Queen’s Speech

Lord Turnbull Excerpts

Thursday 4th June 2015 Lords Chamber

[Lord Turnbull (CB)]

My Lords, I am delighted to welcome the noble Lord, Lord King of Lothbury, to the House and to congratulate him on his excellent maiden speech. It was well worth waiting for. The noble Lord’s career divides neatly into two parts of roughly 20 years as a distinguished academic economist and 20 years at the heart of the Bank of England. As its governor for 10 years, he became a key figure not just in the UK but globally as part of a small group of world policymakers who, by developing innovative monetary policy techniques, prevented a recession from spiralling into a depression, for which we must be grateful. Since he left the Bank two years ago and was made a life Peer, he has wisely followed one of the teachings of the Lords spiritual: when a bishop retires, he leaves the diocese, at least for a time. He has wisely judged that now is the right time to re-engage in the public debate, and we welcome that.

Some people may have found writing a maiden speech daunting, but in the case of the noble Lord, Lord King, it must have come as a relief as two of the passions of his life, English cricket and Aston Villa, bombed out so badly over the weekend, but at least he can remember the name of the football club he supports. With the simultaneous arrival of the noble Lord, Lord O’Neill, the collective experience of the House in finance, economics and taxation has been enormously enhanced, and I look forward to their respective, possibly contrasting, contributions.

The electorate clearly thought that the Conservatives’ record in office was more credible than Labour’s. The latter party was punished heavily, I believe, for its refusal to acknowledge the flaws in its economic management in the middle of the last decade. The electorate clearly also thought that the Conservatives’ policy programme was the more attractive. Nevertheless, the Conservatives do not, in my view, have a monopoly of superior wisdom. There are elements of their programme that are objectionable, and there are elements of Labour’s programme that are more attractive.

Let us start with fiscal policy. A position in which the stock of debt was increasing far faster than money GDP was clearly unsustainable, and the priority was, rightly in my view, to get to a point where the debt/GDP ratio was no longer rising, and as now is beginning to fall. I do not agree, however, that it is an urgent priority to eliminate the overall deficit, both current and capital, in four years and then to go on running a surplus. The Labour proposal that only the current deficit should be eliminated is more logical.

Why do I take this more dovish attitude to public-sector debt? First, one cannot make a sensible judgment without looking at the asset side of the Government’s balance sheet as well as the liabilities. The UK Government debt ratio is around the median of the G7, but the UK also has serious gaps in its infrastructure, including in power generation, roads, and above all in social housing. There is a serious illogicality in the Government’s position. It is promoting HS2 and the northern powerhouse on the grounds that these are investments that will make the economy more productive. If that is so, they will create the means to service the debt to pay for them.

Secondly, I dislike intensely the language of reducing the debt so that we do not impoverish later generations. In an economy where 70% of government debt is owned by UK citizens, we are witnessing a transfer process. Tax is being collected from and interest is being paid to many of the same people or their pension funds. It is true that if that is carried to an extreme, the weight of this extra tax burden can reduce the effectiveness of the economy, but that is far short of the alarmist impoverishment claim. I believe that the narrative of debt reduction is being used to provide a smoke-screen for another objective: to reduce the size of the public sector. There is a case for that, but it should be made explicitly and not be hidden behind a bogus argument.

My second area of concern is housing, where I believe that neither party has it right. Fortunately, I do not need to deal with the objections to the Government’s right-to-buy scheme, as they were dealt with very effectively by the noble Lord, Lord Kerslake, and other noble Lords earlier this week. The proposals coming from Labour on rent control and letting control were a ghastly throwback to the failed policies of the last century. Nevertheless, there was one area in which Labour rather than the Conservatives correctly diagnosed the problem: the relative weight of taxation on higher-value housing. It cannot be fair that a £3 million house, which is 100 times more valuable than a £30,000 house, pays only three times the tax. Council tax is based on relative values as they were a quarter of a century ago.

In that time, relative house prices across the country have shifted substantially. This not just a Kensington issue but a national one; it is as just as much about the relative contributions of Beckenham and Birkenhead. However, having identified a valid issue, Labour produced a deeply objectionable response. Its mansion tax was based on class rather than economics, grafting a tax on absolute values on to a system of relative values. The correct answer, which neither party has shown the courage to adopt, is to start by undertaking a national revaluation and then to redesign the bands, adding two or three more at the top end.

The other flaw is the position of housing in the overall system of taxation. Housing is a capital asset that pays no capital gains tax on people’s first residence, nor any tax on imputed income. The same money invested in businesses or financial assets pays both. It is not surprising that people have been incentivised to pile into residential property. We get this wrong, because we fail to understand the difference between the cost of a house as bought on the market and the cost of building a house. Many people can afford to pay the cost of building a house, but the problem is with land, and until we tackle that all those schemes and subsidies, tax reliefs and rights to buy will simply make things worse.

As a former Permanent Secretary to the Treasury, I cannot be expected to applaud the legislation to freeze our main tax rates. Why do legislators need legislation to force them to implement what they have legislated? This is now the fourth of these legal duties, after the reduction in child poverty, the decarbonisation target and the commitment on international aid. What has happened to good old-fashioned accountability? Far from increasing trust in politicians, these arrangements merely serve to advertise their untrustworthiness. The tax proposal has many dangers in it. If it is to be strictly enforced, it will create extortion opportunities for predatory parties such as the SNP and DUP and could bring to the UK the farcical shut-downs of the US Congress. If there are sensible safety valves and waivers, what is the point?

Finally, one parting shot: we should scrap the Smith commission and start again. Grafting tax powers on top of an already overgenerous grants system will make the outcome even more unfair. The sine qua non of any new system if it is to generate fiscal responsibility is that £1 of extra spending in Scotland must be funded at the margin by £1 of extra tax in Scotland.