Rt Hon Lord Lilley

    Date of Proceeding: 12.03.2008
    Reference: 473 c331
    Member: Lilley, Peter
    Description: It is a pleasure to follow the hon. Member for Wolverhampton, North-East (Mr. Purchase), who rightly reminded us of the importance of manufacturing industry. When I was Secretary of State for Trade and Industry, my mantra was that we could not have a healthy economy without a strong manufacturing sector, which, as he emphasised, is increasingly higher value-added and high tech.

    Of course, Governments cannot always decide the proportion of economic activity in manufacturing and in services-they want both to be strong and good. As an economy, we have benefited from a strong service sector and a strong financial services sector over the past couple of decades because the relative demand for those services has risen. I fear that in a period of economic difficulty focused on the financial services sector we will have greater difficulties than some countries that rely less on that sector than we do. We need to be careful about that and we are jolly glad that we have a manufacturing sector such as that described by the hon. Member for Wolverhampton, North-East.

    My right hon. Friend the Member for Fylde (Mr. Jack) described this Budget as a Chinese meal-soon eaten and even sooner forgotten. That is a fair description of the Budget, but a very unfair description of a Chinese meal. I invite him to join me for a meal in the Oriental Garden in the village of Offley, from which I come. He will have a very memorable meal.


    Mr. Jack: May I immediately reciprocate my right hon. Friend’s generosity? I look forward to getting our diaries together.

    Mr. Lilley: I would like to enter that on the Register of Members’ Interests.

    A disgraceful feature of this Budget-it has, I am afraid, been a feature of Budgets in recent years-was the lack of transparency and the tendency to exclude from the speech important measures or any details that make comprehensible the measures that appear in it. I can remember, as I am sure my right hon. Friend can-we were both Financial Secretaries to the Treasury,
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    and I was Economic Secretary before that-that when we drew up Budgets, officials would sometimes say, “You’ve got to include that measure. It might be boring, but it’s important. It raises revenue.” Invariably, we would say yes. There was a presumption that anything important or significant had to be included and explained and the cost made apparent. The tendency in recent years has been to do exactly the reverse and say that anything important, anything that will be painful or anything that imposes burdens of taxation on people will be hidden in the small print of some press release and barely mentioned in the speech.

    We had the extraordinary experience of the Chancellor giving a Budget speech shortly after taking £100 billion of additional liabilities on to our balance sheet without mentioning that he had nationalised a dodgy bank or that he had included the extra loans on the nation’s balance sheet. I find that disgraceful. It is not treating the House or the nation fairly. I understood that the Office for National Statistics had said that that would be on the balance sheet. The figures should be included in the nation’s assets. The fact that the provision does not come in until the first day of the new financial year is not an excuse for not including it in today’s Budget.

    Closer inspection of the book leads us to discover that the lollipop in the speech-the offer of an increase in the winter heating allowance that the Chancellor announced-will be financed for only one year. It is a one-year increase. Will it disappear next year? If it will, that is fair enough, because no money has been set aside for it. However, if the Chancellor is giving the impression that it will be extended this year, no money has been set aside and there is some dodgy financing going on there, too.

    We were not reminded that the most significant change that will occur in the tax system as of 6 April is the abolition of the 10 per cent. rate band: 5.3 million of the least well-paid people in this country will pay more tax. The Chancellor did not mention it, let alone point out its impact on those people’s standard of living. He also failed to remind us, of course, that it was introduced in an attempt to create the impression that he was cutting the basic rate of income tax by using the money in his last Budget to announce a 10 per cent. basic rate cut while eliminating the 10 per cent. rate so that most people actually end up paying more.

    The Chancellor accidentally said that he was cutting corporation tax from 38 per cent. to 28 per cent., when the actual cut is from 30 per cent. to 28 per cent. I think that that was just a slip of the tongue; I make no complaint about it, as we all make such mistakes and I am guilty of them from time to time. What the Chancellor did not mention, however, was that the corporation tax rate for small companies is going up as of the beginning of this financial year. That matters to millions of small companies, which are, above all, the job and wealth creators of the future-and hopefully the big companies of the future. They are enraged by that prospective increase and the fact that it is being made at these particularly uncertain times in the economy.

