Fiscal Rules

Lord Macpherson of Earl's Court Excerpts

Tuesday 29th October 2024 Lords Chamber

[Lord Livermore (Lab)]

The noble Lord is far more experienced in these matters than me, and I have the greatest respect for him. He mentioned three types of activity. The first one he mentioned was the manifesto commitments we gave: he mentioned the major taxes and he is absolutely right. In our manifesto, we committed to not increasing taxes on working people, which is why we will not increase the basic, higher or additional rates of income tax, national insurance or VAT. I think it is perfectly right that we do that and specify that in our manifesto. He also mentioned speculation. There has been huge speculation ahead of this Budget around specific taxes which at this Dispatch Box, on multiple occasions, I have been unable to comment on, and I think he will understand why. As for announcements being made ahead of a Budget, that is a perfectly routine thing to do, and it is right that Parliament then has the opportunity to scrutinise those at the appropriate moment.

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

My Lords, I broadly welcome the Government’s Statement, but we have to recognise that so many fiscal rules have come and gone in recent years that the credibility of the macroeconomic framework has been severely dented. Can the Financial Secretary confirm that the investment rule will apply to a specific year and not take the form of a discredited five-year rolling period where fiscal virtue is for ever deferred? Does he agree that what matters more than any rule is whether the Government have a credible plan for promoting growth and for stabilising and ultimately reducing the country’s debt in relation to national income?

[Lord Livermore (Lab)]

Once again, I address a noble Lord who has far more experience in these matters than I do. I agree with a huge amount of what he says. I think that stability in fiscal rules is incredibly important and that they should not change particularly frequently—perhaps at the point when Governments change. I am tempted to agree with a lot of what he said, but unfortunately the Chancellor will set out the Government’s full fiscal plan, including the precise details about fiscal rules that he asks for, in tomorrow’s Budget, alongside an economic and fiscal forecast produced by the OBR.

Crown Estate Bill [HL]

Lord Macpherson of Earl's Court Excerpts

Committee stage
Monday 14th October 2024 Lords Chamber

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

My Lords, unusually, as a former Treasury official, I am generally in favour of greater devolution—the more so when the likes of the noble Lords, Lord Hain and Lord Wigley, and my noble and learned friend Lord Thomas support a proposal. But on this occasion I fear I should advocate a degree of caution.

I speak having been in the Treasury when the Crown Estate in Scotland was devolved. With hindsight, I think that was a mistake, particularly because there is considerable benefit in looking at offshore wind policy at a UK level. Indeed, the then Government missed a trick. They should have followed the example of I think the Wilson Government in the 1960s, who hived off oil sea exploration from the Crown Estate. The then coalition Government should have hived off offshore wind from the Crown Estate, not least because it gives the Royal Family, who no doubt are a deserving cause, a massive windfall, as my noble friend Lord Turnbull pointed out at Second Reading.

Although I very much understand the case that noble Lords have made on both sides of the House, I think this is something that should not be rushed. There may be a case for devolving further powers to Wales, not least because there is a case for giving Wales similar treatment to Scotland. But if the Government are sympathetic to this amendment, I encourage them to spend a bit more time working through whether there are unintended consequences and, in particular, looking through the financial implications. One thing I would not want to see happen is Wales being disadvantaged financially by devolution. This might be the right thing to do for the longer term, but I encourage the Minister to think twice before agreeing to it today.

[Baroness Humphreys (LD)]

My Lords, I apologise to your Lordships for not having taken part in the Second Reading debate. I also draw your Lordships’ attention to my registered interests and my membership of the board of Community and Voluntary Support Conwy, CVSC.

I rise to speak to Amendment 26 in my name and Amendments 1, 21 and 23 in the names of the noble Lord, Lord Wigley, and the noble Baroness, Lady Smith of Llanfaes. My Amendment 26 calls for the devolution of the Crown Estate’s powers to Wales and would require the Treasury to devolve Welsh functions of the Crown Estate commissioners to Welsh Ministers or a person nominated by Welsh Ministers.

There are increasing calls within Wales for the devolution of these powers. It is a policy of my party, the Welsh Liberal Democrats, having been debated and agreed in our Welsh conference in 2023. It would ensure that the profit from offshore energy lease agreements stays in Wales.

