My Lords, the Budget that the Chancellor set out last week has three key elements. First, it protects jobs and livelihoods and provides additional support to get the British people and businesses through the pandemic. Secondly, it is clear and honest about the need to fix the public finances. Thirdly, it starts the work of building our future economy, including by providing opportunities to level up across the country.
The Budget announced additional measures worth £65 billion to support the economy through the pandemic this year and next. Added to last November’s spending review, the number is £352 billion and, taking into account measures from the spring Budget last year, the figure rises to £407 billion. The OBR now expects the UK economy to recover to its pre-crisis level six months earlier than originally expected—in the second rather than the fourth quarter of 2022.
Importantly, the Budget extends the furlough scheme until the end of September. Support for the self-employed will also continue until September, with an additional 600,000 people now potentially eligible to claim. The universal credit uplift of £20 a week will be maintained for a further six months and working tax credit claimants will receive equivalent support over the same timeframe.
Among other things, the Budget also reaffirmed the Government’s commitment to increase the national living wage to £8.91 an hour from April. It also announced a new restart grant in April to help businesses to reopen and get going again, as well as a new recovery loan scheme to replace our earlier bounce-back loans and coronavirus business interruption loans.
The Chancellor was also open about the longer-term fiscal challenge that we now face. The Budget does not raise the rates of income tax, national insurance or VAT. Instead, it maintains personal tax thresholds on income tax, inheritance tax, the pensions lifetime allowance and the annual exempt amount in capital gains tax, with higher earners affected the most. It also announced an increase in corporation tax to 25% from 2023. Importantly, 25% is still the lowest corporation tax rate in the G7 and companies that make less than £50,000 profit annually will only be subject to a 19% tax rate. Given that the Government are providing businesses with over £100 billion of support to get through the current crisis, it is only right to ask them to contribute to our recovery.
The third component of the Budget is a series of initiatives and measures to support the investment-led recovery that the country needs. A new super deduction will, in some cases, allow companies to reduce their taxable profits by 130% of the cost of the investment that they make in plants and machinery, which is equivalent to a 25p tax cut for every pound that they invest. Worth £25 billion over the two years that it is in place, the super deduction represents the biggest business tax cut in modern British history.
My Lords, I should have added that the maiden speakers all have an extra minute and the welcomers an extra 30 seconds. I call the noble Lord, Lord Eatwell.
My Lords, in these very uncertain times, it is inevitable that some of the Budget measures will prove an unexpected success and some an unexpected failure. So, instead of dealing with detail, I will focus on the inspiration and what the Budget tells us about the Chancellor’s thinking—his economic philosophy, if you like.
Fortunately, that philosophy is summed up in the Budget speech:
“The only reason we have been able to respond as boldly as we have to covid is because 10 years of Conservative Governments painstakingly rebuilt our fiscal resilience.”—[Official Report, Commons, 3/3/21; col. 255.]
Note that he said: “The only reason”. For the Chancellor, the prime objective of government policy must be fiscal resilience—the heartbeat of austerity. There was no mention of the impact of those 10 years on public services desperately understaffed as the pandemic hit, no mention of the lack of 35,000 nurses in the NHS—indeed, no mention of the NHS at all—and no mention of the fact that we entered the pandemic with a little over six intensive care unit beds per 100,000 population, compared with double that number in France and Italy and five times that number in Germany.
For the Chancellor, fiscal resilience is paramount and the unique determinant of economic success. Hence the grandstanding on future tax rises in the Budget. For the future is to be dominated not solely by higher taxation but by cuts in government spending on top of the cuts already announced in the autumn. These are deemed necessary to pay off the debt. Overall, it is deflation in excess of £30 billion a year—year after year. How well founded is the Chancellor’s assertion that austerity is
“The only reason we have been able to respond”?
As is evident from the OBR report, the increase in government spending to counter the pandemic was funded almost entirely by the Bank of England. Does anyone really believe that the Bank would have refused to fund the increase?
