(11 years, 2 months ago)
Lords ChamberMy Lords, I refer the House to the spending review Statement made earlier in another place by my right honourable friend the Chancellor of the Exchequer. Copies of the document have been made available in the Printed Paper Office and its text will be printed in full in the Official Report. I commend my right honourable friend’s Statement to this House.
“This coalition came into office with a commitment to address with firmness and resolve one of the biggest economic crises of the post-war era. The action we have taken, together with the British people, has brought the deficit down by a third, helped a record number of people into work, and taken our economy back from the brink of bankruptcy; and it allows us to say that, while recovery from such a deep recession can never be straightforward, Britain is moving out of intensive care, and from rescue to recovery.
Today we announce the latest action to secure the recovery. We act on behalf of every taxpayer and every future taxpayer who wants high-quality public services at a price our country can afford. We act on behalf of everyone who knows that Britain has got to live within its means. We have applied three principles to the spending round I will set out today: reform, to get more from every pound we spend; growth, to give Britain the education, enterprise and economic infrastructure it needs to win the global race; and fairness, making sure we are all in it together by ensuring those with the broadest shoulders bear the largest burden and making sure the unfairness of the something-for-nothing culture in our welfare system is changed.
We have always understood that the greatest unfairness was loading debts on to our children that our generation did not have the courage to tackle ourselves. We have always believed, against much opposition, that it is possible to get better public services at lower cost—that you can cut bureaucracy and boost enterprise by taking burdens off the back of business. In the face of all the evidence, the opposition to these ideas has collapsed into incoherence. We have always believed that the deficit mattered—that we needed to take tough decisions to deal with our debts—and the opposition to that has collapsed into incoherence too. Today I announce the next stage of our economic plan to turn Britain around.
Let me start with the overall picture on spending. In their last year in office, the previous Government were borrowing £1 in every £4 that they spent. It was a record for a British Government in peacetime and a calamitous risk with our economic stability. As the note we saw again this week from their outgoing Chief Secretary put it,
“I’m afraid there is no money”.
So we acted immediately. Three years ago, we set out plans to make savings and to reduce our borrowing. Instead of the £157 billion the last Government were borrowing, this year we are set to borrow £108 billion pounds: that is £49 billion less in borrowing. That is virtually the entire education budget.
So we have made real progress, putting right what went so badly wrong. But while we have been acting, the challenges from abroad have grown: a eurozone in crisis, rising oil prices, and the damage from our own banking crisis worse than anyone feared. The truth is that we have to deal with the world as it is, not as we would wish it to be, so this country has to continue to make savings. I can report to the House that the biggest single saving we have made in government is the £6 billion a year less we are paying to service our debts than the previous Government budgeted for. Bear that number in mind when you hear the Opposition complaining about cuts.
The deficit has come down by a third, yet at over 7% it remains far too high, so we must continue to take action—not just because it is wrong to go on adding debts to our children’s shoulders, but because we know from the global turbulence of the past few years that the economic risks are real and the recovery has to be sustained. If we abandoned our deficit plan, Britain would be back in intensive care. So the figures today show that until 2017-18, total managed expenditure —in other words, the total amount of government spending—will continue to fall in real terms at the same average rate as it is falling today.
The task before us today is to spell out what that means for 2015-16. Total managed expenditure will be £745 billion. To put that huge sum into context, consider this: if government spending had been allowed to rise through this Parliament at the average rate of the past three decades, that total would have been £120 billion higher. This Government have taken unprecedented steps to achieve that expenditure control. Now we need to find £11.5 billion of further savings. I want to pay a personal tribute to my right honourable friend the Chief Secretary for the huge effort that he has put into delivering them. Finding savings on that scale has not been easy. These are difficult decisions that will affect people in our country, but there never was an easy way to bring spending under control. Reform, growth and fairness are the principles. Let me take each in turn.
I will start with reform and the obligation that we all have in this House to ensure that we get more for every pound of taxpayers’ money that we spend. With the help of my right honourable friend the Minister for the Cabinet Office, we have been combing through Whitehall, driving out costs, renegotiating contracts and reducing the size of government. Cutting money that the previous Government were spending on marketing and consultants, reforming government IT and negotiating harder on behalf of the taxpayer have already saved almost £5 billion. In this spending round, we will find a further £5 billion of efficiency savings. That is nearly half of the total savings we need to achieve.
We are reforming pay in the public sector. We are holding down pay awards, and public sector pay rises will be limited to an average of up to 1% for 2015-16. However, the biggest reform that we will make on pay is to automatic progression pay. That is the practice whereby many employees not only get a pay rise every year, but automatically move up a pay grade every single year, regardless of performance. Some public sector employees see annual pay rises of 7%. Progression pay can at best be described as antiquated; at worst, it is deeply unfair to other parts of the public sector that do not get it and to the private sector that has to pay for it. So we will end automatic progression pay in the Civil Service by 2015-16, and we are working to remove automatic pay rises simply for time served in our schools, NHS, prisons and police. The Armed Forces will be excluded from those reforms.
Keeping pay awards down and ending automatic progression pay means that, for every pound we have to save in central administration, we can better limit job losses. I do not want to disguise from the House that there will be further reductions in the number of people working in the public sector. The Office for Budget Responsibility has forecast that the total number of people working for the Government will fall by a further 144,000 by 2015-16. I know that for those who are affected that is difficult. That is the consequence of the country spending far beyond its means.
When I presented the spending round three years ago, I said that about half a million posts in the public sector were forecast to have to go. That is indeed what has happened, and we are saving £2 billion a year, with a Civil Service now smaller than at any time since the war. I also said three years ago that I was confident that job creation in the private sector would more than make up for the losses. That prediction created more controversy than almost anything else at the time, including with the Opposition. The shadow Chancellor called it “a complete fantasy”. Instead, every job lost in the public sector has been offset by three new jobs in the private sector. In the past year, five new jobs have been created for every job cut in the public sector. The central argument of those who fought against our plan is completely demolished by the ingenuity, enterprise and ambition of Britain’s businesses. I pay tribute to the hard-working people of this country who proved their pessimism wrong.
In this spending round, the Treasury will, as one would expect, lead by example. In 2015-16, our resource budget will be reduced by 10%. The Cabinet Office will also see its resource budget reduced by 10%. However, within that we will continue to fund support for social action, including the National Citizen Service. Ninety thousand places will be available for young adults in the citizen service next year, rising to 150,000 by 2016. It is a fantastic programme that teaches young people about their responsibilities as well as their rights, and we are expanding it.
Local government will have to make further savings too. My right honourable friend the Communities and Local Government Secretary has set an example to all his colleagues in reducing the size of his department by 60% and abolishing 12 quangos. He is a model of lean government, and has agreed to a further 10% saving in his resource budget. But we are committing to more than £3 billion capital investment in affordable housing and we will extend the troubled families programme to reach 400,000 more vulnerable families who need extra support. We are proving that it is possible to save money and create more progressive government. That is the right priority.
Here is another of the Government’s priorities: helping families with the cost of living. Because we know that times are tough, we have helped to keep mortgage rates low, increased the personal allowance, cut fuel duty and frozen council tax. That council tax freeze is due to come to an end next April. I do not want that to happen, so I can tell the House today that because of the savings we have made we can help families with their bills. We will fund councils to freeze council tax for the next two years. That is nearly £100 off the average council tax bill for families, and brings savings on these bills for families to £600 over this Parliament. That demonstrates our commitment to all those who want to work hard and get on.
There is one more thing that we can do to help with the cost of living in one part of the country. For years, Members from the south-west of England have fought on behalf of their constituents who face exceptionally high water bills. Nothing was done until we came to office. Now we have cut those water bills by £50 per household every year until 2015. My honourable friend the Member for Camborne and Redruth and many others have campaigned to extend that rebate beyond 2015. I am happy to confirm today that we will do that. Taking money out of the cost of government and putting it in the pockets of families—that is what we mean by reform.
Local government has already taken difficult decisions to reduce staff numbers, share services and make savings. I pay tribute to Sir Merrick Cockell for all he has done in showing how this can be achieved. We were told by the scaremongers that savings in local government would decimate local services. Instead, public satisfaction with local council services has gone up under this Government. That is because, with our reforms, communities have more control over their own destiny. That is because we have devolved power and responsibility to manage budgets locally. That is because we have let councils benefit from the tax receipts that come when the local economy grows. Today, we give more freedom, including greater flexibility over assets, and we will drive greater integration of local emergency services. I thank my honourable friend the Member for Bournemouth East for his fresh thinking in this area, which has helped to inform us.
We are also embarking on major reforms to the way we spend money locally through the creation of the single local growth fund that Lord Heseltine proposed. This will be £2 billion per year, which is at least £10 billion over the next Parliament. Local enterprise partnerships can bid for that sum, and the details will be set out tomorrow. Our philosophy is simple: trust people to make their own decisions and they will usually make better decisions. But in return for those freedoms, we have to ask local government for the kind of sacrifices central government are making. The local government resource budget will be reduced by 10% in 2015-16, but when all the changes affecting local government that I will set out are taken into account, including local income and other central government funding, local government spending reduces by around 2%.
I set out today the block grants to the devolved Administrations. Because we have prioritised health and schools in England, this feeds through the Barnett formula to require resource savings of about 2% in Scotland, Wales and Northern Ireland. The Scottish resource budget will be set at £25.7 billion, and Scotland will benefit from new capital borrowing powers of almost £300 million. Being part of the UK means that Scotland will see its capital spending power increase by almost 13% in real terms in 2015-16. It is rightly for the Scottish Parliament to decide how best to use it. That is devolution within a United Kingdom delivering for Scotland.
The Welsh resource budget will be £13.6 billion, and we will shortly publish our response to the Silk commission on further devolution of taxation and borrowing. When we do so, we will be able to say more about the impressive plans to improve the M4 in south Wales that my honourable friend the Member for Vale of Glamorgan and others have been campaigning for. The Northern Ireland resource budget will be £9.6 billion. We have agreed to provide an additional £31 million in 2015 to help the Police Service of Northern Ireland tackle the threat posed by terrorism. Those police officers do an incredibly brave job on our behalf, and we salute them. Separately, we will make 10% savings to the Scotland, Wales and Northern Ireland Offices.
We believe that the cultural heritage of our nations is not just an economic asset, but has intrinsic value. When times are tough, they too must make a contribution to the savings this country requires. The Department for Culture, Media and Sport will make savings of 7% in its resource budget. Elite sports will be protected and the funding of community sports, arts and museums will be reduced by just 5%, but because we recognise the value of our greatest museums, galleries and English Heritage, we are giving them much greater freedom from state control, which they have long called for, applying our reforming principles across the board and empowering those on the front line who know best—what the director of the British Museum called:
“good news in a tough economic climate”.
And while we are at it, we will make sure that the site of the Battle of Waterloo is restored in time for the 200th anniversary to commemorate those who died there and to celebrate a great victory of coalition forces over a discredited former regime that impoverished millions.
We still have the finest Armed Forces in the world, and we intend to keep it that way. The first line of national defence is sound public finances and a balanced defence budget, and my right honourable friend the Defence Secretary is helping to deliver both. He and his predecessor, my right honourable friend the Member for North Somerset, have filled the £38 billion black hole they inherited in the finances of the Ministry of Defence. We will continue to ensure we get maximum value for money from what will remain, which, at over 2% of our GDP, is one of the largest defence budgets in the world. The defence resource budget will be maintained in cash terms at £24 billion, while the equipment budget will be £14 billion and will grow by 1% in real terms thereafter. We will further reduce the civilian workforce and their allowances; renegotiate more of the hopeless private finance initiative contracts signed in the past decade; and overhaul the way we buy equipment.
My right honourable friend the Prime Minister has rightly been clear throughout, however, that he is not prepared to see a reduction in Britain’s military capabilities. This spending round not only protects those capabilities, but enhances them with the latest technologies. We will not cut the number of soldiers, sailors or airmen—we need them to defend our country—and we will give them the best kit to do that job: new aircraft carriers, submarines, stealth fighters, destroyers and state-of-the art armoured vehicles. We also make a major commitment to invest in cyber. It is the new frontier of defence and a priority for the Government.
We will look after families who have lost their loved ones and those injured protecting us long after the wars they fought in are over. We previously committed to fund the military covenant for five years, and today I commit to funding the Armed Forces covenant permanently. We will do that with the money we have collected from the LIBOR fines, so those who represented the very worst values will support those who represent the very best of British values. Our veterans will not be forgotten.
The intelligence services are on the front line too. Silently, and often heroically, these fellow citizens protect us and our way of life, and so we will protect them in return, with a 3.4% increase in their combined resource budget. The Foreign Office is the public face of our diplomacy, and my right honourable friend the Member for Richmond (Yorks) is quite simply the best Foreign Secretary we have had in a generation. He, too, has demonstrated how we can make our taxpayer pound go further. While making savings in his budget, he has managed to expand our network of embassies in the emerging world and focus his diplomats on British commercial interests. There will be further savings in that budget of 8% in 2015, but he is still committing to strengthen our embassy network in high-growth markets, from Shanghai to Abuja.
The Foreign Office projects our values abroad, and the Home Office protects our values here in Britain. Police reform is a model of what we can achieve across Government. Police forces are more accountable to the public, with modern working practices, the latest equipment and democratic oversight, and all that on a smaller budget. What was the Opposition’s prediction? They said that crime would rise, and what has happened instead? Crime has fallen by more than 10%. Thanks to the hard work of police officers up and down this country, crime is at its lowest level for 30 years. What was their prediction about our borders? They said that because of cuts we would not be able to control immigration, and what has happened instead? Net immigration is down by more than one third.
