The Economy

Lord Tunnicliffe Excerpts

Thursday 28th April 2016 Lords Chamber

[Lord Tunnicliffe (Lab)]

My Lords, I thank the Minister for introducing this debate. I thank him particularly for his kind remarks about my late noble friend Lord Peston. I feel that Lord Peston as an academic would have enjoyed the early part of the Minister’s speech because of its generous use of conditional clauses, which I am sure he would have picked his way through with some relish.

While I expect today’s debate to be wide-ranging, I will focus on last month’s Budget as the most significant recent step. In many ways, when it comes to the latest Budget—and perhaps this is true of most Budgets—the devil is not only in the detail but, more importantly, in the details that were missing. The Budget was certainly a masterclass in creative accounting, but when we have an economy which requires investment and innovation, regional communities with desperate need of support and assistance, and families which feel abandoned and betrayed, we need, and indeed expect, more than political posturing. Instead, we got a Budget which revealed much more about where the Government’s true priorities lie. It laid bare the Chancellor’s failure and did nothing to tackle the underlying challenges which face our economy.

Very often, the details of Budgets unravel in the days following the Chancellor’s Statement, and unravel they did. The decision to cut the personal independence payment—PIP—the resignation of the Secretary of State for Work and Pensions, Iain Duncan Smith, and of course the U-turn, all in a space of a few days, or rather a few hours, reflects the scale of the failure of this Budget. If the Chancellor had not changed course on PIP, 370,000 disabled people would have lost an average of £3,500 a year, and while of course the U-turn is welcome, it leaves us with more questions than answers as to where the additional savings will be made.

However, plenty of decisions that were taken in this Budget will not be reversed. The Institute for Fiscal Studies and the Resolution Foundation both pointed to the figures, which show that as a result of the Budget the richest in society will receive a cash gain in this financial year of more than £250 a year. The next richest 10% will get £150 extra, and the next richest decile after that will receive a benefit of around £75. In contrast, the gains for those on lower incomes are small in comparison. In short, this Budget, as with previous Budgets, is helping the rich get richer and the poor get poorer. The cuts in tax credits and benefits changes made in the last Parliament meant that low-income households with children were the biggest losers as a proportion of their income, and that trend looks set to continue.

The Resolution Foundation analysis shows that 80% of gains from the Budget income tax changes go to the top half of earners. Its analysis of all major post-election policy announcements today shows that, by 2020, the poorest 30% of households are set to lose around £565, while the richest 30% are set to gain around £280. The poor are getting poorer and the rich are getting richer. How is this reasonable, just or fair by any standards? Can the Minister comment on these figures and on what this Budget is doing to the most vulnerable people in our society?

I suspect that many of the figures I have just quoted will be repeated this afternoon, and why should they not? It is extremely powerful data. However, too often we forget what these numbers mean in practice and what it means for the people behind these figures. I suggest to anyone who has not read it already that the Joseph Rowntree Foundation report into destitution—the first study of its kind in the UK—offers an illuminating reflection on the daily struggles, the psychological impact and the economic consequences of what poverty does to individuals as well as to their relationships with family and society. The report reveals that 1.2 million people, of whom over 300,000 are children, live in destitute poverty. Destitution is defined as:

“When someone lacked two or more basic essentials in one month”.

This means that, over that month, people had,

“slept rough, had one or no meals a day for two or more days, been unable to heat or to light their home for five or more days, gone without weather-appropriate clothes or gone without basic toiletries”.

We would find difficult to imagine these existences and levels of pain, and very few of us will have experienced them.

The most common causes of people being in this situation are the extra costs of ill health and disability, the high costs of housing and other essential bills, unemployment or a financial shock such as a benefit sanction or delay. Let us compare that with the situation at BP, where the chief executive, Bob Dudley, has just been given a £13.8 million pay package, despite the company posting its worst-ever annual losses this year. When you compare the cases of destitution and BP, the sheer absurdity of the situation is inescapable. We really are living in an age of extremes, and I am afraid that we have a Government who are exacerbating the problem rather than finding solutions.

