HL Deb 06 November 1986 vol 481 cc1192-203

3.50 p.m.

The Minister of State for Defence Procurement (Lord Trefgarne)

My Lords, with your Lordships' permission. I should like to repeat a Statement being made in another place by my right honourable friend the Chancellor of the Exchequer. The Statement reads as follows:

"Cabinet today agreed the Government's public expenditure plans for the next three years. In the normal course of events that would be followed by the publication of the printed Autumn Statement, accompanied by an oral Statement to the House, next Tuesday. For obvious reasons that is not possible this year. So while the Autumn Statement will be printed in the normal way and presented to Parliament as soon as the House reassembles next Wednesday. I thought it would be for the convenience of the House if I made my oral Statement today.

"This will cover all three of the key elements in the printed Statement: the Government's outline public expenditure plans for each of the next three years and the expected outturn for this year; proposals for next year's national insurance contributions; and the forecast of the economic prospects for 1987 required by the Industry Act 1975.

"The full text of the economic forecast, together with the public expenditure figures and the rest of the information customarily published with this Statement, will be available from the Vote Office as soon as I have sat down. They will also appear in the printed Autumn Statement to be published next week.

"I turn first to the outturn for the current financial year, 1986–87. The public expenditure planning total now looks likely to amount to almost £140½ billion—£1¼ billion, or a little less than 1 per cent. above what was allowed for in this year's Public Expenditure White Paper. The main reason for this excess is a 9 per cent. rise in the current spending of local authorities—far more than was provided for. However, other items on the expenditure side, the largest of which is debt interest, are likely to fall short of what was forecast at the time of the Budget, thus reducing the total overrun on the expenditure side to about £½ billion.

"On the receipt side, the North Sea tax take is likely to be even lower, by about £1 billion, than I envisaged at the time of the Budget, largely because for a long period the oil price has been below the 15 dollars a barrel level on which the Budget arithmetic was explicitly based. This shortfall, however, is more than offset by the continuing buoyancy of non-oil tax revenues, in particular VAT and corporation tax. Non-oil revenues now look likely to exceed the Budget forecast by £2 billion. This would imply a net overrun on the receipts side of about £1 billion, rather more than that on the expenditure side. But this will be reduced by a change I propose to make to the North Sea fiscal regime. The collapse of the oil price has led to a sharp cutback in investment activity in the North Sea, with inevitable consequences for the UK offshore supplies industry both in Scotland and the North East of England.

"I therefore propose, on a carefully targeted basis, to accelerate the arrangements for the repayment to the oil companies of advance petroleum revenue tax due to them. The details of this change, which will require legislation early in the new Session of Parliament, are set out in a press notice which the Inland Revenue will be issuing as soon as I have sat down. The new arrangements will have a revenue cost this financial year of some £300 million, which will be fully, recouped over the next three years. Taking this into account, the public sector borrowing requirement for the current year is still forecast to be about £7 billion, the figure I set in the Budget.

"I turn now to the public expenditure plans for the next three years. Since 1982–83, public spending, both before and after deducting the proceeds of privatisation, has been declining as a proportion of national output. It is set to be lower still this year. The Government are determined to ensure that this trend continues: to see to it that total public spending, even without taking account of privatisation proceeds, continues to decline as a percentage of GDP. The plans I am about to announce for the next three years secure that objective. Indeed, they show that by the end of the period the ratio of public spending to national output will be back to the level of the early seventies.

"But within this overall constraint, and in the context of its policy priorities, the Government have felt it right to allow an increase in the previously announced planning totals for 1987–88 and 1988–89. Compared with the prospective outturn for the current year, we are now planning for an average growth in the public expenditure planning total of about 1¼ per cent. a year in real terms, well within the prospective growth of the economy as a whole.

"The new planning totals have thus been set at £148¼ billion for 1987–88 and £154¼ billion in 1988–89, an increase of £4¾ billion and £5½ billion respectively over the totals previously published. For 1989–90 the planning total has been set at £161½ billion.

