Budget Responsibility and National Audit (Fiscal Mandate) Bill [HL]

Lord Bilimoria Excerpts

Friday 9th September 2016 Lords Chamber

[Lord Bilimoria (CB)]

My Lords, I thank the noble Baroness, Lady Kramer, for introducing this Bill. It would amend the Budget Responsibility and National Audit Act 2011 by introducing the three factors that she spoke about: infrastructure; making sure,

“that the fiscal mandate does not have a substantially negative impact on intergenerational fairness”;

and ensuring,

“that the economy of the United Kingdom remains competitive”.

What is the OBR’s role under the current charter? It is to produce five-year forecasts for the economy and public finances; to judge the Government’s performance against their fiscal targets—including, in its judgment, whether government policies have a better than 50:50 chance of meeting the fiscal targets; to scrutinise the Treasury’s costing of tax and welfare spending measures; to assess the long-term sustainability of the public finances; to assess the Government’s performance against the welfare cap; to produce a fiscal risk statement; and to produce forecasts of devolved taxes.

Let us look at the role of other fiscal watchdogs. Lars Calmfors was the chair of the Swedish Fiscal Policy Council. In Sweden, there is less ongoing contact between the fiscal council and the finance ministry. He argued that requiring the OBR to publish a forecast with the Budget makes it very difficult to,

“avoid behind-the-scenes ‘negotiations’ … with the Treasury”.

He concluded that,

“the most important lesson is this: one cannot have it both ways—the OBR cannot be both an independent watchdog and an in-house provider of input into the Treasury’s work”.

I wonder what the Government think of that. Other parallels can be drawn. The US Federal Reserve has a dual mandate of achieving price stability and full employment, whereas in the Bank of England the Monetary Policy Committee is purely focused on targeting inflation and achieving price stability. Which is the better option?

The current Governor of the Bank of England has dabbled in trying to look ahead. He had that great idea of forward guidance, which was very swiftly dropped as a ridiculous idea. He then made a pronouncement that we would start increasing interest rates the moment that unemployment fell below 7%. What a ridiculous statement: unemployment is now well below 7%, at 5%, and interest rates have in fact been dropped.

The Government have a new industrial strategy which is woven into the name of one of our departments—the Department for Business, Energy and Industrial Strategy. That reminds me of my days at Cambridge University, when we had the industrial society. We have moved on at Cambridge and now have the entrepreneurs’ society. Having an industrial strategy brings back Victorian images of the past, while the five-year plans remind me of India; in its socialist days, it had five-year plans. India, of course, has liberalised since 1991 and is the fastest-growing major economy in the world.

The deficit currently stands at around 4% of GDP while Britain’s debt share currently stands at 83% of GDP. In 2010, when the coalition Government took office during the financial crisis, there was no question but that the deficit was huge. It was over 10%, but that has been reduced drastically. One can then argue—we have debated this—whether the austerity policy of the former Chancellor, George Osborne, was good. In the cuts that took place to government departments while ring-fencing various areas including health, aid and schools, many departments’ budgets were slashed by 20%. Has the policy of trying to cut the welfare bill by £12 billion by 2019-20 worked? There was a very unfair move with the tax credits. We should never balance our books on the backs of the poor. Quite frankly, George Osborne failed to meet his own fiscal charter. His pledge to deliver a budget surplus has been suspended. In fact, Theresa May has now said that this aspiration is not likely to be fulfilled for at least another decade following Brexit. They have made an additional rod for their own back, following the Brexit vote, but the Brexiteers had no plan. It was claimed that £350 million a week being given to the European Union could instead be spent on the NHS. Many people, having been misled, voted to leave to save the NHS.

David Blanchflower, who was a member of the Monetary Policy Committee of the Bank of England, said:

“The problem is that many who voted leave thought this was all about immigration and EU rules, whereas in reality it was mostly about austerity. The Poles, the Czechs and the Hungarians came to the UK to work; they have higher employment rates than those born in the UK and pay far more into the system than they take out. It is clear that the rising number of immigrants has put pressure on public services but this was mostly because Osborne under-invested in services in order to shrink the state. They paid their taxes, but Slasher didn’t invest that money in new schools, houses and hospitals”.

According to the Guardian:

“When public finances are tight, the economic contribution made by migrants ought to be welcomed. But the climate of cuts allowed migrants to be blamed and Britain’s contribution to the EU—at £8bn”—

which is just over 1% of our public expenditure a year, a fact which was not highlighted by anyone during the campaign—is far,

“outweighed by our economic gains from membership—to take on disproportionate significance … Without investment, productivity is low; jobs are insecure”.

What is happening on research?

“Collaboration across the continent has made Europe a powerhouse for science. Britain gained disproportionately from EU research funding. The loss of this funding creates a real gap”,

and will make productivity gains even harder to achieve.

“The referendum shows how far Britain’s economic failures have divided the country, but leaving the EU only makes them harder to address”.

And how are we going to direct the energy that we are putting into building the country,

“to make sure that future generations”—

as the noble Baroness, Lady Kramer, said—

“suffer as little as possible? … We are already hearing from lead Brexiters that their promises on using the released EU funds for the NHS don’t hold”.

Surprise, surprise.

The noble Baroness, Lady Kramer, said that,

“spending on infrastructure is investment and should not be included as day-to-day spending when considering eliminating the deficit”.—[Official Report, 25/5/16; col. 489.]

Do the Government agree?

HSBC thinks that Theresa May is now going to embark on a £50 billion infrastructure spending spree, scrapping George Osborne’s plan to abolish the budget deficit and borrowing the money while bond yields are at historic lows. In fact, Simon Wells at HSBC said:

“In the current environment, the case for public investment is compelling. Interest rates can’t go any lower, uncertainty is extreme and borrowing is cheap. Moreover there is evidence that fiscal multipliers (i.e., the GDP impact of fiscal stimulus) are larger when the economy is in a slump”.

