HC Deb 11 June 1998 vol 313 cc1195-216 3.30 pm
The Chancellor of the Exchequer (Mr. Gordon Brown)

With permission, Madam Speaker, I should like to make a statement. The comprehensive spending review has been the most comprehensive and in-depth examination of Government spending and priorities for many years. The results of it will be announced in two stages. Today, I will announce an entirely new regime to apply to public spending control: a fundamental reform of the rules that govern our public finances. Later next month, I will set out the results of a wholesale revision of our spending priorities and the purposes of Government support in each Department.

The central challenge is to combine prudence and stability in public finance with investment and reform in public services. There are four key elements to our approach. First, the new regime must be consistently prudent and responsible. Strong public services cannot be sustained on weak public finances. The spending plans that we set must ensure sustainable finances over the whole economic cycle—rigorous financial discipline that, together with monetary stability, ends once and for all the boom and bust that for 30 years has undermined stability, hindered long-term investment in our public services and prevented this country from achieving its potential.

That is why we will enforce two fiscal rules: the golden rule that, over the cycle, current spending is covered by revenues, and the sustainable investment rule that there must be a prudent debt-to-gross domestic product ratio.

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

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

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

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

My right hon. Friend the Chief Secretary to the Treasury, whom I thank for all his work in the review, and I are today publishing detailed figures both for the current balance and for capital spending. We will set out in these documents not only the public sector's net cash requirement—the PSBR—but the internationally accepted accruals measure of public sector net borrowing, which will provide a better guide to the underlying state of public finances—that is the public sector net borrowing. Copies of the Economic and Fiscal Strategy Report will be available in the Vote Office.

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

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

In addition, we inherited an annual level of public borrowing that was unacceptably high. In the final year of the previous Government, the public sector net cash requirement was £23 billion, and public sector net borrowing was £27 billion. In the first year of the Labour Government, with the tough decisions that we took in our first Budget in July, public sector net borrowing fell last year from £27 billion to £6 billion. We kept within the spending ceilings that we inherited. In addition to a £400 million increase in the Budget for pensioners, we were also able to put £2 billion more into the health service and £2 ½ billion more into education.

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

As a result of the plans that I am announcing today, we will lock in the fiscal tightening that I announced in the March Budget, not just for this financial year, but for the next financial year as well. Over the three years from the time we came into Government—that is to 1999–2000—the fiscal tightening amounts to 2 ¾ per cent. of national income, measured by the public sector net cash requirement, and 3 ½ per cent. of GDP measured by public sector net borrowing. That is more than £25 billion since 1996–97. This is the fiscal tightening from 1996–97 to 1999–2000 that we promised in the Budget.

To meet our first rule—the golden rule—the Government will plan for balance on the current budget over the economic cycle as a whole. For 35 years, current spending has grown by an average of nearly 3 per cent. a year in real terms. Within that average, annual changes have ranged from plus 11 per cent. to minus 3 per cent. From 1989 to 1994, a surplus on the current budget of over £10 billion was transformed into a deficit on the current budget of £38 billion. So, in the same way as our economy has suffered from the instability of boom and bust, public spending has suffered from the instability of stop and go. The uncertainties caused by that short-termist approach have frustrated the long-term planning of decent public services.

Let us be clear about who has suffered first and who has suffered worst: the vulnerable who depend most on our public services. Imprudence in public spending is of no help to those who rely on public services being there when they need them.

In the previous economic cycle, Britain ran an average deficit on the current budget of 1 ½ per cent. of GDP—the equivalent of an annual deficit of £12 billion. By contrast, the plans that we publish today will ensure that, over the full economic cycle, Britain will have a current budget balance—current expenditure covered by revenues over the cycle—which other Governments have promised but not achieved.

So that we can deliver sustainable public finances—and, thus, sustainable public services—over the whole cycle, the plans that I am announcing today deliberately take a more cautious approach than previous plans in meeting the fiscal rules. That is why we need to plan for a surplus on the current budget over the next three years. The plans that we publish today are for a surplus on the current budget, next year, of £7 billion; in 2000–01, of £10 billion; and, in 2001–02, of £13 billion.

Within that new framework, I can confirm that current spending will grow in line with our cautious estimate of the trend rate of growth of the economy, which is 2¼ per cent. in real terms each year over the next three years. Current spending is now planned to be 39¼ per cent. of GDP every year for the rest of the Parliament.

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

As everyone knows, the public will be better served if we also ensure the best value for money and the most efficient possible use of resources. Inefficiency in the public sector is a cost which could be afforded by a Government who had a vested interest in proving that the public service could not work and believed in a philosophy of private, good; public, bad.

Inefficiency will not be tolerated by a Government who will modernise the public sector so that this country is properly equipped for the future. That is why, in our spending review, there will be no place for new spending unless there is reform through clear targets, new standards and rigour in the use of money. I can confirm that each Department will set efficiency targets as a result of our review. Each Department will also be set new quality standards. I can confirm that, as part of best value, we will introduce an inspectorate for housing that will help to improve management of council housing, set new standards for performance and guarantee the high quality of investment.

Before allocations are made from the comprehensive spending review, Departments will have to demonstrate how they propose to root out unjustified subsidies. Therefore, not only will we set ourselves fixed budgets for three years, but we are building in new disciplines to ensure that investment is conditional on reform. Just as those new disciplines will apply to current spending, they will be applied also to capital investment.

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

In the interests of greater stability, I propose to bear down on the debt-to-GDP ratio. The plans that we are publishing today show that the debt ratio falls from 45 per cent., when we came into government, to 40½ per cent. next year; and, in the following years, down again, to 39½ per cent., and to 38¼per cent. The comparable figure in the European Union is 78 per cent.

