Autumn Budget Forecast

Lord Sassoon Excerpts

Tuesday 29th November 2011 Lords Chamber

[The Commercial Secretary to the Treasury (Lord Sassoon)]

My Lords, I refer the House to the autumn Statement made earlier in another place by my right honourable friend the Chancellor of the Exchequer, copies of which have been made available in the Printed Paper Office and the text of which will be printed in full in the Official Report. I commend my right honourable friend’s Statement to the House.

The following Statement was made earlier in the House of Commons.

“Let me start by placing squarely before the House of Commons and the British public the economic situation facing our country. Much of Europe now appears to be heading into a recession caused by a chronic lack of confidence in the ability of countries to deal with their debt. We will do whatever it takes to protect Britain from this debt storm while doing all we can to build the foundations of future growth.

Today we set out how we will do that by demonstrating that the country has the will to live within its means and keep interest rates low; by acting to stimulate the supply of money and credit to ensure that those low interest rates are passed on to families and businesses; by matching our determination on the deficit with an active enterprise policy for business and lasting investment in our infrastructure and education so that Britain can pay its way in the future; and at every opportunity by helping families with the cost of living.

The central forecast that we publish today from the independent Office for Budget Responsibility does not predict a recession here in Britain, but it has unsurprisingly revised down its short-term growth prospects for our country, for Europe and for the world. It expects gross domestic product in Britain to grow this year by 0.9 per cent and by 0.7 per cent next year. It then forecasts 2.1 per cent growth in 2013, 2.7 per cent in 2014, followed by 3 per cent in 2015 and 3 per cent again in 2016.

The OBR is clear that this central forecast assumes that,

‘the euro area finds a way through the current crisis and that policymakers eventually find a solution that delivers sovereign debt sustainability’.

If they do not, the OBR warns that there could be a ‘much worse outcome’ for Britain. I believe that it is right. We hope that this can be averted, but if the rest of Europe heads into recession, it may prove hard to avoid one here in the UK.

We are now undertaking extensive contingency planning to deal with all potential outcomes of the euro crisis. Like the Bank of England and the OECD yesterday, the OBR cites the chilling effect of the current instability as one of the central reasons for the reduction in its growth forecast. I want to thank Robert Chote and his fellow committee members, Stephen Nickell and Graham Parker, and their team for the rigorous work that they have done. Their forecast today demonstrates beyond any doubt their independence. This is an important point for the House. If we accept their numbers, we must also pay heed to their analysis. In addition to the eurozone crisis, the OBR gives two further reasons for the weaker forecasts. The first is what it calls the ‘external inflation shock’—the result, in its words, of,

‘unexpected rises in energy prices and global agricultural commodity prices’.

The OBR’s analysis—independent—is that this explains the slowdown in growth in Britain over the past 18 months.

Secondly, the OBR today has shown new evidence that an even bigger component of the growth that preceded the financial crisis was an unsustainable boom, and that the bust was deeper and had an even greater impact on our economy than previously thought. The result of that analysis is that the OBR has significantly reduced its assumptions about spare capacity in our economy and the trend rate of growth. That increases the OBR’s estimate of the proportion of the deficit that is structural—in other words, the part of the deficit that does not disappear even when the economy recovers. Our debt challenge is therefore even greater than we thought, because the boom was even bigger and the bust even deeper, and the effects will last even longer. Britain has had the highest structural budget deficit of any major economy in the world and the highest deficit in the entire history of our country outside war—and the last Government left it to this Government to sort that mess out.

The OBR’s analysis feeds directly through to borrowing numbers that are falling, but not at the rate that had been forecast. In 2009-10, the last Government were borrowing £156 billion a year. During the first year of this Government, that fell to £137 billion. This year the OBR expects it to fall again, to £127 billion, then to £120 billion next year, followed by £100 billion in 2013-14, £79 billion in 2014-15, then £53 billion in 2015-16 and £24 billion a year by 2016-17. However, I can report that because of the lower market interest rates that we have secured for Britain, debt interest payments over the Parliament are forecast to be £22 billion less than predicted.

The House might also like to know, given the economic events described by the Office for Budget Responsibility, what would have happened to borrowing without the action that this Government have taken.

The Treasury today estimates that borrowing by 2014-15 would have been running at well over £100 billion a year more and that Britain would have borrowed an additional £100 billion in total over the period. If we had pursued that path, we would now be in the centre of the sovereign debt storm.

The crisis we see unfolding in Europe has not undermined the case for the difficult decisions we have taken; it has made that case stronger. We held our deficit-reduction Budget on our terms last year, not on the market’s terms this year, as so many others have been forced to. In that Budget we set out a tough fiscal mandate: that we would eliminate the current structural deficit over the five-year forecast horizon. We supplemented the mandate with a fixed debt target: that we would get national debt as a proportion of national income falling by 2015-16. To be cautious, I set plans to meet both those budget rules one year early. That headroom has now disappeared, but I am clear that our rules must be adhered to, and I am taking action to ensure that they are. As a result, the OBR’s central projection is that we will meet both the fiscal mandate and the debt target.

The current structural deficit is forecast to fall from 4.6 per cent of GDP this year to become a current structural surplus of 0.5 per cent in five years’ time, and the debt-to-GDP ratio, which is forecast to stand at 67 per cent this year, is now set to peak at 78 per cent in 2014-15 and to be falling by the end of the current Parliament. So borrowing is falling, and debt will come down. It is not happening as quickly as we wished, because of the damage done to our economy by the ongoing financial crisis, but we are set to meet our budget rules, and we are going to see Britain through the debt storm.

