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Mr. Richard Livsey (Brecon and Radnorshire): The Chief Secretary rightly castigates the Conservative Opposition for their wish list and the £16 billion hole in their budget. Will he tell me whether there were discussions prior to the settlement on public expenditure about public expenditure match funding to go with European objective 1 funding for Wales? We are grateful for the European public expenditure survey cover, but we do not appear to have public expenditure for match funding.

Mr. Smith: I find those remarks surprising, given the warmth of the welcome for our spending review announcement and the benefit that it brings to the objective 1 areas in Wales and the regions. The 5.4 per cent. real increase for Wales, as well as the objective 1 public expenditure cover which we have provided, will more than facilitate match funding and enable west Wales and the valleys to benefit from objective 1 funding to the full.

I was dealing with the Opposition's argument that our plans are imprudent or unsustainable. We have put these plans forward on very cautious assumptions. The assumption of 2¼ per cent. growth is based on the figures published in the Red Book. These assumptions are tested against trend output, which is 1 per cent. lower than that. It is there for all to see, on page 8 of the spending White Paper, that even if growth were lower, we would meet the golden rule.

These cautious assumptions on growth, unemployment and market expectations of interest rates have all been audited and confirmed as reasonable and prudent by the National Audit Office. They are affordable within the Budget arithmetic in the Red Book, which shows the tax share of GDP falling and which the shadow Chancellor endorsed the day after the Budget when he said:


These plans are sustainable because of our cautious assumptions and because we have sorted out the public finances, so that not only is debt interest £5 billion a year lower than it was, and not only are we meeting the golden rule, but the projected current surplus goes from

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£14 billion this year to £16 billion, £13 billion, £8 billion and £8 billion, with net borrowing lower in every year than in any year of the last Parliament.

Mr. Michael Fallon (Sevenoaks): The Chief Secretary described all these assumptions as cautious. What does he say to Goldman Sachs's assessment today that as a result of the public spending plans interest rates will be higher and the pound stronger?

Mr. Smith: The spending plans entirely meet the conditions that we set out in the Budget settlement. They therefore reflect that locking in of extra fiscal tightening. They are entirely within the envelope on expenditure--the 2.5 per cent. increase in current spending, and the doubling of investment as a proportion of GDP from 0.9 per cent. to 1.8 per cent--which we set out at the time of the Budget. There is thus no reason to expect the judgment on the macro-economic fiscal fundamentals to have changed since the Budget. These are prudent, sustainable plans both because we comply with our golden rule and, as I have explained, because we have straightened out public finances. This is prudent spending; it is spending for a purpose.

When the Tories were in Government, from 1979 to 1997, 42p of every extra pound they spent went on debt interest and social security. We will spend only about 17p in every extra pound we spend on debt interest and social security. More than 80 per cent. of our extra spending, then, goes to front-line services and investment.

The Tories do not have a leg to stand on with their claims of unaffordability or unsustainability. No matter how hard the shadow Chancellor wriggles around on spending, he cannot escape the logic that he would cut our plans, thereby putting a £16 billion axe to our crucial public services.

Caroline Flint (Don Valley): My understanding is that during the course of the Finance Bill, the Conservatives asked for concessions to the tune of £4 billion. Rather than £16 billion-worth of cuts, therefore, would the figure not be nearer £20 billion?

Mr. Smith: My hon. Friend is entirely right: the Conservatives crank this up by the day. They made spending commitments for an extra £4 billion during proceedings on the Finance Bill, and their document outlines all the extra spending that they say they want to put into services. That all adds to the figure of £16 billion, which is the logical consequence of moving from 3.3 per cent. expenditure growth to 2 per cent.

The Conservatives' position is unsustainable, and it will not be believed by the British public. With their record of broken tax promises, mounting debt, mass unemployment, inflation, and boom and bust, they cannot be trusted by the British people again. Their position is in clear contrast to ours--we want stability, investment, quality public services and a rebuilding of our country. With this review, the Government have made clear the next stage in the renewal of Britain.

