Budget Statement

Lord O'Neill of Gatley Excerpts

Wednesday 23rd March 2016 Grand Committee

Moved by

[Lord O'Neill of Gatley]

That the Grand Committee takes note of the economy of the United Kingdom in the light of the Budget Statement.

[The Commercial Secretary to the Treasury (Lord O'Neill of Gatley) (Con)]

My Lords, last week in the other place the Chancellor set out a Budget to continue the UK’s economic recovery. It was a Budget which responded to the global economic uncertainties that have grown in recent months, and made appropriate choices to insulate ourselves from those risks as much as possible.

There are many positive stories to tell about the UK’s economy. For example, last Wednesday the employment statistics showed yet another boost to employment, with 150,000 more jobs than the Office for Budget Responsibility expected just four months ago. This means that employment is at the highest level ever, and the proportion of people on the claimant count is the lowest it has been for over four decades. Last year also saw the highest annual growth in nominal and real earnings since 2008. Meanwhile, the fiscal deficit as a share of GDP is forecast to be cut this year by almost two-thirds from its 2009-10 post-war peak—from 10.3% to 3.8%. The OECD has forecast that the UK will be the fastest-growing major advanced economy in 2016.

However, there are still significant economic issues that need to be addressed. The Office for Budget Responsibility has forecast a deterioration in the fiscal position between 2016-17 and 2020-21, largely driven by lower tax receipts—particularly as a result of a weaker productivity outlook and a weaker outturn for nominal GDP. This reflects a common recent phenomenon of low productivity growth across the western economies, but it also comes at a time when economic turbulence worldwide has led to weaker growth forecasts for the global economy and, importantly, for global trade.

I observe that there have been three specific developments in global markets since the Autumn Statement that are material. First, until this month, there had been evidence of the US economy slowing. Secondly, as is well discussed, commodity prices and inflation expectations have continued, or did continue, to drop, resulting in nominal GDP in many places, including the UK, being weaker than previously thought. Thirdly, while in my judgment Chinese activity data has not deteriorated much further—remember that this is since November—additional policy uncertainty has raised risk premia in markets exposed to China. Against that, I would note that, in the context of the revised OBR forecasts for public sector finances, it is interesting to observe that there have been signs of reversal in all three of these trends in recent weeks. None the less, there remain many global risks—these and others—and, as an open trading economy with extremely strong links worldwide, we are by no means immune from them.

At the same time, domestically our productivity remains too low, as we have discussed many times in this House. I have spoken at length about tackling the UK’s productivity challenge. These issues have existed and been debated for decades and the solutions and better outcomes will not necessarily materialise in a matter of months. Nevertheless, the measures set out in this Budget take further important steps which, as well as helping us stick to our path for running a budget surplus, will secure growth and promote productivity increases over the long term.

With noble Lords’ permission, I will first discuss the revised fiscal figures for the next five years and then move to specific measures introduced in this Budget. In the face of the new assessment of productivity and the slowing global economy, the OBR now forecasts that UK GDP will grow by 2% this year, 2.2% again in 2017 and then 2.1% in each of the three years after that. The Government have responded to the deterioration in the OBR’s fiscal forecast and are taking new measures to ensure we keep living within our means. To help us achieve this, the Government will make further savings of £3.5 billion from departmental spending, following an efficiency review.

Although debt as a percentage of GDP is above target this year, compared to the forecast, importantly, the actual level of our national debt in cash is around £9 billion lower. In the future, debt is forecast to continue to fall as a share of GDP each year to the end of the forecast period. In 2009-10, the deficit was forecast to reach 10.3% of national income. Thanks to sustained action, the deficit is forecast to fall by almost two-thirds by this year, reaching 3.8% of GDP. The deficit is now forecast to continue to fall across this Parliament and, because we have taken decisive action to control spending and make savings, in 2019-20 Britain is set to run a surplus.

When the forecasts change, of course our plans also have to change. However, the decisions made in this Budget ensure that our fiscal mandate will be met, meaning greater resilience for our economy in uncertain times. Importantly, we have set out how to achieve this in a fair way. HM Treasury analysis published alongside the Budget shows that, as a result of actions taken, the proportion of taxes paid by those on highest incomes will increase, while the poorest and most vulnerable will continue to be supported.

In parallel, I also welcome this opportunity to listen to Members’ views on the information that will be provided to the Commission this year under Section 5 of the European Communities (Amendment) Act 1993. As in previous years, the Government will inform the Commission of the UK’s economic and budgetary position as part of our participation in the EU’s stability and growth pact. The Government plan to submit their convergence programme, with the approval of both Houses. The convergence programme explains the Government’s medium-term fiscal policies as set out in the 2015 Autumn Statement and Budget 2016, and also includes the OBR forecasts. As such, it is based entirely on previously published documents that have been presented to Parliament.

The UK economy is deeply intertwined with the economies of other EU member states. In 2014, 44% of total UK exports were destined for the EU 28, so it is in our interests that the European economy is successful and stable. It is therefore important that we participate in the EU’s macroeconomic co-ordination processes to continue to drive important messages about sound economic policy and further development of the single market. With the Budget on 16 March this year, I appreciate that the time to prepare for this debate has been particularly tight. Against that background, the Treasury has made every effort to provide early copies of the convergence programme document in advance of the debate today.

Before I turn to the measures contained in the Budget, I would like to make a few comments on one now key and topical aspect of the fairness agenda: namely, disability payments. The focus of the Government has always been on strengthening the economy in order to create a fairer society. As a result of the Government’s policies, unemployment is at a four-decade low, wages are higher, inequality, child poverty and pensioner poverty have fallen, and the gender pay gap is at an all-time low. These have not happened by chance but because of deliberate strategies to fix the economy, back business, control spending and reform welfare by incentivising the reasons to work. So although there have been controversies, the results have helped to build a stronger society.

We have also significantly increased our support to disabled people. Indeed, the sums are considerably greater than those under the previous Labour Government. However, it was clear that the reforms proposed to personal independence payments, although they drew on the work of an independent review, did not command support. That is why they have been withdrawn. Over the coming months, the Government will be working to build a system of disability support that is stronger, fairer and better integrated with our health and social services. And, to be clear, there are no plans to make further welfare savings. But there remain strong reasons to keep the welfare budget under control. Strong leadership demands taking difficult decisions—decisions that may not always be popular, but which will make the country stronger.

The measures set out in this Budget will make the country fundamentally stronger. They will encourage growth, savings and investment, boost productivity, invest in our skill base, ensure that the tax system is fair as well as being competitive, rebalance the economy, and help people’s well-being. We know that, in order to strengthen our economy, our businesses have to be as competitive as possible because that increased competitiveness will be a driver of long-term growth.

It is for this reason that the Budget cuts the rate of corporation tax even further, to 17% in 2020, giving us the most competitive rate in the G20 and benefiting more than 1 million businesses. The Budget also cuts the burden of business rates by £6.7 billion over the next five years, taking 600,000 of our smallest firms out of business rates altogether. Through a £1 billion North Sea oil and gas package, this is a Budget that helps Britain’s largest industry succeed in difficult economic times. Through cuts to both the higher and basic rates of capital gains tax, it encourages investment, which is the lifeblood of Britain’s businesses. And through the abolition of Class 2 national insurance contributions, it creates a simpler tax system and a tax cut of more than £130 for the 3 million-plus self-employed people in Britain.

Tax should not merely be competitive; it also has to be fair. The Budget sets out a series of measures designed to ensure that multinational companies pay their fair share of tax by introducing restrictions on the use of internet expenses, strengthening the rules on hybrid mismatch agreements, preventing property developers shifting payments offshore and taxing royalties payments where these are used to avoid tax. Important measures are also taken to simplify the tax system, including modernising the climate change tax system, updating corporation tax rules on losses and reforming stamp duty land tax on residential properties.

This is also a Budget that helps incomes and savings. It raises the tax-free personal allowance to £11,500 from next year, and the higher rate threshold to £45,000. It freezes fuel duty, helping families and businesses keep costs low every time they fill up. For the first time, it creates a lifetime ISA, helping people to buy their first home or save for their retirement—potentially one of the most exciting savings tools for a generation.

In this Budget, we have taken further important steps to boost our productivity, adding to those announced in the summer of 2015. On education, it commits a further £1.6 billion to education spending, gives more schools the opportunity to extend the school day, drives forward the academies programme, creates the first national funding formula for schools, boosts sport in schools, helped not least by the soft drinks industry levy, and, crucially—I am particularly pleased about this—fires a starting pistol for transforming education in the so-called northern powerhouse.

On our transport infrastructure, this Budget tackles some major existing barriers to growth: the green light to so-called HS3 and, in particular, a commitment to a Manchester to Leeds train time reduction to 30 minutes; a national plan for developing the Thames Gateway; major motorway improvements in the north, including working up a plan for a trans-Pennine tunnel; the start of the Crossrail 2 development; and two new subjects for the independent National Infrastructure Commission to study—5G and developing the Cambridge to Milton Keynes to Oxford corridor.

This Budget also continues the Government’s devolution agenda through: new devolution deals with Greater Lincolnshire, East Anglia, the West of England and the Cardiff Capital Region; the start of negotiations with Edinburgh and South East Scotland; further devolution to Liverpool city region and to Greater Manchester; and an accelerated launch of the 100% retention business rates pilot.

Over the past six years, this country has grown and strengthened its economy in precisely the way that we need if we are to continue succeeding in an uncertain world. Global circumstances have the power to blow any country’s economy off course. It is for this reason that it is so important to redouble our efforts to build economic security through sustainable growth and sensible public spending decisions. But living in a changing, uncertain world creates opportunities as well as threats. I want the UK to be in a position where we can focus on making the most of those opportunities, both here and around the world. That is what this Budget helps us do. It prioritises stability, security and sustainable long-term prosperity, and I commend it to your Lordships.

[Lord Eatwell (Non-Afl)]

My Lords, before the Minister at least notionally sits down and before I begin my speech, I listened very carefully to what he had to say about disability payments. He failed to explain how the budgetary position set out in the Red Book is to be restored, given that the payment cut has been rescinded. It will be very difficult for this Grand Committee to evaluate the Budget unless he provides this essential piece of information. I am happy to give way for him to do so.

[Lord O'Neill of Gatley]

My Lords, I am planning to talk about that more. I anticipate that that will not be the only comment on this topic, and I plan to respond when I hear other noble Lords make their comments. It needs to be said in exactly the right context rather than for me to respond right now.

--- Later in debate ---

[Lord O'Neill of Gatley]

My Lords, I do not know whether it is the intimacy of this Moses Room—it is my first time here—but, as with each debate on economic and financial matters in which I have been involved, including the third Budget-type debate within a year, it has been a genuine pleasure to listen to the remarkably insightful and broad comments of noble Lords with their vast experience and wisdom. Again, I do not know whether it is the intimacy of this room, but the debate seems to have come with a lot more humour than I remember from some others I have taken part in. That is also very pleasurable.

I, too, congratulate the noble Baroness, Lady Knight, on her marvellous valedictory speech. I had been thinking until I saw the number of people exiting the Room when she finished that they were all here for the Budget debate, but clearly not. Whatever we think about the complexity of our democracy it is quite extraordinary to be able to celebrate somebody who has been in Parliament for 50 years. It is more than the lives of some of us—I think of the young people sitting behind me in that regard.

The noble Baroness mentioned 15 March 1979, and I have heard a deeply pessimistic tone from many noble Lords. I was coming towards the end of my master’s degree year at Sheffield University around that time. I do not know why I find myself thinking this, but during those days of horrific strikes Orgreave Colliery—as I am sure many people know—was at the centre of many of the disputes. One of the most enjoyable things I have done in my relatively short time as a Minister was, along with the Chancellor, to sign the devolution deal for the Sheffield city region. The deal was signed at its advanced manufacturing centre, which I had to point out to a number of people is on the very same site as that event 50 years ago. It is a sign of the way the world can change.

I also congratulate my new noble friend—but my previous normal friend—Lord Price for his speech. It sounds like there is an enormous amount of support for his preceding life in business. Along with some of the amusing comments, it sounds as if food might need to be an important part of his drive to pursue the simple challenge of boosting our exports. If we can sell curries to India, as the noble Lord, Lord Bilimoria, said, maybe his challenges are not as tough as some people typically presume.

Let me turn to the remarkable substance. Again, I apologise that it is going to be impossible in the remaining 17 minutes I have to respond to everything noble Lords have said. I had planned—as I try to do—to respond to each of the 19 important contributions but I have decided to try to do it on a thematic basis. Having said that, I will start by responding to the interesting comments from the noble Lord, Lord Davies. Briefly, before I do that, I want to respond to the right reverend Prelate the Bishop of Portsmouth. He made a very important comment about simplification and the speed with which words can be used. I will certainly take that note back to my colleagues and I hope that is something we can address in the future. Among many points, the noble Lord, Lord Newby, mentioned devolution and the Cambridge deal. It is not the role of the Government and completely against the spirit of devolution for us to tell any region whether it should be part of it. It is up to them. If Cambridgeshire for whatever reason decides, rather oddly in my opinion, that it does not want to be part of it, then so be it. It would not be first place in the country where that issue is valid.

Let me turn to the broad summary. I do so in response to the comments from the noble Lord, Lord Davies, on the presumption that he reflects a lot of the comments from the opposition. Lack of investment and productivity, of course, is one of my themes and I will come back to that.

As I have said before, if you go to the 40,000-feet level, the big and welcome surprise of the last Parliament and the worst days of the recession was how few jobs were lost, in contrast to the expectations. The noble Lord, Lord Darling, talked eloquently about the interesting days when he was in the middle of before the coalition came in. As I have reminded people previously, nobody would have dreamt of the scale of employment created over the subsequent five years of that coalition. Whatever the ins and outs of the other issues I am going to go on to, we should be careful not to confuse attempts to boost productivity with anything that reduces jobs and opportunities, particularly the number of jobs being created for young people. I say that because, while I do not believe it was in the Government’s manifesto, the decision by the Chancellor to acknowledge the productivity challenge right at the start of this Government, and hence why I was invited to become part of the Administration, is a recognition of its importance.

I want to make two further points in response to the noble Lord, Lord Davies, before I come to the thematic areas. On the topic of inequality, on which I am a little surprised more was not said—in some ways I am pleased about that—and as I tried to address very specifically in an Oral Question recently, based on the existing objective measures of these issues, it is the case that inequality today is less prevalent than it has been for the past decade. What I probably did not say within the considerable amount of evidence that I cited during that brief Question—that is why debates such as this one are much more useful because one can say more that is of real substance—is that while there may have been aspects of rising inequality within different income groups, on all the internationally accepted measures of income both before and after tax, inequality is lower today than at any time in the past 10 years. When it is adjusted for wealth, which is the result of house prices, that is not the case. That is why it is appropriate to put so much effort into trying to do something about the tremendous housing challenge we are facing.

