Lord Tyrie
Main Page: Lord Tyrie (Non-affiliated - Life peer)Budget Resolutions and Economic Situation
Lord Tyrie Excerpts
Mr Andrew Tyrie (Chichester) (Con)
I would like to start by thanking the House of Commons—[Interruption] —or what is left of it, as three-quarters of the House goes to lunch, and quite right too—for being kind enough to put me back in my job. I would also like to welcome not only the three returning members of the Select Committee on the Treasury but the seven newly elected members. We will be meeting very soon to examine the Budget.
I congratulate the right hon. and learned Member for Camberwell and Peckham (Ms Harman) on her speech. It is an extremely difficult speech to make—probably for anyone to make in the House of Commons—immediately after a Budget that she has not seen. Of course, it is a Budget that I have not seen either. I note that in her speech she did not challenge the central Budget judgment—that is, to tackle the deficit. She did not say the deficit was being reduced at too great a speed. Of course, the Chancellor has announced that the Budget will be balanced in a couple of years, according to OBR forecasts. If the Chancellor succeeds, he will be delivering the pace of deficit reduction that Alistair Darling sought in his March 2010 Budget, so I do not think this was ever a great economic experiment. Like the decision in 1976 fundamentally to change monetary policy after the International Monetary Fund came in, this is something that both parties are beginning, slowly, to agree on.
Caroline Lucas (Brighton, Pavilion) (Green)
I am grateful to the right hon. Gentleman for giving way, because there is a party here that does not agree with the consensus that appears to be building up. Today’s Budget will go down as a pivotal moment in the dismantling of the welfare state, with the Government’s own advisers saying that slashing the benefits cap will throw 40,000 more children into poverty. Can he say whether that is a price worth paying, when even the IMF has told the Government that low borrowing costs make austerity unnecessary, with the costs of paying down the deficit in this way outweighing the benefits?
Mr Tyrie
That was a very interesting short speech. The hon. Lady made some important points, which I will not have time to address, with almost all of which I profoundly disagree and with which—this is the point I was trying to make—I think a large proportion of the House now disagrees.
The new Committee has a heap of new things to look at as a result of this Budget: the Green Paper on pensions and savings, the £12 billion of cuts to the welfare bill, the living wage, the new fiscal target, the shake-up of Sunday trading laws, the inheritance tax threshold changes and the avoidance measures, among much else. We will do our very best to report back to the House on these issues, and as soon as we can.
The plain fact, which I think is widely—almost universally—accepted, is that the backdrop for this Budget is dramatically better than it was when the Chancellor stood up and the right hon. and learned Member for Camberwell and Peckham replied exactly five years ago. The Chancellor deserves a great deal of credit for having brought about that transformation in the country’s economic fortunes.
I think, though, that it is worth mentioning a few risks in the economy. The first, which I consider very important and to which the Chancellor alluded, is the euro crisis and the Greek problem, which has the potential to turn from a manageable challenge into a major catastrophe. Were Greece to default, the United Kingdom could not take for granted the relatively compressed bond yields that help to keep our debt service costs low. The second is the bursting of the stock market bubble in China. Thirdly, we shall have to adapt to the moment when interest rates start to rise, because it could prove a shock for those who have become too used to the idea that they can remain at an artificially low level.
That is without taking account of quantitative easing—£375 billion of it—which will have to be unwound. I want to put down a marker about QE, on behalf of Parliament. When it is unwound, it may make a profit or a loss, and that profit or loss will need to be examined by the House and the Treasury. It is a matter for us, and not exclusively for the Bank of England. Any losses that are borne by QE do not score against the Bank’s balance sheet; they score against taxpayers. I think it extremely important for the House to be closely involved when big decisions are made about QE.
Mark Garnier (Wyre Forest) (Con)
Does my right hon. Friend agree that one of the biggest vulnerabilities of the economy is household debt, which is currently greater than the national debt at slightly under £1.5 trillion?
Mr Tyrie
Yes. We have a long way to go before we can fully restore a savings culture in this country. The savings ratio is still unacceptably low, much lower than it has been historically. There is a great deal more to do, and I think that the pensions and savings reform Green Paper will have a role in that.
