Economy: Budget Statement

Lord Higgins Excerpts

Thursday 22nd March 2012 Lords Chamber

[Lord Higgins]

My Lords, this is an excellent and imaginative Budget and I strongly support all of what is in it, but it is singularly unfortunate that the presentation should have been spoilt by what seems to me to be a disregard for the convention that Parliament—that is to say, the House of Commons—should be the first to be told what is in the Budget and its details. It is a long time since Hugh Dalton resigned simply because he spoke to a journalist on his way into the Chamber to announce his Budget, but none the less, I believe that the convention remains extremely important—not least because of the dangers that arise with market-sensitive information in the Budget. In that context, I was worried by the front page of the Financial Times yesterday, which states:

“Mr Osborne will confirm that he is cutting the top rate of income tax from 50p to 45p, but the wealthy will be hit by a punitive array of higher levies on the purchase of expensive homes and a crackdown on avoidance schemes.

The chancellor will introduce a 7 per cent stamp duty rate on sales of property costing more than £2 million—according to officials involved in the Budget”.

That is a very worrying statement indeed. We must not allow this kind of thing to happen. I do not know whether my noble friend would care to comment on that.

The other thing is that clearly, in public relations terms, it was a disaster. Almost everything was released in advance, except for the proposals on pensions, so almost every front page this morning carries scathing remarks about pensions although, as my noble friend just said, pensioners have in fact been hit less than other taxpayers. Those headlines are misleading, but that is a worrying development.

On the specific proposals, I am very pleased to see the rise in the tax threshold which will take people completely out of tax, which is always a great advantage if it is possible. I believe that we must move more in that direction. Equally, I believe that the cut in corporation tax is very important if we are to get growth. It certainly makes us competitive with our European partners.

I am also pleased about what the Chancellor did not do. He did not, as the Labour Party had been suggesting, cut the basic rate of VAT. It is true that it has gone up, since I introduced VAT through the House of Commons at 10 per cent, to 20 per cent, but none the less, it seems to me that the present rate is necessary. I am particularly glad that the Chancellor went out of his way to reaffirm the present structure of VAT, which gives zero rating to those items most important in the household budget, something which no other VAT in Europe does. All of that is very good news.

We are debating the effect of the Budget on the economy. The reality is that the effect of the Budget on the economy will be virtually nil. It is a fiscal-neutral Budget. This is a micro tax-managing Budget—in many admirable ways—not in any way a major macroeconomic management Budget. Therefore, the reality is that the weight of economic management has been shifted from fiscal management, from the Budget, on to monetary policy. There has been a very big change in that.

I originally deplored the fact that what was called the Monetary Policy Committee was not a monetary policy committee at all, it was an interest rate committee. It went on for years and years fiddling around with one particular interest rate, rather than being concerned with the supply of money. One worry has been that monetary policy in the sense of control of supply has, until recently and the advent of quantitative easing, been virtually ignored. We now have quantitative easing. Throughout, I have come out strongly in favour of it. Given the other restraints, given the level of interest rates, it seems to me that that must be the right approach.

I was therefore delighted to see a beautifully written article—I could not possibly have written it anywhere near as well—by Mr Martin Wolf in the Financial Times of 15 March. It said absolutely everything which ought to be argued on quantitative easing. He poses two particular questions: first, is it effective and, secondly, is it dangerous? As the OBR report states, it remains to be seen whether this round of quantitative easing is as effective as the previous one, but it has certainly assisted in the growth of the economy. That is something which we should all welcome. The risks depend on inflation, but we have to take that in the context of the general state of the economy. The OBR report contains fascinating passages on that. In a section on monetary policy, it specifically points out that we must be very careful in that regard, but one has to take into account on the inflation risk the level of excess capacity in the economy. The OBR proposes, and I am sure it is right, that we should gradually increase the level of demand through monetary means until we have mopped up a large part of that excess capacity, particularly in terms of unemployment. It is none the less very important, to the point where it does become an inflation risk, that other action should be taken.

In that context, I have some queries about the way in which quantitative easing is being operated. It is undoubtedly having adverse effects, particularly on pension funds, as lower interest rates affect the pension funds’ ability to fund future pensions. Perhaps at some stage we should ask whether quantitative easing as currently operated is the right way of increasing the money supply. There might be other effective methods that do not have the adverse effects to which I referred. As we are, let us make no bones about it, printing money, dare I say that it might even be a good idea simply to print it and distribute it on an equitable basis across the population? We have, after all, an election coming up fairly soon.

Be that as it may, I think that there is some confusion about the way in which quantitative easing is operating. It is not in the least bit clear whether the Bank’s purchase of gilts from the market is the right way to do it. The tendency is for the banks to use the money to build up their balance sheets rather than to extend it in loans to small or other businesses. None the less, it is not at all clear what the Bank is going to do with these gilt-edged securities. Will it hold them in reserve until such time as the economy starts to overheat and it needs to take the opposite action from that which it is taking at present, or should it simply cancel the gilts in its portfolio? I have searched in vain throughout the mass of documentation to find out what, in pure book-keeping terms, is really happening with this operation in relation to the Debt Management Office and so on. Perhaps we should look at that in order to illuminate what is really going on.

Overall, this is an excellent Budget. I believe that it does as much as possible in the circumstances to help particular individuals and, on the economy, to increase our competitiveness abroad. Europe is still a terrible risk. At least it has dealt with the debt problem for the moment. However, it has totally failed so far to deal with the exchange rate problem in the European Union. That is certainly a big risk, which we face.

--- Later in debate ---

[Lord Sassoon]

My Lords, I welcome the debate that we have had today and the valuable contributions that have been made, including particularly those from noble Lords in all parts of the House who have drawn attention to the many initiatives in the Budget that I did not have time to highlight in my opening speech. I am grateful for the opportunity to reply to as many of the points raised as I can, but I will not have the time to reply to everything—there have been a lot of questions.

