(10 years, 10 months ago)
Grand CommitteeRead Hansard Text Read Debate Ministerial Extracts
Lord Deighton
To move that the Grand Committee takes note of the 2013 spending review.
The Commercial Secretary to the Treasury (Lord Deighton)
My Lords, last week’s spending round was a further step in the Government’s programme of returning the public finances to a sustainable position. Spending reductions are being achieved by transforming public service delivery, driving through efficiency savings and controlling welfare spending.
Through three years of reform and savings, the Government’s actions have brought the deficit down by a third; we are set to borrow £108 billion this year, £49 billion less than at the peak. We have kept interest rates at record lows, which is good news for mortgage borrowers as well as, of course, making a major contribution to keeping the Government’s own costs down. We have helped a record number of people into work. From the initial savings plan of £80 billion, we are right on target, having already delivered £53 billion of it. It has been well managed from the beginning.
We have to keep going. This spending round looked at taking £11.5 billion of savings out of departments. At the same time, we continue to meet our pledge to protect certain areas, the so-called ring-fence: the health service, the schools system and our overseas development budget. Because of the tough decisions that we have taken to be able to make economies elsewhere, we have been able to invest in education and accelerate school reform, so the Department for Education’s overall budget will increase to £53 billion and school spending will be protected in real terms. We have increased the health budget from £99 billion when we came into office to £110 billion in 2015-16. Capital spending in health will rise to £4.7 billion. We are proud to be able to fulfil our commitment to spend 0.7% of our national income on development. I do not think of those ring-fences as some sort of constraint on our ability to save but as reflecting our priorities and protecting what we have been able to accomplish in those critical areas.
We are reforming public services to get more for every £1 we spend of taxpayers’ money. Yesterday, I was at a Civil Service programme for staff members called, I think, “Be Exceptional”. The whole point was to clarify for everybody that this is a continuing and constant programme of reform and is now the way we do business: determining how we can deliver things differently and more efficiently. It is not something that you do as a one-off to meet a specific target but a continuing requirement for our Civil Service to be able to deliver and perform in a more effective way, utilising fewer resources.
As part of that, we are driving out costs, renegotiating contracts and reducing the size of government. We have cut spending on things like marketing and consultants. We are focused hard on what technology can do for us, and are consolidating procurement and negotiating hard on behalf of the taxpayer. We must also reform pay in the public sector by keeping pay awards under control and limiting public sector pay rises to an average of up to 1% for 2015-16. In the spending round, we announced that we are ending the automatic progression pay in the Civil Service by 2015-16.
We have already saved £5 billion, and this spending round found another £5 billion of efficiency savings; that is of course nearly half the total of £11.5 billion at which we were aiming. To give noble Lords a sense of where that is coming from, just under £2 billion comes from the departmental administration budgets in the year in question. That means that since 2010 there has been an overall reduction of around 40% in the cost of running Whitehall departments. That tells you on the one hand that it has been a very thorough exercise. On the other hand, it might tell you something about how efficiently we were positioned at the start.
We have reduced by £1.5 billion the Government’s projects portfolio, scaling back some projects and stopping other non-priority ones. That is just a question of being much more rigorous about prioritising, which you always have to do when budgets are tight. I talked about the Government being a much more effective procurer by centralising procurement using our immense bargaining power. We expect to squeeze a further £1 billion out of that. One example highlighted in the spending round is that we are bringing together health and social care to manage more efficiently the delivery of services to the home and over time provide a better service as well; it should help the NHS save something like £1 billion.
In 2010, the Government set out welfare savings worth about £18 billion a year. Last week, my right honourable friend the Chancellor of the Exchequer announced further welfare reforms. We have put in place new measures to support people to get them into work. It is all about keeping welfare spending under control and affordable. The changes involve making sure there is up-front work search and that all claimants prepare for work and search for jobs right from the start of their claim, and introducing weekly rather than fortnightly visits to jobcentres for half of all jobseekers. It is all about getting people back into work in the most efficient and effective way.
That is at the specific level. At the general level the Chancellor also introduced a new welfare cap. The theory behind this is to try to control the very significant overall costs of the benefits Bill. We have capped the benefits of individuals. This now is an approach to try to cap the system as a whole to keep our entire budget within what we can control. That cap will apply to what is effectively more than £100 billion of welfare spending and is another move to make sure that we are managing our budget in a consistent, rigorous and professional way and that welfare remains affordable.
The other half of the spending round statement was in Investing in Britain’s Future, which in effect lays out our plan for infrastructure. It demonstrates that right up to 2020-21 we will invest in infrastructure. It does a number of things. It gives a long-term spending commitment, which is the right horizon to provide for those kinds of long-term projects. We have been plagued by “stop, go, stop, go” historically. This gives certainty to an industry that needs that long-term investment in the right way. It also demonstrates that we are prioritising infrastructure and shows which infrastructure projects we are funnelling the money towards. That is what is done here.
Infrastructure is at the heart of our economic strategy. It is a key supporting foundation for what my right honourable friends the Prime Minister and the Chancellor always refer to as the global race. We need infrastructure in this country that can support industries that expected to be competitive on the global stage. This investment is critical because we have underinvested for generations now and we need to modernise our infrastructure and bring it up to date. We are talking here about transport, energy, communications systems and flood protection. The document also refers to our social infrastructure, both housing and schools. We are getting the right long-term approach to that. I do not think that there is any political contention about whether this is a good thing or not; it is all about how well and how effectively we do it. We will, I am sure, have a discussion about how well and effectively we are doing it and who had the good ideas first, but fundamentally it is really important that this country gets behind its infrastructure programme and delivers it as efficiently as possible. It is now all about delivery and making this programme happen.
To make a programme happen you need three things: a really good plan, the money and the capability to implement it. We are building on the original national infrastructure plan that was produced with the Autumn Statement in 2010. It is to be updated towards the end of this year and we will refresh the so-called construction and infrastructure pipeline, which is where we show the list of projects to industry so that it knows what we are doing and can make preparations to support it. Investing in Britain’s Future is in effect a supporting strategy document that lays out in each of the sectors what we are doing, why we are doing it, and what we think it takes to make this country competitive. To me, that is why what we have done in this spending review is potentially transformational. We are taking the right long-term strategic approach that thinks about the issues in the correct way.
The money is the next step in any plan. I have already referred to how parts of the infrastructure which the Government fund from taxpayer resources will be handled, and of course the majority of the focus in this document is on our roads and our rail system. I will not go through the numbers or the detail of the particular projects because they are all laid out in the document, but the road investment is more significant than anything we have seen since we put the major national structure of roads in place in the 1970s. The rail investment, which has already begun with Network Rail, marks a period of greater investment than anything since the Victorian times, and of course we have also put a comprehensive budget in place for HS2. Similarly, we have put long-term budgets in place for science, infrastructure and affordable housing, and to ensure that we finish off our digital communications programme so that we have very fast broadband coverage in the maximum number of locations as soon as possible. We are working closely with the private sector to accomplish that.
My final point concerns our own capability, which is an exercise that I have been very much involved in myself: making sure that the Government know how to be a good client when they are building infrastructure. We have reviewed the four major departments with infrastructure responsibility, which of course are the Department for Transport, the Department for Energy and Climate Change, Broadband Delivery UK, which sits within DCMS, and the Environment Agency, which sits within the Department for Environment, Food and Rural Affairs. We have looked at the commercial resources that they need to deliver the project portfolio in front of them, and we will work with them to supplement their own resources to make sure that they have people in place. Structurally, from an organisational point of view, the presumption is that we will manage these projects within organisations that are dedicated to project delivery. We will get them done urgently, with focus and for great value. An example would be that we are going to corporatise the Highways Agency so that it has the flexibility it needs to hire the staff it needs to do the job and has flexibility with its funding so that it can get on and be the most effective deliverer of roads that it can be.
Baroness Kramer
My Lords, I want to thank my noble friend Lord Deighton, who has done the heavy lifting in this debate by providing us with the details of the spending review and summarising them for us, so I will not try to repeat that. However, I want to confirm that I find myself very much in support of the general thrust of the two Statements, first on the spending round and then on infrastructure, because what lies beneath them is essentially a strategy of reducing revenue spending in order to allow a shift into infrastructure investment. That surely is what we need to achieve the growth that we require for this country.
I know that the Labour Party now buys into austerity, so I will be very interested to hear its comments, but I am still not clear whether Labour understands why austerity has been so necessary. We have seen the build-up of debt over more than a generation, but during those years Labour spent and borrowed as if we were at the bottom of an economic cycle when we were in fact at the top of one. When the inevitable bust came—it is always caused by one event or another, but cycles happen—the economy found itself so heavily overborrowed that many of the tools that would have been available in more rational circumstances were not available, leaving the Government with no choice but to cut sharply into structural revenue spending.
However, the coalition is also having to rebuild an economy that, in the view of many now, had been neglected for more than generation. It is hard to believe that manufacturing fell from 26% of GDP in 1979 to a low of 10.5% in 2009. The service industry grew but manufacturing did not grow alongside it as it should have done. However, that is only part of the imbalance that was allowed to develop. We became a largely public sector-driven economy, and it has to be excellent news that for every job that has been lost in the public sector, three have been gained in the private sector. Those are now sustainable jobs, which is what we need in order to build. How did we lose so many apprenticeships in the Labour years? How did we take so many young people through education but find that when they finished they lacked the skills needed to get a job? This spending round, again, has supported apprenticeships and protected, in real terms, spending on schools and the pupil premium, which surely is an investment in the future of our most disadvantaged youngsters.
