Economy Update

Baroness Penn Excerpts

Thursday 26th May 2022 Lords Chamber

[Baroness Kramer (LD)]

My Lords, I honestly do not think anybody in this House is seriously fooled. The announcements by the Chancellor today, including the U-turns on a windfall tax and increasing benefits, are basically covering fire for Boris Johnson and his disgraceful role in partygate. The timing gives it away. People have been suffering from a cost of living crunch through much of this winter, making an appalling personal decision on eating or heating. They have needed that help.

The Chancellor says today that he did not know until yesterday that the energy cap would go up by £800 in October. He must be the most out-of-touch person in the country. He could have talked to anybody, on any street, and they would have told him not only that the cap would go up but the amount.

I do welcome today’s package. Anything is needed when a crisis is this urgent and desperate, but one of my concerns is that it covers only the increase in energy costs. The Chancellor’s own speech explains that the average increase in people’s energy bills this year will be just under £1,200. He goes on to say that this is

“the same amount as our policies will provide for the most vulnerable people this year.”

There are other serious pressures, notably the increase in food prices, which are falling most on people on the lowest incomes. I wonder whether the Minister will tell us what experience ordinary people will have and how much more per week it will cost them to deal with those higher food bills. That problem is desperately acute.

There is nothing in here for businesses. I took a quick look at the response from the response from the British Chambers of Commerce, which is usually a very modest group that is always likely to welcome—and does welcome—the actions of the Government. It states:

“For business, the toxic mix of inflation, raw material costs and supply chain disruption”,


largely from Brexit,

“is the flip-side of the coin to the problems facing consumers. Unless steps are also taken to ease business costs, they will likely feed into the inflationary pressure on the economy and quickly eat into the financial support announced today.”

We must not forget that individuals are also facing significant increases in taxes. National insurance contributions are going up 1.25% and, because thresholds have been frozen, many people will find that their income tax bill is shockingly higher than they ever anticipated.

I would like to understand more about why the Chancellor has chosen not to go further. He is going to see £7 billion coming in today from the tax on oil and gas. I agree with others that the oil and gas companies can very much afford to do that. I note that they still plan share buybacks and saw nothing in the market to suggest that that has changed. BP is not cancelling its planned £8 billion in share buybacks this year, nor Shell its £6 billion in announced plans. The Chancellor also now has £8.6 billion in extra VAT due to inflation this year, rising to £40 billion by the end of the Parliament. With that kind of windfall coming into the Treasury itself, there is scope to do a great deal more.

I join others in my party who have called for a cut in VAT, because that would stimulate business, particularly small businesses; take pressure off companies that thought they were going into clear waters coming out of Covid but are now wondering if they are going to survive; and help those on the lowest incomes deal with this severe increase in food prices. Essentially, it is largely paid for by the extra revenues that flow into the Treasury thanks to inflation. Can the Minister explain why that has not happened and why, under those circumstances, the Government are absolutely determined to go ahead with their increase in national insurance contributions, which is going to diminish the pay packet of virtually every working person in the country?

[Baroness Penn (Con)]

My Lords, I thank the noble Lord, Lord Collins, and the noble Baroness, Lady Kramer, for their questions and for their welcome, I think, for the announcement made today. It is an important announcement, of significant scale, and it will mean a lot to people up and down the country who have been worrying about their energy bills in particular, as well as wider inflation, which I will come to.

Both noble Lords asked why now and what has changed. I say to them that three things have changed since the Spring Statement. First, the war in Ukraine has developed; we were at an early stage in the conflict then. Secondly, inflation expectations have unfortunately worsened since that time. Thirdly, we now have a much clearer idea of the likely level of the price cap in October. The noble Baroness said that anyone could predict what that would be, but there have actually been quite significant levels of volatility and I think it is right to have the best available information so that we can scale and target our support in the best possible way. That is exactly what we have done.

