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Mr. Leslie: I understand that the hon. Gentleman is talking about private and independent money paying for
health or whatever, but with regard to the amount of public funds raised through general taxation for public services, I understood that his guarantee was that the level of public expenditure would reduce year on year, Parliament by Parliament. Is that not the nature of the guarantee?
Mr. Letwin: No, it is not. I do not expect the hon. Gentleman to agree with our policy, or necessarily even to want to present it as it is in future, but I want to ensure that, at the end of my speech, he knows what our guarantee is, and, much more importantly, why it is that way.
In addition to the question--I accept that it is a different question--of bringing to the aid of the crucial public services extra funding from the private sector, which is a vital ingredient, we also contend that we shall continue to need, as we always did under the Conservative Government, to increase by considerably more than the rate of inflation spending on the crucial public services--not reduce but increase. Spending on all the central public services such as health and education needs to go up. I shall come to the rest in a moment, but I want to get the first point into the hon. Gentleman's mind, because it would be marvellous if one intelligent Labour Member knew exactly what we were asserting so that he can go away and work out whether, as a matter of fact, any economist in the world would challenge the propositions that I am about to make.
The first proposition is that public spending on those crucial public services can and should, before we come to additional funding from the private sector, go up by substantially more than the rate of inflation. Can that be connected with, and consistent with, two other things? First, there is "Mr. Gordon Prudence Brown's" prudence. Can one, in other words, sustainably increase crucial public service spending? Secondly, can it be made consistent with reducing the tax burden as a proportion of GDP? Can those three things be put together?
Let me perform a small piece of mental arithmetic which I hope will for ever liberate the hon. Gentleman from the supposition that this is a miracle when, it is, in fact, extraordinarily simple. It is so simple that it has entirely eluded Labour Members, I think genuinely.
Mr. Letwin:
No, no borrowing is involved. Let us consider the arithmetic.
Mr. Letwin:
Yes, it is interesting. However, when one hears it, it is not quite so interesting because it is so devastatingly simple. Public spending is about £370 billion a year. If the GDP, of which it is a part, is growing on trend--I am talking about cyclically adjusted GDP--at about 2.5 percentage points in real terms, which is, roughly speaking, what the Treasury thinks is happening--
Mr. Chris Pond (Gravesham):
The hon. Gentleman has already sent the hon. Member for Arundel and South Downs (Mr. Flight) to sleep.
Mr. Letwin:
My hon. Friend has no doubt been asleep for some hours. He knows this already, but Labour
If GDP goes up by 2.5 percentage points in real terms each year, as the Treasury thinks it will--the Treasury thinks that the long-term trend rate of growth in the economy is about 2.5 percentage points in real terms compound per annum, as I think the Financial Secretary would agree if called upon to do so--and it is probably about right--give or take a quarter of a percentage point, which is what the economists argue about--and if the crucial public services, which take up about one-fifth of £370 billion, are going up at about the same rate, and if all the other public services taken together, the rest of the £370 billion, are increasing by slightly less than 2.5 per cent in real terms per annum--in other words, are increasing not just nominally but in real terms by 1,1.5 or 2 percentage points each year--it will ineluctably be the case that, without public borrowing increasing an iota across the cycle, there will be a reduction in the need to tax as a proportion of GDP. This is a simple piece of arithmetic.
Mr. Steve Webb (Northavon):
I admire any hon. Member who uses the word ineluctably so beautifully. The hon. Gentleman gave away the Conservative position when he said that the crucial public services occupy one fifth, or whatever, of the total--by which he must have meant health and education alone. He must have excluded the state pension. Clearly, he does not regard that as a crucial public service. Given the demographic pressures on the state pension, which would eat up at least his 1 per cent. or so real rise, is he saying that a Conservative Government would never give pensioners more than the 75p that they got this year?
Mr. Letwin:
No, I am not saying that and I will return to the subject. The hon. Gentleman is a serious thinker about pensions and social security in general and asks a serious question. As it happens, the serious dispute between the Liberal Democrats and the Conservatives concerns social security, not health and education. Before I deal with that question, I want to ensure that our friends on the Labour Benches, who have genuinely not understood what we or the world of economists are arguing about, are put in the picture so that, although they may not want to participate in the debate, they at least know what we are talking about when we are participating in it.
Mr. Vernon Coaker (Gedling):
The hon. Gentleman said that we would have a recession.
Mr. Letwin:
Yes, yes. We made the most dreadful mistakes: we went into the exchange rate mechanism, we spent too much money in 1990 and we did many other things of which we are deeply ashamed. Yes, that is true. Alas, it does not alter the facts of economics that the Conservatives should have made a mistake at some time. I hesitate to mention this, but I warn the hon. Gentleman that at some time some Labour Government may also make some slight mistake. These things happen. What do not change are the laws of economics. They are governed by the laws of arithmetic, which we all understand. If Labour Members take out their pocket calculators, they
Therefore, we are facing the issue that was raised by the Liberal Democrats--most recently, by their spokesman on social security, the hon. Member for Northavon (Mr. Webb), and well deserved that position is too. He asked the interesting question, which is not whether one can raise by a considerable percentage in real terms--indeed, by as much as or more than gross domestic product--spending on the critical public services. By those, I mean health and education when I talk about one fifth of the expenditure, and possibly also the police and defence if one ups the figure a little. One can increase that spending and do so sustainably, with a falling ratio of debt to GDP let alone a maintained ratio, which is probably a more sensible target, and one can increase spending on the rest of the services by 1 per cent. or 1.5 per cent. of GDP each year quite comfortably. I entirely accept the hon. Gentleman's argument. What one cannot do is also to allow the entire burden of social security spending, which broadly occupies £100 billion of the £370 billion a year, to rise by or faster than the rate of growth of the economy on trend--I leave aside the cyclical effects, which obviously complicate the picture on social security. One cannot do that; and that is as true as everything that I have already said.
The dispute between the serious hon. Gentleman on the Liberal Democrat Benches, the hon. Member for Northavon, and ourselves, in which the Chancellor has been an unwitting participant, actually concerns precisely how far it is or is not possible in time to constrain the growth of spending on social security in its various forms, and pensions are a major component--in such a way that one answers genuine social needs, bearing in mind all the lessons that some of us--not, alas, the Government--have learned from the right hon. Member for Birkenhead (Mr. Field), who taught many of us much about this subject. We all accept that the social security budget will grow in real terms, but can one so constrain it that one does not end up either with imprudence or the need to raise taxes?
Before I say why the hon. Member for Northavon and the Liberal Democrat party are wrong on that subject, I have a further observation that undercuts any argument that they might like to deploy: in the end, one cannot fund the crucial public services that I have described, which it is the common aim of all three parties to fund, if one does not have the tax base with which to do it. That is uncontroversial. The Conservative party and I believe that having that tax base is a matter of being able increasingly, in a sort of global Laffer-curve effect, to compete on tax with the most successful economies in the world.
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