§ 4.13 p.m.
The Earl of Caithness
My Lords, with the leave of the House I shall now repeat the Autumn Statement which is being made in another place by my right honourable friend the Chancellor of the Exchequer. The Statement is as follows: "With permission, Madam Speaker, I should like to make my Autumn Statement. As usual, the main public expenditure figures and the full text of the Industry Act Forecast will be available from the Vote Office as soon as I sit down. The printed Autumn Statement will be published next Wednesday, after which there will be a full debate in this House.
"Following the announcement I made in my Budget, next year the Autumn Statement will be brought together with our proposals for taxation in one annual Budget Statement. This is a long overdue reform. For one final year, however, I shall bow to tradition and leave my Budget proposals until the spring.
"But this Autumn Statement will also be the first occasion on which the Treasury's economic forecast will be presented alongside others. Two weeks ago I announced my intention to establish a new panel of independent forecasters. That will be in operation for next year's Budget. But in the 336 meantime the forecast I am publishing today will include some details of how the Government's own economic forecast compares with the view that other organisations have taken. I am sure this change will be widely welcomed.
"This year's Autumn Statement has been drawn up against a background of continuing recession at home and renewed weakness abroad. Despite exceptionally low interest rates, confidence in the United States remains depressed. Industrial production has fallen sharply in Japan. And the countries of continental Europe face the prospect of continuing high interest rates and a marked slowdown in Germany. It is not surprising, therefore, that here in Britain the recovery that nearly all forecasters expected at the time of the Budget has still not become established.
"There has been an encouraging increase in retail sales. But the housing market remains depressed and confidence has taken a severe blow from the turmoil in the foreign exchange markets that led to sterling's suspension from the ERM.
"Against this difficult background a strategy that brings renewed confidence and a return to growth is more essential than ever. But the Government have no intention of engineering a short-lived boom that would lead swiftly to higher inflation and higher interest rates. Our objective is sustainable, long-term growth. And our strategy to achieve that is based on three principles.
"First, with the pound floating, a completely new framework is required for monetary policy. Interest rates are now set according to British monetary conditions—to meet the target I have established for inflation. Underlying inflation will be kept within the range of 1 to 4 per cent; and our aim is to get it down to the lower half of that range by the end of this Parliament. Low inflation is the key to sustainable growth and a lasting reduction in unemployment.
"I have set out clearly the indicators that will guide my assessment of how far we are on track to meet our inflation objectives. The exchange rate, asset prices and the growth of MO are all taken into account. And today I can announce the monitoring range I intend to use for the broad measure of money, M4. For the second half of this financial year that range will be 4 to 8 per cent.
"As I have explained to the House before, in the last few months of our ERM membership monetary policy was tighter than was needed to deliver our inflation objectives. It is crucial that monetary policy should not be so lax that the private sector faces higher inflation. But nor should it be so tight that money demand is inadequate.
"Outside the ERM I have been able to rebalance policy by cutting two percentage points off interest rates. This in itself will provide a significant boost to the economy without re-igniting inflation. Despite the fall in the exchange rate I expect underlying inflation to be below 4 per cent. by the end of next year. And in common with most 337 economic forecasters I expect GDP to rise next year by about 1 per cent. following a fall of a similar magnitude in 1992.
"My second principle is that there must be an appropriate balance between fiscal and monetary policy. Above all, public spending must be kept under firm control. The Government therefore put in place last July a clear medium-term strategy for the control of public spending designed to ensure that public expenditure declines as a share of GDP over time. The new system is based on a top-down approach. Clear and affordable limits are set for the total level of public expenditure and the Government can then settle their priorities through a process of collective discussion involving first a new Cabinet Committee and then the full Cabinet itself.
"The third key principle of the Government's strategy is that the best way to increase the long run growth rate in the economy is to make markets work better. So we will be pressing ahead with our policies on privatisation, deregulation, cutting out waste and keeping the tax burden on companies and individuals as low as we can. We must also fight for the interests of British business in world markets and provide them with the best environ-ment in which they can compete and succeed. And in the short term that means securing a successful outcome to the GATT round.
"Low inflation, tight control of public spending, open markets, competition and a vigorous supply side policy—these are the principles of the Government's strategy and they provide the right framework for economic growth. I do not believe that governments can spend their way out of recession. It is individuals and companies in the private sector that are the engine of economic growth.
"But, that does not mean that once the right economic framework is in place, the Government's task is complete. The Government too are investing for the future, in the nation's infrastructure and the development of human capital. And, as I said in my Mansion House speech, the Government have also been looking at specific policies to ease the path to recovery. I shall be announcing later in my Statement, a series of measures to rebuild confidence, to help industry and strengthen the economy.
"Taking account of these measures, I expect the PSBR in the current year to rise to around £37 billion. Of course that is high, but borrowing is bound to rise in a recession; and it would be damaging to seek to prevent it from doing so. As the economy recovers it is absolutely vital that borrowing is brought back towards balance. We have made an excellent start today with a tight overall settlement for public spending.
"Much of the recent increase in the PSBR reflects the rapid growth in expenditure on social security benefits, and this has also damaged the financial position of the National Insurance Fund.
"In normal circumstances, it would have been necessary to raise national insurance contributions, 338 to reduce that shortfall. But, given the current weakness of the economy, I do not believe this would have been appropriate.
"Accordingly, while the upper and lower earnings limits and the thresholds of the bands for the employers' contribution will be indexed as usual, the rates for national insurance contributions will remain unchanged. And I have agreed with my right honourable friend the Secretary of State for Social Security that the fund should receive a Treasury grant to make up the shortfall.
