Pre-Budget Report

My Lords, the House is asked to note with approval the Government’s economic assessment as set out in the Pre-Budget Report of 2008. I do not approve of it at all. As for all opposition speakers, even my initial thoughts were that the document already looked rather out of date. As many noble Lords have said, the economic outlook for 2009, even at the time of the PBR, was not particularly bright. The growth forecast then was a negative 1 per cent for 2009. But then, extraordinarily and optimistically, the Treasury forecast 1.5 to 2 per cent growth for 2010. The 2009 forecast looks far too optimistic, especially so after the release of the fourth quarter GDP figures on Friday. As other noble Lords have mentioned, these showed a decline of 1.5 per cent in the final three months of 2008. The figure formally confirmed that we are in recession. As for this year, according to the FT of 24 January the European Commission predicted that the annual rate of growth for 2009 would be negative 2.8 per cent and the Ernst & Young ITEM Club predicted a fall of 2.7 per cent. The Government’s GDP forecast for 2010 also looks completely optimistic. The head of the FSA, the noble Lord, Lord Turner of Ecchinswell, who I am sorry to see has taken no part in our financial debates since the credit crunch began, said in a recent City lecture: "““I do not know whether in three months’ time or six months’ time we are going to be able to use words like ‘green shoots’ without everyone thinking ‘what an absurd thing to say’. But I do think that within two years … we will clearly be on an up path””." Does the Minister agree with that view or with the view of the knowledgeable noble Baroness, Lady Vadera, and, in the other place, Tony McNulty, who both see green shoots coming already? The same weak situation exists with UK public sector borrowing. Here the Government have squandered the golden legacy that they were given in 1997. How can one note with approval how the total for 2008-09 has shot up since the November PBR forecast, according to independent commentators? As has been said, the PBR forecast the 2008-09 deficit at £76 billion and the 2009-10 deficit at £118 billion, or 8 per cent of GDP. I do not know how the Minister can predict the figure for 2015-16, let alone the next two years. The highest forecast in the Treasury’s latest compilation of independent forecasts published a few days ago, which I tend to believe, indicates a full year deficit of £90 billion in 2008-09—an increase of nearly 15 per cent in two months—and for 2009-10 the highest independent forecasters are giving a figure of £144 billion, which is a 22 per cent increase over the PBR figure. The Government have failed since 1997 to keep back any reserve for a rainy day. We were as a result heavily in debt as a nation even before the credit crunch started and so we are in a much weaker position to react to it. Debt to GDP is now at the same level as for Spain, which has lost its Standard & Poor’s AAA credit rating. The same loss may happen for the UK. Another problem is that the Treasury balance sheet is changing week by week. According to last Friday’s Times, the influential Treasury Select Committee has requested that in these exceptional times the Treasury must behave like a large public company and publish accounts every three months. I am in total agreement with its views. The Government have persisted, and the Minister’s speech today is no exception, in blaming the economic crisis on the global credit crunch. They fail to take any responsibility for having built up public borrowing to a dangerously high level even before the credit crunch started. They also refuse to accept responsibility for creating a system of regulation under the tripartite regime that failed properly to monitor the risk level of the activities of banks and other financial institutions. International concern about our weaker economic and financial position than that of the USA and the eurozone has been demonstrated, as other speakers have said, by the collapse in sterling. The pound has dropped 32 per cent against the dollar in less than six months and about 16 per cent against the euro. The Prime Minister himself said in 1992: "““A weak currency arises from a weak economy which … is the result of a weak Government””." While a weak currency is useful for export, a precipitous fall such as we have seen against the dollar in particular can severely weaken confidence in the UK economy and scare off new overseas investors from buying UK debt. In the longer term, as my noble friend Lord Higgins said, it can have severe inflationary consequences. Another major concern about the UK economy is the unemployment rate. UK unemployment was 1.92 million between September and November, the highest level since September 1997. December was the 11th consecutive month for which the claimant count had risen. The Ernst & Young ITEM Club, according to the Guardian on 18 January, has said that the number of people out of work will reach 3.25 million by the end of 2010 and 3.4 million the year after. Let us now look at the fiscal measures taken by the Government. The lowering of the VAT rate from 17.5 per cent to 15 per cent for 13 months is costing £12 billion in lost revenue. The measure is unlikely to work, due to the cautious nature of consumers at present. Leading accountancy firms such as Grant Thornton and Ernst & Young have criticised it, as have others, including the chief executives of Next and Marks & Spencer. Even the noble Lord, Lord Jones of Birmingham, said on 23 November: "““You drop your VAT to get them into the high street but actually, at the end of the day, if they haven’t got a job, what are they going to do?””." The Conservative Party has decided on a much more sensible measure, which is to allow small and medium-sized businesses to defer their VAT bills for up to six months. The Government are planning yet again to increase their favourite stealth tax, national insurance. The decision has been made to increase the employee, employer and self-employed contribution by 0.5 per cent from April 2011. Our party has come up with more sensible measures to give firms relief from their NI contributions if they hire workers who have been unemployed for three months. We have also proposed a 1 per cent cut in national insurance for six months for those firms with fewer than five employees. The Government have temporarily deferred until April 2010 a rise in the smaller companies’ corporation tax rate, but they still wish to penalise small businesses at the very time when they need help. I remind the House that this measure was originally to be staged: in April 2007 it was 19 per cent, to be moved up in stages to 22 per cent by April 2009. What signal does that give to the vital sector of our economy, the smaller businesses? In contrast, our party plans to cut smaller companies’ corporation tax from 22p to 20p and the main rate from 28 per cent to 25 per cent. Overall in the PBR, the shadow Chancellor has calculated that there are future tax increases—or ““fiscal consolidation””, as the Minister described them—of £40 billion, or £1,500 per family, over the next Parliament, matched by the temporary giveaways of £20 billion. Our party is offering other positive measures. It is trying to help those climbing on to the property ladder with a stamp duty holiday for first-time buyers on house purchases of up to £0.25 million, which would save 200,000 first-time buyers each year an average of £2,000 each. The Government, on the other hand, have been aggressively repossessing houses through Northern Rock, although they have now suddenly done a U-turn and are encouraging Northern Rock to lend again. Our party is helping old-age pensioners by proposing to raise their tax allowance by £2,000 to £11,490. It is helping savers by suggesting the abolition of the basic rate of tax on savings. It is planning to raise the inheritance tax threshold to £1 million, so that the middle classes can pass on their homes without penalty. Like my noble friend Lady Noakes, I wish the Government well in their stimulus packages, but I am uncertain whether they will work. Does the Minister believe that the examples of the Swedish banks in the 1990s and the rescue of UBS by the Swiss Government and central bank are useful models to follow? In summary, I cannot note with approval the Government’s assessment as set out in the Pre-Budget Report as I am very concerned about the seemingly uncontrollable increase in government debt and the overoptimistic forecast for early recovery.