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Lord Howe of Aberavon: My Lords, I am prepared to acknowledge, as we must, that the Chancellor is entitled to a modest degree of self-satisfaction for the most immediate outlook. He is, indeed, probably the first Labour Chancellor ever to have been in the position of introducing a pre-election Budget in which modest short-term generosity was compatible with responsible economic guidelines. I believe that no other previous Labour Chancellor has had that opportunity. That is for a reason that has already been mentioned.
Therefore, to that extent, the Chancellor has done okay so far and, in some aspects, entirely well. He has recognised the need for strict control of monetary policy, and he has taken the step, which many of his predecessors would have liked to take, of giving more responsibility for that to the Bank of England. That has brought economic benefit and also political relief for the Chancellor because that matter is now being handled by another department. It was a logical consequence of our more tentative moves in that direction.
Thus far, he has also followed a reasonably disciplined fiscal policy. I do not mean disciplined in every respect but at least in the sense of maintaining a balance. He has followed, although by a different name, the medium term financial strategy which I was derided for pronouncing in 1980. He has endeavoured to follow the same guidelines, but he has done so in two rather curious ways.
During the first part of his reign, he stuck to our published spending plans for two years. Then, almost simultaneously, he accelerated it. We have seen a substantial growth in planned public expenditure accompanied--although, again, not from the outset--by a steady growth in the tax burden. As the noble Lord, Lord Taverne, said, for a long time that growth was not acknowledged and not disclosed. However, in the end, they came clean and acknowledged it. I shall not go over the components that made that up.
The basis for my real worry is concern about the future. Those spending instincts are developing into spending plans, notably as outlined in the Budget speech. Moreover, they are not only outlined; they are proudly proclaimed. I am worried by the tendency of the Chancellor in that context. Although he speaks,
He is coming close to catching the occupational disease of economic managers, not excluding the chairmen of reserve banks as well as finance Ministers, who have come to believe that at least in their own country, whatever may happen elsewhere, they have abolished the economic cycle. I have to confess that even ex-Chancellors sometimes succumb to that illness. By the end of the 1980s I had been away from the Treasury for five years, and, even then, I was making speeches on the other side of the world praising the success of our economy in terms that made it sound as though we had learned to walk upon the water.
In the catalogue of what he there condemns, what is the difference between "unaffordable tax cuts" and unaffordable spending programmes? That is the real worry. Reversing spending would be much more painful and much more disruptive than reversing tax cuts. As the noble Lord, Lord Taverne, pointed out, that is the importance of the warning clauses in the advice from the International Monetary Fund. That body said:
Of course, that advice has implications. If we are seeking to say that we can enhance public services without raising taxes and without having unduly extravagant public spending plans, then we as a nation must begin to contemplate some aspects of the European model. European countries, for example, spend on health approximately half as much again as we do as a percentage of GDP. That additional half comes from the private sector. Therefore, it is a model that we must certainly examine. It has nothing to do with privatisation of the health service but concerns looking elsewhere to raise the finance to improve the services as we want.
Those downside risks are not to be discounted when we look at Japan, which has constant and chronic problems, when we look at the hazards in the United States, and even when we consider the hazards of foot and mouth disease. I should not like to be in the Treasury now, counting upon a secure economic future on which to build the increasingly extravagant spending plans foreshadowed in the Chancellor's Budget. That is the real risk that we face. One can get carried away. There is no job more exhilarating, with its public acclaim and success, than that of the inhabitant of No. 11. And there is no acclaim more dangerous for those who hold that office.
Lord Haskel: My Lords, I congratulate the noble Lord, Lord Strathclyde, on having selected tax as the topic for debate today. There is no better topic than tax to illustrate the contrast between a Tory administration and a Labour administration. During the Tory administration perhaps the rich paid less tax, but the poor certainly paid more. As a result, a quarter of our children were born into poverty and half of our pensioners lived in poverty. But, by careful targeting, four years of Labour administration have seen 1 million children lifted out of poverty--170,000 in this Budget alone. Next month, we shall see most pensioners lifted out of poverty, too.
During the Tory administration, the tax and benefits system condemned millions of people to the poverty trap and the low pay trap. By careful management of the tax and benefits system, during four years of Labour administration steps have been taken to destroy those traps and to make work pay. Despite that, the gap between the richest and the poorest deciles of our population is still widening. So much for the claim that increased taxes are destroying initiative.
There was a time when the Tory Party cared about the poor as well as the rich, but the single-minded crusade to cut tax benefits only the rich. The success of my right honourable friend the Chancellor is not only that has he recognised the plight of the working poor and remedied their situation but also that he has seen to it that the better-off can benefit from their hard work and entrepreneurial activity. He did that by bringing the tax and benefits systems together. That is a sensible move because it stops the curious situation in which the Government hand out benefits with one hand and take them away with the other through tax.
