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A noble Lord: Six.

Baroness O'Cathain: My Lords, yes, it is six. My noble friend is quite right. Could they agree a sort of "state of the nation" statement? They would be regarded as apolitical and therefore, being realistic, more believable by the population at large. It could even be that the next step would be to restore faith in politicians when they were seen to be doing a good job, because a good job is being done. Let us all agree. Inflation is low, which is a great achievement; unemployment is falling; our competitiveness is increasing; and there are many, many great success stories in British industry. I think it is worth a try.

7.49 p.m.

Lord Skidelsky: My Lords, I add my congratulations to those of other noble Lords on the two excellent and informed maiden speeches that we have had this evening. I also endorse what my noble friend Lord Tugendhat and others have said about the excellent recovery that we have seen in the British economy over the past couple of years. That is partly due to the reforms of the 1980s.

I could say a great deal about education and training. I am afraid that it has become one of those great black boxes into which many hopes are poured after the speaker has run out of concrete ideas about what to do. Of course, no one can be against education and training, but I deny that we know how to improve that department dramatically and pouring money into that particular box is no guarantee of improved output.

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The noble Lord, Lord Eatwell, based his speech on our poor investment performance over a long period. However, perhaps I may point out one fact; namely, that since 1980 UK investment has grown faster than that of the United States and that of our major European competitors. That is in stark contrast to the 1970s when Britain was firmly at the bottom of the G7 investment growth league. There has been a dramatic improvement.

I should like to take up and further develop a number of interesting points made by my noble friend Lord Boyd-Carpenter in reference to two phrases in the Queen's Speech:

    "to bring the budget deficit back towards balance over the medium term [and] ... reduce the share of national income taken by the public sector".--[Official Report, 16/11/94; col. 3.]

Both will test the resolve of the Chancellor of the Exchequer. The second also opens up a crucial divide between noble Lords on both sides of the House. We stand for reducing the role of the state in national life, while many noble Lords opposite stand for increasing it. I believe that that will be one of the main political battlefields over the coming years.

We moved a great deal during the 1980s. No one believes any longer in the state as owner. All over the world, most notably in the former communist countries, the state has been divesting itself of that function. That process was started in this country in the early 1980s. Even the Labour Party has finally caught up with privatisation--better late than never.

The same can be said of the state as planner. The days of national plans are over. We all accept that, for most purposes, the best planning system is the market. That has been another major change in the political economy over the past 15 or 16 years. But the state as spender is still alive and well. Perhaps I may give your Lordships some figures which are purely illustrative. Before the First World War, the typical Western state spent under 10 per cent. of the national income. Between the wars it was about 25 per cent. In the 1950s and early 1960s it was about 30 per cent., and by 1975 it was over 45 per cent. Since then, the rise has been stopped but not reversed. Today, the British Government spend just under 45 per cent. of GDP. I submit that that figure is much too high and that it needs to come down dramatically.

We can argue about what a safe percentage is; that is, safe in terms of the liberty of the individual and the efficiency and productivity of the economy. Of course, people will differ about that, but there seems to be a safe limit. In 1945, Colin Clark suggested that it was 25 per cent. I would settle for 30 per cent. which is roughly the share spent by governments in the 1950s and early 1960s, a period known as the "golden age" of the post-war economy. Undoubtedly, the deterioration of economic performance after that was associated with the rise of public spending as a share of national income, though that is a correlation. I leave open the causal link.

I return now to the budget. The government aim to balance the budget over the cycle. I applaud that aim. I believe that that is an excellent fiscal rule. Experience has taught us that fiscal policy needs to be governed by rules: it cannot simply be left either to the calculations

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of economists or those of politicians. If the state runs budget deficits through good and bad times, it loses all ability to exercise any stabilising influence on the business cycle. The state can flatten the ups and downs of the cycle, as the noble Lord, Lord Kingsdown, said in his speech, but in order to do so it must conduct a prudent and credible fiscal policy. If a rising debt-GDP ratio results, it will eventually drive up interest rates or taxes and crowd out private spending. The state would then lose its ability to be a macro-economic stabiliser. That is what happened during the past 15 years as a result of the excesses of the 1970s.

