Budget Resolutions

Mel Stride Excerpts

Wednesday 27th October 2021 Commons Chamber

[Mel Stride (Central Devon) (Con)]

I broadly welcome the Budget, which is the first my right hon. Friend the Chancellor has delivered in what we might call the second phase of this crisis, the first phase having been from a sharp contraction in the economy through to the recovery, during which period my right hon. Friend, I think it is fair to say—[Interruption.]

[Madam Deputy Speaker (Dame Eleanor Laing)]

Order. One moment. It is too noisy down here. It is not fair —the right hon. Gentleman has to be heard too.

[Mel Stride]

I was saying that in the first phase of this crisis, between the huge contraction in the economy and the recovery that we are now seeing, it is fair to say that my right hon. Friend the Chancellor did a pretty remarkable job to support the jobs market and to support jobs—not without criticism, incidentally, from my Committee, but overall it was a remarkable job.

My right hon. Friend has an even tougher job as he looks to the future, now having to deliver sustainable economic growth and ensure that the public finances are on a sustainable trajectory, as well as meeting all the other objectives the Government rightly have on levelling up, net zero and so on.

[Robert Halfon (Harlow) (Con)]

My right hon. Friend mentions levelling up. Does he not agree that this is a real workers’ budget? The funds for skills and schools will transform the prospects of our young people and our adults, and let them climb the ladder of opportunity to get skills, security, prosperity and jobs for the future.

[Mel Stride]

My right hon. Friend is absolutely correct about skills. He, of course, through his Committee, has done so much to promote that agenda, which I will come to momentarily, but the background is extremely tough.

While the Chancellor is right to point out that the deficit is falling, it is none the less very highly elevated compared with historical measures. The debt, in financial terms at least, is at a record level of £2.2 billion, and the economy has the headwinds of supply chain bottlenecks and the mismatch between demand and supply that we are seeing in parts of the labour force.

However, there are reasons to be cheerful, which my right hon. Friend outlined. Those are the OBR’s revised forecast showing that growth is much stronger this year—I think the Chancellor suggested 6.5%, compared with the March forecast of just 4%—and the scarring downgrade from 3% to 2%. By my calculation, that is probably worth about £10 billion or thereabouts per year; it is a significant achievement. All that has been achieved through the hard work of the last 18 months to two years. I do not think we should take that away from my right hon. Friend.

That has left my right hon. Friend with some breathing space, and he recognises that there are many challenges facing the economy and uncertainties going forward. A big test as we unpack the Budget is what he has done with that additional headroom. Not surprisingly, he has spent quite a lot of it. It appears to me that, with his fiscal rule of keeping day to day expenditure without borrowing and debt coming down as a percentage of GDP, he has headroom of about £25 billion in 2024-25 on the net debt target, which is about 0.9% of GDP, with the OBR economic and fiscal outlook suggesting he has a 55% to 60% chance of hitting that particular metric. The Committee will want to look very closely at how prudent an approach my right hon. Friend has taken to the Budget.

I see my hon. Friend the Member for Basildon and Billericay (Mr Baron) itching to intervene, so I give way to him.

[Mr John Baron (Basildon and Billericay) (Con)]

I am listening intently. I do believe that the Government have done extraordinarily well in raising the national living wage as part of that headroom. That is a major step towards a high-wage, high-tech economy, and it bolsters our one nation agenda, which is to be applauded.

[Mel Stride]

My hon. Friend is absolutely right. I will come to the matter of wages and wage growth momentarily, but let me dwell on the challenges facing the economy.

Another thing that the OBR points out is the increased sensitivity to interest rate rises—the Chancellor made this point—and the damage that they can do to the public finances. I think my right hon. Friend gave the example of a 1% rise leading to a £23 billion increase in debt servicing costs. To put that in perspective, it would wipe out the value of the corporation tax increases and income tax threshold freezes that my right hon. Friend announced in the last Budget. That would be gone in one enormous gulp, so we must be careful about the vulnerability we have. Though we have low interest rates, and interest rates might move up in baby steps, that applies to a very large debt indeed.

Let me touch on inflation—I am pleased that my right hon. Friend spent quite a lot of time on it during his speech—and its impact on interest rates. We have already seen the Monetary Policy Committee beginning to divide on whether rates should go up, and there is an expectation, certainly in the markets, that rates will start to increase. We have seen 10-year gilts going up in more recent times, and it is possible that quantitative easing will start to unwind —perhaps passively initially—when we reach a certain trigger level of interest rates, so it is important that this credible plan is there to deliver on those fiscal targets.

The history, however, is not good in that respect. We have had Chancellor after Chancellor failing to meet their fiscal targets; they have either abandoned them completely or delayed or modified them in some form. Depending on what happens to demand in the economy relative to supply, there may be a case for fiscal stimulus even further down the line. One thinks of the removal of the universal credit uplift, the energy price increases, the labour market demand-supply mismatches and the rise in taxes, often taking demand out of the economy. None the less, and setting that to one side, the Chancellor’s default position must be to stick to those fiscal targets and resist the huge cacophony of demands for more and more expenditure, particularly the day-to-day expenditure that he is rightly targeting in his fiscal rules.

Some of those demands might end up being necessary. If we do not get back to the pattern of demand for public transport that we had before we locked down, it is conceivable that further subsidy will need to go to the public transport sector. Other areas, such as the health service, might have additional demands, but I point out to my right hon. Friend—he knows this more than most —that the NHS public expenditure take has risen in the last 10 years from 32% to 42%. He must get very good at saying no to Ministers when it is necessary to do so, and telling them to go back to their Departments, work harder and get more out of what they are given. That is a lesson for us all, incidentally, particularly those of us on this side of the House.

