My Lords, it is a privilege to open this debate on behalf of the Government and to set out today our plan to tackle the cost of living and to rebuild our economy. I start by welcoming the noble Baroness, Lady Lea of Lymm, to the House, and I look forward to hearing her maiden speech. I congratulate all noble Lords on their dedication to this debate over other, footballing matters that may be happening this evening.
The Government’s priorities in this Autumn Statement are
“stability, growth and public services”.
We have been honest about the challenges we face and fair in our solutions. We have taken difficult decisions to tackle inflation and to keep mortgage increases down but, in doing so, we have protected the most vulnerable. Our plan will lead to a shallower downturn, lower energy bills, lower interest rates, higher long-term growth and a stronger NHS and education system.
I turn to the first priority in the Autumn Statement: stability. High inflation is the enemy of stability. The Office for Budget Responsibility confirms that “global factors” are the primary cause of current inflation. The world is still dealing with the fallout from the Covid pandemic: furlough, vaccines and the response of our NHS protected us from the worst of the pandemic, but they all need to be paid for, and the lasting impact on the supply chains has made goods more expensive. This has been made worse by an energy crisis made in Russia. Since Putin’s invasion of Ukraine, wholesale gas and electricity prices have risen to eight times their historical average. The OBR forecast the UK’s inflation rate to be 9.1% this year and 7.4% next year. However, inflation is higher in Germany, the Netherlands and Europe, and the OBR has confirmed that our actions in the Autumn Statement will help inflation to fall sharply from the middle of next year.
Higher energy prices have fed through to forecasts for growth. Overall, this year, the economy is still forecast to grow by 4.2%. GDP is then forecast to fall by 1.4% in 2023, before rising to 1.3% in 2024, and 2.6% and 2.7% in the following years. This has also impacted our public finances, so we need a clear plan to support our economy and to restore our public finances.
The decisions that the Chancellor made in the Autumn Statement mean that, over the next five years, borrowing will be more than halved. This year, we are forecast to borrow 7.1% of GDP; next year, it will be 5.5% of GDP; and, by 2027-28, it will fall to 2.4% of GDP. The Chancellor also confirmed two new fiscal rules: first, that underlying debt must fall as a percentage of GDP by the fifth year of a rolling five-year period, and, secondly, that public sector borrowing over the same period must be below 3% of GDP. In short, as growth slows, we will use fiscal policy to support the economy; then, once growth returns, we will increase the pace of consolidation to get debt falling. With just under half the £55 billion of consolidation coming from tax, and just over half coming from spending, this is a balanced plan for stability.
My Lords, over the past three months, the Government have subjected the British economy to two episodes of extreme foolishness. First came the Truss-Kwarteng episode, going for growth without a coherent strategy and throwing money at the wealthy. Unfortunately for Britain, the ideology and economic reality did not mix. As a result, all Britain is worse off and the poorest suffer most. Then came this Sunak-Hunt episode, described by financial market experts as a “massive overreaction”. This time, political intent was dressed up as technical economics. Again, there was no coherent growth strategy as taxes were raised to an all-time high and massive expenditure cuts in 2024 and 2025 were announced. Why would anyone invest in a Britain that the Chancellor tells us is heading for a recession, not just now but with massive cuts in 2024 and 2025 too? The result is that all Britain is worse off. The two episodes share these common characteristics: no coherent plan for growth and severe damage to the British economy for years to come—a continuation of 12 years of Tory economic incompetence.
In the first half of 2010, with Alistair Darling as Chancellor of the Exchequer, the economy was growing at an annual rate in excess of 3%. Following the May election, with George Osborne as Chancellor, growth came to a shuddering halt. Austerity was the new, destructive policy. Education and local authority support for economic development were severely cut, and the NHS was underfunded. School spending per pupil in England fell by an average of 9% in real terms between 2009 and 2019—before the pandemic—which, according to the Institute for Fiscal Studies, was
“without precedent in post-war UK history.”
The result? England today is one of only a few OECD countries where the young have worse literacy and numeracy skills than 55 to 65 year-olds. Perhaps the Government were trying to balance things up, as they also halved spending on adult education. Is it any wonder there is a skills shortage?
My Lords, this is my first chance to welcome the noble Baroness, Lady Penn, back to her position at the Dispatch Box, and obviously my first chance to welcome the noble Baroness, Lady Lea, to her position on the Conservative Benches. I draw attention to the fact that I am on the executive of both the All-Party Parliamentary Motor Group and the Chemical Industry All-Party Parliamentary Group.
For this debate to be so long after the Statement has given time for perspective to develop—that is perhaps putting a gloss on it. Reports have been published and analysis probing the implications of the numbers and projections is available, and I am sure that your Lordships will draw on that research in various ways. For example, the Institute for Fiscal Studies concluded that the Chancellor was
“hemmed in by rising interest payments and poor growth prospects”
and in this position
“decided to allow borrowing to rise, and to put off properly tough decisions”
until after the next election. For example, I note that the vast bulk of the projected cuts in the benefits budget are scheduled to start in 2024.