This Home Secretary is demonstrating that responsible budgets and reform can deliver better services for the public. In 2015, she will work with a resource budget of £9.9 billion, which is a saving of 6%, but the police budget will be cut by less than that. There will be further savings in the central department, police forces will be encouraged to share services and some visa fees will go up, but protecting Britain from the terrorist threat remains a top priority, so I can confirm that the police counterterrorism budget will not be cut at all.
For the police to do their job, they need a criminal justice system that works a lot better. A case of common assault can take 240 days to pass through the courts and involves five separate sets of case papers generated on three different computer systems. In some prisons, the cost of keeping a prisoner is £40,000 a year, but in others, it is one third of that, while the cost of legal aid per head is double the European average. My right honourable friend the Lord Chancellor is reforming all these things, and by doing so will make savings of 10% in his departmental budget—and he will do that while for the first time offering probation services for those who have served short sentences to help to end the revolving door of crime and reoffending.
That is an example of the reform we are bringing in across Government, and every step of the way, every penny saved, every programme reformed, every entitlement reduced, every difficult choice taken, has been opposed by vested interests and those who got Britain into this mess in the first place. We will not let up. I will not let that happen. The reform will continue.
Government spending does not alone create sustainable growth; enterprise does, and the job of the state is to provide the schools, science, transport links and reliable energy that enable business to grow. Britain was once the place where the future was invented, from the railway to jet engine to the world wide web. We can be that country again, and today we set out how to get there. A huge amount of innovation and discovery still goes on, but successive Governments, of all colours, have put short-term pressures over long-term needs and refused to commit to capital spending plans that match the horizons of a modern economy. Today we change that. We commit now to £50 billion of capital investment in 2015. From roads to railways, bridges to broadband, science to schools, it will amount to more than £300 billion of capital spending guaranteed to the end of this decade.
Today, we raise our national game. That means that Britain will spend on average more as a percentage of its national income on capital investment in this decade, despite the fact that money is tight, than in the previous decade, when government spending was being wasted in industrial quantities.
My right honourable friend the Chief Secretary to the Treasury will tomorrow set out the next stage of our economic infrastructure plan, with specific plans for more than £100 billion of infrastructure projects. Here is what that will mean for the departments. The Department for Transport will make a 9% saving in its day-to-day resource spending, bearing down on the running costs of Transport for London and on rail administration, but its capital budget will rise to £9.5 billion —the largest rise of any part of Government—and we will repeat that commitment for every year to 2020.
We are already massively expanding investment on major road schemes, but we will do more. We are announcing the largest programme of investment in our roads for half a century. We have already expanded our investment in the railways, but we will do more. We are committing to the largest investment in our railways since the Victorian age, and with the legislation before this House today, we should give the green light to HS2, which will provide a huge boost to the north of England and a transformation of the economic geography of this country.
Here in London, we are digging Crossrail, the largest urban infrastructure project in Europe, but we will do more. We are looking now at the case for Crossrail 2, linking London from north to south. We are going to give the mayor almost £9 billion pounds of capital spending and additional financing power to the end of this decade.
Investing in our economic infrastructure also means investing in energy, so we will provide the certainty that investors are crying out for in western countries. This country is already spending more on renewables than ever before. Now we will provide future strike prices for low carbon. We are restarting our civil nuclear programme when other countries are unable to continue theirs, and now we are providing guarantees for new nuclear. Our exploitation of gas in the North Sea is already second to none. Now we are making the tax and planning changes that will put Britain at the forefront of exploiting shale gas. We will provide our country with the energy of the future at a price that we can afford. Taken together, this should support over £100 billion of private sector investment in energy.
The Department of Energy and Climate Change will do this while reducing its resource budget by 8%. The Department for Environment, Food and Rural Affairs will see a 10% reduction, but we will set out plans for a major commitment to new flood defences for the rest of this decade. Again, we are prioritising long-term capital through day-to-day cost savings, which is exactly the tough choice that Britain should be making.
It is not enough to have roads, power stations and flood defences. That is just the physical infrastructure we need to compete in the 21st century. We need the intellectual capital, too. This country needs to invent, pioneer and export around the world. That means backing the Department for Business, Innovation and Skills, which helps us to do that. And it means taking tough decisions about what we should support. My right honourable friend the Secretary of State for Business, Innovation and Skills has agreed to a reduction of 6% in the cost of the department. That means that we are making savings to student maintenance, keeping grants but not increasing them, and the cost of the central department will also be cut further. That means that, within the reduced budget, we can put more money into apprenticeships and continue with the dramatic increase in support that we have provided to exporters through UK Trade & Investment.
We are not going to shift medical training and research out of that department, because they are working well where they are. And in that department too, we can shift from day-to-day spending to a huge 9% increase in capital investment. That includes a huge investment in science. Scientific discovery is first and foremost an expression of the relentless human search to know more about our world, but it is also an enormous strength for a modern economy. From synthetic biology to graphene, Britain is very good at it and we are going to keep it that way. Today, I am committing to maintaining the resource budget for science at £4.6 billion, to increasing the capital budget for science in real terms to £1.1 billion, and to maintaining that real increase to the end of this decade. Investment in science is an investment in our future. So yes, from the next generation of jet engines to cutting-edge supercomputers, we say: keep inventing, keep delivering; this country will back you all the way.
We have infrastructure and we have science, but we still need an educated work force to make it happen. Because of our ongoing reforms to our universities, they are now better funded than before. People will remember that the reforms to higher education were bitterly contested in the House. We remember the scaremongering about fees, and the claims that they would destroy social mobility and put off students from poorer communities applying. And what has happened since? We now have the highest ever proportion of students from the most deprived neighbourhoods applying to universities. We should all welcome that.
There is no greater long-term investment a country can make than in the education and skills of its children. Because of the tough decisions that we have taken elsewhere, we have been able to invest in education and accelerate school reform. When we took office, our country’s education system was falling behind other parts of the world. Now, thanks to the brilliant programme of reform by my right honourable friend the Secretary of State for Education and the Minister for Schools, my right honourable friend the Member for Yeovil, we are once again leading the way.
We have applied our reform principles in education too, freeing schools and teachers to concentrate on teaching and turning the majority of secondary schools into academies. In this spending round, that momentum of reform will grow. The Department for Education’s overall budget will increase to £53 billion and schools spending will be protected in real terms, fulfilling the pledge we made at the beginning of this Parliament, for all of this Parliament. We will transfer power and money from town halls and central bureaucracy to schools, so that more of the money for education is spent on education. So, while grants to councils and spending on central agencies are reduced, the cash going to schools will go up.
I can announce today that schools spending will be allocated in a fairer way than ever before. School funding across the country is not equally distributed; it is distributed on a historical basis with no logical reason. The result is that some schools get much more than others in the same circumstances. That is unfair and we are going to put it right. Many MPs on both sides of the House have campaigned for that. My honourable friend the Member for Worcester has been a particular champion in this Parliament. Now, the lowest-funded local authorities in this country will at last receive an increase in their per-pupil funding as we introduce a national funding formula to ensure that no child in any part of our country is discriminated against. We will consult on all the details so that we get this historic reform right. The pupil premium that we have introduced also ensures that we are fair to children from low income backgrounds. It will be protected in real terms, so that every poor child will have more cash spent on their future than ever before. The capital budget will be set at £4.6 billion in 2015-16, with over £21 billion of investment over the next Parliament.
We will also tackle the backlog of maintenance in existing schools and we will invest in new school places. We will fund 20 new studio schools as well as 20 new university technical colleges, as they are outstanding new vocational institutions. Free schools are giving parents the opportunity to aspire to a better education for their children. The Opposition have said that they want no more of them, but we will not allow such an attack on aspiration to happen. Instead, we must accelerate the programme and bring more hope to more children. That is why I can announce that we will fund an unprecedented increase in the number of free schools. We will provide for 180 great new free schools in 2015-16.
The schools budget will be protected, there will be fairer funding across the nation, the pupil premium will be extended to more students than ever before and there will be a transformation in the free school programme. We will not make our children pay for the mistakes of the past. We will give them every chance for the future, because that is the single best investment we can make for Britain.
Our education settlement is also consistent with the third and final principle of this spending round—fairness. It is not possible to reduce a deficit of this size without asking all sections of the population to play their part, but those with the broadest shoulders should bear the greatest burden. The Treasury’s distributional analysis shows that the top fifth of the population lose the most after this spending round, and the independent Institute for Fiscal Studies is unequivocal that the richest 10% have paid the most. In every year of this Parliament, the rich will pay a greater proportion of income tax revenues than they did in any one of 13 years under the last Labour Government.
When it comes to Her Majesty’s Revenue and Customs, despite the fact that this department will see a 5% reduction in its resource budget, we are committed to extra resources to tackle tax evasion. The result is that we expect to raise over £1 billion more in tax revenues from those who try and avoid paying their fair share.
Fairness also means refusing to balance the budget on the backs of the world’s poorest. I know that not everyone believes we should fulfil our commitment to spend 0.7% of our national income on development—but I do. I am proud to support a Government who are the first in our history to meet our pledge and meet it not only this year, but next year and the year after that. Of course, overseas development is about more than just the Department for International Development budget, and we comply with internationally policed rules. The DfID budget is, however, the lion’s share, and it will be set at £11.1 billion in 2015-16. Even in these tough times, the decisions we make mean we keep to our commitments.
That includes our commitment to the National Health Service—an institution that is the very embodiment of fairness in our society. The NHS is much more than the Government’s priority; it is the people’s priority. When we came to office, the health budget was £96 billion; in 2015-16, it will be £110 billion—and capital spending will rise to £4.7 billion. New medical treatments and an ageing population mean that the demand for NHS services is rising, so we have not spared in also demanding reform and value for money in this service. This will not insulate the health service from tough choices; there are already 7,000 fewer managers, and the NHS will continue to make efficiency savings. Those savings will, however, enable new investment in mental health and funding for new treatments for cancers such as prostate and breast cancer. Let me respond directly to the breast cancer research campaign in which so many have taken part. We will continue to back the charity research support fund and look into making it easier for these organisations to benefit from gift aid.
Many older people do not just use the NHS; they also use the social care system. If we are honest, they often fall between the cracks of the two systems, being pushed from pillar to post, not getting the care they should. None of us here would want that for our parents or grandparents, and in a compassionate society, no one should endure it. It is a failure that also costs us billions of pounds: Britain can do better.
We said in the 2010 spending review that the NHS would make available around £1 billion a year to support the health needs of people in social care. It worked, and saved hundreds of millions in the process. Last year, these improvements meant almost 50,000 fewer bed days were lost to the NHS. So today, I can announce that I will bring together a significant chunk of the health and social care budgets. I want to make sure that everyone gets a properly joined-up service where they will not have to worry about whether a service is coming from the NHS or the local council.
Let us stop the tragedy of people being dropped in A&E on a Friday night to spend the weekend in hospital because we cannot look after them properly in social care. By 2015-16, over £3 billion will be spent on services that are commissioned jointly and seamlessly by the local NHS and local councils working together. It is a huge and historic commitment of resources to social care, tied to real reform on the ground, to help end the scandal of older people trapped in hospitals because they cannot get a social care bed. This will help relieve pressures on A&E, help local government to deliver on its obligations and will save the NHS at least £1 billion. This is integrated health and social care—no longer a vague aspiration, but a concrete reality transforming the way we look after people who need our care most.
So these are the three principles that guide the spending round: reform, growth and fairness. Nowhere could these principles be more clearly applied than in our approach to welfare. Two groups of people need to be satisfied with our welfare system: those who need it who are old, vulnerable, disabled or have lost their job, whom we as a compassionate society want to support. Then there is a second group: the people who pay for this welfare system who go out to work, pay their taxes and expect it to be fair on them, too.
So we have taken huge steps to reform welfare: changing working age benefits with universal credit so that work always pays; removing child benefit from the better off; capping benefits so that no family out of work gets more than the average family gets in work. And we have been making sure that benefit payments do not rise faster than wages. The steps we have taken will save £18 billion a year—and every single one of them was opposed by the welfare party on the Opposition Benches.
Now we propose to do three further welfare reforms. First, as I said in the Budget, we are going to introduce a new welfare cap to control the overall costs of the benefits bill. We have already capped the benefits of individuals, and now we cap the system as a whole. Under the system we inherited, welfare spending was put into a category called annually managed expenditure, but the problem was that it was not managed at all. The cost of welfare went up by a staggering 50%—even before the crash. Our welfare cap will stop that happening again. The cap will be set each year at the Budget for four years. It will apply from April 2015 and will reflect forecast inflation, but it will be set in cash terms. In future, when a Government look to breach the cap because they are failing to control welfare, the Office for Budget Responsibility will issue a public warning. The Government will then be forced to take action to cut welfare costs or publicly breach the cap and explain it to Parliament.
We will exclude a small number of the most cyclical benefits that directly rise and fall with the unemployment rate to preserve the automatic stabilisers: housing benefit, tax credits, disability benefits and pensioner benefits will all be included—but the state pension will not. I have had representations that we should include the basic state pension in the welfare cap. That would mean that a future Government could offset a rise in working age benefits by cutting the pensions of older people. That penalises those who have worked hard all their lives. Cutting pensions to pay for working age benefits is a choice this Government are certainly not prepared to make. It is unfair; we will not do it and we reject those representations completely.
