My Lords, I want to focus on the parts of the growth plan targeted at regional disparities—the drive to level up the country. I draw your Lordships’ attention to my role as chair of the Purpose Business Coalition, which encompasses the levelling-up goals architecture.
The new Administration have not yet set out in detail how significantly their approach to levelling up will differ from the last. However, the signalling—including the briefing about de-Goveing Whitehall and wanting to dismantle the former Levelling Up Secretary’s strategy—suggests that the focus on delivering growth through taxation and deregulatory measures in the new investment zones will replace the activist approach to tackling regional disparities set out in the levelling-up White Paper of February this year rather than supplementing it. I very much hope that is not the case.
While the policy programme remained underdeveloped, the White Paper showed that the Government understood a fundamentally important point that had eluded Governments of both colours for decades: the importance of successful capacity building in areas being left behind. That lack of local agency is a key factor holding back many areas, and national government has a role to play there to help build up local institutions, governance capacity, its skills base and of course its physical infrastructure. It was really important that that was stated front and centre in the levelling-up White Paper. Without that, the geographical disparities that exist within regions, as well as between regions, may well widen further—an acceleration of the decades-long trend that has seen, in the main, large cities, including in the north, making significant and commendable progress but with provincial towns, such as the area that I used to represent in the other place, without the tools to keep up.
It is not too late for the new Administration to embrace a twin-track approach: supply-side change without dismissing the idea of active, joined-up government as some kind of quasi-socialist meddling, as some of the more wayward of the off-the-record briefings in the last couple of weeks seemed to suggest it is. I hope they will, and, I humbly suggest, that so will many of their new MPs in those northern constituencies.
The existing programme of infrastructure investment earmarked from the levelling-up and towns funds need not be sacrosanct in full. Much of it was targeted in town centres that have since been further ravaged by the Covid lockdowns. Reassessing whether those commitments remain the best way to target scarce resources would be understandable, although probably unwelcome for many of those new MPs, particularly in the north of England.
Finally, there must be a question mark over the extent to which companies would take advantage of relaxation of regulatory standards in investment zones, aside from the fierce debate that change in particular areas, such as environmental or employment legislation, would entail. As they decide what options to give the new zones, I hope Ministers will keep in mind the scale of change in boardrooms in recent years: how important it is now for companies to be, and be seen to be, good citizens making a positive impact in the communities in which they are based. Driven by genuine leadership and the market forces of ethical investors, discerning consumers, and the young graduates and school leavers they are in a race to attract, this is now mainstream within boardrooms. That means that if loosening standards happened in investment zones, it would not necessarily drive the change in business behaviour which would be needed if it was to successfully drive up productivity.
It goes without saying that the UK is facing an uncertain economic future. That is why it is absolutely right that the Government’s focus is on growth, boosting productivity, delivering more jobs and attracting more businesses, investment and trade to the UK. But we need to go beyond this to ensure that growth benefits all people, families and communities right across the UK. Doing this will require an understanding of people’s living standards, and this in turn requires two things. First, the Government need to have an effective, official UK measure of poverty, which the Government currently refuse to implement. Secondly, it requires us to protect those with the lowest incomes by ensuring that benefits are not eroded in real terms—which we hear the Government are currently considering backing away from.
Over the last three years, we have seen the economic, social and personal impacts of the pandemic fall hardest on those who are least able to shoulder the burden. Now, with the rising cost of living, it is those very same people, families and communities who face a perilous winter.
But it could have been even worse. The Government’s action on energy bills and emergency cost of living support has protected more than 1.5 million people from poverty. If the Government had a measure of poverty, they could be demonstrating how their policies were protecting the most vulnerable. With such positive action taken so far, it is remarkable that we hear rumours of limiting the uprating of benefits next year. To do so would be to provide a significant real-terms reduction in incomes for families right across the UK who are struggling to make ends meet.
Our estimate at the Legatum Institute suggests that uprating benefits by earnings, rather than CPI inflation, would increase poverty in the UK by a further 450,000 people. If the Government had a measure of poverty, they would know this and take steps to avoid it. Uprating benefits only by earnings would increase poverty among working families by 350,000 people. It would increase poverty among families that include a disabled person by 250,000 people. These are the very people and families that society should be protecting from the impacts of the cost of living crisis, not consigning to a winter of precarity.
Perhaps this is the problem: that policy-making and political debate about poverty and the lives of those on low incomes are conducted in a vacuum of effective measures. This need not be the case.
For the past five years, I have been leading the Social Metrics Commission. Our goal has been to create a measure of poverty which both accurately reflects the lives and experiences of people on low incomes and has a broad consensus of cross-party support behind it. In 2018, we published our findings and in 2019, with the support of statistics experts, charities and the Office for National Statistics, the Conservative Government committed to developing experimental statistics based on our measure. This work has now been stopped without explanation or reason. As a result, policy decisions are being taken blind to the impact they could have on poverty.
What does all this mean? First, uprating benefits by inflation next year is the right thing to do. Even if the Government are successful in boosting trade, driving strong economic growth and increasing employment, failing to do so would increase poverty among working families and disabled people and fail to protect many of the most vulnerable in society.
Secondly, it means that the adoption of the Social Metrics Commission measure as an official statistic would allow the Government to show the positive impact they are having on people’s lives right now and take the necessary steps to protect vulnerable people at a moment of global crisis. Looking forward, it could be the foundation for the Government driving an economic and growth strategy which ensures that, for the first time in a generation, as a society we can see a meaningfully lower level of poverty.
My Lords, it is a pleasure to follow the noble Baroness, Lady Stroud. I start by congratulating the noble Baroness, Lady Gohir, on an excellent maiden speech—I am sorry she is not in her place. Whoever would have thought that there would be two Shaistas in the House of Lords?—make of that what you will.
It seems that in her youth, the Prime Minister confused the great tradition of liberalism with libertarianism when she joined my party. Perhaps, despite her education, she had missed the central tenet of liberalism: do no harm. Untrammelled freedom, free from responsibility, is far from what it means to be a Liberal Democrat. If I may indulge myself a little, I shall read the first sentence from our constitution:
“The Liberal Democrats exist to build and safeguard a fair, free and open society, in which we seek to balance the fundamental values of liberty, equality and community.”
The key word here is “balance”. Our ambitions are diametrically opposed to hers, and I am proud she decided that the Liberal Democrats were not the party for her.
Instead, the Prime Minister identified ideological soulmates within elements of the Conservative party, and the so-called mini-Budget is ideologically driven. It is a Budget that unashamedly signals that this Government want to install an economy in which growth is driven by a “me, me, me” culture, one in which the law of the jungle will reign supreme. The “Do no harm” principle is ignored. The poor and vulnerable are asked to bear more of the tax burden, to shoulder more of the pain of inflation, while incomes and benefits for some stay the same. At the same time, the rich receive tax cuts, oil and gas giants bank eye-watering increases in profits, other big businesses make even greater profits and bankers take home even bigger bonuses.
My message to the Government is: stop the harm. Ditch the high ideology and grapple with the imperatives of the day. Help the most needy in our society. They cannot afford to pay double the energy costs of last year and cover the economic ineptitude which led to higher borrowing costs. Invest in education and R&D, without which the holy grail of growth will ever remain a pipe dream.
It is meaningful, long-term investment in R&D, skills and training that will drive the innovation and technology needed to meet the challenge of climate change. Without this investment, we will see the rest of the world forge ahead and grow without us.
In concluding, I associate myself with all previous remarks condemning the Government’s actions on obstructing green growth and loosening protection of the environment. I want to stress two points. First, the issuing of new licences for the exploration and production of oil and gas is reprehensible, as is removing the ban on fracking. Can the Minister assure your Lordships’ House that taxpayers will not be left to pick up the cost of dismantling the inevitable future stranded assets? Secondly, can the Government just get on with launching an information campaign on what people can do to reduce energy use? If, for ideological reasons, they cannot bring themselves to do this, they should get out of the way of others who can.
