Contribution
My Lords, it is a privilege to follow the noble Lord, Lord Bridges of Headley, and I congratulate him on securing the debate. The challenges facing this country and many others globally because of the current fiscal outlook have been a consistent focus for him, both during his distinguished stint as Chair of the Economic Affairs Committee and since. I welcome my noble friend Lord Pitt-Watson to the Front Bench, as this is the first time I have spoken in a debate to which he will be responding. I should declare interests, as in the register, as a trustee of LAMDA, an adviser to the family office WFO and a director of Digbeth Loc. Studios.
The survey of the fiscal outlook by the noble Lord, Lord Bridges, could be described, perhaps by Sir Humphrey Appleby, as very grounded, verging on the bleak. There is no denying that globally the challenges are formidable, with economies in a more vulnerable position to future new shocks, by some measures, than before the global financial crisis of 2008. As the noble Lord described, the UK is, unfortunately, not a positive outlier relative to the global picture and in too many respects is at the wrong end of the spectrum.
Before I make my observations on these challenges and some of the responses to them, I begin on a positive note by welcoming the encouraging trend in productivity growth that has emerged in recent weeks. Output per job increased by 1.4% in the 12 months to 30 June and has been consistently above average since late 2024. It is premature to call victory or attribute the improvement to the effects of AI, but productivity is so central to the turnaround of the economy and the balancing of the fiscal books that there seem to be grounds for cautious, tentative optimism. It perhaps supports the argument that my noble friend Lord Eatwell made after the Government’s first Budget: that the increase in employers’ national insurance would drive productivity growth more than hit employment.
But for all that, there are powerful headwinds to contend with. The Financial Times this week described the issue of national debt service globally as “a $2tn monster”. The US, France and the UK are all having to pay more debt interest than they spend on defence. This not only poses real challenges in setting steady state spending plans but, as I have already noted, gives less leeway to respond to future financial crises. The OBR, in its long-term forecasting, assumes a financial crisis every nine years. In this week’s announcement by the Dutch central bank that it was moving the physical custody of 14% of its gold from New York and Ottawa to London—an eloquent demonstration, perhaps, of the damage that the Trump Administration are doing to international confidence—it made a strikingly blunt assertion:
“This ensures that DNB is … prepared for severe crises”.
As my right honourable friend the Chancellor prepares his Budget, he is undoubtedly constrained by the commitment in the Labour manifesto not to increase the three most significant personal tax rates. Taxation policy has always been part of the political debate, but perhaps most acutely since the Conservative Party’s campaign—fake news—“Labour’s Tax Bombshell”, which can credibly be seen as having swung the 1992 general election result. It is understandable why the party, scarred by that, has sought to avoid a repeat. But, to be frank, it is not conducive to the best management of the economy in inevitably changing circumstances.
Those changing circumstances include, most importantly, the effects of the war in Iran. The NIESR has estimated that every 10% increase in the oil price reduces GDP by 0.12%. So the rise of 40% or more since the US’s misconceived attack on Iran is likely to have reduced GDP by 0.5%, with the IMF having concluded that prior to this the UK economy was on a positive, improving trend.
I will end on one or two more positive notes. The fiscal devolution started by the last Chancellor and turbocharged by the new Prime Minister has the potential to have disproportionately beneficial effects on growth, employment and housing, as I am already seeing in the work I am doing in the West Midlands. My right honourable friend Gordon Brown made a compelling analysis in the Financial Times of the role of innovation in driving growth and the UK’s world-leading strength in science and technology. I hope my noble friend the Minister can reassure the House of the Government’s understanding of the need to address the fragile state of the higher education sector.
The scale and severity of the challenges that we face are formidable. These are global challenges, faced by multiple countries and exacerbated overwhelmingly by the policies of the US Administration. The noble Lord, Lord Bridges, is wrong to attribute the causes of that challenge to this Government. In fact, in contrast, I am totally confident that the Labour Government—governing, unlike its predecessors, in the national interest—are best placed to find a successful path through these challenging times.