Comprehensive Spending Review

HL Deb 14 July 1998 vol 592 cc129-51

4.52 p.m.

Lord McIntosh of Haringey

My Lords, with the leave of the House, I shall now repeat a Statement made by the Chancellor of the Exchequer on the Comprehensive Spending Review.

"This Government's central objectives are high and stable levels of growth and employment, and sustainable public services, built from a platform of long term stability. And to achieve this, two fundamental economic reforms have been undertaken for the long term—to take monetary policy out of party politics through operational independence for the Bank of England, and to impose a new framework of financial discipline, through fiscal rules that achieve a current budget balance and prudent levels of debt to national income.

"Last May we imposed a two-year spending limit and we have kept to this limit. We promised to cut public borrowing, and it has been cut by £20 billion; a fiscal tightening that will be locked-in into next year. And to meet our fiscal rules and in line with cautious and published assumptions audited by the independent National Audit Office, we plan current surpluses for the next three years of £7 billion, £10 billion and £13 billion. And as a proportion of national income, debt will fall below 40 per cent.

"By the end of this Parliament debt interest payments will be £5 billion a year lower than if we had simply left borrowing at the level inherited from the last government.

"In the last economic cycle, under the previous government, the current budget deficit averaged at 1.5 per cent. of national income, the equivalent of £12 billion of extra borrowing every year. And during the 1990s national debt doubled.

"Over this economic cycle and for the first time for decades, Britain is set to have both a current budget in balance and a sustainable approach to debt—an approach that is among the most prudent of our G7 partners, and more prudent than our predecessors.

"All the allocations we make this afternoon are made within and subject to this overall financial discipline, as I set out in the Economic and Fiscal Strategy Report published last month. And through our New Deal for the unemployed, we are tackling the bills of economic failure and under the plans published today the growth in social security spending for this Parliament will be significantly lower than in the last Parliament.

"Working within this framework, the Comprehensive Spending Review has examined the most effective use of public money across and within each department and I am grateful to the Chief Secretary and to the Public Spending Committee of Cabinet for their work.

"By looking not just at what Government spend but at what Government do, the review has identified the modernisation and savings that are essential. The first innovation of the Comprehensive Spending Review is to move from the short-termism of the annual cycle and to draw up public expenditure plans not on a one-year basis but on a three-year basis.

"And the review's second conclusion is that all new resources should be conditional on the implementation of essential reforms, money but only in return for modernisation: Government moving out of areas where they need not be, and—in those areas where public service matters—Government setting clear targets for modern, efficient and effective services.

"So today we begin not, as all spending announcements for the last 30 years have traditionally done, with annual allocations but by setting out the new three-year objectives and targets for each service and therefore the results we are demanding; the new standards of efficiency which will have to be met to ensure every penny is spent well; the procedures for scrutiny and audit that will now be set in place; and the reforms we have agreed. And all based on a clear and modern understanding that Government should not only do what they have to do, but do what they do to the highest standard.

"So let me set out the essential changes. First, each department has reached a public service agreement with the Treasury, effectively a contract with the Treasury for the renewal of public services. It is a contract that in each service area requires reform in return for investment. So the new contract sets down the new departmental objectives and targets that have to be met, the stages by which they will be met, how departments intend to allocate resources to achieve these targets and the process that will monitor results.

"The Prime Minister has decided that this continuous scrutiny and audit will be overseen by a Cabinet committee, continuing the work of the existing Public Spending Committee, and money will be released only if departments keep to their plans.

"Secondly, the contract will stipulate new three-year efficiency targets for the delivery of services—targets that range between 3 per cent. and 10 per cent. The terms of these will be made public. The purpose of these efficiency targets is to ensure more resources go direct to front line services—to patient care in the NHS, to classroom teaching, to fighting crime—a policy of promoting front-line services, so that by securing greater value for money, we secure more money for what we value.

"Thirdly, in addition to efficiency targets we have embarked upon a programme of radical reforms. To achieve our priorities, difficult decisions and choices have had to be made. We have already reformed student finance and begun welfare reform—matching rights with responsibilities. And as a result of the comprehensive review, further reforms will be announced in legal aid, procedures for asylum, in child benefit, youth justice and with the withdrawal of unjustified subsidies. And in defence and the Foreign Office, we have achieved the changes necessary to provide us with the defence and diplomatic capability we need while making the savings necessary—for example, in the number of warships, and with a new public/private partnership for the Defence Evaluation and Research Agency.

"Fourthly, for central and local government we have now agreed a programme for releasing assets we do not need to fund £11 billion of additional new investment in health, education, housing, transport and other capital projects that we urgently do need. And with a number of further announcements today our policy of promoting public/private partnerships is extended into new areas, including national science policy, urban policy and overseas development.

"Fifthly, while we are raising capital investment for a fixed period of three years in order to tackle a backlog of under-investment, current spending will grow by no more than 2.25 per cent. And we must ensure that public sector pay settlements are fair and affordable and do not put at risk our targets for public service improvement in each of the next three years for which we have budgeted.

"So in line with the three-year allocations, the independent review bodies will now report not just to the Prime Minister but to the departmental Ministers who have to meet these public service improvement targets and who will now respond to the recommendations.

"And consistent with three-year allocations, we are announcing a further strengthening of the pay review system. Having spoken to the chairmen, the Prime Minister has confirmed that their remits—in addition to their responsibility to recruit, reward and motivate staff—and therefore their role will be strengthened with three responsibilities: their recommendations will take account of affordability (in other words, the current departmental spending limits); they will take account of the Government's inflation target of 2.5 per cent.; and they will take account of the need to achieve the Government's targets for output and efficiency.

"This reform offers the opportunity for public services to manage their pay and conditions more directly, but also gives departments a responsibility to ensure that pay settlements cannot be determined without regard to the demands of the service. In this way, as in every other organisation, pay decisions will now be made in relation to the overall objectives of the service.

"But perhaps the most important advantage of conducting a comprehensive spending review is the opportunity it allows for individual Secretaries of State to put in place a substantial reallocation of resources within their departments—from bureaucracy to front-line services, from dealing with the symptoms of problems to dealing with causes—and to consider a co-ordinated approach that breaks free from old departmental fragmentations and duplication.

