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I would say to the noble Lord, Lord Razzall, if he does not mind, on his comment about people having to put up their houses or give personal guarantees to get loans, why not? If you are not prepared to take the risk on yourself, why should a bank?

We have had a wide-ranging debate on the subject and I am grateful to all noble Lords who have spoken. Time obviously prevents me making further comment, but I am sure that we will return to these matters after the Budget. I therefore beg leave to withdraw the Motion.

Motion withdrawn.

Public Expenditure: Review of Commitments


2.01 pm

The Commercial Secretary to the Treasury (Lord Sassoon): My Lords, with the leave of the House, I shall now repeat a Statement made in another place by my right honourable friend the Chief Secretary to the Treasury. The Statement is as follows.

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"Mr Speaker, with your permission, I would like to make a Statement on the Treasury's review of the public spending commitments made by the previous Government between 1 January 2010 and the general election.

In the review, we examined the £34 billion of spending that was approved in their final few months of office. The aim was to test in each and every case whether these commitments are affordable, whether they deliver value for money, and whether they remain genuine priorities for this Government.

This review is now complete. My decisions on these commitments fall into three categories. The first is projects where spending will be approved because they are a high priority or because the money has largely been spent. The second is projects that will be cancelled. The third is projects whose long-term affordability will be considered as part of the wider spending review process over the coming weeks and months. A detailed list of the projects that have been cancelled or suspended until the spending review has been laid in the Libraries of both Houses.

For those projects that offer value for money and meet the Government's priorities of fairness and responsibility, or for those where it is simply too late to withdraw, we have acted quickly to confirm approval in order to avoid disruption. For example, we have approved the funding for essential medicines in the case of a flu pandemic, for some hospital projects and for support to post offices, as well as spending on crucial equipment for military operations in Afghanistan.

However, the House will be aware that as a country today we have the biggest peacetime budget deficit in our history. We have a choice: we can act fairly, responsibly and decisively now, or follow the approach of the previous Government-deny and delay-which would only end in greater cuts being forced upon us. Given our priority to get the deficit under control, the Government collectively have looked closely at each project. I am grateful for the support of Cabinet colleagues in this process.

Some commitments are simply unaffordable, do not meet government priorities and will be cancelled. We have taken the decision to immediately cancel 12 projects, which would have cost nearly £2 billion over their lifetime. These include, first, the CLG's regional leader boards; BIS's loan to Sheffield Forgemasters; DWP's low-value employment programmes, including the extension of the young person's guarantee to 2011-12; and the jobseeker's two-year guarantee. Secondly, they include the Department of Health's active challenge routes; county sports partnerships; and the North Tees and Hartlepool hospital project. They include, thirdly, the local authority business growth incentive, and, fourthly, the withdrawal of government funding for the Stonehenge visitor centre.

Many of these are difficult decisions and, I fully understand, painful ones for some of the communities affected, whose hopes were irresponsibly raised by the previous Government. But they are decisions that a responsible Government must face up to in these difficult economic times.

There are other decisions which we feel should be weighed up against all other significant pressures on public spending within the context of the spending

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review-a spending review that the previous Government delayed because they did not want to admit that painful decisions had to be made. For this reason, I can announce that there are a further 12 projects with a total value of £8.5 billion, approved since 1January, which we will suspend and refer for consideration to the spending review over the coming weeks and months. These include the health research support service; the Kent Thameside strategic transport programme; and the libraries modernisation programme. Any other new major hospital schemes will be assessed in the context of the spending review, to ensure that they are affordable and represent the highest possible value for money. Only the highest priority schemes will be able to go forward.

We will do this in the context of the approach set out in our spending review framework, which will include a fundamental review of all capital investment plans, to identify those areas that will achieve the greatest economic returns. The Secretary of State for Education has already announced that he is looking at the whole Building Schools for the Future programme and will shortly set out the outcome of this work. This programme has been very heavily overcommitted and we are in agreement that tough decisions need to be taken. Government departments have also independently reviewed projects with budgets within delegated limits approved since 1 January. They will report the results of these reviews in due course. Together, these decisions will significantly relieve burdens on departmental budgets that will be under major pressure in the spending review.

