Budget Statement — House of Lords, 2015-03-25
Topic: Macroeconomics
Terence Langley Higgins (Conservative, Centre-right): My Lords, since the last general election, the Chancellor has succeeded in transforming the disastrous situation that he inherited into one in which recovery is well under way. He has done so to the extent that the Economist headlines its article on the Budget "Bust to boom". I think that is something of an exaggeration. Indeed, we must always be aware of creating yet another unsustainable boom. What we need is a sustainable rate of growth, and I shall come to the problems of achieving that in the middle part of what I have to say The Chancellor also gave a warning at the beginning of his Budget by saying that, "the OBR has once again revised down the growth of the world economy … the growth of world trade and … the prospects for the eurozone. It warns us that the current stand-off with Greece could be very damaging to the British economy".—[Official Report, Commons, 18/3/15; col. 766.] I believe that that is profoundly true. Perhaps the biggest danger that we now face is another total disruption of the international economic situation. I therefore believe that, as we clearly have an interest in it, we should take a leading role as far as the Greek crisis is concerned. The reality is that it is inconceivable that Greece will become competitive at the present exchange rates. It will do so only if it leaves the euro. Therefore, it is desperately necessary for us to help the rest of the eurozone and overcome some of its inhibitions on this issue by having a plan to ensure that Greece can leave in an orderly way In that context, it is important to realise that one reason the Greeks are so keen not to leave the euro is that they do not want to go back to an undemocratic regime, which they had under the colonels. Having said that, they need to be able to sustain their growth. That means that not only do we have to arrange an orderly withdrawal but Greece will need a great deal of financial assistance then, ahead of a crisis arising. Otherwise, the danger is that it will get a competitive exchange rate, having left the euro, and then find itself being financed by Russia, which would be very dangerous. Therefore, the incoming Government should give great priority to persuading the members of the eurozone that the approach they are adopting at the moment is not the right one. We must have proper contingency plans to deal with that problem if our own economy is not to be damaged in the way that the OBR suggests it might be I turn, secondly, to the deficit. I understand the various thoughts that the noble Lord, Lord Skidelsky, has just voiced—it is always a pleasure to follow him in these debates—but, despite what he said, it is crucial that we continue to get the deficit down. It is of course true that the Government failed to achieve the objective announced at the last general election. I said at the time that all my experience at the Treasury with previous cuts made me extremely sceptical that they would ever be able to do so, but it is still vital that we should get it down: first, because we cannot leave our children with the kind of debt that we would otherwise have and, secondly—the point made from the Liberal Democrat Benches a moment or two ago—we have to avoid the amount of interest that the Government pay on the debt becoming a bigger and bigger burden compared with other items of public expenditure. Therefore, we must remain on course. I believe that the Government are right to have changed the date but we should still try to achieve a surplus within the period that the Chancellor has now specified. That is crucial if we are to continue the process I should say in passing that it is quite extraordinary for Mr Miliband or Mr Balls to shout loudly that the Government have failed in their deficit objective when they have opposed every proposal that might have enabled the Government to achieve it more rapidly. That is a very cynical, but not surprising, approach for them to have adopted Turning to the boom, we should be grateful to the OBR for an extremely interesting forecast and analysis of where we are in the so-called gap between productive output and the level of demand. In that situation, I am rather surprised because it seems to suggest that if we continue to mop up such excess capacity as now exists, we can grow at 2.5%, which is a noticeably lower level than almost 40 years ago when we normally assumed that the growth in productive potential would be 3% None the less, to my surprise, the OBR is indicating that we are getting closer to that productive ceiling than was previously thought. Clearly, we probably lost more capacity in the recent crisis than we originally thought. Therefore, while we can grow at 2.5% for the immediate period, we will then be in a situation where we can grow only at the rate of productive potential, which must require more investment. I certainly agree with the noble Lord, Lord Skidelsky, on the importance of investment. We need to make sure that that happens In passing, there is a continual danger that we may confuse investment from overseas with simply buying up property in England from overseas. If there is to be investment from overseas, it is essential that it should be investment in real productive resources Having said all that, with a supportive monetary policy, which has been very much a feature of the past five years, we can make progress. I am more sceptical about whether the governor’s forward guidance on interest rates is a good idea. At all events, the two must go together. The monetary policy has to be combined with the policy of deficit reduction. If that is so, we can have sustainable growth under a Conservative Government in the next five years.