Budget Statement

Lord Layard Excerpts

Wednesday 25th March 2015 Lords Chamber

[Lord Layard (Lab)]

My Lords, if you want to have the right policy, you have to start with the right diagnosis. Unfortunately, the Chancellor has got the wrong diagnosis. He and his colleagues have argued all along that Labour caused the deficit by irresponsible public expenditure, which led to his policy. In fact, the deficit was caused by the banks, and the resulting worldwide recession and the fall in tax receipts. It was not caused by irresponsible expenditure.

I will begin with a few revealing facts from the Treasury’s wonderful Pocket Databank. The Labour deficits in the 11 years before the world recession averaged only 1.2% of GDP. Over that same period, the national debt was substantially reduced relative to GDP. Let us have a comparison with the five years of the preceding Conservative Administration under John Major. In that period the deficit averaged 5.1%, which is four times the Labour figure of 1.2%, and the debt rose relative to GDP. I believe that those are significant figures. Therefore, who is irresponsible? It is outrageous to attribute our problems to the alleged fiscal irresponsibility of the Labour Party before the world recession threw our country and every country into deficit. It is time to see the last of the mantra—the mess that Labour made. It should be revealed as the myth that it is and relegated to the dictionary of phrase and fable.

Unfortunately, in consequence of this wrong diagnosis, something serious is happening in the real economy that is affecting the citizens of this country: the dismantling of many of our public services. As has been said, that is now the central issue for this election. The issue is whether we want to see our public services reduced relative to GDP to the level, or lower, of the 1960s. We say no, for many reasons. Simple economics says that this is nonsense. Every textbook says that, as people get richer, demand for some things grows faster than income, while demand for some other things grows more slowly. Demand grows faster for health and education—things that are characteristically well supplied by the public sector. Demand for things such as food, which are typically paid for privately, grows more slowly.

As we become more affluent, surely we will want to spend disproportionately more on old people, child protection, family support and the local environment. We value these things increasingly as we move further from the breadline. This is basic economics 101. It is interesting that in polls, such as the YouGov poll I looked at this morning, when people are asked whether they are willing to pay more for better schools and hospitals, most of them on balance are in favour of doing so. Therefore, economic theory is in line with what people say about their preferences.

Instead of that, we always hear the argument that people would be better off keeping the money for themselves. What do we think about that argument? Last year, Mrs Merkel had a seminar in her office on the subject of what matters to us. Various people presented evidence on what makes people most satisfied with their lives. In every survey in every country, the evidence is clear that the variation in disposable household income across the population explains less than 1% of the variation in life satisfaction. People vary enormously in their life satisfaction but the variation in their household income explains only a very small part of it. Much bigger factors include variation in mental health or physical health, variation in the quality of family life and so on. If that is taken through to an analysis of the benefits of different things, it can be shown, for example, that money spent on evidence-based mental health care benefits the well-being of people 10 times more than the same sum would if it were left in the household budget. The general point is that, as we get richer, our greatest problems become problems not of material survival and comfort but of health and human relationships.

To say that you are protecting the NHS is simply not enough. We have to think in a different context where we would expect the NHS to grow faster than our national income and not simply protect it. We really want to tackle all the things that people worry about and talk about, including alcoholism, domestic violence, dementia and suicide, which are all big, national problems that require public services. One could argue that people should pay for their own healthcare but that is not the route to an efficient health service. The US spends three times as much on health as Britain but has a lower life expectancy and administration gobbles up 25% of the costs. The philosophy of private good and public bad is too simplistic to handle these issues.

If politicians want to improve the life satisfaction of their people they should stop cutting public services. Why would they want to improve the life satisfaction of their people? Very simply, it is because that is what makes people vote. We now have good evidence that the biggest determinant of how people vote is how satisfied they are with their lives. That is even more important than the state of the economy. That is of course a justification, if you like, for democracy.

We do not need to destroy our public services. Our debt is now 80% of GDP but it is stable, and 80% is well below the average that we have had over the past 200 years. This debt is owed not to foreigners but almost entirely to the Bank of England, which is owned by us—or will be owned by our children who will own the bonds which we leave to them when we die. It is not an imposition on our children—that is a fallacy.

In the short run, cutting our public services will cut our GDP as much as it cuts our debt. The cuts that the Chancellor is proposing are a disaster. The plan has been ridiculed by all responsible commentators, and almost everyone finds it hard to believe that the Chancellor would ever carry it out if he regained power. Let us earnestly hope that he does not.

Young People: Alternatives to University

Lord Layard Excerpts

Thursday 23rd October 2014 Lords Chamber

[Lord Layard (Lab)]

My Lords, this debate is about the low skills of the non-graduate workforce. For years, we thought that the answer to that was more full-time vocational education, so we introduced, first, the GNVQ, as has been said already, and then the diploma. Both of them failed because that is not the way to get skills to the people in a form that employers want. It was also not the form of training that the young people wanted—they wanted to earn at the same time as learning.

