Overall, the strategy is paying off. If I may mix a metaphor, while we are some way short of Winston Churchill’s “sunlit uplands”, none the less it is very important that the Government stand firm and stick to the course to which they have set. We are making progress and we must continue to be determined in dealing with the deficit, getting things on an even keel

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and rebalancing the economy in the way in which a number of noble friends and noble Members have suggested today.

2.03 pm

Lord Stoneham of Droxford (LD): My Lords, this is an encouraging Budget. It is clear that the outlook for employment is improving, business investment is clearly moving forward, and business confidence has substantially improved. It is always the most vulnerable who benefit most from the extra job opportunities. However, exports remain a worry, and I hope that the Government will concentrate, among other things, on looking at more import substitution and home sourcing, particularly in sectors which we know will now grow, such as—I hope—housing. Housing is the great conundrum in our economy and still remains largely unresolved, with a huge shortage of supply and too much demand.

In the current circumstances, it is right that while combining a commitment to correct the financial deficit, the Government should now convert their austerity theme to one of sustainable growth. The best levers they can pull are to continue their emphasis on improving skills and on improving infrastructure helped by low-cost private sector funding, to focus on their industrial strategy to partner improvements in key sectors, and to encourage export growth and import substitution.

I am surprised that few Members of this House have concentrated on the main subject of the Budget: pension reforms. I have worked with Steve Webb since 2002 on determining Liberal Democrat policy on pensions, so I will concentrate on that. I am proud of what the Government have achieved in the pension field. We have built on the work of Adair Turner’s Pensions Commission and the early work done by the Labour Government. The triple lock on the state pension has protected the most vulnerable in the recession, and the basic state pension is now worth a higher share of the average wage than at any time in the past two decades. We are introducing a single-tier state pension to provide a simple, decent state pension, set above the basic means test, so that working people will know what they will get in retirement from the state and can therefore plan accordingly.

We are seeking to reverse the decades-long decline in private sector pensions provision. Barely one worker in three in the private sector paid into a pension at the time the Government came in, and urgent action was required. In 2012, we began the process of automatic enrolment, and 10 million people have already gone into workplace pensions. That has been a great success; more than 3 million workers have been automatically enrolled, and only one in 10 has exercised their right to opt out. A combination of employer contribution and tax relief from the Government makes an attractive proposition to people who were not otherwise making proper pension provision. That has given rise to the biggest rise in workplace pension coverage since figures began to be collected in 1997.

The Government still need to make sure that these pensions savings are invested in value-for-money schemes that will be well governed, and that individuals do not build up multiple-stranded pension pots but follow them when they change jobs so that a worthwhile sum

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can be built up. Having ensured that the vast majority of workers build up a worthwhile pension pot on top of a simplified state pension, the Budget has taken the opportunity to look at the choices people will face in retirement, reduce complexities for consumers in their financial planning for their retirement and generally encourage more long-term saving.

I was interested to see that Janan Ganesh, a Financial Times commentator, wrote this week:

“Historians of the coalition government will have to work out how Britain came to be governed so radically by such pragmatists”.

It is interesting that we in this Government have achieved the biggest fiscal contraction since the war; the public sector payroll expansion of 13 years of the Labour Government has been undone in one Parliament; we have had multiple public sector reforms in education, the health service and welfare; and now the Budget is throwing all the old pension orthodoxies on to the bonfire. My noble friend Lord Lawson—who, sadly, is not with us today—recently said on the radio that the coalition was now pointless. However, we have to ask, as the FT columnist said, whether the Government have been able to govern more radically than a single-party Tory or Labour Government could have done, particularly in the area of pensions.

The Budget proposals will end the closed market for annuities and open up choice. Potentially, savers can better control their financial planning for retirement, and that will encourage innovation among fund managers to come up with new products. The annuities market has been far too closed, uncompetitive and complacent, as the Financial Conduct Authority has recently shown in its report. The opportunities of this change are matched, however, by a number of dangers, and we must use the next year for proper consultation to get the right safeguards in place for these major changes.

There are a number of things that the Government have to concentrate on. Mis-selling will not go away. As the noble Lord, Lord Hollick, warned us—sadly, he is not in his place at the moment—the last revolution in personal pensions in the 1980s gave rise to the worst mis-selling opportunities of our generation. I well remember, as an employer at that time, resisting employees who were being persuaded by slick salesmen that they should give up their defined benefit pensions for their new personal pensions, which they were being offered by these salesmen.

We have to watch, because, when we make these radical changes, mis-selling will continue. The Government must be vigilant and people should not be allowed to fritter away their pension pots through bad selling. The Government have initially started to provide independent advice; it must be mandatory, and it has to be very well organised. The 400,000 people entering retirement each year need that independent advice. There is also a danger that, if the newly freed pension pots flood into markets such as buy-to-let property, the older generation will add to the burden on the young if prices are simply pushed up further and first-time buyers are more out of reach in the housing market.

We must also remember that tax relief on pensions savings has been justified largely as a reward for long-term saving. However, if it encourages short-term

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spending, it has to be questioned. There is huge inequality on tax relief on pensions savings. If you cap the lump sum free-of-tax payment, on which the cap has up to now been £312,000—that is the sum that people can take tax-free from their pensions if they have the maximum pension allowance—at average earnings of, say, £30,000, there is a saving to the Exchequer of £2 billion. So there is a huge subsidy there that is going to the better off in society. To contain pension tax relief to the standard rate of tax, which has long been a Liberal Democrat policy, would save the Exchequer £10 billion—so we have to justify that tax relief, and we have to ensure that in a time of austerity the principal beneficiaries of tax reductions are those on average or below average earnings. There will be public anger if it is not concentrated on those people.

Finally, we have to ensure that there are major reforms here. We need reform. It is positive that it is being done, but we have to ensure that we do not simply become an onshore tax haven for the better off because of these new schemes. The Government have initiated a pensions revolution, which we should welcome. The changes will have major long-term consequences. We must use the coming year to ensure that this revolution occurs fairly and efficiently and is not susceptible to any short-term electoral advantage ahead of the election, which could be deeply damaging to society and the long-term cohesion of this country and the economy.

2.13 pm

Viscount Eccles (Con): My Lords, there has been much concentration on productivity during this debate, and it is clearly the case that, if recovery is to be sustained and debt and deficit are to be dealt with, productivity is a key component. But I want to think a bit about what we produce as well as how we produce it and, as my noble friend Lord Holmes concentrated on, the social effects as well as dry economic statistics.

In the Budget, the Chancellor gave a general exhortation that we should export more, build more, invest more and manufacture more. It was said, correctly, by many people that the recovery is fragile. There are worries about balance, the supply side, skills, the output gap and unemployment. There is clearly a long road ahead, during which public expenditure will continue to be under pressure. Yet if we think back to the advance of technology and the spread of knowledge as well as the opportunities that they have given us over the years, and if we think about the United Kingdom—a free society with a long and reasonably untroubled history, with a language that has become the leading language of the world and a long tradition of successful higher education—it is quite puzzling how we went into quite such a deep hole in 2008 and why it is taking us so long to climb out of that hole into a sustainable recovery.

What has happened? My first theme is that I think that we have tended to have the wrong idea about economic change. Too often, we have seen it in terms of obsolescence—that things will disappear—but, if you look around, you can see that nothing we make, have made or that we do completely disappears. The employment patterns within that marketplace change,

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but they do not disappear. New things come, but old things do not go. To go to the romantic end of such a theme, somebody somewhere is knapping flints and thatching a cottage; somebody is still writing a book standing up, like Voltaire or Surtees, and that book will be bound by hand. Of course, in larger industries the changes are much more dramatic—in steel or coal or the subsidiaries of the steel industries, the foundries. Those energy-intensive old industries can become very unfashionable, but there was a time when structural steel looked as if it would go out altogether in favour of prestressed concrete. I shall not trouble the House with a detailed analysis of why, but steel has come back and, largely, prestressed concrete has gone out. Then we remember British Leyland. I come from the north-east, where Middlesbrough is the leading dock for exporting and importing cars; we are now a net exporter of cars, as my noble friend the Minister said. However, what happened to our car designers?

With the opportunities for technological change in the diversity that has been available, what has held us back? Why are we not very considerably more successful in short order than we are today? I think that we can look for myths—big ideas, and worst of all Utopian big ideas, which from time to time have gripped us. The first, which has largely gone, will be all-embracing central planning. Of course, there is a role for government in infrastructural planning because there is no way in which to get the money together unless the Government get involved. But as with HS2 or Hinkley Point, there is a great struggle to get to the decision on a new airport, or whatever—and if the Government get involved in too many areas and go in the wrong direction and the end of the road comes for the National Coal Board, the British Steel Corporation or British shipbuilding, what disasters follow from that? They are distortions and long-term disasters, social as well as economic.

The second myth on which I want to touch is that of the interpretation of the post-industrial society. This was the brainchild of Daniel Bell. He foresaw and calculated the rise of the knowledge economy but he never thought that one thing would push out another. He thought only that the emphasis and proportions would change. However, in tabloid-style simplification, both the political system and, regrettably, the schools came to the wrong conclusions. No longer was it considered sensible to go into a foundry, optimise power steering pumps for motor cars, go into steel or coal—never mind about carbon capture and storage and the huge need for knowledge in that area—and still less to become a plumber or a potter. I think that Daniel Bell would be horrified by the interpretation that was put on the fashion that followed. There is a need to invest in capital, of course, and to have a capital allowance—what a good idea—but, if you do not have the people who know what capital goods to buy or how to operate them, you do not buy those tools and those machines. Again, one comes back to social influences and people. Where are the people who can make the right decisions? They are certainly not economists.

We may now be in danger of building another myth called the global race. The problem with races is that they have only one winner. However, I thought that

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with economic development everyone has the possibility of winning. Admittedly, some people win more than others, but are there any real losers? If we characterise life in language which implies that this is a zero-sum game, we make a mistake.

Where is the Chancellor of the Exchequer in all this? I go back to his very cautious, rather general language. I think he understands that timescales are long and that, if you go in a wrong direction, it takes a long time to put it right, and that there is much complicated interaction within the process of putting it right within society. It is not just an economic problem but a social problem and a cultural issue. A whole raft of things have to be thought through. He, quite correctly, can enable only to a degree. Success is in the hands of society; he cannot command it. It needs to be decentralised to those who live in the real world, where Utopian myths go hang.

2.23 pm

Lord Haskel (Lab): My Lords, I start by thanking the usual channels for giving us an extra week in which to consider the Budget before we debate it. Things that first of all seem too good to be true often benefit from this rather longer consideration. For instance, the pension reforms mentioned by many noble Lords may be welcomed a little bit less when you realise that annuities are an important source of long-term finance for investing in our infrastructure—investment which concerns many noble Lords. Or is the Chancellor after the early tax revenue from the consumption that early withdrawals will produce? My party is absolutely right to call for a more considered and careful scrutiny. Pensions have to be a consensual matter, not a political toy. The noble Lord, Lord Stoneham, just reminded us of the pensions mis-selling scandal which resulted from a previous change.

What about the public finances? I think the Minister told us that they are not bad. Headline borrowing is down. However, my noble friend Lord Myners reminded us that the OBR tells us that, if you take into account the upswing in the economic cycle, the figures are actually worse than a year ago. Growth estimates are not going to do very much for this because what the Minister did not say is that the OBR is concerned that the recovery may not last, as it is largely cyclical.

Where are we looking for the recovery? The Minister mentioned industry. There are modest incentives to invest more, export more, train more and do more research. This will require better management by business—the people referred to by the noble Viscount, Lord Eccles. I put it to the Minister that it also requires better management by government.

Every year, the Government pay some £90 billion to private contractors and the voluntary sector to provide public services, and that is going to rise. Unless this is well run, we will end up with a weak and sickly state and poor civic life. Most of this money goes to a small group of companies that seem to be good at winning contracts but mediocre at delivering services. In some cases, they are dishonest. These services are central to our civilised society, as is banking. Like the banks, these companies are becoming too big to fail. I put it to the Minister that part of a Budget should be

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to examine the Government’s competence to manage these enormous sums, and not just hide behind commercial confidentiality, as happens at present. It is no good having a policy if you cannot manage it. The few figures released in the Budget show that failure of the Government’s contractors to deliver on things such as disability benefits, the jobs programme and other schemes is stacking up huge costs for the state.

The Minister declared that raising productivity is most important, and I agree. Does he agree that subsidising low pay through the tax system also encourages low productivity? Instead of subsidising low pay, surely it makes more sense for the Government to encourage people to run their businesses better. With his background, the Minister must know that subsidising low-paid, low-skill jobs through the tax system encourages a low-productivity economy. Housing benefit paid to people in work is also rising sharply. I put it to the Minister that this is another way of subsidising a low-pay, low-productivity economy. I agree with my noble friend Lord Myners that low pay is no way to encourage economic growth.

On 20 February, the Office for National Statistics gave the final productivity estimates for last year. It told us that output per worker fell compared with the previous year. We were told that we are 21 percentage points below the average for the rest of the major G7 industrialised economies. I agree with the Minister that we are not going to pay our way in a globalised economy if we stay like that, and neither is that how we are going to increase our exports to deal with our balance of payments. It is this that leads to the inequality described so graphically by the right reverend Prelate the Bishop of Chester. Unless we address this inequality, the economic recovery for which we are all working cannot be healthy and will not be balanced, as the Minister promised and as the right reverend Prelate the Bishop of Sheffield called for.

The TUC’s fair pay campaign demonstrates that many jobs being created are low pay and low productivity. Many exclude security, training and good prospects. Some employers insist on dehumanised terms and working conditions. Successful leadership means that people have to think that you believe in what they believe in, otherwise you get the social problems referred to by a number of noble Lords. No, it would not be difficult for a Labour Government to manage this better because the current level is so low.

I welcome the Budget’s encouragement for training, apprenticeships and qualifications to raise productivity, but the economy is changing, too. We are moving into the kind of economy that does not pay you just for your qualifications and knowledge but for what you innovate, as my noble friend Lord Kestenbaum explained. That kind of knowledge economy requires a different kind of investment that is less tangible. I put it to the Minister that it is strong investment in these less tangible assets that explains the success of many of our younger, newer rising businesses. Although you cannot touch these investments now, they are made in the hope of benefit in the future—not only in training but in designing a new service, in building a database or in producing something that is copyrighted. They involve branding and marketing. In this changing

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world, this kind of investment is just as important as the more tangible investment in machinery, buildings and transport.

