Spring Statement

Lord Macpherson of Earl's Court Excerpts

Wednesday 20th March 2019 Lords Chamber

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

My Lords, I begin by congratulating the Government, the Chancellor and the Minister on reducing the deficit from £153 billion at the end of the last decade to just £23 billion this year. Fiscal consolidation is notoriously difficult, and I recognise that there are differences of view about the pace and incidence of consolidation. For example, was the balance between the increases in taxes and spending reductions right? Were the Government sensible to spend so much on tax cuts? However, on the quantum of consolidation, I think the Government have it just about right. One thing is certain: you cannot run a deficit of 10% of national income for any length of time. The last Labour Government recognised this, which is why Alistair Darling initiated the consolidation programme in 2009. George Osborne and Danny Alexander chose to be more ambitious still, though in the end they delivered the quantum, if not the content, of the Darling plan. More recently, to the surprise of the pundits I think, the current Chancellor has seen consolidation through.

My noble friend Lord Hennessy of Nympsfield once put it to me that the lot of the Treasury official is to deal with disappointment. As he put it, consolidation and recovery in the post-war period has been “routinely punctuated by the greatest orgy”. There is something in that. Getting the economy back on track following a crisis is a Sisyphean task: you spend years of your life pushing a rock up a steep, inhospitable hill only to see it falling down again, sometimes in a matter of days, when the next crisis hits. So I congratulate my former colleagues on a job well done.

Turning to the Spring Statement itself, I shall make three small points. First, I have been impressed by the tax take over the last year or two. Generally, revenues tend to disappoint—that is because people generally do not like paying taxes—but because of the buoyancy of income tax revenues, revenue has been persistently surprising on the up side. The last time I remember this was in the late 1990s. The noble Lord, Lord Young of Cookham, will remember that for the whole of the early part of the consolidation of the 1990s, revenue kept disappointing on the down side, but then suddenly in 1997, somewhat unfortunately for the outgoing Government, the dam burst and revenues kept pouring in. I remember that between 1997 and 2000 the Treasury was just awash with cash, almost embarrassingly so. Of course, it did not last, so my advice to the present Government is to enjoy it but not to assume that it will last too long.

I worry about the sustainability of the tax base. As I have noted before, the tax and national insurance take is set to be 34.6% of national income this year and then to stay at that level through to 2023. Noble Lords should bear in mind that in only one year since 1950 has the tax take been that high. That leads me to think that HMRC has discovered the holy grail of tax collection—I suspect not—or national income is higher than currently assumed, which is a theme I shall return to, or the Government will fail to sustain that level of taxation. My worry is that much of the tax base is eroding. Fuel duties and tobacco duties are in secular decline; taxing capital in a world of huge capital mobility is all too difficult; the North Sea tax take is well past its best and will fall further with decommissioning; and, although local government is raising council tax a bit, over the last 20 years council tax has probably not risen enough. As my noble friend Lord Wakeham has pointed out, the current stamp duty regime discourages people from moving house: it does not surprise me that the OBR has revised its stamp duty estimates down yet again. Spending pressures are set to rise in the coming decade. The Government need to look at whether the tax system is equipped to deal with this. For my part, like the noble Lord, Lord Shipley, I recommend looking again at the taxation of land and property. The great thing about residential and commercial property is that it is fixed—it cannot move. I also think we will need to look again at a social care tax of some sort.

My second point relates to the next spending review. If ever there was a time to prioritise public investment, it is now. I was sorry to see in the OBR report that business investment has fallen for four consecutive quarters. Now is the time when the Government need to fill the gap, prioritising infrastructure and housing. To be fair, the Government are seeking to do this, but I would encourage them to be more ambitious still. Public investment needs to be focused on projects that yield the highest return. That probably means more expenditure on roads and, although I know I am in a minority of around three, that also suggests that we should cancel HS2.

Within current spending, I also hope that the Government will prioritise further education, skills and training. If Brexit achieves what its proponents suggest, we will no longer be able to rely on the Polish taxpayer to provide the economy with the skills it needs. Of course, such expenditure will need to be paid for. Here—again, I shall be unpopular—I would take a long, hard look at the so-called triple lock. I should declare an interest in that I am due to get my free bus pass in three months’ time. However, the fact is that the elderly have contributed very little to fiscal consolidation.

Finally, I shall say a few words about the macroeconomy. Yesterday’s labour market statistics were very encouraging. The level of job creation at this time of uncertainty is impressive. Earnings growth is accelerating. That is good news because it means that living standards are rising, which should provide further support for demand in the economy. Together with the revenue statistics, it also suggests to me that the ONS is underestimating the level of gross domestic product. We are at full employment and the supply of labour is likely to fall if the Government achieve their Brexit objectives. That means that the risk of inflation is increasing.

I can see why the Bank of England is reluctant to act while a no-deal Brexit remains a possibility, and that possibility has increased today, but it could have used this phoney Brexit period to reduce the impact of quantitative easing. The Bank continues to miss an obvious trick. Instead of reinvesting the proceeds in gilts when debt matures, it should take the opportunity to run down its gilt holdings and reduce quantitative easing. I can see that my noble friend Lord Gadhia agrees with me. As and when a deal is done on withdrawal, the Bank may well find that it has presided over monetary conditions that are too loose. That will mean that it will have to raise interest rates further than if it had prepared the ground now.

