Autumn Statement

HC Deb 08 November 1990 vol 180 cc117-36 2.53 pm

The Chancellor of the Exchequer (Mr. John Major)

With permission, Mr. Speaker, I should like to make a statement.

The Cabinet agreed the Government's expenditure plans this morning. I am, therefore, now able to inform the House of the public expenditure outturn for this year; the plans for the next three years; our proposals for national insurance contributions in 1991–92; and the forecast of economic prospects for 1991 required by the Industry Act 1975.

As usual, the main public expenditure figures, together with the full text of the economic forecast, will be available from the Vote Office as soon as I sit down. The printed "Autumn Statement" will be published next Tuesday.

In this survey we have had to take some tough decisions in the interests of the economy and the new plans represent a very tight settlement. But it is a settlement which is fully consistent with the Government's commitments and channels extra resources to the areas where the need is greatest. For this, and other reasons, I should like to pay tribute to my right hon. Friend the Chief Secretary for the skill and persistence with which he has brought the survey to a successful conclusion.

Since 1984–85, while the economy has grown by nearly 20 per cent., total public spending has risen scarcely at all in real terms. As a result, the ratio of public expenditure to national income has fallen by more than seven percentage points, the largest sustained fall for 40 years. Moreover, in the past three years large budget surpluses have enabled us to repay debt totalling £26 billion.

Mr. Dennis Skinner (Bolsover)

Not any more.

Mr. Major

We shall add to that this year.

The main objective of economic policy at present must be to bring inflation down, but, as we do so, the short-term prospect is bound to be one of weak activity. [Interruption.] In the past, during similar periods the ratio of public spending to national income has risen strongly. On this occasion it will not.

Planned public expenditure in the current fiscal year is now expected to be £180.6 billion, rather less than 1 per cent. above the planning total set a year ago. A large part of this extra spending is due to an increase in the financing requirements of the nationalised industries, to a surge of common agricultural policy spending on agricultural market support and to expenditure on the Gulf crisis.

Notwithstanding this cash overrun, public expenditure remains under tight control. Inflation has been higher than forecast, but it has not been allowed to feed through fully into expenditure. As a result, the ratio of spending to national income in the current year is likely to be slightly lower than projected at the time of the Budget—virtually unchanged from the 1989–90 level.

The decisions on public expenditure for the next three years have been taken against a more difficult world and domestic economic background than for some time. Activity at home and abroad has begun to weaken and some countries such as Canada and the United States are expected to grow very slowly indeed over the coming year. The outlook has also been complicated by events in the Gulf, with the rise in oil prices and the uncertainty that they have produced. Against that background, our new plans are designed to protect the most vulnerable groups in society against the effects of higher inflation [Interruption.] I repeat, to protect the most vulnerable groups in society and to maintain longer-term policies to improve the working of the economy.

Mr. Robert N. Wareing (Liverpool, West Derby)

rose——

Mr. Major

I shall of course give way to the hon. Gentleman when we come to questions a little later.

But, beyond that, this is not the year for making substantial additions to plans in other areas. The priority must be to honour existing commitments, within a total for public spending that is affordable and fiscally prudent.

For 1991–92, the new planning total has been set at £200 billion, a little under £8 billion more than the previously published figure. The planning totals in the following two years are £215 billion and £226 billion respectively.

In recognition of the economic uncertainties and the risks arising from the Gulf crisis, these totals include higher reserves than last year's plans: £3½ billion in the first year; £7 billion in the second year; and £10½ billion in the third. I believe that these increases are prudent. Our plans also incorporate an estimate of privatisation proceeds at £5½ billion a year that is in line with the average outturn in recent years.

After taking account of inflation, the level of spending next year will be rather less than implied by last year's plans: that is, the cash additions to the planning total do not fully compensate for the higher level of prices now expected for 1991–92. This restraint is necessary, but it means that many of my colleagues have had to drop or postpone proposals that they would otherwise have regarded as desirable.

Nevertheless, within this total there are substantial extra resources in three main areas: health, social security and central Government support for local authority services. These additions to plans total some £7½ billion in 1991–92. It has also been possible to make improvements to other key areas including education, public transport, and the environment.

We have also been able to make savings elsewhere, including defence. I can assure the House categorically that financial constraints will not hinder in any way the United Kingdom's military contribution to resolving the Gulf crisis. However, the "Options for Change" announced by my right hon. Friend the Secretary of State for Defence on 25 July will produce increasing savings in the defence budget. Over the next three years the new plans provide for a real reduction in defence spending of about 6 per cent., and further reductions should be achieved in later years as my right hon. Friend's proposals are fully implemented. For the first time in the period since world war 2, we are now able safely to plan on a defence budget that is significantly less than one tenth of all Government expenditure and falling.

In certain other areas, we have been able to accommodate increases in expenditure by finding offsetting savings. For example, on the trade and industry and employment programmes we have made selective increases while keeping broadly to existing plans overall, and within the Home Office programme, lower prison population forecasts have enabled us to reduce the prison building programme, while considerable resources have been made available for the refurbishment of existing prisons, including Strangeways.

In July, the Government announced extra support for local authority current spending which will add around £2½ billion to previous plans. Current spending by local authorities has substantially outstripped central Government spending over recent years. This year local authorities in England budgeted for increases of over 5 per cent. in real terms before capping. This has led to community charges which in many authorities are far higher than expected or justified.

The additional support that we are providing for next year should enable local authorities to finance local services without sharp increases in their charges. My right hon. Friend the Secretary of State for the Environment has already announced that, if required, the Government will make vigorous use of their powers to cap high-spending authorities. I re-emphasise that.

Nearly £3 billion has been added to the social security plans for next year. This mainly reflects the upratings already announced by my right hon. Friend the Secretary of State for Social Security which maintain in full the real value of benefits paid to 10 million pensioners and 11 million people on income-related benefits. The additions also reflect the substantial extra cost of community charge benefit which will help about one in four charge payers. My right hon. Friend was also able to announce selective increases for poorer pensioners, people in residential and nursing homes and families. These improvements will be financed within the social security programme by savings from restructuring the statutory sick pay scheme, as announced by my right hon. Friend on 24 October.

