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Lord Peston: Disgraceful!

Lord Skidelsky: No, it is not disgraceful and I am not going to give way. I am not going to give way to the noble Lord's arrogance and attitude of infallibility taken towards anyone who disagrees with him. That is it.

Lord Peston: My Lords--

Noble Lords: Order, order!

Lord Skidelsky: My Lords, I turn now to the noble Lord, Lord Bruce of Donington. I fear that I always disappoint him when I speak. Wherever the noble Lord sees disaster, I see progress. I have seen progress in the British economy over the past 15 or 16 years. We have a motorcar industry which is now thriving whereas it was practically defunct in 1979. We even have a new motorbicycle industry which has just started up. I wish Triumph the best of success. However, I fear that the noble Lord will be disappointed in yet one other respect: he will see more evidence of progress in the economy than he sees in volume 3 of my life of Keynes.

I should like to extend a very warm welcome to the financial strategy announced in the Queen's Speech. I am delighted to know that it is to be the intellectual basis of the Chancellor's Budget strategy. Three objectives are stated: to achieve a permanently low inflation rate; to bring the Government's accounts into balance, and to reduce the share of national income taken by the public sector. I support particularly the last of those objectives--not least because I think that it will make it easier to achieve the first two. Speaking at the Lord Mayor's banquet on Monday, the Prime Minister said that public spending should fall below 40 per cent. of national income. I am very pleased that all Ministers are starting to say that, because it sounds as though they mean it. I believe that we should consciously aim lower--at much nearer 30 per cent. than 40 per cent., but I would not be discontented if we were able to meet half way.

The Prime Minister's more modest objective will still be formidably difficult to achieve. This is not the time or the place to suggest how we should achieve it, although I have my own ideas on the subject. I should like to put forward an economic and philosophical case for trying to get public spending down, and to do so as clearly and as briefly as possible.

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There are four main reasons. First, I think that at our present levels of public spending we have a permanent borrowing problem. The Government's Budget deficit is still about 4 per cent. to 5 per cent. of gross domestic product. Since 1991, despite the increases in taxes, public debt has been rising about twice as fast as national income. Instead of rolling back the state, we have been increasing our deficit spending. Of course, I recognise that it is right that the budget deficit should rise in recessions, but about half of the deficit in the 1990s--I think that that is a reasonable estimate--has been structural rather than cyclical, the carryover of past deficits as well as non-cyclical increases in spending. I doubt whether the Budget has been properly balanced since 1968-70 when the noble Lord, Lord Jenkins of Hillhead, managed to do it. I am sorry that he is not in his place.

Our governments spend more than they take in taxes on a permanent, not temporary, basis. Continuous deficits incurred to finance consumption and capital works that do not yield the cash revenue to service the debt carry the risk of inflation, which means that the Government's creditors demand a higher rate of interest to compensate them for the risk of being paid back in devalued pounds. That is normal. Our long-term interest rates are over 2 per cent. higher than those in Germany or the United States. If we want to bring them down, we need to have a credible deficit reduction strategy. I submit that the only credible deficit reduction strategy is to try to reduce public spending as a share of national income.

However, I should like to go further, which brings me to my second reason for getting public spending down. We have to do it in order to stimulate economic growth. I think that it is intuitively plausible that high public spending ratios slow down economic growth. The empirical evidence for that is quite persuasive. The governments of the fastest growing regions of east Asia spend only about 20 per cent. of their national income. They do that even after they have "caught up" with us, as Hong Kong and Singapore virtually have done.

I do not think that we need to compare ourselves with societies that are very different from ourselves in order to reach similar conclusions. Let us compare ourselves with our own past. Since the mid-1960s, public spending in the European Union has increased by well over 10 percentage points of national income, taxes have gone up and growth rates have come down. Our peak post-war performance--I am referring to this country as well as to other European countries--came when governments were spending little over 30 per cent. of national income. So my figure of 30 per cent. is not simply plucked out of the air. It is the figure that we spent when we were at the peak of our post-war success. Were we so much more uncivilised then than we are today to justify the state spending so much more of our money? I do not believe that for a moment.

People often argue that the increase in public spending has been as a result of a worsening economic situation. I do not believe that to be true, because one can show that it started when we were still growing relatively quickly and when unemployment was negligible. The increase in public spending started in the

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1960s and was designed to increase economic growth which was already reasonably satisfactory. It was not designed to compensate for worsening economic conditions. The fastest growing components of public spending today do not have a direct connection with growing unemployment. For example, legal aid is one of the fastest growing parts of public spending. What connection has that with unemployment? Invalidity benefits, one-parent families, and so forth are mostly part and parcel of the "entitlements explosion" that started in the 1960s and are not a response to a worsening economic performance.

My third reason for wanting to get down government spending is that I believe that levels of government spending which are too high reduce welfare, they do not increase welfare. Growth in national income, which is obviously driven by public spending, is growth in areas which reflect the choices of bureaucrats, not the preferences of households. The extreme example of that was, of course, the Soviet Union which for years trumpeted huge growth rates, based almost entirely on the growth of its military-industrial complex.

Mr. Douglas McWilliams made a very valid point in the Financial Times of 8th November when he wrote that if public spending aims to be an investment in a more prosperous and pleasant society, the return on that investment should be measured by the performance of the market sector alone. There are problems with using real GDP growth as a proxy for welfare.

My last reason is probably the most important of all. I want to reduce public spending in order to increase individual liberty. The greater the amount of resources taken and allocated by local government, the less freedom of choice ordinary people have in the spending of their own money. Basically, I want to reduce the size of the state in order to increase liberty. That does not mean--it is a caricature to suggest this of those who argue the case--a return to the nightwatchman state of the 19th century. Governments who spend less are better able to do things which governments need to do, such as providing decent infrastructure, and even to stabilise economies when economies need stabilising--tasks which are now crowded out by expenditures which are not needed in a privately wealthy economy.

I should like to end by reinforcing one point that has been mentioned by other speakers this evening. I believe that tax cuts should be a consequence of reduced public spending, not a way of winning votes. Therefore I would not favour tax cuts, except as part of a credible medium-term fiscal strategy for reducing the growth of public spending. I believe that to be the Chancellor's view. He has stated that many times and I hope that he will stick to it.

The effect of cutting taxes without cutting spending is to increase borrowing. In present conditions that will push up interest rates. Interest rates are already too high. We need a budgetary policy which produces lower interest rates, not higher ones.

Since 1979, we have made impressive strides in destroying the appeal of what I would call "production socialism". No one believes any longer in the state as owner, but the Government as spender are still alive, are

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still well and are still growing. The harder part of the task still remains. It is to push back "entitlements socialism"--a many-headed monster that grows and still consumes much too much of our estate. So I would commend that as the next task for a re-elected Conservative Government.

Lord Richard: My Lords, before the noble Lord sits down, I wonder whether he and the House will allow me to refer to the incident involving himself and my noble friend Lord Peston which took place at the beginning of the noble Lord's speech. I have to say to him that he should have given way. In my view, there is no question but that when one noble Lord makes a personal attack upon another noble Lord, which it clearly was, he should have given way when my noble friend tried to respond. It was a display of personal animosity and petulance by him towards my noble friend which frankly I do not believe accorded with the traditions of the House. He has not been here very long, and nor have I been here very long. I would only say to him that if he continues to behave like that, then he will find it more difficult to be listened to with respect.

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