In July 2023, Senedd Members voted by a majority of 35 to 13 in favour of a Plaid Cymru debate calling for the devolution of the Crown Estate to the Welsh Government. As we have heard, there are similar calls at local government level. Last week, as the noble Lord, Lord Wigley, detailed, councillors in Gwynedd Council debated a motion asking their chief executive to open negotiations with the Crown Estate over “access fees”. The council paid its annual fee of £161,000 to the Crown Estate in 2023 to allow public access to beaches in Gwynedd, of which £144,000 was paid to allow access to Hafan Pwllheli marina. Councillors also believed that responsibility for the Crown Estate should be devolved to the Welsh Government, with their motion stating:

“Any profits generated by the Crown Estate, here on Welsh lands and waters, should remain in Wales, for the benefit of our residents and communities”.


In addition to all this, social media videos provide information about the Crown Estate and explain why the promoters want change, leading to greater awareness of the issue among the public.

The Crown Estate owns land estimated to be worth more than £600 million in Wales. This includes 65% of the coast of Wales and 300,000 acres of land, including any gold and silver on it. Profits on these numbers are unclear, however.

Let me be clear: there is no criticism of the Crown Estate commissioners implicit in this amendment. The commissioners operate within a system that was established 63 years ago but with a history going back to 1760, and they cannot diverge from the status quo without an Act of Parliament similar to that which devolved similar powers to Scotland in 2017. So, while the commissioners operate the system from the 1960s, history for us in Wales has moved on. Devolution has opened the eyes of the people in Wales to the opportunities and responsibilities that the new order has brought.

--- Later in debate ---

As I am sure other noble Lords are, I am keen to find common ground and a way forward on the issues in this group of amendments. My humble opinion is that the publication of these documents, and some words of reassurance from the Dispatch Box, would be helpful in this regard. I look forward to the debate on these measures and to the Minister’s response to my amendment and the others in this group. I beg to move.

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

My Lords, this is an interesting and important amendment that goes to the heart of Treasury control. Historically, it is fair to say that, when it came to nationalised industries, the Treasury set external finance limits that were not subject to constraints ex ante from Parliament. The proposal to borrow is definitely the right one. I recall having to jump through extraordinary hoops to enable the Crown Estate to invest in creating special purpose vehicles, usually with foreign sovereign wealth funds, to support the financing of investment. So moving to give the Crown Estate borrowing powers is the right approach.

The question then is: to what extent do those need to be constrained by Parliament? There are precedents. For example, Scotland is constrained in the quantity of its borrowing. However, the Crown Estate has more in common with nationalised industries. I hope that the Minister will confirm that in each Budget and spending review, the Treasury will publish three-year to five-year plans for the external financing limit of the Crown Estate. This will allow Parliament to scrutinise those proposals along with the rest of the Budget but should not require overarching constraint in legislation, which would effectively constrain the Treasury’s decisions on who should borrow across government and how best to allocate borrowing resources.

[Lord Howard of Rising (Con)]

My Lords, I rise to speak to Amendment 8. There should be a limit on the level of borrowings that the Crown Estate can have. It would be irresponsible to issue a blank cheque that risks, even encourages, abuse by the political system. At Second Reading, I suggested that a limit could be set as a percentage of capital reserves, and I proposed 10% as an appropriate amount. When added to the Crown Estate’s cash position, 10% would retain a generous amount of flexibility while guarding against the risk of abuse and overborrowing. Amendment 8 does just this. I thank the Minister for seeing me to discuss my amendment, but regret that he did not agree with the principle that a limit on borrowing is necessary. He believes that the approval needed by His Majesty’s Treasury would act as a sufficient safeguard. There are two important reasons why I believe that this is not the case.

First, relying on the good intentions of His Majesty’s Treasury to provide the necessary safeguards is simply insufficient. The First Lord of the Treasury is the Prime Minister. There is also the Chancellor of the Exchequer, who could, if the political ambition was sufficient, persuade His Majesty’s Treasury that a loan to the Crown Estate was desirable. The Minister said at Second Reading that he did not envisage the Crown Estate borrowing in the near future. However, there may be a less responsible Government in the future who may make use of this possible sleight of hand to encourage profligate or political spending.

Secondly, if a current or future Government wished to disguise spending, it is possible for the Crown Estate commissioners to carry out the desired spending for the Government with funds provided by the Treasury. Loans to the Crown Estate would be classed as an asset, meaning that the spending would be seen not as an expense but as a capital asset. Without restrictions on borrowing, there is an incentive for future less responsible Governments to increase lending to very high levels. A limit on the Crown Estate’s borrowing would go some way towards safeguarding against this. However, I also welcome Amendment 10, in the name of my noble friend Lady Vere of Norbiton, which provides another safeguard against this happening by ensuring that loans made to the Crown Estate are included in the Government’s assessment of the national debt.

