Economy: Budget Statement

Lord De Mauley Excerpts

Thursday 22nd March 2012 Lords Chamber

[The Commercial Secretary to the Treasury (Lord Sassoon)]

My Lords—

[Lord De Mauley]

My Lords, I wonder if noble Lords would kindly leave the Chamber quickly and quietly so that we can proceed with the debate.

[Lord Sassoon]

My Lords, yesterday’s Budget reinforces this Government’s determination to restore the UK to prosperity. It is because of the decisive action that the Government have taken, starting with the June 2010 Budget, that we have secured and maintained the stability of the UK economy. The private sector has already responded vigorously. Since the election, private sector employment has risen by more than 630,000 and the Office for Budget Responsibility forecasts that between the start of 2011 and the start of 2017, some 1.7 million jobs will be created in the UK’s private sector—an extra 1.7 million jobs creating wealth, leading innovation and driving our recovery across the nation. The dynamism of UK businesses is truly remarkable. As the Government, we have to continue to reduce the burden of the state. If we do that, the economy will flourish.

Yesterday’s Budget builds on a strong foundation, safeguarding our economic stability, creating a fairer, more efficient and simpler tax system, and driving through reforms to unleash the private sector enterprise and ambition that are critical to our recovery. As my right honourable friend the Chancellor said yesterday, Britain will earn its way in the world.

We can succeed in that goal only if we continue to safeguard our economic stability by tackling the record deficit and debt that we inherited from the previous Government. It is because of our determination to tackle that legacy that we have sheltered the UK economy from the turbulence that undermines our nearest neighbours. It is because of our commitment to stick the course that, in the past two years, the cyclically adjusted primary deficit has been halved, falling from 7 per cent of GDP in 2009-10 to 3.4 per cent in 2011-12 and approaching balance in line with our fiscal mandate. Indeed, borrowing over the forecast period will now be £11 billion lower than was predicted in the Autumn Statement last year.

Stability is the vital precondition for growth and will continue to be our key priority, but as the Office for Budget Responsibility said in its report yesterday,

“the situation in the euro area remains a major risk”

to the UK’s economic forecast. The OBR also identifies a risk of a,

“further spike in oil prices.”

Despite these headlines, however, there are positive signs for the UK economy. The OBR continues to forecast positive but subdued growth. Along with the Bank of England, it forecasts that the economy will avoid recession, with this year’s growth forecast broadly unchanged at 0.8 per cent, then 2 per cent for next year, 2.7 per cent in 2014, and 3 per cent in both 2015 and 2016.

Economic stability is the vital foundation for securing that growth and the Budget reaffirms our commitment to safeguarding that stability. That is why this year’s Budget has a neutral impact on the public finances, implementing fiscal consolidation as planned. It keeps us on course to achieve a balanced structural current budget by 2016-17, with debt falling as a percentage of national income by the end of this Parliament in 2015-16.

Restoring fiscal sustainability will remain this Government’s number one priority. Such is the scale of the challenge that we must remain vigilant on spending. In particular, it is vital that we maintain control over welfare spending. That is why my right honourable friend the Chancellor announced yesterday that the additional costs of universal credit will be capped at £2.5 billion. We will also address the rising costs of an ageing population and the burden which that places on future generations. That is why there will be an automatic renewal of the state pension age to ensure that it keeps pace with increases in longevity. However, as the director of the Institute for Fiscal Studies said this morning, when you look at all the Government’s measures, you see that pensioners have not been hit as hard as other taxpayer groups.

We have also taken the difficult decision to remove child benefit from high earners. It is right that we focus support on those who need it the most, but we have to do it in a way that is fair, without setting up a cumbersome tax credit system and avoiding a cliff-edge for millions of families. That is why, instead of withdrawing child benefit all at once when people earn more than the higher-rate threshold, the benefit will be withdrawn only when someone in the household has an income of more than £50,000. And the withdrawal will be gradual, so that only those on an income of more than £60,000 lose all their child benefit. Overall, child benefit will continue to benefit 90 per cent of families with children.

