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.
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.