Economy

Lord O'Neill of Gatley Excerpts

Thursday 10th September 2015 Lords Chamber

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

My Lords, as the noble Baroness, Lady Kramer, suggested, yet again we have had a very interesting debate this afternoon. For myself, it is particularly helpful that it is on many topics very specifically close to my role as a Minister. As was pointed out by a number of noble Lords, it is the second debate on closely related matters that we have had in two days. Whether the greater participation of noble Lords present here today than the one two days ago is a sign of the growing appetite for such discussions or the hour at which the earlier one took place—or some sporting event of that particular evening, or what is about to follow this debate—I shall leave others to ponder.

I was somewhat unsure as to quite what the noble Lord, Lord Haskel, might have had in mind with his very specific reference in the title of the debate to,

“the British economy beyond austerity”.

Like others, I congratulate him on the content that he chose to focus on—on productivity. I heard the noble Lord describing what we are entering into as the age of productivity. Linked to the tone of what I have already said, I cannot resist the temptation to say that we must hope that the amount of discussion now taking place in this Chamber and the attention that we are giving the topic of productivity is itself a leading indicator of what may happen to productivity performance. I do not need to further remind the House that we had a specific discussion about productivity on Tuesday, and I encourage noble Lords, if they have time, to read the documents that are now available in the very likely event that I miss referring to all of those matters in my subsequent comments. I am conscious of the fact that our time is under intense pressure.

From what I have heard from noble Lords, there appears to be general recognition that some degree of deficit reduction and a focus on maintaining a lower level of debt has in the past been generally the right thing to do, even if not everybody signs up to exactly the same path. Coincidentally, I encourage noble Lords also to read, if they have the time, Chris Giles in today’s Financial Times. He has written a very topical piece linked to the comments made by many noble Lords about the ongoing performance of the fiscal accounts in view of policy and the economic recovery. In my judgment, the tone of that piece supports the general view that it has been correct and appropriate for fiscal policy to have been focused on deficit reduction. I was somewhat fearful before I listened to the noble Lord, Lord Haskel, that we would yet again end up having primarily a discussion about the appropriate stance of fiscal policy. While a number of noble Lords made some useful comments on that topic, the debate has been very rich and much broader.

Before I try to address the number of specific points raised and add some comments myself, I would also like to focus on the issue of austerity. Several noble Lords, notably my noble friends Lord Howell and Lord Selsdon, the noble Viscount, Lord Hanworth, the noble Lords, Lord Soley and Lord McFall, and the noble Baronesses, Lady Wall and Lady Kramer—I apologise if I have missed anyone out—tried to focus on the conceptual environment that we are in in the context of austerity. At the risk of sounding too much like I did in much of my previous life as an economist, it is important to remind noble Lords that, while our deficit is now less than half what it was at the peak of around 10% of GDP in 2010, and our debt to GDP ratio appears to be stabilising, it is at a very high level of 80% of GDP. In most standard economic textbooks, usually irrelevant of one’s political bias, it is generally expected and desirable to run fiscal surpluses in times of economic performance beyond what is generally regarded as the trend rate of economic growth. That is not least because it would mean that, for the inevitable moments when life becomes somewhat less favourable and economies turn down, there is an opportunity for fiscal policy to provide the additional help that one would hope would be there for monetary policy and other forms of intervention to try to ensure a recovery.

In that regard, let me highlight for noble Lords the fact that last year the UK economy grew by 3%, and I think I am right in saying that five of the past six consecutive quarters have experienced what would typically be regarded as above trend growth. Most independent estimates congregate around a figure of 2.4% of GDP in terms of our long-term trend, so I would encourage future discussions and debates about many of these topics to think about the stance of fiscal policy and the use of the word “austerity” in that context. That is because, as has been pointed out by a number of noble Lords and in the piece in the Financial Times that I referred to, it is not clear that the stance of fiscal policy either has stopped or is stopping the economy currently from growing above trend, and certainly there appears to be growing evidence, as the economy continues to expand, on whether the past stance, where fiscal policy was very definitively tightened, ultimately stopped the kind of recovery that we are now apparently enjoying.

But linked to the welcome introduction by the noble Lord, Lord Haskel, in my judgment it is important that the discussion should move on and focus on other things which are in themselves part of the productivity issue, as a number of noble Lords have already pointed out in welcome comments, but separately from the productivity issue are important in themselves to our economic future. I shall briefly summarise my thoughts on what are generally four areas: the performance of our external trade; investment; the so-called rebalancing of the economy; and, connecting back to the issue I shall start with, the topic of productivity. Before I do so, I must apologise because the sheer number of questions that were put in my direction means that of course I have no chance of answering them all, especially those that were particularly complicated, but I choose to answer two that I regard as being direct and simple.

The noble Lord, Lord Giddens, put to me a yes or no question on whether RBS is no longer too big to fail. I am going to be an economist and say that I will not give him a yes or no answer. What I will do is repeat what I think the Governor of the Bank of England has said, which is that the bank is now in a position where it can begin its return to the private sector. I think that that is what most observers, particularly those with expertise, have believed throughout the unfortunate years of the past is where it ultimately belongs.

[Lord Giddens]

I thank the Minister. The issue is really whether there is still an implicit public guarantee behind the bank.

[Lord O’Neill of Galley]

In view of the sensitivity surrounding this topic and the fact that there are to be further discussions, I do not intend to pursue it at length. I have given the short answer which I thought I should give. However, we can follow this up in a written format.

My noble friend Lady Wheatcroft put a very pointed question to me about Hinkley Point. I shall say two things. I along with many others am spending a considerable amount of my time on the said topic, and decisions will be made in due course on many important factors, including the issue of value.

In the remaining half of my speaking time, I shall turn to the four areas I have already mentioned which I believe are particularly important to the economy beyond austerity, the first of which is of course the issue of productivity. I do not want to overelaborate or spend too much time going yet again into the details of the productivity plan. I am grateful that a number of noble Lords made reference to it in the debate, albeit that some of those references were not as favourable as I would have hoped. The important point I want to emphasise is that, as I mentioned in the debate on Tuesday, a senior Treasury official has been appointed to lead a cross-departmental group holding regular meetings to ensure that what is announced in our implementation plan is being implemented. That senior official will report back to me, thus allowing me to get directly involved as and when the need arises. I should add that I have encouraged this official, as part of her reporting back, to keep challenging me and the Government on any areas which officials believe, from their objective point of view, are being neglected or not being given sufficient attention. They should not feel shy about suggesting that we might perhaps want to reconsider them. I will not reveal the name of the person to avoid them being bombarded with the wisdom of noble Lords.

The second area on which a number of noble Lords commented briefly is international trade, which is of course highly important to our economic future. It is in itself part of the productivity story, but it is of sufficient importance that we need to focus on it in and of itself. It is right to recognise that the previous Government had already put a renewed focus on exports. The further support and encouragement given to UKTI has resulted in a more than doubling of the number of businesses receiving direct help on an annual basis since 2010. However, how we perform as an exporting nation is only partially determined by what we can do ourselves. It is a reality that the biggest driver of a nation’s exports is the level of domestic demand in its export markets. Over recent weeks, our friends in the media have only too willingly highlighted with their seemingly never-ending gloom that there are considerable challenges on an ongoing basis in many parts of the world, and there is not a great deal that we can do to control those developments. However, what we can do is work harder in the specific areas we have highlighted and spend more time trying to ensure that our trade performance improves in those places where domestic demand is likely—none of us ever knows—to perform most strongly.

I apologise that I cannot recall the noble Lord who specifically mentioned it, but China was briefly touched on. I am sure that many Members of the House are aware that, the week after next, the Chancellor will be leading a group of senior businesspeople and a number of Ministers, myself included, on an economic and financial dialogue visit to China. Given my own past and my now ministerial hat, I think that it is a particularly important trip. I should like also to point out in the context of the current excitable discussions about what is going on in China that, even in the event of the Chinese economy slowing to growth of 5% a year instead of the remarkable levels it has enjoyed for the past 30-plus years—and which, I should add, was much less than is currently believed by the consensus—that growth would equate, before the end of this decade, to the equivalent of another United Kingdom economy being created. It is a hugely important opportunity for us.

I am sure that a number of noble Lords are excited about and looking forward to the visit from the leadership of India later this year. Right at this moment, the country’s economy appears to be one of the few in the world that might be growing more quickly than that of China. These are the places in which, using my ministerial position, I am encouraging many different parts of government to make sustained efforts to boost our trade performance.

Closely related to that, a third area of great importance is, of course, investment, and, in particular, related to the international trade picture, international investment into the UK. As has been noted by a number of noble Lords, the fact that we have significant investment coming into this country, despite our shared views of the considerable challenges from many parts of the world, should not be ignored. I find it quite intriguing analytically—I noted it in the context of the interesting comments of the noble Viscount, Lord Hanworth, on the level of the pound—that, if things are as bad as many of us focus on, why the pound seems to do so well relative to a number of other currencies. That is perhaps a discussion for another day. It is certainly a consequence of a considerable number of investors around the world wanting to invest in the UK, including investing in our infrastructure and benefiting from what they perceive to be reasonably stable and attractive economic policies, including our taxation policies. As can be seen in the Budget, and as I have discussed, there remains, and will continue to remain, considerable focus on ensuring that that environment remains friendly.

The fourth and final area that is crucial, in the spirit of the excitement that the noble Baroness, Lady Kramer, talked about and which reflects my own focus, is the rebalancing of the economy. I say this towards the end of a week when we have received—we will hear a lot more about this, I am sure, in the coming days and weeks—a considerable number of bids from different parts of the United Kingdom, not just England, for devolution deals so that local areas can have a greater say and control over their own economic affairs, including specific asks that, one would imagine, may do something to boost their productivity and that of the nation. I have spent a considerable amount of time in the past few weeks travelling around the country, particularly to the northern powerhouse area, ahead of these bids. The number of anecdotes I have heard are highly encouraging that there may be some signs, probably not yet evident in our data, that our economic performance is becoming more diverse.

I repeat something that I said on Tuesday night: in the context of the ongoing debate about the appropriate stance on fiscal policy and public spending, it was frequently suggested a number of years ago that some regions of the UK would be especially vulnerable because of their dependence on government spending and would therefore suffer particularly as a result of the fiscal policy. My travels around the country, particularly the north-east, have shown me—this is quite interesting and very encouraging—that the growth in private sector job creation has more than compensated for any loss of public sector jobs. It is one of the regions that has seen the biggest rise in employment relative to its base in the past few years, and long may this continue. It will remain an area of intense focus with regard to government policy.

In conclusion, we have had an excellent debate; in some ways it is a shame that it could not go on for longer. I congratulate the noble Lord, Lord Haskel, on securing the debate. We all want to see the country reaping the rewards of a strong economy, and we are all committed to having in place the right policies to achieve that. Fiscal responsibility will, however, need to continue. As has been recognised, rather than simply focusing on fiscal policy, it is appropriate for more attention to focus on trying to do the right thing in order to improve our productivity performance, which will enable all our citizens to enjoy greater wealth.

