My Lords, I continue with the theme excellently elaborated by my noble friend. Treasury Ministers are often said to be like drivers who have to steer the economy by looking in the rear-view mirror, reacting after the event to data that are slow to emerge, to developments that take time to assess and signals that are difficult to distinguish. Those data are contradictory, developments are inconsistent and signals blend in with the background, like closet speed cameras set up to catch unwary motorists. Some say that the situation today is made doubly difficult by the fog of uncertainty in which we are shrouded by the result of the European Union referendum. They say that Britain’s new Prime Minister is not only First Lord of the Treasury, she is also a lady in waiting—waiting for the smoke to clear from the Brexit battlefield. Only then, they argue, will the Government be able to judge just how much damage the referendum result has done to Britain’s economic prospects and how Ministers should respond.
Yes, we face unusual uncertainty today because of Brexit, and many people warned about that; but we are far from flying blind. After all, it was the Prime Minister who was the first to acknowledge that the economy was in trouble and way off the course charted for it by the outgoing Chancellor. Even before taking over at No. 10, she declared that the Government’s target of a budget surplus in 2020 was a dead duck. When talking about the Cameron Government’s budget strategy, she sounded like Cinderella’s stepmother contemplating a child to whom she feels no commitment and for whom she feels no affection. She was clearly fed up with failure.
The reason why the Government have had to abandon their 2020 budget surplus is obvious. It is the same thing that has made them miss every such target since 2010—poor economic growth brought on by the tightest fiscal squeeze among the advanced economies. It is a budget squeeze that the former Chancellor used to boast about and that he planned to continue for the next four years. That was in the days before he swapped the hard hat and high-visibility jacket for a Harry Potter invisibility cloak—presumably it was either that or “Strictly” for him. His squeeze is one that means you fall short of your growth targets causing tax revenue to drop and your debt and deficit targets to go for a burton. Then you demand more spending cuts to reduce the role of the state and bring down government borrowing, so the downward spiral continues on and on. Surely, it was completely clear well before the referendum result that the UK economy was running out of steam. It grew slower last year in 2015 than the year before. It is growing slower still this year and the referendum result means even slower growth next year. The economy has become like the farmer who is always doing worse than last year but better than next year.
Last November the Bank of England expected the economy to grow by 2.6% in 2017. In February it cut that forecast to 2.3% and in August it was cut again to only 0.8%. Independent economists agree that the Treasury’s most recent survey of independent forecasts for GDP growth showed an average forecast for 2017 of only 0.7%. Most of those forecasts were made after
the EU referendum. The National Institute for Economic and Social Research reckons there is a 50:50 chance of recession and that Britain is,
“in the midst of a slowdown”.
The Bank of England Monetary Policy Committee was admirably quick to take action to forestall such a slowdown from turning into a slump, but as my noble friend Lord Darling said, there are limits to the effectiveness of monetary action alone when interest rates are already so close to zero. What is needed is complementary action on the fiscal front to give the economy a sharp boost, ratchet up Britain’s growth rate, and bring the public finances back into balance by doing so.
The IMF is calling on Governments to use fiscal policy to stimulate their economies and not rely on monetary measures alone, and so is the US Treasury. Japan has shown the way. The Japanese Government have launched a £33 billion fiscal boost that includes extra infrastructure investment, help for small and medium-sized businesses hit by uncertainty due to Brexit and higher welfare spending, notably childcare subsidies and cash payments to 22 million low-income households. That is the kind of action that this Government need to take for Britain too. The need is pressing, yet we are not even half way from the EU referendum in June to the new Chancellor’s Autumn Statement when he says he may reset fiscal policy. His decision to delay that Statement until 23 November shows what I think is a reckless lack of urgency in tackling the slowdown.
Abandoning the budget surplus target for 2020 says nothing about easing the squeeze between 2017 and 2019. Paul Johnson of the Institute for Fiscal Studies has pointed out that simply dropping the 2020 surplus target will not mean the end of austerity. It just means that it will go on for longer, potentially until well into the 2020s. The economy is running out of momentum now. Productivity gains have come close to a dead stop. The longer the Chancellor waits, the harder it will become to break out of the vicious circle and breathe fresh life back into an economy that is in dire need of the help that only he can provide.
