HL Deb 01 November 1988 vol 501 cc95-110

3.50 p.m.

The Secretary of State for Trade and Industry (Lord Young of Graffbam)

My Lords, with the leave of the House, I shall now repeat the Autumn Statement which is now being made in another place by my right honourable friend the Chancellor of the Exchequer. The Statement is as follows:

"Cabinet today agreed the Government's public expenditure plans for the next three years. I am therefore taking the earliest opportunity of informing the House of the contents of the Autumn Statement: that is, the public expenditure plans for the next three years, and the expected outturn for this year; proposals for national insurance contributions for 1989–90; and the forecast of economic prospects for 1989 required by the 1975 Industry Act.

"The main public expenditure figures, together with the full text of the economic forecast, will be available from the Vote Office as soon as I have sat down. They will also appear in the printed Autumn Statement, which will be published next Tuesday.

"I turn first to public expenditure. For the current financial year, 1988–89, the public expenditure planning total now looks likely to amount to some £153½ billion, or some £3¼ billion less than was allowed for in the last public expenditure White Paper. In other words, only around £¼ billion of the £3½ billion reserve provided for is in fact likely to be needed.

"The main reasons for this shortfall are an extra £1 billion in privatisation proceeds, a reduction in social security spending of almost £1 billion as a direct result of the sharper than expected fall in unemployment, and a saving of some £¾ billion, largely due to extra housing receipts under the right-to-buy programme. Taken together with the strong growth in the economy this year, and the containment of debt interest now that the Budget is in surplus, this means that total public spending this year, even excluding privatisation proceeds, will be less than 40 per cent. of national income—the first time this has happened for over 20 years. Not so long ago, the share of national income spent by the state seemed to rise inexorably. Over the past six years, that trend has been decisively reversed.

"Since 1982–83, public expenditure, excluding privatisation proceeds, expressed as a share of national income has fallen by seven percentage points—the largest and longest sustained fall since the wartime economy was unwound. Over the whole decade since this Government first took office, from 1978–79 to 1988–89, public expenditure has grown by under 1½ per cent. a year in real terms. This is exactly half the rate at which it grew over the whole of the immediately preceding decade.

"Looking ahead, Cabinet agreed in July that public spending over the next three years should keep as close as possible to the existing planning totals, and should continue to fall as a share of national income. The plans I am about to announce meet both those objectives.

"For 1989–90, the planning total published in the last public expenditure White Paper was £167 billion. It will remain at £167 billion. This important outcome has been made possible, despite the many claims for increased public spending, by a rigorous reassessment of priorities, coupled with the continuation of two of the factors that have contributed to this year's shortfall: benefit savings from lower unemployment and increased receipts from council house sales.

"For 1990–91, however, though these two factors will persist, the planning total has been set at £179½ billion, some £3¼ billion more than the previously published figure. For 1991–92, the planning total has been set at £191½ billion. These totals include the same level of reserves as in last year's plans; that is to say, £3½ billion in the first year, £7 billion in the second year and £10½ billion in the third. They also incorporate an unchanged estimate of privatisation proceeds of £5 billion a year.

"Over the three survey years as a whole, the real growth in spending on programmes will be over 3 per cent. a year. This can be afforded only because of the fall in the burden of debt interest brought about by the dramatic improvement in the Government's finances from Budget deficit to Budget surplus. As a result, overall public spending, excluding privatisation proceeds, will rise by less than 2 per cent. a year, well within the prospective growth of the economy as a whole. In other words, total public spending, excluding privatisation proceeds, will continue to decline as a proportion of national income. But, at the same time, substantial additional funds have been made available for the Government's most important public expenditure priorities. The figures I am about to give all represent increases over the plans in the last public expenditure White Paper.

"First, health. An extra £1¼ billion is being provided for the National Health Service in England in 1989–90, and an extra £1½ billion in the following year. There will be corresponding increases in Scotland, Wales and Northern Ireland. On top of that, health authorities are expected to receive an extra £100 million a year from sales of surplus land. Continuing the rate of cost improvement savings acheived in recent years will produce an extra £150 million in 1989£90 and an extra £300 million the following year. In addition, the Government are accepting the recommendation of the Government Actuary, in a report published today, that NHS employers' superannuation contributions in England and Wales should be reduced, which will save the health service a further £300 million a year.

"In total, the increases for the health service in the UK as a whole will be over £2½ billion in 1989–90 and over £2½ billion in 1990–91. These are by far the largest increases the health service has ever received. Comparing next year with this year, the increase in real resources for the NHS should amount to some 4½ per cent.