While this Government may not be too concerned about failing the most vulnerable in society, at the very least I would have expected them to care about failing to meet their own targets, but they have failed on nearly every measure. They have failed to deliver on growth and productivity. GDP growth has been revised down for last year, this year and every year in the forecast compared with the Autumn Statement last November, as has productivity growth. I know that my noble friend Lord Davies will go into more detail on this in his closing remarks. They have failed on debt and borrowing. A year ago, George Osborne boasted:

“The original debt target I set out in my first Budget has been met”,—[Official Report, Commons, 18/3/15; col. 769]

but last month it was confirmed that that was no longer true. Public sector net debt in 2015-16 will now rise to 83.7% as a proportion of GDP, or £1,591 billion—£275 billion higher than he expected in June 2010. The weakening economy means that, over the course of this Parliament, George Osborne is now set to borrow £38.4 billion more than he planned just four months ago. The Government have also failed to deliver on investment. Public sector net investment is set to fall as a share of GDP from 1.9% to 1.5% over the course of the Parliament.

Yet, despite all those misses, the Chancellor has convinced himself that his Budget is a hit, because he claims that,

“in 2019-20 Britain is set to have a surplus”.—[Official Report, Commons, 16/3/16; col. 955]

Very few seem to share the Chancellor’s optimism, and with good reason. Both the OBR and the IFS have said that he has only a 50:50 chance of meeting that target. You can move around numbers for only so long before you run out of options. Indeed, if it were not for the Chancellor’s creative accounting, he would fail to meet his 2019-20 target. As Paul Johnson, director of the IFS, said in his opening remarks of the Budget briefing regarding the problems associated with unconvincing growth in the economy:

“It inevitably causes problems for the fiscal target—to get to budget surplus by 2019-20. Indeed these changes cost the Chancellor more than £13 billion in that year. He made up just slightly more than that £13 billion through policy measures. But this is a rather odd £13 billion. More than half of it is purely temporary—shifting tax revenues into that year and shifting capital spending out. The target would not be forecast to be met without both this shuffling of money between years and a wholly unspecified spending cut of £3.5 billion on top of the specific cuts announced in November. The Chancellor is confident that the efficiencies can be found to achieve this spending cut, but won’t be able to tell us where they will come from until 2018.

In the longer term the public finances are kept on track only by adding yet another year of planned austerity on the spending side. Spending in 2020-21 will be £10 billion less than planned”.

As well as this creative shuffling, the Chancellor has still not accounted for £2 billion-worth of public spending saving, as well as the £4.4 billion that the Government had hoped to save from PIP. Perhaps the Minister when he responds could provide more detail than the Chancellor was able to. If you want to read a Budget that offers a true reflection of the economic realities of our country, do not read this one.

Something different must be done, because while the Chancellor has focused on meeting his surplus target—a target he is just as likely to miss as to reach—the foundations of our economy are dangerously unstable. The figures published by the OBR—I am one of the few sad people who actually reads the document from cover to cover—on sectoral net lending show the stark reality of what is driving our diluted economic growth. Risky, unsecured lending by households is rising at the fastest rate since 2008. Households are expected to spend £58 billion more than they earn this year, rising to £68 billion by the end of the decade. This is up from the respective forecast of £41 billion and £49.2 billion in November’s Autumn Statement. The UK’s household deficit, the amount by which debts such as credit cards, car leases and student loans exceed our income, will reach 3% of GDP and stay there for an extended period. The Government may have reduced public borrowing, but they have subcontracted the task to households. As the OBR has said quite unequivocally:

“The persistence of a household deficit of this size would be unprecedented in the latest available historical data”.

Strong words indeed, and words that should be heeded, especially given the fact that if interest rates start to rise, millions of families will face serious hardship.

The truth is that it is a sad reflection of the state of our economy that this insecure lending has become the norm. As Frances O’Grady, General Secretary of the TUC, has said of this reliance on debt:

“Rising household debt signals that too many people are still struggling to make ends meet. With pay growth slowing, and households facing a lost decade on wages, it’s no surprise that more families are relying on borrowing to meet the costs of day-to-day essentials. Although employment has risen, wages are still worth less today than eight years ago. This has left families struggling to meet the rising cost of living. We need a recovery where families can afford to pay their bills and raise their children without relying on credit cards and payday loans”.

