Lord O'Neill of Gatley
That this House takes note of the economy of the United Kingdom in the light of the Budget Statement.
Baroness Chisholm of Owlpen (Con)
My Lords, there are 24 speakers for the debate on the Budget Statement. If Back-Bench contributions are kept to around seven minutes, the House should be able to rise at approximately 10 pm.
The Commercial Secretary to the Treasury (Lord O'Neill of Gatley) (Con)
My Lords, the British economy is now fundamentally stronger than it was some years ago. We have recovered significantly from the financial crash of 2008. We have seen real GDP growth higher than that of any major advanced economy in 2014, and that is the current consensus expectation for this year as well. We have started to see rising wages and, until very recently, particularly strong increases in the rate of employment. We have also seen business investment 31.9% higher than it was in 2010. Although this all puts us in a relatively strong position, if we want to make this recovery truly secure, and truly national, there is still a lot that we need to do. We need to increase our growth; step up our productivity a gear or two; and continue reducing the budget deficit—because in normal economic times, that is the right thing to do. Of course, we also need to see our external current account deficit improve.
This Budget will continue Britain’s journey towards economic security and prosperity. The first way we achieve this relates to a continued course of deficit reduction in line with the pace set in the previous Parliament. As I have just said, in normal economic times, it is right that Governments run an overall budget surplus. That gives a Government much more room for manoeuvre in the event of an economic downturn. This is sensible fiscal policy. The fiscal path laid out in this Budget is set to take us eventually into surplus. Importantly, it takes a smoother path than had previously been set out because we can get to the same destination while keeping a steadier pace.
The budget deficit is now less than half of the 10.2% it was in 2010 and this year it is forecast to fall to 3.7% of GDP. Our fiscal plans forecast this deficit to fall further to 2.2% in 2016-17; down to 1.2% the following year; down to 0.3% the year after that; and then to a budget surplus of 0.4% in 2019-20. At the same time, our national debt share is forecast to continue falling in every single year, down from around 80.3% of GDP this year to 68.5% by 2020-21.
The spending decisions we need to make to get there are indeed tough but they are necessary. Without sound, sustainable public finances, there can be no real economic security for working people. The fiscal charter published earlier this month commits the UK to sticking to this path: achieving a budget surplus by 2019-20 and then maintaining a surplus thereafter. The only exception to the rule would be if there is a recession or a marked slowdown; that is, if the Office for Budget Responsibility judges that we have real GDP growth of less than 1% a year, as measured on a rolling four-quarter basis. There is still a view in some quarters that we are in an age of austerity but from an overall fiscal policy perspective, with strong employment and recent above-trend growth, this is surely no longer the case. The charter will bind the country to living within our means.
Under this Budget’s fiscal plan, we require some £37 billion of further consolidation over this Parliament. Some £17 billion of this comes from measures set out by the Chancellor in the other place; namely, £12 billion from welfare and £5 billion from tackling tax evasion, avoidance, non-compliance and planning, and imbalances in the tax system. The other half will be set out following this autumn’s spending review. As a point of principle, no year will see overall cuts as deep as those required in 2011-12 and 2012-13. As a second point of principle, we will make our spending decisions in a fair and balanced way.
The second way in which we can secure this country’s recovery is through improving our growth and productivity. In my maiden speech in this House I said that our productivity challenge is well known, that we can try to do a lot better and that we should see the so-called productivity gap as an exciting opportunity, as well as a challenge. The productivity plan that we recently published—all 82 pages of it—shows we are rising to that challenge. It is based on a two-pronged approach: first, encouraging long-term investment in economic capital, including infrastructure, skills and knowledge; and secondly, promoting a dynamic economy, one that encourages innovation and helps resources to flow to their most productive use. The policies introduced in this Budget will help to make that plan a reality, so I would like to outline the highlights again.
First, overhauling the vehicle excise duty system and hypothecating the money that this duty raises into a new roads fund will pay for the sustained investment in roads that this country needs over the long term. We remain committed to the £15 billion that we have already allocated for new roads for the rest of this decade.