"Secondly, roads. An extra £220 million is being provided next year for building and repairing motorways and trunk roads and for strengthening bridges, with a further £250 million the following year.

"Thirdly, housing. Gross provision for public sector housing investment is being increased by around £440 million in 1989–90 and £340 million the following year. But thanks to the success of the Government's right-to-buy policy, this is more than financed by extra receipts.

"Fourthly, law and order. An extra £290 million has been made available in 1989–90 and £430 million in 1990–91, principally for a further expansion in the prison building programme. This will provide a further 3,000 places by 1991–92. Provision for local authority spending on the police has been increased by £240 million.

"Defence spending is to be increased by £150 million in 1989–90 and £600 million in 1990–91. These significant increases are designed to provide a firm framework for the next three years within which our defence programme can be planned with confidence.

"So far as the massive social security budget is concerned, lower unemployment has saved more than £1½ billion in both 1989–90 and 1990–91. But substantial increases in planned spending on other benefits, particularly for the disabled, mean that the social security programme will be only marginally reduced in 1989–90 compared with previous plans, and some £1.7 billion higher in 1990–91.

"On science and technology, we have altered the balance of public support within an increased total. In particular, provision for spending by the Department of Education and Science has been increased by £120 million a year, with the science budget up by 16 per cent. in 1989-90. This reflects the importance the Government attach to basic and strategic research.

"The new plans imply an overall increase of £2¼ billion in public sector capital spending in 1989–90. This includes extra investment in hospitals, housing, prisons and roads. There is provision for higher investment by the nationalised industries including further anti-pollution investment by the water authorities.

"That the Government have been able to strengthen their priority programmes within an unchanged planning total for 1989–90 is, in large measure, a reflection of the success of their policies. The improved performance of the economy has eased pressures on a number of programmes, giving the Government more scope than ever before to shift resources where their own priorities, rather than circumstances, dictate.

"The details of these and other changes are provided in the material in the Vote Office. More details will be published in the printed Autumn Statement next week.

"I turn next 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 statement on benefits which my right honourable friend the Secretary of State for Social Security made on 27th October. The lower earnings limit will be increased next April to £43 a week. in line with the single person's pension, and the upper earnings limit will be raised to £325 a week. The upper limits for the 5 per cent. and 7 per cent. reduced rate bands will also be increased, to £75 a week and £115 a week respectively. The upper limit for the 9 per cent. rate for employers will be raised to £165 a week.

"Over recent years, we have steadily reduced the Treasury supplement; the taxpayer's contribution to the National Insurance Fund. From 18 per cent. in 1979, it now stands at 5 per cent. My right honourable friend and I now propose to carry this policy to its logical conclusion and to abolish the supplement altogether. The necessary legislation will be introduced early in the new Session. However, because of the healthy state of the National Insurance Fund, this discretion will not require any increase in contribution rates. Thus, the main Class I contribution rates will remain unchanged at 9 per cent. for employees and 10.45 per cent. for employers.

"Finally, I turn to the Industry Act forecast. Growth this year looks to be turning out at 4½, per cent., compared with the 3 per cent. growth I forecast at the time of the Budget. Investment is particularly strong, growing twice as fast as consumption, with manufacturing investment expected to show the biggest rise of all, at 18 per cent. Indeed, it is striking that total investment has grown almost twice as fast as total consumption over the whole of the past five years.

"The continuing vigour of the British economy is testimony to the transformation that has taken place in the supply side of the economy; a transformation which has enabled the seven years to 1988 to record a combination of strong and steady growth unmatched since the war. As a result, unemployment has been falling rapidly. Since the middle of 1986 it has fallen by very nearly 1 million—the largest fall on record. Over the past year, unemployment has fallen faster in the UK than in any other major country.

"Inflation, as measured by the retail prices index, is likely to be a little over 6 per cent. in the fourth quarter of this year. Part of the rise in recorded inflation reflects the impact on mortgage payments of the higher interest rates needed to tighten monetary policy and thus get inflation firmly back on a downward trend. Excluding mortgage interest payments, the retail prices index in the fourth quarter is likely to be around 5 per cent. compared with the 4 per cent. rise in the RPI forecast at the time of the Budget.

"Exports have continued to perform well, with manufactured exports up 7½ per cent. over the past year. Over the past seven years, the UK's share of world trade in manufactured goods has remained steady after decades of decline. However, with investment booming, and consumer spending increasing fast, total imports have grown even faster than exports, rising by 13 per cent. in the year to the third quarter. This has led to a substantially greater current account deficit than I forecast at the time of the Budget. For 1988 as a whole, this now looks like turning out at some £13 billion, equivalent to 2¾ per cent. of GDP.

