Queen’s Speech

Lord Northbrook Excerpts

Wednesday 25th May 2016 Lords Chamber

[Lord Northbrook (Con)]

My Lords, Her Majesty’s most gracious Speech contained the following paragraph:

“My Ministers will continue to bring the public finances under control so that Britain lives within its means, and to move to a higher wage and lower welfare economy where work is rewarded”.

I will examine this in more detail.

The latest GDP figures for the first quarter of 2016, as expected, showed a slight slowdown in the UK economy, with the figure coming out at an annual rate of 2.1%. This had been anticipated by the OBR economic and fiscal outlook in March. Capital Economics’ UK analyst Ruth Miller believes the expected slowdown to be temporary. She said:

“Many of the factors likely to be to blame for the first quarter's weakness should prove short-lived. We would not be surprised if growth were to subsequently accelerate in the second half of”—

2016—

“putting the economy back on track”.

Recently, we have seen the Bank of England and outside forecasters slightly reducing their GDP forecasts for 2016 and 2017. According to the Treasury in its May Forecasts for the UK Economy, the average of the latest predictions monitored gives a 1.9% growth rate for 2016 and 2.1% for 2017, a bit below the Bank of England’s estimates of 2.2% and 2.3%. The OECD has, however, forecast that the UK will still be the fastest-growing major advanced economy in 2016.

The figures on the public finances are less negative when they are viewed in an historical context. In 2015-16, the interest burden was 3.9% of GDP, the lowest ratio we have seen since 2007-08. According to Andrew Sentance, a former member of the MPC, the Government’s interest burden is now within the range of 2% to 4% of GDP, which was the norm in the mid-1980s, mid-1990s and mid-2000s. We are now at a much calmer level of government borrowing on an international comparison, but it is still far too high. It will take much longer to repair the damage to public finances created by the financial crisis. Care, however, should be taken not to make short-term reactions to any OBR change of forecasts by spending proposed windfalls that may not materialise.

However, we seem to be in a low-inflation climate for the time being, which has meant that interest rates have been able to stay low for a long time. The latest inflation figures have continued the benign trend. This has certainly surprised me, as I thought that quantitative easing would lead to it rising sharply. While pensioners and savers have suffered, it has generally been good for the economic climate. However, as the Minister said in the March debate, there are still economic issues that need to be addressed. He rightly focused on the delay in getting the deficit down in the next five years. This is due to lower forecast tax receipts caused by weaker productivity and a weaker outturn for nominal GDP. This reflects a common recent phenomenon of low-productivity growth across western economies. Also, economic turbulence, such as in China, has led to weaker growth forecasts for the global economy and global trade.

The Minister’s views are backed up by first-quarter UK economic statistics. Overall industrial production dropped for the second successive quarter. Manufacturing production, which has been hard hit by the crisis in the steel sector, saw output in March almost 2% lower than it was a year earlier. It remains to be seen how long the weakness in the manufacturing sector continues, although it is not specific to the UK. We have seen a softening in industrial growth across many economies, linked to the already mentioned slowdown in China.

On the employment front, over the past three years the UK has seen its unemployment rate fall from around 8% to just over 5%. The good news is that the employment rate has reached its highest percentage level since comparable records began in 1971. Average weekly earnings growth, according to the latest figures, stands at 2% year-on-year which, while not especially strong, is not inflationary. The number of unfilled vacancies for businesses employing more than 250 workers is still at record levels. It is the smaller firms with fewer than 250 employees that are reporting fewer vacancies, and they have been doing so for a few months now.

Is this a temporary problem or an unforeseen consequence of the national living wage? Could that be having an impact on smaller firms with fewer financial resources and lower pay rates, making them more cautious about taking on new workers, at least in the short term?

Turning to retail sales, there is further good news. Figures for these in March and April were affected by the timing of Easter, so month by month needed to be treated with caution. After disappointing March figures, sale volumes were 1.3% during April and 4.3% higher than a year earlier. Vicky Redwood, chief economist at Capital Economics, said:

“Indeed, consumer spending should prevent the economy from slowing too much this quarter, even if referendum uncertainty has a bigger impact on business confidence and investment”.

Productivity has been a recurring problem. At the start of April, figures were published by the ONS indicating that productivity among UK workers during the last quarter of 2015 fell at the fastest rate since 2008. The figure for the manufacturing sector was particularly poor—a fall of 2%. There was a slight improvement in preliminary estimates for the first quarter of 2016. The recent overall decline in productivity has attracted the following comments. Howard Archer, an economist at IHS Insight said:

“How productivity develops going forward is critical to the economy’s growth potential … The crucial question for the UK economy is, does the fourth quarter of 2015 mark a temporary relapse in productivity. Or is it evidence that the UK has an ongoing serious productivity problem”.

Finally, I shall just say a few words on the important independent IFS survey on the economic effects of Brexit. Paul Johnson said:

“Leaving the EU would give us an immediate £8 billion boost to the public finances, but the overwhelming consensus is that the economy would be smaller than otherwise following Brexit”.

The IFS judges that Brexit could leave the economy between 2% and 3.5% smaller than under a remain scenario.