Economy: Budget Statement

Lord McKenzie of Luton Excerpts

Tuesday 13th November 2018 Lords Chamber

[Lord McKenzie of Luton (Lab)]

My Lords, I thank the noble Baroness, Lady Stroud, for her comments about Patricia Hollis. If Patricia were here today, rather than pat the Government on the back for what they have done, she would be using the full power of her intellect and eloquence to point out what they have not.

Brexit overhangs this Budget just as it infects so much of our public debate. There have been various attempts to model both the longer-term macroeconomic consequences of Brexit and the short-term consequences for the UK. Despite a range of estimates, the former point overwhelmingly to a lower GDP than would otherwise have been the case. Whether or not they knew it at the time, Brexiteers voted for our country to be poorer. The extent to which there is a smaller GDP will be influenced by assumptions made about access to the EU market in the future and any restrictions we might face. There is also a view that there will be a short-term negative shock to the economy, with the main factors depending on judgments about the extent to which the referendum has deterred investment and the transitional costs of shifting to a new trade and investment regime.

The OBR forecasts are based on the assumption that there is a Brexit deal, although we are told that a disorderly Brexit would have severe short-term implications for the economy, the exchange rate, asset prices and the public finances. Given the debacle of the negotiations to date, are we under this Government not already close to the point of not securing an orderly Brexit? In any event, are the Government seriously maintaining that they can deliver a deal dividend? If so, will the Minister enlighten the House on the nature and size of it?

We should also judge this Budget, as the Government want us to, on the basis that austerity is finally coming to an end. At its least benign, this should mean no more cuts; at its most significant, a repairing of at least some of the damage which earlier measures have inflicted on people’s lives. How can austerity be over when Age UK reports that 1.4 million older people are not getting the care and support they need; when £19.6 billion is needed to stop further cuts to departmental budgets; when the extra money for universal credit—welcome as it is—is less than one-third of the £7 billion of social security cuts still to come?

How can austerity be over when the Budget has not provided a penny extra for day-to-day costs in our schools, given the 8% loss since 2010? How can austerity be over when 1.3 million people still avail themselves of food banks in the rich country that we are? In making a judgment on whether the economy is working for all, we might reflect on the recent publication from Credit Suisse which reported that the ranks of the ultra-rich in the UK have risen by some 400 over the last year—that is those with assets of over $50 million.

But we know the UK economy is not working for everyone, and this Budget does not change that. This is the stark message from the IPPR commission, referred to by the noble Lord, Lord Kerslake—I congratulate him and his colleagues on the work that they have done. The economy is no longer delivering rising living standards for a majority of the population. Too many people, the commission says, are in insecure jobs; young people are set to be poorer than their parents; and the nations and regions of the UK are diverging further.

The cause is not fundamentally addressed by this Budget: it is continuing weakness in productivity, investment and trade. We are not faced with a choice between a fair economy and a strong economy. We should strive for both. I agree with the point that it is not a quick fix. We do not have to deal with things on an incremental basis. We were bold in the 1940s and, as my noble friend Lord Hain said, we were bold in tackling the banks’ recession in the 2000s. Of course, being bold does not mean that we are always right; we were also bold in the 1980s.

The Red Book makes reference to the Government’s efforts to crack down on avoidance, evasion, aggressive tax planning and unfair outcomes. It claims that they have secured over £185 billion in tax that would otherwise have gone unpaid. We obviously support such efforts but, for the avoidance of doubt, can the Minister set down for the record which taxes and which years are included in that calculation? It has always been a bit of a mystery. Perhaps he could also set down how the Government calculate the tax gap, which is claimed as 5.7%, and in particular the treatment of profits diverted from the UK.

We welcome the announcement that the Government are to proceed with a ban on pensions cold calling, and now is the time to make progress. Too many people have lost out to scams, although some recent press reporting may offer some comfort.

The digital services tax is a belated attempt to get the tech giants to pay their fair share and is to be welcomed, notwithstanding the low level of its ambition: some £400 million a year by 2022-23. It is understood that this is to be a holding measure until the reform of the international corporate tax framework is secure, but I wonder what consideration has been given to the fact that the DST is seemingly a tax on revenue, not profits, and what the double tax relief implications of this might be.

We note the determination for the pensions dashboard to proceed, but express our concern about its potential governance. As originally envisaged, this was to be delivered by the DWP—an ambition we shared with the Government. If it is to work—and the need for it has been made very clear by recent press coverage of pensions pots being unaccessed—there will be a need for robust governance arrangements.

It appears to be the case that the Budget does not herald any change of approach to a long-standing anomaly referred to by the noble Baroness, Lady Altmann, concerning how tax relief on an employee’s pension contributions can be given. In short, as we have heard, there are two systems, one of which—net pay arrangements—does not secure effective relief up to a point for the lower paid. It is the employer who determines which of the two systems is to operate. HMRC has previously suggested that it would not be straightforward to unravel this, but the Chartered Institute of Taxation begs to differ. Perhaps the Minister will undertake to look at this.