"The stronger than expected economic growth this year means that total tax revenues are likely to exceed the Budget forecast by £3½ billion. Both income tax and VAT have been particularly buoyant. In the Budget, I set a public sector debt repayment—or—PSDR for 1988–89 of £3 billion, equivalent to around ¾ per cent. of GDP. With higher than expected government revenues and lower than expected public expenditure, this year's PSDR now looks likely to turn out at some £10 billion, equivalent to over 2 per cent. of GDP.

"This will be the second successive year of debt repayment, something that has not been achieved since records began in the early 1950s. Moreover, this year, the Budget would still be in surplus, by some £4 billion, even if there were no privatisation proceeds at all. No other major economy has such sound public finances.

"Looking ahead to 1989, the economy is forecast to grow by a further 3 per cent., with domestic demand also up by 3 per cent. Once again, investment is expected to grow considerably faster than consumption, and once again unemployment is expected to fall.

"The slower growth forecast for 1989 inevitably implies a marked deceleration during the course of the year, particularly so far as domestic demand is concerned. Thus, comparing the second half of next year with the second half of this year, overall growth is forecast at 2½ per cent., and growth in domestic demand at only 1½ per cent. The current account deficit is likely to fall only slightly, to some £11 billion, or 2¼ per cent. of GDP.

"Inflation, while it will inevitably continue to edge up for some months to come, is forecast to peak at some point in the middle of next year before falling back again to 5 per cent. by the fourth quarter.

"In short, after two years of unexpectedly rapid expansion, growth next year is forecast to return to a sustainable level, and one which compares well with the economic performance of the '70s; while inflation will resume its downward path. The public finances are in substantial surplus and will remain so, with public spending on priority programmes continuing to increase, while overall public spending continues to fall as a share of GDP to a level in 1991–92 not seen for a quarter of a century. The prospect that lies before us is yet further testimony to the success of the policies we have been pursuing these past 9½ years and will continue to pursue, and to the economic transformation those policies have wrought."

My Lords, that concludes the Statement.

4.7 p.m.

Lord Bruce of Donington

My Lords, the House is indebted to the noble Lord, Lord Young of Graffham, for repeating the Statement made in another place. I must say that in the 10 years that I have had the honour of being in your Lordships' House I have never heard a more remarkable Statement.

One of the most agreeable characteristics of the noble Viscount, Lord Whitelaw, when he was the Leader of your Lordships' House, was his ability to own up to error. Time and again when your Lordships' House has been in some unfortunate impasse, perhaps some misunderstanding between the Front Benches, the noble Viscount came to the House and said in his most disarming manner, "My Lords, I may have made a mistake. In fact, I very often make mistakes". He always sat down to the plaudits of the House and its general approval of his unfailing honesty of expression in that regard.

The noble Lord, Lord Young of Graffham, if he will forgive me. does not suffer from a surfeit of modesty. The noble Lord was, of course, in part tied by the fact that he was reading a Statement made in another place. Perhaps if it had been left to him he would be making some amends for some of the most incredible forecasts made by the Chancellor at the time of his Budget.

The Statement begins with a long recital of proposal expenditure plans, with which I will deal briefly before I sit down. I refer to an incredible omission that makes the Statement most remarkable. It is the complete lack of any Treasury admission of gross error in the forecast that it made at the time of the Budget. We were then told that the current balance of trade would be in deficit for the year in the sum of £4 billion. Some of us took a sharp intake of breath at that. I can well remember the time when the prospect of a deficit on current account of some £300 million filled people with dismay. Even so £4,000 million was the forecast. We now have a Statement which says quite cheerfully and without explanation: "Oh no, it is not going to be £4 billion. It is going to be £13 billion and £11 billion the following year".

Before any reliance is placed on the forecasts that are made most optimistically in the concluding paragraphs of the Statement, read with such relish by the noble Lord, surely the House is entitled to ask on what basis these current forecasts are made. Using the Treasury model with the information available at that time, it is quite inconceivable that the Chancellor of the Exchequer did not know that the forecast of the current account deficit was at the time of the Budget being grossly understated. It is quite inconceivable.

