Last Wednesday saw the Lords debate Budget 2016, George Osborne’s last before the upcoming EU referendum. Lord Bilimoria welcomed the business friendly measures that the Government introduced, such as the expansion of business rates relief and the sustained reduction in Corporation tax, but he lamented the impact of the Chancellor’s proposals on the UK’s increasingly complex taxation system and condemned the poorly thought out plans to cut Personal Independence Payments.
Moved by Lord O’Neill of Gatley
That the Grand Committee takes note of the economy of the United Kingdom in the light of the Budget Statement.
Lord Bilimoria (CB): My Lords, it is wonderful to follow the noble Lord, Lord Darling; this is the first time I have taken part in a debate with the noble Lord since he joined us. I remember very clearly leading a delegation to India as the chairman of the UK India Business Council, accompanying Gordon Brown, who was then Chancellor, and the noble Lord, Lord Darling, who was then Secretary of State for what is now BIS. I remember saying at one of the speeches I made there, “We have with us possibly—probably—the next Prime Minister and the next Chancellor”. Of course, on 27 June 2007 that came true. It is wonderful to have the noble Lord with us as well as the noble Lord, Lord Price, whom we welcome. I say this not just because Waitrose is a very good customer of Cobra beer. The noble Lord is a hugely respected established figure in the food and drink and retail industry—that feeling is unanimous; I have never heard a bad word said about him—and we are very lucky to have him with us.
Looking ahead, there is huge uncertainty. We have the election for the Mayor of London, the EU referendum, the Iraq inquiry report, the decision on Heathrow and Gatwick, which the noble Lord, Lord Darling, mentioned, which has been delayed until after the mayoral election, the American elections, and the Middle East situation and Daesh-IS. There is wretched, awful terrorism in places such as Paris and Brussels. What a backdrop for a Chancellor to produce a Budget against. Just look back to November, when the Chancellor was riding high—there was £27 billion extra and a rosy outlook—then within weeks he was backtracking because the outlook for the global economy was weaker, and the UK is not immune to slow-downs elsewhere.
This Budget has some excellent measures in it. Capital gains tax, which I have talked about time and again—which used to be 18% under the old Labour Government, increased to 28% and should go back to 18%—is down to 20%. That is wonderful news, and with the basic rate going down from 18% to 10%, that will help wealth creation, which I will come back to later. Entrepreneurs’ relief has also been extended, which is also fantastic. On business rate relief, 630,000 small businesses will pay no business rates at all next year, and reforms to national insurance will abolish class 2 contributions. That is all good news.
Cutting corporation tax down to 17% is absolutely tremendous and I will come to that later. Improved loans for doctoral students and loan systems for postgraduate students are also great. They are not quite where they should be but it is great progress. I declare my interest when I say that beer duty being frozen is very good. On a serious note, it is good for the pub industry, jobs and the consumer. There is investment in infrastructure—whether you agree with it or not—such as Crossrail 2 and HS3. I think that is terrific. There is also investment in roads.
However, the Government have made serious mistakes in the Budget, for example with the PIP. The IFS calculated that 370,000 people were affected by the change to the PIP criteria, and that it worked out to an average loss of £3,500 per person per year. The comments of my noble friend Lord Low on this issue have been vindicated as the public have agreed with them and the Chancellor has had to backtrack. As regards our complicated tax system, as a member of the Economic Affairs Finance Bill Sub-Committee, I know that a huge overhaul is needed vis-à-vis tax simplification, and I will come to that later.
The most important point concerns the uninspiring efforts to improve productivity, which was referred to by the noble Lord, Lord Eatwell. The OBR pointed out that productivity will be a serious issue. Chris Giles of the Financial Times said that the OBR had “flip-flopped” by giving the Chancellor, “a £27bn windfall to play with over five years in the Autumn Statement”,
but that the OBR, has now removed £56bn in these Budget forecasts”. Does the Minister agree with that?
The director-general of the Institute of Economic Affairs, Mark Littlewood, described the Budget as “slow, steady” and “rather unimaginative”. I think that is rather unfair. However, he went on to say that, “at least the Chancellor hasn’t thrown out his target of a Budget surplus for 2020, even if he has almost no margin for error in hitting that target”.
What he said about the increase in the 40% threshold is very good. However, on the capital gains tax, he says:“The old top rate of 28% was actually losing the government income—high CGT rates damage economic growth by encouraging individuals to hold on to assets that would be better off under different ownership”. Therefore, I congratulate the Government on that once again. KPMG’s chairman referred to,“a variety of measures aimed at the more traditional butcher, baker and candlestick-maker across the country but also the digital age ‘kitchen table’ entrepreneurs”.
