Spending Review 2020

Lord Agnew of Oulton Excerpts

Thursday 3rd December 2020 Grand Committee

Moved by

[Lord Agnew of Oulton]

That the Grand Committee takes note of the spending review 2020.

[The Minister of State, Cabinet Office and the Treasury (Lord Agnew of Oulton) (Con)]

My Lords, a spending review is a significant moment in the life cycle of any Government. It is an opportunity to deliver on the priorities of the British people, and, despite the most challenging of backdrops, that is what this spending review achieves.

Given the circumstances, this year’s review sets out departmental resource spending and capital spending for the next financial year—2021-22—and devolved Administrations’ block grants for the same period. It includes multi-year funding certainty for some key existing projects and priority commitments, including health, schools and defence. Its immediate aim has been to protect people’s lives and livelihoods, but it also delivers stronger public services—including new hospitals, better schools and safer streets—and a once-in-a-generation investment in infrastructure.

In their response to the pandemic, the Government have sought to prioritise jobs, businesses and public services. This support has come in many forms, including the furlough scheme, support for the self-employed, grants, loans and tax cuts. There has also been additional funding for councils, schools, the NHS, the charity sector and the cultural sector. This year, the Government are providing £280 billion to help get the country through the coronavirus.

Next year, we will be allocating an additional £18 billion to fund programmes on testing, vaccines and personal protective equipment. We will also be providing, among other things, £3 billion to support NHS recovery, more than £2 billion in subsidies to the rail network to keep the country moving and more than £3 billion to local councils. Much of our response to the pandemic has been nationwide, but we are also providing £2.6 billion to support the devolved Administrations in Scotland, Wales and Northern Ireland. In total, public services funding to tackle coronavirus next year will be £55 billion.

Your Lordships will appreciate that the economic picture is very challenging. The Office for Budget Responsibility forecasts that the economy will contract by 11.3% this year, the largest drop in at least 300 years. The OBR expects that, as restrictions are lifted, the economy will start to recover, growing by 5.5% next year, 6.6% in 2022, then 2.3%, 1.7% and 1.8% in the years following. Economic output, however, is not expected to return to pre-crisis levels until the fourth quarter of 2022. Long-term scarring means that, in 2025, the economy will be roughly 3% smaller than expected in this year’s March Budget. The dual impact of the virus and our necessary response has resulted in a significant increase in our borrowing and our debt. The UK is forecast to borrow the equivalent of 19% of GDP this year, a total of £394 billion. Borrowing is projected to drop to £164 billion next year, £105 billion in 2022-23 and then to remain at around £100 billion, approximately 4% of GDP, for the rest of the forecast.

Noble Lords may well consider this a high price to pay, but the price had we not taken the steps we have would have been much higher. The Government understand that this situation is unsustainable over the medium term and that there is a responsibility to return to a more sustainable fiscal position once the economy recovers. Importantly, we have been able to act in this way because the country entered the crisis with strong public finances. Our actions have proved to be right. Indeed, the OBR, the Bank of England and the International Monetary Fund have all said that our economic response has protected jobs, supported incomes and helped businesses stay afloat.

We have three priorities, the first being to protect health and jobs. I have already noted that the Government’s immediate priority in the spending review is protecting lives and livelihoods. We are doing more to build on the existing plan for jobs, launched in the summer. Nearly £3 billion in additional funding will be made available to deliver a new, three-year Restart programme to help more than 1 million people who have been unemployed for more than a year find new work.

Protecting jobs is also about taking tough, prudent decisions. The reality is that coronavirus has deepened the disparity between public and private sector wages. In the six months to September, private sector wages fell by nearly 1% compared to last year. Over the same period, public sector wages rose by almost 4%. Given that context, the Government cannot justify a significant across-the-board pay increase for all public sector workers. Instead, to protect public sector jobs while ensuring fairness between the public and private sectors, the Government are pausing pay rises in the public sector next year—with two important exceptions. Taking account of the pay review body’s advice, we will provide a pay rise to more than 1 million nurses, doctors and others working in the NHS. Meanwhile, the 2.1 million public sector workers who earn below the median wage of £24,000 will be guaranteed a pay rise of at least £250. The Government are also accepting in full the recommendations of the Low Pay Commission to increase the national living wage by 2.2% to £8.91 an hour, to extend this rate to those aged 23 and over and to increase national minimum wage rates. Taken together, these minimum wage increases should benefit around 2 million people.

