Autumn Statement

Lord O'Neill of Gatley Excerpts

Thursday 3rd December 2015 Lords Chamber

[The Commercial Secretary to the Treasury (Lord O'Neill of Gatley) (Con)]

My Lords, once again, we have had a very healthy debate on the Autumn Statement, as we have before on economic and fiscal policy. Today there have been quite a lot of very valuable insights and thoughts about economic matters and finance. As I have done before, I thank all Members of the House for their excellent contributions. I am reminded of my maiden Statement, which I recall coincided with my dear and noble friend Lord King saying that the standard of debate in this place was, according to his vast experience, considerably higher than that of the other place. I have not had that other experience but each time I come here to discuss economic and financial matters, I can only echo that sentiment.

Let me quickly move on by making an apology to all your Lordships. As we have heard, we are on a very tight schedule and, if I am looking at the clock correctly, I have probably not much more than 15 minutes to respond to many of these interesting ideas. I will try to respond thematically as opposed to my preferred customary style, which is to respond to each noble Lord or noble Baroness individually. I will not be able to do that but I shall try to respond specifically to my noble friend Lord Carrington, the noble Lord, Lord Davies, and the noble Baroness, Lady Kramer. I will refer to others in the context of thematic issues.

Quickly moving forward, last week’s spending review and Autumn Statement presented by the Chancellor was an important fiscal event, one of the most important of recent times. In the spirit of what the noble Lord, Lord McFall, said—I will touch back on this in a second—it was particularly important because it was the spending review as well as the Autumn Statement, and it set forth in detail the path of public spending for the duration of the Parliament. As noted by some in this regard, we remain on track to achieve an overall surplus by the end of 2019-20—which, if it occurs, would be the first surplus since the turn of the millennium and of the century. As was also touched on—I shall come back to this—with stronger economic figures than anticipated we can do this while borrowing less, investing more in long-term capital spending on our infrastructure and smoothing the transition to a lower-welfare, higher-wage economy.

I turn to the thematic context. There are three broad areas, with sub-categories to some specifics. First, with respect to the background global environment within which the Autumn Statement was presented, my noble friend Lord Carrington set some of the scene in his wonderful opening remarks. I cannot resist an attempt at humour. He made reference to a number of supposedly highly-rated economists frequently getting their forecasts wrong. He made a comment soon after about the BRICs, so I trust that he was not referring to my past life in that regard. I should follow that by saying that I had remarked in a joke in that previous life that I might have ended up regarding them as ICs as opposed to BRICs, in view of the particular problems of Brazil and Russia.

At this stage, as we come towards the end of 2015, the ongoing evidence about the cyclical state of the world economy, as well as some of it structurally, is a little different in my view from the general view out there. While of course the world is slowing—or, let me emphasise, showing signs of slowing compared to expectations—I would draw attention to three or four things that are a little different.

First, and in slight contrast to something that my noble friend Lord Carrington said, in the year to date the biggest source of positive surprise comes from the eurozone area. Having seen the most up-to-date data in the monthly manufacturing and purchasing managers’ indexes around the world, which we have had in the last couple of days, some of the strongest data are coming out of the Eurozone—notably from Germany but, rather encouragingly given some of the structural issues, also from Spain and Italy. Secondly, in that regard, I draw your Lordships’ attention to the fact that the eurozone purchasing managers’ index is stronger than that of the United States. The USA’s own purchasing managers’ index, in its latest indications, is now weaker than that of many of the rest of the G7 countries, such as ourselves and much of continental Europe.

Thirdly, in the context of my attempt at humour about the BRICs, while China continues to show signs of slowing, very importantly for our priorities there is just as clear evidence that domestic consumption and its own services industry continue to increase their share of GDP rather rapidly. There is not much evidence of a significant slowing among Chinese consumers, which is an important, ongoing and positive thing for the rest of the world, including the UK, which wants to engage by providing things to their consumers. That strongly justifies our active engagement and many noble Lords here are aware of my strong involvement in that.

Fourthly, in this regard, I will mention that many other so-called emerging economies still have considerable challenges, a large number of which are in my view probably more cyclical in nature than structural. They relate to the intensity of the decline of commodity prices. Importantly, as the flipside to that, there remains an important source of ongoing support for real disposable incomes in many commodity-importing countries, ourselves included.

The second area, which I will touch on quickly, is the policy environment against that background and in particular the framework and role of the OBR, which many noble Lords touched on. Within that second area on policy, I have a couple of thoughts about the OBR. I will touch initially on the interesting suggestion made by the noble Lord, Lord McFall, about the OBR releasing its latest ideas earlier than has hitherto been possible. It would be very difficult for it to do that, not least because it is given a large amount of sensitive evidence about policy considerations that would dramatically impinge on the Government’s thinking in the lead-up to actual policy decisions.

However, I believe that yesterday, Robert Chope and the OBR were due to appear at the Treasury Select Committee, which was shifted for obvious reasons but will, I am sure, happen very soon. I imagine that many of the questions that the noble Lord, Lord McFall, the noble Baroness, Lady Kramer, and others touched on will come up on that occasion. If they do not, I am sure that there will be an opportunity for them to pursue those questions further. Having said that, the OBR is of course independent of government and it is its rightful role to come up with new suggestions on the relationship of the economy and the fiscal position, given its mandate.