My Lords, it is a pleasure to follow the noble Baroness, Lady Sheehan, although I regret to say that I find it difficult to agree with anything she said.
I congratulate my noble friend Lady Neville-Rolfe on her well-deserved reappointment to government. At difficult times such as those we face today, it is encouraging that your Lordships’ House has her experience and wisdom at the centre of the spider’s web in the Cabinet Office, so to speak. She made a good fist of a difficult hand. I am a strong supporter of the political philosophy of the Prime Minister and her Government, and agree with her instinct that it was necessary to move fast and far in order to achieve the growth in the economy that we all desperately need.
I also congratulate the right reverend Prelate the Bishop of Birmingham on his thought-provoking valedictory speech and the noble Baroness, Lady Gohir, on her passionate maiden speech.
I welcome in particular the Government’s decision to reverse the planned rise in corporation tax. The proposed increase from 19% to 25% amounted to an increase of more than 31%—nearly one-third—which would have acted as a deterrent to those thinking of setting up new companies here. The evidence of how effective low corporation tax is for economic activity is particularly strong if one looks at the example of Ireland, whose economy has thrived beyond best expectations.
The accelerated reduction in the rate of basic income tax is welcome. However, does my noble friend the Minister not agree that, to compensate for the unexpectedly rapid and large increase in mortgage rates, there is a strong case for the reintroduction of interest tax relief on principal private residences?
Does my noble friend agree that, to deal with energy costs and energy security, there is a need to adopt without further delay a new and much more ambitious strategy with regard to nuclear power? I mean not only the nuclear generation of electricity but—this is often overlooked—the use of nuclear power to generate industrial heat for our manufacturing and transport industries. Dr Tim Stone, the chairman of the Nuclear Industry Association, recently lamented the fact that we have thrown away our leading position in nuclear power.
In the 11 years from 1956 to 1967 we built 27 new nuclear reactors. In 1978, both France and the UK had 6.4 gigawatts of nuclear power. Today, France has 61 gigawatts and we have less than one-tenth of that, 6 gigawatts, and much of that is to be decommissioned over the next few years. The Government’s plan, set out in their vision for Great British Nuclear, must be fulfilled, expanded and delivered at speed and at scale.
The most important supply-side reforms to which the Government have committed involve the removal of unnecessary costs for businesses. It will come as a relief to companies up and down the country that departments will be required to review, replace or repeal retained EU law, which will otherwise disappear through sunset regulations by the end of next year. That is an enormous task which can be achieved only with full support and co-operation by all departments and regulators. Wholesale regulatory reform is essential to overcome our perennial problem of low productivity, which is essential for the Prime Minister’s growth plan to be achieved and sustainable. Financial services rules such as MiFID II have severely restricted the development of innovative challenger asset-management companies. The Government have already made some moves with regard to solvency too, but the proposed reduction in risk margins still falls short of what the industry believes to be appropriate. The financial regulators should be re-merged into a single body. If this is a step too far at present, at least they should both be given competitiveness objectives ranking equally with their primary objectives.
I look forward to other noble Lords’ contributions.
My Lords, first I welcome my friend, the noble Baroness, Lady Neville-Rolfe, back to the Front Bench.
The Chancellor was absolutely right when he said that the only way to sustainably raise the living standards of our nation is to confront the challenge of our lifetime: to raise productivity. He was right when he talked of the need to lift skills, improve infrastructure and speed up the planning process. However, that was Chancellor George Osborne in 2015. The Prime Minister and her Chancellor talk about their decision to go for growth as if they have had a unique revelation. On the contrary, successive Governments have talked this talk. The problem has been delivery.
There have been numerous initiatives. George Osborne cut corporation tax and raised the investment allowance, just as Kwasi Kwarteng has done. It did not increase investment levels. He announced the creation of 26 new or extended enterprise zones. The productivity gap remained. Nevertheless, we are now promised dozens of investment areas. Business was not crying out for tax cuts or gimmicky zones. Even the president of the CBI has said that cancelling the planned increase in corporation tax was not a particular demand of his members—albeit that the noble Viscount, Lord Trenchard, was keen on it.
Business needs a skilled workforce and efficient infrastructure; that is the key to bridging the UK’s productivity gap and growing the pie. But our education system ranks only 15th in the OECD’s league table, behind countries such as China and Japan, but also behind Estonia and the Netherlands. Our best schools are brilliant but, through the Peers in Schools initiative, I have been into secondary schools which in the staff room the staff refer to as “secondary moderns”. I have been into a secondary school where the headmaster told me that his first task was not so much educating his pupils as providing them with some stability in their lives. The skilled workforce, on which bridging the productivity gap depends, needs a better education system than the one that we have.
The need for serious infrastructure investment remains. This country has a national productivity investment fund. Its contributions to improving infrastructure include extending passenger waiting areas within Derby bus station and a new pedestrian cycle crossing in Middlesbrough. Competing with modern China or Korea will need a little more than that. Perhaps the Minister could tell me what the national productivity investment fund is doing now.
Business also craves stability. That has certainly not been enhanced in recent weeks. Incentives for long-term investment might help. Some countries enable companies to reward long-term investors with enhanced voting rights. The UK will not countenance that. Business also needs a stable community if it is to flourish. The inequity now evident in our society is threatening that stability.
The mini-Budget fiscal event was crazy. The withdrawal of the 45% tax rate was simply crass, from every point of view. The noble Lord, Lord Frost, in welcoming the growth strategy, invoked the name of the late Lady Thatcher, but that devotee of good housekeeping would never have countenanced the idea of borrowing to fund tax cuts. It took her nine years to reduce the top rate to 40%. Even if this Government have the right recipe to grow the pie, it will take years to bake it.
In the meantime, to get anywhere near that promised plan to bring down debt in the medium term, there will have to be vicious cuts to public spending; or does everything depend on what is written on page 17 of the growth plan:
“The financial services sector will be at the heart of the government’s programme for driving growth across the whole economy”?
A “deregulatory package” will
“unleash the potential of the UK financial services sector.”
Can they have forgotten 2008?
My Lords, it is always a pleasure and a challenge to follow the noble Baroness, Lady Wheatcroft. Two years ago, I watched the then Prime Minister take a pickaxe to one of the granite foundations of our country’s reputation: respect for the rule of law. Now I feel that I may have watched this Administration if not tear up then at least damage the Conservatives’ hard-won and hitherto well-deserved reputation for fiscal prudence.
Much of the commentary over the last two weeks has been sensationalist, too general and insufficiently nuanced. There are quite a few cooks stirring today’s toxic broth of geopolitical and economic stresses—Covid, Putin, energy costs, inflation, to name a few—but I will restrict my comments to just three observations.
First, the collateral crisis was one of those foreseeable unforeseens except by a few wise people, such as my noble friend Lord Wolfson of Aspley Guise. Its genesis, perhaps, was far too many years of unwisely loose monetary policy, through both quantitative easing and artificially low interest rates. Those influences encouraged long-term investment funds to pep up their returns through the derivatives market, which became a problem when interest rates rose both hugely and suddenly two weeks ago, requiring those funds to post collateral they did not have. Braver and earlier action on both rates and QE, as many advocated, would have softened this blow. In any event, as many noble Lords have said today, the return to higher interest rates is the new norm. In the long term, that will be good for our economy. Artificially cheap money distorts behaviour.
Secondly, many of the big policy changes in the Chancellor’s mini-Budget had been well flagged in advance without causing market disruption, so what caused the markets to take fright in the Far East overnight on Sunday/Monday of last week? I am supportive of much of the political philosophy underlying the Chancellor’s Statement. Britain is overregulated and over-nannied. The individual has been lured into thinking that it is the duty of the state to solve any problem, when it is not and cannot be. We are overtaxed and underproductive. We lack sufficient investment and we are trapped in a low growth cycle, but there is a time for fiscal loosening on a massive scale and it is not when unemployment is low, inflation is high and markets are already expecting a ballooning of the budget deficit to near 8% of GDP.
