Speech – Robert Skidelsky

My Lords, I join other noble Lords in paying tribute to the remarkable maiden speech of the noble Baroness, Lady Moyo. It was very thoughtful and thought provoking, and I very much appreciated her reference to me—she will have a great future here.

The Budget was crafted in the shadow of disruptive world events over which the Chancellor has little or no control, but it is by its effectiveness in tackling or responding to those events that I think this Budget will be judged. The three killer apps—as one might call them—are global finance, technology and geopolitics. The global banking crisis of course caused the depression of 2008-09. The recent collapse of SVB shows, as the noble Lord, Lord Fox, noted in this House on Tuesday, what a huge proportion of our tech industry depends on finance from a single foreign bank whose solvency in turn depends on fluctuations in interest and bond rates. That is one element of huge fragility in our system.

As for technology, it simply speeds up the operation of every single movement in the economy, whether beneficial or destructive. We know about geopolitics, which threatens all our supply chains and the future of the global economy. So those three elements are really beyond the control of a Budget or a Chancellor and, together, they make the world economy more dangerous, more unstable and more uncertain.

The Minister, in introducing the Statement, stuck closely to the forecasts—but how does she explain the ludicrous divergence in the OBR’s forecasts on inflation and growth between October/November 2022 and March 2023, or the divergence in forecasts between the Treasury and the Bank of England? The noble Lord, Lord Willetts, pointed out that these different models factor in different things, but which of the factorings lead to an outcome that we can have faith in? You factor this, you factor that. What is going on is that all the models used are inadequate. They have become inadequate in the face of large structural breaks which have been occurring in the economy as a result of Covid-19 and the war in Ukraine. They are models which are still optimising around some long-forgotten equilibrium.

I am not sure that we have a better model, but it limits the confidence that we can have in these forecasts. They are trotted out almost as truths. The Chancellor said, “We will grow by” X, Y or Z per cent in the next three years, but what he meant was that the OBR model says that those will be the growth rates—and that is not a satisfactory basis for building confidence.

The speed-up of model obsolescence represents a huge break from the past. We were brought up to believe that short-term forecasts were relatively reliable—after all, how much could change in six months?—and that the longer ones were less reliable. Now, however, both are unreliable. It has infected both the short-term and long-term forecasts. The Treasury is not steering the economy—that phrase was the title of one of Sam Brittan’s great books. The economy is being tossed around by the world economy from one place to another, and that is not going away any time soon. These destructive events have wreaked havoc with the macroeconomic rules so laboriously constructed in the 1990s and 2000s, in particular that of the separation of fiscal and monetary policy, which was the architectural triumph of the Blair-Brown years.

What is it like today? What is the state of that separation today? The fact is that it has been fatally undermined. The Bank of England has been stoking up inflation when it was set up to do the exact opposite. It has been given a green mandate that conflicts with its inflation mandate, and no one knows exactly what the relationship is between fiscal and monetary policy. It has become hopelessly fuzzy, as we found out on the Economic Affairs Committee when we interviewed the Governor of the Bank of England. The whole relationship is shrouded in fictions that no one is meant to penetrate. That is not the basis for giving confidence in macroeconomic policy. In fact, the confidence has been withheld.

“Our plan is working”, said the Chancellor. What plan? To reduce inflation? To get growth? To reduce the inactivity rate? To achieve energy security? He must realise that any improvements that have been recorded since he became Chancellor, or in the last two or three months, are not due to anything the Treasury has done but result from what has been going on in the world economy. There have been beneficial developments, particularly what has happened to energy prices.

A remarkable thing about Budget making today is what it says about markets, media and policy networks. If you analyse it, you will find that there is actually very little difference between the Truss-Kwarteng and the Sunak-Hunt Budgets; the first just came at slightly the wrong time, that is all. Now, things have got a bit better. These are Budgets that depend on five-year forecasts; you cannot say that the difference of a month or two in the presentation of a Budget should have caused such panic in the market—unless, of course, no one had any real confidence in the long-term forecasts on which the Budgets were made.