Finally with respect to the OBR, while my own observations are that it has revised down slightly its forecast of productivity, as touched on by the noble Lord, Lord Haskel, interestingly it has also revised higher its forecast for investment. Importantly, going forward, its own forecasts remain on the more conservative end among many highly respected domestic forecasters. As a number of noble Lords have pointed out, while it is true that there could be risks to the downside as a result of its changes, equally, it could be just as vulnerable to being positively surprised again, as it clearly has been given those changes. I finish on this subject by pointing out that from what I can understand, of the £27 billion change that it made, £18 billion of it was due to the change in its modelling of the relationship between nominal GDP and various forms of tax revenue, particularly VAT, while £9 billion was due to its own revised higher estimates of the economy.

Sticking with this second theme of policy, yet again, a number of noble Lords offered very contrasting views about the appropriate stance for fiscal policy, which is not surprising in view of the nature of this place and the understandable biases that some Members may have. All I would say in this context is that, the spirit of the Autumn Statement is that fiscal policy—whatever the justified underlying stance—is less restrictive as of last week than had previously been believed by many. Several noble Lords have been particularly critical about the supposedly tough stance on fiscal policy. Although Members of this place may have their own judgments on that, which may be valid in principle, fiscal policy is certainly not as restrictive as they might have thought a week ago.

I will finish this part of my closing comments by taking this back to where I started. The Chancellor for some time now has been talking about policy in the context of both our national and our economic security. I was very pleased to have discovered how policy was going a couple of days before the announcement, as, in my judgment, against the background of such uncertainties around the world, it is probably appropriate that our stance on fiscal policy, within the flexibility we have been afforded, should be less stringent than we had otherwise planned for it to be. That gives us more internal momentum against the background of those never-ending, swirling uncertainties that unfortunately seem to be so prevalent.

The specific points that were made covered many areas, including the apprenticeship levy, and skills and productivity, which I will touch on together. They also related to investment spending and further education colleges. Separately, there were some very interesting ideas about energy policy, housing and the role of manufacturing. The noble Lord, Lord Palumbo, made some very interesting suggestions with respect to discussing broader principles and tempted me to live up to what I think he suggested was my independent northern spirit. I can never resist such a temptation, so I look forward to rising to that challenge whenever it comes.

The broad issue that links at least half those thematic points and that the noble Lord, Lord Davies, spent a lot of time on, is productivity. The noble Lord, Lord Haskel, also touched on this in some of his comments. Although the Chancellor did not use the word productivity in the Autumn Statement as much as he may have done previously in the summer Budget, I suggest to noble Lords that, on the contrary, there continues to be a strong focus on the important role of productivity. I will respond to some of the specific comments of the noble Lord, Lord Davies, as I have tried to do in recent discussions. Although our productivity level has been weak, and is significantly lower than the levels of our main partners among the developed countries, the evidence from the past year or so is that ours has improved slightly more than had been the case, and that the gap is not quite as big as it was.

I would not want to jump from that to immediately say that this is a consequence of the 92-page document that we published with the summer Budget, because some of those data relate to before then—and of course one swallow does not make a spring—but it seems to me that there are some signs of slight improvements at the margins of the data that are available to make judgments about. More importantly, there are a number of ongoing policy developments—which there was more focus on—including some that relate to the specific points that were made.

I will respond to points about skills, further education colleges and the apprenticeship levy together. The apprenticeship levy, which has been described by some as a back-door tax, is, as I have discussed here before, part of a conscious decision to try to encourage our corporate world to have a greater influence on and a greater obligation towards trying to sow the seeds of much stronger skills for today, tomorrow, and the medium-term and long-term future. It is only the largest employers that are likely to have to pay much and, in the event that they take up the challenge to its fullest, they will be more than recompensed for their endeavours. The desire is that, in the context of the apprenticeship plan, they will influence the nature of qualifications coming out of further education colleges and perhaps influence how those might develop further.

I would link FE itself with the goals for skills and apprenticeships. We need to strengthen the quality of the qualifications that come out of our further education colleges and get away from the focus just on the amount of money that is being spent or not. We need to ensure that the people who come out of those institutions have the right qualities and skills to cope in an increasingly competitive world. In my judgment, the real thrust of policy in the past six months in this regard has been about making it a priority to raise the standards of the qualifications that come out of further education colleges. If successful, that will play a critical role in moving towards raising the broad scope of the skills challenge, which a number of Members of the House have touched on and which, again, I have made significant reference to in the past.

Establishing manufacturing targets sounds like a very eye-catching thing to do. The noble Lord, Lord Bilimoria, mentioned this, but I know from my own association with the I in BRICs in the past that it would be absolutely remarkable if India got half way to achieving that kind of target. It is not clear to me that it would be particularly smart to suggest that an economy as sophisticated and diverse as ours has some defined target for manufacturing as a share of GDP, not least because the interplay between high- value-added manufacturing and services is a lot more sophisticated and complex than it once was, and you do not want to choke off one at the expense of the other.

What is clear in a broader sense is that we want to encourage an environment that creates more higher-value-added jobs that allow us to keep our head above water and compete in an endlessly changing world with lots of challenges, whether they are service jobs or manufacturing jobs. The focus on wages and the high-wage, low-welfare economy is at the core of this, together with a number of very specific initiatives, which again I directly relate to productivity. The northern powerhouse, the Midlands engine and the devolution of powers and decision-making to local authorities in those areas are critical in this.

Because of my shortened time, I will finish by saying thank you to all noble Lords whom I have not had the chance to specifically answer. Although considerable challenges from overseas remain, as well as our own long-term internal challenges, it seems that Britain is in a fundamentally stronger place than it was five or six years ago. This Autumn Statement and spending review set out how we will achieve the next steps of our economic recovery, and I commend it to your Lordships.