As in previous years, the Government have also made very substantial extra provision for health. Between this year and next, spending on the national health service in the United Kingdom will rise by £3 billion, so that the real resources over and above inflation that are available for spending on health will increase by a further 5 per cent. The total real increase in health service spending since 1979 will now be nearly 50 per cent. This has enabled the NHS to employ some 8,000 more hospital doctors and dentists, and over 50,000 more nurses and, of course, to provide for more sophisticated health care than ever before. As a result, more than 1½ million more in-patient and day cases are now treated every year. In the largest sustained programme of hospital building ever seen, nearly 500 major capital schemes have been completed since 1979. The plans that I am announcing ensure that the next three years will see further improvements in services.

Extra finance is also being provided for public transport. London Transport and British Rail have large long-term investment programmes which will enable them to extend and to upgrade the London underground and to prepare for the opening of the channel tunnel. Between them, they will spend some £¾ billion on safety alone in the next three years. The new plans also consolidate the substantial extra provision for roads that was announced last year and include measures to relieve congestion in London. Investment in public transport in the next three years will be double the level of the past three years.

Central Government spending on education will be increased by more than £500 million next year, largely to finance the record number of students in higher education. One in five of the 18 to 19 age group will be in higher education, compared with one in eight only a decade ago.

The number of higher education qualifications gained, as a proportion of the relevant age group, is higher in the United Kingdom than in Germany, France, Italy and almost every other European country.

Following the publication of the White Paper on the environment, the new plans provide significant extra resources for environmental research and in support of environmental bodies such as the National Rivers Authority and the Countryside Commission. There is extra provision also for the Government's programme of action on rooflessness.

Throughout the past decade, we have sustained a high level of capital spending in the public sector. In total, it will approach £30 billion in the current year. Leaving aside defence, our new plans include an extra £1½ billion a year for investment by central Government and nationalised industries. There is also extra support for local authorities' capital spending on schools, housing and local transport.

Taking capital and current together, real growth in total public spending over the three survey years will be less than 2 per cent. a year—well within the trend growth of the economy. As I have said, this is a tight settlement and it means that the ratio of public spending to national income should remain stable at its present level for the next two years. Thereafter, as activity strengthens and inflation remains in check, the downward trend will be resumed.

I now turn to national insurance contributions. As usual, the review this autumn has taken account of advice from the Government Actuary on the income and expenditure of the national insurance fund, and of the statement on benefits that was made by my right hon. Friend the Secretary of State for Social Security on 24 October.

The lower earnings limit at which contributions begin will go up next April to £52 a week, in line with the single person's basic pension, while the upper earnings limit will rise to £390 a week. The upper limits for the reduced employers' rates will also be increased.

In addition to those changes, there will be reductions in the contribution rates paid by employers. As my right hon. Friend explained in the House on 24 October, the restructuring of statutory sick pay will add modestly to employers' costs from next April. It is right that the Exchequer should share these costs. Therefore, the main employers' contribution rate will fall next April from 10.45 per cent. to 10.4 per cent. and each of the lower rates will be cut by 0.4 per cent. This relief through contributions will limit the impact of the statutory sick pay adjustments on employers of lower-paid workers in particular. The necessary legislation will be laid before the House. The contribution rates paid by employees and the class 4 rates paid by the self-employed will remain unchanged.

I am publishing today the economic forecast required by the Industry Act 1975, the first since we became members of the exchange rate mechanism. I must emphasise at the outset that the Gulf crisis and its effect on world oil markets make the future unusually difficult to predict. The United Kingdom, along with other countries, has already seen some of the adverse impact on consumer price inflation. The oil price rise is likely also to contribute to the general slowdown in the world economy that was already under way before the Gulf crisis.

For the Industry Act forecast I am following the practice of international institutions such as the International Monetary Fund and assuming some fall in oil prices from recent levels to around $25 a barrel by the end of 1991. But I must reiterate that the situation in the oil market remains very volatile.

Despite these uncertainties, however, it is now clear that the tight United Kingdom policy stance of the past two years is bringing about an easing of domestic inflationary pressures. This will make possible both a sharp fall in retail prices index inflation next year and a strengthening of output.

So far this year, the public sector debt repayment has been running below both last year's outturn and our expectations at Budget time. Local authority borrowing was particularly high earlier this year as some authorities experienced delays in collecting non-domestic rates and the community charge. Public corporations' finances have been adversely affected by the slowdown in economic activity and central Government spending has also been higher. Nevertheless, despite this, I still expect a significant debt repayment in the year as a whole of £3 billion. This amounts to ½ per cent. of GDP and represents a strong fiscal stance at this stage of the economic cycle.

Mr. Skinner

What was the right hon. Gentleman's forecast?

Mr. Major

For the benefit of the hon. Member for Bolsover (Mr. Skinner), we have a stronger fiscal position than Germany, France, the United States and every other member of the Group of Seven, with the solitary exception of Japan.

Thus our public finances remain strong. Given our membership of the exchange rate mechanism and the counter-inflationary strategy that we are pursuing, it is essential that they remain strong. As I made clear to the House last month, the Government remain committed to the medium-term objective of a balanced budget. That is why we have continued our firm restraint of public expenditure in the current year.

Turning to demand and output, it is clear that growth has now slowed down sharply. GDP is forecast to grow by 1 per cent. this year. This figure is the same as the forecast I made at the time of the Budget, but the path has been slightly different, and I expect output in the second half of the year to be down on the higher than expected and projected level in the first half.

This period of weak activity should last until early next year, after which I expect growth to resume; GDP is expected to grow by over 2 per cent. in 1991, though year-on-year growth is forecast to be only ½ per cent.

Unemployment has been rising since the spring and may continue to rise in the months immediately ahead, but job prospects will improve with a resumption of growth, the more so if employers keep tight control of costs, including pay rises.

Within domestic demand, growth of consumer spending has now slowed markedly from over 7 per cent. two years ago to under 3 per cent. in the first half of this year. The signs are that it will fall further over the year ahead as consumers continue to adjust to lower growth of real incomes, following the high borrowing of recent years.

Business investment rose by an unprecedented 45 per cent. in the three years to 1989, taking investment to an historically high level as a share of GDP. It may have fallen slightly in 1990 and is expected to fall a little further next year. A modest downturn from such a high level is unsurprising; indeed, it would be extraordinary if it did not occur at this stage in the cycle. It will still leave investment over 50 per cent. higher in real terms than in 1979.

