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Mr. Jack: We have never had a Chancellor like this before.

Mr. Bruce: It is all very well to say that. When challenging Opposition politicians, Conservative Members are fond of saying, "First, create your growth." However, the Tories are basing their spending plans on a level of growth that has never been produced. If they deliver it, they will be able to spend it; if they do not, their forecasts and promises are empty. That is the real situation.

There is also an element of modifying the books. When forecasting expenditure commitments, one traditionally assumes a flat unemployment situation--that is, one assumes that unemployment will remain at the same level as the previous year. The Government assume falling unemployment for the first year. I hope that they are right, but a change of forecasting technique has enabled them to claim that there is extra room for manoeuvre; all that they have done is changed the rules, to massage the figures so that they look slightly more acceptable. If they are unsuccessful, their promises will not add up. That is why the public are increasingly disillusioned about what the Conservatives have to say.

We all need to review certain base areas of Government expenditure provision. The Government's big idea on pensions, which they announced yesterday, is not so big really, because all the parties agree in principle that we have to do something about funding the earnings-related aspect of pensions in the long term if we are to deliver it. We all have reason to be ashamed that the basic state pension is inadequate and that it will be unsustainable even to provide an inadequate basic pension for many people who do not have alternative provision. All the parties agree on that. The Governments's proposals--at least with modified details--are within the ball park of what we all can agree.

It is a cheek for the Government to announce, after 18 years, without debate, and six or eight weeks before a general election, "We", one party, "are about to introduce the biggest overhaul in pension provision ever achieved." As they freely admit, they are looking to operate the programme over 30 to 40 years. If there is one matter on which all the parties should co-operate, it is how to fund pensions--something that will have to be managed by successive Governments of different political complexions. It simply is not good enough for one party to claim that it can sort out pensions on its own. I anticipate the debate next week, so I shall not dwell on that further.

We have to review the way in which further and higher education is funded, because the reality is that Government funding has been like a roller coaster: massive expansion, then a panic, then a sudden contraction, which has resulted in inadequate resources. There is nothing in place to ensure the proper management and sustained expansion of further and higher education to the quality that we need.

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The right hon. Member for Kingston upon Hull, East (Mr. Prescott), the deputy leader of the Labour party, argued about the extent to which the Government have passed on debt to local authorities. Apart from anything else, that has created conflict between central and local government, which is not healthy for the proper delivery of good-quality public services. It is simply preposterous for the Government to suggest that every council in the country is profligate, incompetent and disreputable in its delivery of public services.

The Government know that that is not true, and so do the public. There is a variation in quality in how councils deliver services, but the Government have consistently increased their expectations of what councils will do, while reducing the allocation of funds from central taxation. At the same time, they have reduced the ability of councils to raise their own revenue. Fifteen years ago, councils controlled 50 per cent. of their revenue; they now control 15 per cent. The Government have in effect taken the revenue from councils and used it to disguise their own incompetence, and refused to allow councils a realistic allocation of resources.

The Government have financed much of their programmes by selling off capital assets, but we are running out of capital assets to sell and mechanisms by which to sell them that give a good deal to the taxpayer and a good service to customers. I am prepared, as is my party, to consider any reasonable and realistic proposals. There is a proposal to privatise London Underground, but at a very low price in relation to its capital assets, and that does not answer the question of how one will sustain the service in the long term. If it is to depend on continuing massive taxpayer subsidies, there will be many questions about why private companies should be allowed to fund their profits from taxpayer subsidies.

I do not accept that it is not possible to fund publicly owned enterprises out of the private sector without increasing the cost on the public sector borrowing requirement. Risk-bearing bonds for specific projects are a perfectly reputable, well-established way of financing specific developments that do not need to be charged to the PSBR. It is the Government's ideological drive to privatise but not to explore the ability to bring in the private sector in a risk-bearing but worthwhile way to the mutual benefit of both parties. The job of the private sector is to bring the benefits of management and risk analysis. The job of the public service is to ensure that we deliver adequate services. It is perfectly possible for the two to be combined.

