Comprehensive Spending Review

Lord Knight of Weymouth Excerpts

Monday 1st November 2010 Lords Chamber

[Lord Knight of Weymouth]

My Lords, it is a great privilege to follow that speech by the noble Baroness, Lady Campbell, and I look forward to the Minister’s response. I, too, am looking forward to the maiden speeches from the noble Lord, Lord Allan, and my noble friends Lady Healy and Lady Nye.

I served on the National Economic Council for the last year of the previous Government, and I noted what the Chancellor said, which was repeated by the Minister in his opening remarks, that the Government,

“faced the worst economic inheritance in modern history”,

and that the country was on,

“the brink of bankruptcy”.—[Official Report, Commons, 20/10/10; col. 965.]

This was an inheritance of a growing economy, very low interest rates, low inflation and falling unemployment, but with a growing deficit. It is important to distinguish deficit from debt. Clearly, a rising year-on-year deficit adds to debt, but it is in the context of the overall debt-to-income ratio of the nation. As we heard from my noble friend Lord Myners, in 1997 that was 42.5 per cent. By fixing the roof while the sun shone, we got that down to 36.5 per cent in 2007-08 when the global financial crisis hit. At that point, we had the second lowest debt-to-income ratio in the G7 after Canada. That meant that when the crisis hit—when, as we heard from the noble Baroness, Lady Kennedy, the Conservative Opposition were pledging to match our spending and wanted more, not less, banking deregulation—we had the room to borrow to make up for the collapse in tax revenues that is at the root of the deficit.

With London as the global centre for finance we were especially hard hit and the deficit is very high as a result, but it is important to remember that tackling the deficit is as much or more about increasing revenue through growth than it is about cutting public spending. We borrowed to buy bank shares, assets that can be sold in time; we borrowed to invest in housing to keep people in construction employment and in their homes; we borrowed to invest in jobs and defeated all expectations of a year ago that youth unemployment would exceed 1 million and general unemployment would exceed 3 million. The fiscal stimulus worked and still left room to continue to borrow if further investment in growth were needed, alongside necessary reductions in spending.

There is also room for less haste, with fewer mistakes and fewer contradictions along the way. We do not have to have the fiasco of the implementation of the child benefit cuts that have been described by experts as “unworkable”. We could buy time to iron out contradictions. For example, today we hear that the noble Lord, Lord Young, is to address the Prime Minister’s concerns about,

“the shocking way in which small and medium sized firms are locked out of procurement opportunities by central and local government”.

How does this square with the work programme procurement, mentioned by the Minister in his opening remarks, which is an essential plank in the Government’s economic strategy and is effectively closed to any but the very largest contractors?

We also have time to get the phasing right. I support the principles behind the work programme. We were developing the pilots to test the risks behind this idea as we left office. How do the Government think that a programme that pays by results of sustained job outcomes will work if there are no jobs in the labour market? Should we not wait until private sector jobs growth is secure? PricewaterhouseCoopers estimates that the CSR job losses will be half a million each from the public sector and private sector. I make that a total of about 1 million. In government, we estimated that 1 million job losses cost £4 billion in benefit and lost tax revenues. Is that being properly accounted for?

Will those jobs come back? Vacancies are falling, claimant numbers are rising, and last month saw the first rise in youth unemployment for many months. Current employment growth is largely in part-time work and is not showing through in falling claimant figures. Many employers—very responsibly during recession—put staff on short time and will now grow output through increasing hours and productivity rather than through rushing to take on more staff.

Jobs growth comes through four possible sources. Will it be through consumer growth? Looking at the current retail figures, and with VAT going up in January, I suspect not. Will it be through housing-led growth? The housing market looks pretty flat, and government spending on housing is being cut by 60 per cent. Could it be through trade-led growth? Admittedly the IMF predicts that virtually every other major economy will grow faster than that of the United Kingdom, but the signs remain poor. Could it be through investment-led growth?