Families claiming the working families' tax credit are £30 better off compared with those who used to claim family credit. Nearly 300,000 more families claim WFTC than claimed family credit. Families with children will have their taxes cut by up to £20 per week in the year of the child's birth, and by £10 a week from the second year. That means a tax cut--I stress that word--for around 5 million families. In any case, a family with children and with someone in full-time work will be guaranteed a minimum income of £225 a week from October this year.
It is that personal tax system that makes work pay and gets people out of the poverty trap. The minimum wage means that people will get fair pay. Maternity and paternity pay mean that mothers and fathers will be able to spend more time at home with their young children. That shows that the tax and benefits system encourages family life. I am surprised that noble Lords opposite do not welcome that; I have often heard them voicing support for family life.
To claim that we should pay less tax because we have a surplus is too glib. We should not forget that we also have large debts on which we are paying interest. Most taxpayers would agree to give priority to paying off their debts. That would save us from repeating the mistakes of the past and returning to the stop-go system which has been so damaging to our economy. By paying off debt, the Chancellor can smooth out the economic cycle by dealing with fiscal policy over the entire cycle--in good times and in bad. Of course, the cycle will not be abolished, as the noble Lord, Lord Strathclyde, seemed to suggest, but it can be smoothed out. That is what my right honourable friend the Chancellor is doing.
That is why I think that warnings from the IMF about planned levels of public spending are overstated. They do not fully take into account the fact that the Government have cut public sector net borrowing by £44 billion since 1996-97. That enables us to balance the budget over the cycle and in good times and bad. I wonder about the report. According to the Financial Times, the dispute between the Treasury and the IMF about how we manage our finances has been going on for some time. The Financial Times tells us that while the IMF staff economists criticised the golden rule, the directors generally praised the UK's economic performance. The IMF staff economists are mainly concerned about the possibility that the Chancellor's public spending plans will push up interest rates. Well, interest rates are a matter for the Monetary Policy Committee. It was interesting to hear the authoritative views of my noble friend Lord Barnett, who is a member of the Bank of England Monetary Policy Committee.
I do not know how the noble Lord, Lord Strathclyde, can claim that we are paying more business taxes than other European countries. We have less tax on corporate income and lower employer social security payments than most of our competitors in the European Union. Our rates are certainly below those of France and Germany. Indeed, the 10p starting rate of corporation tax is the lowest in any major industrialised country. Our VAT rate is also comparatively low and the VAT threshold, at £54,000, is the highest in Europe.
In addition, allowing small companies to benefit from cash accounting in their VAT returns means that their VAT burden is effectively reduced. Small businesses and, soon, larger companies will be able to reduce their tax liability by claiming research and development credit if they invest in new products. So as far as the burden of taxation is concerned, British companies are at the lower end of the scale, which gives us cause for satisfaction.
However, we are also at the lower end of the productivity scale, as the noble Lord, Lord Taverne, reminded us, which gives us cause for worry. Sadly, there appears to be no correlation between tax levels and levels of competitiveness and productivity. Indeed, the opposite seems to be the case. Although our tax levels are well below those of France and Germany, our productivity on average is 20 per cent below theirs. Our future prosperity is not so much a matter of tax, as the noble Lord, Lord Strathclyde, seemed to think, or of the exchange rate, as the noble Lord, Lord Taverne, suggested, but of skills, innovation, investment and competitiveness. We should be concerned about productivity growth, not the level of taxation.
I have to agree with the noble Lord, Lord Taverne, that closing the productivity gap will raise our standard of living. We will achieve that not by cutting taxes and hoping that deprivation, fear and insecurity will create the work-force we require; improving skills and investing in high-quality public services in health and education will produce a work-force which will close that gap. However, fiscal incentives are not enough. Business and industry also have to do their part.
The TUC has got the message. It has developed the Partnership Institute to help firms to raise productivity. Employers' organisations in engineering, steel and other manufacturing sectors have also come together to meet the productivity challenge. I welcome those positive initiatives.
As the right reverend Prelate the Bishop of Hereford reminded us, there is more to managing the economy than simply saving money by cutting taxes. Delivering social justice and sound stewardship are also important, as is raising our standing of living through productivity growth. The Budget meets all of those challenges.