That means that borrowing will take the strain in the near term, with the great majority of the planned consolidation due only after the next election. Decisions like this indicate that the Financial Statement was informed not just by a lack of headroom but by fairly cynical politics. I would judge that Chancellor Hunt has adopted either a Micawber strategy—“Something might turn up”—or what I would call the advance Liam Byrne strategy: he has already left a note for the next incoming Chancellor that says, “There’s no money left”.
However, the serious side is what this is doing to people, and how hard it is hitting and will hit families. Paul Johnson of the IFS was very clear when he said:
My Lords, I declare my interests as co-chair of Peers for the Planet.
The Prime Minister recently reaffirmed that, far from action on climate change and action on economic growth being in conflict, in fact there
“There is no long-term prosperity without action on climate change.”
I therefore want to look at the elements in the Budget Statement that bring those two issues together. The Chancellor pointed out that, this year, the UK will spend an extra £150 billion on energy compared to pre-pandemic levels, equivalent to paying for an entire second NHS through our energy bills. He went on to say that
“there is only one way to stop ourselves being at the mercy of international gas prices: energy independence combined with energy efficiency”.—[Official Report, Commons, 17/11/22; col. 851.]
He then signalled an acceleration of homegrown renewable energy sources, including offshore wind, carbon capture and storage and nuclear. Investment in this area, he rightly said, would not only help to address the current energy price crisis but deliver new jobs, industries and export opportunities. That is all very welcome, but there was one elephant in the room: onshore wind. It is one of the quickest and cheapest forms of energy generation, and rolling it out more quickly would help us move away from expensive fossil gas and reduce energy bills, but it was not mentioned.
It would, of course, be completely wrong to give carte blanche, without any processes or consultation, to every wind farm application made, but it is equally wrong to have the current de facto ban created by the 2015 ministerial Statement. The UK has installed 14.2 gigawatts of onshore wind capacity to date, but this has slowed dramatically to almost nothing since that ministerial Statement. We urgently need to restore balance to decision-making on applications for onshore wind.
My Lords, growth is good and necessary, and it is clear that money does not grow on those proverbial trees. We find ourselves in extremely challenging times, and it seems to me that some of the measures that are set out in the Autumn Statement are prudent and necessary to rebalance the budget. I thank the Government for their desire to focus on supporting the poorest households, which is right and just, including their decision to increase benefits in line with inflation. Yet I have a number of concerns. I want to use my time to focus on just two key issues: first, food and feeding people, and, secondly, the criminal justice system. I declare an interest both as a trustee of Feeding Britain and as Anglican Bishop for prisons in England and Wales.
As I have seen first-hand in the diocese of Gloucester, food clubs and food banks are reporting record demands, with larger numbers of people seeking help for the first time and with much greater frequency. For reasons we know, food prices have soared well above inflation, and it would also seem that food supplies are getting more difficult to acquire in sufficient quantities. In order for people to safely navigate their way to next April without being hungry and to lessen the need for food aid, it would be helpful if there could be a further reduction in the rate of deductions from universal credit, as well as the introduction of something akin to a yellow card warning system in place of the current sanctions policy.
In the meantime, churches and different faith groups are playing their part, not only regarding food banks and food provision but in working with local community organisations and borough and county councils to run warm spaces, often with food provision, in our urban and rural communities. In Gloucestershire, we have an imaginative initiative called The Long Table, which not only aims to tackle hunger and loneliness and build community but is also investing in people and working to build food resilience and food sustainability, working in relationship with local farmers and food producers.
My Lords, it is difficult to imagine a more difficult set of circumstances in which any Chancellor has had to frame a financial Statement to Parliament. Whatever the decisions, inevitably there will be predictable criticism from all sides: taxes are too high, borrowing could be a bit more, spending greater or less, according to taste. The Chancellor could not escape the shadow of the mini-Budget. It meant that, above all, he had to satisfy the markets that the national finances were sustainable.
Much public reaction to the Statement concentrated on the fall in living standards, which is indeed alarming and unprecedented, but it has been obvious, alas, for some time that a fall in living standards was absolutely inevitable because of the rise in imported energy relative to the price of exports. Sadly, no Government can protect all their citizens in circumstances such as these. I would argue that the Government have done a huge amount, spending over £100 billion supporting families and raising disposable income above where it would otherwise have been, but, alas, there is still a drop in living standards.
The Chancellor had to choose how much consolidation came from taxation and how much from cuts and expenditure, and he chose a balanced approach of 50:50. Given that many departmental budgets are under pressure because of inflation at this time, it seems improbable that he could have gone further, like cutting spending more. With inflation at 11%, protecting programmes in money terms, which the Chancellor has said he will do, means real cuts for certain departments.
The Chancellor was advised from many sources that you cannot raise taxes going into a recession. That, one might point out, flies in the face of historical evidence, such as the Budget of 1981, but leave that aside—that is in fact not what the Chancellor is doing. We are not tightening fiscal policy going into a recession. Most of the fiscal tightening falls in the latter part of the survey period, by which time, I hope, the recession will be over.