At one time, there were things called “Budget leaks”. You were not meant to reveal what was in the Budget. In fact, the Chancellor of the Exchequer in 1947 resigned because of a Budget leak. Now, Budget leaks are routine; they are sort of trailers in which the Treasury lays out what it is going to do. What about the opportunities for speculation, for example, that that might give rise to? No one thinks about that any more. You have to make the newspaper headlines.

The Chancellor might have taken advantage in his Budget to display the beginnings of a coherent framework. There is one such framework—it is a very old model; no one knows about it any longer—called the balanced budget multiplier. That approach underpins the Biden Administration’s $738 billion Inflation Reduction Act, which was passed into law last year; I do not think that the Chancellor referred to it in his speech. It is based on an intelligent combination of extra investment and higher social spending to be paid for by higher taxes on the rich and the very rich. Split roughly half and half between tax and spending increases, the combined effect is forecast to secure—again, one has to make the point that it is a forecast—a cumulative reduction in the federal fiscal deficit of about $300 billion over five years. It may not happen—it probably will not—but at least there is a mechanism in it which suggests that it could happen. What we do not have in the present enthusiasm for the policy working is any mechanism or theory which gives you confidence that what the Chancellor is doing will achieve what he wants it to do.

I will make two final points—I am sorry that I have gone on a bit—about where we are in the cycle. It is very difficult to assess what is happening in the labour market; the noble Lord, Lord Bridges, talked about this. On the one hand, we have a very high inactivity rate of about 7 million altogether, which is usually connected with a slack labour market. On the other hand, we have unemployment very low at 3.7% and lots of job vacancies, which would suggest a tight labour market. What is the explanation of that puzzle? The truth, I think, is that headline unemployment figures no longer accurately measure the capacity utilisation of an economy; I think that that has been true for some time, but it has been brought to the forefront recently. A shortage of supply in some areas is combined with a general deficiency of demand in the economy. We would expect the latter to be the case, given that the economy has not grown for three years while the population has grown by 1 million and real wages have fallen substantially. Therefore, we would expect a deficiency of aggregate demand, even though there are pockets of shortage of supply. The Budget might have addressed its attention to that.

I wish that the Chancellor had argued in favour of job creation, rather than incentives to people to apply for jobs that do not exist. Gordon Brown and I, two years ago, argued for a public sector job guarantee scheme, which I still think would act as a kind of buffer stock of employment which would oscillate with the oscillations of the cycle. I am sorry that it was not adopted; it would have been—and still would be—a good method of job creation today that would also tie in with the devolution strategy.

My last point is about securing the long-term growth of the economy. Of course, I welcome the incentives that the Chancellor has provided for investment—the creation of 12 new investment zones modelled on becoming potential Canary Wharfs—but I wish he had given a bit more attention to two British institutions for investment, which I do not think that he mentioned: the UK Infrastructure Bank and the British Business Bank, both of which could be developed. As the noble Lord, Lord Eatwell, said, we know that investment has been a problem in the British economy for a long time. We also know that the share of public investment in total investment has dropped dramatically, and it has not been compensated by any increase in private investment. Here is a good opportunity to insert the state into the long-term recovery of the economy and to provide for the energy and security autonomy, which is the aim of the Government and us all.

In short, there are quite a few interesting initiatives, but I do not think that they have been properly joined-up, and we still await a commanding framework for action in a world that is spinning out of control.

My Lords, the Chancellor’s Autumn Statement is designed to reassure the markets of the sustainability of the public finances. That is, the Chancellor accepts as binding the views of the City of London, whether they are right or wrong. It is what the markets think that matters, not how matters really are—a nice intrusion of post-modernist thinking in what is supposed to be the hard science of economic policy-making.

It is pretty obvious why the Government should pay such attention to the financial markets. For decades, the financial sector has propped up the UK’s hollowed-out economy. Financial flows into the City of London allowed the country to neglect production and trade and artificially maintain a higher standard of living than its productive capacity warranted. Now we are paying the price.

