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Economic And Fiscal Strategy

Volume 590: debated on Thursday 11 June 1998

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5.5 p.m.

My Lords, with the leave of the House, I shall now repeat a Statement made by my right honourable friend the Chancellor of the Exchequer on the Economic and Fiscal Strategy Report. The Statement is as follows:

"The comprehensive spending review has been the most comprehensive and in-depth examination of government spending and priorities for many years. Its results will be announced in two stages. Today I will announce an entirely new regime to apply to public spending control, a fundamental reform of the rules that govern our public finances. Later next month I will set out the results of a wholesale revision of our spending priorities and the purposes of government support in each department. The central challenge is to combine prudence and stability in public finance with investment and reform in public services.

"There are four key elements to our reforms. First, the new regime must be consistently prudent and responsible. Strong public services cannot be sustained on weak public finances. The spending plans we set must ensure sustainable finances over the whole economic cycle, rigorous financial discipline that, together with monetary stability, ends once and for all the boom and bust that for 30 years has undermined stability, hindered long-term investment in our public services and prevented the country achieving its potential. That is why we will enforce two fiscal rules—the golden rule, that over the cycle current spending is covered by revenues, and the sustainable investment rule, that there must be a prudent debt to GDP ratio.

"Secondly, in each department we are assessing radically what government do, and how and where they spend their money. The comprehensive spending review results, when published, will not only show changes in priorities within and between departments but must redefine the role of government so that it is enabling and empowering, not centralising and controlling. Where government should be acting, we will do more; where government is unnecessary or restrictive, we should not act at all. And the results of the spending review will mean reform and modernisation.

"Thirdly, in respect of publicly-owned assets the essential test should be how to best meet the public interest and we will therefore propose a radical change in government policy towards investment and the assets government hold. Finally, where governments spend on public services they should link spending explicitly to modernisation and reform for each government department. Where there is extra money it will be tied to specific outputs. It will be investment for reform.

"So first the new framework for the future. For 30 years British public spending has been characterised by: an annual spending round rather than long-term planning; a year-to-year bidding culture, with all the problems of hurried end-of-year corrections, instead of strategic planning of resources; incremental bids not tied to outcomes, rather than spending to achieve defined results; too much attention to current spending and muddling through, too little attention to long-term investment and reform; too much focus on the public sector acting in isolation from the private sector and not enough long-term partnership with it.

"So to break decisively with this old-fashioned and short-termist culture, first, we will abolish the annual spending round. We will now set departments firm plans and fixed budgets for three years at a time. Secondly, to ensure our fiscal rules are met and to make possible long-term investment in our infrastructure, there will now be a separate current budget and a separate capital budget for each department. Thirdly, in place of incremental budgeting we will lay down new targets for efficiency and performance for every department. Fourthly, instead of the old sterile conflict between public and private sectors, we will promote new public/private partnerships. Fifthly, for the first time this Government are legislating for a code for fiscal stability which requires more open and comprehensive reporting of the public accounts. The key assumptions have been and will continue to be examined by the independent National Audit Office.

"The Chief Secretary and I are today publishing detailed figures both for the current balance and capital spending. We will set out not only the public sector's net cash requirement, the PSBR, but also the internationally accepted accruals measure of public sector net borrowing, which will provide a better guide to the underlying state of the public finances. Copies of the Economic and Fiscal Strategy Report will be available in the Vote Office.

"And all these changes—the end of the annual spending round, a long overdue distinction between investment and current spending, a new emphasis on outputs, more effective partnership between the public and private sectors and proper public scrutiny of how we are meeting our fiscal rules—make clear the importance the Government attach to reform and modernisation as the foundation for both sound finance and good public services.

"I turn now to the public finance plans that follow from our fiscal rules. The Government inherited a national debt which doubled in the early 1990s. And in the last economic cycle, debt as a proportion of GDP rose by 18 percentage points—and is now around £15,000 for every family in the country. As a result we are paying more in interest payments than we spend on schools or on housing and law and order put together.

"In addition, we inherited a level of annual public borrowing that was unacceptably high: in the final year of the last government, a public sector net cash requirement of £23 billion and public sector net borrowing of £27 billion.

"In the first year of the Labour Government, with the tough decisions we took in our first Budget, public sector net borrowing fell last year from £27 billion to £6 billion. We kept within the spending ceilings that we inherited in addition to a £400 million increase in the Budget for pensioners, £2 billion more on the NHS and £2.5 billion more on education.

"Those who said that we would fail to meet our targets and would fail to show the discipline necessary have been proved wrong. Indeed, over the first two years of our Government, through setting tough departmental limits, spending is within budget. But Britain must have sustainable public finances, not just for the odd year or two, but throughout the economic cycle. And British public spending, which has for decades been denied a long period of consistency and stability must now be subject not only to a framework for the future but also to clearly defined limits.

"As a result of the plans that I am announcing today, we will lock in the fiscal tightening that I announced in the March Budget not just for this financial year but for the next financial year as well. Over the three years from the time we came into Government—that is to say, 1999–2000—the fiscal tightening amounts to 2.75 per cent. of GDP measured by the public sector net cash requirement. It is 3.5 per cent. of GDP measured by public sector net borrowing, that is over £25 billion since 1996–97. This is the fiscal tightening from 1996–97 to 1999–2000 that we promised in the Budget.

