Autumn Statement: Economy — House of Lords, 2016-11-29
Topic: Macroeconomics
Sheila Masters (Conservative, Centre-right): My Lords, it is a pleasure to follow the right reverend Prelate the Bishop of Portsmouth, although my speech will focus on rather different issues. I want to start with a little about the tax content of the Autumn Statement before turning to the economy. From a taxation perspective, this was an unexciting Autumn Statement. It is good news that my right honourable friend the Chancellor of the Exchequer has confirmed the downward path of corporation tax to 17%, and it is even more welcome that the Prime Minister has hinted that it might go even lower if that is necessary to remain competitive in the G20. But the G20 is not the only show in town in terms of competitive corporate tax rates, and I hope that the Government will be even more ambitious in future years On the other hand, the Chancellor has offered nothing on personal taxation to incentivise wealth creation or to underline the attractiveness of the UK as an investment destination. I am disappointed that he has ignored the top rate of income tax. At 45%, it is higher than the EU, OECD and global averages, and marginal rates are often very much higher than 45% as a result of tax code complexity introduced by both Labour and Conservative Governments High tax rates do not necessarily result in higher yields. We can see the impact of this in the stamp duty forecasts in the Autumn Statement: the top rate of 12% of stamp duty on houses over £1.5 million, introduced earlier this year, has led to fewer transactions and a significant downward revision in forecast receipts. When my noble friend Lord Lawson, who unfortunately is not in his place today, overhauled tax rates in the 1980s, he demonstrated that lower tax rates can result in higher yields, including at the top end of the income distribution. We seem to have lost sight of that valuable lesson On national insurance, the Chancellor has tinkered at the margins but has shied away from reform. The Office of Tax Simplification has recently called for significant simplification and alignment with income tax. Others, notably the TaxPayers’ Alliance, have called for full merger. I have argued in earlier debates in your Lordships’ House that this is an area that is ripe for radical change and I regret that the Chancellor has not been bold on this There is not much else to say on taxation. One small change is, however, worth mentioning—the abolition of the employee shareholder status scheme. The shares-for-rights scheme was a completely crazy idea. It was obvious from the outset that the major use of the scheme would be in tax planning for the higher paid, and so it proved. Few outside the tax planning community will regret the scheme’s passing There might not be much to say on taxation but there is quite a lot to say about the economy. My starting point is the forecasts made by the Office for Budget Responsibility. The OBR does an excellent job in difficult circumstances and I am glad that it is now an established part of our system. As it happens, I do not believe the forecasts but I do not blame the OBR for that. It was doing its job in the context of considerable uncertainty—in particular, about separation from the EU following the referendum. The OBR is not supposed to guess this kind of thing and it asked for the Treasury’s guidance. The Treasury gave it none. I think that this is exactly the kind of situation where we should have had forecasts prepared on alternative scenarios. This would have helped to illustrate the range of potential outcomes given the degree of uncertainty. But the OBR is obliged to give a single forecast, which makes its report considerably less useful than it might otherwise have been Although no one doubts that there is uncertainty about the impact of leaving the EU, so far that uncertainty is having, at worst, a small impact on our economy. Some of the predictions made ahead of the referendum, in particular by the Treasury, have already been proved wrong. We know what has happened in the past few months—GDP growth has been solid, unemployment has been decreasing and employment increasing, business investment is continuing and consumers are still spending. That is why the OBR’s forecast for the growth rate for this year, at 2.1%, underlines the resilience of our economy However, when the OBR looks into 2017, it comes up with only 1.4% growth, largely as a result of its view of the impact of uncertainty on business investment and consumer spending. The OBR is not out of line with the average of other independent forecasters, but there is quite a variation out there. The gloomiest have largely moved away from their early forecast of a recession, but there remain big differences of opinion around the key variables. Kristin Forbes, an external member of the MPC, showed in a speech last week how forecasts can systematically overestimate the impact of uncertainty. I do not have a crystal ball to show the future, but it is relatively easy to construct alternative paths for the economy which are more optimistic than those that are laid out in the OBR’s forecasts. Uncertainty does not always have to have a negative outcome I personally do not think that it is worth spending too much time disputing the forecasts or picking away at the OBR’s estimate that approximately £60 billion of extra debt can be attributed to the outcome of the referendum. The Chancellor may or may not need to borrow extra on this account, but it is probably prudent of him to include an estimate of extra borrowing. However, just as businesses do not necessarily need to draw down the whole of their credit lines, there may well be no need for the Chancellor to increase the national debt for this reason. If the economy turns out to prove the pessimists wrong, the Chancellor will not need that borrowing capacity As has been pointed out already in this debate, one of the keys to GDP growth is productivity growth, and the OBR is assuming a downward trend in response to our exit from the EU. Both the low annual rate of increase and the gap between the UK and other major economies are generally regarded as problems that we must solve. One of the puzzles has been that the very obvious technological change all around us ought intuitively to have improved our productivity, but this has not shown up in the statistics. The ONS has been working on this since Sir Charles Bean’s review last year, but we still do not have any clear answers. I have not ruled out the possibility that the statisticians have simply been getting this wrong The Chancellor, like others before him, thinks that he has to do something about productivity. The "something" he has settled on is the national productivity investment fund. The aims of this fund—housing, transport, digital communications, and research and development—are all worthy aims. However, whether any of the £23 billion earmarked for the next five years will have any impact on productivity is a moot point. I say very gently to my noble friend the Minister that the sentence in the Autumn Statement that: "The government will raise productivity across the UK", is just not true. Governments do not raise productivity. At the very best, Governments create the environment in which productivity is raised by the actions of others. I do not think that the Government, or the public sector bodies that will help them spend the £23 billion, know how to invest for productivity. Therefore, I hope that this programme will be subject to rigorous scrutiny. If the money does not demonstrably achieve productivity gains—and I am a sceptic, as can be seen—the Government should stop spending and let the private sector use the economic capacity for other things The Autumn Statement cannot be accused of being overoptimistic. Any set of forecasts that has debt rising above 90% of GDP is at best depressing. I support the Chancellor in what he is doing in response to the forecasts, even though that means deferring the essential task of eliminating the deficit and reducing debt. But I sincerely hope that the forecasts are wrong and that we can in fact make an early return to the task of repairing the country’s finances.