I mentioned this in last year’s Budget debate, and someone must have listened because, on page 73 of its outlook, the OBR says that we do rather well at this kind of investment—better than most of our competitors—and we have kept it up. Good for us. So why do we not recognise this in the Budget’s tax and incentive systems? Surely this is part of our journey away from the low-tech, low-pay and low-productivity economy. It is this kind of economy that demands more and more group enterprise—the kind of enterprise that depends a lot on leadership, collaboration, adaptability, and ability to learn and relearn. It is the absence of these less tangible skills that concerns so many employers today.

There was a time when we were promised an industrial strategy that would produce balanced and sustainable growth. However, as many noble Lords have said, it looks as if we are getting a recovery based on low productivity, a housing boom, consumption involving households dipping into their savings, and increased borrowing. Instead of a recovery that works for us all, it is working for the few. Many have to make do with low wages and dehumanised working conditions. This Budget is going to produce neither the economy nor the society that I would like to see.

2.33 pm

Lord Sheikh (Con): My Lords, I am pleased to speak in this debate and pay tribute to the Chancellor of the Exchequer for another successful Budget. Under this Government our economy is on the mend. The problems inherited from the previous Government were greater than we had imagined, but slowly things are turning around. This Government are striving to be the most pro-growth in living memory. However, tough decisions are needed to reduce the deficit, heal our economy and keep interest rates low. Our economy needs to be more resilient and balanced. This is the only way in which to secure a better future for Britain and our well-being.

We are indeed on the way to growth, and this Budget was the next step. It was a positive Budget, one looking not only to solve the problems of the past but to secure a better future. The Budget will also indicate that people can be trusted with their own money. More money in the pockets of working people often means more money in the hands of business, through consumer spending. It is welcome that the personal allowance will rise to £10,500 in 2015-16. I ask my noble friend the Minister if there is scope to increase it further.

Much has also been made of the ways in which this Budget will benefit pensioners. People work hard throughout their lives and it is only reasonable that they expect flexibility from, and a good return on, their savings. There will be no obligation to buy an annuity if savers do not want to do so. As someone who has been actively involved in the arrangement of pensions, I can say that some people were not happy with the restrictions on their pension funds when the

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time came for their retirement. I therefore welcome the revised arrangements. I am pleased to note that everyone who retires on these schemes will now be offered free, impartial and face-to-face advice. Financial education has been insufficient in this country for far too long. While I wholeheartedly support people having the freedom to do what they wish with their money, it is important that we make sure that they are in a position to make wise choices. With this in mind, I ask the Government: what is being done to ensure that advice is offered not only to those who are about to retire but to younger people who must learn the importance of saving for later in life?

Manufacturing declined massively under the previous Government and is enjoying something of a renaissance under this Government, but still the growth is not enough. We must not rely purely on financial services but begin to make things again and reactivate our manufacturing capabilities. I was born and brought up in a colony where nearly everything we had was of good quality and was made in Britain. We had British-made cars, clothes, household appliances, bicycles and food products—the list goes on. The Empire is now gone but the British people have the ability to be great again in manufacturing.

On many occasions in your Lordship’s House, I have stressed the importance of placing a greater focus on trade, in particular our exports. In January, our trade deficit was estimated to be £2.6 billion. Our deficit on goods continues to be partly offset by our surplus in services, but we cannot allow this to go on. The continued efforts of UK Trade & Investment must be acknowledged. I applaud the Chancellor for expanding the resources available to it and going through it. Doubling the amount of lending available to exporters and cutting the interest rates on this lending will be welcomed from across the board. The Chancellor was clear that we will have the most competitive export finance in Europe. Our exporters need the confidence that Government understand the crucial role that exporters play and are willing to support them at every turn. I know that a great deal of progress has been made over the past couple of years, not least in recent months.

It was encouraging that the Business Secretary visited the United Arab Emirates on a trade mission back in January and launched a UKTI Gulf investment team. I visit UAE frequently because I own properties in Dubai. The economy of that city is indeed lifting, and we should make use of the opportunities that are now opening to outsiders. I was also very pleased to see the Trade Minister open British business centres in Slovakia and Hungary earlier this month. The drive to boost our trade with central and eastern Europe is most welcome. However, this is not enough.

We need to look in more depth at opportunities with countries such as Brazil, India and China, where export prospects are greatest. A report last month from the manufacturers’ organisation EEF found that emerging markets now account for half of manufacturers’ priority targets. In particular, Brazil has become a top priority, with one-third of companies planning to increase exports there. It is very important that our Government fully realise this potential and capitalise

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upon it swiftly and assertively. They must develop strategies to target these markets rather than react to potential opportunities.

The report also found that there is a lack of awareness among manufacturers of the support available to them. This further confirms my already held view that we need to market the services of UKTI more effectively. In particular, I should like to see a much more concerted effort on expanding our trading links with Africa. I know Africa as I was born and brought up there. I am visiting Kenya, Tanzania and Zanzibar in three weeks’ time.

A recent report from the World Bank forecasts that sub-Saharan Africa will grow by 5.3% this year. There are several African countries where growth exceeds 7% per year. Countries such as Ghana, Ethiopia, Mozambique, Kenya, Uganda and Tanzania are seeing increased consumer spending and need further investment in telecommunications and education. We have historic ties with some of these countries. We must act now and connect our businesses at home with the overseas markets of the future. I should be grateful if my noble friend the Minister could inform the House of any further plans to focus on these lucrative emerging economies.

Of course, none of these ventures will even be possible if we fail to nurture the talent and innovation of our young people. That is why I applaud the announcement to extend further the apprenticeship programme, supporting 100,000 more through extra grants to businesses. As someone who has been involved in training in my own business—financial services—I appreciate the training of our young in every field to ensure our growth and well-being.

The Federation of Small Businesses welcomed both the reduction in corporation tax and the doubling of the annual investment allowance for small firms. However, it cited as problems poor communication and the fact that firms often do not take advantage of government schemes simply because they do not know about them. This is a problem that has been mentioned in relation to business and exports many times. I ask the Government for clarification on what is being done to improve the way in which their policies are communicated to SMEs and others who can benefit from them. I also ask the Minister whether he believes that the Government will meet their exports targets. If the growth in exports continues to be slow, what plan do the Government have to deal with this?

Finally, the people who are paying 45% tax are often entrepreneurs and businessmen, who create jobs and generate revenue for the country. They should not be penalised and I feel that consideration should be given to reducing their tax rate from 45% to 40%. I would appreciate my noble friend’s comments on this point.

I believe that this was for the most part a good Budget. The Government are on course, as is our economy. However, I shall be grateful if, in his closing remarks, my noble friend is able to answer some of the points that I have raised.

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2.44 pm

Lord Desai (Lab): My Lords, what a difference one year makes. Last year, we were all worried about a triple-dip recession and the Chancellor’s Budget was a PR disaster of a kind unknown before. This year, we have had only the small accident relating to bingo and beer, forgetting that we are “all in this together”. Perhaps baccarat and Bollinger should also have been offered relief.

This year, we have recovered. I have been saying for some time—indeed, since before this Government came to power—that, given the depth of the recession that we faced, we could not but have a very hard austerity policy to eliminate the deficit as soon as possible. It was not a very popular thing to say. I said it in a letter in the Sunday Times in February 2010, along with the noble Lord, Lord Turnbull—the only other Member of this House to do so—and many economists, and there were long letters from various of my Keynesian friends saying that I had taken leave of my senses. However, I believe that the primary task of any Government taking office in May 2010 was to eliminate the deficit as soon as possible. It has to be said of the Chancellor that, unlike all his predecessors in the post-war period, he is the only one who has stuck to a strategy which he himself has outlined. Most other Chancellors have deviated from the strategies that they have put forward.

It is not all over yet. We are not out of trouble and we are going to have perhaps another five years of pretty tight economic conditions before we get back to what we believe to be the new normal. The noble Viscount, Lord Eccles, asked why our recession was so deep compared with everybody else’s. That is explained quite a bit by the fact that when we began to lose manufacturing in the 1970s, we replaced it partly with public sector jobs and partly with service sector jobs of two kinds. The higher-paid jobs, for the highly educated, were in the City and the lower-paid jobs were in retail and so on. The people who could not achieve the kind of income that they were making in manufacturing realised that they could sustain their living standards only by borrowing. Therefore, from roughly 1990 to 2007 we sustained our living standards by borrowing. However, the growth rate was not sustainable and it was not sustained, and this economy will not get back to that rate.

It is very important to understand—many people say this—that, had we gone on growing after 2008 at the rate that we had been, the gap today would be 15%. How do we know that we could not have sustained that growth rate? We know because the fundamentals of that rate were very weak. Therefore, we now have to form a new growth path where the rate will not necessarily be as high as the one we were used to. One problem that we will have to face is where that growth is to come from. It will not be easy to bring back manufacturing. People imagine that we have a blank page on which to bring back manufacturing, but there are substantial economies competing with us, especially the emerging economies, which are very good at manufacturing—not only in the low-tech and medium-tech industries but even in high-tech industries. Therefore, we are competing against Brazil, China, India, Indonesia and so on.

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If we are to bring back manufacturing, we have to find out where our comparative advantage lies. It may be that, as my noble friend Lord Haskel pointed out, it lies in innovations relating to abstract things such as apps and computers and so on. There, our real comparative advantage is in ingenuity rather than in manufacturing as such. Therefore, when we have made the austerity adjustment, we need to think through what we are going to grow with. That will require a large investment in skilling the population and so on, and it will not be an easy task.

One of the things that many people say is that the Government could have borrowed more and could have spent more. The answer is that the Government did borrow more. They have often been criticised for the debt-to-GDP ratio being very high and public debt having doubled. Until we get rid of the deficit, debt goes on rising. The Government have not borrowed on the fiscal account and spent the money but they have borrowed through the Bank of England. Borrowing through the Bank of England is what has kept the interest rates low. Such recovery as we have had is because low interest rates have meant that a variety of zombie firms survived and households feel richer than they really are.

To that extent, QE has given us some sort of relief but it is misleading relief. At some stage we will have to taper off from what the Bank of England has done, and whether we adopt the suggestion of the noble Lord, Lord Myners, is something that I hope the Minister will come back to when he replies from the Dispatch Box. It is an interesting idea that we cancel one part of the debt with another.

That said, the problem will remain that we will have to start producing a fiscal surplus one of these days. It will not be possible that we, having got to zero deficit, start spending once again. The crucial point is that there was a time in the 1960s, 1970s and 1980s when public spending had a large multiplier. The reason for that was that we had a good demographic situation and healthy manufacturing industries. Those two conditions allowed for the multiplier to be high. We no longer have a good demographic situation and we no longer have a manufacturing industry, except for high-tech industry. Therefore, multipliers will be rather low. This is as true of us as it is of many other economies. We are in a post-Keynesian situation, and we will stay there. To the extent that we can steer the economy, we will have to rely much more on the private economy itself having the health and the capacity to be able to generate its own growth, rather than think that someone can crank a handle and growth will occur.

That era ended in 2008 and is not coming back. There has been a lot of debate about productivity growth. I remember from when I was doing this sort of thing professionally, that in the public sector productivity is measured by salary. The output of a public sector worker is what that public sector work gets paid. The output of a private sector worker has a wage component and then there is a profit component. Productivity can be measured when we are actually producing solid things. It is about the hours worked and the value of the output. It is very difficult to measure productivity in the public sector economy. What has happened is

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that a number of public sector workers have been shifted from the public sector to the private sector. The high salaries that employees used to make, which we thought of as high productivity, have been swapped for private sector jobs. They are probably being paid less and indeed, their productivity, as measured, would be even less than the wage they get.

The productivity gap that we are all worried about may be a statistical illusion. This is my conjecture and it ought to be checked out by people who do this sort of thing for a living, which I no longer do. We ought not be misled into thinking that either productivity is too low or that we do not have enough spare capacity in the system, and so on. I do not know what the spare capacity in the economy is, or whether it is even a valid concept any longer. If we did not have spare capacity and were having a recovery, we should have inflation, but we do not have inflation. If we have a positive growth rate of, say 2.5%, and we do not have inflation, there must either be spare capacity somewhere or we are in a very happy position. These valid questions open up how much the structure of the economy has changed. If we can begin to grasp that, we will be better off.

I have one final point. It is very tempting to think that the people who pay more than 40% tax are middle class; they are not. They are a minority of the population. Please measure class at least by deciles of income and exclude the top three deciles and the bottom three deciles, so that the people in the middle do not pay 40%. Please do not be kind to 40% taxpayers. Please do not be kind to people who pay inheritance tax. Things are bad enough as they are. We do not have to exacerbate inequality or give money to people who do not deserve it. Both things are an inefficient use of money.

2.56 pm

Lord Horam (Con): My Lords, I heard the speech of the noble Lord, Lord Desai, last year, and I greatly enjoyed it as he always talks with such wisdom. I enjoyed it even more this year. If one had to conduct a Desai test before Budgets, this one would definitely pass by comparison with some of the others. During his long career in politics and economics, the noble Lord, Lord Desai, founded the Centre for the Study of Global Governance. I do not know whether he would agree, but whether it is global governance or national governance, successful governance is always a balance between competence and fairness. One can reinforce the other.

If we look at the Budget from that point of view, it was a distinct success on the side of fairness. I echo what my noble friend Lord Sheikh said about raising the income tax threshold. That was one of the most significant things in the Budget and one of the top two or three priorities. Liberal Democrats claim great credit on this front, and I would give them a fair measure of credit, but none the less it was clearly a success, whoever claims it. When Labour left office people were paying income tax on £5,600 a year. It was scandalous that they paid income tax on such a low level of pay. The income tax threshold is now rising to £10,000 a year and from next year it will be £10,500. It

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cost £12 billion to make this change, which is undoubtedly a big ticket item by any standard, but it was the right thing to do.

The Chancellor has also accepted the Low Pay Unit’s recommendation for raising the minimum wage and is generally encouraging about the living wage. The noble Lord, Lord Haskel, mentioned that in his speech and I entirely agree with what he said. It is not just a matter of rewarding people for their restraint, which has been considerable in the past three or four years, but producing an economy that has an incentive for higher productivity. Subsidising low wages is no good at all in the long run. There may be some sort of consensus, at least on the Back Benches, about this issue. That is also an area in which the Government are absolutely on the right lines. Companies that are cash rich can certainly afford higher pay now. Given that inflation is less than 2%—1.7% on the latest reading—there should be no adverse effect on that.

With regard to competence, the Chancellor clearly was right to keep a firm grip on government spending. I recognise that there has been a lot of criticism of him over the past two or three years from what I call a Keynesian point of view. As someone who read economics at Cambridge when the influence of Keynes was very high in the late 1950s and early 1960s, I can well understand that point of view and where it is coming from. The noble Lord, Lord Hollick, made that point and others will no doubt do so. I see the noble Lord, Lord Skidelsky, in his place. As the biographer of Keynes, I defer entirely to him.

