Budget Statement

Lord Eatwell Excerpts

Thursday 21st March 2013 Lords Chamber

[Lord Eatwell]

My Lords, I am grateful to the noble Lord for introducing this debate on the Budget Statement. He demonstrated that it was not a boring Budget. Indeed, the Budget was—let us say—revelatory. It revealed that, try as you might, you cannot spin economic failure.

Two weeks ago the Prime Minister declared that,

“there are signs that our plan is beginning to work”.

The reality is that the economy is stuck in recession—or as near recession as makes no difference. Just three months ago the OBR, an organisation that always looks on the brighter side of life, was forecasting growth of more than 1% this year. Now it has had to face up to reality and halve its growth forecast.

The Budget Statement also revealed that austerity does not cut deficits. Despite all the Government’s efforts, the deficit is not falling. Taking out special measures, in 2012 it was £121 billion; in 2013, £120.9 billion—a lot of work must have gone into shaving off that £100 million—and in 2014, £199.8 billion, all within the slightest margin of error. The reason deficits are not falling is obvious to all: no growth in output means no growth in tax revenues and significant pressure on social spending.

There was one further major revelation. This Budget of no growth, stagnant deficit and falling living standards revealed that the Treasury has run out of ideas. It does not have a clue what to do next so it is handing economic policy over to the Bank of England in the hope that it might think of something, even though all the evidence at home and abroad suggests that monetary policy is ineffective in the face of prolonged recession.

The scale of our problems is indeed daunting. They will not be solved by a £3 billion infrastructure programme, postponed for two years. In his Budget speech, the Chancellor boasted that,

“we can provide the economy with the infrastructure it needs”.

The noble Lord has special responsibility for the infrastructure programme. Will he tell us how much was actually spent on infrastructure projects in 2012, and how much will actually be spent in 2013—not allocated, not “in the pipeline”, but actually spent? More generally, will he offer his diagnosis of why the Government’s infrastructure policy has so far failed so dismally?

The growth problem will not be solved by policies, postponed to 2014, designed to pump money into the housing market. The shared equity scheme will only partially offset the deep cuts in capital grants for social housing in the previous spending review, and the new mortgage guarantee, available for new-build and existing properties, is more likely to give a further twist to the house price spiral than provide the major new-build stimulus that the construction industry needs. Perhaps when the noble Lord sums up, he will tell us the Treasury’s estimate of the impact of the guarantee scheme on house prices, how much of the expenditure will be a dead weight loss—funding purchases that would have taken place anyway—and the Treasury’s estimate of the cost of this scheme.

The growth problem will not be solved by the cut in corporation tax to 20%, another measure postponed to 2015. As for business investment, the Government just do not seem to understand that the key stimulus to investment is the prospect of demand for the goods and services that the investment will produce. It does not matter how low taxes or interest rates are if investment does not result in a marketable product for which there is growing demand. Yet, as the Chancellor himself admitted, this Budget does nothing to stimulate overall demand in the economy. The OBR forecasts that real wages will fall in 2013 and not recover for two years thereafter. The continuing squeeze on households severely curtails the prospect of any growth in demand, a fact to which our increasingly devastated high streets are an eloquent testimony.

I return to corporation tax. The Chancellor boasted that “headline” UK corporation tax will be far lower than headline corporation tax in Germany or the United States. Did not this boast give him some food for thought? Has he not noticed that the US economy, despite political problems between President and Congress, has sustained its underlying dynamism through the crisis and has already grown to levels of output way above the pre-crisis peak, while UK output languishes 3% below the peak? Has he not noticed the superior industrial performance of Germany, even among the difficulties of the eurozone? Has he not thought to ask himself, “If their taxes are so much higher than ours, how come they are doing so much better than we are?”.

The British economy is in dire straits. What is needed right now is a radical policy of expanding demand, financial reform and investment in the well-springs of growth. In the housing market, the Chancellor has accepted the argument for a boost to demand. Why has he not followed the logic of his expansionist policies in housing and stimulated demand on a wider canvas by cutting VAT and channelling more funding to the poor, who possess the great economic virtue of spending every pound that they receive?

The financial services industry, the mother of the mess that we are in, remains unreformed. The banking Bill that will come before this House later in the year is all about protecting the banks from themselves. There is nothing in it about the sort of banks that we need for Britain’s future. We need a financial system that channels savings to industry, large and small; we need a financial system that understands the needs of local communities and local industry; and we need a supply-side policy that does not just hope that private finance will be seduced into investment in infrastructure, science and technology and skills but actually gets on with the job. In this country, we are blessed with some of the greatest science-based universities in the world, yet, with just a few notable exceptions, we are steadily losing world share in cutting-edge applications across all industries, large and small, traditional and novel. Reversing that downward trend will require a fundamental rethink of company structures, company finances, supply chains and incentives. We need to learn the lesson from the US, Germany and Scandinavia that partnership and a sense of purpose between government and private industry is the bedrock of sustained growth.

The reaction from the Chancellor to these sorts of proposals is predictable. He said in his Budget speech that such ideas are from,

“people who seem to think that the way to borrow less is to borrow more”.—[Official Report, Commons, 20/3/13; col. 934.]

Has he not noticed that it is his policies that are leading to more borrowing and prolonged recession? Did he not read the OBR’s damning assessment of the Budget? It states:

“Given … the fact that the overall net effect of these changes is relatively small, we have not adjusted our overall GDP forecast”.

