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 Mr Ian Bruce Mr Ian Bruce Conservative, South Dorset 5:20 pm, 7th July 1997

I accept that there is a real increase, but it is nothing like what the Government have claimed. The Chief Secretary's point ignores the fact that no compensating increase has been given this year, which means that the Departments will have to absorb that deflator in full. If the two are added together, we are talking about a standstill Budget and no significant investment in either Department. The Government have not addressed that factor.

When the Secretary of State for Health was trying to dismiss my intervention earlier, he missed the point that the Liberal Democrat manifesto commitment and our alternative Budget would provide substantial extra investment in health and education in the current financial year. We explained how that would be delivered, but the Government have failed to provide a single penny of that. The situation will deteriorate even before we reach next year.

The Chancellor has also reduced the level of the contingency reserve to only £2.8 billion for next year. Given the inherited contingency reserve, he will have less ability to accommodate the Budget pressures. In the Goldman Sachs Budget review of 2 July, David Walton, a colleague of Gavyn Davies who edits the review, noted:

The Budget plans imply a sharp fall in the real level of public spending … this is considerably tougher than Ken Clarke intended … The Chancellor did not mention what services he intended to cut in the fanatical pursuit of these spending totals. The chances of achieving these plans are close to zero. On Budget day, the Chancellor boasted: I have decided to allocate … to the NHS for 1998–99 a sum of £1.2 billion. This does more than meet our commitment to the people of this country".—[Official Report, 2 July 1997; Vol. 297, c. 315.] However, as I have already said, no additional funding has been provided for the current year, despite an existing £350 million NHS deficit. If that is taken into account, the higher inflation this year will cut real spending in the NHS by between £300 million and £350 million. Labour Members who cheered the Budget a week ago will not cheer when they see the consequences for their local health authorities this winter.

For the following year, the extra £1.2 billion is substantially wiped out by the higher inflation. The Library has said that taking into account the extra £1.2 billion and higher inflation, the net increase is some £0.41 billion"— at current prices. I accept that that is extra money, but it is about a third of what the Chancellor claimed and it will follow a cut this year. That will mean a serious, continuing squeeze on the health service and represents no bonanza.

A further concern must be that £200 million of the extra health money has to go through the Scottish Office, the Welsh Office and the Northern Ireland Office. Those Departments will be able to pass the money on only if they can squeeze other areas to cover for the loss through inflation. That is the same problem that local authorities will have with the education vote.

The Chancellor boasted in the Budget of £1 billion extra in 1998–99 for education and extra money for capital spending in schools—£83 million in 1997–98 and £250 million in 1998–99. After inflation, that amounts to a cut of £200 million in real education spending for 1997–98. In 1998–99, there will be no more money for further and higher education. After inflation, the extra £1¼ billion will be worth around £600 million in real terms. That is a real increase, but it is much less than the Government have claimed.

If local authorities are in difficulties, they will be unable to pass all the money to education. They will lose £1.2 billion from their real spending plans because the higher inflation will affect local authorities just as much as it will affect Government Departments. Local authorities will also have to pay more to top up their pension funds following the Government's change to the taxation of dividends. It is estimated that the change could cost local authorities up to £300 million per year. The Chancellor was not convincing when he tried to dismiss that criticism as a Conservative plot simply because the local authority being interviewed at the time was Conservative controlled. Every local authority in the country—under Labour, Liberal Democrat, Conservative, Scottish National party or no overall control—will have to find the extra money. That is the reality.

Local authorities will receive around £1.2 billion extra for education next year and simultaneously lose exactly that amount in higher inflation. If they want to deliver more money for education, they will have to cut other budgets. That is against the background of an already planned 1 per cent. real cut in local authority funding next year, which the Government do not intend to change, and of additional pressures in areas such as school rolls and social services. That is the dilemma that all the public services will face.

The Chancellor claimed in his Budget speech: My goal … is to ease inflationary pressures without damage to industrial and exporting prospects … In this way we can moderate the upward pressure on interest rates and on the exchange rate as well as further our objective of sustainable public finances."—[Official Report, 2 July 1997; Vol. 297, c. 305.] But the Budget failed in its primary task of rebalancing the economy away from excess consumer demand to prevent higher interest rates and a higher pound. Of the £6 billion of new taxes, only £1 billion to £1.5 billion fell on the consumer, which will have only a marginal impact on consumer spending in a year in which consumers will receive £37 billion in windfalls of various sorts.