United Kingdom: Productivity

Lord O'Neill of Gatley Excerpts

Tuesday 8th September 2015 Lords Chamber

Moved by

[Lord O’Neill of Gatley]

To move that this House takes note of Her Majesty’s Government’s plans to boost productivity in the United Kingdom.

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

My Lords, as ever, it is a pleasure to discuss a subject that is so vital to this country’s economic well-being: how we can step up our productivity an additional gear. I cannot resist the temptation also to point out that this debate will be coinciding with the time when, we hope, the one and only Wayne Rooney will break the goal-scoring record for the English national football team. I applaud my noble friends and fellow noble Lords for giving up the time to watch that fun to be with me here.

The extent of the productivity challenge is very well known and something that we have discussed recently. The OBR estimated in 2014 that a high productivity scenario would see public sector debt fall in net terms to 56.7% by the end of this decade, while in an alternative poor productivity scenario, national debt would continue to rise to a level not far shy of 90%. As we all know, the statistics show that the level of our relative productivity is considerably lower than that of many of our G7 competitors. These statistics are well known and have been discussed here often, and I do not wish to go over old ground. However, as I set out in my maiden speech, there are, have been and remain many valid questions about the accuracy of our productivity statistics. Despite that, the fact remains that the UK can do a lot better. Indeed, if we are serious about long-term economic growth, we have to do a lot better. That is no small challenge, but it is a challenge to which we are rising.

At the last Budget, we published a productivity plan setting out precisely how we will improve national productivity. The first way we will do this is by encouraging long-term investment in our economic capital, including infrastructure, skills and knowledge. That means putting in place an even more competitive tax system and sending out a clear message that Britain is open for business. But a nation truly flourishes when it uses the full skills of all its people in all parts of that nation. As I have said previously in this Chamber—notably, just before the Summer Recess—of all the factors that will contribute to delivering a step change in our productivity, perhaps education and skills are the most important.

The previous Government made huge progress in getting people back into work. We now need to think holistically about all the basic, further and higher education that individuals need to contribute more productively in the workforce. We are increasing the number of apprenticeships to 3 million starts this Parliament and, crucially—I repeat, crucially—we are also improving the quality of apprenticeships by putting employers at the heart of paying for and choosing apprenticeship training.

Professional and technical education should provide a clear route to employment and deliver the higher-level skills that employers need. To achieve this, the Government will simplify and streamline the number of qualifications, and create a network of prestigious institutes of technology. This country is home to many of the best universities in the world. We need to make sure that our universities continue to lead the world with high-quality science and innovation, and by sharpening incentives for providing outstanding teaching to university students.

Changes need to be made in the workplace, too, and the Government have been engaging all parts of industry to make sure their voices are heard. I particularly welcome the work of Sir Brendan Barber and ACAS in finding a human solution to the productivity puzzle and, in particular, to how best management practice can provide levers for boosting productivity in the workplace. I have enjoyed some conversations with Sir Brendan and his colleagues and look forward to learning more from them about these important issues.

To ensure that the UK has the right skills base to deliver and maintain world-class infrastructure, a national infrastructure plan for skills will be published shortly. We remain committed to delivering the high-quality infrastructure we need to build and sustain a more productive economy, whether that is our transport system or our digital infrastructure. We have a clear, comprehensive and cross-sector plan for delivering this—the national infrastructure plan—a new version of which is being worked up as I speak. This will build on the progress that has been made in maintaining continuity and stability. It will remain in place until the end of the Parliament, and be supplemented by annual delivery updates. It will continue to be underpinned by an infrastructure pipeline of more than £400 billion of planned public and private investment.

I have set out our plan to encourage long-term investment in economic—and, crucially, human—capital. We also have to promote a dynamic economy, one that encourages innovation and helps resources flow to their most productive use. The productivity plan also sets out how we will liberalise the housing market by reforming our planning system and making more land available for housebuilding. We also need financial services to work better to invest for growth and we have set out plans to promote competition in banking, to free up markets from unnecessary regulation and to open ourselves up even more to international investment. A dynamic workforce is key. The reforms set out in the Budget are important steps towards a higher-pay, lower-welfare society, in which more people can work and progress up the career ladder.

Perhaps the final piece of the picture is making sure that the economy prospers across the UK. I have talked here previously at some length about the importance of strong, interconnected cities beyond the capital. That is one of the major features of highly productive countries elsewhere in the world. The concept of the northern powerhouse—greater investment mixed with wide-ranging devolution—sets out a blueprint for stronger regional growth in the UK. However, devolving powers alone is not sufficient. It is about transferring powers and responsibility to those who know best what will work for them. This will likely be the most effective way to identify and deliver the measures needed to boost the supply side across the country’s regions.

I have been highly encouraged by the dynamism of many city regions and by the local leaders I have met while travelling up and down the country as they bid for greater devolution and greater responsibility. I have been particularly pleased during many such visits in recent weeks. I am sure noble Lords will hear quite a bit more about this topic in the coming days and weeks. The northern powerhouse is a key part of our plans to rebalance the UK economy, but we want to see every part of the country, not just the north, reach its full potential. As the Chancellor’s launch of a rural productivity plan makes clear, productive growth is by no means limited to urban areas. This 10-point plan will boost mobile and digital connectivity in rural areas, support a skilled workforce and create strong conditions for rural business growth.

As has been noted previously in this House, writing a productivity plan is the easy part. Now we have to put it into practice. There is some sign already that headway is being made. On city devolution, and more broadly on devolving powers, the deadline for entering proposals has now passed and we will consider submissions from a number of places, especially those that have strong, credible proposals. Areas are increasingly signing up to the concept that having a devolution deal means that they need to move towards a city region mayor as a single point of accountability to represent the greater responsibility involved in these devolved powers.

BIS has launched a consultation that will pave the way to introducing the levy on large businesses to help fund apprenticeships. The Prime Minister has created a series of implementation task forces, including on housing and exports, to deliver our productivity plan commitments. Government departments will have to report on the key commitments that will be included in their single departmental plan. At the official level, a Treasury director-general has been appointed, who will report directly to me, to oversee the implementation of the productivity plan across Whitehall.

We are also engaging industry and Sir Charlie Mayfield, chairman of the John Lewis Partnership—by coincidence, I met him earlier today—will lead a business-led review of what UK firms can do to raise their productivity. The first output from Charlie’s review is likely to be published later this year. Of course, this is just the start; much more remains to be done. I know that this House will be scrupulous in holding the Government to the implementation of this plan.

There has been some better news recently from the reported productivity statistics, showing some signs that productivity has started to improve. In the first quarter of 2015, output per hour grew by 0.3% compared with the previous quarter. In a long-term historical context, that is of course still very modest, but it puts productivity 1.3% higher than in the same quarter of 2014. That happens to be the fastest annual growth rate since the first quarter of 2012.

That said, we have to be careful in believing that these statistics are necessarily persistent or truly accurate, because, as I and many others have commented tonight and previously, the question of whether these data accurately measure productivity in the true complex, modern, service-based economy remains valid. In this regard, it is worth noting that a number of commentators suggested during the Summer Recess that our productivity data, as well as those of some other nations, perhaps underestimate the actual performance due to growing technological advances and possible overestimation of the so-called price deflators. As many noble Lords know, but to remind them, to examine this in more detail we have established an independent review of economic statistics, launched as part of the Government’s productivity plan.

More recently, other economic indicators have been generally promising, although in some cases there is evidence of modest slackening. Among them all, what is particularly encouraging for the productivity story are signs of accelerating business investment. Business investment increased by 2.9% in the second quarter of this year, up from—the then also quite encouraging, by previous recent trends—2% rise in the first quarter.

In conclusion for now, before I hear the undoubtedly stimulating thoughts of many noble Lords, it would be wrong to assume that productivity can be transformed overnight. Many advanced economies, ourselves included, have historically picked what might be called the low-hanging fruit. Many of the decisions to make a step change need further boldness, political courage and close monitoring to ensure the policies announced are actually implemented. For the biggest long-term gains to occur, we will need to mobilise more consensus and draw from expertise across the political spectrum. The contributions that noble Lords can make to this debate will be particularly welcome.

Stepping up our productivity a gear will be one of the major tasks over the coming years and remains one of the priorities of the Government. Through the publication of the plan, we have made a strong start; the challenge now is to deliver on it. That is what the Government are planning to do. I look forward to our debate and I beg to move.

--- Later in debate ---

[Lord O’Neill of Gatley]

My Lords, as always, even in my relatively short time in this place, we have yet again had an incredibly high standard of debate. I am grateful to noble Lords for a considerable number of thoughtful remarks.

I began my opening remarks with a reference to the football match taking place at Wembley. I happened to notice that there is exactly the same number of speakers in this debate as there are who generally participate in one team in a football match—that is, 11. Whatever the outcome of that game and irrespective of whether Mr Rooney has achieved his lifetime ambition of becoming the highest scorer, I suspect that the collective contribution of the 11 noble Lords participating in this debate will be greater.

[Baroness Noakes]

My noble friend the Minister might like to be aware that England were leading 2-0, and that Mr Wayne Rooney has indeed achieved his lifetime goal.

[Lord O’Neill of Gatley]

I am very grateful to my noble friend for enhancing the quality of our proceedings, making it even better than it was previously.

Before I focus on a number, if not all, of the comments that were made, it is important to comment specifically on the environment and the circumstances in which we are trying to meet this challenge. A number of noble Lords recommended higher levels of spending, notably on education but also in other areas. However, it is important to put this in the context that, despite the rather successful stance on economic policy adopted by the previous Government, the level of net debt as a share of GDP in the UK last year reached its highest level since 1967 of more than 80% of GDP. A central focus of any rational Government, based on plenty of evidence from the recent and more distant past, should be to try to reduce our level of debt significantly below that level. By definition, that will constrain aspects of how the Government prioritise their spending. This has influenced some of the things on which we have chosen to focus our spending priorities, as I outlined in the very interesting debate on the Budget that we had just before the Summer Recess.

I will go a little off-script in trying to respond to all the valuable comments that noble Lords have made. I shall do it in the same team order, sticking with the spirit of this evening. First, the noble Lord, Lord Monks, may be surprised to hear me say that I welcome many of the ideas that he mentioned. As we stated in the productivity plan, we are in the process of exploring the whole interplay between long-term incentives to invest and the long-term management behaviour of all participants in the economy, including that of CO leadership. It is one of the reasons why it is particularly helpful, as was pointed out by a number of noble Lords, including my noble friend Lord Leigh, to have Charlie Mayfield and his colleagues leading the separate approach to what business itself can do for productivity. That is very important in the context of what the noble Lord, Lord Monks, said. There are a number of aspects on which I would like to expand. I do not have enough time to concentrate on them now but I am sure they will come up in future discussions.

On executive pay, it is of course the case that more policies have been introduced to give the boards of publicly quoted companies direct influence on executive pay. Even more importantly in terms of the broad productivity argument, the data show that levels of executive pay in the United States are, and have been for a long time, considerably higher than ours and yet its level of productivity is considerably higher. While there are aspects of long-term incentives that deserve considerable investigation and thought, I am not entirely sure that that much of the blame should be laid just on executive pay.

