Contribution
My Lords, I congratulate my noble friend Lord Bridges of Headley on securing this debate. The fiscal outlook, as my noble friend set out in his excellent speech, is pretty awful. The upcoming Budget will be particularly difficult. The small headroom left by the previous Chancellor has probably already disappeared. Public expenditure at 44% of GDP is too high, debt at approaching 100% is too high, taxes at 38% are too high and growth at around 1% is way too low. The Bank of England seems incapable of getting inflation down to its 2% target. The backdrop to the Budget could hardly be worse.
The Government have now been in power for over two years. They may want to continue blaming their economic inheritance—as the noble Lord, Lord Livermore, did ad nauseam—but that simply will not wash. We are where we are because of choices made by this Government. They have been true to form: Labour Governments always spend too much, borrow too much and tax too much. The solution is definitely not more of the same, but there is no sign that the new leadership in No.10 and No. 11 will change course.
I will focus my remarks today on two areas: debt, spoken about by my noble friend Lord Bridges of Headley, and taxation. We used to think that 40% of GDP was a de facto ceiling for debt. In the wake of the global financial crisis and then the pandemic, we seem to have normalised debt staying at historically high levels. The fiscal rules require only that debt falls, and that could be by any amount, by the end of the current forecast period. There is no commitment to putting debt on a serious downward trend. The noble Lord, Lord Burns, rightly emphasised the need for this.
Debt has to be serviced, and the cost is rising. As we have heard, the UK’s long-term borrowing rates are the highest for 30 years; 10-year rates are the highest in the G7. Bond yields reflect the market’s view of our economic prospects: we are being judged as weaker than the rest of the G7. Persistent inflation, weak growth and worries about a Government that show no sign of controlling expenditure or moderating debt levels will keep our borrowing expensive. The ultra-low interest rates that we experienced after the financial crisis lulled Governments around the world, not just our own, into seeing borrowing as a cost-free option. But since rates have normalised again, the real cost is now visible and, as my noble friend Lord Bridges said, we will be spending over £100 billion a year on interest. This is way more than on defence.
There are three ways to reduce debt. The Government seem to be betting on growth solving the problem. Many of their policies, however, are positively anti-growth: employment laws and the jobs tax in particular. The two other ways are to spend less or to tax more. I do not believe that this Government will cut expenditure. Does anyone believe that the Government will be able to keep a lid on the out-of-control NHS expenditure? Does anyone believe that they will have the courage to face down their Back-Benchers to cut the benefits bill? If they cannot make headway on these two big-ticket items, expenditure will remain too high.
That leaves taxation. The Chancellor has refused to rule out raising taxes in next month’s Budget, but raising taxes is about the worst thing that he could do. He ought to learn from the last Chancellor’s dreadful decisions that hiking taxes has consequences. Loading more national insurance on to employers will simply destroy jobs, especially entry-level jobs. Increasing taxes on banks, as the TUC has called for this morning, simply means that they will have less to lend to the real economy. Taxing oil and gas companies might satisfy the green zealots, but it will threaten our energy security. The Chancellor may be tempted to satisfy calls from his left wing to tax the rich more, but that will backfire. Wealth taxes have not worked anywhere. Higher rates of capital gains tax are counterproductive, because people simply do not sell assets. Creating higher rates of income tax will drive even more wealthy people to head for the departure lounge.
Some of us were privileged yesterday to hear Dr Art Laffer speak. He was clear that the decline in the UK economy over the past 70 years is highly correlated with periods of high rates of taxation. He was also clear that there is no example of an economy which has been taxed into prosperity. The Government would do well to take note of this.
A serious response to our woes must be rooted in unburdening the private sector so that it can grow without interference. The economy needs less regulation, lower tax rates and increased incentives, and this applies to individual taxpayers as much as to our business sector. The state must play its part by doing less and spending less. I do not think that the Prime Minister or his Chancellor are remotely capable of achieving those things. That is a tragedy for us all.