The new welfare cap is proof that Britain is serious about living within its means: controlling spending, protecting the taxpayer and being fundamentally fair. Today we are introducing a limit on the nation’s credit card. The principles enshrined in the cap apply to our second reform today. We will act to ensure that we stop the cost of paying the winter fuel payments made to those who live abroad from rising in a way that no one ever intended. EU law now says that people living in the European Economic Area can claim winter fuel payments from us, even if they did not get them before they left the UK. Paying out even more money to people from all nationalities who might have worked in this country years ago, but no longer live here is not a fair use of the nation’s cash. So from the autumn of 2015, we will link the winter fuel payment to a temperature test; people in hot countries will no longer get it. It is, after all, a payment for winter fuel.
The third welfare reform I announce today is about making sure we do everything to help people get into work. My right honourable friend the Secretary of State for Work and Pensions has changed the national debate about welfare, and has comprehensively won the argument. He has committed himself to finding a further 9.5% of savings in his department’s running costs. That will require a difficult drive for efficiency, and a hard-headed assessment of underperforming programmes.
However, welfare reform is about much more than saving money, vital though that is. It is about reducing dependency and changing people’s lives for the better. I am determined to go further to reduce worklessness with all its social consequences. Where is the fairness in condemning people to a life on benefits because the system will not help them to get back into work?
Today we are introducing Upfront Work Search. We are going to make sure that people turn up with a CV, register for online job search, and start looking for work. Only then will they receive their benefits. Thanks to this Government, lone parents who are out of work can now receive free childcare for all their three and four-year-olds, so it is reasonable to ask that they start regularly attending jobcentres and preparing to return to work.
We are announcing further changes today. Half all jobseekers need more help with looking for work, so we will require them to go to the jobcentre every week rather than once a fortnight. We will give people more time with jobcentre advisers, and proper progress reviews every three months. We will also introduce a new seven-day wait before people can claim their benefits. Those first few days should be spent looking for work, not looking to sign on. We are doing those things because we know that they help people to stay off benefits, and help those who are on benefits to get back into work faster.
Here is a further change. From now on, if claimants do not speak English, they will have to attend language courses until they do. That is a reasonable requirement in this country. It will help people to find work, but if they are not prepared to learn English, their benefits will be cut.
As a whole, this new contract with people on benefits will save more than £350 million a year, and all that money will enable us to afford extra support to help people to get into work. Help to work, incentives to work, and an expectation that people should do everything that they can to find work: that is fair to people who are out of work, and it is fair to those in work who pay for them. Together, these reforms bring the total additional welfare savings in 2015 up to £4 billion.
Step by step, this reforming Government are making sure that Britain lives within its means. The decisions that we make today are not easy, and these are difficult times; but with this Statement, we make more progress towards an economy that prospers, a state that we can afford, a deficit coming down, and a Britain on the rise. I commend this economic plan to the country”.
My Lords, I should like to put both the spending review and the comments of the noble Lord, Lord Davies, into context. He said a great deal about a failed economic strategy. We inherited one. Any of us who have worked with the management challenges of a significant budget would recognise that in 2010, when this Government came into power, spending was out of control. This spending round represents a continuing exercise in getting our public finances back into shape. This Government and the officials working in this area should absolutely be commended. They laid out a very clear plan in 2010 to deliver £80 billion of savings through to 2014-15. Sixty-five per cent of that—just over £50 billion—has already been delivered and the rest is on target. Therefore, the purpose of this spending round is to make a further £11.5 billion of savings, which have been thoughtfully and effectively made based on the criteria, as the noble Lord pointed out, of reform, growth and fairness. Within that £11.5 billion of savings, we have of course made some extremely tough choices. There are no easy choices in this current environment. We have protected the priorities that we promised and laid out at the election—those relating to health, schools and overseas aid.
The principles underlying how we have dealt with each department have revolved around making sure that the departments work and operate on a highly efficient basis with the right number of people, with the right degree of automation, with the right degree of procurement, and with commercial skills being brought to the purchasing decisions they make so that we can get our costs down and operate efficiently. That is true right across the departments and it is where those savings have come from.
I shall give an example of reform. Probably the most significant reform laid out in this programme is that we are establishing a new £3.8 billion health and social care pot to be shared between the National Health Service and local authorities to make sure that the services between hospital and the home are much better delivered and so that we can take care of people who need that help. We do not want the situation where somebody is delivered into a hospital bed on a Friday night because there is nowhere else for them to go and they are sent home again on a Monday because we cannot take care of them over the weekend. That is the kind of service reform that we have been talking about, and that has been the basis on which this £11.5 billion saving has been made.
Where does that take us? It will mean that by 2015-16 we will be well down the path of taking public expenditure as a proportion of total expenditure back to a sensible level. It should be back to just over 43% from the 30-year high of 47% or 48% in 2009. By the end of our consolidation in 2017-18, it will be back to 40%. That is the repair that this Government have had to undertake because of the spending profligacy that took place under the previous regime.
The deficit has fallen by a third as a percentage of GDP and is set to continue falling to below the pre-crisis level by the end of this Parliament. Most interestingly, the biggest saving that we have made is on our debt interest costs because we have got borrowing under control. Those costs are £9 billion lower than was forecast in the Budget of 2011. For me, that is probably the most telling statistic. Of course, we introduced savings on welfare bills through the Autumn Statement decisions.
We have talked about the situation with respect to capital spend and perhaps I may exchange some statistics. Effectively, through each of the fiscal events, the Government have saved money on current spending and invested it in capital spending. That is how we have chosen to do it; we are not doing it by increasing borrowing, and that is absolutely the right strategy to pursue. The sum involved is £10 billion over this Parliament. Public investment will be higher on average over 2010-11 to 2014-15 than it was under the previous Government. We are investing more in roads than at any point under the previous Government—and that is now. We are building more school places than at any time under the previous Government, and next year we will be building more affordable houses than at any point in the past 20 years.
There will be much more detail about this tomorrow, when the Chief Secretary comes out with details on the capital plan. Accompanying that will be a document called Investing in Britain’s Future, which will lay out how we will spend £100 billion on infrastructure investment over the next Parliament. We all want it to happen quicker. I am here today because the Chancellor and the Prime Minister wanted some help in making it happen quicker. We have an urgent and focused plan to deliver on that, and the Chief Secretary will lay it out in detail tomorrow.
In summary, we currently have the largest investment in railways since the Victorian age. Crossrail, which is being dug at the moment, is the largest urban infrastructure project in Europe. In this spending round, we are funding the case for Crossrail 2, which would link London from north to south. We have given the mayor almost £9 billion of capital spending. We have completed Kings Cross station. We are funding science at higher levels than ever before, with a long-term commitment. We are developing our intellectual as well as our physical infrastructure.
The noble Lord talked a little about where we were in delivering on the Government’s infrastructure programme. He said about 20% of it was under way. By next year, half will be under way. That is the whole point of a pipeline. The Government can really add value by getting through the difficult early stages of choosing the project, finding the funding and dealing with planning and environmental considerations. We are focused where we should be—dealing with ideas and getting them through to the “shovel in the ground” stage. That is really the hard bit in any project. It is right that the projects we are focused on are the ones that have not started yet. Our record in this country, once we start, for delivering things on time and on budget—I have been part of some of it—is extremely good.
My Lords, can my noble friend confirm that at the end of the previous Government’s period of office the national debt had doubled, and that on the figures presented today the national debt will have doubled again by the time of the election? Can he explain what the effects would be of a rise in interest rates of, say, 1% on the repayments which the Government will have to make on their borrowings and on the value of the government gilts held by the Bank of England? How will that hole be dealt with? He mentioned that interest rates have been held down, but we are already seeing rates beginning to rise, so what contingency plans are in place? Should we not be very much more concerned about the future of the economy, given that the outgoing Governor of the Bank of England has today warned our youngsters about the possible impact on mortgages and on the balance sheets of the bank themselves? Where is the contingency planning for that eventuality in the Government’s Statement today?
I thank my noble friend for raising, as he has done on many occasions before, everyone’s awareness of the fact that when we discuss the deficit we are talking about the annual addition to our stock of borrowing. Until that deficit turns into a surplus we will not reduce our stock of borrowing, and the increased stock of borrowing leaves us with a significant exposure. My noble friend Lord Newby informs me that a 1% increase in interest rates will have an economic effect of approximately £4 billion, but we will review that number.
The way to provide for the contingency to be able to cope with any additional expenditure, whether it is interest, overseas issues or events that crop up, is to continue to drive down our deficit to give us as much flexibility as possible to handle whatever events face us in the future.
My Lords, can the Minister address the question of fairness with regard to the devolved Administrations? Under the title of fairness, the Green Paper refers to the Barnett formula going on until the end of 2016 at least. Surely, as a committee reported to this House—the noble Lord, Lord Barnett, himself has been involved in this—whatever the situation is with regard to Scotland and Northern Ireland, the Barnett formula is patently unfair to Wales and is underfunding the Welsh Assembly for essential services. When are the Government going to get to grips with this?
We do not have any proposals to adjust the Barnett formula in this Parliament. As I understand it, the Welsh resource budget will be approximately £13.6 billion, and we will publish our response shortly to the Silk commission on the further devolution of taxation and borrowing.
My Lords, the Minister has said a number of things that I think are significantly challengeable. First, his maths in response to the noble Lord, Lord Forsyth, are clearly substantially deficient and lead one to ask how much a Treasury Minister really knows about the state of government finances.
Secondly, the Minister said that debt as a percentage of GDP will be below pre-crisis levels by the end of this Parliament. I would like to see the evidence on which the Minister makes that statement. Clearly, it is not consistent with the OBR’s forecast.
My question, however, is about the relationship between monetary policy and fiscal policy. The Government have consistently talked about an accommodative monetary policy linked to a tighter fiscal policy. They now own £325 billion of their own debt through the QE programme. Why do they not simply cancel the debt that they have bought for fair value in the markets from banks and pension funds with the proceeds that they have in the QE portfolio on the asset purchase scheme?
Why do the Government not recognise that they can manage a pretty low inflation risk through using sterilisation techniques in the money markets and adjusting reserve ratios, and acknowledge that, despite QE, monetary growth is not increasing and inflation risk is low? That would be a simple answer that would at a stroke reduce debt as a percentage of GDP by 30%.
The question of how we unwind QE is a matter for the Monetary Policy Committee. It is not for me to give advice here.
My Lords, when it comes to not understanding, I have to say that from the conversations that I have had in the media today with members of the Labour Party and listening to today’s speech, I am unclear whether they want different cuts or more borrowing, but it seems to be one response or the other to this particular spending round. I am very pleased with many aspects of this spending round, particularly the emphasis now on future growth.
Will the Minister confirm that the decision to put more money into schools, thereby protecting the schools budget as well as being a real-terms increase in the pupil premium, is because they have proven to be successful and effective programmes? On the infrastructure area, which is his area of specialty, will he assure me that although there is the Heseltine pot for local areas, the big national infrastructure expenditures will be co-ordinated with local activity so that we can maximise the opportunities that spin off from this very substantial increase in infrastructure?
I thank my noble friend for her observations about the education programme being a prime example of investing in the success of an effective programme. That is absolutely right. On the local pot and infrastructure spend, it is absolutely our intention to make sure that there is a strong relationship between the regional plans—ultimately, all infrastructure operates at a local level—and that we co-ordinate those at a national level to ensure that we get the maximum leverage from the money that we are spending at both ends.
My Lords, I noted when I listened to the Chancellor that he made a commitment to apprentice training. My thoughts go back to the 1980s when there were many closures, particularly in engineering. No one was taking on apprentices. Within 10 years, employers were calling out for trained journeymen. There were complaints sometimes that skilled labour had to come from abroad. I am on my feet today to say that I hope that the Chancellor and the Government keep their promise to take on apprentices. Not only does that help the apprentices, but it gives a great source of pride to the family when a young person is taken on for skilled work.
I thank the noble Lord for raising this important issue. It is the Government’s intention to implement the recommendations of the Richard review, which will see through the apprentice programme. It sits very neatly alongside the success that we have seen over the past four years, with the private sector picking up and generating employment to compensate for the small number of losses in the public sector. A strong apprentice programme sits very nicely with that.
My Lords, will the Minister comment on whether the Government have fulfilled all their statutory obligations, in particular the Public Bodies Act 2011, in their spending review decisions?
My Lords, I am working on the assumption that we have fulfilled those, but I am sure somebody will tell me very quickly if we have not. It is not a stipulation I am familiar with.
My Lords, when the coalition was formed, I stressed that it would be far more difficult to reduce the deficit than was generally supposed. Having been involved in spending cuts in previous Governments, I would certainly not underestimate the task facing the Chancellor. None the less, there is a danger that we are underestimating what still needs to be done. The Government keep repeating the mantra, “Oh well, we have reduced the deficit by a third”. Actually, this means that we are borrowing more at two-thirds of the rate that we inherited from the previous Government.
We are still living way beyond our means, in part because we are paying for Gordon Brown’s proposals, for which there was no money then and for which no money is available now, except by borrowing. Does my noble friend agree that we really have to press on with much more determination in tackling this whole issue and that it would be wrong to say that we are all right just because we reduced the deficit by a certain amount?
I agree with my noble friend that managing the public finances responsibly will be a continuing exercise of considerable discipline. On managing current spending, we have introduced the welfare cap on the overall budget as well as the cap on specific benefits that we saw in the previous Budget. Departmental budgets are being managed with discipline. There has also been a real focus on switching from current expenditure to capital expenditure, which should support the enhancement of the productive capacity of the economy and thus help us with tax revenues. Those components should continue to be an urgent and aggressive focus of the Government’s fiscal management.
