Autumn Statement

HL Deb 06 November 1991 vol 532 cc230-45

3.46 p.m.

Lord Brabazon of Tara

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

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

"Cabinet agreed the Government's expenditure plans this morning, so I am now able to inform the House of the expected public expenditure outturn for this year; the plans for the next three years; our proposals for national insurance contributions in 1992–93; and my forecast of economic prospects for the year ahead. As usual, the main public expenditure figures, with the full text of the economic forecast, will be available from the Vote Office as soon as I sit down. The printed Autumn Statement will be published next Wednesday.

"This year's public expenditure survey has been a difficult one. There is no more challenging task in government than to choose between competing expenditure priorities while keeping public spending as a whole under firm control. But there is also no greater test; and let me at once pay tribute to my right honourable friend the Chief Secretary, who has my shown great skill and judgment in bringing the survey to a successful conclusion.

"Firm control of public spending has been and will remain a key element in this Government's economic policy. From its peak in the early 1980s, we have reduced the ratio of public spending to national income by over five percentage points. This has been achieved by reducing the size of government; by a rigorous search for greater efficiency and value for money; and by prudent management of the public finances which has led to a large saving in debt interest. Over the past decade, this careful and responsible approach has enabled us not only to cut tax rates and reduce public borrowing but also to make substantial and well-targeted spending increases in areas of priority; and it is this approach that will continue to underlie the Government's expenditure plans over the years ahead.

"The prospect now is for renewed economic growth. But the recession has inevitably added to the pressures on public spending both this year and next. I expect public expenditure within the planning total to be almost £205 billion in the current fiscal year, slightly below the revised level I set in the Budget. An increase in programme spending, largely the result of weaker activity, will be offset by additional privatisation proceeds.

"After four successive years of debt repayment, I math clear in the Budget that we would see a return to public sector borrowing this year. I now expect a PSBR in 1991–92 of £10½ billion, about 1¾ per cent. of GDP. Our fiscal position compares well with other Community countries. It remains the Government's policy to balance the budget over the economic cycle.

"Last year we made provision for substantial increases in expenditure over the next few years. So our objective in this year's survey has emphatically not been to make significant across the board additions to existing plans. But I have judged it right lo allow expenditure to rise to meet the unavoidable consequences of weaker economic activity. Our priority has been to meet in full our commitments to the most vulnerable members of society; to maintain the expenditure programmes which contribute most to the long-term strength of the economy; and to improve the quality of public services.

"For next year the planning total has been set at £226.6 billion, some £5.5 billion above the figure published in the FSBR. The planning totals in the two following years have been set at £244.5 billion and £258 billion respectively. The planning total for 1992–93 assumes privatisation proceeds of £8 billion, the same level as we now expect in the current year. For the two following years the level assumed is £5.5 billion, the same as in last year's plans. The new plans also include reserves of £4 billion, £8 billion and £12 billion respectively. These are higher than the corresponding figures in last year's plans but by no more than I judge prudent and realistic. I am determined to contain pressures next year within the reserve.

"Let me now turn to the individual spending programmes: first, health. Once again we have provided for substantial improvements to patient care. Planned NHS spending in the UK in 1992–93 has been increased by £1.5 billion. Additional capital expenditure will enable the health service to make faster progress in upgrading buildings and equipment. Total NHS spending in England will rise by 4.2 per cent. in real terms between this year and next and spending on hospital and community health services will rise by a full 5 per cent.

"These latest increases will bring the total real increase in NHS spending since 1978–79 to well over 50 per cent. In England alone this has funded an increase of 1½ million acute in-patient and day cases a year, with 16,000 more doctors and dentists, 51,000 more nurses and 500 major capital schemes completed. At a time when tough decisions have been necessary across the range of public expenditure programmes we could not have made our commitment to the NHS more clear.

"The investment programmes of British Rail and London Transport amount to more than £2.5 billion next year and will contribute substantially to the efficiency and competitiveness of the economy. But their income from passengers and asset sales has been adversely affected by weak trading conditions. We have therefore provided for increases in finance of over £1.4 billion in 1992–93 to support that investment. Public transport has rightly taken priority within the transport programme and provision for expenditure on roads has been held to its planned level.