Many of us have computers: I have one myself. There is a saying, "Rubbish in, rubbish out". Quite clearly, at the time of the Budget the noble Lord or his servants must have caused some rubbish to be put in. Perhaps it was a different statement of the unemployment figures that was fed into the model. These have varied from time to time with no distinction being made between those actually unemployed and those claiming benefit. There have been 21 alterations in the figures. Even with a variation of that feed-in, there can be no excuse for a crass error of that kind. As your Lordships will recall, it was made at a time when an unparalleled sum of £2 billion to £3 billion was made available to the top income earners—or top income receivers, I should say—in this country. That probably was the purpose of it.

It will be impossible for your Lordships to overlook the consequences of the Chancellor's forecast of a £13 billion deficit on current account. The endeavour is made to shrug it off as a matter of no consequence. Statements have been made at one time or another that this deficit is easily covered by overseas assets, though one should bear in mind that these have depreciated by some £29 billion since the Stock Exchange crash of October 1987. It presupposes that the owners of those private investments overseas are willing for a charge to he created by the Government in order for them to cover the current account deficit. The noble Lord knows as well as anyone else that these charges are not available.

The question to which the country should address itself, and the question upon which even these expenditure plans announced this afternoon depend, is how long a country can continue to sustain a current account deficit on these lines. I have been waiting for some time and I expect the noble Lord, Lord Aldington, has also, for an apology to be made to him and to his committee for its report having been stigmatised as Marxist. It has proved very much nearer the mark than any forecast that the Chancellor has made. The position remains one of the utmost gravity.

I invite the noble Lord to contemplate what may happen as a result of the American election, whichever candidate is returned, whether it is Mr. Bush or Mr. Dukakis. If the new President of the United States, with his advisers, decides to take the advice offered to him some four monhts ago by the Chancellor of the Exchequer and to reduce the trade deficit, where then will be the prospects of the United Kingdom? The fact of the matter is that this country cannot go on sustaining such deficit.

The noble Lord always has the alibi which has been hinted at again in the Statement this afternoon of overheating: the country is doing so well because the economy is overheating. The imports into this country and the importers' industry are white hot at the present time, with manufactures coming into the country very largely as a result of the Budget earlier in the year. These manufactures are coming in as a result of the concessions to the higher taxpayers. This situation cannot be sustained.

In the meantime the inference is that the overheating, as it is called, applies to the country as a whole. We know perfectly well that it does not. Unemployment in the northern region as a percentage of the workforce (which has recently been enlarged by the noble Lord to include those employed in the Armed Forces) is 12 per cent., whereas in the South-East unemployment is 5.3 per cent. Unemployed claimants per vacancy in the northern region are 14 people unemployed for every vacancy. In the South-East the figure is five. The growth in average male earnings in the northern region is 8.6 per cent. and in the South-East it is 11 per cent. These are some of the figures that go to the root of the whole philosophy behind this Statement.

As regards the expenditure plans, we shall have to examine those in detail. I have had them for only 10 minutes or so and I am quite unable to pass any detailed observations. One thing can be said for certain. In the current age it is an idle boast to claim that the reduction of public expenditure is of itself a good thing, particularly at a time when the infrastructure of this country is in such a shocking state. There is much deprivation among our people. I believe that when the House has had an opportunity to digest this Statement and to analyse it further when the details are available from the Vote Office, it will treat it with the contempt that it deserves.

4.15 p.m.

Lord Banks

My Lords, I join in thanking the noble Lord for repeating the Statement made in another place by the Chancellor of the Exchequer. It seems that government policy is based upon a combination of high interest rates and the restraint of public expenditure. As the Statement explains, public expenditure is continuing to decline as a percentage of national income. It is expected to be less than 40 per cent. in the current year. One of the prongs of this two-pronged policy is in the main high interest rates designed to rein in private expenditure.

I believe it is agreed that the effect of these interest rates is long term to some extent. The other prong is designed to rein in public expenditure.

Is this strategy working and will it work in the future? Is this strategy sufficient to cope with a very high deficit in the balance of payments and at the same time with the rising inflation that we have at the moment? I have some doubts about it when I consider other factors that are involved. There is, for example, the impact of interest rates on rises in pay settlements, there is the credit boom and there are the proceeds of the recent tax cuts, all of which tend to increase private expenditure. If one takes all these factors together, they seem to constitute a recipe for private affluence amid public squalor, to quote Galbraith's phrase.

I wonder too whether the pound can sustain for two or three years a balance of payments deficit as high as it is at present. Exchange rates, as we know, are very important. I imagine the noble Lord will agree that we ought to be seeking stability in those. We are not yet a fully fledged member of the European monetary system. I should like to ask again whether we can be given any indication of when that is likely to occur. We understand that it is the Government's policy that it should occur at some time.