These are tough choices to make, but this Government will not shirk their responsibility to restore fiscal sustainability and economic stability. We have learnt, to all our costs, the consequences of unsustainable spending and ever increasing debt.

As my right honourable friend the Chancellor said in the Budget, if Britain is to earn its way in the world, then we need to build a recovery based on private sector enterprise, investment and export, and if we are to succeed in that ambition then we have to undertake far-reaching reform to ensure that our tax system is simple, predictable, fair and supports work.

First and foremost, we are committed to creating the most competitive tax system in the G20—a tax system that supports work, encourages growth and keeps our most successful businesses here in the UK. While the previous Government increased taxes on small businesses, we have cut the tax rate on small companies to 20 per cent. While the previous Government wanted to increase national insurance on jobs, we have cut it, and while the previous Government sat idly by as our competitiveness drained away, we have already committed to reduce the headline rate of corporation tax to 23 per cent by 2014 because it is necessary to cut one of the most growth-impeding taxes there is. As we announced yesterday, we are going even further, cutting the rate of corporation tax to 22 per cent by 2014. That is a headline rate of corporation tax dramatically lower than our competitors and a spur for prosperity and job creation across the economy.

That is why we are also cutting the 50p rate of income tax. That rate was higher not just than the US, but higher than France, Italy and Germany—the highest in the G20. It was a rate that damaged our competitiveness while raising next to nothing in additional revenue. From April next year, the top rate of tax will be 45 per cent, restoring our competitiveness and galvanising our entrepreneurs and hard-working families. But at the same time, we will continue to ensure that those with the broadest shoulders carry the heaviest burden. That is why the Chancellor has announced a new cap on income tax reliefs that are currently uncapped. From next year, for anyone seeking to claim more than £50,000 of these reliefs in any one year, a cap will be set at 25 per cent of their income.

While the Chancellor ruled out a mansion tax, it is right that those with considerable assets do pay a fair share. That is why we are also introducing a new stamp duty land tax rate of 7 per cent on properties worth more than £2 million, and why we are tackling the abuse whereby people avoid stamp duty on their homes. Taking the cumulative tax, tax credit and benefit changes in the Budget together, it is the top decile of the income distribution that sees the largest reductions in income and the top quintile that makes the greatest contribution to reducing the deficit. That is exactly how it should be.

At the same time, we are taking decisive action to support working people on the lowest incomes. The Government believe that the best way to support working people on low incomes is to take them out of tax altogether. Next month, the personal allowance will rise to £8,105. Taken with the previous increase, that is more than 1 million low-earners taken out of tax. But we are going further and sooner. Yesterday, my right honourable friend the Chancellor announced the largest ever increase in the amount that people can earn tax-free—an increase from next April of £1,100 to £9,205. That means that around 2 million low-income earners will have been taken out of tax altogether and there will be a tax cut of £3.5 billion for working families. These are substantial tax reforms that demonstrate our commitment to tackling the deficit in a fair way.

But tax is only one part of our ambition to restore competitiveness, promote business and encourage investment. As your Lordships are well aware, this Government have already set out ambitious infrastructure plans, setting the stage for some £250 billion of investment in the next decade and beyond. That investment is critical to enabling Britain to compete with emerging giants in the global market. Yesterday, the Chancellor provided further details on those ambitions, for example confirming that Network Rail will extend the Northern Hub and improve the Manchester to Preston and Blackpool and Manchester to Bradford lines. We will live up to our commitment to devolve power and responsibility to local authorities. That is why we concluded a groundbreaking deal with Manchester to support £1.2 billion of investment in infrastructure, will support £150 million of tax increment financing to help local authorities promote development and are providing an extra £270 million to the Growing Places Fund to help local authorities unblock stalled infrastructure projects.

