HL Deb 29 November 1995 vol 567 cc574-81

3.10 p.m.

Lord Desai rose to call attention to the economic state of the nation, and to the Budget statement of 28th November; and to move for Papers.

The noble Lord said: My Lords, last week in the debate on the gracious Speech we had an occasion to discuss the state of the economy and industry. Today I hope that we can take that discussion further because on that occasion some of us were constrained from speaking our mind because we awaited the details of the Budget announced yesterday.

All that one can say about the Budget is that it could have been much worse. With the permission of the House, after taking a broad look at the state of the economy, I wish to point out in a general way why I believe that the Budget could have been worse, why it fails to be better, and the ways in which I believe that it could have been improved.

As we have all seen, the Budget has been given a lukewarm welcome from the Back Benches of the ruling party and a hostile welcome from everywhere else in the country. It combines an immediate net giveaway of about £3 billion with arguments that there is room for having that moderate tax cut along with a small increase in spending on education, health and welfare. It argues that that somehow combines sound finances, low inflation and a tax cut.

Sound finances are obviously a matter of choice. One has to define them in the way that one will. Given the Government's own predictions last year, it is true that this year's predictions are more pessimistic about the path of the PSBR and how soon the Budget will balance. Paradise has been postponed. It has not only been postponed. On pages 75 and 76 of the Red Book, faced with a higher than predicted PSBR for 1995–96 and for 1996–97, the Chancellor has thought fit to lose £12.5 billion from revenue and to balance that by losing only about £4 billion from expenditure. Therefore £8.5 billion have been added to the PSBR relative to the prediction last year. That increases the ratio of PSBR to GDP and violates the Maastricht conditions; and we shall not get under the Maastricht conditions until after the election.

The election is the key to the way in which the Budget has been framed. One can only be thankful, as I implied before, that the wilder excesses of Tory populism have not had their day and we have not had what is called a scorched earth budget, as we had in 1992. Noble Lords will recall that in 1992, having spent a lot of money in order to win the last election—and to their surprise having won it—the Government were faced with the task of meeting the bill which went up to £50 billion. All our problems over the past four years are encompassed in the task of overcoming the effects of the profligacy which may have won the last election but did not do much good for the economy.

What we now have is another cautious little nudge at seeing whether the markets would bear a signal that the Government intend this year to loosen the reins of public spending a little, although not wildly—a little tax cut here; a little extra spending there. If the markets bear it, if the Chancellor is lucky, and interest rates then come down—and I shall argue later that interest rates will not come down as fast as would be beneficial to the economy—then perhaps next year enough will have been built into the projections to allow a bigger tax cut. Perhaps not only paradise has been postponed, but perhaps the scorched earth policy has been postponed by one year too. We shall see. We do not know what to make of the projections before us.

What we have, clearly in the interests of the electoral cycle, is a policy of relaxation of public spending when it might have been prudent not to have done so. I make no apology for being a fiscal hard man. Noble Lords know that I am no friend of lower taxation. I have never argued for lower taxation. I argue for the appropriate amount of spending to be undertaken and then financed properly. I believe in balancing the Budget and perhaps borrowing only for capital purposes.

However, capital spending has been quite severely cut and a smoke and mirrors element has been added to the Budget which is called the private finance initiative. The private finance initiative projections between this year and next year are the fastest growing item in the economy. We are expected to believe that next year the private finance initiative will net us in the region of £2 billion whereas so far we have hardly seen £0.5 billion.

Therefore the private finance initiative is an excuse for cutting capital spending without putting anything in its place. It is a straight cut in capital spending and nothing else. We should call things by their old names rather than their new names. No doubt at the end of a long evening the Minister will argue that that is not the intention and all kinds of things are in the offing; and perhaps many plans will materialise. We shall see. I have my doubts.

