Comprehensive Spending Review

Lord Eatwell Excerpts

Monday 1st November 2010 Lords Chamber

[Lord Eatwell]

My Lords, this has been a remarkable debate. There have been some very fine speeches, mostly from these Benches, but also from the Benches opposite. We heard three remarkable maiden speeches from the noble Lord, Lord Allan of Hallam, my noble friend Lady Healy of Primrose Hill and my dear and noble friend Lady Nye.

Two questions have been central to the whole debate. The first is whether this policy is necessary and the second is whether it will work. Is it necessary? That depends on an assessment of the economic state of the nation and, in particular, the Government’s inheritance from the previous Labour Government. Let us reflect on that inheritance for a moment. In 2007, before the recession struck, the economy was growing steadily at a little under 2.5 per cent a year and maintaining the continuing steady growth that characterised Labour’s decade in office. Interest rates were lower than in the US and the cyclically adjusted fiscal deficit—as chart C6 of the Government’s Budget Report shows—was less than a quarter of 1 per cent of GDP. Crucially, the ratio of public debt to GDP was, at 36 per cent, the lowest in the G7 and well below the 42 per cent that Labour had inherited from the previous Conservative Government. This was a time, as many noble Lords have reminded the Minister, when the main plank of the Conservative Party’s economic policy was a commitment to match Labour’s spending plans.

In response to the recession, the Labour Government acted decisively, devising the much copied model for rescuing the banks, cutting taxes and accelerating expenditure, particularly on construction. There were two main results. First, in the very depths of the recession, which, given the size of our financial services industry, hit Britain particularly badly, unemployment was the lowest in the G7 countries other than Japan. Secondly, as a result of the anti-recession policies, the deficit grew rapidly, faster than in any other country, although, because we started from such a strong point, even today it is still the lowest of the large G7 economies.

The strength of the British economy going into the recession meant that even in the face of a severe fall in tax revenues the Labour Government could afford to stabilise the financial sector to save jobs and to save businesses. When the Minister sums up, perhaps he will say what he would have done differently. Would he have spent less and taxed more? How much deeper would he have wanted the recession to be?

In his Budget of March this year, my right honourable friend Alistair Darling put in place a plan for growth and deficit reduction. The OBR Pre-Budget Report states that,

“cyclically adjusted borrowing falls from 8.8 per cent of GDP in 2009-10 to 2.8 per cent in 2014-15”,

and in that fiscal year public sector debt reaches 74.4 per cent of GDP—still lower than any other major G7 country today.

The noble Lord, Lord Sassoon—he was echoed by the noble Lord, Lord Newby—is fond of telling your Lordships’ House that Labour has no recovery plan, yet in the CSR Statement Mr Osborne cited the impact of Labour’s plans and even costed them. He said:

“I have examined this proposal carefully and I have consulted the published documents of my predecessor”.—[Official Report, Commons, 26/10/10; col. 965.]

Was the Chancellor making it up? No, he was not. It is the noble Lord who has been making up this fairy tale.

What has happened as a result of my right honourable friend’s March Budget? Everything has turned out better than expected. Debt is lower than predicted and growth is higher. This Government’s inheritance was an economy on the path to recovery. This year to date, as a result of Labour policies, the economy is growing at an annual rate of 3.25 per cent and is set to beat the target of halving the deficit in four years.

What was the new Government’s balanced assessment of their inheritance? The new Ministers declared Britain “bankrupt” and “shattered”—that was a Liberal Democrat, by the way—and even, as a Tory Treasury Minister said, a “basket case”. This hysterical nonsense became the considered foundation of economic policy. The party opposite seems to have entered the most dangerous realm of all—they believe their own propaganda. The hysteria has produced the policy before us today. At its core is the attempt to eliminate the deficit in four years, even at the immediate cost of lower growth and higher unemployment—hence 25 per cent cuts in total expenditure, heavily weighted towards cuts in welfare. Yet by 2014, the Budget Report states that there is a 50 per cent chance that growth will be at the level that Labour’s plans would have achieved. How is that possible with the size of these cuts?

The predicted performance, the very core of the Government’s policy, depends crucially on a fast and sustained recovery by the private sector to fill the gap left by the fall in public sector spending, and not of course on growth in private consumption; that is cut by higher taxes and unemployment. Instead, private sector investment and house building are forecast to contribute more to the growth of the economy than they did even in the good times before the recession.

Will it work? A little history may help us. As we all know, Tories love cutting the public sector. That is what they came into politics to do and that is what the noble and learned Lord, Lord Howe, did in his Budget of 1981, as the noble Lord, Lord Stewartby, reminded us. As he also reminded us, in response, 364 economists issued a statement that,

“present policies will deepen the depression”—

and—

“erode the industrial base of our economy”.

That statement has been much derided because, as we all know, the economy grew after 1981. However, what is not noticed is that “present policies” were not continued; they were radically altered. The next five years witnessed the most dramatic change in monetary policy since the war, resulting in an extraordinary explosion of consumer borrowing. Consumer demand filled the gap left by government cuts.

Can history repeat itself? It cannot in the liberalisation of credit—that has been done; nor in lower interest rates—they cannot go any lower; nor, of course, in growing consumer demand. As my noble friend Lord Myners pointed out, there is only one monetary policy weapon left: quantitative easing. I have severe reservations about the strategy of maintaining demand by quantitative easing. It may keep interest rates down at the short end, but the lack of long-term bonds is seriously increasing the riskiness of insurance companies and pension funds. It may mean that there is more cash in corporate hands, but will they spend it on investment when expectations of growing demand are so depressed? Is quantitative easing simply pushing on a string? In truth, no one knows.

The other leg of the Government’s policy is their claim to have increased confidence. Confidence in the commitment to cuts, yes; confidence in the loss of jobs, yes. I know that the noble Lord is fond of fairytales but will the confidence fairy really wave her magic wand over a growing Britain? In truth, no one knows. That is why this policy is a huge gamble. For the sake of Britain we pray that it works, but there must be a high probability that it will not; as Mr Osborne says, there is no plan B.

We have the answers to our questions. Is the misery and destruction of this policy necessary? No, it is not; Labour had set Britain on a growth path to recovery. Will it work? No one knows, least of all the party opposite. What we do know is that vital political and economic debate in this country is debased by the Government’s hysterical fantasies of bankruptcy and financial collapse and by their failure to recognise the strength of the policies put in place by Alistair Darling. Labour dealt with the recession and laid the foundations for recovery. It is the responsibility of this Government not to squander that inheritance.