In the spirit of how I began, which is that the world is not quite as gloomy as it seems, something that so many people believe innately in their veins, it is important for everybody to realise that global inequality has declined and continues to decline at a pretty considerable rate. The United Nations achieved its goal of halving world poverty, without even realising it, five years sooner than it originally stated. One has to be careful of making such overwhelming summaries.

Let me turn to the thematic issues. It is most important that we start with the personal independence payment. The noble Lord, Lord Eatwell, challenged me to be clear about it, so it is appropriate that I should start with PIP. The most important thing to say, in my opinion—here no doubt I risk upsetting some of my colleagues as well as many others—this is what I would personally describe as a Q times A equals E problem. Many years ago I learned that if you are trying to pursue an idea or a policy, the quality of the idea times its acceptability equals its effectiveness. I shall come on to this in terms of the frankly quite ridiculous, albeit amusing, things we have heard about black holes. The prime purpose of that policy initiative was to try to stop the degree of gaming and abuse of beneficiaries, which sadly in the way it has been portrayed has not been able to be done successfully. That in my limited understanding is why the issue came to our attention and generated the policy behind it. It comes down to making sure that the people who are in need of government support are those who get it, and rightly so, and those who are not in need do not get it. I am sure that this issue will be addressed again.

On the £4.4 billion, let me first point out that total government expenditure in this year’s Budget will be close to £700 billion, so the idea that £4.4 billion spread over five years is going to put a black hole into the Government’s finances is really not worthy of me pursuing in any great depth. While I am going to come back to this as a separate theme, a number of noble Lords have quite rightly talked about the volatility of the forecasting environment we are in. On the OBR’s forecast change, one noble Lord—perhaps the noble Lord, Lord Bilimoria—referred to the four-month gap since the Autumn Statement but it is actually not much more than three months. The forecast is £55 billion different from what it was. That is the context in which one should think about this so-called black hole. By the time we get round to the Autumn Statement, one of the few things I can guarantee for Members of this House is that the OBR’s forecast will change again, and I suspect that it will be considerably more than £4.4 billion.

Theme number two is on the environment, what I just said about the OBR and on forecasting in general. As noble Lords will know, I spent many years of my life—far too many—in the dubious world of economic forecasting. There is a slight dilemma in that the Government have, very importantly, introduced the power of an independent entity, the OBR, to constrain the actions of the day by providing these forecasts. Partly due to the incredible uncertainties of the world economy in general but also to the circumstances over the past three months, this is a very large change in forecast. In my old life, where I managed a large number of economic forecasters, I would not encourage people to change their forecast that frequently. However, if that is the process which has been brought about by the existence of the OBR, it needs to be respected by the Government. It is an independent entity and we need to set our policies in that framework.

I will finish on that topic, although I could talk about it all afternoon. Robert Chote said to the Select Committee yesterday that he thinks there is a 55% chance that the Government will achieve a fiscal surplus by the end of this Parliament. Again, as someone who has been steeped in economic forecasting for a large part of my life, while many noble Lords might not think it, that is not a bad probability of a good outcome. I used to joke to people that 60% right would allow most people who presided over it to be lucky enough to be well off enough to own their own Caribbean island. I encourage those noble Lords who question the value of such statements—I will come on to that in a second—to think again.

That takes me to theme number three on the issue of fiscal policy and the right framework. A large number of noble Lords have somehow again raised the idea that there is no economic purpose to having a fiscal surplus. Unless international economic theory and best policy has changed dramatically in the three years since I was so immersed in it, on the contrary, it is widely accepted that when countries are at or close to full employment they should run a fiscal surplus or very close to it. One can argue about the dates but the goal of trying to achieve a fiscal surplus in normal times is an extremely sensible economic policy to pursue, not least because if you luckily achieve that in not normal times, it gives you the fiscal leeway to do something about the immediate needs of the weak cycle that one would focus on.

I will go from that theme directly into the very important issue of productivity. I do not at all have enough time to respond to the many powerful things noble Lords have said. To those noble Lords who seem to enjoy a more pessimistic way of thinking, I say that one should not dismiss another reason why it is important to focus on fiscal policy. If the productivity data were genuine—I have considerable doubts which I have expressed before and will do so again in the future—it may well be because of a large level of public debt as a share of GDP that has been accumulated both here and in many other parts of the developed world. To take it back to the purpose of fiscal policy, there is a reasonable amount of evidence that public debt as a share of GDP somewhere below 60% of GDP, and especially if it is below 40%, generally creates a much better environment for private sector productivity. One could argue about the scale of some of these numbers but the notion of not trying to pursue a fiscal surplus in a time of full employment—and we have the highest employment for 40 years—is, in my judgment, mistaken.

There were some very useful comments on productivity more generally, and I apologise that I do not have time to go through them all in detail; I want to focus on one or two areas. I am surprised more was not said about education. I spent a considerable amount of time today, as I have done in the past, looking at globally comparable indicators for factors relevant to productivity. If you try to identify those that the UK seems weaker in as compared with the rest of the world, it is education that sadly comes out as one of the most identifiable. That is why it is a feature of this Budget. The noble Lord, Lord Bilimoria, made comments about higher education and I think other noble Lords made similar comments. My surprise came because in my judgment, doing more about education and skills, particularly for younger people, which is what we have tried to focus on in this Budget, is probably the single most important thing in terms of improving—adjusted for measurement error— our long-term productivity.

On taxes, a considerable number of interesting things were said as time went on, and I want to touch on two or three. First, I personally think that the sugar tax is a very courageous move. As many noble Lords may be aware, in addition to my responsibilities as Treasury Minister, I am chairing a review into antimicrobial resistance where I have to think a lot about the role of taxes, subsidies and incentives. What has been introduced is an important step for policy-makers to think about for further development, as the noble Baroness, Lady Kramer, implied with her question.

More broadly on taxes, some interesting comments were made about taxation with respect to private businesses. This links again to the review that I am leading. A major peculiar aspect of our time is that private sector investment spending both here and elsewhere in the world is very low despite enormous levels of cash. There is quite a bit of growing evidence that private sector entities that are not subject to some of the challenges of public accounting are better at investing. One purpose of the policies taken was to encourage—particularly for start-ups—more risk-taking in an equity sense for private investment. The comments by my noble friend Lord Lupton and others about capital gains tax should be seen in that context. We suffer from weak productivity and investment, and the measures that have been seriously thought about from a micro-economic perspective to try to stimulate them further are very important.

I have run out of time; I knew that I would and I apologise. There are many other things I would like to have said. Let me summarise by saying that I believe the UK still has a brighter economic future than I have heard in the tone of what many have said today, notwithstanding the challenges we face. As we have discussed, this Budget has come at a time of significant downward revisions both here and elsewhere in the world. At some point in the future, who knows when, it is quite possible that those revisions will go in the opposite direction. Against that background, it is important to note that this Budget prioritises long-term growth potential and investment, tries to support business, builds up young people’s skills, gives another tax cut to workers as well as business, and tries to help more people to get on the housing ladder.

The submission of the convergence programmes, which was touched on briefly, should not be affected by the fuss about PIP for the reasons that I have outlined. The submission by euro-outs and stability programmes by euro area member states provides an important framework for co-ordinating fiscal policies. A degree of co-ordination across countries can be beneficial to ensure a stable global economy, which is in the UK’s national interest. The UK has always taken part in international mechanisms for policy co-ordination, such as the G7, G20 and OECD, and it should continue to do so.

The Government’s fiscal strategy remains that the UK should live within its means by running a surplus in normal times, which is a reliable way of ensuring debt reduction that will continue over the longer term, leaving the country better placed to withstand future economic shocks as and when they appear. This Budget sets out the policies that will help our economy to succeed in the long term, and I am delighted to commend it to noble Lords.

Motion agreed.

Taxation: Income Tax Threshold

Lord O'Neill of Gatley Excerpts

Wednesday 16th March 2016 Lords Chamber

[Baroness Seccombe]

To ask Her Majesty’s Government by how much the amount a person can earn before paying tax has changed since the 2010 Budget; and how many people have been affected by this change.

[The Commercial Secretary to the Treasury (Lord O'Neill of Gatley) (Con)]

My Lords, since the 2010 Budget, the amount a person can earn before paying tax has increased by more than 60%, from £6,475 in 2010-11 to £10,600 in 2015-16 this tax year. Next month, it will increase again to £11,000, and in today’s Budget the Chancellor of the Exchequer has announced that it will rise by a further £500 in April 2017 to £11,500. A considerable number of taxpayers will benefit from these changes.

[Baroness Seccombe (Con)]

My Lords, that is an amazing figure, which I am sure we will all appreciate. It is especially important for young people. However, tax is only part of the issue; wages are also important. Can my noble friend tell the House how much the increased minimum wage will help the young, and how many will be affected?

[Lord O'Neill of Gatley]

My Lords, I welcome my noble friend’s phraseology. From October 2016, the new national minimum wage rate will mean a pay rise of up to £450 a year for nearly half a million young workers. The Government will increase the main national minimum wage rate to £6.95, 25p more than the current rate. This is the largest increase since 2008 in cash terms. It is expected to reach its highest level ever in real terms, surpassing its pre-recession peak.

[Lord Campbell-Savours (Lab)]

On the question of the tax take, why did the Chancellor not deal with personal service companies today?

[Lord O'Neill of Gatley]

I anticipated that a number of things might be asked at this session so shortly after the Budget had been announced, and I encourage many noble Lords, if they have the chance before next week’s debate, to read the Red Book. They will then be more aware of the real details of what has been announced, including, I think, something in this area.

[Lord Newby (LD)]

I thank the noble Baroness for reminding the House of an extremely successful Liberal Democrat policy. Given that the Chancellor has already broken two of his three fiscal targets, will the Minister now agree that they should be abandoned along with the cuts in spending and benefits, which particularly affect the poor and the disabled and which the Chancellor claimed were necessary just to meet those failed targets?

[Lord O'Neill of Gatley]

My Lords, of course I am not going to rise to that bait, but I would like to point out—and it is another reason why I encourage people to study the Red Book in close detail—that, in contrast to the mood among many observers and certainly in the media, the target for this year’s nominal budget deficit has come in lower than forecast at the Autumn Statement. The only reason that it is at the same level as a share of GDP and that the overall current debt level to GDP is higher than desired is the evident other news that the level of nominal GDP was significantly lower than before. In terms of policy, and on the contrary to what was said in that question, the plan is very much in place and on target.

[Lord Clark of Windermere (Lab)]

My Lords, the Minister has quite rightly taken pleasure in announcing the higher level of income that people can earn before they start to pay tax at 20%, and of course we welcome that. But there is a group of people who, it was announced in the Budget, will lose 100% of their income. I am talking about disabled people in receipt of personal independence payment. The Chancellor evaded the details of that decision, so I wonder if the Minister can advise the House of the Treasury’s estimate of the number of disabled people who will lose part or all of their benefit.

[Lord O’Neill of Gatley]

My Lords, I plan to make some longer comments specifically about this sensitive issue next week when I open the debate on the Budget. There are some very important complexities behind the policies which, frankly, were misunderstood in the way they were reported at the weekend.

[Lord Lexden (Con)]

My Lords, the second part of my noble friend’s original Question asked,

“how many people have been affected”,

by raising these tax thresholds. Can my noble friend give us the figures to show the extent to which people have benefited from the changes?

[Lord O’Neill of Gatley]

My Lords, as a result of the changes announced in the Budget today and in the summer Budget 2015, 31 million individuals will see their income tax bill reduced in 2017-18. This is close to an additional 1 million whose income tax has been reduced as a result of the previously announced measures. A typical base-rate taxpayer is going to pay notably less—just over £1,000 less tax in 2017-18 than back in 2010-11—while a typical high-rate taxpayer will pay more than £1,100 less than would otherwise have been the case. Let me add that this is the first time that there has not been an even stronger benefit for the lowest-income earners over the whole of that period.

Economy: Productivity

Lord O'Neill of Gatley Excerpts

Wednesday 16th March 2016 Lords Chamber

[Lord Harrison]

To ask Her Majesty’s Government what assessment they have made of the United Kingdom’s productivity in relation to that of other European Union and G20 states.

[The Commercial Secretary to the Treasury (Lord O'Neill of Gatley) (Con)]

My Lords, UK productivity levels hover around the middle of the park in relation to the G20 and the EU28. We face a significant, ongoing and long-standing productivity gap with the most productive nations of the world, such as the United States. The Government have of course recognised that and, within the overall fiscal framework, are working to remedy the problems and fulfil the challenge they set themselves in last summer’s productivity plan, Fixing the Foundations.

[Lord Harrison (Lab)]

My Lords, given that UK productivity is, by 29%, worse than French or German productivity and that in the vital area of financial services, according to the Office for National Statistics, we have deteriorated badly over the past six years, is there any prospect that this Government might redouble some of their own productivity? For instance, in the area of infrastructural services—rail, road and air— decisions might be made more quickly and effectively to provide the basis for improved productivity. Finally, in order to help smaller firms, which need help, will the Minister turn his attention to the HMRC decision to break off the valuation check service this March?

[Lord O'Neill of Gatley]

My Lords, the noble Lord asked a number of questions and I shall plump for the middle one. I assume that many Members of the House have not had a chance to digest the details of today’s Budget, but I am very pleased to say that we are accelerating our infrastructure plans, on which there is already quite impressive independent evidence. I could highlight a number of things that have been announced today. One that is very dear to my heart is that we are accelerating—compared with before, and taking on board the full recommendations of the independent National Infrastructure Commission—so-called HS3. In particular, the target is for the train journey time from Leeds to Manchester to drop to 30 minutes.

[Lord Tebbit (Con)]

My Lords, does my noble friend agree that we could set an example in this House of increasing productivity if we asked rather shorter questions?

[Lord O'Neill of Gatley]

My Lords, as a novice and relative newcomer, I sometimes quite like long questions as it gives me less time to answer them. However, as a general intention, it would be welcomed.

[Lord Davies of Oldham (Lab)]

My Lords, the Minister is a specialist on productivity and therefore obviously agrees with the American economist who said that productivity, in the long run, is the only thing that matters. Of course, it certainly was the basis of the success of the British economy during the Industrial Revolution. How is it, therefore, that the UK is still sixth out of the G7 countries and this Government are making no progress, apart from vague announcements about infrastructure which rarely come to fruition? We are making no progress on improvements in productivity per worker at all. Until we do so, we will not be able to clear our debts and have a position in the world that others respect.

[Lord O'Neill of Gatley]

My Lords, there are many complex aspects to the ongoing productivity puzzle around the world, and I do not have time to speak to many of the issues that the noble Lord implied in his question. I remind the House that next week we will have a debate on the Budget, when I will have the chance to go into some of the issues in more detail. However, in a recent discussion with independent directors at the Treasury, I was particularly pleased to hear them commend the Government’s efforts to boost productivity through their policies and to address some of the long-term, powerful weaknesses of the UK.