Robert Chote, head of the OBR, says that the OBR has revised down productivity growth, meaning that, “the cash size of the economy is about 3 per cent smaller … than we predicted in November”.
I ask noble Lords to keep that figure in mind—3% smaller than a few months ago. Robert Chote also said that the public sector net borrowing situation was £11 billion worse than previously forecast, and that weaker GDP growth means that debt to GDP ratio would rise, rather than fall, this year. Does the Minister accept that?
The Institute of Directors—not surprisingly—welcomed the measures that will help SMEs but also questioned how the Chancellor aimed to achieve the budget surplus he has promised by 2019-20 given the downgrade in the economic forecast. Simon Walker, the director-general, said:“The UK faces risks on many fronts, and much heavy lifting will still be required to get rid of the deficit by the end of the Parliament”.
Does the Minister think that there is a realistic chance of doing this? The Government have had the guts to do a lot but they have not had the guts to reduce the top rate of income tax down from 45% to 40%. That is what it was under a Labour Government for many years. They have reduced CGT; they should reduce the top rate of income tax down to 40%. That would make us more competitive. Does the Minister agree?
Government spending as a share of GDP touched nearly 50% under the Labour Government. It was at 45% of GDP by 2010. The Government want this to go down to 36.9% of GDP by 2020. Is that realistic? Given that the NHS and so many other areas are ring-fenced, does the Minister really think that we can get government spending down to 36.9% of GDP? The OBR forecasts are changing all the time. The Government are relying on them when it suits them. Now it does not suit them. It is like the Governor of the Bank of England bringing in forward guidance. What a ridiculously ludicrous idea. Of course, he has had to backtrack on that completely.
The Office of Tax Simplification is an oxymoron. The Government should be simplifying tax, not complicating it, but the Office of Tax Simplification does not have the powers it needs. I would ask the Government to look into giving it more powers and consulting it more, which they are not doing at the moment.
I congratulate the Government on security, about which the Minister spoke in his remarks. We have now finally agreed to the 2% defence spending, which is the NATO commitment and is wonderful, particularly given the environment we are in. Also, the SDSR 2015 is a huge improvement on the SDSR 2010.
We should keep things in perspective. This little country comprises less than 1% of the world’s population yet we have 4% of the world’s economy and 7% of the world’s welfare spending. That cannot really go on. We have seen welfare reform that was desperately needed, but on the other hand the reforms need to be fair or we will see headlines like that in the Sun, “Beware the IDS of March”. The disability benefit proposals were a huge mistake on the part of the Government and I think that the Chancellor now regrets that. Reducing corporation tax is great, but capital allowances are not as attractive as they should be. Does the Minister agree that they also need to be more attractive?
I turn to productivity. We are caught up in a short-term, five-year election cycle when what we really need more than anything else to improve our productivity is to invest in our universities. As a percentage of GDP our spend on universities is way below that of the United States, way below the EU average, way below the OECD average, and yet along with the United States we still have the best universities in the world. Cambridge University with its 92 Nobel Prize winners has won more than any other university in the world. Just imagine how much better we could do if we were to spend the equivalent in proportion to our competitors.
Linked to that is investment in R&D and innovation. We have great research papers and amazing fundamental research, and yet as a percentage of GDP we underinvest on R&D and innovation compared with the EU and the OECD average and are way below the United States; even South Korea invests more as a percentage of GDP on R&D and innovation than we do.
I think that the noble Lord, Lord O’Neill, said that when the forecasts change, our plans have to change with them. Perhaps we should rename the noble Lord as John Maynard Keynes:
“When the facts change, I change my mind”.
The facts have changed and they are going to continue to change, but will the Government be able to adapt quickly enough to be able to cope with that? The Minister also mentioned the Oxford-Cambridge corridor. That is brilliant news. The corridor will create a golden triangle between London, Oxford and Cambridge that will help with R&D and innovation and the university excellence that we have.