Britain will now plan on the basis that our debt-to-GDP ratio will be 40 per cent. or lower. For the first time for decades, we are set, over the cycle, to have both a current budget in balance and a prudent debt-to-GDP ratio. As a result of our two fiscal rules, public sector net borrowing, which was more than 3 per cent. of national income in the most recent economic cycle, will average 0.2 per cent. for this Parliament, 0.2 per cent. for next year, 0 per cent. for the following two years and 0.1 per cent. for the year after that. We will meet the fiscal rules that are laid down in the Maastricht treaty.

It is only because we have set this tough framework—based on strict control of public spending, a prudent debt-to-GDP ratio and a fiscal tightening—that it is possible to take the necessary action to reverse the chronic underinvestment in our country's education, health, transport and housing infrastructure and to re-equip Britain as a modern nation. In recent years, total investment, public and private, in Britain has fallen as a share of national income—it is far behind the rates of our competitors and those that we achieved in the 30 years after the war.

If Britain is to renew its infrastructure, as it should, we must be prepared to break with old dogmas. We will not succeed simply by throwing money at problems or by privatising the responsibility for them, so we must be prepared to look at new ways in which to manage our assets and, if necessary, to redeploy them so that they serve the future rather than reflect the past.

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

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

My right hon. Friend the Deputy Prime Minister and I will propose a new long-term framework for investment by local authorities to release resources for new investment and to co-ordinate the use of existing assets. Local authorities are now expected to realise at least £2¾ billion a year from property sales—again, that is a sale of what we do not need, to pay for investment in what we do need.

To maximise investment in the renewal of our infrastructure, public and private sectors must work together in a more effective and modern partnership. In the past, the private finance initiative was a means of substituting private investment for public investment—it was an excuse for abdicating responsibility for public investment, so there was no net gain to investment in our country.

As we have shown in our new deal for schools, public-private partnerships work best when public investment succeeds in levering in additional finance from the private sector. Moreover, as the Deputy Prime Minister has shown in the planned investment in the channel tunnel rail link and in London underground, private investment can be mobilised to serve the public interest.

The Government will apply a public interest test. What is the best means—whether through private or public investment—to secure the highest levels of investment in Britain's future, so ensuring the best public services? It is not to demand private ownership as a matter of dogma when it does not serve the public interest, and it is not to maintain state ownership when private and public partnership is the best way in which to advance the public interest.

It is obvious to the Deputy Prime Minister and me—[Interruption.] It is obvious that the levels of investment and efficiency that we need in National Air Traffic Services can be best achieved by a partnership between the public and private sectors, which will give NATS the ability to plan and finance the forward investment that they want to make.

Safety is paramount: the Government's proposals will ensure that air safety regulation is conducted independently from National Air Traffic Services and is open and transparent. The regulator's remit will be to enforce the toughest safety standards in the world.

My right hon. Friend the Minister of Transport is to make a separate announcement today on the future of air traffic control services. Our preference is for 49 per cent. of the shares, and a golden share, to be held by the Government, and 51 per cent. by private investors, including employees. We will hold consultations on the details of the implementation of the proposals.

The realisation of assets will enable us to invest more in our transport infrastructure, as will our proposals for greater commercial freedom for financially sound regional airports such as Manchester, Newcastle, Leeds-Bradford and Norwich. [Interruption.]

Madam Speaker

Order.

Mr. Brown

I thought that Conservative Members would be interested in plans for new investment in our airports.

The same partnership approach is appropriate for the Commonwealth Development Corporation, which needs new finance for higher investment in developing countries. The Secretary of State for International Development will introduce proposals to sell a majority holding.

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

Those are four examples of new partnerships being evolved that show that we can make the long-term investment that we need while protecting and safeguarding the public interest. Public investment in reform and modernisation is also a means by which the Government can help to renew the infrastructure.

Under the previous Government, public investment fell below 1 per cent. of national income—to 0.8 per cent.—and we now invest less than our major European partners. The present Government recognise that we must invest properly in our economic and social infrastructure to equip us for the future.

We must invest in our schools and hospitals; our transport infrastructure; our science and technology base; and in building better housing and safer and stronger communities. To meet those challenges for the future, we are setting up a new programme: investing in Britain's future.

Over this Parliament, we will double the level of net public investment as a share of national income, raising it from ¾per cent. to 1½ per cent. Through realising unused and underused assets and being prepared to take tough decisions, we will plan to invest £29 billion a year in our economic and social infrastructure by the end of this Parliament.

In place of two decades of rundown in investment, Britain is now ready to invest in its own future. Our long-term aim will be to maintain the share of investment in national income at this sustainable and prudent level. For years, we were told that prudence in public finances could be achieved only at the cost of running down public investment and neglecting public services. Those Conservative years ended with neither good public services nor prudence in public finances.

The framework that I am announcing today means that, with sensible and tough decisions about priorities in every Department in our spending review, this country will be able to ensure that the necessary resources are available for health, education and essential public services. Because of our toughness to modernise, our discipline and reform, our prudence today provides the solid foundation to invest in better schools, hospitals and public services today and tomorrow.

In place of short-termism and neglect of public services, we have a new long-term direction for renewal of our public services and of our country. Prudence and investment in reform are the way forward to creating a Britain that is modern, strong and fair. I commend the statement to the House.

Mr. Francis Maude (Horsham)

So far, the Chancellor of the Exchequer has had a Budget in July last year, a pre-Budget in November, another Budget in March and a mini-Budget in June. Now there is a comprehensive spending review in July. Four Budgets in 12 months is not bad going for a self-proclaimed devotee of long-term planning and consistency.

In today's Financial Times we can read why he has been forced to do all that. It states: The announcement is expected to 'focus ministers minds' in the final stage of spending negotiations, says a government member. We know where that came from—not from the Red Lion, but from the horse's mouth. The statement effectively announces the failure of the Chancellor's comprehensive spending review. It was designed to save money, but it has saved nothing.

