The Commercial Secretary to the Treasury (Lord Sassoon)
My Lords, with the leave of the House, I will repeat a Statement made in another place by my right honourable friend the Chancellor of the Exchequer.
“Mr Speaker, today’s the day when Britain steps back from the brink and when we confront the bills from a decade of debt; a day of rebuilding, when we set out a four-year plan to put our public services and welfare state on a sustainable footing for the long term, so that they can do their job of providing for families, protecting the vulnerable and underpinning a competitive economy. It is a hard road, but it leads to a better future.
We are going to bring the years of ever-rising borrowing to an end. We are going to ensure, like every solvent household in the country: that what we buy, we can afford, that the bills we incur we have the income to meet and that we do not saddle our children with the interest on the interest on the interest of the debts we were not ourselves prepared to pay.
Tackling this budget deficit is unavoidable. The decisions about how we do it are not. There are choices, and today we make them. Investment in the future, rather than the bills of past failure: that is our choice. We have chosen to spend on the country’s most important priorities: the healthcare of our people; the education of our young; our nation’s security; and the infrastructure that supports our economic growth. We have chosen to cut the waste and reform the welfare system that our country can no longer afford.
This is the context of the spending review. We have, at £109 billion, the largest structural budget deficit in Europe—this at a time when the whole world is concerned about high deficits and our economic stability depends on allaying those concerns. We are paying at the rate of £120 million a day—£43 billion a year—in debt interest, this at a time when we all know that the money would far better serve the needs of our own citizens than those of the foreign creditors we borrow from. We have inherited from the previous Government plans—if you can call them that—that envisaged our national debt ratio still rising in the year 2014. Not a single penny of savings had been identified. Indeed, they are plans that envisaged the Chancellor of the Exchequer standing here in 2014 presenting a spending review that still had years of cutting public spending ahead of it. That is why last year the IMF warned this country to accelerate the reduction in the deficit. That is why the OECD, the Governor of the Bank of England and the CBI all agreed with the IMF.
The action we have taken since May has taken Britain out of the financial danger zone. The immediate reductions to in-year spending have bought us a breathing space in the sovereign debt storm. The creation of an independent Office for Budget Responsibility has brought honesty back to official forecasts. I can confirm to the House that the OBR and its new chair, Robert Chote, have audited all of the annually managed expenditure savings in today’s Statement.
The emergency Budget in June was the moment when fiscal credibility was restored. Our market interest rates fell to near record lows, our country’s credit rating was affirmed and the IMF went from issuing warnings to calling our Budget “essential”. Now we must implement some of the key decisions required by that Budget. To back down now and abandon our plans would be the road to economic ruin. We will stick to the course, we will secure our country’s stability and we will not take Britain back to the brink of bankruptcy.
In the Budget, I set out the tax increases we were prepared to make, including on capital gains at the higher rate, pension relief on the largest contributions and, for the first time, a permanent levy on banks. We also had to increase VAT, where, fortunately, we were able to benefit from the preparatory work of the previous Government. But I made it clear that spending reductions rather than tax rises needed to make up the bulk of the consolidation. That is what the leading international evidence suggested worked best. So I set out spending totals for the coming years and announced some £11 billion of welfare savings that would help achieve them. I also set out a new fiscal mandate for the public finances to eliminate the structural deficit by balancing the cyclically adjusted current budget over five years, by 2015-16. We set a target of national debt falling as a proportion of national income by that same year. We explained how, for reasons of caution, we will achieve both these objectives a year earlier in 2014-15.
I can confirm that the spending plans I set out today will achieve a balanced structural current budget and falling national debt on that same timetable. I can further confirm that the current spending totals I set out in the Budget for each of the next four years are the same as the current spending totals I set out today. They have not changed. Next year, current expenditure will be £651 billion, then £665 billion the year after and £679 billion the year after that, before reaching £693 billion in 2014-15. The House will note that current spending is rising, not falling, over this period. This is partly because, even with the measures we take today, debt interest payments will continue to grow in these years. Debt interest payments will reach £63 billion in 2014-15—for it takes time to turn around the debt supertanker—but I can now report to the House that against the plans we inherited, one of the departments which suffers the greatest cut today, and at the steepest rate, is the department for debt interest. Debt interest payments will be lower by £1 billion in 2012, then £1.8 billion in 2013 and £3 billion in 2014—a total of £5 billion over the course of the spending review. That is the equivalent of 16 new hospitals or the annual salaries of 100,000 teachers.
At the Budget, I also set out my plans for capital spending over the next four years. I can now tell the House that capital spending will be £51 billion next year, then £49 billion, then £46 billion, and £47 billion in 2014-15. That is about £2 billion a year higher than I set out in the Budget. Given the contractual obligations we inherited from the previous Government, doing anything else would have meant cutting projects which would clearly enhance the economic infrastructure of the country. This has no direct impact on whether we meet the fiscal mandate or the year in which the debt ratio starts falling. So total public expenditure—capital and current—over the coming years will be £702 billion next year, then £713 billion, £724 billion, and £740 billion in 2014-15. In real terms, public spending will be at the same level as in 2008. Our public services and our welfare system will be put on a sustainable long-term footing and we will make sure that the financial catastrophe that happened under the previous Government never, ever happens again.
I turn now to the spending decisions and the three principles I propose to apply to the choices we have to make. First, on reform, in every area where we make savings, we must leave no stone unturned in our search for waste and we must deliver the changes necessary to make our public services fit for the modern age.
Secondly, on fairness, we are all in this together and all must make a contribution. Fairness means creating a welfare system that helps the vulnerable, supports people into work and is also affordable for the working families who pay for it from their taxes. Fairness also means that, across the entire deficit reduction plan, those with the broadest shoulders should bear the greatest burden; those with the most should pay the most, including our banks.
Thirdly, on growth, when money is short, we should ruthlessly prioritise those areas of public spending which are most likely to support economic growth, including investments in our transport and green energy infrastructure, our science base and the skills and education of citizens.
Let me explain now how these principles have guided our specific decisions. First, on reform, I believe that the public sector needs to change to support the aspirations and expectations of today’s population, rather than the aspirations and expectations of the 1950s, so the spending review is underpinned by a far-reaching programme of public service reform. We saw over the past decade that more money without reform was a recipe for failure; less money without reform would be worse; and we are not prepared to accept that, so we have begun by squeezing every last penny that we can find out of waste and administration costs.
Our ambition in this review was to find £3 billion of savings from the administrative budgets of central government departments. With the help of the Green review and the work done by my right honourable friend the Minister for the Cabinet Office, I can tell the House that we have gone further than we thought possible in cutting back-office costs. Quangos will be abolished, services will be integrated, assets will be sold and the administrative budgets of every main government department will be cut by a third. The result is this: we promised £3 billion of Whitehall savings; we will deliver £6 billion.
Of course, there is understandable concern about the reduction in the total public sector headcount that will result from the measures in the spending review. We believe that the best estimate remains the one set out by the independent Office for Budget Responsibility. It has forecast a reduction in headcount of 490,000 over the spending review period. Let us be clear: that is over four years, not overnight. Much of it will be achieved through natural turnover, by leaving posts unfilled as they become vacant. Estimates suggest a turnover rate of over 8 per cent in the public sector. But yes, there will be some redundancies, which will be up to the decisions of individual employers in the public sector. That is unavoidable when the country has run out of money.
We feel responsible for every individual who works for the Government and we will always do everything that we can to help them to find alternative work. In fact, in the past three months alone, the economy created 178,000 jobs. So we should remember that, unless we deal with this record budget deficit decisively, many more jobs will be in danger in both the private and the public sector.
