My Lords, I want to focus on the parts of the growth plan targeted at regional disparities—the drive to level up the country. I draw your Lordships’ attention to my role as chair of the Purpose Business Coalition, which encompasses the levelling-up goals architecture.
The new Administration have not yet set out in detail how significantly their approach to levelling up will differ from the last. However, the signalling—including the briefing about de-Goveing Whitehall and wanting to dismantle the former Levelling Up Secretary’s strategy—suggests that the focus on delivering growth through taxation and deregulatory measures in the new investment zones will replace the activist approach to tackling regional disparities set out in the levelling-up White Paper of February this year rather than supplementing it. I very much hope that is not the case.
While the policy programme remained underdeveloped, the White Paper showed that the Government understood a fundamentally important point that had eluded Governments of both colours for decades: the importance of successful capacity building in areas being left behind. That lack of local agency is a key factor holding back many areas, and national government has a role to play there to help build up local institutions, governance capacity, its skills base and of course its physical infrastructure. It was really important that that was stated front and centre in the levelling-up White Paper. Without that, the geographical disparities that exist within regions, as well as between regions, may well widen further—an acceleration of the decades-long trend that has seen, in the main, large cities, including in the north, making significant and commendable progress but with provincial towns, such as the area that I used to represent in the other place, without the tools to keep up.
It is not too late for the new Administration to embrace a twin-track approach: supply-side change without dismissing the idea of active, joined-up government as some kind of quasi-socialist meddling, as some of the more wayward of the off-the-record briefings in the last couple of weeks seemed to suggest it is. I hope they will, and, I humbly suggest, that so will many of their new MPs in those northern constituencies.
The existing programme of infrastructure investment earmarked from the levelling-up and towns funds need not be sacrosanct in full. Much of it was targeted in town centres that have since been further ravaged by the Covid lockdowns. Reassessing whether those commitments remain the best way to target scarce resources would be understandable, although probably unwelcome for many of those new MPs, particularly in the north of England.
Finally, there must be a question mark over the extent to which companies would take advantage of relaxation of regulatory standards in investment zones, aside from the fierce debate that change in particular areas, such as environmental or employment legislation, would entail. As they decide what options to give the new zones, I hope Ministers will keep in mind the scale of change in boardrooms in recent years: how important it is now for companies to be, and be seen to be, good citizens making a positive impact in the communities in which they are based. Driven by genuine leadership and the market forces of ethical investors, discerning consumers, and the young graduates and school leavers they are in a race to attract, this is now mainstream within boardrooms. That means that if loosening standards happened in investment zones, it would not necessarily drive the change in business behaviour which would be needed if it was to successfully drive up productivity.
My Lords, I refer to the Register of Lords’ Interests and my role as chair of the Social Metrics Commission and CEO of the Legatum Institute.
It goes without saying that the UK is facing an uncertain economic future. That is why it is absolutely right that the Government’s focus is on growth, boosting productivity, delivering more jobs and attracting more businesses, investment and trade to the UK. But we need to go beyond this to ensure that growth benefits all people, families and communities right across the UK. Doing this will require an understanding of people’s living standards, and this in turn requires two things. First, the Government need to have an effective, official UK measure of poverty, which the Government currently refuse to implement. Secondly, it requires us to protect those with the lowest incomes by ensuring that benefits are not eroded in real terms—which we hear the Government are currently considering backing away from.
Over the last three years, we have seen the economic, social and personal impacts of the pandemic fall hardest on those who are least able to shoulder the burden. Now, with the rising cost of living, it is those very same people, families and communities who face a perilous winter.
But it could have been even worse. The Government’s action on energy bills and emergency cost of living support has protected more than 1.5 million people from poverty. If the Government had a measure of poverty, they could be demonstrating how their policies were protecting the most vulnerable. With such positive action taken so far, it is remarkable that we hear rumours of limiting the uprating of benefits next year. To do so would be to provide a significant real-terms reduction in incomes for families right across the UK who are struggling to make ends meet.
Our estimate at the Legatum Institute suggests that uprating benefits by earnings, rather than CPI inflation, would increase poverty in the UK by a further 450,000 people. If the Government had a measure of poverty, they would know this and take steps to avoid it. Uprating benefits only by earnings would increase poverty among working families by 350,000 people. It would increase poverty among families that include a disabled person by 250,000 people. These are the very people and families that society should be protecting from the impacts of the cost of living crisis, not consigning to a winter of precarity.
