UK Convergence Programme

Motion to Approve

Moved by

That this House approves, for the purposes of section 5 of the European Communities (Amendment) Act 1993, the 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.

My Lords, the Government have a legal requirement to give the European Commission an update of the UK’s economic and budgetary position as part of our convergence programme. Given our decision to leave the European Union, some Members may find it odd that we are debating the UK’s convergence programme here today, but it is right to do so, because we continue to exercise our full membership of the EU until the point of our exit and because doing so is a legal requirement and one that we must therefore take seriously.

The document before us may look familiar. This is because substantial parts of its content are drawn from the Autumn Budget report and the OBR’s most recent economic and fiscal outlook. It is the content, not the convergence programme itself, that requires the approval of the House today.

I remind the House that although the UK participates in the stability and growth pact, which requires convergence programmes to be submitted, by virtue of our protocol to the treaty opting out of the euro we are required only to “endeavour to avoid” excessive deficits. The UK cannot be subject to any action or sanctions as a result of our participation.

Let me provide a brief overview of the information we will set out in the UK’s convergence programme. Noble Lords should 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 Autumn Budget and again in the Spring Statement.

The UK economy has been growing for nine consecutive years, with the longest unbroken quarterly growth run of any G7 economy. It has added 3.6 million jobs since 2010, has almost halved youth unemployment and has seen female participation in the workforce increase to record levels. The economy is now delivering the fastest rate of regular wage growth in over a decade. Despite the slower global economy, the OBR expects Britain to continue to grow in every year of the forecast period: at 1.2% this year, 1.4% in 2020 and 1.6% in each of the final three years. This represents cumulative nominal growth over the next five years that is slightly higher than the Budget forecast. The OBR forecasts 600,000 more jobs in our economy by 2023. There is positive news on pay too, with the OBR revising wage growth up to 3% or higher in every year.

The Government have made significant progress since 2010 in reducing the deficit, and in 2016-17 reduced the Maastricht treaty-defined deficit below the EU’s 3% limit for the first time since the financial crisis. The OBR forecasts it to fall below 2% of GDP in 2018-19 and below 1% in the final two years of the forecast period. At the Spring Statement, the OBR forecast that public sector net borrowing is expected to be £22.8 billion this year—£3 billion lower than forecast in November and £130 billion lower than in 2009-10.

My goodness. I thank the Minister for his statement. I think we can all agree that this is a bit of a paper exercise, as the UK is not a member of the euro. Therefore, no matter how we perform on our structural deficit, there are no enforcement measures that the EU or any part of it can take against the UK. He is also absolutely right that there is nothing new in any of these numbers; they are basically a cut and paste from the last Budget and the OBR forecast. The forecast is slightly differently defined from our deficit numbers, but the cyclically adjusted treaty deficit number actually rises slightly this year, so technically we are actually going into the excessive debt procedure, although probably only briefly. Again, that has no particular consequences.

I find this, like many other debates on the economy, to be utterly surreal, because we will have no idea how the economy will look until Brexit is sorted out. That is so fundamental to creating the terms on which we have to look forward. All that we know is that every forecast that HMT has done of the medium term, in any Brexit scenario, shows us to be significantly worse off than if we had remained in the EU. That includes getting absolutely wonderful and amazing free-trade deals all over the place.

Because we have had so many debates on this issue, I am sure that the House will not mind if I am brief and will make just a few points. First, while I share the Government’s pleasure in our good employment numbers, I repeat that it is a lagging indicator, and I wish that HMT would take that on board. But rather more troubling, a recent piece of work by Aston University suggests that established businesses have been shedding employees in significant numbers for some time and that the slack has been taken up by start-ups.

I am delighted with start-ups, but we are all well aware that a start-up is far more volatile, and if we go into any period of recession or rough water it is exactly that start-up arena that will take some of the harshest blows. I had not anticipated that there was a threat to our employment numbers, but it looks to me as if we potentially have something here that the Government should take a very close look at.

I want to pick up an issue that I have heard mentioned by a number of Brexiteers who have said that they all accept that the investment numbers have plunged but that that means that there is a wall of pent-up investment waiting for the moment we hear that Brexit has been settled. In the companies that I talk to—and I see many Members of this House who talk with companies on a regular basis—if you miss the investment cycle for a particular business, you have missed it. It is not held back and set aside for the UK; it goes elsewhere. Your next opportunity to try to access that money will be in the next investment cycle, which for many companies is five to seven years away. We have to be very serious about the impact of the drop in investment and of missing out on the variety of cycles.