We have designed a windfall tax that will have significant allowances in it to encourage investment, while still, rightly, raising money that will go to households to support them with the cost of living. In waiting, we have been able to design that investment incentive in it and we also have a tax that will raise more money than the tax proposed by the opposite side, which they estimated to be about £3 billion—our estimates are about £5 billion. It has also allowed us to match the level of support that we intend to provide for the needs that people will have over the coming months. The lowest-income households, which the noble Lord, Lord Collins, rightly referred to in his questions, will receive around double the amount under the Government’s plans than in the plans set out by Labour.

Both noble Lords opposite asked about a VAT cut. A VAT cut on energy would provide, on average, support of around £120 per household. The basic support of a grant to every household of £400 is obviously much more substantial than that, but also, using a VAT cut would mean that more relief would go to those households which are, for the most part, the wealthiest, so I do not think it would be necessarily a well-targeted approach to the problems that we face.

The noble Lord asked when we will legislate for this new levy. The usual channels will, of course, discuss that, and we will bring forward legislation as soon as parliamentary time allows. However, we are clear that the levy starts from today, so there will not be an opportunity to avoid it from that perspective. He also asked about the gap in support for families while we look at what support can be put in place for the October increase in the price cap. Of course, when we knew the April figures and other estimates for the economy, we put more support in place: the national living wage has gone up, and most families have, I think, received their council tax rebate of £150 per household. We had previous cuts in the universal taper rate and an increase in the work allowance, and of course we announced the increase in national insurance thresholds.

I really have to correct the noble Baroness when it comes to national insurance. Yes, we have introduced the health and social care levy that will raise billions of pounds to pay for health and social care spending in years to come, but the increase in the NICs thresholds that will come in in July means that 70% of people will pay less in NICs next year than they would otherwise pay. I do not think it is right for people to get the impression that their pay packets are going to go down in July when they will go up. Also, in increasing thresholds while retaining that levy, we have had to take some difficult decisions that reflect our approach to fiscal responsibility, but we have done it in a targeted and quite redistributive way. I thought that was something that the Liberal Democrats might welcome, and I am disappointed that they still do not feel able to do so.

The noble Baroness talked about pressures beyond the increase in the cost of energy, and she is absolutely right. I have mentioned some of the action we have taken. We have introduced the fuel duty cut to help people with the cost of living. She talked about businesses needing support. We have introduced business rates relief and increased the investment allowance for businesses. We have NICs relief for small businesses employing low numbers of people, which is worth millions of pounds to many small businesses.

I think I have covered most of the points raised by noble Lords. I am glad they have welcomed the action. We have designed it very carefully to recognise that households across the country will be feeling the squeeze in months to come. There is some universal support, but those on the lowest incomes will struggle the most to meet those costs, so we have put in place extra support to help them where we can.

It is important that I close with one thing. The Government cannot meet the cost of living crisis and alleviate all the pain that people will feel over the coming months; I will never pretend that we can. We can put in place targeted interventions to help those least able to meet those rising costs, and that is exactly what we have done with our announcement today.

--- Later in debate ---

[Viscount Younger of Leckie (Con)]

My Lords, I am sorry to interrupt the noble Lord, but I ask him and all noble Lords to keep their questions succinct, so that we can get the maximum number of Back-Benchers in.

[Baroness Penn (Con)]

I am not sure that I picked up the noble Lord’s questions there, but he did talk about the potential inflationary impact of this announcement and asked what the Government are doing to tackle inflation. I can say to all noble Lords that we have three tools available to us to combat and reduce inflation and we are using them all. First, we have strong, independent monetary policy, overseen by the Bank of England. Secondly, we have responsible fiscal policy from this Government. I am cognisant of the potential inflationary impacts of announcements such as these and that is why we are ensuring that the support we are putting in place is targeted, timely and time-limited. We will continue to take difficult fiscal decisions to ensure that we remain within our fiscal rules. Thirdly, we are taking an activist approach to supply-side reforms, which will increase our productive capacity, ease inflationary pressures and raise our long-term growth potential. I do not think the list of further taxes that the noble Lord said he wanted to apply would encourage more investment in our economy, which is what we need to see the growth that we all want and to support the record lows in, for example, unemployment that this Government have presided over.

