Budget Statement

Lord O'Neill of Gatley Excerpts

Monday 4th December 2017 Lords Chamber

[Lord O'Neill of Gatley (CB)]

My Lords, despite a lot of obvious things that—understandably—worry many people around the world, in fact the world economy has strengthened quite notably in 2017. Based on many of the indicators that I have followed for a very long time, the world economy is ending 2017 on a cyclically rather strong footing. I suspect that when we look back, world GDP growth may have been in the vicinity of 4% this year. In addition, eight of the 10 largest economies in the world have accelerated at the same time. The other two, India and—surprise, surprise—the UK, have weakened. Rather interestingly, even both of those have in recent weeks shown some better signs after their previous disappointments.

This level of global economic activity is probably the best that we have seen for 10 years and some of the economies most relevant to us here in the UK are showing particularly good signs, ironically including the eurozone. Its November purchasing managers’ index, published just last Friday, was the strongest since 2000. Of course, this is merely the cycle and, as I said, there are all sorts of things that worry people all the time, many of which could derail the global economy at any stage. But I say all this because it is important to remember it as the backdrop to the Budget.

In this regard, it is disappointing that the UK economy has slowed, although there may be a reason why the economy has not slowed as much as some might have thought. Looking forward, if this global environment were to remain so benign, it might help us more than many of us have previously thought with some of the challenges ahead, including of course Brexit. As I have stated in this House before, as important as I believe Brexit to be, we have bigger challenges here in the UK which, if addressed, could actually help diminish the dilemmas of Brexit, as well as forming an appropriate response to the challenge. At the core of these are weak productivity, poor educational outcomes for a country with our development, poor skills and regional and intergenerational inequality.

I therefore re-emphasise that some recent signs in the UK, albeit tentative, show surprising improvements. Our own November purchasing managers’ index, also published last Friday, was the strongest for four years. Moreover, and in my judgment of greater importance, there are tentative signs of regional economic change, especially in parts of the so-called northern powerhouse. Many people are still unaware that we have regional purchasing managers’ indicators: up to October, those regional PMIs show the north-west in particular, but also now Yorkshire, continuing to outperform London as they have for most of this year. Employment trends have also been stronger in some of these areas in recent months. On top of this, there are perhaps growing signs that the peaking of house prices in London is not yet being followed elsewhere in the country; indeed in parts of the north and elsewhere, house prices are picking up somewhat. If for some reason these trends were to persist—this is very tentative—they would be highly welcome developments which, among other things, would have a large impact on regional inequality in the UK.

Against this global and domestic background, and given the rather emotional political environment, I believe that the Budget was quite sensible. The Chancellor is to be commended for avoiding some of the considerable pressures for major shifts in taxation or spending. It is also possible that with the abandonment of its acknowledged previous multi- year anticipation of a future improvement in productivity, the OBR could still turn out to be wrong but in a different direction. While there are obvious reasons that can explain our persistent productivity weakness, some of which I have spent far more time looking at than I sometimes think I would like to have done, many aspects of them remain a bit of a mystery. It is also the case that despite persistent tightening of the labour market our productivity could suddenly start to improve—even if we do not know why—especially if wages were to accelerate.

The whole issue remains quite uncertain, as it was even without the OBR’s shift. Whatever path follows on this score, the Chancellor was right to focus on policies to boost productivity rather than pursuing a major shift in spending or tax policy focus. It was especially heartening, after a gap of more than 12 months, to see fresh policy measures, albeit modest, with respect to devolution. In this regard, I congratulate those in North Tyneside as well as the Government for their persistence in these endeavours, and encourage others in the remaining urban areas of England to put aside their ongoing petty squabbling and seize these greater opportunities. There may be many reasons why the north-west economy has recently started outperforming elsewhere, but being a trailblazer in the context of devolution certainly has not been a hindrance. Let us have some more of these policies as we may have found something that is actually working.

I shall finish quickly with a cautious welcome of the industrial strategy launched a few days after the Budget. It is so easily fashionable to dismiss it as merely a set of good concepts and wishes, which indeed it is, but it is generally the right sort of framework in which to deliver further long-term economic improvement, especially in helping to contain the damage from Brexit and other inevitable things that lie ahead. The focus on significantly boosting government support for R&D as well as more financial support for those emergent sectors that might develop as world-class industries are the right sort of policies, as are even more ambitious policies with respect to place-based devolution. The Government should get on and deliver them.