My Lords, Britain has less than 1% of the world’s population and represents just 4% of the world’s GDP, and yet it makes up 7% of the world’s welfare spending. There is no question that the Budget deficit needs to be cut and that the Chancellor needs to balance the books, even if this has meant cuts of well over 20% in some departments, as we saw in the Statement. Yet now the British economy is growing faster than any other G7 economy, with low rates of unemployment and high employment, and projections which show that the growing economy will produce more tax receipts, allowing the Government to invest in the crucial means to make us more productive and innovative. I thank the noble Lord, Lord Carrington, for initiating this debate, and I could not agree with him more about tax simplification—in fact, I often say that the Office of Tax Simplification is an oxymoron.

I turn first to higher education, which is one of the jewels in this nation’s crown. The decision to allow part-time students to access maintenance, as well as the protection of science budgets in real terms, is an excellent one. The Government are finally moving in the right direction with regard to our universities. For decades we have underinvested in R&D, well below the OECD, EU and United States averages, but now there is a financial boost going towards Innovate UK and the UK’s network of world-leading Catapult centres. Investment is being made into promoting exports through UKTI. We see investment in our aerospace industries and other advanced manufacturing industries. Here I applaud the Chancellor’s decision to provide extra support for postgraduate students, who are a vital part of boosting productivity in this country.

As we have heard from the noble Baroness, Lady Noakes, by maintaining a historically low rate of corporation tax, the Chancellor has supported a business-friendly Britain, but as an entrepreneur and businessman of course I think that the top rate of income tax should fall back from 45% to 40%. If it did so, that would make us more competitive. Also, capital gains tax should be reduced from 28% to 18%, which is where it was. This week I spoke at the launch of ResPublica’s excellent report, Make or Break. It is all about encouraging manufacturing in the UK. During his visit to the UK in November the Indian Prime Minister, Narendra Modi, spoke of his “Make in India” initiative. India has a target to increase manufacturing as a percentage of GDP from 16% to 25%. Does the noble Lord, Lord O’Neill, agree that we in Britain should have a target to increase manufacturing from 10% of GDP, where it is today?

Furthermore, and more important, the Chancellor has understood our recommendations on military and defence spending. The warnings have been there since SDSR 2010, in which the scaling back of spending on defence and security, I believe, damaged our capabilities in those areas. On top of that, when it comes to security in the dangerous world we are living in, dismissing the idea of cuts to police forces is excellent news.

In full, this is an excellent review of the public finances. While it is right to continue to make the cuts that will make us more efficient as an economy, it is also essential to use the UK’s advantageous position to invest in helping the economy to grow. No business can grow by cutting alone; businesses can become more efficient by making cuts, but they also have to invest to grow. These are all steps in the right direction. However, this is dependent on a continuing increase in tax receipts and on net interest payments being low. If interest rates go up, it will be more difficult for the Chancellor to continue down this path.

Moreover, let us not forget that this was made possible by the Chancellor finding an extra £27 billion. The noble Lord, Lord Horam, talked about luck. Well, my best definition of luck is when determination meets opportunity. What is brilliant is that we must not forget that forecasts can be very badly wrong.

Robert Chote, the director of the OBR, said that his organisation had predicted growth to be six times stronger between 2010 and 2012 than the official figures suggested was the real case.

I would like to conclude by saying that I am so glad that the Chancellor has made the decision to reverse his planned cuts on tax credits. While the media and the noble Lord, Lord McFall, may have branded the Chancellor as having committed a dreaded U-turn, let us not forget, with all due respect to the noble Lord, Lord Wakeham, that without the actions of this House, the mistakes the Chancellor would have made would now be mistakes enshrined in law. That is no better reminder of the importance of this House when carefully considering legislation, and as the check and balance and guardian of the nation. Steve Jobs, the founder of Apple, said that, “changing your mind is a sign of intelligence”.

Clearly, we have a very intelligent Chancellor. I now also name him as “the listening Chancellor”. Thank you, Chancellor.

My Lords, in his first Budget in 2010, the Chancellor said that the Government would,

“have debt falling and a balanced structural budget deficit by the end of this Parliament”.

—[ Official Report , Commons, 22/6/10; col. 168.]

Despite the Chancellor’s tough talk about austerity and cutting public expenditure, the reality is that public expenditure as a percentage of GDP has continued to increase. I thank the noble Viscount, Lord Younger, for leading this debate.

