Economy: Government Policies — Debate

Part of the debate – in the House of Lords at 11:37 am on 24th March 2011.

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Photo of Lord Lawson of Blaby Lord Lawson of Blaby Conservative 11:37 am, 24th March 2011

My Lords, I look forward enormously to this debate. There is a glittering array of speakers and, indeed, there can be no Chamber anywhere in the world that possesses so much expertise and experience in the fields of economics and business as this House does. I welcome in particular, as I am sure we all do, the maiden speeches that we will hear from my noble friend Lady Stedman-Scott and the noble Lords, Lord Hussain and Lord Popat.

Inevitably, this debate is likely to focus very much on yesterday's Budget, and that is what I intend to do in my opening remarks. I welcome the Budget for a number of reasons, the most important of which is that it has stuck-and my right honourable friend the Chancellor has been very firm about this-to what is comfortably known as plan A. I am referring to the overriding need during the course of this Parliament to eliminate the structural budget deficit-the fiscal consolidation or the cyclically adjusted fiscal deficit. As the highly respected Institute for Fiscal Studies has pointed out, in all the 34 countries of the OECD, only Ireland has a larger cyclically adjusted fiscal deficit than this country has. The cyclically adjusted fiscal deficit is that part of the deficit that is not due to the recession but is entirely due to the gross mismanagement of the public finances by the previous Government and by Mr Gordon Brown, in particular.

I congratulate the Chancellor, in difficult circumstances, on sticking to his guns on this central issue. It will be increasingly difficult over the next 12 months. We have a very difficult year ahead. The public expenditure cuts are only just beginning to take effect. There will be a great deal more unpopularity and many more problems than there have been already. There will be difficulties on a large scale with a number of public service trade unions. However, the Chancellor has to hold his nerve and go through. The Budget yesterday is a sign that that is what he intends to do. In consolidation and in public expenditure cuts, he has set out to do the least that is needed economically. However, it is probably the most that is possible politically.

There is absolutely no need to hold back for fear of the fragility of the economy. It would be wholly wrong to do so. The world economy, and the British economy with it, is firmly on the recovery path. It is true that the recovery is slow, and is likely to continue to be so for the next 12 months. It is true that it will be bumpy, and that some quarters will be very uncomfortable. However, it is clear that the world economy is on a recovery path.

The Budget contained quite a few lollipops, as they were known in the Treasury in my day. Every Chancellor, including me, likes to put a few lollipops in his Budget. It is possible that there were rather too many in this Budget. Lollipops all have to be paid for and they also complicate the scene, whereas the Chancellor has rightly said that one of his watchwords will be simplification.

The lollipops are there for political reasons. I wonder whether there is not another approach that the Government could have adopted-and can still adopt-to a greater extent than they have so far. In the 1980s, we made a virtue of unpopularity. It carries a lot of conviction, because it happens to be true, if you say to people: "Look, no politician likes to be unpopular. We are politicians and we do not like to be unpopular. We would never do anything unpopular unless it was the right thing to do. We are doing it because it is necessary. We would far rather do popular things". I know that noble Lords opposite think that many of us on this side are crazed fanatics powered by ideology. That might be the way that the Labour Party works-I do not know the inside of the Labour Party and I am not particularly interested, either-but not only is it a wholly inaccurate description of the Conservative Party and of our Liberal Democrat allies and friends, but the public know that it is complete nonsense, so all that happens is that the Labour Party loses all credibility.

The Government are doing the right thing, even though it is unpopular and will continue to be so. The criticism from the faint-hearts often comes from those-there are many in the media, as well as on the Benches opposite-who are obsessed with trying to fine-tune the economic cycle. One cannot fine-tune the economic cycle. The overriding need in economic policy for any Government-and this is what this Government are doing-is to focus firmly on the medium and longer terms.

In this context, the priorities are twofold. Eliminating the structural deficit is absolutely essential, as I have already said and as my right honourable friend the Chancellor made abundantly clear. There is also the need to cut back the relative size of the state in order to achieve the maximum rate of growth of which this economy is capable. That is where the growth strategy comes in. Greater growth will lead to a larger public sector and more public services in the future.