The current account has now begun to improve markedly. With low growth of domestic demand, import volumes have shown virtually no growth over the past year and import prices have been falling in recent months as a result of the firm exchange rate. Export growth, on the other hand, has remained strong over the past year so that the United Kingdom's share of world trade in manufactures has risen for the second year running. The deficit on visible trade has followed a welcome trend and has virtually halved since the middle of 1989. This progress has been partly offset by poor figures for invisibles in recent quarters, although in the past these have, more often than not, been revised up later—at times, substantially.

I now expect that the current account deficit in 1990 will remain close to the forecast I made at the time of the Budget—at just over £15 billion. With domestic demand and import growth likely to stay low, I expect a considerably improved performance next year, with the deficit falling to £11 billion despite some slowdown in export growth as world trade decelerates. As a proportion of gross domestic product the deficit is expected to fall from 3¾ per cent. last year to 1¾ per cent. in 1991—a sharp improvement.

I am now certain that inflationary pressures have been brought firmly under control. The monetary indicators show this clearly. The growth of MO has fallen every month since April and is now considerably within its target range, while growth of the wider measure, M4, and lending have fallen sharply to 14½ per cent. and 15½ per cent. respectively. With demand and output slowing markedly over the past two years, it is clear that inflation will come down next year. The fall in the headline figure will be very sharp as the effects of the past mortgage rate rises, of the high initial level of the community charge and of recent petrol price increases cease to influence the inflation rate by the end of next year. From a peak at the current level of about 11 per cent., I expect RPI inflation to fall to around 5½ per cent. in the fourth quarter of next year.

In summary, the plans that I have announced today honour our existing commitments and provide additional resources for key areas—notably for the health service, for pensioners and for investment. They are within an overall total we can afford and they avoid the sharp upturn in the share of expenditure in national output which has occurred at similar stages in previous economic cycles. They are, therefore, consistent with the tight fiscal and monetary policies that will lead to a falling trade deficit and to a sharp reduction in inflation. They are, in my judgment, the right policies for building on the economic achievements of the past decade and I commend them to the House.

Mr. John Smith (Monklands, East)

Can the Chancellor of the Exchequer explain why, in his analysis of our economic situation, he was unable to utter the word "recession"? Is not it clear from the surveys compiled by the Confederation of British Industry and by the chambers of commerce, let alone from the experience of commerce and industry from one end of the country to another, that we are the midst of a recession and that the outlook for an economy with falling output, with declining investment and with rising unemployment is far from encouraging?

From table 11 in the "Economic Prospects for 1991" section of the autumn statement, is not it clear that output is predicted to fall significantly in the second half of 1990 and in the first half of 1991—that is, for a whole year or for four quarters? By any definition, is not that a recession? Why is that information hidden in a table at the back of the published document? Why does not the Chancellor come to the Dispatch Box and admit that, as his figures prove, we are in a recession and that the recession has been caused by the Government's economic policies? Is not it the case that the only way in which he can justify the phrase in his statement about "strengthening of output" is by a leap of faith that output will suddenly increase in the second half of 1991?

Is not it clear from the Chancellor's document that, having predicted in his Budget—not all that long ago—that manufacturing output would increase by ¾ per cent. in the first half of next year, he now predicts that it will fall by ½ per cent. for the whole of that year? In the Budget, investment was forecast to decline by ¾ per cent. in the first half of next year; now it is forecast to be falling by 1 per cent. for the whole of 1991. In the Budget, exports were predicted to increase by 5½ per cent.; now they are forecast to rise by just 2½ per cent.

As we are clearly experiencing a recession, why do the Government continue to cause reductions in the investment expenditure of the Department of Trade and Industry? Why is it cut by £250 million in cash terms, and by even more in real terms? As we prepare for 1992, should not we be increasing investment in the regions, in training, in export promotion and in research and development?

Can the Chancellor tell us whether he has reversed the cuts in the training budget that he announced last year? The Department of Employment appears to have sustained a cut of £370 million; I understand that some of that is accounted for by £254 million going to Scottish Enterprise, which will take over responsibility for some of these functions in Scotland. I must tell the Chancellor that, with considerable difficulty, I was able just a few minutes ago to extract from the Department of Employment its press release explaining its figures. It said: Employment training, which is already running substantially below capacity this year, will be reduced in scale and reshaped to give TECs more discretion in matching the needs of their local labour markets … Payments to TECs will be more closely focused on their success in securing jobs and qualifications for participants. We have learnt from the past that—as far as the Government are concerned—closer focusing equals reduction. While we are in the midst of our present economic difficulties, why on earth are we cutting spending on training? Will the Chancellor tell us what the cut is and will he tell us why?

The Government will also seek to take credit for the instances in which there are planned increases in the totals for public expenditure. Will the Chancellor reflect on the experience of last year? The figures provided today show that a planned expenditure total of £179 billion turned out to be £180 billion. However, the GDP deflator—which was estimated last year at 5 per cent.—turned out to be 8 per cent. because of inflation.

Is not it clear that the promised increase in public spending announced this time last year did not materialise? The public know that. That is why they know that the services on which they depend have not improved—that teacher shortages are increasing, and hospital waiting lists are at record levels. Do not the Government's own figures about the effects of inflation on the projected increases for the year to come show that those figures corroborate the experience of all our constituents in relation to public services? Does the Chancellor think that it was a bit much to talk in his autumn statement about protecting the "vulnerable groups in society", given the Government's position on child benefit, which was announced only a few weeks ago?

Will the Chancellor explain the cuts in the Department of the Environment budget? There appear to be cuts in the total, although the text that he read out mentions increases. Will he say whether less will be spent next year than is currently being spent on water, environment and the countryside?

Will the Chancellor tell us who invented the word "rooflessness"? Is it meant to be a synonym for being homeless? Was the word introduced because Ministers and the Chancellor cannot bring themselves to talk about the state of homelessness that they have caused for so many people in this country?