My Lords, in both cheering on Wales tonight and praising everything that my noble friend Lord Eatwell said, I remind the House of some famous first words from the Prime Minister and some lesser-spotted last words from one of his predecessors as Chancellor—words that clarify both the ruinous fiscal policy the Tories have pursued since 2010 and the dreadful prospects set out in this year’s Autumn Statement, and which expose the true source and full extent of the real, gaping hole at the heart of Britain’s public finances.
Rishi Sunak concluded his first Budget speech in March 2020 with the breathtaking claim that
“the Conservatives are the party of public services.”—[Official Report, Commons, 11/3/20; col. 292.]
Their record since 2010 and their plans in the Autumn Statement tell a totally different story. Rishi Sunak and Jeremy Hunt are said to be the “numbers men”, so let us look at the numbers, courtesy of the Office for Budget Responsibility.
Last October, the OBR confirmed that nearly a decade of Tory austerity from Chancellors George Osborne and Philip Hammond had seen cuts in public spending amounting to more than 7% of GDP—savage cuts equivalent to £180 billion in today’s terms, which is almost as much as we spend each year on health and social care in England. Those public spending cuts made up 82% of the total Tory fiscal consolidation; tax increases made up 18%. Here lies the origin of the chronic and mounting staff shortages, industrial unrest, deteriorating standards and lengthening response times that are now only too typical of Britain’s struggling public services, especially in health.
This is why even Tory councils are warning that they face possible bankruptcy after enduring funding cuts for over a decade. George Osborne, once again welcome at Downing Street in advising the Chancellor and the Prime Minister, boasted of having squeezed the UK economy tighter than any of the advanced economies. He was more reticent about the plans in his final Budget in March 2016 for a further five-year fiscal squeeze—plans that would have added another £60 billion of public spending cuts to those actually made by Philip Hammond. David Cameron has confirmed that, had he stayed in office after 2016, he would have gone for even more spending cuts. The Government have now embarked on the kinds of cuts that Cameron and Osborne were exploring when they left office. They may differ in detail but it is a familiar formula, with the biggest spending cuts put off until three to five years’ time, conveniently after the election.
6:10 pm
Lord Howarth of Newport (Lab) [V]
My Lords, the Chancellor who warned of a black hole has indeed consigned us to a dungeon. If the main drivers of inflation—the energy crisis, the pandemic and its effect on supply chains—are global, and we face recession, it is the wrong response to weaken our economy with a planned fiscal tightening of 2% of GDP. Falling real incomes and interest rate increases will amply reduce domestic inflationary pressures. There are pay demands, of course, but no wage-price spiral. We are now on track to 19 years of no real growth in average wages and household income. We know the enormous damage that excessive austerity in Britain did to investment and productivity, public services and living standards following the global financial crisis. Once we have brought inflation down, do we then need austerity 2.0 to satisfy newly contrived fiscal rules on the ratio of debt to GDP? While markets will not tolerate unfunded tax cuts, they might well take a benign view of investment in public services that will strengthen our economy.
If there is a black hole in the British economic cosmos, it is that which sucks resources away from low-income families and public services and piles them up in the bank accounts of the wealthy. The Chancellor’s reductions in capital gains tax and dividend allowances twinkle only faintly in that murk. With his decision to allow the average energy bills faced by households to rise in the spring, we shall see how far his measures to support people on low incomes will go. The prognostications are worrying. An indexing of benefits that have previously been severely cut and capped, with disregards and capital limits frozen, hardly justifies his claims that this is a compassionate Government. His reliance on dragging low earners into the tax net through freezing the income tax and national insurance thresholds equally belies that claim.
Important for people struggling in poverty is the maintenance of law and order and the good functioning of the justice system—but once again, and scandalously, these have been neglected. The plight of renters in the private sector was unaddressed. If he sincerely wants to help more disadvantaged communities, why has he made a real-terms cut in the Budget for levelling up? How much control of resources will the Treasury really allow for mayors and local authorities?
The Chancellor offered no vision of how we are to meet certain great economic challenges. On climate change, infinitely the most important, he reaffirmed the 2030 target for emissions reduction, but gave no indication of what the Government will invest overall, with numbers and waymarks, along the journey to net zero. What are the Government’s projections for overall spending on averting climate change, adapting to climate change and repairing the damage of climate change? Confirmation that Sizewell C is to go ahead, plans to build some small modular nuclear reactors, and the investment announced in energy efficiency, welcome and significant as they are, do not amount to a full strategy. The Prime Minister is being blown hither and thither by onshore wind and his own MPs.
6:17 pm
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Autumn Statement 2022 · Order Paper · Order Paper
I turn now to our plans for tax. Our decisions on tax have been guided by two broad principles: we are asking those who have more to contribute more, and we will avoid the tax rises that most damage growth. On personal taxes, we are reducing the threshold at which the 45p rate becomes payable from £150,000 to £125,140. At the same time, we are maintaining at current levels the income tax personal allowance, the higher rate threshold, the main national insurance thresholds and the inheritance tax thresholds for a further two years, until April 2028.