It is the timing and execution, as much as the substance, of the Chancellor’s Statement that has been catastrophic. The numbers were unverified by the OBR and there was no clear plan. A rushed Statement on the Friday was compounded by unscripted, boastful words over that weekend. It displayed a mixture of naivety, lack of experience and overconfidence, which asked to be punished by international capital markets and duly was. The international capital markets were the first to hold the Government to account.
Thirdly, why does a market reaction of such severity matter? The answer is that, at the end of June this year, overseas investors held about 31% of the Government’s total debt of £2.2 trillion. Their views matter; they do not have to buy our debt. As the previous Bank of England governor said, we rely on the kindness of strangers, and two weeks ago those strangers were not feeling kind. Commentators understandably focused on the rise in rates at the long end of the yield curve and, at one point, a near 10% fall in sterling against the dollar. However, the yield increase at the short end has been even bigger, which has raised interest rates, including mortgage rates, and put greater pressure on households. This plays into my argument that it is financially illiterate to loosen financial policy when there is an inflation problem. It just forces the Bank to hike short rates more—the “accelerator and brake” syndrome.
Markets are a drama. They are built on confidence. They are an amalgam of analysis, courage, fear, confidence and scale. This makes them so human. What might prove to be relatively small misjudgments, either political or economic, can have and have had huge negative impacts, which a more measured, informed, well-explained and mature approach might have avoided. I very much hope that our political leaders, like the best business leaders, have the humility to take learnings from the errors of judgment and mistakes made.
My Lords, I am not sure we have fully grasped the magnitude of our predicament. You cannot place a complex modern economy into a cryogenic state and then just bring it out without damage. We spent maybe £400 billion—more, according to some estimates—on the pandemic and the associated lockdowns. We paid people for the better part of two years to stay home and we covered the difference by printing money. That creates a debt that has to be settled. There is no escaping the reckoning.
When I say that I do not think we have grasped it, I do not make this point in any partisan sense. I blame the then Prime Minister, who came to the Dispatch Box in another place and boasted of our massive fiscal firepower and preened himself on the fact that our furlough scheme was more generous than that of France, Germany or Ireland, just as much as I blame the leader of the Opposition, who opposed every loosening of the lockdown and now complains about inflation as though it was some act of God.
At the very beginning of this debate I think the noble Lord, Lord Newby, said that there was no need to act precipitately, but when we find ourselves in a hole this deep we have to act with urgency. Every aspect of the financial Statement, with the exception of the energy subsidy, was an attempt to stimulate growth. In the position we are in, we have to stab at every button and tug at every lever. The IR35 reforms, easier fracking, easier housebuilding, reform of financial services and of childcare—anything that brings prices down and stimulates economic growth.
Of course all these things are unpopular, at least in the short term. Human beings are change-averse. All the easy stuff has already been done—actually, quite a lot of the hard stuff has already been done—but we need to judge policies not by their popularity when polled in isolation but by the popularity of the outcome. Every privatisation was unpopular when it happened and most remained unpopular afterwards, yet people approved of the overall package because it led to rising living standards.
I have to say that this applies also to tax. I was very disappointed that, with a majority of 71 in another place, the Government were unable to push through a small simplification of our tax rates that would probably have been at worst fiscally neutral and more likely beneficial in a quite short period of time. As an aside, a number of people, starting with the noble Baroness, Lady Smith, and ending with the noble Lord, Lord Sikka, have spoken about trickle-down economics. To my knowledge, no one has ever advocated the idea that you enrich the poor by giving the rich more money to spend on their Lamborghinis or their art collections. The phrase “trickle down” was invented in the United States in the 1930s as a caricature of the policies supposedly pursued by the Coolidge Administration. If you type “trickle down” into Google, it will prompt you with “debunked”, “false” and “Reagan”, but you will not find a single person ever advocating it. It is an absolute fantasy, a leftist parody of how conservatives are supposed to think.
What we were trying to do in the Budget—it is very disappointing that we backed off at the first crackle of musket fire—was to set the incentives so that the whole economy would grow and we would get more revenue in with lower rates, something that even the IFS thought was feasible at that level. This is not a new idea.
I want to finish by agreeing with the fiscal analysis of my noble friend Lord Bridges of Headley. The idea that bringing tax back to the pre-pandemic level is creating some kind of skeletal, Randian state—a sort of libertarian attempt to end all government spending—is utter fantasy. We would gladly settle for the tax breaks that pertained in the Blair and Brown years; they would be a huge improvement on where we are now. However, we have only two ways out of this mess: we can either try to grow our economy so that the share taken by the state shrinks in proportionate terms or we can wait for an external correction by either the IMF or the market. There is no third option.
I too add my congratulations and best wishes to my noble friend Lady Gohir, the right reverend Prelate the Bishop of Birmingham and the noble Baroness, Lady Neville-Rolfe—perhaps best wishes especially to the noble Baroness, Lady Neville-Rolfe, for serving a second stint.
Long-term economic growth is driven by two things: the growth of a country’s labour force and its productivity performance. In the decade up to the Covid shock, the UK grew by just less than 2%. Contrary to expectations prevailing immediately at the end of the financial crisis, it was mainly driven by extremely strong employment growth. Unfortunately, along with it, and maybe because of it, there was extremely weak productivity, even by our poor standards—about one-quarter of that which had prevailed. So in addition to it being rather risky in general to have a precise growth target, one would have thought that to have a notably higher one would mean you would have to generate significant belief that either or both of those two legs would be stronger. It is extremely difficult to believe that the long-term labour force growth trend will be even stronger than it was before, so the Government should have, in advance of a rather cavalier and naive tax-cutting Budget, at least tried to show that they would maintain labour force growth and evidence of dramatically improving productivity. They now somewhat desperately need to do that.
Here are four specific ideas that should be included. First, the Government should intensify their brief mention of efforts to reform pension and insurance company investment behaviour. As the chaotic gilt market sell-off highlighted, for far too long our supposed long-term investment institutions have in fact been investing far too much in supposedly lower risk investments. We need genuine long-term risk-taking and patient capital to be successful and to help a true growth investing culture.
Secondly, along with this, incentives for true risk-taking must be improved, not ill-thought-out, obsessive ideas about broad corporate taxation, which simply allow even more accountancy-style management of balance sheets and have for 20 years typically resulted in more share buy-backs and little investment.
Thirdly, the devolution process started by this Government in 2014 should be accelerated, and they must be serious about it, devolving more powers, especially on skills but also much, much more. Recent geographic ONS data—the first it has ever produced in such detail—shows that within the dreadful overall trend Greater Manchester experienced stronger productivity improvements in 2002-18 than London. It could be a fluke, but it is probably not, and is a sign of something that can work. Devolving powers should be at the heart of what this Government are trying to do to be serious.
Lastly, if I were in their shoes I would encourage the OBR to choose for itself to reduce the importance of its short-term GDP forecast changes. As talented as the OBR team is, its own cyclical forecasts jump around just like anybody else’s. The only thing guaranteed is that, like everybody else’s, they will be different the next time. This should not be confused with having a credible independent organisation, such as the OBR, that gives its best forecast of the country’s growth trend and the long-term trend of the nation’s finances.
My Lords, what joy it brings me to see my noble friend on the Front Bench and what a speech she gave to the House this afternoon.
I am very happy with the new Prime Minister and Chancellor. I joined the Conservative Party in 1964, and the basic tenets of the party at that time were almost identical to what we are being offered today. I fought my seat in Northampton South in February 1974. I was told that I would not win, that it had been a Labour seat all its life and that there had never been a Conservative in Northampton. I fought that seat on the basis of what I have just described, with energy, determination and enthusiasm. What the Prime Minister is bringing to our nation is energy, huge effort, enthusiasm and commitment to the basic philosophy of the party I joined so long ago and continue to support wholeheartedly.
