Comprehensive Spending Review

George Osborne Excerpts

Wednesday 20th October 2010 Commons Chamber

[The Chancellor of the Exchequer (Mr George Osborne)]

Today is the day when Britain steps back from the brink and when we confront the bills from a decade of debt; a day of rebuilding, when we set out a four-year plan to put our public services and welfare state on a sustainable footing for the long term, so that they can do their job of providing for families, protecting the vulnerable and underpinning a competitive economy. It is a hard road, but it leads to a better future.

We are going to bring the years of ever-rising borrowing to an end. We are going to ensure, like every solvent household in the country, that what we buy we can afford, that the bills we incur we have the income to meet and that we do not saddle our children with the interest on the interest on the interest on the debts that we were not prepared ourselves to pay.

Tackling this budget deficit is unavoidable. The decisions about how we do it are not. There are choices, and today we make them. Investment in the future, rather than the bills of past failure: that is our choice. We have chosen to spend on the country’s most important priorities: the health care of our people; the education of our young; our nation’s security; and the infrastructure that supports our economic growth. We have chosen to cut the waste and reform the welfare system that our country can no longer afford.

This is the context of this spending review. We have, at £109 billion, the largest structural budget deficit in Europe—this at a time when the whole world is concerned about high deficits and our economic stability depends on allaying those concerns. We are paying at the rate of £120 million a day, £43 billion a year in debt interest—this at a time when we all know that the money would far better serve the needs of our own citizens than those of the foreign creditors we borrow from. We have inherited from the previous Government plans—if one can call them that—that envisaged our national debt ratio still rising in the year 2014. Not a single penny of savings had been identified. Indeed, they were plans that envisaged the Chancellor of the Exchequer standing here in 2014, presenting a spending review that still had years of cutting public spending ahead of it. That is why, last year, the International Monetary Fund warned this country that it had to accelerate the reduction in the deficit. That is why the OECD, the Governor of the Bank of England and the CBI all agreed with the IMF.

The action we have taken since May has taken Britain out of the financial danger zone. The immediate reductions to in-year spending have bought us a breathing space in the sovereign debt storm. The creation of an independent Office for Budget Responsibility has brought honesty back to official forecasts. I can confirm to the House that the OBR and its new chair, Robert Chote, have audited all the annually managed expenditure savings in today’s statement.

The emergency Budget in June was the moment when fiscal credibility was restored. Our market interest rates fell to near-record lows, our country’s credit rating was reaffirmed and the IMF went from issuing warnings to calling our Budget essential. Now we must implement some of the key decisions required by that Budget. To back down now and abandon our plans would be the road to economic ruin. We will stick to the course, we will secure our country’s stability and we will not take Britain back to the brink of bankruptcy.

In the Budget, I set out the tax increases we were prepared to make, including on capital gains at the higher rate, pensions relief on the largest contributions and, for the first time, a permanent levy on banks. We also had to increase value added tax, where, fortunately, we were able to benefit from the preparatory work in the Treasury of the previous Government. I made it clear that spending reductions rather than tax rises needed to make up the bulk of the consolidation. That is what the leading international evidence suggests works best. So I set out spending totals for the coming years and announced some £11 billion of welfare savings that would help to achieve them. I also set out a new fiscal mandate for the public finances to eliminate the structural deficit by balancing the cyclically adjusted current Budget over five years by 2015-16. We set a target of national debt falling as a proportion of national income by that same year. We explained how, for reasons of caution, we will achieve both these objectives a year earlier, in 2014-15.

I can confirm that the spending plans I set out today achieve a balanced structural current Budget and falling national debt on the same timetable. I can further confirm that the current spending totals I set out in the Budget for each of the next four years are the same as the current spending totals I set out today. They have not changed. Next year, current expenditure will be £651 billion, then £665 billion the year after and £679 billion the year after that, before reaching £693 billion in 2014-15. The House will note that current spending is rising, not falling, over that period. That is partly because, even with the measures we take today, debt interest payments continue to grow in these years. Debt interest payments will reach £63 billion in 2014-15—it takes time to turn around the debt supertanker—but I can now report to the House that against the plans we inherited, one of the departments which suffers the greatest cut today, and at the steepest rate, is the department for debt interest. Debt interest payments will be lowered by £1 billion in 2012, then by £1.8 billion in 2013 and by £3 billion in 2014—a total of £5 billion over the course of the spending review, which is equivalent to 16 new hospitals or the annual salaries of 100,000 teachers.

At the Budget, I also set out my plans for capital spending over the next four years. I can tell the House that capital spending will be at £51 billion next year, then £49 billion, then £46 billion and at £47 billion in 2014-15. This is about £2 billion a year higher than I set out in the Budget. Given the contractual obligations we inherited from the last Government, doing anything else would have meant cutting projects that would clearly enhance the economic infrastructure of this country. This has no direct impact on whether we meet the fiscal mandate or the year in which the debt ratio starts falling. So, total public expenditure—capital and current—over the coming years will be £702 billion next year, then £713 billion, then £724 billion and £740 billion in 2014-15. In real terms, public spending will be at the same level as in 2008. Our public services and our welfare system will be put on a sustainable long-term footing and we will make sure that the financial catastrophe that happened under the previous Government never, ever happens again.

Let me now turn to the spending decisions and the three principles that we propose to apply to the choices that we have made. First, on reform, in every area where we make savings, we must leave no stone unturned in our search for waste, and we must deliver the changes necessary to make our public services fit for the modern age.

Secondly, on fairness, we are all in this together and all must make a contribution. Fairness means creating a welfare system that helps the vulnerable, supports people into work and is affordable for the working families who pay for it from their taxes. Fairness also means that, across the entire deficit reduction plan, those with the broadest shoulders will bear the greatest burden; those with the most should pay the most, and that includes our banks.

Thirdly, on growth, when money is short, we should ruthlessly prioritise those areas of public spending that are the most likely to support economic growth, including investments in our transport and green energy infrastructure, our science base and the skills and education of our citizens.

Let me explain now how those principles have guided our specific decisions. First, on reform, I believe that the public sector needs to change to support the aspirations and expectations of today’s population, rather than the aspirations and expectations of the 1950s, so the spending review is underpinned by a far-reaching programme of public service reform. We saw over the last decade that more money without reform was a recipe for failure; less money without reform would be worse, and we are not prepared to accept that, so we have begun by squeezing every last penny that we can find out of waste and administration costs.

Our ambition in this review was to find £3 billion of savings from the administrative budgets of central Government Departments. With the help of the Green review and the work done by my right hon. Friend the Minister for the Cabinet Office and Paymaster General, I can tell the House that we have gone further than we thought possible in cutting back-office costs. Quangos will be abolished; services will be integrated; assets will be sold; and the administrative budget of every main Government Department will be cut by a third. The result is this: we promised £3 billion of Whitehall savings; we will deliver £6 billion.

Of course, there is a very understandable concern about the reduction in the total public sector head count that will result from the measures in the spending review. We believe that the best estimate remains the one set out by the independent Office for Budget Responsibility. It has forecast a reduction in the head count of 490,000 over the spending review period. Now let us be clear: that is over four years, not overnight, and much of it will be achieved through natural turnover, by leaving posts unfilled as they become vacant. Estimates suggest a turnover rate of over 8% in the public sector; but, yes, there will be some redundancies, and that is up to the decisions of individual employers in the public sector. That is unavoidable when the country has run out of money.

We feel responsible for every individual who works for the Government, and we will always do everything that we can to help them to find alternative work. In fact, in the last three months alone, this economy created 178,000 jobs. So we should remember that, unless we deal with this record budget deficit decisively, many more jobs will be in danger in both the private and the public sector.

The Cabinet Office and the Treasury will oversee the programme of Whitehall savings. Both Departments will lead by example. The core Cabinet Office budget will be reduced by £55 million by 2014-15. Additional allocations will be provided to fund electoral reform, support the big society projects, establish community organisers and launch the pilots for the national citizen service, which will give young people for the first time a right of passage to citizenship. In recognition of the challenges faced by the voluntary and community sector, I am establishing a one-year £100 million transition fund to help those facing real hardship. The Treasury will see its overall budget reduce by 33%, and we will share the Department’s enormously expensive private finance initiative building, which my predecessor but one signed up to, by moving part of the Cabinet Office into the same premises.

The Chancellor is also a royal trustee, and I want to say something briefly about the civil list. As I outlined in the Budget, the 10-year settlement expired this year, and no provision for a new settlement had been made when we entered office.

Her Majesty has graciously agreed to a one-year cash freeze in the civil list for next year. Going forward, she has also agreed that total royal household spending will fall by 14% in 2012-13, while grants to the household will be frozen in cash terms. In order to support the costs of the historic diamond jubilee, which the whole country is looking forward to celebrating, there will be a temporary additional facility of £1 million. After that, the royal household will receive a new sovereign support grant linked to a portion of the revenue of the Crown estate, so that my successors do not have to return to this issue as I often as I have had to.

Central to this review—[Interruption.]

[Mr Speaker]

Order. All this noise makes progress slower and saps time that would otherwise be available for Back Benchers to question the Chancellor. Apart from anything else, it is unfair and discourteous.

[Mr Osborne]

Central to this review is the reshaping of our public services. First, there needs to be a dramatic shift in the balance of power from the centre to the locality. A policy of rising burdens, regulations, targets, assessments and guidance has undermined local democracy and stifled innovation. We will completely reverse that. We will give GPs powers to buy local services, schools the freedom to reward good teachers, and communities the right to elect their police and crime commissioners.

Secondly, we should understand that all services paid for by the Government do not have to be delivered by the Government, so we will expand the use of personal budgets for special education needs, children with disabilities and long-term health conditions. We will use new payment mechanisms for prisons, probation and community health services, and we will encourage new providers in adult social care, early years and road management.

For local government, the deficit that we have inherited means an unavoidably challenging settlement. There will be overall savings of funding to councils of 7.1% a year for four years, but to help councils we propose a massive devolution of financial control. Today I confirm that the ring-fencing of all local government revenue grants will end from April next year. The only exception will be simplified schools grants and a public health grant. Outside of schools, police and the fire service, the number of separate core grants that go to local authorities will be reduced from over 90 to fewer than 10. Councils and their leaders will remain accountable, but they will no longer have to report on 4,700 local area agreement targets.

The local government settlement includes funding for next year’s council tax freeze to help families when their budgets are tight. We are also introducing tax increment finance powers, allowing councils to fund key projects by borrowing against future increases in locally collected business rates.

Some in local government have concerns about the financing of social care. I can announce that grant funding for social care will be increased by an additional £1 billion by the fourth year of the spending review, and a further £1 billion for social care will be provided through the NHS to support joint working with councils, so that elderly people do not continue to fall between the cracks of two different systems. That is a total of £2 billion of additional funding for social care to protect the most vulnerable.

We will also reform our social housing system, for it is currently failing to address the needs of the country. Over 10 years, more than 500,000 social rented properties were lost. Waiting lists have shot up, families have been unable to move, and, although a generation ago only one in 10 families in social housing had no one working, this had risen to one in three by 2008-09.

We will ensure that in future social housing is more flexible. The terms for existing social tenants and their rent levels will remain unchanged. New tenants will be offered intermediate rents at about 80% of the market rent. Alongside £4.4 billion of capital resources, this will enable us to build up to 150,000 new affordable homes over the next four years. We will continue to improve the existing housing stock through the decent homes programme, and we will reform the planning system so that we put local people in charge, reduce the burdens on house builders and encourage more homes to be built, with a new homes bonus.

Within an overall resource budget for the Department for Communities and Local Government which is being reduced to £1.1 billion over the period, priority will be given to protecting the disabled facilities grant. This will go alongside a £6 billion commitment over the four years to the supporting people programme, which provides help with housing costs for thousands of the most vulnerable people in our communities. In recognition of the important service provided by the fire and rescue service, we have decided to limit its budget reductions in return for substantial operational reform.

Let me turn now to reforms in our security and defence. Yesterday, my right hon. Friend the Prime Minister set out the conclusions of the strategic and defence review. He explained in detail how we will protect the British people, deliver on our international obligations and secure British influence around the world. This spending review provides the resources to do just that. The budget for the Ministry of Defence will reach £33.5 billion in 2014-15, a saving of 8% over the period. On top of this settlement, we will continue to provide out of the reserve the resources that our forces in Afghanistan require. As the Chancellor, I believe strongly that if we ask our brave servicemen and women to risk their lives on our behalf in active combat, then we will give them all the tools they need to finish the job.

Our international influence and commitment to the world are not determined only by our military capabilities; our diplomacy and development policy matter too. Savings of 24% in the Foreign and Commonwealth Office budget will be achieved over the review period by a sharp reduction in the number of Whitehall-based diplomats and back-office functions. There will be a focus on helping British companies win exports and secure jobs at home, and with the help of UKTI we will attract significant overseas investment to our shores.

I can also confirm that this coalition Government will be the first British Government in history, and we will be the first major country in the world, to honour the United Nations commitment on international aid. The Department for International Development’s budget will rise to £11.5 billion over the next four years. Overseas development will reach 0.7% of national income in 2013; this will halve the number of deaths caused by malaria and save the lives of 50,000 women in pregnancy and of 250,000 newborn babies.

Whether working behind the counter of a charity shop, volunteering abroad or contributing taxes to our aid budget, Britons can hold their heads up high and say, “Even in these difficult times, we will honour the promise that we made to some of the poorest people in our world.”

Our aid budget allows Britain to lead in the world. It may be protected from cuts, but it is not from scrutiny. I have agreed with my right hon. Friend the International Development Secretary a plan of reform that reduces administration costs to half the global donor average, ends the aid programmes that we inherited in China and Russia, focuses on conflict resolution and creates an independent commission to assess the impact of the money that we commit.

Let me now turn to security at home. Protecting the citizen is a primary duty of the Government. Our police put themselves in harm’s way to make the rest of us safe, and we owe them our gratitude. But no public service can be immune from reform. Her Majesty’s inspectorate of constabulary found in his recent report that significant savings could be made to police budgets without affecting the quality of front-line policing. Tom Winsor is leading a review of terms and conditions that will report on how the police service can manage its resources to serve the public even more cost-effectively.

Using independent forecasts for the precept, the settlement that I am proposing today will see police spending falling by 4% each year. By cutting costs and scrapping bureaucracy, we are saving hundreds of thousands of police man hours. Our aim is to avoid any reduction in the visibility and availability of police in our streets. Our new national security strategy judges terrorism to be one of the highest risks facing this country. Therefore I am prioritising counter-terrorism over the review period, both in the Home Office budget and the single intelligence account. We have been assured that this will maintain our operational capabilities against both al-Qaeda and its affiliates and against Northern Irish terrorist threats. This will enable us to meet the terrorist threat and to protect the Olympic games in 2012.

Overall, the Home Office budget will find savings of an average of 6% a year. The Ministry of Justice’s budget will reach £7 billion by the end of the four-year period, with an average saving of 6% a year. A Green Paper will set out proposals to reform sentencing, intervene earlier to give treatment to mentally ill offenders and use voluntary and private providers to reduce reoffending. Some £1.3 billion of capital will also be provided over the period to maintain the existing prison estate and fund essential new-build projects, but plans for a new 1,500-place prison will be deferred.

The Law Officers’ Department will reduce its budget by a total of 24% over the period, with the Crown Prosecution Service greatly reducing its inflated cost base. Reforms will also be required to streamline the criminal justice system, close underused courts and reduce the legal aid bill. We do need fair access to justice but provided at a fair cost for the taxpayer.

All the reform that I have spoken of—to Whitehall and the way services are provided, to local government and to our defence, security and justice system—will improve both value for money for taxpayers and the service provided to the public. Next month, each Government Department will publish a business plan setting out its reform plans for the next four years, so that their priorities are clear and the public can hold them to account.

Reform is one of the guiding principles of this spending review—and so, too, is fairness. Let us be clear: there is nothing fair about running huge budget deficits and burdening future generations with the debts that we ourselves are not prepared to pay. How ironic that it was the last Labour Prime Minister himself who once observed that

“Public finances must be sustainable over the long term. If they are not then it is the poor…that will suffer most.”—[Official Report, 2 July 1997; Vol. 297, c. 304.]—

not that he is here in the Chamber today. That is why we are restoring order to our public finances before that is allowed to happen.

A fair Government deal with the deficit decisively, and that is what we are going to do. A fair Government make sure that those with the broadest shoulders bear the greatest burden. The distributional analysis published today shows that those on the highest incomes will contribute more towards this entire fiscal consolidation, not just in cash terms but also as a proportion of their income and consumption of public services combined.

I completely understand the public’s anger that the banks, which were so appallingly regulated over the last decade, and whose near-collapse wrought such damage to our economy, should now be contemplating paying high bonuses. We are overhauling the system of regulation that we inherited, so that the Bank of England, with its clout and reputation, is put in charge. We have set up the Independent Commission on Banking to look at the structure of the industry, and next year we will receive its report.

Today we set out very clearly, for all to take note of, our objective in taxing the banking industry going forward. We neither want to let banks off making their fair contribution, nor do we want to drive them abroad. Many hundreds of thousands of jobs across the whole United Kingdom depend on Britain being a competitive place for financial services.

Our aim will be to extract the maximum sustainable tax revenues from financial services. We will assess what those maximum revenues could be—not just in one year, but over a period of years. We have already decided, in the face of opposition from the previous Government, to introduce a permanent levy on banks. The legislation will be published tomorrow. Once fully effective, the permanent levy will raise more net each year and every year for the Exchequer than the one-year bonus tax did last year. I note that the previous Chancellor now admits that that failed to curb behaviour and was not sustainable.

However, that is not enough. We want the banks to pay not just by the letter of the tax law, but by its spirit. A year ago, the previous Government announced in a fanfare that they would require banks to sign up to the code of practice on taxation. I have asked the Revenue how many of our leading 15 banks actually signed up. The answer is four—four out of 15. That is what happened when they were in office—all talk and no action.

I have instructed the Revenue to work with the banking sector to ensure that the remaining banks have implemented the code of practice by the end of next month. We will also address the situation under the last Government where the gap between the taxes owed and the taxes paid grew considerably. So in this spending review, while the HMRC budget will be expected to find resource savings of 15% through the better use of new technology, greater efficiency and better IT contracts, we will be spending £900 million more on targeting tax evasion and fraud. This additional £900 million is expected to help us collect a missing £7 billion in tax revenues. Nor will fraud in the welfare system be tolerated any more. We estimate that £5 billion a year is being lost in this way—£5 billion that others have to work long hours to pay in their taxes. This week we published our plans to step up the fight to catch benefit cheats and deploy uncompromising penalties when they are caught.

That brings me to the wider welfare budget. A civilised country provides for families, protects the most vulnerable, helps those who look for work, and supports those in retirement. That is why one of the first acts of this coalition Government was to re-link the basic state pension to earnings and guarantee a rise each year by earnings, inflation or 2.5%. Never again will those who worked hard all their lives be insulted with a state pension increase of just 75p. But this guarantee of a decent income in retirement has to be paid for at a time when people are living much longer than anyone predicted. We should celebrate that fact, but also confront it. Lord Turner’s report on pensions, commissioned by the last Government, acknowledged that a more generous state pension had to be funded by an increase in the pension age. Even since its publication, life expectancy has risen further than it predicted.

Before the summer, we launched a review on increasing the state pension age, and that review has now concluded. As a result, I can announce today that the state pension age for men and women will reach 66 by 2020. This will involve a gradual increase in the state pension age from 65 to 66, starting in 2018, and it will mean an acceleration of the increase in the female pension age already under way since this April. From 2016, the rate of increase will be three months in every four rather than the current plan of one month in every two. Raising the state pension age is what many, many countries are now doing, and will by the end of the next Parliament save over £5 billion a year—money that will be used to provide a more generous basic state pension as we manage demographic pressures.

Earlier this month, we also received the interim report from John Hutton’s public service pensions commission. I am sure that the whole House will want to thank John Hutton for his excellent and independent piece of work. I welcome his findings. I hope that it will form the basis of a new deal that balances the legitimate expectations of hard-working public servants for a decent income in retirement with the equally legitimate demands of hard-working taxpayers that they do not pay unfairly for it.

I think that the elements of this new pension deal are clear. We should accept that public service pensions continue to provide a form of defined benefit and that there is no race to the bottom of pension provision. We want public service pensions to be a gold standard. At the same time, we should accept that they must be affordable. When these public service pension schemes were established in the 1950s, taxpayers made half the contributions; today, they make up two thirds of the contributions, and the unfunded bill is set to rise to £33 billion by 2015-16.

We should accept, as John Hutton does, that there has to be an increase in employee contributions, although I also agree with him that this should be staggered and progressive. That means that the lower-paid—and those in the armed forces—are protected, and the highest-paid public servants, who get the largest benefits, pay the highest contributions. We will await the full commission report next spring before coming to any conclusions on the exact nature of the defined benefit and the progressive contribution rise. We will also launch a consultation on the fair deal policy, as he recommends, but we will now carry out, as the interim report suggests, a full public consultation on the appropriate discount rate used to set contributions to these pensions. From the perspective of filling the hole in the public finances, we will seek changes that deliver an additional £1.8 billion of savings per year in the cost of public service pensions by 2014-15, over and above the plans left to us by the last Government.

It is also clear that the current final salary pension terms for MPs are not sustainable, and we anticipate that the current scheme will have to end. We will make a further statement following the publication of Lord Hutton’s findings.

The welfare system is also there to help people of working age when they lose their job, have a disability, start a family and need help with low pay. But the truth, as everyone knows, is that the welfare system is failing many millions of our fellow citizens. People find themselves trapped in an incomprehensible out-of-work benefit system for their entire lifetime because it simply does not pay to work. This robs them of their aspirations and opportunities, and it costs the rest of the country a fortune. Welfare spending now accounts for one third of all public spending. Benefit bills soared by 45% under the previous Government. In some cases, the benefit bill of a single out-of-work family has amounted to the tax bills of 16 working families put together. This is totally unsustainable and unfair. The last Government promised reform and flunked it: we will deliver.

My right hon. Friend the Work and Pensions Secretary is setting out proposals, with my support, to replace all working-age benefits and tax credits with a single, simple universal credit. The guiding rule will be this: it will always pay to work. Those who get work will be better off than those who do not. This represents the greatest reform to our welfare state for a generation. It will be introduced over the next two Parliaments at a pace that ensures that we get this right. I have set aside over this spending review more than £2 billion of resources to make this happen, and it will go alongside our new Work programme, which we are also funding today. Drawing on the skills of the voluntary sector and private providers, the Work programme will provide intensive help for those looking for work and support for those who could look for work but currently lack the confidence or the skills to try.

The Department for Work and Pensions will make savings to help to deliver these schemes by increasing the use of digital applications and reducing overheads. But we will also be seeking substantial savings from the rest of the £200 billion benefit bill, on top of those already identified in the Budget. As I said in June, the more we could save on welfare costs, the more we could continue other, more productive areas of Government spending. And in the massive public consultation we conducted over the summer, the overwhelming message we received was that the British people think it is fair to reform and reduce welfare bills in order to protect important public services.

So today I announce these further welfare savings. We will time limit contributory employment and support allowance for those in the work-related activity group to one year. This is double the length of time that applies to contributory jobseeker’s allowance. We will increase the age threshold for the shared-room rate in housing benefit from 25 to 35, so that housing benefit rules reflect the housing expectations of people of a similar age not on benefits. We will give local authorities greater flexibility to manage council tax, together with direct control over council tax benefit, within an overall budget that will be reduced by 10% from April 2013.

We will align the rules for the mobility and care elements of disability living allowance paid to people in residential care, generating savings but enabling us to continue with this important benefit. We will freeze the maximum savings credit award in pension credit for four years, thereby limiting the spread of means-testing up the income distribution.

We will further control the cost of tax credits by freezing the basic and 30-hour elements for three years; we will change the working tax credit eligibility rules so that couples with children must work 24 hours per week between them; and we will return the child care element of the working tax credit to its previous 70% level. We will also introduce a new cap on benefits. No family that does not work will receive more in benefits than the average family that does go out to work. That is tough, but fair. Of course, those in receipt of disability living allowance, working tax credit or the war widow’s pension will be excluded.

Taken together, all these welfare measures I have outlined will save the country £7 billion a year. But we want to ensure that low-income families with children are protected from the adverse effects of these essential savings—because this Government are committed to ending child poverty. I can announce today that I am increasing the child element of the child tax credit by a further £30 in 2011-12 and £50 in 2012-13 above indexation. This will mean annual increases of £180 and then £110 above the level promised by the last Government, and it will provide support to 4 million lower-income families. And I can confirm that using the same model we inherited, the spending review will have no measurable impact on child poverty over the next two years, while we await the conclusions of the report by the right hon. Member for Birkenhead (Mr Field).

Let me now turn to the universal benefits. I have taken the difficult decision to remove child benefit from families with a higher rate taxpayer. I wish it were otherwise, but I simply cannot ask those watching this earning just £15,000 or £30,000 a year to go on paying the child benefit of those earning £50,000 or £100,000 a year. The debts of the last Labour Government, and the need to ensure that the better-off in society also make a fair contribution, make this choice unavoidable. It also means that no further changes to child benefit are required. Child benefit will continue to be paid in the normal way to the great majority of the population from birth until a child leaves full-time education at the age of 18 or even 19. We can afford to do that because, according to the latest independent estimates we have received from the Office for Budget Responsibility, removing child benefit from higher rate taxpayers will actually save Britain £2.5 billion a year.

We will also keep the universal benefits for pensioners, in recognition of the fact that many have worked hard and saved hard all their lives. Free eye tests, free prescription charges, free bus passes, free TV licences for the over-75s and winter fuel payments will remain exactly as budgeted for by the previous Government, as promised. I am also turning the temporary increase in the cold weather payments introduced by the last Government into a permanent increase. In my view, higher cold weather payments should be for life, not just for general elections.

So, too, are the promises that we make on the national health service. The NHS is an intrinsic part of the fabric of our country. It is the embodiment of a fair society. This coalition Government made a commitment to protect the NHS and increase health spending every year. Today we honour that commitment in full. Total health spending will rise each year over and above inflation. This year we are spending £104 billion on health care, capital and current combined. By the end of four years we will be spending £114 billion. We can afford that, in part because of the decisions on welfare that I have just announced, and also because we have made tough decisions in other parts of the Government budget. But to govern is to choose, and we have chosen the national health service.

That does not mean that we are letting the Department of Health off the need to drive real reform and savings from waste and inefficiency. Productivity in the health service fell steadily over the past 10 years, and that must not continue. By 2014 we are aiming to save up to £20 billion a year by demanding better value for money—but the money we save will be reinvested in our nation’s health care.

As the independent forecasts we published in the Budget show, we need to make those savings to deal with our ageing population and the rising costs of new medical treatments, but there are also new services we can offer. A new cancer drug fund will be provided, spending on health research will be protected, and we will prioritise work on the treatment of dementia. We will expand access to psychological therapies for the young, the elderly and those with mental illness. We will fund new hospital schemes, including the St Helier, the Royal Oldham and the West Cumberland.

For health spending, as for other spending announcements, there will be consequential allocations for Scotland, Wales and Northern Ireland. The Barnett formula will be applied in the usual way, which means that the increase in health spending and the relative protection of education spending will feed through to the devolved resource budget. It means that all three nations will actually see cash rises in their budget, although rises below the rate of inflation. For Scotland the resource budget will rise to £25.4 billion in 2014-15. For Wales it will rise to £13.5 billion, and for Northern Ireland to £9.5 billion. In Scotland we are proceeding with the implementation of the Calman reforms. In Wales we will consider with the Assembly Government the proposals in the final Holtham report, consistent with the Calman work being undertaken in Scotland.

In Northern Ireland, the collapse of the Presbyterian Mutual Society has caused great hardship, and people have been left without their money for far too long. I confirm today that we will provide the Northern Ireland Executive with £25 million in cash and a £175 million loan to help those who have lost their life savings.

We will also help those across the United Kingdom who have lost money as a result of the collapse of Equitable Life. For 10 years the Equitable Life policyholders have fought for justice. For 10 years the last Government dithered, delayed and denied them that justice. It is time to right the wrong done to many thousands of people who did the right thing, saved for their future and tried not to depend on the state, and then were the innocent victims of a terrible failure of regulation.