    The Chancellor was remarkably opaque about what he is doing with non-doms-non-domiciled residents who work here, but do not necessarily pay tax on overseas income. They pay tax on their income in this
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    country and it would have been interesting to hear from the Chancellor exactly how much tax they pay on the incomes they generate in this country. It appeared to me that the Chancellor was backing off in his proposals and reverting more to those made by my hon. Friend the Member for Tatton (Mr. Osborne), the shadow Chancellor, to pay a flat £25,000. Of course, the Chancellor charges more-unsurprisingly, as Labour always charges more-but once the non-doms have paid, no further inquiries are made about their foreign revenues.

    In fact, when the Chancellor said that he was going beyond that and was not only going to charge the non-doms that sum, but start chasing their overseas income and investments as well, he produced an absolute uproar among the non-dom community resident in this country.

    A friend of mine, who is not a non-dom in this country and is not even resident here, has a business in central Europe. He lives in Zurich. He told me that he was delighted by what the Chancellor proposed because the outflow of non-doms from this country to Switzerland-to the fashionable suburb of Zurich where such people live-has been such as to treble the value of his house since the announcement was made. The idea that this is just a brouhaha is not the case; people are physically upping sticks and moving, and we are losing not just the £25,000 or £30,000 that they might pay, but the hundreds of thousands in tax revenues that they are paying on their incomes in this country, generated in this country, and, of course, the prospect of moneys being returned from abroad to this country-not to mention the contribution they make to arts and charities.

    Lorely Burt: Will the right hon. Gentleman clear something up for me? Was not a £30,000 tax for non-doms initially a Conservative proposal?

    Mr. Lilley: I am sorry that the young lady-I mean hon. young Lady-has not been listening. I said that I hoped that the Chancellor was reverting more to the proposal that my hon. Friend the shadow Chancellor made for a flat licence costing £25,000 a year. The idea was that if a non-dom paid that, no further inquiries would be made into foreign income. The Chancellor then went much further by saying that in addition to paying the flat fee, investigations would be made into foreign trusts and related financial matters. As I was saying, the non-doms were not prepared to tolerate that, hence the outflow from this country.

    The Chancellor seems to be moving from that position, but it is very hard to tell even from the press release-it is simply impossible to tell from his speech-whether he has done a complete U-turn. I very much hope that he has and that he has adopted the shadow Chancellor’s more sensible proposal, as a result of which some of those who have moved to Zurich may think again. The press release says that the Chancellor is not going to charge for people’s children. It has always struck me as an extraordinary idea that one should have to pay £30,000 a child, although £35,000 is still going to be payable for a wife. How that applies in a system of independent taxation, I do not know.

    Lorely Burt: Spouse.

    Mr. Lilley: I should say spouse, yes. Wealthy wives will have to pay for their non-earning husbands and vice-versa.

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    Mr. Austin Mitchell: It must be admitted that although the formulation has changed, it is clear that the Conservatives were proposing to raise a far larger sum through their taxation of non-doms than will be raised by the present system. Did that trebling of house prices in Zurich begin at the Conservative party conference, when the Conservatives first announced their intention to hit their friends, or did it begin when the Government followed suit?

    Mr. Lilley: I think it began the day the Chancellor started announcing proposals to investigate overseas earnings and bring them into the United Kingdom tax regime, on top of charging £30,000 per member of a household. I am pretty sure that concerns will be lowered if he has indeed performed a complete U-turn.

    The one thing that we do know about the Chancellor’s proposals is that he has committed the next Parliament not to change them. But, as the hon. Member for Great Grimsby (Mr. Mitchell) will know, one cannot commit a future Parliament to anything. One can commit one’s party for a future Parliament, but one cannot rely on its being in government. I certainly hope that we cannot rely on the Chancellor’s party remaining in Government. I think he should at least have made it clear that he was speaking only for his own party. I am sure that my party will do all in its power to alleviate the problems that he has created, but the next Parliament cannot be bound by anything that he has announced today.

    The central issue underlying the Budget was how prepared we are in this country for a potential slowdown in the British and world economies. It is not the job of Members of Parliament to forecast the future. When it was my job and I was a forecaster, I enunciated Lilley’s rule, which was “Never make a forecast except about the very distant future or the immediate past”. That is the safe thing to do, because one cannot be found out, but one can claim to have forecast what has just happened.

    I do, however, remember the distant past. One of the advantages of having reached my stage in life but having, before arriving in the House, had a career in the real world is that I observed what happened in the 1960s and 1970s, and I have a sense of déjà vu. Then as now, America was fighting an unpopular war. Then as now, it was financing its unpopular war without raising taxes. Then as now, that produced a huge deficit in the American Budget. Then as now, that Budget deficit produced a corresponding deficit in the balance of payments and a big outflow of dollars across the world, which was absorbed in the foreign exchange reserves-then those of Germany and Japan, now those of China and other countries.