Given the uncertainty described by my noble friend Lady Smith at the start of this debate, which has been reinforced by many other noble Lords who have spoken today, we should stand ready to revisit all of this before too long, given the spectre of Brexit.

Online Marketplaces: VAT Evasion

Lord McKenzie of Luton Excerpts

Monday 22nd October 2018 Lords Chamber

[Lord Bates]

We sympathise with those people, which is why we have listened to the calls that have been made. We have introduced pioneering joint and several liability for marketplaces and are introducing a due diligence system. While we are working through the G20 and the OECD, we are looking at initiatives that could be considered to solve the problem, such as split payments to ensure that VAT is automatically paid when someone domiciled in the UK makes a transaction.

[Lord McKenzie of Luton (Lab)]

My Lords, the PAC noted that HMRC does not know how many fulfilment houses, or packaging establishments, there are in the UK and is therefore unable to systematically target VAT fraud. Is that right? If so, what will the Government do about it?

[Lord Bates]

That is right, which is why we require those establishments to register.

Budget Statement

Lord McKenzie of Luton Excerpts

Monday 4th December 2017 Lords Chamber

[Lord McKenzie of Luton (Lab)]

My Lords, it is a particular pleasure to follow and hear the noble Lord, Lord Skidelsky. There can seldom have been greater disparity between the upbeat rhetoric of a Chancellor and the seriousness of our economic situation. The reality, as we have heard, is a bleak canvas where real wages are lower than in 2010 and living standards are set to fall in 2017. Economic growth has been revised downwards in every year of the forecast as households’ real income and spending is squeezed by higher inflation. Perhaps most worrying is the downward revision of productivity growth and what that means for our economic future. Just this morning, we saw headlines from the CBI contrasting the gloom over the UK economy with the strength of the global economy, including members of the eurozone. That could not be more pertinent as we stumble towards an exit from the EU.

A variety of assessments have been undertaken about the effect on the UK economy of our departure from the EU in both the short and the long term. These reflect assumptions around reductions in trade with EU countries and increasing tariff barriers, reductions in foreign direct investment, especially related services, and reduction in the UK’s net fiscal contribution. They do not make happy reading. The NIESR estimates the long-run impact of leaving the EU will mean GDP between 1.5% and 3.7% lower than baseline in 2030 and real wages between some 2.2% and 6.3% lower. Other studies show different outcomes pretty much all with a lower GDP.

Where we end up of course depends on negotiations, which will presumably get under way at some stage, but not apparently today. Lack of progress is creating uncertainty, which is in danger of inhibiting the investment that we need to improve productivity. The projected lack of growth has reduced the Chancellor’s headroom against his fiscal mandate, but we should acknowledge a modest loosening of the fiscal policy—a loosening of the squeeze in my noble friend Lord Hain’s terminology, or perhaps a modest change of heart.

So far as debt falling as a share of GDP, we know that that has been achieved only with the help of the reclassification of some £70 billion of housing association debt. As the OBR pointed out, the DCLG Secretary of State confirmed in his evidence to our Secondary Legislation Scrutiny Committee that the regulations under review were introduced only to enable a reclassification. That is a pretty cynical approach. Will the Government really stand aside should a housing association fall into severe financial difficulty?

What have been the Chancellor’s priorities in dealing with this headroom? There is £3 billion, as we have heard, for Brexit—no additional funding for social care but funding to help us extricate ourselves from the single market at a time when its economies are growing strongly and ours is struggling. That is perverse indeed. Can the Minister tell us how this sum will be allocated across departments? What is the strategy and what are the economic risks of the various options?

The Chancellor has allocated nowhere near enough extra resources to address the NHS funding crisis, although a new payment with new money is to be welcomed—as is an additional £10 billion of capital, notwithstanding that most of that is coming from selling parts of the NHS estate. Recently, we have debated the very minimum of changes to universal credit, with nowhere near enough being done to end the misery caused by that programme: nothing for the self-employed, second earners, lone parents or disabled people; no rolling back of the cuts of £3 billion a year; nothing to ease the effects of a decade of cuts to social security on the incomes of families with children; and a million more children heading for poverty. It is no wonder that the social mobility commissioners have had enough. It appears that the Government are too busy with Brexit to address the needs and aspirations of their citizens.

As for the abolition of SDLT for first-time buyers, we share the reservations that this does too little to help too few of the young people who wish to buy a home of their own; it risks further pushing up prices. Government focus on the need to build more homes is to be welcomed, but we need more affordable homes and we need delivery. Garden cities have not blossomed since announcements four years ago. My noble friend Lord O’Neill took us back to the time when Nye Bevan was in charge of housing, with his insistence on maintaining standards and the use of councils to deliver many of these properties, which are now applauded. Of course, that was at a time when materials were difficult to obtain, being just after the Second World War. There is much to learn from what he did.

