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My Lords, I refer the House to the spending review Statement made earlier in another place by my right honourable friend the Chancellor of the Exchequer. Copies of the document have been made available in the Printed Paper Office and its text will be printed in full in the Official Report. I commend my right honourable friend’s Statement to this House.
“This coalition came into office with a commitment to address with firmness and resolve one of the biggest economic crises of the post-war era. The action we have taken, together with the British people, has brought the deficit down by a third, helped a record number of people into work, and taken our economy back from the brink of bankruptcy; and it allows us to say that, while recovery from such a deep recession can never be straightforward, Britain is moving out of intensive care, and from rescue to recovery.
Today we announce the latest action to secure the recovery. We act on behalf of every taxpayer and every future taxpayer who wants high-quality public services at a price our country can afford. We act on behalf of everyone who knows that Britain has got to live within its means. We have applied three principles to the spending round I will set out today: reform, to get more from every pound we spend; growth, to give Britain the education, enterprise and economic infrastructure it needs to win the global race; and fairness, making sure we are all in it together by ensuring those with the broadest shoulders bear the largest burden and making sure the unfairness of the something-for-nothing culture in our welfare system is changed.
We have always understood that the greatest unfairness was loading debts on to our children that our generation did not have the courage to tackle ourselves. We have always believed, against much opposition, that it is possible to get better public services at lower cost—that you can cut bureaucracy and boost enterprise by taking burdens off the back of business. In the face of all the evidence, the opposition to these ideas has collapsed into incoherence. We have always believed that the deficit mattered—that we needed to take tough decisions to deal with our debts—and the opposition to that has collapsed into incoherence too. Today I announce the next stage of our economic plan to turn Britain around.
Let me start with the overall picture on spending. In their last year in office, the previous Government were borrowing £1 in every £4 that they spent. It was a record for a British Government in peacetime and a calamitous risk with our economic stability. As the note we saw again this week from their outgoing Chief Secretary put it,
“I’m afraid there is no money”.
So we acted immediately. Three years ago, we set out plans to make savings and to reduce our borrowing. Instead of the £157 billion the last Government were borrowing, this year we are set to borrow £108 billion pounds: that is £49 billion less in borrowing. That is virtually the entire education budget.
So we have made real progress, putting right what went so badly wrong. But while we have been acting, the challenges from abroad have grown: a eurozone in crisis, rising oil prices, and the damage from our own banking crisis worse than anyone feared. The truth is that we have to deal with the world as it is, not as we would wish it to be, so this country has to continue to make savings. I can report to the House that the biggest single saving we have made in government is the £6 billion a year less we are paying to service our debts than the previous Government budgeted for. Bear that number in mind when you hear the Opposition complaining about cuts.
The deficit has come down by a third, yet at over 7% it remains far too high, so we must continue to take action—not just because it is wrong to go on adding debts to our children’s shoulders, but because we know from the global turbulence of the past few years that the economic risks are real and the recovery has to be sustained. If we abandoned our deficit plan, Britain would be back in intensive care. So the figures today show that until 2017-18, total managed expenditure —in other words, the total amount of government spending—will continue to fall in real terms at the same average rate as it is falling today.
The task before us today is to spell out what that means for 2015-16. Total managed expenditure will be £745 billion. To put that huge sum into context, consider this: if government spending had been allowed to rise through this Parliament at the average rate of the past three decades, that total would have been £120 billion higher. This Government have taken unprecedented steps to achieve that expenditure control. Now we need to find £11.5 billion of further savings. I want to pay a personal tribute to my right honourable friend the Chief Secretary for the huge effort that he has put into delivering them. Finding savings on that scale has not been easy. These are difficult decisions that will affect people in our country, but there never was an easy way to bring spending under control. Reform, growth and fairness are the principles. Let me take each in turn.
I will start with reform and the obligation that we all have in this House to ensure that we get more for every pound of taxpayers’ money that we spend. With the help of my right honourable friend the Minister for the Cabinet Office, we have been combing through Whitehall, driving out costs, renegotiating contracts and reducing the size of government. Cutting money that the previous Government were spending on marketing and consultants, reforming government IT and negotiating harder on behalf of the taxpayer have already saved almost £5 billion. In this spending round, we will find a further £5 billion of efficiency savings. That is nearly half of the total savings we need to achieve.
We are reforming pay in the public sector. We are holding down pay awards, and public sector pay rises will be limited to an average of up to 1% for 2015-16. However, the biggest reform that we will make on pay is to automatic progression pay. That is the practice whereby many employees not only get a pay rise every year, but automatically move up a pay grade every single year, regardless of performance. Some public sector employees see annual pay rises of 7%. Progression pay can at best be described as antiquated; at worst, it is deeply unfair to other parts of the public sector that do not get it and to the private sector that has to pay for it. So we will end automatic progression pay in the Civil Service by 2015-16, and we are working to remove automatic pay rises simply for time served in our schools, NHS, prisons and police. The Armed Forces will be excluded from those reforms.
Keeping pay awards down and ending automatic progression pay means that, for every pound we have to save in central administration, we can better limit job losses. I do not want to disguise from the House that there will be further reductions in the number of people working in the public sector. The Office for Budget Responsibility has forecast that the total number of people working for the Government will fall by a further 144,000 by 2015-16. I know that for those who are affected that is difficult. That is the consequence of the country spending far beyond its means.
When I presented the spending round three years ago, I said that about half a million posts in the public sector were forecast to have to go. That is indeed what has happened, and we are saving £2 billion a year, with a Civil Service now smaller than at any time since the war. I also said three years ago that I was confident that job creation in the private sector would more than make up for the losses. That prediction created more controversy than almost anything else at the time, including with the Opposition. The shadow Chancellor called it “a complete fantasy”. Instead, every job lost in the public sector has been offset by three new jobs in the private sector. In the past year, five new jobs have been created for every job cut in the public sector. The central argument of those who fought against our plan is completely demolished by the ingenuity, enterprise and ambition of Britain’s businesses. I pay tribute to the hard-working people of this country who proved their pessimism wrong.
In this spending round, the Treasury will, as one would expect, lead by example. In 2015-16, our resource budget will be reduced by 10%. The Cabinet Office will also see its resource budget reduced by 10%. However, within that we will continue to fund support for social action, including the National Citizen Service. Ninety thousand places will be available for young adults in the citizen service next year, rising to 150,000 by 2016. It is a fantastic programme that teaches young people about their responsibilities as well as their rights, and we are expanding it.
