My Lords, it is a pleasure to take part in this Budget debate. It is the first one in many years in which the noble Lord, Lord Skidelsky, is not speaking before or after me, so I feel a bit lonely.
I confess that, unlike the distinguished people whom the noble Lord, Lord Taverne, mentioned, I have always broadly supported the Chancellor’s economic strategy. In 2008-09, for whatever reason, the global economy had one of the biggest output shocks in 70 years. The effect was that the debt-to-GDP ratio, which was 37% in 2007, practically doubled in three years. From that point onwards there was a problem, in that output was much below its pre-crisis level, there was a big deficit and one had to find a way out. One way would have been to borrow more and raise the GDP ratio faster. The other was the direction the Chancellor took: to try to cut the deficit and go down the route of austerity. Whatever the earlier debate was, the aim of the route the Chancellor took has more or less come about, and he can now claim that the UK has the fastest growing economy in the G7—which is not saying much because the other G7 economies are not growing very fast.
I am more worried about the next five years over which the Chancellor has drawn his strategy. According to the projections, the economy is not supposed to grow above 2.5%. That is about half a percentage point below our historic growth rate, which means, given that growth in productivity and GDP are connected, that one cannot simply say that productivity will grow. If it is to grow in the way the Government think, where are the results in GDP growth? There is something missing between the growth projections and the hopes for growth in productivity.
Between 2000 and 2007, growth was roughly 3% and productivity grew by just under 2%. The situation will be difficult, and although the announced policies are no doubt very good, they relate to only a small part of the economy—the manufacturing industry. A large part of the economy is accounted for by the care sector and the service sector, which are not marketable services. I am not saying that they are a drag on the economy, but we have to factor that in when we consider why productivity is so low. That is worth doing and we have to devise a way in which the surplus-producing part of the economy can finance the welfare-producing part.
That said, the Chancellor, having succeeded in the first five years, is getting a little too ambitious. There is too great a hurry to move into surplus. He does not need to hurry that much. I hope that somewhere in the Treasury there are contingency plans in case things go wrong. I do not like the way household debt is increasing. According to the projections, if one strips out pension savings, household savings have practically collapsed. We are back to where we were when the seeds of the previous crisis were being sown. Household savings were down, household debt was up, everyone was mad about buying houses—and now, especially given the low interest rates, a new financial crisis might be bubbling up.
That is why I am not happy about the promise not to raise taxes. If you do not want to raise taxes, fine, but do not promise not to raise them. We should remember when President Bush said, “Read my lips”. That is what can happen, and it is no good making promises you do not need to make. It worries me that the Government think that they can get away with not increasing income tax, VAT and so on. They will have to be inventive and find another way to raise money, perhaps by increasing vehicle excise duty or creating something really imaginative such as a tax on haircuts.
Britain has had a low-productivity economy for a long time, when compared with the other G7 countries. There are diagrams in the Budget document showing that every other G7 country except for Japan is ahead of us in productivity. This has been true for at least as long as I have been studying macroeconomics in this country —50 years. We have always had a low wage, low productivity economy. Our productivity is much lower than our wages in relative terms, which is why we have always had inflationary pressures. Low wages remain a problem, and the whole argument about tax credits was that they made low wages respectable. The Chancellor has said, “I am going to limit tax credits”—fine—“and then I will introduce the living wage”. As many noble Lords have said, it is hard to understand the macroeconomic logic in ratcheting up the wage rate. It is a very noble aim, but I like the Chancellor being Gladstone, not Disraeli: I like him as a hard-hearted, not a soft-hearted man. He has made a major macroeconomic mistake in going for the living wage. He will have to carry a larger unemployment burden; I do not see any way in which he can escape it. I wish him luck.