Finance (No. 3) Bill

Lord Magan of Castletown Excerpts

Monday 18th July 2011 Lords Chamber

[Lord Magan of Castletown]

My Lords, it is an honour to rise to speak in your Lordships’ House for the first time. My journey here has, I suspect, been a slightly less conventional one than most. I left school, aged 17, with only one rather poor A-level, and then, at the age of 18, I started work as a clerk in the City of London. Since that time I have had a career of nearly 50 years in the financial services industry. Therefore, I believe that I have a contribution to make in this evening’s debate on the Finance Bill. At the outset, I should like to express my gratitude to my two noble friends, the noble Lords, Lord Northbrook and Lord Howard of Rising, who acted as my supporters when I was introduced into this House. I should like in addition to thank all those who work here in your Lordships’ House for their highly professional and courteous assistance.

I was born in New Delhi in November 1945 when the sun was beginning to set on the British Raj. My father, Brigadier WMT Magan, was born in 1908 in County Westmeath in the south of Ireland, and sprang from an ancient Irish landed family. He was an officer in Hodson’s Horse, a famous cavalry regiment in the Indian Army. Rather unusually for a cavalry officer, he ended up as a director of MI5 and was regarded as one of the leading figures in post-war intelligence. My father died last year at the distinguished old age of 101 and a half. My mother, who is now aged nearly 95, was born in Rawalpindi. Her father, Sir Kenneth Grant Mitchell, was a distinguished servant of the Indian Government. Her uncle was a distinguished Governor of Kenya and her great-uncle was a famous admiral who founded the Royal Australian Navy.

While the empire is thus very much in my blood, Ireland, where we have a family home, continues to be of absorbing interest. The noble Lord, Lord Myners, has already referred to this. The Ireland of today is completely transformed from the Ireland I knew as a boy. The large subvention payments Ireland received from the original EEC, extremely well strategically invested under the aegis of the Irish Development Agency, coupled with significant taxation advantages, have resulted in the complete modernisation of the economy. The European headquarters for so many cutting-edge multinationals now located there have established Ireland’s very strong export base. This radical modernisation, coupled with the transformed relationships between the Governments in Dublin and Westminster, is wonderful progress. The recent courageous and hugely successful visit to Ireland by Her Majesty the Queen indeed marks a watershed moment in the relationships between our countries.

However, following what was clearly an uncontrolled nationwide overindulgence in real estate activity, and its consequent devastation of large parts of the Irish banking sector, we can now see what the current constraints are for Ireland in its membership of the euro. Look at this straitjacket: Ireland cannot manage her own currency; she cannot set her own interest rates; she cannot through fiscal stimulus give a much needed boost to her domestic economy; she cannot through credit stimulus, which is particularly necessary after the deflationary effects of the credit crunch, increase money in circulation; and she is largely beholden to a single creditor, the European Central Bank. Ireland is very significantly driven back into the most uninviting prospect of all—that of slashing, and then slashing again, the national budget in an environment where growth has very significantly deteriorated.

Our decision in this country not to join the euro was a most judicious one. We may have been overdosing on Keynesianism but we have at least remained unfettered in the management of our own financial affairs—and while we are riding through a great storm, which could get worse, we are still at the helm of our own ship. However, we cannot hope to re-achieve real national greatness until we put the nation’s house in order. That means, in particular, putting the nation’s long-term finances in order.

Let me now make certain comments on the Finance Bill which I hope—as I know is customary on these occasions—to lift above tendentious hyperbole and rhetoric. It is clearly necessary to fully recognise also that the current Administration have been in office for just over one year. When we look at this year’s Budget, we see that the combined spend on welfare, health and education is just under £450 billion—getting on for two-thirds of the total budget of £710 billion. One might also note that the payment of debt interest will be £50 billion, which will comfortably exceed the defence budget of £40 billion. Incidentally, this year’s defence budget for the United States is set at the equivalent of some £500 billion, which is more than 12 times our commitment, and yet its population is only five times the size of ours.

Further, we can also see that UK government receipts for this year are budgeted at only £589 billion, compared to a total spend of £710 billion. Therefore, the deficit for this current year will still be a whopping £121 billion, even though it is substantially reduced from £146 billion and £156 billion in the two previous years.

The spend on welfare of £232 billion is the largest single element of the Budget, and of this, getting on for £100 billion will be disbursed on dependency payments. There are some 40 million people of working age in this country. Some 2.5 million people who are looking for employment are categorised as unemployed, and there are a further 3.4 million people who are receiving out-of-work benefit payments; these people are primarily long-term unemployed and have no intention—or, through incapacity, are unable—to seek work. A total, therefore, of some 5.9 million people will claim some sort of support from the state; in other words, 15 per cent of the working age population. Yet, as we are constantly being made aware, several million new jobs in this country have been created in recent years, the vast majority of which, however, have been taken by immigrant workers.

Looking further, you have to search the Budget Red Book in considerable detail before you eventually find, in the small print on page 95, the figures for the public sector debt. Only then can one see its remorseless and alarming historic and continuing increase. We have to be brutally frank: the nation’s long-term financial condition needs radical overhaul.

