Lord Skidelsky
Main Page: Lord Skidelsky (Crossbench - Life peer)
Lord Skidelsky
My Lords, the Finance Bill implements the taxation provisions of the emergency Budget Statement of 22 June. These will come to about 20 per cent of the total fiscal tightening which has been planned in this Parliament. So the Finance Bill as we have it before us is part of the Government’s programme for balancing the Budget over the next five years. In his opening speech, the noble Lord, Lord Sassoon, said that a failure to address the deficit is the greatest danger we face. I would say that the failure to address the hole in the economy is the greatest danger we face and that unless the noble Lord is able to demonstrate how cutting the deficit will produce an economic recovery, there is a massive hole in his speech. I listened in vain for any such demonstration by the noble Lord.
In the debate on the Address, I asked the noble Lord, Lord Henley, this question. By what mechanism do the Government believe that fiscal tightening will promote recovery? The noble Lord, Lord Henley, was good enough to write to me, making three points. His first was that public borrowing is only taxation-deferred. The idea is that the public, knowing that they will have to pay for the deficit with higher taxes, increase their saving by the amount of the higher taxes they expect to have to pay. Thus the deficit not only fails to stimulate the economy, it crowds out more efficient private spending. As stated, the argument is simply false. That part of the deficit which brings into employment resources which would otherwise stand idle will be paid off without any need to increase taxes, simply by the growth of public revenue which the rise in national income brings about. I do not know that any serious economist believes this Ricardian equivalence argument and yet it is one of the justifications for the Government’s deficit-cutting programme. So where is the Treasury getting its wisdom from?
The second point the noble Lord, Lord Henley, made was that it would be irresponsible to accumulate substantial debts that would have to be paid off by subsequent generations in the decades to come. The reply to this is that a deficit does not impose a burden on future generations. There is no repayment burden because the Government, unlike private individuals, can and normally do repay their maturing debts by continuing to borrow. As for the interest burden which is said to arise when interest is paid by taxation rather than by fresh borrowing or printing money, it is merely a transfer payment. Income is transferred from taxpayers to bond holders. Since most of the transfer of income is within the United Kingdom, it is therefore a redistribution rather than a loss of income for future generations. Again, these are quite straightforward points once one grasps them, but the Government and many of the fiscal consolidators have gone on and on about the burden which would be faced by future generations, as though there was a net loss to them from an increase in the national debt.
If, however, the public deficit is cut now, there will undoubtedly be a burden on both present and future generations. Income and profits will be lowered straightaway; profits will fall over the medium term; pension funds will be diminished; investment projects will be cancelled or postponed; and schools will not be rebuilt, with the result that future generations will be worse off, having been deprived of assets that they might otherwise have had.
I go back to the letter of the noble Lord, Lord Henley. Of course, this is not a personal attack on the noble Lord, whom I greatly like and admire. He is just acting, as is the noble Lord, Lord Sassoon today, as the unfortunate fugleman of the Treasury. His third point was:
“The higher the level of debt, the higher the interest rate that markets will demand to compensate them for holding that debt. Failure to tackle Britain’s deficit would therefore push up the costs of debt service and risk higher long-term interest, not just for the Government, but also for families and businesses through the higher costs of loans and mortgages”.
Every proposition in that short paragraph is false in the present situation. If the economy were fully employed, it is true that the higher the level of public debt, the more the Government would have to pay for it, which could cause the whole structure of interest rates to rise. But if the private economy is depressed, interest rates on government debt do not have to rise; indeed, they have not risen over the whole of this recession, even though the Government are borrowing almost three times as much as before. Why? It is surely not because of the resolute steps which the Chancellor has taken to reduce the deficit and thus restore confidence, since the Treasury is able to borrow just as cheaply and with the same long maturities as under the previous Government.
The reason that all Treasuries, except the most profligate ones such as the Greek treasury, can get their money so cheaply is that investors demand safety-first investment strategies, or, as Keynes would have said, there has been a massive flight to liquidity. Even as government debt mounts, low yielding bonds are still considered better—because they are safer—than equities. Or, put another way, when there is a dearth of private sector investment opportunities, government borrowing does not “crowd out” private sector investment; it adds to it.
The reason that private sector investment is depressed is not fears about the cost or sustainability of the deficit. Do businessmen wake up in the night, thinking, “God, how large the deficit is! I really can’t do any business now because of the increase in the deficit”? I do not believe that that is the way in which businessmen think about it. They do not invest because they do not see the orders, not because they think that the deficit is running out of control. It is the same with the commercial banks, which still cannot accurately price their assets. It is because they have troubles with their balance sheets and because businesses cannot see where the orders are coming from that there is too little investing and borrowing going on in the private sector.