We support the reduction in national debt—[Interruption.] We certainly support it, but we should like to know whether all Labour Members support it. If the Chancellor reads the papers, he will find that the reduction in national debt to which he has referred was due to be exceeded under the plans of the past Conservative Government. For him to claim the credit is quite cheeky.

I pay tribute to the Chancellor's courage in adopting a programme of modernisation of the public sector. I assure him that we shall give firm support to his plans to privatise a number of entities. We remember the comments that he and his colleagues made when those issues were debated in the past, and we shall do our best in the coming days to reconcile those remarks with his fulsomely enthusiastic remarks of today. No doubt such a reconciliation can be achieved; we are charitable folk and we shall do our best to seek one, and to give him the support that he deserves for his programme of public sector reform.

It is just a pity that whenever—[Interruption.] The Deputy Prime Minister should listen with enthusiasm because we are the only people who are supporting him; he will not find much support behind him.

The Chancellor's statement is of some importance. We always said that the Government would be a tax and spend Administration. We have already seen the taxes—the equivalent of 5p added to the basic rate of income tax in only 13 short months. Today, goaded by broken promises on waiting lists and class sizes, he has gone soft on spending. No one should doubt that today's statement amounts to a fundamental reversal of the Government's economic policy. It is not surprising that press stories over recent days have veered widely between—[Interruption.]

Madam Speaker

Order. The House must settle down and listen.

Mr. Maude

Press stories have veered widely between promoting Brown the lion Chancellor and Gordon the giveaway spender. Today, it is goodbye Iron Chancellor; may he rust in peace.

Can the Chancellor confirm that the Bank of England's Monetary Policy Committee knew of his spending plans last week when it decided to put up interest rates again? If it did not know, how can it be expected to do its job when the monetary right hand does not know what the fiscal left hand is doing? If it knew, was not its immediate decision to raise interest rates a damning indictment of his change of policy? Once again, are not hard-working people paying the price for the Chancellor's mistakes?

On the Chancellor's claim to be abolishing the spending round, what will be the size of the contingency reserve for these three years? If it is substantial, does he understand that there will be a spending round? All his colleagues will wrangle about how it is divided up. If it is not substantial, how will he cope with the unexpected demands for public spending that arise, the necessities that cannot be avoided? Does he really think that the Secretaries of State for Health and for Education and Employment will sit quietly, accept it as it is and not wolf all their dinner at once and come back for more?

Before the general election, Labour made a string of incompatible pledges. It pledged not to raise taxes, to spend more on health and education while cutting spending on welfare, and to end boom and bust. If we had to count the number of times that we have heard the Chancellor and the Prime Minister use the words "boom and bust", we would run out of calculators. On promise after promise, the Chancellor is failing to deliver. He has delivered boom and bust at the same time. Manufacturing is in recession while inflation is rising. He has put taxes up 17 times, the equivalent of 5p on the basic rate of income tax. It is easy to be an Iron Chancellor when all it involves is putting his hand in other people's pockets.

Today, the Chancellor has had to announce that he has lost the battle with his Cabinet colleagues to keep spending down. Will he confirm that in his last set of Budget forecasts, he set three growth options for public spending: ¾per cent., 1½ per cent. and 2¼ per cent? Having failed to get savings from his colleagues has he not he been forced into the slackest, least prudent, least disciplined choice? Is not his central problem his failure to control welfare spending? He promised to cut it, yet every welfare reform so far has cost more, not less. The basic objective of the comprehensive spending review has failed.

Is not the baseline figure fiddled to begin with? Can the Chancellor say how much higher the control total would be without the fiddles to hide billions of pounds of public spending? Has he not changed the rules of the private finance initiative to get debt off the Government's balance sheet without the transfer of risk, which is essential? Can he confirm that the Accounting Standards Board is resisting his attempts to fiddle the books in that way? Is not the extraordinary treatment of the channel tunnel rail link, about which he boasted, the most brazen of those fiddles? How does he justify taking the cost of the new deal outside public spending altogether, as if, in some mysterious way, it is not public spending at all?

Will the Chancellor confirm what is said in one of the newspaper reports that mysteriously appeared this morning—that school repairs will in future count as capital spending? Is not the fudging of the difference between capital and current spending at the core of his great boast to be increasing investment? It is a good job that he is increasing public investment because his Red Book shows that private investment in business is scheduled to fall sharply in future years. That is directly because of the economic policies that he has pursued. Will the Chancellor persist, as one of the fiddles, in raiding the lottery for yet another slab of public spending? This is new Labour, new accountancy. It is the Chancellor's contribution to creative Britain.

The reality is that Labour was elected to office on incompatible pledges. To the City, it was an end to tax and spend; to the spending lobbies, it was jam today. The comprehensive spending review was designed to square that circle. The Chancellor has told us today that he has failed comprehensively. The Government made clear promises before the general election that they would not raise taxes but they have. They were going to control inflation, but the Chancellor has missed his target 11 months out of 12. Labour was going to support home owners, but they are all paying more now. It has all gone now. Prudence has been dumped. She was just another photo opportunity.

Mr. Brown

I should start by welcoming the shadow Chancellor of the Exchequer to his new position. I hope that he will enjoy his period in the office. Conservative Members should have some pride in the fact that the new spokesman on financial matters was the Minister who in 1991 personally signed the Maastricht treaty.

