Economy: Budget Statement

Lord Northbrook Excerpts

Thursday 22nd March 2012 Lords Chamber

[Lord Northbrook]

My Lords, it is always a pleasure to follow the noble Lord, Lord Desai. I welcome the opportunity to take note of the UK economy in light of the Budget. First, I will look at the general UK economic background and then I will move on to look at specific measures in the Budget.

Initial comments on the Budget forecasts have in general endorsed the OBR inflation forecasts, which state that it will fall back sharply though the remainder of 2012 and ease further to be close to the 2 per cent target from early 2013, as the upward pressure from commodity prices eases and spare capacity weighs upon inflation. Growth forecasts have given rise to more criticism. It is good news that the OBR has revised upward slightly the forecast for this year to 0.8 per cent, although commentators feel that the 2013, 2014 and 2015 forecasts could be a little optimistic. However, the forecasts are supported by the Bank of England, which says that the UK will avoid recession.

The Chancellor and the Minister are quite right to draw attention to two jokers in the pack, which could significantly affect the forecasts. First, there is the OBR euro area growth downgrade by 0.8 per cent. Secondly, there is the problem of a further spike in the oil price due to the Iranian situation but I hope that this might be lessened by further Saudi release of oil production on to the markets.

The budget deficit too is forecast to decrease. The Chancellor must be given credit for sticking to his guns and bringing this down. His forecast of £126 billion is £1 billion better than at the time of the Autumn Statement. Yesterday’s borrowing figures, however, although covering only a month, show that there can be no cause for complacency going forward. The Chancellor will need to continue with his fine determination to get this figure down to £21 billion, as forecast, by 2016-17 when the structural deficit, he states, will be eliminated.

Here, I should like to take issue with the noble Lord, Lord Eatwell, in his opening remarks. He stated that there was not a particular crisis in the finances before the banking crisis. However, I think that the debt figure of £36 billion was already breaking the Government’s own rules. I should also like to draw his attention to a speech made by the noble Lord, Lord Myners, when he said:

“There is nothing progressive about a Government who consistently spend more than they can raise in taxation, and certainly nothing progressive that endows generations to come with the liabilities incurred by the current generation. There will need to be significant cuts in public expenditure, but there is considerable waste in public expenditure”.—[Official Report, 8/6/10; col. 625.]

The shadow Chancellor, Ed Balls, has stated that there can be no let-up or any reversal of the cuts of the Government.

How does the overall Budget help the Chancellor’s plans? According to table 1 in the OBR fiscal and economic outlook, the total fiscal impact to 2016-17, as a result of the policy decisions, will be about broadly neutral. As a result, much on the expenditure front needs to be done to get the deficit down. The Chancellor has said that if, in the next spending review, the Government maintain the same rate of reductions in departmental spending as they have done in this review, a further £10 billion of savings would have to be made to welfare by 2016. That is a challenging task.

The IFS green budget states that,

“the spending cuts are still to come”,

and that only 12 per cent of the planned total cuts to public service spending, and just 6 per cent of the cuts in current spending, will have been implemented by the end of this financial year. Page 67 of its report compares the size of the cuts planned to those of other economies. Over the next few years, the UK currently has the fifth-largest planned reduction in public expenditure as a share of national income. Only Iceland, Greece, Estonia and Ireland are planning larger cuts. They are large by historic standards. The Government’s plans will be the tightest seven-year period for spending on public services since the Second World War. Over the period April 2010 to March 2017, there will be a cumulative real-terms cut of 16 per cent, which is considerably greater than the nearly 9 per cent cut achieved from 1975 to 1982. The challenge is great but I am sure that the Chancellor will make every endeavour to achieve it.

There is much to praise about this year’s Budget. First, I would highlight the decision to cut the top rate of income tax from 50 per cent to 45 per cent. This sends a good signal to business and wealth creators. Secondly, I fully endorse the planned lowering of corporation tax. Again, this sends out a good message to entrepreneurs who should also benefit from the £20 billion national loan guarantee scheme. I also applaud the move to consult on a new cash basis for calculating tax for firms with a turnover of up to £77,000. Any move like that will make filling in tax returns dramatically simpler for up to 3 million firms, which must be a good thing and helpful to business.

For individuals I shall highlight two areas. First, the adjustment to the cliff edge withdrawal of child benefit was long overdue. The second area is the increase in personal allowances to £9,205 from next year. That is a positive step. Other measures in the Budget may not have an immediate effect, but could be a useful long-term help to the UK economy. The decision to relax the planning laws to encourage sustainable development should help business. In addition, moves to encourage the life sciences, aerospace and technology sectors are helpful. There are a few measures that I am less certain about. The abolition of the additional age-related allowance seems to have caused quite a stir, even though, as the noble Lord, Lord Newby, stated, it is made up for by the increase in the pension.

On a separate theme, could I ask my noble friend about the figures in table A1 for oil companies over the next five years with the change to North Sea oil and gas decommissioning? I see that it is going to cost the industry a net £1,145 billion over the next five years, which is a substantial figure. Are those figures due to last year’s Budget? Also, where does the most welcome £3 billion new field allowance for large and deep fields west of Shetland come in table A1? I can only see figures for the first two years.

While some commentators have criticised the increase in stamp duty, I find myself less concerned about it, particularly with the plan to clamp down on offshore companies avoiding the duty. Clearly this hits central London hard, so as long as the knock-on effects have been thought through, such as the effect on building work in London, I see no problem with it. Likewise, on the introduction of the general anti-avoidance rule, I take on board the comments of the noble Lord, Lord Davies of Stamford, on this. It is right to press ahead with a narrowly targeted GAAR aimed at truly artificial schemes, but supporting guidance must be practical for taxpayers as well as HMRC.

Two other areas give me cause for concern, the first of which is the 3p rise in fuel duty that is due later in the summer. This will not help the beleaguered motorist as prices are at record highs. The Government may correctly say that the price of oil is beyond their control, but I do not see why the increases cannot be delayed. Can the Minister say how much this will raise in tax? The other issue I am not happy with is the extra 300,000 people who will be dragged into the top rate of tax as the threshold for the higher rate is reduced to counteract the effect of higher personal allowances. In addition, there are still anomalies of high marginal rates for taxpayers with children and an income of between £50,000 and £60,000 and between £100,000 and £118,000, according to today’s Financial Times.

Overall, I commend the Chancellor on his Budget and for sticking to his last in cutting the budget deficit, offering sensible tax rates to individuals and companies, and setting in place longer-term projects to encourage the return of growth.