"Social security represents over a quarter of all public spending. We have added £4¼ billion to plans in 1992–93. This reflects both higher unemployment and increased take-up of other benefits. In addition to full indexation of benefits, the new plans allow for higher rates of income related benefits for disabled pensioners and those over 80, the Budget increase in child benefit and the two new benefits for disabled people which come into operation next April.

"The July local authority grant settlement made provision for an extra £1.4 billion of central government funding next year to maintain the new balance between local and central funding of local services that I announced in the Budget. The Government are determined that this generous level of support should not be used to fund massive extra spending at the expense of local taxpayers. My right honourable friend the Environment Secretary has made clear that he will be prepared if necessary to make full use of his recently extended powers to cap local authority budgets.

"Approaching half of local authorities' revenue spending is on education. So the settlement should allow for a substantial increase in current spending on schools. Provision for capital work on all maintained schools next year will increase in real terms by 10 per cent. Taken together with lower construction costs, this will allow for a significant increase in school building work.

"Public funding for universities and polytechnics will rise by 4.6 per cent. in real terms next year. This will help finance a further increase in student numbers, enabling one in four of our young people to enter higher education next year compared to one in eight in 1979. By the end of the decade it should be one in three—a remarkable achievement. The proportion of students completing their courses in Britain is one of the highest in the industrialised world, a testimony to the quality of our higher education institutions.

"The science budget, which pays for basic and strategic science carried out by the research councils, will rise by around 3 per cent. in real terms between this year and next. By 1994–95 it will be over 7 per cent. higher than it is now.

"We have made additions of nearly £½ billion to employment spending in Great Britain next year. Overall, publicly funded expenditure on training, enterprise and vocational education will be two and a half times as high in real terms as in 1978–79.

"The plans for defence include an increase of £830 million in 1992–93. They provide for the continuing costs of the Gulf conflict, in particular the replacement of ammunition and equipment. They also meet the transitional costs—redundancy payments and works—needed to implement the new force structure and to secure longer term savings. Full details of the new plans for other programmes are being made available separately.

"We recognise that we cannot expect the private sector to control its costs if the Government do not do the same. So the plans we have made assume further improvements in efficiency and firm downward pressures on pay and other costs across the public sector. That underlies the tight settlements we have made both on programmes and on running costs.

"Reflecting the economic cycle, I expect public spending as a proportion of GDP to rise slightly in 1992–93 before resuming its downward trend. Even at its peak the ratio of public expenditure to national income will be significantly lower than the levels that had to be financed following earlier recessions. That is good news for tax payers present and future and good news for the economy. It is a testimony to this Government's prudent and disciplined approach to the public finances over the last 12 years.

"I now turn to national insurance contributions. As usual, the review this year has taken account of advice from the Government Actuary on the income and expenditure of the National Insurance Fund and of the decisions on benefit rates set out by my right honourable friend the Secretary of State in his statement to the House on 21st October.

"The lower earnings limit at which national insurance contributions begin will rise by £2 a week to £54 in April, while the upper earnings limit for employees' contributions will go up by £15 a week to £405. The contribution rates for both employers and employees will remain the same, and the profits-related contribution rate for the self-employed will also be unchanged.

"Let me now turn to my economic forecast for 1992, which is published today. Developments since the Budget have broadly confirmed the forecast I made in March. Over the past year we have made dramatic progress on inflation. RPI inflation has more than halved, from nearly 11 per cent. a year ago to around 4 per cent. in September. Measures of underlying inflation have fallen too, though less sharply. RPI inflation, excluding mortgage interest payments, is down from 9½ to 5¾ per cent. Producer price inflation, excluding food, drink and tobacco, is down from 6½ per cent. to 4¾ per cent.

"Also encouraging is the evidence of much greater realism in wage settlements. Average earnings growth has fallen from a peak of over 10 per cent. to 7¾ per cent. in August, and those figures almost certainly understate the speed of the turnaround. According to the CBI, settlements in manufacturing industry averaged 5½ per cent. in the third quarter, the lowest figure since the summer of 1987. Unit labour costs in manufacturing have actually fallen over the past three months. All this augurs well for the future and suggests that the British labour market has benefited substantially from our trade union and supply side reforms.

"As special factors drop out of the calculation of the RPI, inflation as measured by the RPI may rise slightly early next year, but it is forecast to fall back to 4 per cent. in the fourth quarter. Underlying inflation will continue to fall. Producer price inflation, excluding food, drink and tobacco, is expected to be 3½ per cent. at the end of 1992, the lowest figure since the 1960s. The increase in the GDP deflator, the widest measure of inflation in the economy, is also expected to fall next year.

