The Commercial Secretary to the Treasury (Lord Deighton) (Con)
My Lords, I congratulate my noble friend Lord Rose on his muscular magic and sparkle. He meets my noble friend Lord Palumbo’s definition of someone who can get something done as a template for the perfect politician. I was actually hired with that objective, and it is not always that easy, but we are all trying our best.
Yesterday’s Autumn Statement provides a lot of information about the UK economy and gives us the opportunity to do what we have done today, which is to evaluate the effectiveness of what the Government are doing and to discuss some of the knottier problems we face.
I think that the good news—the “success story”, as my noble friend Lord Lawson described it—is well understood. At 3% this year, we have strong growth—the fastest in the G7; it is well balanced across manufacturing, construction and services. As my noble friend Lord Younger said—my noble friend Lord Lawson commented on it, too—it is the envy of other European countries, although I appreciate that the noble Lord, Lord Lea of Crondall, does not agree with that. We have record numbers in employment based on significant job creation by the private sector—2 million since 2010; my noble friend Lady Bottomley described it as a 1,000 a jobs a day. Inflation has sunk below the target of 2%; energy and food prices have fallen, helped by a strong pound; and of course interest rates have stayed low.
That is the picture. We have heard today views on the key subjects of the deficit and living standards, and a range of questions around what I would lump into the “productivity” category. I shall try, coherently where I can, to go through those in order and respond—again, where I can—to noble Lords’ observations and questions as I go along, but we are somewhat constrained by time.
First, on the deficit, I am not going to enter into a Keynesian ideological argument, but I will buy front-seat tickets when my noble friend Lord Lawson and the noble Lord, Lord Skidelsky, duke that one out. The deficit has been halved, and we are on track to eliminate it in 2018-19. Progress is slower than we planned in 2010, but it is because the recession was deeper than we had understood and the recovery, as the noble Lord, Lord Skidelsky, was kind enough to point out, was stalled by the eurozone crisis and high commodity prices. The OBR has pointed out that it was not stalled by fiscal consolidation.
I do not believe that, given those circumstances, many people—possibly with the exception of my noble friend Lord Stevens—think that we should have gone faster. Since this year’s Budget, the deficit has not come down quite as quickly as expected, which is because of weaker tax revenues, both income tax and corporation tax. As the noble Lord, Lord Desai, said, life is never easy. The forecasts are dependent on highly changeable assumptions. Even the history is hard to work out, and we have seen some statistical changes which make it even more opaque, although I would point out in response to an observation made by the noble Baroness, Lady Worthington, it is not down to the Chancellor to change the accounting rules; we simply follow the external requirements.
However, the OBR expects borrowing to be a little higher than forecast in the next two years and then a little lower in the following two years, so still ending up with a small surplus in 2018-19. The noble Baroness, Lady Donaghy, was sceptical about our ability to achieve that. The OBR estimates the likelihood of the Government meeting their fiscal mandate at about 80%. The forecast shortfall in tax revenues, which is what is slowing us down, reaches about £23 billion in 2017-18. One reason that we are still on target is that two-thirds of this shortfall, £16 billion, is covered by lower debt interest costs, which result from both lower interest rates and inflation because of the indexed component. The noble Lord, Lord Bilimoria, rightly pointed out that we are therefore exposed to those interest rates. I am not going to use my crystal ball, but I think that we all understand that that is a significant risk. The primary reason that we should be so focused on bringing debt down overall is our inability to absorb shocks with the level of interest that we have to support.
There has been considerable debate around the spending reductions required. We had a discussion about how appropriate ring-fencing was—my noble friends Lord Lawson and Lord Wrigglesworth raised that—but in this Parliament we have managed to accomplish £67 billion of spending cuts even with that constraint. Our position is that we can continue to cut spending in the next Parliament at the same rate that we successfully achieved in this one. My noble friend Lord Palumbo talked about grasping the financial reality; my noble friend Lord Stevens said that yes, it can be done. I must admit that I am optimistic about our ability to reduce public spending through efficiency and reform. Part of the problem in making change in the public sector is that there one does not have the discipline of the market that drives and forces change effectively in the private sector, because you cannot survive without change. Frankly, while I do not enjoy the financial austerity that we find ourselves in, forcing people who run the public sector to determine how to do it much more efficiently is an extremely healthy discipline.
