Orders of the Day — Budget Resolutions and Economic Situation

Part of the debate – in the House of Commons at 5:20 pm on 7th July 1997.

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Photo of Malcolm Bruce Malcolm Bruce Shadow Spokesperson (Treasury) 5:20 pm, 7th July 1997

The change in the Conservative party since it has gone from being in government to being in opposition is extraordinary. There was an inherent tension in what the right hon. Member for Charnwood (Mr. Dorrell) said. He acknowledged that there was a shortfall in funding in the Budget—the outgoing Chancellor's Budget was absolutely fine, although eye-wateringly tight—and that the Conservatives would be looking for spending cuts but would not need a Budget to make them. He could not tell us what such cuts would be—not surprisingly since, in the present circumstances, I imagine that the Conservatives want that problem to be placed elsewhere. He then complained that social services were seriously underfunded. The Conservative party will have to do some thinking and decide which side of the argument it wants to be on. Is it in favour of spending cuts or more spending or improving services and recognising that the money will have to come from somewhere?

I agree with the right hon. Member for Charnwood that the Government have some explaining to do. They have, in reality, severely cut forecast public spending without any explanation of its implications across Departments. The Liberal Democrats expect them to explain themselves more fully.

It is true that a Budget has rarely won so much praise on the day as that delivered by the Chancellor on Wednesday. There was not just the waving of Order Papers, but sycophantic and almost eulogistic leader columns in the press the following day, saying how wonderful it all was. But never has it taken such a short time for that initial acclaim to turn to criticism and discredit.

The Budget was said to deliver more for public services—that got the loudest cheer—but, as was revealed over the weekend, it cut previous spending plans by more than £5 billion in real terms. In one year, that is a major reduction. There will be more money for areas such as education only if there is less money for other services such as the police and social services—a point made more than once by the right hon. Member for Charnwood. Liberal Democrat Members expect the Chancellor to come back to the House this week to explain that cut and where it will fall, Department by Department, and we shall not let up until we get that explanation.

It was claimed that the Budget would rebalance the economy and avoid the need for higher interest rates and a higher pound. Although, in time, the extra taxes will filter through to ordinary taxpayers, they fall largely on business income and on savers. Within hours of the Budget, therefore, sterling was soaring towards an exchange rate of DM3. The Bank of England is also expected to put up interest rates; in my view, that is very likely to happen this week.

The Budget was supposed to be environmentally friendly and to lower carbon dioxide emissions, but experts say that it will do the opposite. It was supposed to boost business investment, but the Institute of Fiscal Studies has said that it will do no such thing. It was delivered by a party which claims to be for lower taxes—at least that was its claim at the previous Budget—yet it contained an unprecedented and unforecast tax hike. Perhaps the Budget's hidden objective was to be fair—to do most for those who have the least—but, again, that is not so, because in terms of percentage of income it leaves the poorest 10 per cent. of the population the worst off.

Regrettably, therefore, the Budget is not one which I can welcome; it is one which I fear has some inherent criticisms. It promised a great deal but delivered very little. I welcome the good intentions in the Budget, which I hope will bear fruit as this Parliament progresses—the promise of more measures on the environment and the commitment to more pre-Budget consultation. If such consultation materialises, it will be welcome and we shall certainly play our part in it. The intention to look at tax and benefit reform is overdue and needed, and it requires all-party involvement. All of that is welcome, but action now to deal with the crises facing us today would have been more welcome.

I will consider the main parts of the Budget in turn. Today's newspapers confirm that the Budget contained a huge hidden cut of about £5.3 billion in public spending for next year. As yet, no Labour or Government source has been able to dent that contention, although one source claimed that the Liberal Democrats who identified the cut were "economically illiterate". Such a statement has not been explained or substantiated, and the maker of it will have to eat his words. The Chief Secretary to the Treasury, who is replying to the debate, will need to explain not only what the Liberal Democrats have put on the table—how the spending totals, which have been squeezed by a further £5.3 billion, will be delivered and where the cuts will fall—but how the House of Commons Library, the Institute of Fiscal Studies and Goldman Sachs are all "economically illiterate", since they have all confirmed exactly what we have stated.

The House of Commons Library, in response to my question, confirmed to me in a briefing on the Budget that because of the higher actual and forecast rates of inflation…real expenditure in 1998–99 will be some £5¼ billion lower. The Chancellor's first Budget therefore hid its most important effect: a massive £5.3 billion cut in real public spending for next year, compared with a forecast made only seven months ago in the Budget of the right hon. and learned Member for Rushcliffe (Mr. Clarke). That is the reality. Never before has such a large real cut in public spending attracted so little attention when first announced.

The Chancellor hid the cut in public spending on Budget day and hoped that it would not be noticed. He made—and has made—no announcement about how Departments were to achieve such savings, which services were to be axed and which Labour manifesto promises were to be broken as a consequence. If there is no relaxation, the effects in practice will be devastating. That must now be dawning on Departments, if it did not do so last week.

The only mention of such a development is tucked away on page 102 of the Red Book, which notes in passing: In real terms, Control Total expenditure is lower than projected at the time of the last Budget, due to the higher forecast for the GDP deflator. That is the bombshell in the middle of the Budget.

On the very first page of the Red Book, the bit to which the Government expect everyone to turn, the boast is made that the Budget will be providing high quality public services—within unchanged Control Total for 1998–99". Those two statements—between the covers of the same book—are irreconcilable.

The real spending cut was caused by the significant upward revision of the forecast for inflation. I should say in passing that I have already expressed concern that the Chancellor has departed from his manifesto pledge in redefining his inflation target in more relaxed terms than those in which it was expressed in the manifesto. The GDP deflator—the measure of inflation used to adjust Government spending—was revised upwards this year and next from 2 to 2.75 per cent. The Chancellor has not simply ignored the effect of that. He took into account the higher rate of inflation by adjusting upwards his forecast for the amount of money that he will get from tax revenues, so he recognised that adjusting the inflation forecast would boost the revenues coming into the Exchequer's coffers. Amazingly, however, he made no compensating adjustment to his spending totals to protect them from higher inflation: he is just banking the extra money to help to reduce his borrowing figures.

The two years of higher inflation will mean that all the previous spending allocations for 1998–99 are worth 1½ per cent. less in real terms, so it could be said that the Budget contains two windfall taxes—one on the utilities and one an inflation windfall from public spending—and they are almost exactly equal in value.