"Madam Speaker, let me now turn to the Government's public spending plans.
"In this Survey, the priority was clear. It was vital to put the needs of the economy first. So within a tight overall settlement, we have sought, wherever possible, to protect programmes, especially capital programmes, that will promote recovery and Britain's longer-term prospects.
"At current levels of borrowing, the amount we have to pay in debt interest is rising rapidly, diverting billions of pounds a year away from spending on services. Against that background, the Cabinet decided in July to set a remit for the public spending round which would keep expenditure under firm control.
"That remit had two elements. For next year, we set ourselves the objective of sticking to existing cash plans. And, for the three survey years as a whole, our aim was to hold the growth of the New Control Total down to 1½ per cent. or less, to keep the overall growth in public spending to a rate below that of the economy as a whole.
"Although our target for next year of £244.5 billion allowed a real increase of 4½ per cent., the pressures for more spending have been intense. And we have had to consider carefully whether the original targets were achievable.
"But I can now announce to the House that we have indeed hit our target. The planning total for next year will be £244.5 billion. As a result of certain definitional changes, I should warn the House that the number which actually appears in the printed document will be slightly different. It will, in fact, be £2 billion lower.
"I can also announce that the new totals for 1994–95 and 1995–96 are fully consistent with the remit agreed in July. Despite the pressures that have emerged since the summer, the real growth in the NCT over the next three years will average just under l½per cent. a year, half the rate of growth over the last three years.
"I am sure that honourable and right honourable Members on this side of the House will welcome the meeting of the remit; and let me at once pay tribute to my right honourable friend the Chief Secretary for his skill, perseverance and hard work in making this possible.
"Madam Speaker, to meet our objectives we have had to look very carefully at every single programme and particularly at current spending. The biggest single budget is of course social security. Indexing the social security benefits in the coming year would cost £2½ billion. And if we are 339 to protect capital spending it is to areas of current spending such as social security that we must look first. But, I can now tell the House that despite the many claims on the available resources the Government have been able to meet in full their commitment to index pensions and other benefits.
"The other major claim on current public spending is public sector pay.
"The earnings of public sector staff have risen on average by 20 per cent. over the last two years—compared with just 13 per cent. in the private sector. But if the gains in competitiveness from the recent fall in the exchange rate are not to be lost it is vital that all employers keep tight control over their paybills. The public sector cannot be sheltered from the difficulties faced by the private sector, where pay awards are now the lowest in a generation.
"I have therefore decided that in the coming year pay settlements in the public sector should be restricted to a maximum of 1½ per cent. This is of course consistent with a lower growth in paybills. The aim must be to keep the growth in paybills in each area of the public sector as low as possible.
"The restriction will apply to the whole of the public sector and related bodies without exception, regardless of whether pay is negotiated, recom-mended by the review bodies or subject to formula calculations. It will apply to all offers made from today, though formal offers already made will be honoured. The Government will in due course bring forward a resolution on MPs' pay, consistent with this policy. Ministers will receive no increase at all.
"Given the overall objective of restraining the growth in public spending, this Survey has involved some difficult decisions. If some items are to be increased, it means that others must be cut back.
"Our tough decisions about public sector pay will lead to savings of £1.5 billion a year. That will permit higher levels of service to the public and higher capital programmes.
"Nonetheless, in some programmes we have made reductions in the baselines set out last year. But in many cases, expenditure still remains on a rising trend.
"What is more, the progress we have made on inflation will help to ensure that reductions in baselines are consistent with continuing improve-ments in public services.
"Even so, individual programmes have faced searching scrutiny and hard choices have been made.
"Over the next few years, defence expenditure will continue to fall in real terms. The benefits of the Options for Change Review will be secured and some further savings, consistent with the policies which underlie it, will be made.
"The legal aid budget is a demand-led programme that has been putting immense pressure on the public finances. The Lord Chancellor is announcing changes to restrict its growth, and they are fully reflected in the Survey.
340 "And at a time when tight control over public expenditure is needed at the national level, the same discipline should be applied locally. Central government support for local authority revenue expenditure in England will therefore rise by 3.7 per cent. next year, and total standard spending by 3.1 per cent. In addition, there will be a special grant of £539 million in England to help local authorities meet their new responsibilities for community care.
"This settlement should be fully adequate to meet local authorities' requirements. The proposals assume that local authorities implement in full our policy of pay restraint. Provided that they do this, the savings made will enable them to ensure proper provision of services without exerting upward pressure on the council tax. The Government will not hesitate to use their capping powers as necessary. My right honourable friend the Secretary of State for the Environment will be making a full announcement later this month.
"Full details of the new plans for local authorities in Scotland and Wales and for other programmes are being made available separately.
"The population-related formulae, which largely determine changes to expenditure provision more generally in Scotland, Wales and Northern Ireland, have been updated. Expenditure plans for the territories will be announced by their respective Secretaries of State at a later date.
"Madam Speaker, at the time of the General Election, the Government made clear that education and health would be amongst their key priorities for the longer-term. Rising spending in these areas is fully justified, not just in terms of immediate needs, but as a contribution to the country's human capital.
"The education programme is therefore planned to rise to a level £1½ billion higher in 1995–96 than the equivalent spending this year. There will be some important changes over this period. The proportion of children staying on at school beyond 16 is expected to go on rising. The Government are providing for a higher proportion of school leavers to take up YT places. And we shall finance a sharp increase in the number of students attending further education or sixth form colleges—25 per cent. up over the Survey period.
"At the same time we have earmarked enough finance to maintain the present record level of participation of young people in higher education. All this is an important investment in our young people which will improve the quality of the country's human capital and benefit the economy in the longer run.