"As a result of interdepartmental reviews, services for asylum seekers will now be managed by one department rather than five; the three departments responsible for criminal justice will work together to one set of objectives; children's services and the urban regeneration budgets and our approach to tackling fraud will be reorganised, achieving both efficiencies and savings.

"Our prudence has been for a purpose. It is because we have set tough efficiency targets, and reordered departmental budgets that our top priorities, health and education, will receive more new money than the other 19 government departments combined. To accommodate this, we have had to take a firm line with other spending programmes, and rigorously select priorities.

"As a result, more than half today's allocations—over 50 per cent.—will be invested in health and education. So there will be additional resources, but it is money in return for modernisation.

"Now the allocations to individual services. Here, the main conclusion of the comprehensive spending review is that it is not just a social duty for government to invest in good public services, to improve our social fabric, and to tackle poverty and deprivation by extending opportunity. Most people in Britain, apart from a small and extreme minority, also agree that it is in the economic interests of the whole country to create an infrastructure of opportunity, and invest in education, science, transport and strong communities so that individuals can contribute to the economic and social well-being of the country.

"I turn to education. Invest in the education of our children and we are investing in our future. In the old economy, it was possible to survive with an education system that advanced only the ambitions of the few. The new economy demands an education system that advances the ambitions of all. But investment will take place only in exchange for further modernisation and reform.

"The Education Secretary has agreed not just to set numeracy and literacy targets for 11 year-olds but to set government targets for nursery education, for cutting truancy, for higher attainment by teenagers, for improved standards of teaching including a qualification for head teachers, for greater efficiency in further and higher education and for the inspection of schools. In return for investment, there will also be further reforms in teacher training and in the administration of school budgets.

"At every stage, we are linking investment to reform and it is on this basis that the Education Secretary tomorrow will announce the biggest single investment in education in the history of our country. In this and in other services there will be separate announcements based on the Barnett formula for Scotland, Wales and Northern Ireland.

"In the last three years of the previous Government growth in education spending was £7 billion. For the next three years, I can announce additional education spending of £19 billion. In total, we will spend £3 billion more next year, £6 billion more in 2000 and £10 billion more in 2001. That is what we mean by education, education, education; honouring our commitment to the British people.

"In 18 years of the last Government, spending on education rose on average by 1.4 per cent. a year. Education spending will now rise in real terms by an average of 5.1 per cent. a year till the end of Parliament.

"We said that we would devote a rising share of national income to education—and we have. Spending on education will now rise to 5 per cent. of national income.

"Today, around a million children are still being taught in classrooms built before 1914. Six thousand schools are already being refurbished. On top of this, over the Parliament capital investment to re-equip our schools will double. And after our reforms in student finance, there will now be an expansion in the number of students in higher and further education—by the end of this Parliament more than 500,000 additional students.

"We said that we would meet our pledge on school class sizes for five, six and seven year-olds. Under the proposals the Education Secretary will announce tomorrow our pledge will be met—as we promised.

"Investing in education is essential to secure both a fairer society and an efficient economy. And if our country is to be prepared and equipped for the competitive challenges ahead the Government also have an economic responsibility to invest in science and innovation; in the transport infrastructure, and in building safer and stronger communities.

"Net public investment will be doubled as a result of the Government's new Investing in Britain Fund, but in every area investment is conditional on reform. It is the development and application of ideas and inventions in science that hold the key to improved national competitiveness.

"As a result of a reduction in subsidies that can no longer be justified, and as a result of £400 million in support from the Wellcome Foundation, which I thank, the Government are able to announce the biggest ever government-led public/private partnership for science. A total of £1.1 billion will now be available to provide modern facilities for science research at our universities and support science teaching and research throughout the country. This innovative step-change in our approach to science will lay the foundations for putting Britain at the forefront of the next generation of scientific and industrial research.

"Anyone who travels on our roads and railways knows that after years of neglect and under-investment Britain suffers from an overcrowded, under-financed, under-planned and under-maintained transport system. So for transport we propose a new investment strategy involving new public/private partnerships—like those for the Underground and Channel Tunnel rail link—and a commitment to integrated planning. In return for these innovations there will be £2 billion more investment. From a 25 per cent. decline in transport investment in the last Parliament, there will be a 25 per cent. increase in the next three years—for investment in public transport and meeting our environmental objectives. Full details will he set out by the Deputy Prime Minister in his transport White Paper.

"Economic success and social cohesion both depend on safer and stronger communities. That is why we will now invest more in crime prevention. And that is why today also we propose policy reforms to tackle the underlying causes of poverty.

"It is because we are announcing major modernisations that put legal aid on a fairer footing and reform youth justice that more resources will be made available for policing and for the first time substantial resources for innovative evidence-based crime prevention work. Measures to tackle drug abuse will have a new priority, with a 25 per cent. increase in funding. All details, including the new targets that will be met, will be given by the Home Secretary.

"To build stronger communities, we need also to renew our housing stock. To cut out waste and ensure best use of resources, the Deputy Prime Minister will impose new guidelines for greater efficiency in construction and repair. And a new housing inspectorate will audit housing management in every local authority.

"With the help of these reforms we will be able not just to tackle homelessness but to renovate 1.5 million homes and to do so we will allocate, from capital receipts, £3.6 billion. Our commitment to the environment recognises the need for responsibility in the use of energy and it means that there will be a new programme for home energy efficiency.

"We are committed to a comprehensive programme of welfare reform. Since coming into office, we have introduced the New Deal, the reform in student finance, the working families tax credit and a new approach to child benefit. The Prime Minister has set up a welfare review which led to the welfare Green Paper and a long-term framework for the provision for future pensions and for the reform of disability benefits will be announced later this year.

"Last week we announced reforms in the Child Support Agency and yesterday new measures to combat social security fraud. Today I announce further changes in welfare policy. The New Deal for the unemployed is based on opportunities matched by responsibilities. It is now time to extend this approach to communities by tackling the underlying causes of poverty. For our most deprived estates, the key problems are not just poor housing but lack of employment and economic opportunity. In exchange for long-term targets for improving business start-ups, skills and educational qualifications, a total of £800 million will be allocated to the New Deal for communities. And a New Deal helping the young unemployed to become self-employed will be launched on Friday.