The Chancellor made some predictions. Has he reflected on the record of the Treasury at making successful economic predictions? I assume that he has read the Treasury bulletin issued recently which confirms that in 1988 the Treasury was wrong by 288 per cent. about the balance of payments; in 1989, it was 30 per cent. wrong about the balance of payments; and in 1990, 20 per cent. wrong—[HON. MEMBERS: "Getting better."] Getting better, certainly, but there is still a long way to go. Conservative Members clutch at any crumb of comfort, but if they find these figures comfortable they need to think again.

On inflation, the prediction in 1988 turned out to be 62 per cent. wrong; in 1989, it turned out to be 38 per cent. wrong; and in 1990, it turned out to be 40 per cent. wrong. All the same, inflation kept peaking and blipping along while these errors were being made.

Does the Chancellor recall coming to the House last year with his autumn statement and saying that inflation now would be 5.25 per cent? And what is it? It is 11 per cent. The Government keep making predictions that lack credibility. Does the right hon. Gentleman understand that this is the fifth occasion on which the Government have predicted a fall in inflation? Why should we believe this one any more than the others? And since the right hon. Gentleman is predicting a fall in the headline rate, will he tell us what will happen to the underlying rate? What will be the underlying rate in the fourth quarter of next year?

We have received uncertain predictions from the Government and they have usually turned out to be incorrect. We have received poor policies and poor purposes. The most disturbing aspect of the autumn statement was the Chancellor's statement that there will be no change in economic policies. It was those economic policies which got us where we are now and they will make matters worse until they are changed.

Mr. Major

I hope that the right hon. and learned Gentleman will forgive me for saying at the outset that that was an odd response from the shadow Chancellor, who keeps telling the markets that he would spend money only on child benefit and pensions. He produced a litany of areas on which the Labour party clearly thinks that it would be wise to spend a lot more money. [Interruption.] The right hon. and learned Gentleman is clearly sensitive about the deep split between himself and the shadow Chief Secretary on these matters.

Let me deal first with the questions that the right hon. and learned Gentleman asked. He made a point about recession. He used the word in the way most calculated to alarm—[HON. MEMBERS: "Answer the questions."] I will come to the specific points in a moment. The right hon. and learned Gentleman's use of the word recession conjured up an image quite different from the reality of what is happening or is expected to happen in future.

It is perfectly true that output will decline for a brief period during the second half of this year——

Mr. John Smith

And the first half of next year.

Mr. Major

—and during the first quarter of next year, but if the right hon. and learned Gentleman will listen for a moment he will hear, first, that it declines from a very high level. We shall be back into growth next year at an accelerating rate. Inflation will fall, savings will increase, the trade gap will close and investment will be 50 per cent. higher than in 1979. We shall still have more people in employment than any other European nation. It is clear from what is happening and from what I have been able to forecast today that the British economy is coming back on track—that is what the right hon. and learned Gentleman does not like—[Interruption.] The Leader of the Opposition is occasionally wont to express the view from the Dispatch Box that he is glad that television is here. I hope that it is here at the moment to witness the way in which right hon. Members on the Opposition Front Bench are behaving.

In terms of investment, the past three years have seen both a record rise in total investment and in business investment and I quoted the figures a few moments ago on the difference in 1979. The fall next year will be modest and from a very high level.

There is certainly a redirection within the employment programme which is broadly unchanged in cash terms. The Government will be spending more than £2½ billion on training enterprise and vocational education. The savings on employment training have been made following a reappraisal of what employment training is delivering and there will be improved job clubs and other facilities as an alternative, and a considerable degree of extra resources and extra choice for training and enterprise councils in future.

The right hon. and learned Gentleman referred to child benefit and the vulnerable. He knows as well as anyone in the House that on each occasion that child benefit was not increased, extra resources were put into child scale rates and income support to more than make up the difference.

There is an increase in the environment budget of about £180 million in 1991–92 for the White Paper policies despite the fact that this is a very tight year for the survey. It is perfectly clear that although at the moment we find ourselves in the most difficult part of the economic cycle, we can now see our way through it and out of it during the course of next year.

Several Hon. Members

rose——

Mr. Speaker

Order. The House knows that this matter may be discussed in our debate on the Loyal Address specifically tomorrow and again next week. Hon. Members should ask single questions, please.

Sir William Clark (Croydon, South)

Does my right hon. Friend agree that this is a very tight public expenditure settlement and that both he and my right hon. Friend the Chief Secretary to the Treasury are to be congratulated? Although the pundits in the media and the press have been saying that there will be an overshoot of £12 billion on public expenditure, if we ignore the reserves there is an overshoot of only £4.5 billion. Despite our difficulties, more and more money is being spent on capital projects, unlike what happened under the last Labour Government who reduced public expenditure on the national health service and roads. Is not it about time that the Opposition stopped talking down Britain and our economy?

Mr. Major

In his latter remarks, my right hon. Friend asked for more than is likely to be delivered. It is perfectly true that to many commentators this will be a surprisingly tight package. It keeps public spending at £200 billion when many expected larger increases. The share of expenditure in national income remains unchanged when I think that many expected at this stage of the cycle that it might increase. As I said earlier, we still expect a substantial debt repayment in the present fiscal year. It is a tight settlement and it was necessary to be a tight settlement. We will continue to keep tight control of public expenditure.

Mr. A. J. Beith (Berwick-upon-Tweed)

Is not it clear that when we strip away the skilful and ingenious presentation, this statement amounts to cuts in many areas and inadequate investment in the key areas of transport, training and education because the Government must fund the massive inflation that they have caused and also because the Chancellor still has to leave room for the kind of income tax cuts that the Prime Minister keeps talking about without abandoning all semblance of fiscal respectability? Will the Chancellor confirm that the underlying rate of inflation will remain high throughout next year? Will he confirm that inflation minus mortgage interest rates will be high throughout next year? Is not that a serious problem and what is the Chancellor going to do about it?

Mr. Major

I expect underlying inflation also to fall next year—[HON. MEMBERS: "How far?"] To broadly the level of the headline rate.

With regard to the programmes to which the hon. Gentleman referred, I have already said that something in excess of£½ billion is being added to the education budget largely to finance the very dramatic increase in the number of students in higher education. The plans imply at least as much capital spending in schools and colleges next year as in the current year.

As there have been huge increases on transport in each of the last two surveys, the priority on transport this year is the extra almost £600 million mainly for the Jubilee line extension, the east-west crossrail and services for the channel tunnel. It is a very good settlement for public transport, for we are determined to produce an efficient and effective public transport service.