None the less, it is fair to make two points. First, as the noble Lord, Lord Desai, said, to some extent we are in a post-Keynesian situation. Things have moved on since Keynes was alive and doing his marvellous work in economics, for which we are all still greatly indebted. Secondly, the Chancellor has been extremely flexible. He has considered these points and has steered a middle course—a third way, if you like—between a classic Keynesian point of view and a non-Keynesian point of view. He has been flexible and sensible. The noble Lord, Lord Hollick, quoted Anatole Kaletsky as saying that the Chancellor is a stealth convert to Keynesianism. The Chancellor has proved able to learn from experience and reality and has provided a way forward which makes total sense to me. That is now history. We are now at the turning point. We have economic growth again and the question is how this can best be sustained. As I said, companies have cash in the bank, demand is increasing, which is what they need, and it is a good time to ramp up incentives to invest. Therefore, the Government’s approach is welcome.

As has been pointed out, we also need more public investment. We are a small and crowded island with strong democratic procedures in place. Therefore, it is always hideously difficult to get public investment going with any sense of urgency. However, I am sure that, given the background of the noble Lord, Lord Deighton, and his success in the Olympics, we have the right man in place to get public investment going.

In that context, as one who was born in north Lancashire and takes his title from that area, I am all in favour of fracking. I am certain that a sensible regime that both rewards the local communities that

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sit on top of the Bowland shale and allows the exploitation of gas and oil to proceed to the benefit of the economy and our economic security can be constructed. However, at the moment, mixed signals are coming from the Government about this. The Prime Minister is saying that it can be done quite quickly, possibly during the course of this year—there may be evidence on the ground—but the companies are saying something quite different and that we might not get a reasonable amount of production until the end of the decade. I would be grateful if the Minister could clarify the situation. It is important to have a good understanding of what is happening in this area.

Just as important as infrastructure are human skills and it is for that reason that I am strong supporter of what the Secretary of State for Education is doing. In all fairness, he is building on the work of the previous Labour Government in initiatives such as Teach First and the academy programme, but he is pushing forward with a vigour—some might say a ruthlessness, but a relentlessness anyway—that is, I hope, transformational. This is hugely important. It is just as important as infrastructure investment.

All that is very good but I must stress, as we have all done in different ways, that the economic recovery is fragile and there are some clear threats on the horizon. One, of course, concerns the economic measures which it may be necessary to take to deal with the political situation in Ukraine. Soft power should be used—I am right behind that—but it may come with a big economic penalty. It is an economic penalty we should pay, but it will none the less be there.

The second threat comes from deflation in the eurozone. Undoubtedly, the European Central Bank has done a good job in averting disaster and restoring a good measure of confidence. However, it now faces a much harder task in avoiding a prolonged period of Japanese-style deflation. If that materialises, we shall certainly suffer in the UK.

A further threat comes from the situation in China. For some years now, the Chinese economy has been propped up by debt-fuelled investment—I do not know what the noble Lord, Lord Desai, thinks about that—much of which has been squandered on speculative property ventures, useless infrastructure and excess manufacturing capacity. Now the day of reckoning is coming in China, I fear. There will be defaults of companies and credit will have to be reduced. That will have a considerable impact on the rate of growth of the Chinese economy, which will hurt us and the whole world.

Finally, we have our own imperfections. We are still not very good at exports; productivity is behind our rivals in Europe; and we are still too dependent on debt, rising house prices and domestic consumption. Therefore, there is undoubtedly a great deal to do. There is no room for complacency. The Budget has reinforced my view that the Government are heading in the right direction and I hope that they will keep to it.

3.05 pm

Lord Low of Dalston (CB): My Lords, the Budget seems to have played pretty well on the day. However, if I was the Chancellor I might be a bit worried by that

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as it is part of the lore of politics that what goes down well in the spring frequently bombs by July. In the case of this Budget, the shine has begun to come off already. Indeed, in the area where the Budget was probably at its strongest—pensions and savings—fears have been expressed about the potential impact of people drawing down from their pension pots prematurely and the threat to providers of annuities, such as insurance companies. Be that as it may, the Chancellor’s far-reaching reforms in this area are to be welcomed, even though they will principally benefit the better off.

I note that the IFS has expressed concern about the risk that permanent tax concessions, such as the increase in the personal allowance, which are funded only by temporary tax increases and unspecified cuts in public expenditure—as the noble Lord, Lord Hollick, pointed out—will weaken the long-term outlook. Moreover, bringing forward revenue that the Treasury would have expected to receive anyway, as with national insurance changes, may be a cost to the Treasury later on.

This was indeed a Budget for pulling rabbits out of hats. As other noble Lords have said, it was full of conjuring tricks and sleights of hand. Take the announcement that the number of £1 million Premium Bond prizes is to be doubled. That sounds impressive until you learn that it is to be doubled from one to two. Much of the rest of the Budget displays a similar level of disingenuousness.

Reducing the deficit by a third is presented as good progress, but it was originally supposed to be eliminated altogether by the end of this Parliament and had already been reduced by a third last year. This is no better than Gordon Brown’s serial announcements of the same new money.

The Budget contains a fundamental misrepresentation of the Chancellor’s fiscal stance and its effectiveness. However, before I come to that, I want to say a word about the Government’s characterisation of the situation we face and the problem with which they are trying to deal. The policy of the Government over the past three years has largely focused on public debt; it has not talked much about private debt. The Minister reflected this emphasis in his introduction today. But let us be clear: private debt got us into this mess. Before 2008 our public finances were in reasonable order. You can argue that there was some letting go of the controls of public expenditure in the last few years but on the whole that was not the case. We had a low level of debt and did not have high levels of deficit. We had a very rapid expansion of private debt and that produced a bubble and a crash, which then produced a recession and public debt went up as a result.

We do not have a high level of public debt because of profligate Governments; we have high levels of public debt because we had a financial system which was out of control, creating too much private debt. It is important that we understand this sequence of events. That is not me talking: it is the noble Lord, Lord Turner, on the “World at One” on 30 December last year. I am sorry if it appears to labour the point but I do so only because it is so often misrepresented.

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When I hear noble Lords to my left—I mean spatially, not ideologically, you understand—engaging in the same kind of misrepresentation, I often wonder whether they really believe it or whether they are indulging in political knockabout. They are not stupid, so I have to conclude that it is the latter, but I would hope that we can avoid such disreputable distortions of analysis in this House. At all events, amid all the focus on bringing down public debt and government debt, we have yet to come up with a solution to the problem of running a reasonably growing economy without returning to the increases in private debt which got us into so much trouble in the first place. That is the problem confronting the Chancellor, as he congratulates himself on a recovery based on a housing bubble and rising consumer spending, which this Budget does nothing to tackle.

I turn now to the central misrepresentation of the Budget; namely, that the Government’s strategy of cutting the deficit is working, reiterated as the central plank of the Minister’s introduction to the debate. On the face of it, this would seem to be self-evidently the case. The economy is recovering—is it not?—and recovering faster than anywhere else. But there are several things wrong with that. Is it because of or in spite of the Government’s policies? This recovery has been likened to a man who has been hitting himself over the head with a baseball bat saying that he feels better when he stops and attributing his improvement to the fact that he had been hitting himself over the head with a baseball bat. Then again, as I have said, according to the Government’s strategy on taking office, the deficit was supposed to be eliminated by next year, not four years later in 2018-19 as is now being forecast. The economy is forecast to recover to pre-crisis levels, but only this year, after six years, and 14% smaller than it would have been had the recession not struck. Moreover, what has gone has gone for good. The damage is irreparable.

As the economist Simon Wren-Lewis has conclusively demonstrated, the economy started growing once the Government abandoned their strategy of fiscal contraction, not in response to the strategy of fiscal contraction. From a peak deficit in 2009-10 there was substantial fiscal tightening until 2012-13. This essentially stopped in 2012-13 and 2013-14, whereas the original plan was for fiscal contraction to continue in 2012-13 and 2013-14. The figures show clearly how the strategy was abandoned as the recovery failed to materialise. I am not complaining about that, of course; rather, I am just pointing out that you cannot abandon a strategy and carry on pretending that it is still working. I was disappointed to hear the noble Lord, Lord Desai, say that this is the only Chancellor to have adopted this strategy and stuck to it because, as Simon Wren-Lewis has shown, it is just not true.

The final thing the Chancellor shamelessly glosses over is the full extent of planned austerity despite the economic recovery. He said:

“While the underlying structural deficit falls, it falls no faster than was previously forecast, despite higher growth”.

This goes to the heart of the Government’s argument: faster growth alone will not balance the books. Securing Britain’s economic future means that there will have to be more hard decisions and more cuts but, apart from talking about the welfare cap, the Chancellor has been

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completely unspecific about what these cuts might be. Presumably this is deliberate until after the next election for, if he were to come clean about just what he has in store for us, the public’s verdict on the Budget might be very much less favourable than it appears to have been to date.

3.13 pm

Lord Flight (Con): My Lords, some insightful and important points have been made in this Budget debate which I hope the Minister will feed through to the Treasury, because I have certainly not seen some of them being made elsewhere. I was extremely pleased to be able to agree with much of what the noble Lord, Lord Desai, had to say, which has not always been the case. It seems that he sees things very much as I see them. Equally, however, some sharp and important points were made by the noble Lords, Lord Hollick and Lord Myners. It has always struck me that the QE creation of £380 billion-odd would have to be monetised because there was never any prospect of raising that amount from the bond markets when those markets are tending to fall.

I also congratulate the Minister on what I thought was a very clear presentation, whether people agree with it or not, of government policy and what is in the Budget. It is only fair to say that with a relatively limited scope, there are some measures which are good for the economy and for citizens. I welcome in particular the infrastructure measures, and again I hope that the Minister will get a move on and make them happen as soon as possible. The measures for improving export finance are important. I have observed previously that French and American export finance in particular is much more generous than it is in the UK, which often results in us losing orders.

I would like to focus on the measures relating to savings, both the ISA reforms, which I do not think anyone else has actually even commented on, and the pension reforms. I want to talk about them in the context of the all-important issue of the UK savings rate. Reference has been made to it, but no one has made the point that the main reasons for the problems and imbalances in the British economy going back 50 years are because we have had an inadequate savings rate. You can have too high a savings rate, which has been China’s problem, and you can have too low a rate, which has been our problem, as well as that of India. I think that what we really need is a national debate about the right savings rate and what would make sense to try and achieve it; that debate is well overdue.

First, however, I declare an interest as an adviser to the not-for-profit trade body, the Tax Incentivised Savings Association. The association acts on behalf of the various savings institutions and has embarked on a major process, with some 50 organisations, to produce a study on the problem of saving rates being too low and what might be done to fix it.

ISAs have been extremely important. They were really a cross-party creation because they were an adaptation by the last Labour Government of the previous PIMA regime. They have been hugely successful as a means by which people can accumulate savings

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for their retirement, and something like seven times as much per annum is now saved in ISAs as is saved in personal pension schemes. The reason for that is extremely simple: it is because ISAs are extremely simple. People have access to their money because it is not tied up in strings of nightmarishly complex legislation. By and large the providers of ISAs have offered a straightforward range of products, some more sophisticated than others, through which people can save. They are now supposed to be called NISAs—I always hate changes of name because you forget what has happened—and I think that they are going to be much more important than many realise in terms of helping to increase the savings rate and savings accumulation for people’s now much longer periods of retirement.

However, I should point out to the Minister that there is one small item that needs to be addressed. Generally, in a marriage at least, the man has the ISA. Statistically he is likely to die prior to his wife, but although the capital can pass to the surviving spouse free of inheritance tax, she loses the tax benefits of an ISA, which is tax-free in terms of income and capital gains. In a way the wife is being cheated because, if the husband has made that sort of provision for retirement for both of them, it is unfair that she should not participate if her husband predeceases her. Obviously it is the same case the other way round as well.

On the issue of the reforms relating to annuities, going back 13 years to when I was a Member of Parliament I used to get lots of letters from women with £10,000 or £15,000 in a small money purchase pension pot who quite rightly objected strongly to that money having to be put into a footling annuity which was going to be neither here nor there. My impression was that if these ladies had had access to the capital, they would have hung on to every penny right to the end as their reserve pot of money. I have always objected to the compulsory purchase of annuities, although obviously there is a concern that people may cash in and consume their pensions savings—indeed, the figures provide for some £2 billion of tax revenues from this source. I am not so sure they will but, again, it seems to me that it would make sense to consider some incentives for people not to do that. If people, for example, want to transfer their pension savings to an ISA, which is a much simpler way of managing their savings, why should they not be able to do that without incurring a tax charge on the way through?

My other old chestnut is that home ownership became popular because people saw it as a way of passing on some wealth to their children. It has always struck me that, if what might be left in people’s pension pots on the death of the surviving spouse could pass to their children’s pension fund free of tax, that would be another quite powerful incentive for people at all levels to save more in their pension scheme. Tax would of course be paid on it once the pension was drawn.

However, my main concern is the savings rate. All my life, at least in the 1950s and 1960s, it was stop-go balance of payments crises. We then discovered, with the freeing of capital flows, that large deficits could be financed by borrowing other people’s savings and selling the family silver. However, that was not without

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a price—although we have not had quite the same pattern of stop-go, we have always tended to end up with overconsumption, overborrowing and the need to put the brakes on. No one even talks much about current account deficits now. Although it is all very well to exhort people to export more, the current account deficit is, in essence, a function of public and private consumption less the savings rate compared with GDP. If that is 5% more than GDP, which it is now, there is going to be a current account deficit of 5%. No matter how hard we try to export, we are not going to tackle the current account gap unless savings are higher or consumption is lower.

I think it was the noble Lord, Lord Lawson, who discovered as Chancellor that the current account deficit did not matter much in the short term because it was financeable. However, in the long term, it still does matter. We found that we did not have a British company capable of building a nuclear power station and that the interests of most of our utilities, which were internationally owned, were often different from those of government. This is really selling the family silver to pay for cumulative current account deficits. There is a long-term price to pay, even though it may be possible to deal with it in the short term.

Finally, there is the other side of the coin, which is that although our generation here may be adequately provided for in retirement, the next generation certainly is not. Pension scheme contributions are nowhere near enough and the government commitments to welfare and health spending for that generation are simply not going to be affordable. Unless something gives—the most civilised thing would be for the savings rate to increase so that people can afford more of these things themselves—there is going to be a real mess in 20 to 30 years’ time. Even this House rather kicked under the carpet the fact that pay-as-you-go public sector pension schemes are likely to have a cash-flow deficit per annum as high as some £25 billion as early as 2017. There are plenty of studies pointing out that the overall welfare spending commitments that Governments have presently given are simply not going to be affordable in some 20 or 30 years’ time.