Since my hon. Friend has—indirectly—raised this issue, let me add that, during the last Parliament, the Treasury Committee briefly examined the question of whether pensions could be treated like individual savings accounts. The idea did not find much favour in the press at the time, but I personally think that it merits careful consideration.
Helen Goodman
I am grateful to the Chair of the Committee.
If we want debt in the personal sector to fall, should we not bear in mind the fact that permanent budget surpluses in the Government sector will make that more difficult?
Mr Tyrie
That is an interesting theoretical point. In fact, it travels under a very fancy name, “Ricardian equivalence”, and a heap of academic theory has been written about it. I greatly look forward to discussing it with the hon. Lady in the Treasury Committee, and I know that the other nine Committee members look forward to our exchanges as well.
The right hon. and learned Member for Camberwell and Peckham talked quite a bit about productivity. As the economy has begun to recover and growth has begun to return, people are saying that it is not the growth that they wanted. They are saying that it is in the wrong part of the country, that it is going to the wrong people, or—as we are hearing now—that it is not accompanied by productivity. That has been true so far, but it is important to bear in mind a few points about productivity.
First, we are recovering from the worst recession in economic history. There has been a 6% fall in output. A shock on that scale is huge for the economy to absorb, so of course that means that the recovery will be uneven. What really lies behind the recovery is a massive reallocation of capital as well as labour, across regions, across the labour market and across sectors of the economy, so we might well expect productivity not to move in line with that in previous recessions.
Secondly, in any case, much of the growth in the run-up to the crisis was fuelled by over-leveraged banks lending to over-leveraged households. That was unsustainable. Comparing productivity levels with what they might have been had growth continued at the pre-crisis rate is therefore highly misleading, because it means imagining that the unsustainable productivity levels could have been sustained, and we know that they could not have been. The peak levels of productivity are probably a chimera.
Thirdly, we should bear in mind the fact that lower productivity reflects much more flexibility in the labour market than many people had feared. Most had thought that unemployment would be much higher than it has turned out to be, perhaps 3 million or even 3.5 million. If the labour market had been less flexible, we would have had higher unemployment. We would also have had higher productivity, but I do not think there are many takers for that in the House, particularly now that we know how important it is to secure labour market participation among the young, on social as well as economic grounds.
There are other developments in the labour market that might affect the productivity statistics. For instance, productivity has been held down by rising rates of workforce participation among older people. That is an intended, and welcome, consequence of the Government’s pensions policy, and, to a degree, it represents the policy not only of the coalition Government, but of both Governments before that. So I think that, when all those factors are taken together, the productivity problem is not necessarily as serious as it initially appeared to be. However, I also think it important that the Chancellor’s measures bring about a pick-up.
Geraint Davies (Swansea West) (Lab/Co-op)
One would expect marginal productivity to fall, but the fact is that there are 800,000 fewer people earning more than £20,000 a year than there were five years ago, in 2010. Is that not why the Government have had to borrow more in five years than Labour did in 13? Productivity is a catastrophe.
Mr Tyrie
Responding to that would require me to do a bit of calculation on my feet, but I would guess that if it is part of the reason, it is only a very small part. Far more important has been the much higher level of overall labour participation. Millions of jobs are being created in the economy, which is a remarkable achievement.
Mr Baker
I am most grateful to my right hon. Friend. He may not have had a chance to look at the financing arithmetic, but I am happy to tell him that since April, the forecast for the total financing is down by £14 billion. Will he join me in welcoming that, and in congratulating the Government on their progress on precisely the issue that was raised by the hon. Member for Swansea West (Geraint Davies)?
Mr Tyrie
One of the advantages of not having to make a speech immediately after the Leader of the Opposition is that one does at least have a chance to read the Red Book beforehand. I am operating under something of a handicap. However, I look forward very much to reading it.
I shall make only a couple more points, in order not to detain the House for too long. One of them relates to the deficit. During the last Parliament, all economic and financial policy was overshadowed by the need to address that colossal deficit, but the economic and financial policy of this Parliament can and should be about much more, and we heard some of that from the Chancellor. It needs to be about nothing less than the economic revival of Britain in the 21st century. Taken together, this Budget, the forthcoming autumn statement, the spending review, and the Chancellor’s second Budget in eight months’ time will present the biggest opportunity for a generation to achieve that.
