Economy: Budget Statement — House of Lords, 2018-11-13
Topic: Macroeconomics
Francis Thomas Baring (Conservative, Centre-right): My Lords, in contrast to the noble Lord, Lord Hain, I believe there is much to welcome about the Chancellor’s recent Budget in the current circumstances. The Chancellor has been given an unexpected windfall by a major change in the independent Office for Budget Responsibility’s forecast in his favour. According to the Financial Times of 30 October: "The magic ingredient enabling this … according to the Office for Budget Responsibility, was a ‘windfall’ of additional tax revenues and lower projected spending needs—now reflected in a huge change to the UK’s fiscal watchdog’s forecast" The expected windfall, amounting to £68 billion over five years, has come from higher tax revenues, and the OBR chairman, Robert Chote, has predicted that this will continue for the coming period Looking at the current economic scenario, I would like to focus on the latest quarterly GDP figures. There was good news that the economy grew by 0.6% in the three months to September, following 0.4% growth in the previous quarter, considerably higher than the recent trend. Less good news was that the economy lost momentum in August and September when growth and GDP fell to zero. By September, only construction was powering ahead. Retail sales after a strong start fell at the end of the quarter. Looking at 2018 as a whole, it seems sensible that the OBR has cut the GDP forecast from 1.5% to 1.3%, but it has raised the estimate for next year from 1.3% to 1.6%, which may be a little optimistic Considering overall the economy in the light of the Budget, it is hard to make any firm predictions because of the uncertainty over Brexit. Anecdotally, businesses seem to be delaying expenditure decisions, together with possible relocation of staff, until they see what Brexit deal, if any, emerges. For example, the exodus of the financial community from the City—such an important contributor to tax revenues—has yet to materialise. However, I am told that this could still happen due to the loss of passporting rights and could even be worse in the case of no deal. No one has convinced me that life will be very easy for some parts of industry. The automotive sector, with its just-in-time manufacturing, will have major problems with customs procedure if a sensible deal is not reached Also, I worry about the Northern Ireland border situation. According to fullfact.org data of February this year, if we discount sales to the rest of the United Kingdom and count only exports to foreign countries, 35% of Northern Ireland’s exports go to the Irish Republic and £7 billion go to the EU, including the Republic, which represents almost 13% of our exports, according to Trading Economics. Disruption to the Irish border trade could have a significant effect on UK exports. I am also concerned about the customs situation at ports generally Another economic figure to be watched carefully is UK inflation. At the moment, it seems under reasonable control, but recent figures for wage rises of more than 3%—the fastest for a decade—could be a cause for concern and may necessitate interest rate rises if the trend continues There is much in the detail of the Budget that I welcome. I applaud particularly the raising of the level at which the 40p rate and the basic rate of tax start. I also applaud the sizeable increase in the investment allowance. The relief measures for business rates are also welcome. The increase in spending on roads of £29 billion over five years and the £420 million for pothole repairs are sensible. The extra digital services tax is overdue. Extra money for the NHS is necessary. In my view, however, there needs to be a major cross-party debate to determine spending priorities to stop it becoming a bottomless pit. The extra £1 billion for defence was also a good measure. The additional funding for universal credit was very sensible. I claim a small amount of credit as part of the team that made that case to the Chancellor recently However, I am concerned about other Budget measures. The increase in national insurance was not mentioned in the Budget speech; the announcements on it that were sneaked out later are unwelcome. Sadly, to correct my noble friend Lord Higgins, the new probate charge is not just a rumour. Essentially, it is a tax, but it was also not referred to in the Budget Statement. That seems an attack Conservative supporters, as it means a charge of no less than £6,000 at the top end of the scale. That is in addition to inheritance tax. Not surprisingly, the Daily Mail vigorously attacked it, which may or may not be helpful. Delaying cutting fixed-odds betting terminals’ maximum stakes to October next year is inexcusable. It may well be overturned in the other place, which I would applaud. I am sorry that the police are not getting more resources, as major crime problems in both cities and the countryside suggest that they desperately need them. Also, the prison situation does not look good; I am not sure how to focus extra funding there. Surely some of the international aid budget could be diverted to those two areas I want to focus now on the tax burden. According to the FT on 29 October, tax revenues are, "scheduled to rise from 36.6 per cent of national income in 2017-18 to 37.2 per cent by 2023-24, the highest level since 1986-87". I fear that I may be in the minority in continuing to suggest that, within reason, lower taxes can yield higher revenues Finally, I want to return to the budget deficit. Clearly, the Chancellor’s measures will put back the days when the books will be balanced. Although the Government deserve high praise for reducing public sector net borrowing from £153 billion in 2009-10—I remind the noble Lord, Lord Hain, of that—to a forecast £40 billion in 2017-18, they keep pushing back the date when the deficit will be cleared. There seems to be a general belief that the current forecast level of deficit does not matter because many other countries are in an equally bad financial state. This budget year, debt interest alone is forecast at £41 billion, and to be in the 40s for the foreseeable future. That situation is fine as long as the markets tolerate it. However, a bad Brexit deal could upset the market and international investors could require a higher return from investing in UK debt. That could cause a serious rise in the UK deficit and have a major effect on the UK economy.