So let me make it clear: I accept the findings of the parliamentary ombudsman in full. I have read the advice of Sir John Chadwick and I thank him for it, but I do not agree with the level of compensation that his analysis suggested. I agree with the ombudsman that the relative loss suffered is the difference between what policyholders actually received from their policies and what they would have received elsewhere. The parliamentary ombudsman herself recognised that a balance had to be struck between being fair to policyholders and being fair to taxpayers, particularly when many budgets and benefits are being cut. But money that we pay out has to come from general public expenditure. I have decided that the fair amount to pay out in total is in the region of £1.5 billion, two thirds of which will be found in this spending review period. Those who had with-profits annuities were particularly hard hit, as they were retired and were unable to move their savings elsewhere. As a result, the Government will cover the cost of the total relative loss suffered by those deserving people. The scheme will start making payments next year.

Those measures, and our welfare reforms, mean that it will always pay to work; the benefits savings will help us protect key public services such as the national health service; and there is help for those who have saved and lost everything. These are fair decisions, consistent with the second principle of this spending review.

The third and final principle centres on growth and promoting a private sector recovery. By restoring macro-economic stability we have brought certainty to business, and by cutting business taxes we are giving businesses the freedom to compete. Today’s review builds on those steps, because even when money is short we should prioritise the areas of public spending that are most likely to support economic growth. That is what we are doing with the Department for Business, Innovation and Skills. Administration will be cut by £400 million, 24 quangos will go, lower-priority programmes such as Train to Gain will be abolished, and adult learners and employers will to have contribute more to further education. But that means that today I can announce the largest ever financial investment in adult apprenticeships—an increase of more than 50% on the previous Government’s provision, helping 75,000 new apprentices a year by the end of this spending review period.

We will maintain and invest in the post office network and protect community post offices. We will come forward with our detailed response to Lord Browne’s report on higher education funding and student finance, including our plans to provide financial support to encourage those from the poorest households to stay in education. Our universities are the jewels in our economic crown, and it is clear that if we want to keep our place near the top of the world league tables, we need to reform our system of funding and reject—as, to be fair, many Opposition Members do—the unworkable idea of a pure graduate tax. Clearly, better-off graduates will have to pay more, which will enable us to reduce considerably the contribution that general taxpayers have to make to the education of those who will probably end up earning much more than them.

Overall, annual savings of 7.1% will be found from the budget of the Department for Business, Innovation and Skills—the minimum it was asked to find. Within those savings, however, the Secretary of State and I have decided to protect the science budget. Britain is a world leader in scientific research, and that is vital to our future economic success. That is why I am proposing that we do not cut the cash going to the science budget. It will be protected at £4.6 billion a year. Building on the Wakeham review of science spending, we have found that within the science budget, significant savings of £324 million can be found through efficiency. If they are implemented, with this relatively protected settlement I am confident that our country’s scientific output can increase over the next four years.

We will also invest £220 million in the UK Centre for Medical Research and Innovation at St Pancras, and fund the molecular biology lab in Cambridge, the Institute for Animal Health in Pirbright and the diamond synchrotron in Oxford.

Research and technological innovation will help us with one of the greatest scientific challenges of our times—climate change—and support new jobs in low- carbon industries. So today, even in these straitened times, we commit public capital funding of up to £1 billion to one of the world’s first commercial-scale carbon capture and storage demonstration projects. We will also invest more than £200 million in developing offshore wind technology at port sites.

Yesterday protesters scaled the Treasury, urging us to proceed with their idea for a green investment bank. That is the first time anyone has protested in favour of a bank—but we will go ahead. I have set aside in the spending review £1 billion of funding for that bank, but I hope that much more will be raised from the private sector and the proceeds of future Government asset sales.

The aim of all those investments is for Britain to be a leader of the new green economy, creating jobs, saving energy costs and reducing carbon emissions. We will also introduce incentives to help families reduce their bills. We will introduce a funded renewable heat incentive, and our green deal will encourage home energy efficiency at no up-front cost to homeowners, allowing us to phase out the Warm Front programme.

Overall, the total resource settlement for the Department of Energy and Climate Change will fall by an average 5% a year, but there will be a large increase in capital spending, partly to meet the unavoidable commitments that we have been left on nuclear decommissioning.

The Department for Environment, Food and Rural Affairs will deliver resource savings of an average 8% a year, but we will fund a major improvement in our flood defences and coastal erosion management that will provide better protection for 145,000 homes.

Britain’s arts, heritage and sport all have enormous value in their own right, but our rich and varied cultural life is also one of our country’s greatest economic assets. The resource budget for the Department for Culture, Media and Sport will come down to £1.1 billion by 2014-15. Administrative costs are being reduced by 41% and 19 quangos will be abolished or reformed. All that is being done so that we can limit four-year reductions to 15% in core programmes such as our national museums, the front-line funding provided to our arts and Sport England’s whole sport plans. We will complete the new world-class building extensions for the Tate Gallery and the British Museum. The Secretary of State will provide details of further projects shortly. I can also announce today that, in order for our nation’s culture and heritage to remain available to all, we will continue to fund free entry to museums and galleries. There is also ongoing provision of the £9.3 billion of public funding for a safe and successful Olympic and Paralympic games in London in 2012.

We have approached the BBC to ensure that it, too, makes its contribution, as a publicly funded organisation, to savings during the spending review. I am pleased to confirm that this week we have struck a deal. The BBC will take from the Government the responsibility for funding the BBC World Service and BBC Monitor, as well as part-funding S4C. That amounts to some £340 million of savings a year for the Exchequer by 2014-15.

To ensure that the cost of those new obligations is not passed on to the licence fee payer, the BBC has agreed a funding deal for the full duration of its charter review. The licence fee will be frozen for the next six years. That deal helps almost every family, and is equivalent to a 16% saving in the BBC budget over the period, similar to the savings in other major cultural institutions.

The BBC has also agreed to reduce its online spend and make no further encroachments into local media markets in order to protect local newspapers and independent local radio and TV. It will contribute to the £530 million that we will spend over the next four years in bringing superfast broadband to rural parts of our country that the private sector will take longer to reach. Pilots will go ahead in the Highlands and Islands, North Yorkshire, Cumbria and Herefordshire. All that will help encourage the growth of our creative industries as a key part of the new economy that we are seeking to build.

After our defence requirements are met, the Department for Transport will receive the largest capital settlement. Over the next four years we will invest more than £30 billion in transport projects—more than was invested during the past four years. Of that, £14 billion will fund maintenance and investment in our railways. Direct bus subsidies will be reduced, but statutory concessionary fares will remain.

The cap on regulated rail fares will rise to RPI plus 3% for the three years from 2012, but that will help this country afford new rolling stock as well as improve passenger conditions. The Secretary of State will set out how more of the transport money will be allocated next week.

However, I want to tell the House today about some of the projects that will go ahead. For let us remember that, even after the tough spending settlements, the country will still be spending more than £700 billion a year. In Yorkshire and Humber, capacity on the M62 will be expanded, £90 million will be spent on improving rail platforms across various towns and cities, and we will also improve line speeds across the Pennines. In the north-east £500 million will be spent on refurbishing the Tyne and Wear metro and the Tees valley bus network. In the north-west we will invest in rail electrification between Manchester, Liverpool, Preston and Blackpool, and we will provide funding for a new suspension bridge over the Mersey at Runcorn.

Rail and roads in Scotland are devolved to the Scottish Executive, and roads in Wales are also devolved, but I can tell the House that major rail investments around Cardiff, Barry and Newport will go ahead.

In the east midlands the M1 and the A46 will be improved. In the west midlands we will extend the Midland metro and completely redevelop Birmingham New Street station. In the south-west we will fund improvements on the M5 and the M4, and the new transport scheme for Weymouth. In the east of England, colleagues will be delighted to know, the A11 to Norwich will be upgraded. Around London, we will widen the M25 between 10 different junctions and complete improvements to the A3 at Hindhead.

In London, on top of the Olympics, a major investment in our capital city’s transport infrastructure will take place. Crossrail will go ahead and key tube lines will be upgraded for the 21st century.

That is nothing like the complete list, because next week, we will set out more details. So, yes, we are saving money and putting the state on a more sustainable footing, but even then, we will spend tens of billions of pounds on Britain’s future infrastructure. Next week the Secretary of State will also set out our national infrastructure plan, so that private money is put to work in building for this country the economic infrastructure that our businesses need. Our regional growth fund will also help us do that. As promised, £1 billion has been found for the fund over the next two years—money designed to lever in private investment in areas of our country where it has been too absent over the past decade. I can announce today that I am providing close to half a billion pounds extra in the third year for the regional growth fund.

Long-term investment in the capacity of our transport, our science and our green energy will all help move Britain from its decade-long dependence on one sector of the economy in one part of the country, and the ruin to which that has led.

The most important ingredient of a 21st-century economy is well-educated children, who believe in themselves and aspire to a better life, whatever their background or disadvantages. In June, after the Budget, when the Chief Secretary to the Treasury and I turned our attention to how to allocate spending between Departments, we set ourselves a goal. We wanted to see if it was possible, even when spending was being cut, to find more resources for our schools and for the early years education of our children. I can tell the House that we have succeeded. It has meant other Departments taking bigger cuts, but I believe strongly that that is the right choice for our country’s future.

There will be a real increase in the money for schools, not just next year or the year after, as the previous Government once promised, but for each of the next four years. The schools budget will rise from £35 billion to £39 billion. Even as pupil numbers greatly increase, we will ensure that the cash funding per pupil does not fall. We will also sweep away all the different ways in which money is ring-fenced so that schools can decide how to spend their money as they think best.

We will also introduce a new £2.5 billion pupil premium, which supports the education of disadvantaged children and will provide a real incentive for good schools to take pupils from poorer backgrounds. That pupil premium is at the heart of the coalition agreement, and at the heart of our commitment to reform, fairness and economic growth.

Parents, teachers and community groups will be supported if they wish to establish free schools. We will fund an increase in places for 16 to 19-year-olds, and raise the participation age to 18 by the end of the Parliament. That enables us to replace education maintenance allowances with more targeted support.

We will also provide support for the early years of our children. The increased entitlement to 15 hours a week free education for all three and four-year-olds that was introduced under this Government will continue. Sure Start services will be protected in cash terms and the programme will be focused on its original purpose. We will help them further by introducing for the very first time 15 free hours of early education and care for all disadvantaged two-year-olds, so that those children have a chance in life and are ready like the rest of their classmates for school.

Overall, the Department for Education will be required to find resource savings of only 1% a year. Central administration will be cut by a third and five quangos will go. The capital budget will, as we know, have to bear its share of the reductions, but as the House knows, we have had to phase out the hopelessly inefficient and over-committed Building Schools for the Future programme. However, £15.8 billion will be spent to maintain the school estate and to rebuild and refurbish 600 schools. I repeat: the resource money for schools—the money that goes into the classroom—on the broadest definition, including all the main grants, will go up in real terms every year. That is a real investment in the future of our children and in the future growth of our economy too.

Let me conclude. The decisions we have taken today bring sanity to our public finances and stability to our economy. We have dealt decisively with the largest budget deficit this House of Commons has ever had to face outside of wartime. We have had to make choices—choices about the things we support—and today I have announced real increases in the NHS budget and the resources of schools, as well as new investment in the infrastructure of our economy. I have announced real reductions in waste and reforms to welfare and although that will reshape public services to meet the challenges of this time, I think it is the right choice.

I have one final observation. During the process of this spending review, I have received many submissions, including one from the Labour party. It said that the average cut for unprotected Departments should be set at 20% over the coming four years, rather than the 25% that I anticipated in my June Budget. I have examined that proposal carefully and consulted the published documents of my predecessor, the right hon. Member for Edinburgh South West (Mr Darling), and because of our tough but fair decisions to reform welfare and the savings that we have made on debt interest, I am pleased to tell the House that that has been possible. The average savings in departmental budgets will be lower than the previous Government implied in their March Budget. Instead of cuts of 20%, there will be cuts of 19% over the four years, so I thank the Opposition for their support and input and look forward to their votes.

This coalition Government faced the worst economic inheritance in modern history. The debts we were left with threatened every job and public service in the country, but we have put the national interest first. We have made the tough choices. We have protected health and schools and investment in growth, and we have reformed welfare and cut waste. We have made sure that we are all in this together, and we have taken our country back from the brink of bankruptcy. A stronger Britain starts here, and I commend this statement to the House. [Interruption.]

[Mr Speaker]

Order. I call Alan Johnson.

--- Later in debate ---

[Alan Johnson]

Today is the day that abstract figures and spreadsheets turn into people’s futures, people’s jobs, people’s pensions, people’s services and their prospects for the future, and the day when the statistics that were nestling comfortably in the lap of the Chief Secretary yesterday actually become the uncomfortable truth for many people and families throughout this country.

We hear the chant on every occasion, but Government Members are deficit deceivers. They have peddled a whole series of myths to the British public. The most incredible myth of all is that the biggest global economic crisis since the great depression is the fault of the previous Government—[Interruption.] You see? The strings are pulled and away they go.

The Chancellor said that the Government have brought Britain back from the brink of bankruptcy. Perhaps he will confirm three facts. Fact No. 1: when the global crisis hit, the UK had the second-lowest debt of any G7 country. Fact No. 2: the previous Government inherited a debt interest level of 10p in every £1 of tax received, and even after a world recession, we bequeathed a figure that was 15% lower. Fact No. 3: the interest rates that the UK pays on its debt have been falling since the beginning of the year. Perhaps the Chancellor, in the interests of accuracy, can confirm those statistics.

When the last comprehensive spending review took place in 2007, the Chancellor was the shadow Chancellor. Was he calling for reduced public spending? Read the Hansard. Was he calling for regulation of the banking industry? I have two things to say about 2007. I have read his contribution to the debate. First, instead of arguing for reduced public spending, he argued that we were spending too little. He complained that we were slowing the growth in health and education expenditure. Indeed, the Conservative party supported every penny of our spending plans until well after the collapse of Lehman Brothers in America, which set off the disastrous chain reaction that caused the global recession.

In 2007, far from calling for regulation of the banks, the Conservatives were calling for deregulation of the banks. The right hon. Member for Wokingham (Mr Redwood) produced a report on behalf of the then Leader of the Opposition who had called for greater regulation of the banking industry. We need to get the facts right.

The Chancellor described his emergency Budget in June as being unavoidable and fair. We know that it was unfair, because the IFS produced the statistics with devastating and forensic accuracy a few hours later, and we also know that it was avoidable. The deficit has to be paid down—[Hon. Members: “Ah!”] Here they go again. The Chief Whip’s spreadsheet tells them when to stand up and what to say. Where is he? He does not need to move to have influence on his Back Benchers. So we do need to bring the deficit down.

Today’s reckless gamble with people’s livelihoods runs the risk of stifling the fragile recovery. The ridiculous analogy with credit card debts insults the intelligence of the British public. If countries around the world had not run up debts—that is what the fiscal deficit is, by the way—to sustain their economies, people would have lost not their credit cards, but lost their jobs, lost their houses and lost their savings. The Liberal Democrats know that, and they argued that when seeking the support of the electorate. The Deputy Prime Minister argued that, and then he discovered Greece. In the period between the ballot box closing and his ministerial car door opening, the Deputy Prime Minister discovered a different approach.

Like us, the Liberal Democrats—every single one of them—were elected to this House on a platform that said, in the context of reducing the deficit, that speed kills. The Chancellor repeats a long list of those who support his swift cuts; he mentions it all the time. Curiously, he failed to mention the other countries in the United Kingdom—Scotland, Wales and Northern Ireland—which do not support these measures. Perhaps that is why he calls himself a one-nation Tory. Here is another supportive quotation that he missed out, and he can take this down and use it in future briefings:

“The measures we have taken have been commended by international bodies such as the European Central Bank, the European Commission, the IMF and the OECD. They have also won the approval of the international markets.”

That was the Irish Minister of Finance last December, when he told the Irish Parliament that his austerity plan meant that they had turned the corner. Four months later, they slid back into recession.

The concerns of those watching this announcement today went beyond the misrepresentation of figures and the clever Punch and Judy stuff in which we all engage—including myself at times. They will be interested in whether they will stay in work, whether they will stay in their homes and whether they will stay safe on the streets. We are told that the expected job losses from this spending review—and the Chancellor confirmed it—will be some 490,000. PricewaterhouseCoopers reported last week that 1 million jobs were at stake because the impact on the private sector is just as severe. Is it not the case that at the same time as the Government are throwing people out of work, they are reducing the support to help people return to the workplace?

I applaud the ideas and the efforts of the Secretary of State for Work and Pensions to do what we were seeking to do and make work pay—[Interruption.] He often gives credit to what we did when we were in government. The fact is, however, that today’s proposals will make it harder for people to return to work because of the changes to working tax credit; because of the changes to support for working parents; and because of the huge increase in fares for those who have to travel to get the jobs. The Secretary of State has had his job made harder by today’s announcement.

On housing, the Chancellor has announced the retreat of central Government from any role in building new affordable homes. Can he tell the House how many jobs will be lost in the construction sector as a result of his decision to all but end capital funding for house building? Crime has fallen dramatically in the last 13 years. I heard what the Chancellor said about the report from Her Majesty’s inspectorate of constabulary, but the Home Office is not a protected Department. As it deals with counter-terrorism and policing, the public will be worried that they will lose more police on the streets.

Spending has to be reduced—[Interruption.] Yes, spending has to be reduced, but the front-line services on which people rely must be protected. We support moves to ring-fence the health budget—[Hon. Members: “Ah!”] The point about the health service is not that its budgets will be protected, it is the taking of £2 billion to £3 billion out of those budgets to pay for a top-down structural reorganisation that the Conservatives told the public in their manifesto would not happen. This is the top-down reorganisation to end all top-down reorganisations, and we are already seeing the loss of jobs in the NHS as a result.

On education, the Chancellor mentioned that the pupil premium would be funded. There are stories already about teachers and teaching assistants losing their jobs as a result of today’s announcement. We will have to look at the statistics carefully, including the small print, before we can see what is happening on education. The Chancellor said that they will keep a version of education maintenance allowance. That is good, because it has been the biggest single contributor to lifting the number of children from poorer homes who stay in education—and it was introduced by the Labour Government. He told us that it will be introduced in some form, but he did not say how. Nor did he say what effect the removal of ring fences will have on Sure Start, which is crucially important to ensuring that we have a more progressive society.

On the NHS, we believe that the real-terms increase will be more than swallowed by the cost of the reorganisation. It would be good if the Chancellor could confirm that the baseline for the NHS will exactly reflect its actual budget this year. It seems to us from the statistics that there may be some smoke and mirrors.

Without growth, the job of getting the deficit down becomes impossible. A rising dole queue means a bigger welfare bill and less tax coming in—a cost of at least half a billion pounds for every 100,000 people thrown out of work by the Government’s approach. To get the deficit down, the starting point must be jobs, jobs, jobs. That remains the core of the difference between us and the Government. We were told that the Ministry of Justice will see 14,000 jobs cut. Does the Chancellor agree with the Department’s assessment that the vast majority of those—11,000—will be from the front line? Can he confirm that £230 million of taxpayers’ funds have been earmarked for redundancy costs in that Department alone? What is the total scale of redundancies expected across the public sector? What will the total redundancy bill be? Thanks to the Chief Secretary’s gaffe yesterday, we know that the Treasury has provided the Chancellor with estimates: he should share them with the House. Can the Chancellor confirm that the poorest will still bear a greater burden than the richest, with the middle squeezed even further, and that women will shoulder three quarters of the cuts? Does he still claim that these measures are progressive and fair?

There is an alternative approach. The Chancellor finished by suggesting that their cuts were the same as ours—[Hon. Members: “Less.”] Less than ours? That is even more utter and complete nonsense, for two reasons. First, the Conservatives calculated the 20% figure by some very dodgy formulae that stretched the limit of credibility for the protected Departments. Secondly, the Chancellor has not caught up with the fact that we have listed a series of measures with which we agree—for instance, the increase in capital gains tax and the changes to welfare. The Chancellor has not caught up with the statements that we have made about the welfare bill. We will look at the further measures that the Chancellor has announced today, but if we take the statements that we have made into account, we came into this debate with departmental cuts half the level of those that the Government are proposing.

This spending review is not about economic necessity; it is about political choices. The Chancellor argues that Labour would have done nothing about the deficit; he goes on to say that his cuts are no worse than ours. He cannot have it both ways. He cannot be right in both arguments, although he does manage to be wrong on both counts. The difference between us is that the Government are removing almost twice as much from Department budgets, while we were looking for a much more gradual, much slower reduction, which would not stifle the very low levels of growth in our economy. It is our firm belief that the rush to cut the deficit endangers the recovery and reduces the prospects for employment in the short term and for prosperity in the longer term. We believe that we can and should sustain a more gradual reduction, securing growth. I do not believe that the Chancellor or the Prime Minister sufficiently understands the worries and concerns of families up and down this country. Those worries will have multiplied considerably as a result of the Chancellor’s statement today.

[Mr Osborne]

He’s a nice guy, but he’s in the wrong job. The truth is this: frankly, either member of the Balls family would have done a lot better than that, and they might even have asked me a question or two, but let me try to respond to what he said.

The right hon. Gentleman keeps talking about a plan B, but he has not even got a plan A. There was a complete denial of the fact that this country has the largest budget deficit in the G20. He made no acknowledgement of the fact that the credit rating agencies were looking at this country when he was in the Cabinet and no acknowledgement of the fact that our market interest rates were the same as Spain rather than others. Frankly, he spent half his statement defending the economic policy of the last Labour Prime Minister—who perhaps could have turned up to hear it—but that is totally irrelevant to the questions put before the House today and the proposals that we have set out.

The right hon. Gentleman kept saying, “We want to reduce the deficit.” As far as I could tell, he did not agree with a single measure that I set out. He did not propose a single saving. He is a deficit denier, and the truth is this. We have been told for a whole year that we would get Labour’s deficit reduction plan. Before the election, let us remember, we were told in the debates, “Don’t worry, it’ll come after the election.” During the leadership contest, we were told that it would come after the leadership contest. After the leadership contest, we were told that it would come before the spending review, and then this morning, a member of the shadow Cabinet said on the radio, “We are not going to do an alternative to the spending review.” I then got this message in the Chamber that said that at eight minutes past 1 this afternoon, when the shadow Chancellor was actually in the Chamber, he sent an e-mail to members of the public saying:

“I’m going to be honest with you, being in opposition does mean”

we have to set out “a clear alternative”, and he then said, “Please share your thoughts with us.” Labour Members were in government until six months ago. They sat round the Cabinet table as the deficit increased. Six months later, they have not put forward a single idea for reducing the budget deficit. It is absolutely pathetic.

Despite the fact that the right hon. Gentleman says that he is relatively new to the subject, he dismisses, with a sweep of the hand, the verdict of the IMF, the OECD, the CBI, the chambers of commerce, the European Commission and everyone else who has looked at the British economy. I do not know whether he saw the letter from 35 leading employers in this country, but they included people such as the leaders of Asda and Microsoft—I know that the business community of this country is totally irrelevant to Labour now—and the person who founded the Carphone Warehouse, who I think used to be a supporter of the Labour party. All those people wrote to the national newspapers saying:

“Addressing the debt problem in a decisive way will improve business and consumer confidence.”

If the right hon. Gentleman wants to ignore all those people, what about Tony Blair? There is total silence on the Labour Benches for the man who won Labour three general elections. I think that the right hon. Gentleman was in the Cabinet when Tony Blair was Prime Minister, and he has said:

“The danger now is this: if governments don’t tackle deficits, the bill is footed by taxpayers, who fear that big deficits now mean big taxes in the future, the prospect of which reduces confidence, investment and purchasing power. This then increases the risk of prolonged slump”.

The right hon. Gentleman used to be a Blairite—[Interruption.] Well, at least the right hon. Member for Morley and Outwood (Ed Balls) has been fighting Tony Blair all his career and says he is wrong, but the shadow Chancellor used to be a supporter.

The right hon. Gentleman has dismissed all the leading businesses of Britain, all the international organisations and Tony Blair, but let me answer a couple of his specific questions—[Interruption.] Well, to be fair, in the space of about 10 minutes he asked three, so I will answer them. First, he asked about police numbers. Of course this is a challenge for the Home Office, but we believe that with the advice from the inspectorate of constabulary and Tom Winsor’s report, there will be no reduction in the availability and visibility of policing. However, the right hon. Gentleman was asked during the election—[Interruption.] He was the Home Secretary. [Interruption.] The new Leader of the Opposition asks—[Interruption.] This is what the man who was Home Secretary before the election said in the election, when he was asked a question on the “Daily Politics” show:

“Can you guarantee if you form...the next government that police numbers won’t fall?

Johnson: No”.

So what is the basis on which he makes his argument?

The right hon. Gentleman talks about the national health service, and he said that he agreed with our decision to ring-fence it. Presumably this is the same shadow Chancellor who said recently, “There is no logic, sense or rationality to this policy.” He has done a complete U-turn.

The right hon. Gentleman says that he rejects the minus 20% definition of the Labour cuts. At the same time, he began his statement by praising the Institute for Fiscal Studies, but that number comes from the IFS. He suggests that I have not paid attention to the announcements that he has been making this week. Well, it is true that I have been quite busy, but I have paid attention to what he has said. I understand that not many people got a chance to question him about his policies, but he said that taxes needed to be increased. However, when he was asked which taxes, he said that he was open-minded about it. That is a polite way of saying he hasn’t got a clue.

The right hon. Gentleman was once the great force of modernisation in the Labour party, and he has now ended up reading out the policies dreamed up by the new Leader of the Opposition. He said in that press conference earlier this week that being in opposition was not about “pretending to be in government.” Now we know how right he was.

[Mr Andrew Tyrie (Chichester) (Con)]

This is undoubtedly one of the most radical and—I think most people in all parts of the House would agree—necessary shake-ups of the public sector, whatever the scale of shake-up people wanted. Personally, I particularly welcome the cull of quangos, the re-examination of the private finance initiative, the efficiency drive in Whitehall, and the announcements on Equitable Life and the BBC. The Select Committee on Treasury will be looking in far greater detail than in the past at the Treasury’s decisions, and particularly at the way that it has prioritised between Departments and at the ring-fencing. We will also examine them for fairness. The Chancellor’s analysis in the June Budget presented that Budget as progressive. I would be grateful if he could confirm that this CSR is also progressive. I would also be grateful if he could say something about his plans to denationalise the banks.

[Mr Osborne]

First, let me thank my hon. Friend for the welcome that he gave—to repeat what I said —to what I implied about PFI, the contribution that the BBC will make and the very difficult choice that we all have to make in this Parliament about what is a fair settlement on Equitable Life. In particular, helping the trapped annuitants is an absolute priority and it is a good thing and, as I said, we found three times as much money as John Chadwick recommended.

My hon. Friend raised two particular points. First, he mentioned ring fences, and although we call them ring fences, in the end they are about priorities. We have made a choice. As a coalition Government, we have chosen certain things that we are going to cut—obviously we have made some difficult decisions on welfare—but we have also chosen to spend more money on health care and the resources going into schools. Those are choices, and in the end that is what politics in a democratic country is about. We have made those choices, so I would not regard them particularly as ring fences, more as democratic choices.

Finally, on the distributional impact, we have published distributional analyses in the book that I have published today—my hon. Friend will know that we are the first Government to attempt to do this—and I will very much welcome the Treasury Committee’s inquiry on the spending review, which I know he will conduct. We have used the methodology that is used in many other countries to try to allocate the benefit in kind of public expenditure, as well as the direct income effect of some of the benefit changes. We believe that that shows this is broadly progressive, in that the top quintile pays the most and it is broadly flat across the other quintiles. The same is true of some of the annually managed expenditure decisions as well, on which we have also published tables.

I very much welcome the Treasury Select Committee’s inquiry and its work on this matter. As I have said, this is the first time the British Treasury has attempted to do this, and we very much welcome the Committee’s input.