"To meet our first rule, the golden rule, the Government will plan for a balance on the current budget over the economic cycle as a whole. For 35 years, current spending has grown by an average of nearly 3 per cent. a year in real terms. But within this average, annual changes have ranged from plus 11 per cent. to minus 3 per cent. From 1989–90 to 1993–94 a surplus on the current budget of over £10 billion was transformed into a deficit on the current budget of £38 billion. So in the same way that our economy has suffered from the instability of boom and bust, public spending has suffered the instability of stop and go. The uncertainties caused by this short-termist approach have frustrated the long-term planning of decent public services. Let us be clear who suffered first and worst: the vulnerable who depended most on public services. So imprudence in public spending is of no help to those who rely on public services being there when they need them.

"In the last economic cycle Britain ran an average deficit on the current budget of 1.5 per cent. of GDP, or the equivalent of an annual deficit of £12 billion pounds. By contrast the figures that we publish today will ensure that, over the full economic cycle, Britain will have a current budget balance—current expenditure will be covered by revenues over the cycle, something that other governments have promised but did not achieve.

"So that we can deliver sustainable public finances and thus sustainable public services over the whole cycle, the plans for current spending that I am announcing today deliberately take a more cautious approach than in the past to meeting the fiscal rules. That is why we need to plan for a surplus on the current budget over the next three years.

"The plans that we publish today are for a surplus on the current budget next year of £7 billion, in 2000–2001 £10 billion, and in 2001–2002 £13 billion. Within this new framework I can confirm that current spending will grow in line with our cautious estimate of the trend rate of growth of the economy, that is 2.25 per cent. in real terms a year over the next three years. Current spending is now planned to be 39.25 per cent. of GDP every year for the rest of the Parliament.

"It is because we are showing prudence in public finance, and because we are prepared to modernise in choosing our priorities, that we will be able to invest in long-term improvements in our key public services, education and health, and also fulfil our commitments to those, like the elderly, who depend upon public services.

"But as everyone knows the public will be better served if we also ensure the best value for money and the most efficient possible use of resources. Inefficiency in the public sector is a cost that could be afforded by a government who had a vested interest in proving the public sector could not work and believed in a philosophy of private good, public bad. But inefficiency will not be tolerated by a government who will modernise the public sector so that this country is better equipped for the future. That is why in our spending review there will be no place for new spending unless there is reform through clear targets, standards and rigour in the use of money.

"I can confirm, first, that as a result of our review each department will be set efficiency targets. Secondly, each department will be set new quality standards. I can confirm that as part of best value, we will introduce an inspectorate for housing that will help improve the management of council housing, set new standards for performance and guarantee high quality of investment. Thirdly, before allocations are made from the comprehensive spending review, departments will have to demonstrate how they propose to root out unjustified subsidies.

"So not only will we set fixed budgets for three years, but we are building in new disciplines to ensure that investment is conditional on reform. Just as new disciplines will apply to current spending, so they will also be applied to capital investment.

"Our second fiscal rule is to ensure a prudent and stable ratio of debt to national income. This is the sustainable investment rule, which is essential if we are to contain interest payments on the public debt. If this Government simply left the debt/GDP ratio at the level we inherited from the last government, we would be paying interest payments of £25 billion more over the Parliament, at a cost to public services.

"In the interests of greater stability, I propose to bear down on the debt/GDP ratio. Indeed, the plans that we are publishing this afternoon show the debt ratio falling from 45 per cent. when we came into government to 40.5 per cent. next year and in the following years down again to 39.5 per cent. and 38.25 per cent. The comparable figure in the European Union as a whole is 78 per cent. Britain will now plan on the basis that our debt/GDP ratio will be 40 per cent. or lower.

"For the first time for decades we are set over the cycle to have both a current budget in balance and a prudent debt/GDP ratio. As a result of our two fiscal rules public sector net borrowing, which was over 3 per cent. of GDP in the last cycle (1995–96 to 1996–97), will average 0.2 per cent. for the Parliament, 0.2 per cent. next year, 0 per cent. for the following two years and 0.1 per cent. the year after that. And we will meet the fiscal criteria laid down in the Maastricht Treaty.

"It is only because we have this tough framework, based on strict control of current spending, a prudent debt/GDP ratio and a fiscal tightening that it is possible to take the action necessary to reverse the chronic under-investment in our country's health, education and transport and housing infrastructure, and to re-equip Britain as a modern nation.

"Total investment, public and private, in Britain has in recent years fallen as a share of national income and is far behind our competitors, and far behind the rates that we achieved in the 30 years after the war. But if Britain is to renew its infrastructure, we must be prepared to break with old dogmas. We will not succeed simply by throwing money at problems or by privatising the responsibility for them. We must, therefore, be prepared to look at new ways of managing our assets and, if necessary, be prepared to redeploy them so that they serve the future, not reflect the past.

"The British Government have property, land and other assets worth hundreds of billions of pounds. But, as we discovered in the first register of national assets, Britain has an accumulation of unused or underused properties and holdings. We can no longer afford a surplus of holdings when we have a deficit in investment and there is no benefit to us in hoarding assets that do nothing to equip us for the future when we need to build a modern 21st century infrastructure. There is no public interest served by continuing to hold surplus land and building that are not needed.

"The fiscal projections set a new target for central government to realise for investment around £1 billion a year for each of the coming three years from the sale of surplus holdings that we no longer need. In the next financial year we will go ahead with the sale of all remaining debt held in British energy. So we will realise the value of what we do not need to invest in what we do need.

