Economy: Spring Statement

Lord Northbrook Excerpts

Thursday 31st March 2022 Grand Committee

[Lord Northbrook (Con)]

My Lords, the Chancellor has had a most difficult series of unexpected events to cope with since he came to office. First, there were the consequences of Brexit, then Covid and, finally, the Russian invasion of Ukraine. All these have not made forward planning easy; they have had and will continue to have severe effects on the economy.

I will first look at the economic background as set out in the Statement. The reduction in current-year GDP growth forecast for this year from 6.8% to 3.8% is major but unsurprising. Forecasts for the next few years are unexciting, but I hope that the noble Lord, Lord Macpherson, is right that the forecasts will be upgraded in the future. The Budget deficit is forecast to decline, but the top annual figure—as many other noble Lords have said—for interest alone on the debt is alarmingly high at £83 billion by the end of the next tax year.

Inflation is forecast to peak at 8.7% towards the end of the year, the highest rate for 40 years. With household incomes not following suit, living standards are set to be hit hard. The forecasts of the Office for Budget Responsibility—the OBR—then predict a sharp fall to below 2% by 2024. I hope that it is right but, once higher inflation is established, it can take much longer to bring it back under control as was proven in the 1970s.

A brighter spot, as my noble friend Lord Balfe has said, is the jobs market, which is recovering in areas, with record job vacancies and some of the labour market indicators returning to pre-pandemic levels according to a recent House of Commons Library note. The inflationary effect of wage pressure, however, will need to be watched carefully.

On the subject of inflation, I am no economist, but I have noted a recent article by Tim Congdon in the Critic. He wrote:

“In the decade to February 2020 — before the Covid-related money explosion began — the compound annual growth rate of the M4x measure of broad money was 3.8 per cent a year. In an economy with a trend growth rate of real output of a bit more than 1 per cent, that was compatible with roughly on-target inflation. In the 20 months to October 2021, the Bank of England bought gilt-edged securities on such a large scale that M4x soared by almost 20 per cent. The implied annual growth rate is 11.4 per cent, more than seven per cent up on the earlier trend. I therefore expect inflation to lie between five and ten per cent for most of the next two years.”


He believes that

“a sustained reduction in money growth to under five per cent a year is … a necessary condition … of meeting the official two per cent inflation target in the current Parliament.”

For those of us for those of us with longer memories, it was the noble Lord, Lord Lawson, overlooking the huge growth in broad money supply in the late 1980s that caused a major increase in inflation. I would like to pass this ball on to the noble Lord, Lord Desai, for his comments.

An economic figure that others have not really mentioned, on which I will focus, is UK exports to the EU. According to figures released by the ONS in February, UK exports of goods to the EU fell by £20 billion in 2021, a decrease of 12% on 2018. The hardest hit commodities recorded substantial falls. Outbound shipments of clothing and footwear to the EU were down by almost 60%. Food and live animal exports were down by almost 18%, while vegetable exports dropped by almost 40%. Shipments of cars to the EU, heavily disrupted by global supply chain issues and Covid, were down by a quarter. What measures are Her Majesty’s Government taking to reverse this decline?

As always, I will try to give a balanced view on the fiscal measures in the Spring Statement. While, overall, I believe there were not enough measures to boost confidence and recovery, I welcome the reduction of VAT on energy saving measures, such as the installation of solar panels, ground source heat pumps and insulation. I ask the Minister whether there needs to be more government support to help with the cost of these.

I also approve of the 5 pence-per-litre reduction on petrol and diesel duty. The promise of a future cut on income tax is helpful. The most eye-catching measure to raise the threshold at which employees start to pay national insurance to £12,570 is most welcome. According to the Times, it means that everyone earning below £32,000 will be sheltered from the imminent national insurance hike and income tax threshold freeze.

I also approve of the Chancellor’s wish to assist businesses with additional capital allowance support, noting that it is rather the opposite to what the then Chancellor proposed in the 1980s. I welcome the Chancellor’s move to increase the employment allowance to £5,000. As noble Lords know, this relief allows eligible businesses to reduce their national insurance contributions each year and will help nearly 500,000 businesses.

