To move that the Virtual Proceedings do consider Her Majesty’s Government’s assessment of the medium-term economic and fiscal position as set out in the latest Budget document and the Office for Budget Responsibility’s most recent Economic and Fiscal Outlook and Fiscal Sustainability Report, which forms the basis of the United Kingdom’s Convergence Programme.
The Motion was considered in a Virtual Proceeding via video call.
My Lords, many noble Lords will be familiar with the purpose and provenance of this annual Motion and debate. Since 1999, in the days when we were members of the European Union, the Government were required to send an annual assessment of our economic and budgetary position to the European Union, following its consideration by Parliament. Known as the UK convergence programme, this is part of the stability and growth pact based in the Treaty on the Functioning of the European Union. It is also now important to reflect on and embrace the fact that the UK will be sending this economic assessment having left the European Union. This Government have honoured the promise we made to the British people in the 2019 general election and, after years of regrettable delay, we have delivered on the instruction that was given in the 2016 referendum.
The UK having left the European Union, some noble Lords may find it somewhat perplexing that I am bringing forward this Motion at all. However, as we are in the transition period, there is still a legal obligation under the terms of the withdrawal agreement to provide the European Commission with an update of the UK’s economic and budgetary position. However, the UK cannot be subject to any action or sanctions as a result of our participation, which will end once the transition period comes to an end. This is just one example of the kind of reporting back and accounting to the European Union that will become a thing of the past at the end of this year, when we are a fully independent and sovereign country.
I present this year’s assessment to the House today at an unprecedented and challenging moment for our country and people, and at a unique time in our history. The coronavirus pandemic is the biggest challenge we have faced in decades. For many, life as normal, and business as usual, is on hold. The sacrifices that the British people are making in observing social distancing measures are helping to protect the NHS and save lives, and we thank them all. However, there is clearly a financial and economic cost to bear. Our huge and unprecedented programme of support is therefore helping people and businesses around the country.
My Lords, the Covid-19 pandemic has created an unprecedented shock to the economy. In response, the Government’s fiscal policy measures are unparalleled. At 20% of GDP, it is the largest peacetime fiscal expansion in British history. Against this backdrop, the March Budget, just eight weeks ago, already feels like a plan for a different age, yet it was clear even then that the Chancellor presided over an economy with serious underlying weaknesses, presenting the worst average growth forecast on record and rapidly deteriorating public finances, with debt having doubled to £2 trillion, reaching nearly 80% of GDP.
The impact of coronavirus on the economy will be vast. The OBR has published an initial scenario in which GDP falls by 35% in the second quarter, unemployment rises by more than 2 million to 10%, government borrowing increases to £273 billion—the largest single-year deficit since the Second World War—and debt exceeds 100% of GDP. As the IFS has observed:
“These figures are predicated on … a swift recovery. Should the … economy fail to bounce back, the picture would worsen further.”
The Resolution Foundation has reflected this uncertainty with a range of forecasts depending on whether social distancing lasts for three, six, or 12 months. It estimates that GDP will fall this year by 10%, 20% or 24%, with unemployment rising to 2 million, 5 million or more than 7 million. In its three-month scenario, government borrowing reaches 11% of GDP, higher than during the financial crisis, 22% in its six-month scenario, higher than any point in peacetime, and 38% in its 12-month scenario—more than the UK has borrowed in any single year in history.
Faced even with economic consequences on this scale, the Government will apparently still end the Brexit transition period this year. There is a clear risk of no deal, which according to their own assessment would reduce GDP by 9% and, even if they achieve the free trade deal they are seeking, on their own figures this would reduce GDP by 6% compared to staying in the single market, putting additional strain on the economy, which is already under unparalleled pressure.
My Lords, in last year’s debate on the government statement on economic convergence, my noble friend Lady Kramer said that it was “surreal” to debate the EU framework when the UK was leaving the EU. This year’s debate is far more surreal: we have now left; Boris Johnson has hardened the terms for a new economic relationship; it looks increasingly possible that no agreement will be reached; and the pandemic has disrupted the world economy.
Statements about the UK economy made before the end of February are no longer valid. The OBR warned that the projections it offered would be invalidated if Covid-19 affected Britain severely. Well, since then it has. The Treasury has abandoned its commitment to fiscal restraint—rightly, given the gravity of our situation. None of the statements we are considering placed much emphasis on the UK’s structural trade deficit or the impact on our economy of a further fall in our exchange rate. The collapse of our negotiations with the EU would worsen both.