We are also reforming allowances on unearned income, something that we have discussed many times in this House. The dividend allowance will be cut from £2,000 to £1,000 next year and then to £500 from April 2024. The annual exempt amount for capital gains tax will be cut from £12,300 to £6,000 next year, then to £3,000 from April 2024. Those changes still leave us with more general core personal allowances overall than countries such as Germany, Ireland, France and Canada.
On business taxes, we have decided to freeze employers’ NICs thresholds until April 2028, but we will retain the employment allowance at its new, higher level of £5,000. That means that the smallest 40% of businesses will still pay no NICs at all. On VAT, we already have a registration threshold more than twice as high as the EU and OECD averages, but we will maintain it at its current level until March 2026. We will implement the internationally agreed OECD pillar II global corporation minimum tax rate and take further steps to tackle tax avoidance and evasion. Together those measures will raise an additional £2.3 billion by 2027-28.
We will also increase the energy profits levy from 25% to 35% from 1 January until March 2028, and we will introduce a new temporary 45% levy on electricity generators, reflecting the fact that the structure of our energy market creates windfall profits for low-carbon electricity generation too. Together those taxes will raise more than £14 billion for the public purse next year.
Finally, on business rates, we believe that bills should accurately reflect market values and so will proceed with the revaluation of business properties from April 2023. However, we will soften the impact on businesses, with nearly £14 billion of support over the next five years. Nearly two-thirds of properties will not pay a penny more next year.
Just as we want to support businesses, we need to provide a shelter for those most at risk from the economic storm. To do so, we are uprating pensions and benefits by 10.1% next year, and we are accepting the recommendation of the Low Pay Commission to increase the national living wage by 9.7% next year, which is worth more than £1,600 to a full-time worker. We are also providing £55 billion in help for households and businesses with their energy bills, one of the largest support plans in Europe. This includes continuing the energy price guarantee for a further 12 months from April at a higher level of £3,000 for the average household.
Despite some difficult decisions, we are protecting our public services, with funding rising in real terms over the next five years. Overall departmental spending will grow at an average of 3.7% per year over the spending review 2021 period, but departments will be required to find efficiency savings to manage pressures from inflation. After the spending review period, day-to-day spending will continue to grow in real terms at 1% a year until 2027-28.
This does not mean that there will not be difficult decisions. For example, while we remain committed to the 0.7% ODA target in the longer term, the OBR forecasts show the fiscal situation means that ODA will remain at around 0.5% for the forecast period. In the current global context, we recognise the need to increase defence spending, but we must first review and update the integrated review, written as it was before the Ukraine invasion. Until then, we will continue to maintain the defence budget at least 2% of GDP, consistent with our NATO commitment.
We must promote our security abroad, but we also need to invest in priorities at home. Our first priority is investment in our health and care system. To recruit and retain our dedicated NHS workforce, the Department of Health and Social Care and the NHS will publish an independently verified plan for the number of doctors, nurses and other professionals we will need in five, 10 and 15 years’ time—something that I know this House has called for.
I turn to social care. The 1.6 million employees in the sector are working extremely hard. Local authorities have rightly raised concerns about their capacity to deliver the Dilnot reforms immediately, so we will delay their implementation for two years, allocating the funding to allow local authorities to provide more care packages. We also know that we must expand the capacity of the social care system to free up some of the 13,500 hospital beds that are occupied by those who should be at home.
To expand the capacity of the social care system in England, we will make available up to £2.8 billion of extra funding, increasing to £4.7 billion in 2024-25. To deliver ever greater care, the NHS will also need to look at efficiency savings, but we will still need to invest more to meet our aims. Because of the difficult decisions taken elsewhere, we will increase the NHS budget in each of the next two years by an extra £3.3 billion. Taken together, these actions will ensure that up to £8 billion of additional funding is made available for health and social care in 2024-25.
However, a healthy country is not sufficient; we need a skilled one too, so we are not just going to protect the education and schools budget, we are going to increase it. The core schools budget will rise by £2.3 billion in both 2023-24 and 2024-25, restoring 2010 levels of per-pupil funding in real terms, and the Barnett consequentials mean an extra £1.5 billion for the Scottish Government, £1.2 billion for the Welsh Government and £650 million for the Northern Ireland Executive.
I turn to the third priority in the Autumn Statement: growth. As my right honourable friend the Prime Minister set out in his Mais lecture last year, to grow the economy we need to invest in three things: people, capital and ideas. On people, alongside our investment in schools and the health service, Sir Michael Barber will advise the Government on the implementation of our ambitious skills programme. Just as we look to improve opportunities for those in education, we are determined to help people already in work to raise their incomes, progress in work and become financially independent. That is why we will ask more than 600,000 more people on universal credit to meet a work coach so that they can get the support they need to increase their hours or earnings.
On capital, we remain committed to building the roads, rail, broadband and 5G infrastructure we need. To do so, we will maintain our capital budgets at the same level in cash terms for the next three years. We will proceed with Sizewell C and deliver the key Northern Powerhouse Rail, HS2 to Manchester and east-west rail. We are building new hospitals and rolling out gigabit broadband.
