Finance (No. 3) Bill

Lord Desai Excerpts

Monday 18th July 2011 Lords Chamber

[Lord Desai]

My Lords, I welcome the debate. I have nothing particular to add to what other noble Lords have said about the interesting report of the noble Lord, Lord MacGregor, which I welcome. I especially welcome the transparency and the consultation that the Government have introduced in deciding their tax legislation.

I want to concentrate on why the recovery is so slow and faltering. That is an important question that we all ought to take up. The general proposition in many quarters is that somehow the Government have gone wrong and they need a plan B—or C or D, I do not know. I think that we face a very different kind of crisis from those we are normally used to. Recessions normally happen because of a lack of effective demand, and we know the standard games and policies that we have to follow. We got into this crisis not because of a lack of effective demand but because of overspending and overborrowing. When you have to carry an economy through a crisis in which the major consideration is deleveraging by both households and Governments, you need a very different kind of strategy from the one you normally encounter in a standard recession.

That said, we do not have a road map for such crises. Normally all economic theory is about the other kind of crisis. There is a paradoxical conclusion that we might follow. If the task is to deleverage, we ought to hurry that up. That leads to the idea that we should not have low interest rates at all; we should have proper high interest rates so that households that falsely think they can afford their mortgages should be told that they have negative equity and cannot afford them. That is a cruel thing to say, but right now we are postponing deleveraging rather than assisting it. That is a choice that the Government can make.

We have, of course, decided to deleverage public debt at a rate that is now known, and the task of eliminating the deficit within five years has been adopted. The problem of deleveraging is not just a problem of the recession. We are observing from the crises of both pensions and elderly care that we, not just in the UK but in western economies, are suffering from a serious undersaving problem. We have been undersaving for far too long and we will completely have to change our habits of thinking, living, taxes, and so on. The task of the tax system should be as far as possible to tax consumption and not income, to tax pollution but not work. I do not know at what stage we will get into those kinds of discussion. I welcome the proposal to merge income tax and national insurance contributions. I have never understood national insurance contributions because they are a tax on earned income, while unearned income gets taxed less, which is a very peculiar thing that successive Governments have tolerated.

If we are to face up to the challenge of saving seriously, we will have to adopt something like what Lord Kaldor talked about in his expenditure tax proposal. We may have to move to an expenditure tax proposal as that would reward savings much more than we have done so far. We have been led to think that expenditure leads to income. I am sorry that the noble Lord, Lord Skidelsky, is not in his place as we have had long arguments about this. If you think that expenditure leads to income and income then leads to output that leads to inward gain, we have a certain trajectory. Our problem is that we cannot go through the politics of income growth if there is consumption expenditure.

The gap is in investment. The Government face the challenge that despite the quantitative easing that they have been practising for a couple of years, the money is there but no one is investing. That is very much the reason why the money supply is not expanding, as the noble Lord, Lord Higgins, said. People are not borrowing the money that is available. Therefore, there is a lack of investment by the private sector despite the fact that interest rates are low and people should be encouraged to invest. This is a difficult thing to do. I do not believe that it is necessarily within the Government’s control to encourage investment if they can no longer pick winners or horses that will start a race. However, the Government ought to concentrate on how they can give a certain boost to new investment proposals, perhaps in green technology. Unless they get an investment programme going, they will find that even if people decide to save they will be frustrated.

Whichever way the Government go—I welcome some of the taxation proposals—they should be aware that in the short term and in the long run the crisis arises from undersaving. We have to try to correct our overborrowing and then provide for a proper level of saving to finance the problems created by longer life expectancy and people needing elderly care. If these two challenges are properly thought through and met, we may yet have a prosperous future.