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Pre-Budget Report 2007

My Lords, we have had a short but very interesting debate and I thank my noble friends for coming out, as the noble Lord, Lord Haskel, pointed out, for the second week running to talk about the economy. The Motion refers to the Pre-Budget Report which was announced in another place on 7 October this year. As I said in my speech on the humble Address last week, we on these Benches pressed hard for a debate on the PBR before prorogation but the Government refused. It has not been our custom to require that Budget Statements, Pre-Budget Statements and Comprehensive Spending Reviews are repeated in your Lordships’ House. While they are clearly Statements of public importance within the terms of the Companion, they are generally long and often complex and we have judged that the convenience of the House is better served by a debate. But that is predicated on a debate being allowed on a timely basis, which this debate is not. The Government have forced us to re-examine our stance, and we may well in future wish to take such Statements in the House on the same day. Once the Government had got past Prorogation and avoided a timely debate on the PBR, they suddenly discovered a passion for a debate on it before the end of this month. But this is only to dance to the tune of an obscure European code of conduct and not because the Government believe that it is important that this part of their policies should be debated in your Lordships’ House. We do not believe that this reflects well on the Government’s approach to your Lordships’ House. One of the few benefits of debating the PBR so late is that we have had an opportunity to reflect on the impact that it has had. It was a copycat PBR. Our abiding memory is that it was cobbled together at the last minute in order to launch a general election campaign, which the Prime Minister called off when he saw that his popularity was evaporating as a result of my party’s highly successful conference. We have heard from a number of sources that the very late decision by the Government—almost certainly in No. 10, as the noble Lord, Lord Newby, said—to introduce additional inheritance tax relief was only because of the outstanding success of the announcement made by my honourable friend Mr George Osborne the previous week. On the other side of the equation, they copied us by tackling the long-running issue of non-doms. They also sprang some capital gains tax changes without any consultation. These penalise investment in business and enterprise. I am glad to say that this was all down to the Government; we would not have been so inept. The Government’s successive forecasts generally show a deteriorating pattern. We were thus not surprised to find in the PBR that the Government would stay longer in budget deficit than in the earlier reports. A return to surplus is now put off until 2009-10. In consequence, the Government will be borrowing more than they previously estimated—£16 billion over the next five years more than the last Budget forecast, to be precise. Net debt as a percentage of GDP rises to nearly 39 per cent, which is within a whisker of the Government’s own rule of 40 per cent, as my noble friends Lord Marlesford and Lord Northbrook have already pointed out. As my noble friends have also pointed out, that figure excludes considerable amounts of off-balance-sheet debt and also excludes amounts for unfunded pension liabilities. The Government have revised their growth figures down for next year, blaming the turmoil in credit markets. The Bank of England made it clear last week that the UK will see a ““sharp slow-down”” in 2008 and the detail of the Bank’s central forecast suggests growth of only 0.3 per cent in the first two quarters of next year. For the first time in a very long time the ““R”” word has crept back. The noble Lord, Lord Newby, reminded us of Alan Greenspan’s comment on the likelihood of a recession in the US. But the Bank of England’s chief economist last week said, "““there’s a substantially higher probability of a recession””," in the UK next year. We would not wish on our economy slow or even negative growth coupled with inflation. The big question is whether our economy has real resilience built into it. The Government’s policy of high debt and budget deficits may well have left our economy vulnerable to external shocks. We obviously have to ask whether we can actually achieve the PBR’s growth forecast of 2 to 2.5 per cent next year, followed by a bounce back to trend the year after. As the noble Lord, Lord Newby, has pointed out, household consumption has been a big driver of GDP growth in recent years and there are very significant areas of uncertainty around that. We do not know what path interest rates will take as there may well be inflationary pressures in our economy which could well defer a move in rates downwards and, as a highly indebted nation, interest rates are critical. As we heard earlier, personal debt is now nearly £1.4 trillion, largely secured on property but with a significant unsecured element. Recent surveys suggest that 2.1 million adults are struggling with repayments. The Government have often asserted that people save when they feel insecure and they spend when they feel secure. ““Oh, people feel good about life under new Labour so they do not bother to save”” is a paraphrase of Ministers’ responses to our questions about the plummeting savings ratio. The truth is that