My goodness, what challenges she faced on the day she became Prime Minister: the world facing its fifth wave of debt, inflation rising far too fast, energy supply and pricing a huge challenge, and, on top of all that, Ukraine and Russia. There was no time to really prepare for any of that, yet somehow she and her team, in a very limited time, did a huge amount of work that is manifesting itself now. My friend the noble Lord, Lord Lupton, may well be right that some of the elements could have been better put together, but you have to look at the time span. Does nobody understand the sheer pressure of having fought to be leader of our party for a whole month and then being thrown in? She and her team have succeeded. It is a truly great achievement.
My noble friends need to understand that one element is missing. There is one word missing: communication. I spent my economic career in the marketing world, and part of that time as the director responsible to the Central Office of Information for whatever campaign the Government of the day decided needed to be communicated. I say to my noble friends on the Front Bench that it is no good relying just on TV. There is press, billboards, radio—all sorts of media. Remember that, and please do not forget that it is not unusual to communicate directly to every single household in this country if the need is there. At this point in time, I believe that need is there. It has been done before and ought to be considered again. If that happens and we really communicate well, I am quite sure that this will be a highly successful Government. I look forward to continuing to support them.
My Lords, the twin problems to which the mini-Budget was addressed were near-zero growth and a relentless rise in prices. I doubt whether it will do very much for the first—certainly not in time to offset the second. In the short run, what we face is not a growth crisis but an inflationary crisis and that, of course, also means a currency crisis.
What was the growth strategy? I think it was based on Reaganomics—the idea that unfunded tax cuts, by incentivising the wealthy to work hard and invest more, would pay for themselves. That was a sort of Laffer curve idea, which was very popular in the 1980s. The British Treasury never bought it; it always thought that tax cuts to encourage the wealthy would need to be complemented by welfare cuts to incentivise the poor to “get on their bikes”, in the famous phrase.
Well, that is the basis of growth orthodoxy but it is very insecure. There is no evidence that tax cuts for the rich speed up the real rate of economic growth. What they do encourage is speculation in financial assets and real estate. Also, there is no correlation between the rate of growth and the size of the public sector. So the growth strategy is very insecurely based. As the noble Lord, Lord Eatwell, pointed out earlier, public investment, not public ownership, has been the main growth engine since the war.
Apart from its intellectual incoherence, the Chancellor’s mini-Budget sets out to tackle the wrong problem. The problem, as Keynes wrote in 1939, is not how to get growth but
“how to pay for the war”.
We have blundered inadvertently into a war situation, and that creates war problems. A war economy is inherently inflationary: too much consumer demand, too little supply. This is our situation. Excess demand is easy enough to explain. For over a year, from 2020 to 2021, the Government paid a large chunk of the workforce to not work. Pent-up demand exploded before supply could catch up.
That is one part of it but, in addition, Russia’s invasion of Ukraine has produced big supply shortages, reflected in the near doubling of wholesale energy prices. They would have trebled had it not been for the energy price cap. How long can the Government go on capping prices without raising taxes? Is the Minister expecting energy supply in Europe to increase over the next few years? Is he expecting Saudi Arabia to increase rather than reduce supply? The important point in these questions is that, when debt costs are rising, the Government should be reducing and not increasing their borrowing.
Today, we are significantly less able to run a war economy than we were in 1940. We make fewer things, grow less food and are more dependent on foreign supplies. Extensive deindustrialisation since the 1980s has made our standard of living dependent on the City of London’s ability to finance our twin deficits—budget and current account—which are rising towards 10% of GDP. The City attracts capital into London to engage in financial investment. The energy crisis has blown a hole in the current account. Banks have indicated that a 10% current account deficit will be very difficult for the City to finance. The second factor depressing sterling is, of course, the very high rate of inflation.
We need a credible currency to maintain our standard of living and there is nothing in the strategy of the mini-Budget that guarantees that. What we need is a co-ordinated policy that can communicate a clear path forward.
My Lords, the Chancellor said his recent fiscal Statement represented
“a new approach for a new era”.
He continued by saying:
“For too long in this country we have indulged in a fight over redistribution”, adding that the Government would focus on growth built around several priorities, including reforming the supply side of the economy and cutting taxes to boost growth. He argued that the growth plan would
“unleash the power of the private sector”, with the aim over the medium term of reaching
“a trend rate of growth of 2.5%”.
We await his supply-side reforms, due to be announced in his medium-term fiscal plan on
“the planning system, business regulations, childcare, immigration, agricultural productivity and digital infrastructure.”
I welcome his decision to reverse the national insurance increase proposed by Rishi Sunak. I also very much approve, as other noble Lords have said, of the repeal of the IR35 off-payroll changes of 2017 and 2021, the cancellation of the proposed corporation tax increase, the advancement of the basic rate tax cut by a year, the changes to the stamp duty threshold and the cutting of the additional tax rate from 45% to 40%, believing that, within reason, lower tax rates yield higher revenues and make the UK more attractive to international business. The huge energy support package also had my support.
So how could this Financial Statement have had such a bad reception? The first problem was timing. There was a perfectly respectable argument for reducing the 45% rate—after all, that is what it was during Tony Blair’s term in office and after—but the Government had to prepare the ground first. It is not immediately obvious that it could pay for itself, but it could easily do so if more big earners decided to declare their income in the UK. That takes time and patience to explain, especially at a time of such hardship when people are struggling with electricity bills, mortgages and cost-of-living expenses. People are also worried about the increasing effects of inflation. There could have been shrewder ways of doing this—namely, by raising the threshold for the start of the 40% tax bracket, since it now encompasses millions of middle earners who were never meant to pay this rate.
Going back to the proposed supply-side reforms com, the planning system ideas to encourage growth look sensible on the face of it, but there will be resistance to these, especially from Back-Bench MPs in southern rural seats. Every Government propose to tackle business overregulation, but generally there seems to be little overall success in this area.
The Government also completely failed to anticipate the market’s reaction to the unfunded tax cuts. The decision not to have the Statement’s financial effect costed by the OBR was a serious mistake. It also vaguely mentioned further tax cuts, further undermining market confidence.
I welcome the proposed reforms to the universal credit regime earnings threshold, which will mean that 120,000 more claimants will be helped to increase their earnings. However, I cannot see how much additional welfare reform is going to succeed as there will be serious opposition, including from the Government’s own Back Benches.
I am happy with the Government’s plan to introduce legislation to ensure minimum service levels on transport services and to require unions to put pay offers to a membership vote.
I await with interest more details of the proposed investment zones to be established across the UK, which will benefit from tax incentives, planning liberalisation and wider support for the local economy. Hopefully, the loss in tax take can be made up for by the new businesses attracted there.
Overall, the Government had some great ideas in the Financial Statement, but they were let down by poor preparation of the ground and in getting the Back Benches onside. Hopefully, as a result of the reaction to it, the Government will be more careful in these areas in future.
My Lords, I add my own welcome to my noble friend Lady Neville-Rolfe. She has vast experience and formidable tenacity. As a board director, she helped make Tesco hugely popular. We live in hope.
What to say at this time of night? I have recently been messed around with a condition called oscillopsia. It means that things appear to move to and fro; they keep shifting in front of my eyes. The other day I saw that sterling had crashed. I blinked, and, when I opened my eyes, I found that sterling had recovered. That made me rather happy. Then I saw that the top rate of income tax had been reduced from 45%, but, after I had blinked—well, it had not. That made me less happy. And I watched Angela Rayner give what she said was Labour’s response: everything would be reversed. Then I blinked, and Keir Starmer said no, it would not. I do not know whether that made me happy or unhappy, but, if I am honest, it did not come as much of a surprise.
There is a lesson there: violent disunity in a party usually leads to the dustbin of history. It might get pretty crowded in the near future.
