Energy (oil and gas) profits levy

Kit Malthouse Excerpts

Tuesday 22nd November 2022 Commons Chamber

[Kit Malthouse (North West Hampshire) (Con)]

It is obviously foolish for the Opposition to pretend that a pandemic and a continental war, with its associated energy shock, would not be felt economically in this country. At the same time, it is clearly preposterous for them to try to talk down the UK economy as some kind of basket case, when we compare very favourably to some of our peers on debt to GDP, employment is still very high and we have an economy that exhibits so many underlying strengths. At the same time, it is fair to say that the autumn statement was greeted with some dismay on the Government Benches. The Chancellor of the Exchequer has obviously had to make some very difficult and challenging decisions, given the economic headwinds we face.

First of all, however, I should point to one of the bright moments in the statement, which was the Chancellor’s pledge on education funding. The £2.3 billion extra on top of what is already in the baseline over the next two years was very welcome. I am grateful to the 27 colleagues who, along with me, signed a letter urging the Chancellor not only to protect schools funding, but to invest further. Our view was that one of the groups most hard hit by the pandemic and that awful disease was children. The case for investing further in their education to deal with the backlog, helping them to catch up and ensuring they can have productive lives in the future, felt to us morally strong and it would have been indefensible to cut that spending. We are therefore extremely pleased that he responded in such a positive way.

I have only a few minutes, so I want to outline three lessons from the recent turmoil, two warnings and a hope for the future. The first lesson is predicated on a phrase that does not go down well in either marriages or politics—the four little words, “I told you so.” For those of us who have been tracking the path of the UK money supply over the last 10 years, the underlying inflation, which was baked into our system and has emerged over the last 12 months, has not, I am afraid, come as any great surprise. The fact that the Bank of England has been slow to recognise the importance of monetarism and money policy over the last couple of years is a cause of great dismay, not least because a number of us consistently raised this issue with the previous Governor when he was in front of the Treasury Committee and since. The denial of the kind of Bank of England orthodoxy that the money supply mattered has come back to haunt us in a big way. The enormous growth in the money supply has outstripped the growth in our economy—yes, coming out of the crash in 2007-08, but in particular coming out of the pandemic—and resulted in the inflation in this country that is now taxing every family. It is hard to see that the Bank has moved with alacrity to deal with it—if anything, I think the criticism is that it has been a bit slow—but I hope the lesson we learn for the future, and on which this House should concentrate and focus, is that the money supply matters. When we look around the world we see consensus around a loose monetary policy for far too long and we need to bear that in mind.

The second lesson is that the Bank’s handling of the bond market really matters as well. We had assumed that that was a benign market that we could take for granted, but it became clear that the Bank’s hangover from its quantitative tightening—its declaration of sales forward into the market—had a significant impact. That was then exacerbated by the so-called fiscal event. We also bear huge losses on that market from the Bank’s dealings. Admittedly, there have been profits in previous years, but the fact that we are bearing about £11 billion-worth of losses from the Bank’s trading in that market matters. Also, within that market, we discovered to our horror that pension funds were effectively gambling with borrowed money, shorting inflation through the so-called LDI— liability-driven investment—strategy, which became so systemically problematic for the economy that the Bank had to intervene again. That points to lax supervision and comprehension of the weaknesses in the bond market.

The third lesson is that we as a House have perhaps not concentrated enough on the operations of the Debt Management Office. I have yet to see anywhere an obviously declared policy decision to move our debt more towards index-linked or inflation-linked bonds. We have moved from 6% of our debt being index-linked 10 or so years ago to about 22%. That is a near-quadrupling of the figure. As I think the Chair of the Treasury Committee—my hon. Friend the Member for West Worcestershire (Harriett Baldwin)—said yesterday, that effectively means that the Government were shorting inflation. At a time when we had lost track of the money supply, or in fact, had decided that the money supply did not matter, that proved to be a foolish bet.

[Bim Afolami]

When I was on the Public Accounts Committee a couple of years ago, we looked at index-linked debt on the whole of Government accounts. If I recall this correctly, the answer we received was that there was no long-term risk of widespread inflation because there were global forces that were becoming deflationary, rather than inflationary. The points that my right hon. Friend is making illustrate well the poor analysis in that approach.

