Second Reading and Remaining Stages (Continued)

Part of Finance Bill – in the House of Lords at 6:04 pm on 26th July 2010.

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Photo of Lord Lea of Crondall Lord Lea of Crondall Labour 6:04 pm, 26th July 2010

My Lords, I add my congratulations and welcome to the noble Lord, Lord Spicer, who is an erstwhile tennis partner. More recently, he found himself showing me round the Carlton Club-as much to his surprise as mine, I think. It reminds me of his distinguished service as chairman of the 1922 Committee. I wonder how many years there will be before another revolution, so that the 1922 Committee will be the 2012 committee. I am sure the noble Lord, Lord Spicer, will advise his co-conspirators of how to go about that with his usual courtesy. He is a man of very great courtesy. He could slide a dagger in 16th century Rome and everybody would still be his greatest friend. I say that as a compliment.

I am afraid I will now part company with the noble Lord, Lord Spicer, and all his colleagues by saying that this will be the most disastrous Budget in living memory. First, economic growth will be hit. Secondly, it will be disastrous for employment. Thirdly, it will be disastrous for social cohesion and social justice. Fourthly, it will be disastrous for regional balance. These intertwine in many ways. The Budget is based on an implicit ideology which reminds me of the old Galbraith slogan and, indeed, of George Orwell: private sector good, public sector bad. I will come back to that point.

My starting point must be that the OBR has recently found that Labour's deficit reduction plans would have more than achieved the target of halving the deficit over four years from 11.1 per cent in 2009-10 to 5 per cent in 2013-14. The OBR has also said that Labour's plan would have reduced the structural deficit by nearly three-quarters, from nearly 5.2 per cent of GDP in 2010-11 to 1.6 per cent of GDP in 2014-15. That would have met the timetable set out in the G20 communiqué on 27 June. It is about time that the Conservatives-with their rhetoric about the mess that they were left-were shamed into ceasing to make those ridiculous remarks about the legacy.

The real problem with the legacy is totally different. The problem is the hole in the economy caused by the banking crisis. The loss that GDP has to bear is, according to the IFS, 20 per cent cumulatively. That is £300 billion before we get back to where we would have been if there had been no banking crisis. We will not achieve that, but that is the amount of lost output, income and living standards that we have all suffered thanks to the banking crisis. That, in turn, caused the public finance deterioration of about £50 billion. However, logically and arithmetically, rapid economic growth would need to be far more than the trend; it would need to be 4 per cent or 5 per cent per annum to get back up to where it should have been.

Filling the output gap is the only way to produce greater tax income and lower expenditure. Both go together. Tax income would come from the higher output from corporation tax, income tax and so on. Lower public expenditure would come from not having to spend as much on unemployment benefit and social security. Those are the dynamics of economic growth. I am sure that we will hear more about the fundamentals of that from the noble Lord, Lord Skidelsky, who wrote his monumental book on Keynes only recently. The real question, which I rarely hear Ministers comment on, is: what growth rates do they think would be needed to get back to that trend? Do they agree with these figures-not, do they disagree with them?-because that is the territory that we ought to explore?

Samuel Brittan, hardly a socialist revolutionary, has quoted Goldman Sachs in a recent article. I do not normally quote Goldman Sachs, but it has carried out work on the output gap and judges potential output to have grown at an annual rate of 2.6 per cent when output was on trend in 2005. On that basis, the output gap is now in excess of 10 per cent. That gap can only grow given that we are now at a lower base. The only scary variation on that is that we are so rapidly destroying potential growth that we will have to stabilise at much lower living standards than Germany because of the collapse of fixed investment, which fell by no less than 14 per cent in 2009. We must avoid that at all costs. People are now assessing what they describe as the sustainable rate of unemployment as 6 per cent, 7 per cent, 8 per cent or 9 per cent. This will be disastrous as it will inevitably exacerbate regional differences and cause dreadful social problems in swathes of Britain, particularly in areas other than the south-east. However, I do not exclude the south-east as there will be growing inequality and poverty in some areas there.