My Lords, we have a long debate in front of us and, in opening for the Liberal Democrats, I will not try to cover every single item in the Budget. I will not have time to go into detail about the £10 billion of debt amassed during the Covid crisis by the poorest households. I will leave it to others to explain why the universal credit uplift should be made permanent, and why this debt should be addressed before we see a further escalation of homelessness across the country. Similarly, I will not speak in detail about the challenge facing small businesses, viable enterprises that have supported jobs in our communities in the travel, tourism and creative sectors, for example—viable businesses, but already experiencing a debt crisis while facing spiralling fixed costs. Instead of giving them a ladder out of this hole, the Budget offers them a chance to dig themselves into more debt through the recovery loan scheme. This debt will haunt the economy for years.
I want to focus on two other big gaps in this Budget. The first is the national strategy deficit. Anyone reading the two inches of documents that come with modern Budgets will see that there is no shortage of the word “strategy”, but no actual evidence of strategy; instead, we have broad aims. There is the aim of net zero by 2050, for example, but no plan in this Budget or anywhere else for how we are going to get there. Indeed, some of the Budget measures cut across net zero.
Then we come to industrial strategy. In this instance, the Chancellor inherited something that had worked across several Parliaments. Sitting atop this was the Industrial Strategy Council. It was launched as a joint industry-government body that would steer the UK to higher productivity. As the noble Lord, Lord Henley, the then Conservative Minister for BEIS, said in 2017:
“The Industrial Strategy Council will be independent. It will be responsible for putting the right evaluation and reporting structures in place and make recommendations to government on industrial strategy.”
My Lords, this is the first time I have ever spoken in a Budget debate in the Lords and I am making my “maiden speech” only because I want to support the Chancellor at a time when there are no easy answers—it is a very difficult situation. I always listen with respect to the noble Lord, Lord Eatwell, but I disagree with him over fiscal resilience and its importance. The central dilemma for the Chancellor in this Budget is how he can start repairing the public finances without endangering the recovery. He resolved that dilemma by delaying the increases in corporation tax and the freezing of personal allowances, again delayed for one year. This staging gives the recovery the chance to get established, and I believe that was the right judgment.
Overall, the Budget increases the tax burden by 1% of GDP, which is uncomfortable for many of my noble friends on this side of the House, but we have been through phases like this before, in the early 1980s and other periods when fiscal tightening, far from killing off growth, ushered in long periods of expansion, which is what enables us to pay for good public services. We should not succumb to the mistaken interpretations of Lafferism or Reaganomics that led America astray in the 1980s. Some will criticise the increase in corporation tax, but once you have ruled out the three main taxes, as was done in the Conservative manifesto, the Chancellor had little choice. The question remains whether such a large increase in corporation tax can be delivered: moving the tax up in one go to 25% may cause prospective investors a bit of hesitation.
The OBR talks of lowering investment in the medium term, and I would appreciate it if my noble friend Lord Agnew would comment on that very obvious reservation that the OBR expresses. I believe that the Chancellor has risen to these unprecedented challenges flexibly and pragmatically, and I support him.
My Lords, it is indeed an honour and privilege to make my first contribution to your Lordships’ House. I express my gratitude to noble Lords across the House for the warm and kind welcome which I have received. I particularly thank Black Rod, the clerks of Parliament, the doorkeepers and the security guards for their patience and guidance and for always going the extra mile in these challenging times. I could not have asked for better supporters than my noble friends Lord Harris of Haringey and Lady Hayman of Ullock. Both are inspiring public servants who have taught me so much already and continue to answer my never-ending questions.
Choosing Burnley for my title is recognition of the pride and affection I have for the town where I was born and have always lived. When working as a taxi driver as I studied for my master’s degree in European law, I really enjoyed the warmth of local people. As my taxi driver father agreed, it also felt like a public counselling service late on Saturday nights.