I end where I began. This is an encouraging Statement and the public finances are in a better state. The critical thing is to keep them that way.

Economy: Budget Statement

Lord Macpherson of Earl's Court Excerpts

Tuesday 13th November 2018 Lords Chamber

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

My Lords, this is a Budget of our times, overshadowed by the interminable uncertainty of Brexit, which hangs over the economy like a dark cloud. Understandably, it is a Budget designed to offend no one and to avoid at all costs controversial votes in Parliament. It is hard to object to the measures; indeed, some of them are very sensible. I welcome the increase in resources for the National Health Service, the focus on public investment—in particular, in the roads programme—funding for the pensions dashboard and the careful and considered way in which the Government are going about preparing a digital services tax.

In passing, I should say that I agree with my noble friend, or rather the noble Lord, Lord Wakeham—he should be a friend; I want to make that clear—who made a good point about stamp duty. Stamp duty is an extraordinarily inefficient tax. It taxes mobility and transactions. This country should have followed the fine example of Ireland, which used the crisis to reduce stamp duty rates and introduce a sensible, self-assessed property tax.

It is the macroeconomic stance that I want to focus on today. We are now nine years into a recovery. The economy is at full employment. Last year was the first year since 2001 when public debt fell as a percentage of national income. Even this year, public debt will be a mere 1.5% of GDP below its peak. By way of comparison, by this point in the recovery after the 1991 recession, public debt was 8.6 percentage points below its peak.

The one thing that I learnt from 30 years at the Treasury is that, when the forecasts give you a fiscal windfall, it is imprudent to spend all of it. As Robert Chote, the chairman of the Office for Budgetary Responsibility, has said,

“what the sofa gives, the sofa can easily take away”.

But spending the windfall is what the Government have chosen to do. Next year, the Chancellor will spend some £11 billion of the £12 billion windfall. By 2022-23, he plans to spend £18.8 billion of a windfall of £18.2 billion. I question this decision for two reasons, the first structural and the second cyclical.

It is over the next decade when the long-predicted demographic time bomb finally arrives. Sound fiscal principles suggest that Britain should have followed Germany’s example and reduced the national debt now the better for future generations to shoulder the burden when spending pressures increase. To use the phrase much beloved by a previous Prime Minister, we should be fixing the roof while the sun is shining. If there is an economic downturn, the probability of which increases with each year of growth, the Government will need all the firepower available to support economic activity. If the debt level is still more than 80% and rising, their room for manoeuvre will be pitifully small.

Looking at the numbers, I see two things which make the public finances even more vulnerable. First, the revenue forecast looks difficult to sustain. This year, taxes and national insurance are projected to be 34.6% of national income. That is the highest tax take since 1969-70. I congratulate the Chancellor and Her Majesty’s Revenue and Customs on getting so much revenue in, but history suggests that such a high tax take will be difficult to sustain.

Secondly, the spending settlement for the NHS looks like the bare minimum necessary to keep the service on an even keel. The Government have yet to provide for long-term care for the medium term. They have provided extra resources for the Ministry of Defence only over this year and next. They have heralded the end of austerity, but if they are to continue to protect health, schools, the triple lock and overseas aid while providing more resources for the MoD, there is not enough in the spending projections to cover the programmes which are really coming under pressure: the police, the Prison Service and local services. At some point, the NHS will be back for more; it always is.

I encourage the Government to prepare for such an event by initiating a debate on the balance of spending and taxation in an ageing society. In my view, the triple lock uprating formula for the basic state pension is unsustainable and the case for a hypothecated tax for health and social care remains compelling. But it needs to be one which everybody pays. The elderly have had a very good run over the last 20 years. I should declare an interest: I am due to receive my free bus pass in eight months’ time. It is time for us older people to share more of the burden.

Another worry I have about the macroeconomic stance is the Bank of England’s ultra-loose monetary policy. Quantitative easing worked initially, but it is like heroin: to have any impact, the Bank needs to inject more and more money into the system. QE has distorted asset prices and, despite the Bank’s protestations, it has helped the haves over the have-nots. I am surprised that the Bank has not yet signalled its withdrawal: it has missed an elementary trick by insisting on reinvesting the proceeds of debt as it matures. Had it allowed the quantity of QE slowly to run off as debt matured, monetary policy would be in a much more sensible place. As it is, we have an expansionary fiscal and monetary policy when the economy least needs it. Both the Treasury and the Bank of England have little to fall back on if the economy stalls.

I shall finish with a few words on the Budget process itself. Here, I have great sympathy with the Treasury: in a world of considerable uncertainty I can understand why the Prime Minister and the Chancellor would want to leave decisions to the last possible moment. It was ever thus. I recall sitting in a room over in the House of Commons with John Major and Ken Clarke. John Major was arguing that we should remove VAT on fuel from the Budget which Ken Clarke was due to give the next day. I had to bring the discussion to a halt by saying that it was too late—the Red Book was already printed. Now that we have the independent Office for Budget Responsibility, it is important that that institution is given the time necessary to cost proposals and feed that into the fiscal forecast. I am troubled that the OBR points, on page 2 of its report, to,

“repeated failures to observe the forecast timetable”,

agreed with the Treasury. I note that the OBR will be seeking assurance that this will not be repeated at fiscal events. I wish it well, though I am not optimistic. I would be grateful if the Minister would tell the House whether the Chancellor or the Treasury have yet given that assurance.