Pre-Budget Report 2006

My Lords, this is the last time we will have an opportunity to discuss a Pre-Budget Report prepared by the current Chancellor, so it is a good time to assess how he has done on the macroeconomy and public finances, as well as on some of the specific issues raised by this year’s Pre-Budget Report itself. On the macroeconomy, the Chancellor’s decision on day one of this Government to adopt Liberal Democrat policy and make the Bank of England independent was the most important that he has made as Chancellor, as most noble Lords have said. It has worked well and more than any other single decision has given the stability and certainty of policy direction to keep inflation down and stimulate growth. Your Lordships’ Select Committee on Economic Affairs has once again, in its report today, criticised the way in which the Chancellor makes appointments to the Monetary Policy Committee, which at its most charitable could be called eccentric, at least in the administrative procedures that are adopted. I absolutely agree with that, but despite that wrinkle in the system the MPC has clearly worked well. As far as the growth projections are concerned, for the next couple of years the Chancellor’s projections look a bit on the high side, but as always the outcome will depend in large measure on growth in the US, where the picture is mildly discouraging, and in Europe, where it is mildly encouraging. The noble Lord, Lord Barnett, in particular, discussed why the Chancellor felt able to raise the trend rate of growth from 2.5 per cent to 2.75 per cent. I believe that the single biggest reason is the projected growth in the population, for which the single biggest reason is the large increase in net migration into the UK. In the past couple of years, we have seen possibly as many as 600,000 migrants coming into the UK from the former eastern bloc and elsewhere. Although that level is set to fall, all the projections show that net migration is set to remain relatively high, at over 150,000 per year, way into the future. In some respects, that is good news. In many industries and regions, migration has met labour shortages, both at the top end of the scale—I believe that 30 per cent of doctors in the UK were born outside the UK—and the bottom end of the scale, where almost one-fifth of those employed in the leisure services industry and tourism were born outside the UK. It has held wage growth in check, as the noble Lord, Lord Barnett, said. At the same time, however, an underlying weakness has enabled and encouraged that high level of migration to take place—the fact that there is still a large proportion of economically inactive adults. Of those people and those with low-skilled jobs, we find that some 20 per cent do not have the literacy and numeracy levels that we expect of 11 year-olds. It is a sad indictment of the Government, who have placed education absolutely at the forefront of their thinking, that they have fallen so far short of ensuring that all young adults have the basic tools of employability. It is equally depressing that during the Government’s lifetime the number of young people studying the core disciplines of maths, science and modern languages has fallen in both relative and absolute terms despite the huge amount of extra funding that has gone into the education system. While I hope that the Government will be successful and that, by 2020, 90 per cent of adults will have the equivalent of five GSCE grades A to C, experience over the past 10 years suggests that, far from that being too far in the distance as a target, frankly it is a pipe dream on current policies. The Government missed a huge opportunity to tackle the problem by not accepting the Tomlinson report on vocational education. One hopes that they do not miss another opportunity by not implementing the Leitch report, which, as far as it goes, should be warmly welcomed. The Chancellor established the golden rule as the centrepiece of his strategy for public finances. It is just possible that the rule has had a restraining influence on the Chancellor’s natural spending habits, but it now looks pretty threadbare, partly because it is constantly revised, which undermines credibility whether or not the revisions are right, and partly because there is a problem with a rule that looks at cycles of 10 years, as in most cases Governments do not neatly span 10-year cycles. If a Government coming in in years nine and 10 of a 10-year cycle were faced with the need severely to curb public expenditure just to meet the golden rule, would they do so? I think not. Therefore, the rule has serious flaws. If we really think that the rule is of fundamental importance—I am not sure that there is a consensus that it is as important as, say, the rule that underpins the MPC—the logical step would be, as the noble Lord, Lord Northbrook, said, to establish an independent body along the lines of the MPC to determine where we are on the cycle and to set limits on what the Government can spend on current expenditure in any year. I am not sure that Prime Minister Brown will be any keener on that than Chancellor Brown has been. I cannot, unfortunately, accept the rosy picture of the public finances painted by the noble Lord, Lord Sheldon, because in this year’s PBR, as in last year’s, and as in the Budget, we see taxes rise to fill a hole in the public finances. I shall come to the specifics in a moment, but the overall position is absolutely clear. In recent years, we have seen an unsustainable surge in spending, which will have to be severely reined in as soon as the Chancellor is safely out of No. 11. Nothing demonstrates this