House of Lords
Wednesday, 16 December 2009.
Prayers—read by the Lord Bishop of Chester.
Arms Trade: Global Treaty
I beg leave to ask the Question standing in my name on the Order Paper. In doing so, I declare an interest as a trustee of Saferworld, a charitable organisation that works on arms control and security sector reform.
In a volatile world, the Government are to be congratulated on their lead role in working towards—
My Lords, I thank my noble friend for his Question. He is more of an old hand than I am at all this.
Negotiations on the arms trade treaty will begin at preparatory committee meetings in 2010 and 2011, ahead of a UN conference on the ATT in 2012. We want an ATT to be legally binding and to set standards for the arms trade, ensuring respect for human rights, international humanitarian law and sustainable development. We have intensified engagement with the European Union and key bilateral partners to ensure that maximum progress is made before the first UN meeting in July.
My Lords, I am so confident of my noble friend that I was expecting that positive Answer, and I thank her very warmly for it.
Does my noble friend agree that because of the importance of the issue, a weak treaty would be worse than no treaty and that the treaty must be strong? Is there a danger that by working with the very sensible consensus approach, we might legitimise the lowest common denominator? Does she also agree that it is essential to ensure that our American friends are with us on the importance both of human rights and of including ammunition? Are eight weeks in the next three years sufficient time for all this?
Securing a consensus treaty does not mean that it will necessarily be a weak treaty. We will need to work hard to ensure that we have a strong treaty that is robust and that takes full measure of the need to deal with irresponsible and unregulated arms dealing. That has to be the central objective of those who are negotiating it.
We have very clear United States support. Secretary of State Hillary Clinton confirmed US support of the ATT in a statement that she made in October, and we will continue to work with the United States through the UN process to secure a treaty that will raise the global standard on arms control.
Will the Minister accept that while a global arms trade treaty is certainly a very worthy goal towards which one must work, merely signing a treaty, rather like merely passing a law, does not mean that wishing makes it so? We must realise that there is an enormous amount of work to be done even after a treaty is signed. Does she agree particularly that civil society must play a major part at all levels in ensuring that the arms trade treaty really works, and that no great progress will be made until countries such as Russia, Ukraine and many other arms manufacturing and trading countries are on side as well?
I thank the noble Lord. We are fully aware that countries such as China, Russia and, indeed, Ukraine have been co-operative on this issue. However, sceptical countries are involved with which we need to work, attempt to address their concerns and see whether we can move matters forward so that we have a truly international agreement. We engage firmly and strongly with NGOs and civil society and today officials from the FCO are meeting with NGOs to discuss further progress and measures that we need to collaborate and work together on. Their views are fully taken into account at all times.
I can assure the noble Lord that all arms trading, of whatever kind of weapons, is an important aspect of the treaty, which is about a global agreement to deal with the irresponsible, unregulated system that currently exists. We already have in the UK and across the European Union a code of conduct on arms dealing which covers the measures suggested by the noble Lord.
Are there enforcement measures in this area? We know that much of the informal dimension of arms smuggling—as in the current case in Bangkok, where a Georgian-registered aircraft has been blocked—is paid for through all kinds of offshore centres. Are we going to follow the money in checking what is going on?
I thank the noble Lord for raising an important issue. We are well aware of enforcement in the context of the UK and European Union code of conduct, to which we have agreed, and it will need to be a matter of negotiation during the process taking place at the United Nations. We believe that it should place a legal obligation on each individual country to establish national export control systems which could be enforced and followed rigorously by the United Nations and others following the process.
I agree that it is an extremely important aspect of all of our policies, including defence and others that I know the right reverend Prelate would support. We support the need for strict and comprehensive controls. We need to be steadfast about the inclusion of issues such as weapons, a commitment to human rights, international humanitarian law and sustainable development as central elements in the treaty. Efforts that we are making to meet the millennium development goals are being severely damaged by conflicts in and the transfer of arms to countries—particularly in Africa, where many post-conflict countries are still awash with arms.
The European Union is, of course, a strong ally of the efforts being made in the United Nations to get these stringent controls in place. If what occurs in the UN is stronger than the EU code of conduct, the UN applications would need to apply across the European Union. We would then be part of a global treaty—that is the difference—and, in many ways, the EU code of conduct would be replaced by a global, international code and a set of regulations which are likely to be far more effective. On our work with the Eastern Partnership and with countries which have large amounts of armaments and where exports of armaments to vulnerable countries are still taking place, we need to draw in their support for this global treaty. This will make it easier for us to follow exactly what their arms dealers might be doing to contravene the new international treaty.
My Lords, in the quarter to October 2009, 2,491,000 people were ILO unemployed, which was up 21,000 on the May to July period. In November 2009, 1,626,200 people were claiming jobseeker’s allowance, which was down on the previous month.
My Lords, although there is some Christmas cheer in those figures, there is sad news, too, especially for young people, whose unemployment figure is at a record high of 952,000. In presenting his Pre-Budget Report, the Chancellor said that promoting employment is and has been a top priority. However, is not the increase in national insurance a deliberate tax on jobs? Is this why the Chancellor admitted in that same Statement that unemployment will keep on rising for some time?
My Lords, the figures that I have just announced are encouraging, but we are not complacent; we expect unemployment to continue to rise for a few months or more. On the question of young people, when you strip out the number of full-time students, ILO unemployment for young people has fallen over the month and, of course, the White Paper this week announced a number of additional measures to support young people in particular. The challenge with regard to the PBR measures is to ensure that we sustain the economic recovery and do not do anything to impair it. Part of that includes a balance of tax measures and reductions and restraint in public expenditure.
My Lords, is the Minister aware that in these figures over 1 million people—433,000 men and 577,000 women—said that they were having to work part time but would rather work full time? Many of them have effectively had a forced pay cut by having to work fewer days. Will the Minister accept that there is a great deal of hidden unemployment in those figures?
My Lords, the noble Lord is right to point out that there has been an increase in part-time working, but overall, over the last period, the number of people in employment has risen. That again emphasises the need to have a range of measures to support the recovery in the economy so that as we move into growth, which the Chancellor anticipated would happen by the end of this year, we can have a job-sustained recovery. A number of measures have been announced to achieve that.
My Lords, what is the Government’s projection for unemployment on the ILO basis for 2010? I remind him that the convention that the Government do not provide those figures ended last week when in the Green Book—the Pre-Budget Report—we were provided with projections for the claimant count between 2008 and 2014.
My Lords, the noble Lord is quite right that the previous convention was changed in the Pre-Budget Report and for the first time HMT projected the claimant count. It has retained the more cautious NAO-audited unemployment assumptions. I do not have the ILO count, but the Treasury’s projection is that claimant-count unemployment will peak at 1.75 million in mid-2010, fall to 1.5 million at the of 2012 and reach 1.25 million in 2014. I remind the noble Lord that outside commentators’ projections just six months ago about the level of claimant-count unemployment at the end of this year were something like 400,000 in excess of the reality.
My Lords, apprenticeships are very important. There has been huge investment in apprenticeships over recent years and a sustained increase in their number—they had pretty much gone out of existence under the previous Administration. Extra measures were announced in the White Paper, including a new subsidy for employers that take on 16 to 17 year-old apprentices, as well further support across government procurement to enhance and sustain apprenticeships. That is a key plank of making sure that we have a sustained, jobs-related recovery.
My Lords, does the Minister agree that the hardest hit areas, such as Merthyr Tydfil, are those that have always been vulnerable in the past? What special measures will the Government take, perhaps with the Welsh Assembly Government, to tackle the problems of the black spots, especially in south Wales?
My Lords, one feature of the recession that we have just endured is that the impact has generally been spread more evenly across the country than in some of the earlier recessions. However, arrangements and policies are in place—for example, local employment partnerships and the various funds that CLG supports in areas of particular deprivation and challenge—to focus extra support on the areas where unemployment represents the biggest challenge. However, across the country, unemployment has been more evenly spread than in previous recessions.
My Lords, no prisoners have been compensated for denial of access to illegal drugs, including heroin. It is a fact that some prisoners take illegal drugs in prison. However, NOMS has introduced a range of measures to reduce the supply of drugs. Drug misuse in prisons has declined by 68 per cent since 1996-97, as evidenced by random and mandatory drug-testing results. A comprehensive programme of work is in place to build on that success.
My Lords, perhaps I may first thank the noble Lord, Lord Bach, for his courtesy in writing to me about another case of drugs in prison which would have fallen outside the scope of this Question. The public will understand that there is a duty on the Government to ensure that prisoners receive medical treatment for such things as drug addiction. However, despite his Answer, I find it difficult to understand how it could be reported in the press that 197 prisoners have received monetary compensation for the denial of drugs. Should not the treatment be about denying them drugs rather than compensating them for not having drugs?
My Lords, in 2002, 197 prisoners claimed that their drug detoxification treatment, which dated back to the late 1990s, had been inadequate. Regrettably, the standard of care that the claimants received fell short of minimum acceptable medical standards. First, their medication was wrong—they were given dihydrocodeine, which was not the appropriate drug. Secondly, the detoxification process was too short. It was for those reasons, and on the basis of legal advice, that it was decided to settle these cases out of court to minimise the cost to the taxpayer. It was very unfortunate indeed, but these were detoxification programmes. It is one reason why the Government have invested a large amount of money in clinical drug treatment under the integrated drug treatment system.
My Lords, can the Minister give the House some idea of the size of the problem that we are facing? Can he confirm the figures that I have, which indicate that some 35 per cent of all prisoners leaving prison have some sort of drug problem or drug addiction?
My Lords, I am afraid that I cannot confirm that figure, but I can give these figures: at the latest count, 69 per cent of those who enter prison had taken drugs within the previous 12 months, which may not be an enormous surprise to the House, but 55 per cent of those entering prison have some sort of drug dependency problem. They are not necessarily on what are normally described on hard drugs, but a large number of them will be. No one is pretending that this is not a great problem.
My Lords, I declare an interest as chairman of the Prison Drug Treatment Strategy Review Group that has been established to review and make clear recommendations on effective drug treatment in prisons. Let me assure noble Lords that that is not an easy task. Does my noble friend agree that it is vital that we have a range of high-quality drug treatment services in the prison system, not only to address maintenance prescribing and the prescriptions in terms of detoxification but so that we provide a wide variety of psychosocial interventions that will clearly address the many complex needs that drug-using offenders present to us?
I am very grateful to my noble friend. I congratulate him and his team and thank them very much for their work on the Prison Drug Treatment Strategy Review Group. There could hardly be more important work to do in relation to drugs in prison. We believe that this group, chaired by my noble friend, provides the right mix of knowledge, expertise and experience. I agree with him, of course, that there are problems in getting the balance right between detoxification and weaning people off drugs in other ways, as well as all of the other issues that affect prisoners who are dependent on drugs. Those issues, alas, sometimes come to the fore when prisoners are released, putting the rest of the community in some kind of danger.
The Trace charity, which helps prisoners on drugs who are in prison, has claimed that there is infighting between the Ministry of Justice and the Department of Health about their treatment and that prisoners are being prescribed methadone because the DoH wants to control treatment. That means that inmates are being diverted from MoJ-funded abstinence schemes. Is it right that there is a struggle going on as to how those prisoners should be treated?
It is not right; there is no struggle going on at all. That makes extremely good copy, but it just does not happen to be right. The point is that it is important to try to get the balance right. There is certainly a place for methadone maintenance in prison; there is no doubt about that. Mr Trace himself wrote a letter to the Times yesterday rather contradicting what had been said about him in the article last week. The integrated drug treatment system being brought in across prisons provides evidence-based treatment, tailored to the needs of the prisoner.
All treatments, whatever they are, ultimately aim at getting prisoners off drugs whether that is while they are in prison or when they return to the community. The rise in prisoners getting methadone treatment means that more prisoners are getting the treatment they need at the right stage of the treatment journey. I invite the noble Lord, and the House, to look at a letter written by Professor Gerry Stimson in the Times of the day before yesterday in which he makes it clear that the provision of methadone in prison is considered best practice by the World Health Organisation, the United Nations Office on Drugs and Crime and UNAIDS, among others.
The Minister has referred to the fall in the incidence of drugs in prison, which is very welcome. With regard to the latest available records, what was the number of convictions for persons seeking to smuggle drugs into prison, and does that represent a rising or a falling trend?
I cannot give the noble Lord those figures, but I shall of course write to him and put a copy of my letter in the Library. Preventing drugs from coming into prison is an absolute priority and a great deal more work has been put into that than was the case previously. There is a comprehensive range of security measures to reduce drug supply in prison, which the noble Lord will know about and which I will write to him about. They include the need for those who are caught bringing drugs into prison to be severely punished.
To ask Her Majesty’s Government, following the Motion agreed by the House on 7 December about the increase in the number of public bodies accredited as financial investigators under the Proceeds of Crime Act 2002, what steps they are taking to ensure that due legal process is followed by such investigators.
Noble Lords are probably aware of my Written Statement, made on Monday, which addressed this point. The legislation already ensures due legal process. In the light of concerns, the Government propose to issue a circular to all investigators to make clear the scope and focus of the powers, to ensure that they will not be misused. We will be issuing a draft of that circular to the Merits of Statutory Instruments Committee. Should it wish to make any observations on the draft, we will give such observations careful consideration.
I thank the Minister for that reply and refer back to that same Statement. I draw his attention to the schedule he has set out in Hansard of 14 December at col. WS213 of the recoveries over the past five years, rising from £172,000 to £5.6 million. Can the Minister please confirm that the £5.6 million—or any of the other figures in that schedule—contains only moneys to which the Government can unambiguously remain entitled, and which are not subject to any appeal process that might require any refunds subsequently to be made? How do the Government take care, in their own guardianship, of assets held while pending appeals?
My Lords, the most significant figure is £148 million: the asset recovery total for last year. It shows that rendering ill-gotten gains back to the taxpayer is an important area of our activity.
Under POCA, assets can be frozen by court order from the commencement of a criminal investigation if there is reasonable cause to believe that the alleged offender has benefited from his crime and there is a real risk that he would dissipate his assets to avoid a confiscation order. The Crown Court can allow a person access to these funds for reasonable living expenses, but it would be wrong to allow access to money that is reserved for possible confiscation to fund a legal defence.
After a conviction but prior to an appeal, the state can seek to enforce the confiscation order. This is a power over the defendant’s remaining in prison after a court has enforced a prison sentence or, indeed, when a fine is to be paid, even though the matter is under appeal. The action is not suspended, as conviction and sentence remain in force until overturned. If the appeal is successful, moneys or assets are returned and the proceeds of sales are returned to the original owners minus any fees incurred in realising the assets.
I have learnt in your Lordships’ House that the simple questions are usually the most difficult. I am pleased to say that, on this occasion, it is a simple question that I can answer quite simply.
The incentivisation scheme pays quarterly in arrears to the central accounts of the agencies that have recovered proceeds. There is no evidence from the returns on how moneys have been allocated that any of the money has been used for any staff bonuses. The incentivisation scheme is to drive up asset recovery; it is not a payment on commission to individuals.
My Lords, first, the order that we dealt with on Monday provided that investigating officers are of an appropriate senior grade, equivalent to that of a police superintendent, and that they are NPIA-trained with an emphasis on the proportionality of the use of their powers. It is important that the restraint orders can only be made by a Crown Court judge, who must be convinced, on the evidence and facts of the case, that an order is appropriate.
Confiscation powers therefore remain in the hands of judges, and not in the hands of police or other financial investigators. I think that that is the reassurance that the noble Lord seeks.
My Lords, will the Minister please explain to the House what steps the Government are now taking to ensure that such extraordinary draconian powers are not extended in future without proper consultation, following such Acts as the Proceeds of Crime Act?
This is a case where “draconian” is in the eye of the beholder. Following criticism of the order not being subject to prior consultation, I made a commitment to take that lesson on board and to ensure that consultation would take place in future. I hope that is the reassurance which the noble Baroness seeks.
My Lords, a quick totting up of the number of bodies that are now able to exercise powers as financial investigators reveals no fewer than 459. That excludes the police and SOCA but includes all local authorities. There has been unhappy experience of local authorities abusing powers handed to them in other legislation—for instance, national security legislation. One wonders whether it will be different this time. Does the Minister think it proper for the state to make available so widespread a right to exercise such deep and intrusive powers? Does he not agree, on reflection, that, in the words of the Police Federation, this is a case of mission creep which should be severely cut back?
No, my Lords, I do not at all agree with the noble Baroness’s sentiments. This is a question of having more specialist investigators to deal with more specialised crime. The police deal with volumes of crime and with anti-social behaviour and have to deal with many aspects of other crime. Trading standards officers are just one example whereby local authorities deal with major crime such as the sale of fake goods and fake DVDs. London Transport will be letting major railway, Underground and bus contracts. Specialist staff will be needed to deal with specialised crime, thereby releasing police from such areas where they do not have the relevant expertise. Therefore, it is entirely appropriate to extend financial investigations to these bodies, but it is equally important to ensure that we do not have mission creep or, as the noble Baroness said, misuse of powers. That is why we are seeking to put out guidance which clearly seeks to avoid misuse in relation to local authority overexuberance as regards certain anti-terrorist legislation, as some noble Lords have mentioned.
Standing Orders (Private Business)
Motion on Standing Orders
That the standing orders relating to private business be amended as follows:
Standing Order 151 (Personal bills defined)
Leave out paragraph (2) and insert:
“(2) The proceedings in this House in respect to personal bills shall be subject to the provisions of Standing Orders 152-174, and to such general or special directions (if any) as may be given from time to time by the Chairman of Committees.”
Standing Order 154 (Appointment and duties of Personal Bills Committee)
Leave out Standing Order 154
Standing Order 155 (Petitions for personal bills affecting private interests in Scotland to be referred to two judges of the Court of Session)
Leave out Standing Order 155
Standing Order 156 (No personal bill to be read a first time until Personal Bills Committee has reported)
Leave out Standing Order 156
Standing Order 157 (Personal bills to be delivered to all persons concerned)
Leave out paragraph (1) and insert:
“(1) Subject to any directions given by the Chairman of Committees a copy of every personal bill introduced into this House shall be delivered before the second reading to every person concerned in the bill.”
Standing Order 159 (Interval between second reading and committee)
Leave out Standing Order 159 and insert:
“No committee shall sit upon any personal bill until ten days after the second reading.”
Standing Order 166 (In other cases all persons interested to consent)
Leave out paragraph (2) and insert:
“(2) The consent of any such parties shall not be required if the committee on the bill consider that their consent may be dispensed with on account of remoteness of interest, or for any other reason.”
Standing Order 167 (Appointment of guardian or protector of minor interested in personal bill)
Leave out paragraph (2)
Standing Order 171 (Consent to personal bills relative to estates in Scotland)
Leave out Standing Order 171
Standing Order 172 (Such consent to be personal, or disability to attend proved)
Leave out Standing Order 172.
My Lords, this Motion, and the following two Motions in the name of the noble Baroness the Leader of the House, formally implement the recommendations of the Procedure Committee which were agreed to yesterday. The changes to private business standing orders give effect to the abolition of the Personal Bills Committee. The changes to public business and judicial standing orders are the necessary consequence of the establishment of the Supreme Court and the ending of the House’s judicial function. In case noble Lords are curious about why I am moving the first Motion and the Leader of the House is moving the others, the reason is that as Chairman of Committees I am responsible for the conduct of private business, whereas the Leader of the House conventionally takes responsibility for all other procedural matters. The second and third Motions are therefore in her name. I beg to move.
Standing Orders (Public Business)
Motions on Standing Orders
To move that the standing orders relating to public business be amended as follows:
Standing Orders (Public Business) Baroness Royall of Blaisdon to move that the standing orders relating to public business be amended as follows:
Standing Order 17 (Recall of the House)
Leave out paragraph (3)
Standing Order 21 (Judges)
Leave out Standing Order 21
Standing Order 75 (Public Petitions)
In paragraph (1), leave out the words “Judicial or”
Standing Order 78 (Committee for Privileges)
Leave out Standing Order 78 and insert:
“78. A Committee for Privileges shall be appointed at the beginning of every session; sixteen Lords shall be named of the Committee, of whom two shall be former holders of high judicial office. In any claim of peerage, the Committee for Privileges shall sit with three holders of high judicial office, who shall have the same speaking and voting rights as the members of the Committee.”
Standing Order 87 (Appellate and Appeal Committees)
Leave out Standing Order 87
Judicial Standing Orders
Motion on Standing Orders
Social Security (Contributions Credits for Parents and Carers) Regulations 2009
Motion to Approve
Non-Domestic Rating (Chargeable Amounts) (England) Regulations 2009
Motion to Approve
European Communities (Definition of Treaties) (1996 Hague Convention on Protection of Children etc.) Order 2009
Motion to Approve
Legislative Reform (Revocation of Prescribed Form of Penalty Notice for Disorderly Behaviour) Order 2009
Motion to Approve
Community Radio (Amendment) Order 2010
Motion to Approve
Legislative Reform (Insolvency) (Miscellaneous Provisions) Order 2009
Motion to Approve
Cluster Munitions (Prohibitions) Bill [HL]
Order of Consideration Motion
To move that it be an instruction to the Grand Committee to which the Cluster Munitions (Prohibitions) Bill [HL] has been committed that they consider the bill in the following order:
Clause 1, Schedule 1, Clauses 2 to 9, Schedule 2, Clauses 10 to 31, Schedule 3, Clauses 32 to 34.
My Lords, it is customary at this time of the year when the House is due to rise for the Christmas Recess for me and my colleagues in the usual channels to pay tribute on behalf of the House to the staff who have facilitated our work during the year. Normally, that is done at the end of business when we move to adjourn the House. On this festive occasion, however, with the leave of the House, we propose to pay our tributes now before we proceed on to the next items of business.
This has been a difficult year for the House and not just for its Members. Staff at all levels have been on the front line in facing the scrutiny and criticism that the House and its Members have attracted over the course of the year. Their professionalism, discretion and composure in handling such attention has, I am sure all will agree, been consistently impressive. I am sure that I speak for the whole House in saying that we are deeply indebted to them all.
We recognise that it has been a demoralising time to be working for the House. The commitment and enthusiasm that staff at all times have and continue to display are of great credit to them. They have hugely assisted and encouraged us all. I know that my opposite numbers will in their tributes single out individual members of staff who have completed, or are shortly due to complete, their long service to the House. The former Black Rod, Lieutenant General Sir Michael Willcocks, and the staff of the House’s Judicial Office have been the subject of tributes earlier in the year, but I am sure that the House will wish to join me in reiterating our thanks to them.
On this occasion, I should like to begin by paying tribute to a member of staff who on 21 August this year, at the very young age of 37, lost her battle with cancer just under eight years after having joined the Committee Office. In 2001, Siobhan Conway began her career in the House as a personal secretary in the Committee Office. She was soon promoted to become an IT support officer. In that role, Siobhan played a crucial role in supporting Select Committees and their staff, notably in the preparation and publication of their reports at a time when the activity of the House’s Select Committees grew significantly. She was an inspiration. She was known, however, not only for her expertise, which was beyond question, but also for her warmth and sense of fun. I have it on good authority that Siobhan was the life and soul of every office party and, indeed, of the very corridor on which she worked. Her loss came as a great shock to her colleagues, many of whom were present at her funeral this summer. I am sure that the whole House will wish to join me in extending our sincere condolences to Siobhan’s family and friends.
I also want to focus on a member of staff who has been at the forefront of the trials and tribulations that we have experienced in the past year. Mary Morgan, a legend, was the House’s director of public information. She retired at the end of October after 13 years of service. Mary was no novice in handling politically sensitive issues of interest to the media. At a very early stage in the course of her career here, she had to address stories about the Lord Chancellor’s wallpaper and the Lying in State, to name but two, even before this year’s expenses became the hot political topic.
It is perhaps an indicator of how much the House has changed that her post was originally an experiment proposed by the then Finance and Staff Sub-Committee. Mary used her role as a platform from which to build the House’s well-reputed information service. She set up and developed the highly respected and valued range of publications which now actively promote the work of the House, including the Work of the House of Lords brochure and the annual House of Lords calendars, for which, I am told, there is a market on eBay. I am sure that all noble Lords will wish to join me in thanking Mary for her immense contribution to our work and in wishing her a long and happy retirement—I should add, with or without a subscription to the Sunday Times.
All that remains for me to do is to wish all staff and noble Lords a restful and enjoyable festive period and to give thanks to my colleagues in the usual channels, who, in a difficult and trying year, have been most helpful and co-operative at all times.
My Lords, it is a privilege and a pleasure to follow the noble Lord the Captain of the Gentlemen-at-Arms in paying tribute to all staff of this House, both personally and on behalf of those on the Benches behind me—Her Majesty's Loyal Opposition. Naturally, I fully endorse all the remarks made by the noble Lord, Lord Bassam.
I should like to put on record the remarkable service of Hedley Duncan, who retired as Yeoman Usher of the Black Rod this year after 10 years’ service to this House. He came to us after a long career in the Armed Forces, where he reached the rank of brigadier. His expertise was invaluable throughout his time. He, too, was involved in the arrangements for the Lying in State of Her Majesty the Queen Mother, when some 200,000 members of the public came to pay their respects.
I also commend the remarkable service of Dave Foley, our Redcoat in Black Rod’s Department, who served us memorably for 12 years. He joined us after a long and distinguished career as a flight sergeant in the Royal Air Force. Goodness, we knew it. We are kept in order by our officers here. His sense of loyalty and duty were evident daily, he was well liked by Peers and throughout the House he was known for his helpful approach.
All our staff, as the noble Lord, Lord Bassam, said, merit our special thanks this year, one that has been difficult for both Houses of Parliament. Politicians' reputations have been dented and some of the public confidence in our institutions of government undermined. Throughout all this, our staff and officers have been the public face of this House, day in and day out. It is they who meet and assist the public day after day. It is so often they who have to bear the brunt of critical comments. They always do so, as we ourselves see, with the utmost courtesy and distinction. They have a care for the reputation of this House, for which we are all most grateful.