Finally, on ideas, we will continue to support innovation in our economy and remain committed to increasing public funding for R&D to £20 billion by 2024-25. We will also continue our work to support the transformation of scientific breakthroughs into breakout businesses. By the end of this year we will decide and announce changes to EU regulations in five key growth industries: digital technology, life sciences, green industries, financial services and advanced manufacturing. The Chief Scientific Adviser, Sir Patrick Vallance, will also lead new work on how we should change regulations to better support the safe and fast introduction of emerging new technologies.
It has been impossible to condense the full range of action in the Autumn Statement into my opening speech, and I look forward to responding to all noble Lords’ contributions at the end of the debate, but I hope I have been able to demonstrate that in the midst of a global economic challenge, this Government will respond in the way this country does best. United, we will use our resourcefulness and resilience to get through the storm. We will shelter the most vulnerable as we do so. We are taking difficult decisions but, in doing so, we are bringing about stability and security and setting our country up for growth in the days ahead. I beg to move.
As we know, there are currently major labour shortages in many sectors of the economy. Well over a million British workers are “missing” from the labour force. A significant contribution to the shortage of labour arises from those untreated or waiting for treatment in an overstretched NHS.
Let us add to these “headwinds”, as the Chancellor calls them, the cost of Brexit—another Conservative policy. We do not need to argue over the OBR’s estimate of a permanent 4% loss of GDP, and hence 4% loss of tax revenue: the negative impact of Brexit can be seen all around us, whether in migrant labour shortages, markets lost, SMEs withdrawing from European markets, or the Paris stock exchange overtaking London. The Conservative mayor of Birmingham has now commented on the damage to the economy in his area.
It was not the war in Ukraine that caused the current economic crisis: the war revealed the underlying long-term weakness of the UK economy. That is why the OECD ranks only Russia as a worse economic performer than the UK.
Now, to bookend the Conservative years, austerity is back. Twelve years of policies which have been consistently damaging to the economy raise an important question: why are Conservative Chancellors so incompetent? I think the answer is clear in their rhetoric: the private sector is portrayed as the “wealth creator” that has to carry the burden of funding the public sector. In a speech in 2014, George Osborne referred to
“government as the enemy of business and wealth creation”.
Similarly, in his 2021 Budget speech, Mr Sunak declared:
“Government should have limits”
and that
“my goal is to reduce taxes.”—[Official Report, Commons, 27/10/21; col. 286.]
In the Autumn Statement, Jeremy Hunt maintained the anti-state rhetoric by asserting that
“high-tax economies damage enterprise and erode freedom.”
Tell that to the Scandinavians. The point about these statements is not that reducing the burden of taxation is a bad idea—we all want lower taxes. In appropriate circumstances, cutting taxes may be a very good idea, but underfunding the public sector sources of growth is a very bad one.
However, in the Conservative mindset, the public and private sectors are seen as separate entities competing for resources—what economic nonsense. The private sector depends on top-class research conducted in publicly funded universities, on efficient infrastructure, and on a well-educated, adaptable, healthy labour force. Austerity that cuts spending on schools, libraries, skill centres and Sure Start, and underfunds the NHS, damages the very core of British private enterprise.
The lessons of economic history are clear. When in the latter half of the 19th century Germany sought to compete with the industrial strength of Britain, it created industrial banks to ensure the flow of long-term funding to nascent German industry, and it created the Technische Hochschulen to provide the scientific and engineering expertise to drive German industrial competitiveness. In more recent times, all the important technological innovations in the iPhone were made in public sector institutions; it was the public sector that took the extreme risks associated with experimental new technologies. It was the genius of Steve Jobs to take those public sector ideas and mould them into the most commercially successful product of modern times.
In today’s fast-changing competitive world of artificial intelligence and bioengineering, high risk and high reward go hand in hand. That is why the rest of this century must be the era of an entrepreneurial state. We need new institutions to channel funds to the development of new high-tech products and to link our outstanding research with commercial innovation; a pro-business state that complements private industry; and a well thought through medium-term growth strategy.
In vain, I searched the Autumn Statement for such a strategy. The Chancellor’s speech ends with what I can only interpret as a joke. He said that
“you do not need to choose either a strong economy or good public services. With the Conservatives, and only with the Conservatives, you get both.”—[Official Report, Commons, 17/11/22; cols. 845-56.]
When the Resolution Foundation reports that:
“Almost three-in-five households in the most deprived areas are already cutting back on essentials such as food and fuel”,
and the Institute for Government declares that the Autumn Statement’s impact on public services will be a “poisoned inheritance”, the joke is on the British people.
“The truth is we just got a lot poorer. We are in for a long, hard, unpleasant journey; a journey that has been made more arduous than it might have been by a series of economic own goals.”
The Office for Budget Responsibility—the OBR—reports that living standards will be down by 7% over this year and the next. This is the biggest fall in living memory and off the back of very poor income growth for many years prior. The effects of this will be felt across the country. To quote Paul Johnson of the IFS again, he said:
“This will hit everyone. But perhaps it will be those on middling sorts of incomes who feel the biggest hit … Middle England is set for a shock.”