Page 5 of the Printed Paper Office version of the speech says:
“We will end automatic progression pay in the Civil Service by 2015-16”.
That is a very serious breach of faith. Quite apart from anything else, how are the Government going to do it?
We are going to do it simply by implementing it in 2015-16. As I understand it, many of the structural changes to Civil Service pay have already been made in many departments. This is just equalising the system right across the service.
My Lords, I start by acknowledging the very difficult economic situation that every Government are going to face. People are living longer and I am the last person in the world to complain about that.
Given that every forecast made by the Chancellor since 2010 has had to be adjusted, how do we know that we need exactly £11.5 billion of cuts in 2015? What was his economic forecast for that year? We now know that no economic forecast by anybody can be expected to be accurate, even if it is based on next year. Perhaps the Minister will tell us why we should assume, when every forecast that the Chancellor has previously made has been wrong, that a forecast based the economy in two years’ time will do precisely what he said. In one line, he says:
“We commit now to £50 billion of capital investment in 2015”.
That is rather a lot of money for one year. How long a period is that planned to be spent over? The cuts are going to take place after 2015. When will that £50 billion of capital expenditure be spent: this year, next year or only after 2015? We all know that we need it now. Why is he delaying it?
I absolutely share the noble Lord’s experience that economic forecasting is a hazardous art form. However, if done thoughtfully, it gives us the basis for creating a long-term plan against which we can make the best decisions possible, given the information we have. One of the things that I have been working on with the Chancellor is to take a longer-term perspective, particularly of our capital budget, and to have that budget as a foundation for our long-term fiscal management rather than being the bit that gets added on at the end. That is what results in the stop-go approach to investment which has plagued us for many years. For me, what it rather reflects is a shift in priorities to deal with the things for which you need to create a longer-term planning horizon, so that we can get the investment side of what we are doing sorted out over the right kind of horizon.
My Lords, to get back to a point raised by the noble Lord, Lord Forsyth, about quantitative easing, or the printing of money, there is of course the fact that the Government have saved £9 billion because of low interest charges. Those savings have been made at the expense of interest rates on savings, particularly those on pensions. Pensioners have been very badly hit because their expectations, and indeed their pensions, have been lowered for the future. Is it not a shame that some of the most vulnerable people in our society, such as the pensioners, have been made very much poorer in order to finance government spending, which is still far too high?
I of course accept that one of the consequences of lower interest rates is lower returns to savers. That absolutely follows on and it is a consequence in part of our current monetary policy, and indeed the monetary policy of every major nation. One compensating comment I would make is that of all the constituencies which this Government have striven to protect, looking at the triple-lock protection on pensions the basic state pension has clearly been kept in very good shape during this period of economic challenge.
My Lords, the Chancellor said:
“EU law now says that people living in the European economic area can claim winter fuel payments from us, even if they did not get them before they left the UK”.
When on earth did that start and what are the Government doing to persuade the Europeans to change it? When the Chancellor suggests that he will deal with it by linking,
“the winter fuel payment to a temperature test”,
from 2015, what will that save? If it is worth doing it in 2015, why should he not do it in 2014, if not autumn 2013?
I thank my noble friend for pointing out this unfortunate anomaly in European legislation, which puts us in that position. The Chancellor’s position is that he has dealt with that anomaly in the best possible practical way to reduce that payment, given the timing of its introduction and the form of the obligation we have on us.
My Lords, the Chancellor said in his Statement:
“The first line of national defence is sound public finances”.
Following the theme of the noble Lord, Lord Higgins, why can the Chancellor then go on to boast that we have one of the largest defence budgets in the world? Here, I do not speak on behalf of my party but as an individual member of the community in this country. However, I suspect that I represent a fair point of view when we hear about the possible incursions into Syria and read of the Prime Minister saying that he is not prepared to see a reduction in Britain’s military capabilities. If we are to take truly tough decisions, is it not time that we really faced up to our position in the world—what we can do, what we cannot do and what we can afford?
That is a very broad question. In terms of the spending review, over time we have already taken some very difficult decisions with the Ministry of Defence. The focus of this particular spending round was to ensure that we put in place some economies in the support areas, but kept our front-line capability and made absolutely sure we had an equipment budget that could support our troops and the work that they were called on to do. That was the policy decision behind which the spending decisions fell into line.
My Lords, what is there in the Statement to boost our very important tourism industry? Cultural and heritage attractions, the things that tourists come to our country to enjoy, are going to suffer. What are we doing to boost tourism?
If noble Lords look across the contributions to the spending reduction, it is evident that the Department for Culture, Media and Sport, which oversees tourism, had one of the milder settlements, with cuts of something like 7%. In addition, museums in particular have been given some flexibilities in how they manage their finances and organise themselves, in order to help them cope with any changes in their grants. That is the sum total of specific points with respect to tourism.
(11 years, 2 months ago)
Grand CommitteeMy Lords, I thank my noble friend Lord Dykes for giving us an opportunity to discuss this important question. I think that some very interesting issues were raised. I am not sure that there is much disagreement over principle; on practice and implementation, there may be some more. Everyone gave their own measure of how important the financial services sector is to the UK economy, and the obvious implication of that is that we need to nourish and protect it, and to use it as an engine for our future growth; I think that everybody accepts that. My own numbers demonstrate that the financial services sector represents 10% of our gross domestic product, 12% of our tax revenue and half of our trade surplus, and employs over 1 million people—two-thirds of whom are outside London. It was very helpful to hear reference being made to the broader industries involved, such as the pensions industry. I was at a meeting recently with the Indian finance Minister, who asked us to help train India’s whole actuaries sector, such is the respect with which our pensions industry is regarded.
I am also very persuaded by the soft power arguments in support of our law and education expertise. Every time I travel with the aim of trying to bring money into the UK or help UK businesses overseas, there is a British law firm that is regarded as the leading light in virtually every territory. It is an extraordinarily good example of soft power. It is a similar case with our education system. The countries in which we are most effective are those where the current ruling elite were educated in the United Kingdom. What worries me is that when I look at the next generation, a smaller proportion have been educated here. However, it is a very powerful base from which to develop relationships that help us to win business.
As well as being a major employer, the role of the banking sector in particular as a provider of credit and financial services to businesses and consumers is critical. What we are really talking about in most of this discussion is how we can build a safe and secure system, repair the damage that was caused during the crisis, and put it on a sound footing in order to deal with all the issues.
I was slightly worried that the tone of the comments of the noble Lord, Lord Davies, meant that he was looking for a fight around regulation. I am not a fan of light regulation like my noble friend Lord Flight. I am a fan of very good regulation and this Government have been the leader in devising the architecture and the systems that are now being put in place to make this system better. We are absolutely in agreement. It is good regulation we want, not lots of bureaucracy, and that is a critical distinction to make. We all accept that the financial crisis was in part caused—certainly exacerbated—by certain practices within the banks and we have to get that corrected to ensure that it does not happen again and we do not leave taxpayers with the bill.
This is probably a good time to follow up on what my right honourable friend the Chancellor talked about in the Mansion House speech last night: the plan going forward for RBS and Lloyds in particular. There are three key objectives in the plan to restore them to good health: first, that they can play a strong role in their support of the economy; secondly, that any transactions that result in the sale of shares represent excellent value for money for the taxpayer; and, thirdly, that we will do whatever we can in restructuring and working with the banks to return them to private ownership. As the Chancellor announced, Lloyds is a lot closer so it is being prepared for a sale of shares to institutions; RBS is still some time away. With regard to the noble Lord’s suggestions, one of the restructuring options being looked at is the so-called good bank/bad bank split, which is pretty consistent with dividing it into a retail and wholesale bank. Certainly something that will be evaluated quite carefully is whether that is the better structural option.
My noble friend Lord Dykes referred to the Co-operative Bank and the surprising speed with which that problem was revealed. The bank is working very well with the regulators to ensure that its capital position is being addressed. It is being addressed without recourse to the public purse, which is a good step forward in terms of how these resolution processes take place. However, the Government continue to support mutual structures, building societies, et cetera, so that really is an important part of competition in the banking sector.
We have had quite a discussion about rebalancing, which is a very popular word that is applied to almost every aspect of our lives these days. In terms of making the banking sector less crucial to the UK economy, I am much more interested in growing other industries than in shrinking the banking sector just for the sake of it. It would be sensible to shrink it if it was too engaged in risky businesses, but I do not think our objective should be simply to reduce the scale of the banking business. The focus needs to be on ensuring that we have a healthy business. As was pointed out, Hong Kong has a bigger relative financial sector than we do. The focus needs to be on our broader economic strategy to help support other businesses, particularly those that can bring jobs and growth to the economy outside the south-east of England, where the financial services jobs are predominantly based.
One of the proactive things that we are trying to do as a Government to ensure that the financial services sector is protected is to ensure that the way in which we regulate and tax the market and all the infrastructure services we provide to the City of London continue to allow it to be the most effective, successful, dynamic financial sector in the world. That should be our objective. That is how we bring business in. That is why banks and other institutions want to come here. We should also support very clearly our own institutions as they develop their interests overseas; we have talked about insurance companies, for example, and how effective and successful they can be overseas. We have to get our financial regulation right. Finally, we have to incentivise banks to lend to the real economy, and other markets and forms of disintermediation have to work so that we can get key parts of the economy financed. I take on board the noble Lord’s comments about AIM. I accept that ISAs cannot be included for the time being. We will follow up with noble Lords when those proposals become clearer later in the year.
I note that the Government announced the creation of the Financial Services Trade and Investment Board—really as a promotion body to help push the City forward. Historically, we have generally left the City to its own devices because we thought it was so successful, but this is a body with some very good people from the Government involved to work through what we can do to support the industry and to make it successful around the world. My experience of working quite intensively with both the lord mayor and the mayor has been that this works quite well in tandem. We also, of course, have the Treasury as a third strand of the Government promoting the City. It had been suggested to me in the past that we should share the role by having both a day mayor and a night mayor—noble Lords can choose which one they would like to put in which category.
The board is up and running and it is doing very well. The kinds of things that are on its agenda are, for example, helping us to be the leading centre for the internationalisation of the renminbi and, talking of India, to help us to be well positioned as the rupee is eventually internationalised so that we can capture that business. My noble friend Lord Flight gave a very eloquent exposition of the UK investment management strategy, demonstrating that, in general, it is a good thing. We need, however, to be careful about how it is regulated—again, we are back to good regulation. The abolition of stamp duty reserve tax, which was a big step forward, was really aimed at making our industry the best one in the world. As an example of what followed, we have seen Santander choosing London as the base for its world-wide asset management business, which is a great step forward. In March, we also established an Islamic task force to try to establish the UK as the preferred choice for the Muslim world to invest in and do business with. These are the kind of new initiatives.
We have talked a lot about the EU and the interesting challenge around being the major financial centre in Europe but not a euro country, and some of the issues and challenges which that throws up. The general sense I got from this debate—which I certainly share—is that noble Lords do not read very much in the papers about when the UK has pushed legislation so that it actually gets the right outcome, not just for this country’s interests but in the market’s interest—and MiFID was a wonderful example of that. Of course, the EU-US free trade agreement should be another example; financial services will be a very big part of that.
We talked a little bit about tax. I agree that the GAAR—the anti-avoidance measure—may be limited. As we saw in Northern Ireland, however, with the G8 meeting, the only real way to address these tax issues is through international collaboration. I am delighted that our Government are taking a lead on tax and transparency and really setting the pace to help to improve those things. We have talked enough about Vickers and what is coming there.
On the comments on diversity, I could not agree more that there would be nothing healthier for some of these financial institutions than to have a broader and more diverse group of people working in them, particularly at the senior level. My own example is that I joined a US investment bank when I left university because I did not feel comfortable in a merchant bank because I had not been to public school. I can only imagine how a woman feels on the trading floor of a US investment bank, because it is a distinct male environment. It would benefit from that diversity. I am an absolute supporter of that. All my experience in professional life has demonstrated the enormous power that comes from that diversity.
I should address the financial transaction tax. The noble Lord is absolutely right. If applied equally around the world, it is certainly a runner, but the way that it is structured now it just will not work. I think that our case is being very effective in persuading countries who were on the fence to see that perhaps it may not be in the market’s interest.
In closing, we have heard how important the sector is, how we are reforming it, how we are making sure that it addresses the problems of the real economy, but also what an important sector it is for the future of this country. I appreciate the comments of noble Lords in what was a very useful and interesting debate.
(11 years, 3 months ago)
Lords ChamberMy Lords, it is a privilege to open this debate. We will be considering the Government’s priorities for business, the economy, local government and transport for the year ahead. I am particularly looking forward to the maiden speech of the noble Baroness, Lady Lane-Fox of Soho. She brings valuable business expertise, inspiration to our entrepreneurs and a deep knowledge of how to make the most of technology to revolutionise business and our daily lives. She is a most welcome addition to this House.
The measures in Her Majesty’s gracious Speech advance the Government’s strategy to position this country for success in the global economy. This strategy and its component parts are clear and have been consistently articulated and pursued. Our priority now must be the effective implementation of the policies which have been introduced, delivering meaningful improvements to our economic performance. The foundation of this strategy remains the steady restoration of our public finances from their precarious state in 2010. Although slower than anticipated growth, caused principally by problems in the eurozone, has necessarily extended the period of fiscal consolidation, the deficit has already been cut by a third. This has established credibility in the financial markets and keeps our borrowing costs at record low levels. This commitment to fiscal responsibility, reinforced by an activist monetary policy and the reform of the banking system, is the base on which we are building the supply side measures, such as establishing the lowest corporation tax rate in the G20, aimed at making the UK a great place to do business.