While conducting this review, I have discovered yet another black hole in the books that we inherited. I can tell the House that billions of pounds of spending commitments were made for this financial year that relied on underspends or access to the reserve. There was no reason to suppose that underspends would have occurred on anything like that scale and there is insufficient contingency in the reserve to cover the remainder. I will therefore be cancelling at least £1 billion of commitments where there is not the money to pay for them. We will announce the action we take to tackle this further hole in the accounts in next week's Budget. As far as the reserve is concerned, I am sure the House will agree, our priority is that we keep this for genuine emergencies and new pressures that may result from military operations in Afghanistan.

The previous Government committed to spend money they simply did not have. They made commitments that they knew the next Government could not fulfil and in doing so cynically played politics with the hopes of our communities. The actions I have set out today show that this Government will take responsible spending decisions, which, although sometimes difficult, will be guided by fairness and the overriding need to tackle the deficit. We did not make this mess but we will clean it up.

I commend this Statement to the House".

My Lords, that concludes the Statement.

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2.08 pm

Lord Eatwell: My Lords, I am most grateful to the noble Lord for repeating the Statement on spending cuts. I am sure that it was not a happy thing for him to do and I am grateful to him for having done it.

Let us first deal with a major red herring. Everyone is against waste. If some government spending is wasteful, it should be cut. But if it is necessary to maintain overall demand in the economy, the money released should be spent on something useful. Demand really is central to this deficit-and-cuts debate. Businesses need the prospect of growing demand to encourage them to invest and innovate. The falling pound earlier this year stimulated demand for tradable goods, as I remember the noble Lord acknowledged last week.

In 2009, there was a massive withdrawal of demand by the private sector. Households and businesses increased their savings by a whole 10 per cent of GDP in one year. The increased savings could not be channelled back through the financial sector, which was desperately cutting lending to rebuild shattered balance sheets. Fortunately, the Government raised net spending, the deficit, by around 9 per cent of GDP, offsetting much of the decline in private sector demand. But now the Government seem determined to remove demand from the economy.

The central question that the noble Lord must answer is: where then is the demand coming from? It will not come from Europe where Governments are cutting as well. The slide in the pound against the euro has in the past couple of months been reversed. It will not come from households where there is increasing unemployment and the fear of unemployment will tend to increase the savings rate. It will not come from firms. How will the expenditure of firms be stimulated? It will not be by monetary policy. Interest rates can hardly go any lower. Are we to have more quantitative easing? I think not. The question of whether these cuts will simply lead to a decline in output and greater unemployment is central to consideration of the validity of the policy as a whole. Will the Office for Budget Responsibility be publishing an assessment of the impact of these cuts on economic output and employment?

I do not want to go through all the specific cuts set out by the noble Lord, which would be painful for both of us. But the Statement refers regularly to total lifetime cost. What was the discount rate used in the assessment of total lifetime cost?

Turning to the specific cuts, there seems to be an almost obsessive attack on education and skills. Schools for the future, the capital funds of universities and other skills programmes are to be reviewed. It is most extraordinary. We have just had the debate from the noble Lord, Lord Sugar, when the Government asserted their commitment to the development of skills. It is most extraordinary to find that there will be so many cuts in skills.

There are the significant cuts to the MoD search and rescue helicopter programme. Given the emphasis which noble Lords throughout the House have placed on the need for military helicopters-obviously, those in theatre, but also the search and rescue ones which may be released to go to theatre-this seems to be an extraordinary element undermining our Armed Forces.

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Finally, as a Wiltshireman, perhaps I may say how sad I am to see that the Stonehenge project has again been abandoned. When will this degradation of one of our greatest national monuments stop? Why are we allowing it to continue?

2.13 pm

Lord Sassoon: My Lords, I am grateful to the noble Lord, Lord Eatwell, for the points that he has made. Of course, it is not happy announcing these cuts, but it is absolutely necessary. It is a reflection of the speed with which the new Government have picked up the inheritance that again we are coming forward with a significant review of some of the wasteful spending decisions that were taken in a haphazard and speedy way in the last few months of the previous Government. I do not know whether the noble Lord was listening to his Front-Bench colleague in another place, the former Chief Secretary, but I heard him start his response to this Statement by saying that these cuts were so trivial that they were not worth making. That seems to be rather at odds with the argument of the noble Lord, who says that these cuts somehow are fundamental to how we support demand in the economy. I defer to the noble Lord. I am more of an accountant than an economist, but I am a little confused.

