Pre-Budget Report 2009

My Lords, our major task right now is to accept the public deficit until there is clear evidence that the recession is over. Opposed to this is George Osborne, the shadow Chancellor, who would choose to cut the public deficit. This could indeed lead to a serious slump in demand and production not unlike the situation in the early 1930s. This is now estimated to amount to £40 billion each year. In 2007, gross domestic product rose by 0.5 per cent against the estimate of 2.5 to 3 per cent, and this year it has fallen by 4.75 per cent. Next year, it is expected to rise by 1 to 1.5 per cent, but this is not a recovery. There is still a gap in output and it is not likely to be reduced until 2011. A major problem that the Government have to face is the tax gap, which is the difference between what the Government collect and what they ought to collect. The Revenue estimates that the tax gap—the amount retrieved from evading taxpayers—is about £40 billion a year. The Government have taken steps to reduce this loss, but if one looks at the action undertaken over the past year, success has not really been achieved over the period. By all means, maintain the pressure on evading taxpayers, but we should not expect major successes here. The central issue in the Chancellor of the Exchequer's speech last week was the public finances and the very large borrowing, particularly this year and next. The amount to be borrowed is £178 billion this year, which was the collapse of tax revenues, which amounts to 12.6 per cent of national income, by far the highest amount ever borrowed. A major cause of the collapse of tax revenues was the recession. The very large deficit is due to the level of public expenditure, which has not changed a great deal since before the recession. As a consequence of the high level of public sector debt, there is some expectation that the £1,000 billion debt barrier will be broken in the summer of 2011. We shall have to wait to see what happens there. The Treasury estimate is that the recession has permanently destroyed 5 per cent of productive capacity. The output gap will be growing and will not start to decline until 2011. As Samuel Brittan commented in the Financial Times last Friday, we should not attempt cyclical corrections. The Government’s decisions are quite reasonable, and in 2011, the actions consequential on the decline will need to be undertaken. Unemployment has increased much less than in many other countries. That is the situation that we have seen. In previous declines in our economy, a much higher proportion of people lost their jobs. Those job losses resulted in long, even lifetime, benefits. As a result, there is a situation that has not equalled the same problems of the past. Past recessions particularly affected young people who were at the beginning of their working lives. One action by the Government to deal with this problem is the further education or training of 16 and 17 year-olds. Every 18 to 24 year-old person will be guaranteed work or training after being out of work for 12 months. In his speech on 9 December, the Chancellor of the Exchequer pointed out that we are now the sixth biggest exporter of goods. This seems to be a success for our manufacturing industry, but for many years, we used to be the third largest exporter. This decline was the result of the action of Conservative Governments in the early 1980s, and which has continued. In the last 30 years we have gone from being a major international exporter to relying more on our financial centre. One major decision in dealing with the economic situation was to reduce VAT from 17.5 to 15 per cent. Not surprisingly, purchases did not greatly increase because this rate was to last the whole year. What will be seen, quite dramatically, are post-Christmas purchases. This is normal, but there is a big incentive to purchase in the few days before the new year when the purchase tax will rise to 17.5 per cent. We shall see the post-Christmas demand inflated even more than normal. I understand that the stores are ready and anticipating an even greater post-Christmas sale. At a difficult time, this is a welcome change in decisions on spending.