Economy: Budget Statement

Lord Wood of Anfield Excerpts

Thursday 22nd March 2012 Lords Chamber

[Lord Wood of Anfield]

My Lords, yesterday we saw a Conservative Chancellor give a Budget at a time of stagnant growth, rising levels of unemployment not seen since the mid-1990s, youth unemployment at more than 1 million, with unemployment among certain groups such as young black males now around 50 per cent, and real living standards dropping—confirmed yesterday—for the second year in a row, which is the first time that that has happened for 36 years.

The Government would have us believe that all that is exogenous—the fault of the fallout of the economic crisis, or the previous Labour Government, or the eurozone, or spiking oil prices. Let us put aside the fact that the Government cite international factors to explain tough times on their watch but conveniently forget about them when it comes to their account of the previous Government. It would be reasonable, I think, for families, for small business and for pensioners to expect a Chancellor who finds himself in power in such an economic moment to use his Budget to respond to the squeeze and insecurities that they face. So what did we get? We got a Budget that was underpinned neither by an argument about how to counter economic stagnation nor by any measures to get growth and jobs going again. Instead we got a Budget that was focused on redistribution rather than growth—a venerable Labour tradition, you might think. However, the redistribution is in favour of the very wealthiest in our society—which, combined with the totality of decisions taken, is at the expense of pensioners and ordinary families.

I want to talk about two themes: growth and tax. I shall start with growth. Little was said about it yesterday, and I can understand why. Last year growth was expected to be 2.5 per cent this year. In his speech this year, the Chancellor sought to get credit from his own Back-Benchers because he now thinks that growth will be 0.8 per cent instead of the 0.7 per cent predicted at the time of the Autumn Statement. However, hidden in the forecasting is cause for continuing concern about the prospects for growth and the sources of growth. Despite some highly optimistic projections in the Budget documents for the growth of total investment in the next four years, the estimate of business investment growth was revised down considerably yesterday. As the National Institute of Economic and Social Research said, although some of the announcements will undoubtedly help the sectors to which they apply and should be welcomed,

“they do not address the major factor depressing business investment this year: a lack of demand”.

What about borrowing, control of which the Government have put at the heart of their economic strategy? As announced yesterday morning, net borrowing increased by £15.2 billion in February. That is a record for a monthly figure. The City had forecast that it would be half that amount. As my noble friend Lord Eatwell explained, after yesterday's Budget, the Government are still on course to borrow more than £150 billion more over the Parliament than they forecast in their spending review.

On tax, I want to look specifically at the decision to cut the 50p rate for the approximately 1 per cent of the population who earn above £150,000 a year. Assuming that there is no avoidance—I take the point—this income tax cut will give 14,000 people in Britain a windfall of, on average, £42,500 each. The justification for a higher rate of tax for those on very high incomes is that it reflects a distributional truth about our economy. Over the past 30 years, as we all know, the incomes of the very rich have taken off relative not simply to those at the very bottom but to the remaining 97 per cent of the population. Since 1979, nearly a quarter of every extra pound earned in the UK has gone into the pockets of the top 1 per cent. It is a higher rate for those whose salaries are not just higher but stratospherically higher than those of the vast majority.

What is the possible justification for prioritising, of all things, the reduction of the 50p tax rate? The advocates say, “You don’t understand. There are two effects of the 50p tax rate: first, it doesn’t bring any money in, because it is eminently avoidable; and secondly, it deters people, who will bring in wealth, from coming to this country”. You cannot have it both ways—either it is eminently avoidable, or it is an apocalyptic deterrent. If it is a deterrent that is avoidable, perhaps I may suggest that Her Majesty’s Revenue and Customs should focus resources on telling everyone how easy it is to avoid so as to bring the rich of other countries to our shores. Or perhaps we should adopt a more conventional measure—clamp down on avoidance, which makes our tax revenues less reliable, less predictable and produces greater unfairness.