However, the maintenance and growth of demand in the economy are critical to the programme of the new Government. Restoring confidence for businesses and individual savers is at the heart of that. Maintaining low interest rates, supporting the flow of credit to businesses, having a clear path on corporate taxation and reducing the burden of regulation will all be parts of the underpinning of growth and demand. Although the noble Lord runs down the current prospects for the economy, he refers to the depreciation of the pound, which indeed seems to have had a positive effect that is now coming through in much stronger export growth.

The noble Lord asked about the OBR forecasts. As I said earlier in the week, the OBR will publish new forecasts in connection with the Budget next week and will take account of the effects of all decisions made by the new Government up to and including the Budget. He also asked about discount rates used in assessing total lifetime costs. Perhaps I may write to him on that point.

To take the specific cuts in reverse order, the noble Lord talked about Stonehenge. The costs and benefits of this project had to be considered in the light of the current financial picture and the benefit of going ahead with it simply does not at this time justify the costs.

The search and rescue helicopters project is a joint DfT-MoD project, which would deliver a harmonised search and rescue service for the United Kingdom for 25 years from 2012. Given the pressures on public spending, the MoD and DfT intend to conduct a rapid but thorough review of this project. We will continue to work closely with the preferred bidder while this review is taking place.

The noble Lord talked more generally about skills. I can assure him that the combined skills and support for those entering the jobs market is central to the

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Government's overall programme. Perhaps I can write a more comprehensive answer for him on that than I can give immediately.

2.17 pm

Lord Howarth of Newport: My Lords, we all agree that the UK's fiscal deficit needs to be reduced, but is there not a crucial issue about timing? If you attack the deficit too fast, you abort recovery. If you deal with it too late, you risk inflation and possibly a downgrading of Britain's credit rating. What is the reason for the Government's hasty attack on public spending in an increasingly deflationary global environment? We see Governments withdrawing stimulus all across the world. China is seeking to slow its economy. Germany is deflating. Demand is imploding in the eurozone, which is such a crucial market for our exports. The noble Lord did not answer the question posed by my noble friend Lord Eatwell as to what the sources of growth will be to enable the private sector to drive the recovery of the UK economy. Is not the explanation for the Government's zeal and impatience in cutting public spending that they are born not of a pragmatic judgment about how to secure sustainable economic recovery for this country but of a doctrinaire determination to cut back the role of the state without proper regard for the state's own essential contribution to the promotion of innovation, for the quality and reliability of public services, for fairness to the poor and vulnerable in our society and for national self-respect? I strongly endorse the point made by my noble friend Lord Eatwell about Stonehenge. Stonehenge is an emblem of this country. It will be extraordinarily important for us in 2012. The Government's decision announced today means that we shall present ourselves shoddily to the world.

Lord Sassoon: I thank the noble Lord, Lord Howarth, for his comments, but we really do need to get back to the central point today, which is that the previous Government left us with a series of projects that are unaffordable and in many cases present poor value for money. We need to do this. There are huge pressures on public expenditure, which are going to be looked at in the round through the spending review, but we have to take off the further pressures that have been put on by projects that simply cannot be justified. That will provide us with a much better baseline from which decisions made in the Budget next week and then in the spending round going forward can be taken to protect what really matters-projects that present good opportunities to invest in sustainable growth in the future. That is absolutely central and the announcement today helps to contribute to it.

In the short term, I cannot stress enough that to pay for these projects the previous Government were relying on an assumption that £7 billion of underspend would be made in the current year. That is approximately 1.8 per cent of DEL expenditure, but the evidence of recent years shows that the underspend has been reducing to what is estimated to be less than 1 per cent of DEL in 2009-10. The issue is not whether these projects stack up as value for money but that there is simply no money left to pay for them.

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I would like to make a point about Stonehenge. I would hate anyone to be left with the thought that we are somehow abolishing Stonehenge or knocking it down-I see that the noble Lord agrees with that. Of course it would be nice to enhance the visitor centre, but unfortunately this is a project that does not stack up in the current circumstances.

