Budget Statement

Lord Gadhia Excerpts

Monday 4th December 2017 Lords Chamber

[Lord Gadhia (Non-Afl)]

My Lords, I have always thought that the annual Budget Statement brings out some of the very best and worst of punditry and pontification among the commentariat in our country. This year’s Budget was no exception. My nomination for best contribution goes to Paul Johnson of the Institute for Fiscal Studies who captured perfectly the constant deferral in achieving a balanced budget, when he noted that,

“there is an Augustinian tinge to these plans: ‘Lord make me pure, but not yet’”.

The worst contribution, I fear, has to be the Daily Mail headline that described our Chancellor as: “Eeyore no more!”. It was an amusing quip, but it missed the important distinction that AA Milne’s character is pessimistic by nature. In contrast, the Chancellor is forced to be cautious by circumstance.

The brutal truth is that in recent times, central bankers rather than Finance Ministers have been more important in determining the future of western economies through unprecedented quantitative easing, more than trebling central bank balance sheets from $4 trillion to $14 trillion over the past decade. Lack of fiscal room for manoeuvre has rendered the Treasury relatively impotent but, as Mark Carney reminds us, Bank of England independence should not be confused with omnipotence. Its mandate can deliver price and financial stability and provide a breathing space for adjustment, but cannot secure lasting prosperity, solve broader societal challenges or address intractable issues such as housing affordability or poor productivity.

It is only now, with the deficit reduction process more advanced and declining towards 1% of GDP by the end of the Parliament, that the baton is passing back from monetary to fiscal policy. This is the first Budget since the financial crisis where we have seen a modest loosening of the purse strings, amounting to almost £18 billion over the course of the Parliament, providing some hope for a future beyond austerity. I anticipate further modest rebalancing in future Budgets under the envelope of a gradually declining debt-to-GDP ratio from this year’s peak of 86.5%. This is the new compass guiding policy, rather than the elusive balanced budget, which I doubt will ever be achieved in our lifetimes.

The respected market economist, Mohamed El-Erian, eloquently described this transition as an important crossroads for the world economy, but it feels more like a tightrope than a smooth tarmac road. With our continuing twin deficits, the current account tracking between 4% and 6% of GDP in the red—by far the largest in the G7—coupled with high household debt, now running at 150% of disposable income, we remain beholden to the kindness of strangers for our funding. Any spare debt capacity and fiscal space that the Chancellor has drawn on has been painfully created, and those who believe that we can somehow let rip and borrow significantly more are being naive, reckless or both.

The other big news of the Budget was, of course, the revision to productivity and the knock-on impact on growth forecasts, resulting in an economy that will be about £42 billion smaller by 2022 than previously expected in March—a number that is, incidentally, almost identical to our annual net interest cost for servicing the national debt. The reality is that Britain’s productivity puzzle is not news. The most salutary lesson is: do not extrapolate from the past. The previous OBR forecasts assumed that productivity growth would continue at levels experienced before the financial crash, but that has proved wishful thinking.

However, a “slower for longer” growth trajectory is clearly unsatisfactory in meeting expectations of higher living standards and better public services. The disturbing talk of a Japanese-style lost decade—or longer—will, I hope, concentrate minds on addressing the fundamentals. It is therefore welcome to see the industrial strategy co-ordinated closely with the Budget.

The two biggest influences for improving productivity are skills and investment levels and, in my remaining time, I shall make a few remarks about the latter. The most notable outcome of the Budget is that public sector investment is due to rise to 2.4% of national income, which, if sustained, would be the highest level in 40 years. It seems as though 2.4% is becoming an auspicious number for the Government, because it is, by coincidence, the target set for total R&D investment as a proportion of GDP by 2027. These twin investment goals are important stakes in the ground. As we seek to finance more innovation, which is intrinsically more risky, it requires more equity rather than debt. Start-ups are well aware of this, but our SMEs and scale-ups, in particular, need greater access to risk capital.

The Government’s Patient Capital Review did excellent work in identifying this funding gap, and estimates that we could easily double, and perhaps even treble, the current £3 billion deployed in scale-up businesses annually. The Budget contained a range of measures to crowd in private sector equity investment with the aim of unlocking more than £20 billion of new capital for innovative firms over the next 10 years. This is much needed rocket fuel for scale-up Britain, with its associated multiplier effects on jobs and livelihoods.

I end with some brief comments about the current market environment. Against a background of unusually synchronised global economic growth, to which my noble friend Lord O’Neill of Gatley referred, financial markets are enjoying a period of exceptionally benign conditions. The VIX index, which measures market volatility and is popularly known as the fear gauge, has been trading at about half its long-term average during much of this year but is now ticking back up again. Valuation levels across virtually all asset classes are at relative highs. In view of this, a market correction is more likely than not in 2018, which could lead to real economy effects. We should recognise that any impact on the UK economy could be disproportionate, as animal spirits are already sedated by Brexit uncertainty.

We must also recognise that Brexit remains an experiment. We simply do not know what happens to an economy when it unwinds a close integration with its nearest neighbours and, at least in the short term, becomes less globalised, but in 10 or 15 years’ time it is more likely that the effects of the so-called fourth industrial revolution will heavily outweigh those nearer-term impacts.

The Chancellor did not have a particularly high bar to meet for this Budget. His task was essentially to deliver a set of measures that did not unravel in short order. Spending a little more in a targeted way and avoiding significant or contentious tax rises has allowed him to meet this narrow objective, but he should be congratulated on having one eye on the future and using whatever limited wiggle room he had to invest in our future prosperity.