I wish our officers, our staff, and all Members of this House a very happy Christmas Recess and a good return in the new year.
My Lords, I rise to add my words to these tributes. But before that, I return to the theme that has been with us for the year, and perhaps I may give another plug for the Lord Speaker’s Robing Room address of 9 December, and her stark sentence of four words. She said: “Parliamentarians are deeply demoralised”. We know, from our debates in recent days on our Code of Conduct and expenses, how that has deeply got to us. We know, when we meet other people, as we will do over Christmas at parties and pleasant events, that some friendly and some perhaps not-so-friendly comments will be made as quips, as we go about what we do at Christmas time. Perhaps we have broad enough shoulders to cope with those comments but they also get to the staff here, who share in some of that odium. They are asked, “Do you really work for those people?”, and they are entitled to be demoralised. However, they have persevered and kept going and we should all be grateful that, if they have attracted some of that odium, they have not shown any demoralisation.
My specific task is to thank two members of staff. One is Shirley Hutson, who retires later this week as Head Housekeeper in the Department of Facilities. It is a post that she has held since 2000, having joined the Lords as a housemaid and cleaner in Black Rod’s Department in 1990. Her personal commitment to the House and her high standard of professionalism have been noted over the years, and in her current role her firm but fair management style has been just what has been needed to secure the highest standards from her team. These qualities were reflected in Shirley’s appointment as an MBE in the New Year Honours List 2006, which colleagues across the department both recognised and appreciated. We wish her well in retirement.
I also refer to Peter Clark, a Senior Attendant in the Department of Facilities, who joined in June 1997 and retired in April this year. He joined as an attendant after a long career in the Metropolitan Police, including 11 years with the Palace police. For a lot of his time here, he was based at 1 Abbey Gardens, but he is currently a tour guide, so he has not left the building. He is a great cricket fan, a keen golfer and a very sociable colleague. We wish him well both in retirement and in his new work here.
It just remains for me to wish all members of staff and your Lordships a splendid and happy Christmas.
My Lords, we are at that happy time of the year once again when we all, but most of all the staff, take a well deserved break.
I thank all who serve us so well in this House—the doorkeepers, the attendants, the restaurant and cleaning staff, the House authorities, including Hansard and Library staff, as well as all those buried in offices on the second floor and in Tothill Street who beaver away on our behalf. Special thanks are due to the clerks and those in the Finance Department, who have had much to deal with during the year.
On behalf of the Cross Benches, I am truly grateful for their devoted service while remaining ever-helpful, ever-calm and ever-cheerful. It is still a wonder to behold the doorkeepers marshalling a crowded Peers’ Lobby to allow the Lord Speaker safe passage and the business of the House to continue its centuries-old tradition.
I also thank John Rhodes, who retires after 12 years of devoted service to this House. Originally, John was recruited as a Senior Clerical Officer in the Accountant’s Office. He then worked in the Judicial Office before being promoted to work in the Delegated Legislation Office. He was a founder member of staff of the Merits of Statutory Instruments Committee, rapidly helping the committee to establish a strong reputation and earning the respect and affection of his colleagues and the members of the committee.
I also congratulate Stella Devadason on being appointed Redcoat and Jenny Banks on her splendid recovery, and I welcome John Dryden and Jackie Mouzouros as permanent doorkeepers in this House. I also send good wishes on his retirement and for the future to Dave Foley, who, as we know, retired this year.
I wish all these and any others whom I may have neglected to mention a very peaceful and restorative holiday break, if only because it will be a busy parliamentary year ahead. We shall arrive on Tuesday, 5 January—some of us a little before—bright-eyed and bushy-tailed, ready to be looked after during another Session.
My Lords, I associate these Benches with all those tributes and wish all noble Lords a splendid celebration of Christmas, together perhaps with the lusty singing of Christmas carols this year, particularly, bearing in mind Monday’s debate, “Away in a Manger” with its line “No crib for a bed”.
Consolidated Fund Bill
Second Reading and Remaining Stages
Bill read a second time. Committee negatived. Standing Order 47 having been dispensed with, the Bill was read a third time and passed.
Pre-Budget Report 2009
Motion to Take Note
My Lords, I welcome this opportunity to debate the measures set out in this year’s Pre-Budget Report. The 2009 PBR has been delivered at a time when the economy is starting to see signs of recovery, after a tumultuous time for the world economy. Co-ordinated action by Governments around the world has helped to revive confidence in markets. The challenge that we face now is to take action to secure the recovery and to promote long-term growth.
The Chancellor announced in the PBR a plan for reducing the deficit by half within four years, but given the uncertainties that remain and given that growth is still fragile, the PBR announced that we will maintain support until the recovery is secured. Cutting support now could derail the work done so far and risk the recovery. That is why further support is being offered to business to ease problems with cash flow and access to bank lending by deferring tax rises and extended tax allowances. This includes the extension of the time-to-pay scheme, which has helped over 160,000 businesses to spread their tax payments over a timetable they can afford, and freezing the small companies tax rate next year to help 850,000 businesses.
The PBR announced that support for the mortgage interest scheme, which provides cover for mortgage interest payments for those who have lost their jobs, has been extended for a further six months. To date, the scheme has helped over 220,000 people. It is important that families receive the help they need through the tax and benefits systems. Through the downturn, the tax credits system has provided this extra help to 400,000 families whose income has fallen. Members of your Lordships' House will be aware that the retail prices index has been negative and many benefits and tax credits are linked to the September RPI. This should have meant no increase in these benefits. Instead, the Chancellor concluded that the basic state pension will rise by 2.5 per cent in April, providing welcome support to the pensioner community. Other benefits, such as child benefit and some disability benefits, will rise by 1.5 per cent. These will give real-terms increases to those who need it most.
The Chancellor has put in place support to secure the recovery, but there is another challenge to face: the direction and long-term growth of the economy. The recession has had a marked impact on the labour market, but unemployment has risen by far less than expected by independent forecasters and by less than equivalent rises in the recessions of the 1980s and early 1990s. None the less, certain groups, such as young people, will be particularly hard hit. The PBR announced that every 18 to 24 year-old will be given work or training after six months out of the labour market, rather than 12 months. Investing in the skills of young people will not only prevent a lost generation of youth unemployment but also promote our long-term growth.
The recession has been deeper than expected but, as set out at the time of the Budget and the PBR, growth is forecast to return in the fourth quarter this year. Next year growth is forecast to be between 1 and 1.5 per cent. This will be followed by growth of 3.5 per cent in 2011 and 2012 as world trade picks up and the spare capacity opened up by this recession comes back into productive use. Our growth will be achieved by the help of exports. This is why the Chancellor has announced investment in key industries of the future: in digital, bio and low-carbon technology.
The PBR announced measures to support innovation and enterprise, introducing a patent box—a reduced rate of corporation tax applying to income derived from patents from April 2013 to strengthen the incentives to invest in innovative industries and to ensure that the UK remains an attractive location for innovation. Further, an additional £200 million of funding for the strategic investment fund will support advanced, innovative industrial projects of strategic importance. Also vital to our growth in future is investment in our infrastructure. The PBR announced further plans for rail electrification between Liverpool, Manchester and Preston. We will ensure that our workforce is equipped with the right skills for the future by giving financial support for up to 10,000 undergraduates from low-income backgrounds to take up short internships in industry, business and the professions.
We have increased borrowing now to support the economy when it needs such support. With falling tax revenues, we must also reduce the debt and ensure sound public finances. The Chancellor set out a clear plan for consolidation. As a result of the combined effect of lower revenues, our commitment to maintain spending and extra support to the economy, borrowing will rise to £178 billion this year, or 12.6 per cent of GDP. As the economy recovers and the deficit reduction plan starts to take effect, this will fall to £176 billion next year, to £140 billion the year after, £117 billion in 2012-13, £96 billion in 2013-14 and then to £82 billion in 2014-15. Excluding public sector investment, or capital spending, and taking into account the economic cycle, the budget deficit is expected to fall to 1.9 per cent of GDP by 2014-15.
To maintain our fiscal sustainability, the PBR announces tax rises for those with the greatest ability to pay, while ensuring that those on the lowest incomes will be protected. To this end, the PBR announces a special one-off levy on banks of 50 per cent on individual discretionary bonuses above £25,000. The restriction of pensions tax relief announced in the Budget will apply only to those with gross incomes of £150,000 or over, where gross income includes all pension contributions. There will be an additional 0.5 per cent increase in employee, employer and self-employed national insurance contributions for those earning more than £20,000.
We also recognise that slower spending growth will be essential if we are to reduce borrowing. We will work to eliminate waste, cut some budgets, and stop some programmes altogether. The PBR announces £12 billion from greater efficiency, £5 billion from scaling back or cutting lower priorities, and £4.5 billion from reducing the cost of public sector pay and pensions.
While we ensure investment for our future, the Chancellor also announces that we want to protect the most important front-line services that people depend on—schools, healthcare and police. Cutting public spending in the past has led to long-term damage that we do not want repeated. These services are essential for the continued well-being of people across the country.
These have been testing times, and people all around the world have been affected. The actions taken by the Government have helped our economy to start to emerge from the crisis. There will be more to be done—not just now, but over the next few years. The PBR sets out actions to secure the recovery, to build our future, and to ensure that we have the means to do so while ensuring controlled public finances.
This is the programme set out in the 2009 Pre-Budget Report, and that, with the approval of the House, is the basis on which we will send updated information to the European Commission.
I look forward to your Lordships’ contributions to this debate.
My Lords, I am pleased to be able to follow the noble Lord, Lord Myners. It is many years since he and I used to share a floor in a bank giving investment advice. He was much more talented at it than I was and went on to have a very distinguished business career. He has now become a robust defender of the Government.
Welcome as the Minister is, I cannot say quite the same about the PBR, although I have to say that I have great sympathy with the Chancellor of the Exchequer, who has found himself in a position in which no one would want to be, and not one at all of his making. The basic arithmetic in the PBR was very similar to that outlined in the Budget—so much so that one wondered what was the point of the PBR. Indeed, I had to be reminded on Sunday by Andrew Rawnsley that the PBR was a device originally introduced by Mr Gordon Brown when Chancellor of the Exchequer so that he could lord it twice a year over colleagues, so that he could announce the same public expenditure increases twice a year and so that he could boast about having abolished boom and bust twice a year.
The fatal weakness of the PBR is that it gives no clear message. It tries to be all things to all people, and thus satisfies nobody. Core Labour voters may have been pleased by the increases in public expenditure and benefits, yet they can hardly have been unaware of the conclusions of those who have studied the detailed tables in the PBR that very severe cuts in public spending are in course down the line on a dimension that has not been seen in this country since the IMF bailed out Britain in the 1970s.
At the same time, those who are worried about the sustainability of the public finances will hardly have been satisfied either because all they can find in the documentation is generalised totals of public expenditure, with no details for departments. We have references to efficiency cuts, but why have they not been realised in the past? Why should we believe them now? It has taken the Institute for Fiscal Studies to devil out the detail and reveal that for departments that are not ring-fenced, there will be cuts of something like 6 per cent a year, getting close to 20 per cent in total for departments dealing with higher education, transport and defence. Can these total figures be believed when the Government are so unwilling to publish them themselves?
The Chancellor of the Exchequer says that he cannot publish detailed expenditure plans because the future is so uncertain but, if the future is so uncertain, how can he lay out total figures for headline expenditure at all? The subdivision between departments will be much less affected by economic events than the totals for public expenditure. If the economic future is so very uncertain, how can the Chancellor be so absolutely confident that Britain will enjoy the surprisingly high figure for growth of 3.5 per cent the year after next? That is the key assumption on which all his shaky arithmetic about halving the deficit in four years depends.
One wonders in what world Ministers are living when the Chancellor of the Exchequer allows himself to say that Britain faces the future from a position of strength. Lewis Carroll once wrote that if he said something three times, it must be true, but nobody can deny that we lag behind France, Germany, the eurozone as a whole, the United States and Asia in coming out of recession. At 12.5 per cent, we have one of the highest budget deficits among industrialised countries.
According to the IMF’s statistics, the increase in Britain’s total debt to GDP ratio will be, apart from Iceland and Ireland, the largest among 21 advanced industrialised countries between 2007 and 2014. Of course it is true, as the Chancellor said in his Statement, that Britain’s stock of debt in total is not much out of line with some countries such as Italy, Greece and the United States, but we have shot up the table from a very advantageous position. Even if we are not at the very top of the table, the critical, and worrying, point is that our annual deficit is so large that if the forecasts for growth prove optimistic, we will shoot right up to the top of the table of total indebtedness.
Indeed, the most serious and worrying point about the budgetary position is that such a large part of the deficit is now acknowledged by the Treasury to be structural. In the previous Budget, the Treasury increased its estimate of that part of the budget deficit that was structural by more than 6 per cent, so that the structural deficit is now more than 9 per cent of GDP, a highly alarming figure. A structural deficit is, by definition, one that will not go away when the economy recovers and tax revenues get back to the point where they were before. A structural deficit, by definition, requires a structural response. The longer the delay in addressing the structural deficit, the more it will go on growing. Interest payments will become embedded in it and it will become larger and larger. There is also a risk that interest rates will go up during this prolonged period, as they are almost certain to do. That is without taking account of the fact that growth may not achieve the 3.5 per cent that the Chancellor has forecast for the year after next. Those are the risks and they are very much personified in the deficit that we will experience in 2013-14. The deficit remains in 2013-14—after three years of 3.5 per cent growth, as forecast by the Chancellor—at 5.5 per cent of GDP, which is not a sufficiently small deficit to stabilise the ratio of debt to GDP. In other words, debt will still be increasing at this point.
The origins of this structural deficit do not lie, as the Government like to say, only with the banking crisis. They lie also in the consistent overspending by the previous Chancellor and his attempts to justify it with the much discredited golden rule. The previous Chancellor of the Exchequer followed two years of prudent public expenditure plans with 10 years in which the growth of public spending vastly exceeded the long-term trend rate of growth of the economy. It is not as though the Chancellor was not repeatedly warned that, if there was a slow-down in our economy or the world economy, we would face a severe crisis.
The Government talk a lot about their countercyclical, Keynesian stimulus policy—their so-called stimulus. In reality, much of what the Government call stimulus is just a continuation of their previous overspending, which they have decided to label a stimulus. The argument today is less about stimulus versus no stimulus than about how long the Government should take to correct their own past mistakes of overspending. There will be some who say that it is much the same thing—to cut spending still runs the risk of endangering the recovery. That is to ignore the point that our deficit is largely structural and needs action to eliminate it before we get into further trouble.
We are continuously told by the Government that cutting spending or putting up taxes will endanger the recovery, but they still introduced the 50 per cent rate of income tax for 2010. They do not seem to think that that endangers the recovery. They are still going to put VAT up to 17.5 per cent again in 2010; they do not think that that will endanger the recovery. Yet when they cut VAT, they thought that it was a tremendous stimulus to the recovery. Now, when they put it up, they think it will have no effect on the recovery.
The worst decision in the PBR was to put up national insurance by another 0.5 per cent to a 1 per cent increase—a move which is widely disliked and described by industry as a tax on jobs. It is an increase that will affect anyone earning more than £20,000 who pays national insurance contributions. Of course, the Government put it up not for a good reason, to reduce the deficit; they put it up to increase spending.
Then we have the curious business, to which the Minister referred, of the increase in child benefit and tax credits, which the IFS has described as an increase to be followed by a cut. I refer Members of the House to paragraph 5.19 on page 79 of the Pre-Budget Report, which indicates that mandarins in the Treasury can still write pretty impenetrable prose. For those who can decipher it, it appears to mean that the Government will increase child benefit and tax credits by 1.5 per cent this year, but that next year—when the rise for 2011 is to be determined on the basis of the RPI in October 2010—the increase will be less than the RPI. It will have subtracted from the RPI the increase that is being given this year, and the increase will be only any increase over and above that rate of inflation, as the Government are expecting inflation to increase in 2011.
I would never accuse the House of having been misled, but it is not quite as simple as it appears. For those of us who are sceptical about the arithmetic and the intention of this Budget, appearance and reality do not seem to match very closely in the case of the increase in tax credits and child benefit.
I am sure the Minister has enjoyed putting a tax on bankers’ bonuses. That was a good part of the bread and circuses element of the PBR. However, I doubt whether its effect will be quite as dramatic and far-reaching as people think. It applies only to bonuses up to April 2010 and, with any ability to move bonuses, it may be offset by falls in the income tax take. I agree with the noble Lord that many bankers have been living on another planet and that bankers have contributed to this crisis. However, to say that only bankers are responsible for this crisis is not correct. So, too, were regulators and so, too, were central banks, which allowed interest rates to be too low and created a bubble that went on for a long time, particularly in the United States when interest rates were at 1 per cent for a long period, and in this country, when the inflation target was altered from a broad definition of inflation that included housing to a narrower definition. They also excluded the requirement for the Bank of England to pay consideration to the growth of money and the growth of credit. That resulted in the targeting of too narrow a definition of inflation and created conditions in which it was almost impossible not to make money. Saying it was all the fault of bankers is rather like saying pâté de foie gras is immoral and the fault lies with the geese who have been force-fed.
We are encouraged to believe that good things will continue to drop on us from above like dates from a palm tree in some Pacific island. We are told that the growth rate the year after next will be 3.5 per cent. Of course that may happen, but I notice the noble Baroness, Lady Vadera, when speaking in the Far East but reported in some newspapers in this country, drew our attention to the continued fragility of the banking system and the danger that banks have not recognised all the bad debts on their books. Add to that the disappearance of the shadow banking system, the process of de-leveraging, which has hardly begun, as indicated by the troubles over Dubai’s debt. For those reasons, many people expect that we will face not 3.5 per cent growth, but somewhat less. It may well turn out that it will be 3.5 per cent, but this very gradual approach to reducing the deficit is heavily based on achieving a rapid return to above-trend growths.
In my view, this is a timid PBR. It encourages the fiction that our fiscal deficit problem can be resolved painlessly and that difficult decisions can be put off for several years. The Government say that to act now is to endanger the recovery, but there are many examples, not just from my noble and learned friend Lord Howe’s Budget in the early 1980s, but from all around the world—from countries such as Canada and Sweden in the early 1990s—when Governments have taken decisive action even though the economy was experiencing a slowdown. A noted example was the famous budget of Manmohan Singh in India, who cut spending and tightened policy during an economic slowdown in the early 1990s. From that moment, the Indian economy began to grow at a rate that left it able to challenge China as an Asian tiger.
On the very day when the Pre-Budget Report was delivered, another budget was delivered across the Irish Sea in Dublin by the Finance Minister of the Republic, Mr Lenihan. Ireland has a deficit that is proportionately rather similar to our own. Mr Lenihan told the Dáil:
“We cannot tax our way”—
to growth. Ireland could not afford to wait to cut its deficit; the risks were too large. He took the step of cutting some taxes, notably VAT, and reduced civil service numbers by five per cent. He also reduced civil service pay and cut total spending by 7 per cent.
That was a brave budget, in contrast with the PBR, although they have something in common; they both received a critical reception from the press. Mr Lenihan’s budget, however, will stand the test of time, and I wager that in three years’ time Ireland not only will be in a sounder fiscal position but will probably experience higher growth than this country will. We have postponed decisions, and it will be left to the real Budget after the election before we face up to the problems.
My Lords, it is a pleasure to follow the noble Lord, Lord Lamont of Lerwick. He is an experienced politician and former Chancellor of the Exchequer, and his knowledge is viable and has been deployed to good effect this morning. The House is grateful to him. I share a lot of his analysis, but he is a hard act to follow.
I am not an economic expert, but I think that I know enough about politics to recognise a problem when I see one. The United Kingdom is facing some serious problems—the noble Lord eloquently set out the extent of the difficulties a moment ago—and these and a combination of circumstances surround the events of the debt burden that the UK is now facing. The Copenhagen conference on climate change will also create difficulties of its own that will compound the financial circumstances that we are trying to address.
Although some colleagues may consider this to be a second-order issue, the ageing of the United Kingdom population over 10, 15 or 20 years will also have an impact on some of the policy choices that we will have to make to get this right in the future. The dependency ratio—the number of people who are in active employment and/or of working age—will collapse from four per retired person to something in the region of two over that time frame, and we will have to address that as well. The public spending review will be less important than the next CSR decisions, and the decisions that the Government will have to take will tell a story that is different in tone from that of the Pre-Budget Statement of the past few days.
If that was not enough of a problem, we face unique levels of public distrust of the political classes, of which your Lordships’ House is, unfortunately, part. This will make things more difficult. We need to provide the leadership that is necessary to persuade the country that we are all in this together. We must face up to the fact that the country is poorer and that the steps that we need to take to deal with that will be unpleasant. Any future misery will need to be fairly shared, which is much more difficult if there is a unique level of alienation from the political classes in the United Kingdom.
If all that was not bad enough, there will be the complication of the looming election, which will be a distraction from some of the decisions that this country will have to take.
I agree with the noble Lord, Lord Lamont, that we need to face up to the reality of the long-term future of the United Kingdom and to tell the truth about the extent of the difficulties. However, the tone of some of the documents that the Government have produced is so mixed with spin and presentational issues that it is difficult to know the exact extent of some of the problems. I regret that. When I first served in the House of Commons, in 1983, Treasury documents were harder to read but they certainly told an awful lot more about, and much more clearly, what the Treasury and the Government were trying to do. The presentational tone of some of the documents makes the situation harder to understand..
I agree that the Government’s handling of the short-term support package—which has been necessary to support the recovery; to promote business confidence, which is crucial to the economy; and to get the wealth creation and infrastructure issues right—has been done in a reasonably straightforward and sensible way. It was essential that it should be done. However, I agree with the noble Lord, Lord Lamont, that even if the short-term situation is dealt with—and we hope that it is—the Government’s long-term plans will not begin to properly address the situation in future.. We should have a period covering two or three CSRs—a six to 10-year period of recovery—and some of the Treasury documents refer to that.
I do not think that the Government’s plans are credible or that the risk to our country’s credit rating is being addressed seriously enough. The growth forecasts are unrealistic and far too optimistic. Moreover, the causes of all of this—the incompetence of the central bankers and the inefficiency of the stock markets in reflecting real value—remain.
We face tax increases and reductions in public services that we have not experienced in the recent past, certainly not in our lifetime, and those issues need to be addressed sooner rather than later. For the Treasury to refuse, delay or refrain from publishing its projections for annually managed expenditure only makes the debate more difficult. As has been said, it is ridiculous for the Chancellor of the Exchequer to try to hide behind the fact that it is all too uncertain at the moment and not safe to tell us the unvarnished truth. Uncertainty will be with us for a long time to come. If that is the defence mechanism for keeping the detailed figures to himself, that is not a safe basis on which to proceed. In the absence of definitive departmental figures, there is bound to be speculation of the kind that we have had from the Institute for Fiscal Studies, which is doing the best it can to make estimates of the coming cuts. If we are facing frozen budgets over the next three to six years and real-terms cuts of between 4 and 5 per cent, that is a serious problem which we need to start planning for now. If we do not, the future will be harder to handle.
If all of that is not bad enough, the Fiscal Responsibility Bill is supposed to ensure and enshrine transparency to put Parliament at the centre of planning and policy-making in future. How can Parliament possibly do that if it does not have such basic figures as the annually managed expenditure details, department by department? If we do not get those figures soon, it will be impossible to respond adequately to the extent of the difficulty. If anyone doubts that, I refer them to the excellent op-ed piece by Mr Martin Wolf in the Financial Times today. If the noble Lord, Lord Myners, has not yet read it, I hope he will leave the debate and go and do so, because it begins to capture the extent of the problem that we all face.
The DWP’s White Paper, Achieving Full Employment, is encouraging because it tackles some of our deep-rooted unemployment problems. Although unemployment has not increased to the extent that we thought it might, there are still potential difficulties with unemployment rates. Some of the suggestions in the White Paper are very constructive. The ideas have been around for some time and I hope they will be promoted. In that regard, we should spend more time trying to work alongside employers. All activities in the recent past—the Flexible New Deal, for example—have been supply-side measures. We need now to support employers, and not just the big ones. The employer partnership schemes are welcome, but they are at a very high level. Small and medium-sized enterprises will struggle and need help. Our colleagues in the United States are experimenting successfully with tax credits for employers, particularly small-scale employers, to take on staff on a tapered basis. So there is an incentive for employers to do their bit. However, the White Paper’s proposals to make work pay, and to make sure that nobody is worse off by going into work, are very useful.
The money guidance scheme which has been produced by the FSA is underfinanced. I was expecting more money from the industry to be allocated to it in the Pre-Budget Report, though there is a £5 million budget for the citizens advice bureaux. Money guidance will be very important in the next three to six years. I hope the Government will look at that and see whether more money can be put into it.
Finally, I share an idea that I had on my way in this morning. I remember well the Treasury producing a document written by the noble Lord, Lord Grabiner, about the informal economy and the need for making sure that more people were brought out of the grey economy and into the legal economy. If we are now saying to people, “You will be at least £40 better off if you go back to work”, it is a time for an amnesty for people operating outside the tax regimes in this country. It would be to the benefit of the Treasury if it revisited some of the recommendations of that report. That would pay handsome dividends and increase the tax take. I seriously suggest that the Minister should go back and look at that.
We need more information before we can get to the crux of this matter. Mr Martin Wolf’s article in today’s Financial Times ends by saying that these are problems that politicians should not duck. I agree with that, as I hope the Government will. I hope they will provide the figures that the House needs to be able to make sure that we respond to what will be a very serious task in the next three or six to 10 years.
My Lords, this Pre-Budget Report is a clear example that, as a country, we seem to have lost our sense of balance. We seem to have lost our sense of priorities and, quite frankly, many people are saying that the Government may have lost the plot. The state has become too big and too wasteful; it is now not aiding society and business but burdening them.