Perhaps I may briefly mention three of the individual items of expenditure referred to in the Statement. First, we welcome the additional expenditure on the health service although we doubt very much whether it will be enough to offset the chronic underfunding that we believe the health service has suffered in recent years. Next, there is the spending on prisons. We believe that to be essential, and we welcome it. We regret that no intention is expressed to abolish the upper limit in regard to employees' contributions to national insurance. We oppose the abolition of the Treasury supplement because it has always seemed to us that in effect if not technically it makes contributors pay for noncontributory benefit.

Finally, I wish to ask the noble Lord how far public expenditure is to decline as a percentage of national income. The Statement says it is intended that it should continue. Are any reasons advanced for this continued reduction? Is there any long-term strategy behind it?

Lord Young of Graffham

My Lords, I am grateful to the noble Lord, Lord Bruce of Donington, for his remarks on the Statement that I have just repeated to your Lordships' House. Perhaps I may say how much I agree with him on two matters. The first concerns the compliments that he paid to my noble friend Lord Whitelaw. I agree with every word that he said about my noble friend. The second concerns the way in which he said that this was an agreeable Statement. Surely no Statement that has been made to your Lordships' House could be more agreeable than the simple fact that £10 billion will now be paid off the national debt. Public expenditure after 22 years comes below 40 per cent. to 39.75 per cent. and over the next four years will decline gradually to 38.75 per cent.

I hope that the noble Lord, Lord Bruce of Donington, was slightly careless with his choice of words. I am sure he did not really mean to say that my right honourable friend the Chancellor of the Exchequer was aware at the time he made the Budget forecast that there were any figures that would imply other than a forecast of £4 billion on balance of payments. I am sure that he did not. Forecasts are simply forecasts, and circumstances can change very rapidly.

One of the other forecasts for which the noble Lord, Lord Bruce of Donington, failed to blame my right honourable friend the Chancellor of the Exchequer was his original supposition that the economy would grow by 3 per cent., instead of which it grew by 4.5 per cent. It was that excessive growth that was the cause of the difficulties that my right honourable friend recently adjusted.

The noble Lord should reread the Statement. He referred to the fact that the Chancellor somehow had given billions back to people at the time of the last Budget. I ask the noble Lord to look at the figures, which are now available. They will show that, instead of receiving total receipts from taxes of £184.9 billion, we are now estimating that there will be £188.6 billion, so that the Chancellor will take £3.7 billion more from the taxpayer than he estimated at the time of the Budget.

The noble Lord spoke also of a reduction in public expenditure. The figures over the planning period go from £167 billion to £191.5 billion. That is no reduction. Indeed, the noble Lord, Lord Banks—I am grateful for his comments—referred to that ill-used phrase "private affluence and public squalor". He was critical of the way in which the Government were not spending money on part of the public sector.

In 1988–89 the health service will receive over £2 billion more and in 1991–92 £1.5 billion more. If one compares next year with this year, the increase in real terms should amount to some 4.5 per cent., the greatest increase ever given. On roads it is £220 million, going to £250 million the following year; on housing it is £340 million, going to £440 million the following year; on law and order it is £290 million, going to £430 million the following year, and on defence it is £150 million. Wherever one looks there is additional expenditure. The great magic of the situation is that the Government have been able to afford extra public expenditure, at the same time reducing it as a percentage of GDP.

The noble Lord, Lord Banks, asked in conclusion how far that process should go. We have yet to get back to those halcyon days when public expenditure was at the point where the noble Lord, Lord Wilson of Rievaulx, took it on in 1964. I for one would like to see it back to that level.

Lord Boyd-Carpenter

My Lords, is my noble friend aware that the noble Lord, Lord Bruce of Donington, was quite right when he said that he had never heard a Statement like this, because he has never heard as good a Statement as this or as encouraging a Statement for the British public as a whole? Is he aware that the Statement makes it clear that Her Majesty's Government, while providing additional funds where they are really needed, have kept an effective grip on public expenditure, a fact that reflects great credit on the Government as a whole and on the Chief Secretary to the Treasury in particular? Is he aware also that many people will be very reassured to see this steady management of public expenditure?

Perhaps my noble friend can add one thing. The Chancellor of the Exchequer recently confirmed, I think, that it remains the policy of the Government to reduce the levels of taxation, particularly direct taxation. In view of the fact that those admirable citizens who have mortgage payments to pay are very much in need of further reductions in their tax demands, can my noble friend indicate without anticipating next year's Budget that it remains the policy of the Government to accept that taxation is still too high and should be reduced by stages?

