Address in Reply to Her Majesty's Most Gracious Speech
3:02 pm

Debate resumed on the Motion moved on Wednesday last by the Lord Archer of Sandwell--namely, That an humble Address be presented to Her Majesty as follows:

"Most Gracious Sovereign--We, Your Majesty's most dutiful and loyal subjects, the Lords Spiritual and Temporal in Parliament assembled, beg leave to thank Your Majesty for the most gracious Speech which Your Majesty has addressed to both Houses of Parliament".

3:10 pm
Photo of Baroness Hollis of Heigham

Baroness Hollis of Heigham (Parliamentary Under-Secretary, Department for Work and Pensions; Labour)

My Lords, at the start of our first term in office we faced chronic under-investment in public services and a £27 billion deficit on the public finances. Our first task was to create a platform of stability and sustainable public finances, which we have done. As a result we now have inflation on target; the lowest long-term interest rates for 35 years, with business investment over the past two years of around 14 per cent of GDP; the lowest levels of unemployment since 1975, with more people in work than ever before and sound public finances.

We inherited an unsustainable level of debt. Between 1979 and 1997, 42p of every additional pound of public spending went on debt, unemployment and social security. By repaying debt (£34 billion last year), cutting unemployment (saving £4 billion last year) and safeguarding social security expenditure, this figure is now only 16p in the pound--42p in the pound in 1997, 16p in the pound now. This means that we have been able to free up resources. So we can now begin to plan with confidence for substantial increases in investment in priority areas.

A strong economy is the platform on which to build opportunity and prosperity for all. Fuller employment not only offers jobs and prosperity to people of working age but ensures that children grow up confident of their future and that people can save for a comfortable old age.

We have done much. Let me remind the House: in our previous term we introduced the New Deals. These have already helped to cut long-term youth unemployment by 75 per cent and long-term unemployment by over 60 per cent. The number claiming unemployment benefits is the lowest for 25 years and the New Deal is leading to real, sustainable jobs, meaning less spending on benefits for the unemployed and higher tax receipts.

In turn this has allowed us to make a start on transforming the tax and benefits system for families with children. We want a system that gives the most help at times when families need it most and which gives more help to the families who are most in need. We inherited a system which saw over 4 million children growing up in poverty and in which one in five children were growing up in homes where no one worked.

Our tax and benefit measures introduced since 1997 have meant that by autumn 2000 there were 300,000 fewer children living in families where no one was in work compared with spring 1997. By October this year all families with children will be better off in real terms by, on average, £1,000 a year compared with 1997. Child benefit for the first child has been increased by over a quarter since 1997 and we have provided extra support for the poorest children. A couple on income support with two children under 11 are now nearly £1,500 a year better off compared with 1997; or, to put it another way--I believe that this statistic is striking and I am sure that it will impress your Lordships--the benefit for a child under 11 in May 1997 whose parents were on income support was £16.90;. the benefit for that same child in October will be £32.95. That is a virtual doubling in cash terms, or an 80 per cent increase in real terms, in just over four years. That is what we mean by security for those who cannot work. That is what we mean when we say that we are delivering on child poverty.

We have also put in place a long-term strategy to ensure that all pensioners can share fairly in the nation's rising prosperity and to tackle pensioner poverty. Our first priority has been to help those on the lowest incomes. This year we are spending almost £4.5 billion a year more on pensioners in real terms than in 1997--£2 billion of this is going to the poorest pensioners. This will increase to over £5.5 billion next year--that is over £3 billion more than an earnings link would have given them.

However, this is not just about statistics; we have begun to make a real difference. Some 2 million of the poorest pensioner households are now at least £15 a week better off in real terms and all pensioner households are on average over £11 a week better off. So, much has been achieved in the past four years, particularly for children, pensioners and families of working age. But much more needs to be done if we are to achieve our ambition of an active welfare state.

What, therefore, do we still need to do? We now have the lowest levels of unemployment in a generation but almost 1 million people remain unemployed. Too many people are still denied the opportunity to work. That is unacceptable. So we are going to build on the New Deals to ensure that everyone who can work has the opportunity to do so. We shall introduce a new principle of "employment first" interviews for everyone coming on to benefit so that people know what their opportunities, obligations and responsibilities are and what they can expect in return. The New Deals for young people and older workers will focus on the hurdles of numeracy, literacy, IT skills and presentation, delivering help individually tailored to those who most need it.

Employment zones have already helped over 8,000 people into work in areas of persistently high unemployment. We are investing in action teams for jobs to unlock the employment potential in the most severely disadvantaged areas and groups. Early indications are that this innovative approach is already helping those who find it hardest to get work--6,000 people so far, one-third of those the teams have engaged with. These are people who not only have a long history of unemployment but also live in areas of persistently high unemployment. In this Parliament we are looking to build on the success of the employment zones and the action teams for jobs, extending them to new areas and to new claimant groups.

Our policies since 1997 are lifting over 1 million children out of poverty. But we must do more. So we have pledged to end child poverty within a generation, to halve it by 2010 and to reduce it by another million this Parliament. Further progress in this area needs major changes in the support we give to families. The children's tax credit has already cut income tax for families. It is worth £520 a year for 5 million families. Half a million families have been removed from paying tax altogether. From next year the credit will be raised further from £10 to £20 a week in the year of a child's birth.

We must also do more to tackle pensioner poverty and to help those on modest incomes who have worked hard and saved for their retirement. The pensioners' tax allowance already means that by next year seven out of 10 pensioners will no longer pay tax, or will pay tax at the 10p rate. We are pledged to extend the tax allowance further so that by 2003 no pensioner will pay tax until their income reaches £127 a week.

The basic state pension will increase by 2003 to £77 a week for a single pensioner and to £123 a week for a pensioner couple. The minimum income guarantee will ensure that no single pensioner will have an income below £100 a week and that no pensioner couple's income will fall below £154 a week.

However, before we can make further progress we need the right structure of government in place, one that will enable us to focus on the specific and diverse needs of our client groups. Your Lordships will be aware that after the election the Prime Minister made a number of such government changes which, taken together, will ensure a sharper focus on government priorities and a better ability to deliver public services.

The new Department for Work and Pensions brings together the former Department of Social Security with the Employment Service and the employment and disability responsibilities of the former Department for Education and Employment. The new department will continue our programme of welfare reform. It will mean a single, focused approach to the development of employment, equality and benefit policies for people of working age and pensioners needing advice and support. It will provide a joined-up, efficient, modern organisation responding to people's needs and the changing ways in which they wish to reach out to our services.

To underpin this continued reform of the welfare state we shall establish two new organisations: first, Jobcentre Plus to bring together in a single modern organisation the services currently provided to those of working age by the parallel services of the Employment Service and the Benefits Agency. We shall have 50 Jobcentre Plus offices up and running by the end of the year, providing a local, integrated employment and benefits service for the first time. Secondly, we shall establish the Pension Service, to provide a high quality service dedicated to pensioners.

Fundamental reform also, inevitably, means new legislation. The Bills announced in the Queen's Speech will enable us to take further steps to transform the help we offer people. The welfare reform Bill--the first of the three Bills coming from my department--will enable us to continue the work that we have already begun to reform welfare provision for people of working age, to ensure that everyone who can work has the opportunity to do so. Your Lordships will be aware that in our manifesto we announced a proposal for partners of benefit claimants, whether or not they have children, to attend work-focused interviews. The New Deal for Partners already offers help and assistance, on a voluntary basis, to enable partners of those receiving working-age benefits to get into work.

But we think it right to go further, bringing these arrangements into line with those for benefit claimants, particularly lone parents. This Bill will make receipt of benefit for partners conditional on participating in such an interview. Your Lordships will need no assurance from me that we are not proposing to force people to seek work where their family or other circumstances mean that that is not an option. The interviews will simply ensure that partners are aware of the support available through the New Deal and of the help available to them in work. I put it simply. Sometimes in a relationship the woman may have better employment opportunities than the man. It is not unreasonable that both partners should be aware of the choices available to them. We do not think that this is an onerous requirement. There will be safeguards to ensure that people do not lose benefit where the timing of the interview is not right or where the partner has no prospects of finding work.

We want people with disabilities to play a full part in the community. This means full civil rights, including equal access to education and other public services. We are also promoting the rights of disabled people in the workplace, working with the Disability Rights Commission. The chance to work is vital to ensure social inclusion for disabled people. The New Deal for Disabled People is already pioneering a range of these approaches. But we want to do more. Disabled people are still seven times more likely than people without disabilities to be jobless. Some 3.2 million people with disabilities are already in work. But 1 million more say that they would like to work but are not in work. It is unacceptable that many disabled people are written off when they could work, with the right support. This Bill will, therefore, extend the support offered to jobseekers through employment zones to sick and disabled people who are able to work. It will include proposals to help ensure that incapacity benefit claimants get the right support including help, where appropriate, to enable them to return to employment. Detailed proposals are still being developed and will be announced in due course.

An active welfare state also means supporting people in work and giving them choices, particularly around the time of a child's birth, to balance work and life responsibilities. Your Lordships may recall that in last March's Budget, the Chancellor announced a range of measures designed to offer such support. This Bill will legislate to increase the standard rate of statutory maternity pay and maternity allowance from the current £62.20 a week to £100 a week in 2003; and the payment period will be extended from 18 weeks to 26 weeks. In other words, of the 360,000 women who receive these payments each year, most will get more than £1,200 in extra maternity pay.

I have already mentioned that we need to do more to relieve child poverty and to encourage people to move into work by making work pay. The new tax credits Bill, coming from both my department and the Treasury, will introduce the new generation of tax credits from 2003, as announced by the Chancellor in Budget 2000, enabling us to address both of those concerns. First, we shall draw together the various existing strands of support for families with children--including the child elements in income support, jobseekers' allowance, the working families' tax credit, the disabled person's tax credit and the children's tax credit--to create a seamless mechanism for channelling support to children. This new credit will provide a more transparent system of support and will be portable, spanning both welfare and work. It will build on the foundation of universal child benefit and will be paid to the main carer, in line with child benefit.

We shall support those in low-paid work through an employment tax credit, building on the adult elements of existing tax credits. The new credit will help to increase work incentives for low-paid workers and help to relieve in-work poverty in working households. We shall consult on the detailed proposals of both credits later this summer, with a view to introducing a Bill to Parliament later in this Session.

Since we took office we have been working towards a long-term strategy to make sure that everyone has a decent income in retirement, through a fair and proper balance of public and private provision. Since April, stakeholder pensions have offered a safe, flexible and value-for-money pension option for moderate and higher earners who do not have access to a good occupational scheme. As noble Lords will recall, this is a funded money purchase scheme for individuals without, for the most part, a second pension. From April 2002, we shall reform the state earnings-related pension scheme (SERPS) through and into the state second pension, benefiting 18 million of the lowest paid and certain carers and people with disabilities. Again, that is a huge increase in their future well-being.

The pension credit Bill--it is the third Bill to which I refer today--forms a key part of our strategy. We want to ensure that it pays to have saved. Pensioners will be rewarded--not penalised--for having worked hard to provide for themselves in retirement.

Through the pension credit, we shall also improve the way we deliver help to pensioners, significantly reducing the information they have to provide in support of their claim. This will enable them to get what they are entitled to more quickly and with much less intrusion. These reforms are long overdue, as I am sure your Lordships will agree.

People also have a right to expect that the right benefit is paid to the right people at the right time. Fraud and error undermines confidence in the welfare state and we are determined to tackle it. We have already saved £1 billion on fraud and error. The introduction of automated credit transfer will save a further £100 million a year. But there is much more to be done. We are committed to halving the rate of fraud and error by 2006--a major commitment. Fraud prevention will also be incorporated into the design of all new policies on benefits.

In this Parliament we shall also take forward further measures to support and ensure our long-term economic stability. My noble friend Lord McIntosh will say more about this in his winding-up speech. Briefly, we shall introduce a European Communities (Finance) Bill to enable the UK to adopt the Own Resources Decision (ORD) agreed at the 1999 Berlin European Council on the future financing of the European Community. The agreement reached at Berlin--it is a good one from the UK's point of view--will bring the UK's proportionate contribution (based on 1999 prices) to Europe's finances, after enlargement, down to the level of France and Italy.

We shall introduce a number of Bills to ensure that enterprise and competition can flourish. The Enterprise Bill will include measures designed to encourage enterprise, strengthen competition laws and promote safeguards for consumers. The export control and non-proliferation Bill will improve the transparency of export controls and establish their purpose. We shall publish a draft communications Bill to create a single regulator for the media and communications industries and to reform the broadcasting and telecommunications regulations.

In conclusion, a few weeks ago we offered the people of this country a programme based on three pillars: a sound economy, investment in public services, and a commitment to expanding opportunity and building social justice. I hope and believe that your Lordships will agree with me that in this Queen's Speech, and in particular in the Bills outlined today, we see that programme being delivered with your Lordships' help and that, as a result, our people in whom we are investing are truly our commonwealth.

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Lord Barnett (Labour)

My Lords, before my noble friend sits down, can she explain this? If the Government know how they will eliminate fraud by 2006, why cannot they do so now?

Photo of Baroness Hollis of Heigham

Baroness Hollis of Heigham (Parliamentary Under-Secretary, Department for Work and Pensions; Labour)

My Lords, if my noble friend had the advantage of hearing the frequent Questions in this House on fraud, he would be familiar with all the policies which the Government have brought into practice, including extended powers for the Benefit Fraud Unit, working with local authorities to check the fraud in housing benefit, clarifying benefit claim forms, introducing hotlines and trying to "fraud-proof" a range of the benefits we are now introducing. I am very happy to add to that at great length to persuade my noble friend that, though our target to halve the level of benefit fraud by 2006 is challenging, we shall strive to meet it--and we hope and expect to do so.

3:30 pm
Photo of Lord Saatchi

Lord Saatchi (Conservative)

My Lords, it is an honour to open this debate on the gracious Speech on behalf of our Benches, particularly because it is clear from this afternoon's list of speakers that we are going to have an excellent debate.

Before I begin, I have one duty to perform. Your Lordships can imagine the pleasure that it gives me to congratulate the noble Baroness, Lady Hollis, on her party's spectacular election victory, which was a very fine achievement. Nothing could be more tedious for listeners to the debate nor more painful for the losers than to rehearse yet again all the arguments from the election campaign.

Most people say that Labour's great victory was based on the strong economy. That focus on economics above everything else led Labour on its heroic journey from four defeats to two great victories.

I shall concentrate on the two opening sentences of the gracious Speech, which concern the economy. My noble friend Lord Higgins will look more deeply into aspects of social security and industry.

As we have just heard, the Government like to wear their heart on their sleeve when it comes to their good intentions for the public services and looking after the poorest people in society. That is how they gained their caring reputation. They routinely condemn our Benches for ice-cold brutishness. I shall apply the Government's criteria to the plans described in the gracious Speech.

The first sentence of the Speech refers to investment in public services. During the election campaign, the Labour Party said that it would put schools and hospitals first, so let us start there. How will the Government help? I hope that it will not be done in the way suggested by a headline that appeared the day after the election, which said, "Labour abandons waiting list targets". Apparently, hospital waiting lists had been rising again, so, when in doubt, the Government's reflex was to change the target from length of waiting list to maximum waiting time--not even average waiting time. I am sure that they do not really intend their help for schools and hospitals to be only in image and not in reality, although that has been the story so far.

I have just discovered some statistics that I found dazzling. I found it amazing to discover that under this Government spending on public services has risen by 1.3 per cent a year, while under the last Conservative government it rose by 1.7 per cent each year. I found it even more amazing to discover that spending on health and education as a percentage of GDP has been less than under the previous Conservative government. Believe it or not, these are the official annual spending increase figures from the Treasury: on health, Labour plus 5.4 per cent, Conservative plus 5.5 per cent; on education, Labour plus 4.6 per cent, Conservative plus 5 per cent.

Does that not make you gasp? Have we all been hypnotised? The redoubtable Andrew Dilnot, head of the Institute for Fiscal Studies, says:

"One striking area of especially low growth is public investment, where the Government has failed to achieve its own plans, which were designed to correct what it identified as public under-investment. In government, the four years 1997-98 to 2000-01 have seen the lowest level of public sector net investment of any four-year period in recent decades, well below the average under the Conservatives. This is a real puzzle".

However, it is not as much of a puzzle as how the Government are going to do any better in their second term, when they have a second chance.

For example, to raise the UK's level of overall spending on health and education to German proportions, which I believe is a stated aim, public spending would have to jump by 4 per cent of GDP. That is an extra £40 billion a year. On present plans, even after the proclamations about good intentions, the share of health spending in GDP will rise by only 1 per cent between now and 2004. That would still leave us 3 per cent of GDP below Germany's level and 1.4 per cent below the EU average. That is puzzling.

Perhaps most astonishing of all is that the Government's figures show that after what will have been nine continuous years of Labour government, UK spending on health will be running at less than half of that in a country that the Government regularly deride for its heartlessness and cruelty--America, where health spending accounts for 13 per cent of GDP. That is more than double the 6 per cent offered by the romantic souls on the Government Front Bench. The truth is that after what will be nine continuous years of Labour government, public spending as a percentage of GDP will be lower than in all but three of the 18 years of Conservative government.

However, there are even more extraordinary statistics relating to the next phrase in the gracious Speech, which refers to,

"a more prosperous and inclusive society".

The noble Baroness referred to inclusion earlier. It is a word that affects the hearts of all who hear it. It is all part of the Government's drive against poverty among children and pensioners and is all very touching. How striking it is, then, that poor people--the lowest decile of income distribution--are now paying a record amount in tax. A Government who say that they want to extend their generous hand to the poor as well as to schools and hospitals now extract £3 billion a year from 8 million taxpayers with gross annual incomes below £10,000, which is much less than half the average income of £24,000 a year.

Even more astoundingly, the Government tax poorest people most. Those on the lowest decile of gross income, counting cash benefits as well as original income, now suffer an average tax burden of over 50 per cent--up from 44 per cent when this Government came to power. Households in that group without children now pay a staggering 63 per cent of their income in tax, up from 47 per cent when this Government came to power. So much for the knights in shining armour in the Government.

However, if the poorest bear the heaviest tax burden, perhaps the Government are paying out more to them in benefits. Not at all. The Government are no Robin Hoods here either. The poorest tenth receive barely 12 per cent of all benefit spending, while, incredibly, the top half of the income distribution receives 30 per cent of all benefit expenditure. Meanwhile, the hated means test goes marching inexorably on.

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Lord Haskel (Labour)

My Lords, do the figures that the noble Lord has just quoted include the tax benefit scheme?

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Lord Saatchi (Conservative)

Yes, my Lords, they include all taxes paid and benefits received. I shall go into a little more detail about benefits.

According to the Government's Red Book figures on the effects of the means testing of benefits, after what will be nine years of Labour government, 38 per cent of the UK population will be on some kind of means test--a figure rising to 57 per cent for pensioners. Why? It is because the Government first tax people on low incomes, then they means test the income to satisfy themselves that the people are in need, then they offer benefits to restore the income back to where it was before the tax was paid, then they tax the benefits. The DSS family resources survey for 1999 reports that in that year, 24 per cent of benefit units--an Orwellian definition that apparently roughly equates to households--received at least one income-related benefit.

However, the House of Lords Library notes that:

"By 2003 the proportion of non-pensioner households on means-tested benefit could be around 29 per cent. The population of pensions households being means-tested could be around 57 per cent. These imply an average for all households of 38 per cent".

Therefore, means testing of the population will have increased from 24 to 38 per cent in five years, which is all very sensitive.

In the meantime, I believe that the noble Baroness said that the Government considered it to be important and placed great priority on people being able to receive their benefit. However, the gruesome fact is that the Government are hoarding billions of pounds which they should be paying out to eligible households. According to my co-author, Dr Peter Warburton, who has had a good look at the DSS social security statistics for the year 2000, between £2 billion and £4.3 billion of income-related benefits are not being paid to those who are entitled to them. That massive sum is being retained by the Government. When the Minister replies to the debate, perhaps he will tell us what will happen to that money.

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Baroness Hollis of Heigham (Parliamentary Under-Secretary, Department for Work and Pensions; Labour)

My Lords, for information, will the noble Lord tell us to which benefits he is referring and to which claimant groups?

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Lord Saatchi (Conservative)

My Lords, yes, I shall and, later, perhaps I may pass over the extract from this document. However, these are the Government's own figures relating to the take-up of all the different types of income-related benefit. In fact, they rather flatter the take-up figures. The figure for family credit is used rather than that for working families' tax credit, which replaced it. Most people believe that the take-up of the working families' tax credit is lower than that of the family credit. Therefore, it is a flattering picture.

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Lord McIntosh of Haringey (Deputy Chief Whip (House of Lords), HM Household; Labour)

My Lords, they are wrong. The argument is very simple: 800,000 people took up family credit; 1.2 million people take up the working families' tax credit.

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Lord Saatchi (Conservative)

My Lords, that is fine. If the Minister would have a look at the relevant table and the figure of £2 billion to £4 billion and say what happened to it and whether that amount will be saved and given to those who are entitled to it or kept, that would be helpful.

Perhaps we could find more helpful territory for the Government by moving on to the second paragraph of the gracious Speech, which concerns the phrases "economic stability", "low inflation" and "sound public finance". Perhaps if we look at the economy from a broader perspective, we shall find more grounds for confidence. Of course, the Government's real claim to fame is strong public finances. The main proof of that is, as the noble Baroness said, the heroic repayment of £34 billion of government debt. A similar figure also appears in the Treasury press release. I believe that the noble Baroness referred to an amount of £34 billion over the past two years. We all consider that to be a first-class result.