"A further reform will make it possible for thousands more young people to stay on in school and go on to further and higher education. To raise Britain's appallingly low staying-on rates, a new educational maintenance allowance, linked to attendance and based on parental income, will be piloted for 16 to 18 year-olds. If, as we expect, the new educational maintenance allowance succeeds in encouraging young people to stay on in education, we plan to introduce it nationally, using the money currently spent on child benefit post-16.

"As the interdepartmental review of children's services has uncovered, we spend £10 billion on young children but do so in an unco-ordinated and piecemeal way with thousands of the youngest children—those under three—missing out. Plans for a sure-start programme will be announced later this month, to bring together quality services for the under-threes and their parents—nursery, childcare and playgroup provision, and post-natal and other health services. One new feature will be to extend to parents the offer of counselling and help for them to prepare their children for learning and school. This is a significant step in the development of a family policy for our country, supporting family life and encouraging stable families, and building on our national childcare strategy. The Home Secretary's group will bring forward further recommendations on family policy.

"At the heart of our review has been a determination that we fulfil our duty to the oldest members of our society. First, pensioners will benefit most from a better health service. And it has always been wrong that charges are levied on pensioners for the eye sight tests that they regularly need to preserve sight and protect against disease. So for pensioners, from next April, eye test charges will be abolished.

"Secondly, the elderly who rely heavily on public transport need a fairer deal to enable them to be more mobile. In his Transport White Paper the Deputy Prime Minister will announce plans for nationwide help with transport for the elderly.

"Thirdly, the elderly fear their winter fuel bills. As a result of the cut in VAT, our winter fuel payment and other changes, average pensioner fuel bills are up to £100 lower this year. Later this week the Social Security Secretary will announce our further plans for help with fuel bills for the rest of the Parliament. And she will also announce further financial proposals to help pensioners who need it. Here also we are prepared to make reforms that will help alleviate poverty. From next April every pensioner and pensioner couple will have a minimum income guarantee.

"We shall also set a minimum tax guarantee: that no pensioner will pay income tax unless their income rises above a specified level. The Government will also announce measures to ensure that more people receive the income that they are due. As a result of our proposals, thousands of pensioners will be relieved from poverty. A total of £2.5 billion will be set aside for this programme.

"Further reforms in other services have made possible new investments that improve the quality of our community life. As a result of cutting wasteful bureaucracy and quangos and a new targeting of resources on priorities, £290 million extra will be invested in museums, the arts and sport over the next three years, not just repairing the damage of the previous Government's cuts but a real increase of 5.5 per cent. making possible improved access to museums and galleries.

"As a result of assets sales in areas where spending is no longer needed, the Foreign Office budget will not only ensure more resources for the proper representation and promotion of Britain abroad, but also the Foreign Secretary is announcing today that our support for the BBC World Service will be raised by a total of £44 million over the next three years.

"For 20 years overseas aid has been falling as a proportion of national income. Under this Government it will rise. As a result of a decision to sell a majority stake in the Commonwealth Development Corporation, and of a new decision to target overseas development assistance on health, education and anti-poverty programmes, the Secretary of State for International Development will announce today that Britain will, during this Parliament, increase overseas aid from the low of 0.25 per cent. of national income—the budget figure we inherited last year—to 0.30 per cent. of national income. Britain will enter the millennium at the forefront in pressing for debt reduction for the poorest countries. And aid which was falling by 2 per cent. a year under the last Government will rise in each of the next three years.

"The National Health Service is compassion in action; what its founder, Aneurin Bevan, rightly called the most civilised achievement of modern government. The final conclusion of the Comprehensive Spending Review is that it is fair and efficient to provide the best health service we can on the basis of need, not the ability to pay, and that under this Government health services will never be left to the hazards of private or charitable provision. Yet half the beds in NHS hospitals are in accommodation built before the First World War. And three-quarters of ward blocks are hand-me-downs from the days of charity, voluntary, municipal and emergency wartime hospitals. Investment in the NHS is long overdue. And we will recognise the care, the responsibility and the dedication of doctors, nurses and all staff to the patients of the NHS.

"The Secretary of State for Health will announce on Thursday in this House targets that tackle inefficiencies in hospitals and cost overruns, that simplify management structures and give a new emphasis to long-term planning. On quality, all hospitals will be required to publish league tables measuring the success rates of their treatments. Over the lifetime of this Parliament over £1 billion will he saved from red tape and put into patient care, in part by scrapping the costly and time-consuming annual round of contracts.

"So on the 50th anniversary of the NHS this Government will now make the biggest ever investment in its future, giving the NHS for the first time for decades the long-term resources it needs. Under the last government the increase for the last three years was £7 billion. For the coming three years, I am announcing an increase in health service funding of a total of £21 billion.

"Health department spending rose by an average of 2.5 per cent. a year during the last Parliament. Next year it will rise by 5.7 per cent. and the year after by 4.5 per cent. For the rest of the Parliament this Labour Government will achieve yearly real growth averaging 4.7 per cent. Every hospital will benefit from the 50 per cent. increase in investment in equipment and buildings and the £5 billion fund for NHS modernisation will give us the largest hospital building and modernisation programme this country has seen. As we start its next 50 years, the National Health Service is safe in this Government's hands.

"This Government have made the choices necessary to deliver stable and sustainable public finances. We have been steadfast in our priorities—the nation's priorities. As a result of prudence and a commitment to an investment in return for reform, a total of £40 billion will be invested in the nation's priorities—health and education. We are a Government whose prudence allows us to build modern public services and to renew Britain; a Government keeping our promises to the people of Britain; a Government line by line delivering on our manifesto; a Government step by step making Britain stronger. I commend this Statement to the House".

My Lords, that concludes the Statement.

5.18 p.m.

Lord Higgins

My Lords, during the high drama of the earlier debate, I was reminded of an occasion on which I had to compete in the only race which took place after Roger Bannister's first four-minute mile. There was a slight sense of anti-climax then and to some extent there is a slight sense of anti-climax in your Lordships' House now.