How did we end up with a Government, although this concerns more than one Government, with a procurement process that simply is not fit for purpose? I congratulate the noble Lord, Lord Deighton, for bringing sense, skill and proper planning into government purchasing. I now understand that the infrastructure programme that he has laid out represents a steady rollout, year by year, which is exactly what we need in order to deliver infrastructure. Perhaps he could tell me whether I am correct in my understanding that the order of play of this rollout of infrastructure is to have an early focus on opportunities for fairly quick wins, such as broadband, school places and affordable housing, with the longer-term projects that need much more planning and preparatory work, particularly in transport, coming out over the longer term. We now have a path for that.
We are holding this debate just as increasingly positive news is creeping out; we are moving, as the Chancellor said, from rescue to recovery. Both the manufacturing and service sectors are growing, according to the PMI and the Bank of England. Very encouragingly, the headline small business index rose to 15.9 in the second quarter, up from 6.3 in the first quarter. Mortgage approvals are up and confidence is improving. The position with the silver pound, which is rarely talked about, is interesting. Projections show that spending by the over-50s—a group of people who have been far less hit than others in the population, especially younger people—is increasing steadily. We know that it is a group of people with the capacity to spend. Their spending was up from £250 billion in 2007 to £317 billion in 2012. The forecast according to Age UK is for a bigger number to be delivered this year. That seems to be an affordable place to go to see that kind of consumer stimulus.
I am particularly encouraged that exports are rising markedly. The BCC—the British Chambers of Commerce—reports that the growth in exports is at its fastest since 1989. The Government have taken on a really tough target of doubling exports to £1 trillion by 2020. Much of that will have to come from SMEs, which provide over half our exports today. I give credit to the noble Lord, Lord Green, but also very much to Vince Cable, for turning UKTI into an effective tool after a generation of neglect. This spending round provides more money for our embassies to work with UKTI and for increased export finance, especially to small businesses, which is surely vital. This is an area where scaling up has to continue. It must surely be one of the primary focuses now of economic policy.
The welfare changes in this spending review are, frankly, modest. That must be right, as we have to manage austerity in a fair way. I want us to monitor the impact of the delay in paying jobseeker’s allowance to see whether that has an untoward impact, albeit one that is unintended. As I say, the changes on the welfare side have been very modest. However, I have a point of clarification for the noble Lord, Lord Deighton, on the so-called welfare cap, which strikes me as less a cap and more a sensible management tool to capture key parts of annually managed expenditure: programmes such as incapacity benefit, which spiralled completely out of control under Labour even though there seemed to be no particular increase in either disabled or injured people. Will the Minister confirm my understanding that the cap is the OBR forecast of the cash cost of the included programmes? Does breaking the cap trigger a report to Parliament but not necessarily an automatic curtailment, unless there turns out to be an important need for underlying change?
I will talk briefly about infrastructure because the noble Lord, Lord Shipley, will focus his remarks on that issue, especially on housing. However, I take this opportunity to repeat a plea to the noble Lord, Lord Deighton, for increased flexibility for tax increment financing to allow local authorities to pick up the pace of investment in small-scale infrastructure. The very case that he makes for large infrastructure, involving the orderly rollout of schemes, certainty of funding and tapping into external financing applies just as much to the small and local. We have accepted that small is crucial in business and commerce; we now need to accept that small as well as big is vital in infrastructure.
All this has consequences for our financing system. The business bank is an important beginning, but long-term patient capital is still hard to find in the UK. I hope we will try to develop the capital markets to provide that capital. The noble Lord, Lord Davies, the noble Baroness, Lady Noakes, and I all attended a talk given by Robert Peston not long ago in which he pointed out that in the US, 80% of small business funding comes from the capital markets rather than the banks. The opposite is the case here. Therefore, when a bank is compromised, we are in a very difficult position. The major banks are going to be seriously challenged to meet lending demand, despite Funding for Lending, as growth picks up and firms chew through their cash reserves.
It is good news that RBS has asked Sir Andrew Large, former Bank of England deputy governor, to look at its lending practices, because when it says that it has £20 billion that it would love to push out of the door tomorrow morning but cannot, we all find that a fairly extraordinary statement. However, something is holding our banks back. I suspect that it is not the usual argument about capital but is much more about capability, and it would be interesting to find out more. The Government have done much to enable recovery, and this spending round is an illustration of that. However, we cannot let a weakened banking system derail these early beginnings for which the public have waited and worked.
Lord Risby
My Lords, it is a great pleasure to follow my noble friend Lady Kramer, who makes the very important point that unemployment has fallen and that we have seen growth in the private sector and the emphasis on infrastructure that has characterised the Government’s policy. I congratulate my noble friend Lord Deighton, who brings such enormous private sector expertise to the role that he is fulfilling, which adds huge value to what the Government are doing.
I think it is fair to say that all European countries are trying to restrain expenditure and look at how to generate economic growth. We are in the fortunate position whereby there are now signs of some economic growth. Indeed, most organisations believe that in the coming year we will have the highest rate of growth in Europe of all the major economies, albeit that there is still room to go much further. However, the truth of the matter is that we remain vulnerable. We are not tied to major currencies such as the euro and the dollar. We need to continue our policy of restraint to keep mortgage rates and borrowing costs low, as we still have to borrow an enormous amount. While the point of today’s debate is to look to the future, it is worth remembering that key element of the review, as we know that the markets can be fierce in their judgments, as we saw when they made a judgment some years ago about the competence of policy in this area and promptly devalued our currency by 25%. That has meant that inflation has continued at a high level, which we must never see again.
However, I should very much like to consider how we can stimulate growth from external activity and foreign investment, which were alluded to in the spending review. All Governments are of course trying to do this, but last week an interesting statistic from UNCTAD revealed that foreign direct investment into the United Kingdom rose by 22% in 2012 to the highest in Europe, £41 billion, compared with a drop of 18% in the world, 42% in Europe and, extraordinarily enough, 85% in Germany. It is clear that much of this investment arises from the fact that we have an open economy and are very welcoming, but it is also important to note the high level of re-investment that has been made by foreign-owned corporations in this country, which suggests that they have a high level of confidence. China, with which we have had some political difficulties, has continued to make major investments, and I hope that after the resolution of a recent difficulty this investment will increase further.
Nevertheless, our trade and export activities have been inadequate. For example, there was hardly any improvement in 2012 in our manufacturing and service exports when compared with the previous year. Of course, our European markets have been weak and we have tried and been successful in expanding our exports to countries such as Russia, China and India. Nevertheless, we could have done much better. This is now simply a necessity for us. Household budgets are of course being squeezed and European markets look to remain anaemic. Over the next two years, 90% of world demand will be generated outside the EU.
In the spending review, the Government have set a national challenge to double UK exports and to get 100,000 more companies exporting by 2020. In consequence, £140 million was announced in the Autumn Statement last year to help SMEs to export. I am pleased to see in the spending review that despite the pressures, funding certainty has been given to UKTI to continue with this policy, thereby maintaining the support for the next few years. Some £70 million was announced to package overseas export promotion more professionally, and a new unit has been formed—noble Lords will agree that this is important—to look at the attractions of investment in our financial services sector, again with particular emphasis on SMEs. The CBI welcomed all this by declaring:
“It’s right to link increases in UK Trade and Investment’s budget to improved commercial nous, at a time when it must be firing on all cylinders to boost exports and support the drive for growth”.
It is fair to say that all Prime Ministers have been for years trying to advance the promotion of exports from this country, but I should like to talk about an initiative that was brought into being in November last year, the creation of prime ministerial trade envoys. There are eight of us, six of whom are in your Lordships’ House and two of whom are Members of the other place. We were appointed on a cross-party basis. The whole idea is to assist UKTI, our embassies abroad, our export effort and, with the appellation of being called a prime ministerial trade envoy, get the highest possible access. As it happens, I am the trade envoy to Algeria. Perhaps I may touch on this for a few minutes. The role of the trade envoy is to enhance and develop commercial partnerships through the following: identifying commercial opportunities both for trade and investment, bringing together UK and target market business leaders to develop opportunities to secure the high-level access that I mentioned, and working with the export promotion activities of our embassies and UKTI. It is good that this is done entirely on a cross-party basis. Yesterday morning, we had a very good meeting in which we were trying to exchange best practice and to see how we can work together to really drive this element of our national life, exports, which have frankly been inadequate when compared with many other countries, even in Europe.
I should like to talk a little about Algeria because it summarises exactly what I am talking about. We have had no historical links to that country, but it has $190 billion dollars of reserves and a $300 billion infrastructure programme. We start from a very low base, but in the past 18 months there have been an enormous number of ministerial visits, which were very welcome, including that of the Prime Minister in January. We now have a clear partnership with Algeria. So many of the countries that we are talking to and to which we want to export feel, particularly after a post-colonial experience, that there should be a partnership in the fullest sense of the word. We now have, for obvious reasons, a security relationship and a defence relationship with Algeria, which is important. Every week, English-language schools are springing up all over the country, and we hope that during the course of the next month or two, hopefully in September, we will sign some major contracts. This has come about because of a concerted effort led by the Prime Minister and other Ministers. I pay tribute to a very dynamic ambassador in this regard.