There is a suggestion from some in the House that if you spend more, you will borrow less. That is something-for-nothing economics, and the House should know the risks that we would be running. Last April, the absence of a credible deficit plan meant that our country’s credit rating was on negative outlook and our market interest rates were higher than Italy’s; 18 months later, we are the only major western country whose credit rating has improved. Italy’s interest rates are now 7.2 per cent, and what are ours? They are less than 2.5 per cent. Yesterday we were even borrowing money more cheaply than Germany. Those who would put all that at risk by deliberately adding to our deficit must explain this.

Just a 1 per cent rise in our market interest rates would add £10 billion to mortgage bills every year: 1 per cent would mean that the average family with a mortgage would have to pay £1,000 more; 1 per cent would increase the cost of business loans by £7 billion; 1 per cent would force taxpayers to find an extra £21 billion in debt interest payments, much of it going to our foreign creditors. In other words, 1 per cent dwarfs any extra Government spending or tax cut funded by borrowing that people propose today—and that is the cost of just a 1 per cent rise. Italy’s rates have gone up by almost 3 per cent in the last year alone. We will not take this risk with the solvency of the British economy and the security of British families.

The current environment requires us to take further action on debt to ensure that Britain continues to live within its means. This is what we propose to do. First, there is no need to adjust the overall totals set out in the spending review. Taken all together, the measures that I will set out today require no extra borrowing and provide no extra savings across the whole spending review period. Secondly, I am announcing significant savings in current spending to make the fiscal position more sustainable in the medium and long term; but in the short term—over the next three years—we will use these savings to fund capital investments in infrastructure, regional growth and education, as well as help for young people to find work. Every pound spent in this way will be paid for by a pound saved permanently. That includes savings from further restraint on public sector pay.

For some workforces the two-year pay freeze will be coming to an end next spring, and for most it will be coming to an end during 2013. In the current circumstances, the country cannot afford the 2 per cent rise assumed by some government departments thereafter, so instead we will set public sector pay awards at an average of 1 per cent for each of the two years after the pay freeze ends. Many people are helped by pay progression—the annual increases in salary grades to which many are entitled even when pay is frozen. That is one of the reasons why public sector pay has risen at twice the rate of private sector pay over the last four years. While I accept that a 1 per cent average rise is tough, it is also fair to those who work to pay the taxes that will fund it. I can also announce that we are asking the independent pay review bodies to consider how public sector pay can be made more responsive to local labour markets, and we will ask them to report back by July next year. This is a significant step towards the creation of a more balanced economy in the regions of our country which does not squeeze out the private sector. Departmental budgets will be adjusted in line with the pay rises I have announced, with the exception of the NHS and school budgets, where the money saved will be retained in order to protect those budgets in real terms. This policy will save over £1 billion in current spending by 2014-15.

The deal we offer on public sector pensions is also fair to both taxpayers and public servants. The reforms are based on the independent report of John Hutton, a former Labour Pensions Secretary, and he says:

‘It is hard to imagine a better deal’,

than this. I would once again ask the unions why they are damaging our economy at a time like this and putting jobs at risk. I say call off the strikes tomorrow, come back to the table, complete the negotiations and let us agree generous pensions that are affordable to the taxpayer.

Let me turn to other areas of public spending, starting with overseas aid. This Government will stick by the commitments they have made to the poorest people in the world by increasing our international development budget—and the whole House should be proud of the help our country is providing to eradicate disease, save lives and educate children—but the spending plans of the Department for International Development meant that the UK was on course to exceed 0.7 per cent of national income in 2013. That I do not think can be justified and so we are adjusting those plans so we do not overshoot the target.

Turning to welfare payments, the annual increase in the basic state pension is protected by the triple lock introduced by this Government. This guarantees a rise either in line with earnings, prices or 2.5 per cent, whichever is greater. It means that the basic state pension will next April rise by £5.30 to £107.45—the largest ever cash rise in the basic state pension and a commitment of fairness to those who have worked hard all their lives. I wanted to make sure that poorer pensioners did not see a smaller rise in their income, so I can confirm today that we will also uprate the pension credit by £5.35 and pay for that with an increase in the threshold for the savings credit.

I also want to protect those who are not able to work because of their disabilities and those who, through no fault of their own, have lost jobs and are trying to find work, so I can confirm that we will uprate working-age benefits in line with September’s consumer prices index inflation number of 5.2 per cent. That will be a significant boost to the incomes of the poorest, especially when inflation is forecast to be considerably less than that by next April. We will also uprate with prices the disability elements of tax credits, and increase the child element of the child tax credit by £135 in line with inflation too. But we will not uprate the other elements of the working tax credit this coming year; and given the size of the uprating this year, we will no longer go ahead with the additional £110 rise in the child element, over and above inflation, that was planned. By April 2012, the child tax credit will have increased by £390 since the coalition came into power. The best way to support low-income working people is to take them out of tax altogether, and our increases in the income tax personal allowance this year and next will do that for over 1 million people.

Let me turn to future public spending. Today, I am setting expenditure totals for the two years following the end of the spending review period: 2015-16 and 2016-17. Total managed expenditure will fall during that period by 0.9 per cent a year in real terms— the same rate as set out for the existing period of the spending review, with a baseline that excludes the additional investments in infrastructure also announced today. These are large savings and we will set out in future how resources will be allocated between different areas of government.

I am also announcing a measure to control spending which is not for today or next year, or even for the next decade, but it directly addresses the long-term challenge Britain and so many other countries face with an ageing population. Our generation has been warned that the costs of providing decent state pensions are going to become more and more unaffordable unless we take further action.

Let us not leave it to our children to take emergency action to rescue the public finances; let us think ahead and take responsible, sensible steps now. Starting in 2026, we will increase the state pension age from 66 to 67, so that we can go on paying a decent pension to people who are living longer. Australia, America and Germany have all taken similar steps. This will not affect anyone within 14 years of receiving their state pension today. By saving a staggering £59 billion, it will mean a long-term future for the basic state pension.

