Economy: Spring Statement

Lord O'Neill of Gatley Excerpts

Thursday 15th March 2018 Lords Chamber

[Lord O'Neill of Gatley (CB)]

My Lords, I, too, congratulate the right reverend Prelate the Bishop of Lincoln on his excellent maiden speech. By complete coincidence, I attended a wedding last Friday at which at least half of those present came from that proud county, so I can vouch that they appear to be a rather robust bunch.

With respect to the Spring Statement, I will make six—hopefully brief—points, two of which are questions. First, I congratulate the Chancellor on sticking to his commitment to only one annual fiscal event, not least to avoid the never-ending temptation of saying or doing something purely for the sake of it. I join other noble Lords in congratulating the Government more broadly on the ongoing positive fiscal progress. Far too frequently, the importance of eventually returning to some kind of fiscal health is underestimated in this place.

Secondly, I point out—others have touched on this but, to my slight surprise, it has not been specifically mentioned—that the OBR was surprisingly gloomy, contrary to general expectations in advance because of recent evidence. Although I suspect that, as I have just implied, things might not be as grim as it suggested, its justification does not lack credibility. In this regard, it would not be the worst of all outcomes if, yet again, it—and some of the rest of us—is pleasantly surprised in the autumn.

Thirdly, the OBR might easily be wrong. As David Smith highlighted in yesterday’s Times, if going forward the GDP growth that it suggests is as weak for the rest of the period, it will turn out to be worst extended period for 70 years. Is this realistic? Perhaps it is. But, beyond Brexit, it seems that there are some creeping better signs, not least the recent evidence of a pick-up in productivity. There are some credible reasons, some of which I have outlined in this place before, why this recent two-quarter improvement in productivity is not to be dismissed, as the OBR has done, and might persist. I do not have the time to highlight what they are, but I will no doubt return to them at some future date. If the OBR is wrong, the boost to public finances as well as the scope for material debt reduction, and for government investment spending, could be significant.

However, my fourth point is that the OBR might be right. If it is, the Government will have no choice but to take a bolder path on investment spending, both directly and indirectly.

Fifthly, in this regard, can the Minister respond to a question on the following? Recently, I participated in a conference on investment in the UK. At that event, the Chief Secretary to the Treasury said—this was very recently—that the Government would soon publish a paper on a new methodology for approval of investments, implicitly suggesting the possibility of allowing for broader productivity-enhancing analysis rather than the all-too-familiar rigid value-for-money approach that has long since dominated the thinking of many departments. That could be hugely important. When will that report be published?

Sixthly and lastly, in this vein, why are the Government so quiet and why have they become so apparently timid about their northern powerhouse and Midlands engine strategies, especially when, oddly, there is some evidence—albeit modest—that parts of this past strategy are working? The last time I spoke here, I highlighted the apparent strength of the north-west, notwithstanding some points touched on earlier, and, since then, the most recent data suggests that this is continuing. I would have thought that the Government would be rather proud of that and would want to pursue it more. Succeeding with both the broader, wider northern region, as well as the so-called Midlands engine, and sustaining the strength of the north-west would, among other things, help to deliver on some of the implicit core things that the OBR is so gloomy about and, most importantly, would result in a better future for the whole of the United Kingdom.

As it relates to the northern powerhouse, there are clear implementable policies, especially on transport infrastructure and education and skills, which the Government should embrace. While the transport asks require significant new central government fiscal action, the skills and education initiatives do not challenge the fiscal framework that much. As demonstrated by the recent proposals from the Northern Powerhouse Partnership, of which I am the vice-chair, these would be highly important to the education and skills challenges of the whole of the north and, for that matter, the Midlands, but would have very little impact on the Government’s overall fiscal framework, irrespective of whether the OBR is right or wrong. The Government need to rediscover their lust for these policies, some of which may have contributed to the tentative signs of some highly necessary and important regional rebalancing of the economy.

