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The Minister is right to say that the mood on the economy has changed, certainly compared with three months ago. We are no longer talking in terms of Armageddon and a return to the 1930s. There has been
a change of mood and greater optimism. On the objective evidence, it is clear that the economy is falling less rapidly than it was, although we probably cannot say any more than that. It is not surprising because the authorities—here, in the US and in other countries—have thrown the kitchen sink at the economy. We have had drastic cuts in interest rates, the creation of money, big fiscal deficits and, in the case of the UK, a massive devaluation. It would be amazing if all that had not had an impact.
I am more sceptical about where all this will lead. There are big areas of uncertainty. For example, unemployment is still rising, both in aggregate and among particular groups. This week we saw a big increase in the number of young people not in education, employment or training, and in two months a big graduate cohort will come on to the labour market, many of whom will not find work. The effect of rising unemployment is also significant in terms of confidence.
Nor do we know what will happen when the Bank of England withdraws the monetary steroids that are keeping the economy going at the moment. The Governor, in his speech yesterday—in one of his quieter passages—pointed out that next year, in order to prevent an excessive flow of liquidity into the economy and the danger of inflation, he will cut off the increased liquidity injection. We do know how that will affect growth. The Minister said he is confident in the medium term, and I hope that he is right, but we have to ask where that confidence comes from. Households and businesses are de-leveraging frantically and the Government will have to rein back their spending, so at this stage it is difficult to anticipate where the injection of growth will come from.
The hon. Member for Banbury spoke about the deficit. He is right to say that there is a serious problem. Government tax receipts are now 35 per cent. of GDP—lower than at any stage since the days of Harold Macmillan. We are in a low-tax economy—not by design but because of the collapse of revenue from the financial services sector and housing—and expenditure is some 48 per cent. of GDP, so we have a 12 to 13 per cent. gap that has to be borrowed, and that is clearly not sustainable. The Government have a problem with timing—I sympathise with them on this point—because it would be foolish to try to contract the deficit suddenly in the middle of a recession, but it will have to happen. Severe budget discipline will be needed, and it would be helpful to start from a platform of honesty about that. It is clear from the Government’s own plans that current spending is being cut according to any meaningful measure, and anecdotes from local hospitals and other sources suggest that the cuts process has already started.
In addition, a very deep cut is planned in public investment—a halving from its peak. I introduced a debate on that point on 2 February, because it is a big problem. The Minister referred to the need for infrastructure investment, but it is difficult to see how that will be financed, given the scale of the cuts required. I agree with the hon. Member for Banbury that in this discussion of public finances, it would be helpful to get beyond broad aggregates about expenditure limits and get down to the particular programmes that we will have to talk about cutting. We have tried to inject into that debate discussion not only about the defence budget, as the hon. Gentleman suggested, but about tax credits—which may be good in principle, but have become over-extended—public sector pensions and many other items.
We will need a mature and grown-up debate on those, in which this House should participate. Sadly, for constitutional reasons going back a century or more, we do not have the powers that we perhaps should have.
There is also clearly a serious problem still with the banking sector. Many solvent, successful businesses with good order books and a good credit history cannot get credit on decent terms. They face big arrangement fees and unreal demands for security, and this is causing them to cut back and close their doors. Many of us see that at constituency level, and the business federations also report that back to us. There is a big lending problem. Many individuals have also been excluded, which enhances the relevance of the post bank proposal put by the hon. Member for Blaydon.
In addition to the lending constraints, the Government have bottled the big issue of banks that are too big to fail. As the Governor of the Bank of England pointed out yesterday, that whole concept is outrageous. If banks are too big to fail, they are too big, and the Government will have to take the initiative to break them up or find some effective way of regulating them so that the taxpayer is not taking on excessive levels of risk.
The Governor also said that we need to address the whole climate of irresponsible risk taking in the City and the banking sector, which still has not been properly confronted. We have seen a premature return to the culture of bonuses, although we have seen some limited restraint in the semi-nationalised banks. However, the Government still have not put in place a framework for dealing with that issue systematically.