Secondly, we will give people the skills that they need to secure a better job. Apprenticeships have been a significant success story but the rate and quality of training has been uneven, to say the least. To tackle that, the Budget will introduce an apprenticeships levy on large firms. Firms that offer apprenticeships can get back more than they put in and that money will be directly controlled by employers. This stands not only to deliver 3 million more apprenticeships but, crucially, to enable an increase in the quality of apprenticeships, paving the way for a new generation of higher-skilled workers. Our productivity plan also contains measures to improve schools education by creating more free schools, ensuring that there is a university technical college within reach of every city and training up an additional 17,500 teachers in science, technology, engineering and mathematics. The Budget will also increase the cash available to enable English students from low and middle-income back- grounds to study at university, while putting funding on a long-term sustainable position—including asking those who benefit from a university education to contribute more of the costs of their degrees once they are earning.
Thirdly, we will be building up strong, interconnected cities beyond our capital. Research that I carried out before I entered government shows that this is central to driving growth and productivity, and revitalising many areas of Britain. Indeed, what I inelegantly called “ManSheffLeedsPool” was the spiritual precursor to the northern powerhouse. We will roll out further powers to Greater Manchester and work to have devolution deals with the Sheffield city region, the Liverpool city region, Leeds, West Yorkshire and its partner authorities and, as of very recent events, the north-east, as well as delivering a new round of enterprise zones for smaller towns and extending the coastal communities fund. To bring the towns and cities of the northern powerhouse closer together, the Budget will create a new statutory body, Transport for the North, whose remit will include an Oyster-style ticketing system across the north. While we are of course heavily focused on the northern powerhouse, we are also very focused on other engines of growth such as the West Midlands. Why not perhaps have powerhouses, too, in the east Midlands, as well as on the south and south-west coasts?
The third way in which we will give this country economic security is by helping our businesses to prosper and securing long-term investment in it. This Budget cuts the rate of corporation tax to 19% and then to 18%—the lowest in the G20, saving businesses around £6.6 billion by 2021. The employment allowance will be increased from £2,000 to £3,000, taking up to 90,000 firms out of employer NICs completely, while the annual investment allowance will be set at £200,000, eight times higher than the previous permanent rate, helping to increase investment by around 0.6% by 2020-21.
Furthermore, while we still believe that banks should make an additional contribution to the public finances, we have set out the path to a more competitive and sustainable basis of taxation: a 26% rate of corporation tax and a 0.1% levy on banks’ UK balance-sheet liabilities. The productivity plan sets out further measures to meet our ambitious export target of £1 trillion by 2020 and build stronger links with the world’s emerging markets. As a priority, the Government will remodel how they try to deliver on trade, exports, investment and prosperity, so as to have a step-change in the quantity of our exports and investments. We will focus on diversifying into more markets, increasing the integration of international service sector markets, supporting trade sector agreements beyond the EU and reviewing how SMEs finance their exports.
The fourth way in which we are securing this country’s economic recovery is by putting the welfare system on to a more sustainable footing and giving the country a pay rise. For a long time, we have been a low-wage, high-tax, high-welfare society—one which took money away from the poorest in taxes then gave it back to them in the form of tax credits and welfare. Far too many people have been trapped in a lifestyle of benefits dependency. Where we ought to be is the opposite: a high-wage, low-tax, low-welfare society—one in which it pays to work and where our benefits system targets its support towards the most vulnerable. Through the changes we are announcing in this Budget, that is where we are moving.
The Budget sets out £12 billion of welfare savings, which is what we need if we are to live within our means as a country. The cost of tax credits more than trebled in real terms over the 2000s—the so-called noughties. It is now £30 billion, so the Budget will reduce the level of earnings at which a household’s tax credits and universal credits start to be withdrawn and from April 2017, in all but the most exceptional cases, families who have a third or subsequent child will not be eligible for additional tax credit or universal credit support. All in all, these changes to tax credits will return real-terms tax credit spending to the level that it was in 2007-08. The number of families with children eligible for tax credits will fall to five out of 10 in the next financial year, down from six out of 10 currently and from nine out of 10 back in 2010. The Budget will also freeze working-age benefits, excluding statutory payments such as maternity pay and disability benefits, and reduce rents paid in the social housing sector by 1% a year for the next four years.