    For quite a long while-the best part of a decade-that outflow of dollars across the world produced an unparalleled period of prosperity and strong growth combined with low inflation. We seemed to have the best of all possible worlds, much as we have had for the last decade or more in the western world. But, then as now, the outflow of dollars began to drive up commodity and oil prices. We are in roughly that position at the moment. We know what happened next then: for a while the rising commodity prices seemed to be absorbed by, for instance, the squeezing of margins of companies and a burst of productivity increases, but after a while
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    that could not be maintained. Rising commodity prices showed up in rising prices of goods and services, and inflation began to accelerate. When Governments tried to slow that inflation by putting on the brakes, they were landed with stagnation with no reduction in inflation. Stagflation was the phenomenon of the future.

    The only question that we need ask is “Why should it be different this time?” Why should history not repeat itself now? But our history does not always repeat itself.

    Stephen Hesford: I am obliged to the right hon. Gentleman, who will have an active memory of those times. I was still at school but have read since that, yes, the UK had stagflation, but stagflation was not universal. There were economies that survived and prospered but, unfortunately, not the UK’s. Is not the position the other way around this time? The UK is in a position to survive, but other economies are not.

    Mr. Lilley: That was very much the question that I intended to address and I am grateful to the hon. Gentleman for prompting me. It is the important question; not merely, “Will it be the same this time?” It may not. Marx said:

    “History repeats itself, first as tragedy, second as farce.”

    Maybe it will be farcical this time, maybe not. If it is to repeat itself, how well placed are we to cope with something similar? The lessons of the period when the hon. Gentleman was at school and I started at university, before working first as an economic consultant and then in the City, was that countries that had run a very tight ship experienced far fewer problems during the latter and more painful unravelling of events than those that had run large budget deficits and a less tight ship. The sad truth is that we now have the highest budget deficit of any major country, with the exception, as my right hon. Friend the Leader of the Opposition pointed out, of Bangladesh, Pakistan and Hungary.

    Mr. Brady: Egypt.

    Mr. Lilley: Egypt, Pakistan and Hungary. My apologies to Bangladesh. It is sad that one must apologise to Bangladesh for being compared with the UK; there were times when it would have rather welcomed such a comparison.

    Running a tight ship is important. We have not done so and the prudent period of the early stage of the Government-when they committed themselves to following the spending plans they inherited from their Conservative predecessors-gradually eroded. At precisely the time they ought to have been starting to be more cautious, they became less cautious. They ought to have been repairing the roof while the sun was shining; instead, they were squandering the money coming into the Exchequer.

    The second feature that helped countries in those difficult times was that they had strong foreign exchange reserves. The Prime Minister squandered our gold reserves; had he known history, he would have realised that gold is one of the things that increases in value most during these cycles. The losses that he incurred by his decision to sell off the gold reserves
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    exceed the losses of any of the Jerome Kerviels or Nick Leesons of the past, making him the biggest rogue trader of all time. The fact that our reserves are not as healthy, to the tune of many billions of dollars, is a sadness.

    Countries that had lower tax burdens did better in those circumstances than countries with high tax burdens. It is sad, too, that we have moved from having one of the lowest tax burdens in Europe to having one of the highest. We have overtaken Germany, not just because our burden has been going up but because other countries, prudently and sensibly in the good times, have been cutting their tax burden; we have not.

    The fourth feature that helped countries weather the storms was flexible labour and other markets. I am happy to say that we did liberalise our labour markets and reform our trade unions during the 1980s and 1990s. The Government inherited that and have retained a good part of it, which puts us in a better situation than we might otherwise be in. But they have been adding burdens to businesses and companies, regulating and collectivising, which means that we will be a bit less flexible than we might have been and a bit less well placed to deal with the possible dangers of coming years.

    We should also ask why the credit crunch is occurring: why are we facing the current difficulties in international banking and credit markets? It has been suggested that the crunch has been caused by a lemming-like move by banks and other financial institutions to invest in high-risk and imprudent investments. However, banks and financial institutions-some of them, at least-have always been prone to being imprudent. Some have always made bad investments, but those bad investments do not normally provoke a credit crunch. So what is different this time? It is a moot point whether imprudent investments, which have undoubtedly been made, have caused the crunch or whether the crunch revealed the imprudence. I drew an analogy in a recent debate: when the tide goes out, we see who was swimming naked, but the fact that some people forgot to wear their bathing trunks did not cause the tide to go out. Likewise, when the tide of credit ebbs, we discover who was making imprudent investments, but those imprudent investments might not have been what caused the credit crunch.

