Comprehensive Spending Review

Lord Eatwell Excerpts

Monday 1st November 2010 Lords Chamber

[Lord Eatwell]

My Lords, this has been a remarkable debate. There have been some very fine speeches, mostly from these Benches, but also from the Benches opposite. We heard three remarkable maiden speeches from the noble Lord, Lord Allan of Hallam, my noble friend Lady Healy of Primrose Hill and my dear and noble friend Lady Nye.

Two questions have been central to the whole debate. The first is whether this policy is necessary and the second is whether it will work. Is it necessary? That depends on an assessment of the economic state of the nation and, in particular, the Government’s inheritance from the previous Labour Government. Let us reflect on that inheritance for a moment. In 2007, before the recession struck, the economy was growing steadily at a little under 2.5 per cent a year and maintaining the continuing steady growth that characterised Labour’s decade in office. Interest rates were lower than in the US and the cyclically adjusted fiscal deficit—as chart C6 of the Government’s Budget Report shows—was less than a quarter of 1 per cent of GDP. Crucially, the ratio of public debt to GDP was, at 36 per cent, the lowest in the G7 and well below the 42 per cent that Labour had inherited from the previous Conservative Government. This was a time, as many noble Lords have reminded the Minister, when the main plank of the Conservative Party’s economic policy was a commitment to match Labour’s spending plans.

In response to the recession, the Labour Government acted decisively, devising the much copied model for rescuing the banks, cutting taxes and accelerating expenditure, particularly on construction. There were two main results. First, in the very depths of the recession, which, given the size of our financial services industry, hit Britain particularly badly, unemployment was the lowest in the G7 countries other than Japan. Secondly, as a result of the anti-recession policies, the deficit grew rapidly, faster than in any other country, although, because we started from such a strong point, even today it is still the lowest of the large G7 economies.

The strength of the British economy going into the recession meant that even in the face of a severe fall in tax revenues the Labour Government could afford to stabilise the financial sector to save jobs and to save businesses. When the Minister sums up, perhaps he will say what he would have done differently. Would he have spent less and taxed more? How much deeper would he have wanted the recession to be?

In his Budget of March this year, my right honourable friend Alistair Darling put in place a plan for growth and deficit reduction. The OBR Pre-Budget Report states that,

“cyclically adjusted borrowing falls from 8.8 per cent of GDP in 2009-10 to 2.8 per cent in 2014-15”,

and in that fiscal year public sector debt reaches 74.4 per cent of GDP—still lower than any other major G7 country today.

The noble Lord, Lord Sassoon—he was echoed by the noble Lord, Lord Newby—is fond of telling your Lordships’ House that Labour has no recovery plan, yet in the CSR Statement Mr Osborne cited the impact of Labour’s plans and even costed them. He said:

“I have examined this proposal carefully and I have consulted the published documents of my predecessor”.—[Official Report, Commons, 26/10/10; col. 965.]

Was the Chancellor making it up? No, he was not. It is the noble Lord who has been making up this fairy tale.

What has happened as a result of my right honourable friend’s March Budget? Everything has turned out better than expected. Debt is lower than predicted and growth is higher. This Government’s inheritance was an economy on the path to recovery. This year to date, as a result of Labour policies, the economy is growing at an annual rate of 3.25 per cent and is set to beat the target of halving the deficit in four years.

What was the new Government’s balanced assessment of their inheritance? The new Ministers declared Britain “bankrupt” and “shattered”—that was a Liberal Democrat, by the way—and even, as a Tory Treasury Minister said, a “basket case”. This hysterical nonsense became the considered foundation of economic policy. The party opposite seems to have entered the most dangerous realm of all—they believe their own propaganda. The hysteria has produced the policy before us today. At its core is the attempt to eliminate the deficit in four years, even at the immediate cost of lower growth and higher unemployment—hence 25 per cent cuts in total expenditure, heavily weighted towards cuts in welfare. Yet by 2014, the Budget Report states that there is a 50 per cent chance that growth will be at the level that Labour’s plans would have achieved. How is that possible with the size of these cuts?

The predicted performance, the very core of the Government’s policy, depends crucially on a fast and sustained recovery by the private sector to fill the gap left by the fall in public sector spending, and not of course on growth in private consumption; that is cut by higher taxes and unemployment. Instead, private sector investment and house building are forecast to contribute more to the growth of the economy than they did even in the good times before the recession.