We are showing a world that is sceptical that democratic western Governments can take tough decisions that Britain will pay its way in the world. That is the first thing that the Government can do in the current environment: keep our interest rates low and protect our country from the worst of the debt storm. But we need to make sure that those low interest rates are available to families and to businesses. It is monetary and credit policy that is, in a debt crisis, the principal and most powerful tool for stimulating demand.

Last month, the Bank of England’s Monetary Policy Committee decided to undertake further quantitative easing, and I have authorised an increase in the ceiling on its asset purchases to £275 billion. This will support demand across the economy, but we must do more to help those small businesses who cannot get access to credit at an affordable price.

We have already extended the last Government’s enterprise finance guarantee scheme, and we are today expanding it to include businesses with annual turnovers of up to £44 million and accrediting new lenders, such as Metro Bank. But this scheme is by itself not nearly ambitious enough and never will be within the constraints of state aid rules, so the Government are launching a major programme of credit easing to help small business. We have set a ceiling of £40 billion. At the same time, I have agreed with Mervyn King that we will reduce by £40 billion the asset purchase facility that the previous Government gave the Bank to buy business loans. Only a small proportion of the facility was ever used. I am publishing my exchange of letters with the governor today.

We are launching our national loan guarantee scheme. It will work on the simple principle that we use the hard-won low interest rates that the Government can borrow at to reduce the interest rates at which small businesses can borrow. We are using the credibility that we have earned in the international markets to help our domestic economy. New loans and overdrafts to businesses with a turnover of less than £50 million will be eligible for the scheme, so that it stays focused on smaller companies. We expect that it will lead to reductions of 1 percentage point in the rate of interest being charged to these companies, so a business facing a 7 per cent interest rate to get a £5 million loan could instead see its rate reduced to 6 per cent and its interest costs fall by up to £50,000.

We have developed with the Bank of England a mechanism to allocate funding to different banks based on how much they increase both net and gross lending to firms. There will be a clear audit trail to ensure the banks comply, for we will use the experience of the European Investment Bank’s loans for SMEs programme here in the UK to ensure that it works. We are getting state aid approval, so that the national loan guarantee scheme will be up and running in the next few months. Initially, £20 billion-worth of these guarantees will be available over the next two years. Alongside it, we are also launching a £1 billion business finance partnership. That is aimed at Britain’s mid-sized companies—a crucial part of our economy, neglected for too long and now identified by the CBI director-general and others as a future source of growth. The Government will invest in funds that lend directly to these businesses, in partnership with other investors such as pension funds and insurance companies. It will give these mid-cap companies a new source of investment outside the traditional banks.

If the business finance partnership takes off, I stand ready to increase its size; and we will develop further partnerships ideas and ideas for new bond issuance to help Britain’s small and medium-sized companies. No Government have attempted anything as ambitious as this before. We will not get every detail perfect first time round, but we do not want to make the best the enemy of the good. With the strain on the financial system increasing, the important thing is to get credit flowing to Britain’s small businesses.

The Government can use the low interest rates that we have secured to help young families, too, who want to buy a home but cannot afford the very large deposits that banks are now demanding. We will use mortgage indemnities to help 100,000 such families to buy newly built homes. We will also help construction firms that cannot get bank finance with a £400 million fund that will kick-start projects that already have planning permission; and we are going to reinvigorate the right to buy. This was one of the greatest social policies of all time. It brought home ownership within the reach of millions of aspiring families. It was slowly and stealthily strangled by the last Government, as discounts were cut and cut again. We will bring it back to life. Families in social housing will be able to buy their own homes at a discount of up to 50 per cent. We will use the receipts to build, for every home purchased, a new additional affordable home—so new homes for families who need them; new home ownership for families who aspire to it; and new jobs in the construction industry, so that we get Britain building. That is what our new right to buy will bring.

In the years leading up to the crash, our economy became dangerously overdependent on the success of a poorly regulated City of London. Meanwhile, employment by businesses in a region such as the West Midlands actually fell. By 2007, the previous Government were relying on finance for £1 in every £8 raised in taxation. That left Britain completely exposed when the banks failed, and I can confirm that, next month, we will publish our response to the report that we commissioned from John Vickers to protect taxpayers better.

It is this Government’s policy to ensure that we remain the home of global banks and that London is the world’s pre-eminent financial centre. That is why we will not agree to the introduction of an EU financial transaction tax. It is not a tax on bankers; it is a tax on people’s pensions. Instead, we have introduced a permanent bank levy to make sure that the banks pay their fair share. I have always said that we wished to raise £2.5 billion each and every year from this levy. To ensure we do that, I need to raise the rate of the levy to 0.088 per cent. That will be effective from l January next year. We will also take action to stop some large firms using complex asset-backed pension funding arrangements to claim double the amount of tax relief that was intended. This will save the Exchequer almost £500 million pounds a year.

Financial services will always be a very important industry for the UK, but we have to help other parts of the private sector in other parts of the country to grow. That means uncongested roads and railways for businesses to move products that cannot be reduced to a screen on a City trading floor. It means providing secure power sources at reasonable prices. It means creating new superfast digital networks for companies across our country. These do not exist today. If we look at what countries such as China or Brazil are building, we see why we risk falling behind the rest of the world. So today we are publishing the national infrastructure plan. For the first time, we are identifying over 500 infrastructure projects that we want to see built over the next decade and beyond: roads, railways, airport capacity, power stations, waste facilities and broadband networks. We are mobilising the finance needed to deliver them, too.

The savings that I have announced in the current Budget have enabled me today to fund, pound for pound, £5 billion of additional public spending on infrastructure over the next three years. New spending by Network Rail, guaranteed by the Government, will bring £1 billion more. We are committing a further £5 billion to future projects in the next spending period, so that the planning can start now. This is public money. By exploring guarantees and letting city mayors borrow against future tax receipts, we are looking for new ways to deploy it. But we need to put to work the many billions of pounds that British people save in British pension funds and get those savings invested in British projects. You could call it British savings for British jobs, Mr Speaker.

