Spending Round 2019

Lord Livermore Excerpts

Wednesday 25th September 2019 Lords Chamber

[Lord Livermore (Lab)]

My Lords, I take this opportunity to join others in welcoming the noble Lord, Lord Duncan of Springbank, to his new role.

This spending round claims to turn the page on austerity. Certainly, following the global financial crisis, a period of fiscal retrenchment was undoubtedly necessary. In the decade since the era of austerity began, Britain’s budget deficit has fallen from a peak of £153 billion in 2009-10 to a forecast, prior to this spending review, of £21 billion in 2020-21; the lowest level in 17 years. This is a considerable achievement and the result, as the previous Prime Minister put it and as the Minister repeated, of the hard work of the British people. But it is worth reflecting on who in society worked the hardest, because even in an era of austerity, there are still choices to be made about who should bear the greatest burden. The reality is that the distribution of austerity in the years after 2010 hit the most vulnerable disproportionately hard.

The impact of the austerity implemented between 2010 and 2015 meant that the poorest decile of working-age families was more than 6% worse off. The second poorest decile was more than 5% worse off and the third poorest more than 4% worse off. Meanwhile, money was found to cut the top rate of income tax and, as the Institute for Fiscal Studies put it, households in the sixth to ninth wealthiest income deciles were protected over this period to a remarkable degree. After 2015, as austerity continued, with cuts to universal credit and a four-year benefits freeze, we again saw a distribution impact that was strongly regressive. A couple with children that is out of work and most in need is now more than £4,000 a year worse off, and a lone parent out of work is £3,500 worse off every year. Even in work, which the benefits system should reward, the cuts to family incomes are large. A lone parent is nearly £1,500 a year worse off, and a couple with children with one earner is £1,000 a year worse off. Yet over this period, while the poorest decile has lost an average of £1,100 a year, the richest decile has actually gained £400 a year. While some of the richest working-age families gain £1,000 a year, the poorest lose £3,000 a year, or 15% of their income.

The consequences of these choices to reallocate available resources away from the bottom half of the income distribution are all around us. Household debt now stands at 139% of disposable income and is forecast to reach 146%. Rough sleeping, which fell by three-quarters under the last Labour Government, has risen by 169% since 2010. Nearly 1,000 Sure Start children’s centres have closed and child poverty is projected to rise a further six percentage points by 2023 to its highest ever level. Given the scale of the sacrifice asked for in this era of austerity, and given that it hit the poorest in our society disproportionately hard, we might hope that the Government would now honour this sacrifice by showing caution in the years ahead. We might hope that they would not take risks with the public finances such that the hard work of the British people is undone, their sacrifices were for nothing and we are taken right back to square one.

However, in his spending review three weeks ago, the Chancellor appeared not to be showing caution but instead to be playing fast and loose with the nation’s finances. Presumably laying the ground for a potential general election, the Chancellor announced an extra £13.4 billion of spending for next year, but as the noble Lord, Lord Young of Cookham, pointed out, this spending round was not accompanied by new economic forecasts from the Office for Budget Responsibility. Making such major spending decisions without the latest economic and fiscal forecasts is a risky move. As Paul Johnson, director of the Institute for Fiscal Studies, commented:

“By making major spending decisions without having the most up-to-date forecasts for the economy and public finances, the Chancellor is taking a gamble”.


Given that the next set of forecasts from the OBR, due later this year, are likely to reflect a deterioration in the outlook for the UK economy, it is easy to see why the Chancellor decided to hold this spending review before the updated forecasts were published, because the 2019 spending round also had significant implications for the Government’s fiscal rules. The Chancellor’s fiscal mandate, inherited from Philip Hammond, requires him to ensure that borrowing is below 2% of GDP in 2020-21. At the Spring Statement in March, the OBR declared that the Chancellor would have £27 billion of headroom against that rule—a figure subsequently reduced to £14 billion by the decision of the Office for National Statistics on student loans. However, in reality, the Chancellor’s headroom is likely to be much lower even than that. We have already seen a marked deterioration in the borrowing figures for 2019-20, such that his £14 billion of headroom could be reduced by around £5 billion. If we add in the impact of the weaker than expected economic performance since the Spring Statement, that could take off a further £5 billion. Taking these together, the Chancellor’s assumed £14 billion borrowing headroom actually comes in at closer to £4 billion.

All of this means that, while the additional £13.4 billion announced in the spending review might have come within the fiscal mandate limit as calculated back in March, it is very unlikely to be consistent with the fiscal mandate had the OBR been asked to update its forecasts. Indeed, the Resolution Foundation, the independent think tank, has calculated that the Government could in fact break their fiscal mandate by some £10 billion.

Rather than show prudence in their fiscal announcements and be honest about the likelihood of tax rises needed to make this new spending affordable, the Chancellor hinted that he would simply jettison his existing mandate, declaring that he would set out a new fiscal framework ahead of the Autumn Budget—not shaping his spending decisions to fit his fiscal rules but bending those rules to fit his political goals.

This lack of caution is all the more extraordinary given not just the uncertainty over Brexit but the Government’s clear desire to pursue a no-deal outcome. As the Office for Budget Responsibility has pointed out, even a relatively benign no-deal Brexit would further weaken the economy and push up borrowing by around £30 billion a year. A more disorderly no-deal scenario is estimated by the Bank of England to reduce the level of GDP by 8% by 2024. The Treasury’s own figures show that even if we avoid a no-deal outcome, any Brexit scenario that leaves the UK outside the single market will reduce GDP in the longer term by 6.7%, with very clear consequences for the public finances.

Nowhere in the Chancellor’s spending plans does an appreciation of these risks appear. Instead, in the face of such economic uncertainty, now is the time the Chancellor chooses to gamble with the nation’s finances; now is the time the Prime Minister chooses to commit to a further £9 billion of income tax cuts for the wealthiest in society. An improvement hard-won over the course of a decade, and borne disproportionately by the poorest in society, is now gambled for short-term political gain and jeopardised by the Government’s inability to tell the truth about the consequences of their Brexit policy. Once again, we know that it will not be the wealthiest who pay the price: once again, it will be the most vulnerable in our society who are left to pick up the pieces.