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.

Budget Statement

Lord Skidelsky Excerpts

Thursday 16th March 2023 Lords Chamber

[Lord Skidelsky (CB)]

My Lords, I join other noble Lords in paying tribute to the remarkable maiden speech of the noble Baroness, Lady Moyo. It was very thoughtful and thought provoking, and I very much appreciated her reference to me—she will have a great future here.

The Budget was crafted in the shadow of disruptive world events over which the Chancellor has little or no control, but it is by its effectiveness in tackling or responding to those events that I think this Budget will be judged. The three killer apps—as one might call them—are global finance, technology and geopolitics. The global banking crisis of course caused the depression of 2008-09. The recent collapse of SVB shows, as the noble Lord, Lord Fox, noted in this House on Tuesday, what a huge proportion of our tech industry depends on finance from a single foreign bank whose solvency in turn depends on fluctuations in interest and bond rates. That is one element of huge fragility in our system.

As for technology, it simply speeds up the operation of every single movement in the economy, whether beneficial or destructive. We know about geopolitics, which threatens all our supply chains and the future of the global economy. So those three elements are really beyond the control of a Budget or a Chancellor and, together, they make the world economy more dangerous, more unstable and more uncertain.

The Minister, in introducing the Statement, stuck closely to the forecasts—but how does she explain the ludicrous divergence in the OBR’s forecasts on inflation and growth between October/November 2022 and March 2023, or the divergence in forecasts between the Treasury and the Bank of England? The noble Lord, Lord Willetts, pointed out that these different models factor in different things, but which of the factorings lead to an outcome that we can have faith in? You factor this, you factor that. What is going on is that all the models used are inadequate. They have become inadequate in the face of large structural breaks which have been occurring in the economy as a result of Covid-19 and the war in Ukraine. They are models which are still optimising around some long-forgotten equilibrium.

I am not sure that we have a better model, but it limits the confidence that we can have in these forecasts. They are trotted out almost as truths. The Chancellor said, “We will grow by” X, Y or Z per cent in the next three years, but what he meant was that the OBR model says that those will be the growth rates—and that is not a satisfactory basis for building confidence.

The speed-up of model obsolescence represents a huge break from the past. We were brought up to believe that short-term forecasts were relatively reliable—after all, how much could change in six months?—and that the longer ones were less reliable. Now, however, both are unreliable. It has infected both the short-term and long-term forecasts. The Treasury is not steering the economy—that phrase was the title of one of Sam Brittan’s great books. The economy is being tossed around by the world economy from one place to another, and that is not going away any time soon. These destructive events have wreaked havoc with the macroeconomic rules so laboriously constructed in the 1990s and 2000s, in particular that of the separation of fiscal and monetary policy, which was the architectural triumph of the Blair-Brown years.

What is it like today? What is the state of that separation today? The fact is that it has been fatally undermined. The Bank of England has been stoking up inflation when it was set up to do the exact opposite. It has been given a green mandate that conflicts with its inflation mandate, and no one knows exactly what the relationship is between fiscal and monetary policy. It has become hopelessly fuzzy, as we found out on the Economic Affairs Committee when we interviewed the Governor of the Bank of England. The whole relationship is shrouded in fictions that no one is meant to penetrate. That is not the basis for giving confidence in macroeconomic policy. In fact, the confidence has been withheld.

“Our plan is working”, said the Chancellor. What plan? To reduce inflation? To get growth? To reduce the inactivity rate? To achieve energy security? He must realise that any improvements that have been recorded since he became Chancellor, or in the last two or three months, are not due to anything the Treasury has done but result from what has been going on in the world economy. There have been beneficial developments, particularly what has happened to energy prices.

A remarkable thing about Budget making today is what it says about markets, media and policy networks. If you analyse it, you will find that there is actually very little difference between the Truss-Kwarteng and the Sunak-Hunt Budgets; the first just came at slightly the wrong time, that is all. Now, things have got a bit better. These are Budgets that depend on five-year forecasts; you cannot say that the difference of a month or two in the presentation of a Budget should have caused such panic in the market—unless, of course, no one had any real confidence in the long-term forecasts on which the Budgets were made.

At one time, there were things called “Budget leaks”. You were not meant to reveal what was in the Budget. In fact, the Chancellor of the Exchequer in 1947 resigned because of a Budget leak. Now, Budget leaks are routine; they are sort of trailers in which the Treasury lays out what it is going to do. What about the opportunities for speculation, for example, that that might give rise to? No one thinks about that any more. You have to make the newspaper headlines.

The Chancellor might have taken advantage in his Budget to display the beginnings of a coherent framework. There is one such framework—it is a very old model; no one knows about it any longer—called the balanced budget multiplier. That approach underpins the Biden Administration’s $738 billion Inflation Reduction Act, which was passed into law last year; I do not think that the Chancellor referred to it in his speech. It is based on an intelligent combination of extra investment and higher social spending to be paid for by higher taxes on the rich and the very rich. Split roughly half and half between tax and spending increases, the combined effect is forecast to secure—again, one has to make the point that it is a forecast—a cumulative reduction in the federal fiscal deficit of about $300 billion over five years. It may not happen—it probably will not—but at least there is a mechanism in it which suggests that it could happen. What we do not have in the present enthusiasm for the policy working is any mechanism or theory which gives you confidence that what the Chancellor is doing will achieve what he wants it to do.

I will make two final points—I am sorry that I have gone on a bit—about where we are in the cycle. It is very difficult to assess what is happening in the labour market; the noble Lord, Lord Bridges, talked about this. On the one hand, we have a very high inactivity rate of about 7 million altogether, which is usually connected with a slack labour market. On the other hand, we have unemployment very low at 3.7% and lots of job vacancies, which would suggest a tight labour market. What is the explanation of that puzzle? The truth, I think, is that headline unemployment figures no longer accurately measure the capacity utilisation of an economy; I think that that has been true for some time, but it has been brought to the forefront recently. A shortage of supply in some areas is combined with a general deficiency of demand in the economy. We would expect the latter to be the case, given that the economy has not grown for three years while the population has grown by 1 million and real wages have fallen substantially. Therefore, we would expect a deficiency of aggregate demand, even though there are pockets of shortage of supply. The Budget might have addressed its attention to that.

I wish that the Chancellor had argued in favour of job creation, rather than incentives to people to apply for jobs that do not exist. Gordon Brown and I, two years ago, argued for a public sector job guarantee scheme, which I still think would act as a kind of buffer stock of employment which would oscillate with the oscillations of the cycle. I am sorry that it was not adopted; it would have been—and still would be—a good method of job creation today that would also tie in with the devolution strategy.

My last point is about securing the long-term growth of the economy. Of course, I welcome the incentives that the Chancellor has provided for investment—the creation of 12 new investment zones modelled on becoming potential Canary Wharfs—but I wish he had given a bit more attention to two British institutions for investment, which I do not think that he mentioned: the UK Infrastructure Bank and the British Business Bank, both of which could be developed. As the noble Lord, Lord Eatwell, said, we know that investment has been a problem in the British economy for a long time. We also know that the share of public investment in total investment has dropped dramatically, and it has not been compensated by any increase in private investment. Here is a good opportunity to insert the state into the long-term recovery of the economy and to provide for the energy and security autonomy, which is the aim of the Government and us all.

In short, there are quite a few interesting initiatives, but I do not think that they have been properly joined-up, and we still await a commanding framework for action in a world that is spinning out of control.

Autumn Statement 2022

Lord Skidelsky Excerpts

Tuesday 29th November 2022 Lords Chamber

[Lord Skidelsky (CB)]

My Lords, the Chancellor’s Autumn Statement is designed to reassure the markets of the sustainability of the public finances. That is, the Chancellor accepts as binding the views of the City of London, whether they are right or wrong. It is what the markets think that matters, not how matters really are—a nice intrusion of post-modernist thinking in what is supposed to be the hard science of economic policy-making.