What is the correct savings rate? I have not seen a definitive answer. My common-sense view is that it should be an average of at least 10% over different periods, whereas it is now somewhere between 4% and 5% and forecast to go down to 3.2%. It is all very well saying that we have to use consumption to get the economy going—that is working but unless it is accompanied by measures that will lead to a higher sustained savings rate going forward, it is going to as usual end in tears, as some noble Lords have mentioned. I therefore go back to where I started: I am very hopeful that being able to save £15,000 per person per annum in a NISA will increase the savings rate. As auto-enrolment gathers momentum and contribution rates increase, or need to be increased, that will increase the savings rate as well. I commend the Treasury and the Minister to at least think about some of the tax points I have raised.

I close by saying that, given that this is now an appointed House, it is rather out of date that we are excluded from participating in the legislative process

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of finance Bills. It seems there is quite a bit more in the way of informed views and experience in this House on such matters than there is in the other place.

3.25 pm

Viscount Hanworth (Lab): My Lords, from my perspective this has been a distressing Budget. It has all of the features that we have come to expect of the activities and the enactments of the Chancellor. I wish to examine some of these features, albeit briefly.

The Budget is highly political in the sense that it is dominated by the objective of gaining an electoral advantage for the Conservative Party, no matter what the long-term costs of doing so might be. The Budget promises a continuing attack on welfare provision and a shrinking of the public sector to a level not seen in post-war years. Apart from a token investment—equal to the amount of money to be spent on the repair of potholes in roads—in the Ebbsfleet housing project, which was announced in advance of the Budget, there have been no plans for any further centrally funded investment in social and economic infrastructure.

The Budget manifests the Conservatives’ desire to do nothing that might amount, in their perception, to undue activity on the part of the state. Some of the provisions of the Budget have been designed to appeal to pensioners and to those who are heading towards retirement. Such people constitute a significant part of the active electorate and the Conservatives have been fearful that, unless they appeal to those people, UKIP might seduce them. This is one explanation for the deceptively attractive proposal to allow people, on their retirement, to get their hands on the entirety of their pension endowments without suffering what has hitherto been a heavy tax penalty. This is likely to inject extra cash into the economy to stimulate it in time for the general election.

The critics have been quick to spell out the detriment from this provision. It would add an impetus to an already overheated property market as pension endowments are used to buy property to generate retirement incomes from lettings. This would compound the severely deleterious effect of the Government’s misguided Help to Buy policy. This liberalisation of the pension rules is also liable to lead to penury in old age for a substantial number of incautious people who will grab their wealth and spend it. The financial services industry is set to scramble wildly in an attempt to mop up the cash that has been liberated by offering pensioners all sorts of innovative financial products with deceptive inducements. Little has been done to protect gullible pensioners.

We should briefly remind ourselves of the current state of the economy and of the tasks that confront the Chancellor. At a time when it seems as if the economy is set to expand, there is a desperately poor export performance, which promises an eventual crisis. There is low productivity and low investment in a much diminished manufacturing sector. There are spiralling levels of household debt and there is a vigorous inflation of house prices, without any significant activity in housebuilding that might meet the needs of young people.

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The nostrums of Keynesian economics, which were once widely accepted by the Conservatives, indicate that the Government should have taken a central role in addressing these problems. They should have become active in stimulating the economy at a much earlier stage of the recession. The means of doing so should have been a heightened level of investment in the infrastructure of the economy. There has been a lingering consciousness in the Government’s mind about the need for such an investment programme. There has been recognition of the need to invest in airports, rail links, sewerage systems, power stations and housing. In every case, the projects have been deferred until, supposedly, the economy is better able to afford them. In other words, there has been a complete inversion of the Keynesian logic.

Two major impediments have stood in the way of such investment projects. The first has been an ideological insistence that the projects should be financed and undertaken solely by willing providers from the private sector. The willing providers have not been forthcoming. The second impediment has been the concerns over the public sector borrowing requirement, allied to a desire to eliminate the budget deficit. With such an agenda, it has been impossible for the Government to fund investment projects. The budget deficit is due to the recession of the economy, which has reduced the flow of funds from taxation. It would be largely overcome if the economy could be restored to full employment.

A misconception has been affecting the common understanding of the borrowing requirement. It has been widely believed than any net borrowing denotes a burden of debt that cannot be sustained indefinitely. This fallacy has arisen from a failure to distinguish between the current account and the capital account of the Government. One should bear in mind that any successful business enterprise is bound to have a substantial and permanent burden of equity capital and financial debt, which corresponds to its borrowing via stocks and bonds. The enterprise is not liable to be criticised for the fact that, in order to sustain its capital investments, it is bound to borrow. The same should be true of the investments in social capital for which the Government are responsible.

In making their social investments, the Government have two advantages that are denied to private enterprises: on the one hand, they can borrow at much lower rates of interest than are typically available to private enterprises; on the other hand, whereas private enterprises must service their debts via insecure commercial profits, the Government can service their debts by the taxation over which they have control. The present Government have forgone the opportunity of undertaking much needed social investments at a time when the rates of interest on the necessary borrowings are at a virtually unprecedented low level.

When the Government have contracted to proceed, eventually, with an investment project, they have promised the undertaker a so-called market rate of return that is utterly exorbitant. The rate of return that has been promised to Electricité de France for building a nuclear power station is far in excess of the already excessive 10% discount rate that the Government typically use in their project appraisals. Moreover, the returns have

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been promised for a 35-year period. It would have been appropriate to finance this project, at far less cost, via the Government’s borrowings on their capital account. The cost of such borrowings could be serviced from the expected revenues of the project, but equally—logically—it could be serviced from taxation. In a wholly egalitarian society, it should make no difference which of these two means is adopted for financing investments in social capital.

From the perspective of the Conservative Party, which is averse to the strongly progressive taxation that is the corollary of a highly unequal society, the preferred means of financing such investments is by charging the consumer. However, there is an electoral disadvantage in imposing costs on the consumer. This has deterred the Government from making the social investments that are their responsibility, and this failure to invest promises social and economic problems in the future.

3.32 pm

Lord Northbrook (Con): My Lords, this is a very timely debate, coming after a generally very well received 2014 Budget. The economy continues to recover, with forecasts for GDP growth being revised upwards once again. The budget deficit is coming down. The unemployment rate is continuing to improve. According to the latest CBI survey, manufacturing continues to recover. Inflation forecasts remain low. The economic background continues to improve, although there is still a long way to go.

The Budget has focused, quite rightly in my view, on measures to help business, as well as giving important help to savers and taxpayers, mainly at the lower end of the tax scale. My speech will focus in more detail on the above. I will also focus on the excellent report by the Economic Affairs Committee on the draft Finance Bill, published a fortnight ago. I congratulate the noble Lord, Lord MacGregor of Pulham Market, and his group on choosing the topic of proposed tax changes to limited liability partnerships, and on their thoroughness on what seems a complicated area of tax law.

Looking at the economy, first, I will highlight the Office for Budget Responsibility’s forecast for GDP improvement. As the Chancellor said in his Budget speech, a year ago the forecast for 2014 GDP growth was 1.8%. It is now 2.7%. This is a good sign of recovery. The 2015 forecast has also been revised upwards. Borrowing is also showing a marked improvement. Britain borrowed a horrendous £157 billion the year before the coalition came to power. The OBR says that in 2014-15 this will fall to £95 billion and, although it has taken longer than expected and there is a long way to go, predicts that it will come down to £18 billion by 2017-18. According to the Red Book, interest payment savings on the debt over this Parliament are expected to amount to about £10 billion per year by 2015-16 as a result of the Government’s consolidation plans.

Unemployment figures also show an encouraging trend. According to the Office for National Statistics, employment is up by nearly half a million people for the year ending January 2014. According to the Budget speech, 1.3 million more people are in work compared

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to when the coalition came to power. According to the ONS, the claimant count has fallen by 24% in the past year—the largest annual fall since 1998, according to the Red Book. Youth unemployment fell by 58,000 during the past year, which is also a good sign. I also applaud the imposition of the welfare cap linked to inflation—now supported by the Opposition, I see—although I know that cyclical unemployment benefits are excluded.

The next area that is showing an encouraging recovery is manufacturing. Last Thursday’s CBI Industrial Trends Survey showed a 3% rise from February in manufacturers reporting above-normal order books, suggesting that the recovery remains on track, driven largely by domestic demand. Anna Leach, head of economic analysis at the CBI, said that overall the survey of 368 manufacturers showed demand rising and robust output growth. Encouraging news emerged yesterday on manufacturing pay deals. Pay settlement figures in manufacturing rose to 2.6% in the first quarter of this year compared to last year’s average of 2.4%, in the latest sign that the squeeze on living standards is easing.

Another economic indicator performing favourably is inflation. The OBR forecasts that it will fall below the 2% target in 2014 at 1.9 %, and will not exceed it at any time until 2018. This Tuesday’s latest figures confirmed the favourable trend.

Turning to the Budget measures themselves, I will focus first on the welcome measures to help business. As the Chancellor said in his speech, when the coalition came to power the corporation tax rate was 28%. Very shortly, corporation tax will be down to 21%. The corporation tax rate cut has been a great help to companies. The second major boost for business in the Budget, as many speakers have said, is the increase in the annual investment allowance from £250,000 to £500,000 until the end of 2015. This has been warmly welcomed by the manufacturing and agricultural sectors. The third major area of help is company energy costs. The Chancellor can be congratulated on producing a £7 billion energy package that will cap a green tax and shield companies from rising renewable energy subsidy costs. The major manufacturers’ trade body, the EEF, and the employers’ group, the CBI, have praised all of the above, as well as congratulating the Chancellor on his apprenticeship funding, changes to the R&D tax credit regime, the extra support for UKEF to boost exports, and the decision to make permanent the seed enterprise investment scheme, which is such a help in financing new start-ups.

Moving on to measures for savers, first, I warmly welcome the Chancellor’s proposals with regard to pensions from 2015, allowing investors free access to spend or invest their pot as they wish once they have reached the qualifying age. I remember occasions when this was nearly achieved in the past but the efforts fell at the last fence, so I am delighted to see the Chancellor finally acting to give pension savers their freedom. I also welcome the new pensioner bonds for those over 65, paying up to 4% if held for three years.

Next, I warmly welcome the Chancellor’s plans to extend the ISA limit to £15,000 and the merger of the cash and shares ISA. According to the Daily Telegraph,

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these tax-free accounts are now held by no fewer than 24 million people. Sensibly, in a separate move, the Treasury has allowed—encouraged by a campaign by the noble Lord, Lord Lee of Trafford, and me, as well as by several other noble Lords from all sides of the House—AIM stocks to be included in ISAs. I also welcome the abolition of the 10% rate of tax on savings for certain savers and basic rate taxpayers. The increase in the personal allowance to £10,500 is most welcome, too. The limited increase in the starting level for the higher-rate band is also welcome, but more needs to be done to uprate this at least in line with inflation.

I turn to the excellent Economic Affairs Committee report on the draft Finance Bill. The report, not referred to by other speakers, was only recently published on 11 March. I understand that it is too soon for us to have a government response to consider today. The committee’s sensible conclusion is that the measures proposed are so different from the original proposals consulted on last summer that more time is needed to settle that question and get the legislation right. It also recommends delaying the limited liability partnership salaried members’ provisions to 2015. Can the Minister enlighten us on whether HMT will take on board the proposals? Will he respond to the recommendation put by the committee in relation to mixed member partnerships—here, I declare an interest—namely, partnerships including limited liability partnerships with corporate members? The recommendation was that HMRC amend the provisions so that they are drafted more precisely and rely less on guidance. I ask the Minister to take notice of this seemingly arcane area of tax law, because implementation of the provisions could cause chaos.

The Government have been right to stick to their course on deficit reduction. I listened with interest to the view of the noble Lords, Lord Hollick and Lord Myners, that there should have been increased government spending early in the Parliament, but this would have been a dangerous course, as the markets could well have been upset by a perceived lack of financial discipline in government finances and the cost of servicing the debt could have soared. I prefer the views of the noble Lord, Lord Desai. Recovery is heading in the right direction. There is a still long way to go, but the coalition’s approach has been fully justified. Finally, I agree with the noble Lord, Lord Flight, that this House should have more input on the Finance Bill, particularly as large chunks of it are not considered by the other place, meaning that you have legislation which is not considered by either House.

3.42 pm

Lord Hunt of Chesterton (Lab): My Lords, I want to comment on some of the policies on energy, science, technology and exports that were in the Budget speech. I declare an interest as a director of a small company and as an emeritus professor at UCL and Cambridge. Some of the information about science expenditure was in supplementary information provided with the Budget speech and not in the version that we had from the Printed Paper Office. One question that one wants to ask is whether best use is being made of government expenditure on science and technology.

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This Government certainly recognise the importance of science expenditure and there is a general feeling that the Chancellor has appreciated this more during his period in office. The previous Labour Government appreciated this, too, and had to overcome the lack of priority given to science and technology by the Thatcher and Major Governments.

The importance of the UK having a highly competitive science and technology area, and of its industrial applications, were raised in a recent report of the House of Lords Science and Technology Committee, which commented on the critical level of funding for parts of the UK scientific infrastructure—which I myself have seen accentuated in the areas of environment and engineering, as well as in atomic physics. That the UK did not have world-leading laboratories in hydraulics was a factor whose implications we saw in the floods of this year.

Importantly, the Chancellor said that policies for science and technology needed to be integrated with increased exports, but one has to recall that when the Conservatives came into power, the first thing they did was to indulge in various ideological decisions such as abolishing the regional development agencies, which were widely supported by industry and business. In Germany and elsewhere, such regional organisations of employers supported by government and local authorities are an important vehicle for encouraging exports. It is rather different from having a man from BIS coming to visit your company. That these organisations across Europe are extraordinary group activities is one of the reasons why they are so strong. As has often been commented on, the way that German industries in local areas work with the banks ensures expansion and adequate finance. It was surprising that the abolition of this very successful and growing area of our business in the UK was supported by the Lib Dems, who I had always thought were supporters of regional power and influence.

If we look at what has happened during the past three years, I suppose that we should be pleased that the Government have seen some of the error of their ways. Mr Willetts, in a rather nicely written piece that I have cited before, explained that when he came to power, he thought that the only thing the Government had to do was to get out of the way of business. He then stated that it was in fact very important that the Government lead, support and work with industry and science and technology to make important developments. A variety of specific initiatives have been taken, one of which was to focus on space. The UK is an important leader in applying work in space in a commercial way, as we saw just last week, with Inmarsat being located in London. That was a brilliant example of UK science and technology being widely recognised and used.