I remain concerned about the lack of safeguarding against excessive borrowing, which poses a significant and unnecessary risk that the Crown Estate does not need to continue operating successfully. As we have heard, I am not the only member of this House who has concerns about permitting the Crown Estate limitless borrowings from His Majesty’s Treasury. Amendments 2 and 5, tabled by the noble Earl, Lord Russell, and Amendments 3, 4, 6 and 7, tabled by my noble friend Baroness Vere of Norbiton, all propose alternative limits to borrowing which would be quite acceptable. Should the Minister find these amendments too restrictive, Amendment 8 provides him with a generous alternative.

Finally, as the Minister has been made aware, I would like to degroup Amendment 9; as such, I will save my comments on it for the next group. I apologise for any inconvenience this may cause the House, but having reflected on the matter, I feel it important to deal with that amendment separately.

Budget Responsibility Bill

Lord Macpherson of Earl's Court Excerpts

2nd reading & Committee negatived & 3rd reading
Monday 9th September 2024 Lords Chamber

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

My Lords, this is a sensible Bill to strengthen a sensible institution. The creation of the Office for Budget Responsibility, together with the granting of operational independence to the Bank of England, has transformed macroeconomic policy-making in the UK, and it is no coincidence that the premium the UK has had to pay on its debt, relative to its G7 partners, has declined over the last 25 years.

Economic forecasting is a thankless task. Forecasts are invariably wrong. The late Denis Healey’s commented that he would like to do for economic forecasters what the Boston Strangler did for the reputation of door-to-door salesmen. In an ideal world, forecasts would not be necessary. However, Governments have to plan public spending and the taxes necessary to pay for it. They need to do so over the medium term to better understand the implications for borrowing and the debt market. Somebody has to make the projections on which the decisions that determine the well-being of the nation are based.

Over my career at the Treasury, I worked on well over 60 fiscal events. For over 50, the Chancellor determined the forecast. It is fair to say that, on the vast majority of those occasions, the Chancellor did not seek to interfere with the forecast that Treasury officials presented to him. Even then, he often had to resist pressure from the First Lord of the Treasury to raise the growth rate just a little to make tax cuts or public spending increases more “affordable”—I emphasise the inverted commas surrounding the word affordable.

Whether or not Prime Ministers or Chancellors interfered, the perception of the markets was that they did. The result was that the forecast’s credibility was always called into question and that the taxpayer had to fund an interest rate on government debt that was slightly higher than it needed to be. Two years ago, that term came to be known as the “moron premium”. I emphasise that the OBR is no better at forecasting than other institutions; the importance is that its forecasts are perceived to be unbiased, and this is borne out by the evidence.

On the detail of the Bill, I welcome the Government putting a number on what constitutes fiscally significant. It may be a little on the high side—most fiscal events over the last 30 years have made a fiscal adjustment of less than 1% of GDP—but I see the problem in setting it too low and triggering an endless round of forecasts.

I also welcome the Government’s determination to improve the credibility of public spending projections. We should be in no doubt that an incredible spending forecast is the source of the problem with which the Government are now wrestling. Had the previous Government been required to populate their spending plans with policy decisions, I rather doubt that they would have announced successive cuts in national insurance contributions.

The measures set out in the Chancellor’s letter to Richard Hughes of 29 July are a big step forward: in particular, a clear timetable for spending reviews and a requirement for the Treasury regularly to update the OBR on emerging spending pressures. Allowing the OBR to publish, in effect, corrected spending plans will improve decision-making, even if it makes life more difficult for the Chancellor in the run-up to an election.

As the Government consider further reforms to the OBR framework, I encourage the Treasury to focus on another issue that also muddies the waters in the run-up to an election: the costing of opposition policies. Every four or five years, we have to go through the absurd theatre of the Chancellor of the day publishing, to great fanfare, official costings of their opponents’ policies. Of course, they are not official costings, since the assumptions are determined by Ministers and their special advisers. The Opposition are always rightly indignant at the time, claiming that the process is terribly unfair. I had to field unhappy telephone calls from shadow Chancellors from both main parties. But, once in government, parties have an uncanny knack of forgetting about the unfairness.

While the present Government are still in their early days of missionary zeal, I encourage them to resuscitate the 2015 proposal of the then shadow Chancellor, Ed Balls, to put opposition costings in the hands of the OBR, as happens in countries such as Holland. I ask the Financial Secretary to raise this issue with the Chancellor when he returns to the Treasury.