Last Thursday, we hosted a conference in London which attracted senior business people and investors from around the world. The positive attitude to the UK’s business environment was overwhelming and represents a significant advantage to us in the global race, which we can exploit but cannot take for granted. Our economy faces many challenges, but progress is promising in a number of areas: more than a million and a quarter private sector jobs have been created since 2010, with the OBR projecting employment to rise in every year of its forecast. We have also seen our exports to some of the large emerging markets increasing strongly, a trend that we must accelerate to reduce our relative exposure to a slower growing Europe.
I turn to some of the specific initiatives driving this agenda forward. Following the Financial Services Act, the Banking Reform Bill, which was introduced in the previous Session, will enter this House for consideration before the Summer Recess. This Bill is fundamental to the Government’s commitment to pass the necessary legislation before the end of this Parliament to restore the financial system to stability. Only then can it effectively support growth in the economy. The Bill implements the recommendations of the Independent Commission on Banking, ring-fencing retail banking services on which households depend from more volatile wholesale activities.
In addition to strengthening our financial infrastructure, first-class economic infrastructure is a necessary condition for UK business to achieve global competitiveness. Our intention is to improve our approach to planning for, financing and delivering this critical infrastructure as we go through a significant period of renewal. This is very well illustrated by our ambitious programme to deliver transport infrastructure. We all know that good transport is essential to drive sustainable economic growth and prosperity. Efficient transport systems help UK businesses to be more productive by making journeys quicker and more reliable, supporting UK exports, enabling a flexible workforce, attracting inward investment and rebalancing our economy by generating development opportunities throughout the country.
In many cases, crucial transport investments are needed now to unlock growth and support the supply chain. That is why we are pioneering new ways to deliver infrastructure projects faster in all parts of the country, from essential highway maintenance that keeps traffic moving, to targeted improvements to our networks, to transformational investments for future generations. We will reduce the time it takes to plan and deliver new roads by up to a half and we are piloting a new delivery model for upgrades to the M1, M3 and M6. We have also focused our short-term investment plans on projects that will deliver benefits quickly, such as addressing pinch points and extending managed motorways.
Her Majesty’s gracious Speech announced the paving Bill and High Speed 2 hybrid Bill. High-speed rail is an engine for growth that will help drive regional regeneration, secure economic prosperity across Britain and support tens of thousands of jobs. We should not underestimate the scale of transformation that rail infrastructure is providing. Crossrail is the largest infrastructure project of its kind in Europe—it is going on at the moment—and is one of the largest single infrastructure investments undertaken in the UK. The high-speed rail link will be the first new line that we have built north of London for over 120 years —that is why we need it—and will boost our rail capacity, benefiting many throughout the country. Network Rail’s current investment in our railway infrastructure is the biggest since Victorian times. Introducing a paving Bill will allow Parliament to make a clear commitment to high speed rail. Crucially, the Bill will also give us the spending powers to progress the detailed design work for the scheme. We want to get this project moving and delivered at the earliest opportunity and this Bill will help us do just that.
It is not only railway lines that are being transformed but a concerted regeneration of major stations is currently under way. Two examples of this are, the £550 million part-privately funded redevelopment of Birmingham New Street that will stimulate the physical regeneration of the surrounding area, and the £850 million reconstruction of Reading station, due for completion in 2015, which will add five new platforms.
As to local government, we believe there is a significant opportunity to deliver our growth agenda more effectively by supporting the initiatives, capabilities and energy that exist in our regions and cities. Local government has a key role to play in local economic development. By implementing many of the recommendations in the review by my noble friend Lord Heseltine, the Government are handing power to the regions. We are committed to creating a single local growth fund for the key areas of skills, housing and transport. The final size of the fund will be set out at the spending round next month.
We have brought in local enterprise partnerships, with public and private participation, to co-ordinate regional development and enabled cities to take control of their own local economies through City Deals. Thus far, City Deals have been implemented in eight major cities, with 20 more to be agreed this year. Now we are going further by continuing the process of devolving resources away from Whitehall towards local leaders who know what is best for their areas. We are introducing a localism Bill and the general power of competence. The Bill will increase local accountability by empowering local people to hold councils and local bodies to account for local spending decisions and ensure that they deliver effective value for money. This is the final step in a programme of reforms to local audit arrangements that will close the Audit Commission and deliver an estimated £1.2 billion of savings over 10 years.
We are also committed to reforming the planning system to help achieve sustainable development. We have simplified planning and provided incentives for communities to support development through neighbourhood plans and the community infrastructure levy. The primary legislation required to enact this programme is in place, and we are now streamlining the planning application process, including by broadening permitted development rights by exploring opportunities to create new housing from shops and agricultural buildings.
Housing is central to our plans for economic growth but, more importantly, it is essential to the hopes and dreams of people across the country. Our aim is to help people achieve their aspiration to live in a home that gives them security. The Government are committed to addressing housing shortages through a major increase in the supply of new homes where they are needed and wanted. This is why the Government have committed to invest over £11 billion in housing programmes during this spending review period. It is why, to date, the Government have sold enough surplus public sector land to deliver 45,000 new homes. With our new guarantees programme, we now aim to deliver 200,000 new affordable homes by 2016-17 with over £20 billion investment. It is also why we are providing a package of support for councils and developers to help accelerate and unblock locally led large housing sites. In addition, we are of course making it easier to obtain a mortgage through our Help to Buy scheme.
Direct support for business is a key part of our plan to improve the UK’s competitive performance: this takes the form of tax incentives, progressive legislation, access to finance and other forms of intervention with a particular focus on nurturing smaller businesses. The National Insurance Contributions Bill will entitle businesses and charities to a £2,000 employment allowance each year. By reducing the costs of employment, this will support small businesses aspiring to grow. More than 90% of this benefit will go to small businesses with fewer than 50 employees. This Bill also builds on the robust stance that this Government are taking in tackling all forms of tax and NICs avoidance. Our approach is very simple: in return for offering a highly competitive tax system, we expect everyone to pay their taxes. The general anti-abuse rule reinforces this principle and will deter those who market and participate in artificial schemes. In addition, we continue to lead international efforts to develop a more effective cross-border tax framework.
The Government are also working hard to help UK businesses to increase their exports. We have supported 32,000 UK exporters in 2012-13, up from 25,000 the previous year. This has helped UK exporters to win billions of pounds of high-value export contracts, such as £150 million for an oil industry project in Brazil and over £78 million of new business for UK rail companies in Singapore. However, we want to do more, which is why we have committed to increase total annual UK exports from £488 billion in 2011 to a £1 trillion target by 2020. We plan to deliver this partly through increasing the number of UK SMEs that export from one in five to one in four.
If those SMEs are to grow, they need better access to finance. That is why we have set up the business bank with £1 billion of funding. Of the £1 billion, the Government will invest £300 million alongside private investors over the next two years in new channels, such as non-bank lenders.
We have also set up the Green Investment Bank to stimulate the additional investment required to finance the UK’s transition to a greener economy. In its first six months of operation, the bank has committed more than £635 million, including investments in each of its four priority sectors: waste, offshore wind, non-domestic energy efficiency and the Green Deal.
Beyond these schemes, we have implemented a package of credit-easing measures to improve the supply of affordable credit to SMEs across the country. For example, the Funding for Lending scheme was recently extended with incentives heavily skewed towards SME lending support. The £1.2 billion Business Finance Partnership was established to stimulate the development of alternatives to bank finance.
The Government are also supporting SMEs which lack a sufficient track record or collateral to access bank finance by providing government loan guarantees. Since May 2010, more than 10,500 SMEs have been offered enterprise finance guarantee loans with a total value in excess of £1 billion.
Her Majesty’s gracious Speech announced legislation that will further support SMEs in the design sector to drive growth through innovation by facilitating the protection of their intellectual property. The Intellectual Property Bill will implement the recommendations of the Hargreaves review. One of its key elements is the unified patent court agreement, which will make it possible for British businesses to protect their inventions across 25 countries in a single application. That could bring direct savings to UK businesses of up to £40 million per annum in translation costs alone.
The Department for Business, Innovation and Skills also plans to modernise and simplify our consumer rights framework through introducing a consumer rights Bill during this Session. In particular, this Bill will include important new protections for consumers buying digital content such as music downloads or software where legal protection is currently unclear. Clarity in this area should also reduce the regulatory burdens for business, with the aim of improving market performance.
In summary, I believe that our future prosperity depends on our ability to be competitive in a fast-changing world. That means competitive in terms of hosting businesses that can take on the world and win, and competitive in terms of attracting highly mobile capital and investment. This Government are determined to create the best possible financial and economic conditions for the UK to succeed in this race. First, we have to demonstrate that we can deal with the deficit—it is impossible to produce sustained growth if the public finances are not under control. Secondly, we need to complete our work in fixing the financial system so that it is able to sustain growth in the economy. Thirdly, we must implement the reforms necessary to improve our competitiveness. These range from the support we are providing for SMEs to investments in infrastructure and housing and to the devolution of important local spending responsibilities. I believe that this is the right recipe to convert from our current phase of economic healing to one of sustained recovery and the right recipe to unlock the aspirations of our nation by backing people who want to work and get on.
(11 years, 5 months ago)
Lords Chamber
To ask Her Majesty’s Government how much has been spent on infrastructure projects in the current financial year, and how that figure compares with that in the previous financial year.
My Lords, we are spending more on infrastructure projects this year. Capital spending by the departments responsible for economic infrastructure—DfT, DECC and Defra—is increasing. The transport budget, for example, rises from £7.7 billion last year to £8 billion this year, then £8.7 billion next year and £8.9 billion in 2014-15, which is more than at any point under the last Government. This has been possible because the Government increased infrastructure spending by £10 billion over the past two Autumn Statements, increases which the Budget committed to making permanent, with a further £3 billion a year from 2015-16.
I thank the Minister for that Answer. However, the Office for Budget Responsibility reported a rather different situation last week, when it announced that public sector net investment would fall by 34%, from £38.7 billion in 2010-11 to an estimated £25.5 billion in the current year, 2012-13. The OBR also forecast that, taking into account all the measures so far announced, including those announced in the Budget last week, there would be zero growth in infrastructure spend between now and 2017-18. Will the Minister please explain why these measures have failed, and continue to fail, to boost overall infrastructure investment, and which additional measures he plans to introduce to improve the dire forecast for the next five years?
My Lords, first, it is necessary to clear up the numbers. There is a significant difference between public investment numbers and investment in infrastructure. Public investment includes huge investments in health and in defence, so there is a significant difference there. Also, if you look at the national infrastructure plan, you see that approximately 80% of the investment that we expect over the next 15 years in fact comes from the private markets and not from public capital expenditure.
My Lords, the national infrastructure plan has identified some £200 billion of energy infrastructure investment and £200 billion of communication and transport infrastructure investment. What proportion of that total does the Minister estimate might be under way by the end of five years, and to what extent are any delays caused not by the absence of finance—where sovereign funds and others are willing to put up the money—but by planning and environmental legal constraints in this country?
I thank my noble friend for that question, which focuses us on the issues to do with accelerating the delivery of this very important programme. With respect to the proportion that will be under way within this Parliament, this Government have focused activity on the top 40 programmes and projects, which accounts for about £200 billion of the £400 billion my noble friend refers to. Approximately 20% of those projects are currently in construction, and we would expect that proportion, by 2015-16 and the end of this Parliament, to be approximately 50%. There is no question but that the gate that most constrains our ability to accelerate the stream of projects is to do with the variety of planning regulations that surround any major public infrastructure investment.
Do I take it from the Minister’s enthusiasm for private sector investment in infrastructure, with which I wholly agree, that he supports the expansion of Heathrow Airport?
If I may say, my Lords, those are two quite separate questions. I am very enthusiastic about private sector investment. Infrastructure investments lend themselves to financing in the private markets because they generate a cash flow that can repay those investments. The question about Heathrow Airport is an entirely separate one, although I accept that airports are a particularly attractive investment proposition for the private markets.
My Lords, is not the difference between the figures that he quoted and those quoted by my noble friend Lord Hollick that the previous figures were allocated but not actually spent?
I bow to the noble Lord’s extensive experience in managing public expenditure. There is absolutely a distinction between what is allocated and what is spent. There is a small additional amount this year that is underspent, but it is in the region of £2 billion, which is consistent with previous years. I agree that that is part of the difference.
My Lords, the Budget document says that the Government will create an enhanced cadre of commercial specialists in Infrastructure UK to promote infrastructure delivery. How many such specialists are there now, how many will be in the enhanced cadre and when will these specialists be appointed?
I thank the noble Lord for drawing attention to an important part of our intervention to improve the public sector’s delivery of these crucial projects. On the question of the amount of resources required, we are not simply discussing the resources in Infrastructure UK here; we are discussing the resources right across government, particularly in the government departments that are charged with delivering infrastructure: the DfT and DECC being the two primary examples. Between now and June, we will work precisely to define their requirements, based on the project load that they are managing, and what they ought to be staffed with in order to make that happen. That gap is thus being defined, and we have to assess what is in the departments as well as what is in Infrastructure UK in order to determine how to fill in that difference.