I reiterate this Government’s number one economic priority: tackling the record peacetime deficit that we inherited from the previous Government and restoring economic stability. We will stick to our deficit reduction plans; I assure my noble friend Lord Flight of that. I noted the contributions from a number of Peers—the first was probably from the right reverend Prelate the Bishop of Chichester—acknowledging the need for a fiscally neutral Budget at this time. As my noble friend Lord Higgins pointed out, a combination of tight fiscal policy and loose monetary policy is the balance that we are taking forward. I assure my noble friend that the Bank’s holding of gilts under quantitative easing is completely transparent; it is updated day by day on the Bank’s website and the position will be unwound in due course.

Nevertheless, we have a steady stream of noble Lords from the Benches opposite who still preach the idea of free spending with as much money as is out there, with no fiscal discipline. They do not seem to have learnt lessons. I am not surprised by the noble Lord, Lord Liddle, espousing that but I am a little surprised at the noble Lord, Lord Desai, saying that we should spend this £28 billion from the Royal Mail pension plan. We inherit £28 billion of assets but we inherit liabilities to the pensioners that are considerably higher than that. Is it really right that we should spend that money? No, we will not. As for suggestions that we might like to recook the books, I think that we had enough of cooking the books under the previous Government. We will not go there. As it happens, the noble Lord, Lord Desai, was doing what I had been doing a little earlier to look for the GDP number. I assure him that it is there in table D2 of the Red Book, but I agree that you have to look some way into the document.

We will stick to fiscal rectitude. Even if we were to decide to hand out vouchers, which we will not, I do not know how we would be assured about where they would be spent—we could not be sure that they would all be spent on goods produced in this country.

I was rather hoping to keep away from too much historical analysis of how we got to where we are, but perhaps I should be grateful to the noble Lord, Lord Eatwell, for drawing our attention to chart 1.5 of the Red Book. He seemed to suggest that it showed what a good job the previous Government did to keep the deficit under control. Perhaps he would like to look closer at that chart. It exposes to the full glare of daylight exactly what the previous Government were doing. It shows that the Labour Government continued to borrow £30 billion to £40 billion a year while the sun was shining. That illustrates precisely the nature of the structural problem that we inherited: running budget deficits year after year to create the illusion of growth until the credit card finally ran out. We will not go back to that.

Having talked about the basic stance of the Government, let me deal with the question of leaks, because it relates directly to the way that the previous Government used to conduct their business. As the Chancellor said in the Budget Statement, a Budget produced within a coalition is different. The days of the Chancellor coming up with a Budget in secret are—whatever we think about the rights and wrongs—gone. This was not a Conservative or a Liberal Democrat Budget, it was a coalition Budget, as we have heard from the broad agreement from coalition Peers this afternoon. As the noble Lord, Lord McFall of Alcluith, recognised, that makes this Budget different.

In the course of coalition Budget negotiations, various proposals were raised, discussed and debated. I come back to what we have been used to in previous years. It has been more widely debated than in previous years, when the Chancellor briefed the Prime Minister on what was in the Budget the day before, if the Prime Minister was lucky, and even more than in the dying days of the previous Government, when the Prime Minister told the Chancellor what should be in the Budget the night before. We do not need lessons from Members opposite on how to conduct ourselves in the run-up to a Budget.

[Lord Higgins]

That was not quite the point I was making. I understand about negotiations within the coalition, but it appears—for example, from the front page of the Financial Times—that officials told the Financial Times before the Budget was announced what was going to be in it. I believe that the House of Commons has the right to hear first.

[Lord Sassoon]

That issue has been the subject of an Urgent Question in another place this afternoon, and the Government have explained their position in an answer there.

I have said that we will stick to our fiscal position. That means that there continue to be tough choices to be made. Some of those tough choices have been highlighted this afternoon. I start with my noble friend Lord Newby, who gave a fair and good analysis of the issues about pensioners and the fair deal that they are getting. However, because the noble Lords, Lord McFall, Lord Myners and Lord Davies of Oldham, and others raised the issue, let me underline it again. The Government are committed to supporting pensioners. The IFS confirmed today that that is indeed the case. Pensioners will get the largest ever rise in the basic state pension this April to £107.45 a week. The Government are protecting pension benefits, including winter fuel payments, free prescriptions and eye tests, free bus travel, free TV licences and, of course, the triple lock on the basic state pension is being introduced. The single-tier state pension will be introduced and has been estimated to be likely to be £140 in current terms. I refute the suggestions that pensioners have been poorly treated. We are all in this together.

My noble friends Lord Fink and Lord Sheikh have quite properly raised the issue of tax transparency. I agree with them on the importance of the new annual statements, which will show everyone who pays tax what they are paying and where the money will be spent across the different categories of expenditure. I am sure that will raise a healthy debate.

On tax reform, I am very confused about where the Opposition stand on the 50p tax rate. Are they really still saying that the Chancellor of the Exchequer should justify the continuation of a tax that is shown to produce next to no revenue for the country and which materially affects our global competitiveness? The noble Lord, Lord Eatwell, quotes approvingly the Institute of Directors, but the main part of the institute’s statement after the Budget called for the tax rate to be reduced to 40p. Is that what the noble Lord, Lord Eatwell, wants? The noble Lord, Lord Wood of Anfield, who is not in his place at the moment, questioned whether the Government had been fully transparent on this. The forestalling number that he was looking for is set out in bold type on page 51 of the Red Book, a complete contrast to what the previous Government did in not even recognising that there was a forestalling problem. The tax raised less than a third of the estimates that they put out. I believe that they are in no position to question the basis on which we have looked at the evidence in coming forward with a 45p rate.