What is clear is that Chancellor Hunt, and whoever is in that role after the next election, will reap the costs of Conservative chaos and a long-term failure to grow the economy. Combined with this are the effects of an ageing population, hundreds of thousands—if not millions—of people unexpectedly stepping out of the economy, QE and high levels of past borrowing. On this latter point, we face simply huge levels of expected spend on debt interest. Interest is more or less double what had been forecast and will hit around £100 billion a year by the end of the forecast period.
Without growth, however, the situation will be even worse and the Chancellor’s projections rely on growth built into the OBR projections. Yet it is very hard to see how this Statement helps that growth. Indeed, it is very likely that it will contract the economy rather than grow it. This is not helped by at least one change that actually undermines future growth. I shall use the rest of my speech to explain.
The Chancellor used his Statement to make changes in the R&D tax credit scheme. The scheme currently provides tax incentives for companies to invest in innovation, which is considered key to growing the technology base of the country. Indeed, we should take no word other than the Government’s, who trumpeted it as such a measure. In his Autumn Statement, however, the Chancellor made the incentives much less generous for small and medium-sized businesses. This is a very misplaced change, which some people have described as disastrous. For example, Make UK points out that about two-thirds of private sector expenditure on R&D is made by manufacturing companies and a large number of those will be hit by this change.
Elsewhere, the BioIndustry Association, which represents life science companies, warned that the changes would result in promising innovations, ranging from vaccines to cancer treatments, moving overseas. In taking from smaller companies, the Chancellor seems to be giving back to the country’s bigger businesses via changes in the R&D expenditure credit—RDEC—scheme. But it is in SMEs that key innovations often start, and to hit them is not sensible. I am not decrying the RDEC system, which has been shown to yield very positive returns. Increasing the generosity of RDEC, however, should not come at the expense of support for SMEs.
The Chancellor’s justification for this very detrimental change is that, in the view of the Treasury, the “generosity” —its word—of the scheme had made it a target for fraud. First, we should point out that the Treasury’s record on fraud is not glorious, given the billions of pounds shelled out during Covid that will never be repaid. Secondly, if there is an acknowledged problem in the administration of the scheme, surely the sensible thing to do is to administer it better. Yet reducing the value of the scheme means that genuine claimants are being punished for a failure properly to police the scheme. It is a very blunt instrument. If the Treasury was concerned about fraud, perhaps it could have instigated a system that properly checked the validity of the claims. If it wanted to drive growth, it should look at other systems of support and take the CBI’s advice, such as to look more carefully at the definition of R&D and to improve complicated HMRC and BEIS tax credit guidance.
It is clear that the Chancellor had a tough job, especially given the wreckage created by his immediate predecessor. However, while we are all agreed that growth is the key to digging the nation out of this hole, the Chancellor is introducing measures that will reduce growth. This is not only practically damaging but a very clear indication that this Government do not understand innovation—and that is very worrying.
Two years ago, I introduced a Bill to this House that did no more than put onshore wind applications on the same footing as other infrastructure projects that may be equally locally controversial to onshore wind developments—or even more so—and to deal with what to do when existing wind farms come to the end of their lives or require repowering. Polls consistently show the vast majority of the public support new onshore wind development. We do not need to overcomplicate this. We do not need new legislation. All that has to be done could be done by the very simple step of amending or removing the 2015 ministerial Statement which caused all these problems in the first place. I offer this as a simple path out of the troubles that the Government are currently having in another place. I could even offer my services as a mediator if necessary.
Turning to the new electricity generator levy, I agree with the Chancellor that there is
“no objection to windfall taxes … if they are genuinely about windfall profits caused by unexpected increases in energy prices.”—[Official Report, Commons, 17/11/22; col. 847.]
I understand the rationale behind bringing electricity generators into the scope of such taxation. But the Chancellor also said that any such tax should “not deter investment”, yet while the windfall tax on oil and gas has a generous investment allowance, no equivalent is proposed for the electricity generator levy. Considerable concern has been expressed within the industry that the disparity between the respective taxes on the oil and gas industry and renewable generators will, effectively, penalise low-carbon generators over polluting fossil fuel extractors and deter investment. As RenewableUK has said:
“Ministers now need to work with the industry to ensure that the implementation of these plans ensures a level playing-field, rather than imposing unfair burdens on renewables.”
I would be grateful if the Minister, when she winds up, could comment on how the levy will be constructed to ensure that it does not deter the investment we so desperately need in renewable energy.