Overall, the Chancellor has been careful due to the high level of UK debt. This has been respected, particularly by foreign exchange markets where sterling has remained steady. However, I think he has been overcautious if the OBR is remotely correct. The OBR calculated that additional receipts arising from higher inflation would provide a windfall of roughly £35 billion to the Chancellor over the next five years, with only some of that having to be spent on the higher costs of servicing the debt and higher pensions and benefits. A proportion of this anticipated windfall should have been used to encourage a consumer-led recovery. The Chancellor’s tax-raising measures would seem to do the opposite.

I oppose measures to increase national insurance, even diluted as mentioned previously, as they put further pressure on individuals and families already struggling with higher utility, food, clothing and other essential costs. The freezing of income tax allowance rates is an additional squeeze on standards of living.

A proportion of the windfall should also be used to help companies, but for them the news is no better. There is the prospect of a huge corporation tax rise. There is no relief for business rates or energy costs. Tony Danker, director-general of the Confederation of British Industry, said the limited plans laid out by the Chancellor were welcome

“but don’t do enough to tackle the current challenges facing firms … In reality, we cannot wait until October to get growth going. The Government needs to get moving straight away.”

He added that

“We need concrete plans now on how we get new nuclear, hydrogen … investment. We need more EV charging infrastructure … We need post Brexit regulation changes”.


Overall, he believed that the Spring Statement has not done enough to tackle the current challenges facing firms.

Elsewhere in business, Arjan Geveke, director of the Energy Intensive Users Group, called the statement “disappointing” due to the lack of support to help businesses with soaring energy costs. The Federation of Small Businesses wanted the Chancellor to cut fuel duty more, help small companies with energy bills and reform business rates to take more companies out of the system in levelling-up areas. According to the FT, tech groups were upset after the Spring Statement confirmed that the Government would not reform a share options scheme to make it easier to attract talented workers.

The temporary cut to VAT for the hospitality, hotel and holiday accommodation sectors, as well as admission to certain attractions ending on 31 March, is being reversed. I believe that it should be continued for a period. Kate Nicholls, the chief executive of UKHospitality, said that the return to the full 20% rate in April is a “real setback” for the sector. She said:

“For many businesses, the removal of the lifeline of a lower rate of VAT might prove fatal.”


Will the Minister encourage the Chancellor to retain this relief?

As a Laffer curve enthusiast, I strongly believe that lower taxes can, within reason, produce higher revenues for the Treasury. However, sadly, this Budget overall fails to aim for this course of action. I feel that the Chancellor should have made it clear that his caution was due to mistrust of the OBR forecasts; this would have helped us to understand the philosophy behind his Statement.

--- Later in debate ---

[Baroness Penn (Con)]

My Lords, I understood the noble Lord’s points and attempted to describe why we have evolved a system of national insurance contributions that is separate from our income tax system. I am sure this will not be the last time we debate this subject, particularly with the noble Lord.

I was just talking about the choices we have made with this Spring Statement and since then. If you look at them in the round, they benefit the poorest households most. This Spring Statement recognises the impact of growing pressures on the cost of living. We continued with the health and social care levy because it will provide additional funding for the public’s priority of the NHS and, in time, as those reforms come on stream, for social care. I believe it was the right choice to do that and raise the thresholds for national insurance rather than to scrap or cut the health and social care levy altogether. If we were to do that, as advocated in the policy of the shadow Chancellor, because half the revenues from the health and social care levy come from the highest 15% of earners, a reversal would not be targeted at the lowest and middle earners.

The same goes for support to tackle energy bills. The shadow Chancellor has talked about scrapping VAT on domestic energy, which would also benefit high-income households most. There are choices to be made and they are really difficult—I do not shy away from that. But this Spring Statement provides a tax cut to support millions of people with the cost of living. We have set out how we plan to use taxes to support higher growth in this country in years to come and how, when we are on the path to that and to meeting our fiscal rules, we will share the proceeds of that growth.

I thank noble Lords for their patience with the length of my—

[Lord Northbrook (Con)]

Before the Minister sits down, can I kindly ask whether, in the interests of time, she would kindly write to me? I had some queries.

[Baroness Penn (Con)]

I will be happy to write to the noble Lord on his specific points. I apologise for not being able to cover them in my response. With that, I commend this Motion to the Committee.