My first connection with your Lordships’ House was when I collected my noble friend Lord Clarke of Hampstead from Preston train station and drove him to Burnley, where he was leading a commission on the 2001 disturbances in the northern towns. This takes me to the current debate.
We are still waiting for a balanced economy where there is equal distribution of wealth across all regions and, in particular, the north. Will the Minister reflect on this point and ensure that investment is not just for infrastructure but also to empower local people to engage in decisions affecting their lives? I hope the concept of a “northern powerhouse” does not end up being a “northern poorhouse” due to the lack of attention and perpetual rhetoric without any action or meaningful devolution.
Having served in the European Parliament, I am accustomed to time-restricted speeches. I finish by saying that I will continue to work on the issues which I have always championed: human rights, climate change, workers’ rights and gender equality. I look forward to working with and getting to know noble Lords across this remarkable House and in this great city—the mayor of which shares my surname. Although I am the first Lord Khan to take a seat in this magnificent Chamber, I hope not to be the last.
My Lords, I am delighted to follow my noble friend Lord Khan of Burnley and congratulate him on his splendid maiden speech. Born in 1979, he is the youngest ever mayor of Burnley. He makes me feel ancient; when he was born, I was a lieutenant-commander serving on HMS “Norfolk” in the South Pacific—noble Lords can imagine that it was hell out there. I was shocked to find that there had never been an HMS “Burnley”, but the town had an affiliation with a sister ship I fought alongside in the Falklands, HMS “Active”, so all is well.
My noble friend Lord Khan graduated in law in 2002 and gained a masters in 2004. As he mentioned, while studying he worked as a taxi driver. I think we will have to wait to find out who else he had in the back of his cab. He became a local councillor in 2007, was re-elected in 2011, was elected unopposed in 2015 and had 90% of the vote in 2019—which, I have to say, all sounds a bit like the Chinese legislature, but never mind. During this time, he was a university lecturer and he became an MEP in 2017. The Burnley race riots of 2001 had a huge impact on him and inspired him to develop numerous community cohesion projects. I think he should be particularly proud of his ground-breaking higher education programmes to increase academic participation among women of the south Asian community. Wajid, you are a very valuable Member of this House, and I extend to you all our warmest welcome.
The Budget says it delivers security today. It is a bold claim, and one that demands not just economic strength and financial security for our people but also robust defence. I have spoken after every Budget for the last decade and bemoaned the fact that defence normally gets only one sentence. In this Budget—admittedly, post Covid—it does not get any. The world is more dangerous and unstable than for many years, and the pandemic has exacerbated that trend. I hope that, after 11 years of cutting defence spending, the Government will not rest on their laurels of the welcome increase in the spending review last November, because without more resources our military capability will continue to decline. We all know that in 10 days’ time we will find out whether that is happening, and I look forward to that with interest.
My Lords, first I congratulate the noble Lord, Lord Khan.
This is surely a Budget of unintended consequences. For two years, investment in plants and machinery will qualify for a 130% capital allowances relief, which means an extra £25 tax reduction for a spend of £100. I am sure the creative tax avoidance industry is already working on a redefinition of what is “plants and machinery”. It has been suggested that fixtures such as fire alarms, swimming pools and jacuzzis could qualify. I suppose that we could see a claim for an industrial duck house. Let us be clear: the tax relief is not only for the cost of the duck house but for more than the cost. At the same time, this Budget will drag more people into the tax net by freezing personal allowances. Then there is the increase in corporation tax—but not until 2023, so as to give enough time for business to relocate overseas.
The Government have failed to appreciate the administration burden they create, such as the implementation of the VAT reverse charge, which is a severe burden on the construction industry. I hope that the Minister can announce, at least, a suspension of the charge, reducing administration and thus rectifying the restriction to cash flow in the supply chain.