"I have never wavered from the view that the defeat of inflation is a necessary condition for economic success. The best performing economies are low inflation economies. Our objective is to match those economies, or better them. Our achievements on inflation are essential steps along the way.

"To achieve that objective we have followed a prudent and cautious monetary policy, whose credibility has been underscored by our firm commitment to the ERM. The success that we have achieved on inflation has allowed me to cut interest rates without jeopardising sterling's position in the ERM. Interest rates have fallen 4½ per cent. since last October, and are now below the average of the past 12 years. Our interest rate differential with Germany is at its lowest for 10 years.

"As inflation and interest rates have fallen it has become increasingly clear that we are emerging from recession. Consumer spending fell in the year to the second quarter of this year, but has been rising slowly in recent months. Service sector output seems to have stabilised in the second quarter and manufacturing output may also now be picking up, though again slowly.

"The monthly rate of increase in unemployment peaked in March and is likely to moderate further in the next few months as recovery gets under way. Consumer confidence has increased throughout this year as mortgage rates and inflation have come down, and is likely to go on rising as the fear of unemployment begins to abate. I expect to see personal consumption rise by 2½ per cent. in 1992, providing impetus to the recovery.

"As I forecast in the Budget, output is likely to fall by about 2 per cent. this year. But this fall is now behind us; the economy may already have started to pick up. I expect GDP to rise ¾ per cent. in this half year.

"With consumer spending expected to go on rising, an end to the business investment recession in sight, and the run down in stocks likely to slow, I expect GDP to rise by 2¼ per cent. next year. Growth will gather pace through the year. The increase in output from the second half of this year to the second half of next is expected to be 2¾ per cent.

"The performance of our exporters this year has been remarkable. Our exports of manufactures have shown renewed vigour; up 5 per cent. in volume terms over the past year. Our volume share of world trade in manufactures looks as though it may rise again in 1991, for the third year running.

"The current account deficit in the first nine months of this year was under £5 billion. For the year as a whole, we are on track for a deficit of about £6½ billion, or 1 per cent. of GDP; half the size of the deficit in 1990 and closely in line with my Budget forecast.

"Some rise in the current account deficit is to be expected at this stage of the cycle, though I expect the rise to be moderated by a continued good performance on exports. The current account deficit is forecast to be £9½ billion, or 1½ per cent. of GDP, in 1992. With prudent financial policies in place I foresee no difficulty in financing it.

"Turning to companies, business investment has fallen over the past year. That is never welcome. But it must be set in the context of the boom in the late 1980s. Investment rose by 45 per cent. in the three years to 1989 and was at a record level in the first half of 1990. Even now, after the fall over the past year, business investment is nearly 40 per cent. higher than in the first half of 1979. And the share of the country's resources going into investment remains higher than at any point in the 1970s.

"Investment usually lags the cycle in total activity. But it is likely to rise from about the middle of next year as profitability recovers, company finances improve and the general pick up in activity gathers pace.

"The past few months have seen a surge in business optimism in nearly every sector, nearly every region; in businesses large and small. The October CBI survey was just the latest, but the most authoritative, of a whole succession of recent surveys to confirm that. Business confidence is at its highest level for three years. Output expectations are up, investment expectations have improved and export optimism is rising. That gives powerful support to our view of the recovery.

"Mr. Speaker, the spending plans I have announced not only honour our commitments in full; they also provide substantial additional resources for health, public transport, and education. Once again we have demonstrated that there is no inconsistency between prudent fiscal and monetary policies and high quality, well-funded public services.

"These are the policies that have allowed us to reduce inflation and to cut interest rates. They are the policies that have enabled us to increase spending on the health service by over half since 1978–79, to help the most vulnerable, and to invest in the young people who are Britain's future. And they are the policies which are leading Britain to a sustained, non-inflationary recovery. I commend them to the House".

My Lords, that concludes the Statement.

4.5 p.m.

Lord Peston

My Lords, I thank the noble Lord for reading the Statement of his right honourable friend the Chancellor of the Exchequer. I understand that parts of the Statement have been leaked, but I do not see any reason to fuss about that. Indeed, it would be more desirable for the whole document to be published a day or so earlier so that we could respond to it in a more prepared fashion. For years I have also held the view that we should publish our expenditure and tax plans at the same time. That is a view which is gaining increasing support across the party spectrum. It is absurd that today we consider expenditure and then we have to wait until March or April before we can consider how it is going to be paid for. Households which did their budgeting in that way would be regarded as profligate. It is about time that governments—I do not simply mean this Government—approached their budgeting in a more rational way.