I welcome the Prime Minister’s late conversion in his speech last Monday to the Confederation of British Industry, but I have to say to him, “too little too late”. If he was serious he would not have cancelled the regional development funds, Sheffield Forgemasters, Building Schools for the Future, or support for the creative industries. He needs his version of last year’s excellent New Industry, New Jobs strategy which my noble friend Lord Mandelson introduced. Nor would he be cutting the entitlement to free training for first level 2 qualifications for adults over 25 or charging fees to those over 25 wanting A-level equivalents. He would not be slashing the educational maintenance allowance, which has done so much to persuade those from poorer backgrounds to carry on learning. Skills and long-term growth do go together.

These training cuts are also the tip of the iceberg of unfairness in this spending review. As we have heard, the Institute for Fiscal Studies has been clear that families are the biggest losers, and the poorest are hit hardest. For example, the VAT increase means that compared with the richest 10 per cent, the poorest 10 per cent lose double the proportion of their income.

It has been said by the Minister and the noble Lord, Lord Lamont, that we are in effect opposing for our own sake and not offering anything in return, but alongside our focus on jobs and growth we agree with continuing the migration off incapacity benefit that we started, we support aspects of the reform of the disability living allowance—although I have listened carefully to the noble Baroness, Lady Campbell, and I hope the Ministers have too—and the principles of the work programme build on what we did in government. There is room to make reforms of the welfare system, but we oppose the changes that will make it harder to get back into work, that are unfair and that undermine the basis of our welfare state. The real-terms cut to working tax credits, especially the childcare element, will reduce the incentives to work and make those in low-paid employment significantly worse off.

And what of those who now lose their jobs? As the labour market continues to be difficult, they will get a cut of 10 per cent in housing benefit after 12 months on jobseeker’s allowance, regardless of how hard they are working to get back into employment. They might also have a large family in an inner city and find themselves having to move because of the housing benefit cap. They might be unable to work because of sickness and have paid national insurance through their working lives, find themselves still sick 12 months later, on the tougher work capability assessment, and then lose entitlement to contributory employment support allowance and get no money until the family falls within the means test. Under no version of fairness could the Minister pretend any longer that this CSR is fair.

That takes me to my final point. In their haste, the Government have pulled the rug from under the basics of the welfare state—the universal principle and the contributory principle. No more the idea that everyone pays in and everyone gets out: that we are taxed as individuals and assessed for benefits as households. The changes to child benefit and employment support allowance need careful debate and consideration, not the unseemly haste, the high risk or the shambolic delivery plans that are unfolding as this spending review unravels.

--- Later in debate ---

[Lord Sassoon]

As I have said, we are coming forward with a £150 million fund that, by 2014, will enable those on lower incomes in that 16-to-19 age group to transfer into higher education.

[Lord Knight of Weymouth]

I have no wish to delay the House, but the Minister cannot be allowed to get away with that. The noble Baroness’s question was about 16-to-19 year-olds in schools, but he gave an answer about access to higher education, which is the next phase. The concerns expressed during this debate by the noble Baroness, Lady Nye, were about the abolition of the education maintenance allowance. What is his response?

[Lord Sassoon]

My Lords, one of the responses is that if we give children who would not otherwise have the opportunity to go to the best universities the ability to look forward to a fund that will enable them to do so, that is one way in which we will help disadvantaged children, right through the chain, from the start, through higher education and beyond. In that context, the £2.5 billion pupil premium will be another critical component.

--- Later in debate ---

[Lord Sassoon]

The pupil premium will be used to ensure that those schools that have a particular proportion of disadvantaged children will get a premium to ensure that there is an appropriate rebalancing.

[Lord Knight of Weymouth]

My Lords—

[Baroness Anelay of St Johns]

My Lords, I remind the House that it is a courtesy for a Minister to give way during the debate to answer questions. It is not a courtesy then to interrupt repeatedly. The House has had a long and testing debate and I am sure that we will return to these issues in detail in departmental debates.