The right hon. Gentleman started by saying that he supported us. Then he said that he opposed us. Then he said that he supported us. Then he opposed us. What he revealed as he went on is the extreme right-wing agenda that is now dominant in the Conservative party. He lectures us on debt, but it was his Government who ran up the national debt and doubled it. He lectures us on stop-go, but the worst two economic cycles happened under the Conservative Government when they caused two of the most difficult recessions for our industry. He lectures us on social security, but his Government, by their failure and by causing unemployment, massively pushed up social security spending simply to keep people out of work. He lectures us on tax, but his Government were responsible for 22 tax rises and for raising the amount of tax, against all promises that they made in their election manifesto. He even tried to lecture us on the channel tunnel rail link, but it was his Government's failure which caused all the problems that my right hon. Friend the Deputy Prime Minister had to intervene to solve.

In all those areas, the shadow Chancellor has nothing to offer to the debate, except for one thing—that we should cut spending more. He says that we should cut spending and the share of spending. Over the next few months and years, he will have to explain to the British people through debates in the House which hospitals, schools, transport investment and housing expenditure he wishes to cut. We will relentlessly pursue the Conservative party over its real aims for the future of the welfare state.

It is wrong to say that there is any problem with the Accounting Standards Board.

The Monetary Policy Committee makes the decisions. It is independent and able to do so.

The right hon. Gentleman mentioned public spending as a share of national income. It will fall to 39 per cent. during the next three years, as I said in my statement.

Debt interest payments over the next few years will be at a prudent level because we are reducing the share of debt in national income.

We have a programme of investment and reform combined with prudence. During the Conservative years, we had neglect of investment, the run down of our public services, and imprudence and boom-bust in the economic management of this country. We offer the only way forward. The shadow Chancellor will have to go home and think again. The Conservative party is unfit not only for Government, but for Opposition.

Mr. Giles Radice (North Durham)

The Treasury Select Committee will want to look carefully at the Chancellor's statement and at the comprehensive spending review when it is announced later. Is my right hon. Friend aware that abolishing the annual spending round in favour of a three-year planning period will not only build in fiscal prudence, but will provide Departments with a long-term planning perspective which is so badly needed? Is he further aware that the public spending plans announced today will provide extra resources for badly strapped public services, especially education and health, and will promote badly needed capital investment and capital projects?

Mr. Brown

I am grateful to my hon. Friend, who is the Chairman of the Treasury Select Committee. I shall be happy to work with it in reviewing the proposals, as will the Chief Secretary. My hon. Friend rightly points to the big change that we are announcing today, from an annual spending round to a three-year plan of spending, within which each Department will have far greater flexibility and the ability to plan over that period. I was surprised when I heard the shadow Chancellor say at lunchtime that the annual spending round was a tried and tested way of doing things properly. If it is the first commitment of the Conservative Opposition to restore the annual spending round, I hesitate to think what other proposals they will come forward with later.

My hon. Friend is absolutely right to say that the purpose of the spending review is to ensure that we can get the money that is necessary to the priorities that we have. Education and health are two of the greatest priorities for this country, but they were neglected under the previous Government. We are determined to make sure that those priorities have the resources they deserve. We are prepared to take tough decisions to make that possible. When I come back to the House in a month's time, we shall be able to announce the allocations for health and education over the coming years.

Mr. Malcolm Bruce (Gordon)

Does the Chancellor accept that the Liberal Democrats welcome the timing of today's statement and, like the Chairman of the Treasury Select Committee, the hon. Member for North Durham (Mr. Radice), the signs of greater long-termism in the Government's fiscal policy? The Chancellor may agree that, under the Tories, the short-term approach to budgeting and, in particular, to capital investment was extreme. To the extent that that is clearly going to change, his statement is immensely welcome.

The Liberal Democrats also welcome the Chancellor's greater emphasis within Government on outputs as a determinant of funding. However, if budgets for three years are to be set in one go, should not the Government open up the debate to wider public consultation, in line with the spirit of the pre-Budget report, rather than keep it so tightly under wraps that we have little opportunity to contribute? With budgets fixed for three years, will the Chancellor assure us that there will be a sufficiently funded contingency reserve to meet variations over that period? Is not there a danger that the Chancellor is trying to satisfy two audiences at once? Would it not be better to choose more decisively than he has done between bigger public surpluses and better public services? Today's Financial Times was right to conclude: The question … is whether the increases he"— that is, the Chancellor— will feel able to permit can meet the objectives for improved services the government has set. Liberal Democrats welcome the boost to investment that the statement provides, but does the Chancellor not understand that quality education and quality health rely just as much on first-class teachers and nurses as on first-class buildings?

Will the Chancellor confirm that, even if control spending grows at 2.5 per cent. in real terms over the next three years, it will still have grown by only 1.5 per cent. per year over the life of this Parliament—less than the 1.8 per cent. achieved by the Tories over the past 18 years? Does the Chancellor accept that, even if spending growth was 3.75 per cent. per year over the remainder of the Parliament, it would still be no higher as a share of national income than it was under the Tories?

What will the extra money deliver in terms of services? That is the question people need to have answered. No doubt, the modest early years pledges are now deliverable by the later years of this Parliament, but can the Chancellor say whether average hospital waiting lists will be lower in this Parliament than in the last? Will primary school pupils of all ages be removed from oversized classes? Will nursery education be extended to all three-year-olds whose parents want it?

During the election campaign, the Liberal Democrats warned that keeping to Tory spending plans would mean worse education and health services. Sadly, so far, we have been proved right. Is not the reality that, although the Chancellor might have done enough today to stop things getting worse, he has done far too little to deliver the sort of radical improvement in our education and health services for which the British people thought they had voted and which they are now entitled to expect?

Mr. Brown

First, let me tell the hon. Gentleman where I agree with him. I agree with him when he says that we should concentrate on outputs and on the effectiveness of services and not simply on the size of the budget. I agree with him when he says that we should have three-year plans; indeed, that is what we shall do. I agree with him when he says that he wants to have a discussion on what level of public spending is necessary; no doubt, through the Treasury Select Committee, of which he is a member, he will involve himself in that debate. I agree with him that it is important that resources go to education and health, which are the two priorities.