It is pretty obvious why the Government should pay such attention to the financial markets. For decades, the financial sector has propped up the UK’s hollowed-out economy. Financial flows into the City of London allowed the country to neglect production and trade and artificially maintain a higher standard of living than its productive capacity warranted. Now we are paying the price.

Instead of starting to repair this long-term damage, the Autumn Statement is designed to repair the so-called “black hole” in the budget, in the belief that doing so will, by some magical process, produce an automatic surge in output and growth. In other words, it concentrates on shrinking the numerator, the budget, while ignoring the effects of that shrinkage on the denominator, which is GDP growth. Even in terms of maintaining investor confidence, that is misguided, as the noble Lord, Lord Eatwell, pointed out. How does the Chancellor imagine foreign creditors reacting if his spending cuts produce, or deepen, a recession?

Politics should be based on some theory, at any rate, but there is no explicit theory to be found in either the Autumn Statement or the OBR forecast. The Chancellor sets fiscal targets to reassure the markets. The OBR is there to reassure the markets that the Government’s targets are consistent with its own forecasts. The Treasury and the watchdog cling to each other for mutual protection behind a barrage of statistics that claim far more than they are entitled to.

If there is an implicit model behind both Treasury targets and OBR forecasts, it is the one known as financial crowding-out. There is assumed to be a fixed supply of capital, so the Government’s increased demand for funds puts upward pressure on interest rates. The rise in interest rates will “crowd out” any stimulus afforded by additional borrowing. That is why the less the Government borrow, the more growth you will get. That is simply a restatement of the “Treasury view” of the 1920s, explained by the then Chancellor of the Exchequer, Winston Churchill, who said that

“when the Government borrows in the money market it becomes a new competitor with industry and engrosses to itself resources which would otherwise have been employed by private enterprise, and in the process it raises the rent of money to all who have need of it.”—[Official Report, Commons, 15/4/29; col. 53.]

Presumably, Jeremy Hunt would subscribe to that hoary doctrine, though doubtless in less orotund language. It is as though the Keynesian revolution had never happened; we are just back to pre-Keynesian orthodoxy. It is all embellished in various ways and tweaked here and there, but the substance is exactly the same. However, as the economist Rob Calvert Jump wrote in a recent article:

“There is now a consensus amongst economists that austerity does significant damage to an economy’s potential, undermining growth, as the experience of the last decade in Britain has shown us. Further austerity will do far more damage than a ‘fiscal hole’ that disappears with tweaks to models or accounting rules. The ‘fiscal hole’ is a dangerous fiction compared to the hard facts of austerity’s impact.”


The last point is particularly worth emphasising. How many people realise that the notorious “fiscal black hole” is the product of shifting definitions of net public sector debt?

Theory alone cannot provide us with all the answers; in fact, all the macro models are in more or less of a mess. I will give three examples. The first is the rise in the inactivity rate. There has been a fall of 227,000 in employment since a year ago. So we have a tight labour market with unemployment at 3.6%, a strong demand for labour and a falling labour participation rate. How can that be explained?

Secondly, there is the notorious productivity puzzle. No one has much of a handle on this. What we know is that the forecasts suggest there will be a dramatic fall in living standards, by about 7.1% over the next two years. How will creating a depression stimulate enterprise, innovation or investment, which are the drivers of productivity?

Finally, inflation is expected to peak at 11% in the first quarter and then fall. Again, the discussion really makes no advance on the old discussion about the causes of inflation, whether due to excess demand or cost push—there are, of course, cost-push factors. I think everyone understands that the UK’s support of Ukraine has pushed up energy prices. That is why the Government are now explicitly asking the public to save energy to beat Putin, using crude, World War II-style “Dig for Victory” messaging. What is much less understood is that the UK has a special problem: gas is particularly expensive here, due to our chronic lack of gas storage and our inefficient and exploitative energy distributors.

To conclude, I am strongly in favour of balancing the budget, but not by any mixture of cutting spending and raising taxes. The approach I would favour in present circumstances revives the almost forgotten Keynesian idea of a balanced budget multiplier. A contemporary version of this would suggest a windfall tax or excess profits tax on energy producers, the proceeds of which would be spent by the Government on maintaining investment and consumer demand in the face of the economic downturn.

--- Later in debate ---

[Baroness Penn (Con)]

I am not sure exactly which bit of what I said the noble Lord wants me to correct. I stated the Government’s record on economic growth since 2010, and I simply referred to the comments of the noble Baroness, Lady Kramer, on the recession that was also experienced under the previous Labour Government.

I return to the subject of energy. The noble Baroness, Lady Hayman, asked about energy efficiency. Warmer homes and buildings are key to reducing bills, creating jobs along the way and meeting our targets on climate change. That is why we are committed to driving improvements in energy efficiency, with a new ambition to reduce the UK’s final energy consumption from buildings and industry by 15% by 2030. A new ECO+ installation scheme was announced earlier this week.

I disagree with the analysis that this is jam tomorrow; we have £6 billion of new government capital funding that will be made available from 2025 to2028, but that is in addition to the £6.6 billion allocated in this Parliament. The aim of that kind of longer-term projection of funding is to create consistency and allow businesses and the supply chain to build up and plan for the future, which can be something that we struggle with in the provision of energy efficiency measures. We are also launching the energy efficiency task force and expanding our public awareness campaign to help reduce bills for households and protect vulnerable people over the winter and beyond.

In response to my noble friend Lord Leigh of Hurley, on other tax measures and the taxation of US groups trading in the UK, the UK has long been committed to tackling base erosion and profit-shifting, which is why we introduced the diverted profits tax in 2015 and the corporation interest restriction rules in 2017. I am glad that he welcomed progress on Pillar 2, which we will legislate for in the spring 2023 Finance Bill, but I agree with him that we need to make further progress on Pillar 1. That is why we continue to work internationally on finalising Pillar 1, so that the corresponding multilateral convention can be ready for signature in the first half of 2023, allowing for implementation in 2024.

Other noble Lords noted some strange political alliances that seemingly might have formed in the course of this debate. The noble Lords, Lord Sikka and Lord Howarth of Newport, but also my noble friends Lord Bridges and Lady Noakes raised concerns around the Government’s decision to freeze the personal allowance and other tax thresholds. I say to noble Lords that despite the need to increase taxes—I fully acknowledge that freezing thresholds is a tax increase, I am not trying to hide it in any way—given that the personal allowance nearly doubled across the last decade, it will still be £2,150 higher by April 2028 than it would have been had it been uprated by inflation each year since 2010. The noble Lord, Lord Sikka, also asked about the distributional impacts of tax. I cannot answer his specific point, but on average it is households in the poorest income deciles that are gaining the most next year as a result of decisions taken in the Autumn Statement.

I take seriously the concerns expressed by my noble friends Lady Noakes and Lord Bridges. The Government have had to take difficult decisions and we are being honest about that. We want a low-tax economy, but first must come economic stability, and we need everyone to contribute a little towards sustainable public finances. I know it will be little comfort to them to be reminded that the UK tax system remains competitive, with the tax-to-GDP ratio meaning that we are still in the middle of the pack within the G7 and lower than such countries as France, Germany and Italy. As I say, the Government take their challenge on growth seriously and we have taken some tax decisions to prioritise this; for example, keeping the annual investment allowance level that was set in the growth plan permanently at £1 million, rather than reverting to £200,000 from 1 April 2023.

My noble friend Lord Bridges rightly identified a greater range of actions that we must take to set the conditions of growth beyond tax policy. A key area and opportunity post Brexit is regulation, and I hope he will welcome the action on Solvency II that we have announced and the measures in the forthcoming Financial Services Bill, which we will seek to replicate across other growth sectors across the UK economy, such as life sciences, as spoken about passionately by my noble friend Lady Blackwood. Many noble Lords, including the noble Lord, Lord Shipley, and my noble friend Lord Tugendhat, raised the issue of housing. The noble Lord, Lord Shipley, spoke about the need to build more houses for social rent: that is exactly what the Government are doing, through such measures as removing the cap on councils borrowing against their housing revenue account. I reassure him also that we are still committed to ending no-fault evictions.

