Economy: Budget Statement

Lord Skidelsky Excerpts

Tuesday 13th November 2018 Lords Chamber

[Lord Skidelsky (CB)]

My Lords, I welcome the general thrust of the Budget. As the OBR says, it represents the “largest fiscal loosening” since 2010. Noble Lords have suggested that the Chancellor is spending his windfall, but I mistrust the language of “windfalls”. Windfalls are only forecasts of revenue based on forecasts of growth; they are not there under the bed, so to speak, and should be given the credence they deserve—which is very little.

Let us put that aside. We are not here to discuss the Budget, over which we have no control. We are here to discuss, as per the terms of the debate, the economy in the light of the Budget Statement—that is, how the Budget will affect the economy. The answer is: very little. The loosening of which the OBR speaks is much too small to repair the damage caused by eight years of austerity. An adequate loosening would have required an economic understanding and a moral compass beyond the reach of this Government.

The Conservative Party’s narrative has been unchanged for 10 years. The Conservatives say that the recession was caused by the Labour Government; Mr Hammond twice called it “Labour’s Great Recession” in his Budget speech. He said that the austerity policy had nothing to do with ideology: it was simply necessary to clear up the mess Labour had left. Let me put it as bluntly as I can: this narrative is economically illiterate and morally fraudulent, yet the Conservatives have lived off it for the past eight years. That makes me very angry. Take the myth of “Labour’s Great Recession”. The idea that Labour was somehow responsible for the recession is ludicrous. The banks caused it, and Governments were left to clear up the mess. The Chancellor would have been more honest had he talked about the “Bankers’ Recession”—but no Conservative Chancellor can talk that way about his friends.

A slightly more reasonable version of Mr Hammond’s story is that the Labour Government left a fiscal mess. This does not run, either. The economist Simon Wren-Lewis of Oxford University has made a detailed—and far from uncritical—analysis of Labour’s fiscal policy between 1997 and 2010. I will quote just two sentences. He said that,

“any claim that the UK fiscal position was dire before the onset of the Great Recession is not tenable”.

He also stated:

“The line that the Labour government was responsible for leaving a disastrous fiscal position … is pure spin”.


I want to emphasise that, although Professor Wren-Lewis supports Labour, no competent analysis of Labour’s fiscal record would differ greatly from that summary. In any of its forms, the story of “Labour’s Great Recession” is a myth.

Let us exclude the myth and ask whether austerity was a necessary policy in 2010, as the Chancellor claimed and as the noble Lord, Lord Higgins, who is not in his place, accepted. The answer is no. The economics of the matter are straightforward. If the private sector reduces its spending, the Government have to increase their spending to plug the gap. If they cut their spending as well, it deepens and prolongs the recession. The only counterargument is that austerity was needed to give confidence to the markets. But the evidence is unarguable that any confidence-boosting effect of cutting spending—on the poor, it must be said—was overwhelmed by its depressive effect on total spending.

No competent economic authority now disputes that this is what happened—so why go on denying it? Martin Wolf of the FT called austerity a “large unforced error”. That well-known left-wing firebrand Mark Carney, Governor of the Bank of England, estimated at the end of 2016 that austerity had,

“on average, subtracted around 1 percentage point from demand each year”.

Cumulatively, that has left the British economy about 6% smaller than it would have been; in round numbers, it knocked £125 billion off the economy in that period. We are told that the divorce settlement from the EU will cost £35 billion or so, but the coalition Government cost the economy £125 billion.

I do not want to claim that the past eight years have been a tragedy like the First World War, which we remembered recently, or even the great depression. I do claim that the coalition Government inflicted quite unnecessary harm on the British people, which they have never acknowledged or apologised for.

The Budget has to be judged by the extent to which it sets about repairing the damage. It is not enough to say that austerity is coming to an end; it has to be reversed sufficiently to make up for the harm that it has done. This cannot happen unless the harm is acknowledged.

The damage is most clearly seen in the low growth figures, which other noble Lords alluded to. Far from bouncing back as vigorously as is usual after a deep collapse, the British economy has been growing at less than 2% a year since 2010. That is well below its historic trend and, as the noble Lord, Lord Hain, pointed out, things are expected to get worse. The OBR forecasts growth to be 1.5% on average over the next five years.