The major difference is that while the matter we were discussing earlier is of great importance, there cannot be the slightest doubt that the Statement we have just heard is of far greater importance both in quantitative terms and in terms of the future of our country. Therefore, I begin by thanking the Minister for his stamina in the way in which he presented and repeated the Statement made by the Chancellor of the Exchequer. Since I have been in your Lordships' House, I have been vastly impressed by the way in which the noble Lord masters his briefs. I have a number of clear and specific questions to ask him in a few moments.

The wording of the Statement is in many ways, as the noble Lord, Lord Barnett, will know, rather precise. I should like to pin down a number of points. However, before I do so, I wish to refer to the extraordinary way in which the contents of the Statement were leaked in the national press this morning. In more than 30 years in politics I cannot recall any similar event. As far as The Times is concerned there were specific quotes from the document itself. In the Financial Times there were statements attributed to the Prime Minister's official spokesman and I understand, although I did not hear it myself, that the Chancellor of the Exchequer, before appearing in another place, did a broadcast which revealed a considerable amount of what appears in the Statement. Hugh Dalton must be turning in his grave.

This is a matter of great concern. The tactic is very simple. You release the good and the bad news beforehand, you put your spin on the good news, and the bad news is dead news by the time Parliament has an opportunity to comment on it. That is serious. In another place Madam Speaker has stressed that Statements should, in the first instance, be made to Parliament. I hope that the noble Lord, Lord Richard, in his role as Leader of this House, will support Madam Speaker in saying that this kind of practice is not one which the Houses of Parliament, either in another place or in your Lordships' House, should approve or condone. It has gone far enough and it is high time it stopped.

I turn to the proposals. We have to recognise that the Statement reflects a major reversal of policy. The policy set out by the present Prime Minister before the last election was very clear in statement after statement, in broadcasts, and so on. It was that priority would be given to certain areas, notably health and education, and that was to be financed by savings as far as the social security budget was concerned. That was the policy, clearly stated. But it is equally clear that that has been reversed. It is quite true, and certainly one must welcome this, that there are to be substantial increases in both health and education. But it is certainly not the case that the Government's programme of welfare reform has been operated in such a way that the total of public expenditure on it has been cut. Of course, there are careful words in the Statement saying that the rate of growth has been reduced but that was not what the policy was. The policy was that there should be cuts. Instead, in the Statement and the detailed supporting documents, we find an increase. The amount spent on social security is to go up from £95 billion in 1998–99 to over £108 billion by the end of the planned period. So the whole strategy has changed. That obviously has important implications as far as the management of the economy is concerned—implications for taxation, borrowing, inflation, interest rates and so on.

Before I go into the details, perhaps I may stress another point. To a large extent there is what I think the Americans would call a question of "smoke and mirrors" as far as the presentation is concerned. In order to give the impression that there have been reductions in social security spending, the working families tax credit has been taken out of the public expenditure figures and something like £5 billion has been allocated to what is called an accounting adjustment.

I come to my first question for the Minister. Is it not the case that the Office for National Statistics is opposed to this reclassification? Clearly, as far as part of the working families tax credit is concerned, it is a hand-out and cannot conceivably be regarded as a reduction in taxation. It clearly is a hand-out. If we look at all the total for the so-called accounting adjustments, we find that something like £15 billion has been stuffed into this rather convenient receptacle making the prudence of the operation look a great deal better than it might have done.

There are other aspects that give one cause for concern. It is rather extraordinary that when the previous government were dealing with social security fraud, the previous opposition said that it was exaggerated at £2 billion. Only a little while ago it was said to be £4 billion. Suddenly it has grown to £7 billion and apparently this is to be part of the savings that the Government are to make. I ask the Minister why is it that these estimates of social security fraud have more than doubled in quite a short period of time?

I turn to a broader issue raised by the Statement. In the Budget Red Book as short a time ago as last March we were told that by the year 2000 there would be a budget surplus in each year to the end of the planned period. I ask the Minister not to look at the carefully-worded Statement. Can we have a straight answer? Is that any longer true? Secondly, we were told that there was to be a reduction in the national debt. Again, I ask the Minister not to look at the Statement. If we compare it with the Red Book is that any longer true? Thirdly we were told that there would be a reduction in the percentage of national income taken by the state. Is that statement made in the Red Book any longer true? I hope that we can have a clear answer from the Minister.

I turn to some of the individual items. As far as education is concerned, there is certainly a substantial increase. Earlier in the afternoon we were debating whether £2 million or—a debateable figure—£27 million could be afforded. Apparently, there is to be an increase in educational spending, which of course in many ways is welcome, of £8.5 billion. How is it that the Minister could have stood earlier at the Dispatch Box, when the Government are proposing an increase of that size, arguing the point as to whether the amendment cost £2 million or £27 million? I think that some question of priorities inevitably arises.

Perhaps I may also raise a matter we debated earlier on the Social Security Bill and the promise made in the Chancellor's Budget that he would raise tax thresholds for individuals at a cost of £1.3 billion. It will be in the recollection of your Lordships that we were told that that was something which would happen sometime later, although the impression was given that it would be immediate. Has that £1.3 billion been taken into account in the review we are considering this afternoon?

There are a number of difficult issues involved in the review, especially as far as concerns pensions. That also is to be welcomed. However, the move towards a guaranteed minimum pension inevitably suggests that the Government are moving towards means testing the national insurance pension. That is implicit in what is now proposed, I think it would be true to say. I am glad to see that I have some support from nods on the other side of the House. Despite all the protestations to pensioners of "Do not worry. Regardless of your income level we will not means test the national insurance pension", once you go for a guaranteed minimum pension in the way now proposed, it seems to me that that proposal, that basis of the national insurance scheme, is in danger of being undermined.

Finally, I should like to say a word or two about the implications of the change in policy which I referred to at the beginning of my remarks. The reality is that there is a huge increase in expenditure with no corresponding savings of the kind which the Government clearly intended to make. Perhaps I may ask the Minister a very simple question. As a result of the proposals set out in the Statement, does he think that the pressure on interest rates will be upwards or downwards?

