Economy: Spring Statement

Lord Macpherson of Earl's Court Excerpts

Thursday 31st March 2022 Grand Committee

[Lord Macpherson of Earl’s Court (CB)]

My Lords, it is a privilege to take part in the debate. Sadly, the noble Lord, Lord Bird, has just left the Room, otherwise I, as a former official, would have responded to his criticisms on behalf of the Treasury.

When my noble friend Lord Stern of Brentford was at the Treasury, he developed a methodology where you could rank individual investment projects by their social return. Obviously it was then a matter for elected Ministers to choose whether they wanted to prioritise that social return. I do not want to give away official secrets but it is fair to say that High Speed 2 was relatively low on that list—but I do not want to reopen that debate.

I want to distinguish the fiscal judgment in the Chancellor’s Statement from the individual measures. Unlike just about anybody else who has spoken today, I am broadly in favour of the fiscal judgment. The fact is that the economy is growing faster than the official figures suggest. You have only to look at the one metric that is not a statistical construct—namely the revenues coming into the Treasury week in, week out—to be pretty certain that GDP will be revised up in the months and years ahead. The anaemic growth of the supply side of the economy means that we are almost certainly operating above trend or, to put it another way, above full capacity.

The fact is that the Bank of England has left monetary policy too loose for too long. We are now paying the price with inflation. It is disingenuous to say that the rise in inflation is down to Ukraine. Inflation was always likely to rise above 7% whether Putin invaded Ukraine or not; the war is simply making a bad situation worse. At a time when inflation has been accelerating, the economy does not need a further demand-side stimulus.

The Chancellor is also right just to keep an eye on debt interest payments, which this year will be the fastest-growing programme in government. It is fair to say that in future years it will not be, if inflation comes down. The fact is, since inflation is likely to stay higher for longer, the Exchequer could be vulnerable to the consequences of index-linked gilts and to higher long-term interest rates, as quantitative easing begins to unwind. Just because there is headroom against the Chancellor’s fiscal targets does not mean that you should spend it all in every single fiscal event; it is better to keep that headroom for the rainy days that inevitably lie ahead.

I am supportive of the fiscal judgments, but I am much less sanguine about the individual measures. We debated national insurance yesterday. I do not want to get into too much detail on that, other than to note that the Chancellor has put in plain sight what other Governments have chosen to conceal—namely, when you need to increase tax you raise the rate of national insurance and, when it comes to cutting tax, you cut the basic rate of income tax, ideally in the year of a general election. That is unfair—not the general election point; that is politics—but the actual principle of moving from income tax to national insurance. It helps the old at the expense of the young—and I recognise the danger here, since there are an awful lot of old people in this Room. Nevertheless, the old have had a very good run. Also, the residual Marxist in me makes the point that it basically provides further relief to rentiers and capitalists at the expense of working people.

It is not just the balance of personal taxation that is problematic. If ever there was a time to provide further help for those in and out of work, living on the basic minimum provided by universal credit, it is now. Some will argue that next year they will get a better uprating, but that is 13 months away. Having to wait that length of time is scant consolation for people who really are living on the edge.

Another point, which I think my noble friend Lord Hain made, is the Statement’s silence on security. It is striking that our friends in Europe, particularly Germany, have already taken bold decisions. This country is going to have to spend more on defence, and it is better to take decisions now, plan accordingly and reserve some money, making a claim on the reserve for that expenditure, than to put that decision off.

My final point relates to growth. Unless we can get growth in productivity up, the Government will continue to face uncomfortable decisions on taxes and spending. Indeed, that is one reason why the tax burden is set to reach the highest level since Sir Stafford Cripps was Chancellor. As the OBR has observed, the Government’s approach to Brexit is taking its toll in terms of lower exports. That is one Treasury forecast that has proved extraordinarily accurate. I am confident that, in the long run, we will end up in a place much closer to the European Union in our trading relationship, but I suspect that that new equilibrium still lies a decade away, so we cannot expect trade to solve our productivity problems. That makes it more important than ever that the Government focus on the other drivers of growth, such as on innovation, where I am glad to see that the Government are reviewing the R&D tax credit, which I fear is increasingly exploited by firms that are really not in the innovation business at all. That also means infrastructure where, again, I would encourage the Government to focus on those projects with the highest economic return, and skills, on which I welcome the review of the apprenticeship levy. However, we will not make much progress until the Government prioritise further education at the expense of higher education.

Raising the rate of productivity is less about new policy initiatives; we have enough of those. It is about laser-like and persistent focus on ensuring that the large amounts of government expenditure on things like education and skills really make a difference. Delivering on productivity requires a long attention span. It involves building cross-party coalitions and requires leadership from the top. I am not terribly optimistic that we will see that in the short run but, if we do not grasp this nettle now, the Government will find it all but impossible to deliver the low-tax economy they so desire.