"As usual, these totals incorporate estimates for the proceeds of privatisation. Last year I increased the estimate of these proceeds very substantially to £4¾ billion in each of the three survey years, a figure which I expect to be duly achieved this year. Although the privatisation programme is now moving ahead more strongly than ever before, I have decided to make only a modest further addition to this estimate, bringing it to £5 billion in each of the next three years. The new planning totals also contain substantial reserves, rising from £½ billion in 1987–88 to £7½ billion in 1989–90.

"The public expenditure increases I have announced allow us to make realistic provision both for local authority current expenditure, over which the Government have no direct control, and for demand-led programmes such as social security, while still leaving scope for increased spending on services to which the Government attach particular priority.

"But before referring to some of the more important changes, let me make one thing absolutely clear. There can be no question of allowing the projected increases in public expenditure over the next two years to undermine the prudence of the Government's overall fiscal stance. The Government's fiscal stance has been clearly set out in the medium-term financial strategy published at the time of this year's Budget. There will be no relaxation of that stance.

"Within the totality of public expenditure, the largest increase is for the local authorities, whose current spending next year is now put at £4 billion above the previous provision. This in part reflects the fact that the previous plans simply carried forward the same level of cash spending as in 1986–87. At the same time, we are increasing next year's aggregate exchequer grant—the contribution that taxpayers make to local government spending—by almost 10 per cent. over this year's settlement. a rise of almost £1½ billion.

"These substantial sums demonstrate in particular the priority the Government are giving to education, which, including the new proposals on pay and conditions of service for teachers announced last week, accounts for about half the increase in provision. There is also a substantial increase in provision for the police.

"On top of the increased provision for the cost of education in schools, which is contained within local authority current spending, there will be additional spending on the universities of £60 million in 1987–88 and £70 million in 1988–89.

"Spending on the health and personal social services will be increased by more than £600 million. For the National Health Service alone, the increase in England amounts to over £300 million a year. Combined with the additional resources being generated by greater efficiency, this will not only enable the health service to cope with the growing number of elderly patients but will also allow it to improve services.

"Gross provision for housing investment is being increased by £450 million. This will sustain the rising trend of spending on local authority renovation and improvements and provide additional resources for the housing associations.

"In the light of this year's experience, £1¾ billion has been added to next year's provision for social security, most of which represents a greater expected expenditure on existing means-tested benefits.

"Provision for investment in roads in being increased by £65 million next year and £75 million the year after, mostly for local authority roads.

"For defence, the provision remains as planned in the last White Paper after allowing for minor changes, including a reduction in the estimated cost of the Falklands deployment. The defence programme will continue to benefit from the substantial real growth in previous years and the wide-ranging action to improve efficiency and value for money.

"Taking all programmes together, the additions to planned capital expenditure amount to getting on for £1 billion in 1987–88, of which about two-thirds is local authority spending.

"Further details of these and other changes will be contained in the printed Autumn Statement which will be published as soon as the House returns next week. In addition, full details, together with information on running costs and manpower, will be given in the public expenditure White Paper early in the New Year.

"I now turn to national insurance contributions. The Government have conducted the usual autumn review of contributions in the light of advice from the Government Actuary on the prospective income and expenditure of the National Insurance Fund, and taking account of the benefit uprating which my right honourable friend the Secretary of State for Social Services announced on 22nd October.

"The lower earnings limit will be increased next April to £39 a week, in line with the single person's pension, and the upper earnings limit will be similarly raised to £295 a week. The limits for the reduced rate bands which I announced in last year's Budget will also be increased again in April, but by proportionately larger amounts. The upper limit for the 5 per cent. and 7 per cent. bands will be raised to £65 a week and £100 a week respectively, and the upper limit for the 9 per cent. rate for employers will be raised to £150 a week.

"The taxpayer's contribution to the National Insurance Fund—the so-called Treasury supplement—will be reduced by 2 per cent. to 7 per cent., but this will not require any change in contribution rates. Thus the main Class I contribution rates will once again remain unchanged at 9 per cent. for employees and 10.45 per cent. for employers.

