Government Spending Review 2013

Lord Higgins Excerpts

Wednesday 3rd July 2013 Grand Committee

[Lord Higgins]

My Lords, it is always a great pleasure to follow my noble friend Lady Noakes, and I very much agree with her general theme and her closing remarks.

As I am going to say quite hard things in the context of what my noble friend said, let me stress that I would not for one moment underestimate the difficulty of reducing a deficit. I began that a very long time ago as a new Treasury Minister. We were an incoming Government determined to cut the deficit and, indeed, public expenditure and the size of the public sector. I was sent to see the new Secretary of State for Education, one Margaret Thatcher, who was basically in favour of cutting back the size of the public sector but not her department. I arrived with a long list of cuts, including eliminating the Open University. In the end, after a lot of haggling, I said, “Margaret, we’ll give you a deal. You can keep the Open University and make all the other cuts, or you can make all the other cuts and keep the Open University”. To my astonishment, she said, “I’ll keep the Open University”, so I got my cuts and we and the country got the Open University, which was probably the right decision. The reason I stress this point is because we have to be a great deal tougher than we are being.

I am worried by the constant repetition—it is once again in the Chancellor’s speech—that we have cut the deficit by one third. That means that we are continuing to borrow at two-thirds of the appalling rate at which the previous Government were borrowing. I hope that we can get rid of that expression. It is interesting that it has not changed since this public expenditure round announcement. We are still saying the same mantra. I hope that we can get rid of it.

My concern is that in the light of that statement we can be complacent. We simply must not be complacent. There is nothing more important for the future of this country than getting the deficit down. I am a little worried about some of the presentational side of things. The public sector finance statistics have the heading, “Public sector net borrowing”. It ought to be, “Net extra borrowing”. We constantly hear figures from the Government that overlook the word “extra” when it ought to be there. There is also a very curious quirk in the figures. In the column for public sector debt, the figure is £1,103.6 billion in 2011, but in 2012 there appears to be a miraculous reduction. The statisticians evidently felt that they could not forecast the figure to the last decimal place so they moved the whole figure one place to the right. If you look down the column there suddenly appears to be an enormous reduction. Clearly they could not forecast it, but it is 10:1 that they would have got the last decimal point right if they tried. I hope that we can improve the statistics and that the Minister will bear that in mind.

In his speech, the Chancellor of the Exchequer made two important points. First, he said:

“We act on behalf of everyone who knows that Britain has got to live within its means”,

but he did not go on to say, “but we are still not doing so”. We are nowhere near doing so. This is a matter of grave concern. He went on to say:

“we have always understood that the greatest unfairness was loading debts onto our children”,

from one generation to another. We are making a massive intergenerational change, and we are not dealing with it as much as we should.

As for the overall figures, there is a problem with cutting. The reality is that the previous Labour Government under Gordon Brown raised a series of benefits and other concessions which people now expect. However, he did not have the money to pay for them and neither do we. It is immensely difficult to try to claw back the benefits and increases in public expenditure that he introduced.

We are faced with cuts of £11.5 billion but are told that there is an increase in spending of, I think, £10.5 billion on the high-speed rail scheme, so we are only about £1 billion better off. I may have misunderstood the figures but that is my understanding of the position. Therefore, we are making very little progress. There is clearly a distinction between expenditure on investment and cuts, but we are not doing as much as we should in this regard.

In addition, extra one-off items are included in the cuts to the Post Office pension fund. We have the assets but do not make explicit allowance for the liabilities, so there again we have a problem. The same is true of the arrangements for transferring balances from the Bank of England with regard to quantitative easing. Neither of those provisions is likely to be repeated, at least not on the same scale. We have also gained £5 billion in efficiency savings, much of which relates to public sector pay. I certainly welcome the provisions in the Statement on not awarding progressive pay increases simply on the basis of the length of someone’s employment.

I am also concerned about debt interest. The Chancellor laid great stress on the fact that we are paying £6 billion a year less to finance the debt. That is obviously a great advantage, but it rests on the proposition that interest rates will stay where they are. They might stay where they are for longer than we would like. We have only to look at the American experience to see that trying to unwind quantitative easing produces very emotional reactions in the markets. Therefore, low interest rates might be maintained, perhaps wrongly, for longer than we expect, but sooner or later they will have to go up. As for the public sector finance statistics, what assumption is made about interest rates when calculating the debt interest payments, which fluctuate widely? It would be helpful to know that. As I say, I do not underestimate for one minute how difficult this exercise is, but we need to renew our determination to reduce the deficit by substantially more than we are doing in the review.

--- Later in debate ---

[Lord Deighton]

My Lords, first, I thank all noble Lords for their insights, ideas and challenge. It has been a most fascinating exchange and I congratulate the noble Lord, Lord Davies, on holding up the Opposition’s end there. I will address his question about morality straightaway. To me, this is a very simple issue: unless we are able to create a state that can actually afford to sustain itself, those who are most vulnerable will be the most exposed victims of the fall-out from that kind of financial crash. We have to get our ability to afford a welfare state in the right state so that we can sustain it. That is the way that we protect the vulnerable in the long run.

The Chancellor was back with another spending round because we had not defined the spending plans for 2015-16. We took the opportunity to lay out the investment programme through to 2021 because, as I explained in my earlier remarks, we think that it is the right way to provide an environment in which people can plan investment correctly. On the general question of whether anything is really being done about growth for the future, the point is precisely to begin to deliver a programme from which future Governments will benefit. They can quibble over who was responsible for the earlier decisions. These kinds of investments have very long lead times and our planning is trying to break the link between the political and economic cycles. There was some misunderstanding there, in that I do not think anybody was trying to claim more; we were just trying to claim that there is a long-term plan. Public sector gross investment in this decade, 2010 through to 2020, is slightly higher on average than in the previous decade, if you smooth out the peaks and the troughs and take the average.