"The Deputy Prime Minister and I will propose a new long-term framework for investment by local authorities to release resources for new investment; and to co-ordinate the use of existing assets. Local authorities are now expected to realise at least £2.75 billion a year from property sales—again a sale of what we do not need to pay for investment in what we do need. To maximise investment in the renewal of our infrastructure, public and private sectors must work together in a more modern and effective partnership.

"In the past the private finance initiative was a means of substituting private investment for public investment and thus an excuse for abdicating responsibility for public investment. So there was no net gain to investment in our country. But as we have shown with our new deal for schools, public-private partnerships work best when public investment succeeds in levering, in addition, finance from the private sector. As the Deputy Prime Minister has shown in the planned multi-billion investment in the Channel Tunnel Rail Link and London Underground, private investment can be mobilised to serve the public interest.

"So this Government will apply a public interest test—what is the best means, whether through private or public investment, of securing the highest levels of investment in Britain's future and so ensuring the best public services; not demanding private ownership as a matter of dogma when it does not serve the public interest, nor maintaining state ownership when private and public partnership is the best way of advancing the public interest.

"It is obvious to the Deputy Prime Minister and me that the levels of investment and efficiency that we need in our National Air Traffic Services can be best achieved through a partnership between the public and private sector which will give the National Air Traffic Services the flexibility to plan and finance forward investment more effectively. Safety is paramount. The Government's proposals will ensure that air safety regulation is conducted independently from the National Air Traffic Services and is open and transparent. The regulator's remit will be to enforce the toughest safety standards in the world.

"My right honourable friend the Minister for Transport is making a separate announcement today on the future of air traffic control services. Our preference is that 49 per cent. of the shares, and a golden share, are held by the Government, and 51 per cent. by private investors including employees. We will consult on the details of the implementation of the proposals. This realisation of assets will enable us to invest more in our transport infrastructure, as will our proposals for greater commercial freedom for financially sound regional airports such as Manchester, Newcastle, Leeds-Bradford and Norwich.

"The same partnership approach is appropriate for the Commonwealth Development Corporation which needs new finance for higher investment in developing countries, and my right honourable friend the Secretary of State for International Development will bring forward proposals to sell a majority shareholding.

"We will also consider how to extend the existing public-private partnership in the Tote into a broader partnership with the private sector. I can also announce that we are agreed in principle that a new public-private partnership is the best way for the Royal Mint to take advantage of new commercial opportunities.

"These are four examples of new partnerships now being evolved that show we can make the long-term investment we need while protecting the public interest. But public investment in reform and modernisation is also a means by which the Government can help renew our country's infrastructure. Under the previous government public investment fell below 1 per cent. of national income and we now invest less than all our major European partners. This Government recognise that we must invest properly in our economic and social infrastructure; in our schools and our hospitals; our transport infrastructure; our science and technology base; and in building better housing and safer and stronger communities.

"To meet these challenges of the future we are therefore setting up a new programme, investing in Britain's future. So over this Parliament we will double the level of net public investment as a share of GDP by raising it from 0.75 per cent. up to 1.5 per cent. Through realising unused and underused assets we will plan to invest £29 billion a year by the end of the Parliament. In place of two decades of run-down in investment, Britain is investing in its own future. Our long-term aim will be to maintain the share of investment in national income, at this sustainable and prudent level. For years we have been told that prudence in public finances could only be achieved at the cost of running down public investment and neglecting public services, years that ended with neither good public services nor prudence.

"The framework I am announcing today means that with sensible and tough decisions about priorities in every department in our comprehensive spending review, which will report next month, this country will now be able to ensure that the necessary resources are available for health, education and essential public services. Because of our toughness to modernise and our discipline in reform, our prudence today provides the solid foundation to invest in better schools, hospitals and public services today and tomorrow. In place of short termism and the neglect of public services, we have a new long-term direction for the renewal of our public services and our country. Prudence and investment in reform are the way forward to create a Britain that is modern, strong and fair. I commend this Statement to the House".

My Lords, that concludes the Statement.

5.25 p.m.

My Lords, I start by thanking the noble Lord, Lord McIntosh, for repeating the Statement, and in particular for his courtesy in letting me have a copy of the Statement well before half-past three which has given me a chance to read it. I congratulate the noble Lord on coming to the House. That is in contrast to his noble friend in the Foreign Office who does not appear to be prepared to come to the House.

I am a little sorry for the noble Lord, Lord McIntosh, in having to repeat such a long Statement. Perhaps I should apologise on behalf of my fellow Scotsman, the Chancellor, who seems always to use 10 words when one would do. Perhaps if he had not gone to France yesterday to watch a certain football match, he might have had time to slim down the Statement and not give the noble Lord such a long read.

The first part of the Statement tells us how we have conducted public affairs in the Treasury and in government departments over the past 30 years. As the past 30 years includes the tenancy of the Treasury of some noble Lords opposite—for example, the noble Lord, Lord Barnett—we are all obviously reprimanded for the way in which we dealt with spending rounds in the past. For many years—certainly during the time I have been involved with these matters—there has been a three-year rolling programme. That has been reviewed each year. It seems sensible to consider new priorities and new demands; to work out what needs to be done as regards the economy; and to plan for the following year so that the programme rolls forward one year at a time. As I said, there has been a three-year rolling programme. When I read and hear the Statement I wonder what differences are proposed. If there is to be a system of three-year blocks—it could be read like that—does that mean that the next time the Government consider the whole question of spending will be in 2001 when they will plan another three-year block? I cannot believe that that is what they intend, but perhaps it is.