This explains—I go to a point made by the noble Lord, Lord Higgins—why quantitative easing is not the automatic offset to fiscal tightening that some noble Lords, especially the noble Lord, Lord Barnett, assumed it to be. It is not the printing of money but the spending of money which is important. Quantitative easing, unless it is done in particular ways—that is a subject on its own—is not a guarantee of the spending of money. So how does the noble Lord, Lord Higgins, propose to get a monetary policy consistent with a reasonable level of demand through quantitative easing? That was a missing part of an otherwise very interesting speech. In short, contrary to what the deficit vigilantes say, the deficit is the consequence and not the cause of depressed business conditions.
I believe that a Government who had the courage and intelligence to explain all this properly to the public would have a much better chance of calming jittery markets than the grotesque exaggeration of the dangers of debts and deficits which is now going on.
I agree thus far with the noble Lord, Lord Desai. There is not going to be a repeat of the 1929-31 depression. We have done enough to cut off the slide. There is an anaemic recovery going on. The UK may grow by 2 per cent this year, though I would be surprised if it did. If we look beyond a single quarter’s figures, to the forces of demand in the world, especially as they will be impacted by the rolling out of the cuts in Europe and elsewhere over the next few years, it is hard to see where the sources of robust growth are coming from. In that sense I disagree with the noble Lord, Lord Desai, who made a constructive and well-thought-out speech. I agree with him when he argues that the extra cuts this year are too slight to have any really depressive macro-economic consequences.
The point is that the Government have said that they are deliberately going to take £100 billion of spending out of the economy over the next four or five years, and it is the effect of that determination to do that on business confidence which seems the relevant factor, not the very small amount of cuts that are going to take place this year.
So what would my alternative policy be? One confidence-boosting policy would be for the Government to cut taxes by the same amount as they cut their own spending. This would imply a reduction of taxes by about £100 billion over five years. There is a nod to tax cutting in the Budget in the proposals to reduce corporation tax, but the net effect of the tax policies is to raise taxes and therefore will be deflationary. Also, the effect of tax cutting on demand is subject to quite large uncertainties: how much will be saved, how much will be spent and so on. A far better way would be to offset any cuts in current spending by an increase and acceleration in capital spending. A recession is an ideal time to bring a country up to date, since labour and capital will be cheaper than in boom times.
The £38 billion high-speed rail link from London to Birmingham and beyond, unveiled in March by the noble Lord, Lord Adonis, who I see is in his place, is a perfect example of such a programme, as is the smaller railway electrification programme announced at the same time. This is not all shovel-ready stuff, but a determined Government could get the high-speed scheme going long before the business-as–usual start planned for 2017. It would set up an immediate demand on the construction industries while also offering long-run returns. Former Chancellor Alistair Darling’s scheme for a green investment bank to invest in renewable energy and energy efficiency, is another example. Industry experts predict that up to £37.5 billion will be needed each year for the next 10 years to upgrade or replace our old power plants.
These are examples to develop the capital of this country for its long-term benefit which should certainly be part of any fiscal plan for both the immediate and the medium-term future. Of course it would be better if a large programme of capital spending could be agreed with other governments. But we could still do a lot of it on our own. A Government whose animating spirit was Lloyd George rather than Boy George would ask the public to subscribe to a national recovery loan of £100 billion, to be spent over five years to equip the UK with a modern transport system, an efficient energy system and a modern school system. To advocate capital cutting at a time of recession is the worst remedy that one could possibly have. It is an insane policy and it will not only destroy the coalition, but it will do enormous damage to the country.
Lord Bates
My Lords, it is a privilege to contribute to this debate. We have heard two excellent maiden speeches from my noble friends Lady Browning and Lord Spicer. Although their speeches were very different, they were both accomplished parliamentary performances. They will both be a credit to this House, and we look forward to many more of them.
I was particularly interested in the contribution of my noble friend Lady Browning, who drew on her experience in small to medium-sized enterprises. We have heard some wonderful expositions of macroeconomic theory in this debate—and I mean that genuinely. They have been quite astounding and it has been a privilege to listen to them. But there is also another side to this. I wonder what lessons could be learnt from the small business community, which has been wrestling with exactly the same recession that the Government are now wrestling with, and the same problems. They acted more responsibly. They have been controlling costs, which is the first thing that you can do in a recession, since the onset of the financial crisis two years ago. That lost two years of the Government taking responsive action has meant that the delay has increased the severity of the measures that are necessary to correct the problems that we face. Our costs are too high as a country. I cannot quite understand how it is possible to double public spending over the past two years and double the debt over the past five years but somehow not possible to reduce it by 25 per cent or to reduce government borrowing by a similar proportion. One might begin by simply retracing the steps taken to get us into the situation that we are in.
The responses that a small business might have to this crisis might be, first, to control unnecessary costs. What do I mean by controlling costs? One way in which to control costs in a small to medium-sized enterprise is by reducing complexity, which adds to cost. If you take out complexity, you increase efficiency in the business. One thing that I have been delighted about with the Finance Bill is that it runs to only 26 pages, which is terrific. I dug out from the Library last year’s Finance Bill, which was 167 pages long. Just to add to that, in case there might be a worry that it was not complex enough, 156 pages of Explanatory Notes went with it.