At the same time, we will honour our commitments to support the elderly, the vulnerable and disabled people. The Budget will roll out free childcare of up to 30 hours a week to all—all—working parents of three and four year-olds and put more money into the pockets of our working families. Next year, we will raise the tax-free personal allowance higher than previously forecast to £11,000 a year, which will mean less tax for 29 million people, and—in one of the flagship policies of this Budget—from next April we will introduce a national living wage, which will start at the rate of £7.20 an hour and rise to £9 an hour by 2020. As a result of these changes, a typical renting household with two full-time earners on minimum wage and two children will see its income rise by 12% in real terms over this Parliament, and by 2017-18 eight out of 10 working households will be better off by an estimated average of £130 a year.
The figures I have set out today make a real difference to people’s lives. They represent the security of finding employment, of having a decent living wage and of living in a strong and stable economy. The Budget includes measures to increase spending on our National Health Service and to meet our NATO defence spending commitment of 2%. It introduces important changes to inheritance tax, to the non-dom taxation system and to dividend taxes. It rebalances our welfare system, putting it on a more sustainable footing. It helps make our country and our businesses more productive. It paves the way for further significant employment increases. It cuts taxes for 29 million people and gives up to 6 million people a pay rise. The Budget sets the United Kingdom up for a stronger, more prosperous future. I am delighted to be introducing it to your Lordships.
Lord O’Neill of Gatley
My Lords, we have had a remarkably high standard of debate here this evening. I was encouraged to make that remark but, in all sincerity, I really appreciate the comments that all Members of the House have made this evening. My own maiden speech coincided with that of my good friend the noble Lord, Lord King, and I recall his comment that the general standard of discussion in this House was somewhat higher than in the other place. I have not had the benefit of participating in those debates, but after much of what I have heard over the past few hours, their standard must be pretty high if they can test many of the interesting things that I have heard today.
I must also add my birthday congratulations to the noble Baroness, Lady Kramer. I have to say that, in pursuit of the great and the good, to commit to this discussion on such a joyous day is truly remarkable. I hope I would do the same if I were in the same situation. In that regard, when I come to respond to specific comments, I may end up giving the noble Baroness more reference than others for her commendable duty.
Let me make some further brief comments before trying to do justice to many of the individual remarks. I apologise now, and will do so again later, for failing, as I am sure I will, to refer to all the individual highly valuable comments. No doubt I will make some errors in the pronunciation of some noble Lords’ names.
Before doing so, I shall make two or three general comments. Many individuals in this place have different opinions but, on balance, most noble Lords who have spoken recognise that the only way to secure a long-term economic recovery is to put our public finances on a more sustainable footing. I am grateful to hear those comments. The Government have committed to such a course. That is what they made pretty clear to the electorate and it may, among other reasons, be why they came to power with a majority.
It is also the case, as articulated by the Chancellor, and supported by the balance of measures, that the Government believe that the best route out of poverty is through employment. It is right that if you are working full-time, your wages should not be unnecessarily topped up by the state. In that regard, as reflected in the overall balance of areas of contention, it is not surprising to hear that there is a lot of concern about the scale of some specific spending cuts. However, let me also point out—here I speak from my experience before I joined this Government—that it is important to protect areas of public spending that are probably more likely to contribute to long-term productivity gains than welfare would, including, in particular, education, health, public sector investment spending and, in my view, our commitment to foreign aid. It follows that, if you do that, the remaining areas will suffer the brunt of public expenditure cuts if the Government are to be as committed as they should be to this path of fiscal deficit reduction.
It is also the case, as many Members have said this evening, that many interesting issues are raised by the notion of introducing a national living wage, which, as a number of people commented, will effectively be the equivalent of trying to increase the national minimum wage. I shall come back to talk about that. However, reflective of the Government’s clear priorities, and as I believe was generally made clear at the election, it is the Government’s desire, as articulated so clearly by the Chancellor, to reward people who work and to give them their own rights in how we contribute policy-wise to a fairer outcome for all of the nation, including those who earn income and pay taxes.