My Lords, it is a pleasure to follow the noble Baroness, Lady Stroud. I start by congratulating the noble Baroness, Lady Gohir, on an excellent maiden speech—I am sorry she is not in her place. Whoever would have thought that there would be two Shaistas in the House of Lords?—make of that what you will.
It seems that in her youth, the Prime Minister confused the great tradition of liberalism with libertarianism when she joined my party. Perhaps, despite her education, she had missed the central tenet of liberalism: do no harm. Untrammelled freedom, free from responsibility, is far from what it means to be a Liberal Democrat. If I may indulge myself a little, I shall read the first sentence from our constitution:
“The Liberal Democrats exist to build and safeguard a fair, free and open society, in which we seek to balance the fundamental values of liberty, equality and community.”
The key word here is “balance”. Our ambitions are diametrically opposed to hers, and I am proud she decided that the Liberal Democrats were not the party for her.
Instead, the Prime Minister identified ideological soulmates within elements of the Conservative party, and the so-called mini-Budget is ideologically driven. It is a Budget that unashamedly signals that this Government want to install an economy in which growth is driven by a “me, me, me” culture, one in which the law of the jungle will reign supreme. The “Do no harm” principle is ignored. The poor and vulnerable are asked to bear more of the tax burden, to shoulder more of the pain of inflation, while incomes and benefits for some stay the same. At the same time, the rich receive tax cuts, oil and gas giants bank eye-watering increases in profits, other big businesses make even greater profits and bankers take home even bigger bonuses.
My message to the Government is: stop the harm. Ditch the high ideology and grapple with the imperatives of the day. Help the most needy in our society. They cannot afford to pay double the energy costs of last year and cover the economic ineptitude which led to higher borrowing costs. Invest in education and R&D, without which the holy grail of growth will ever remain a pipe dream.
My Lords, it is a pleasure to follow the noble Baroness, Lady Sheehan, although I regret to say that I find it difficult to agree with anything she said.
I congratulate my noble friend Lady Neville-Rolfe on her well-deserved reappointment to government. At difficult times such as those we face today, it is encouraging that your Lordships’ House has her experience and wisdom at the centre of the spider’s web in the Cabinet Office, so to speak. She made a good fist of a difficult hand. I am a strong supporter of the political philosophy of the Prime Minister and her Government, and agree with her instinct that it was necessary to move fast and far in order to achieve the growth in the economy that we all desperately need.
I also congratulate the right reverend Prelate the Bishop of Birmingham on his thought-provoking valedictory speech and the noble Baroness, Lady Gohir, on her passionate maiden speech.
I welcome in particular the Government’s decision to reverse the planned rise in corporation tax. The proposed increase from 19% to 25% amounted to an increase of more than 31%—nearly one-third—which would have acted as a deterrent to those thinking of setting up new companies here. The evidence of how effective low corporation tax is for economic activity is particularly strong if one looks at the example of Ireland, whose economy has thrived beyond best expectations.
The accelerated reduction in the rate of basic income tax is welcome. However, does my noble friend the Minister not agree that, to compensate for the unexpectedly rapid and large increase in mortgage rates, there is a strong case for the reintroduction of interest tax relief on principal private residences?
Does my noble friend agree that, to deal with energy costs and energy security, there is a need to adopt without further delay a new and much more ambitious strategy with regard to nuclear power? I mean not only the nuclear generation of electricity but—this is often overlooked—the use of nuclear power to generate industrial heat for our manufacturing and transport industries. Dr Tim Stone, the chairman of the Nuclear Industry Association, recently lamented the fact that we have thrown away our leading position in nuclear power.
My Lords, first I welcome my friend, the noble Baroness, Lady Neville-Rolfe, back to the Front Bench.
The Chancellor was absolutely right when he said that the only way to sustainably raise the living standards of our nation is to confront the challenge of our lifetime: to raise productivity. He was right when he talked of the need to lift skills, improve infrastructure and speed up the planning process. However, that was Chancellor George Osborne in 2015. The Prime Minister and her Chancellor talk about their decision to go for growth as if they have had a unique revelation. On the contrary, successive Governments have talked this talk. The problem has been delivery.