What was striking yesterday was the discriminating approach that the Chancellor displayed towards tax avoidance. On stamp duty and general avoidance, George Osborne said that he will come down like a tonne of bricks on morally repugnant behaviour and sharp practices. At the same time, he was recommending the scrapping of the 50p tax rate for those earning more than £150,000 a year, on the grounds of a resignation to the unavoidability of avoidance of income tax. “But”, the defenders of the 50p tax rate continue, “you still don’t understand. The 50p rate stops people working”. Does the 50p tax rate stop people working? I have not seen any evidence of it. If it does, and if the productivity of the wealthiest in our society is dramatically on the wane, the fact that their incomes continue to rise way ahead of median and mean wages suggests that there is something deeply dysfunctional about the labour market at the very top. Perhaps that is something that a government inquiry might look at.

Even if there is evidence—although I cannot find any—that the abolition of the 50p rate will lead to people coming to Britain, there are two further questions that need to be answered. First, will the very wealthy who want to come to Britain pay income tax while they are here? Secondly, will they be wealth creators, as opposed to income gainers? On the first question, I would like to see evidence. In 2008, only 16 per cent of those who earned more than £10 million paid income tax. A policy based on worry about tax revenues that is aimed at bringing people who pay precious little income tax does not have the feel of evidence-based policy-making.

To the second question of whether they create wealth, we do not have the answer. We hear that it is important to signal that we are open for business—but is there any evidence that those who might be attracted to move here would use their wealth to create jobs and income for others? The Government had better hope so, because there was precious little in the rest of the Budget for those out of work.

The cut in the 50p rate was an ideological choice that has had its advocates scrambling around for a rationale. As the IFS said, the argument that 50p brings in no extra income is based on data for one year. This point was made by my noble friend Lord Eatwell. In the year on which the evidence was based there was a transition from 45p to 50p. The irony is that by scrapping 50p from April 2013 the Chancellor has thrown down the gauntlet to the accounting profession to meet another challenge. It has months to work out how to defer the income of its very wealthy clients for another year so that they may benefit from the 45p rate in 13 months’ time. The race is on. Perhaps the Minister will tell us whether the Treasury has factored in behavioural responses of the wealthy to this transition in its revenue calculations for the coming year.

The collection of courageous assumptions lying behind the Treasury's optimism about tax revenues made me want to applaud the Chancellor for his mathematical pyrotechnics. The Budget assumes that the ostensible cost to the Treasury of reducing the income tax rate will be only £100 million, because all those who avoided the tax at 50p will come flooding back into the tax system at 45p. This is an assumption about tax elasticity of heroic proportions. The Government are resigned to income tax avoidance but think that a 5p reduction will be sufficient to eliminate it completely. I wish them luck with that.

On the income that we will recoup from getting tough on stamp duty, the Government’s optimism continues. In contrast to their approach to income tax, they put their faith in a crackdown on corporate envelopes holding residential property. We should welcome the new stamp duty rates. However, my concern is not with them but with the idea that there is equivalence between a tax on the income or even the property of the very wealthy, and a tax on the very occasional and up until now eminently obscurable transactions on property worth more than £2 million. About 1 per cent of those earning more than £150,000 are likely to move to a house worth £2 million or more in the next year, so 99 per cent this group will enjoy a straightforward and sizeable tax cut.

I will end by focusing on two quick points. First, yet another Budget has passed without signs of a growth strategy. As a leading BBC economic journalist said on Tuesday, cutting taxes for a hedge fund manager and cutting taxes for his cleaner do not a growth strategy make. Even setting aside poor performance on growth and the escalating problems of unemployment—data were published today on consumer confidence and retail sales that should give us serious cause for concern—we will struggle to find in the Budget documents a growth strategy to meet the scale and urgency of these concerns.

Secondly, the Budget reveals something else. The Government talk constantly about tough choices. They are right that for all sorts of reasons they have to make them. However, yesterday saw the Chancellor make a decision that was big but not tough. It was a choice in straitened times to favour those who have the most. It was not the end of the Government's macroeconomic strategy—that remains in place, and we are the poorer for it—but it was the moment when their credibility as a Government who asked every section of society to bear its fair share of the pain was fatally undermined.