I was somewhat disappointed to hear the disparaging remarks of the noble Lord, Lord Stoneham, about the quality of the productivity plan. I cannot resist mentioning that the typical practice of my previous life concerning a number of empty pages was partly to encourage those who study these things in great detail to use those spaces to make notes to inform their subsequent comments. Moving on to the noble Lord’s more substantive comments, there was a brief reference to the balance of payments, which I will come back to. My noble friend Lord Flight touched on it as well. There are intriguing ongoing aspects of our balance of payments performance that also deserve further detail, which I do not have time to go into, but I will come back to those in a short while.

On the noble Lord’s challenge about the data on superfast broadband, I think I am right in saying, despite his observations on the productivity plan report, that we cited a goal of achieving the capabilities of what appears to be the best in the world: Singapore. In that regard, despite the fact that we have yet to reach the 95% goal, according to the data that I have seen we are significantly ahead of similar developed countries across Europe today. But that is not good enough and we should aim to have the best in the world.

My noble friend Lady Noakes touched on a variety of very interesting topics, including infrastructure projects. It was interesting to hear her particular angle because from many others there was implicit reference to the fact that we are not spending enough on important infrastructure projects, yet she drew attention to one for which a particularly large cost has been discussed. The noble Lord, Lord Davies, also referred to it. It is well known that, in my previous life, I stated a number of views about the relative priority of various train infrastructure projects in the UK. I am pleased to say that despite what appears to be a misunderstanding in the media, we are committed to expanding other forms of train infrastructure, including making further progress in the setting up of Transport for the North, which will be a critical part of the delivery of the northern powerhouse.

Turning to the interesting comments of my noble friend Lord Flight, I found that much of what he suggested or discussed gave an extremely good rationale of the Government’s strategy in this five-year term, and in particular on policies to try to induce stronger, sustainable economic growth, and with it efforts to boost savings. My noble friend made a couple of references to the linkage between savings and investments, and during one of them raised the indirect linkage to the balance of payments. Somewhat intriguingly, as another angle on why the analysis of our economic data’s accuracy that Charlie Bean is undertaking is so vital, it is less well known that in the past couple of years there have been notable improvements in our trade balance, at least in the reported data. The deterioration in the current account is actually coming from the so-called invisibles account. It is probably something to do with the valuation effects relating to the considerable inflows and outflows on the capital accounts, which are an inevitable consequence of our crucial role in global finance.

In so far as some of that savings and investment balance would traditionally be associated more with the trade balance, there are, as I say, reasonably interesting signs of some improvement, at least as reported by the data. However, it is inevitably the case that we need to do more to boost the structural performance of our savings rates because, as my noble friend Lord Flight points out, if you look around the world recently, and especially historically, countries with higher savings rates typically have higher investment performance—and, with that, better productivity performance.

The noble Lord, Lord Desai, gave us some interesting statistics from his active time, by the sounds of it, in using our wonderful Library facilities. He made some particularly interesting comments on the reality of how our workforce is split between those employed to produce what are typically regarded as the more highly productive parts of our output and those who are not. I want to touch on a couple of anecdotes relating to my own observations and to comments that came up from other noble Lords, particularly one from my noble friend Lord Leigh. This is related to my focus on the northern powerhouse. It was widely feared in recent years that, as a result of the fiscal strategy and its reduction in public spending, with the loss of public sector jobs, due to the dependency of some regions of the north on public spending those economic regions would be particularly vulnerable. According to the data as produced, however, among the rather encouraging signs in recent developments is that some of these areas, notably the north-east, are showing considerable improvement in their job creation and overall employment performance. Virtually all this is being led by the private sector, which, if sustained, is a very encouraging development.

The other thing I would suggest, linked to the interesting suggestions of the noble Lord, Lord Desai, is that investing in high-producing areas that relate to future and current technologies is getting considerable attention, particularly given the role which the British Business Bank may play in supporting such developments. That is something I have had a number of conversations about.

Quickly moving on, I think that the noble Lord, Lord Bilimoria, devoted most of his interesting comments to the topic of education. He knows, from my own past, that I have spent a considerable time in that area, including as a non-executive at the Department for Education before I took on this role, as well as in a number of areas of education philanthropy. I will just pick up on a couple of comments that the noble Lord, Lord Bilimoria, made, not least because they relate to comments made by other noble Lords and focus on very important issues.

Although the absolute level of spending of this and previous Governments on higher education may appear low relative to other countries, I go back to my opening comments: at this particular moment in time, we are constrained by the high level of debt in so many other areas where one would naturally think about wanting to spend more. That is a reality that we cannot lose sight of. However, as the noble Lord, Lord Bilimoria, pointed out, it is remarkably encouraging how well our higher education stands in a global context. If we could achieve the same success with primary and secondary education, on those few measures of international comparison that are available, I suspect that we would have a lot more satisfactory views collectively about our productivity challenge.

If you look in detail at the bits we have discussed in the productivity plan—of course it could have been 162 pages if we had put everything in that we wanted to—there is indeed quite a lot of focus on dealing with educational challenges at primary and secondary level. It also relates to the important points that the noble Lord, Lord Davies, touched on before his request for us to focus much more on higher education. In that regard, I would highlight that the Government are now trying to focus on what you might call coasting schools and, importantly, schools in coastal towns and cities. These are at the core, in the evidence we have available today, of some of these particularly grave education and skills challenges.

Noble Lords made a couple of comments about the success of London. I would link again to my own experiences, which I have mentioned before in this place: the success of London in primary and secondary education in the past 10 to 15 years is, I believe, a particularly interesting case study. We should explore using that example around other parts of the country to achieve improved outcomes, which are very important. It is influencing the thinking of Governments in a number of related areas.

My noble friend Lady Harding gave a very brief but interesting history of the development of literacy, which for me was very educational and which touched again on a number of the areas that I have just referred to in respect of London and skills. One point that my noble friend touched on, which a number of other noble Lords did too, was about the supposed success of Germany. I cannot miss the chance to touch on that. Although it is true that productivity in Germany, like in the rest of our G7 neighbours, is considerably higher than ours, what seems to be less well known is that in recent years Germany has not been so successful with productivity or investment. We have requested the data analysis because there may be something going on in common in a number of countries which is leading to doubts about how some of these data are being collected.

A number of comments made by other noble Lords touched on the importance of both secondary and higher education. Given the short time I have left, I just reiterate what I think I said at the outset and in previous comments: in my judgment, all the different areas of education and skills are probably the most important things that we need to have some success with if we are to deal with the long-term challenge of productivity; albeit less so with respect to the cyclical challenge.

Given his remarkable history, the noble Lord, Lord Rees, made several comments that are well worth focusing on and thinking about in some detail. In that regard, I shall take them away from this evening’s interesting debate.

My noble friend Lord Leigh, to a couple of whose valuable comments I have already referred, also focused on the important areas of finance and trade. I would put those in the “relatively easy” pot compared to the complexity and depth of the challenge that we need to deal with in education and skills. However, as he noted, they are areas on which we are focused. Trying to increase the number of challenger banks and the competitiveness of the financial sector to provide finance for the economy, and trying to boost our trade with important rising powers around the world—I am actively at the centre of that—is a crucial part of our economic policy.

In summary, this has yet again been an interesting debate with some important and powerful contributions on which I want to ponder, reflect and incorporate to frame some of my thinking about the right policy to help in this long-term challenge for the country. I said that increasing our productivity has been the chosen next step by this Government on the path started by the previous one towards a strong and secure economic recovery. Implementing that step and achieving that goal will require action and input from across the whole spectrum, whether it be from industry, academia or policymakers—not least from the Members of this House. I welcome the contributions that have been made by your Lordships this evening and will welcome contributions from all of them and others going forward. I look forward to updating this House on progress on an ongoing basis.

Motion agreed.

Budget Statement

Lord O'Neill of Gatley Excerpts

Tuesday 21st July 2015 Lords Chamber

Moved by

[Lord O'Neill of Gatley]

That this House takes note of the economy of the United Kingdom in the light of the Budget Statement.

[Baroness Chisholm of Owlpen (Con)]

My Lords, there are 24 speakers for the debate on the Budget Statement. If Back-Bench contributions are kept to around seven minutes, the House should be able to rise at approximately 10 pm.

--- Later in debate ---

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

My Lords, the British economy is now fundamentally stronger than it was some years ago. We have recovered significantly from the financial crash of 2008. We have seen real GDP growth higher than that of any major advanced economy in 2014, and that is the current consensus expectation for this year as well. We have started to see rising wages and, until very recently, particularly strong increases in the rate of employment. We have also seen business investment 31.9% higher than it was in 2010. Although this all puts us in a relatively strong position, if we want to make this recovery truly secure, and truly national, there is still a lot that we need to do. We need to increase our growth; step up our productivity a gear or two; and continue reducing the budget deficit—because in normal economic times, that is the right thing to do. Of course, we also need to see our external current account deficit improve.

This Budget will continue Britain’s journey towards economic security and prosperity. The first way we achieve this relates to a continued course of deficit reduction in line with the pace set in the previous Parliament. As I have just said, in normal economic times, it is right that Governments run an overall budget surplus. That gives a Government much more room for manoeuvre in the event of an economic downturn. This is sensible fiscal policy. The fiscal path laid out in this Budget is set to take us eventually into surplus. Importantly, it takes a smoother path than had previously been set out because we can get to the same destination while keeping a steadier pace.

The budget deficit is now less than half of the 10.2% it was in 2010 and this year it is forecast to fall to 3.7% of GDP. Our fiscal plans forecast this deficit to fall further to 2.2% in 2016-17; down to 1.2% the following year; down to 0.3% the year after that; and then to a budget surplus of 0.4% in 2019-20. At the same time, our national debt share is forecast to continue falling in every single year, down from around 80.3% of GDP this year to 68.5% by 2020-21.

The spending decisions we need to make to get there are indeed tough but they are necessary. Without sound, sustainable public finances, there can be no real economic security for working people. The fiscal charter published earlier this month commits the UK to sticking to this path: achieving a budget surplus by 2019-20 and then maintaining a surplus thereafter. The only exception to the rule would be if there is a recession or a marked slowdown; that is, if the Office for Budget Responsibility judges that we have real GDP growth of less than 1% a year, as measured on a rolling four-quarter basis. There is still a view in some quarters that we are in an age of austerity but from an overall fiscal policy perspective, with strong employment and recent above-trend growth, this is surely no longer the case. The charter will bind the country to living within our means.

Under this Budget’s fiscal plan, we require some £37 billion of further consolidation over this Parliament. Some £17 billion of this comes from measures set out by the Chancellor in the other place; namely, £12 billion from welfare and £5 billion from tackling tax evasion, avoidance, non-compliance and planning, and imbalances in the tax system. The other half will be set out following this autumn’s spending review. As a point of principle, no year will see overall cuts as deep as those required in 2011-12 and 2012-13. As a second point of principle, we will make our spending decisions in a fair and balanced way.