Today’s Motion is that this House takes note of the steps Her Majesty’s Government are taking to build a stronger economy. This Budget is one step that makes the economy weaker not stronger, and sentences millions of our citizens to long-term financial misery.

--- Later in debate ---

[Lord O'Neill of Gatley]

My Lords, the best news is that people were hopeful early this morning that we would be over by 4 pm and, unless I am particularly long-winded in my summary, we should achieve that. I start by thanking everybody again for their varied contributions. I have presented myself with an additional risk in summing up because of how I started out. I deviated deliberately from my normal style to highlight—despite some of the comments of the noble Lord, Lord Davies—some of our really problematic challenges, particularly on productivity and the current account. That has led, in a very stimulating manner, to many of your Lordships offering extremely thoughtful comments, as always. I thank you all and apologise in advance if I do not give the right credit to everybody for their important contributions.

I cannot resist saying I am particularly pleased that the noble Lord, Lord Haskel, referred to antimicrobial resistance because three weeks from today, I will present the final reports of the important independent review I have been undertaking. I look forward to having a chance to debate that in this place. I say that because from my brief time as a Member of your Lordships’ House, I am aware of our collective belief that we conduct ourselves on a higher level than the other place. But I gather that yesterday, there was a debate in the House of Commons on antimicrobial resistance, which is to be welcomed.

Let me quickly return to the issues raised. In my judgment, there generally continue to be signs that our economy is in fundamentally better shape than it has been for some time. However, as I have pointed out, particularly with respect to productivity and the current account, and especially given what lies ahead on 23 June, there are some considerable risks—not least because as an outward-facing economy we are strongly affected by all sorts of forces around the world, none of which I had or will have the time to go into, although many others mentioned them. I would point out that while we have been sitting here, we have had the first estimate of US GDP growth for the first quarter: 0.5%. That annualised number is much less than expected. Despite the comments about how supposedly disappointing our growth is, that means that our first-quarter growth was four times stronger than the United States’. Some of the issues we face—on productivity and otherwise—are affecting many parts of the world.

As I tried to do during the Budget debate, I am going to summarise the comments made by noble Lords today in the context of specific areas. I have identified five: the economy itself and its performance; the Budget and the appropriate policy; global trade, especially with respect to the EU issue; productivity; and distributional analysis/inequality.

Before I do that, let me address two specific issues that arose early on in the debate. I was challenged by my noble friend Lord Forsyth on the immigration issue and the contents of the HM Treasury document. I am rather pleased that, despite the length of our debate, others did not make the same point. Of course, as the Government have articulated clearly in the run-up to this referendum, we believe that net migration remains too high and we are committed to reforms to bring that down. Many examples of that can be given. I would also point out, as that document pointed out, that most evidence suggests net migration in aggregate is a net positive for our economy—if for some more than others.

On the topic of PIPs, raised by the noble Lord, Lord Tunnicliffe, I thought I put that to bed during the Budget debate but perhaps not all noble Lords heard what was said there. The figure of £4.4 billion over the course of the rest of this Parliament, which the noble Lord referred to, is really a minuscule sum compared to the considerable volatility that will arise from the OBR’s changing its view again—one of the few things we can really predict about the OBR. For example, over the course of the last forecast, the figure changed by £75 billion. While many people have been right to point out the huge dangers of forecasting, I have very strong confidence in one forecast: that it will change its assumptions for the next Autumn Statement and the next Budget. That will be much bigger than anything that has happened with PIPs. It is a shame that that debate took place in such an environment. As far as I understand it, the underlying intention is not necessarily to save money but to make sure that those most worthy of the payments are getting them and that the system is not being gamed in the way we suspect it is.

I turn now to the five issues. A number of noble Lords made important comments on the economy, including the noble Lords, Lord Northbrook, Lord Hain, Lord Suri, Lord Sheikh and Lord Davies of Stamford, and the noble Viscount, Lord Hanworth. I have touched briefly on some of the many challenges that exist. Despite what I have just said about the latest US GDP figures, I note last month’s purchasing managers’ indices—a highly important leading indicator of probabilities—which showed a noticeable pick-up in a number of countries around the world, including the US and China, although sadly not the UK, which in itself is interesting.