The polls clearly show that the public are vastly in favour of the one-off levy on bankers’ bonuses. We talk about moral hazard, but I do not think that anyone feels that it is right that the bankers, who have been saved by taxpayers, should continue to rake in the millions in these awful times. But it seems that we have entered a blame game and not a gain game. What about our bloated public sector, full of non-jobs and wasteful, inefficient, unproductive expenditure? What about the gold-plated pensions for those who work for the state, when companies in the private sector can no longer afford anywhere near those sort of pensions?
In the past, there was a clear understanding and trade-off whereby a public sector job meant a lower salary compared with the private sector but a job for life and a generous pension. Today, the public sector has its cake and eats it, too. Many surveys show that average pay in the public sector is now higher than in the private sector. Where is the sense of balance?
We have very high levels of government borrowing and one of the highest deficits, as the noble Lord, Lord Lamont, said, with a financial sector that has been propped up to the tune of more than £1.2 trillion. Yet businesses, especially SMEs, are still struggling to get finance from the banks, which are still not lending. I implore the Minister to do all that he can to put pressure on the banks that the taxpayer has saved to pass on the enormous support that we have given them by lending to business, particularly to SMEs, which are the engine of our economy.
We have giant levels of government borrowing, but we have had far higher levels in the past—for example, after the Second World War. The big difference then was that there was a clear reason for those high levels of borrowing and, at the end of the war, there was a clear light at the end of the tunnel, making it easier for us to work our way out. Today, as demonstrated clearly by the Pre-Budget Report, there is no light at the end of the tunnel, there is no clarity and there is no confidence. As the noble Lord, Lord Lamont, said, the future is uncertain.
Taxes in this country are far too high and the situation only gets worse. The national insurance hike in the PBR is a tax on jobs when unemployment is already dangerously high. The pros are vastly outweighed by the cons. The national insurance increase is the report’s biggest earner, from my understanding, raising about £9 billion by 2011-12, yet the consequences of such a move are not included in the number-crunching. How much money is it projected that the economy will lose through declining job creation in response to this tax?
Talking of jobs, we have heard that we have a welfare state that has created a benefits trap where, particularly after this Pre-Budget Report, for many people on benefits there is hardly a financial incentive to work. I served on the National Employment Panel for many years. We often referred to Australia’s extremely successful welfare-to-work reform, instituted by Prime Minister John Howard. Why have we not learnt those lessons? Why have we not had the guts to implement the reforms here? It is only recently that serious reform has even been talked about, but where is the action?
The Chancellor announced earlier in the year that the top-end tax rate was to be raised to 50 per cent, which widened the gap significantly between us and the economies with which we compete. Where there was a gap, there is now a chasm, with a difference of 7 per cent between the UK’s top rate of tax and that of Germany, one of our closest competitors.
The report contains some positive moves for business, which the Minister outlined. Deferring the rise in corporation tax for small companies will be welcomed by many battle-scarred businesses, as will the time-to-pay scheme and the 12-month extension of the enterprise finance guarantee scheme. Yet, as I have said previously and will say again, the Government are providing not even a tiny fraction of their £1.2 trillion support for the financial sector and banks for businesses, enterprise and entrepreneurship. Once again, there is a complete imbalance of priorities, for it is after all business and growth that will get our economy out of the dire straits that it is in. It is government’s responsibility to create the environment and be the catalyst to enable business to flourish. We are not doing anywhere near enough.
While we are in recession, countries such as China and India are roaring ahead. As the president of the UK India Business Council, I am grateful to the Government for the financial support given by UK Trade & Investment to the UKIBC. I am very proud of the work that the UKIBC does to help to promote bilateral trade and business between the UK and India. However, we could and need to do much more. When I talk to business audiences around the country, I always take a straw poll and ask, “How many of you do business with India?”, and it always frustrates me no end that, disappointingly, only a small fraction of hands go up. Britain has to look outwards and be fully engaged with countries such as India. These are the sorts of priorities that the Government need to have. In the most recent quarter, the Indian economy grew by over 8 per cent.
Talking of growth, what about us in the UK? We have heard the Government’s forecast for economic growth, but within the past two years the Government have got their forecasts wrong by over 6 per cent. Given that track record, it is hard for us to believe the projections for 2010-11, let alone for further than that. There is no question of cutting back our bloated public sector spending and creating an environment for the economy to grow, which are two clear solutions to our predicaments. Extortionate taxes, however, compounded by the non-dom levy, which is targeted at so many people who have helped our economy to prosper, will kill the goose that lays the golden egg. We are driving people out of this country. We have descended into the politics of envy, not the politics of aspiration. In my role leading the UK India Business Council I would speak proudly of our tiny nation always punching above our weight as the fourth largest economy in the world. Sadly, it appears that we may not even be in the top 10 very soon.
This is déjà vu. We have gone back 30 years to 1979. This is Groundhog Day. Once again we have a winter of discontent. Once again our economy is on its knees. While others have started to recover, we have strikes back with a vengeance. Our state education system, the foundation and future of this country, is nowhere near as good as it should and could be. We are letting our children and our future down.
Yet we have so much going for this country. We have the best of the best higher education and world-class high-tech manufacturing. We have the City of London, which, in spite of the financial crisis and in spite of everything, is still one of the world’s leading financial sectors. We have our strengths as a country of innovation, creativity and research and development. On the other hand, all this is being let down by a state that is overspending, overborrowing and overtaxing. It is not just us but our future generations who will pay the price for this. Surely, with the Pre-Budget Report, the Government should be making preparations for the next generation, not, as so many have said, for the next general election.
I will not follow the noble Lord, Lord Bilimoria, in his interesting speech. I do not recognise some of the things that he had to say. I do not see my country in quite the same way as he seems to at the moment. I agree with the shadow Chancellor when he said that we are all in this crisis together, although that is a thing that politicians say before they begin their more partisan remarks. I want to try to be as non-partisan as I can today.
I do not intend to go back over the causes of the crisis. I do not want to say anything about the origins of the financial crash, which had its beginnings in the United States and which led to the global downturn, or about the United Kingdom banking crisis and the Government’s wise decision to prop up the banking system, a policy that was followed in other advanced countries. If it had not been followed, the banking system throughout the world would have been in terrible crisis, which is why we had to prop it up. The industrial system does not work without the financial system working with it, which is why we had to act in the way that we did. I shall also not say anything about the G20 and the way in which it led international action to support the world economies at a critical moment, with Governments introducing tax cuts, government spending and co-ordinated action to lower interest rates and increase money supply. It is right that they did that; again, that helped the world to recover and to come out from this very deep recession, as it is now beginning to do.
It is also right that the United Kingdom Government, faced by falling corporate and income tax revenues—the main reason why we have a large public sector deficit at the moment—should have acted not to cut public spending at that moment but to sustain public and private demand, thus saving businesses and jobs. I am struck by the fact that even now there are 2.5 million more people in work than there were in 1997 and the fact that our employment levels are higher than those of many of our main competitors.
We can argue about the level of public spending. I listened to what the noble Lord, Lord Lamont, a previous Chancellor, had to say, although we should occasionally remember what public spending is for. We need our hospitals, which were in a very bad state in 1997, as indeed were our schools; they were chronically underinvested and I am proud that the Government took the action that they did. We now have a much better situation.
It is true that there was a small public sector deficit in 2007, but I cannot remember terrific criticism of that. In fact, in 2007 the shadow Chancellor committed an incoming Conservative Government, if they won the election, to supporting the Labour Government’s spending plans for the following three years. It did not seem that everyone was aware that there was such a large structural deficit. They were not aware, frankly; it is only with what has happened with the collapse of revenues that this has been revealed.
It is not fair to say that the Government are not coming forward with a plan. They have a plan—although they have not given us all the figures—to reduce the budget deficit by £100 billion or by more than half over four years. That is the deepest and fastest cut since the Second World War. I advise the noble Lord, Lord Kirkwood, to read the excellent report, where he will see some of the figures.
As the Pre-Budget Report shows, fiscal tightening will be achieved by a combination of increased taxation and reduced spending: one-third by increased taxation and two-thirds by reduced spending. On spending cuts, I am pleased that the Government are committed to protecting education and front-line health services and to maintaining police and community support officers.
I am grateful to the noble Lord for giving way. I am delighted that he has been able to find in this glossy document the figures that he is telling us, in the format that he is quoting. I have gone through it and I cannot find them. Maybe there are pages missing in mine. Could he give us some page numbers?
The noble Baroness can do her own research, frankly; she should read a document before she comes in if she is going to talk about it.
The fact is that, if there is the commitment to protecting certain services, other department budgets will have to shrink. The Institute for Fiscal Studies has got it about right. We are talking about 5.6 per cent or 6 per cent, which will mean severe cuts; there is no question about that. To those who criticise the Chancellor for being too timid, I say that there are very severe cuts in this plan.
On debt levels, I have one remark. I agree that it is true that our debt levels will rise, albeit from a low base, because we had one of the best debt to GDP ratios of any country in the world. However, because of that low starting level, in a sense we can afford a higher one in a crisis. In fact, even at its peak we shall be reaching the average for the other G7 countries, so this is not way out of line with everybody else.
There is a legitimate debate over the timing of the reduction plan. I understand that the noble Lord, Lord Lamont, would like to start all the cuts now. I think that that was what he was arguing this morning; at least, that is the inference that I took and presumably it is what the Opposition would like to do. The fact is that the Government have resisted immediate fiscal tightening because, although a return to growth is predicted by the end of the year, the outlook is still uncertain. It is fair to say that this is perhaps the most uncertain time that any of us have been in. Therefore, the Government have produced their plan but are not introducing it straightaway, because we are not absolutely certain that we have come out of the recession. That is a perfectly legitimate and sensible position for the Government to adopt.
There is a fear that, if we reduce the deficit straightaway, we risk a double-dip recession and could be in the position that Japan was in in the 1990s. That is precisely what happened there; when the Japanese cut back on public spending, they went back into recession. The United States in the late 1930s also failed to come out of recession and went back into it. There is a danger of premature action, which is what the Government are trying to guard against. It is interesting that the Governor of the Bank of England and the head of the IMF think that it is right not to take that sort of risk and that we have to see rather more certainly where we are before we start a massive cutback—and it is a massive cutback, whatever the noble Lord may think. Incidentally, I note that the leader of the Opposition said recently—I think that it was last week—that,
“there is a danger, if you do too much too early, you would choke off some demand”.
That message is clearly getting through to the Opposition as well.
I have said quite enough and will conclude by noting that, in 1945, Keynes warned the incoming Labour Government that, with the abrupt ending of US lend-lease, the United Kingdom faced “a financial Dunkirk”. That is not the situation that we are in today, in 2009, but, as the Chancellor told the Commons, it is,
“a critical time for our economy and for our country”.—[Official Report, 9/12/09, Commons; col. 359.]
There is no question about that; if anybody has got the wrong message from the Chancellor’s speech to the House of Commons, that is not what I took from him. I took the message that we are in a serious situation, which is why we have to prepare such a major cutback over the next few years. However, I am confident that, provided that we act calmly and with forethought, we can come through this once again, as we did in 1945 with the Labour Government.
My Lords, it has been a common practice with this Government’s Budgets and PBRs—especially those of the former Chancellor, the present Prime Minister—for the pundits, experts and commentators to look through all the small print for the hits, hurts and horrors that were concealed in the statement itself. After 24 hours, the statement then starts to fall apart. However, I have never known a Chancellor’s statement to be so rapidly and totally panned by just about everyone as this one has been. The criticism is universal, from the media to think-tanks and bodies such as the Institute for Fiscal Studies, to City economists, international observers, the rating agencies and so I could go on; it is universally recognised as a purely political PBR.
Like my noble friend Lord Lamont—I shall be following him in much of what I have to say—I actually have sympathy with the Chancellor. He has had to deal not only with an awful inheritance from the present Prime Minister, but—if rumours and leaks are correct—with a great difficulty with him even now in taking some further action. Of course, it was the Prime Minister who tried to pretend all through the summer that there was no need to cut government spending. Everyone, from the Governor of the Bank of England downwards, now knows that the measures taken are simply not enough. Even the tax proposals which affect most people, like the one on national insurance, have had their introduction postponed until after the election.
There, was, however, one event 24 hours later. We now know from leaked Treasury documents, but not from the statements themselves, that overall departmental spending will be cut by 9.3 per cent over four years. Since then, we have also seen—my noble friend Lord Lamont referred to this—the IFS forecasts about non- ring-fenced departmental spending. No wonder the Chancellor concealed that by postponing the Comprehensive Spending Review until after the election, leaving it to his successors. Will the Minister confirm that the IFS forecasts for cuts in non-ring-fenced departments’ spending, to which my noble friend referred, are correct?
One of the most telling reactions was in the gilt market, and among all the City economists advising on it. Gilt yields—that is, the cost of borrowing—rose, and even then most, including the rating agencies, held back on their judgments on the basis of waiting to see what is done after the election. I rarely quote my own speeches, but this morning I was reminding myself of what I said in the debate on the economy on 7 May this year. I said:
“My nightmare scenario, which I profoundly hope will not happen but is where the Government may be leading us, is what happens if the Debt Management Office fails to raise the huge sums in gilts that will be required”.
I went on:
“At September 2008, overseas investors owned more than 36 per cent of all outstanding gilts, compared with less than 20 per cent 10 years earlier.”.—[Official Report, 7/05/09; col. 685.]
Since May, the position has got worse. We can see that the rating agencies are suspending judgment but giving very clear warnings. Now, as the Minister knows, I have some criticisms of the rating agencies for the role that they played in rating banks and financial institutions, but it is nevertheless the case that those agencies are listened to in looking at the ratings of individual countries, and our triple-A rating is clearly under threat.
We now know that the official government projection is for net government debt to grow to almost £1.5 trillion by 2014-15. Many of us in the House recall the period in 1976—my noble friend Lord Lamont referred to it and I am sure that the noble Lord, Lord Barnett, will particularly recall it—when the then Chancellor, the noble Lord, Lord Healey, had to come back from Heathrow to go to the IMF and bail us out. I believe that our debt position is now much worse than it was then. The cost of servicing debt is projected by the Government to be £63.7 billion by 2013. That is more than every other government spending department, so the cost of servicing the debt is the worst of all in terms of cost and size. But that is based on optimistic assumptions about economic growth. Earlier this year, the Chancellor got his assumptions about economic growth for this year badly wrong. It is bound to be affected by the serious delay in taking real action on government spending. It should have started by now. As the much listened-to Roger Bootle said,
“the forecast for 3.5% growth in 2011 and 2012 looks highly ambitious. If, as I suspect, growth turns out to be much weaker … then the borrowing numbers will be much higher”.
Moving on to my second question to the Minister, I recognise that there are different repayment periods for gilts. I know that there is now much more emphasis on long-dated gilts, not least because of the pension fund requirements. However, for the amount of new gilts that must be raised in the forthcoming years, even on the Government’s own borrowing projections, what would be the impact on the cost of servicing the debt if there was, say, a 0.5 per cent interest rate increase above the Government’s current assumptions? I fear that the figures that the Government have put before us for the cost of servicing the debt are simply too low.
I turn briefly to two other points. On pages 108 and 109 of the PBR, there is reference to the additional £3 billion of annual savings by 2012-13. Some of those were also contained in the “Smarter Government” Statement last week—in itself an admission that we have had “unsmart” government for 12 years. And no wonder. To cite the “Smarter Government” document, the additional £3 billion saving includes,
“at least £500 million by reducing duplication between organisations and streamlining”,
what are euphemistically called “arm’s-length bodies”. The document announces the rationalisation of more than 120 of these “arm’s-length bodies”, which I think most of us would normally refer to as quangos and government agencies. There will be savings of £650 million from cuts of 50 per cent in consultancy spend, and 25 per cent in marketing and communications spend across government; £550 million from local government reducing the burdens of inspection, assessment and reporting requirements from across government; £140 million from reducing the costs of the senior Civil Service by up to 20 per cent; and £92 million from making more efficient use of funding available under the Rural Development Programme for England. We all know the fiasco in relation to the Rural Payments Agency, where well over £200 million in costs—I think the figure will be much greater than that—was caused by government policy in dealing with the inefficiency of that body. We can see a similar need to contain savings there.
The interesting point about all of this is that it is a reflection of government mismanagement to date. In each of the areas I have quoted, the Government seek to make savings where they have themselves let spending rip over the years. Every single one of them has followed from government policy, and now they are having to cut back.
We have already often debated how the Government have so badly damaged pensions in this country. However, one of the major planks of the Government’s pension policy—I want the Minister to respond to this point when he comes to wind up. Perhaps I may have the Minister’s attention for one second as I want to ask him a question about this. One of the major planks of the Government’s own pension policy, on which much time has already been spent, is the personal pension to be introduced in 2012. In fact, until it deteriorated in the context of pension policy, it was one of the positive aspects of that policy. However, page 85 of the Pre-Budget Report states:
“The government announces a change to the implementation of private pension reform, including to the timetable for employers joining the reform”.
As I understand it—I should be grateful to know whether this is correct—that means that the personal pension policy will actually come in even later than 2012. If that is correct, it makes an even bigger shambles of the whole approach that the Government have taken to pensions. My questions are when and why. Why is there practically nothing in the PBR about public service pensions or accelerating the timetable for raising the pension age? Surely those areas should have been addressed now.
To conclude, in order to be as brief as possible—there is much else I could say—just as Tony Blair will be most remembered by history for deceiving the country as to the reasons for taking us to war in Iraq, so, as this PBR yet again demonstrates, the present Prime Minister will be remembered as the Chancellor and Prime Minister whose profligacy left Britain’s economy the most vulnerable of all major economies when the international banking crisis hit us.
My Lords, I agree with the remarks of my noble friends Lord Lamont and Lord MacGregor. I slightly disagree with the depth of pessimism of the noble Lord, Lord Bilimoria. However, in the few minutes available to me, I shall take a slightly different, perhaps less fundamental, view of what is happening today. We have heard a lot of good speeches about the depth and length of our current crisis. However, I am aware, having listened to quite a few Budget speeches—before the advent of the Pre-Budget Report—that there was always almost a necessity for the Opposition to be rude about the Government’s Budget; that is almost accepted.
I remember the second Budget of my noble friend Lord Lamont, in which he introduced a new tax plan; he brought down taxable income at some stages to 20 per cent rather than 25 per cent. What was the reaction? The Labour leader—then Neil Kinnock, now the noble Lord, Lord Kinnock—said that the Budget was,
“a panic-stricken pre-election sweetener”.
Labour later said that it would oppose the introduction of the lower rate of income tax. Shortly afterwards, we—the Conservatives—won the election.
Then there is the case of one of the first Budgets of the noble Lord, Lord Healey. I was already in the House of Commons in March 1974 when the deficit was running at only £4 billion a year. The then Chancellor increased income tax by 3 pence. The reaction was that two Conservative MPs wore Chairman Mao suits in protest. One of them, the noble Lord, Lord Dykes, is a Member of this House today; I am sorry that he is not with us.
I am not totally frivolous in saying that there is a sense in which one must try to stand back and look at a Budget, and what it will do, with a sense of history and, perhaps, without taking too much of a party-political view—particularly when there is going to be an election in five or six months’ time. Standing where I do in this House, I obviously hope that we, the Conservatives, will win it. One must understand to a degree why this was a pre-election PBR. It is obviously largely there to win votes.
It would be much better if the Opposition and Her Majesty’s Government could agree that there was a crisis and basically agree what measures should be taken to deal with it. If that does not happen, there are disputes and wrangles which make for a much worse loss of confidence, nationally. One of the problems with this is that if the United Kingdom loses its triple-A credit standing, which some newspapers tell us is a possibility for the future, it will in my judgment be largely because the newspapers are so busy telling us what a crisis we are in. We need rather more quietness and confidence, and rather more of an ability to take a long-term view.
That said, I confess I find it totally impossible to understand what the purpose of the Fiscal Responsibility Bill is. I have a copy of it in my hand. It seems to me simply to repeat the powers that the Chancellor already has. Does it simply mean the Chancellor now feels sufficiently insecure that he cannot make Secretaries of State in the high-spending departments do what he wants them to do, and therefore he has to introduce the Fiscal Responsibility Bill? The Bill says:
“The Treasury must ensure that, for each of the financial years ending in 2011 to 2016, public sector net borrowing expressed as a percentage of gross domestic product is less than it was for the preceding financial year”.
Well, big deal. It is extraordinary that it is thought necessary to produce this Bill, which I gather will be debated in the Commons on 6 January, the second day after the return from the Recess. I quote another paragraph from the Bill. It states:
“The Treasury may make an order imposing on the Treasury a duty or duties framed by reference to any one or more of the financial years ending in 2011 to 2016”.
I should be very grateful if the Minister in replying—I know how wise he is—would explain to me what that means. As I say, I do not know whether it simply represents a fear on the part of the Treasury that it does not have the ability to tell departments what they must do.
I switch to a very important question; namely, what sort of companies and businesses will emerge in the United Kingdom that will make it stronger and better able to keep up with the competition which will certainly come from China and India? Some improvements have been made to the common agricultural policy which will help agriculture in this country to a degree, but not much. Yields per acre will not increase a great deal. Climate change is possibly of benefit to us because we are well up in the technology to deal with it and the Prime Minister is taking it very seriously. I do not think that banks and hedge funds can and should have a higher percentage of our national assets. It is perfectly possible to look at separating deposit banks from investment banks, as has been done in the past in the United States and perhaps that should be looked at. I am in favour of the idea of a global Tobin tax on all financial transactions. We have spoken about this before, but I realise the extreme difficulty of making that work effectively and globally.
Above all, we need to increase the number employed in manufacturing—to use an old-fashioned word—in this country. This concerns not only employment but our brains. How good will the things that we produce be? We must specialise in the highest technology that is available. I very much like the idea of a new advanced apprenticeship to help those who do not go to university to be ready to deal with firms’ modern technology. We need to encourage all that we do in pharmaceuticals, biotechnology, the carbon sector and the nano industry. I appreciate the references made to that in the Pre-Budget Report. Certainly, if we do not adopt the best, most modern and exciting developments, others will do so, employment will not rise and we will slip down as a manufacturing country.
I suggest that money should be made available to universities and charities that concentrate on the most novel scientific developments. This is happening to an extent at present. Until last year, I was for 10 years on the council of the University of Sussex and was delighted that in recent years the number of undergraduates reading high sciences there was increasing. However, like other universities, we were, and are, looking for more money for that purpose. It is well worth pursuing.
I suggest to the Front Benches that we should consider making money prizes available, denoting great merit, for the best scientific discovery of the year. We should copy the Nobel Peace Prize and think about awarding British prizes for the best, most successful and most exciting scientific development of the year. The relevant technology would then be invested in, thereby benefiting manufacturers in this country as well. If we could move in that direction, it would have very positive support, open more doors and enable employment and growth to rise.
My Lords, I suppose that one should not expect too much from any opposition of any political party in a pre-election period, as the noble Lord noted. He tried very hard not to make a party-political speech. Like him, I have made a few, when I was in government and in opposition. Nobody was listening and it was a total waste of time. It is a particular waste of time to do so in your Lordships' House, as we all know, but we still do it. I have listened very carefully to constructive comments on how we can get out of the problem we are discussing. The implied but not specified solution is, usually, massive cuts in public expenditure and/or increases in taxation. That is understandable given the size of our deficit. For my part, I apologise if I ever stray into party-political comments.
I wish to deal with two major areas only: the banks and the deficit. I do not think that any political party at present, whether in government or opposition, could have avoided suggesting the tax that is proposed for banks, or something like it. It is quite impossible to avoid that. I am just sorry that the banks did not see fit to make it possible for the Government not to take any action. I think that President Obama said that the banks just did not get it. There is a larger number of banks in America, but the same applies in this country. But, more importantly, I hope that government policy will allow banks the freedom to manage themselves. I am sure that my noble friend Lord Myners will confirm this. He has always said that is the case, although he might be better at managing banks than some who are doing so. I do not want to see government too far involved in managing banks. I hope that when we no longer manage them, the Government, on behalf of taxpayers, will soon be able to sell their investment in the banks at a profit. I declare a modest interest in terms of being able to join in that.
On the major issue of the large deficit that we face, I agree with the Government that it would be foolish to start cutting public expenditure or increasing taxes at this juncture when growth is as fragile as we see it to be. I note that the Government are planning not to cut public expenditure but rather to increase it by £31 billion in the coming year. I should be grateful if my noble friend could explain why it was thought necessary to increase public expenditure at that level in the coming year. I should have thought that a lesser figure would be more helpful and might have avoided the necessity to increase national insurance contributions. However, I note that the Opposition have not suggested that they would reverse that decision. I am sure that there will be increases in taxation in the near future, before, or certainly after, an election. So they will hurt. It is no use pretending that increasing taxes on only a modest number of people will get you the money you need, because it will not. Increasing taxes or cutting public expenditure will hurt lots of ordinary people. If we pretend otherwise, we are being dishonest.
No particular party, as has been recognised, has been able to announce any details of what should be done in terms of detailed cuts in public expenditure, to which the noble Lord, Lord Lamont, referred. In any event, it would be wrong to be too specific until there is a clear idea of the level of economic growth that we can expect. The Government have forecast 3.5 per cent in the two years in question. The Governor of the Bank has forecast 4.1 per cent. Over the years, national and international forecasters very often have got their forecasts wrong. They do not talk about getting it wrong; they talk about revising their forecasts, as do governments and international commentators at the highest level constantly.
For my part, even without giving the details, I accept that the Government mean it when they say that they are going to bring the deficit down to the percentage that is required. How precisely they will do it, they are unable to say. No one can say. An opposition cannot say, nor are they saying. In this debate and in other debates elsewhere, I have listened carefully to hear constructive comments on precisely what should be done, but I am afraid that I have not heard any. But some in the media and in the Opposition—I regret to say that I have heard this in one or two speeches today—are risking damaging our rating for servicing the borrowing. I recognise that there is a serious problem, as did the noble Lord, Lord MacGregor, who knows that I have the highest regard for him. He is risking, as are many others, the rating for servicing the borrowing.
