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Government Economic and Social Policy

Part of Orders of the Day — Opposition Day – in the House of Commons at 8:44 pm on 9th June 1993.

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Photo of David Willetts David Willetts , Havant 8:44 pm, 9th June 1993

I am talking about the prospects for this year's public expenditure round. My right hon. Friend the Member for Worthing (Sir T. Higgins) made an interesting observation when he asked why Budget purdah could not be extended to that. But surely the point is that Treasury Ministers already face a dilemma similar to that presented by the run-up to a Budget.

If Treasury Ministers rule out every tax increase that they do not intend to implement whenever the possibilities are mentioned, eventually the shape of the Budget will become apparent. Similarly if every scare story in the press about a public expenditure idea that will not come about is ruled out, we shall be left with a clear indication of the state of the Treasury's negotations with spending Departments. That is no way in which to conduct the public expenditure round.

The hon. Member for Aberdeen, North (Mr. Hughes), challenged me to say what would emerge from the round. The best indication can be found in previous negotiations. last year, the Chief Secretary to the Treasury scored a considerable achievement: he achieved a reduction of £2 billion in public expenditure plans for 1994 and 1995 on what had previously been planned. Normally, planned spending is increased every year as the year in question approaches.

Let us look at the figures for expenditure increases. Following an unsustainable 6·5 per cent. increase in real spending in 1992–93 and a 3·75 increase in 1993–94, the plans provide for a 1·25 per cent. increase in next year's spending and a 0·75 per cent. increase in the year after that. Despite all the scares about cuts, the public expenditure round will actually involve a rather different Treasury battle—a battle to hold to its previous plans. If it can do that, it will be doing well.

The Chief Secretary has also announced a fundamental medium-term review of public expenditure. The Opposition have launched their own fundamental review of public spending, under the chairmanship of Sir Gordon Borrie. I do not feel that the Opposition are in a position to attack the Government for their review when the Opposition are carrying out a review of their own. We are told that the Opposition's review rules out no options; we are told that it is very wide-ranging. I was rather surprised to receive a letter from Sir Gordon Borrie inviting my suggestions for Labour's review on social spending: surely it is impossible to be more wide-ranging than that. I am still waiting for a letter from the Chief Secretary—but that is another story.

In considering medium-term expenditure on the welfare state, it is worth trying to identify some areas in which cuts are possible. I believe that, given the decision by the European Court of Justice that pension ages must be equalised, a manifestly sensible move would be to equalise them at 65. I also believe in better targeting of social security benefits: it is absurd that the most affluent fifth of pensioners with large incomes from occupational pensions and personal savings receive more income from the state in benefits than the poorest fifth. It is difficult to defend such a position.

The decisions faced by the Government, however, do not just concern expenditure; they also concern taxation. As my hon. Friend the Member for Beaconsfield (Mr. Smith) rightly pointed out, the Budget contained an announcement of significant increases in personal taxation. The row about the increase in VAT has distracted attention from the fact that the freezing of personal tax allowances, and future increases in national insurance contributions, will mean asking the personal sector—especially the more affluent members of society —to pay higher taxes to bring down the deficit.

The best way in which to raise further revenues is to enable the economy to grow as rapidly as possible. Part of the explanation of the fiscal difficulties that we have experienced over the past two years is that tax revenues have proved much more sensitive to the state of the economic cycle than was expected by either the Treasury or outside forecasters. The recession has five times as much impact on the PSBR through lower tax receipts than through higher spending. The real problem has been the collapse in tax revenues. As we look to economic recovery, it is reasonable to expect those tax revenues to pick up. For that reason, we must do everything possible to encourage strong growth.

There is nothing inherently virtuous about slow growth. Sometimes people are tempted to talk about it as though it were more reliable, sober and respectable than rapid growth—as though economic growth were like alcohol, best taken in moderation. That is not true at all. If the country has the capacity to sustain rapid growth without inflation, we should seize the opportunity.

At this point, we must engage in a rather esoteric debate about unused capacity in the economy. If the economy contains a large amount of unused capacity, we can look forward to several years of strong growth with low inflation. The experts differ: estimates of unused capacity range from 3 per cent. from Mr. Gavyn Davies to 10 per cent. from Professor Patrick Minford. As both are members of the Treasury's panel of outside forecasters, we can doubtless expect some interesting discussions of that technical point on the panel.

I belong to the group that believes that there is a significant amount of unused capacity in the economy. I believe that the supply side reforms that the Government introduced in the 1980s have had a permanent effect, raising the growth potential of the British economy. The interpretation of the recession put about by the leader of the Opposition this afternoon has been proved wrong by the evidence.

The right hon. and learned Gentleman spoke of an ill-trained work force and a collapse in investment, but the figures and the research simply do not bear him out. Industrial investment is rising more rapidly than GDP, and hence rising as a percentage of GDP; moreover, it fell much less during the current recession than during the previous one. Companies continued to invest during this recession.

I see that the leader of the Opposition is now in the Chamber. He said a good deal about a crisis in the training of our supposedly ill-trained work force. This week, two independent academic experts have produced a report on what they call employee commitment and the skills revolution". Let me quote two paragraphs from it: The Training in Britain inquiry"— in 1986–87 found that 33 per cent. of employed people aged 19–59 had received training in the past three years.In our sample of employees aged 20–60,"— and, remember, this was a piece of research conducted during the recession— 54 per cent. had received training over the past three years. This is a dramatic increase in such a short period.Nearly all the reported training was related to the current job, and four-fifths of it was provided by employers. The performance of the British economy on training has improved dramatically, and it is precisely because of the success of our supply-side revolution in the 1980s that we can look forward now to the prospect of years of strong growth without inflation.