Middle East: Economic Response

My Lords, it is a pleasure to return to the House after such a sunny break and to be able to review calmly the Chancellor’s Statement of 21 May. It was not a major package. It was a collection of small measures, welcomed by some people as far as it went. As far as I know, the Chancellor did not announce the total cost, but except for the short delay in the increase of 5p on petrol, we are told that it will be covered by the changes to corporation tax on overseas investment and the foreign branch exemption. I would be grateful if the Minister could tell us how much that corporation tax change will cost British businesses and in which tax years. What investment allowances will be made? As someone who made major investments overseas at Tesco and built up some fine businesses in Korea, Thailand and eastern Europe, I can tell your Lordships that we would not have taken the successful risks we did if early losses had not been allowed against profits at home. How is the Treasury going to avoid this change chilling overseas investment—a beacon of British wealth creation, reputation and strength for centuries? I read the new list of food, drink, fertiliser and fuel items that will attract zero tariffs until December 2028. I note that they are rightly out for consultation. I have two questions here. First, have the Government had regard to the impact on our aspirations for new trade deals, where the granting of tariff-free access is a major bargaining chip? We know that the new Canada deal seems stuck because it has indicated that there is not much extra we can offer it. Secondly, while government has tried to avoid lifting tariffs in areas where there is significant UK production in the agricultural sector, many of the items—nuts, fruit and tuna, for example—are substitutes for UK-grown foods and will displace demand for them. Moreover, we have a vibrant and important food manufacturing industry now facing stronger competition in areas such as confectionery, biscuits and processed foods. What is the Government’s estimate of the impact on them and the vital jobs that they support? Is this a further nail in the coffin of our manufacturing industries? This brings me neatly to the third area of concern, which also affects food manufacturing—the high energy costs in the UK. They have been made worse by the Middle East war, but the main reason for them is the Miliband obsession with a drive to net zero. This obsession is doing very little for climate change, as the UK is responsible for less than 1% of global emissions. The Official Opposition have repeatedly made clear, sometimes with some welcome support from the Minister, that we must make full use of the North Sea—not only with tie-backs but with an early go-ahead for Jackdaw and Rosebank. This becomes more urgent by the day, given that there seems little chance of an early opening of the Strait of Hormuz. When can we expect an announcement on these two licences? Our high electricity prices are also a cause of wider de-industrialisation. I welcome the support for the ceramics industry. Stoke-on-Trent’s five towns were the Silicon Valley of Britain in their day, and I am an avid collector of Staffordshire pottery. However, something more fundamental is needed on energy to preserve our shrinking industrial base. Given that the Statement was about the impact of war in the Middle East, I was surprised that it was so light on defence. I ask the Minister again: when will the defence investment plan be published? He used to say “in due course” but in the King’s Speech debate he said “shortly”, which offered more hope. That brings me on to my final area of concern: the gravity of the wider picture of inadequate and crumbling defence forces because of lack of proper funding or a proper defence investment plan; the country’s finances in a mess; troubling social policies and divisions; and anaemic growth—the lack of that magic which makes governing so much easier. This is not surprising given the avalanche of taxes and business costs that we have experienced—national insurance, minimum wage hikes, the Employment Rights Act, a new visitors’ levy on our hotels, packaging taxes and vicious rates revaluations that, according to the weekend’s papers, risk closing down yet more of our country’s pubs. Further, only today I see that it is proposed to reduce checks on those claiming disability benefits. This would be going in precisely the wrong direction. Is the report correct? To understand the damage that these policies have caused, we need only look back at the OBR’s March 2024 forecast for 2026. At that point, shortly before we left office, having navigated enormous challenges—not least the unprecedented inflation following the outbreak of the war in Ukraine—the OBR forecast UK GDP growth of 2%, unemployment at 4.2% and inflation at 1.6%. After Labour’s tax rises and spending spree, the OBR now forecasts UK growth at 1.1% in 2026, unemployment at 5.3%—and tragically much more among the young—and inflation of 2.3% for 2026. This is all in the wrong direction over those Labour years. We face many serious problems in this country, and we on these Benches believe that we need a greater sense of urgency and a much better plan from the Government, especially on growth and productivity, defence, energy and debt reduction. Sadly, the latest package is another bit of unexciting incrementalism, mostly focused on lesser issues and badly managed, as we saw from the outcry of all experts on the proposal to fix supermarket prices. We can do better.

