Budget Resolutions — House of Commons, 2021-10-27
Topic: Macroeconomics
David Michael Davis (Conservative, Centre-right): It is a privilege to follow the hon. Member for Eltham (Clive Efford). Although I may disagree with much of what he says, he always speaks with compassion, commitment and belief, and that is important in this place Unlike the Opposition, I took pleasure in the optimism and cheerfulness of the Chancellor’s presentation—something has obviously rubbed off from next door in that respect—which was because he was able to announce any number of increases in spending, from the national health service to local infrastructure and from R&D to the numeracy multiplier in education. As my right hon. Friend the Member for Wokingham (John Redwood) pointed out, the Chancellor was able to do that because of a Treasury re-forecast for the growth rate—a Treasury error When people have heard the number of Budgets that I have, they come to realise that finding £20 billion down the back of the sofa is not unusual. In this case it was £44 billion, but the Chancellor’s predecessor but one found £20 billion in his last Budget. That arises because the Treasury, the OBR and the Bank of England are all very bad at forecasting; they generally get it right within about £20 billion but not much closer The first thing I will say about the Budget strategy we are talking about today is that we have to make allowance for it being £20 billion out. The key point in that is the growth rate. As my right hon. Friend the Member for Wokingham pointed out in his brilliant speech, the key to the whole strategy must be growth—private sector growth—without which we cannot pay for anything. That is what I will briefly focus on today; given his speech I can do it more quickly that I might otherwise have Before I get to that, the overhang of debt that arises from the covid crisis, which is £400 billion of borrowing or thereabouts, is crucial to the broad economic strategy. We have not seen that scale of debt since after each world war, and the approach should be the same. In essence, we should create war bonds that are paid off over 50 to 75 years. Both sets of war bonds were paid off in the last decade or so, which gives us a measure of how long was taken over it In the 1920s, when Winston Churchill was Chancellor, he consolidated the war debt on a 4% basis when our Bank rate was 4.5%. The Bank rate today is barely above 0%—0.1%—so now is the time to do that. If we are worried about the £27 billion cost of each 1% increase in interest rates, we should lock it up as quickly as we can so that we can sterilise it from our future decisions about spending and growth. That is key The Chancellor says that he aims to broadly balance the books by 2023. Given the error margin in our forecast, he ought to say 2025 and base balancing the books on growth. To that end, the area where I disagree with the Government’s strategy is on the level of income tax, national insurance contributions and taxation generally which, in my view, is likely to raise significantly less money than the Treasury spreadsheet tells them. The simple truth is that the increase in NICs will undoubtedly depress growth and employment and, as a result, depress the tax take Similarly, the freeze in the income tax personal allowance will have a big effect on the poorer families who we care about and who matter to us—that goes to the point about levelling up that the hon. Member for Eltham made. It will have a big effect on consumption and, as a result, a big effect on growth. There is a real issue there. My view, like that of Nigel Lawson, who I think is one of the Chancellor’s heroes, is that cutting tax rates leads to more growth, more investment, more employment and, as a result, more tax take. That is, essentially, the normal Conservative strategy The other element of the Budget strategy is based on higher wages—not just raising the living wage, but the whole wage bill—with which we all agree, but that can be done only if we increase productivity. Again, we come back to a tax issue. Notwithstanding the arguments about the bank sector, we are talking about increasing corporation tax. Of course there are a lot of offsets for investment, but I am afraid that when investors are deciding which country to invest in, they take the headline rate of corporation tax into account We may be the best in the G7, but when someone is looking at whether to invest in Great Britain or the United Kingdom, they are not looking at the G7 but at Ireland or the Netherlands as comparators. Those places have significantly lower corporation tax rates than we do, which is important because, as well as trade, investment is the key to productivity. As a result, we should look hard at reducing that tax. I hold no brief for the individual capitalists involved; it is simply a question of where the money will go and whether we need it here, and the answer is yes It is really very simple. The route to maintaining a growth rate higher than 1.3%, which is in the Red Book, for a few years is lower taxes and more investment and, as a result, more employment. The level of 1.3% applies because of demographic factors, which we cannot change. We cannot change the demographics that we face. We can do very little—we can attract research, investment and talent—but we will not materially change them. Tax cuts, however, will increase investment and productivity rates. That is the key to a successful strategy.