There have been numerous initiatives. George Osborne cut corporation tax and raised the investment allowance, just as Kwasi Kwarteng has done. It did not increase investment levels. He announced the creation of 26 new or extended enterprise zones. The productivity gap remained. Nevertheless, we are now promised dozens of investment areas. Business was not crying out for tax cuts or gimmicky zones. Even the president of the CBI has said that cancelling the planned increase in corporation tax was not a particular demand of his members—albeit that the noble Viscount, Lord Trenchard, was keen on it.
Business needs a skilled workforce and efficient infrastructure; that is the key to bridging the UK’s productivity gap and growing the pie. But our education system ranks only 15th in the OECD’s league table, behind countries such as China and Japan, but also behind Estonia and the Netherlands. Our best schools are brilliant but, through the Peers in Schools initiative, I have been into secondary schools which in the staff room the staff refer to as “secondary moderns”. I have been into a secondary school where the headmaster told me that his first task was not so much educating his pupils as providing them with some stability in their lives. The skilled workforce, on which bridging the productivity gap depends, needs a better education system than the one that we have.
My Lords, it is always a pleasure and a challenge to follow the noble Baroness, Lady Wheatcroft. Two years ago, I watched the then Prime Minister take a pickaxe to one of the granite foundations of our country’s reputation: respect for the rule of law. Now I feel that I may have watched this Administration if not tear up then at least damage the Conservatives’ hard-won and hitherto well-deserved reputation for fiscal prudence.
Much of the commentary over the last two weeks has been sensationalist, too general and insufficiently nuanced. There are quite a few cooks stirring today’s toxic broth of geopolitical and economic stresses—Covid, Putin, energy costs, inflation, to name a few—but I will restrict my comments to just three observations.
First, the collateral crisis was one of those foreseeable unforeseens except by a few wise people, such as my noble friend Lord Wolfson of Aspley Guise. Its genesis, perhaps, was far too many years of unwisely loose monetary policy, through both quantitative easing and artificially low interest rates. Those influences encouraged long-term investment funds to pep up their returns through the derivatives market, which became a problem when interest rates rose both hugely and suddenly two weeks ago, requiring those funds to post collateral they did not have. Braver and earlier action on both rates and QE, as many advocated, would have softened this blow. In any event, as many noble Lords have said today, the return to higher interest rates is the new norm. In the long term, that will be good for our economy. Artificially cheap money distorts behaviour.
Secondly, many of the big policy changes in the Chancellor’s mini-Budget had been well flagged in advance without causing market disruption, so what caused the markets to take fright in the Far East overnight on Sunday/Monday of last week? I am supportive of much of the political philosophy underlying the Chancellor’s Statement. Britain is overregulated and over-nannied. The individual has been lured into thinking that it is the duty of the state to solve any problem, when it is not and cannot be. We are overtaxed and underproductive. We lack sufficient investment and we are trapped in a low growth cycle, but there is a time for fiscal loosening on a massive scale and it is not when unemployment is low, inflation is high and markets are already expecting a ballooning of the budget deficit to near 8% of GDP.
My Lords, I am not sure we have fully grasped the magnitude of our predicament. You cannot place a complex modern economy into a cryogenic state and then just bring it out without damage. We spent maybe £400 billion—more, according to some estimates—on the pandemic and the associated lockdowns. We paid people for the better part of two years to stay home and we covered the difference by printing money. That creates a debt that has to be settled. There is no escaping the reckoning.
When I say that I do not think we have grasped it, I do not make this point in any partisan sense. I blame the then Prime Minister, who came to the Dispatch Box in another place and boasted of our massive fiscal firepower and preened himself on the fact that our furlough scheme was more generous than that of France, Germany or Ireland, just as much as I blame the leader of the Opposition, who opposed every loosening of the lockdown and now complains about inflation as though it was some act of God.
At the very beginning of this debate I think the noble Lord, Lord Newby, said that there was no need to act precipitately, but when we find ourselves in a hole this deep we have to act with urgency. Every aspect of the financial Statement, with the exception of the energy subsidy, was an attempt to stimulate growth. In the position we are in, we have to stab at every button and tug at every lever. The IR35 reforms, easier fracking, easier housebuilding, reform of financial services and of childcare—anything that brings prices down and stimulates economic growth.