My noble friend Lady Cumberlege asked about our commitment to community pharmacists and the issue of funding there. The plan for patients set out the further expanded role of pharmacies agreed in the community pharmacy contractual framework for the next two years, as well as an additional £100 million investment to recognise the pressures facing the sector. The Government have also committed to look further by enabling pharmacists with more prescribing powers and making more simple diagnostic tests available in community pharmacies.

In response to the noble Lord, Lord Rogan, I welcome the 25th anniversary of the Belfast agreement and I am extremely pleased that we confirmed in the Autumn Statement that we are funding the planned trade and investment event in Northern Ireland. DIT will work with local partners as this is taken forward, including with Invest NI.

The noble Lord, Lord Bilimoria, asked about defence spending. As I said in my opening speech, we recognise the need to increase defence spending, but before we make announcements on that, we need to refresh the integrated review, which was drafted before Russia’s invasion of Ukraine.

The right reverend Prelate the Bishop of Gloucester referred to the benefit of women’s programmes for preventing female offending and the savings to the Ministry of Justice as a result. In September, the Ministry of Justice announced that almost £21 million will be invested in women’s services to tackle the causes of female offending and cut crime.

The noble Lord, Lord Livingston of Parkhead, asked an interesting question about the difference between the Bank of England and OBR forecasts. Given the number of recent changes in fiscal policy and the volatility in financial and energy markets, the range of external forecasts is wide. Differences will partly reflect when each forecast was produced and the differences in assumptions about government policy, interest rates and energy prices, but I take his wider point.

I congratulate my noble friend Lady Lea on her excellent maiden speech. I know she brings a wealth of economic experience, not least from her own time working in the Treasury. I look forward to working with her in the future.

We have faced two enormous shocks in the last three years. The pandemic has caused supply chain disruption, slowed growth and increased debt levels, and Putin’s war in Ukraine has caused energy prices to spike. This has added up to inflation at levels not seen in a generation, hitting the pockets of families across the country. That is why tackling inflation is our priority. It makes everyone worse off, especially the most vulnerable, so we have taken difficult decisions that will mean taxes go up and spending will not rise by as much as previously planned. When we take into account the need to invest more in areas such as our NHS, it means hard choices to be made elsewhere.

However, I remind noble Lords that we fight these economic challenges from a position of relative strength. Unemployment is close to the lowest level it has been in nearly 50 years, and the UK is forecast to have had the fastest growth in the G7 in 2022. We also have incredible strengths within our country that aid our mission: our teachers, our NHS workforce, our armed services, and everyone who works in our public sector—day in, day out—to deliver the services upon which we rely.

We are inventive and resourceful, and the innovative, intuitive and ambitious people who make up our private sector will drive our growth. Combine this with the decisions taken over the last 12 years and the results are clear to see: employment is up by millions compared to 2010; we have had the third highest real GDP growth rate in the G7 since 2010; renewable energy production is growing faster than in any other large country in Europe since 2010; thousands more children are in good and outstanding schools compared to 2010; and we have record numbers of doctors in the NHS. Now, because of the difficult decisions we take in our plan, we are strengthening our public finances, bearing down on inflation and supporting jobs—all while protecting public services.

The Autumn Statement is a plan that provides stability. It is a plan for growth and a plan for public services. I beg to move.

[Lord Skidelsky (CB)]

Before the noble Baroness sits down, could I ask a question, please?

[Baroness Jones of Moulsecoomb (GP)]

Excuse me, but before the noble Baroness sits down, she did not answer my questions, unless I fell asleep, which is quite possible because it is past my bedtime. I asked two specific questions about NHS funding and hospitals.

--- Later in debate ---

[Baroness Penn (Con)]

There were many questions that noble Lords asked that I did not get to in the time available. Maybe I should write to all those who have participated in this debate to make sure that I address all the points raised but do not detain noble Lords any further.

[Lord Skidelsky (CB)]

Could the Minister explain how fiscal consolidation, particularly cutting public spending, promotes growth?

[Baroness Penn (Con)]

My Lords, there is probably a longer conversation to be had, but I did set out how the profile that we have taken in our approach to consolidation supports growth at this time but also gets our public finances on to a sustainable footing. I am now sitting down; I will take no further interventions.

Budget Statement

Lord Skidelsky Excerpts

Tuesday 14th March 2017 Lords Chamber

[Lord Skidelsky (CB)]

My Lords, I always seem to follow the noble Lord, Lord Desai, or he follows me, in these debates. Like terrible twins, we cannot be separated. He is always fun to listen to and has given us a lot to think about, although I shall not follow him on this occasion down the path of secular stagnation, which is certainly worth thinking about.

Ever since I entered this debate eight years ago, I have said that the austerity policy was wrong—that it would slow down growth, and therefore make it impossible for Chancellors to meet their targets. I do not think that I was wrong. As Larry Elliott wrote last week:

“A one-term deficit reduction plan has now become a 15-year slog”,


and it will no doubt go on.

True enough, public sector net borrowing has fallen from 9.7% of GDP in 2010-11 to 3.8% this year, and is expected to fall to 0.7% in 2021-22, but this reduction is not the result of any measures taken or cuts made by George Osborne; it is the result solely of the growth of the economy, which is due to a different set of factors of which monetary policy has been very important. This is a difficult issue, but one cannot have this debate without a tiny bit of economic theory being somewhere buried in its recesses, and I want to produce my little smidgeon.

What has happened is that growth policy, such as it was, has been outsourced to monetary policy since 2010. This is by far the weaker of the two instruments, because of the slippage between printing money and spending money which was discerned by Lord Keynes in 1936. In other words, you can print the money; the problem is to get it spent. If there are leakages on the way, there will be quite a weak impact.

The net impact of fiscal contraction and monetary expansion has been to slow down the rate of growth of the economy. Everyone now recognises this, except of course the Front Bench on the government side. Everyone recognises that austerity policies have slowed down the rate of growth of the British economy. Mark Carney, Governor of the Bank of England, said in his recent Roscoe Lecture that,

“sustained austerity … has, on average, subtracted around 1 percentage point from demand each year”,

since 2010. That is not a unique statement; we hear it from official bodies as well. Had George Osborne simply continued with the policies of his Labour predecessor, he would have left his own successor, Mr Hammond, with a nice surplus by now.

It is a bit disturbing to see that the penny has not yet dropped. The austerity rhetoric seems to be hardwired into the minds of Chancellors, although their practice is somewhat different from their rhetoric, but it is more disturbing to see that it seems to be hardwired into the minds also of Treasury officials. Two representatives of the Treasury view have spoken today, the noble Lords, Lord Macpherson and Lord Higgins—the noble Lord, Lord Higgins, was brought up and bred in the Keynesian era, so he is a bit more relaxed about these things.

Over these years, someone has been getting something wrong. Is it the Chancellors? Is it the Treasury? Is it the OBR? Is it the economics profession? I blame the economics profession quite largely for these wrong models of the economy, but the truth seems to be that all macroeconomic forecasting policy models were wrong, because the theory on which they were based was wrong. At least the IMF has admitted that it was wrong, but I do not see any admission from the Treasury to that effect. The Treasury, after all, has never been interested in growth; it is the Government’s housekeeper. That is why Harold Wilson set up the Department of Economic Affairs in 1964 as a counterweight to the Treasury view. Who now remembers it? Very few. It ran aground on the sterling crises of that era, but it is certainly something Governments should look at again.