Budget Statement

Lord O'Neill of Gatley Excerpts

Monday 4th December 2017 Lords Chamber

[Lord O'Neill of Gatley (CB)]

My Lords, despite a lot of obvious things that—understandably—worry many people around the world, in fact the world economy has strengthened quite notably in 2017. Based on many of the indicators that I have followed for a very long time, the world economy is ending 2017 on a cyclically rather strong footing. I suspect that when we look back, world GDP growth may have been in the vicinity of 4% this year. In addition, eight of the 10 largest economies in the world have accelerated at the same time. The other two, India and—surprise, surprise—the UK, have weakened. Rather interestingly, even both of those have in recent weeks shown some better signs after their previous disappointments.

This level of global economic activity is probably the best that we have seen for 10 years and some of the economies most relevant to us here in the UK are showing particularly good signs, ironically including the eurozone. Its November purchasing managers’ index, published just last Friday, was the strongest since 2000. Of course, this is merely the cycle and, as I said, there are all sorts of things that worry people all the time, many of which could derail the global economy at any stage. But I say all this because it is important to remember it as the backdrop to the Budget.

In this regard, it is disappointing that the UK economy has slowed, although there may be a reason why the economy has not slowed as much as some might have thought. Looking forward, if this global environment were to remain so benign, it might help us more than many of us have previously thought with some of the challenges ahead, including of course Brexit. As I have stated in this House before, as important as I believe Brexit to be, we have bigger challenges here in the UK which, if addressed, could actually help diminish the dilemmas of Brexit, as well as forming an appropriate response to the challenge. At the core of these are weak productivity, poor educational outcomes for a country with our development, poor skills and regional and intergenerational inequality.

I therefore re-emphasise that some recent signs in the UK, albeit tentative, show surprising improvements. Our own November purchasing managers’ index, also published last Friday, was the strongest for four years. Moreover, and in my judgment of greater importance, there are tentative signs of regional economic change, especially in parts of the so-called northern powerhouse. Many people are still unaware that we have regional purchasing managers’ indicators: up to October, those regional PMIs show the north-west in particular, but also now Yorkshire, continuing to outperform London as they have for most of this year. Employment trends have also been stronger in some of these areas in recent months. On top of this, there are perhaps growing signs that the peaking of house prices in London is not yet being followed elsewhere in the country; indeed in parts of the north and elsewhere, house prices are picking up somewhat. If for some reason these trends were to persist—this is very tentative—they would be highly welcome developments which, among other things, would have a large impact on regional inequality in the UK.

Against this global and domestic background, and given the rather emotional political environment, I believe that the Budget was quite sensible. The Chancellor is to be commended for avoiding some of the considerable pressures for major shifts in taxation or spending. It is also possible that with the abandonment of its acknowledged previous multi- year anticipation of a future improvement in productivity, the OBR could still turn out to be wrong but in a different direction. While there are obvious reasons that can explain our persistent productivity weakness, some of which I have spent far more time looking at than I sometimes think I would like to have done, many aspects of them remain a bit of a mystery. It is also the case that despite persistent tightening of the labour market our productivity could suddenly start to improve—even if we do not know why—especially if wages were to accelerate.

The whole issue remains quite uncertain, as it was even without the OBR’s shift. Whatever path follows on this score, the Chancellor was right to focus on policies to boost productivity rather than pursuing a major shift in spending or tax policy focus. It was especially heartening, after a gap of more than 12 months, to see fresh policy measures, albeit modest, with respect to devolution. In this regard, I congratulate those in North Tyneside as well as the Government for their persistence in these endeavours, and encourage others in the remaining urban areas of England to put aside their ongoing petty squabbling and seize these greater opportunities. There may be many reasons why the north-west economy has recently started outperforming elsewhere, but being a trailblazer in the context of devolution certainly has not been a hindrance. Let us have some more of these policies as we may have found something that is actually working.

I shall finish quickly with a cautious welcome of the industrial strategy launched a few days after the Budget. It is so easily fashionable to dismiss it as merely a set of good concepts and wishes, which indeed it is, but it is generally the right sort of framework in which to deliver further long-term economic improvement, especially in helping to contain the damage from Brexit and other inevitable things that lie ahead. The focus on significantly boosting government support for R&D as well as more financial support for those emergent sectors that might develop as world-class industries are the right sort of policies, as are even more ambitious policies with respect to place-based devolution. The Government should get on and deliver them.