I compliment my noble friend Lord Fox on raising the lack of strategy in this Budget and the lack of noticing the problems with social care. These are the overall faults of this Budget—a Budget of unintended consequences with nice-sounding words.
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The Budget also announced, among other things, the creation of the first ever UK infrastructure bank, headquartered in Leeds. Two new schemes—Help to Grow and Help to Grow: Digital—will help tens of thousands of small and medium-sized businesses to get world-class management training and help them to develop their digital skills. We are helping to ensure that we have access to the talent that we need through the reforms that we are making to our visa system.
Achieving an investment-led recovery means allowing investment to flow more freely, which is why we want to give the pensions industry more flexibility to unlock billions of pounds from pension funds into innovative new ventures. Alongside these measures, our commitment to levelling up across the United Kingdom is reflected in the £4.8 billion levelling-up fund; accelerated city and growth deals in places such as Ayrshire, Falkirk, north Wales and Swansea Bay; more than a £1 billion for 45 new towns deals; and a £150 million fund to help communities across the United Kingdom take ownership of pubs, theatres, shops or local sports clubs at risk of loss. This complements the inward investment that will be attracted through the announcement of eight new freeports in eight English regions.
The country has experienced the worst fall in GDP in three centuries—not the 1976 sterling crisis, not the Second World War, not the First World War, not the Napoleonic War; this has been harder financially than all those. In response, the Chancellor has presented a plan that will continue to protect jobs and livelihoods and to support British people and businesses through this moment of crisis. It will begin to fix the public finances and will start the work of building our future economy through investment-led recovery.
Is the Chancellor right to suggest that fiscal resilience should be his principal objective, or is his obsession distorting the Government’s entire approach to economic policy? Let us be clear: the prime objective of government economic policy should be the management of demand for the nation’s real resources, labour and productive capacity. The Government should set fiscal policy to ensure the very best use of resources today and development of resources for the future. If this involves more debt, then that is the best economic decision; if it involves more taxation, then that is the best decision. The role of taxation is not to pay off the debt but to be part of a balanced programme of fiscal and monetary policy to stimulate the real output needed for the achievement of the Government’s goals: health, education, defence of the realm, decent living standards, tackling climate change and so on.
Of course, the mixture of taxation, spending and debt decrease or increase may have other consequences that must be taken into account. For example, the OBR demonstrates that quantitative easing has lowered the maturity of UK debt, making it more interest rate-sensitive. That is serious. There may be other effects in the money markets. For example, holders of government bonds may come to believe that current policy will increase inflation. It does not matter whether the belief is true or false; if the result is that they sell off bonds, interest rates will tend to rise. Given his important responsibility of managing expectations, there is market danger in the Chancellor’s suggestion that fiscal resilience should be the paramount goal.
If, instead, we view the Budget through the lens of a programme of monetary and fiscal policy that secures the highest real output, some key consequences emerge. In a speech last week, the Governor of the Bank of England defined the ideal post-pandemic economic policy: the cost of the Covid shock
“has to be managed, and it will be easier to do that with a higher trend rate of growth, boosted by stronger investment.”
Have the Government provided a plan for stronger investment? The approach in the Budget is best characterised as, “There’s a problem, so throw money at it and hope it works. There’s a lack of investment, so throw money at super deduction for two years.” The result is spelled out by the OBR: long-term investment will not be increased, just shifted around. There will be a two-year boost to take advantage of the subsidy, then a decline. For companies to invest, they do not need super deductions; they need the prospect of growing demand for their products. What does this Budget offer them? Miserable rates of demand growth: 1.5% in 2023, 1.6% in 2024 and 1.7% in 2025—no long-term strategy for investment.
Similarly, there is a housing crisis. Let us throw money at it in the form of stamp duty holidays and a mortgage guarantee. The result? Sharply rising house prices and a few more houses. Has the Chancellor not noticed that house prices have risen by 8.5% in the midst of the worst recession of modern times? There is no long-term strategy for housing.