[Lord Forsyth of Drumlean (Con)]

My Lords, could my noble friend help me by explaining something? During the Covid lockdown, when there was the furlough scheme and many employers kept people in employment, the Chancellor thought it was appropriate to increase universal credit by £20 a week, which is £1,000 of additional income for some of the poorest people in our country. If that was thought appropriate then, why is it not thought appropriate now, when those people are facing—in the words of the Governor of the Bank of England—“apocalyptic” increases in prices? What is the logic of the Chancellor’s position?

[Baroness Penn (Con)]

My Lords, the increase in universal credit was always brought forward as a temporary measure as, through the restrictions needed to deal with the Covid pandemic, large parts of our economy were effectively shut down. We face a different set of challenges now. They are severe for many households, but they are to do with inflationary pressures and a large part of that is driven by energy prices, so we are targeting our response towards dealing with that. Under our plans, the lowest-income households will receive around £1,200, which is roughly equivalent to the expected increase in costs for the energy price cap rise. Some people benefited from a UC uprating or temporary uplift, but pensioners who struggle with energy bills did not benefit under that system. People with disabilities, who can face higher energy costs, did not necessarily benefit from that UC uplift. This is a targeted set of measures to deal with a specific set of problems and it should be welcomed.

[Baroness Falkner of Margravine (CB)]

My Lords, I welcome the support for people with disabilities, but why have the Government taken so long and yet not come to a view or set out the tax on the power generation sector? The peroration from the noble Lord, Lord Sikka, was perhaps overly long, but he made a very important point: one way to deal with the energy price crisis specifically would have been to emulate the French by having a price cap. I accept the point from the noble Baroness, Lady Kramer, that it is not only an energy crisis; nevertheless, that would have been far more targeted and directed.

[Baroness Penn (Con)]

My Lords, the structure of the French energy market is different from our own. Different interventions are appropriate in different circumstances, but the generosity of the approach we have taken is comparable. On electricity generation, it is more complicated. As I have said, we have taken time to design the levy so as not to deter investment and we are looking very carefully at the scale of the extraordinary returns in the electricity sector and measures that could be taken in response. We have longer-term plans to reform that sector, but there may be a case for doing something in the interim and we are working urgently to look at that.

[Baroness Blackstone (Ind Lab)]

My Lords, the Minister has rightly admitted that a large part of the problem that the Government are facing is driven by energy prices. In that case, why are the Government still resisting the development of onshore wind—a rapid and cheap way of generating more power—when, if we doubled our capacity from this form of power, we could cut £6 billion off households’ energy bills?

[Baroness Penn (Con)]

This Government have invested significant amounts in renewable energy and will continue to do so. As we set out in our energy security strategy, we have a long-term path for both improved energy security and meeting our goals on net zero.

[Lord Hannan of Kingsclere (Con)]

My Lords, will my noble friend the Minister remind the House that actions have consequences? If you have spent a long time demanding green levies and net zero—a fine, legitimate position—do not now complain about fuel poverty. If, as Members in this House have done, you have opposed trade deals with Australia and New Zealand because they are going to flood us with cheap food, do not complain about the price of food. If you spent two years during the lockdown demanding longer and stricter measures, then spare us the high moral tone about inflation. If you pay people to stay at home while printing more money, then you are bound to have a cost of living crisis. Will my noble friend the Minister comment a little on the fiscal effect of a windfall tax? Ronald Reagan used to say that businesses do not pay taxes, they collect taxes. In this case, as all taxes are paid by human beings, is it not the case that the windfall tax will be passed on to consumers, customers, staff and employers, and will take more money out of the economy?