The four priority states with which the Government hope to sign free trade agreements to compensate for the anticipated decline in trade with our immediate neighbours are the United States, Japan, Australia and New Zealand. New Zealand? At present, 0.2% of Britain’s exports flow to the 5 million New Zealanders. If we were to double our exports to New Zealand every year for the next five years, that would still leave us exporting less to them than we already do to Poland, Norway or Sweden—countries with which we will find it more difficult to trade in 2021. Is that a rational trade strategy?
Michael Gove has just announced a “customs academy” to train the extra 50,000 staff who will be needed to handle Britain’s trade with the EU after we have crashed out. So much for Vote Leave’s promises that leaving the EU would reduce the burdens on business.
In recent weeks, the Government have rediscovered respect for experts and evidence—at least on health, disease and epidemics—which Ministers from Boris Johnson and Michael Gove down had rubbished. On the economy, the Prime Minister and many of his advisers are still in a fantasy world. Iain Martin, in last Friday’s Times, even resurrected the Singapore-on-Thames illusion that a no-deal Britain could flourish as a service economy, without an important manufacturing sector.
My Lords, let no one pretend that these Virtual Proceedings represent a meaningful opportunity to hold the Government to account. Until a couple of hours ago, we were told that we had just two minutes for Back-Bench speeches. Now it is a stunning three minutes. We have no opportunity at all to intervene. This is not accountability. This is a sham. The sooner we return to normal proceedings, without the excessive time-limiting that has been introduced, the better.
As it happens, the only thing I want to hold the Government to account on today is why on earth we are required to continue sending economic assessments to Brussels and why the Government have failed to repeal Section 5 of the 1993 Act. This Motion has always been a waste of time, as we have debated many times in the past. We have never had any interest in converging our economy with that of the EU; today, it is simply ludicrous. It is obvious that an assessment of our economy in the middle of a major global pandemic is, at best, an academic exercise. More importantly, as has been said, we have left the EU. The future trajectory of our economy may well be of interest to the EU, but we should not be involved in servile submissions to it.
This Motion would have been a waste of time even if the transition period were to be extended beyond 31 December this year. I am grateful to my noble friend the Minister for confirming that the Government remain resolute on no extension to that transition period. At one level, I just want to be done with these silly Motions but, more substantively, does the Minister agree that it would be massively to the UK’s disadvantage if, through an extension, we were exposed in any way to contributing to repairing the economic fallout from Covid-19 across the whole of Europe? Now is the time for the Government to concentrate on our own economy—nothing more, and nothing less.
My Lords, I hope that government talk of getting the economy back to normal will cease, because that was not a good place to be—with business investment abysmal, retail sales the worst for 25 years, productivity falling and economic growth low and slowing every year since 2014 until it finally fell to zero. Record UK employment masked widespread job insecurity, with nearly 1 million people struggling to survive on zero-hours contracts, over 1 million in temporary work or doing second jobs, and the number feeling insecure at work doubling from 6.5 million in 2010 to 13 million in 2013.
Ten years ago, the Government used the overhang from the global financial crisis, of increasing national debt and high government borrowing, as an excuse for austerity to remove £150 billion of spending power from the economy, 80% of it in public spending cuts and 20% in tax rises. But that austerity was never about balancing the budget and bringing down debt to be better prepared for a future crisis, as George Osborne and Philip Hammond have since claimed. It was ideologically driven to reduce the role of the state, leaving us grossly unprepared for precisely this kind of pandemic crisis.
The Government never spent enough on the NHS; the pandemic began with more patients than ever on waiting lists for treatment and A&E waiting times the worst on record. Britain has fewer than three doctors per thousand of our population, compared to more than four in Germany and nearly five in Norway. We have only 2.5 hospital beds per thousand people, against six in France and eight in Germany. It is as if the Government had chosen as the patron saint of the NHS Ethelred the Unready.
After the Second World War, Britain grew her way out of debt. The national debt-to-GDP ratio fell from its wartime high of 259% to a post-war low of 26% in 1990. In the past 50 years, we have had a budget surplus only six times: three of those under the last Labour Government and two under Margaret Thatcher. What brought the debt-to-GDP ratio down in the post-war period was not austerity but economic growth, spurred by massive public investment in housing and a huge investment in infrastructure—it had twice the share of GDP it has today. The NHS would not have been in peril of being overwhelmed had it not been starved of funds for so long; nor, so shamefully, would adult social care, cut by £7.7 billion these past 10 years. The old normal delivered a massively unfair deal to millions of ordinary citizens and left the economy ill-equipped to face the future. We need a new normal.