better than education, which we are told will be protected in next year’s public spending round. The annual growth in schools’ expenditure between 1997 and 2007 is 16.3 per cent. By comparison, for 2007-10 it is expected to be4.9 per cent. This is not a sensible approach. Stop-go spending on public services, even on a rising trend, is as inefficient and demoralising as it is for the entire economy. I suspect that the crunch on public spending will come in negotiations on public sector pay, in which the Chancellor appears committed to forcing through a real-terms pay cut. How ironic that this Chancellor, who has been so keen to court the unions to further his career up to this point, is set as Prime Minister to face a confrontation with them as one of his first challenges in that office. In addition, the Chancellor as Prime Minister will be faced with a number of open-ended public expenditure commitments—the continuing Afghan and Iraq wars; defence procurement contracts such as the Eurofighter and Trident; new nuclear power; and ID cards—none of which he seems keen to reverse. With these commitments, even if he is able to keep his pledges on education, the outlook for other key public spending commitments—on pensions, policing and hospitals, for example—looks pretty bleak. The major tax change in the PBR was, of course, the increase in air passenger duties as part of the Chancellor’s plans to tackle climate change. However, the form of the air passenger duty is highly inefficient as a means of curbing aircraft greenhouse gases, because it takes no account of whether the aircraft is empty or full and it excludes freight altogether. It is very difficult to resist drawing the conclusion that this duty increase was a product of fiscal necessity, not of environmental concern. The noble Lord, Lord Barnett, discussed the concept of the green budget. I believe that the phrase was first used not in relation to the environment at all but to describe a provisional budget with a number of options for a full budget. This certainly is not a green budget, although the noble Lord, Lord Barnett, sets too high a bar on the potential effectiveness and value of green taxes. In my view, to be effective a tax increase does not have to completely destroy the activity that is being taxed. If green taxes on aircraft, for example, merely slow or stop growth in air travel, that would be a major achievement. One has to accept that taxes can have a valuable impact without totally destroying the activity on which they are imposed. The other environmental measures in the Pre-Budget Report are pitiful. The total financial consequence of all the other environmental announcements was£5 million in 2007-08 and literally zero in each of the following years. On the potentially vital issue of carbon capture and storage, the Chancellor announced a study to be undertaken with Norway. Frankly, we do not need further study; we need financial commitment to demonstration projects, in which power generation companies are champing at the bit to participate. When we discussed the Stern report during the debate on the Queen’s Speech, and in today’s debate, the noble Lords, Lord Barnett, Lord Sheldon and Lord Peston, raised the issue of whether we should be taking a lead on global warming. They pointed out that, given that the UK accounts for only a small proportion of total greenhouse gases, we could not make much difference, either directly or indirectly, in anything that we did, and that, therefore, we should not seek to take a lead. I have two points to make on that. First, since the Queen’s Speech debate, I have had a number of conversations with representatives of major environmental players, including the former environment Minister of Brazil. It was clear to me that a lead taken by Britain would have an impact way beyond its immediate effects. The whole world knows that we must act on global warming, but it looks to the countries with the longest track record of environmental pollution—and we are the leaders in that field—to set a practical and moral lead. Secondly, I compare tackling global warming to tackling global poverty. The noble Lords who argued that we should not take a lead on global warming have, over the years, been keen supporters of UK funding for international development. Yet while there is a moral case for supporting action against both climate change and poverty, not least because broadly the same people suffer most—notably the poor in Africa and elsewhere—we will be afflicted much worse by global warming. As the noble Lord, Lord Hunt, pointed out, we are not just speaking of minor costs. He spoke about the inundation of Essex, which a number of noble Lords seemed to find mildly amusing. Perhaps the prospect of having to spend billions of pounds over a sustained period to stop the inundation of London will focus people’s minds more clearly. Extreme poverty makes us uncomfortable, but extreme global warming would make us poor. My final thought on this Pre-Budget Report, as it wings its way to Brussels, is that this Chancellor has developed to an extraordinary extent the concept of publishing at the time of the Pre-Budget Report as wide a range of material as the Treasury printing presses can produce. I suspect that this Pre-Budget Report broke all records, although I have not weighed it. Perhaps the Minister could pass on to the Chancellor one suggestion to make to his successor—to produce over a slightly more digestible period the myriad reports that the Treasury now deems necessary for the effective running of the economy, so that noble Lords, the Commission and the country at large can take more note of them.