Will it work? A little history may help us. As we all know, Tories love cutting the public sector. That is what they came into politics to do and that is what the noble and learned Lord, Lord Howe, did in his Budget of 1981, as the noble Lord, Lord Stewartby, reminded us. As he also reminded us, in response, 364 economists issued a statement that,

“present policies will deepen the depression”—

and—

“erode the industrial base of our economy”.

That statement has been much derided because, as we all know, the economy grew after 1981. However, what is not noticed is that “present policies” were not continued; they were radically altered. The next five years witnessed the most dramatic change in monetary policy since the war, resulting in an extraordinary explosion of consumer borrowing. Consumer demand filled the gap left by government cuts.

Can history repeat itself? It cannot in the liberalisation of credit—that has been done; nor in lower interest rates—they cannot go any lower; nor, of course, in growing consumer demand. As my noble friend Lord Myners pointed out, there is only one monetary policy weapon left: quantitative easing. I have severe reservations about the strategy of maintaining demand by quantitative easing. It may keep interest rates down at the short end, but the lack of long-term bonds is seriously increasing the riskiness of insurance companies and pension funds. It may mean that there is more cash in corporate hands, but will they spend it on investment when expectations of growing demand are so depressed? Is quantitative easing simply pushing on a string? In truth, no one knows.

The other leg of the Government’s policy is their claim to have increased confidence. Confidence in the commitment to cuts, yes; confidence in the loss of jobs, yes. I know that the noble Lord is fond of fairytales but will the confidence fairy really wave her magic wand over a growing Britain? In truth, no one knows. That is why this policy is a huge gamble. For the sake of Britain we pray that it works, but there must be a high probability that it will not; as Mr Osborne says, there is no plan B.

We have the answers to our questions. Is the misery and destruction of this policy necessary? No, it is not; Labour had set Britain on a growth path to recovery. Will it work? No one knows, least of all the party opposite. What we do know is that vital political and economic debate in this country is debased by the Government’s hysterical fantasies of bankruptcy and financial collapse and by their failure to recognise the strength of the policies put in place by Alistair Darling. Labour dealt with the recession and laid the foundations for recovery. It is the responsibility of this Government not to squander that inheritance.

EU: Economic Governance

Lord Eatwell Excerpts

Wednesday 27th October 2010 Lords Chamber

[Lord Eatwell]

My Lords, I am most grateful to the Minister for repeating as a Statement the Answer given to a Question asked in the other place. Before dealing with the issues referred to in the Statement, might I correct a factual error? The noble Lord stated that,

“on the day of the spending review, the vast majority of Labour MEPs”,

voted,

“against a freeze in the EU budget”.

The noble Lord is misinformed. In fact, on Tuesday, Labour MEPs voted against proposals for an increased EU budget. Moreover, Labour MEPs tabled amendments to cut more than €1 billion from wasteful areas such as agriculture and export subsidies. Perhaps the noble Lord would like to reflect on the fact that, on the day of the comprehensive spending review, Tory MEPs voted to increase the European Parliament’s entertainment budget by 50 per cent. Will the noble Lord correct his colleagues in another place?

In the Statement, the noble Lord argued—entirely correctly, in my view—that,

“a strong and stable eurozone … is in our interests just as much as in the interests of our neighbours”.

It follows that we in the UK have a major economic interest in the fiscal policies and arrangements of the eurozone. Will the Minister tell the House what role the UK has played in EU discussions on the co-ordination of eurozone economic policy to date? What measures of policy co-ordination throughout the European Union would Her Majesty’s Government support? What role, for example, did the Government play in the recent weakening in the German position on sanctions imposed on those countries running fiscal deficits in excess of those defined in the stability and growth pact? Does he support the view of President Sarkozy and Chancellor Merkel that a new EU treaty would be required to develop a new stability regime in Europe?

Matters of economic stability are global matters. Important decisions affecting the future of the UK will be taken at the G20 summit in Seoul next month. Given that many of the matters to be discussed at the Seoul summit, including the development of international financial regulation, are matters in which the EU now has an overarching role, will the UK be co-operating with our EU colleagues who are members of the G20 to present a united voice in Seoul?

Public Expenditure: Value for Money

Lord Eatwell Excerpts

Tuesday 26th October 2010 Lords Chamber

[Lord Sassoon]

My Lords, shortly after coming into office we cancelled £6 billion of in-year expenditure. That is the sort of rigorous approach that we will take, not only to inherited expenditure but to the management of all new contracts.