Instead of starting to repair this long-term damage, the Autumn Statement is designed to repair the so-called “black hole” in the budget, in the belief that doing so will, by some magical process, produce an automatic surge in output and growth. In other words, it concentrates on shrinking the numerator, the budget, while ignoring the effects of that shrinkage on the denominator, which is GDP growth. Even in terms of maintaining investor confidence, that is misguided, as the noble Lord, Lord Eatwell, pointed out. How does the Chancellor imagine foreign creditors reacting if his spending cuts produce, or deepen, a recession?

Politics should be based on some theory, at any rate, but there is no explicit theory to be found in either the Autumn Statement or the OBR forecast. The Chancellor sets fiscal targets to reassure the markets. The OBR is there to reassure the markets that the Government’s targets are consistent with its own forecasts. The Treasury and the watchdog cling to each other for mutual protection behind a barrage of statistics that claim far more than they are entitled to.

If there is an implicit model behind both Treasury targets and OBR forecasts, it is the one known as financial crowding-out. There is assumed to be a fixed supply of capital, so the Government’s increased demand for funds puts upward pressure on interest rates. The rise in interest rates will “crowd out” any stimulus afforded by additional borrowing. That is why the less the Government borrow, the more growth you will get. That is simply a restatement of the “Treasury view” of the 1920s, explained by the then Chancellor of the Exchequer, Winston Churchill, who said that

“when the Government borrows in the money market it becomes a new competitor with industry and engrosses to itself resources which would otherwise have been employed by private enterprise, and in the process it raises the rent of money to all who have need of it.”—[Official Report, Commons, 15/4/29; col. 53.]

Presumably, Jeremy Hunt would subscribe to that hoary doctrine, though doubtless in less orotund language. It is as though the Keynesian revolution had never happened; we are just back to pre-Keynesian orthodoxy. It is all embellished in various ways and tweaked here and there, but the substance is exactly the same. However, as the economist Rob Calvert Jump wrote in a recent article:

“There is now a consensus amongst economists that austerity does significant damage to an economy’s potential, undermining growth, as the experience of the last decade in Britain has shown us. Further austerity will do far more damage than a ‘fiscal hole’ that disappears with tweaks to models or accounting rules. The ‘fiscal hole’ is a dangerous fiction compared to the hard facts of austerity’s impact.”

The last point is particularly worth emphasising. How many people realise that the notorious “fiscal black hole” is the product of shifting definitions of net public sector debt?

Theory alone cannot provide us with all the answers; in fact, all the macro models are in more or less of a mess. I will give three examples. The first is the rise in the inactivity rate. There has been a fall of 227,000 in employment since a year ago. So we have a tight labour market with unemployment at 3.6%, a strong demand for labour and a falling labour participation rate. How can that be explained?

Secondly, there is the notorious productivity puzzle. No one has much of a handle on this. What we know is that the forecasts suggest there will be a dramatic fall in living standards, by about 7.1% over the next two years. How will creating a depression stimulate enterprise, innovation or investment, which are the drivers of productivity?

Finally, inflation is expected to peak at 11% in the first quarter and then fall. Again, the discussion really makes no advance on the old discussion about the causes of inflation, whether due to excess demand or cost push—there are, of course, cost-push factors. I think everyone understands that the UK’s support of Ukraine has pushed up energy prices. That is why the Government are now explicitly asking the public to save energy to beat Putin, using crude, World War II-style “Dig for Victory” messaging. What is much less understood is that the UK has a special problem: gas is particularly expensive here, due to our chronic lack of gas storage and our inefficient and exploitative energy distributors.

To conclude, I am strongly in favour of balancing the budget, but not by any mixture of cutting spending and raising taxes. The approach I would favour in present circumstances revives the almost forgotten Keynesian idea of a balanced budget multiplier. A contemporary version of this would suggest a windfall tax or excess profits tax on energy producers, the proceeds of which would be spent by the Government on maintaining investment and consumer demand in the face of the economic downturn.