Cost of Living — House of Lords, 2022-06-09
Topic: Macroeconomics
Alan Thomas Howarth (Labour, Centre-left): I thank my noble friend Lord Eatwell for his incisive analysis, and it is a pleasure to follow the noble Lord, Lord Griffiths, whom I hold in enormous respect. CPI inflation at 9% is, in reality, 11% for households on low incomes who have to spend a higher proportion of their resources on energy and food. Inflation for them may hit 14% by the autumn. Families on exiguous wages and capped social benefits are in deep difficulty The noble Lord, Lord Griffiths, spoke rightly about how inflation is corrosive of trust. I suggest that the erosion of social capital—in the sense of strong social relationships and trust, which are a precondition of a strong economy—has been due above all to what proved to be excessive reliance since the 1980s on free market policies. Markets, for all their wealth-creating dynamic, are solvents of institutions, traditions and social bonds. The twin cults of individualism and competition have set all against all. As rewards to asset holders have exceeded the rewards to labour, there have been huge accumulations of private wealth, and inequality has reverted to the levels of a century ago. The wages of the disadvantaged and undefended in the labour market have stagnated and their lives have become more precarious. Young people see the system as stacked in favour of older generations. Toxic pathologies have been induced by such inequality. The effusion of national solidarity at the Queen’s Platinum Jubilee expressed a longing for a more solid sense of mutuality than is experienced in day-to-day life in Britain. Without it, our economy has been debilitated and lacks resilience Faced with a series of exogenous crises, the Government have made large-scale fiscal interventions. We are not in a good place. In 2021, the public sector net debt to GDP ratio was over 100%. We have exhausted the scope for quantitative easing that allowed government after the financial crisis of 2008 to borrow freely without affecting interest rates. Interest rates have already risen painfully, while the pound has weakened. The prospect for government outlays in interest payments, and for departmental spending limits, is grim. The Chancellor’s tax increases have hit the limit of what his party will tolerate. The labour market is tight. The outlook for growth, particularly in Britain, is darkening. Interest rates in the UK will rise yet further to douse inflation. The Bank risks precipitating recession, compounding social misery and choking off tax revenues Even if recession is averted, how can tax revenues be sustained, let alone increased, to enable us to address the fiscal implications of an ageing population and to fund decent services for all? A strong economy requires us to tackle our deficits in education, housing and the social determinants of health. Failure to invest in a timely transition to net-zero carbon and a green economy which generates plentiful good jobs would be catastrophic The Mirrlees review in 2009 exposed a tax system riddled with disincentives, incoherence, inefficiencies and poor targeting. This rickety system does not yield enough. One major source of revenue, fuel duty, is bound to fall. The Chancellor is considering how the tax regime can remedy the failure of UK businesses to invest. He should also be looking at the relative taxation of capital and labour, the taxation of land and property and the taxation of carbon. The system needs reform to channel entrepreneurial energy away from rent seeking into investment in productivity Productivity, which is key to non-inflationary growth and higher living standards, has hardly improved since 2010. To achieve competitive productivity requires not only tax reform but improved infrastructure, regulation, skills and access to capital. Regional differences in productivity are exceptionally large in the UK. I believe that this is significantly due to the concentration of decision-making, both in government and in business, in London. With the emasculation of local government since the 1970s, power and wealth have been concentrated in London and the south-east. George Osborne’s austerity axe fell excessively on local authorities in deprived areas, weakening their economies further. The Government’s levelling-up strategy has so far been wasteful of resources and does not offer adequate powers to the city regions and local government. We need more globally competitive cities. My noble friend thinks our troubles are due in considerable measure to Brexit. Some price has to be paid, of course, for leaving the EU single market, but Brexit should not be made a scapegoat for deep-seated and persistent weaknesses in our economy. That said, the Government’s handling of the Northern Ireland protocol and their ill-judged trade diplomacy with the EU are damaging our performance and threatening our prospects A responsible Government would work to develop a shared view of the needs of the economy across the whole United Kingdom. Leaving our fortunes to the market, deregulation and cheap, casualised labour, with an implausible aspiration to get back to a balanced budget and low taxes, would be an abdication of responsibility.