The Cabinet Office and the Treasury will oversee the programme of Whitehall savings. Both departments will lead by example. The core Cabinet Office budget will be reduced by £55 million by 2014-15. Additional allocations will be provided to fund electoral reform, support the big society, establish community organisers and launch the pilots for the national citizen service, which will give young people, for the first time, a right of passage to citizenship.
In recognition of the challenges faced by the voluntary and community sector, I am establishing a one-year £100 million transition fund to help those facing real hardship. The Treasury will see its overall budget reduced by 33 per cent and we will share the department’s enormously expensive PFI building, which my predecessor -but-one signed up to, by moving part of the Cabinet Office into the same premises.
The Chancellor is also a royal trustee, and I want to say something briefly about the Civil List. As I outlined in the Budget, the 10-year settlement expired this year, and no provision for a new settlement had been made when we entered office. Her Majesty has graciously agreed to a one-year cash freeze in the Civil List for next year. Going forward, she has also agreed that total royal household spending will fall by 14 per cent in 2012-13, while grants to the household will be frozen in cash terms. In order to support the costs of the historic diamond jubilee, which the whole country is looking forward to celebrating, there will be a temporary additional facility of £1 million. After that, the royal household will receive a new sovereign support grant linked to a portion of the revenue of the Crown Estate, so that my successors do not have to return to the issue so often.
Central to this review is the reshaping of our public services. First, there needs to be a dramatic shift in the balance of power from the central to the local. A policy of rising burdens, regulations, targets, assessments and guidance has undermined local democracy and stifled innovation. We will completely reverse this. We will give GPs power to buy local services, schools the freedom to reward good teachers, and communities the right to elect their police and crime commissioners. Secondly, we should understand that all the services paid for by government do not have to be delivered by government. So we will expand the use of personal budgets for special education needs, children with disabilities and long-term health conditions. We will use new payment mechanisms for prisons, probation, and community health services, and we will encourage new providers in adult social care, early years and road management.
For local government, the deficit we have inherited means an unavoidably challenging settlement. There will be overall savings in funding to councils of 7.1 per cent a year for four years. But to help councils, we propose a massive devolution of financial control. Today, I can confirm that ring-fencing of all local government revenue grants will end from April next year. The only exception will be simplified schools grants and a public health grant. Outside of schools, police and the fire service, the number of separate core grants that go to local authorities will be reduced from more than 90 to fewer than 10. Councils and their leaders will remain accountable, but they will no longer have to report on 4,700 local area agreement targets.
The local government settlement includes funding for next year’s council tax freeze to help families when their budgets are too tight. We are also introducing tax increment finance powers, allowing councils to fund key projects by borrowing against future increases in locally collected business rates. Some in local government have concerns about the financing of social care. I can announce that grant funding for social care will be increased by an additional £1 billion by the fourth year of the spending review and a further £1 billion for social care will be provided through the NHS to support joint working with councils, so that elderly people do not continue to fall through the crack between two systems. That is a total of £2 billion of additional funding for social care to protect the most vulnerable.
We will also reform our social housing system, for it is currently failing to address the needs of the country. Over 10 years, more than half a million social rented properties were lost. Waiting lists have shot up, families have been unable to move, and, although a generation ago only one in 10 families in social housing had no one working, this had risen to one in three by 2008-09.
We will ensure that social housing is more flexible. The terms for existing social tenants and their rent levels will remain unchanged. New tenants will be offered intermediate rents at around 80 per cent of the market rent. Alongside £4.4 billion of capital resources, this will enable us to build up to 150,000 new affordable homes over the next four years. We will continue to improve the existing housing stock through the Decent Homes programme, and we will reform the planning system so that we put local people in charge, reduce burdens on builders and encourage more homes to be built, with a new homes bonus scheme.
Within an overall resource budget for the Department for Communities and Local Government that is being reduced to £1.1 billion over the period, priority will be given to protecting the disabled facilities grants. This will go alongside a £6 billion commitment over four years to the Supporting People programme, which provides help with housing costs for thousands of the most vulnerable people in our communities.
In recognition of the important service provided by the fire and rescue service, we have decided to limit its budget reductions in return for substantial operational reform.
I turn to reforms in our security and defence. Yesterday my right honourable friend the Prime Minister set out the conclusions of the strategic defence and security review. He explained in detail how we will protect the British people, deliver on our international obligations and secure British influence around the world. This spending review provides the resources to do just that. The budget for the Ministry of Defence will reach £33.5 billion in 2014-15, a saving of 8 per cent over the period. On top of this settlement, we will continue to provide out of the reserve the resources that our forces in Afghanistan require. As a Chancellor, I believe strongly that if we ask our brave service men and women to risk their lives on our behalf in active combat, then we should give them all the tools they need to finish the job.
But our international influence and our commitments to the world are determined not only by our military capabilities. Our diplomacy and development policy matter, too. Savings of 24 per cent in the Foreign and Commonwealth Office budget will be achieved over the review period by a sharp reduction in the number of Whitehall-based diplomats and back-office functions. There will be a focus on helping British companies win exports and secure jobs at home, and, with the help of UKTI, we will attract significant overseas investment to our shores.
I can also confirm that this coalition Government will be the first British Government in history, and we will be the first major country in the world, to honour the United Nations commitment on international aid. The Department for International Development’s budget will rise to £11.5 billion over the next four years. Overseas development will reach 0.7 per cent of national income in 2013. This will halve the number of deaths caused by malaria. It will save the lives of 50,000 women in pregnancy and 250,000 new-born babies. Whether working behind the counter of a charity shop, volunteering abroad or contributing taxes to our aid budget, Britons can hold their heads up high and say, even in these difficult times, that we will honour the promise we made to the very poorest in our world.
Our aid budget allows Britain to lead in the world. It may be protected from cuts but not from scrutiny. I have agreed with my right honourable friend the Development Secretary a plan of reform that reduces administration costs to half the global donor average, ends the aid programmes that we inherited in China and Russia, focuses on conflict resolution and creates an independent commission to assess the impact of the money we commit.
I turn now to security at home. Protecting the citizen is a primary duty of government. Our police put themselves in harm’s way to make the rest of us safe, and we owe them a debt of gratitude. But no public service can be immune from reform. Her Majesty’s Inspector of Constabulary found in his recent report that significant savings could be made in police budgets without affecting the quality of front-line policing. Tom Winsor is leading a review of terms and conditions which will report on how the police service can manage its resources to serve the public even more cost-effectively.
Using independent forecasts for the precept, the settlement I am proposing today will see police spending falling by 4 per cent each year. By cutting costs and scrapping bureaucracy, we are saving hundreds of thousands of man-hours. Our aim is to avoid any reduction in the visibility and availability of police in our streets.
Our new national security strategy judges terrorism to be one of the highest risks facing this country. Therefore, I am prioritising counterterrorism over the review period, in both the Home Office budget and the single intelligence account. We have been assured that this will maintain our operational capabilities against al-Qaeda and its affiliates and against Northern Irish terrorist threats. This will enable us to meet the terrorist threat and protect the Olympic Games in 2012. Overall, the Home Office budget will find savings of an average of 6 per cent a year.