Recently, David Cameron was quoted as saying that a downgrade is,
“the greatest single risk to sustained economic recovery”.
It is a major risk. The more that it is talked about, the greater the risk. I have looked carefully to see what rating organisations have in mind to do and how serious this risk is. Arnaud Marès, of the sovereign risk group at Moodys, said:
“Affordability is stretched to the limits of what is consistent with a top rating, but our assumption remains that a substantial margin for fiscal manoeuvre exists”.
That quote is from Moodys; it is not from a politician. It is from the body which sets the rating. I am pleased to hear that the risk it sees is flexible enough to allow us to borrow at the triple-A rating. To talk otherwise is damaging and would be damaging to anyone who expects to be in government in a few months’ time. I hope that we can stop talking about the potential risk of downgrading our rating.
For my part, the Government could go a little further in spelling out how they would proceed. I declare a past interest as Chief Secretary to the Treasury for five years. I spent most of that time cutting public expenditure. I regret to say that because it is not what I came into politics to do. When I am asked to give someone personal financial advice, I always say, “No, I am legally not allowed to give advice”. I can only tell my noble friend what I would do if I were Chief Secretary today. I would like to see the Government set an eventual overall cut in public expenditure, department by department. on a percentage basis. It would have to be a large percentage to allow flexibility for the Chief Secretary who, when Cabinet has agreed that figure, could say to his opponent—I should say the Secretary of State concerned—who wants to spend the money that he cannot. In practice, he would be able to say, “I am sorry, Cabinet has agreed that you have to take the cut”. That is what should be done. The best way to cut expenditure would be to leave it to departments. They should decide on their priorities. They have to make the cuts in expenditure. I would leave it to departments to decide how they would make their cuts. I recognise the need to ring-fence, but I hope that the ring-fencing is fairly light. Departments should be able to maintain, I hope, the servicing of those major areas of expenditure without being ring-fenced completely.
I believe that spelling out the procedure in that way would help. But, on the whole, the Government have shown their determination to get borrowing down over a period of years. As I have indicated, they are not cutting expenditure. Even in the two years after next year, they are still planning increases in public expenditure of 0.8 per cent in real terms and not a cut. I should like to know from my noble friend whether that is purely because of ring-fencing or are the Government still not making the major cuts that might not be necessary if, for example, the 3.5 per cent growth did not occur, which I would regret to see?
For the moment, I hope that the Government will proceed along the path that they are going, including even the so-called smarter cuts to achieve greater efficiency. The plain fact is that if you are spending £700 billion, there will be inefficiency. If the most efficient people in the world were spending as much as £700 billion, there would be bound to be potential for savings. Eleven billion pounds spent on the smarter procedure is petty cash in that context—much more could be found. I wish that I could propose a way in which to cut the deficit painlessly, but I cannot. I would love to hear someone in this debate tell me a way.
My Lords, the Motion on the Order Paper to approve the Pre-Budget Report struck me as rather strange. The EU demands that we approve it, but what if we decide not to approve it? I wish to say right at the start that I do not approve of it very much. Not only do I not approve of the report; most of the commentators—most of the financial experts and economists—have serious reservations about it, as my noble friend Lord MacGregor said, as do I. Now, maybe Moody’s does not have reservations about it, as the noble Lord, Lord Barnett, tells us, but does anybody have confidence in the rating agencies?
I shall be very brief, not only because I have been overactive in the Chamber for three of the past four sitting days—a self-denying ordinance forced me to remain silent on the SSRB debate, knowing that I would be involved in the ad hoc group—but also because much of what I want to say has already been said. However, I think that attention should be drawn to two issues, and I aim to be brief in making my points.
The two issues are: the process of these regular tomes issuing forth from the Treasury; and the lack of any firm commitment to improving the public finances, indicating, or warning, exactly where the axe will fall, if it does, or whether there will just be shifting from one expenditure area to another.
I am not criticising the Government about the Pre-Budget Report process, just about how it is carried out. For years I have hoped that these reports and Budgets would be clear and straightforward in their content, but that has been hope unfulfilled. All that has happened is that they have become ever glossier. Production companies must rub their hands in glee when they win a contract to publish these documents—sorry, perhaps I should say books—consisting of 211 pages and a very glossy cover.
My main point is not about the glossy cover. However, if the Minister would like to give some thought to things other than the stuff inside the report, perhaps he could tell us whether the Government’s policy is to encourage greengrocers to use plastic bags for every purchase, as depicted in one of the photographs on the cover. On the same theme, perhaps he could tell us what the picture of a boy throwing a blue ball—blue, mind you—at an adult is meant to say, or the intent behind the photo showing a train leaving St Pancras, if it is St Pancras. Is this a sop to the EU showing a trainload of people going over with a Pre-Budget Report to get its approval? Or is the train carrying off the bankers and entrepreneurs to reside elsewhere in order to avoid the tax on bonuses or the 50 per cent tax rate? On this latter point, I approve of the tax on bonus payments to those who, alongside the Chancellor of the Exchequer and his predecessor, created the parlous state in which we now find ourselves.
To be serious, my main point about the process is that we get all this year after year. All Governments have indulged in it. We receive the great speech of the Chancellor of the Exchequer, but every one of us knows that the devil is in the detail and that we will have to pore over it for days. It smacks of being a bit of a game, but it is deadly serious. This time, to put it very mildly, the speech and the content of quite a bit of the report do not send the same message. Correction: superficially they might pass the test, but the short-term tactics to try and keep the populace happy until June 2010 tell a very different story from the long-term implications of the actions proposed. In effect, it is an expensive charade. We are so bored with the endless mantra of lists of what this great Government have achieved over the past—and very long—12 years and seven months. Do they really think that we believe them? It is an insult to our intelligence and an outrage.
Child benefit is just one example. However, my noble friend Lord Lamont has shot my fox on that one. He is not in his place, but I have already told him so. Suffice it to say that the child benefit issue was an example of legerdemain, which is unacceptable. There are many more such hidden jolts to the confidence that the Government hope to engender, but those looking for comfort are probably not consumed with a lively interest in reading the small print inside the glossy book
My second point concerns the state of the public finances. There is nothing about the Government’s plans to bring the public finances into order that induces confidence. Again, we have statistics that are highly selective and questionable and no expenditure data at department-by-department level—just statements that X per cent will be saved, or fiddling round and shoving figures from one box to another. As my noble friend Lord MacGregor said, it is an indication of the massive mismanagement over this period of 12 years and seven months.
Those of us who have some knowledge of statistics know only too well that statistics can be found to prove almost any point; at university we used to call it selective sifting. But let us leave that to one side. What we all need is a narrative telling us exactly how the Government plan to put the public finances in order. The problem as I see it is that if there is no firm plan in place, we could be forced by the markets into some most unpalatable actions. Time is running out. In the view of one financier to whom I spoke—he is not a banker—
“we are hanging on by our fingertips”.
I hear you ask: what do you—perhaps not me, but the Conservatives—suggest? I am not an adviser to the Conservatives, nor an adviser to anyone, which is not a surprise. However, it seems to me that we should have a strategy that involves two prongs: get the private sector to grow as fast as feasible and wise, and tackle the overweening waste in the public sector.
We can all agree that there is a lack of confidence in the private sector. Please do not quote focus groups or spurious surveys and polls at me; I am sufficiently close to the ground to know that there is a serious lack of confidence among those who were memorably described by a former Labour Lord Chancellor as “the ordinary people”. Although I have constantly promoted the savings ratio over the years, perhaps now is the time to give that a bit of a rest. We now have a savings ratio of 5 per cent positive, rather than 1.5 per cent negative. Private investment is where the emphasis should be focused, together with sensible consumption. A 5 per cent savings ratio could finance £50 billion if the money goes nowhere else. But nothing is that simple; I am talking in the broadest of terms. What does not sit easy with this is the serious increase in taxation. I remind your Lordships that a previous Conservative Chancellor of the Exchequer took a very brave risk by switching the emphasis from indirect taxation to direct taxation, which in turn was rewarded by an increase in growth, tax yields and confidence. Perhaps the Government should look at that.
Hand in hand with that, the public spending issue must be tackled. A serious reduction in public expenditure must be undertaken, but not in front-line services. I certainly hope we never let pass our lips again the sentence that we heard in the past week, “putting the front-line services in front”. Surely the front-line services are in front—otherwise why describe them as front-line services? Just step outside this House. Gross mismanagement of public services stares us in the face at every turn. I have a whole list that I will not bore you with.
We are in limbo. I fear that we may be on the way to hell. Heaven is probably not obtainable, but please let the Government be both transparent and humble.
My Lords, I have shifted significantly to the right because I am told that the microphone to my left is not working.
The purpose of my speech is statistical. In the 40 pages of supplementary material to the PBR, the only table that goes beyond 2011-12 is table 2.9: “Current receipts”. One would have expected there to be an equivalent table called “Current expenditure”, which should also cover the period until 2014-15. There is an issue about the provision of information.
The noble Lord, Lord Barnett, challenged us to say what we thought would be the right way to proceed. The challenge was absolutely correct, but the problem is that unless you have detailed information upon which you can rely, it is very difficult to be specific. I take one example from table 2.9. It predicts a doubling of air passenger duty over the period from today to 2014-15. Once one has seen that in a figure, I suppose there is a basis for doing some research and investigation into whether it is possible to agree with the consistent increases described in the table. The table also describes consistent increases in council tax and business rates. Is this reasonable? In the formulation of policy, unless you have accurate information, it is difficult to be confident that what you are saying makes sense.
My wider question is: how confident is the Minister and the Government that the report presents the most likely outcome for the public finances? The Treasury will have done its sensitivity analysis. The report states in many places—one can only agree—that forecasting is particularly difficult in current circumstances. I should have thought that it was more difficult as regards receipts than expenditure. How wide is the difference between the best and the worst cases, and where within that analysis does the most likely case, the one in front of us, lie?
I ask that not least because of the way in which these figures have rapidly changed since the end of January this year, when we had the equivalent debate to this—although then, of course, we were in possession of Maastricht treaty figures. The noble Lord, Lord Myners, said in his opening speech then that the six-year run of borrowing would be £78 billion, £118 billion, £105 billion, £87 billion, £70 billion and £54 billion. Now, less than a year later, the six-year run is £90 billion, £175 billion, £173 billion, £140 billion, £118 billion and £97 billion. A total of £514 billion was forecast, but now, with one actual figure within the six-year run, it is forecast to be £793 billion, an increase of over 50 per cent. It may well have been that these figures, or close to these figures, had emerged and were presented by the time we came to the Budget; nevertheless, 11 months ago we had the figures that we had then and now we have the figures that we have within the report.
The Minister went on to say that net debt would be 41 per cent, 48 per cent and 53 per cent,
“before peaking at 57 per cent in 2013-14”.—[Official Report, 27/1/09; col. 201.]—
all as a percentage of GNP. That was a four-year run. We now have a seven-year run, which on page 18 of the report reads 44 per cent, 55 per cent, 65 per cent, 71 per cent, 75 per cent, 77 per cent and, again, 77 per cent for 2014-15, which represents a substantial and rapid increase with no peak. The concept of a peak that we were given 11 months ago has disappeared. As I said, by the time of the Budget the figures had significantly deteriorated, prompting the Government to say that the deficit was still in line to be halved from 12 per cent of GDP to 5.5 per cent in 2013-14. However, as has been said by several speakers in this debate, crucially this outcome depends on the forecast that the economy will grow by 3.5 per cent in 2011 and 2012, and above past trends thereafter. Outside commentators may always be wrong, as the noble Lord, Lord Barnett, said, but of course they can be wrong in both directions and at the moment they are unanimous in regarding this predicted rate of growth as optimistic. I do not believe that any of them will be including it in their most likely outcome, which we shall see over the next weeks or months.
My own view is that it is only common prudence to go forward on the assumption that recovery will continue to disappoint. When we look at the previous trend rate of less than 3 per cent and look at its components, it seems doubly unlikely that, given the lower pound, the effects of a post-recession bounce and export-led growth will deliver 3.5 per cent as early as 2011. Indeed, I doubt the figure of 3.5 per cent altogether. One component relating to household consumption, for example, is predicted to rise by 3 per cent and, at the same time, there will be a falling savings ratio. The savings ratio has dramatically increased and is predicted to go on increasing. In these uncertain times, I think that people will continue to do their best to increase their savings, and it is very unlikely that they will swap savings for consumption as early as 2011.
I trust that no undue pressure was put on the statisticians. I am taking into account the assumption on page 164 that trend growth will be one-quarter percentage point lower than the Government’s neutral view. I fervently hope that my doubts are misplaced. Any further deterioration in forecasts will confirm the widely held public view that no forecast can be trusted. It is because, as my noble friend Lord Renton of Mount Harry pointed out, we need a nationally supported effort to get us through this economic disaster that trust is so vital. It is therefore completely wrong to play divisive party politics as a substitute for accurate analysis and action—matters are far too serious. We have very little room to manoeuvre and will therefore need one and all to be on side as we battle our way towards better times.
My Lords, I declare that I am chief executive of London First, a not-for-profit organisation whose members include the capital’s leading businesses and universities.
I begin by thanking the Government and the noble Lord, Lord Myners, for saving us from the abyss in October of last year. We should all be grateful for the leadership and courage shown at that point.
The Government are right to note that the banking sector owes a debt to the British people for standing behind them in their hour of need. Although not quite “God’s work”, some bankers do assume the role of St Nicholas—for instance, in supporting city academies in the East End. Actually, the financial services community in the past decade has, through taxes, paid enough to rebuild all UK schools several times over. With the right business environment, it will do so again. However, the Chancellor’s tax on bank bonuses is simplistic, avoidable and a poor proxy for the institutions that benefited most.
Britain is the second largest exporter of services in the world. The UK, led by London, is an extraordinary global talent hub. If you are clever, creative and ambitious, you come here to develop your career. University College, London, is now fourth among world universities, joining Oxford, Cambridge and Imperial in the top 10. That talent, whether attracted by our universities, career opportunities or the buzz of London life, is then marketed worldwide. Lawyers and accountants from London are the Wise Men in the East, advising in Dubai; engineers and architects are active in the Far East; and businesses currently working on the Olympic site have seen a star above Rio de Janeiro and are offering their expertise.
These people operate in a globally competitive market, and the globally mobile seek globally competitive compensation. The unpredictability represented by the banker tax, the non-doms fiasco and the April 2010 50 per cent income tax rate is a barrier, real or perceived, to their commitment to London. The Institute for Fiscal Studies calculates that the marginal rate of payroll tax for someone earning £100,000 in 2011 will be 66.6 per cent. For the first time in a decade, London First’s business leaders cite tax as the foremost challenge to operating in the UK. The risk to London’s competitive position far outweighs any short-term gain. To address our structural deficit, we need to grow the economy. We should be fattening the goose so that there is more for us all to share, not shooing it away.
So are the Chancellor’s other measures up to the scale of the task? The proposed efficiency savings would be most welcome, were I confident of their delivery. Sparing so-called front-line services means that other economically vital services such as transport will bear a heavy burden. The Chancellor’s reiterated commitment to infrastructure investment and to Crossrail are welcome, but will there be “room at the inn” of public spending for Tube modernisation or other valuable infrastructure once politically sacrosanct but economically feeble crucial projects have occupied the best rooms? I fear that even those economically crucial projects will be squeezing for space in the stable, like rush-hour commuters in Northern Line carriages.
The national insurance rise has the merit of raising a significant amount by taxing a broad base, but a tax on jobs in the fragile economic years ahead seems a perverse choice—as perverse perhaps as the timing of a business rate hike of over 10 per cent for many thousands of businesses in April 2010, which the PBR disappointingly failed to address.
Finally, on a more positive note, and in recognition of the first snow of Christmas today, I shall be taking advantage of the boiler scrappage programme—in time, I hope, to stave off the bleak mid-winter. If I can recruit an enthusiastic cabal of nine colleagues to do likewise, perhaps you will even see 10 Lords a-leaping.
My Lords, Alistair Darling’s decency and dignity under pressure are not in doubt. Last week, fate handed him a once-in-a-lifetime chance to carve a lasting reputation as a Chancellor of granite. Alas, he flunked it, or, to put it another way, he was flunked by his neighbour and Mr Balls. As my noble friend Lord Lamont reminded us, on the same day and at the same time across the Irish Sea in Dublin, the Finance Minister, Mr Brian Lenihan, insisted that continuing to borrow and waiting for growth were not a viable proposition. He reduced unemployment, child and weekly carer’s benefits and sliced 5 to 8 per cent from public sector salaries as well as presenting other measures to clip the Irish deficit. He refused to raise taxes. A day later, that first-class newspaper, the Irish Times, took Mr Lenihan to task for not carrying out remedial action sooner, yet it congratulated him on his boldness and courage in putting the country first and leading from the front.
It is now clear that, in Westminster a year ago, Mr Darling’s previous PBR amounted to yet another dodgy dossier with counterfeit forecasts. Take Treasury predictions on spending: for the ninth successive year, government spending has exceeded the Government’s own forecasts. Do Ministers and spin doctors—those grey squirrels of modern politics—tweak the figures against the advice of officials, I wonder, or are the official forecasters so gelded that the permanent secretary should recruit replacements?
Again, a year ago, Mr Darling claimed, with all the solemnity of an Edinburgh advocate, that our economy would start to recover in the third quarter of this year. I then submitted to your Lordships that this was fantasy finance. It is still fantasy finance. Last year and this year in the PBR, Mr Darling announced to general astonishment that our growth rate in 2011 would reach 3.5 per cent. So a growth rate receding by 4.75 per cent suddenly leaps to 1.5 per cent in 2010 and 3.5 per cent in 2011. Yes, it is fantasy finance, because in only one year of Mr Brown’s boom years did the United Kingdom achieve a growth rate approaching that scale. How can Mr Darling dare ask us to swallow this assertion on which his entire fiscal framework is based for a second year running? It is the impurest fiction and, when it comes to Treasury fiction, truth is always a lagging indicator.
Mr Darling deferred all major spending decisions in his Pre-Budget Report, yet he purports to be able to halve the deficit in the next four years without showing us how that masquerade can be achieved in practice. His explanation was non-existent last week. That was exacerbated by the Treasury’s refusal to publish debt interest figures in the official papers. The size of our debt is the worst in peacetime. Our households are more indebted and our dependence on financial services is greater than any other western nation’s. Three months ago, the IMF warned that the UK will endure a sharper decline in its potential growth rate than the eurozone, the USA and Japan. With respect to the noble Lord, Lord Radice, let me say that two years ago, before the crash, three or four Members of your Lordships’ House highlighted that our public finances were already in disrepair. Yet still we are borrowing more than other economies.
By vaunting that his policies are executed from a position of strength, is Mr Darling stretching the forbearance of the bond markets and the credit rating agencies? The so-called bond market vigilantes are prowling around, paying special attention to the United Kingdom and Greece, where deficits are the highest in Europe, at around 13 per cent of GDP. This week, even the Greek Prime Minister admitted that his country had lost every trace of credibility and promised radical spending curbs soon. My noble friend Lord MacGregor referred to the fact that, last week, bond investors displayed misgivings about the United Kingdom by a sell-off that pushed gilt yields to the highest level since 2008. Some eminent City economists, such as Michael Saunders of Citigroup, contend that a bond market rout could still occur before a general election if gilt holders—most of them foreign—conclude that Mr Brown’s political gamesmanship has exceeded their patience. If the Government survive without a bond market commotion until the general election, it will fall to the next Administration to take swift, effective and credible action on public spending, along the lines of Mr Lenihan’s package in Dublin last week.
In our last economic debate, on 25 November, I devoted my speech to the dangers of inflation. The British are prone to inflation as to a genetic disease. Alan Greenspan, the former chairman of the Federal Reserve, and Spencer Dale, the Bank of England’s chief economist, have both warned that inflation presents us with a special concern. Yesterday’s inflation figures confirmed those anxieties. Inflation must be staunched at source, otherwise it will impede our ability to tackle the deficit and contract the size of the state. Again and again, inflation has exceeded lax Bank of England forecasts. Excuses are always offered. However, a counter-case is clear. Oil costs will probably rise; the VAT reversal and stamp duty holiday will reach an end; bond yields on two-year gilts are at a record low; and asset bubbles, such as property in the Far East, spell potential trouble and could multiply. The asset price index has risen by 60 per cent over eight months and the gold price seldom lies, while commodity brokers in the Chicago pits are licking their lips. Of course, sterling is weaker, which will swell inflation as consumers pay higher prices for imported goods.
We recover without inflation or we do not recover at all. This is yet another reason why, after May, the Government must slice the deficit with speed and intensity, otherwise inflation will become an even higher risk with unsettled bond markets. In May, the Prime Minister, whatever his hue or doctrine, must exhibit convictions underpinned by courage. He must parade the character to resist the charms and threats of vested interests and pressure groups and, above all, he must command the driving powers of leadership and tenacity to resist the trifles of tonight’s news and tomorrow’s headlines. The country found those qualities 30 years ago and they are now called for once more in the national interest.
My Lords, first, I would like to refer to what the noble Baroness, Lady Valentine, said about companies relocating. There is a serious risk that increased taxation will bring forward plans that many financial services companies have to relocate to the Far East anyway. There is a logic to that: if the economic growth in the world is to be in places such as China, India and the Pacific basin, one should perhaps be located in Singapore, for example. Raising the top tax rate to 50 per cent will be a tipping point for a number of companies that might be thinking of moving anyway. I think that that is extremely dangerous.
I shall not delay the House for long. All I really want to talk about is quantitative easing: when is it going to end and what effect does it have on sovereign debt? On Monday, the noble Lord, Lord Barnett, obligingly raised the question of quantitative easing. He, of course, is concerned that quantitative easing is going to end too quickly, but I refer to the comments of the noble Lord, Lord Newby, who asked a supplementary question about when quantitative easing would end and what effect that would have on the bond markets. The noble Lord, Lord Myners, said that,
“the fact that quantitative easing will come to an end at some time is already priced into the markets”.—[Official Report, 14/12/09; col. 1309.]
If he comes to consider that, I wonder whether he would hold to that view.
The only debate, as far as I can make out, is whether quantitative easing is buying 90 per cent of government debt or, according to one of the business commentators in the papers last Sunday, 99 per cent of government debt. It strikes me that a market is composed of willing buyers and willing sellers, but it does not refer to an organisation that on the one hand is issuing debt and with the other is printing the money to buy the debt. Surely the price of gilts must be dominated by the Bank of England, if it is both the buyer and the seller of those bonds. Therefore, although I agree that 10-year gilts have risen from 3.6 per cent to 3.8 per cent, can we really be confident that that is a market rate for selling gilts when quantitative easing will at some stage have to come to an end?
During Questions, the noble Lord, Lord Myners, said that it was not his job to say when quantitative easing would come to an end, but we must all agree that one day it will have to come to an end. Perhaps the noble Lord, Lord Newby, was not right to talk about February 2010. Perhaps it will be earlier—perhaps it will be in March or April—but it must come to an end at some stage. Perhaps the noble Lord, Lord Barnett, will have an opportunity to tell us when he thinks that quantitative easing should come to an end. As a former Chief Secretary to the Treasury, he will know the problems of inflation. If you go on printing money indefinitely, eventually, rather like in Zimbabwe or the Weimar Republic, you have to get a wheelbarrow and fill it with £50 notes to buy a loaf of bread at Tesco.
Many of my noble friends have observed that inflation is rising at the moment. At 1.9 per cent, it is bumping up against the 2 per cent limit that the Bank of England’s Monetary Policy Committee is supposed to be adhering to. As my noble friend Lord Ryder observed, many inflationary pressures are coming along. Not many of us think that the price of crude oil is going to drop dramatically and we have the VAT rates going up. There are many inflationary pressures coming in, so, on the whole, prices are being forced up anyway. That surely indicates that interest rates will rise as well.
Quantitative easing must come to an end. When the last issue of quantitative easing—£25 billion—was mentioned by the Bank of England, messages were issued at that stage that this was coming to an end and that quantitative easing was not going to be extended any further. To return to the point made by the noble Lord, Lord Newby, when it comes, who is going to buy those gilts? As my noble friend Lord MacGregor mentioned, 36 per cent of government debt is held by foreigners. I cannot quite understand why, as a foreigner, I would want to buy British gilts yielding 3.8 per cent for a 10-year gilt when I have seen a 25 per cent devaluation in sterling over the past year.
I do not quite understand where the money is going to come from. Clearly, there is some demand from pension funds to buy our gilts, but a yield of 3.8 per cent seems seriously modest and not much of an incentive to buy the stuff. As my noble friend Lord Ryder said, surely a gilt strike is well on the way. We will have a serious funding problem and it seems to me that that may well come before the next general election. Serious problems are posed by the Pre-Budget Report, which has not grasped the problem of addressing our debt. I think that it is storing enormous problems for the near future, which may all come to a head before the next general election.
My Lords, this is what I would call a cold, grey day. The noble Lord, Lord Myners, looks rather grey today with his grey outfit and undertaker’s tie—undertaker is a political translation for entrepreneur.
I have a difficulty. The noble Lord, Lord Myners, always shows the House great courtesy, because when he is speaking in a debate, he tends to sit here throughout. He was not almost drummed out of the House by the Chief Whip, as I was when I joined as a junior, for having the nerve to get up to go to lunch. I have therefore sat through all the debates in which I have spoken perhaps only for a few moments—most of them, indirectly, have been economic—in the 1970s, 1980s, 1990s and now. My difficulty is that I really do not want to say the same thing three or four times. Therefore, I take a cue from the noble Lord, Lord Barnett and my noble friend Lord Renton. At the moment, an election is coming and no one is telling the full story because they do not know it.