Eventually, by about 2009, the previous Government accepted that the main alternative to university education should be apprenticeships. That was an enormous step forward and it led to the apprenticeships Act. The most important thing in that Act was the guarantee offered that by 2015 every young person with minimum qualifications would be entitled to the offer of an apprenticeship. It was an extraordinarily important step because only a guarantee rather than a numerical target energises a system, and there are people for whom a solution has to be found.

Unfortunately, the coalition Government repealed that part of the Act. As has been said, they switched their main focus of expansion from youth apprenticeships to apprenticeships for those over 25, and we now have fewer youth apprenticeship starts than we did in 2009-10. However, there is a figure that I want to highlight. Among young people aged 18 today, only 8% are in work-based learning, 51% are in full-time education, and 41% are doing neither. That is a shocking fact which I hope will be addressed as a result of this debate. We need a completely new deal for that 41%, and I think that the right deal is to reintroduce by 2020 an apprenticeship guarantee. I will say a word or two about how it might be structured slightly differently from before and how it might be delivered.

As in Germany, the main type of apprenticeship has to be at level 3, as has been said already, but employers are going to accept on to such apprenticeships only those youngsters who already have a decent record of achievement. Therefore, we need a solution for the people who do not at that point have a decent record of achievement. We have to establish a new system of pre-apprenticeship courses in further education colleges which are explicitly aimed at getting somebody qualified for an apprenticeship. These courses, which exist only sporadically at the moment, would of course include work experience, but I think that if they were provided in a framework where young people knew that if they completed them properly they would be entitled to an apprenticeship, they would be overwhelmed with applicants.

Therefore, we need an apprenticeship guarantee with two parts. First, every young person under 21 should be entitled to take a pre-apprenticeship course and, secondly, everybody who successfully completes such a course should be entitled to the offer of a level 3 apprenticeship. Of course, others would also be entitled to the offer of a level 3 apprenticeship, such as those who had five good GCSEs, including maths and English, and those who have completed a level 2 apprenticeship or traineeship, as well as the new tech bacc, proposed by our party. I repeat that we need to think in terms of a guarantee with two parts: a pre-apprenticeship for anybody without qualifications to offer and a level 3 apprenticeship if they complete that successfully. Of course, the whole system of applications has to be integrated with the university application system through UCAS.

The second question is: how can we find places for all these people? Obviously it is in the collective interests of business to provide them, but pressure and exhortation has to be applied to individual employers, and that role has to fall on the National Apprenticeship Service, which was set up by the apprenticeships Act. The service’s record has not been perfect but it is the only national body with local outreach that could possibly be capable of doing the job. Of course, it will also need money to pay for the training subsidy that goes to the employer of each apprentice.

Fortunately, there is now a lot of money in apprenticeships, but it is going to the wrong people—to those over 25. Therefore, we have the scope, without huge extra expenditure, to redirect money to solve the problems of getting our young people off to the right start in life. Surely we ought to accept that our moral obligation is greatest to the people at the very beginning of their careers. Our obligation is especially to those 40% who are completely missing out at the moment. This is the time when we need to give them a new deal.

EU: Budget Report

Lord Layard Excerpts

Thursday 25th April 2013 Lords Chamber

[Baroness Noakes]

I am very pleased to learn that. I think that backs up my case for the repeal of Section 5 as having no meaning whatever. In addition to repealing Section 5, I hope that the Government will, as part of their current review of EU competences, also look carefully at whether the economic policy articles of the EU treaty, which are basically the source of the documents that we are reviewing today, have any real meaning for the UK. I believe that we should be seeking to disapply those articles as part of our membership renegotiation. Some of those articles talk about the co-ordination of economic policies, but it is clear that the context for them is economic and monetary union, which has no relevance to us. For example, the convergence reporting included in the first Motion would be fine if we were preparing to join the euro, but we are not and I sincerely hope that we will not.

The noble Lord, Lord Harrison, taunted us a little by saying that we would not qualify anyway. I would point out to him that most of the current members of the eurozone do not qualify at the moment, so I do not think that is a particularly good argument. In any event, we are not going to join the euro, so why are we bothering to submit information that we call a convergence programme? Under Article 126, member states have to avoid excessive deficits and submit to monitoring by the Commission, but under the existing UK protocol we are not subject to any sanctions whatever for non-compliance. There is no point in submitting information that simply allows Brussels pen-pushers to find things to do during the day.

