Economic Environment: Growth and Jobs

Motion to Take Note

Moved by

That this House takes note of the case for creating an environment which encourages (1) business growth, and (2) job creation, especially in relation to the tax system.

My Lords, I am honoured and delighted to be leading this debate at such an important time for our country. Of course, most of our thoughts are on the next 100 days, which will make a huge difference to our future and the 66 million people and 5.7 million businesses on these islands, but whatever happens to Brexit, the success of business is important to everyone whether, say, they sit in the NHS in Salisbury or in a retirement home in Scarborough. This is because business produces the wealth on which we all depend.

I would like to reflect more deeply on this point. There are many excellent things about being appointed to the House of Lords, especially the chance to scrutinise legislation in a way that is not practicable in the House of Commons. However, I have to say that I have been disappointed by our failure to understand commercial interests and their importance to wealth creation and to the UK’s position in the world. However, I am comforted by the fact that, although no one is guiltless on this matter, attitudes in the Conservative Party are somewhat better than they are elsewhere. We should not underestimate the significance of a culture where enterprise is valued.

The same attitude seems to permeate society at large where too much attention is given to dividing up the cake and to regulating in ways that reduce it than to ensuring that it increases. Growth was only 0.3% in the three months to May, despite annual population growth of 0.6%, and output per hour, the key measure of productivity, is now at best flatlining. Against this challenging background, I will explore some of the drivers of growth and what is getting in the way. A key question is whether our tax system helps the economy to grow in both absolute and relative terms. Does it help with our international competitiveness at a time when we will need to trade more broadly? Are we encouraging the magic of digital growth and taxing it fairly?

Before starting my main themes, I should like to thank the Library staff, who, as always, have been unfailingly helpful in assisting me to prepare for this debate.

I turn, first, to certainty. Businesses need to know where the country is going, and at present capital is being held on balance sheets rather than invested. Ask almost any CEO and they will say that US and other firms are holding back from investment. In March, many sought a delayed Brexit as they did not want a no-deal scenario, but I fear that we are now reaching a stage where delay in reaching a conclusion on Brexit is itself possibly the greatest negative factor affecting the economy. Businesses also fear the chaos and extreme socialism of the present Labour leadership. For all those reasons, the economy, hitherto resilient, particularly on employment, is now slowing.

On fiscal responsibility, there is an arms race of new ideas for taxation among both Conservative leaders and the Labour Party. Unfortunately, the necessary lodestone of fiscal responsibility is missing. We must not now put at risk all the good work that we have done in reducing the deficit created by the financial crisis. The national debt is still far too high, at £1.8 trillion, and it costs us £37.5 billion a year—money that could be put to better use.

My Lords, my experience is of building up a business from small beginnings. That was some time ago, and the business environment was very much as the noble Baroness described it. But things are changing.

This was brought home to me when, early in January this year, I was shown a letter from the chief executive of BlackRock, perhaps the world’s largest investor. It was a letter addressed to chief executives saying that companies needed to do more than make profits. He said that they must make a positive contribution to society and he planned to hold them to account. Companies needed to show that they had a purpose, not just high-minded mission statements. How do we achieve these social ends, as well as being efficient, productive, progressive and technologically advanced? We achieve this by government and business working together to move in this direction.

For instance, we played an important part in preparing the UN agenda for sustainable development and we are committed to achieving its goals, which include a commitment to tackling injustice and inequality, particularly in employment. We have declared a climate emergency and signed up to environmental standards. The noble Baroness mentioned education. Several universities have now opened business and society departments. The Government have committed themselves to a civil society programme, using public procurement to create social value and public good. This is our modern business environment and it will become even more so as the next generation takes over.

However, it is still widely accepted by some that tax discourages economic activity, and that tax cuts will raise revenue. There is absolutely no empirical evidence for this. Indeed, recent analysis of business growth and investment in the UK economy seems to show that, as a result of tax cuts, large corporations are investing more money in dividends and share buy-backs than in sustainable business growth. This is reflected in our stagnant productivity.