I smiled to myself with considerable amusement when I heard the noble Lord, Lord Hain, refer to the very optimistic-sounding view of Oxford Economics on productivity, compared to that of the OBR. Of course, the OBR was set up in a particular way. I imagine that some people, including me, hope that Oxford Economics is proved right, because the fiscal outcome would by definition be considerably stronger than that implied by the latest OBR forecast. We can agree or disagree with what the OBR says, but it was set up to serve the purpose of independence, which, in general, it does pretty well.

I cannot resist pointing out the irony in the comments made by the noble Viscount, Lord Hanworth, about the problems of manufacturing and the rather strange situation with foreign ownership. Ten yards to his left as I look, is the noble Lord, Lord Bhattacharya, who pointed out—as we do a little less often than we should—the miraculous development going on in our auto industry, most of which is owned overseas but is the most productive auto industry in the world, with record numbers of exports. If we could bottle that and do the same with a lot of other things, it would be pretty good for all of us.

I turn to the second topic: the Budget. I will end up repeating things I have said before, as have many noble Lords, but I will try to be brief. Most of your Lordships are aware that there are some who would like the pace of deficit reduction to be faster, while many—perhaps the majority here—want it to be somewhat slower. It continues to surprise me when I hear that said so often here. There is something called the full employment adjusted cyclical position. Many academics are saying that, at this stage of our level of employment, we should be in a fiscal surplus. The idea that we should suddenly do things that involve spending a lot more money, and ignore that issue—that we should not worry about the rainy day in the future—is very questionable. The Government, faced with the self-imposed constraint of the OBR, are trying to choose the right path of deficit reduction, with the goal of achieving a future surplus to support both the private sector and, in the areas where it is necessary, the public sector, but with respect for trying to lower the deficit.

I have to apologise to the noble Baroness, Lady Kramer, who raised an issue which I had not quite understood from her comments on the Budget debate: whether we should introduce a goal of a surplus adjusted for capital spending. It sounds very reminiscent of what was called the medium-term fiscal strategy, specifically adjusted for capital spending. In principle, it is of course a very important idea, and I will give it some thought and discuss it with colleagues. However, as that experience demonstrated, when times are tough it becomes rather convenient to redefine certain elements, and you end up with unintended consequences.

Topic number three is trade and the vital issue of EU membership. The noble Lords, Lord Newby, Lord Sheikh and Lord Bilimoria, among others, outlined the issues wonderfully and in a very clear style, which I admire—I want to borrow some of it next time I have to do the same thing. As I said in my opening remarks—and as I have done myself many times in the past—one can easily articulate a future in which the only place where any of us are exporting to is China. In fact, I once produced a chart showing that by the end of this decade, Germany will be exporting more to China than it will to France. I have occasionally added the joke that German companies would rather be in a eurozone with China than with France. That was a forecast. It is not going to happen by 2020, because China’s economy has slowed, but it could still happen in the future. I give that example because, despite how good Germany is at exporting, the Germans are not, so far as I am aware, thinking of leaving the EU because of the opportunities they might find elsewhere. However, that is the sort of risk that we seem to be putting to our electorate here. All of us here—and I detect that most Members of the House strongly agree —need to ensure that the people of this country are correctly informed about the risk they may be facing.

I should also add, because there is sometimes confusion of membership of the euro and membership of the EU, that there is often no more powerful voice than the one and only Martin Wolf, who earlier this week outlined 10 reasons why we should not leave the EU. As I am sure noble Lords know, he is not the most vocal supporter of the euro.

With respect to trade, it was very nice to hear the interesting comments of my noble friend Lord Sheikh about Africa and Islamic finance. Coincidentally, today in Manchester my ministerial colleague the Economic Secretary is hosting a big conference on Islamic finance, which involves participation from some of the most important policy-makers in the Middle East and others. We are very committed to that.

Topic four is productivity, which itself took more time and had more contributions than I will have a chance to do justice to. Very briefly, with respect to the very interesting comments of the noble Lord, Lord Mawson, about technology, young people and the health service, this is a major area where things will happen, the scale and dimensions of which most of us in this place, because of our age and minds, will not be dictating. But I share the noble Lord’s excitement, especially as it relates to giving the right mental and financial support to encourage young people to go down that unpredictable path of discovery. That is very important for us to do, and we are trying.