Sometimes in life, you have to go, as I have in the debate, by what we call the rule of thumb. That means, you guess. If you want to know which way the wind is blowing, in the Navy you stick your thumb in your mouth, hold it up to the wind and whichever side is cold is where the wind is coming from. That leads you to the great excitement of depression, because that little trick tells you, if you put your back to the wind, whether the depression is coming from the right or the left, but it is always coming from the right if you have your back to the wind. We may be in a depression, but I am not quite sure why. I have looked at the figures. Another rule of thumb is: divide 72 by the prevailing rate of interest and that tells you how long it takes to double your money or to double your return. If we take the government debt and take an interest rate of 3.5 per cent probably, if the government cannot pay it off, the debt will be outstanding.
I have one hope today, because I heard someone mention 2013. I suddenly calculated that in that year, I will have been in your Lordships' House for 50 years. Have I learnt anything? Probably not—but I have been drip fed by wise men.
What comes to mind, first, is that in the banking sector, as the noble Lord, Lord Myners, knows, you have to separate the banks. You have to have the investment banks, or the merchant banks, and you have to have the clearing banks. You have to go back to the automotive trade and look at the question of gearing: of not being geared more than two to one. In fact, some modern cars that have more than five gears end up stalling because people move too far in a high gear. So the banking system is fairly easy to sort out.
The question is: where is the revenue coming from? As we know full well, we have moved to the services sector, where we had a surplus, in general, over the past few years, of £40 billion a year on services, mainly financial services, but we had a deficit growing and growing in visibles, physicals, in real trade, to £100 billion last year and possibly £110 billion this year. When people say that things are going well and England is booming with exports, they forget that of course Oxford Street is full—but only Oxford Street—of course people are flooding into London to do their Christmas shopping, and of course British Airways will hurt the economy desperately. But people are flooding in to buy because of the vast depreciation of sterling, and 80 per cent of all that we sell in the shops is now imported.
We have a problem with exchange rates. I do not mind repeating that it was my great uncle, Stafford Cripps, who first devalued the pound, so the rate of the currency has become of historic interest to me. I keep my own chart. When the euro emerged, it was 1.66 to the pound. The rates say that it is 1 or 1.1, but you try to change a pound for a euro and you will probably get less than a euro today. The dollar has moved up and down constantly. We are now in a devalued currency where we need to import, and the cost of our imports is rising. The worry is that we do not now make a lot of things we can export, so our future has, inevitably, to be where it always has been, which is in the international field. I have been involved in foreign trade and in encouraging inward investment with most of the agencies, and one of the things we used to encourage was recognising that decision-makers were usually the chaps at the top. If you could make England an attractive place for them to come and work, then they would come and bring their businesses with them. I have mentioned before in your Lordships' House that this is particularly true of the Japanese. When we were getting Nissan into the United Kingdom, the most important factor was, effectively, golf. By chance, the Japanese bought my mother’s old family house at Denham, and they turned it into a Japanese golf course, and then they bought another old family house and turned it into a golf course, so I had two golf courses to offer them free membership of.
Foreigners want to come here because they want to be here. This is a great country to be in. Suddenly, with one word, you scare them off. That word is “non-dom”. As your Lordships know, domicile is a matter of fact. You take the domicile of your father at birth, and you cannot change it, except voluntarily from the age of 16, and only then if you cut off all relationships with your domicile of origin. In my case, that would mean resigning from the MCC, as it would for my noble friend Lord James. For so many people, these things are impossible. From this very light-hearted thing, I realise that, at the moment, we have frightened the foreigner. We have frightened him because of the lack of security of the currency, which needs to be stable, because no one is quite sure what to do, and the lack of understanding of what Governments want to do. Inevitably, one has to have a proposal.
The noble Lord, Lord Myners, may remember that I wrote to him before a debate some time ago and asked him whether he could tell me the expenditure on non-departmental public bodies. He wrote back and said that he could not tell me. Unfortunately, I left that letter in the back of my 25 year-old Land Rover—if you have an old Land Rover, you do not have to pay road tax, so everyone in your Lordships' House should make sure their cars are 25 years old, as you do not have to register them. I asked the Minister whether he or his department would be kind enough to provide me with a copy of that letter. Unfortunately, after four questions my secretary—who has been with me for 45 years, is called Miss Moneypenny and who does not give up—did not get an answer. I then asked more questions on NDPBs. I asked 32 altogether, and the Minister’s colleague wrote back and said they had not got the answer to the question about what the budget was for the past four years and suggested I should ask the Library. I went into the Library and found the answer in about 18 minutes. Here we have these bodies, which are not called quangos because my last question was to ask what is the difference between a quango and a NDPB. The answer was that quangos do not exist; they have gone, and they are now NDPBs, which started in 1980. Here we have this particular body, which has a most interesting budget. The last figures were for up to February 2008. Today, we have a budget expenditure of £42 billion a year. I think that this year the figure will be £45 billion. The Government have brought down the number of NDPBs, but the expenditure since they came to power in 1997 has doubled from £24 billion to £45 billion. That is the equivalent of half the total health budget and is more than the defence budget. It is a very worrying amount of money. I am not suggesting that NDPBs do not fulfil a role, but it would be nice to know, in terms of disclosure, what they do and what they achieve. Should the Minister feel it appropriate, I would be perfectly happy to consider taking them all over. The answer is that if you can do the job of some of them in the Library, it may be that you do not need them all. What do they do? There is some real saving.
The second area is very simply that if we are to be an international trading country again, we have to trade. We cannot support a trade deficit on visibles that is rising each year. We have a major deficit with virtually every country in the world at the moment. The two most successful markets for us are the United States and Ireland, but the Ireland situation will drop away. So if we have no trade, we have no revenues. If we decide that we want to persuade every foreigner that this is not a free country where you can live and work with the best accountancy systems in the world, the most trusted Government, the most trusted legal system and the language, we will not get anywhere. The noble Lord may feel that I have been light-hearted, but he will forgive me because I am trying to make a point.
My Lords, our major task right now is to accept the public deficit until there is clear evidence that the recession is over. Opposed to this is George Osborne, the shadow Chancellor, who would choose to cut the public deficit. This could indeed lead to a serious slump in demand and production not unlike the situation in the early 1930s. This is now estimated to amount to £40 billion each year. In 2007, gross domestic product rose by 0.5 per cent against the estimate of 2.5 to 3 per cent, and this year it has fallen by 4.75 per cent. Next year, it is expected to rise by 1 to 1.5 per cent, but this is not a recovery. There is still a gap in output and it is not likely to be reduced until 2011.
A major problem that the Government have to face is the tax gap, which is the difference between what the Government collect and what they ought to collect. The Revenue estimates that the tax gap—the amount retrieved from evading taxpayers—is about £40 billion a year. The Government have taken steps to reduce this loss, but if one looks at the action undertaken over the past year, success has not really been achieved over the period. By all means, maintain the pressure on evading taxpayers, but we should not expect major successes here.
The central issue in the Chancellor of the Exchequer's speech last week was the public finances and the very large borrowing, particularly this year and next. The amount to be borrowed is £178 billion this year, which was the collapse of tax revenues, which amounts to 12.6 per cent of national income, by far the highest amount ever borrowed. A major cause of the collapse of tax revenues was the recession. The very large deficit is due to the level of public expenditure, which has not changed a great deal since before the recession. As a consequence of the high level of public sector debt, there is some expectation that the £1,000 billion debt barrier will be broken in the summer of 2011. We shall have to wait to see what happens there.
The Treasury estimate is that the recession has permanently destroyed 5 per cent of productive capacity. The output gap will be growing and will not start to decline until 2011. As Samuel Brittan commented in the Financial Times last Friday, we should not attempt cyclical corrections. The Government’s decisions are quite reasonable, and in 2011, the actions consequential on the decline will need to be undertaken. Unemployment has increased much less than in many other countries. That is the situation that we have seen. In previous declines in our economy, a much higher proportion of people lost their jobs. Those job losses resulted in long, even lifetime, benefits. As a result, there is a situation that has not equalled the same problems of the past.
Past recessions particularly affected young people who were at the beginning of their working lives. One action by the Government to deal with this problem is the further education or training of 16 and 17 year-olds. Every 18 to 24 year-old person will be guaranteed work or training after being out of work for 12 months.
In his speech on 9 December, the Chancellor of the Exchequer pointed out that we are now the sixth biggest exporter of goods. This seems to be a success for our manufacturing industry, but for many years, we used to be the third largest exporter. This decline was the result of the action of Conservative Governments in the early 1980s, and which has continued. In the last 30 years we have gone from being a major international exporter to relying more on our financial centre.
One major decision in dealing with the economic situation was to reduce VAT from 17.5 to 15 per cent. Not surprisingly, purchases did not greatly increase because this rate was to last the whole year. What will be seen, quite dramatically, are post-Christmas purchases. This is normal, but there is a big incentive to purchase in the few days before the new year when the purchase tax will rise to 17.5 per cent. We shall see the post-Christmas demand inflated even more than normal. I understand that the stores are ready and anticipating an even greater post-Christmas sale. At a difficult time, this is a welcome change in decisions on spending.
My Lords, I sensibly did not prepare a speech for this debate. If you are in the bottom quartile of speakers in a long debate, you may find that much of the ground has been covered by those before you and, very often, more effectively than you could do it yourself. However, I will draw attention to a few individual aspects and make one or two suggestions that I hope the Government will at least consider.
We are in a situation where we have extremely little room for manoeuvre. This is the problem. Any debtor, beyond a certain point, runs out of options. We are enormously constrained by the need to look in many different directions. The Government have not always got it right in the way that they have presented what they are trying to do. There are legitimate questions of credibility about policy and its presentation.
Sometimes the Government give the impression that borrowing is a sort of free ride, or something of a nil-cost option. It certainly is not; if you spend £1 billion extra and borrow the money, you will increase public expenditure the following year by £40 million or £50 million. You cannot avoid it; it is the interest cost. If you do this year after year, you reach levels where your room for manoeuvre, as I say, runs out. That is what has happened. Public expenditure and fiscal deficit were casualties of the decision in the Government’s second term to project public expenditure as growing at a faster rate than they expected the economy to grow at. Even if the economy grew as quickly as was taken into account, it was still running behind the commitments.
We all know, from our own affairs as well as those of our country, that once you get to a certain point of indebtedness your options for dealing sensibly with things shrink. That is the position that we had reached when the global storms hit us. I am not saying that all the consequences of those global storms are the Government’s fault—of course not. However, we came into that situation at a time when we had had several years of economic strength. We should have taken the opportunity during that time not to pump up even more public expenditure but to cut back a bit and strengthen our fiscal position. That would have given us a much more flexible hand to play now.
The other point about the rapid increase in public expenditure is that it is much easier to increase spending than it is to restrain it. Decisions that might be quite lightly taken to increase public expenditure in times when the economic background looks comfortable can come back and hit you very badly if things do not turn out as well as expected. One of the key points that has been raised in this debate is how vulnerable we are to the credibility of a 3.5 per cent growth rate the year after next. It is optimistic. The markets, the commentators and everybody else know that it is optimistic. We know that it is optimistic. The Government do not tend to play their hand as though they are conscious of what a delicate position we are in over this. They should not be too hesitant about doing things that are tough.
I remember well the Budget of 1981 because I used to carry the Chancellor’s bags in those days. In the lead-up to that Budget there was tremendous angst about whether it would be so badly received as to be damaging. My noble and learned friend Lord Howe—a resolute person, particularly in times of difficulty—went ahead with it and, generally, the public reaction to it was not at all bad. The Government were seen to be doing what was needed by the circumstances. You cannot say that of everything that this Government have done in the present situation.
I agree with the noble Lord, Lord Barnett: you cannot let everything be run by rating agencies. We ought not to give them the chance to scaremonger but we have to discuss this. It is so important to the economic strategy that the Government are following, and the situation that has led to it, that we have to accept that there are many people in the rating agencies who have genuine doubts about what we can do. The Moody comments have been brought into this debate. It is true that Moody says that there is no immediate threat to our top-level status, but by saying that it admits that there is a longer-term potential threat to our status. We have to live with that.
Part of all this comes back to the gilt and currency markets. You have to talk about the two together because if foreigners are buying British bonds, they have to make a call on the exchange rate as well as on the other parts of the deal. We remain vulnerable; we have huge borrowing—almost £800 billion projected over the next six years. These figures are so big as to be not only very scary, but far beyond anything for which there is any precedent.
There are several factors, such as the reluctance to produce a Comprehensive Spending Review, which seem to be for the Government’s convenience, rather than the economic need. This is where I offer a few thoughts to the Treasury Bench. The Treasury ought to put every fiscal proposal through the most scrupulous assessment of its likely impact. If your credibility is under threat—it certainly has not come out well in the past two weeks—you have to be acutely conscious of what the impact may be, not only of the measures themselves, but of the language that is used to explain them. Rightly or wrongly, the Government have given the impression that they have put off everything that they do not want to talk about until after the election. A little bit of that is not unreasonable from a Government in office, but it has got to a point where there is a reluctance to believe much of the Government’s case—and some of it is perfectly reasonable. I do not want to cause offence by saying that I think that they have fallen down on this, but we are in more extreme circumstances, financially and economically, than any of us can remember, and we have to look at the way in which these things are discussed and debated. I hope that message will get through.
Finally, a number of noble Lords have said that we have to take on board the fact that we have a highly geared economy, and that when things go well, its tax revenues are extremely buoyant. When things turn round the other way and you lose the income tax, the corporation tax, the VAT and so on, at the same time having to extend benefits and welfare payments as unemployment rises, you have a very sharp shake-out. That is what we are experiencing now. In our planning, we have to try to limit, as much as possible, the areas of incredulity which, I am afraid, has been the general reaction to what the Government have done.
My Lords, I have listened with interest to the excellent analysis of the PBR by many noble Lords. As my noble friend Lord Lamont pointed out, unlike the Irish Government, who have wisely moved to cut public expenditure now, the Chancellor is carrying on as though there is not too much wrong with the economy and, when growth returns next year, it will get better and we can go on as before. This is so inconsistent with the Government’s previous reverence for its golden rules, about which we have heard so much in this debate year after year. What about the 40 per cent ceiling on borrowing? The national debt will rise to double this level by 2014, and the Government now behave as though it does not matter much. As my noble friend Lord MacGregor said, the Prime Minister pretended throughout the summer that there was no need to cut public spending.
The Chancellor said that the bonus tax is not designed not to raise revenue but to improve behaviour; but what about the Government’s behaviour? Their squandering, over 10 years, of the healthy position which they inherited in 1997 made us ill prepared for the crisis, and yet they refuse to change their behaviour in any way before 2011, however serious the deficit. As my noble friend Lord Lamont has said, we will have to wait until after the election for the real Budget.
I declare an interest in that I am employed by Mizuho International, the London-based investment banking subsidiary of the Mizuho Financial Group of Japan. I do not know whether bankers are more unpopular than politicians or politicians more unpopular than bankers. A year ago I think it was the latter, but now I think bankers are more widely reviled. The Government have already failed to defend the City’s interests by agreeing to the establishment of three new super-regulators at the European level, which will make the rules and set the strategy, leaving our FSA with the responsibility of supervising banks on a day-to-day basis. There is now a debate as to whether the discredited tripartite arrangements should continue, albeit with strengthened co-ordination systems, or whether the FSA’s supervisory arm should be subordinated to the Bank of England or even subsumed into it. The question is rather less important than it should be if the FSA’s real reporting lines are to be to the three new EU-level super-regulators.
The alternative investment fund managers directive is an example of the kind of disproportionate and protectionist measure that we may see emanate from these bodies. This directive is intended to apply not only to hedge funds but to all funds which are not UCITS. When I was director-general of the European Fund and Asset Management Association in Brussels in 2006, the majority opinion seemed to me to be, “Let’s leave this well alone”, although there were elements within the Commission that believed then that to regulate hedge funds would be a useful step on the road to extending the EU’s hegemony over the City of London. It would appear that those views have prevailed, taking advantage of a time when our unpopular Government’s eye was off the ball, concentrating only on staying in power.
Furthermore, we do not need and cannot afford duplicating regulation. The noble Lord, Lord Turner, said, not so long ago, that the FSA needed more people and more highly paid people to ensure that in a future crisis they are less likely to be caught again with their eyes off the ball. I disagree with the noble Lord. I think the FSA already has too many people doing the wrong things, even if it were not soon to be emasculated to a member-state-level authority responsible only for managing day-to-day operations.
Given that the FSA must also accept some of the blame for the economic crisis and for the state that it allowed some of the banks to get into, would the Minister confirm that the bonus levy will also be applied to all bonuses over £25,000 to be paid to FSA staff? Noble Lords may be interested to learn that the FSA did not manage its own wages bill so well. It forecast that the cost of its salaries and bonuses would rise by 4 per cent in 2009 over 2008. In the event, it rose by 14 per cent, and the authority had to borrow £23 million to balance its books and make its bonus payments.
The £550 million which the Government hope to receive from their proposed levy on bonuses pales into insignificance compared with the £178 billion deficit now expected in the current year. However, as pointed out by Anatole Kaletsky, writing in the Times last Friday, the Treasury is risking serious damage to a leading British industry in pursuit of a one-off benefit which does not begin to make a serious contribution to reducing the deficit. The City of London Corporation has stated that this tax sends out a very mixed message of an arbitrary and unpredictable taxation regime. The City is already haemorrhaging bankers, brokers and fund managers to other financial centres, such as Switzerland and Hong Kong. Financial companies contribute around a quarter of the total yield from corporation tax, some £11 billion a year. On top of this, their employees contribute many tens of billions a year in income tax, VAT, stamp duty and other taxes. The Chancellor’s misguided move to impose a higher rate of income tax on incomes over £150,000 will, I believe, be counterproductive. The steady trickle of emigrating bankers could become a flood. Then there is the punitive treatment of pension contributions which will only be tax-free in respect of the basic rate of tax, but will be taxable when drawn at the recipient’s highest marginal rate, which will be 50 per cent.
Furthermore, there is the 2 per cent national insurance contribution increase. I think it is now 2 per cent, but it is so stealthy a tax increase that I could not find it quickly in the documents. I think it was 1 per cent plus 0.5 per cent plus another 0.5 per cent, so I think actually we now have a 52 per cent marginal tax rate. The Government, by their actions, especially their bank windfall tax, and their failure even to begin to tackle the enormous and increasing budget deficit, are already doing great damage to our crucial financial sector. The Minister will argue that the bankers caused the economic crisis. Obviously, the banks, the regulators, and Governments here and abroad all bear some responsibility. However, as the Minister is well aware, the estimated final cost to the Treasury of the bank bail-outs since the collapse of Northern Rock will be only some £10 billion compared with the previously estimated figure of £50 billion. The Chancellor has also predicted that the Treasury will eventually eliminate even this.
The Government are taking advantage of the current unpopularity of bankers to push for the state involvement and regulation of their employers’ remuneration practices. That is extremely damaging to the perception of London as a good, competitive, efficient and stable place in which to operate a financial business. Surely the state has no right to interfere in agreements on remuneration between employer and employee, except where it is the shareholder. It is therefore eminently reasonable that, as the majority shareholder in RBS and as a significant minority shareholder in Lloyds, the Government should, and properly may, become involved in remuneration policy. They have no right to become involved in banks in which they are not a shareholder because, in doing so, they interfere with the rights of the shareholders of those banks.
Furthermore, the right way to deal with excessive remuneration packages that are paid to practitioners in proprietary trading activities is to increase the capital requirements of such businesses in order to introduce a more sensible risk/reward ratio. Increasing the committed capital, which it is acknowledged is necessary, will automatically reduce the margin and correct the problem of excessive bonuses that are payable from short-term trading profits.
As noble Lords are well aware, the Government are to a large extent protecting spending on schools, hospitals and the police, but if we are at war, as we clearly are even though the Prime Minister does not behave as though we are, defence spending should be similarly protected. The Government are fond of boasting how they have greatly increased spending on the National Health Service, but, as your Lordships are well aware, the increased resources have been most inefficiently applied, and the number of doctors and the availability of the best possible treatment have improved at best only marginally and in no way commensurately with the increased expenditure. This is because billions of pounds have been wasted on the failed IT system which the Government attempted to foist on hospitals up and down the land.
Another important point is that the PBR shows that our net contributions to the European Union are set to rise from £4.8 billion in 2009-10 to £6 billion in 2010-11. In 2008-09, they were only £3 billion. Our rapidly increasing contributions to the EU budget could not have come at a worse time. While I congratulate the noble Baroness, Lady Ashton, on her appointment as High Representative for Foreign Affairs and Security Policy, I regret both the creation of this office and our failure to obtain in the Commission a powerful post with responsibility for economic affairs or financial services.
It is reported that the FCO will face a substantial cut in its budget just as we are massively increasing the EU’s diplomatic presence around the world. We do not need and cannot afford two Foreign Offices. Even though many senior diplomats do not recognise the fact, one reason why we punch well above our weight around the world, especially in countries such as Japan, the world’s second largest economy, and in fast-growing economies such as China and India, is the high quality of our diplomats and the influential presence of our missions abroad. As Sir Win Bischoff, chairman of Lloyds Banking Group, said in his letter to the Financial Times on Monday:
“We need to strengthen our partnerships, and work through the global value chains, to make sure that the UK and London have better structural links with Asia. Only in this way can we remain a central part of that growth story”.
Our maintenance of strong British embassies in these countries is crucial to the maintenance and enhancement of such structural links. EU embassies will at best be far less efficient in supporting London’s interests in those countries. The fact that after 12 years of profligate and misguided overspending by this Government, our diplomatic presence will have to be scaled back to pay for a wasteful and unaccountable European External Action Service, conveying a muddled message to our trading and economic partners in Asia, is a catastrophe.
My Lords, I was very surprised to be told by the Chancellor at the beginning of the PBR Statement that we start from “a position of strength”. What exactly is this position of strength? Is it the state of the Budget finances? This cannot be the case, as a mind-boggling £178 billion deficit is forecast for this year and £176 billion for next year: more than double the previous record and more than an eighth of Britain’s gross domestic product. Is it the 2009 GDP growth forecast? That seems unlikely, as it has been cut from a 3.5 per cent decline to 4.75 per cent.
The Chancellor, as many noble Lords have already said, has also made very optimistic forecasts for growth of 3.5 per cent for 2011 and 3.5 per cent for 2012. If these are not met, the deficit will become much more serious again, so the starting point for the Chancellor’s PBR speech should have been completely the opposite; in budgetary terms, we start from a position of great economic weakness. The cause of the difficulties is not simply the costs of the financial crisis, for which the Government bear only a portion of the blame, but a large structural weakness, for which they should bear all the blame. Simply put, believing that they had abolished boom and bust, the Government spent too much when the bust happened. The reduction in public spending that is now required is therefore severe.
The Chancellor’s task was therefore set. He should have made the public realise the scale of the problem, and he should have shown that he had a plan to deal with it. Finally, he should have shown that this plan consisted mostly of spending cuts rather than of tax rises. He should have set out a comprehensive review of government spending. This happened in 2001 and 2005, ahead of both elections. Spending was predicted to rise at both these times. Now he says that he cannot produce the review because the economy is too unpredictable. This is not good enough. Whatever the argument about timing, this should not have prevented him from beginning the task of reducing the size of the state.
A structural deficit—excessive spending caused not by events but by how the state is organised and the nature of the services that it provides—requires a structural response. Where was that in the PBR? Rather than making a principle of reining back spending, the Government decided to go back to the old policy of tax and spend. Initial reaction to the 1 per cent freeze on public sector pay was favourable. However, the Chancellor’s announcement that he would ring-fence 95 per cent of the health budget from real cuts, guaranteeing front-line spending on schools and police numbers and giving half a million extra children free school meals, has, according to the IFS, increased planned spending by around £15 billion in total in 2011-12 and in 2012-13 while gathering in only £9 billion of new taxes.
There is extra spending in areas that will not help to pump prime the economy and that have not been well thought through. There are, for example, plans to spend £670 million on free social care for the elderly. The elderly need special attention, but the country cannot afford this extra measure at this critical time. Do not just take my word for it. According to the Guardian of 19 November, the noble Lord, Lord Lipsey, a former member of the Royal Commission on Long Term Care, said that the Government’s plans amounted to,
“a demolition job on the national budget”,
and that the Prime Minister’s announcement was like,
“an admiral firing an Exocet into his own warship”.
The former Health Minister, the noble Lord, Lord Warner, also criticised the plans. He said there had been no proper impact assessment and no data to show how this would work.
Where the Government have decided to cut back spending, they have not been honest and spelled it out in the Pre-Budget Report. The Chancellor claimed, for instance, that spending will remain flat for departments outside the ring-fenced areas of education, health and aid. As other noble Lords have already said, it has taken major detective work by the IFS to discover that this is not so. Those departments face average cuts of 5.6 per cent a year, or around £36 billion in the three years to 2013-14. This is equivalent to nearly half the annual NHS budget. Of this £36 billion, only £21 billion has been specified. There is thus a black hole of £15 billion, according to IFS researcher Gemma Tetlow. In fact, all the increases in central government spending on public services in Labour’s second and third terms will be reversed by 2013-14, and the first-term increases could be reversed by 2017-18.
Another area in which the Chancellor has been economical with the truth is pensions. He said that the basic state pension would rise by 2.5 per cent; nowhere in his speech, or in the hundreds of pages of pre-Budget documents, was it revealed that parts of the state pension, such as SERPS and extra pensions, which do not count as basics, would be frozen. Once again, the Chancellor hoped that people would not notice.
On tax, there was a further imposition on private enterprise and middle Britain with a national insurance increase. This plans to raise more than £6 billion in the 2011 and 2012 tax years. If the 1 per cent rise in employers’ NI is taken into account, the IFS calculate that all jobs paying over £14,000 will be hit, not only jobs paying over £20,000 as claimed by the Chancellor. The rise in national insurance was roundly condemned by the CBI, the British Chambers of Commerce, the Institute of Directors and the Federation of Small Businesses. Richard Lambert, director general of the CBI, summed it up best. He said:
“The Chancellor has made a serious mistake imposing an extra jobs tax at a time when economic recovery will still be fragile. Increasing the national insurance contribution will hold back job creation and growth”.