In other words, the Budget’s contribution to growth is nil and the Budget’s contribution to deficit reduction is nil.

The Prime Minister’s speech on the economy two weeks ago revealed him to be an economic fantasist. The Budget has told us even more about the Chancellor. He declared yesterday:

“We have got a plan to cut our structural deficit. Our … credibility comes from delivering that plan, not altering it with every forecast”.—[Official Report, Commons, 20/3/13; col. 934.]

He cannot admit that no growth and no cut to the deficit is not a forecast; it is reality. He cannot admit failure, face up to the real world and change course.

Albert Einstein defined insanity, as,

“doing the same thing over and over again and expecting different results”.

Well, the Chancellor is not mad—far from it. It is just that he has not a clue about what to do next, and he is willing to sacrifice the British economy on the altar of his own political career.

--- Later in debate ---

[Lord Higgins]

My Lords, myths can be important in politics, and there is now a pretty well established myth that last year’s Budget was a bad Budget. In reality, all the good news came out the day before Budget Day and therefore there was nothing left but criticism on Budget Day itself.

I am sorry that the Chancellor does not appear to have learnt the lesson from that. It is vital that we reassert the convention in Parliament that budgetary matters are first announced to the House of Commons. There are good reasons for that. Obviously it is the right of the House of Commons to receive the news first, but it also prevents the risk of market-sensitive information getting into the public domain and someone making a fortune out of it. I was therefore very concerned by the Evening Standard story last night. I have to say that, obviously in a post-Leveson mood, it made an abject apology in later editions for what was on the front page of the first edition, and that is to be welcomed. It emerged very clearly that it was in receipt of an embargoed copy of the speech. I believe that is totally wrong, not least because it discriminates between some journalists and others, and because it endangers the basic principle. I hope the Minister will give me an assurance that he will speak to his right honourable friend the Chancellor and ensure that that practice is abandoned forthwith and that the traditional view—which was exemplified by Hugh Dalton when he resigned as Chancellor when all he did was to have a quick word as he was going into the Chamber—will prevail.

[Lord Eatwell]

This side totally support the remarks just made by the noble Lord, Lord Higgins.

[Lord Higgins]

I am grateful to the noble Lord. I think it should be a unanimous view in Parliament.

I believe this is a very good Budget that does a considerable amount to encourage growth. I particularly welcome, first, the help-to-buy proposals, both of them, which will ensure that there is a higher degree of growth than there would otherwise be. The Minister, in a speech that gave the impression that he wrote it himself, rightly said that there are risks here. It is not clear, if one is going to give guarantees to homebuyers—if one is going to subsidise in this way—that they are really able to meet the responsibilities of taking out a mortgage. We do not want to go back to the disasters of Northern Rock and so on, of which many of us in this House bear the scars, but both schemes are very good and greatly to be welcomed.

I very much welcome the proposal about helping small businesses by removing what the Chancellor rightly described as the jobs tax. Many small businesses are reluctant to take on a few more employees because of the up-front costs. I am sure that the employment allowance will be of considerable help to the state of the economy.

I now turn to the main point with which we are all concerned: the deficit. The Minister referred to it. What was clear from the business about the AAA rating and so on is that we have to press ahead. It is very good news that the slogan that had been emerging, “We have cut the deficit by a quarter”, can now be changed to “We have cut the deficit to a third”, but it still means that we are continuing to borrow more at two-thirds of the rate that the previous, disastrous, Labour Government were maintaining. Therefore, we need to look very carefully at what is being said.

If I may make a rather semantic point, in his speech the Chancellor referred to “cutting borrowing”. He should, of course, have said, “We have been successful in cutting extra borrowing”. Total borrowing continues to go up, and that is of serious concern, not least in relation to monetary policy. It is very important that we look at the new relationship that appears to be developing with the Bank of England. I was always very sceptical of what was always hailed as Gordon Brown’s great achievement of giving independence to the Bank of England because it means that we are handing over more and more power to a small group of people who are totally unaccountable with regard to one of the two main levers of economic management. I hope that we can make progress on this.

On the proposals the Chancellor is making, we certainly need to look at the inflation target and at whether other considerations can be taken into account. Having said that, it would be helpful to move now from what was just an interest rate policy for many years after the Gordon Brown change to a policy that is concerned with controlling the money supply, which is what one really means by “a monetary policy”. I remain a strong supporter of quantitative easing despite the unfortunate side-effects, particularly on private sector pension schemes and so on. If one is not able to do anything because of the deficit problem on the fiscal side, we really must have an active monetary policy. In that context, greater co-ordination between the Treasury and new Bank governor will be of crucial importance. As I have said time and again, and I commend this to my noble friend on the Front Bench, it is absurd that the Treasury is working to one set of economic forecasts and the Bank of England to another. We should have a more unified policy on the link between the monetary and fiscal sides of economic management.

Overall, however, the Chancellor has done everything that could possibly have been done to be helpful, to stimulate growth and to ensure that we continue to do so. However, we must continue to do all that we can to cut the deficit. Immediately after the election and the formation of the coalition, I stressed how incredibly difficult this was going to be on both the tax and expenditure sides. I have been proved absolutely right. We have to go on in the same way. Labour still seems to be saying that we are cutting too much too soon. I am afraid that it is absolutely clear that we have not cut enough fast enough. We must therefore press ahead with that.