[Lord Eatwell]

My Lords, is the Minister’s commitment to value for money and fairness not truly incredible when the Government are cheerfully imposing larger penalties on families with children than they are on the banks?

[Lord Sassoon]

My Lords, we have introduced a fairness premium worth over £7.2 billion to support the poorest children in this spending review, and I think that that speaks for itself.

Housing: Shared Ownership

Lord Eatwell Excerpts

Monday 25th October 2010 Lords Chamber

[Lord Sassoon]

My Lords, I am wary of straying too far from financial regulation into housing policy areas but I will ask my ministerial colleagues in the Department for Communities and Local Government to write to my noble friend on that point.

[Lord Eatwell]

My Lords, is the Minister aware that in the source book referred to by the noble Baroness, Lady Gardner, there is a clear premise that building societies—mutuals—are significantly less risky than banks because, as the source book itself says, of their,

“lower exposure to wholesale funding and complex financial instruments”.?

If they are less risky, is it not time to reduce the punitive levy on building societies for the Financial Services Compensation Scheme—a levy which is reducing the funds available for lending to house buyers?

[Lord Sassoon]

One of the beauties of the current system and our future system of financial regulation is that decisions about the relative riskiness of different classes of financial assets are emphatically not for government but for the financial regulator, which in due course will be the Bank of England. So while I can ask the Financial Services Authority to write to the noble Lord, I am certainly not going to second-guess its judgments.

Taxation: Avoidance

Lord Eatwell Excerpts

Wednesday 20th October 2010 Lords Chamber

[Lord Eatwell]

My Lords, is the Minister aware that the figure that he has given for reducing tax avoidance and evasion is roughly the same as that which is being taken out of the welfare budget in the current spending review? Why do the Government not collect the taxes and stop hitting the poor?

[Lord Sassoon]

I am a little at a loss to understand why the noble Lord is questioning why we are putting extra money into HMRC to recover this enormous sum of £7 billion annually by the end of the spending review period when that was not done by the previous Government.

Comprehensive Spending Review

Lord Eatwell Excerpts

Wednesday 20th October 2010 Lords Chamber

[Lord Eatwell]

My Lords, we must all be grateful to the noble Lord for expending the energy to repeat the long Statement that we have just heard. It may have appeared rather dull—a number of noble Lords on the Benches opposite fell asleep—but it is a massive gamble. The Government are gambling the jobs, homes and well-being of hundreds of thousands, perhaps millions, of the British people on the hope—fingers crossed—that this will be a price well worth paying; for, make no mistake about it, that is the bet that the Government are placing. They are staking the misery of thousands, and the serious weakening of major British industries and institutions, on the belief that this gamble will not only restore growth to the British economy but restore it at a greater rate than would have been the case if the economic measures embodied in the March Budget of my right honourable friend Alistair Darling were left in place. Can the Minister tell us how many jobs will be lost in this gamble, including not just the loss of public jobs—we know that that number is 500,000—but of private sector jobs, too? Or will he simply confirm that he does not know the answer to that question?

The key component of this gamble is the hope that private sector growth will step in to fill the jobs and income gap left by the Government’s withdrawal from economic responsibility. That was made clear at the time of the June Budget. As we have heard, the Chancellor made clear in the Statement that the Budget and this Statement have to be taken together to assess effectively the impact on the economy, so I refer to table C3 in the Budget 2010 document. There it is made clear that the contribution of government expenditure to growth over the next four years will be relentlessly negative in every year—it will reduce the growth rate of the economy. It is also made clear that the gap cannot be made up by consumer spending as unemployment rises and standards of living fall, so what are the Government betting on? In the Budget report they forecast that growing business investment will make a contribution to the growth of GDP three times greater than it did in the prosperous years 1999 to 2008. On top of that, the Government say that the contribution of investment in housing will be double that in the good times, and that the contribution of net trade will be positive, whereas it was negative in every year of the earlier period. That is pretty difficult to believe. The National Institute of Economic and Social Research does not believe that. Its July report, Prospects for the UK economy, found that government spending cuts will reduce potential growth below that expected from Alistair Darling’s policies in every year from 2011 to 2015. In updated projections published yesterday, the institute finds that the Government’s policies will result in yet lower growth and consequentially higher deficits than they forecast.