As regards the expenditure plans themselves, we have the usual problem of interpreting the Government's words and actions. On the one hand, their ideological doctrine causes them to say that public expenditure is a bad thing. On the other hand, and for obvious reasons which are not entirely independent of the date of the general election, the Government boast about expenditure increases. In that connection there is no bigger contradiction in the present Statement than that shown between their expenditure plans and the promises made by, among others, the Prime Minister himself, of tax cuts and the commitment to a balanced budget, albeit over the cycle.

If their tax cut pledge is to be taken seriously either the Government's expenditure plans will be reversed in the unlikely event of them being returned to power, or we shall be on course for yet another deficit financed inflationary boost generated by the Government to be followed by a recession similar to the one that we have recently experienced or, in fact, which we are continuing to experience.

I now turn to the detail, to ask some questions and comment about it as well as I can. I start with the public sector borrowing requirement for 1991–92. Can the noble Lord confirm that the figure he mentioned is net of privatisation proceeds? I may have missed it somewhere in the Statement, but am I right in saying that there is no statement about public sector borrowing for the fiscal year 1992–93? I have read through the Statement and listened as carefully as I can, but I cannot find any statement about the expected public sector borrowing in that year. If that is the case, then my remarks about irrational budgeting and profligacy hold a fortiori because one of the most important factors which this Government have emphasised is that we should know what are the borrowing consequences of our actions. I ask the Minister whether there is a statement somewhere that I have missed as regards the public sector borrowing requirement for 1992–93.

There is a reference to the national insurance contributions. Again, I may have missed it, but I have not noticed anything about the expected level of unemployment which the Government expect in the coming year. Essentially, public expenditure will depend to a very large extent on the level of unemployment and how much will be paid out in benefits. Can the noble Lord tell us what the Government actuary is assuming about unemployment in the next fiscal year? Is he assuming that there will be unemployment of about 2.5 million? If that is the case, is the noble Lord aware that the direct public expenditure cost of the extra unemployment is around £3 million? There is also a loss of tax receipts of roughly £1.5 billion. In other words, without unemployment, is the noble Lord aware that our fiscal position would be very much better than it is?

May I also ask the noble Lord whether he wishes that this Government had copied the proposal of the Labour Party to get rid of the income limit for National Insurance contributions? That would bring in quite a large amount of additional revenue which would help the public sector borrowing to a considerable extent.

I should now like to ask a question about the figures on the NHS. I found what was said by the noble Lord's right honourable friend very difficult to understand or believe. In paragraph 15 of the Statement he says that the total real increase in NHS spending over the past 12 years or so has been over 50 per cent. Is the noble Lord aware that if he looks in the CSO's Blue Book, which gives constant price figures for NHS spending, the increase is nowhere near that figure. I assume that what he is claiming by 50 per cent. is the money deflated by the RPI. Everyone knows that that is the incorrect deflator to get to real terms. The figure in the Blue Book is a good deal less than half that. Is the noble Lord aware therefore that his right honourable friend the Chancellor is rather misleading people in quoting the figure of 50 per cent.? It is a very serious point. One asks a similar question about how the planned increase of £1.5 billion is meant to be interpreted. Is it an actual increase which should be deflated by the prices and costs that the NHS faces? Or is it merely going to be deflated by the RPI, which next year will be unusually—regretfully unusually—low?

I now turn to schools and the figure of £1.4 billion, quoted in paragraph 18 of the Statement. Does that figure include the likely cost of the settlement that the school teachers' pay review body will be recommending to the Government in the coming year? Is the Minister aware that if the settlement is at all generous—in other words, if it leads to school teachers being paid anything like what they deserve—an enormous fraction of that £1.4 billion will be used up just for that purpose? There will be virtually nothing left over for any real increase.

I turn next to public funding for universities and polytechnics. I declare my usual interest in that I still have a modicum of income arising from that source. May I inquire whether the figure of 4.6 per cent. increase in real terms for higher education includes anything that will get university professors' salaries back to something like the level at which they should be? I should perhaps add that the pay of junior staff is also dear to my heart. Has any sum been allowed for that?

