Budget Statement

Lord Low of Dalston Excerpts

Thursday 27th March 2014 Lords Chamber

[Lord Low of Dalston (CB)]

My Lords, the Budget seems to have played pretty well on the day. However, if I was the Chancellor I might be a bit worried by that as it is part of the lore of politics that what goes down well in the spring frequently bombs by July. In the case of this Budget, the shine has begun to come off already. Indeed, in the area where the Budget was probably at its strongest—pensions and savings—fears have been expressed about the potential impact of people drawing down from their pension pots prematurely and the threat to providers of annuities, such as insurance companies. Be that as it may, the Chancellor’s far-reaching reforms in this area are to be welcomed, even though they will principally benefit the better off.

I note that the IFS has expressed concern about the risk that permanent tax concessions, such as the increase in the personal allowance, which are funded only by temporary tax increases and unspecified cuts in public expenditure—as the noble Lord, Lord Hollick, pointed out—will weaken the long-term outlook. Moreover, bringing forward revenue that the Treasury would have expected to receive anyway, as with national insurance changes, may be a cost to the Treasury later on.

This was indeed a Budget for pulling rabbits out of hats. As other noble Lords have said, it was full of conjuring tricks and sleights of hand. Take the announcement that the number of £1 million Premium Bond prizes is to be doubled. That sounds impressive until you learn that it is to be doubled from one to two. Much of the rest of the Budget displays a similar level of disingenuousness.

Reducing the deficit by a third is presented as good progress, but it was originally supposed to be eliminated altogether by the end of this Parliament and had already been reduced by a third last year. This is no better than Gordon Brown’s serial announcements of the same new money.

The Budget contains a fundamental misrepresentation of the Chancellor’s fiscal stance and its effectiveness. However, before I come to that, I want to say a word about the Government’s characterisation of the situation we face and the problem with which they are trying to deal. The policy of the Government over the past three years has largely focused on public debt; it has not talked much about private debt. The Minister reflected this emphasis in his introduction today. But let us be clear: private debt got us into this mess. Before 2008 our public finances were in reasonable order. You can argue that there was some letting go of the controls of public expenditure in the last few years but on the whole that was not the case. We had a low level of debt and did not have high levels of deficit. We had a very rapid expansion of private debt and that produced a bubble and a crash, which then produced a recession and public debt went up as a result.

We do not have a high level of public debt because of profligate Governments; we have high levels of public debt because we had a financial system which was out of control, creating too much private debt. It is important that we understand this sequence of events. That is not me talking: it is the noble Lord, Lord Turner, on the “World at One” on 30 December last year. I am sorry if it appears to labour the point but I do so only because it is so often misrepresented.

When I hear noble Lords to my left—I mean spatially, not ideologically, you understand—engaging in the same kind of misrepresentation, I often wonder whether they really believe it or whether they are indulging in political knockabout. They are not stupid, so I have to conclude that it is the latter, but I would hope that we can avoid such disreputable distortions of analysis in this House. At all events, amid all the focus on bringing down public debt and government debt, we have yet to come up with a solution to the problem of running a reasonably growing economy without returning to the increases in private debt which got us into so much trouble in the first place. That is the problem confronting the Chancellor, as he congratulates himself on a recovery based on a housing bubble and rising consumer spending, which this Budget does nothing to tackle.

I turn now to the central misrepresentation of the Budget; namely, that the Government’s strategy of cutting the deficit is working, reiterated as the central plank of the Minister’s introduction to the debate. On the face of it, this would seem to be self-evidently the case. The economy is recovering—is it not?—and recovering faster than anywhere else. But there are several things wrong with that. Is it because of or in spite of the Government’s policies? This recovery has been likened to a man who has been hitting himself over the head with a baseball bat saying that he feels better when he stops and attributing his improvement to the fact that he had been hitting himself over the head with a baseball bat. Then again, as I have said, according to the Government’s strategy on taking office, the deficit was supposed to be eliminated by next year, not four years later in 2018-19 as is now being forecast. The economy is forecast to recover to pre-crisis levels, but only this year, after six years, and 14% smaller than it would have been had the recession not struck. Moreover, what has gone has gone for good. The damage is irreparable.

As the economist Simon Wren-Lewis has conclusively demonstrated, the economy started growing once the Government abandoned their strategy of fiscal contraction, not in response to the strategy of fiscal contraction. From a peak deficit in 2009-10 there was substantial fiscal tightening until 2012-13. This essentially stopped in 2012-13 and 2013-14, whereas the original plan was for fiscal contraction to continue in 2012-13 and 2013-14. The figures show clearly how the strategy was abandoned as the recovery failed to materialise. I am not complaining about that, of course; rather, I am just pointing out that you cannot abandon a strategy and carry on pretending that it is still working. I was disappointed to hear the noble Lord, Lord Desai, say that this is the only Chancellor to have adopted this strategy and stuck to it because, as Simon Wren-Lewis has shown, it is just not true.

The final thing the Chancellor shamelessly glosses over is the full extent of planned austerity despite the economic recovery. He said:

“While the underlying structural deficit falls, it falls no faster than was previously forecast, despite higher growth”.

This goes to the heart of the Government’s argument: faster growth alone will not balance the books. Securing Britain’s economic future means that there will have to be more hard decisions and more cuts but, apart from talking about the welfare cap, the Chancellor has been completely unspecific about what these cuts might be. Presumably this is deliberate until after the next election for, if he were to come clean about just what he has in store for us, the public’s verdict on the Budget might be very much less favourable than it appears to have been to date.