Mr. Terence L. Higgins (Worthing)

Although it is very important for the long-term trend of public expenditure to decline as a percentage of national income, does my right hon. Friend agree that the primary role of the rate of interest must now be to keep sterling within the limits of the exchange rate mechanism and that, as a result, fiscal policy has become more important than ever? Against the present economic background, are not the increases in planned public expenditure which my right hon. Friend has announced entirely appropriate if we are to avoid the dangers of recession? In that context, is not the increase in transport expenditure which my right hon. Friend has just announced particularly appropriate?

Mr. Major

I see my right hon. Friend's point. He is, of course, entirely right about the necessity of remaining within the bands in the exchange rate mechanism to which we are committed, and equally entirely right that we will need to keep a very firm control of the trend rate of public expenditure in future years.

Mr. Robert Sheldon (Ashton-under-Lyne)

May I press the Chancellor further on the underlying rate of inflation? When the underlying rate was less than the RPI, the Government made a great deal of it. Now that it is likely to be more than the RPI, may we have his forecast of the underlying rate of inflation, excluding mortgage interest, at the end of next year, the fourth quarter?

Mr. Major

As the right hon. Gentleman knows—he is a very distinguished former Treasury Minister—the underlying rate of inflation has never been published, for perfectly understandable reasons.

Mr. Charles Wardle (Bexhill and Battle)

What happened to my right hon. Friend's forecast last year for the surplus on invisibles and to his belief that negative growth in GDP would be avoided this year? If his forecasts this year go even slightly astray, just how disinflationary will £200 billion of spending be? Are not there lesssons to be learnt from 1973–74?

Mr. Major

We do have a surplus on invisibles this year, and I would expect there to be a surplus on invisibles next year. The underlying premise of my hon. Friend's question is perhaps inaccurate.

Mr. Giles Radice (Durham, North)

Does the Chancellor of the Exchequer agree that, as the planned spending total to a large extent reflects the Government's failure to control inflation and the mess over the poll tax, there will be little room for improvements in vital public services? Will not the increase in the public spending total actually disturb the markets? In other words, are not we in danger of getting the worst of all worlds—disturbing the markets without satisfying the public?

Mr. Major

Of course, if the markets listen to the hon. Gentleman that would undoubtedly be the case. I suspect that the markets will notice that we have kept very tight control of expenditure in the circumstances that prevail, and I think that the markets will welcome the fact that we have been able to do so. It is clearly important that we do.

Mr. Ian Stewart (Hertfordshire, North)

Now that my right hon. Friend has announced the first part of his budgetary package on public expenditure and has shown very welcome restraint on the public expenditure totals, when the time comes will he be equally austere in presenting his Budget in the spring, because a tight fiscal policy is the best foundation for restoring economic growth?

Mr. Major

I am grateful to my right hon. Friend for his early budgetary representation which I will consider with great care.

Mr. William Ross (Londonderry, East)

As the 1992 planning forecast has now increased by 4 per cent. and it is intended to increase that total by 7.5 per cent. the following year and by 5 per cent. the year after, does the Chancellor expect those increased sums to be met from the Revenue or will he dip once more into the public borrowing requirement?

Mr. Major

No, I am not at this stage anticipating a public borrowing requirement. As I indicated in my statement, our medium-term policy is to remain at nothing worse than balance in terms of public borrowing. I hope that we will keep to that fiscal balance. We have a surplus this year, against the expectations of many commentators.

Mr. Tim Smith (Beaconsfield)

Is my right hon. Friend aware that his statement today on public expenditure is most welcome because he has succeeded in containing the increase in spending below that necessary to accommodate inflation while at the same time providing substantial additional resources for priority programmes? Does not the substantial increase in cash spending next year show that urgent need to continue to press down on inflation? Will my right hon. Friend continue to take a tough stance on monetary and fiscal policy?

Mr. Major

I entirely agree with everything that my hon. Friend has said and see no reason to add to it. I could not have expressed it as well myself.

Mr. Ted Leadbitter (Hartlepool)

The Chancellor's statement suggested that he is still aware of the volatility of oil prices. However, is he aware that today there has been a reported 70 per cent. increase to £1.1 billion in the profits of the Shell oil company? It is therefore reasonable to deduce that there will be comparable increases for other oil companies. Does the right hon. Gentleman accept that the volatility of oil prices is beneficial for the oil companies, but that higher prices for oil buyers, such as motorists and industry, are disadvantageous? Does he agree that a lower profit margin and a more reasonable price would remove one element that has a serious impact on inflation, which so concerns the House at the moment?

Mr. Major

As the hon. Gentleman knows, that point has been examined by the Monopolies and Mergers Commission. The hon. Gentleman is right that the volatility of oil prices represents a damaging uncertainty for the projections that we and other countries must make. It is for that reason that I have taken the assumption, similar to that taken in many other forecasts, of an oil price that will be down to $25 by the end of 1991.

Mr. Anthony Nelson (Chichester)

Is my right hon. Friend aware that Conservative Members fully support the content as well as the style and tone of his statement? Will he also accept our congratulations to the Chief Secretary to the Treasury on showing clear political judgment in giving a priority to increased health spending? However, does he agree that if we are to increase expenditure on such areas—as we must—at a time when our constituents are having to tighten their belts, it would be quite improper to face them with an increased burden of taxation next year?

Mr. Major

I am grateful to my hon. Friend for his kind remarks to both myself and my right hon. Friend the Chief Secretary. As he knows, I believe that my right hon. Friend has produced a remarkably successful outturn to the public expenditure round. I believe that it is important to sustain expenditure on health and, on this occasion, we have managed to increase it in real terms by 5 per cent. again. I note my hon. Friend's point about taxation, but, as he knows, I must consider that only in the period between now and the Budget.

Mr. John Fraser (Norwood)

With "rooflessness", as the right hon. Gentleman calls it, going through the roof, how many extra homes for rent will be provided by the public sector as a result of this statement?

Mr. Major

My right hon. Friend the Secretary of State for the Environment will be making that clear in his own statement.