Why are the figures for defence not quoted in real terms? Why are they just in money terms? Noble Lords will be aware that real terms expenditure on defence actually peaked some six or seven years ago. One of the oddities is that the row about defence cuts seems to be taking place now. Defence cuts have been pursued by this Government for the past five or six years in real terms. Is that figure meant to be a real terms figure or a nominal terms figure?

Turning to the economy generally, I was going to attack the Government in terms of their forecasting. Then I looked up my own forecasts at this time last year and found that mine were at least as erroneous as the Government's. I have therefore decided not to attack the Government for forecasting errors. However, I have two or three questions. First, how confident are the Government about the alleged rate of growth of the economy next year? Their figures seem rather at the optimistic end of the spectrum compared with those of the average forecaster or indeed most forecasters. Will the noble Lord tell us anything about that? It looks ultra-optimistic to me. I notice that the noble Lord says in paragraph 41 that a rise in current account deficit is to be expected at this stage of the cycle. Will the noble Lord tell us why an increase is to be expected? Surely if we have export-led growth a decrease in the current account deficit would be expected.

Next, I should like to ask about business optimism and take the opportunity of congratulating the noble Lord's right honourable friend the Chancellor of the Exchequer for the one original contribution he has made to economics in his life. He has invented the concept—which I am sure the rest of us will use from now on—of seasonal adjusted optimism. I am already thinking of setting an exam question on, "What is seasonal adjusted optimism, and what use is it in analysing economic policy?" However, there is a serious point here. Has the noble Lord noticed a very definite difference between the response of businessmen when asked about their expectations—I agree that the CBI survey shows that businessmen are more optimistic—and their response when asked about what is going on at the moment? It is an extraordinary contrast. All their answers remain deeply pessimistic. That is one reason why I think the Government ought not to be too confident that the upturn is yet taking place.

Noble Lords may not be aware that in the Statement there are words that are not read out, namely, the sub-headings. The last sub-heading is "Peroration". I therefore come to my peroration, which is very short and very simple. The whole Statement is a complete irrelevance because there will be a different government sitting on those Benches by the time these expenditure plans come to force. There will be quite different plans for expenditure, taxation and economic policy and those will be the ones that influence the economy in years to come.

Lord Ezra

My Lords, I, too, thank the noble Lord for reading the Statement. I am at one with the noble Lord, Lord Peston, in saying that our rather exceptional practice in this country of considering expenditure estimates six months in advance of revenue estimates makes it very difficult to reach a considered judgment. I hope very much that any future government will take that advice on board and that we shall be able to see the whole thing in the round.

What is particularly difficult for us to see and to give a judgment upon is what will be the impact of the Government's plans on the PSBR? The PSBR is a crucial figure. From that will result the ways in which the Government intend to raise revenue to keep government borrowing under control. The Government have estimated that the PSBR for this year will be just over £10 billion. There are external independent estimates that the PSBR for next year, on the forecast of the Government's expenditures—which have now been revealed to us—could be as much as £20 billion. I do not know whether the noble Lord can tell us whether that is anywhere near the truth or not. If it is, what impact would that have on their revenue plans? How would they raise this very large amount of additional money to meet these expenditure estimates?

As to the expenditure estimates themselves, I welcome the fact that the Government have recognised that the impact of recession has been that there has to be more public expenditure. They have chosen the three sectors in which we have all been emphasising that additional expenditure is required, namely, health, transport and education. The real problem is whether these levels of expenditure can be sustained in the future.

Here I come to the forecasts. I did not join the noble Lord, Lord Peston, in making any forecasts about what the growth might be for this year. However, I recall that in last year's Autumn Statement the Government forecast that the growth for 1991 would be up by 0.5 per cent. It is perfectly true that in the subsequent budget some six months later they estimated that it would be minus 2 per cent., which is more or less what it has turned out to be. However, as expenditure estimates are based on the forecast contained in the expenditure statement it raises the whole question of the validity of these estimates.

For the year 1992–93 the Government have estimated that the growth will be 2.25 per cent. I agree with the noble Lord, Lord Peston, that that seems a little on the high side judged by a number of independent estimates which consider that it might be somewhat below 2 per cent. If it were to turn out to be somewhat below 2 per cent., what impact would that have on the Government's plans? Notoriously, these autumn forecasts turn out to be wrong and are corrected in the Budget Statement. However, we are by then committed to the expenditures. That makes the whole exercise a little difficult. I should like to raise the whole question of the validity of the forward estimates. If they turn out to be over optimistic, how can the expenditure estimates be corrected; or will that in turn mean that new and additional revenue sources will have to be looked for?