Lastly, I turn to the issue of energy efficiency, where I am afraid the Statement is all about jam tomorrow and there is a sad lack of ambition. It is often said that the cheapest form of energy is the energy we never use. We have some of the worst housing stock in Europe, and the people who live in it pay not only in inflated energy costs—and every taxpayer is now doing that as well—but also in the sometimes catastrophic effects on their health. Since its peak in 2012, insulation installation rates in the UK have plummeted, and energy efficiency programmes have been bedevilled by short-termism, stop-go policies and a lack of co-ordination. We desperately need to get away from the piecemeal approach of the past and bring in a combination of policy levers. We need grants, of course, but also setting minimum energy efficiency requirements, stamp duty rebates, incentives for employers to skill up their workers, and a long-term approach that will provide consistency and certainty to the private sector, which is absolutely crucial if this is to work. It should start with social housing as a catalyst to unlock the private investment needed and scale up the market.
As a first step, the Government need to bring forward the entirety of the £3.8 billion that they committed in their 2019 manifesto via the social housing decarbonisation fund and end the burdensome and bureaucratic competitive bidding process we have at the moment. I also hope that the Minister can reassure me that the Government will not seek to reverse the measures on energy efficiency in social housing that your Lordships’ House placed in the Social Housing (Regulation) Bill when that legislation is considered in the other place.
If food provision is to be sustainable, we need British farming to be viable in order to feed Britain and to grow the economy. It is not just high costs for fuel and feed which are a threat but the fact that, following the removal of the basic payment scheme, there is still a lack of clarity around the environmental land management scheme. The farming sector needs a properly funded agricultural transition plan if it is to plan effectively for the future, grow its business and ensure food sustainability for us all.
In the big picture of the Budget, what do we need to fund and where do we need yet more radical thinking regarding existing expenditure? That brings me to my second area: that of the criminal justice system. I observe a criminal justice system under great pressure, not least financially, and there is a desperate need for a robust and courageous review of our criminal justice system which will then inform when and how money is spent. A wise move would be to spend less on expanding the prison population and more on rehabilitation and reducing reoffending and indeed offending in the first place. For example, where is the join-up between money spent on prisons and money spent on addiction prevention and rehabilitation? Where is the join-up between investing in adequate housing for those leaving prison, and thus reducing reoffending, and the high cost of repeatedly sending someone to prison?
When it comes to women’s centres, I am aware that I am like a squeaky wheel, but I repeat that it costs about £5,000 a year for a woman to engage with a woman’s centre, with the outcome of significantly reduced rates of reoffending, while a place in prison costs nearer £60,000 per year. If the Government want to save money, here is a way forward which is good for all—although the starting place is not the balance sheet but a radical and courageous review of our criminal justice system. Let us not add 18,000 people to the numbers locked up in cells and let the taxpayer pay the £4 billion bill but properly invest in rehabilitation, appropriate education and skills, and prevent reoffending and seriously reduce the prison population. If the Government want to save money and redistribute expenditure, then look at the data, listen to those working in prisons and rehabilitation in the community, listen to offenders and those at risk of offending, and indeed, listen to victims of crime, and do not build more prisons and send more and more people to prison for longer as a short-term response to populist headlines regarding crime. The evidence does not support that.
To draw to a close, I am aware that I have touched briefly on only two areas. Only time will tell whether the Chancellor of the Exchequer’s balancing act is successful for the long-term growth of our economy and the good of the most vulnerable. However, I believe there is some further rebalancing and joined-up thinking to do, which will not only serve us better financially but will help to shape the kind of country we want and need to be.
In the short term, borrowing actually increases, up by more than £64 billion this year and more than £40 billion the following year. The Chancellor raised taxes as a percentage of GDP by just over 1% during the survey period to their highest level since the war. Understandably, this leaves many of my noble friends very unhappy but the reason that tax as a proportion of GDP is at its highest level since the war is that spending as a proportion of GDP is at its highest level since the Second World War. Borrowing as a proportion of GDP is also approaching the same level, its highest since the war. All three are because of Covid, the secondary consequences of the Covid and the war in Ukraine.
Much of the increase in expenditure as a percentage of GDP—the measure of the so-called size of the state—over the survey period has come from indexation. The increases in both benefits and the triple lock increase spending-to-GDP ratios as indexation itself outstrips nominal GDP growth. Those who argued that we should take advantage of our second-lowest debt-to-GDP ratio in the G7 should look at what has happened to debt interest and why our previous financial position was, in many people’s opinion, an accident waiting to happen.
The noble Lord, Lord Fox, referred to debt interest but rather understated the problem. Debt interest has doubled from £56.4 billion last year to £120 billion this year, just slightly less than what we spend on the NHS. Much of this surge in debt was caused by indexed debt, which has nearly quadrupled from 6% of the stock of debt in 2001 to 22% this year. That process is part of the reason why, earlier this year, we saw some alarming predictions of how, in a few years’ time, debt in this country might begin to approach the levels in Italy or Japan.
Some people argue that the answer to all these problems is to go all out for growth through tax cuts, and that growth will float all these problems away. Unfortunately, however, we have another problem: severe inflation threatening to become embedded. At this moment, going for growth at all costs is likely to exacerbate inflation and probably end up exactly as the Barber boom did.
We use the phrase “cost of living” and realise the huge problems that there are for people, but we do not talk enough about the process of inflation itself. We need not just to protect people now but to prevent the situation becoming embedded and getting worse year after year. We need not just to stun the snake of inflation but to kill it. There is a real danger, as gas prices may come down, that we will end up living permanently—or for a long time—with a relatively high rate of inflation that does not go back to the 2% target where it ought to be.
