Pre-Budget Report 2009

My Lords, I sensibly did not prepare a speech for this debate. If you are in the bottom quartile of speakers in a long debate, you may find that much of the ground has been covered by those before you and, very often, more effectively than you could do it yourself. However, I will draw attention to a few individual aspects and make one or two suggestions that I hope the Government will at least consider. We are in a situation where we have extremely little room for manoeuvre. This is the problem. Any debtor, beyond a certain point, runs out of options. We are enormously constrained by the need to look in many different directions. The Government have not always got it right in the way that they have presented what they are trying to do. There are legitimate questions of credibility about policy and its presentation. Sometimes the Government give the impression that borrowing is a sort of free ride, or something of a nil-cost option. It certainly is not; if you spend £1 billion extra and borrow the money, you will increase public expenditure the following year by £40 million or £50 million. You cannot avoid it; it is the interest cost. If you do this year after year, you reach levels where your room for manoeuvre, as I say, runs out. That is what has happened. Public expenditure and fiscal deficit were casualties of the decision in the Government’s second term to project public expenditure as growing at a faster rate than they expected the economy to grow at. Even if the economy grew as quickly as was taken into account, it was still running behind the commitments. We all know, from our own affairs as well as those of our country, that once you get to a certain point of indebtedness your options for dealing sensibly with things shrink. That is the position that we had reached when the global storms hit us. I am not saying that all the consequences of those global storms are the Government’s fault—of course not. However, we came into that situation at a time when we had had several years of economic strength. We should have taken the opportunity during that time not to pump up even more public expenditure but to cut back a bit and strengthen our fiscal position. That would have given us a much more flexible hand to play now. The other point about the rapid increase in public expenditure is that it is much easier to increase spending than it is to restrain it. Decisions that might be quite lightly taken to increase public expenditure in times when the economic background looks comfortable can come back and hit you very badly if things do not turn out as well as expected. One of the key points that has been raised in this debate is how vulnerable we are to the credibility of a 3.5 per cent growth rate the year after next. It is optimistic. The markets, the commentators and everybody else know that it is optimistic. We know that it is optimistic. The Government do not tend to play their hand as though they are conscious of what a delicate position we are in over this. They should not be too hesitant about doing things that are tough. I remember well the Budget of 1981 because I used to carry the Chancellor’s bags in those days. In the lead-up to that Budget there was tremendous angst about whether it would be so badly received as to be damaging. My noble and learned friend Lord Howe—a resolute person, particularly in times of difficulty—went ahead with it and, generally, the public reaction to it was not at all bad. The Government were seen to be doing what was needed by the circumstances. You cannot say that of everything that this Government have done in the present situation. I agree with the noble Lord, Lord Barnett: you cannot let everything be run by rating agencies. We ought not to give them the chance to scaremonger but we have to discuss this. It is so important to the economic strategy that the Government are following, and the situation that has led to it, that we have to accept that there are many people in the rating agencies who have genuine doubts about what we can do. The Moody comments have been brought into this debate. It is true that Moody says that there is no immediate threat to our top-level status, but by saying that it admits that there is a longer-term potential threat to our status. We have to live with that. Part of all this comes back to the gilt and currency markets. You have to talk about the two together because if foreigners are buying British bonds, they have to make a call on the exchange rate as well as on the other parts of the deal. We remain vulnerable; we have huge borrowing—almost £800 billion projected over the next six years. These figures are so big as to be not only very scary, but far beyond anything for which there is any precedent. There are several factors, such as the reluctance to produce a Comprehensive Spending Review, which seem to be for the Government’s convenience, rather than the economic need. This is where I offer a few thoughts to the Treasury Bench. The Treasury ought to put every fiscal proposal through the most scrupulous assessment of its likely impact. If your credibility is under threat—it certainly has not come out well in the past two weeks—you have to be acutely conscious of what the impact may be, not only of the measures themselves, but of the language that is used to explain them. Rightly or wrongly, the Government have given the impression that they have put off everything that they do not want to talk about until after the election. A little bit of that is not unreasonable from a government office, but it has got to a point where there is a reluctance to believe much of the Government’s case—and some of it is perfectly reasonable. I do not want to cause offence by saying that I think that they have fallen down on this, but we are in more extreme circumstances, financially and economically, than any of us can remember, and we have to look at the way in which these things are discussed and debated. I hope that message will get through. Finally, a number of noble Lords have said that we have to take on board the fact that we have a highly geared economy, and that when things go well, its tax revenues are extremely buoyant. When things turn round the other way and you lose the income tax, the corporation tax, the VAT and so on, at the same time having to extend benefits and welfare payments as unemployment rises, you have a very sharp shake-out. That is what we are experiencing now. In our planning, we have to try to limit, as much as possible, the areas of incredulity which, I am afraid, has been the general reaction to what the Government have done.