Lord Brabazon of Tara

My Lords, I am grateful to the noble Lords, Lord Peston and Lord Ezra, for their reception of my right honourable friend's Statement. Both noble Lords asked a number of reasonably detailed questions to which I shall do my best to reply. The noble Lord, Lord Peston, started by saying that the Government had an ideological difficulty with a Statement such as this in that it sets out an increase in public expenditure as against our aim of reducing public expenditure. We have always found room for increases in public expenditure in the sectors which we believe to be most important. Those sectors are again today benefiting from those increases. I refer to health, transport and education. We have no difficulty with that.

As the Statement makes clear, our aim is to have a balanced budget over the cycle. We have had a few years recently when we have made substantial public sector debt repayment. Now we are looking for a public sector borrowing requirement in the next few years. In the past few years we have managed to make substantial tax cuts at the same time as having paid back debt and having made substantial increases in investment in the sectors which I have outlined. That is a very satisfactory situation.

The noble Lords, Lord Peston and Lord Ezra, referred to the public sector borrowing requirement for this year and for next year. For this year, 1991–92, the figures are net of privatisation proceeds. If that was not made clear in the Statement, I apologise. As usual we do not make a forecast for the PSBR in 1992–93 in the Autumn Statement. It is normally done and will be done again in the FSBR in 1992. The noble Lord, Lord Ezra, asked about the impact on spending of the 1992–93 PSBR. The Autumn Statement does not forecast the 1993 PSBR. We will have to wait for the Budget Statement next year. The working assumption made for PSBR in 1992–93—of 3 per cent. of GDP—is purely illustrative. It is based on standard tax assumptions and new public expenditure plans.

The noble Lord, Lord Peston, asked about the increase in health spending and how that was calculated. The real increase in health spending is calculated, as the CSO estimates, by the GDP deflator. The noble Lord also asked about the forecast for unemployment. We do not make forecasts for unemployment. It is impossible to be precise. The estimates give effect to an additional £45 million of expenditure in this area. The assumption for 1991–92 of 2.35 million for Great Britain is not a forecast but merely an assumption for planning purposes. That is the standard way of dealing with the matter.

The noble Lord, Lord Peston, referred to the upper limit of National Insurance contributions and advised me to follow the Labour Party's proposals. I have to disappoint him and say that we do not intend to increase the upper earnings limit. It is the maximum permitted by statute, which is seven and a half times the lower expenditure earnings limit. Abolishing the upper limit would increase NICs paid by more than 3 million employees and would add to SERPS entitlement for those earning above present UEL and so increase future public expenditure on SERPS.

The noble Lord asked whether defence expenditure is to be increased in real terms. After allowing for Gulf related and redundancy costs there will be an underlying fall of 6 per cent. in defence spending during the survey period. The noble Lord asked how confident I was in the growth forecast for 1992 and wondered whether it was not too optimistic. The forecast is only ever a central estimate but events since the Budget confirm that forecast. We have every reason to believe that this one is just as soundly based.

The noble Lord criticised the use of the word "confidence". I would say that the business community itself repeatedly says that confidence is the key ingredient to recovery. But it is not only that which gives us evidence that the recovery is under way. Retail sales, manufacturing output, export volumes and car registrations are all higher in the latest three months compared with the previous three months and imports of capital goods and raw materials are rising. That answers the noble Lord's question about the balance of payments forecast. At this stage of the cycle, where there is expectation of recovery, there is the likelihood of some growth in imports—hence some worsening of the balance of payments despite the additional strength of exports to which the Statement referred. The forecasts, as always, are our best estimates. No forecast is perfect, but we always publish errors made in past forecasts.

The noble Lord, Lord Peston, asked about school teachers' pay. So far as I am aware, the figures I have given include estimates for pay. If I am not right on that I shall certainly come back to the noble Lord. Whether that includes a figure for professors' salaries, which would suit the noble Lord and to which he would look forward, I cannot answer because I do not know what the noble Lord would like to receive. I hope that I have responded to most of the points raised.

4.29 p.m.