I turn now to specific points made by noble Lords in their speeches. In doing so, I shall try to structure my remarks and be as brief as possible, although that does mean I may neglect to respond to some specific things—again, I apologise in advance.
First, on the economy and public finances, the noble Lord, Lord Davies, ended today’s very rich discussion by talking about the context of the Budget. On the one hand, many noble Lords talked about how there is far too much concern about deficit reduction—the noble Lord, Lord Taverne, talked at some length about the risks of too much focus on this—but many others, including the noble Lord, Lord Palumbo, suggested the complete opposite. As a trained macroeconomist, I know that it is always a judgmental decision—appropriately so, given the many uncontrollable external forces, especially from the rest of the world—around the appropriate pace of reduction and, especially, around the evidence about the absolute level of debt, never mind the level of deficit per se, that is consistent with higher living standards and, in particular, with contributing to improving productivity.
In that regard, I turn also to some of the comments of the noble Lord, Lord Desai. He talked, I think, about evidence of the historical growth performance being in excess of 3%, but it is widely recognised today—subject to the vagaries of how economists can recognise any of these things and agree on them—that our trend rate of growth is in the vicinity of 2.4%. The way to address that, as I will talk about in a second, to improve the trend rate and bring it back to what might have been a very long-term performance, is almost definitely through steps to boost productivity and not, at least in my judgment, through the specific stance on fiscal policy.
In that regard, if I understood the noble Lord correctly —others also suggested this—in bemoaning the goal of moving towards a budget surplus, there appeared to be a contradictory concern about what would happen in the event of some of these shocks coming from the rest of the world, as we would not have the ability to respond. However, an additional reason for moving to a healthier set of public finances when the economy is on a reasonably strong footing, as it appears to be, is indeed that, in the event of some external shock, you would have the latitude to respond.
As in my opening comments I emphasise again that, in the event of the economy slowing to a positive 1% growth, the OBR has a responsibility to shift to a different cyclical stance on fiscal policy, if it deems it appropriate. Generally speaking, that seems to me pretty sensible.
I turn to some further specifics about fiscal consolidation on spending, which I touched on briefly in my opening summary. As I have just mentioned, a number of noble Lords focused on the Budget seemingly having tougher spending cuts than might have been envisaged. Indeed, I think a couple of noble Lords implied that they were tougher than was suggested before the Budget. However, as some others have pointed out, the Budget is indeed less restrictive in its overall fiscal stance than the previous Budget, and the overall reductions in public spending are not as stringent as they might have been. As I have already indicated, given the commitments to areas such as health, education, public sector investment, defence and foreign aid, other departments are likely to take the brunt of cuts. The case for those has been well articulated and widely debated in this House and, of course, in the other place on a number of occasions, including earlier today.
I turn to the very important topic of productivity. I am particularly pleased to hear that so many noble Lords have read the 80-page document, which, in responding to an Oral Question a few days ago, I suggested they should read. I think that a date is being found to enable us to have a full length-debate on the issues surrounding productivity, including the long-known historical challenges to achieving success in raising it and the specific steps that this Government propose to undertake in that regard.
Going back to what I said in my opening comments, and as many noble Lords are aware, over the long term economic growth is essentially driven by two factors: the number of people who work and their productivity. There has been much focus on this issue, correctly in my view. I think it is fair to say that, in the last Parliament, we had more success than one might have expected in terms of increasing employment. It is therefore appropriate now to switch attention to trying to do more about the key driver—that is, productivity. There is a very large amount of evidence that those countries with the best productivity performance typically have not only the best living standards but greater equality than many other places. Therefore, it is very important in my judgment that this issue receives appropriate attention.
I am pleased that there will be a formal review of our economic statistics led by Professor Sir Charles Bean. I have long felt—this precedes my joining the Government—that further work needs to be done in a number of areas ranging from our external trade data to the accurate measurement of our GDP and the implied productivity data. I cannot resist alluding to the irony of doing that, given that the latest evidence on productivity indicates that it may be accelerating. I also note that both the Bank of England and the independent OBR are separately forecasting a rise in productivity over this Parliament.