My Lords, till sales at UK supermarkets slowed to growth of just 0.2% in the three weeks to mid-May. Families do not know how they will cope with higher fuel costs, higher council tax and expected inflation. I am sure the Minister will tell us that the Government have tried to ease costs on the most vulnerable, and I support those actions. But with no relief in sight from the consequences of Trump’s Iran war, will the Government look seriously at the emergency £2 billion transport relief package proposed by my colleagues, to be funded by the Treasury’s unforecast boost in tax receipts: a cut in fuel duty by 10%, a slash in bus fares to £1, a slash in rail fares by 10% and a cut on VAT on public EV charging to 5%? Does he also recognise that this is not a short-term crisis? The Government will have to find ways to reverse or offset the national insurance increase to small employers, especially in hospitality and leisure. They must break the link between electricity prices and the oil price, intensify the move to contracts for difference to spur on renewables, provide an effective programme for individuals and small businesses to install energy saving, and overhaul business rates at least to exclude all new business investment in energy saving from business rate consequences. Can he take this series of actions, which would make a significant difference?

I am very grateful to the noble Baronesses, Lady Neville-Rolfe and Lady Kramer, for their comments and questions. The noble Baroness, Lady Neville-Rolfe, ended her remarks with her usual doom and gloom and talking down the British economy. Unfortunately, she did not mention any of the positive economic news that we have heard in the last few weeks. She shares with us a belief in the importance of growing the economy and knows that that is our number one objective. She did not mention the fact that last week’s figures confirmed that Britain’s economy was the fastest growing in the G7 for the first quarter of this year. She did not mention that we beat the OBR’s spring forecast, with economic growth at 0.6% in the three months to March. She did not mention the fact that, because of the resilience in our economy, last week the IMF upgraded Britain’s growth forecast for this year. She also did not mention the positive news on public finances that borrowing last year was £20 billion lower than in the previous year and is falling in every year of this Parliament. She did not mention the fact that the IMF backed our economic plan, saying that the Government’s fiscal framework strikes “a good balance between deficit reduction and growth-friendly spending”. She did not mention any of the things that we are doing to ease the cost of living, including that interest rates have been cut six times since the election, that real wages have continued to rise in every month of this Government and that inflation fell in April faster than expected, making the UK the only G7 economy where inflation fell last month. She did not mention any of those things, and I think that continuing to talk down the economy when we are doing all that we can to help it through this difficult period, with the war in the Middle East, does not benefit anyone. She talked about the cost of the measures that we are introducing and about the foreign branch profits. I hope she will agree with us that, when a country faces challenges because of higher oil and gas prices, we must ensure that those who benefit from increased prices and volatility pay their fair share. She will remember that, in our first Budget, the Government extended and increased the energy profits levy, last year we announced a new permanent windfall tax regime for oil and gas price shocks, and last month we increased the electricity generator levy, alongside further action to weaken the link that the noble Baroness, Lady Kramer, mentioned between high gas and electricity prices. Now, the Government are making specific changes to the taxation of foreign branch profits, changing how companies are taxed in relation to their overseas activities. The noble Baroness will know that, until now, some businesses have structured their affairs with taxable branches to pay little or no corporation tax on UK profits. The change that we are introducing removes the ability to achieve disproportionate relief for overseas costs without UK taxation or future profits. The change, from 1 September 2026, for oil and gas-extracting UK resident companies will ensure that the UK continues to have a robust and effective corporation tax regime in line with international best practice and will ensure the effective taxation of profits attributable to UK activities. The noble Baroness talked about the cost. She is absolutely right to say that we expect these reforms to raise hundreds of millions of pounds per year and that they will fully fund the package of measures announced by the Chancellor. The costings will be certified by the OBR forecast in the usual way at the next fiscal event. The noble Baroness talked about zero tariffs and rightly said that they are out for consultation. Obviously, that is the case and I am