This applies to my colleagues who are prime ministerial trade envoys. It is happening everywhere. It is part of a process, on which I hope everybody will agree, of reorienting our exports to more dynamic markets. It will not solve all our problems, but in the past we have seen erratic and feeble export promotion, and that is changing. This is happening at the highest level of government and is reinforced by the commitments made in this spending review. We have so much to offer. I talked about our open economy and the English language. We make a virtue of not paying bribes and not getting involved in anything like that. We have attempted to reinvigorate UKTI and there are trade envoys to support this. That is all under the direction of my noble friend Lord Marland.
This week, as my noble friend commented, the BCC reported a remarkable level of export activity among its members that showed a considerable increase in confidence to a six-year high. That was also reflected in the purchasing managers’ index, which showed an improvement. I hope that the efforts that are now being made will address a key element of our future growth, and I welcome the commitment given to this in the spending review and the Government’s commitment to try to make this happen.
The Lord Bishop of Truro
My Lords, I thank noble Lords for this opportunity to contribute to this debate. I am especially grateful to the noble Lord, Lord Risby, for his contribution, which helps us see matters from a wider perspective. In a debate such as this, we can sometimes focus too much on our own issues. With my tongue only slightly in cheek, as a Bishop who represents Cornwall, I wonder whether the noble Lord might represent to the Prime Minister the fact that we need a trade envoy from England to Cornwall. Having heard from the noble Lord, Lord Deighton, that infrastructure is an important part of the comprehensive spending review, I mention the dualing of the A30 in Cornwall and, knowing as I do that it is not all down to the Government, there might be something to be said for hoping that the good work that is being done to make the harbours better in Penzance and St Mary’s continues to a successful conclusion very soon to ensure a better and sustainable transport link between the mainland and the Isles of Scilly.
We have been abroad, but I want to spend a few minutes speaking from another perspective: that of the Children’s Society. I declare an interest as its chair. I cannot help but look at these big announcements from the point of view of children and families, especially the most vulnerable among them. According to the Government’s own figures, the combined effect of public expenditure cuts and tax and benefit changes is to make the poorest households nearly £1,000 worse off. The Chancellor pointed out that the richest 10% have paid the most, but he forgot to say that across the rest of the distribution it is poorer households that lose a higher proportion of their income. Low-income families with children in particular are bearing a disproportionate share of the burden of tackling the deficit.
Perhaps optimistically, I was looking for some good news this time around, and there is some. I welcome the Government’s continued commitment to free early education for all 3 and 4 year-olds and to extending this to around 40% of 2 year-olds in more deprived areas. The protection of the pupil premium in real terms is also welcome when so many areas of public spending are being cut. I am concerned about how much of this is actually reaching the most disadvantaged children whom it is designed to benefit. We will know more about this, I hope, when the Government’s evaluation of the pupil premium scheme is published shortly.
However, there are some worrying aspects of the spending round. I apologise to my noble friend Lady Kramer, but I want to use the word “cap”. The first is the overall cap on large parts of the welfare budget, covering housing benefit, disability benefits and tax credits, including universal credit. I am not here to defend social security spending for its own sake. Contrary to much political and media rhetoric, very few people want to be reliant on benefits to make ends meet. Nearly every family aspires to having a job that pays a decent wage and a home they can afford, but the reality is that many millions of people are unemployed or underemployed, wages have been stagnating in real terms for the last decade, and housing costs have soared beyond the means of many working families. Forcing Ministers to choose between the political embarrassment of breaching the welfare cap or meeting vulnerable people’s living costs could mean that many more people will be pushed towards doorstep lenders and food banks because the level of benefits is inadequate to meet their family’s basic needs.
Here I shall expand a little on a question about food banks that I put yesterday to the noble Lord, Lord Freud. From my perspective, while applauding the wonderful work of volunteers in setting up food banks, many of whom are Christians, I have to say that it is a complete scandal that we have any food banks at all in this country in the 21st century. There are over 20 food banks in Cornwall alone. What on earth is happening in our country? I ask the Government again whether we ought not to spend a tiny amount of money on some research. Certainly the anecdotal experience that I have and the stories that I hear make it clear that there are some real benefit issues, which is why many people are driven to go—they do not choose to go; they have to go—to food banks.
If the Government are serious about cutting the welfare bill, they need to address the underlying drivers of social security spending that lie outside the benefits system: a lack of jobs, low pay and a chronic housing shortage. Imposing an artificial cap on the budget risks shifting the blame and the burden on to the poorest families, who have done nothing wrong but who are being penalised for our failure to tackle the root causes of the problem.
This links to my second point, which concerns the low level of public sector net investment. Anyone listening to the Chancellor’s speech could be forgiven for thinking that we were about to embark on a massive infrastructure investment spree, suggested again by the noble Lord, Lord Deighton, this afternoon. But analysis by the Institute for Fiscal Studies shows that public sector net investment is not in fact set to rise, and will actually fall as a share of GDP in 2016-17 and 2017-18. This feels like a huge missed opportunity to make up for years of underinvestment in affordable housing, creating badly needed jobs in the short term and helping to bring down house prices and rents in the longer term, so that fewer people are dependent on government subsidies. The £3 billion capital investment in affordable housing announced by the Chancellor is a small step in the right direction, but it does not go nearly far enough to address Britain’s chronic housing shortage. Housing is arguably the UK’s biggest long-term policy failure. In the past year, there were 102,000 housing starts, less than half the 240,000 a year needed to meet estimated demand. It seems ludicrous to me that only 5% of public expenditure on housing goes on capital investment in new houses while 95% goes on demand-side housing subsidies.
Finally, I remain uneasy about the language used by the Chancellor in speaking about welfare, a concern that is shared by many of my fellow Bishops. This section of his speech starts by distinguishing two groups of people who need to be satisfied with the welfare system. The first group are,
“those who need it who are old, vulnerable, who are disabled, or have lost their job and who we as a compassionate society want to support”.
The second group are,
“the people who pay for this welfare system who go out to work, pay their taxes and expect it to be fair on them, too.—[Official Report, Commons, 26/6/13; col. 313.]
The first group barely get a mention in the rest of the speech, whereas three and a half pages of the transcript are dedicated to addressing the perceived concerns of the second group.
Making such a clear distinction between taxpayers and claimants creates the misleading impression that the welfare system involves a large one-way transfer of money from one group to the other. Far from stimulating compassion, it encourages resentment towards those who are seen to be living off the good will of others. It also ignores the reality that the vast majority of us both contribute to and benefit from the support provided by the benefits system at different points in our lives. For example, around half of all children will be in families that are entitled to universal credit when it is fully implemented.
Forgive me, as I conclude, for using a biblical reference to make my point. Paul, in one of his letters, used the metaphor of the human body to describe a Christian vision of mutual support and interdependency. He said:
“those parts of the body that seem to be weaker are indispensable, and the parts that we think are less honourable we treat with special honour … so that there should be no division in the body … if one part suffers, every part suffers with it”.
Paul was talking, of course, about the church community. I believe the same principles apply to the way we support one another through our social security system. We are in danger of dishonouring the less presentable parts of our society and as a nation we will become less healthy as a result. The Government’s spending plans should have the well-being and development of all our children at the heart of them. When millions of British children are left to grow up in poverty, everyone’s future prosperity suffers.
Baroness Noakes
My Lords, it is a pleasure to follow the right reverend Prelate the Bishop of Truro. My own remarks will be focused on rather different areas of the spending review. I was unable to be in the House when the Minister repeated the Chancellor’s spending round Statement, so I am grateful for the opportunity to speak today.
I start by congratulating the Government on sticking to their resolve to keep downward pressure on spending in order to eliminate the deficit. The update on GDP from the Office for National Statistics last week underscored the scale of the problems the Government inherited in 2010. The peak-to-trough deficit in 2008-09 is now calculated at an astonishing 7.2%. That alone vindicates the stern action taken by the Government when we came into power. The Benches opposite could barely conceal their gleeful anticipation of a triple-dip recession earlier this year. However, as last week’s figures confirmed, we avoided that. In addition, we now know that we did not even have a double-dip recession. The Government inherited an extremely poor hand of cards, but my right honourable friend the Chancellor has played them skilfully.
I fully support the Government’s approach on public sector pay. Continuing to limit pay rises to 1% is thoroughly sensible, especially as public sector pay has continued to run ahead of private sector pay in recent years. I also support the move to remove automatic pay progression. I understand that several central government departments have already done this and so I am unclear as to the savings that this move will generate. I could not find any figures on this in the Green Book and I echo the criticisms by the Institute for Fiscal Studies about the paucity of analysis in the Green Book. I hope my noble friend can give some analysis today. Will this apply to local government? What will be the impact on the NHS’s budget? What precisely are the Government’s plans and how much do they expect to save?
I have some concerns about the cost of public sector pensions that have not been dealt with. Public sector workers account for less than 20% of the workforce but are more than three times more likely to have current access to a defined benefit pension scheme than those in the private sector. This would not matter much if public sector pay scales fully reflected the value of the pension promise, but the plain fact is that they do not. The current Government, like the last one, have talked a good story about bearing down on the cost of public sector pensions. In 2011, they claimed that they had done such a good deal that it would last for 25 years and would save billions. That is fine if you have faith in 50-year projections based on heroic assumptions. Meanwhile the real problem, which the Government continue to ignore, is that public sector pension cash flows are now negative: pension payments exceed contributions received. In 2005, this cash cost was only £200 million, but it is now around £11 billion a year. According to the Office for Budget Responsibility, it is forecast to rise to more than £16 billion over the next few years, and this figure is likely to be even higher once the latest proposals for a flat-rate state pension and the related contracting-out changes are implemented. The spending round scraped together £11.5 billion of savings but failed to defuse the cash time bomb of public sector pension costs.