"There will also be increases in the level of real resources provided to the National Health Service in each of the next three years. Spending in the NHS will rise by nearly 3 per cent. in real terms next year compared with this year's plans. That means an increase of over £1.9 billion.
"This is a very tight settlement overall. At the beginning of the spending round, there was widespread speculation that the Government would take the easy way out by letting current 341 spending rise and cutting capital spending instead. But what we have done is take the tough, but necessary, decisions to put the needs of the British economy first.
"Restraint on current expenditure has made it feasible to provide more protection to capital. We have done so across a whole range of programmes. Next year there will be a significant increase in the volume of road building. We have maintained the national roads programme at a time when construction prices have fallen.
"Our new plans will ensure that in real terms, compared with 1979, we will have a doubling next year of the combined capital spending of British Rail and London Transport. Next year health capital spending in England alone will be at the record level of nearly £2.1 billion. The new plans should more than deliver our election commitment to provide, through the Housing Corporation, 153,000 homes over three years.
"One major project for which we have expressly reserved provision is the Jubilee Line extension. Subject to satisfactory completion of negotiations, the line will be able to go ahead. This will create many thousands of jobs and give an important boost to the construction industry.
"The Government have taken seriously their pledge to do what they can for capital projects. But there is yet more that can be done. I said in my Mansion House speech that I was examining ways to increase the scope for private financing of capital projects. Obviously, we have to protect the taxpayer. But I also want to ensure that sensible investment decisions are taken whenever the opportunity arises. I am now able to announce three significant developments.
"In the past the Government have only been prepared to give the go-ahead to private projects after comparing them with a similar project in the public sector. This has applied whether or not there was any prospect of the project ever being carried out in the public sector. I have decided to scrap that rule. First, in future, any privately-financed project which can be operated profitably will be allowed to proceed. This should be widely welcomed, particularly by the construction industry.
"Secondly, the Government have too often in the past treated proposed projects as either wholly private or wholly public. In future the Government will actively encourage joint ventures with the private sector where these involve a sensible transfer of risk to the private sector. We may be prepared to consider such an approach, when the time arises, for projects such as the East-West Crossrail, the Central Scotland Fastlink, the Birmingham western orbital road and perhaps also the Channel Tunnel rail link.
"Thirdly, we will allow greater use of leasing where it offers good value for money. As long as it can be shown that the risk stays with the private sector, public organisations will be able to enter into operating lease agreements, with only the leasing payments counting as expenditure and without their capital budgets being cut. In addition, 342 British Rail will be allowed to lease some £150 million of new rolling stock in the next three years. The new leases will be undertaken with a view to developing the leasing market for rolling stock which will facilitate privatisation.
"In addition, my right honourable friend the Secretary of State for Transport will publish a Green Paper early next year on the scope for motorway charging. If, in the light of consultation, the Government decided to proceed with charges for inter-urban roads, that would create significant new opportunities for private finance. As a possible transitional step, private contractors might be invited to design, build and operate roads for which they would receive payments from government relating to the use of their roads. Money contributed by the private sector under these arrangements will not contribute towards public spending. It will represent additional resources in the area concerned.
"These changes are only a beginning. I have asked my honourable friend the Financial Secretary to carry forward and develop our policy in this area, encouraging the private sector to bring forward proposals, and to help us identify any obstacles which frustrate its success.
"Many of the measures I have announced so far today will take time to have their full effect. I therefore propose to introduce a supplementary package of time-limited fiscal measures. These will be aimed at sectors of the economy which have been hardest hit by the recession, helping to rebuild confidence and so foster recovery.
"Housing and construction have faced par-ticular difficulties in the past two years. But home buyers now have some of the lowest mortgage rates since 1978. The Government have responded in a number of other ways, most recently with measures to help those with negative equity who wish to move. Today, I propose to go further.
"The overhang of empty properties in the owner-occupied sector is holding back activity in the housing market. I therefore propose to make available an extra £750 million to be used before the end of this financial year to buy up some of these properties. I hope that the Housing Corporation will be able to achieve a substantial contribution on top of this from private sector lenders. Scotland, Wales and Northern Ireland will introduce parallel measures. This measure should reduce the overhang of empty properties by over 20,000 over the next few months, so providing a helpful stimulus to activity. It will also increase the available stock of subsidised housing by a similar amount and make a real contribution towards housing families in need.
"Many honourable Members will be aware of the representations by many local authorities to persuade the Government to relax the rules on local authority capital receipts. Many local authorities have accumulated a stock of these receipts rather than use them to pay off debt as the Government 343 wished. That remains the Government's wish, and I do not intend to reward those who have ignored it.
"I propose instead to allow a time-limited relaxation of the rules governing local authorities' use of their future capital receipts. The existing rules allow them to spend only 25 per cent. of housing receipts and 50 per cent. of other receipts. With certain exceptions, local authorities will now be entitled to spend all the capital receipts they realise between tomorrow and the end of December 1993.
"This measure is expected to stimulate extra capital spending by local authorities, of over £1.75 billion in the next three-and-a-half years. The Government hope that local authorities will make early and effective use of the additional spending power before the end of this financial year across the range of local authority capital programmes, including housing, education, schools and roads. Any receipts not spent this year or next will provide an ongoing stimulus to house building and construction in 1994–95 and 1995–96 as well.
"The availability of these extra receipts will be taken into account in distributing credit approvals between local authorities. In this way, virtually all local authorities should receive some benefit. There will be separate measures for Scotland, Wales and Northern Ireland.