As part of the mea culpa article by Mr Willetts describing the evolution of government policy, he commented that, after being rather suspicious of the Labour Government’s Technology Strategy Board, the Government have become strong supporters of it. Although I did not hear any further mention of expanding it in the Chancellor’s Statement, it would be very interesting to know from the Minister whether that is planned. The amount of money being funded through

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the TSB is still small compared to the money spent in Germany, for example, through the Fraunhofer centres. The Fraunhofer centres also focus not just on very high-tech but give credit to important technology at the level of everyday living and small businesses—for example, how buildings get damp in strong rain conditions and what you should do about it. One of the Fraunhofer centres deals with that in particular. It was the noble Lord, Lord Sainsbury, who introduced the TSB, as he explains in his book on progressive capitalism.

One feature of the Chancellor’s speech, as of many speeches made by members of the Government, is the total absence of the word Europe. I was very gratified that the noble Lord, Lord Razzall, earlier commented that the most important feature for the long-term strength of UK industry, business, science and technology is that we remain in and active members of Europe.

The word from Brussels now is that because of our tendency under this Government to think of departing from Europe, in many European meetings in Brussels the UK’s point of view is simply ignored. They say, “You guys are on your way out; why should we listen to what you have to say?”. That was said by a senior British civil servant, now in Brussels, who said that the situation was serious. Last night, rather gratifyingly, we heard Mr Clegg talking about Great Britain, not Little England. I hope that that will be a feature of the next election. At the moment, we seem to be run by a Little England party. However, that was on Wednesday. On Tuesday, we had a speech from the Prime Minister saying that we greatly believe in Europe and that Europe is helping us with our development of full employment, so it varies from day to day.

It is important to keep reminding ourselves that areas in which the UK is a world leader are often those projects that we are undertaking with Europe. Airbus is a very important example. Rolls-Royce has only a small proportion of its work in the UK; most of it is now in Germany or in the United States. It is important for the Government to do much more to advertise that. When the Prime Minister flew to Beijing with his big delegation, he did not fly in an Airbus, he flew in a Boeing. When he arrived in Beijing, there was a big notice above his head, shown on television, reading “Boeing”. That is not very clever.

I also want to talk about energy and climate change. The Chancellor spoke about that in his speech and emphasised the fact that the UK is investing strongly in low-carbon sources of energy, particularly nuclear and wind. The fact that the UK is continuing its strong policy is one reason why we have some leadership in the world discussions on climate change. I am a vice-president of GLOBE, and many politicians from all over the world come to see what we are doing, both legally and by our policies. Indeed, our policies are coherent. I have been praising Germany in my speech, but the fact that it has a totally incoherent policy on energy—suddenly switching against nuclear—is a source of great difficulty in Europe.

However, the Government should not become too fascinated by the possibility of cheap gas. I notice that we had a fracking speech earlier this afternoon. The message from US politicians visiting London is that the reason why fracked gas is so cheap in the United

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States is that, as a result of legislation by President Bush, the costs of providing water for the fracking operation and for cleaning the water after the fracking operation are not attributed to the cost of the gas. In the words of American politicians, the water consumers of America are subsidising the cost of the gas. We need to be very careful about that.

I also notice that the issue rather reminds me of the Labour Government in the 1960s, when they asked whether they could abolish a railway going through Wales. Speaker Thomas, Lord Thomas, said, “Mr Prime Minister, that goes through 24 marginal constituencies”. I wonder whether the fact that fracking of gas would go through a lot of marginal constituencies in Lancashire may be the cause of the delay that we heard about this afternoon. To continue that point, the issue of water is one of the reasons why there was great concern about fracking in the UK; the Institute of Civil Engineers made some remarks about that that have not been explained by the Government.

I come to my last point. The Chancellor emphasised in his speech that the carbon price compensation for energy-intensive industries needs to be considered and implemented. However, it is very important that this is not just a handover of funds. Surely the funds should be handed over with conditions relating to efficiencies and new technologies implemented by the companies that are using this extra funding. In Stoke, for example, in the Potteries, they are using new techniques to make use of the gas coming out of the old coal mines. That kind of energy use should be supported. The other feature that the Government emphasised was the encouragement of combined heat and power. Many noble Lords have been commenting about that for 10 years or more and it is a very welcome development.

3.54 pm

Lord Bourne of Aberystwyth (Con): My Lords, it is a great pleasure to follow the noble Lord, Lord Hunt of Chesterton, who spoke with such authority on science and technology. I should also tell him that I am very familiar with the railway line that he referred to and, thankfully, it still does go through many a marginal constituency.

I think that the central thrust of the Budget thinking is right: we must as a nation reduce the deficit; we must press down on the debt, otherwise we will saddle future generations with that debt.

In general, Budgets can be broken down into three categories: calamitous, of which there are a few; routine, of which there are many; and transformational, of which there are very few. There is a strong case for suggesting that this Budget is transformational. It makes fundamental changes to the tax and budgetary system applying to pensions. It deserves comparison with the Budget of my noble and learned friend Lord Howe of Aberavon abolishing exchange controls. Another such Budget was that of my noble friend Lord Lawson of Blaby abolishing higher rates of income tax.

The fundamental change to pensions—and I disagree fundamentally with the noble Viscount, Lord Hanworth, on this point—is to give people power over their pension pots. I accept that we need a system of good

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advice, a point which was well made by the noble Lord, Lord Hollick, and the right reverend Prelate the Bishop of Chester. It is certainly true that we need to ensure that proper advice is in place for people. Subject to that, however, surely it is right to give people control over their own pension pots which they have built up over time. For the first time people will be trusted to manage their own pension pots. It is a major transfer of power to the individual. In fairness, it has been widely welcomed by all political parties. The added beauty of the move is that it does not cost the Exchequer any money; indeed, it will add to the country’s coffers as the amounts paid through drawdown will exceed the amount paid on an annuity in the early years. Admittedly, however, that will smooth out over time.

The Budget is also good news for the nation’s economy in terms of savings in general. That point has been made by my noble friends Lord Flight and Lord Northbrook, who are not in the Chamber at present, in relation to ISAs and the increase of the limit. That increase is also very welcome. Successive Governments have for too long neglected savers. Fairly recently the World Economic Forum pointed out that that needs to be addressed, and I think that it now has been. Another factor, which has not been mentioned overmuch, is abolition of the 10p rate for lower-income savers. Again, it is sensible to help people on lower incomes with their savings income. In addition there is the pensioners bond, which has certainly been mentioned. These boosts are very welcome. One of the key aspects of the Budget is what we are doing for savers.

In addition to savers, this is a good Budget for business. Business means prosperity and jobs. Increasing the tax breaks on business investment by business, doubling it to £500,000 annually, provides a significant boost to investment, and the Chancellor has also extended the life of the scheme. Cutting energy costs for business will also boost enterprise.

In this debate there has rightly been much talk about needing to rebalance the economy in regional terms. In that context, it is worth noting that half of the businesses that benefit most from the carbon price floor are in the north of England, and a further third are in Scotland and Wales. That is good news. We should also welcome the extension of the life of the business rate relief and enhanced capital allowances in enterprise zones. I declare my interest as chairman of an enterprise zone in Wales. This, too, is a welcome incentive to business.

It is a good Budget for savers and for business, and it is also a good Budget for export. We have seen in this Budget a doubling of the amount that the Government are making available, to £3 billion, and also a cut in the interest rate for exporters. Surely that is good news, too.

In relation to housing, there were one or two comments suggesting that the Help to Buy scheme was something that we should be ashamed of, but I do not believe so at all. For too long, successive Governments in this country have not concentrated on housing. We should welcome not just the Help to Buy scheme extension but the help that is now being provided for the development of Ebbsfleet. The greatest concentration

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and problem is clearly in the south-east and so Ebbsfleet, the help for Barkingside and in the redevelopment of Brent Cross are measures that should be welcomed rather than otherwise. So in many respects, this Budget will help the economy. It is helping savers, business and exporters.

Perhaps I might also mention some of the micro aspects of the Budget, which are in danger of being overlooked but which provide assistance to our tourist industry, as well as to our well-being as a country. There is help for the 800th anniversary of the Magna Carta, and for cathedrals and theatres. These aspects should not be neglected as they also provide a boost for our tourism industry, our country and our economy.

I believe this is a good Budget in many respects. Its legacy will be for savers but it continues on the right course for the country: of deficit reduction and bearing down on the debt. In concluding, I add my support, as a relatively new boy here, for this House having a greater role in relation to the Budget. That point seems to have been very well made and I hope that we can pursue it in the future because we have a definite and positive role here.

4.01 pm

Lord Skidelsky (CB): My Lords, we are invited to discuss the effects of the Budget on the economy. Let me state my views right at the outset. I believe that there are lots of small, good things in the Budget, which have been pointed out, but also quite a number of sleights of hand, which have also been pointed out. However, the effects of the Budget and of the Chancellor’s budgetary strategy in general on the economy have been largely negative. I believe that the austerity policy has slowed down the recovery of the economy and made it more fragile. It has also slowed down the reduction of the deficit, which I think we all want to see.

Many noble Lords have been discussing the challenges of the future and of the new normal. All those are very important. The noble Lord, Lord Desai, even said that we were living in a post-Keynesian age. But as long as we have spare capacity in the economy we are living in a Keynesian age. I, too, have my views about the future and I hope to be able to expound them in an interesting way in future debates. However, at the moment, we are not fully recovered and the recovery is not fully secure. I want to concentrate on the effects of budgetary strategy on the present situation.

One obvious thing to say from the start is that the Chancellor has failed to meet his deficit reduction targets. That is very obvious but it is not much mentioned any longer. He inherited a prospective deficit of £149 billion in 2010-11, equivalent to 10% of GDP. He promised to get this down to £20 billion or 1% of GDP—or zero, depending on your definitions—by 2015-16, mainly in spending cuts. By this fiscal year, the deficit should have been down to £60 billion. In fact it is projected to be £108 billion, or 6% of GDP. Now the Chancellor says he must cut spending by another £25 billion, which would be £62 billion in total over four years, to meet his target. The key question is: why did he fail on this crucial test—the test on which he staked his credibility in 2010?

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In order to answer that, we have to start by distinguishing between fiscal tightening and deficit reduction. They are not the same thing. Tightening is raising taxes and cutting spending. The effect of these measures on the deficit depends on what happens to the Government’s revenue—the other side of the balance sheet—and that depends on what happens to the economy. Here we come to the key explanation of why the Government have failed to hit their targets. The Chancellor has done the tightening all right but the economy has not grown as expected. George Osborne expected the economy to grow by 2.3% in 2011, by 2.8% in 2012 and by 2.9% this year. In fact it grew by 0.9% in 2011, 0.3% in 2012 and 1.8% in 2013. The economy started collapsing almost from the moment George Osborne took office and because it did not grow according to plan the Chancellor has been forced to announce further tightening.

Was this just bad luck? I do not think so. The official line is—it is always is when policies do not work out as expected—that sound measures were blown off course by unexpected events; these being the Greek sovereign debt crisis, European stagnation and so on. Then the argument goes that to have abandoned austerity at that point would have been fatal. The markets would have done a bear on sterling and things would have been a lot worse. By sticking to his tightening, the Chancellor was able to continue to borrow cheaply. In his Budget speech George Osborne claimed that debt interest payments would have been £42 billion more had he not stuck to the policy.

I obviously do not have time in the two or three minutes left to say why I think that whole set of arguments is fallacious. But let me just say that the Chancellor’s policy was based on the wrong theory of the relationship between the Budget and the economy. It is as simple as that. He believed that if the Government cut their spending, the private sector would take up the slack. That is simply untrue when we are in a slump. If the private sector is tightening its belt—either reducing its debt or increasing saving—the last thing the Government need to do is to be tightening their own belt at the same time for the obvious reason that the two sets of tightening will reduce total spending in the economy. If there is a reduction in total spending in the economy there will be reductions in investment, output and employment. The Government cut their spending but so did firms and households. No wonder the economy went into a nosedive. I do not think it takes rocket science to work out that that would happen. The TUC just the other day suggested that we have an investment gap of £50 billion as a result of these policies.

What about the present upturn? Surely that is a vindication of austerity. It may be three years late—later than he thought it would happen—but it has still happened. I do not think that is as a result of austerity. It is true that employment fell less than output between 2011 and 2013 and the Government have congratulated themselves on the number of new private sector jobs that have been created—1.7 million on the present count as the Minister said in his introduction. However, the headline unemployment figure—the claimant count—has ceased to be a reliable measure of the amount of slack in the economy. In the past two years the private

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sector has created a large number of bad jobs—part-time, minimum-wage and zero-hour contract jobs—to replace the better jobs that have been lost. That is why productivity has fallen. Any job is better than no job, but we need a measure of underemployment and economists have been thinking of different sets of measures. On those measures, underemployment in the United Kingdom amounts to about 10% of the workforce and not 7%.

The economy’s growth in the past six to nine months has been in spite of the Chancellor’s Budgets. The reason for the resumption of growth is twofold: first, external conditions have been kinder, and secondly, there has been an aggressive policy of monetary easing. Since 2011, the Bank of England has injected £175 billion of new money into the economy. That, much more than fiscal austerity, has kept down the interest on government debt. It has also produced a boom in asset prices—homes and stock exchange securities—which has contributed to the feel-good factor and to an increase in confidence. By the same token, quantitative easing has produced a lop-sided and vulnerable recovery. Not only does it threaten new financial crashes down the line, but it has increased inequality. As John Kay of the Financial Times put it last year:

“The main effect of QE is to boost asset prices”,

and,

“The one certain outcome … is that those with assets benefit relative to those without”.

I agree with that. To put it crudely, a recovery based on an asset boom will be weaker and less resilient, to use the Chancellor’s favourite word. I prefer it to “sustainable”, which has been hugely overused. It will be weaker and less resilient than a recovery based on a widely distributed upsurge of purchasing power.

I do not believe that the Chancellor has been much influenced by economic arguments; certainly, he has not been influenced by mine. His policy has, I think, been mainly driven by the ideological belief that state spending is inherently wasteful, that it destroys incentives to private wealth creation, and therefore should be cut to a minimum. The ballooning of the deficit in the slump simply gave him the opportunity to act on these beliefs. In doing so, he has prolonged the slump, caused unnecessary hardship to millions and seriously damaged the growth potential of the economy.

4.12 pm

Lord James of Blackheath (Con): My Lords, I shall deal with two separate points and will make a separate declaration of interest on each. First, I was for a significant period early in my career a member of Lloyds Bank. In that context, I want to address one point which arises in the Chancellor’s address on the Budget. It is probably the only sentence in the whole thing that does not deal with the Budget. He said:

“Another abuse has been the manipulation of the LIBOR rate”.—[Official Report, Commons, 19/3/14; col. 786.]