It is now becoming clear that the Government genuinely believe that the state can and should intervene to shape people's lives. They believe that more government is better. They do not accept, as I do, that the lessons from the past are that public intervention is more often than not wasteful and distorted and that freedom and choice depend on containing the state's role and making it as small as possible. That is demonstrated by the projected size of the Government's spending programmes and by the intrusive way in which they have determined their spending and taxation programmes.
I shall start with the facts. Total expenditure--by which I mean current expenditure and investment--is projected to grow by more than 4 per cent in real terms over the next three years, rising from 38.4 per cent of GDP to 41.1 per cent of GDP. I calculate that to be an extra £62 billion at today's prices. How is that growth in spending to be funded? If one goes through the Red Book, it appears that taxes rise by about £40 billion at today's prices. The rest comes from the projected fall in the government surplus, going from a surplus of £16 billion in 1999-2000 to a net borrowing projected of £10 billion in 2003-04. That is a turnaround of £26 billion from surplus to deficit in four years. It contrasts with the picture in the final Budget report of the previous government which showed a growing budget surplus in the early years of this new century.
The Government claim that their last Budget was fiscally neutral and therefore prudent. This misses the point that adding spend to existing plans where spend and taxes are growing faster than GDP necessarily means transferring expenditure from the private sector to the public sector. To reduce the argument to an absurdity, one could double expenditure and taxes and still claim that it was fiscally neutral. Clearly, that would have a major impact on the economy and would not be prudent. The fact is that if expenditure grows faster than GDP, as is planned, that part of the transfer from the private to the public sector not achieved through taxes will have to come through higher interest rates and higher inflation.
In the current circumstances, the Government cannot rely on higher savings to make up for the increased share of GDP appropriated by the Government. The Bank of England issued a quarterly bulletin recently that points out that the savings ratio has already fallen from 10 per cent in 1997 to 3 per cent in the third quarter of 2000. As the Bank of England points out, this is not because there has been an excessive boom in consumption, which the Bank estimates at being fairly stable at around 4 per cent growth a year, but, according to the Bank, it is because of,
This is not a sustainable position. It occurred during a period when public expenditure rises have been buffered by a significant decline in interest payments resulting from the low inflation levels and low interest rates in place when this Government took office and which have worked their way through to the benefit of lower public debt charges.
This pattern of public expenditure growing faster than GDP is clearly unsustainable beyond the short term. More than that, as my noble and learned friend Lord Howe pointed out, it creates clear risks if economic growth falls, if taxes fall and surplus turns to deficit even more rapidly.
Beyond the risks of economic downturn that my noble friend mentioned, one of the other serious risks is if there is an unwelcome fall in the stock markets and asset values in the coming year. The Bank of England points out that it is only the rise in asset values over the past few years that has led consumers to feel comfortable with the lower savings ratio. If their confidence is shaken, savings will rise and consumption and GDP could fall rapidly. Then the Government's careful plans would soon look completely threadbare.
It is not just the macro issues upon which I wish to comment in looking at the Government's spending plans. I believe that the Government are ignoring the disincentive effects of higher taxation on economic growth and are making a judgment that they are better able to spend money than individual citizens. Much of the tax increase comes from fiscal drag from economic growth, which means that governments raise the tax burden unless they take action to offset that. In addition, research published by the Centre for Policy Studies--I declare an interest as chairman of that body--shows that even before the previous Budget the Government had introduced 45 tax increases over the past four years, accounting for a net £11 billion per year extra tax burden or, cumulatively, £36 billion over the course of the Parliament on top of the tax rises that came as a result of fiscal drag.
Those rises included £6 billion a year out of pension funds which will result in more future pensioners being dependent on the state. They include over £2.5 billion in direct tax increases, much of it paid by the low income families who, with the other hand, the Chancellor seeks to help. There have been over £2 billion of new taxes on business on top of the high yield from corporation tax and the burdens of regulation which increase costs and prices and will reduce investment and jobs. I say to the noble Lord, Lord Haskel, that that is no way to raise productivity in the economy.
Finally, I turn to the complexity of the spending programmes. We have a government who have introduced penny packages aimed to reward or penalise specific interest groups according to whether or not they fit the Government's autocratic definition of that which they approve or disapprove. There is an attempt to mould the behaviour patterns of the nation around what the Government and the Chancellor of the day seek to approve and think we ought to approve. I believe it is a dangerous trend for taxation and expenditure policy to go down that intrusive route of trying to define individuals' lifestyles. It exposes the danger of a rising tax burden.
I believe that we need less government, not more; a lesser role for government in running inefficient public services; less intrusion by government into the way we run our lives; less of a role for government in handing out our money to pursue their own special interests; more money left in the hands of individuals, families and entrepreneurs to build wealth and to enjoy the freedom from state diktats that come from being able to exercise independent choice rather than being dependent on what the state provides.
