Pre-Budget Report 2006

My Lords, this is the second time in a week that I have unexpectedly followed the Minister. I will again choose specific topics rather than try to comprehensively cover the field. I used to be what might be described as a Budget and pre-Budget nerd or weirdo, in that, following my time in the Treasury, when I used to be intimate with all the documents, I gave myself the challenge of reading the Budget Statement and many other documents before midnight at the end of the day they were published. I have long since ceased to be such a nerd or weirdo. One of the reasons is that the endless detail in the PBR needs to be put in context. I suspect that it washes over everyone else in the same way as it does over me. For example, I do not believe the ““golden rules”” are now given much credibility; the dates of the cycle have clearly been shifted to make those rules fit, and we know that substantial elements of what used to be known as ““government borrowing””, which would include Network Rail and the ever-accumulating off-balance-sheet financing of the PFIs, are not included under the golden rules. I have to admit that as I listen to the relentless, grinding recital of statistics from the Chancellor as he makes his Budget Statement, it now induces sleep or the mind wanders elsewhere—particularly as I realise that he is often repeating figures he has given earlier so that he can present them as new. The Institutefor Fiscal Studies, for example, said that, of the£36 billion education budget that he announced, only £100 million was actually new. As we know, he very often gives five-year figures to make them look larger. I shall make one or two observations on the macroeconomic scene before I come to two specific topics, where I hope to support the Government’s approach and offer some constructive suggestions. I shall start with government spending, on which the Minister has spent so much of his time. I am concerned that, having got it to realistic levels as a proportion of GDP in the late 1980s, and again in the late 1990s, government spending is becoming an increasing proportion of GDP again. It is still too high, although there is a noticeable and inevitable slowdown in the figures ahead. I accept that, between 1997 and 2000, the Government were prudent in their spending, but since 2000 they have been all too inclined to throw money at everything in the belief that it will achieve results. Since 2000, spending in nominal terms has risen by an average of7 per cent per year, well in excess of economic growth, and without questioning value for money. I think Iam right in saying that the Government have now spent £7 billion on consultants. Much money has been wasted—my noble friend Lord James could give many examples of that—some of it through sheer government incompetence, such as the very large sum that we are now paying in EU fines for errors connected with the Rural Payments Agency, or simply through the Government not achieving the results that they had hoped because they have not introduced appropriate reforms, as in the NHS. The result is that taxes are now too high. Theyhave risen substantially in the corporate sector, at a time when many of our competitors are reducing corporation tax to rates well below ours. We were not in that situation a few years ago: indeed, the opposite applied. Our taxes are too high for individuals. As the Governor of the Bank of England recently pointed out, the increased taxation for individuals is one of the contributory factors to the squeeze on spending which we can now anticipate. The Chancellor has run out of ideas for stealth taxes, but he must find scope for reducing the burden of taxation and regulations and for simplifying them. It is significant that Tolley’s tax handbook was 4,555 pages long in 1997—one might well have considered that too many—and it now has 9,841. There is no sign of any of these matters in this year’s Pre-Budget Report. It is interesting that, in each of the past three years, the level of borrowing anticipated in the PBR, and the actual outcome, was a good deal higher than predicted in the Budget of that year. We are now seeing substantial increases this year. I grant that the low inflation has certainly been a success so far, but there are signs of upward creep. The latest Bank of England inflation report in November concluded: "““Overall the risks to growth and inflation are judged to be broadly balanced though as in August there is greater than usual uncertainty over the outlook for inflation””." I often wonder about the extent to which our low inflation has been assisted by two key factors. I would like to see a proper analysis of this. The Minister referred to competition from China, India and other developing countries. The reduced price of many imported products that are key ingredients of everyone’s spending has been a major contributory factor in keeping inflation low. I notice that the Bank of England’s latest quarterly bulletin, in referring to this factor without quantifying it, said that that beneficial tailwind had waned somewhat in the past couple of years. If that beneficial impact falls from its present level, and even reverses, we could see an upward pressure on inflation. Equally, immigrant workers, particularly from former Soviet Union territories now in the EU, have contributed substantially to keeping pay levels low in certain parts of the country, especially in the south-east and even in East Anglia, and to keeping that area of inflation under control. I sometimes wonder whether our economy is not benefiting from the productivity improvements of other countries and of immigrants to this country. That may not last. That leads me to what I think is one of the greatest concerns of all. Productivity is one of our biggest worries. Our productivity growth has fallen. In 1992-97, productivity improvement was 2.6 per cent a year. It was 2.1 per cent a year between 1997 and 2001—already declining. Since 2001 it has been a mere 1.5 per cent a year. It is no wonder