My Lords, I join in thanking the noble Baroness, Lady Neville-Rolfe, for introducing this topical and timely debate. I shall focus my comments on promoting job creation and business growth in the digital ecosystem. The industrial strategy made provision for substantial investment in digital infrastructure, as well as investment in talent and skills. My observations are less about the tax system, save for the tax incentives to invest in digital entrepreneurship through EIS and SEIS.

Last year I was fortunate to be a member of the ad hoc Select Committee on AI, ably chaired by the noble Lord, Lord Clement-Jones, in which we did a deep dive into both the benefits and the threats of AI. I am tempted to talk more about medtech, infotech, proptech and digitech, but in my limited time I will focus on the importance to our economy of fintech, a sector where the UK is arguably the global leader. Fintech is essentially a combination of financial services with innovation, with a multitude of benefits and savings. The UK fintech ecosystem has all the key elements for a world-leading environment where the industry can thrive with start-ups, entrepreneurs and technological innovation in abundance.

However, I must stress that this is not a time for complacency. As the noble Baroness mentioned in her introductory comments, the digital revolution has provided disruptive technology solutions to age-old as well as brand new problems, from efficiency and reliability to transparency and usability. It also poses a potential threat of massive job losses.

It is a sobering reality that there are currently 1.3 million unbanked working adults in the United Kingdom. Moreover, 16 million people in the UK have less than £100 in their savings account. Some 10% of households are still without access to the internet, and 30% of people over 65 have never used a computer. Fintech holds the key to unlocking and tackling financial inclusion, and it is a sector that places entrepreneurship at its heart. I entirely agree with the noble Baroness that we need to establish a culture of enterprise.

Start-ups are the lifeblood of the sector and are driving the digital economy forward. Banking the unbanked, highlighting affordable credit solutions and providing SME loans all combine to deliver the future that we all deserve. At a time when investors have less appetite for high risk, the tax incentives of EIS and SEIS for start-ups have been essential to the sustainability of many fintech businesses. Last year the United Kingdom had its best year ever in terms of fintech investment, with over £3 billion invested from private equity and VC investments alone. This puts the UK third in the sector, behind only China and the US. London has the world’s highest concentration of 64,000 financial and professional services firms. There are just over 1,600 fintech firms in the UK—a figure that is destined to double by 2030.

My Lords, I too congratulate my noble friend Lady Neville-Rolfe on securing this debate. As President Ronald Reagan once said, you cannot be for big government, big taxes and big bureaucracy and still be for the little guy. It is exactly because we on this side of the House are for the little guy that our approach to business growth and tax is what it is.

As your Lordships discussed recently in an employment debate that I had the honour to lead, we know that the current low levels of tax are effective. Since 2010 our economy has grown by 18% and there are 1.2 million more businesses, with unemployment down by over 1 million in the same period. In fact, the UK unemployment rate is, at 3.8%, at its lowest since October 1974. We have 32.7 million people aged over 16 in employment, which again is a record since records began in 1971. As there are more people in work today than ever before and unemployment is at a record low, this means fewer workless households. Worklessness is the number one cause of poverty. No, it is not austerity or Brexit; it is households where there are no earners. That is what jobs do for households and why these numbers, as a direct result of the economic policies of this Government, should give us cheer.

We know that every Labour Government have left office with worse employment figures than they inherited from their Conservative predecessor; one has to ask why. Other than perhaps simple competence, one answer must be the levels of taxation. Let us look closely at some impacts of taxation. Our starting point should be that this is not the Government’s money, so it is not a question of tax giveaways; it is the people’s money. When a Government taxes they should tread extremely carefully; if we damage job creation, the bill comes right back to us through the benefits system.