Local government will have to make further savings too. My right honourable friend the Communities and Local Government Secretary has set an example to all his colleagues in reducing the size of his department by 60% and abolishing 12 quangos. He is a model of lean government, and has agreed to a further 10% saving in his resource budget. But we are committing to more than £3 billion capital investment in affordable housing and we will extend the troubled families programme to reach 400,000 more vulnerable families who need extra support. We are proving that it is possible to save money and create more progressive government. That is the right priority.
Here is another of the Government’s priorities: helping families with the cost of living. Because we know that times are tough, we have helped to keep mortgage rates low, increased the personal allowance, cut fuel duty and frozen council tax. That council tax freeze is due to come to an end next April. I do not want that to happen, so I can tell the House today that because of the savings we have made we can help families with their bills. We will fund councils to freeze council tax for the next two years. That is nearly £100 off the average council tax bill for families, and brings savings on these bills for families to £600 over this Parliament. That demonstrates our commitment to all those who want to work hard and get on.
There is one more thing that we can do to help with the cost of living in one part of the country. For years, Members from the south-west of England have fought on behalf of their constituents who face exceptionally high water bills. Nothing was done until we came to office. Now we have cut those water bills by £50 per household every year until 2015. My honourable friend the Member for Camborne and Redruth and many others have campaigned to extend that rebate beyond 2015. I am happy to confirm today that we will do that. Taking money out of the cost of government and putting it in the pockets of families—that is what we mean by reform.
Local government has already taken difficult decisions to reduce staff numbers, share services and make savings. I pay tribute to Sir Merrick Cockell for all he has done in showing how this can be achieved. We were told by the scaremongers that savings in local government would decimate local services. Instead, public satisfaction with local council services has gone up under this Government. That is because, with our reforms, communities have more control over their own destiny. That is because we have devolved power and responsibility to manage budgets locally. That is because we have let councils benefit from the tax receipts that come when the local economy grows. Today, we give more freedom, including greater flexibility over assets, and we will drive greater integration of local emergency services. I thank my honourable friend the Member for Bournemouth East for his fresh thinking in this area, which has helped to inform us.
We are also embarking on major reforms to the way we spend money locally through the creation of the single local growth fund that Lord Heseltine proposed. This will be £2 billion per year, which is at least £10 billion over the next Parliament. Local enterprise partnerships can bid for that sum, and the details will be set out tomorrow. Our philosophy is simple: trust people to make their own decisions and they will usually make better decisions. But in return for those freedoms, we have to ask local government for the kind of sacrifices central government are making. The local government resource budget will be reduced by 10% in 2015-16, but when all the changes affecting local government that I will set out are taken into account, including local income and other central government funding, local government spending reduces by around 2%.
I set out today the block grants to the devolved Administrations. Because we have prioritised health and schools in England, this feeds through the Barnett formula to require resource savings of about 2% in Scotland, Wales and Northern Ireland. The Scottish resource budget will be set at £25.7 billion, and Scotland will benefit from new capital borrowing powers of almost £300 million. Being part of the UK means that Scotland will see its capital spending power increase by almost 13% in real terms in 2015-16. It is rightly for the Scottish Parliament to decide how best to use it. That is devolution within a United Kingdom delivering for Scotland.
The Welsh resource budget will be £13.6 billion, and we will shortly publish our response to the Silk commission on further devolution of taxation and borrowing. When we do so, we will be able to say more about the impressive plans to improve the M4 in south Wales that my honourable friend the Member for Vale of Glamorgan and others have been campaigning for. The Northern Ireland resource budget will be £9.6 billion. We have agreed to provide an additional £31 million in 2015 to help the Police Service of Northern Ireland tackle the threat posed by terrorism. Those police officers do an incredibly brave job on our behalf, and we salute them. Separately, we will make 10% savings to the Scotland, Wales and Northern Ireland Offices.
We believe that the cultural heritage of our nations is not just an economic asset, but has intrinsic value. When times are tough, they too must make a contribution to the savings this country requires. The Department for Culture, Media and Sport will make savings of 7% in its resource budget. Elite sports will be protected and the funding of community sports, arts and museums will be reduced by just 5%, but because we recognise the value of our greatest museums, galleries and English Heritage, we are giving them much greater freedom from state control, which they have long called for, applying our reforming principles across the board and empowering those on the front line who know best—what the director of the British Museum called:
“good news in a tough economic climate”.
And while we are at it, we will make sure that the site of the Battle of Waterloo is restored in time for the 200th anniversary to commemorate those who died there and to celebrate a great victory of coalition forces over a discredited former regime that impoverished millions.
We still have the finest Armed Forces in the world, and we intend to keep it that way. The first line of national defence is sound public finances and a balanced defence budget, and my right honourable friend the Defence Secretary is helping to deliver both. He and his predecessor, my right honourable friend the Member for North Somerset, have filled the £38 billion black hole they inherited in the finances of the Ministry of Defence. We will continue to ensure we get maximum value for money from what will remain, which, at over 2% of our GDP, is one of the largest defence budgets in the world. The defence resource budget will be maintained in cash terms at £24 billion, while the equipment budget will be £14 billion and will grow by 1% in real terms thereafter. We will further reduce the civilian workforce and their allowances; renegotiate more of the hopeless private finance initiative contracts signed in the past decade; and overhaul the way we buy equipment.
My right honourable friend the Prime Minister has rightly been clear throughout, however, that he is not prepared to see a reduction in Britain’s military capabilities. This spending round not only protects those capabilities, but enhances them with the latest technologies. We will not cut the number of soldiers, sailors or airmen—we need them to defend our country—and we will give them the best kit to do that job: new aircraft carriers, submarines, stealth fighters, destroyers and state-of-the art armoured vehicles. We also make a major commitment to invest in cyber. It is the new frontier of defence and a priority for the Government.
We will look after families who have lost their loved ones and those injured protecting us long after the wars they fought in are over. We previously committed to fund the military covenant for five years, and today I commit to funding the Armed Forces covenant permanently. We will do that with the money we have collected from the LIBOR fines, so those who represented the very worst values will support those who represent the very best of British values. Our veterans will not be forgotten.