The Government have negotiated an agreement with two groups of British pension funds to unlock an additional £20 billion of private investment in modern infrastructure. We can today give the go-ahead around the country to 35 new road and rail schemes that support economic development. In the north-west, we will electrify the trans-Pennine express between Manchester and Leeds, build the Manchester Airport and Crewe link roads and work with Merseyside to turn the vision of the Atlantic gateway into reality.

In Yorkshire and Humber, there will be new stations and new tram capacity, and we will halve the tolls on the Humber Bridge. I want to pay tribute to my honourable friends the Members for Beverley and Holderness (Mr Stuart) and for Brigg and Goole (Andrew Percy), and indeed other local MPs who have campaigned for years to make this happen. Under this Government it has.

In the north-east, we will bring forward investment on the Tyne and Wear Metro. In the Midlands, the A45, the A43, the A453, the Kettering bypass, the M1 and M6 will all be improved. In the south-west, the Bristol link road and the A380 bypass will go ahead. For families across the south-west facing the highest water charges in Britain, the Government will cut the household bills of all South West Water customers by £50 a year. In the east of England, we are going to make immediate improvements to the A14. In the south-east, we will build a new railway link between Oxford, Milton Keynes and Bedford that will create 12,000 new jobs. We are going to start working on a new crossing of the lower Thames, and we will explore all the options for maintaining the UK’s aviation hub status, with the exception of a third runway at Heathrow.

Here in London, we will work with the mayor on options for other new river crossings, for example at Silvertown. We are going to support the extension of the Northern line to Battersea, which could bring 25,000 jobs to the area. Devolved Administrations in Scotland, Wales and Northern Ireland will get their Barnett share, and we are working with them to improve the links between our nations, such as the M4 in south Wales and the overnight rail service to north of the border.

This all amounts to a huge commitment to overhauling the physical infrastructure of our nation. We will match it by overhauling the digital infrastructure, too. The Government are funding plans to bring superfast broadband to 90 per cent of homes and businesses across the country, and extend mobile phone coverage to 99 per cent of families. This will help to create a living, economically vibrant countryside.

Our great cities are at the heart of our regional economies, and we will help bring world-leading, superfast broadband and wi-fi connections to 10 of them, including the capitals of all four nations. We will go ahead with the 22 enterprise zones already announced, plus two further zones in Humber and Lancashire confirmed today. I can also confirm that capital allowances of 100 per cent will be available to encourage manufacturing and other industries into the zones in Liverpool, Sheffield, the Tees valley, Humber and the Black Country. Those allowances will also be available to the north-eastern enterprise zone, and we will consider extending to the port of Blyth to create new private sector jobs there, too. This Government’s new regional growth fund for England has already allocated £1.4 billion to 169 projects around the country. For every one pound we are putting in, we are attracting six pounds of private sector money alongside it. I am today putting a further £1 billion over this Parliament into the regional growth fund for England, with support as well for the devolved Administrations. If we do not get the private sector to take a greater share of economic activity in the regions, our economy will become more and more unbalanced, as it did over the last 10 years.

Government should not assume that this will happen by itself. We must help businesses to grow and succeed, and we can do that at a national level too, with our commitment, for example, to British science. At a time of difficult choices, we made ours last year when we committed to protect the science budget. Today we are confirming almost half a billion pounds for scientific projects, from supercomputing and satellite technology to a world-beating animal health laboratory, and Government can encourage many more of our small firms to export overseas for the first time. We are doubling to 50,000 the number of SMEs we are helping, and extending support to British mid-caps, who sometimes lack the overseas ambition of their German equivalents.

We will make it easier for UK-based firms to compete for Government procurement contracts and make new applications out of government data. We will provide funds for smaller technology firms in Britain that find it difficult to turn their innovations into commercial success. We have listened to the ideas from business groups about encouraging innovation in larger companies, and we will introduce a new ‘above the line’ research and development tax credit in 2013 that will increase its visibility and generosity.

We will give particular help to our energy-intensive industries. I have not shied away from supporting sensible steps to reduce this country’s dependency on volatile oil prices and reduce our carbon emissions. I am the Chancellor who funded the first ever green investment bank and introduced the carbon price floor. Our green deal will help people to insulate their home and cut their heating bills. I am worried about the combined impact of the green policies adopted not just in Britain but by the European Union on some of our heavy, energy-intensive industries. We are not going to save the planet by shutting down our steel mills, aluminium smelters and paper manufacturers. All we will be doing is exporting valuable jobs from this country, so we will help them with the costs of the EU trading scheme and the carbon price floor, increase their climate change levy relief and reduce the impact of the electricity market reforms on those businesses, too.

This amounts to a £250 million package over the Parliament, and it will keep industry and jobs here in Britain. It is a reminder to us all that we should not price British businesses out of the world economy. If we burden them with endless social and environmental goals, however worthy in their own right, not only will we not achieve those goals, but the businesses will fail, jobs will be lost, and our country will be poorer.

Our planning reforms strike the right balance between protecting our countryside while permitting economic development that creates jobs, but we need to go further to remove the lengthy delays and high costs of the current system, with new time limits on applications and new responsibilities for statutory consultees. We will make sure that the gold-plating of EU rules on things such as habitats do not place ridiculous costs on British businesses. Planning laws need reform, and so too do employment rules. We know many firms are afraid to hire new staff because of their fear about the costs involved if it does not work out. We are already doubling the period before an employee can bring an unfair dismissal claim and introducing fees for tribunals. Now we will call for evidence on further reforms to make it easier to hire people, including changing the TUPE regulations; reducing delay and uncertainty in the collective redundancy process; and introducing the idea of compensated no-fault dismissal for businesses with fewer than 10 employees.

