Lord Lea of Crondall
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Lord Lea of Crondall
My Lords, I add my congratulations and welcome to the noble Lord, Lord Spicer, who is an erstwhile tennis partner. More recently, he found himself showing me round the Carlton Club—as much to his surprise as mine, I think. It reminds me of his distinguished service as chairman of the 1922 Committee. I wonder how many years there will be before another revolution, so that the 1922 Committee will be the 2012 committee. I am sure the noble Lord, Lord Spicer, will advise his co-conspirators of how to go about that with his usual courtesy. He is a man of very great courtesy. He could slide a dagger in 16th century Rome and everybody would still be his greatest friend. I say that as a compliment.
I am afraid I will now part company with the noble Lord, Lord Spicer, and all his colleagues by saying that this will be the most disastrous Budget in living memory. First, economic growth will be hit. Secondly, it will be disastrous for employment. Thirdly, it will be disastrous for social cohesion and social justice. Fourthly, it will be disastrous for regional balance. These intertwine in many ways. The Budget is based on an implicit ideology which reminds me of the old Galbraith slogan and, indeed, of George Orwell: private sector good, public sector bad. I will come back to that point.
My starting point must be that the OBR has recently found that Labour’s deficit reduction plans would have more than achieved the target of halving the deficit over four years from 11.1 per cent in 2009-10 to 5 per cent in 2013-14. The OBR has also said that Labour’s plan would have reduced the structural deficit by nearly three-quarters, from nearly 5.2 per cent of GDP in 2010-11 to 1.6 per cent of GDP in 2014-15. That would have met the timetable set out in the G20 communiqué on 27 June. It is about time that the Conservatives—with their rhetoric about the mess that they were left—were shamed into ceasing to make those ridiculous remarks about the legacy.
The real problem with the legacy is totally different. The problem is the hole in the economy caused by the banking crisis. The loss that GDP has to bear is, according to the IFS, 20 per cent cumulatively. That is £300 billion before we get back to where we would have been if there had been no banking crisis. We will not achieve that, but that is the amount of lost output, income and living standards that we have all suffered thanks to the banking crisis. That, in turn, caused the public finance deterioration of about £50 billion. However, logically and arithmetically, rapid economic growth would need to be far more than the trend; it would need to be 4 per cent or 5 per cent per annum to get back up to where it should have been.
Filling the output gap is the only way to produce greater tax income and lower expenditure. Both go together. Tax income would come from the higher output from corporation tax, income tax and so on. Lower public expenditure would come from not having to spend as much on unemployment benefit and social security. Those are the dynamics of economic growth. I am sure that we will hear more about the fundamentals of that from the noble Lord, Lord Skidelsky, who wrote his monumental book on Keynes only recently. The real question, which I rarely hear Ministers comment on, is: what growth rates do they think would be needed to get back to that trend? Do they agree with these figures—not, do they disagree with them?—because that is the territory that we ought to explore?
Samuel Brittan, hardly a socialist revolutionary, has quoted Goldman Sachs in a recent article. I do not normally quote Goldman Sachs, but it has carried out work on the output gap and judges potential output to have grown at an annual rate of 2.6 per cent when output was on trend in 2005. On that basis, the output gap is now in excess of 10 per cent. That gap can only grow given that we are now at a lower base. The only scary variation on that is that we are so rapidly destroying potential growth that we will have to stabilise at much lower living standards than Germany because of the collapse of fixed investment, which fell by no less than 14 per cent in 2009. We must avoid that at all costs. People are now assessing what they describe as the sustainable rate of unemployment as 6 per cent, 7 per cent, 8 per cent or 9 per cent. This will be disastrous as it will inevitably exacerbate regional differences and cause dreadful social problems in swathes of Britain, particularly in areas other than the south-east. However, I do not exclude the south-east as there will be growing inequality and poverty in some areas there.
The regional development agencies have delivered for the regional economies. They have been independently evaluated and shown to lever, on average, £4.50 of benefit for every pound spent. The scrapping of the RDAs springs only from the ideological dogma: private sector good, public sector bad. Come back George Orwell, all is forgiven. The RDAs have trained more than 400,000 people and have created 850,000 jobs over the past 10 years. They have started, or rather have helped to start up—my noble friend Lord Myners will correct me if I say “started”—60,000 businesses. Some £100 million of funding has been brought forward by RDAs for regeneration projects to boost the economy during the recession.