2.9 pm
Mr. David Gauke (South-West Hertfordshire) (Con): It is a pleasure to speak in this afternoon’s debate. It would be fair to say that it is not particularly well attended, but I thank those hon. Members who have taken part, particularly my hon. Friend the Member for Bournemouth, East (Mr. Ellwood). He is a passionate advocate for the cause of tourism in this country, and I thank him for mentioning the glorious village of Aldbury in my constituency, which he knows well. I also want to thank my hon. Friend the Member for Banbury (Tony Baldry) for his excellent speech on the public finances, and that is the issue on which I want to focus.
When we consider the future of Britain’s economy, the central fact is that we have run out of money. We are borrowing record amounts. For every £4 spent by the Government, £1 is borrowed. We are borrowing more in the next two years than in aggregate over the country’s entire history, with debt likely to double—if it does not grow by even more. The 40 per cent. sustainable investment target—that is, the target that debt should not be more than 40 per cent. of GDP—is well and truly broken and is not likely to be met until 2032. We are borrowing more than any other country in the world.
The central question for the Government is whether they have a coherent plan to get us out of this mess. We know that the Government have optimistic growth forecasts, particularly from 2011 onwards. We know that there will be unspecified fiscal tightening after 2014 of £45 billion. We know that spending restraint will be delayed until after the general election, but we also know from the Government’s figures that cuts are already planned in public spending between 2011 and 2014. That is the
topical issue of the day, but the Prime Minister is characterising the facts in a somewhat different way. Only yesterday, he said that we never hear any figures from the Conservatives. Let me attempt to address that in the short time that I have available this afternoon.
In Prime Minister’s questions last week, on 10 June, the Prime Minister listed cash spending in the years beginning 2010-11: £702 billion, £717 billion, £738 billion and £758 billion. He claimed that that showed more spending from Labour. However, if we take out inflation we have the following numbers: £702 billion, £699 billion, £701 billion and £701 billion. If we take out debt interest and benefits—I am using the numbers prepared by the Institute for Fiscal Studies, which give us the real departmental spending—the numbers are £391 billion, £382 billion, £373 billion and £362 billion. That is a cut of 2.3 per cent. per year or 7 per cent. over three years. If health is protected, as we intend it to be, the percentage would go up for the remaining Departments to a fall of 3.3 per cent. a year, or 10 per cent. over three years. Let us be clear: these are the Government’s own numbers.
The Prime Minister had another crack at defending his position yesterday. He read out the numbers for current spending: £629 billion, £633 billion, £638 billion and £642 billion. However, if we deduct debt interest and benefits the departmental spending will fall from £344 billion to £341 billion, to £337 billion and to £332 billion. That is a cut of 1 per cent. per annum or 3 per cent. over three years according to the Prime Minister’s own chosen measure of current spending.
Let us look at capital spending. The hon. Member for Twickenham (Dr. Cable) was quite right to highlight that matter. Again, the Prime Minister stated yesterday:
“Capital expenditure will grow until the year of the Olympics. After that, it will be less”.—[ Official Report, 17 June 2009; Vol. 494, c. 295.]
The facts are very straightforward. Page 226 of the Red Book lists net investment in table C4. The figure for this year, 2009-10, is £44 billion, which then falls to £36 billion, £29 billion, £26 billion and finally £22 billion in 2013-14. There are two points to make about that. First, that is clearly a significant cut and it is a year-on-year cut. There is nothing about an increase until the year of the Olympics, 2012; there is a cut every year. Secondly, why highlight the year of the Olympics as if everything is explained by capital expenditure on the Olympics and as if that is no longer a relevant factor after 2012? Average capital expenditure on the Olympics is just over £1 billion a year, and that is clearly barely relevant to a reduction of £22 billion in capital spending.