The Chancellor of the Exchequer has been very clever in trying to hive off the responsibility for seven successive hikes in interest rates on to the Bank of England. Let us be absolutely clear: the decisions made by the Bank of England are determined by the decisions made by the Chancellor of the Exchequer. The Chancellor cannot avoid responsibility for them.

Given the overall approach of the Statement, it seems very clear that the Monetary Policy Committee of the Bank of England is likely to be very concerned about the situation which will follow. We are seeing an overall increase in public expenditure at a point where, if we are not actually at the peak of the cycle, we are certainly approaching very close to it. Indeed, it is a very strange policy in many ways designed to ensure that we have a sensible economic policy—a policy which the Chancellor says is prudent. If one looks at the Statement, it does not seem that the Chancellor's claims of prudence can really be justified.

Therefore, although there are clearly many things in the Statement which will be welcomed—indeed, anything which increases public expenditure for this or that individual on a massive scale is likely to get a welcome—the long-term proposals will go a long way towards undermining what the policy of the Chancellor of the Exchequer has previously been; in fact, this is a reversal of it. I believe that the claims for prudence are now very difficult to justify. I fear that, as a result, we are heading back to what may still appropriately be called "stagflation".

5.31 p.m.

Lord Taverne

My Lords, the Statement is one about long-term strategy. I should like to begin by making some general observations. It would be a tragedy if our society became one of ever lower taxation and declining public services. A high quality society requires high standards in education, in health, in public transport and in a number of other public services. By their original pledge to keep public spending within the limits set by the previous government—certainly for the first two years—it appeared as if the Government were opting for the American rather than the more civilised European model. We on these Benches are not asking for the average European levels of state pensions in this country or for European levels of income tax. However, we have always accepted that there may be a need from time to time to increase taxation, or charges, if a civilised level of public services is to be maintained.

Now the Government have relented from their very rigid control of public expenditure. In the Statement there are unexpectedly large increases in spending on education and on hospitals. The latter have to be seen in perspective. The average increase in spending over the lifetime of this Parliament is not that enormous in the case of health expenditure. It has been announced that there will be an average increase of 4.7 per cent. in real terms for the next three years. By my calculations that means that over a period of five years, the full length of a parliament, the average increase in spending on the health service will be about 3.6 per cent. On figures I have obtained from the Library of the House, in the period from 1989–90 to 1996–97 the average increase under the previous government was some 3.3 per cent. Therefore, it is a very welcome and sizeable increase, but it is not an enormous one. There may need to be more revenue for the health service from one source or another if the decline in the standards of the health service is to be arrested. This may be a temporary boost; but, unless the extra high level of spending is maintained, one may simply be standing still or there may even be continued decline.

As for education, there is to be an increase of 5.1 per cent. for the last three years of the Parliament. Again, looking at the very low levels of the first two years, that means that the average will be 3.5 per cent. That is substantial and very much better than was obtained under the previous government. Therefore, all in all, I believe that these increases are to be warmly welcomed but they must be seen in perspective. I shall not go into other items, except to mention in passing that I greatly welcome the extra spending on science and the increase in the allocation to the World Service of the BBC.

As for the techniques of securing greater value for money, I must declare a certain scepticism. Since I was a Treasury Minister over 30 years ago, I have noticed that every new administration always claims that it will have a wonderful new weapon for extracting better value for money out of its public expenditure. Sometimes one sees that improvements are made, but the claims are always vastly exaggerated. I hope that the Chancellor of Exchequer will not count on too many savings.

However, if one looks at the overall scheme, there is no doubt that it depends on inflation being kept low. Indeed, if inflation goes higher, the plans cannot be maintained. They rely very heavily indeed on a rigid control of public sector pay. Do the Government not realise that this may be a very weak part of the strategy? Do they not realise that you cannot, indefinitely, keep public sector pay below private sector pay? That is not only grossly unfair for teachers and nurses and not only conflicts with trying to get the best value out of public services; but, also, it will not hold. It is demoralising and, in time, it will not be possible to recruit people to perform the services that we need. Have the Government not looked back and realised from history that our experience has been that this kind of policy of trying to keep public sector pay increases below those in the private sector cannot be maintained?

I turn now to my other reservation; namely, that what may turn out to plague the Government and undermine these splendid plans is the failure of the first two Budgets effectively to attack consumption. The Government have announced a tough fiscal policy. However, it is not quite as tough as it was. Their policy has been tough on companies, but it has not been tough on consumption. In that respect, it does not compare favourably with the policies followed after the 1992 devaluation by Chancellor Lamont and, in his earlier days, by Chancellor Clarke. It means that the Government are relying too much on interest rates to keep down inflation. That may lead to a recession and, if there is a recession, the three-year plan will have to be modified as a result. So there is a weakness here. I do not know whether there will be a recession, and I am not saying that there will be one because I do not believe that anyone can predict that. However, if this does lead to a recession, it may undermine the three-year plan. It has certainly already hurt investment and manufacturing.

The Government have accomplished many good things, quite apart from this change of tack over public spending. The methods of controlling the latter are, on the whole, to be welcomed. The Statement which was made on public accounts the other day was also most welcome, as indeed is the long-term approach of today's Statement. I very much hope that the Government will achieve their aims. However, there are many uncertainties and some weaknesses in the Government's strategies. I have in mind their failure to tackle consumption and perhaps their excessive reliance on restraining public sector pay. I hope that those weaknesses do not lead to disappointment.

5.38 p.m.

Lord McIntosh of Haringey

; My Lords, I am grateful to both noble Lords for the way they responded to the Statement. It is interesting to note that whereas public attention will be very largely focused, I believe, on the spending plans as regards health and education, and so on, both noble Lords, being highly intellectual persons, have chosen to focus on the issues of economic management in general rather than on the spending plans. In a way I welcome that approach, because it is appropriate for this House.

The noble Lord, Lord Higgins, started by saying that he had to run in the race after the four-minute mile. I lived in Iffley Road at the time of the four-minute mile, but, after I had seen the record being broken, I have to say that I went away and did not see the noble Lord running. It is a matter which has not been of regret to me for the past 44 years, but no doubt it will be for the rest of my life.