Just as we invest in our physical infrastructure, we have to invest in our digital infrastructure. That is why we are funding ultrafast broadband and wi-fi in 10 of the UK’s largest cities, providing £50 million to increase urban broadband in our smaller cities as well, and helping build on our long and rich history of scientific and technological leadership. It is right that we capitalise on and commercialise that leadership, which is why we went even further in the Budget to commit £100 million of support, with the private sector, for investment in major new university research facilities, £125 million towards making UK advanced manufacturing supply chains more competitive, and £60 million to establishing a UK centre for aerodynamics, creating a springboard for innovative businesses and entrepreneurs to lead our economic recovery. Government, local authorities, universities, businesses and entrepreneurs are working together to catalyse private-sector growth and innovation.

All this is of particular interest to my noble friend Lord Heseltine. I look forward with particular anticipation to his maiden speech today. My noble friend’s extraordinary work in Liverpool has rightly been recognised by that great city. Now, my noble friend has kindly agreed to review how spending departments and other public-sector bodies can better work with the private sector to support economic development.

Of course, while we can provide the right conditions for a private sector recovery, we also have do all we can to remove barriers to those businesses attempting to seize new opportunities. That is why we are simplifying the administration of tax for our smallest firms, consulting on a new cash basis for calculating tax for firms with turnover up to £77,000, making tax returns dramatically simpler for up to 3 million firms. Of course, bureaucracy does not end with tax. If we want those businesses to lead our economic recovery, then we have to match their “can do” attitude. That is why the Budget endorsed a fundamental overhaul of the planning system, replacing 1,000 pages of guidance with just 50, and introducing a presumption in favour of sustainable development and a new planning guarantee so that no decision should take more than 12 months, including appeals.

Just as we encourage businesses to expand at home, we want to encourage British businesses to expand overseas. It is a damning statistic that, over the past decade, our share of world exports shrank as Germany’s grew. In the past three years, UK exports have risen almost 30 per cent, rising above their pre-crisis peak, with exports to India and China nearly doubling from five years ago. But we can and must go further. By 2014-15, UK Trade and Investment will be working with 50,000 small firms a year to expand their sales abroad—double the current number. We have set the ambition to more than double the UK’s annual exports to £1 trillion by 2020.

At the same time, we have to ensure that our businesses have the finance to feed their ambition. In particular, it is critical that we support the small businesses that provide more than 50 per cent of private sector jobs and 30 per cent of private sector investment and which have the potential to become the global leaders of tomorrow. That is why we launched the National Loan Guarantee Scheme earlier this week to give smaller businesses with a turnover of up to £50 million access to cheaper loans. We have provided up to £20 billion of guarantees under the scheme. This Government’s deficit reduction strategy has earned market credibility and low interest rates, and this Government are ensuring that the full benefits of those low interest rates are passed on to businesses across the UK.

In conclusion, this Government are committed to making Britain the best place to start, grow and finance a business. We are providing businesses with the most competitive tax environment; access to low-cost finance, capitalising on record low gilt yields; reduced bureaucracy and simplified tax rules; access to emerging economic giants; world-leading physical and digital infrastructure; and investment in our technology and innovation future. That is why the OBR forecasts that between the start of 2011 and the start of 2017, 1.7 million jobs will be created in the market sector. That is why Nissan has decided to move new production to the north-east, creating more than 2,000 jobs in the region; why Jaguar Land Rover has confirmed that it is creating 1,000 new jobs in its Halewood factory, on top of the 1,000 new jobs in Solihull; why Tesco has announced that it will create 20,000 new jobs in the UK over the next two years; and why GlaxoSmithKline, Britain’s biggest pharmaceutical company, has today confirmed plans to invest more than £500 million and create up to 1,000 new jobs because of the tax incentives in the Budget.

This Government are building a sustainable and prosperous economy, a recovery that builds on our strengths across all regions of the country and all the creativity and productivity of our private sector. Whereas under the previous Government, the country borrowed its way into trouble, under this Government, we will earn our way out of trouble.