What have Cabinet Ministers said, notwithstanding those facts? The Secretary of State for Wales told the BBC’s “Question Time” last week that
“up until 2014 there will be real term increases in Government spending Departments.”
The Secretary of State for Health told Channel 4 news on 11 June:
“I am also committing to you, in the way that the Prime Minister has, that we will continue to maintain growth in health spending in the following period”.
The Secretary of State for Children, Schools and Families—a noted economist—told Radio 5 Live:
“I think we can see the spending on schools and hospitals rising in real terms after 2011”.
The facts are very clear. I have outlined the numbers and the facts to the House this afternoon.
The Prime Minister has put his Ministers in an impossible position in the launch of his election campaign—assuming, of course, that he makes it to the election—by stating that it will be about Labour investment versus Conservative cuts. Never before has a campaign unravelled quite so comprehensively even before the election has been called. Columnists and observers from The Guardian and from every news organisation have lined up to describe the Government’s position as silly, infantile and dishonest.
It is difficult for me to characterise the nature of the Prime Minister’s position within the confines of the conventions of this House, but the Prime Minister must think that the British people are stupid if he thinks they will believe his claim that it will be Labour investment versus Conservative cuts. The facts point in a very different direction. Not one single respected commentator or observer supports the Prime Minister’s line that the Government will be spending more on departmental expenditure.
I think we should spare a thought for Ministers of honesty and integrity, such as the Economic Secretary, who are forced to go out to defend the Government’s position. I want to ask him two questions, and I hope that he has a chance to answer them. Does he accept that the Government’s budget projections involve real-term cuts in departmental expenditure from 2011 onwards, whether we look at total spending or current spending? Secondly, does he accept that capital spending will fall in each of the next four years and will not, as the Prime Minister told the House yesterday, rise until the year of the Olympics?
It is clear that the numbers point in one direction. The country’s money has run out. The public finances are in a mess and, whoever is in power after the next election, there will need to be real-term spending cuts. If the numbers and the facts do not suit the rhetoric, what will the Government do? I warn them that if they attempt to adjust the numbers or if bogus growth figures suddenly appear in the comprehensive spending review, that will do nothing for their reputation. It is time for some honesty; it is time for a grown-up debate. The Prime Minister has descended into self-parody and we need a change.
2.19 pm
Ian Pearson: With the leave of the House, I shall briefly respond to the debate, although I appreciate that it is not customary for a Minister to do so in a topical debate.
We heard interesting contributions from the hon. Members for Banbury (Tony Baldry), and for Bournemouth, East (Mr. Ellwood), and from my hon. Friend the Member for Blaydon (Mr. Anderson), as well as contributions from Front Benchers, as is usual. My hon. Friend the Member for Blaydon talked principally about three issues: regional development agencies, the private finance initiative and the post bank. On the latter, I know that he has been in discussions with what used to be the Department for Business, Enterprise and
Regulatory Reform and is now the Department for Business, Innovation and Skills. I would not want to say any more on that matter.
My hon. Friend made some good points about regional development agencies. I am not sure what the Conservative policy on RDAs is, but I think that it would be a huge strategic blunder to get rid of RDAs. They have been on a learning curve and, overall, they now provide effective assistance to businesses in their regions and contribute to their regional economies. He referred to One NorthEast and some of the success stories of the manufacturing advisory service. I can confirm that those success stories are not confined to the north-east, but can be found across the regions of England. He also talked impressively about the action that companies in the north-east are taking on renewable energy, plastic electronics, industrial biotechnology and electric vehicles. Those are all important areas for the UK economy for the future.
I have to say that I do not agree with my hon. Friend that the private finance initiative has let the country down. Under the private finance, many more schools and hospitals have been built than could possibly have been built using conventional financial routes. Independent investigation shows that there is good evidence suggesting that PFI projects are far more likely to be built on time and on budget than those built using conventional procurement, although the Government have made great strides to improve their record on conventional procurement.