As we move towards a general election, the public will have before them two parties offering something that the public know that they cannot deliver: falling borrowing, falling taxes and rising public services. I have said on numerous occasions that there are not many people on earth who have learned how to walk on water, and none of them is on either of the Front Benches. The reality is that people want a presentation of what the priorities are; how they will be paid for; what can be done; and what cannot be done. That is exactly what they will get from the Liberal Democrats.

7.45 pm

Mr. Robert Jackson (Wantage): Earlier today the House enjoyed a dress rehearsal for the general election debate ahead, although the right hon. Member for

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Kingston upon Hull, East (Mr. Prescott) will be in trouble with the hon. Member for Hartlepool (Mr. Mandelson) if his soundbites are as long as his speech.

At the risk of being a party pooper after all the excitement earlier--there is a pervasive air of unreality in the debate between the two Front Benches on public expenditure--I wish to say something about that and then to spell out in detail the implications that it has for higher education, to which the hon. Member for Gordon (Mr. Bruce) referred in an excellent speech. The unreality lies in the fact that both Front Benches seem to believe, first, that it is impossible to raise taxes, apart from Labour's one-off exception--the so-called windfall tax--secondly, that public borrowing must be reduced, not least to meet the Maastricht criteria and, thirdly, that it is possible at the same time to maintain public services free to their users at present standards or at even higher standards.

I believe that that is, to put it charitably, an unrealistic conclusion because most public services are labour intensive and their nature is such that machinery cannot easily be substituted for human labour. The price of labour in the public sector is largely determined by independent pay review bodies, operating on the principle of comparability with the private sector. Accordingly, the cost of public services will tend to rise roughly in line with those in the rest of the economy. However, if public borrowing is to be reduced and taxes cannot be increased, either the cost of labour in the public sector must be brought down, by abandoning the comparability principle, or the number of public sector employees must be reduced. Either way, the quality of public services will fall if my assumption--that technology cannot so easily replace labour--is correct and the funds for public investment in new technology are tightly constrained.

It is the proud boast of my right hon. Friends on the Government Front Bench that the ratio of public spending to gross domestic product in Britain has fallen to some 41.6 per cent. in the present financial year, and that it is scheduled to fall still further in future years. By ruling out increases in both taxes and public borrowing, the Labour Front Bench has implicitly accepted that Britain will continue to have the lowest public expenditure to GDP ratio in Europe. Well and good. I have no fundamental quarrel with that project, although I am not sure that it will carry public support when the implications are properly understood. As responsible politicians, we have a duty to face up to those implications, even eight weeks before a general election.

In spite of the remarks by the right hon. Member for Kingston upon Hull, East about the European social model, the position on both sides of the House appears to be that Britain's true comparators are not the countries of continental Europe with public expenditure to GDP ratios of roughly 50 per cent., but rather the United States and Japan with public expenditure to GDP ratios of 33.3 per cent. and 36.2 per cent. respectively.

It must surely follow that our aspirations in terms of public services should match those of the Americans and the Japanese rather than those of the continental Europeans. Alternatively, we must resign ourselves to running public services that lack the private sector-driven buoyancy of their equivalents in the United States and Japan and are increasingly degraded and slummy compared with those on the continent.

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What is the way forward? If the present Front-Bench consensus prevails, we are surely obliged to look at the way in which health, education and other public services are financed in the United States and Japan. Let me pick out one feature. In almost every case, services which in Britain and elsewhere in Europe are provided at public expense free to the users are funded in the United States and Japan on a mixed public-private basis. In my view, the only way forward consistent with our aspirations to keep a low public expenditure to GDP ratio and to maintain high-quality public services is to put them on a new financial footing based on a mixture of public and private funding.

I do not want to venture any general observations about how it should be done, except to say that we must recognise how astonishingly inept we have been in the past at handling the issue, notwithstanding the recent welcome innovation of the private finance initiative.

