Comprehensive Spending Review

Lord Higgins Excerpts

Monday 1st November 2010 Lords Chamber

[Lord Higgins]

My Lords, by a quite extraordinary coincidence I was about to raise that very matter in my opening remarks. Indeed, I was going to say how glad I was that my noble friend the Chief Whip did not say at the beginning of business that we should try to rise by 10 o’clock or that speeches should be curtailed accordingly. Particularly with the ever increasing size of the House, we will find more and more pressure to reduce speeches to a length at which, in a debate of this sort—of great importance and considerable complexity—it would not be possible for the House to fulfil its job of holding the Government to account as effectively as it should. It is very much a question of balance. I understand my noble friend’s point, but we should beware of excessive curtailment of the length of our speeches, as that may frustrate our very purpose. We are in fact barely half way through the list of speakers and are therefore likely to go rather late. However, I do not think that anyone has gone over about 10 minutes and many speeches have been of an extremely high quality. They have raised a number of questions, such as fairness and so on. I intend to concentrate on a rather different aspect.

As I said at the time of the Statement on the spending review, it is quite extraordinary that the Treasury officials and Ministers should have managed to carry out such a comprehensive review in the time that they took. It was desirable that they should do so and, overall, they have done a remarkably good job. There are some obvious omissions—for example, I simply do not understand why winter heating payments should not be means-tested—but, by and large, they got the balance pretty right.

The basic controversy raised before, through and after the election was summed up rather cleverly, as always, by the noble Lord, Lord Myners, who said that this was a question of scale and pace. He took the view that the scale was too large and the pace was too quick. I take the contrary view. Experience shows that it is extremely difficult to cut public expenditure quickly. It almost always takes much longer than people expect. The pace proposed by the Government is probably the minimum at which we ought to aim, because we will almost certainly undershoot it. That was a matter of great debate among all parties but, on the whole, the Government got the pace about right.

With scale, we are faced with a rather strange situation. Individual cuts are clearly a matter of great controversy and depend on many of the arguments that we have heard deployed this afternoon. However, the reality is that, even after all these cuts, public expenditure will go on rising, from £702 billion to £713 billion next year and to £724 billion and £740 billion in the years after that. With cuts, that is strange and therefore important, particularly given the interest that we have to pay, which has been shown to be going up from £43 billion now to £63 billion in 2014-15—a massive increase. I assume that the Treasury’s calculation has been done on the assumption that the rate of interest at which it is able to borrow remains the same. Perhaps my noble friend will confirm that.

My noble friend Lord Tugendhat raised big issues about the situation with the international financial markets. We are fortunate in having most of our borrowing spread over a lengthy period of time, but it would not take a large increase in the average rate at which we could borrow—particularly at the margin—for that £63 billion by 2014 to look much bigger. We are making the most optimistic assumptions that we can. Worldwide record low rates of interest are being used. That may be very dangerous for the future.

The other problem is aggregate demand. I raised this at the time of the relevant Statement and my noble friend referred to the forecast of the Office for Budget Responsibility, which said that, on aggregate, demand in the economy would go up. Again, that is strange against the background of a programme of what the Opposition would call “savage cuts”. What will happen to aggregate demand? Is it my noble friend’s view that the situation will get worse or better? There was much joy in the City over the past few days at the fact that the quarterly rate of growth was 0.8 per cent. However, if I understand it correctly, that was before the cuts. They have not yet had any perceptible effect. I would have thought that the level of aggregate demand would go down. These are extremely difficult calculations. For example, what is the effect on aggregate demand of large numbers of civil servants becoming unemployed and their spending power being correspondingly reduced? It would be helpful to know the views of the Treasury and the Office for Budget Responsibility on what will happen to aggregate demand.

If aggregate demand is going to decrease, the question whether there should be further stimulus arises. My final point, which I have raised previously, is on quantitative easing. The noble Lord, Lord Myners, seemed to be recanting somewhat in his opening speech. The £200 billion of quantitative easing that he introduced was widely publicised as an increase in the money supply. In reality, following that quantitative easing, the money supply went down. That fact has not registered. We will therefore need to assess carefully what the effect of further quantitative easing would be on the level of demand. Against that background, we have the problem of not knowing what has happened to the country’s productive potential as a result of the recession and crisis and whether it is much less than it was at the beginning of that period.

These are complex issues. However, so far, the spending review has not been placed in the overall context of the management of the economy, which is now significantly divided between the Treasury and the Bank of England. We need a much more detailed analysis presented to us, by either the Government or the Office for Budget Responsibility, if we are to assess the true economic impact of this spending review over the next four years.