Government Spending Review 2013

Baroness Noakes Excerpts

Wednesday 3rd July 2013 Grand Committee

[Baroness Noakes]

My Lords, it is a pleasure to follow the right reverend Prelate the Bishop of Truro. My own remarks will be focused on rather different areas of the spending review. I was unable to be in the House when the Minister repeated the Chancellor’s spending round Statement, so I am grateful for the opportunity to speak today.

I start by congratulating the Government on sticking to their resolve to keep downward pressure on spending in order to eliminate the deficit. The update on GDP from the Office for National Statistics last week underscored the scale of the problems the Government inherited in 2010. The peak-to-trough deficit in 2008-09 is now calculated at an astonishing 7.2%. That alone vindicates the stern action taken by the Government when we came into power. The Benches opposite could barely conceal their gleeful anticipation of a triple-dip recession earlier this year. However, as last week’s figures confirmed, we avoided that. In addition, we now know that we did not even have a double-dip recession. The Government inherited an extremely poor hand of cards, but my right honourable friend the Chancellor has played them skilfully.

I fully support the Government’s approach on public sector pay. Continuing to limit pay rises to 1% is thoroughly sensible, especially as public sector pay has continued to run ahead of private sector pay in recent years. I also support the move to remove automatic pay progression. I understand that several central government departments have already done this and so I am unclear as to the savings that this move will generate. I could not find any figures on this in the Green Book and I echo the criticisms by the Institute for Fiscal Studies about the paucity of analysis in the Green Book. I hope my noble friend can give some analysis today. Will this apply to local government? What will be the impact on the NHS’s budget? What precisely are the Government’s plans and how much do they expect to save?

I have some concerns about the cost of public sector pensions that have not been dealt with. Public sector workers account for less than 20% of the workforce but are more than three times more likely to have current access to a defined benefit pension scheme than those in the private sector. This would not matter much if public sector pay scales fully reflected the value of the pension promise, but the plain fact is that they do not. The current Government, like the last one, have talked a good story about bearing down on the cost of public sector pensions. In 2011, they claimed that they had done such a good deal that it would last for 25 years and would save billions. That is fine if you have faith in 50-year projections based on heroic assumptions. Meanwhile the real problem, which the Government continue to ignore, is that public sector pension cash flows are now negative: pension payments exceed contributions received. In 2005, this cash cost was only £200 million, but it is now around £11 billion a year. According to the Office for Budget Responsibility, it is forecast to rise to more than £16 billion over the next few years, and this figure is likely to be even higher once the latest proposals for a flat-rate state pension and the related contracting-out changes are implemented. The spending round scraped together £11.5 billion of savings but failed to defuse the cash time bomb of public sector pension costs.

While I fully support the Government’s efforts to control spending, we must not lose sight of the facts that we are still borrowing money each year and that debt will not start to reduce until 2017-18. Furthermore, there are no overall cash cuts; we are spending more every year. In 2009-10, we spent £669 billion. In 2015-16 we are planning for £745 billion. This is not Greek-style austerity.

The Treasury has clearly been involved in tough discussions to cut expenditure, but I am reminded of the line from Horace:

“Parturiunt montes, nascitur ridiculus mus”.

The Treasury laboured but brought forth a ridiculously small amount of savings. We still have a huge problem. Expenditure is in excess of 45% of GDP and debt is north of 75% of GDP. On current plans, even after this spending round, the figures will be 40% and 85%. We are a long way from resolving our finances. It is not surprising that the Cabinet Secretary is warning of a 20-year turnaround timescale.

There is no paradigm shift in this spending round. I had hoped to see an end to salami slicing. International experience points to much tougher decisions, taking out whole programmes rather than bits of them. There are far too many government departments, and along with that far too many government Ministers and senior civil servants, together with their hangers on. Streamlining the machinery of government would be a good place to start.

If we are serious about reducing public expenditure, we need to look again at the sacred cows of education and health. Ring-fencing might be politically astute but is economic nonsense. The overseas aid budget is an extravagance that does not command even general public support. Many of the projects that sail under a green flag are not obviously value for money. I have particular concerns about the Green Investment Bank, which will not be run as a bank or supervised as a bank. I fear that the billions of pounds that are being thrown at it will end up as losses as it “invests” in unbankable projects.

I congratulate my right honourable friend the Chancellor for ignoring the Keynesian siren voices calling for more money to be thrown at infrastructure at the expense of even more debt. The announcements last week about infrastructure spending were, I believe, predicated on no new money. I do not criticise that. I am sceptical about the economic benefits claimed for public sector infrastructure spending, and it is absolutely essential not to abandon hard economic analysis when it comes to spending public money.