These are dreadful figures. Britain is near the bottom of the G7 countries. If we take into account the growth in population and the large inequality in income distribution, there is little room for an improvement in the real living standards of most people in the next five years.

The reason for low economic growth is the collapse in productivity. British workers work longer hours than workers in Germany, the Netherlands, France and Denmark, but they produce less for those hours. Annual growth in productivity has plummeted from average annual rates of about 2.3% before the great recession to 0.4% in the past decade. The Resolution Foundation states that,

“had the pre-crisis trend continued, productivity would be more than 25 per cent higher than it is today”.

I agree with Andy Haldane of the Bank of England when he says that we have a “long-tail problem”, but our tail has become longer than it was because our path back to headline full employment—in itself very welcome—has consisted largely in multiplying the number of low-productivity jobs at the expense of high-skill services and manufacturing. Look at the cuts in investment in housing, education and public services since 2010 and you have a pretty good explanation for the collapse in productivity.

The Budget could at least have begun to reverse this trajectory. Instead, we are promised a bagatelle for the British Business Bank, “a little extra” for schools, public toilets and potholes, a little relief here and there—and yet another inquiry into the productivity puzzle.

Over everything hangs the fear of the deficit. Some commentators even fear that the Chancellor has given away too much, too soon if he is to balance his books—but balancing the books should never have been an objective of policy. Balancing the economy should have been the objective, with a balanced budget as the happy by-product of sensible policies for ensuring strong economic growth. The hard-working British people, whose praises the Chancellor never ceases to sing, deserve better than he is prepared to give.

--- Later in debate ---

[Baroness Kramer (LD)]

My Lords, I begin by echoing the words of the noble Baroness, Lady Noakes, in reference to the loan charge. I am also on the Finance Sub-Committee of the Economic Affairs Committee. This House will know that, in the other place, my colleague Stephen Lloyd, the MP for Eastbourne, put down an Early Day Motion on this issue; 100 MPs have signed it across all parties, reflecting the experiences of their constituents. These are ordinary people such as hospital cleaners, social workers and nurses, who found themselves moved out of their normal employment and did not have the scope or understanding to realise that they were being put into tax-fragile arrangements when they were moved over to work as contract workers. I ask the Minister to take this back. The public pronouncements that have been made, both by the Chancellor and the Financial Secretary, seem to suggest they do not understand that this is the kind of person affected rather than a handful of glamorous celebrities or footballers. It is crucial that that is drawn to their attention.

That was the first of the wind-up speeches; it is clear that the big announcement in the Budget was the £20.5 billion for the NHS. However, I pick up the point made by the noble Baroness, Lady Jolly, that this equates—if one looks across the whole budget for the Department of Health and Social Care—to a rise of only 2.7% in 2019-20, which is £3.2 billion short of the minimum increase of 3.3% necessary for the NHS and the full department just to stand still.

There is an impression created by the Budget that the problems in health have been solved. They have not. Health is still facing continuous cuts year on year. We have to be honest about that and many of us are very worried. Again, on mental health, to which the noble Baroness, Lady Jolly, drew attention, the money promised of £2 billion falls about £1.5 billion short of delivering the programme that was described. While additional money is welcome, it is well below the necessary promise. On social care, £650 million barely touches the borders of an overwhelming problem.

The noble Baroness, Lady Altmann, talked about how unprepared families are to deal with social care issues, saying that this Budget could have been used to deal much more widely with that underlying problem. The noble Lord, Lord Kerslake, and others referred to the LGA work which shows that by 2024-25 adult social care alone will face a £3.5 billion gap just to fund the national living wage and maintain existing standards of care. So even in health we are still in a cutting regime.

On the subject of non-protected budgets, the noble Lord, Lord Haskel, talked about further education but I should like to focus on schools. There was money for bits and bobs but we need £2.8 billion a year just to reverse the real-terms cuts per pupil since 2015. Schools need teachers to function but that has not been dealt with in this Budget.

Other non-protected budgets are those for prisons, police and local government, the latter of which was referred to by the noble Baroness, Lady Eaton. Picking up the point made by my noble friend Lord Fox, there are a few patches for this year but non-protected budgets will still be facing a 3% cut per person in real terms by 2023. I think that everyone in this House recognises the inadequacies of many of those departments when it comes to delivering the services needed by a reasonable and civilised society.

