Spending Round 2019

Lord Howell of Guildford Excerpts

Wednesday 25th September 2019 Lords Chamber

[Lord Howell of Guildford (Con)]

My Lords, I listened to the noble Lord, Lord Davies of Stamford, with a certain amount agreement, which is, frankly, extremely unusual. But there it is—in the extraordinary situation we find ourselves in, many new alliances are formed. A certain madness seems to have gripped the discussion on public expenditure in recent years, and aspects of this are what I want to talk about. My noble friend Lord Horam confessed that he had been an economist; I confess that I am an economist apostate. I was in the Treasury as an economist, and since then I have become more and more convinced that modern, liberal economics seriously distorts the way the world works, seriously misguides our public policy and seriously undermines a great many of the developments that good governance requires for a modern society in the digital age. In fact, I think liberal economics has not at all come to terms with the total transformation of the internet and digital age, leading to much grief and misunderstanding.

When it comes to public expenditure, we are treated by analysts and the media to a sort of Punch and Judy pantomime show between polarised extremes. Either public spending is depicted by one side as a mass of ruthless cuts, making austerity a dirty word—that is what it has become in the language of both political debate and outside as well—or, from the other pole, as a sea of extravagant waste of taxpayers’ money, driving us all ever deeper into debt and so on. In fact, in this digital age, a rough practical balance is asserting itself throughout the world’s economies between obvious and growing public spending needs and the capacities of the private sector and private finance on the market with a good deal of co-operation between the two.

Much of our political debate is manufactured—it is the way it comes out with party politics as we have played it in recent years—but it has very little influence on what is really happening in the trend of public expenditure. These deeper forces all around the world bring about a sort of figure for total public spending—as a proportion of all spending, investment and GDP—that hovers between a percentage in the mid-30s and the high 40s. Although, of course, it is always with upward pressure and with endless political promises, which all politicians and Governments make, to spend on favourite causes and lobbies, many of them highly deserving—they come up all the time. It depends on what gets included in definitions of public spending, what is deemed off budget and what is simply ignored.

Again, we have to realise that, in the world of economic statistics, there is chaos, because all the traditional views are being undermined. The very concept of GDP and all the aggregates that were invented by Simon Kuznets in the 1930s—taken up by Lord Keynes—which were very relevant to the pre-digital economy, do not fit into the arrangements and patterns of business, economics and wealth creation that we have today. Even the Asian miracle economies, where all the growth will be in the next 10 to 20 years—including even the autocracies—find that the state, markets, public spending and private enterprise cannot do without each other when it comes to finance, resources and national objectives. Even China, with its swollen state-ownership sector—wildly inefficient in many areas—finds that it has to grope all the time for a new public-private balance with its belt-and-road initiative and in its tax policies.

My advice to Chancellors, past and present—not listened to, of course, in any way, except perhaps by Ian Macleod, but that was a long time ago—is not to talk about austerity or ending austerity, but to talk much more about balance and constant control, which is always necessary on all public spending, whether it is growing or shrinking. All public spending programmes always grow, unless a hand is kept on them. All public spending has to have a very tight hand kept on it, so the idea that you can stand back and say, “Austerity is over, now we can let everything rip”, is a recipe for disaster. It is a serious imbalance in how the economy and society work.

Back in the 1970s, some of your Lordships will recall—I am afraid noble Lords would have to be rather old because I am talking about 50 years ago—that we sought new controls on the then hopelessly swollen and inefficient public sector, inherited by the Conservatives in 1970 and again in 1979, by means of what we called programmed budgeting, an approach pinched from the Americans. The idea was to focus much more on results and actual outputs of public policies, and on questioning whether the right systems were in place to deliver, rather than simply on whether they should be state or private systems, or whether certain estimates had been exceeded. Indeed, we had no OBR in those days and our forecasts were very primitive. In some ways, there was a questioning of whether a particular public expenditure programme was the right one to deliver the results required for the consumer and the public effectively. That was the genesis of privatisation; it was rapidly concluded that many of these operations should not only be contracted out but put into the private sector.

The Treasury did not like that at all at the time. The Treasury was and is very good and very sharp at cutting existing spending programmes, or occasionally, as now with the spending round, letting its budgets rise. It may be very good about fiscal rules—though whether they are being revised or not, I am not so sure—and with deficit headroom, which does or does not exist. However, even 50 years ago—I fear that this applies still today—it was much less good at ensuring and delivering quality government programmes and seeing the best and most efficient ways of meeting vital social and infrastructure needs, which are always changing and evolving, and where constant innovation is required. Just cutting—or not cutting—is fine, but what is really required in the handling of all public expenditure programmes is constant innovation, to see that they are delivering what we want. It is not just a question of more schools, as in the spending round being put forward now, but of having really well built and efficiently designed schools, which match modern ideas of efficient education for the technical society that we are going to live in. It is not just a question of more prisons, though heaven knows we have enough prisoners, but of better prisons, run in entirely new and better ways. It is not just a question of having more police, but entirely new police methods, which are needed to combat the kind of crime that is developing in our country so rapidly, particularly knife crime on the streets.

Hearing the distinguished former Foreign Office Permanent Secretary, the noble Lord, Lord Ricketts, prompts me to make a further spending round point. The whole balance of our international resource allocation has gone awry; it is completely dotty. The Foreign and Commonwealth Office is meant to be the spearhead of our international standing, prosperity and security, and needs to be. Yet while the two other great international departments—DfID and the MoD—have budgets respectively of £14 billion-plus and £37 billion-plus, the FCO budget is £2.3 billion at the most, and the core number of discretionary expenditures in the FCO is much less. It makes no sense to have our foreign policy, our foreign reach and our security for the future run on a shoestring. I know that there is £90 million more expenditure in the current spending round, but that is small compared with what we really need. We should bite the bullet and re-merge the whole DfID operation and the FCO into a really powerful and punchy overseas department, which would then have a budget of £16 billion and far more impact round the world. It would be far better for world development as well. That could build up our role in the giant worldwide Commonwealth network, and in all the other new Asian networks with which we have to engage, in a way that reflected our changed national direction and purpose, as it is not being reflected now. I do not believe that our development aims would be in any way compromised. The whole concept of development aid is anyway patronising and out of date, and needs rethinking. So, in this transformed global system, I look forward to a much more balanced discussion of the role of public spending in our growth and direction, with less ideology and more practicality.

I had further words to say on the public expenditure implications of the Brexit drama. Like the most reverend Primate, I am absolutely bewildered about why we are discussing no deal when no deal is now illegal. What we should be discussing is the withdrawal agreement, which I think is attainable. The key to that is of course Ireland, which my right honourable friend the Prime Minister is working on—how much that will cost and what the implications will be. I believe they will be reasonably limited, but there is the question of the £39 billion transfer and at what point it has to go over. We will see how all this works out. I know that all the experts are saying that there will not be an agreement with Ireland. I believe that there will and that they will be wrong, but we will have to see what happens in a few weeks’ time.

When it comes to public spending now, I say open wide the crystal fountain, by all means. Just make sure that the fountain works well and delivers top-quality flow in places and in ways that people really want it. We should look for balance between public finance and private enterprise investment, harnessing both in delivering quality government with public infrastructure and social care programmes, which will always expand through need and demand. Above all, in the digital age now upon us, we need to remember that the best levels of public spending and the best programmes to meet people’s real need will be decided by technology advancing ever more rapidly every day—not by politics, yesterday’s tired ideologies or economic and political theories.