Budget Statement

Lord Willetts Excerpts

Thursday 16th March 2023 Lords Chamber

[Lord Willetts (Con)]

My Lords, I was sitting like a coiled spring about to praise the excellent maiden speech from my noble friend Lady Moyo when we had the interruption of the Urgent Question and the brief adjournment, so it is a pleasure and an honour to resume the debate and, although my noble friend is no longer in her seat, to say how excellent her maiden speech was. Her most recent book, Edge of Chaos: Why Democracy is Failing to Deliver Economic Growth, which is a fantastic contribution to economic debate, is very relevant for one of the points that has been made in several interventions already.

I begin by welcoming the Budget and will draw on some of the analysis we have done at the Resolution Foundation, of which I am president. The Chancellor has had some good news, with energy prices not as high as feared, inflation falling more rapidly than was expected and interest rates slightly lower than forecast, not least because of the stabilisation measures that he has introduced during his time as Chancellor. So there was a favourable backdrop to the Budget, shown in the good news that we are going to avoid recession and that he had some fiscal room for manoeuvre.

Nevertheless, I have to say, as president of the Resolution Foundation, that the overall picture on living standards is still very bleak indeed. Wages are not expected to return to their 2011 level in real terms until 2026. That is 18 years before we are back to the level before the financial crash. At the moment, with big falls in household disposable incomes this year and next totalling 5.7%, it is very likely that incomes will actually be lower in real terms at the time of the next election than they were at the last. So there is still a very sombre backdrop against which we have to judge this Budget.

The boldest and most ambitious measures in this Budget focus on improving participation in the labour force. It would be marvellous if the combined effect of the ambitious measures on childcare, helping disabled people and promoting older people returning to work bore fruit. They are more radical than expected and we can all hope that they have a significant effect—30 hours of free childcare and help particularly for people on universal credit. For disabled people, it is very welcome indeed that the work capacity requirement is being scrapped. Regarding older people, the Chancellor got into a little difficulty yesterday in referring to the Deputy Speaker in the other place as an older worker when she was born in 1958. She is a spring chicken in terms of your Lordships’ House, and it should not be a point of observation that someone born in 1958 is old and working.

We must hope that those measures do bring 110,000 extra people into work. It could be more. We have already had several exchanges on this, so I make just a couple of observations. First, it has been said with shock that the cost of the change in pension rules, divided by the increase in the number of people going to work because of that change, is about £80,000 per extra job. These are net extra jobs. When you look at the likely effect of the more ambitious and expensive childcare measures in the Budget on net actual increase in work, they also come in at a cost of £80,000. It looks as if that is about the going rate for creating an extra real job. To be honest, having worked over the years in various ways engaging with welfare-to-work programmes and welfare reform, spending that amount of money for a net effect, while a lot of the effects will be deadweight, does not come as a surprise. Therefore, I hope that in the exchanges across this Chamber we accept that this is the going rate for intervention. We must hope that there are greater impacts than that, but that is what the OBR is forecasting.

Incidentally, in his excellent speech my noble friend Lord Bridges asked about the difference between the OBR forecast and the Bank’s forecast. One of the reasons for it is that the OBR is factoring in a 110,000 increase in workers as a result of the Budget measures, while there is no such estimate in the Bank’s forecast.

Of course, the help with childcare for families with young children is also a more progressive measure than the help on pensions because, as well as getting several tens of thousands of extra people into work, it boosts the incomes of large numbers of low-income families. It also has an even bigger effect on the incomes of some middle-income families. To assess the effect of the pension measure, we must look beyond the immediate benefit for the extra people going into work, and this is clearly a measure to do with NHS activity and NHS employment. Therefore, you would have to factor in the benefits for those people who receive healthcare that they would not otherwise have received were it not for those measures. This is essentially a healthcare recovery measure, but it is being applied more widely because of what we are familiar with as hybridity rules. You cannot have one pensions tax rule specifically for NHS consultants and a different one for everyone else.

I welcome this very ambitious set of measures to boost the workforce and the number of people in work, and hope that they succeed. We could well see an effect greater than 110,000, and I hope that is what we secure.

I will briefly reflect on the fiscal situation. Again, several people, including my noble friend Lord Bridges, have already touched on this. The state is undoubtedly getting bigger. It is not getting bigger because a bunch of socialists have seized control of the levers of government; it is getting bigger for completely different reasons. It is getting bigger partly because we are in a much more dangerous security environment than we were, so there is a pledge to increase defence spending. It is getting bigger because we borrowed a lot of money during Covid and, with interest rates higher, the cost of debt interest has risen by 2% of GDP. It is getting bigger because of demographic changes. Those are the drivers pushing up public spending.