We will cut the burden of health and safety rules on small firms, because we have regard for the health and safety of the British economy too. This Government have introduced flexible working practices and we are committed to fair rights for employees. But what about the right to get a job in the first place or the right to work all hours running a small business and not be sued out of existence by the costs of an employment tribunal? It is no good endlessly comparing ourselves with other European countries. The entire European continent is pricing itself out of the world economy. The same is true of taxes on business. If we tax firms out of existence, or out of the country, there will not be any tax revenues for anyone. We have set as our ambition the goal of giving this country the most competitive tax regime in the G20. Our corporate tax rate has already fallen from 28 per cent to 26 per cent, and I can confirm that it will fall again next April to 25 per cent.

We are undertaking major simplification of the tax code for businesses and individuals, including, this autumn, consulting on ideas to merge the administration of income tax and national insurance. We are publishing next week rules on the taxation of foreign profits, so that multinationals stop leaving Britain, and instead start coming here, and we will end low-value consignment relief for goods from the Channel Islands, which has been used by large companies to undercut shops on our high streets. We have supported enterprise by increasing the generosity of the enterprise investment scheme. Today, we are extending this scheme specifically to help new start-up businesses to get the seed investment they need. Even at the best of times they can struggle to get finance, and in the current credit conditions that struggle too often ends in failure. From April 2012, anyone investing up to £100,000 in a qualifying new start-up business will be eligible for income tax relief of 50 per cent, regardless of the rate at which they pay tax, and to get people investing in start-up Britain in 2012, for one year only, we will also waive any tax on capital gains invested through the new scheme. We can afford this with a freeze on the general capital gains tax threshold for next year.

I also want to help existing small businesses which find the current economic conditions tough. Business rates are a disproportionately large part of their fixed costs. In the Budget, I provided a holiday on business rates for small firms until October next year. I am today extending that rate relief holiday until April 2013. Over half a million small firms, including one-third of all shops, will have reduced rate bills or no rate bills for the whole of this year and for the whole of the next financial year too. To help all businesses, including larger ones, with next year’s rise in business rates, I will allow them to defer 60 per cent of the increase in their bills to the two following years.

I also want to help any business seeking to employ a young person who is out of work. The OBR forecasts that unemployment will rise from 8.1 per cent this year to 8.7 per cent next year, before falling to 6.2 per cent by the end of the forecast. Youth unemployment has been rising for seven years and is now unacceptably high. It is little comfort that this problem is affecting all western nations today. The problem is, of course, primarily a lack of jobs. But it is made worse by a lack of skills. Too many children are leaving school after 11 years of compulsory education without the basics that they need for the world of work.

Our new youth contract addresses both problems with the offer of private sector work experience for every young person unemployed for three months. After five months, there will be weekly signing on. After nine months, we will help pay for a job or an apprenticeship in a private business. Some 200,000 people will be helped in this way but, as the Deputy Prime Minister has said, this is a contract. Young people who do not engage with this offer will be considered for mandatory work activity, and those who drop out without good reason will lose their benefits.

If we are to tackle the economic performance of this country and tackle Britain’s decades-long problems with productivity, we have to transform our school system too, so that children leave school prepared for the world of work. My right honourable friend the Secretary of State for Education is doing more to make that happen than anyone who ever had his job before him. The previous Government took six years to create 200 academies. He has created 1,200 academies in just 18 months. Supporting his education reform is a central plank of my economic policy, so today, with the savings that we have made, I am providing an extra £1.2 billion—as part of the additional investment in infrastructure—to spend on our schools.

Half of that will go to help local authorities with the greatest basic need for school places. The other £600 million will go to support my right honourable friend’s reforms and will fund 100 additional free schools. These schools will include new maths free schools for 16 to 18 year-olds. This will give our most talented young mathematicians the chance to flourish. Like the new university technical colleges, these maths free schools are exactly what Britain needs to match our competitors and produce more of the engineering and science graduates so important for our long-term economic success.

To ensure that children born into the poorest families have a real chance to become one of those graduates, we will take further steps to improve early education. Last year, it was this coalition Government who not only expanded free nursery education for all three and four year-olds, but gave children from the poorest fifth of families a new right to 15 hours of free nursery care a week at the age of two. I can tell the House today that we can double the number of children who will receive this free nursery care: 40 per cent of two year- olds—260,000 children—from the most disadvantaged families will get this support in their early years.

On education and early-years learning, this is how we change the life chances of our least well-off and genuinely lift children out of poverty and that is how we build an economy ready to compete in the world. It will take time. The damage that we have to repair is great. People know how difficult things are and how little money there is, but where we can help with the rising cost of living, we will. I have already offered councils the resources for another year’s freeze in the council tax. That will help millions of families, but I want to do more.

Commuters often travel long distances to go to work and bring an income home. Train fares are expensive and they are set to go up well above inflation to pay for the much needed investment in the new rail and new trains that we need, but RPI plus 3 per cent is too much. The Government will fund a reduction in the increase to RPI plus 1 per cent. This will apply across national rail regulated fares, across the London Tube and on London buses. It will help the millions of people who use our trains.

Millions more use their cars to go to work, and pick up the children from school. It is not a luxury for most people; it is a necessity. In the Budget I cut fuel duty by 1p. The plan was for fuel duty to be 3p higher in January and 5p higher by August next year. That would be tough for working families at a time like this, so despite all the constraints that are upon us, we are able to cancel the fuel duty increase planned for January, and fuel duty from August will be only 3p higher than it is now. Taxes on petrol will be a full 10p lower than they would have been without our action in the Budget and this autumn. Families will save £144 on filling up the average family car by the end of next year. At this tough time, we are helping where we can.