"Finally, I turn to the Industry Act forecast. Both growth and inflation have turned out to be slightly lower this year than I envisaged at the time of the Budget. Growth now looks like turning out at 2½ per cent. against a budget forecast of 3 per cent., and inflation in the fourth quarter of this year is likely to be 3¼ per cent., against the Budget forecast of 3½ per cent. The principal reason for this slower growth has been the disappointing performance of exports, which were hard hit by the cutback in spending by OPEC and other primary producers affected by the sharp fall in commodity prices in general and the oil price in particular.

"Combined with a halving in the value of our own oil exports, this has meant a significant deterioration in the current account of the balance of payments, from a surplus of some £3½ billion in 1985—and a cumulative surplus of £21 billion over the six years from 1980 to 1985 inclusive—to a forecast of broad balance for 1986. Looking ahead to 1987 the prospects are generally encouraging. While the necessary adjustment of the exchange rate to the oil price collapse has now taken place, it will inevitably take time before the full benefits come through in higher non-oil exports and lower import growth. This means that we can expect the current account of the balance of payments to go into deficit next year, for the first time since 1979, to the tune of some £1½ billion.

"Even so, non-oil exports are forecast to rise next year by 5½ per cent., compared with an increase of only 1 per cent. this year, with manufacturing output, in consequence, up by 4 per cent. And with domestic demand continuing to expand at the same rate as this year, the economy overall is likely to grow by a further 3 per cent. next year—the sixth successive year of steady growth at an average annual rate of almost 3 per cent.

"Recorded inflation is likely to edge up a little, to 3¾ per cent. in the fourth quarter of 1987. This is almost entirely due to the effect on the RPI of the timing of mortgage rate changes. The Government's commitment to a monetary policy that will squeeze out inflation remains unabated.

"Meanwhile the likelihood of faster growth next year, coming at a time when unemployment already appears to have stopped rising, suggests that the prospects for some fall in unemployment are now more promising. But this promise could still be frustrated by excessive pay settlements.

"The strategy that we have followed since 1979 has brought inflation down to the lowest level for two decades, combined with sustained growth and steadily rising living standards. This is a combination that has eluded successive governments for a generation. We have brought it about by the determined pursuit of free markets and sound money. And that is what we will stick to".

My Lords, that concludes the Statement.

Lord Bruce of Donington

My Lords, we on this side of the House are most grateful to the noble Lord for repeating the Statement which was made in another place. Your Lordships will recall that last year the Autumn Statement had to be interposed in the middle of a debate on the Address on the home front and the environment, and it is obviously to the convenience of the House that the Statement is made today. Moreover, in view of the attack of jitters that has taken place since the speech of the Chancellor of the Exchequer at the Mansion House, I expect that the City wants to be reassured as to what the noble Lord's right honourable friend the Chancellor of the Exchequer is likely to do.

I deeply sympathise with the noble Lord in reading a Statement of this kind, which I am bound to say is much more elegant than the statements made by his own right honourable friend, the former Minister for the Environment, immediately prior to the 1983 election, when he advised his colleagues to "Spend, spend, spend". The result of course was that there was a certain increase in government expenditure. There was a slight buoyancy in the economy as a result, and in the event the party opposite was quite successful in the 1983 election. The noble Lord will note—and I believe that the country will also note—that there should be an election every year on this basis, because when an election appears to be imminent all kinds of goodies which were formerly reckoned to be impossible are apparently within easy achievement.

Indeed we on this side of the House, and I am sure the House generally, will most certainly welcome the increased expenditure on education; the extra grants to local authorities; the extra money to be made available to universities; the small extra amounts available to the National Health Service; the albeit marginal increase in investment in roads, and so on. All these are extremely promising, and of course the Government themselves have consistently fought against them all these years.

The Government now claim in this Statement that all these goodies are the result of a sound financial policy and a sound economic policy. But I am afraid one thing that is not mentioned in the Statement itself, and perhaps it will be elaborated on later, is that despite all these "goodies" and all the manipulations that have taken place in the figures as distinct from the real numbers. unemployment still remains at 3¼ million at the least, and probably somewhere near 4 million. This is not exactly the best testimonial that the Government can lay before the country.