[Baroness Penn (Con)]

I do not think that is necessarily the case because in the specific circumstances that we are talking about, energy companies have benefited not from greater efficiency in their operations or profitability due to their own efforts, but due to global circumstances. I think that my noble friend and I disagree on green levies and net zero. Actually, our investment in renewable energy has reduced the impact of the current crisis on people’s bills.

[Lord Liddle (Lab)]

I welcome this package, although it is belated, and I welcome its focus on lower-income people, with this exception that it is a universal payment to pensioners, including pensioners who pay 40%— and more—rates of tax, as I am sure is the case with many Members of this House, including me. Do the Government think they are doing enough for poor, working families with children? To give an example, I heard on the radio last week about the impact of inflation on the school meals budget, and how schools are having to reduce the content of food because of the squeeze of inflation on those budgets. Is that not something that the Government should have addressed as a priority, to make sure that children from poor families get at least one decent meal a day?

[Baroness Penn (Con)]

In ensuring that children get decent meals, we have extended free school meals, and we have the holiday support programme that ensures that this is not just during term-time. On the noble Lord’s question about support to pensioners versus families with children, there is a greater deal of support going to those on low incomes, and we have made this a target. There is also a universal payment and a payment for pensioners who are less able to meet rising energy costs. Pension credit take-up in not where I think anyone in this House would want it to be, and simply targeting pension support through pension credit is not necessarily going to reach everyone we need to. We have to have a balance between universal support that ensures that no one slips through the net, and better targeted support that ensures that those who need it most, get the most support. I think we have done that quite carefully in this package and got it right this time.

[Lord Shipley (LD)]

My Lords, I cannot find anything in the Statement in relation to prepayment meters. There is a lot about those on low incomes and rising energy prices, but for many people on low incomes there is a problem with prepayment meters because it puts the cost they have to pay up. This matter has been raised in your Lordships’ House several times in recent weeks. Can the Minister tell us whether any progress is being made to reduce the pressure for those who have prepayment meters?

[Baroness Penn (Con)]

I completely understand the point the noble Lord is making and have to apologise; I tried to get an answer in anticipation to this being raised. I do not have one, but I am very happy to write. I reassure him that those on prepayment meters will get the £400 rebate delivered by a different mechanism. We are ensuring that they receive it.

[Baroness Bennett of Manor Castle (GP)]

My Lords, I join almost the whole House in welcoming the belated arrival of the energy profits levy, albeit at an inadequate level. I note that the Statement spends almost as much time on the new investment allowance, through which, for every £1 an oil or gas company invests, it gets 90% back in tax relief. From the Treasury factsheet accompanying this, it appears that this tax offset applies only to investment in the oil and gas sector. The Statement makes no reference to renewables. I believe a report is out in the Independent now expressing astonishment that it appears that oil and gas companies, if they chose to invest in renewables, would not get the tax relief on them. Can the Minister confirm that there will be the same tax relief on renewables as the Government are offering on oil and gas?

[Baroness Penn (Con)]

My Lords, this is a levy on oil and gas producers, but the Government have also been clear that in the medium term, in terms of our energy security, new investment in those sectors will be needed. The investment relief has been designed to ensure that this is not deterred.

[Baroness Neville-Rolfe (Con)]

I have a couple of concerns about wider financial sustainability and, if I go too wide, perhaps my noble friend could write to me. The first is on monetary policy, picking up on what the noble Lord, Lord Sikka, said. How are we going to get inflation down? The Chancellor seems to be leaving this to the Bank of England, but it has been very slow to increase interest rates or stop QE—it has now done that—and it does not have any proper monetarist economists on the MPC, so I am not quite clear how inflation is going to go down. The second thing, which is also perhaps a little broad, is that 1 million non-British people have arrived in the UK in the last year. I would be interested to know how much of the much-needed aid that has been announced today will in practice go to them.

[Baroness Penn (Con)]

My Lords, on my noble friend’s first point, she tempts me to comment on the operation of monetary policy by the independent Bank of England. The only comment I will give is this: since control of monetary policy was taken out of the hands of politicians 25 years ago, inflation has averaged precisely 2%. On my noble friend’s second point, I do not have those figures. I am not sure that they would necessarily be available, but I am happy to find out. If they are, I can write to her and supply them.