There is so much I support in the Chancellor’s package, particularly the principle of letting people keep more of their money. Frankly, I would not even have begrudged Mick Lynch the extra couple of grand that he would have kept if the top tax rate were reduced. I read that his package is around £120,000. Is that outrageous? No, 120 grand is well worth it for being on the side of working people—except that he is not on the side of working people. He is doing everything he can to stop people working, alongside any number of Labour MPs. I am sure that he is a lovely man, but he has about as much in common with most workers as I have with cross-stitch embroidery.
It is not as easy as that though, is it? We are in a beggar’s muddle. The whole of Europe is in chaos. We cannot simply go on—
I thank the noble Lord for that. I suggest that he goes and stands not on the picket line but outside stations when normal people are trying to get to work to do their job. I shall not take any more interventions on that front.
If we as a Government want people to understand and accept what we are about, we have to stop using the language of supply-side this and demand-side that and instead try to get into their homes, sit by their firesides and understand the reality of their lives—and accept that they are scared. There is a lot that is scary right now. It is about the economy, stupid, is it not? No, it is not really—it is about people. The people are the economy; they are the ones who provide the creativity, products, services and extraordinary inputs that go to make those game-changing outcomes. All our language and policies should have one ultimate objective—to enable them to dream their dreams once more. If we cannot, and if taxes come down but mortgages, rents, debts and prices everywhere go up, we will open our eyes and find that Mick Lynch and his men of many miseries will be running the show—and then we will see what economic chaos is truly about. I really wish my noble friend well.
My Lords, I have this vision of the noble Lord, Lord Dobbs, sitting beside fireless firesides.
Let me switch tone and say to the noble Baroness, Lady Neville-Rolfe, that I recognise and welcome her to her new role. I assume that she will speak frequently on Treasury issues, so we will have a great deal of very polite combat. I also very much welcome the noble Baroness, Lady Gohir. She said that she would look at everything through the lens of women’s lived experiences, and she did exactly that in this debate. I say to the right reverend Prelate the Bishop of Birmingham that it is a really sad farewell. He has always spoken for ordinary people, he did so again today, and we will sorely miss him.
The noble Lord, Lord Burns, summarised the subject of our debate. He said that the financial event
“has not gone down well”.
I do not just repeat that for its understatement, but I do say that this was not just an issue of communication and optics. I follow in the footsteps of my noble friend Lord Fox and quote Larry Summers, the former US Secretary of the Treasury, who summed up that event as
“misguided fiscal policy coupled with lack of central bank credibility coupled with toxic leverage creating positive feedback loops”— only an American could say that—
“that led cumulatively to a disastrous outcome.”
A disastrous outcome is what we are living with and, frankly, that is something that I think no one in this House would have ever wished upon this country.
I concur with those in my party who look at the mini-Budget and say, “Keep a cap on energy prices but at the lower rate of last April; give longer protection to small businesses; keep the tax cuts that help ordinary people but scrap the rest and start again.” We need to remove not just the cancellation of the 45p rate but the reversal in corporation tax increases—I will talk a bit about that in a moment. The Government need to levy a much more rigorous windfall tax on oil and gas companies. I say to the noble Lord, Lord Forsyth, that, if he looks at the Lib Dem plan, he will see there the money that is needed to be able to fund significant parts of the support for ordinary people by going back much further, making the levy far more significant —not just a mere 25%—and taking away all the various opt-outs and concessions provided if oil companies go and invest in oil and gas.
I say to the Government that this not the time for ideology; we need an absolutely practical plan—I think of what the noble Lord, Lord Skidelsky, said. We need a plan that protects people and businesses and grows the economy and an OBR forecast that both informs that plan and informs all of us. It is not just the financial markets that are shaken, but ordinary people who suddenly realise that prices, including for food and energy, will remain cripplingly high. Liz Truss has said that benefits will rise far less than inflation—though I hope, like many people in this House such as the noble Baroness, Lady Stroud, the noble Lord, Lord Carlile, the right reverend Prelate the Bishop of Durham and many others, that that will be revisited, because, frankly, it is cruel. Interest rates and mortgage costs are rising sharply, and the Institute for Fiscal Studies has warned that stealth freezes in tax and benefit thresholds will take twice as much money from UK households as they stand to gain from the Government’s cuts to headline rates.
On public services, quite a number on the Conservative Benches—the noble Lord, Lord Howell, and others—talked about the importance of cutting public services, whether by function or overall. But these services are already struggling in the face of inflation, and I am very afraid that we will see cuts, particularly in the education sector, which would be an utter blow to any growth agenda.
The UK stands out from other G7 countries in the failure of our economy to recover to pre-Covid levels. That failure is owned by the Conservative Government and the Conservative Party—it cannot be blamed on Covid or Russia. When the Prime Minister speaks of an anti-growth coalition, and when I look back at what has been happening in this country, she is describing herself, the Tory party and their record. I stand on Benches, and I believe much of the Opposition stand on Benches, that are fundamentally and have always been pro-growth.
The last OBR numbers that we saw demonstrated a huge hit to the UK as an international trading nation. It is, as the noble Lord, Lord Inglewood, said, an inevitable consequence of hard Brexit. Even the most optimistic view of new global trade and plans for lax regulation across the board scarcely claw back a fraction of that trading loss. That issue must be fundamentally tackled.
If I may reflect the noble Lord, Lord Londesborough, here, productivity has barely improved for a decade. It is not hard to see why. The Government have underfunded education and skills at all levels, despite a lot of fine talk and endless ideological tinkering. Business investment has declined sharply from already low levels despite some of the lowest corporation tax rates in the developed world. I say to people like the noble Lords, Lord Forsyth and Lord Bridges, and the noble Baroness, Lady Noakes, that for 10 years we have had incredibly low corporate tax rates and, every single day of that 10 years, they have failed to generate growth. It is time to recognise when a policy has failed and not to make it the central lynchpin of a so-called growth agenda. We need a policy that works, not one that simply meets a soundbite test.
With the weak pound, we may well see more foreign money coming to the UK, but it will not be money to build our businesses; it will be the asset strippers and the vultures, and they are already circling. Goldman Sachs has openly said that it is hunting for cut-price assets from UK pension funds to take advantage of the liquidity pressures—and it is the respectable end, frankly, of the vulture industry. The AIM, which is always a good canary in the mine for business investment, has slumped to a 13-year low.
The Government have completely failed to reshape the financial sector to support patient capital—the noble Lord, Lord O’Neill, addressed a lot of this—and to provide scale-up funding. Without that, frankly, we lose most of the benefits of innovation. The plan now to remove the cap on bankers’ bonuses, and much of the deregulation in upcoming Bills, is designed to let risk rip once again, rewarding the chancers, the price fixers and the churners, abetted by a regulatory system with no backbone. I forget who said this in the debate, but somebody cited 2008 and asked, “Have we really learned nothing?”
Infrastructure expansion is constantly on again, off again. We do not so much have a planning problem; it is the lack of competent government leadership, which blows hot and cold on public projects and encourages private developers to put forward insultingly inappropriate development plans. That is why local communities object to them. Thirty-storey high-rises; intensive development; a disregard to public amenities: no wonder we have public opposition and delays. That is where reform is needed.
We have a shortage of working-age population on an exceptional scale. Let me quote the Public Services Committee this July:
“ONS statistics show that the number of people of pensionable age will grow by 28% between 2020-45, while the number of working age people will grow by just 5%.”
Various people discussed our labour market, problems not addressed at all by this Budget. Frankly, on those grounds alone, the Government’s immigration policy is utterly senseless.
As for the idea that the net-zero target is anti-growth, that displays, as the noble Baronesses, Lady Hayman and Lady Walmsley, said, a complete failure to understand the dynamics of sustainability. Let me quote the IMF:
“If the right measures are implemented immediately and phased in gradually over the next eight years, the costs will remain manageable and are dwarfed by the innumerable costs of inaction.”