That leads me naturally to the High Speed 2 project, on which I find myself surprisingly in agreement with the noble Lord, Lord Mandelson. Last week, the Chief Secretary announced a funding envelope of £42.6 billion for the construction costs of HS2. What he did not say was that the £42.6 billion was one-third higher than the previous budget, as Transport Ministers had to admit the previous day. Two days ago, transport officials as good as admitted to the Public Accounts Committee in the other place that the benefits have been overstated. The benefit/cost ratio for the HS2 project was already low by transport standards and now looks to be completely bust. Even the CBI, usually a cheerleader for infrastructure projects, has called for a rethink. Today is not the day to debate HS2 itself, but these developments remind us that public sector infrastructure is not the panacea that some would claim for it and it does not unambiguously benefit the economy.

I am aware that we are debating only the spending round and not a full Budget or Autumn Statement. However, just let me say that while controlling expenditure is important, the supply side of the economy still feels neglected. We need much more tax reform, lower rates all round and a much simpler system, and we need to make far more progress on deregulation. We need to liberate and incentivise the private sector to create wealth. We need to keep Britain as an attractive place in which overseas companies can invest. In sum, we need a lot more than the spending round gave us.

--- Later in debate ---

[Lord Davies of Oldham]

My Lords, this has been a fascinating and somewhat lopsided debate. It is my task to at least try to achieve some balance in the arguments before the country at present. I have only just got my breath back from the Minister’s very first statement, in which he said that this economy has been well managed by the Chancellor from the beginning. So why is the Chancellor back with a second comprehensive spending review Statement? Why is he back with a second round of cuts? I accept that, as the noble Baroness, Lady Noakes, indicated, the economy may not be in a double-dip recession, but why is he here in circumstances where it is absolutely clear that there has been no growth in this economy for the past three years?

There is nothing in the Chancellor’s proposals, which the Minister has been defending with his usual elan today, that suggests growth for the future. The noble Lord of course has particular expertise on infrastructure. We all appreciate that and welcome his appointment to give the Government a boost in that respect. However, let us recognise that there has been no expenditure on infrastructure since 2010. In fact, all those issues which were planned at that time, which I think the Minister referred to as the 2010 pipeline, have been effectively blocked. There is virtually no progress on any of the 2010 schemes. Now, of course, infrastructure spending is being suggested—in the distant future. The things being boasted about are HS2 and north-south Crossrail. Both projects are 10 to 15 years away from significant expenditure; perhaps it is a little earlier with HS2, but certainly not prior to the next general election. If it is being suggested that there will be a boost to the economy through infrastructure spending over the next couple of years, everyone needs to be disabused of this idea. That is not going to happen.

I accept a number of points that were made in the debate. I appreciated the point of the noble Baroness, Lady Kramer, about the decline of manufacturing industry. On whose watch was that? Which Chancellor said that we were going to rely on the service-industry economy? That was the noble Lord, Lord Lawson, in the 1980s. Who turned their backs on the manufacturing industry in the 1980s, when we saw a massive collapse in manufacturing jobs? It was the party of Margaret Thatcher. I will give way to the noble Baroness, of course.

[Baroness Noakes]

Can the noble Lord remind the Committee what happened to manufacturing industry on Labour’s watch?

[Lord Davies of Oldham]

The very tragedy, in my view, of Labour’s watch was that it actually continued too many of the positions adopted by the Conservative Party in the 1980s. As regards manufacturing—the noble Lord, Lord Haskins, also made an important point on that—we should have put much greater emphasis upon the development of skills in our society. We have not equipped any of the next generation for the kind of economy that we seek to sustain.

I understand what the noble Lord, Lord Risby, indicated in terms of the enormous value of foreign investment. Of course we would all welcome that but does he think that foreign investors are enthusiastic about the great uncertainty over Britain’s relationship with Europe? That is the product of discord in the governing coalition. How welcome is that for potential investors? The noble Baroness, Lady Noakes, indicated the areas in which she welcomed what was happening but even she will recognise that the IMF has said that some £10 billion ought to be invested in infrastructure in “shovel-ready” industries, particularly construction. It ought to be put into housebuilding because that is the fastest way in which you could inculcate some element of demand into the economy. However, are the Government pursuing that strategy? If the noble Lord, Lord Deighton, were able to identify schemes that could fulfil that aim, I would be surprised. I give way to the noble Lord.