Last Updated: Friday, December 7th, 2012
Lord Lamont, the former Chancellor of the Exchequer, was the speaker at a lunchtime event yesterday, hosted by ConservativeIntelligence, to reflect on Wednesday’s Autumn Statement. Norman Lamont was the last chancellor to face a large deficit. He faced a deficit of 7% of GDP, more or less where we are now, and that his answer was to introduce a phased programme of tax increases and spending cuts that took effect gradually reducing the deficit as the recovery took a grip. He was the first chancellor to legislate for future years thus binding the hands of his successors as well.
Lord Lamont was supportive of the Chancellor’s biggest decisions and his overall fiscal judgments. He suggested that Wednesday’s Autumn Statement may well prove to have been “George Osborne’s most difficult day”. The situation was “extremely challenging” given that the Coalition started with the worst fiscal situation for a hundred years. Nonetheless borrowing was down this year and was due to fall in every year of this parliament. That, he said, was to be welcomed. Although he personally might have planned to cut more from the very beginning – perhaps, for example, by trimming the aid budget and cutting benefits that went to wealthier pensioners – Osborne had been right in his Statement to let the automatic stabilisers absorb the worse-than-expected global economic environment and not embark upon a further £17 billion of cuts that would have been necessary to offset falling revenues. To chase down the cycle in this way would only cut growth further. The Chancellor had set his course, said Lamont, and he should now pursue it without significant correction. Most importantly, he argued, was the need to wait upon Tolstoy’s two great warriors – Time and Patience.
He gave a particularly warm welcome to the decision to reallocate £5 billion from current to capital spending. Slowly but surely the Coalition was clawing back the cuts in capital expenditure announced by the last Labour government. The switch from paying benefits to freezing petrol duty and introducing new capital allowances for plant and machinery were also good news for business. The best underlying economic news, he said, were the unemployment numbers – more people were now in work than at any point in UK history – and a 50% increase in exports to the BRICs.
Lord Lamont was reticent about saying where he would have cut further from day one although nodded when asked if more co-payments were probably needed across the public sector. What was key, he said, was that we had to realise that our economic competitors in the Far East were spending a much lower percentage of their incomes on the state and on servicing historic and recent borrowings. UK and European businesses were therefore struggling under a tax burden that was in danger of becoming increasingly uncompetitive. Borrowing was higher in Britain than France or Germany. Our deficit reduction programme had to be ambitious in order not to fall behind our nearest neighbours in terms of first debt and then tax burdens.
His greatest challenge to the Coalition’s economic strategy was on the banking sector which he described as the number one problem. Much more action was still needed, he argued, in order to get credit to hungry parts of the economy. Thought needed to be given to altering capital adequacy requirements so that they became counter-cyclical. He hoped that Mark Carney might look at this question when he succeeded Mervyn King although, he feared, it was getting late in the day by then. Lamont also recommended more bank competition and also large-scale securitisation of the bad debts that were still clogging up the balance sheets of the economy’s biggest lenders.
Asked about the possibility that the Bank of Japan might soften its inflation targeting, permitting a greater annual increase in prices, he dismissed suggestions that the Bank of England should follow suit. The Bank of England had missed its inflation targets for about forty months already. House prices may have stayed flat in nominal terms but because of inflation had fallen in value by about a quarter in large parts of the country, he continued. Inflation had had a similar effect on Britain’s debts. There should be no more permissiveness on prices if we are to avoid an unjust transfer of wealth away from diligent savers and pensioners.
Lord Lamont noted that he had supported the first round of Quantitative Easing in order to counter what had been a 1920s-style contraction in the global money supply in 2008/09. Being outside of the €urozone had not only enabled the UK to enjoy some exports-boosting exchange rate flexibility it had also enabled us to initiate this QE. He was against anymore, however. Inflationary pressures were now too real.
On the Heseltine Review Lord Lamont struck a sceptical note. While he favoured a south-to-north rebalancing of the UK economy – especially through procurement, transport infrastructure and relocations – and greater decentralisation of political power he did not support anything that smacked of an industrial policy. Yes there should be City Challenge-style competitions so that cities and regions could compete to offer innovative programmes in order to win public sector funds but the fastest growing employment category was often “other”. It was “other” because governments, like official statisticians, are rarely able to predict where new jobs or growth are likely to come from.
Finally, on the politics, Lord Lamont was upbeat. The Tories should adopt the message that Bill Clinton issued at the summer’s Democratic convention. The Republican argument was that they had left the biggest economic mess in a hundred years, Clinton joked, and that since the Democrats hadn’t cleared up all of it so far the Republicans should be reelected. Unlike in America where George W Bush’s team were off the scene, Britain’s Labour Party would be led by people whose fingerprints were all over ‘the mess’, making the Clinton attack even easier to press home. Osborne and Cameron should tell the country, Lamont concluded, that a lot had been done but there was a lot was still to do. The British people were wise enough to realise that that message had the benefit of being both fair and true. He was, however, “shocked” at the number of people now paying the 40p tax band. Raising the thresholds should become as big a priority as increasing the basic allowance, he recommended.