What is interesting in this respect is that much play has been made—and it was made by the Chancellor in his speech—about the Chief Secretary having been very tough on spending, how spending has been brought under control, and so on. A perusal of the Red Book tells us that that is not the case. I refer noble Lords to page 141. In considering the deviation from projections for 1996–97 your Lordships will see that the total amount is £3.2 billion—it is the size of the giveaway—which exactly matches the drawdown of reserves. The Minister may tell me that it is not true and that I have misunderstood the Red Book. However, it is absolutely clear on page 141 of the Red Book. The figure, under changes from previous plans, is minus £3.2 billion; the control total is minus £3.2 billion; and everything else is a little shuffling of the cards—give a little more to health and education, and a little less to defence or whatever it is. By and large, drawing down on the reserves makes possible this net giveaway. Whatever else that is, it is not prudent public finance. People should not pretend that since the Government have been in charge they have so improved the management of the public finances that somehow responsibility and prudence have prevailed.

What is true is that over the past 16 years, if anything, the debt:GDP ratio has worsened. When Labour gave up office, the debt:GDP ratio was 45 per cent. After the country endured much suffering, the ratio was brought down a little. But ever since the late 1980s we have seen a steady rise in the debt:GDP ratio. The Red Book projections show that the debt:GDP ratio will not fall until after the general election. After it, we shall see all kinds of nice things but in the run-up to it we shall see nothing but a little more of the spending habit, albeit clothed in the virtues and protestations of fiscal prudence.

In a sense, I am persuaded and should argue strongly that the economy needs a growth boost. I do not deny that the economy has slowed down and, as it has done so, by the Government's own projections the growth rates for 1995–96 are lower than they expected. The growth rates for 1996–97 are rather high, almost unbelievably high, but we will leave it at that. The economy needs a boost but the kind of boost it needs is, in my view, capital spending. If the Government meant to revive, for example, the construction industry, if they seriously meant to do something about unemployment or about the growth rate of the economy, they would not have cut capital spending and relied on private finance initiatives, with a wave of the wand, to make up for the gap.

In principle, we have a cut in capital spending with a small increase in the current net stimulus to the economy, all financed by a drawing down of the reserves. It could have been done in exactly the other way: if one had the room and had £3 billion available, then one could have said: "All right, given that money, it ought to be put into capital spending. Capital spending should not be cut". Then we would have boosted that part of the economy. As it is, our borrowing is in excess of our capital spending, which is not fiscal prudence. Fiscal prudence requires that one borrows for capital spending purposes and for nothing else. I recognise that there are cyclical problems and that recessions cause a rise in the deficit, but the recession was made severe by wrong policies and we are suffering from them now.

Let us examine the likely effects of the Budget on the economy. Had the Chancellor resisted even the slightest temptation to which he has succumbed, it would have been possible to argue with the financial markets that interest rates could have come down drastically, perhaps three-quarters of a per cent. to 6 per cent. Had that happened, I believe that it would have had a widespread stimulating effect on the economy. We do not know how the gilt markets, the money markets, will react, but I feel that a rise in the PSBR, current and projected; a rise in the debt:GDP ratio, current and projected; the postponement of a balanced Budget for at least one year so that we will not see anything until the year 2000 will not please the gilt markets. I make no apology for putting that view forward because low interest rates are essential to the economy. We know that in the globalised world of today if you want low interest rates you must keep your nose clean and act fiscally in a responsible fashion. This Budget is not fiscal responsibility. It is not gross irresponsibility, as some people urge on the Chancellor, but it is certainly not, in any sense of the word, responsible behaviour.

Thus if interest rates are not going to fall as much as one would like, the stimulus must come from somewhere else. Capital spending would have been better as a stimulant than what we have. If we carefully examine the increase in expenditure in the three departments—education, health and law and order—in each case the total budget is being cut. Although there is some rise in health expenditur, once again there is a bit of the smoke and mirror stuff about capital spending. The private finance initiative will ride to the rescue and all kinds of other nice things will happen. It will be the same with education. All kinds of items are being taken out, such as student loans. We do not know, and perhaps the Minister can tell us in his reply, what assumptions are made about student loans and what amount of expenditure has been taken out of the Department for Education's spending funds in order to generate the extra spending that the Department for Education will have. All across the board, such increases in spending as have been generated have been gross increases, whereas on the net side, because of the cut in capital spending, we have a peculiar situation.