[Baroness Sharp of Guildford (LD)]

My Lords, is the Minister aware that there is a strong link between innovation and productivity and that Britain continues to lag well behind our competitors in business R&D? Can he tell the House precisely how the Government are proposing to encourage businesses to increase their contribution to R&D?

--- Later in debate ---

[Lord O'Neill of Gatley]

My Lords, among the many complexities that I hinted at is the separate evidence about the UK’s standing in the world on a number of matters. Particularly in our universities, the UK’s performance in R&D is rising in the relevant tables, which contrasts with some of the measurements of productivity. That is among the many puzzling aspects of ongoing developments here and elsewhere.

[Lord Forsyth of Drumlean (Con)]

My Lords, further to the Question from the noble Lord, Lord Harrison, is not productivity measured in terms of output per head? Therefore, if people are fleeing unemployment in Europe to come to this country in uncontrolled numbers, is it not a fact that, by definition, our productivity will fall?

[Lord O'Neill of Gatley]

My Lords, I suspect that there is a broader theme in that very interesting question from my noble friend. We have to be careful that in the justified and appropriate desire to boost productivity, we do not do anything untoward to reverse the remarkable success in raising employment levels. I say that on a day when we have hit yet another new high. Although people from my background and many others are aware of the importance of productivity, most individuals in our country want to have jobs, and that is what is increasingly taking place.

[Lord Pearson of Rannoch (UKIP)]

My Lords, do the Government accept that a falling 9% of our economy trades in deficit with the single market, that a growing 11% goes in surplus to the rest of the world, that 80% stays right here in our domestic economy, but that 100% is strangled by EU overregulation? What does this situation do for our national productivity, and how much would it improve if we left the EU and traded freely with the single market and the rest of the world?

[Lord O'Neill of Gatley]

My Lords, again, that was quite a long question with many different aspects to it. We are heavily focused on doing things to boost our productivity in many areas, including our export performance. However, I highlight—again, I would like the chance to come back to this issue—that the best exporting sectors are not necessarily always the most productive. Some of the regional data available from around the UK show that the services sectors appear to be doing better than that question implies.

Tax Credits (Income Thresholds and Determination of Rates) (Amendment) Regulations 2016

Lord O'Neill of Gatley Excerpts

Monday 7th March 2016 Lords Chamber

Moved by

[Lord O'Neill of Gatley]

That the draft Regulations laid before the House on 14 January be approved.

Relevant document: 23rd Report from the Secondary Legislation Scrutiny Committee

[The Commercial Secretary to the Treasury (Lord O'Neill of Gatley) (Con)]

My Lords, I confirm that the provisions contained in the regulations before your Lordships today are compatible with the European Convention on Human Rights.

I will start by setting out the purpose of the regulations that are put before the House today. These regulations make a single change: reducing the income rise disregard from £5,000 to £2,500, taking it back to the original level it was set at when tax credits were introduced and aligning it with the income fall disregard. This change was announced in the summer Budget of 8 July 2015. This means that awards will more accurately reflect the claimant’s recent earnings, meaning fewer overpayments and that fewer people will go into debt as a result.

Tax credits were introduced in 2003, at which point the income rise disregard was set at £2,500. At the time, the tax credits IT system was unable to cope with the unpredictability of family incomes, and in 2006 the amount by which a family’s income could increase before their tax credit award would adjust within the year—the income rise disregard—was increased to £25,000. This meant that two families with significantly different incomes could receive the same tax credits award.

Following the 2010 election, the coalition Government reduced the rate of the disregard to £10,000 and then to £5,000. Improvements to stabilise the tax credits system and the increased use of real-time information—RTI—mean that the system is now able to be more responsive to claimants’ changes of circumstances. I reassure noble Lords that when considering bringing forward this change, the Government considered the impacts on claimants in accordance with their legal obligations, and that there will be no cash losers from this measure in the tax year.

The purpose of a disregard is to provide a buffer zone in which a family’s income can increase during the course of a year without affecting their tax credit entitlement. It has been a feature of the tax credits system since its inception in 2003 and was originally set, as I said, at £2,500. Let me explain how the disregard works in practice. Following receipt of a claim, HMRC makes an initial tax credit award based on the claimant’s current circumstances and income from the previous tax year. As the current tax year progresses, claimants can notify HMRC of changes in their circumstances. Some changes must be reported within one month: for example, a partner moving in with a previously single claimant. However, other changes, such as a change in income, do not need to be reported until the year’s end, although claimants are encouraged to keep HMRC informed of changes in earnings.

After the end of the tax year, HMRC sends claimants renewal papers. The purpose of these is to determine the claimant’s actual entitlements for the year just ended and, if appropriate, to initiate a claim for the year ahead. HMRC does this by asking the claimant to confirm their income and circumstances for the year that has just ended. Where the claimant’s income has stayed the same, or if the income in that year has risen by less than the disregard amount compared to the year before, the increase in income does not affect the tax credit award in that tax year. It is disregarded from the final calculation of a tax credit award. If, on the other hand, their income has risen by more than the tax credit disregard, their tax credit award is decreased in the year. However, it is important to emphasise again that individuals will still be taking home more money, owing to the increase in their income.

Either way, in the subsequent year a claimant’s tax credits award will be calculated in the usual way, using their full annual income from the previous tax year to determine their tax credit entitlement. After the change in the tax year, whether the recipient’s pay rise was above or below the disregard level, their tax credit award for the following year will be adjusted downwards to what it would have been had no disregard existed.

I turn to fairness. In practice, this means that when the income rise disregard was set at £25,000, someone on tax credits could get a pay rise of £2,000 per month and still be technically entitled to the same tax credits award until the tax year end. Even under the current system, a household’s income can rise by £400 a month and they will still be entitled to the same tax credits award until the end of the tax year. Claimants would see their tax credits entitlement reduced in the following year, having become accustomed to the significant income change.

Let us assume that this pay rise of £400 a month means that this household is now taking home as much money as their next-door neighbours, whose circumstances are exactly the same. But the next-door neighbours are not entitled to the same level of tax credits even though they have exactly the same income and circumstances. Under the system set out in the regulations, with an income rise disregard of £2,500, the household with an increased income of £4,800 a year would have their tax credits award adjusted to reflect their increased earnings sooner. Their total income would rise more than the decrease in the tax credits award, providing the buffer zone that the income rise disregard is designed for, and they would also see their award aligned more closely with next year’s tax entitlement—the same as the next-door neighbours.

This example shows how reducing the income rise disregard reduces the unfairness in tax credits awards for families in similar circumstances. This is the right thing to do to ensure fairness to all tax credits claimants. This principle is already live in universal credit, where a claimant’s award changes each month based on their earnings, and this change brings forward some of these benefits.

HMRC will communicate this change by providing information in tax credits renewals packs, which will highlight the annual income threshold that would need to be exceeded to trigger a change in their tax credit awards, and when they should report changes in income to HMRC.

With the introduction of RTI—as I said, real-time information—employers can now submit employee payroll information in real time. Ninety-nine per cent of employers are covered by the scheme, which means that HMRC is now in a better position proactively to check that it has the correct income details when claimants renew their award at the end of the tax year. It also provides an opportunity to check awards within the year.

From September 2016, HMRC will use this real-time information to conduct automated checks of an individual claimant’s monthly income. This means that HMRC is better able to assess claimants’ tax credit entitlement in relation to their increased income. Should RTI find that a claimant’s entitlement should be reduced by £500 or more, HMRC will send a letter, text message or automated voice message to the claimant, prompting them to make contact with HMRC within 14 days. If they do not, their income will be automatically amended on the system.

Let me be clear: HMRC will not only tell all claimants up front when they must report changes in their income, it will also, in the majority of cases, prompt claimants to report significant increases in income that HMRC has picked up through the RTI feed. If claimants do not respond to the prompt, the system will automatically make the change and reduce the claimant’s tax credits award. This reduces the risk of overpayments while making clear to the claimant their responsibilities.

Finally, the Government are committed to seeing this change implemented correctly, and are taking this considered approach in both the operational IT delivery and in engagement with claimants. This will ensure that we see a reduction in the risk of tax credit overpayments and, therefore, a reduction in claimants falling into debt.

In conclusion, the disregard reduction will affect only those claimants whose income increases in-year by more than £2,500. Let me repeat that there will be no cash losers. This change will make tax credits more responsive to income changes; will reduce the overinflated rise and subsequent fall that follows an income rise; and will reduce the inequality of very different awards to families in similar circumstances and with similar incomes. It returns the disregard to its original design and purpose, and now is the right time to do this because the tax credits system is now much more able to deal with income changes. I beg to move.

--- Later in debate ---

[Lord O'Neill of Gatley]

My Lords, I thank those who have taken part so far in this debate. Each time that I have had the pleasure of standing here, I have always learned some interesting thoughts on whatever the topic is. I will try to respond to the things that I have heard as part of my closing statement. First, I will reiterate the broad framework.

This measure needs to be considered alongside the broader steps that the Government are taking, with their ambition for a higher-wage, lower-tax and lower-welfare society, which they were successfully elected to deliver in 2015. Under this proposal is the belief that work will always pay. In that regard, these regulations will reduce the degree of unfairness still persistent in the tax credit system. The reduction to the income rise disregard will reduce the instances where one family receives a higher tax credit award than another family with precisely the same income and the same circumstances. As I have already set out, it is also not unimportant to recall that this policy returns the income rise disregard to its original level.

With the introduction of real-time information, which each of the three speakers mentioned, the tax credits IT system is now more responsive and able to adjust to the fluctuations in family incomes in-year. I will return to that but, as the noble Lord, Lord Kirkwood, in particular mentioned, it is of course important that we try our best to monitor how that progresses. In the event that things do not turn out the way we expect, one would hope that a rational response would be to react accordingly. Before I come back to the specifics, it is also important to point out, as the noble Baroness, Lady Manzoor, herself said and other noble Lords touched on, that this is against the background where we are in any case migrating to universal credit. As part of that, a monthly system will be in operation and it is important to bear in mind that we are already in a position of travel. These new regulations reflect—

[Lord Tunnicliffe]

Will the Minister admit that the only possible rational response if the circumstances turn out as he has just described—and he promised a rational response—would be to return the disregard to the £5,000 level?

[Lord O'Neill of Gatley]

I am not sure that that would be the only rational response, but it would certainly be one of a number of ideas that one should consider in the event of any evidence that would subsequently accumulate as a result of the implementation of this regulation. Other policies could be thought of as well.

[Baroness Manzoor]

On that, of course there will not be sufficient time to return and up-level the income disregard from £2,500 to £5,000 because obviously universal credit will come into play. We will have all this upheaval. Bearing in mind what my noble friend Lord Kirkwood has already indicated, we are talking about this being implemented from 6 April. By the time the Government assess their evidence, many people may well find that they are in debt.

While I have the Floor, I must pick up on what the Minister has said twice. This is not a special award for people. People have to pay this money back the following year. Whether it is set at £5,000 or £25,000 is just a matter of accountancy. I do not want noble Lords who may not be familiar with this issue to think that people are getting £5,000 or £25,000 in their pockets without any comeback. It is simply a buffer zone. But it is the impact of those overpayments that causes real problems because they can push quite a number of people into debt. That is the issue here.

[Lord O’Neill of Gatley]

Let me respond to the two specific points made by the noble Baroness, Lady Manzoor. The first is linked to the question put by the noble Lord, Lord Tunnicliffe. As I said, there are a number of ways one could think of to make a rational response, and one of the reasons I hesitated to go down the path that the question sought to take me is that it is important that this be seen in the context of what is happening with universal credit. Rather than prejudging what is implicit in both questions, which is that the real-time information system will not succeed in the way we believe it will, I think we should give it a chance.

In response to the second point made by the noble Baroness, I suspect that a number of noble Lords will not be aware of something that is technically quite complicated; there may not be sufficient awareness of what we are trying to deal with here. The reason why the disregard is being put back to its original level is because there are people who receive a significant increase in their income where there is no consequence without it coming back down. That is why all members of the coalition were perfectly happy to reduce it so significantly at the start of the last Government.

[Lord Kirkwood of Kirkhope]

I appreciate that the Minister is trying to make progress, but I wonder if I could ask him a brief follow-up question to RTI. Is he confident that the new system which is to take effect in a few days’ time will be sufficiently sophisticated to disaggregate the data flows in the new system from the old system? Otherwise the overpayments that are overhanging the data at the moment will make it impossible for any statistical changes to be determined in the new system as opposed to the old, in terms of how successful or otherwise it might be.

[Lord O’Neill of Gatley]

My Lords, I have not personally studied the RTI system in enormous detail, but I am confident in our officials’ advice and guidance that the system has been sufficiently upgraded to enable us happily to undertake this policy initiative.

[Baroness Manzoor]

My Lords, that may be the case, but we still have £1.9 billion of overpayments being made now—not before, but now—with more than £5 billion in overpayments and £89 million from 2003-04. Those are the latest figures. There is a real issue around the real-time information processed at the moment, and that is my concern. I do not feel that the Minister is reflecting his confidence that the systems are working as they should. I am married to an IT expert who works around the world on these major systems and he expressed concern when I told him about the scale of the problem that the DWP is trying to deal with. Some reassurance from the Minister would be really helpful because the system is not working now, and I am talking about now.

[Lord O’Neill of Gatley]

My Lords, I want to answer in part by referring to something that I have touched on already and I shall elaborate further on its purpose. I could bore noble Lords with the detailed estimates of overpayments going back to when tax credits were first introduced. The underlying purpose of this should be looked at in a broader manner. As I said a few moments ago, this is being done within the context of trying to encourage a higher employment, high wage-earning and more gratified society. Trying to undertake this initiative, despite what happened as a result of the remaining part of the original tax credits proposals, is a sign of the belief that this, to some degree, is a technical decision based on the fact that we have been persuaded that the quality of the IT system can improve this dilemma. By definition, narrowing the income increase to a lower level reduces the conceptual scope for the size of aggregates over payments. It is only appropriate, particularly in the circumstances where we are migrating to universal credit, that this proposal be given a chance.

That takes me directly to some of the more specific comments that I have not answered. In particular, the noble Lord, Lord Kirkwood, very thoroughly outlined the other attraction, against the background of what I have just said, as to why this is being pursued in terms of the aggregate savings over the lifetime of the Parliament. Again, I bring it back to the bigger purpose. The noble Lord correctly identified the £935 million in the last Budget proposals against the background where this is positioned. This is about the same amount of money being agreed with a number of cities around the country in devolution deals over 30 years. To answer all the questions implicit from what the noble Lord said, if more places have the ability to use that money and choose initiatives locally to support greater skills and greater training to help even more work, it is a relatively straightforward policy choice, which should not be seen as too similar to some of the issues debated on tax credits. In that sense it seems relatively straightforward.