My Lords, will my noble friend confirm that had he continued with Alistair Darling’s plans for capital expenditure, capital expenditure would have been severely reduced?
My noble friend is precisely right that the restoration to capital expenditure which this Government have made through the 2010 spending round, the two Autumn Statements and the recent Budget, has restored capital expenditure levels to considerably above the previous Government’s plan.
My Lords, can the Minister clarify how much of the amount he quoted in his original Answer is in respect of Network Rail and how much is capital expenditure, whether it is considered to be in the private or public sector, and whether or not it was financed by government guarantee?
The plan for Network Rail is included under the high-level output specification, which is a £9 billion plan from 2014 to 2019. Of that £9.4 billion, approximately £4.2 billion has been added during the tenure of this Government.
My Lords, the Minister mentioned defence infrastructure. Does he not agree that it would be better over the next eight years to spend money on building warships in our warship yards rather than spending money in those yards not to build warships, which is what the plan appears to be?
I congratulate the noble Lord on being able to take the Question into the sphere of defence expenditure, which is not my expertise or my brief. One thing that I am working on in all our infrastructure investments is to make sure that they are highly productive. Spending the money that we are allocating well is probably the most effective thing we can do over the next three years.
(11 years, 5 months ago)
Lords Chamber
To move that this House takes note of the Budget Statement and the economy of the United Kingdom.
My Lords, yesterday’s Budget was extremely clear on the two issues which it set out to address: first, the challenges facing the UK economy; and, secondly, the Government’s response to these challenges. On the first, we are all very familiar with—and should never forget—how we got here. There was a massive financial crisis which has turned out to have even more serious consequences than we thought at the time; and after that bubble burst we were left with the record and unsustainable debt levels unwisely accumulated during the boom years. The recovery from this trauma is slower than any of us would have liked or, in fact, have anticipated. It has left us with both deficit and debt levels that are still far too high.
On the second point, the Government have been consistent in basing their policy response on their three key pillars: an unwavering commitment to the fiscal responsibility which is at its heart, reinforced both by monetary activism to support demand and keep interest rates low and by a reforming agenda of supply-side measures aimed at ensuring that the UK is one of the best places in the world to do business. This strategy has been pursued with careful consideration of the cost of living pressures on ordinary people, and the Budget therefore took measures to mitigate some of those pressures.
If there is an underlying mission statement or ideology to this strategy, it is one of economic realism. If our economy is to succeed in the global race over the medium and long term, we must have businesses that are world beaters. That must be supported by first-class infrastructure and a tax and regulation environment that fosters enterprise. These businesses must be able to draw on a highly educated workforce which is motivated to succeed because hard work is incentivised. That is consistent with what my right honourable friend the Chancellor described yesterday as the “aspiration nation”. I will expand on these individual components of policy and how they have evolved, which will, I hope, provide a framework for the contributions that follow.
First, on fiscal policy, there should be no doubt that the Government are committed to reducing the deficit. This commitment is key to retaining the market’s confidence—confidence which is measured daily through the record low interest rates that we currently enjoy. We should not take this confidence for granted: at our current levels of debt and borrowing we would be vulnerable to the potential fickleness of the markets if our commitment to fiscal consolidation wavered. It is like stretching a piece of fabric: you never know when or where it will split but the risk is always there. We hear arguments—as I am sure we will later this afternoon—for borrowing more, and opposite arguments for harsher spending reductions. I think that we have the balance about right and that we have adapted to the worse than anticipated economic environment in which we find ourselves.
The Office for Budget Responsibility—another of the Government’s important and brave innovations in the interests of transparency, so that we can all agree on what the numbers really are—is extremely clear on the reasons why our recovery is slower than it originally forecast. Unfortunately, none of these factors is within the control of any Government. Those reasons are, first, that the financial crisis was deeper and its consequences more pernicious than was originally understood; secondly, the depth and continuation of the well advertised eurozone crisis; and, thirdly, the impact of commodity price inflation, particularly in 2011.
That, if you like, is the bad news. However, there is also some extremely good news about how our economy is responding to these challenges, and I do not want to pass over that. In particular, our private sector has created 1.25 million new jobs. These are real jobs for real people, making a real difference to their lives and prospects. To put that into context, for every job lost last year in the unavoidable shrinkage of a bloated public sector, six new jobs were created in the private sector. It is a crucial success, and very good evidence that a vital element of what is described as rebalancing is, in fact, proceeding to plan.
An important ingredient in prosecuting this fiscal consolidation plan—particularly when growth and the tax receipts which flow from it are elusive—is the effectiveness of the Government’s spending controls. We must manage well the things that we do have some control over. That is really how our effectiveness as a Government should be measured.
Yesterday’s Budget was fiscally neutral despite the many stimulative measures it included. This was due to the rigorous financial management by my right honourable friend the Chief Secretary to the Treasury, who resisted the traditional final-quarter Whitehall spending splurge. That is precisely the sort of discipline that you see every day in the private sector and I am delighted that it is now being applied in the public sector too. We are focusing government departments on meeting targets that are consistent with our consolidation plan. We are keeping the lid on public sector pay, which is important. We are also continuing to extract further reform efficiencies in how we run government. However, we are still making space for a very valuable additional £3 billion per annum of capital spend from 2015 onwards.
I turn to monetary policy. We in this House have engaged in a very active and expert discussion about the role and efficacy of monetary policy—which was another big topic yesterday. Some of the subsequent analysis has said that monetary policy has not really changed anything while, on the other hand, other analysis has said that it has been a revolution. So, clearly, it is worth clarifying the policy.
I think that the Government’s thorough review of our monetary policy is most welcome. It was exactly the right thing to do in view of all the surrounding discussion and was very thorough. The updated remit has also been agreed by both the present and the next Governor of the Bank of England. The important points are as follows. First, we are retaining the existing model of flexible inflation targeting. Secondly, we have reaffirmed the primacy of the 2% inflation target. Thirdly, the updated remit provides for a much more explicit discussion of the trade-offs involved, particularly when monetary policy is responding to the kind of severe economic shock that our economy has suffered. Fourthly, the Government have requested that, by August, the Monetary Policy Committee assess the potential of so-called intermediate thresholds, the technique which has been utilised by the Federal Reserve in the US. The Government want to build on good practice in monetary policy both here and around the world in order to develop a best-in-class framework. We should therefore welcome it. It is transparent and includes the appropriate governance.
On a slightly more practical and specific level, there is also a clear determination to drive ahead with the implementation successes that we have had in monetary policy, particularly, for example, with the Funding for Lending scheme, which is transmitting the concept and goal of monetary activism into the real economy. We are seeing its impact on funding costs.
This is probably the right point for me to discuss the home-buying initiatives, which were an important part of the announcement yesterday. One of the obvious challenges for any Budget is how to create a meaningful stimulus to the economy and make a meaningful difference to people’s lives and aspirations, within the confines of extraordinarily tight fiscal management. I believe that the two help to buy schemes, as they are branded, are an extremely effective and creative way of responding to this challenge. The equity loan scheme will provide £3.5 billion to invest in approximately 74,000 new homes, while the mortgage guarantees will support a potential total of £130 billion of mortgages. These are bold and innovative policies but they will also require careful risk management.
Our focus on the deficit should not and does not mean that we cannot have a strong and reforming growth strategy. In fact, much of yesterday’s Budget was devoted to just that: how we can help business. In my own relatively short time at the Treasury, I have been extremely impressed by the attentiveness with which this Government listen to what business is asking for and the urgency with which we try to press forward with the corresponding reforms.
In my own area of focus—delivering our economic infrastructure quickly, well and cost-effectively—I have enjoyed the total support of my right honourable friends the Prime Minister and the Chancellor. That is why we have pushed through this plan to increase capital spending by £3 billion a year; why we are working on a significant upgrade of the capability within the key Whitehall departments responsible for the economic delivery of infrastructure; why we are focused on the delivery of the biggest 40 projects under our control; and why we have made available a very significant guarantee facility, which takes advantage of the strength of our credit, to be able to guarantee projects that need that one extra shove to move from conception into execution. Very importantly, we are also translating our policy of electricity market reform into a set of financeable contracts so that we can set about building the new electricity-generating capacity we require.
Overall, our supply-side reforms—I am not going to list them—have significantly improved our ranking in international competitiveness league tables. This is particularly true in tax, where we are now right at the top. Let us give credit: bringing corporation tax down to 20% from 28% in 2010 makes us the most competitive in the G20. When we look in the Treasury at the different ways to stimulate the economy, there is nothing that is more immediately impactful than reducing the rate of corporation tax, which is why my right honourable friend the Chancellor has focused on it. The introduction of the £2,000 employment allowance benefits smaller businesses and reinforces the positive employment momentum that has been established successfully in the past few years.
I believe that this Government have got the tax mood music just right. Lower tax rates for companies and individuals are essential for a successful enterprise economy, one that concentrates on growing the size of the cake so that we can have much easier discussions about how we share it. In return, however, we expect taxes to be paid, and we are right to push through strong tax avoidance and evasion measures domestically and I praise my colleagues in the Government for taking a lead in co-operation to address this subject internationally.
Ensuring that taxes are paid is one element of how this Government ensure that their policies are deployed fairly. Once again, this Government have led in transparency in setting out the distributional implications at each fiscal event—another innovation—demonstrating that those who can afford the most have also contributed the most to our deficit reduction. I also point to pensions and welfare as examples of good administrative reform that simplify and improve overly complex systems. Similarly, the simplicity and power of moving to a £10,000 personal allowance takes 2.7 million people out of the tax system altogether.
In conclusion, I fully accept that this country is facing a highly challenging economic situation. The slowness of recovery has left both debt and deficit at levels which still expose our economy to substantial risk. This has much to do with the precarious levels of public and personal debt that were the legacy of the financial crisis, and the continuing recession in the EU, our principal trading market. This Government are focused on fixing our debt problem and are utilising our relatively limited room for manoeuvre to support businesses and individuals who want to get on and succeed. It will take time. In a global economy, we are not entirely masters of our own destiny. But I believe, as does my right honourable friend the Chancellor, that we have the right mix of policies to address the challenges we face.
My Lords, I thank all noble Lords for their excellent contributions. I am still new enough in my job to find myself taking copious notes with lots of ideas to follow up on, so I welcome the debate. I may have a bias in my listening, but I have to say that the broad sense of the contributions suggests that this is a well crafted Budget that has delivered very well what can be delivered, given what I think everyone accepts is limited room for manoeuvre. The noble Lord, Lord Desai, said that once you have established a strategy you should stick to it so that people should not expect enormous deviation from one annual Budget to the next. I shall try to address the questions and issues that have arisen, and I shall do that in terms of subject matter so that there is some coherence rather than moving from one contributor to the next. I hope that that is acceptable to noble Lords.
On the deficit, I did not hear a compelling case for an alternative strategy to that which the Government have in place. We have pointed to the many exposures that would occur should we embark on another spending spree without getting the budget under control. I should point out that the OBR borrowing forecast shows a fall in every year of the forecast both in cash terms and as a percentage of GDP, and that is both with and without some of the special one-off changes such as the APF transfers. I concede that borrowing is falling more slowly than we would like, but that is because of the economic challenges and because we are allowing what the Economist has described as the “automatic stabilisers” to operate. Over the past three years, the UK has cut the structural deficit more than has any other G7 country.
A number of speakers such as the noble Lord, Lord Bilimoria, for example, talked about bringing down the level of public expenditure as a proportion of national income. I can confirm that the OBR forecast takes total managed expenditure down to, I think, 40.5% of GDP by 2017-18, which is the same level as it was in 2004-05. Several speakers, including my noble friend Lady Browning and the noble Lord, Lord Bilimoria, asked about the cost of borrowing. I can confirm that a 1% rise in government borrowing costs would add just over £8 billion to the annual debt interest by 2017-18. That provides some perspective on the risks we are trying to manage.
There was a lot of discussion about the impact of our weak export markets, the opportunity to switch into faster-growing ones, and how important conditions have been weighing against us. The OBR expects the euro area to contract by 0.5% in 2013, which follows a decline of 0.5% in 2012. Let me give noble Lords an example. In the year to the fourth quarter of 2012, goods export volumes to the EU fell by 2.5%, while our exports to non-EU areas grew by 1.2%. That gives a sense of the opportunity.
Some mention was made of international comparisons, particularly by the noble Lord, Lord Eatwell. With respect to Germany, I would just point out that the IMF has forecast that the UK will grow faster than Germany in both 2013 and 2014. With respect to the United States, our employment at just over 70% is now higher than in the US, where it is just over 67%. Those are some measures on which we are actually performing more strongly.
On monetary policy, I think the general mood of the debate was that noble Lords welcome a good and thorough review of this important area. I absolutely take on board the observations of my noble friend Lady Kramer, who believes that this is so important that it should be subject to a wider review. I also take on board the observations of my noble friend Lord Higgins that one of the reasons this needs to be managed extraordinarily carefully is the degree of independence that we have vested in the Bank of England, which is why I think we should welcome the clarity with which the new mandate has been defined.
