Comprehensive Spending Review

Lord Myners Excerpts

Monday 1st November 2010 Lords Chamber

[Lord Myners]

My Lords, I congratulate the Minister on mastering something which it took me a long time to understand as a Minister: when you have to convey unpalatable messages or to spin messages, it is best to keep your eyes firmly fixed on the notes in front of you and avoid any eye contact with those opposite through fear of not being able to maintain a straight face. I congratulate the Minister on maintaining a straight face throughout that speech.

I appreciate that we have more than 50 contributions today, so I shall endeavour to make my remarks as brief as possible. Like the Minister, I look forward to the maiden speeches from the noble Baronesses, Lady Nye and Lady Healy of Primrose Hill, and the noble Lord, Lord Allan of Hallam, who are all significant and important additions to your Lordships' House.

The structure of my response is very similar to the structure of the Minister’s speech, which is perhaps not altogether surprising as his speech was almost certainly written by the same people who were writing speeches with completely opposite views for me when I was a Minister, barely a few months ago. I recognise the structure.

We need to ask ourselves the following questions. Are the cuts necessary in scale and in terms of pace and are there alternatives which are worthy of consideration? Are the proposed cuts fair? Are they progressive? Do they fall on the broadest shoulders? I will not speak specifically to that issue, as I am sure that a number of my noble friends on these Benches will wish to do so. It is quite clear from the Institute for Fiscal Studies that the broadest shoulders are not bearing the greatest burden in terms of these cuts. To the extent that this programme can in any way be described as progressive—that is, limited to the top 2 per cent of all income earners—that is specifically as a consequence of the tax changes which the previous Government introduced in their Budget. This is not a fair programme; it is not a progressive programme; and I am sure that others will speak to that effect later in the debate.

Next, I ask myself whether the proposal is, to use parliamentary language, well put. Finally, are the issues of growth sufficiently addressed? The Chancellor presented cutting the fiscal deficit and the share of public spending as a proportion of gross domestic product as unavoidable. It is simply not true. There is a choice in terms of the target and the pace—whether the focus should be on expenditure or taxation and whether the expenditure cuts should fall most heavily on welfare. It is the Government’s decision to make cuts on this scale, at this speed and with the greatest burden bearing on the poorest, the most deprived and the most vulnerable in the community. The Minister nodded his head for most of my statement until he saw the consequences of what he was nodding in agreement with.

There was no risk of national bankruptcy. I can say that with confidence, having been a Treasury Minister in May. There was no talk in the Bank of England or the Treasury about national bankruptcy. It is a complete figment of the imagination—a convenient truth that is now peddled by the Government. Let us remind ourselves that the average maturity of funding for government debt is 14 years. Let us remind ourselves that the Government are borrowing at the lowest interest rates for 40 years. That was true before the general election, as it is now. Interestingly—I am sure the Minister would point to this as being a sign of confidence in government—the spread of gilt yields over US dollar yields has expanded. I am afraid the Minister is wrong. His hand movements went in the wrong direction. He will no doubt wish to check the facts and find that I am correct. The spread has widened, so this is not a positive response to the Government. It is a very clear statement from the markets that there is now a real risk of recession. That is the consequence of the policy that the Government are pursuing.

We went into the global financial crisis with the second lowest debt as a percentage of GDP in the G7 countries. It was 36.5 per cent of GDP in 2007-08, which was lower than 42.5 per cent when the party opposite was last in government in 1996. Borrowing as a percentage of GDP in 2007-08 was only 2.4 per cent. That was largely being used for capital investment—for schools, hospitals and infrastructure. Let us remember that the Opposition were committed to the public expenditure programme as late as 2008. Indeed, David Cameron endorsed it as a tough approach. However, we then had a global crisis. It was absolutely right in those circumstances, when we saw a significant reduction in demand in the economy, for the Government to step in to create that demand in a typical Keynesian response.

However, the deficit needs to be addressed. We not only made a clear commitment to address the deficit—to halve it as a percentage of GDP within four years—but had already made a significant start on it. Remember that the deficit was lower at the end of our period in government than was forecast 12 months earlier and economic growth was stronger than had been forecast 12 months previously. Again, the Government’s argument now that the crisis they confronted was far greater than they had imagined or envisaged simply is not borne out by the truth. The deficit as a percentage of GDP was lower than we were forecasting, as confirmed by the OBR. Economic growth was faster than had been forecast 12 months earlier. Of course the deficit needed to be addressed but we had a programme to do that. We had a programme to reduce the deficit from 11.1 per cent of GDP in 2009-10 to 5 per cent in 2013-14. The Government’s own Office for Budget Responsibility has endorsed the fact that the programme we outlined would have achieved that degree of reduction.

One of the fallacies of the Government’s thinking is that, somehow, borrowing is wrong. The family budget analogy—a good family always lives within its means—is used here. The Government miss the point entirely. Borrowing is sensible from a government perspective in a situation where there is endemic, pervasive overcapacity, as there clearly is at the moment; or when there is underutilisation of capacity and higher unemployment of people and capital than would otherwise be available. It is equally sensible to borrow for investment. The Government miss this point because their analysis of the economy is based solely on liabilities, not on assets.