However, after four years of what I hope I have just demonstrated was fairly miserly spending and the famously record taxing that the Government have carried out, is it not extraordinary that Britain is not, after all, being led to a massive US-style government surplus which we might use to repay debt, spend on public services or whatever else we may choose? Not at all. Believe it or not, the cupboard is bare. The Government are leading us into a massive deficit.

How will the Government fill that deficit? If they could, they would find some more invisible tax rises, but that game appears to be up. Therefore, they will fill it in the old-fashioned way--they will borrow it. The Government's spending will be paid for by borrowing. These are the amounts that the Government say they will borrow over the next four years: in year one, £1 billion; in year two, £10 billion; then £11 billion and £12 billion. Spookily enough, those figures add up to £34 billion over four years. Therefore, the Government are repaying debt of £34 billion, receiving the applause, and then promptly borrowing it again. I repeat: £34 billion over four years. The Government's own figures show that by the end of this Parliament they will be borrowing £12 billion a year.

However, that is simply the good news. The bad news comes from Europe, where, until recently, the ECB had been telling us that Europe and the euro-zone were immune from the US downturn. That now appears not to be the case and that is why people are becoming worried about the ECB. I want to ask what the Government have in mind for improving the effectiveness and, in particular, the transparency of the ECB.

The Bank of England, for example, publishes promptly the minutes and voting record from its rate-setting meetings. The Bank of England Act requires it to do so. The US federal reserve system's Open Market Committee publishes the minutes of each meeting within a few days of the next regularly scheduled meeting--that is, approximately four to six weeks after each meeting. However, with regard to the ECB, perhaps I may read your Lordships the following exchange. I should be grateful if the Government could tell us what steps they will take to improve the situation as one day soon the ECB may be looking after all our finances. I shall read a note from my researcher to her opposite number in Europe:

"Hi, Samantha. I hope you're OK. I have a really quick query. How long after the ECB meet to discuss euro-zone interest rates are the minutes of the meeting published? Many thanks, Alex".

The reply reads:

"Hi, Alex. Sorry I didn't get the chance to get back to you yesterday. Hope all is well. The ECB does not publish any minutes of meetings at all as they are "confidential". All you can get is a two-paragraph statement on the rates that appears on their internet site--www.ecb.int. Hopeless, isn't it?"

Therefore, given that so much of what will happen with regard to our public finances will be affected by Europe and by the activities of the ECB, will the Minister be able to say in his reply what plans exist to improve the effectiveness and transparency of that body?

I have also tried to demonstrate that there is a tangled web in the Government's economic policy. I shall close by saying that if we really want a bigger slice of the cake for schools and hospitals, the only way in which to achieve that is by making the cake bigger. As I believe the gracious Speech showed, this Government, like all Labour governments before them, do not know how to do that.

I have tried to give an alternative view of the Queen's Speech and I very much look forward to hearing other noble Lords' comments this afternoon.

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Lord Barnett (Labour)

My Lords, I listened with very great interest to the noble Lord's attack on the low level of increase in public expenditure on social services. Is he suggesting that the Government should spend more?

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Lord Saatchi (Conservative)

My Lords, I am commenting only on the high hopes that people had of this Government when they were elected four years ago and the fact that the electorate have given the Government a second chance. I am sure that the Front Bench opposite knows very well that there will be no third chance.

3:47 pm
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Earl Russell (Liberal Democrat)

My Lords, I begin by congratulating the Government on not changing places. I also warmly welcome back the Minister to her place. It is a great pleasure to me; it is very good news indeed for social security; and I hope that it is an equal pleasure for the Minister. She gives me vigorous exercise in debate. She does innumerable kindnesses, the latest as recently as last Friday, for which I am extremely grateful. I shall not say that she is always competent because no one on earth is that, but she comes as near to it as any Minister with whom it has been my pleasure to argue. I am very glad to see her here.

I also congratulate the noble and learned Lord, Lord Goldsmith, on keeping the office of Attorney-General in this House. The noble and learned Lord, Lord Williams of Mostyn, is a very hard act to follow. The Manchester Evening News has hurled at the Attorney-General perhaps the biggest hot potato that has greeted any new Minister at the beginning of his term of office. It may interest him that the very earliest known English laws are laws to restrict the right of private vengeance. It is the very purpose of the state to restrict private vengeance. That the state may have got it wrong is in a free country a view which must always be tenable. But the view that the right of vengeance should be taken out of the hands of the state is an assault on the very existence of the state itself. Therefore, the noble and learned Lord is in a very hot seat indeed and I have great confidence in him in it.

I also thank the Minister very much for her invitation to a meeting to discuss the reorganisation of the department. As that meeting is in the future and not in the past, my comments on the reorganisation are tentative. The case in favour is clear. For a long time it has been evident to us in our debates that having the welfare to work scheme and the New Deal as benefits in the same ministry makes a good deal of sense. On the other hand, some of the spin in that regard caused a certain amount of misgiving. The department responsible for social security is one of the most competent departments in Whitehall. It has a very good departmental culture and a long-standing concern with the alleviation of poverty.

As far back as I know, there has always been somebody who is concerned with the alleviation of poverty, whether that responsibility is in the hands of the state or the Church. In the development of the employment agency side of the new department, I hope that that tradition will not be lost sight of. It has always been an illusion that one could reduce poverty substantially by instilling in people a greater will to work. On every previous occasion on which that view has been held it has proved to be an illusion, and it could be so again.

I want to say a little about public services. I declare an interest--mercifully, I do so in this Session for the last time--as a serving university teacher. At Question Time today, the noble Lord, Lord Walton of Detchant, drew our attention to a major problem in the public services and the fact that increasingly people are developing a reluctance to work. Before the Government talk too much about reform, they should think about why such reluctance is becoming so strong. Most people who go into the public services do so out of a sense of vocation; they certainly do not do so for the money. That sense of vocation and Treasury public service agreements sit rather uneasily together, especially when those agreements--which are back, somewhat to my regret, at the Treasury--are driven by the pursuit of efficiency, which is always concerned with getting people to do more rather than with how well the job is being done.

I remember extremely vividly a conversation with an intensive care nurse--probably the best nurse I have ever seen in action. After the patient had drifted off into a healing sleep, the nurse, observing that no one else was at that moment awake, paused a moment and said, "I am about to go back to speak to the sixth form at my old school and I am going to tell them, 'Whatever you do, never go into nursing. There is more expected of you than you can possibly do. You are set up to fail and you can therefore choose only between demotivation and burn-out'". Every public servant to whom I have repeated that story and members of my profession recognised it instantly. In fact, as I see it, for the past 25 years all government pressure has been to make me do my job worse and worse each year. I have got very tired of that, and I am not alone in my view. Governments, after all, should recognise that their expertise in such matters is limited.

Mr Richard Caborn has given rise to a certain amount of merriment by not being able to answer questions in a sports quiz. I want to attack not Mr Caborn, but his critics, who did not recognise the difference between a Minister of Sport and a sportsman. It is like expecting the commander of a battleship to understand fiddly details about how to get better value for money from the ship's engines; that is not his department. I remember the late Baroness Macleod of Borve saying that when her husband was Minister of Health, he would never have had a doctor in the ministry; different jobs were involved. When governments talk about, for example, improvements in education, they are outside their element; they are not competent to recognise an improvement in education. Unless governments are prepared to let those who work in the public services have their own values, they might find that they have to pay market rates to attract such people, which would be very expensive.

We have had a lot of argument recently about the role of the public or private sectors in the delivery of public services. We on these Benches do not make an ideological issue in that regard. We have never gone in for the attitude that involves saying, "Four legs good, two legs bad". That attitude comes from the 20th century's politics of class conflict, against which we set our face at the beginning of that century; we are very glad that we did so. For us, that is more of a matter of horses for courses. The public and private sectors both have excellences. The question is: which excellence belongs to this particular job? The answer involves identifying the function that is required.

The great discipline of the private sector is competition. When there is no competition, the excellence of the private sector cannot be brought to bear. That applies especially when there is a single monopoly purchaser, against whom there can be no competition. Also, it is the nature of the market to have losers as well as winners; if it does not, it is not a market. One sees that in the supply of school places. After he had been at the ministry responsible for education for a few years, Lord Joseph realised that it was impossible to combine a market in school places with a universal supply of places. In that context, I was extremely pleased to read in The Times today that the Government are contemplating legislation to repeal the Greenwich judgment. If that report is correct, I warmly welcome such legislation.

We need to think about what we want to do. That has not been done nearly enough. When it happens, we might have a slightly more worthwhile debate. The bulk of what we have to deal with concerns the Minister's brief; namely, all of the various issues involving welfare reform. I say in passing that I agree with my noble friend Lady Williams of Crosby in her regret that the Government have adopted the slightly pejorative American use of the word "welfare" and do not continue to talk, as we always have, of social security. It is clear that all that we do in this context happens in a global market and that the playing field in that market is not level. Capital can move at a few seconds' notice across the world. Labour, even if there were no restrictions on its movement, is much less easily uprooted. That creates a big advantage to capital and tends to downgrade the price of labour. Too far in that direction and we could see a serious drop in the general level of world demand, which would not be good for the world's economy. When we discuss the cost of social security, we should bear in mind those questions along with narrower questions.

The relationship between the state and the market is a seesaw, and a seesaw should never become immobile. The Government have reached a seriously mistaken diagnosis of what they think is wrong with the social security system. The White Paper, Towards Full Employment, published earlier this year, states:

"Rather than being a solution to these problems, the welfare system had become part of the problem itself".

The Government have asserted that many times but it has not yet been proved or even seriously argued for. If the Minister can put me right in that regard I shall be grateful. The Government think--this illusion is centuries old--that the problem is having to make people want to work. It is not usually a problem to make people want to work; after all, work is to many people their only social life as well as their only means of earning money. When people do not want to work, that is usually a matter of physical or mental illness or it involves the thinking behind the old proverb that,

"hope deferred maketh the heart sick".

There are of course many categories of people--they are determined by geography, race, gender or disability--for whom work is difficult. The Minister and I know all about that. We have had exchanges on such matters many times. I shall not detain her now. But a great many of the people who do not get work have some disadvantage.

I raise in passing the question whether in some areas, like the ward next door to mine, there is a covert postcode discrimination by employers so that it is much more difficult to obtain work if one comes from those areas. If we could address that--I do not immediately see how--it would be nice.

Beyond that, a lot of the Government's policies on welfare reform have sprung out of the mind of Mr Michael Portillo and the Jobseekers Act. The key innovation in that legislation was not the "actively seeking work" requirement. That is not particularly controversial. What was crucial in that Act was the assumption that the state and its organs are the supreme judges of the work people should seek--for which jobs they should apply and which jobs they should not leave--and that the state's judgment takes priority over that of the people concerned.

Of course, the state is at a major disadvantage in relation to information. So there is at least a rebuttable presumption that the state might get some of these things wrong. If it has got them wrong and disqualification from benefit is inflicted as a result, that is a particularly severe penalty.

There is one case which particularly tickled me. It happened under the previous government but it could easily have happened under this Government. A man in Cardiff, a lifelong supporter of the Labour Party, was offered a job pulling pints at the Cardiff Conservative Club. He refused it and was told that he was voluntarily unemployed and could have no benefit. I believe that that discomposes me a great deal more than it discomposes new Labour Ministers. I do not think that that should have happened. There is, after all, such a thing as an individual conscience. If you deny that, you will not get a conscientious workforce and the losses out of that may be more than are realised.

Another sphere where private judgment matters, because it has the information, is as regards parents. I heard what the Minister said about interviews for partners. It could be argued that that is the down-side of equality. The argument has substance. But the requirement of interviews and, even more, if they are to come in, the existence of targets can create a rebuttable presumption and the existence of targets backed by the power to disentitle benefits may be a very severe pressure indeed.

The Minister may remember the noble Lord, Lord Evans of Parkside, speaking in our debates on single parents in 1997. He described the occasion when he was six, when his father said goodbye after breakfast, went down the pit and never came back. He said that for a year afterwards, he and his younger sister would never let their mother out of their sight. He said it would have been absolutely useless to encourage her to seek work.

Where there is an inflexible bureaucratic rule, it is impossible to respond to a case like that and a government who cannot respond to such a case are not living in the real world. The Government should think about their targets for getting single parents into work because they involve a really serious intrusion into the sphere of private judgment. They should watch, too, how many of the people disentitled to benefit are removed from the claimant count. I accept the point made by the noble Baroness, Lady Blackstone, in her Written Answer to me of 8th May last that not all of them are removed from the claimant count. But when the Prime Minister, in the House of Commons on the 20th of this month, boasted of the reduction in the claimant count, he should have been able to say how much of that reduction was achieved simply by taking people off the count by disentitlement. "She left my employment", as Goldfinger put it. It is worrying.

There have been, since 1997, 701,000 people sanctioned under the Jobseekers Act. That is an awful lot of people. We do not know anything about what happened to them and we should do.

As regards housing benefit, the Minister knows my views. I ask her to stick to the commitment of the 1986 Act that income support is not meant to cover rent. Before she speaks, as the Government do, about work incentives, I ask her to look again at the DETR and the DSS research on housing benefit. I know she knows it well. I should like to think that anything that the Government do will be compatible with that research. If it is not, it will take up a good deal of time in this Chamber.

Finally, we should not lose sight of the purpose of benefits. The purpose of benefits is not to cure poverty. That they have not done so is no reproach to the Government. The purpose of benefits is to alleviate poverty until something better can be done. That is a very necessary purpose.

I have a pupil at the moment who has just finished his exams. He is still in those intervening days between the end of the exams and the beginning of the right to social security, which is quite a long time on an empty stomach. He has absolutely nothing to live on. He spent his last penny ringing me up and ran out of money before he could tell me where he was and before I was able to do anything about it.

We talk about rights and responsibilities. They are interlocked. They are not necessarily contingent. If you do not believe in the death penalty, you do not believe that the right to life is contingent on good behaviour. I do not, in fact. But if we want people to exercise their responsibilities rather better--and I must confess that I do--then how we exercise our responsibilities to them is a matter to which we should not be indifferent. If we tell people, "We do not care whether you have anything to eat. You are nothing to do with us. Go away. We have forgotten about you", that is an abdication of responsibility which invites retaliation. I do not think it is wise.

4:07 pm
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Lord Roll of Ipsden (Crossbench)

My Lords, those who have spoken today have again done what it is usual to do in a new Parliament; that is, to combine the traditional initial reaction to the gracious Speech with some reflections on the record of the outgoing administration.

I remember only too well the last government coming into office in 1997. As Labour returned to power after 18 years in the wilderness and with an enormous and unprecedented majority, it was understandable that its followers greeted this as a new dawn. I had some very welcoming words to say about the new government, both about what they have already put in train and what they were intending to do fairly quickly. However, I said that it might be as well to wait to say,

"Bliss was it in that dawn to be alive",

before we actually joined in that jubilation.

What has happened since? I will not and I could not possibly follow the noble Baroness, Lady Hollis, in that avalanche and catalogue of all the good things that the Government have done, particularly in the field of social justice and ameliorating the condition of the less advantaged members of our society. I readily accept that much has been done for the family, for the young and for children through taxes and through other means. Of course, the gap between the rich and the poor continues and, indeed, has grown rather wider. That is a topic to which we may return on another occasion.

However, I should say that in so far as the gap has increased through improvements at the top end, I am made slightly uneasy by what appears to be the Prime Minister's somewhat undiscriminating approval of what he regards as the rewards of merit. Often the connection between "reward" and "merit" is not evident.

However, I join wholeheartedly in praising what has been achieved so far in relation to the broad economic and financial management of our society and our economy. Naturally, I welcome the independence of the Bank of England in respect of monetary policy. Three years earlier I had the pleasure of chairing an independent panel that made almost exactly the same recommendations as those that the Chancellor has implemented and which are now embodied in the Bank of England Act.

Much against the views of many followers of the Government, I agree with the decision to keep the tax and spending pattern of the previous administration for another two years. I believe that that was essential to prevent the avalanche of plagues that would almost certainly have appeared, given the fact that the Labour Party had been out of office for 18 years.

More generally, the financial management has been good. I agree with the noble Baroness that the reduction of the national debt and the consequent reduction and easing of the burden of interest payments are to be welcomed as pillars of our economic and financial stability and, provided they are used, they have created more room for manoeuvre for funding improvements in social services. We shall see whether that actually happens.

Inflation has been kept down; unemployment has been greatly reduced; employment has been increased; and a respectable growth rate has been maintained. The fact that those things have been achieved--to some extent with the aid of propitious external circumstances--cannot be denied, and immediately a question is raised about the future. The uncertainties of the American economy present a big question mark and there are disturbing signs on the Continent, particularly in Germany. With our relatively flourishing economy today, how long we shall be able to withstand what happens abroad remains to be seen.

Looking ahead to the future, in choosing the improvement and enlargement of public services as the centre of their programme, the Government have probably judged the public mood correctly. Perhaps the increasing success of the Liberal Democrats in elections, given their avowed readiness and eagerness to tax more in order to gain more funds for public services, also appears to be a sign that the public mood is moving in a somewhat unusual direction.

I do not believe that anybody could possibly disagree with the desire to improve public services. We hear a lot about having world-class, first-class public services, and who would deny them? As the Americans used to say a long time ago, that would be like denying the virtues of motherhood and sliced bread. But how are we to achieve such services?

Today, appropriately, the Institute for Public Policy Research has published a highly interesting report which throws considerable doubt on what has become something of a slogan "public-private partnership/private finance initiative". No doubt there will be continuing controversy on this point, but it is worth considering. I agree with the Government that such a matter should be approached without dogma. Today ideology is out of fashion and, paraphrasing Sir William Harcourt, we can say that we are all pragmatists now.

Nevertheless, if we are to look at this matter in a hard-nosed way, we should look upon it as a business proposition. Unfortunately, some of the examples of what has happened so far, particularly in private finance initiatives, are not encouraging. Under a PFI a first-class new school has been built, but why it appears to be impossible to build such a school under a different system of finance is a complete mystery to me. Surely the essential difference between the two lies in the eventual cost to the public purse.

I simply cannot understand why the difference in the rewards earned by a private consortium, which provides the initial capital outlay, and the public purse, which usually over a period of 30 years commits itself to repaying that, should be significantly different. After all, that represents a commitment by the state, so there should not be a significant difference in the cost of securing the finance, even if it comes from a private consortium. Yet there have been many examples that show that even the modest savings envisaged to the public purse, compared with the size of the total outlay, are often illusory and compared with the rewards earned by the private consortium are certainly inadequate. That requires careful consideration.

The zeal with which some Ministers--for example, the Deputy Prime Minister--advocate this new policy is reminiscent of the zeal with which the long-forgotten Clause 4 used to be defended. Zeal is not required, but careful, convincing argument.

However, there is another aspect. Having spent 34 years in the City, I do not believe that anyone could accuse me of a prejudice against private enterprise. I am conscious of what it has done, what it is doing and what it can do and of the fact that a great part of the material advances of mankind are due to the inventiveness, the ingenuity and the readiness to take risks of private entrepreneurs.

It is quite unacceptable for people to say that one cannot acquire adequate management from the public sector alone. Not only is that a denigration and a slur on the body of devoted, loyal and generally extremely efficient public servants--of which I know something after 25 years in the public service--but it is also entirely unjustified in actual experience. The public service has shown a readiness to adapt itself to new tasks--even in terms of remuneration--that cannot be ignored.

In parenthesis, a C, a K and certainly a G are highly desirable and justifiably prized rewards, but your Lordships may well remember the celebrated statement in "Gentlemen Prefer Blondes" that a kiss on the hand makes you feel very good but a diamond and sapphire bracelet lasts for ever. Even a devoted civil servant cannot maintain the kind of status that conventionally he has to maintain without adequate remuneration.

When still in Whitehall I shocked my fellow permanent secretaries by arguing that there was no reason why we should all receive the same pay. Some of us were in direct competition with people outside who had much higher remuneration. Needless to say, at the time nothing happened, but the public service has adapted itself even in that regard.

Finally, I return to my King Charles's head, Europe. When the previous Labour Government took office I was pleased that they made some positive noises, certainly compared with the two preceding governments who were in power for 18 years. However, what followed was a period of considerable inactivity, the result of which has been that opponents of our entry to the euro-zone have had it all their own way. Now, judging by the opinion polls, a large majority appears to be against our entry. Perhaps significantly, a modest majority appears to believe that we shall enter anyway at some future date.

I believe that the situation is extremely difficult for the Government. Ministers seem wisely to have retreated below the parapet which the Chancellor so skilfully erected for them in his five economic tests. The political wisdom of that was shown by the result of one sortie: some statements made in the euphoria of the election victory about an eventual referendum within two years of the present Parliament created the impression among the media and the markets that early entry was very much on the cards. As a result, the pound plummeted. That had to be. The invention of the term "euro realism" and the statement that the issue is being approached by the Government with consideration and caution--incidentally, I thought that the Government applied that to everything they did--naturally brought the pound back up again.

For the moment, the situation is in limbo and I do not know what will happen. For my part, perhaps I may give an example which is applied to more important human transactions; namely, the triumph of hope over experience. But I shall wait patiently and I still happen to think that, in spite of everything, the eventual emergence of the single European currency is inevitable.

4:21 pm
Photo of Lord Lea of Crondall

Lord Lea of Crondall (Labour)

My Lords, I am particularly happy to follow the noble Lord, Lord Roll of Ipsden, because I share a great deal of his analysis and shall pick up his final point. In the light of the Chancellor's Mansion House speech, which coincided with the Queen's Speech here last Wednesday, this is an opportune moment to consider economic strategy not only for the next year or 18 months but for the next four or five years or longer. I emphasise that duality because, unfortunately, there are times when the short term, on which I accept that the record has been exemplary, as stated by the Minister, and the strategic may be in conflict. Despite new Labour's stated aim to be strategic, it is, on the main strategic issue facing the country--that is, the euro--currently allowing a succession of short-term arguments and economic indicators to dominate its decisions to the exclusion of the strategic.