That certainly contrasts with the Monetary Policy Committee which meets every month to make sure it "fine tunes" monetary policy. It appears that the Government's spending plans do not need "fine tuning" at all. That is an interesting thought. I was interested in the idea that somehow in the past no distinction has ever been made between investment and current spending. That is another fiction rather like the description of the way governments of all parties have dealt with normal annual spending rounds. It will not be long before we see annual spending rounds reintroduced, although the Government will obviously have to find some other words to define them.

I was interested to hear of the Government's plans to pay off some of the national debt. My recollection is that when we paid off some of the national debt in the mid to late 1980s we were roundly criticised by the Labour Party for doing so. I welcome this conversion, along with the many others. There is a nice paragraph about the tough decisions the Government have taken in their first Budget. That is rapidly followed by the sentence,
"We kept within the spending ceilings that we inherited".
However, we took the tough decisions when we were in government and the party opposite simply carried on with them. It has only managed to carry on with them by fiddling some of the figures. That is the fact of the matter.

As regards spending plans and other such matters, the only reason that the noble Lord can come to this House and throw a few nuggets to his noble friends—and the Chancellor can throw a few nuggets to his honourable friends on his Back Benches—is because of the golden economic legacy that the party opposite inherited. That legacy was well underlined at the time by the noble Lord, Lord Healey. If I remember his words correctly, he said that no government had had such a good economic inheritance as the current one. They have us to thank for much of that.

I then turn to what the Government are going to do, and the quality standards that departments are to be set. I note one of them:
"we will introduce an inspectorate for housing that will help improve the management of council housing".
Most council housing in this country is run by Labour local authorities. That has been the case for years, and I welcome the admission that it is not very well run. I suppose the Government had no option. Up and down the country, the way in which Labour authorities have run their housing estate is being exposed. Nowhere is that more evident than in Scotland, where, one after another, Labour local authorities are having to own up to direct labour organisations which are a disgrace. I hope the inspector will be paid more than the plumbers who work for North Lanarkshire's DLO department, who receive £54,000 a year. Will the noble Lord assure me that the inspectorate will be better paid than the plumbers who work for that council? I welcome the proposal. However, it is rather late. The Secretary of State has had to send in a team of investigators to try to sort all these matters out. This is the Labour Party trying to sort out their own local government problems.

I could not help but notice an interesting sentence:
"And we will meet the fiscal criteria laid down in the Maastricht Treaty".
Why does that statement have to be there? The noble Lord knows that we on this side agree with the fiscal criteria that were laid down. We have always made that perfectly clear. It was sensible economics. Why does the Chancellor have to say it? Is he merely attempting once again to jump his neighbour, the Prime Minister, into joining the single currency? I wonder whether the Prime Minister, who seems to lack the Chancellor's convictions about the single currency, approved of this sentence and its meaning.

We then turn to the most amazing part of the Statement. I welcome it—I welcome the conversion of the Labour Party absolutely and wholeheartedly. However, that does not prevent me from being amazed. Perhaps I may read to your Lordships, slowly, what the noble Lord, Lord McIntosh, said. He said:
"There is no public interest served by continuing to hold surplus land and buildings that are not needed … £1 billion a year … from the sale of surplus holdings".
Do I hear something of an echo of the sale of the family silver coming from the Benches opposite? Do they regret, and will the noble Lord, Lord McIntosh, apologise for, the number of times from the Dispatch Box he poured derision on what we were doing, when it was exactly what he is now saying his party is going to do?

On the sale of British Energy, will the noble Lord tell the House how much he expects to raise from this interesting sale? Of course, it is marvellous, when I think of all the privatisations that had to be driven through this House and the other place in the teeth of the party opposite. I welcome this proposal. It is the Road to Damascus in spades.

Local authorities are also expected to sell property and to raise considerable amounts of money—much more than central government: £2¾ billion a year. In the other place I sat on the committee which put into place the legislation for the sale of council houses. The party opposite did not want to sell anything in those days. This is an amazing conversion. I say to noble Lords opposite: welcome to the real world.

But what are local authorities going to sell? Will it be their playing fields? That would be interesting. Some noble Lords used to get very worked up when they thought that my party was agreeing to too many sales of playing fields.

Then we come to the private finance initiative. Now it is a great thing. That is another great change. Again, welcome to the real world! It amazes me that one such initiative—I take an example in Scotland which is self-contained; namely, the private finance initiative that built the bridge over the sea to Skye—was attacked day after day and week after week by Members of the party opposite. It was campaigned against by them. The campaign was largely led by a Member who is now in the Scottish Office team. How they disapproved of using—I must not call it privatisation—a public/private partnership. What is better than that partnership? The bridge has been built; people are using it; and in 20 or 25 years' time it will revert to the Government and be free. That seems to me a good public/private partnership. Yet the party opposite attacked it. Amazing!