Getting inflation down must be a top priority. We are in danger of forgetting, because it has been so long, the poison that inflation can inject. Getting on top of inflation is a job primarily for the Bank of England, which has not distinguished itself in recent years, but Governments also have a role to play. It is important that fiscal policy and monetary policy point in the same direction. Of course we also need growth, but we will not have growth if we do not get inflation down first. As Jim Callaghan reminded us,
“inflation is the mother and father of unemployment.”
Growth is not something that happens abracadabra because Governments will it or snap their fingers. Governments do not create growth but they can prevent it. What we need is a strategy to remove the obstacles to growth—a battery of non-inflationary supply-side measures, including training, infrastructure, deregulation and, most importantly, planning reform in the field of housing.
This Autumn Statement, against the background of a massive world crisis, makes some unavoidably tough decisions that are bound to be unpopular. However, in a very difficult situation, I believe that the Chancellor’s decisions are realistic and sensible. I commend them to the House.
We can usually sum up a year’s key events with a simple phrase. In 1992, it was “Black Wednesday”, when the Tories lost whatever reputation they had for sound economic management in one turbulent day. This year, it has been “disastrous mini-Budget”, when they lost it again. Now, they are scrambling to undo the damage, but they are swimming against the tide of events. Their long record of miserably slow growth is well entrenched; their so-called plans for growth have always lacked potency and credibility. Today, Britain is the only G7 economy whose GDP is still below its pre-Covid level, and we are fast heading into recession. Slow growth is why the Government have missed all their targets for balancing the budget and bringing down Britain’s debt-to-GDP ratio since 2010. In March 2022, the OBR projected the debt ratio to fall below 80% in 2026-27, but the mini-budget and the energy crisis blew that off course. The OBR now expects it to fall in 2027-28, but to 97% this time. The Tories are going the wrong way: from bad to worse.
It is the same old story. Beyond the blue horizon waits a beautiful day but, like the horizon, Tory success is always out of reach. Fate has cast Rishi Sunak and Jeremy Hunt as the George Osborne understudies, called upon to take centre stage and share the leading role—a double act in a Whitehall revue, but not one that will run and run. This Autumn Statement will prove to be another Tory fiscal flop at the expense of the country. It is going to bomb at the box office, mercifully opening the door to a Labour Government delivering public investment, kick-started growth, business success and sound public finances, because these all go hand in hand.
The Chancellor said nothing about the Treasury’s view on biodiversity loss. Nor did he tell us how our country will be enabled to support an ageing population or to develop the resilience to protect itself against another pandemic. The additional money that he announced for the NHS will not be sufficient to fund the pay increases needed to prevent the system buckling, tackle the backlog, and meet rising demand for healthcare in the recession. He offered no vision for a model of health- care that will be economically sustainable for the future. The Autumn Statement had nothing to say about resources for preventive strategies to lessen demands on the NHS and enable us to become a healthier society. A long-term workforce plan, rightly, is being commissioned, but he said nothing about its funding.
Equally, the additional funds for social care will not stabilise the system, enable the release of enough hospital beds, and provide decently for the vulnerable and frail in the community. By putting the onus on local authorities to fund much of the increase in care funding through council tax—a regressive tax—the Chancellor ensured that the cost and benefit will not fall equitably. He did not foreshadow any plan to integrate the health and social care systems in order to get rid of the vast inefficiencies of their separation.
The root cause of the threadbare state of our public services is our poor productivity. The Chancellor announced constructive policies on regulation, competition, tariffs, clusters, and R&D spend. I hope that his policy on Solvency II is prudent. More is needed to forge a comprehensive strategy covering availability of labour and capital, childcare, skills, taxation, regulation, planning, infrastructure, housing, personal and business mobility, and obstacles to trade. Plans for infrastructure investment were cut back. He said not a word about immigration. Why did he not have the candour to say that immigration is good for the economy? Will he make sure that the Home Secretary does not wreck our universities? The additional funding for schools will do no more than restore the level in 2010. The Barber review is still to come, but there was no indication of an uplift in funding for post-16 education and apprenticeships. The Chancellor should challenge convention and classify spending on education and training, which is investment in human capital, as capital expenditure.
By reducing R&D reliefs for small and medium enterprises, which the noble Lord, Lord Fox, spoke about, instead of improving the policing of abuse, the Chancellor removed incentives for enterprise and innovation in science-based industries. The tax changes that he announced, on stamp duty and business rates, were not part of a programme of tax reform to drive improved productivity. Corporation tax will rise from April, and the super-deduction capital allowance will expire. We are going to live with higher taxes under any Government. That need not impair economic performance, but it makes it all the more urgent that we have a rational tax system. The Chancellor has shown no interest in this crucial part of his responsibilities.
The Chancellor has appeased the markets for now. On the tests of strategic vision, investment, growth, the future of our public services, and fairness, his Autumn Statement is wanting.