Lord Newby: My Lords, does the Minister agree that probably the most depressing part of this Statement is the issue that he was just discussing-that billions of pounds of commitments relied on underspend or access to the reserve? Was that not a series of decisions which could have been taken only by a Government who knew that they could not win an election and which therefore represents a poison pill for their successors? Can the Minister ensure that, at the time of the Budget, the total component of that expenditure is set out so that we can see what it is? Can he also make sure that all departments understand that, in the future, they simply cannot get away with that kind of sharp practice?

Lord Sassoon: I am grateful to my noble friend Lord Newby. I agree completely with his analysis and that the numbers should be set out. As far as the reserve is concerned, I reinforce my hope that everyone in this House will agree that the reserve needs to be kept for genuine emergencies and new pressures that may result, particularly from military operations in Afghanistan.

Lord Harrison: My Lords, the Minister said that he sees himself as an accountant rather than an economist. I have to confess that I am neither an accountant nor, despite the best efforts of my noble friend Lord Eatwell when he was my director of studies at Cambridge, an economist. All the projects described by the Minister had a past and a present and they would have had a future. In respect of each of them, what exactly are the costs that have been incurred in preparing for them through the tendering processes that have gone on so far? Even more particularly, can he tell us the costs of cancellation and the liabilities that the Government are incurring as a result of these decisions?

Lord Sassoon: My Lords, I think that I can help the noble Lord, Lord Harrison, with those questions. Of the 12 programmes and projects that are being cancelled, nine have costs in the financial year 2010-11 totalling £491 million; the total realisable savings from their cancellation will be £474 million in the same year. From that it can be seen that the difference between the two is less than £20 million. Those are the costs that will either be incurred as a result of cancellation or have already been sunk into the projects. However, the great majority of the money is to be saved, starting in the current year.

Baroness Noakes: My Lords, we should congratulate the Government on taking early and decisive action to deal with the deficit. The Benches opposite seem constantly to want to ignore the deficit and find a reason for not dealing with it. I am proud that our Government are getting on with it. The announcement made by my noble friend today clearly does not deal with the whole

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of the deficit and we will expect more from the Budget and the Comprehensive Spending Review later this year, but it is a very good start. It will help to restore confidence in our country, which is a key element of restoring growth. That is the most important aspect that we have to work on at the moment.

I have one question for my noble friend, which echoes the point made by the noble Lord, Lord Newby, in relation to the commitments that relied on underspend or access to the reserve. The Statement refers to billions of pounds' worth of spending commitments made in this way, but goes on to say that £1 billion-worth will be cancelled. I think that my noble friend said that a total of £7 billion was concerned in this way. Why cannot the whole £7 billion-worth of projects be cancelled, because, in the terms of the Statement, there is not the money to pay for them?

Lord Sassoon: I am grateful to my noble friend Lady Noakes for taking us back to what is in fact the basis of this and I share completely her analysis of how important it is to get a grip on the deficit. Let me try to help her with some of the numbers. The total of spending decisions that have been found as a result of this exercise to be unaffordable and bad value for money is £10.5 billion. Those have been put into either the "cancelled" or the "suspended" category. We have cancelled projects with a total value of just under £2 billion, so the rest-approximately £8.5 billion-worth-have been suspended and will go into the process that I have described. I hope that this helps to reconcile the numbers.

Baroness Farrington of Ribbleton: My Lords, will the Minister go into more detail about the cancellation of BIS's loan to Sheffield Forgemasters and any implications that that may have for future development? Can he also give us a guarantee that, by the time we have the details of the impact assessments, he will be able to tell us what the implications are, in particular for the construction industry and the many small firms that will now not have work to do?

Lord Sassoon: I am grateful to the noble Baroness for that question. On Sheffield Forgemasters, the problem with the loan is simply that it is unaffordable. In the context of tighter resources, we have had to focus support in areas where market failures are clearest and, where we can, we need to look to the private sector and private investment to provide solutions. I know that my right honourable friend the Chief Secretary to the Treasury has spoken to my right honourable friend the Secretary of State for Business, Innovation and Skills about this project and we hope very much that there will be a private sector investment solution.

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