All that we are doing today—sticking to our deficit plan to keep interest rates as low as possible, increasing the supply of credit to pass those low rates on to families and businesses, rebalancing our economy with an active enterprise policy and new infrastructure, and providing help with the cost of living on fuel duty and rail fares—all that takes Britain in the right direction. It cannot transform our economic situation overnight.

People in this country understand the problems that Britain faces. They can watch the news any night of the week and see for themselves the crisis in the eurozone and the scale of the debt burden that we carry. People know that promises of quick fixes and more spending that this country cannot afford at times like this are like the promises of a quack doctor selling a miracle cure. We do not offer that today.

What we offer is a Government who have a plan to deal with our nation’s debts to keep rates low; a Government determined to support businesses and support jobs; a Government committed to take Britain safely through the storm. Leadership for tough times—that is what we offer. I commend this Statement to the House.”

--- Later in debate ---

[Lord Sassoon]

My Lords, was not all that fun? I really think that at least the noble Lord, Lord Eatwell, studied the documents, to which we will come in a minute, unlike the noble Lord, Lord Myners. There is nothing of substance from the opposition Benches, so we have the noble Lord, Lord Myners, brought out of retirement to give us a bit of theatre to cheer up our early evening. But we really have got some serious things to talk about.

The Statement made by my right honourable friend the Chancellor was made against a very difficult situation in the eurozone. The Government’s overriding priority is to demonstrate our commitment to live within this country’s means and to keep our interest rates low and stable. We have to ensure that we work to stimulate the supply of money and credit to make sure that those low interest rates are passed on to families and businesses. My right honourable friend’s Statement supports our business and invests in our infrastructure. I am pleased that the noble Lord, Lord Myners, at least welcomes that increased investment in our infrastructure because that is what will lay the foundations for sustainable growth into the future.

If the noble Lord, Lord Myners, had spent time reading the documents today, he would understand some of the facts that have been laid out by the independent Office for Budget Responsibility. Let me remind him and other noble Lords of some of that. First, yes, growth is lower. But why is growth lower? The OBR sets it out in forensic detail. First, it ascribes the lower growth to date as being substantially attributable to the higher inflation as a result of imports of commodities. Secondly, it highlights the current risks and the reasons for its reduction in the forecast growth as being principally as a result of difficulties in the eurozone. The noble Lord is shaking his head at those, but perhaps he will nod approvingly at this. Thirdly, he will have noticed when he talks about the structural deficit that the OBR’s analysis since it has re-looked at the numbers is that the so-called boom under Labour was even higher and more fictitious than before and that the structural deficit that it built up was even larger, which is why, additionally, we are not going to make up the structural shortfall that we need to make up.

Having said that, the OBR goes on to lay out its growth projections for the next few years. In terms of the top-line growth from 2012 through to 2016, those numbers in each year are forecast to be higher than the growth of the eurozone. So we should not talk down the prospects of the country. The noble Lord asked what the sources of that growth had been. If he had got as far as chart 1.4 in Autumn Statement 2011, which is not very far in, it shows exactly where the OBR expects the growth to come from. For example, it expects total investment to contribute four percentage points to growth between 2010 and 2016, while net trade will contribute two percentage points. The noble Lord, Lord Myners, shakes his head. Does he have better numbers? Does he not share the analysis of the OBR? Those are its numbers.

If the noble Lord was to look a bit further into the masterly document that the OBR has produced, its latest forecast for reduction in general government employment over the period 2011 to 2017 will be 710,000 jobs. It forecasts that in the same period the private sector will generate not 700,000 new jobs but 1.7 million new jobs. Again, I say to the noble Lord and others on the opposition Benches that the policies that this Government are driving through are those which will underpin sustained growth and, that the private sector is already delivering that growth.

On borrowing, we had all sorts of contradictory thoughts from the noble Lord. I am not sure whether he wants us to go faster or slower on the pace of balancing the budget. It was not at all clear to me. All I know is that, if we were sticking in the current environment to the previous Labour Government’s plans, borrowing in 2013-14 would not be the £79 billion which this Government will be borrowing, but £100 billion. To look at it another way, over the spending review period, under the plans of the previous Government, there would be an additional £100 billion of borrowing. That would not be just borrowing: it would be £100 billion of additional debt, with which a Labour Government would have wished to saddle this country.

As to credit easing, it will not be the Government who make the decision. Again, if the noble Lord had chosen to look at it, the banks will be taking those decisions.

The noble Lord also gets it wrong on the pension funds and infrastructure. The pension funds have come to us and have said that they wish to allocate something of the order of 2 per cent to 2.5 per cent of their funds to infrastructure. They have asked us as the Government to facilitate that, which we are happy to do.

After all, this is the noble Lord who a few months ago—perhaps last month—was advising HSBC’s retail bank to move to Paris. This is a man who does not have the best interests of British banking or the British economy at heart.

[Noble Lords]

Oh!

[Lord Sassoon]

That was reported in the press. If the noble Lord would like to deny it, he is at liberty to do so.

[Lord Myners]

I think that that borders on an accusation of treachery and that the noble Lord owes me an apology. What I said was that it would not surprise me, in the circumstances, if the board of HSBC felt that it had to consider matters of location, which is exactly what it confirmed it was doing when it gave evidence to the Treasury Select Committee. To suggest in some way that I am guilty of some form of treachery is a monstrous suggestion, which I hope that the Minister will withdraw.

[Lord Sassoon]

The noble Lord, Lord Myners, mentions treachery, which never passed my lips. He was reported as saying that he suggested that HSBC should be moving its retail bank to Paris. If in fact that was not the advice he was giving, I am very glad that he has now clarified that.

This Government are making sure that we deal with the legacy of our predecessors—of his Government —and return our economy to sustainable growth. That means sticking to our deficit plan to keep interest rates as low as possible, which is what was at the heart of my right honourable friend’s Statement this afternoon.

