Economy: Budget Statement

Viscount Hanworth Excerpts

Thursday 22nd March 2012 Lords Chamber

[Viscount Hanworth]

My Lords, the Budget that we are discussing today has appalled many people on this side of the House. At a time of high unemployment, when fuels bills and food prices are rising, benefits are being cut and many families are feeling painful financial pressure, the Chancellor, George Osborne, has chosen to benefit the rich. This is bound to have dire consequences for the Conservative Party and its allies when they submit themselves to the judgment of the electorate.

We understand that, before deciding to cut the top rate of tax, the Chancellor asked for an assessment of how much revenue was being derived from top-income earners and how much would be lost in consequence of this largesse. He may have been encouraged to go ahead with his cuts on learning that the tax take was less than one might imagine. To use this as a justification for cutting taxes implies an inverted logic. The reason for the revenue being less than expected is well documented in the report of the Select Committee on Economic Affairs, which tells of an estimated tax gap of £42 billion, which is a substantial proportion of the current budget deficit. The gap is defined as the difference between tax collected and the tax that should have been collected. This enormous figure represents the total of tax evasion and tax avoidance. It is a testimony to the extent to which high-income earners, aided by tax consultants who operate on an industrial scale, have managed to avoid paying their taxes. It represents a huge fiscal resource.

It is difficult to understand what justification the measures of the Budget might have had in the minds of its proponents. Can it really be true that, by taking an emollient attitude towards high-income entrepreneurs, who represent only a small proportion of the beneficiaries, the Chancellor imagined that he might stimulate the economy? Are we witnessing a reprise of the grotesque and wholly discredited doctrine of the trickle-down effect?

Perhaps we should take stock of what the Government have been doing lately to encourage industry and enterprise. We can begin with George Osborne’s trip to China. This was ostensibly a trade mission in which the Chinese would be encouraged to purchase goods manufactured in Britain, and in which direct foreign investment in the UK would be encouraged. British exports to mainland China are valued at £7 billion, which could surely be increased. As it transpired, the Chancellor did very little to encourage the purchase of British goods. He did far more to encourage inward investment. Just 24 hours after his arrival, we learnt that a Chinese sovereign wealth fund was to acquire a 9 per cent stake in Thames Water. Much more of this sort was expected to follow.

It is curious that such inward investment should acquire the unquestioning approval of so many commentators. In effect, it ensures that foreign countries will profit from the labours of British workers by reaping the profits and dividends that would otherwise accrue to Britain. The malign effects of such investment differ from the often beneficial effects of direct foreign investment in industrial capital, albeit that the two categories of investment are often confused. However, one should not overlook the manner in which foreign enterprises, such as the Japanese motor manufacturers, are liable to displace native enterprises. They are also free to repatriate the profits and the dividends.

George Osborne’s principal objective during his visit to China was to turn London into the first non-Chinese trading hub for the renminbi, China’s national currency. Such a development would be a major benefit to the City of London, which is one of the most important parts of the UK economy in his opinion, and to which he has strong allegiances. As well as such benefits, we should consider the costs that are imposed on the rest of us by the City of London. Its costs are not only the episodic ones associated with the lengthy financial crisis that began in 2008. They have been borne by the rest of the economy over a much longer period.

The City of London can be likened to a diseased organ of the body. Its hypertrophy has pre-empted the life-blood that would otherwise sustain the other organs. As I have already indicated, the massive inward investment that the City has facilitated has found its way, in the main, not into physical capital but into financial assets. The City has facilitated the acquisition by foreign investors of large tracts of British industry and many of our essential utilities. In the process, the captains of finance have greatly enriched themselves and the pound sterling has maintained a high value against other national currencies.

The consequence of this overvaluation of the pound has been the inability of our manufacturing sector to export its products. This has led, over many years, to its atrophy and decline. These consequences are manifest in a comparison of the proportion of national product that originates in manufacturing in the UK with the proportions in other European Union countries. According to figures published by the OECD, the UK proportion is around 20 per cent. Among our European neighbours it is, on average, 25 per cent or 26 per cent. In view of the disadvantage of our overvalued currency, our industry needs to be fostered carefully and protected. The Government often seem to be doing the exact opposite.

They have failed to constrain the banks and the financial sector more generally to provide much needed investment funds to small and medium-sized enterprises. That is the point that the noble Baroness, Lady Kramer, made so forcefully. They have also failed to take steps to ensure that British manufacturers have an adequate chance to gain contracts for the supply of equipment to some of our major infrastructure projects. A recent example is provided by the Thameslink project. The contract to provide the rail fleet has been awarded to the German firm of Siemens.

One investment in infrastructure that is urgent, and will remain so for many years to come, is the renewal of our energy resources. Last year, investment in wind power fell by 40 per cent compared to the year before, and the Government have failed to support an industry that could have become a major exporter. Since 2009, our nuclear industry has been in the hands of an Anglo-Franco-American consortium, in which we are decidedly the junior partners. The Government have made little attempt to ensure that the promised renaissance of the nuclear power industry will be to the benefit of British manufacturers and technologists.

Their declared intention is to rely heavily on the private sector to achieve the necessary investments in infrastructure. We have already observed that private finance initiatives, mediated by the City, have been more costly to the taxpayer than the direct investments via the erstwhile nationalised industries. Those industries ought to have been allowed to raise funds in their own right but, in the main, they were prevented from doing so.

This Budget and the statements and pronouncements that have surrounded it seem to be the products of the ideological fantasies that were inculcated to young Conservatives in the era of Margaret Thatcher. This ideology has done great damage to our economy, both in the period of the previous Conservative incumbency and—dare I say?—in later years as well. It continues to wreak havoc.