This Government have been trending in the low-tax direction for some time now and the job statistics back this up. Labour has gone on record as wanting to increase taxation, not least by withdrawing what it calls loopholes and which everyone else sees as highly successful incentives to encourage new businesses to start and entrepreneurs to succeed. One jests but, to take a good example, entrepreneur’s relief has been specifically targeted by Labour. The latest HMRC figures show that it had 40,000 claimants last year, costing some £2.4 billion. I say “costing”, but that is to completely misunderstand the purpose and nature of this and other reliefs. Labour and others will claim that it is simply to benefit the rich, but it is of course available only to entrepreneurs such as me and the noble Lord, Lord Haskel.

My Lords, I am full of admiration for the noble Baroness, Lady Neville-Rolfe, for her bravery in introducing this subject at this point in the Government’s management of the Brexit process and the ingenuity of her remarks in attempting to draw the House’s attention away from it. I draw the attention of the House to my entry in the register of interests, in particular my involvement in a number of small companies. This debate cannot be Brexit-free, but at least should be Brexit-lite.

The noble Baroness referred to the inevitable focus on Brexit over the next 100 days. Whether we leave the EU on 31 October or not, it is not 100 days. It may be 1,000 days, or 10,000, while the future trading arrangements with the EU are agreed. The uncertainty and confusion over Brexit overshadow everything. They have united the CBI and the TUC; they are to be welcomed in some ways but regretted in others.

The Government were unprepared for a no vote in the referendum and for the triggering of Article 50. We are now faced with the leadership contenders in a race to the bottom, competing to establish their macho credentials for contemplating leaving without a deal. As the noble Baroness, Lady Neville-Rolfe, acknowledged, even when Brexit is resolved, other issues are as important as tax if not more so. The more vibrant and vigorous a market is, the firmer regulation needs to be to address monopolistic and oligopolistic tendencies and to protect competition and the consumer. Other issues are education and training, migration and visa policy, and infrastructure.

Tax policy to encourage business growth and job creation is therefore a necessary but not a sufficient condition for a successful economy. As with regulation, a balance has to be struck between supporting business and fairness for all taxpayers and individuals. As the leadership race for the Conservative Party unfolds, I guess it is between the entrepreneur and the other candidate—I am not sure what he is; a comedian, a chameleon? One advocates a cut in corporation tax to 12.5%, even though, despite what other noble Lords have suggested, there is no firm evidence that the reduction from 28% to 19% has been beneficial to the economy. The other candidate advocates raising the threshold for higher rate income tax from £50,000 to £80,000. Whoever becomes leader of the party will perhaps, or presumably, become Prime Minister. Should the unwritten constitution not require that when the leader of the governing party changes, there is a vote of confidence—another confirmatory vote—in the House as a matter of course?

My Lords, it is a pleasure to follow the noble Viscount, and I may comment on some of his remarks in due course. We are indebted to my noble friend for securing this debate and for the compelling speech with which she introduced it. She covered much of what I might have wanted to say with greater insights than I can offer.

I have two matters by way of introduction: since I intend to identify what I regard as the obstacles to business growth, and in doing so venture some criticism of the Government, I say to my noble friend the Minister, who is also a fellow Cumbrian, that I acknowledge the many good things that the Government have done. Not least, they have gone a long way to bringing under control the public finances, which had reached such a terrifyingly bad state of affairs. I echo other noble Lords in congratulating them on their moves in regard to education. Secondly, in the matter of declaring a personal interest, I refer noble Lords to my entry in the register of interests. However, having checked with the Companion, I think that on this occasion I am required to be more a little specific. Accordingly, I declare personal interests through my family’s business in south Cumbria, consisting of farming, forestry, mineral extraction, aggregates, housebuilding, leisure and National Hunt horseracing.

My noble friend Lady Neville-Rolfe has great experience and standing in the business world, whereas the cohort to which I belong is the SME sector. I also talk regularly with SME friends and neighbours, especially where they are engaged in the field of high-tech. There is strong evidence of a worrying decline in business confidence, and I think it is widespread. Not only has investment in small firms fallen for four consecutive quarters, but 72% of businesses in the sector have no plans for capital investment in the months ahead. I do not think the prospect of leaving the EU in itself is the cause of these trends; in fact, many seem to welcome it. Innovative entrepreneurs tell me that they are not even greatly exercised by the thought of leaving on WTO terms. There are, however, two Brexit-related issues that do have a bearing, in addition to the one mentioned by the noble Lord, Lord St John. First, there can be no doubt that the interminable process has inflicted serious damage on business prospects. Secondly, the avoidable collapse of net migration from the EU from 189,000 to 74,000 has resulted in difficulties in accessing suitably skilled staff in certain parts of the country. The figures speak for themselves—one in five small employers rely on staff from the EU.