I hope noble Lords will agree that the Government have been right to protect lives and livelihoods now, but it is also a spending review for the future. Next year, total departmental spending will be £540 billion. Over this year and next, day-to-day departmental spending will rise, in real terms, by 3.8%—the fastest growth rate in 15 years. In cash terms, day-to-day departmental budgets will increase next year by £14.8 billion. Crucially, those increases will apply across the entire country. In fact, the spending review increases Scottish Government funding by £2.4 billion, Welsh Government funding by £1.3 billion, and funding to the Northern Ireland Executive by £900 million.

Our second priority is stronger public services. This spending review recognises the priorities of the British people. In the case of the National Health Service, it honours the historic, multiyear commitment the Government have made. Next year, the core health budget will grow by £6.6 billion, allowing the delivery of 50,000 more nurses and 50 million more GP appointments. We are also increasing capital investment in health by £2.3 billion for new technologies and new hospitals. Indeed, the Government are funding the biggest hospital building programme in a generation—building 40 new hospitals and upgrading 70 more.

The Government are also investing in social care. The spending review allows local authorities to increase their core spending power by 4.5% and grants them extra flexibility for council tax and the adult social care precept which, together with £300 million of new grant funding, gives them access to an extra £1 billion to fund social care. This is all on top of the extra £1 billion social care grant provided this year, which will be maintained into next year.

The spending review also prioritises a better education for the country’s children. The Government are increasing the schools budget next year by £2.2 billion, in line with our commitment of an extra £7.1 billion by 2022-23. Every pupil will see a year-on-year funding increase of at least 2%. We are also funding the Prime Minister’s commitment to rebuild 500 schools over the next decade. Education does not end when a child walks through his or her school gate for the final time. This is why the spending review provides £291 million to pay for more young people to go into further education, £1.5 billion to rebuild colleges, and £375 million to deliver the Prime Minister’s Lifetime Skills Guarantee. We are taking steps to extend traineeships, sector-based work academies, and the national careers service, as well as improving the way the apprenticeship system works for businesses.

The people of this country also expect their Government to keep our streets safe. Next year, funding for the criminal justice system will increase by over £1 billion. We are providing more than £400 million to recruit 6,000 new police officers—well on track to recruit 20,000—and £4 billion over four years to provide 18,000 new prison places.

I have said that this Government are willing to take tough, prudent decisions. During what is a fiscal emergency, when we are seeing the highest peacetime levels of borrowing on record, it is difficult to justify spending 0.7% of our national income on overseas aid. The Government will continue to protect the world’s poorest: spending the equivalent of 0.5% of our national income on overseas aid in 2021, allocating £10 billion in this spending review, which will mean that we remain the second-highest aid donor in the G7. It is our intention to return to 0.7% when the fiscal situation allows.

There are many ways that the UK plays a constructive role in the world. This spending review includes more than £24 billion investment in defence over the next four years, the biggest sustained increase in 30 years, allowing us to provide security not just for our country but around the world. This settlement reaffirms the UK’s position as the largest European defence spender in NATO, and the second largest in the alliance. It includes an ambitious package of reform to ensure that we remain ready to meet ever-changing needs.

The third priority of the spending review is investment in infrastructure. Capital spending next year will total £100 billion—£27 billion more in real terms than last year. Indeed, our plans deliver the highest sustained level of public investment in more than 40 years. The Government are introducing a £7.1 billion National Home Building Fund, on top of the £12.2 billion Affordable Homes Programme. We are delivering faster broadband for over 5 million premises across the UK, as well as better mobile connectivity with 4G coverage across 95% of the country by 2025. We are undertaking the biggest ever investment in new roads, upgraded railways, new cycle lanes and over 800 zero-emission buses. We are also delivering the Prime Minister’s 10-point plan for climate change, and making the UK a scientific superpower with almost £15 billion of funding for research and development.

Finally, the Government have announced a new levelling-up fund worth £4 billion. This will allow local areas to directly bid for project funding for what the Chancellor has called

“the infrastructure of everyday life”—[Official Report, Commons, 1/12/20; col. 151.]

such as libraries, museums and galleries, and upgraded railway stations. All of that capital investment will help to spread opportunity, create jobs and drive economic growth in every part of the country.

This spending review has taken place at a time of great challenge, but by focusing on three key priorities—protecting health and jobs, stronger public services and investment in infrastructure—it delivers what the British people expect of this Government. The job now is to implement our plans. That is what I and my colleagues in the Government are determined to do in the months and years ahead. I beg to move.