So, where is the plan for investment? Well, there is what I can only describe as a PR brochure, Build Back Better: Our Plan for Growth, published by the Treasury. It is full of wonderful, glossy photographs and a lucky dip of proposals on infrastructure, skills, innovation and the environment, but the photos fail to disguise the fact that there is no unifying framework, a complete absence of any plan for implementation or monitoring, no institutional oversight and no evidence of consultation —nothing to encourage the commitment of private investment, and no strategic thinking for an investment decade. How could there be when fiscal resilience and spending cuts have to come first?
The pandemic has imposed a massive cost on the British economy, the real cost of lost output, lost jobs, furloughed idleness and collapsed businesses, the highest death rate in the G7 and the biggest fall in production. But there is an economic opportunity. New thinking can define a break from the policies of the past 10 miserable years. Just as, after the war, Britain built a better society, we can build a new economy and a new society now, but only if monetary and fiscal policy are the servants of a building programme; not if, as for the Chancellor, the real economy is to be squeezed in the service of outdated fiscal orthodoxy.
Then, last week, it was abolished. There was no announcement to Parliament, no Statement to your Lordships, just short letters to the council members. There was a chorus of disapproval in British manufacturing. In justifying their decision, the letters note:
“The UK is in a completely different situation than it was in 2017.”
It cites Brexit, the net zero challenge and Covid. Can the Minister explain why these three challenges make the need for an industrial strategy less, rather than more, urgent?
This decision officially confirms that BEIS is a vassal of the Treasury, a Treasury led by a Chancellor to whom the concept of a strategic approach to manufacturing seems anathema. Instead of this, Her Majesty’s Government have the Build Back Better document. This is actually a rehash of existing activities. It recycles 142 pre-existing policy initiatives, and these do not hang together that well. I would call the document flimsy, but it is bulked out with acres of colour photography, and therein lies the explanation: this is a Government dazzled by flash photographic announcements and bored by the hard graft of strategic development. They are insouciant about delivery.
The second gap I want to briefly cover concerns social care and its relationship with local government finance. This Budget is eerily quiet about this vital service, and this silence is a scandal. We all know what it means to elderly, vulnerable people to have recourse to proper care, and we all know that this is failing people every day. But there is a second, knock-on issue. The 5% rise in this year’s council tax will hit everyone, the poorest and richest, and 60% of this rise is due to the social care precept that the Treasury is essentially forcing local councils to raise. Since 2016, this precept has added hundreds of pounds to individual council tax bills all over the country. In short, councils are being made to tax local residents to shore up the failing social care system, so that the Conservatives can pretend that they are not doing it.
Once again, this is no strategy for social care, just a tactic of lumping it to hard-pressed councils. Meanwhile, the money these councils have to spend on other services—roads, libraries, the bins and other care—is being squeezed, so squeezed that the Government are allowing some councils to capitalise revenue spend. This capitalisation is essentially mortgaging future revenue. I ask the Minister: how is this prudent or just for future council tax payers? How do the Government think the levelling-up agenda can succeed when red wall seat councils are being squeezed so hard in this way?
This country is just beginning the long road to economic recovery from Covid. Our businesses are only now realising the huge economic stress of Brexit, and we are in the very first stages of addressing the climate emergency. To meet these three challenges, we need something more than glossy photographs and clever slogans; we need strategic focus and a Government who get down to the hard graft of delivery. This Budget offers little prospect of that.
On a more positive note, I welcome the formation of an ARPA equivalent and the increase in R&D funding. We need technological innovation, not least to ensure zero-carbon energy in the future. A small number of large nuclear reactors, supported by many advanced modular reactors, and a massive use of hydrogen in conjunction with renewables is the way ahead. We can no longer afford to delay the nuclear programme.
Lastly, on a subject close to my heart, how will the Government contribute to kick-starting the much-needed decarbonisation of the maritime sector? Will it be through the newly established infrastructure bank or other institutions?