Comprehensive Spending Review

Lord Bilimoria Excerpts

Monday 1st November 2010 Lords Chamber

[Lord Bilimoria]

My Lords, I have always believed that a wise person learns from other people’s mistakes, a sensible person learns from his previous mistakes, and a fool makes the same mistake over again. The question before us is: is the Government’s spending review wise, sensible or foolish?

As regards past mistakes, it is widely held that it was Franklin D Roosevelt’s failure to provide prolonged stimulus during the great depression, combined with fiscal tightening, that prolonged the slump and was responsible for the double dip during that period. On the other hand, the Canadian and Swedish examples of making severe cuts in the 1990s that led to their economic recovery are cited as examples of why a country in our position should take similar measures by having our own “bloodbath budget”. Well, we have had our “Axe Wednesday”.

However, the world was very different in the 1990s. Canada was able to make those cuts, first, because the rest of the world was emerging into a prolonged boom time—a sharp contrast to today—and, secondly, because Canada is a country with enormous natural resources whose exports have accounted for 45 per cent of GDP. Sweden had, 50 years ago, the same level of public sector expenditure as a percentage of GDP as the United States—at 30 per cent of GDP—but, by the 1990s, the figure was well over 60 per cent. However, when those countries began wielding their axe to public expenditure, they were surrounded by a benign and increasingly booming global economy. Furthermore, both countries had the flexibility to use fiscal and monetary measures to compensate for huge public spending cuts.

Just look at the world situation over the past four years. In 2006, the sub-prime crisis started to unfold. In 2007, there was the credit crunch. In 2008-09, there was the great recession. By 2010, we had the sovereign debt crisis. In the same year, we now have the potential global currency crisis, increasing economic protectionism and beggar-thy-neighbour policies around the world. That is a classic domino effect, with one thing leading to another. What is next?

Here in Britain, there is no question that the previous Government squandered away an economy in excellent shape that was handed to them on a silver platter in 1997. They used that period of prolonged growth and low interest rates to take public expenditure to well over 50 per cent of GDP, from the 40 per cent level that it had historically been. I am delighted to see that the comprehensive spending review plans to bring public expenditure as a percentage of GDP back to 40 per cent by 2014. I would appreciate hearing the Minister confirm that that is the Government’s target.

Today, we have the non-dom levy and the 50p high rate of tax, both of which are driving people away and deterring the best talent from coming into this country. On top of that, the current Government have introduced a madcap immigration cap. In addition, the forthcoming VAT increase will hit every man, woman and child in this country. Those things combined with interest rates of 0.5 per cent—how low can we go?—mean that as a country we have boxed ourselves into a corner, with no room for manoeuvre. We have high levels of unemployment, especially youth unemployment; our housing market has come to a standstill; the spectre of inflation looms; our people have low levels of confidence and high levels of uncertainty; and our banks are not lending. We have to prevent not just the danger that we bump along the bottom for the next few years but the risk that we become another Japan—in the doldrums for two decades.

Our only hope is to play to our strengths and to address our weaknesses. Our weaknesses include nearly £200 billion of welfare and pensions expenditure. I am delighted to see the measures in the CSR to deal with this head on. As much as we all appreciate and love the NHS, there are still tens of billions of pounds of efficiency savings to be made.

With 500,000 public sector jobs predicted to be lost over the coming years, are the Government doing enough to encourage the private sector to provide those jobs? Are they doing enough to promote growth in the economy today? I welcome the £1.5 billion fund and the £200 million enterprise fund to help businesses in this country, but by comparison with the United States, which has created a $30 billion loan fund along with $12 billion in tax breaks specifically for small business, we seem to be falling very far short of the mark. The proposed measures are even more piffling when compared to the hundreds of billions of pounds spent on bailing out the banks, given that it is the small and medium-sized enterprises that will lead the charge to recovery in this country.

Our strengths include our higher education sector, but we are cutting that by 40 per cent over the next four years to try to save £3 billion. Our higher education is the cornerstone of our competitiveness and is one of our biggest export earners through the foreign students that we attract. Surely such a cut is foolishness.

We have had a hastily rushed-through defence review when our brave troops are making the ultimate sacrifice in Afghanistan—a war that is almost 10 years old—and despite the uncertainties that the world throws our way all the time. We did not predict the Falklands war, but it happened. We did not predict 9/11, but it happened. We do not know what is going to happen next, so to skimp on our defence at this time is foolishness.

Our creative industries, our design capabilities and our tourism are strengths, yet we are planning cuts in those. That is foolishness indeed.

I am president of the UK India Business Council, which is funded by UK Trade & Investment, which in turn is funded by the Foreign and Commonwealth Office and the Department for Business, Innovation and Skills. Surely to cut funding that helps UK firms to go global is folly. The Indian economy is booming even in these times. The Goldman Sachs BRICs report predicts that China and India will become the world’s two largest economies by 2050, yet Gerard Lyons, who is the chief economist of Standard Chartered Bank, told us yesterday that Britain exported more to Ireland in 2009 than it did to Brazil, India, Russia, China and South Africa combined—countries that have a population of 3 billion. Instead of encouraging the spirit of global enterprise, we make cuts. “Penny wise and pound foolish” seems to be the mantra of the comprehensive spending review.

The amounts involved in those cuts to our areas of strength are tiny compared to the big-ticket items in our areas of weakness, but the effect of destroying our abilities and competitiveness is potentially catastrophic. We are shooting ourselves in the foot. Our Nobel Prize-winning economist Christopher Pissarides has said:

“Unemployment is high and job vacancies few. By taking the action that the chancellor outlined in his statement, this situation might well become worse”.

No one denies that cuts need to be made, but the timing, severity, pace and priorities of the cuts and their indiscriminate nature are a cause for worry not just here but in the United States and all over the world.

We are still in the eye of the storm and the global uncertainties continue to whirl around us. Our only chance of getting through depends on our strengths. I implore the Government not to hamper this country’s great and special strengths. Help us unleash our strengths and play to them. Then, and only then, will we get through this nightmare and come out stronger than ever.