The switch from RPI to CPI for business rates is welcome, if a little late. As for other tax measures, the Government have published an array of policy measures, announced in the Budget as part of the new annual tax policy-making cycle. They range from setting tax rates and allowances to anti-avoidance rules for offshore trusts, accommodation allowances for the Armed Forces and hybrid mismatch rules. There are over 100 of them. Of course, they justify an increase in resources for HMRC, but they demonstrate how complex our system is, how difficult it is to simplify it and how the fiscal landscape is changing.

However, there are broader issues, of which we were reminded with the release into the public domain of what have been termed the Panama and Paradise papers. They show vast amounts of wealth swashing around in offshore entities—some in the UK, some in British Crown dependencies or British Overseas Territories. We acknowledge that it is not just a matter of political will to secure an appropriate tax take from such sources, where there may be competing claims on who has the taxing rights, and we accept that the Government have been active in supporting the OECD in its base erosion and profit-shifting initiatives. However, there is more to do in establishing beneficial ownership and driving transparency. The weekend press suggested that the EU was ready this week to approve a list of those countries, island states and former colonies that it deemed to be non-co-operative jurisdictions, which would be blacklisted with suggested appropriate sanctions. Unanimity is required for this decision. How will the Government approach this matter?

The Chancellor invited us to share his vision of an economy fit for the future, but frankly, we should decline. We would rather he spelled out the real challenges we face so that we can be enjoined to face the reality of those challenges.

Household Debt

Lord McKenzie of Luton Excerpts

Monday 13th November 2017 Lords Chamber

[Lord McKenzie of Luton (Lab)]

My Lords, it is a pleasure to follow my noble friend Lady Lister. I, too, welcome the focus of the right reverend Prelate the Bishop of St Albans’s Question, which chimes with some of the discussion we have had in recent weeks on legislation. The right reverend Prelate asks for the Government’s assessment of the risk associated with current levels of household debt. As a recent Guardian article sets out, at a time when the Government are planning to cut the annual deficit year on year, the debt of Britain’s households is going in the opposite direction. We have heard some of the statistics already.

The House of Commons briefing paper tells us that household debt as a percentage of disposable income started rising in 2016 and stood at 140% of disposable income in Q2 of 2017. At the end of 2016, it amounted in total to £1,825 billion with mortgage debt making up 87% of that amount. We are also reminded that individual insolvencies in England and Wales in the first three-quarters of this year were the highest since 2014. It is the rise of non-mortgage forms of credit that is fuelling the rise in borrowing, especially arrears of household bills and utility bills. This is across the piece, including council tax and water company bills. Rent arrears, as we know, are rising dramatically. At a time of low wage growth and freezing of benefits, consumers are turning to credit to buy essentials. So we have an economy being built on debt when this was supposed to be an era of business investment, higher productivity and export growth.

What are the risks? We should first recognise that borrowing can be good for the economy—for example, if it is enabling consumer spending to be smooth—but high levels of household debt can also create problems for the economy and for individuals. There are obvious risks of increased default on loans, especially if interest rates are to rise with wages stagnating. There will be risks to the economy as a whole where individuals divert resources to dealing with secured debt and cut back on other consumer spending.

The Money Advice Service defines overindebtedness as including keeping up with domestic bills and credit arrangements being a heavy burden, and missing credit commitments or domestic bills in any three or more of the last six months. The FCA has a concept of potential vulnerability, which is a wider concept, covering those with low financial resilience, low financial capability, an experience such as divorce or bereavement, or health issues. Its 2017 survey identified that 8% of the UK adult population, or 4.1 million people, have not paid domestic bills or met credit obligations in three of the last six months. This has implications for the revenues of local and central government. Just under 8 million people are overindebted, while 4.5 million people say that they have been declined a financial services product in the last two years.

Whatever measure is used, there are millions of people in this country living hand to mouth, struggling or unable to pay their way, with many having to resort to food banks to survive. Of course we know that the misery caused by unmanageable debt is not just the financial strain it puts on households, consigning them to a future of accessing high-cost finance. It puts strains, sometimes unbearable strains, on household relationships. It affects people’s self-esteem and health, particularly their mental health.

Does it have to be like this? Of course it does not. For a start, the Government could make speedier progress on introducing their manifesto commitment, referred to by others, to provide a breathing space for those struggling with debt. I leave it to my noble friend Lord Stevenson, who has been at the forefront of pushing this issue and to whom I pay tribute, to say more on this. The Government can also ensure that the new single finance guidance body is robustly introduced as soon as possible to secure a smooth transition from the existing money advice services. There is also work to do around financial education and financial capability.

But there are more profound matters. We know that the build-up of council tax arrears has arisen as a result of passing the buck to local authorities and the continuing squeeze on their finances. We know that the payment architecture for universal credit, as my noble friend Lady Lister has just said, is fuelling rent and other arrears. We also know that a decade of draconian cuts to the social security system has thrown millions into poverty. The Government have the power to change all this. They do not have to accept, for example, the grotesque juxtaposition of growing domestic debt levels when they see billions washing around in offshore centres. The risk to our economy and the well-being of those mired in debt are in the Government’s hands to address.