The Chancellor followed many of his predecessors in mentioning the productivity question. How come the UK’s productivity is 18% lower than the average of G7 countries? It is not such a puzzle. In every single year between 1980 and 2015, Britain’s investment share of GDP was 3.7% lower than the G7 average. This level of underinvestment over a 25-year period is bound to produce a depressing productivity record.

The private sector is not picking up the slack. As Martin Wolf wrote last week, consumption in the last year rose by 3%, but investment fell by 1.5%. Chancellors have tried to help investment and I welcome some of the measures, but the amounts pledged have not reversed the cuts in the capital budget that have occurred since 2010.

Our infrastructure quality is ranked as the second worst in the G7. I must finish now, because the noble Lord, Lord Desai, said everything that I wanted to say about the burdens on our future generations and did so extremely well. But now that we have bond yields that are near rock bottom, we should take advantage of them to build a better Britain and not go on about deficit targets which present policy puts perpetually beyond reach.

Budget Statement

Lord Skidelsky Excerpts

Wednesday 23rd March 2016 Grand Committee

[Lord Skidelsky (CB)]

My Lords, I want to address three topics that have arisen from the Budget—the productivity collapse, the overreliance on OBR forecasts and the failure to distinguish between capital and current spending. I know that noble Lords have spoken on the first two but the third one is also important and was briefly alluded to by the noble Lord, Lord Desai.

Productivity is really a disaster. Before the crash, productivity growth was about 2% a year. In the last eight years it has been 0.2%. These figures should alarm the Chancellor. It means that he can expect no help to growth from productivity and that a lot of our present growth is bubble growth, which will subside when the balloon is pricked, together with the bubble revenues it brings him. The belated recognition of this fact has led the OBR to revise downwards its growth forecasts, leaving the hole in the Budget to which many noble Lords have already alluded. Near-zero productivity growth also means we can expect very little improvement in living standards over the next few years. The Iron Chancellor will have presided over Britain’s longest period of stagnation in a century.

No one has a completely convincing explanation of why productivity has been so poor, certainly not the Bank of England, which has written a couple of reports on the matter. In the most general sense it must be because of the way our labour markets and financial system have worked during the recovery from the recession. What new jobs have we created? In his Budget speech the Chancellor claimed that the economy created 2 million “good” jobs in the last Parliament,

“90% … in skilled occupations ... three quarters … full-time”.—[Official Report, Commons, 16/3/16; col. 953.]

The view from chez Corbyn was, understandably, very different. He referred to,

“nearly 1 million people on a zero-hours contract ... the highest levels of in-work poverty on record”.—[Official Report, Commons, 16/3/16; col. 971.]

This means that this has been a jobs-rich, skills-poor, recovery—in marked contrast to both the great depression of the 1930s and the recovery from the 1980s. The labour-intensive nature of the recovery has shown that Margaret Thatcher achieved her goal of creating the flexible workforce dreamt of by the Chicago economists, but only by drying up the springs of productivity and thus real wage growth. From 2008-14, the median real wage, which had been growing by about 2% a year in the 1980s and 1990s, fell by an average of 1% a year. Real weekly wages still have not reached their pre-crisis peak; this is not what a recovery should look like in a “high-wage” economy.

We can discern two trends from this: a further shift from manufacture to services; and within the service sector, a shift from higher paid to lower paid jobs—from local government to hospitality, personal services and retail. Our new service economy is starting to look like the Victorian servant economy, with the difference that the services are now outsourced rather than in-house. However, to explain the increase in the labour intensity of employment we also have to look at the financial sector. Capital investment has fallen off, with investment as a fraction of output having been consistently 1% or 2% lower than its pre-crash level. The effects of this continued underperformance of investment, accumulating over time, has left us with an anaemic capital-labour ratio that continues to drag on our productivity.

Why has investment been so sluggish? This, we must remember, has been despite all the efforts by the Bank of England to stimulate fresh investment by keeping interest rates at zero, and, of course, pouring a lot of money into the economy. Is it because we have a damaged banking system or because we have a banking system which is less interested in helping small and medium-sized enterprises than in churning money around itself? Is it because the demand for loans has fallen off? It is probably some combination of the three. Much of the new money has been hoarded. Some of it has gone into asset speculation. Two-thirds of bank lending goes into mortgages to buy existing houses—which is speculation in a fixed asset. All of which is a far cry from the textbook idea of banks as intermediaries which channel public savings into real investment. Therefore, on the one hand an increase in labour intensity and on the other hand an increase in what the noble Lord, Lord Turner of Ecchinswell, calls “financial intensity”—an increasing share of financial actions taking place within the financial sector itself. I argue that the interaction between the two explains our productivity collapse. The conclusion I draw is therefore pretty clear. If the private sector will not invest in the economy, the state has to do it.

My second topic, which has been referred to by the noble Lord, Lord Darling, is about the over-reliance of the Chancellor on OBR forecasts. We know the picture. In November the OBR gave the Chancellor a £27 billion bonus and more recently it discovered a £4.4 billion hole. Targeting deficit reduction over a medium-term period became fashionable in 2010 to give fiscal consolidation credibility. In 2010, the noble Lord, Lord Darling, announced that he would halve the budget deficit over four years. A few months later, the Chancellor said that he would eliminate the “cyclically-adjusted” current spending deficit by the end of the 2010 Parliament. Labour now follows the same path. John McDonnell says that a Labour Government will balance the books every five years. All these targets depend, as noble Lords know, on growth forecasts which are bound to be wrong at the time, bound to be wrong—as the noble Lord, Lord Desai, said—even about the past, and are bound to be even more wrong in the future. Today no one knows how much the economy will grow over the next five years, yet the Chancellor still has a target of an overall surplus in 2019-20. The combination of point targets and variable forecasts is a mad way to do budgeting. No wonder the Chancellor has revived his talk of headwinds. I can see that having these medium-term targets gives some assurance of fiscal discipline. However, it also means that policy is just shuffled around between the front and back of the sofa according to the latest OBR forecast. The one thing this vacillating method fails to provide is a credible policy of fiscal consolidation.

The larger problem underlying all this is that the Chancellor’s Administration has been trying to achieve a balanced budget for a given state of the economy rather than trying to use the budget to balance the economy. Unfortunately, this restricted view is shared by Labour. It means that the current debate largely revolves round the fairness of the cuts—the distribution of the sacrifice—rather than challenging the logic of the cuts in the first place. We therefore need a lot more thought about that.

My final point is about George Osborne’s failure to distinguish between capital and current spending. This goes back some way, and he is not the first to fail to do that. One of Gordon Brown’s achievements was to revive the distinction between debt incurred to finance capital formation and debt incurred to fund consumption. The basic idea is that the Government should cover all current spending by taxes, but can borrow for investment. Had that distinction taken root, the spending that needed to be balanced by taxes would have been much smaller and the budget deficit consequently less alarming than has been shown to be the case in public debate. The problem, of course, is the difficulty of defining investment. Building a new school or hospital is surely an investment, but because it does not produce a calculable prospective revenue to service and pay off the debt, it creates a lot of wiggle room to borrow for current spending.

In reaction, the Treasury now treats all public investment as current expenditure. When the Chancellor says that he aims for a surplus in 2019-20, he means a surplus on public sector net borrowing. Since any investment financed by borrowing increases the deficit, that is in effect a veto on government borrowing for investment in the foreseeable future. We need to do a lot more work on this.

I am reminded of something that Keynes wrote in 1942. He said:

“We need to extend, rather than curtail, the theory and practice of extra-budgetary funds for state operated or state-supported services … [It is important] to associate as closely as possible the cost of particular services with the sources out of which they are provided … This is the only way to preserve sound accounting, to measure efficiency, to maintain economy and to keep the public aware of what things cost”.

I do not deny for a moment that there are some thorny problems here, but unless we make a determined effort to relate the cost of particular services with the sources from which they are financed—I have been a long-standing advocate of a national investment bank—we will never escape from the deficit trap, at least except by destroying what is left of social cohesion. That is the course, I am afraid, on which the Chancellor has embarked. But as the resignation of his Work and Pensions Secretary shows, it will bring him little joy.