While I fully support the Government’s efforts to control spending, we must not lose sight of the facts that we are still borrowing money each year and that debt will not start to reduce until 2017-18. Furthermore, there are no overall cash cuts; we are spending more every year. In 2009-10, we spent £669 billion. In 2015-16 we are planning for £745 billion. This is not Greek-style austerity.
The Treasury has clearly been involved in tough discussions to cut expenditure, but I am reminded of the line from Horace:
“Parturiunt montes, nascitur ridiculus mus”.
The Treasury laboured but brought forth a ridiculously small amount of savings. We still have a huge problem. Expenditure is in excess of 45% of GDP and debt is north of 75% of GDP. On current plans, even after this spending round, the figures will be 40% and 85%. We are a long way from resolving our finances. It is not surprising that the Cabinet Secretary is warning of a 20-year turnaround timescale.
There is no paradigm shift in this spending round. I had hoped to see an end to salami slicing. International experience points to much tougher decisions, taking out whole programmes rather than bits of them. There are far too many government departments, and along with that far too many government Ministers and senior civil servants, together with their hangers on. Streamlining the machinery of government would be a good place to start.
If we are serious about reducing public expenditure, we need to look again at the sacred cows of education and health. Ring-fencing might be politically astute but is economic nonsense. The overseas aid budget is an extravagance that does not command even general public support. Many of the projects that sail under a green flag are not obviously value for money. I have particular concerns about the Green Investment Bank, which will not be run as a bank or supervised as a bank. I fear that the billions of pounds that are being thrown at it will end up as losses as it “invests” in unbankable projects.
I congratulate my right honourable friend the Chancellor for ignoring the Keynesian siren voices calling for more money to be thrown at infrastructure at the expense of even more debt. The announcements last week about infrastructure spending were, I believe, predicated on no new money. I do not criticise that. I am sceptical about the economic benefits claimed for public sector infrastructure spending, and it is absolutely essential not to abandon hard economic analysis when it comes to spending public money.
That leads me naturally to the High Speed 2 project, on which I find myself surprisingly in agreement with the noble Lord, Lord Mandelson. Last week, the Chief Secretary announced a funding envelope of £42.6 billion for the construction costs of HS2. What he did not say was that the £42.6 billion was one-third higher than the previous budget, as Transport Ministers had to admit the previous day. Two days ago, transport officials as good as admitted to the Public Accounts Committee in the other place that the benefits have been overstated. The benefit/cost ratio for the HS2 project was already low by transport standards and now looks to be completely bust. Even the CBI, usually a cheerleader for infrastructure projects, has called for a rethink. Today is not the day to debate HS2 itself, but these developments remind us that public sector infrastructure is not the panacea that some would claim for it and it does not unambiguously benefit the economy.
I am aware that we are debating only the spending round and not a full Budget or Autumn Statement. However, just let me say that while controlling expenditure is important, the supply side of the economy still feels neglected. We need much more tax reform, lower rates all round and a much simpler system, and we need to make far more progress on deregulation. We need to liberate and incentivise the private sector to create wealth. We need to keep Britain as an attractive place in which overseas companies can invest. In sum, we need a lot more than the spending round gave us.
Lord Higgins
My Lords, it is always a great pleasure to follow my noble friend Lady Noakes, and I very much agree with her general theme and her closing remarks.
As I am going to say quite hard things in the context of what my noble friend said, let me stress that I would not for one moment underestimate the difficulty of reducing a deficit. I began that a very long time ago as a new Treasury Minister. We were an incoming Government determined to cut the deficit and, indeed, public expenditure and the size of the public sector. I was sent to see the new Secretary of State for Education, one Margaret Thatcher, who was basically in favour of cutting back the size of the public sector but not her department. I arrived with a long list of cuts, including eliminating the Open University. In the end, after a lot of haggling, I said, “Margaret, we’ll give you a deal. You can keep the Open University and make all the other cuts, or you can make all the other cuts and keep the Open University”. To my astonishment, she said, “I’ll keep the Open University”, so I got my cuts and we and the country got the Open University, which was probably the right decision. The reason I stress this point is because we have to be a great deal tougher than we are being.
I am worried by the constant repetition—it is once again in the Chancellor’s speech—that we have cut the deficit by one third. That means that we are continuing to borrow at two-thirds of the appalling rate at which the previous Government were borrowing. I hope that we can get rid of that expression. It is interesting that it has not changed since this public expenditure round announcement. We are still saying the same mantra. I hope that we can get rid of it.
My concern is that in the light of that statement we can be complacent. We simply must not be complacent. There is nothing more important for the future of this country than getting the deficit down. I am a little worried about some of the presentational side of things. The public sector finance statistics have the heading, “Public sector net borrowing”. It ought to be, “Net extra borrowing”. We constantly hear figures from the Government that overlook the word “extra” when it ought to be there. There is also a very curious quirk in the figures. In the column for public sector debt, the figure is £1,103.6 billion in 2011, but in 2012 there appears to be a miraculous reduction. The statisticians evidently felt that they could not forecast the figure to the last decimal place so they moved the whole figure one place to the right. If you look down the column there suddenly appears to be an enormous reduction. Clearly they could not forecast it, but it is 10:1 that they would have got the last decimal point right if they tried. I hope that we can improve the statistics and that the Minister will bear that in mind.
In his speech, the Chancellor of the Exchequer made two important points. First, he said:
“We act on behalf of everyone who knows that Britain has got to live within its means”,
but he did not go on to say, “but we are still not doing so”. We are nowhere near doing so. This is a matter of grave concern. He went on to say:
“we have always understood that the greatest unfairness was loading debts onto our children”,
from one generation to another. We are making a massive intergenerational change, and we are not dealing with it as much as we should.
As for the overall figures, there is a problem with cutting. The reality is that the previous Labour Government under Gordon Brown raised a series of benefits and other concessions which people now expect. However, he did not have the money to pay for them and neither do we. It is immensely difficult to try to claw back the benefits and increases in public expenditure that he introduced.
We are faced with cuts of £11.5 billion but are told that there is an increase in spending of, I think, £10.5 billion on the high-speed rail scheme, so we are only about £1 billion better off. I may have misunderstood the figures but that is my understanding of the position. Therefore, we are making very little progress. There is clearly a distinction between expenditure on investment and cuts, but we are not doing as much as we should in this regard.
In addition, extra one-off items are included in the cuts to the Post Office pension fund. We have the assets but do not make explicit allowance for the liabilities, so there again we have a problem. The same is true of the arrangements for transferring balances from the Bank of England with regard to quantitative easing. Neither of those provisions is likely to be repeated, at least not on the same scale. We have also gained £5 billion in efficiency savings, much of which relates to public sector pay. I certainly welcome the provisions in the Statement on not awarding progressive pay increases simply on the basis of the length of someone’s employment.
I am also concerned about debt interest. The Chancellor laid great stress on the fact that we are paying £6 billion a year less to finance the debt. That is obviously a great advantage, but it rests on the proposition that interest rates will stay where they are. They might stay where they are for longer than we would like. We have only to look at the American experience to see that trying to unwind quantitative easing produces very emotional reactions in the markets. Therefore, low interest rates might be maintained, perhaps wrongly, for longer than we expect, but sooner or later they will have to go up. As for the public sector finance statistics, what assumption is made about interest rates when calculating the debt interest payments, which fluctuate widely? It would be helpful to know that. As I say, I do not underestimate for one minute how difficult this exercise is, but we need to renew our determination to reduce the deficit by substantially more than we are doing in the review.
Lord Shipley
My Lords, I am grateful to my noble friend Lord Higgins for raising the Open University, which requires me to declare my interest as a pension holder of that institution after some 34 years’ service. I am very glad that Mrs Thatcher had the common sense not to take my noble friend’s advice, because as we all know the Open University has been the most enormous success and a world beater and world leader. It is a tribute to all those involved in setting it up and making such a success of it.
I should declare that I am a vice-president of the Local Government Association. As an adviser on cities and deputy-chair of the regional growth fund advisory panel, I strongly welcome the Government’s direction of travel on local growth. I wish to comment on some strategic issues on public service reform which I hope the Minister will consider.
I start with the Scottish referendum on independence. In last week’s debate on the Select Committee on Economic Affairs report on the economic impact of independence on the United Kingdom, it was explained that while we know the public expenditure level on Scotland, we do not know the amount of tax raised in Scotland; the data are not collected other than on a UK-wide basis. There have been some private estimates, notably by Oxford Economics, as to the tax raised. In the context of all that the Government are now doing on devolution, decentralisation and the single local growth fund, the tax raised for the constituent parts of the UK needs to be known. Part of this is about how you measure success. We will certainly have a single local growth fund between 2015 and 2020 and the Government will have to measure success, and one measure will inevitably be the tax generated from growth. You have to have a base and work has been done with Greater Manchester on its city deal and the earn-back model, which I understand has now been agreed. Hopefully, that will be an exemplar of how tax can be measured.
The spending round has been difficult and we all understand the reasons for that. If there is a headline cut of 10% in local government, for authorities that have social care responsibilities—notably the counties and unitaries—the real reduction is 2.3% because of the extra £2 billion allocated to local authorities. I make the point to the Minister that if you ring-fence the National Health Service and are content with that, you have to ring-fence health more broadly. If you do not prevent ill health through the social care system, you end up with a cost landing on the National Health Service. I am pleased that the £3.8 billion in total in the spending review that has come to the health service and local authorities is extremely helpful. I hope that if the health service continues being ring-fenced, social care will be ring-fenced as well.
