EU: Budget Report

Lord Eatwell Excerpts

Thursday 25th April 2013 Lords Chamber

I reiterate that the convergence programme contains no new information, only information that has previously been presented to Parliament, information from the OBR’s economic and fiscal outlook and from the Budget which sets out the Government’s strategy to return the UK to sustainable growth. I commend the Motion to the House.

[Lord Eatwell]

My Lords, as the noble Lord, Lord Newby, made clear, the Government are required by the European Communities (Amendment) Act 1993 to submit an assessment of the UK’s convergence programme towards the economic structure of the eurozone. This requirement is perhaps more apt this year than in past years. On the broadest economic assessment, the Government’s convergence programme has been a great success: the eurozone is stagnant and so is the UK. Despite the welcome announcement of some growth in the past quarter, overall performance for the past six months has been growth of nil, and output is still 2.6% below the 1998 peak. Things have come to a pretty pass when growth of 0.6% per year is a cause for celebration. The Chancellor’s statement that this demonstrates that the UK is healing is surely delusional.

Moreover, the second Motion before us commends the Government’s economic stance to the European Union member states, declaring that they should,

“continue on the path of growth-friendly fiscal consolidation”—

I repeat: growth-friendly fiscal consolidation—in the week in which, as a result of UK-style austerity policies being implemented in the eurozone, even German industrial growth has shuddered to a halt. We know that the eurozone is stagnant and that the outcome of the Government’s policies has been to condemn Britain to the same fate. We have, indeed, converged. Therefore, the fundamental question raised by the Budget report and the OBR’s economic and fiscal outlook is whether growth-friendly fiscal consolidation is an economic oxymoron. Will the austerity policies advocated so consistently by this Government result in persistent stagnation, or will they restore the sustained economic growth of over 2% a year that this country desperately needs?

A casual reading of the OBR outlook would suggest that growth will be restored. After all, on page 8, it is argued:

“We expect the economy to grow by 2.3 per cent in 2015, 2.7 per cent in 2016 and 2.8 per cent in 2017”.

That all sounds pretty good, but a more careful reading of the report reveals a disturbing aspect of these predictions. On page 39, the OBR states:

“Our forecasts for medium-term growth are shaped by our estimate of the amount of spare capacity in the economy, and the speed with which it seems likely to be absorbed”.

It then lets the cat out of the bag by stating that,

“the output gap is assumed to narrow at a relatively gradual rate over the medium term”—

I repeat: assumed. In other words, the OBR has no causal explanation of the determination of the growth rates predicted in the medium term. It is merely assumed that by some unspecified mechanism the economy will return to a medium-term growth path when things get back to normal.

Once we realise that this future growth is assumed to happen, the OBR’s forecast for the future path of government borrowing is cast in an entirely new light. The fall in the deficit that is predicted from 2014 onwards is, the OBR makes clear, a function of the assumed increase in revenues consequent upon the assumed reappearance of economic growth. It is revenues that do all the heavy lifting, but those revenues are predicated on the assumption that the economy will return to medium-term growth. It is just an assumption; there is no evidence, no theory or causal explanation.

Once these characteristics of the OBR’s methodology are taken on board, a fundamental question mark is raised over the foundations of the Government’s economic policy, which is set out with admirable clarity on page 1 of the Budget report. They are:

“fiscal responsibility to deal with our debts with a credible deficit reduction plan … monetary activism to support demand … and … supply-side reform to help businesses create jobs”.

Those are the three components of what might be called the austerity strategy. Fundamental questions that are raised from this outline are: does fiscal consolidation cut the deficit, or does it simply cut growth, with little or no impact on the deficit? Is monetary activism an effective means of supporting demand? Are the Government implementing the supply-side reforms that will deliver lasting prosperity? I will deal with these questions in turn.

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[Lord Eatwell]

My Lords, I can maybe help the noble Baroness by confessing, “It was me that done it”. The objective at the time was to urge the then Government of John Major—Sir John Major as he is now—to make a report on the convergence procedure. The first time the debate took place, they elected not to do that but simply to send in the Budget report instead. I complained mightily, but of course to no avail. All Governments since then have taken this cop-out of simply sending off the Budget report instead of issuing a proper report on convergence.

--- Later in debate ---

[Lord Newby]

My Lords, I thank all noble Lords who have taken part in today’s debate. As the noble Lord, Lord Davies, said, we have covered everything, from macroeconomic theory to House of Lords procedure, and I will do my best to respond to as many of the issues raised as I can.