The regional development agencies have delivered for the regional economies. They have been independently evaluated and shown to lever, on average, £4.50 of benefit for every pound spent. The scrapping of the RDAs springs only from the ideological dogma: private sector good, public sector bad. Come back George Orwell, all is forgiven. The RDAs have trained more than 400,000 people and have created 850,000 jobs over the past 10 years. They have started, or rather have helped to start up-my noble friend Lord Myners will correct me if I say "started"-60,000 businesses. Some £100 million of funding has been brought forward by RDAs for regeneration projects to boost the economy during the recession.

All these figures are, of course, the mirror image of those claimed by Mr Osborne. However, the independent OBR has now more or less predicted many of Labour's figures rather than Mr Osborne's. It predicts that the Osborne strategy will mean tens of thousands more people in the dole queue and that it will bring employment down by 100,000. The CIPD forecasts that unemployment will increase by about half a million over the next two years to 3 million, and remain at that high level until 2015. A final twist in this jobs question is that George Osborne's election campaign-a totally cynical campaign -promised to scrap Labour's jobs tax. I say "cynical" as a rise in national insurance would keep people out of work. However, in the Budget, we learnt that the promised NI cut for employees would not go ahead and that more people would be out of work under the Government's plans than under Labour's. So much for George Osborne's election claim that jobs would be saved under his plans.

Even now the penny does not seem to have dropped in Conservative ranks that public expenditure and private expenditure have a symbiotic relationship. As regards buildings and infrastructure-for example, schools and hospitals-the money is spent by Costain and all the suppliers. You do not need to be Einstein to work that out.

Finally, on the social impact, I follow up on the effect of income distribution. I thank the noble Lord, Lord Razzall, for probing this question after I started it. I was astonished by the flat answer given by the noble Lord, Lord Sassoon, that the whole package is progressive-or certainly not regressive. He does not seem up to speed with the Government's own line. On 20 July, the Treasury Select Committee published a report on the Budget and its conclusions are quite different from the Government's. The Government now have a dilemma over what to say to the Treasury Select Committee.

The original hypothesis was, said Robert Chote, Director of the Institute of Fiscal Studies,

"that the Budget looked progressive when assessing whether the lowest income decile paid less than the highest income decile largely because of the reforms that had been announced by the previous Government in its March 2010 Budget rather than the specific measures announced in the June 2010 Budget".

I underline that with another quote which is even more startling and has not yet been widely understood:

"Mr Chote concluded that based upon the three factors he had outlined-taking out the measures inherited from the previous Government, looking further into the future than 2012-13 and including some of the other measures which the Treasury had chosen not to model in their analysis of tax and welfare changes on households-the June 2010 Budget was 'regressive'".

In other words, it is regressive if you take out the measures inherited from the previous Government. It is astonishing to me they were ever there. The Government claim that it is progressive, but only because they embrace the measures taken by the Labour Government in the Labour Government's Budget. You would be run out of the Monte Carlo casino if you tried that there.

The conclusion is that, now the Government have started to go down this path,

"the Comprehensive Spending Review will [have] effects on different income groups. We recommend that the Treasury builds on the approach taken in the Budget to give information about the impact of CSR changes on different households. We would like the analysis for both the CSR and future Budgets to take two forms: a narrowly drawn set of figures based on those measures most easily modelled".

This is like the reference of the noble Lord, Lord Sassoon, to all these fancy tables. You have to have a flannel round your forehead to get your brain round them, and now they turn out to be misleading because they include the Labour Government's measures. They also want,

"a wider analysis using more assumptions, which would allow a fuller set of measures to be included".

We desperately need to see the economy holistically-that is, public expenditure, the cuts, what you might call the macroeconomic situation and specifically the Budget measures.

The Minister has got himself into slightly hot water on this whole question of income distribution. Will the Government go with the spirit of the Treasury Select Committee and in future do income distribution analysis combining the Budget and the CSR? That will become a key question later in the year. Meanwhile, we are left with the poorest 10 per cent of households seeing an average annual spending cut of £1,300, equivalent to 20 per cent of their household income, whereas the richest 10 per cent of households see an average annual cut of £1,135, equivalent to only 1.6 per cent of their household income. That really needs to be addressed in a proper statistical manner.