The noble Baroness, Lady Stroud, congratulated the Chancellor on the additional money for universal credit. However, I do not think it is adequate and nor, quite frankly, do most Members of this House. The money put back into work allowances equated to only about half the cuts made in 2015. The benefits freeze continues for another year and the newly self-employed continue to face overbearing minimum income requirements.

The noble Baroness, Lady Stroud, also talked about the tax credit debt rollover problem. According to the IFS, £4 billion more in welfare cuts is still to come—something that I think we all find reasonably challenging. I personally find it very unacceptable, and I wanted to pick up the point made by the noble Lord, Lord Horam. I am appalled that nothing has been done in this Budget to tackle the waiting time problem for people going on to universal credit. I have a personal friend—so I see it personally—who, because of the loan she had to take out to cover that period, is trying to live on £20 a week after rent. That is simply impossible and we should not have a universal credit system that puts people into that situation. The Chancellor missed an opportunity.

I was absolutely thrilled when the right reverend Prelate the Bishop of Chelmsford raised the green agenda, which we did not hear much about during this debate. This was a real opportunity to put down a marker, as the right reverend Prelate said, particularly after publication of the intergovernmental report on climate change. Why do we not have a 5p levy on plastic cups? I would have thought that the Treasury would welcome the money, as well as the impact that it would have on the overall plan to reduce plastics. Surely this would have been an opportunity to ban single-use plastics within three years, which is entirely doable.

The noble Baroness, Lady Altmann, talked about ultra-low emission vehicles and electric cars, the subsidies for which were cut, even though there were goodies in the Budget for oil and gas. That industry has real potential for the future of the UK. This would have been the occasion to reinforce that future and to make a substantial difference to the environment and the critical circumstances that we face.

I join various people in this House who have talked about our need to face up to the challenge of raising additional taxes. I think that we have a broken tax system and this should have been the Budget that began to deal with it. If we are to restore public services to the level at which we wish to see them and to do so in a fiscally responsible way, tax will be necessary. I do not just want a conversation on this; I want action. I have no problem with raising the personal allowance threshold for low earners, but at this time and in these circumstances it is surely inappropriate to raise the threshold for higher earners. I suspect that many, if asked, would gladly have forgone the promised £520 for the average high earner in order to help those left on the fringes of society. As one friend said to me, “It’s pretty hard to think I’m a priority when I see homeless people asleep in so many doorways”.

The Government could have made real headway with our public services and welfare crises if they had supported Liberal Democrat proposals to put a penny in the pound on income tax and dedicate it to the NHS and social care. Although they did not talk about the amounts, the noble Lords, Lord Kerslake and Lord Macpherson, pointed out the benefits of a hypothecated tax. The Government could have made real headway if they had returned corporation tax to 20%—I do not think that a penny of investment has been stimulated below that level. If they had restored capital gains tax to equate with income tax, if they had overhauled inheritance tax—many people talked about the importance of the challenge of taxing wealth as well as income—and if they had changed pension relief as we proposed, they could, as I said, have made real headway with our public services and welfare crises, delivering something like another £29 billion a year by 2020 to spend on those necessary and fundamental services.

Here I disagree with the noble Lord, Lord Skidelsky, because I think that fiscal responsibility is absolutely key to the future, and that is why I turn to tax-raising measures. I remember the Brown Government, and spending being based on the assumption that boom and bust had ended for ever. However, never underestimate the cycle—it comes back to bite you. His Government assumed that there would be no external events but we ended up with a phenomenal banking crisis. They also assumed a flow of taxes based on very high profits within financial services that, frankly, derived from abuse. When that abuse was ended, that revenue source disappeared. Therefore, I disagree fundamentally that there was no need for adjustment.

[Lord Skidelsky]

I intervene simply because the noble Baroness mentioned me. I am not against fiscal responsibility. Why on earth does she think that I am? I think that fiscal responsibility includes preventing crises, such as the one in 2008, and taking the right measures when a crisis has happened to restore the economy. I am not against fiscal responsibility. In fact, who is?

[Baroness Kramer]

I think that we will have to debate this off-piste or I will talk for too long.