One thing requires to be made clear. Do the Government—and it is not clear from this Statement, apart from their usual self-congratulatory noises about the success of the medium-term financial strategy—still believe in M3? Do they still believe in the limitations that they have hitherto regarded as almost axiomatic? I well recall, as will the House, the almost dogmatism, if one could use the term. of the noble Lord, Lord Cockfield, on this subject when he occupied the Bench opposite for this purpose. Is M3 still the be all and end all of government policy in their financial and fiscal stance, because some doubt has been cast on this by none other than the Governor of the Bank of England?

How far does the medium-term financial strategy have any significance at all, particularly in view of the fact that broad money targets, as the noble Lord well knows, have grossly exceeded the band forecasts that were put in the medium-term financial strategy at the time of the Budget? Could the noble Lord give us some firmer indication of what the public sector borrowing requirement is likely to be next year?

There is one other point, which is a point of detail but on which I should be glad to have the noble Lord's reaction: do the existing expenditure figures take any account of the massive overspending in contemplation in the European Economic Community next year? The forecast overspend on the CAP is something like £2 billion, which of course gives this country a share of approximately £600 million. Do the figures make allowance for that contingency? Could the noble Lord give us some information as to whether this expectation of a deficit of that magnitude has any effect at all on the prospects of our receiving our due refund for the current year, which I believe is put at some £486 million? We should be glad to have information upon that point.

Speaking personally, I would much prefer to examine this Statement in conjunction with the detailed figures that are going to be produced later in order that I may compare them, and the House may compare them, with the forecast that appeared at the same time last year, so that we can see what the Government's record is like in the forecasting game. Therefore, I shall refrain from asking the noble Lord any more detailed questions and just give a general view that, compared with the needs of the country, compared with the requirements as already spelt out by both the CBI and the TUC and by most informed economic opinion in this country, this series of expenditure plans will do nothing at all to revive the prosperity of this country.

The prosperity of this country is not by reference only to the fortunes of 200 or 300 large companies; in our view it is by reference to the welfare of the people of the country as a whole, and in particular those 3½ million people who are condemned at the present time to unemployment and idleness.

4.15 p.m.

Lord Diamond

My Lords, may I too thank the noble Lord the Minister for repeating this Statement and for helping the House in a sphere with which perhaps he is not wholly familiar? I must say, if I may borrow from the well-known advertisement, that it appears that becoming a junior Minister in the House of Lords is very much a gymnasium of the mind. The noble Lord has to turn his attention to a great variety of matters.

So far as the Statement is concerned, we are glad that there will be an early opportunity for debating both the principles of it and the detail, no doubt on the last day of the debate on the Queen's speech. Therefore for that reason and the fact that it is never wise to make too many comments off the cuff immediately one hears a Statement. I have not too many comments to make on the detail at this stage.

However, there emerges from this Statement a major question. One notes, and one is grateful for, the increase that is proposed for education, for which we on these Benches have been pressing hard. We also welcome an increase in the provision for the police, although until we see the figures we very much doubt whether it is adequate to meet the rise in crime with which we are all faced. We also welcome the increase in spending on health and personal social services. All these we welcome very much indeed. We welcome the gross provision for housing investment, although it is very small. We have been pressing for that, and will continue to press for it, from these Benches.

All these we welcome. But has the Minister observed the economic background produced by this Statement against which these increases in expenditure are inexplicably proposed? Has he noted, for example, that the Statement says that growth next year is expected to fall to 2½ per cent. from the figure of 3 per cent. given in the Budget? Has he noticed that exports are down, so much so that the current account this year is expected to be flat, and there is expected to be a deficit next year in our current account of £1½ billion? Has he noticed—it is not in the Statement, but we are all very much aware of it—that interest rates are not only at a fantastically high level but in real terms (I imagine the noble Lord will correct me if I am wrong: I am sure he has the figures) must be the highest they have ever been? I repeat they must be the highest they have ever been, or very nearly that in real terms.

Against that background how have the Government come to the conclusion that now—just now—is the right time (and of course politicians are concerned with timing above everything else) for announcing all these increases that the noble Lord from the Front Bench of the Labour Party has accurately referred to as "goodies"? Why has the Minister announced that now? What is the explanation for the sudden change in the Government's stance?