However, the hon. Gentleman should congratulate the Government on what we are doing and what we plan to do. On education, he asked for £500 million to be invested in capital re-equipping of our schools. We are investing £2½ billion already and, of course, today's announcement makes more investment in the long term possible. He said at the election that we should invest £1¼ billion in the health service. We have already put £2 billion more into the national health service—£300 million last year and £1.7 billion this year. Of course, it is our aim to get resources to help. He should congratulate us on what we have done and on what we are doing.

The hon. Gentleman read out a list of items which, no doubt, the Liberal Democrat party has carefully costed. We will not make spending commitments in every single area, as he has been doing. The Liberal Democrats will not face up to difficult decisions about taxation in the Finance Bill; on public spending, their amendments to student loans legislation alone would have cost 1p on income tax. We do not know what they favour.

I should remind the hon. Gentleman that, in the first speech of this Parliament by the leader of his party, the right hon. Member for Yeovil (Mr. Ashdown) said: If we tighten our belts now, we have a real opportunity to get to grips with the huge hangover of debt left behind by the Conservatives."—[Official Report, 14 May 1997; Vol. 294, c. 74.] That is the real world that we inherited; that is what we are tackling. In the spirit of the statement of the leader of his party, the hon. Gentleman should be supporting us.

Several hon. Members

rose—

Madam Speaker

Order. I appeal for co-operation from hon. Members in asking brisk questions, and ask the Chancellor to give brisk answers, as so many hon. Members are seeking to put questions.

Mr. Robert Sheldon (Ashton-under-Lyne)

The Chancellor is obviously right to draw the clear distinction between capital and current expenditure in a new form, which will be widely welcomed. He will be judged by how far that leads to the very large increase in capital investment that many of us want. Ending the annual spending round will be welcomed not least by spending Ministers, who will find themselves short of the annual misery, and by Treasury Ministers, who have the worst of it. Is my right hon. Friend aware that, over a long period such as three years, there will be a change in priorities and in their perception? How does he intend to ensure flexibility, other than, perhaps, by increasing the contingency reserve?

Mr. Brown

I am grateful to my right hon. Friend. I very much appreciate his guidance and advice—first as Chairman of the Public Accounts Committee, and since then. He is right to draw attention to the importance of capital investment in the modernisation of the country. We shall insist on the toughest efficiency standards in the use of resources. Some of the measures that we are bringing forward this afternoon are designed to achieve exactly that. We can prove that public investment and prudence can go hand in hand.

My right hon. Friend also raised the abolition of the annual spending round. As he knows, under its old form, end-of-year allocations were made simply to use up the budget. There was not the necessary flexibility to put the money forward for the best available purpose, and Departments were not able to plan ahead strategically, as we are now able to do. Of course, within their budgets, Departments will be able to examine their priorities and regularly assess them. It is one of the fundamentals of the review that standards and efficiency targets must be met. His fears about an inability to change when new priorities develop are not founded, because there are flexibilities in the budgets.

Mr. Stephen Dorrell (Charnwood)

I enjoyed the Chancellor's description of his medium-term financial strategy almost as much as I enjoyed his description of his privatisation programme. If he is really going to set before the House detailed three-year programmes, Department by Department, without the safety valve of an annual spending review, how will he accommodate, as the right hon. Member for Ashton-under-Lyne (Mr. Sheldon) asked, not just shifts of priority in a Department's programme, but shifts in the Government priorities between departmental programmes? How will he deal with the inevitable unexpected event that will arise during this Parliament?

By setting firm programmes three years ahead, is not the Chancellor lining himself up for a spending crunch some time in this Parliament, or are we seeing the beginnings of a process that will lead to excuses for another round of tax increases later in the Parliament?

Mr. Brown

I welcome the sight of the right hon. Gentleman on the Back Benches. I hope that he will be able to speak his mind in the way in which he promised. Unfortunately, his first statement was to agree with the shadow Chancellor that the annual spending round is somehow of great merit. Perhaps its repeal should be the first item in the Conservatives' manifesto at the next election on which they can agree.

The problem in British public spending is not too much long-termism or that people have made decisions in advance and have not been able to change them, but too much short-termism and an inability to plan ahead. Of course, individual Departments will be able to consider priorities within their budgets, but the comprehensive spending review is considering priorities for the next three years. When I report, with the Chief Secretary, to the House next month, we shall be able to say not only what those priorities are, but how the modernisation and reform necessary to achieve them is working. I hope that the right hon. Gentleman will be able to welcome our proposals.

If the right hon. Gentleman thinks about his experience at the Treasury and as a departmental Minister, he will realise that it is the short-termism of Government that has made us unable to invest in our future. Public expenditure on investment is so low because it was very easy for Governments to transfer money from investment to consumption and not face up to difficult decisions. The result is a run-down Britain in terms of transport and other amenities that are vital for the future. We shall tackle that problem and take the necessary action. The right hon. Gentleman's perspective, and his writings—which I have read—mean that he should be in a position to support us.

Mr. Ken Livingstone (Brent, East)

Could the Chancellor assure the House that the spending totals that he is setting will be sustained in real terms even if lower than expected GDP growth means that those totals would go beyond 40 per cent. of GDP?

Mr. Brown

The whole point of the spending figures that we are announcing is that we are working on a three-year basis. In other words, individual Departments will be able to consider their position over time and make the necessary adjustments. I want them to have flexibility, which we are introducing in other areas. Conservative Members were shouting when I announced our proposals to enable local authority airports to have greater commercial freedom to make investments.

On public spending as a whole, we shall not promise to allocate money that we do not have simply because decisions are not made by others. We shall set targets, which must be met. They will be sufficiently good to enable our health and education services to invest in the future. The three-year programme offers the flexibility necessary to deal with any problems that arise.