The intelligence services are on the front line too. Silently, and often heroically, these fellow citizens protect us and our way of life, and so we will protect them in return, with a 3.4% increase in their combined resource budget. The Foreign Office is the public face of our diplomacy, and my right honourable friend
The Foreign Office projects our values abroad, and the Home Office protects our values here in Britain. Police reform is a model of what we can achieve across Government. Police forces are more accountable to the public, with modern working practices, the latest equipment and democratic oversight, and all that on a smaller budget. What was the Opposition’s prediction? They said that crime would rise, and what has happened instead? Crime has fallen by more than 10%. Thanks to the hard work of police officers up and down this country, crime is at its lowest level for 30 years. What was their prediction about our borders? They said that because of cuts we would not be able to control immigration, and what has happened instead? Net immigration is down by more than one third.
This Home Secretary is demonstrating that responsible budgets and reform can deliver better services for the public. In 2015, she will work with a resource budget of £9.9 billion, which is a saving of 6%, but the police budget will be cut by less than that. There will be further savings in the central department, police forces will be encouraged to share services and some visa fees will go up, but protecting Britain from the terrorist threat remains a top priority, so I can confirm that the police counterterrorism budget will not be cut at all.
For the police to do their job, they need a criminal justice system that works a lot better. A case of common assault can take 240 days to pass through the courts and involves five separate sets of case papers generated on three different computer systems. In some prisons, the cost of keeping a prisoner is £40,000 a year, but in others, it is one third of that, while the cost of legal aid per head is double the European average. My right honourable friend the Lord Chancellor is reforming all these things, and by doing so will make savings of 10% in his departmental budget—and he will do that while for the first time offering probation services for those who have served short sentences to help to end the revolving door of crime and reoffending.
That is an example of the reform we are bringing in across Government, and every step of the way, every penny saved, every programme reformed, every entitlement reduced, every difficult choice taken, has been opposed by vested interests and those who got Britain into this mess in the first place. We will not let up. I will not let that happen. The reform will continue.
Government spending does not alone create sustainable growth; enterprise does, and the job of the state is to provide the schools, science, transport links and reliable energy that enable business to grow. Britain was once the place where the future was invented, from the railway to jet engine to the world wide web. We can be that country again, and today we set out how to get there. A huge amount of innovation and discovery still goes on, but successive Governments, of all colours, have put short-term pressures over long-term needs and refused to commit to capital spending plans that match the horizons of a modern economy. Today we change that. We commit now to £50 billion of capital investment in 2015. From roads to railways, bridges to broadband, science to schools, it will amount to more than £300 billion of capital spending guaranteed to the end of this decade.
Today, we raise our national game. That means that Britain will spend on average more as a percentage of its national income on capital investment in this decade, despite the fact that money is tight, than in the previous decade, when government spending was being wasted in industrial quantities.
My right honourable friend the Chief Secretary to the Treasury will tomorrow set out the next stage of our economic infrastructure plan, with specific plans for more than £100 billion of infrastructure projects. Here is what that will mean for the departments. The Department for Transport will make a 9% saving in its day-to-day resource spending, bearing down on the running costs of Transport for London and on rail administration, but its capital budget will rise to £9.5 billion —the largest rise of any part of Government—and we will repeat that commitment for every year to 2020.
We are already massively expanding investment on major road schemes, but we will do more. We are announcing the largest programme of investment in our roads for half a century. We have already expanded our investment in the railways, but we will do more. We are committing to the largest investment in our railways since the Victorian age, and with the legislation before this House today, we should give the green light to HS2, which will provide a huge boost to the north of England and a transformation of the economic geography of this country.
Here in London, we are digging Crossrail, the largest urban infrastructure project in Europe, but we will do more. We are looking now at the case for Crossrail 2, linking London from north to south. We are going to give the mayor almost £9 billion pounds of capital spending and additional financing power to the end of this decade.
Investing in our economic infrastructure also means investing in energy, so we will provide the certainty that investors are crying out for in western countries. This country is already spending more on renewables than ever before. Now we will provide future strike prices for low carbon. We are restarting our civil nuclear programme when other countries are unable to continue theirs, and now we are providing guarantees for new nuclear. Our exploitation of gas in the North Sea is already second to none. Now we are making the tax and planning changes that will put Britain at the forefront of exploiting shale gas. We will provide our country with the energy of the future at a price that we can afford. Taken together, this should support over £100 billion of private sector investment in energy.
The Department of Energy and Climate Change will do this while reducing its resource budget by 8%. The Department for Environment, Food and Rural Affairs will see a 10% reduction, but we will set out plans for a major commitment to new flood defences for the rest of this decade. Again, we are prioritising long-term capital through day-to-day cost savings, which is exactly the tough choice that Britain should be making.
It is not enough to have roads, power stations and flood defences. That is just the physical infrastructure we need to compete in the 21st century. We need the intellectual capital, too. This country needs to invent, pioneer and export around the world. That means backing the Department for Business, Innovation and Skills, which helps us to do that. And it means taking tough decisions about what we should support. My right honourable friend the Secretary of State for Business, Innovation and Skills has agreed to a reduction of 6% in the cost of the department. That means that we are making savings to student maintenance, keeping grants but not increasing them, and the cost of the central department will also be cut further. That means that, within the reduced budget, we can put more money into apprenticeships and continue with the dramatic increase in support that we have provided to exporters through UK Trade & Investment.
We are not going to shift medical training and research out of that department, because they are working well where they are. And in that department too, we can shift from day-to-day spending to a huge 9% increase in capital investment. That includes a huge investment in science. Scientific discovery is first and foremost an expression of the relentless human search to know more about our world, but it is also an enormous strength for a modern economy. From synthetic biology to graphene, Britain is very good at it and we are going to keep it that way. Today, I am committing to maintaining the resource budget for science at
£4.6 billion, to increasing the capital budget for science in real terms to £1.1 billion, and to maintaining that real increase to the end of this decade. Investment in science is an investment in our future. So yes, from the next generation of jet engines to cutting-edge supercomputers, we say: keep inventing, keep delivering; this country will back you all the way.
We have infrastructure and we have science, but we still need an educated work force to make it happen. Because of our ongoing reforms to our universities, they are now better funded than before. People will remember that the reforms to higher education were bitterly contested in the House. We remember the scaremongering about fees, and the claims that they would destroy social mobility and put off students from poorer communities applying. And what has happened since? We now have the highest ever proportion of students from the most deprived neighbourhoods applying to universities. We should all welcome that.