pleased that she agrees with that. She mentioned the impact on trade deals. These are temporary suspensions to tariffs and so will lapse long before any trade deals are negotiated. So I think we will be able to see immediate improvements in the cost of living, and perhaps over time there will be trade deals that achieve that more permanently. The noble Baroness talked about high energy costs and blamed them on the drive to net zero. I think we had an Oral Question in this House when the IMF put out its previous forecasts, and she will know that the IMF said that we faced higher energy costs in this country exactly because the previous Government had failed to take action to make the UK more self-sufficient in energy. So blaming the solution to the problem and saying it is the problem itself is a little perverse. The problem for the UK is that we are too exposed to imports of energy and we are, as she knows, taking action as a Government to reverse that. The noble Baroness knows I agree with her when it comes to oil and gas production from the North Sea and how important and valuable that is. She asked me specifically about two fields, Jackdaw and Rosebank. She will know that the development proposals are a matter for the North Sea Transition Authority and the Offshore Petroleum Regulator for Environment and Decommissioning. I am unable to comment on the specifics of any individual project while the regulatory process is under way, or on the investment decisions of individual operators. As I understand it, the Secretary of State for Energy Security and Net Zero will be making a decision regarding the environmental impact assessments of these projects in the coming months. I am pleased that the noble Baroness welcomed the support for the ceramics industry. She is right to say that there are far longer-term issues at play in terms of the competitiveness of many of our industries: the foundational sectors so important to the industrial strategy. That is why we have already increased support for our most energy-intensive companies through the British industry competitiveness scheme that we announced a couple of weeks ago. The noble Baroness asked me about defence spending. As she knows, the defence investment plan is the first zero-based review of defence spending in almost two decades. It will set out the MoD’s plans to ensure that resources are directed effectively to meet its priorities. The Government are working hard to facilitate this and to ensure that the plan delivers the outcomes the UK needs for defence and for taxpayers. I shall repeat what I said previously: it will be published shortly. The noble Baroness asked about supermarkets, finally. As she knows, it is quite right that we have discussions with supermarkets, as we have with fuel retailers and high street banks, to discuss ways we can work together to ease the cost of living on households. But, as I said to her, I think in a previous Private Notice Question, this is not about price caps, as some speculation has suggested; we would never advocate for that, and it is not for us to tell supermarkets how to run their businesses. The noble Baroness, Lady Kramer, focused primarily on quite a long shopping list of support that her party would like to see introduced. Obviously, we did introduce some support last week, as the Chancellor set out, but I am not convinced that the funding that the noble Baroness thinks is there for her package of support actually is. Unfunded commitments are not the way to ease the cost of living crisis. We saw exactly that with the Liz Truss Government, and we saw exactly that with the previous Conservative Party Government. Introducing unfunded support now would mean higher inflation and higher interest rates in the long term, meaning that the very people we are trying to help now would pay more for their rent, bills and mortgages in the long term. I do not believe that is a sustainable way to help people with the cost of living crisis.

Before we move on to Back-Bench questions, I have been asked to remind noble Lords that the next 20 minutes are only for Back-Bench questions and not for Front Benches.

My Lords, the Minister will remember—at least I think he will remember—that, after 1945, the best brains of Britain, America and some other countries got together to rebuild the entire financial stability and structure of international institutions on the rubble of the Second World War. Today, nearly all those institutions are in very serious trouble. Is there enough attention being paid by us and other countries to rebuild them in a way that will restore financial stability generally? Without that, all our own efforts are going to be minimised.

I do not personally remember 1945, although I have read about it. The noble Lord is absolutely right on the importance of international institutions. The G7 has been a very important institution in this crisis and in previous crises, and the Government are fully committed to the G7, in particular, playing its full part and to making sure that the IMF and many of our institutions play their full part in dealing with all international crises.