Lord Boyd-Carpenter

My Lords, I thank my noble friend for reading this immensely important Statement. It seemed to me basically a very cheering one. It seemed to express that kind of modest confidence which is the right attitude for the Government to adopt at this moment. I wonder whether my noble friend can indicate how the general outlook as he described it compares with that in certain other countries, especially the major countries of the EC. Does it give an indication of developments which are better or not so good?

I was glad that my noble friend so emphatically rejected the suggestion of the noble Lord, Lord Peston, that the rate of National Insurance contributions on higher earnings should be raised to a higher limit. The limit is already too high and constitutes an additional tax on reasonably high earnings. To move it even further up would be a retrograde measure which I am delighted to see the Government have decided not to adopt.

Finally, can my noble friend say a word about the Government's attitude towards pay claims in the public sector? Some of us believe that, with inflation falling and, on the other hand, the need to maintain strict discipline, pay increases in the public sector should be very limited in amount and that, if exceptions to that proposal are to be made, they should be made on only the strongest possible grounds. Some indication by the Government of their attitude generally to pay demands would be extremely helpful. However, I do not know whether my noble friend can also help your Lordships in that way.

Lord Brabazon of Tara

My Lords, I am most grateful to my noble friend Lord Boyd-Carpenter for his remarks. I too believe, as he said, that it is a cheering Statement. We have seen a continuation of prudent expansion in public expenditure in the key areas where it is necessary, including the National Health Service. It also forecasts modest confidence, as my noble friend said, in the prospect of better times to come.

So far as concerns comparisons with our main competitors, certainly one need only look at the inflation figures to see how closely we are now coming into line with our European partners. In fact, we may even find ourselves shortly with an inflation rate which is below that of Germany. If that happens, I believe that it will be the first time—I stand to be corrected on this if I am wrong—in 25 years. That is not necessarily something to be proud of, but it is at least an indication that we are going in the right direction.

My noble friend is quite right, as I said, about our not wishing to increase the upper earnings limit of national insurance contributions. I know that that is the stated policy of noble Lords opposite. But, in effect, it is an increase in tax. There is no point in pretending that it is anything else. We might as well call it that. Whatever the noble Lord likes to call it, it is an increase in taxation and should be seen by those who earn as being just that. One might as well put it on income tax for all the difference it makes.

As regards pay claims in the public sector, with inflation falling, as my noble friend said, I hope that they will be limited and that they will certainly not be more than what can be afforded by the various enterprises concerned. I also hope that there will always be room for increases in pay related to increases in productivity. That is an incentive which is obviously most welcome. But in general terms, with inflation falling as it is at present, pay claims should—as, indeed, they have in the private sector—become very much lower.

Lord Desai

My Lords, my noble friend Lord Peston has already said that we should have a more rational way of considering expenditure together with revenue estimates, and the noble Lord, Lord Ezra, agreed with him. I believe that one further reform is needed. The way we account for the public sector borrowing requirement lacks some reason. We should have separate treatment of revenue and capital items in our Budget because we frequently mix them up. The treatment of privatisation proceedings has been taken off the PSBR. That has caused the delusion that we have more money than is in fact the case. I welcome the Government's decision to have a balanced budget over the cycle. But one would like to see a balanced budget over the cycle without the addition of the privatisation proceedings, because that only confuses capital and revenue items.

I move on now to the estimates of the forecasts for GDP growth next year. We have already heard the noble Lord's remark that it may be somewhat optimistic. But while it may be optimistic, and assuming that that optimism will be realised, let us add that what is projected is an inadequate rate of growth for an economy recovering from a deep recession. An economy which has a deep recession ought to be recovering at a much higher rate of growth before it catches up with the trend rate of growth, which is about 2.75 per cent. If, out of recession, we can only hope for 2 per cent. or 2.75 per cent., that means that we have not really cured the recession as thoroughly as we would have liked. I wonder whether the noble Lord can enlighten us as to whether there are any other policies up the Government's sleeve that we shall see within the next six months which might accelerate the rate of growth in the economy. I am sure that that would be welcomed.