[Several hon. Members]

rose—

[Mr Michael Meacher (Oldham West and Royton) (Lab)]

In cutting the deficit, why did the Chancellor ignore the economic growth dividend, which could yield at least £60 billion in extra Government tax revenues over the next five years? Why did he not tax at all the 1% super-rich, whose wealth has quadrupled over the past decade? And why did he not introduce a major public sector, as well as private sector, jobs and growth programme, which could most effectively cut benefit payments and increase tax revenues?

[Mr Osborne]

The first thing I would say to the right hon. Gentleman is that we believe strongly, as do the major employers in this country and the people internationally who look at this economy, that dealing with the deficit is essential for sustainable growth. That is what this is all about: putting the British economy and our public finances on a sustainable footing so that we can create jobs in the future and so that the economy can grow.

The right hon. Gentleman talked about taxes on the top 1%. We introduced an increase in capital gains tax, and the truth is that not everyone in my party was particularly happy about it, but Labour had 13 years and all those Budgets in which to do that. The shadow Chancellor now rather lamely says that Labour supports the capital gains tax increase, but I would love to know, when the Cabinet minutes are published in 20 or 30 years’ time, whether he ever raised this matter in Cabinet. We took a decision to increase capital gains tax to the higher rate, and last week I published proposals for increasing tax on the very highest pension contributions. That is a £4 billion tax; it was not an easy thing to do, but we have done it. We have also accepted and lived with the previous Government’s decision to increase tax to 50%—of course, they introduced that in the last month they were in office. Again, that was not an easy decision. I am not instinctively in favour of higher marginal tax rates, but it is necessary at a time like this. I am determined that all parts of the income distribution should make a contribution, but that the people at the top of the income distribution should make the most.

Finally, on the disposal of the banks, at the moment we are not in a position to do that, but of course we monitor the situation the whole time and, as and when we can dispose of them, we will. I am very keen to create a more competitive banking sector at the end of this process, which is one of the reasons why we set up the independent commission.

[Karen Bradley (Staffordshire Moorlands) (Con)]

Areas such as Staffordshire Moorlands were neglected by the previous Government. Will the Chancellor tell the House how areas that have been let down by policies such as regionalisation will be helped by the measures announced by this Government?

[Mr Osborne]

We have much more focused local area partnerships that are going to help areas such as Staffordshire Moorlands, which I suspect were rather neglected by the regional development agency. I assume that such areas were not where the action was in the west midlands, and that the emphasis would have been on the big metropolitan centres. Her town of Leek and the surrounding countryside would, I suspect, have been ignored by the RDA. One of the advantages of local enterprise partnerships—and, indeed, the regional growth fund—is that we can focus on particular areas where we want to get more private sector involvement and create jobs.

[Mr David Winnick (Walsall North) (Lab)]

I witnessed the misery and devastation that occurred in my black country constituency and elsewhere during the Tory years, and all the indications that the Chancellor has given today are that there will be a repeat of that, and that, despite what he has said, the people who will suffer the most will be those on the lowest incomes. This will be a day of tragedy for the British people.

[Mr Osborne]

The hon. Gentleman is not known for overstatement, but I would say to him that we inherited a situation of rising unemployment, the biggest fall in output in a generation, the biggest banking crisis—thanks to the way in which the previous Government had regulated the banks—and a huge budget deficit. In the next hour—or however long you allow for questions, Mr Speaker—every single Labour Member who gets up should propose an alternative plan. It is very difficult to make choices, but they can attack this plan only if they have an alternative.

[Bob Russell (Colchester) (LD)]

I welcome the Government’s commitment to end child poverty—during this Parliament, we hope—which Labour failed miserably to do, but may I draw the Chancellor’s attention to what the coalition programme says about rented housing? Hundreds of thousands of families will be adversely affected by the removal or cutting of housing benefit. Will he confirm that local authorities have a statutory duty to house homeless families, and that the cost of bed-and-breakfast accommodation is considerably greater than that of housing benefit?

--- Later in debate ---

[Mr Osborne]

The housing benefit budget has been rising at a very rapid pace and, frankly, anyone doing my job would have to address that bill. We have sought to do that in a way that is fair and that balances the needs of the taxpayer with the needs of those in receipt of housing benefit. There has been a lot of speculation about social tenants, but we are not changing the social tenancy agreements of people in existing social tenancies—[Hon. Members: “Yes you are!”] That is what we are not doing. We are saying that for new tenants we will have to have something more like the market rent. I have to say that that was the policy of the previous Government—

[Thomas Docherty (Dunfermline and West Fife) (Lab)]

indicated dissent.

[Mr Osborne]

But it was the stated policy of the previous Government to increase social rents over time to approach the level of market rents—[Interruption.] That was the policy of the previous Government. As I have said, we have tried to do this in a way that protects existing social tenants. It will help to build more social housing, and in the end the Opposition have to ask themselves why they failed so miserably on building social housing.

[Stewart Hosie (Dundee East) (SNP)]

The Chancellor has announced 500,000 job losses and cuts of £81 billion—that is just the cuts, not the tax increases—while giving no detail of how that will be achieved. This will cause huge anxiety among those in the public sector and those who depend on their services, and in the private sector firms that are dependent on public sector contracts. I believe that this is reckless: it cuts too fast and too deep. I have one question today: how can the Chancellor possibly imagine that, after his statement, a real-terms, direct cut to the Scottish block of around £4 billion can do anything other than weaken the ability of Scotland to recover in these difficult economic times?

[Mr Osborne]

First, we have preserved the Barnett funding arrangements. Secondly, the decisions that we have taken on the national health service and schools budgets in England will help the funding settlement for Scotland. What we are seeking to do, north and south of the border, is to put the United Kingdom’s economy on a strong and sustainable footing so that there can be growth in Scotland and in the rest of the country. My final observation is that people are pretty clear, in the House and in Scotland, that if Scotland had been independent over the past three years, given the scale of the banking crisis, it would now look like Iceland.

[Robert Halfon (Harlow) (Con)]

My constituents will welcome this Robin Hood public spending statement, particularly the resources that are going into cold weather payments, apprenticeships and help for young children. Does the Chancellor agree that people would rather have lower taxes and more spending on public services than spend £120 million a day paying off the debt?

[Mr Osborne]

My hon. Friend is right. This country is spending £120 million a day on debt interest. So all the pet projects that Labour has suddenly discovered—[Interruption.] Well, the truth is that the previous Labour Government inherited a golden economic legacy from the Conservatives, but we have been left the worst economic inheritance that any peacetime Government in this country have ever faced. Unfortunately, we have to deal with it, but we are doing that as two parties working together to clean up the mess that one party created. The goal that I have in sight is a more prosperous, sustainable economy and a public finance situation that is deliverable and affordable for the people of Harlow.

[Teresa Pearce (Erith and Thamesmead) (Lab)]

The Chancellor has told us that we can expect 490,000 public sector jobs to go in the next five years, while PricewaterhouseCoopers has made an expert estimate that another 500,000 private sector jobs will go. How does putting out of work 1 million people, who will no longer pay tax and will add to the jobseeker’s allowance and housing benefit budgets, cut the deficit and add to growth?

[Mr Osborne]

I shall make a couple of observations. First, the independent Office for Budget Responsibility—the hon. Lady is, after all, quoting its forecast, so I presume that she would accept its whole forecast—has predicted that unemployment will fall and that more private sector jobs will be created. Secondly, she must accept—even the deficit deniers in the Labour party must accept it, and they admitted it during the general election—that there would have been a reduction in the public sector head count if there had been a Labour Government. I do not know whether the hon. Lady agrees with that—she can shake her head, nod or whatever—but that is the truth. We have had to make some decisions, but there is a high turnover in the public sector anyway, so we hope that much of this can be accommodated by posts not being filled. There will be redundancies—I think the Labour party has accepted that there would have been redundancies under its plan—but we are going to do everything we can to deal with that situation and help those people to find work. In the end, however, the current size of the budget deficit means that we have to deal with this situation, or many, many more jobs would be at risk. Let us remember that this Government came into office with unemployment rising, and that is what we have had to deal with.

[Nadhim Zahawi (Stratford-on-Avon) (Con)]

The shadow Chancellor, although very good at the jokes, demonstrated in his response his confusion about the difference between fiscal and structural deficit. I wondered whether the Chancellor could help by explaining that difference to him.

[Mr Jack Straw (Blackburn) (Lab)]

The Chancellor of the Exchequer failed to answer the question put by my right hon. Friend the Member for Kingston upon Hull West and Hessle (Alan Johnson) about the extraordinary 11,000 reduction in the number of front-line probation and prison staff in the Ministry of Justice. Will the Chancellor confirm that this runs completely counter to what the Prime Minister said on 2 May about protecting front-line services, and that, even worse, it can only be a grave gamble with the security and safety of the British public and will eat away at the very successful fight against crime?

[Mr Osborne]

Obviously, I do not agree with right hon. Gentleman. All Government Departments have had to make savings. Is he really telling me that if his party had been re-elected and he had been in the Cabinet, the Ministry of Justice would somehow have been protected from any reductions?

[Mr Straw]

Not on this scale, George. You know that.

[Mr Osborne]

Let me explain a couple of things to the right hon. Gentleman. First, as a member of the Cabinet, he fought the general election on protecting part of the health service, not the whole of it, if I remember correctly. He talked about two years of real increases in school funding, but we are going with four. I think he also made a promise on police numbers, but the then Home Secretary ditched the promise in the middle of the general election. The Ministry of Justice has to make a contribution. The right hon. Gentleman says, “Not on this scale”, but over the next four years, the actual reduction in non-protected Departments would have been greater under his Government than under ours because of the decisions we have taken on welfare. The Institute for Fiscal Studies calculated a figure of minus 20%; it is minus 19% in our figures. The Ministry of Justice is, of course, part of one of those non-protected areas.

[James Morris (Halesowen and Rowley Regis) (Con)]

I welcome the Chancellor’s statement, and I know that many hard-working people in my constituency will support the welfare reforms he has announced. Does my right hon. Friend agree that the welfare reform proposals made today are vital because the decisions were ducked by the previous Government?

[Mr Osborne]

My hon. Friend is absolutely right. These decisions are absolutely vital to provide economic stability and to make sure that Britain does not go back to the brink of bankruptcy. What I would say to my hon. Friend and his constituents, many of whom work extremely hard and for long hours to pay their taxes, is that it is not acceptable for those taxes to go into the debt interest that we pay to foreign creditors when we really want the money spent here at home. That is what this is all about—trying to reduce our debt bills and bring some economic stability by reforming a welfare state that, frankly, grew out of control. We have taken the decisions today. If people have alternatives, they can put them on the table.

[Mr Clive Betts (Sheffield South East) (Lab)]

With regard to the new rents at 80% of market rent levels for social housing tenants, when a tenant is out of work, will the rent be covered totally by housing benefit? In that case, is there no new money to pay for social housing? When a tenant is in work or seeking it, will not these new higher rents provide a disincentive to going out to work? Will the rents apply to existing tenants who seek to move home, which would be a disincentive to mobility?

[Mr Osborne]

We have had to take some difficult decisions on housing benefit, but I think they are fair and we have sought to protect the most vulnerable. Of course, the universal credit we are introducing means that it will always pay to work—that is the basic principle and housing benefit is part of it. The Secretary of State for Communities and Local Government will set out the reforms in detail. The principles are set out in the document, which the hon. Gentleman can look at. As I said, existing social tenants will be protected through their rent agreements.

[Simon Hughes (Bermondsey and Old Southwark) (LD)]

The Government have rightly taken decisions to deal with the deficit left by the international recession, the banks and the outgoing Labour Government. Can the Chancellor confirm that the policy behind the statement is not just that those with the broadest shoulders should carry the biggest burden, but that as well as children, pensioners and households on the lowest incomes will be protected most, which will be supported by the assessment of the impact of the Budget and the statement he has made and presented today?

[Mr Osborne]

The poorest suffer when a country loses control of its public finances. That, indeed, was the assessment of the right hon. Member for Kirkcaldy and Cowdenbeath (Mr Brown), and it was one of the few things he said that I agreed with. Constituents on the lowest incomes benefit from a Government trying to deal with this economic problem. The structural deficit—someone asked me about it—is the bit that does not go away when the economy grows. Labour Members seem to be suggesting that in four years’ time, a Chancellor of the Exchequer will stand up to announce the next four-year programme of cuts, which would not do this country much good.

Specifically on pensioners, we have of course taken the big decision to link the basic state pension to earnings, and we have protected the pension credit. Yes, there have been some difficult decisions on welfare, but I have sought to protect the most vulnerable, and I believe that our overall welfare reforms will help to provide incentives to many in our country who do not currently have them to seek employment.

[Mrs Louise Ellman (Liverpool, Riverside) (Lab/Co-op)]

It is very disturbing that this statement simply does not disclose the extent of the cuts being made to transport, although it is clear that there will be a massive increase in both train and bus fares. How can that help economic recovery, including people’s ability to get to work?

[Mr Osborne]

We are spending more on transport projects over the next four years than was spent during the last four years. I have made every effort to prioritise transport spending, which has led to other questions coming down the line. Given that the hon. Lady is a Liverpool MP, I thought she might at least welcome the Mersey Gateway project. I am an MP for the north-west, as is the right hon. Member for Blackburn (Mr Straw), and we have been talking about the Mersey Gateway project for an awful long time. It is going ahead.

[Richard Harrington (Watford) (Con)]

Will my right hon. Friend confirm to me and my constituents that the purpose of today’s announcement is to take public expenditure back to 2008 levels, not 1888 levels as some Opposition Members have implied?

--- Later in debate ---

[Mr Osborne]

My hon. Friend is absolutely right.

[Naomi Long (Belfast East) (Alliance)]

Given that Northern Ireland has a great reliance on the public sector, which means that these cuts will hit it pretty hard, when do the Government intend to bring forward their promised proposals to look at rebalancing the economy in Northern Ireland, along with the Northern Ireland Executive?

[Mr Osborne]

Of course there are difficult decisions today, but because of the decisions we have taken on the English health service and the English education system, Northern Ireland gets a relatively favourable settlement in comparison with some other parts of the country. We have also made the decision today on the Presbyterian Mutual Society and we want to work with the devolved Administration to ensure that people who have had no certainty for a long time can now get it and get some money for the savings they have lost. I promise the hon. Lady that my right hon. Friend the Secretary of State for Northern Ireland regularly raises with me issues about growth and investment in Northern Ireland. As I am sure the hon. Lady knows, he has lots of ideas for stimulating economic activity, and I believe he is going to bring forward his proposals later this year. We will all be able to participate in the debate about them at that time.

[Ms Louise Bagshawe (Corby) (Con)]

Does my right hon. Friend share my joy at the shadow Chancellor’s admission that the deficit must be reduced, and my mystification that he is apparently so bereft of ideas that today he sent an e-mail asking for “Answers on a postcard, please”?

[Mr Speaker]

Order. I must ask for a very brief reply. I hope that the message will be received.

[Mr Osborne]

I agree with my hon. Friend.

[Liz Kendall (Leicester West) (Lab)]

Cutting funds for local councils by 28.4% over four years will decimate services in Leicester West, and allowing councils to borrow against business rates will further widen inequalities, as areas with more private businesses can borrow more to improve services. Can the Chancellor explain to me, and to my constituents, how that is fair?

[Mr Osborne]

I am sorry that the hon. Lady is opposed to more freedom for local government—[Interruption.] Well, that is what my increment financing proposal means. Along with our other decisions about grants, it means more freedom for local government. As I have said, this is a challenging settlement for local government. [Interruption.] Let me repeat that the Labour party created the budget deficit, and if the Labour party does not have a plan, it is in no position to criticise those who are trying to sort out this mess.

[Tony Baldry (Banbury) (Con)]

Do not an increase in the number of adult apprenticeships, commitment to the digital economy through the rolling out of universal super-fast broadband, investment in the green investment bank, protection for the science budget and the encouragement of green-collar jobs demonstrate the coalition Government’s belief, with every fibre of our being, that the only way forward for the country is a private sector-led recovery which will generate real wealth and real, new jobs for the 21st century?

[Mr Osborne]

Of course I agree with my hon. Friend. We made every effort to protect the science budget—that was one of the things that we strained to achieve—and if the efficiency proposals in the Wakeham report are implemented, that will lead to a real increase in scientific output. We have also been able to confirm the synchrotron project in Oxfordshire. Although Oxfordshire is extremely well-represented in the Cabinet, it is unfortunately not one of the counties that will benefit from a super-fast broadband pilot, but I hope that if the pilots are successful we will be able to roll them out in other rural parts of England, including the Banbury constituency.

[Hazel Blears (Salford and Eccles) (Lab)]

According to the independent organisation New Philanthropy Capital, the massive cuts of nearly 30% in local councils’ budgets over the next four years will mean cuts of between £3.2 billion and £5.1 billion in charitable and voluntary bodies which provide essential services for many of the most vulnerable people in our communities. What action will the Chancellor take to ensure that the Prime Minister’s much-vaunted big society does not end up smaller and weaker, and leave thousands of the most vulnerable citizens at risk?

[Mr Osborne]

As I mentioned early in my speech, we have provided some additional resources for the voluntary sector through the transition fund. As for the local government settlement, I said that it was challenging. The right hon. Lady, who used to be a member of the Cabinet, is well aware that some difficult decisions were required to reduce the deficit. If there are other areas of Government spending that she would have preferred me to cut more, she can tell me what they are, but she did not volunteer any in her question.

[Jesse Norman (Hereford and South Herefordshire) (Con)]

May I say, on behalf of not merely the people of Herefordshire but people in rural counties everywhere, how thrilled I am about the new super-fast broadband pilot? That is magnificent news. May I also ask the Chancellor whether it made a difference that the previous fundamental savings review had not been implemented when he came to see the problem face to face?

[Mr Osborne]

It did make a difference, and I found in the Treasury absolutely no plans to reduce the budget deficit. They were pencilled into the March Budget, which Labour Members all cheered at the time, but absolutely no plans were put in place.

I am delighted that we have been able to help Herefordshire in this way. It is one of the most rural parts of England, and I think that super-fast broadband is key to the future of the rural economy.

[Sammy Wilson (East Antrim) (DUP)]

We understand the economic mess that the coalition Government have inherited and the problems that it presents, but the spending review represents a huge gamble with people’s jobs, with economic growth and with public welfare. I suppose we all hope that it pays off.

How does the fact that capital expenditure will fall by 40% over the next four years in an already fragile Northern Ireland economy sit with the promise from the Secretary of State for Northern Ireland only last week that the investment programme would be protected? What assessment has the Chancellor made of the impact on his desire, and that of the Northern Ireland Executive, to rebalance the Northern Ireland economy?

[Mr Osborne]

Let me say first that the biggest gamble that the country could have taken in the current world environment would have been not to set out a credible plan to reduce the budget deficit. If we had not set out that plan and made our decisions, we really would have been in the firing line. Secondly, the capital spending cuts that I have—unfortunately—announced today are less than those proposed in the Labour Government’s plan, because of the increase in the capital envelope that I announced. That does make them particularly easy, but I have sought to prioritise infrastructure investments, and if there are good projects in Northern Ireland we can work on them with the devolved Administration. This is, of course, an area of devolved responsibility.

Finally, let me say that one of the absolute priorities of my right hon. Friend the Secretary of State for Northern Ireland, after security, is enabling the economy to grow and a private sector recovery to take place in Northern Ireland. I am sure it will be possible to arrange, some time later this year, an opportunity for us all to get together—the representatives in Northern Ireland, the Secretary of State and I—to discuss what we can do to help Northern Ireland see that private sector job growth.

[Nick de Bois (Enfield North) (Con)]

While I greatly welcome today’s announcement, my constituents—particularly my younger constituents, who live in an area where there is one of the highest levels of youth unemployment—would be keen to know what specific measures will be taken to support apprenticeships, thus enhancing their chances for the future.

[Mr Osborne]

We have already announced a record investment in apprenticeships, and many tens of thousands of additional apprenticeships. That is because of the difficult decisions that we made elsewhere in the Budget, and I think it shows that we are investing in the skills that our economy needs for the future.

[Mr Andrew Love (Edmonton) (Lab/Co-op)]

The Chancellor has announced the loss of 490,000 jobs in the public sector, and has not challenged the forecast by PricewaterhouseCoopers that 500,000 jobs will be lost in the private sector as a consequence. What estimate has he made of the number of jobs that will be lost in the construction sector, in view of what was said by my hon. Friend the Member for Sheffield South East (Mr Betts) about cuts in funds for social housing? Given the accepted sluggishness of the private sector recovery in the economy, will we not see significant increases in overall unemployment in the next year?

[Mr Osborne]

The hon. Gentleman, who is a member of the Treasury Committee, knows that the budget deficit was threatening the economic stability of the country. He also knows that his party proposed to eliminate the structural deficit over a slightly longer period than we propose. That, however, would not have reduced the scale of the cuts; it would merely have prolonged them. A structural deficit is a deficit that does not return when the economy grows. That is the definition of a structural deficit.

We are investing in road projects, and in housing projects: we are providing 150,000 new homes. The hon. Gentleman probably has not had time to study the document, but the capital cuts that have been set out today are less than the capital cuts in the March Budget presented by the Labour party.

[Gavin Williamson (South Staffordshire) (Con)]

Will my right hon. Friend assure the House that, unlike the Labour party, which abandoned Prudence after two years of government and pursued the policies of economic recklessness, he will continue to hold Prudence close to his heart to ensure that we have long-term stability and growth?

[Mr Osborne]

I can assure my hon. Friend that I am planning a long-term relationship with Prudence.

[Mark Durkan (Foyle) (SDLP)]

Can the Chancellor assure us that the green investment bank will be active and accessible to all regions, including Northern Ireland, and that relevant projects will not be disqualified by virtue of having a cross-border character? That would be entirely appropriate, given our market and environmental context.

[Mr Osborne]

In my statement, I set aside £1 billion of direct Government funding for the green investment bank. That will, I hope, be the minimum sum. I also want to dispose of certain Government assets and put the money from those sales into the bank, but I wanted to provide a minimum of £1 billion in case those asset sales took longer to realise than we hoped. I also want to lever in private sector investment so that the bank is a very successful vehicle for helping all parts of the United Kingdom invest in green energy. I am very happy to consider the case for cross-border projects because, obviously, the economies of Ireland and Northern Ireland are very closely linked, and I will come back to the hon. Gentleman on that specific point.

[Sarah Newton (Truro and Falmouth) (Con)]

We have inherited a social care funding system that is just not fit for purpose and that lets down tens of thousands of the most vulnerable people in our society. I greatly welcome the extra £2 billion of funding while we establish a new and reformed system. When will details of the extra funds be made available?

[Mr Osborne]

There are details in the book we have published today, and we will set out more details in the coming days. Also, we are, of course, waiting for Andrew Dilnot’s report into social care. We have tried to address a long-established problem that we are all aware of in our constituencies: the wall that is sometimes there between the health service and the local authority. Given the challenging nature of the settlement, I was conscious that social care might be affected, which is why I found the additional £2 billion for it.

[Phil Wilson (Sedgefield) (Lab)]

The Chancellor said in his statement that he would like the country to be able to afford new rolling stock. Can he say what that means for the intercity express programme, considering both that if it does go ahead it will create hundreds of jobs in my constituency and thousands more in the north-east of England, and that no public sector money will be required until after the next election?

[Mr Osborne]

I am very aware of that project. If the hon. Gentleman will bear with me, the Secretary of State for Transport will make an announcement on it shortly.

[Stephen Williams (Bristol West) (LD)]

The Chancellor said that fairness was one of the objectives of his statement. I grew up in poverty—in fact, I was on free school meals—and one of my ideological objectives in politics is to deliver social mobility, so will the Chancellor confirm that the £7.5 billion of extra investment he has announced today is the biggest part of the CSR and will help unlock potential in some of the poorest families in the country?

[Mr Osborne]

My hon. Friend brings a life experience to bear on this debate. The two biggest settlements have been for health and education. In education, we have particularly prioritised disadvantaged children, primarily those on free school meals. At the heart of the coalition agreement was the commitment to a £2.5 billion pupil premium. We have found that money on top of the flat cash settlement per pupil, even when pupil numbers are rising. It leads to a real increase in resource in schools—over four years, rather than the two years that the Labour party was offering at the general election. We are also offering for the first time 15 hours of free education for all disadvantaged two-year-olds, which will of course include those on free school meals. That offers a real chance to ensure that other people on free school meals have as successful a career as my hon. Friend.

[Joan Ruddock (Lewisham, Deptford) (Lab)]

The Chancellor said that he will replace the education maintenance allowance with more targeted support. Can he tell me and the thousands of families in Lewisham who will be affected what could be more targeted than £30 into the pocket of a family who are bearing the extra burden of keeping a teenager at school?

[Mr Osborne]

We looked very carefully at this programme, and it has a very high dead weight. We are raising the compulsory participation age to 18 and funding that—one of the policy’s original stated purposes was to get people to stay on after 16—and we will introduce a more targeted scheme, so there will be help. I have to say that we conducted a public consultation over the summer, and we received 100,000 responses, many from parents and children in receipt of EMA. It was one of the most prominent issues raised, and the overwhelming view of the responses was that it was not a well-targeted support. That has certainly been my experience from those in some of the schools that I have visited. We are looking for a more targeted payment that actually helps those whom this financial incentive would really encourage to stay on in education.

[Mr Rob Wilson (Reading East) (Con)]

I welcome the Chancellor’s commitment to protecting the science budget and his comments on Lord Browne’s review of university and student funding, but does he agree with me—and, apparently, the new shadow Chancellor—that the problem with a graduate tax is that the money goes straight to the Treasury and not to the universities?

--- Later in debate ---

[Mr Osborne]

My hon. Friend is absolutely right, and he has considerable experience in this area. The problem with the graduate tax, which we honestly looked at and honestly considered—[Interruption.] Actually, an enormous amount of work was done in looking at the feasibility of the graduate tax, some of it by the previous Government: the shadow Chancellor was the higher education Minister who ruled out a graduate tax, and under the previous Government the education Department published a paper about why it would not work. As I have said, we looked at this idea carefully—we approached it in a genuinely open-minded way—but there were many disadvantages to it. One of them was that it would represent a massive centralisation of the university system with, basically, the Treasury controlling, almost to the last pound, how much different universities would get. That is why, as I understand it, the Russell group of universities—for a start—are completely against it.

[Sir Stuart Bell (Middlesbrough) (Lab)]

On the Prime Minister’s statement which the Chancellor confirmed, the House will welcome the facts that the science budget is safeguarded, that the adult apprenticeship scheme will be advanced, and that £500 million will go into the Tyne and Wear metro and the Tees valley bus network.

Following on from the questions of my hon. Friends the Members for Erith and Thamesmead (Teresa Pearce) and for Leicester West (Liz Kendall), since the Chancellor places so much emphasis on fairness, how can it be fair to make 490,000 people unemployed in the public sector and a putative further 500,000 in the private sector? How can that be a sensible policy for growth?

[Mr Osborne]

That is, quite frankly, a deliberate misrepresentation of the number, which was produced independently. The number is for the reduction in the public sector head-count over four years. As I have said, there will be redundancies, but there will also be posts that go unfilled. The plan set forward by the Labour party also involved a reduction in the head-count of hundreds of thousands; the Leader of the Opposition admitted that on a number of occasions during both the general election and his party’s leadership contest. We have all got to face up to this challenge, but I should point out that the same organisation that produced the number that the hon. Member for Middlesbrough (Sir Stuart Bell) cites—the Office for Budget Responsibility—also forecasts falling unemployment through to 2014.

[Andrew Percy (Brigg and Goole) (Con)]

I welcome the commitment to infrastructure funding for Yorkshire and Humber, which follows the announcement on the review of the Humber bridge tolls two weeks ago. I also welcome the commitment to offshore wind energy. Just last week in North Lincolnshire, Labour and Conservative councillors voted through an offshore wind development at the South Humber gateway, which has the potential to bring 5,000 jobs to the region. However, that is now in jeopardy because Natural England is requesting that it be called in for a public inquiry, with the risk that the jobs will go to mainland Europe. Given the commitment to offshore wind, will the Chancellor have a quiet word with the Secretary of State for Communities and Local Government and encourage him to reject that application for a public inquiry?