Yesterday, it was announced that the Government will spend £746 billion in 2015-16, rising to £765 billion in 2018-19, compared with £692 billion in 2010. Government spending is increasing and, as a percentage of GDP, our national debt is rising. According to the OBR, it will now peak at 81% of GDP in 2015-16. This means that the Chancellor will completely miss his target to ensure that net debt is falling relative to GDP by 2015-16.

We have a perception of austerity that has simply not been matched by reality. Yesterday, the Chancellor acknowledged that we are at least another four years away from that target. To build on what the noble Lord, Lord Skidelsky, said, if we are borrowing £300 billion more than the Chancellor said he would in 2010, why should anyone believe him this time around? The OBR has predicted that public expenditure is going to have to fall to 35.2% of GDP by 2019-20—the lowest level since the 1930s. Let us remember that the 1930s were pre-welfare state days. Can the Minister confirm that that is really achievable?

In order to achieve those cuts, it is predicted by the OBR that the defence budget, which is already negligently too low, will have to be cut by 60%. Can the Minister confirm that that might have to happen, although it is hoped that it never will. However, I was delighted to hear that the Government will be giving money to veterans, including £2 million for the Gurkhas. I was privileged to have been brought up with the Gurkhas. My late father, Lieutenant-General Bilimoria, was commissioned to the 2nd Battalion, Fifth Gurkha Rifles (Frontier Force), and was president of the Gurkha Brigade when he was commander-in-chief of the Central Indian Army. I was privileged to have been brought up with two Victoria Cross holders from birth—they were living legends. Therefore, I thank the Government for doing that.

However, it is the low level of interest rates for a prolonged period, at the level of 5% that led to the financial crisis from which we suffered. Yet today we are being propped up by interest rates that are 10 times lower—at 0.5%. Government borrowing has been increasing year on year and expenditure on debt interest has contributed to it. It is more than £1.27 trillion and is costing us £1 billion a week—more than the entire defence budget.

Does the Minister agree that interest rates might have to rise? The Governor of the Bank of England made a ridiculous statement that he would start increasing interest rates when unemployment fell below 7%. Unemployment is at 6% now and interest rates have not gone up, but they will go up at some stage, and if they do the debt interest levels will go up. The SNP made the mistake in its budgets with the oil price and its budgets are shot to tatters at the moment. Will the Minister give his views on future interest rates?

Wearing my hat as chancellor of the University of Birmingham I have seen that our higher education sector is one of the jewels in our crown. I am delighted that the Government are about to announce loans for postgraduate studies. On the other hand, we highly underinvest in higher education as a proportion of GDP compared with the OECD, the EU and America. On R&D and innovation, the patent box is all very well—it is stored—but if we invested the same proportion of GDP as countries such as America, the OECD and the EU, we would help our productivity hugely. Our current account deficit has reached 5.2% of GDP, which is worse than Italy and France. Our fiscal deficit of 5% is almost double that of the United States, let alone Germany which has just 0.2%.

As the noble Lord, Lord Adonis, said, skills are so essential. I am proud to be an ambassador for Studio Schools. Last month I opened the Vision Studio School in Mansfield. That is the sort of initiative that I am glad the Government are backing. Tax breaks to apprentices are excellent but, on the other hand, the word “entrepreneurship” was completely missing from the SME Bill. Entrepreneurship should be the cornerstone of our future growth. I launched the 10th anniversary of the Cambridge University Centre for Entrepreneurial Learning this week. That is what we should be backing. The Sirius campaign, backed by UKTI, bringing young entrepreneurs to Britain to develop their businesses, is a great initiative that the Government should be doing.

The Government are doing a lot, but are they doing enough on the big things? We have a tax system that is so complicated that the tax code is now 17,000 pages long. The Office of Tax Simplification is an oxymoron. Our corporation tax rate is low but our income tax rate is too high. Capital gains tax is too high. The Indian restaurant industry which we supply and the Bangladesh Caterers Association UK are constantly complaining about VAT and asking for it to be reduced. Our hospitality and tourism industries say that VAT is far too high. We do not have a competitive tax system.

The noble Lord, Lord Rose, in his excellent speech, spoke about confidence. We need confidence, productivity, and a better educated and more entrepreneurial workforce who think globally. Government expenditure should be at a believable rate: 35% is unachievable; 40% would be a realistic rate. We could then balance our books and have an educated, productive, confident and enterprise-based economy so that, even as 1% of the world’s population—that is all we are—we can continue to punch above our weight.