If we fail in that endeavour and inflation takes off, interest rates go through the roof, the cost of servicing our debt becomes ruinous and international markets lose faith in our economy, we will be back broadly where we were in 1992 when we had Black Wednesday. Conservative Members will remember the long, hard lesson of that: it took us a generation to re-establish our ability to look the electorate in the eye and say, “We can offer a fiscally responsible Government.”

There were some announcements on tax today. May I say first that the drop in the bank surcharge is absolutely the right thing to do? We are putting corporation tax rates up to 25% from 19%, so it would be absurd to cripple our financial institutions with uncompetitive international tax rates.

I was particularly delighted by the shift in the universal credit taper rate from 63% to 55%. That will help countless low-paid families to earn more and keep more of their money, and encourage more people into work. When I was a Treasury Minister, we looked endlessly at this and I pushed really hard on it. I know how expensive it is to do that—my right hon. Friend the Chancellor suggested £2 billion a year—so I take my hat off to him for having grasped that particular nettle.

My right hon. Friend is also right to set out an aspiration to get taxes down before the end of this Parliament. The same pattern occurred under Lady Thatcher, who is much referred to when we talk about tax. In the early years of the Thatcher Government, the tax burden rose quite strongly, and it was my right hon. Friend’s hero Lord Lawson who was able to bring tax rates down. Let us hope that my right hon. Friend is in a position to emulate that in due course.

I turn briefly to inflation, which is right at the core of what is happening in the economy. The threat to the public finances from inflation cannot be overstated. The big debate now is whether price surges and increases in inflationary expectations will be transitory or more persistent. My right hon. Friend referred to the surge in demand relative to supply, which of course will lead to price increases; all else being equal, one might imagine that it will pass relatively quickly.

We have seen the commodity, transport and energy price increases that my right hon. Friend referred to, but there are other price increases that we might expect to be stickier. There are bottlenecks that are often outside our control—a south-east Asian chip manufacturer can have a bottleneck that results in our being unable to produce cars in the United Kingdom. Structurally, the labour market has changed: as a consequence of the pandemic, there is now greater demand for goods relative to services. It will take time to mop that up.

The Bank of England MPC has expressed increasing concerns, in different ways, about inflation and has been constantly deferring the moment at which it believes inflation will peak. There is a debate as to when deferred “transitory” becomes “persistent”, but the huge danger is that we will go into a wage price spiral. One way in which that might happen is if we talk up wages by inducing companies to put them up without a coincident increase in productivity. That will simply feed the inflationary tiger. We have to be very careful on that point.

[John Redwood (Wokingham) (Con)]

Does my right hon. Friend agree that we need to be very careful about believing any of these forecasts from the OBR and the Bank of England? They said that inflation would be down at under 2% just a few months ago and have now had to change their mind. Does he also agree that when Lord Lawson cut income tax rates, we had a surge of extra revenue?

[Mel Stride]

It is certainly the case that the Bank of England’s projections on inflation have been under-baked. In fact, if we go back in time, we can see that its recent revisions have been more dramatic, which really illustrates my point. I have a feeling that there will be rather more inflationary pressure than many people imagine.

Some of the drivers of inflation are outside the control of my right hon. Friend the Chancellor, but some are very much within it. One of those is immigration. I totally accept the comment from my right hon. Friend the Prime Minister that we do not want to instinctively

“reach for that…lever of uncontrolled immigration”.

He is absolutely right: this country left the EU to get control of our immigration. However, what we must not do is avoid pulling the lever where there are genuine pinch points in the labour market in the shorter term. If we do not act to bring in skills if necessary, we will simply encumber businesses in a way that may mean many going out of business, and replace them with imports, which can also be inflationary.

The other such area is skills. Further to the point that the Chair of the Select Committee on Education, my right hon. Friend the Member for Harlow (Robert Halfon), made about the importance of skills, I was really pleased by the announcements from my right hon. Friend the Chancellor about post-16 T-levels and lifelong learning. Those announcements are vital to repurposing the workforce to get the challenges of the future sorted.

In the longer term, there is a huge opportunity for us in this country. We are a world leader in life sciences, FinTech, financial services and the digital sector and we have opportunities in artificial intelligence, robotics and genetics, but if we are to grasp those opportunities, we have to get the level of business investment up. I think that my right hon. Friend referred to that level increasing over time; that may be true, but it is still quite a long way below where it ought to be, looking at it historically.

The super deduction is a very important move that the Chancellor has already made, and the extension of the annual investment allowance to 2023 is very welcome, but I think we may need to look even deeper at how, beyond the end of the super deduction, we can continue to see business investment rise.

On research and development, it seems to me that in the plethora of announcements, figures, dates, schemes and adjustments to relief that my right hon. Friend identified, we may have slipped on our target of hitting £22 billion by 2024-25—if I heard him correctly, it has slipped to 2026-27—and I am not quite sure where we are on our target of 2.4% of GDP by 2027. Those are vital targets for us to meet in the longer term.

Finally, there needs to be an overarching examination of how the recovery is balanced. Those hit hardest by the pandemic have been the poorest in our society, who are much more likely to have faced the impact of lockdown and loss of income, and young people. My Committee will look very closely at all the issues that I have raised, including that point.

Once again, I welcome the Budget. The Chancellor has been in a very difficult position and I think he has put forward a very positive set of proposals. The devil will be in the detail; my Committee will look forward to examining that detail, including with my right hon. Friend on Monday.

[Several hon. Members rose—]