The European project is now far wider than anything we have grappled with previously. The fact that we could leave the exchange rate mechanism--or be shown the door, if you prefer--shows how false that analogy is. It is precisely because we have to get the entry rate right and secure a smooth landing that the Governor of the Bank of England cannot be allowed to judge the issue as though this year's inflation figure, which is the lowest in Europe, is the only issue.

Therefore, when we now hear the argument that we cannot debate the issue because it might affect the exchange rate, the answer must be, "Of course it will affect the exchange rate. Entry will not happen at the present exchange rate". If we do not want to affect the exchange rate, we had better join the noble Baroness, Lady Thatcher, and say, "Never!".

We are talking about Britain's industrial position in Europe and in the world. There may be some in the City whose book is best served by us being an offshore island with no political say in the affairs of the Continent. "Down with the continental system", is a cry which has echoed throughout the centuries and has come from the same groups of people. We will of course be in Europe and a keen player in the world economy. For those who are committed in a positive way to the project--and after all the Government agree the principle--we must speak out on the means of getting from A to Z or in four years' time we shall be where we are today or further back in our programme of modernising Britain.

If we describe the policy in short as "prepare and decide", a phrase which has recurred in ministerial speeches since the Chancellor's benchmark speech in November 1997, there are unfortunately a whole plethora of ambiguities. For example, how are the issues being prepared--I use the word "prepared" advisedly--so that the people on the doorstep in middle England can understand them sufficiently to vote in a referendum? Can I be the only one here who has been reading with wonder in every newspaper every day since the election that we must close the gap between Parliament and the people? Yet are we not to apply that to the euro?

We all know that one does not win general elections solely on what one says in the last few weeks. Is there any good reason to believe that referendums are all that different? Are we really supposing that a few senior Ministers can do this on their own in a matter of weeks without the normal infrastructure of mass involvement, of democratic explanation within the political parties, on the doorsteps and in civil society generally? Surely the needs of democracy point directly in the opposite direction. If we do not speak now, when do we speak? Is it going to be when we decide not to have a referendum because we have not lifted a finger in good time to persuade the public of the reasons for saying, "Yes"?

Therefore, although it was a plausible enough soundbite in Sweden last week, it really will not do for Peter Hain to go around Europe stirring up apathy with his slogan "Cool it!". What else have we been doing for the past four years but cooling it? Our brains are getting so cool they can hardly function. We will soon be in a deep coma. And why allow our gladiator to have nets thrown over him by the gladiator on the other side? At the very minimum, what are the Government proposing to do to counter some of the more recurrent arguments against the euro in general and UK participation in particular?

Perhaps I may remind your Lordships that Sub-Committee A dealt with the main arguments a year ago in its report, How is the euro working?. As regards the fashionable objection that one interest rate cannot fit all parts of Europe, we pointed to the fallacy of that objection; namely that the difference between different degrees of capacity, utilisation and inflationary pressures, the issue on which the argument principally turns, is, for example, far greater between London and Cardiff than between London and Brussels--and we do not have different interest rates in London and Cardiff, do we? What is of great concern in South Wales is the issue of international investment and inward investment. And why should companies take two exchange rate risks in coming to Britain when they have to take only one risk on the Continent?

There is then the contention that the European Central Bank is undemocratic. Sub-committee A pointed out that the difference in procedure from the Bank of England on the publication of voting patterns is not too surprising given the multi-national nature of the ECB board and the fact that its decisions are unanimous. But in any event, is it really persuasive to stand on the touch-line saying that we know how to play the game so much better than the equally successful economies which are actually playing it?

Furthermore, our friends on the Continent are beginning to ask why the Treasury, far from explaining the many positive features of the euro system, seems to say something about the subject only when it wants to say something negative? It cannot go on that like that. We now know that there will be a rather short time between the national economic assessment and the referendum, so it cannot be left until then to explain the case to the British people. If, as some eurosceptics would have us do, we wait until then there will not be a referendum because the essential political test, which everyone knows is the winnability of the referendum, will be impossible to meet. Surely, no member of the Government wishes to achieve that outcome by a policy of benign neglect.

Those of us who have invested a good deal of political capital in this project will not let the matter rest there. I respond to the challenge myself. What are the positive arguments? First, single market, yes; single money, yes. We challenge the logic of those who say that there should be a single market but not a single currency. The ultimate in market transparency is certainty in exchange, and the single currency achieves that for the greater part of our trade.

Secondly, to different degrees we are all uneasy about globalisation, but what is the answer to it? Surely, the answer is to have an economic area which is strong enough to set standards for workers and consumers as well as producers and is as large as that of the United States, if the UK is in.

Thirdly, it is in the employment and social area that Europe begins to connect with the people. I spent the election on doorsteps in Falmouth and Camborne. Obviously, the issues which came up were dominated by jobs, hospitals and schools, but when I talked to people at greater length I found that they were delighted with the four weeks' holiday paid up front. They had never had it but they do now, thanks to Europe; they were delighted to hear about pro rata rights for part-time workers; they had never had it but they do now, thanks to Europe; and they had never had maternity pay but they do now, thanks to Europe. The list is a long one. Apart from the TUC, no one ever told them that Europe had anything to do with it. Some new Labour politicians are often blind to their own long-term self-interest by failing to give any credit to Europe.

It is to our advantage that we introduce these reforms on a trans-European basis. There is, after all, a logical reason--namely, the facts of international competitiveness--why we need to deal with such matters as minimum labour standards on a joint European basis. Trade unions in the major industrial sectors which are in daily touch with the workplace say that this is a hot issue which is becoming hotter. Therefore, we cannot "cool it". The arguments need to be addressed now, which is a job for Mr Hain.

My question to the Front Bench is: what is wrong with the arguments which support the Government's avowed principles being presented now? How will we get out of the double bind of always waiting for something else to happen before we make the arguments, in the meantime allowing those arguments to go by default? If we wait until the notes and coin are introduced in January, will we then highlight something that has gone wrong with one or other aspect--no doubt the hijacking in Palermo of a security vehicle full of bank notes?

Those who now say "cool it" confuse two things: on the one hand, the contention that we anticipate the national economic assessment; on the other, the failure to address some of the principled arguments heard in the media every day of the week. The first half of this is at best to play semantics, but the second is more worrying. Do Ministers fear that they are not equipped to mount the arguments? I start by helping them out of one hole. Let us remove the ridiculous notion that it must be clear and unambiguous before we can enter. That is not what we do on other issues, is it? Moreover, was it clear and unambiguous when the founding fathers of the EU started the operation in 1950? Was it clear and unambiguous to us in the United Kingdom when we joined in 1973? Was it clear and unambiguous when Jacques Delors masterminded the Treaty of Maastricht and the timetable for economic and monetary union in 1990? In any case, how will we be judged by history if we simply wait and see which side is winning and then join it years later? Is that statesmanship? Is it not a recipe for being a second-class partner in the meantime? We shall not win unless we go out there and make the case. If we fail to do that the real winner of the election will prove to be Mr William Hague.

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Lord McCarthy (Labour)

My Lords, before my noble friend sits down, does he agree that the difference between this decision and all others on which we must be certain is that in this case we cannot go back?

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Lord Lea of Crondall (Labour)

My Lords, there are many decisions in which we have been involved--joining NATO and the EU--where it is really only one-way. No doubt this is the greatest decision that we shall make in this Parliament, and that is why we must have the great debate. My main advocacy is that that debate should be brought forward now and when we make the decision it cannot be without some degree of ambiguity. That is real life, not life according to an economic textbook.

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Baroness Noakes (Conservative)

My Lords, the gracious Speech rightly prioritised public services, such as education and health. Those are areas in which the Government have conspicuously failed to deliver on their promises over the past four years. Businesses which listened to the gracious Speech may well have concluded that the Government cared little about them. There was a reference to the introduction of legislation to encourage enterprise, but business people know that governments cannot legislate for enterprise but that they can and do legislate to introduce regulatory burdens. One of the glaring omissions from the gracious Speech was a reference to the burdens on business which threaten the entrepreneurial flair of this country.

The Treasury and the DTI have recently set out the Government's strategy for enterprise and productivity for this Parliament. Much of this was welcome, in particular the lower taxes on capital gains and the modest expansion of share option scheme reliefs, but there was very little in the published document that could be interpreted as relieving burdens on business. The whole issue of regulatory burdens was largely side-stepped and treated as a non-issue. But regulatory burdens are not a non-issue for British business. All of the organisations which speak for the business community say the same thing: the regulatory burden is large, getting larger, and should be reduced if business is to prosper.

The total sums involved are increasing at a frightening rate. The British Chambers of Commerce have recently estimated that in the past year alone the cost of new regulations since 1997 increased by 50 per cent, to over £15 billion. That figure does not include the direct cost of implementing the national minimum wage, which is over £2 billion. It does not include the expected new rules on environmental liability or, for example, the EU's proposed directive on waste electrical equipment. Businesses fear that both of them will have very large price tags attached. It is that increase in burdens which has caused business so many concerns.

The financial impact has been concealed by the relative prosperity of British business over the past few years, but the costs are real and are increasing. It came as little surprise to British business that the UK's competitive position has been eroded since this Government came to power. We used to be fourth in the World Economic Forum's league table of competitive countries, but over the past three years we have slipped down to ninth place. Other league tables have us in an even worse position. The reason for that is explained partly by stealth taxes and our rising tax burden, but a very big cause is the increased labour market regulation that has been imposed.

Regulation hits big and small businesses. However, its impact is often disproportionately great for small and medium-sized enterprises. Noble Lords do not need reminding that SMEs employing fewer than 250 people account for 99 per cent of businesses in this country. They employ 12 million people--well over half of the workforce. They account for 40 per cent of GDP.

A number of organisations have tried to estimate the cost to individual businesses of the regulatory burdens. One example is the Institute of Chartered Accountants, which produces an annual survey. Its last estimate calculated that for a medium-sized business the annual increased burden of implementing the new regulations introduced in 1998-99 was £10,500.

But it is not just a question of money. The real cost is the effort that is diverted away from business. The Small Business Research Trust calculated that small businesses spend about 25 hours per month coping with the regulatory burdens imposed by government. That is over three working days. If that time was spent on developing new products or services, training staff, developing staff, cultivating new customers or markets or on anything that is designed to make the business more profitable, we would see a major upsurge in productivity in this country.

For some time the Chancellor has been fretting about the productivity gap between the UK and the US. We even lag behind France and Germany. There is a simple answer--and it does not lie in more legislation for enterprise or in more reforms of the competition regime. It lies in liberating our own entrepreneurs, letting them run their businesses instead of filling in forms or acting as unpaid tax collectors or distributors of welfare benefits.

There are many things that the Government could do without legislation, and I hope that the Government will consider at least some of them. The Government could, as we have proposed, introduce regulatory budgets so that individual government departments have a limit on the amount of regulatory burden they can impose on business. Even if those budgets were set at a standstill, that could have a major impact because it would stop the rising tide of the regulatory burden.

Transparency could be improved. The regulatory impact assessments that are produced with all new legislation could be independently audited and kept up to date, mapping the increases in costs. They could highlight not only the direct costs but also the opportunity costs to businesses as time and effort is diverted away from the real task of running profitable businesses.

When new regulatory burdens are introduced, the Government could do more to minimise the impact on the unfortunate businesses on which the burdens will fall. Ministers could help to ensure that guidelines which significantly increase the compliance burden on small and medium-sized enterprises do not see the light of day. I refer, for example, to the 112-page national minimum wage guidelines. I emphasise that Ministers can do these things without a single clause in legislation; it takes only the political will to achieve them.

However, there are some matters that require legislation. I take the example of the working families' tax credit, soon to be joined by an employment tax credit and a childcare tax credit. The burden of these credits, both in terms of administration and cash flow, is felt especially by SMEs which do not have abundant staff resources or financial capacity. Those schemes could be adapted relatively easily to make the Inland Revenue a direct payer. At a stroke that would remove many of the burdens from SMEs. If that is a bridge too far, the Government could consider a fair recompense to be paid to businesses, especially SMEs, for administering their tax and credit systems.

When legislation is brought forward imposing new burdens on business, the Government should make it the rule rather than the exception that such measures provide for businesses, or at least all SMEs, to be recompensed for the cost of complying with the provisions. Some legislation carries a huge regulatory price tag. Of course the Government can, by virtue of their legislative muscle, impose any burdens on businesses and citizens. My plea is that there should be a general presumption that if they do so, they should at the same time devise an appropriate recompense mechanism.

If the Government are serious about reducing the burdens on business, they need to think about removing some existing burdens. Perhaps the Regulatory Reform Act passed in the last Session of Parliament will allow some burdens to be reduced, but I suspect that specific legislative cover will be needed if significant progress is to be made.

Small and medium-sized enterprises feel most keenly the impact of employment regulations, which are a major factor in our diminishing international competitiveness. Every piece of new legislation creating new rights for employees also creates a burden on business. Exempting smaller businesses from the burden of employment legislation, as has been done in the US, would be a good start. Saying "Enough is enough" of the EU's social policy agenda would be a good second move.

The regulatory burdens on businesses are not trivial matters. It is a source of regret that nothing was said about this issue in either the gracious Speech or in other policy announcements made by the Government since the recent general election. But all is not lost. There are some ways in which Ministers can reduce the burdens on British businesses. I look forward to the Minister's response later this afternoon.

4:47 pm
Photo of The Bishop of Southwark

The Bishop of Southwark (Bishop)

My Lords, I am pleased to make a short contribution from these Benches to this important debate on the gracious Speech. First, I add our congratulations to the noble Baroness, Lady Hollis, on continuing in her office where she demonstrates such great expertise.

Perhaps I may focus on two or three of the proposed Bills. Last Thursday a homelessness Bill was given its First Reading in the other place. We had hoped that the provisions of the Bill would be similar to those in the Homes Bill which failed for lack of time in the previous Session of Parliament. The provisions commanded wide support from those involved in housing and homelessness. As churches, through our housing associations, our hostels and our drop-in centres, we have a direct interest in these matters. On a first glance at the new Bill, I am rather anxious that many of these important provisions seem to have disappeared. We shall be watching the Bill with great care. I realise that perhaps there will be more discussion on that matter tomorrow.

I should like to add our welcome to the proposed Bill to reform adoption law. We believe that the existing law on adoption is insufficiently child-centred. We hope that the new legislation will bring the law more into line with the Children Act 1989 principle of ensuring that the welfare of the child is the paramount consideration in any decision. That includes seeking the wishes and feelings of the child to any proposed adoption and establishing parity status of children and young people in their own adoption proceedings.

I hope that the Bill includes the provision of more information to potential adopters so that they can make informed and responsible decisions about their adequacy for any particular child or children. There are stories of people, including clergy, who have sought to adopt children on the basis of inadequate information, only to discover that the care required was far different from that which they expected. Neither children nor adults gain from finding themselves in that position.

We know too from the experience of such agencies as the Children Society that there is a real need for a national adoption register and some standardisation of practices and allowances across authorities and local authorities. At the moment the uncertainties caused by such variations deters some adopters and limits the chances of some young people to be adopted. It is crucial to establish which local authority has professional and financial responsibility for a young person placed for adoption. It is by no means unknown for children and young people to be disadvantaged by not receiving services due to them while two local authorities argue over who has responsibility for them.

In this increasingly complex world, the uncertainties caused by variation in adoption practices across the country is as nothing compared to those introduced when adoption is attempted across national frontiers. We have had highly publicised cases of babies being sought and bought by British prospective parents in countries suffering the ravages of war, poverty or social breakdown. We have even seen adoptions being attempted via the internet.

It will not be easy to negotiate the domestic and international controls which will bring some order into this chaos, but the principle is surely quite straightforward. The need welfare of the child must be paramount. No adult has an abolute right to adoption just as a parent does not have absolute control or indeed even absolute responsibility for their own children. We believe that children are a gift from God, not just to the parents or the adoptive parents, but to the whole community which, therefore, has a stake in assuring that the welfare of the child is paramount.

On a slightly different note, I for one am pleased to see the commitment to allow political parties to make positive moves to increase the representation of women in public life. As noble Lords will know, the Church of England has been ordaining women priests since 1994 and those who have experienced their ministry almost universally speak highly of them. I have just appointed a new senior cleric in my own diocese giving it its first woman archdeacon. I have no doubt that women should play their part in the most responsible positions of every part of public life.

The place of women, just as the place of those from ethnic minority communities, as full members of our society and of our parliamentary democracy is just one way in which we can help build a fuller, richer society. However, integration is not without its impact on existing structures, positions and those who occupy them. Whether we are talking about politicians, priests or other work in the public or private sector, we need to ensure that there is a coherent relationship between public and private life throughout our society. Sometimes the provision of a creche is more significant than a high salary and family friendly working hours are sometimes more significant than high office. I gently say that a good place to start might be here in the Palace of Westminster.

The foundation of the raft of new legislation in these and other fields, however, as the Minister made clear, lies in a sound economy. From these Benches we would not wish to disagree with that, nor with the attempt to bring more people into the dignity of work. We agree that work is the best form of welfare, yet there must always be a partnership between social justice and economic prosperity. I for one get a little anxious when politicians from all sides seem to be singing from the same economic hymn sheet.

The Government are to be congratulated on their determination to target those in need, particularly children and pensioners. But I do not believe that we should be complacent when the gap between rich and poor continues to grow. Economic inequality, when it is too great, invitably brings with it civil inequality and unrest. The great Thomas Acquinas maintained that civil disorder is an evil, usually damaging the weak more than the powerful and that, therefore, strange though it may seem, some injustice in society should be tolerated for the sake of stability. But, he maintained, there is a limit to the injustice which can be tolerated before it should be condemned.

This Bench would simply not wish to forget that there is such a limit, that the gap between rich and poor continues to grow; nor that the validity of the trickle-down theory of economic prosperity has yet to be demonstrated. On these Benches we were dubious of that theory when it was claimed by the Conservative administration of the 1980s and we see no reason to change our minds when the same is claimed by a new Labour Administration in this new millennium. Ghettos of social exclusion still seem to be impervious to the trickle-down of wealth. We know; we are there with our clergy and congregations.

We would agree that obligations as well as rights should be demanded of individuals, but we would also suggest that the same thing applies for corporations. We agree that obligations as well as rights should be demanded of the poor, but we also suggest that they must also be demanded of the rich.

The final Book in the Bible, and perhaps its most fearsome-- full of foreboding and judgment-- was directed to the complacent and well-to-do and in that context those well-to-do people of Asia Minor. Your Lordships' House should not be surprised if we on these Benches keep that judgment and complacency in mind as we, with your Lordships, give detailed examination to the Government Bills in the months ahead.

4:57 pm
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Lord Haskel (Labour)

My Lords, despite the words of the noble Lord, Lord Saatchi, about the painful effects on noble Lords opposite, I would like to begin by referring to the election earlier this month. Lots of promises were made during the campaign, but one was made which I believe will be particularly difficult to keep. It is not the promise about tax or about the euro. It is not the promise about public services, although that is part of it. No. The most difficult promise to keep will be that of the Prime Minister to liberate the individual potential of every single person in this country.

What has inspired that promise is a belief in equal worth, which demands more than just recycling income from the haves to the have-nots to meet people's needs, temporary or permanent. The old idea of paying dole money certainly contributed to equality of outcome, but it did little to enhance people's life chances. Equal worth demands more than simply holding the ring and being a referee. It requires an active state which initiates counter-measures against inequality, which gets rid of the entrenched patterns of advantage and disadvantage and removes the deliberate favouring of one group over another.

It was this concept of equal worth which inspired the previous government to introduce a legal minimum wage, decent working conditions, tax and benefit reforms to abolish the poverty trap and make the return to work worthwhile, better pay for women, and a legal basis for fair trade unionism. As my noble friend Lady Hollis reminded us, there was also the system of family support. There is the recognition that free markets have losers as well as winners and that equal worth means that the losers have to have a second chance through training and life-long learning and indeed a second chance to benefit the economy.

Having done all that, how does the Prime Minister intend to keep his promise to liberate the individual potential of every person in this country? The answer lies in the opening statement of the gracious Speech quoted by the noble Lord, Lord Saatchi. It refers to empowering people with better public services and building an inclusive society through investing in social capital. It is the public services of health and education, security and justice, transport and regulation which will empower people to achieve their individual potential. That is why it was so important during the election campaign to win the argument for spending on public services over Tory tax cuts. We won that argument. And winning that argument was one of the most significant features of the election because winning that argument finally broke the ideological base of the Opposition.

During the election the argument revolved around how we were going to sustain the rise in public spending. Obviously, the public rejected the idea of simply putting up taxes. It would not be done by borrowing either, as was suggested by the noble Lord, Lord Saatchi. But we can increase the tax take by increasing the output per person. There is plenty of potential for that. We have to make the cake bigger. However one measures it, our output per worker is below that of our main competitors--France, Germany and the United States. Part of the Chancellor's answer to the problem of sustaining the rise of spending on public services while at the same time enabling people to become better off is to raise productivity.

Of course the Government cannot do this on their own. The noble Baroness, Lady Noakes, made that point. So the Chancellor is pinning his hopes and his reputation on a shared mission to raise productivity in the public and the private sector, in manufacturing and in services. How does he intend to play his part? The answer again lies in the gracious Speech when the Government say that they will introduce legislation to,

"encourage enterprise, strengthen competition laws, and promote safeguards for consumers".

That means creating a wider and deeper enterprise culture open to all to make us more productive.