"The reduction in the exchange rate has offered immense opportunities to exporters. But our exporters of project equipment and other supplies requiring medium or long-term finance rely heavily on the guarantees provided by the Export Credits Guarantee Department. I now intend to make available a further £700 million of ECGD cover and to ease some of the constraints on cover for individual countries. That will enable these exporters to compete more effectively in the increasingly difficult situation they now face.
"I have also considered the position on capital allowances. It remains my view that the reform of business tax by Lord Lawson in his 1984 Budget was the right one. Low tax rates and a broad tax base provide the best framework for the medium term. However, in present circumstances, I am prepared to allow some changes which should help to bring forward private sector investment.
"Accordingly, for a limited period of 12 months, I propose to raise from 25 per cent. to 40 per cent. the allowances available in the first year for investment in plant and machinery, excluding cars. I also propose to introduce an initial allowance of 20 per cent. for expenditure on new industrial and agricultural buildings for which contracts are placed before 31st October 1993 and which are brought into use before the end of 1994. I propose to legislate for these changes, with retrospective effect to 1st November, in the next Finance Bill.
"I have one final measure to announce. The motor industry lies at the heart of British manufacturing. In recent years, it has seen a renaissance, with large increases in inward 344 investment. However, the recession has brought a more difficult climate. I have considered what might best be done to help. Any action in this area will, of course, have to be paid for in my next Budget by higher motoring taxes after 1992–93.
"I have decided nevertheless to continue with the tax reform begun in my last Budget and to abolish car tax altogether from midnight tonight. This will mean a saving of about £400 on a typical family car. This measure will require a simple Bill, which I shall bring forward shortly. It will provide a direct boost to the motor industry and will of course benefit business more widely. I am sure it will be warmly welcomed.
"The measures I have announced today should provide an immediate boost to confidence and welcome relief for some of the most hard-pressed sectors of the economy. Taken together they will add some £4 billion to borrowing over the next three years, but with no increase in the PSBR over the medium-term.
"And these measures come on top of the Government's new spending plans for the next three years and the proposals I have announced to liberalise the rules on private finance.
"Finally, there is the significant relaxation in monetary policy since Britain left the ERM just two months ago. Britain already has the lowest interest rates in the European Community; and the pound is trading at a level that gives British industry a sharp competitive edge in foreign markets.
"That relaxation of policy has been possible because of the dramatic progress we have made in getting inflation down; and it is precisely because our inflationary prospects remain excellent that today, Madam Speaker, I can go further.
"Alongside the tight public expenditure plans I have announced I believe it is appropriate now to make a further reduction in interest rates. The governor and I have agreed that the Bank will tomorrow set the minimum lending rate at 7 per cent. That reduction is, in my judgment, fully consistent with the Government's inflationary objectives.
"Today's reduction takes British interest rates down to their lowest level for nearly 15 years; it means that our interest rates have been cut by fully 8 per cent. over the last two years; it takes a further £1 billion off industry's costs on top of the £9 billion fall in interest payments we have already seen; and it will provide further help to all those with mortgages.
"British business now has the opportunity it has been looking for—to bring the country out of recession; to increase sales, expand production and invest for the future. And industry can now seize the new opportunities, safe in the knowledge that the Government will play their full part. We have a new monetary framework that will deliver low inflation over the medium-term. We have a new system for controlling public expenditure that will deliver annual spending increases which the country can afford. We have new spending plans, which protect the poorest in society and offer hope, 345 help and opportunity by switching resources to programmes that support the long-term prosperity of the country. We have the lowest interest rates in the European Community. And we have a carefully targeted set of measures designed to lift confidence and get the country back to work.
"This is a clear and comprehensive strategy. It is a strategy for growth. I commend it to the House.
§ " My Lords, that concludes the Statement.
§ 4.42 p.m.
§ Lord Peston
My Lords, I thank the noble Earl for reading the Statement of his right honourable friend. I particularly thank him because, as he well knows, I did not get to know anything about the Statement until he just read it. I appreciate there may be difficulties with this, but it does not seem to me to be an appropriate way to engage in the serious business of your Lordships' House if one actually has to come to respond to something like this with no forewarning. I understand that there are one or two commercially sensitive matters here; but, nonetheless, I should have thought that the main Opposition spokesmen could have been trusted with a sight of the document in order to help in its consideration.
That leads to me a second point. I have listened as closely as I can to the noble Earl, and I must say I find it very difficult to see how the figures add up. On the one hand, he tells us that a large number of things are going to increase; and, on the other hand, he tells us that the Chancellor is going to stay within his total budgetary framework. I am not foolhardy enough to try to do all the calculations in my head as I go along. I have to tell him that he may have said this is a simple Statement but I found it very difficult to follow. I assume that the reference to having a full debate about these matters will refer to the other place; but if we are to explore these issues fully we must have an opportunity to look at them in some detail. As noble Lords will be aware, my own view, although I shall have to be rather "broad brush" today, is that it is the detail that is interesting and that really matters.
This is the last Autumn Statement that we shall ever have, so one ought to say farewell to Autumn Statements as well as other things. As I understand it, the noble Earl is not backtracking, nor is his right honourable friend the Chancellor of the Exchequer, from the new budgetary position we are going to have. That is the sensible position of getting a statement of expenditure plan, then a statement of taxes to finance that and later a statement of how we are going to finance the difference if there is, as there is at the present time, a government deficit. That is the correct way of doing it, and I take it that from now on that is what we are going to have and that I am right in being reassured by the noble Earl's statement that there will be no backtracking by the Treasury, which might be fearful that people might wish to discuss taxation at the same time as they discuss expenditure. My view is that that is always the sensible way to do it, and then the people who want more expenditure should be asked to say how they are going to pay for it. That is 346 something that I am willing to do, and I believe the Liberals also feel that this is the right way of doing things.