In that context, I question the words “abuse” and “manipulation” as being too easily accepted without challenge.

When I joined Lloyds in 1959, I was sent to the training course at Ramsay Lodge in Scotland—it was part of the castle complex—which was owned by the

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Bank of Scotland and run by Lloyds. It was a wonderful training course, with the slight complication that it was in a building immediately adjacent to a residence for trainee nurses. There were 80 of them and 40 of us. It was a bit of an unfair match. There was a croquet lawn between the two buildings. In the course of 12 weeks, I do not think a single croquet match was played on it but by the end not a single blade of grass was left because of the clatter of boots.

Every week, we got a visit from a different director of Lloyds Bank who lectured us on a specific subject. In week 2, in September 1959, we got a lecture from a director on the subject of LIBOR. None of us had ever heard of LIBOR. I took proper lecture notes, and I still have them. I have been looking at them, and there is a very interesting distinction in them. When the director explained to us what LIBOR stood for, it was not what it was said to be when the scandal erupted three or four years ago. Then we were told it was the “London interbank offered rate”. On the training course, we were told that it was the “London interbank overnight rate”, and the director made no bones about the fact that the word “overnight” implied that it was take it or leave it, no option whatever. He freely admitted that it was the most profitable thing in the bank and made a fortune for everybody. If the word has been altered from “overnight” to “offered”, the latter would surely be manna from heaven to any lawyers defending it, because it would mean that you have a choice. If we have moved into the electronic age as regards the movement of capital, you can make that choice and manipulate it very much more easily and swiftly.

Can the Minister talk to the London clearing bankers’ association—and can the Treasury look at this—and find out when that word changed? What principles and rules were laid down for its application at that time? It may be that we have challenged and accused the banks because of the way that they operated under the old system, and that it has been replaced, and this is damaging our banking industry and the scale of fines and punishments that are now being imposed. That issue should be addressed, and I ask the Minister to look at it. The Bank of England may have some clues, and Lloyds Bank itself may have some, but there has been a significant change in that wording, which needs to be looked at.

Secondly, there is a very interesting difference between the attitudes of the two sides of this House as shown in the course of this debate, which puts me in a very interesting position. I want to declare that my father was a fully paid-up member of the British Communist Party. I do not know how many descendants of members of the British Communist Party sit on these Benches over here, but he would be horrified to see where I am now standing. He had two great hates in this life: the Conservatives and the Church of England. I think that he thought they were both the same; he never drew a distinction. He had a lifelong desire to see the destruction of both, and there were two great bad moments of my life as a young man. The first was when I joined the Young Conservatives and he immediately called me a class traitor who should be thrown out of the house. I said, “I only joined it because they’ve got the best-looking girls”. He replied “Yes—but they all

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stink. All Conservative women stink”. “Why, father?”. “Because they have such terrible ideas in their brains, and it rots their insides and they stink.” I said, “I’ll go and do some market research and will let you know”, and I never found any evidence to support it.

My father regarded the Conservatives as the enemy, but attributed the extreme poverty in which he had grown up to the Church of England—that was the cause of his problem with it. His mother had been the district nurse—the midwife on a bike, although nothing like the television programme—in Hammersmith. His father had died the year after he was born, and she had managed somehow to keep three children alive and fed. However, she then got a dreadful infection of her teeth, all of which had to be extracted, but could not afford the dentist’s fee. Therefore the church got the dentist who was part of the congregation to agree to do it free, but nobody would pay the seven shillings and sixpence for the anaesthetic, so she died in the chair as a result of the whole process being done in one night. The church then had three orphans to deal with, whom it initially put into a Church of England orphanage in south London. Two of the children were then sent across to Canada as boat children, where they were sold for $50 each to the first family who would take them; my father never saw them again. Meanwhile, he met my mother, who was in similarly unfortunate circumstances, in the orphanage in south London. She was 12 and he was 14, and they married 10 years later.

My father used to go on about how I had advanced to the point where I had been able to go to private school and see the comparisons and all the rest, but I should always remember that I was a working-class boy—as I always have. However, he would then talk about the socialists of the day and say, “They’re not real socialists—they’re chocolate box socialists”. Today we have seen the chocolate box socialist position on this Budget on the other side of the House. My father would have described it as “chocolate box”, first, because they have all joined because they have opinions which mean that they want to be identified with the pretty picture on the box, and secondly, the chocolates inside are soft-centred and far too bitter to swallow. That would be his reaction, and that is my reaction to the whole presentation we have had across the House. If my father had then asked me what I thought I was associated with on this side, I would say that the contrast is that this organisation has understood this political difference: you cannot spend money that you do not have, and you have to make the money first to spend it. That is the line we have taken, and it has been consistent here today.

However, my father would now be sitting on a cloud, laughing his head off and looking at me, saying, “Look, lad, I used to tell you it was clogs to clogs in three generations but you’ve done it in two, because your posh friends have just completely destroyed your entire position with your pensions”. I have five pensions, but then I was chairman of 11 public companies in 21 years, and so I had to put them together bit by bit wherever I went. I think that my pension is ruined by the Budget last week, and I would like to hear a reaction from the Minister on that. My position is that if you stop the flow of funds to the annuity companies

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and simultaneously withdraw funds from them, you will create a double whammy that will drive them out of business in very quick time. In that case, I expect very shortly to get a letter saying, “Sorry, we can’t pay you any pension this month, as we’ve no money left”. How long is it before that is going to happen, and what will the Treasury do to mount an oversight and monitoring process to ensure the continued health of the annuity companies?

My nightmare would be to see Labour come back into power and decide that it had to correct this by nationalising the annuity companies. The Labour Party cannot say that it would not do it, as it has form on this—to put it in criminal terms. It has had a look at taking money out of pension schemes; it has form, and it would do it if it had a chance, so it should not say that it would not do it, because it would. So we need to know how we would protect the annuity companies against that ultimate calamity.

I think that my father is having a very good laugh and saying, “I told you so—it serves you right for being on the wrong side of the House”. But I am absolutely in the right place and, from what I have heard, you guys are in the right place, too, and thank you very much.

4.21 pm

Lord McKenzie of Luton (Lab): My Lords, I think it is clear that this Budget had more than an eye on next year’s general election. Aspects of it are, of course, to be welcomed. There is the U-turn on the annual investment allowance, now to be doubled, up to the election at least, after originally being cut, and the doubling of export finance—albeit that the Government are to miss their export targets and are struggling to rebalance the economy. There is the news that the economy is growing again after three damaging years of flatlining, albeit with no recovery for millions of families who are experiencing a fall in living standards. There is good news for savers also, if you are one, but the prospect of being able to tuck away £15,000 per year into a NISA or to have the first £5,000 of savings income subject to a nil rate of tax will seem but a distant dream to those who the Centre for Social Justice refer to in its report entitled Maxed Out. I refer to those millions of people in the UK who are struggling under the weight of their personal debt, with squeezed household budgets, zero hours employment contracts and a rising cost of living. The budget does nothing for them—nor has it protected public services, which provide vital support for the most vulnerable in our society.

The noble Lord, Lord Holmes of Richmond, advised us when we were discussing these matters to reflect on the fact that the Budget was about real people’s lives also. I very much agree. I had brought to my attention just yesterday—and I pass it on to the Minister—the example of Mapledown School in Barnet, a secondary school for disabled children that provides vital care for 65 pupils, so as well as educating the children it also supports their carers. Because of cuts to the council, passed on by the council, the school has had a reduction of funding of some 25%, with heavy restrictions on the services that it can provide. So in winding up, perhaps the Minister could

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give that school some sort of message about when it is expected that it might be able to share in the benefits of recovery.

I propose to concentrate the rest of my contribution on the announcement on scrapping compulsory annuitisation—or, more accurately, the compulsion to take an income by way of annuitisation, or drawdown, from a DC scheme. It is, in the words of the IoD,

“the most radical reform to the pensions savings architecture in decades”.

That is possibly true and, given its ramifications, it is all the more to be regretted that this announcement came with no prior consultation, and with a paucity of underpinning analysis. Then there are major issues, such as the impact on the gilts and bond markets and government investment—a point stressed by my noble friend Lord Haskel. Also, how much of it can or should work for private sector DB schemes, what does the guaranteed guidance amount to and how can it be delivered? What does it mean for the future of the annuities market—a point just raised by the noble Lord, Lord James? Will it fuel a buy-to-let market? These are left as open questions for changes which are due to start in a year, and transitional changes which are due within days.

In his rush to get a favourable headline, the Chancellor forgot something else. The Government have eschewed the opportunity of building a consensus for this policy in advance. They ignore all the efforts which have underpinned so much of pensions policy development in recent decades, from the Pensions Commission through auto-enrolment to the single-tier pension. The policy is predicated on the importance of consumers having choice—choice, that is, in the decumulation of their pension pots. The mantra is that it is their money and we should trust them to make the right decisions about how it is deployed. Perhaps begging the question as to whose money it is, given that DC schemes get a contribution from the taxpayer on original investment and again on accumulation, we can agree with the importance of choice, provided individuals have the opportunity for an informed choice. However, we recognise that informed choice can be difficult given the complexity of the pensions marketplace.

The NAPF saw the Budget announcement as perplexing in its juxtaposition to auto-enrolment, which was designed to counter the fact that often people are ill informed and make poor decisions about planning for old age. It says:

“On the one hand the idea that savers can take their pension as a lump sum, albeit subject to tax, may be an incentive to save. However, this choice brings with it a significant burden of responsibility for individuals to understand the choices they are making. We know this is not always the case as people often underestimate how long they will live and overestimate how long their pot will last”.

The prospect that those in retirement will take more of their pot earlier produces considerable extra resource for the Treasury. There may no longer be the 55% exit tax charge, but there are still substantial revenue gains for the Treasury, reaching £1.2 billion in 2018-19, and some £3 billion overall by the end of that year. What are the estimated withdrawals from DC pots which generate these numbers, and what is the assumption

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about how they are invested? The Treasury is also, ironically, taking the benefit of some £850 million from the sale of class 3A national insurance contributions—effectively an annuity product—the cost of which will mean increased state pension payouts beyond the forecast period.

The Pensions Minister—perhaps we should call him Mr Lamborghini—has apparently declared himself relaxed about people blowing their pension pots and believes that the single-tier pension will preclude them falling back on the state for support. This analysis ignores the extent to which means-tested benefits for pensioners endure through the single-tier pension arrangements, and there will be many still invested in their DC scheme who have retired, or will do so, before the single-tier pension comes on stream.

We know that the annuities market is not currently serving consumers well, and the Financial Conduct Authority considers that people are getting a bad deal. Annuity rates have been in decline and the fundamental reasons for this are clear—people are living longer and we have been in an extended period of rock-bottom interest rates. However, matters are made worse by too few people shopping around for the best deal and suggestions that the insurance company providers are extracting super-profits from their annuity business. Recent figures show that someone with a modest pension pot of £24,000 could increase their annual income by 25% just by shopping around to get the best deal. The Government have not helped by their refusal to introduce a cap on charges.

However, the position is not all gloom and doom. Annuity rates for 2013 rose because of rising gilt yields and a more competitive pricing environment—the latter driven by the focus on transparency by the FCA and the ABI and the unwinding of some of the cautious pricing from gender-neutral changes. There is an inevitability about some of the factors which have driven rates down—longevity being one—but not all.

Some of the market failures can and must be fixed. However, in acknowledging the potential benefits of more choice, we must not lose sight of the important role that annuities play and can continue to play. They are the only financial product guaranteed to produce an income for life, with the investment risk and the longevity risk remaining with the provider. They also pool risk, which is reflected in the pricing. Having individual choice over individual pension pots runs counter to all this. Certainly one of the big questions that arises from these proposals is what the annuity market will look like in the future. Evidence from other countries suggests that many will not annuitise. What is the Government’s assessment of how this is likely to affect the market, particularly on pricing?

We need to better understand precisely what is to be provided to consumers under the guaranteed guidance. Perhaps the Minister can confirm that we are talking here not about advice, but guidance; there is a difference between the two—guidance is a weaker concept. There are substantial issues about ensuring the robustness and independence of what is to be offered, and there is a wider issue of whether a one-off, face-to-face session at the point of retirement—what happens to those who have retired already or those who retire in stages?—

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will be sufficient to fully inform consumers and equip them to make effective choices for the rest of their retirement. Frankly, I doubt it.

This all gives the impression of having been put together somewhat in a rush, without due analysis and with big questions remaining unanswered, and perhaps with a hint that under the guise of promoting choice the Government are looking to rake in another £3 billion in tax from pensioners. That is no way in which to develop a sound, long-term pensions policy.

4.31 pm

Baroness Neville-Rolfe (Con): My Lords, I am glad to be following the noble Lord, Lord McKenzie of Luton, and to be able to express a contrary view.

When the coalition Government took office in 2010, the country was in desperate need of a credible plan to eliminate the deficit and to manage the national debt. They adopted such a plan knowing that it would take several years and that there would be a great deal of criticism along the way. The Government were faced with an Opposition consistently critical and negative, whose alternative appeared to consist of inviting us to spend our way out of debt.

Given the great reliance of the UK economy on banking—greater than that of any other major economy—the turnaround was always going to be slow and painful. The welcome return to sustainable economic growth—I like the word “sustainable”, unlike the noble Lord, Lord Skidelsky—has vindicated the Government’s approach. Even so, there is a long way to go until the deficit reaches acceptable levels, as the noble Lord, Lord Desai, explained so clearly. The present path—call it austerity if you will—must be sustained. If anything, deficit reduction should be speeded up.

The deficit and the national debt, and the return to growth, are clearly the most important economic matters before us as a country, and have been well aired today. However, I want to concentrate on some supply-side aspects of the Budget that are essential to future prosperity. First, we should have fewer Budgets and Financial Statements. These provide opportunities to tinker, regulate and add complexity to the vast financial rulebook, which is unscrutinised by this House, as other noble Lords have said, but consume ever more resources in the public and private sectors. However, with the supply side in mind, I commend the Government for the sweeping reforms of our pension system in last week’s Budget. By reducing the constraints on individual choice, the reforms will revolutionise the way in which Britons save for retirement.

There is a risk that a few will blow their small pensions irresponsibly. We must, of course, allow for this in the cost-benefit projections and work through the details. However, we should trust people as we trusted them to buy their council houses—also substantial assets. The change to the rules on annuities, which many will still opt to go for, is the kind of radical supply-side reform that transforms people’s lives. Transformation was also the word used by my noble friend Lord Bourne of Aberystwyth. Such reforms have been absent for too long.