The noble Baroness, Lady Manzoor, raised an interesting point, suggesting that the Labour Benches were not as supportive as she hoped they might be. She pointed out the irony, given that this was a policy originally brought in by a Labour Government. That might well be among the reasons why that is the case, because it is in the circumstances where we are migrating to universal credit, where assessments will, in any case, be adjusted on a monthly basis. As I said, if it allows some savings so that the Government can then feel more confident allocating to broader and more substantive initiatives to help real pockets of disadvantage to change their supply response to labour market conditions—which both the initiatives I mentioned, one of which was not tabled here, should be seen as—it seems an extremely logical thing to do and not as contentious as the noble Baroness implied.

I turn to the questions, which I am not surprised have come, about the impact assessment. It is fair to say that, as a result of that remarkable debate and subsequent vote in this House some time ago, the Treasury has provided a lot of information to the various appropriate committees, the exact names and acronyms of which I shall not attempt to repeat, because I am sure I will get them wrong. A lot of information has been provided as part of that process. That is where the figure of approximately 800,000 people comes from. After considerable discussion, it is not clear to me that any further special impact assessment on this technical measure will necessarily help to provide anything of substance beyond what has already been provided.

--- Later in debate ---

[Lord O’Neill of Gatley]

My Lords, I can be very clear: this is being done specifically to achieve deficit reduction. However, the goal and policy on deficit and debt reduction also contain a number of economic policy priorities, which include a very strong commitment to devolution in many parts of the country. I was merely trying to illustrate that the amount we estimate will be saved from this proposal is very similar in size to the sorts of figures that we are successfully negotiating in a number of parts of the UK. We hope to do more of that going forward.

This change aims to reduce the disregard to £2,500 because that is fair to claimants, reduces inequalities in the tax credits system and is fair to the taxpayer, reducing unnecessary costs. As I have said a number of times, there are no cash losers because these are people whose pay will go up by £2,500 or more. This change will reduce the incidence of temporarily inflated awards, because the system will respond sooner and further to people’s changes in income in-year. I commend the regulations to this House.

[Baroness Manzoor]

My Lords, I thank the Minister for summing up. I also thank my noble friend Lord Kirkwood and the noble Lord, Lord Tunnicliffe, for their support today, although I am very disappointed. I agreed with everything the noble Lord said, up to a point, but when he said that he would not be supporting the Motion to Regret my heart fell.

I have listened very carefully to what the Minister has said. He has said a number of times that there are no cash losers. We have to disagree on that, because it depends on how you classify cash losers. It is really important to say that this is not a pay rise by any means. This £2,500 is actually recouped back from the tax claimant. It is not a pay rise but can cause great difficulties because of the fluctuations for people who are working on low incomes.

I will not go over the debate again. The House has been very patient and I thank noble Lords for listening. I feel very strongly about this issue and wish to test the opinion of the House.

Income Inequality

Lord O'Neill of Gatley Excerpts

Thursday 21st January 2016 Lords Chamber

[Lord Foulkes of Cumnock]

To ask Her Majesty’s Government whether they intend to commission research into the impact on social cohesion of income inequality.

[The Commercial Secretary to the Treasury (Lord O'Neill of Gatley) (Con)]

My Lords, income inequality is falling and is close to its lowest level since the mid-1980s. The Government have taken action to reduce inequality and poverty by boosting the incomes of those in work through the new national living wage, by taking 3.8 million working-age individuals out of income tax since 2010 and by reducing worklessness, with more people now in work than ever before.

[Lord Foulkes of Cumnock (Lab)]

My Lords, with FTSE 100 chief executives—only four of whom actually founded their companies—earning 183 times the median earnings for a full-time worker, and with the chief executive of HSBC, for example, receiving £7.5 million in the year that its profits went down by 17%, does the Minister agree that it is a miracle that there is not more social unrest in this country? Will the Government consider setting up a commission to make recommendations on ways in which this terrible income inequality can be dealt with?

[Lord O'Neill of Gatley]

My Lords, as I suggested in my opening formal comments—and I am happy to provide plenty of data to back up the substance because it is so wide—true measures of income inequality, whether in terms of disposable income or of what is called original income, have for many years shown a decline in income inequality. How chief executives are remunerated by their companies, particularly in the quoted sector, depends on the decisions of their boards and shareholders.

[Baroness Kramer (LD)]

My Lords, do this Government expect that the planned changes to universal credit will increase or decrease the number of children living in households with below-average incomes? Given the public interest, will the Minister report back to this House on that measure?

[Lord O'Neill of Gatley]

My Lords, I am sure that we will have further debates on this topic in the weeks and months ahead, but, as has been clearly articulated by me and others on a number of occasions in this place and the other place, our prime policy is to ensure that as many people as possible throughout our society achieve employment, supported by an increase in the national living wage. I should add that I make these comments after remarkably strong employment data published yesterday.

[Lord Kinnock (Lab)]

My Lords, this Question, as the Minister will have noticed, is about social cohesion. Is it not clear that there is a relationship between social cohesion and social equity? By not accepting the proposition in my noble friend’s Question, is he really saying to us that the Government, who are supposed to be strongly committed to social cohesion, are not willing to investigate the relationship between social cohesion or lack of it and social equity or lack of it?

[Lord O'Neill of Gatley]

My Lords, the Government are focused primarily on pursuing the appropriate economic policies to promote sustained economic expansion and higher productivity, including better opportunities for those who have been most disadvantaged, whether it be commitment to the northern powerhouse or the Midlands engine, and the devolution of policies that go with that, particularly skills and education. Those are the policies that are attracting more and more of our policy attention.

[Lord Davies of Oldham (Lab)]

My Lords, the Minister says he has data that show inequality reducing. I would very much welcome any submission he intends to make. I can only assume that he is measuring the past few months and that some of the inequality that has been reduced is because assets have dropped in value for the very rich because of the collapse of prices on the FTSE. Let us be absolutely clear: from 2010 onwards, wages were effectively frozen in this country as there were no pay rises at all for workers. I cannot understand how the Minister can suggest that the Government have been pursuing policies of reducing inequality.

[Lord O'Neill of Gatley]

My Lords, it is very dangerous to goad someone with my background about data, but there are considerable and widespread data on these matters published completely independently of the Government. In fact, the data show that the so-called Gini coefficient, which is one of the widely accepted global measures of inequality, has been showing a slow decline in British inequality since the mid-1980s, as I said earlier, both at the disposable income level and before disposable income.

[Lord Lea of Crondall (Lab)]

My Lords, the Minister mentioned the Gini coefficient. I was a member for some time of the Royal Commission on the Distribution of Income and Wealth. Obviously, there are different measures. I assure the Minister that we can swap anecdotes about data. But to be specific, is it not long overdue to remove the charity status of the public schools, given the inbuilt inequality of opportunity which that concrete part of our social structure creates?

[Lord O'Neill of Gatley]

My Lords, one of the widely regarded measures shows that inequality may have widened, which is the one that would include the broadest measures of wealth to account for house prices. That is the only one that shows that; all the others, as I have said, show the exact opposite of the tone of most of these questions. That is why we are also focused, as part of the productivity plan and otherwise, on trying to do something about broadening the supply of houses and to discourage the degree to which landlords have been influencing the housing market. These policies, along with the others I mentioned, will continue to attract the justifiable prime focus of our economic policies.

[Lord Newby (LD)]

My Lords, will the Minister confirm that yesterday’s employment figures showed a further fall in productivity? Why do the Government think that happened and what are they doing about it?

[Lord O'Neill of Gatley]

My Lords, of course one can infer some tentative implications about productivity from yesterday’s data on employment, but it would be very premature to do so. We know from the very latest productivity statistics that, if one uses a magnifying glass, there has been a modest increase in productivity in the last two quarters for which data have been reported. It is an ongoing observation that, in what are generally currently regarded as some of the most successful economies in the world, cyclically, the US included, they have, if anything, an even bigger apparent conundrum on this than we do here in the UK, because of the evidence of the past 12 months.

[Lord McFall of Alcluith (Lab)]

My Lords, the latest figures indicate that the salary of a chief executive in the largest corporations in America is now 333 times the average wage, while in Britain it is now 180 times that. The Minister is right that inequality has been growing in Britain for the last three years. It is now at the level of World War 2; if in 20 years’ time we continue this trend, it will be at the level of Victorian standards. As a distinguished economist, the Minister could do us all a favour by telling the privileged members of the Cabinet that GDP is not the best way to measure the prosperity of a country; it should be a measure of well-being. If we focused on that area, we might start to tackle this horrendous problem.

[Lord O’Neill of Gatley]

My Lords, I take the noble Lord’s suggestions with great interest. I repeat that it is the responsibility of boards and their shareholders to analyse and support the compensation of their chief executives. As we have touched on in parts of the productivity plan, those boards and shareholders should think carefully on an ongoing basis about the justification for those levels of remuneration.

[Lord Clark of Windermere (Lab)]

My Lords, I think that a number of us were surprised by the Minister asserting that inequality has actually been decreasing over recent periods. Does that take into account the zero-hours contracts and the regional variations?

[Lord O’Neill of Gatley]

My Lords, it is a reality of life that, when evidence gets in the way of perception, it surprises people. But on the widely accepted global measures—of which ours is one—measured inequality has been declining slowly since the 1980s, whether they include disposable income or are without it.

Economy: Balance of Payments and Industrial Productivity

Lord O'Neill of Gatley Excerpts

Thursday 10th December 2015 Lords Chamber

[Lord Harrison]

To ask Her Majesty’s Government what steps they will take to improve the United Kingdom’s current balance of payments and industrial productivity levels.

[The Commercial Secretary to the Treasury (Lord O’Neill of Gatley) (Con)]

My Lords, this Government are committed to boosting productivity and enabling our trade performance. Our productivity plan, Fixing the Foundations, is designed to ensure that we remain a dynamic, open and enterprising economy. It includes steps to improve our export support, which we built on at the spending review. This action, together with our commitment to eliminate the budget deficit, reduces the potential risks to our economic security associated with our external position.

[Lord Harrison (Lab)]

My Lords, the trade deficit of the United Kingdom is as big as the Bay of Biscay. Manufacturing is once again in decline because of the failure to invest such that it is blocking the march of the makers, as proposed by the Chancellor. British productivity is failing to produce because of underinvestment in people and parts. Is not John Longworth of the British Chambers of Commerce right to criticise the Chancellor’s unbalanced economy? Would it not be helpful in our negotiations with the European Union, when highlighting competitiveness, if competitiveness started at home?

--- Later in debate ---

[Lord O’Neill of Gatley]

My Lords, in answering some of these questions, I have to resist the temptation to be a bit of an economics data nerd. First, as I think I pointed out in this House recently, our trade performance has stabilised in recent years. The biggest contribution to the deterioration in our current account balance comes from the so-called invisibles balance, particularly lower returns on our investments overseas.

[Lord Flight (Con)]

My Lords, it is appropriate that the noble Lord, Lord Harrison, should raise the issue of the current account deficit. Many people seem to have forgotten about it. Over the past 15 years it has amounted to some £700 billion and it has been financed by selling the family silver. Even some 50% of buildings in the City of London are now foreign-owned. Would the Minister agree that the issue is essentially macroeconomic? What is needed is a higher savings rate and a higher investment rate. Both have been too low for a long time.

[Lord O’Neill of Gatley]

My Lords, my noble friend is technically correct that the balance of payments current account reflects the difference between our national savings and our national investment performance—one is the reverse side of the other. The best way to improve it is by reducing our domestic savings rate but remaining as attractive as we are to overseas investments.

[Lord Fox (LD)]

My Lords, I draw attention to my interest in the register of Members’ interests. I am sure that the Minister has seen the verdicts of the EEF—the manufacturers’ association—on the current downbeat mood in manufacturing and of the respected OBR, which says that the apprentice levy is a workplace tax. Does he agree with those verdicts and can he explain how they will help with fixing the foundations and uplifting the mood of manufacturers?

[Lord O’Neill of Gatley]

My Lords, there were at least three questions there but I shall try to be brief. I speak frequently to the EEF and its survey unfortunately reflects similar and growing evidence from surveys all over the world of weakness in manufacturing. The UK’s most regular monthly survey of the degree of optimism, or otherwise, in business shows that it remains one of the strongest in the G7 countries.

[Lord Davies of Oldham (Lab)]

My Lords, as the Minister has indicated that he is prepared to comment on statistics, I shall ask two straightforward questions. Is it the case that manufacturing output is now down the levels of 2009—just after the financial crash? The march of the makers is therefore becoming the slow movement of the disappointed. Is it not also the case that, with productivity set to fall over the next two years, the gap between the UK and the G7 countries is now down to 1991 levels? If these figures are correct, what on earth have been the so-called successes of the long-term economic plan?

[Lord O’Neill of Gatley]

My Lords, again there are many questions about the arcane world of economic statistics with which I am very familiar. I suggest that there is no clear correlation between the level of manufacturing and the overall level of productivity. I spent considerable time yesterday discussing this with my many friends in the north of England.

[Lord Spicer (Con)]

My Lords, there are signs that we may be on the brink of a recession. Is this really the right time to think of putting up interest rates?

[Lord O’Neill of Gatley]

My Lords, luckily the decision on what happens to interest rates has absolutely nothing to do with me and is the responsibility of the independent Bank of England.

[Viscount Hanworth (Lab)]

My Lords, one of the factors that inhibits our exports is our overvalued rate of exchange. Should the Government not consider establishing a sovereign wealth fund to purchase foreign assets whenever the sterling rate of exchange exceeds a certain threshold value? This, after all, would compensate for our selling our family silver abroad.

[Lord O’Neill of Gatley]

My Lords, by and large as a result of the Bank of England’s responsibility for monetary policy, in effect the responsibility for what happens to the exchange rate in a very competitive world is hugely influenced by our monetary policy relative to others. We have been and remain in favour of open markets, where prices are determined in world markets.

[Lord Howell of Guildford (Con)]

Will my noble friend explain to most of the noble Lords who have spoken that nowadays, most manufacturing items have a huge service and knowledge-laden complex in them? Will he also explain that to the Office for National Statistics, which does not seem to understand the difference? Will he not concede that at the moment, as an economy, we have an £86 billion trade surplus on our services overseas, which indicates that the mixture of services and manufacturing that we are developing is the winning formula for the future?

[Lord O’Neill of Gatley]

My Lords, my noble friend Lord Howell points out some extremely important facts, which I encourage everybody to listen to and read more about. I would add, as I emphasised at the start, that there are some signs that our trade balance in goods and services in recent years has improved. The deterioration that so many people talk about is in another source; it relates to the difference between the returns of investors here in the UK and our return on our own investments overseas.

Autumn Statement

Lord O'Neill of Gatley Excerpts

Thursday 3rd December 2015 Lords Chamber

[The Commercial Secretary to the Treasury (Lord O'Neill of Gatley) (Con)]

My Lords, once again, we have had a very healthy debate on the Autumn Statement, as we have before on economic and fiscal policy. Today there have been quite a lot of very valuable insights and thoughts about economic matters and finance. As I have done before, I thank all Members of the House for their excellent contributions. I am reminded of my maiden Statement, which I recall coincided with my dear and noble friend Lord King saying that the standard of debate in this place was, according to his vast experience, considerably higher than that of the other place. I have not had that other experience but each time I come here to discuss economic and financial matters, I can only echo that sentiment.