Germany by 2025 is expected to have 11.3% of the world’s electric vehicle battery manufacturing capacity. We, who think of ourselves as a car-building country, will have only 0.8%. France is now investing on a far greater scale than we are in carbon capture and storage. Which countries do this Government think will dominate the future and reap the economic rewards of sustainability? Reform the energy market—it needs it—but this Government’s focus on increasing oil and gas exploration and fracking will either force us to abandon that target or load this country in the future with billions in stranded assets that ordinary people will have to pay for, a point made by my noble friend Lady Sheehan.
We have to deal with the public debt, which will not evaporate—I pick up the point made by the noble Lord, Lord Bridges—because the Treasury has been issuing index-linked gilts to the point that they are now something like 25% of public debt. I listened to people trying to compare us with the United States, but that has both the dollar and a domestic market of 350 million people. The EU has a domestic market of 450 million people. Both have a base of stability which we do not enjoy. The need for the Bank of England to declare its willingness to buy £65 billion in gilts to stabilise the market a week ago underscores how vulnerable we are. The noble Lord, Lord Davies, raised an important point: we should be very careful as we change the rules on pension funds, because seeing them invest in illiquid assets will create its own series of risks. My noble friend Lady Bowles once again warned us how blinkered we can be to risk because of the way we structure accounting standards.
There has been so much mismanagement for so many years, driven by ideology, rather than facing up to the real world. My party and I have, in many speeches, tried to draw the attention of the Government to the economic growth crisis and every time—noble Lords can go back and look in Hansard—we have been summarily dismissed. We have no choice now but to get this right. Ideology needs to be set aside and competence needs to replace it.
My Lords, I congratulate the noble Baroness, Lady Gohir, on her maiden speech. She clearly set out her position and passion, and she had many ideas for which I have personal sympathy. I also join the regrets of the House for the final speech of the right reverend Prelate the Bishop of Birmingham. His insightful and compassionate contributions were always an important part of our debates, and I fear we are at a point in our history where we need more compassion and discussion.
This has been a fascinating and wide-ranging debate. I suspected that my going through the individual contributions of 55 Back-Bench speakers would get in the way of what I suspect is the desire of the House to listen to the Minister rather than me, so I tried to do an analysis of the contents. On balance the split, while not clear-cut, was about 3:1 in favour of those who had more concerns about than praise for the mini-Budget. Keir Starmer, our leader, said at our recent conference that we must put “country first, party second.” I hope we can all embrace this concept in these extremely difficult times, and that Ministers will reflect on the level of concern expressed today and follow our advice, which is, frankly, to go back to the drawing board.
The Government having spent the summer railing against orthodoxy in the running of the UK economy, it is somewhat ironic that it was ultimately for the Bank of England to step in and restore calm. While the Chancellor stood by, letting the pound plunge and pension funds go to the brink, the Bank took it upon itself to make an unprecedented intervention in the bond market. The initial market response to that announcement was promising: the pound recovered some of its losses against the dollar and 30-year yields dropped sharply for a time. Then the Chancellor took to the airwaves and sent the economy into another spiral.
When the Chancellor of the Exchequer speaks, he does so to a global audience. Any lack of clarity or dithering sparks market panic, with our economy and people suffering as a result. The same is true for veiled swipes at institutions such as the Bank of England. Mr Kwarteng might not like how the Treasury or other institutions do business, but undermining the system is not the way forward.
The International Monetary Fund felt compelled to issue its own rebuke of the Government’s plans, suggesting that they change course immediately. That follows its forecast from earlier this year predicting that the UK will have the slowest growth of any G7 nation next year. It is hard to see the mini-Budget improving that outlook. Standard & Poor’s swiftly put the UK’s sovereign rating on a negative outlook, citing the likelihood of
“weaker than expected economic growth and rising borrowing costs”.
Fitch has since followed suit, noting the contradiction between fiscal policy and the Bank’s attempt to curb inflation. This has been much commented on as trying to drive a car with one foot on the accelerator and the other on the brake. These are not comments to brush away. Our creditworthiness now sits below the economies of France and South Korea.
Let us consider the state of the gilt market. In his recent letter to the Commons Treasury Committee, the Bank’s Deputy Governor laid out exactly why it was forced to intervene in the bond market. His letter is full of strong language about the effects of the mini-Budget, referring to a “self-reinforcing spiral” in debt markets. That created a doom loop which meant that, without the Bank’s intervention,
“it was likely that” pension
“funds would have to begin the process of winding up the following morning.”
As a result of the chaos, investors the world over saw UK gilts as a higher risk than those issued by Italy and Greece. Even after the pound eventually returned to levels seen before the mini-Budget, our borrowing costs were still elevated.
What does this mean in practical terms? Liz Truss can wave goodbye to her hope of spreading Covid-related debt over a longer term. The Government’s energy intervention just got substantially more expensive, reinforcing the case for an extension of the windfall tax. Who will ultimately have to pay these debts off? That is right—taxpayers up and down the country who are already contending with higher mortgages and other costs.
However, it would be a mistake to believe that these problems started with the Chancellor’s September fiscal statement. The UK is the only G7 nation not to have recovered to pre-Covid levels of real GDP, meaning that many remain out of pocket. Put in other words, household disposable income is falling. That feeds into record low levels of consumer confidence: a staggering minus 49% in September, down 5% in a month from August. With household incomes having to cover higher mortgages and energy bills, many people are being pushed towards consumer credit. Indeed, in August, consumers borrowed on credit cards at the fastest annual rate since 2005.
We are told that the situation will improve once the Chancellor makes his next fiscal statement, now due at the end of the month. Other than tax cuts, what levers do the Government intend to pull? Exactly what impact do they expect them to have? If rumours are to be believed, the Government will pin their hopes on deregulation. This will come across many sectors, but perhaps none more so than financial services.
Noble Lords will recall that much of that regulation was designed alongside international partners in the wake of the 2008 global crisis. We should all be proud of our financial services sector. It generates billions for the economy and employs millions of people across the UK, and its tax bills help fund vital public services. Of course we should support the sector and find ways for it to boost economic growth. That is why we have been eagerly awaiting the legislation implementing the outcome of the future regulatory framework review. So can the Minister confirm this evening whether the Financial Services and Markets Bill will stay in its current form, or will the Government make financial services deregulation part of their planned growth Bill, lumping these very technical matters in with deregulation in other sectors of the economy?
Regardless of the vehicle used, I am not convinced that anybody outside of government wants to see UK firms allowed to adopt practices unthinkable in other jurisdictions. Yes, we want London to remain one of the world’s leading financial centres, but firms tell us that they want high standards. They want preferential access to international markets, but the Government failed to secure that in their negotiations with the EU. Would equivalence not be a quicker, safer route to growth in this particular sector?
While I am asking about deregulation and upcoming legislation, I wonder whether the Minister could answer a few more questions. Are the Truss Government committed to bringing forward the next economic crime Bill, as promised by the previous Prime Minister? If so, when can we expect it? Would the Minister agree that tackling tax evasion and other forms of economic crime is even more important in the current context? In the rush to change financial regulations, do the Government remain committed to the Basel rules? What about the decisions of the Financial Action Task Force in relation to high-risk countries or its country-specific recommendations to improve the UK’s performance in relation to money laundering?
Economic competence is not just about implementing the fiscal recommendations of one’s favourite think tanks; it is about delivering financial stability day after day. We need answers to all these questions and more before we can take the Prime Minister and the Chancellor seriously. Downing Street urgently needs to fix the problem it created two weeks ago. This cannot wait three weeks, until
My Lords, I begin by joining my noble friend Lady Neville-Rolfe in welcoming the noble Baroness, Lady Gohir, and congratulating her on her maiden speech, which I listened to with great interest, although I do not think she is in her place any longer. The noble Baroness, Lady Hayman, said that she is full of fire and passion, evidence that she will be an eloquent voice for women. She is no doubt delighted to discover that we are now on our third woman Conservative Prime Minister, and I am sure we are all looking forward to hearing her future contributions.