There is no greater long-term investment a country can make than in the education and skills of its children. Because of the tough decisions that we have taken elsewhere, we have been able to invest in education and accelerate school reform. When we took office, our country’s education system was falling behind other parts of the world. Now, thanks to the brilliant programme of reform by my right honourable friend the Secretary of State for Education and the Minister for Schools, my right honourable friend the Member for Yeovil, we are once again leading the way.
We have applied our reform principles in education too, freeing schools and teachers to concentrate on teaching and turning the majority of secondary schools into academies. In this spending round, that momentum of reform will grow. The Department for Education’s overall budget will increase to £53 billion and schools spending will be protected in real terms, fulfilling the pledge we made at the beginning of this Parliament, for all of this Parliament. We will transfer power and money from town halls and central bureaucracy to schools, so that more of the money for education is spent on education. So, while grants to councils and spending on central agencies are reduced, the cash going to schools will go up.
I can announce today that schools spending will be allocated in a fairer way than ever before. School funding across the country is not equally distributed; it is distributed on a historical basis with no logical reason. The result is that some schools get much more than others in the same circumstances. That is unfair and we are going to put it right. Many MPs on both sides of the House have campaigned for that. My honourable friend the Member for Worcester has been a particular champion in this Parliament. Now, the lowest-funded local authorities in this country will at last receive an increase in their per-pupil funding as we introduce a national funding formula to ensure that no child in any part of our country is discriminated against. We will consult on all the details so that we get this historic reform right. The pupil premium that we have introduced also ensures that we are fair to children from low income backgrounds. It will be protected in real terms, so that every poor child will have more cash spent on their future than ever before. The capital budget will be set at £4.6 billion in 2015-16, with over £21 billion of investment over the next Parliament.
We will also tackle the backlog of maintenance in existing schools and we will invest in new school places. We will fund 20 new studio schools as well as 20 new university technical colleges, as they are outstanding new vocational institutions. Free schools are giving parents the opportunity to aspire to a better education for their children. The Opposition have said that they want no more of them, but we will not allow such an attack on aspiration to happen. Instead, we must accelerate the programme and bring more hope to more children. That is why I can announce that we will fund an unprecedented increase in the number of free schools. We will provide for 180 great new free schools in 2015-16.
The schools budget will be protected, there will be fairer funding across the nation, the pupil premium will be extended to more students than ever before and there will be a transformation in the free school programme. We will not make our children pay for the mistakes of the past. We will give them every chance for the future, because that is the single best investment we can make for Britain.
Our education settlement is also consistent with the third and final principle of this spending round—fairness. It is not possible to reduce a deficit of this size without asking all sections of the population to play their part, but those with the broadest shoulders should bear the greatest burden. The Treasury’s distributional analysis shows that the top fifth of the population lose the most after this spending round, and the independent Institute for Fiscal Studies is unequivocal that the richest 10% have paid the most. In every year of this Parliament, the rich will pay a greater proportion of income tax revenues than they did in any one of 13 years under the last Labour Government.
When it comes to Her Majesty’s Revenue and Customs, despite the fact that this department will see a 5% reduction in its resource budget, we are committed to extra resources to tackle tax evasion. The result is that we expect to raise over £1 billion more in tax revenues from those who try and avoid paying their fair share.
Fairness also means refusing to balance the budget on the backs of the world’s poorest. I know that not everyone believes we should fulfil our commitment to spend 0.7% of our national income on development—but I do. I am proud to support a Government who are the first in our history to meet our pledge and meet it not only this year, but next year and the year after that. Of course, overseas development is about more than just the Department for International Development budget, and we comply with internationally policed rules. The DfID budget is, however, the lion’s share, and it will be set at £11.1 billion in 2015-16. Even in these tough times, the decisions we make mean we keep to our commitments.
That includes our commitment to the National Health Service—an institution that is the very embodiment of fairness in our society. The NHS is much more than the Government’s priority; it is the people’s priority. When we came to office, the health budget was £96 billion; in 2015-16, it will be £110 billion—and capital spending will rise to £4.7 billion. New medical treatments and an ageing population mean that the demand for NHS services is rising, so we have not spared in also demanding reform and value for money in this service. This will not insulate the health service from tough choices; there are already 7,000 fewer managers, and the NHS will continue to make efficiency savings. Those savings will, however, enable new investment in mental health and funding for new treatments for cancers such as prostate and breast cancer. Let me respond directly to the breast cancer research campaign in which so many have taken part. We will continue to back the charity research support fund and look into making it easier for these organisations to benefit from gift aid.
Many older people do not just use the NHS; they also use the social care system. If we are honest, they often fall between the cracks of the two systems, being pushed from pillar to post, not getting the care they should. None of us here would want that for our parents or grandparents, and in a compassionate society, no one should endure it. It is a failure that also costs us billions of pounds: Britain can do better.
We said in the 2010 spending review that the NHS would make available around £1 billion a year to support the health needs of people in social care. It worked, and saved hundreds of millions in the process. Last year, these improvements meant almost 50,000 fewer bed days were lost to the NHS. So today, I can announce that I will bring together a significant chunk of the health and social care budgets. I want to make sure that everyone gets a properly joined-up service where they will not have to worry about whether a service is coming from the NHS or the local council.
Let us stop the tragedy of people being dropped in A&E on a Friday night to spend the weekend in hospital because we cannot look after them properly in social care. By 2015-16, over £3 billion will be spent on services that are commissioned jointly and seamlessly by the local NHS and local councils working together. It is a huge and historic commitment of resources to social care, tied to real reform on the ground, to help end the scandal of older people trapped in hospitals because they cannot get a social care bed. This will help relieve pressures on A&E, help local government to deliver on its obligations and will save the NHS at least £1 billion. This is integrated health and social care—no longer a vague aspiration, but a concrete reality transforming the way we look after people who need our care most.
So these are the three principles that guide the spending round: reform, growth and fairness. Nowhere could these principles be more clearly applied than in our approach to welfare. Two groups of people need to be satisfied with our welfare system: those who need it who are old, vulnerable, disabled or have lost their job, whom we as a compassionate society want to support. Then there is a second group: the people who pay for this welfare system who go out to work, pay their taxes and expect it to be fair on them, too.