Let me quickly move on by making an apology to all your Lordships. As we have heard, we are on a very tight schedule and, if I am looking at the clock correctly, I have probably not much more than 15 minutes to respond to many of these interesting ideas. I will try to respond thematically as opposed to my preferred customary style, which is to respond to each noble Lord or noble Baroness individually. I will not be able to do that but I shall try to respond specifically to my noble friend Lord Carrington, the noble Lord, Lord Davies, and the noble Baroness, Lady Kramer. I will refer to others in the context of thematic issues.

Quickly moving forward, last week’s spending review and Autumn Statement presented by the Chancellor was an important fiscal event, one of the most important of recent times. In the spirit of what the noble Lord, Lord McFall, said—I will touch back on this in a second—it was particularly important because it was the spending review as well as the Autumn Statement, and it set forth in detail the path of public spending for the duration of the Parliament. As noted by some in this regard, we remain on track to achieve an overall surplus by the end of 2019-20—which, if it occurs, would be the first surplus since the turn of the millennium and of the century. As was also touched on—I shall come back to this—with stronger economic figures than anticipated we can do this while borrowing less, investing more in long-term capital spending on our infrastructure and smoothing the transition to a lower-welfare, higher-wage economy.

I turn to the thematic context. There are three broad areas, with sub-categories to some specifics. First, with respect to the background global environment within which the Autumn Statement was presented, my noble friend Lord Carrington set some of the scene in his wonderful opening remarks. I cannot resist an attempt at humour. He made reference to a number of supposedly highly-rated economists frequently getting their forecasts wrong. He made a comment soon after about the BRICs, so I trust that he was not referring to my past life in that regard. I should follow that by saying that I had remarked in a joke in that previous life that I might have ended up regarding them as ICs as opposed to BRICs, in view of the particular problems of Brazil and Russia.

At this stage, as we come towards the end of 2015, the ongoing evidence about the cyclical state of the world economy, as well as some of it structurally, is a little different in my view from the general view out there. While of course the world is slowing—or, let me emphasise, showing signs of slowing compared to expectations—I would draw attention to three or four things that are a little different.

First, and in slight contrast to something that my noble friend Lord Carrington said, in the year to date the biggest source of positive surprise comes from the eurozone area. Having seen the most up-to-date data in the monthly manufacturing and purchasing managers’ indexes around the world, which we have had in the last couple of days, some of the strongest data are coming out of the Eurozone—notably from Germany but, rather encouragingly given some of the structural issues, also from Spain and Italy. Secondly, in that regard, I draw your Lordships’ attention to the fact that the eurozone purchasing managers’ index is stronger than that of the United States. The USA’s own purchasing managers’ index, in its latest indications, is now weaker than that of many of the rest of the G7 countries, such as ourselves and much of continental Europe.

Thirdly, in the context of my attempt at humour about the BRICs, while China continues to show signs of slowing, very importantly for our priorities there is just as clear evidence that domestic consumption and its own services industry continue to increase their share of GDP rather rapidly. There is not much evidence of a significant slowing among Chinese consumers, which is an important, ongoing and positive thing for the rest of the world, including the UK, which wants to engage by providing things to their consumers. That strongly justifies our active engagement and many noble Lords here are aware of my strong involvement in that.

Fourthly, in this regard, I will mention that many other so-called emerging economies still have considerable challenges, a large number of which are in my view probably more cyclical in nature than structural. They relate to the intensity of the decline of commodity prices. Importantly, as the flipside to that, there remains an important source of ongoing support for real disposable incomes in many commodity-importing countries, ourselves included.

The second area, which I will touch on quickly, is the policy environment against that background and in particular the framework and role of the OBR, which many noble Lords touched on. Within that second area on policy, I have a couple of thoughts about the OBR. I will touch initially on the interesting suggestion made by the noble Lord, Lord McFall, about the OBR releasing its latest ideas earlier than has hitherto been possible. It would be very difficult for it to do that, not least because it is given a large amount of sensitive evidence about policy considerations that would dramatically impinge on the Government’s thinking in the lead-up to actual policy decisions.

However, I believe that yesterday, Robert Chope and the OBR were due to appear at the Treasury Select Committee, which was shifted for obvious reasons but will, I am sure, happen very soon. I imagine that many of the questions that the noble Lord, Lord McFall, the noble Baroness, Lady Kramer, and others touched on will come up on that occasion. If they do not, I am sure that there will be an opportunity for them to pursue those questions further. Having said that, the OBR is of course independent of government and it is its rightful role to come up with new suggestions on the relationship of the economy and the fiscal position, given its mandate.

Finally with respect to the OBR, while my own observations are that it has revised down slightly its forecast of productivity, as touched on by the noble Lord, Lord Haskel, interestingly it has also revised higher its forecast for investment. Importantly, going forward, its own forecasts remain on the more conservative end among many highly respected domestic forecasters. As a number of noble Lords have pointed out, while it is true that there could be risks to the downside as a result of its changes, equally, it could be just as vulnerable to being positively surprised again, as it clearly has been given those changes. I finish on this subject by pointing out that from what I can understand, of the £27 billion change that it made, £18 billion of it was due to the change in its modelling of the relationship between nominal GDP and various forms of tax revenue, particularly VAT, while £9 billion was due to its own revised higher estimates of the economy.

Sticking with this second theme of policy, yet again, a number of noble Lords offered very contrasting views about the appropriate stance for fiscal policy, which is not surprising in view of the nature of this place and the understandable biases that some Members may have. All I would say in this context is that, the spirit of the Autumn Statement is that fiscal policy—whatever the justified underlying stance—is less restrictive as of last week than had previously been believed by many. Several noble Lords have been particularly critical about the supposedly tough stance on fiscal policy. Although Members of this place may have their own judgments on that, which may be valid in principle, fiscal policy is certainly not as restrictive as they might have thought a week ago.

I will finish this part of my closing comments by taking this back to where I started. The Chancellor for some time now has been talking about policy in the context of both our national and our economic security. I was very pleased to have discovered how policy was going a couple of days before the announcement, as, in my judgment, against the background of such uncertainties around the world, it is probably appropriate that our stance on fiscal policy, within the flexibility we have been afforded, should be less stringent than we had otherwise planned for it to be. That gives us more internal momentum against the background of those never-ending, swirling uncertainties that unfortunately seem to be so prevalent.

The specific points that were made covered many areas, including the apprenticeship levy, and skills and productivity, which I will touch on together. They also related to investment spending and further education colleges. Separately, there were some very interesting ideas about energy policy, housing and the role of manufacturing. The noble Lord, Lord Palumbo, made some very interesting suggestions with respect to discussing broader principles and tempted me to live up to what I think he suggested was my independent northern spirit. I can never resist such a temptation, so I look forward to rising to that challenge whenever it comes.

The broad issue that links at least half those thematic points and that the noble Lord, Lord Davies, spent a lot of time on, is productivity. The noble Lord, Lord Haskel, also touched on this in some of his comments. Although the Chancellor did not use the word productivity in the Autumn Statement as much as he may have done previously in the summer Budget, I suggest to noble Lords that, on the contrary, there continues to be a strong focus on the important role of productivity. I will respond to some of the specific comments of the noble Lord, Lord Davies, as I have tried to do in recent discussions. Although our productivity level has been weak, and is significantly lower than the levels of our main partners among the developed countries, the evidence from the past year or so is that ours has improved slightly more than had been the case, and that the gap is not quite as big as it was.

I would not want to jump from that to immediately say that this is a consequence of the 92-page document that we published with the summer Budget, because some of those data relate to before then—and of course one swallow does not make a spring—but it seems to me that there are some signs of slight improvements at the margins of the data that are available to make judgments about. More importantly, there are a number of ongoing policy developments—which there was more focus on—including some that relate to the specific points that were made.

I will respond to points about skills, further education colleges and the apprenticeship levy together. The apprenticeship levy, which has been described by some as a back-door tax, is, as I have discussed here before, part of a conscious decision to try to encourage our corporate world to have a greater influence on and a greater obligation towards trying to sow the seeds of much stronger skills for today, tomorrow, and the medium-term and long-term future. It is only the largest employers that are likely to have to pay much and, in the event that they take up the challenge to its fullest, they will be more than recompensed for their endeavours. The desire is that, in the context of the apprenticeship plan, they will influence the nature of qualifications coming out of further education colleges and perhaps influence how those might develop further.

I would link FE itself with the goals for skills and apprenticeships. We need to strengthen the quality of the qualifications that come out of our further education colleges and get away from the focus just on the amount of money that is being spent or not. We need to ensure that the people who come out of those institutions have the right qualities and skills to cope in an increasingly competitive world. In my judgment, the real thrust of policy in the past six months in this regard has been about making it a priority to raise the standards of the qualifications that come out of further education colleges. If successful, that will play a critical role in moving towards raising the broad scope of the skills challenge, which a number of Members of the House have touched on and which, again, I have made significant reference to in the past.

Establishing manufacturing targets sounds like a very eye-catching thing to do. The noble Lord, Lord Bilimoria, mentioned this, but I know from my own association with the I in BRICs in the past that it would be absolutely remarkable if India got half way to achieving that kind of target. It is not clear to me that it would be particularly smart to suggest that an economy as sophisticated and diverse as ours has some defined target for manufacturing as a share of GDP, not least because the interplay between high- value-added manufacturing and services is a lot more sophisticated and complex than it once was, and you do not want to choke off one at the expense of the other.

What is clear in a broader sense is that we want to encourage an environment that creates more higher-value-added jobs that allow us to keep our head above water and compete in an endlessly changing world with lots of challenges, whether they are service jobs or manufacturing jobs. The focus on wages and the high-wage, low-welfare economy is at the core of this, together with a number of very specific initiatives, which again I directly relate to productivity. The northern powerhouse, the Midlands engine and the devolution of powers and decision-making to local authorities in those areas are critical in this.

Because of my shortened time, I will finish by saying thank you to all noble Lords whom I have not had the chance to specifically answer. Although considerable challenges from overseas remain, as well as our own long-term internal challenges, it seems that Britain is in a fundamentally stronger place than it was five or six years ago. This Autumn Statement and spending review set out how we will achieve the next steps of our economic recovery, and I commend it to your Lordships.

Spending Review and Autumn Statement

Lord O'Neill of Gatley Excerpts

Wednesday 25th November 2015 Lords Chamber

[The Commercial Secretary to the Treasury (Lord O'Neill of Gatley) (Con)]

My Lords, I refer the House to the Autumn Statement made by my right honourable friend the Chancellor of the Exchequer in the House of Commons, copies of which have been made available in the Printed Paper Office, and the text of which will be printed in full in the Official Report.

The following Statement was made earlier in the House of Commons.

--- Later in debate ---

[Baroness Kramer (LD)]

My Lords, it is always a pleasure to follow the noble Lord, Lord Davies of Oldham, but I confess that he disappointed me today. He did not throw anything, so we have missed out on the drama of the other place. I was also somewhat disappointed in the Budget. It is less generous than it appears on first viewing: we still have a £12 billion cut in welfare. If I understand it correctly, that will now happen as people transfer into universal credit. I am sure that the Minister will advise noble Lords about that—it would be good to understand how it will work. Of course, I am absolutely delighted that the Chancellor reversed his plans to cut tax credits for poor working people. I think, with some interest, that had the Chancellor been a Member of this House a couple of weeks ago, when the relevant statutory instrument was debated, he would have supported neither the Conservative nor the Labour Motion, but the Liberal Democrat fatal Motion.

We are also pleased with the upfronting of money for the NHS in this Budget, especially the investment in mental health. That is welcome, but can the Minister confirm whether that £600 million is new money for mental health and does not contain any former promise within it? We are supportive of stamp duty on buy to let and very supportive of the increased spending on infrastructure. We note that the Chancellor partially explained that that was because borrowing is now cheap. That is what we have been saying for weeks, so we are very glad that he has listened to that argument.

However, if I lived in a deprived community, I would be exceedingly concerned today. Perhaps the Minister can help us. Although the Government have said there will be no cuts in the policing bill, I am somewhat confused. Does that mean that the grant levels for policing will continue to be the same from central government, or is part of the money to be replaced by a precept raised locally, by police and crime commissioners? I did not follow that and therefore do not understand what might be happening. If I am in a deprived community and find that I have an additional bill on my council tax for policing, I am almost certainly going to have an additional bill on my council tax for social care, because, as Members of this House will know, the most vulnerable elderly tend to live in the most deprived communities, with the narrowest council tax base. Therefore, paying for social care through an additional precept on council tax will be very tough for those communities. I would indeed be worried.

I would also be worried in another sense. The Chancellor significantly slashed the revenue side—that is, the operations budget—of the Department for Transport. Immediately in my head went up the warning sign that much of that is spent on bus grant. Again, with local authorities under great financial pressure, are we looking at either losing a lot of our bus services outside the big urban centres, where the systems can wash their face themselves, or are we looking at additional council tax being raised to pick up bus services?

The repatriation of business rates is something that we have always supported in principle, but I did not quite follow that; again, perhaps the Minister can help us. If I understood the Chancellor correctly, the equalisation will disappear. As this House will know, business rates have been centrally collected and then redistributed on the basis of need. As that is eliminated, will we again find that our most deprived communities, with the least capacity to generate new business and new business rates, will be the ones that suffer, while somewhere such as Kensington and Chelsea or Westminster will be in heaven? I hope very much that the Minister can support us, because one knows that, with Budgets, the devil is very much in the detail.

Perhaps the Minister can help us also on further education. What I heard was a real-terms cut in the further education budget, which will be protected only in cash terms. In this House, we have all discussed—indeed, the Minister himself has discussed—the significant problem of the lack of skills that is holding back economic growth. Especially now, as we are constraining migration, it is really important that British people have lifelong learning. Apprenticeships and universities have a huge role to play, but the underpinning in our ever-changing world, where people constantly need to update their skills, means that further education is absolutely critical. Have we just heard a cut in that sector?

Perhaps the Minister can help us with this policy of equalising per pupil spending in schools. It sounds on the surface not to be an issue, but does this mean that schools, for example, in London, in some of our most difficult communities and which have delivered outstanding success, are about to have a cut in their per pupil spend based on this equalisation? We really need to know and understand the detail of that.

I will make just two more comments. Although there were many measures to support new ownership, the private rental sector was ignored. We have 1.6 million people on the waiting list for social housing who will obviously not be helped, and so many in generation rent, who spend half their income on rent, have not been helped either.

My last point is that this Budget relies on a £27 billion find by the OBR in increased tax receipts and low interest rates. I point out that both could change or disappear. Given the constraints of the fiscal charter, what are the consequences for this Budget if that should happen?