Today is clearly a day for our second city. I thank the right reverend Prelate the Bishop of Birmingham for the contribution he has made to this House over the years. He joked about my noble friend Lady Neville-Rolfe’s reference to his “mature” and “sensible” contributions, and then proved how right she had been to say it. The right reverend Prelate made many noteworthy points in the few minutes allotted to him, not least about the importance of the need for the devolution of power and influence. He asked about “wealth created for whom”, an important question which I am sure we will be debating for many weeks to come, sadly without his presence.
It is a privilege to close this debate on behalf of the Government and I thank noble Lords for their many contributions. We have heard about and debated the many steps the Government are taking to achieve economic growth: a series of bold initiatives which we believe will, together, reboot this country’s long-term prospects. It is an agenda which protects and reassures now in the form of our plans to cut energy bills at a time of global uncertainty for our people, and an agenda which lays the foundations for a future about which we all can and should feel optimistic. In her introduction, my noble friend Lady Neville-Rolfe rightly said that we need to do things differently and we need to do them better. This Government are making growth their guiding mission, which I am sure many of us agree it needs to be.
I shall address in turn the different aspects of the Government’s plans that were raised in the debate. I start with plans to reduce millions of energy bills, an issue raised by many speakers, including the noble Baroness, Lady Smith of Basildon, the noble Lords, Lord Fox and Lord Burns, my noble friends Lord Forsyth of Drumlean and Lord Lamont, and others. The Government had previously announced £37 billion of support, meaning 8 million of the most vulnerable households receiving £1,200 of support and others receiving £400. Last month, the Government built on that and announced the energy price guarantee to limit the energy bills of typical households to £2,500 a year for the next two years—that is an average, of course. In turn, another benefit of that is significantly reducing the rate of inflation.
As many noble Lords observed, there are no cost-free options. The Government must now intervene to guard against the worst economic outcomes going forward, and that intervention will therefore initially be funded by the Exchequer.
The noble Lord, Lord Fox, asked about the case of fixed-rate contracts that were agreed before
The noble Baroness, Lady Brinton, argued that business energy bill support is needed for more than six months. I am also pleased to be able to tell her that after the initial six-month period we will provide further support for vulnerable sectors. We will publish a review of the energy bills support scheme after three months to assess effectiveness and how the scheme might be extended, further targeted or revised beyond the six-month period for vulnerable non-domestic customers. Continuing support to those deemed eligible would begin at the end of the initial six-month support scheme without any gap.
The right reverend Prelate the Bishop of Edmundsbury and Ipswich—he must have the longest title in the House—also raised the important subject of energy poverty. In addition to the extensive support I have just mentioned to support people who need additional help on top of the warm homes discount, the Government are also providing an extra £500 million of local support via the household support fund, which will be extended from this October to March 2023. The household support fund helps those in most need with payments towards the rising cost of food, energy and water bills.
The Government are also aware—again, this point was raised by many Members—that the energy price guarantee will leave those households currently with unregulated energy sources, such as those living off the gas grid, with uncapped bills this winter. However, our objective is that all households, regardless of their heating source, will be no worse off than an equivalent domestic gas household under the energy price guarantee.
As the noble Baronesses, Lady Hayman and Lady Walmsley, and again, the right reverend Prelate the Bishop of Edmundsbury and Ipswich, noted, there is more at stake here, and there is a need for a more holistic approach. That is why the Government are investing more than £6.6 billion over this Parliament to improve energy efficiency and decarbonise heating. Despite the comments of some Members, we are making good, steady progress on this issue. In 2008, 9% of homes had an energy performance certificate of C or above, and that figure is now 46%. Meanwhile, the energy company obligation, or ECO, has been extended from 2022 to 2026, boosting its value from £640 million to £1 billion a year, which will help about 450,000 families with green measures such as insulation. I am sure that it did not escape the attention of Members that last week the Chancellor announced an additional £1 billion investment over three years in the ECO-plus energy efficiency scheme—something I am sure we will return to in this House when we bring the legislation forward to implement it.
The noble Baronesses, Lady Smith of Basildon and Lady Kramer, and the noble Lords, Lord Burns and Lord Razzall, and other noble Lords, all raised the issue of a windfall tax on energy companies. We already have a tax on energy companies. The energy profits levy was introduced on
If the noble Lord will have patience, I will finish my paragraph and then he can intervene.
It applies to profits earned by companies from the production of oil and gas in the UK and on the UK continental shelf.
My Lords, the net impact of the windfall tax the Minister referred to is only 2% of the earnings before interest, tax, depreciation and amortisation of BP’s profits and only 1.5% of Shell’s. It excludes profits made in the forecourts, from refineries and by trading, which is the biggest source of profits for oil and gas companies. Surely that tax was just a joke and a sop, because a large amount of it is then handed back through accelerated investment allowance.
I know that there has never been a tax that the noble Lord does not want to increase even further, but it is already a very high level of tax. I think I saw a figure of £170 billion mentioned by the Opposition. That is worldwide profits. The UK cannot tax profits made in other jurisdictions; we can tax those that are made in our country, that we have control of. I remind the noble Lord that we also want those companies to invest in renewables, as they are doing. There are many renewable projects—offshore wind projects, hydroelectric projects, et cetera—in which we need additional investment. So the calculation made by the Treasury, which I have never seen to be shy of raising taxes in the past when it could, is that, on the one hand, of course we want to secure a fair return for taxpayers, but we also want to make sure that the profits are there to enable the massive sums that we need to invest if we want to move to a green transition in future.
On the suggestion of the noble Lord, Lord Vaux of Harrowden, of a briefing on energy markets for interested Peers, I say to the noble Lord that, as he knows, this is a complicated subject. Exactly who is making the excess profits under which particular regime is a complicated issue. He will be pleased to hear that we will shortly be debating the legislation to implement the support policies I have mentioned, and I am sure that these matters will be raised further in the debate during the passage of that legislation. I look forward to discussing it further with him then.
The noble Lord, Lord Liddle, made the point that we need to get onshore wind moving—a matter I know is dear to the heart of the noble Baroness, Lady Hayman, and she will no doubt agree. The British Energy Security Strategy recognises the range of views on onshore wind across the country and, as I said before, we will be consulting on developing partnerships with a number of supportive communities that wish to host new onshore wind infrastructure, perhaps in return for guaranteed lower energy bills. The growth plan went further, with specific changes to accelerate delivery of infrastructure, including bringing onshore wind planning policy in line with other infrastructure policies to allow it to be deployed more easily in England. The noble Baroness, Lady Walmsley, has asked many times about that; I am sure she will be pleased to hear that.
The noble Baroness, Lady Fox of Buckley, meanwhile noted the need for green innovative growth. We have indeed established a Green Jobs Delivery Group, headed by Ministers and business leaders, to act as a central forum for driving forward action on green jobs and skills. Our plans for net zero and energy security are driving an unprecedented £100 billion-worth of private sector investment by 2030 into new British industries, supporting about 480,000 green jobs by the end of the decade. To return to my earlier point, many of the companies investing in the UK are those that the Opposition wish to tax to death.
The noble Lords, Lord Bilimoria, Lord Eatwell and Lord Fox, alongside my noble friends Lord Lamont, Lord Lilley and Lord Bridges of Headley, all commented on the Government’s plans regarding taxes. The plain truth is that the Prime Minister promised that this would be a tax-cutting Government and we are keeping that promise.
A number of noble Lords also raised the overall approach of the growth plan.
As I understand it, the Government are at present in negotiation with renewable energy suppliers, including companies running onshore and offshore wind farms, to persuade them voluntarily to accept a lower price than they are presently getting. This is effectively restricting their profits without any benefit to the Government in terms of tax.