The second tax rise is £550 million from the bankers’ bonus payroll tax. This is clearly popular with the public in the short term but care must be taken not to frighten off financial service companies from basing themselves in London when their taxes are so important to the national finances.
According to Michael Saunders of Citibank, these two tax hikes will raise modest amounts of money, all absorbed by additions to public spending. They demonstrate that the Government have abandoned Tony Blair’s big tent in favour of its core vote. This is also shown by the small announcements on free school meals, the over 50s, bingo, boilers, electric vans and so forth. Even if the economy picks up as the Treasury predicts, there will still be £2,400 per family per year to be found to balance the books by 2017-18.
At a time of the world’s greatest financial crisis since the 1930s, the Government are reverting to electoral gimmicks. Today the world needs statesmen who have the vision and guts to make fundamental financial reforms rather than reverting to the politics of division. The Pre-Budget report should have contained a major strategy to cut the budget deficit rather than being remembered as the “bingo and boilers” report. As today’s FT states:
“The Treasury’s failure to give details of its fiscal consolidation plan in Parliament contrasts with its claim that the new Fiscal Responsibility Bill ‘gives Parliament a clear, central role in both setting and monitoring the government’s fiscal plans’. The Statutory Code for Fiscal Stability requires the Treasury to apply the principle of transparency to the formulation and interpretation of fiscal policy”.
The Chancellor and the Treasury have totally failed to do this in the PBR.
My Lords, I start by reminding the noble Lord, Lord Lamont, that the Pre-Budget report was started not as he described but in order that, instead of having to wait until April for the annual Budget, at Christmas there would be an indication of the direction in which the Government intended to take the economy; a kind of indication of direction of travel. Therefore, at the risk of being old fashioned, I will look at the PBR in that way. So what is the direction? What are the priorities? How do the Government view the current situation?
Yes, there is a big deficit gap to close and many figures have been quoted. It is easy to be selective when discussing Britain’s debt—there is the real market and there are the secondary markets—and we have to take care that we do not talk down Britain by quoting the secondary markets instead of the real market, a point made by my noble friend Lord Barnett. I also remind noble Lords that the reason we have the deficit is not because of mismanagement. Without good management we would have had a full-blown depression instead of a recession, and we can deal with a recession by a combination of growth, cuts in public spending and tax increases. Of these, surely it is best to encourage growth. To take away this encouragement too early would serve only to put the emphasis on taxes and cuts. Is this what noble Lords want? It is certainly not what I want. It is an eminently sensible policy to achieve a 50 per cent reduction in the deficit by 2013, as has been described. It will cause less pain for the vulnerable and the better off will carry a greater burden, but that is what I understand as a fairer society. I compliment the Government on sticking to the principle of fairness.
Pensions are a good example of this. Unexpectedly, I will get a basic pension increase of 4 per cent in real terms but my SERPS will be frozen, as the noble Lord, Lord Northbrook, pointed out. That is my bit of pain. I am not the only pensioner in the Chamber and I hope other noble Lords will join me in thanking the Government for a generous increase in our basic pension.
As the Minister explained, the services that are most important to the least well off are to be protected—schools, health, Sure Start, incentives for people to stay in their home, overseas aid. This direction of travel shows that, at least on this side of the House, we know how normal people live. We are trying to deal with the deficit in a humane and fair way and we are trying to avoid injustice. In return, all we get is criticism—or is it just adversarial politics, as the noble Lord, Lord Renton, suggested?
I also welcome the direction of travel for business. The Government are continuing to help and encourage the real economy in these hard times. Not only are the banks are being pressed to lend, but they have come up with half a billion for their customers’ capital growths and they are rolling over another half a billion to finance guarantees. The Government are putting up their own contributions to capital ventures and to strategic investment funds. Some of the schemes are working well; some not so well. However, while bankers’ bonuses are being taxed more, the tax on profits from patents is being reduced. The noble Lord, Lord Bilimoria, said that we have lost our sense of priorities. This incentive shows exactly where our priorities lie. Deferring a planned rise in small company corporation tax and extending indefinitely the Revenue and Customs time-to-pay scheme were all welcomed by business organisations which are usually reluctant to praise the Government. Most people in business who I meet welcome the continuing policy of turning away from special favours to the financial sector to more support and encouragement for the real economy.
I am sure that this is the right direction of travel because it is becoming more and more clear that the huge, opaque, global network of financial trading referred to by the Prime Minister and President Sarkozy in their recent article in the Wall Street Journal is the next bubble that has to be tackled. It has the same characteristics as the last one. The world’s actual production of goods and services is leveraged 73 times in financial trading. Nation states are the lenders of last resort to banks with so-called assets 10 or 15 times the gross national product of goods and services of the nation states. In addition, it is now becoming apparent that while the crisis has reduced profitability, the buy-out funds continue to load debt on the companies they control in order to pay dividends to themselves. They also trade in that debt. Is there not something rather worrying and familiar about all this?
It is no wonder that presidents and Prime Ministers are joining us, Britain, to try to break this up. In spite of all the scepticism that greeted the 50 per cent tax on bonuses, the idea is being taken up in other countries—and quite right, too. Of course it makes sense to keep the money in the business to build up the capital instead of relying on yet more debt. The noble Lord, Lord Selsdon, proposed quite an interesting alternative: that those bankers who accept the bonus should lose their membership of the MCC. There is a problem for the tax avoidance industry.
The threat is that this highly leveraged and opaque trading will move out of London if it is made more transparent, more regulated, more manageable and more taxed. There has been quite a bit of talk about aspirations. I could not help noticing the contrast in aspirations between financial sector and the real economy. Our high ambitions for the real economy—our science, our technology, our skills, our manufacturing and our infrastructure—mean that we are trying to win a race to the top. What are our ambitions for the financial sector? They are taxation and regulation. That means, as far as that sector is concerned, we are engaged in a race to the bottom. What a contrast.
The noble Viscount, Lord Trenchard, was worried about business leaving London. I wonder whether he heard the BBC on 7 December. It was reported by its correspondent in Washington that Wall Street bankers were so incensed at the current banking regulations in the United States that they were threatening to move to London—one lot moving out and one lot moving in. I know that my noble friend the Minister is a past chair of the Low Pay Commission, so I am not sure how relevant his experience will be, but I hope that, with one lot moving out and one lot moving in, he will ensure that staff at City jobcentres are suitably prepared.
For noble Lords to blame the Government’s 50 per cent tax for this exodus is naive. Some now argue that western financial markets are mature and that future growth lies in Asia or Latin America. One major fund manager came out of retirement to start a business in Hong Kong, reflecting the advice given to trustees of pension funds to buy Asian funds. People will move to where the growth is. As a result, instead of being concentrated in London and New York, the financial services business will become much more evenly spread out. It is just a fact of economic life.
I hope that the Government will continue in the same direction of travel and move even further along the road in the Budget next April. I hope that they will convert the funds which help productive industry into longer term institutions that do not end when the funds are fully drawn down. I hope that they will continue the tax on bank bonuses beyond April and add to it a Tobin tax, so that the size of the financial sector becomes less threatening.
This crisis has cost the banks a lot of their social mandate. They will lose even more public support if this matter of the bonuses is not treated sensibly. In the end, they may be forced to make the split about which the noble Lord, Lord Renton, spoke and separate their trading business from their service business so as to give the service side an opportunity to win back the public support which it will definitely need.
I hope that the Government will be sure-footed and continue in the same direction, with their care for the wider social and economic consequences of their actions. I hope that they will continue building up and talking up confidence in the real economy. With the improving ability of banks to raise capital from the markets and their increasing stability, I hope that the Minister will soon be able to tell us that the potential impact on the public finances of this intervention will be such that we can start getting the taxpayer’s money back from the banks. We would all welcome that, and what a good Christmas present for next year it would be.
My Lords, last night at the delightful drinks party given by the Lord Speaker, I at last heard a forecast that I believe is credible and we can rely on. It came from the right reverend Prelate the Bishop of Manchester, who assured me that Christmas will fall on 25 December.
I have had 54 years of City life, during which I have counted about eight financial crises or recessions. They have all had two things in common: first, they have all ended; secondly, they have mostly ended in tears. Even so, I am prepared to suppress my usual pessimism, which your Lordships might find surprising. During those 54 years, I have seen that we always come through, if not necessarily to sunny uplands then to some very nasty, boggy territory on the other side, which becomes the fertile ground in which the next recession down the line waits to take root.
I have two pleas to make to your Lordships today, which I hope might have some beneficial effect on life when the present recession ends. First, will the Government next year, whoever they may be, give serious consideration to the creation of a new consumer credit Act? I regard the Consumer Credit Act 1974 as pretty well the seed plot from which most of our troubles have grown. I explain for those of your Lordships who were not around at the time—I unfortunately was—that the principal characteristic of that Act was that it decided with perfectly pure and understandable socialist principles that hire purchase was an extremely wicked thing, because it meant that a poor man could pay a quarter of the value of his car, fail to pay the next six instalments and have the car taken away. So the Act effectively banned secured credit and insisted instead that we should have credit control.
The problem with that, which we have never really considered in this House, was that the credit loan arrangement that came in was very bad for the banks, because it reduced the security of all their lending. The banks did not like that; they went away, sulked for a while and immediately came up with the idea of the second mortgage to get them security. That was a bit of a cheat against the 1974 Act, but at least it got the banks where they wanted to be. Unfortunately for the banks, though, the second-mortgage business became so profitable for them that it began to challenge their mainstream business, so they hived off the second-mortgage business to create the secondary banking market, which duly became the crash of the early 1970s. We need to remember that the great crisis at that time was the prolonged insolvency of the National Westminster Bank, which rightly became known as the “National Wastemonster”, and which was saved only by the brilliant intervention of the Bank of England and its lifeboat, as were all the other banks.
When the secondary banking tide had gone back out and the wreckage had been cleared away, we thought that that was the end of that. We had not realised that this had not really gone away; it was just lurking around, waiting for its opportunity. That came with the big bang, which led to the “me too” banking creation, where everyone seemed to join in. There were a new set of creations that went on to become the Northern Rocks, the Bradford & Bingleys and all those other names that have haunted our nightmares for the past year.
So there is one unbroken sequence of calamity going back to the Consumer Credit Act 1974. The sociological consequences of that Act are still with us to this day. It has secured this vast market of unsecured credit, including the explosion of credit cards. That is probably toothpaste out of the tube now, but credit cards still need curtailment. We have lost the connection between purchase being limited to what we can afford for what we need and the morality of lending between borrower and lender, which has been destroyed. Nothing would do more good for the stability of the post-recession era, when we get there, than the reintroduction of some form of restored morality between borrower and lender based on some form of required commitment to the loan for a particular purpose and limited to what you can afford for what you need. That is an important point.
I hope that that will come about. I would like to see it come about in a straightforward way: no loan should ever be taken out again, in any domestic context, that is not universally acknowledged and signed for and accepted by both the husband and the wife or the partners in every household, so that they both buy into the concept of a manageable loan at that time. That would be a huge benefit. Beyond that, we should be looking at some form of central control of credit cards along the lines that my noble friend Lord Marlesford put forward in a presentation to this House some time ago. His words were extremely wise and should be borne in mind for the long term.
My second plea is that we get better at forecasting the international consequences of things like sub-prime debt. I shall tell a brief story that illustrates the point. In 2008, when we got to the Summer Recess, I went to work in New York. Each day from my hotel I walked up 47th Street, where there is a one-legged Vietnam veteran who sits on the pavement and cleans shoes for $2 a time. He has been there for quite a long time and I got to know this friendly and talkative guy. I was getting my shoes cleaned by him one day and he said, “You’re in a nice suit but you’re going to burn in eternal hellfire”. I said, “I’m sure I am but not too soon, I hope”. He said, “No sir, you’re going to start burning in eternal hellfire nine weeks tomorrow”. “Really?” I said, “I had hoped for a bit longer than that. Why then?”. He said, “Because Lehman Brothers is going to file for bankruptcy that day. The great fiery jaws of hell are going to open up and suck all you suits down into it”. I would like to know how a one-legged Vietnam vet sitting on 47th Street knows, nine weeks to the day before the event, that Lehman Brothers is going into insolvency when the rest of the financial world appears to live in total ignorance and does nothing about it. In the two weeks that followed on that trip, pretty well every maitre d’ and barman in New York wanted to tell you the same story, so it was an open secret. What was going on? Lehman was a leading member of a relatively small but hugely financially sensitive banking community. If there were nine weeks to find a solution, it should not have been beyond the capability of the geniuses who run those organisations to do so. Some form of mutualisation should have worked.
The noble Lord, Lord Myners, will share with me vivid memories of what mutualisation means from our time together on the council of Lloyd’s. He will also remember that, when we got through the end of that crisis, we created a realistic risk scenario committee to devise what we thought would be the 10 most unthinkable calamities that would befall the world. We were given strict rules: we must not include any terrorism, because that was all known, and we had to think of 10 things that had never occurred and never could. These were to be fed into the Lloyd’s of London computer to see what the consequences would be. Where is the equivalent of that being done among the financial communities of the world today?
Unfortunately, in the Lloyd’s of London situation, the first three worst scenarios that we could think of all happened in the next three years—that is if you allow for the fact that one of them effectively became 9/11, because although we could not call it terrorism we imagined the triple failure of the air traffic control at Kennedy, LaGuardia and Newark airports simultaneously and the mass collision of jumbo jets above Wall Street, which would come crashing down and destroy the entire infrastructure, with its entire economic memory and computer base, putting America out of all commercial trading. That is not dissimilar to what happened with 9/11 and, because Lloyd’s had been able to feed that into its computer, it knew what to do about it beforehand.
Where was the pre-think where everybody should have been coming up with a different solution on how to cope with a Northern Rock, a Lehman Brothers or whatever? Why was there no central co-ordination between the great financial masters of this universe? I presume that the noble Lord, Lord Myners, would now be included in them. Why, then, are they not creating some form of realistic risk scenario process similar to that which served the Lloyd’s of London community so well, so that we have some perception and do not have to ask my poor old one-legged friend on the pavement of 47th Street in New York what will happen, because we have slightly better information coming through, where it matters, in the heartland of financial government? I can only wish all of your Lordships a very happy Christmas. By the way, of the 10 realistic risk scenarios, seven have now happened. I shall not spoil your Christmases by telling you what the three were that have not.
My Lords, I was struck at the beginning of this debate by the attitude of the noble Lord, Lord Myners, who produced his speech in what I can only describe as a remarkably sotto voce manner. He has obviously cheered up; perhaps that was because of the speech by my noble friend Lord James, or because of others. However, when I listened to his speech I wondered whether his sombre manner reflected his real view of the state of the economy. Perhaps he had finally realised that the green shoots that his colleague, the noble Baroness, Lady Vadera, saw at the beginning of the year have now turned to lifeless brown twigs. Indeed, the PBR attests to what my noble friend Lord Renton, if I may plagiarise him slightly, might have called electoral opportunism. Like a brown twig, it does not stand up to much pressure.
Since the Chancellor of the Exchequer regularly nicks the best parts of the upratings statement, I hope that your Lordships will see it as fair game for me to talk about that in this debate. First, there is the issue of pensions, which has been mentioned. The much publicised and paraded 2.5 per cent rise in the basic state pension is a clear example of the Government’s desire to publish their manifesto a few months early. Not only is the 2.5 per cent the bare minimum by which the Government are allowed, by their own rules, to raise the pension—although they are of course not unaccustomed to breaking their own rules; the Prime Minister’s fiscal “golden rules” spring readily to mind—but the rise does not apply to all state pensions. The second state pension, the graduated pension and the £7 per week delayed retirement payment are just three of the areas, relied on by many pensioners, where pensions have in fact been frozen.
When the Chancellor made his Pre-Budget Report, among the few winners were thought to be pensioners. Yet now the Green Book shows that they, along with millions of others, will have to pay for the fiscal mismanagement by the Government, as many of your Lordships have said. Equally, if, as the Chancellor himself has predicted, inflation rises to 3 per cent in the new year, even that small increase in the basic state pension will yield little tangible result for pensioners. Much of it, too, will be swallowed up by the increase in the rate of VAT, which happens on January 1, whereas the increases in the basic state pension and out-of-work benefits start only at the beginning of the next financial year.
There was also the announcement in the PBR Statement that the Government will begin to count employer pension contributions as their employees’ income. What will be the results? First, it is inevitable that more people will creep over their tax thresholds. Secondly, it could well have the perverse effect of reducing the employer contributions. The result of that will inevitably be lower pension income in retirement for their former employees. One could also argue that those moving into the next tax bracket will, in effect, suffer from double taxation—something that all Governments have set their hearts against over the years. How can the Minister justify raiding pension funds in that way?
On the subject of benefits, the social security policy set out in the upratings statement suggests an increased amount of electioneering in the making of social security policy. The centrepiece of the benefits element of the upratings statement was the supposed increase in areas of social security. Yet, as my noble friend Lord Lamont pointed out, the Government have admitted that this rise does not affect the baseline on which next October’s inflation rate will be used to calculate the 2010-11 benefit levels. Is this not the shortest of short-term measures, with the Government admitting that they have no plans to continue any increase beyond 2011? Is it perhaps something of an electoral coincidence that the Government have chosen not to put in any plans for funding beyond next year? This measure, perhaps most of all, demonstrates that the Pre-Budget Report that your Lordships are debating is overtly political.
I am not enough of an economist to know whether the PBR is economically nonsensical, but I have my suspicions. Why have the Government chosen to stimulate the economy with this rise in social security benefits? Is it because the original method, by which I mean the reduction in the VAT rate, did not work out very well? Anyway, why do we have fiscal stimulation at all? What is really needed, as many noble Lords have said, is to cut the structural deficit.
The Government have also guaranteed that anyone in work will be better off than if they were on benefits, a sentiment with which your Lordships cannot disagree. Yet neither in the Pre-Budget Report nor in the upratings statement is there any detail of the structure, method or cost entailed in achieving this. This is a good example to take from a report that has dodged the bullet in favour of attempting to create dividing lines between the Government and the Opposition. In fact, from 2011—when the Government’s further national insurance rise kicks in—there will be a de facto rise of 1 per cent because of the annual tax hike in the spring Budget. To back up what the noble Lord, Lord Bilimoria, said, what effect do Her Majesty’s Government believe that this has on employment, especially as past recessions have shown that unemployment continues to grow for some months after we have come out of recession?
In short, the upratings statement is a perfect follow-up to the Pre Budget Report—an attempt to rectify 12 years of this Government’s economic policy with a paltry bundle of brown twigs. If the Government really believe in economic stimulus, not only is it a case of too little, too late, but it is also a serious misrepresentation of the actual freezes and cuts that the Government are planning to make in benefits and pensions. Like the 13-month reduction in VAT, the publicised rises in benefits and pensions seem destined not to have any real effect. It is a case of the Government giving with one hand only to immediately take away again with the other. No wonder they take pride in a fiscally neutral mini-Budget. The economic circumstances dictate a concrete policy in the area of social security; instead, the upratings statement has provided the country with empty political posturing, which is incomplete and ill timed and which the Government intend to go back on as soon as they can. The PBR reminds me of the words of Oscar Wilde, who wrote that, when he smelt flowers, he generally looked for a coffin.
My Lords, three questions have dominated today’s debate. First, how worried should we be about the deficit? Secondly, how quickly should it be reduced? Thirdly, what specific action should we take to bring about that reduction?
On the size of the deficit, there is pretty fair agreement, both on where we started from and where we are going to. We started with a relatively low level of public debt as a share of GDP compared to our competitors. To use the analogy commonly employed by economists, the bath of public debt was not very full; it was at a perfectly acceptable level. It was being filled, slowly, even in the good times, but it was manageable. In the past year, the taps have been turned on full belt and the Pre-Budget Report shows the taps remaining on more or less at full belt, into the future. As the noble Viscount, Lord Eccles, pointed out, the Pre-Budget Report shows that, for the whole of the projected period to 2014, debt as a proportion of GDP continues to rise. There is no turning point in terms of the level of water in the bath. As pointed out by the noble Lord, Lord MacGregor, the cost of having a full rather than an empty bath, in terms of interest payments, rises commensurately with its debt. We are talking about a figure of £63 billion by 2014, as I think the noble Lord mentioned. Some have said, “If you go on like that for very long, you will be talking about serious amounts of money”. Clearly, the deficit is extremely large, is growing and is something about which we should be extremely worried.
How quickly should the deficit be reduced? The Government are giving us the Fiscal Responsibility Bill by way of overall policy framework in this area, which will require borrowing to be halved over four years and to be reduced again in the fifth year, albeit by an unspecified amount. As I said yesterday at Question Time, although the motivation for the Bill is clear, it is in many ways a nonsense because if we find in five years’ time, as we may, that we are involved in military action that cannot be foreseen or that there is another downturn, the Government will almost certainly feel it appropriate—and everybody will agree—that public expenditure as a proportion of GDP should rise to meet those new circumstances; yet, under the terms of the Bill, this would be illegal. This seems to me to render the Bill pretty stupid. It does not, however, render the message behind the Bill stupid; namely, that we should be bearing down heavily on the overall level of debt. I may be wrong but I think that the principle enshrined in the Bill of halving the deficit over the period of the next Parliament, or certainly over the next four years, has been accepted as a working assumption by all the political parties. If you accept that as the point you want to get to at the end of the next Parliament, the big question is when you start turning the taps off.
At the moment, the Government are giving us very little indication of the tap-turning off process. The Conservatives are making our flesh creep by suggesting that the taps will be turned off the moment they get into office, if, indeed, they get into office. We have suggested that five tests should be applied to determine the pace at which the taps are turned off. These would be: a return to sustained economic growth; stable or increasing levels of employment; the costs of government borrowing and whether they are going up significantly; the availability of credit to businesses; and the external economic environment, particularly as regards growth in the EU. These tests, rather like the Chancellor’s five tests around the euro, are not scientific tests. Choosing the point and the calibration of turning off the taps is more an art than a science, but we think it is sensible to have some basis against which you can explain how you are going to do it. When you do it, you can set your actions against that framework, rather than making extremely vague, generalised statements, which is what I think we are faced with from the other two parties.
The noble Lord, Lord Barnett, said that it was impossible at this point—because we do not know what growth will be—to be very prescriptive about income and expenditure, particularly expenditure. In that case, it is slightly surprising that the Government have chosen to be very prescriptive about those bits of expenditure that they want to increase, but almost silent about how they will make cuts. The pace at which government expenditure needs to be cut will depend in no small measure on whether the Government’s growth targets are met. There is considerable scepticism on all sides about whether 3.5 per cent is the level of growth that we can confidently expect to go forward from 2011. But whatever view you take on growth is pure speculation at this stage. However, we know that growth will depend on businesses being able to invest. Here, the situation is not good.
We have had a number of debates in your Lordships' House about the way in which the banks are responding in terms of business investment. We know that the two state banks have signed agreements with the Government about lending rates. But the truth is that they are not meeting those targets. They say that there is not a demand for loans. I do not know about other noble Lords, but every time I meet a group of businessmen in the City or the south-east or, as I did last Friday, a group of very senior businessmen from West Yorkshire, their view is that they have got perfectly viable plans for investment in businesses which have a strong track record. They have been told by the RBS and the other banks that at regional level the amount of money available for lending has been seriously reduced. They are simply not getting the loans. Therefore, when senior representatives of these banks tell us that there is no demand, I no longer believe them. I hope that the Government will put ever-greater pressure on them to meet those lending targets because there is demand. There just is not a willingness on the part of the banks to lend.
During the conversation which I hope the noble Lord, Lord Myners, will have with Stephen Hester on that point, will he point out to him that for a Government who have put tens of billions of pounds into saving that bank, it is not politicisation to propose that they might suggest how the bank should be run. It is pure common sense that the Government, as the dominant shareholder, should have a view on some of the big policy issues that the bank is facing. We on these Benches argue that the Government would have been a lot better off just nationalising RBS at the time and being done with it. Then they could have run it more in the public interest without having the various filters between Whitehall and the bank, which means that the bank is able, whether on bonuses or on lending, to exercise what in my mind is a greater degree of independence than the amount of funding it has had from the state justifies.
Going back to the main issue, if we are to halve borrowing between now and 2014, how are we going to do it? I am afraid that here the PBR lacks all credibility. As we hear about what went on, it is clear that the process was shambolic. After midnight on the eve of publication of the PBR, the Education Secretary went to Downing Street to ask whether he could have more money. As he was to have a busy day the next day, the Chancellor had very sensibly gone to bed. The Chief Secretary was still up and had a conversation with the Education Secretary, as a result of which, by the morning, the PBR had been changed and the amount available for education had increased. I cannot imagine how either the noble Lord, Lord Lamont, or the noble Lord, Lord Barnett, would have responded had a spending department knocked on their door after midnight on the eve of the Budget and asked for more cash. I do not think that they would have said, “Oh, all right then, go on and do it”. But that is exactly what happened in this case. It is perhaps more shambolic than the idea that you can cobble together a bankers’ bonus tax in a week.
In terms of the outcome of the PBR for individual departments, the Government have ring-fenced all those things which they think are politically sensitive—education, health, the police and aid. They have left other things which they think are less politically sensitive to bear the brunt of the cuts. We do not know quite what that means, but let us assume that the IFS is right and that we are talking about 20 per cent real terms cuts between now and 2014 in the-non ring-fenced departments. That scenario is both implausible and highly undesirable. Does anyone really think that defence expenditure will reduce by 20 per cent in real terms over that period? Perhaps the Government have plans for exiting Afghanistan that we are unaware of. Take another area—prisons. Does anyone believe that at a time when the prison population is likely to increase rather than reduce we should be cutting 20 per cent of the budget on prisons? The one thing you know is that if you cut expenditure on prisons, and prisoners spend less time being trained, the recidivism rate and the cost to the state increase.