their spending was holding up economic growth, which the Chancellor rather liked. In the first quarter of this year, the savings ratio fell to 2.1 per cent, the lowest level since 1960. If that ratio starts to swing back to its pre-Labour levels of around 10 per cent, that will suck a considerable amount of spending out of the economy. That would add to other strains on household spending capacity. The Government have steadily increased the tax burden since they came to power, often through the use of stealth taxes, and we can see a continuation of this pattern in the Pre-Budget Report, including the rising proportions of income tax and national insurance. The net disposable income of individuals as a percentage of gross income has been falling as a consequence and this seems set to continue. To this must be added the undoubted pressures on inflation, with food and fuel prices on an upward trend, as the noble Lord, Lord Newby, pointed out. He also pointed out that wage growth is overall less than RPI at the moment, which means that there is a real squeeze on the value of pay packets. People on very low incomes—for example, a large number of pensioners—experience even higher levels of inflation than the average shown in the RPI and will feel the pinch even harder. All of a sudden, an economy constructed on both personal and government debt starts to look problematic. What stress testing of the impact of a further squeeze on household incomes have the Government carried out? If consumer demand, for example, is one percentage point lower than currently forecast, what does the Treasury’s model say about corporate profits, and therefore tax receipts, or about the need for additional debt? I put some of these questions about falling consumer spending to the Government in the debate on the gracious Speech last week, when the Minister was not with us. The noble Lord, Lord McKenzie of Luton, said: "““What happens is what is already happening: there is a rebalancing of the economy whereby business investment comes more to the fore””.—[Official Report, 14/11/07; col. 565.]" I sometimes wonder whether Ministers are on the same planet as the rest of us. Business investment is at an all-time low—below 10 per cent of GDP—and the Government’s own GDP forecasts show that business investment growth will be lower than in 2006-07. Lower consumer spending will provide an unpromising environment for some categories of investment. I ask again: what will happen to our economy if consumer demand falls further than currently forecast or fails to recover as quickly as forecast? The Government will be judged on how well they have prepared our economy for rough waters. It does not much matter that the seas are being whipped up by forces outside their control, such as the fall-out from the sub-prime debt crisis. What matters is whether our economy can weather the storm. We have real fears about that. Little attention has been paid to the Comprehensive Spending Review. Today’s Motion is expressed in terms of the PBR and does not even mention the CSR. Perhaps the Government are not keen on a debate on the CSR, but this appears to be our only opportunity to talk about it. Many of the CSR07 settlements had been dribbled out in earlier announcements. We knew that the overall budgetary position made the high spending of recent years impossible, so there was relatively little new to say last month. The big picture is that the Government are planning public spending increases of 2.1 per cent during the next three years, which compare with 4 per cent for the previous nine years. Increases of 2.1 per cent will be below the expected growth in GDP, hence the Government have copied our policies; namely, that expenditure plans should share the proceeds of growth. Some departments will get more than 2.1 per cent. For example, the settlement for health is expected to deliver 3.7 per cent. That sounds generous until it is compared with recent years, when the NHS absorbed spending increases of more than 7 per cent per annum. All the scenarios in the Wanless report needed more than 3.7 per cent. The big question is whether the CSR07 moneys will be spent any more wisely than any of the previous CSR settlements. We know that public sector efficiency has gone backwards during the years of high spending. We know also that we have not bought enough with the taxpayers’ money poured into public services. In education, 40 per cent of 11 year-olds are unable to read, write or add up properly, and only a similar percentage get five good GCSEs. In the NHS, we have frightening levels of hospital- acquired infections; local hospitals are facing increasing threats of closure; and the Government have bungled pay settlements. Our crime rates are among the worst in the world, and rising, with prisons bursting at the seams because of inadequate planning. Despite massive increases in benefits, child poverty has been rising and the Government are missing their targets by miles. We can see nothing in the PBR or CSR which makes us think that money will be spent any better in the future. Indeed, the Prime Minister seems to be leading moves away from public service reform, which might make a difference, back towards the central, stateist policies which have never delivered. The Motion before us is that this House ““takes note with approval”” of the Government’s PBR assessment. For these Benches, I am happy to take note of the PBR assessment, but I cannot bring myself to do so ““with approval””.