The proposed enterprise Bill contains a number of practical steps to do that. Thankfully, it gets the politics out of competition policy and encourages the Office of Fair Trading to promote competition and not just regulate it. Making price fixing a criminal offence is a real deterrent. Previously the deterrent was a company fine which in effect was a business expense mainly punishing the shareholders. The further encouragement for small businesses and the more favourable tax regime making it easier to start a business make a real contribution towards our enterprise economy being open to everyone. I was surprised that the noble Baroness, Lady Noakes--I am sorry that she is not in her place--did not welcome the proposals to reduce regulation on VAT and accounting. She grudgingly managed to mention the Regulatory Reform Act but, sadly, made no mention of the task force led by my noble friend Lord Haskins.

The Government are right to get on with this task with a sense of urgency. It will not be easy; nor will it be quick. Millions of people are going to have to feel that things have got better through their own individual experience that public services have become more responsive, that staff have become more thoughtful, that things happen more quickly, and that quality has improved. That is what will count, not whether the service is delivered through the public or the private sector. It will in the end come down to people and their skills. And we are going to need an awful lot more of them--people and skills. There is a shortage of doctors, nurses and teachers.

At Question Time the noble Lord, Lord Walton of Detchant, suggested that there is a shortage of 10,000 GPs. There is a shortage of fitters and engineers to improve our transport system and make it safer. There are shortages in both the public and the private sector. To counter those shortages, we are trying to attract people from developing countries. The cost is that they will remain just that--developing countries. If we are to seek these skills and talents from economic migrants and asylum seekers, it will mean that many of us will have to change our attitude towards them. Will the Government find these extra people among the 2.3 million men of working age, identified by the Centre for Economic Performance of my noble friend Lord Layard, who are listed as economically inactive? My noble friend Lady Hollis suggested that they may. If so, they will have to combat age discrimination and make the New Deal really effective for the over fifties.

Perhaps the most difficult task in this project is to bring back the pride, recognition and status associated with working in the public sector and delivering high quality public service. I agree with the noble Earl, Lord Russell. That means valuing people in public service and the work they do, rather than attacking them. As the noble Lord, Lord Roll, suggested, this means pay incentives and paying them what they would earn in the private sector. Quite simply, we are going to have to pay people more to fill the thousands of unfilled vacancies.

Extending the involvement of the private sector in delivering public services will not be simple for companies either. Those companies will have to change. They will have to adapt to the high level of exposure and to the scrutiny and openness which are essential in delivering public services. They will have to act in a socially responsive way that may not always be reflected in their share price. They will have to learn to ally social purpose to their corporate objectives--not an easy task. This kind of social change is a long-term business. For example, it will take 20 years before we see the benefit of Sure Start, by which time present Ministers will have departed their offices. But their legacy will be the social capital which this work is creating.

Some noble Lords opposite may feel that there is no such thing as society. Perhaps they will be more at home acknowledging that there is such a thing as social capital. The Prime Minister's promise to liberate the individual potential of every person in the country is part of building up the social capital of our country. It is a brave, bold and ambitious task which deserves the support of us all.

5:07 pm
Photo of Lord McCarthy

Lord McCarthy (Labour)

My Lords, I join the noble Earl, Lord Russell, the right reverend Prelate the Bishop of Southwark and other noble Lords in welcoming back the noble Baroness, Lady Hollis, to the Dispatch Box. It is better to have the noble Baroness looking after pensions than anyone else. I know that many in the pension organisations feel that way as well.

I welcome the noble Baroness's speech for two reasons. First, she told us that she has a good deal more welfare legislation in the box. Secondly, if I understood her correctly, it will be delivered in the traditional way, which contrasts with much of the rest of what is proposed for the social services, except that we do not know exactly what is proposed for the social services. That brings me to what I want to say. I want to ask the Government this question: what precisely are the implications of the changes they seem to be proposing in what, when I read economics many years ago, we used to call the public/private balance? Are they suggesting that we should significantly change the public/private balance by, in a curious way for this country, expanding public services by increasing the private sector's involvement in them? That would be an unusual thing to do.

If the Government want to do this, then my next comment would be: whatever you do, present a better argument than the one you have produced so far. The argument appears to be that, in the future, we shall have to avoid "ideology". But then, everyone says that. Everyone has always said it. When the Attlee government nationalised gas, electricity, the mines, the railways and so forth, they said that those actions had nothing to do with ideology. They trotted out a series of extremely distinguished Members of this House--Lord Reid, Lord Herbert, Lord Stanley and Lord Heyworth--all of whom had served on distinguished committees and said that something of this kind had to be done for those industries because they needed a great deal of money, they needed reorganisation and the government of the day naturally wanted a measure of parliamentary control.

At no point was it said that those nationalisations were undertaken for ideological reasons, because no one ever does say that. Indeed, when the Wilson government nationalised Rolls-Royce, British Leyland and Harland and Wolff, Mr Heath even agreed over the matter of Rolls-Royce. Wilson did not say that it was an "ideologically driven" policy. The government of the day pointed out that those organisations, though excellent, were on the point of collapse and were going bankrupt. An emergency flow of funds was to be put in place to help the companies get back on their feet. The move was to be an eminently practical one.

I suppose that the action taken then could have been described as what the Government now would call "pragmatic". But that is a terribly difficult word. I would prefer not to see it used. The word is a philosophical one with at least four different schools of opinion as to exactly what it means. The OED first defines pragmatism as "obstinacy and officiousness". Only its fourth definition suggests that it means "common sense", and we all know that that means absolutely nothing.

When Mrs Thatcher denationalised the buses, telecommunications and water, she insisted that it was not done for reasons of ideology. Even during the denationalisation of British Rail, I can recall Members of the previous administration telling us that, when they proposed to create over a hundred separate railway organisations alongside one monopoly in the form of Railtrack, it was not being done for ideological reasons. They were going to increase the efficiency of the railways. Indeed, they sat on those Benches and said that they would improve safety. It was supposed to be practical and sensible, but then everyone says that.

Thus, if something rather unusual is going to be done by this Government, for goodness sake, find a better justification than simply denying that it has nothing to do with ideology--"I have principles, you have half-baked ideas and they have ideologies". Ideology is a Janus-word. It conjures up images of what was done in Stalin's name, or Lenin, or Hitler, or Mussolini. For that reason, I ask the Government to think carefully about why they want to pursue this line and then to give us a sensible explanation. I do not ask for such an explanation today, although I hope that the Government will say something today. I ask Ministers to go away and think about this, and to read carefully the excellent IPPR report, which unfortunately was published only today, and consider whether it may be of some help to them.

I understand that then the Government want to introduce change in the public/private balance in three broad areas. I should like to say a few words about each of them and to explain what kind of tests could, in principle, be applied. First, I look at the injection of private money, although when one examines the matter closely, these projects do not always mean that much private money will be involved. A great deal of public money is usually required as well. Nevertheless, a public/private partnership is supposed to include an injection of at least some private money.

I should warn the Government that there is a deep scepticism on this subject felt by an enormous number of the general public. The problem is that members of the public cannot see how it can be cheaper, or from where the profits are going to come. They do not understand how it can be possible for the private sector to raise money more cheaply than the Government. Then again, over the weekend they will have read--and the IPPR has confirmed this--that the PPI does not work for the National Health Service or for schools.

Noble Lords knew of the problems when certain legislation went through this House. It was monstrous to suggest that a PPI would be the best way to deal with the London Underground; and it was even more ridiculous to suggest that air traffic control could be run in this manner. And, in the end, people noticed that it was not adopted for the Post Office.

If the public/private partnership is going to be pushed, I say again to the Government: present a better argument than the one you have presented so far. Face the fact that, as Mr Prescott admitted to Mr Humphrys a few days ago on Radio 4, it will often be more expensive, but the Treasury is not made of money. He said something along those lines. Given that, the Government should tell the people of this country how much more they would be prepared to pay if it were done privately. Would they pay 10 per cent more, 20 per cent more, or even 50 per cent? Could it ever become too expensive to have these things done in the private sector? These are the kinds of questions which I beg the Government to take away and think about.

I come now to the second way in which the private sector is going to help us. It will bring in private sector "entrepreneurial expertise". Sometimes I think that anyone who believes this has never employed a plumber. Has any noble Lord ever tried to hire a plumber from the Yellow Pages? If one wants to see private enterprise at work, the marketplace for plumbers is a perfect example: many buyers, many sellers and everyone knows what they want. However, it has always worked abominably. No one knows quite why that is; it is simply the way that marketplace works. Of course, some people are so elevated that they have butlers and so never have directly to seek to employ a plumber. They would not know about this kind of thing.

However, the rest of us also read the newspapers. We know all about the scandals that have occurred after private sector enterprise has been introduced into the public sector. We know all about what has happened to National Health Service cleaning services. Some 12 months ago my wife underwent an operation. She stayed on a public ward, where she took a liking to a lump of dust underneath her bed. Five days later it was still there. She became rather fond of that little piece of dust. That happened in a fine public sector hospital. So everyone knows what has happened to cleaning services in the National Health Service, as well as what has happened to NHS wages as a result of privatisation.

Also we can cite examples of the conditions in some private old people's homes. We know how bad some of them can be. Then again, unless one wanted a passport, everyone has laughed at the farce created by computerisation at the Passport Office. Many of us know all about the painstakingly recruited and extremely expensive "knicker salesmen"--as they are known in the health service--these are people who come into the health service as chief executives. They last for six months and then depart with a substantial severance payment. We all know of the scandals which can ensue when the wrong kind of labour is imported into the public sector. I urge the Government to be careful and to work out how they will ensure that the relevant people know exactly what they are doing. Health service executives and prison service executives need to have relevant experience in their fields.

Thirdly, I come to the silliest reason of all: under-utilised facilities. I do not wish to take up too much of the time of the House, so I shall cite the most ridiculous example, that of the National Health Service. People pay into BUPA and other private health schemes because there is over-capacity. They pay to jump the queue. They pay for better food and to have the dirt cleaned out from under their beds. It is for those reasons that they pay the premia for private care. People do not want to pay all that money in private healthcare fees and then go into a private hospital, only to find lying in the next bed a person being cared for under the NHS who has also jumped the queue. Their healthcare is not costing them a farthing. Why on earth should people sign up to private organisations unless they were able to get an edge?

If great efficiencies are introduced so that there is no spare capacity, then the private sector in the NHS will be killed off. That is because it is based on privilege. It also exists by poaching labour from the NHS for which it does not have to pay, because it does not train anyone. It is parasitic. It can continue indefinitely in such a parasitic state, but changes will destroy it.

I have a final comment that I wish to put to the Government. Over the past 18 years, since Mrs Thatcher shot Hugh Clegg in 1983, successive governments have systematically starved the public sector of funds. Starved of funds, not in terms of how much it got--I dare say the noble Lord over there can give me 1.8 per cent or 1.9 per cent increase per year--but in terms of what it was expected to do; what the public expected it to do; what medical science would have enabled it to do if it had had more money. In that sense it was starved of public funds. What it got in exchange was management consultants. It has been the most wonderful place for management consultants; they have expanded like wildfire. Many of them were in the public sector themselves and went out and made a lot of money--they are friends of mine; good luck to them--but the public sector has been starved of money and satiated with consultants and advisers.

Every conceivable gimmick has been put into the National Health Service. It has been restructured and restructured and restructured. But every time you introduce a major restructuring, half the people apply for their own job and sit around wondering whether they will get it, while the other half apply for another job, a better job, and if they do not get it their morale sinks. Everyone who gets a new job in a major restructuring is immediately dissolved from past responsibilities, because all the job descriptions are different. It is not your fault if it all goes wrong next year; you have got a different job description. That is not you down there; that is someone else.

So there is a considerable downside in major restructuring and a considerable downside in all major change. At last we have got some money. I say to the Government: think very carefully; think big. Suppose that you just throw the money at the social services and leave them alone to spend it. Of course, that is too shocking, and so you are bound to invent some new procedures and change a bit of structure. But do not expect that to do much good. It is your money that will do the good, and thank God you are at last going to spend some.

5:22 pm
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Lord Skidelsky (Crossbench)

My Lords, I am intrigued by the revelation of the noble Lord, Lord McCarthy, of the Government's diabolical plot to destroy the private health sector. I am sure that we will be able to make use of that in our forthcoming debates.

This has been an interesting debate and I am very pleased to be taking part in it. An intervention so early?

Photo of Lord McCarthy

Lord McCarthy (Labour)

My Lords, if the noble Lord is going to misrepresent me, I should like to get it right. I never said it was a plot. I think it is naivety. The Government somehow believe that they can do it without damaging the sector. I think that is doubtful. But it is not a plot.

Photo of Lord Skidelsky

Lord Skidelsky (Crossbench)

It was a joke, my Lords.

I am very pleased to be taking part in the debate. The noble Baroness, Lady Hollis, opened it in the passionate and charming way that she has made uniquely her own; my noble friend has done the best that he could with the materials at his disposal; and the clarity of the noble Lord, Lord Roll, is always a joy to experience. My own speech will be partly a reply to the thought-provoking remarks of the noble Lord, Lord Haskel.

I wonder whether noble Lords have fully grasped the revolutionary philosophy which drives this Government's economic policy. The Government have one overriding economic objective: to improve the efficiency and the productivity of the economy. That, of course, is not revolutionary in itself; Chancellors have been trying to do that for the past 50 years. The revolutionary principle is the particular way in which this Government use fiscal policy to achieve their aim. I shall call that use, if I may, "supply-side socialism mark 2" in order to distinguish it from mark 1.

Much of mark 2 socialism is based, as the noble Lord, Lord Haskel, said, on the human capital theory of economic growth--I prefer to call it "human capital" rather than "social capital", but they come to much the same--that is, the proposition that investment in human capital is the key to faster economic growth. I shall say only three things about that today. First, that it is very dicey as a theory; secondly, that even if the theory is right--obviously there is a case to be made for it so far as concerns education--it will take a long time to have its effects; and, thirdly, that it gives the Chancellor almost virtual licence to call "investment" anything that he wants to spend money on.

Why do I call this a revolution in economic policy? First, because it abolishes the separation between economic and social policy. Traditionally in Britain--and you can trace this back to Beveridge--social policy was designed to meet social and not economic objectives. The aim of the Labour Party particularly was to capture a part of the fruit of economic growth for social goals--better educational opportunities, better healthcare, higher pensions, relief of poverty and so on. So improved social provision was seen as the result of economic growth not, importantly, as the means to it--certainly not as the direct means to it.

The Blair Government have reversed this paradigm: social policy is to be judged by its effects on economic performance. In economic jargon, the "trade-off" between efficiency and justice or equality has been liquidated; the contradiction has been resolved. No wonder this leaves old social democrats such as the noble Lord, Lord Hattersley, somewhat bewildered.

Secondly, the Government's approach marks a break from the fiscal philosophy of my noble friend Lord Lawson of Blaby. In the view of my noble friend, the main contribution that a government could make to economic growth was to provide a stable macro-economic background--that is now common ground between all the parties--and, more importantly, to liberate private enterprise from public restraint by reducing taxes, simplifying the tax system and deregulating both product and labour markets. The Lawson strategy implied that as the economy grew, people would pay more for education, healthcare and pensions out of their own household budgets. That was supply-side Conservatism as it was practised in the 1980s and the 1990s.

This gives us a good vantage point from which to open a serious debate on what this Chancellor has tried, and is trying, to do. The first thing to say is that his human capital theory of fiscal policy implies a substantial increase in taxation. I do not see how this conclusion can be avoided. True enough, the Government hope to improve the quality and efficiency of public services through the use of public/private partnerships. Good luck to them--though I share many of the doubts expressed by the noble Lords, Lord McCarthy and Lord Roll.

But PPP is no substitute for spending money, and the Government have not claimed otherwise. The total tax burden rose from 37.6 per cent of GDP in 1996-97 to 40.5 per cent in 2000-01--and that was in a period of tight public spending, as my noble friend pointed out. That is not the end of it. Total managed expenditure--the broadest measure of public spending--is set to rise in real terms at an average annual rate of almost 4 per cent between now and 2003-04, or one and a half times the trend rate of GDP growth.

The social security budget, too, is on a roll. The Government's minimum pension guarantee is a commitment with serious long-term public spending implications. Let us consider the pledges on the National Health Service. The Prime Minister said that it was his ambition to raise health spending to the European average by the end of this Parliament. We spend 6.7 per cent of GDP on healthcare; the European average is 8.3 per cent. Last year, £44 billion of our taxes went on health. To spend what the Europeans spend we would need an extra £28 billion a year, and that is not counting the backlog of investment needed to bring our hospitals up to scratch.

Even to spend an extra £28 billion a year means an extra 10p in the pound on the standard rate of income tax. I wonder how many of the people who would be happy to pay higher taxes to get better public services realise how much higher they would have to be. As Anthony Hilton, City editor of the Evening Standard, put it in a recent article,

"Tony Blair could bankrupt the Exchequer and still not convince voters he has kept his word".

The effect of these big discretionary increases in public spending will be to increase the net borrowing requirement. This is expected to be in the double billions for each of the three years beginning next year, causing gross public debt to increase by about 15 per cent. Unless the national growth rate goes up substantially--which is the premise of the fiscal strategy--increases in taxation are inevitable.

Next, let us consider the impact of the Chancellor's fiscal activism on the nature of the tax system--how he raises his money and distributes his benefits. An ideal tax system should not distort the spending and saving decisions of households. But this Chancellor wants to do exactly that: to channel people's money to what he wants to do rather than what they want to do. As a result, we have developed one of the most complicated and distortionary tax systems in Europe. As Jonathan Sayeed put it in another place earlier this year:

"Even before this Budget, a bewildering array of different rates, credits, tapers, allowances, rebates, reliefs, means tests and adjustments led us to the point at which even those with a fair degree of financial knowledge have not a clue about the true extent of their tax liabilities".--[Official Report, Commons, 7/3/01; col. 366.]

Many economists believe that the over-complicated and distortionary nature of the present system has damaged medium-term growth prospects. In other words, it has achieved the exact opposite of what the Chancellor wants. The fall in sterling against the dollar suggests that investors are starting to take that view. That is hardly surprising, as growth in productivity fell flat during Labour's first term in office. That is quite apart from the danger to the Chancellor's fiscal projections posed by the American recession.

What I believe is happening is this: improvements in the public and social services which should be the result of better economic performance are now planned and justified as an "investment" in economic growth. Once you treat the welfare state as an engine of economic growth, you have removed a decisive constraint on public spending. That puts the Chancellor's own fiscal rules in jeopardy. It is also a very neat way of pre-empting the debate on how the public and social services should be financed, as who can be against wise and prudent investment? The Conservatives fell into this trap in the last election. They were forced to compete on the rhetorical terrain captured by this most politically astute of Chancellors. Politically, it is brilliant, but does it make economic sense or even political sense in the longer run?

This is where we have to join the battle. The Chancellor believes that faster economic growth can be secured by heavy public investment in human capital and by using the tax system to alter behaviour. We believe in a simple tax system with tax rates set to represent a decreasing share of national income and, to coin a phrase, in a "bonfire of controls". We believe that this is the only way to raise the long-term trend rate of economic growth. We also believe that it is right that those who can afford it should make direct contributions to the cost of education and healthcare. That is the only way to raise revenue for, and increase efficiency in, these services consistent with fiscal balance and consumer choice.

Now, we have to make a detailed and persuasive case for our alternative approach, which is something that we lamentably failed to do in four years in opposition.

5:34 pm
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Lord Borrie (Labour)

My Lords, within hours of the new Government being formed, journalists commented that my right honourable friends the Chancellor of the Exchequer and the Secretary of State for Trade and Industry had hit the ground running, making key announcements of policy initiatives on matters relating to business, the economy and taxation. It was to a degree reminiscent of the announcement made soon after the 1997 election by Gordon Brown to the effect that monetary policy should be determined in future not by him, not by the Treasury, but by the Bank of England--a decision which earlier this afternoon was welcomed by the noble Lord, Lord Roll of Ipsden. Indeed, that announcement was similar to the one made a couple of weeks ago that decisions as to whether projected mergers between companies--a take-over of one company by another--should be allowed would in future be determined not by Ministers but by the competition authorities. That is reminiscent of the 1997 decision regarding the Bank of England because the projected new policy will involve a very significant removal of political power on a key matter. It represents a major devolution of political power.

When the Government introduce this proposal, presumably in the enterprise Bill--the change regarding company mergers will certainly require legislation--though there will be some exceptions. The Government will not wish to give up the final decision in mergers where, for example, national security is involved. The Government will no doubt also want to have some greater discretionary role in decisions in other cases. It may be proposed that the Secretary of State should have the final word. If the enterprise Bill contains such a provision, I imagine that it will receive considerable close parliamentary scrutiny, because the broader the discretion, the greater is the risk that future Secretaries of State will wish to interfere even if the present one does not.

The DTI "trailered" these proposals about mergers in consultation papers in 1999 and 2000. But, more remarkable, along with the other announcements a couple of weeks ago by the Chancellor of the Exchequer, was the proposal that the projected enterprise Bill will also contain provision for the imprisonment of company directors and other individuals who are involved in price fixing and cartel arrangements. Such powers exist in the United States of America; they have been used from time to time and company directors have served terms of imprisonment. As my noble friend Lord Haskel said, if such provision were to be introduced in this country it would provide a powerful deterrent to illegal anti-competitive activity.

It will no doubt be said that in Britain we have only recently revolutionised our laws with prohibitions imposed by the Competition Act 1998--a measure which my noble friend Lord Haskel steered effectively through this House together with my noble friend Lord Simon of Highbury. Industry was given until March last year to adjust and to introduce its compliance programmes. So this is a new piece of legislation, newly effected. It was intended to bring our law into line not with United States law but with EU law, with which many major British companies were already familiar because they had to comply with EU law when engaging in inter-state trade across continental Europe.

