Economy — Debate

Part of the debate – in the House of Lords at 1:52 pm on 25th March 2010.

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Photo of Lord Northbrook Lord Northbrook Conservative 1:52 pm, 25th March 2010

My Lords, like other noble Lords, I am grateful to the noble Lord, Lord MacGregor of Pulham Market, for initiating this debate. It is unusual for this House to have the opportunity to discuss the Budget the day after it is announced, but nevertheless extremely welcome.

The economic background to the Budget is depressing. The Labour Government inherited a strong and growing economy in 1997 with very little debt and a competitive tax regime. Initially they stuck sensibly to Conservative spending plans. Then they started to come up with stealthy ways to raise extra money. This began with the raid on pension funds. It was followed by selling a considerable part of the gold reserves at rock bottom prices, losing £7 billion. Then they decided to go on a spending spree in health and education, which sadly has produced much less than it should have done. They introduced fiscal rules-the golden and sustainable investment rules-which they proceeded to manipulate and then break when times got difficult.

Even before the banking crisis, our finances were in a weak state. To make matters worse, the Government encouraged a huge growth in public sector employment so that 6 million people now work for the state. State spending amounts to 53.4 per cent of GDP, and no fewer than 25,000 earn £100,000 or more. Thus it is wrong to blame the world economic situation for all our troubles, as we were already in a difficult situation before disaster struck. It is extraordinary that the Government are taking credit for solving the economic crisis that they played a large part in creating.

Turning to the Budget, I start, as always, by praising certain measures. I am in agreement with David Frost, director general of the British Chamber of Commerce, who said that,

"the Chancellor has clearly recognised the need to place business at the heart of this Budget. Doubling the annual investment allowance, help with business rates, and allowing entrepreneurs to keep more of their gains will prove especially popular".

I also welcome the increase in the ISA limits to £10,200 and the stamp duty relief to first-time buyers below £250,000, although I disagree with the means of paying for it.

Commentators are on the whole less kind to the Budget speech itself. Ben Broadbent of Goldman Sachs commented:

"We recently highlighted the clear pattern in the historical data that significant fiscal corrections are better for the economy, and better for debt reduction, if they occur through reductions in current spending rather than cuts in public sector investment or hikes in tax rates. On this score the Government's pre-existing plans did not measure up well. Today's budget does nothing to alter that, nor does it offer any detail on where cuts in current spending, such as they are, will fall".

Michael Saunders of Citigroup commented:

"The UK's fiscal plans remain relatively unambitious compared to other high-deficit countries. Moreover, the Budget has no proper medium-term public spending plans and, without those, the UK cannot claim to have a credible plan to return to fiscal sustainability".

The Chancellor delivered the Budget Statement in an ultra-calm manner disguising the terrible figures, in particular, of the budget deficit. It is not surprising but staggering that he failed to mention that Britain's national debt is going to rocket to £1.4 trillion by 2014-15, more than twice the level of just a year ago. I suppose we should rejoice that the borrowing figures have gone from the truly horrific to the simply terrifying. This year they are £11 billion lower than forecast at the Pre-Budget Report and £14 billion lower for the next financial year. However, the absolute level of borrowing is still horrendous.

The Government forecast that they will halve the deficit over the next four years, but this still relies both on spending cuts which have not been properly detailed and, almost certainly-as other speakers have mentioned-on overly optimistic growth forecasts. I accept the 1 to 1.5 per cent growth forecast for 2010, but the 3 per cent forecast for 2011 seems much too high, as does the 3.25 to 3.75 per cent figure for 2012 and beyond. I ask the Minister what the debt figure would be if growth only managed to be 2 per cent in 2011 and 2012.

It is all very well for government departments to spell out their cost savings, but it is difficult to put them into context when we do not have the absolute spending figures of each department in a Comprehensive Spending Review. Table 1.2 in the Red Book tells us that there is a relatively small total net increase in government spending of £1.4 billion for 2010-11, balanced by an £850 million net inflow over the next two years. The largest spending increases are the extra £600 million additional winter fuel age-related payments to pensioner households and the £550 million fuel duty phase increase. Can the Minister tell me what the £230 million savings labelled "reprioritised spending" from BIS and DfT are, as well as the £475 million "reprioritised spending" from DWP? It is interesting that the largest revenue gainer over the next three years is stated to be the Liechtenstein disclosure facility, which is said to bring in no less than £500 million over the next three years. Is this based on known tax avoidance moneys there?

Of course, there had to be a stealth tax lurking in the Budget and, after careful research, it turns out to be something that the Chancellor failed to mention. Personal allowances were frozen but, with the latest inflation figure at 3 per cent, will the Minister confirm that the revenue gain to the Exchequer would be about £1.8 billion in 2010-11 and £2.2 billion in 2011-12?

Overall we have far too little information on how the deficit is going to be reduced-I await publication of the IFS analysis later today-except that, in the next four years, the £78 billion to be saved will consist of £19 billion extra taxes and £38 billion cost savings, of which only £11.8 billion have been identified. Where are the rest of the savings coming from? In the Pre-Budget Report, government departments were asked to find savings of £11 billion without damaging front-line services.

Finally, there seemed to be an answer to where spending cuts might fall, but even a cursory examination of yesterday's departmental press releases reveals questionable figures. For instance, how can the Department of Health save £550 million from staff sickness absence in the NHS? A key difficulty that any Government must face is predicting tax revenues in the next few years. For instance, financial services provide 25 per cent of corporation tax revenue. I am sceptical that it can recover from £36 billion to £42 billion in 2010-11 in such a difficult economic climate.

My final thought on the Budget again focuses on what was not said yesterday. Rises in national insurance will hit those on incomes of just £20,000, and firms face an annual bill of £4.5 billion from the increase in NI payments. A six-pronged attack will see the NI rises; the freezing of personal allowances; the threshold for 40 per cent tax frozen; 50 per cent tax rates for those earning £150,000 or more; personal allowance withdrawn for those earning more than £100,000; and withdrawal of pension tax relief. This, according to Deloitte's, amounts to a £15 billion raid on the middle classes by 2012. Is this the message to encourage business and economic recovery, and to enable us to compete with other countries?