--- Later in debate ---

[Lord Lupton (Con)]

My Lords, I want to talk about two matters in the Budget, one of which has had little publicity to date but to my mind signals a significant and welcome policy development. Before doing so, I want to make one general observation and remind the Committee of my declared interest as chairman in Europe of a global corporate advisory firm, some of whose clients may well be affected by the Budget.

In my first few months sitting in your Lordships’ distinguished company in the House, I have come to the conclusion that the opposition parties have learned little from the depressing tale of recent economic history. Reckless mismanagement of the economy in 13 short years, most of those years in the boom period before the crash, brought this country almost to its knees in 2010, requiring the Conservative-led coalition in that year, now a Conservative majority Government, to take decisive action to reduce a double-digit deficit.

It is apparently perfectly acceptable, when we have a deficit still running at more than 3%, to table amendments costing the country literally billions while criticising in a knee-jerk way any tax cut, even when there is good evidence that such a cut may produce more revenue. I am sorry to say that there is something sickening about listening to the sheer hypocrisy of Labour Peers criticising a so-called “black hole” of £4 billion opening up over the next five years on PIP when they dug a 10% deficit cavern in 2010—a Wookey Hole compared to a PIP pothole.

[Lord Skidelsky]

My Lords, can we just get some accuracy on the figures? The deficit when George Osborne took office was 8.3%. Let us not talk about double digits.

[Lord Lupton]

As the noble Lord well knows, the economy is a supertanker that does not turn around in six months, as indeed the evidence over many economic cycles shows. None the less, just to recall, all of that generated in 2010 the famous billet doux from the Treasury: “Good luck. There’s no more money”.

I want to talk about the proposal to cut capital gains tax from 28% to 20% from next month. In 2010, the Adam Smith Institute produced a compelling report on the effect of capital gains tax rises on revenues using data from the USA dating from 1955 to 2006. I apologise in advance for bombarding noble Lords with numbers, but when the tax rate was raised four times between 1968 and 1976 from 20% to 35%, total capital gains tax revenues fell by 21%. When the 35% CGT rate in 1978 was then progressively cut to 20% by 1984, the CGT take rose by 46% to $41 billion. When the rate was increased again in 1986 to 28% from 20%, revenues fell by 13%, and when the rate was cut from 20% to 15% in 2003, CGT revenues almost exactly doubled to $110 billion. Noble Lords will get the drift: there is a clear pattern of inverse correlation between the two. Professor Paul Evans of Ohio State University found in an important piece of research carried out in 2009 that a 1% reduction in the marginal tax rates on CGT in the US might trigger a 10% increase in revenues.

There have been fewer changes to CGT rates in the United Kingdom so it is more difficult to draw evidence-based conclusions, but I note that the rate cut in this Budget is possibly the only cause for my being in agreement with the former Chancellor of the Exchequer, Gordon Brown. He reformed CGT in his first Budget in July 1997, cutting CGT on long-term investments from 40% to 24%, and again in 2003 he cut CGT on business assets to a rate of 10% for assets held for more than two years. Thereafter—guess what?—CGT revenues in the UK increased by 35% to £3.2 billion. Since much of capital gains tax is a voluntary tax in that you can often choose when to realise a profit, this feels intuitively right.

I applaud the cut in the rate of CGT, not least for basic rate taxpayers who will now pay only 10%. With entrepreneurs’ relief at 10% now extended to all long-term investors in unlisted shares—quite often start-ups—there is already anecdotal evidence of a further surge in entrepreneurialism which will, based on strong historical evidence, particularly in the United States, increase revenues from this tax to the Exchequer—and hence my reason for applauding it.

I would also like to say a few words about the introduction of the interest deductability cap which, perhaps unsurprisingly given its name, has had little coverage in the press. The Budget imposes what to my mind is a sensible cap on the amount of interest which can be deducted from taxable profits at 30% of those earnings in the UK with a de minimis threshold of £2 million of net interest expense to avoid harming smaller companies. This represents a very important policy shift. While a key driver of this measure seems to be restraint of tax shifting by international companies away from the UK, sections of the investment community, some of whom I represent in the UK, will no longer have such a powerful personal motive to leverage the companies their firms buy.

This provision will force a change on the private equity business model in the UK, requiring, I believe, greater prudence and greater concentration on genuine business improvement rather than overreliance on pure financial engineering. That is a good thing and I am sure that the private equity industry will rise to the challenge.

The great financial crisis was littered with carcases of companies where the so-called “tax shield” of carefully constructed legal structures with double dipping and excessive debt went wrong when the profits of the company stumbled. From talking this week to some of the major players in the private equity world, my feeling is that this OECD-wide initiative, which our Government are now pioneering, is regarded by them as an inevitability, with the result that lesser personal rewards will be available from what, in aggregate—that is the point: in aggregate—became the taking of major systemic risk through excessive leverage. Excessive, and even abusive, use of interest rate deductions incentivises the use of debt over equity, overleverages corporations, thereby increasing their risk, and increases systemic risk in the UK banking sector as a direct result. Change is long overdue—a fact the Chancellor recognised with prescience when he called for such change in opposition. I applaud this move, with the cautionary note to the Minister that when interest rates eventually rise, the Government may need to be flexible on whether 30% is then the right threshold for the cap.

This is not only a pro-business Budget but one which is pro-market, pro-new entrant, pro-small business and pro-entrepreneur too. Under the bonnet of this Budget, small businesses and entrepreneurs are being helped the most and large companies are being held better to account to behave responsibly and pay their fair share. Growing, successful businesses create jobs. Higher employment improves the economy, reduces the deficit and enables us to take care of the most needy in our country. We should trumpet the success of UK business in recent years. I am confident that this Budget will build an even more vibrant business economy.

Autumn Statement

Lord Skidelsky Excerpts

Thursday 3rd December 2015 Lords Chamber

[Lord Skidelsky (CB)]

My Lords, four minutes is hardly long enough to have a properly developed argument or debate, so I will confine myself to a number of propositions that I hope might at least excite the interest of the noble Lord, Lord O’Neill.

The first proposition is that the Chancellor has failed to meet his deficit reduction targets. In 2010, he said that the deficit would be down to zero by now; this year he is set to borrow £70 billion, and the balancing is postponed for five years. To me the explanation is clear enough: the Chancellor’s policies depressed the growth of the economy, especially between 2010 and 2012, and therefore postponed the closing of the gap between spending and revenue. Perhaps the noble Lord, Lord O’Neill, will tell me why I am wrong.

Secondly, productivity, which was already low before the crash, has collapsed, as the noble Lord, Lord Shipley, pointed out. Between 1971 and 2007 productivity growth was fairly constant at between 2% and 3%. Since the crisis it has been closer to zero. Productivity growth did not collapse like this in previous cycles. The gap between our productivity and that of the rest of the G7 is now at the highest since records started in 1991. I have an explanation for this collapse, which is that recovery has produced a huge expansion of low-productivity jobs in retail, hospitality and suchlike, and that is the truth behind the much-vaunted recovery of employment. Does the noble Lord, Lord O’Neill, agree, and, if so, what do the Government propose to do to create that high-wage economy that Ministers constantly proclaim as their goal?

Thirdly, investment, already inadequate, fell from 19% of GDP pre-crash to 15%, and it is still at the pre-crash level. A robust recovery would expect to see investment for a time exceed its pre-crash level. This has not happened. Why? I have an explanation. Money which would have gone into investment in a healthy recovery has gone into speculation. Investment is down, but we have had a wonderful boom in asset prices, including house prices, which has mightily benefited the rich. Does the noble Lord, Lord O’Neill, think that this is healthy?

