Budget Statement

Lord Myners Excerpts

Thursday 27th March 2014 Lords Chamber

[Lord Myners (Non-Afl)]

My Lords, we spoke briefly before this debate started about the role of the Civil Service. The Minister probably sits in the same office in the Treasury that I once occupied, and I can imagine the process running up to the Treasury. Indeed, the noble Lord might even have had to go through the indignity that I went through of having to be photographed holding a blank document, this being the cover of the Budget document even before it had come back from the printer, while looking over the Chancellor’s shoulder and pointing at it, saying, “What wonderful proposals we have here”.

The Civil Service is extremely good at helping Ministers put a gloss on an indifferent story. It does it through statistics. The Minister referred to the growth in small business lending in the past 12 months. If he looked at the level of lending to small businesses in the past decade, or the past 20 or 30 years, he would note that it is still extremely low. There are carefully selected data. The Minister told us that output growth is at its strongest—indeed, it is the strongest of all the world’s developing nations. However, it is also a level of growth and achievement that is still lower than the pre-cyclical peak. We are the only economy still to be producing less than we produced in 2008. The Minister refers to reducing our dependence on debt but the OBR forecasts a further decline in the savings ratio.

The noble Lord, Lord Razzall, talked about inflation being back to forecast at 1.85%. He is correct in that, but it is 1.8% above a figure of 12 months ago, which was in itself 8% higher than inflation and prices would have been had we managed to achieve the 2% target throughout the period that the Government have been in office. This is just playing with statistics. The issues about cost of living and the squeezed middle arise because of the failure to keep inflation under control during the early years of this Government, when it consistently, over a period of 49 months, ran at a higher level than the 2% forecast.

There are some things in the Budget which I find commendable, such as the increase in capital allowances. I ask the Minister why it has taken such a long time to do this but it is entirely sensible, as is the increase in resource to the Department for Business, Innovation and Skills for export-led activity, albeit that it is an extraordinarily modest amount of money. Nevertheless, an extra £3 million advanced to UKTI can only be helpful.

Looked at from a macro perspective, the Budget has little economic consequence. It is a pre-election Budget. It is the last Budget we will have before the election that is likely to have any impact on voters’ expectations and general sense of confidence and well-being.

How is the Chancellor doing against his primary goal of eliminating the deficit? First of all, it was a pretty poor goal to set. The Minister, as a former partner of that eminent finance house, Goldman Sachs, will recognise the fundamental flaw in looking at only one side of the balance sheet, and yet that is what the Chancellor does. He does not have regard to public investment and he treats revenue and capital expenditure as the same. That has been the practice of Governments over many years and it leads to a failure to realise that there are extraordinarily attractive opportunities for public investment, particularly when interest rates are low and when public capital creation as a percentage of GDP is running at levels lower than at any time in the past 25 years.

The Minister deals regularly with financial institutions, seeking to persuade them to invest in infrastructure. I doubt very much whether he will say this but I suspect that, in his heart, he thinks that this is a wasted exercise. Quite frankly, the amount of money he has got into new investment, as opposed to buying investments made under previous Governments, is very small and the amount of risk transfer is almost zero. Why are the Government not spending more at a time when they are able to borrow at zero rates of interest for important capital projects? I am not talking about borrowing to support revenue projects. There is a need to get welfare expenditure under control. It was never the intention that people could make it a lifestyle option to live off the taxpayer through benefits. There is a need to get a grip on that and the Government are doing so. However, to conflate that with the issue of capital expenditure is clearly wrong.

I mentioned earlier obfuscation on statistics. The Chancellor said that he has reduced the deficit to 5.5% of GDP, compared to it being 11% when he came into office, claiming that he has halved the deficit. This is a sleight of hand, as any self-respecting economist would know. Even at our current levels, our deficit will be higher this year than the deficits in Greece, Italy and Ireland.

The OBR discloses the sleight of hand. If the deficit is adjusted for the cyclical recovery which has taken place, government borrowing figures are worse than they were 12 months ago. I do not think we heard the Chancellor say that in explicit terms when he spoke in the other place, nor have we heard anything close to that from the Minister.

The recovery, inasmuch as we have one, is built on candy floss. The upswing is cyclical in its source. This is not a recovery based on investment or exports. This is no march of the makers, as we were promised by the Chancellor. The labour market is tightening and capacity gaps are closing, yet business is sitting on huge cash balances. However, business chooses not to invest in new capital capacity because demand is being met at the moment by low-cost, low-productivity labour. It is simply easier for a business to meet any short-term increase in demand by employing more people on zero-hours contracts than to invest in important manufacturing capacity. The blame for that lies with the Government for not building the right environment for confident capital investment, and not least the Conservatives in government for the uncertainty they have unleashed over our future relationship with Europe.

The Minister talked about trends in productivity. Let me tell him that, since the end of the Second World War, labour productivity in this country has increased by 2.2% per annum. This is not significantly lower than our competitor nations. Our problem is not productivity of labour, but productivity of capital. However, labour productivity has not increased at all since 2007. Declining labour and capital productivity do not augur well for the future, and the impact is already with us in the declining share of world trade currently taken by the United Kingdom. I believe that this lack of confidence explains why SMEs are not borrowing. I wrestled with this when I was a Minister: was it that the banks were not willing to lend or was it that SMEs did not want to borrow? I have concluded that it is much more the latter than the former.

We have the wrong sort of growth, in the same way my doctor tells me that I have the wrong sort of cholesterol. We have growth that is based on a consumer boom that has been unleashed by low rates of interest and encouraged by a profligate and reckless Government who are stoking a boom in house prices and disregarding the inevitable consequences, while doing absolutely nothing to close the gap between the number of new family homes we need and the number being built.

Private sector debt as a percentage of GDP is rising, while government debt has doubled in the period that this Government have been in office. Debt will have risen to twice the level it previously stood at after 350 years of government: so much for their sound management of the nation’s finances.

I should like to close with a brief comment about quantitative easing. I was in office when QE was introduced, but I do not think any of us envisaged that it would last this long. A new deputy governor has been appointed at the Bank of England to look specifically at QE. Will the Minister give consideration to whether we should not seriously examine the possibility of off-setting the gilt-edged securities owned by the Government through the QE asset purchase programme against the gilts that were issued? Perhaps he would like to respond to me in writing on this. The first thing you do when you find that a company is in difficulties is say, “Pay off your debts with your surplus cash”. Why are the Government not doing this? It would reduce debt as a percentage of GDP at a stroke. The impact on inflation is likely to be low and could probably be handled through sterilisation activities in the money markets. This has not been publicly debated or raised as a possibility but, given the existence of surplus capacity in the economy and restrained inflationary pressure, I cannot see any significant reason why the Government should not look seriously at it as a possibility. The alternative, of seeking to sell the QE-purchased gilts back into the market while continuing to fund a deficit of 5.5% of GDP, is unthinkable.