[Lord Brooke of Alverthorpe (Lab)]

My Lords, I would like to follow up on the latter point about the tight labour market. Estimates are that we have between 400,000 and 1 million illegal workers in this country. None of them is paying tax, national insurance or into the Exchequer. Could the Government spend a little time looking at that? One solution would be to have an amnesty in the next six months for everyone who is an illegal worker to register. It would make their lives safer. They are here and would come into the system, and it would increase the flow of revenue and national insurance. I hope the noble Baroness will be prepared to take that away. Secondly, we look again at flows of income on page 5, with the “excess savings” we have in the country and what people are doing with them. I suggest we have a look again at what we did at the end of the Second World War, when we introduced post-war credits and raised substantial money as a country for investment. That was of great benefit to the country, and I am sure that people would be prepared to participate in an event of that kind if the Government were prepared to stimulate one.

[Baroness Penn (Con)]

On the noble Lord’s second point, the Government always welcome new or revisited ideas and I will certainly pass that back to the Treasury. On people who may be working in the black economy or working without paying tax and national insurance, the noble Lord is right that this is an issue. The Government have taken significant steps over recent years to ensure proper minimum wage enforcement. We also have a Director of Labour Market Enforcement because, as well as ensuring that people pay proper taxes, we need to ensure that they are not vulnerable to exploitation and that the proper rights they should have at work are also offered to them.

[Baroness McIntosh of Pickering (Con)]

My Lords, can my noble friend look at the potential of a windfall tax on the excessive profits that electricity companies have been making? One electricity company alone posted a profit of £1.5 billion—a 14% increase. Would it also not have been better to have targeted the money through the warm homes discount to make sure that it reaches those most vulnerable, who are living in the coldest homes?

[Baroness Penn (Con)]

My Lords, as I have said already, we are looking at certain parts of the energy generation sector that are also making extraordinary profits, because the price that electricity generators are paid is linked to the price of natural gas. So, like many other countries, we are looking at what measures we might want to take to correct that and engaging with industry urgently on it. On how the support we are providing is delivered and targeted, the Chancellor, as my noble friend would expect, looked at many different options for how best to support people. This package strikes the right balance in terms of targeted and universal support, simplicity of delivery mechanism and the speed at which support can get to people, and it should be very welcome.

[Baroness Wheatcroft (CB)]

My Lords, we are told that the windfall tax will raise around £5 billion and that the cost of the £650 for households will total around £5 billion—it is probably £5.2 billion. Can the Minister tell us the cost of the other measures announced today and how those are to be funded? Given that the Chancellor has also said that he will honour the pledge to restore the triple lock on pensions, and that they will go up by CPI at the rate that is likely to be in September, how is that going to be funded?

[Baroness Penn (Con)]

In terms of the funding, the noble Baroness is absolutely right: the total cost of the package is around £15 billion. It will be part funded by the levy and the rest will be funded by borrowing. As my right honourable friend the Chancellor said, it is part of an overall fiscally responsible approach. We have ensured that our approach is both targeted and time-limited, so that is the case. I am afraid that I have forgotten the noble Baroness’s other—

[Baroness Wheatcroft (CB)]

If I may, the Chancellor’s Statement says that the levy raises around £5 billion of revenue and that

“it avoids having to increase our debt burden further.”

I am slightly puzzled.

[Baroness Penn (Con)]

My Lords, I have remembered the noble Baroness’s second point about increasing benefits next spring in line with September’s CPI inflation. I can confirm that that is the Government’s intention and I think that would be costed by the OBR in the fiscal forecasts already in place. The other spending will be paid for by borrowing, but it is a one- off cost.

[The Deputy Speaker (Baroness Garden of Frognal) (LD)]

My Lords, time is now up for this business.