Budget Statement

Lord Taverne Excerpts

Wednesday 25th March 2015 Lords Chamber

[Lord Taverne (LD)]

My Lords, it is a long time since I spoke in an economic debate. My reason for speaking today is my deep disappointment with the Budget. I respect George Osborne, who does not normally seek cheap popularity. He has depth and stamina and is not a PR man, unlike some other senior figures in the Government. But his Budget boasted about our economic success. If one looks at the record, one will see that boasting reveals a certain degree of complacency. At one time, I was a non-executive director of some major companies. I found the companies that kept declaring how excellent they were to be generally mediocre. The really good British companies were self-critical and concentrated on improving their weaknesses, not on boasting about their strengths.

In fact, our economic record since the crash of 2007 has not been brilliant. There has been progress, but our recent recovery is based on some very shaky foundations. Perhaps the most serious deficit we face is a huge trade deficit, which means that we depend precariously on the inflow of hot money. According to the IMF, the current account deficit is some $120 billion, the largest of any OECD country and three times that of France, with which Osborne compared us so unfavourably. The inflow of hot money, that is excluding capital for portfolio investment in companies and property, is some $210 billion. Our dependence on this fickle form of capital is greater than that of any other major country and it could flow out very rapidly. For example, after the election we are committed to a referendum, and polls show that there is a real chance of Brexit. That could be an economic disaster.

Why can we not pay our way? Because we are not competitive. Indeed, we are pretty well bottom of the league of major countries in the growth of productivity—on which, in the end, as many speakers have mentioned, prosperity depends. Our GDP per head is still 0.5% below what it was in 2007. Productivity has recovered much faster in the United States, Germany, Japan and—please note, Mr Osborne—in France.

Furthermore, the monstrous inequalities in today’s Britain have increased. More people are in jobs, that is true, and unemployment has fallen—good—but at the cost of a major decline in wages, the biggest in more than 100 years. There is now some recovery, but it is very slow. At the same time, top executive pay has been rising by more than 10% a year while wages have suffered.

For that, there is no justification, moral or economic. Inequality does not improve growth or productivity, and of course it undermines a good society. Two of the most important books that I have read in the past decade are The Spirit Level, by Wilkinson and Pickett, and Capital in the Twenty-first Century, by Piketty. The first shows that the most unequal countries are also the most socially dysfunctional. Piketty traces the rise and fall and rise of inequality in the United States, Britain, France and Germany and explains that it is due to the fact that generally, return on capital grows faster than the growth of GDP. Hence, the owners of capital, the rich, grow richer. He also shows that the post-war years, when, through progressive policies, inequalities were reduced in all those countries, were also the years of fastest economic growth. So much for the need to pay chief executive officers and bankers millions a year so that we can be better off or to pay bankers huge bonuses to stop those who helped to bring about the crash being recruited abroad for their unique skills.

Conservatives favour shrinking the state and tax cuts. Tax cuts mean crippling public services. Apart from anything else, it is foolish for Mr Cameron to pledge no VAT rise. He could reasonably say that he sees no present need for an increase in VAT and has no present plans for it, but why tie his hands with solemn pledges when he does not know what crises may be ahead?

Anyway, it may be unfashionable, but in my belief, in present circumstances tax cuts should be the lowest priority of policy. I am with that great American lawyer Oliver Wendell Holmes. He not only dominated the Supreme Court for 20 years after his appointment at the age of 72—which is a good example for those of us of riper years—but declared that paying taxes is the price for a civilised society. Amen to that.

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[Lord Deighton]

That is consistent with my earlier response, that we did not have that choice because the markets would not have allowed us to continue with the scale of deficit we had.

Many noble Lords made very useful and interesting contributions on the housing market: the noble Lords, Lord McKenzie, Lord Best, Lord McFall, Lord Whitty, the noble Baroness, Lady Valentine, and the noble Lord, Lord Graham, who, with mobile homes, may well have the solution to some of our supply problems. The current status is that over 500,000 homes have been built during this Parliament. Of course, that is also tied to the financial crisis, but planning approval and housing starts are now at their highest for seven years, so they are benefiting from part of the recovery.

I agree with the general sentiment of most noble Lords who contributed on this topic that supply is the principal problem, and that dealing with our planning system, incentivising local authorities to build more, using both sticks and carrots in the process, is absolutely key to the way ahead. The noble Lord, Lord Best, suggested that there was nothing in the 2015 Budget for housing supply, but then referred to all the things in the small print that are going on. The demand-side interventions by my right honourable friend the Chancellor have been very effective; Help to Buy has been a successful policy—more than 80,000 people now own homes who would not have been able to do so before. The OBR and the Bank of England are comfortable that the impact of improving demand in that way has not been highly inflationary to the house price market.