The Ministry of Justice’s budget will reach £7 billion by the end of the four-year period, with average savings of 6 per cent a year. A Green Paper will set out proposals to reform sentencing, intervene earlier to give treatment to mentally ill offenders, and use voluntary and private providers to reduce reoffending. Over the period, £1.3 billion of capital will also be provided to maintain the existing prison estate and fund essential new-build projects, but plans for a new 1,500-place prison will be deferred. The Law Officers’ Department will reduce its budget by a total of 24 per cent over the period, with the Crown Prosecution Service greatly reducing its inflated cost base. Reforms will also be required to streamline the criminal justice system, close underused courts and reduce the legal aid bill. We need fair access to justice, but provided at a fair cost for the taxpayer.
All the reforms I have spoken of—to Whitehall and the way services are provided, to local government, and to our defence, security and justice system—will improve both the value for money for taxpayers and the service provided to the public. Next month, each government department will publish a business plan setting out its reform plans for the next four years, so that their priorities are clear and the public can hold them to account.
Reform is one of the guiding principles of the spending review. So too is fairness. Let us be clear. There is nothing fair about running huge budget deficits, and burdening future generations with the debts that we ourselves are not prepared to pay. How ironic that it was the previous Labour Prime Minister himself who once observed:
“Public finances must be sustainable over the long term. If they are not, the poor … will suffer most”.—[Official Report, Commons, 2/7/97; col. 303.]
That is why we are restoring order to our public finances before that is allowed to happen.
A fair Government deal with the deficit decisively—that is what we are doing today—and a fair Government make sure that those with the broadest shoulders bear the greatest burden. The distributional analysis published today shows that those on the highest incomes will contribute more towards this entire fiscal consolidation, not just in cash terms, but also as a proportion of their income and consumption of public services combined.
I completely understand the public’s anger that the banks that were so appallingly regulated over the past decade, and whose near collapse wrought such damage on the economy, should now be contemplating paying high bonuses. We are overhauling the system of regulation that we inherited so that the Bank of England, with its clout and reputation, is put in charge. We have set up the Independent Commission on Banking to look at the structure of the industry, and next year we will receive its report.
Today we set out very clearly, for all to take note of, our objective in taxing the banking industry going forward. We neither want to let banks off making their fair contribution, nor do we want to drive them abroad. Many hundreds of thousands of jobs across the whole United Kingdom depend on Britain being a competitive place for financial services. Our aim will be to extract the maximum sustainable tax revenues from financial services. We will assess what those maximum revenues could be—not just in one year, but over a period of years.
We have already decided, in the face of opposition from the previous Government, to introduce a permanent levy on banks. The legislation will be published tomorrow. Once fully effective, the permanent levy will raise more net each year and every year for the Exchequer than the one-year bonus tax did last year—and I note that the previous Chancellor now admits that it failed to curb behaviour and was not sustainable.
However, that is not enough. We want the banks to pay not just by the letter of the tax law, but by its spirit. A year ago, the previous Government announced in a fanfare that they would require banks to sign up to the code of practice on taxation. I have asked the Revenue how many of our leading 15 banks actually signed up. The answer is four—four out of 15. That is what happened when they were in office: all talk and no action. I have instructed the Revenue to work with the banking sector to ensure the remaining banks have implemented the code of practice by the end of next month.
We also need to address the situation under the last Government where the gap between the taxes owed and the taxes paid grew considerably. So in this spending review, while the HM Revenue and Customs budget will be expected to find resource savings of 15 per cent through the better use of new technology, greater efficiency and better IT contracts, we will be spending £900 million more on targeting tax evasion and fraud. This additional £900 million is expected to help us collect a missing £7 billion in tax revenues.
Nor will fraud in the welfare system be tolerated anymore. We estimate that £5 billion is being lost this way each year—£5 billion that others have to work long hours to pay in their taxes. This week we published our plans to step up the fight to catch benefit cheats, and to deploy uncompromising penalties when they are caught.
That brings me to the wider welfare budget. A civilised country provides for families, protects the most vulnerable, helps those who look for work, and supports those in retirement. That is why one of the first acts of this coalition Government was to relink the basic state pension to earnings, and guarantee a rise each year by earnings, inflation or 2.5 per cent—whichever was higher. Never again will those who worked hard all their lives be insulted with a state pension increase of just 75p. But this guarantee of a decent income in retirement has to be paid for at a time when people are living much longer than anyone predicted. We should celebrate that fact, but also confront it. Lord Turner’s report on pensions, commissioned by the last Government, acknowledged that a more generous state pension had to be funded by an increase in the pension age. Even since its publication, life expectancy has risen further than it predicted.
Before the summer we launched a review on increasing the state pension age, and that has now concluded. As a result, I can today announce that the state pension age for men and women will reach 66 by 2020. This will involve a gradual increase in the state pension age from 65 to 66, starting in 2018; and it will mean an acceleration of the increase in the female pension age already under way since this April. From 2016, the rate of increase will be three months in every four rather than the current plan of one month in every two. Raising the state pension age is what many countries are now doing, and will by the end of the next Parliament save over £5 billion a year—money which will be used to provide a more generous basic state pension as we manage demographic pressures.
Earlier this month, we also received the interim report from John Hutton’s public service pension commission. I am sure the whole House will want to thank John for this excellent and independent piece of work. I welcome his findings, and I hope that they will form the basis of a new deal that balances the legitimate expectations of hard-working public servants for a decent income in retirement with the equally legitimate demands of hard-working taxpayers that they do not pay unfairly for it.
The elements of this new pension deal are clear. We should accept that public service pensions continue to provide a form of defined benefit, and that there is no race to the bottom of pension provision. We want public service pensions to be a gold standard. At the same time, we should accept that they must be affordable.
When these public service pension schemes were established in the 1950s, taxpayers made half the contributions. Today they make up two-thirds of contributions, and the unfunded bill is set to rise to £33 billion by 2015-16.
We should accept, as John Hutton does, that there has to be an increase in employee contributions, although I also agree with John that this should be staggered and progressive. That means that the lower paid and those in the Armed Forces are protected and the highest-paid public servants, who get the largest benefits, pay the highest contributions. We will await the full commission report next spring before coming to any conclusions on the exact nature of the defined benefit and progressive contribution rise. We will also launch a consultation on the fair deal policy, but we will carry out, as the interim report suggests, a full public consultation now on the appropriate discount rate used to set contributions to these pensions. From the perspective of filling the hole in the public finances, we will seek changes that deliver an additional £1.8 billion of savings per year in the cost of public service pensions by 2014-15, over and above the plans left to us by the previous Government.
It is also clear that the current final salary pension terms for MPs are not sustainable, and we anticipate that the current scheme will have to end. We will make a further Statement following the publication of Lord Hutton’s findings.
The welfare system is also there to help people of a working age when they lose their job, have a disability, start a family and need help with low pay, but the truth, as everyone knows, is that the welfare system is failing many millions of our fellow citizens. People find themselves trapped in an incomprehensible out-of-work benefit system for their entire lifetimes because it simply does not pay to work. This robs them of their aspirations and opportunities, and it costs the rest of the country a fortune. Welfare spending now accounts for one-third of all public spending. Benefit bills have soared by 45 per cent under the previous Government. In some cases, the benefit bill of a single out-of-work family has amounted to the tax bills of 16 working families put together. This is totally unsustainable and unfair. The previous Government promised reform and flunked it. We will deliver.
My right honourable friend the Work and Pensions Secretary is setting out proposals, with my support, to replace all working-age benefits and tax credits with a single, simple universal credit. The guiding rule will be this: it will always pay to work. Those who get work will be better off than those who do not. It represents the greatest reform to our welfare state for a generation. It will be introduced over the next two Parliaments at a pace that ensures we get this right. I have set aside more than £2 billion over this spending review of resources to make this happens and it will go alongside our new work programme, which we are also funding today. Drawing on the skills of the voluntary sector and private providers, the work programme will provide intensive help to those looking for work and support for those who could look for work but currently lack the confidence or skills to try.