Twenty years ago, our national debt was £150 billion; today, it is closer to £900 billion. Even if the Budget is brought into near-balance by 2015-16 in line with the objectives of the current Administration, the national debt will by then have risen to more than £1,350 billion, getting on for a tenfold increase in our national debt over a 20-year period. Even allowing for inflation and for the considerable growth in the economy, this remains a staggering increase in the nation’s indebtedness. Twenty years ago our indebtedness was around 25 per cent of national income; this now looks set to increase to some 70 per cent of national income. Even by this more conservative measure, the level of our nation’s indebtedness will have nearly tripled.

We also have to recognise that the state has additional massive contingent financial obligations, particularly in connection with unfunded public sector pensions and PFI obligations. It is estimated that these additional contingent liabilities will amount to a further £1,100 billion. As Shakespeare, the immortal bard, reminds us,

“borrowing dulls the edge of husbandry”.

I will tell your Lordships something else that dulls the edge of husbandry: the liberal spending of other people's money.

Let us be absolutely clear: our total national debt, including contingent liabilities, is heading towards £2,500 billion, a number so large that the figures are almost impossible to comprehend. What is more comprehensible is that this total level of national debt will be roughly the equivalent of some £100,000 of additional indebtedness for every household in this country.

The Office for Budget Responsibility must be only too well aware of this developing financial horror story. There is a suggestion that the unacceptable widening of what in economics-speak is referred to as the “fiscal gap” could be brought back into line by, say, an increase of 13p in the basic rate of income tax, from 20p to 33p, or by an increase of 13 percentage points on VAT—that is, a VAT rate of 33 per cent. This is the scale of the financial challenge that we as a nation are facing, but surely such grotesque rises in either direct or indirect taxation would be completely unacceptable to the British people. I suggest that there is an alternative, and much more palatable, remedy to get the country back into financial good health. But it is time to wake up, and wake up fast.

What is clearly beyond any doubt is that the world has moved on with tremendous panache in what is now the post-communist age. We have witnessed on a global basis the collapse of faith in communism—the dismantling of the Berlin Wall just 20 years ago was one clear manifestation of this. Yes, the Long March is well and truly over. We have as a consequence seen extraordinary vigour and growth from so many emerging countries. There has truly been a Great Leap Forward.

Let us look specifically at China. Sixty years ago, China was in a chaotic condition. It was only some 30 years ago that it started to reform and modernise its economy, embracing the markets and encouraging private enterprise, albeit within a totalitarian framework. It is really only within the past 20 years that we have witnessed the truly dynamic surge in growth from China, as well as, of course, more recently, from India and Brazil. China's economy is now 90 times larger than it was 30 years ago. Growth has lifted 300 million people out of poverty. Only five years ago, China’s economy was half the size of Japan’s; but because of its continuing phenomenal growth since then, China has recently passed Japan and has been propelled to the world’s second largest economy, with $5.5 trillion GDP, second only to the USA’s $14 trillion GDP. If present trends continue, China will pass the USA as the world’s largest economy by 2030.

There are some real lessons here for us. The keys to our recovery are very clear to see. We must as a nation unequivocally take every conceivable initiative to unleash the forces of enterprise. We must remember that wealth is not finite; there is infinite opportunity to create additional wealth. We must continue with real vigour the fundamental overhaul of our bureaucratic and regulatory constraints on enterprise. We must undertake a fundamental overhaul of our taxation regime, which clearly in so many ways at present stifles enterprise and growth. We must be clearly aware, particularly at HM Treasury, that lower rates of tax do not inevitably translate into lower revenue flows for the Exchequer—in fact, the empirical evidence is frequently quite to the contrary. We must understand that government of itself does not create wealth. The Government cannot do it all. The Government’s job is to distribute fairly the wealth they receive and to manage the nation’s finances prudently.

We must appreciate that while we are physically a small island, this of itself should not be a bar to achieving and sustaining high rates of growth and prosperity. Singapore is even smaller, and look what has been achieved there. Look at our regions that are crying out for development and growth. We must not forget that we as a nation have a long and hugely successful history as traders in global markets. Over and above that, many of the world’s major financial and other markets are made here in London. There is tremendous opportunity from our own existing strengths and skills sets to give a huge boost to the country’s trade in goods and services, as well as to commerce and industry.

We are one of the most talented and creative peoples of the world. Over the centuries we have absorbed millions of additional diverse, highly-talented, enterprising people, many of whom have sought refuge here. We have to face up to reality. We, too, in this country could, if we really had the collective mindset to do so, completely transform our economy and the prosperity of our people in a relatively short timescale. China has achieved a stunning economic revolution in 20 years. We in this country have to ask whether we can move from being a major debtor nation with relatively low rates of growth and whose relative competitiveness continues to deteriorate—in reality, this has been our condition for far too much of the post-war period—or whether we can transform our economy, sustain very high rates of growth, create opportunity and prosperity for all and become, once again, a major creditor nation.

This is the big issue. This is where we should be having the big debate, and we in this House should be at the forefront of stimulating and leading this big debate.