--- Later in debate ---

[Lord Sassoon]

My Lords, there is no one more grateful than me for not having to read out 45 minutes of Statement, however excellent it is, so I am glad of the change in the rules of the House.

The situation with the pension funds is that two groups of funds approached us to ask if we as the Government could facilitate their creation of a collective vehicle through which they might invest. We have signed a memorandum of understanding with the groups of pension funds, and we will work quickly to help them set up a vehicle that will then be in place for them. We will be reporting on progress certainly by the Budget next year. Of course, there is nothing to stop those pension funds from investing now, and indeed some of them do so through private sector vehicles.

Further, the UK pension funds are not the only bodies putting up their hands and recognising the attraction of this asset class. Noble Lords may have seen only yesterday an interesting article by the chairman of the Chinese sovereign wealth fund, the CIC, in the Financial Times, saying that it was looking to invest in this sector. The appetite for investment in UK infrastructure is very strong. The UK pension fund vehicle will be additive, and we welcome that.

The housing strategy was published on 21 November. The Government have a clear plan for supporting the housing market in order to achieve a more stable and sustainable position. Without going in detail through every element of what that strategy consists of, we are introducing the new build indemnity scheme to support builders and lenders in increasing the supply of new homes by increasing the supply of affordable mortgage finance. We are launching the new £400 million “Get Britain Building” investment fund. We are bringing more empty homes and buildings back into use. We are invigorating the right to buy, and for the first time within that, the receipts from additional right-to-buy sales will be used to support the funding of new affordable homes for rent on a one-for-one basis. We are supporting locally planned large-scale developments and we are consulting on various planning obligations. What was set out on 21 November is a substantial and important package for housing.

[Baroness Lister of Burtersett]

My Lords, can the Minister explain to the House the justification for reneging on the pledge to increase in real terms child tax credit, given that that increase was supposed to stop child poverty rising? Can he tell the House what the impact of that will be on the number of children living in poverty?

[Lord Sassoon]

My Lords, the original £110 rise over inflation was announced at a time when the expectation as regards inflation was significantly lower than has turned out to be the case. The inflation increase that will be made is much higher than intended. Inflation in all the independent forecasts is expected to come down significantly next year, so by April 2012 when the uprating comes in, the inflation expectations are going to be different. That is the basis for the change now. On the distributional effects, those have been set out in considerable detail in a document that was put up on the Treasury’s website this afternoon.

[Lord Empey]

My Lords, I welcome many of the comments made in the Budget Statement but there is one that I want to ask the Minister to clarify. He announced that he was asking the independent pay review bodies to consider how public sector pay can be made more responsive to local labour markets. Can he explain what that means? How are the regions geographically defined? Further, if there were to be a reduction in public sector pay in some of the regions, would that lead on inevitably to reductions in benefits in those areas as well?

[Lord Sassoon]

My Lords, I am grateful to the noble Lord, Lord Empey, for drawing attention to this critical issue because it is potentially an important structural change in the economy. We want to make sure that in the labour markets in all the regions of the country there is no unfair competition or crowding out in any way of the ability of the private sector to hire people. Private sector pay has to be reflective of local market conditions where until now public sector pay has been set on a national basis. We have said that we will be asking the independent pay review bodies to consider how pay can be made more responsive to local labour market conditions, and they will report to us by July 2012.

[Lord Higgins]

My Lords, I think that it is perhaps rather unfortunate that the Statement was not repeated today because it is very well worth repeating. It includes a remarkable number of individual proposals that are going to help the recovery without endangering the Chancellor’s overall objective of maintaining what I think has become known as plan A, which will result in the deficit being reduced. Is it not rather surprising that the shadow Chancellor in another place continues to say that the proposals of the Government are cutting too fast and too soon? We have seen how very difficult it is to make cuts quickly, and in fact that is one of the problems we have had to face.

In answer to the noble Lord, Lord Myners, saying just now that the Government’s proposals are not respectable, does my noble friend accept that the OECD—perhaps as respectable a body as one could possibly imagine—has warmly endorsed the overall drive of the Chancellor’s policy? Moreover, is it not clear, since we have the advantage of the IBR forecast taking into account what is in the autumn Statement rather than making a forecast based on not knowing what the effects of the Chancellor’s Statement would be, that what the Government have proposed in the autumn Statement will effectively bring matters back on course so that the plans that the Chancellor originally had will be fulfilled?

Having said that, there are some concerns about the situation with regard to monetary policy. Paragraph 3.53 in the forecast of the OBR is very strange. It is important that we should maintain growth in the money supply if we are to see recovery. Can my noble friend tell us what the situation is so far as the money supply is concerned?

[Lord Sassoon]

I am grateful to my noble friend Lord Higgins. I wondered whether we would get through this debate without mention of the money supply, but he has not disappointed me. We have had it as well. I agree absolutely with his analysis of the situation. As the OECD said yesterday, the UK’s consolidation programme strikes the right balance between addressing fiscal sustainability and preserving growth. I can also confirm what my noble friend says. The OBR analysis shows that we are on track to meet the fiscal mandate set out by the Chancellor last year. In respect of monetary easing, I can only draw my noble friend’s attention to the stance taken by the Bank of England with an additional £75 billion of asset purchases, which it believes is necessary in order to ensure that there is no undershoot of inflation, and the package of credit easing measures. The noble Lord, Lord Myners, did not seem to want to see it this way, but that package has been designed to complement the monetary easing with which the Bank of England is driving ahead.

