My Lords, I, too, congratulate our two maiden speakers today. My case is that austerity is not the fundamental issue. With a current account deficit of over £40 billion per annum, a budget deficit of £50 billion per annum, and the OBR forecasting another £122 billion of additional borrowing over the next five years, this is not a picture of austerity; it is still one of Keynesian expansion. Although it is welcome news, the 32 million in employment—up 2.7%—is similarly a reflection of a positive situation, not a negative one. The issue is pay and living standards. Because productivity has been so poor, living standards and pay in both public and private sectors have scarcely increased for eight years. No wonder people are discontent. The two key factors that drive productivity are capital investment and making more efficient use of better skilled employees, both of which need to be worked upon. I would add a third factor that is relevant to increasing living standards: a much bigger free trade situation, where there is scope, post Brexit, for trade deals with some 165 countries that do not to date have deals with the EU.
Capital investment needs business confidence. The attack on business in the Conservative manifesto was misplaced and it is welcome that business is being brought back. The major cause of falling productivity has been tax credits. This has been conceded, to a large extent, by the noble Lord, Lord Darling. Tax credits were intended to increase living standards but ended up subsidising employment. This in turn led to labour hoarding and the use of labour as a cheaper alternative to capital investment. No wonder our productivity has been poor. Poor productivity has very much coincided with the period since the introduction of tax credits.
There is obviously masses of scope for capital investment in the public sector. In particular, I see the need for major improvement in the road network in the south-east, but I have some reservations about the Government having sole responsibility here. HS2 and Hinkley Point are not ideal examples of the most effective forms of public sector capital investment. However, the proposals in the spring Budget were extremely good and represented a clear statement on how to improve productivity. There is the £23 billion fund for productivity improvement over five years, the Sainsbury technical education initiative and the industrial strategy Green Paper, so there is huge scope. The UK has the other advantage of an extremely lively, young entrepreneurial generation coming straight out of higher education and willing to start new businesses. We have never seen anything as strong as that before, and it has also been crucial to the technology sector.
I could talk for a long time about Brexit, but on a three-year view I think it will be positive for economic growth, in particular for living-standards growth because of the much greater scope for free trade. To close, it is time to phase out budget deficits, to save and invest more, to reduce current account deficits and, above all, to improve productivity and advance free trade arrangements.