Lord Gadhia
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(3 years, 1 month ago)
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Lord Gadhia (Non-Afl) [V]
My Lords, I offer five brief reflections on the Budget. First, faced with the sharpest economic contraction in more than 300 years, the Chancellor’s overall fiscal judgment and priorities are hard to fault. The narrative of “spend now, tax later” has stuck but, as the OBR points out, there is a risk that the Government cannot rein in spending and does not raise enough revenue. Consequently, further tax increases cannot be ruled out.
Secondly, addressing the slump in business investment through the super-deduction scheme is a bold and welcome move. It should bring forward investment and help propel the recovery as government spending falls away. However, it may not increase the overall level of investment. That jury is still out.
Thirdly, the contribution of trade to GDP growth is disappointing. The Budget Red Book shows this flatlining if not reversing. Data on bilateral trade flows with EU countries also shows sharp declines. This might be the temporary effect of Covid and new customs procedures, but it could also be more ominous. We must monitor these trends closely.
Fourthly, while the peak in unemployment is expected to be lower, at 6.5%, employment levels remain broadly flat. The labour force is therefore declining, and up to 1.3 million migrants have departed during the pandemic. Our economy will soon falter without the resumption of a steady flow of migrant talent.
Fifthly, our vulnerability to rising interest rates has increased and has been exacerbated by the new wave of quantitative easing from the Bank of England. A 1% increase in rates adds more than £20 billion to interest costs. Restoring fiscal discipline is not a political choice but an economic and macroprudential necessity.
To conclude, crises are like buses; they come in pairs. The cumulative impact of the financial crash and the pandemic have stretched government and central bank balance sheets to their limit. We must hope that the third bus does not arrive too soon, so that the Chancellor’s plan for rescue, recovery and repair has enough time to work through.