Lord Brabazon of Tara

My Lords, the noble Lord, Lord Desai, added to what the noble Lords, Lord Peston aid Lord Ezra, said; namely, that this expenditure should be considered at the same time as the Budget. I do not intend to go into that argument because it is not something for discussion today. I am merely trying to bring the good news on the expenditure front to your Lordships. The noble Lord suggested that revenue and capital items in the expenditure process, or indeed in the PSBR if that is the case, should be separated. That argument has been going on for a long time. However, if one is in the red, so to speak—in other words, if there is a public sector borrowing requirement—and one goes along to one's bank manager and asks for an increase in one's overdraft, he does not actually distinguish what you are going to spend it on. One is still spending more than one is earning.

I believe the noble Lord suggested that I said that the GDP growth estimates were on the optimistic side. I do not think I said that. It was a suggestion made by other noble Lords. I do not want the House to think that I said it, because I did not. I do not want there to be any confusion on the matter.

So far as concerns the growth figures, I see no reason for assuming that the estimates we have given are not good ones. Growth should be back to trend by the middle of next year. There should be scope for above-trend growth for a while without impairing progress on inflation. We have to hear in mind the fact that the prime concern is not to allow inflation to rise again.

Lord Stoddart of Swindon

My Lords, I have a few short questions for the Minister. He referred to the return of confidence in industry and indeed he forecast an increase in activity next year. But would he not agree that one of the things industry wants is lower interest rates? As he confirmed earlier today, real interest rates are at a record level. Can the Minister say, first, whether it is the Government's intention to bring interest rates very quickly below their present level? I believe that we are entitled to an answer to that question.

Secondly, is it the Government's intention to give some guidance not only on public sector wages but also on private sector wages and salaries? Would it not be in the Government's interest, if they want to create a consumer boom before the general election, to allow and indeed encourage wages to increase rather more than the retail price index? Then people could perhaps recoup some of the losses which they have incurred during the past two years of disastrous management of this country's economy by the present Government. He should give them some sort of encouragement before the election, but is he going to do so?

Lord Brabazon of Tara

No, my Lords; most certainly not. Of course we should like to see lower interest rates. As I said during Question Time today, we shall reduce interest rates when it is prudent to do so—

Lord Stoddart of Swindon

That was last week!

Lord Brabazon of Tara

My Lords, it is today as well. Interest rates will be maintained at the level which is necessary to keep sterling within its ERM bands and which will enable them to continue to bear down on inflation.

On wages, outside the public sector obviously wages are a matter for private companies and their shareholders. They should not need to pay increases greater than can be justified by increases in productivity or general improvements in the trading affairs of a business. They should certainly not pay more than it is prudent to pay. I would not recommend companies to increase wages more than the RPI in order to engineer some pre-election consumer boom, as the noble Lord suggested. Contrary to some of the policies coming from the Benches opposite, we do not look to the short term, we are considering the long term and looking for increased sustainable growth in the economy. We are not looking for short-term political benefit, as I suspect some of the policies we hear of from the party opposite do.

Lord Donoughue

My Lords, is the Minister aware that the growth rate which he has forecast for the coming year, together with accumulated growth rates—some negative—for the past three years means that the average growth for this country over four years is 1.5 per cent. per annum? That is the most dismal record of growth over any four years since the war. I wonder whether he is satisfied with it.

Would the noble Lord like to correct what he said about taxation? I am sure it was a slip but one which we have heard before. It was that taxation has fallen under this Government. Does he agree that, following the redistribution between direct and indirect tax, the tax burden has risen? The Minister mentioned the unemployment assumptions. Were they not rather low? Is he aware that the unemployment assumptions that he mentioned are about half a million below the average City forecast?

Finally, I should like to take up the point made by the noble Lord, Lord Boyd-Carpenter, when he praised the modest confidence of the document. Perhaps I may recall the comment made by Clement Attlee about one of his ministerial colleagues that he had much to be modest about.

Lord Brabazon of Tara

My Lords, all I can say on growth is that it is true that for about the past year it has not been as high as one would have hoped. However, over the period it has been remarkably good and better than that of many of our competitors. The average growth of GDP from 1979 to 1991 has been 1.7 per cent., whereas in the period of the last Labour Government it was only 1.2 per cent. That is certainly an improvement.

The rate of taxation has fallen. If I said anything other than that, then I correct myself. As everyone knows, income tax has fallen during the period of this Government from 33 per cent. to 25 per cent. VAT went up in the first year or so but there was still a lowering of taxation.

I can add nothing to what I said at the beginning on unemployment figures in answer to the noble Lords, Lord Peston and Lord Ezra. We do not forecast unemployment, the assumptions are made in the figures.