Spending Review

Part of the debate – in the House of Lords at 4:34 pm on 15th July 2002.

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Photo of Lord Saatchi Lord Saatchi Conservative 4:34 pm, 15th July 2002

My Lords, first, I congratulate the Minister on his delivery of the Statement and wish his sore throat better as soon as possible. I also say straight away that there are several aspects of the Minister's Statement that we want to study in more detail and others to which we are happy to give a welcome immediately—in particular, the extra spending on the war on terrorism and defence and also the increased budget for international development.

Of course, as the Minister said, it is also a fine and worthy aim to help students to stay longer in school. Perhaps he will comment later on how that might be paid for and, in particular, whether child benefit will continue as a universal allowance.

Having said that, I wonder whether, after that stirring performance, the Minister would be disappointed to learn that in the latest research in word association tests, in which people are invited to select the word from a list which they most identify with the Government, the word that they now pick is "disappointment". That may be because this is the third time that the Government have announced the results of a major spending review; it is the third time that people have heard how much more money is to be spent department by department; and it is the third time that the Chancellor has made promises about improving our schools, hospitals, transport and so on.

But, after six Budgets, five years in office and three spending reviews, the outline of an unattractive conclusion is beginning to form in people's minds; namely, the Government may not know how to bring about the improvements in public services that they want to see. Therefore, as I believe the Government say, this Statement is a defining moment for them.

It was in this year's Budget that the Government, ever watchful of the public mood, sensing the danger and running out of the clever taxing and accounting devices on which they had relied successfully for many years, hit on a startling new plan. In this Budget, a new concept emerged in the Government's mission statement—a most blasphemous of possibilities that one hardly dares whisper its name. It was "sincerity".

Before this Budget, any impertinent functionary in the Treasury who embarked on the route of openly justifying tax rises, perhaps with a page of prose of engaging frankness, would find that a bolt of lightning struck the pen from his hand. But now, perhaps unable to find more invisible tax rises and nervous that the public might see through them in any case, the Government declared that in order to pay for all the spending about which we have just heard there would be more tax in the form of national insurance contributions which would be spent, in particular, on health. What mean-spirited curmudgeon, they reckoned, could disagree with that?

But the eye of the public, which is always restless in its quest for a true picture of the activities of our Government, sees instead that the money being raised is either not spent on health or, if it is spent, is ineffective. I refer your Lordships to a particularly helpful page in the Government's Budget Red Book which shows the impact of the national insurance contribution increases as raising personal tax by £4.6 billion. But one searches in vain for the equivalent amount being spent on health. Instead, in the same table one finds that the exact same amount—that is, £4.6 billion—is shown to have been spent not on health but on the Government's tax credits. Therefore, all the money ostensibly being raised for health is not being spent on hospitals but on benefits.

The Minister will say shortly that other money is being spent on health. "No", he says, "it's not hypothecated money to health", but "yes", he says, "it will be spent". Therefore, the question remains: why does it seem to have no effect and why are the public disappointed? The answer lies in what I believe to be the most accurate gauge of public sector inflation. For some reason, it is known as the "GDP deflator for government consumption". In the five years to 1998 it rose by 2.2 per cent a year. By the end of 1999 it was running at 4 per cent, rising to 5.75 per cent in 2000. In the last financial year to the end of March the figure was 6.5 per cent. That is three times the economy's overall inflation rate of 1.8 per cent.

Coming up to date, in the first quarter of this year public spending rose at an annual rate of 11 per cent. How can such a large increase have so little effect? It is because 59 per cent of that sum was eaten up by higher wages and prices in the public sector. So the effective rate of increase in spending was only 4.2 per cent year on year.

The Government now find themselves on a ratchet. They spend; they fail; so they spend even more. The public can see that too and that is why the clear message from pre-Budget and post-Budget polls is of scepticism about the direct link between spending and outcome. People have worked out that it is possible to spend more, much more, without success. For example Scotland, Wales and Northern Ireland all have spending levels per head which are much higher than those in England and, indeed, above the European average for health. But waiting lists in Wales and Northern Ireland are much longer than those in England and waiting times in Scotland are actually going up.