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I was impressed by this year’s Red Book—a cornucopia of interesting information, simply written, and also, as we have heard, favourite bedside reading for my noble friend Lord Northbrook. I was struck by what it shows about the path of future taxation: national insurance, up from £107 billion this year to £138 billion in 2018-19; capital gains tax, more than doubling from £3.9 billion to £9 billion; and business taxes, close to my heart as a retired retailer, up from £26.6 billion to £32.3 billion, despite attempts to slow their growth. What a pleasure, I should perhaps say, to hear from the right reverend Prelate the Bishop of Chester about the social institutions that helped Sir Terry Leahy, also of Tesco, to make his way up from working-class Liverpool.

As a member of the business community, I have always been concerned about our standing in the world and have championed UK competitiveness. We have been lucky to have been served so well by Trade Ministers on both sides of this House, most recently by my noble friends Lord Green of Hurstpierpoint and Lord Livingston of Parkhead. Therefore, I welcome the improvements to export finance, to export support and, indeed, to the cost of long-haul flights announced in the Budget. Perhaps the Minister can let us have more details on the costs and the timing of these initiatives when he responds to my noble friend Lord Sheikh.

Those are of course only some of the ways in which government can help our exporters. Perhaps even more important than finance or trade missions is the support provided by our embassies on local political and administrative issues, which can, in my experience, be the difference between a successful and a very troublesome investment. More generally, the drivers of competitiveness and hence success, including export success, are: low taxes, where we have done so well on corporation tax—the Chancellor’s best policy for business, although more can be done, as others have said; the exchange rate and energy costs, the terms of trade, well explained by my noble friend Lord Razzall; and encouraging enterprise, education and infrastructure investment.

On enterprise, I hope that the doubling of the annual investment allowance will, by encouraging capital spending, improve productivity—an issue about which many noble Lords have expressed original and interesting views. However, government action is less important to enterprise and small business than the overall climate. Business will succeed and improve productivity only if it has the confidence to take risks and to invest. Our accelerating growth and the rise in employment to a record 30.4 million by the end of this year will certainly help. We have heard that for every job lost in the public sector over the past three years, we have created four in the private sector—I would add that many of these new jobs are in small firms—which in my view is better for long-term prosperity.

However, in business we also have to believe that success will be sustained and that we can get ahead in the longer term. This depends primarily on education. The Secretary of State is doing many good things. Free schools are rightly identified in the Red Book as a growth driver and now number 174. We just need more of them—even more “vigour”, in the words of

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my noble friend Lord Horam. I also welcome the 50 university technical colleges, fulfilling the dream of my noble friend Lord Baker of Dorking, and the 46 studio schools.

However, let us learn from Germany in this area too. Trades are learnt from sitting alongside experienced master craftsmen and engineers, and employers have a big role in vocational course design and standards. Therefore, there is more to do but I was delighted to see that apprenticeship starts have reached 1.6 million in this Parliament. These are helping many young people into the skilled jobs that we need in a productive modern economy, in manufacturing, ICT and services.

The Budget also helps long-term competitiveness by finding resources for infrastructure investment—not only the housing projects already mentioned, but the Mersey Gateway Bridge, the improvement to the overcrowded M4 in Wales, the A1 north of Newcastle, and continued rail improvement in our ever-expanding and congested capital, building on the miracle of Crossrail.

I end on a final theme, which is how we simplify what the public sector does so that we waste less money, make fewer mistakes and make it easier to do business. I was glad to hear of the Prime Minister’s ambition to see us ranking in the top five countries in the world in which to do business, and would like to refer to the World Bank Group data on this, kindly provided by the Library. Singapore, Hong Kong, New Zealand, the United States and Denmark top the chart at present. In the UK we already do well in the provision of credit and protection of investors. However, it is depressing to see that we score badly in the time that it takes to enforce contracts, register property, get construction permits or start a business, and even in the time it takes to pay taxes.

The proposed simplification of the tax system, though not new, is important. As someone who has campaigned for the politically unattractive combination of income tax and NICs, I am glad to see a small advance: allowing the self-employed to pay class 2 NICs through self-assessment.

How can we build a coalition for a simpler, less bureaucratic and less costly Britain? My vision is for a rule book that is half the size of what we have at present, with half the number of regulators, half the number of quangos and half the number of tsars as we shut things down as well as set up important new things.

We also need a new culture of good implementation that prevents the expensive crises that we see everywhere, from Stafford to the west coast main line, and the new regulation that often follows. Reliable delivery is one of the best things that the best in the private sector can teach the public sector.

I welcome the progress that the Minister has described but we need to keep our nerve, stay on the stony road and gradually bring our plans to fruition.

4.41 pm

Lord Davies of Oldham (Lab): My Lords, that was an excellent speech. We are destined to stay on the stony road, according to government plans. It was an excellent speech in a debate in which there have been

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many excellent speeches on both sides of the House. Inevitably, I took much greater solace from those on my side than from the government side, but nevertheless the Minister introduced the debate very competently, as we would expect, and to all who have contributed I pay due tribute as to the quality of the debate. In the wind-up it will be appreciated that mentioning all 30 contributions would be above and beyond the timescale on which any of us operates.

Let us get this absolutely straight about the Budget. We are engaged in the American experience. This is a year-long election campaign that we are starting. The Americans, of course, extend that to two years, or more. They have almost continuous election campaigns but we have the full-blown one year, or a little longer, election campaign because we were ridiculous enough to agree to establishing a fixed-term Parliament under the auspices of the coalition. It means, of course, that the Queen’s Speech will be cobbled together on the lowest common denominator between the two parties, which want to differentiate themselves before the election. A few dusty Bills that have been locked away in departmental cabinets for so long can now be brought out to keep Parliament vaguely occupied while the MPs do what they always do. They will go back to their constituencies as often and as much as they can. I have never met a Member of Parliament, male or female, who was not absolutely assured that when it came to winning votes the best place they could be was in their constituency.

That is what we are facing and that is what the Budget is about. It is a pre-election Budget. The Chancellor is setting out to shore up his core vote. That is why the noble Lord, Lord Higgins, reflecting on his past as a Member of Parliament for Worthing, emphasised that there would be much joy in Worthing. I am not at all surprised. I reckon that there will be much joy in most of the constituencies that return a Conservative majority of 20,000 or more. Of course, we expect the Chancellor to take some cognisance of the needs of the nation, rather than the needs of those he seeks to shore up against what he probably regards as a somewhat unfair UKIP threat.

The noble Lord, Lord Palumbo, expressed the view that we should begin to pursue the objective of a new politics. However, I would not advance that argument in a pre-election year. There is no way in which we can avoid the circumstances in which a polarisation of debate will take place over the coming year. The noble Lord will have to bide his time and try to win support for his arguments later.

This Budget is highly political. The most striking thing about it was how political the Chancellor was in springing pensions reform upon the nation. As the noble Lord, Lord Stoneham, identified and my noble friend Lord McKenzie emphasised, pension reform in this country has been built on the basis of the parties reaching some modicum of agreement. Of course it has. Pensions have to be sustained over a considerable period of time and are fundamental to the welfare of our fellow citizens. However, this pension reform is not a product of consensus. It is true that my party had indicated growing anxieties reflecting the public mood about the way in which annuities worked and that reform was needed, but this reform was brought

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in in one fell swoop as part of a carefully guarded government secret purely for electoral and political considerations.

It is all the worse for that because the Chancellor and others will have to wrestle over this coming year with the issues identified by my noble friends. These issues include: how adequate independent advice will be offered to so many people; how we will deal with the situation where some people cash in their pots and then, potentially, subsequently fall back on society; and how we deal with the fact that there will not be a collective response to the development of pensions. We are all at different levels of risk and chance elements as far as the grim reaper is concerned, and that is why the concept of insurance is so important. However, the Government are in danger of throwing people on to their own resources and takings risks, and that is why this reform should never have been introduced in this way.

The second issue on which I wish the Minister and the Government to respond relates to the point made by my noble friend about housing inflation, low credit terms and easy credit being the basis of this recovery. My noble friend Lord Hollick explained that it was exactly these factors that helped to exacerbate the collapse and the crisis that we all endured. How can the Government pretend that they are on the high road to economic recovery when it is based upon the same factors that brought disaster in the past? I hope the Minister will address that point because my noble friend Lord Hollick was emphatic that it should be answered.

There are taxation changes in the Budget which, on the whole, are generally regarded as neutral—of course they are. This is because many of them are lost upon anyone who cannot take a joke such as, “Please have a free pint of beer on the Chancellor after you have consumed 300 prior to that”, or something similar on the reform of bingo. These are the classic budgetary tactics which are adopted in a pre-election year. We got them in pretty full measure, if nothing else.

What my noble friend Lord Haskel sought to emphasise is that the Government are ignoring the cause of difficulties in other countries. They always identify the economic problems of this country as if they happen in isolation—until they begin to tackle them. They have to take on board the fact that we are in a worse position in terms of the length of our crisis than is any other state except Italy. We are boasting about these marginally increased rates of growth after several years when there was no growth at all, and we are ignoring the fact that the United States, for example, is operating on a growth rate at the present time of 5%. The Government had better wise up and realise that they have something to learn from other nations which have tackled these issues differently. They have pursued entirely different strategies, but the Government purport to suggest that their approach, that of austerity, is the only one.

The noble Lord, Lord Low, accurately and eloquently defined how austerity is biting and the significance of that, while the noble Lord, Lord Skidelsky, launched a bit of an Exocet at the Government on the basis of the strategy they are pursuing by explaining just where they have got things wrong.

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The Chancellor has got things wrong. He made the fundamental claim that the deficit would be removed by 2015, the year of the next general election. Now he is saying that it is going to take a little longer, deeply into the next Parliament, but not too deep. Well, that looks like failure if it is giving us a promise of the adoption of the Government’s strategy. The Chancellor has also indicated that the recovery would see borrowing reduced in such a way that he will set an example in how he has conducted the economy. But the Government have borrowed more in five years than the previous Labour Government borrowed in 13 years. He has also emphasised that the crisis has been a difficult one, but that he will tackle it in such a way that the country can rest assured under his governance. What has that meant? It has meant austerity of such a kind—I do not think that this has been given a sufficient airing in this debate—that wage earners have seen an average reduction of £1,600 a year in their resources as a result.

As far as the Government are concerned, it is not possible to do anything about the recession except stimulate the demand for housing. We are already finding it very difficult to meet that demand and we all know about the shortage of housing in this country, particularly in the London area. What are the Government doing? They are doing nothing about supply; rather, they are encouraging the development of enhanced demand through their scheme of lending support for mortgages.

The Government have also done absolutely nothing for young people. We all know that there are differences between the needs of the different generations, but what is quite clear is that although pensioners have not seen an enhancement of their position in the way they might have hoped—they are now to get this particular bonus from the Government—it is our young people who are really bearing the weight of the recession. It is our young people who cannot get jobs. In case the House thinks that I am talking about people who cannot get jobs because they are incompetent, what is the developing crisis in the universities about if it is not that people are not repaying their fees? Why are they not? Because they are not earning enough money—£21,000—to be eligible to have to repay their fees. It is causing a crisis in university finance and young people are paying the price.

The Government are also of course taking advantage of those who cannot fight back so easily—350,000 people visit food banks regularly, which is an absolute indictment of the society in which we live. I accept the points the right reverend Prelates made about their concern with the distribution of wealth and the very important point which the right reverend Prelate the Bishop of Sheffield made about seeing that support and economic development occur widely across the country and not, as at present, remain concentrated almost overwhelmingly in the south-east, with the disastrous consequences we have seen for house prices in that region.

In case it is thought that I have been critical of the Government but not faced up to the fact that painful measures need to be taken, of course we recognise that. I emphasise that the first proposal for a welfare cap was made by my leader, Ed Miliband, in June 2013. We were aware of course that the issue of

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escalating welfare payments had to be tackled—but that does not mean that we can indulge in a Budget which is purely about electioneering and consolidating the Tory core vote.

4.57 pm

Lord Deighton: Along with the noble Lord, Lord Davies, I pay tribute to the very stimulating contributions from right around the House. The past five hours have simply flashed by. Like the noble Lord, Lord Davies, I hope contributors will excuse me if I do not refer to them all individually. I think the most helpful way to sum up is for me to try to break down the discussion into the five or six key areas and go through what I think were the pertinent issues and the points that I should address.

I begin with pensions and savings because, as my noble friend Lord Bourne said, this was a transformational Budget precisely because of what we were able to do in terms of the pensions revolution. With one or two exceptions here today, it has been very broadly welcomed, particularly by my noble friends Lord Wakeham, Lord Higgins and Lord Stoneham, as well as by a number of other noble Lords. I absolutely accept that the provision of expert guidance is a critical part of making this transition work. The Government have laid out a clear plan and commitment to that, which we will follow through. I was very taken by the very thorough analysis offered by the noble Lord, Lord McKenzie, of some of the potential impacts which will flow from a change this radical. He is absolutely right to bring those to our attention, and the consultation that we have started will attend to them very directly.

My noble friend Lord James referred to the risk to the annuity companies. A similar change occurred in Ireland and the health of the annuity companies was just fine. My general attitude to the financial services business is that in the same way as we have given pensioners the flexibility to respond based on their own requirements, I think we will find that pensions and insurance companies will be able to respond very flexibly to the new environment. I will certainly take away the request from my noble friend Lord Flight to have a look at the NISA tax issue with respect to the tax treatment of the surviving wife.

We have had this discussion—I think we had it last year as well; in fact, I am sure we had it last year as well—about whether our debt and deficit are really going down fast enough, or whether they have gone down at all. I thought that I was quite clear about the process we are going through, and my noble friend Lord Higgins echoed the way in which I approached it. The situation is really not that complicated. We inherited a record deficit. Until you get that deficit to zero, of course debt will continue to go up. The OBR tells us that we will be back in surplus by 2018-19. It is only at that point that the accumulated debt can begin to go down. We expect the deficit as a proportion of GDP to hit its peak in 2015-16 and then begin to come down.

It is a difficult, long-term process. There are many more cuts that need to be made in order for us to be able to accomplish that. My right honourable friend

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the Chancellor could not have been clearer about that. I really do not accept the suggestion of the noble Lord, Lord Skidelsky, that this is driven by some ideological rage to reduce the size of the state. It is driven simply by what I regard as an extremely sensible approach of reducing the amount of debt because debt will eventually overwhelm you and leave you with absolutely no protection against future shocks. It is true in personal finances, it is true in company finances and, while there is more flexibility in sovereign finances, ultimately you have to deal with the same issue. We were overleveraged and we have to fix it. I absolutely agree with what I think was the most popular contribution of the day, from the noble Lord, Lord Desai, that the deficit just has to be eliminated, and we have stuck to the plan to do that. My noble friend Lord Horam pointed to the fact that there are still some risks out there, whether in China or Ukraine or deflation in the eurozone. It is by no means plain sailing even if we stick to the plan.

