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depends crucially on a number of important public services. I myself know how important the National Health Service is. It is crucial that it be adequately funded and able to improve the quality of its services.

I want to deal directly with the question of Health Service funding because the Chief Secretary made a great deal of it in his speech, and I want to point out that there are three types of definition that the Government use in the statistical fog that surrounds the presentation of the White Paper which led the Financial Times to say :

"The Government's announcements on public spending are up to the most creative standards of the accounting profession".

It was not I who said that, but the Financial Times --often a good witness in these matters. Sometimes the Government describe it in terms of cash increases. They do so most frequently in the case of the Health Service. Sometimes they use the GDP deflator--the average of inflation throughout the economy--and sometimes the deflator for general Government expenditure, which is easily obtained from Economic Trends and which can be applied to the figures. They do not use that very often because it gives them the smallest increases and, of course, it is the cash terms, which exclude totally the effects of inflation on the services to which they are being applied, that they are most happy to quote.

The Prime Minister, for example, often boasts about a cash increase, in the case of the Health Service, of £9.4 billion in 1979-80 to £22 billion in 1989-90. But the increase in so-called real terms is considerably less. If we apply the GDP deflator to Health Service expenditure, the increase is from £16.4 billion to £21.5 billion- -a rise of just 3.1 per cent. per year.

But we get a very different picture of the real-terms increase if we use the implicit deflator of general Government expenditure to look at the cash figure. On this basis, the rise from 1979 to 1980 is from £19 billion to £21.6 billion--a growth of 1.4 per cent. per annum. Taking account of demographic factors, principally the aging of the population, and the need to keep abreast of technology, which I think everyone accepts--which, together, require a minimum rate of growth of at least 1 per cent. per annum--it is pretty clear that real health provision in this country has been almost at a standstill. So we have a figure of 1.4 per cent. measured against a requirement of 1 per cent. I think that, for all the statistical conjuring tricks that this Government get involved in, the public do not believe them. When these figures are revealed in their true light, the public are proven to be right, and the Chief Secretary is proven to be wrong. But it is not even just that. The quality of life is a crucial part of our public services. The tragic run of accidents at King's Cross, Zeebrugge and Clapham highlights the need for the highest regard for safety standards in the public and private sectors. But safety needs investment, and it is quite incredible that the Government cut, for example, research funding in food safety at the institute of food research in Bristol.

Only yesterday there was evidence of a report prepared by, amongst others, Government officials about the dangers of salmonella poisoning. It is hardly believable that the Government are ending next month a project which involves three scientists in dealing with the elimination of salmonella from poultry. They are to be made redundant and the research discontinued. I can tell

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the House that, although the Government claim to have a £15 billion public sector surplus, it would only cost them £300,000 over the next two years to save this project.

I may say also, on the conflict between whether it should be a private or a public responsibility, that I understand approaches have been made to commercial people to see whether they would carry on with the research. The response from the firms has been that they would carry on with the research only if they got the exclusive use of the results for their commercial benefit. So the safety of the public is less important than their commercial benefit, which is why we need to take responsibility for many other areas of public expenditure.

We find this problem throughout all the areas. I discovered just the other day that the tourist deficit in Britain is increasing by an enormous amount. The latest balance of trade in tourism shows that it is in the red to the tune of about £2.1 billion. Why has this happened? One reason-- I hope that the Chief Secretary will listen to this--is that Mr. Michael Mendlicott, the chief executive of the British Tourist Authority, said that he blamed high hotel prices. I think he was quite right to do that, but he said also that it was the image of squalor and litter that foreign tourists now associated with Britain.

We have had a lot of talk from the Government about "operation facelift". We even had the Prime Minister scrambling around St. James's park trying to pick up pieces of paper that workmen had been instructed to put in careful piles so that she could pick them up and put them in a bag and be photographed doing so. That is the extent of the Government's commitment to improvement in this area. The truth of the matter is that visitors to this country are telling us how squalid it has become. That is because of the neglect of the Conservative party.

But what is perhaps the most shameful thing--this is the last example in detail that I will use, so that I may spare the Chief Secretary even more embarrassment--is the Government's record on overseas aid. When the last Labour Government left office, they were providing 0.52 per cent. of GNP in overseas aid.