There are in this country 5.7 million small businesses; that is over 96% of the total. Between them, they generate £2 trillion, or 52% of all private sector turnover. I am led to believe that they contribute handsomely to the Exchequer, but I have been unable to locate the figure—perhaps the Minister might help me when he comes to reply. The sector employs 16.3 million people, or 60% of all private sector employment. About 5% of them export to the EU; many of them do not export at all. Some 96% of businesses employ fewer than 10 people.

My Lords, I congratulate my noble friend Lady Neville-Rolfe on raising this important issue and thank her for her many contributions to UK business over her impressive career.

In terms of being a good place for business, we perform well internationally. We are number 9 out of 190 countries and, as my noble friend Lord Leigh of Hurley said, our unemployment rate is at its lowest since 1974, and employment is increasing. A lot of this success is due to initiatives by government, and by government and businesses together, of which we should all be proud. Just recently, the industrial strategy, with its £37 billion for productivity investment, support for R&D and sector deals, is creating real excitement. It is now supported by the export strategy and the productivity plan led by Sir Charlie Mayfield, which is giving practical checklists to SMEs.

We need to be balanced in our criticism, but that is not to say that there is not more to be done. I will concentrate on access to finance, with a particular focus on SMEs and scale-ups, because they are most keenly affected. It is worth calling out the success of two government schemes: the enterprise investment scheme and the seed enterprise investment scheme, which were begun a couple of decades ago. My noble friend Lord Flight, through his chairmanship of the association, has helped to ensure the strong and continued government commitment, including its endorsement as part of the patient capital review. As regards enhancement, SMEs want to applaud the continuity but also welcome ongoing efforts to simplify the process.

The British Business Bank has been another important addition. It now has a range of programmes, including the Start Up Loans Company, having backed over 50,000 companies, with an average loan size of £6,500. In fact, HMT has just boosted its funding by an extra £2.5 billion as a result of the patient capital review, and that is to be welcomed.

My Lords, I must start by drawing attention to my entry in the register of interests, as I provide advisory services to a business, and to my role as the Prime Minister’s trade envoy to Uganda and Rwanda. I also thank my noble friend Lady Neville-Rolfe for introducing this debate. Many years ago, I made my maiden speech in a debate about the economy and the need to be more business-friendly. We have come a long way from where we were, but there is still more that we can and should do.

We should start by putting Britain’s economic performance in context. For three years, Britain has become synonymous with one word and one event: Brexit. Our departure has played out like a soap opera that the whole world has watched with increasing despair. Almost every day, news bulletins have been filled with Brexit updates, to the exclusion of almost every other event. This has resulted in one of the most important national stories flying under the radar: that the British economy continues to outperform all expectation.

At a time of considerable global uncertainty, with a potential US-China trade war, many leading economies slowing and protectionism rearing its ugly head again, Britain has continued to grow above expectation. The UK economy grew by 0.3% in the three months leading up to May. The economy has now grown by more than 17% since 2010.

Nowhere is this underreported miracle more obvious than in the UK labour market. At 3.9%, unemployment is down to the lowest level the UK has seen since the 1970s, with a record high of 32.7 million people in employment—up by nearly half a million in the past year and by 3.67 million since 2010. This has worked across the board, with a record high number of women in employment, 1 million more disabled people in work since 2013 and nearly half a million fewer young people out of work.

This is a great triumph for this Government, who reformed the welfare system and created a friendly environment for businesses when taking office in 2010. What is striking is that 80% of the 3 million or so new jobs are full-time and wages are rising at a higher rate.