Mr. Geraint Davies (Croydon, Central): I note from studying the statistics that the cost of unemployment

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benefits will have fallen by 40 per cent. by 2001-02 from the time when the Government took hold of the economy. Does my right hon. Friend think that the Opposition will target expenditure cuts on social security? Where do they intend to make these cuts? Will they come from families, children, pensioners and people with disabilities? Even if the Conservatives squeezed the poorest as much as possible, they would have to go even further in cutting expenditure on health, education and front-line services. There is no place to make the sort of cuts they want, and the British public need to know that.

Mr. Smith: My hon. Friend is absolutely right. The Conservatives could not find that scale of spending cuts in social security which, along with debt interest, consumed 42p in every extra pound that they spent throughout their period in Government. It was actually 55p in every pound when the shadow Chancellor was Chief Secretary to the Treasury.

My hon. Friend is also right about the benefit to the fiscal position, as well as the incalculable benefit to individuals and their families, of the 1 million extra people we have got into jobs. That contributes £3.5 billion to our fiscal position, just as the savings on debt interest contribute some £5 billion. We are able prudently to undertake this investment because we have saved on the costs of unemployment and on that millstone of debt that the Conservatives strung around our neck.

The review represents movement through to the next stage in the renewal of Britain. Our first priority was to build a platform of economic stability, which is a crucial precondition to achieving stable and steady growth in a modern economy. We made tough choices to sort out the public finances. Our next goal was to provide employment opportunity for all--to get more people into work than ever before. With the help of the new deal, by making work pay, there are now 1 million more people in work than in 1997. Indeed, there are more people in work than ever before.

Now, as we maintain a platform of stability and continue to create new employment opportunities, we are investing in the future of our country--its public services, its infrastructure, its skills and its people. We are tackling that legacy of neglect, the years of underinvestment and the damaging short-termism. Tackling that was never going to be easy--we never said that it would be--but we are doing it and we are determined to build a Britain where there is opportunity and security for all.

What does the Conservative party want to do, apart from wielding its £16 billion axe? It wants to return us to the short-termism that saw our public services, infrastructure and skills base fall into decline and led our economy into boom and bust and stop-go. The shadow Chancellor has confirmed that approach. He told Sir David Frost that he would plan "year after year". The right hon. Gentleman plainly opposes setting out three-year plans; he claims that they are unsustainable. He is not getting into the business of guarantees; he would plan year by year. That would move Britain back to chronic short-termism--the boom and bust, the excesses, the unemployment, the high inflation and high interest rates, and everything else that did so much damage to our country before.

By contrast, we are moving Britain closer to our goal of opportunity and security for all. We are laying the foundations for the future--foundations for increased

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productivity, a faster, integrated transport network, a renewal of Britain's neglected science and research base, and the investment that will modernise our schools and hospitals and give the police the increased resources that they need to crack down on crime.

What is more, our new spending plans are about delivering employment and education opportunity for all, building on the success of the new deal and our other policies that have helped more than 200,000 young people into work and cut youth unemployment by more than 70 per cent., just as we have cut long-term unemployment by more than 60 per cent.

As we take the next steps towards our goal of full employment, we recognise the importance of education and lifelong learning as the surest route to employment and employability. That is why education spending across the United Kingdom will grow by 5.4 per cent. over the next three years. Indeed, with the additional resources provided for education at the time of the Budget, over the four years to 2003-4 education will benefit from an annual growth rate of 6.6 per cent. in real terms--the largest sustained investment in our country's education for more than 50 years. In fact, over the five years covered by the Government's two spending reviews, education spending will have risen by 33 per cent. in real terms--more than it rose in the entire period of the Tory government, from 1979 to 1997. That is money for schools, teachers, books, new equipment--investment to give our children the best start in life.

Education cannot be limited to the few. In the 21st century, the need to learn new skills will be very important to adults who want to get on and make the most of their talents. We must tackle the scandal of the 2 million adults in Britain who have literacy and numeracy skills equivalent to those of a seven-year-old. That is why the settlement makes a commitment to investment in adult basic skills and education.

With extra resources comes the responsibility to deliver results. This spending review is not only about the amount of money that each Department will get, because with each allocation will come public service agreements to achieve real improvements in all our services. In education, we have set the target of increasing the percentage of 16-year-old pupils obtaining five or more GCSEs at grades A to G, including English and maths, to 92 per cent. by 2004, from the 86 per cent. that it was in 1997. These are resources for results.


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