The Department for Work and Pensions will make savings to help to deliver these schemes by increasing the use of digital applications and reducing overheads. We will also be seeking substantial savings from the rest of the £200 billion benefit bill on top of those already identified in the Budget. As I said in June, the more we can save on welfare costs, the more we can continue other, more productive, areas of government spending. In the massive public consultation we conducted over the summer, the overwhelming message we received was that the British people think it is fair to cut welfare bills in order to protect important public services.
So today I announce these further welfare savings. We will time-limit contributory employment and support allowance for those in the work-related activity group to one year. This is double the length of time that applies to contributory jobseeker’s allowance. We will increase the age threshold for the shared-room rate in housing benefit from 25 to 35, so that housing benefit rules reflect the housing expectations of people of a similar age not on benefits. We will give local authorities greater flexibility to manage council tax, together with direct control over council tax benefit, within an overall budget that will be reduced by 10 per cent from April 2013.
We will align the rules for the mobility and care elements of disability living allowance paid to people in residential care, generating savings but enabling us to continue with this important benefit. We will freeze the maximum savings credit award in pension credit for four years, thereby limiting the spread of means-testing up the income distribution.
We will further control the cost of tax credits by freezing the basic and 30-hour elements for three years. We will change the working tax credit eligibility rules so that couples with children must work 24 hours per week between them. We will return the childcare element of the working tax credit to its previous 70 per cent level. We will also introduce a new cap on benefits. No family that does not work will receive more in benefits than the average family that does go out to work. That is a tough, but fair deal. Of course, those in receipt of disability living allowance, working tax credit or the war widow’s pension will be excluded.
Taken together, all these welfare measures I have outlined will save the country £7 billion a year. But we want to ensure that low-income families with children are protected from the adverse effects of these essential savings, because this Government are committed to ending child poverty. I can announce today that I am increasing the child element of the child tax credit by a further £30 in 2011-12 and £50 in 2012-13 above indexation. This will mean annual increases of £180 and then £110 above the level promised by the previous Government. This will provide support to 4 million lower-income families. I can confirm that using the same model as we inherited, the spending review will have no measurable impact on child poverty over the next two years, while we await the conclusions of the report by the right honourable Member for Birkenhead.
Let me now turn to the universal benefits. I have taken the difficult decision to remove child benefit from families with a higher rate taxpayer. I wish that it were otherwise, but I simply cannot ask those earning just £15,000 or £30,000 to go on paying the child benefit of those earning £50,000 or £100,000. The debts of the previous Labour Government, and the need to make sure that the better off in society also make a fair contribution, make this choice unavoidable. It also means that no further changes to child benefit are required. Child benefit will continue to be paid in the normal way to the great majority of the population from birth until a child leaves full-time education at the age of 18 or even 19. We can afford to do this because, according to the latest independent estimates from the Office for Budget Responsibility, removing child benefit from higher rate taxpayers saves Britain £2.5 billion a year.
We will also keep the universal benefits for pensioners, in recognition of the fact many have worked hard and saved all their lives. Free eye tests, free prescription charges, free bus passes, free TV licences for the over-75s and winter fuel payments will remain exactly as budgeted for by the previous Government, as promised. I am also turning the temporary increase in the cold weather payments introduced by the previous Government into a permanent increase. In my view, higher cold weather payments should be for life, not just for elections.
So, too, are the promises we make on the National Health Service. The NHS is an intrinsic part of the fabric of our country. It is the embodiment of a fair society. This coalition Government made a commitment to protect the NHS and increase health spending every year. Today, we honour that commitment in full. Total health spending will rise each year over and above inflation. This year we are spending £104 billion on healthcare, capital and current combined. By the end of four years we will be spending £114 billion. We can afford this in part because of the decisions on welfare that I have just announced and because we have made tough decisions in other parts of the government budget. But to govern is to choose, and we have chosen the NHS.
That does not mean that we are letting the health department off the need to drive forward real reform and savings from waste and inefficiency. Productivity in the health service fell steadily over the past 10 years, and that must not continue. By 2014, we are aiming to save up to £20 billion a year by demanding better value for money. But the money we save will be reinvested in our nation’s healthcare.
As the independent forecasts we published in the Budget show, we need to make these savings to deal with our ageing population and the rising costs of new medical treatments. But there are also new services we can offer. A new cancer drug fund will be provided, spending on health research will be protected and we will prioritise work on the treatment of dementia. We will expand access to psychological therapies for the young, elderly and those with mental illness. We will fund new hospital schemes, including the St Helier, the Royal Oldham and the West Cumberland.
For health spending, as for other spending announcements, there will be consequential allocations for Scotland, Wales and Northern Ireland. The Barnett formula will be applied in the usual way, which means that the increase in health spending and the relative protection of education spending will feed through to the devolved resource budgets. It means that all three nations will actually see cash rises in their budgets, albeit rises below the rate of inflation. For Scotland, the resource budget will rise to £25.4 billion in 2014-15. For Wales, it will rise to £13.5 billion, and for Northern Ireland, it will rise to £9.5 billion. In Scotland, we are proceeding with the implementation of the Calman reforms. In Wales, we will consider with the Assembly Government the proposals in the final Holtham report, consistent with the Calman work being taken forward in Scotland.
In Northern Ireland, the collapse of the Presbyterian Mutual Society has caused great hardship, and people have been left without their money for too long. I can confirm today that we will provide the Northern Ireland Executive with £25 million in cash and a £175 million loan to help those who have lost their life savings.
We will also help those across the United Kingdom who have lost money as a result of the collapse of Equitable Life. For 10 years, the Equitable Life policyholders have fought for justice. For 10 years, the previous Government dithered and delayed and denied them that justice. It is time to right the wrong done to many thousands of people who did the right thing, saved for their future and tried not to depend on the state, and then were the innocent victims of a terrible failure of regulation. So let me make it clear. I accept the findings of the Parliamentary Ombudsman in full. I have read the advice of Sir John Chadwick, and I thank him for it, but I do not agree with the level of compensation his analysis suggested. I agree with the ombudsman that the relative loss suffered is the difference between what policyholders actually received from their policies and what they would have received elsewhere. The Parliamentary Ombudsman herself recognised that a balance had to be struck between being fair to policyholders and fair to taxpayers, particularly when many budgets and benefits are being cut. But money we pay out has to come from general public expenditure. I have decided that the fair amount to pay out in total is in the region of £1.5 billion, two-thirds of which will be found in this spending review period. Those who had with-profits annuities are particularly hard hit, as they were retired and were unable to move their savings elsewhere. As a result, the Government will cover the cost of the total relative loss suffered by these deserving people. The scheme will start making payments next year.
These measures and our welfare reforms mean that it will always pay to work. Benefit savings will help us protect key public services like the NHS. There is help for those who have saved and lost everything. These are fair decisions, consistent with the second principle of this spending review.
The third and final principle centres on growth and promoting a private sector recovery. By restoring macroeconomic stability, we have brought certainty to businesses. By cutting business taxes, we are giving business the freedom to compete. Today’s review builds on these steps because, even when money is short, we should prioritise those areas of public spending which are most likely to support economic growth. That is what we are doing in the Department for Business, Innovation and Skills. Administration will be cut by £400 million. Twenty-four quangos will be cut. Lower-priority programmes like Train to Gain will be abolished. Adult learners and employers will have to contribute more to further education. This means that today I can announce the largest ever financial investment in adult apprenticeships, an increase of more than 50 per cent on the previous Government, helping 75,000 new apprentices a year by the end of the spending review period.