Of course all these things are unpopular, at least in the short term. Human beings are change-averse. All the easy stuff has already been done—actually, quite a lot of the hard stuff has already been done—but we need to judge policies not by their popularity when polled in isolation but by the popularity of the outcome. Every privatisation was unpopular when it happened and most remained unpopular afterwards, yet people approved of the overall package because it led to rising living standards.
I too add my congratulations and best wishes to my noble friend Lady Gohir, the right reverend Prelate the Bishop of Birmingham and the noble Baroness, Lady Neville-Rolfe—perhaps best wishes especially to the noble Baroness, Lady Neville-Rolfe, for serving a second stint.
Long-term economic growth is driven by two things: the growth of a country’s labour force and its productivity performance. In the decade up to the Covid shock, the UK grew by just less than 2%. Contrary to expectations prevailing immediately at the end of the financial crisis, it was mainly driven by extremely strong employment growth. Unfortunately, along with it, and maybe because of it, there was extremely weak productivity, even by our poor standards—about one-quarter of that which had prevailed. So in addition to it being rather risky in general to have a precise growth target, one would have thought that to have a notably higher one would mean you would have to generate significant belief that either or both of those two legs would be stronger. It is extremely difficult to believe that the long-term labour force growth trend will be even stronger than it was before, so the Government should have, in advance of a rather cavalier and naive tax-cutting Budget, at least tried to show that they would maintain labour force growth and evidence of dramatically improving productivity. They now somewhat desperately need to do that.
Here are four specific ideas that should be included. First, the Government should intensify their brief mention of efforts to reform pension and insurance company investment behaviour. As the chaotic gilt market sell-off highlighted, for far too long our supposed long-term investment institutions have in fact been investing far too much in supposedly lower risk investments. We need genuine long-term risk-taking and patient capital to be successful and to help a true growth investing culture.
Secondly, along with this, incentives for true risk-taking must be improved, not ill-thought-out, obsessive ideas about broad corporate taxation, which simply allow even more accountancy-style management of balance sheets and have for 20 years typically resulted in more share buy-backs and little investment.
My Lords, what joy it brings me to see my noble friend on the Front Bench and what a speech she gave to the House this afternoon.
I am very happy with the new Prime Minister and Chancellor. I joined the Conservative Party in 1964, and the basic tenets of the party at that time were almost identical to what we are being offered today. I fought my seat in Northampton South in February 1974. I was told that I would not win, that it had been a Labour seat all its life and that there had never been a Conservative in Northampton. I fought that seat on the basis of what I have just described, with energy, determination and enthusiasm. What the Prime Minister is bringing to our nation is energy, huge effort, enthusiasm and commitment to the basic philosophy of the party I joined so long ago and continue to support wholeheartedly.
My goodness, what challenges she faced on the day she became Prime Minister: the world facing its fifth wave of debt, inflation rising far too fast, energy supply and pricing a huge challenge, and, on top of all that, Ukraine and Russia. There was no time to really prepare for any of that, yet somehow she and her team, in a very limited time, did a huge amount of work that is manifesting itself now. My friend the noble Lord, Lord Lupton, may well be right that some of the elements could have been better put together, but you have to look at the time span. Does nobody understand the sheer pressure of having fought to be leader of our party for a whole month and then being thrown in? She and her team have succeeded. It is a truly great achievement.
My noble friends need to understand that one element is missing. There is one word missing: communication. I spent my economic career in the marketing world, and part of that time as the director responsible to the Central Office of Information for whatever campaign the Government of the day decided needed to be communicated. I say to my noble friends on the Front Bench that it is no good relying just on TV. There is press, billboards, radio—all sorts of media. Remember that, and please do not forget that it is not unusual to communicate directly to every single household in this country if the need is there. At this point in time, I believe that need is there. It has been done before and ought to be considered again. If that happens and we really communicate well, I am quite sure that this will be a highly successful Government. I look forward to continuing to support them.
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Perhaps this is the problem: that policy-making and political debate about poverty and the lives of those on low incomes are conducted in a vacuum of effective measures. This need not be the case.
