Government Spending Review 2013

Lord Flight Excerpts

Wednesday 3rd July 2013 Grand Committee

[Lord Flight]

My Lords, I hope it will be the privilege of all of us to live long enough to see the judgment of economic historians on the times in which we are living. The Chancellor is following blatant neo-Keynesian policies, with an ongoing deficit of £120 billion-plus per annum and printing some £370 billion of money. If I wanted a definition of neo-Keynesian, that would be it. No wonder the Opposition is flummoxed, because to recommend even larger Keynesian policies on top of that is patently unrealistic. Will that approach be vindicated or will the Hayekian school be right that the problem with such policies is that they make returning to normality in due course even worse than it would be if you took hold of the situation much sooner?

In the 1930s when Chamberlain as Chancellor took Hayekian measures and slashed public sector pay, spending and taxation, and unleashed a housing boom because there were no planning restraints, we had growth of 4% a year from 1935 to the start of the Second World War. It was the highest period of growth in the 20th century. Today, although growth and recovery have been disappointing, there are positives and we have heard quite a few of them this afternoon. Thankfully, we are not in the euro. The economy is doing markedly better. Indeed, there was 0.6% growth in the latest quarter. I would expect growth of at least 1.5% this year against falls in the eurozone of 0.6%. Certainly there is no double dip. Foreign investment in the UK is up substantially. As I think the noble Baroness, Lady Kramer, pointed out, there is really good news on the apprenticeship scheme. Exports are rising. In my little territory, EIS venture capital investment has doubled in the past year, as has equity money for new small businesses, and as well as congratulating the noble Lord, Lord Risby, for what he is doing in Algeria, a little bird told me that Algeria was going to apply to join the Commonwealth, so the noble Lord seems to have done extremely well.

There are some useful micro-points as well, which I certainly approve of. The ending of automatic progression in the public sector should at least reduce average nominal pay in the state sector, which keeps rising in a blatant breach of supposed pay freezes. Tougher eligibility rules for jobseeker’s allowance are necessary. Having to learn English makes good sense. Ending winter fuel payments in hot countries is surely a no-brainer. The welfare cap on housing benefit, tax credits, disability benefits and pensioner benefits, and bringing it all together to assess people’s needs, is sensible. Limiting to £2 million the funds to be made available annually for investment by local enterprise partnerships, as suggested by the noble Lord, Lord Heseltine, is a fairly sensible economy. I am particularly keen on the extra 180 free schools and the extra technical colleges. The technical colleges go hand in hand with the apprenticeships and are going to make a big difference to this economy and to the people who attend them.

There is a lot of good going on behind the question of how to judge the macro-stance. Even on the macro-stance it is amazing to have achieved a near political consensus on the need to reduce welfare spending, which is really what the situation amounts to. The state is slimming down modestly. Between 2010 and 2017 it is, I think, a 2.7% reduction in real terms. No one has achieved that in living memory. There is a modest shift from current to capital expenditure, and I am sure that the noble Lord, Lord Deighton, will make the very most of that in the rational management of the infrastructure scenario, which of course is still crucial. However, what about the future? Debt is piling up—it will be 80% of GDP by the end of the year—interest bills are rising, and as QE has to come to an end they are likely to rise dramatically further. We are stuck with a deficit compounding of £120 billion per annum.

In the announcement, there was little net new. Cash spending continues to rise; it will be £720 billion this year, £730 billion next year and £745 billion in 2015-16. Most of the figures have already been announced. There are major changes within spending divisions, but not in the aggregates. For the poor spending divisions affected, out of public spending of £720 billion only £204 billion was really up for cuts. Six of them had cuts of at least 10% of their expenditure. It has become obvious that to have a health budget of £127 billion, a education budget of £97 billion, and a welfare budget of £220 billion in effect not up for cuts is a mistake. I am afraid that the NHS has not been vindicated by all that has come to light.

There are two quite separate points. First, will running a deficit of this size prove the right thing to do economically? For me, the great disappointment is the missed opportunity for sorting out the public sector and shrinking the size of the state. Over 10 years ago, I spent nearly two years of my life organising the James review. A team of consultants looked at each area of the public sector, and the level of potential waste and cuts was then approximately £100 billion. That does not seem to have changed that much. The issue is the will to sort it out and to get the state right out of areas where it should not be involved. Those are the key areas that matter. The cost of health and welfare together is nearly £360 billion, which is more than half of total public expenditure. I think even Prime Minister Attlee would have been shocked if it had been more than half of public expenditure in his time.

The leakage is not allowed for. The noble Baroness, Lady Noakes, referred to the growing public sector cash deficit on public sector pensions. I have banged on about it before, but the real figure is likely to be about £25 billion per annum, and there is no provision for it. There was a quiet study of the student loan book, which is worth £83 billion in total. Some 40% will have to be written off, which is another £30 billion, and there is no provision for that. Is there any review of the whole area as to why that is the outturn? I am afraid not.

Astonishingly, welfare, health and education together account for £516 billion of £720 billion, which is why only £200 billion-odd is eligible for cuts. The harsh truth is that much of the public sector remains bloated and poorly managed and has falling productivity. Many noble Lords may have seen the latest Taxpayers’ Alliance report, which pointed to £120 billion of waste, much of it gravy-train expenditure. It is a drag on the 50% private sector. In fact, it is a huge tribute to the private sector that it managed to create 1.3 million jobs when its opportunity is thus limited.

One thing remains. It is always the case that public sector pay layer by layer should be about 15% below private sector pay, allowing for shorter hours, lower productivity, better pensions and better security of employment, but it remains about 15% above private sector pay layer by layer. There is a gap of 30% in aggregate, which is the result of the strength of public sector unions under the previous Government. In the area of health, we have the highest paid doctors, the worst provision of health, some £20 billion of claims for negligence and the legal costs going with them. It is a great pity that there has not been anything like an adequate resolve to get to grips and sort out the public sector.

I shall end by commenting on the elephant in the room, which is QE. It was very clear that money printing was needed in 2008-09 because the money stock was contracting dramatically and the money supply with it, partly the result of the wrong government policies, because just when we needed to support the money supply, moves against banks led to it contracting. However, this has been allowed to go on and on. Inflation has remained higher than planned. When interest rates return to real levels, they will increase government interest costs substantially and probably hit the housing market seriously.

The reality is that there is no way in which the Bank of England will suddenly be able to sell off £370 billion of gilts into a falling gilt market with rising interest rates. We will have the extra money stock there, and all that it will need is higher velocity of circulation to produce a massive increase in the money supply. One can see what is likely to happen: as and when the economy recovers sufficiently there will be strong pressure for wages to be increased. People have had real-wage cuts for quite a long time. I am afraid that the overall money stock will be there to finance that uncontrollably. No one knows when, but there is clearly a substantial risk of a period of high inflation at some stage in the next 10 years. The idea that new Governor Carney could pursue a more expansionary monetary QE is simply unrealistic. He will need all his wisdom and experience to steer the British economy out of QE over the next couple of years.

In conclusion, if there is no collapse in Japan, which is always possible, or a banking crisis and collapse in China or a break-up of the euro over the next two years, the dear old British economy will look a lot better by the time of the election, even though we have not tackled such major issues. The Government could quite easily win the next general election on the back of that, but what then?