[Kit Malthouse]

I completely agree. I remember well debates with Mark Carney, when he was head of the Bank of England, about the combination of a rise in the money supply and the underlying inflationary effects in our economy being masked by deflationary effects, not least of global supply chains, and the fact that we now have so much stuff made and imported from China, as well as the effect of the internet. Once the curtain was pulled back and we had problems with our supply chains—and that curve of deflation bottomed out—lo and behold, the money supply suddenly became important again. Let us hope that we learn that lesson for the future.

Notwithstanding the difficult decisions that the Chancellor has made, another opportunity is coming for us to trim the sails: the Budget in the spring. As we move towards that moment, I hope that we can look towards some positive changes in the global economic environment. Hopefully, the war in Ukraine will start to recede. International container prices are already falling, as are energy costs. We can therefore think again in the spring and I hope that we will bear two things in mind.

First, we need to bear in mind that, in a tight labour market, tax rises can prolong inflation. If we, through tax rises, give people, in effect, a take-home pay cut at the same time as they face higher costs because of their mortgages and generally because of the cost of living, they are likely to start to demand more from their employers. I am afraid that that has a possibility of sparking a wage and price spiral, particularly as we know that the secondary effects of that inflation will take some time—possibly months, if not years—to work their way through the system. I would bear that in mind when we think about possible tax rises, particularly from fiscal drag.

My second concern—I give this warning to Ministers—is that chasing debt to GDP could become a hare that they are unable to catch. If the actions taken from a fiscal and monetary point of view damage our GDP number—if GDP falls—we have to work even harder to reduce costs, or debt, against that number. If the action taken to reduce the numerator in the equation paradoxically damages the denominator, the equation becomes harder and harder to reach. If we base our ability to reach that debt-to-GDP ratio on a lower figure—particularly with a 3% GDP debt limit—through tax rises, the only way to avoid a doom loop is to tax and tax, even if we know that we can never fill in the hole that we are digging.

Finally, let me turn to my hope for the future. When we get to the spring Budget, I hope not only that the global winds that are blowing against us will have receded somewhat, but that, frankly, we can restore our belief in capitalism. My strong view is that the only way that we will get out of this hole—a number of Members have said this in the past few days—is through growth. We will not tax our way to prosperity, nor will we tax our way out of this debt-to-GDP problem. We need to inject growth into the economy. The only way to do that is to let the wealth creators free by loosening the ties that bind them and by looking at the regulation and taxation on capital, in particular, so that people are willing to take risks. One of the most dismaying choices in the statement was the proposed increase in capital taxes, not least because that changes the risk-reward ratio, meaning that it is less likely that people will go out and start a business.

Although some of the decisions about research and development, including the vast amount of money that is being pumped into that across the whole UK, are extremely welcome, unless there is a strong, pullulating, dynamic private sector out there to pick up the ball and run with it, all the intellectual property that the money creates will just end up overseas, where plenty of venture capitalists and entrepreneurs will be willing to pick that up and run with it.

Believing again in capitalism, allowing people to keep more of their money and to invest it, and building businesses for the future will be critical to our overall success in the months, years and decades to come. As we move towards the spring Budget, I hope that Ministers will look again at the five-year OBR forecast, remembering that it is there not to be fulfilled, but to be beaten and bested. It is there to warn us of what might happen so that we can take action now to avoid it. I hope that come the spring Budget, that is exactly what the Government will do.

--- Later in debate ---

[Dr Liam Fox (North Somerset) (Con)]

It has been clear from this debate and the previous debate that the backdrop to our economic discussion is one of continuing post-pandemic global economic disruption and the rise of global inflation, caused not least by Putin’s invasion of Ukraine. If anyone still believes that we do not live in an interconnected and interdependent world, they are simply not looking at the evidence around us.

