Public Expenditure

Part of the debate – in the House of Commons at 12:00 am on 16th March 1978.

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Photo of Mr Nigel Lawson Mr Nigel Lawson , Blaby 12:00 am, 16th March 1978

No. That error was made after I left the Committee.

Then there is the overmanning, the administrative overburden and waste which still permeates much of the public sector. There is the increasingly expensive nonsense which my right hon. Friend the Member for Newham, North-East (Mr. Prentice) mentioned, as did my right hon. and learned Friend the Member for Surrey, East, of the so-called industrial strategy—the State as entrepreneur, of which the hon. Member for Walton wanted more and more and which, in a paper delivered the other day, was so devastatingly exposed by, of all people, the former managing director of the Industrial Reorganisation Corporation Mr. Ronald Grierson himself.

Indeed, I see that even the CBI, in its Budget representations to the Chancellor of the Exchequer, has said that There should be less Government spending on support for industry and employment. If the CBI can say that, perhaps even the hon. Member for Walton can accept it. There is ample scope, in these and other ways for a rearrangement of priorities.

Although I acceded to the request of the Chief Secretary to spell out the areas where we see that there is scope for economies, I am not sure that it is incumbent on us to spell out in any detail what we would cut in one area to make way for necessary increases in another when it is now clear that the Government themselves, with all the information at their disposal and with the books in front of them, are unable to reveal their own cuts in advance of making them. For, as the General Sub-Committee of the Expenditure Committee has pointed out in its report on the White Paper, the unannounced shortfall in spending this year has in fact turned to be larger than all the pre-announced and hotly debated cuts put together. The Government did not know what they were going to do. It just happened. I do not see why it is incumbent on us to spell out the detail when the Government cannot.

But, as far as the total is concerned, the Government, whether by accident or design—or, maybe, a combination of the two—have achieved the necessary cuts of £4 billion. If they were now to hold expenditure at the current year's level—and my right hon. Friend the Member for Newham, North-East and my right hon. and learned Friend the Member for Surrey, East suggested that there is a lot to be said for holding it constant for several years to come—the State's share of the national wealth would continue to decline and there would be scope in the coming Budget for the substantial cuts in income tax that the people want and the nation needs.

Of course, instead of doing that and holding public expenditure steady, the Government are planning a massive increase in expenditure. Quite how massive they rather delicately decline to reveal, and even the General Sub-Commitee had some difficulty in winkling it out. It is absolutely clear that it is greater than the 2 per cent. rise that the Press was led to believe was implicit in the White Paper. The Chief Secretary told the Expenditure Committee that it might be anything from 2 per cent. to 8 per cent. But what did he know? What did he care? Treasury officials told the same Committee that their best guess was 4 per cent. but that this was only a single figure in the middle of a wide range". The Bank of England Bulletin, out today, reckons that it might be close to 7 per cent. but that it is more likely to be closer to 4 per cent. My own guess—it shows, incidentally, the absurdity, as my right hon. and learned Friend has said, of discussing figures for later years when the Treasury cannot even be sure, within a margin of billions of pounds, what next year's public spending is likely to be—is that the increase in 1978–79 will be around 5 per cent. I say that as a confirmed White Paper watcher for many a long year. This is not only 5 per cent. too much; it is also roughly double the likely rate of growth of the economy as a whole over the same period, as my hon. Friend the Member for Hitchin pointed out.

So much for the ringing declaration, which has already been quoted by the right hon. Member for Down, South, in paragraph 4 of the White Paper that in order to leave room for manoeuvre on taxation, it is necessary that the planned growth rate for total public expenditure should be with-in the prospective growth rate of national income. Yet for the only year for which we have any figures that we can believe it is at least double the likely growth of national income. It is clear that, with a General Election in the offing, the Government are now bribing on all cylinders and planning a substantial increase in public expenditure, and substantial tax cuts too.

It is worth contrasting this with what the same Treasury Ministers were saying in last year's public expenditure debate before they had lost all sense of responsibility. For example, the Chief Secretary, in opening the debate, said: the same people who ask for higher public expenditure invariably also want large cuts in direct taxation. They cannot have both. Of course, if there is a General Election coming, maybe they can.

The Financial Secretary wound up on that occasion as he is winding up tonight. He took it upon himself to reply to the hon. Member for Bedwellty (Mr. Kinnock). I am sorry that the hon. Member is not here tonight. I shall not attack him. Last year, he declared that the Government should increase the Budget deficit in order to reduce unemployment. With great patience, the Financial Secretary explained that an increase in the Budget deficit would increase inflation, which in turn would prevent a reduction of unemployment.