So the growing fear with this Government, perhaps reflected in the research I described, is that while they wear their heart on their sleeve about care, they do not seem to know how to make their good intentions come true. Take, for example, what the Chancellor calls,

"The first challenge is to increase our productivity".—[Official Report, 25/11/97; col. 773.]

That was five years ago, and what happened? The latest figures actually show a fall in productivity in the first quarter of the year. The Government see that productivity gap with our competitors as an opportunity. They say it gives us, "increased room for catch-up". To avoid catch-up problems in the public services the Chancellor says that he is going to have new reviews and reports, targets, procedures and checks, and inspectors and audits. But in a striking passage in the Statement on the subject of value for money in the public services, the Minister described a system of rewards and punishment that would follow success and failure in delivery. In saying that he reminded us of what the Chief Secretary said; that is,

"Money will only be released if the Government are satisfied we are getting the returns we want".

That was four years ago.

Do the Government think they will increase the productivity of the public services if they issue a new regulation every 20 minutes, as they do for business? Or will they issue 4,440 pages to hospitals next year—17 pages of rules every day—as they did to schools last year? Or will it be a czar that will make all the difference or a new No. 10 delivery unit? The public can see that the strategy has not worked and they can see why; that is, without real reform spending is not the answer.

Perhaps I can leave to one side the question of why the spending does not seem to have worked and why people may be disappointed with the results and turn to another aspect of the Statement which may be equally of interest. It concerns the effect of the failed spending effort on the economy as a whole. Let us consider the example the Government are setting to households in Britain. They say in the Statement that we can spend more than our income. So with government income (on their own estimates) growing by 2.5 per cent, they will spend 4.3 per cent more a year. The public duly take their cue.

The size of outstanding household debt, including mortgage debt, has soared. As a ratio of annual disposable income it is at an all-time high at more than 100 per cent. Non-mortgage consumer credit is growing at 12.4 per cent a year while mortgage lending is growing at 9 per cent a year. As with the Government, underlying incomes are growing more slowly at only 5 per cent, so household finances are becoming stretched. So are the Government's.

How much more will the Government need to borrow to meet the plans we heard set out in the Statement? The Statement said that the spending plans were possible because of what the Government had achieved in debt reduction. Why then do the Government plan to borrow over the next five years twice as much as they repaid in debt in their first few years? That is according to their own figures. More realistically, according to economists, undershooting tax revenues because of an economic slow-down suggests that we could expect the PSNB to approach £20 billion this year, £30 billion next year and £35 billion in 2004–05.

As we are all aware, independent forecasters have been steadily downgrading predictions for GDP growth this year. Consensus expectations have dropped to 1.7 per cent compared with 1.8 per cent in June. Some forecasts are now as low as 1.2 per cent. Remember, the Chancellor's Budget forecast on which this spending plan is based is for a growth of 2.5 per cent this year and 3 to 3.5 per cent next year.

The spending plans in the Statement threaten all the theoretical economic foundations on which the Chancellor's framework is built. The framework's three main pillars—the independence of the Bank of England, the symmetrical inflation target and the code for fiscal stability—are all much less solid than the Minister might like to think.

Can we be saved by the EU and its growth and stability pact which sets limits on government spending? I doubt that. The pact only applies to small countries. For big countries, as Francis Mer, the new Finance Minister of France, said,

"Le pacte de stabilite Europeest pas inscrit dans le marbre".

So we are not going to endorse the Government's failed approach to public services today. Our Benches will not support their policy of spending without change. That does not mean that we are against spending more on education and the other services the Minister described. But we are against his plans to spend more without real reform because, as the record seems to show, it does not work.

If this gathering gloom were not enough, the Chancellor will soon face a stark reminder of the dark days of industrial strife. On 17th July 1.3 million public sector workers, supposed to be the beneficiaries of the Statement, are planning a one-day pay strike—the biggest industrial action for more than 20 years. The Government must be disappointed. If they would tax more, spend more and achieve something, that would be fine. If they would tax less, spend less and leave things alone, that would be finer still for some. But to tax more, spend more and make things worse is not going to be acceptable for long. O si sic omnes: if only everyone were sick of it.