For the past five years, I have been leading the Social Metrics Commission. Our goal has been to create a measure of poverty which both accurately reflects the lives and experiences of people on low incomes and has a broad consensus of cross-party support behind it. In 2018, we published our findings and in 2019, with the support of statistics experts, charities and the Office for National Statistics, the Conservative Government committed to developing experimental statistics based on our measure. This work has now been stopped without explanation or reason. As a result, policy decisions are being taken blind to the impact they could have on poverty.
What does all this mean? First, uprating benefits by inflation next year is the right thing to do. Even if the Government are successful in boosting trade, driving strong economic growth and increasing employment, failing to do so would increase poverty among working families and disabled people and fail to protect many of the most vulnerable in society.
Secondly, it means that the adoption of the Social Metrics Commission measure as an official statistic would allow the Government to show the positive impact they are having on people’s lives right now and take the necessary steps to protect vulnerable people at a moment of global crisis. Looking forward, it could be the foundation for the Government driving an economic and growth strategy which ensures that, for the first time in a generation, as a society we can see a meaningfully lower level of poverty.
It is meaningful, long-term investment in R&D, skills and training that will drive the innovation and technology needed to meet the challenge of climate change. Without this investment, we will see the rest of the world forge ahead and grow without us.
In concluding, I associate myself with all previous remarks condemning the Government’s actions on obstructing green growth and loosening protection of the environment. I want to stress two points. First, the issuing of new licences for the exploration and production of oil and gas is reprehensible, as is removing the ban on fracking. Can the Minister assure your Lordships’ House that taxpayers will not be left to pick up the cost of dismantling the inevitable future stranded assets? Secondly, can the Government just get on with launching an information campaign on what people can do to reduce energy use? If, for ideological reasons, they cannot bring themselves to do this, they should get out of the way of others who can.
In the 11 years from 1956 to 1967 we built 27 new nuclear reactors. In 1978, both France and the UK had 6.4 gigawatts of nuclear power. Today, France has 61 gigawatts and we have less than one-tenth of that, 6 gigawatts, and much of that is to be decommissioned over the next few years. The Government’s plan, set out in their vision for Great British Nuclear, must be fulfilled, expanded and delivered at speed and at scale.
The most important supply-side reforms to which the Government have committed involve the removal of unnecessary costs for businesses. It will come as a relief to companies up and down the country that departments will be required to review, replace or repeal retained EU law, which will otherwise disappear through sunset regulations by the end of next year. That is an enormous task which can be achieved only with full support and co-operation by all departments and regulators. Wholesale regulatory reform is essential to overcome our perennial problem of low productivity, which is essential for the Prime Minister’s growth plan to be achieved and sustainable. Financial services rules such as MiFID II have severely restricted the development of innovative challenger asset-management companies. The Government have already made some moves with regard to solvency too, but the proposed reduction in risk margins still falls short of what the industry believes to be appropriate. The financial regulators should be re-merged into a single body. If this is a step too far at present, at least they should both be given competitiveness objectives ranking equally with their primary objectives.
I look forward to other noble Lords’ contributions.
The need for serious infrastructure investment remains. This country has a national productivity investment fund. Its contributions to improving infrastructure include extending passenger waiting areas within Derby bus station and a new pedestrian cycle crossing in Middlesbrough. Competing with modern China or Korea will need a little more than that. Perhaps the Minister could tell me what the national productivity investment fund is doing now.
Business also craves stability. That has certainly not been enhanced in recent weeks. Incentives for long-term investment might help. Some countries enable companies to reward long-term investors with enhanced voting rights. The UK will not countenance that. Business also needs a stable community if it is to flourish. The inequity now evident in our society is threatening that stability.
The mini-Budget fiscal event was crazy. The withdrawal of the 45% tax rate was simply crass, from every point of view. The noble Lord, Lord Frost, in welcoming the growth strategy, invoked the name of the late Lady Thatcher, but that devotee of good housekeeping would never have countenanced the idea of borrowing to fund tax cuts. It took her nine years to reduce the top rate to 40%. Even if this Government have the right recipe to grow the pie, it will take years to bake it.
