Spring Statement — House of Lords, 2019-03-20
Topic: Macroeconomics
Nicholas Macpherson (Crossbench, Unknown): My Lords, I begin by congratulating the Government, the Chancellor and the Minister on reducing the deficit from £153 billion at the end of the last decade to just £23 billion this year. Fiscal consolidation is notoriously difficult, and I recognise that there are differences of view about the pace and incidence of consolidation. For example, was the balance between the increases in taxes and spending reductions right? Were the Government sensible to spend so much on tax cuts? However, on the quantum of consolidation, I think the Government have it just about right. One thing is certain: you cannot run a deficit of 10% of national income for any length of time. The last Labour Government recognised this, which is why Alistair Darling initiated the consolidation programme in 2009. George Osborne and Danny Alexander chose to be more ambitious still, though in the end they delivered the quantum, if not the content, of the Darling plan. More recently, to the surprise of the pundits I think, the current Chancellor has seen consolidation through. My noble friend Lord Hennessy of Nympsfield once put it to me that the lot of the Treasury official is to deal with disappointment. As he put it, consolidation and recovery in the post-war period has been "routinely punctuated by the greatest orgy". There is something in that. Getting the economy back on track following a crisis is a Sisyphean task: you spend years of your life pushing a rock up a steep, inhospitable hill only to see it falling down again, sometimes in a matter of days, when the next crisis hits. So I congratulate my former colleagues on a job well done Turning to the Spring Statement itself, I shall make three small points. First, I have been impressed by the tax take over the last year or two. Generally, revenues tend to disappoint—that is because people generally do not like paying taxes—but because of the buoyancy of income tax revenues, revenue has been persistently surprising on the up side. The last time I remember this was in the late 1990s. The noble Lord, Lord Young of Cookham, will remember that for the whole of the early part of the consolidation of the 1990s, revenue kept disappointing on the down side, but then suddenly in 1997, somewhat unfortunately for the outgoing Government, the dam burst and revenues kept pouring in. I remember that between 1997 and 2000 the Treasury was just awash with cash, almost embarrassingly so. Of course, it did not last, so my advice to the present Government is to enjoy it but not to assume that it will last too long I worry about the sustainability of the tax base. As I have noted before, the tax and national insurance take is set to be 34.6% of national income this year and then to stay at that level through to 2023. Noble Lords should bear in mind that in only one year since 1950 has the tax take been that high. That leads me to think that HMRC has discovered the holy grail of tax collection—I suspect not—or national income is higher than currently assumed, which is a theme I shall return to, or the Government will fail to sustain that level of taxation. My worry is that much of the tax base is eroding. Fuel duties and tobacco duties are in secular decline; taxing capital in a world of huge capital mobility is all too difficult; the North Sea tax take is well past its best and will fall further with decommissioning; and, although local government is raising council tax a bit, over the last 20 years council tax has probably not risen enough. As my noble friend Lord Wakeham has pointed out, the current stamp duty regime discourages people from moving house: it does not surprise me that the OBR has revised its stamp duty estimates down yet again. Spending pressures are set to rise in the coming decade. The Government need to look at whether the tax system is equipped to deal with this. For my part, like the noble Lord, Lord Shipley, I recommend looking again at the taxation of land and property. The great thing about residential and commercial property is that it is fixed—it cannot move. I also think we will need to look again at a social care tax of some sort My second point relates to the next spending review. If ever there was a time to prioritise public investment, it is now. I was sorry to see in the OBR report that business investment has fallen for four consecutive quarters. Now is the time when the Government need to fill the gap, prioritising infrastructure and housing. To be fair, the Government are seeking to do this, but I would encourage them to be more ambitious still. Public investment needs to be focused on projects that yield the highest return. That probably means more expenditure on roads and, although I know I am in a minority of around three, that also suggests that we should cancel HS2 Within current spending, I also hope that the Government will prioritise further education, skills and training. If Brexit achieves what its proponents suggest, we will no longer be able to rely on the Polish taxpayer to provide the economy with the skills it needs. Of course, such expenditure will need to be paid for. Here—again, I shall be unpopular—I would take a long, hard look at the so-called triple lock. I should declare an interest in that I am due to get my free bus pass in three months’ time. However, the fact is that the elderly have contributed very little to fiscal consolidation Finally, I shall say a few words about the macroeconomy. Yesterday’s labour market statistics were very encouraging. The level of job creation at this time of uncertainty is impressive. Earnings growth is accelerating. That is good news because it means that living standards are rising, which should provide further support for demand in the economy. Together with the revenue statistics, it also suggests to me that the ONS is underestimating the level of gross domestic product. We are at full employment and the supply of labour is likely to fall if the Government achieve their Brexit objectives. That means that the risk of inflation is increasing I can see why the Bank of England is reluctant to act while a no-deal Brexit remains a possibility, and that possibility has increased today, but it could have used this phoney Brexit period to reduce the impact of quantitative easing. The Bank continues to miss an obvious trick. Instead of reinvesting the proceeds in gilts when debt matures, it should take the opportunity to run down its gilt holdings and reduce quantitative easing. I can see that my noble friend Lord Gadhia agrees with me. As and when a deal is done on withdrawal, the Bank may well find that it has presided over monetary conditions that are too loose. That will mean that it will have to raise interest rates further than if it had prepared the ground now I end where I began. This is an encouraging Statement and the public finances are in a better state. The critical thing is to keep them that way.