Then we come to national air traffic control. At the last election this was a very big issue in Scotland. Perhaps I may quote Mr. Gallie, the defeated Conservative Member of Parliament for Ayr, on the subject of NATS. My quote is taken from yesterday's Herald. He said:
"I made it clear I did not oppose privatisation, but when I gauged the feelings of my constituents who worked in the Scottish Air Traffic Control Centre at Prestwick it was clear they did not support these views. I respected their views and persuaded the Government to shelve any privatisation plans until after the General Election. I wonder after today's news from within the Cabinet"—
that was when it was just a rumour, an attempt on the part of spin doctors—
"whether the current crop of Ayrshire MPs will show the same loyalty to their constituents".
The press did not leave it at that. They went to Sandra Osborne, who is the Member of Parliament for Ayr. She said:
"I campaigned against privatisation of air traffic control and was unhappy when it appeared to remain on the agenda, however vaguely, after the election. I remain unconvinced".
Cunninghame South MP, Brian Donohoe, said:
"I firmly believe to put air traffic control into the hands of private industry would be a major step backwards in terms of safety and efficiency. This has come as a shock and I will be spending the next few days finding out the strength of feeling within Government for such a move. In the meantime I remain opposed to the principle".
An awful lot of humble pie is going to be eaten—certainly in Scottish politics—over this one, because it was made a major issue. Frankly, the Labour Party have now done a total about turn on the issue. I welcome the about turn, but I am appalled at the brazen way in which they have done this. I hope that some of those people will have the courage of the convictions they had last year in April and May when they were touting for votes around Scotland. On a general point, have the Government managed to square the difficulties of the Royal Air Force when it comes to the privatisation of NATS?

As to the other three—the Commonwealth Development corporation, the tote and the Royal Mint—my recollection is that the noble Lord, Lord Callaghan, is very keen on the Royal Mint. I am well inside what the noble Lord had to read out. There can be one verbose Scotsman, and there can be another verbose Scotsman. I wonder whether he is happy about the privatisation of the Royal Mint.

We then turn to what the Government intend to spend the money on. For a year they have frozen all spending on roads and new road projects. Some very important schemes have been frozen. We should therefore welcome the fact that they are unfreezing them.

What we see here is a tax-and-spend government, just as we said they would be. They have taxed companies and pension funds in this country. The noble Lord, Lord McIntosh, will expect me to remind noble Lords of the £5 billion a year in tax on pension funds. The tax equivalent is 5p in the basic rate. Now we are seeing the spending. So much for the Iron Chancellor!

In the Budget, Gordon Brown set out three possible scenarios for public spending. Today, he has announced that he is to follow the least disciplined option, with spending set to grow by 2¼ per cent. in real terms.

Labour promised so much. They promised to keep taxes low, to control inflation and to bear down on public spending. They have raised taxes 17 times. They have missed their inflation target 11 times out of 12. Interest rates have gone up and up, and with them mortgage rates for young people trying to buy their own homes. Today, they have even admitted that they cannot keep a tight control on spending. It is no wonder that the Chancellor tried to bury it all in a mountain of words.

5.38 p.m.

My Lords, it gives me great pleasure to respond to the Statement repeated by the Minister, because I know how much pleasure it gave him to deliver it. Indeed, in certain respects we welcome it. I should also welcome an assurance from him that, given the very broad nature of the Statement, we might have a rather longer opportunity to debate it than the limited time that is available this afternoon. There is a slight sense that the timing of the Statement was determined principally by the need of the Chancellor to make a Statement before he makes a speech, which he will do this evening, rather than for any other reason of timing. I should therefore welcome that assurance from the Minister.

In terms of the aspects of the Statement which we welcome, we believe that the introduction of a more transparent system of Government accounting and the concentration on outputs rather than simply cash is a welcome change. Anyone who attempts to make sense of the way in which the Government spend their money using current conventions finds it an extremely difficult task. I believe that the changes proposed in the Statement will help in that regard and also help to ensure that the Government can operate under the discipline that the noble Lord and the Chancellor wish it to operate under in the future.

Secondly, naturally, anyone will welcome the principle of planning for the longer term rather than planning simply year on year ahead, although, given the nature and scale of events, in the political process one cannot believe that it will be possible to continue for the whole of this Parliament without having some significant review of at least some aspects of these plans.

Thirdly, we welcome the Government's commitment to increasing levels of public investment. I am particularly pleased to see that housing is back on the list of desirable areas of public expenditure. "Housing" is a word that has for many years been lacking in government Statements when public investment has been mentioned. I should welcome anything further that the Minister could say about how increased expenditure on housing might be delivered in the future under these plans.

We find less acceptable the way in which the Government increasingly appear to consider a low level of current expenditure to be a virility symbol which they must worship. This seems to us to have echoes of some of the rhetoric of the early years of the previous administration, and we find it more than slightly disturbing, coming from this Government. We notice, for example, that levels of current expenditure of some of our key competitors are significantly greater than in this country—in Germany, for example, they are some 5 per cent. or more greater—without this having any deleterious effect on the efficiency of growth rate with which the economy is managed. I should welcome anything further that the Minister is able to say about the general proposition that a low and increasingly tight level of current expenditure is a good thing in itself. We find that a difficult contention to accept.

We are relieved to see that the freeze on current expenditure will be lifted from the next financial year. However, does the Minister agree that, given the freeze that we have seen in the previous and current financial years, and the announcement made today for future years during this Parliament, over the course of the Parliament as a whole the Government will preside over a lower level of expenditure growth than was the case over the entire period of Tory Government? If that is right, as I believe it to be, how does the Minister believe that will deliver the better public services on which the Government have placed so much store?

When the lottery was first introduced, there was tremendous enthusiasm because it was able to put capital into a range of tremendous projects which otherwise could not have been undertaken. However, with the passage of time, we have found that a significant number of projects have fallen by the wayside because there has not been adequate current expenditure to back them up and keep them going. In the policy that the Government have set out this afternoon, we see a danger that very little will be done to deal with under-funding of current expenditure and that ongoing current expenditure will not be provided for to enable the new facilities planned on the capital front to be fully utilised over the longer term.