    The usual criticism of banks is that they will not take risks. I constantly meet businessmen who say, “I’ve got a terrific idea and project, but the trouble with the banks is that they will not take a risk.” As the banks are usually criticised for preferring safe investments to risky ones, why have they apparently moved towards investing in riskier assets in recent years? I suggest the answer is that interest rates have compelled or encouraged them to do so. We have been through a period of low interest rates in real terms. That is to do with the supply of savings relative to the available investment opportunities. The supply of savings comes above all from China, but it transfers itself across the world economy, and in order to bring about a balance between borrowing and lending and saving and investing, interest rates had to be held lower. That meant that people had to invest a large sum of money in lower yielding assets because there were not enough higher yielding assets-in less secure assets because there were not enough highly secure assets. They did so because that was all that was open to them-not because they suddenly became
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    transfixed with the idea of taking high risks for low yields, but because there were not any high yields for low risks. If they had not done so, we would not have had a balance between supply and demand in savings and investment, and we would then have been in the classic situation of a Keynesian credit slump.

    Suddenly, the banks are now holding off from investing. Instead of everyone praising them, saying, “Oh, good, they are being prudent; how wonderful,” the central banks of the world are saying, “For God’s sake, resume lending. We will flood the banking markets of the world with money-cheap, easy, readily available, often secured against rather dodgy assets-because we want you to start lending again.”

    The problem has been aggravated by the fact that the banks thought they had security by lending against collateral. They took as collateral solid bricks and mortar: property. The banks and financial institutions of the world-including Northern Rock-invest in mortgages secured against physical assets. The trouble is that the value of physical assets is a financial issue, not a matter of physical bricks and mortar. For a while it all seemed wonderful. They took property as collateral. That encouraged more investment in property. That drove up the price of property. That seemed to validate their decision to take property as collateral. It was all hunky-dory until there was a feeling that the money created by that lending was flowing into other markets and inflation was beginning to rise. The central banks across the world began to raise interest rates again to choke off the prospect of inflation. Their doing so initially choked off inflation in the housing market in America-it is beginning to do the same in the UK. Suddenly, the collateral was worth a lot less; there have been sharp falls in property prices in America. The property bubble burst, and that had a synchronised effect. It was not the random effect whereby someone dealing with different businesses in different markets will find that some experience problems while others do well. Because the banking system as a whole was relying on property as its collateral, the banking system as a whole found itself in difficulty.

    The whole world financial system is hugely brittle; we are sitting on a knife edge. The financial institutions-the monetary authorities, led by the Federal Reserve and with our own central bank joining in-are trying to flood the system with money to start people lending and borrowing in order to prop up the value of collateral. They are dealing with a difficult problem and there is no guarantee that they will succeed-I think Keynes described it as like pushing on a string-but I hope that with enough cheap money they will. The difficulty lies in whether they can restart things without going to the other extreme and triggering greater inflation next time round.

    Bob Spink (Castle Point) (Con): On a point of order, Mr. Deputy Speaker. I wonder whether you could advise me on how I can inform the House that I have, as of today, resigned the Conservative Whip because the party has failed to deal with serious criminal and other irregularities in my constituency.

    Mr. Deputy Speaker: Order. I think that the hon. Gentleman has done enough to inform the House on that point. It is certainly not a point of order for the Chair.

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    Mr. Lilley: Well, not only is the world financial system brittle and on a knife edge, but so is the future of my hon. Friend the Member for Castle Point (Bob Spink).

    All this House can do is recognise that those monetary authorities have a delicate task in trying to get us back to a position of balance between the risk of deflation and the risk of inflation renewing. We must recognise that the solution will not be found simply in piling regulation upon regulation on to the financial system. The problem was not caused by regulatory inadequacy, although there have been such inadequacies. It was not even caused primarily by a spontaneous eruption of imprudence, although there was imprudence. It was caused by a basic problem in the financial system, which built up over quite a long period and will require the greatest delicacy and wisdom to resolve. The Budget was presented in that context, but I fear that it did not prepare this country adequately for the difficulties that may be ahead of us.

    3.58 pm