Britain urgently needs a public investment boost from the Government, otherwise the UK economy will remain trapped in a slow growth/no growth equilibrium that could last for years. The truth is that far from being a successful Chancellor, George Osborne fell behind schedule on his debt targets and went significantly over budget on borrowing, where he became a serial offender. In this past financial year, 2015-16, he delivered a £76 billion borrowing figure, exceeding the figure forecast by my noble friend Lord Darling in his final Labour Budget in March 2010 when he planned to bring down Britain’s budget deficit over the following Parliament to £74 billion in 2014-15.
Yet it was precisely Labour’s £74 billion level of planned borrowing that the new Tory Chancellor condemned when he took over at the Treasury. It would take Britain close to “the brink of bankruptcy”, he fulminated, insisting that Labour could not be trusted. Instead he replaced it in June 2010 with new tougher targets, halving Labour’s planned borrowing in 2014-15 from £74 billion to £37 billion and setting
himself a tight borrowing target of £20 billion for 2015-16. Both of those targets were missed by a mile. By March 2016, debt was £275 billion above George Osborne’s target and the 2015-16 budget deficit was £56 billion higher than he had planned in 2010. So much for the credibility of his “long-term economic plan”.
All his scaremongering about Britain becoming another Greece also proved to be nonsense. Just like under the last Labour Chancellor, my noble friend Lord Darling, even during the banking crisis Britain had no problem financing its budget deficit and the yield on UK government debt dropped to an all-time low of 1.22% in February this year. The Chancellor kept crying wolf while the bond market kept behaving more like Britain’s best friend.
The rate of deficit reduction should be linked to the pace of economic recovery and the Government need to take vigorous fiscal action to promote faster growth with an immediate boost to public investment aimed at housebuilding, infrastructure, education and skills, and low-carbon investment. Looking further ahead, longer life expectancy and increasing demand for what the American management writer Peter Drucker termed “knowledge workers” mean an expanding role for the state in education, pensions and health services, especially elderly care. The Government’s determination to shrink the role of the state is taking our society in entirely the wrong direction. We need to renew the case for a balance between private enterprise and public provision. Jacob Hacker and Paul Pierson say in their 2016 study of the part played by government in helping advanced societies to flourish that:
“The mixed economy remains a spectacular achievement … By combining the power of markets with a strong dose of public authority, we achieved unprecedented prosperity”.
Growing inequality must also be reversed because the real incomes of not only working-class but also middle-class Britons have fallen badly behind, with only the top 10% benefiting from the neoliberal economic era.
Centrist US economic commentator Rana Foroohar’s 2016 book, Makers and Takers, argued that Adam Smith’s vision of market capitalism had broken. Markets, she showed, no longer supported the economy and have delivered only divisive and slower than normal growth, where the very rich got richer and the rest trailed behind. She said:
“Market capitalism was set up to funnel worker savings into new businesses via the financial system. But only 15 per cent of the capital in financial institutions today goes toward that goal—the rest exists in a closed loop of trading and speculation … In the US, finance doubled in size since the 1970s, and now makes up 7 per cent of the economy and takes a quarter of all corporate profits, more than double what it did back then. Yet it creates only 4 per cent of all jobs. Similar figures hold true for the UK”.
Where both a fast-ageing society and a chronic housing shortage demand more not less government, the British state continues to be shrunk by this dogmatic Government’s policy. Our public services are being cut and outsourced. Job insecurity, zero-hours contracts and low pay are rife. Occupational pensions are expiring. Skills lag abysmally. Productivity is embarrassingly low and the trade deficit both embarrassingly and historically high. Frankly, this Finance Bill is at best irrelevant and at worst totally counterproductive to
addressing Britain’s deep-seated problems. The Government must radically change course and offer an alternative to such systemic failure.
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