National Insurance Contributions (Secondary Class 1 Contributions) Bill

Lord Horam Excerpts

2nd reading
Monday 6th January 2025 Lords Chamber

[Lord Horam (Con)]

My Lords, the UK remains the sixth-largest economy in the world if you look at crude gross domestic product. Sadly, the bad news is that it has slipped down the league of nations in gross domestic product per head. We are now either 21st or 28th in GDP per head, depending on how you calculate it. Taiwan and South Korea—despite its present problems—are ahead of us while, on present forecasts, we think Poland will possibly take over in about two years’ time. That is because the annual average increase in GDP per head has fallen over the decades, from about 2.5% in the 1980s to about 1.3% a year in the 2010s, to even less, 0.3%, in the 2020s.

As the noble Baroness, Lady Moyo, who has just left the Chamber, said in a speech in the Autumn Statement debate, the UK’s GDP is now lower than that of any of the 50 states of the United States. It is even lower than that of the poorest US state, Mississippi. It actually gets worse than that, because I think the noble Baroness was taking the average UK GDP per head. Unfortunately, there is a huge discrepancy between GDP per head in London and GDP per head outside. In fact, as you go outside London, GDP per head goes down by about 50% to about half what it is in London, and in the poorest regions of the UK, which are in the north-east of England and Wales, it is about one-third of what we enjoy here. So, although we in London enjoy a standard of living that is similar to many of our compatriots in Europe, in Paris, Munich and so forth, outside London and the Home Counties, the situation has become progressively more dire, and I do fear for the politics of this country while that situation continues.

Does the Autumn Statement, along with the national insurance increase that we are debating today, make any difference to that fundamental fact? The fact is that it does not—or at least not much. The noble Lord, Lord Eatwell, is always interesting, and I was very interested in his heroic defence of the Government’s measures. In particular, he made the reasonable point that, if the cost of labour goes up, it may be used more productively in the private sector. But surely the real issue here is the profligate use of labour in the public sector. That is where real efficiencies could be achieved. In the National Health Service, for example, more people are employed than ever but productivity has gone down. We are now in a situation where, in one particular public agency, the unions are threatening to go on strike because they have been asked to work three days a week in the office rather than at home. It is astonishing that the private sector should stand accused when it is the public sector that is the real problem. So I understand the noble Lord’s point, but I feel that he is aiming at the wrong target.

I agree with the Minister’s point that there is a sensible defence of the Government’s position, as the noble Viscount, Lord Chandos, has just explained and the noble Lord, Lord Macpherson, referred to, given that we are looking at a situation where there is a hole in the public finances, of whatever size—we can disagree about how big it is, but there is a hole—and there are clearly some short-term problems which were unanticipated, for example the £11 billion or so that has to be spent to compensate the victims of the infected blood inquiry, and we have run down our defence stocks and our armaments to help Ukraine. All these are factors that any Government would have to consider. It is perfectly true that Conservative Governments in the past increased taxation at the beginning of their periods of government—Mrs Thatcher did it, and it was done by George Osborne as well—to cope with factors of that kind. So there is a reasonable defence there.

The problem, as my noble friend Lady Neville-Rolfe said, is the clumsy way that this has been done. Was it necessary to antagonise farmers quite so much that they came here with all their tractors and so forth to protest about what happened? Was it necessary to further disadvantage the private education sector? Was it necessary to hit the charities? Was it further necessary to disregard poorer pensioners in a difficult winter, with all the problems they will be facing?

That is surely the reason why the measures, including this one, are so unpopular and why business is so upset. Demonstrably, business is upset, and as my noble friend Lady Neville-Rolfe also said, morale matters. If you talk people down and constantly go on about the difficulties, you will destroy morale. The Government now have the task of improving morale when they need not have been in this position.

There is a bit of a problem, which all Governments face, in how the Treasury is set up to deal with difficult situations such as this. The first part of the problem is that it combines being a finance ministry and being an economic ministry. To go back to Harold Wilson’s days, older Members will remember when he tried to untie this Gordian knot by creating the Department of Economic Affairs, so that growth was given the same emphasis that balancing the budget had. Sadly, that lasted for only four or five years. There have been various attempts since then to deal with this problem—I think that the noble Lord, Lord Birt, made one—but it remains a problem. The noble Lord, Lord Macpherson, may have much more understanding of this than I do, but I think the only way forward is to emphasise the growth unit inside the Treasury rather than establish another organisation, which the Treasury will inevitably try to fight. We have to face that problem, and I am afraid that the Office for Budget Responsibility actually makes the problem worse, because it emphasises the budget-balancing side of the Treasury’s task rather than its growth side.

There is a second point, which was recently brought out in an interesting book by Professor Paul Collier, who is professor of economics and public policy at the Blavatnik School of Government in Oxford. He made the point in his book, Left Behind: A New Economics for Neglected Places, that the people in the Treasury, given the way that it is staffed and the tasks they are given, are drawn from a very narrow circle. I certainly do not intend to make any criticism of individuals here, but they are very often people from a London background who have been to Oxford and Cambridge. How can they therefore be expected to understand the effect on farming, for example, of the national insurance increase? How can they be expected to understand the effect on charities or small businesses, when they have never run a small business? They are tasked with a narrow remit and their expertise is of a particular kind. They do a heroic job, but how can they reasonably take account of all these factors?

They are mostly economists, like me. I am an economist by background, and I think it was Angus Deaton, the Nobel Prize winner, who said that the teaching of economics has lost touch with welfare recently; it has been too keen to pursue methodological purity at the expense of social, business and other factors. That is a problem as well. We therefore need to look at this rather structural problem, as well as at the politics of decisions that particular politicians may make.

Having said all that, like the noble Lord, Lord Macpherson, I am not unoptimistic about this country’s future. For example, we have a great services sector, hardly referred to today: 80% of our GDP comes from the service sector and that sector is expanding by 8% a year universally—throughout the whole world—so there are huge opportunities. I declare an interest here. Many years ago, I started an economics consultancy specialising in metals and minerals. Frankly, the sky is the limit for what you can do if you have the right product and the right marketing. The world is literally the UK’s oyster if we get this right, and we should concentrate on it.

I liken the UK economy at the moment to the football club that I support, Manchester United. It has a glorious history but has recently been sliding down the league tables because of complacency, bad mistakes, bad recruitment and generally not doing very well. But suddenly, yesterday, the players put their back into it: they had a clear plan and worked with real aggression and intent, and they got a result. This is something which we can hope that the Government will do: turn round the British economy, in the way that the players turned round Manchester United’s fortunes yesterday. I am afraid that the Government will have to show a better understanding of the private sector than they have done so far if they are to achieve that admirable result.