I have noted that there will be a council tax freeze for five years; of course, that depends on local authorities deciding to freeze their council tax, which will be up to them. I observe, however, that when central government permits a freeze of council tax, certainly over a period as long as five years, it makes local government more dependent in the long term on central government. I am not sure, given the Government’s direction of travel towards raising more tax locally and people being more responsible for their spending decisions locally, that there should be such central control of the allocation of money.
I believe strongly in localisation. I also believe strongly, for the avoidance of doubt, in the equalisation of funding on the basis of need. It is difficult to do either properly without knowing more about the tax base of an area to which power is being devolved. In England it is difficult to localise without knowing the current level of public spending in each area, either of local government—a council—or of a local enterprise partnership. Data are not being collected on that basis. They are collected on a regional basis, but they will have to be collected on a different basis to make devolutionary centralisation meaningful.
Data on tax income by local government area are simply not available at all. I hope that as part of public service transformation, the Minister will take on board the need to improve the tax income and public spending data which the Government produce. This is caused not least by the fact that community budgets—the tri-borough pilots in London, Essex, Greater Manchester and Cheshire West—have shown significant signs of savings being generated if public services can be planned together. The numbers are actually very large indeed. I am much encouraged by that. However, while this is partly about integrating health and social care it is also about integrating the work of the Department for Work and Pensions with the work of local authorities and local enterprise partnerships.
As a crucial step, I ask the Minister to look into the concept of total place accounting, which is not the same thing as total place spending. However, at the moment, departments, local authorities and those spending public money in a given locality are not accounting for their expenditure on a local basis. It is going to be important for all service providers in a local area to account formally for what is spent by them in that area and then to produce accounts that demonstrate that. It is two years before we get into the single local growth fund, but improving the data is starting to matter.
That takes me to the concept of the local treasury, because community budgeting is about all the funds available in an area for public investment to be jointly spent as a community budget. For a local treasury to succeed, we need to know what tax is raised and what public money is spent in an area, and then consider the gap so that a needs-based funding system can be applied.
According to the Local Government Association, which revised its figures yesterday on the basis of the spending review announcement, the position for 2015-16 is that some 56 councils in England will have only 86% of the money they need to meet existing commitments in 2015-16. One of the consequences will be a lowering of investment in prevention. You will see that happen despite the extra money going into social care. As I have said, if you do not prevent, you end up with a higher cost later. I have therefore concluded that community budgeting is the answer. There are other possibilities, and I fully understand why the Government do not go down the route of unitary councils in all parts of England. It is nevertheless my view that there are significant savings to be made by local government in the creation of unitary councils. I come from the north-east of England where we have only unitary councils. Some of the savings are demonstrable. The issue is, however, complicated, and such a move needs to be done with the will of those participating. Nevertheless, some of the financial problems that have been caused in some local authorities will mean that we need to do that.
I ask the Minister to read a report called Rewiring Public Services, launched yesterday at the Local Government Association conference. It is a hugely important read that extends the debate about how matters could be progressed. Here is a fact that is telling. By 2018-19, on current projections, council tax and business rates will total more than local government spending on services, excluding schools. We are close to making the central government grant obsolete and we could plan now to move away from local taxes being controlled in Whitehall towards financial independence of the sector, which itself is responsible for redistribution to meet needs. That whole issue could benefit from further work. I mentioned the local treasury concept, which would have at its disposal all the various pots of money and make the local spending decisions. A local treasury could have the power to create specific local taxes.
Finally, my noble friend Lady Kramer talked about housing. It is right to increase the housing borrowing cap for local authorities. The average debt on a council house is £17,000. There is significant headroom. We could build many more social homes by permitting local authorities to borrow more. Since April last year, the housing revenue account has been a trading account and we are the only EU country that treats borrowing in the housing revenue account as public borrowing. That need not be the case and we could build 20,000 or 30,000 houses, maybe more, if that borrowing cap were to be increased. I hope that the Minister will think further about that.
Lord Flight
My Lords, I hope it will be the privilege of all of us to live long enough to see the judgment of economic historians on the times in which we are living. The Chancellor is following blatant neo-Keynesian policies, with an ongoing deficit of £120 billion-plus per annum and printing some £370 billion of money. If I wanted a definition of neo-Keynesian, that would be it. No wonder the Opposition is flummoxed, because to recommend even larger Keynesian policies on top of that is patently unrealistic. Will that approach be vindicated or will the Hayekian school be right that the problem with such policies is that they make returning to normality in due course even worse than it would be if you took hold of the situation much sooner?
In the 1930s when Chamberlain as Chancellor took Hayekian measures and slashed public sector pay, spending and taxation, and unleashed a housing boom because there were no planning restraints, we had growth of 4% a year from 1935 to the start of the Second World War. It was the highest period of growth in the 20th century. Today, although growth and recovery have been disappointing, there are positives and we have heard quite a few of them this afternoon. Thankfully, we are not in the euro. The economy is doing markedly better. Indeed, there was 0.6% growth in the latest quarter. I would expect growth of at least 1.5% this year against falls in the eurozone of 0.6%. Certainly there is no double dip. Foreign investment in the UK is up substantially. As I think the noble Baroness, Lady Kramer, pointed out, there is really good news on the apprenticeship scheme. Exports are rising. In my little territory, EIS venture capital investment has doubled in the past year, as has equity money for new small businesses, and as well as congratulating the noble Lord, Lord Risby, for what he is doing in Algeria, a little bird told me that Algeria was going to apply to join the Commonwealth, so the noble Lord seems to have done extremely well.
There are some useful micro-points as well, which I certainly approve of. The ending of automatic progression in the public sector should at least reduce average nominal pay in the state sector, which keeps rising in a blatant breach of supposed pay freezes. Tougher eligibility rules for jobseeker’s allowance are necessary. Having to learn English makes good sense. Ending winter fuel payments in hot countries is surely a no-brainer. The welfare cap on housing benefit, tax credits, disability benefits and pensioner benefits, and bringing it all together to assess people’s needs, is sensible. Limiting to £2 million the funds to be made available annually for investment by local enterprise partnerships, as suggested by the noble Lord, Lord Heseltine, is a fairly sensible economy. I am particularly keen on the extra 180 free schools and the extra technical colleges. The technical colleges go hand in hand with the apprenticeships and are going to make a big difference to this economy and to the people who attend them.
There is a lot of good going on behind the question of how to judge the macro-stance. Even on the macro-stance it is amazing to have achieved a near political consensus on the need to reduce welfare spending, which is really what the situation amounts to. The state is slimming down modestly. Between 2010 and 2017 it is, I think, a 2.7% reduction in real terms. No one has achieved that in living memory. There is a modest shift from current to capital expenditure, and I am sure that the noble Lord, Lord Deighton, will make the very most of that in the rational management of the infrastructure scenario, which of course is still crucial. However, what about the future? Debt is piling up—it will be 80% of GDP by the end of the year—interest bills are rising, and as QE has to come to an end they are likely to rise dramatically further. We are stuck with a deficit compounding of £120 billion per annum.
In the announcement, there was little net new. Cash spending continues to rise; it will be £720 billion this year, £730 billion next year and £745 billion in 2015-16. Most of the figures have already been announced. There are major changes within spending divisions, but not in the aggregates. For the poor spending divisions affected, out of public spending of £720 billion only £204 billion was really up for cuts. Six of them had cuts of at least 10% of their expenditure. It has become obvious that to have a health budget of £127 billion, a education budget of £97 billion, and a welfare budget of £220 billion in effect not up for cuts is a mistake. I am afraid that the NHS has not been vindicated by all that has come to light.
There are two quite separate points. First, will running a deficit of this size prove the right thing to do economically? For me, the great disappointment is the missed opportunity for sorting out the public sector and shrinking the size of the state. Over 10 years ago, I spent nearly two years of my life organising the James review. A team of consultants looked at each area of the public sector, and the level of potential waste and cuts was then approximately £100 billion. That does not seem to have changed that much. The issue is the will to sort it out and to get the state right out of areas where it should not be involved. Those are the key areas that matter. The cost of health and welfare together is nearly £360 billion, which is more than half of total public expenditure. I think even Prime Minister Attlee would have been shocked if it had been more than half of public expenditure in his time.
The leakage is not allowed for. The noble Baroness, Lady Noakes, referred to the growing public sector cash deficit on public sector pensions. I have banged on about it before, but the real figure is likely to be about £25 billion per annum, and there is no provision for it. There was a quiet study of the student loan book, which is worth £83 billion in total. Some 40% will have to be written off, which is another £30 billion, and there is no provision for that. Is there any review of the whole area as to why that is the outturn? I am afraid not.
Astonishingly, welfare, health and education together account for £516 billion of £720 billion, which is why only £200 billion-odd is eligible for cuts. The harsh truth is that much of the public sector remains bloated and poorly managed and has falling productivity. Many noble Lords may have seen the latest Taxpayers’ Alliance report, which pointed to £120 billion of waste, much of it gravy-train expenditure. It is a drag on the 50% private sector. In fact, it is a huge tribute to the private sector that it managed to create 1.3 million jobs when its opportunity is thus limited.