Therefore, even in the highly unlikely event of this Government being returned, they simply would not do what is in the PBR, which, therefore, as a document lacks all credibility. What we need is a number of principles against which we can judge not just the pace of cutting public expenditure but what to do. I would set just two principles. The first is fairness. If we are to be cutting, the country as a whole must feel that everyone is in it together. On that, the Government do reasonably well; the only problem is that there is no credibility in the overall package. I am afraid that the Tories do not do very well on that.
The other important principle to maintain is a high level of investment. The only mention in the Pre-Budget Report as regards this area—the creation of Infrastructure UK—simply does not meet the point. One of the more obscure paragraphs in the PBR describes how the PPP, or PFI, system has virtually ground to a halt, and the Government have to fund those projects directly from their own funds. We need a new approach in this area, and we have suggested the creation of an infrastructure bank. But there is a hugely significant principle—however you address this issue—whereby in a period of cuts the need remains for a policy of growth through investment in the future.
The noble Baroness, Lady O’Cathain, said that we were in limbo. She also hoped that we were not going to hell. The noble Lord, Lord James, seemed to think that that was predestined, but did not seem too worried. For the rest of us, we accept the first part of the noble Baroness’s comments. The PBR is at best a holding document which, in reality, tells us very little about what needs to be done to reduce the deficit. For that, we shall have to wait until after the election.
My Lords, noble Lords will recall the story of Penelope. While waiting for Odysseus to return, she laboured by day to weave a robe but at night unravelled it and started again the following day. Our modern-day Penelope is the Chancellor of the Exchequer. He weaves his Budgets and PBRs by day, but by night they are unravelled. The only difference is that it is not the Chancellor who does the unravelling: they do it all by themselves, with a little help from the Institute for Fiscal Studies. Penelope’s objective, of course, was to avoid the undesirable suitors who pursued her. The Chancellor has no such excuse. No one lusts after the Chancellor and his plans for our economy.
The subject matter of this debate is thoroughly depressing. Despite that, our debate has been excellent, and, as usual, my noble friend Lord James of Blackheath has managed to present a unique and humorous perspective on it. My noble friend Lord Lamont, whose experience as Chancellor of the Exchequer trumps the rest of us, opened for these Benches with a measured and comprehensive demolition of the PBR. My noble friends built on that foundation with many hard-hitting speeches.
It is hard to know where to begin with this PBR. But let me get out of the way the vacuous Fiscal Responsibility Bill, which the Chancellor seems to believe will validate his economic stewardship. Having heard my noble friend Lord Renton, I shall now regard this as the Insecurity of the Chancellor Bill. It is the worst kind of window dressing and does not deserve to use up the few legislative days left in this Parliament. However, if the Government insist on bringing it to your Lordships’ House, all I can say is “Bring it on”.
The PBR confirmed that Britain is in the longest and deepest recession since the 1930s. We are the only country in the G20 still to be in recession. The Chancellor has finally faced reality with his negative growth forecast of 4.75 per cent for this year. This implies a roughly flat fourth quarter and it is clear that the recovery is not secure. I hope that the Benches opposite will now be silenced on their wearisome comparisons, which we have heard so often, with the economic record of the last period of Conservative government.
Why is this country suffering more than the rest of the G20 or than most of the OECD? The answer is of course very simple: it now resides in No. 10 Downing Street. The delusions of a man who believed that he had abolished boom and bust and who engineered an economy built on debt, both public and private, took this country from an admired economy to one that is pitied abroad.
We sincerely hope that our economy is now returning to growth, but building a set of financial forecasts from 2011 onwards on the back of a 3.5 per cent growth rate seems to us to lack prudence. If, as my noble friend Lord MacGregor pointed out, we do not achieve that growth, the appalling figures for the deficit and for debt, to which I shall come in a moment, will be commensurately worse.
My noble friends Lady O’Cathain and Lord Eccles emphasised the need for private sector business growth, and the noble Baroness, Lady Valentine, and my noble friend Lord Trenchard reminded us that the financial sector remains an important part of the economy. My noble friend Lord Selsdon highlighted the need for the UK to be attractive to inward investors. However, did the PBR do anything for this?
The PBR does not help British business or help growth; it harms it. The national insurance rises are quite simply a tax on jobs. We cannot think of a single policy more likely to be damaging than one that will choke off job creation as we come out of recession. As my noble friend Lord Northbrook pointed it, it has been roundly condemned by the CBI, and the business community is unanimous on this. As Miles Templeman of the Institute of Directors said:
“A further tax on jobs at a time like this is madness”.
The additional national insurance starts to bite at around £20,000 of annual income, which is considerably less than average earnings. So we have the spectre of a Prime Minister trying desperately to wage a class war against the few in order to cling to power, while his Chancellor indulges in taxing the many. My party’s clear policy is to try to avoid the national insurance increases. We may well be too late for the first one but the second is firmly in our sights. Of course, the increase in national insurance will also make the task of controlling public expenditure harder because national insurance is also paid by local councils, schools and the NHS. In total, the public sector will have to absorb around £1.2 billion a year, and £450 million will come out of the NHS budget alone.
I turn to the deficit. The Government have no plans to tackle this until the year after next. We believe that this is the wrong approach and that it should be tackled now. Of course we understand the view that acting too soon or too vigorously could damage the economic recovery. The noble Lord, Lord Radice, noted that my right honourable friend Mr David Cameron is fully aware of this, but we are encouraged by the fact that the Governor of the Bank of England, the CBI and the OECD, to name but a few, agree with us that the deficit should be reduced earlier and faster than the Government plan. The recent report from the Policy Exchange shows that early action can help the restoration of growth rather than choking it off. It is a judgment, and we think that the Government have got the judgment wrong.
Importantly, the Government’s mañana strategy for the deficit means that an opportunity to calm the markets has been lost. Credit default swaps and gilt yields rose sharply again last week. The noble Lord, Lord Barnett, was sanguine about the UK's credit rating, but we agree with those who are now ringing the alarm bells, and this is not confined to the rating agencies.
The deficit cannot be reduced without addressing public expenditure. The evidence is that deficits are best reduced by reducing expenditure more than increasing taxation—which does seem to be the opposite of the Government's policy. My noble friend Lord Stewartby criticised the Chancellor's retreat from a long overdue Comprehensive Spending Review. It is reckless in the extreme to avoid the tough decisions which must be made on spending in the face of a budget deficit of nearly 13 per cent and a structural deficit of a whopping 9 per cent.
As many noble Lords have pointed out, the Institute for Fiscal Studies has laid bare the cuts in public expenditure which lie behind the illusion of flat overall spending over the next four years. Stripping out social security, debt interest, costs and the like gives a reduction in departmental spending of around £36 billion over the period. Even if we accept at face value the Government’s efficiency targets, that still leaves £15 billion unaccounted for. But we should not accept those efficiency targets at face value, as today's NAO report on efficiency savings reminds us that the Government’s efficiency claims are rarely capable of surviving audit. If overseas development, health and education are protected, simple arithmetic says that cuts will have to be borne by the other budgets, such as defence and transport, as the noble Lord, Lord Newby, pointed out. None of this seems credible. But even as the ink was drying on the PBR, the Prime Minister was out and about in Europe committing another £1.5 billion of taxpayers' money for climate change. Can the Minister explain where that will come from? The task of balancing the books gets more difficult every day that the Government remain in power.
The Minister often likes to make up stories about what my party would do if we were elected to govern next year. For example, let me remind him of what he said on 7 December in this House. He said that,
that is, my party—
“will slash the number of people in teaching, slash the number of people in the National Health Service and slash the number of people in defence and security”.—[Official Report, 7/12/09; col. 891.]
It is perfectly clear that the Minister has not a shred of evidence that my party will do what he said—at least I challenge him to produce that evidence. I do not expect him to apologise for his unsubstantiated slur, but I do ask him to give an assurance that his Government’s plans will not involve reductions in—to use his words—people in teaching, people in the National Health Service and people in defence and security. Given the background of the public expenditure projections, I put it to him that, even in the protected areas, he cannot give that absolute assurance.
I shall not dwell overlong on debt. Debt rising to 78 per cent of GDP is, quite simply, appalling. Over the next four years, the Government now plan to borrow even more than they said they would borrow in the Budget. My noble friends Lord Hamilton and Lord Ryder have warned of the difficulties in financing this, especially when quantitative easing comes to an end, as it must, as was rightly pointed out. It is our view that if the Prime Minister, when he was Chancellor, had managed the economy with prudence and wisdom, we would have entered this recession with lower levels of debt and hence greater budgetary flexibility. Debt would still have risen in a recession, but we would have coped more easily with the crisis. The Institute for Fiscal Studies has demonstrated that, when the effects of an ageing population are taken into account, debt will remain high for a generation, and this is way beyond the 40 per cent that the Prime Minister used to lecture us on as being the prudent maximum. My noble friends have already given the depressing statistics on debt, and I shall not repeat them. I will, however, repeat the urgency of bringing the debt down. Every month that hard decisions are ducked compounds the pain for the future.
My noble friend Lord Skelmersdale rightly exposed the Government’s policies towards pensions and benefits. We have become accustomed to the Government's cavalier approach to pensions ever since the ACT raid in 1997. What we find incredible is that the Government keep finding new ways to twist the knife. The further changes to defined benefit tax relief are so complicated that it took 113 pages of a booklet published last week to explain them. The one certain consequence is that those few remaining cheerleaders for defined benefit schemes in the private sector will give up the unequal task. At the same time, as my noble friend Lord MacGregor and the noble Lord, Lord Bilimoria, pointed out, the Government have failed to any real extent to deal with the unaffordability of public sector pensions. Taxpayers will not tolerate that.
It was shocking to find in the small print of the Pre-Budget Report that the benefit increases announced by the Chancellor would be clawed back the following year. Even more shocking was the Government’s decision to defer the implementation of the personal account system, to which my noble friend Lord MacGregor referred. That decision is based entirely on fiscal considerations. Most of us thought that the Government had a genuine concern about pension saving by low and moderate earners. We bought into the consensus around the Turner commission on that basis. We now know the depths to which the Treasury will sink when scraping the barrel for money.
This Pre-Budget Report ducks the difficult decisions about public spending and the deficit. Pain deferred is pain increased. The PBR has failed to give confidence to business. The tax on jobs will hit hard. If we cannot create jobs, we cannot begin to rebuild our economy or remedy the harm of unemployment, especially youth unemployment. The PBR did not give any cause for optimism or hope about an economic future.
We hope that our party will be elected next year in order to clear up after yet another Labour economic mess. I hope that when the time comes, the electorate remember what my right honourable friend Mr George Osborne described in another place as the greatest of the golden rules: never trust a Labour Government with your money again.
My Lords, this has been, in the words of the noble Baroness, Lady Noakes, an excellent debate. The quality of contributions reflects very well on the House.
First, I reassure the noble Lord, Lord Skelmersdale, that there was nothing that he should read into my sotto voce opening comments, other than that I had spent the first two hours of this morning with insolvency practitioners, which tends to cast a cloud over the rest of one’s day. I point out to the noble Lord, Lord Selsdon, that I do not think that I am wearing a funereal tie. In fact, it is rather bright. My wife said to me this morning when I was going out that I was wearing my bookmaker’s suit so I certainly do not want to convey the sense that I am feeling anything other than positive about presenting the Pre-Budget Report debate.
I will move along apace. It has been a long debate. Many noble Lords will no doubt be wanting to travel later this afternoon. I will also be obliged to settle a wager with my noble friend Lord Davies if my closing remarks go over 20 minutes—that wager being settled in the form of me having to write a letter to our Chief Whip thanking him for his great success in securing so much support for me from our Back Benches today. Rest assured, when the clock goes to 19 minutes, I will be finishing. I shall not be able to respond to all the points raised, but I will do my best.
I have already set out the key measures the Government have taken and will take to encourage economic recovery. The critical issues for us to consider today were summarised by the noble Lord, Lord Newby, in his comments. They are how worried we are about the deficit, how quickly it should be reduced and how it should be reduced. I hope that I will be able to cover those points in particular in my closing remarks.
We are at a very important point in the recovery as we move towards growth in 2011. Recovery is imminent, and it may well appear in the fourth quarter of 2009 data. That is entirely consistent with the Chancellor of the Exchequer’s forecast that we would see economic recovery towards the turn of the year. As well as addressing immediate concerns, we must not be myopic and must look to the long term. It speaks well of the House that so many comments today have been focused on what we do over the medium term in terms of taking the right decisions to ensure that the economy continues to grow. I agree with the noble Lord, Lord Bilimoria, that the answer to economic growth and bringing the public finances back into a more sustainable position depends importantly on commercial success, investments, business growth and creating the right conditions for that to take place.
We have taken steps to ensure fiscal consolidation. This is necessary for our future investment, but it must be done when, and only when, the time is right. That was precisely the statement expressed by Dominique Strauss-Kahn from the IMF. He said that there would be a time for fiscal consolidation, but it is not yet with us. The PBR also sets out steps to promote our long-term growth: investing in key industries for the future, our infrastructure—the noble Baroness, Lady Valentine, quite correctly reminded us that that is so important—and the skills of people in the country. The aim of the PBR is to secure the recovery and promote long-term growth and, as we do so, to build a fairer society and secure opportunity for all.
I shall spend a few moments talking about growth. We are at an inflection point. Growth is returning. The range of forecasts from external economists for GDP growth in 2010 narrowed as we got closer to the end of the year. They now vary between a negative 0.5 per cent and 2 per cent. The Government’s forecast is, of course, at neither extreme, but is pretty much where the consensus now lies. We anticipate growth in 2011 of 3.5 per cent. That is a rather lower figure than some well respected economists in the City, including, in particular, Goldman Sachs, forecast, and it is lower than the central prediction from the Bank of England. The projection of economic performance at an inflection point is always extremely difficult. I know from when I was a City analyst that when you are in a steady state the teenage scribblers are able to extrapolate existing lines. It is at the point when there are major changes that it is extremely difficult to make accurate forecasts.
However, the Government are forecasting a strong pick up to growth through 2010 into 2011. This is based on three key factors: first, the positive effects of a very large macro-economic stimulus, in particular, the effect of low interest rates, which will tend to come through gradually, and the consequences of quantitative easing; secondly, the positive effects of the G20 co-ordinated response; and, thirdly, the positive effects of the continued recovery in world trade and strong world growth prospects for 3.25 per cent growth in 2010, rising to 4.5 per cent in 2011, according to global agencies. The Government’s forecast is for growth rates similar to those we saw after the recessions of the 1980s and 1990s. I think that speaks to my observation about inflection points. There is therefore precedent that as you come out of a recession, particularly a deep recession, economic growth can be quite strong. UK GDP is projected to contract by 4.75 per cent in the current year, but that provides us with a basis for an expectation of a strong recovery in 2010-11, which will provide the basis for much fiscal correction.
The noble Lord, Lord Lamont, made an excellent speech and I will refer to a number of points that he raised. In so doing, I hope other Members of the House will recognise that they echoed his observations and feel that I am answering their comments at the same time. All G7 economies have seen falls in output. The noble Lord asked why we were taking longer than others to come out of the recession. At the moment we are seeing only very preliminary estimates of GDP recovery. I anticipate that in several countries we are likely to see revisions of those data, as we have already seen in the UK. Our high dependence on the financial sector and the damage that has been caused there by the problems in banking have undoubtedly meant that this recession has been even more challenging than we had anticipated. While it has taken us longer to come out of recession than some other economies, it must be remembered that several other economies, including those of Germany, Italy and Japan, have experienced much steeper falls in economic activity. Unemployment in the UK remains well below the EU, G7 and OECD averages.
The noble Lord, Lord Lamont, correctly told us that difficult decisions will have to be made. The critical question is when we make those difficult decisions. It is very important that we have a well-rooted economic recovery before we begin to make the inevitable fiscal adjustments that the Chancellor sees as being necessary. The Government have been very clear in their commitment. The Fiscal Responsibility Bill will secure a 50 per cent reduction in the deficit, expressed as a percentage of GDP, over four years once the recovery is established. Moreover, that deficit reduction will take place year by year, so there will be a progressive programme.
My Lords, I apologise that I was unable to get to the Chamber for the first couple of minutes of the Minister’s remarks. Is he unaware that, in real life, there is a considerable time lag between the firm announcement of decisions to cut public expenditure and these public expenditure cuts taking effect? When you are talking about the timing, that needs to be taken into account. Is the Minister also not aware that there are great problems with confidence in the financial markets? Perhaps he was going to go on to discuss these. If they go wrong, it will mean a considerable burden of debt interest, even if we can finance the deficit.
I note the comments of the noble Lord, Lord Lawson. I am advised that, as the noble Lord did not participate in the debate, I cannot reply specifically to him. However, I will do so through my summing up. I also note for my noble friend Lord Davies that I regard that as two minutes suspended from my 20-minute target. I did not make allowances for interventions.
The noble Lord, Lord Lamont, referred to the Irish model. This was also picked up by the noble Lord, Lord Ryder of Wensum, and the noble Viscount, Lord Trenchard, among others. I find this a very unattractive model to propose at the moment. There will need to be real cuts in public expenditure; of that there is no doubt. There will need to be action taken to reduce the deficit. That action will need to be decisive and it will take time to have effect. There is a judgment call to be made about when the appropriate time is. It would be irresponsible, and would let down society and cause great damage to our economy, to move prematurely.
The noble Viscount, Lord Eccles, asked whether the GDP forecasts that we have made represented the Treasury’s best estimate. They do; they are estimates in which we have a high degree of confidence. The Bank of England has led us to become comfortable with fan diagrams that show a range of outcomes; there are a range of outcomes here. However, our central estimate is below that of some groups of consensus estimates. We will see strong growth out of recession because of the capacity shortfall that my noble friend Lord Sheldon referred to.
The noble Lord, Lord Kirkwood of Kirkhope, referred to our annual managed expenditure and whether these data should be disclosed at the moment. I think it is right that it should be disclosed as part of the Comprehensive Spending Review, and the Chancellor has made it clear that he will make the review as soon as he is comfortable that recovery is restored and that there is clearer visibility about the future. I respect his great knowledge in reaching that conclusion.
I was delighted to hear the noble Lord’s comments about the DWP White Paper on employment and also noted his comments on money guidance. We have committed that at least 25 per cent of the funds released from dormant accounts will go into money guidance. There is a clear need to continue to support that area of expenditure to help people make better-informed decisions.
I have already referred to the excellent speech by the noble Lord, Lord Bilimoria. I do not agree with everything that he says, but his contributions are always well argued and very thoughtful. The noble Lord asked what amount was lost in output as a result of the increase in NIC. Of course, the increase will not take place until 2011. It is not possible to answer that question because it requires you to do a factor analysis, holding everything else stable. It is also important to consider how the proceeds of NIC are spent. In practice, they tend to be spent on things which have an immediate impact on the economy. Tax is not something which is withdrawn from the economy; it is taken from the economy and put back in to the economy. Therefore, with the greatest respect, I do not think that I can provide an answer to that question.
My noble friend Lord Radice reminded us of the chronic underinvestment in hospitals and schools that we inherited, and the vital need to increase public expenditure in order to address that underinvestment. We have done that, and that provides us with a background in which we can perhaps look with a little more comfort at having to cope with a difficult period in terms of public expenditure over the next few months.
The noble Lord, Lord MacGregor of Pulham Market, drew on his considerable experience in business and economics in his contribution. He referred to the gilt market and to confidence, as did a number of noble Lords. The gilt market did soften a little after the PBR, but actually it was moving in line with most sovereign bond markets. There was a move out in credit default swaps for most sovereigns as well, so I am not sure that one should conclude that the movement in the gilt market was entirely due to the PBR. When the noble Lord, Lord Ryder, whose comments I always listen to with great care, was referring to the deterioration in the gilt market, he could only refer to yields now at their highest level since 2008, which shows us that we cannot go back very far. One has to remember that, at the moment, gilt yields are extremely low. Questions were asked about who the foreign purchasers of gilts might be—38 per cent was the figure given for foreign ownership of gilts. It is clear that foreign investors are very attracted by the gilt-edged market, and we are borrowing at rates which are historically extremely low. We also have a very good maturity spread in the gilt-edged market. We do not have a lot of short-term debt which is coming up for maturity. If you look at the maturity framework of the gilt-edged market, it is far more attractive than a number of other markets.
On personal accounts, I assure the noble Baroness, Lady Noakes, that this has nothing to do with a fiscal adjustment. This is to take the pressure off business during a period of recovery; but we are committed to introducing auto-enrolment from the end of 2012 or the beginning of 2013. This is a programme with which I have a very strong identification. In addition to being chairman of the Low Pay Commission, as mentioned by one of the noble Lords earlier on, I was also chairman of the Personal Accounts Delivery Authority.
There was a lot of talk about the increase in the level of debt in the economy, but I remind the House that we start from a very advantageous position. Even at the end of this period of extraordinary borrowing to keep the economy moving and to keep people in their employment and in their homes, borrowing as a percentage of GDP will still be below the G8 average. It is a great testament to the conservatism, caution and prudence of my right honourable friend the Prime Minister when he was Chancellor of the Exchequer that we go into this global recession from a position of such considerable strength, as the noble Lord, Lord Northbrook, reminded us when he quoted from the PBR.
The noble Lord, Lord Stewartby, said that we had little room for manoeuvre, but I suggest that debt service costs at 3 per cent of GDP and a borrowing rate that is below that of our major competitor countries give us rather more room for manoeuvre than he suggests. However, I agree that it would be wrong for the Government ever to give the impression that borrowing is a free option. It absolutely is not a free option. We need to reduce the level of borrowing and to ensure that we do not burden future generations with excessive levels of debt.
I am very grateful to my noble friend Lord Haskel for his reminder to the House of the PBR’s very positive reception by many in the business community because of its deferment of the SME tax-rate increases, the establishment of a patent box tax, the extension of the time to pay arrangement, and continued funding support.
The noble Lord, Lord Newby, referred to credit from the banking sector. The House knows that I take a great interest in this. I am rather more persuaded that it is a function of a decline in demand rather than in the availability of supply. Historical experience and international comparisons also suggest that, at this point in the economy, demand for debt is lower. I am much more concerned about the cost and the terms of credit. As the House will know, a number of banks have now introduced customer charters, some of which are extraordinarily good in terms of the amount of detail that they provide. I am currently persuading Abbey National and HSBC to enter into similar charters. I agree that banking should not be politicised, but the banks need to recognise that they have responsibilities to the general public, and Mr Hester has already communicated to the Treasury his regret about the remarks that he is quoted as having made yesterday.
Although I have not spoken in the debate, I have listened to more than half of it. I think it is generally recognised that there is no Minister better able than the noble Lord, Lord Myners, to defend the Government’s economy strategy, but the economic strategy that he has expounded today is very clearly: no expenditure cuts this year, borrow more, and spend the money on increased benefits as electoral sweeteners. Could that be cynically described as a British Government saying to the British people, “If you lend me a tenner, I will buy you a drink”?
Definitely not. Quite the opposite; it is the British Government saying, “Rely on us to ensure that the economy continues into a strong, sustainable, low-inflation recovery that will give us the benefit of higher tax proceeds. The fiscal stabilisers will reverse their impact, and we will move to being able to reduce expenditure progressively to get government debt back to where we targeted it to be”. I am grateful for that chance to correct the noble Lord’s misunderstanding in that respect.
As I said, the Government have rightly taken action to support the economy while uncertainties and risks remain, but when the time is right we will reduce debt and ensure the public finances. It is absolutely critical that we do so. No one in government or on my own Benches should believe for one moment that we can or will flinch from making those difficult decisions once we believe that the economy is firmly in a state of strong recovery.
All the actions with which I have presented your Lordships today are based on our values of fairness and opportunity, and only by following these polices can the nation expect to enjoy the fruits of an economic recovery that is characterised by those qualities of fairness and opportunity.
Finally, and most importantly, I wish all noble Lords a very merry Christmas and a happy new year.
The following Act was given Royal Assent:
Consolidated Fund Act.
My Lords, before I repeat the Statement today, I declare a past interest as a non-executive director of both the Defence Logistics Organisation and the Defence Procurement Agency and, when those two organisations combined, as a non-executive director of Defence Equipment and Support. I can assure noble Lords that I was not personally involved in any decisions relating to the matter before us today and I have no interest, pecuniary or otherwise, to declare in respect of the report.
I am sure that the whole House will wish to join me in offering sincere condolences to the families and friends of the two soldiers of the 3rd Battalion The Rifles who were killed in operations in Afghanistan recently.
With the leave of the House, I shall now repeat a Statement made in another place by my right honourable friend the Defence Secretary. The Statement is as follows:
“Mr Speaker, seven weeks ago I addressed this House about Mr Charles Haddon-Cave’s report into the events leading to the loss of 14 service personnel aboard Nimrod XV230 on 2 September 2006. As I said then, it was a tough read. It spelt out in detail the many failings both in the MoD and in industry that led to that tragedy. I wish again to express my sorrow for what happened that day and to reiterate my sincere apologies to the families of those who died. I know that nothing that I can say will bring these 14 men back. What we must do now is learn all the lessons and take all the actions necessary to implement them.
Mr Haddon-Cave’s investigations were wide-ranging. His report was thorough and detailed. I want to thank him again for his efforts and for helping us to identify the changes that we need to make. Today I am setting out to the House how we are implementing his recommendations. Some of them are complex. I am therefore placing in the Library of the House a more detailed written response to the 84 recommendations.
This afternoon I want to focus on three areas: the creation of a new Military Aviation Authority; the changes that we are making to the management of airworthiness; and our relationship with industry.
The Nimrod XV230 was lost as a result of a number of failings in the MoD and industry over a period of some three decades. Opportunities to discover and avoid the dangers, particularly during development of the safety case, were missed. In part this was due to specific errors. It was also because the MoD’s aviation safety processes had become too cumbersome, complex and lacking in transparency and accountability. Despite the efforts of many hard-working men and women in the MoD and the private sector to deliver safe aircraft, the result was simply not good enough.