It is absolutely sensible to pass on to future generations the benefits of capital investment—in education, hospitals, roads and infrastructure—and the costs of that investment in a fair and proportionate way. This Government, in fact, are slashing capital investment at precisely the time when we should be increasing capital investment because of the existence of surplus capacity. Now is the time to commission new building work because there is excess capacity in the building and construction industry. I should like the Minister, in his closing speech, to confirm that, under the Government’s own economic forecasts, the economy will still be producing at 10 per cent below theoretical productive capacity at the end of the CSR period. If that is, as I believe, correct, then I think it underlines the fact that the Government’s policies are pushing us back into a recession and not ensuring that the economy recovers in the way it should.

On the issue of fairness, the Minister has spoken about children. He says that the Government have chosen to invest in children and that investment in children will outstrip inflation. However, we know from public statements that there will actually be a significant reduction in investment and expenditure per pupil in the education system. We know the pupil premium is a sleight of hand—a deception played by one of the coalition partners on the other. We have seen a fairness programme that is going to put the greatest burden on young families, on women, on the disadvantaged, and on local authorities. The Minister talked in a straight-faced way about devolving responsibility from central government to local authorities, but the only thing they have devolved is the axe for cutting, because they have not had the guts to make the cuts themselves; they have passed most of these cuts on to local authorities. I fail, for the life of me, to see how that squares with the big society.

Thirdly, I ask whether the CSR was well put. There were presentational tricks. I will be the first to admit that the current Chancellor is not the first to use presentational tricks: the mixture of numbers and percentages, the combination in single statements, paragraphs and sentences of cash amounts and inflation-adjusted amounts. We had more on the widening of the A11 in Norwich than we had on the loss of half a million jobs in the public sector. I hope that the Office for Budget Responsibility will be asked to look at ministerial statements on the economy to ensure that, in the future, they meet certain minimum tests for veracity, balance, and completeness.

What was most striking about the Chancellor’s Statement—this is my fourth and final point—was that there was no compelling supply-side narrative and no macroeconomic analysis at all. There was no evidence to support the contention that crowding out was working, or that there was some form of Ricardian Equivalence. There was no acknowledgment at all of what was necessary for the private sector to grow. The absence of a growth narrative was the most significant deficiency from an economic perspective of the Chancellor’s Statement. What we do know is that the proposed cuts will reduce economic activity by something in the region of 0.5 per cent per annum through the CSR period. I believe it will be more when one takes into account the multiplier effect. I am confident that the OBR will shortly reduce growth assumptions significantly. That is because we are seeing more unemployment; consumption will be affected by the increase in VAT; demand for credit remains low; the export outlook does not look at all encouraging; and investment by business in the private sector is clearly going to be curtailed until a more certain economic future can be seen.

We need a supply-side agenda, which is simply not being produced by this Government. The Government are fixated on cutting, cutting, cutting and reducing the size of the state. They have no alternative other than keeping fingers crossed and assuming that if the state consumes less, the private sector will somehow more than make up for that—something that is clearly at odds with the fact that we currently have considerable excess capacity in the economy. Cutting back on investment at a time such as this is a tragedy.

The Government have created further uncertainty for the banking industry. They have slashed spending on business support programmes and have abolished the RDAs, replacing them with mere shadows. They are cutting investment programmes in innovation and applied research. Some of the consolations offered in terms of a green investment bank or a carbon-capture demonstration model are, frankly, trifling by comparison. Instead, the Government are increasingly relying on monetary policy. I strongly advise them to avoid compromising the independence of the Bank of England in this respect. I also urge the Bank of England to be very careful about introducing further quantitative easing until it can produce clear evidence that existing quantitative easing has worked. Certainly, the scale of existing quantitative easing exceeds anything which we envisaged was likely when it was first introduced by the Monetary Policy Committee as a possible response to low interest rates.

I have already said that Labour would have taken decisive action to reduce the deficit. What else would we have done? We should have introduced a much more activist programme to support industry and new investment by facilitating investment in innovation and, importantly, putting in place better infrastructure and making sure that private capital was increasingly available to support public needs in terms of infrastructure. I am pleased to read in the Sunday newspapers that the Minister has been travelling the world making the case to sovereign wealth funds for investment in infrastructure. If those reports are correct, that is sensible, although it is slightly at odds with the Chancellor feeling that paying interest on borrowings to non-domestic lenders is somehow unpatriotic, while giving ownership of infrastructure to non-nationals is acceptable. I should like to believe that the Government would invest in and create a new national investment bank. There are important opportunities here to use private capital from interested pension and insurance funds that would give fixed and predictable returns to support investment in infrastructure. However, to date, we have seen very little original thinking from the Government on that.

Finally, what I found shocking about the Chancellor’s presentation was the waving of Order Papers and the cheering at the end of his speech. This was deeply insulting to those who will have to bear the burden of this cutting programme. To see the Chief Secretary demoted to a position of being glass filler in chief—filling the Chancellor’s glass of water from time to time until he received a note telling him that it would perhaps be sensible if he shuffled up the Bench a little, so he was not as visible to the television cameras, and sat immediately behind the Chancellor—speaks volumes about the discomfort that those on the Liberal Benches must now be feeling. The Chief Secretary said he did not come into politics to cut government expenditure and public funding of needy services. That is what he has done; that is what the Government have done; and in doing that, they have completely failed to put forward a clear growth strategy that is fair and reasonable and which would ensure that the country delivers to its full potential.