Is this the same Chancellor of the Exchequer that we had a few months ago? I have some difficulty sometimes on that matter. Is this the Chancellor of the Exchequer who told the Treasury and Civil Service Committee on 27th November, 1991, virtually a year ago:History, I think, shows that we have seen continuing depreciation of sterling, what you call a temporary fillip to exports, which has been bought at the price of continuing inflation".He also said:It seems to me that the real challenge is that costs and prices have to adjust to the exchange rate rather than the other way round".I would have thought that in his Autumn Statement the noble Earl's right honourable friend might have explained to us why he has said exactly the opposite today. A year ago he said that depreciation of the currency would lead to inflation. There is no suggestion that he believes that today: quite the contrary. I assume that this is the same Chancellor of the Exchequer who as recently as in the Budget said that GDP would grow by 2 per cent. per annum this year. For those of you who read these things, he actually said that GDP would grow by 3¼ per cent. next year. As it is, the Statement says that we shall get minus 1 per cent. this year, and the definition of recovery next year, as I understand it, is plus 1 per cent.
I have two problems here. The first is that I should have thought that the Chancellor might have wished to say, "I did get it wrong by an incredible order of magnitude". The other thing that one has to ask oneself is, given that he and his forecasters got it wrong last time, whether there is any reason to believe they will get it right this time. There is talk about bringing in these outside experts, and your Lordships will have heard my view last week on adding more outside experts to the failed experts that we currently have. It does not seem to me to be the right way of doing things at all.
Perhaps I may mention one of my puzzles about the figures adding up. This is a Statement regarding the total sum of 1 per cent. that the Government put forward much earlier, and they are now sticking to it. Presumably when this Statement was invented, the unemployment and social security benefit side of it would have been based on a forecast of the real economy, related then to a forecast of unemployment, which would be used to forecast unemployment benefit. But now that the real economy is depressed, unemployment is higher and so much more unemployment benefit must be forecast because more people are getting it. What I cannot see, again, is where the cuts come to finance that benefit in the Statement. It is a sort of magic trick—that somehow you will spend a lot more money here, but you are not going to reduce anything else there. Or perhaps I anticipate. Maybe unemployment benefit is going to be paid out of the reduction of legal aid, which I gather we are going to be told about later in the day.
347 That is one of my puzzlements at what is happening. The second refers to public sector pay. I saw the 1½ per cent. figure. Can the noble Earl say whether that 11 per cent. is included in the calculation —meaning that what had been thought to be the public sector pay bill a year earlier will now be raised by 1¼ per cent.? Is the whole pay bill forecast to go up by 1½ per cent. or is there some other figure for the whole pay bill? I am a bit lost on that as well.
On the economics of it, the public sector pay side is the wrong area in which to operate. If one is concerned about expansion, efficiency and costs, what matters is the private sector pay bill. The public sector pay bill merely adds to aggregate demand. It does not impinge directly on cost matters at all. I think that the concentration on public sector pay is purely ad hoc. I suppose that it has just been thrown in because, in abandoning all their other policies, the Government think that they might as well have a public sector incomes policy as well as everything else.
The reduction of 1 per cent. in the interest rate, which I take it is the reason that I was not supposed to know about these things, is of course welcome. It will benefit industry by lowering the cost of borrowing and it will be of some benefit to consumers who have to borrow to spend. However, on the economics of interest rates, it is perhaps worth bearing in mind that interest income is an important part of quite a lot of people's income. As rates are cut, their income will be lowered and they will spend less. Therefore, the notion that, on the economics of it, a cut in interest rates is unequivocally expansionist simply is not the case.
What really staggers and intrigues me is the fact that we have seen the final demise of monetarism in what the Government have done today. This is as clear as can be from the supplementary package. Essentially, the Government have abandoned "monetarism" by which I mean, as I think serious monetarists also mean, two things. The first is to have a financial strategy that is stuck to while secondly, within that, one tries to control the money supply, however defined, and then let the economy get on with it. What one did not have if one was a monetarist—or what one did have if one was a Keynesian, like me —is what is called the supplementary package. "Supplementary package" are just two words for the one word "Keynesianism".
I do not object to many of these things, but I wish that the Government themselves would at least recognise that they have thrown away both the previous 12 years of their own history and the previous 12 years of their own arguments. I do not oppose the supplementary package, but I expect some noble Lord on the other side to get up and make the proper speech that a Conservative noble Lord should make and say that such supplementary packages distort and destabilise the economy, that they cannot work—the Chancellor himself has said that in the past —and that he cannot possibly support the Government on this.
Perhaps I may ask the noble Earl one or two detailed questions about the supplementary package. I take it that the relaxation of the rules on local 348 authority housing is hypothetically forward-looking. If I understand the noble Earl correctly, it amounts to saying, "If you sell some more housing in the future, you will be able to use a larger share of the capital receipts. Therefore, despite the fact that you may have accumulated large sums in the past, you cannot spend them." I should like the noble Earl to clarify that so that I understand what he is saying.
The export bit is particularly disingenuous. Of course, devaluation offers a great opportunity to exporters, but we need to bear in mind the fact that it also offers a great opportunity to people who wish to push up prices and add to inflation.
On capital allowances, I agree with the Government entirely. They should have done this long ago. However, I hope that the noble Earl remembers on how many occasions capital allowances were rejected by spokesmen from the Government Front Bench, again as distorting and destabilising the economy and being essentially short term, with no long-run effect. Although I am not about to buy a new car, the same goes for the abolition of the car tax. I heartily approve of it, but I do not quite see how the Government find an intellectual underpinning for it.