The third problem that has to be addressed is our productivity problem. The Minister referred to this. Productivity is running at around 1.2%. Pre the financial crisis, it was more than 2%, and even then we did not think that was a terrific number. I do not care how you redefine productivity in services; you are not going to get from 1.2% to 2%. We have a problem, and it is better that we recognise it.

The Government are trying to tackle some of this through their industrial strategy, but as I read it the industrial strategy focuses very much on trying to get new cutting-edge technology into our tier-1 companies. Our tier-1 companies are fine on productivity. They are among the most productive companies across the globe. Our problem is that the structure of our economy has a very long tail of medium-sized and small companies, and they are hugely lagging in productivity. For them, productivity may be a matter of getting rid of a 10 year-old piece of equipment and replacing it with a three year-old piece of equipment. It is very different from trying to focus on cutting-edge new technology. There is nothing wrong with that, but if we want to deal with the productivity problem we had better start focusing on where the problem is. I recommend that very much to the Government.

All of that comes together and cumulates in our low growth rate. Yes, we have limped along with a low growth rate for many years, but frankly that is nothing to celebrate. The OBR anticipates that the good news will be that it will rise to about 1.5% in the medium term. Some of that may be undermined. The Purchasing Managers’ Index is showing a sharp drop in business confidence. We know from Ernst & Young that in reaction to potential Brexit at least £1 trillion in financial assets have already been moved to the EU 27 and people do not intend to bring them back in any circumstances. Ernst & Young has also confirmed that since March it has seen a steady increase in financial firms publicly committing to move people, assets and operations to the EU 27. When Ernst & Young reports, it is not giving us confidential information, only publicly declared information, so we know the problem is far more fundamental.

I challenge the Minister on his rosy description of additional funding for public services. Every public service seems to be falling apart, whether we are talking about schools, prisons, social care, the NHS or the welfare system with more children in poverty. We have some marginal spending increases starting to come through in the autumn, but it will take a long time even to catch up on that degree of damage and to get a turnaround, given the cuts which, particularly in the past few years, no longer attacked fat but got well into muscle and bone. I believe that there is wide demand to see something far more radical to bring public services up to the quality that we think is necessary.

I repeat my question earlier: for goodness’ sake, will the Government please take the borrowing for investment in infrastructure out of their deficit calculation? It had been out of the deficit calculation, but it was brought back in by George Osborne in 2015 for reasons that no one has ever been able to explain to me. It distorts the numbers, because obviously when interest rates are low you borrow to build infrastructure and treat it in a very different way, as capital expenditure, from day-to-day revenue spend. Indeed, if we had not had infrastructure in there, we would have been lighter on the public-spending numbers as well. Coming along with all of this we have the fourth industrial revolution, so the need to ramp up that investment in a very wide range of infrastructure is exceptionally acute.

We are in something of a moment of economic depression. This might be the calm before the storm, but in reality it is Brexit that will set the context, and I hope for goodness’ sake that we manage to make sure that we do not let that destroy our hard-won economy.

My Lords, I want to make a comment and ask a question of my noble friend. The comment—actually, I suppose it too is a question—is: is it not ironic that Britain never wished to join the single currency, yet we are probably the closest aligned to the Maastricht criteria that were set in 1992?

My question for my noble friend is as follows. The Government have been fined substantial sums of money over the years for late payments of the single farm payment and countryside stewardship schemes under the common agricultural policy. Only yesterday, the Rural Payments Agency announced that it is going to make bridging payments for the 2018 basic payment scheme claims and the countryside stewardship claims for 2018 advance payments. As we leave the EU and presumably will no longer face fines for late payments of farm support—in so far as they will continue to exist—what will the mechanism be, if Defra fails to ensure that the RPA makes the payments on time, to ensure that the payments are made in as timely a fashion as possible?

My Lords, as we look forward, it is increasingly difficult to match our view of the future macro economy with the micro economy. I would like to relate this to freedom of movement. Either it is true that a lot of the economy of the south-east is heavily involved in freedom of movement in Europe or it is not. In so far as it is true, everyone is holding their breath at the moment.