So we have taken huge steps to reform welfare: changing working age benefits with universal credit so that work always pays; removing child benefit from the better off; capping benefits so that no family out of work gets more than the average family gets in work.
And we have been making sure that benefit payments do not rise faster than wages. The steps we have taken will save £18 billion a year—and every single one of them was opposed by the welfare party on the Opposition Benches.
Now we propose to do three further welfare reforms. First, as I said in the Budget, we are going to introduce a new welfare cap to control the overall costs of the benefits bill. We have already capped the benefits of individuals, and now we cap the system as a whole. Under the system we inherited, welfare spending was put into a category called annually managed expenditure, but the problem was that it was not managed at all. The cost of welfare went up by a staggering 50%—even before the crash. Our welfare cap will stop that happening again. The cap will be set each year at the Budget for four years. It will apply from April 2015 and will reflect forecast inflation, but it will be set in cash terms. In future, when a Government look to breach the cap because they are failing to control welfare, the Office for Budget Responsibility will issue a public warning. The Government will then be forced to take action to cut welfare costs or publicly breach the cap and explain it to Parliament.
We will exclude a small number of the most cyclical benefits that directly rise and fall with the unemployment rate to preserve the automatic stabilisers: housing benefit, tax credits, disability benefits and pensioner benefits will all be included—but the state pension will not. I have had representations that we should include the basic state pension in the welfare cap. That would mean that a future Government could offset a rise in working age benefits by cutting the pensions of older people. That penalises those who have worked hard all their lives. Cutting pensions to pay for working age benefits is a choice this Government are certainly not prepared to make. It is unfair; we will not do it and we reject those representations completely.
The new welfare cap is proof that Britain is serious about living within its means: controlling spending, protecting the taxpayer and being fundamentally fair. Today we are introducing a limit on the nation’s credit card. The principles enshrined in the cap apply to our second reform today. We will act to ensure that we stop the cost of paying the winter fuel payments made to those who live abroad from rising in a way that no one ever intended. EU law now says that people living in the European Economic Area can claim winter fuel payments from us, even if they did not get them before they left the UK. Paying out even more money to people from all nationalities who might have worked in this country years ago, but no longer live here is not a fair use of the nation’s cash. So from the autumn of 2015, we will link the winter fuel payment to a temperature test; people in hot countries will no longer get it. It is, after all, a payment for winter fuel.
The third welfare reform I announce today is about making sure we do everything to help people get into work. My right honourable friend the Secretary of State for Work and Pensions has changed the national debate about welfare, and has comprehensively won the argument. He has committed himself to finding a further 9.5% of savings in his department’s running costs. That will require a difficult drive for efficiency, and a hard-headed assessment of underperforming programmes.
However, welfare reform is about much more than saving money, vital though that is. It is about reducing dependency and changing people’s lives for the better. I am determined to go further to reduce worklessness with all its social consequences. Where is the fairness in condemning people to a life on benefits because the system will not help them to get back into work?
Today we are introducing Upfront Work Search. We are going to make sure that people turn up with a CV, register for online job search, and start looking for work. Only then will they receive their benefits. Thanks to this Government, lone parents who are out of work can now receive free childcare for all their three and four-year-olds, so it is reasonable to ask that they start regularly attending jobcentres and preparing to return to work.
We are announcing further changes today. Half all jobseekers need more help with looking for work, so we will require them to go to the jobcentre every week rather than once a fortnight. We will give people more time with jobcentre advisers, and proper progress reviews every three months. We will also introduce a new seven-day wait before people can claim their benefits. Those first few days should be spent looking for work, not looking to sign on. We are doing those things because we know that they help people to stay off benefits, and help those who are on benefits to get back into work faster.
Here is a further change. From now on, if claimants do not speak English, they will have to attend language courses until they do. That is a reasonable requirement in this country. It will help people to find work, but if they are not prepared to learn English, their benefits will be cut.
As a whole, this new contract with people on benefits will save more than £350 million a year, and all that money will enable us to afford extra support to help people to get into work. Help to work, incentives to work, and an expectation that people should do everything that they can to find work: that is fair to people who are out of work, and it is fair to those in work who pay for them. Together, these reforms bring the total additional welfare savings in 2015 up to £4 billion.
Step by step, this reforming Government are making sure that Britain lives within its means. The decisions that we make today are not easy, and these are difficult times; but with this Statement, we make more progress towards an economy that prospers, a state that we can afford, a deficit coming down, and a Britain on the rise. I commend this economic plan to the country”.
My Lords, as the Minister indicated, we are considering a spending review that the Chancellor of the Exchequer said represents reform, growth and fairness, but there is little in the Statement to back up any of those assertions. In fact, the real reason we are here today is because of this Government’s economic failure. They have been forced back, begging for more: more cuts to the police, more cuts in the defence budget and more cuts to local services. This Government have failed on living standards, growth and the deficit, and families and businesses are paying the price. We have been told—in fact, it has even been boasted by the Government—that there was no intention for it to turn out like this. The Chancellor told the other place in his first Budget in the halcyon days of 2010 that the economy would grow by 6%, but in fact the economy has grown by 1%.
The Government pledged to get the banks lending, but at this stage lending is still down, month by month. There has been no reform of the banking industry, and competition and lending to individuals and small and medium-sized enterprises has gone backwards. The Government made keeping the AAA credit rating the No. 1 test of their economic credibility. However, on its watch Britain has been downgraded not once but twice. The Government promised that living standards would rise, but they have fallen year on year. They said that they would balance the books, but the end to austerity is being pushed further and further into the future, way beyond the next general election, which of course was their original target date. This is all because of failure. What a legacy to leave. What a straitened inheritance for the next Labour Government to sort out—and we will sort it out, in a fairer way.
Plan A has failed. The need for this Statement today could not demonstrate that more clearly. However, where is the change of course? Where is the plan for growth and jobs that we—and, of course, the International Monetary Fund—called for? It does not have to be this way. Instead of planning cuts in 2015, two years ahead, surely the Government should be taking bold action now to boost growth this year and the next—investment that would get our economy going and bring in the tax revenue to get the deficit down. More revenue would mean that our police, Armed Forces and public services would not face cuts. Housebuilding is at the lowest level since the 1920s, so where do the Government plan to build 400,000 affordable homes this year and the next? There is no point in the Government boasting about infrastructure investment in five or seven years’ time when we need action now.