I conclude by saying that last week I was in Delhi in my new role as a food champion for Britain, having been appointed by Defra. We went to launch a food festival in Delhi. It was a curry festival—taking coals to Newcastle. British curry chefs were flown out to the ITC Maurya, one of the finest hotels in India, to serve British curry—chicken tikka masala and Balti, dishes that do not exist in India—to Indians. In my speech at the opening of the festival I said that we should just look back to the 1980s. Britain was the laughing stock of the world when it came to food. British food was sneered at. Today, this country has some of the finest cuisine in the world, and indeed London is the restaurant capital of the world. In the 1980s, this country was looked upon as the sick man of Europe, but today we are the envy of Europe. In the 1980s, this country looked down on entrepreneurship—Del Boys and second-hand car salesmen—but today we celebrate it because we are one of the centres of the world. We have the best of the best capabilities in every field that can be imagined, whether it be architecture, entrepreneurship, universities, the City of London, the creative industries, or culture and sport, we are the best of the best.
The Budget is there to help us, but Governments make mistakes. I think that the Chancellor has lived up to one of my favourite sayings: good judgment comes from experience and experience comes from bad judgment. So,a fair and competitive Budget.
Lord O’Neill of Gatley:
My Lords, I do not know whether it is the intimacy of this Moses Room—it is my first time here—but, as with each debate on economic and financial matters in which I have been involved, including the third Budget-type debate within a year, it has been a genuine pleasure to listen to the remarkably insightful and broad comments of noble Lords with their vast experience and wisdom. Again, I do not know whether it is the intimacy of this room, but the debate seems to have come with a lot more humour than I remember from some others I have taken part in. That is also very pleasurable.
I, too, congratulate the noble Baroness, Lady Knight, on her marvellous valedictory speech. I had been thinking until I saw the number of people exiting the Room when she finished that they were all here for the Budget debate, but clearly not. Whatever we think about the complexity of our democracy it is quite extraordinary to be able to celebrate somebody who has been in Parliament for 50 years. It is more than the lives of some of us—I think of the young people sitting behind me in that regard.
The noble Baroness mentioned 15 March 1979, and I have heard a deeply pessimistic tone from many noble Lords. I was coming towards the end of my master’s degree year at Sheffield University around that time. I do not know why I find myself thinking this, but during those days of horrific strikes Orgreave Colliery—as I am sure many people know—was at the centre of many of the disputes. One of the most enjoyable things I have done in my relatively short time as a Minister was, along with the Chancellor, to sign the devolution deal for the Sheffield City Region. The deal was signed at its advanced manufacturing centre, which I had to point out to a number of people is on the very same site as that event 50 years ago. It is a sign of the way the world can change.
I also congratulate my new noble friend—but my previous normal friend—Lord Price for his speech. It sounds like there is an enormous amount of support for his preceding life in business. Along with some of the amusing comments, it sounds as if food might need to be an important part of his drive to pursue the simple challenge of boosting our exports. If we can sell curries to India, as the noble Lord, Lord Bilimoria, said, maybe his challenges are not as tough as some people typically presume.
Let me turn to the remarkable substance. Again, I apologise that it is going to be impossible in the remaining 17 minutes I have to respond to everything noble Lords have said. I had planned—as I try to do—to respond to each of the 19 important contributions but I have decided to try to do it on a thematic basis. Having said that, I will start by responding to the interesting comments from the noble Lord, Lord Davies. Briefly, before I do that, I want to respond to the right reverend Prelate the Bishop of Portsmouth. He made a very important comment about simplification and the speed with which words can be used. I will certainly take that note back to my colleagues and I hope that is something we can address in the future. Among many points, the noble Lord, Lord Newby, mentioned devolution and the Cambridge deal. It is not the role of the Government and completely against the spirit of devolution for us to tell any region whether it should be part of it. It is up to them. If Cambridgeshire for whatever reason decides, rather oddly in my opinion, that it does not want to be part of it, then so be it. It would not be first place in the country where that issue is valid.
Let me turn to the broad summary. I do so in response to the comments from the noble Lord, Lord Davies, on the presumption that he reflects a lot of the comments from the opposition. Lack of investment and productivity, of course, is one of my themes and I will come back to that.
As I have said before, if you go to the 40,000-feet level, the big and welcome surprise of the last Parliament and the worst days of the recession was how few jobs were lost, in contrast to the expectations. The noble Lord, Lord Darling, talked eloquently about the interesting days when he was in the middle of before the coalition came in. As I have reminded people previously, nobody would have dreamt of the scale of employment created over the subsequent five years of that coalition. Whatever the ins and outs of the other issues I am going to go on to, we should be careful not to confuse attempts to boost productivity with anything that reduces jobs and opportunities, particularly the number of jobs being created for young people. I say that because, while I do not believe it was in the Government’s manifesto, the decision by the Chancellor to acknowledge the productivity challenge right at the start of this Government, and hence why I was invited to become part of the Administration, is a recognition of its importance.