My hon. Friend also referred to the fact that payments are made over a period of years, because the costs of running a facility are often a large part of the total whole-life costs, which are taken into consideration when we talk about the private finance initiative. If he looks back at the bad old days of conventional procurement under the Conservatives, he will see that often the attitude was, “design, build and fail to maintain.” There was a scandalous record of failing to maintain the fabric of our infrastructure, and private finance has addressed that issue.
Ian Pearson: If the hon. Gentleman will allow me, I will not give way to him. I want briefly to respond to the debate; as I say, it is not normal to do so. I want to come on to the points that he raised, and those made by the hon. Member for Banbury.
The hon. Member for Bournemouth, East, spoke with great passion about tourism. I acknowledge the importance of tourism to the UK economy. I do not particularly want to get into the issues of pubs and bingo today, as they are perhaps not central to preparing Britain’s economy for the future, but he is certainly correct to point to the fact that tourism is a significant part of the UK economy. It is an important part of Britain’s economic future, too.
The hon. Gentleman referred—I think I quote him correctly—to the Government throwing “obscene sums” at the economy. I have to disagree. The hon. Member for Twickenham (Dr. Cable) talked about us throwing the kitchen sink at the economy. It is quite good that we did so. We needed to take action to stabilise the banking system. It is right, in the Government’s opinion, that there should be a fiscal stimulus to support the UK
economy. Frankly, it would have been irresponsible for a Government not to have thrown the kitchen sink at the problem.
As the hon. Member for Banbury suggests, however, we know that public spending cannot grow in the way that it has since 1997. I am enormously proud of the public investment made since 1997; we have largely rebuilt Britain’s infrastructure. The hospital system and general practitioner practices across the country are in a far better state than they were when we came to power. Schools have been rebuilt. Each and every Member can point to new schools in their constituency that were built in the past 10 or 12 years, sometimes with private finance and sometimes through conventional public procurement. That is clear, important investment in the fabric of the country for the future.
With regard to spending figures—a point raised by the hon. Member for South-West Hertfordshire (Mr. Gauke)—we can trade different sets of figures, but he will be aware that public sector current expenditure is planned to rise by 6.8 per cent. this year, and by 4.4 per cent. in 2010-11. We believe that it is important to invest during these difficult economic times, but we have also said that we need to take a responsible attitude to the public finances in the medium term. That is why, in the Budget, we published figures showing a real-terms increase in public-sector current expenditure of 0.7 per cent. per year from 2011 onwards. The hon. Gentleman pointed out that we should take into account debt interest charges and welfare bills. I do not know what welfare bills or public debt charges will be between 2011 and 2014. We live in a time of great uncertainty. Given that uncertainty in the world economy, it is too early to say how those factors will pan out, and so much too early to say how the growth in public spending will be shared, especially as we are only one year into the current comprehensive spending review.
Ian Pearson: I will give way, and then I will conclude.
Mr. Gauke: I am grateful to the Minister for giving way. I note his comment that he does not know what interest payments or welfare bills will be, but presumably the Treasury has made its own projections, as the Institute for Fiscal Studies has done. Will he agree to release publicly the Treasury projections showing what it anticipates welfare bills and interest payments will be in the years 2011 to 2014?
Ian Pearson: We will make information available in the normal way, as we always do. I hope that he agrees with my point: it simply is not possible to know, and to forecast with any great precision, what welfare bills or debt charges are likely to be in the years 2011 to 2014. Given that uncertainty, it would be wrong to say how they would pan out, and wrong to speculate about the overall balance.
We have to get back to the fundamental argument, which is that the Government have invested massively in our public services. We are continuing to provide a fiscal stimulus this year and next year because we believe that it is important to help the economy through difficult economic times. On all assumptions, the Conservative party wants to spend less now. It wants to spend less in
the future than the Labour Government—that is a dividing line. It is important to recognise that the Conservative party would spend less on services than a Labour Government, and that will be an issue when it comes to the general election.
That this House has considered the matter of preparing Britain’s economy for the future.
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