This goes back to the point I made to the noble Lord, Lord Vaux, earlier: we will indeed be debating these matters further when the legislation arrives. It is a complicated subject. There are two types of renewables certificate. The earlier renewables obligations were given before 2015, and it can be said that some of those operators are indeed making considerable profits. They are perhaps the ones that the noble Lord is talking about. Then there are those that have been on the contracts for difference scheme since 2015, which are now, I am pleased to say, paying back into the system, such is the success of the CfD regime. But, as I said, we will be debating that when the legislation comes to this House.
The Minister has admitted that this is an extremely complex subject. I wonder whether he would consider acceding to the request from the noble Lord, Lord Vaux, and arranging more of a seminar-type event before Second Reading so that we can probe into the understanding—that is, not to make political points but to understand the technicalities we face.
I will certainly look at doing that but, as I said, we are preparing for the legislation. There is furious drafting going on at the moment. It will be in the House shortly. I think noble Lords will find that it addresses some of the points they are raising, but I would be happy to look at holding a seminar as well if they would find that helpful.
Once again I can only agree, as I normally do, with my noble friend Lord Forsyth’s words; what a great Budget Statement it was. He rightly noted, for instance, that investment comes from retained profits after tax. The noble Lord, Lord Bilimoria, for his part, agreed that it is absolutely right to target growth. My noble friend Lord Lamont said that going for growth is a laudable objective. My noble friend Lord Lilley said simply that growth is crucial. All were correct. I cannot agree with everything that the noble Baroness, Lady Wheatcroft, said—I do not normally agree with her very much—but she was right to say that, on growth, the problem has been about delivering.
My noble friend Lord Frost observed that the Government’s opponents think that the right way forward is more of the same, while our belief is that we have to do things differently. The measures in the growth plan represent an ambitious first step towards getting to the 2.5% target through removing barriers to the flow of private capital, supporting skilled employment, accelerating infrastructure construction, getting the housing market moving and cutting red tape for businesses. Historical experience suggests that 2.5% GDP growth is ambitious but achievable given the growth that the UK has observed in the past.
Independent economic forecasters have estimated that the energy package could reduce the headline rate of inflation by around 5% by freezing energy bills. As always, the Chancellor is of course working closely with the Governor of the Bank of England to tackle inflation and closely co-ordinate support for the economy. While more government borrowing is required in the short term to tackle high energy prices, the Chancellor is committed to seeing government debt fall over the medium term. The independence of the Bank of England is sacrosanct and the Government have reconfirmed their commitment to the monetary policy remit. The Government have full confidence in the Bank of England to take action to get inflation back to target.
The right reverend Prelate the Bishop of Durham and the noble Baroness, Lady Brinton, used the phrase “trickle-down economics” as if it is somehow official government policy. I am afraid that, as my noble friend Lord Hannan said, this phrase is a fantasy of extremely fertile left-wing imagination. We have no such policy, as my noble friend Lord Bethell said. No Minister has ever used that phrase. I cannot be clearer: it is fantasy.
The noble Baronesses, Lady Smith of Basildon, Lady Bowles of Berkhamsted and Lady Fox of Buckley, discussed the perceived market reaction to the Government’s decisions. Of course I cannot get into commenting on specific financial market movements. They are determined by a wide range of international and domestic factors. We recognise that there has been some market volatility, which is to be expected as financial markets adjust to policy decisions. The Government do not have a preferred price or yield for assets in financial markets; the price is set by that market. I note, however, my noble friend Lord Lilley’s astute observation that sterling has recovered against the US dollar.
On corporation tax—again, this was mentioned by the noble Baroness, Lady Smith of Basildon—the Government have prioritised cancelling the corporation tax rise and announcing the permanent level of the annual investment allowance to support businesses and increase the productive capacity of the economy. Importantly, the decision on corporation tax is not a cut: it is not proceeding with a previously announced increase.
Meanwhile, the income tax rate cut is being brought forward to April 2023 instead of 2024. This is the first cut to the basic rate in 15 years, supporting over 30 million taxpayers to keep more of their own income. Taxpayers in England, Wales and Northern Ireland will all gain around £170 on average.
The noble Baroness, Lady Walmsley, made the point that freezing the personal allowance is bad for low-income households.
My noble friend is tempting me down a difficult road with the Barnett formula. I am sure that he will allow his point to stand, but I will not get into an argument about it at this late stage.
The Government equalised the primary threshold and the lower profits limit, the point at which employees and the self-employed respectively start paying class 1 and class 4 NICs, with the personal allowance at £12,570 from July 2022. This was the largest ever increase to a personal tax starting threshold, with an almost 30% increase. About 2.2 million working people have been taken out of paying NICs altogether, on top of the 6.1 million who already do not pay NICs.
The right reverend Prelates the Bishop of Durham and the Bishop of Derby both spoke on the importance of benefits, and I know that the House had a discussion on this earlier today. The next annual review of government-provided benefits is due to commence this autumn, and the Government will announce their outcome following this review.
Achieving economic growth is about a good deal more than just cutting tax, crucial though that is. The Government have announced a series of complementary steps to support that growth. As my noble friend Lord Wolfson of Aspley Guise rightly noted, supply-side reforms are key, and the Chancellor made a series of announcements to achieve those reforms.
The noble Lord, Lord Davies of Brixton, asked about IR35. The Government recognise that administering the reforms places a high burden on businesses that engage contractors. The Government’s overarching priority is growth, so now is the right time to simplify the tax system and reduce those burdens, so that businesses can focus once again on core profit-making activities.
The noble Lord, Lord Hendy, questioned the Government’s plans on strike legislation, which were also mentioned by my noble friend Lord Northbrook. On this, I agree with my noble friend Lord Dobbs that the Government should be on the side of the workers trying to get to work. I confirm that the Government will indeed legislate to implement our manifesto commitment on minimum service levels. Our plans will also ensure that staff in organisations that are in active industrial disputes always have the opportunity to resolve disputes when fair and meaningful pay offers are made from employers. The measure will make it simpler to end industrial disputes over pay and ensure that trade union leaders do not have undue influence in causing disruptive strike action through rejecting fair pay offers without the consent of their members.
The noble Lord, Lord Patel, noted the importance of capital investment, particularly in research, science and innovation. The Government are committed to their target to increase R&D investment to 2.4% of GDP across the economy, which I know that the noble Lord will welcome. At the 2021 spending review, the Government committed to £20 billion by the end of the SR period, £5 billion more than in 2021-22 and the largest ever sustained uplift in public research and development spending.
The noble Lord, Lord Inglewood, asked about the business rates offer in investment zones. Investment zones could benefit from a range of time-limited tax incentives over the next 10 years, such as reliefs on business rates, stamp duty, land tax and employer national insurance contributions. Businesses in designated areas and investment zones will benefit from 100% business rates relief on newly occupied and expanded premises.
Crucially, the Government understand that growth and sustainable finances go hand in hand and that maintaining fiscal discipline will provide the confidence and stability to underpin long-term growth. As the Chancellor said last week, there is no path to higher sustainable growth without fiscal responsibility.
The noble Lord, Lord Liddle, said that he did not believe that the numbers could be made to add up. The point of the medium-term fiscal plan, three weeks from now, is to do exactly that. My noble friend Lord Lamont rightly said that fiscal responsibility is not the enemy of growth and furthermore noted that the Chancellor has the resolve and determination to face these challenges.
Given the exceptional circumstances, we moved quickly to provide significant support for households and businesses in the first days and we are acting swiftly to set out a growth plan. The Chancellor has brought forward the medium-term fiscal plan and OBR forecast date to
The core economic mission of this Government is growth. We have a plan to achieve it. The Prime Minister promised that this would be a tax-cutting Government and we are keeping that promise. Most importantly, we promised to release the enormous potential of our great country, and that is what the growth plan does and what this Government are determined to deliver.