All these figures are, of course, the mirror image of those claimed by Mr Osborne. However, the independent OBR has now more or less predicted many of Labour’s figures rather than Mr Osborne’s. It predicts that the Osborne strategy will mean tens of thousands more people in the dole queue and that it will bring employment down by 100,000. The CIPD forecasts that unemployment will increase by about half a million over the next two years to 3 million, and remain at that high level until 2015. A final twist in this jobs question is that George Osborne’s election campaign—a totally cynical campaign —promised to scrap Labour’s jobs tax. I say “cynical” as a rise in national insurance would keep people out of work. However, in the Budget, we learnt that the promised NI cut for employees would not go ahead and that more people would be out of work under the Government’s plans than under Labour’s. So much for George Osborne’s election claim that jobs would be saved under his plans.
Even now the penny does not seem to have dropped in Conservative ranks that public expenditure and private expenditure have a symbiotic relationship. As regards buildings and infrastructure—for example, schools and hospitals—the money is spent by Costain and all the suppliers. You do not need to be Einstein to work that out.
Finally, on the social impact, I follow up on the effect of income distribution. I thank the noble Lord, Lord Razzall, for probing this question after I started it. I was astonished by the flat answer given by the noble Lord, Lord Sassoon, that the whole package is progressive—or certainly not regressive. He does not seem up to speed with the Government’s own line. On 20 July, the Treasury Select Committee published a report on the Budget and its conclusions are quite different from the Government’s. The Government now have a dilemma over what to say to the Treasury Select Committee.
The original hypothesis was, said Robert Chote, Director of the Institute of Fiscal Studies,
“that the Budget looked progressive when assessing whether the lowest income decile paid less than the highest income decile largely because of the reforms that had been announced by the previous Government in its March 2010 Budget rather than the specific measures announced in the June 2010 Budget”.
I underline that with another quote which is even more startling and has not yet been widely understood:
“Mr Chote concluded that based upon the three factors he had outlined—taking out the measures inherited from the previous Government, looking further into the future than 2012-13 and including some of the other measures which the Treasury had chosen not to model in their analysis of tax and welfare changes on households—the June 2010 Budget was ‘regressive’”.
In other words, it is regressive if you take out the measures inherited from the previous Government. It is astonishing to me they were ever there. The Government claim that it is progressive, but only because they embrace the measures taken by the Labour Government in the Labour Government’s Budget. You would be run out of the Monte Carlo casino if you tried that there.
The conclusion is that, now the Government have started to go down this path,
“the Comprehensive Spending Review will [have] effects on different income groups. We recommend that the Treasury builds on the approach taken in the Budget to give information about the impact of CSR changes on different households. We would like the analysis for both the CSR and future Budgets to take two forms: a narrowly drawn set of figures based on those measures most easily modelled”.
This is like the reference of the noble Lord, Lord Sassoon, to all these fancy tables. You have to have a flannel round your forehead to get your brain round them, and now they turn out to be misleading because they include the Labour Government’s measures. They also want,
“a wider analysis using more assumptions, which would allow a fuller set of measures to be included”.
We desperately need to see the economy holistically—that is, public expenditure, the cuts, what you might call the macroeconomic situation and specifically the Budget measures.
The Minister has got himself into slightly hot water on this whole question of income distribution. Will the Government go with the spirit of the Treasury Select Committee and in future do income distribution analysis combining the Budget and the CSR? That will become a key question later in the year. Meanwhile, we are left with the poorest 10 per cent of households seeing an average annual spending cut of £1,300, equivalent to 20 per cent of their household income, whereas the richest 10 per cent of households see an average annual cut of £1,135, equivalent to only 1.6 per cent of their household income. That really needs to be addressed in a proper statistical manner.
Lord Bates
I am quoting from the same rating agencies that rate government debt and sovereign debt around the world. That is what results in the prices of those debts being traded on the international money markets. The noble Lord, Lord Myners, knows better than anyone about the global flows of international finance. The rating levels are crucial to this, as we see when we look at the situation in Ireland. To stretch the small business analogy to its absolute limits, you can say that international confidence in the Government’s resolution to get to grips with the deficit is analogous to what many companies will have—
Lord Bates
I will just finish this point, if I may. It is analogous to what many companies will find in dealing with their share price. The share price reflects the market’s belief in the Government’s resolution and its confidence in the soundness of the finances. That has a huge impact on the Government’s ability to—
Lord Lea of Crondall
I am grateful to the noble Lord for giving way. I do not think he has answered the noble Lord, Lord Skidelsky, or my noble friend Lord Myners. Would it be too much of a caricature to say that if we have to believe in voodoo economics, which is what the markets add up to, the logic of the noble Lord, Lord Skidelsky, and my noble friend Lord Myners is of no matter whatever? Do we just have to worship the voodoo economics of the markets?
