Budget Resolutions — House of Commons, 2021-10-27
Topic: Macroeconomics
Melvyn John Stride (Conservative, Centre-right): My hon. Friend is absolutely right. I will come to the matter of wages and wage growth momentarily, but let me dwell on the challenges facing the economy Another thing that the OBR points out is the increased sensitivity to interest rate rises—the Chancellor made this point—and the damage that they can do to the public finances. I think my right hon. Friend gave the example of a 1% rise leading to a £23 billion increase in debt servicing costs. To put that in perspective, it would wipe out the value of the corporation tax increases and income tax threshold freezes that my right hon. Friend announced in the last Budget. That would be gone in one enormous gulp, so we must be careful about the vulnerability we have. Though we have low interest rates, and interest rates might move up in baby steps, that applies to a very large debt indeed Let me touch on inflation—I am pleased that my right hon. Friend spent quite a lot of time on it during his speech—and its impact on interest rates. We have already seen the Monetary Policy Committee beginning to divide on whether rates should go up, and there is an expectation, certainly in the markets, that rates will start to increase. We have seen 10-year gilts going up in more recent times, and it is possible that quantitative easing will start to unwind —perhaps passively initially—when we reach a certain trigger level of interest rates, so it is important that this credible plan is there to deliver on those fiscal targets The history, however, is not good in that respect. We have had Chancellor after Chancellor failing to meet their fiscal targets; they have either abandoned them completely or delayed or modified them in some form. Depending on what happens to demand in the economy relative to supply, there may be a case for fiscal stimulus even further down the line. One thinks of the removal of the universal credit uplift, the energy price increases, the labour market demand-supply mismatches and the rise in taxes, often taking demand out of the economy. None the less, and setting that to one side, the Chancellor’s default position must be to stick to those fiscal targets and resist the huge cacophony of demands for more and more expenditure, particularly the day-to-day expenditure that he is rightly targeting in his fiscal rules Some of those demands might end up being necessary. If we do not get back to the pattern of demand for public transport that we had before we locked down, it is conceivable that further subsidy will need to go to the public transport sector. Other areas, such as the health service, might have additional demands, but I point out to my right hon. Friend—he knows this more than most —that the NHS public expenditure take has risen in the last 10 years from 32% to 42%. He must get very good at saying no to Ministers when it is necessary to do so, and telling them to go back to their Departments, work harder and get more out of what they are given. That is a lesson for us all, incidentally, particularly those of us on this side of the House If we fail in that endeavour and inflation takes off, interest rates go through the roof, the cost of servicing our debt becomes ruinous and international markets lose faith in our economy, we will be back broadly where we were in 1992 when we had Black Wednesday. Conservative Members will remember the long, hard lesson of that: it took us a generation to re-establish our ability to look the electorate in the eye and say, "We can offer a fiscally responsible Government." There were some announcements on tax today. May I say first that the drop in the bank surcharge is absolutely the right thing to do? We are putting corporation tax rates up to 25% from 19%, so it would be absurd to cripple our financial institutions with uncompetitive international tax rates. I was particularly delighted by the shift in the universal credit taper rate from 63% to 55%. That will help countless low-paid families to earn more and keep more of their money, and encourage more people into work. When I was a Treasury Minister, we looked endlessly at this and I pushed really hard on it. I know how expensive it is to do that—my right hon. Friend the Chancellor suggested £2 billion a year—so I take my hat off to him for having grasped that particular nettle My right hon. Friend is also right to set out an aspiration to get taxes down before the end of this Parliament. The same pattern occurred under Lady Thatcher, who is much referred to when we talk about tax. In the early years of the Thatcher Government, the tax burden rose quite strongly, and it was my right hon. Friend’s hero Lord Lawson who was able to bring tax rates down. Let us hope that my right hon. Friend is in a position to emulate that in due course I turn briefly to inflation, which is right at the core of what is happening in the economy. The threat to the public finances from inflation cannot be overstated. The big debate now is whether price surges and increases in inflationary expectations will be transitory or more persistent. My right hon. Friend referred to the surge in demand relative to supply, which of course will lead to price increases; all else being equal, one might imagine that it will pass relatively quickly We have seen the commodity, transport and energy price increases that my right hon. Friend referred to, but there are other price increases that we might expect to be stickier. There are bottlenecks that are often outside our control—a south-east Asian chip manufacturer can have a bottleneck that results in our being unable to produce cars in the United Kingdom. Structurally, the labour market has changed: as a consequence of the pandemic, there is now greater demand for goods relative to services. It will take time to mop that up The Bank of England MPC has expressed increasing concerns, in different ways, about inflation and has been constantly deferring the moment at which it believes inflation will peak. There is a debate as to when deferred "transitory" becomes "persistent", but the huge danger is that we will go into a wage price spiral. One way in which that might happen is if we talk up wages by inducing companies to put them up without a coincident increase in productivity. That will simply feed the inflationary tiger. We have to be very careful on that point.