The second way in which we can secure this country’s recovery is through improving our growth and productivity. In my maiden speech in this House I said that our productivity challenge is well known, that we can try to do a lot better and that we should see the so-called productivity gap as an exciting opportunity, as well as a challenge. The productivity plan that we recently published—all 82 pages of it—shows we are rising to that challenge. It is based on a two-pronged approach: first, encouraging long-term investment in economic capital, including infrastructure, skills and knowledge; and secondly, promoting a dynamic economy, one that encourages innovation and helps resources to flow to their most productive use. The policies introduced in this Budget will help to make that plan a reality, so I would like to outline the highlights again.

First, overhauling the vehicle excise duty system and hypothecating the money that this duty raises into a new roads fund will pay for the sustained investment in roads that this country needs over the long term. We remain committed to the £15 billion that we have already allocated for new roads for the rest of this decade.

Secondly, we will give people the skills that they need to secure a better job. Apprenticeships have been a significant success story but the rate and quality of training has been uneven, to say the least. To tackle that, the Budget will introduce an apprenticeships levy on large firms. Firms that offer apprenticeships can get back more than they put in and that money will be directly controlled by employers. This stands not only to deliver 3 million more apprenticeships but, crucially, to enable an increase in the quality of apprenticeships, paving the way for a new generation of higher-skilled workers. Our productivity plan also contains measures to improve schools education by creating more free schools, ensuring that there is a university technical college within reach of every city and training up an additional 17,500 teachers in science, technology, engineering and mathematics. The Budget will also increase the cash available to enable English students from low and middle-income back- grounds to study at university, while putting funding on a long-term sustainable position—including asking those who benefit from a university education to contribute more of the costs of their degrees once they are earning.

Thirdly, we will be building up strong, interconnected cities beyond our capital. Research that I carried out before I entered government shows that this is central to driving growth and productivity, and revitalising many areas of Britain. Indeed, what I inelegantly called “ManSheffLeedsPool” was the spiritual precursor to the northern powerhouse. We will roll out further powers to Greater Manchester and work to have devolution deals with the Sheffield city region, the Liverpool city region, Leeds, West Yorkshire and its partner authorities and, as of very recent events, the north-east, as well as delivering a new round of enterprise zones for smaller towns and extending the coastal communities fund. To bring the towns and cities of the northern powerhouse closer together, the Budget will create a new statutory body, Transport for the North, whose remit will include an Oyster-style ticketing system across the north. While we are of course heavily focused on the northern powerhouse, we are also very focused on other engines of growth such as the West Midlands. Why not perhaps have powerhouses, too, in the east Midlands, as well as on the south and south-west coasts?

The third way in which we will give this country economic security is by helping our businesses to prosper and securing long-term investment in it. This Budget cuts the rate of corporation tax to 19% and then to 18%—the lowest in the G20, saving businesses around £6.6 billion by 2021. The employment allowance will be increased from £2,000 to £3,000, taking up to 90,000 firms out of employer NICs completely, while the annual investment allowance will be set at £200,000, eight times higher than the previous permanent rate, helping to increase investment by around 0.6% by 2020-21.

Furthermore, while we still believe that banks should make an additional contribution to the public finances, we have set out the path to a more competitive and sustainable basis of taxation: a 26% rate of corporation tax and a 0.1% levy on banks’ UK balance-sheet liabilities. The productivity plan sets out further measures to meet our ambitious export target of £1 trillion by 2020 and build stronger links with the world’s emerging markets. As a priority, the Government will remodel how they try to deliver on trade, exports, investment and prosperity, so as to have a step-change in the quantity of our exports and investments. We will focus on diversifying into more markets, increasing the integration of international service sector markets, supporting trade sector agreements beyond the EU and reviewing how SMEs finance their exports.

The fourth way in which we are securing this country’s economic recovery is by putting the welfare system on to a more sustainable footing and giving the country a pay rise. For a long time, we have been a low-wage, high-tax, high-welfare society—one which took money away from the poorest in taxes then gave it back to them in the form of tax credits and welfare. Far too many people have been trapped in a lifestyle of benefits dependency. Where we ought to be is the opposite: a high-wage, low-tax, low-welfare society—one in which it pays to work and where our benefits system targets its support towards the most vulnerable. Through the changes we are announcing in this Budget, that is where we are moving.

The Budget sets out £12 billion of welfare savings, which is what we need if we are to live within our means as a country. The cost of tax credits more than trebled in real terms over the 2000s—the so-called noughties. It is now £30 billion, so the Budget will reduce the level of earnings at which a household’s tax credits and universal credits start to be withdrawn and from April 2017, in all but the most exceptional cases, families who have a third or subsequent child will not be eligible for additional tax credit or universal credit support. All in all, these changes to tax credits will return real-terms tax credit spending to the level that it was in 2007-08. The number of families with children eligible for tax credits will fall to five out of 10 in the next financial year, down from six out of 10 currently and from nine out of 10 back in 2010. The Budget will also freeze working-age benefits, excluding statutory payments such as maternity pay and disability benefits, and reduce rents paid in the social housing sector by 1% a year for the next four years.

At the same time, we will honour our commitments to support the elderly, the vulnerable and disabled people. The Budget will roll out free childcare of up to 30 hours a week to all—all—working parents of three and four year-olds and put more money into the pockets of our working families. Next year, we will raise the tax-free personal allowance higher than previously forecast to £11,000 a year, which will mean less tax for 29 million people, and—in one of the flagship policies of this Budget—from next April we will introduce a national living wage, which will start at the rate of £7.20 an hour and rise to £9 an hour by 2020. As a result of these changes, a typical renting household with two full-time earners on minimum wage and two children will see its income rise by 12% in real terms over this Parliament, and by 2017-18 eight out of 10 working households will be better off by an estimated average of £130 a year.

The figures I have set out today make a real difference to people’s lives. They represent the security of finding employment, of having a decent living wage and of living in a strong and stable economy. The Budget includes measures to increase spending on our National Health Service and to meet our NATO defence spending commitment of 2%. It introduces important changes to inheritance tax, to the non-dom taxation system and to dividend taxes. It rebalances our welfare system, putting it on a more sustainable footing. It helps make our country and our businesses more productive. It paves the way for further significant employment increases. It cuts taxes for 29 million people and gives up to 6 million people a pay rise. The Budget sets the United Kingdom up for a stronger, more prosperous future. I am delighted to be introducing it to your Lordships.

--- Later in debate ---

[Lord O’Neill of Gatley]

My Lords, we have had a remarkably high standard of debate here this evening. I was encouraged to make that remark but, in all sincerity, I really appreciate the comments that all Members of the House have made this evening. My own maiden speech coincided with that of my good friend the noble Lord, Lord King, and I recall his comment that the general standard of discussion in this House was somewhat higher than in the other place. I have not had the benefit of participating in those debates, but after much of what I have heard over the past few hours, their standard must be pretty high if they can test many of the interesting things that I have heard today.

I must also add my birthday congratulations to the noble Baroness, Lady Kramer. I have to say that, in pursuit of the great and the good, to commit to this discussion on such a joyous day is truly remarkable. I hope I would do the same if I were in the same situation. In that regard, when I come to respond to specific comments, I may end up giving the noble Baroness more reference than others for her commendable duty.

Let me make some further brief comments before trying to do justice to many of the individual remarks. I apologise now, and will do so again later, for failing, as I am sure I will, to refer to all the individual highly valuable comments. No doubt I will make some errors in the pronunciation of some noble Lords’ names.

Before doing so, I shall make two or three general comments. Many individuals in this place have different opinions but, on balance, most noble Lords who have spoken recognise that the only way to secure a long-term economic recovery is to put our public finances on a more sustainable footing. I am grateful to hear those comments. The Government have committed to such a course. That is what they made pretty clear to the electorate and it may, among other reasons, be why they came to power with a majority.

It is also the case, as articulated by the Chancellor, and supported by the balance of measures, that the Government believe that the best route out of poverty is through employment. It is right that if you are working full-time, your wages should not be unnecessarily topped up by the state. In that regard, as reflected in the overall balance of areas of contention, it is not surprising to hear that there is a lot of concern about the scale of some specific spending cuts. However, let me also point out—here I speak from my experience before I joined this Government—that it is important to protect areas of public spending that are probably more likely to contribute to long-term productivity gains than welfare would, including, in particular, education, health, public sector investment spending and, in my view, our commitment to foreign aid. It follows that, if you do that, the remaining areas will suffer the brunt of public expenditure cuts if the Government are to be as committed as they should be to this path of fiscal deficit reduction.

It is also the case, as many Members have said this evening, that many interesting issues are raised by the notion of introducing a national living wage, which, as a number of people commented, will effectively be the equivalent of trying to increase the national minimum wage. I shall come back to talk about that. However, reflective of the Government’s clear priorities, and as I believe was generally made clear at the election, it is the Government’s desire, as articulated so clearly by the Chancellor, to reward people who work and to give them their own rights in how we contribute policy-wise to a fairer outcome for all of the nation, including those who earn income and pay taxes.

I turn now to specific points made by noble Lords in their speeches. In doing so, I shall try to structure my remarks and be as brief as possible, although that does mean I may neglect to respond to some specific things—again, I apologise in advance.

First, on the economy and public finances, the noble Lord, Lord Davies, ended today’s very rich discussion by talking about the context of the Budget. On the one hand, many noble Lords talked about how there is far too much concern about deficit reduction—the noble Lord, Lord Taverne, talked at some length about the risks of too much focus on this—but many others, including the noble Lord, Lord Palumbo, suggested the complete opposite. As a trained macroeconomist, I know that it is always a judgmental decision—appropriately so, given the many uncontrollable external forces, especially from the rest of the world—around the appropriate pace of reduction and, especially, around the evidence about the absolute level of debt, never mind the level of deficit per se, that is consistent with higher living standards and, in particular, with contributing to improving productivity.

In that regard, I turn also to some of the comments of the noble Lord, Lord Desai. He talked, I think, about evidence of the historical growth performance being in excess of 3%, but it is widely recognised today—subject to the vagaries of how economists can recognise any of these things and agree on them—that our trend rate of growth is in the vicinity of 2.4%. The way to address that, as I will talk about in a second, to improve the trend rate and bring it back to what might have been a very long-term performance, is almost definitely through steps to boost productivity and not, at least in my judgment, through the specific stance on fiscal policy.

In that regard, if I understood the noble Lord correctly —others also suggested this—in bemoaning the goal of moving towards a budget surplus, there appeared to be a contradictory concern about what would happen in the event of some of these shocks coming from the rest of the world, as we would not have the ability to respond. However, an additional reason for moving to a healthier set of public finances when the economy is on a reasonably strong footing, as it appears to be, is indeed that, in the event of some external shock, you would have the latitude to respond.

As in my opening comments I emphasise again that, in the event of the economy slowing to a positive 1% growth, the OBR has a responsibility to shift to a different cyclical stance on fiscal policy, if it deems it appropriate. Generally speaking, that seems to me pretty sensible.