In 1987, the Tory Government gave just 0.28 per cent. of GNP in aid--the lowest figure ever recorded. Under the Tories, British aid has declined by over 15 per cent. in real terms. [Interruption.] I hope that the hon. Gentleman who is shouting about fiddling will listen to what I have just said. British aid to sub-Saharan Africa in 1979 amounted to £386 million. In 1987 it was worth only £284 million--a cumulative decline since 1979 for one of the poorest parts of the world of over £600 million.

My hon. Friend the Member for Eccles (Miss Lestor) recently asked the Prime Minister her position on overseas aid. I quote the right hon. Lady's reply :

"You raised the question of the UN target for aid at 0.7 per cent. of GNP. The Government have accepted this in principle. But like previous administrations, and many other donors, we have not set a timetable to achieve this target ; progress towards it must depend on economic services and other calls on Government resources." The sums involved are not large, and the Government have a £15 billion surplus. The spending of that money on aid would not add to any inflationary problems in this country but could bring much-needed relief to people living in very difficult circumstances indeed. Any Government with any sense of decency would use that

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money to increase overseas aid as one of their first priorities. [ Hon. Members :-- "What would you do?"] We would head towards the United Nations target, which is what every civilised country wants to do and which the Prime Minister says is also her objective. Just in case it is thought that I am making a narrow partisan point--I do not think that the vast majority of the people of this country, who are ashamed of our aid record, will think that--I remind the House of what our colleague countries in the OECD said recently about the British effort. The development assistance committee of the OECD reviewed the United Kingdom's overseas aid programme. It noted the Government's contribution and commented on the Autumn Statement--the precursor of the White Paper. The committee said : "The Committee firmly believes that the time has come to reverse the downward trend in the United Kingdom's ODA/GNP ratio". That was the view of our fellow countries, whose Governments are trying hard to achieve the target set by the international community--a target on which the Government have so disgracefully turned their back. Perhaps one small thing that the Government might consider is the reversal of their priorities in this important respect.

An analysis of the White Paper in terms of concept, and a scrutiny in terms of detail, reveal that the Government are trapped in a dogmatic obsession on public expenditure, which undermines our national economic effort and impairs our quality of life. In terms of overseas aid, it also undermines our international reputation. Nor is that the only evidence of the Government's wrong-headed approach and misshapen priorities. They are a Government who lavish benefits upon the rich but freeze child benefit and humiliate pensioners with the social security and housing benefit cuts of last year. They are a Government whose notions of equity are revealed by their determination to press on with the poll tax--a form of taxation that every other civilised country has rejected. They are a Government whose sense of responsibility for national assets is revealed by the irresponsible privatisation of vital public services such as electricity and water. In other words, they are a Government whose policies do not remotely reflect the priorities that the nation needs. Sadly, the White Paper reflects this Government's inadequate values, false priorities and deceptive techniques, and it is not worthy of our support.

5.43 pm

Mr. Nicholas Soames (Crawley) : The House will have listened with great interest and much amusement to the remarks of the right hon. and learned Member for Monklands, East (Mr. Smith). It is a great pleasure to have him back and I should be immensely grateful if he would do what he said he would do when I saw him on his first day back and send me a copy of his diet, which has obviously stood him in good stead. We are delighted to have him back, and he looks extremely well.

The voters of this country will certainly not be seduced by what they have heard from the right hon. and learned Gentleman--by the promise of apparently limitless public spending or by a raft of promises that could not possibly be fulfilled.

Mr. Skinner : When did you write this?

Mr. Soames : Just now.

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Like a parachutist, the right hon. and learned Gentleman has dropped in on us from cloud-cuckoo-land. He gave all his old prejudices a good canter round the course, like an old hunter who has not been out of the stable for a very long time. He dodged all the fences and none of us learnt anything new. In short, he was deeply unconvincing. During his enforced absence the Labour party continued to show all the qualities of an organisation in terminal decline, and I am afraid that his return will have done nothing to help matters. The debate takes place against a very favourable economic background. The firm control of public expenditure has been a vital ingredient in achieving such a satisfactory state of affairs. Restored and revived, the United Kingdom now has a golden opportunity to take a lead in Europe, not only in internal economic matters but in joint action to shape international developments that affect all our interests. We should not be in that position were ours not an economy with growth, substance and vitality in it.