--- Later in debate ---

[Lord Agnew of Oulton (Con)]

My Lords, I have listened with great interest to the many learned contributions, the extent of which are testament both to the expertise of noble Lords and to the importance of this spending review.

Crucially, a spending review is not an abstract policy exercise; it is about making decisions with real-world, long-lasting impacts. The immediate aim has been to protect people’s lives and livelihoods, but it also delivers stronger public services, including hospitals, better schools and safer streets. I will try to address as many of the points raised as possible but, as noble Lords, will know, there have been a great number of contributions. I will try to get to all of them in the time available.

The noble Lord, Lord Razzall, asked about the ability to carry on borrowing if interest rates remain low. The OBR has set a range of scenarios for the outlook of the public finances. In all scenarios, borrowing costs continue to be low, driven by interest rates that are low by historical standards, making the cost of servicing the current debt, and the projected increase in debt, affordable. Over time, and once the economic recovery is secure, the Government will take the necessary steps to ensure that borrowing and debt are on a sustainable path. The current high levels of uncertainty mean that now is not the right time to set out a detailed, medium-term, fiscal strategy. It is still too early to judge the full impacts of the Covid-19 epidemic and the unprecedented fiscal support that has caused the necessary increase in borrowing. However, as I have said, borrowing costs remain low. The OBR forecasts that spending on debt interest will fall further this year to just 1.1% of GDP, compared to 2.4% in 2010.

The noble Lord, Lord Horam, asked about modern monetary theory. The Government have provided one of the largest and most comprehensive packages of measures in the world, with targeted support for public services, workers and businesses. Since March, the Government have announced a total of over £280 billion of support measures.

The noble Baroness, Lady Warsi, asked about the impact of Brexit. The OBR’s central forecast assumes that the UK’s future trading relationship with the EU follows a smooth transition to a typical free trade agreement at the end of the year. In that forecast, the unemployment rate peaks at 7.5% in the second quarter of next year then starts to decline.

The noble Lord, Lord Kirkhope, asked about better reporting and monitoring of spending. I strongly support the noble Lord in this. There is a significant change in the way that the Treasury will monitor spending in future. It has created a public value framework, which improves governance and focuses on high-quality evaluation. We have gathered the outcomes for every department, alongside departmental settlements and metrics, through which these will be monitored, and this will be published shortly.

The noble Baroness, Lady Bennett, asked whether austerity has returned. We do not, of course, agree with that statement, but it is in the context of the huge amounts of borrowing that we have had to undertake this year—£394 billion. The spending review announced another £38 billion of support for public services in 2021, bringing the total made available this year to over £113 billion. The spending review provides £100 billion of capital investment next year, a £27 billion increase in real terms, compared to last year.

The noble Lord, Lord Bilimoria, asked about certainty on measures until March next year and a route out of tiering. To support businesses to retain their employees and protect the UK economy, the Chancellor has extended the coronavirus job retention scheme, which has helped to pay the wages of some 9.5 million jobs across the country. This has protected jobs that might otherwise have been lost. The self-employment income support scheme has had some 2.7 million claims and will continue until April 2021. Our responses are designed to complement each other, and the measures adopted with the Covid-19 winter plan. Our package will remain the same as we move out of national lockdown into a tiering system.

The noble Baroness, Lady Uddin, asked about equality impacts. The policy decisions taken by Ministers are subject to parliamentary scrutiny. There is no legal requirement to publish equality impact assessments in respect of the public sector equality duty. The legal requirement is to consider a policy’s impacts and to have due examples between the different groups. The equalities annex provides illustrative examples of what the spending review is doing for those sharing protected characteristics. The list focuses on the characteristics most likely to be disproportionately affected by decisions taken: age, disability, race and sex.

I come to the three priority areas that I set out in my opening comments, starting with health and jobs. The noble Lords, Lord Hain and Lord Tunnicliffe, the noble Baroness, Lady Kramer, and others were concerned about the public sector pay freeze. We have approached this in a very careful way. We will protect those public sector workers who most need their pay to be protected: that is 2.1 million with pay rises—those earning under £24,000—which is actually 38% of the public sector workforce. For everyone else, there will be a temporary pause on pay rises, but performance pay, overtime, pay progression, pay rises and promotion will continue. This is estimated to be worth more than 1% of pay.

It is worth restating that the pension structures for public sector pay are attractive. No one is suggesting that they are not deserved by public sector workers, but it is extremely important that they are considered when comparing the overall remuneration package between private sector pay and public sector pay. Public sector employer contributions average more than 20%. For the teachers’ pension scheme, those contributions went up from something like 16% to 23% only last September. The noble Lord, Lord Davies of Brixton, asked about pensions; I hope that I have dealt with that.