Lord Bates
I accept these points. All I am saying is that, by arguing the other way, the noble Lord effectively says that there is not the slightest correlation between the ratings of global rating agencies, the level of debt in the economy and the price that we pay for that debt. I find that a more extraordinary position to argue from. I agree that these are contentious matters. What I have tried to set out through my contribution to the debate is that it is a multi-layered and complex subject but, essentially, we need to control costs; introduce simplicity to the system as a mechanism of doing that; increase sales by driving up enterprise; and repair the balance sheet so that the international lenders who are providing the debt have the confidence to continue doing so. I believe that the Government have done that and they have my full support.
Lord Sassoon
The OBR receives unpublished information of different kinds and then publishes its forecasts publicly. I should have thought that the information the OBR has is of limited ongoing value. However, I have listened carefully to the points made by noble Lords. As the legislation to set up the OBR on a permanent basis goes through the House, there will be other opportunities for noble Lords to discuss the issue more fully. However, as we are concentrating today on the Finance Bill, perhaps I may move on and discuss matters which are of more direct relevance to that Bill.
I have said, and will return to say again, that the new fiscal mandate will eliminate the deficit in five years and that the bulk of this reduction will come from lower spending rather than higher taxes. However, this autumn’s spending review is not only about cuts and tackling the deficit; it will be a complete re-evaluation of the Government’s role in providing public services. I take the point to which my noble friend Lord Razzall rightly drew attention in our earlier discussions about this. As to the specific point made by the noble Lord, Lord Barnett, even areas which are protected—such as the National Health Service—will be looked at to ensure that administration costs are cut. I agree with the noble Lord that that should be done; the question is where and how such administration cuts should be recycled.
We have set out our steps for tackling the budget deficit and we have done so in a more transparent way than any previous Government. Some noble Lords have argued that, because we have lifted the skirt a bit, they would now like the skirt to be lifted a lot further. However, they do not give us much credit for the greater transparency we have already introduced.
We are on track to have debt falling and a balanced structural current budget by the end of this Parliament. It is only by acting quickly to tackle the deficit and restore confidence in the public finances that we will underpin and achieve economic growth. Action of this kind requires us to take tough decisions. A number of noble Lords have questioned this basic judgment, starting with the noble Lord, Lord Tunnicliffe. I was struck by the intervention from the opposition Benches of the noble Lord, Lord Desai, who did not in any way question the basic Budget judgment and gave a very balanced account. I had a look two or three times at the briefing notes that officials had given me just to check that the noble Lord was sitting on the right Benches, because I thought it was a very balanced account of the judgment that has been taken. And of course there are risks ahead. The basic judgment was questioned by other noble Lords, including the noble Lords, Lord Tunnicliffe and Lord Rosser. We had one quote from the OECD. The one I have to hand is from its Secretary-General, Angel Gurría, who hailed the Budget as a courageous move by the British Government, and said:
“It provides the necessary degree of fiscal consolidation over the coming years to restore public finances to a sustainable path, while still supporting the recovery”.
That is the basic judgment at the heart of the Budget.
The recent G20 communiqué stated that those countries with serious fiscal challenges needed to accelerate the pace of consolidation. The noble Lord, Lord McFall of Alcluith, says that it is the UK Government calling for early fiscal consolidation but it is actually the G20 that is calling for countries such as the UK to get on with it. The noble Lord, Lord Davies of Oldham, says that we are not adopting the same policies as certain other countries. Too right. Different countries need to adopt different policies appropriate to their particular circumstances, and our circumstances are regrettably that we inherited from the previous Government the largest budget deficit in Europe except Ireland, and we have to get on and tackle it. The bulk of the deficit reduction will come from lower spending but given the astonishing size of the budget deficit, we have not been able to avoid the need to raise some taxes. My noble friend Lord Higgins asked what increase of revenue there would be in the current and next year. The figures in the Red Book in Table 2.1 on page 40 show that the amounts raised by tax policy decisions in the Budget represent an increase in revenue of £2.8 billion in 2010-11 and £6.25 billion in 2011-12.
The choices that we have now made are ones that face up to the challenges ahead and do not simply defer them to future generations. There has been precious little from the opposition Benches in the way of alternative plans and thoughts as to how we are to deal with it. I welcome the contribution from the noble Lord, Lord Skidelsky, in one respect and that is that he put up a radical alternative vision. It seemed to be founded on the starting premise or assertion that we can continue to push up government borrowing without limit, although even he went on to recognise that certain Governments have got to the limits of what the borrowing capacity of a country can be.
