Finance Bill

Lord McFall of Alcluith Excerpts

Monday 26th July 2010 Lords Chamber

[Lord McFall of Alcluith]

It is a privilege to be speaking in a Second Reading debate so soon after being introduced in this House. I congratulate the noble Lord, Lord Spicer, and the noble Baroness, Lady Browning, on their excellent maiden speeches. They were colleagues in the Commons, and I look forward to healthy exchanges in this Chamber.

The noble Lord, Lord Stern of Brentford, was an excellent and regular witness before the Treasury Committee and a fine ambassador for our country. That came home to me very clearly during the visits I made to Africa where the impact of his climate change report had great ramifications. The noble Lord should be proud of his role in the Treasury and as climate change ambassador as a result of that. He mentioned the Office of Budget Responsibility and the need for transparency, clarity and independence. I offer noble Lords the example of United Kingdom Financial Investments, which came before the Treasury Committee and had a disaster on the first day. It was lodged in the Treasury building, and you could not put a piece of paper between it and the Treasury. The relationship between the OBR and the Treasury seems very similar. My advice to the Government is to get it out of the Treasury very quickly so that it can be independent and have that transparency and clarity of message that has, to date, been missing. It is important that we get that.

I wish this Government well for the sake of the country and for the sake of individuals. We are most definitely living in uncertain times. Last week, Ben Bernanke of the Federal Reserve, in his comments to Congress, said that it is an unusually uncertain environment. Last week, comments were made by Spencer Dale, the chief economist of the Bank of England, and a debate took place in the pages of the Financial Times, with comments from Jeffrey Sachs, Paul Krugman and Martin Wolf, who, incidentally, is on the Government’s independent Banking Commission.

When Sam Brittan, a favourite journalist of mine, wrote about this Budget, he asked: “Are these hardships necessary?”. He pointed out that the real argument should be about whether we need this unparalleled fiscal austerity. Mohamed El-Erian, in his column in the Financial Times, made very clear the global nature of this problem, which we have not spoken about enough. He said:

“The world is facing deep structural challenges”,

yet we are witnessing,

“fruitless discussions … and a troubling lack of global”,

financial “harmonisation”.

The utterances that came out at the G20 in Toronto fill that description aptly. Unless we get on top of this, and look at global imbalances and develop policies for the structural change, we will find ourselves in real problems.

Against that background, what is plan B for this Government? We are living in uncertain times. Therefore, there is no certainty about the proposals being put forward. I followed the deliberations of the Treasury Select Committee in its June 2010 Budget, which was released a few weeks ago. When the Chancellor of the Exchequer was asked about plan B, he said:

“The plan is to have confidence in the British economy and its ability to pay its way in the world”.

That is the sum total of the explanation for plan B, but I would suggest that that is insufficient. The political nature of the debate has made it harder to discuss plan B, but it must be discussed. The noble Lord, Lord Stern, made reference to that in his speech. There is insufficient assurance in these deeply worrying times.

Against that we have had a Budget which has accelerated the fiscal position very tightly. There will be £40 billion of spending cuts and tax decisions, made up of £8 billion in tax and £32 billion in spending cuts by 2014-15, of which £11 billion will be specific measures on welfare. You cannot tell me the implications for poorer people in our society when we have that £11 billion coming directly out of the welfare budget, with suggestions that more is to come. The impact of that will be a massive discretionary tax on £13 billion extra of spending. The Government have 77 per cent of its spending and 23 per cent of its tax rises for their Budget. Martin Wolf, in the Financial Times, said that the adverse impact on the poorest 10 per cent will be harsher than on the most rich groups in 2012-13 and that it will get worse thereafter.

There is a huge gamble at the core of this Budget. Can the Government explain this massive assault and spending cuts adequately to the satisfaction of ordinary people? Can they manage their public relations in this regard? Are these policies being fair on their impact on society? What will they do for long-term unemployment? The ONS June figures show that those who have been unemployed for more than 12 months have increased by 85,000 over the first quarter of this year. Standing at 772,000 that is the highest figure since the first quarter of 1997.