Incidentally, that was why I intervened earlier in the Chief Secretary's speech. It was not to make a silly debating point but to refer directly to the contrast with what the Financial Secretary said last year. He then said: If we were to increase the public sector borrowing requirement as a result of increasing public expenditure, we would have to raise interest rates. Once we did that we would make it more difficult to invest. Then we would not get the industrial expansion that is absolutely essential."—[Official Report, 17th March 1977; Vol. 928, c. 637, 760–1.] What do we now see? The Government's motion tonight was obviously drafted by the hon. Member for Bedwellty, because it approves the plans to increase public expenditure specifically in view of the need to reduce unemployment". In other words, since a General Election is now in the offing, the Government have decided, even though they have a busy parliamentary timetable, to repeal the laws of economics. Unfortunately, those laws cannot be repealed. That is the trouble. The inexorable consequences will follow—not lower unemployment, but higher and rising inflation.

I know that the Government will make much of the fact that the public sector borrowing requirement this year is likely to turn out much lower than forecast, probably less than £6 billion, in large part because of unexpectedly high income tax payments. I suspect, incidentally, that there will be a very much smaller shortfall in the public sector financial deficit, which is in many ways a more significant figure. I am glad to see the hon. Member for Nottingham, West, Chairman of the General Sub-Committee, agreeing with me. For the first time ever, we may find that the PSFD is bigger than the PSBR.

But what matters now and for the future course of inflation is not the borrowing requirement for the financial year just ending but the borrowing requirement for the year ahead. It is abundantly clear that any tax cuts in the coming Budget will, on the basis of the plans for public expenditure for the coming year as contained in the White Paper, mean a substantial rise in the borrowing requirement.

This underlines still further the gross irresponsibility of the Chancellor's new pre-election economic strategy. What could be more irresponsible than to plan for a substantial increase in the borrowing requirement at a time when the money supply in terms of sterling M3, as today's figures have confirmed—it was not just January's figures—is increasing at a rate well in excess of the Chancellor's 13 per cent. upper limit? It will not be long before the brakes are off altogether.

This year, as the hon. Member for Cornwall, North remarked, a number of eminent academics were invited for the first time by the Expenditure Committee to comment on the White Paper. It was an interesting and useful innovation. I too contributed my fourpennyworth. Every one of them commented on the complete lack of any coherent economic framework to the Chancellor's proposals—the disturbing intellectual vacuum in which the White Paper is presented.

What, for example, does the Treasury regard as the maximum permissible size of the PSBR? Perhaps the Financial Secretary would care to answer that question now. I hope that he will answer it when he replies to the debate. The White Paper is silent on this, even though it is absolutely crucial. Perhaps the Financial Secretary will tell us. Or perhaps he thinks that it does not matter at all and that there should be whatever degree—this is clearly what the hon. Member for Cornwall, North thinks—of so-called reflation is needed to bring about full employment—the very same crude fallacy that he himself rebuked last year.

But in that case, if there is no limit in terms of the borrowing requirement—I hope that the Minister will say that there is a limit and what it is—what determines the Chancellor's scope for action? It is quite clear what, in practice, the Chancellor regards as limiting the scale of the bribe he is now contemplating for 11th April. As he ponders in his room now, he is asking himself "How much can I do without risking a major balance of payments crisis and a collapse of the pound?" That is the one thing that is causing him concern and the one thing that he feels is a constraint.

Yet the fact that that is the only practical limitation that he sees, the only one remaining now that he has decided, evidently, that monetary restraint is something with which he need no longer bother at all, should surely provide the clue to where the real answer lies. For the reason why, even with North Sea oil, we once again view the prospect for the balance of payments with great trepidation, and why there has been such massive import penetration into this country even while our economy has been stagnant, has nothing whatever to do with demand, whether inadequate or excessive.

The problems lie entirely on the supply side—our appallingly low productivity; the pervasive lack of confidence; the erosion of the incentive to acquire a skill, to work overtime or even, in some cases, to work at all; and, in general, the malfunctioning of both the labour and the capital markets, due in large measure to inflation, to formal incomes policies and to high direct taxation.

It is the correction of these fundamental weaknesses—not the expansion of public expenditure; that has nothing to do with it—that alone will enable the economy to expand and unemployment to come down, as we all hope it will.

The present Government have presided over the worst economic record in the Western world. In four years our currency has lost almost half its value, industrial production is still at the level reached in the three-day working week, productivity has been totally stagnant and unemployment is higher than that of any of our major competitors.