Spring Budget 2024

Lord Macpherson of Earl's Court Excerpts

Monday 18th March 2024 Lords Chamber

[Lord Macpherson of Earl’s Court (CB)]

My Lords, I worked on seven pre-election Budgets over my life sentence at the Treasury, so I feel for any Chancellor having to deliver one. He has to reconcile the usually unrealistic demands of his supporters with the need to retain integrity by doing the right thing.

There is much in the Budget and this Bill to approve of. First, on the economy, prospects seem a little brighter: inflation is falling, real wages are finally rising, and unemployment remains low. Secondly, there are some sensible tax-raising measures. As the Chancellor confirmed in his Budget speech, reforming the rules on residents and domiciles has been under discussion for 40 years or more; I welcome him finally grasping the nettle. I doubt whether it will raise quite as much money as the OBR estimates—seriously rich citizens of the world are notoriously footloose—but it is right in principle.

If you are going to cut taxes—I recognise that that is a big “if”—prioritising national insurance reductions over income tax is the act of a courageous Chancellor. In the old days, rentiers and capitalists tended to face higher tax rates than workers, who received earned income relief. That was turned on its head in the 1980s and, since then, successive Chancellors have tended to raise national insurance rates, in effect, to pay for income tax reductions. Occasionally, they felt a little guilty.

Both Lord Lawson and Gordon Brown reformed national insurance at some considerable cost, but the trend was clear: the basic rate of income tax has fallen from 35% in the mid-1970s to 20% today. Meanwhile, the effective rate of employee national insurance contributions rose from 5.5% in the mid-1970s to a peak of 13.25% in 2021. That benefited the old at the expense of the young; it privileged investment and rental income over wages and salaries. Whenever I tried to get a Chancellor interested in cutting national insurance—I worked on a package to help the low paid with the then right honourable Norman Lamont— I would get a pitying look. I was told that it would not work politically. Voters did not like paying income tax, but they thought that national insurance was paying for their pension or the NHS and so objected to it much less.

The Chancellor has turned that on its head: he is raising income tax, while cutting national insurance. It is the right thing to do; it focuses relief on those who need it and should improve labour supply. However, I worry about the number of people in modestly paid jobs—police sergeants and senior nurses come to mind—who are being dragged into higher-rate tax. Although prioritising national insurance is the right thing to do, I worry about its affordability. I welcome the Chancellor’s ambitions on public service productivity, but, having seen many an efficiency review come and go, I would be surprised if this one moves the dial sufficiently to offset rising pressures on public spending.

These matters have been set out at length by the OBR in its excellent Fiscal Risks and Sustainability report—further proof, if any were needed, that George Osborne was right to strengthen the institutional framework supporting sensible macroeconomic policy. The fact is that the demographic pressures that the likes of the noble Lord, Lord Fowler, worried about in the 1980s have already materialised and will only get worse in the years ahead. The triple lock has made things worse. Add in the increasing cost of social care, and we have a real problem.

Then there is the national security situation, which has deteriorated considerably over the last two years. Although generally approving of Mr Hunt’s time as Chancellor—we should all thank him for preventing the British economy from falling into the abyss in October 2022—I was disappointed by the Budget’s silence on defence spending. I do not know whether we will end up having to spend 0.5% or 1% more of national income on defence; either way, we are talking about at least £15 billion more of spending pressures. Add to that the pressures on health, social care and pensions, and we are looking at tens of billions more.

So, at some point in the coming decade, whichever party is in power, the Government are going to have to look again at a health and social care levy. As and when it is introduced, I recommend that the Government use the income tax base rather than the national insurance base. It is right that all citizens with the necessary income pay it, rather than just those who are working.

Finally, I would like to say a few words on the Chancellor’s plan for a retail offer of NatWest shares. As the accounting officer at the Treasury when RBS was taken into public ownership, I have always taken an interest in trying to get as much money back for the taxpayer as possible. The RBS share price was trading in line with the price we paid for it—around £5 in current prices—when the late Alistair Darling left office in 2010. Since then, the price has languished, partly because of wider banking reforms, partly because of low interest rates and partly because of problems specific to RBS/NatWest.

I support the principle of selling NatWest—it needs the state off its back—and hitherto the Government have secured a competitive price for it through their trading plan in the wholesale market. I fear that a successful retail offer will require a heavy discount, which means that the taxpayer will be subsidising retail investors. The case for subsidising share ownership is much weaker than it was in the 1980s, shareholding is more widespread and history suggests that banks are perhaps not the best entry point to shareholding.

I know that the Chancellor has said that any sale will be

“subject to … value for money”,

but VfM is in the eye of the beholder. Can the Minister commit to publishing the accounting officer’s advice on VfM as and when the sale goes ahead?