Let us not forget youth unemployment, which, for 18 to 24 year-olds, stands at an unprecedented 17.3 per cent. Since the start of the recession, youth unemployment has risen 5.1 per cent. I remember well as a school teacher meeting former pupils 10 years after they had left school and being introduced to their spouses and children. When I asked them whether they had a job they said that they did not. They were the lost generation of the 1970s and 1980s. Do we want to go back to a lost generation or do something about youth unemployment now, so that when we come out of this recession we will be in a fit and proper position in terms of skills in the economy? That is one issue.

The second issue in the gamble concerns the impact of the fiscal tightening on GDP. The Office of Budget Responsibility has predicted growth in 2010 of 1.2 per cent; in 2011 of 2.3 per cent; and in 2012 of 2.8 per cent. It will need a substantial contribution from business investment and exports in 2012 to achieve that. Indeed, contributions from business investment in that year will have to be 1 per cent and from exports 0.9 per cent if we are to achieve our growth target. That is a big challenge. In order to meet that challenge, the Government will be dependent upon domestic private spending being maintained and spending on UK exports being little affected by the fiscal squeeze which they are presently urging countries around the world to adopt. Something does not add up in that situation. We should remember that the Government’s plans are predicated on a private sector revival, with 2 million new jobs being created over the next five or six years. I have yet to meet an experienced economist who will tell me that that is a feasible outcome. This is a fast adjustment early in the life of the coalition Government and it raises the question of what effect these measures will have on individuals.

That brings me neatly to the Liberals. I held a landmark birthday party at my home on Saturday for one of my offspring. The cake with the candles was brought in and I thought of the coalition Government. Why should I think of the coalition Government when I should have been enjoying myself? It was because I saw the candles as the Liberals and the cake as the Conservatives, the Tories. The candles gave a little glow and a little hope but, as you and I know, they were cruelly blown out by my three year-old granddaughter. We were then left with the Tory cake. The question is whether it is an edible cake; is it succulent? Are we going to ask for second helpings or will it be inedible? I think it will be the latter. That is the issue. It will be hard to digest for many people.

Are the cuts on the cake illiberal? Are they too deep for an economy in the early stages of recovery when some of our trading partners are still very weak? Will the tax changes provide enough private sector investment and job creation after the state withdraws quickly? Will it be fair for all sectors? Is there a coherent ideology? If there is no ideology from the Government then we will have little shape and direction to where we are going. The noise of the cuts will be drowned out by everything else.

However, this is what the Government believe in and demonstrates their aspirations for society, but where is the Liberal influence? Where is the Liberal influence on the acceleration in the fiscal tightening area? Where is the Liberal influence on child poverty? In their manifesto the Liberals agreed with the eradication of child poverty by 2020.

[Lord Phillips of Sudbury]

My Lords, I am grateful to the noble Lord for giving way but I must reply to his assault upon the sole Liberal Democrat in the Chamber. Does he not agree that a candle at least provides a little light in a naughty world?

[Lord McFall of Alcluith]

Yes—but it depends for how long the candle exists before it is blown out. That is the issue. I fear that the candles have been blown out already.

In terms of child poverty, the Liberals have signed up for eradication in 2020. The Minister stood at that Dispatch Box last week and said that there are four criteria to the Child Poverty Act 2012. But the Government have given their commitment to one of those criteria only for the next two years and ignored the other three. If I have one criticism of my colleagues on the Treasury Committee for their June 2010 Budget, it is that there was no mention of child poverty. I hope this mild statement here will propel them to ensure that child poverty is taken into account.

I am being followed by the noble Lord, Lord Skidelsky, the expert on Keynes. Keynes did not believe in deficits for the sake of it. Sam Brittan said that the Government’s approach is not like that of households. When households and businesses do not spend, the Government step in. That is why we have had quantitative easing. There is an awful lot in this Budget that we still need to look at. I hope if recovery stalls that the Government will listen and that it will not be too late.