Mr. David Davis (Haltemprice and Howden)

The Chancellor will be aware that I was among those who welcomed his commitment to eradicate the deficit in all the years of this Parliament. I certainly welcome his commitment today to output and the associated realisation of under-utilised assets, which will help towards that end.

However, does not the Chancellor accept that it will be a tragedy if that commitment is viewed by the financial communities as an exercise in creative accounting? Earlier, he brushed aside the question of the independent Accounting Standards Board's concerns about his treatment of private finance as off balance sheet. That is not simply a technical issue; it means that the Government may conceal from the public the shouldering of large liabilities for the future. Will he tell the House how he will deal with that serious concern of the Accounting Standards Board?

Mr. Brown

I am happy at all times to discuss these measures, but the right hon. Gentleman is referring to a discussion within the accounting community about the specific treatment of items related to the private finance initiative. He referred to creative accounting. We shall not do as the previous Conservative Government did, which is why we have introduced public sector net borrowing as a better measure of the underlying state of public finances. The old public sector borrowing requirement figures did not reflect the true underlying state of public finances. If the right hon. Gentleman considers the public sector net borrowing figure, he will find that it is a better estimate of that state. I am happy to discuss these matters with the Accounting Standards Board, but PFI projects are a precise issue, which we and the board are dealing with.

Mr. Geraint Davies (Croydon, Central)

I welcome my right hon. Friend's statement, particularly on the public-private partnership in National Air Traffic Services. Will he reiterate that its employees can now look forward—perhaps through having their own shares—to having a real share in the success of the services; that safety, while independent of NATS, will remain paramount; and that, taken with new commercial freedoms for regional airports, his statement is good news for investment in Britain's transport infrastructure and, therefore, for prosperity and success up and down the land?

Mr. Brown

A high level of investment in the air traffic control service will be necessary in future years. We have proved in other initiatives in which we have been involved that private finance can be levered in to support the public investment that is being made. Our preferred option for National Air Traffic Services will do exactly that. As a result, both the employees and the users of the service will see enhanced investment in the future service. Our proposal for the independent, wholly publicly controlled regulatory body is designed to ensure that we have the safest air standards in the world. I believe that when people study the proposals as they come forward, they will find them worthy of support.

Mr. Peter Brooke (Cities of London and Westminster)

I congratulate the Chancellor on keeping a straight face for most of his statement. What effect does he expect today's announcement to have for the balance of the year on the value of sterling?

Mr. Brown

The right hon. Gentleman, who is a former Treasury Minister, knows that it is not for me to comment on the day-to-day movement of sterling. I have already said that I share the worries of exporters about the level of sterling. Most of the questions to me were tabled when sterling was at DM3.10. It is now substantially lower than that. Indeed, it is only 2 to 3 per cent.—if I am right today—higher than it was when the Labour Government came to power last May. The big rise in sterling took place in the years and months before the general election. The sterling rate in relation to the dollar is virtually unchanged over the past two years.

As I said, I share the worries of exporters about the pound, but what they fear most of all is what we are taking steps today to eliminate: the stop-go in our public economy and our national finances. By taking steps to ensure stability, we are doing the best service to exporters.

Mr. Tam Dalyell (Linlithgow)

Rather differently from my hon. Friend the Member for Croydon, Central (Mr. Davies), may I express concern about the air traffic controllers? Has there been discussion with the representatives of their unions? What technical advice has the Treasury received on safety? As I understand it, we are proposing something which no other country in the world has done. Every other country has a public air traffic control system. The temptations in certain circumstances to take short cuts could imperil safety.

Mr. Brown

I am grateful to my hon. Friend for raising the question. A statement is being made this afternoon by the Minister of Transport. In time, he will also publish his reply to the Select Committee report that examined all the issues in relation to air traffic control. The proposed independent regulator will ensure that the air safety standards are the best in the world.

My hon. Friend might consider that we need new investment at the highest possible levels in our air traffic control services, and if, as a result of the partnership that we propose, we can lever in private investment in addition to the existing public investment, that will ensure a better future for both the employees and the customers of National Air Traffic Services. I give my hon. Friend a guarantee that the best safety standards in the world are our objective.

Mr. John MacGregor (South Norfolk)

I welcome the Chancellor's total reversal of his previous position and his conversion to the privatisation of National Air Traffic Services, but why the delay? Why did he not do that a year ago, as he could have done, as we urged him, and as the Civil Aviation Authority wanted, to avoid delaying its investment plans for a whole year?

Will the Chancellor answer the question on the private finance initiative that he has so far failed to answer? Will he give a guarantee that the Government will not engage in off-balance-sheet creative accounting on the new and substantial Government guarantees on private sector finance, such as the channel tunnel rail link, and will he include them in his public expenditure figure?

Mr. Brown

There is no question of that in the channel tunnel rail link proposals. The Deputy Prime Minister made clear the arrangements that we had agreed, which were put to independent authorities.

On air traffic control, we are determined to ensure the highest levels of investment that are necessary. When we came into government, the plans that the right hon. Gentleman suggests were well advanced were not well advanced at all. We have had to examine these matters in detail, and will continue to do so. I guarantee that we will want the highest standards of safety, and a public sector independent regulator will ensure that. Air traffic control will benefit, as will transport as a whole, from levering in more private investment. It is a private-public partnership in which the Government, under the preferred option, have 49 per cent. of the shares.

Mr. Alan Williams (Swansea, West)

May I congratulate my right hon. Friend on his good luck in the choice of shadow Chancellor, whose performance today almost made his predecessor appear competent? May we assume that the proceeds from the sale of council assets will be invested by those same councils? If so, how will my right hon. Friend ensure that the asset-poor councils do not slip inexorably further and further behind the asset-rich councils?

