Budget Statement

Lord Hain Excerpts

Wednesday 3rd November 2021 Grand Committee

[Lord Hain (Lab)]

My Lords, I apologise to the Committee, as I already have to the Chair, because the group of amendments on which I have to speak in the House is one group away, so I may have to miss some of the wind-ups. I was here for all the opening speeches and remained for the debate.

The Chancellor delivered his Budget speech with his customary panache and began to bask in the warm glow of appreciation from his colleagues. How awful it was for him then to hear commentators instantly liken it to a Gordon Brown Budget—not the kind of talk likely to enhance his appeal among Tory traditionalists. Its one saving grace was that the Institute for Fiscal Studies’ Director Paul Johnson contrasted it to a George Osborne Budget, which was much more to the Chancellor’s liking.

This was in fact a see-saw Budget, with a downside in March and September when the Chancellor announced record tax rises, and an upside a few days ago when he topped up his earlier public spending plans. Grasping the implications of the Budget for the economy means assessing both sides of his balance sheet, and they make for worrying reading.

In my view, this Budget bears closer comparison to George Osborne’s 2010 Budget than it has received, despite significant differences, because Chancellor Sunak is following in George Osborne’s footsteps in one key respect: he is withdrawing a major fiscal stimulus that has kept the economy alive. The way he is doing it is entirely novel for a Tory Chancellor; it is the reason why there are rumblings of discontent in Tory tea rooms and outside Parliament among what Harold Macmillan used to call “the party in the country”. George Osborne squeezed spending in the British economy by following the 80:20 rule: 80% public spending cuts and 20% tax increases. Chancellor Sunak’s strategy is very different: he is withdrawing fiscal stimulus through raising taxes by more than he is raising public spending.

The key distinction, which most commentators have overlooked, is that Rishi Sunak is a man in a hurry. He is withdrawing fiscal support for the economy twice as fast as George Osborne did. George Osborne took two years to withdraw 46% of the stimulus package with which Alistair Darling had tackled the 2008 global financial crisis. Rishi Sunak is taking two years to withdraw 85% of his own 2020 fiscal stimulus. In my view, that runs the same risk that George Osborne fell victim to: of causing the economy to lose momentum, real incomes to stagnate, and debt and deficit targets to be missed by a mile. Osborne’s strategy caused economic growth to halve in 2011 and come to almost a complete stop in 2012.

Many economists fear that Rishi Sunak may be running the same risk now. Martin Sandbu, European economics commentator with the Financial Times, has pointed to the pre-Budget IMF data showing that the UK had already pencilled in a much stronger fiscal contraction than its G7 or eurozone peers on average. Office for Budget Responsibility forecasts now show UK economic growth tailing off to 2% in two years and to only 1.3% in 2024, which could easily slip. The Labour decade before the 2008 global credit crunch saw UK growth average 3% per year, which is roughly double Chancellor Sunak’s plans. That Labour achievement is the least we should be aiming for now to begin to deliver a high-productivity, high-wage economy.

I support the pre-Budget open letter from 70 economists and nine think tanks calling for continued fiscal support for the economy, specifically a stimulus package of £70 billion to £90 billion in annual spending for three years, focused on green investment, social care and childcare. That would be closer to the example of vigorous action set in the US by President Biden and pressed by shadow Chancellor Rachel Reeves in an excellent speech during the Budget last week.

The American economy is recovering from the pandemic more quickly than the UK’s because the US Government have taken much stronger discretionary action to boost the US economy. US GDP has already returned to its pre-pandemic level. Premature withdrawal of fiscal support is why Britain took longer than America and Germany to recover from the 2008 global financial crisis. The signs are already there that we are doing so again. This time we faced two added blows, from the pandemic and Brexit, with Brexit hitting the economy between two and six times as hard as the pandemic, depending on which economist you talk to. The forecasts for real household incomes look dire, especially for those on low incomes, hence the critical importance of the noble Baroness’s amendment to the social security legislation yesterday, which I hope the Government accept.

The Tory traditionalists who I mentioned at the start of my speech profess to hate high government debt and budget deficits. They crave balanced budgets, which they somehow associate with Margaret Thatcher. David Davis MP, writing in the Mail on Sunday, wonders whether Rishi Sunak can “match” her “brilliance”. Someone should tell Mr Davis that in 11 years in Downing Street Margaret Thatcher delivered only two Budget surpluses. Who delivered three in 13 years in office? Gordon Brown. Be careful what you wish for.