But EU law relies entirely on monetary penalties. It has not followed in American footsteps with gaol as the ultimate sanction. I do not think that our membership of the EU requires us to have harmonised policies on penalties; however, the Government will need to explain why, unlike the rest of the EU, we need a change whereby terms of imprisonment are to be used as a sanction.

Moreover, I suggest that the apparently greater deterrence to illegal conduct may be weakened by the higher burden of proof that applies in criminal cases. Although the Consumers' Association has said that cartels are organised theft, I am not sure that courts, judges and juries can be relied upon to think in those terms. Therefore, as regards that matter and many others, the enterprise Bill will require a good deal of scrutiny in this House.

I rather like the word "enterprise". I am sorry that the Opposition do not seem to like it. I refer to the remarks of the noble Baroness, Lady Noakes. I believe that the enterprise Bill is intended to focus positively on the advantages to the public that come from competition and an enterprise culture. Risk taking is surely an essential part of that. As the DTI stated in its White Paper in February,

"An entrepreneurial economy needs to support responsible risk taking".

At present our insolvency laws are much too draconian because they hit not only the fraudulent and the irresponsible, who of course ought to be restricted and restrained in their business activities, but, I am afraid, they hit also the unlucky, who might perhaps do better second time round and engage in activities beneficial to the consumer. I am glad to know that the enterprise Bill will significantly relax our insolvency laws so that a failed businessman, marked with failure because of his insolvency, will none the less in many cases have a better chance of starting up again.

Last year many on my side of the House and elsewhere were disappointed that there was no consumer protection measure in the gracious Speech, despite the Government having published a comprehensive, 60-page White Paper in July 1999. Now, from what little has been trailed about the enterprise Bill to come before us, I think that we can expect something in that Bill.

Earlier this year the DTI introduced some useful regulations--I say to the noble Baroness, Lady Noakes, that sometimes regulations can be useful--enabling trading standards officers and others to obtain from the courts so-called "stop now" orders--that is a neat phrase--to stop traders breaching various EU directives that have been transposed into United Kingdom law to deal with doorstop selling, misleading advertisements, consumer credit and certain other matters. It was not legally possible for those regulations to cover contraventions of UK consumer laws that are not derived from the EU. In other words, they could not cover those parts of UK consumer law which emanate from the common law and from statute but only those which emanate from EU directives. I trust that that gap will be filled by the new Bill and that it will attempt also to cover traders who persistently engage in oppressive or unfair conduct of all kinds against consumers.

This Government have sought to promote competition, particularly through the Competition Act 1998. I say to my noble friend Lord McCarthy that part of their ideology, or at least their firm policy, constitutes a competitive society made more competitive by rules and regulations that are better able to deal with anti-competitive conduct.

Although competition is vital to protect the consumer, it is not always enough. The consumer needs a certain amount of regulation or--if you can get it and if it is effective--self-regulation, to promote specifically such matters as public safety and the provision of accurate, meaningful information about products and to combat the behaviour of rogue traders. As my noble friend Lord McCarthy remarked in relation to plumbers and as I say in relation to the second-hand car trade, there is plenty of competition. However, that does not mean that the consumer is adequately protected against rogue traders or misleading information and other bad practices that we all know exist. I feel sure that I am knocking at an open door in saying these things to the Government today.

5:45 pm
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Lord Hodgson of Astley Abbotts (Conservative)

My Lords, it is perhaps not surprising after so clear and decisive a general election victory that there should be a note of self-congratulation in the speeches from the Benches opposite. I listened with great care and interest to the opening speech of the Minister. However, I have to say that as I heard the veritable blizzard of self-congratulatory statements, the word "hubris" sprang unbidden in my mind.

There are two economies out there. There is the economy the Government like to talk about in which consumers are prosperous, house prices are still just about rising and retail spending is up. However, in the other economy, the manufacturing economy, things are very different. That is an economy in crisis. There is a range of reasons for this; for example, the strong pound and, as my noble friend Lady Noakes so ably pointed out, the regulatory burden imposed on manufacturing which has drained the confidence from that sector.

Last week I visited a company in the north of England of which I am a director. The company is a successful one. It is a world leader in its field. Some 65 or 75 per cent of our production on Tyneside is exported. However, the agenda contained an item to discuss moving more of our manufacturing outside the United Kingdom. We did not reach a conclusion on the matter but it has emerged with increasing frequency over the past year or two. If we eventually are forced to make such a move, it will be at the cost of some 800 jobs on Tyneside. It is not just anecdotal evidence of this kind that we should be concerned about. Manufacturing output fell in April by just under 1 per cent and the sector is close to recession. We are as a country now running the largest ever trade deficit in manufactured goods.

The future looks no better. Here I follow the remarks of the noble Lord, Lord Haskel. The key to our future in manufacturing is productivity. But, as the Treasury said of the previous government, average productivity growth over the past four years has not been strong. Those are Delphic Treasury words. The Government so far have fiddled about with this complex and difficult issue. Instead of focusing on it, as my noble friend Lord Skidelsky pointed out, they have fiddled about with complex tax breaks and eye-catching wheezes. If ever there was an area of spin not substance, that is it. I for one shall look to see whether the brave new tomorrow in this area is any different from the disappointing past.

I want to concentrate my remarks on the City and the financial services industry which were passed over lightly in the gracious Speech. The City is an undoubted success story but it is not a success story that can be taken for granted. There is no preordained reason why the City of London should be one of the three leading financial centres of the world. But sometimes I feel that the Government act as though it is and always will be.

Before I go any further I must declare an interest, or rather three interests. I am chairman of an investment bank based in the City. It is a shareholder in the London Stock Exchange. I am a past director of the Securities and Futures Authority, one of the current regulatory bodies; and I remain deputy chairman of its enforcement committee.

First, therefore, I wish to refer to the regulatory burden. There is always a balance to be struck between lack of regulation which undermines public confidence and drives business away and too much regulation which imposes too many costs on firms, drives them out of the market and drives away business. We have to address that delicate balance all the time. No one would argue that there should not be a proper degree and level of investor protection. However, we must always remember the cost.

The Financial Services Authority budget for the next year is about £170 million. But that does not include the cost to firms of complying with its regulations. My bank estimates that we spend at least £2 for every £1 of subscriptions that we have to pay to the FSA. Some firms argue that the ratio is much higher. However, assuming that it is 2:1 it means that every year, good times and bad, £500 million is being spent on City regulations. That is £0.5 billion. That money does not come out of thin air. It is not produced by the Government; it is paid for by the consumer. When difficulties occur in the regulatory system and there is, in this Chamber and elsewhere, the inevitable rush to judgment, we need to remember that year in, year out, good times and bad, consumers are paying £500 million additional costs. We need constantly to revisit the issue to see whether the right balance is being struck. I am by no means clear that the Government have hoisted it in.

The Government could help to keep costs down by ensuring that new regulations are brought in with plenty of notice, giving regulated firms time to adjust their internal procedures, change their IT systems, train staff and so on. The present example is not encouraging. The Government have said that the Financial Services and Markets Act will come into force before the end of November 2001. In his courteous and full reply to a Question for Written Answer, the Minister stated that 80 statutory instruments had to be implemented in order to fill in the detail of this vast piece of legislation. When the noble Lord wrote to me on 5th April only 16 of those 80 had been made. By a process of elementary arithmetic, 64 are still to come.

We may have made some progress. But let us consider what it means for regulated firms. It is now the end of June, with five months to the end of November. One and a half months are the holiday season. Therefore there are three and a half months, 14 weeks or 98 days in which to bring in and comply with 64 statutory instruments. There is no run-in period for these measures. After N2 one either complies or one is breaking the law. The Government need to think carefully about the additional and unnecessary stress and cost of the failure by the Treasury to plan adequately in advance. It is neither the Treasury nor the Government who will pay the price. The FSA will pay the price in terms of a launch in an atmosphere of good will or resentment.

My second point relates to the Government's attitude towards the future structure: the arrangements of buying and selling shares and other securities. The position of the London Stock Exchange is under threat in several ways. First, I have to raise again the issue of stamp duty. The key issue in maintaining market supremacy is that of price formation: the ability to quote the keenest possible price. There is increasing evidence that the existence of stamp duty is affecting price formation in the London market. Once a market switch has taken place, it will be hard for London to reassert its hitherto dominant position. The Government need to think again urgently about stamp duty.

Secondly, and equally importantly, the pricing of shares for purchase and sale is only one of three elements in each individual transaction. The other two are settlement--the means whereby money is transferred from the seller to the buyer--and the transfer of title, the means whereby one ownership is given up and another is assumed. Those two, in particular the latter, require trans-European action if a pan-European capital market is to emerge. The Government should be backing the City by pushing for action in these areas.

Deutsche Bourse is now attempting to integrate trading and settlement systems by taking over Clearstream, based in Luxembourg. It will thus create a monolithic non-transparent system. This needs to be resisted. It is a possible non-tariff barrier which will hold back the growth of the European capital market; and that will harm London's prospects. European settlement costs are seven times greater than those in the United States. To reduce them, we need transparent non-discriminatory links between all systems. The Government should be taking a lead on this. I have seen no sign of action.

Thirdly, and finally, perhaps I may deal with the takeover directive. This issue was raised first 12 years ago in Brussels. Serious discussions took place six years ago. It was agreed originally that it offered no advantages to the United Kingdom given the record of the takeover code and the Takeover Panel. The United Kingdom opposed the directive until two years ago when the Government caved in. That was a mistake. Since then the only role has been to make the best of a bad job. At the last minute, 12 years into negotiations, in May the German Government threw all their toys out of the pram and insisted that the directive should contain within it provisions for poison pills, the ability of boards to frustrate takeover bids and thereby deprive shareholders of a value that is rightfully theirs. The position has been partly rectified but Article 5 on the protection of minority shareholders and Article 9(b) on the obligations on the boards of offeree companies are still not satisfactory. They represent threats to investor interests. It is interesting to see the divergent attitude of the Government towards home regulation where we spend £500 million supporting the SFA and the more cavalier attitude adopted with regard to the takeover directive.

Further, as Section 3 of the Preamble makes clear, the directive provides only for minimum guidelines. The Takeover Panel is, and will remain, far in advance of what is available on the Continent. But the downside of the directive is the increased risk of litigation with all the consequent costs, delays and uncertainties that that implies.

The decisions of the Takeover Panel have always been subject to judicial review. But in its early days a company, Datafin, tried to resort to the courts. In his judgment, the noble and learned Lord, Lord Donaldson, made it clear that unless there were a clear miscarriage of justice the courts wanted nothing to do with such cases. Therefore, we have been able to keep statute law out of the system. Under the new directive the Takeover Panel becomes "the relevant authority". It ceases to be self regulatory and becomes statutory. That carries with it a clearly increased risk of litigation. I am far from clear what advantages the Government believe that the United Kingdom or the City have gained from this directive.

The Government seem extraordinarily cavalier about the success of the City. "Don't worry about the regulatory burden or the timetable for its introduction. Don't worry about stamp duty and its effect on price formation and the impact on the London Stock Exchange. Do not worry about attempts on the Continent to wrap up exchange and settlement systems. Do not worry about losing the speed and flexibility of the takeover code". Some of those the key historic and competitive advantages of the City of London are being lightly cast aside. I look forward to hearing the Minister's comments.

6:00 pm
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Lord Tomlinson (Labour)

My Lords, the first two sentences of the gracious Speech refer to economic stability, a prosperous and inclusive society and the need for the Government to secure low inflation and sound public finances. We can all take it as read that there is a general welcome for the economic basis on which the Government fought the election. The independence of the Bank of England, with the consequent success of policies to control inflation, is almost universally accepted. The success of combating inflation and creating new employment is equally welcome. The control of public expenditure and the repayment of debt are widely welcomed. Low interest rates have been sustained, giving certainty to corporate and private borrowers.

However, although the record is good, the economy sound and the Government deserving of congratulations, we need to look forward. The continuation of that economic success cannot be taken for granted. At the start of a new Parliament, some aspects of the economy merit our concern and it is right and proper that concern should be expressed in your Lordships' House today.

Despite the background of economic success, some clouds are beginning to gather--none more so than the problems reflected in the recently published trade figures. The quarter to April 2001 produced the biggest deficit for 11 years, widening from £4.8 billion in the previous quarter to £5.6 billion. That is the largest deficit since the third quarter of 1989. The United Kingdom is suffering from the slow-down in international trade on the one hand and from the strength of sterling on the other. We have managed a large deficit for some years, but the current trend is worse and the gap is getting bigger. The provisional deficit on trade in goods and services in the single month of April rose to £2.2 billion, compared with £2 billion in March and £1.6 billion the month before. In April, exports of goods fell by 1.5 per cent.

It is clear that the strength of sterling was a major cause of the widening of the gap, particularly between the United Kingdom and the rest of the European Union. The deficit for the quarter to April 2001, at £500 million, was five times greater than that for the previous quarter.

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Lord Skidelsky (Crossbench)

My Lords, does the noble Lord agree that if investors have confidence in an economy, it can sustain a substantial balance of payments deficit for a long time? Is not the United States an example of that? Why is he particularly worried about the fact that our payments are in deficit at the moment?

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Lord Tomlinson (Labour)

My Lords, I agree that a deficit can be sustained for some time. I said that we had managed a deficit for a long time. However, I am concerned about the direction of the deficit--the fact that it is widening substantially, particularly with the European Union. I am concerned about the trend.

My second cause for concern in this attempt to look forward was also addressed by the noble Lord, Lord Skidelsky, and by my noble friend Lord Haskel, who is no longer in his seat. It concerns the trend in productivity. The noble Lord, Lord Hodgson, referred to productivity problems, but in no sense can they be held to have started in 1997 or anywhere thereabout. We have had constant productivity problems over a long period. Even a superficial examination of the document entitled Productivity in the UK: Enterprise and the Productivity Challenge, recently produced by my right honourable friends Gordon Brown and Patricia Hewitt, begins to show us how serious some of our productivity problems are. Output has been boosted in recent times by higher employment, but further improvements in productivity are the imperative of the greater prosperity foreseen in the Queen's Speech. The Chancellor's accumulated surplus will disappear speedily with present spending plans without recourse either to the improvements in productivity that we need to match our major competitors or to the tax increases that the noble Lord, Lord Skidelsky, referred to in his interesting speech.

The statistics on productivity in Gordon Brown's recent paper show that output per worker is 40 per cent higher in the United States than in the United Kingdom and the gap is growing. It is also 10 per cent higher in Germany and nearly 30 per cent higher in France.

Other statistics are also relevant to productivity. In the United Kingdom, research and development spending has fallen from 1.5 per cent of GDP 20 years ago to barely 1.2 per cent of GDP today, whereas France, the United States and Japan are all on rising trends and invest substantially higher percentages of GDP than we do. Germany's trend is slightly downwards, but it, too, has had a consistently higher level of investment in research and development than the United Kingdom.

There are other manifestations of the result of higher productivity and higher investment to consider. On a pro rata basis by population, there are 30 per cent more patent applications in the United States, 40 per cent more in France and 200 per cent more in Germany.

The major reason for our relatively poor productivity is our relatively poor investment in physical capital. We have had a lot of debate and discussion about the benefits that might accrue from investment in human capital, but the poor performance of investment in physical capital is largely responsible for our poor productivity, despite the fact that we have highly developed capital markets in the United Kingdom and despite our great success in attracting inward capital investment from other countries. After those two facts, which should be to our benefit, have been taken into account, the United States now has 25 per cent more capital stock per hour worked, France has 40 per cent more and Germany has 60 per cent more. We have a substantial backlog to make up on fixed capital stock per worker.

There are other aspects of the problem relating to productivity. Every time in the past 40 years that we have reached full employment, the first thing that we have bemoaned is skill shortages in areas relevant to the needs of industry. We have got wrong almost every massive investment that we have made in trying to train our labour force. At times of full employment the first cry has been "skill shortages".

Therefore, we have serious problems which require the concern of government and which do not enable us to assume that economic prosperity will continue automatically. We have a problem both in relation to our trade situation and in relation to the productivity that will be necessary to enable us to maintain the type of investment in public services that are foreseen in the gracious Speech without resort to tax increases.

Finally, I want to say one or two things about the effect of the exchange rate on sterling and our international performance by returning inevitably to the question raised so clearly by my noble friend Lord Lea--that of our membership of the single currency.

First, in the short time available, I want to say clearly that I agree substantially with his arguments. I hope that the Government will begin to indicate their views on which, if any, of the five economic tests remain problematic to them. I hope that they will do so sooner rather than later.

In the meantime, I have expectations of the Government in which I hope not to find myself disappointed. If we are invited constantly to support the euro in principle, subject to the five-test assessment, or if we are told constantly that we are pragmatically pro-euro, I believe that we have a right to look to the Government to start spelling out clearly not merely to us but, through us, to the whole of the British people what they anticipate the benefits of the successful attainment of those tests to be. When we have completed those tests successfully, they anticipate a government view in favour of joining the euro. I look to the Government to start telling us what the benefits will be because they should be spelt out clearly now. They remain constant whether or not we attain success in those five rather subjective tests.

Not only do I understand but I share concerns that the incantation of those three words--"five economic tests"--is being used not as part of the debate on the euro but rather as a shroud to avoid debate. That cannot continue any longer. I believe that a number of Members on the government side of the House will be quite content to assist the Government in bringing forward that debate.

6:12 pm
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Lord Layard (Labour)

My Lords, there is probably only one proposition on which every Member of the House agrees--that the main economic issue for this Parliament is whether to join the euro. I very much agree with what has been said by a number of noble Lords: there must be a public debate on the matter. There is already half a public debate. The "no" campaign produces documents every day and the number of misconceptions increases every day. I want to spend a few minutes helping to do what the noble Lord, Lord Tomlinson, suggested was needed--that is, to make some of the key points on the other side.

Quite simply, the matter concerns productivity. That has been talked about a great deal today. However, in a country such as ours probably the main issue which determines the level of productivity is its relations with the rest of the world. One grows rich by being part of a large market. If one takes any part of the United States, one sees that it is rich because it is part of the large US market.

We have also seen the impact on the prosperity of European countries of the formation of the European common market. We stayed out of it for a long time and that was the great period when our productivity growth fell way behind that of the rest of Europe. After we joined, we managed to keep up with the rest of Europe. Unfortunately, we have not been growing any faster than it, but at least for the past 20 years we have not been growing more slowly.

However, Europeans have recognised that they do not have a truly single market because they have not had a truly single currency. Exchange rate uncertainty has been a major deterrent to any real deep trade integration. That is why the nations have now joined together to adopt a common money, much as, if we can cast our minds back in a broad-minded sort of way to the period before the First World War, the whole world had a common money. It is not such an awful thing to have.

During that time, we saw one of the great periods of trade integration and its impact on the spread of prosperity between nations. Now that a single currency is coming to Europe, we are already seeing the restructuring of the European economy in response to that with production concentrated increasingly in least-cost locations to the great benefit of European consumers.

Some people say that if we had stayed out we would be maintaining the status quo. I believe that that is the first fallacy of which we should dispose. The old status quo in which we lived until the past few years was one in which production in every single European currency destined for a market in any other European country involved exchange rate risk. However, for continental producers who are producing for the continental market, that risk has now gone.

Therefore, if we keep our independent currency, we shall become more at risk than we were in the past when compared with our competitors. I do not need to quote the experience of BMW, Vauxhall, Corus and so on to underline the importance of that. It will become even more important as the years go by. Therefore, I believe that we should start by recognising that the decision to stay out is not the default position; it is as active a decision as if we decided to enter.

However, then critics say--this came out in the past week--that the European market is certainly not our only one, and they point out that it is growing more slowly, in some sense to be defined, than others. The "no" campaign recently published a paper by Roger Bootle putting forward those arguments. I believe that there are three widely-held fallacies.

The first says that the importance to Britain of Europe has become exaggerated by "our side" because the argument has focused on the share of trade in goods and services that goes to Europe. Instead, it is argued that one should add in the flow of income from investments, which of course is much more related to the United States. However, that is wrong. We are interested in the problem of the set-up costs of penetrating a market. Those involve a much longer time horizon and lock in the fortunes of companies and workers to the vagaries of an exchange rate if it is floating, whereas most investments can be more rapidly reallocated between currencies.

The second argument put forward a great deal at present is that Europe is growing more slowly than the rest of the world. However, the funny thing is that people do not look at history. Of course, for a long time Europe has been growing more slowly than the overall world economy, yet the share of our trade with Europe has increased steadily over the past 30 years. That is because trade integration is so important when compared with anything else. I believe that one can say with almost complete certainty that we should not be looking only at the present share of trade with Europe. If we joined the euro-zone, our share of trade with Europe would increase because integration would be so rewarding in terms of gains in profits and productivity.

Finally, people love to point out that more of our goods exports are invoiced in dollars than in euros. Of course, the largest number are invoiced in sterling. But the currency in which one is invoiced is not the point. What matters is the relation between one's costs--in pounds in our case--in one's own currency and the prices of one's competitors when expressed in the same currency. If the invoicing is in a third currency, the prices can be adjusted to obtain whatever price one deems to be optimal in the market in which one is selling.

Exchange rate stability in Europe is the prize we would win; the cost of course is loss of control over our interest rates. If one is in principle in favour of joining, one has already judged that the gain from exchange rate stability outweighs the cost of losing control over one's interest rates. One could not have made one's decision in principle without having looked at that key central trade-off.

As the Government have presented the matter to us, the next issue is to decide when to join. The Government must of course make a careful assessment of the tests. One is bound to say that the basic convergence of economic cycles and thus of interest rates looks to be well within sight. The remaining problem is with the exchange rate. We could consider joining only at an appropriate rate, which would be substantially lower than that which currently prevails. However, the exchange rate is not an exogenous, external element that the Government are powerless to affect; they can influence it and ultimately it will have to be agreed with our European partners. If that involves a change in the exchange rate, there will be problems with demand management--a lower exchange rate would mean a higher level of demand for British production.