We will maintain and invest in the Post Office network and protect community post offices.
We will come forward with our detailed response to Lord Browne’s report on higher education funding and student finance, including our plans to provide financial support to encourage those from the poorest households to stay in education. Our universities are jewels in our economic crown and it is clear that if we want to keep our place near the top of the world league tables, then we need to reform our system of funding and reject—as, to be fair, many opposite do—the unworkable idea of a pure graduate tax. Clearly, better off graduates will have to pay more, and this will enable us to reduce considerably the contribution that general taxpayers have to make to the education of those who will probably end up earning much more than them.
Overall, average annual savings of 7.1 per cent will be found from the Department for Business budget, the minimum it was asked to find. Within those savings, however, the Secretary of State and I have decided to protect the science budget. Britain is a world leader in scientific research and that is vital to our future economic success. That is why I am proposing that we do not cut the cash going to the science budget. It will be protected at £4.6 billion a year. Building on the Wakeham review of science spending, we have found that within the science budget significant savings of £324 million can be found through efficiency. If these are implemented, then, with this relatively protected settlement, I am confident that our country’s science output can increase over the next four years.
We will also invest £220 million in the UK Centre for Medical Research and Innovation at St Pancras, fund the molecular biology lab in Cambridge, the animal health institute in Pirbright and the diamond synchrotron in Oxford.
Research and technological innovation will also help us with one of the greatest scientific challenges of our time—climate change—and it will support new jobs in low carbon industries. So today, even in these straitened times, we commit public capital funding of up to £1 billion to one of the world’s first commercial scale carbon capture and storage demonstration projects. We will also invest over £200 million in the development of offshore wind technology and manufacturing at port sites.
Yesterday protestors scaled the Treasury urging us to proceed with our idea for a Green Investment Bank. It is the first time anyone has protested in favour of a bank. We will go ahead. I have set aside in this spending review £1 billion of funding for the bank, but I hope much more will be raised from the private sector and the proceeds of future government asset sales. The aim of all these investments is for Britain to be a leader of the new green economy—creating jobs, saving energy costs, reducing carbon emissions.
We will also introduce incentives to help families reduce their bills. We will introduce a funded renewable heat incentive. Our green deal will encourage home energy efficiency at no upfront cost to home owners and allow us to phase out the warm front programme. Overall, the total resource settlement for the Department of Energy and Climate Change will fall by an average 5 per cent a year but there will be a large increase in capital spending, partly to meet unavoidable commitments on nuclear decommissioning.
Defra will deliver resource savings of an average 8 per cent a year, but we will fund a major improvement in our flood defences and coastal erosion management, and that will provide better protection for 145,000 homes.
Britain’s arts, heritage and sport all have enormous value in their own right, but our rich and varied cultural life is also one of our country’s greatest economic assets. The resource budget for the Department for Culture, Media and Sport will come down to £1.1 billion by 2014-15. Administrative costs are also being reduced by 41 per cent; 19 quangos will be abolished or reformed. All of this is being done so we can limit four-year reductions to 15 per cent in core programmes like our national museums, the frontline funding provided to our arts and Sport England’s whole sport plans. We will complete the new world-class building extensions for the Tate Gallery and British Museum in London. The Secretary of State will provide details of further projects shortly. I can also announce today that in order that our nation’s culture and heritage remains available to all, we will continue to fund free entry to museums and galleries. There is ongoing provision of the £9.3 billion of public funding for a safe and successful Olympic and Paralympic Games in London in 2012.
We have also approached the BBC to ensure that it, too, makes its contributions, as a publicly funded organisation, to savings during this spending review. I am pleased to confirm that we have struck a deal this week. The BBC will take from the Government the responsibility for funding the BBC World Service and BBC Monitoring, as well as part-funding S4C. This amounts to some £340 million of savings a year for the Exchequer by 2014-15. To ensure that the cost of these new obligations is not passed on to the licence-fee payer, the BBC has agreed a funding deal for the full duration of its charter review. The licence fee will be frozen for the next six years. This deal helps almost every family and is equivalent to a 16 per cent saving in the BBC budget over the period, similar to the savings in other major cultural institutions.
The BBC has also agreed to reduce its online spend and make no further encroachments into local media markets to protect local newspapers and independent local radio and TV. It will also contribute to the £530 million we will spend over the next four years to bring superfast broadband to rural parts of our country that the private sector will take longer to reach. Pilots will go ahead in the Highlands and Islands, North Yorkshire, Cumbria and Herefordshire. All of this will help encourage the growth of our creative industries as a key part of the new economy we are seeking to build.
After our defence requirements are met, the Department for Transport will receive the largest capital settlement. Over the next four years, we will invest over £30 billion in transport projects—more than was invested during the past four years. £14 billion of that will fund maintenance and investment in our railways. Direct bus subsidies will be reduced, but statutory concessionary fares will remain. The cap on regulated rail fares will rise to RPI plus 3 per cent for the three years from 2012, but that will help this country afford new rolling stock as well as improve passenger conditions.
The Secretary of State will set out how more of the transport money will be allocated next week, but I want to tell the House today about some projects that will go ahead, for let us remember that, even after these tough spending settlements, the country is still going to be spending over £700 billion a year. In Yorkshire and the Humber, capacity on the M62 will be expanded, £90 million will be spent to improve rail platforms across various towns and cities and we will also improve line speeds across the Pennines. In the north-east, £500 million will be spent refurbishing the Tyne and Wear metro and Tees Valley bus network. In the north-west, we will invest in rail electrification between Manchester, Liverpool, Preston and Blackpool, and we will provide funding for a new suspension bridge over the Mersey at Runcorn.
Rail and roads are devolved to the Scottish Executive, as are roads in Wales, but I can tell the House that major rail investments around Cardiff, Barry and Newport will go ahead. In the East Midlands, the M1 and A46 will be improved. In the West Midlands, we will extend the Midland Metro and completely redevelop Birmingham New Street station. In the south-west, we will fund improvements on the M5 and M4, and the new transport scheme for Weymouth. In the east of England, colleagues will be delighted to know that the A11 to Norwich will be upgraded.
Around London, we will widen the M25 between 10 different junctions and complete the improvement to the A3 at Hindhead, while in London, on top of the Olympics, a major investment in our capital city’s transport infrastructure will take place. Crossrail will go ahead and key tube lines will be upgraded for the 21st century. That is nothing like the complete list.
So, yes, we are saving money and putting the state on a more sustainable footing, but even then we will still be spending tens of billions of pounds on Britain’s future infrastructure. Next week we will also set out our national infrastructure plan so that private money is also put to work in building for this country the economic infrastructure that our businesses need. Our regional growth fund will also help us do that. As promised, £1 billion has been found for the fund over the next two years—money designed to lever in private investment in areas of our country where it has been too absent over the past decade. I can announce today that I am providing close to half a billion pounds extra in the third year for the regional growth fund.
Long-term investment in the capacity of our transport, our science and our green energy will all help move Britain from its decade-long dependence on one sector of the economy in one part of the country, and the ruin that that led to.
The most important ingredient that a 21st-century economy needs is well educated children who believe in themselves and aspire to a better life, whatever their background or disadvantages. In June, after the Budget, when the Chief Secretary to the Treasury and I turned our attention to how to allocate spending between government departments, we set ourselves a goal. We wanted to see if it was possible, even when spending was being cut, to find more resources for our schools and for the early-years education of our children. I can tell the House that we have succeeded. It has meant other departments taking bigger cuts, but I believe strongly that this is the right choice for our country’s future.