[Lord O’Neill of Gatley]

My Lords, I thank the noble Lord, Lord Davies, and the noble Baroness, Lady Kramer, for their interesting and detailed responses to the Autumn Statement and the spending review. One of the unfortunate consequences of their detailed response is that I have only three minutes or so to respond.

Let me start by trying to make some overall comments. An important backdrop to today’s Autumn Statement and spending review is that the independent Office for Budget Responsibility has become more optimistic about our economic growth than it was previously, consistent with other respected domestic institutions. Importantly, in line with that, it has become more optimistic about our modelling of the path and profile of tax receipts.

As highlighted by the Chancellor, the OBR now calculates that this means a £27 billion improvement in our overall public finances over the forecast period. This allows the Government to borrow £8 billion less than forecast and, importantly, and in contrast to what the noble Lord, Lord Davies, suggested, spend £12 billion more on capital investment and cut less in the early years, while still achieving a budget surplus consistent with what was previously projected. In fact, that surplus will be slightly higher, by £100 million, by 2019-20.

In practical terms, this means: a £10 billion real-terms increase in the NHS budget; investment in our national security; real-terms protection of the police budget—I will have to write to the noble Baroness, Lady Kramer, on the technicalities of her question; doubling the housing budget; the largest ever investment in free childcare; a 50% increase in transport capital spending; extra support in science and innovation, in contrast to what was widely expected by the media; the biggest real-term increase to the basic state pension in 15 years; and, of course, avoiding the need to lower the tax credit thresholds.

Through the spending review, the Autumn Statement also sets out the details of the Government’s commitment to deliver £12 billion of savings to the cost of governance. It delivers the economic security on which our future growth is based and protects national security, which it is, of course, the first duty of any Government to provide.

I shall quickly try to respond to some of the key specifics. The noble Lord, Lord Davies, as he has done in previous debates in this House, referred to a number of aspects of the economy. I have probably had more access and time to look at some of the things presented in the Autumn Statement and, crucially in this regard, by the independent OBR. With respect to, for example, the never-ending references to our balance of payments deficit, as significant as that has been, one of the sources of the upward revision by the OBR is the improvement in the balance of payments position that has recently occurred. As I pointed out in the Chamber a week or so ago, the trade part of the current account balance of payments has been improving for some time.

With respect to other specific asks, I am particularly pleased with some aspects of this in the context of what the noble Lord, Lord Davies, said, both from the northern powerhouse perspective and in terms of our broader energy dependency. In that regard, I should like to highlight the announcement of £250 million towards research for small nuclear reactors, which will benefit a considerable number of parts of the north of England. In addition, there is £250 million for a devoted potholes fund.

With respect to the ongoing and crucial issue of skills, the Autumn Statement spells out specifically how the apprenticeship levy will be funded. While some are making reference to that being some form of tax, as we have discussed here before—and as I have been among those most prominently pointing out—it is important that our corporate sector, which is at the forefront of pointing out our skills shortage, takes ownership in providing the necessary skills. It will apply only to the largest employers, and anyone who achieves their target will get their funds returned in any case.

I have already touched on answers to some of the interesting comments made by the noble Baroness, Lady Kramer, but I want to start by bringing us back to universal credit. I will refer to what the Chancellor himself said this morning and then make additional comments. He said with respect to tax credits:

“Because I have been able to announce today an improvement in the public finances, the simplest thing to do is not to phase these changes in, but to avoid them altogether. Tax credits are being phased out anyway as we introduce universal credit”.

He concludes the section of his wonderful presentation by saying that the House—that is, the other place,

“should know that helping with the transition obviously means that we will not be within that lower welfare cap in the first years, but the House should also know that, thanks to our welfare reforms, we will meet the cap in the later part of this Parliament”.

With respect to the observations about the role played by this House, it is important to remember that the Chancellor said the day before our debate that he was prepared to listen and there was on offer an alternative Motion that could have been respected.

[Lord Taylor of Holbeach (Con)]

My Lords, before the clerk starts the clock for Back-Bench questions, we have 30 minutes. I know a lot of noble Lords want to contribute. Can they please be as brief as possible? That gives as many noble Lords as possible a chance to express their views and ask questions of the Minister. Thank you.

--- Later in debate ---

[Baroness Hollis of Heigham]

My question, if the noble Lord, Lord Tebbit, will give me the courtesy of allowing me to speak, is: why do we need these cuts if public finances show that the tax credit cuts are not necessary, and where precisely will they fall? I have to say that the answers are not there.

[Lord O’Neill of Gatley]

My Lords, if I understand the noble Baroness’s questions correctly and specifically—I am not entirely sure that I do—it has been made clear in the Chancellor’s speech that there will be a series of measures over the term of the Parliament and the period covered by the spending review and Autumn Statement. By the end of the Parliament we will have achieved the £12 billion of savings that was set out, and the migration to universal credit will play the role that it was intended to play.

[Lord Shipley (LD)]

My Lords, the Chancellor announced a big package of new powers and also new responsibilities for local councils. He also said that by the end of this Parliament local government would be spending the same in cash terms as it does today, so it will not be spending the same in real terms. First, will the Minister confirm that there will be no cost shunting from central to local government without the necessary funding following it? Secondly, can he confirm that over the next few years of this Parliament any new demands made of local government by central government will be properly funded?

[Lord O’Neill of Gatley]

Again, I had a slight problem hearing the specific words of the question. However, if I understand the broad gist of it, I point out that, given the new revenue-raising powers that all our local authorities will have available to them, their ability to have control over their plans will, of course, be considerably greater than is implied by the numbers that I think the noble Lord was referring to. That is particularly true of the big urban areas that have undertaken devolved responsibilities. In terms of where that destiny will be, as will be seen more clearly in the detailed documents to be released later, if not already, Greater Manchester, the first place that had devolved responsibility, has now had its third negotiated settlement. There will be more for others, as I have personally been very eager to discuss as part of our initial agreements with many of them.

[Lord Grocott (Lab)]

Can the Minister confirm that when this House made its decision on tax credits, and the Prime Minister and the Chancellor went into meltdown about the outrageous nature of the House’s behaviour and its affront to the constitution, as well as making several other extreme statements, they had a very simple solution to hand to reassert—if that was needed—the authority of the Commons, which was to introduce a small, timetabled, money Bill, which the House of Commons could have passed in no time? The Chancellor could have achieved his original objective. The fact that he chose not to—and we are very delighted to see that he will not go ahead with these cuts—means that he thought again at the request of the House of Lords, and the House of Lords was fulfilling its historic and important constitutional function of telling Governments to think again.

[Lord O'Neill of Gatley]

My Lords, at the risk of repeating aspects of what I said, I think I made it clear that the arguments advanced had legitimacy and were, as with any other arguments, capable of influencing the Chancellor—which, I might add, has been observable on a number of other economic policies. What was not legitimate was the fatal Motion carried in this House.

[Lord Stoddart of Swindon (Ind Lab)]

My Lords, I will ask a quick question on transport, which I understand is to take a cut of 30%. Which services will that adversely affect? Will there be cuts in assistance to the railways and to London transport, in which case fares will increase, or are there other means of finding that 30% cut?

[Lord O'Neill of Gatley]

My Lords, as I think was touched on in part of the question asked by the noble Baroness, Lady Kramer, the cuts are in the Department for Transport’s operational budget. There is a significant increase in capital spending. With respect to a number of our investment challenges, I would also highlight that some of the additional £12 billion capital investment is specifically for transport. Tangential to that, I also highlight the more specific commitment to HS2, as well as—very importantly for the northern powerhouse project—a significant allocation of money for the rollout of Transport for the North, particularly the state-of-the-art ticketing proposals that we hope will come to the fore.

[Lord Higgins (Con)]

My Lords, the Chancellor is determined to eliminate the deficit, but the results so far show very clearly that this is entirely consistent with having a rate of economic growth that compares very favourably with those of other countries around the world. To add one particular point, the Chancellor was clearly frustrated at being unable to zero-rate VAT on certain items because of the European regulations. When negotiating with the European Community, would it not be a good idea to include negotiations on this particular point, which inhibits us from taking the tax decisions that we wish to take?

[Lord O'Neill of Gatley]

My Lords, on the second question, which I assume specifically refers to the so-called tampon tax, the Chancellor took great delight in announcing to the other place that a number of women’s charities would be direct beneficiaries of the money we accrued from the imposed tax from the EU. In the mean time, the Government will continue to debate the merits of that tax with the EU.

On the first question, as I touched on, the basis for the OBR’s improved forecast is of course the circular connection between the improvement in the economy—which I repeat that the OBR has become slightly more optimistic about—and the improved nominal GDP outlook for the rest of this Parliament, as well as tax revenues. That has given the flexibility for the Chancellor to commit—or recommit—to the mandate that the Government successfully achieved from the electorate to reduce the level of debt and to move towards a fiscal surplus, while choosing various priorities in domestic spending. Indeed, it is that economic success that has been so helpful in giving the flexibility highlighted in today’s policies.

[Lord Campbell-Savours (Lab)]

My Lords, I take the noble Lord back to the £12 billion figure, tax credits and his explanation that the relevant sum would be covered by migration—I think that was the term he used—to universal credit. Is he saying that the whole of the £12 billion will be covered by that migration or will there be additional benefit cuts in other areas? If there are to be additional benefit cuts, when will they be announced?

--- Later in debate ---

[Lord O'Neill of Gatley]

My Lords, as is highlighted in the documents, the removal of the two particularly contentious parts of the tax credits cuts will result in a figure somewhere in the vicinity of just over £3.5 billion. A number of other policies have been adopted, which were there in any case, and have been announced today. Together with the planned phasing-in of universal tax credits, these will achieve over the course of this Parliament the £12 billion of planned savings that were scheduled at the start of it. I highlight the fact that the OBR documents suggest that that is likely to be achieved.

[Baroness Williams of Crosby (LD)]

My Lords, I congratulate the Government on front-loading the money for the National Health Service, which should enable it just about to get through the coming year. However, will the Minister confirm that the original Nicholson savings still exist, and that therefore the NHS will have to find over this Parliament something of the order of £22 billion?

[Lord O'Neill of Gatley]

My Lords, the noble Baroness has slightly caught me off guard with that point. Certainly, the additional money announced today for the NHS does not mean that it is not expected to deliver the efficiencies that had previously been announced. It is still expected to deliver those efficiencies.

[Lord Cormack (Con)]

My Lords, I declare an interest as president of the All-Party Arts and Heritage Group, which many noble Lords in all parts of the House support on a regular basis. I express my appreciation for the fact that the Chancellor has recognised that a cut in the very small budget of the DCMS would be a false economy. Will my noble friend assure me that English Heritage and Historic England will be similarly treated?

[Lord O'Neill of Gatley]

My Lords, the Chancellor’s Statement was very clear on this issue. He will welcome the noble Lord’s appreciative comments.

[Lord McFall of Alcluith (Lab)]

My Lords, if it is the case that in a short three-month period from July to November the transformation in the Government’s figures was due solely to the generosity of the OBR, will the Minister confirm that spending by the Government will be £83 billion more in this Parliament, funded by £47 billion of tax increases and £35 billion of welfare cuts? Given the answer that was given earlier, the Autumn Statement is silent on the welfare cuts. Will the Minister indicate where that £35 billion will come from over this Parliament?

[Lord O'Neill of Gatley]

My Lords, as I have already said, it is indeed the case that the new baseline that the OBR presented allowed for considerably more flexibility in today’s announcements. However, it does not change the overall thrust of economic policy. What it has done, as I emphasised, is given more flexibility across the board in respect of three areas. As has been debated considerably in this House recently, there is a £12 billion increase in public sector investment spending over what was previously planned, which covers particularly housing but also transport, including both road and rail. Relative to the Budget in March in particular—the coalition’s final Budget—but also to the summer Budget, there is also a lesser pace of spending reductions across the board. The Chancellor highlighted that, going forward, the aggregate real cuts would be something like 0.8%, compared with 2% previously, and that is a slower pace than was previously the case. If one looks at the mix—and there are some very interesting tables presented in the Treasury document and particularly by the OBR about the shifting balance—previously spending reductions made up significantly more than 50% of the planned savings but are now a bit less than 50%, and the balance is made up in other areas, including lower debt payments, which I think the noble Baroness, Lady Kramer, indirectly referred to.

[Lord Spicer (Con)]

My Lords, one potential massive investment that could take place, which would not require taxpayers’ money or affect the public borrowing requirement, would be investment in Heathrow and the London airports system. Why is more not being made of that?

[Lord O’Neill of Gatley]

My Lords, I am pleased to say that the matter of Heathrow Airport is a bit above my pay grade, but I think that a decision on that subject will be made and announced before the end of the year.

[Lord Scriven (LD)]

My Lords, it says in the spending review that an extra £1.5 billion for local government by 2019-20 is to be included in the better care fund. Is that new money or, as has happened previously, will some of that money be shunted from the NHS into social funds to be given to the better care fund?

[Lord O’Neill of Gatley]

My Lords, I will follow up with a written answer to that. I am pretty sure that this involves additional money for the better care fund but I will reply to the noble Lord in writing.

[Lord Tebbit]

My Lords, did my noble friend share my surprise at the allegation made by the noble Lord, Lord Davies, that our economy was performing very poorly compared with our overseas competitors? If that is indeed the case, why on earth are all those people at Calais fighting to get here instead of fighting to stay in President Hollande’s paradise of a socialist France? They must be mad.

[Lord O’Neill of Gatley]

My Lords, my noble friend Lord Tebbit goads me to spend a lot of time talking about the economy, which—looking at the clock and avoiding my own tendency—I will desist from rising to. But I implied in my answer to the noble Lord, Lord Davies, that I was somewhat baffled by his tone about the economy. I suspect that many noble Lords have not yet had the chance to read everything that has been said, particularly by the OBR, but in a number of areas of frequently highlighted vulnerability, particularly the balance of payments, the OBR is somewhat cheerier than is typically the case. As the Chancellor pointed out very clearly at the start of his speech, our economy continues to perform at the highest levels of the G7 economies and somewhat better than generally expected by the consensus over the medium term, including the OBR’s own forecast beyond this year and next year.

[Baroness Royall of Blaisdon (Lab)]

My Lords, there is much in the Statement about housebuilding and it is very welcome that the Government want to enable more people to buy homes, although I see that few of them will be in London and the south-east. But the only mention of social housing is the enabling power to allow housing associations to sell off their own homes, which will detrimentally affect housing, especially in rural areas. What is the Chancellor saying about building more social housing all over the country?

[Lord O’Neill of Gatley]

My Lords, I beg to differ with the substance of the question. While the new policies announced today go more broadly than social housing, the Government continue to focus on the needs in this area. What is particularly exciting about housing policy today is a stronger commitment, and specific policies to go with it, to encourage more housebuilding in general, including specific targeted measures to help those in London.

[Lord Livingston of Parkhead (Con)]

My Lords, my noble friend the Minister is absolutely right to point out that the UK has an improving balance of trade. It is one of the best performing economies in the G7 and the strongest place in the whole of Europe for foreign direct investment. How does he think that may change when we have a shadow Chancellor who—God forbid he should ever get into power—likes to quote Chairman Mao?