However, balancing the budget should not be the main object of fiscal policy. It should certainly not be the long-run aim. That should be to balance the budget at the lowest possible level of taxes and spending, consistent with the necessary duties of a modern state in a wealthy market economy. How does one get from here to there? Recovery will certainly help. Ann Widdicombe told the House of Commons on Tuesday that unemployment was costing the Exchequer £14 billion a year, or close to 2 per cent. of GDP.

Reducing unemployment will undoubtedly reduce public spending and increase public revenue, thus enabling taxes to be cut. We should do everything that we can to expedite that result. In fact, it is already happening. Unemployment is already falling. I should like the Chancellor of the Exchequer to take up on a larger scale the ideas of Dennis Snower that the long-term jobless be allowed to transfer their unemployment benefits to employers who are willing to hire them. I know that the Labour Party has come out in support of that proposal. The first steps in that direction were taken by Mr. Norman Lamont. I should like to know the results of that scheme. It has been running for two years now on a pilot basis. Can my noble friend the Minister tell the House whether there has been any conclusion from the operation of that pilot scheme as to whether it could be extended? I believe that it could be usefully extended.

But the growth of the economy on its own will not do the job of reducing the share of the public sector in the national income. My noble friend Lord Lawson managed to get taxes and spending down to 39 per cent. in 1990, but that was at the height of an unsustainable economic boom. A sustainable reduction in the tax burden requires a permanent reduction in the agenda of the state. That is the bottom line. We need to open up a wide-ranging debate on the justification of state spending and whether it needs to continue at its present level in a modern, developed economy.

We need to ask ourselves whether we can redefine the responsibilities between the individual and the state. We need to ask: are the functions which have been assumed by the state in respect of social security, medical care, retirement pensions, and so on, appropriate in increasingly wealthy societies? Of course, there is a host of small-scale cut-backs that one can make across the board which may add up to a fair amount. For example, large cuts in the defence budget, which has expanded to 8 per cent. of GDP, would be reasonable over the medium term. Cuts could be made

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in the cost of the running of government. One could also apply what has been called the "circumcision principle" --that is, cut 10 per cent. off everything.

However, that is all small beer compared to the big issue of entitlement spending. Spending on entitlements--non-means tested cash benefits and services--comes to £120 billion, or 18 per cent. of GDP. I refer to the basic state pensions, child benefits, one-parent benefits, state education and health and personal social services.

If we are serious about reducing the share of national income taken by the state, long-term public expenditure policy needs to be informed, I suggest, by three main principles. First, there should be no new open-ended commitments. As my noble friend Lord Boyd-Carpenter pointed out, the fastest growing component of public spending since 1979 has been legal aid. Other fast-growing components include invalidity benefits, mobility allowances, attendance allowances and one-parent benefits. What these have in common is that there is a commitment to provide money to people who satisfy certain conditions. It sounds cheap when you start such a scheme, but claimants tend to rise dramatically over time; partly because behaviour changes in order to qualify for the benefits being offered and the only way of dealing with that is through cash limits on these entitlements.

The second principle is to eliminate commitment creep--the tendency for pledges to be reinterpreted increasingly generously over time. We need to think far harder about separating the basics, which must remain free, from the add-ons that we might ask the better off to pay. The third principle is that of course some benefits should be means tested. The most obvious candidates are the state pension and child benefit. Huge savings can be made by concentrating these on those with low incomes. The principle, after all, is exactly the same as that of the progressive income tax; the better off pay more to the state and get less out of it. May I say to the noble Lord, Lord Bruce of Donington, that the best way to get rid of the poverty, which he most eloquently and rightly deplored, is to target help on those most in need. That has been denied by our system of universal benefit.

Unless radical measures are taken to contain and reverse the growth in public spending the Government will find themselves presiding over an increasing tax burden. This is not good for the economy and it is not what they promised to do at the last general election. It is not what they want to do but it is what they will have to do unless they have the courage to open the debate on spending entitlements and the conviction to win the argument.

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