Mr. Brown

I said in my statement that the Deputy Prime Minister and I were considering a new framework for investment by local authorities. We aim to raise the levels of investment in our vital assets. That new framework with local authorities will be discussed by the Deputy Prime Minister, in the case of England, and by the Secretaries of State for Wales, Northern Ireland and Scotland. Those discussions will take place in order to ensure that we secure the best use of our assets. I assure my right hon. Friend that the distribution will be fair.

Mr. Alex Salmond (Banff and Buchan)

Does the Chancellor recall the phrase "selling the family silver" and the political criticisms that he once shared about the folly of basing an economic strategy on the wholesale disposal of public assets? Was it not the Labour party's position hitherto that privatisation of air traffic control would jeopardise the new air traffic investment promised to Prestwick? What assurances can the Chancellor give Prestwick workers that that new investment will be delivered under the new privatised arrangement?

Mr. Brown

It will not prejudice the new investment. We are talking about higher levels of investment after years of uncertainty. I hope that the Scottish National party will not start the sort of scaremongering that it indulged in on many other issues, only to be proved wrong. I made it absolutely clear at the general election that we were prepared to consider this issue, and we have done so.

As to the hon. Gentleman's point about the use of resources from privatisation, I remember reading that the shadow Chancellor had said that the great thing about privatisation is that it can be used for tax cuts. We are releasing resources that we do not need, in order to fund investments that we do need. In view of this country's infrastructure and what needs to be done in the health service, in education and in transport, we must take a modern view of how we shall equip ourselves for the future and be prepared to release assets that we do not need in order, to make the investments that we do need. I am sorry to say that, once again, the Scottish National party—with its extreme and old-fashioned views—opposes us.

Mr. Alan Simpson (Nottingham, South)

May I congratulate the Chancellor on recognising that having a medium-term economic plan is better than not having one? It has been a long time since the House was in such a position.

I have two specific questions. First, I am sure that the Chancellor is aware of the considerable economic arguments, particularly in the private sector, regarding whether it is better to use one's asset base to borrow against for investment purposes or to sell parts of it in order to use the capital for investment purposes. Will he put in the Library the comparative analysis that led him to the conclusion that it was better to sell assets than to borrow against them?

Secondly, the Chancellor will know also that the distribution of assets among local authorities is as inconsistent and uneven as the distribution of capital receipts. Would he consider it acceptable if local authorities that do not have surplus lands were to advance proposals to sell the properties in which their tenants live or the school buildings in which children are educated and the lands on which those buildings stand?

Mr. Brown

The discussions that the Deputy Prime Minister is having with local authorities and other Secretaries of State will consider issues in relation to the use of resources.

I hope that my hon. Friend the Member for Nottingham, South (Mr. Simpson) will not raise groundless fears regarding particular assets that are important to individuals. His main question was about whether we would be prepared to relinquish some of our assets or to fund new investments by borrowing. I remind him that we inherited borrowing levels of £25 billion and that we are paying more in interest payments than we are paying to fund our schools. As a result of the previous Government's mismanagement, we are paying more in interest payments than we are spending on housing and law and order combined.

I want to create a situation where, instead of paying interest, we use the funds that we have to invest in our future. As I said in my statement, if we had continued with the debt-to-GDP ratio that we inherited from the previous Government, we would have been funding an additional cumulative total of £25 billion in interest payments over this Parliament. I am not prepared to use public money to do that when we want to be able to put it directly into houses, hospitals, schools and transport infrastructure.

My hon. Friend asked whether we are prepared to borrow. The answer is yes, but within limits. We are not, however, prepared to borrow in a way that would amass huge interest payments—that money could be better used for other things. I hope that he will now agree with me.

Sir Michael Spicer (West Worcestershire)

Having given up control of monetary policy, the Chancellor of the Exchequer apparently intends to give up year-on-year control of fiscal policy, so what will be the point of his job? Perhaps he should consider adding the Treasury to the excellent list of sales that he announced today.

Mr. Brown

The hon. Gentleman spends most of his time criticising me for measures that I have taken, so I presume that he thinks that some of my decisions are sufficiently controversial not to be written off as irrelevant.

At the Treasury, we have inherited a situation in terms of debt and borrowing levels that has to be dealt with. We must reform the public finances, and the Chief Secretary and Ministers are doing that. I hope that, by the end of that process, the hon. Gentleman will agree that we have done things that should have been done a long time ago.

Mr. Barry Sheerman (Huddersfield)

May I congratulate my right hon. Friend on his radicalism and his pragmatism in his statement? He has been radical; we all know that longer-term planning makes sense and that some of the ideological baggage on this side needed to be buried, and buried now. Will he ensure that his radicalism carries through to the sort of investment that we need in this country? We must prioritise investment that leads to value added wealth creation in enterprise, innovation and intellectual property.

Mr. Brown

I agree entirely with my hon. Friend, and he rightly points to the wholly unacceptable neglect of investment over recent years. When hon. Members absorb the fact that, under our proposals, it will be possible to invest £31 billion in the last year of this Parliament to improve the infrastructure of this country as a result of the tough decisions that they are taking, they will begin to see the difference that we can make to public services and infrastructure.

We shall, of course, do that in a way that gives us a long-term plan for the future. The public-private partnerships that we propose are a means to realise resources for investments elsewhere and, at the same time, to lever in private finance to enhance the public investments that we are making. The policy of long-termism—planning for the long term—is one which we shall continue to pursue.

My hon. Friend mentioned investment in innovation and science. I can tell him that that is one of the priorities that we have identified. Hospitals, schools and transport are priorities, as are housing and building stronger communities, but I also mentioned the science and technology base. I hope that we will be able to show results in that area when we come to the end of the spending review. The rundown of science and technology under the previous Government is something which no Government should have allowed, and something which we are not prepared to tolerate.