The Government have not made their job any easier by tying their hands on tax—as the Budget made clear—and on spending. Moreover, we have just been through an electoral bidding war, and a good deal of ground has been conceded—probably too much, in my view. Almost half of public expenditure is now ring-fenced by pledges to protect or increase spending on health, schools, foreign aid, pensions and child benefit, and that, of course, excludes the defence announcement that we have just heard. While it is understandable on political grounds, it could make economic management considerably more difficult in the years ahead. However, as I mentioned earlier, all sides now agree on the need for deficit reduction, although they disagree to some extent on how it can be accomplished. We heard a little about that from the right hon. and learned Member for Camberwell and Peckham.
Let me say a few words about taxable capacity. Some have suggested that taxes should be higher, rather than spending being cut, in order to keep the deficit reductions at broadly the same rate. It is important to realise, however, that it is not at all clear that by raising tax rates we necessarily get any more money; we might get less. It is salient that over the past 30 years, despite the best efforts of some Governments at times to collect a good deal more revenue, the UK’s tax take has remained stubbornly between 32% and 35% of GDP.
There is a ceiling to how much can in practice be collected in tax, and my guess is that the UK is quite close to that ceiling now. That derives not only from the fact that it is difficult to get taxes from very wealthy individuals—something to which the Chancellor alluded. The fuel protests in 2000 were a timely reminder for the political classes and the bureaucrats who advise them of how difficult it can be to raise taxes. In any case, we live in an age of global tax arbitrage: countries are competing for a slice of an increasingly footloose tax base, particularly in corporate taxation. Along with a number of other countries, we have launched an initiative to try to ensure that multinationals pay tax where their profits are earned, and that is a worthy ambition, but I wonder how much extra tax yield can be protected in this way. I note that the attempt to get the increase in yield from Swiss tax avoidance raised much less than was forecast at the time the Chancellor announced it.
Catherine West (Hornsey and Wood Green) (Lab)
Does the right hon. Gentleman, as Chair of the Select Committee, feel that HMRC is fit for purpose?
Mr Tyrie
Yes I do, and I think it is in better shape than it was. It is important to remember that HMRC is a much-maligned department. Have any of us ever met people who like taxmen and women? They are not the most popular bunch, and they are easy targets. They have certainly made their share of mistakes, but they are being asked to implement a difficult tax code, and they have been doing their best in very difficult circumstances.
Of course we need more supply-side reform: a simpler and less distortive tax system; deregulation; better regulation in some areas; simpler and less distortive taxes on energy; better education and transport systems; and more flexible labour markets. All these are necessary to release the energies of the British people and generate sustained improvements and growth in living standards.
The Chancellor’s decision—although he did not announce it today—to keep the Office of Tax Simplification and put it on a statutory footing is welcome. Fundamental reform of the tax system is long overdue. It is a scandal that Britain has the longest tax code in the world. “Tolley’s Tax Guide”, which seems to double in size every decade, now runs to 11,000 pages. With that length has come complexity. That is a massive burden on business. I draw that point to the attention of the hon. Member for Hornsey and Wood Green (Catherine West) who asked whether HMRC was fit for purpose.
The OTS recently published a list of 1,140 tax reliefs. A number of those could probably go. What is needed—and what has been needed in western economies, particularly ours, for decades—is fewer reliefs and lower taxes. We would be more likely to get the money in, there would be less scope for avoidance and the tax system would be less distortive of economic activity, and as a result the economy would grow more. This has not been done, however, because each relief has no doubt created its own, often vociferous, lobby group.
This is the first year of a Parliament, and it is in the first year of a Parliament that such special pleading can be faced down with intelligent tax reform. I hope we will see more of that in the next Budget in eight months’ time, building on what has been announced today.
The Chancellor has the opportunity to do some remarkable things in this parliamentary term if he has some good fortune: to balance the books; to reform and simplify the tax system; to complete fundamental reform of banking and the financial system, which he already has under way; to reduce the size of the state at least to the average of the first three years of Gordon Brown’s tenure as Chancellor; and above all to secure Britain’s long-term competitiveness. If he seizes that opportunity, it will be of enormous value to the country and his will come to be seen as one of the more remarkable tenures of any Chancellor of the Exchequer.