I turn to some further specifics about fiscal consolidation on spending, which I touched on briefly in my opening summary. As I have just mentioned, a number of noble Lords focused on the Budget seemingly having tougher spending cuts than might have been envisaged. Indeed, I think a couple of noble Lords implied that they were tougher than was suggested before the Budget. However, as some others have pointed out, the Budget is indeed less restrictive in its overall fiscal stance than the previous Budget, and the overall reductions in public spending are not as stringent as they might have been. As I have already indicated, given the commitments to areas such as health, education, public sector investment, defence and foreign aid, other departments are likely to take the brunt of cuts. The case for those has been well articulated and widely debated in this House and, of course, in the other place on a number of occasions, including earlier today.

I turn to the very important topic of productivity. I am particularly pleased to hear that so many noble Lords have read the 80-page document, which, in responding to an Oral Question a few days ago, I suggested they should read. I think that a date is being found to enable us to have a full length-debate on the issues surrounding productivity, including the long-known historical challenges to achieving success in raising it and the specific steps that this Government propose to undertake in that regard.

Going back to what I said in my opening comments, and as many noble Lords are aware, over the long term economic growth is essentially driven by two factors: the number of people who work and their productivity. There has been much focus on this issue, correctly in my view. I think it is fair to say that, in the last Parliament, we had more success than one might have expected in terms of increasing employment. It is therefore appropriate now to switch attention to trying to do more about the key driver—that is, productivity. There is a very large amount of evidence that those countries with the best productivity performance typically have not only the best living standards but greater equality than many other places. Therefore, it is very important in my judgment that this issue receives appropriate attention.

I am pleased that there will be a formal review of our economic statistics led by Professor Sir Charles Bean. I have long felt—this precedes my joining the Government—that further work needs to be done in a number of areas ranging from our external trade data to the accurate measurement of our GDP and the implied productivity data. I cannot resist alluding to the irony of doing that, given that the latest evidence on productivity indicates that it may be accelerating. I also note that both the Bank of England and the independent OBR are separately forecasting a rise in productivity over this Parliament.

In relation to infrastructure spending, I think the noble Lord, Lord Davies, said that public sector investment spending will decline over this Parliament. There is certainly no plan for that to happen. Public sector investment is very importantly linked to the productivity goals and many aspects of the northern powerhouse, and there is a conscious decision to ensure there is no decline in spending and that it is protected in real terms. In fact, under current plans, from 2018-19 onward, it will start to rise in line with GDP.

I am spending a considerable amount of time on infrastructure in my ministerial role. We hope, in the not too distant future, to come back with a detailed national infrastructure plan. I say to the noble Lords, Lord Freeman and Lord Higgins, and the noble Baroness, Lady Kramer—who was correctly complimented for her role in the coalition, focusing on the transport aspects of this—that we need to have a bolder and perhaps longer -term national infrastructure plan, that thinks about the potential state-of-the-art long-term infrastructure that the country may need but not necessarily have immediately introduced. This may give us a framework to consider the challenges and opportunities that may prevail going forward. I acknowledge the supportive comments of a number of noble Lords about the commitment in this Parliament, despite the challenges, to spend more on a number of key parts of national infrastructure, including both roads and trains.

I jump to the very important topic of the northern powerhouse and city and regional devolution. A number of noble Lords made comments about that, including the noble Lords, Lord McFall, Lord Scriven and Lord Soley, the noble Viscount, Lord Hanworth, and the right reverend Prelate the Bishop of Birmingham. This project led to me becoming a member of the Government. I am very passionate about it and I think it is fair to say, from everything he has said, that the Chancellor is too. I will make a number of quick comments, and I apologise for not responding to some of the very important points raised.

On the topical issue of the supposed cancellation of the electrification of the Leeds to Manchester route, I say that it has not been cancelled: it has been delayed. That announcement was made in the context of trying to create a new and healthier environment for the leadership of Network Rail. I am just as agitated as many others about that decision, not least because it happened to be announced on the day of my first speech as a Minister about the northern powerhouse in Manchester. I assure your Lordships that it is getting a lot of attention and I hope that further initiatives will come forth. I add—in contrast to what I heard, I think from the noble Lord, Lord Scriven—that having Transport for the North and a northern Oyster is exceptionally important. In order for the northern powerhouse to be anything other than a number of cities, geographically identified with a pin, in the north of England, and for it to generate lasting economic change, it is important that the cities are joined together on an economic basis, if not an administrative one, in a way that has not been pursued before. There is enormous evidence from the great successes in recent years of Transport for London that having something like that technology, whereby individuals can find out very quickly the ease at which they can travel, knowing the costs as well as the facilities available, is important. I think it has boosted by 30% the movement of people around Greater London. If that was done between many of these northern cities, it would play a major role in boosting the economic fortunes of the north of England.

There are many other points that I have not responded to. I will very quickly turn to two other areas and I apologise for missing some out. It was a joy to hear so many Members talking about the importance of skills. If I had to pick one area that is so important to our productivity—and perhaps why we have had so many challenges going back for so long—it is something to do with the challenges facing particularly the most disadvantaged and their ability to get skills. Obviously, that links to our basic, further and higher education. As far as I am having some influence on the productivity plan, we are very eager to pursue the initiatives we have introduced in it.

Lastly, and without enough time to focus on the very interesting comments made about work and welfare, I think it is openly acknowledged that to introduce a policy to deliberately encourage an implied higher minimum wage—announced as a national living wage—carries a risk of some costs to employment. Indeed, the OBR said in its own independent analysis that it would directly lead to the loss of 60,000 jobs, although it added that in the context of the Budget Statement and all the other initiatives, this would be more than offset by the distributional effects of so many people receiving higher incomes, as well as a number of the other policies.

The last thing I would say—and it is not doing justice to this considerable topic—linked to what I said about employment and productivity, is that in an environment where employment has been so strong, if you are going to pursue such an initiative, it is best to do it when the employment market is as strong as it is. As I think I mentioned the last time I stood at this Dispatch Box, in a number of countries some of the new academic thinking is suggesting that while it is risky, this may be a way of trying to explore boosting productivity.

I will stop there. My time is up. It is very late in the day. The noble Baroness, Lady Kramer, has to go and celebrate her birthday and I am sure everybody else has lots of other things to do. I commend the Budget to the House.

Motion agreed.

Income Per Capita

Lord O'Neill of Gatley Excerpts

Tuesday 14th July 2015 Lords Chamber

[Lord Wigley]

To ask Her Majesty’s Government what steps they are taking to secure an increase in the level of income per capita.

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

My Lords, to achieve meaningful and lasting growth in the level of income per capita and living standards we need a sustained pick up in productivity. Interestingly, the most recent data have shown a notable rise in productivity, admittedly from somewhat disappointing data beforehand. Of course, it should not necessarily be assumed that this is the start of a trend. This is why the Government have just published a productivity plan that sets out how we will achieve a step change in productivity.

[Lord Wigley (PC)]

Does the Minister accept that GDP per capita now is still lower than it was in the first quarter of 2008 and that the disparity between the level of income per head in London and in Wales or, indeed, in the north of England, remains very stubborn indeed? What plans do the Government have in the document he has just drawn to the attention of the House to close the disparity between London and the rest of these islands?

[Lord O'Neill of Gatley]

My Lords, I encourage every Member of this House to read all 82 pages of the document because it includes considerable detail to answer those questions. To be brief—I am aware from my recent appearances in this House that one has to be brief and not put Members to sleep—one of the most important measures related to previous Questions that I have been asked is that we have authorised an independent review into the accuracy of all UK economic statistics, which are highly relevant to this Question.

[Baroness Kramer (LD)]

My Lords, I am pleased that the Liberal Democrat plan to help to close the gender pay gap has been reannounced by the Government. Will the Minister join me in congratulating the former coalition Minister, Jo Swinson, who pushed through the relevant amendment on corporate disclosure? Will the Government now take steps to close the pay gap between older people and the under-25s, who will not be eligible for the new minimum living wage?

[Lord O'Neill of Gatley]

I would like to make reference to the presentation of the Budget and the policies included, which, I think I am right in saying, considered many ideas from many people in undertaking its commitments to raise the living standards of everyone in the UK.

[Lord Forsyth of Drumlean (Con)]

My Lords, does my noble friend agree that the way in which we can increase per capita income is by selling goods and services competitively across world markets, and that there is a limit to the good that Governments can do but almost no limit to the harm?

[Lord O'Neill of Gatley]

My Lords, while again I use this opportunity to encourage all Members to read our brilliant document, I shall also make reference to forces that I believe are important from my previous life on the topic of sustainable development and GDP per capita, one of which is indeed the performance of a country’s trade balance, particularly its export performance. That is something that our private sector needs to take the lead on. All that a Government should do is to make sure that it has the right environment to allow it to flourish.

[Lord Foulkes of Cumnock (Lab)]

My Lords, this is no laughing matter. Can the Minister explain to the House how the proposed changes in child tax credits will affect the per capita income of those involved?

[A noble Lord]

It is on page 64.

[Lord O'Neill of Gatley]

My Lords, I am very pleased to hear that one Member of the opposition Benches has read the productivity report in detail. On the specific question, as we showed in the Budget documents and in parts of the productivity document, we believe that when all the measures are looked at in total, eight out of 10 working households will be better off as a result of the personal allowance, the national living wage and the welfare changes announced collectively in the Budget.

[Lord Flight (Con)]

Does the Minister agree with Alistair Darling that the Government subsidising wages tends to depress wages and leads to overemployment, and thus poor productivity growth?

[Lord O'Neill of Gatley]

My Lords, I suggest that Alistair Darling has made many interesting contributions towards improving Britain’s economic performance and productivity performance, including that observation.

[Lord Davies of Oldham (Lab)]

My Lords, I take it that the Minister accepted the post because he intends to do good rather than harm to our productivity figures, in which we compare so badly to our leading competitors. However, how are the Government doing good when they dither over airport expansion, postpone rail electrification, have slippage on road programmes and generally fail to give the necessary government investment that would help on productivity? Even the construction industry is anticipating a drop in productivity this coming quarter. How on earth are we going to solve our chronic balance of payments problem while our productivity levels remain so low?

[Lord O'Neill of Gatley]

My Lords, I am still learning the practices here, and I am extremely tempted to give a very long answer to that very detailed question. I shall find the appropriate moment do so. Suffice it to say, at the risk of repeating myself, that I think I am right in saying that the very specific attention this document gives to all the factors that are important for productivity has never before been given, including virtually every single topic that the noble Lord mentioned.

[Lord Wrigglesworth (LD)]

My Lords, as the Minister has done so much work on this subject, can he tell the House which he thinks comes first: higher pay or higher productivity?

[Lord O'Neill of Gatley]

My Lords, there is considerable debate in leading academic circles about causation, as I am sure many Members of this House are aware. Historically the conventional belief has been that higher productivity will lead to higher wages. Due to the length of time during which this country and many others have shown signs of weak productivity and wages there is growing evidence, which has obviously influenced the choice of policy, that deliberately trying to raise wages for the less well off may result in a boost to productivity, as the ONS estimated in its independent analysis of this measure when it was announced last week.