Frankly, our economic policy is none of the EU’s business. We should stop this charade of pretending that the eurozone architecture has some meaning for us. The economic challenges for the UK have nothing to do with our convergence with the rest of the EU or whether our economy complies with eurozone rules. To that end, I find it difficult to support the sentiments behind the second of the Minister’s Motions, which are predicated on the relevance of the reporting and surveillance regimes set up under the European semester. These may well be relevant to the eurozone—I have no real view on that—but I am clear that they are not relevant to us. Of course the UK has an interest in the economic health of countries within the EU and we have an interest in the stability of the eurozone, or at least in the avoidance of a disorderly break-up of the eurozone. However, our interest derives from the fact that European countries are our trading partners and not from our membership of the EU. We are always interested in the economic status of countries with which we trade, whether they are in the EU or not.

I agree with the noble Lord, Lord Eatwell, on the importance of the UK being competitive in export markets on a global basis. However, we should remember that European countries account for a minority and a diminishing proportion of our external trade. If we knock out the Rotterdam-Antwerp effect, we probably export less than 40% of our exports to EU countries at the moment, and that 40% really only represents five countries that are important to us. Furthermore, we have a substantial trade deficit with EU countries— £46 billion in the latest statistics—and the growth prospects for the EU are at best weak.

The rest of the world is much more important to the UK both in terms of the proportion of our exports and the fact that we have a trade surplus. Since growth prospects for rest of the world are distinctly more promising than for the EU, our focus should be on looking not at what the EU is doing but at what is happening in the rest of the world. The IMF forecasts for 2014 show the emerging economies powering ahead at a little short of 6%, the US—a major trading partner for us—at 3%, but the poor old EU struggling along at around 1%. I think that that puts today’s Motions in context.

The second Motion before us invites the House to support the five priorities which are set out in the EU’s 2013 Annual Growth Survey, which the Government say are in line with their own growth agenda. In line with my earlier comments, I do not much care whether our economic policies are in line with the EU’s priorities but I do care whether our policies will deliver growth and success in the UK economy. Today’s GDP statistics, which have already been referred to, are encouraging but clearly we still have a long way to go.

Your Lordships’ House had an opportunity to debate the Budget Statement last month. I regret that I was unable to take part in that debate. I have no intention of wearying the House with the speech that I would have made had I been able to attend but, in concluding, I will just reflect on one aspect of the Chancellor’s policies to support the economic growth which we so desperately need. That concerns taxation, an area in which the EU’s policies are simply not relevant to us. In introducing the debate last month, my noble friend Lord Deighton said:

“I believe that this Government have got the tax mood music just right. Lower tax rates for companies and individuals are essential for a successful enterprise economy”.—[Official Report, 21/3/13; col. 689.]

The thought that I want to leave with the Minister today is that the tax mood music is certainly making a better sound than we have heard for many years but it is not yet playing the tunes that make us dance for joy. We still have high rates of tax on individuals, including some very nasty marginal rates in the £110,000 to £120,000 range. The corporation tax destination rate of 20% is great by G20 standards, and was a really encouraging move in the Budget, but it is not a low rate when compared with the rest of the world. We do not compete only with the G20 when investment decisions are made. We need to be competitive in a much broader context and cannot be complacent on that. Low tax rates—both personal and corporate—are strongly correlated with economic growth and wealth creation, which increases tax revenues. High rates do the reverse. Our economy needs much bolder action and much more courage from the Government on tax.

[Lord Layard]

My Lords, I welcome this debate, which I think is more timely than on previous occasions when we have had this type of debate. Now even the IMF is beginning to question the Government’s strategy. Why is that? Because of the facts: we can see that the strategy is not working. However, as far as this side of the House is concerned, we have never believed that the strategy would work. We did not need to see the evidence that it was not working. We never thought it could because it was based on three major fallacies: a wrong diagnosis of the problem, which led to a faulty remedy and was linked to an absurd myth about the problems for future generations. These are three basic errors in thinking that have led to practical untold misery for millions of our people. I do not think we will get out of our present problems until we have a fundamental rethink on these three basic issues.

I will quickly go through them. First, what is the problem that caused the crisis? It was not, as is put about, the profligacy of the Government. I have been looking at the lovely Green Book that the Treasury produces and have found a really remarkable fact, which is that public sector net borrowing, cyclically adjusted, was lower at the beginning of the financial crisis than in the last year of John Major’s Government. That is a very important point. So we rule out government profligacy as the cause of the problem. The cause was the profligacy of the private sector banks. These banks imploded and that led to a collapse of private sector spending and a rise in private sector saving. That is what caused the recession but it is also what caused the government deficit.

I should like to be sure that we are all clear on the fundamental identity that every A-level student knows, which is that the budget deficit is automatically, at every moment in time, equal to the private sector saving plus the balance of payments deficit. The budget deficit can be reduced only if either private sector saving falls or the balance of payments improves. Nobody is expecting a big improvement in the balance of payments so the budget deficit can be improved only if there is a significant fall in private sector saving. That is the condition. Of course, that is also the condition for a reduction in unemployment. Both the things that we are worried about require a fall in private sector saving. That will simply not happen if the Government go on depressing the economy.