There in a nutshell is the gulf in economic policy between the Conservative Government and this side of the House. Our policy is to support growth and investment in order to cut the deficit; their policy is to cut the deficit, and hope. The House will recall that the Government displayed their gambling instincts in the Budget report by presenting various outcomes for the economy with probabilities attached—those fan diagrams that we heard so much of—but that device seems to have disappeared from Spending Review 2010. If we look at the probabilities that the Government put forward, the Chancellor argues in the Budget Statement that there is a 30 per cent probability, a one-in-three chance, that growth in 2015 will be zero. Given that the Government admit that such outcomes are not just possible but likely—a one-in-three chance—will the Minister confirm, as Mr Osborne stated at the weekend, that,

“we have to see this through, and the course which I set in the Budget is the one that we have to stick to”.

In other words, even though his own published statements recognise that his policy might be a disastrous failure, he will not change it. If the bet does not pay off and even more people are ruined than he currently contemplates, there will be no change of policy. There is no plan B.

This is being done, we are told, because the country is bankrupt and expenditure cuts are necessary to survive the “sovereign debt storm”. Will the Minister confirm that interest rates payable on UK debt fell throughout the “sovereign debt storm”, both before and after in-year spending cuts? Not only was the UK’s financial standing never at risk, sterling has become a safe-haven currency during eurozone difficulties. The truth is that the scale of today’s cuts has nothing to do with the overall fiscal position. The truth was revealed by the noble Lord, Lord Sassoon, in the Finance Bill debate in this House on 26 July this year. He said:

“we cannot afford a public sector of the size to which it had grown”.—[Official Report, 26/7/10; col. 1220.]

He also stated that there must be,

“a complete re-evaluation of the Government's role in providing public services”.—[Official Report, 26/7/10; col. 1217.]

That is what this spending review is all about. It is about an ideological commitment to cut the size of the public sector, and I give the noble Lord credit for being so honest to admit it.

Before turning to the scale of the cuts, I would be grateful if the noble Lord would help me with a rhetorical device that the Chancellor uses in his Statement. Whenever a spending increase is announced, it is announced in terms of a sum of money and, as is the way with these things when millions or billions of pounds are involved, it all sounds very impressive. However, when cuts are announced, they are announced as percentages—4 per cent here, 6 per cent there—so that they do not sound quite so bad. Will the noble Lord tell the House what a 7.1 per cent annual reduction in funding for local councils means in money terms? What do the 24 per cent cuts in the budgets of the Home Office and the Ministry of Justice actually mean in money terms? What do they mean in terms of access to justice and prompt justice for all? How much money is being taken from the Department for Business, Innovation and Skills in annual cuts? We are told not the actual figure but that there will be a reduction of 7.1 per cent a year—say, 30 per cent over the period of the review—in the budget of the department that is supposed to support growth and innovation in this country.

Turning to higher education, I declare an interest as a university teaching officer. I am sure that all sides will welcome the commitment to protect the science research budget in money terms, although the real value will inevitably be eroded by inflation. Will the noble Lord tell the House what is happening to the teaching budget in science and engineering? What will happen to the research and teaching budgets in the arts and humanities? As for the future of the planet, what is the money value of the 20 per cent-plus cut in the Department of Energy and Climate Change budget and of the 35 per cent cut in Defra funding? The Minister should not be shy and hide behind percentages but tell us the numbers.

The most important number is the figure for cuts in the welfare budget, because the Government have committed an intriguing sleight of hand. Some departmental budgets have been cut by less than was expected. The noble Lord was delighted to make fun of the Opposition when he referred to only 19 per cent cuts in departmental budgets. Some sweeteners have been added, too. How have those been paid for? They have been achieved by cutting the welfare budget. A complex series of changes was announced in the Statement. Have the Government made an impact assessment of the changes, many of which will impact on Britain's poorest and most vulnerable families? Will the Minister tell the House the overall money value of the cuts in welfare spending, and will he confirm that more is being cut from welfare spending than from all the departmental budgets added together?

All independent assessments have found that the Government's measures will reduce growth over the next five years. That reduced growth will reduce the real income of future generations. That is the real burden that this Government are imposing on our children. The burden will fall immediately on the next generation, including the 15 to 25 year-olds who are desperately looking for a job or a university place or just a chance.

Of course, the gamble may come off, and we all pray that it will. But should it not, this irresponsible approach to dealing with the aftermath of the international financial crisis will impose a loss of real income on generations to come. Today and in the future, Britain will be paying the price of this Government’s gamble.