--- Later in debate ---

[Mr Osborne]

I think that I would get myself into a lot of legal hot water if I were to do that, but let me make a couple of observations. First, all involved in planning decisions, whether at local, area or national level, should take into account the need for the economic investment that the British economy must have over the coming years and give that due consideration. Secondly, we have found additional money for offshore wind technology investment, including manufacturing at port sites, which was one of the issues the trade unions raised with me as a particular priority. Finally, both my hon. Friend and our hon. Friend the Member for Beverley and Holderness (Mr Stuart) have been very persistent in asking for a Treasury review of the Humber bridge tolls—in which no doubt the shadow Chancellor takes an interest, too—and there will be a Treasury-led review of the tolls, but I am not going to prejudge its outcome.

[Mr Michael McCann (East Kilbride, Strathaven and Lesmahagow) (Lab)]

The Department for International Development operates within my constituency, and many people will welcome today’s commitment by the Government to spend 0.7% of GDP on international development. However, can the Chancellor tell me how much of that budget will be assigned to works previously delivered and paid for by other Government Departments, agencies and non-departmental public bodies?

[Mr Osborne]

There is a very substantial increase, of about 37%, in DFID’s budget. There are parts of international development work that the Foreign and Commonwealth Office carries out too—conflict stabilisation and the like. It is, of course, perfectly within the rules set on the UN commitment, which are internationally policed and so we cannot fudge them, and perfectly reasonable to count that expenditure towards the 0.7% target. However, the large bulk will be delivered through DFID, whose budget has a substantial increase. I suggest that it is a task for this House—all parties—to ensure that that development aid is well spent on the poorest people and on conflict prevention.

[Andrew Bridgen (North West Leicestershire) (Con)]

Does my right hon. Friend agree that the reason why the previous Labour Government failed to hold a spending review was because they bottled their responsibilities? Does he also agree that Labour Members are still running away from those now and that the cuts that we are seeing are no more than the butcher’s bill for 13 years of Labour profligacy and waste?

[Mr Osborne]

I completely agree with my hon. Friend. It is striking that in all the responses and everything that we have heard today from Labour Front Benchers and Back Benchers there has not been a single positive proposal as to how to reduce the deficit that they all sat there and allowed to grow.

[Simon Danczuk (Rochdale) (Lab)]

What will the increase in train fares do to get people out of their cars and on to the trains?

[Mr Osborne]

What I would say to the hon. Gentleman is that, again, we have to take a realistic decision about investment in our railways. We are going to invest £14 billion in them and we also want to invest in new rolling stock, on which I was asked a question by the hon. Member for Sedgefield (Phil Wilson), who has now left his place. That has required a tough decision on rail fares, but I hope that passengers will at least understand that if we want investment in rail stock we have to be able to afford it, and the people who use the rail stock should make a contribution to that.

[Sajid Javid (Bromsgrove) (Con)]

I welcome the bold and powerful statement that my right hon. Friend has made today and, in particular, the efforts to protect the most vulnerable. Does he agree that the biggest risk to our economy would have been to have done nothing at all, as advocated by most Labour Members, and that the action that he has taken today will do the most to restore economic confidence to our economy?

[Mr Osborne]

I agree with my hon. Friend. Whoever won the general election—whoever formed the Government—was going to have to come to the House of Commons to set out a plan for reducing the highest budget deficit in our peacetime history; the deficit is considerably higher than it was when Denis Healey had to go to the International Monetary Fund. We have set out those proposals, and I believe that they will deliver certainty and stability going forward. The market interest rates for British businesses and British families are already lower as a result of the decisions that we have taken since coming into office. As for the decisions that we have announced today, I have noted that not a single Labour Member has asked me about the increase in the child tax credit, which will help 4 million families.

[Caroline Lucas (Brighton, Pavilion) (Green)]

I am not sure how the Government can claim to be the greenest ever when it is estimated that Department of Energy and Climate Change and Department for Environment, Food and Rural Affairs funding combined will reduce by 47% in real terms over the next four years. However, my question is this: should the Chancellor not do more than just hope that the private sector will fill the huge gap between the £1 billion he has set aside for the green investment bank and the £4 billion to £6 billion that Ernst and Young says is the minimum required? He said that he would try to find a bit more through the sale of assets, but how much does he imagine that will fund as well?

[Mr Osborne]

There is commitment, even in these difficult times, to a carbon capture and storage demonstration, to the development of offshore wind technology and manufacturing at port sites, and to a renewable heat incentive. On the green investment bank, it would have been easy to say, in my position, “Let’s wait to see whether we can get some Government asset sales and some private sector money; just create the body and hope it gets the funding.” I wanted to provide a back-stop and I have done so today by making available £1 billion from general Government expenditure. However, I also want to see substantial Government asset sales go into the green investment bank and to lever in some private sector money, so that it is a multi-billion pound force for investment in our country.

[Dr Thérèse Coffey (Suffolk Coastal) (Con)]

I congratulate the Chancellor and the Chief Secretary to the Treasury on this spending review. Delivering investment in 21st-century infrastructure will be welcomed by my constituents, as will the spending to protect the post office network and, most importantly for us, to deal with coastal erosion. Does he agree that it is the coalition Government who are making the difficult and politically courageous spending decisions? That has also been reflected today in the European Parliament, where Conservative MEPs voted to reduce the European Union budget, unlike Labour MEPs, who did not take that opportunity and instead also voted for tax-raising powers for the EU.

[Mr Osborne]

My hon. Friend tells me something that I did not know, which is that the behaviour of Labour MEPs is completely inconsistent with the message from their party that it is serious about trying to reduce Britain’s budget deficit. The money that we have found for flood and coastal defences totals about £2 billion and will help 145,000 households. Obviously, the relevant Secretary of State will make the announcements about the different tranches that will now go ahead, and I wish Suffolk Coastal every success.

[Mr Tom Clarke (Coatbridge, Chryston and Bellshill) (Lab)]

This is further to the question asked by my hon. Friend the Member for East Kilbride, Strathaven and Lesmahagow (Mr McCann) and refers to the Chancellor’s use of the words “conflict resolution”, which strangely were also used several times by the Prime Minister yesterday in the context of a statement on defence expenditure. It also recalls the episode of the Pergau dam. Can the Chancellor give us an absolute assurance that ring-fenced funding for overseas aid will not find its way into defence commitments and will be used for the purposes outlined in the millennium development goals?

[Mr Osborne]

Let me say to the right hon. Gentleman that, first, the 0.7% target is internationally monitored and so, having said we are going to hit it, we obviously do not want to find the international bodies saying that we have badged overseas aid in the wrong way. [Interruption.] May I say to the hon. Member for Brent North (Barry Gardiner) that we have increased the international aid budget by almost £4 billion today? I understand that lots of Labour Members, and indeed Members on this side of the House, want to ask questions about specific difficult decisions that we have taken, but to quibble about the massive 37% increase in DFID’s budget is a little unfair. We have made a decision as a House of Commons to hit the 0.7% target, as internationally observed—all parties were committed to this in the general election—which we have to understand has consequences in Government budgets elsewhere. That involves a substantial increase in the international development budget. We are funding very specific projects on malaria, maternal health and the like, and as a country we should be proud and tell the world about our commitment, rather than suggest that the rules will be fudged when they cannot be because they are internationally policed.

[Mr Aidan Burley (Cannock Chase) (Con)]

Will my right hon. Friend take this opportunity to nail, once and for all, the lie perpetuated by many Labour Members that the international banking crisis is in some way completely responsible for the budget deficit, given that, in reality, the figures show that just £40 billion of the total £667 billion spent by Government last year went to prop up the banks?

--- Later in debate ---

[Mr Osborne]

If my hon. Friend has not yet had the opportunity to do so, he should look at chart 1.1 in the book produced by the Treasury, which shows that a structural deficit was emerging throughout the past decade and that that made Britain particularly ill-prepared for what happened in our banks. Of course, the poor regulation of our banking system meant that this country was probably affected more than any other, except for Iceland and perhaps Ireland. We are trying to sort that out, by addressing not only the public finances, but the regulation of the banks. As I say, if we had fixed the roof when the sun was shining, we would have been in a better condition to deal with the storms.

[Jeremy Corbyn (Islington North) (Lab)]

The Chancellor will be aware that housing is the biggest and most serious problem facing people in my constituency, because of overcrowding and a shortage of social housing. His proposals in July to cap housing benefit render at risk the lives of many people living in private rented accommodation, where the rent is paid by housing benefit, and his proposals now to have two tiers of council tenure do not sit very well, because one tenant will be living in secure accommodation on a fixed rent of about £100 a week whereas their next-door neighbour, because of an accident of dates, will be paying at least twice that in rent and will have no security of tenure. How does that fit with the notion that we are all in it together?

[Mr Osborne]

There is a problem in social housing, but frankly the party that the hon. Gentleman supported in this House—on and off—for 13 years did absolutely nothing to address it. We are trying to reform social housing provision so that more homes are built and so that there is more availability of socially rented properties, unlike the fall that we have seen recently. He talks about his constituents and he must ask himself—I certainly confronted this—whether it was fair to ask the people of his constituency who go out to work to fund housing benefit bills of £50,000, £60,000 or £70,000 a year. That is totally unaffordable to the working people of Islington. We have introduced what I think is a perfectly reasonable rule that the average family out of work should not get more in benefits than the average family earns in work. I find it difficult to see how people could object to that.

[Andrea Leadsom (South Northamptonshire) (Con)]

Does my right hon. Friend agree that in this country the key to our economic recovery will be the development and growth of new small and medium-sized enterprises? More people are employed in SMEs in this country than in any other sector. Does he also agree that in order to get SMEs up and running, it will be key that they have better funding, and that we remove barriers to entry for new providers to get funding to new SMEs?

[Mr Osborne]

I did not mention in my speech that we are funding the enterprise finance guarantee scheme to help small businesses get access to credit. In the Budget I also stopped the increase in the small companies tax rate that was going to take place under the previous Government. We want to help the small businesses and medium-sized enterprises that are the engine room of our private sector economy. I hope that some of the transport infrastructure, which is something that businesses often raise with us, set out today will help.

[Several hon. Members]

rose—

--- Later in debate ---

[Mr Speaker]

Order. We are grateful, but I think we have the thrust of it.

[Mr Osborne]

First, to put it in context, close to 200,000 jobs have been created in the last three months. Secondly, the Labour party’s plans involved a head-count reduction of more than 400,000. It was accepted by Labour politicians during the election that there would be a head-count reduction and that there would be redundancies. This is what happens when a country loses control of its public finances. If we had been better managed over recent years—if the people doing my job before me had managed to avoid this record budget deficit, which is the largest in the G20—[Interruption.] Opposition Members keep saying that this is all to do with the international situation. They have not yet managed to explain to me why we were the worst affected in that international situation. We have to take some difficult decisions, but it will help if private sector recovery helps to create jobs. The number that the hon. Lady keeps using is a number from an independent body—the Office for Budget Responsibility—that she presumably regards as credible, since she is quoting it, but the OBR also forecast falling unemployment over the period. She cannot really use one forecast from the body and not the other.

[Mary Macleod (Brentford and Isleworth) (Con)]

When my right hon. Friend met the IMF and World Bank officials in Washington recently, did they agree with his approach on reform, fairness and growth, which he has presented today, or did they suggest something else, like the Opposition have?

[Mr Osborne]

They said very clearly in their article IV assessment of the British economy that the measures we had taken were essential for fiscal sustainability. They do not always say that kind of thing about economies—last year, they criticised the previous Government’s economic plans. To be honest with my hon. Friend, I did not share all my detailed budget plans with the IMF; I thought I would share them with the House of Commons first.

[Jim Shannon (Strangford) (DUP)]

In the statement, the Chancellor did not mention additions to tax credits at any stage. One of the anomalies before the statement was made was, I understand, that people on an income of £45,000 would be penalised in their tax credits whereas those who had two incomes coming into their house, perhaps totalling £80,000, would not be penalised. That money is not cappuccino and cupcake money—it is for education and clothing for their children and for the mortgage. What steps will the Chancellor take to help those people?

--- Later in debate ---

[Mr Osborne]

I think the hon. Gentleman is referring to child benefit, and it has clearly been a difficult decision to remove child benefit from families where there is a higher rate taxpayer. It raises £2.5 billion. It is interesting to note that, although it was the first issue raised by the Leader of the Opposition at Prime Minister’s questions last week, not a single Labour MP has mentioned it. I think they are beginning to realise that making this their priority for public spending is probably a mistake. I understand that it is a difficult decision, but I have to try to make this fair. These higher rate taxpayers represent the top 20% of earners and the decisions that I have taken have tried to make this fair across the income distribution.

[Paul Uppal (Wolverhampton South West) (Con)]

It is often said of the last Labour Government that although talk is cheap, the consequences of their actions were very expensive. Does the Chancellor agree that the sentiment of the spending review is not about cuts but about responsibility and the financial responsibility that we bequeath to our children and our grandchildren?

[Mr Osborne]

My hon. Friend makes a very good point. We have talked a lot about fairness and about fairness across the income distribution, but there is also a fairness between generations. If we do not deal with these debts and do not have a credible plan, it will be our children and grandchildren who are saddled with the debts that we were not prepared to pay. I think that is very unfair.

[Mr David Lammy (Tottenham) (Lab)]

The Chancellor describes the cuts to local government as challenging, but will he clarify whether cuts to the area cost adjustment and to specific grants mean that cuts to local authorities could be up to 35%? Both those grants are based on deprivation. How does he reconcile that with his obligations on child poverty?

[Mr Osborne]

The right hon. Gentleman is obviously—I do not hold this against him—a centraliser rather than a localiser. He would like all these decisions to be taken by people doing my job and directed to elected local councils through grants. We take a different approach. We are sweeping away a lot of these grants. I have to say however—I am sure that this will be of interest to people in his constituency, as I know something of the nature of it—that the increase in the child tax credit will help. We have also, at the insistence of the Secretary of State for Communities and Local Government, put a great deal of resources into the Supporting People programme, which is particularly important in areas such as that represented by the right hon. Gentleman.

[David Rutley (Macclesfield) (Con)]

Does the Chancellor agree that the investments spelled out today in the regional growth fund will go a long way to help underpin growth and private sector jobs in the north-west, which we both represent?

[Mr Osborne]

As my hon. Friend is my local MP, I had better agree with him. His predecessor—people will remember the former Member for Macclesfield—was passionate about supporting manufacturing and I am glad that the torch has been passed to a new generation there. My hon. Friend is right. We need to see a private sector recovery and we need to see growth and investment in the north-west of England. We want to get away from the economy that we have seen over the past 10 years, where all the growth was focused on one sector and where, from memory, for every 10 jobs created in the south-east of England by the private sector one job was created in the midlands and the north. That is not a sustainable economic model.

[Derek Twigg (Halton) (Lab)]

I was grateful to hear the announcement from the Chancellor about the Mersey Gateway, which has all-party support. However, he knows that it must have funding to ensure that it can go ahead. Will he set out today, given that he is a local MP, what funding is allocated for the Mersey Gateway project?

[Mr Osborne]

I do not have the exact number to hand, but I shall give it to the hon. Gentleman this afternoon. We are funding the project as it was set out. I know the chief executive of Halton borough council because he used to be the chief executive of my local borough council. I have discussed it with him and I hope to have further discussions to ensure that the bridge is built and that the private investment linked to the bridge comes in. I shall give the hon. Gentleman the exact number later today.

[Alec Shelbrooke (Elmet and Rothwell) (Con)]

May I thank the Chancellor for taking the decision to give to Equitable Life more than three times the amount that was recommended in the Chadwick report? Will he describe to the House and to my constituents what settlement he thinks that the Equitable Life policyholders might have got if the Opposition were still in government?

[Mr Osborne]

We know the answer to that because they had 13 years to address the problem and gave absolutely nothing. They then set up Sir John Chadwick’s report and, although I thank him for it, I do not agree with its conclusions. I strongly suspect that if Labour had won the election, they would have agreed with his conclusions, which would have meant just a third of the money that I have set out today for Equitable Life policyholders. We are helping policyholders across the piece, but our particular priority has been the trapped annuitants, whom we will fully compensate.

[Lilian Greenwood (Nottingham South) (Lab)]

The Chancellor has confirmed that almost half a million public sector jobs will go under his plan, and PricewaterhouseCoopers estimates that another half a million will go in the private sector. Will he explain how adding a million people to the dole so that they are paying no taxes will bring down the deficit and help our economy to grow?

[Mr Osborne]

Let me explain it to the hon. Lady. This country has the largest Budget deficit in the G20. If we do not address that, there will be economic ruin for this country, so we are addressing it. The reduction in the public sector head-count will take place over four years. This economy created 200,000 jobs in the last three months and part of the head-count reduction will happen through turnover. The last time I checked, Labour were still committed to eliminating the structural deficit—they just would have taken longer over it—so the job losses and the head-count reduction would have been prolonged. I do not think that is right for this country.

[Mr Robert Buckland (South Swindon) (Con)]

As a fellow one-nation Conservative, does my right hon. Friend agree that today’s announcement has been driven not by some ideological crusade, as the Labour party has suggested, but by a genuine desire to spend more Government revenue on public services and less on servicing Labour’s debt?

[Mr Osborne]

My hon. Friend is absolutely right. Of course, we have made choices today. First, we have chosen to seek to reduce debt interest by going faster than the Labour party would have done. I think it is better to spend the money here rather than to give it to our foreign creditors. Secondly, we have chosen to put particular emphasis on trying to reduce the welfare bills. That has enabled us to increase investment in the NHS, schools and early-years provision, which we were discussing earlier. That is true to the values of one-nation conservatism and to the values of this coalition.

[Barry Gardiner (Brent North) (Lab)]

I welcome the Chancellor’s decision to honour the previous Government’s commitment to contribute 0.7% of gross domestic product to international development, but I would like absolute transparency on this. How much of the money that was previously allocated in the Defence and Foreign and Commonwealth Office budgets is now going to be covered by the Department for International Development’s budget?

[Mr Osborne]

Let me make two points. First, there is an increase of almost £4 billion in the DFID budget. Secondly, having a tri-departmental fund for DFID, the Ministry of Defence and the Foreign Office will help with conflict and supporting post-conflict stabilisation. It will grow from £229 million this year to £309 million in 2014-15—a growth of just short of £100 million. That will help us to avoid having to come into emergency situations, but it is, of course, pretty small given the scale of the increase that I have just announced in DFID’s budget.

[Several hon. Members]

rose—

Oral Answers to Questions

George Osborne Excerpts

Tuesday 12th October 2010 Commons Chamber

[Glyn Davies (Montgomeryshire) (Con)]

6. What recent representations he has received on steps to reduce the budget deficit.

[The Chancellor of the Exchequer (Mr George Osborne)]

The Government’s plan to tackle the record budget deficit they inherited has been supported by the CBI, the OECD and, now, the International Monetary Fund. We have received more than 60,000 representations from the public as to how to go about deficit reduction and many of their suggestions are being put into effect. To date, we have received no proposals and no suggestions from the official Opposition, who created the deficit in the first place.

[Mr Jones]

I thank my right hon. Friend for his response. With the country set to pay £43 billion in interest in 2010-11, I am reassured that the general public have been willing to contribute to the tough decisions required of this Government to turn our economy around. Has he received any helpful advice from the Labour party, past or present, other than that from Tony Blair?

[Mr Osborne]

My hon. Friend is absolutely right about debt interest; this country is now paying £120 million a day in debt interest. Debt interest under the previous Government was forecast to rise to £60 billion a year, making it one of the largest items of Government expenditure. He talks about suggestions from Members of Parliament. The new leader of the Labour party said:

“I think whoever is the Labour leader will, by the time of the spending review, have to show that they have an alternative plan”.

So the clock is ticking.

[Glyn Davies]

The Chancellor attended the IMF conference at the weekend. Can he share with us what our international partners are saying about the coalition Government’s efforts to deal with the deficit?

[Mr Osborne]

As I am sure my hon. Friend is aware, the IMF’s article IV study of the United Kingdom said:

“The government’s strong and credible multi-year fiscal deficit reduction plan is essential to ensure debt sustainability.”

That is in marked contrast to last year’s IMF report on the UK. At the IMF annual meetings, which I attended last weekend, it was made clear that concerns about sovereign debt issues in Europe were one of the greatest threats to the world recovery. Of course, the decisions that we have taken in this House have moved Britain out of the financial danger zone and helped to deal with that potential threat.

[Derek Twigg (Halton) (Lab)]

On reducing the budget deficit and the issue of fairness, how does the Chancellor square the fact that his local authority has had a cut of only £600,000 to its education budget with the fact that Halton, the 30th most deprived authority, has had a cut of more than £1.2 million? How is that fair?

[Mr Osborne]

Decisions on local government allocations are properly a matter for the Secretary of State for Communities and Local Government, but I make the observation that we face a series of tough decisions because of the economic mess that the Labour party left us. To date, it is living in complete denial: there is not one single suggestion from one single Labour Member on how to reduce the budget deficit, or even achieve the £44 billion of cuts on which Labour fought the last election.

[Mr Andrew Love (Edmonton) (Lab/Co-op)]

Can the Chancellor confirm or deny reports in the weekend press that he has given the Governor of the Bank of England the green light to increase quantitative easing, to deal with the policy that the Chancellor is pursuing on the deficit?

[Mr Osborne]

What I said at the weekend was that I would follow the exact same procedure that my predecessor, the right hon. Member for Edinburgh South West (Mr Darling), pursued when he was Chancellor of the Exchequer. The fact that that is regarded as something of a surprise by the Labour party shows how far it has departed from the centre ground of British politics.

[Mr David Ruffley (Bury St Edmunds) (Con)]

Our net contribution to the EU is, amazingly, projected to double in this Parliament from £4.7 billion to £9.5 billion a year. Does my right hon. Friend agree with me and many of my Bury St Edmunds constituents that if we are to cut the deficit, we need to cut our spending on the EU?

[Mr Osborne]

It is good to see my hon. Friend. I make the observation that the situation is, unfortunately, yet another legacy of the previous Government. [Interruption.] Well, Labour Members obviously do not know the history: Tony Blair gave away our Budget rebate in return for the French reforming the common agricultural policy. So far as I have noticed, that deal has not held, and our contributions are rapidly rising. We have made strong arguments at the European level for similar budget restraints in the EU to those that member states are having to impose domestically. Of course, that will be our negotiating stance as we go into the new budget review period.

[Alan Johnson (Kingston upon Hull West and Hessle) (Lab)]

Will the timing of the spending cuts that are to be announced next week be exactly as laid out in June’s emergency Budget, and will the Chancellor confirm that the aim continues to be that the deficit will be eliminated by 2015?

[Mr Osborne]

First, I should welcome the right hon. Gentleman to his new role on behalf of all Government Members. I did the job for five years, and I hope that he does it for even longer than I did. The answer to his question is yes.

[Alan Johnson]

Well, the reason I ask is that there was some speculation at the weekend, when the Energy Secretary suggested, in a rather unfortunate yachting analogy, that he would not be “lashed to the mast” with a particular set of spending numbers. That is important, because from my vast experience in this job I am absolutely clear about this: the Chancellor says that the deficit was wrong and that his emergency Budget measures were unavoidable, but I believe that it is the other way round. The deficit was unavoidable if we were to avoid financial meltdown, and his Budget proposals were entirely wrong—wrong because they would, according to the Institute for Fiscal Studies, have two and a half times the adverse effect on the poorest as on the richest in our society, and wrong because he is seeking to cut public spending before there is any momentum for private sector spending in our economy.

[Mr Osborne]

Quite frankly, being in opposition involves choices, just as being in government does. The right hon. Gentleman talks about the Budget; there is a simple choice before the House today, which is whether we proceed with a graduate tax. Lord Browne’s report says that such a tax would add £3 billion to the deficit and would not produce savings until 2041. That is a real choice on the deficit before us today. The right hon. Gentleman is the shadow Chancellor and opposes a graduate tax; is he going to assert his authority over Opposition tax policy?

[Jacob Rees-Mogg (North East Somerset) (Con)]

5. Whether he has assessed the merits of returning responsibility for debt management to the Bank of England.

--- Later in debate ---

[Henry Smith (Crawley) (Con)]

7. What steps he is taking to ensure the independence of the Office for Budget Responsibility.

[The Chancellor of the Exchequer (Mr George Osborne)]

The independence of the Office for Budget Responsibility is central to its credibility. With the approval of the Treasury Committee, I have appointed Mr Robert Chote to be its new chair. Today I am also appointing the distinguished economist Stephen Nickell and the experienced forecaster Graham Parker to serve alongside Mr Chote as permanent members of the budget responsibility committee. I am also publishing new terms of reference that safeguard the independence of the OBR, and copies are available in the Vote Office. I have asked the OBR to publish its autumn forecasts on the economy and the public finances on Monday 29 November.

[Henry Smith]

I thank my right hon. Friend for his answer. I warmly welcome the creation of the OBR, at last, as an independent economic forecaster. I know that the Treasury Committee has raised a number of concerns, including the location of the OBR and whether the veto over the chairmanship of the Select Committee will be in the Bill.

[Mr Osborne]

The short answer to my hon. Friend’s questions is yes. The OBR will move out of the Treasury—in the period immediately after the general election, that was the quickest way to establish it—to a permanent home. The choice of location will be for the permanent chair of the OBR who, I believe, will make a statement on that later today. I think the veto given to the Treasury Committee is the first of its kind in this Parliament, and will be enshrined in legislation.

[Stephen Timms (East Ham) (Lab)]

The Chancellor has announced two new appointments to the budget responsibility committee today. In line with the Treasury Committee’s recommendation, will he extend its veto to those two appointments, as well as to the position of the chair? Will he invite the OBR to comment, as the Select Committee envisages, on the fiscal mandate?

[Mr Osborne]

My answer to the right hon. Gentleman is yes and no—yes to the first part of the question. I listened very carefully to what the Treasury Committee said about the two other members of the budget responsibility committee, and I propose that it should indeed have a veto over those two appointments, which were made on the recommendation of a panel that included Robert Chote. I made the suggested appointments, but it will be for the Treasury Committee presumably to hold hearings and hopefully give its approval.

I do not propose to follow the second path that the right hon. Gentleman suggested. If the OBR begins commenting on the fiscal mandate, it intrudes on what is a legitimate matter of debate in the House between elected representatives who have strong views on this. I want to do everything I can to preserve the independence of the OBR, not just for this Government but for future Governments as well.

[Mr Andrew Tyrie (Chichester) (Con)]

Would the Chancellor just confirm that the veto on the other two members of the OBR will function in exactly the same way as it would for the chairman? Would he also confirm that, in line with our recommendations, the OBR will be permitted at the request of Opposition parties at election time to examine their fiscal policies as well?

[Mr Osborne]

What I would say to my hon. Friend in response to his first point is yes, the procedure that I propose is exactly the same, unless he wants to volunteer some alternative method. On his second point, this is genuinely a matter that should be debated in the House in a non-partisan way, because it does not affect just this Parliament. There is a question of whether we want the OBR to be able to cost Opposition policies at the time of a general election. I propose to have discussions with Opposition party leaders about whether that is the appropriate thing to do, and it would be a legitimate matter for the House to debate and decide.

[Rehman Chishti (Gillingham and Rainham) (Con)]

9. What recent representations he has received on his Department’s spending challenge.

--- Later in debate ---

[Mr Peter Bone (Wellingborough) (Con)]

10. What recent discussions he has had with the Minister for the Cabinet Office on the cost to the public purse of the Government Whips Office and the Opposition Whips Office.

[The Chancellor of the Exchequer (Mr George Osborne)]

I have had discussions with my right hon. Friend on the overall Budget for the Cabinet Office as part of the spending review. As my hon. Friends might expect, I am keen to ensure maximum value for money from the Government Whips Office. When it comes to the Opposition Whips Office, that is an area of public spending where I am prepared to tolerate inefficiency and poor leadership.

[Mr Bone]

My right hon. Friend will be aware that during this Parliament, the additional salaries paid to Whips will be more than £6 million. As we now have a Backbench Business Committee and will soon have a House Committee, would that not be an area for cutting? After all, we are all in it together.

[Mr Osborne]

Unfortunately, the Parliamentary Secretary to the Treasury, the Government Chief Whip, is not here to listen to that question, but as Ministers in the Government Whips have already taken a 5% pay cut and had their salaries frozen during the Parliament, so they have already shown some restraint. If my hon. Friend wants to catch the ear of the Chief Whip in the Aye Lobby tonight, he can do so.