Greece

Lord O'Neill of Gatley Excerpts

Monday 6th July 2015 Lords Chamber

[Lord O'Neill of Gatley (Con)]

My Lords, with the leave of the House, I will now repeat a Statement made in another place by my right honourable friend the Chancellor of the Exchequer. The Statement is as follows:

“Mr Speaker, I last updated the House on the situation in Greece a week ago. Since then, the Greek Government have failed to make the IMF payments that were due. And the Greek people have expressed a decisive view in yesterday’s referendum, and rejected the creditors’ terms.

Greece is a proud nation and a very long-standing ally of the UK and we respect the decision of its people. But there is considerable uncertainty about what happens next. We need to be realistic—the prospects of a happy resolution of this crisis are sadly diminishing.

Over the last 24 hours the Prime Minister and I have spoken to some of our counterparts, and I have spoken to the head of the IMF and, just a few minutes ago, the chair of the eurogroup. We are urging all sides to have a final go at trying to reach an agreement that defuses the crisis. The next steps are the ECB discussion taking place right now, tonight’s Franco-German summit, and tomorrow’s gathering of eurozone leaders. If there is no signal from these meetings that Greece and the eurozone are ready to get around the table again, we can expect the financial situation in Greece to deteriorate rapidly. For now, the British Government’s position remains the same. We will do whatever is necessary to protect the UK’s economic security at this time.

This morning, the Prime Minister chaired a meeting, attended by the Governor of the Bank of England, myself and others to review our response to the ongoing crisis. So far, the financial market reaction has been relatively contained. Private sector exposures are far less than three years ago, and the eurozone authorities have said that they stand ready to do whatever is necessary to ensure the financial stability of the euro area. But the risks are growing, so it is right that we remain vigilant and monitor the situation carefully. I am in close contact with the governor.

We are also acting to protect British residents and holidaymakers in Greece. Last week I told the House that the Department for Work and Pensions and public service pension administrators had started contacting Greek residents that draw a British state or public sector pension from a Greek bank account. I can now confirm that the DWP has spoken to 2,000 people, advising them on how to switch payments to non-Greek bank accounts if they wish, and the DWP has enabled people in Greece who receive a UK state pension to set up a UK bank account if they do not already have one. International payments into Greece are still exempt from the restrictions that the Greek authorities have placed on the banking system, so I can confirm today that UK Government payments, including state pension and public service pension payments, will continue to be made in the usual way.

We are doing more to keep holidaymakers and residents informed about the developing situation. We are in regular contact with the travel industry to understand the impact on British nationals, and we have increased the number of Foreign Office staff in our embassy in Athens, to be prepared for whatever happens. On the islands of Crete, Corfu, Rhodes and Zakynthos, where many British tourists are, and where we already have a vice-consular presence, we have deployed more consular staff to support the teams there. But it is unrealistic to think that we can provide a consular presence on all the Greek islands, and that is why we urge everyone travelling to Greece to look at the travel advice before they go.

It is clear British holidaymakers should take sufficient euros in cash to cover the duration of their stay, emergencies, unforeseen circumstances and any unexpected delays. Travellers should be careful and take sensible precautions against theft. As the economic crisis in Greece persists, there are greater risks of shortages. In recent days, the media have reported a shortage of medical supplies in Greece. Therefore, I want to reiterate the Foreign Office’s advice that UK travellers take sufficient supplies, including prescription medicines, for the duration of their trip. Going forward, we will continue to ensure that travel advice is regularly updated with the latest information and Her Majesty’s ambassador in Athens will provide regular updates there on the UK response in Greece.

Finally, we have put in place measures to support British businesses. HMRC’s “Time to Pay” scheme is now open to help businesses that are experiencing cash-flow problems as a result of the banking controls in Greece. The Department for Business, Innovation and Skills has published detailed guidance to help business, which can be found on the Government’s website. Businesses experiencing problems with their Greek contracts can call the Business Support Helpline, which will direct them to commercial lawyers with experience in the Greek market, or they can contact their Member of Parliament, and we will provide direct advice.

The Trade Minister met major UK companies and business groups last week to discuss the situation, and he will have further meetings this week. This is a critical moment in the economic crisis in Greece; no one should be under any illusions. The situation risks going from bad to worse. Britain will be affected the longer the Greek crisis lasts, and the worse it gets. There is no easy way out. But even at the 11th hour, we urge the eurozone leaders and Greece to find a sustainable solution. Meanwhile, here in Britain, we must redouble our efforts to put our house in order, and in the Budget in two days’ time, I will set out exactly how we will do that”.

My Lords, that concludes the Statement.

--- Later in debate ---

[Baroness Ludford (LD)]

My Lords, I, too, thank the Minister for repeating the Chancellor’s Statement. I find the Statement curiously semi-detached, and I would have hoped—to repeat a word which the noble Lord, Lord Davies, used—for something a little more proactive. The Statement says that we will do whatever is necessary to protect the UK’s economic security, but then it just talks about remaining vigilant and monitoring the situation. Can the Minister be rather more precise about what action is being taken to protect the UK’s economic security? Is the UK as protected as it can be from whatever might happen after tomorrow, whether that is a Grexit or other financial difficulties? Is it the Government’s view that a Grexit has been priced into the markets? What can we expect in that respect?

What about British people who have money in Greek banks? If I recollect correctly, it was said last week that four of the banks are represented in this country, three of which have branches and one of which has a subsidiary. If there is a haircut of deposits, which there has been speculation about, what will happen to British deposit holders? Over the weekend it was remarked that the Government intend to reduce the cap on deposit guarantees from £85,000 to £75,000 because of the drop in the value of the euro. That seems rather bad timing in view of the potential difficulty with bank deposits.

What will be the advice to British tourists if it is clear after tomorrow that Grexit will happen? We all hope that there is not social upheaval, but we have to anticipate that the difficulties in getting cash, medicines and so on will only get worse. What is the Government’s contingency plan? I find what is mentioned in the Statement a little abstract. I do not see clear plans for those who, for instance, might need pharmaceutical supplies during their visit. Will the Government advise people with medical needs not to go to Greece? I would regret that, but is it possible that it will happen? Can the Minister be more specific about what the Government plan to protect our economy and our citizens?

[Lord O'Neill of Gatley]

My Lords, the noble Lord, Lord Davies, and the noble Baroness, Lady Ludford, asked many questions, so I shall try to be as brief as possible.

A number of these matters were touched on in my right honourable friend the Chancellor of the Exchequer’s Statement, but, to repeat, the Prime Minister and the Chancellor have had discussions with a number of key participants in trying to bring this crisis to an end, including—for the Chancellor—the head of the IMF, today, and a number of members of the eurozone finance group. I believe that we are as up to date as possible in the thinking of all the key participants ahead of the key meetings tonight and tomorrow.

With respect to businesses and tour operators, I shall expand on what I said. BIS has published detailed guidance to help business as a result of events in Greece. It is available on the Government’s websites along with a business support telephone number. As I also said, the Trade Minister has met a number of UK companies and business groups to discuss the situation and they seem pretty calm. He plans to meet with them again this week. The same goes with respect to our contacts with a number of important tour operators.

It is indeed the case that the four largest Greek banks have branches in the UK. However, their balance sheets are pretty small by the standards of these things, with deposits totalling less than £225 million. Eurobank is now a branch of the Luxembourg subsidiary and so the Luxembourg subsidiary deposit guarantee scheme will provide protection to eligible deposits there. The others are covered by the Greek deposit scheme. There is one Greek bank with a subsidiary in the UK, Alpha Bank, and this is a separate, stand-alone entity from its parent bank. It is small with assets slightly over £0.5 billion at the end of 2014 and, as a UK subsidiary, it is regulated by the PRA and its deposits are covered by the Financial Services Compensation Scheme.

There were further questions about the schemes in place for the deposit guarantee. The amount of €100,000 was agreed back in 2010 in euro terms. It is being reduced in sterling terms at the end of this year merely because of the resulting appreciation of the pound against the euro.

--- Later in debate ---

[Lord O'Neill of Gatley]

My Lords, I thought the days where I was speculating about which members were suited and which ones were not to participation in the euro had long since gone. In that regard I can only say that I do not believe it is particularly useful for anybody for me to offer my own judgment on such matters at this time, particularly ahead of some very important discussions this evening and tomorrow.

[Lord Elystan-Morgan (CB)]

My Lords, can the Minister tell the House as a matter of basic law whether the treaties that brought about the formation of the eurozone and the regulation thereafter contain any provision at all with regard to a member state unilaterally leaving the eurozone of its own accord or the states, other than an errant state, in some way bringing about the departure of such a state from the eurozone? Am I right in thinking that the treaties altogether are as silent as the grave with regard to the departure of any state from the eurozone?

[Lord O'Neill of Gatley]

My Lords, as far as I understand the considerable things written on this topic, it is somewhat unclear. It will be a very interesting test case in the event of such an outcome from these important discussions in the next couple of days, and I can imagine a number of legal types will have some fun pursuing these discussions in the event of such an outcome.

[Lord Davies of Stamford (Lab)]

My Lords, I do not think I can readily recall another instance in history in which a Government have succeeded in such a short time in running their economy into the ground, going in six months from an economy which was expanding again and with falling unemployment, to the brink of catastrophe, where Greece stands at present. The Greek Government have now been supported in their policies by the Greek electorate in yesterday’s referendum, apparently on the basis that the more self-destructive their behaviour, the more likely they are to get a large amount of money out of the rest of the world—either out of the rest of the eurozone, or out of the rest of the European Union or the IMF, both of which we are of course members. Does the noble Lord agree that it would be extremely regrettable if such a precedent were created? It would be a major moral hazard if one could get away with such blackmailing policies, and it is very important that this country in particular, as a member of the IMF and the European Union, has nothing to do with any such proposal.

[Lord O'Neill of Gatley]

My Lords, I am afraid that I will answer in a similar spirit to my answer to my noble friend Lord Lawson’s question a couple of minutes ago. I have spent many years talking about these kind of things, but we are at such a delicate stage of discussions following the outcome of the weekend’s referendum, which, I think I am right in saying, was considerably larger than was anticipated by virtually anybody. Now, through this evening and tomorrow, very delicate discussions will take place, and it would not be advantageous for anybody if I offered my opinion on anything that the noble Lord asked about such important, critical details.

[Lord Higgins (Con)]

My Lords, I understand the point made by my noble friend, but none the less, it is very important that the Chancellor’s expertise and our own in this matter should be fed in, at any rate behind the scenes, perhaps to try to pour oil on troubled waters, which up to now has been very difficult. I previously expressed in your Lordships’ House a view similar to that of my noble friend Lord Lawson. The economic reality which Greece is facing is that it is locked into an uncompetitive exchange rate, and it is not going to become competitive. No amount of bailing out or assistance otherwise will prevent that happening. If it is patched up now, we will be back in the same situation in a comparatively short time.