Fourthly, instead of borrowing to modernise our infrastructure, the Chancellor has encouraged foreign money to do it, even if the foreign companies, such as Deutsche Bahn, are state-owned. Now, he and the Prime Minister have gone bananas over China. What effect is that going to have on our balance of payments and therefore on our ability to increase exports? We privatised lots of our own public utilities because we thought they wasted money; now, we sell them to foreign state-owned enterprises because we want to save money. Public enterprise is apparently good if it is not British.

Fifthly, the Chancellor plans to privatise the Green Investment Bank—one of Vince Cable’s achievements in the coalition—because,

“it is necessary to move the bank off the public balance sheet if it is to raise additional funding through borrowing”.

This is an absurd reason. If it makes economic sense for a privatised GIB to borrow, why not for the Government?

I feel sympathy for the Chancellor trying to balance his budget on the back of bogus Treasury accounts but, instead of challenging the Treasury’s accounting rules, the Chancellor has committed himself to running an overall surplus in normal times, just like Victorian Chancellors, who never borrowed for anything except defence.

Failure to meet his budget targets, low productivity, low wages, low investment, a bonanza for speculators, rising inequality and still more austerity to come: these are the Chancellor’s bequests to the British economy. They have brought enormous harm to the country and will continue to do so unless he finds the confidence to challenge the Treasury’s view. But there is not much time.

Queen’s Speech

Lord Skidelsky Excerpts

Thursday 4th June 2015 Lords Chamber

[Lord Skidelsky (CB)]

My Lords, it is always a great pleasure to follow the noble Lord, Lord Desai. We seem to be yoked together like a pair of terrible twins, perhaps on the theory that at least we understand what each other is saying even if no one else does. It is a great pleasure to welcome the noble Lord, Lord King, to this House, and the very powerful speech of the noble Lord, Lord O’Neill, promises strenuous mental exercise over the coming months and years.

Praise where praise is due: there are several good things in the gracious Speech. It is strong on aspiration and there are some sound implementing measures promised. It is a good idea to take people working 30 hours a week on minimum wages out of income tax. Can the Minister explain how many are expected to benefit from that measure?

I particularly welcome the goal of building a northern powerhouse, and look forward to the Cities and Local Government Devolution Bill, which will provide for an elected mayor of Greater Manchester and possibly elected officials in other conurbations. Elected mayors are vital to the strength of local government. Some of us on the House’s Economic Affairs Committee hearing evidence about HS2 were struck by the weakness of the northern voice. It would have been better, I think, to have started the scheme by reducing transport costs in the north of England rather than spending a huge amount of money in the next five years reducing train times from London to Birmingham by 15 minutes. Elected mayors in the big cities will help to redress the London bias which has too long dominated our economic life.

I welcome the aspiration in the gracious Speech to “full employment” and job security. I emphasise aspiration because there is no indication of how either goal is to be achieved. In particular, how does the aim of job security square with the large increase in insecure jobs over the last five years through temporary work, exploitative self-employment, zero-hour contracts, agency work and so on? Evidence suggests that about 5 million working-age adults are in such precarious jobs, and they account for much of the increased employment of which the Government boast.

This growing population of the working poor contributes to the amply documented rise in inequality, which has been growing since the 1980s and has accelerated since the onset of the crisis. Austerity has contributed significantly to this by reducing the share of income going to wage earners. The gap between rich and poor is now almost as great as it was before the First World War. This is morally unacceptable, socially divisive and economically destructive. In particular, it is a major cause of the collapse in productivity, to which noble Lords have alluded. I quote the Government’s briefing:

“Fixing the UK’s long-running productivity weakness is one of the government’s biggest challenges over the next five years”.


The noble Lord, Lord O’Neill, powerfully reinforced that, as did other noble Lords. Treating productivity as a long-run problem, however, disguises the fact that the most urgent problem is the collapse in short-run productivity. Between 2000 and 2008, productivity increased by about 2% a year, but since 2010 it has not grown at all. That is what is wrong with the argument of the noble Lord, Lord Desai, as it is not just a long-term problem based on the increase in unmeasurable service costs; it is what has happened in the last five years. That is what we ought to address, because most of the new jobs created since 2010 have been low-productivity jobs. How many people understand that the welcome fall in unemployment is the mirror image of the redeployment of many of the unemployed to low-productivity jobs? Real wages, as we know, have fallen since the coalition took office and apropos the noble Baroness, Lady Wheatcroft, most minimum wage jobs are not in companies that have shareholders. That is not the main problem here.

I do not want to rake over the coals of my long dispute with the coalition on economic policy. I do not doubt the Government’s commitment to sustainable growth but they see growth purely in terms of supply-side policy. It was assumed from the start that public austerity, by promoting the switching of production from the less efficient public sector to the more efficient private sector, would increase the efficiency of the economy. However, what that ignores is the effects of the policies on demand. At best, the Government have seen the problem of demand as a very short-run problem, not taking into account that a prolonged demand shortfall has lingering effects on supply. Economists have a rather horrible word for this: hysteresis, a word from engineering denoting the reduced capacity of a machine when it is disused or underused for any length of time. This has been happening to our productive system. Many, if admittedly not all, of our supply problems stem from the way that the labour market has adjusted to the austerity policies of the last five years.

The Government still hanker for supply-side solutions. Of course supply is very important but it is not the only thing. They promise to introduce a bill to freeze benefit rates and reduce benefit caps for two years, in order, they say:

“To ensure that it pays to work rather than to rely on benefits”.


Of course you can always force people to work by reducing benefits but you will then get wages chasing benefits downwards in a vicious circle. What good does that do for productivity? The Government promise 3 million extra apprenticeships, which is very good, but those apprentices will need jobs to go to. Rather than the mean-spirited assault on benefits, the Government should bring forward investments in infrastructure that provide decent jobs. The Government promise a British investment bank, something that I have been advocating since 2010—better late than never—but are silent about its scope and financing. I suggest that investment projects should be targeted at the areas of higher than average unemployment, as part of the rebalancing and northern powerhouse strategy. To boost demand, the Government should take steps to raise middle and lower incomes, which will provide confidence for firms to invest. Raising the minimum wage would be a step in that direction.

It seems to me that the Government’s post-crash growth strategy relies dangerously on recreating the pre-crash levels of private debt. This is a perilous course, which risks another collapse at no distant future. In short, is that what we want? Is this the best that we can do? I think not. Let us try to do better. Let this House give voice to that better future which the leaders of the defeated parties failed to offer at the last election.

Budget Statement

Lord Skidelsky Excerpts

Wednesday 25th March 2015 Lords Chamber

[Lord Skidelsky (CB)]

My Lords, at the time of his first Budget in June 2010, the Chancellor said:

“The most urgent task facing this country is to implement an accelerated plan to reduce the deficit”.

He committed himself to achieving a “cyclically-adjusted current budget balance”—the relevant part of that deficit standing at 4.8%—by the end of this Parliament. Instead, today, we still have a deficit of 2.8%. Of course, as a good politician, the Chancellor left himself wiggle room by talking about a “rolling five-year period” for achieving his goal. We are still rolling, but always “on target”. In last week’s Budget Statement he said that he will hit his original target three years late. He is like the runner, who, when the race is finished, gets to decide when it started.

In 2010, the Chancellor said that,

“reducing the deficit is a necessary precondition for sustained economic growth”.

Had he said, “sustained economic growth is a necessary condition for reducing the deficit”, he would have been nearer the mark. The main reason for his failure to balance the books is that the economy did not grow according to plan. His 2010 deficit reduction programme presupposed an average GDP growth of 2.7% between 2011 and 2013. Actual growth in the period was 1.3%.