Lord Woolmer: My Lords, listening to the debate, it is clear that the Opposition seek to raise the issue of, "Can you trust Labour in government to handle the economy?" I remember that before the previous election they said, "Don't trust Labour, re-elect a Conservative Government". The electorate gave their verdict that time and, I suspect, will give the same verdict in a few weeks. The answer from the Front Bench appears to be that there is a question mark at present about whether or not one can trust Labour and that we should look at the IMF report. I shall return to that subject in a moment.
The view of the noble and learned Lord, Lord Howe, appears to be that one can probably trust them now but in three or four years' time there will be problems. Interestingly, the kind of expenditures that the noble and learned Lord thought might raise problems in the future appear to be endorsed by the Conservative Party in saying that it will honour all these spending plans. I am not entirely sure where that leaves the Conservative Opposition. We heard very little about what spending they would cut or which
The Motion before your Lordships' House today refers to the IMF report. I should like to confine my remarks to themes arising from that. As I read the report--I am sure that most noble Lords have read it also--it makes clear its support for everything that the Labour Government have been doing. It confirms the sustained economic growth, the low inflation rates, the low interest rates, the increase in private investment and the fact that those gains are due to strengthened macro-economic and structural policies, improved monetary and fiscal frameworks, credibility of monetary policy, operational independence of the central bank--the Bank of England--and so forth. Any reasonable reading of the IMF report would conclude that it is overwhelmingly supportive of, and endorses, Labour policies.
As has been said, the IMF report deals with two themes, one of which is productivity. I shall not have time today to address that particular matter, but I agree that it is an issue of enormous, long-running importance. It must be a puzzle to all parties that, despite the many economic reforms--I willingly accept that they were initiated by the noble Baroness, Lady Thatcher, when she was Prime Minister, and have been followed through by successive governments, including the Blair Government--such as deregulation and the freeing up of labour and capital markets, productivity performance in Britain still remains behind that of our competitors. I am sure we shall return to that issue time and again over the next few years.
The first theme of the IMF report related to short-term fiscal and monetary policy and was really concerned with whether or not the Government would be tempted to have a spending spree Budget in election year. Indeed, on page 13 the report states:
Before the Budget, the markets in the City had assumed and built into their expectations a boost to the economy of around £3 billion to £4 billion. The amount of boost in the Budget was in fact £3.5 billion--bang in the middle of those expectations. It was indeed a cautious and prudent Budget. Given that
My noble friend Lord Barnett referred to the fiscal rules. The golden rule of borrowing only to invest and not to fund current spending has been fully met. The rule of ensuring that public sector debt does not rise above 40 per cent of GDP has been more than met, as the IMF report confirms. In fact, it is projected to decline to 31 per cent of GDP by 2004-05.
But the electorate have every reason to ask how the Conservatives performed when they were in government. The noble and learned Lord, Lord Howe, properly refers to his own introduction of the medium-term financial strategy, the MTFS. Of course, that was in 1980. But if we look at the performance of the Conservatives in their last seven years of government, from 1991-92 through to 1996-97, we find a deficit on the current budget year in, year out, averaging over 4 per cent of GDP. That is equivalent in today's terms to a budgetary overspend of £35 billion. On the Order Paper today we are debating a Motion that is concerned about an increase of £3.5 billion. The electorate will have no great difficulty in comparing the Conservatives in government and their deficit of £35 billion year in, year out, with the surplus of this Labour Government.
The ratio of public sector debt to GDP in the 1990s, under a Conservative government, rose sharply to exceed 40 per cent. That was in fact because the Conservative government were borrowing to fund current expenditure. Public sector investment under the Conservatives fell in real terms from £15 billion in 1978-79, to just £5 billion in 1996-97. The record of the Conservatives in office in public investment was truly appalling.
It was precisely because of those cuts that our schools, hospitals, roads and railways got into such a mess, the result of which we are seeing today. It is that backlog of budgetary weakness and neglect of public services that the Labour Government have had to tackle. First, Labour had to get the budget back into sound balance, to restore the nation's finances and reduce public debt. Next they had to begin the process of investing in our education, health and transport services--a task which will be central to the Labour Government after the next election.
Far from being critical of the Labour Government, the IMF report endorses that they have the right priorities. At the same time as tackling the country's economic needs, the Labour Government targeted affordable tax cuts to help working families, to provide
In their last few years in office, the Conservatives had a record of budgetary deficits, spiralling public debt, and of deep cuts in public investment, leaving our roads, railways, schools and hospitals in an appalling state. The Labour Government have begun the process of putting all those soundly right, with the right priorities and, at the same time, targeting tax cuts and social benefits on those most in need. In the coming weeks I believe that that record will be one that the electorate will endorse.
