Autumn Budget Forecast

Lord Myners Excerpts

Tuesday 29th November 2011 Lords Chamber

[Lord Myners]

My Lords, the Minister must be delighted that he is the first Minister to be able to take advantage of this new procedural protocol so that he does not have to repeat the dire message that we received in the other place earlier today. Twelve months ago, when my noble friend Lady Kennedy of The Shaws introduced the debate on the Autumn Statement, he beguiled us with visions of sunlit uplands, growth, prosperity, low inflation and a resurgence in private investment. I fear that he would be deeply embarrassed and would squirm if he reread the words he used 12 months ago in the light of the Chancellor’s Statement today.

The Autumn Statement metamorphosed from a mid-year review of where we are with the economy into a Budget as it became clear that the growth and fiscal targets set by the Government are going to be missed by a country mile. The OBR has now reduced its forecast economic growth for this year, next year and the year after on no fewer than four occasions as a consequence of government policy.

Remember why we were invited to sign up to the agenda of unprecedented austerity. Cutting public expenditure, we were told, would free up resource for private sector expansion, the economy would spring back to life, unemployment would fall and inflation would subside. In fact, as we were told by the Chancellor today, what we are getting is lower growth and record unemployment: a 17-year peak for unemployment; a million young people out of work; female unemployment at the highest level since 1988; and the International Labour Organisation is forecasting that unemployment will increase by another 500,000 to 2.8 million. Inflation is way outside the target, more than double the rate of any of our major competitor countries. So much for the sunlit uplands that the Minister told us to expect 12 months ago.

The OBR tells us in paragraph 1.11 that the economy was in fact growing more strongly in 2009 and early 2010 than previous figures suggested. The policies pursued by my right honourable friend Mr Alistair Darling were working and government borrowing was coming down: it was £25 billion less in 2009-10 than forecast originally in the Budget for that year. The economy was growing, the deficit was falling, as we knew it had to do. We all know what has happened since: the economy has flatlined; growth has been lower than in any of the 27 EU countries over the last 12 months, except Cyprus, Portugal and Greece. The deficit is growing, not falling, and the Chancellor is now forecasting additional borrowings of £150 billion over the OBR fiscal period. Compared with the forecast he made 12 months ago, the borrowing figure has increased by £150 billion. This is the consequence of failure, not of success. We are having the pain but there is no sign of the gain.

There is no sign of a let-up: the OBR forecasts a surge in unemployment and makes two very vital points. First, the OBR now believes that the productive capacity in the economy has been permanently diminished and hence the structural element of the deficit is even higher. Secondly, the OBR and the Bank of England are unable to account for a marked decline in productivity. Yet the Government have no policies to address this decline in structural capacity and productivity. The Government and the Treasury in particular are suffering from collective cognitive dissonance. The Prime Minister told us a fortnight ago that getting the deficit down is,

“proving harder than anyone envisaged”.

Correct, Prime Minister, because the policies your Government are pursuing are actually causing the deficit to increase. The deficit is a consequence of lack of growth, not the cause.

The second area of cognitive dissonance relates to the sources of growth. Growth can be achieved from household consumption, but we know, and the OBR confirms, that that is falling as increased job uncertainty and a squeeze on real incomes—a squeeze that the OBR describes today as a post-war record—are having a severe impact on consumer confidence. The Government are clearly trying to take demand out of the economy. Large companies are sitting on cash and not investing because of the uncertainty. Small and medium-sized businesses cannot get credit to expand, and we are lecturing other countries to adopt the same austerity policies. From where is the demand going to come to increase economic growth? Is the Minister not familiar with John Maynard Keynes’s paradox of thrift? Where is the growth going to come from?

The third area of cognitive dissonance is along the lines of, “It’s all Europe’s fault”. Europe is no doubt very significant and we will be discussing this in Grand Committee on Thursday, but noble Lords should be clear that the economic slowdown in this country is primarily a result of a decline in domestic demand. In fact, the OBR and ONS data show that economic growth in the first nine months of this year, inasmuch as there has been any, has come from exports. Exports to Europe are up 17 per cent over the last nine months. It is domestic demand that is down; it is domestic demand that is forcing up the deficit and forcing up unemployment. Of course, as noble Lords will know, the flatlining of economic growth in the United Kingdom preceded the euro crisis by at least nine months.

This is the context, therefore, for an emergency Budget that has done nothing to add to aggregate demand and places a further squeeze on real incomes, particularly on those on middle incomes or those who are now increasingly fearful of losing employment.