[Lord O'Neill of Gatley]

My Lords, again, I am very tempted to rise to the bait of my noble friend’s question, but I have to be careful in this regard, given my own interest in China. All I would say is that as we creep through time, a number of the more sceptical voices about the performance of our own British economy in a sea of great turbulence and unpredictability around the world continue to improve, as does the most up-to-date, ongoing evidence of the economy’s performance.

[Lord Haskel (Lab)]

My Lords, the Statement promised a lot on infrastructure; so did the Budget two years ago, when a £40 billion fund was established to guarantee it. But since then only about 10% of this fund has been used—largely, I suspect, because employment in the construction industry has gone down by perhaps 120,000 people. So what confidence can we have that the infrastructure promise in this Statement will be more successful than what was promised two years ago?

[Lord O'Neill of Gatley]

My Lords, I am slightly surprised at the tone of this question with respect to infrastructure, along with a couple of earlier questions. Let me repeat that within the £12 billion additional commitment to capital spending, much of it, in its broadest sense, is indeed on infrastructure. I also point out that since the summer Budget, an independent commission has been looking at the nation’s infrastructure needs. It will give advice and report back ahead of the next Budget.

I will add that, based on the involvement that I personally have with many other countries around the world, the guarantee scheme that the noble Lord refers to in terms of its low take-up is generally regarded as one of the most sophisticated and credible in the world. It will continue to be used, as we have highlighted in today’s Statement, and we will welcome many more proposals for infrastructure spending from the private sector, which may be interested in using that guarantee.

[Lord Lansley (Con)]

My Lords, the announcement that a national funding formula for schools will be introduced from 2017 will be immensely welcome after years of campaigning. Clearly, this formula will not be simply a flat rate. It will mean that pupils in similar circumstances should receive similar funding, coming directly from the Government as it does. Can my noble friend say at all when we might see the consultation on the structure of that funding formula?

[Lord O'Neill of Gatley]

My Lords, given my own previous specific involvement in education as a non-exec at the Department for Education and a long-time educational philanthropist, I also welcome this measure. I suspect that it will be particularly helpful for young children and adults in the most disadvantaged parts of urban Britain, particularly outside London. I do not have the information to provide the details here on how it will be worked out but I am sure that, in the fullness of time, it will be made available to everybody, especially Members of this House.

[Baroness Janke (LD)]

My Lords, it is very welcome that local authorities will be able to keep the business rate, particularly where there is concentration of business. However, in many local authorities there is not the same concentration of business. What plans are there for those local authorities and is it envisaged, as in the work of the City Growth Commission, that moving to more revenue-raising measures might be a further aspect or result of the Chancellor’s announcement?

[Lord O'Neill of Gatley]

My Lords, the announcement about the retention of business rates was made a number of weeks ago now. I may have misunderstood the question, but they are now available for all local authorities to retain. The latter part of the question was about the recommendation of the City Growth Commission, which I think most noble Lords will be aware that I used to chair. As we have agreed in principle with the deals we have already done, those areas that are prepared to take on mayoral responsibilities and have greater accountability will be given the powers to change and raise the rates suited to their own local desires and competitiveness.

[Baroness Farrington of Ribbleton (Lab)]

My Lords, I want to speak about the Minister’s apparent optimism about the northern powerhouse and regions in the light of the fact, following the previous speaker, that there is a disparity of funding for young people taking A-levels in sixth form colleges, schools and FE colleges. All the predictions are that many FE colleges will close. As for the north of England, I speak with detailed knowledge of Lancashire, where we have a fine tradition of tertiary colleges. For the Chancellor to be offering the chance for new school sixth forms or academies is pathetic, given the needs. If the Chancellor is serious about, for example, the construction industry, or the Government are serious about the care sector, how do they put that alongside the fact that closing FE colleges will restrict the number of people who are qualified to work in those fields and many others? I am afraid that too many members of this Government went from school to sixth form to university. The Leader of the House is saying that this is not the case, but far too much of their modelling is based on that sort of history, and they do not know enough about further education.

[Lord O'Neill of Gatley]

My Lords, I would love to give a very long answer to this question, not least because I had the pleasure of graduating through the comprehensive system, and of course I am very passionate about the northern powerhouse. I will say one or two very quick things. First, the BBC published an interesting poll last week of the views of people in the north about the northern powerhouse. The BBC, predictably, did not highlight what was possibly the most interesting part of the response, which was that nearly 70% of young people in the north believe that the Government could make a difference to their futures. That was very gratifying to see.

The second thing is about the new national funding formula. My strong suspicion is that this will benefit particularly the most disadvantaged parts of the country, including the north, relative to what would have been there before—although, as I said a few minutes ago, the details of that are yet to be provided even to me, never mind to everybody else.

[Lord Woolmer of Leeds (Lab)]

My Lords, before the last election, in the northern powerhouse we were told that the trans-Pennine rail electrification scheme was going to go ahead. Almost immediately after the election, that was abandoned and put on hold. Today in the Commons, the Chancellor said that the trans-Pennine electrification may go ahead. In the detailed document published in support of the spending review and Statement, on page 64, there is no indication at all of any project start or completion other than that of Manchester to Liverpool. The noble Lord will know that that does not take you over the Pennines. Can he tell the House whether the trans-Pennine electrification is going to proceed, when it will start and when it will be completed? Lots of dates are set out for other projects.

[Lord O'Neill of Gatley]

My Lords, I expressed my irritation about the unfortunate pausing of the trans-Pennine project, whenever it was. I am equally pleased that it was unpaused some weeks ago. It is inappropriate for the Chancellor or me to give a specific time when the trans-Pennine link will be completed.

Let me finish with a point I touched on earlier. One of the many highlights of today’s announcements was the further significant commitment to transport for the north. What I would call phase 2 of the northern powerhouse project, beyond giving devolution to areas that want more responsibility, is building a state-of-the-art transport infrastructure between different parts of the northern powerhouse. Today, there has been a substantial announcement to take that further along this very exciting journey.

Finance Bill

Lord O'Neill of Gatley Excerpts

Tuesday 10th November 2015 Lords Chamber

Moved by

[Lord O’Neill of Gatley]

That the Bill be now read a second time.

[The Commercial Secretary to the Treasury (Lord O’Neill of Gatley) (Con)]

My Lords, since 2010 the Government have laid the foundations for a stronger economy. We can now see that the recovery is well established. The UK had the fastest-growing economy in the G7 countries in 2014, and is reasonably well positioned for the same in 2015.The fiscal deficit has been halved as a share of GDP and national debt, as a share of GDP, is forecast to fall in 2015-16.

Working people are, generally, also feeling the benefits. Employment has increased and continues to increase reasonably rapidly, with full-time employment at record highs, as I heard my noble friend mention in the previous debate. Unemployment is lower and continues to fall. In addition to more people being in work than ever before, very importantly and encouragingly, wages continue to rise—a relatively new trend in the past 12 to 18 months or so. Therefore, it seems reasonably clear that the long-term economic plan is having some success. However, of course, the job is not done. The Finance Bill before us today is the first of this Parliament and it demonstrates this Government’s commitment to continue the work of the last five years. It implements key measures to eliminate the fiscal deficit in a way that is fair to taxpayers and supports the growth of business.

As the Chancellor set out in the summer Budget 2015, the Government want to ensure that people are able to keep more of the money that they have worked hard to earn. The Bill includes three manifesto pledges to achieve that aim. First, the Government committed to legislate within 100 days for the five-year tax lock, ruling out increases to income tax rates, VAT and national insurance contributions for the duration of this Parliament. Clauses 1 and 2 of the Finance Bill deliver the first two aspects of this commitment. The third aspect of the tax lock was debated in this House earlier today.

Secondly, the Government committed to ensuring that individuals working 30 hours a week on the national minimum wage do not pay income tax. The Government have a proud record of reducing tax bills for the lowest paid. In total, 3.8 million individuals have been removed from income tax altogether since 2010. Clause 5 continues this record by increasing the personal allowance from £10,600 in 2015-16 to £11,000 in 2016-17 and £11,200 in 2017-18. Compared to today, 570,000 individuals will be taken out of income tax altogether by 2016-17.

As I just said, the Government have made a commitment to ensure that individuals working 30 hours a week on the national minimum wage do not pay income tax. Clauses 3 and 4 will extend this commitment beyond this Parliament. Once the personal allowance has reached £12,500, it will automatically increase to stay in line with this threshold. This will be the first time in history that the personal allowance is not indexed to price inflation.

Finally, as I am sure many—if not most, or even all —noble Lords will agree, it is a natural desire to pass on a home to your children and grandchildren. Clause 9 will introduce a new inheritance tax main residence nil-rate band, so that around 93% of estates will be able to pass on all their assets without paying any inheritance tax. However, to ensure that the wealthiest continue to contribute their fair share to the public finances, the largest estates will not be able to benefit from the new nil-rate band.

These are three important manifesto commitments delivered to ensure that hard-working British people keep more of the money they earn. Of course, these commitments must be delivered in a way that is fair and sustainable. In 2013-14, the Government spent more than £34 billion on income tax relief for pensions, making it one of the most expensive reliefs. Two-thirds of this relief currently goes to higher and additional-rate payers. The Finance Bill will restrict pension tax relief for the highest earners, putting it on a more sustainable footing.

I turn briefly to productivity, a topic that I have discussed quite broadly in this place before, and will no doubt discuss again. It is well known that improving the productivity of the UK remains a historic and significant economic challenge, which this Government are eager to do something about. The summer Budget set out a number of measures to meet this challenge, including, for example, investment in infrastructure and the creation of 3 million new apprenticeships funded by a new levy on employers.

The Finance Bill implements further measures to address parts of the productivity issue. It includes several measures to back business. Clause 7 cuts the rate of corporation tax to 19% in 2017 and 18% in 2020. This will benefit more than a million businesses, saving them a total of £6.6 billion by 2021 and giving the UK the lowest rate of corporation tax in the G20. Clause 8 increases the permanent level of the annual investment allowance to £200,000 from 2016, to provide stable and long-term incentives for small and medium-sized businesses to invest in plant and machinery.

Improving productivity, however, also means prioritising central investment in infrastructure. That is why Clause 46 reforms vehicle excise duty, to support the creation of a new roads fund. From 2020, all revenue raised from vehicle excise duty in England will be invested directly back into the strategic road network. These reforms are also being implemented in a fair and sustainable way that strengthens incentives for the cleanest cars. Nobody will pay more than they do today for the cars they already own. For cars in the new system, the vast majority of motorists will pay less than the average they pay today. Zero-emission cars will continue to pay nothing, whereas cars worth more than £40,000 will pay a supplementary charge. As I said, productivity is a challenge but it is a challenge that the Finance Bill, as well as other measures beyond it, is designed to meet.

As I set out at the beginning of this speech, the Government have made significant progress in bringing down the fiscal deficit but the hard work is not yet complete. As set out in the summer Budget, around £37 billion of fiscal consolidation is required over the next five years, and £5 billion of this will be raised by measures announced at the summer Budget to tackle tax avoidance, evasion, non-compliance and imbalances in the tax system, many of which are being legislated for in this Bill.

As evidenced in the last Parliament, this Government are tough on corporate tax avoidance. The Finance Bill continues this trend. First, Clause 44 stops investment fund managers exploiting loopholes in the tax system to avoid paying the correct amount of capital gains tax on the profits of the fund payable to them. Secondly, Clause 37 stops multinationals off-setting losses against controlled foreign companies tax to ensure that they pay tax on profits diverted from the UK. Finally, Clauses 40 and 42 stop corporate groups reducing their taxable profit by transferring stock or intangible assets around the group.

Fixing the public finances also means ensuring that everyone pays their fair share of tax. Clause 51 introduces a new means for HMRC to recover tax and tax credits debt directly from the bank accounts of debtors. This levels the playing field between hard-working, honest taxpayers and those who persistently refuse to pay their debts, almost half of whom have more than £20,000 readily available in cash.

The Bill also ensures that landlords with the largest incomes are no longer unfairly helped by the tax system. Landlords are able to off-set their finance costs from property income when calculating their taxable income. At present, the relief they receive is at their marginal rate of tax. This means that landlords with the largest incomes receive either 40% or 45% relief, whereas landlords with lower incomes benefit only at the basic rate of income tax—20%. Clause 24 ensures that all individual residential landlords will get the same rate of tax relief on their property finance costs.

The Government believe that it is only fair for the contribution made by banks to reflect the risk they pose to the economy. However, the UK must also remain competitive as a major dominant global financial centre. The Finance Bill introduces a balanced approach to bank taxation by introducing a new supplementary tax of 8% on banking centre profit in Clause 17, while gradually reducing the full bank levy rate over the course of this Parliament in Clause 16. This will increase banks’ tax contribution by around £2 billion over the next six years, while at the same time providing a more sustainable long-term basis of taxation.

The Government are committed to supporting low-carbon energy, while at the same time ensuring value for money. The climate change levy exemption provided indirect support only to renewable generators, and the value UK renewable generators receive from the exemption was expected to be negligible by the early 2020s. That is why Clause 49 removes this exemption. Any loss that UK renewable generators face will be small compared with the other financial support they receive from the Government, which will total around £5.1 billion in 2015-16 alone. Taken together, this Bill is tough on tax avoidance by wealthy individuals and businesses and resolute in ensuring that the tax system is balanced and fair.

In conclusion, the Finance Bill before us demonstrates the clear direction set out by the Government at the start of the Parliament. It prioritises economic security for working people, businesses and the public finances. I commend the Bill to the House.

--- Later in debate ---

[Lord O'Neill of Gatley]

My Lords, yet again we have had an extremely interesting debate, and I thank all noble Lords for their excellent contributions. As has become my wont in previous debates, especially when not too many noble Lords have spoken, I will attempt to respond to most of what my modest brain could understand about what everybody said. I apologise in advance if I forget some of you, or if I misunderstood some parts.

Let me start with two overall points, especially concerning the comments of the noble Lord, Lord Davies, about the economy in general, because they link to a number of things that noble Lords touched on. Also—I will come back to this issue when I respond to the comments about welfare—it is very important when we debate government policy that we do not forget that it is presented in this Bill in the context of the mandate the Government sought and, importantly, secured in the election that they won with a majority. In the election campaign, the Government made it pretty clear that they were committed to deficit reduction, debt reduction, as low tax as possible and a low welfare spending environment. By and large, that is the framework that has shaped this Budget.

On the economy, I will address the three points that the noble Lord, Lord Davies, touched on in his interesting closing comments. First, I said in my opening comments that we have had considerable discussions about productivity and, given its importance, I am sure we will have many more in this place in the future. I welcome many of the insightful comments that a number of noble Lords made about aspects of productivity. I hope we can learn as we go along, because this is a complex and huge challenge.