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Lord Layard (Labour)

My Lords, there could perhaps also be a problem with inflation, although one hopes that that would be a one-off issue. I entirely agree with the noble Lord. My point is that there are problems.

One cannot imagine a situation in which one joined but in which there was not some problem of demand management when one linked up with another monetary system. We again come back to the fact that if one is in principle in favour of joining, one must have accepted that one will have to overcome some challenge or other at the point at which one eventually joins. I do not want to prejudge the Treasury's evaluations but I cannot help recalling that the feeling in the 1950s was that we could wait and see about the common market. In fact, events moved on, as they always do, to a position in which for a time we did not even have the option of joining. I am not suggesting that there are similar events in our current situation but in that case, having decided to wait, we ended up waiting for 17 years. I devoutly hope that it will not be that long this time.

6:23 pm
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Lord Blackwell (Conservative)

My Lords, it is typical of debates on the economy to start off with a recitation of statistics on the current state of the economy. I do not begrudge the Minister that pleasure because on many measures--not, as we have heard, all measures--the economy's current performance looks quite good. However, the danger of such confidence is that the Government start to believe their own rhetoric about the strength of the economy and the prudence of their policies and ignore the reality of leads and lags in the economy, which is a dangerous driver of economic activity. What we measure today is not necessarily a good measure of what is going on "underneath" the economy. As a result, I fear that the future may not be as rosy as the Government expect and their policies may not be as benign as they judge them to be when they look at the current state of the economy.

At this stage--just after an election--I do not want to make a narrow party-political point. However, the truth is that what one observes of any economy today is not the consequence of actions that are taken today; it is the cumulative effect of policies that have been followed for several years. The current conditions--low inflation and unemployment, almost 10 years of continuous growth and the fact that government finances are in surplus--are the consequence of a sustained period of monetary and fiscal restraint since at least 1992, when Britain left the ERM. I give the Government credit for not immediately destroying that legacy. However, they cannot claim single-handedly to have abolished boom and bust. When I look at the Government's current policies, I am not so certain that the future is assured.

Continued stability in the economy depends on having an economy that can withstand external shocks. The Government's over-confidence is putting that stability at risk. We are moving, as several noble Lords have pointed out, from a situation in which public expenditure grew at a rate that is lower than GDP--it did so for many years--to one in which projections suggest that government expenditure will grow much faster than GDP. That involves turning surplus into deficit even under the assumed condition of benign economic growth. As my noble friend Lord Saatchi pointed out, the Red Book shows that as a result, over the next five years, the Government will borrow back all the money that they repaid during the previous five years. Moreover, as my noble friend Lord Skidelsky pointed out, such growth in economic expenditure is not sustainable under any conditions; indeed, it is risky because the imbalance that is created will be compounded by any economic weakness that there may be.

I therefore fear that, despite the Government's rhetoric, they are reverting to boom and bust, which has often been fuelled by runaway public spending. That is a real risk; we have all be lulled by the worldwide experience over the past five years. In that period only five OECD countries suffered a year of recession; however, in the preceding five years--the first five years of the 1990s--18 OECD countries, including, of course, the UK, suffered recession. We cannot go on assuming that such conditions will not recur.

There is therefore a risk in the game that the Government are playing. However, worse than that risk is the fact that their current policies are, in ways that are not yet fully observable, killing the golden goose of economic wealth creation, on which all of that future prosperity depends. As my noble friend Lady Noakes said, during the past four years the Government have imposed on business significant new burdens in terms of regulations and taxation. I accept that that has not all been one way--I congratulate the Government in particular on their plans to reduce capital gains tax, which is a welcome development. However, rhetoric on enterprise and deregulation is not the same as policies. Too many policies, particularly those in the labour market, have gone the other way. A trade body recently estimated that the cost of regulation over the past four years was £35 billion. I do not know whether that figure is right; the additional 27 hours a month that have been incurred by businesses and which were discussed by my noble friend Lady Noakes suggests that the real figure could be much higher. Ministers must recognise that rhetoric and deregulation are not what this is all about; for scores of businesses up and down the country the reality involves an expansion of regulation, which is decreasing our prospects for employment and wealth creation.

In addition to those microeconomic effects, and forgetting about leads and lags, the Government are ignoring another fundamental reality; namely, the reality of crowding out. With an economy that is close to full employment the truth is that every extra pound of public spending ultimately squeezes out close to a pound of GDP activity in the private sector. In other words, as the public sector gets larger, the private sector gets smaller than it would otherwise have been.

It is worse than that because we do not have a static economy, as that would suggest. We are not simply dividing up a static pie: it is the private sector on which we depend for wealth creation and growth. The more we squeeze the private sector to pay for public spending now, the more we limit future economic growth, the more we reduce our future national income and the more we reduce the amount that we have to spend on growth and private and public consumption in future.

The days are gone when economists believe that increasing public expenditure could promote growth and future wealth. It has exactly the opposite effect. The noble Lord, Lord Haskel, said that the objective should be a bigger cake. The result of the Government's plan, because of that inevitable effect of crowding out--crowding out the wealth-creating part of the economy--will be a smaller cake.

A prudent economic policy not only balances government budgets today but limits the share of national income that the Government claim today against the welfare of citizens tomorrow. A government who take too much of the national income today and spend it on non-productive areas will reduce national income and welfare for citizens tomorrow. Nothing is more misleading than to call that spending "investment" as a new form of double-speak.

So given the combined effects of new regulatory burdens on the supply side and the crowding out impact of public spending and reducing wealth creation, it is not surprising that aggregate productivity growth in the UK, as a number of noble Lords have mentioned, has slowed over the past four years from 2.3 per cent in the previous four years to 1.8 per cent. And as a result of more interference on the supply side, there is little to suggest that that will rise.

I am too old, perhaps, to place much reliance on simplistic regression models. But I do not think that it is complete chance that, if you look across the world's economies, there is a very clear relationship between public expenditure as a percentage of GDP and growth rates. The higher the ratio of public expenditure to GDP, on the whole, the lower the growth rate. I do not believe that that is an accident.

As the Government's spending plans show that the proportion of government spend to GDP will rise rapidly again, having been brought down during the period of rapid growth and productivity gains in the 1980s and early 1990s, I believe that we need a proper national debate on the sensible limits of that government spending ratio that takes account not only of the macro-economic effects that I have talked about but also the effect on efficiency and productivity and also--in some ways, a more important point--the threat to personal choice and liberty posed by a large state.

One more factor that I should throw into this debate is the unrecognised under-funding of state pension liabilities. Based on figures released by the Government Actuary, I was able to estimate recently that the cost of under-funded pension liability is over £1 billion for the basic state pension alone. To that must be added the under-funded liabilities of public sector workers and others which are several hundred million pounds in addition.

We need to construct an economic policy, balancing what we take today versus growth and investment for the future, which allows those future liabilities to be funded so that we are not building up another time bomb for future generations.

I go back to my starting point--the leads and lags in the economy and the danger of looking at performance statistics today and ignoring the impact of what the Government are doing in relation to economic wealth creation for the future. While the Government bask in the current economic environment that has resulted from past policies, I believe that there are many trends beneath the surface which are caused by current policies, policies for which the Government are responsible and which threaten to undermine that economic success in years to come. I look to the Minister who is to reply to show that the Government have indeed moved beyond pre-election rhetoric and that they are aware of the dangers of the course on which they are now set.

6:34 pm
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Lord Brooke of Alverthorpe (Labour)

My Lords, first, I apologise to the House for my late arrival to the debate. That was caused by problems with Railtrack.

I am grateful for the opportunity to speak in this part of the debate on the gracious Speech. If the Prime Minister had not called a general election on the day that he did, I should have had the privilege, in the following day's Labour debate, to draw the House's attention to the beneficial effects of the Government's policies on the UK economy. It might not have been entirely to the taste of the noble Lord, Lord Blackwell, but I should certainly have been saying that we had built on what had been there before, and that we had built on it very substantially indeed.

I wanted to stress in particular the valuable impact of the Government's policies on helping to reduce the scourge of unemployment. We still have very substantial numbers of unemployed people in this country and that issue needs to be addressed. The Government have also helped to reduce social exclusion and have sought to reduce inequality--scars on our social fabric that had grown over the previous two decades. In my opinion, those are some of the principal defining features between the approach of Labour and the Conservatives over the past few years.

I hope that those will continue to be important objectives for the Labour Government in their second term. Particularly in the light of what the noble Lord, Lord Skidelsky said, I await with interest to see what will be the position of the new leadership within the Conservative Party when it has been determined.

Leaving aside the politics, I should have echoed much of what was said by my noble friend Lord Tomlinson; namely, that there are storm clouds ahead and that notwithstanding what we endeavoured to do in the first term of the government, much remained to be done, and that our success or otherwise would be dependent primarily not only on the Government's continuing successful economic management, a point raised by a number of noble Lords today, but also on the need to improve further, with a significant drive, the country's overall performance through higher productivity. In particular, I should have spoken in favour of the greater use of information technology.

The gracious Speech now gives me the opportunity to make a few brief observations on the latter points. IT and the Net can provide the platform for a substantial increase in our productivity in this country. The Government recognised that when they were elected in 1997 and they made an exceptionally good start, in my opinion, in seeking to identify and support the actions needed to keep the UK in the forefront of the global e-commerce race. The report they produced e-commerce@its.best.uk was generally welcomed and seen as an outstanding document, both here and abroad. There was some good follow-up and the Government have achieved much of which they should be proud since publication.

But, as I regret is so often the case in the UK, it seems that we are now starting to slip behind. In a sense, I fear that there is an admission of that in the Queen's Speech where it states:

"My Government will work with our partners to make sure that Europe has the most competitive knowledge-based economy in the world".

I have not drawn a great deal of comfort from the DTI/Treasury document to which my noble friend Lord Tomlinson referred, which was published last week, about productivity in the UK in so far as it says anything about IT and the Net and its implications and possibilities for productivity in the UK.

The phrase in the gracious Speech gave me the feeling that we are now shifting our focus from "making Britain the best place in the world for e-commerce", as the Prime Minister said previously, to working with partners to ensure that Europe has the most competitive knowledge-based economy in the world.

Perhaps that is a more honest and realistic assessment of what we can achieve than the somewhat over-hyped ambitions of the past. That is fair enough, but it disturbs me. Last year I spent seven months as chairman of Sub-Committee B of our European Union Select Committee looking at the way in which e-commerce is developing. I and other observers are concerned that our competitors within Europe are continually raising their game in this arena. So we need to keep up the pressure.

Even more worrying, in the past two years we have made little progress on some key issues and I believe that the UK is lagging behind some of our competitors, not just on a worldwide basis but also within Europe. In a number of areas a step-change in the Government's efforts is required. Time does not permit me to go into all of them, but I shall mention two where the Government can act.

The first is in their own backyard. They have set targets for the whole of government to be online by 2005. Some other targets have been changed or abandoned since the election, but I seek some reassurance from the Minister that the Government are adhering to that target, although I sense an increasing scepticism about our ability to meet it. I suspect that the recent reorganisation of government departments, while justifiable, will in some respects have created further problems and possible delays for "e-government" planning.

In short, there is a pressing need to re-engineer government around the citizen/business user with new integrated online services, rather than simply taking existing services and putting them online. More investment will be needed for that as well as better assessment of cost-savings of property assets and staffing that would flow from a significant take-up of "e-services". A strong catalyst in that regard would be the opening up of government services to competition, perhaps from the voluntary sector and from the private sector. As I said earlier, these issues fall within the Government's area of control and action and such action is now required.

Finally, I want to speak about the pressing need to get on with building the infrastructure for the new economy and rolling out broadband, with its high speed and "always on" capabilities. The national economies that first achieve pervasive broadband use will gain significant competitive advantages, both through the transformation of existing industries and the creation of new ones. Yet currently the UK is 22nd in the OECD league table of broadband access and poor broadband connectivity in the UK is becoming a factor in mobile investment decisions. At long last BT is rolling out broadband capability and Oftel has improved competition in that area. Indeed, only a few weeks ago my noble friend gave us the programme for the roll-out from BT up to July. I would be grateful if in the future he can update the House on the continuing stages of that programme and whether there is a possibility of it moving at a faster pace.

I do not believe that the roll-out from BT alone will be sufficient to make broadband capability pervasive on the scale required. Investment costs are extremely high and even in a positive investment climate, which is far from the case for the telecom sector, it will not be easy to acquire money from other parts of the private sector. So I contend that if we are serious about productivity in this area there is a case for the Government to undertake an urgent review of where and whether it is possible to intervene to some degree, either directly or in partnership with the private sector, or to explore the prospects for the tax breaks to encourage greater growth of band width.

Offering broadband connections to all SMEs could massively raise productivity. I would not include sole-traders who are not in as much need of it; nor would I include the bigger companies who, from the facts, are doing well and can cope on their own. But the vast bulk of firms that employ people in this country, the small to medium enterprises with from 10 to 500 staff, are desperately in need of access to broadband. Over 95 per cent of our private sector workforce would be covered by such a change and it would provide an unprecedented uplift in performance and productivity.

Perhaps the Minister can say whether it will be possible to hold a further review of the way forward in this area. I suspect the reply will be "No", which is a pity because, as we look around and see what some of our competitors, not on a worldwide basis but within Europe, are doing, we can see that step-changes are being effected in a number of European countries. If noble Lords look at what is happening in Germany, they will see how that country is moving ahead quickly and leaving us far behind.

6:47 pm
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Lord Northbrook (Conservative)

My Lords, first I declare an interest as an investment fund manager. In the main I shall speak about the key measures that affect business in the gracious Speech and in the Enterprise for All press statement. The Labour Government's first four years showed that they were able to take advantage of the inheritance of the sound economy that they took over in 1997. In their second term the Government want to show that they can improve the country's long-term economic performance.

For all the government business-friendly rhetoric of the first term, the Economist, as have many speakers, noted that British productivity still lags behind that of France, Germany and the US. Recently there has been an improvement in manufacturing performance, but rather than that being caused by government policy, it is more likely to be a result of companies having to make efficiencies to deal with an overvalued exchange rate.

Several measures announced last Monday in the Government's strategy paper on enterprise and productivity were welcomed. One of the most interesting moves will be to take politicians out of competition policy as well as to deny Ministers the right to make the final decision on mergers. The Government also propose to allow the Office of Fair Trading and the Competition Commission to be more proactive in starting investigations.

The proposals, which include a threat to jail directors involved in cartels, were welcomed by competition authorities and consumer groups, but were met with concern by industry bodies. Digby Jones, the Director-General of the CBI, warned that they would put UK companies at the disadvantage of competing in a market where Britain would be the only large EU country with such draconian legislation.

The planned reform of insolvency law is needed both in order to encourage people to take risks and to avoid unnecessary failures. The main insolvency professional body, R3, welcomed the proposal to abolish the preferential status of Crown creditors such as the Inland Revenue, but the British Bankers' Association stated that the plan to abolish receivership might make banks more reluctant to lend to companies. John Thirwell, a BBA director, said:

"There is a real danger that finance from banks will be less flexible, less available and more expensive".

Further measures include a review of the planning system, which also can place considerable constraints on business, and that is long overdue.

However, as the Financial Times stated on 19th June:

"Whilst parts of the Enterprise for All press statement make a lot of sense, the overall strategy is flawed. The Chancellor does not accept that he risks undermining the pursuit of efficiency through his habit of excessive interference".

How has that interference manifested itself? According to the British Chambers of Commerce publication Burdens Barometer, compiled for the first time in 2000, red-tape will have cost businesses £15 billion by 2002. Those figures are also based on the Government's own regulatory impact assessment.

Major elements of that figure are compliance with the working time directive (£7.65 billion), the data protection directive (£3.1 billion), the EU pollution directive (£1.6 billion), and IR 35 (£0.5 billion). Those are the most high profile of the new burdens but there are many others, including working families' tax credit, new rights on parental leave, the part-time workers directive and the implications of the Human Rights Act.

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Lord Lea of Crondall (Labour)

My Lords, I thank the noble Lord for giving way. Perhaps I may take an example in that great litany of burdens; the part-time workers directive. The noble Lord called it a burden but would it not be equally true to say that it enables employers to treat part-time workers as part of the labour force--and not before time?

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Lord Northbrook (Conservative)

My Lords, I thank the noble Lord for his question. My point is whether or not the issue can be resolved on a more informal basis between employers and employees rather than having to be enshrined in legislation.

Moreover, further burdens are on the way, including waste electrical and electrical equipment directives and further reforms to parental leave. The cumulative cost of those regulations hit medium and small-sized businesses most, as confirmed by recent figures from the Institute of Chartered Accountants. The figures show that the costs to smaller businesses of complying with new legislation more than doubled between 1999 and 2000. As regards medium-sized businesses, the average cost of implementing new legislation rose from £1,700 in 1999 to £3,600 in 2000 and for smaller businesses from £4,700 to more than £8,000.

There is a major effect of this red-tape burden. The first is lower productivity. As has been stated, one of the DTI's main departmental aims is to raise productivity, but most experts accept that red tape on the scale introduced under Labour reduced productivity and investment. OECD statistics show that productivity increased at two-thirds the rate of 1992-97 during the four years since Labour came to power. As many speakers have said, the deceleration in Britain stood in marked contrast with America, where productivity rose. Output per worker is more than two-fifths higher in the USA and in France it is one-fifth higher.

Another effect of the red-tape burden, as mentioned by several speakers, is wasted office time. The secretary of the Institute of Chartered Accountants' Enterprise Group, Clive Lewis, stated in a press release last October:

"Not only does the volume and complexity of regulation eat into the resources of a business but it absorbs time that could be spent more valuably on survival and expansion".

An additional effect of the red-tape burden has been a 30 per cent rise during 1999-2000 in individual complaints dealt with by ACAS. According to the magazine Personnel Today,

"the raft of legislative changes brought in under the Employers Relations Act is the chief factor behind the big rise in tribunal claims reported by ACAS".

Another consequence of the red-tape burden has been as a result of the working families' tax credit. The National Association of Citizens Advice Bureaux reported in a recent document that:

"Employers have sacked workers entitled to the pay boost or cut their hours because they want to avoid the red tape of paying through the wage packet".

More red tape is in prospect. The Government are speedily preparing the ground for the introduction of two new and potentially costly regulatory burdens on business; namely, the introduction of the EU Information and Consultation Directive and, secondly, the introduction of new rights for parental leave. The EU Information and Consultation Directive, in case anyone is not familiar with it, forces UK companies to consult their employees before taking major decisions such as those on redundancies and closures. Prior to the election the Government were supposedly strongly opposed to the directive, keen as they were to maintain business support. For example, the then Secretary of State for Trade and Industry, Stephen Byers, stated at DTI questions in January 2001:

"The Government remain opposed to the directive which we believe contains a number of weaknesses".--[Official Report, Commons, 18/1/01; col. 498.]

However, they allowed the directive to be passed four days after the election. Companies with 150 staff will have to adopt the regulations in three years' time and those with 50 or more staff must do so after seven years. The CBI stated that it was "deeply disappointed" by the EU Council of Ministers' decision, arguing that the legislation would be damaging because there is no single right approach to employee involvement.

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Lord Haskel (Labour)

My Lords, I thank the noble Lord for giving way. Did he have the opportunity of seeing the survey carried out by the CBI, which was published on 12th or 15th June, stating that a large number of firms are already carrying out these various directives?

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Lord Northbrook (Conservative)

My Lords, I thank the noble Lord for his question. Again, my point is that if such a process is already happening can it not be done as a voluntary agreement rather than requiring legislation?

The Engineering Employers' Federation greeted the Council's decision with dismay. David Yeandle, its deputy director of employment policy, stated:

"There can have been no compromise that would have made this a less bitter pill to swallow for UK employers".

The second new and potentially costly burden is the introduction of new rights for parental leave. In the previous Parliament, the Government incorporated into UK law the European directive on parental leave, granting parents of children under five the right to three weeks off work to spend time with their children. That was implemented through the Employment Relations Act 1999, which included other changes to UK maternity entitlements. The key point about the Government's reforms in this area of family-friendly policy is that they are trying to legislate in an area where companies' employees and employers should be able to work out their own solution. The Government's approach will create extra red tape.

Reacting to the Labour Party's announcement of proposals to create a task force to consider how working parents can be given a legal right to request flexible hours, Davis Sears, deputy director of British Chambers of Commerce, said:

"There is still a danger that the approach being proposed will lead to an increase in the regulatory burden on small businesses, adding yet another hoop for employers to jump through. The announcement assumes that the need to regulate is a foregone conclusion. Business would rather the proposed task force were given a more open remit to meet the needs of employers' and employees' [for] flexibility in the workplace. We will be pressing for small business representation on the task force to take this issue forward".

Moving on to the Government's tax policies towards business, I welcome the Chancellor's cuts in corporation tax, capital gains tax on business assets and VAT since 1997. I urge him to follow the example of the Irish Government by continuing to reduce corporation tax. I note that the Financial Times states that the changes proposed to capital gains tax may at the margin encourage investment, but this positive outcome is outweighed by the disadvantages of having a constantly shifting and confusing tax regime.

A particularly damaging new tax on manufacturing business is the climate change levy. Evidence already shows the damage that it has caused. In May The Times reported:

"Labour's controversial climate change levy more than tripled the pace of cost increases in Britain's industries after its introduction last month, official estimates have revealed".

The first evaluation of the effect of the climate change levy shows that it added more than 0.9 per cent to industry's costs in April, according to the Office for National Statistics. Without the extra charge on business energy use, firms' costs would have risen by just 0.4 per cent during the month. But the levy implied a total rise of 1.3 per cent--more than three times as much.