I will look at a few items in the Chancellor’s Statement, and allow other Members of the House to bring up other issues. I shall start with credit easing. On the Andrew Marr programme on Sunday, the Chancellor said the Government would be lending to SMEs. Now it sounds as though it is more like an interest rate subsidy or that we will be lending to the banks to lend to SMEs. Can the Minister tell us when the policy changed? It cannot be that the Chancellor did not know his own policy, yet he very clearly said on the Andrew Marr programme that the Government would be lending to SMEs. Why did the policy change over a matter of three days? How will it work in practice? How much will it cost? Where do the skills lie in Government to evaluate risk?

It is clear that the Governor of the Bank of England wants nothing to do with credit easing. How will credit easing be co-ordinated with quantitative easing, and who will make the credit judgments? What assumptions have the Government made about the probability of default and loss in the event of default as a consequence of credit easing? There is absolutely nothing on this in the Chancellor’s autumn Statement. Has credit easing actually been approved by the Permanent Secretary? Does it pass the tests for value for money? How much will the banks benefit? My sneaking suspicion is that this is another back-hander to the banks, something that the banks will benefit from more than SMEs. We have the abject failure of Project Merlin as evidence of the ability of the banks to constantly outwit this Government.

Much was made in the leaks over the weekend about infrastructure expenditure: an extra £5 billion. I am not going to look a gift horse in the mouth—this is a good move—but let us put it in context. This Government cut public expenditure investment by £50 billion a year ago. It is now increasing it by £5 billion over a four-year period: £1 billion per annum is going to be spent by the Government on additional infrastructure expenditure out of total government expenditure during that period of about £2.8 trillion. Mr Fallon said on “Newsnight” last night that pension fund participation in this programme was guaranteed. I invite the Minister to name some of the projects where agreements have been reached, to tell us what the pay arrangements are or the tolls that will be charged.

I draw the Minister’s attention to a statement issued by the National Association of Pension Funds this afternoon, which said,

“there are no plans or details on the table yet”.

Quite frankly, this does not cut the mustard. I remind the House that in this autumn Statement, the Government have said they will cut investment by public funds by the following amounts over the next four years: £2.4 billion, £3.2 billion, £2.5 billion, £2 billion, £2.4 billion and £4.1 billion. Those are the real numbers, not the figments of imagination that we got out of the proposals for infrastructure investment. Nor does the Treasury seem to have given any thought to how these funds would displace funds that otherwise would have been used to support new private sector investment.

I will also say a little about the bank levy. Project Merlin has clearly failed. The Governor of the Bank of England has said that lending to SMEs has contracted—not increased, contracted—by £5 billion over the last 12 months. Does the Minister agree with that number? What assumption have the Government made about how the bank levy will operate in the future? Will it be passed on to customers? Let us remember that the Government are not increasing the total tax paid by banks; they are merely adjusting the rate. This Government do not believe that the banks can pay any more tax but are planning to increase the tax on women and families by £1.3 billion a year through adjustments to the family tax credit. This is contemptible, verging on the wicked.

On spending cuts, the Chancellor says that he has been able to meet his moveable fiscal rules because he will cut spending by an additional £8.3 billion in 2015-16 and £15.1 billion in 2016-17. But other than the cut in the family tax credit, he says nothing about where these cuts will come from. Can the Minister tell us what will be cut?

In conclusion, plan A is no longer credible. It is no longer responsible, respectable or worthy of being taken seriously by anyone. These plans today have been hastily cobbled together. They do not come even close to passing the tests for a plan for growth. The Budget was described by the Chancellor as a march of the manufacturers. Today, we have had a march of the myth-makers. The Government have killed confidence in the economy. Labour’s five-point plan is practicable, fundable and implementable, and worthy of implementation compared with the dross that we have had in the autumn Statement today.

--- Later in debate ---

[Lord Sassoon]

That was reported in the press. If the noble Lord would like to deny it, he is at liberty to do so.

[Lord Myners]

I think that that borders on an accusation of treachery and that the noble Lord owes me an apology. What I said was that it would not surprise me, in the circumstances, if the board of HSBC felt that it had to consider matters of location, which is exactly what it confirmed it was doing when it gave evidence to the Treasury Select Committee. To suggest in some way that I am guilty of some form of treachery is a monstrous suggestion, which I hope that the Minister will withdraw.

[Lord Sassoon]

The noble Lord, Lord Myners, mentions treachery, which never passed my lips. He was reported as saying that he suggested that HSBC should be moving its retail bank to Paris. If in fact that was not the advice he was giving, I am very glad that he has now clarified that.

This Government are making sure that we deal with the legacy of our predecessors—of his Government —and return our economy to sustainable growth. That means sticking to our deficit plan to keep interest rates as low as possible, which is what was at the heart of my right honourable friend’s Statement this afternoon.