Part of the difficulty in assessing the data is the opacity of some of the figures on post-pandemic global trading and investment, but some patterns are now clearly beginning to emerge. According to the Office for Budget Responsibility, in the fourth quarter of 2021, UK imports from the European Union dropped by 18%, but global imports from the rest of the world were up by more than 10% and UK exports to the European Union in July this year reached an all-time high of £17.4 billion. In other words, despite the fact that there are greater barriers to trade on the European Union side than on the UK side, British exports to Europe are actually managing to be more robust than European exports to the United Kingdom. So let us be clear: we do not need a new relationship with the European Union, Swiss or otherwise. We do not require freedom of movement, integration into the European single market or integration of EU law into the UK.

[Kit Malthouse]

My right hon. Friend has outlined some impressive figures. Does he recall that one of the themes of the Brexit debate was that our trading patterns should change? We said that there was a big wide world out there to which we had to look, from a trade point of view, that we had become over-reliant on the EU and that there were more exciting markets elsewhere that were growing much more strongly and that we could participate in.

[Dr Fox]

I entirely agree. The concept of the bloc in trade terms is very second half of the 20th century. We need to look at the growing markets that give greater opportunities for the United Kingdom in goods and services. The fact that they are not immediately geographically adjacent to us should not be our primary concern. We need to move with the trends in the global economy, not focus on what is a largely ossified view of the world based on the post-second world war consensus.

When we look at the origins of the inflation that we are facing in the United Kingdom, we see that there are several of them. They have been referenced a lot during this debate. The post-pandemic supply issues are still ricocheting around the global economy and particularly harming developing countries at the present time. Also, the central banks—not just the Bank of England but the Federal Reserve in the United States and the European Central Bank—got into a group-think on what they laughingly call the modern monetarists, which means that they are not monetarists at all. They believed that they had found some sort of monetary alchemy through which they could continue to print money faster than the economies were growing without creating inflation. I believe that is why there is higher inflation in the United States, the United Kingdom and Europe than in other countries—notably Switzerland, which sits in the middle of the eurozone but did not follow the same expansionist monetary policies.

By far the greatest boost to inflation has come from Putin’s invasion of Ukraine, however. That has come about in a number of ways, which I will come to in just a moment, but we must remind ourselves that inflation is not just an economic evil; it is a moral and social evil as well. The poorest people in our society are hit the hardest by inflation because they spend more of their income on non-discretionary items. It also transfers money from the savers to the borrowers in society, which is not something that a Conservative Government should want to see. The Government have done much in this statement to protect those on low and fixed incomes, including an extra £26 billion in cost of living support, particularly on fuel, on top of what we have spent already, and an extra £11 billion on uprating benefits. The Government introduced those two items to protect those on low and fixed incomes and, taken together, they are the size of the United Kingdom’s defence budget. These are not small sums. Our increased spending on education and health is hugely welcome, especially as we catch up on the post-pandemic disruption, but to be frank, even the generous sums put forward by the Government will largely be eaten up by inflation until we get it under control.

And that is before we come to the most frightening item of all, the fact that this year we will be spending £120 billion on debt interest payments. For reference, we spend only £134 billion on NHS England each year, so we are spending almost the NHS budget on debt interest payments. We need to recognise that we cannot increase our debt further. As my right hon. Friend the Member for North West Hampshire (Kit Malthouse) said, around 20% of our debt is now index-linked and is therefore very vulnerable to rises in the retail price index. Duncan Simpson, the chief executive of the TaxPayers Alliance, said:

“The spiralling cost of servicing the national debt is deeply concerning. Taxpayers’ money that should be spent on frontline services or keeping rates down is instead going towards interest payments that outsize the costs of government departments.”

If we cannot raise debt any further, either we have to see spending come down or taxes go up, or we have to increase Britain’s wealth from the rest of the global economy. The latter is difficult in current global conditions and the Government have correctly, but rather disappointingly, from a political perspective, had to see taxes rise. That sets a clear way in which to see our future priorities. The first thing is to bear down on inflation. At the same time, we have to get control of the public finances and then we have to get our taxes back down.

I hope the Opposition will reflect on this point today. We have heard from the Opposition Front Bench on both days of this debate that we are facing a recession made in Downing Street. Currently, the greatest source of global inflation is Putin’s invasion of Ukraine and rising global commodity prices, particularly food and fuel, which is causing potential starvation in vulnerable states, with widespread social dislocation and increased international migration.