Economy

Part of the debate – in the House of Lords at 7:53 pm on 3rd November 2008.

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Photo of Lord Ryder of Wensum Lord Ryder of Wensum Conservative 7:53 pm, 3rd November 2008

My Lords, after succeeding Tony Blair, Gordon Brown published a Green Paper on the constitution, in which he pledged to redress the balance between Parliament and the Executive. However, Parliament was not recalled during the Summer Recess, and we have had to wait weeks for this debate to take place in your Lordships' House.

A few noble Lords took part in a lively Finance Bill debate in your Lordships' House on 18 July, two months before the collapse in the markets. By July our public finances were already in disarray. I submitted that borrowing would reach £70 billion by the end of the financial year, which is about double the forecast the Chancellor made last March, and that the duty to restore our finances would fall to the next Administration—indeed, that fiscal policy would dominate the daily lives of future Downing Street residents, and that their reputations would be defined by their success in tackling the mounting deficit. That was in July.

If anyone doubted the identity of the person responsible for this upheaval in our public finances, then the noble Lord, Lord Desai, gave the answer in his Evening Standard article on 22 September. He declared with all his authority:

"The Golden Rule was fudged and fudged again until Alastair Darling inherited an empty kitty. Brown talked of prudence but the Public Private Partnerships have saddled us with a lot of debt off the balance sheets. Those chickens will come home to roost".

The Prime Minister promised to eliminate boom and bust, yet months ago the IMF concluded that Britain was the one major economy likely to suffer a recession, partly due to the incompetent management of its public finances. The IMF fears were confirmed when public spending figures published a fortnight ago showed the worst first-half borrowing statistics in this country since 1946.

Our public finances are now even worse with the cost of the Bradford & Bingley recapitalisation and commercial loan guarantees. Net debt is heading for 50 per cent of national income, excluding off balance sheet items. To complicate matters, I read that the Government are putting their faith in Lord Keynes. I do not want to digress down this alley, but I cannot help remark that, although an admirer of Keynes, I fear that some Ministers proclaiming his name have never read or even understood his works. His propositions are often taken out of context, as was the case in Japan in the 1990s when recovery was bungled by overborrowing. Sometimes Keynes's fiercest disciples are not true Keynesians, as the great man recognised towards the end of his life.

The real scale of our debt could be two, even three times greater after accounting for PFIs and public sector pensions, to which many of my noble friends have referred. Public sector pensions are the costliest dimension of our hidden millstones.

The independent Pensions Policy Institute published a report last month. It stated:

"It is often assumed that better pensions in the public sector make up for lower pay. Although a job-for-job type comparison of pay is difficult to make between the private and public sectors", the evidence suggests that pay in the public sector is not lower than pay in the private sector across the board. In other words, the rule of thumb that decent pensions compensate for lower public sector pay no longer holds true. In addition, public sector staff tend to work shorter hours with stronger job security, take longer holidays and more sick leave.

Gold-plated pensions are becoming indefensible, the more so now that Mr Brown has increased the size of the public sector by nearly 1 million employees. Whereas the latest unemployment figures showed an extra 300,000 private sector workers are jobless, they revealed an increase of 4,000 employed in the public sector.

Expressed in stark terms, it is held that UK private sector workers are paying more in taxes to fund the pensions of the 20 per cent of the labour force in the public sector than they save for their own retirement. Payments into personal and company pensions totalled £15.6 billion in 2005, while in the same year £18 billion was used to pay the pensions of public sector workers—and that was a good year.

Of course, the inequities have multiplied since the collapse in the markets, leading to hundreds of billions of pounds being wiped off the value of private sector pensions. The Government's response over 10 years has been scant: savings from reforms amount to no more than £13 billion over 50 years. Further reforms were of course vetoed by the public sector unions, Labour's paymasters.

Treasury officials should start preparing a White Paper on public expenditure for 18 months' time, setting out three objectives; first, the reduction of money supply by controlling government borrowing; secondly, the restoration of incentives by holding down and, only if possible, lowering taxes; and thirdly, a plan for spending, including public sector pensions, that could be compatible with the objectives of borrowing and taxation, with a realistic assessment of the prospects for economic growth. These were the aims of the 1979 White Paper. They worked then, and they must work again.