Reading the March OBR report on the economic and fiscal outlook put me in mind of the saying of my noble friend Lord King that:
“The lesson is that no amount of sophisticated statistical analysis is a match for the historical experience that ‘stuff happens’.”
Now we know that there was never a better time to leave the EU and to leave it wholly and quickly. Given the economic storm we are facing, extending the transition period will only extend uncertainty for the deals we hope to reach with the US, Australia and others. It will increase the chances that we get involved with the eurozone crisis and, if we extend the transition, we will not be able to take advantage of the legislative flexibility that we so desperately need in order to repair the economy.
During the virus crisis, we have seen member states of the EU adopt various forms of trade protectionism. There has been no EU common policy against the virus. We have seen not sharing or helping, but export restrictions being put on medical equipment. Turkey and China had to help out the worst-hit countries. Debt has not been shared between the wealthier northern countries and the poorer southern ones. We have seen procuring but not obtaining, and cherry-picking on one side of the tree only—dropping state aid rules for oneself but not others. We have seen countries closing borders when it suits, as a protection for their own nationals. In effect, the single market has not been working. China has been able to exploit the EU’s economic dependence on it to further assert political dominance and stop criticism of its record.
We have seen from the negotiations so far that Brussels wants to keep the UK in a captive position dressed up as a level playing field, for example, in relation to fishing. Right now, we have a negotiating advantage. If the EU wants a trade deal, it should agree one. We have seen it on the brink of falling apart. We need to take care of our own economy and put an end to the uncertainty that the remainers so favour. It is time to stop fighting that old battle. The country has spoken three times. We are better prepared for no deal than we were, in part because of the Covid-19 situation, and the economic hit we might take fades into insignificance compared with what we are suffering right now. I hope the Minister will reassure us that we will not be blown off course.
The Deputy Speaker (Viscount Ullswater) (Con)
My Lords, I have taken over as Deputy Speaker.
3:03 pm
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Having set out that context, I will now give a brief overview of the information we will provide in the assessment that makes up the UK’s convergence programme. This information is based on the Spring Budget report and the Office for Budget Responsibility’s most recent economic and fiscal outlook. It is this content, not the convergence programme itself, that I ask the House to take note of. Noble Lords should also note that this does not represent new information; rather, it captures the Government’s assessment of the UK’s medium-term economic and budgetary position, as we set out in the 2020 Spring Budget that the Chancellor of the Exchequer delivered almost seven weeks ago.
The Office for Budget Responsibility’s forecast confirmed that the Government delivered the Spring Budget within our fiscal rules. Since 2010, significant progress has been made to restore the public finances. By 2018-19, the deficit had been reduced by four-fifths—from 10.2% of GDP to 1.8%—and debt brought back under control. This careful management of the economy and public finances meant that the fundamentals of the United Kingdom economy going into the coronavirus pandemic were strong. This helped the Government to act in an unprecedented way, with measures to protect people’s jobs and incomes, to help businesses and to support the economy through this difficult period.
It is clear, however, that the impact on the economy as a result of coronavirus, and the Government’s unprecedented response to it, will lead to a significant increase in borrowing this year compared to the OBR’s forecast. Indeed, under the OBR’s coronavirus reference scenario, borrowing is expected to rise sharply this year, but fall back quickly in 2021-22 as temporary policy costs end and the economy recovers. While growth remained solid in 2019, as noble Lords would expect, growth in 2020 will be significantly below that of last year—although estimates are highly uncertain at this point. The consensus, both in government and among external economists, is that not taking the steps we have taken would have risked the impact of coronavirus leaving more permanent scars on our economy. As the OBR has said,
“the costs of inaction would certainly have been higher.”
In the Spring Budget, the Chancellor initiated the start of that unprecedented and wide-ranging economic response to the impact of coronavirus. The Budget itself made available £12 billion for temporary, timely and targeted measures to provide security and stability for people and businesses, which by itself represented a significant state intervention. That included, for example, a commitment to refund small businesses for two weeks of statutory sick pay, and waiving business rates for properties used for retail, leisure, hospitality and nurseries during the next financial year.