Every ideology--left, right and centre--has conspired to produce the result that in Britain services are either wholly private--in which case almost anything goes--or wholly public, in which case the Treasury rules, usually to the most obscurantist degree. We face a real effort of imagination--almost of self-overcoming--if we are to succeed on the road we really must take.

The best that I can do in the time I have today is to turn to one sector of public spending in which we are perhaps closer than in any other to embracing the idea of public-private co-operation: higher education.

In the universities, even at the height of the welfare state consensus, there always remained an element of private finance in the shape of the deemed contribution by parents to the maintenance of their student children. At the end of the 1980s, I had, as a Minister, something to do with the introduction of a further source of private finance through loans to students to enable them to finance part of their maintenance by anticipating their future earnings after graduation. Although the policy was fiercely resisted at the time, it is now seen to have been right and there is a emerging consensus that students and/or their parents should be expected to contribute further. A committee chaired by Sir Ron Dearing is deliberating on the matter and is expected to report in the mid-year--safely after the election.

I now come to what I consider to be the essential issue--whether, as some suggest, increased private contribution to higher education costs should continue to be limited to maintenance costs only, or whether it should be directed to the funding of higher education proper. In line with my previous argument about the implications of the attitude of Members on both Front Benches to tax and spending, I would plead with Front-Bench Members at least to keep the option open during the election campaign.

One reason for my request is that the additional finance that will be required to maintain higher education of an acceptable quality will not be forthcoming simply by shifting into university funding the residual public spending of some £1.3 billion which at present goes to student support, if that were to be the deal on offer. Sir Ron Dearing and his colleagues will make their assessment of what will be required and it would be wrong and, above all, unnecessary for Front-Bench Members to prejudge the matter before the committee reports.

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I said earlier that in Britain every ideology conspires to make us bad at managing private-public partnerships. The debate about higher education funding provides a good example in the shape of the widely held notion on both sides of the House that education must be free, so tuition costs at university must always be met by the taxpayer with nothing expected from students and their families. The great principle of universal free university education is absent in the United States and Japan, where the great private universities and the state universities charge tuition fees. It is also a comparatively recent innovation in Britain, where a deemed parental contribution to tuition fees remained until the late 1970s.

The notion that university education must be free to users has no philosophical justification. There is a logical link between the idea of compulsory education and the principle of state funding. If the state imposes an obligation upon parents, it has a duty to ensure that parents--or at any rate poor parents--can meet that obligation. Outside the limits of compulsion, however, it seems to me that there is no moral obligation on taxpayers to pay for education. The only considerations are those of expediency, such as at what price for education do undesirable consequences emerge in terms of participation rates or access by all social classes. Can it really be true, as the exponents of free higher education sometimes seem to argue, that the price of education to the student has to be set at zero to bring about any desired level of participation?

Is university education so poorly esteemed among the working classes, for example, that any price above zero will make it unattractive? One has only to ask those questions to know the answer. Practical experience since the introduction of student loans has demonstrated that requiring students to contribute to their costs while studying is compatible with higher participation rates in general and in detail with higher participation rates from the less advantaged social classes.

Two further fallacies underlie the ideology that although their maintenance might be paid by students themselves, tuition should not. The first is that there is a meaningful distinction to the student and his family, but in practice each student will have only one budget in which what matters is the size of his total outgoings rather than their various purposes. The second is that while tuition is a fixed cost, maintenance is a discretionary variable--as if the geographical distribution of our universities and the range of their courses were such that all students had an equal discretionary ability to save costs by living at home.

That brings me to equity, which must always be a central value in our public expenditure policies. Not only is it inequitable and unrealistic to assume that more than a fraction of students have the discretion to continue to live at home; there is also a marked inequity in the idea that the additional contribution we envisage from students should be towards maintenance rather than tuition.