One thing remains. It is always the case that public sector pay layer by layer should be about 15% below private sector pay, allowing for shorter hours, lower productivity, better pensions and better security of employment, but it remains about 15% above private sector pay layer by layer. There is a gap of 30% in aggregate, which is the result of the strength of public sector unions under the previous Government. In the area of health, we have the highest paid doctors, the worst provision of health, some £20 billion of claims for negligence and the legal costs going with them. It is a great pity that there has not been anything like an adequate resolve to get to grips and sort out the public sector.
I shall end by commenting on the elephant in the room, which is QE. It was very clear that money printing was needed in 2008-09 because the money stock was contracting dramatically and the money supply with it, partly the result of the wrong government policies, because just when we needed to support the money supply, moves against banks led to it contracting. However, this has been allowed to go on and on. Inflation has remained higher than planned. When interest rates return to real levels, they will increase government interest costs substantially and probably hit the housing market seriously.
The reality is that there is no way in which the Bank of England will suddenly be able to sell off £370 billion of gilts into a falling gilt market with rising interest rates. We will have the extra money stock there, and all that it will need is higher velocity of circulation to produce a massive increase in the money supply. One can see what is likely to happen: as and when the economy recovers sufficiently there will be strong pressure for wages to be increased. People have had real-wage cuts for quite a long time. I am afraid that the overall money stock will be there to finance that uncontrollably. No one knows when, but there is clearly a substantial risk of a period of high inflation at some stage in the next 10 years. The idea that new Governor Carney could pursue a more expansionary monetary QE is simply unrealistic. He will need all his wisdom and experience to steer the British economy out of QE over the next couple of years.
In conclusion, if there is no collapse in Japan, which is always possible, or a banking crisis and collapse in China or a break-up of the euro over the next two years, the dear old British economy will look a lot better by the time of the election, even though we have not tackled such major issues. The Government could quite easily win the next general election on the back of that, but what then?
Lord Northbrook
My Lords, after that global tour de force from my noble friend Lord Flight I am going to focus, rather more boringly, on the details of the 2013 spending review. Like my noble friend Lord Higgins, I do not underestimate the difficulties that the Government face in cutting the huge debt mountain that they inherited.
As part of the programme to cut the Budget deficit, the departmental cuts have been difficult but necessary. The deficit has now been cut by a third since the coalition came to power, which I also welcome, but with caveats I will come to later. As other noble friends have said, recent economic figures have been more encouraging, as has been the increase in the numbers employed in the private sector.
Current spending will reduce by £11.5 billion in 2015-16, allowing the coalition to increase capital spending plans by £3 billion a year from 2015-16 and by £18 billion over the next Parliament. The Conservative research department has estimated that the Government will invest,
“over £300 billion guaranteed to the end of this decade”.
I welcome my noble friend Lord Deighton’s expertise in this area, although having been to a recent seminar at the Royal Society the conclusion was, slightly depressingly, that all parties have to agree to this, like Crossrail, so that it is actually implemented. I will, however, argue later in my speech that further significant progress needs to be made in cutting annual managed expenditure so that total expenditure can fall.
The spending review ensures fairness for hard-working people by keeping council tax down for the next two years. This will mean nearly £100 off the average council tax bill over that period. NHS spending is being maintained. Efficiency savings are being reinvested in the front line. Part of the health and social care budgets will be merged, spending £3 billion on joined-up care. The tough new welfare cap, which applies from April 2015, is welcome. The new conditions that are being imposed on jobseekers and the seven-day wait before claiming are useful reforms.
The spending round also prioritises growth. There is a sensible increase in the transport capital budget to 2020, which will encourage road building. The BIS capital budget increase includes big investment in science and apprenticeship funding; and UKTI support for exports, as so clearly described by my noble friend Lord Risby, will be increased. Plans are being set out for the future to support £100 billion of private sector investment in the energy sector.
The IFS has published its usual forensic analysis of the spending review. I will focus first on the departmental spending figures. These show that there is a wide range of outcomes for different departments. There are no cuts overall in 2015-16 for international development, transport and health. Particularly with health, is there not a case for what I understand to be zero-based budgeting before the final figures are agreed?
The other extreme is a near 30% cut in the CLG communities budget. Overall, the IFS estimates that there is an average DEL cut of 2.1% in real terms across departments in 2015-16, on top of an 8.3% average cut between 2011 and 2014. However, capital spending has been increased while current spending has been cut, unlike in the 2010 spending review. Departmental priorities have been the same since 2010. Some departments are set to be cut by more than a third over five years. One issue confuses me, not being an economist. Can the Minister explain, if he agrees, why the IFS claims that public sector net investment is going to be broadly flat in the next four years when so many capital projects have been mentioned?
I now move on to annually managed expenditure, although I query the word “managed”. According to the IFS, this will increase by no less than 18% from 2013-14 to 2017-18. On the positive front, I welcome some major attempts to control this. The social rent uprating policy will save £1 billion by 2017-18. The seven-day waiting period for unemployment claims will save £765 million by the same date. I also welcome limits to public sector pay increases. Capping social security is a positive idea, but why do we have to wait until after the election to put these measures in place? If welfare spending has been allowed to rise undesirably, forcing an active decision could lead to better policy-making. Surely it is better to review all spending frequently, regardless of whether it is higher or lower than forecast, or at least to cap individual components. In addition, which areas exactly are being capped?
On the negative side, as my noble friends Lady Noakes and Lord Flight have already mentioned, public sector pensions will continue to be a huge burden on the state. They mentioned the figures. In a recent CPS publication in 2011, Michael Johnson stated that the shortfall between contributions and payments for public sector pensions was £8 billion. This figure, as my noble friend Lady Noakes mentioned, was fairly insignificant in 2005—about £200 million—but will rocket to £15.4 billion in 2016-17. Even that £15.4 billion figure is net, with the amount being paid by the employer—the state—deducted. The true figure, according to Michael Johnson, will have increased by £17.2 billion to £32.6 billion by 2016-17. My noble friend Lord Newby, I think, was asked during the passage of the Public Sector Pensions Bill what the government figure for this was and said he would look into it. As I understand it, we have not had any reply to that and I wonder whether we could have one from the Minister either today or in writing.
Mr Johnson believes that OBR figures do not take account of the DWP’s White Paper on the single-tier pension last January. This will add another £9 billion, due to some very technical but highly credible unforeseen changes in connection with NIC rebate circularity, single-tier pension transition costs and increased life expectancy. I will not burden the Committee with those details. Mr Johnson calculates the extra costs, within a decade, as being at least £41 billion, an increase of £1,600 a year for every household in the UK. Hence, if you strip out the benefit of transferring the Post Office pensions, where the Government have banked the assets of the scheme but, I understand, not the liabilities, the impact on actual public sector net borrowing position is such that the Chancellor, overall, is mid-way through a two-year suspension of deficit reduction.
The IFS concludes that further cuts are expected beyond 2016. Total spending is approximately frozen in real terms, but annual managed expenditure is increasing. In the absence of further policy action, this implies that there will have to be further departmental cuts. To avoid these would mean tax rises of £25 billion. If tax increases are not made and certain departmental spending continues to be protected—schools, the NHS and overseas development—other departmental spending would have to be cut by almost 15% over two years, which is 8% overall. I do not expect the Minister to give me a response as to which of the options will be taken, but these are daunting figures and choices.
Finally, I echo the comments of my noble friend Lady Noakes that on the supply side we need more tax reform and deregulation, and like my noble friend Lord Higgins, I do not underestimate the difficulties the Government face.
Lord Empey
My Lords, I should like to make a few comments in the gap. Like many people in this country, I am disappointed and to a certain degree angry that the United Kingdom finds itself in its current economic powerlessness around the world. This has major implications for our foreign policy, our defence policy, and for a number of other matters. While a number of noble Lords have pointed at former Prime Minister Gordon Brown and others, this situation has been developing over a substantial period of time. It did not happen overnight. I think that the rock we perished on really goes back to the 1960s and 1970s when we turned our back on manufacturing, thinking it was old hat. It was about dirty, smelly factories, and the new way to do things was in the service sector, with finance and so on. We moved away from a broad-based and balanced economy with a portfolio spread across a range of areas. Indeed, our outward-looking expertise and our contacts throughout the world were not exploited to the extent that they might have been.
I want to make a point about the rhetoric that we are currently using, which other noble Lords have referred to in the debate. We have been talking about “savage cuts” of this, that and the other. The arithmetic disproves that. Spending and borrowing are going up. I did a brief calculation and worked out that as a country we have borrowed around another £80 million since the debate this afternoon began. Anyone who suggests that we are in the throes of brutal cutbacks is simply not being realistic. There are many things that we would like to spend money on and there are many groups in our communities that we would wish to help, but unless we as a nation can make the money to pay for those benefits, clearly they are not possible. Everyone will suffer if we lose that capability.
I have one question in particular for the Minister on pension funds. I asked his colleague, the noble Lord, Lord Freud, about this and received a Written Answer the other day. Pension funds in other parts of the world can buy into our electricity and water sectors, transport, airports, all sorts of things. Why are our own pension funds not doing the same thing? The answer is that there are too many of them and they are too small, so they do not have the capability to do so. An example of this is the Ontario public sector workers’ fund. It has 400,000 members and a huge balance sheet. We now describe a large fund as one with over 1,000 members. That is just not competitive. I know that the Government are looking at this, but there needs to be a radical step change so that the pension funds in this country have enough firepower to make the purchases that will bring revenue into this country instead of being broken up into tiny funds that are of no significance whatever.
