Economy: The Growth Plan 2022

Lord Tunnicliffe Excerpts

Monday 10th October 2022 Lords Chamber

[Lord Tunnicliffe (Lab)]

My Lords, I congratulate the noble Baroness, Lady Gohir, on her maiden speech. She clearly set out her position and passion, and she had many ideas for which I have personal sympathy. I also join the regrets of the House for the final speech of the right reverend Prelate the Bishop of Birmingham. His insightful and compassionate contributions were always an important part of our debates, and I fear we are at a point in our history where we need more compassion and discussion.

This has been a fascinating and wide-ranging debate. I suspected that my going through the individual contributions of 55 Back-Bench speakers would get in the way of what I suspect is the desire of the House to listen to the Minister rather than me, so I tried to do an analysis of the contents. On balance the split, while not clear-cut, was about 3:1 in favour of those who had more concerns about than praise for the mini-Budget. Keir Starmer, our leader, said at our recent conference that we must put “country first, party second.” I hope we can all embrace this concept in these extremely difficult times, and that Ministers will reflect on the level of concern expressed today and follow our advice, which is, frankly, to go back to the drawing board.

The Government having spent the summer railing against orthodoxy in the running of the UK economy, it is somewhat ironic that it was ultimately for the Bank of England to step in and restore calm. While the Chancellor stood by, letting the pound plunge and pension funds go to the brink, the Bank took it upon itself to make an unprecedented intervention in the bond market. The initial market response to that announcement was promising: the pound recovered some of its losses against the dollar and 30-year yields dropped sharply for a time. Then the Chancellor took to the airwaves and sent the economy into another spiral.

When the Chancellor of the Exchequer speaks, he does so to a global audience. Any lack of clarity or dithering sparks market panic, with our economy and people suffering as a result. The same is true for veiled swipes at institutions such as the Bank of England. Mr Kwarteng might not like how the Treasury or other institutions do business, but undermining the system is not the way forward.

The International Monetary Fund felt compelled to issue its own rebuke of the Government’s plans, suggesting that they change course immediately. That follows its forecast from earlier this year predicting that the UK will have the slowest growth of any G7 nation next year. It is hard to see the mini-Budget improving that outlook. Standard & Poor’s swiftly put the UK’s sovereign rating on a negative outlook, citing the likelihood of

“weaker than expected economic growth and rising borrowing costs”.

Fitch has since followed suit, noting the contradiction between fiscal policy and the Bank’s attempt to curb inflation. This has been much commented on as trying to drive a car with one foot on the accelerator and the other on the brake. These are not comments to brush away. Our creditworthiness now sits below the economies of France and South Korea.

Let us consider the state of the gilt market. In his recent letter to the Commons Treasury Committee, the Bank’s Deputy Governor laid out exactly why it was forced to intervene in the bond market. His letter is full of strong language about the effects of the mini-Budget, referring to a “self-reinforcing spiral” in debt markets. That created a doom loop which meant that, without the Bank’s intervention,

“it was likely that”

pension

“funds would have to begin the process of winding up the following morning.”

As a result of the chaos, investors the world over saw UK gilts as a higher risk than those issued by Italy and Greece. Even after the pound eventually returned to levels seen before the mini-Budget, our borrowing costs were still elevated.

What does this mean in practical terms? Liz Truss can wave goodbye to her hope of spreading Covid-related debt over a longer term. The Government’s energy intervention just got substantially more expensive, reinforcing the case for an extension of the windfall tax. Who will ultimately have to pay these debts off? That is right—taxpayers up and down the country who are already contending with higher mortgages and other costs.

However, it would be a mistake to believe that these problems started with the Chancellor’s September fiscal statement. The UK is the only G7 nation not to have recovered to pre-Covid levels of real GDP, meaning that many remain out of pocket. Put in other words, household disposable income is falling. That feeds into record low levels of consumer confidence: a staggering minus 49% in September, down 5% in a month from August. With household incomes having to cover higher mortgages and energy bills, many people are being pushed towards consumer credit. Indeed, in August, consumers borrowed on credit cards at the fastest annual rate since 2005.

We are told that the situation will improve once the Chancellor makes his next fiscal statement, now due at the end of the month. Other than tax cuts, what levers do the Government intend to pull? Exactly what impact do they expect them to have? If rumours are to be believed, the Government will pin their hopes on deregulation. This will come across many sectors, but perhaps none more so than financial services.

Noble Lords will recall that much of that regulation was designed alongside international partners in the wake of the 2008 global crisis. We should all be proud of our financial services sector. It generates billions for the economy and employs millions of people across the UK, and its tax bills help fund vital public services. Of course we should support the sector and find ways for it to boost economic growth. That is why we have been eagerly awaiting the legislation implementing the outcome of the future regulatory framework review. So can the Minister confirm this evening whether the Financial Services and Markets Bill will stay in its current form, or will the Government make financial services deregulation part of their planned growth Bill, lumping these very technical matters in with deregulation in other sectors of the economy?

Regardless of the vehicle used, I am not convinced that anybody outside of government wants to see UK firms allowed to adopt practices unthinkable in other jurisdictions. Yes, we want London to remain one of the world’s leading financial centres, but firms tell us that they want high standards. They want preferential access to international markets, but the Government failed to secure that in their negotiations with the EU. Would equivalence not be a quicker, safer route to growth in this particular sector?