The noble Baroness, Lady Humphreys, was concerned about Welsh farmers and funding. We are delivering on our commitment to maintain the funding available to farmers and land managers in every year of this Parliament. This totals £1.1 billion in support for farmers and land managers across the UK, with £240 million going to Welsh farmers in 2021-22. This funding ensures that farmers and land managers in Wales will receive the same total funding in 2021-22 that they received in 2019. This funding is on top of the remaining EU finding that farmers and land managers in Wales will receive for agri-environmental and rural development projects.

The noble Baroness, Lady Goudie, asked about reporting on gender pay. The public sector will accord to any legal duties set out in legislation as an employer.

Several noble Lords, including the noble Baronesses, Lady Bowles and Lady Kramer, and the right reverend Prelate the Bishop of Portsmouth asked about welfare, low incomes and universal credit. The Government have supported those on low incomes through a wide-ranging package of support, of which the temporary increase of £20 a week and the working tax credit basic element forms one part. It would be wrong to make a decision now in place of extending the temporary uplift, which is place until April 2021. As we have done throughout this crisis, we will continue to assess how best to support the economy, which is why we will look at the economic and health context in the new year.

To illustrate, extending the £20 increase by a further 12 months would cost more than £6 billion a year—the equivalent of adding a penny on income tax. As it stands, spending on working-age welfare this year is more than £100 billion and already set to be at its highest level on record, both in real terms and as a percentage of national income. Additional welfare measures that the Government have introduced include the suspension of the universal credit minimum income floor to support self-employed people on low incomes. The local housing allowance rate for universal credit for the 30th percentile means that more than 1.5 million households have benefited from just over £600 per year on average in additional support. We are keeping the LHA at the same cash level in 2021-22 to ensure that the claimants continue to benefit from this increase.

The noble Lord, Lord Hain, asked about cuts to public investment for plans. The Government have expanded statutory sick pay so that employees can claim if they are asked to self-isolate. We have also changed the rules so that SSP is payable from day one rather than day four. SSP is a statutory minimum, and many employers pay more than that in occupational sick pay. More than half of employees receive more than SSP when they are off sick, so many people will not see any fall in income during their isolation period. People who are instructed to self-isolate by NHS Test and Trace and are on a low income, unable to work from home and who will lose income as a result, may be entitled to a payment of £500 from their local authority.

The noble Lord, Lord Goddard, is concerned about public sector pay. We absolutely recognise the contribution that public sector workers make and, indeed, have made this year. The temporary pausing of pay awards for the majority of the sector allows us to protect public sector jobs and investment in services, as coronavirus continues to impact the public finances. The vast majority of care workers are employed by private sector providers, which ultimately set their pay, independent of central government. Local authorities work with care providers to determine a fair rate of pay based on local market conditions. We are providing councils with access to an additional £1 billion for social care.

The noble Lord, Lord Bilimoria, and the noble Baroness, Lady Warsi, asked about our plan for jobs and support for those who have lost their jobs. The Government are taking unprecedented steps to support unemployed people; we are building on the plan for jobs, providing £3.6 billion additional funding in 2021-22 for DWP to deliver employment support to those who need it most, from helping the recently unemployed to swiftly find new work to offering greater support for people who will find that journey harder.

On support for the recently unemployed, we are investing £1.4 billion to build on the plan for jobs commitment, increase capacity in Jobcentre Plus and double the number of work coaches, who are the first point of contact when someone loses their job, providing valuable personalised support to all unemployed claimants. We are also investing around £200 million in other job-search support measures, including the job-finding support offer, which we will launch in January to provide support to those unemployed for less than three months.

The Government also recognise that young people are particularly at risk, and the £2 billion Kickstart scheme will provide young people at risk of long-term unemployment with fully subsidised jobs to give them experience and skills. All young people on universal credit will also benefit from an expanded youth offer, which provides extra support as they search for work. We have also announced a new three-year, £2.9 billion Restart programme, which will provide intensive and tailored support to more than 1 million unemployed universal credit claimants across England and Wales and help them to find work, with approximately £400 million of investment in 2021-22. A programme delivered by expert providers will offer up to 12 months of intensive employment support to universal credit claimants who have been unemployed for over a year, with some additional places available to claimants whose work coaches believe that they could benefit from this extra support.