The noble Lord, Lord Higgins, said that he regretted the leaks in the press. Of course, the Government regret any speculation in the press. In particular the Government regret it when the lobby briefing which is given as normal by the Prime Minister's official spokesman is then quoted in the press against all the rules on those briefings. The Chancellor spoke on the radio this morning but my understanding is that he spoke entirely in generalities and certainly did not give any market sensitive information and gave no significant leaks of what was contained in the Statement. As regards the quality of the speculation in the press, we have only to look at the totally opposing views in the Guardian and the Independent on what is proposed for public sector pay to realise that what we are talking about are not leaks or any breach of parliamentary privilege but simply legitimate and sometimes rather inaccurate speculation.

The noble Lord, Lord Higgins, spoke about our approach to savings in the social security budget. He mentioned Labour Party statements made both before and after the election and said that we would have to make savings to pay for the improvements we propose in health and education. The noble Lord ought to recognise that the social security budget plans for the next three years contain a 2 per cent. growth in real terms, which is lower than the growth in public spending and in GDP which is projected for that period. If I had been a Labour Party activist and this was being proposed by a Conservative government I would march down the high street with a banner saying, "Oppose Tory Cuts", because that is really what it is in comparison with the expenditure plans for virtually all other public services.

The noble Lord made an interesting, difficult and technical point about the classification of the working families tax credit in the Government accounts and the views of the Office for National Statistics on the reclassification of those accounts. We have taken into account the views of the Office for National Statistics on this matter. The accounting adjustments referred to in the White Paper are in line with its definitions of national accounts. I hope that that will satisfy the noble Lord, but if he is not satisfied we can engage in correspondence about it.

The noble Lord referred to social security fraud. It is true that when we were in opposition we were not convinced of the value of the estimates made by the then Conservative government of social security fraud. When we were in opposition we did not know as much as we do now. I believe that my honourable friends in the social security department are now being realistic in their estimates of social security fraud without in any way saying that this will not continue to be an intractable problem in many ways.

The noble Lord asked me to confirm what is being said in the Red Book rather than in the Statement. Clearly, there is a difficulty here for opposition spokesmen who have a short time to read these documents. However, there is a real difference between the way in which we present public expenditure now and the way in which it was presented in Red Books in the past. All Red Books right up until March of this year have talked in traditional terms of a control total and then various non-control items. What we are doing now is rather different. We are distinguishing between departmental expenditure limits, annually managed expenditure and total managed expenditure which is the addition of those two items. It may help noble Lords to think of them as three children: Del, Amy and Tim. What we are doing in this redefinition of public expenditure is to distinguish between those items which can and should be controlled by departments in the way in which they set their targets and the way in which they spend money to achieve those targets—and will be held to account for that—and those items, such as the vast bulk of social security expenditure, which are demand led and therefore are annually managed expenditure items. They are both brought together in total managed expenditure and the comparisons are not quite as direct as the noble Lord would perhaps wish.

As regards the noble Lord's specific questions on the Red Book, I can confirm that we still expect a £30 billion surplus cumulatively over the next three years in accordance with the golden rule forecast. We expect a reduction in the national debt of 4 per cent. over that period. We expect public expenditure as a percentage of GDP to go down below 40 per cent. by the end of the three year period, in contrast, of course, with an increase of nearly 17 per cent. of GDP under the Conservative government. The noble Lord will forgive me if I do not enter into the arguments about £2 million or £27 million of student finance.

The noble Lord asked about the means testing of what he called the national insurance pension. We have said in the Statement that there will be a guaranteed minimum income for all pensioners and that there will be a guaranteed maximum tax take from all pensioners. I think that gives pensioners the assurance they want, even if it does not satisfy the noble Lord.

The noble Lord's final question concerned whether this public expenditure programme would produce pressure on interest rates. The public expenditure programme in total does not arise from this Statement but results from the Economic and Fiscal Strategy Report last month. It was that report and that announcement in Parliament which set out the global figure expected for public expenditure over the next three years. The Monetary Policy Committee has met since that figure was made public and has not seen fit to propose an increase in interest rates. I hope therefore that the noble Lord will to some extent be reassured on that, although of course the Monetary Policy Committee does not control interest rates around the world.

The noble Lord, Lord Taverne, had an interesting approach to the Statement. He quite rightly said that there are two ways of looking at the balance between taxation and services. You can have what he described as the American model of low tax and low services, or you can have what he presumably applauds as an alternative; namely, a high tax, high spend model. We did not win the election on a high tax, high spend model of the economy. We won it on a fair tax and protection of public services model which is not quite the same thing.

If we have tried to achieve anything in our past two announcements it is that public services can and will be protected but will be protected at least as much through improvements in efficiency and targeting as through increases in taxation. The noble Lord is, of course, quite right to take the three year figures we have presented today and recalculate them to cover the whole five years of this Parliament, including the two years for which we accepted the public spending plans we inherited from the previous government. I do not apologise for that. In the light of the effective work that has been done on public expenditure over the past 15 months, it was clearly the right decision to tackle the issue in that way. The benefits and rewards are apparent in the Statement I have repeated.

The noble Lord talked about the dangers of a rigid control of public expenditure. He went on to specify public sector pay as being, as it were, the leading edge of that criticism. The Statement is inevitably elliptical. What we mean to say about public sector pay is that there will be an extension of the remit of the public sector pay review bodies; that they will be responsible for recommendations to government about the level of public sector pay in the light of our requirement on each spending department to fulfil its outcome targets—in other words, it has to produce the goods first—and our inflation targets. However, it will be for the departmental Ministers, the Secretaries of State for the spending departments, to make the final decision. If a convincing case is put to them that it is not possible to achieve the output targets in education, health or any other public service without increases in public sector pay, that that can be afforded within their budgets and by achieving their targets, and that it will not breach the Government's inflation targets, then that is a matter for the spending departments and the Secretaries of State concerned. Neither the pessimistic view of today's Guardian nor the optimistic view of the Independent properly represents the Government's view.

5.51 p.m.

