Budget Statement

Lord Desai Excerpts

Thursday 27th March 2014 Lords Chamber

[Lord Desai (Lab)]

My Lords, what a difference one year makes. Last year, we were all worried about a triple-dip recession and the Chancellor’s Budget was a PR disaster of a kind unknown before. This year, we have had only the small accident relating to bingo and beer, forgetting that we are “all in this together”. Perhaps baccarat and Bollinger should also have been offered relief.

This year, we have recovered. I have been saying for some time—indeed, since before this Government came to power—that, given the depth of the recession that we faced, we could not but have a very hard austerity policy to eliminate the deficit as soon as possible. It was not a very popular thing to say. I said it in a letter in the Sunday Times in February 2010, along with the noble Lord, Lord Turnbull—the only other Member of this House to do so—and many economists, and there were long letters from various of my Keynesian friends saying that I had taken leave of my senses. However, I believe that the primary task of any Government taking office in May 2010 was to eliminate the deficit as soon as possible. It has to be said of the Chancellor that, unlike all his predecessors in the post-war period, he is the only one who has stuck to a strategy which he himself has outlined. Most other Chancellors have deviated from the strategies that they have put forward.

It is not all over yet. We are not out of trouble and we are going to have perhaps another five years of pretty tight economic conditions before we get back to what we believe to be the new normal. The noble Viscount, Lord Eccles, asked why our recession was so deep compared with everybody else’s. That is explained quite a bit by the fact that when we began to lose manufacturing in the 1970s, we replaced it partly with public sector jobs and partly with service sector jobs of two kinds. The higher-paid jobs, for the highly educated, were in the City and the lower-paid jobs were in retail and so on. The people who could not achieve the kind of income that they were making in manufacturing realised that they could sustain their living standards only by borrowing. Therefore, from roughly 1990 to 2007 we sustained our living standards by borrowing. However, the growth rate was not sustainable and it was not sustained, and this economy will not get back to that rate.

It is very important to understand—many people say this—that, had we gone on growing after 2008 at the rate that we had been, the gap today would be 15%. How do we know that we could not have sustained that growth rate? We know because the fundamentals of that rate were very weak. Therefore, we now have to form a new growth path where the rate will not necessarily be as high as the one we were used to. One problem that we will have to face is where that growth is to come from. It will not be easy to bring back manufacturing. People imagine that we have a blank page on which to bring back manufacturing, but there are substantial economies competing with us, especially the emerging economies, which are very good at manufacturing—not only in the low-tech and medium-tech industries but even in high-tech industries. Therefore, we are competing against Brazil, China, India, Indonesia and so on.

If we are to bring back manufacturing, we have to find out where our comparative advantage lies. It may be that, as my noble friend Lord Haskel pointed out, it lies in innovations relating to abstract things such as apps and computers and so on. There, our real comparative advantage is in ingenuity rather than in manufacturing as such. Therefore, when we have made the austerity adjustment, we need to think through what we are going to grow with. That will require a large investment in skilling the population and so on, and it will not be an easy task.

One of the things that many people say is that the Government could have borrowed more and could have spent more. The answer is that the Government did borrow more. They have often been criticised for the debt-to-GDP ratio being very high and public debt having doubled. Until we get rid of the deficit, debt goes on rising. The Government have not borrowed on the fiscal account and spent the money but they have borrowed through the Bank of England. Borrowing through the Bank of England is what has kept the interest rates low. Such recovery as we have had is because low interest rates have meant that a variety of zombie firms survived and households feel richer than they really are.

To that extent, QE has given us some sort of relief but it is misleading relief. At some stage we will have to taper off from what the Bank of England has done, and whether we adopt the suggestion of the noble Lord, Lord Myners, is something that I hope the Minister will come back to when he replies from the Dispatch Box. It is an interesting idea that we cancel one part of the debt with another.

That said, the problem will remain that we will have to start producing a fiscal surplus one of these days. It will not be possible that we, having got to zero deficit, start spending once again. The crucial point is that there was a time in the 1960s, 1970s and 1980s when public spending had a large multiplier. The reason for that was that we had a good demographic situation and healthy manufacturing industries. Those two conditions allowed for the multiplier to be high. We no longer have a good demographic situation and we no longer have a manufacturing industry, except for high-tech industry. Therefore, multipliers will be rather low. This is as true of us as it is of many other economies. We are in a post-Keynesian situation, and we will stay there. To the extent that we can steer the economy, we will have to rely much more on the private economy itself having the health and the capacity to be able to generate its own growth, rather than think that someone can crank a handle and growth will occur.

That era ended in 2008 and is not coming back. There has been a lot of debate about productivity growth. I remember from when I was doing this sort of thing professionally, that in the public sector productivity is measured by salary. The output of a public sector worker is what that public sector work gets paid. The output of a private sector worker has a wage component and then there is a profit component. Productivity can be measured when we are actually producing solid things. It is about the hours worked and the value of the output. It is very difficult to measure productivity in the public sector economy. What has happened is that a number of public sector workers have been shifted from the public sector to the private sector. The high salaries that employees used to make, which we thought of as high productivity, have been swapped for private sector jobs. They are probably being paid less and indeed, their productivity, as measured, would be even less than the wage they get.

The productivity gap that we are all worried about may be a statistical illusion. This is my conjecture and it ought to be checked out by people who do this sort of thing for a living, which I no longer do. We ought not be misled into thinking that either productivity is too low or that we do not have enough spare capacity in the system, and so on. I do not know what the spare capacity in the economy is, or whether it is even a valid concept any longer. If we did not have spare capacity and were having a recovery, we should have inflation, but we do not have inflation. If we have a positive growth rate of, say 2.5%, and we do not have inflation, there must either be spare capacity somewhere or we are in a very happy position. These valid questions open up how much the structure of the economy has changed. If we can begin to grasp that, we will be better off.

I have one final point. It is very tempting to think that the people who pay more than 40% tax are middle class; they are not. They are a minority of the population. Please measure class at least by deciles of income and exclude the top three deciles and the bottom three deciles, so that the people in the middle do not pay 40%. Please do not be kind to 40% taxpayers. Please do not be kind to people who pay inheritance tax. Things are bad enough as they are. We do not have to exacerbate inequality or give money to people who do not deserve it. Both things are an inefficient use of money.