Understandably, the Chancellor does not say much about the growth failure and never talks about the possible connection between his own plans and the failure of growth to materialise. Instead, the Chancellor and his supporters say that this poor growth record was bad luck: his entirely correct policy was undermined by “headwinds”. The noble Lord, Lord Deighton, mentioned a couple of them today—the eurozone crisis and our higher oil prices. However, the Chancellor’s own watchdog, the OBR, disagrees with the headwinds theory. It concludes that austerity reduced UK GDP growth by 1% in both 2010-11 and 2011-12—2% altogether. Using this analysis, Professor Simon Wren-Lewis of Oxford University has shown that austerity has produced a cumulative loss of GDP since 2010 of 5%. That means five years of British output and income permanently lost—we cannot get it back. And that, as Professor Wren-Lewis, points out, is a conservative estimate. No “accelerated plan to reduce the deficit” was required in 2010; just a rate of public spending growth somewhat less than the pre-crash GDP growth rate would have done the job.

The Chancellor’s new rolling five-year deficit elimination programme forecasts GDP growth of just under 2.5% for the next five years. Why on earth do we think that these forecasts will be any better than those of the previous five years, given the continued drag of the proposed cuts on the growth rate and the highly unstable GDP growth pattern since 2013? I accept that there has been a lot of progress in the north-east but the main driver of growth in the last couple of years has been rising asset prices. Where is the Chancellor going to find the £35 billion of cuts that he needs to meet his 2018-19 target? The noble Lord, Lord Deighton, referred rather airily to spending cuts and efficiency savings. I look forward to hearing details of these rather nebulous plans. In fact, what we suffer from is a candour deficit, not a budget deficit.

In conclusion, I enter a protest against the Chancellor’s slippery use of the word “deficit”—a slippery use that has spread throughout the public conversation on the matter and confounds public understanding of what he is doing. In 2010, George Osborne committed himself to eliminate the “cyclically adjusted current deficit”—the word “current” being crucial. However, this was going to be politically difficult, as it meant cutting public services. So his project soon morphed into one of cutting the “structural” deficit—that is, cyclically adjusted current spending plus net investment. This was politically easier, as cutting investment just means scrapping or slowing down investment projects, not cutting actual services. Nearly all the cuts in the Chancellor’s first two years were cuts in public investment, not in current consumption.

Now we come to last week’s Budget. In his speech, the Chancellor claimed that he has cut the deficit from 10% to 5% of GDP and will eliminate it entirely by 2018-19. But here he just means public sector net borrowing: no more cyclically adjusted caveats, no more borrowing, full stop. Since raising taxes is not on his agenda, this means only one thing—getting public spending permanently lower. He evidently now feels confident enough to proclaim openly what was probably in his mind from the start: to reduce the size of the state to dimensions which would have brought a smile to the face of the Iron Lady.

--- Later in debate ---

[Lord Deighton]

The Government’s strategy is crystal clear. The benefit of getting the deficit under control is absolutely worth it in terms of fixing the roof while the sun is shining. That is the philosophy. To do it over a two-year period and to get control of our public finances so that we can then grow and focus on, for example, the productivity argument I shall speak about in a minute is the critical part of the argument.

[Lord Skidelsky]

Does the noble Lord not accept the OBR’s conclusion that the austerity policy slowed down the rate of growth of the economy in 2011-12 and 2012-13? If that is the case, is it not a bit neglectful of him not to take into account the effects of the spending cuts on the economy?

[Lord Deighton]

That is consistent with my earlier response, that we did not have that choice because the markets would not have allowed us to continue with the scale of deficit we had.

Many noble Lords made very useful and interesting contributions on the housing market: the noble Lords, Lord McKenzie, Lord Best, Lord McFall, Lord Whitty, the noble Baroness, Lady Valentine, and the noble Lord, Lord Graham, who, with mobile homes, may well have the solution to some of our supply problems. The current status is that over 500,000 homes have been built during this Parliament. Of course, that is also tied to the financial crisis, but planning approval and housing starts are now at their highest for seven years, so they are benefiting from part of the recovery.

I agree with the general sentiment of most noble Lords who contributed on this topic that supply is the principal problem, and that dealing with our planning system, incentivising local authorities to build more, using both sticks and carrots in the process, is absolutely key to the way ahead. The noble Lord, Lord Best, suggested that there was nothing in the 2015 Budget for housing supply, but then referred to all the things in the small print that are going on. The demand-side interventions by my right honourable friend the Chancellor have been very effective; Help to Buy has been a successful policy—more than 80,000 people now own homes who would not have been able to do so before. The OBR and the Bank of England are comfortable that the impact of improving demand in that way has not been highly inflationary to the house price market.

There were lots of comments on pensions and savings, from my noble friends Lord Freeman and Lord Flight—who talked about the savings rate in a very interesting and thoughtful contribution about what we need to do about the long-term savings rate and how important it is—and from my noble friend Lord Northbrook and the noble Lord, Lord McKenzie.

One of the key questions all noble Lords asked was about where we are on Pension Wise, which is the service provided by government to provide guidance to people who are now faced with these new flexibilities. There are three potential channels: the digital channel—noble Lords can go home tonight and look at that, as it is up and running—which gives a description of what the flexibilities are; the telephone channel which is managed by the respected organisation TPAS—you can call up a call centre now and book an appointment with TPAS to have a 45-minute telephone session; and you can also call up Citizens Advice, which is the respected brand that delivers the face-to-face service. Therefore, each of those organisations—TPAS and Citizens Advice—has hired and put its people through a training programme so that they are ready to meet the demand. Of course, that is a very challenging thing to work out, because it is very hard to work out how many people will want what kind of advice, and when. However, we have done everything we can to ensure that that service will be available with the right capacity and the right quality—and to take on board my noble friend Lord Freeman’s point, with support from the FCA there will be plenty of opportunities to have a look at how it is working, and there will be a lot of work around making sure that potential scammers cannot be successful.

It is useful to be critical about growth and productivity performance, because it is important to focus on what we can do to make it better. We should remember that we are growing faster than anybody else at the moment, so it is not all bad news.

My noble friend Lord Taverne and the noble Lord, Lord Hunt of Chesterton, talked about the role of foreign capital coming in—hot money, as my noble friend referred to it. Generally speaking, this economy has enormously benefited from being an open economy, with the advantages that come with that. The noble Lord, Lord Hunt, referred to Hitachi, which has come here to assemble the trains, and has also decided to set up in the UK as the base for its European rail business. So, generally speaking, operating as an open economy has been a hugely successful thing for this economy.

Autumn Statement

Lord Skidelsky Excerpts

Thursday 4th December 2014 Lords Chamber

[Lord Skidelsky (CB)]

My Lords, I do not have time to answer the disparagement by the noble Lord, Lord Lawson, of Keynesian stimulus. Perhaps one day we will be allowed to have a proper economic debate in this House in which we can pursue these issues further.

I will concentrate on one point: the Chancellor’s failure to meet his budgetary targets. Growth has been revised up to 3% this year, to be followed by 2.4% in 2015, then 2.2% and then 2.3% thereafter for ever and ever. My first point is that these forecasts are not worth the paper that they are written on because they are conditional on all sorts of unlikely things happening in that period. Their importance lies in the fact that they are the basis of his budget projections. In 2010 the Chancellor forecast GDP growth of 2.3% in 2010-11, 2.8% in 2011-12 and 2.9% in 2012-13. In fact the upwardly revised figures show that it was 1.6% in 2010-11, 0.7% in 2011-12 and 1.7% in 2012-13. According to the Chancellor the economy should have grown 8.2% compounded in that period, but in fact it grew by 4.1%. No wonder his deficit reduction plans went awry.

Agreed, it was not all his fault. Of course it was not; what happens to the budget is determined by what happens to the economy, and what happens to the economy is not all within the Treasury’s control. It is equally important to remember, though—here we do a little bit of Keynesian economics—that what happens to the economy is also determined by budgetary policy. That could hardly not be so, as government spending accounts for about 40% of GDP.