There will be a real increase in the money for schools, not just next year or the year after, as the previous Government once promised, but for each of the next four years. The schools budget will rise from £35 billion to £39 billion. Even as pupil numbers greatly increase, we will ensure that the cash funding per pupil does not fall. We will also sweep away all the different ways in which money is ring-fenced so that schools can decide how to spend their money as they see best.
We will also introduce a new £2.5 billion pupil premium that supports the education of disadvantaged children and will provide a real incentive for good schools to take pupils from poorer backgrounds. This pupil premium is at the heart of the coalition agreement and at the heart of our commitment to reform, fairness and economic growth.
Parents, teachers and community groups will be supported if they wish to establish free schools. We will fund an increase in places for 16 to 19 year-olds, and raise the participation age to 18 by the end of the Parliament. That enables us to replace education maintenance allowances with more targeted support.
We will also provide support for the early years of our children. The increased entitlement to 15 hours a week of free education for all three and four year-olds, introduced under this Government, will continue. Sure Start services will be protected in cash terms, and the programme will be refocused on its original purpose. We will help them further by introducing for the first time 15 free hours of early education and care for all disadvantaged two year-olds so that these children have a chance in life and are ready, like the rest of their class mates, for school.
Overall, the Department for Education will be required to find resource savings of only 1 per cent a year. Central administration will be cut by one-third and five quangos will go. The capital budget will have to bear its share of the reductions. As the House will know, we have had to phase out the hopelessly inefficient and overcommitted Building Schools for the Future programme, but £15.8 billion will be spent to maintain the school estate and rebuild and refurbish 600 schools.
I repeat: the resource money for schools, the money that goes to the classroom, on the broadest definition, including all the main grants, will go up in real terms every year. It is a real investment in the future of our children and in the future growth in our economy.
Mr Speaker, let me conclude. The decisions we have taken today bring sanity to our public finances and stability to our economy. They deal decisively with the largest budget deficit that this House of Commons has ever had to face outside of wartime. We have had to make choices about the things we support. Today I have announced real increases in the NHS budget and the resources for schools, as well as new investments in the economic infrastructure of our economy. I have also announced real reductions in waste, and reforms to welfare, and through this we will reshape public services to meet the challenges of our times. During the process of this spending review I have received many submissions, including one from the party opposite that the average cut for unprotected departments should be set at 20 per cent over the coming four years rather than the 25 per cent that I anticipated in my June Budget. I have examined this proposal carefully and I have consulted the published documents of my predecessor, the right honourable Member for Edinburgh south-west. Because of our tough but fair decisions to reform welfare and the savings we have made on debt interest, I am pleased to tell the House that it has been possible, and the average saving in departmental budgets will be lower than the previous Government implied in their March Budget. Instead of cuts of 20 per cent, there will be cuts of 19 per cent over four years, so I thank them for their input and look forward to their support.
This coalition Government faced the worst economic inheritance in modern history. The debts that we were left threatened every job and public service in the country, but we have put the national interest first, made the tough choices, protected health, schools and investment in growth, reformed welfare and cut waste, made sure that we are all in this together and taken our country back from the brink of bankruptcy. A stronger Britain starts here. I commend this Statement to the House”.
My Lords, that concludes the Statement.
Lord Sassoon
My Lords, for the Opposition to describe as a gamble all that we have done in a radical spending review seems incredible. Whey they were in government, they put more and more money on the table, doubled their bets and got credit until the music stopped. We were then left with the largest budget deficit in peacetime history. Now they have the gall to come here and say that what we are doing to put order back into the public finances is a gamble. It was absolutely unavoidable that we had to clear up the mess that we were left with. The overwhelming probability, in the commentaries that have continued to be published since the Budget, is that the plan will deliver what my right honourable friend the Chancellor said it would deliver.
The noble Lord talked about unemployment. As I have made clear, the independent estimates of the Office for Budget Responsibility forecast a reduction over four years of 490,000 employees in the public sector. However, the same OBR forecast done at the time of the Budget said that, in every year of the forecast period, total employment in the country would rise and unemployment would go down. To put that into perspective, it is worth remembering that in the last consolidation of national finances in the wake of the recession of the early 1990s, between 1992 and 1997, 690,000 jobs were cut from the government workforce, but they were more than absorbed by the increase of 1.7 million in private sector jobs. That has been done before under a Conservative Government and will be done again.
I begin to feel my age in this House when my old speeches are read back to me. It is very good and useful that the noble Lord reminds us of exactly what we said we would do and have done, which is to combine the necessary retrenchment with radical reform of how the public sector goes about its business. The combination of saving hard-working taxpayers their money with introducing radical reform is nowhere better demonstrated than in the welfare arena. The move over two Parliaments to a universal credit system is the most radical change in welfare for many decades. The noble Lord asked me who would pay for that change and all the other changes. The tables are all there at the back of the document explaining that the top quintile of the population will bear the largest share of the burden. There the noble Lord will find tables and analysis, which the previous Government did not care to show the nation in any spending review. However, I repeat that those who can afford to bear the greatest burden will pay for the change.
I am grateful to the noble Lord for his slightly back-handed compliments on science, although I will take them as well meant. He clearly appreciates that the effort we have made on investment in science and wider infrastructure is absolutely critical to the medium-term growth of the economy. That is why we have maintained the science base in cash terms. I do not know whether, out of the science expenditure, we can provide calculators to noble Lords so that they can make calculations from percentages to money terms and so on, but perhaps that is something that those looking at procedures can look at.
The question on social housing gives me an opportunity to draw attention to how we can deliver so much more if we apply decent disciplines to public expenditure. We will deliver 150,000 new units of social housing in the next four years at a cost of £4.4 billion. In the previous four years, the previous Government built 170,000 new homes at a cost of £11 billion—another indication of the sort of waste that is of the past.
Coming back to the big questions of growth, which are absolutely critical, I know that the OBR, international forecasters and forecasters from the City are all forecasting continued growth this year, sustained and rising for the next few years. In the second quarter of this year, we had growth of 1.2 per cent and we had new jobs created in the first quarter—
Lord Sassoon
Thanks to the stabilisation of the economy and the confidence that came with the new Government, we had second-quarter growth of 1.2 per cent and more than 300,000 new jobs.
Lastly, whose policies are these and where is the endorsement coming from? The noble Lord talked about the interest bill, so perhaps I may put it to him this way. The day before the election, the Government of the United Kingdom were paying 96 basis points more than the German Government for 10-year money. That was the increment that we had to pay over what Germany was paying. As of the moment that the Chancellor sat down this afternoon, those 96 basis points had reduced to 56. That represents a saving on a daily basis of millions of pounds that eats into the £120 million daily bill of interest that the previous Government left us with.
Lord Howe of Aberavon
My Lords, my question is: will it not remain essential for months and indeed years ahead to have a similar economic discipline to that being imposed so far in this comprehensive spending review? Also, given the many features with which the Chancellor has dealt today, is not this review absolutely inescapable? It is not merely a comprehensive spending review but a continuous spending review, to which the party opposite has offered no alternative policy but in which the policy of the Government has been clearly set out comprehensively and with courage.