I will talk about the recovery. The debate we had last year was about there not being a recovery. We have moved on from that. As the noble Lord, Lord Desai, said, we were discussing whether or not we were having a triple-dip. We have moved the debate on. Now the debate is about whether it is the right kind of recovery, which is a higher class of problem for us to be addressing. It is interesting that the essence of the Opposition’s position on this is the risk of, “It might look as though there are some of the components of all the mistakes we made”. If that is the best criticism that can be levied, that tells you something about the potential strategy of an alternative Government.

The Chancellor has been quite clear—and I think I was quite clear in my opening comments—that this is a recovery that has some challenges. It is a partial recovery. There are some real issues in the imbalances. I was not trying to disguise that. The Chancellor has not disguised that. Investment has not yet come back as we would have hoped, although there are some signs. That is not unusual at this stage of a recovery so we should not be surprised. Exports are not performing as well as we had hoped.

On investment, the noble Lord, Lord Kestenbaum, made the case strongly for innovation, as did the noble Lord, Lord Hunt, and my noble friend Lord Eccles. I think that there was a lot of agreement about our need to tackle the productivity question and, looking at our science and research capability, the intangibles in the economy which do not get measured in the productivity numbers quite as we would like. I take all that on board.

On the balance of the recovery, the right reverend Prelate the Bishop of Sheffield implied that all the employment growth was in London. That is not consistent with the ONS statistics, which show that it is much more broadly based than that. My noble friend Lord Holmes made an excellent point in saying how crucial the employment recovery is, because those are real jobs for real people. At the beginning of the recovery, there was perhaps a greater proportion of temporary work, but if you look at the employment improvement over the past 12 months, you see that it is fundamentally in good, solid, long-term jobs. The sector which has seen the most benefit in terms of employment growth

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has been professional science and technical research, so there has been a lot more substance to the employment recovery in the past 12 months.

My noble friends Lord Sheikh and Lady Neville-Rolfe talked about exports. There are a number of combinations. It is clear that we need to switch over time from the EU towards the BRICS and the MINTs. I am joining the Chancellor in two weeks’ time on a visit to Brazil, where we hope to address what my noble friend Lord Holmes pointed to as our underperformance relative to the Italians. I think that everybody welcomed the extra support for UKTI and UKEF, so that funding can be provided to exporters at the most competitive rates. We now want to support our exports in the most aggressive way rather than try to make available a facility which made us the good guys in terms of complying with OECD rules in the most gold-plated way. I am very much in favour of a much more aggressive approach.

It was inevitable in a discussion on the balance of recovery that mention should be made of house prices and the housing market. I think we all accept that we have a long-term challenge to build the supply of houses that this economy needs. We tried to attend to this challenge at this Budget as we have in previous fiscal events. The initiatives at Ebbsfleet, Barking Riverside and Brent Cross, together with the expansion of the Help to Buy equity loans scheme, which is available solely to new house purchases, should all add up to improving the pipeline by about 200,000 houses. This year, we have seen more housing starts than in any time since 2007, so a degree of normalisation is going on in terms of the recovery from the financial crisis.

On the argument that house prices have been inflated by the Help to Buy scheme, I think that the scheme has been much maligned. If you look at the data behind it, you see that 75% of the houses supported are outside London and the south-east. I do not think that anybody regards us as having anything close to a housing bubble outside London and the south-east. Appearing in front of the Treasury Select Committee this morning, the OBR described the higher inflation in London house prices simply as a function of excess demand over supply. The problem was a lack of supply of houses; it was not a bubble. I think that one defines a bubble in terms of people speculating and buying houses on the basis that prices will go up and up, but that is not what is driving house price behaviour in London.

There was a lot of discussion about infrastructure, particularly from the noble Lord, Lord Hollick, who asked whether we should have borrowed more to be able to accelerate development. From my experience over the past 15 months in trying to tackle this problem for the country, it is clear to me that you do not turn infrastructure on and off like a tap. The political debate about it mildly amuses me, because we spend all our time trying to take credit for the things that are being built on our watch whereas, of course, those are all things that other people did all the hard work on to get them to that stage by the time you are in government.

The work I am doing is really to make the next one, two or three Governments look really good by having a stable pipeline of terrific projects which will come

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through. Those are things such as HS2, which we are trying to do in a first-class way. That will also bring growth back to the north, which we have talked about. That is why we spent so long trying to get Hinkley Point right. There was misinformation about the Hinkley Point investment. It is of no surprise to anyone that it is currently going through state aid; something of that scale was always going to go through state aid; we accepted that. The noble Viscount, Lord Hanworth, said that this was a bad deal for the British. The basis of the deal is that the French will construct at their risk a nuclear power station, and it is their problem if they cannot build it on time and on budget. I am very happy to have signed a 35-year contract with them on the basis that they can do that, because that was a risk that I did not want our taxpayers to bear.

More broadly on energy, which both the noble Lord, Lord Hollick, and the noble Baroness, Lady Worthington, addressed, the focus on energy in the Budget was about ensuring that our manufacturing businesses remain competitive. A number of things have happened in the short term. This morning, Ofgem referred the supply side of the industry to the Competition and Markets Authority for review, which is a good thing. We need a good, evidence-based review so that we can look at the facts to decide what we need to do with the supply side of the industry. That is the right outcome given the noise around it and the shortage of facts and evidence.

On generation, I think we are in good shape in our nuclear plan. The new energy policy has enabled us to write contracts for difference which can support that investment. We have a series of wind and other renewables projects under way based on the same CFD process, and we will see at the end of the year how the new capacity market auction works to trigger gas investment. It is extremely tricky to get the right combination of securing supply, making prices affordable and decarbonising at a rate which balances all the different interests, but we have a plan and it will work.

We had a little discussion about quantitative easing. There were questions from the noble Lord, Lord Myners, and a response from my noble friends Lord Higgins and Lord Flight. I shall not give a point of view about that because I think it undermines the independence of the Monetary Policy Committee of the Bank of England, whose job that is, but I accept that exit from quantitative easing is an economic issue that will need to be addressed intelligently.

The noble Lord, Lord Davies, said that there is really nothing in the Budget for young people. I really could not disagree more. This Budget is all about shaping an economy which will provide the jobs and opportunities that our young people can succeed in. For me, it is completely the other way round.

There was a very interesting contribution from the right reverend Prelate the Bishop of Chester on social mobility. For me, there is no better measure of a successful society than whether that is working. I know that Terry Leahy was certainly a product of that; as was I. For me, education is absolutely at the heart of that, which underlies all the work that this Government are doing in that area.

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There was some discussion of tax policy. There were very interesting suggestions from my noble friend Lord Wakeham about the longer-term plan to remove anomalies from some of the other taxes in place. Of course, stamp duty is a very profitable source of revenue for the Exchequer. The noble Lord, Lord Sheikh, mentioned increasing the personal allowance and bringing down tax rates. I would just point him towards the Chancellor’s comments that he is, ultimately, a believer in low taxes.

I should say as a coda that the noble Lord, Lord Northbrook, mentioned the Economic Affairs Committee’s recommendations. We will carefully consider and address those as part of the Second Reading. We decided not to address them today.

In short, and as noble Lords can tell, I believe that we have a plan that deals effectively with the extraordinary challenges and very high debt levels that we inherited from the financial crisis. As I have acknowledged and noble Lords have discussed, the economy faces many longer-term structural challenges that, crucially, we must address consistently over time. I think of our economic management as stemming and managing down the consequences of the crisis while at the same time putting in place structural reforms to position us to be a winner in the global economic race.

I thank all noble Lords for their contributions. The debate has been extremely stimulating. I apologise to those to whom I have not referred or answered in person but, as always, my door is open.

Motion agreed.

Prisoners: Indeterminate Sentences

Question for Short Debate

5.16 pm

Asked by Lord Wigley

To ask Her Majesty’s Government what steps they are taking to address the position of individuals serving indeterminate sentences on public protection grounds who have already passed their tariff.

Lord Wigley (PC): My Lords, I am grateful for the opportunity to have this short debate on the plight of individuals given an indeterminate prison sentence for public protection. This form of sentence was abolished in 2012, but many remain in prison, wholly uncertain as to when they will be released.

IPP sentences were introduced by the Labour Government in the Criminal Justice Act 2003. That Act placed a duty on courts to impose an IPP sentence on offenders who were convicted of violent or sexual offences if there was a serious enough risk that the convicted person might reoffend. A minimum term, or tariff, was placed on offenders, which they had to complete before qualifying for assessment by the Parole Board. It was planned that offenders would undergo rehabilitative courses when in prison prior to their tariff date, to help them “qualify” for rehabilitation. After being released, all IPP offenders would be out on licence for life.

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Within two years of the sentence coming into force in 2005, almost 3,000 people had been given an IPP sentence. The figure rose to 8,233 by 2012. Courts had little discretion in choosing whether to impose an IPP sentence, and many offenders were given such sentences after being convicted of offences such as burglary and robbery. Some of these were granted relatively short tariffs—one was set as low as 28 days. The Parole Board was given no extra resources to deal with the huge influx of IPP prisoners. Consequently, there were never enough places on relevant courses, so that the majority of those serving IPP sentences were kept in prison well past their tariff. Many are still there, with no immediate prospect of release.

In January this year, there were 5,335 prisoners serving IPPs in our prisons, two-thirds of whom had passed their tariff. As the Parole Board currently releases some 400 of these inmates every year, at the present rate it will take nine years to clear the backlog. David Blunkett, who was Home Secretary when IPPs were introduced, recently admitted that the Government had “got the implementation wrong”. They certainly had.

Parliament reacted to these difficulties through the Criminal Justice and Immigration Act 2008, which granted courts more discretion in determining whether to impose an IPP sentences on offenders, and provided that such sentences would be used only if the expected tariff was longer than two years. According to the Howard League for Penal Reform, these changes increase the average length for tariffs but reduce the rate of new IPP sentences by a third, yet the number of prisoners who were released remained very low.

In 2012 the then Justice Secretary, Kenneth Clarke, abolished the IPP sentence entirely and replaced it with a two-strikes life sentence system. In spite of a number of attempts in both Chambers to get the abolition applied retrospectively, the Government have, regrettably, steadfastly refused to do so. Today, there are still more than 3,500 offenders languishing in prison past their tariff date, serving a sentence that no longer exists on account of crimes which they may or may not commit in future. This is surely absurd. Had these individuals been convicted after December 2012 and, likewise, if they had been sentenced prior to April 2005—when Section 225 of the 2003 Act became applicable—they would not be in this situation.

The situation is particularly stark for those offenders who were initially given a short tariff. At the end of last December, there were 982 IPP offenders in our prisons who had been given tariffs of two years or less. That represented 18% of all prisoners serving IPP sentences. Had these 982 individuals been sentenced after 2008, they would not have received IPP sentences and would have been released years ago. This is grotesque and totally unfair to the prisoners and their families. A further 2,405 had tariffs of between two and four years, representing 45% of all IPP prisoners. They have no idea how many years they will remain incarcerated. It is hardly surprising that as many as 24 people on IPP sentences have committed suicide while in custody. It is easy to understand why many people deem IPPs to be “life sentences via the back door”.

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As might be expected, morale within the prison estate has taken a knock. Last year, the Howard League and the Prison Governors Association published research based on interviews with 102 senior prison governors. The majority reported that IPP sentences had a negative impact on both prisoners and prison staff. Furthermore, 92% said that IPPs resulted in decreased staff job satisfaction, since these prisoners were more likely to be disruptive. Discipline problems inevitably increased, particularly among those sentenced prior to 2008 with short tariffs who see others, sentenced for similar crimes after 2008, come and go while they still languish in their cells. One prison governor said that,

“invariably they could see no chance of release as they struggled to access appropriate courses ... This led to anxiety, resentment and discipline problems”.

Far from being rehabilitated, some prisoners can become more difficult as time goes by, especially if left to feel that they have nothing to lose and nothing to aim for. Prison governors also said that the additional demands arising from IPP prisoners had a detrimental impact on courses for other prisoners. The needs of individuals serving life sentences were particularly neglected.

The Government must surely find an alternative way of addressing these prisoners’ risks. Quite apart from concerns for justice, keeping inmates incarcerated beyond their tariff is a false economy. Every prison place apparently costs some £40,000 a year, so IPPs are costing more than £200 million a year in total. Furthermore, following the judgment of the European Court of Human Rights in the James, Wells and Lee v United Kingdom case, which was in favour of the plaintiffs, it is highly likely that more individuals will take the Government to court to gain compensation. In 2012, the European Court of Human Rights unanimously determined that detaining individuals serving IPPs beyond their tariff without progressing those individuals’ rehabilitation was “arbitrary and unlawful”. The Government’s attempt to appeal the decision was rejected in February 2013.

Under the LASPO Act 2012, the Justice Secretary has the power to put an order to Parliament which would require the Parole Board to direct the release of all inmates serving IPPs, provided that certain conditions are met. The Justice Secretary has indicated that he is not minded to do this, as he argues that it is not appropriate to modify sentences which were passed by the courts. I suggest to the Justice Secretary that he is ignoring the fact that, prior to 2008, the courts felt they had little option but to impose IPPs on someone convicted of any one of 153 different offences. I am sure that many sentencers would support such a move and, besides, the Justice Secretary must accept that he was given these powers for a reason. Indeed, I suggest that the Justice Secretary is acting unreasonably in applying a blanket refusal to use discretionary powers that Parliament has specifically given him and given him for a purpose. Parliament expected the Justice Secretary to use discretion; in refusing to do so, he is surely flouting the will of Parliament.

Consideration should also be given to converting the sentences of those given a tariff of two years or less to a determinate sentence of twice their tariff, which would mean—other things being equal—that

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many prisoners would be released immediately. The Government must also commit to increasing the funding of the Parole Board so that it can cope with the extra demands being placed on it, as well as providing the necessary resources for rehabilitation courses.

The introduction of IPPs in 2005 was, in no small part, the action of a Government trying to show that they were tough on crime even if the sentence itself was totally disproportionate to the crime committed. Now, this Government seem to be intent on giving out the same message and, incredibly, we learnt earlier this week that the Justice Secretary has tried to limit the number of books that inmates can read. Enough is enough. The Government must put justice and common sense ahead of politics, bring an early closure to the plight of those so unreasonably detained in prison, and remove what is increasingly seen as a disgraceful blot on the good name of British justice.