Since the Spring Budget and the accompanying OBR forecast, the UK, like many countries around the world, continues to face significant economic disruption. Noble Lords will know that in response, the Government have continued to build on the initial financial support package set out in the Spring Budget, for example through the Coronavirus Job Retention Scheme, the Self-employment Income Support Scheme and the Coronavirus Business Interruption Loan Scheme.
We are making great progress in getting much-needed support out to businesses to help manage their cash flows during this difficult time, with millions of pounds of loans and finance provided to hundreds of firms across the country. The Government are also deferring VAT payments for the next quarter, and UK VAT-registered businesses will not need to pay VAT alongside their normal VAT returns—an intervention by itself worth over £30 billion.
While the Spring Budget rightly focused on our immediate measures to respond to the coronavirus outbreak and support people and businesses in the short term, it also set out our medium and longer-term plans, which I will also briefly highlight. The Budget confirmed a significant funding package to deliver 50,000 more nurses, 6,000 more doctors and 6,000 more primary care professionals, and a change to NHS pension rules which means that NHS staff, including senior doctors, can work additional hours for the NHS without their annual allowance being reduced.
The Budget also included ambitious measures aimed at levelling up all regions of our country. For example, the Government will invest £500 billion in roads, railways, broadband, housing and research to level up opportunity across the whole of the United Kingdom. It set out a consultation on our new £3 billion national skills fund and a £1 billion investment to upgrade the further education college estate—measures designed to help young people get the skills they need for the high-paid, high-skilled jobs of the future. These are vital investments in our public services and our future that display the ambition of this Government and for a country free to forge its own path and shape our own destiny having left the European Union.
Now, the Government have clearly committed considerable resources to respond to the unprecedented coronavirus crisis. However, we have also committed to continuing negotiations on the future relationship with the European Union, which are being undertaken virtually. We look forward to negotiating constructively in the next round, which will begin on 11 May. Whatever the outcome of those negotiations—and we remain committed to a deal with a free trade agreement at its core—our position on extending the transition period is clear and unchanged. The transition period ends on 31 December this year, something enshrined in United Kingdom law.
I know some noble Lords are concerned about the impact of not extending the transition period. The fact is, extending the transition period would simply prolong the negotiations, bringing further uncertainty for businesses at a time when they need clarity. As the First Secretary of State said last week in the other place:
“Given the uncertainty and the problems and challenges coronavirus has highlighted for us and for our European friends ... we should focus on removing any additional uncertainty, do a deal by the end of the year and allow the UK and the European Union and all its member states to bounce back as we come through coronavirus.”—[Official Report, Commons, 29/4/20; cols. 317-18.]
An extension would also entail further payments into the EU budget and keep us bound by EU legislation at a time when we need full legislative and economic flexibility to manage the UK’s medium and longer-term response to the pandemic. We need to be able to design our own rules, in our best interests, to manage our response to coronavirus, including working closely with our European friends, without the constraints of following EU rules.
In the Spring Budget, as well as responding to the challenges posed by the coronavirus outbreak, the Government prepared this country for our longer-term recovery and prosperity. Having continued to improve the state of our public finances, we are well prepared to step up and provide unprecedented short-term and temporary financial support for people and businesses at this time of national emergency. As the Budget showed, we are also investing in our public services and infrastructure for the longer term, levelling up all regions of the UK, with the Budget setting out meaningful investment in our future productivity and our current public services, something that will be needed more than ever as we emerge from the coronavirus crisis.
Following this debate on the economic and budgetary assessment that forms the basis of the convergence programme, the Government will, for the last time, submit it to the Council of the European Union and the European Commission. I beg to move.
However severe the coming recession, policymakers will need to manage a protracted period of disruption to livelihoods and finances. There will be an urgent need to rebuild the economy and we will need a radically different approach to the past decade, when we saw the worst period of pay growth for 200 years.
In time, the Government will also need to begin restoring fiscal sustainability; again, we will need a very different approach to what has gone before. In the previous decade, while money was found to cut the top rate of tax and some of the richest families gained £1,000 a year, the poorest lost £3,000—15% of their income. The financial resilience of many families was undermined and our economy and public services were weakened, ill prepared and ill equipped for the storms ahead. Subsequent Budgets must move away from the failed strategy of the past and build a new social contract that is fit for the future.
We will not emerge successfully from this acute economic and social crisis unless our Government reconsider their priorities for our domestic economy and trading partners and carry the country with them as they rebuild. So far, I see little sign that they will do so.