Finally, I note that the Brokeback utterances mentioned at the weekend by my good friend in the Commons, David Davis, took place in the Boot & Flogger pub in London. I would suggest to you that the Liberals will get the boot if they are insufficiently authoritative with their influence and that the Tories, if their PR strategy fails and their narrative is rejected, will be flogging a dead manifesto and will have to live with the consequences. Dealing with those generalities not specific to the Budget, I am delighted to contribute to this debate.

--- Later in debate ---

[Lord Sassoon]

I look forward to seeing if and when the noble Lord, Lord Myners, returns to the City. There are accepted practices and terms for all who have worked in different parts of the public sector when they return to the City or elsewhere. Perhaps I may move on to talk about the new fiscal mandate.

[Lord McFall of Alcluith]

If the OBR members have access to confidential information and take that away with them, will it be available to them in their new job a few days after leaving the OBR? The purdah issue is very important. Can the Minister address it?

[Lord Sassoon]

My Lords, I believe that I have addressed the point. As with any such office, it would be inconceivable if members of the OBR took confidential information away with them. Just as the noble Lord, Lord Stern, has referred to a report which he compiled for Ministers in 2004 but which he left behind in 2007, it would be extraordinary to suggest that those working on sensitive matters in the public sector would take away secret documents.

[Lord McFall of Alcluith]

They are taking away information in their head. It is intellectual property; it is not taking away documents. The Minister is being less than open with us if he puts that construction on it.

[Lord Sassoon]

The OBR receives unpublished information of different kinds and then publishes its forecasts publicly. I should have thought that the information the OBR has is of limited ongoing value. However, I have listened carefully to the points made by noble Lords. As the legislation to set up the OBR on a permanent basis goes through the House, there will be other opportunities for noble Lords to discuss the issue more fully. However, as we are concentrating today on the Finance Bill, perhaps I may move on and discuss matters which are of more direct relevance to that Bill.

I have said, and will return to say again, that the new fiscal mandate will eliminate the deficit in five years and that the bulk of this reduction will come from lower spending rather than higher taxes. However, this autumn’s spending review is not only about cuts and tackling the deficit; it will be a complete re-evaluation of the Government’s role in providing public services. I take the point to which my noble friend Lord Razzall rightly drew attention in our earlier discussions about this. As to the specific point made by the noble Lord, Lord Barnett, even areas which are protected—such as the National Health Service—will be looked at to ensure that administration costs are cut. I agree with the noble Lord that that should be done; the question is where and how such administration cuts should be recycled.

We have set out our steps for tackling the budget deficit and we have done so in a more transparent way than any previous Government. Some noble Lords have argued that, because we have lifted the skirt a bit, they would now like the skirt to be lifted a lot further. However, they do not give us much credit for the greater transparency we have already introduced.

We are on track to have debt falling and a balanced structural current budget by the end of this Parliament. It is only by acting quickly to tackle the deficit and restore confidence in the public finances that we will underpin and achieve economic growth. Action of this kind requires us to take tough decisions. A number of noble Lords have questioned this basic judgment, starting with the noble Lord, Lord Tunnicliffe. I was struck by the intervention from the opposition Benches of the noble Lord, Lord Desai, who did not in any way question the basic Budget judgment and gave a very balanced account. I had a look two or three times at the briefing notes that officials had given me just to check that the noble Lord was sitting on the right Benches, because I thought it was a very balanced account of the judgment that has been taken. And of course there are risks ahead. The basic judgment was questioned by other noble Lords, including the noble Lords, Lord Tunnicliffe and Lord Rosser. We had one quote from the OECD. The one I have to hand is from its Secretary-General, Angel Gurría, who hailed the Budget as a courageous move by the British Government, and said:

“It provides the necessary degree of fiscal consolidation over the coming years to restore public finances to a sustainable path, while still supporting the recovery”.