While I am asking about deregulation and upcoming legislation, I wonder whether the Minister could answer a few more questions. Are the Truss Government committed to bringing forward the next economic crime Bill, as promised by the previous Prime Minister? If so, when can we expect it? Would the Minister agree that tackling tax evasion and other forms of economic crime is even more important in the current context? In the rush to change financial regulations, do the Government remain committed to the Basel rules? What about the decisions of the Financial Action Task Force in relation to high-risk countries or its country-specific recommendations to improve the UK’s performance in relation to money laundering?

Economic competence is not just about implementing the fiscal recommendations of one’s favourite think tanks; it is about delivering financial stability day after day. We need answers to all these questions and more before we can take the Prime Minister and the Chancellor seriously. Downing Street urgently needs to fix the problem it created two weeks ago. This cannot wait three weeks, until 31 October. The Government need to stop lurching from crisis to crisis, with each new display of incompetence somehow trumping the last. If the Conservative Party cannot get a grip, the Labour Party stands ready to step in and deliver responsible public finances, strong fiscal rules and fair, long-term growth.

--- Later in debate ---

[Lord Callanan (Con)]

This goes back to the point I made to the noble Lord, Lord Vaux, earlier: we will indeed be debating these matters further when the legislation arrives. It is a complicated subject. There are two types of renewables certificate. The earlier renewables obligations were given before 2015, and it can be said that some of those operators are indeed making considerable profits. They are perhaps the ones that the noble Lord is talking about. Then there are those that have been on the contracts for difference scheme since 2015, which are now, I am pleased to say, paying back into the system, such is the success of the CfD regime. But, as I said, we will be debating that when the legislation comes to this House.

[Lord Tunnicliffe (Lab)]

The Minister has admitted that this is an extremely complex subject. I wonder whether he would consider acceding to the request from the noble Lord, Lord Vaux, and arranging more of a seminar-type event before Second Reading so that we can probe into the understanding—that is, not to make political points but to understand the technicalities we face.

[Lord Callanan (Con)]

I will certainly look at doing that but, as I said, we are preparing for the legislation. There is furious drafting going on at the moment. It will be in the House shortly. I think noble Lords will find that it addresses some of the points they are raising, but I would be happy to look at holding a seminar as well if they would find that helpful.

Once again I can only agree, as I normally do, with my noble friend Lord Forsyth’s words; what a great Budget Statement it was. He rightly noted, for instance, that investment comes from retained profits after tax. The noble Lord, Lord Bilimoria, for his part, agreed that it is absolutely right to target growth. My noble friend Lord Lamont said that going for growth is a laudable objective. My noble friend Lord Lilley said simply that growth is crucial. All were correct. I cannot agree with everything that the noble Baroness, Lady Wheatcroft, said—I do not normally agree with her very much—but she was right to say that, on growth, the problem has been about delivering.

My noble friend Lord Frost observed that the Government’s opponents think that the right way forward is more of the same, while our belief is that we have to do things differently. The measures in the growth plan represent an ambitious first step towards getting to the 2.5% target through removing barriers to the flow of private capital, supporting skilled employment, accelerating infrastructure construction, getting the housing market moving and cutting red tape for businesses. Historical experience suggests that 2.5% GDP growth is ambitious but achievable given the growth that the UK has observed in the past.

Independent economic forecasters have estimated that the energy package could reduce the headline rate of inflation by around 5% by freezing energy bills. As always, the Chancellor is of course working closely with the Governor of the Bank of England to tackle inflation and closely co-ordinate support for the economy. While more government borrowing is required in the short term to tackle high energy prices, the Chancellor is committed to seeing government debt fall over the medium term. The independence of the Bank of England is sacrosanct and the Government have reconfirmed their commitment to the monetary policy remit. The Government have full confidence in the Bank of England to take action to get inflation back to target.

The right reverend Prelate the Bishop of Durham and the noble Baroness, Lady Brinton, used the phrase “trickle-down economics” as if it is somehow official government policy. I am afraid that, as my noble friend Lord Hannan said, this phrase is a fantasy of extremely fertile left-wing imagination. We have no such policy, as my noble friend Lord Bethell said. No Minister has ever used that phrase. I cannot be clearer: it is fantasy.

The noble Baronesses, Lady Smith of Basildon, Lady Bowles of Berkhamsted and Lady Fox of Buckley, discussed the perceived market reaction to the Government’s decisions. Of course I cannot get into commenting on specific financial market movements. They are determined by a wide range of international and domestic factors. We recognise that there has been some market volatility, which is to be expected as financial markets adjust to policy decisions. The Government do not have a preferred price or yield for assets in financial markets; the price is set by that market. I note, however, my noble friend Lord Lilley’s astute observation that sterling has recovered against the US dollar.

On corporation tax—again, this was mentioned by the noble Baroness, Lady Smith of Basildon—the Government have prioritised cancelling the corporation tax rise and announcing the permanent level of the annual investment allowance to support businesses and increase the productive capacity of the economy. Importantly, the decision on corporation tax is not a cut: it is not proceeding with a previously announced increase.

Meanwhile, the income tax rate cut is being brought forward to April 2023 instead of 2024. This is the first cut to the basic rate in 15 years, supporting over 30 million taxpayers to keep more of their own income. Taxpayers in England, Wales and Northern Ireland will all gain around £170 on average.

The noble Baroness, Lady Walmsley, made the point that freezing the personal allowance is bad for low-income households.