All this is like shooting fish in a barrel—and I get tired of it. However, there is one other figure that I should like to ask about before I sit down. The Government often talk about the ratio of government expenditure to gross domestic product, which the Government are committed to reducing. Although it may well be in one of the government documents that I have not yet got and this is a difficult Statement to follow, I have not seen any specific statement about the ratio of government expenditure to GDP. Am I to assume that, at least for the moment, that has simply gone as an objective? Again, one could change Keynes's dictum of, "In the long run we're all dead", to a new dictum of "In the long run, all the figures come out right, but in the short run, they go all over the place." I should certainly like to know the Government's position on these matters.
To conclude, like every noble Lord I want to see the British economy recover. I want to see our people prosper. I want us all to get going again. I shall be interested to see the reaction of the markets, but my difficulty is that, given the speech that was made by the Chancellor of the Exchequer, which is so different from anything that he has said before, and given that we all agree that confidence is of the essence, why should anybody believe a word that he says this time, compared with last time?
§ Lord Ezra
My Lords, I, too, thank the noble Earl for reading out the Statement. I reiterate the concern expressed by the noble Lord, Lord Peston, that, contrary to normal practice, Front Bench spokesmen were not able to have a glimpse of the Statement beforehand. As it is such a lengthy and complex Statement, this has put us in some difficulty.
Rarely has an Autumn Statement been awaited with such interest as this one. I should like to start by saying that I welcome its contents relating to stimulating growth. However, like the noble Lord, Lord Peston, having heard the Statement I find it difficult to see how the figures can be precisely 349 reconciled. There seems to be much more being expended on the growth side than is being saved in expenditure in other directions, but no doubt the noble Earl will explain that.
I wish to ask in particular about the new framework for monetary policy and the indicators that are to be pursued. How frequently are we going to be informed about the result of this monitoring? Will there be a monthly statement to tell us how things are going? Obviously, the big risk with the new policy for growth is a trend towards renewed inflation. We shall want to know whether that risk is serious or not, quite apart from the regular announcements about inflation.
I should like to refer to one or two matters in relation to the specific measures for growth. In the case of British Rail and London Transport, those of us who have always pressed for more infrastructure investment will be pleased to hear about additional resources. However, how do the additional sums which are being made available compare with the sums that have been requested by those two organisations? Are their additional requirements for investment being met by these figures, or is there still a gap?
On the question of private projects for the public sector, can we be clear about the regime to be followed in future? Hitherto, the Treasury has been very restrictive on any services rendered by the private sector to the public sector which contained a capital element. That capital element has hitherto been charged against the public sector, thus inhibiting this type of service even though it was financially advantageous. Am I to understand that from now on any capital project or any capital element in any service rendered by the private sector for the public sector will not count against the public sector's capital budgets?
Next, on export credits, we are all very pleased to hear about the additional amount being made available. However, there are also export services which, to judge by the accounts of the British Overseas Trade Board, have been progressively cut over the years. Is there now to be a review of those export services which finance visits abroad, provide information on export opportunities and so on? Are these now to be reviewed, as I believe the President of the Board of Trade hinted? We should like to hear clearly whether that is intended so as to take advantage of the new export opportunities.
The increase in capital allowances is certainly very welcome. But, as the noble Earl may be aware, we had a debate in the House yesterday on small firms. His noble friend Lady Denton may have informed him of its outcome. A number of suggestions were made about ways in which small firms in particular could be helped in the present difficulties. Do the Government intend bringing forward any measures specifically relating to small firms in addition to the measures that they have announced today?
The Earl of Caithness
My Lords, I listened with care to what the noble Lords, Lord Peston and Lord Ezra, said in reply to the Autumn Statement. I thought that the noble Lord, Lord Peston, was in particularly gloomy mood today. I expected him to 350 receive the Statement with slightly more welcome than he managed to conjure up from the depths of his gloom. Like him, I should like to bid farewell to the Autumn Statement, but I would hate to bid farewell to the chance of discussing economic matters with him across the Floor of the House. I am sure that we shall have plenty of opportunity for that. On that particular point, he raised the request for a debate. As he will have noticed, my noble friends the Lord Privy Seal and the Chief Whip were listening to him at that time and I shall leave it to the usual channels in accordance with the tradition of this House.
Both noble Lords were right to say that it was difficult to pick up a Statement of this length and complexity just by listening to what I was repeating. I know that the whole House will want to study the figures in detail and I am sure that that would solve many of the questions that the noble Lord, Lord Peston, asked me. He again chided us about forecasts when, as an economist, he will know that forecasts are not always as accurate as he would himself sometimes have wished. However, I remind him that the Government's forecast was in line with the average of the independent forecasts at the time of the Budget.
Perhaps I may clarify the situation with regard to pay. There will be a limit of 1.5 per cent. for all public sector employees for the next year. With regard to capital receipts, that is for the future only. There will not be anything retrospective with regard to the receipts already received. It would be quite wrong to penalise those authorities that have done the right thing; namely, having got the receipts, to have removed the debt overhang and therefore to have benefited their chargepayers. The noble Lord will have heard me say that in the long term we wish to reduce expenditure as regards GDP. We got it down very successfully in the 1980s and we wish to get it down again.
The noble Lord, Lord Ezra, asked me whether the settlement that has been reached for British Rail and London Underground met their aspirations. It is impossible to meet everyone's aspirations. There is always a good case to spend more money. However, it is right that there should be a firm control over public expenditure. That is what my right honourable friend has announced today. He meets the target of £244.5 billion that was set in July and that is to be welcomed.
With regard to capital allowances, I note what the noble Lord said and I was grateful for his welcome on that point.
