My Lords, it is, as always, a great honour to speak in what has become one of our great set-piece debates and to follow such distinguished contributors, not least my noble friend Lady Neville-Rolfe—I agree with much of what she said—and the noble Lord, Lord West of Spithead, who is not in his usual place. I was disappointed that, in his wide-ranging speech on the economy, he did not mention the enormous success and impact of the “Queen Elizabeth” visit to New York, marrying defence and the economy.
I draw your Lordships’ attention to my entry in the register of interests, not least that I am a member of the Chartered Institute of Taxation. Your Lordships will be pleased to know that I last gave tax advice in 1988—some say the recipients are still suffering.
None the less, the Budget gives me great cause for optimism, not least because of one seminal phrase, which my noble friend Lady Neville-Rolfe mentioned, in its opening paragraph. It says that higher productivity remains the only path to sustainable growth and rising living standards. The gravity of this statement should give us pause, as well as a lens through which to view this Budget, to see if its contents reflect it.
On productivity, I see two aspects. One is that we should provide, where possible, a much needed direct boost to the UK, whose productivity, at first glance, tends to compare unfavourably with that of some of our competitor nations. The second is the vital issue of how we measure it. On the first aspect, unlike some speakers this afternoon, I see much to be optimistic about, not least the National Productivity Investment Fund, which the noble Lord, Lord Gadhia, mentioned. This will provide a £37 billion boost to areas in chronic need, which have historically been subject to underinvestment in housing, transport, digital infrastructure and R&D. However, I commend the Government on what is now a long-standing commitment to R&D that has seen science largely protected from budget cuts.
But let us not kid ourselves. Productivity in the UK is also low due to the cheap labour we have had for many years. This will change after Brexit, and hopefully wages will rise—not a bad thing. Business will, as a result, invest in AI and labour efficiencies. I have been to many factories where migrant labour is predominant and where dedicated, hard-working, wonderful people give their best but perform low-paid, menial tasks. These should and must be mechanised to improve productivity as we currently define it, on an output-per-hour basis.
I will also speak on two other enablers of productivity: tax and regulation. Before I do, I ask my noble friend the Minister where we are in our quest for better measurement of productivity. We are all guilty of worshipping at the altar of a measure that is surely outdated, geared as it is toward manufacturing, not services, and surely not capturing as well as it might the transition of the UK to a digital economy, which is well under way. It fails to measure the long hours that many, particularly in services in the City of London and elsewhere, give to our economy but that, if anything, yield a lower productivity headline, because it is measured only as output per hour.
I turn now to tax, which is a significant influence on the productivity of businesses. For too long, we have operated in an environment where our economy is global but our tax system is local, with businesses able to exist betwixt and between these two paradigms. As such, numerous measures have targeted abusive corporate behaviour to ensure that tax is properly paid in the location where business activity was conducted. I am pleased to see that profit fragmentation, whereby UK businesses can arrange for UK-taxable profits to be booked to entities resident in lower tax jurisdictions, will be addressed in the Finance Bill, and this corrosive practice outlawed. This will upset our friends in the Office of Tax Simplification, owing to the reams of paper that will be required to put this on the statute book correctly, but it is the right direction of travel. Looking at the tax yield anticipated from it in the Red Book, I suggest that it is a very modest measure. In fact, I understand, from sources close to the tech companies, that they were expecting a lot worse. I ask my noble friend to encourage the Chancellor to seek ways of increasing the share of tax that these multinational, internet-based entities pay.
Similarly, I commend new legislation to create international disclosure rules on offshore structures that would facilitate tax evasion. This will complement the updated offshore tax compliance strategy, which, the Red Book confirms, is forthcoming. While I accept the tightening of the rules for entrepreneurs’ relief, it remains an absolutely key part of our offer to entrepreneurs, who really are incentivised by this opportunity to make capital to invest in businesses and then to use it to reinvest in new businesses. The implication of the Chancellor’s small tweaks and changes to entrepreneurs’ relief is that it is here to stay. Why not state that publicly, to silence the siren voices of certain left-leaning think tanks, largely run by people who have never faced the struggle of starting a business, which call for its abolition and cause so much uncertainty for entrepreneurs? Why not state that entrepreneurs’ relief is here to stay? I have some interests to declare here, as my day-to-day business advises recipients of entrepreneurs’ relief, and some eagle-eyed Members of your Lordships’ House will note that I am personally about to benefit from entrepreneurs’ relief as well.
A short word on regulation, which entrepreneurs tell me is the single biggest impediment to productivity growth. We await the Government’s response to a consultation to look at measures to boost productivity for SMEs. This is a worthwhile initiative and the gains are surely significant. However, I am concerned that, in certain respects, efforts will be undermined by an overzealous approach to regulation, not least in my area of financial services. The Red Book welcomes the FCA’s plans to expand access to the ombudsman for SMEs with a turnover of up to £6.5 million, as well as increasing the award limit to £350,000. The idea is that the ombudsman provides a more effective, and certainly cheaper, form of redress than going through the courts. However, expanding the role of the FOS at a time when questions have been raised in the financial services press over its competence, seems premature. Given its status and reach—there is barely any long-stop on cases and no right of appeal against the ombudsman’s judgments—the Government should first reflect on whether it, and the system in which it operates, is really fit for purpose.
This matter should not detract from the broader and more positive narrative emerging from this well-received and welcome Budget for economic growth. I cannot help but shudder at the alternative we might have faced last week if Labour had been in government. We would have been talking today about shutting down entrepreneurs’ relief and BPR, and raising top-rate taxes, ignoring the fact that the top 1% of people in this country pay over 25% of all income tax. To add insult to injury, Labour wants literally to take equity away from those who legally own it and give it to some fuzzy employee group.
In conclusion, in the Chancellor’s Budget there is significant investment going into physical and digital infrastructure, as well as into research. The UK is still the second-largest recipient of FDI in the world and this Budget will make the biggest difference. That will be especially true when we finally update our tools for measuring productivity to make them fit for a modern economy. On tax and regulation, two key enablers, the Government are increasingly playing a global leadership role, with an approach that is rightly optimistic and pro-business but which has fairness and transparency at its core.