None the less, I urge my noble friend to make two points in these discussions, if need be behind the scenes. First, it is very important to make clear to Greece, and for our European partners to do so, that leaving the eurozone does not mean that it has to leave the European Union, the political implications of which would be very serious indeed. Secondly, if we get to a situation where Greece leaves the eurozone, it will be tremendously difficult to sustain the new exchange rate, and it would be advisable for the financial assistance that would otherwise be given in the form of bailout to be given to sustain Greece so that after leaving the eurozone it did not end up in a constant cycle of inflation and devaluation. Such a situation would have to be stabilised, and we should do all we can to ensure that it would be. Will my noble friend seek to ensure that that would happen?

[Lord O'Neill of Gatley]

My Lords, my noble friend raises some very interesting ideas and suggestions, and in the course of our ongoing discussions with our friends in all parts of the eurozone, which I am sure will continue through the rest of today and tomorrow, we will pass those ideas on. I thank him.

[Baroness Falkner of Margravine (LD)]

My Lords, the noble Lord, Lord O’Neill, is wise to resist the encouragement of the noble Lord, Lord Lawson, to comment on his own views about the current situation in Greece, particularly given the role that Goldman Sachs played in Greece’s original submission to join the eurozone. However, I will ask a concrete question which is covered in the Minister’s brief. He said that his right honourable friend the Chancellor of the Exchequer has had conversations with the head of the IMF. Given our exposure to Greece, given the IMF’s exposure to Greece—something in the region of £23 billion—and given that the IMF believes that the debt sustainability needed by Greece is roughly £50 billion, would the United Kingdom Government be prepared to expose themselves further, were the IMF to go ahead and offer Greece emergency lending at this point?

[Lord O’Neill of Gatley]

My Lords, Greece has already missed a payment to the IMF, as everybody knows, and has fallen into arrears with the fund, which is not technically a default. The IMF has said that its shareholders will not suffer losses, saying:

“Notwithstanding the overdue obligations, member countries’ claims on the IMF are fully secure and the IMF will continue to meet its obligations to members and lenders”.

Greece has, of course, an existing IMF programme and it is important that future support for Greece helps it to meet the conditions necessary to continue with that programme, including the agreements of conditionality, sufficient financing assurances and the clearance of any arrears.

[Lord Campbell-Savours (Lab)]

My Lords, we cannot do very much because we are not in the euro but there is some way in which we can help. There is a crisis in hospitals in Greece. Equipment is breaking and there is a lack of medicines and equipment for treating ill people. Can we do anything to help on a humanitarian basis?

[Lord O’Neill of Gatley]

My Lords, let me reassure Members of this House that—as I said in my prepared comments and in repeating my right honourable friend the Chancellor’s Statement—we will do whatever is possible to make sure that any tourists or businesses going to Greece get the right guidance and advice. As to the issues on the ground for the Greek people, raised in the noble Lord’s question, we will be looking for further updated guidance over coming days, pending how the discussions go tonight and tomorrow on the financial and economic relationship between Greece and the rest of the eurozone. But, of course, we would all like to think that we will try whatever is within our means to help the Greek people in potentially challenging circumstances if they were to deteriorate further.

[Lord Howell of Guildford (Con)]

My Lords, one idea that has been widely referred to but was not mentioned in the discussions in the other place this afternoon is that Greece could temporarily leave the eurozone and return if and when matters settle down later. I do not expect my noble friend to give an opinion on that now, but will he see that that point is looked at in the considerations in the coming days? Can he give us any guidance—possibly he cannot—on the treaty-changing implications of that or any other proposal connected with this growing crisis?

[Lord O’Neill of Gatley]

My Lords, while that may not have been discussed in the other House, it has, as I am sure my noble friend Lord Howell is aware, been suggested by some other members of the eurozone. It is certainly something that we are aware of having been raised and it will be mentioned again in discussions; that is for sure. I reiterate, however, that it is not appropriate for me or my right honourable friend the Chancellor to talk about such matters ahead of the delicate discussions that will take place tonight and tomorrow.

[Lord West of Spithead (Lab)]

My Lords, will the Minister confirm that contingency work has been done on the implications of what is happening in Greece for the eastern Mediterranean flank of NATO? Is he aware of any moves by the Russians to deal with Greece by giving assistance similar to that offered to Cyprus to get access to bases there? Lastly, are we thinking of any way to help the Greeks with the tens of thousands—in fact, more than 100,000—refugees who have poured into Greece as a result of the war in Syria et cetera?

--- Later in debate ---

[Lord O’Neill of Gatley]

My Lords, while I am sure an offer of Russian help could appear, it is within the aspirations of both Greece and its European colleagues and friends to solve the outstanding challenges between them, whatever is offered from Russia.

With respect to the further questions of the noble Lord, Lord West, we should be careful about what specifics we suggest we may offer until we see further evidence of what may emerge from the discussions tonight and tomorrow. As the Chancellor has said, we should be prepared for the worst but should actively seek to be in a position to help the Greek people and, of course, to protect our own economic interests.

[Lord Lamont of Lerwick (Con)]

My Lords, while it is true that the Syriza Government have made some bad policy decisions and have at times been very provocative, is it not also true that on one fundamental point they are right—in 2010 there should have been a much more extensive write-off of the Greek debt? If we are to have a sustainable situation in Greece, it requires, as the IMF has now said, a substantial further write-off of debt because the debt is not sustainable. This continuing extending and pretending is only shoring up more trouble in the long run.

[Lord O’Neill of Gatley]

My Lords, as my noble friend says, these opinions have been offered by many people, including in the past week or so, according to media reports, the IMF. It is not of great help in resolving issues today to reflect on what might or might not have happened in 2010. However, in the discussions that take place this evening and tomorrow, all sorts of options and ideas will be pursued to, I hope successfully, bring these growing economic risks and challenges under better control.

[Lord Birt (CB)]

The Minister has rightly emphasised that we are at an extremely delicate stage. At such delicate times, is it not also important to be really clear about the principles involved? The Greek Government have willingly, knowingly borrowed money on a massive scale from a number of institutions, including within the EU, over a very long period. Will the Minister agree that—if only pour encourager les autres—the worst of all options would be to accept that a sovereign Government should not repay their debt?

[Lord O’Neill of Gatley]

My Lords, my reaction, possibly based on my past experience, is as with a number of other questions that have been put to me. Ahead of such important discussions, I do not think it is particularly useful for me as the Minister, or for anybody in similar areas of government, to speculate idly about what is right or wrong. A lot of information is available about events that have led up to this crisis. It is the responsibility of the Greek authorities, having taken their stance to the Greek people over the weekend, together with eurozone Finance Ministers and their leaders, to try to bring this crisis to a better resolution in the next couple of days.

[The Lord Bishop of Chester]

My Lords, I was struck in the Statement by the sentence:

“Greece is a proud nation and a very long-standing ally of the United Kingdom”.

The danger in all of this is that, because we are not in the eurozone, we slightly sit on the fence, hedge our bets or stand on the sidelines. That can leave a certain vacuum. I have been very upset by the rhetoric between Germany and Greece in recent weeks—on both sides. The two nations are a little like chalk and cheese in so many ways. Politically, I wonder whether there is not a role, precisely because we are not in the eurozone politically, that we are not taking. What high-level contacts have there been between the Greek Government and the UK Government on these political issues?

[Lord O'Neill of Gatley]

My Lords, the right reverend Prelate asks, again, a slightly delicate question. I mentioned in my formal comments that the Prime Minister and the Chancellor in particular had a number of discussions with key participants from the eurozone and the head of the IMF earlier today and this afternoon. I suspect that there will be further discussions during this evening and tomorrow. We are obviously aware of our position as an EU member relative to those inside the eurogroup, and we will offer in private the views that we think may be of some use in helping them come to the right resolution.

[Lord Richard (Lab)]

I also have a slightly delicate question. The Minister referred a number of times to the delicate negotiations and discussions that are going to take place today and tomorrow. Can he perhaps lift the curtain just a little about what input Her Majesty’s Government hope to have in those discussions? Have we been asked for any advice specifically? Are we giving advice? I am not asking what the advice is; only that our presence should be established. Is that the position?

[Lord Richard]

My noble friend asks whether we are just going to be observers or will be participants in one form or another.

[Lord O'Neill of Gatley]

My Lords, it is important to remain focused. In terms of our own policies, we must focus on what we can do about the future of our own economy and, in the context of this crisis, make sure that we are protected from any potential further contagion in the best way that we can. As I also said, in private, we will offer discussion and ideas as and when we are asked. But the key for us is to make sure that we have the right control over the levers that we can control ourselves and that are relevant to the performance of the UK economy.

Economy: Productivity

Lord O'Neill of Gatley Excerpts

Monday 8th June 2015 Lords Chamber

[Lord Haskel]

To ask Her Majesty’s Government what action they will take to increase productivity as compared to that forecast in Table 5b of the Bank of England May inflation report.

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

My Lords, productivity is a key challenge for this Parliament and a key focus. That is why, before the Budget, the Chancellor will publish a productivity plan, which will be a plan to make Britain work better.

[Lord Haskel (Lab)]

My Lords, I welcome the Minister to his first Oral Questions. I also welcome his words, but I think that many noble Lords will agree with me that we have heard these promises before. However, manifestly, they have not worked. Why not? Will the Minister agree with me that they have not worked because they do not understand that productivity involves every aspect of our economic life and beyond—a life which is presently dominated by austerity? So, once again, I ask the Minister whether the Government will demonstrate their commitment to productivity by moving on from a life of austerity to a life of productivity.

[Lord O'Neill of Gatley]

My Lords, as your Lordships can tell, I am not yet very familiar with the exact procedural formalities. I apologise, as I should be. I have been immersed in studying issues to do with productivity for a large part of my adult life. It is dangerous to associate productivity improvements with a so-called focus either on austerity or on some other particularly cyclical fiscal policy stance.

We are living through a moment in time when a very large number of diverse developed countries are all apparently showing a dramatic slowing in measured productivity, whether it be Germany, which is generally regarded as successful and whose measured productivity has been even weaker than ours in the past few years, or the United States, which is frequently regarded as a beacon. In my maiden speech last week, as those of your Lordships who were here would have heard, I highlighted a number of factors that will be focused on. When the Chancellor makes his presentation, I think your Lordships will see that those feature highly in the appropriate steps we plan to implement.

[Baroness Kramer (LD)]

My Lords, does the Minister agree that employee ownership models, such as the John Lewis model, tend to enhance productivity? If so, will he take steps to share that understanding, especially with small and medium-sized companies, and consider tax incentives?

[Lord O'Neill of Gatley]

The ideas that are being thought about include appropriate incentives to boost long-term investments and greater incentives for both the owners and participants in any company, whether privately owned or otherwise. The role of tax incentives is very important and they will be looked at further.

[Lord Kinnock (Lab)]

The Minister is correct to say of course that productivity has slowed throughout the OECD countries. However, as he acknowledged in his maiden speech last week, our record is palpably worse than so many other OECD countries. Does he accept that increasing productivity needs extra investment, better skills and decent pay? Will he therefore encourage the Government to reverse the 50% cut in net public investment since 2010, the ongoing 40% cut in further education for the over-19s since 2010 and the 6% loss in average earnings in this country? Is it not clear that unless those reversals are made, there is no hope of our country resuming the 15% increase necessary to return to our historic trend, let alone securing the 30% increase necessary to catch up with our comparable competitors?