We will continue with our programme of efficiency reforms. We have done about £15 billion-worth so far in this Government; there is a plan to do the same again. It means the same things that private sector companies do, with discipline on pay and head count—which has already been practised—and the use of technology, which we are right at the beginning of in the public sector. It means rationalising all the space that we have got and centralising and deploying effectively our buying power. The opportunity is enormous and the challenge is how to grasp it.
We will continue to bear down on tax avoidance, for which my right honourable friend the Chancellor set a £5 billion target yesterday, and we will continue to seek efficiencies in the welfare budget, given that it represents a significant portion of overall spending, by freezing working-age benefits for two years and reviewing the level of the benefit cap.
On living standards, it has taken longer than we would like for earnings to recover; we all accept that. It is not surprising, given the scale of the crisis that we have been through, but the Government have sought to support people during these difficult times. There has been a lot of discussion about who is disproportionately bearing the brunt of this—the noble Lord, Lord McKenzie, among others, brought this up. All the objective distribution analysis that is produced by the Treasury demonstrates that during the course of this Government the weight of the burden has been much more evenly distributed than what was experienced under the previous Government. That is what the statistical analysis tells you. We can have this debate, but the objective analysis does not support the rhetoric that we hear from the other side.
What have the Government done to see us through this period of challenge to living standards? They have had a very active monetary policy to keep interest rates and mortgage rates low. They have raised personal allowances, which was welcomed by my noble friend Lord Wrigglesworth—that has taken 3.5 million people out of tax altogether and reduced tax for 24 million people. The noble Lord, Lord McKenzie, pointed out that that is expensive; it cost £12 billion. The right reverend Prelate the Bishop of Portsmouth was extremely clear about the pressures that people are under. We have done things to contain the cost of living pressures, by acting on council tax, energy bills, fuel duty and rail fares and by raising the national minimum wage—we had some discussion about that and in particular its enforcement, which was mentioned by my noble friend Lord Horam and the noble Baroness, Lady Donaghy. We are putting money into enforcement and it will make a significant difference. And, of course, we have now had a highly progressive stamp duty reform, which many noble Lords welcomed.
Earnings are now strengthening. The OBR forecasts this to continue. For those in full-time work for more than a year, as my noble friend Lord Younger noted, earnings grew 4% over the past year. Real household disposable income, which is probably the best measure of living standards, is forecast to increase by 1.6% in 2014—I should clarify for the benefit of the noble Lord, Lord Skidelsky, that that is 1.6% per capita. We should note that there is a compositional effect in the labour market: because so many more people are finding work, particularly young people, it weighs down on average earnings.
Productivity has been the focus of many comments today—it was absolutely the focus of the noble Lord, Lord Adonis. A number of noble Lords asked where it was in the Chancellor’s Autumn Statement. Growth and structural reform have been and continue to be a key plank of what this Government have been doing. Many of the measures which were announced yesterday were reinforcements of the general strategy that has been in place for some time. Productivity, together with low inflation and a strong jobs market, is at the heart of our ability to give people long-term improvements in living standards. That ambition was so well articulated by the right reverend Prelate the Bishop of Portsmouth, together with his support for church roof funding.
The UK’s low productivity has been a long-term problem. We had a fascinating analysis from the noble Lord, Lord Desai, of why it might be persistent. I am by nature an optimist, and we will find ways to deal with this. Many noble Lords have addressed it. My noble friend Lord Lawson gave the best example of when we have addressed it effectively: our supply side reforms back in the 1980s. My noble friend Lord Horam referred to them as well. They had the enduring impact of the labour market flexibility which has put us in such a better position than our competitors on the continent.