The noble Lord, Lord Bilimoria, asked about the strategy for mass testing. It is absolutely a top priority of the Government, which is why we are investing some £15 billion in NHS Test and Trace next year, so we can maintain the testing capacity that we have built up this year, keep the transmission of the disease down and keep the economy open, which is absolutely fundamental. This is in addition to the £22 billion for NHS Test and Trace already provided this year. As the Prime Minister confirmed on 23 November, the Government are rapidly rolling out weekly or more frequent testing to all NHS staff and care workers, and in universities, to enable students to return safely home for Christmas, and in high-risk work places, such as prisons and food factories.

The noble Lord, Lord Sheikh, asked about the rise in mental health issues, which many have experienced in the past nine months. We have provided the NHS with a further £3 billion next year, which includes up to £500 million that can be used to boost access to NHS mental health services. We will be finalising arrangements in the coming weeks. This funding will address waiting times for mental health services, following the drop in referrals in the first wave. It will give more people the mental health support that they need.

The noble Baroness, Lady Kramer, expressed concern about public sector workers. The majority of public sector workers will see a pay increase next year. The Government have announced unprecedented support for the public sector: for example, the Treasury has provided £31.9 billion to support health services, much of it for wages. The public sector award was already 7% ahead of the private sector before the coronavirus. If we carried on with blanket, across-the-board pay rises, the existing gap between the public sector and the private sector award would widen significantly. That is why we believe it is right to temporarily pause while the economy recovers.

On stronger public services, the noble Lord, Lord Reid, is concerned, as many noble Lords are, about aid cuts and the armed services. I will deal with those issues together, because there is a lot of overlap. Many noble Lords expressed concern about the cuts to the aid budget. They included the noble Baronesses, Lady Ritchie, Lady Uddin, Lady Sheehan and Lady Kramer, my noble friend Lady Warsi, the noble Lords, Lord Sheikh, Lord Oates and Lord Reid, and my noble friend Lord Bourne, to name but a few. It is important to place on record some of the milestones of our commitment to overseas aid. In 2019, the US spent only 0.16% of GNI on ODA, Japan spent only 0.29% and France spent only 0.44%. All things remaining equal, the UK will be the second most generous ODA spending country in the G7 as a percentage of our national income in 2021. We will still be ahead of France, Japan, Canada, Italy and the US.

We are one of the few countries to meet the NATO 2% target as a percentage of income in the UK. We are also the world’s largest donor to the COVAX Advanced Market Commitment, the global initiative supporting the access of developing countries to Covid-19 vaccines. The UK is also the top donor to the World Bank’s lending arm for the poorest countries. The Government have committed £1.65 billion in funding over five years for Gavi, the vaccine alliance. The Prime Minister committed in 2019 to double the UK’s public international climate finance support to at least £11.6 billion between 2021 and 2025.

Various noble Lord asked about our increases in spending on defence. There is a tremendous overlap here. For example, we are currently the fifth-largest contributor to the UN peacekeeping budget. The UK has recently deployed six UN missions with nearly 600 troops and staff officers to South Sudan, the Democratic Republic of Congo, Somalia, Mali, Libya and Cyprus, and we continue to provide training for around 11,000 peacekeepers annually on the African continent. I feel that this reaffirms our commitment to overseas aid and that the big increase in defence spending will support that.

My noble friend Lady Buscombe asked for more rigour in defence procurement. As I mentioned in answer to an earlier question on the issue of value in the spending of public money, this is receiving a great deal more attention. We are investing in a long-term programme of modernisation and there will be increased accountability in how the money is spent.

Various noble Lords asked about the long-term association with Horizon. The Government are committed to enhancing the UK’s position at the forefront of global science collaboration. Negotiations over our future relationship with the EU, including Horizon, are ongoing, but of course leaving the transition period will provide options for other solutions if that does not come about.

The noble Earl, Lord Clancarty, asked about Erasmus. The Government have allocated funding to prepare for a UK-wide domestic alternative to fund global education mobilities, in the event of the UK no longer participating in Erasmus. The Government will outline further detains in due course.

The noble Lord, Lord Shipley, asked about council tax. The Government are providing local authorities with additional funding to tackle Covid-related pressures, and giving local authorities the flexibility to raise council tax. Local authorities need the ability to raise additional revenue to continue to deliver local services. However, they will need to consider the burden of tax on their ratepayers. To give local authorities additional flexibility in making these decisions, we will allow them to defer up to 3% of the ASC precept for 2022-23.

It has been flagged up to me that I am running out of time. I apologise to noble Lords whom I have not been able to answer in detail in this debate. I will follow up with written answers to those questions that I have not been able to address.

Motion agreed.