The report recognised and, indeed, welcomed the many improvements that we have made since the loss of XV230, but it also made it clear that we needed to go much further. I agree and I am today announcing the most radical reform to the MoD’s approach to airworthiness procedures since military aviation began.
First, we are creating a new independent Military Aviation Authority, which will regulate, audit and assure all military aviation activity. It will be led by a senior, three-star military officer, supported by a staff of around 250 personnel. He will provide the leadership for airworthiness and independent assurance that we and our industry partners are all operating to the highest safety standards. He will have been identified and appointed by February and the new authority will begin its work from April next year. The MAA will be independent of those who fly and maintain our aircraft day to day, ensuring that they operate fully within the regulations and are properly equipped, trained and resourced to deliver safe aircraft to the services.
In proposing this new organisation for the management of airworthiness, Mr Haddon-Cave wanted to ensure responsiveness in the face of changing operational circumstances and that a safe approach was adopted at all times. I agree, but to make his recommendations effective in the military environment some adjustments are necessary.
The single service assistant Chiefs of Staff must retain responsibility for determining that our aircraft can be safely released into service. The MAA will provide full assurance but will not carry out the release-to-service role directly. For operational emergency clearances, I have decided to opt for a tighter regime than Mr Haddon-Cave proposed, under which the assistant chiefs, not those who fly the aircraft at the front line, will be responsible for these clearances. The MAA will play an assurance role in this area, too. This refinement to the Haddon-Cave model will deliver his intent while retaining operational agility and improve on both our current and his proposed governance arrangements.
Mr Haddon-Cave also recommended a new approach to aviation safety cases. He was critical of our current approach, saying that it was bureaucratic and missed the point. I agree. We need to make it simpler and more relevant. The MAA will rewrite our instructions to include the improvements that the report recommends. I have instructed that we examine how to apply this best practice appropriately across the whole of defence. We are also auditing the standards of our current aviation safety cases to check that they are fit for purpose. The majority of this work has already been completed and will be finalised in the next couple of weeks.
I turn to the criticism of our relationships with industry. My department has been working with BAE Systems and QinetiQ to address their failings identified in the report. BAE Systems has announced the appointment of Dr Chris Elliott to provide independent support to the group managing director in undertaking a review of the company’s approach to product safety. QinetiQ has appointed Sir Robert Nelson QC to oversee the company’s formal investigation, which will include a review of processes, structure and reporting. All their findings will be shared with us.
Partnership with industry has always been a part of ensuring that our troops are provided with the best possible equipment and support. We recognise that partnership does not mean that we can just transfer work to industry; we still have a role to play. That is why we are improving the skills of our people to ensure that we manage industry’s activities on our behalf more effectively. A review of the contract conditions that we put in place with industry is also being conducted. We will institute improved checks and audits by the MAA on industry compliance.
However, I acknowledge that we need to do more, so I have asked my noble friend Lord Drayson, as part of his work on the defence acquisition reform project, to establish a much clearer understanding of the different roles and interests of industry and the MoD and to be sure that industry’s efforts meet our needs.
In his report, Mr Haddon-Cave also criticised the personal conduct of a small number of civilians and service people who held positions in the MoD and in industry in the period leading up to 2006. A number of those individuals work for BAE Systems or for QinetiQ, both of which are conducting their own investigations. A number of others are now retired.
In relation to the two serving RAF officers who were named, neither officer currently holds a position in any way related to safety. An RAF police investigation is now under way. Honourable Members will understand that I am unable to comment further on these matters at present.
There is an expectation that, in some situations like this, investigations are accompanied by blameless suspensions of the individuals under investigation. We will look again at this to develop a common practice for all MoD personnel, military and civilian.
Mr Haddon-Cave’s analysis and conclusions on safety management in aviation have wider relevance and we are looking to see what changes we may need to make across other safety domains in defence. He made a number of broader observations on areas that were not the main focus of his report. Mr Haddon-Cave did not take evidence on the department’s approach to change management. However, I will ensure that his observations on these important issues are reflected in our planned work on the organisation and culture of the MoD and as part of the preparations for a future defence review.
Every effort is being made by my department to ensure that our Armed Forces have the best training and the best equipment, but we must recognise that the work of defence is inherently dangerous. We ask our Armed Forces to place themselves in harm’s way and this entails risk. At the same time, any organisation that wants to learn and improve must change and develop. Our Armed Forces cannot stand still in the face of developing threats and the need to work in hostile environments. It is also vital that we do everything possible to use public money effectively and efficiently. However, I am clear that change and development and the management of risk are not, and cannot be, incompatible with a clear commitment and approach to safety.
My honourable friend the Minister of State for the Armed Forces and I have been clear throughout that the Ministry of Defence will be open and honest about our shortcomings and will respond vigorously to face the challenge to improve our performance. I regret enormously the death of those on the XV230 and apologise for the part that my department played in failing to prevent that. The measures that I have announced today reflect my personal commitment to improving the safety of military aviation and the safety of our Armed Forces”.
My Lords, I start by joining the Government in sending our condolences to the families and friends of the two soldiers of the 3rd Battalion The Rifles who were killed in Afghanistan.
I thank the Minister for repeating the Statement. The subtitle of the Nimrod review is “A Failure of Leadership, Culture and Priorities”. This surely sums up its 583 pages. While we accept, as the Statement says, that the work of defence is inherently dangerous, this report requires questions to be asked and lessons applied. Fourteen lives were lost on the Nimrod XV230. We owe it to their families to establish as far as possible exactly what happened and to try to prevent it from ever happening again. We owe it to them to ensure that the Armed Forces have confidence in a safety regime that applies to the increasingly complex equipment that they are using.
Above all, the report shows that, where safety is concerned, cutting costs inevitably leads to cutting corners. Ultimately something will fail, be it from human error or from mechanical or systems failures. When this happens, the result, as painfully detailed in the report, will be catastrophic.
We welcome the creation of the independent MAA. The MAA will need to have competence to deal with industry. More and more, through-life capability management is being outsourced to industry and we welcome the Government’s commitment to institute improved checks and audits by the MAA on industry compliance. We particularly welcome the fact that the noble Lord, Lord Drayson, has been asked to establish a much clearer understanding of the different roles and interests of industry and of the MoD and to be sure that industry meets the needs of the Government and the Armed Forces.
It is vital that the proper technical advice is passed up the chain and that the Armed Forces should trust that advice. Mr Haddon-Cave recommended a new approach to aviation safety cases. The Nimrod safety case was a lamentable job from start to finish. We welcome the Government’s acceptance that instructions need to be made much simpler and more relevant.
The report was very critical of two companies, BAE Systems and QinetiQ. The delay in their responses is not acceptable, as they both had plenty of warning. Did those two companies give the Government any reasons for that delay?
The report criticised two senior retired officers, General Sir Sam Cowan and Air Chief Marshal Sir Malcolm Pledger, for their roles as CDL during the key periods. Yet in all that they did, they were carrying out the strategy, policies and actions of the MoD, continuously reiterated and discussed with Ministers. If there was, as has been described in the report,
“a sustained period of deep organisational trauma”,
within the MoD, the Secretary of State must answer for that. In our parliamentary culture, it is Ministers who are accountable, both to Parliament and to the public, and it is wholly wrong that those retired officers should be pilloried in the press as they have been. What message does that send to serving members of the Armed Forces? I hope that the noble Lord will acknowledge the injustice done to them.
It will take more than a few tweaks to the bureaucratic structure of the MoD and DE&S to fix the shortcomings identified in this report. We need to see a thorough overhaul of the regime in the MoD, in DE&S and among civilian constructors to ensure that disasters like this do not happen again.
My Lords, I first enjoin these Benches in the earlier tribute to those who lost their lives yesterday in Afghanistan. To allow less than one hour for this House to respond to a major Statement does scant justice to the importance and complexity of the Haddon-Cave review. More particularly, it is totally inadequate given the tragic loss of 14 dedicated personnel aboard the Nimrod that was lost over Afghanistan in September 2006. I suggest that we really need—indeed, that we owe it to the relatives of the deceased—a much more thorough debate on the report and on the Government’s response.
The establishment of a military aviation authority, which we surely welcome, needs to be probed. Would it not be preferable for it to be chaired by a truly independent senior non-service person rather than a serving officer? Indeed, will there be any outside non-executive involvement or similar in that authority?
On the Haddon-Cave review itself, I pay tribute to that near 600-page tome as a remarkably comprehensive and detailed document, but I do have a number of questions. I echo very much the probing of the noble Lord, Lord Astor, in this regard, but given that Ministers have overall responsibility for their departments—certainly, for the financial resources allocated to them and for overall policy—why were no Ministers questioned by Haddon-Cave? Similarly, there was no questioning of either the Permanent Secretary or the second PUS despite, if I understand it correctly, the latter having overall responsibility for health and safety. Additionally, why were no non-executive members of the Defence Logistics Organisation board interviewed? I believe that we will be hearing from the noble Baroness, Lady Cohen, shortly.
Haddon-Cave found against both BAE Systems and QinetiQ. On page 301, his report says:
“If BAE Systems had carried out the NSC task properly, the accident”,
would not have happened. In a press release dated 29 October 2009, BAE says:
“We accept full responsibility for these failings and apologise unreservedly for them”.
QinetiQ, as has been said, has appointed a former judge to oversee that company’s formal investigation.
However, the review also comes out heavily against two senior figures: General Sir Sam Cowan and Air Chief Marshal Sir Malcolm Pledger, both former Chiefs of Defence Logistics. Paragraph 17 on page 353 says:
“Two very senior figures bear particular responsibility for the episode of cuts, change dilution and distraction and its consequences”.
From my reading of the report, there appears little evidence to support these conclusions. It could be suggested that these former officers were only doing their jobs as instructed by Ministers and more senior officials. That is why I question the non-interviewing of Ministers. In terms of process, given the obvious distress to General Cowan, Sir Malcolm and their families that the besmirching of their reputations inevitably brings about, should they not at the very least be told of the review’s conclusions in so far as they concern them, providing an opportunity to challenge or refute before final publication?
The Minister’s Statement mysteriously tell us that:
“An RAF Police investigation is now under way”.
Can the Minister perhaps elucidate just a little? How extensive is the investigation? Does it just involve current serving officers? Indeed, who does it involve?
Paragraph 23 of the executive summary on page 12 says:
“But for the delays in the Nimrod MRA4 replacement programme, XV230 would probably have no longer been flying in September 2006, because it would have reached its Out-of-Service Date and already been scrapped or stripped for conversion. The general history of procurement in the MoD has been one of years of major delays and cost overruns. This has had a baleful effect on in-Service Support and safety and airworthiness generally”.
None of us who specialises in defence in this House needs reminding of all this. My point is that, given the financial pressures on the defence budget, there is an increasingly obvious danger in running on and patching up across all three services.
Today’s Statement hints at other changes that may be needed across the safety domain in defence. All who have responsibility for our Armed Forces need to place the highest priority on safety, obviously commensurate with operational risk, if we are to avoid tragedies like the Nimrod ever happening again.
My Lords, I thank both noble Lords for their responses, particularly to the extent to which I think that they support the creation of the MAA and the changes that that brings about. I will therefore not go into too much detail on their questions, but pick on some particular points.
BAE and QinetiQ received the report at the same time as the House, when it went into the public domain. In the circumstances, it is entirely reasonable that it would take a number of months to respond to it. I understand the expectation is that there will be a response reasonably early in the next year.
I am afraid that I cannot comment on the report or on the comments about other officers. We are content that evidence was provided for the report’s recommendations. Therefore, we have dealt with all the recommendations in full and have set out in our written response what we are doing about the recommendations we are accepting, the ones we partly accept and the ones we are rejecting, even the ones we are rejecting that have in many ways been modified. An RAF Police investigation is being conducted into the actions of the two serving officers. It would be inappropriate to comment further on them or on the retired personnel. For that reason, no matter how hard I am pressed, I will make no further comment on that issue or on the extent and depth of the police investigation.
The organisational trauma and the importance of ministerial responsibility are clearly accepted in the Statement. However, I am happy to reiterate that today. The Secretary of State acknowledged in October and today that Nimrod XV230 was lost as a result of a number of failings in the MoD and industry over three decades. This was due to specific errors and to the fact that the MoD’s aviation safety procedures had become too cumbersome and complex. We are therefore accepting recommendations made by Mr Haddon-Cave in regard to these specific failings in order to improve military airworthiness. The broader pursuit of savings within defence did not cause the crash, but may have contributed to related failings. Mr Haddon-Cave’s observation regarding savings and change will be reflected in our work on the forthcoming defence review and in the work being undertaken to reform defence acquisition.
The noble Lord, Lord Lee, touched on the formation of the MAA and sought a debate in the House on that. I am afraid I have to give the standard ministerial response that that is a matter for the usual channels. However, the MAA is an important organisation. He asked why a serving officer should be involved. Having been involved in safety critical environments, I can see why there may be some attraction in that. Given the complex, technical nature of aviation safety—I am also familiar with that—I think, on balance, one has to recognise that you need somebody who is up to speed with that environment. Therefore, it is difficult to imagine anybody but a serving officer being involved. That concern is reflected in the safety structure of the Ministry of Defence under the new regime. The MAA will not report to the Chief of the Air Staff but to the Second Permanent Under-Secretary, who holds responsibility for defence safety. Within the structure of the Ministry of Defence, it is, I think, an organisation which is as independent as is reasonably practical while being—
Essentially, Mr Haddon-Cave was given a brief that allowed him to choose who he interviewed. I do not know or understand his thinking. He interviewed those he thought it was appropriate to interview.
I was also pressed on non-executive directors. In this complex matter it is all too easy to make mistakes, but I understand that it is intended that the MAA will have non-executive directors, or at least a director of part of its administration. If I am wrong on that, I shall, of course, write to noble Lords to clarify the matter.
We all take the gravity of this situation. Any accident is sad, but this was extremely sad. I hope that the Ministry of Defence has not been slow in accepting its responsibility. It is also true that the MoD has for some years been on an improving trend in terms of safety practices. Certainly, if one looks at the response to this tragic accident and goes through the work on the specific fleet, and looks at how the Ministry of Defence is following up the work on all fleets to assure safety and to see how it might be applied to other platforms, there is real change. Together the MAA and that change will improve and assure safety in the defence environment.
My Lords, I am sure that everyone welcomes the establishment of the MAA, as I certainly do. Will the MAA have the power to recommend the immediate grounding of any type of aircraft where it considers that to be appropriate? If not, why not? If it does have that power, who at the Ministry of Defence will have the responsibility to see that such an instruction is immediately implemented?
Does my noble friend agree that General Sir Sam Cowan and Air Chief Marshal Sir Malcolm Pledger have in fact been traduced by the Haddon-Cave report? I speak in this case from personal knowledge. I was invited by Sir Sam to be his senior independent director on the board of the Defence Logistics Organisation in 1999, and to continue in the same role by Sir Malcolm Pledger in 2003 until his retirement in 2005.
As the Statement acknowledges, Mr Haddon-Cave took no evidence to support either his general conclusion that the Defence Logistics Organisation was in disarray or his specific conclusion that further damage was done by the arbitrary imposition of a 20 per cent cut in costs. Mr Haddon-Cave could have asked me. It was not chaotic, and there was no sense that the Ministry of Defence’s traditional commitment to safety was being threatened. I think that I would have been in a position to know. I chaired, and indeed had set up, the defence logistics audit and risk committee, which consisted entirely of other independent non-executive directors, like me, who were on board throughout the Defence Logistics Organisation. In that forum anyone worried about safety could readily have said so, and they did not.
It is quite wrong to say that a 20 per cent target for cuts was imposed. There was an aspiration, fully supported by Ministers, of reducing costs by 20 per cent over four years—a goal which should have been well within our reach in the course of putting together three organisations that were fundamentally doing the same thing.
I would ask the Minister to accept that no matter how dreadful and how tragic the accident, and how much our sympathy goes to the families of the dead, it cannot be right wrongly to blame honourable men.
My Lords, I recognise the contribution made by the noble Baroness, Lady Cohen, to defence, and her role. I can agree with her statement to the extent that Haddon-Cave admitted that he took no evidence in this area. Our acceptance of the report specifically concerns acceptance of the recommendations which we believe to be evidence-based. I cannot proceed further on that subject in view of the police investigation.
My Lords, I apologise for arriving a little late after the Minister began the Statement—which of course I had read, having seen it in the Printed Paper Office earlier. Like him, I have spent a great deal of my life involved with both civil and military aviation, first in the Army and, secondly, in the United Kingdom’s commercial helicopter world.
One of the organisations whose work I have sometimes been frustrated by, but mostly respect, is the Civil Aviation Authority. The Statement refers to the creation of a military aviation authority. It is an abundantly sensible idea to regulate, audit and assure all aspects of military aviation. As there is to be a military representative on the board of the Civil Aviation Authority, is there to be civil aviation expertise available on the board of the Military Aviation Authority? Perhaps the noble Lord can also say whether the role of the Air Accidents Investigation Branch—which used to be part of the Department of Trade and Industry but is probably somewhere else now—will be maintained or developed to enhance the military’s ability to investigate military air accidents.
The Statement makes a lot of sense in many respects but is the sort of Statement that requires time to digest. I have read a very large part of Mr Haddon-Cave’s massive report, which raises two further questions in my mind. One relates to the Statement yesterday on the Nimrod MR2, which apparently is to be withdrawn a year early. What does that mean? A year earlier than what? What will be the effect of the withdrawal of the MR2, which yesterday’s Statement said was to be done on financial grounds and had nothing to do with air safety—which I wholly respect? Is any gap in capability likely to be generated by that? Will he also say where the Nimrod R1 stands? I know that there are only three of them, but whether all three are available is a matter of conjecture. They play a vital part in our various intelligence activities.
I think I recall that, many years ago, the noble Lord flew me to an oil rig. The Secretary of State announced yesterday that the Nimrod MR2 would be brought out of service 12 months earlier than planned. He emphasised, as do I, that that was not related to the Haddon-Cave report. I thank the noble Lord for that acknowledgement. There will, as a result, be some reduced capability and the initial deferring of the MRA4 capability. My understanding is that the reconnaissance versions will be kept, with sufficient capability to support our forces. If I have to trim from that, I will write to the noble Lord.
I welcome the noble Lord’s comments on the CAA and the MAA. They are analogous to a degree but, as he will know, the CAA environment is very much one in which many airlines operate common types to a very prescribed situation. The MAA acknowledges the inevitability of national sovereignty in operating special types of aircraft. So in many ways it will need a different sort of capability, and in some ways a more enhanced capability than the CAA.
The civil accident investigation branch will continue to support military accident investigations. In addition, we will grow our own military accident investigation capability. There will be regard in the MAA for the value of CAA experience, with the idea of the cross-fertilisation of directors. As I understand it, that is being pursued. If I have to demur from that, I will of course write to the noble Lord.
I am assured that the MR1 out-of-service date is not affected by yesterday’s Statement. So the reconnaissance version will continue as planned.
My Lords, I thank the noble Lord for repeating the Statement. I, too, greatly regret that Mr Haddon-Cave did not consider the role and responsibilities of Ministers. Following the SDR in 1998, the failure of the Government adequately to fund the proposed new defence strategy led to more and more extreme attempts to extract the required pint out of a half-filled pot.
Where matters of flight safety were concerned—in which both those in the aircraft and maybe innocent people on the ground could be at risk—there should not have been presumptions of economies without far more rigorous consideration. There was not “a clear commitment and approach to safety”, to which the Statement now aspires.
The ministerial directives to amalgamate the single service logistics into the DLO, against the considered advice of the Chiefs of Staff, and subsequently further concentration of the DPA into the DE&S, proved to be an organisational overload in these key areas—so much so that neither were the anticipated 20 per cent economies in four years achieved, nor were key priorities affecting flight safety followed. The Nimrod accident is one but not the only failure that can be laid at, or will be attributable to, this ministerially misdirected policy.
The MoD is once again facing a position where financial resources and aspirations are seriously mismatched. We learn that there is to be a new Military Aviation Authority of some 250 people, but will Ministers, considering how to resource this and the other connected new arrangements that they have undertaken to implement, accept that the current levels of funding for defence are inadequate for our commitments? Commitments must be cut back rather than expecting to find unrealistic and unrealisable economies to resource new large structures and balance the books. What cost do the Government expect to have to find to set up and run the new MAA?
I also regret that the two senior officers charged by Ministers to restructure and achieve unrealisable savings should be held so personally to blame for the systemic failure of the MoD in setting out the policy they were to implement.
My Lords, I thank the noble and gallant Lord for his comments but he will forgive me if I do not respond to them because he seems to have made some general remarks on costs and on the present funding of the Armed Forces.
The essence of the issue before us today is flight safety, and the Ministry of Defence has secured the appropriate money to ensure proper funding for flight safety standards over the years. I have spent some time being briefed and I have talked to people about the flight safety standard aspired to. I have also talked about the concept of ALARP and about the catastrophe rate that one aims to prevent. I do not believe that there is a money problem there.
For a series of technical reasons, a catastrophic event was caused by errors in the design of the aircraft over a number of decades. We acknowledge that in the safety review, which was instituted by the DLO in a commitment to look at its ageing assets and make sure that they were satisfactory, there was an opportunity to find those design defects. If they had been found, the catastrophe would not have occurred. However, while the pressure to change and become more efficient may have had some distracting effect, the accident did not occur for the want of appropriate investment. Indeed, we have put sufficient money into the Nimrod so as to maintain appropriate safety standards.
My Lords, as a rifleman, I join in the condolences for the families of two members of my regiment who were killed in Afghanistan yesterday.
Like the noble Baroness, Lady Cohen of Pimlico, and my noble and gallant friend Lord Craig, I am particularly concerned about a very disappointing admission in the Statement: namely, the very serious blemish in Mr Haddon-Cave’s report about the way in which he traduced the names and reputations of two distinguished senior officers. Of course, the hurt that they have suffered from sensational and erroneous headlines is nothing like that suffered by the families of the 14 servicemen who lost their lives. Nevertheless, I regard the way in which they have been treated as wholly unacceptable and a stain on the Ministry of Defence.
The loyalty of our Armed Forces to their Queen, to Ministers and to their officers is a byword. Service men and women expect their loyalty upwards to be matched by similar loyalty downwards to them. As this traduction amounts to disloyalty downwards to two distinguished people who had demonstrated loyalty upwards throughout their professional lives, it has damaged respect for the MoD in the Armed Forces, who now fear that their loyalty may similarly not be returned. That state of affairs is as dangerous as it is regrettable, particularly when we are fighting a war. I urge Ministers to take urgent steps to ensure that such totally unsubstantiated and unbriefed “broader observations”, to quote the Statement, are never again allowed to be published in their name. In particular, I ask the Minister what steps are being taken to put the record straight and to state publicly that General Sir Sam Cowan and Air Chief Marshal Sir Malcolm Pledger were wrongly pilloried for initiating financial cuts for which Ministers were responsible.
My Lords, the concerns expressed come from the report, not from the MoD. The MoD has carefully avoided any comment on these individuals for the reasons I gave earlier. Clearly, there is a police investigation, which means that there is a case, but I absolutely refuse to give any further indication of that. I do not know of the gravity of the case. Until that police investigation is complete, the MoD will not be making any statements about the officers who are presently employed or the officers who have retired. The MoD is very proud of its staff; it is very proud of the way in which they reacted to the challenge of this tragedy review, of the work they have done since and of the loyalty that they have applied to their task. That was made clear in the Statement.
My Lords, I associate myself with the remarks about the two soldiers who died yesterday in Afghanistan. They died in a noble cause. I hope that their relations will feel that.
Is the Minister aware that this Statement will be widely welcomed by all concerned, and especially by the bereaved families who simply look for the truth and for clarity? I commend the Government on a speedy response to what is a very tough, blunt and detailed report from Mr Haddon-Cave. Given the scale of the disaster and the grief caused to so many people, it is right and proper that the report should be radical and that the Government should respond so clearly and decisively. I hope the recommendations will be implemented without delay.
The Defence Secretary said in the Statement that Mr Haddon-Cave had made a number of broader observations about areas which were not the main focus of his report. A number of noble Lords have mentioned the generalised comments that he made about the management of change. In doing so, as has already been said, he strayed too wide of his remit. I was the Secretary of State for Defence at the time of the 1998 Strategic Defence Review and I take full responsibility for its recommendations. He makes a number of comments about it. If Mr Haddon-Cave was going to come to conclusions on the impact of that review on management conduct in the Ministry of Defence, he should have done so only after hearing from those who were concerned and involved, and especially from Ministers, such as myself and my noble friend Lord Gilbert, who was the Minister for Defence Procurement at the time.
As he did not seek such evidence, it was particularly unfair and unjust to name General Cowan, whom I appointed as the first ever Chief of Defence Logistics, and his successor, Air Chief Marshal Pledger. I sincerely believed at the time that they could, without any risk to safety or efficiency, achieve a 20 per cent cut in the costs of the new logistics organisation over a period of four years. I did not think that that was an unreasonable target, given the past and given the synergies of bringing together three service logistics organisations. Even today, I do not think that that was a dangerous strategy.
My Lords, it is good to have the endorsement of my noble friend Lord Robertson’s response. We will be taking the recommendations forward as speedily as possible. We have accepted the recommendation: the MAA will form from April 2010 and be fully operational from April 2011. There should be an announcement in February as to who is to head it, and the task of looking for an appropriate location for it will start in the new year.
I do not feel that it is sensible for me to comment further on Mr Haddon-Cave’s observations on individuals. I stress that the Government were careful to ensure that his recommendations, on which we have acted, were evidence-driven, and it is those recommendations that we are reporting to the House today.
Motion to Adjourn
My Lords, in moving that the House do now Adjourn, I repeat all our best wishes and seasonal greetings to all Members, staff and Officers and, in particular, to our Lord Speaker, who, I am sure the whole House will agree, deserves a well earned rest over the holiday. I beg to move.
House adjourned at 5.07 pm.