Budget Statement

Lord Skidelsky Excerpts

Wednesday 25th March 2015 Lords Chamber

[Lord Skidelsky (CB)]

My Lords, at the time of his first Budget in June 2010, the Chancellor said:

“The most urgent task facing this country is to implement an accelerated plan to reduce the deficit”.

He committed himself to achieving a “cyclically-adjusted current budget balance”—the relevant part of that deficit standing at 4.8%—by the end of this Parliament. Instead, today, we still have a deficit of 2.8%. Of course, as a good politician, the Chancellor left himself wiggle room by talking about a “rolling five-year period” for achieving his goal. We are still rolling, but always “on target”. In last week’s Budget Statement he said that he will hit his original target three years late. He is like the runner, who, when the race is finished, gets to decide when it started.

In 2010, the Chancellor said that,

“reducing the deficit is a necessary precondition for sustained economic growth”.

Had he said, “sustained economic growth is a necessary condition for reducing the deficit”, he would have been nearer the mark. The main reason for his failure to balance the books is that the economy did not grow according to plan. His 2010 deficit reduction programme presupposed an average GDP growth of 2.7% between 2011 and 2013. Actual growth in the period was 1.3%.

Understandably, the Chancellor does not say much about the growth failure and never talks about the possible connection between his own plans and the failure of growth to materialise. Instead, the Chancellor and his supporters say that this poor growth record was bad luck: his entirely correct policy was undermined by “headwinds”. The noble Lord, Lord Deighton, mentioned a couple of them today—the eurozone crisis and our higher oil prices. However, the Chancellor’s own watchdog, the OBR, disagrees with the headwinds theory. It concludes that austerity reduced UK GDP growth by 1% in both 2010-11 and 2011-12—2% altogether. Using this analysis, Professor Simon Wren-Lewis of Oxford University has shown that austerity has produced a cumulative loss of GDP since 2010 of 5%. That means five years of British output and income permanently lost—we cannot get it back. And that, as Professor Wren-Lewis, points out, is a conservative estimate. No “accelerated plan to reduce the deficit” was required in 2010; just a rate of public spending growth somewhat less than the pre-crash GDP growth rate would have done the job.

The Chancellor’s new rolling five-year deficit elimination programme forecasts GDP growth of just under 2.5% for the next five years. Why on earth do we think that these forecasts will be any better than those of the previous five years, given the continued drag of the proposed cuts on the growth rate and the highly unstable GDP growth pattern since 2013? I accept that there has been a lot of progress in the north-east but the main driver of growth in the last couple of years has been rising asset prices. Where is the Chancellor going to find the £35 billion of cuts that he needs to meet his 2018-19 target? The noble Lord, Lord Deighton, referred rather airily to spending cuts and efficiency savings. I look forward to hearing details of these rather nebulous plans. In fact, what we suffer from is a candour deficit, not a budget deficit.

In conclusion, I enter a protest against the Chancellor’s slippery use of the word “deficit”—a slippery use that has spread throughout the public conversation on the matter and confounds public understanding of what he is doing. In 2010, George Osborne committed himself to eliminate the “cyclically adjusted current deficit”—the word “current” being crucial. However, this was going to be politically difficult, as it meant cutting public services. So his project soon morphed into one of cutting the “structural” deficit—that is, cyclically adjusted current spending plus net investment. This was politically easier, as cutting investment just means scrapping or slowing down investment projects, not cutting actual services. Nearly all the cuts in the Chancellor’s first two years were cuts in public investment, not in current consumption.

Now we come to last week’s Budget. In his speech, the Chancellor claimed that he has cut the deficit from 10% to 5% of GDP and will eliminate it entirely by 2018-19. But here he just means public sector net borrowing: no more cyclically adjusted caveats, no more borrowing, full stop. Since raising taxes is not on his agenda, this means only one thing—getting public spending permanently lower. He evidently now feels confident enough to proclaim openly what was probably in his mind from the start: to reduce the size of the state to dimensions which would have brought a smile to the face of the Iron Lady.