There was an interesting contrast between the contributions from the noble Lord, Lord Skidelsky, and my noble friend Lord Bates. The noble Lord, Lord Skidelsky, postulated what might cause a businessman to invest, but I heard from my noble friend Lord Bates pretty much what I had already scribbled down as what I thought businessmen wanted, which is that they will increase their investment when they have confidence that there will be increasing orders from their customers. I believe that their confidence in their customers will be founded on the customers’ view of whether there is a grip on the economy. Businessmen will look at the level of interest rates and they will want to see them kept low. They will want and need to see credit continuing to flow. They will need to see that government expenditure is under control. They will want to see that regulation is being tackled. They will want to see predictable and falling corporate tax rates. They will want to see that employment taxes are being cut from where the previous Government intended to take them. They will want to see that the Government, in cutting back expenditure, are maintaining investment in those areas of economic growth. These are all things which I see in the total Budget package. I agree with my noble friend Lord Bates on them.
There was discussion about value added tax and, in that context, whether this a progressive or regressive Budget. We are taking responsibility in this Bill for the financial challenges that we have inherited but in a way that is fair and open. Everyday essentials such as food and children’s clothing will remain zero-rated for VAT throughout the Parliament, protecting those on low and middle incomes. Those most affected by the VAT rise will be those who spend the most. This is clear in both government and independent analysis. If one looks at the impact of expenditure by decile, as is appropriate for a tax on expenditure, one sees that the richest pay the most and the poorest least. These points were questioned by the noble Lord, Lord Tunnicliffe, but were knocked admirably on the head by the noble Lord, Lord Desai, who said that it was wrong to suggest that VAT was necessarily a regressive tax. I do not want bore everybody with more quotes from the IFS, but its view is that total expenditure is the more appropriate guide to lifetime living standards, as households smooth their expenditure over their lifetime. Analysis by expenditure rather than income level is therefore a better measure of the impact of the VAT increase and, on this basis, the VAT increase is progressive.
Other noble Lords made wider points on whether the Budget is regressive or progressive, including the noble Lords, Lord Lea of Crondall, Lord Rosser, and, again, Lord Myners. They questioned whether policies of the previous Government should be included in the assessment. The IFS accepts that, looking at the Budget as a whole, the changes are progressive. It does not make sense, surely, to ignore the policies of the previous Government which the coalition Government have decided to retain and will legislate to implement.
Lord Lea of Crondall
The Minister is rather gratuitously missing the point. The Government have never made that clear when they proclaim that the Budget is progressive. I can make their sums add up to that conclusion only by including the March measures of the Labour Government. That is an astonishing thing to do.
Will the Minister agree to desist from claiming that this Budget has those effects? Does he agree with the Treasury Select Committee that a proper analysis of the income redistribution effects of measures announced this year should include the public expenditure cuts and that they should be looked at together? The noble Lord, Lord Razzall, and I persistently have asked these questions. This is an opportunity for answers. They are serious questions and they need serious answers.
Lord Sassoon
My Lords, given that I have just said that I thought it appropriate for the assessment of the total effect of the Budget to include an assessment of those policies proposed by the previous Government which the coalition Government have decided to retain and will legislate to implement, I am at a bit of a loss to understand the premise of the noble Lord’s question. I am not sure that this stage of the Bill is the point to be going into clarifications of this kind, so, if he will permit me, I will move on.
I turn to the welfare budget. We have to strike a balance between what is right to do with the welfare budget on the one hand and the depth of cuts to public expenditure on the other. If we fully protected the welfare budget, it would force deeper cuts to public spending, which could affect the services on which the most vulnerable in society depend. Refocusing benefits so that they go to those who need them most helps in turn to relieve pressures on front-line spending. I remind noble Lords that 880,000 people on the lowest incomes are being lifted out of income tax entirely.
We also had a certain amount of talk from the noble Lord, Lord Lea of Crondall, about “private sector good, public sector bad”. I want to refute any suggestion that that is the Government’s view. A much more sophisticated and appropriate way to look at it was the approach of my noble friend Lord Blackwell, who pointed out that a situation in which government spending accounted for 48 per cent of GDP was unsustainable. That is the right way to look at it. Private sector growth is absolutely what we need, but the public sector does a very fine job; it is just that we cannot afford a public sector of the size to which it had grown under the previous Government.
Although we probably had enough talk of cake from the noble Lord, Lord McFall, it is a question of the size of the cake, how it is distributed and what we can afford of the cake, not of wholly inappropriate comparisons between one part of it being good and the other part being bad.
Lord Lea of Crondall
On the idea that it is a gross caricature to say, “private sector good, public sector bad”, the Minister’s predecessor on the Conservative Front Bench said that the private sector is productive, the public sector is unproductive. The noble Lord can look at Hansard. I was simply making the point about all the ordering—I mentioned Costain—when it comes to cutting schools and cutting hospitals, and the interdependence of the public and the private sector.
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.