The only way forward now is less austerity, in order to get private spending going. In the conditions of a liquidity trap, this has to involve fiscal policy; it cannot be done by monetary policy alone. Of course, we have the proposal from Milton Friedman for dealing with the recession by an increase in government spending, financed by the central bank. This is the way we should be thinking today. The noble Lord, Lord Turner, has proposed it; various people have proposed it. This must be the way forward.

It should be explained to the public that the extra debt is not a debt owed by the Government to anybody; it is simply a debt of one bit of the Government to another bit, which they own. So there is no change in the debt held by the public. We really must consider going down this route. The only objection of any validity is that there would then be an increase in the base money, which, at some future point when people were less willing to hold base money, could lead to an inflation. Then, of course, either the Bank of England can sell some of the debt or, which has a lot to be said for it, the commercial banks can be required to hold more base money as their reserves, which would improve their liquidity and stability.

That brings me to the third error that is bedevilling this whole debate, which is that we cannot have this debt because it impoverishes future generations. You hear this every day on Radio 4. It is a complete misunderstanding because even the debt that is owed by the Government to the public is owed to the British public. If there is less austerity, this higher debt will have been bought out of higher income, so it will have added to the wealth of future generations. Of course, at the same time, it will have impoverished them because they will have to service the debt, but they will be paying themselves and there will be no net change in the wealth of future generations. This is a fundamental fallacy and we have to scotch it because it is intolerable that we should be depressing our economy, depressing business and causing mass employment because of simple fallacies that are being put about.

Existing policy is based on these three fallacies. Of course, it is also based on bad values. It is extraordinary to me that a Government would say that their overriding objective was to reduce the budget deficit. Surely that must be the means to some useful end. The useful end must be a better life for the people, in particular a higher level of employment. Is there any limit to employment caused by a higher level of debt? This has been a matter of controversy. The main research that claimed that there was a limit has now been discredited and it is quite clear that there is no simple limit to the debt that a country can sustain if it has its own independent central bank. It is absolute nonsense to point at any of the euro countries, which are not supported by an independent central bank, and say that we might have got into the same situation.

Economy: Growth

Lord Layard Excerpts

Thursday 31st March 2011 Lords Chamber

[Lord Layard]

My Lords, long-term growth depends on the accumulation of capital. I want to make just one point about each type of capital: human capital, physical capital and social capital. Human capital is of course much the most important as it accounts for over half of the value-added in our economy. As a country we do quite well at the production of human capital in our universities and sixth forms. We have a good and well understood system. But we have absolutely no well understood system for producing skills for the other half of the population. It is an area of scandalous neglect which has persisted for many decades.

Eventually, the previous Government produced what I consider to be the central solution, which is to ensure that everyone who wants it can have access to an apprenticeship. This was established as an entitlement in the Act passed in 2009. Anyone with five passes of any kind at GCSE would be entitled to an apprenticeship place. As a result, every 14 year-old would be just as likely to see a way forward if he wanted to go down the apprenticeship route as he would if he took the sixth form route. This was to happen by 2013 and in my view it was the single most important policy for growth that was introduced in the previous Parliament. But, incredibly, the present Government’s Education Bill, if it is passed, will cancel this reform. Instead, the Government are offering 12,500 extra places a year for unemployed youngsters. One wonders at their thinking. How can it make sense to wait for a person to become unemployed before they can get a proper education? We have got into an extraordinary frame of mind in this country. For that group of people we have stop-gap measures and programmes. We want a proper system for the half of our population whose talents we have failed to develop to enable them to become skilled and have a proper stake in our community. Will the Government please let the reform in the 2009 Act stand? They did not oppose it before, and surely the need is even more obvious now.

I turn to physical capital. What we need are incentives to invest, which means good prospects for growth and financial inducements for the creation of new capital. But instead the Government are spending money on cutting corporation tax, which mainly provides a windfall gain for existing capital. If we had time-limited tax allowances for new capital creation, that would be of benefit in the long term and bring forward the recovery.

Finally, social capital is a much neglected asset of ours, but it is crucial to the mobilisation of our human potential. Social capital is what the big society is all about, so I find it difficult to understand why we are seeing the destruction of so much social capital at this time. Every day we hear of people in the third sector being laid off. They are often people who have been mobilising the assets of dozens of volunteers. We learn from the National Council for Voluntary Organisations that the charitable sector is annually going to be losing at least £3 billion of state funding. If the Government do not want to shoot their big society programme in the foot, these cuts should surely be the first ones to reverse.