Mr. Nicholas Budgen (Wolverhampton, South-West)

Since my right hon. Friend is promising very substantial increases in public expenditure, will he confirm that there will be room for either substantial cuts in interest rates when it is safe to do that, or for cuts in taxation, but not for both?

Mr. Major

My hon. Friend is well aware that I cannot comment on the prospects of taxation, and I have no intention of doing so. I will not cut interest rates until I am absolutely satisfied that it is safe and secure to do so.

Mr. Alex Salmond (Banff and Buchan)

Am I correct in thinking that the Chancellor has assumed £2,700 million in oil revenues for the current year, bringing to a round £90,000 million the total by which Scottish oil revenues have bankrolled the Government in the past 10 years? What has happened to the additional North sea revenues as a result of the higher oil prices which, according to the brokers' forecasts, are running at £20 million per day? How much of that has gone to the oil companies and how much to the Chancellor? I am sure that the right hon. Gentleman will appreciate the anxiety of people in Scotland to find out the answer to that question today, given the announcement of further steel closures and the further abandonment of North sea steel markets to the Japanese and the Germans.

Mr. Major

The hon. Gentleman did not, of course, put the reverse point to me some time ago when oil revenues fell dramatically after accidents in the North sea. He should look at both sides of the equation. Oil revenues are important to the Exchequer, but they represent a relatively small element of income.

Mr. Anthony Beaumont-Dark (Birmingham, Selly Oak)

Does my right hon. Friend accept that many of us have been disturbed at what we have read in the papers, which we always believe, that the Government are dismantling the health service? How is it, then, that we are told that we will spend £3.2 billion more this year? If that is dismantling the health service, what would we have to spend if we were trying to improve it?

Mr. Major

I am grateful to my hon. Friend for his most helpful observation. It is certainly the case that, on any measure, expenditure on the health service has risen dramatically over recent years to accommodate not only an improving service, freely available operations which previously were not available, and more doctors, nurses and dentists but a general improvement, as well as the largest capital building programme for hospitals that we have ever known.

Ms. Diane Abbott (Hackney, North and Stoke Newington)

Does the Chancellor accept that the figures that he announced on the extra money that he is lavishing on the health service do not mean much except in the context of the outturn figure of inflation and the relative price effect? As the Chancellor will know, the health service as a whole has a higher rate of inflation than the rest of the economy. That point was made by the Treasury and Civil Service Select Committee in its report on last year's autumn statement.

Mr. Major

The relative price effect in health may conceivably—statisticians disagree—add about I per cent. over the normal GDP deflator. On that basis there is still a large real increase in health spending yet again next year.

Mrs. Elizabeth Peacock (Batley and Spen)

I heard my right hon. Friend say that investment is slowing down, but is he aware of investment that has recently taken place, is now taking place and is planned to take place in the near future in manufacturing industry in Yorkshire? Is not that a sign of great confidence in the future of manufacturing and our country?

Mr. Major

I entirely agree with my hon. Friend. There has been a considerable degree of investment in manufacturing in the past few years. Equally as important as the quantum of investment has been the quality and nature of the investment that we have seen during the past few years.

Mr. D. N. Campbell-Savours (Workington)

Is not it true that any old Chancellor can reduce inflation if he is prepared to kick people out of work and reduce consumption by in effect strangling the whole economy? Is not the real art to reduce inflation by keeping people in work and maintaining demand? Why does not the Chancellor pursue such a strategy? Is that not in the national interest?

Mr. Major

How curious it is, in view of the hon. Gentleman's remarks, that we have more of our population in work than any other nation in Europe.

Mr. John Townend (Bridlington)

May I congratulate my right hon. Friend on resisting the demands of the Opposition and, indeed, some of his colleagues, for higher expenditure? Is he aware that by continuing to run a budget surplus and repay the national debt he is doing a great service to our children and grandchildren? He mentioned wage increases. Does he agree that the public sector must set an example this year if we are to bring down inflation as quickly as we hope?

Mr. Major

I am grateful to my hon. Friend. He is right about the repayment of the historic national debt which, by the end of this year, will have amounted to about £29 billion over the past four years. Consequently, there has been a considerable year-on-year saving in interest which will no longer have to be paid on that debt. My hon. Friend is right about the need to restrain wage increases generally.

Mr. Keith Vaz (Leicester, East)

The Chancellor will recall that a couple of weeks ago he was a most unwelcome guest in my constituency [HON. MEMBERS: "Shame."] While he was dining at the Grand hotel with the chairman of the Conservative association, did the chairman tell him that the current waiting list for hip operations in Leicestershire was 29 weeks? As a result of the Chancellor's grand proposals, how much less will people have to wait for operations in Leicestershire?

Mr. Major

The hon. Gentleman is too gracious in his welcome. The chairman of the Conservative association did mention that in the period up to 1979 there were virtually no hip operations anywhere in the national health service.

Mr. Yeo

Would it be fair to characterise my right hon. Friend's statement as one that puts teachers and textbooks before tax and patients before prisons? Has the achievement of containing public spending in real terms at the same time as directing resources to those highly desirable areas been made possible by the success of the Government's policies over the past decade in defence and law and order?

Mr. Major

My hon. Friend is entirely right. He certainly analyses the autumn statement correctly. H ad it not been for the staunch and successful way in which the Government decided to station cruise missiles two or three years ago and the effects that followed from that, I doubt whether we could safely have reduced defence expenditure today.

Mr. Skinner

Why does the Chancellor of the Exchequer come to the House of Commons with nothing less than a cock and bull story? During the past 11 years, the Government have accumulated more than £120 billion in extra revenue through privatisation and North sea oil revenues. As a result of those 11 years, we now have a public sector debt repayment which, according to him, will be only £3 billion next year and will disappear from view the following year, a trade balance of £15 billion and invisibles that are almost invisible, whereas they used to amount to £700 million a month. No wonder he says that the economy must be put back on track. He is running an economy that is off the rails.

Mr. Major

I am bound to say that a PSDR of only £3 billion was not a beast that I recall during the period of the Labour Government. The hon. Gentleman referred to a cock and bull story. We know which of those he talks.

Mr. Richard Alexander (Newark)

My right hon. Friend told the House the total amount of saving in the national debt which will be achieved as a result of this statement. How much saving to income tax payers will be represented by the fact that they no longer have to pay the interest payments on that capital sum?

