Pre-Budget Report 2009

My Lords, three questions have dominated today’s debate. First, how worried should we be about the deficit? Secondly, how quickly should it be reduced? Thirdly, what specific action should we take to bring about that reduction? On the size of the deficit, there is pretty fair agreement, both on where we started from and where we are going to. We started with a relatively low level of public debt as a share of GDP compared to our competitors. To use the analogy commonly employed by economists, the bath of public debt was not very full; it was at a perfectly acceptable level. It was being filled, slowly, even in the good times, but it was manageable. In the past year, the taps have been turned on full belt and the Pre-Budget Report shows the taps remaining on more or less at full belt, into the future. As the noble Viscount, Lord Eccles, pointed out, the Pre-Budget Report shows that, for the whole of the projected period to 2014, debt as a proportion of GDP continues to rise. There is no turning point in terms of the level of water in the bath. As pointed out by the noble Lord, Lord MacGregor, the cost of having a full rather than an empty bath, in terms of interest payments, rises commensurately with its debt. We are talking about a figure of £63 billion by 2014, as I think the noble Lord mentioned. Some have said, "If you go on like that for very long, you will be talking about serious amounts of money". Clearly, the deficit is extremely large, is growing and is something about which we should be extremely worried. How quickly should the deficit be reduced? The Government are giving us the Fiscal Responsibility Bill by way of overall policy framework in this area, which will require borrowing to be halved over four years and to be reduced again in the fifth year, albeit by an unspecified amount. As I said yesterday at Question Time, although the motivation for the Bill is clear, it is in many ways a nonsense because if we find in five years’ time, as we may, that we are involved in military action that cannot be foreseen or that there is another downturn, the Government will almost certainly feel it appropriate—and everybody will agree—that public expenditure as a proportion of GDP should rise to meet those new circumstances; yet, under the terms of the Bill, this would be illegal. This seems to me to render the Bill pretty stupid. It does not, however, render the message behind the Bill stupid; namely, that we should be bearing down heavily on the overall level of debt. I may be wrong but I think that the principle enshrined in the Bill of halving the deficit over the period of the next Parliament, or certainly over the next four years, has been accepted as a working assumption by all the political parties. If you accept that as the point you want to get to at the end of the next Parliament, the big question is when you start turning the taps off. At the moment, the Government are giving us very little indication of the tap-turning off process. The Conservatives are making our flesh creep by suggesting that the taps will be turned off the moment they get into office, if, indeed, they get into office. We have suggested that five tests should be applied to determine the pace at which the taps are turned off. These would be: a return to sustained economic growth; stable or increasing levels of employment; the costs of government borrowing and whether they are going up significantly; the availability of credit to businesses; and the external economic environment, particularly as regards growth in the EU. These tests, rather like the Chancellor’s five tests around the euro, are not scientific tests. Choosing the point and the calibration of turning off the taps is more an art than a science, but we think it is sensible to have some basis against which you can explain how you are going to do it. When you do it, you can set your actions against that framework, rather than making extremely vague, generalised statements, which is what I think we are faced with from the other two parties. The noble Lord, Lord Barnett, said that it was impossible at this point—because we do not know what growth will be—to be very prescriptive about income and expenditure, particularly expenditure. In that case, it is slightly surprising that the Government have chosen to be very prescriptive about those bits of expenditure that they want to increase, but almost silent about how they will make cuts. The pace at which government expenditure needs to be cut will depend in no small measure on whether the Government’s growth targets are met. There is considerable scepticism on all sides about whether 3.5 per cent is the level of growth that we can confidently expect to go forward from 2011. But whatever view you take on growth is pure speculation at this stage. However, we know that growth will depend on businesses being able to invest. Here, the situation is not good. We have had a number of debates in your Lordships' House about the way in which the banks are responding in terms of business investment. We know that the two state banks have signed agreements with the Government about lending rates. But the truth is that they are not meeting those targets. They say that there is not a demand for loans. I do not know about other noble Lords, but every time I meet a group of businessmen in the City or the south-east or, as I did last Friday, a group of very senior businessmen from West Yorkshire, their view is that