Lord Barnett

My Lords, I know the noble Lord, Lord Higgins, to be characteristically not as churlish as he was made to sound this afternoon. He is basically quite a nice fellow. However, he must feel, because he is speaking from the Opposition Front Bench, that he has to behave in the way that he has. I wish to make it clear that I warmly welcome the Statement. Listening to it, I thought that we were going to have a general election next week!

I wish to ask a few specific questions. First, it was previously stated by the Chancellor that there was a "golden rule" that current revenue would always exceed current expenditure, which we are now told will be 2¼ per cent. a year. Indeed, even with public capital investment, public expenditure is expected to grow from only 39 per cent. to 41 per cent. of GDP. Given the Bank of England's current role of considering inflation first and everything else second, including government economic policy and presumably including the Chancellor's Statement today, we shall not know what the revenue is to be over the next three years.

I am not suggesting, as the noble Lord, Lord Higgins, seemed to do, or implying that the Monetary Policy Committee will be obliged to increase interest rates arising out of this. Fortunately, no one from the Monetary Policy Committee is likely to be listening to him. The Bank of England and its Monetary Policy Committee do not know what is going to happen in regard to inflation or anything else this month, let alone over a three-year period.

Never mind whether there is to be a hard landing, a recession or whatever, if economic growth and revenue are nothing like as high as is assumed in the Chancellor's Statement, have departments been warned that there may be a need for cuts in their departmental expenditure? That consideration is not unimportant and I assume that it may well happen, despite the reserves that are built into these matters.

There is to be a new Cabinet committee to oversee departmental expenditure. Am I to take it that that is the first announcement of a reshuffle—namely, there will no longer be a need for a Chief Secretary to the Treasury? If that is not the case, will my noble friend say what the Chief Secretary will do in future?

Finally, I note from the Chancellor's Statement that the Government are to retain the Barnett formula. I should be flattered—at least so far as Wales is concerned. However, so far as Scotland is concerned, I am not flattered. I have made clear that in my view the Barnett formula should not be continued as it is, and certainly not for three years, given the state of income per head in other parts of the UK including the north of England by comparison with Scotland. There is clearly a need for a review. I know that the Government are very fond of reviews; they have just announced another one. I should have liked to hear, and perhaps my noble friend will confirm, that there is at least to be some review of the Barnett formula as I have suggested, in order—not to do away with the name, because I have grown very fond of it—but to have a Barnett formula mark II. That certainly needs to be done, and perhaps my noble friend will tell me that that is the Government's intention.

Lord McIntosh of Haringey

My Lords, my noble friend asked first about the golden rule. However, he over-simplified it grossly. He said that revenue should exceed expenditure. The golden rule states that it should exceed expenditure over the period of the economic cycle—the difficulty being that we do not know what the economic cycle is. My noble friend is being, uncharacteristically, too simplistic.

He asked what would happen in a worst case scenario: if there were to be a shortfall in revenues or an increase in demand for expenditure. The estimates that we have made are extremely cautious and conservative. They have been audited by the National Audit Office. Even after that, we have erred on the side of pessimism rather than optimism. Therefore I do not believe it would be appropriate for us to be warning departments now about a matter for which we have fully provided in the projections and allocations that we have made.

My noble friend asked whether the new Cabinet committee will involve changes in responsibilities within the Treasury. I am sure that he will await, as I shall, with interest the Prime Minister's decisions on that matter in due course.

My noble friend asked about a "Barnett formula mark II", for which he understandably has a concern. We made it clear last year that we would continue the Barnett formula, particularly in the context of Scottish and Welsh devolution. It works, it is well understood by what are called the home countries, and we have no particular plan to change it.

My noble friend also asked about the number of government reviews taking place. If we examine the White Paper, we see the result and completion of major reviews that have taken place over the past 14 months and which have resulted in the interdepartmental spending programmes to which there has been no reference in this debate but which form an important and valuable part of the Government's proposals.

Lord Peston

My Lords, I congratulate my noble friend and, through him, my right honourable friend the Chancellor of the Exchequer on this tremendously important Statement. That said, it is a terrible state of affairs when a major Statement of this kind, containing enormously important policy initiatives, is not debated in this House. We can spend only 20 minutes on it, and we have to share that time with my noble friend the Minister. I do not say that with any disrespect to him. When I think of how much time we have wasted on ludicrous legislation over the past few weeks and the fact that this House will not be debating an incredible number of important initiatives, I feel very sad. That point might be noted by the usual channels.

I cannot have a great row with the noble Lord, Lord Higgins, on the classification of the accounts, on whether the policy is contractionary or expansionary and, above all, on leaks—except to say that I strongly believe that there should not be any leaks, because all documents should be placed in the public domain immediately they are produced, even though that would put at least one very important journalist out of business.

First, I wish to ask my noble friend whether there is a document called the Comprehensive Spending Review? Shall we receive a bigger document which we can read in due course which would contain a good deal of the detail in which we are interested?

My second question was raised by my noble friend Lord Barnett. The Statement says that: current spending will grow by no more than 2; per cent. It does not say "per annum" so I wonder whether it means "per annum". It also does not say "at constant prices". Does it mean that? Those are specific questions.

With regard to the departments, I welcome the three-year approach to public expenditure. I totally support my noble friend's view that those of us who favour public expenditure, as I do, have a particular responsibility to support those who wish to see resources used efficiently. There is no argument about that. As a result of the Statement, I ask my noble friend whether it will bring to an end the second-guessing of the departments by the Treasury. In particular, will the departments be set free to manage the resources that they are given so that they can both manage them efficiently and be brought to account? Can my noble friend give me the answer?

I entirely support the extra funds for science. I have some questions on which my noble friend may wish to write to me. Will the new level be a plateau to which science will grow, as I hope? Alternatively, will it simply be a once-for-all change which means that we will have another crisis in science financing before we can turn round? I certainly wish to know the answer to that.

One of the document's great initiatives is the new educational maintenance allowance. Some of us have been looking for this for 25 years on grounds of both efficiency and equity. It has never been obvious why one could find money for university students but none for 16 year-olds. I am slightly confused; in one part of the Statement it is said that the Government will introduce it and in another it is said that if it succeeds they plan to introduce it nationally. The first statement seems to imply that the allowance would apply to everyone, so I do not understand the second statement that if it succeeds it would be introduced nationally. Could we be given the answer to that?