That is the basic judgment at the heart of the Budget.

The recent G20 communiqué stated that those countries with serious fiscal challenges needed to accelerate the pace of consolidation. The noble Lord, Lord McFall of Alcluith, says that it is the UK Government calling for early fiscal consolidation but it is actually the G20 that is calling for countries such as the UK to get on with it. The noble Lord, Lord Davies of Oldham, says that we are not adopting the same policies as certain other countries. Too right. Different countries need to adopt different policies appropriate to their particular circumstances, and our circumstances are regrettably that we inherited from the previous Government the largest budget deficit in Europe except Ireland, and we have to get on and tackle it. The bulk of the deficit reduction will come from lower spending but given the astonishing size of the budget deficit, we have not been able to avoid the need to raise some taxes. My noble friend Lord Higgins asked what increase of revenue there would be in the current and next year. The figures in the Red Book in Table 2.1 on page 40 show that the amounts raised by tax policy decisions in the Budget represent an increase in revenue of £2.8 billion in 2010-11 and £6.25 billion in 2011-12.

The choices that we have now made are ones that face up to the challenges ahead and do not simply defer them to future generations. There has been precious little from the opposition Benches in the way of alternative plans and thoughts as to how we are to deal with it. I welcome the contribution from the noble Lord, Lord Skidelsky, in one respect and that is that he put up a radical alternative vision. It seemed to be founded on the starting premise or assertion that we can continue to push up government borrowing without limit, although even he went on to recognise that certain Governments have got to the limits of what the borrowing capacity of a country can be.

There was an interesting contrast between the contributions from the noble Lord, Lord Skidelsky, and my noble friend Lord Bates. The noble Lord, Lord Skidelsky, postulated what might cause a businessman to invest, but I heard from my noble friend Lord Bates pretty much what I had already scribbled down as what I thought businessmen wanted, which is that they will increase their investment when they have confidence that there will be increasing orders from their customers. I believe that their confidence in their customers will be founded on the customers’ view of whether there is a grip on the economy. Businessmen will look at the level of interest rates and they will want to see them kept low. They will want and need to see credit continuing to flow. They will need to see that government expenditure is under control. They will want to see that regulation is being tackled. They will want to see predictable and falling corporate tax rates. They will want to see that employment taxes are being cut from where the previous Government intended to take them. They will want to see that the Government, in cutting back expenditure, are maintaining investment in those areas of economic growth. These are all things which I see in the total Budget package. I agree with my noble friend Lord Bates on them.

There was discussion about value added tax and, in that context, whether this a progressive or regressive Budget. We are taking responsibility in this Bill for the financial challenges that we have inherited but in a way that is fair and open. Everyday essentials such as food and children’s clothing will remain zero-rated for VAT throughout the Parliament, protecting those on low and middle incomes. Those most affected by the VAT rise will be those who spend the most. This is clear in both government and independent analysis. If one looks at the impact of expenditure by decile, as is appropriate for a tax on expenditure, one sees that the richest pay the most and the poorest least. These points were questioned by the noble Lord, Lord Tunnicliffe, but were knocked admirably on the head by the noble Lord, Lord Desai, who said that it was wrong to suggest that VAT was necessarily a regressive tax. I do not want bore everybody with more quotes from the IFS, but its view is that total expenditure is the more appropriate guide to lifetime living standards, as households smooth their expenditure over their lifetime. Analysis by expenditure rather than income level is therefore a better measure of the impact of the VAT increase and, on this basis, the VAT increase is progressive.

Other noble Lords made wider points on whether the Budget is regressive or progressive, including the noble Lords, Lord Lea of Crondall, Lord Rosser, and, again, Lord Myners. They questioned whether policies of the previous Government should be included in the assessment. The IFS accepts that, looking at the Budget as a whole, the changes are progressive. It does not make sense, surely, to ignore the policies of the previous Government which the coalition Government have decided to retain and will legislate to implement.