Comprehensive Spending Review

Lord Watson of Invergowrie Excerpts

Monday 1st November 2010 Lords Chamber

[Lord Watson of Invergowrie]

My Lords, this view has been expressed on numerous occasions in the six or so hours over which we have debated the spending review, but I believe that it bears repeating. Contrary to what we have heard from coalition Ministers—including the noble Lord, Lord Sassoon, in his opening remarks—the measures announced in the spending review on 20 October were not inevitable. In point of fact, the economic crisis is the opportunity that many Conservatives—although I can see just three Conservatives opposite, apart from those on the Front Bench—have been waiting for. That was demonstrated by the crass and vulgar waving of Order Papers at the end of the Chancellor’s speech almost two weeks ago.

The coalition has seized the chance to reshape the economy by announcing an £83 billion shrinkage of the state. In the Financial Times on the day after the Chancellor’s Statement, Martin Wolf, who is widely considered to be one of the world’s most influential writers on economics, dismissed the Chancellor’s claim that cutting the fiscal deficit and reducing the share of public spending in GDP was unavoidable. Martin Wolf said:

“This is not so. It was a choice to concentrate so much of the fiscal adjustment on spending. Similarly, the UK government was never Greece or Ireland … The chancellor presents the hypothesis of looming national ‘bankruptcy’. If so, the UK must have been bankrupt for much of the past two centuries”.

I am not suggesting that reducing the fiscal deficit could be avoided, but the choice of how and how quickly it should be done is a matter of political judgment—or, perhaps, of ideology. The coalition has adopted the maxim that a good crisis should not be allowed to go to waste. That view is propounded by the Chicago school’s spiritual leader, Milton Friedman, who is on record as saying,

“Only a crisis … produces real change”.

He also wrote that, after a crisis has struck,

“a new Administration has some six to nine months in which to achieve major changes; if it does not act decisively during that period, it will not have another such opportunity”.

That helps to explain why the coalition is forcing through a raft of cuts for which it has no mandate. The coalition is doing so not because the economy is on the verge of collapse—it is not—but, as the Nobel Prize-winning economist Paul Krugman has said, because,

“the Tories are using the deficit as an excuse to downsize the welfare state”.

That point has been made by many noble friends on these Benches today.

Not only does the spending review herald the harshest public spending cuts since the 1920s, but the coalition is using the economic crisis to reign in the state and to reorganise society. I can understand the Conservatives doing that, but my main point is that, to their shame, the Liberal Democrats are allowing themselves to be used in this iniquitous process, which is nothing less than social engineering. Neither party has a mandate to embark on this course or for the string of decisions that have been announced in blatant violation of pre-election pledges, from the abolition of universal child benefit to the privatising transformation of the NHS. That is what most people voted against in May.

Following the months of leaks about cuts that were used to soften up the public with the fatuous theme of “We are all in this together”, I would like the Minister to say how exactly the Cabinet and their families—with their trust funds and prep schools for their children—will suffer. We should be told just what sacrifices they feel they will have to make. I will not be holding my breath.

When the Labour Government proposed any policy perceived as affecting the well-off disproportionately, the usual media suspects would characterise it as a class war, but the silence from those same mouthpieces over the past two weeks has been deafening. Just what is different about the coalition attacking the poor? Millions of people really will suffer as a result of these cuts. Over the next four years, Government departments face average cuts of 19 per cent in real terms, of which the heaviest—of at least some £18 billion—will be to welfare, which is targeted at the most vulnerable.

Much has been said and written since the spending review was announced about the distributional impact, but the bottom line is that the Institute for Fiscal Studies—which, incidentally, is described even by the Daily Telegraph as the country’s most respected economic forecaster—states:

“Our analysis … shows that … with the notable exception of the richest 2% … the tax and benefit components of the fiscal consolidation are, overall, being implemented in a regressive way”.

The IFS is an independent body, whose former director, we should not allow it to be forgotten, is now the head of the coalition’s Office for Budget Responsibility.

There are to be deep cuts to public services that are disproportionately used by the poorest households, such as social housing and social care. The Chancellor’s insistence that those with the broadest shoulders would bear the greatest burden and that his cuts would hit the richest hardest would be laughable if it were not so serious. His own figures show that the poorest 10 per cent will bear the largest share of the spending review announcements. Even when all tax and spending measures are taken into account, the poorest 10 per cent end up second worst off of all income groups—and that is only because the Government’s calculation boosts the impact on the top 10 per cent by including the 50 per cent tax rate announced by the previous Government.

The coalition appears to be relying on the private sector to ride to its rescue by hoping for public acceptance of the endlessly repeated falsehood that Labour profligacy created the deficit that the coalition now faces. The facts tell a rather different tale. Britain’s budget deficit has mirrored the average deficit rise across the 33 most developed countries. The deficit increased from 1 per cent of GDP in 2007 to 9 per cent in 2009 as tax receipts plunged and benefit payments increased due to the crisis of 2008.

There are many other areas that could be highlighted, were there the time. For instance, why should universities be expected to face deep cuts when we need to maintain the expansion of higher education to help grow the economy? Why should the Government continue to pay to schools and academies a greater amount of money to educate each 16 to 19 year-old than they do to FE and sixth form colleges, despite evidence that colleges recruit a more disadvantaged group of students?

One area that I must highlight—as many have already done, not least my noble friends Lady Turner of Camden and Lady Gould of Potternewton—is the effect of the spending review on women and, by extension, on families. The coalition’s cuts will fall disproportionately on women, who are more likely to work in the public sector. According to research by the House of Commons Library, measures announced in the spending review will hit women twice as hard as men. That seems hard to believe, but it is because benefits typically make up one-fifth of women’s income as opposed to only one-tenth of men’s. For instance, 1 million more women than men claim housing benefit and many of those will be lone parents who now face poverty as a result of the cuts and restrictions about to be imposed. Of the £8.5 billion that will be raised by cutting direct payments to individuals, two-thirds will come from women—again that is revealed by the House of Commons Library. In June’s emergency Budget, £5.8 billion was raised from women and £2.2 billion from men. Of the £16 billion in total that is being clawed back through direct tax benefit changes, £11 billion will come from women. Yet we are told the spending review is fair.

Tories and Lib Dems do not seem to understand the way that many poorer families live. Clearly, they believe that supporting families makes them dependent, whereas the reality is that such support helps working parents to become more independent. Everyone knows that women in general live on lower incomes, yet the coalition has chosen to force them to bear a greater share of the burden.

In finishing, I will say a brief word on the effects of the cuts in housing benefit, which has also been referred to by many noble Lords. I just wish that Ministers would admit that housing benefit is not just for the unemployed. Some 300,000 people in employment receive housing benefit. The issue is about much more than a few well-off areas of London—although you would be hard-pushed to know that given the media coverage of the past two weeks—and more than 750,000 claimants could be affected by the changes to the way local housing allowance levels are calculated. That will involve families in many communities across the UK. Indeed, Department for Works and Pensions figures show that Scotland will be hard hit. Around 40,000 people in Scotland will have their housing benefit cut from next year and will lose £7 a week—over £350 a year on average—because of the changes, even before the 10 per cent reduction for the long-term unemployed is taken into consideration.

On that issue, the coalition has been forced to think again, and rightly so if it genuinely intends that the effect of the spending review should be fair. I have to say that that claim has already been revealed to be a hollow one, as millions of people will, I fear, discover to their cost in the years ahead.