[Lord Davies of Stamford]

My Lords, the economy has already suffered two major negative demand shocks, one from the Government’s excessively rapid fiscal retrenchment and the other from the crisis in the eurozone. Will the Government try to avoid creating a third substantial negative demand shock by allowing banks which have under Basel II to increase their capital in relation to risk assets to do so by the simple expedient of reducing their lending and their banking book? Will the Government take powers to ensure that this increase in capital is done exclusively as a result of rights issues, other capital issues or issues of synthetic capital such as contingent convertible bonds, or by increasing retention of earnings at the expense of dividends and bonuses? Does the Minister agree that, if that is not done, the Government will cause a devastating blow to the economy, which is already on the ropes from these other causes?

[Lord Sassoon]

My Lords, the first thing to remind the House of is that it was my right honourable friend the Chancellor who took the lead in ensuring that the Basel III reforms on capital were phased in over a period to 2019, which was accepted by the G20 precisely for the reasons that the noble Lord gives; that is, that we did not want to place more burdens on the credit situation in the short term. Similarly, the Vickers commission has recommended that certain of its reforms be on a similarly extended timetable for the same reason. As for today’s measures, the £20 billion of underpinning of the national loan guarantee scheme is directed at ensuring that the flow of credit to small and medium-sized businesses continues, as it must do as we go into the recovery phase of the economy.

[Baroness Wheatcroft]

My Lords, the noble Lord, Lord Myners, referred to the march of the myth-makers. Does the Minister agree with me that perhaps the biggest myth was that we had done away with boom and bust? As a result of that, what we are paying in interest on our debt is more than what we are spending on education, and that is with interest rates at the low level that plan A had assumed. What does the Minister think will happen to those interest rates if we do not stick to plan A?

[Lord Sassoon]

My Lords, I dread to think what would happen to interest rates. The interest rates on our 10-year money have stayed rock solid. They are slightly down today, at below 2.3 per cent. Where is Italy? It is north of 7 per cent. Every 1 per cent increase in our interest rates would cost this country £21 billion or £22 billion. To look at it another way, by keeping our interest rates below the levels which were forecast by the OBR only in March this year at the time of the Budget, we have saved £21 billion or £22 billion on our interest bill, money that can be much better spent on our public services. I dread to think where we would be, but it would be in horrendous territory.

[Lord Radice]

I welcome the Government’s infrastructure schemes, but what impact will the measures announced in the Autumn Statement today have on output and jobs?

[Lord Sassoon]

My Lords, I can only refer again to the numbers in the OBR’s document. I do not want to detain the House by repeating them all, but they show the cumulative effect of all these measures, including the infrastructure measures. I am grateful to the noble Lord for drawing attention to those measures because they are now more central. The economic infrastructure in particular has become central to the Government’s thinking and planning in a way that it has never been under previous Governments.

[Baroness Kramer]

My Lords, there are some key measures in the Statement on which I congratulate the Government and which completely change the framework for both businesses and infrastructure to access financing. Over the long term, they will create the capacity for accelerated growth that we should all have seen more than a decade ago.

I have two questions for the Minister. First, micro-business is obviously the beginning of the business pipeline. The national loan guarantee scheme works through the banks, which pay no regard to micro-businesses. That does not seem to be a scheme that particularly helps them. They also seem to be too small for the business finance partnership. Will there be, or are there, mechanisms within credit easing to address that particular group of essential businesses?

Secondly, the Minister will guess that I am absolutely delighted that the Northern line will be financed against the community infrastructure levy and that similar powers may be given to various city mayors through tax increment financing mechanisms. Will he look at applying this far more widely, because many small infrastructure projects could come very quickly out of the pipeline, be well managed by local authorities working in co-ordination with each other and give us a much wider distribution of infrastructure as a spur to growth?

[Lord Sassoon]

My Lords, on the first of the questions which my noble friend raises, money will indeed flow through the banks as a result of the guarantee scheme to micro-businesses, although I appreciate that it will always be tougher for them. It is worth noting that there will be banks coming into the credit easing framework that were not there previously—some of the new entrants into the market—so we are maximising the footprint through the banks. I draw attention to one of the other schemes that will be directly relevant to micro-businesses. The seed enterprise investment scheme and the related one-year CGT holiday are to encourage investment in new, early-stage companies. That will commence from April 2012, with a kick-starter of offering a CGT holiday.

On my noble friend’s second question, I well take the point about the importance of locally driven infrastructure schemes, which is why my right honourable friend the Chief Secretary announced the initial £500 million fund specifically for that purpose earlier in the autumn. Beyond that, the use of the CIL is being considered, but I would just caution that we need to think about the fiscal impact of widening that scheme.

[Lord Wills]

My Lords, since I came into this House some 18 months ago, one of the most notable features week after week has been the presence on the Bench to the right of the Minister of former Ministers who served with great distinction in previous Conservative Administrations, including three former Chancellors who served in the Treasury during the 1980s. Can the Minister shed any light on why not a single one of them is in their place today to support him in this most depressing Statement?

[Lord Sassoon]

My Lords, I take it as a sign of great confidence in the direction of policy of my right honourable friend the Chancellor of the Exchequer because former Chancellors are never shy of giving their advice. If they are not giving it today, I assume that they are satisfied.

[Lord Cormack]

My Lords, I am sure that my noble friend is entirely right in what he has just said. Am I right in believing that the money that has been earmarked for HS2 is still there? If that is the case, could I suggest to him, bearing in mind the stimulating effect on the economy that infrastructure plans have wherever they take place, that it might be better to abandon that scheme and to use that money for reinstating more Beeching lines and other things, so that people all over the country have the benefit of the money that my right honourable friend the Chancellor has said they should have? Could we abandon that scheme in favour of others?

[Lord Sassoon]

My Lords, I am delighted that not only can we continue with the HS2 scheme, although it does not impact in any material way on the current spending review period, but also that a number of other exciting rail projects have been announced or confirmed today; for example, the reopening of the Oxford-Bedford link as part of the overall possible link between Oxford and Cambridge, the electrification of the trans-Pennine line, and lots more that is going in rail infrastructure.