I want also to ask about our exchange rates, a subject on which I tabled an Oral Question last week. I know that the lowering of exchange rates can have inflationary implications, but we are not playing on a level field. Other countries are flagrantly manipulating their exchange rates. China has been doing it for years, and Japan is doing it at the moment. Its exchange rate with the dollar has dropped by 15% since the new Prime Minister was elected a few months ago. There is no point in playing by the Queensberry rules while someone is taking the very bread out of your mouth, and that is what is happening. Will the Minister tell us, if he can, whether the Government are looking closely at the issue?
My final point is this. If we are trying to stimulate the economy and achieve some of our objectives in an atmosphere of reduced spending, will the Minister consider how VAT is applied to things such as the retrofitting of buildings? Such activity achieves the Government’s energy objectives by suppressing demand while at the same time increasing employment. We have to be more imaginative in how we use fiscal measures to achieve our objectives and generate further employment.
Lord Haskins
My Lords, I did not intend to participate but could not resist doing so when the noble Lord, Lord Higgins, mentioned the Open University, which has always been very well represented in the House. I happen to chair the Council of the Open University and I was gratified to listen to his story. It is one that I have told many times to people, who listen with increasing disbelief that it could ever have happened. Not only did Mrs Thatcher do as the noble Lord, Lord Higgins, has suggested, she actually broke a manifesto commitment to shut the place. We are eternally grateful to her for that.
I am speaking today because I chair a local enterprise partnership, I sit on the Efficiency and Reform Board in the Cabinet Office, which is an experience in itself, and along with many other noble Lords I recently served on the Select Committee on Small and Medium Sized Enterprises. I was in Whitehall this afternoon talking about the situation with regard to LEPs, and it is clear that there is not very much money. I do not think that that should come as a great surprise to anyone, but some of my colleagues in the LEPs were getting a bit hot under the collar about it. However, anyone who thinks about it will realise that we are not in a situation where money is going to be dished out in a big way, and nor should we be, so we must concentrate on those things that do not relate to money but which can profoundly improve the economic situation.
As a representative of the Humber LEP, I talk to many would-be investors in renewable energy in the North Sea. It is hoped that some very big external investments will be coming in. Of course money comes into it, but there are some real issues that we have to deal with. The environment for people investing in this country is, broadly speaking, positive when compared to investing in, say, France or even in Germany. The broad impression is that this is a good place in which to do business and we must support that.
However, two or three points come up all the time. One that applies right across the country is the skills issue. I do not think it is so much about spending more money but about using the money that is presently available more effectively and efficiently. Last week I was talking to the head of a college in Leeds who pointed out that the college has to manage 39 different funding streams. That is just crazy. The college spends more time trying to understand where the money comes from than spending it. Successive Governments have looked at this but they have always baulked at tackling it. The reason they do not tackle it is twofold. First, Ministers come in with their own pet schemes that they put into the system and no one can cancel and, secondly, the Civil Service—the Whitehall engine—does not like to have its arrangements upset. These 39 schemes really should be whittled down to nine or 10.
The second issue is that of our major projects, which the Cabinet Office Efficiency and Reform Board has been looking at for the past few years. It is scary how badly these projects have been mishandled over the years—going back 20, 30 and even 40 years. We have to get a grip on that and make sure that we do not do it again. Once again it comes from the Whitehall silo mentality where one department finds it difficult to talk to another department. I contrast that with what I see when I go to Scotland to look at how they are doing things there. Whitehall could learn a lot from Scotland. In Scotland, Northern Ireland and Wales, the Ministers and officials know each other and communicate with each other.
I will give noble Lords an example. The noble Lord, Lord Heseltine, is taking a great interest in what we are doing in the Humber. We are looking at regulation. Regulation is another issue which constantly comes up, not because there is too much of it—that is not the issue—but because of the way in which existing regulation is mismanaged. I have a big investor at the moment who is having to go through one regulator and then start again with another, very often duplicating what the first one had done. We are setting up a pilot group to get all the state regulatory agencies together so that when a major project comes along, we all sit down around a table, agree what the issues are and apportion the regulatory problems. That does not sound very exciting, but it makes a huge difference to the attitude of investors.
Finally, looking at the local authorities, the test is whether you have the political leadership to carry all this out. It varies enormously across the country and we could do a lot more. Have we got the quality of officers in the local government offices? Finally, have we got the local business leadership we need to bring all that together, as in the 19th century with the Joe Chamberlains? I am afraid that a lot of the corporations have fled to London. You are not dealing with big companies with a lot of clout in the regions, but we will do our best.
Lord Davies of Oldham
My Lords, this has been a fascinating and somewhat lopsided debate. It is my task to at least try to achieve some balance in the arguments before the country at present. I have only just got my breath back from the Minister’s very first statement, in which he said that this economy has been well managed by the Chancellor from the beginning. So why is the Chancellor back with a second comprehensive spending review Statement? Why is he back with a second round of cuts? I accept that, as the noble Baroness, Lady Noakes, indicated, the economy may not be in a double-dip recession, but why is he here in circumstances where it is absolutely clear that there has been no growth in this economy for the past three years?
There is nothing in the Chancellor’s proposals, which the Minister has been defending with his usual elan today, that suggests growth for the future. The noble Lord of course has particular expertise on infrastructure. We all appreciate that and welcome his appointment to give the Government a boost in that respect. However, let us recognise that there has been no expenditure on infrastructure since 2010. In fact, all those issues which were planned at that time, which I think the Minister referred to as the 2010 pipeline, have been effectively blocked. There is virtually no progress on any of the 2010 schemes. Now, of course, infrastructure spending is being suggested—in the distant future. The things being boasted about are HS2 and north-south Crossrail. Both projects are 10 to 15 years away from significant expenditure; perhaps it is a little earlier with HS2, but certainly not prior to the next general election. If it is being suggested that there will be a boost to the economy through infrastructure spending over the next couple of years, everyone needs to be disabused of this idea. That is not going to happen.
I accept a number of points that were made in the debate. I appreciated the point of the noble Baroness, Lady Kramer, about the decline of manufacturing industry. On whose watch was that? Which Chancellor said that we were going to rely on the service-industry economy? That was the noble Lord, Lord Lawson, in the 1980s. Who turned their backs on the manufacturing industry in the 1980s, when we saw a massive collapse in manufacturing jobs? It was the party of Margaret Thatcher. I will give way to the noble Baroness, of course.
Baroness Noakes
Can the noble Lord remind the Committee what happened to manufacturing industry on Labour’s watch?
Lord Davies of Oldham
The very tragedy, in my view, of Labour’s watch was that it actually continued too many of the positions adopted by the Conservative Party in the 1980s. As regards manufacturing—the noble Lord, Lord Haskins, also made an important point on that—we should have put much greater emphasis upon the development of skills in our society. We have not equipped any of the next generation for the kind of economy that we seek to sustain.
I understand what the noble Lord, Lord Risby, indicated in terms of the enormous value of foreign investment. Of course we would all welcome that but does he think that foreign investors are enthusiastic about the great uncertainty over Britain’s relationship with Europe? That is the product of discord in the governing coalition. How welcome is that for potential investors? The noble Baroness, Lady Noakes, indicated the areas in which she welcomed what was happening but even she will recognise that the IMF has said that some £10 billion ought to be invested in infrastructure in “shovel-ready” industries, particularly construction. It ought to be put into housebuilding because that is the fastest way in which you could inculcate some element of demand into the economy. However, are the Government pursuing that strategy? If the noble Lord, Lord Deighton, were able to identify schemes that could fulfil that aim, I would be surprised. I give way to the noble Lord.
Lord Risby
I am most grateful but a little confused by what the noble Lord is saying. We have just had a record increase, the highest ever, in foreign direct investment in this country, way ahead of anywhere else and the highest in Europe. The point that I was making is that that trend is increasing, so I am afraid that his argument is not sustained by the reality.
Lord Davies of Oldham
My Lords, I was making a point that the noble Lord ought surely to take into account. Far from there being an environment in which foreign investors will necessarily find a place to invest in the future, as long as we are extremely uncertain about our relationship with the biggest market that we service, Europe, it is bound to cause anxieties among investors.
I also noted what the noble Lord, Lord Higgins, said—he is also my noble friend when we are on the golf course. He was very concerned to address some real points to the Minister with regard to the future of interest rates and the assumption made about future public expenditure. The Minister must address that point in his reply.
I appreciated the point that the noble Lord, Lord Shipley, made about local authority finance and being able to identify local resources. One product of the debate on Scottish independence and the referendum will be to identify those issues as far as Scotland is concerned. That is bound to give a stimulus to the broad argument that the noble Lord is putting forward about the resources available to the various localities of the United Kingdom and the needs that may be identified. I would have thought that that is bound to take a significant step forward as a result of the debate on next year’s Scottish referendum.
The noble Lord, Lord Flight, entertained us all with the Hayek versus Keynes debate. Although the noble Lord said that growth before the Second World War was considerable, he may have noticed that full employment in this country did not return until we went into wartime defence production. It is quite clear that under the Hayek principles you can certainly run an economy with a considerable level of unemployment. However, that word has not been manifest in this debate at all because the fact that we have significant levels of unemployment is a limited consideration for all those on the Conservative Benches concerned with how to manage the economy. We have people coming out of our colleges and universities who are highly qualified by any standards and who, in the past, would have expected to find a choice of jobs. They are facing a situation where the market is such that there are no jobs available. That is why I was grateful that the noble Lord, Lord Flight, identified the thinking behind the Conservative position and, to a more limited extent, the Liberal Democrat position with regard to what the Government are doing at present.