If the entire cost of student maintenance has to be met by student borrowing, the effect will be to eliminate the contribution that is now expected from better-off parents, and amounts to some £800 million. Making students liable for all their maintenance costs would be socially regressive, in the same way as Shirley Williams' abolition of the parental contribution to tuition fees in the late 1970s.

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Still worse, if our main concern is to restrain the growth of public expenditure, the policy of requiring the student to contribute more to his maintenance rather than to tuition costs must be relatively expensive, at least until that distant date when income from the loans scheme will exceed expenditure on it.

As such a high proportion of the student body is from better-off families, the Treasury will incur substantial up-front costs as parental contributions are replaced by student borrowing. If, however, the parental contribution to student maintenance were retained alongside a private charge for tuition, most better-off families would continue to use their own resources to assist their student children to pay the bills.

In debates about public expenditure, it is all too easy to frame one's arguments solely in terms of the balance sheet, and that is how I have argued so far. We also have to recognise a deeper truth--that the way in which we pay for services can have implications for the way in which they are provided. Let me again apply that insight about public expenditure to the specific case of higher education.

There is a curious paradox in British universities today. In every other area of public policy, there is a healthy all-party consensus that decentralisation is desirable, that local units should be encouraged to get on with the job and that morale in public services depends on local initiative and local responsibility. In our universities, however, the whole trend of the last 20 years has been in the opposite direction. As the cost to the state of higher education has risen, the state and its agencies have, perhaps inevitably, become more and more directive and intrusive in their relations with the universities. The effects are well known to all who know the universities: a growing sense of powerlessness, and a pervasive demoralisation. The balance sheet may look good to the Treasury--more, much more, higher education at lower, much lower, unit costs--but what, meanwhile, is happening to what we think that we are buying?

Here we move beyond the question of resources to more fundamental questions, about the conditions in which activities such as university teaching and learning survive and flourish. I believe that what is needed is a greater measure of autonomy and local responsibility than the present state-dominated and state-accountable funding arrangements allow. Not only are more resources required for that, but, more fundamentally, those resources should be private, not public, and those who provide them should be accountable not to politicians and bureaucrats but to the users who benefit--or hope to benefit--from what they are paying for.

That is not to say that I am calling for a complete privatisation of the universities. That would be impracticable, and, in view of the importance of the public interest in higher education, it would also be undesirable. What I am pleading for in the funding of higher education is a mixed financial system, analogous to, for example, the system in the university of California. If we are to approximate to the American ratio of public expenditure to gross domestic product, let us at the same time adopt the admirable American system of higher education funding, in which the taxpayer's contribution is complemented by student fees so that the autonomy of

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universities is underpinned by the margin of financial manoeuvre that is secured by some 10 to 20 per cent. of income outside state control.

In the interests of social equity, the state should of course act to enable students to pay such fees. The student loan scheme should be extended--preferably outside the public sector borrowing requirement--to enable students to borrow up to a certain overall limit, both to maintain themselves and to pay their contribution to the costs of tuition. Beyond that the state should not intervene, except perhaps to insist that "means-blind" admission policies should be followed as a condition of state funding. In particular, the state should resist the temptation to try to fix the level of student fees. As the purpose of the policy should be to underpin university autonomy, the matter of fees should be left entirely to the autonomous institutions. It should be an essentially private transaction between universities and their students.

I make no apology for taking advantage of a debate on public expenditure to make a speech that is mainly about university finance. Not only is higher education an important branch of public spending in quantitative terms; it is also a striking example of how the way in which public spending works can affect the quality of the services being purchased. Our universities are like the proverbial goose that lays the golden eggs. So much do we appreciate the eggs that we are directing more and more effort to their mass production at the lowest possible cost-to-benefit ratio. As a result, the gold is rapidly turning to ever-thinner plate, and we are on course to create a university system that is over-centralised, over-bureaucratised and increasingly lacking in quality. In a country which has to live by its wits, that is unacceptable, and the first step towards putting the matter right must be to recognise the unreality of the assumptions about public expenditure, on both sides of the House, that have brought us to this pass.

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