Every time you add complexity into the tax system, into government and into regulation, you immediately add to costs and overheads, because there needs to be people sitting in government departments interpreting what it actually means. It is more difficult to collect revenue from a complex tax system, simply because there are people on the other side who are hiring equally qualified accountants and lawyers to navigate through the same complexity that we are facing. So, complexity adds to cost. Simplicity reduces cost and I therefore pay tribute to my noble friend the Minister for introducing such an efficient Finance Bill to this House and I hope very much that this is a shape of things to come. We must be ruthless in cutting down on unnecessary legislation and bureaucracy, not because of some free-market experiment, but simply because that is the way that we can cut the overheads of government and cut the cost of government without cutting front-line services, which is what we all want to do.
There is another thing that we would do. So far in the debate, some comments have suggested that this is a one-gear approach to tackling the deficit; that all it is about is reducing cost. Of course, it is not about reducing cost, any more than in business it is all about reducing cost. It is about reducing cost, taking out cost, simplifying systems, but it is also about increasing sales, increasing revenue into government.
I am delighted to see a number of things in the Bill which are aimed at stimulating the enterprise economy so that we can actually start increasing sales: the reduction in the small companies rate to 20 per cent, instead of the previous Government’s planned increase to 22 percent from April 2011; the increase in the entrepreneurs’ relief lifetime limit for capital gains tax from £2 million to £5 million, effective immediately; the reversal of the most damaging part of the increase in employer national insurance contributions inherited from the previous Government; the raising of the threshold for national insurance contributions by £21 above indexation; a review of small business taxation, including IR35 regulations, to create a simple, more predictable tax regime. Together, I believe that all these measures will increase our sales as a nation and that has to be important.
Some might say that that sounds a bit simplistic, but a very sophisticated organisation, the World Economic Forum, undertakes an annual assessment of the competitiveness of all the economies in the world. I know that it has been a source of concern to the previous Government as well as to the current Government that the level of competitiveness of the UK economy is falling substantially. What are the criticisms that the World Economic Forum find in our economy, the reason we are tumbling down the league tables? There are four. It identifies, first, access to financing. Secondly, interestingly, it identifies inefficient government bureaucracy. Thirdly, it identifies tax regulations. Fourthly, it identifies tax rates.
That is an independent, credible organisation, undertaking an assessment of all governments around the world and coming out with some pretty clear statements about what it thinks the inherent weaknesses of our economy are. That is why the responses which have been brought forward by the coalition Government are interesting; they chime very much with what the World Economic Forum has found. First, I talked about tax rates and the measures which are being introduced there. I talked about the need for tax simplification and less regulation, a new system of regulatory control whereby Ministers must first show how they will reduce the existing burden of regulation before bringing forward new regulations—what a breath of fresh air. Also welcome is a fundamental review of all regulations that the previous Government scheduled for introduction over the coming year. Regulations will cease to be law after seven years unless Parliament has confirmed that they are still necessary and proportionate and they were explicitly set to have a longer timeframe. There will be a review of all the employment law for which each department is responsible, as well as unnecessary health and safety regulations. The gold-plating of EU regulations will be tackled. I am making the point that when an external audit of the performance of our company—UK plc—points out that there is a real problem with the complexity of the bureaucracy, that will help to reassure, as it relates to one of the responses that we are taking. The lower tax rates will help, too.
My noble friend Lady Browning made an impassioned plea about access to finance, which is a major problem. I see it from two sides. I have seen it on the small business side, where things are tightening up dramatically, but I also spare a thought for the banks, although I know that that may not be the most popular thing to say. The banks have said to me in conversation that the problem is not so much that they are refusing to lend now. The problem relates to the level of anxiousness that, unless there is confidence that the deficit will be tackled—I appreciate that this may not fit with economic theory, but it certainly fits with banking practice—there could be an increase in interest rates. The one thing that is keeping UK plc and many homes, families and businesses afloat is the 0.5 per cent base rate—not that you get it, but it is the base rate from which the premium is operated. Low interest rates are keeping people in their homes by making homes affordable and they are keeping people in their businesses and their jobs. If interest rates were to ratchet up to 5 per cent or 10 per cent as a result of international confidence in the economy decreasing—
Lord Skidelsky
I would not normally interrupt, but is the noble Lord seriously suggesting that markets are likely to price our government debt at 5 per cent or 10 per cent? If so, does he accept that view of the markets? Does he think that it is binding and that we just have to do whatever market sentiment tells us?
Lord Bates
That is a fair point but, in a sense, it does not really matter what the most distinguished economist in the room says about it or what the least distinguished economist in the room—me—says about it. Fitch’s preliminary assessment of the Budget was that,
“it sets out an ambitious deficit reduction path that, if delivered upon, will materially strengthen confidence in UK public finances and its ‘AAA’ status … Taken together, the specific measures announced today are substantial and enhance confidence in the outlook for UK public finances”.
Moody’s Investors Services has said that the UK Budget is “supportive” of the country’s AAA rating. There is that element of international confidence—