[Clive Efford (Eltham) (Lab)]

Has the Government Whips Office had cause to contact the Secretary of State for Energy and Climate Change, following his comments last week? Has having the Liberal Democrats as part of the Government increased the costs of the Government Whips Office?

[Mr Osborne]

The presence of the Liberal Democrats in the coalition means that two parties are working together to sort out a problem that one party created.

[Mike Freer (Finchley and Golders Green) (Con)]

11. What steps his Department is taking to simplify the tax system.

--- Later in debate ---

[Julian Smith (Skipton and Ripon) (Con)]

T1. If he will make a statement on his departmental responsibilities.

[The Chancellor of the Exchequer (Mr George Osborne)]

The core purpose of the Treasury is to ensure economic stability, promote growth and employment, reform the banking system and restore some sanity to the public finances.

[Julian Smith]

What message does my right hon. Friend think the national insurance holiday and the abolition of Labour’s jobs tax sends to those thinking of setting up their own firm in God’s own county?

[Mr Osborne]

It will be my great good fortune to visit Yorkshire later this week to hand out the Yorkshire Post awards in Leeds. My hon. Friend makes a good point. We have introduced a regional tax cut for the first time in British history, which means that businesses that are set up outside the south-east of England will benefit from a national insurance holiday on the first few employees that they bring on board. We have also got rid of Labour’s job-destroying jobs tax, which, as we now read in the memoirs of various senior members of the Labour Government, they tried to dissuade the previous Prime Minister from introducing.

[John Mann (Bassetlaw) (Lab)]

T3. As confirmed by the OBR and Treasury officials to the Treasury Committee, the Budget is predicated on having in this Parliament an extra 700,000 EU migrants net living in this country. Where will they live and work? How will they be spread across the United Kingdom?

[Mr Osborne]

The Office for Budget Responsibility is using the statistics from the Office for National Statistics. Of course, one of the decisions that the previous Government made was to allow countries to join the European Union without any transitional controls whatsoever on their citizens’ movement to the United Kingdom. We are living with the consequence of that decision.

[Karen Bradley (Staffordshire Moorlands) (Con)]

T2. Many small businesses in Staffordshire Moorlands tell me that they have enough to deal with without the intricacies and complications of the tax system. Will the Minister provide more information to the House about how the work of the Office of Tax Simplification will help those small businesses?

[Luciana Berger (Liverpool, Wavertree) (Lab/Co-op)]

T4. Many pensioners in my constituency are concerned about the indexation of pensions changing from the retail prices index to the consumer prices index. A pensioner who currently receives a pension of £10,000 will be more than £800 worse off by 2016. Does the Minister think that it is fair for pensioners to be hit in that way?

[Mr Osborne]

The Government have introduced a triple lock on the basic state pension, which means that it rises by earnings, or by CPI or RPI—whichever is higher. The previous Government had 13 years to do that, and they did not.

[Andrew Bridgen (North West Leicestershire) (Con)]

T5. In my constituency, more than 7,000 jobs are directly linked to east midlands airport. I believe that it has been shown that there would be no environmental or fiscal gain from the introduction of a per plane tax, as flights would simply divert to other European hubs. Is the Economic Secretary willing to reconsider any plans for a per plane tax, and will she meet me as a matter of urgency to discuss that?

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[Toby Perkins (Chesterfield) (Lab)]

T8. The Chancellor was a millionaire the day he was born, so he has not got a clue what it is like to try to raise a family on £40,000 a year—[Interruption.] Do you mind? He cannot hear me. People who earn that much are not the super-rich; they are hard-working people who are getting by and getting on. The cuts to child benefit will take about 10% of the income of some of them. By what definition of fairness does he think robbing 10% from hard-working people is a fair deal for such families?

[Mr Osborne]

I will make one observation if the hon. Gentleman wants to lay into my background: I went to the same school as the deputy leader of the Labour party.

On child benefit, we have had to take some difficult decisions. It is quite extraordinary that the Labour party finds itself opposing our decision. Yes, it was a tough decision, but it was fair in the context of the decisions that we must take. The fact that Alan Milburn today warned Labour Members not to oppose the measure—[Interruption.] Of course, the sensible part of the Labour party is no longer on the Front Bench. The fact that Alan Milburn, whom Labour appointed as its social mobility tsar, is warning them is something to which Labour Members should pay attention.

[Mike Freer (Finchley and Golders Green) (Con)]

T6. Although my constituents accept the need to tackle Labour’s legacy, many of them have large families and are concerned about the changes in child benefit. Will the Minister consider transitional arrangements to help families to adjust?

--- Later in debate ---

[Mark Menzies (Fylde) (Con)]

T7. In the Budget statement, the Chancellor of the Exchequer mentioned the need to rebalance the economy towards export-led growth, which is particularly important for constituencies such as mine in the north-west. Will he update the House on the Government’s progress in that respect?

[Mr Osborne]

I have seen at BAe Warton in my hon. Friend’s constituency a very good example of high-skilled manufacturing. Everything the Government do is designed to support a private sector recovery and to rebalance our economy, so that not all the growth that takes place does so in only one corner of the country.

[Barry Gardiner (Brent North) (Lab)]

After the row at the International Monetary Fund summit at the weekend, has the Chancellor concluded that the renminbi is undervalued, or that the US is under-focused on consumption-led domestic growth?

[Mr Osborne]

I have concluded that it is very sensible for the serving Chancellor of the Exchequer of the day not to comment on the value of currencies.

[Tom Brake (Carshalton and Wallington) (LD)]

T10. When the Chancellor and the Chief Secretary consider how to address the huge budget deficit they inherited from Labour, will they not lose sight of the importance of investing in affordable housing, specifically to ensure that homes meet the decent homes standard?

[Dr William McCrea (South Antrim) (DUP)]

During a visit by the Deputy Prime Minister to Northern Ireland last week, he stated, “I will go away with colleagues in the coalition Government to look at the possible impact of the deficit reduction plan on capital expenditure in Northern Ireland.” Can the Chancellor confirm that that has been done and what steps will be taken in response?

[Mr Osborne]

As the hon. Gentleman may know, I have met the First Minister and Deputy First Minister of Northern Ireland and I am looking at the points that they raised with me. If he will forgive me, I will make an announcement on 20 October.

[Penny Mordaunt (Portsmouth North) (Con)]

Does the Minister think that we will stand a greater chance of having fairer taxation now that Finance Bills are published and properly consulted on, and will that stop appallingly unfair policies such as the abolition of the 10p tax rate ever being introduced again?

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[Michael Connarty (Linlithgow and East Falkirk) (Lab)]

With all this talk of fairness, why is it that no one has mentioned VAT? A 14.5% increase in real terms in the VAT rate has been attacked by what I thought were Conservative-voting business people and families in my constituency, and will punish those at the lower end of the income spectrum. Why is such a high rate of VAT being pursued by this Government?

[Mr Osborne]

We are having to take decisions to close the highest budget deficit in the G20. I listened to what the previous Chancellor of the Exchequer said recently on “The Andrew Marr Show”. He was asked:

“we now read from Peter Mandelson’s book that you were quite keen on the idea of VAT going up”.

Alistair Darling replied:

“Well yeah, obviously…It would have allowed you to have done you know a lot more to take down the deficit…and would have…ameliorated some of the worst effects of reductions”.

For once, the previous Chancellor of the Exchequer had the right idea—[Interruption.] That is because he was overruled by the then Prime Minister.

[Robert Halfon (Harlow) (Con)]

May I bring to the Minister’s attention the case of my constituent, Mr Peter Gorse? Mr Gorse ran a healthy small business until the Royal Bank of Scotland forced him into bankruptcy so that it could repossess his assets. Will the Minister agree to meet me and my constituent so that his case can be heard fairly by that taxpayer-owned bank and to ensure that cases such as his are fairly considered as we reform the banking system?

--- Later in debate ---

[Mr Osborne]

I agree with my hon. Friend. As we are just a couple of minutes from the statement on higher education, it would be interesting to hear from the Opposition about whether they really will pursue this graduate tax, which the shadow Chancellor has passionately opposed, including in the open letter he wrote to his party leader just a couple of weeks ago.

[Emma Reynolds (Wolverhampton North East) (Lab)]

The Government failed to conduct an equality impact assessment on the June 2010 Budget. Can the Chief Secretary reassure me that they will not make the same mistake again, and will the Government ensure that they assess the—probably disproportionate—impact on women of the comprehensive spending review?

--- Later in debate ---

[Matthew Hancock (West Suffolk) (Con)]

Since the formation of a Government who are determined to deal with the deficit, market interest rates have in some cases halved. What impact does the Chancellor think that has had on both our GDP growth and the interest payments that we have to make on Government debt?

[Mr Osborne]

First, the fall has helped to reduce interest payments, and secondly it has helped many companies during the recovery. It is striking how our market interest rates have fallen since taking the steps that we announced in the Budget. That is not the case in some other countries in Europe that had similar market interest rates to ours at the time of the general election.

[Rachel Reeves (Leeds West) (Lab)]

Does the Chancellor agree that market interest rates were falling before the election? The fall is not due to the Government’s policies—they were falling before.

[Mr Osborne]

I advise the hon. Lady to look at the market interest rates of Spain and the United Kingdom, which were the same at the time of the general election. In Spain, they have hardly fallen at all, but they are 1% lower in the United Kingdom. That is a real boost to businesses.

[Dr Julian Huppert (Cambridge) (LD)]

Is the Chancellor aware that the Treasury is the only large Department that does not have a chief scientific adviser? Does that say anything about its interest in and understanding of science, and will he appoint a chief scientific adviser?

[Mr Osborne]

I assure my hon. Friend that I have received plenty of advice—public and private—from the nation’s scientists.

Proposed Public Expenditure Cuts

George Osborne Excerpts

Monday 13th September 2010 Commons Chamber

[Bob Russell (Colchester) (LD)]

(Urgent Question): To ask the Chancellor of the Exchequer if he will make a statement on his additional proposals for cuts in public expenditure. I am grateful to you, Mr Speaker, for allowing this urgent question.

[The Chancellor of the Exchequer (Mr George Osborne)]

I am grateful for the opportunity to update the House on the progress of the spending review, and to remind people of the context in which we make these difficult decisions.

The previous Government left Britain with the largest budget deficit of any major economy and no credible plan to deal with it. That was a major cause of instability and uncertainty that threatened any prospect of economic recovery. It was reflected in the substantially higher market interest rates that British families and businesses were being charged compared with those for families and businesses in countries that were regarded as less exposed to sovereign credit risk. The new Government had to take urgent steps to restore stability and allay fears about our country’s ability to pay its way in the world. In the words of the previous Labour Prime Minister,

“if we fail to offer a convincing path out of debt, that...will itself plunge us into stagnation”.

Those views were echoed in the comments this weekend from the International Monetary Fund, which said that

“fiscal consolidation remains essential for strong, sustained growth over the medium run”.

That is why in the Budget I announced decisive steps to get the deficit under control. I believe that that Budget has restored stability to the British economy and provided a sound basis for a sustainable recovery. It has helped keep down the market interest rates that Britain pays on its debts, which are today more than half a percentage point lower than at the general election. In other countries, such as Spain, Portugal or Ireland, these same rates have stayed broadly flat or gone up since then.

Because of the measures that we are taking, independent forecasters are increasingly confident about the British economy. Last week the OECD predicted that the UK would see the strongest growth in the G7 this quarter and the second strongest growth next quarter. I can also tell the House that today the EU predicted that the UK will see the strongest recovery in the second half of this year of any major European economy. These, of course, are just forecasts and all this hard-won stability would be put at risk if we did not now implement the components of our Budget plan.

Let me remind the House of the measures that we took at the emergency Budget and the steps that we now have to take. We are set to tighten the public finances by a total of £113 billion by 2014-15. Of this, £29 billion will come from tax measures, including the increase in VAT, higher capital gains tax and a new permanent levy on banks. A further £11 billion will come from the welfare reforms announced at the Budget. Another £10 billion will come as a consequence of paying lower interest charges on the national debt as a result of our plan—£10 billion that those who opposed the Budget plan would have to find to pay the holders of Government debt.

That leaves £61 billion that will come from reductions to departmental expenditure plans. It is worth reminding the House that £44 billion of that £61 billion was assumed in the figures left to us by the previous Government. In other words, for all the synthetic noise and fury that we hear, £3 of every £4 that we are having to cut were cuts that the Opposition were planning to make. Unfortunately, not a single one of those pounds was allocated to a specific programme.

Our job now is to allocate those departmental budgets. That is the purpose of the spending review that is under way, and I will announce the full results to the House of Commons on 20 October. The review is informed by the largest public consultation exercise ever undertaken on public expenditure. More than 100,000 substantive ideas have been received from members of the public. Teams at the Treasury have been sifting through these ideas over the past six weeks and some are already being implemented.

We have also created a mechanism for collective discussion of spending issues across the Cabinet, which is something of an innovation, so the Prime Minister—[Interruption.] Well, there was a Cabinet Committee on life chances, on talent and on democratic renewal under the previous Government, but no permanent committee on public expenditure. The Public Expenditure Committee of the Cabinet has already met twice this month and will meet again this week.

Of course, some decisions that shape the spending review have already been taken. We will protect the budget of the NHS with real increases, we will honour the commitments on international aid that we have made to the poorest in the world, and we will protect capital investment in our economic future. We have not reduced capital spending in future years beyond the plans that we inherited, and as we take further decisions, we will strive to ensure that those support economic growth, promote reform and local control, and are fair—fair between different sections of society and between different generations.

Let me say something about welfare spending—[Interruption.]

[Mr Speaker]

Order. May I tell the Chancellor that he has well exceeded his time? Allowance will have to be made for the Opposition Front Bench. That will happen today, but in future the time limits must be adhered to in this place.

[Mr Osborne]

I will heed your injunction, Mr Speaker, but the question was a very general one about an update on the public expenditure review.

I shall say something about welfare, if the Speaker will allow me. The welfare bill has risen by 45% in the past 10 years and almost £1 in £3 that the Government spend goes towards welfare. The current system is not protecting those who genuinely cannot work, nor is it helping those desperately looking for work to find a new job quickly. Close to 5 million people are on out-of-work benefits, more than half of whom have spent at least half of the past 10 years in this situation. Rather than rewarding work and supporting the vulnerable, we are wasting the lives of millions of people. That is why my right hon. Friend the Secretary of State for Work and Pensions is working with me and other Cabinet colleagues to see what we can do fundamentally to reform the welfare system so that it rewards work and supports aspiration, as well as saving the taxpayer on what someone once called the bills for social failure. When we have decisions to announce, we will bring them to the House and, of course, we will want to keep the House informed in other ways.

I have already given the Treasury Committee an unprecedented power to veto my preferred candidate to chair the independent Office for Budget Responsibility, Mr. Robert Chote, and I can tell the House today that I have asked my hon. Friends the Members for Gainsborough (Mr Leigh) and for Southport (Dr Pugh) to draw on their considerable expertise on the Public Accounts Committee in the last Parliament to advise the Government on how to improve the financial management systems that we have inherited, and in turn improve accountability to the House.

We have many difficult choices to make, but one thing is clear: one party created this mess; two parties are working hard to clear it up.

[Bob Russell]

If the Chancellor wished to give a full statement to the House, he could have done so last week rather than giving a cursory one to the BBC and having to be dragged here today. I acknowledge that 75% of the cuts are Labour’s cuts, but we have not as yet had the spending review. Clearly, none of the cuts will affect the quality of life of Members of Parliament, but they will certainly affect the disadvantaged in society. We know that there will be higher food costs in the coming year, and other costs will rise. I have no time for the welfare cheats, but to try to blame this country’s financial ills on that small category of the population is unethical. It would be more ethical to act with equal determination towards those who cheat on tax, whether it be income tax, value added tax or corporation tax. There is now a whole industry of financial experts advising people on tax avoidance.

The turf war between the Chancellor’s office and that of the Secretary of State for Work and Pensions is somewhat immature. Children living below the poverty line and people on low incomes, the disadvantaged in society, do not want these fun and games, they want fairness.

[Mr Osborne]

The position on welfare is exactly as I set out in my Budget speech at this Dispatch Box when I said that if we could find further savings on welfare, we would be able to reduce the pressure on other Departments. That was what we were planning to do over the coming months as part of the spending review, and that is exactly what I said in the television interview to which my hon. Friend refers.

Secondly, it would be impossible to conduct a spending review without looking at the welfare bill. Whether one is looking for £61 billion of savings or £44 billion, welfare spending accounts for a third of the entire Government budget, so one has to look at the welfare budget. That is what we are doing, but we are looking to do it in a way that reforms welfare, to help those millions of people who have been trapped for a decade or more on out-of-work benefits into work, to help those with aspirations to improve their income, to make sure that work is rewarded by the benefit system, and to do that while we are protecting those who cannot work and protecting the most vulnerable in our society. I would argue that the failure on welfare reform over the last decade was one of the greatest failures of the previous Government.

Despite the lurid headlines in some newspapers, the relationship and the co-operation between the Treasury and the DWP is strong. There is a perfectly natural—[Interruption.]

[Mr Speaker]

Order. The Chancellor must be heard. This sedentary chuntering needs to come to an end. I want to hear the Chancellor.

[Mr Osborne]

It is an improvement on the situation under the previous Government, where there was absolutely no contact between the Secretary of State for Work and Pensions and the Chancellor. The two Departments are working very well. Obviously the Treasury is interested in financial management and control: that is a proper part of our function. My right hon. Friend has inspirational plans that he has worked on to reform welfare and get people working, and the two of us are working together with colleagues in the Cabinet to make that happen.

Let me finally say something about the tax gap and people who do not pay their taxes. Later this week, figures will be produced—independent figures, not produced by me—which will show the latest situation on the tax gap that we have inherited: in other words, the gap between what should be collected in tax and what is collected in tax at the moment. Judging by previous figures I have seen, I think that the House will be pretty staggered by this number. [Interruption.] Labour Members seem to forget that their people were in power for 13 years. We have inherited this situation, and we will be taking steps to reduce tax avoidance, including tax avoidance by the richest people in our society, so that everyone makes a contribution.

[Yvette Cooper (Normanton, Pontefract and Castleford) (Lab)]

The shadow Chancellor and the shadow Chief Secretary are not in Westminster today, Mr Speaker, and you will be aware that I had asked a similar urgent question of the Secretary of State for Work and Pensions, so it is good that the Chancellor is replying, although very unfortunate that the Secretary of State for Work and Pensions has chosen not to come to respond.

On Thursday, the Chancellor told the BBC that the Government were cutting an additional £4 billion from out-of-work benefits. The BBC website says:

“The government is planning to reduce the annual welfare bill by a further £4bn, Chancellor George Osborne has told the BBC.”

Today, he has refused to tell the House what he told the BBC. Did the BBC correspondents just get it wrong? Did they mishear what he said? Will he now come clean and tell us what he has in fact got agreed and planned for the additional cuts that he wants to make to the welfare bills for the spending review? Will he tell us whether the Secretary of State for Work and Pensions has agreed to £4 billion of additional cuts? Will he admit that the timing of this interview had nothing to do with reaching agreement on the spending review with the Work and Pensions Secretary and everything to do with getting Andy Coulson off the BBC headlines for the day?

In June, the Chancellor wrote to the Secretary of State:

“I am pleased that you, the prime minister, and I have agreed to press ahead with reforms to the ESA as part of the spending review that deliver net savings of at least £2.5bn by 2014/15.”

His Chief Secretary said yesterday that this was not agreed; well, is it agreed or isn’t it?

The Chancellor is not being straight with the House—[Interruption.]

[Yvette Cooper]

I certainly accept your point, Mr Speaker. I am sure that no Minister would want not to be straight with the House, and I am sure that the Chancellor will be. I withdraw any suggestion that he was not, because I am sure that he will be.

Will the Chancellor confirm, therefore, that saving an additional £4 billion from getting people into work will require new jobs for 800,000 people, at a time when his own Office for Budget Responsibility says that far from creating an extra 800,000 jobs, his Budget will cut 100,000 jobs from the economy in each and every year?

The Chancellor has also said that he plans to target the workshy and those who are fit for work. Will he confirm, however, that savings from getting those who are fit for work off sickness benefits are already built into the Treasury figures, and that cutting an extra £2.5 billion from employment support allowance would hit only those who have been through the new, tougher test and who even his Ministers agree are genuinely too sick or too disabled to work? Is it not the truth that he is planning to cut the level of support for some of the most vulnerable people in society? Will he confirm that someone who is on employment support allowance, and has been through the test, is already facing a £285 cut in the value of their ESA and an average £650 cut in their housing benefit as a result of his plans?

The Chancellor claims to support jobs and to be progressive, but he is doing the opposite. The truth is that his plans hit the poorest harder than the rich, women harder than men and children and pensioners worst of all. Now he has shown that he is targeting those who are most sick and disabled in society. Is it not the truth that he has decided to hit those who he knows will find it harder to fight back? This is not progressive; it is a nasty attack, and he should withdraw it now.

[Mr Osborne]

First of all, I note that there has still not been a word of apology about leaving this country with the worst public finances in its history. Nor, by the way, has there been an apology for the complete failure, by the right hon. Lady and her predecessors as Secretary of State, to reform the welfare system, despite all those promises.

In the Budget speech, I made it very clear that we were looking for additional savings from welfare. If the Labour party wants to propose some ideas to make up its £44 billion part of the savings package, perhaps it will contribute to this debate. Sadly, at the moment, we have had absolutely no ideas from it. It opposed the VAT rise; the pay freeze; the in-year savings; the housing benefit reforms; the tax credit reforms; the switch to the consumer prices index for benefits; and the abolition of child trust funds. It opposed all those things. They are £33 billion worth of cuts.

Where are the Labour party’s numbers? Where are its ideas? If it wants to engage with us in a real debate about how we reform welfare, protect the most vulnerable and help people who can work into work, we will be all ears. But at the moment there is a deafening silence from the Labour party.

The right hon. Lady talks about my right hon. Friend the Secretary of State for Work and Pensions not being here. He happens to be at a conference in Europe about international labour market reforms. The shadow Chancellor is not here, and nor is a single one of the Labour party leadership contenders. That is because instead of talking about the national interest, they are courting the votes of vested interests.

[Nadhim Zahawi (Stratford-on-Avon) (Con)]

I congratulate the Chancellor on his innovative way of taking suggestions from the public on the spending challenge. Has he had any suggestions from the shadow Chancellor or the Labour party leadership contenders?

[Mr Osborne]

The answer to my hon. Friend is no. Since Labour Members called for a vote on the value added tax rise, we have discovered that actually the shadow Chancellor supports the VAT rise. So he did have ideas; he just did not tell us about them.

[Barry Gardiner (Brent North) (Lab)]

If the recent report from BDO Stoy Hayward, which says that we could be back in recession by Christmas, proves true, how many more billions will the Chancellor take off the most vulnerable in society?

[Mr Osborne]

I draw the hon. Gentleman’s attention to the central forecasts produced by the Office for Budget Responsibility, the Bank of England, the OECD and the European Commission. They forecast steady and sustainable growth over the coming period. I take the view—a view shared by quite a number of people who observe the British economy—that if we had not put in place, in the Budget, a credible plan to reduce the budget deficit, this country would be in an economic mess.

[Mr Andrew Tyrie (Chichester) (Con)]

The Chancellor helpfully published, decile by decile, the distributional effects of a number of his measures in the Budget. But the exclusion from his analysis of a number of other measures has led to a lot of controversy about whether his Budget is progressive or regressive. Will he now commit to publishing in the comprehensive spending review a full analysis of all the measures in aggregate, decile by decile, so that we can see whether their effects will be progressive or regressive?

--- Later in debate ---

[Mr Osborne]

First, let me say to my hon. Friend that the previous Government never published any distributional impacts as part of their Budgets. We have begun that work in the Red Book. We said that we wanted to receive comments about how we could improve the work. There is a real challenge, of which my hon. Friend is well aware, given all his experience, to do with the modelling of some of the impacts. The Treasury model, which, of course, we inherited—we did not create a new Treasury model—has made it very difficult to model certain expenditure changes.

We will continue to try to provide Parliament with the best information that we can, but I do not want to promise to deliver something that I cannot actually deliver.

[Kate Green (Stretford and Urmston) (Lab)]

I welcome the Chancellor’s repeated commitment to supporting people back into work. Can he confirm that benefits savings that may be achieved will be prioritised for DWP back-to-work programmes and, in particular, that the funding needed to meet the objectives of dynamic benefits will be provided to the Secretary of State for Work and Pensions as a first call on any savings on the benefits bill?

[Mr Osborne]

We have a dual task. We have a welfare bill that represents a third of all Government spending; and, given that at least half the Labour party—I think—still believes in trying to reduce the deficit, we have to find savings from the welfare bill. At the same time, we are seeking a fundamental reform of welfare to encourage people into work. Bringing those two objectives together is precisely what I am working on with the Secretary of State for Work and Pensions.

[Mr Mike Hancock (Portsmouth South) (LD)]

I am sure that the whole House will be pleased to hear the comment about going after those who deliberately avoid paying tax—it would be interesting to know when we will hear how that will be achieved—but more importantly, the Chancellor mentioned the phrase “protection of the vulnerable” several times in his statement today. I would be interested to know how that is going to be achieved, and when he will explain to the House how the vulnerable in our society—including the very poor—will get the protection that they deserve.

[Mr Osborne]

Let me give my hon. Friend a specific example: disability living allowance. We were faced with a number of options, but we decided that we wanted to keep it as a universal benefit, and instead look at the criteria that allowed people to get on it and ensure that they were entitled to stay on it. We are particularly conscious of benefits on which people in vulnerable positions are dependent, but with each benefit, we are proceeding with caution, seeking as wide a consensus as possible. However, my hon. Friend has my commitment that we are doing everything that we can to protect the vulnerable during this process. I would also make a general observation: the thing that really hurts the most vulnerable in our society is when a country loses control of its public finances.

[Mr Dennis Skinner (Bolsover) (Lab)]

Is the Chancellor really aware that as a result of these successive sadistic statements about cuts, war pensioners are ringing Members of Parliament and people who are severely disabled are frightened to death of losing their benefits? Is it not time that he had the gall to tell the truth: that this is all about using the deficit, which we had planned for, as an opportunity to carry out the Tory ideology of cutting the power of the state?

[Mr Osborne]

As the hon. Gentleman is now a Blairite, I thought that I would read out what his master said recently, which is relevant to what he has just said:

“I look at those policy papers now—the work on…the use of social security budgets…and I do think how different it would have been if we had done it. If we had…not wandered into a cul-de-sac of mixed messages and indecision… But there it is. It didn’t happen, and that’s it.”

We are trying to do the things that he once promised in his election manifesto.

[Margot James (Stourbridge) (Con)]

In his article yesterday, David Smith, the economics editor of The Sunday Times, reminded us that the structural deficit had averaged 2.7% since 2003 and that we inherited planned tax rises and expenditure cuts of £73 million. Given the positive reaction of the markets to his Budget of a few months ago, what does the Chancellor think would happen if he did not persist with these tough but very necessary measures?

[Mr Osborne]

The answer is simple: there would be a catastrophic loss of confidence in Britain and an increase in market interest rates, which would hit every business and family. That would lead to an increase in unemployment, which is why we are not prepared to take the prescription offered by at least some of the people standing for the leadership of the Labour party.

[Mr Andrew Love (Edmonton) (Lab/Co-op)]

The Chancellor ought to read the International Monetary Fund report on that subject. The economy is slowing, business confidence and business investment are flat, and net trade is going through the floor rather than through the roof. In those circumstances, is it not folly of the first order to cut public expenditure? Is not the Chancellor threatening a double-dip recession—the very thing we do not need?

[Mr Osborne]

The people who are talking down the British economy are the Opposition. Since the hon. Gentleman mentioned the IMF, let me remind him what it said this weekend:

“Fiscal consolidation remains essential for strong, sustained growth over the medium term.”

[Matthew Hancock (West Suffolk) (Con)]

Since the election, the interest rates on gilts at two and three years—the kind of time periods that people borrow for their mortgages—have halved. Does the Chancellor think that that has anything to do with the new Government getting to grips with the nation’s finances?