that the World Economic Forum shows us falling from seventh place in 1997 to 13th place in 2005 in terms of competitive conditions. That is an extremely worrying trend. On the macroeconomic situation, we have seen enormous and significant contributions to growth and the feel-good factor from the City of London and from financial and various other services. That is certainly reflected in City bonuses at the moment. Indeed, the Bill, to which we have just given Report clearance and which the Minister knows I wholly support, is designed entirely to ensure that we remain predominantly the leading financial centre in the world. I wonder whether to some extent the feel-good factor prevalent in London is contributed to by, on the one hand, the success of the City, the substantial bonuses and wealthy people coming here and, on the other, the contribution of other immigrants to keeping the costs of services low. I wonder whether that feel-good factor extends as much to the rest of the country. I want briefly to share a concern to which I hope we can return on another occasion. There are increasing warnings on the level of highly leveraged debt backing European companies, the majority of which is held by private equity-owned businesses. In the past two weeks, there have been three warnings. The first was from Sir John Gieve, Deputy Governor of the Bank of England, on the danger that hedge funds and equity groups are over-borrowing. Secondly, Standard & Poor’s drew attention to the fact that the average debt-payment burden of outstanding leveraged buy-out deals is now four times above the normal safe level. Thirdly, today a private equity professional has drawn attention to the fact that debt-driven private equity houses face a tenfold increase in corporate defaults, which, he believes, will come soon. While this is a subject for later debate, if some of those warnings come true, the financial sector will face a very different situation. I now turn to two topics on which I wish to be constructive. First, the Eddington report contained two key findings that are highly related to what I said about growth and productivity. One finding was that, "““in mature economies with well-developed transport networks it is transport constraints that are most likely to impact upon a nation’s productivity and competitiveness””." Another states: "““Eliminating existing congestion on the road network would be worth some £7-8 billion of GDP per annum””." As a former Secretary of State for Transport I strongly support the report’s recommendations on road pricing. I could not do otherwise, because in May 1993 I published a document, Paying for Better Motorways, which, if I may say so, covered all the arguments much more succinctly than the Eddington report and others that I have seen, but the arguments were compelling. My own concern was that one of my officials suggested that motorway tolls should be known as motorway access charges, or ““macs””, in the same way as teacher training days in schools became known as ““Baker days””. I was not sure that I wanted to be associated with motorway charging in quite that way, but we set out all the arguments in our report. I wish to make three points. First, I regret the lack of progress since then. We have lacked political courage, and I am concerned that the Eddington report talks about the introduction of road-pricing within the next 10 years. We cannot wait that long. I recognise that there is a technology requirement but, having looked at this matter carefully in 1993 and gone to the United States, Norway and elsewhere to do so, I think it is clear that the technology could have been developed in the 10 years since then. I hope that we can get on with it. Secondly, as with identity cards, in road-pricing the Government are destroying a good idea in principle by being over-complex, which could lead to excessive costs. It would be better to focus on motorways and not to try to be too sophisticated by introducing a sensitive road pricing system on many other roads in the UK. That, I believe, would also have a serious effect on rural areas. It can be done on motorways. I constantly have to make the point to people who live in urban areas, where there is alternative public transport, that there is no such alternative in rural areas. I do not see the need for road pricing in rural areas, where the congestion is not the same and alternative transport is not available. Thirdly—and I emphasise this—it is vital that we use the proceeds for motorway improvements. During the Prescott era, we saw a substantial decline in investment in roads infrastructure. We all know that there are demands for bypasses, and so on, and we will never be able to entertain them all in the short term. If we are to get motorway improvements at the same time as the advantages of motorway tolling, which can be adjusted according to times of congestion in different periods of the day, the proceeds of tolling must be hypothecated to the improvement of the motorways. In Paying for Better Motorways in 1993 we made precisely that point and gave a commitment that, if charging were introduced, it would provide another source of finance for improving roads. That is the only way that it can be made acceptable to the public. My final comments refer to the Barker report. I shall be brief but hope that we can return to the issue another time. It is impressive how the delays in the processes of our planning system lead to much higher costs for so many businesses and for our infrastructure generally. It is significant that that is one of the main obstacles foreseen by people who want to invest inwardly, and it is increasingly seen as a burden on businesses. I do not have time to go into the detail, but many improvements can be made in the process without diminishing the opportunities for democratic accountability and for the public tomake their views known. I very much hope thatthe Government will pursue with sufficient speed the appropriate recommendations on processes in the Barker report.