--- Later in debate ---

[Lord O'Neill of Gatley]

My Lords, it is important to remind noble Lords that I referred to “measured productivity”. There are considerable issues to be focused on about aspects of how productivity is measured. Again as I highlighted in my maiden speech, the UK in the past few years has had the best employment increase record throughout the G7 countries. One does not need to look at a choice between employment and productivity, but if one were forced to do so, I think that most people in this country would want jobs and not to get so lost in the productivity issues. However, I also add that—as is well known—over the long term, countries that have the better true productivity performance are those with generally a higher standard of living and wealth, including in shared wealth. In that regard, let me repeat some of the policies that I suggested will be focused on. They will include rebuilding the northern powerhouse, improving our infrastructure, undertaking policies to improve the supply of new homes, further reforms of education and apprenticeships and—this is linked to my previous comment—boosting incentives for long-term investment.

[Baroness Farrington of Ribbleton]

My Lords, the Minister referred to the importance of employment. Would he care to comment on the fact that the personal income of people in employment ought to be sufficient for them to be self-sufficient—that is, a living wage? Would he care to endorse the—apparently—lately formed views of the Mayor of London that the Government ought to stop subsidies to companies which make huge profits while paying pittances to the people the Minister referred to, who want not only employment but a living wage and dignity?

[Lord O'Neill of Gatley]

The policies we will focus on will be those to boost the long-term performance of the economy from a productivity perspective, which will help enhance the job satisfaction of many people in our country.

Queen’s Speech

Lord O'Neill of Gatley Excerpts

Thursday 4th June 2015 Lords Chamber

[Lord Gardiner of Kimble (Con)]

My Lords, this is the final day of the debate on the humble Address, and the advisory speaking time is seven minutes. That will allow the House to rise at a respectable time, and I hope that noble Lords making their contributions will be mindful of that.

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

My Lords, I begin by thanking your Lordships for the warm and generous welcome I have received from everyone in this House. It is a privilege to serve as a member of Her Majesty’s Government, and it is a particular honour to make my maiden speech opening this debate following Her Majesty’s gracious Speech. I have been told that the conventions of a maiden speech require the speaker to be both brief and uncontroversial. Let me warn noble Lords—though some already know me—that only about 50% of that comes naturally to me.

My only regret today is that my parents are no longer around to see me here. They were true working-class Tories, which may surprise some people. They would have been not only proud but, frankly, slightly astonished that their continuous attempts to get me to focus on the Daily Telegraph at the breakfast table during my younger years, and not on the latest Manchester United programme, eventually bore some fruit. Indeed, one of my cousins told me just yesterday that even many years later my dad was still, in my absence, apparently pondering whether I would ever get a proper job. That showed me that they appeared to know that an individual and society’s collective productivity is what drives wealth and sustains success. This Government have put productivity as a priority for the next five years.

I was brought up in south Manchester, where I attended the local primary and junior school. When I reflect back—which, of course, I have especially done in the past few days—it is still clear to me that many of those school friends were at least as naturally gifted as I may have been, but for a variety of reasons, so many of them did not achieve their potential. I was lucky enough to go on to university and then achieve a career in the City, ending up as chief economist of Goldman Sachs. My time there overlapped with the rapid growth in the so-called large emerging economies, especially Brazil, Russia, India and China, which nearly 14 years ago now I was lucky enough to describe as “the BRICs”.

During those 18 years I started to understand the factors that drive economic growth. Economic theory tells us there are two things that make a country’s GDP grow—the size of its labour force, and its productivity—and I believe that this basic theory is right. The labour force is primarily driven by a country’s population, which is of course limited by physical factors. Importantly in that regard, the UK seems reasonably well blessed for the next couple of decades compared with many of our developed country—and in particular G7—friends. Productivity is trickier, but we can try to influence that with good policy, and I believe that if we are bolder and truly ambitious, we can do something about it.

I am therefore very excited to have joined the Government at this time to help drive the changes that this country needs to try to increase our productivity, whether that is having the right infrastructure, giving our children the best education, giving our workforce the skills they need for the 21st century, getting more women into the workforce, having a more effective policy on housing supply, providing better long-term incentives to invest, or providing even more effective and—importantly, perhaps—less strangling regulation.

During my time in the City, I also saw that successful interconnected urban areas—often, areas beyond the capital city—are vital to economic growth. The UK was, and frankly still is, underperforming in this regard. So, when I left Goldman, among the things that came on to my plate, I was very attracted to an offer to chair an independent commission on the growth of our cities outside of London. I pay tribute in this regard to my noble friend Lord Heseltine, whose work in this area has of course been groundbreaking. His was one of the very first voices to say that government policy on the industrial cities of the north should not be one of managed decline. He was a true pioneer in trying to help them to enable themselves to redevelop.

That can-do, positive, growth-oriented approach has been at the heart of what I ended up somewhat inelegantly calling “ManSheffLeedsPool”, which, of course, has now become better known as the northern powerhouse, not least because it includes other important northern cities such as Hull and the cities of the north-east—strong, interconnected cities across the north of England. I have been lucky enough to be asked to help deliver this, and to use my experience in the emerging world—especially, although not only, China—to help improve the UK’s economic performance.

Importantly, I will also continue to lead the review into antimicrobial resistance that I have been leading for the past nine months, for which we will make our final recommendations in about 12 months’ time. I hope that noble Lords will continue to feed into the extremely productive work that the review is carrying out, which in itself will help to improve the productivity of not only the UK but the whole world.

I believe that this country could be on the edge of something exciting and special. It is an honour and privilege to be asked to serve in Her Majesty’s Government, and I look forward to contributing to the work of this House.

Turning to the legislative agenda, last week in this Chamber we heard Her Majesty’s gracious Speech, setting out this Government’s legislative programme, which will build on the foundations laid in the previous Parliament to get Britain back towards prosperity. Our legislation is designed for everybody in the country, meeting their needs and helping them to fulfil their ambitions at each stage of their lives. Important things were achieved in the previous Parliament. The deficit has come down, and the economy has improved. The record on jobs, in particular, has been strong. There are 2 million new jobs and, importantly, in the past 12 months we have had the strongest employment increase among the G7 countries. Today, we have the highest employment record in the UK’s modern history.

However, the work is far from finished. The fiscal deficit is still too high, and the same is true of our external current account deficit. Our trade remains overly reliant on slow-growing emerging European markets. We need to do more with my friends in the emerging world. There are big infrastructure decisions that we have yet to make. Our businesses are still hampered by excessive regulation, and of course, there is so much to do to improve the competitiveness of our cities outside of London. The cities commission that I chaired showed that if the largest metro areas outside of London—not just northern powerhouse, but others too—could grow at the same strong rate as London, the UK’s national growth trend could be boosted by 0.2%. This may seem immediately significant only to the economics geeks among your Lordships but, to put it in perspective, it will translate into an extra £79 billion to the British economy by 2030.

Our productivity challenge is well known. I do not need to labour too long on the statistics, but our output per hour is 17% below the G7 average; 27% below that of France; similarly, 28% below that of Germany; and, even higher, 31% below that of the US. In my judgment, there are some valid questions about the accuracy of our productivity statistics but that should not be an excuse. We can and should do a lot better. If we could get our productivity rates up, we could enter a virtuous circle to the benefit of all.

Against that background, today I shall briefly address the measures in the Government’s legislative programme dealing with business, economic affairs and transport.

When businesses do well, so does the country, so we want to help businesses every step of the way. Our enterprise Bill will remove another £10 billion of red tape from businesses. Our target for cutting red tape will cover the activities of more regulators so that they contribute to our deregulation target too. We will make it easier for small businesses to solve late-payment disputes with other businesses. We will also create a faster, simpler, more efficient business rates appeals system, to be in place for the next business rates revaluation in 2017.

Moving on to the tax lock, we also want to let people keep more of the money they earn to spend or invest as they see fit. We will keep the manifesto commitment not to increase the rates of national insurance contributions, income tax or VAT. The commitments for income tax and VAT will be delivered through a finance Bill and, for NICs, we will introduce a national insurance contributions Bill, preventing any increase in the class 1 rate above the current rates.

We believe it is important to keep improving the transparency, accountability and governance of the Bank of England. To keep us ahead of the game, a Bank of England Bill will address the recommendations of the Warsh review, complete the transition to eight meetings of the Monetary Policy Committee a year and formalise changes to the Bank’s top team. Further changes are under discussion between the Treasury and the Bank, and we will announce them shortly.

This Government believe that strikes, many of which disrupt essential public services, should be the result only of a clear mandate. The trade unions Bill will therefore introduce a 50% threshold of those eligible to vote for ballot turnout. In the health, education, fire and transport sectors, it will also introduce a voting threshold of 40% in support of strike action in order for that vote to be legitimate. Other measures will tackle the intimidation of non-striking workers, reform the rules on ballot mandates and make changes to the role of the certification officer.

Noble Lords will recall that in 2013 the Prime Minister delivered a deal in Brussels which saw the EU budget cut in real terms for the first time while protecting our rebate. The mechanism by which individual member states finance this budget is known as the Own Resources Decision. The new ORD was agreed unanimously by member states in 2014. This fully reflects the financing aspects of the Prime Minister’s historic deal, including protecting our rebate. In common with previous practice, legislation is required for the UK to approve this, and we will introduce this in the form of the European Union (Finance) Bill.

I turn now to an important topic for the country and a Bill which, if executed correctly, could be highly advantageous; namely, the HS2 Bill. As is known from a number of my past public comments, I believe that other significant transport projects are vital for the success of the northern powerhouse. However, let me point out that, just in the past few days, a significant number of the leading local policymakers of all the northern cities that will be linked by HS2 have repeated their highly favourable stance to this project.

HS2 will connect eight of Britain’s top 10 cities. It will more than double capacity on some of our busiest routes and support up to 100,000 new jobs, 25,000 of which will be in construction alone. The cross-party support shown to HS2, both here and in the other place, is notable. I would like to pay tribute to the work of the noble Lord, Lord Adonis, and others in this regard. This Bill will provide the Government with the legal powers to acquire the land needed for phase 1 of HS2, to build it and to operate it. As a hybrid Bill, it will also enable both Houses to hear petitions based on specific issues relating to HS2, although not about the general principle. I look forward to working with my noble friend Lord Ahmad of Wimbledon on this important issue.

The Department for Transport is also taking forward the buses Bill to enable combined authorities with directly elected mayors to franchise their own buses. It is right that local areas that have ambitious plans to grow and develop should be given franchising powers as they consider necessary to deliver an integrated transport system.

In conclusion, this Government’s legislative programme has three primary objectives: first, to help working people at every stage of their lives; secondly, to put the public finances on a stable, sustainable footing by running a surplus; and thirdly, to deliver a step-change in the nation’s productivity. A dynamic, growing economy, underpinned by sound finances and solid investment, is by far the best way to give the people of this country a better standard of living. The measures set out by Her Majesty last week will help us achieve exactly that.