Do the Government agree?

The Office for Budget Responsibility estimates that increases in investment spending give the largest immediate boost to the economy, followed by increases in spending on public services and benefits. The most effective tax cut is believed to be a temporary cut to VAT, such as the one introduced at the end of 2008.

Following the leave vote, forecasters have revised down their expectations for growth unanimously. Lower growth will lead to lower tax revenues and more pressure on benefit spending if unemployment starts to rise. These effects mean that borrowing is expected to be higher this year than the 2.9% of national income that was forecast by the Office for Budget Responsibility in March.

“For investment spending to work”—

as big infrastructure projects have been shelved, such as the nuclear project and HS2, over which there has been a big debate—

“‘shovel-ready projects’ are required, said Victoria Clarke, an economist at Investec. But Ms Clarke, who worked in the Treasury during the 2008 financial crisis, warned that ‘a lot of [those projects] were done previously?.?.?.?you don’t have a lot of decent projects ready to go’”.

Can the Government confirm that we have lots of projects ready to go?

Reducing corporation tax is excellent. To make all this work, we need a tax system that is fair and competitive and encourages employment, growth, wealth creation, inward investment, entrepreneurship and investment. Does our tax system at the moment fulfil those needs?

When it comes to immigration, we need good immigration. The UK is no longer a superpower, but we are a global power. America is the only great superpower left in the world and is growing stronger. The vice-chairman of the Federal Reserve, Stanley Fisher, has said:

“I believe it is a remarkable, and perhaps under-appreciated, achievement that the economy has returned to near-full employment in a relatively short time after the great recession, given the historical experience following a financial crisis”.

We have austerity that is leading to decisions on student funding, which the noble Baroness, Lady Kramer, spoke about, removing vast amounts of grant money and introducing loans that may be burdens on students for decades. There is a reduction in investment within towns and cities.

Then there is talk of improving school education. The Prime Minister has introduced this whole debate on the reintroduction of grammar schools. There are just over 160 grammar schools out of over 3,000 schools. There is no question but that grammar schools have been very effective in the past. Practically speaking, can grammar schools be implemented quickly? British private schools are the best in the world but fewer than 7% of our schoolchildren go to them. Why can we not have more of that for the state system?

When the coalition Government introduced the first charter, its fiscal mandate was based on these five-year forecasts, but it has just not been able to achieve them. As we have seen, those three targets are one by one not being achieved. Following the UK vote to leave the EU in 2016, George Osborne made a Statement suggesting that the Government’s fiscal targets may be withdrawn. Sure enough, now they have.

What we need more than anything is growth. Governments cannot cut their way to growth. I have run my own business; I built Cobra Beer from scratch. We went through ups and downs, but what I know is that you have to invest to grow. You cannot just grow by cutting costs all the time.

I turn to public spending. Total managed expenditure as a share of GDP is forecast to be 37% in 2019-20. Is that achievable? Can we cut public expenditure to those levels? Is that realistic? Our net debt is 81% of GDP. That is higher than the average of most advanced economies, which is 73%. We talk about tax simplification but the Office of Tax Simplification is an oxymoron. Our tax gets more and more complicated.

There is one aspect that I would add to what the noble Baroness, Lady Kramer, has introduced in the Bill. Surely part of the responsibility should also be national security. We had this huge debate about spending 2% of GDP on defence, as required by NATO, which we now do, but national security is a huge imperative and that is not highlighted.

When it comes to productivity, which has been spoken about again, we are well below the OECD average. We underinvest in R&D and innovation. There is no question but that we underinvest well below the EU and OECD averages. In fact South Korea, which was mentioned by the noble Baroness, invests double what we in the UK do as a percentage of GDP.

I turn to universities. The noble Baroness said it has never been more vital to invest in universities, yet we have a situation now where investment in universities as a proportion of GDP is well below the EU and OECD averages. It is half of what the United States spends. We should be encouraging investment in higher education, including on attracting international students. Instead we have an immigration policy that includes international students within overall immigration statistics and treats them as immigrants. Numbers from India have halved over recent years, and countries such as Australia are saying, “Thank you for your immigration policies; more students from countries like India are coming to us”. We need more international students and academics to help our universities to excel.

Then we come to the area of how business models work. I make a comparison here using an article just published by the Harvard Business Review called “The Transformative Business Model”, written by Professor Christoph Loch, Professor Stelios Kavadias and Professor Kostas Ladas of the Cambridge Judge Business School, of whose advisory board I have just taken over as chair:

“Basically, a business model is a system whose various features interact, often in complex ways, to determine the company’s success”.

What is the most efficient way to allocate an organisation’s resources? One of them is to be agile and adaptive as an organisation, and then go from innovation to translation. Does our budget system actually achieve that? I am afraid to say that I do not think we achieve it; we do not have at all the balance between spending, a fair and competitive tax system and the targets. What the noble Baroness, Lady Kramer, is talking about is vital. We need to introduce these other aspects.

We need to put things in perspective. Ben Gummer MP came up with the idea of every taxpayer knowing what proportion of their taxes were spent on government spending when they paid their taxes. If you look at that pie chart, you will see that the smallest amount, 1% of GDP, goes on EU spending. That puts everything into perspective.

As Mrs May said:

“He uses the language of austerity; I call it living within our means. He talks about austerity, but actually it is about not saddling our children and grandchildren with significant debts in the years to come”.—[Official Report, Commons, 20/7/16; col. 818.]

I conclude by saying that I still believe we have one of the greatest and most adaptable economies and countries in the world, with 1% of the world population but the fifth largest economy in the world. We need to listen to this.