What a boast that is. The Green Book reveals that capital expenditure by departments will actually be cut. So much for the Prime Minister’s assurances at this morning’s Question Time that a great deal of progress is being made in this area. Year on year, real departmental capital budgets have been cut. Where do we see these figures? The book shows, in black and white, a 1.7% cut. If I am not believed, PricewaterhouseCoopers surely will be, because it said the same thing. There is a pattern here. Investment has fallen in real terms under this Government. It fell an astonishing 50% in the first three months of this year. Projects such as Labour’s successful Building Schools for the Future programme have been cancelled, and developments promised by the Government have never materialised. Just seven projects have been completed and 80% of projects have not even been started.
We need action now, not more empty promises for the years ahead. The Chancellor in his Statement insisted that we must plan for the long term, look to the future and secure a recovery for future generations. However, there is no substance to these statements. Where is the proper British investment bank that business clearly needs and wants? Where is the 2030 decarbonisation target to give energy companies the certainty they need to make their long-term investment for the future? Where is the backstop power to break up the banks, which the parliamentary commission called for? What happened to the plan of the noble Lord, Lord Heseltine, and its much-heralded £49 billion single-pot growth fund for the regions? A measly £2 billion is all that has been announced today.
Instead of action to boost growth and long-term investment, all we have today is more of the same failing plan and more of the same on social security and welfare spending. We have had plenty of tough talk and divisive rhetoric, but on the Chancellor’s watch the benefits bill is still rising. Social security spending is £21 billion higher than he planned. This is because the Government have failed to get growth going and to get people back into work—work that pays decent wages and does not discriminate, work that holds a compulsory job guarantee, paid for by a tax on bank bonuses. We hear the call for a cap on social security spending. Will the Minister enlighten the House with a few more details on this and how it will be administered? Why not get our housing benefit bill down by tackling high rents and the shortage of affordable homes? Why not stop the winter fuel allowance for the richest 5% of pensioners, while keeping the triple lock for basic state pensions? Why not make work pay with a 10% tax rate paid for by a mansion tax, instead of huge tax cuts for millionaires?
This Government are making the wrong choices on growth and social security spending—decisions that are unfair and do not reflect the sort of society we want to live in. The Government are also making the wrong choices on departmental spending. When thousands of front-line police officers are being cut, why are they spending more on police commissioners than on the old police authorities? Why have the Government wasted £3 billion on a reckless reorganisation of the NHS, when there is a crisis in our social care system that needs to be addressed, and which they are now somehow going to spatchcock by transferring resources? Why are they funding new free schools in areas with enough school places, while parents in other areas cannot get their children into a local school? Will this spending review mean fewer police officers in 2015-16, on top of the 15,000 we have lost in this Parliament? Will it mean fewer nurses on top of the 4,000 we have lost from the NHS? Will it mean fewer Sure Start children’s centres on top of the 500 that have already closed?
It is clear that the Government will continue to impose deeper cuts on local authorities in areas with the greatest need. It is the areas with the greatest need that continue to suffer the deepest cuts. People up and down the country need to know about this Government’s real intentions. The Government have comprehensively failed on living standards, on growth and on the deficit. That is why the Chancellor was before the House of Commons earlier today. We see prices rising faster than wages, families worse off, long-term unemployment up, welfare spending soaring, the economy flatlining and the slowest recovery for a century. The result of this failure is not balancing the books as promised, but in 2015 a deficit of £96 billion. That is why there is a need for more borrowing to pay for the coalition’s economic failure. That is why the Government have been forced to make this Statement and impose these cuts on our public services.
Two years ago, when the intake of breath was so severe at the cuts at that time, the Chancellor said that,
“we have already asked the British people for what is needed, and … we do not need to ask for more”.—[ Official Report , Commons, 23/3/11; col. 951.]
—another broken promise.
My Lords, I should like to put both the spending review and the comments of the noble Lord, Lord Davies, into context. He said a great deal about a failed economic strategy. We inherited one. Any of us who have worked with the management challenges of a significant budget would recognise that in 2010, when this Government came into power, spending was out of control. This spending round represents a continuing exercise in getting our public finances back into shape. This Government and the officials working in this area should absolutely be commended. They laid out a very clear plan in 2010 to deliver £80 billion of savings through to 2014-15. Sixty-five per cent of that—just over £50 billion—has already been delivered and the rest is on target. Therefore, the purpose of this spending round is to make a further £11.5 billion of savings, which have been thoughtfully and effectively made based on the criteria, as the noble Lord pointed out, of reform, growth and fairness. Within that £11.5 billion of savings, we have of course made some extremely tough choices. There are no easy choices in this current environment. We have protected the priorities that we promised and laid out at the election—those relating to health, schools and overseas aid.
The principles underlying how we have dealt with each department have revolved around making sure that the departments work and operate on a highly efficient basis with the right number of people, with the right degree of automation, with the right degree of procurement, and with commercial skills being brought to the purchasing decisions they make so that we can get our costs down and operate efficiently. That is true right across the departments and it is where those savings have come from.
I shall give an example of reform. Probably the most significant reform laid out in this programme is that we are establishing a new £3.8 billion health and social care pot to be shared between the National Health Service and local authorities to make sure that the services between hospital and the home are much better delivered and so that we can take care of people who need that help. We do not want the situation where somebody is delivered into a hospital bed on a Friday night because there is nowhere else for them to go and they are sent home again on a Monday because we cannot take care of them over the weekend. That is the kind of service reform that we have been talking about, and that has been the basis on which this £11.5 billion saving has been made.
Where does that take us? It will mean that by 2015-16 we will be well down the path of taking public expenditure as a proportion of total expenditure back to a sensible level. It should be back to just over 43% from the 30-year high of 47% or 48% in 2009. By the end of our consolidation in 2017-18, it will be back to 40%. That is the repair that this Government have had to undertake because of the spending profligacy that took place under the previous regime.
The deficit has fallen by a third as a percentage of GDP and is set to continue falling to below the pre-crisis level by the end of this Parliament. Most interestingly, the biggest saving that we have made is on our debt interest costs because we have got borrowing under control. Those costs are £9 billion lower than was forecast in the Budget of 2011. For me, that is probably the most telling statistic. Of course, we introduced savings on welfare bills through the Autumn Statement decisions.