There were lots of comments on pensions and savings, from my noble friends Lord Freeman and Lord Flight—who talked about the savings rate in a very interesting and thoughtful contribution about what we need to do about the long-term savings rate and how important it is—and from my noble friend Lord Northbrook and the noble Lord, Lord McKenzie.

One of the key questions all noble Lords asked was about where we are on Pension Wise, which is the service provided by government to provide guidance to people who are now faced with these new flexibilities. There are three potential channels: the digital channel—noble Lords can go home tonight and look at that, as it is up and running—which gives a description of what the flexibilities are; the telephone channel which is managed by the respected organisation TPAS—you can call up a call centre now and book an appointment with TPAS to have a 45-minute telephone session; and you can also call up Citizens Advice, which is the respected brand that delivers the face-to-face service. Therefore, each of those organisations—TPAS and Citizens Advice—has hired and put its people through a training programme so that they are ready to meet the demand. Of course, that is a very challenging thing to work out, because it is very hard to work out how many people will want what kind of advice, and when. However, we have done everything we can to ensure that that service will be available with the right capacity and the right quality—and to take on board my noble friend Lord Freeman’s point, with support from the FCA there will be plenty of opportunities to have a look at how it is working, and there will be a lot of work around making sure that potential scammers cannot be successful.

It is useful to be critical about growth and productivity performance, because it is important to focus on what we can do to make it better. We should remember that we are growing faster than anybody else at the moment, so it is not all bad news.

My noble friend Lord Taverne and the noble Lord, Lord Hunt of Chesterton, talked about the role of foreign capital coming in—hot money, as my noble friend referred to it. Generally speaking, this economy has enormously benefited from being an open economy, with the advantages that come with that. The noble Lord, Lord Hunt, referred to Hitachi, which has come here to assemble the trains, and has also decided to set up in the UK as the base for its European rail business. So, generally speaking, operating as an open economy has been a hugely successful thing for this economy.

[Lord Taverne]

Would my noble friend deal with the question of the danger of the inflow of hot money, which makes us very vulnerable indeed if there is a crisis of any kind? Is not the deficit on the balance of trade a very serious failure of the present Government?

[Lord Deighton]

There is a deficit on the balance of trade, although the most recent figures two weeks ago were the strongest that they have been for a very long time. I accept that our relative export and import performances are not as strong as they should be, but I would not put it down to a failure of this Government. It is a chronic long-term challenge, which British industry has to face up to.

Hot money is a complicated subject. In terms of investing and having ownership shares in our big businesses, I frankly do not find that particularly disturbing, because we are in a global market and those ownership positions are traded very actively. As I said, Britain has benefited on a net basis and manages that exposure very effectively.

The noble Lord, Lord Northbrook, asked what the future was for a business rates review and the annual investment allowance. The Chancellor said that that allowance would be looked at in the Autumn Statement next year.

There was a strong consensus for more decentralisation around the House—the noble Baroness, Lady Valentine, for London and my noble friend Lord Shipley, looking at the north-east.

My noble friend Lord Thomas referred to the tidal lagoon in Swansea, and I am delighted that that has moved into the next stage of negotiation. I was also delighted that he pointed out the work that has been done for farmers to help with their volatility by spreading out their taxes over a five-year period.

I am very much in sympathy with the perspective of the noble Lord, Lord Stevenson, on the arts, which is an important part of life and a great national strength. Through the tax system we are doing quite a lot to support the film industry.

In conclusion, I thank noble Lords not just for this debate but over the years that I have been at the Dispatch Box, when we have had very interesting exchanges. I have learnt a lot and improved my perspective from it. I thank my noble friend Lord Newby, who has been my colleague at the Treasury and has been magnificent at the Dispatch Box.

Despite the argument that we have been having, the British economy is in a very different situation five years on from the one that we inherited. We have stabilised the public finances. There is a very valid debate about the pace at which deficit reduction continues from here, but the circumstances of the economy will have a great deal to do with that, as they did over the past five years. For me, the focus is really on two things, both of which I would describe as productivity challenges. One is in the public sector, delivering great outcomes but in a much smarter way with more limited inputs. The same applies to the private sector, where the Government’s job is to create an environment in which we can unleash the inherent dynamism of that sector and, frankly, let them get on with it.