I want to make two further points in response to the noble Lord, Lord Davies, before I come to the thematic areas. On the topic of inequality, on which I am a little surprised more was not said—in some ways I am pleased about that—and as I tried to address very specifically in an Oral Question recently, based on the existing objective measures of these issues, it is the case that inequality today is less prevalent than it has been for the past decade. What I probably did not say within the considerable amount of evidence that I cited during that brief Question—that is why debates such as this one are much more useful because one can say more that is of real substance—is that while there may have been aspects of rising inequality within different income groups, on all the internationally accepted measures of income both before and after tax, inequality is lower today than at any time in the past 10 years. When it is adjusted for wealth, which is the result of house prices, that is not the case. That is why it is appropriate to put so much effort into trying to do something about the tremendous housing challenge we are facing.
In the spirit of how I began, which is that the world is not quite as gloomy as it seems, something that so many people believe innately in their veins, it is important for everybody to realise that global inequality has declined and continues to decline at a pretty considerable rate. The United Nations achieved its goal of halving world poverty, without even realising it, five years sooner than it originally stated. One has to be careful of making such overwhelming summaries.
Let me turn to the thematic issues. It is most important that we start with the personal independence payment. The noble Lord, Lord Eatwell, challenged me to be clear about it, so it is appropriate that I should start with PIP. The most important thing to say, in my opinion—here no doubt I risk upsetting some of my colleagues as well as many others—this is what I would personally describe as a Q times A equals E problem. Many years ago I learned that if you are trying to pursue an idea or a policy, the quality of the idea times its acceptability equals its effectiveness. I shall come on to this in terms of the frankly quite ridiculous, albeit amusing, things we have heard about black holes. The prime purpose of that policy initiative was to try to stop the degree of gaming and abuse of beneficiaries, which sadly in the way it has been portrayed has not been able to be done successfully. That in my limited understanding is why the issue came to our attention and generated the policy behind it. It comes down to making sure that the people who are in need of government support are those who get it, and rightly so, and those who are not in need do not get it. I am sure that this issue will be addressed again.
On the £4.4 billion, let me first point out that total government expenditure in this year’s Budget will be close to £700 billion, so the idea that £4.4 billion spread over five years is going to put a black hole into the Government’s finances is really not worthy of me pursuing in any great depth. While I am going to come back to this as a separate theme, a number of noble Lords have quite rightly talked about the volatility of the forecasting environment we are in. On the OBR’s forecast change, one noble Lord—perhaps the noble Lord, Lord Bilimoria—referred to the four-month gap since the Autumn Statement but it is actually not much more than three months. The forecast is £55 billion different from what it was. That is the context in which one should think about this so-called black hole. By the time we get round to the Autumn Statement, one of the few things I can guarantee for Members of this House is that the OBR’s forecast will change again, and I suspect that it will be considerably more than £4.4 billion.
Theme number two is on the environment, what I just said about the OBR and on forecasting in general. As noble Lords will know, I spent many years of my life—far too many—in the dubious world of economic forecasting. There is a slight dilemma in that the Government have, very importantly, introduced the power of an independent entity, the OBR, to constrain the actions of the day by providing these forecasts. Partly due to the incredible uncertainties of the world economy in general but also to the circumstances over the past three months, this is a very large change in forecast. In my old life, where I managed a large number of economic forecasters, I would not encourage people to change their forecast that frequently. However, if that is the process which has been brought about by the existence of the OBR, it needs to be respected by the Government. It is an independent entity and we need to set our policies in that framework.
I will finish on that topic, although I could talk about it all afternoon. Robert Chote said to the Select Committee yesterday that he thinks there is a 55% chance that the Government will achieve a fiscal surplus by the end of this Parliament. Again, as someone who has been steeped in economic forecasting for a large part of my life, while many noble Lords might not think it, that is not a bad probability of a good outcome. I used to joke to people that 60% right would allow most people who presided over it to be lucky enough to be well off enough to own their own Caribbean island. I encourage those noble Lords who question the value of such statements—I will come on to that in a second—to think again.