they have got perfectly viable plans for investment in businesses which have a strong track record. They have been told by the RBS and the other banks that at regional level the amount of money available for lending has been seriously reduced. They are simply not getting the loans. Therefore, when senior representatives of these banks tell us that there is no demand, I no longer believe them. I hope that the Government will put ever-greater pressure on them to meet those lending targets because there is demand. There just is not a willingness on the part of the banks to lend. During the conversation which I hope the noble Lord, Lord Myners, will have with Stephen Hester on that point, will he point out to him that for a Government who have put tens of billions of pounds into saving that bank, it is not politicisation to propose that they might suggest how the bank should be run. It is pure common sense that the Government, as the dominant shareholder, should have a view on some of the big policy issues that the bank is facing. We on these Benches argue that the Government would have been a lot better off just nationalising RBS at the time and being done with it. Then they could have run it more in the public interest without having the various filters between Whitehall and the bank, which means that the bank is able, whether on bonuses or on lending, to exercise what in my mind is a greater degree of independence than the amount of funding it has had from the state justifies. Going back to the main issue, if we are to halve borrowing between now and 2014, how are we going to do it? I am afraid that here the PBR lacks all credibility. As we hear about what went on, it is clear that the process was shambolic. After midnight on the eve of publication of the PBR, the Education Secretary went to Downing Street to ask whether he could have more money. As he was to have a busy day the next day, the Chancellor had very sensibly gone to bed. The Chief Secretary was still up and had a conversation with the Education Secretary, as a result of which, by the morning, the PBR had been changed and the amount available for education had increased. I cannot imagine how either the noble Lord, Lord Lamont, or the noble Lord, Lord Barnett, would have responded had a spending department knocked on their door after midnight on the eve of the Budget and asked for more cash. I do not think that they would have said, "Oh, all right then, go on and do it". But that is exactly what happened in this case. It is perhaps more shambolic than the idea that you can cobble together a bankers’ bonus tax in a week. In terms of the outcome of the PBR for individual departments, the Government have ring-fenced all those things which they think are politically sensitive—education, health, the police and aid. They have left other things which they think are less politically sensitive to bear the brunt of the cuts. We do not know quite what that means, but let us assume that the IFS is right and that we are talking about 20 per cent real terms cuts between now and 2014 in the-non ring-fenced departments. That scenario is both implausible and highly undesirable. Does anyone really think that defence expenditure will reduce by 20 per cent in real terms over that period? Perhaps the Government have plans for exiting Afghanistan that we are unaware of. Take another area—prisons. Does anyone believe that at a time when the prison population is likely to increase rather than reduce we should be cutting 20 per cent of the budget on prisons? The one thing you know is that if you cut expenditure on prisons, and prisoners spend less time being trained, the recidivism rate and the cost to the state increase. Therefore, even in the highly unlikely event of this Government being returned, they simply would not do what is in the PBR, which, therefore, as a document lacks all credibility. What we need is a number of principles against which we can judge not just the pace of cutting public expenditure but what to do. I would set just two principles. The first is fairness. If we are to be cutting, the country as a whole must feel that everyone is in it together. On that, the Government do reasonably well; the only problem is that there is no credibility in the overall package. I am afraid that the Tories do not do very well on that. The other important principle to maintain is a high level of investment. The only mention in the Pre-Budget Report as regards this area—the creation of Infrastructure UK—simply does not meet the point. One of the more obscure paragraphs in the PBR describes how the PPP, or PFI, system has virtually ground to a halt, and the Government have to fund those projects directly from their own funds. We need a new approach in this area, and we have suggested the creation of an infrastructure bank. But there is a hugely significant principle—however you address this issue—whereby in a period of cuts the need remains for a policy of growth through investment in the future. The noble Baroness, Lady O’Cathain, said that we were in limbo. She also hoped that we were not going to hell. The noble Lord, Lord James, seemed to think that that was predestined, but did not seem too worried. For the rest of us, we accept the first part of the noble Baroness’s comments. The PBR is at best a holding document which, in reality, tells us very little about what needs to be done to reduce the deficit. For that, we shall have to wait until after the election.