Comprehensive Spending Review

Lord Davies of Stamford Excerpts

Monday 1st November 2010 Lords Chamber

[Lord Davies of Stamford]

My Lords, that was a very eloquent and well-informed speech and I hope that the Government have taken careful note of it. I am delighted to follow such a substantial and distinguished contribution.

I think all of us were delighted and greatly relieved at the good performance of the economy in the third quarter and the fact that the growth rate was at 0.8 per cent. But it is quite ludicrous—actually embarrassingly ludicrous—for the Chancellor to go around almost in an orgy of self-congratulation about that. Anyone who knows anything about how an economy works and the time lags in an economy knows perfectly well that there is nothing that could have happened in fiscal or monetary policy since the middle of May which would have affected the output of the economy three or four months later. There was no change in fiscal policy over that period. Quite clearly, if tributes are to be given, they are to be given to the former Prime Minister and to the former Chancellor for the course that they had correctly set during the difficult international conjuncture of the past two or three years.

Undoubtedly the Government are now embarked on economic policies which are very risky. It is not just I who says that—there have been eloquent supporters of the Government today in this Chamber, the noble Lords, Lord Lamont and Lord Tugendhat, who have acknowledged the same thing. You cannot take £133 billion out of the economy over five years—taking the combination of expenditure reductions and increases in taxation—with impunity. That is roughly on average 2 per cent of GDP per annum. That is an enormous reduction in aggregate demand and begs a tremendous question as to where that aggregate demand is going to come from, particularly in present international circumstances. There are obviously great risks. No sensible person denies that and sensible Tories today have acknowledged that.

I am worried about two aspects. I may be right or I may be wrong but my inclination is that Government are cutting expenditure too far too fast. I may be completely wrong, but there are two slightly more objective factors here, which concern me deeply. The Government do not seem to be helping themselves very much. I have several examples in mind. It seems to me extraordinarily ill-chosen, in the situation in which we find ourselves now, to increase the VAT rate from the beginning of January. Every fool knows that January and February are the low point seasonally in the economy when consumption is at its lowest. Increasing a consumption tax like VAT at that point is likely to exacerbate the volatility of the economy rather than stabilise it. Why 1 January or perhaps 4 January? Why then? Any sensible person would have done it perhaps in April, or in two stages. It is extraordinary.

I put another example to the noble Lord, Lord Sassoon, at Questions the other day. Why allow the publication of a forecast that there are going to be 490,000 job losses in the public sector over five years—a calculation that must be based on knowledge of which particular departments and functions are going to be affected—without saying what those departments and functions are. As a result it is not just 490,000 people and their families who are going to be desperately worried and cutting back on their consumption expenditure and increasing their savings ratio, but it is going to be millions on millions of people in the public sector—other than those who have been explicitly protected— any of whom could feel that they are going to be targeted. It is not a sensible thing to do when you are trying to replace with enhanced consumption spending your explicit and deliberate reduction in public spending. I am worried about that.

I am also worried that the Government do not seem to have much of a fallback position. If you ask them, the reply is “monetary policy”. There are two problems there. One is because of the time lags. If the Government find that they have cut expenditure too far and too fast and killed the recovery, it will be too late to use monetary policy then because monetary policy does not feed through into output for a year or two. Again they will have exacerbated the volatility of the economy and have got the thing badly wrong.

The next thing that concerns me in this context is that monetary policy at present levels of interest rates means of course quantitative easing. I am concerned that the Government are getting rather addicted to quantitative easing—rather like an adolescent discovering drink or drugs. It tastes pleasant, it makes you feel good—let us have some more. There is a big question about quantitative easing which the Government need to answer. The Government have never answered it as far as I know—in fairness I am not sure the question has ever been asked—so I shall do so now explicitly and ask for an answer. It is very easy for the Bank of England to buy in this paper, creating automatically bank deposits and generating an increase in the monetary aggregates. That is an easy and apparently painless thing to do. But when is the Bank going to sell back that paper? Is the Bank ever going to sell back that paper? Is this part of the Government’s debt that is being bought in by the Bank of England going to be permanently monetised? If so, how much do the Government plan permanently to monetise in this fashion? Is there a ceiling? May I have an answer please from the Minister? If there is no intention to monetise, when and in what circumstances is it planned to sell back this paper, bearing in mind of course that selling it back will be in direct competition with government new issues in the gilt market at the relevant time. That is a problem that does not exist when you increase and use interest rates to manage demand. It is an important question to which the country needs a clear and explicit answer. When and in what circumstances is that paper to be sold back?

I was going to speak at slightly greater length about some of the perversities in the measures on benefits in the comprehensive spending review. However, my noble friend Lady Hollis made an absolutely brilliant analysis and she was followed by an extraordinarily distinguished analysis from the noble Lord, Lord Low. They have done so well that I am going to do something quite different. I ask the noble Lord, Lord Sassoon, whether he would be good enough to commission from the DWP and the Treasury a reasoned response to all the perversities that were set out by my noble friend Lady Hollis and the noble Lord, Lord Low. He should not only send that to them but put a copy in the Library for the benefit and elucidation of us all.

I am of the view that welfare reform is a very good thing and that Iain Duncan Smith’s single benefit idea is much to be commended. As I see it, it forms a coherent progression with the measures taken by the previous Administration to make sure that people had a greater incentive to work and that there were fewer perversities in the system. That was created by the introduction of the minimum wage and by the tax credit scheme which were, again, very important measures of welfare reform. Similarly, I would welcome other measures in the same direction. There were egregious abuses with regard to housing benefit. I am perfectly happy to acknowledge that and it is good that we are addressing them. Indeed, I have always felt that housing benefit was inherently problematic because it tends to drive up rents. Too often, landlords assume that the maximum that the benefit office or local authority will pay is the minimum that they will demand. It becomes an engine for driving up rents and therefore contributes to the problem that it is designed to alleviate: homelessness. Yet that does not mean to say that the Government are very clever to have produced a situation in which literally tens of thousands of people—so we are told by no less a figure than the Mayor of London—will be forced out of their homes.

My noble friend Lady Kennedy spoke movingly about people who are confronted with redundancy. I think that would have moved noble Lords on all sides of the House. Yet if you go home and tell your children that you are to be evicted, it is only scarcely less horrible than having to go home and say, “I’ve got the sack”. We should think carefully about the tens of thousands of our citizens being forced to leave their homes in that way. I put it to the Minister that there was a solution which was, at once, more practically sensible, more economically judicious and more humane in all these matters—this goes for child benefit as well. It was to introduce the new, more stringent rules for new applicants, to phase in the new rules for existing claimants, to use transitional relief; and to withdraw benefits at a certain level—whatever effective rate of taxation that might be. That could have been done in a less economically disruptive and less dramatic way in terms of the human impact on families.

It is never too late, I say to the noble Lord. What is the point of having these debates if the Government come here with a closed mind before they start? I hope that some of the thoughts that have come out of this debate will indeed be taken back by the noble Lord, Lord Sassoon, to his colleagues and that we might get a slightly better result than the one we have before us at present.