Ever since I started writing and speaking about these matters in 2010, I have been predicting that the Chancellor would not meet his budget targets. The reason I gave was that the pursuit of those targets in itself would slow down the economic growth on which their achievement depended. Why? Because it slows down the rate of spending in the economy, and growth depends on spending. The cuts have hit spending, and the spending has hit growth. So it is not surprising that the Chancellor finds himself with a projected deficit of £91.3 billion this year, when in 2010 he promised to balance the budget by the end of this Parliament.

According to the OBR, the discrepancy between the projection and outcome results from the “unexpectedly weak” performance of tax receipts. Perhaps it was unexpected only to the experts at the Treasury. In fact it was the logical consequence of growth being so much below what was expected between 2010 and 2013, and of what has been happening to the labour market since then. The Government have congratulated themselves on the fall in unemployment. We would expect falling unemployment to increase tax revenues and reduce public spending—but not if unemployment is replaced by jobs that pay so little that those who fill them pay no direct tax and their income has to be propped up by benefits. For example, the number of housing benefit claimants who are in work has doubled since 2009.

So why has the British economy been growing at all? The answer is very largely because there are more people in the country. The population was 62.3 million in 2010; today there are 64.1 million, 2 million more, virtually all of them of working age, and more people are coming in every month. Any economy will grow if it has more people working. The only relevant welfare measure—the measure by which any Government deserve to be judged—is GDP or national income per head. Our GDP grew by 4.1% between 2010 and 2013, but GDP per head has grown by only 2.3%. Real wages have fallen between 5% and 10%, and the typical earner is £1,600 a year worse off.

In conclusion, we are left with the prospect of another round of brutal spending cuts with the rolling five-year deficit reduction programme rolling ever further into the future. With productivity growth likely to be so weak, for the reasons pointed out by the noble Lord, Lord Desai, the Chancellor’s new projections will prove as delusional as his previous ones. It sometimes helps if the people running economic policy do know some Keynesian economics.

Budget Statement

Lord Skidelsky Excerpts

Thursday 27th March 2014 Lords Chamber

[Lord Skidelsky (CB)]

My Lords, we are invited to discuss the effects of the Budget on the economy. Let me state my views right at the outset. I believe that there are lots of small, good things in the Budget, which have been pointed out, but also quite a number of sleights of hand, which have also been pointed out. However, the effects of the Budget and of the Chancellor’s budgetary strategy in general on the economy have been largely negative. I believe that the austerity policy has slowed down the recovery of the economy and made it more fragile. It has also slowed down the reduction of the deficit, which I think we all want to see.

Many noble Lords have been discussing the challenges of the future and of the new normal. All those are very important. The noble Lord, Lord Desai, even said that we were living in a post-Keynesian age. But as long as we have spare capacity in the economy we are living in a Keynesian age. I, too, have my views about the future and I hope to be able to expound them in an interesting way in future debates. However, at the moment, we are not fully recovered and the recovery is not fully secure. I want to concentrate on the effects of budgetary strategy on the present situation.

One obvious thing to say from the start is that the Chancellor has failed to meet his deficit reduction targets. That is very obvious but it is not much mentioned any longer. He inherited a prospective deficit of £149 billion in 2010-11, equivalent to 10% of GDP. He promised to get this down to £20 billion or 1% of GDP—or zero, depending on your definitions—by 2015-16, mainly in spending cuts. By this fiscal year, the deficit should have been down to £60 billion. In fact it is projected to be £108 billion, or 6% of GDP. Now the Chancellor says he must cut spending by another £25 billion, which would be £62 billion in total over four years, to meet his target. The key question is: why did he fail on this crucial test—the test on which he staked his credibility in 2010?

In order to answer that, we have to start by distinguishing between fiscal tightening and deficit reduction. They are not the same thing. Tightening is raising taxes and cutting spending. The effect of these measures on the deficit depends on what happens to the Government’s revenue—the other side of the balance sheet—and that depends on what happens to the economy. Here we come to the key explanation of why the Government have failed to hit their targets. The Chancellor has done the tightening all right but the economy has not grown as expected. George Osborne expected the economy to grow by 2.3% in 2011, by 2.8% in 2012 and by 2.9% this year. In fact it grew by 0.9% in 2011, 0.3% in 2012 and 1.8% in 2013. The economy started collapsing almost from the moment George Osborne took office and because it did not grow according to plan the Chancellor has been forced to announce further tightening.

Was this just bad luck? I do not think so. The official line is—it is always is when policies do not work out as expected—that sound measures were blown off course by unexpected events; these being the Greek sovereign debt crisis, European stagnation and so on. Then the argument goes that to have abandoned austerity at that point would have been fatal. The markets would have done a bear on sterling and things would have been a lot worse. By sticking to his tightening, the Chancellor was able to continue to borrow cheaply. In his Budget speech George Osborne claimed that debt interest payments would have been £42 billion more had he not stuck to the policy.

I obviously do not have time in the two or three minutes left to say why I think that whole set of arguments is fallacious. But let me just say that the Chancellor’s policy was based on the wrong theory of the relationship between the Budget and the economy. It is as simple as that. He believed that if the Government cut their spending, the private sector would take up the slack. That is simply untrue when we are in a slump. If the private sector is tightening its belt—either reducing its debt or increasing saving—the last thing the Government need to do is to be tightening their own belt at the same time for the obvious reason that the two sets of tightening will reduce total spending in the economy. If there is a reduction in total spending in the economy there will be reductions in investment, output and employment. The Government cut their spending but so did firms and households. No wonder the economy went into a nosedive. I do not think it takes rocket science to work out that that would happen. The TUC just the other day suggested that we have an investment gap of £50 billion as a result of these policies.

What about the present upturn? Surely that is a vindication of austerity. It may be three years late—later than he thought it would happen—but it has still happened. I do not think that is as a result of austerity. It is true that employment fell less than output between 2011 and 2013 and the Government have congratulated themselves on the number of new private sector jobs that have been created—1.7 million on the present count as the Minister said in his introduction. However, the headline unemployment figure—the claimant count—has ceased to be a reliable measure of the amount of slack in the economy. In the past two years the private sector has created a large number of bad jobs—part-time, minimum-wage and zero-hour contract jobs—to replace the better jobs that have been lost. That is why productivity has fallen. Any job is better than no job, but we need a measure of underemployment and economists have been thinking of different sets of measures. On those measures, underemployment in the United Kingdom amounts to about 10% of the workforce and not 7%.

The economy’s growth in the past six to nine months has been in spite of the Chancellor’s Budgets. The reason for the resumption of growth is twofold: first, external conditions have been kinder, and secondly, there has been an aggressive policy of monetary easing. Since 2011, the Bank of England has injected £175 billion of new money into the economy. That, much more than fiscal austerity, has kept down the interest on government debt. It has also produced a boom in asset prices—homes and stock exchange securities—which has contributed to the feel-good factor and to an increase in confidence. By the same token, quantitative easing has produced a lop-sided and vulnerable recovery. Not only does it threaten new financial crashes down the line, but it has increased inequality. As John Kay of the Financial Times put it last year:

“The main effect of QE is to boost asset prices”,

and,

“The one certain outcome … is that those with assets benefit relative to those without”.

I agree with that. To put it crudely, a recovery based on an asset boom will be weaker and less resilient, to use the Chancellor’s favourite word. I prefer it to “sustainable”, which has been hugely overused. It will be weaker and less resilient than a recovery based on a widely distributed upsurge of purchasing power.

I do not believe that the Chancellor has been much influenced by economic arguments; certainly, he has not been influenced by mine. His policy has, I think, been mainly driven by the ideological belief that state spending is inherently wasteful, that it destroys incentives to private wealth creation, and therefore should be cut to a minimum. The ballooning of the deficit in the slump simply gave him the opportunity to act on these beliefs. In doing so, he has prolonged the slump, caused unnecessary hardship to millions and seriously damaged the growth potential of the economy.