In the meantime, to get anywhere near that promised plan to bring down debt in the medium term, there will have to be vicious cuts to public spending; or does everything depend on what is written on page 17 of the growth plan:
“The financial services sector will be at the heart of the government’s programme for driving growth across the whole economy”?
A “deregulatory package” will
“unleash the potential of the UK financial services sector.”
Can they have forgotten 2008?
It is the timing and execution, as much as the substance, of the Chancellor’s Statement that has been catastrophic. The numbers were unverified by the OBR and there was no clear plan. A rushed Statement on the Friday was compounded by unscripted, boastful words over that weekend. It displayed a mixture of naivety, lack of experience and overconfidence, which asked to be punished by international capital markets and duly was. The international capital markets were the first to hold the Government to account.
Thirdly, why does a market reaction of such severity matter? The answer is that, at the end of June this year, overseas investors held about 31% of the Government’s total debt of £2.2 trillion. Their views matter; they do not have to buy our debt. As the previous Bank of England governor said, we rely on the kindness of strangers, and two weeks ago those strangers were not feeling kind. Commentators understandably focused on the rise in rates at the long end of the yield curve and, at one point, a near 10% fall in sterling against the dollar. However, the yield increase at the short end has been even bigger, which has raised interest rates, including mortgage rates, and put greater pressure on households. This plays into my argument that it is financially illiterate to loosen financial policy when there is an inflation problem. It just forces the Bank to hike short rates more—the “accelerator and brake” syndrome.
Markets are a drama. They are built on confidence. They are an amalgam of analysis, courage, fear, confidence and scale. This makes them so human. What might prove to be relatively small misjudgments, either political or economic, can have and have had huge negative impacts, which a more measured, informed, well-explained and mature approach might have avoided. I very much hope that our political leaders, like the best business leaders, have the humility to take learnings from the errors of judgment and mistakes made.
I have to say that this applies also to tax. I was very disappointed that, with a majority of 71 in another place, the Government were unable to push through a small simplification of our tax rates that would probably have been at worst fiscally neutral and more likely beneficial in a quite short period of time. As an aside, a number of people, starting with the noble Baroness, Lady Smith, and ending with the noble Lord, Lord Sikka, have spoken about trickle-down economics. To my knowledge, no one has ever advocated the idea that you enrich the poor by giving the rich more money to spend on their Lamborghinis or their art collections. The phrase “trickle down” was invented in the United States in the 1930s as a caricature of the policies supposedly pursued by the Coolidge Administration. If you type “trickle down” into Google, it will prompt you with “debunked”, “false” and “Reagan”, but you will not find a single person ever advocating it. It is an absolute fantasy, a leftist parody of how conservatives are supposed to think.
What we were trying to do in the Budget—it is very disappointing that we backed off at the first crackle of musket fire—was to set the incentives so that the whole economy would grow and we would get more revenue in with lower rates, something that even the IFS thought was feasible at that level. This is not a new idea.
I want to finish by agreeing with the fiscal analysis of my noble friend Lord Bridges of Headley. The idea that bringing tax back to the pre-pandemic level is creating some kind of skeletal, Randian state—a sort of libertarian attempt to end all government spending—is utter fantasy. We would gladly settle for the tax breaks that pertained in the Blair and Brown years; they would be a huge improvement on where we are now. However, we have only two ways out of this mess: we can either try to grow our economy so that the share taken by the state shrinks in proportionate terms or we can wait for an external correction by either the IMF or the market. There is no third option.
Thirdly, the devolution process started by this Government in 2014 should be accelerated, and they must be serious about it, devolving more powers, especially on skills but also much, much more. Recent geographic ONS data—the first it has ever produced in such detail—shows that within the dreadful overall trend Greater Manchester experienced stronger productivity improvements in 2002-18 than London. It could be a fluke, but it is probably not, and is a sign of something that can work. Devolving powers should be at the heart of what this Government are trying to do to be serious.
Lastly, if I were in their shoes I would encourage the OBR to choose for itself to reduce the importance of its short-term GDP forecast changes. As talented as the OBR team is, its own cyclical forecasts jump around just like anybody else’s. The only thing guaranteed is that, like everybody else’s, they will be different the next time. This should not be confused with having a credible independent organisation, such as the OBR, that gives its best forecast of the country’s growth trend and the long-term trend of the nation’s finances.