We live in a heady atmosphere, so far removed from that portrayed by the right hon. and learned Member for Monklands, East that one can hardly believe that he lives in the same country. [ Hon. Members :-- "He does not."] For the first time in my lifetime, even the BBC--apparently with the sole exception of the "Today" programme--seems to sense that there are more possibilities than problems. The energetic creation of new wealth is a powerful force in any community and it has had a most beneficial effect in an enormous number of ways. In short, the country as a whole has been caught by the flame that is generated by the enthusiasm of economic success. Moreover, my right hon. Friend the Chief Secretary and his colleagues are particularly fortunate in their opponents who are, by and large, profoundly unconvincing as arbiters of financial rectitude. The transformation of the economy since 1979, coupled with more vigorous policies to stimulate enterprise and the sound management of public finances, has allowed the Government to spend far more money on priority programmes. On this matter, the right hon. and learned Member for Monklands, East was positively churlish. It is to the Government's credit that they have maintained a clear sense of priority in their distribution of further moneys.

Ms. Armstrong : The hon. Gentleman talks about priorities and Government prudence. He may like to ponder what has happened in my constituency, where the Government have decided to save public money--the grand total of £2,000--by closing down two unemployment benefit offices. The cost of that prudent measure to claimants in my constituency will be £10,000 a year. Is that a measure of the Government's commitment to solving this country's problems?

Mr. Soames : The hon. Member for Durham, North-West (Ms. Armstrong) raises a constituency matter, which I am sure is important, but with which I am afraid I cannot deal. This year the Government have committed £1.4 million to the employment training scheme and substantial other moneys have been spent on employment, no doubt wisely, across the country. The hon. Lady should raise her constituency case with the Minister responsible for these matters.

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It is to the Government's credit that they have maintained a clear sense of priority. The whole House will welcome--I am amazed that the right hon. and learned Member for Monklands, East did not welcome it more wholeheartedly--the substantial extra resources for the Health Service, which is more than £2 billion, and by far the largest increase that the Health Service has ever received.

I particularly welcome the substantial increase in the science budget and in defence expenditure and the amount to be spent on law and order which I hope will help to appease the cries of rage throughout the country. I welcome the fact that more money is to be spent on capital expendiure--an extra £2 billion this year alone. All those additions make a mockery of the Opposition amendment. However, I agree with the right hon. and learned Gentleman that many of our public facilities, such as DSS offices, are squalid in the extreme. The Government should embark on a programme of making good those facilities while emphasising improved services to the customers of the state. My hon. Friends will be amused to hear that since the competitive tendering clauses of the Local Government Act 1988 are beginning to rear their ugly heads, Crawley borough council has issued training instructions to its staff for the first time in 40 years on how to be nice to the punters. It is an agreeable thought that the council has finally woken up to that.

Many of my constituents will be pleased about the amount of money that the Government are spending on overseas aid. The right hon. and learned Member for Monklands, East was quite uncharacteristically churlish about that. I agree that we would like to be able to spend more, but the figures that he gave were quite inaccurate. Over the next three years spending will increase by 18 per cent. in cash and 5 per cent. in real terms. That is excellent news. The right hon. and learned Gentleman failed to acknowledge the quality of the aid delivered by the United Kingdom, which is of quite an exceptional standard and which sets it apart from almost any other country in the world. That marks an important step forward for British interests. The ODA is also to be congratulated on the lead that it has taken to co-ordinate support for the Nigerian economic reconstruction programme to which substantial further funds have been committed. In the 1980s it is pleasant for the Government to be in such a position at the International Monetary Fund that we are co-ordinating the rescue of countries, rather than the reverse, which was the case when the Labour party was in government. The right hon. and learned Gentleman was right to say that one swallow does not make a summer, but the Government have turned an important corner by increasing the aid programme. It is continuing evidence that a strong and successful economy can and should do much more for nations far less fortunate than Britain. It is a further example that the might of modern powers is vested not in military prowess but in economic primacy. To that end I congratulate my right hon. Friend the Chief Secretary on arriving at such an excellent agreement for the British Council which does so much to promote British interests abroad.