Mr. Major

It will be a considerable sum. I cannot give my hon. Friend a precise answer, but we are talking about approximately £2.5 billion a year which is perhaps equivalent to 1p or 1.5p on the standard rate of income tax.

Mr. Paul Flynn (Newport, West)

Will the Chancellor of the Exchequer comment on the claimed increase in what he might describe as "bedlessness" in that, by next April, 3,500 hospital beds will close to comply with the Government's "finance first and patients last" policy? What effect will today's statement and the closure of those hospital beds have on waiting lists next year? Will they stay the same, increase or decrease?

Mr. Major

The hon. Gentleman should perhaps look at the whole question in the round. The cash increase for the hospital and community health services budget was more than 10 per cent. in 1990–91. Even on the basis of health service inflation, which the hon. Member for Hackney, North and Stoke Newington (Ms. Abbott) mentioned, that is a substantial increase over and above inflation. The same health authorities to which the hon. Gentleman referred are also planning to spend more than £220 million on service developments. If there are volume increases on that scale, I see no reason for the shortfall to which he refers.

Mr. Michael Morris (Northampton, South)

I congratulate my right hon. Friend on giving the House such a clear financial strategy, which contrasts with the questioning from Opposition Benches. May I congratulate him on a realistic planning total for reserves? To return to the welcome 5 per cent. real increase in health expenditure, will he say whether the planning total on which this is based is at least no lower than the planning total for the current year?

Mr. Major

Yes, I can certainly confirm that it is a 5 per cent. real increase. It is there specifically to reflect the priority that we give to health. I am grateful to my hon. Friend for his early remarks, particularly those about the increase in reserves. With the present uncertainties, it is wise to increase them to £3½ billion, £7 billion and £10½ billion respectively. Events may yet show that.

Mr. Wareing

Is not the Chancellor of the Exchequer misleading the House when he tells us that, despite tight control of public expenditure, vulnerable people are to be protected? How does he justify a cut in Government grant for the first time in history to the Royal National Institute for the Blind to assist it with the production of braille material? How long will it be before people, such as blind people, are not expected to bail the Government out of the economic mess for which they are responsible? Who is responsible for that decision and what is the justification for it?

Mr. Major

The answer to whether I am misleading is categorically no. The hon. Gentleman asked about the blind. He would do well to reflect upon the changes that I made in the Budget specifically to help people with that most distressing ailment.

Sir Ian Lloyd (Havant)

The Chancellor will doubtless agree that if the claims of every organisation in the country which said that it was underfunded were met, the Chief Secretary would be coming before the House with a claim for about 60 per cent. of the national income rather than the figure that he has announced. The Chancellor told us that the increase in output in real terms is likely to be 2 per cent. and probably not much more in the foreseeable future. Against that, those very expensive organizations—the national health service and local government—have received increases of just over £5.5 billion or 5 per cent. in real terms. If those claims are met in real terms which sectors of the economy will pay for them in real terms?

Mr. Major

My hon. Friend is right about the inevitable claims that could be placed upon the public purse, often for quite legitimate schemes which, if the resources were available, one would be pleased to meet. The substantial increase for health and local government is at the expense of other areas in which we have been able to make savings and, of course, at the expense of a smaller debt repayment than might otherwise have been the case.

Mr. John Evans (St. Helens, North)

Will the Chancellor confirm that, despite his words about protecting the most vulnerable groups in society, his statement contains no additional community charge resources for northern metropolitan boroughs such as St. Helens? Does he agree that any system that gives the borough of Westminster twice as much money per child to care for children at risk from abuse and poverty than it gives to children in St. Helens is corrupt and indefensible?

Mr. Major

The hon. Gentleman has uncharacteristically overlooked the enormous increase of £2.5 billion made available to cushion community charge payers, often from unjustified levels of expenditure. He has equally uncharacteristically forgotten the £3 billion increase in social security that is specifically to help vulnerable people.

Mr. Quentin Davies (Stamford and Spalding)

I congratulate my right hon. Friends the Chancellor and the Chief Secretary on striking an extremely skilful balance in achieving a £200 billion public expenditure outturn. Does my right hon. Friend agree that in the fight against inflation there is a trade-off between the public sector surplus or net debt repayment and private sector savings? In that context, one of the most encouraging features of the past few months has been the rise in the household sector savings ratio. Does he agree that that will continue to play a key role in the fight against inflation?

Mr. Major

I strongly agree with my hon. Friend. The savings ratio has increased significantly over the past year as a result of increased savings and reduced borrowing. I hope that that trend will continue because it is greatly in all our interests for it to do so.

Mr. Stuart Bell (Middlesbrough)

The Chancellor said that there was central Government provision for the poll tax of about £3,000 million. He also said that the poll tax had helped to double the retail prices index from last year's forecast of 5.75 per cent. to 11 per cent. He also accepted that local government borrowing had been higher because of the slow collection rate of the poll tax. Is it any wonder that the poll tax is as unpopular today as it was when it was introduced?

Mr. Major

The community charge added 1 per cent. to the retail prices index. The hon. Gentleman is entirely correct about that. However, it was not so much the community charge itself but the increasing level of expenditure reflected in a high community charge that added to the retail prices index. It is difficult to avoid the fact that in the first year of the community charge there was a quite unprecedented increase in local authority expenditure. That was because many local authorities took the opportunity on the introduction of the charge to increase their expenditure in the hope of blaming the Government for it.

Mr. Jonathan Sayeed (Bristol, East)

Will my right hon. Friend remind the House what happened to the ratio of public expenditure to national income in previous periods of slower growth and what were the consequences for inflation?

Mr. Major

My hon. Friend touches on an important point. Both in this country and elsewhere, at times in the cycle similar to that in which we now find ourselves, the ratio of public expenditure tended to rise dramatically with an impact on taxation and frequently on inflation, too.

Mr. Peter Hardy (Wentworth)

The Chancellor seems to strike a rather complacent note on the creation of jobs. Will he confirm that a very much larger proportion of the jobs created in Britain in the past few years has been casual, low paid and part time—far more casual, low paid and part time than the jobs created in our main competitor countries?