However, in the short run, it is necessary for the state to be only of the size that the economy at the time can afford. That is the essential path to improved economic growth, which we all want to see. There is no growth button that any Government can push. Growth comes from industry and from the inherent creativity of mankind. Of course, we had growth long before we had activist Governments with activist economic policies. You have to remove impediments, as the Chancellor is doing. Many of these impediments have very well-meaning intentions behind them but they remain impediments and they have to be removed wherever possible.

The Budget identifies three areas in that context. The first is deregulation, the second is tax reduction and the third is tax reform. On deregulation, I welcomed what was in the Budget yesterday, particularly the proposed deregulation of the planning system. That is a very serious impediment and deregulation in this regard is long overdue.

It is clear that tax reduction will have to wait. Because of the appalling fiscal position and deficit that this Government inherited, there is no scope for tax reduction at present, but it will have to come. I was very glad to hear my right honourable friend the Chancellor say that he wanted the,

"most competitive tax system in the G20".

That is quite a target. He has done well on the corporate tax side but, so far as concerns personal taxation, we have a very long way to go before we have the most competitive tax system in the G20. In fact, we are now well down the list. That is the context for his remarks about the 50 per cent top rate of income tax, which is way higher than that of most of our competitors in the G20. He saw it as temporary and is asking Her Majesty's Revenue and Customs to inquire into whether there is any increase in revenue from raising the top rate to 50 per cent. Clearly the implication must be that if the inquiry shows no significant increase, or even any increase, in revenue, he will rip it up. I welcome that.

I hope that my right honourable friend will also look at the experience of the 1980s. When I reduced the top rate of tax from 60 to 40 per cent in 1988, it brought about an increase in revenue, not a reduction. Not only that but I have been accused of being a socialist because, as a result of that decrease, we found that the highest taxpayers-the richest people in the country-were contributing a larger share of the total income tax revenue than ever before. Therefore, I think that that should be studied, as well as the effects of increasing the top rate from 40 to 50 per cent.

On tax reform, the Chancellor enunciated the same principles. Those principles were absolutely right and I welcome them. However, the main thing that he announced was the amalgamation of the national insurance contribution and income tax systems. This was widely trailed in the newspapers and was announced in the Budget yesterday. I say to the Minister, and through him my right honourable friend the Chancellor, "Don't go there; there is nothing new about it". The first time I was involved in it, at a distance, was when my successor as Financial Secretary to the Treasury, the late Nicholas Ridley, of whom so many of us in this House have very fond memories, was very interested in doing it. Therefore, when my noble friend Lord Howe was Chancellor, there was an inquiry into what was known as NICIT in the Treasury. Some people thought that it was called that because Nicholas Ridley was in favour of it, but in fact it was an acronym for national insurance contributions and income tax. NICIT was looked at then and, very wisely, nothing was done.

However, after the 1987 Budget, I decided that my next Budget in 1988 would be a major reform of personal taxation. I was very keen on NICIT so, for nearly a year starting immediately after my 1987 Budget, I instigated the most thorough investigation into NICIT by the Treasury and the Inland Revenue that there had ever been. I did not abort it until January 1988, shortly before the Budget, because I had high hopes of it, but it could have been the biggest elephant trap that you could fall into. I do not have time to explain why, but that is the fact. If the Minister and my right honourable friend the Chancellor would care to look at page 827 of the original version of my memoirs, they will find an admirable summary of the main reasons why they should not go there.

Many noble Lords wish to speak in this debate and I do not want to take my full time allowance, as we wish to hear all the other contributions. We all want the Government's policies to succeed. Inevitably, I understand that that is a problem for the party opposite, as it always is for Oppositions-there is nothing special about this Opposition. Oppositions tend to be slightly schizoid because they know that if the Government's policies are successful, that is good for the country, but that might also be good electorally for the party in office and they are not very happy about that-but that is their problem.

On the electoral aspect, what is important is that this is, at bottom, what democracy is about. Democracy is a system that allows the Government of the day to do what they believe to be right and what gives them a reasonable time in which to do it. At the end of the day, the people decide whether they should have a second innings. As we know from what is happening in much of the Arab world today, the essence of democracy is the ability of the people peacefully to eject a Government in whom they have no confidence. In this country, for many years, we have had an electoral system that fulfils that function better than any conceivable alternative would do, and that is an overwhelming reason for not changing it. I beg to move.