The Engineering Employers' Federation estimates that some 2,300 enterprises that employ more than 1.3 million people will not have access to negotiated energy agreements with the Government and, as a result, will face new net costs of almost £100 million, even after a reduction--

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Earl Russell (Liberal Democrat)

My Lords, is it sensible to suggest that the cost of the climate change levy should be calculated against the possible cost to business of flooding which can also be considerable?

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Lord Northbrook (Conservative)

My Lords, I note the noble Earl's comment. The 2,300 companies are open to international competition and will be required to pay the levy in full, with damaging consequences for profitability and their ability to invest in energy-efficient measures.

The UK Steel Association estimates that the additional cost of the climate change levy will be £10 million per year per producer. It also states that the penalties are very heavy even for marginal non-compliance. There are inconsistencies in the way that tax operates and who is eligible.

The Government claim that the levy will be revenue-neutral across the UK, but the 0.3 per cent cut in national insurance contributions will be insufficient to offset the increased energy cost imposed by the climate change levy. The levy effectively favours labour-intensive companies at the expense of technology-intensive manufacturing industries. Many companies in the automotive sector will be badly hit because narrow eligibility criteria prevent them entering a negotiated agreement with the Government.

The Aluminium Federation has stated that, while its sector has been able to negotiate a more affordable CCL tax bill, it is still overly-bureaucratic and will damage the competitiveness of the industry against both competing materials and competitors in other European countries.

In summary, while the Government should be praised for cutting corporation tax and reforming capital gains tax for business assets, this good work has been undone by unhelpful extra taxes, such as the climate change levy and the burden of extra regulation which hinders company productivity. As a final comment, there would be a huge benefit if government Ministers and civil servants spent more time on secondment to businesses, both manufacturing and service. They would see exactly the effect of the extra regulatory policies and that would encourage them to cut back rather than expand red tape.

7:05 pm
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Lord Newby (Liberal Democrat)

My Lords, in the first economic debate of this Parliament I should begin by congratulating the noble Lord, Lord McIntosh, on retaining his position as the Government's spokesman in your Lordships' House on this and other matters. In the previous Parliament the noble Lord demonstrated his versatility in many ways. I believe that during the speech of the noble Lord, Lord Roll, the noble Lord, Lord McIntosh, was about to expand his repertoire by bursting into song. I hope that we shall have that pleasure during his wind-up speech.

I begin with the overall economic situation. I believe there is a consensus that the Government entered the election campaign with most of the economic indicators in a very positive state. To a certain extent, that was the result of their own doing; for example, the independence of the Bank of England helped. As the noble Lord, Lord Roll, said, it was also due partly to propitious external circumstances. The likelihood is that those external circumstances will be somewhat less propitious as one moves into this Parliament.

As we look around the world, we see that in Japan, for example, the prediction is that growth will be 1 per cent or less for a number of years to come. In the US, there are major uncertainties in a number of areas. Are we in for a "V", "U" or "W" in terms of growth over the coming months? Will the Bush tax cuts later in the year provide a stimulus to consumption or will over-borrowed consumers use them to rebalance their finances? How long can the US sustain a huge and growing balance of payments deficit, and what will be the consequences in the short term of the extremely high level of inventories which currently exist in US warehouses? There are many uncertainties. When we move to the euro-zone, we also see a fairly mixed picture, with sentiment in Germany looking particularly gloomy, with attendant consequences for the UK.

All these movements in the economic situation of the major trading countries and blocs are potentially damaging to the UK. While in many respects the economy is strong, as the noble Lord, Lord Hodgson, pointed out, at the moment there are major imbalances and, to a certain extent, we live in a two-economy economy. Over the past three years, the manufacturing sector has lost about 400,000 jobs, with a disproportionate effect in some of the more northern regions, yet in the service sector we see very significant skill shortages which begin to place increasing pressure on incomes and wages which, at their limit, appear to reach unsustainable levels. City firms now pay newly-qualified lawyers between £30,000 and £40,000 at the start of their careers. I do not believe that that kind of income is sustainable. To pick up a point made by the right reverend Prelate, I also believe that in the longer term the effect of such skill shortages and high wages in further increasing the already wide disparities in income will be potentially damaging to the coherence of our society.

To sum up on the overall economic situation, I do not believe there is a need to panic, but perhaps there is need to feel a little uneasy. This macro-economic picture must inform debate on the major economic and political issues that face us during this Parliament, of which I suggest there are two: the first is the possibility, or not, of our joining the euro; the second relates to the funding of public services.

As to the euro, in the very short period since the election we have already seen the price to be paid for uncertainty. First, within days of the election there was speculation that the Government might be readying themselves to grasp the nettle of quick euro entry. The sterling trade-weighted index fell by about 2.5 per cent which, incidentally, only rectified the rise in the index in the previous month. Although there was a good deal of concern about it, in absolute terms that was not a huge or unprecedented shift in the currency. However, when sterling falls by 2.5 per cent what happens is that within days the Chancellor has put the dampeners on speculation about euro entry in his Mansion House speech, by the typical Gordon Brown technique of using positive words in public but briefing negatively to the media in private. At the same time the Prime Minister briefs that any suggestion of an early announcement on the economic tests would lead to unacceptable sterling volatility over the summer. The pound obligingly then rose somewhat.

Therefore, the situation on euro entry is that the Government are committed in the next two years to an assessment of the five tests. They accept, or appear to accept, that sterling should fall before we enter. But they shy away from the first signs of the possible consequences of this fall in terms of inflation and possible increases in interest rates.

With regard to the question of the level of sterling and its effect on interest rates, one does not have to want to join the euro to want the level of sterling to fall. If one wants the level of sterling to fall, the consequences flow, in terms of inflation and interest rates, whether or not one joins. Therefore, many people who seem to argue against joining the euro on the basis that it will lead to higher inflation rates, while at the same time arguing that we need to have a more competitive currency, are frankly living in Cloud-cuckoo-land.

I return to the Government. Against this background of vacillation, it is hardly surprising that Goldman Sachs, among many others, has concluded that the odds of a referendum on the euro being held in this Parliament are less than 50 per cent. I hope they are wrong. But I say this to the Government: if they believe that they can achieve exchange rate stability while giving unclear signals as to their real intentions on the euro, I fear they are in for an unpleasant surprise. Together with the noble Lords, Lord Lea and Lord Tomlinson, I, too, believe that we need a clear timetable for the assessment of the economic tests and for the referendum. Furthermore, on the assumption that the Government want to win the referendum, we need greater urgency in making the argument for British euro membership.

If the Chancellor's real intentions on euro entry are opaque and potentially damaging to the economy, the election and its aftermath has left us little clearer about Labour's long-term view on funding the welfare state. We said repeatedly during the election campaign that there were three choices: first, one can pay less tax and have poorer public services; secondly, we argued that if one wants an improved quality of public services, one needs a targeted and fair additional tax income to fund it. The Government, having cut public services to the bone, propose a short-term boost to expenditure, but appear curiously unwilling to grapple with how quality public services in the longer term might be provided.

I agree with the noble Lord, Lord Haskel, that a large majority voted for improved public services. But a number of major uncertainties remain about the Government's intentions in this area. First, they have been unclear about expenditure plans for the second half of this Parliament. Secondly, they have been unclear about what they will do if the growth rate and tax income fail to reach predictions. The only matter about tax policy on which the Government are clear is that if they find that they must raise taxes, they have ruled out the fairest method of so doing; namely, income tax. I am surprised that those noble Lords who have argued that the tax burden was too high on the lowest decile have not argued also that if taxes needed to be raised in the future, the fair way is through income tax.

Both the Government and the Official Opposition during the election shied away from the fundamental choice that we face: do we want a US or an EU level of public provision; and, if so, how is it to be funded? We have no doubt that the British people want a strong welfare state closer to the EU than the US model. We believe that they agree with us that it must be paid for by fair forms of taxation.

During the course of this Parliament, the Government will face the crunch on public service funding levels. Frankly, they will not solve their problems simply by introducing private sector providers at every opportunity and only investing in schools, hospitals and the transport sector by using the PPP model. Today's IPPR report makes that abundantly clear. Indeed, in London we are likely to see a real crisis in terms of the future funding and management of the Tube before the end of the summer That has been brought about entirely by the Government's ideological "attachment"--if I may use that word--to a structure and funding mechanism which threatens to make Railtrack look like a model of efficiency and safety.

In arguing, as we do, for a first-class welfare system, we accept that one cannot have ever-increasing tax levels. That means if one wants to improve education and health to European levels, one needs to look at the productivity agenda. We need to look also at other areas of expenditure. That is one of the reasons we advocated strongly the introduction of compulsory second pensions to ensure that the state is not faced with unacceptable expectations among the growing proportion of the population of pensionable age.

As an enthusiastic reader of the excellent book of the noble Lord, Lord Saatchi, I was slightly surprised by his speech. The noble Lord argued eloquently that what the state must do is bring forward--I think he called it--"independence day". That is the point at which one stops, in effect, paying taxes. He argued that if you pay a quarter of your income in tax, at present "independence day" is at the end of March. The noble Lord wants to bring that date to the middle of February or possibly to the beginning of February. That is an understandable claim to make. However, the noble Lord appeared to argue that the level of government expenditure is lower than it should be and suggested that in the previous Parliament the Government should have raised expenditure further. That seems completely to cut across what the noble Lord says in terms of reducing the level of taxation.

I agree with the noble Lord, Lord Skidelsky, that the Conservatives' argument surely must be that if the Government want to reduce taxation and the proportion of GDP in the longer term, they must come up with interesting proposals for private provision in terms of health and education. We would oppose it; but we would welcome that debate, not least because we believe that we could win it.

With regard to the legislative programme for the Session ahead, the major feature today has been the enterprise Bill. We welcome many of its individual proposals; for example, the depoliticising of competition decisions and the simplification of VAT for small businesses. However, we believe that a number of problems will remain in the Government's enterprise agenda. There has been much debate, for example, about the regulatory burden. We on these Benches agree that the regulatory burden should be reduced and that the tax system needs to be simplified radically.

The one area where I disagree with the noble Baroness, Lady Noakes, relates to a number of the regulations which already exist, not least some of the European employment regulations about which the noble Lord, Lord Lea, spoke. Furthermore, the electrical equipment directive, which seeks to introduce a degree of sustainability into the production and disposal of electrical white goods, seems to be a welcome additional piece of regulation. But the problem that we have in this country is the gold-plated way in which many regulations are introduced. The simplification of VAT--admittedly, VAT is a tax rather than a regulation, but it is the same principle--could have been done 25 years ago if we had followed the French model when VAT was introduced. Instead we have a gold-plated tax system in terms of small businesses. The same applies to many other directives and regulatory measures. I believe that a much lighter touch in terms of implementation would reduce a great deal of the excessive burden on business .

Another area where the Government's objectives appear to be working against each other is that although the Chancellor is very keen to set up a regional venture capital fund in each region to improve enterprise and productivity, the Government have created a huge bureaucratic model for the regions with the Cabinet Office now being responsible for the Government Offices; the Department for Transport, Local Government and the Regions being responsible for much of the implementation of that programme; and the DTI being responsible for the RDAs. That is not joined-up government but a dog's breakfast.

On the productivity comparisons with the US where, as noble Lords have said, we do particularly badly, there is widespread acceptance, as the noble Lord, Lord Layard, pointed out, that a major contribution to this good performance in the US is the fact that it has a large single market with a single currency. Sadly, that is not an argument for UK euro-entry that we ever hear from the Chancellor.

Finally, our approach to the media Bill will be somewhat more reserved. We want to look very carefully at its effects on the degree of competition in the media industry. The sight of a somewhat vulpine Mr Murdoch emerging from Downing Street within hours of the election makes us believe that we need to be particularly vigilant in that area.

There are some big challenges facing the Government in this Parliament. They will require boldness and self-confidence to resolve. But a mere two weeks after the election, boldness and self-confidence seem sadly lacking. The heady atmosphere which greeted the Government's election in 1997 is wholly absent. There is a clear and ongoing rift between the occupants of Nos 10 and 11 Downing Street. There is a worrying uncertainty about the direction in which the Government wish to take the major public services in the longer term. More generally, there is a disappointing timidity in the Government's ambitions for Britain.

7:21 pm
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Lord Higgins (Conservative)

My Lords, I join with the noble Lord, Lord Newby, in welcoming the noble Lord, Lord McIntosh, to his previous place on the Government Front Bench. For a long while we have both admired his versatility. We look forward with interest in how he applies himself to the first reference by the noble Lord, Lord Newby, which if I understood it correctly, was that the Government's inheritance from the last parliament is rather less favourable than that which they had from the previous Conservative government.

I join also with all those who have welcomed the noble Baroness, Lady Hollis, to the Front Bench. We have always admired her great expertise in the area of social security. We welcome her back under an assumed title; namely, the Minister for Work and Pensions rather than social security. That is a pretty pointlss change. I am not at all clear why there is the reference to work rather than having the very traditional expression "employment" if we have to cover the fact that that is now a responsibility being taken over by the new department. As the noble Earl, Lord Russell, pointed out, the noble Baroness has kindly invited those who are interested to a meeting to discuss the structure of the new department, which is clearly going to involve a very considerable overlap, not least with the Department of Trade and Industry. But it is certainly a less inclusive title than the previous one because those who cannot work, such as some of the disabled or those on child support, are not covered by either part of the Government's new title. But it has probably done something to stimulate activity in the printing industry as regards letterheads.

I begin in a rather traditional way--which was also true of the right reverend Prelate the Bishop of Southwark--in commenting on what was not in the gracious Speech. That is normally the case. People say that there are various things which they would have liked included. I would have particularly liked to see included the limit on annuities being taken at the age of 75. That is a matter on which your Lordships have voted in favour on several occasions. Obviously, there should be protection as regards people not becoming dependent on social security benefits. Perhaps the Minister can confirm whether it will be possible to cover that by way of amendment, if necessary, in the welfare reform Bill.

I have a particular point for the noble Lord, Lord McIntosh. In the previous administration we had an interesting Bill on government resources and accountancy. We moved a number of amendments which the Government did not accept. They set up a committee under the noble Lord, Lord Sharman, who has produced an excellent report. The Treasury missed its chance because it waited many years to produce the Bill but it did not contain everything that was needed. I hope that such a Bill will meet with general approval, given that the noble Lord, Lord Sharman, has now recommended the amendments which we proposed and which the Government rejected. We hope that those amendments can be included at an early stage.

I had not anticipated as fully as perhaps I should have the extent to which this debate would be dominated by the question of the euro. I rather assumed that that would be a matter for Thursday's debate. No doubt my noble friend Lord Howe will cover a number of its aspects although it may well be that it should not be regarded as foreign affairs but part of economic policy.

Therefore, I make one or two comments of my own in anticipation of that debate. The issue was first raised by the noble Lord, Lord Roll. Like many younger economists I have always regarded him as something of a hero in terms of economic analysis. It was very good indeed to hear his views this evening. He concluded by saying, I believe, that he thought that eventually we would join the euro. That was clearly not sufficient for the noble Lord, Lord Lea of Crondall, who seemed dissatisfied with the speech of the Chancellor of the Exchequer to the bankers in the City of London a few days ago and urged more rapid action in that regard.

I had a great deal of sympathy for the intervention of the noble Lord, Lord McCarthy, during that speech. He made the crucial point that joining the euro is irrevocable. We have to realise that we would be giving up for all time the major means of adjusting for the movements in costs and prices and that the larger the area becomes, the greater the increase in the strains on the system. No doubt this debate will continue although it has been fairly wide ranging this afternoon. One will need to take into account the extent to which the present euroland could take the strain of the addition of an economy of the size of the United Kingdom.

The noble Lord, Lord Layard, was clearly also an enthusiast in this area. I was a little unclear. I believe that he used the expression that "demand management" was going to solve all our problems. The reality is that many of those who have argued for our joining the euro--particularly Japanese companies which invest in this country which are anyway going to have to make adjustments between at least two exchange rates--are really saying that they want a more competitive sterling exchange rate rather than it being a question of joining the euro. The two issues have become quite significantly interlinked, which they are. No doubt we shall discover in subsequent debates how the noble Lord, Lord Layard, proposes that the sterling exchange rate should be adjusted. I bear in mind the statement made by the then Prime Minister, Mrs Thatcher, to Mr Lawson that one could not buck the market.

As regards the points made by the noble Lord, Lord Roll, about the Bank of England, we also have to consider that it does not have an exchange rate target although we may be reassured by the fact that in a recent speech Sir Edward George said that he was praying for the euro. By that I take him to mean that he prayed that it would increase in value. At all events, it has not been a tremendous success until now. It is a matter which will be returned to in the debate on Thursday. I hope that nothing I have said is inconsistent with what my noble friend may say. What worries me is that he was taught at Cambridge by Lord Kaldor, whereas I was taught by Sir Dennis Robertson. They did differ.

As regards the Opposition in this Parliament, we shall continue to scrutinise this Government's legislation with great care. I believe that we may reasonably claim as regards these subjects that in the previous parliament, with some connivance with the noble Baroness, Lady Hollis, we did a good job on the social security fraud legislation and child support. We look forward to continuing that approach, not least because it appears that the other place will be programmed like mad and we shall have the job of sorting out the drafting problems in government legislation. We look forward to that task.

I made my next point on the last occasion on which I spoke during the debates on the gracious Speech. It is important that these issues are announced to Parliament. It was quite appalling that last Monday, only three days before the gracious Speech, the Chancellor of the Exchequer should have made what was obviously a major policy announcement. It may have been satisfying to him to find a prominent article in the Financial Times with a smiling picture of him and so on, but it is important that these matters should be first announced to Parliament and not with a degree of spin in other arenas.

Having said that, I do not totally object to some of the Chancellor's proposals; for example, those on capital gains tax and competition policy. Over the years, we on the Conservative Benches have been in favour of a more rigorous competition policy and have sought from time to time to improve it. The noble Lord, Lord Borrie, who has more expertise in this area than anyone else I can think of, drew attention to some serious problems. He made an important point about the distinction between civil and criminal actions and whether what is proposed is likely to be a more effective means of carrying out competition policy. The noble Lord made a number of other important points.

My noble friends Lady Noakes and Lord Northbrook referred to the Labour Government's abysmal record on increasing competitiveness. The British Chambers of Commerce stated that the costs brought about by red tape have increased by around £15 billion. The noble Baroness, Lady Hollis, will know that in debate after debate on Bills in the social security field my noble friends and I have stressed--I refer in particular to my noble friend Lord Astor of Hever--the increased burden being placed on business. That has inevitably affected British competitiveness. According to the CBI, taxes on business increased by more than £26 billion. Since 1997 we have fallen from ninth to nineteenth place in the league table of international competitiveness or, as my noble friend Lady Noakes pointed out, using the analysis of the World Economic Forum, we have fallen from fourth place to ninth.

The overall effect of the measures taken by the Chancellor and the Government has been to reduce rather than to increase our competitiveness. The British Chambers of Commerce is now publishing a "burdens barometer". It sets out a number of the issues involved and the way in which IRS 35 and so on are reducing competitiveness rather than increasing it. Those are serious matters. The measures introduced by the Chancellor will not be sufficient to offset the changes which the Government have already made. The Chancellor has an appalling tendency to complicate matters. The proposed change in capital gains tax is an example. There has been an endless stream of tax credits; for example, the working families' tax credit.

I shall say a few words about the social security aspects of some of these matters. I turn first to the issue of pensions and in particular to corporate and company pensions. As always, I declare an interest as the chairman of a company pension fund. The Government's policies on company pensions have had a serious effect. I refer in particular to the notorious £5 billion change in advance corporation tax. It was not fully understood at the time but is certainly being understood by pension funds now, however well funded they may have been in the first place.

We should be proud of company pensions. The funding of company pensions in this country is greater than the funding of all company pensions in the rest of Europe. Yet, having constantly paid lip service to the importance of company pensions, the Government clobbered pension funds. However, as Mr David Smith pointed out in an important article in the Sunday Times on 22nd April, it was unnecessary. The Government's policy, oddly, has been to increase taxation and tax revenues massively without a corresponding increase in public expenditure. It is an extraordinary situation. The Government have massively repaid the national debt. Not surprisingly perhaps, that was not set out in their 1997 election manifesto. It would be even more surprising if it had appeared in their recent manifesto because that process will be reversed, as my noble friend Lord Saatchi pointed out in his opening remarks.

I shall say a few words about pensions more generally and refer in particular to stakeholder pensions. The noble Baroness, Lady Hollis, will recall that during our debates on stakeholder pensions the Government said that they would seek to arrange for a "decision tree" to be published so that people could understand whether they should invest in the stakeholder pension. What has been produced is unsatisfactory. It has not extended into alternative investments; for example, ISAs or AVCs. I hope that the position can be improved. The crucial point is whether the stakeholder pension is a sound investment given that the Government's proposal on the minimum income guarantee is that it should increase in line with earnings. As Mr Frank Field so memorably pointed out, it is possible that people may invest in a stakeholder pension and then find that they get nothing in return.

To give the Government credit, they have sought to cover that point by the Pension Credit Bill. The gracious Speech states that legislation will be introduced for a new tax credit scheme and that it will include a pension credit as well. I am not clear whether there will be two separate Bills. Perhaps the Minister will say whether the main Bill will subsume the Bill on pension credits.

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Lord Higgins (Conservative)

My Lords, I am grateful for that immediate intervention. There will be two separate Bills. We shall have a chance to debate the Pension Credit Bill in greater depth later on.