4.30 p.m.

Lord Young of Graffham

My Lords, I am grateful to my noble friend. I have to confess that my right honourable friend the Chancellor of the Exchequer has not yet confided his Budget secrets to me and nor do I expect him to. However, he has recently confirmed that it remains his intention to reduce personal and direct taxation as and when it is prudent to do so. Inflation must remain the first priority, but happily today we have expenditure totals that enable progress to be made in the reduction of taxation.

Lord Diamond

My Lords, we on these Benches would also like to thank the Secretary of State for repeating the Statement. Its contents are mixed. The main conclusions that I draw from it are, first, that the Government have again shown ample evidence of their inability to guide the economy; and, secondly, that we are faced with a potentially dangerous situation, which no Member of your Lordships' House would wish to exaggerate—the forthcoming rise in the balance of payments deficit. It is one which is at least three times as large as was forecast as recently as six months ago. For that to have happened in that short period is, if I may say this to the noble Lord who spoke for the Labour Party, no evidence of a lack of good faith on the part of the Chancellor or any of his advisers. It is far from that. It is direct evidence that the Government are totally out of control of the economy. When they gave the figure of a balance of payments deficit of £4 billion, they sincerely believed that that would turn out to be the case. It would be highly dangerous at budget time to forecast a balance of payments deficit of £12 billion as a result of Budget policies. We know that. We have all been through it. We know the dangers. I repeat, I do not want to exaggerate the dangers.

I read the Statement with a note of caution. I gather that most of the Statement has been written to try to satisfy confidence in the City and abroad. It is addressed to that audience and not, in particular, to members of the other place.

My other reason for saying that the Government are shown to be unable to guide the economy is the well known one of what happened to unemployment. Did Conservative candidates in the 1979 election say on platform after platform, "You vote for me and I guarantee that we will put unemployment to a figure that has never been thought of in this country's history"? I do not believe that they did. It is far fairer to the Government to say that the rise in unemployment was unintentional. The rise in the balance of payments deficit is unintentional. The rise in the other figures shown here is unintentional. The Government are totally out of control.

The public expenditure figures make it clear that everything we have been told about resources not being available for those issues about which your Lordships' House feels keenly and upon which it has made its decisions in Divisions is a lot of twaddle. The figures show it. The Chancellor is saying it. He is saying that for the coming year he has some £3.25 billion in hand above what was provided for and approved by the other place at the time of the Budget. He now proposes to continue the path of reducing public expenditure as a percentage of national income and, as we can read on every line, the Government are patting themselves happily on the back.

Why do a Conservative government wish continually to reduce public expenditure? The answer is as plain as a pikestaff. They have reduced taxation for the well-to do. They have improved my situation every year I have been sitting on these Benches. I have not asked for that. They have done it. They have done it for hundreds of thousands of people much more prosperous than myself. Why have they done that? Because is helps the well-to-do. Public expenditure helps the not so well-to-do. It is biased in favour of those at the bottom of the scale. All the social services benefit them. So what do the Government do? They reduce taxation to benefit their well-to-do friends. They say that due to that reduction they have no money to help those at the bottom of the scale. That is what I read into this sorry story.

Lord Young of Graffham

My Lords, I am grateful to the noble Lord, Lord Diamond. It occurs to me that his definition of an economy that is out of control may well he accurate when seen from his Benches. That may well be so, because I am not an authority on what the view is like from the noble Lord's Benches. If one goes around the nation or, even better, overseas, and asks other people whether the economy is one that is out of control, then one will receive a different view. Today when we go overseas we can indeed walk tall, because country after country, government after government and company after company recognise that we have had years of firm public expenditure discipline and we are now reaping the benefit.

The noble Lord was a distinguished Chief Secretary in his day. In that day we saw public expenditure rise as a percentage of GDP from 36 per cent. to 42.5 per cent. Those were the days when far from benefiting more became worse off. One only has to go back to the sorry 1960s and 1970s to realise what our standing in the world was and whether that benefited the less fortunate in our society.

The noble Lord says that now we have this surplus and are paying back the national debt we should afford more money. I say that it is only because we are prudent that we can do both. We can reduce the national debt and substantially increase expenditure. If we were not prudent, we might be back in that sorry time 12 years ago when, in today's figures the Government of the day had to go out and find £44 billion from countries around the world in order to keep afloat. From having to borrow £44 billion to paying back £10 billion, is an enormous difference. Thanks to that, and that only, around the country and in other countries, we are not regarded as out of control.