Lord Sassoon
My Lords, I am grateful to my noble and learned friend Lord Howe of Aberavon for reminding us of the confidence that we can have in the tough decisions that this Government have taken. He was the architect of a similarly bold, tough and successful consolidation of the public finances in the early 1980s. This is indeed an important lesson for us. I agree with him that this must be driven through in the way in which he describes. He points out that the Opposition have provided no alternative policies, but it is worse than that: I understand that, when listening to my right honourable friend’s Statement in the Chamber, the shadow Chancellor sent out an e-mail in his name—I do not know how he did it—asking the public or whomever he was e-mailing for any ideas so that the Opposition could formulate an alternative policy. We look forward to hearing the outcome.
Lord Sewel
My Lords, I have a specific question for the Minister. Will he answer the question that my noble friend Lord Eatwell asked and turn the percentages into numbers, particularly the contribution to be made by the welfare budget? When my noble friend asked that question, I noticed that there was some scribbling going on in the Box and a note appeared shortly afterwards. Perhaps the Minister could share that note with us.
Lord Sassoon
My Lords, I could sit here for a long time, get out my calculator and work these things out. All the numbers are set out in the book; there still seemed to be copies in the Printed Paper Office when I came into the Chamber. There are probably more important things to be talking about now.
The Lord Bishop of Blackburn
My Lords, very many of us are eager to see the big society, with its vision of neighbourliness, prevail. Neighbourliness requires a particular care for children, who are a gift and not a commodity, and for poorer families. Given that many children and poorer families will be badly affected by the reduction in benefits, can the Minister tell us where this lost support may be found in the future for children and poorer families?
Lord Sassoon
My Lords, I am grateful to the right reverend Prelate for drawing our attention to the question of children, which I shall come back to. In respect of his question about poorer families, I draw the House’s attention to the new section at the back of the document, which for the first time lays out the effect on the deciles and quintiles of the population of all the measures that we have taken in the spending review and the Budget. It confirms the fairness of the overall construct—namely, that those who can afford to pay more will do so and that the poorest in society are protected.
The spending review will provide additional support to the most disadvantaged children at every stage, particularly in education, and will support social mobility. As I said when repeating the Statement, free early years education will be extended to 15 hours and care will be given to the most disadvantaged two year-olds. Critically, we will introduce a £2.5 billion pupil premium. There will be more generous maintenance provision and a scholarship fund of £150 million to underpin higher education funding for disadvantaged children. The entire spending review has taken fully into account the needs of children, particularly in education. The coalition Government have taken action to protect families. Overall, there is no measurable impact on child poverty from all the model changes for the next two years.
Lord Bilimoria
My Lords, the Minister has confirmed that public expenditure will go up in actual terms. Historically, 40 per cent was deemed to be the sensible level of public spending expressed as a percentage of GDP and a sensible balance between the private sector and the public sector. Is the Government’s aim to get back to that 40 per cent figure on a regular basis? In this environment, one would need to do that anyway regardless of the budget deficit. In that sense, I welcome the reductions in the welfare budget, which were badly overdue. Although spending on the National Health Service has been ring-fenced, the efficiency savings there are also very welcome and I think that the whole public would agree with them. However, in the coalition Government’s spirit of the transparency, the Chief Secretary revealed to us yesterday that 500,000 jobs would be lost in the public sector, a figure that the Minister has confirmed today. How confident are the Government of those jobs being replaced in the private sector? How confident are they that they have done enough to stimulate growth in the private sector, particularly against a backdrop of increased capital gains tax and higher rates of tax in every area? How difficult will it be?
Lord Sassoon
My Lords, I am grateful to the noble Lord, Lord Bilimoria, for drawing our attention to the important question of the balance between the public and the private sectors, which had got completely out of kilter under the previous Government. I repeat that this is not just an exercise in cutting back expenditure, necessary and unavoidable though that is; it also entails a critical rebalancing of the public and the private parts of the economy. What we have announced today will take the public sector part of the economy back towards that 40 per cent figure. In answer to the question about the absorption of the inevitable job losses in the public sector, I draw the noble Lord’s attention to the fact that, in the past quarter alone, the private sector generated 178,000 new jobs. That was in one quarter, so we should be confident, when the Office for Budget Responsibility believes that overall employment in the economy will rise year by year, that that indeed will be the case and that the inevitable reduction in public sector jobs will be more than absorbed.
Lord Newby
My Lords, a lot of attention has rightly been paid to the effect that the Statement will have on public sector employment. Will the Treasury urge all departments to examine a range of measures, such as part-time working and a complete freeze on bonuses and increments, all of which have already been widely adopted in the private sector and would have the effect of reducing to a minimum the number of public sector job losses?
Lord Sassoon
I thank my noble friend Lord Newby for drawing attention to the fact that departments will be encouraged to take the maximum opportunity of flexibility in pay and other conditions in the way that he described to mitigate the effects of the inevitable job reductions in the public sector. We will also be introducing a number of other measures to mitigate those job losses, which of course we very much regret. For example, we are introducing the regional growth fund and there is the protection that comes with the wider pension reforms. With assistance from Jobcentre Plus, there will be a further range of measures to mitigate the effects of the job losses in the public sector.
The Chancellor of the Duchy of Lancaster (Lord Strathclyde)
My Lords, we have agreed to extra time for this Statement, but perhaps we should, as a matter of courtesy, give priority to those noble Lords who sat through the reading of the Statement, rather than those wandering in five minutes before the end.
Lord Davies of Stamford
I take it that the Government themselves acknowledge that the recovery is fragile and that, by reducing planned public expenditure and increasing taxes so drastically—the Statement rather skated over the taxes aspect—thereby taking demand out of the economy, they are taking some risk, at the very least, with that fragile recovery. In that context, was it sensible to announce the reduction of public sector jobs by 490,000 before publishing the detailed departmental plans from which, presumably, that figure was derived? As a result, not merely the holders of the 490,000 jobs but the whole public sector—millions of people and their families—will be deeply anxious about their future and will be reducing, perhaps drastically, household expenditure. That will take more demand out of the economy quite unnecessarily in a context where we require the reverse of that.
Lord Sassoon
My Lords, I think that what the country has really been worried about is how the Government would deal with this horrendous deficit problem. What underpins the prospects for renewed, sustained growth is that we have reduced the deficit as a necessary precondition and that we have done so in such a way that the markets are convinced that we are serious about it. The latest official data show that GDP grew strongly, by 1.2 per cent, in the second quarter. It is the substantial accumulation and growth of government debt that risks that ongoing recovery and that is what we have dealt with.
Lord Higgins
My Lords, one thing is absolutely clear, which is that Mr Gordon Brown inherited the most favourable economic situation of any Chancellor since the war and left behind an enormous problem for the coalition to deal with. However, as anyone who has had experience of this sort of exercise will know, it is remarkable that the Treasury, officials and Ministers have managed to produce such a comprehensive review in such a short time, dealing with everything from Equitable Life to coastal erosion to measures overseas to deal with malaria and so on. What is being overlooked is that the Statement mentions not only cuts but a number of increases in public expenditure. It is really, apart from dealing with the deficit, a reappraisal of the priorities that we ought to have. From that point of view, it does exactly the right thing. Indeed, there is no cut. Public expenditure, as I understand it, is to go up from £651 billion to £693 billion. That is scarcely a cut by any standard. That is the kind of number that the noble Lord on the Front Bench was asking for.
May I put this question to my noble friend? It is difficult to ascertain from the Statement what the effect will be on aggregate demand. Will it reduce aggregate demand in the economy or will it increase it? If it is going to increase it, clearly the Bank of England will need to take that into account. If it is going to reduce it, it is important that action should be taken to offset the cuts that are being made by quantitative easing or whatever may seem appropriate. Could the noble Lord tell us: is this something that increases or decreases aggregate demand?