As my noble friend is well aware, I could produce many more questions but it would be unfair to other noble Lords who wish to speak. However, we ought to have a chance to debate such matters in detail.

6.1 p.m.

Lord McIntosh of Haringey

My Lords, I am sorry that we only have 20 minutes, but it always seems that some part of the 20 minutes is taken up by people complaining that we only have 20 minutes.

My noble friend asked whether there is a document. There is indeed and it is called: Modernising Public Services for Britain: Investing in Reform. It is available in the Printed Paper Office and will be followed by a series of documents to be produced between now and the end of the month by each individual department. It would certainly not be appropriate for the Chancellor of the Exchequer to set out or present the detailed expenditure plans of each department. Those will be presented by the appropriate Secretary of State in due course. All we could do this afternoon was give the financial framework in which those spending plans will be formulated and a flavour of the targets which the Government will set for departments.

My noble friend asked whether the growth was in constant prices. Yes, of course it is. We are talking about real growth, although it may vary between years.

The issue of management by departments is extremely important. My noble friend was quite right to raise it. Our intention is set out clearly in Modernising Public Services for Britain and also in the document entitled Aims and Objectives which sets out the departmental aims and objectives for each department and each agency. It is our intention that departments should be held to account, as private businesses are held to account. They should say what they are going to do and know what money they have to do it with. If they cannot do it within that sum then they are in trouble because the targets are firm and agreed between the departments and the Treasury. They will have to be adhered to.

My noble friend asked about the educational maintenance allowances. The Statement said that the first step would be pilot projects, but that they would be followed by national implementation if—as my noble friend and all of us hope—it is shown that educational maintenance allowances encourage greater staying on in education by students after the age of 16.

6.4 p.m.

Lord Marlesford

My Lords, I welcome the whole approach that the Government have taken towards public spending. In its methodology it very much builds on the remarkable changes which my noble friend Lady Thatcher introduced during the 18 years of Conservative government. In particular, it does so through such avenues as the private finance initiative—a huge change. I note from the publication to which the Minister referred that that is to be enhanced and increased. Most important, in my view, that is to be done by judging new expenditure against old expenditure rather than new expenditure against new expenditure, so that resources can be shifted to today's priorities.

Having said all that, I found what the noble Lord, Lord Barnett, said rather ominous. I am afraid that I very much agreed with him. The Minister knows that the OECD economic report for June anticipated that economic growth in the United Kingdom will he 1.7 per cent. of GDP for 1998—only half the 3.4 per cent. that it was in 1997. If that is the case, I wonder whether the Government have been wise to put forward major increases in public spending—desirable and popular though they may be. I ask the Minister whether it is not harder in political terms to cut spending than it is delightful in political terms to increase it. It might not be the fault of the Government, it might be world affairs, but if the economy develops a significant downward rate of growth and the Government are forced to choose between increasing taxation or cutting the new spending plans, can the Minister give me the assurance that the Government would not increase taxation as the noble Lord, Lord Taverne, seemed to indicate? If they were to do so, it would shoot out of the water the whole of the sound approach the Government have been taking on economic policy.

Lord McIntosh of Haringey

My Lords, I agree with only one point in what the noble Lord said about the Thatcher Government. I agree that it is right that the private finance initiative should continue and will continue. As for the rest of the inheritance from the previous government in public finance management terms, the two most conspicuous characteristics of the Thatcher Government were that they took enormous amounts of windfall receipts—£65 billion from privatisations and all the receipts from North Sea oil and gas—and spent it all on current expenditure, with no provision for investment.

The Earl of Stockton described that as selling off the family silver. I contrast it with what we are doing, which is totally different. We are taking unused and unwanted items from the attic and using the proceeds from their sale for the restructuring of the economy, the restructuring of the building and—to continue the analogy—the rehabilitation of the building for the benefit of its inhabitants. That is the huge difference between us and the Thatcher Government. What we are selling off will be used for investment and not in order to cut taxes for the better off.

The noble Lord echoed the concerns of my noble friend about forecasts of growth for this year. He quoted the OECD figure of 1.7 per cent. If it is any reassurance to him, the Treasury expectation is a figure considerably lower than that. The public expenditure plans are based on the lower figure and, if it is a further argument against the wonderful situation we inherited from Mr. Kenneth Clarke, I think the noble Lord will agree that growth in 1998 is more dependent on Mr. Clarke's policies than those of the present Chancellor.

Lord Elis-Thomas

My Lords, will the Minister accept that I am not interested in discussing the past legacy of the Thatcher Government? However, as he will understand, I am interested in assessing the relevance of the Statement to the Wales block as it is transferred to the national assembly.

Does the Minister accept that, although I warmly welcome the key approaches in terms of investment in education standards, particularly the commitment of the HE sector to develop a more effective role in the Welsh economy, I am concerned about the adequacy of the allocation in terms of ensuring that the objectives of Pathway to Prosperity—published last week by the Welsh Office—can be enacted? In other words, we are talking in an official statement by the Welsh Office of a job shortfall of 200,000.

Is the Minister aware that some of us may be concerned that although that represents an additional £2.2 billion over the next three years to invest in the Welsh economy, it may not bring the level of performance of that economy up to the UK and European average? There may even be a need to revisit the public expenditure levels in Wales in line with those indicated in passing earlier by the noble Lord, Lord Barnett.

Lord McIntosh of Haringey

My Lords, I referred to the Thatcher Government when the noble Lord, Lord Marlesford, defended them. I do not tend to engage in disputes unless I am invited to do so.

The noble Lord, Lord Elis-Thomas, is right that the spending plans proposed for the next three years provide an additional £2.2 billion over the next three years. Coupled with the additional resources already committed to health, education and transport, that will meet the commitments made in our election manifesto. I hope that that will reassure the noble Lord.

In relation to the distribution and control of that expenditure, it will increasingly become the responsibility of the Welsh assembly and nobody in this Chamber will be able to answer for it.