Mr. Major

The hon. Gentleman is correct in that some, but not all, of the jobs are indeed part time, but that reflects many people's demand to work part time. They are now able to satisfy themselves on that count as they were previously unable to do. Whichever way one examines the labour market, we have a significantly higher percentage of our population in work than any other European nation, including Germany.

Mrs. Edwina Currie (Derbyshire, South)

Am I right in thinking that we are spending a lot more on education—that in fact education has done rather well out of this statement? But do we have systems in place that will ensure that the money is spent—especially in counties such as Derbyshire—on improving the quality of education and the physical fabric of our schools and not, as it is at the moment, with excessive administration expense, on free newspapers, educational advisers who have nothing to do with education, and subsidised baked beans for school meals?

Mr. Major

My hon. Friend is quite correct. The figure of £520 million which I quoted earlier was the central Government increase. There is also a significant increase in local government spending in education, a large part of which is financed by the aggregate external finance settlement.

Mr. Robert Hughes (Aberdeen, North)

Does not the very elegant Treasury prose which the Chancellor read so beautifully—especially the part that said that the higher than expected inflation had not been allowed to feed through into Government public spending—disguise the fact that, never mind any improvements for the very vulnerable in our society, the health service and others will have to make cuts simply to keep pace with current demands?

Mr. Major

No, it does not. I illustrated to the House where the savings had been made to provide increased resources for the vulnerable; for education, social security and health. I set out where those savings had come from. So the hon. Gentleman's premise is, I fear, inaccurate.

Mr. Nicholas Winterton (Macclesfield)

Although I warmly welcome the additional resources allocated to health, education and infrastructure in the announcement made by my right hon. Friend this afternoon, does he agree that manufacturing industry is the only genuine source of non-inflationary economic growth and that he would be able to allocate even more resources to those deserving and necessary areas if interest rates came down and if manufacturing industry could play a more positive and productive role in the economy?

Mr. Major

As my hon. Friend knows, the thrust of the Government's present fiscal and monetary stance is to move to a position where we can see inflation falling significantly which will open the possibility, when it is safe and secure to do so, to reduce interest rates. I shall certainly do that, but not, alas, until I am convinced that it is safe and secure to do so. To do so prematurely would not be in the interests of manufacturing industry or of any other part of the economy.

Mr. Peter L. Pike (Burnley)

The Chancellor forecast that he would receive £5.5 billion from the proceeds of privatisation. He is going to repay national debt to the tune of £3 billion. If he was producing a balance sheet, would not he have to show that he is using £2.5 billion to subsidise the programme for the year ahead and that he will end up with £5.5 billion less in assets? What will he do when there is no more family silver to sell?

Mr. Major

The £5.5 billion is next year and the £3 billion is this year. If we were borrowing at the rate at which the last Labour Government borrowed, there would be a £50 billion borrowing requirement.

Several Hon. Members

rose——

Mr. Speaker

Order. A very important foreign affairs debate will follow the autumn statement. I wonder whether, exceptionally, I could have an arrangement with those hon. Members who are standing. If I call them on the autumn statement, may I ask them not to rise on the business statement?

Mr. Richard Tracey (Surbiton)

My right hon. Friend's allocation of resources to health, transport and education will be particularly welcomed in my constituency and in London generally. As we are not allowed by the rules of the House to question the Opposition on the various intemperate promises that they have dangled before the public, will my right hon. Friend speculate on how a Labour Government could possibly pay for the kind of promises that the Opposition have made? What extra taxation and borrowing would be needed?

Mr. Major

They would not, of course, pay. My hon. Friend and other taxpayers would pay. I am not sure that Mr. Speaker's ruling is quite so welcome to me as it is to my right hon. Friend the Leader of the House.

Mr. Speaker

I am sorry.

Mr. Jacques Arnold (Gravesham)

My right hon. Friend will be aware of the concern about global environmental issues, overseas aid and the work of the BBC's overseas service. Will he confirm that his statement means that these important British programmes will be both safeguarded and extended?

Mr. Major

I can confirm that there is to be an increase in resources for the BBC world service. On the environment, I referred earlier to the increase of £180 million.

Sir Hal Miller (Bromsgrove)

Will my right hon. Friend reflect on the contribution made by the motor industry to the achievement of his targets in the autumn statement? It has expanded employment and radically improved the balance of trade. When he makes his Budget judgment will he bear the industry's contribution in mind?

Mr. Major

I am grateful to my hon. Friend for his early representations. It is true that the turnround in the motor industry's performance in recent years has been remarkable.

Mr. Peter Thurnham (Bolton, North-East)

I congratulate my right hon. Friend on a tight and financially prudent package, but will he confirm that he has also been able fully to protect those groups that are particularly vulnerable to inflation?

Mr. Major

As I said in my statement, the £3 billion increase in social security is intended specifically to ensure that that occurs. I believe, therefore, that I can give to my hon. Friend the assurance that he seeks.

Mr. James Paice (Cambridgeshire, South-East)

While, Mr. Chairman—[HON. MEMBERS: "Mr. Chairman?"] One has waited so long, Mr. Speaker, one forgets.

Mr. Speaker

It is lucky that I do not forget, is it not?

Mr. Paice

My right hon. Friend's statement, which included extra expenditure on a range of important services, is welcome, but does he agree that he would have been able to give far more within the same planning total had it not been for the profligacy of local government? Does he also agree that those who call for extra expenditure should direct their criticism at authorities that waste money in the belief that by providing jobs they are in some way helping? Instead they should provide cost-effective services.

Mr. Major

My hon. Friend is entirely right. When he has an opportunity to examine in detail the figures that I shall publish next week, he will see that we have had to squeeze central Government expenditure to accommodate the local government expenditure overrun.

Mr. Michael Jack (Fylde)

Can my right hon. Friend confirm that had he been making his announcement today with the same proportion of gross domestic product available to him in tax revenue as the last Labour Government enjoyed, his total expenditure would have been short by some £18 billion? Can he also confirm that this remarkable achievement has come about during the lifetime of this Government, even though there have been falling tax rates?

Mr. Major

I can certainly confirm that, but I cannot confirm the precise figure. I have no reason, however, to suspect that my hon. Friend's figure is inaccurate. There have been falling tax rates. The only reason why the tax burden has not fallen, relatively, is that the last Labour Government had a borrowing requirement and did not tax honestly for their expenditure.