Good schools and hospitals rely as much on first-class teachers and nurses as they do on first-class buildings. In general, while we welcome the new framework which the Government plan to introduce, we fear that the Chancellor has not delivered the cash injection necessary to create the first-class education and health services for which people thought they were voting a year ago.

5.45 p.m.

I am grateful to both noble Lords for their utterly different responses. The difference is that the noble Lord, Lord Newby, understood the Statement and the noble Lord. Lord Mackay, understood nothing of it. I have to apologise for the length of the Statement. I got it through in 21 minutes, whereas I believe that the Chancellor of the Exchequer took 25 minutes, so perhaps there is something in Londoners reading as opposed Scots reading which leads to some benefit to your Lordships' House.

As to the Chancellor's absence in France yesterday, I suspect that the noble Lord is just jealous. In fact, as he well knows, the Chancellor was there for business meetings with Dominique Strauss-Kahn, who just happened to invite him to the Scotland v. Brazil match at the same time. It sounds to me like an excellent use of valuable time resources, although personally I would not have given a thank-you for such an invitation—but that is my problem, not the Chancellor's.

I said that the noble Lord, Lord Mackay, understood nothing of the Statement. He is in good company. Mr Francis Maude, in another place, understood nothing of the Statement either. Both of them thought that it was fundamentally a statement about expenditure over the next two or three years—and, of course, that was an important element in the Statement—but neither of them seemed to understand the fundamental nature of the changes from cash accounting to resource accounting which lie behind the Statement and make it possible for the Government, over the rest of this Parliament, to make a sensible distinction between current expenditure and capital expenditure of the kind that all businesses have made since double-entry book-keeping was first invented several hundred years ago. This is the real impact of what the Chancellor announced today, and it is tragic that the Opposition do not show any understanding of it whatsoever.

There are individual aspects of which the noble Lord, Lord Mackay, has a legitimate opportunity to make fun. Let me try to deal with the particular secondary points that he raised. First, he asked about three-year blocks of expenditure and whether decisions will be taken only every three years. The important point here is that those who are responsible in spending departments should have the ability to look more than one year ahead. That is what a rolling three-year programme means. The next review of expenditure programmes will take place in the year 2000. The inestimably beneficial effect of all this will be that there will never be a period in which spending departments have less than two years in which to look ahead.

The noble Lord talked as though there was nothing new in the distinction between cash and resource accounting. This is the first Government to split the current and capital accounts and the first Government under which it has been possible to make the distinction with regard to what we call "investing in Britain", which is our capital expenditure targets over the next three years. If that happened under any previous government, I should like to hear about it.

That leads me to what the noble Lord said about the various public-private partnership proposals which the Chancellor announced and the disposal of surplus land and properties. As the noble Lord well knows, in the 18 years of the Conservative Government, privatisation produced something in the order of £65 billion. I am probably out of date and underestimating that figure. Where did that money go? It went straight into the current account. In other words, it went to reduce taxes for the less well off and to enable the Government to renege on their responsibilities for investment in our country's future.

The whole point about the disposals we are discussing, whether they are disposals of land and property from central Government or of assets from local government, is that they will not be allowed to go into the current account. They will be hypothecated into investment accounts. That is a profound difference and one which shows the complete contrast between what we are doing and the privatisation programme of the last government. If I am then teased about air traffic control and British Energy, I accept that teasing with equanimity. I know that what is being done is the right thing in order to encourage investment.

Did the noble Lord even recognise what was said in the Statement? We are proposing to double the rate of public investment from less than 0.75 per cent. up to 1.5 per cent. over the period of this Government. Did he recognise the profound significance of that for the infrastructure of our country? He said not a word in recognition.

The noble Lord, Lord Newby, looked for an opportunity to debate this matter and that message will go to the usual channels. He may find it better for us to have a debate on both parts of the package—both the Statement that is being made today and the comprehensive spending review which will be announced in July. I can say no more than that I would love to take part in such a debate and engage with the Official Opposition to see whether they understand the next part of the package.

The noble Lord accused us of treating a low level of current expenditure as a virility symbol. A low level of current expenditure is not a good thing in itself; nor is the opposite—tax and spend—as the noble Lord, Lord Mackay seemed to believe. The important point is that of course much current public expenditure is investment in the sense that investment in training and education or investment in proper pay to recruit teachers is investment. But under any acceptable statistical definition—we rely on the independent Office of National Statistics to do this for us—we have to include those elements as being current expenditure. That is why a significant increase in current expenditure was proposed in what we said this afternoon. Of the three options put forward at the time of the Budget, the option of 2.25 per cent. increase in real terms in each of the next three years is a significant increase in current expenditure in addition to the investment expenditure plans which we announced this afternoon.

The noble Lord, Lord Newby, is quite right. I take great pleasure in presenting this Statement to the House.

5.52 p.m.

My Lords, the noble Baroness looks so well that I will give way to her later. Is my noble friend aware that I agree with much that is contained in the Statement, particularly in relation to Maastricht? I do not even want to make fun of it. I do not object to the noble Lord, Lord Mackay of Ardbrecknish, having fun; he will be there a long time and I understand that only too well. He enjoys himself and is welcome to it.

I welcome much in the Statement. However, I know that my noble friend is aware that the Bank of England and the Monetary Policy Committee are obliged only to consider the Government's economic policy after bringing down the rate of inflation to 2.25 per cent. That is the priority. In those circumstances—I mention this as a possibility—what if those eight economists got the rate of inflation wrong?

