Budget Statement

Lord Layard Excerpts

Wednesday 25th March 2015 Lords Chamber

[Lord Layard (Lab)]

My Lords, if you want to have the right policy, you have to start with the right diagnosis. Unfortunately, the Chancellor has got the wrong diagnosis. He and his colleagues have argued all along that Labour caused the deficit by irresponsible public expenditure, which led to his policy. In fact, the deficit was caused by the banks, and the resulting worldwide recession and the fall in tax receipts. It was not caused by irresponsible expenditure.

I will begin with a few revealing facts from the Treasury’s wonderful Pocket Databank. The Labour deficits in the 11 years before the world recession averaged only 1.2% of GDP. Over that same period, the national debt was substantially reduced relative to GDP. Let us have a comparison with the five years of the preceding Conservative Administration under John Major. In that period the deficit averaged 5.1%, which is four times the Labour figure of 1.2%, and the debt rose relative to GDP. I believe that those are significant figures. Therefore, who is irresponsible? It is outrageous to attribute our problems to the alleged fiscal irresponsibility of the Labour Party before the world recession threw our country and every country into deficit. It is time to see the last of the mantra—the mess that Labour made. It should be revealed as the myth that it is and relegated to the dictionary of phrase and fable.

Unfortunately, in consequence of this wrong diagnosis, something serious is happening in the real economy that is affecting the citizens of this country: the dismantling of many of our public services. As has been said, that is now the central issue for this election. The issue is whether we want to see our public services reduced relative to GDP to the level, or lower, of the 1960s. We say no, for many reasons. Simple economics says that this is nonsense. Every textbook says that, as people get richer, demand for some things grows faster than income, while demand for some other things grows more slowly. Demand grows faster for health and education—things that are characteristically well supplied by the public sector. Demand for things such as food, which are typically paid for privately, grows more slowly.

As we become more affluent, surely we will want to spend disproportionately more on old people, child protection, family support and the local environment. We value these things increasingly as we move further from the breadline. This is basic economics 101. It is interesting that in polls, such as the YouGov poll I looked at this morning, when people are asked whether they are willing to pay more for better schools and hospitals, most of them on balance are in favour of doing so. Therefore, economic theory is in line with what people say about their preferences.

Instead of that, we always hear the argument that people would be better off keeping the money for themselves. What do we think about that argument? Last year, Mrs Merkel had a seminar in her office on the subject of what matters to us. Various people presented evidence on what makes people most satisfied with their lives. In every survey in every country, the evidence is clear that the variation in disposable household income across the population explains less than 1% of the variation in life satisfaction. People vary enormously in their life satisfaction but the variation in their household income explains only a very small part of it. Much bigger factors include variation in mental health or physical health, variation in the quality of family life and so on. If that is taken through to an analysis of the benefits of different things, it can be shown, for example, that money spent on evidence-based mental health care benefits the well-being of people 10 times more than the same sum would if it were left in the household budget. The general point is that, as we get richer, our greatest problems become problems not of material survival and comfort but of health and human relationships.

To say that you are protecting the NHS is simply not enough. We have to think in a different context where we would expect the NHS to grow faster than our national income and not simply protect it. We really want to tackle all the things that people worry about and talk about, including alcoholism, domestic violence, dementia and suicide, which are all big, national problems that require public services. One could argue that people should pay for their own healthcare but that is not the route to an efficient health service. The US spends three times as much on health as Britain but has a lower life expectancy and administration gobbles up 25% of the costs. The philosophy of private good and public bad is too simplistic to handle these issues.

If politicians want to improve the life satisfaction of their people they should stop cutting public services. Why would they want to improve the life satisfaction of their people? Very simply, it is because that is what makes people vote. We now have good evidence that the biggest determinant of how people vote is how satisfied they are with their lives. That is even more important than the state of the economy. That is of course a justification, if you like, for democracy.

We do not need to destroy our public services. Our debt is now 80% of GDP but it is stable, and 80% is well below the average that we have had over the past 200 years. This debt is owed not to foreigners but almost entirely to the Bank of England, which is owned by us—or will be owned by our children who will own the bonds which we leave to them when we die. It is not an imposition on our children—that is a fallacy.

In the short run, cutting our public services will cut our GDP as much as it cuts our debt. The cuts that the Chancellor is proposing are a disaster. The plan has been ridiculed by all responsible commentators, and almost everyone finds it hard to believe that the Chancellor would ever carry it out if he regained power. Let us earnestly hope that he does not.