[Lord Eatwell]

My Lords, a year ago the Chancellor of the Exchequer presented a Budget for “enduring growth and jobs” and published a plan for growth that would,

“put fuel in the tank of the British economy”.

That was some fuel. Growth collapsed and unemployment rose by 150,000, and more than 1 million young people are now unemployed. This year, once again, the Chancellor has presented a Budget that he claims,

“helps those looking for work”,

and supports growth.

The auguries are not good. The OBR’s forecast for the growth of business investment this year is down from 7.7 per cent in November to nearly 0.7 per cent now. The forecast for growth of exports and for house-building is down. As for unemployment, another 150,000 are on the dole in 2012. No wonder that the OBR states that it has made no,

“material adjustments to our economy forecast”,

as a result of the Budget 2012 policy measures. In other words, the policy impact of the Budget on the prospects for growth and jobs is nil.

Why is the Government’s growth strategy such a spectacular failure? Why did last year’s plan for growth vanish without trace? Why does the plethora of encouraging-sounding micro-measures on energy, exports and science not make a scintilla of difference to the OBR’s growth forecast? The answer is provided by the Institute of Directors in its response to the Budget:

“The key factor blocking implementation of these”—

investment—

“plans is not cash, but confidence”.

How right it is. The Government simply do not seem to understand that it matters not how cheap finance might be, or even what the corporate tax rate might be; if companies believe that investment will yield no return, they will not invest. What is the point of investing if you have no confidence in the prospect of sales? You are simply going to lose your money.

The source of the Government’s central policy failure is revealed in a chart published in the Budget Statement. Chart 1.5 on page 20 shows what has happened to public sector net borrowing—the deficit—since 2005. Those of your Lordships who have had to suffer the interminable repetition by the noble Lord, Lord Sassoon, of the record deficit—we heard again today that the Government inherited it—may be somewhat surprised by this chart, for it shows that from 2005 to 2008 the deficit was falling from £40 billion a year to around £32 billion a year. Then, following the failure of Lehman Brothers in September 2008, the financial crisis devastated the public finances. A veritable financial tsunami cut revenues and increased spending, driving net borrowing to the peak, which we hear so often from the noble Lord, of £157 billion in May 2010.

In fact, the Government inherited a composite position: a perfectly sound financial stance, overlain by the financial consequences of the crisis. They chose to treat a unique post-war event as if it were due to policy excess. They threw the economy into reverse, devastated business confidence and cut the growth they inherited from 2 per cent to zero. That is the growth rate they inherited, and that is the consequence of their policies.

As an illustration of the Government’s folly, let us suppose that instead of a financial tsunami Britain had been hit by a real tsunami that destroyed 6 per cent of productive capacity, resulting in a sharp fall in tax revenues and an equally sharp rise in government expenditure. Would they then have chosen the path of austerity to restore the public finances? Of course not; they would have set about funding reconstruction. A sinking fund would have been established to spread the cost of restoring the economy, and would in consequence have restored the public finances, over a lengthy period. No one would have recommended bearing all the cost in just a few years, and no one would have imagined that reconstruction could be guided by market forces alone. What is the difference between this hypothetical tsunami and the all too real financial tsunami that the country has suffered? There is none, other than the Government’s failure to distinguish between a unique shock and a normal policy stance.

However, perhaps my characterisation of coalition policy as folly is a little too harsh. After all, the supposed need for austerity has provided the Government with the opportunity to dismantle the welfare state with a zeal that would never have been tolerated in normal times. To assess the impact of this budget on the bottom 50 per cent of incomes, it is necessary to include all those measures that were announced over the past year, in the 2011 Budget and in the Autumn Statement, which will come into effect next month—measures that the Institute for Fiscal Studies estimates will cost families with children an average of £530 per year.