Lord Sassoon
My Lords, I am grateful to my noble friend Lord Higgins. I will relay to my right honourable friend the Chancellor and to all the very hard-working officials in the Treasury his generous words, which confirm that this is indeed a radical, fair and comprehensive spending review. In answer to his question about demand, clearly, with the independent projections from the Office for Budget Responsibility and all the other commentators of consistent growth going forward, demand will indeed increase. The question of what role the aggregate increase in the money supply plays is one on which, as we know, the Governor of the Bank of England continues to be very much focused as he leads on the conduct of monetary policy.
Baroness Hollis of Heigham
My Lords, the devil is in the detail, as has been said before. The Statement says that pension savings credit will be frozen for four years, saving in total—on page 11 of the Red Book—£1 billion from pensioners. The state pension will rise with earnings, so that pensioners not in need of pension credit will be better off, which is good, but poorer pensioners dependent on pension savings credit will find that the income and the increase in state pension will be offset by the freeze in the savings guarantee and they will be worse off. Better-off pensioners will be better off, while poorer pensioners will be worse off. Is that fair?
Lord Sassoon
I understand that the amount affected by the freezing of the credit approximates to £1.50. I think that it is important to consider this in the context of everything else that we have done for pensioners and elderly people in this spending review—
Lord Sassoon
We need to look at it in the overall context of what the Government have done for elderly people, because this is important. The critical decision is that the Government, as announced before, will meet their commitment to uprate the basic state pension by whichever is the highest—earnings, prices or 2.5 per cent—from April 2011, as well as preserving other key pensioner benefits, which people have questioned, including the winter fuel payments, the free TV licences, the bus travel, the eye tests and the prescriptions. I am grateful for the question on the detail but I think that it gives me the opportunity to emphasise the overall deal for pensioners, which we think is important in this spending review.
Lord Forsyth of Drumlean
I congratulate my noble friend and the Chancellor on the excellent Statement, which shows great courage as well as great care in taking forward the mess that we inherited from the previous Government. The previous occupier of his office—the noble Lord, Lord Myners—was almost certainly correct when he assured this House that we would end up making a profit and getting our money back from the bank bailouts. Given that, should we not make it absolutely clear to the country that we have had to take these measures, which Members opposite are complaining about, because for years Mr Gordon Brown as Chancellor and Prime Minister made this country live beyond its means and was borrowing at the height of the boom; and that, despite these measures, our debt as a nation will increase? Could my noble friend tell me how much our national debt will have increased by, despite these measures, by the end of this Parliament? Given that number, how on earth can we take seriously Members opposite who are criticising what is a responsible programme from my noble friends and from our coalition partners?
Lord Sassoon
My Lords, I think I would probably faint at this moment if I even mentioned the debt number. The critical thing is that the debt will peak and we will bring it down, as we said we would, within this spending review. I am grateful to my noble friend for stressing that it has indeed been a courageous and careful exercise that is enabling us to make sure that the debt tops out and starts to come down within the spending review period. He reminds us that a twin failure of the previous Government caused the mess that we are in: first, as my noble friend points out, the great increase in public expenditure that we could not afford; and, secondly, the complete failure to regulate our banking system properly, which caused the whole house of cards to come down. I can give my noble friend the numbers on the public sector net debt, which will go up from 53.5 per cent of GDP in 2009-10 to a staggering 70.3 per cent in 2013-14 before we bring it down to 69.4 and 67.4 per cent by 2015-16 thanks to the measures that this Government have announced today.
Lord Stoddart of Swindon
Yes, he is; he is an independent Labour Cross-Bencher. The Government have ring-fenced health and overseas aid. Is there not another item that has been ring-fenced? It is our net contribution to the European Union, which is £6.7 billion this year. Would the Minister agree that if that were reduced by 20 per cent, it would enable 55,000 more nurses, policemen or teachers to be employed? Should our country not come first rather than subsidising other countries?
Lord Sassoon
I thank the noble Lord, Lord Stoddart, for a question that reminds us that we are working extremely hard as a nation to live within our means. It is equally important that within Europe the European Union also lives within its means. The Government will be doing everything they can to make sure that proper financial discipline is applied to the European budget this year and for the next spending period. I do not know, but I have a sense—I might like to ask on the subject—that the Labour Members of the European Parliament were today voting to allow the European Union to have its own tax-raising powers to fund a separate pot of money. The present Government want to see proper discipline applied to European Union expenditure.
Lord Touhig
My Lords, the noble Lord said that fairness is important to his Budget. He went on to say that a civilised society protected the most vulnerable. Yet in 21st-century Britain 30 per cent of disabled people live below the poverty line. What specific measures are proposed in this spending review to reverse that and to give some fairness and justice to the most vulnerable in our society?
Lord Sassoon
My Lords, as I have reiterated, at the absolute centre of this spending review is the universal credit, which, over the next two Parliaments as we bring it in, will go to the heart of the challenge the noble Lord poses. As to the provision for disabled people, people with long-term conditions account for around 70 per cent of the NHS budget, which is the area of spending being protected above all others.
People with disabilities and social care needs will also benefit from the additional resources given to social care within the health and local government budgets. People with care needs are also being protected from the extension of the single-room rate in the housing benefits. Finally, of the measures to which I should draw the attention of the House, families where someone claims a disability living allowance will be exempt from the new cap on total household welfare payments. Care for disabled people is absolutely at the heart of this review.
Baroness Noakes
My Lords, my noble friend was accused by the noble Lord, Lord Eatwell, of ideology in pursuing the excellent programme that he set out in the Statement. Will he confirm that it is necessity and not ideology that has driven today? Will he further confirm that we inherited the largest deficit in the G20 and an economy where public sector productivity had gone backwards for most of the previous 13 years? We found budgets, such as defence, which were overcommitted to an extent more than the annual budget. Will my noble friend confirm that we are committed to restoring efficiency and effectiveness to public spending, which are principles that eluded the Benches opposite for the previous 13 years?
Lord Sassoon
I am happy to confirm the very succinct summary put forward by my noble friend Lady Noakes of what is at the heart of this spending review. Effectiveness and fairness are what we are aiming at.
Lord Kilclooney
My Lords, it is only right to say thank you. Northern Ireland, historically and geographically, has been very closely associated with Scotland. As a result, the Presbyterian Church in Northern Ireland is the largest Protestant communion in that province. The problems of the Presbyterian Mutual Society have been a running sore for several years. Will the Minister take note that there will be widespread appreciation across Northern Ireland that this problem has finally been addressed in the Statement?
Lord Sassoon
I am very grateful to the noble Lord for drawing attention to the fact that the Presbyterian Mutual Society has been a long-running issue which was not gripped by the previous Government. Whether it is that or properly compensating the policyholders of Equitable Life, we have got on and made what we believe to be fair decisions which were dodged by the previous Government.
Lord Winston
My Lords, would the Minister be kind enough to answer my noble friend Lord Eatwell’s question about universities? Does he agree that the Browne review can in no way cover the costs of teaching, which we need, in the universities which contribute so much to our economy beyond the STEM subjects and so much to our civilised society?
Lord Sassoon
I am very happy to endorse absolutely that sentiment of how critical it is to support the finest universities in the world, which stand up with the universities of the US at the top of all the league tables. While we preserve critical elements of science spending, there needs to be a fundamental rebalancing—that is exactly what the noble Lord, Lord Browne, proposed in his report—between what the state can afford to pay and the contributions paid by those who benefited from a university education. That is what we are proposing.