In terms of delivery today, the noble Lord, Lord Davies, is correct that projects from 2021 and onwards, or in five years’ time, have an impact later. However, the projects we are undertaking now are having an impact. Crossrail is being delivered now—the money in the spending round is for the feasibility study for Crossrail 2. Crossrail will be open in 2018-19 and we are spending something like £15 billion on it. It is the biggest urban infrastructure project in Europe and is going on now, right under our feet. That a very good example of delivery. Similarly, we have upgraded 150 stations, completed more than 30 road projects, opened more than 80 new free schools, delivered more than 84,000 affordable homes and done an enormous amount in rolling out 4G mobile services. There is a significant amount of delivery going on now and we are trying to plan for future delivery. We are trying to accelerate it and make it better value all the way through. I accept the point of my noble friend Lady Noakes that it is not necessarily a good thing just because it is an infrastructure project. We have to evaluate them all, which is what we did in the plan through to 2020. We re-evaluated them all on a zero-budget basis and approved the ones that we thought were most powerful.

My noble friends Lady Kramer and Lord Northbrook both asked about the welfare cap. It will apply to welfare, of course, but does not apply to state pensions. As my noble friend Lady Kramer implied, it will work off the OBR forecast. If the spending is forecast to breach the cap, the Government will have to explain what action has been taken. We will put a buffer in place to ensure that any policy actions are not triggered by small changes. That is how that one works. For the information of the noble Lord, Lord Northbrook, the areas being capped are all in social security: housing benefit, disability benefits, pensioner benefits and tax credits.

The noble Baroness, Lady Kramer, also asked whether we would be focusing on the quick wins in infrastructure and leaving the longer-term strategic projects because they have a longer lead time. It is the portfolio that works; I addressed this earlier. Lots of delivery is going on at the moment and we are trying to put a consistent long-term plan in place. We will, of course, look at local funding of infrastructure projects, of which TIF is one example. Another example is the single local growth fund. The European funds we are allocated will be put into the single pot and be part of that as we devolve responsibility.

I was delighted that the discussion got around to our international competitiveness—I thank the noble Lord, Lord Risby, for giving us the detailed example of what is going on with Algeria. I have spent a lot of my own time dealing with inward investment. This country has a tremendous advantage. Overseas investors really want to invest here. They trust us. They believe in our rule of law. There are many things they like about the opportunities we create here. We are working very hard to exploit this to the country’s fullest advantage. On export promotion we are continuing to fund UKTI. It is in the process of transforming our approach to trade and its support to a very focused business approach.

We had a very powerful discussion about our fiscal position and whether we are moving quickly enough to address what I accept are still very high levels of borrowing. It is absolutely critical that people understand that the deficit each year is extra borrowing—it is adding to the stock of borrowing. I do not think that that is generally perceived or understood more widely. The implications of understanding that properly should focus attention on addressing the deficit as fast as possible.

In defence of the pace at which the Government are addressing the deficit, we are still focused on reaching a balance by 2017-18. We are on that path. There is a plan in place. I am very open to challenges about the paradigm shift, as my noble friend Lady Noakes suggested, that we could be more radical in some of the ways we deliver public services and in some of the ways we have structured the Civil Service. That is a challenge we should set for the next tranche of cost improvement. Without that it becomes very difficult to continue—again, in my noble friend’s words—to “salami-slice”.

My noble friend Lord Shipley asked about whole-place budgets. Community budget pilots have demonstrated that it is possible to do much more by joining up local authorities; I do not think there is any question about that. That is why we talked about the £3.8 billion social care budget that we have set aside. We have also set up a £200 million pot to accelerate joint working among local authorities. Whether we can release the borrowing cap on HRAs is another matter. If we were to do that it would add another £7 billion to public sector borrowing every year. Most of the schemes which creatively try to allow more borrowing at the local level are captured and increase public sector borrowing. That is always the constraint that we are trying to manage.

My noble friend Lord Northbrook asked for a response on public pension cuts. My noble friend Lord Newby and I will certainly get back to him on that.

The noble Lord, Lord Empey, asked why UK pension funds are not investing in UK infrastructure. He is correct to say that that industry is highly fragmented compared to its counterparts overseas. That is why we have worked with the industry to consolidate funds into a pension infrastructure platform of £1 billion. Ten funds have come together so that they can gain economies of scale, develop the expertise to assess those credits and provide us with the scale to begin to get them into that business in the same way that, for example, the Canadians have so effectively prosecuted over the past few years.

I could not agree more with the noble Lord, Lord Haskins, that we need to rationalise the number of funding streams going into skills training. That is why we have set up the single local growth fund so that we can begin to provide that kind of rationalisation.

The noble Lord, Lord Empey, asked about VAT and how it is applied to building. I will get back to him in writing on that.

I thank noble Lords for a very stimulating debate.

[Lord Higgins]

What is the assumption on interest rates in calculating debt interest payments?

[Lord Deighton]

I thank my noble friend Lord Higgins for reminding me of that question; I was intending to deal with it directly. There is a ready reckoner in the OBR. Our debt is fixed-rate, so the effect of interest rates going up increases over time as debt matures and as we borrow more. For example, if we had a 1% increase in gilts rates, by 2015-16 that would be costing us just over £4 billion more per annum in debt service costs. That gives a sense of the sensitivity. By 2017-18, it would more or less double to just over £8 billion.

[Lord Higgins]

Is that the assumption that is being made?

[Lord Deighton]

That is the impact, but those are not the assumptions. We must consider the impacts, so the assumption is on a stable basis, but that is the sensitivity to change. That is how we measure it.