Does the noble Lord remember what the Chancellor said last year, as repeated by the noble Lord, Lord Young of Graffham? I am looking at column 153, the Autumn Financial Statement, on 12th November 1985. I have no need to read out the detail unless the House desires it, but the Government reaffirmed in the strongest language their determination to keep public expenditure flat in real terms, and therefore at a decreasing level, and gave the figures for the years which are under consideration now.

Why have the Government suddenly decided now, of all times, when there can be no question of a general election in the immediate future, that there should be an increase in all these expenditures for which we have been pleading year after year ever since the last general election, and which have been denied to us with all the usual excuses of "firm monetary policy" or "sound monetary policy"? It is the kind of sound monetary policy that enables the Conservative Government, to my continuing amazement, and to their own shame, to continue to sell the assets of this country wholesale (£5 billion a year for the next three years) and use the money for ordinary current expenditure or for buying the goodwill of the voters or both. That is what they call "sound monetary policy".

I am asking the Government, against the background that has come out clearly in this Statement: why have they chosen now to alter their oft-repeated statement as to their position to announce all these "goodies", unless I am perhaps wrong and perhaps there is a general election in the year after all? That is my main question.

May I also ask, with regard to the public sector borrowing requirement, because it is not made clear in the Statement, what would the position be this year and next year if no credit were taken for privatisation? That is a simple arithmetical question.

The final comment I have to make is that your Lordships will accept it from me when I say that the Statement which has just been read out covers more than seven pages, four and a quarter lines of which are devoted to the most pressing and urgent social problem of all, unemployment. Why is that? Does that give a proper indication of the Government's priorities?

Lord Trefgarne

My Lords, I am grateful to both noble Lords. The noble Lord, Lord Bruce of Donington, opened his remarks by speaking about some sort of bonanza, some sort of spend, spend, spend. This is no bonanza. As the Statement makes clear, the proportion of GDP which is being devoted to public expenditure as reflected in the Statement is a declining not an increasing proportion. If the noble Lord wants to talk about spend, spend, spend, I would remind him of the commitments which his party has apparently entered into, which amount to some £28,000 million. That is if one excludes the undertakings given by Mr. Meacher, the status of whose assurances is never entirely clear.

As for unemployment, it is a most serious matter, but as the Statement also indicated—this matter was raised by both noble Lords who have spoken—there are signs that the unemployment figures are now flattening out. Nearly 1 million new jobs have been created since June 1983, and these are not reflected in lower unemployment because the labour force has been growing even more rapidly. Budget measures and pick-up inactivity mean that the immediate prospects of reducing unemployment are now more favourable. Slower growth of the labour force is projected for the rest of the decade and should improve the chances of reductions over the next few years. But as the Statement also makes clear pay developments remain critical.

The noble Lord, Lord Bruce, asked me about the position of sterling M3. As the Chancellor explained in a recent speech, the trend of sterling M3 growth affected by the freeing-up of the financial system over recent years and the shift from negative to positive real interest rates since the 1970s, makes interpretation more difficult. So the messages from M3 need to be continuously tested against the evidence of other indicators.

The noble Lord, Lord Bruce, asked me too about the position of our rebates from the European Community. The United Kingdom 1986 rebate is 1,900 million ecus, which is approximately £1,250 million and is the largest abatement or refund that we have ever received. In other words, the United Kingdom VAT contributions to the Community are being reduced by over £100 million each month. As for the 1987 European Community budget, which is still in draft, that I understand was agreed by the Budget Council in September, drawn up within the 1.4 per cent. ceiling, and agricultural provision is the financial guideline figure and the total for non-compulsory expenditure is consistent with the maximum rate provisions of the treaty. The calculation of what the United Kingdom rebate might be next year is a particularly complicated matter. I think the noble Lord might prefer that I did not delay your Lordships on that; but I should be happy to write to the noble Lord, Lord Bruce, if that would be of assistance.