I will start with the noble Lords, Lord Eatwell and Lord Barnett, who both discussed growth, and in particular the growth forecast. The noble Lord, Lord Eatwell, suggested that the growth forecasts were wrong for theoretical reasons and because the assumptions that were made might be unsustainable. The noble Lord, Lord, Barnett, had a more fundamental problem, which was that he does not believe any growth forecasts, almost by definition. We see in today’s figures, with the 0.3% increase in GDP in the first quarter, that, as they say, if present trends continue the OBR will have got it wrong again. This time, however, it will have got it wrong on the downside instead of the upside. I hope we will not be too unhappy in those circumstances if they perhaps do not get it right. I agree with the noble Lord, Lord Barnett, that growth figures, or indeed any forecasts for five years ahead, have to be treated with a very large pinch of salt. However, there are only two alternatives. Either you do your best and work on the best that you can do, or you throw your hands up in horror. On balance, the Government prefer to do the former.

I will deal with a core assertion of the noble Lord, Lord Eatwell, that everything was fine in 2010, the economy was growing by 2%, and that if only the policies that were in operation then had been carried on, growth would have continued and possibly increased. In 2009-10 the borrowing was £158.9 billion, some 11.2% of GDP. At the time, my colleagues and I supported that borrowing on the basis that the Government were dealing with what Vince Cable called “a massive heart attack” to the economy, and so this had to be dealt with by very significant public expenditure to prevent a total collapse, and in particular, to shore up the banks. What I cannot accept is that that level of borrowing was sustainable in the medium term, and neither could Alistair Darling. A number of noble Lords have spoken in support of Alistair Darling’s economic policies, but remember that they were in two parts. There was a high level of immediate expenditure, but we passed a Bill that would have required by law the Labour Government, had they been re-elected, to halve the deficit by the current financial year. Does anybody believe that if Mr Darling had been in power, he could have continued putting money into the economy at anything like the rate he did in 2009-10 if he wanted to meet that outcome? It is inherently implausible. The question that was being debated as we reached the election in 2010 was not whether there would have to be reductions in public expenditure, but purely about their scale and size. Therefore, the suggestion that all was well in 2010 and that we could have continued with high levels of growth by pushing public sector borrowing along at an unsustainable level does not hold up.

[Lord Eatwell]

My Lords, the noble Lord has rather ably misrepresented what I said. I said that the economy was growing at 2%, which it was, and that the 2% growth would lead to a fall in the deficit, which it did. I did not say that at the time there was a need to increase the deficit. What happened was the destruction of business confidence by the foolish remarks of the new Chancellor of the Exchequer—the comparisons with Greece and so on—that led to a collapse in private sector investment and growth.

[Lord Newby]

My Lords, businessmen take some notice of politicians, but they do not make investment decisions purely—or even largely—on what politicians say. They look around the market and see what is happening elsewhere in the world. The speech of the noble Lord, Lord Eatwell, was notable in a number of respects. One was that although he used the word “Europe” in his first and last sentences, he did not refer at all to the crisis in the eurozone and to the fact, supported by the OBR, that one of the greatest problems and brakes on growth in the UK has been what happened to the eurozone. It is a crisis in which we had no part and that we were obviously unable to deal with. The eurozone countries are dealing with it themselves.

I will move to an area where I have a greater degree of agreement with the noble Lord, Lord Eatwell. It is the importance now of infrastructure expenditure as a source of growth going forward. There are two elements that are linked but separate. One is non-housing infrastructure and the other is housing infrastructure. On non-housing infrastructure, as the noble Lord will be aware, the Government have made available up to £40 billion of guarantees to enable private sector investment in key infrastructure. He will have seen that the policy bore fruit yesterday with the announcement that the Drax power station is using the facility to enable it to invest £75 million in upgrading the station. We hope and expect that this will be the first of many such deals.

Housing is a major problem. It was a major problem during the previous Parliament and remains so, to the extent that the demand for new housing is increasing by about 250,000 units a year. Nothing like that amount of housing has been built for many years. The Government are attempting to deal with this with a three-pronged approach. First, we will make it easier to get planning permission for new housing development. Secondly, we will increase demand. This is why we are supporting first-time buyers and others who want to take out mortgages in circumstances where the banks are requiring prohibitively large deposits from most people. Thirdly, we will improve the supply of housing. That is why, in addition to the £40 billion guarantee for other infrastructure, we have in place a £10 billion guarantee programme for housing.

There remains a major problem with getting the banks involved in funding developers, particularly small developers, and I am engaged in discussions with the BBA to see whether we can help. However, in terms of government support for new investment, both for housing and general infrastructure, which the noble Lord, Lord McFall, suggested we should be doing, I remind him that we have established the Green Investment Bank. We are also establishing a small business bank. This is a degree of banking activism that was absent during the time of the previous Government.