Rev. Martin Smyth (Belfast, South)

I welcome the general thrust of the statement, especially the long-term view. About 13 years ago in the Northern Ireland assembly, we had carry-over from Departments so that we did not have mad spending at the end of a period.

May I press the Chancellor on the concept of the continual review to update matters? Will we have open accountancy so that we can see where the money is going? It is amazing how money is missed time and again in normal business practices, and we must admit that, even in Government circles, it is hard to understand some of the accountancy.

Mr. Brown

I hope that the hon. Gentleman agrees that some of the announcements that we have already been able to make in Northern Ireland have allowed us to begin to make provision for enhancing the infrastructure of the country in roads and railways, and in new investment in airports. That is an important means by which we can help to create new job opportunities and encourage businesses in the area. We shall continue to do that as a contribution to matching prosperity with peace in Northern Ireland.

As for the hon. Gentleman's point about openness of access, I entirely agree with him that independent audit and public scrutiny are needed. That is why the National Audit Office has been called on to scrutinise our figures and some of our assumptions—as it will continue to do—and why we are prepared to be judged on the basis of the fiscal rules that we set down. The fiscal responsibility clause in the Finance Bill shows that we are prepared to be judged on the basis of regular reporting to Parliament on these issues.

I hope that the hon. Gentleman will agree that that system is far preferable to the one that we had before. It means long-termism, which he has supported, along with openness and proper scrutiny. That is right for Parliament.

Mr. Paul Goggins (Wythenshawe and Sale, East)

I thank my right hon. Friend for his statement. Will he spell out in more detail its implications for Manchester airport? Sixteen million passengers travel through the airport each year, and 15,000 people work there. It is estimated that that figure could be doubled by 2005, with proper investment. Can my right hon. Friend confirm that greater commercial freedom for Manchester airport will mean greater freedom to invest, bringing jobs to my constituency and to the north-west as a whole?

Mr. Brown

It is exactly because we want further investment, and want to give greater commercial freedom to enable it to take place, that we are making this provision as part of our comprehensive spending review. Manchester airport, which I have visited, has expanded enormously in recent years, and is set to expand again. We want to give that profitable airport the commercial freedom in key areas that will enable it to make the investments that will be necessary for the future. I hope that in Manchester, as well as in other areas where the same will happen, the move will be welcome. It is a contribution to a modern airports policy.

Mr. Nicholas Winterton (Macclesfield)

If the Chancellor is genuinely determined to adopt long-termism as against short-termism, and to facilitate greater capital investment publicly, privately and in partnerships with, for instance, Manchester international airport—a magnificent airport, serving the north-west—he has my support.

Wearing my hat as Chairman of the Procedure Committee, however, and describing the right hon. Gentleman as a modernising Chancellor, may I ask whether he backs the Committee in its desire to ensure that the House can scrutinise the estimates and public expenditure more effectively than it does at present? The current structure and system are outdated.

Mr. Brown

I am grateful to the hon. Gentleman for his initial remarks. I think that he speaks more for mainstream opinion than many Conservative Members, although they know that further investment—indeed, the modernisation of our infrastructure—must take place, and that we are making the tough decisions that are necessary to achieve that. I hope that the hon. Gentleman will continue to speak out boldly on the issues that matter.

As for what the hon. Gentleman said about the Procedure Committee, I have talked to my right hon. Friend the Leader of the House, who is sitting beside me. We will consider the matter, but I cannot give the hon. Gentleman a final answer now.

Mr. Stephen Timms (East Ham)

Will the Chancellor ensure that the welcome increase in public investment that he has announced is targeted where it is most needed, so that we can tackle effectively the legacy of social exclusion and unequal public services left by the last Government?

Mr. Brown

I thank my hon. Friend for drawing attention to one part of my statement—the announcement of public investment to enable us to build stronger and safer communities.

Historically in this country, money invested in our communities has not been invested in a way that has tackled the causes of poverty, deprivation and unemployment. As part of the new deal for the communities in which my right hon. Friend the Deputy Prime Minister is involved, I want us to look at problems of social exclusion—in particular, at the causes of social exclusion—and to establish how, by investing in education or by providing new business opportunities, we can create the jobs that will enable people to move out of poverty.

I assure my hon. Friend that tackling social exclusion is a major priority of this Government. I want a country in which there is opportunity for all, and in which everyone knows that he or she has a contribution to make.

Mr. Dafydd Wigley (Caernarfon)

Does the Chancellor accept that the broad welcome given to his statement by Conservative Back Benchers reflects the fact that he has today set in concrete Tory spending levels for the rest of the current Parliament? How on earth will he be able to adjust his policy to the reality of life year on year and the state of the economic cycle, when he plans to have precisely 39.25 per cent. of gross national product as current expenditure in each year?

Mr. Brown

In one sense, I am grateful to the right hon. Gentleman, who has drawn attention to the problems of investment. He does not, however, follow me down the road in understanding what we must do about those problems. I propose that we invest in our future, and release funds with which to do so. The right hon. Gentleman should support me in that.

The funds to which I refer owe nothing to Conservative underinvestment in our future. The Conservatives refused to invest. Investment as a share of gross domestic product fell to 0.8 per cent; we inherited that problem, and are trying to deal with it. The right hon. Gentleman should support us when we are trying to secure more hospitals and schools, and a better transport infrastructure—but is this not typical of the nationalist parties, which are so extreme that they will not see the need for investment in our future?

Several hon. Members

rose—

Madam Speaker

Order. We must move on. [Interruption.] I know that hon. Members are disappointed and are heaving sighs, but I have the names of those who have not been called, and I shall try to call them on another occasion. Forty-nine Members were rising to question the Chancellor, and they could not all be called in the space of an hour and a quarter.