I know that economists occasionally get things wrong; they could certainly have got it wrong in suggesting an increase in interest rates, with its impact in two years' time. However, given that, what are the Government's priorities, let alone the priorities of the Monetary Policy Committee? Is the policy to bring down inflation? Is it to bring down the borrowing requirement? Or is it to obtain the levels of growth that the Government require in order to meet the public expenditure figures that are included in the Statement? Which of those are the Government's criteria?

My Lords, my noble friend knows the answer to his question because we spent many happy hours debating it earlier this year during the passage of the Bank of England Bill.

The answer is that the primary target set for the Monetary Policy Committee is to adhere to a rate of inflation set by the Chancellor of the Exchequer and, subject to that, to promote the highest possible levels of growth and employment. The Monetary Policy Committee has adhered exactly to that remit. That means, in terms of what has been announced this afternoon, that in anticipating a real rate of growth in current public expenditure of 2.25 per cent. a year for the rest of this Parliament we are planning that public expenditure should benefit, as it can from the revenues available, from the growth which we expect in the economy. That means that public expenditure, both capital and current, will make its contribution to the regeneration of this country, the creation of jobs and assistance to growth which is the fundamental objective of all economic monetary and fiscal policy.

My Lords, at last! The noble Lord, Lord McIntosh, briefly mentioned the Tote in the Statement. Will he elaborate a little more on what he said? Is the object of the exercise to help racing? It is in a difficult position. Or is it simply to add to the list of bookmakers who do not put enough into racing and the Tote? To eliminate the bookmakers and give all that money to the Tote would be much better.

My Lords, I must confess that our plans on the Tote are not well advanced. As the noble Baroness knows, the Tote is already in a public-private financial partnership with Ladbrokes. However, the discussions that have taken place with the chairman of the Tote elicited the response that he believes that further public-private partnerships would be valuable and could increase the efficiency of the operation of the Tote and produce benefits for the public purse. We do not yet know how that will operate and I certainly do not understand how it relates to the private side of the betting industry.

My Lords, will the Minister expand on one specific aspect of the Statement which we on these Benches, as indicated by my noble friend Lord Newby, very much welcome? I refer to the long-overdue distinction between revenue and capital spending which, in my view, is the most significant aspect of the Statement today.

In the Statement which the Minister repeated, the following sentence appears:
"Total investment, public and private, in Britain has in recent years fallen, … and is far behind our competitors".
Those of us who have been arguing for the distinction to be made between capital and revenue spending by government would argue that one of the reasons that public sector capital spending has been so low is because capital spending has been aggregated with revenue spending and there has therefore been a significant reduction in public infrastructure spending, which it is to be hoped we will now see some movement to reform.

Perhaps I can probe a little on the impact of that decision on public-private partnerships and the private finance initiative. One of the reasons why the previous government, and indeed this Government, wished to try and encourage public-private partnerships and the private finance initiative is the absence of distinction between capital and revenue spending. There was significant pressure on the Government's resources and capital spending suffered.

If we now have the situation enshrined in the Statement in which we are to distinguish between capital and revenue spending; and if—as indicated on page 43 of the larger book—the public sector net borrowing requirements from 1998–99 onwards for the next five years will be negligible; will not the Government have to consider using the fact that they will be the keenest borrower and will be able to obtain the keenest rates in financial markets for capital spending? If they wish to encourage public-private partnerships, it is silly for the private sector to go into the markets and borrow at rates higher than the rates at which the Government can borrow. Will not the Government take into account the fact that, in those public-private partnerships and PFI initiatives, they ought to be in there as the borrower, if necessary, in respect of lending to the private sector vehicle? The overall cost of borrowing and the overall cost of the investment will then be lower.

My Lords, I am grateful to the noble Lord for those very thoughtful comments. I tend to over-simplify these matters. The Treasury hate it when I say that its traditional way of looking at these things is that £1 of capital and £1 of revenue equals £2 for cash accounting purposes. That is the truth of the matter and what we are getting away from. That is the value of the whole exercise.

Everything that we are doing in this regard must be constrained by the two basic framework statements that we have made. First, there is the golden rule and, secondly, the stable debt ratio. Having said that, what we shall get from resource accounting and budgeting is a clear structural distinction between current and capital expenditure so that they are no longer treated as though they were equivalent economic categories.

What we shall get in terms of value for money is twofold. First, we shall be focusing on capital as it is consumed rather than as it is financed. That puts the long-term investment implications of public capital on a more transparent footing similar to that in PFI at the moment. Secondly, there will be greater emphasis on the objectives to which departments devote taxpayers' money; namely, the outputs and, over a longer timescale, the outcomes produced and the trade-offs made. The noble Lord went further than that, but I have forgotten the final point that he made.

My Lords, it is the fact that the Government can borrow at the cheapest and keenest rates and that that should be put to use in the initiatives.

My Lords, there are a number of ways in which that can be achieved. Rather than bore the House with a long exposition, perhaps I may refer the noble Lord to the Deputy Prime Minister's Statement about the Channel Tunnel rail link. Under those proposals bonds will be raised which will be guaranteed by central government. I probably will not be thanked for this, but on that basis the effect will be that we are borrowing at below market rates because there is no risk involved. That is what we are trying to achieve.

My Lords, is my noble friend aware that the PSBR system that we have been operating in this country for many, many years has undermined our public services and seriously impeded investment? Does he agree with me that today's Statement takes a brand new approach to the management of capital expenditure and to our fiscal balances which will have a significant impact on productivity in this country both in terms of the economy, public services, jobs and, therefore, families?