I found particularly useful and interesting the contributions from those noble Lords who talked about what I would broadly describe as our industrial strategy, including, in particular, the speeches of the noble Lords, Lord Bhattacharyya and Lord Kestenbaum, as well as a number of other noble Lords. The Government are extremely interested in trying to get this right. The general sense that I got from the contributions was that while the ideas and policies are right, their scale, urgency and effective implementation need to be addressed with what I would describe as a private sector zeal. That is what I am in government trying to impart. The more we can accomplish that the better it will be. I would point to the money that has been applied to our world-leading sectors, in particular the aerospace industry. A number of noble Lords also referred to the importance of our science and research infrastructure. I absolutely accept those comments. In my own area of trying to define and improve our infrastructure, I am working with my right honourable friend the Minister for Business and Enterprise on incorporating the science base in the same way as we think about our digital or transport infrastructure. The utilisation of the Government’s own purchasing power as a way of incubating promising businesses is also an extremely valuable idea which the Government share and just need to implement effectively.
My noble friend Lord Flight reminded us of the structural change in the UK economy. If you isolate the difficulties that we have had in the financial sector, which was very large and suffered a very significant shock, and in the North Sea oil and gas sector—which is also very large and, certainly in recent years, mainly declining—you can identify in the rump of the economy some extremely promising stories for our long-term industrial future. We should not in any way ignore those.
In talking about our export markets a number of noble Lords said that we should switch to the faster-growing ones. The noble Lord, Lord Kestenbaum, in particular, and the noble Lords, Lord Desai and Lord Bilimoria, asked about our exports to the so-called BRIC economies—Brazil, Russia, India and China—and other strong emerging markets. Between 2009 and 2012 the UK’s exports to Brazil increased by 49%, to Russia by 133%, to India by 59% and to China by 96%. Those are very large numbers but, of course, come off quite a small base. My experience of the co-operation between the business department and the Foreign and Commonwealth Office is that the Government are extremely focused on working with our businesses, both big and small, to develop opportunities in those markets.
I now move on to what I would generally describe as some of the areas relating to fairness. The right reverend Prelate made a compelling case—supported by a number of other contributions from, for example, the noble Lord, Lord Davies, and my noble friend Lord Brooke—in essentially congratulating the Government and everybody who contributed on sticking to their commitment on overseas aid. Doing the right thing can sometimes be difficult but that does not diminish its importance. I think that the House offers its support to that continuation.
There was support for the childcare policies announced yesterday but also interest in how it will work for those at the lower end of the income strata. That is dealt with in the universal credit system, which has funding available to support people there.
There was also a discussion about utilising the new control framework which the Treasury is in the process of introducing on managed expenditure. As my right honourable friend the Chancellor said yesterday, it is really intended to turn unmanaged expenditure into managed expenditure. That will be implemented carefully to ensure that we manage any implications for the impact of our support policies.
The noble Lord, Lord Bilimoria, asked about the beer duty cut. That will go ahead and will come into effect next Monday. I understand from the experts in this area that any EU concerns on comparability should not be an issue.
Another subject that featured in a number of contributions, including from my noble friend Lady Browning, was pension reform and the affordability of the care caps. The Government have made it clear that we would implement those measures only if we could ensure that they would be paid for, and we would utilise some of the changes on national insurance and the three-year inheritance tax freeze to ensure that those are properly funded before they are introduced.
In the interests of time, I will move on to infrastructure. First, I confirm to the House that the Government are taking a long-term approach to capital spending as part of the 2015-16 round. That is why we have set in place the extra £3 billion a year, and we will also plan for a longer period than is customarily the case at the Treasury. In my view, one of the problems with the historical approach to capital spending has been the relatively short periods forward for which it is committed, which does not suit the longer gestation periods of some of the projects that it is intended to support. The plan of this Government is to fix that. Of course, that is on top of additional investments in capital spending in the Autumn Statement.
The noble Lord, Lord Eatwell, asked about the amounts of capital spending, and the noble Lord, Lord Davies, reiterated this question. We do not have the precise numbers for the capital spend for 2012-13 yet, but when we do I will make sure that those are passed on. I can say that public investment as a share of GDP is on average higher over this Parliament and the next than it was between 1997 and 2010.
Other questions were asked about the efficacy of our infrastructure delivery and the challenge of getting it done now rather than being eternally in a planning period. My noble friend Lord Flight referred to some of the red tape delays that we have encountered. We are now in the second phase of our Red Tape Challenge and trying to address some of those regulations that could perhaps reasonably be considered overzealous, which have slowed down some of those plans. For example, something I have been involved in has been looking to get the regulators of these sectors to standardise the approach to infrastructure access charges, which should make these developments much easier.
My noble friend Lord Marlesford asked whether £3 billion a year was really enough. That is £18 billion in capital spend over the next Parliament, and that is while finances are tight. The focus on managing down current spend to accommodate that expansion of capital spend, given the tightness of our fiscal position, is an extraordinary commitment to that level of spend.
The noble Baroness, Lady Worthington, gave a very detailed and passionate speech about the carbon price floor. This is a technical subject that is worthy of a much broader debate. All I can say is that the Government are extremely focused on solving this equation of how to ensure that sufficient electricity is generated in a way that meets our desire to hit our environmental targets, to get it all done on time and to leave our consumers with an affordable result. That is absolutely the intention and I am certainly happy to discuss policies which do not end with that result.
We had some discussion around financial reform and access to finance. My noble friend Lady Kramer very eloquently summarised how it was important to bring together all the initiatives that will compensate for the dislocation in the banking system; for example, through the business bank. The noble Baroness referred to the reduction in stamp duty to stimulate the market, in particular for technology growth companies, so that they can grow here with equity rather than selling out earlier than would be optimal, and I absolutely support that more strategic approach to bunching those initiatives together.
Finally, we had a number of interesting contributions around the initiatives announced in the Budget with respect to housing and the support that the Government propose to give to housing. Those contributions neatly summarised the balance of the argument. On the one hand, I think people accept that this is a critical area; it can and is intended to be highly stimulative to the economy. It is an area where you can get things moving quite quickly so in that respect it is a powerful initiative in the Budget. On the other hand, there was much wise counsel, and I certainly share the caution about how this is implemented to ensure that we both understand and manage the risks involved. In answer to the question from the noble Lord, Lord Desai, about how closely we manage the household debt situation, I would note that household debt in the UK has fallen as a proportion of income from 175% in 2008 to 144% currently, so it is coming down, albeit rather slowly.
In answer to some of the specific questions asked by the noble Lord, Lord Eatwell, I say that the scheme is intended to be self-financing, so the mortgage guarantee scheme will have a price for the guarantee which will be judged to meet the expected level of losses as one would actuarially calculate them. It is intended to be a market instrument in that sense. We have between now and the beginning of next year to work that through in detail with the leading market practitioners.
(11 years, 5 months ago)
Lords Chamber(11 years, 5 months ago)
Lords ChamberMy Lords, fairness underpins the Government’s plans to reduce the deficit. Universal credit will allow people to keep more of their income as they move into work, while the personal allowance increases announced by this Government will benefit 25 million individuals. As a result of this Government’s actions, the richest pay more tax on capital gains, more stamp duty on their homes and more tax on their pensions, and they are less able to avoid or evade tax.
Listening to that Answer, one would not be aware that the disparities in wealth and income in this country have reached record levels. Will the Minister confirm that 1% of the top earners earn 10% of income? The Government are being criticised on the grounds of their inequality policies by everybody from the bishops to the anti-poverty lobby—people who know what is going on. Further, does he not agree that when inequalities in a country get beyond a certain level, as they have here, our social cohesion is seriously damaged?
With respect to the 1% of the top taxpayers, the first point I would make is that actually they are responsible for paying 24% of income tax. The top 10% pay just under 50% of income tax—I think it is 44%—so their contribution to our revenues is the greatest in proportion. As for the development of inequality since this Government came into office, the commonly accepted measures of income inequality have in fact decreased.
My Lords, will my noble friend confirm that the substantial increase in the capital gains tax levied, which was forced through the coalition by the Liberals, has led to a dramatic reduction in the revenue from capital gains tax?
I thank my noble friend for that question. I am not aware of the initial revenue yields. I asked the department earlier, and it said that it did not break it down that way. My noble friend clearly alludes to the importance in tax management of understanding the ultimate yield on a tax, rather than simply assuming that when tax rates are changed people will continue to behave the same.
My Lords, is the Minister aware that, apart from me, the leading researchers in this subject all agree that there is far more inequality in our society than is required for the efficient working of the economy? Therefore, it follows that the inequality is totally unjustifiable.
There is clearly a relatively academic debate about the impact of equality and inequality on efficiency. All I can tell noble Lords is that this Government and their policies are focused on ensuring that, at the top end, those in receipt of large incomes and with significant wealth have been by far the major contributors to the consolidation of our deficit.
My Lords, given the view of employers that business competitiveness requires the replacement of British jobs by new technologies at home and by low-paid jobs abroad; given the Government’s view that the rate of income tax paid by the wealthy should be cut, public services for us all should be cut and the incomes of the poor should be cut; and given that, taking these together, the effect is a reduction of demand in our economy and widening inequality in our society, how do the Government foresee growth and the fruits of that growth being shared equitably among all our people?
There are a significant number of issues in that question. At the heart of this Government’s economic policy is that until we are able to balance our public finances, it is extraordinarily difficult for us to grow this economy in a sustainable way. All our policies are devoted to making sure that we can consolidate our fiscal position and that the contribution to making that happen is appropriately distributed, with by far the most significant contribution coming from those who can afford most. At the bottom end of society, we have a welfare system that works on the basis of incentivising people to get back into work. I absolutely agree that jobs transform lives. The 1 million-plus private sector jobs that have been created are a welcome development in the economy.
My Lords, may it not be more sensible for the Government to concentrate their efforts on trying to increase the overall wealth of the country, rather than rabbit on about how they might divide a perhaps declining cake?
My Lords, I absolutely agree—I am sure everybody does—with the sentiment that it is much easier to argue over the slices of an increasing cake than to divide one up that is static or shrinking.
My Lords, on the noble Lord’s major point about increasing personal allowances as a factor, does the greater relief go to somebody on £50,000 a year or somebody on £15,000?
What I can tell the noble Lord about the increase in personal allowances is that it is a highly progressive change in the tax system. It applies to about 24.5 million or 25 million taxpayers, who will enjoy a benefit of about £400 from it in 2013-14, and it takes just over 2 million people out of the tax system.
Has my noble friend studied the evidence published by the Equality Trust, which shows that across all the OECD countries, and similarly across all the states of the United States, there is a strong correlation between income inequality and indices of social malfunction such as crime, alcoholism, and teenage pregnancies? Considering that we are the second most unequal state in the whole comparison, does he not think that the Government’s policies should be strengthened to deal with those inequalities?
I thank my noble friend for pointing out that the causes of some of these social challenges are broader than those that will be tackled by our tax policy. It is much more important to get to the root causes and deal with issues such as education challenges, other public services, alcoholism and the breakdown of family life. That is extremely important.
The noble Lord has made much in his Answer of the proportion of taxation paid by the highest earners. Is not the reason for this that their gross incomes are excessively high compared to those of others in our society?
The noble Lord is correct that it is a simple question of arithmetic. At equal changes, they will make the greater contribution. However, if one looks at the distributional analysis—it is to the Government’s credit that at each fiscal event we lay out the distributional analysis, which is a great step forward—it shows that their increase is proportionally greater than the amounts they have.
(11 years, 5 months ago)
Lords Chamber
To ask Her Majesty’s Government what representations they have received from the public on the negotiations for the new European Union budget perspective period to 2020.
My Lords, the Government have received a number of representations from the public on the negotiations for the multiannual financial framework 2014-20. These include letters and e-mails from individual members of the public and their Members of Parliament, charities and other non-governmental organisations and universities and research bodies.
Does my noble friend agree that it was a very good deal for the Union and for this country, bearing in mind the balance of severe spending restraints at one end but long-term real infrastructure investment at the other? Is it not now the job of Conservative Ministers in the coalition to explain properly how the EU budget system works: a modest budget in comparison with other member states, no debts or deficit, no borrowing, payments that are always less than commitments, and a budget that does more and more good with less and less spent on farming?
I thank my noble friend for congratulating the Prime Minister on the excellent deal he brought back. We accomplished our three main objectives, which were to restrain the size of the budget, to make sure that we kept hold of our abatement and to resist any new EU-wide taxes. We shrank the budget and shifted it away from the more traditional areas, such as the common agricultural policy, into growth-oriented funds. I agree with my noble friend that we are shifting towards a pattern of expenditure that is more consistent with the reformers among us.
My Lords, will the noble Lord accept that what we have here is a seven-year financial framework, but what really matters now is the annual budget year by year over the next seven years? Can he give an undertaking that this Government will pursue a system of zero-based budgeting in each of those seven years so that we can cut out budget lines that are wasteful and increase those budget lines which need to be increased rather than take this rather conservative approach of across-the-board cuts which cut the good as well as the bad?
The noble Lord is correct that the devil is always in the detail and that it is our traditional practice year by year to negotiate very effectively on behalf of this country to bring about a better outcome in the annual budgets. However, it was extremely important to cap the overall size of the budget as a first step in the necessary reforms that we are all in favour of.
My Lords, do the Government yet know and have the public been told whether the EU’s so-called Parliament is going to vote in secret on this budget? Is not even the suggestion that it might do so yet further proof of the EU’s innately undemocratic and profligate nature? Is it not time that we closed the whole mistake down? What useful purpose does the EU now serve at such vast expense to all of us?
I will address the narrower question; so many noble Lords have much more experience on the broader question. I do not know whether the European Parliament intends to vote in secret. If it does, that is completely wrong.
My Lords, will my noble friend comment on the reports in the papers yesterday that this budget agreement has been reached for certain sweeteners, amounting to billions of euros, being paid to practically every nation in Europe other than the United Kingdom?
