Budget Statement

Viscount Hanworth Excerpts

Thursday 27th March 2014 Lords Chamber

[Viscount Hanworth (Lab)]

My Lords, from my perspective this has been a distressing Budget. It has all of the features that we have come to expect of the activities and the enactments of the Chancellor. I wish to examine some of these features, albeit briefly.

The Budget is highly political in the sense that it is dominated by the objective of gaining an electoral advantage for the Conservative Party, no matter what the long-term costs of doing so might be. The Budget promises a continuing attack on welfare provision and a shrinking of the public sector to a level not seen in post-war years. Apart from a token investment—equal to the amount of money to be spent on the repair of potholes in roads—in the Ebbsfleet housing project, which was announced in advance of the Budget, there have been no plans for any further centrally funded investment in social and economic infrastructure.

The Budget manifests the Conservatives’ desire to do nothing that might amount, in their perception, to undue activity on the part of the state. Some of the provisions of the Budget have been designed to appeal to pensioners and to those who are heading towards retirement. Such people constitute a significant part of the active electorate and the Conservatives have been fearful that, unless they appeal to those people, UKIP might seduce them. This is one explanation for the deceptively attractive proposal to allow people, on their retirement, to get their hands on the entirety of their pension endowments without suffering what has hitherto been a heavy tax penalty. This is likely to inject extra cash into the economy to stimulate it in time for the general election.

The critics have been quick to spell out the detriment from this provision. It would add an impetus to an already overheated property market as pension endowments are used to buy property to generate retirement incomes from lettings. This would compound the severely deleterious effect of the Government’s misguided Help to Buy policy. This liberalisation of the pension rules is also liable to lead to penury in old age for a substantial number of incautious people who will grab their wealth and spend it. The financial services industry is set to scramble wildly in an attempt to mop up the cash that has been liberated by offering pensioners all sorts of innovative financial products with deceptive inducements. Little has been done to protect gullible pensioners.

We should briefly remind ourselves of the current state of the economy and of the tasks that confront the Chancellor. At a time when it seems as if the economy is set to expand, there is a desperately poor export performance, which promises an eventual crisis. There is low productivity and low investment in a much diminished manufacturing sector. There are spiralling levels of household debt and there is a vigorous inflation of house prices, without any significant activity in housebuilding that might meet the needs of young people.

The nostrums of Keynesian economics, which were once widely accepted by the Conservatives, indicate that the Government should have taken a central role in addressing these problems. They should have become active in stimulating the economy at a much earlier stage of the recession. The means of doing so should have been a heightened level of investment in the infrastructure of the economy. There has been a lingering consciousness in the Government’s mind about the need for such an investment programme. There has been recognition of the need to invest in airports, rail links, sewerage systems, power stations and housing. In every case, the projects have been deferred until, supposedly, the economy is better able to afford them. In other words, there has been a complete inversion of the Keynesian logic.

Two major impediments have stood in the way of such investment projects. The first has been an ideological insistence that the projects should be financed and undertaken solely by willing providers from the private sector. The willing providers have not been forthcoming. The second impediment has been the concerns over the public sector borrowing requirement, allied to a desire to eliminate the budget deficit. With such an agenda, it has been impossible for the Government to fund investment projects. The budget deficit is due to the recession of the economy, which has reduced the flow of funds from taxation. It would be largely overcome if the economy could be restored to full employment.

A misconception has been affecting the common understanding of the borrowing requirement. It has been widely believed than any net borrowing denotes a burden of debt that cannot be sustained indefinitely. This fallacy has arisen from a failure to distinguish between the current account and the capital account of the Government. One should bear in mind that any successful business enterprise is bound to have a substantial and permanent burden of equity capital and financial debt, which corresponds to its borrowing via stocks and bonds. The enterprise is not liable to be criticised for the fact that, in order to sustain its capital investments, it is bound to borrow. The same should be true of the investments in social capital for which the Government are responsible.

In making their social investments, the Government have two advantages that are denied to private enterprises: on the one hand, they can borrow at much lower rates of interest than are typically available to private enterprises; on the other hand, whereas private enterprises must service their debts via insecure commercial profits, the Government can service their debts by the taxation over which they have control. The present Government have forgone the opportunity of undertaking much needed social investments at a time when the rates of interest on the necessary borrowings are at a virtually unprecedented low level.

When the Government have contracted to proceed, eventually, with an investment project, they have promised the undertaker a so-called market rate of return that is utterly exorbitant. The rate of return that has been promised to Electricité de France for building a nuclear power station is far in excess of the already excessive 10% discount rate that the Government typically use in their project appraisals. Moreover, the returns have been promised for a 35-year period. It would have been appropriate to finance this project, at far less cost, via the Government’s borrowings on their capital account. The cost of such borrowings could be serviced from the expected revenues of the project, but equally—logically—it could be serviced from taxation. In a wholly egalitarian society, it should make no difference which of these two means is adopted for financing investments in social capital.

From the perspective of the Conservative Party, which is averse to the strongly progressive taxation that is the corollary of a highly unequal society, the preferred means of financing such investments is by charging the consumer. However, there is an electoral disadvantage in imposing costs on the consumer. This has deterred the Government from making the social investments that are their responsibility, and this failure to invest promises social and economic problems in the future.