My Lords, I am tempted to agree tout court. In earlier statements we indicated that we were proposing to move to resource accounts. We shall be publishing the first of them for the year 1999–2000. We shall be producing them parallel with the cash-based supply estimates and appropriation accounts until the years 2000 and 2001. I thank my noble friend for his congratulations. We are not abandoning entirely PSBR at the moment. It represents something real, which is cash coming in to government. When I say that we are producing, as private businesses do, balance sheets as well as income and expenditure accounts, we cannot neglect what private businesses also produce, which is cash-flow accounts.

My Lords, I share my noble friend's surprise at the somersault which the Government appear to have carried out in many parts of the Statement. In the interest of time I shall confine myself to one question. The noble Lord suggested that the separation of capital from revenue was a new inspiration by the Government. There has not been a Chief Secretary over the past 40 years who has not tried with the Treasury to get the separation of capital and income. The noble Lord will probably agree that the Treasury has a list which goes back to when chief ministers questioned whether there should be capital or income, starting with the battleship and turning down all kinds of things.

Has the noble Lord a clear definition of what is going to fall on the capital side and the income side? Does he accept that no doubt this has been gone over many times by governments in the past?

My Lords, the answer to the noble Lord's first question is that for 40 years Chief Secretaries have tried, but we have succeeded. The answer to the noble Lord's second question is as I acknowledged in responding to the noble Lord, Lord Newby; namely, that there are always going to be difficulties in the definition of what is capital and what is revenue. I gave the example of expenditure on human capital, which the Office of National Statistics will not allow us to count as capital. We are approximating as closely as we can to internationally recognised norms of accounting in both the public and private sector. As with employment statistics, I believe that that is the right way to go.

My Lords, can the Minister clarify the Government's thinking as regards best value in local government? I and others understood that the Government were still consulting on best value and that pilot projects were being set up. Can he also expand a little on how the Housing Inspectorate will work?

My Lords, the answer to the noble Baroness's first question is that we are consulting on that subject. As regards her second question, those matters will be covered in the publication next month of the comprehensive spending review. While I am on my feet, may I correct something that I said to the noble Lord, Lord Boardman? The resource accounting and budgeting system will be introduced from the year 2001–2002 and not a year earlier, as I suggested.

My Lords, I welcome the separation of capital and current accounts and the golden rule. Is the projection of 2.25 per cent. growth in real expenditure and output a pessimistic forecast of output? It is below the trend experienced by the economy over the past 40 years. The growth rate in expenditure is even lower than the quoted 3 per cent. per annum. Can my noble friend say whether it is just a cautious outcome or do the Government have genuine forecasts that the economy will grow more slowly than in the past?

Perhaps I may register one small disagreement about the debt-GDP ratio. I do not see how a low or high ratio is any indication of economic prosperity. Between the years 1970 to 1990 the debt-GDP ratio decreased from 70 per cent. to 27 per cent. They were not the happiest years for the British economy. We all complained how miserable we were. Does my noble friend agree that getting that ratio down should not be a primary objective?

My Lords, the projection of a 2.25 per cent. increase in current public expenditure is, as my noble friend said, a cautious figure. It is achievable within the constraints of the golden rule and the debt-GDP ratio. It is not necessarily the same as forecasts for output as a whole. It is designed to be not too far away from the figures for output as a whole.

My noble friend has a point about the debt-GDP ratios. They are not always associated historically and statistically with economic growth. That is true. However, when we are confronted with such wild accusations of tax and spend, it is important at the very least to be able to remind noble Lords opposite that this is not a Government who are moving rapidly towards a command economy.

My Lords, I certainly go along with the increased emphasis on output measures and on the move to accrual accounting, and particularly balance sheets, which is something that the House of Commons Select Committee on the Treasury has advocated for a long time. First, on balance sheets, is it the Government's objective that the government balance sheet should go up or down in value? Secondly, the noble Lord gave the impression that if the Government sold off assets and invested money, that would result in a net increase in investment. Perhaps the noble Lord will confirm that that is not so. It may be more efficient, but it does not change the amount of investment.

Following the point made a moment ago by the noble Lord, Lord Desai, perhaps I may express my grave concern about the way in which the Government's overall policy is developing, with an independent Bank of England which has a clear objective, largely relating to inflation, and now, apparently, with a fiscal strait-jacket with regards to public expenditure. There is an assumption that that means that the tax side will not change. Presumably, that is not the position. Therefore, at least at this stage, remarks about the PSBR or other surrogates for it are not helpful. I share the view of the noble Lord, Lord Desai. I suspect that the Government's forecasts show a low rate of economic growth compared with past history—and that is because of the way in which the Government's monetary and fiscal policies are interacting.

My Lords, the Government's forecasts of economic growth are publicly available. Anybody can produce projections on the Treasury model—and that frequently happens. I simply do not know the answer to the noble Lord's question about whether we expect the balance sheet to go up or down. We expect it to balance. Whether we expect it to go up or down in total depends largely on the way in which we value the fixed assets which are taken into account. Work on that is still developing.

The noble Lord is right in saying that the interaction of all those factors is extremely complex. I thought that by stating our objectives more clearly we would be increasing the transparency of government economic policy. I do not describe these as a "strait-jacket". It is much better to do what we are doing here and to make forecasts about what we hope to achieve through economic policy than to do what the previous government did, which was to set continuing targets for tax reductions regardless of, or without any conscious reference to, their effect on economic growth.