I shall give three or four examples of what happens at the moment. A fitter from Barnsley can work freely in Antwerp. A doctor from Guildford is able to work in Paris, her medical qualifications being automatically recognised. Estonian software coders can work in London. Retired teachers from Bromsgrove are able to live in Brittany and receive a pension. An oil engineer from Bergen can establish a business in Aberdeen. Lorry drivers from Wigan can deliver goods across the continent without the need for international driving permits. Injured in Malta, a holidaymaker from Belfast will have their hospital treatment covered by the NHS. Lastly—a subject close to the heart of the noble Baroness, Lady Bull—a violinist from London or Leipzig can catch a plane at short notice and work in either the next day.

I find it very difficult to know about the next few months, as we postpone the final decision and think about how freedom-of-movement issues relate to the other agenda. This is a problem of uncertainty. I ask the Minister to flag up the fact that we really need to have a cockshy at some of the key questions that have yet to be decided under the heading of freedom of movement. We know something about the social chapter of the Maastricht treaty and workers’ rights. We even know something about the way in which we can redistribute the macro picture from London to Lancashire, as it were—where I come from originally—so that savings on the EU budget might be redistributed more towards the Midlands, the north of England and so on.

I find it important to get some micro, as well as macro, thinking into these sorts of exercises in the Treasury. Otherwise, we might find that people are working on divergent assumptions about how this freedom of movement thing will work out. I cannot believe what some people in my own party say. It is not the leader’s policy, but there are some people who think we can just wave a magic wand and all the examples I have given will disappear and there will be no problem. Surely that cannot be the case. I think every cup of coffee I drink in London is served by somebody from Estonia. All of this relates to the economy. Will the Minister flag up how we will deal with this, as well as looking at the customs union and so on? That is very important, but it is not the only card game in town.

My Lords, I want to pick up on a point that the noble Baroness, Lady Kramer, made about financial services. I asked a Written Question on 27 February regarding what assessment the Government had made of the reduction in tax take that would arise from the actions taken by financial services businesses to enable their businesses to operate after Brexit.

The Minister was kind enough to respond, saying:

“The Government has published a detailed set of economic analysis on the long-term impacts of EU exit on the UK economy, its sectors, nations and regions and the public finances. The Chancellor will also be providing the independent OBR’s updated fiscal and economic forecasts at the Spring Statement on 13th March”.

In anticipation of finding the answer to my question, I ploughed through these analyses. You can imagine my surprise and disappointment when I was unable to find anything that answered it. I must have missed something, I assume.

This is important. The financial services industry is a significant part of our tax base, contributing around £72 billion or 12% of the total annually. My question is not theoretical; I am asking about actions that have already been taken. A study by New Financial has identified 275 firms that have stated that they are moving parts of their businesses out of the country. Only a small number of those firms have said what they are moving, but already the figures are very large: banks have moved or are moving some £800 billion in assets from the UK to the EU, insurance firms are moving tens of billions in assets, and asset managers have transferred more than £65 billion in funds. That £800 billion in bank assets is nearly 10% of the UK banking system. The final tally is likely to be much higher; there are suggestions that more than £1.5 trillion in assets has already been moved.

Studies also suggest that at least 7,000 financial services jobs have already been moved. That does not include the new jobs created in other countries that would have been created here but for Brexit. New Financial expects the headline numbers to increase significantly in the next few years as local regulators across the EU require firms to increase the substance of their local operations. They have also identified hundreds of firms that they think will have to move something somewhere to retain access to EU markets, but which have not yet done so.

My Lords, I will follow up briefly on the comments made by the noble Lord, Lord Lea, a moment ago on the performance of the economy and the existing disparity. The efficiency of an economy clearly depends on overall capacity, capacity utilisation and labour productivity and efficiency. When we have as great a disparity as we have at present between the economy of south-east England and the economy elsewhere, clearly, diseconomies will happen. These could well be seriously exacerbated by the consequences of a no-deal Brexit. We are particularly concerned about sectors such as the Welsh tourist industry, where much of the labour is imported from continental Europe. If there is a cut-off it could affect our capacity to deliver.

There clearly needs to be a strategy for the post-Brexit period that addresses the efficiency of the overall economy but also that disparity. Bringing up the poorer-performing areas nearer to the average would clearly be in everybody’s interest. In that context, another factor for us in Wales is the loss of the EU structural funds, which will bite after 2020. That is a very serious loss. We are still waiting for a categorical confirmation from the Government that there will be a full replacement of that, not just to 2020 but ongoing thereafter. Without it, it will be impossible to get the economic restructuring we need.