Budget Statement — House of Lords, 2015-03-25
Topic: Macroeconomics
Howard Emerson Flight (Conservative, Centre-right): My Lords, voters in this country understand that the Government have done a pretty good job in bringing the economy back after the worst depression since the Second World War. I will only make the point that, first, it was that much worse here than in most of the European countries because of the importance of the financial sector; and secondly, one of the main reasons for the decline in 2010-11, as Professor Collins pointed out, was the mistaken reduction in the money supply in 2009, which was exactly the wrong monetary policy for that time. For the past five years, the fiscal monetary mix has been about right and the austerity Keynesian mix has been about right. As I have said before, there has been a greater explosion of entrepreneurial activity, particularly in new, high-tech industries, than I have ever known or seen in my lifetime, not just in London but all over the country To some extent the savings rate overlaps with some of the excellent points made by the noble Lord in his speech. The savings rate in this country has been significantly too low for at least 20 years, if not since the Second World War, which has led to two different sorts of problem. The first is completely inadequate provisioning for retirement and care home expenses going forward, which, sadly, contrasts with Britain having been the leader on pensions and retirement saving in the 1980s. An average pot of some £230,000 is needed to provide the standard two-thirds of income in retirement. The average size of the pot is now only about one-tenth of that. The tipping point will come in 20 years’ time when retirement incomes will start to fall materially. Therefore, without more saving, there will be a big problem down the line The second is the economic and strategic impact, to which the noble Lord, Lord Hunt, drew attention. Whereas we were a major creditor nation, owning a lot more around the world than the world owned of us, 25 years of current account deficits totalling some £700 billion on a cumulative basis have been financed by selling off assets, such as businesses. We cannot do Hinkley Point without the Chinese and the French. The strategic loss showed up first in the utility sector, but it is dangerously spread across too much of our economy, as the noble Lord, Lord Hunt, pointed out. Even here in London, one of the reasons why young people cannot buy houses in central London is that 49% of them are owned by people from abroad and an astonishing 49% of City property is now internationally owned. We got away with doing that for a long time. We discovered in the 1980s, following the ending of exchange controls and a floating exchange rate, that current account deficits, which had been such a big issue previously, got funded automatically by capital inflows. I am certainly not against the abolition of exchange controls, and I believe in open markets, but if you have an inadequate savings rate, what has happened here is what will happen. The Government still spend £90 billion per annum more than tax revenues and the household debt to income ratio is up to 172%, which is higher than it was in 2007-08. The savings rate now is about 3%. We need a savings rate of at least 10% on average to be in a more balanced situation. Never forget that savings equals investment, so one of the reasons why investment has been inadequate and productivity growth has been disappointing has been lack of savings. In summary, Governments can borrow other countries’ savings for quite a long time and, as it were, get away with it, but it eventually comes home to roost, and we are now at that stage There is some good news. Between 1997 and 2010, four-fifths of growth came from consumption and only one-fifth from investment. Since 2010, investment has increased four times faster than consumption. Last month we had the best current account deficit for 15 years. Auto-enrolment is still in its early days but there is scope for contributions from employer, employee and government to increase and lead to a reasonable accumulation of pensions. The need is perhaps less than forecast because it is very clear that many people do not want to retire as they enjoy the companionship of work. Indeed, if we go back to the late 1990s, some 80% of the total increase in economic activity came from people working longer. I am sure that it will become perfectly natural for people not to want to retire until they are 70 or even 75, with people living much longer I hope that this will be a watershed Budget for trying to revive the savings culture. The Budget measures for ISAs have been helpful and important and saving by ISAs is now something like seven times individual money purchase pension scheme saving. It has become extremely important for the self-employed, a growing part of the population, and its great advantage is that it is simple and straightforward. Free interest income up to £1,000 will, I hope, encourage people to save more. I am less keen on limiting pension pots to £1 million. It would have been better to have reduced the tax credit to 20% for everyone and to have got rid of both the maximum that you can have in a pension pot and the maximum that you can put in every year The savings rate is far too low, and coming out of a recession that is, perhaps, unavoidable. But over the next decade, if whoever is in power does not take measures to increase the savings rate, there will be growing strategic problems in running the economy and there will need to be stick as well as carrot to achieve what is needed.