[Mr Osborne]

I think it does have something to do with the new Government setting out their plan, and it is easy to see why. We can compare what has happened to market interest rates for the United Kingdom with market interest rates for countries such as Spain, Portugal, Ireland and Greece. At the time of the general election, it was well understood that people in the world were concerned about the record UK budget deficit, the largest in the G20. As a result of the steps that we have taken in the Budget—which we now need to see through in the spending review—we have restored stability to the economy and helped to bring down market interest rates. That would not have happened if Labour had stayed in office.

[Caroline Lucas (Brighton, Pavilion) (Green)]

How does the Chancellor think that slashing jobs at tax offices up and down the country will help with the collection of the £120 billion that is lost every year through tax evasion and tax avoidance in this country? What other measures does he have in mind for collecting that money, which could be saved and used to prevent these enormous cuts, which are going to hit the poorest the hardest?

[Mr Osborne]

As I was saying in reply to my hon. Friend the Member for Colchester (Bob Russell), we are keen to ensure that the tax gap is reduced and that Her Majesty’s Revenue and Customs is an organisation that is able to collect that tax that is due to us all. Unfortunately, as has been well documented in recent days, we have inherited a whole string of problems, including 6 million people being given the wrong tax information under the previous Government. We are putting in place the measures that I believe will improve HMRC and enable it to focus on reducing that tax gap.

[Dan Byles (North Warwickshire) (Con)]

Does the Chancellor agree with the right hon. Member for Kirkcaldy and Cowdenbeath (Mr Brown), who said in 1996:

“Losing control of public spending doesn’t help the poor”?

[Mr Osborne]

It is not often that I say this, but I agree with the right hon. Member for Kirkcaldy and Cowdenbeath on that. Maybe one day he will turn up in the House of Commons and explain what he meant.

[Chris Leslie (Nottingham East) (Lab/Co-op)]

Instead of hitting the sick and the disabled with these cuts, why does not the Chancellor tackle the bankers’ welfare bill by reversing his ridiculous decision to give a £1 billion cut in corporation tax to the banks?

[Mr Osborne]

Over the past 13 years, Labour allowed the banking system to become completely unregulated and presided over the biggest banking crisis of our lifetime. At the time of the general election, I remember arguing in the television debates for a bank levy to be introduced in this country even if other countries did not introduce it. The then Chancellor opposed me on that. We have now introduced the levy, and I see that it has been universally accepted by the people who opposed it just a few months ago. The receipts from the levy massively outweigh any gain that comes from the lower corporation tax, and that was taken into account when I set the level of the bank levy at £2.5 billion.

[Malcolm Bruce (Gordon) (LD)]

Why, if the previous Government were so successful in achieving economic success, did the welfare bill rise by 47%? Is it not the case that the former Chancellor of the Exchequer and Prime Minister threw prudence to the winds? Is not getting the public finances in order the best way to stop hitting the sick and the vulnerable? Should not all Members of the House work together to champion the sick and the poor, rather than scaremongering when we do not have the details?

[Mr Osborne]

My right hon. Friend is absolutely right. People will remember that, in the mid-1990s, a central part of the then new Labour party’s claim to office was that it was going to reduce the bills for social failure. No doubt that was in all the election addresses that it delivered at the time. It did not do that, however; the welfare bill went up by 45%, and its former leaders are now telling us candidly that they completely failed. We are going to succeed where they failed.

[Mrs Anne McGuire (Stirling) (Lab)]

I am always astonished that when Members move over to the Government side of the House, they ask for less spending on welfare than they did when they were on the Opposition side. I was visited on Friday by a severely disabled constituent who was seriously worried about her future. Why has the Chancellor promoted the legitimate debate on welfare reform by contextualising it with reference to those who abuse the system—for whom there is no support on either side of the House—thereby sowing great seeds of concern among many disabled people and their families in the UK today?

[Mr Osborne]

It is difficult to see how we can have a debate on out-of-work benefits and how to reform them without at least addressing the issue of some people who should perhaps be doing more to get into work. Let me stress that we are doing everything we can to make sure that the poorest and the most vulnerable are helped, while rewarding work. If the right hon. Lady or any other Labour Member wants to make a positive contribution or propose a positive plan, we will listen to it.

[Priti Patel (Witham) (Con)]

Will the Chancellor condemn the calls for civil disobedience coming from the trade unions in the light of the necessary spending decisions that have to be made in view of the economic mess left by the last Government?

[Mr Osborne]

I do not think that strike action would help anyone at this point in time. Again, the people who suffer most when countries lose control of their public finances are often those working in the public sector, so I would hope that the trade unions, like everyone else in our society, will work together to sort out this national problem—and do so in the national interest.

[Mr Chuka Umunna (Streatham) (Lab)]

The Chancellor’s emergency Budget was criticised for adversely impacting on certain groups, not least women—indeed, it is subject to litigation in the courts at the moment by the Fawcett Society. With particular regard to the extra £4 billion of cuts announced by the Chancellor to the BBC last week, has he carried out an equality impact assessment of the effects of that measure?

[Mr Osborne]

Of course, as we prepare the comprehensive spending review, we will comply with the legislation on the statute book.

[Mr Peter Bone (Wellingborough) (Con)]

Does the Chancellor appreciate that on the coalition Benches, there is unanimous support for his policy of shrinking the size of the state? Are we not lucky to have a Chancellor with the guts and ability to carry it out?

[Mr Osborne]

I thank my hon. Friend for his last remark. The state currently consumes almost half of national income and I do not think that there is a serious contender for high office on the Labour side who does not think that it needs to come down. Unfortunately, not a single proposal has been forthcoming. It is quite remarkable that this is the most contentious issue that we are debating, yet the people who aspire to lead the Labour party have absolutely nothing to say about it.

[David Simpson (Upper Bann) (DUP)]

While there is action to be taken against those who have defrauded the benefit scheme, what are the Government doing to encourage those who are in genuine need of those benefits, and how are they going to be made available?

[Mr Osborne]

The hon. Gentleman would know, first, that we are creating the new Work programme, which we believe will help people currently looking for work to get the skills and support they need to get into work. It will be a far better system than the one we inherited. Then there is the broader debate, alluded to in a number of questions, about how we reform the out-of-work benefit system to reward work and give people a greater incentive to take on additional hours of work. That is absolutely central to the debate.

[Stephen Barclay (North East Cambridgeshire) (Con)]

The recent independent report by the National Audit Office found that on the last Government’s cost-reduction targets for 2010-11, only one Department had achieved even 50% of that target; that of the savings reported, only 38% could be relied upon; and that one Department had the distinction of achieving even less than 5% of its cost-reduction target. What representations has my right hon. Friend had on how to make up that shortfall?

[Mr Osborne]

Not many, is the answer. My hon. Friend is right to draw the House’s attention to the fact that what we used to hear from the Labour Government about efficiency savings—in the press releases issued at the time of their last Budget—was all guff. Anyone who has examined whether any of the former Government’s claims stack up has found that they do not. It is another part of the Labour party’s fraudulent record.

[Mr David Winnick (Walsall North) (Lab)]

Does the Chancellor really believe that the Government’s proposals will not be met with the widest opposition up and down the country? The Chancellor might dismiss this comment, but the Cabinet is playing with fire.

[Mr Osborne]

Let me say this to the hon. Gentleman: he sat on the Government Benches year after year while the budget deficit racked up; he allowed this country to have the largest budget deficit in the developed world. We are now seeking to reduce that budget deficit. The previous Government pencilled in but never identified £44 billion of public expenditure savings. If he wants to make a serious contribution to the debate, I suggest that he propose some specific measures to deliver the plans on which he stood at the last general election.

[Sajid Javid (Bromsgrove) (Con)]

Does my right hon. Friend have a view on why Labour Members continue to treat the entire British public like children? They spend, spend, spend, bringing our country to the verge of bankruptcy—

[Mr Speaker]

Order. There is much pressure on time. I remind the hon. Gentleman that he must ask a Minister about the policy of the Government, not the attitude of the Opposition. We will leave it there; the Chancellor can respond briefly if he wants, but he is under no obligation.

[Mr Osborne]

My hon. Friend said some very good things about how the Opposition treat the rest of the country like children.

[Clive Efford (Eltham) (Lab)]

Formula grant for local government is about £24.5 billion, made up of just over £3 billion in revenue support grant and just over £21 billion from business rates. The cut is £6 billion, which leaves about £3 billion income from business rates that is not being redistributed in formula grant. Would not a good use of that money be the protection of the poorest and most vulnerable in our communities from the ravages of the cuts being imposed by the Government? Exactly how will businesses be accountable for what that £3 billion is used for?

[Mr Osborne]

As well as considering reforms to the formula grant, we took some steps earlier this year, and we hope to take further steps, to increase the freedoms that local authorities have to spend the money and to have fewer ring-fenced programmes from central Government Departments. We are looking at a review of the formula grant.

[Nick Boles (Grantham and Stamford) (Con)]

If we do not put up VAT, do not cut defence expenditure—as the Labour party proposed during Defence questions—and do not cut the welfare bill, as the right hon. Member for Normanton, Pontefract and Castleford (Yvette Cooper) proposes, will the Chancellor confirm that the only way to have a sustainable budget is to slash spending on the NHS?

[Mr Osborne]

My hon. Friend is absolutely right. The Labour party has opposed the £13 billion VAT increase, even though we now know that the shadow Chancellor, Tony Blair and Peter Mandelson all supported that increase; and it has opposed some of the other measures to which my hon. Friend refers. There is a difference when it comes to the NHS: I believe it is the official policy of the Labour party that the NHS should not be protected from cuts and should not have a real increase in funding. I happen to disagree with that policy, and we will see what the public think about it.

[Liz Kendall (Leicester West) (Lab)]

The Chair of the Treasury Committee asked the Chancellor to publish new details of the distributional impact of the Budget, including the proposed cuts to housing benefit and disability living allowance. Is the Chancellor aware that the Institute for Fiscal Studies produced such an analysis last month? Is he aware that it says that

“the overall effect of the new reforms announced in the June 2010 Budget is regressive, whereas the tax and benefit reforms announced by the previous Government” —

for the same period—

“are progressive”?

In the light of that evidence, will he explain whether he still claims that his Budget and his Government are progressive?

[Mr Speaker]

Order. There were three questions there, but one answer will suffice.

[Mr Osborne]

I can do no better than repeat what the IFS said in the report to which the hon. Lady has referred. It said that in 2012,

“Considering all tax and benefit reforms… the richest tenth of households lose the most in both cash and percentage terms.”

[Claire Perry (Devizes) (Con)]

Does the Chancellor agree that there is nothing progressive about leaving 5 million people on out-of-work benefits—a system that condemns single women in particular to a lifetime of poverty—and that there is nothing progressive about leaving the Labour party’s debts to the next generation to repay?

[Mr Osborne]

I can go better, and quote Lord Myners, who said:

“There is nothing progressive about a Government who consistently spend more than they can raise in taxation, and…nothing progressive that endows generations to come with the liabilities incurred by the current generation.”—[Official Report, House of Lords, 8 June 2010; Vol. 719, c. 625.]

[Sir Gerald Kaufman (Manchester, Gorton) (Lab)]

The right hon. Gentleman says that he wishes to protect the most vulnerable. Will he intervene personally to solve the problem of a constituent of mine, who is severely epileptic, who has not received his tax credit for six weeks owing to the total inefficiency of Her Majesty’s Revenue and Customs, and who has no money whatsoever—[Interruption.] Don’t you care about this man? He has no money whatsoever, and is only able to feed his family as a result of collections from his church. The chairman of the board says that it is nothing to do with him; will the Chancellor say that it is something to do with him?

[Mr Osborne]

Of course I take responsibility for the tax credit system that I have inherited. We know that there are real problems with the way in which it operates, and we are trying to establish how we can reform things in general. I will, however, look urgently at the case that the right hon. Gentleman has brought to the House’s attention: if he will give me the details this afternoon, I will get on to it straight away.

[Jo Swinson (East Dunbartonshire) (LD)]

Like many Members of Parliament—although, perhaps, not as much as the hon. Member for Wellingborough (Mr Bone) —I want to see cuts in our public services. I accept that they are, sadly, necessary to deal with the huge deficit that is Labour’s legacy. Does the Chancellor agree that if any party is to have credibility in criticising specific cuts, it must present a realistic alternative that does not just saddle the next generation with thousands of pounds of debt?

[Mr Osborne]

I entirely agree with my hon. Friend. The plethora of memoirs and interviews from people who were at the top of the Labour party until a few months ago have consistently made clear that it is not credible for the Labour party not to issue its own proposals and come up with its own ideas. As I have said, £44 billion of the cuts with which we are proceeding were pencilled in by the last Government, and they have between now and 20 October to tell us where those £44 billion of cuts would have fallen.

[Miss Anne Begg (Aberdeen South) (Lab)]

On Saturday I attended a conference organised by the Aberdeen branch of the Disability Advisory Group. The people there were genuinely worried about the reassessment for disability living allowance and the medicalisation that has been announced. They were completely baffled, and kept asking, “Why us?” Whoever is to blame for the economic crisis, it is certainly not disabled welfare recipients. May I now ask the Chancellor, “Why them?”?

[Mr Osborne]

I respect the fact that the hon. Lady is the Chair of the Select Committee on Work and Pensions, but I must tell her that the number of working-age people who claim disability living allowance has risen by more than 40% in the last decade, which is a substantial increase. When I considered reforms to the allowance, I saw that it would be possible to introduce such reforms as means-testing, but I rejected those. I said that it would be fairer to introduce an up-to-date assessment to help people to receive the benefit and ensure that they were eligible for it in future. I think that that is the fair way in which to proceed with this particular benefit, because I well understand that those who receive it are some of the most vulnerable members of our society.

[Charlie Elphicke (Dover) (Con)]

Can the Chancellor tell us whether, having bankrupted the country, the last Government left any detailed financial restraint, according to Treasury officials? This reminds me of the kids—the yobs—who smash the bus shelter and then throw stones at the people who are trying to clean up the mess. It is a disgrace.

[Mr Osborne]

The last Government left nothing except a letter from their Chief Secretary saying “I am sorry, but there is no money left”.

[Mr David Lammy (Tottenham) (Lab)]

Does the Chancellor recognise that most ordinary people consider a £2.5 levy for rich bankers to be grossly unfair, given that ordinary people are paying 10 times more? He can now do better with tax-dodgers. Does he expect Lord Ashcroft to pay more on 24 October?

[Mr Osborne]

We were the first major economy to introduce the banking levy. We were bitterly opposed in the run-up to the election by a Government, in whom I think the right hon. Gentleman was a Minister, who told us that we should not introduce the banking levy until all the other countries had done so. We took a lead and introduced the banking levy, which will raise £2.5 billion. Since then, many other countries have followed our lead. [Interruption.] Opposition Members say it’s nothing or a pittance. If that is the case, why did they not introduce a levy? They had 13 years to do it and they did not. The only thing they did was cut capital gains tax, which we have had to increase.

[Several hon. Members]

rose—

ECOFIN

George Osborne Excerpts

Monday 26th July 2010 Written Statements

[The Chancellor of the Exchequer (Mr George Osborne)]

The Economic and Financial Affairs Council was held in Brussels on 13 July 2010. The following items were discussed:

EU financial supervision

ECOFIN agreed a revised position on the Commission’s proposals to establish a European Systemic Risk Board and three new European Supervisory Authorities. The Council:

Reaffirmed its December 2009 agreement that supervision should remain national, that the proposed EU roles in mediation and crisis should be subject to safeguards to protect member states fiscal responsibilities, and that EU direct powers over firms should not override national supervisors’ discretionary decisions.

Rejected demands by the European Parliament (EP) for an EU resolution fund and EU supervision of cross-border firms.

Reaffirmed that the European Banking Authority will be based in London.

Sought to limit and tie down the role suggested by the EP for the European Supervisory Authorities in banning products. As a result, the Council agreed that such powers would:

be specifically agreed by Council and EP in legislative proposals;

be subject to a sunset to require the authority to regularly reaffirm its decision;

include an appeal procedure requiring a qualified-majority vote to support a ban if a member state requests it.

The presidency will now take forward negotiations on the basis of the new mandate, and will seek to find agreement ahead of the September EP plenary vote. The UK supports this new ECOFIN consensus, and looks forward to a swift agreement with the EP and the establishment of the bodies by January 2011.

Programme of the Belgian Presidency

The Belgian presidency presented the ECOFIN work programme for the next six months.

Follow up to the European Council:



Commission communication on “Reinforcing economic policy co-ordination”

The Commission presented its paper as a contribution to the ongoing work on economic governance. The UK believes the paper provides helpful input and agrees that robust national frameworks are an important part of the solution—independence of national statistical and fiscal authorities is key, as shown by the creation of the Office for Budget Responsibility. Further work will continue by the European Commission, with ECOFIN returning to this issue in September.

Broad Economic Policy Guidelines

Following initial agreement at ECOFIN and the European Council in June, the broad economic policy guidelines (BEPGs) were formally adopted. The Government are content with the text, following additional language at the June European Council making clear that country-specific recommendations under the BEPGs

“shall be fully in line with relevant treaty provisions and EU rules and shall not alter member states’ competences, for example in areas such as education”.

Stability and Growth Pact

The Council adopted a raft of decisions on excessive deficits including launching excessive deficit procedures for Bulgaria, Denmark, Cyprus and Finland. In addition, the Council noted that since December 2009, effective action has been taken by Austria, Belgium, the Czech Republic, Germany, Spain, France, Ireland, Italy, the Netherlands, Portugal, Slovakia and Slovenia. Following the emergency Budget on 22 June, ECOFIN agreed that the UK is also now taking effective action to further increase the size of fiscal consolidation in 2010-11 and significantly strengthen the planned pace of deficit reduction over the medium-term.

Adoption of the euro by Estonia

Following discussions at the June ECOFIN and European Council, euro-area member states voted to adopt regulations which confirm the introduction of the euro in Estonia on 1 January 2011.

AOB: Report on EMU public finances

The annual report on public finances in the European Monetary Union was presented to Ministers. The report covers consolidation strategies and the link between macroeconomic imbalances and fiscal policy.

IMF Poverty Reduction and Growth Trust

George Osborne Excerpts

Monday 26th July 2010 Written Statements

[The Chancellor of the Exchequer (Mr George Osborne)]

The Government have today finalised an agreement to lend up to the equivalent of $2 billion (approximately £1.3 billion) in special drawing rights to the International Monetary Fund’s Poverty Reduction and Growth Trust. Copies of the agreement have been deposited in the Libraries of both Houses.

Capital Gains Tax (Rates)

George Osborne Excerpts

Wednesday 23rd June 2010 Commons Chamber

[Mr Darling]

My hon. Friend makes a fair point. It is interesting that the Liberal Democrats promised us that if they went into coalition they would get something in return on capital gains tax. They wanted a 40% CGT, yet they appear to have settled for 28%.

[The Chancellor of the Exchequer (Mr George Osborne)]

That is 10% higher than under Labour.

[Mr Darling]

The Chancellor says it is 10% higher, but when I raised capital gains tax to 18%, I remember the angry campaign waged against it by Conservative Members. They said that 18% would discourage enterprise and was a terrible thing, but they seem to have changed their minds on that absolutely and completely. By the way, we are not going to oppose the increase in capital gains tax; especially when there is a higher 50p rate of tax, sooner or later action would have to be taken to stop the real risk of leakage. As I think the Chancellor said yesterday, the real gain from raising capital gains tax comes from income tax receipts. The position of the Liberal Democrats, however, was quite different.

There are other areas, too, where questions of fairness will be raised. Where in the manifestos of either of the political parties that form the Government was it said that they were going to index benefits to the lower inflation index of the CPI—the consumer prices index—which takes about £6 billion away from people whose income, generally speaking, is not that great? Where was it said in their manifestos that they were going to cut more than £100 in relation to child benefit, or to freeze that benefit for three years? Other changes also deserve very close examination. Everybody knows that housing benefit is in need of reform, as is the disability living allowance, but as we all know, these are complicated, difficult and sometimes controversial issues. It will be interesting to see whether the coalition Government can deliver all the things they promised yesterday.

IMF (New Arrangements to Borrow)

George Osborne Excerpts

Wednesday 23rd June 2010 Written Statements

[The Chancellor of the Exchequer (Mr George Osborne)]

The Government have today laid the International Monetary Fund (Limit on Lending) Order 2010 before the House of Commons. Copies of the revised New Arrangements to Borrow, which relate to this order, have been deposited in the Libraries of both Houses.

Financial Statement

George Osborne Excerpts

Tuesday 22nd June 2010 Commons Chamber

[The Chancellor of the Exchequer (Mr George Osborne)]

This emergency Budget deals decisively with our country’s record debts. It pays for the past, and it plans for the future. It supports a strong, enterprise-led recovery, it rewards work and it protects the most vulnerable in our society. Yes, it is tough, but it is also fair.

This is an emergency Budget, so let me speak plainly about the emergency that we face. The coalition Government have inherited from their predecessors the largest budget deficit of any economy in Europe, with the single exception of Ireland. One pound in every four we spend is being borrowed. What we have not inherited from our predecessors is a credible plan to reduce their record deficit—this at the very moment when fear about the sustainability of sovereign debt is the greatest risk to the recovery of European economies. Questions that were asked about the liquidity and solvency of banking systems are now being asked about the liquidity and solvency of some of the Governments who stand behind those banks. I do not want those questions ever to be asked of this country. That is why we have set a brisk pace since taking office.

In the past seven weeks, we have announced, conducted and completed a review of this year’s spending and identified £6 billion of savings. We have announced, established and received the report of the independent Office for Budget Responsibility. The power that the Chancellor has enjoyed for centuries to determine the growth and fiscal forecasts now resides with an independent body immune to the temptations of the political cycle. And we have examined, decided on and in some cases halted the mass of unfunded commitments, IOUs and overcommitted reserves that greeted us on entering office.

This is early, determined action, and it has earned us credibility in international markets. It has meant that our promise to deal decisively with the deficit has been listened to. Market interest rates for Britain have fallen over the past seven weeks, while those of many of our European neighbours have risen. Those lower market interest rates are already supporting our recovery.

But unless we now deliver on that promise of action with concrete measures, that credibility—so hard won in recent weeks—will be lost. The consequence for Britain would be severe: higher interest rates, more business failures, sharper rises in unemployment, and potentially even a catastrophic loss of confidence and the end of the recovery. We cannot let that happen. This Budget is needed to deal with our country’s debts. This Budget is needed to give confidence to our economy. This is the unavoidable Budget.

I am not going to hide hard choices from the British people or bury them in the small print of the Budget documents. The British public are going to hear them straight from me, here at this Dispatch Box. Our policy is to raise from the ruins of an economy built on debt a new, balanced economy, where we save, invest and export; an economy where the state does not take almost half of all our national income, crowding out private endeavour; an economy not overly reliant on the success of one industry, financial services—important as they are—but where all industries grow; an economy where prosperity is shared among all sections of society and all parts of the country. In this Budget, everyone will be asked to contribute. But in return, we make this commitment: everyone will share in the rewards when we succeed. When we say that we are all in this together, we mean it.

The first challenge for this Budget is to set the fiscal mandate—in other words, our overall objective for the public finances. The previous Government had two fiscal rules, one for debt and one for the current Budget. They were supposed to force Chancellors to set aside money in the good years so that they could borrow sustainably when the economy turned down. They completely failed in that task.

As this is the last Budget in which this golden rule will appear, I would like to be the last Chancellor to report on it. We are set to miss the golden rule in this cycle by £485 billion. We now know the intrinsic weakness in backward-looking fiscal rules: past prudence was an excuse for future irresponsibility; and the judge of the rules was the very same Chancellor they were supposed to be restraining. We propose a more credible approach.

Our fiscal mandate will be forward-looking, and the judge of whether we are on course to meet it will be not the Chancellor, but the independent Office for Budget Responsibility. On behalf of the House, I thank Sir Alan Budd and his fellow committee members, Geoffrey Dicks and Graham Parker, for their highly professional effort. In the space of just seven weeks, I believe we have established the Office for Budget Responsibility as a permanent improvement to economic policy making and the transparency of government. The legislation to put the office on a statutory footing will now be drawn up and I hope it will command all-party support.

I now turn to what that fiscal mandate will be. The view of the international community was clearly expressed at the latest G20 meeting, and we will be taking the same message to the G20 summit in Toronto this weekend. Surplus countries should do more to support global demand. So we welcome China’s announcement to come off the dollar peg. At the same time, the international community believes countries with high fiscal deficits need to accelerate the pace of fiscal consolidation. That is precisely what we now propose to do. The formal mandate we set is that the structural current deficit should be in balance in the final year of the five-year forecast period, which is 2015-16 in this Budget. This mandate is structural, to give us flexibility to respond to external shocks; current, to protect the most productive public investment; and credible, because the OBR, not the Chancellor, will decide on the output gap.

In order to place our fiscal credibility beyond doubt, this mandate will be supplemented by a fixed target for debt, which in this Parliament is to ensure that debt is falling as a percentage share of GDP by 2015-16. I can confirm that, on the basis of the measures to be announced in this Budget, the judgment of the OBR, which we published today, is that we are on track to meet those goals. Indeed, I can tell the House that, because we have taken a cautious approach, we are set to meet them one year earlier, in 2014-15. To put it another way, we are on track to have debt falling and a balanced structural current budget by the end of this Parliament.

At this point in the Budget speech, the Chancellor would normally read out their own set of economic and fiscal forecasts, and they normally tell the House more about the political cycle than the economic one. Those days have gone for good. Instead, I will give the House the latest forecasts from the independent OBR, taking into account the measures in the Budget.

Growth in the UK economy for the coming five years is estimated to be 1.2% this year and 2.3% next year; then 2.8% in 2012 followed by 2.9% in 2013; and then 2.7% in both 2014 and 2015. Consumer price inflation is expected to reach 2.7% by the end of the year before returning to target in the medium term, and let me take this opportunity to confirm that the inflation target remains at 2% as measured on the consumer prices index.

The unemployment rate is forecast by the OBR to peak this year at 8.1% and then fall for each of the next four years to reach 6.1% in 2015. Some have suggested that there is a choice between dealing with our debts and going for growth. That is a false choice. The crisis in the eurozone shows that unless we deal with our debts, there will be no growth. These forecasts demonstrate that a credible plan to cut our budget deficit goes hand in hand with a steady and sustained economic recovery, with low inflation and falling unemployment. What is more, the forecast shows a gradual rebalancing of the economy, with business investment and exports playing a greater role and Government spending and debt-fuelled consumption a smaller role—a sustainable private sector recovery built on a new model of economic growth, instead of pumping the debt bubble back up.

Part of the reason, as we have always argued, is that tighter fiscal policy can enable interest rates to stay lower for longer. As the Governor of the Bank of England confirmed this week at the Mansion House:

“If prospects for growth were to weaken, the outlook for inflation would probably be lower and monetary policy could then respond”.

The subject of interest rates brings me to say this about attempts to compare directly last week’s forecasts with this one. As the OBR notes in today’s Budget document, any such comparison would be “misleading”, because last week’s forecast included the lower interest rates that expectations of this week’s Budget have already brought about. So, as Sir Alan has written, actually to follow the fiscal path set out by the previous Government

“would lead to higher interest rates and…lower economic activity”

than his forecast showed.

Let me now turn to the measures in the Budget designed to deliver this accelerated reduction in the structural deficit. The coalition believes that the bulk of the reduction must come from lower spending rather than higher taxes. The country has overspent; it has not been under-taxed. Our approach is supported by the international evidence, compiled by the OECD, the International Monetary Fund and others, which found that consolidations delivered through lower spending are more effective at correcting deficits and boosting growth than consolidations delivered through tax increases.

That is the origin of our 80:20 rule of thumb—roughly, 80% through lower spending and 20% through higher taxes. This evidence has been available in the Treasury for some time, but was published only in a redacted form by the previous Government. We intend to follow international best practice and the Treasury’s own analysis. My measures today mean that 77% of the total consolidation will be achieved through spending reductions and 23% through tax increases. I believe this gets the balance right.