My noble friend Lord Bridges said that we must make offsetting savings elsewhere. We are making offsetting savings elsewhere; in fact, the state is being reshaped under our eyes because the demographic changes plus policy decisions are protecting healthcare and boosting pensions, and other services and benefits for other age groups are being cut. Our estimate at the Resolution Foundation is that the effect of benefit changes is to lower the income of working families by £816 a year below inflation and the effect of the triple lock and other measures is to boost the income of pensioners by £666 on top of inflation. That is a deliberate decision to reshape the state so it is a state for old people. It is a big healthcare, big pension-spend state, cutting back on other services and provisions. Democratic trends are being exacerbated by political decisions, and I have to say I do not like that. I think we should have a state that is fair across the generations, not one which is clearly being structured to benefit that age group.

I have one other comment, having looked at the Budget, on the increasing tendency to have time-limited measures that do not have a long-term effect on behavioural incentives. This important point was made by my noble friend Lady Moyo. The capital allowance for corporation tax, time-limited for three years, will bring forward some capital spending, but it will have no underlying effect on total business investment, when that is a clear problem. The only way it could have that effect is if it were committed to as a long-term permanent policy. That is the way we get a change in behaviour, but if that happened there would be different costings showing the long-term effect on government borrowing, debt or taxes.

I do not wish to go on at great length because I see there are many other people wishing to intervene. I would like briefly to comment on one other strand in the Budget, something which I very much welcome: the focus on growth. That is again an area where there is strong cross-party consensus. The Prime Minister set out in his Mais lecture the framework of investing, innovation and skills, and infrastructure. We have heard in the excellent interventions from the noble Lord, Lord O’Neill, and others about the importance of those three strands, particularly innovation and technology. I strongly support that. There are lots of exciting ideas about how we could promote it, but as we have a Treasury Minister sitting on the Front Bench, I point out that there are some specific things which are directly under the control of the Treasury. I have three suggestions, none of which are the exciting, real technology measures in the Budget—all of which I welcome, and perhaps on occasion I would add to. Our difficulties in innovation are partly shaped by processing and bureaucracies which ultimately can be traced to the Treasury itself, and I shall give three examples.

First, we are celebrating the arrival of ARIA, which will be an advanced research and innovation agency, free from many of the classic constraints that the Treasury imposes on spending departments. There have been previous attempts to give programmes supporting innovation some of the freedoms that ARIA is going to have but which have been withheld by the Treasury. If ARIA is such a good thing, there is absolutely no reason why some of the freedoms which it enjoys should not be available more widely to other bodies also providing public investment in innovation. I declare an interest as someone on the board of UKRI, where of course we comply with all the Treasury rules but it would be nice if we had some of the freedoms that ARIA is going to have, which would enable us to operate with the same flexibility and agility that is expected of ARIA.

Secondly, the Green Book is written around an assumption of conventional public procurement. It is a set of rules designed for people building a road bypass or putting up a new hospital, but they are inappropriate when applied to innovation policy. When you go to America, you see the enormous role that public procurement—particularly but not only led by the Department of Defense—plays in promoting technology and innovation in the US. I have talked to someone who had a new gadget that he was designing and prototyping in the US. I asked him how he was funding it and he answered, “I’ve already sold the first 10,000 to the DoD.” He had not yet made a single one. There they use speculative procurement expenditure to promote innovation. A British department of state could not do that under Green Book rules—you have to already have a product. One of the things that America does so successfully is currently forbidden in the UK by Green Book rules.

Thirdly, the dread words that cause me most concern whenever an innovation programme is proposed appear on page 65 of the Budget Red Book, in the context of an announcement of spending on the future of compute review:

“subject to the usual business case processes”.

The business case processes will take over a year and will involve large numbers of civil servants writing reports which will eventually confirm the decision that was announced yesterday—and this is a Government trying to cut the cost of bureaucracy. All it will mean is that, instead of getting on with the investment in exascale computing which the Chancellor announced yesterday, we will be lucky if anything happens before the election. If the Treasury wants to get on—and the Treasury has put it into its own Red Book—do we really need to waste a year on a business case process not designed to promote innovation? I can tell your Lordships that, around the rest of the world, they do not have an extra year added to every policy decision on innovation so that they can do a massive audit in advance of any spending.

I strongly support the focus of the Chancellor on growth. If it were possible to extend ARIA freedoms more widely, to have more innovative use of procurement for new products and processes, and to simplify the business case process, the Treasury itself would be doing its bit for growth.