Pre-Budget Report 2009

My Lords, I was very surprised to be told by the Chancellor at the beginning of the PBR Statement that we start from "a position of strength". What exactly is this position of strength? Is it the state of the Budget finances? This cannot be the case, as a mind-boggling £178 billion deficit is forecast for this year and £176 billion for next year: more than double the previous record and more than an eighth of Britain’s gross domestic product. Is it the 2009 GDP growth forecast? That seems unlikely, as it has been cut from a 3.5 per cent decline to 4.75 per cent. The Chancellor, as many noble Lords have already said, has also made very optimistic forecasts for growth of 3.5 per cent for 2011 and 3.5 per cent for 2012. If these are not met, the deficit will become much more serious again, so the starting point for the Chancellor’s PBR speech should have been completely the opposite; in budgetary terms, we start from a position of great economic weakness. The cause of the difficulties is not simply the costs of the financial crisis, for which the Government bear only a portion of the blame, but a large structural weakness, for which they should bear all the blame. Simply put, believing that they had abolished boom and bust, the Government spent too much when the bust happened. The reduction in public spending that is now required is therefore severe. The Chancellor’s task was therefore set. He should have made the public realise the scale of the problem, and he should have shown that he had a plan to deal with it. Finally, he should have shown that this plan consisted mostly of spending cuts rather than of tax rises. He should have set out a comprehensive review of government spending. This happened in 2001 and 2005, ahead of both elections. Spending was predicted to rise at both these times. Now he says that he cannot produce the review because the economy is too unpredictable. This is not good enough. Whatever the argument about timing, this should not have prevented him from beginning the task of reducing the size of the state. A structural deficit—excessive spending caused not by events but by how the state is organised and the nature of the services that it provides—requires a structural response. Where was that in the PBR? Rather than making a principle of reining back spending, the Government decided to go back to the old policy of tax and spend. Initial reaction to the 1 per cent freeze on public sector pay was favourable. However, the Chancellor’s announcement that he would ring-fence 95 per cent of the health budget from real cuts, guaranteeing front-line spending on schools and police numbers and giving half a million extra children free school meals, has, according to the IFS, increased planned spending by around £15 billion in total in 2011-12 and in 2012-13 while gathering in only £9 billion of new taxes. There is extra spending in areas that will not help to pump prime the economy and that have not been well thought through. There are, for example, plans to spend £670 million on free social care for the elderly. The elderly need special attention, but the country cannot afford this extra measure at this critical time. Do not just take my word for it. According to the Guardian of 19 November, the noble Lord, Lord Lipsey, a former member of the Royal Commission on Long Term Care, said that the Government’s plans amounted to, ""a demolition job on the national budget"," and that the Prime Minister’s announcement was like, ""an admiral firing an Exocet into his own warship"." The former Health Minister, the noble Lord, Lord Warner, also criticised the plans. He said there had been no proper impact assessment and no data to show how this would work. Where the Government have decided to cut back spending, they have not been honest and spelled it out in the Pre-Budget Report. The Chancellor claimed, for instance, that spending will remain flat for departments outside the ring-fenced areas of education, health and aid. As other noble Lords have already said, it has taken major detective work by the IFS to discover that this is not so. Those departments face average cuts of 5.6 per cent a year, or around £36 billion in the three years to 2013-14. This is equivalent to nearly half the annual NHS budget. Of this £36 billion, only £21 billion has been specified. There is thus a black hole of £15 billion, according to IFS researcher Gemma Tetlow. In fact, all the increases in central government spending on public services in Labour’s second and third terms will be reversed by 2013-14, and the first-term increases could be reversed by 2017-18. Another area in which the Chancellor has been economical with the truth is pensions. He said that the basic state pension would rise by 2.5 per cent; nowhere in his speech, or in the hundreds of pages of pre-Budget documents, was it revealed that parts of the state pension, such as SERPS and extra pensions, which do not count as basics, would be frozen. Once again, the Chancellor hoped that people would not notice. On tax, there was a further imposition on private enterprise and middle Britain with a national insurance increase. This plans to raise more than £6 billion in the 2011 and 2012 tax years. If the 1 per cent rise in employers’ NI is taken into account, the IFS calculate that all jobs paying over £14,000 will be hit, not only jobs paying over £20,000 as claimed by the Chancellor. The rise in national insurance was roundly condemned by the CBI, the British Chambers of Commerce, the Institute of Directors and the Federation of Small Businesses. Richard Lambert, director general of the CBI, summed it up best. He said: ""The Chancellor has made a serious mistake imposing an extra jobs tax at a time when economic recovery will still be fragile. Increasing the national insurance contribution will hold back job creation and growth"." The second tax rise is £550 million from the bankers’ bonus payroll tax. This is clearly popular with the public in the short term but care must be taken not to frighten off financial service companies from basing themselves in London when their taxes are so important to the national finances. According to Michael Saunders of Citibank, these two tax hikes will raise modestly amounts of money, all absorbed by additions to public spending. They demonstrate that the Government have abandoned Tony Blair’s big tent in favour of its core vote. This is also shown by the small announcements on free school meals, the over 50s, bingo, boilers, electric vans and so forth. Even if the economy picks up as the Treasury predicts, there will still be £2,400 per family per year to be found to balance the books by 2017-18. At a time of the world’s greatest financial crisis since the 1930s, the Government are reverting to electoral gimmicks. Today the world needs statesmen who have the vision and guts to make fundamental financial reforms rather than reverting to the politics of division. The Pre-Budget report should have contained a major strategy to cut the budget deficit rather than being remembered as the "bingo and boilers" report. As today’s FT states: ""The Treasury’s failure to give details of its fiscal consolidation plan in Parliament contrasts with its claim that the new Fiscal Responsibility Bill ‘gives Parliament a clear, central role in both setting and monitoring the government’s fiscal plans’. The Statutory Code for Fiscal Stability requires the Treasury to apply the principle of transparency to the formulation and interpretation of fiscal policy"." The Chancellor and the Treasury have totally failed to do this in the PBR.