--- Later in debate ---

[Lord Deighton]

The Government’s strategy is crystal clear. The benefit of getting the deficit under control is absolutely worth it in terms of fixing the roof while the sun is shining. That is the philosophy. To do it over a two-year period and to get control of our public finances so that we can then grow and focus on, for example, the productivity argument I shall speak about in a minute is the critical part of the argument.

[Lord Skidelsky]

Does the noble Lord not accept the OBR’s conclusion that the austerity policy slowed down the rate of growth of the economy in 2011-12 and 2012-13? If that is the case, is it not a bit neglectful of him not to take into account the effects of the spending cuts on the economy?

[Lord Deighton]

That is consistent with my earlier response, that we did not have that choice because the markets would not have allowed us to continue with the scale of deficit we had.

Many noble Lords made very useful and interesting contributions on the housing market: the noble Lords, Lord McKenzie, Lord Best, Lord McFall, Lord Whitty, the noble Baroness, Lady Valentine, and the noble Lord, Lord Graham, who, with mobile homes, may well have the solution to some of our supply problems. The current status is that over 500,000 homes have been built during this Parliament. Of course, that is also tied to the financial crisis, but planning approval and housing starts are now at their highest for seven years, so they are benefiting from part of the recovery.

I agree with the general sentiment of most noble Lords who contributed on this topic that supply is the principal problem, and that dealing with our planning system, incentivising local authorities to build more, using both sticks and carrots in the process, is absolutely key to the way ahead. The noble Lord, Lord Best, suggested that there was nothing in the 2015 Budget for housing supply, but then referred to all the things in the small print that are going on. The demand-side interventions by my right honourable friend the Chancellor have been very effective; Help to Buy has been a successful policy—more than 80,000 people now own homes who would not have been able to do so before. The OBR and the Bank of England are comfortable that the impact of improving demand in that way has not been highly inflationary to the house price market.

There were lots of comments on pensions and savings, from my noble friends Lord Freeman and Lord Flight—who talked about the savings rate in a very interesting and thoughtful contribution about what we need to do about the long-term savings rate and how important it is—and from my noble friend Lord Northbrook and the noble Lord, Lord McKenzie.

One of the key questions all noble Lords asked was about where we are on Pension Wise, which is the service provided by government to provide guidance to people who are now faced with these new flexibilities. There are three potential channels: the digital channel—noble Lords can go home tonight and look at that, as it is up and running—which gives a description of what the flexibilities are; the telephone channel which is managed by the respected organisation TPAS—you can call up a call centre now and book an appointment with TPAS to have a 45-minute telephone session; and you can also call up Citizens Advice, which is the respected brand that delivers the face-to-face service. Therefore, each of those organisations—TPAS and Citizens Advice—has hired and put its people through a training programme so that they are ready to meet the demand. Of course, that is a very challenging thing to work out, because it is very hard to work out how many people will want what kind of advice, and when. However, we have done everything we can to ensure that that service will be available with the right capacity and the right quality—and to take on board my noble friend Lord Freeman’s point, with support from the FCA there will be plenty of opportunities to have a look at how it is working, and there will be a lot of work around making sure that potential scammers cannot be successful.

It is useful to be critical about growth and productivity performance, because it is important to focus on what we can do to make it better. We should remember that we are growing faster than anybody else at the moment, so it is not all bad news.

My noble friend Lord Taverne and the noble Lord, Lord Hunt of Chesterton, talked about the role of foreign capital coming in—hot money, as my noble friend referred to it. Generally speaking, this economy has enormously benefited from being an open economy, with the advantages that come with that. The noble Lord, Lord Hunt, referred to Hitachi, which has come here to assemble the trains, and has also decided to set up in the UK as the base for its European rail business. So, generally speaking, operating as an open economy has been a hugely successful thing for this economy.