In this budget we are talking about over €900 billion, six separate headings of component parts, and an ‘other items’ budget which includes a range of other things. It is a big and complex budget with many different components. There were lots of parts to the negotiation, and these particular transactions are indeed part of it.
My Lords, given that the EU budget is being reduced in real terms, can the noble Lord tell us what the consequential reductions are in expenditure in the UK?
There were three key things that the Prime Minister wanted to protect in terms of the expenditure coming into the UK. The first was to make sure that our universities were very well positioned to bid for the grants available. That part of the budget has gone up and the rewards are based on excellence, so they should do well there. Secondly, he wished to make sure that our farmers are protected in terms of the environmental programmes that they support, which he did. Thirdly and finally, the structural aid that goes to our less well-off regions has been protected at the existing base level of €11 billion.
My Lords, none the less, is it not true that the final outcome of the arrangement for the next seven years will in fact mean that the United Kingdom will be paying £500 million extra per year? Is that really acceptable under the present circumstances with cuts to our own social services?
The final outcome will be determined on a year-by-year basis depending on exchange rates, the growth of our national income and other such factors. The spirit of the question is indeed correct: our net contribution is likely to go up. That is simply because of the concessions made in the 2005 negotiation, when we surrendered some of the abatement advantages.
(11 years, 5 months ago)
Lords Chamber
To ask Her Majesty’s Government what is their assessment of the role of rating agencies and the impact of any downgrade of the United Kingdom’s rating.
My Lords, last Friday Moody’s downgraded the UK rating to AA1, with a stable outlook. It says that the UK’s credit-worthiness remains extremely high but warns that it could downgrade the UK rating further in the event of,
“reduced political commitment to fiscal consolidation”.
The credit rating is one of the important benchmarks for any country but near-historic low gilt yields continue to reflect the credibility earned by the Government’s economic strategy.
I think I thank the Minister for that Answer. If it is all so good now, why did he covet the AAA rating so strongly? Is it not true that the United States had a downgrading, and that it was not a problem and interest rates remain low? Another risk is that the pound will drop further. If it does, there is a real risk to lenders, who could lose a lot of money as it is repaid in downgraded pounds. In those circumstances, would the Chancellor be minded to do anything at all?
I thank the noble Lord for those observations, which contain several of different questions. If you review Moody’s analysis of the UK economy you could not see a stronger recommendation of the Government’s policy of fiscal consolidation. I commend it to everybody as background to policy and why it is the appropriate one in these circumstances.
On the specific question about the impact of currency movements on the exposure of various lenders, my experience in those markets tells me that lenders manage their currency exposures very effectively and that the currency devaluation should not increase those particular exposures.
Will my noble friend confirm that it is the same rating agencies that are apparently of such concern to the Opposition which told us that the junk collections of mortgages, which in part caused the financial crisis, were AAA-rated? Should we not look at what is happening in the real economy rather than at what rating agencies are saying about it? Is it not true that my right honourable friend the Chancellor of the Exchequer is presiding over a remarkable situation, given the shambles that he inherited from the previous Government?
As always, I thank my noble friend for his important observations. There are, again, several issues in there. First, he is absolutely right—Moody’s refers to this—that two things have caused this downgrade. The first is the sluggish growth of the global economy, which has slowed down the British economy; and the second is the very high levels of public and domestic debt, and the difficulty in driving those down.
On the second point, with respect to the credibility of the rating agencies, there are some very important issues surrounding that, particularly when one discusses complex securities such as the ones that we had in the mortgage-backed market. Frankly, with respect to the sovereign market, all the information used to determine credit assessments is perfectly visible to everyone, which is why the markets’ reaction to the downgrade on Friday was so measured.
My Lords, bearing in mind that these agencies give the same grade to an enormous and widely different range of borrowers, leading economists pointed out a long time ago that they cannot be, and should not be, taken seriously. Also, is the Minister aware that all the best economic research shows that one major force exacerbating the economic troubles of the past few years has been the rating agencies? Would he remind the House who is supposed to be regulating these agencies and why they have not intervened? If they have not intervened, is it not about time that someone did something about them? These agencies are a real danger to the survival of the world economy, and I am amazed that the Chancellor himself takes them seriously.
The noble Lord makes some very important observations. First, as I am sure he knows, one of the rating agencies is being sued by the US Government, reflecting the very concerns that he brings out. With respect to relatively simple credit considerations, and in terms of the UK economy the information is all out there, the Chancellor’s economic policy and the performance of the UK economy is evaluated every second of every day by the financial markets. The verdict of those markets is reflected in our historically low gilt yields. This morning we were trading in the 10-year gilt below 2%, which is the most profound commentary on the success of the UK Government’s current economic policy.
My Lords, the underlying issue is surely growth. Yesterday, Paul Tucker, deputy governor of the Bank of England, floated the idea of levying a penalty on banks that park their money at the central bank rather than putting it into the real economy. What comment does the Minister have to make on that strategy?
My noble friend raises the question of monetary policy. We have had a number of debates on creativity to restore a focus on growth and not purely on short-term inflation targeting. All these ideas are welcome and demonstrate the importance of generating growth. We should have the debate but be very focused on sticking to a monetary policy that understands the importance of the medium-term inflation target, while accepting a degree of flexibility around output.
Some specific measures that the Government have taken, such as FLS, were recommended in the Moody’s review as a very positive sign, so other ideas should certainly be debated and considered.
My Lords, could the Minister tell the House whether it is better to borrow to fund the fiscal costs of negligible growth or to fund the expansion in investment and growth?
My Lords, I am not sure that I accept the specific question of my noble friend. It is better to have an entirely consistent strategy of fiscal consolidation to ensure that we regain our credibility in the financial markets so that we can continue to borrow at these historic low rates. If we have a choice between funding capital spend—let us call it that—and current spend, all other things being equal, I would choose capital spend. We saw that in the Autumn Statement, when the Government switched £5.5 billion, if my memory is correct, into financing capital spending because that yields better to improve the growth process. However, it all needs to be done in the context of balancing other important consumer and political objectives.
(11 years, 6 months ago)
Lords ChamberMy Lords, with the leave of the House, I shall now repeat a Statement made in another place by my right honourable friend the Chancellor of the Exchequer.
“Mr Speaker, this decision is a stark reminder of the debt problem built up over the past decade and a warning to anyone who thinks that we can run away from dealing with those problems.
I can report that we have not seen excessive volatility in the markets today: 10-year government gilts are broadly flat—trading at around 2.16%—within the trading range of the past week and near the very lowest rates of borrowing in our history. The FTSE 100 is currently up by about 35 points. The credit rating is an important benchmark for any country but this Government’s economic policy is tested day in, day out, in the markets—and it has not been found wanting today. Families and businesses see the benefit of that in those very low interest rates.
If we accept the outcome of the rating agency decision, we must accept the reasons given for that decision. Moody’s points to the combined impact of what it describes as the ‘slow growth of the global economy’ and the necessary ‘domestic public- and private-sector deleveraging process’—in other words, the process of winding down the huge debts that built up in our society over the past decade.
That is the environment we are operating in, dealing with the very high deficit and debt trajectory this country had coming out of the financial crisis, made more difficult by the economic environment abroad. For on the same day as the rating decision, the latest European forecasts showed the eurozone deep in recession and growth in key economies such as France and Germany weaker than ours.
Crucially, Moody’s says that the UK’s creditworthiness remains ‘extremely high’ because of our ‘highly competitive, well-diversified economy’ and a ‘strong track record of fiscal consolidation’—what it calls the ‘political will’ to ‘reverse the UK’s debt trajectory’. Its message to this Government and this Parliament is explicit: the UK’s rating could be downgraded further if there is a ‘reduced political commitment to fiscal consolidation’.
You will not get that reduced commitment from this Government. We will go on delivering on the economic plan that has brought the deficit down by a quarter and helped create a million private sector jobs, and which continues to secure very low interest rates not just for the Government but for families and businesses in the country.
Ultimately, that is the choice for Britain: we can either abandon our efforts to deal with our debt problems and make a difficult situation very much worse, or we can redouble our efforts to overcome our debts, make sure that this country can earn its way in the world and provide for our children a very much brighter economic situation than the one we inherited from our predecessors. That is what I am going to do—and that is what this Government are going to do”.
My Lords, that concludes the Statement.
My Lords, if I may be very specific about Moody’s expressed reasons for the downgrade, it is due to the,
“slow growth of the global economy and the drag on the UK economy from the ongoing domestic public- and private-sector deleveraging process”.
The noble Lord is absolutely right that we are growing far more slowly than was anticipated. That is a phenomenon of being highly constrained in a global economy that has had severe problems. Every other piece of advice implicit in Moody’s explanation for this downgrade tells us that the most critical thing is to continue with the path of fiscal consolidation.
My Lords, does my noble friend accept that we were supposed to have this Urgent Question much earlier in our proceedings, and that if this does not happen the Whips should rise and say what is going on?
As far as the substance is concerned, does my noble friend agree that it is absolutely crucial that the Government should continue with their existing policy? The reality is that they have not managed to reduce the deficit as fast as we would have liked. The Labour Party is saying that the reduction is being done too quickly and by too much, but clearly the reason why we have had this reassessment of our position is that it has not been done as quickly as international opinion might feel would have been appropriate.
If we are going to take this attitude, it is essential that aggregate demand should be maintained. In that instance, a further increase in quantitative easing would be appropriate. However, we are in some danger of having economic management split between an unaccountable Monetary Policy Committee and the Treasury. Perhaps this point also should be taken into account.
I thank my noble friend for those observations. As for the timing of the Statement, I think that it was simply a matter of the earlier session not finishing on time. I, too, have been here for an hour and a quarter ready to talk about this Question.
On the economic substance, my noble friend raises a number of extremely important points. I do not think that we can evaluate the current economic situation in terms of a direct trade-off between growth and fiscal consolidation. The essence of the situation that we find ourselves in is that fiscal consolidation is an absolute prerequisite for recovery and for the confidence of the markets which allows us to borrow to finance this extremely high deficit. My noble friend is right that an array of other policy weapons is available to prosecute a growth agenda. That includes multiple supply-side reforms to make our economy more efficient, and the Government are fully embarked on those. An activist monetary policy plays an important part, but—I agree—within a constraint of managing very carefully any inflationary risk.
My Lords, the Statement makes it clear that there is the very real danger of further demotion if growth is not achieved. Have Moody’s or any of the other exalted bodies that are our lords and masters in this connection given any indication of at what point a failure to achieve acceptable growth will make possible a further and calamitous demotion?
Interestingly, Moody’s has established that the outlook is stable. That means that it would not anticipate a further ratings change in the next 12 to 18 months—unlike the situation with the US and French economies, where the outlook is deemed to be negative because they are not perceived to have the same political will to drive down the deficit. The focus of the ratings agencies is much more to do with the management of our debt and driving down the deficit than directly with growth. Growth gives you the fuel to help manage down the debt, which is their primary concern.
The noble Lord exaggerates the confusion or nervousness of the markets. My interpretation of the markets is that there is very little volatility at the moment; the markets have taken this situation entirely in their stride. The market variable that has shifted the most is the exchange rate, where sterling has moved back to a range where it was trading before the eurozone crisis. The risk that has gone out of the eurozone sector has enabled the euro to strengthen; and the risk that was inherent in the US so-called “cliff” situation did not materialise, which has allowed the dollar to strengthen relative to sterling. I do not think that the markets are doing anything other than continuing to reward this Government’s focus on fiscal consolidation, which is why we are borrowing at these incredibly cheap rates.
My Lords, perhaps I can pursue an issue which my noble friend talked about: policy weapons which can be used to promote growth in a sustainable way. The Government have acknowledged that infrastructure is one of those policy weapons and that moving decision-making locally is another. I wonder whether now is the time to remove some of the constraints which the Government—the Treasury—have put on tax increment financing for local government, so that it can use that challenge to increase growth locally. At the moment, the restrictions that have been put on TIF by the Government will have the effect that very few schemes will come forward.
I thank my noble friend for bringing a very constructive perspective on ways in which we can address some of our supply-side problems in the short term. Investing in infrastructure and devolving spend to the regions, where they have a clearer grip on the projects necessary for local growth, is one thing that we should be pursuing. I know that my right honourable friend the Chancellor will be making some announcements in the Budget with respect to following through the recommendations of my noble friend Lord Heseltine.
My Lords, can the Minister enlighten us as to what will be the Government’s response to the failure of their deficit reduction plan? That is the reason why we have had the downgrade: because the deficit is not being reduced as was hoped. Do the Government agree with the Secretary of State for Business, Innovation and Skills, who says, “No more cuts”, or will they accept the advice of the No Turning Back group, and say that what we need are more cuts in spending so that we can have more cuts in taxes? Does the Minister agree that this is a Government without a strategy to face this looming crisis?
The noble Lord identifies some of the trade-offs that we have to tread carefully between. I think that the Government have an extremely clear economic strategy. Not everybody necessarily agrees with it, but the strategy could not be clearer. It is to demonstrate to the markets that we absolutely have control of the public finances, to reform our financial system, to ensure that we have the right kind of activist monetary policy and to ensure that, right through the economy, we introduce real microeconomic reforms that can unleash the productive capacity of the economy. That is an extremely clear strategy. It has been prosecuted with consistency through the life of the Government.
Moody’s is entirely supportive of government policy, which is to focus on reducing the deficit. It has merely demonstrated that because of the slow growth in the world economy and the huge debts with which we started this process, it is taking longer than we would all hope.