Lord Peston

My Lords, having listened to my noble friend Lord Bruce and the noble Lord, Lord Diamond, it seem is that the Treasury has a choice. It has to accept that it is either meretricious or incompetent. It is up to it to decide which it would rather be.

It is hard to comment upon the document because, for reasons which seem to be increasingly absurd, we received it late. I can see no national security reason why such a State ent could not be available to your Lordships in the morning so that we could discuss it with full knowledge in the afternoon. I hope that the Secretary of Stat will therefore bear with me if I do not show a full knowledge of it.

I should like to ask the Secretary of State about Table 8 which is important. It is the public expenditure in real terms table. The noble Lord has talked about how bouyant everything is. My reading of the DES figure is that it rises from £17.4 billion to £17.5 billion and then stays constant in real terms. That is not my idea of growth. I should like some explanation of that. The health figures are more interesting. I should like an explanation of them, because the 1988–89 outturn is put at £20.5 billion and the 1989–90 outturn is £20.8 billion. That is 0.3 over 20.5 which with my simple ability for doing sums is an increase of approximately 1.5 per cent. That 1.5 per cent. does not seem to me to be a very large real increase. To all people who know about health, 1.5 per cent. will not be a remotely sufficient increase to fund the demands placed on the health service in just that one year. If we then proceed with £21.1 billion and £21.3 billion, we get similar figures of a very low order of magnitude. I find it extraordinarily hard to make the Government's own figures in this document on health correspond at all to the rather optimistic Statement that has just been made. It seems to me that the Government are not finding the real resources to fund the health service in terms of its own stated requirements.

Perhaps I may ask the noble Lord for further clarification. Such real figures are simply the money figures divided by the projected GDP deflator. If the Government are as incompetent on predicting inflation as they have been about everything else, the GDP deflator upturn will be larger as well. In that case, if the Government stick to their proclaimed cash limits, the health service, education and so on will do rather worse.

I apologise to the noble Lord for asking him such detailed questions so rapidly. However, these are the only figures I have and this is the only way in which I can do it. I must ask him whether he can explain how he can say that everything is so good when the actual figures seem to be much less attractive.

Lord Young of Graffham

My Lords, the noble Lord, Lord Peston, will doubtless recall that the number of school leavers will drop substantially over the next few years. I think the number will drop by 30 per cent. by the early 1990s. Therefore the important matter is the expenditure per capita. As we have a declining school population, one would hope that we would spend less money.

Within this budget, the provision for spending by the Department of Education and Science has been increased by £120 million a year, with the science budget up by some 16 per cent. in 1989–90. The Treasury figures are often an arcane art form, if not a science. The survey changes over the period for the National Health Service in England alone show the departmental total going up from £21.7 million in 1988–89 to £23.1 million in 1989–90 and £24.3 million 1990–91. I accept that these figures are different and there is an explanation for them. What I shall do is write to the noble Lord and put a copy of that letter in the Library.

Lord Mason of Barnsley

My Lords, from the Chancellor's point of view I suppose that was a very good Statement that he made to the House. But what of the views of the Secretary of State for Trade and Industry? First, he has admitted that there are bound to be higher interest rates and there is no telling what the limits will be. Secondly, there is bound to be a rise in inflation, I guess beyond mid-1989. Wages and salaries are very much outstripping productivity and it looks as though that will continue. Both those factors are bound to have an adverse effect on investment and manufacturing industry, especially the expansion of manufacturing industry as we lead up to 1992.

The Minister knows quite well as regards jobs that there has been an increase in service jobs but not in manufacturing jobs. We are getting plenty of waiters but not many productive workers. When we take into consideration the balance of payments deficit and the frightening figure of £13 billion that we shall face, we wonder how long this can go on. Is this not the weakness of the Government's case? The Secretary of State is responsible for our trade and the expansion of industry, especially manufacturing industry. Is he not disturbed by some of these trends?

4.45 p.m.

Lord Young of Graffham

My Lords, I am grateful to the noble Lord, Lord Mason. I am sure he would be the first to admit that a waiter is a productive worker. I think that the noble Lord did not mean to imply otherwise. He was concentrating on a specific sector of the wealth creation processes of this country; namely, manufacturing industry. Investment is particularly strong. Over the past five years, investment has been growing twice as fast as consumption. However, manufacturing investment is expected to show the biggest rise of all—18 per cent. That is the strength of these figures.