My noble friend Lord Higgins asked how much of our productive capacity was destroyed during the recent financial crisis and how easy it will be to rebuild it, which is what we are going through now. Looking at some of the different aspects of the productivity challenge, on tax, having low taxes, certainty in taxes and making sure that they are paid is a key part of this economic plan. My noble friend Lord Flight reminded us that momentum in business investment, contrary to what some noble Lords said, is developing strongly; it is up 27% in this Parliament, so business investment is recovering. That says something about the current environment, and the confidence that we have talked about.
My noble friend Lord Younger talked about the patent box and how supportive it is of research and development. My noble friend Lord Leigh made the point that large multinationals must pay their fair share and referred to the leadership that my right honourable friend the Prime Minister has shown globally in dealing with the issue. That is why we have introduced the diverted profits tax. Several noble Lords talked about that. The noble Lord, Lord McKenzie, wondered how it tied into the BEPS work. It is tied in, but we are first movers because, again, we are showing leadership. The noble Baroness, Lady Donaghy, asked me how high risk the revenues were. The OBR ranks the risk against each of them: it is medium to high, so not right at the top. The perfect answer to this is that it will divert revenues back into standard corporation tax, because those structures will not be put in place any more.
My noble friend Lord Lawson referred to the reforming zeal of my right honourable friend the Chancellor in both the pension changes and stamp duty. All that I can pass on to the House is that I see my right honourable friend the Chancellor up close virtually every day. I have worked with some of the best people in the private sector and believe you me, he passes my noble friend Lord Palumbo’s capability test.
The rates review has been welcomed by several noble Lords, including my noble friend Lord Rose. On the accelerated investment allowance, the reason that it has been a little stop-start is because it was intended to boost investment now. In that case, there is a justification for changing it. My noble friend Lord Lexden talked about Northern Ireland and competition from the Republic of Ireland. We will be introducing legislation to devolve corporation tax, subject to cross-party talks with the Northern Ireland Executive showing public spending sustainability. We have some significant measures coming through, as per the suggestion of the noble Lord, Lord Bilimoria.
We have had a great discussion on infrastructure, housing and regional growth. I could not agree more with the consensus around the House that we need to stop stop-go. Every day in the Treasury we do things to try to change that by putting in place long-term funding and long-term plans addressing the fundamentals. That is why we put the Davies commission in place: to sort out the south-east England runway capacity question. Our focus is absolutely on making things happen. I thank my noble friend Lady Bottomley for her kind words on that. On the HS3 project plan, we will see an interim report on transport for the north from the DfT in March 2015, so that will be the next step, replying to David Higgins’s work.
The noble Baroness, Lady Worthington, talked a lot about the merits of state versus private sector investment. The reality is that the right way to do this is a combination to maximise the amount of investment that we can get in. The skill is in structuring it right so that we get the appropriate outcomes. That is what we are working on. There is a big focus on access to finance for SMEs by extending FLS, which my noble friend Lord Leigh talked about. He also welcomed the introduction of another £400 million for the enterprise capital funds programme at the British Business Bank. My noble friends Lord Lawson and Lord Stevens and the noble Baroness, Lady Donaghy, wanted us to continue our work on cleaning up the banks. We obviously agree.
Exports are critical. My noble friend Lord Younger asked about the extra £45 million; £20 million of that will go to help first-time exporters, the other £25 million will go to help people in the emerging markets. There was lots of focus on skills, including by the noble Lord, Lord Adonis, and my noble friend Lord Jones. We could not agree more. Even on the infrastructure question, we have now moved beyond the pressures to deliver because the rate of delivery is such that the industry is concerned about skills. There was lots of welcome for the postgraduate scheme, including from my noble friends Lord Wrigglesworth and Lady Bottomley.
I am running out of time, so I shall not go on about our long-term commitments on science and innovation which the noble Lord, Lord Hunt, talked about. We obviously welcome the entrepreneurial explosion discussed by my noble friend Lord Flight.
Finally, I thank my noble friend Lord Younger of Leckie for introducing what has been a fascinating although highly truncated debate.