We have talked about the situation with respect to capital spend and perhaps I may exchange some statistics. Effectively, through each of the fiscal events, the Government have saved money on current spending and invested it in capital spending. That is how we have chosen to do it; we are not doing it by increasing borrowing, and that is absolutely the right strategy to pursue. The sum involved is £10 billion over this Parliament. Public investment will be higher on average over 2010-11 to 2014-15 than it was under the previous Government. We are investing more in roads than at any point under the previous Government—and that is now. We are building more school places than at any time under the previous Government, and next year we will be building more affordable houses than at any point in the past 20 years.
There will be much more detail about this tomorrow, when the Chief Secretary comes out with details on the capital plan. Accompanying that will be a document called Investing in Britain’s Future, which will lay out how we will spend £100 billion on infrastructure investment over the next Parliament. We all want it to happen quicker. I am here today because the Chancellor and the Prime Minister wanted some help in making it happen quicker. We have an urgent and focused plan to deliver on that, and the Chief Secretary will lay it out in detail tomorrow.
In summary, we currently have the largest investment in railways since the Victorian age. Crossrail, which is being dug at the moment, is the largest urban infrastructure project in Europe. In this spending round, we are funding the case for Crossrail 2, which would link London from north to south. We have given the mayor almost £9 billion of capital spending. We have completed Kings Cross station. We are funding science at higher levels than ever before, with a long-term commitment. We are developing our intellectual as well as our physical infrastructure.
The noble Lord talked a little about where we were in delivering on the Government’s infrastructure programme. He said about 20% of it was under way.
By next year, half will be under way. That is the whole point of a pipeline. The Government can really add value by getting through the difficult early stages of choosing the project, finding the funding and dealing with planning and environmental considerations. We are focused where we should be—dealing with ideas and getting them through to the “shovel in the ground” stage. That is really the hard bit in any project. It is right that the projects we are focused on are the ones that have not started yet. Our record in this country, once we start, for delivering things on time and on budget—I have been part of some of it—is extremely good.
My Lords, can my noble friend confirm that at the end of the previous Government’s period of office the national debt had doubled, and that on the figures presented today the national debt will have doubled again by the time of the election? Can he explain what the effects would be of a rise in interest rates of, say, 1% on the repayments which the Government will have to make on their borrowings and on the value of the government gilts held by the Bank of England? How will that hole be dealt with? He mentioned that interest rates have been held down, but we are already seeing rates beginning to rise, so what contingency plans are in place? Should we not be very much more concerned about the future of the economy, given that the outgoing Governor of the Bank of England has today warned our youngsters about the possible impact on mortgages and on the balance sheets of the bank themselves? Where is the contingency planning for that eventuality in the Government’s Statement today?
I thank my noble friend for raising, as he has done on many occasions before, everyone’s awareness of the fact that when we discuss the deficit we are talking about the annual addition to our stock of borrowing. Until that deficit turns into a surplus we will not reduce our stock of borrowing, and the increased stock of borrowing leaves us with a significant exposure. My noble friend Lord Newby informs me that a 1% increase in interest rates will have an economic effect of approximately £4 billion, but we will review that number.
The way to provide for the contingency to be able to cope with any additional expenditure, whether it is interest, overseas issues or events that crop up, is to continue to drive down our deficit to give us as much flexibility as possible to handle whatever events face us in the future.
My Lords, can the Minister address the question of fairness with regard to the devolved Administrations? Under the title of fairness, the Green Paper refers to the Barnett formula going on until the end of 2016 at least. Surely, as a committee reported to this House—the noble Lord, Lord Barnett, himself has been involved in this—whatever the situation is with regard to Scotland and Northern Ireland, the Barnett formula is patently unfair to Wales and is underfunding the Welsh Assembly for essential services. When are the Government going to get to grips with this?
We do not have any proposals to adjust the Barnett formula in this Parliament. As I understand it, the Welsh resource budget will be approximately £13.6 billion, and we will publish our response shortly to the Silk commission on the further devolution of taxation and borrowing.
My Lords, the Minister has said a number of things that I think are significantly challengeable. First, his maths in response to the noble Lord, Lord Forsyth, are clearly substantially deficient and lead one to ask how much a Treasury Minister really knows about the state of government finances.
Secondly, the Minister said that debt as a percentage of GDP will be below pre-crisis levels by the end of this Parliament. I would like to see the evidence on which the Minister makes that statement. Clearly, it is not consistent with the OBR’s forecast.
My question, however, is about the relationship between monetary policy and fiscal policy. The Government have consistently talked about an accommodative monetary policy linked to a tighter fiscal policy. They now own £325 billion of their own debt through the QE programme. Why do they not simply cancel the debt that they have bought for fair value in the markets from banks and pension funds with the proceeds that they have in the QE portfolio on the asset purchase scheme?
Why do the Government not recognise that they can manage a pretty low inflation risk through using sterilisation techniques in the money markets and adjusting reserve ratios, and acknowledge that, despite QE, monetary growth is not increasing and inflation risk is low? That would be a simple answer that would at a stroke reduce debt as a percentage of GDP by 30%.
My Lords, when it comes to not understanding, I have to say that from the conversations that I have had in the media today with members of the Labour Party and listening to today’s speech, I am unclear whether they want different cuts or more borrowing, but it seems to be one response or the other to this particular spending round. I am very pleased with many aspects of this spending round, particularly the emphasis now on future growth.
Will the Minister confirm that the decision to put more money into schools, thereby protecting the schools budget as well as being a real-terms increase in the pupil premium, is because they have proven to be successful and effective programmes? On the infrastructure area, which is his area of specialty, will he assure me that although there is the Heseltine pot for local areas, the big national infrastructure expenditures will be co-ordinated with local activity so that we can maximise the opportunities that spin off from this very substantial increase in infrastructure?
I thank my noble friend for her observations about the education programme being a prime example of investing in the success of an effective programme. That is absolutely right. On the local pot and infrastructure spend, it is absolutely our intention to make sure that there is a strong relationship between the regional plans—ultimately, all infrastructure operates at a local level—and that we co-ordinate those at a national level to ensure that we get the maximum leverage from the money that we are spending at both ends.
My Lords, I noted when I listened to the Chancellor that he made a commitment to apprentice training. My thoughts go back to the 1980s when there were many closures, particularly in engineering. No one was taking on apprentices. Within 10 years, employers were calling out for trained journeymen. There were complaints sometimes that skilled labour had to come from abroad. I am on my feet today to say that I hope that the Chancellor and the Government keep their promise to take on apprentices. Not only does that help the apprentices, but it gives a great source of pride to the family when a young person is taken on for skilled work.