Bank Resolution (Recapitalisation) Bill [HL]

Lord Macpherson of Earl's Court Excerpts

2nd reading
Tuesday 30th July 2024 Lords Chamber

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

My Lords, I declare my interest as chairman of C Hoare & Co, which would almost certainly be classified as a small bank for the purposes of the Bill.

I congratulate the Minister on becoming Financial Secretary to the Treasury. After the chancellorship of the Exchequer this is the oldest Treasury ministerial post, and I am pretty sure that it is the first time that it has been held by a Member of this House. I had the good fortune of working with the Minister for a decade around the turn of the century. He has huge Treasury experience and considerable ability and was a pleasure to work with. I wish him well in what will inevitably be difficult times ahead when no doubt he will come to this House on many occasions to make Ministerial Statements.

I speak in support of the Bill, which is a model of good legislative practice with a well-handled consultation and cross-party support. It is welcome that the new Government have seamlessly picked up where the previous Government left off. Politics is all about difference, but at least 90% of governing is about continuity.

Having been the Permanent Secretary and accounting officer when the Treasury had to nationalise Northern Rock and resolve the Icelandic banks in 2008, I am acutely aware that having the necessary powers in place makes it a whole lot easier. Of course, the Government can generally rely on common-law powers in such circumstances or, in the case of Northern Rock, pass an emergency Bill in 24 hours. I pay tribute to the late Lord Darling for managing the financial crisis so effectively with the limited powers then at his disposal, but I would not recommend a make-do-and-mend approach; it diverts finite resources from the job in hand, which is managing the crisis itself. It is better to have the right legislative and institutional framework in place, and to learn from each time the framework is tested in order to improve its functioning.

In 2008, it fell to the Treasury directly to resolve failing banks. I recall asking the Bank of England whether it would take on the role, thinking that the clue was in the name—it is a bank—and that a bank might be better at taking the necessary steps rather than a government department, but the Bank of England declined my request. Lord Darling put that right in his 2009 Act, which ensured that the resolution authority resides in the Bank of England. In my view, that is the right approach; the Bank of England is better placed to retain the necessary expertise and experience, not least because it can pay its staff more generously.

However, the Treasury needs to remain alert to one important point, which the noble Lord, Lord Moylan, touched on indirectly: the conflict of interest created by the abolition of the Financial Services Authority in 2013. The Bank of England is now the regulator and the resolution authority, and responsible for macro- prudential policy. It also in effect has the power to tax the industry through PRA fees and the wider Bank of England levy. The Bill extends its powers of taxation by allowing it to draw on the Financial Services Compensation Scheme to recapitalise a failing bank. There is nothing wrong with that in principle; it is much better that the industry finances its failures rather than the general taxpayer.

The Bank of England generally does its job well. All I am asking is that Treasury Ministers maintain adequate oversight. To this end, they need to be vigilant to three issues. First, apart from the brief period in 2007 when fear of moral hazard dominated its thinking, the Bank of England has a historical tendency to intervene. I recall Sir Douglas Wass, one of my predecessors at the Treasury, some 40 years after the event still expressing irritation at the Treasury being kept in the dark about the Bank’s intervention in the secondary banking crisis of 1973-74. I can foresee circumstances where the Bank will choose to recapitalise a small bank rather than put it into a bank insolvency process, less because it is in the national interest and more as a way of minimising the reputational damage of regulatory failure.

Secondly, because of the Bank’s power to tax the banking industry, I fear that it will pay insufficient attention to minimising the costs of resolution. I may be wrong, but my recollection is that the Bank of England incurred greater costs, with advisers and so on, in resolving the Dunfermline Building Society than the Treasury did in resolving the Icelandic banks. Unlike the Government, the Bank does not have to stand for re-election, so its incentive to contain costs is rather less.

Finally, it is important that small banks remain well capitalised. Challenger banks are adept at lobbying government and central banks for special treatment, arguing that this enhances competition. To some degree it does, but they are not slow to make political donations. I witnessed this at first hand a decade or so ago. It is important that the authorities ignore these blandishments. As my old friend the noble Lord, Lord King of Lothbury, used to observe, the best way to ensure that the banking system is safe is to ensure that it is adequately capitalised.

I should emphasise that these are minor points that are more about the spirit of Treasury oversight than the substance, and I am happy to support the Bill.