It took the right reverend Prelate to introduce morality into this debate. Why is it that the only person who is prepared to talk about those people who suffer the real costs of what is being carried out in the name of austerity is the right reverend Prelate? He identified the shock we all felt in the Chamber yesterday when it was suggested by a Conservative Minister that food banks are supply-driven and nothing to do with people’s needs. People’s needs have occasioned the development of food banks, which are necessary, but our great shame. Nor is there any understanding on the Conservative side about what it is to lose one’s job at present. It is quite okay to say, “We will cut public expenditure by making sure that there is a week in which one cannot claim jobseeker’s allowance”, but what do noble Lords think the morale of a family will be when someone loses his job against a background where the chances of getting a fresh job are very limited indeed? Why is it that, within that framework, it is thought that a really effective cut is to make sure that an application for support cannot be made until a week has elapsed?
Baroness Kramer
Can the noble Lord, Lord Davies, confirm that, during the years of the Labour Government, job centres were prohibited from referring any client to a food bank?
Lord Davies of Oldham
I am not well enough equipped to answer that question, nor am I quite sure of the point of the question.
Baroness Kramer
I shall try to be helpful. Like many people, I take the view that we live in a country where food banks should not be necessary, but unfortunately they have been necessary for a long time because the same issues of delays over benefits and various kinds of crises have affected those at the bottom. As I understand it, during the Labour years, job centres were not permitted to refer clients to food banks. As noble Lords know, you can go to a food bank only with a reference from an appropriate person: a job centre, a doctor or a limited number of other people. You cannot just turn up and make a claim. Today, job centres offer vouchers where they think there is need, but that need is not very different from the need that existed before. Food banks were just not announced.
Lord Davies of Oldham
Food banks are developing in almost every constituency in Britain because the so-called supply-driven factor has been occasioned by the demand of real necessity at present. It is a vastly different situation from that which obtained a decade or even five years ago.
I would ask the Minister to take on board the very important points that have been made by his noble friends today in supporting the coalition. Will he also, at some point in his remarks, address the question of morality? Why is it, for example, that his supporters are concerned to promote a bedroom tax that ensures that there is a desperate issue for impoverished people as to whether they will be forced to move but that when a mansion tax is proposed by the Liberal Party, there are all sorts of anxieties that people who are reasonably well off might be obliged to move and about what an affront to fairness that would represent? The mansion tax would be aimed at properties of very considerable value and at people who know they well might come under attack rather than the very large numbers of people who, under the bedroom tax, are being forced to move from their homes, the schools which their children attend and even the localities in which they have lived for very many years. I hope the Minister will address some of those points.
Lord Deighton
My Lords, first, I thank all noble Lords for their insights, ideas and challenge. It has been a most fascinating exchange and I congratulate the noble Lord, Lord Davies, on holding up the Opposition’s end there. I will address his question about morality straightaway. To me, this is a very simple issue: unless we are able to create a state that can actually afford to sustain itself, those who are most vulnerable will be the most exposed victims of the fall-out from that kind of financial crash. We have to get our ability to afford a welfare state in the right state so that we can sustain it. That is the way that we protect the vulnerable in the long run.
The Chancellor was back with another spending round because we had not defined the spending plans for 2015-16. We took the opportunity to lay out the investment programme through to 2021 because, as I explained in my earlier remarks, we think that it is the right way to provide an environment in which people can plan investment correctly. On the general question of whether anything is really being done about growth for the future, the point is precisely to begin to deliver a programme from which future Governments will benefit. They can quibble over who was responsible for the earlier decisions. These kinds of investments have very long lead times and our planning is trying to break the link between the political and economic cycles. There was some misunderstanding there, in that I do not think anybody was trying to claim more; we were just trying to claim that there is a long-term plan. Public sector gross investment in this decade, 2010 through to 2020, is slightly higher on average than in the previous decade, if you smooth out the peaks and the troughs and take the average.
In terms of delivery today, the noble Lord, Lord Davies, is correct that projects from 2021 and onwards, or in five years’ time, have an impact later. However, the projects we are undertaking now are having an impact. Crossrail is being delivered now—the money in the spending round is for the feasibility study for Crossrail 2. Crossrail will be open in 2018-19 and we are spending something like £15 billion on it. It is the biggest urban infrastructure project in Europe and is going on now, right under our feet. That a very good example of delivery. Similarly, we have upgraded 150 stations, completed more than 30 road projects, opened more than 80 new free schools, delivered more than 84,000 affordable homes and done an enormous amount in rolling out 4G mobile services. There is a significant amount of delivery going on now and we are trying to plan for future delivery. We are trying to accelerate it and make it better value all the way through. I accept the point of my noble friend Lady Noakes that it is not necessarily a good thing just because it is an infrastructure project. We have to evaluate them all, which is what we did in the plan through to 2020. We re-evaluated them all on a zero-budget basis and approved the ones that we thought were most powerful.
My noble friends Lady Kramer and Lord Northbrook both asked about the welfare cap. It will apply to welfare, of course, but does not apply to state pensions. As my noble friend Lady Kramer implied, it will work off the OBR forecast. If the spending is forecast to breach the cap, the Government will have to explain what action has been taken. We will put a buffer in place to ensure that any policy actions are not triggered by small changes. That is how that one works. For the information of the noble Lord, Lord Northbrook, the areas being capped are all in social security: housing benefit, disability benefits, pensioner benefits and tax credits.
The noble Baroness, Lady Kramer, also asked whether we would be focusing on the quick wins in infrastructure and leaving the longer-term strategic projects because they have a longer lead time. It is the portfolio that works; I addressed this earlier. Lots of delivery is going on at the moment and we are trying to put a consistent long-term plan in place. We will, of course, look at local funding of infrastructure projects, of which TIF is one example. Another example is the single local growth fund. The European funds we are allocated will be put into the single pot and be part of that as we devolve responsibility.
I was delighted that the discussion got around to our international competitiveness—I thank the noble Lord, Lord Risby, for giving us the detailed example of what is going on with Algeria. I have spent a lot of my own time dealing with inward investment. This country has a tremendous advantage. Overseas investors really want to invest here. They trust us. They believe in our rule of law. There are many things they like about the opportunities we create here. We are working very hard to exploit this to the country’s fullest advantage. On export promotion we are continuing to fund UKTI. It is in the process of transforming our approach to trade and its support to a very focused business approach.
We had a very powerful discussion about our fiscal position and whether we are moving quickly enough to address what I accept are still very high levels of borrowing. It is absolutely critical that people understand that the deficit each year is extra borrowing—it is adding to the stock of borrowing. I do not think that that is generally perceived or understood more widely. The implications of understanding that properly should focus attention on addressing the deficit as fast as possible.
In defence of the pace at which the Government are addressing the deficit, we are still focused on reaching a balance by 2017-18. We are on that path. There is a plan in place. I am very open to challenges about the paradigm shift, as my noble friend Lady Noakes suggested, that we could be more radical in some of the ways we deliver public services and in some of the ways we have structured the Civil Service. That is a challenge we should set for the next tranche of cost improvement. Without that it becomes very difficult to continue—again, in my noble friend’s words—to “salami-slice”.
My noble friend Lord Shipley asked about whole-place budgets. Community budget pilots have demonstrated that it is possible to do much more by joining up local authorities; I do not think there is any question about that. That is why we talked about the £3.8 billion social care budget that we have set aside. We have also set up a £200 million pot to accelerate joint working among local authorities. Whether we can release the borrowing cap on HRAs is another matter. If we were to do that it would add another £7 billion to public sector borrowing every year. Most of the schemes which creatively try to allow more borrowing at the local level are captured and increase public sector borrowing. That is always the constraint that we are trying to manage.
My noble friend Lord Northbrook asked for a response on public pension cuts. My noble friend Lord Newby and I will certainly get back to him on that.
The noble Lord, Lord Empey, asked why UK pension funds are not investing in UK infrastructure. He is correct to say that that industry is highly fragmented compared to its counterparts overseas. That is why we have worked with the industry to consolidate funds into a pension infrastructure platform of £1 billion. Ten funds have come together so that they can gain economies of scale, develop the expertise to assess those credits and provide us with the scale to begin to get them into that business in the same way that, for example, the Canadians have so effectively prosecuted over the past few years.
I could not agree more with the noble Lord, Lord Haskins, that we need to rationalise the number of funding streams going into skills training. That is why we have set up the single local growth fund so that we can begin to provide that kind of rationalisation.
The noble Lord, Lord Empey, asked about VAT and how it is applied to building. I will get back to him in writing on that.
I thank noble Lords for a very stimulating debate.
Lord Higgins
What is the assumption on interest rates in calculating debt interest payments?
Lord Deighton
I thank my noble friend Lord Higgins for reminding me of that question; I was intending to deal with it directly. There is a ready reckoner in the OBR. Our debt is fixed-rate, so the effect of interest rates going up increases over time as debt matures and as we borrow more. For example, if we had a 1% increase in gilts rates, by 2015-16 that would be costing us just over £4 billion more per annum in debt service costs. That gives a sense of the sensitivity. By 2017-18, it would more or less double to just over £8 billion.
Lord Deighton
That is the impact, but those are not the assumptions. We must consider the impacts, so the assumption is on a stable basis, but that is the sensitivity to change. That is how we measure it.