§ 5.3 p.m.
§ Lord Clark of Kempston
My Lords, does my noble friend agree that the Autumn Statement will be warmly welcomed in commerce and industry generally and that my right honourable friend the Chief Secretary is to be congratulated on containing public expenditure within the target range, but at the same time protecting capital investment and particularly the Jubilee Line? Although capital allowances were changed under my noble friend Lord Lawson when he reduced corporation tax to the lowest in the world at the same time as changing capital allowances, I am sure that my noble friend will agree with me that it is 351 right today to look at capital allowances. I am delighted at what the Chancellor has done there and in abolishing car tax.
As regards the reduction in interest rates, perhaps my noble friend will take this point on board. We have now reduced the base rate from 15 per cent. to 7 per cent., which is a great achievement, but in many cases the reduction in the interest rate has not immediately been passed on by the banks and building societies. Will my noble friend urge my right honourable friend the Chancellor of the Exchequer to impress on both the banks and the building societies that the reduction in the base rate should be passed on in its entirety to the borrower?
The Earl of Caithness
My Lords, I am grateful for what my noble friend, with his great experience, said. I am delighted that he believes this Statement will be welcomed by industry. That is exactly what it is designed to be, but I should also add that at the same time we have been able to look after those least able to look after themselves. That is also an important part of the Statement.
With regard to interest rates, we have no evidence that banks are not passing on interest rate cuts to their customers. As we all know, some banks have had a floor. NatWest had a floor of 8 per cent., but yesterday cut that to 6 per cent. However, if my noble friend has any specific point in mind, perhaps he will let me know.
§ Lord Stoddart of Swindon
My Lords, is the noble Earl aware that there will be great outrage among public sector employees that their pay increases will be restricted to 1.5 per cent? That means a wage cut of 2.1 per cent. for them and it is a wage cut imposed on some of the lowest paid people in the country. Irrespective of what the Statement said about public sector pay having risen by 20 per cent. while private sector pay has risen by only 13 per cent., I hope that he will recognise and accept that that 20 per cent. includes the catching up increases which were given to nurses and teachers, among others. The comparison is therefore unfair and public sector employees are being made to pay for the Government's mistakes. It is quite deplorable and will upset the people in the public sector no end. I do not know what their reaction will be. We may well have some trouble from them and we may be looking forward to a winter of discontent.
Perhaps I may also ask the noble Earl how this is to be enforced. It is not clear in my mind exactly how that will be done. If local authorities refuse to do it, will it fall upon their chargepayers because the government grant is restricted? How will it be done?
Finally, in relation to Scotland and Wales, the basis on which the grant is made has been updated. Will the noble Earl say exactly what that means? Does it mean that Scotland and Wales will receive more or less from central funds? I feel sure that that is what it is all about.
The Earl of Caithness
My Lords, I understand the sentiments behind the comments of the noble Lord, Lord Stoddart of Swindon. Nobody said that it would 352 be very nice to limit public sector pay to 1.5 per cent. on a range of 0 to 1.5 per cent. It is not very nice not to have an increase. It is not very nice for many people in the private sector to have their pay reduced, but in the present economic circumstances I think that the action taken by my right honourable friend is very justifiable.
At the end of his comments the noble Lord asked me some detailed questions about Scotland and elsewhere. As I said when I repeated the Statement, further Statements will be made and it would be wrong for me to say anything without having the full benefit of that. I am sure that the noble Lord will also wish to see those Statements.
With regard to enforcement, I think that I should write to the noble Lord.
§ Lord Mayhew
My Lords, the noble Earl referred very briefly to defence expenditure. He indicated that there would be some reductions. Will he tell us what the new level of defence expenditure decided upon is?
The Earl of Caithness
My Lords, the estimated outturn for 1992–93 in defence will be £23.8 billion whereas the new plans will be £23.5 billion, £23.75 billion and £23.22 billion.
§ Lord Boardman
My Lords, like other noble Lords, I welcome the Statement. However, I was somewhat disturbed by the fact that the noble Lord, Lord Peston, appeared to be referring to the reduction in interest rates as being regrettable as regards the impact it would have on those who are in receipt of interest income. Does my noble friend believe, as I do, that those on the Benches opposite have been pressing for a reduction in interest rates for a long time past?
The Earl of Caithness
My Lords, I knew that it would not escape the notice of my noble friend that on this as on many other occasions the noble Lord and his noble friends opposite have been pressing for many measures, but that when such measures are announced by the Government they say that it is all terrible.
§ Lord Desai
My Lords, let me first say that the Autumn Statement is actually very disappointing. Much information had been passed on before claiming gloom and doom. What we now have is a claim that the spending limits have been observed and that public sector pay will be frozen. But, for all that, we are getting a miserable rate of growth predicted for the next year—minus 1 per cent. for this year and plus 1 per cent. for the next year. That "plus 1 per cent." has redeemed the margin of forecast error which is 1.5 per cent., so anything could happen.
When the ERM strategy was so ignominiously abandoned, we were promised after some delay that we were going to "dash for growth". Can the noble Earl say where is that dash for growth? Where is the growth supposed to be dashing? A one percentage point growth rate is not even a recovery; it is actually quite akin to stagflation. Although the inflation rate will not rise very much it will be higher next year than it was this year, therefore we are dashing from deep recession to, perhaps, low stagflation.
353 So far as I can see, the balance of payments figures have worsened from £12 billion to £15 billion. The PSBR outcome this year is 6.25 per cent., but if you exclude privatisation proceedings it is 7.5 per cent. Therefore, from all viewpoints I say that the Government have done neither one thing nor the other. They have neither kept to their path of fiscal rectitude and monetary discipline, nor have they dashed for growth. They have dithered on one hand and on another and ended up with having neither rapid growth nor any prospect that inflation will be brought down as we were promised in past years.
