Spring Budget 2024

Lord Skidelsky Excerpts

Monday 18th March 2024 Lords Chamber

[Lord Skidelsky (CB)]

My Lords, I am afraid I do not share the admiration the noble Baroness has for the Laffer curve, as I shall try to explain a little later. The opportunity given to this House by a debate on the Budget is not to vote on its proposals, as we do not have the power to do that. However, it is to probe the fiscal philosophy which underpins it and see whether it makes any sense. That is what I would like to do.

It is not an easy task. Walter Bagehot said of a well-known 19th-century politician that his success lay in leaving out the premises on which his arguments depended. One can say the same about Jeremy Hunt; he is no Nigel Lawson, who had no fear in displaying his premises. In his Mais lecture of 1987, Lawson said it was the task of macro policy to control inflation, and of micro policy to secure full employment, reversing the Keynesian wisdom of his day. This has been roughly the philosophic stance of British Governments—both Conservative and Labour—ever since.

The Bank of England was entrusted with the control of inflation; reforms in the product and labour markets, like deregulation and weakening trade unions, were relied on to reduce unemployment to its “natural” level—that is full employment, as it was subsequently understood to be. If we look at the Hunt Budget from this point of view, one fact stares out: his assumption that the British economy is now at full employment. The headline unemployment rate is 3.8% and is forecast to stay at 4%—that is at about 1.5 million of a total labour force of 32 million—for the next two years. It is the lowest rate for 16 years, as the Chancellor was quick to point out. Surely, it is about as good as it gets.

What it seems to show is that there is no spare capacity in the British economy: our problem is a shortage, and not a surplus, of labour. This is a statistical miasma, however. Around 9.25 million of the working-age population is classed as economically inactive, giving an inactivity rate of 22%. To argue that in this situation the economy is at full employment, and that there is no spare capacity, seems perverse. It is much more in line with common sense to say that a proportion of that 22% would want to work if there was a demand for their labour.

In short, I would argue that we have a Keynesian problem of deficient demand and not just one of insufficient or inefficient supply. It does not show up in the headline unemployment numbers but in the withdrawal of part of the population from participation in the economic life of the community. It is worth remembering that Keynes did not talk about unemployment equilibrium—that was a later phrase —but underemployment equilibrium. We have had this situation for a number of years. Whatever the supply-side contribution to it—and I understand the rise in poverty, disability, and mismatch of skills and jobs—insufficient demand has also played a part.

We are told that inflation is on the downward trend, due to the Bank of England’s high interest rates and the Government’s sound fiscal policies. Completely ignored in this assessment, however, is the influence of energy prices on inflation. Has the OBR factored in the increase in energy costs which would follow from, for example, the closure of the Suez Canal? That is a real possibility. We need to remember that inflation is not caused just by expanding the money supply at full employment; we had stagflation in the 1970s, when inflation was due to a supply-side shock.

An important aspect of the sound money policy the Chancellor credits with bringing down inflation was the fiscal austerity practised by successive Conservative Governments after 2010. I quote from the Budget speech:

“It was only because we responsibly reduced the deficit by 80% between 2010 and 2019 that we could provide the £370 billion to help businesses and families in the pandemic”.—[Official Report, Commons, 6/3/24; col. 839.]


The alternative view, which I share, is that the austerity policy prevented a full UK recovery from the great recession of 2008-10. Had George Osborne not slashed public spending, the UK would have been in a much better fiscal position to face the pandemic. As I wrote in the Financial Times in 2010:

“Austerity in the capital budget is the worst possible remedy for a slump”.


I stick by that.

Now we come to the Laffer curve: lower taxes mean higher growth. To justify his claim, Jeremy Hunt produced the Laffer curve like a rabbit out of his hat. However, as the noble Lord, Lord Eatwell, pointed out, there is no correlation over time between tax rates and growth rates. The most prosperous period in modern history was the three decades after the Second World War, when the highest marginal tax rates were at 90%, and literally no one was allowed to become a billionaire—even becoming a millionaire was quite difficult.

My last point is that although Labour has rightly been critical of this Budget, it occupies much of the same intellectual territory as the Conservative Government. It has been common territory since the Lawson revolution of the 1980s. It means that while the Conservatives offer what we might call old-fashioned supply-side policy, Labour offers new supply-side policy, which Rachel Reeves called “securonomics”. To my mind, it is a weak position, because it invites the question of where the money is to come from. Unless you believe there is a demand shortage, you cannot face that problem, and it has been followed by the withdrawal of the pledge to spend a large sum of money on green investment.

I remind the House that practical men are all slaves of economists—who said that? Economics will have to do better to provide a philosophical underpinning for public policy.