In the end, one must discount the increase in expenditure which is obviously done for political popularity. I do not begrudge the increases in expenditure but I would have preferred them to be better financed. If we discount that, what is really going on is that the reserves are being drawn down to give back the tax. There is obviously a great need for the Government to regain their tax cutting image. I have never been convinced that cuts in income tax have any great incentive effect, as people argue they have; there is no scientific evidence for it. If there were any, we would have done much more to cut income tax at the bottom of the scale where people pay horrendously high actual rates of income tax, 80 per cent. or 85 per cent., if not more. Nothing much has been done to cut the income tax that people pay at the bottom, but some cuts have been made in income tax at the top.

Over the past three years, when the Government cut the effective rate of taxation they did so not by changing the basic rate but by altering allowances, not indexing them enough or restricting the rate at which they were deductible. Now, in addition to the 1p cut in the basic rate, we have all kinds of over-indexation of allowances. I have not quite worked out the final effective rate of taxation, but it is certainly not the 7p that it has been calculated has been imposed over the past three years.

At the end of the day, we have a half-hearted attempt at displaying fiscal prudence which does not bear careful examination. It is clear that all the numbers go the wrong way for a Chancellor who is asking for fiscal prudence. It will not be a great stimulant for the economy because it will fail to bring interest rates down as much as we would like, and it will not generate employment through capital spending which is clearly required for the economy. I am sorry to be churlish about it, but we must say that this is a phase of the cycle where stimulation was needed for a rapid cut in unemployment. That has not happened.

In that vein, let me say one more thing about the Budget. In the previous Budget, the Chancellor tried innovatively—and I acknowledged it when we discussed the Finance Bill—to do things in the labour market which would encourage the employment of people who were somehow restricted from it. This Budget has nothing to encourage employment. In that respect perhaps my noble friend Lord McCarthy will bear me out. We have nothing to encourage employment. What we have is a Budget which gives a relief for consumption. I am not sure that is what I should like to do, but there is little for employment. I should have preferred a cut in the national insurance contribution, especially creating a threshold at which it becomes applicable, rather than a cut in income tax or the 20p being given back. I have a penchant for higher taxation and balanced Budgets. The Government claim also to have that, but they do not succeed in delivering a balanced Budget. This is a weak Budget, and we shall learn the consequences soon enough. My Lords, I beg to move for Papers.

3.30 p.m.

Lord Clark of Kempston

My Lords, I am sure that the whole House is indebted to the noble Lord for giving us this opportunity to discuss the economic state of the nation and the Budget. Many of us on both sides of this House believe that finance and economics should be debated a little more frequently. It might be worth considering the tabling of a similar Motion every year immediately after the Budget so that we can regularly debate the state of the nation.

I should like to spend some time on the economic situation in this country, as the Motion seeks, before turning to the Budget. The economic state needs to be viewed over a long period; it cannot be done from year to year. Looking back at this Government's record—and presumably in this respect the Government are on trial—and turning our minds back to 1979, we see that the whole economy was then in a complete and utter shambles. We had strikes, rising unemployment, high inflation and so on. We need to look at what has been achieved since then, despite the gloom that I read into the noble Lord's remarks. As politicians we do not pay sufficient attention to the achievements of this Government; all we do is criticise, carp, denigrate and run down the country, which cannot be good.