As I have pointed out, it is not only the UK economy that has experienced challenges in the past few years. If we can believe the reported data, even some of the supposedly highly productive economies seem to have struggled recently. In addition to the caveat that we will soon get early indications from the independent review which the Government authorised Charlie Bean to undertake—I hope it will include some indications of how productivity is measured—in the most recent quarter, we have some evidence that productivity has started to improve. It is far too dangerous to presume that that is the beginning of a sizeable and permanent improvement, but the latest data show the best improvement since 2011.

On an important and closely related aspect—in my experience, the two go hand in hand—over the past two quarters there have been more encouraging signs about the performance of investment spending. According to our GDP accounts, at least, investment spending has become a more important, positive contributor to GDP. However, I quickly add that, according to some recent business surveys, there has been some softening in the confidence of apparent business investment intentions, which is probably related to global events.

On the balance of payments issue, as I have touched on in previous debates but would like to re-emphasise, it is quite intriguing that our trade deficit, which is usually the subject of most people’s focus on our seemingly never-ending poor performance, has not deteriorated. In fact, it has actually shown some signs of improvement, especially in recent months. But in the main identifiable parts of the accounts, it is the so-called invisibles surplus that has deteriorated. That could be due to something substantial, but it could be something to do with valuation and accounting treatment that is not necessarily going to be permanent, and there may be some questions about the validity of some of the statistics. At the risk of my sounding like a bit of a nerd, the newly appointed governor of the Central Bank of Ireland is a known expert on international balance of payments issues, and it was very interesting to read his suggestion that some of the apparent deterioration in our invisibles account may relate to the behaviour and book-keeping of international companies, which is among the reasons why it is very important that we embolden HMRC to do the work it is tasked with doing. I will come back to this in a few minutes.

I turn now to the individual, very useful comments that noble Lords made. First, the noble Lord, Lord Lennie, spent some time talking about the environment for our tax policy with reference to the fragile economy. In addition to what I have just said, it is quite interesting that the very latest high-frequency indicators, specifically the purchasing managers’ indices for the most recent finishing month, showed in both the manufacturing and services sectors a notable—and to some degree, even for someone like me, surprisingly strong—acceleration. I am not so sure, other than being cognisant of the never-ending uncertainties that go hand in hand with life and the state of the world, quite where the fragilities that he referred to are. I would add in that regard that the tax policy path and the spending path this Government have chosen to pursue do not appear to be slowing the economic recovery, although of course the evidence varies from month to month, depending on the individual economic data.

On the second general point raised by the noble Lord, Lord Lennie, the so-called tampon tax—I apologise for reading the brief; I do not like to do that in my closing comments, as I am sure noble Lords appreciate—the UK does apply a 5% VAT rate to sanitary products, which is the lowest rate currently allowable under EU rules. During the debate in the other House on this issue on 26 October, my fellow Treasury Minister David Gauke said that he would raise the issue with the European Commission and other member states, setting out the Government’s view. I can advise the House that David has now written to the Commission and other member states setting out our strong position that member states should have full discretion over what rate of VAT they can apply to those products.

Turning to the considerable number of lengthy but, as always, very interesting comments made by the noble Baroness, Lady Kramer, again, I apologise that I will not be able to go through them all in the remaining time, but I want to touch on a number of points that relate to both the big picture and the specifics. On the overall nature of fiscal policy, the spending cuts and the figures to which she referred, let me repeat—even though everyone in this place, the other place and the country are aware of this—that one of the reasons why certain areas are being cut to the levels proposed is that the Government, in addition to emphasising their commitment to the lowest tax possible and to deficit and debt reduction, have consciously and deliberately, as part of the election campaign and since, promised to protect key areas which, in my own judgment, are vital to the long-term performance of our country. These are health, education, foreign aid and investment spending and, of course, spending linked to security challenges—following the latest Budget— and defence. It follows by definition that, if you are protecting those areas and are committed, as we are, to deficit and debt reduction, the other unprotected areas have to take the lion’s share of the work.

It is in that context that the interesting comments made by the noble Baroness, Lady Kramer, about welfare payments, and those of many others, should be considered. I am sure—following the rather emotive and intriguing debates we have had about that topic in this House, and what noble Lords have heard from the Chancellor, when he said that he would listen and set out in the Autumn Statement what he would do to address the concerns raised about the transition from a high-welfare, low-wage economy to a lower-welfare, higher-wage economy—that we will have some of these debates again in the future.

However, I will highlight, of the many statistics that are often quoted in debates in the other place and in here, one that I think that we cannot forget. We are about 4% of global GDP and about 1% of the world’s population. It is the case that today, we are spending about 7% of the world’s welfare payments. If we do not believe that we can do something about that, it is a pretty worrying state of affairs, particularly when our economy has improved as much as it has done; and, let me emphasise—in contrast to the tone that was adopted by a number of comments—when we have record levels of full-time employment that are showing continued signs of improving further. If we cannot tackle some of the welfare payment challenges during an economic environment like that, then it is a pretty concerning sign, even though the complexity of our welfare payment system in itself makes it pretty challenging to ensure that none of the policies being pursued has some unforeseen consequences that we did not wish to introduce.

The noble Baroness, Lady Kramer, and others made quite a few comments about skills. I cannot spend too much time on that other than to reiterate, as I said during both the last productivity debate and a previous one, that in my own personal judgment the challenge of skills, within all the factors relevant to the future performance of productivity, will perhaps be the highest one that we face.

It was very interesting and slightly distressing to hear the comments of the noble Lord, Lord Davies, towards the end of his speech, when he suggested that in my previous reference to this I gave the impression that the only thing that mattered was higher education. Let me emphasise right here that that is far from the case, which is why, in the productivity plan, and linked to it, we are very proud of the fact that we have introduced the apprenticeship levy to put more responsibility on the corporate sector, as is the case in some of our fellow developed economies, Germany being a particularly model example in this area. We are also proud that the corporate sector itself essentially picks up a lot bigger share of the indirect, and perhaps even direct, cost of education spending, certainly as it relates to skills. In highlighting further education in the productivity plan, we focused on improving the quality of the further educational attainments of our young adults rather than just their number—both of course are important. I cannot emphasise enough—on my own behalf and, I believe, that of the Government—that there is great awareness of the importance of this challenge and the importance of not just focusing on it in higher education.

The noble Baroness, Lady Kramer, and other noble Lords touched on the Government’s so-called lack of commitment to green policy. The Government remain committed to trying to improve the carbon performance of our economy but they are also trying to be even more focused on the value for money that goes along with a number of these individual policies from the past, especially in the circumstances of our desire to commit to a lower deficit and lower debt.

The noble Baroness, Lady Kramer, and a number of other noble Lords also touched on corporation tax, asking why we are continuing to lower it and, in some cases, why we were favouring large corporations relative to SMEs. I could spend a lot of time on this topic but will just highlight that in the past few weeks, the UK has been recognised positively by independent and globally recognised experts on such measures. I will name just two. In the World Bank’s review of the cost and ease of doing business, we have just overtaken the United States and are now ahead of them on that. Our stance on transparency and tax policy was also mentioned in that review, as it was by the Legatum Institute, which said that the UK’s leadership in Europe is accelerating relative to our European neighbours.

My noble friend Lord Cavendish made some very interesting comments about infrastructure. We are having discussions with many parts of the country about devolution and giving regions more responsibility for some big issues for their future. He touched on a couple of them, and may be aware that Barrow, in Cumbria, is one of the many we are having discussions with. I hope that at some stage those discussions will result in a fruitful outcome for Barrow.

More broadly, I emphasise to the House that I spend considerable time on the fascinating challenge of infrastructure. Whether it be project bonds or any other form of bonds, I am trying to challenge my own mind and my own past of many decades in finance, and the finance industry. At a time when we have such remarkably low bond yields all over the world, rising equity valuations and considerable amounts of cash, along with a massive infrastructure challenge here and elsewhere in the world, somebody in the future weeks, months or years will help us come up with a smart way of doing this that is not just some artificial way of putting it back on the Government’s balance sheets. Many of the suggestions that have been put to me typically end up doing that.

In that regard, I also highlight the very successful role played by the UK government guarantee scheme, which so far is showing signs of helping us boost the scale of our national infrastructure ambition. I cannot finish on that topic without highlighting the fact that since I last spoke in this House, we have announced an independent National Infrastructure Commission, which will pressurise this Government and future Governments over how we rise to these very complex and ambitious infrastructure challenges with our beautiful and complex democracy. Part of the purpose and why I believe that that is such an important thing for us to do is to put us under more pressure to meet those challenges.

I realise that I have taken up 20 minutes of your Lordships’ valuable time, and I now apologise to several noble Lords that I have not had the chance to speak to their individual comments. At the risk of going beyond 20 minutes, I would like to touch quickly on the issue of HMRC, which several noble Lords mentioned.

To meet our fiscal and debt reduction commitments, the Government are committed to trying to tackle tax avoidance. Although it will remain a challenge, given the ambitions that we have set, we are committing the right resources to enable HMRC to ask the right questions and pursue those who are not meeting their obligations. Perhaps I may write to the noble Lords, Lord Flight and Lord Howard, but I can say with some confidence on their specific question that we think there is plenty of protection for people’s individual rights.

I draw to a close. I thank all noble Lords again for their valuable comments, and commend the Bill to the House.

Bill read a second time. Committee negatived. Standing Order 46 having been dispensed with, the Bill was read a third time and passed.

Budget: Household Impact

Lord O'Neill of Gatley Excerpts

Wednesday 16th September 2015 Lords Chamber

[Lord Wood of Anfield]

To ask Her Majesty’s Government whether they intend to publish a distributional analysis of the impact of the Budget on households with different levels of income.

[The Commercial Secretary to the Treasury (Lord O'Neill of Gatley) (Con)]

My Lords, distributional analysis of the impacts of government policy across household income distribution was published by HM Treasury alongside the summer Budget. The analysis presents the cumulative impacts of policy decisions since the June 2010 Budget, up to and including the 2015 summer Budget. It shows that the proportion of public spending received by households in each income quintile remained similar between 2010-11 and 2017-18.

[Lord Wood of Anfield (Lab)]

I thank the Minister for that Answer. The Institute for Fiscal Studies estimates that the Budget has made 8.4 million working families worse off, many considerably so, through tax credit changes. However, the Chancellor has unilaterally decided not to tell the British public from now on what the distributional impact of the Budget measures will be. It is ludicrous to argue, as he does, that having a deficit justifies not publishing information about the regressive effects of the Budget. Does the Minister agree with the Resolution Foundation, which said:

“Deciding to ditch Budget distributional analysis is a retrograde move for which there is no plausible good explanation”?

Will he urge the Chancellor to rethink this attempt to hide information from the public?

[Lord O’Neill of Gatley]

My Lords, contrary to that question, as a result of some discussions involving the Chancellor, the specific distributional analysis that was requested was posted on the government website on 21 July. There followed a number of conversations outlining the Treasury’s belief that the new analysis was intellectually superior to those in the preceding Parliaments. I should add, however, that the requested distributional analysis has indeed been published, despite the apparent lack of awareness of it displayed in the previous question.

[Baroness Kramer (LD)]

My Lords, it is certainly a disgrace that the distributional analysis was not published with the Budget, a practice followed by the coalition every year so that questions could be asked during Budget-related debates. Can the Minister confirm the analysis of the IFS around the distribution that the only gainers from the tax and benefit changes are the richest eighth and ninth deciles, and that the big losses are all concentrated in the poorest first to seventh deciles, with the very poorest among the biggest losers?

[Lord O’Neill of Gatley]

My Lords, the distributional analysis subsequently published on the government website, as I just outlined, actually shows that if one needed to specifically pick where the impact was felt most severely across the different quintiles of income distribution, it was in the highest 20%.

[Lord Vinson (Con)]

My Lords, when addressing this Question, could the Minister bring to the attention of the House that, according to Treasury figures on 21 July, the debt-servicing costs of our huge borrowings is £1,841 per household? Is it surprising that people feel hard up? That money must come out through tax, VAT and other directions somewhere. Individually per household, that is what is being paid.

[Lord O’Neill of Gatley]

My Lords, I cannot recollect the exact numbers but those suggested by my noble friend sound broadly accurate. It is right to refer to such parameters. Indeed, the approach towards the now preferred way of presenting the distributional analysis is predicated on taking account of the consequences of the amount of public debt and, implicitly with that, the appropriate desire of the Government to reduce that level of debt.

[Lord Grocott (Lab)]

My Lords, I thought the Minister said that the biggest losers were those with the highest incomes. Does he have any information for the House on how they are coping?

[Lord O’Neill of Gatley]

My Lords, I have not had time, given a very busy schedule since returning from Recess, to conduct a personal survey but if the noble Lord would like to join me in such an activity, perhaps we should undertake it together.

[Lord Forsyth of Drumlean (Con)]

My Lords, does my noble friend agree that the policy of subsidising low wages and creating dependency on high welfare payments was instituted by the last Labour Government? Is it not very rich of Labour to criticise this Government for unwinding that by ensuring that people have higher wages and lower taxes, and that their dependency on welfare is reduced?

[Lord O’Neill of Gatley]

My Lords, I thank my noble friend for that important point. As I hoped to suggest at the appropriate moment—it is here—this Government were elected with the clear intention of reducing the burden of taxation and bringing us to a lower-tax and less welfare-dependent society. That is what is being done further in this latest Budget.

[Baroness Manzoor (LD)]

My Lords, does the Minister agree that going on the backs of the poorest and most vulnerable in our society cannot be the way forward, if we want a genuinely equal society that really looks after the very poor and most vulnerable—people with illnesses who cannot go out to work, or people who are on tax credits who already go out to work and are suffering because they do not get the wages due to them?

[Lord O’Neill of Gatley]

My Lords, I do not want to bore Members of the House by repeating things I have already said but the distributional analysis shows that the biggest burden has been on the highest quintiles. Let me highlight another important factor: this morning, we had the latest employment and earning statistics. In addition to the rather pleasant news that unemployment has fallen further, we have reached a new level of record full-time employment and, very encouragingly for all members of our earning and working society, average earnings have accelerated now to a level of 2.9% year on year, making it clear that the benefits for those in work are starting to increase more and more.

[Baroness Smith of Basildon (Lab)]

My Lords, the whole purpose of tax credits was to make work pay, and 8.4 million people have lost income through the Government’s changes. The Minister said that his way of showing the analysis—his publication—is the preferred way. It seems to me that the only people who prefer it are the Government. Does he understand that it would be right to commit to the public being able to see the impact of the individual measures of the Budget, and that it should be published alongside the Budget at the same time?

[Lord O’Neill of Gatley]

My Lords, the much-quoted research of the IFS is to be complimented, as it offers an independent judgment on the Government’s fiscal policies. The Government’s own fiscal measures are presented in great detail in the Budget report and assessed independently in many details by the independent ONS. The distributional analysis that has been requested and tabled here has now been presented in the traditional format that was agreed by the previous coalition.