As that relates to education and skills, I will highlight something which I think has not had much coverage. Specifically in the Budget as it relates to the northern powerhouse, we set up the northern powerhouse education fund. It has not yet started, of course, because the Budget was just a few weeks ago, but it will be considering marginal initiatives in the education and skills space specifically to help some of the most challenged areas of the north.

In the same spirit, the noble Lord, Lord Mawson, also touched on health. We are pursuing many things on that front that again I think the Government should be very proud of. A particularly exciting one is of course the devolution of health to Greater Manchester. It will be very important for many parts of the country, particularly urban parts, to watch how this progresses, because of what it means for an integrated health approach that could help our society in so many ways.

On finance, as always, I listened really closely to the important comments of someone as experienced as the noble Lord, Lord McFall. I pointed out in my opening comments something that is not often understood. There are lots of measurement issues with productivity data, but as they are reported, we have seen a dramatic fall in the productivity of the financial sector. It is not obvious to me, as someone who spent so long in that sector, quite what is going on. We must be very careful that our desire to hold people to account, as we should, and punish them—as I think that parts of the Bank of England Bill will—does not smother the financial system from doing what it needs to in its connection to the rest of our economy, linking to some of the comments of the noble Baroness, Lady Kramer. That is a very important challenge and one that I and some of my colleagues are spending considerable time on.

In the broader context, let me turn briefly to long-termism, which the noble Lord, Lord McFall, talked about in a broader sense, as did the noble Lords, Lord Haskel and Lord Mair. That takes up an important part of my mental time, because I, too, believe that initiatives need to be considered. If you look carefully at some of our published documents, you will see that the number of words we are giving to it is creeping up. We are spending a lot of time thinking about the right way to try to change the incentive reward system by linking it to investment and productivity. Many ideas that I have heard here will play in my mind, and we will welcome many others.

To finish off on productivity, on both industrial strategy and R&D, when I was listening to the wonderful comments from the noble Lord, Lord Mair, which many have highlighted, in particular, but also from the noble Lords, Lord Bilimoria and Lord Dykes, many things that they talked about I spend much of my day talking about to research staff, including many of my officials. If I had time, I could proudly highlight what we are doing. We have directly supported the National Graphene Institute at the University of Manchester. There is advanced manufacturing at the University of Sheffield. Yesterday, I gave a speech at the launch of our direct support for sophisticated energy research involving the top six universities in the Midlands. I could go on and on.

Very lastly and importantly, I turn to the comments of the noble Lord, Lord Tunnicliffe, about distribution analysis and the underlying issues of inequality. We believe—with some justification, I think—that what is provided in the Budget is the fullest available evidence about how money is spent. I think the statistics show that 50% of the money that goes on welfare and public services goes to the 40% at the bottom. I repeat for the third time in this place: if you look at internationally credible, accepted and used measures of inequality, you will see that although we are more unequal then we should be, we are not as unequal as we were 10 to 15 years ago.

I would love to respond to the comments about my supposed howler on productivity. If it was as bad as the noble Lord said, I should be allowed out of this place because, although I have made many howlers in the past and will make many howlers in the future, if I was unaware that our productivity is inferior to that of Germany it would be a very bad howler, and I am sure that the noble Lord must have misunderstood.

[Lord Tunnicliffe]

The Minister has made claims about the impact of inequality before, and he referenced various international studies. Will he write a letter and put it in the Library referencing where I can see the arguments and the figures behind them?

[Lord O'Neill of Gatley]

I thought I did write—I apologise if that has not taken place—particularly because of the reaction to an Oral Question on this issue. But if I did not write, I will make sure that I do.

I conclude by saying that this has been a stimulating debate. I have heard many interesting things, particularly on angles with respect to R&D and the key interplay between the strength of our universities and the fact that we need somehow to get more of this R&D going from them into industry.

I will finish where I started. We have two quite clear, large economic challenges in our productivity rate and our current account. If we do not make the right decision on 23 June, they will cause us bigger problems than, luckily, they have as yet.

Motion agreed.