I now turn to the OBR’s fiscal forecasts. As a result of the measures I will announce today, public sector net borrowing will be £149 billion this year, falling to £116 billion next year, £89 billion in 2012-13 and £60 billion in 2013-14. By 2014-15, borrowing reaches £37 billion—exactly half the amount forecast in the March Budget—and in 2015-16, borrowing falls further to £20 billion. As a share of the economy, borrowing will fall from 10.1% of GDP this year to just 1.1% in 2015-16.

We now know, thanks to the OBR forecast, that the structural current deficit is significantly larger than we were told—0.8% of GDP or £12 billion higher next year. Thanks to my action today, the structural current balance will be minus 4.8% of GDP this year. That deficit will then be eliminated to plus 0.3% in 2014-15 and plus 0.8% in 2015-16. In other words, it will be in surplus.

Public sector net debt, as a share of GDP, will be 62% this year, before peaking at 70% in 2013-14. Because of our action today, it then begins to fall, to 69% in 2014-15 and then 67% in 2015-16, whereas under the plans we inherited, debt would have increased in every full year of this Parliament. The House will want to know that, as a result of our measures, debt interest payments will be £3 billion a year lower by the end of this Parliament than they would have been.

I have one further announcement to make regarding macro-economic policy. I can confirm that, as set out in the coalition agreement, the Government will not be joining the euro in this Parliament. I have therefore abolished the Treasury’s Euro Preparations Unit—yes, one does exist—and the official concerned has been redeployed to more productive activities.

Let me now turn to my other decisions on public spending. The state today accounts for almost half of all national income, which is completely unsustainable. All parties in the House now accept that spending needs to be cut, and we have made a start, but we need to go much further if we are to meet our fiscal mandate and see debt falling by the end of this Parliament. Today we are setting out the overall path of public spending that will achieve that.

Let me begin with current spending. Current expenditure will rise from £637 billion in 2010-11 to £711 billion in 2015-16. Although this is an increase, the House should remember that we inherit a rapidly rising bill for debt interest—a bill that will not start falling until the debt itself starts to fall. Debt interest payments alone will cost the taxpayer a quarter of a trillion pounds over this period. One of my predecessors used to call this spending the costs of social failure, but I say it is the price of economic failure. Compared with the plans set out by the previous Government, I am announcing today additional current expenditure reductions of £30 billion a year by 2014-15. The plans for public investment we inherit from our predecessors envisage a steep drop from £69 billion last year to £46 billion in 2014-15.

After the initial in-year reductions, the question we have been faced with is how much further to go on capital spending. Well-judged capital spending by Government can help provide the new infrastructure our economy needs to compete in the modern world. It supports the transport links we need to trade our goods, the equipment we need to defend our country and the facilities we need to provide quality public services. I think an error was made in the early 1990s when the then Government cut capital spending too much—perhaps because it is easier to stop new things being built than to cut the budgets of existing programmes.

We have faced many tough choices about the areas in which we should make additional savings, but I have decided that capital spending should not be one of them. There will be no further reductions in capital spending totals in this Budget, but we will make careful choices about how that capital is spent. The absolute priority will be projects with a significant economic return to the country. Assessing what those projects are will be an important part of the autumn spending review.

The Government can also dispose of assets that should rightly be in private ownership. Yesterday, we launched the sale of High Speed 1. We will look at how to dispose of our shareholding of NATS, the air traffic control services. We will aim to sell the student loan book and look at options around early repayment for individuals, and we will resolve the future of the Tote—at last. My right hon. Friend the Secretary of State for Business, Innovation and Skills will also facilitate a private capital injection into the Royal Mail Group, something that has been long overdue.

Before I turn to discuss departmental budgets, I need to say something first about another area of spending—the civil list. The civil list is the Government’s support for Her Majesty the Queen in her duties as Head of State, and I am sure that everyone in this House will want to join me in recognising the Queen’s loyal service and immense contribution to public life. The amount provided by the civil list has remained unchanged over the past 20 years, at £7.9 million. This has required careful management. Because of inflation, the annual payment is today worth only a quarter of what it was 20 years ago. I can announce that, with the full agreement of the Queen, the civil list will remain frozen at £7.9 million for the coming year, and I will propose a new means of consolidated support for Her Majesty for the future at a later date.

In addition, the royal household has agreed that, in future, civil list expenditure will be subject to the same audit scrutiny as other Government expenditure, through the National Audit Office and the Public Accounts Committee of this House of Commons. I believe that this will mean clear accountability in this House and that it will strengthen public confidence.

Let me turn now to my decisions on departmental expenditure limits. In recent years, Chancellors have been reluctant to explain what their total spending projections will mean for Whitehall Departments, and that is entirely self-defeating. It normally takes people at the Institute for Fiscal Studies less than 24 hours to work it out for themselves and let the public know the truth. I will save them the effort.

We have inherited from the previous Government spending plans to cut departmental budgets by £44 billion a year by 2014-15. This implies an average real reduction for unprotected Departments of 20%—not that this was ever said, or a single pound of cuts to programmes even identified. Because the structural deficit is worse than we were told, my Budget today implies further reductions in departmental spending of £17 billion by 2014-15. We have committed to providing the NHS with real increases throughout the Parliament, and we will honour our international aid obligations to the poorest in the world. Once these are taken into account, the Budget figures imply that other Departments will face an average real cut of around 25% over four years. Clearly, if we can find any additional savings to social security and welfare beyond those that I will outline shortly, then that will greatly relieve the pressure on these Departments and that 25% figure.

Of course, not all Departments will receive the same settlement. I recognise, for example, the particular pressures on our education system and on defence. Final departmental settlements, and the final split between departmental expenditure and annually managed expenditure on welfare, will be set in the spending review. Rather than follow the usual practice of keeping the date of that review a secret until a few weeks before it happens, let me tell the House that it will be presented on Wednesday 20 October.

A further way that we can ease the pressure on public services is to agree that we need to restrain public sector pay in these difficult times, and we need to do something about the spiralling costs of public sector pensions. Many millions of people in the private sector have in the past couple of years seen their pay frozen, their hours reduced and their pension benefits restricted. They have accepted that, because they knew that the alternative in many cases was further job losses. The public sector was insulated from those pressures but now faces a similar trade-off. I know that there are many dedicated public sector workers who work very hard and did not cause this recession, but they must share the burden as we pay to clean it up. The truth is that the country was living beyond its means when the recession came, and if we do not tackle pay and pensions, more jobs will be lost.

That is why the Government are asking the public sector to accept a two-year pay freeze, but we will protect the lowest paid. In the past, I have said that we would be able to exclude the 1 million public sector workers earning less than £18,000 from a one-year pay freeze. Today, because we have had to ask for a two-year pay freeze, I extend the protection to cover the 1.7 million public servants who earn less than £21,000 a year. Together, they make up 28% of the public sector work force. They will each receive a flat pay rise worth £250 in both years, so that those on the very lowest salaries will get a proportionately larger rise. In recognition of our armed services who are risking their lives for us all in Afghanistan, we have also doubled the operational allowance to £4,800. We have asked Will Hutton to draw up plans for fairer pay across the public sector without increasing the overall pay bill, so that those at the top of organisations are paid no more than 20 times the salaries of those at the bottom. The culture of excessive pay at the very top of the public sector simply has to end.

We also need to deal with the cost of public service pensions. This is one of the greatest long-term pressures facing our nation’s finances. The OBR today publishes figures showing that by 2015-16 we will be spending over £10 billion a year simply to meet the gap between pension contributions and payments to the unfunded pensions that they support. That is why I have asked John Hutton to carry out an investigation. As the Work and Pensions Secretary in the previous Government, he brings experience and an unbiased approach. He will provide an interim report in September this year to help inform any decisions required for the spending review, and a full report in time for next year’s Budget.

The Government will also accelerate the increase in the state pension age to 66. A call for evidence will be launched later this week, and we will consult on whether to phase out the default retirement age.

Let me now address the largest bill in Government—the welfare bill. It is simply not possible to deal with a budget deficit of this size without undertaking lasting reform of welfare. It has been a key component of most successful fiscal consolidations elsewhere in the world and, around Europe, countries are now tackling their benefits bill. Germany has already announced €30 billion-worth of cuts to welfare spending, and others are taking similar steps.

Here in Britain, the explosion in welfare costs contributed to the growing structural budget deficit in the middle part of this decade. Total welfare spending has increased from £132 billion 10 years ago to £192 billion today. That represents a real-terms increase of a staggering 45%, and it is one of the reasons why there is no money left. It has also left an increasing number of our fellow citizens trapped on out-of-work benefits for the whole of their lives. A greater proportion of our children grow up in workless households than any other country in Europe. We are wasting the talents of millions, and spending billions on it in the process, so we will increase the incentives to work, and reduce the incentives to stay out of work. We will focus our benefits more towards those in need, and we will end some one-off payments that the country cannot afford any more.

First, we need to put the whole welfare system on a more sustainable and affordable footing. So from next year, with the exception of the state pension and pension credit, we will switch to a system where we uprate benefits, tax credits and public service pensions in line with consumer prices rather than retail prices. The consumer prices index not only reflects everyday prices better, but it is of course now the inflation measure targeted by the Bank of England. This will save over £6 billion a year by the end of the Parliament. I believe that this is a fairer approach than a benefits freeze. In time for the next Budget, we will also publish proposals to move the indexation in the tax system from RPI to CPI in a way that protects revenues.

Tackling spiralling welfare costs means also addressing the bill for tax credits. Spending on tax credits has increased from £18 billion in 2003 to £30 billion this year, and that is an unsustainable rise. There are over 150,000 families with incomes over £50,000 receiving tax credits. Taking into account the various disregards means that families earning up to £83,000 are eligible for this means-tested benefit. The country simply cannot afford this any more.

We need to target tax credits on those who need the help most, so we will reduce payments to families earning over £40,000 next year and then align the thresholds for the child and family element. We will increase the taper rate at which awards are reduced, and remove the baby element for new children from April 2011. We will remove the one-off payment to new workers over 50 from April 2012, and reduce the income disregard from £25,000 to £10,000, and then to £5,000. We will introduce an income disregard for income falls, reduce backdating from three months to one month, and we will not introduce the pre-election promise of a new tax credit element for infants.

Sadly, there are further benefits that this country cannot afford. We will abolish the poorly targeted health in pregnancy grant from April 2011. At the same time, we will restrict the Sure Start maternity grant to the first child only, and we will expect lone parents to look for work when their youngest child goes to school. We have decided that we simply cannot afford to extend the saving gateway, and we have also had to take a difficult decision about child benefit. I have received many proposals about this benefit. Some have suggested that we means-test it; others that we tax it. All these proposals involve issues of fairness.

The benefit is usually claimed by the mother. To tax it would mean that working mothers received less than the non-working partner of higher earners. To means-test it, we would have to create a massively complex new system to assess household incomes. I do not propose to do those things. I know that many working people feel that their child benefit is the one thing that they get without asking from the state. So instead, to control costs, we have decided to freeze child benefit for the next three years. This is a tough decision, but I believe that it strikes the right balance between keeping intact this popular universal benefit, while ensuring that everyone across the income scale makes a contribution to helping our country reduce its debts.

That brings me to another universal benefit: disability living allowance. It is right that people who are disabled are helped to lead a life of dignity. We will continue to support them, and we will not reduce the rate at which this benefit is paid. However, three times as many people claim it today than when it was introduced 18 years ago, and the costs have quadrupled in real terms to more than £11 billion a year, making it one of the largest items of Government spending. We will introduce a medical assessment for DLA from 2013, which will be applied to new and existing claimants. For people with disabilities, that will be a simpler process than the complex forms that they have to fill out at present. That way, we can continue to afford paying this important benefit to those with the greatest needs, while significantly improving incentives to work for others.

Spending on housing benefit has risen from £14 billion 10 years ago to £21 billion today. That is close to a 50% increase over and above inflation. The costs are completely out of control. We now spend more on housing benefit than we do on the police and on universities combined. Among these enormous numbers for total spending, there are some equally enormous individual claims. Today there are some families receiving £104,000 a year in housing benefit. The cost of that single award is equivalent to the total income tax and national insurance paid by 16 working people on median incomes. It is clear that the system of housing benefit is in dire need of reform.

We will introduce that reform by resetting and restricting local housing allowances; uprating deductions; reducing certain awards; re-adjusting support for mortgage interest payments; and limiting social tenants’ entitlement to appropriately sized homes. Lastly, we will for the first time introduce maximum limits on housing benefit, from £280 a week for a one-bedroom property to £400 a week for a four-bedroom property or larger. Our package today will reduce the costs of housing benefit by £1.8 billion a year by the end of the Parliament—or by just 7% of the total budget—but it will improve incentives to work. At the same time, we will target more resources at those who need them most by increasing the budget for discretionary housing payments to deal with hardship cases by £40 million, and from now we will cover the cost of an additional room for those claimants with a disability who need a carer.

Taken together, all those measures to control the costs of welfare will save the country £11 billion by 2014-15. Governments in the past have said that they were going to get to grips with welfare and to reward work. We are delivering. My right hon. Friend the Secretary of State for Work and Pensions will bring forward proposals to further reform the benefits system as a tool to support work and encourage aspiration in time for the autumn spending review.

But as I said right at the start of this speech, this Budget is not just about paying for the bills of the past; it is also about planning for the future. It is my deeply held belief that a genuine and long-lasting economic recovery must have its foundations in the private sector. That is where the jobs will come from, and we will do absolutely everything to support their creation. We argued that imposing a jobs tax was the last thing that Britain needed in a recovery, and the businesses of the country agreed with us, so we will adopt a different approach. We will make it cheaper for companies to employ people. From April 2011, the threshold at which employers start to pay national insurance will rise by £21 a week above indexation. The cost of hiring people on incomes lower than £20,000 will be less than it is today; and in one move we will have lifted 650,000 employees out of this tax altogether.

But if we are to have a sustained, job-creating recovery, we need more than that. We need to see growth not just in one corner of our country, nor in just one sector, for we live in a world where the competition for business is growing ever more intense. I want a sign to go up over the British economy that says “Open for business”, and this is how I propose to do it. Corporation tax rates are compared around the world, and low rates act as adverts for the countries that introduce them. Our current rate of 28p is looking less and less competitive, so we will do something about it. Next year we will cut corporation tax by 1%, to 27p in the pound, the year after we will cut it again by 1%, and again the year after, and again the year after that—four annual reductions in the rate of corporation tax that will take it down to just 24%. That will give us the lowest rate of any major Western economy, one of the lowest rates in the G20 and the lowest rate that this country has ever known.

At the same time, we will agree with businesses a long-term approach to the taxation of foreign profits, the treatment of intellectual property and the proposals from James Dyson on research and development. We will also reduce the small companies tax rate. The previous Government were planning to increase that tax rate next year to 22%, at the very time when we should be encouraging small businesses to grow. Instead, we will cut the rate to 20%, which will benefit some 850,000 companies. And because small businesses are struggling to obtain credit at the moment, I will extend the enterprise finance guarantee scheme, which supports small and medium-sized businesses’ access to lending. Those changes will benefit at least 2,000 small businesses.

My right hon. Friend the Secretary of State for Business, Innovation and Skills will come forward in the summer with further proposals on expanding the availability of credit, to ensure that the economic recovery is properly financed. Also, there are many small businesses in the tourism industry today. To help them, I am reinstating the favourable tax rules for furnished holiday lettings, which our predecessors had planned to repeal. I can also announce that there will be measures to cancel certain backdated business rates bills, including for many businesses in ports.

In the current climate, with the deficit the size that it is, all those reductions in tax must be more than paid for by other changes to business taxation, so we will not go ahead with the poorly targeted tax relief for the video games industry. There will be a small reduction in the rates for capital allowances, which will remain broadly in line with economic depreciation. For the majority of plant and machinery assets, the rate of the allowance will fall from 20% to 18%, while the allowance for longer-lived assets will fall from 10% to 8%. In other words, businesses will still receive full tax relief on their qualifying expenditure, but over a longer time frame.

I have also decided to reduce the annual investment allowance to £25,000 a year, to ensure that support is focused on investment by smaller firms. Over 95% of businesses will continue to have all their qualifying plant and machinery expenditure fully covered by this relief. Manufacturing as a whole will pay less tax. I have listened to the argument that changing those crucial allowances during the early stages of the economic recovery could be disruptive, so I will delay the reductions in capital and investment allowances to April 2012. That will give businesses the extra early advantage of the tax cuts, which will start to come in from next year.

Our reforms today will also mean a greater contribution from the banking sector—one that far outweighs any benefit that it will receive from the lower tax rates that I have just announced. In putting the nation’s finances in order, we must remember that this was a crisis that started in the banking sector. The failures of the banks imposed a huge cost on the rest of society, so I believe that it is fair and right that in future banks should make a more appropriate contribution, reflecting the many risks that they generate. Such an approach has already been recommended by the International Monetary Fund. We are exploring the costs and benefits of a financial activities tax on profits and remuneration, and we will work with international partners to secure agreement, but today the British Government take the initiative in this global debate about the appropriate risks and rewards in international banking.

From January 2011, we will introduce a bank levy. It will apply to the balance sheets of UK banks and building societies, and to the UK operations of banks from abroad. There will be deductions for tier 1 capital and insured retail deposits, and a lower rate for longer maturity funding. Smaller banks with liabilities below a certain level will not be liable for the levy. Once fully in place, we expect the levy to generate over £2 billion of annual revenues.

There are those who have argued whether we should wait until every country in the G20 introduces a bank levy. I believe that is not reasonable or fair. Indeed, I can tell the House that the French and Germans have joined the UK today in committing to introduce a bank balance sheet levy. In a joint statement, our three Governments have pledged to ensure our banks make a fair contribution to reflect the risks they pose.

The message I hear from those in the business community is unequivocal: they want certainty and stability from Government so that they can start the long process of rebuilding their businesses. Today, I am offering them just that—a five-year plan to reform the corporation tax system, with lower rates, simpler rules and greater certainty. It provides the most fundamental and far-reaching reform of our corporate tax regime in generations. It offers a stable and consistent platform for a private sector recovery. It is a balanced package, which will send a clear signal that Britain is open for business. It will help companies invest, attract foreign investment and boost growth. Above all, it will help create jobs. By increasing the amount of business investment by an additional £13 billion between now and 2016, these reforms will help rebalance the economy away from household debt and Government consumption.

We will also take forward our plans to create a green investment bank, bringing forward private investment in clean energy and green technologies; and we will also need investment in our digital infrastructure. But the previous Government’s landline duty is an archaic way of achieving this, hitting 30 million households who happen to have a fixed telephone line. I am happy to be able to abolish this new duty before it is even introduced. Instead, we will support private broadband investment, including to rural areas, in part with funding from the digital switchover underspend within the television licence fee.

Over the past decade, the British economy has become deeply unbalanced, and nowhere are those disparities as marked as between the different regions of Britain. Between 1998 and 2008, for every private sector job generated in the north and the midlands, 10 were created in London and the south. We need a new approach—one that empowers local leadership, generates local economic growth and promotes job creation in all parts of the country, including Wales and Scotland. We will publish a White Paper on how we intend to deal with these issues later in the summer, followed by a consultation paper on rebalancing the economy of Northern Ireland.

As a step towards rebalancing our economy, we are today announcing the support for those regions more dependent on the public sector. First, even when money is so short, we will commit to the following important regional transport projects: the upgrade of the Tyne and Wear metro; the extension of the Manchester Metrolink; the redevelopment of Birmingham New Street station; and improvements to the rail lines to Sheffield and between Liverpool and Leeds.

Secondly, we will create a large regional growth fund to provide finance for regional capital projects over the next two years. We will announce the details shortly, but priority will be given to projects that have the greatest impact on improving innovation and creating jobs.

Thirdly, we will shortly announce a new tax scheme to help create new businesses in those regions where the private sector is not nearly strong enough. For the next three years, anyone who sets up a new business outside London, the south-east and the eastern region will be exempt from up to £5,000 of employer national insurance payments for each of the first 10 employees hired. We aim to have the scheme up and running by September, but any qualifying new business set up from today will also receive help. The Treasury estimates that some 400,000 new businesses will benefit, ensuring all parts of our country contribute to a more balanced and sustainable economic future.

Let me turn now to some further decisions we have made on taxation. I am someone who believes in the virtues of lower taxation, but the only sustainable route to lower taxes is by first achieving sound public finances. The sovereign debt crisis means we need to the reduce the deficit even more quickly in order to protect our economy. The Office for Budget Responsibility has revealed the size of the structural deficit to be even larger than we feared—£12 billion larger next year.

As a result, this Budget announces a further fiscal tightening of £40 billion a year by the end of this Parliament, including welfare and spending measures, over and above the previous Government’s plans. To achieve that additional tightening while maintaining the right “four-to-one” balance between spending and taxation means that I have to announce further tax rises today.

On 4 January next year, the main rate of VAT will rise from 17.5% to 20%. [Interruption.] The years of debt and spending make this unavoidable. This single tax—[Interruption.]

[Mr Deputy Speaker]

Order. Will hon. Members calm down? It is important to Members on all sides of the House that they can hear, but more important, the country takes this Budget very seriously, so I call for more calm and a little more restraint.

[Mr Osborne]

The years of debt and spending made this unavoidable. This single tax measure will by the end of this Parliament generate over £13 billion a year of extra revenues. That is £13 billion that we do not have to find from extra spending cuts or income tax rises. I can also give this House a commitment that we will keep everyday essentials such as food and children’s clothing, as well as other zero-rated items like newspapers and printed books, exempt from VAT over the course of this Parliament. In line with the increase in the main rate of VAT, the higher rate of insurance premium will also rise from 17.5% to 20%, while the standard rate will increase from 5% to 6%.

Let me turn to my decisions on duties. The March Budget included substantial increases in those, and I can tell the House that my Budget includes no new increases in duties on alcohol, tobacco or fuel. We will report back in the autumn on the scope for targeting alcohol duty at the products most associated with binge drinking and under-age consumption. We will explore changes to the aviation tax system, including switching from a per-passenger to a per-plane duty, and consult on major changes. This will help us to reduce our carbon emissions. We are examining the impact of sharp fluctuations in the price of oil on the public finances to see if pump prices can be stabilised, and we will also look at whether a rebate for remote rural areas could work.

I have one final announcement on duties. We have decided to reverse the previous Government’s plans to increase the duty on cider by 10% above inflation and the reduction will come into effect at the end of this month—just in time to celebrate England’s progress to the quarter finals, or else to drown our sorrows.

That brings me to council tax. At times like this when money is short, we think all parts of government should work hard to keep costs down, and we want to give councils every incentive to do just that. So we will offer a deal to local authorities in England: if they can keep their cost increases low, then we will help them to freeze council tax for one year from next April. That will mean that the average family will be some £35 better off next year, and every year thereafter. It will be one less rising bill for families to worry about, and it will drive value for money throughout all levels of government.

One of the most chaotic areas of tax that the new Government inherited from their predecessor is the capital gains tax regime. Some of the richest people in this country have been able to pay less tax than the people who clean for them. That is not fair, and it stems from the avoidance activity that has exploited the wider gap between the rate of capital gains tax and the top rates of income tax. Those practices are costing other taxpayers more than £1 billion every year.

It is therefore right, as set out in the coalition agreement, that capital gains tax should increase in order to help create a fairer tax system. I have listened carefully to everyone’s views and considered all the options. My concern has been to balance the competing demands of fairness, simplicity and competitiveness—and I believe my decision gets that balance right. Low and middle-income savers who pay income tax at the basic rate make up over half of all capital gains taxpayers. They will continue to pay tax on their capital gains at 18%. From midnight, taxpayers on higher rates will pay 28% on their capital gains. I have also decided that the annual exempt amount for capital gains tax will remain at £10,100 this year, and will continue to rise with inflation in future years.

I am acutely aware of how important it is to protect the incentives to succeed in business and to innovate, so to promote enterprise, the 10% capital gains tax rate for entrepreneurs, which currently applies to the first £2 million of qualifying gains made over a lifetime, will be extended to the first £5 million of lifetime gains. I asked the Treasury to examine what would have happened if we had increased the rate much further beyond 28%, and its dynamic analysis showed that that would have resulted in smaller total revenues. I also considered in great detail the options presented to me for introducing tapers or indexation allowances, and concluded that the complexity and administration involved would have been self-defeating.

The changes that I have made mean that the capital gains of the majority of taxpayers are protected; that we have a top rate that is in line with those of our international competitors; that we keep the system simple and easy for any taxpayer to understand; and that we reduce the incentives to convert income to capital gains. It is revealing that the great majority of the almost £1 billion of extra receipts that we expect to see as a result of this change will come from additional income tax payments. I believe that that is the right way in which to reform the taxation of capital gains.

Let me say something about the previous Government’s policy to reduce pension tax relief for people on high incomes, due to come in next year. Many businesses are alarmed at the complexity that it will introduce. I have listened to those concerns; however, I must also protect the £3.5 billion of revenues that the policy was set to raise from high-income people. I will therefore work with industry on alternative ways of raising the same amount of revenue, potentially by reducing the annual allowance.

Let me now turn to income tax. A responsible society is one that rewards the efforts of those who choose to work. The income tax system—in particular, the abolition of the 10% rate of income tax—has meant that many people on lower incomes face higher average tax rates. I believe that it is important to lift people out of the income tax system and allow them to keep more of their hard-earned money. It is especially important to make progress in this Budget, in which we are asking so much of so many, and this demonstrates that the coalition Government put fairness first.

In the current system, everyone under the age of 65 is eligible for a tax-free personal allowance of £6,475. That means that many thousands of people have their income taken away from them in tax, only to have to apply to get it back in benefits. That does not reward work. So today I can announce that we will increase the personal allowance by £1,000 in April. People will be able to earn £7,475 before they have to start paying income tax, 23 million people who are basic-rate taxpayers will each gain by up to £170 a year, and 880,000 of the lowest-income taxpayers will be taken out of tax altogether. Higher-rate taxpayers will not benefit from the change, and the higher-rate income tax threshold will have to remain frozen until 2013-14. Our long-term objective remains to increase the personal allowance to £10,000, as set out in the coalition agreement, and we will take real steps towards achieving that objective during the rest of this Parliament.

I do not disguise from the House that the combined impact of the tax and benefit changes that we make today are tough for people. That is unavoidable, given the scale of the debts that our country faces and the catastrophe that would ensue if we failed to deal with them. My priority in putting together this Budget has been to make sure that the measures are fair: that all sections of society contribute, but that the richest pay more than the poorest, not just in terms of cash but as a proportion of income as well. That is far from straightforward when the deficit is this high, and when the burden of reduction must rightly fall on Government spending.

Too often, when countries undertake major consolidations of this kind, it is the poorest—those who had least to do with the cause of the economic misfortunes—who are hit hardest. Perhaps that is a mistake that our country has made in the past. This coalition Government will be different. We are a progressive alliance governing in the national interest, and that requires us to make two final decisions.

First, we will provide lasting help for pensioners. The earnings link was broken by the last Conservative Government, and was never restored through 13 years of a Labour Government. That meant that each year more and more pensioners were drawn into the means test, which punished those who had done the right thing and saved for their retirement. I can announce today that from April next year we will re-link the basic state pension to earnings. Now pensioners can save with confidence. They will also be protected by our new triple lock, which will guarantee each and every year a rise in the basic state pension in line with earnings or prices or a 2.5% increase, whichever is the greater. There will be no more 75p increases in the basic state pension. With this coalition Government, pensioners will have the income to live with dignity in retirement.

Secondly, we will provide additional support for families in poverty. They are among the most vulnerable people in our society, and they need our help. I have decided to increase the child element of the child tax credit by £150 above indexation next year. That is a £2 billion a year commitment to low-income families, and we make it even now, in these difficult times. I can tell the House that the policies in this Budget, taken together, will not increase measured child poverty over the next two years. Overall, everyone will pay something, but the people at the bottom of the income scale will pay proportionally less than the people at the top. It is a progressive Budget.

Today we take decisive action to deal with the debts that we inherited, and confront the greatest economic risk facing our country. We have been tough, but we have also been fair. We have set the course for a balanced budget and falling national debt by the end of this Parliament. We have insisted that four pounds of every five needed to reduce our deficit will be found from Government spending. We have protected capital investment from additional cuts, and have got to grips with the soaring costs of welfare. We have provided the foundations for economic recovery in all parts of our nation, and have given our country some of the most competitive business taxes in the world. We have taken almost a million people out of income tax and half a million people out of national insurance, and we have done all that without increasing child poverty.