I thank the noble Lord for raising this important issue. It is the Government’s intention to implement the recommendations of the Richard review, which will see through the apprentice programme. It sits very neatly alongside the success that we have seen over the past four years, with the private sector picking up and generating employment to compensate for the small number of losses in the public sector. A strong apprentice programme sits very nicely with that.
My Lords, I am working on the assumption that we have fulfilled those, but I am sure somebody will tell me very quickly if we have not. It is not a stipulation I am familiar with.
My Lords, when the coalition was formed, I stressed that it would be far more difficult to reduce the deficit than was generally supposed. Having been involved in spending cuts in previous Governments, I would certainly not underestimate the task facing the Chancellor. None the less, there is a danger that we are underestimating what still needs to be done. The Government keep repeating the mantra, “Oh well, we have reduced the deficit by a third”. Actually, this means that we are borrowing more at two-thirds of the rate that we inherited from the previous Government.
We are still living way beyond our means, in part because we are paying for Gordon Brown’s proposals, for which there was no money then and for which no money is available now, except by borrowing. Does my noble friend agree that we really have to press on with much more determination in tackling this whole issue and that it would be wrong to say that we are all right just because we reduced the deficit by a certain amount?
I agree with my noble friend that managing the public finances responsibly will be a continuing exercise of considerable discipline. On managing current spending, we have introduced the welfare cap on the overall budget as well as the cap on specific benefits that we saw in the previous Budget. Departmental budgets are being managed with discipline. There has also been a real focus on switching from current expenditure to capital expenditure, which should support the enhancement of the productive capacity of the economy and thus help us with tax revenues. Those components should continue to be an urgent and aggressive focus of the Government’s fiscal management.
We are going to do it simply by implementing it in 2015-16. As I understand it, many of the structural changes to Civil Service pay have already been made in many departments. This is just equalising the system right across the service.
My Lords, I start by acknowledging the very difficult economic situation that every Government are going to face. People are living longer and I am the last person in the world to complain about that.
Given that every forecast made by the Chancellor since 2010 has had to be adjusted, how do we know that we need exactly £11.5 billion of cuts in 2015? What was his economic forecast for that year? We now know that no economic forecast by anybody can be expected to be accurate, even if it is based on next year. Perhaps the Minister will tell us why we should assume, when every forecast that the Chancellor has previously made has been wrong, that a forecast based the economy in two years’ time will do precisely what he said. In one line, he says:
“We commit now to £50 billion of capital investment in 2015”.
That is rather a lot of money for one year. How long a period is that planned to be spent over? The cuts are going to take place after 2015. When will that £50 billion of capital expenditure be spent: this year, next year or only after 2015? We all know that we need it now. Why is he delaying it?
I absolutely share the noble Lord’s experience that economic forecasting is a hazardous art form. However, if done thoughtfully, it gives us the basis for creating a long-term plan against which we can make the best decisions possible, given the information we have. One of the things that I have been working on with the Chancellor is to take a longer-term perspective, particularly of our capital budget, and to have that budget as a foundation for our long-term fiscal management rather than being the bit that gets added on at the end. That is what results in the stop-go approach to investment which has plagued us for many years. For me, what it rather reflects is a shift in priorities to deal with the things for which you need to create a longer-term planning horizon, so that we can get the investment side of what we are doing sorted out over the right kind of horizon.
My Lords, to get back to a point raised by the noble Lord, Lord Forsyth, about quantitative easing, or the printing of money, there is of course the fact that the Government have saved £9 billion because of low interest charges. Those savings have been made at the expense of interest rates on savings, particularly those on pensions. Pensioners have been very badly hit because their expectations, and indeed their pensions, have been lowered for the future. Is it not a shame that some of the most vulnerable people in our society, such as the pensioners, have been made very much poorer in order to finance government spending, which is still far too high?
I of course accept that one of the consequences of lower interest rates is lower returns to savers. That absolutely follows on and it is a consequence in part of our current monetary policy, and indeed the monetary policy of every major nation. One compensating comment I would make is that of all the constituencies which this Government have striven to protect, looking at the triple-lock protection on pensions the basic state pension has clearly been kept in very good shape during this period of economic challenge.
My Lords, the Chancellor said:
When on earth did that start and what are the Government doing to persuade the Europeans to change it? When the Chancellor suggests that he will deal with it by linking,
“the winter fuel payment to a temperature test”, from 2015, what will that save? If it is worth doing it in 2015, why should he not do it in 2014, if not autumn 2013?
I thank my noble friend for pointing out this unfortunate anomaly in European legislation, which puts us in that position. The Chancellor’s position is that he has dealt with that anomaly in the best possible practical way to reduce that payment, given the timing of its introduction and the form of the obligation we have on us.
My Lords, the Chancellor said in his Statement:
“The first line of national defence is sound public finances”.
Following the theme of the noble Lord, Lord Higgins, why can the Chancellor then go on to boast that we have one of the largest defence budgets in the world? Here, I do not speak on behalf of my party but as an individual member of the community in this country. However, I suspect that I represent a fair point of view when we hear about the possible incursions into Syria and read of the Prime Minister saying that he is not prepared to see a reduction in Britain’s military capabilities. If we are to take truly tough decisions, is it not time that we really faced up to our position in the world—what we can do, what we cannot do and what we can afford?
That is a very broad question. In terms of the spending review, over time we have already taken some very difficult decisions with the Ministry of Defence. The focus of this particular spending round was to ensure that we put in place some economies in the support areas, but kept our front-line capability and made absolutely sure we had an equipment budget that could support our troops and the work that they were called on to do. That was the policy decision behind which the spending decisions fell into line.
My Lords, what is there in the Statement to boost our very important tourism industry? Cultural and heritage attractions, the things that tourists come to our country to enjoy, are going to suffer. What are we doing to boost tourism?
If noble Lords look across the contributions to the spending reduction, it is evident that the Department for Culture, Media and Sport, which oversees tourism, had one of the milder settlements, with cuts of something like 7%. In addition, museums in particular have been given some flexibilities in how they manage their finances and organise themselves, in order to help them cope with any changes in their grants. That is the sum total of specific points with respect to tourism.