The noble Lord, Lord Diamond, offered a number of welcomes to the provisions in the Statement which I have just repeated. Indeed some of the points that I have replied to from the noble Lord, Lord Bruce, were raised too by the noble Lord, Lord Diamond, particularly the point about unemployment. I have said that we have generated a very large number of jobs since 1983. The fact is that the total number of people seeking jobs has increased even faster. As for interest rates, that again is a rather technical matter. I have a page of detailed information which I could give the noble Lord, but your Lordships may prefer that I write to him on that matter as well. I hope that I have endeavoured to cover the main points raised by noble Lords.

Baroness Seear

My Lords, how can the Minister maintain that the monetarist policy and the medium-term financial strategy are in place when he surely recognises that the consumer boom, in which he seems to rejoice, is being financed by excessively easy credit and a very large increase in personal indebtedness?

Lord Trefgarne

My Lords, the public expenditure increases, which were referred to in the Statement, have been contained within what is a declining proportion of the gross domestic product generally. I do not think there is anything particularly wrong in the matter to which the noble Baroness referred. The provision of consumer credit has long been a feature of the high street.

Baroness Seear

My Lords, I am so sorry to come back to this, but the Minister really has not answered my point at all. How can he claim that the monetarist policy of controlling the money supply is in place when it is in fact being refuelled by consumer credit which is outside the control of the Government?

Lord Trefgarne

It is not being refuelled by that at all, my Lords. It is being fuelled by increased prosperity of our companies, not least in the export field.

Lord Boyd-Carpenter

My Lords, is my noble friend aware that many people outside and many people inside this House will feel that the improvements in various areas which the Statement contains have been earned by the steady and consistent policy of the Government over the last few years, and by their determination not to be pushed into excessive public expenditure? Is he also aware that some of us would be a little unhappy about one aspect of the Statement: that is, its apparent acceptance of a very substantial increase in local government expenditure? Can we have some assurance that the Government will not relax their efforts to prevent gross overspending by quite a number of local authorities?

Lord Trefgarne

My Lords, my noble friend is quite right to point to the fact that the Statement referred to a considerable increase this year in local government expenditure and an undoubted increase next year along the lines that the Statement reported. Certainly the Government will not relax their efforts to ensure that local authority expenditure is contained within reasonable limits. There is a limit to the controls that the Government have over local authorities, as my noble friend will be aware, but we have moved into an era of rate-capping which can be applied where appropriate.

Lord Renton

My Lords, will my noble friend bear in mind that a number of the factors with which the Chancellor has to contend are quite beyond his control? Is he aware that many of us are full of admiration at his having achieved the Statement which we have heard? On this question of local government expenditure, could my noble friend give some idea of the actual and estimated effects of the changes in local government which have been made by legislation the year before last?

Lord Trefgarne

My Lords, I think that I should need to have notice in order to give a reply to the question which my noble friend has put to me. I shall certainly make inquiries and see what information I can give him.

Lord Ezra

My Lords, I should like to put a particular question and also a general question to the noble Lord arising from the Statement which he has just read out to us. The particular question relates to the North Sea. I was glad to note that the Government have recognised that it was harmful that there had been such a reduction in investment in the future development of oil resources. Is he satisfied that the changes now proposed will deal sufficiently with the question? There has been a massive reduction in investment, having a harmful effect on current employment and a harmful effect on our future prospects for oil production. Is this something which the Government will review again at a later date?

My second question relates to the forecast for the balance of payments. The balance-of-payment figures for the last two months have been, to say the least, very discouraging. There is a view that we could run into a deficit this year and a rather higher deficit than the noble Lord has indicated from the Statement next year. If those developments were to occur, are the Government's financial policies sufficiently flexible to take them into account?

Lord Trefgarne

My Lords, the Government's policies will always be sufficiently flexible to take whatever changes occur fully into account. If I may seek to reply to the first point that the noble Lord raised about the special arrangement for the advanced petroleum revenue tax which was announced in the Statement, that proposal is designed precisely to deal with the matters to which the noble Lord referred, although I must say that I do not think that I would have referred to them in quite the apocalyptic terms used by the noble Lord. I understand that there is to be a detailed press release by the Inland Revenue this afternoon giving the details of those arrangements, which I hope the noble Lord will feel able to look at.