The crucial point is whether the proposal will be understood by the people it is designed to help. Part of the problem arises because around 750,000 people do not at present take up the minimum income guarantee to which they are entitled. It is even less likely that they will understand this issue. Indeed, I have to confess that I have had some difficulty in understanding it myself. It is also somewhat doubtful whether the Government's officials understand it. The briefing for today's debate states:

"The Pension Credit Bill is a key part of this Government's commitment to help pensioners by ensuring that those who have saved for their old age for the first time are rewarded for thrift".

That is a quite incorrect statement. Many people have gained from their thrift because they happen not to be below the income support level. The briefing goes on to state:

"The Bill will guarantee a level of income below which no pensioner should fall. The Bill would also ensure that saving is rewarded by ensuring an extra cash addition for pensioners with modest savings or occupational pensions".

My goodness, for real spin, the expression,

"an extra cash addition for pensioners",

is quite extraordinary. If I understand the position correctly, the Government are really saying that for every pound of income a pensioner has from outside they will not deduct another pound from his income support. That is then described as an extra cash addition. Thus, when the Government do not deduct something that was previously deducted to the full extent, that is said to be a cash addition.

This matter is extremely difficult to understand, but I think that I am right in saying that, so far as concerns the Government providing extra money, they will in fact provide more money for people below the income support level who do not have savings than they will for those who do. That seems to be a strange situation. If one looks at the outside commentary on this issue--I apologise for speaking a little longer because of our diversion on Europe--the position is clear. Age Concern has stated that:

"The very older people who feel penalised because their modest savings exclude them from income support may equally resent having to negotiate yet another means test".

I could quote from many sources. For example, Scottish Life has stated that,

"It's far from simple for people to understand. And it is not all that generous. It effectively means you are allowed to keep only 60 per cent of the pension which you scrimped and saved for during your working life".

The reaction of groups such as Age Concern and other interested bodies demonstrates that this proposal is open to considerable objection. I think that we shall be able to deal with it in greater detail when the Bill comes before the House.

What is crucial here is that it represents yet another increase in means testing which, as my noble friend Lord Saatchi pointed out, has been the hallmark of this Government. We believe that this is the wrong approach. The Government are creating, and these proposals will increase, the extent to which we have a dependency culture. That is not the way we on this side of the House believe that we should proceed.

7:42 pm
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Lord McIntosh of Haringey (Deputy Chief Whip (House of Lords), HM Household; Labour)

My Lords, this is a peculiarly difficult debate to wind up, partly because so many noble Lords have spoken on different subjects--and why not?--they are fully entitled to do so. However, it is also partly because the boundaries of today's part of the debate on the gracious Speech are not entirely clear. Because quite reasonably they wanted to discuss public services, many noble Lords have sought to talk about education and health. Clearly I cannot respond on those matters. Other Ministers will do that.

Similarly, many noble Lords have talked about the euro and, until I listened to the words of the noble Lord, Lord Higgins, I had assumed that this was a proper consideration for our debate today. I was confirmed in that view by the fact that the Opposition Treasury spokesman studiously avoided any reference to the euro. I thought that that was wise of him and I was surprised that the noble Lord, Lord Higgins, sought to leap in on the subject where he did not need to so. It is safe for the Back Benchers of any party to express their views, but I should have thought that, given the present state of Conservative Party thinking, it was particularly unsafe for those purporting to speak on behalf of the party to express any view, whether sensible or less sensible.

However, I think that we can begin with a degree, if not of consensus--that is evident--of agreement as to what has happened over the past four years. Over that period the Government made high and stable levels of growth and employment the priorities of economic policy. If I make points that noble Lords have heard before, they will understand. These are matters on which it is unwise for anyone to speculate or to seek what Sir Ernest Gowers would have called "elegant variation". The noble Lord, Lord Roll, reminded us of how, in interviews with Government Ministers in the period just before the election, if they departed even by a dot or a comma from the position on the euro, or appeared to depart or were interpreted as having departed, that led to a run on the pound. That has been commented on in our debate not only by the noble Lord, Lord Roll, but also by the noble Lord, Lord Newby, and others. It is a particularly important lesson to me that I should continue to do what I have always done over the past four years--and say nothing new. If I find myself saying something new, I shall give noble Lords the same assurance that I have given before: I did not mean it and I was wrong to say anything new. That is because I am not going to do so.

In terms of the past four years, whether or not we believe that the inheritance from the previous Conservative government was benign, perhaps as we enter the second Parliament of a Labour Government we might now start to let that drop away. Would that be acceptable to noble Lords? All noble Lords would have to agree about the effects of the economic policy of the past four years. We have had a period of stability and steady growth. We have had low and stable inflation and employment has risen to record levels. We have long-term interest rates at their lowest levels for 35 years. We have seen investment reaching a record share of GDP. As I have said, we have seen unemployment drop down to its lowest level since the 1970s, whether by the claimant count or, more important, by the ILO count.

The noble Lord, Lord Hodgson, warned of the danger of hubris and accused us of self-congratulation. I cite the contributions of my noble friends Lord Tomlinson, Lord Lea, Lord McCarthy and Lord Brooke. My noble friend Lord Tomlinson went so far in spreading doom and gloom that he was answered on behalf of the Government by the noble Lord, Lord Skidelsky, who rightly pointed out that an adverse balance of payments could be maintained for a considerable number of years. It is not self-congratulatory to point out these unavoidable facts. It is a fact that, because we have been prudent--some think that that word is funny, but I do not agree--we have been able to cut debt and unemployment and to meet our fiscal rules. We are now able to release substantial financial resources for priority public services.

Here again, I have some difficulty as regards definition and inclusion. I want to talk about public services and at the end of what I have to say I shall respond to the points put by the noble Lord, Lord Saatchi. However, I am always conscious of the dangers of treading on the toes of those Ministers who will speak over the subsequent days of this debate. However, surely the platform of stability now has to be taken as read and can be taken for granted. It is on that basis that we should look at the legislative programme announced in the gracious Speech. I shall now move on to talk about some of the items of legislation which were included in that speech.

I shall turn first to the new tax credits Bill, which was described so clearly by my noble friend Lady Hollis. One of the elements of that Bill is the introduction of a new tax credit for families and children, building on the foundations of universal child benefit--and not changing universal child benefit--but providing a secure stream of income to families with children, whether they are in or out of work. That provides an answer to the query put by the noble Lord, Lord Higgins, as to whether this comes within the remit of the Treasury. It is part of that remit. The department of my noble friend Lady Hollis is collaborating. It does not matter what that department is called because it is in good hands.

The right reverend Prelate the Bishop of Southwark made a very interesting series of points about the gap between rich and poor and saying that that gap continues to grow. I do not see the gap between the rich and the poor as being the critical concern here. Surely the right reverend Prelate would agree that our critical concern has to be to deal with poverty, and that we have gone a substantial way to dealing with it. It is more important to deal with the absolute level of the standard of life of the poor in our country. Whether thousands or even tens of thousands of traders in the markets and so forth make obscene amounts of money is of sociological interest, but it is not a proper objective of policy. I am sorry to see from the gestures of the right reverend Prelate that he appears to disagree with me. He quoted from St Thomas Aquinas and said that,

"Injustice is tolerated for the sake of stability".

That is precisely what we do not say. We do not tolerate injustice for the sake of stability. We believe that it is our prime duty to relieve and remove injustice, and we will be able to do that through stability. I would love to engage with the right reverend Prelate in a more theological debate on the subject, but I sincerely and profoundly believe that, above all, it is our duty to raise the floor to remove poverty rather than to think about the gap between rich and poor.

We made many changes in the previous Parliament--the increases in child benefit, the real increases in income-related benefits for children, the 10p. starting point for income tax, the introduction of the working families' tax credit and children's tax credit. We have not made changes in housing benefit, and that almost stops me singing in response to the noble Lord, Lord Newby. The noble Lord, Lord Roll, referred to a kiss on the hand but, as the noble Lord, Lord Newby, will remember, that makes you feel good,

"but it don't pay the rental".

Housing benefit does, and that is how it fits in.

There was little reference to the welfare reform Bill--an enormously important Bill--and all I have to say in addition to the exposition from my noble friend Lady Hollis is in response to the noble Lord, Lord Higgins. It is not a pensions Bill. We have not seen the Long Title of the Bill but I very much doubt whether pension annuities will come into it. The noble Lord is very ingenious, and if he wants to introduce amendments to the Bill he will probably have to seek to amend the Long Title as well, and we shall certainly resist him on that.

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Lord Higgins (Conservative)

My Lords, can the Minister say whether the Bill will include housing benefit?

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Lord McIntosh of Haringey (Deputy Chief Whip (House of Lords), HM Household; Labour)

My Lords, I do not think so. That is not the way it has been described. The Bill is about the New Deal, incapacity benefit, maternity pay and a number of detailed benefits, but, as far as I know, housing benefit is not part of it.

As to the pension credit Bill, I was surprised to hear a renewed attack on the windfall tax. When we have, as a result of the New Deal, which was paid for by that tax, 293,000 young people and 50,000 older people in work who might not otherwise have been, I would have thought that was of enormous benefit to society, both economically and socially.

I turn to the enterprise Bill, which deservedly gained a lot of attention. I agree with those who started with a word of caution. I do not go quite so far as to agree with the noble Lord, Lord Blackwell, who seems to think--as he has done for a number of years--that the economy is going to hell in a handcart. He has been proved wrong so far, and there is just a chance that he might be proved wrong now. It is certainly true that the economic stability we have achieved is enormously beneficial to business. Fundamentally, that is of a different order of magnitude from the complaints about burdens on business that we have heard from a number of noble Lords.

It is also true that we must not relax the monetary and fiscal disciplines and rules that we have set up in the past four years. We must continue our drive towards our long-term ambition to close the historic productivity gap between the UK and its major competitors. The noble Lords, Lord Haskel and Lord Hodgson, both quoted comparative figures, with the United States in particular and with France and Germany. Yes, the platform of economic stability is the first step in the strategy to close the gap, but we need more reform and that is what the enterprise Bill will seek to tackle.

Not all of this needs to be done by legislation. I am sure it is right that some of it can be done by the relaxation of legislation or even the abolition of legislation. However, I was interested that the Opposition, when they were talking about burdens on business, particularly on small business, did not remember the attitude which their party took towards the Regulatory Reform Bill. That Bill sought to make it easier for regulations on business to be removed. And what was the thrust of the Opposition's argument? That the Regulatory Reform Bill went too far and that we should not make it easier in the ways we proposed.

However, I should remind the House that the OECD says that we have the lowest level of product regulation among OECD countries; the CBI says that we have more flexible labour regulations; the Economist Intelligence Unit, after carrying out a survey of 60 major economies, says that we are second out of the 60 as the best economy in which to do business, and the first for policy for private enterprise and competition. So, yes, of course there are many ways in which we can improve matters--the enterprise Bill will seek to do so--but I do not think that some of the charges I have heard today stand up to serious argument.

The Bill will encourage enterprise, for example, through insolvency law reform, an issue referred to by the noble Lords, Lord Borrie and Lord Northbrook. I was glad for their support. We will encourage enterprise by removing some of the stigmas on faultless failure while reserving the toughest penalties for the dishonest. We will strengthen competition laws by reform of the competition regime and, as has been said, by the independence of the competition regime from the opinions of Ministers. We will promote safeguards for consumers by introducing new powers to deal with rogue traders and penalties for corporate wrongdoing, whether it be corporate manslaughter or cartels.

I was interested in what the noble Lord, Lord Skidelsky, said on these subjects. Again, I should like the opportunity for a longer debate than we have time for today. The noble Lord thought it was new that we should be pursuing social policies for economic ends. Social policy is, of course, pursued for its own sake and for the sake of a decent and just society, but surely that has economic ends and economic benefits as well. Surely it is proper for those ends and benefits to be taken into account in pursuing social policies.

It seems to me that the converse is not true. What the noble Lord described as the Lawson version of supply-side capitalism--which states that you leave to households everything that you can and leave to the state only other things--resulted in the impoverishment of the public services of this country over a period of many years. It will be very difficult indeed--and there is no guarantee of success--to pull up our public services again so that we can no longer be accused of private affluence and public squalor, which is the historical condemnation of the policy of supply-side capitalism.

I turn, very briefly, to the point made by the noble Lord, Lord Hodgson--he was the only one to refer to it--about the Financial Services and Markets Act. He gave a figure for the cost to what he described as "the consumer" of regulation. I suggest that he puts that figure--whether or not it is correct, I do not know--against the vast benefit to this country and to our reputation for probity and successful financial markets of having a regulatory authority that works and brings everything together. I suggest that the benefits to the financial community, let alone to the economy as a whole, far outweigh the costs of proper regulation.

We shall be the first major nation to adopt the one regulator, one body of law approach. We shall have one of the best standards of regulation in the world, and I am sure that other countries will copy us. Yes, there are a number of statutory instruments to be introduced before N2 in November, but we are on target to do that and we have no reason to suppose that business will be taken by surprise by them. If the noble Lord really wants to abolish stamp duty, he is going to have to tell us where the £4 billion that comes from duty, not on trade in this country but on UK shares, will come from. Perhaps the shadow Chancellor, whoever he may be, would like to think about that point. I note what the noble Lord says about the takeover direction. I can write to him on that point if he so wishes.

I wonder whether the House wants me to dwell on the issue of the tax burden, as it is called--or more politely, as we have begun to describe it, the "tax-to-GDP ratio". I use the word "politely", but the description is correct. "Burden" is a pejorative term. The noble Lord, Lord Saatchi, should not smile. He wisely avoided talking about it. It is set to fall in each of the next three years. The direct tax burden on a single-earner family on average earnings is the lowest since 1972. It has fallen from 21.5 per cent to 18.1 per cent. Our tax burden is one of the lowest in the European Union. I am grateful for the support of the noble Lord, Lord Northbrook, in setting out the measures that we have taken to cut taxes for business. The noble Lord is correct. We have cut corporation tax to its lowest level in the history of the United Kingdom. We have cut the small companies' rate of tax by three percentage points, and we have carried out many tax changes. They may be complex, but if so they are particularly complex when they deal with "business assets". That is an important definition which ought not to be treated lightly. As I know to my cost, having sold my company before relief for "business assets" was introduced, it is an important complication in the corporation tax system of extreme importance to entrepreneurs and to small companies. I know that the noble Baroness, Lady Miller, will agree with that and will forgive the complication that it necessarily involves.

I turn briefly to the communications Bill. I can confirm to the noble Lord, Lord Brooke, that we shall stick to the 2005 goal for "government online". Our UK online publication in February this year set a target for the most extensive and competitive broadband market in the G7 by the year 2005 by wiring up schools, libraries, further and higher education establishments and so on. We are sticking to that and we take the issues raised by the noble Lord very seriously indeed.

What am I going to say about EMU? I quote:

"In principle the Government is in favour of UK membership of EMU. In practice the economic conditions must be right. The determining factor underpinning any government decision on membership of a single currency is the national economic interest and whether the economic case for joining is clear and unambiguous. If it is, there is no constitutional bar to joining.

Those were the words of the Chancellor of the Exchequer in October 1997. That may be an "incantation" as the noble Lord, Lord Tomlinson, called it, but I do not see how the noble Lord, Lord Newby, can describe that as giving "unclear signals". We have made the position entirely clear. Every attempt to tease out differences deserves to fail. The only change that we have made is that we have said that the Treasury will complete an assessment of the five tests within two years of the start of this Parliament. That is because we recognise--the noble Lord, Lord Layard, is entirely right--that other matters will not stay the same during any period during which we are not members of European Monetary Union.

The noble Lord, Lord Lea, took exception to the "clear and unambiguous case". It is a question of whether a clear and unambiguous case can be made, a question of whether the economic case for joining is clear and unambiguous. That may be based on ambiguities or disagreements in the arguments but the position that has to be put, first to the Government, then to Parliament, then to the people of this country, must be clear and unambiguous. It would be grossly unfair to do anything else.

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Lord Lea of Crondall (Labour)

My Lords, perhaps I may help my noble friend the Minister. Why should explaining the reasons for the Government's avowed support for the principle of membership of the euro be taboo?

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Lord McIntosh of Haringey (Deputy Chief Whip (House of Lords), HM Household; Labour)

My Lords, what I have said is that the decision is whether it is in the national economic interest and whether the economic case for joining is clear and unambiguous and I have nothing to add to that. The evidence that we have of the disruption in exchange rate markets when people tried to do that in the past couple of months is clear. That is not allowing the arguments to go by default. We have taken very seriously the preparation side of "prepare and decide".

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Lord Tomlinson (Labour)

My Lords, I am grateful to my noble friend for giving way. We are agreed in principle, subject to five economic tests. Can he tell us the benefits of having agreed? That is what my noble friend Lord Lea is looking for. If we have agreed in principle, there must be a reason for agreeing in principle. Can we at least say what are the benefits?

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Lord McIntosh of Haringey (Deputy Chief Whip (House of Lords), HM Household; Labour)

My Lords, if and when the time comes when a recommendation is made by the Government to Parliament and to the people of this country, we shall be ready to act on that recommendation and on the decision of the people of this country.

There are two other issues which I do not think I need refer to. On the issue of a framework for informing and consulting with employees raised by the noble Lord, Lord Northbrook, a political agreement was reached at the Economic and Social Policy Council on 11th June, but it now has to be given a Second Reading by the European Parliament. Amendments to it can then be tabled. Whatever changes are made to it, information must be given and consultation has to take place at an appropriate time and at the relevant level of management. So there is no question of what the CBI, according to the noble Lord, describes as a "single approach". It says that there is no single right approach. I do not think that is what is proposed at all.

I turn finally to what is a properly pervading theme of this debate; namely, the issue of public services. I start from a very different theory from that advanced by the noble Lord, Lord Blackwell. He referred to "crowding out theory". I thought that he was going back to pre-Marshallian economics, but we had a debate on the Front Benches as to whether he was really going back to Ricardo or Nassar senior. The noble Lord does not seem to recognise that there is any investment element in public expenditure at all. It would be an equal fallacy to claim that all public expenditure is investment. Clearly, that is not the case. But the noble Lord has taken us back a considerable period, not only into the last century but into the previous one.

A number of speakers, including the noble Lord, Lord Roll, and the noble Earl, Lord Russell, have rightly said that the interaction between public and private is not ideological. The Prime Minister has always said--and this is not claimed as controversial--that there is no ideology here; he has always said that the criterion should be what works best. It is true that if we are to make genuine improvements in the public services we shall certainly have to reverse the starvation of funds which was the result of pre-Marshallian and other theories under Conservative governments. But it is also true that that is not enough. The questions raised by the noble Lord, Lord McCarthy, are very serious ones. The noble Lord quoted the IPPR report. I could quote back to him the report of my noble friend Lord Curry of Marylebone about Tube privatisation which puts a very different complexion on some of the things that he has said. But it is certainly true that when we come to consider the relationship between public and private, we have to consider whether there will genuinely be an injection of private money. We have to consider whether there will be entrepreneurial expertise. We have to consider whether there are under-utilised facilities. All of those are valid questions to which judgment will have to be applied in each case. But that, after all, is the point of not being ideological but pragmatic. However, that almost seems to have become a pejorative word.

Today we announced part of the 2002 spending review. We announced the themes on which we shall investigate initiatives which cover more than one department. Those will reflect the Government's priorities of delivering high quality, efficient and responsive public services; raising productivity in the public sector and outside; improving skills, research and infrastructure; spreading opportunity and prosperity more widely and tackling child poverty and social exclusion. Those are high priorities for this Government. I hope that they are high priorities for all of us.

I said that I would return to the points made by the noble Lord, Lord Saatchi. I shall devote one more minute to that. I was fascinated by his remarks. He made comparisons as regards spending on public services. He gave the impression that that consisted of spending on health, education and transport. But of course in reality spending on public services is net of the reduction in spending on unemployment. Under the Conservative government more was spent on interest on debt than on schools. Now we have taken £9 billion off debt and unemployment and allocated it to schools and hospitals. I am not in any way ashamed of that.

The lowest 10 per cent of the people we are discussing now include a million people who are in work. They are paying taxes, which is exactly what they should be doing; namely, paying taxes and not receiving benefits. The noble Lord talked about the take-up of means-tested benefits. However, I believe that I responded to the point that he made. He mentioned borrowing but steered clear of debate on the tax burden, in particular as regards his famous "independence day", which would cost £50 billion in tax forgone.

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Lord Saatchi (Conservative)

My Lords, I am most grateful to the noble Lord for giving way. As regards the take-up of benefits, at the risk of luring the noble Lord onto the rocks of saying something new, will he tell us what the Government have done with the up to £4 billion worth of unclaimed benefits?

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Lord McIntosh of Haringey (Deputy Chief Whip (House of Lords), HM Household; Labour)

My Lords, I believe that the relevant table is table B11 of what is still called the Red Book, although it is no longer red. If I am wrong about the table number, I shall write to the noble Lord. He does not seem to realise that he refers to the figures of 1998-99. Further, non-take-up of means-tested benefits has been a feature of welfare and social security policy since the time of Beveridge and has always been represented in the national accounts.

I was amused to hear the noble Lord attack the European Central Bank rather than express an opinion on the euro. We all want the European Central Bank to be more transparent. However, let us return to the serious issues; namely, that we have an opportunity to improve the lives of the people of this country in the course of the next Parliament. It will not be easy as there are many obstacles to be overcome. We set the scene for that in our first term of office and we are determined to continue.

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Baroness Farrington of Ribbleton (Baronesses in Waiting, HM Household; Labour)

My Lords, on behalf of my noble and learned friend Lord Falconer of Thoroton, I beg to move that the debate be now adjourned until tomorrow.

Moved, That the debate be now adjourned until tomorrow.--(Baroness Farrington of Ribbleton.)

On Question, Motion agreed to, and debate adjourned accordingly until tomorrow.

House adjourned at fourteen minutes past eight o'clock.