Sadly, in this unavoidable Budget we have had to increase taxes. We have had to pay the bills of past irresponsibility. We have had to relearn the virtue of financial prudence. But in doing so, we have ensured that the burden is fairly shared. Today we have paid the debts of a failed past and laid the foundations for a more prosperous future. The richest paying the most and the vulnerable protected: that is our approach. Prosperity for all: that is our goal.

I commend this Budget to the House.

Financial Services Regulation

George Osborne Excerpts

Wednesday 16th June 2010 Commons Chamber

[Mr Alistair Darling (Edinburgh South West) (Lab)]

(Urgent Question): To ask the Chancellor of the Exchequer to set out his proposals for the future of financial services regulation and for the role of the Bank of England.

[The Chancellor of the Exchequer (Mr George Osborne)]

In 1997, the right hon. Member for Kirkcaldy and Cowdenbeath (Mr Brown), as Chancellor, established, without any consultation and without telling Parliament, the tripartite system to regulate the financial system. In doing so, he removed from the Bank of England its historical role in monitoring overall levels of debt in the economy. It is well known that the late Eddie George was deeply unhappy with that decision. It is also well known that the tripartite system that the right hon. Gentleman created, and that his successor as Chancellor sustained, failed spectacularly in its mission to ensure stability in the financial markets, and the failure of certain banks cost the taxpayer a vast amount of money. Indeed, British taxpayers funded the largest bank bail-out in the world, and it was only in Britain that depositors queued in the high street to get their money back.

The British people rightly ask how this new coalition Government will learn from the mistakes of their predecessor. The coalition agreement commits us to reforming the regulatory system for financial services in order to avoid a repeat of the financial crisis, and that is precisely what we will do. First, on the structure of regulation, our plan is to hand over to the Bank of England the responsibility for macro-prudential supervision, which should never have been taken away from it. The tools for macro-prudential supervision are the subject of ongoing international discussions. We are playing a full part in that process at European and G20 level, along with the Governor of the Bank and the chairman of the Financial Services Authority. It is already clear that the tools will include capital requirements that work against the cycle, rather than with it.

The coalition Government are also committed to handing to the Bank of England responsibility for the oversight of micro-prudential regulation. It is clear that the central bank needs to have a deeper understanding of what is going on in individual firms. My hon. Friend the Financial Secretary to the Treasury will give further details of the institutional arrangements in a parliamentary statement tomorrow. It is important that the institutions involved correctly follow their own internal procedures before those arrangements are made public, and the Governor of the Bank will be talking to the court of the Bank this afternoon.

The coalition Government will also deliver on their promise to establish an independent commission on banking. The previous Government would brook no debate about the future structure of the banks, the relationship between retail and investment banking, and the questions of how best to protect taxpayers and how to ensure greater competition in an industry that they actively sought to consolidate. The previous Prime Minister did not want anyone to challenge his opinions, but we cannot ignore this debate about the future of banking—indeed, I want Britain to lead it. We will therefore establish the commission on banking to investigate those issues. It will be chaired by Sir John Vickers, who is a former chief economist at the Bank of England, was one of the first members of the Monetary Policy Committee and is a former chairman of the Office of Fair Trading. He is a man of unquestioned experience, integrity and independence who approaches this issue with an open mind. I am today placing in the Libraries of both Houses the terms of reference and we await the conclusions of the commission.

Unlike the last Government, this Government are prepared to confront the difficult challenges of the regulation and structure of the banks. We are prepared to learn the lessons of what went wrong, even if they were not.

[Mr Darling]

I am grateful to the Chancellor for that answer, and I wonder whether I might press him on a number of points. First, he says that the Bank of England will have responsibility for macro-prudential supervision, but he also says that the debate as to what macro-prudential supervision consists of is still up for grabs as it is still being debated internationally. When does he expect those discussions to be concluded?

The Chancellor also says that the Bank of England will have some responsibility for micro-supervision. It has been suggested in some quarters, for example, that the Bank of England, rather than the FSA, might have dealt with whether the Royal Bank of Scotland could take over ABN AMRO. Does he not realise that far from clarifying the situation, this is adding another complication? The risk is that we will have a dog’s breakfast of a regulatory system in which no one knows who is making decisions and no one knows who is in charge. Does he not accept that at a time when there is still a great deal of uncertainty in the banking world and a great deal of turbulence, the last thing that we want is a situation in which it is not clear which organisation is responsible for precisely which activity? If both the Bank and the FSA are responsible for regulating institutions, that is bound to lead to confusion and inevitably runs the risk that mistakes will be made.

Will the Chancellor also tell us whether, in relation to the Bank of England’s responsibility, he is planning any reform to the financial stability committee or any internal reforms so that a committee will advise the Governor? If that is the case, will the Governor be making those decisions or will a committee do so, perhaps on a wider basis? Will he also tell us whether or not Lord Turner, the chairman of the FSA, agrees with his proposals and whether he is now prepared to serve, in effect, as a deputy under the Governor of the Bank of England?

In relation to the proposal to break up banks, will the Chancellor explain how Northern Rock, which was a very simple retail bank on the face of it, would have been saved from collapse simply by virtue of the fact that it was a retail bank and not an investment bank? Will he also explain how his proposal would have made any difference to Lehman Brothers, which did not take a single retail deposit but was a complex investment bank that collapsed with calamitous consequences? Will he tell us, too, whether the commission that he proposes to set up will consider the break-up of British banks such as Barclays or HSBC? Will he tell us how the uncertainty that will inevitably be caused by the work of the commission will help to rebuild the financial stability that we want? At a time when there is that instability, does he not think that it would be far better to keep the FSA working on what it is supposed to be doing—that is, the day-to-day supervision and regulation—bearing in mind that some small minor decisions are sometimes very important, especially if they are the wrong ones?

Is it not the case that the proposal was made in the first place because the right hon. Gentleman was looking before the election for a dividing line between him and the then Government? What we have today is something that has been cobbled together, that is ill thought out, that will add to uncertainty and that runs a grave risk that further mistakes will be made with catastrophic consequences in the future.

[Mr Osborne]

The dividing line is between a Government who want to learn the lessons of what went wrong and an Opposition who have no intention of learning from all the mistakes that they made in office. I find that striking.

The right hon. Gentleman talks about a dog’s breakfast. What about the dog’s breakfast of the tripartite system that allowed the Royal Bank of Scotland to fail and that allowed Northern Rock to fail? He was the Chancellor at the time and he completely failed to see the growing levels of debt in the economy. He and the institutions that were created by his predecessor completely failed to see what had gone wrong in individual institutions. The thing I find extraordinary—perhaps Opposition Members will reflect on this—is that their shadow Chancellor is setting them against reform of the regulation of banks and reform of the structure of the banking industry. That is what he has just done. What we are going to do is to have an open debate about the structure of banks. That debate is happening in the United States of America, in the newspapers of this country and in parliamentary debates here. The only place it was not happening was in the last Government under his chancellorship.

We think that the sensible approach, in order to resolve these issues—[Hon. Members: “Answer the question.”] I am answering the questions—every single one of them. We think that the sensible approach is to set up an independent commission under Sir John Vickers to examine these issues and to take into account the different, strongly held views. For example, John McFall, who was the Chair of the Treasury Committee in the last Parliament, has in recent days put his name to a report that calls for structural reform of the banks. The shadow Chancellor might want to ignore his views, but I want to listen to them and to take them on board as part of an independent commission, and that is exactly what we are going to do.

When it comes to the international context, I think that all of that will enable us to lead the debate. Of course, we have to agree this at an international level, where some of the macro-prudential tools are. As the shadow Chancellor knows, there is a debate taking place in the G20. We hope, in the Seoul summit in November, to have come to firm conclusions on the capital, liquidity and leverage requirements. When we have come to those agreements and when we have international agreement on what those standards should be, we will need a regulatory system here, at home, that is fit for purpose, so that they can be implemented.

[Sir Peter Tapsell (Louth and Horncastle) (Con)]

As one of those who strongly opposed the introduction of the tripartite regulation of our financial institutions as soon as it was announced in 1997, may I congratulate the Chancellor on getting rid of the FSA, which has been a major contributor to the disasters in the economic sphere in recent years and which was regarded in the City, throughout the whole of its lifetime, as a thoroughly inefficient organisation?

[Mr Osborne]

To be fair to the FSA, it has been rather candid about the mistakes that were made when the shadow Chancellor was the Chancellor and when the former Prime Minister was the Chancellor. We have to learn from those mistakes. As I have told the House, we will set out the details of the institutional arrangements in a parliamentary statement tomorrow.

[Rachel Reeves (Leeds West) (Lab)]

The Chancellor talks about breaking up the retail and investment banks, but the immediate challenge for the Government is the future of the nationalised banks. Will he consider turning the failed banks into mutuals that focus on long-term returns and not on short-term profits?

[Mr Osborne]

We need to take some time before coming to decisions on how to dispose of the bank shares that we own in the Royal Bank of Scotland and Lloyds, and the banks we own, such as Northern Rock, not least because at the moment the British taxpayer would make a substantial loss on many of those share purchases. However, we are prepared to consider lots of options. Sir John Vickers’ commission is going to look at competition in the banking industry. It has become incredibly consolidated in the past couple of years and that is not necessarily the best thing for bank customers, as many of us will know from representing businesses that cannot get access to credit. It is sensible to look at what Sir John Vickers and his commission have to say about this.

[Mr Andrew Tyrie (Chichester) (Con)]

Why was so much of this announced on this morning’s “Today” programme rather than here? Who will chair the financial stability committee in a crisis? Will it be, as it should be, the Chancellor of the Exchequer?

[Mr Osborne]

There has been quite a lot of speculation, and as we will see in the coming days not all of it has been very accurate. I cannot account for the speculation, because it certainly has not been coming from my office. I am discovering that it is a feature of being in government that lots of people anticipate one’s views before one expresses them.

I congratulate my hon. Friend on becoming Chair of the Treasury Committee and I hope to have the engagement of his Committee in this important debate over the next year. When it comes to the commitment of taxpayers’ money, the elected Government, who are accountable to the House, will remain in charge.

[Keith Vaz (Leicester East) (Lab)]

The Chancellor will know that the FSA was created following the closure of BCCI on 5 July 1991, and the publication of the Bingham report. Nineteen years later, some of my constituents are still waiting for all their money back. I think the Chancellor knows that I am about to ask the same question I have asked every Treasury Minister over the last 19 years, so in the spirit of open government, will he do something that the former Chancellor would not do and please publish the confidential parts of the Bingham report so that we can have a proper debate about the issue?

[Mr Osborne]

I think everyone would acknowledge the work the right hon. Gentleman has done on the issue, over many years, on behalf of his constituents and other people who were so badly affected by that scandal. I was of course present at the exchange between him and the shadow Chancellor about the publication of the secret Bingham report—if I can put it like that—and I have asked for urgent advice about that and for a copy of the report so that I, too, can read it.

[Matthew Hancock (West Suffolk) (Con)]

In a similar exchange in a debate last week, did my right hon. Friend hear the shadow Chancellor say that the former Government did not understand the systemic risks in the banking system? Does he share my surprise that Members on the Labour Front Bench are no longer willing to engage in an argument about putting right the system of banking regulation that so spectacularly failed?

[Mr Osborne]

I am surprised, and I am not sure whether the shadow Chancellor is committing his party for the rest of this Parliament to be against reform of the structure of banking. I see quite a lot of heads shaking, so perhaps he is not. We shall wait and see. It is worth noting that on 8 June Lord Young of Norwood Green, a Minister at the Department for Business, Innovation and Skills in the last Government, referred to

“the tripartite relationship that was supposed to identify and regulate the systemic risk in British banking—a relationship that we all know failed somewhat spectacularly.”—[Official Report, House of Lords, 8 June 2010; Vol. 719, c. 630.]

[Mr Andrew Love (Edmonton) (Lab/Co-op)]

Given the continuing difficulties in the banking sector, does the right hon. Gentleman accept that the proposals he is putting to the House today will lead to greater uncertainty and greater blight in the financial services sector, and make it more difficult for banks and financial institutions to recover?

[Mr Osborne]

No, I do not accept that. We cannot ignore in this House that a debate is raging not just in our country but across the world about the structure of the banking industry and the best way to regulate it. The hon. Gentleman may have decided that he has all the answers and the Labour party may have decided that the system it established 13 years ago was the right system and we should stick with it, but I think we should be more open. We should have a process that brings that debate to a conclusion. Tonight I am going to the Mansion House dinner, as I believe the shadow Chancellor is too. I have sat at Mansion House dinners as shadow Chancellor and listened as the Governor of the Bank of England said something completely different from what the Chancellor of the Exchequer said on the same occasion. We have to resolve the debate, so we have to set up a process that resolves it, and I believe that an independent commission in which everyone can engage, including Members of the House, is the right approach.

[Malcolm Bruce (Gordon) (LD)]

I welcome my right hon. Friend’s approach. Does he acknowledge that it is not just the architecture of the regulation but its quality that has conspicuously failed? It may be understandable that the Labour party wants to defend its creation of the FSA, but do Labour Members not acknowledge that it actually failed? For many people, it too often protected the providers of services and not the consumers who were actually investing in them.

[Mr Osborne]

My right hon. Friend is absolutely right. The overall objective is to move away from a process of regulation that is simply about ticking boxes to one where more judgment is exercised and people start to ask those such as Sir Fred Goodwin, “What are you doing with your bank? Is it right that you are taking over ABN AMRO?”, instead of asking him whether he wants a knighthood.

[Chris Leslie (Nottingham East) (Lab/Co-op)]

Can the Chancellor explain who will be responsible under these reformed arrangements for the regulation of derivatives—financial instruments that are obviously sometimes very opaque and complex and could present a major risk to our financial system? Is it the Bank of England, the FSA or the Treasury?

[Mr Osborne]

The details of the institutional arrangements will be set out in a parliamentary statement tomorrow. As I said, it is right to allow the institutions involved to conduct their internal procedures, such as speaking to the court of the Bank. I know it is a completely novel idea not to bounce every institution in the country into the decisions the Government take, and actually to allow a proper process to take place, but I happen to believe that that is the right approach. The serious issue of the regulation of derivatives is the subject of intense international debate to try to create a better regulated system—or indeed to provide regulation where none existed—and to provide some central clearing operations for derivatives so that we can avoid some of the systemic risks that built up in recent years.

[Nadhim Zahawi (Stratford-on-Avon) (Con)]

Does the Chancellor agree that the previous Government’s idea of regulating our banks was to have a midnight cocktail party, where they twisted the arm of the chairman of Lloyds Banking Group to take over HBOS?

[Mr Osborne]

Indeed, my hon. Friend is right: certainly, if the accounts are true, that was the approach taken by the former Prime Minister. I am not sure whether he did so with the knowledge of the former Chancellor, but I guess that we have to wait for the flurry of memoirs to find out.

[Mary Creagh (Wakefield) (Lab)]

This weekend, there was an advertisement for a pay-day cheque service that had an interest rate at the bottom of the screen of 236%. Given that the Chancellor is about to make changes to the FSA’s consumer protection function, does he think that 236% interest is fair, and if it is not, what will he do about it?

[Mr Osborne]

The OFT will shortly publish a report on high-cost credit that will address some of these issues, and the hon. Lady is absolutely right to be concerned about them. One of the things that I hope will flow from the institutional arrangements that we are putting in place is a stronger voice for the consumer to ensure that particularly the most vulnerable people in our society are protected from exploitation.

[Claire Perry (Devizes) (Con)]

Will the Chancellor assure the House and the country that he will never display the sort of complacency so aptly demonstrated by the right hon. Member for Kirkcaldy and Cowdenbeath (Mr Brown), who said in 2007 that we were entering a golden age of prosperity in the City of London?

[Mr Osborne]

My hon. Friend is right. I was sitting in the Mansion House when the former Prime Minister, with great prophecy, announced that we were embarking in the summer of 2007 on a new golden age for the City of London. Unfortunately, as with everything else that was golden that the previous Prime Minister touched, that turned to lead.

[John Mann (Bassetlaw) (Lab)]

What systemic risks specifically created the collapse of Lehman Brothers, and how does the Chancellor intend to regulate the top 10 large investment banks and protect the British economy against such collapses?

[Mr Osborne]

The risks around Lehman Brothers are well documented.

[Mr Dennis Skinner (Bolsover) (Lab)]

What are they?

[Mr Osborne]

Suddenly, the hon. Gentleman is interested in the regulation of Lehman Brothers, but there we go.

The risks were pretty clear. No arrangements were in place for winding up a large and complex financial firm. That was one concern. No arrangement was in place that would allow a global firm to avoid dying nationally in the way that it did. It was heavily exposed to, for example, the derivatives markets and other things. That had not been spotted either by the British regulator or, of course, the American regulator, which was in the lead. We need to investigate precisely that kind of issue, not just here in Britain, but across the world. That is being done in the international councils on which we sit. But surely, whether with Lehman Brothers, the Royal Bank of Scotland, HBOS or Northern Rock, we must learn the lesson of what went wrong. Again, I find it breathtaking that, at the beginning of the Parliament, the Labour party has set itself against changing the system of regulation. [Hon. Members: “No we haven’t.”] Labour Members may say that, but that is exactly what the shadow Chancellor did about 53 minutes ago.

[Mr Chuka Umunna (Streatham) (Lab)]

My understanding is that the credit rating agencies are not subject to any proper UK regulation at the moment and that some action is being taken at EU level in that regard. Does the Chancellor see any place in the new arrangements for UK regulation of the credit rating agencies, which, of course, bear a large responsibility for what happened in the sub-prime crisis?

[Mr Osborne]

The hon. Gentleman is right to draw attention to the role of the credit rating agencies. Of course, all sorts of organisations and products received triple A ratings that they should never have received. That triple A wrapper basically made them immune to investigation by the firms that were buying those products. Certainly, we need to improve the regulation in the domestic sense—here in Britain—but that is also the subject of decision at a European level, and the la Rosière proposals on European supervisory agencies will consider in particular the role and regulation of credit rating agencies.

[Sajid Javid (Bromsgrove) (Con)]

Will my right hon. Friend commit to ensuring far greater scrutiny of EU regulation concerning financial matters than the previous Administration ever did, to make sure that it helps, rather than hinders, our banking system?

[Mr Osborne]

My hon. Friend makes a very good point that we must get the European regulation right, and the United Kingdom has a particular role as the location of most of the wholesale financial services in Europe. We therefore bring some insights to the table, which not all other members of the European Union can do. I am clear that we must do that. It will be under discussion at the European Council later this week and, I suspect, in pretty much every ECOFIN meeting for the rest of the year.

[Jonathan Edwards (Carmarthen East and Dinefwr) (PC)]

As a part of these reforms, will the Bank of England consider unemployment when determining interest rates?

[Mr Osborne]

The Bank of England has an inflation target, and I am not proposing to change the inflation-targeting regime.

[George Freeman (Mid Norfolk) (Con)]

Thank you, Mr Speaker, for calling me before I have made my maiden speech. For the record, this is not it. [Laughter.]

Given the gravity of the situation in which the last Government have left the finances, does my right hon. Friend the Chancellor agree that it behoves all parties to work together on this? Will he confirm whether he has received any positive contributions from Opposition Members, or whether, as it appears to Conservative Back Benchers, they are now reclined into abject criticism?

[Mr Osborne]

Well, it was a very good maiden intervention by my hon. Friend. I find it strange that the Labour party does not want to engage in this debate. One would have thought that the Labour party was interested in how banks will be regulated, in how we learn from the mistakes and what went wrong, and in the structure of banking in the future, but the shadow Chancellor has set it against that. However, individual Back-Bench Members of the Labour party will probably be more interested in this than their Front Benchers. Of course, by setting up an independent commission and, indeed, by having the debate in the Treasury Committee and on the Floor of the House, those contributions will be heard.

[Toby Perkins (Chesterfield) (Lab)]

The Chancellor says that he is keen to learn the lessons from the economic problems that happened. Is one of those lessons that he was wrong to say that the Government should have let Northern Rock fold?

--- Later in debate ---

[Mr Osborne]

What I said about Northern Rock was that we should have found a way to have a Bank of England-led reconstruction of that firm. The previous Government then introduced legislation in Parliament that would have allowed that to happen in the future. That is exactly how they proposed to handle future bank failures. [Interruption.] The shadow Chancellor says that we voted against it. We did not vote against the Banking Act 2009, by which he introduced the procedures for a Bank-led reconstruction. He continues to shake his head. I seem to remember that I went to his office in the autumn of 2008, pledged my support and delivered on that support.

[Nicky Morgan (Loughborough) (Con)]

As someone who worked with the FSA before I was elected and had to plough through many long consultation papers and then try to help business to understand them, may I perhaps suggest to the Chancellor that the people who are working at the FSA are not the right people to be transferred to the Bank of England and that, in fact, we need people who understand the risks and working in the City of London, rather than those who have just read textbooks about that, as many of the people in the FSA appear to be?

[Mr Osborne]

Of course, it is important that we have the right people doing regulation. The FSA made mistakes, and it has been very candid about them. Lots of institutions made mistakes in the build-up to the crisis—including, of course, the British Government. The people at the FSA have worked incredibly hard in the past couple of years, and I should put on record my tribute to the work that they have done. As for the institutional arrangements that we will put in place, there will be a parliamentary statement tomorrow.

[Steve McCabe (Birmingham, Selly Oak) (Lab)]

Will the changes that the Chancellor envisages have any impact on the bonus culture at the FSA? I understand that it cost us a record £22 million and reached 84% of its staff last year, at the very time when it was calling for curbs on bank bonuses.

[Mr Osborne]

I remember that at the time I, too, was surprised by the FSA’s decision. If the hon. Gentleman will allow me to say this, those questions are best asked once we have made clear what the new institutional arrangements are. Then we can get on to the pay and rations.

[Harriett Baldwin (West Worcestershire) (Con)]

Does the Chancellor agree that it is surprising to hear Opposition Members talk about Northern Rock as a shining example of micro-regulation, when the FSA’s own report into Northern Rock said that the ARROW process gave it far too low a ranking and that that such decisions would have been better taken in the home of the lender of last resort?

[Mr Osborne]

My hon. Friend makes a very good observation. Let me make a broader observation, if I may. She has enormous experience of the financial services. There are Members on the Opposition Benches with real experience as well, including the hon. Member for Leeds West (Rachel Reeves), who used to work in the Bank of England. I would like that experience to be brought to bear in the process over the next year. We have decided not to resolve the issues in the Treasury, in the Department for Business, Innovation and Skills and in No. 10 Downing street, as we could have done. We have decided to have an open commission to which all Members can contribute and with which they can all engage. I think that is a better way to make policy.

[Barry Gardiner (Brent North) (Lab)]

Has the Chancellor taken the opportunity to review the Official Report of the Committee stages of the Financial Services and Markets Act 2000 when the FSA was being set up? If so, does he recall that the constant cry from the Conservative Benches in those days was for lighter-touch regulation? Will he take the opportunity to say unequivocally to the City that, as far as his party is concerned, the era of lighter-touch regulation is over?

[Mr Osborne]

My right hon. Friend the Member for Hitchin and Harpenden (Mr Lilley) was clear about the risks of creating the tripartite system when he was the shadow Chancellor who opposed that legislation. When it comes to light-touch regulation, let me quote what the former Prime Minister, the right hon. Member for Kirkcaldy and Cowdenbeath, said in 2006:

“I will be honest with you, many who advised me, including not a few newspapers, favoured a regulatory crackdown. I believe that we were right not to go down that road”.

I am afraid that the regulatory approach taken by the Labour Government when they were in office completely failed, and we will learn the lessons of their mistakes.

[Guy Opperman (Hexham) (Con)]

Does the Chancellor agree that the Opposition, who sold the gold so wisely and then bought euros, prophesied a golden age and then brought the economy, like a ship, on to the rocks, are not qualified to give us financial advice and seem to have such a poor memory?

[Mr Osborne]

I agree with every word that my hon. Friend said.

[Jacob Rees-Mogg (North East Somerset) (Con)]

May I declare an interest, as I am regulated by the Financial Services Authority? Does the Chancellor agree that boom and bust is part of the human condition, we will never get away from it, and the best that regulation can do is ameliorate extremes, not stop boom and bust altogether?

[Mr Osborne]

I am not sure whether the Labour party in opposition will keep its promise to abolish boom and bust, but it proved pretty disastrous in government. All of us welcome the fact that my hon. Friend will no longer be regulated by the FSA, and instead will be regulated by the Whips Office.

[Jeremy Lefroy (Stafford) (Con)]

Despite some high-profile casualties, does my right hon. Friend recognise the importance of building societies and mutuals to the financial services sector? What steps does he propose to take to encourage that sector to increase?

[Mr Osborne]

My hon. Friend is right that building societies and mutuals have an important role to play in the future. We want to strengthen them and support those who want to create mutuals. We will set out the details of how we will do that in the next few weeks.

ECOFIN

George Osborne Excerpts

Tuesday 15th June 2010 Written Statements

[The Chancellor of the Exchequer (Mr George Osborne)]

The Economic and Financial Affairs Council was held in Luxembourg on 8 June 2010. The Financial Secretary to the Treasury represented the UK.

A-points

Council agreed legislative A-points on VAT administrative co-operation regulation, regulation on the quality of statistics, and the European Investment Bank (EIB) external lending mandate. Given that Parliament has not had the opportunity to clear these documents, the Government abstained on these items at ECOFIN and entered a statement to the minutes to that effect.

Convergence reports and enlargement of the euro-area

The Council took note of reports from the Commission and the European Central Bank on the fulfilment of economic and monetary union (EMU) convergence criteria by the nine non-euro area member states with an EMU derogation. It also noted a proposal for a Council decision aimed at enabling Estonia to adopt the euro as its currency on 1 January 2011, following positive signals that it has met the entry criteria. The final decision will be taken at the July ECOFIN.

Stability and Growth Pact

The Council adopted an opinion on an update by Cyprus of its stability programme. There were also discussions following announcements from Spain and Portugal of their fiscal consolidation measures. Ministers from several member states updated the Council on their domestic austerity measures. The Government outlined the savings package of £6.24 billion for financial year 2010-11 announced on 24 May.

Preparation of the 17 June European Council

a) Broad economic policy guidelines

Ministers approved a report to the European Council on the broad economic policy guidelines for Member States and the EU as a whole. The treaty on the functioning of the EU provides that member states are to regard their economic policies and promoting employment as matters of common concern and co-ordinate them within the Council. As these have not had a chance to complete scrutiny, the UK abstained, and the Government made clear they reserved their position on some aspects of the substance of the proposals. The guidelines will go for discussion at the 17 June European Council before returning to ECOFIN for formal adoption in July.

b) Europe 2020 Strategy

ECOFIN agreed conclusions on the Europe 2020 strategy to feed in to discussions at the European Council. The conclusions cover proposed headline targets for the strategy; the broad economic policy guidelines; national bottlenecks to growth; and enhanced economic policy co-ordination and timing. The Government will continue to encourage a focus on specific, meaningful steps the EU could take to promote growth.

c) Progress report on financial reform

ECOFIN discussed a progress report on financial reform to the European Council covering crisis management (including levies and funds), financial supervision, credit rating agencies, derivatives and financial exit strategies. The Government outlined their priorities for the reform of European regulation of financial services and the need to ensure international consistency and pursue non-discriminatory policies. The Council will now work with the Commission to take forward the ambitious programme it has proposed.

d) Fiscal exit strategies

The Council approved a report to the European Council on progress made in the development of an exit strategy for the unwinding of budgetary stimulus measures introduced in response to the economic crisis. The Government support the strategy, which is in line with announced plans for an additional £6.24 billion spending cuts in the UK.

e) Preparation for the G20 Summit

Ministers prepared an EU position for the June G20 summit in Toronto, where Presidents Van Rompuy and Barroso will represent the EU. The Government supported the agreed terms of reference, which reflect the agreements reached at the 5 June G20 finance ministerial in Korea. The final position will be adopted by the European Council.