For example, this country's record on inflation is absolutely superb. It is 3 per cent. or thereabouts. From its peak, unemployment has come down by over 700,000. As the noble Lord said, the basic bank interest rate is presently per cent. It has come down from 15 per cent. That is an achievement. Looking at inward investment, why do the Japanese and the Americans invest here? It is simply because they come in to a competitive nation and a competitive economy. Britain exports more per head than both Japan and the United States. That is not a bad record. We should talk about this sort of thing rather than ignoring it.

Let us take savings. (It is from savings that we get the capital and expenditure on which the noble Lord spent so much time.) In 1979 there were about 3 million shareholders. Today there are over 10 million. That must be an achievement. It must prove that the ordinary man and woman in the street is prepared to put money into ventures to an extent that they never did before—some 10 million people. Why do small businesses prosper? There are about 3.6 million small businesses in this country, 1 million up on 1979. That is an achievement. Only small businesses will bring about the reduction in unemployment that we so much desire.

I accept the fact that taxation has increased over the past few years because of the depth of a recession not envisaged to be so deep by all the pundits, from whichever part of the political spectrum they come. Even given the increase in taxation, comparing the standard of living today with the standard in 1979 the average family is £80 per week better off.

During the period in office of the last Labour Government—and this is probably my only political point until the next one—the standard of living increased by 0.06 per cent. That equals £1.50 a week. Therefore if we compare management by the two parties, it is obvious which one was successful. One has reduced the basic rate of taxation from 33 per cent. to 24 per cent. Corporation tax is down from 52 per cent. to 33 per cent. For small businesses the rate was 42 per cent.; it is now down to 24 per cent. Last year the growth in manufacturing industry was up by 12 per cent. That is not a bad record. These are the sorts of statements we should be making, so that our competitors and potential customers and investors from abroad will come into this country.

The jewel in the economic policy of the British Government has been privatisation. Whereas at one time the taxpayer paid out some £50 million per week in subsidies, today my right honourable friend the Chancellor of the Exchequer receives some £55 billion every week. That is quite a good record.

I turn now to the Budget. It is well balanced and provides help for all. I particularly like, as I am sure do most noble Lords, the help that is given to the elderly. As well as the change to inheritance tax, which will take most people out of the inheritance tax bracket, the disallowance in regard to nursing home fees is of great benefit to the elderly; and, to return to the savings field, the retirement bond has given further help. The exemption of unquoted shares—that is, the unquoted securities market, now replaced by the alternate investment market—is bound to help both markets. The marriage allowance and the personal allowance have gone up, as the noble Lord said, more than inflation.

I do not agree with the noble Lord's remark that the reduction in taxation is not an incentive. I remind him that when tax on earned income-83 per cent. in the pound under a Labour Government—came down to 40 per cent., the top taxpayers were paying more tax than they were when it stood at 83 per cent. So an incentive must have been offered, and we should obviously not forget that. The new rate for personal savings, particularly for the basic rate payer, at 20 per cent. is also very good. The noble Lord said that no help has been given in regard to the national insurance contribution. My right honourable friend the Chancellor has decreased the national insurance contribution from employers. It is certainly by a small amount on each payment, but it adds up to £500 million, which is a direct incentive and help to business, and particularly to small businesses.

The noble Lord spoke about the public sector borrowing requirement. I agree with him. We can borrow to raise capital expenditure. I guess that capital expenditure in this Budget is somewhere in the region of £20 billion. Consequently, if we borrow £29 billion, we have overspent by £9 billion. I have always maintained that the change in government accounting from above and below the line was a mistake. One should differentiate between revenue expenditure and capital expenditure. If we do so, the position looks much better.

The Chancellor did not mention it, but we are to have a radical change in our taxation returns in 1997; namely, self-assessment. One thing I can never understand about the fiscal system is the use of 5th April. Why do we not set the date at 31st March? I do not know very many companies whose year ends in April.

This is a well balanced Budget. It will help those in need. It will help enterprise, and it will certainly help competitiveness. I am certain that it will help to make the UK the enterprise centre of Europe. Finally, I urge noble Lords to stop denigrating the economy of this country and to start talking it up.