That takes me to theme number three on the issue of fiscal policy and the right framework. A large number of noble Lords have somehow again raised the idea that there is no economic purpose to having a fiscal surplus. Unless international economic theory and best policy has changed dramatically in the three years since I was so immersed in it, on the contrary, it is widely accepted that when countries are at or close to full employment they should run a fiscal surplus or very close to it. One can argue about the dates but the goal of trying to achieve a fiscal surplus in normal times is an extremely sensible economic policy to pursue, not least because if you luckily achieve that in not normal times, it gives you the fiscal leeway to do something about the immediate needs of the weak cycle that one would focus on.
I will go from that theme directly into the very important issue of productivity. I do not at all have enough time to respond to the many powerful things noble Lords have said. To those noble Lords who seem to enjoy a more pessimistic way of thinking, I say that one should not dismiss another reason why it is important to focus on fiscal policy. If the productivity data were genuine—I have considerable doubts which I have expressed before and will do so again in the future—it may well be because of a large level of public debt as a share of GDP that has been accumulated both here and in many other parts of the developed world. To take it back to the purpose of fiscal policy, there is a reasonable amount of evidence that public debt as a share of GDP somewhere below 60% of GDP, and especially if it is below 40%, generally creates a much better environment for private sector productivity. One could argue about the scale of some of these numbers but the notion of not trying to pursue a fiscal surplus in a time of full employment—and we have the highest employment for 40 years—is, in my judgment, mistaken.
There were some very useful comments on productivity more generally, and I apologise that I do not have time to go through them all in detail; I want to focus on one or two areas. I am surprised more was not said about education. I spent a considerable amount of time today, as I have done in the past, looking at globally comparable indicators for factors relevant to productivity. If you try to identify those that the UK seems weaker in as compared with the rest of the world, it is education that sadly comes out as one of the most identifiable. That is why it is a feature of this Budget. The noble Lord, Lord Bilimoria, made comments about higher education and I think other noble Lords made similar comments. My surprise came because in my judgment, doing more about education and skills, particularly for younger people, which is what we have tried to focus on in this Budget, is probably the single most important thing in terms of improving—adjusted for measurement error— our long-term productivity.
On taxes, a considerable number of interesting things were said as time went on, and I want to touch on two or three. First, I personally think that the sugar tax is a very courageous move. As many noble Lords may be aware, in addition to my responsibilities as Treasury Minister, I am chairing a review into antimicrobial resistance where I have to think a lot about the role of taxes, subsidies and incentives. What has been introduced is an important step for policy-makers to think about for further development, as the noble Baroness, Lady Kramer, implied with her question.
More broadly on taxes, some interesting comments were made about taxation with respect to private businesses. This links again to the review that I am leading. A major peculiar aspect of our time is that private sector investment spending both here and elsewhere in the world is very low despite enormous levels of cash. There is quite a bit of growing evidence that private sector entities that are not subject to some of the challenges of public accounting are better at investing. One purpose of the policies taken was to encourage—particularly for start-ups—more risk-taking in an equity sense for private investment. The comments by my noble friend Lord Lupton and others about capital gains tax should be seen in that context. We suffer from weak productivity and investment, and the measures that have been seriously thought about from a micro-economic perspective to try to stimulate them further are very important.
I have run out of time; I knew that I would and I apologise. There are many other things I would like to have said. Let me summarise by saying that I believe the UK still has a brighter economic future than I have heard in the tone of what many have said today, notwithstanding the challenges we face. As we have discussed, this Budget has come at a time of significant downward revisions both here and elsewhere in the world. At some point in the future, who knows when, it is quite possible that those revisions will go in the opposite direction. Against that background, it is important to note that this Budget prioritises long-term growth potential and investment, tries to support business, builds up young people’s skills, gives another tax cut to workers as well as business, and tries to help more people to get on the housing ladder.
The submission of the convergence programmes, which was touched on briefly, should not be affected by the fuss about PIP for the reasons that I have outlined. The submission by euro-outs and stability programmes by euro area member states provides an important framework for co-ordinating fiscal policies. A degree of co-ordination across countries can be beneficial to ensure a stable global economy, which is in the UK’s national interest. The UK has always taken part in international mechanisms for policy co-ordination, such as the G7, G20 and OECD, and it should continue to do so.
The Government’s fiscal strategy remains that the UK should live within its means by running a surplus in normal times, which is a reliable way of ensuring debt reduction that will continue over the longer term, leaving the country better placed to withstand future economic shocks as and when they appear. This Budget sets out the policies that will help our economy to succeed in the long term, and I am delighted to commend it to noble Lords.