In relation to infrastructure spending, I think the noble Lord, Lord Davies, said that public sector investment spending will decline over this Parliament. There is certainly no plan for that to happen. Public sector investment is very importantly linked to the productivity goals and many aspects of the northern powerhouse, and there is a conscious decision to ensure there is no decline in spending and that it is protected in real terms. In fact, under current plans, from 2018-19 onward, it will start to rise in line with GDP.
I am spending a considerable amount of time on infrastructure in my ministerial role. We hope, in the not too distant future, to come back with a detailed national infrastructure plan. I say to the noble Lords, Lord Freeman and Lord Higgins, and the noble Baroness, Lady Kramer—who was correctly complimented for her role in the coalition, focusing on the transport aspects of this—that we need to have a bolder and perhaps longer -term national infrastructure plan, that thinks about the potential state-of-the-art long-term infrastructure that the country may need but not necessarily have immediately introduced. This may give us a framework to consider the challenges and opportunities that may prevail going forward. I acknowledge the supportive comments of a number of noble Lords about the commitment in this Parliament, despite the challenges, to spend more on a number of key parts of national infrastructure, including both roads and trains.
I jump to the very important topic of the northern powerhouse and city and regional devolution. A number of noble Lords made comments about that, including the noble Lords, Lord McFall, Lord Scriven and Lord Soley, the noble Viscount, Lord Hanworth, and the right reverend Prelate the Bishop of Birmingham. This project led to me becoming a member of the Government. I am very passionate about it and I think it is fair to say, from everything he has said, that the Chancellor is too. I will make a number of quick comments, and I apologise for not responding to some of the very important points raised.
On the topical issue of the supposed cancellation of the electrification of the Leeds to Manchester route, I say that it has not been cancelled: it has been delayed. That announcement was made in the context of trying to create a new and healthier environment for the leadership of Network Rail. I am just as agitated as many others about that decision, not least because it happened to be announced on the day of my first speech as a Minister about the northern powerhouse in Manchester. I assure your Lordships that it is getting a lot of attention and I hope that further initiatives will come forth. I add—in contrast to what I heard, I think from the noble Lord, Lord Scriven—that having Transport for the North and a northern Oyster is exceptionally important. In order for the northern powerhouse to be anything other than a number of cities, geographically identified with a pin, in the north of England, and for it to generate lasting economic change, it is important that the cities are joined together on an economic basis, if not an administrative one, in a way that has not been pursued before. There is enormous evidence from the great successes in recent years of Transport for London that having something like that technology, whereby individuals can find out very quickly the ease at which they can travel, knowing the costs as well as the facilities available, is important. I think it has boosted by 30% the movement of people around Greater London. If that was done between many of these northern cities, it would play a major role in boosting the economic fortunes of the north of England.
There are many other points that I have not responded to. I will very quickly turn to two other areas and I apologise for missing some out. It was a joy to hear so many Members talking about the importance of skills. If I had to pick one area that is so important to our productivity—and perhaps why we have had so many challenges going back for so long—it is something to do with the challenges facing particularly the most disadvantaged and their ability to get skills. Obviously, that links to our basic, further and higher education. As far as I am having some influence on the productivity plan, we are very eager to pursue the initiatives we have introduced in it.
Lastly, and without enough time to focus on the very interesting comments made about work and welfare, I think it is openly acknowledged that to introduce a policy to deliberately encourage an implied higher minimum wage—announced as a national living wage—carries a risk of some costs to employment. Indeed, the OBR said in its own independent analysis that it would directly lead to the loss of 60,000 jobs, although it added that in the context of the Budget Statement and all the other initiatives, this would be more than offset by the distributional effects of so many people receiving higher incomes, as well as a number of the other policies.
The last thing I would say—and it is not doing justice to this considerable topic—linked to what I said about employment and productivity, is that in an environment where employment has been so strong, if you are going to pursue such an initiative, it is best to do it when the employment market is as strong as it is. As I think I mentioned the last time I stood at this Dispatch Box, in a number of countries some of the new academic thinking is suggesting that while it is risky, this may be a way of trying to explore boosting productivity.
I will stop there. My time is up. It is very late in the day. The noble Baroness, Lady Kramer, has to go and celebrate her birthday and I am sure everybody else has lots of other things to do. I commend the Budget to the House.