Budget Statement

Lord Londesborough Excerpts

Wednesday 3rd November 2021 Grand Committee

[Lord Londesborough (CB)]

My Lords, I should like briefly to focus on four key areas of the economy, all of which are connected: wage inflation, labour shortages, productivity and, finally, education. By way of quick introduction, since I am relatively new to this place, I should say that I am drawing chiefly on my own experience in the private sector—30 years as an entrepreneur and employer and the last seven years as an adviser and investor in start-ups. It is a particular pleasure to follow the former Chancellor of the Exchequer, the noble Lord, Lord Lamont of Lerwick, and, in her heartfelt valedictory speech, the right reverend Prelate the Bishop of Newcastle, whose comments I found myself endorsing.

The Government’s aim to build back better and create a higher-wage economy sounds good in theory but, as many employers will tell you, wage inflation without genuine increases in productivity is something of a fool’s paradise and certainly not sustainable in the long term. Wage increases ultimately need to be earned rather than given, and that applies to the private and public sectors. There really is no magic money tree, to quote one of our former Prime Ministers. The CBI director-general, Tony Danker, put it very well last week:

“Ambition on wages without action on investment and productivity is ultimately just a pathway for higher prices”.


Taking the Treasury’s own forecast alongside those of the OBR, higher wages, as we have heard, will contribute to inflation rising to 4.4% next year, although in the statement the OBR admits to the risk that it might exceed 5%, while some independent economists are now talking about 6% or 7%. Given that GDP is expected to grow by 6% next year, still with very high levels of borrowing, there is a real danger of interest rate rises coming along just at the time when many will be facing an economic squeeze.

Added to that, we have serious supply shortages, not least in the labour market itself. Businesses across the country are struggling to recruit and retain staff, not just in care homes, hospitality and retail, or HGV drivers, but in many areas of skilled labour, including middle and senior management. One leading executive search consultant in the tech sector told me only yesterday that they had never seen such an imbalance between job vacancies and the pool of available talent. This tight labour market has been made worse by the absence of a comprehensive immigration policy post Brexit. Such shortages of both skilled and unskilled labour are resulting in employers having to pay higher wages to both attract and retain staff.

To boost living standards in real terms we need sustained growth and productivity, something that we have not seen in more than 10 years. Since 2010 the UK’s productivity, as measured by GDP output per hour, has grown by just 4%, according to the OECD. That seems extraordinarily low when you consider the huge advances in technology and communication over that period. Let us put it in context: France had an 8% gain in productivity in the same period, Germany almost 10% and the US more than 10%. This spells trouble for global Britain’s place in the world marketplace, and indeed for building back better.

Why we are lagging behind is a complicated question. I shall focus on the key area of education, to follow up the comments of the right reverend Prelate the Bishop of Newcastle. Yes, innovation and productive investment are crucial too, but there is no escaping the fact that if you do not educate and train your workforce sufficiently then productivity will suffer. It is here that, to me, the Budget Statement makes particularly disturbing reading. The Chancellor states, as the noble Lord, Lord Davies, mentioned, that per-pupil funding will return to 2010 levels in real terms by 2024-25. This follows more than a decade of austerity during which schools have suffered an 8% fall in real spending per pupil, so we are talking about 15 years to return to where we were in 2009. Yes, the Chancellor announced £1.8 billion extra for education recovery post pandemic, in addition to the £1.4 billion announced in June, but the total education recovery spend falls well short of the £15 billion that Boris Johnson’s own catch-up tsar, Kevan Collins, said was necessary before resigning from his post.

Perhaps the most striking contrast lies in the different paths for health and education spending. Since 2010, health spending has increased by more than 40%, while education overall will have seen a feeble rise of just 2%. I appreciate the huge health demands brought by an ageing population, the pandemic and the historic underfunding of the NHS, but this is not a balanced approach.

Education is not a short-term fix for productivity, but the longer we fail to invest in and develop the education and training of our workforce for the future, the longer it will take to achieve these badly needed productivity gains that ultimately underpin a higher wage economy. Without real economic growth, we run the risk of fuelling inflation and interest rates, inflicting further damage on living standards.

To give the Government credit where due, they have made some welcome announcements, notably the 7.5% real-term annual increase for business, energy and industry, with the aim of encouraging innovation and boosting investment in R&D. However, the economy faces a period of labour shortages, restricted immigration, very modest growth from 2023 onwards and rising inflation. I suggest that this is not a good environment for business. Add to that stagnant spending on education and the long-term prospects for productivity do not look bright. We need a spending strategy for education, productivity and sustainable real economic growth. Finally, I suggest that levelling up makes little sense without catching up.