The only welcome part of the Autumn Statement is the small consolation that overseas aid—a subject which was debated yesterday—has not been cut in nominal terms. But, obviously, given the devaluation and inflation, there is a cut in real terms in overseas aid and that I must deplore.
The Earl of Caithness
My Lords, I am sorry that the noble Lord, Lord Desai, does not like the Autumn Statement that I repeated and that he does not think that the growth was good enough. The words "dashing for growth" were not those of the Government; indeed, they may have been written by some people in the media. I explained very carefully on previous occasions—and repeated it in the Statement—that this is a very clear and comprehen-sive strategy for growth. It is the right strategy which takes account not only of the economic situation in the country but also, as the noble Lord will be aware, of the economic situation in the world which has declined markedly in recent months. I am grateful to the noble Lord for his kind words about the overseas budget. I can tell him that, compared with the 1992–93 plans, the new plan provides for cash increases in all years and a 2.5 per cent. real terms increase in 1993–94.
§ Lord Brabazon of Tara
My Lords, whatever noble Lords opposite may say, does my noble friend agree that the Autumn Statement will be widely welcomed by business and commerce in the country? In particular, I was delighted to hear the news about the Jubilee Line, which, as my noble friend will be aware, I was pressing for just the other day. My noble friend said that that would go ahead subject to successful negotiations with the administrators of Canary Wharf. Although I appreciate that my noble friend will perhaps not be able to tell me, I wonder whether he can say how close those negotiations are to reaching a conclusion.
Further, the industry will be delighted that the road building programme is to be maintained. It will also be delighted that private finance will now be able to enter more easily into such major capital projects and especially that British Rail will be allowed to lease provided, of course, that the risk is taken by the private sector.
As regards local authority capital receipts, does my noble friend agree that if local authorities wish to spend money on housing or building using their capital receipts, some of them are in an excellent position to raise capital by privatising their local authority airports? Does he also agree that they should keenly pursue that aim?
The Earl of Caithness
My Lords, I am most grateful for the words of my noble friend. I am glad that he, too, believes that the Statement will be welcomed by industry. So far as concerns the Jubilee Line extension, I know that he will agree with me that it is most important to pursue the negotiations with the administrators as quickly as possible. We have made it clear that if acceptable terms can be negotiated and agreed, then there is provision within the allocation for the extension to proceed now. As my noble friend knows only too well, if that project can be proceeded with quickly, it will benefit many thousands of people; indeed, it will create many jobs.
My noble friend also mentioned the good news on roads. That is most important as 90 per cent. of our goods in this country are transported on roads. It will benefit industry if we have a very good road system. It will also benefit the environment if we do not have traffic jams with cars and lorries causing much pollution. I thoroughly agree with my noble friend on the question of local authority airports. He will recall that we said in our manifesto that we would encourage local authorities to move their airports into the private sector which is the only place where the necessary money to maintain the airports is available. We have given exactly that encouragement today.
Lord Bruce of Donington
My Lords, without prejudice to anything that I may be permitted to say to your Lordships when I have examined the papers, possibly in a later debate, I should like immediately to congratulate the Government on becoming converted to a view that I have been pressing upon them for the past four years in relation to floating exchange rates. As the noble Earl has criticised me on many occasions for having advanced the view that he now holds, it would do him no harm to make some suitable amends for the rather terse observations that he has made in the past.
There is something about the Statement which puzzles me. As noble Lords would expect, I examined, albeit cursorily—and I reserve the right to come back to it later—the estimated expenditure of the United Kingdom out of the Consolidated Fund on the European Community. Over the past few weeks, the Treasury has provided us with figures concerning the net expenditure of the UK in the European Community which amount to about £2.5 billion. However, according to the papers that I have just seen, a billion seems to have been lopped off. I should like to find out where it is. But that will be a matter for a later stage.
As regards the expenditure estimates, can the noble Earl say whether an allowance has been made for the extra contribution that the United Kingdom will have to make to Community funds if the Maastricht Treaty is ratified? It seems to me that the expenditure totals will be about £2 billion to £3 billion short of what is actually required, should that unfortunate eventuality take place. The noble Earl paid tribute to the virtues of the floating exchange rate to which I referred. Perhaps he would care to examine Articles 109j(1) and 109m of the Maastricht Treaty in which he will find 355 that, on ratifying the latter, he will be compelled to enter the ERM again. Of course, that is exactly contrary to the Government's present philosophy.
I trust that in due course the noble Earl will be able to explain such matters. But, in the meantime, the verdict from the country as a whole must be that the Autumn Statement has done nothing to remove the fears that lie over the United Kingdom; that is, the fear of unemployment and the fear of continued insecurity. Until the Government address themselves to the removal of such fear throughout the land, they will not have any success whatever.
The Earl of Caithness
My Lords, for 95 per cent. of what the noble Lord, Lord Bruce, was saying, I was sitting happily ready to reply; for the last 5 per cent., I thought that he was not quite his normal self. Of course he did not mention the important points like the provision of the Jubilee Line extension; the road projects that will go ahead; NHS capital spending; local authorities' spending; and capital allowances for businesses, which are the type of things that counteract what he said in the last 5 per cent. of his comments.
As regards the previous 95 per cent., it is good that he and I are on much more level terms. I am sure that we shall find reasons to diverge again in the future, but it is always on a harmonious basis. Perhaps we both need to look at the precise figures in detail. I hope that we shall have another opportunity to find his missing money.