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Economy: Deficit Reduction

Volume 738: debated on Thursday 28 June 2012


Asked by

To ask Her Majesty’s Government whether they remain of the opinion that their deficit reduction plan has been the right policy for the United Kingdom; and, if so, why.

My Lords, tackling the large deficit that this Government inherited was, and is, necessary to restore public finances to a sustainable path. Reversing the historic rise in public debt will strengthen the UK’s medium-term growth prospects.

My Lords, has the Minister seen the OECD’s latest figures, which show that when the Government took office in 2010 our net debt in that year was 53.9% of GDP, while in Germany it was 52.2%? By 2013, next year, they say that UK debt will be 74%, although it is likely to be higher now in the light of the latest figures, while Germany’s will still be 50.5%. The budget deficit was serious, of course, but it cannot be blamed for those figures. Does the Minister not agree that those figures show that the real reason behind this is that Germany had growth, whereas the Chancellor’s deficit reduction plan deliberately had no growth? In those circumstances, can we now expect another U-turn, shortly I hope, to provide some capital for structural expenditure, which might just help to kick-start a bit of a revival?

My Lords, the debt figures that the noble Lord, Lord Barnett, recited precisely illustrate the structural deficit challenge that we inherited from the previous Government. We have already reduced the current budget deficit from 11% to 8% of GDP in two years, but there is much more to do, and we will do it. We will be reducing borrowing by £155 billion a year by 2016-7, compared to what it otherwise might have been under another Government. We will keep on with that task.

My Lords, the Oxfam report, The Perfect Storm, published two weeks ago, says:

“The combination in the UK of economic stagnation and public spending cuts is causing substantial hardship to people living in poverty”.

In view of this, could the Minister tell the House what plans the Government have in place to mitigate the effects of their deficit reduction programme on our most deprived groups and communities?

My Lords, I can assure my noble friend that the Government are committed both through the changes that we are making to the income tax system and to other public expenditure decisions to protect the vulnerable and reward those who choose to work, particularly at the lower income levels. So we have, for example, the uprating of benefits by 5.2% more than average earnings growth to protect people from rising prices; reforms to the tax credit system, so that we are tackling the deficit in a fair way; uprating the child tax credits, so that families see an increase of £135 per child this year as well as £180 over inflation last year; changes to personal allowances, which will benefit 25 million people, taking 260,000 people out of income tax altogether; and the fairness premium at £7.2 billion—I could go on. My noble friend is right, and I can confirm that this will be very much at the forefront of the Government’s thinking.

My Lords, bearing in mind that the Lords reform Bill is predicated on the Government’s view that your Lordships’ House lacks legitimacy, I congratulate the Minister on his willingness—at least on this occasion—to answer our questions, albeit not very satisfactorily. I hope he continues with that.

On the substantive issue, has the Minister seen the Governor of the Bank of England’s latest, extraordinarily pessimistic forecast about the likely status of what one would have called the real economy—as opposed to the financial economy? Bearing in mind that most of the Government’s expenditure cuts have not yet been made, surely the governor in his pessimism is actually not being pessimistic enough. Does the noble Lord agree?

My Lords, I think that the Governor of the Bank of England is, as always, being very realistic and clear about the nature of the dangers that we continue to face particularly because of the eurozone crisis. This is precisely why we will stick to the fiscal course that we have charted; why it is supported by the IMF, the OECD and business organisations here; and why it is that we have 10-year interests at 1.7 per cent. We will do nothing to jeopardise that position in the face of the very real dangers that the governor points out.

My Lords, leaving aside the welcome reductions in corporation tax, will my noble friend please remind your Lordships of the three main supply-side measures promoted by the Treasury to encourage growth?

My Lords, the first thing that we need to do to support growth is to continue to have companies and individuals confident that we will stick to a responsible course and keep interest rates low. It is from this that all else flows. As well as tight fiscal discipline, it is important that we have a loose monetary discipline. That is the right policy prescription. We will target our other efforts into making sure that education, infrastructure and each of the key drivers of medium-term sustainable growth are supported in all that we do as a Government.

My Lords, the Minister has referred to the reduction of the deficit from 11% to 8% of GDP. However, is it not the case that the deficit on current spending has hardly changed over the course of the last year and that almost all the reduction in the total deficit has come from cuts in investment spending?

No, my Lords, that is not correct. Last year, Government departments came in with underspends of some £6 billion—and that was certainly not all capital spending. What my right honourable friend the Chancellor was able to do this week by cutting fuel duty, putting £550 million back into the pockets of hard-working families, illustrates how we are able to use underspends and put them to very good use where they are most valuable to our people.

My Lords, can the Minister explain why the Prime Minister was the only leader of a nation attending the G20 whose country was in recession? If he is talking about inheritance, does he recall the fact that, in 2010, this Government inherited a 2 per cent growth rate and now it is nought?

My Lords, we face very difficult challenges. For all the deficit reduction that we have done, this country still has a budget deficit higher than Greece, Portugal and Spain. Yet we have interest rates that are very much lower and the confidence of the markets, and it is off that base that sustainable growth will come.