Now set that figure of £530 against next year’s increase in the personal tax allowance announced in the Budget. Taking people out of tax sounds like a laudable goal until you remember that the poorest do not pay tax. Then consider the consequences carefully. As a result of this measure, the poorest 10 per cent of households will gain £10. The richest 10 per cent of households will benefit to the tune of £111. Indeed, of the overall cost of this measure, 70 per cent goes to the top half of the income distribution. Yet that is what Liberal Democrats call “progressive”.

Compare these crumbs thrown to the poor to the £1.6 billion of cuts to the working tax credit about to hit them this April—cuts that are supposed to increase the incentive to work, when there are no jobs. Yesterday, in addition to what has been done already, the Chancellor announced, and the noble Lord confirmed, that the coalition is planning a further £10 billion of cuts to the welfare budget. I never cease to be amazed at the savage pleasure that Tories and Liberal Democrats take in attacking the living standards of the poor. However, my credulity has been stretched to breaking point by their naked pandering to their rich friends.

It is worth examining in some detail the coalition’s case for the pre-announced cut in the 50p tax rate. HMRC’s evaluation of the impact of the tax is based on one year’s data—a sample that no self-respecting economist would ever rely on. Moreover, the self-assessment figures are clearly distorted by income being brought forward in the preceding tax year—a predominantly one-off effect.

Next, let us consider the Chancellor’s claim that as a result of changes to stamp duty and capping unlimited tax reliefs, which will yield about £500 million in a full year,

“we will be getting five times more money each and every year from the wealthiest in our society”.—[Official Report, Commons, 21/3/12; col. 806.]

The origins of this claim can be found in Table A2 of the HMRC review. The table shows that the 50p tax without what is politely called “behavioural impact”—tax avoidance—would yield £3 billion in a full year. However, extraordinarily the 45p tax will result in revenues of £2.9 billion, as the 5p difference will be enough to reverse the behavioural impact. So, while 50p triggers almost complete avoidance, 45p is paid with equanimity. If you believe that, you’ll believe anything.

There is more to come. A Government who quite rightly declare tax avoidance to be “morally repugnant” have created the perfect tax avoidance scheme. Everyone knows that the top rate will fall from 50p to 45p next year, so all those who shifted their income back to avoid the 50p rate last year will shift their income forward to avoid the 50p tax this year. This is a stealth subsidy on a grand scale. To pay for the stealth subsidy, there is the stealth tax on pensioners. Never can a £1 billion a year tax grab have been explained as “simplification” that helps the poor old dears who find the forms too complicated.

Table 2.1 of the Budget Statement provides a helpful guide to the cumulative effect of the measures taken by the Chancellor since assuming office. As of today, 90 per cent of his planned benefit cuts are still to come, resulting in a cumulative 6 per cent taken out of aggregate demand over the next four years. That is the government headwind that business in this country has to battle against.

So what are the overall effects of the Government’s policies? With total output still 4 per cent below the peak achieved in 2008, we will not return to the level of 2008 for another three years. They have transformed a shock as large as that experienced in 1930 into a depression that will last two years longer than the 1930s depression. It is no excuse to argue that everyone else is adopting the same policy. There is only one prize for the quickest lemming.

This country needs policies for growth and jobs. The coalition believes that the rich must be made richer to encourage them to work and the poor must be made poorer to encourage them to work. In the mean time, the economy stagnates, the prospects of growth retreat before our very eyes and the pain of fiscal consolidation intensifies. The Government’s stance, echoed in this mean little Budget, is fundamentally misconceived. Without measures to boost confidence in the growth of demand, supply side reforms, however worthy, will have a negligible impact. A new approach is needed. This Budget illustrates that the coalition has neither the imagination nor the will to meet that challenge.

[Lord De Mauley]

My Lords, perhaps I may respectfully remind noble Lords that this is a time-limited debate and that contributions, other than that of my noble friend the Minister and the noble Lord, Lord Davies of Oldham, are limited to 10 minutes.

[Lord Eatwell]

The noble Lord is mistaken. The Opposition have 12 minutes to reply to the opening statement by the noble Lord, Lord Sassoon.