My Lords, I should first declare my interests as chairman of Hoare’s bank and a director of British Land. I had the privilege as a Treasury official of working on 34 Budgets. If there was any pattern to them, those which attracted the greatest opprobrium on the day turned out to be the most sensible in hindsight.
The good news I take from the OBR’s detailed and thorough report is that the economy is growing—and so it should be. The US economy is strong and, defying the doom-mongers, so is the eurozone. The pound has fallen by 15% and weakened again in the last week. In the old days, there was a Treasury rule of thumb that a 4% depreciation in sterling was broadly equivalent to a 1% cut in interest rates. I do not think that that relationship still holds, if it ever did—but it is a reminder of the expansionary effect of devaluation.
This means that macroeconomic policy is extraordinarily loose. Interest rates are at a record low. The Bank of England has embarked on further quantitative easing. It cut rates as an emergency measure last summer and I am a little surprised that it did not reverse that measure when it emerged that the economy was still growing at a good pace. That is what the noble Lord, Lord Lawson—who sadly cannot be here this afternoon—did in February 1988 when it became clear that the stock market crash of the previous October would not have the deflationary impact that conventional wisdom had suggested. However, the Bank of England is independent and I would not seek to influence it.
In setting fiscal policy, the Government must take monetary policy as given. The Chancellor should be congratulated on not loosening fiscal policy further. He has taken the view that any increase in public spending should be paid for through tax increases, but the fact is that fiscal policy is already very loose. The OBR notes that the economy is broadly on trend—or, to put it another way, we are at full employment. That means the structural deficit will be 2.9% of GDP next year, which is too high given that it is almost nine years since consolidation began under the noble Lord, Lord Darling.
Even more importantly—as my former Treasury colleague the noble Lord, Lord Livermore, pointed out —the national debt is still rising. Because of the effect of QE, it will not now fall as a percentage of GDP until 2018-19, by which time debt will have risen for 16 successive years, which I think might be a record in peacetime: eight years under a Labour Chancellor and eight under a Tory Chancellor. At the moment, the debt interest bill is flattered by unsustainably low interest rates, but when yields begin to rise, so will the debt interest burden. As ever, future generations will pick up the bill. We need a proper debate about how much public spending citizens are prepared to pay for, in particular on the so-called triple lock. We also need to think through how to finance the NHS in the longer term.
Successive Governments have found it all but impossible to raise the tax burden, which means that they enter new spending commitments at their peril. The source of the Chancellor’s current difficulties is no doubt the result of the extra spending announced in the Budget. Raising national insurance on the self-employed is right in principle. The lower rate was justifiable in the old days, as the noble Baroness, Lady Neville-Rolfe, pointed out, because employees were entitled to earnings-related benefits and the self-employed were not—but earnings-related pensions and unemployment benefits were abolished long ago.
Of course, the Treasury hates anomalies. A sensible tax system should generally not favour one group over another. I can remember contributing advice to the noble Lord, Lord Lawson, to raise national insurance on the self-employed. I can say this since it was more than 30 years ago. We got a predictably dusty response. The lesson I took from this and from my time at the Treasury more widely was that there are certain no-go areas when it comes to tax. Sadly, residential property is one. Inheritance is another. The self-employed are perhaps the most significant no-go area of all. I hope that it will be possible for the Chancellor to stick to his guns, but I fear that it will not be.
In an ideal world, the main political parties will not go into the next election having made quite so many irreconcilable commitments on spending and tax. I remember in the run-up to one general election pleading with the then Chancellor to drop some of the Government’s most egregious spending commitments when it came to drafting the manifesto. His response was that that was all very well but the fact was that whoever was sitting across the table from me at No. 11 after the election would be the person who had entered into precisely those spending commitments. I would like to think that next time it will be different—but I shall not be holding my breath.