Impact of Government Policies on Family Budgets

Lord Stoneham of Droxford Excerpts

Thursday 27th October 2011 Lords Chamber

[Lord Stoneham of Droxford]

My Lords, this debate is being held at a time of worrying outlook for the economy. No family or household who saw the figures last week of a 5.2 per cent increase in inflation and a comparable increase in salaries of 1.8 per cent needs telling that grappling with high energy and food prices is very tough indeed. There is huge concern about job security, declining real incomes and frail confidence both in business and in households.

When I joined the House of Lords I thought that it had a reputation for being best at strategic policy debates. Although I would like to thank the noble Lord, Lord Knight, for initiating this debate, I regard it as more of a tactical debate with strong political undertones if not overtones. I have always admired his political skills, not least in retaining Dorset South in 2005. As somebody who was helping to organise the Liberal Democrats’ election campaign that year, and also as a man from Portsmouth, I admired the way in which he arranged for the Sea Cadets to give the Prime Minister a welcome on the first day of that election campaign in Weymouth. It was one of the high spots of the campaign, which certainly did not get better in my view. It showed real political skill.

I would, however, like to correct the noble Lord. He kept referring to the Tory Government: this is a coalition Government. There are good reasons why this is a coalition Government. The Government are trying to grapple with decisions. If there had been a Labour Government, they would have had to grapple with the same problems.

All recessions are painful but I have worked through five of them and this one is undoubtedly the worst. This one is particularly bad because there has been a decline in gross domestic product, and that is bound to cause a fall in living standards. All recessions, sadly, weed out marginal companies and businesses, and that creates unemployment. Sadly, resources at a time of recession are always at their weakest to protect the vulnerable, and that is one of the difficulties that we face now. The aim of the Government is obviously to ensure that the broadest backs share the greatest burdens in this situation as we work to restore the economy, the destruction of which, I must point out again, started under a Labour Government.

At this difficult time, I recall JK Galbraith's warning to President Kennedy. He said:

“Politics is not the art of the possible. It consists in choosing between the disastrous and the unpalatable”.

Sharing pain in these circumstances is not easy, but the broad parameters of what the Government are doing are right. There will be no restoration in confidence, job security and growth unless there is confidence in the fiscal debt recovery plan both nationally and globally. Wherever possible we have to direct help to the most vulnerable. I particularly welcome the Government’s initiative, made despite all the pressures, in raising tax thresholds. At a time of severe economic pressures we have also given the triple guarantee for state pensioners, building on the pension credit scheme of the previous Government, which should protect those who are most vulnerable to inflation and least able to protect themselves. The brave universal credit reform will seek to reduce poverty, simplify a very complex system and improve work incentives.

The problem now is that many of the principal factors impacting on household budgets are externally driven. The exchange rate devaluation was 25 per cent in the last two years of the Labour Government. It has helped growth but—as Harold Wilson rudely discovered in 1967—the pound in your pocket is bound to be affected by higher prices.

The noble Lord, Lord Knight, mentioned fuel. Prices are obviously affected by the weak pound and the rise in wholesale energy prices. We would normally expect energy prices to fall in a recession. Most forecasters have been surprised that they have not fallen and there may be hope now that we may see some fallback in wholesale prices. But energy prices are now acting as a squeeze on real disposable income and deflating the economy. That is not a new problem. In a recent independent review of fuel poverty, Professor Hills has shown that the growth in households in fuel poverty grew from 2 million to 5.5 million between 2004 and 2009. This is a problem of rising wholesale energy prices and poor quality housing stock which is not sufficiently insulated to reduce the demand for energy, and therefore to help offset the price increases.

Although fuel costs and the weakened exchange rate are two key components of the extra costs on household budgets, we must accept that VAT has imposed a significant one-off increase in prices this year. I accept that the consequences of this tax and how regressive it is are disputed, depending on whether you assess it on income or household expenditure. However, the arguments are more complex when choosing between a cut in public spending or an increase in VAT. The critical question is where £13 billion in revenues would otherwise come from. Let us also not forget that no other authority than Alistair Darling was going down this track in 2009. I do not think that there is any guarantee that reducing VAT necessarily increases consumer spending; spending declined by 3 per cent in 2009 when the last Government tried it.

Let us also not forget—the noble Lord, Lord Knight, did not mention it—the benefits of low mortgage-interest rates. As the noble Lord, Lord Sassoon, reminded us in Questions today, a 1 per cent rise in UK interest rates today would add £10 billion to family mortgage bills alone. Actually, in the last year, the average fixed mortgage rate has fallen by almost 1 per cent. At least in this recession, unlike in 1989, we have not had negative equity in serious terms, with people forced to sell their homes because of high interest payments.

The Governor of the Bank of England has warned us that we are about to face the longest decline in real disposable incomes for some time. So what needs to be done to protect households? I believe that the Government must keep to their strategy that the broadest backs should suffer the greatest burden and that the most vulnerable should be protected. It is more than a symbolic gesture that we are maintaining high-pay restraint and the top rate of tax and that we have increased the CGT rate to 28 per cent.

Though all those aspects have to maintained, we must also maintain the Government’s ongoing commitment to raising tax thresholds as we can afford it. We must also maintain the commitment to the triple guarantee for pensions in April 2012. With quantitative easing, we must also recognise that this will create problems for those depending on interest from their savings, and indeed those approaching retirement and taking up occupational pensions. We must not forget that the consequences of low interest rates mean that people living on their savings and on occupational pension schemes are under severe pressure at this time.

In the energy sector, I hope that we will look at recognising what Professor Hills has said this week—that fuel poverty is very much linked to the issue of quality of housing as well as pricing, and that we need more schemes for better insulation, pioneered and financed by energy providers. Indeed, we need a whole series of partnerships. If the Government cannot provide the money then the partnerships will have to come through activity in the housing sector, with housing associations and the private sector, to develop funds for more social housing. It will have to come from energy companies, through some of the work of the regulator, to help those on low incomes and to encourage schemes for energy insulation, all of which are employment-generating activities. The banks need to be seen as sources of credit for small businesses. We need to work on that.

Always remember that once confidence has been shaken it takes a long time to rebuild it. The best protection for vulnerable groups is a growing economy, low inflation, and more choice of jobs. That requires a renewed partnership between industry and Government, to use the resources for business investment which they have but, for the time, are cautious in using.