Far from high interest rates affecting investment, it has been shown over the years that it is inflation that affects them. Because manufacturing companies and industrial companies of all sorts do not know the outturn costs of their investments, that slows them down more than anything else.

The noble Lord also mentioned a deficit in the balance of payments. Nobody will underemphasise the importance of that; it is important. However, at the same time I must point out, without making too much of it, that there is a large overseas balancing item in the first half of 1988 which amounts to some £7 billion. That indicates that there were either unrecorded net credits on the current account or unrecorded net capital inflows, or most likely both. To the extent that it reflects unrecorded net credits—that is, net visible exports or invisible ones—the true current account deficit will be lower than the recorded figure.

It is the nature of these figures that they take some time to refine. I am not placing too much emphasis on this. We must see that we get the current account into balance. But we must point out that at a time when our exports continue to go up, month after month after month, when our share of world trade has stabilised after decades of decline, British industry is competitive again. As Secretary of State for Trade and Industry I believe this is a good Statement.

Earl Russell

My Lords, the noble Lord, Lord Young of Graffham, is perhaps aware that one cannot have something for nothing. He may therefore be prepared to consider the possibility that the restraint in public spending on which he has so much prided himself has not been achieved without a very heavy price from our public services and those who use them.

I should like the noble Lord to consider a view which is quite widespread among those in receipt of public spending, among whom I must declare an interest. These restraints have been achieved by the use of the terms "level funding" and "real terms" in ways which appear to many to be, in the literal and pre-Churchillian sense of that phrase, terminological inexactitudes. The noble Lord may perhaps be aware that the point has been made that many of our public services have survived up until now only by the process of spending reserves, accumulating debts, asset-stripping and deferred maintenance. This is a policy with a limited life expectancy.

I am not simply offering a plea for higher public spending. I am asking the noble Lord to consider the point of view that the level of our spending is incompatible with the level of our commitments. I should like the noble Lord to consider—if he should be convinced by that view—which of those is going to change. Will he decide that the public spending figure is absolute and that therefore some of our services must go? Or will he decide that spending commitments stand and that therefore this spending figure which he is putting before us is incompatible with our commitments? I think he must do one or the other.

Lord Young of Graffham

My Lords, I am grateful to the noble Earl, Lord Russell. However, I fear that I fail to recognise his description of the public services. When I come to your Lordships' House to repeat a Statement which shows that public expenditure will rise from £167 billion to £191½ billion, I wonder where this cutback in public expenditure is. Is it in the health service? During the lifetime of this Government that has seen expenditure rise from £7 billion to £24 billion. Is it in education? Is it in a whole series of areas? I should be grateful if the noble Earl would identify to me precisely those areas of public expenditure which he believes are in terminal decline because of government spending.

Earl Russell

My Lords, is the noble Lord—

The Lord Privy Seal (Lord Belstead)

My Lords, for those of us who have not taken part, this debate is very interesting. If I may say so, the exchanges on each side have been fair and free. My noble friend Lord Young of Graffham does not need anybody to stand between him and those whom he is answering. However, I must remind the House for the second time in two weeks that we have agreed as a House that after a Statement is made—and I know that it was a long one today—a maximum of 20 minutes shall he set aside for the resulting deliberations.

It is a matter for your Lordships' House to decide whether or not we keep to that. I know that the noble Lord, Lord Jay, wishes to contribute. Perhaps I may suggest that we take the noble Lord's intervention and my noble friend's reply and then pass on to the next business.

Lord Jay

My Lords, is the noble Lord aware that at the rate of balance of payments deficit which he announced and forecast today, unless we borrow from overseas our official reserve will last only about three years?

Lord Young of Graffham

My Lords, I should like to see what happens. I could just as well say that on the basis of the present figures, as outlined today, in a matter of 15 years or so there will be no national debt. None of these things proceeds on a straight line. What the Chancellor has said is that he expects the balance of payments figure at £13 billion to be £11 billion the following year. I have little doubt that we shall see it decline, and decline sharply, thereafter.

This is a complex matter. It is complex because no one is totally certain about the method of recording these figures, and it gets confused with capital transfers too. But I hope very much that we shall not find ourselves running out of reserves as we did once upon a time. I hope those days are well and truly behind us.

Lord Molloy

My Lords, I wish to ask the noble Lord the Leader of the House if I may make two very brief points. I have been trying all afternoon to make those points.

Lord Belstead

My Lords, this is a matter for the House. I made a suggestion to your Lordships and I explained why I made that suggestion. May I repeat that I think perhaps the moment has come, with a long day ahead of us, to go on to the next business?