per cent. Again, together with colleagues, I made some representations to the Chancellor and said that it would be totally wrong to increase the rate of capital gains tax without making some allowance for the fact that inflation was built into those gains and therefore it was important to have some form of indexation or other recognition of the length of time that the asset has been held. Alas, in that respect we were not successful in persuading the Chancellor who came up with the rather strange compromise, evidently reflecting the needs of the coalition, that we should have an increase in rate of 28 per cent but no indexation. I think that that is quite wrong for the reason I mentioned—that the Chancellor is taxing again, which is entirely due to previous inflation, and which may stretch back over 20 years. Pensioners and others may be in a very difficult situation because of such a low rate of return on their savings and find it necessary to liquidate some of their assets, so to tax them on that gain without allowing for inflation is wrong. It is effectively a tax on wealth. I therefore hope very much that when the matter is discussed in another place—alas, we cannot do so—allowance will be made for that and it can be changed.
I said that this appeared to be in line with the coalition agreement, and it is crucial in that context to say that we should not go along with proposals put up by either part of the coalition on the basis that it keeps it together or become involved in horse trading rather than saying that it is justified on its merits. In that context, I go along with the noble Lord, Lord Desai, in relation to the student taxation proposals, put forward by Mr Vince Cable. A detailed examination of that shows that it would be a very bad tax indeed and ought not to be proceeded with.
Finally, I want to put the Finance Bill in context. There is no doubt that it represents a very substantial fiscal tightening. It has been pointed out that it may lead to consequences with regard to double-dip recessions and other fashionable ideas of that sort. Against that background it is important to have an appropriate monetary policy, and there seems to be a conspiracy of silence with regard to that. I read some of the papers over the weekend and just before. There were diagrams of every conceivable economic variable but not a single one showing what is happening to the money supply. Pessimistic forecasts were being made by the chief economist of the Bank of England who also did not mention the money supply. I have said before to the noble Lord, Lord Myners, and I say it now to my noble friend on the Front Bench that it is very important to distinguish between the price of money—interest rates—and the quantity of money. Monetary policy, strictly interpreted, is concerned with both, but in fact it is the money supply side that is really important against the fiscal background that I have described.
I think there is a strong case for easing monetary policy further by way of quantitative easing or, alternatively, as I suggested in questions to my noble friend, by the Debt Management Office pursuing a policy of funding that effectively frustrates the effect of the quantitative easing. To make it absolutely clear, I refer to the Bank of England’s 20 July provisional estimates of what is happening to the money supply. Seasonally adjusted provisional figures for June show that M4 fell by £0.7 billion in the month, and if you look at the graphs for growth rates in M4 from December to now, it falls off a cliff, despite quantitative easing. Therefore, despite the efforts of the Bank of England in that respect, we have not succeeded in having a growth of money supply that is consistent with a growth in the economy, but if we are to get out of the hole the economy is now in, it is essential that we should have a fixed plan for increasing the level of aggregate demand.
Of course, there will be queries at that stage. My noble friend Lord Spicer, who I am delighted to see here, referred to the danger of inflation. The level of inflation is much higher than the Bank of England’s target rate, but we need to look at this situation very carefully to see to what extent increasing the money supply in line with the level of growth we would like to see is likely to prove inflationary. This is not a simple issue, but the way the figures look at the moment is being ignored. We are not following a monetary policy that is consistent with our objectives. I have the privilege of being followed by my successor bar two, or perhaps three, as the chair of the Treasury Select Committee in the other place, which I was for 14 years, and I will be interested to know his views on this subject. We need to wake up on this issue because it is being ignored.
Lord Sassoon
My Lords, I fully accept that of course there is huge interdependence between the public and private sectors.
I stress again that the Government’s aim is to make Britain a place where innovation and enterprise can succeed. This is critical. We want to send a clear signal to international business that Britain is once more open for business. Attracting inward investment will stimulate growth and create jobs, and the Budget provides a springboard for a private sector-led recovery, with measures to support business and restore the UK’s competitiveness. These include not only a reduction in corporation tax to 24 per cent, but a reduction in the small profits rate to 20 per cent, an increase in the national insurance contribution threshold for employers and a wide package of support for small businesses. In answer to the specific point raised by my noble friend Lord Northbrook, on the reduction of capital allowances, I can assure and reassure my noble friend that even allowing for reduction of capital allowances and the decrease in annual investment allowances, the next take from corporation tax will be reduced by £1.3 billion per year by the end of the forecast period.
It is right, as set out in the coalition agreement, that capital gains tax should increase in order to help create a fairer tax system. The approach we have taken balances the competing demands of fairness, simplicity and competitiveness and the increase in the rate of capital gains tax will allow this Government to remove almost a million of the poorest people from income tax.
My noble friend Lord Higgins talked about indexation allowances and taper relief. I should point out that indexation allowance for CGT has a substantial Exchequer cost. It cost £1.4 billion in 1997-98 and indexation would add significant complexity to the tax system. Therefore, we do not believe that indexation is justified when CGT rates are well below the top marginal income tax rate and at a period with lower inflation than at a time that indexation allowance was originally introduced.
Lord Higgins
On the point about indexation, to say that it would increase complexity when the Explanatory Notes to the clause as it stands run to six pages is perhaps a little strange. May I pursue with my noble friend the broader point that I raised: is it not important to have a monetary policy that is compatible with the cuts being made? Also, in that context, why does he think that quantitative easing appears not to have had a significant effect on the money supply?
Lord Sassoon
My Lords, I am not going to answer for judgments that are fundamentally for the Bank of England. It has a very clear monetary policy mandate, which is around keeping inflation low, and through the combination of monetary policy and confidence in the new Government’s fiscal stance we have seen that UK government borrowing rates have indeed remained low, and that the spread against the benchmark of the German Bund has indeed worked in the UK’s favour since the election. That goes to the heart of the nexus between monetary policy, low interest rates and keeping the flow of credit going to businesses and private individuals. I want to move on—