Baroness Hogg: My Lords, in a general debate like this I always find it difficult to know what interests to declare. Since I will touch briefly on business taxation, I should perhaps start by saying that I am chairman of Frontier Economics, deputy chairman of 3i, a director of P&O Princess, GKN and two investment trusts.
I should like to start by joining the chorus of praise for my noble friend for initiating this debate; I hope that it will become a fixture. It is timely both because of last week's Budget and because of the symbolic but extremely welcome news that the long fall in unemployment that began in the early 1990s has brought the figure for those claiming benefit to below 1 million. It is also timely because we have been reminded over the past couple of days of the volatility of markets and the sharp fall in the market value of Britain's major companies.
Although it is by no means the most significant of these events, I shall start with the Budget. As many noble Lords have already said, the actual changes made in the Budget are very small. I welcome some points in the Budget in respect of taxes on new enterprises and the changes to capital gains tax, though the latter is still too complicated. However, the overall impact on the tax burden is very small. The widely-quoted figure is of the order of £3.5 billion. In fact, about £2 billion of that was already known to the markets, because those were matters put out to consultation last autumn, when--let us face it--the real pre-election Budget took place. It was a very small addition, which makes only a very short inroad into the rise in the burden of taxation that has already been mentioned by a number of noble Lords.
I shall not further emphasise that matter. Suffice it to say that I am delighted to see the spread of honesty from the Labour Benches in recognising that this has taken place over the past three years, and I have far too much respect for the Minister's integrity to believe for one moment that he will attempt to deny that it has occurred.
The figures in the Red Book slightly understate what has happened to the burden of taxation. The reason for that is a brilliant new Treasury wheeze by which new benefits in the form of credits are expressed as a reduction in taxation and, therefore, a dampening down of the rise in the tax burden. Taken to its logical conclusion, that approach would treat the entire social security budget as a tax cut.
Perhaps I may now deal with the other side of the Budget; namely, expenditure. If the Government are displaying the considerable honesty of later this year going to the country as a high tax and high spend party, perhaps we should, having dealt with the first point, now look a little further at those spending numbers. At the moment, of course, spending is not historically at all high. Public expenditure as a proportion of national income is at approximately its lowest level for 30 years and that is because the Chancellor spent his first three years squeezing public spending, but also--and this is an important point--because he is having some difficulty increasing it. He has substantially undershot the mark.
There are two very good reasons for that. The first is that the great ship "Whitehall" is rather slow to turn round. The second is that, although much emphasis is placed on buildings, public spending largely relates to people, and the hiring of people has to be paid for. With unemployment in the UK at its present level, and with pay having been held down in the public sector, the Government are finding it extremely difficult to hire people to deliver public services. The kind of increases that they now intend to put into their plans cannot be delivered without a sharp increase in relative pay.
The public sector unions have been giving the Labour Government a fairly easy ride. But it has to be said that the market is not so sentimental. The sight of health service managers, heads of schools and education authorities scouring the world for people to fill positions should deliver a clear message.
A big issue is going forward about the pace of change in public services--the speed at which public spending can be increased and public services improved. If I am right that it requires a sharp increase in relative pay, and if that were to lead to a general increase in the rate of earnings, there would be issues for the Bank of England to consider in relation to the control of inflation.
Having dealt with the achievability of public spending targets, I turn to the question of their sustainability. The more that goes on pay, the less there will be available to increase the volume of public services. Looking forward, one then asks the question: what happens after one or two years of increase in public expenditure? We have the plans up to 2003-04, which is not that far away. What do the Government propose to do after that time? On their own account, they have been fairly cautious in relation to growth forecast, although they have not allowed for the possibility of recession. As other noble Lords have said, they will have to borrow again. They will cease to get that wonderful benefit from a reduction in debt interest, because debt interest by then will, of course, rise again with the new borrowing. How do they intend to finance further increases in public spending to maintain the momentum of improvements in public services?
I cannot resist ending by taking up the challenge put forward by the noble Lord, Lord Barnett. As I am blessedly free from any policy responsibilities, I shall respond to him by saying that I think it is high time that the Barnett formula was reconsidered. The noble Lord does himself less than justice. I am sure that I do not need to remind him, he having done a certain amount of work on the matter, that the intention of the Barnett formula at the time of its introduction was to reduce the massive disproportion in expenditure north of the border.
Perhaps I may remind your Lordships of the present extent of that disproportion. The Government spend 25 per cent more per head in Scotland than in England.
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