I agree with the right hon. and learned Member for Monklands, East about transport infrastructure. In the past few years the Government have made a huge investment in that previously neglected area. There has been an increase of more than 50 per cent. since 1978-79 in

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new road building and trunk road maintenance. The trouble is that the investment is so very unevenly distributed. In the early 1970s, quite rightly, the Labour party built a large motorway infrastructure in the north. It is only now, about 20 years later, that that motorway infrastructure is beginning to grow into itself. The Labour Government neglected the south at the expense of the north and the south is now suffering serious problems. It will be clear to anyone who travels throughout the country that the picture that the right hon. and learned Gentleman painted of the north-south divide is an absolute fallacy. It is evident that only blindness and ignorance of the true state of the country's economy can lead the right hon. and learned Gentleman to say such things.

My constituency, which contains Gatwick airport, a large industrial estate and a town which has the lowest unemployment in any constituency in Europe, let alone the United Kingdom, has a road system off the motorways which would not be acceptable in a third world country. I would be grateful if my right hon. Friend would have a word with my right hon. Friend the Secretary of State for Transport to find out what can be done by way of transport supplementary grant for west Sussex.

I should also like to draw my right hon. Friend's attention to another serious matter which is building up a considerable head of steam. A clear and disturbing demographic pattern is emerging whereby we will face great difficulties in recruiting people into public service, particularly in teaching, science, the law and other professions. There will be a great deal more competition for new graduates, and just when the education reforms should have their most critical effect we shall be even shorter of the right people to teach those specialised and vital subjects.

I have recently been taking some interest in the magistrates' service, and in the pay and career structure of justices' clerks. My right hon. Friend will be aware of the critical role that justices' clerks play in the administration of the courts. I fear for the future of the profession, if faithful and loyal service by many good and honourable men does not receive a reasonable or just reward. They do not expect to keep up with private practice salaries, but, in a humane, honourable and prosperous society, it should be expected that the sums paid to lawyers in the public service who carry similar responsibilities should be comparable. The gap between the salary of a typical justices' clerk and a civil service lawyer with similar responsibilities is now several thousand pounds per annum. I find that unacceptable and prejudicial to the smooth running of the administration of the country. It is difficult to attract lawyers of the right calibre into the service and there is very little hope for its future unless we grab the opportunities that exist.

Mr. Churchill (Davyhulme) : My hon. Friend is making an important point. Is he aware that that problem afflicts not only his constituency in Crawley but mine in Manchester? It is becoming increasingly noticeable throughout the country that courts cannot do their work because there are no longer sufficient clerks to service the courts. In recent weeks there have been numerous incidents in which the courts have had to suspend their work and that is profoundly unsatisfactory.

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Mr. Soames : My hon. Friend is completely right. At present my hon. Friend the Minister of State, Home Office is undertaking an inquiry into the administration of the courts in which he intends to pursue the matter of justices' clerks. It does no good for the Government whom we support and whose policies seek swifter dispensation of justice that despite the heroic efforts of the magistrates the shortage of justices' clerks means that it is taking 14 to 18 weeks for cases to come to court. That is completely unacceptable. Mr. Ian Gow (Eastbourne) : Has my hon. Friend considered the possibility of leading a delegation comprising my hon. Friend the Member for Davyhulme (Mr. Churchill) and me so that we would make a trio and take a journey to see my noble Friend the Lord Chancellor who is responsible for these grave issues to which my hon. Friend has quite rightly drawn attention?

Mr. Soames : I would be proud to lead such a distinguished delegation. My hon. Friend is well known in Eastbourne as the fisherman's friend, and he will now be known as the justices' clerks' friend.

The same problems apply throughout the professional public service and I urge my right hon. Friend very carefully to study what steps we may take to improve the conditions of service and to recruit, maintain and motivate those people who are vital to the administration of the country.

By any measurable yardstick of achievements, individual political, economic cultural, or scientific, the Untied Kingdom has entered a new and brighter age. None of it could have happened without a sound and growing economy and the spirit of enterprise that permeates the whole fibre of the country. The Government should continue their prudent and sustainable progress. I wholeheartedly support the public expenditure White Paper.

5.59 pm

Mr. Giles Radice (Durham, North) : The hon. Member for Crawley (Mr. Soames) would not expect me to follow him in his eulogies of the Government, but I join him in congratulating my right hon. and learned Friend the Member for Monklands, East (Mr. Smith) on his speech. It is delightful to see him in such sparkling form on his return. Having reeled from the blows of my hon. Friend the Member for Dunfermline, East (Mr. Brown), it must have been hard for Ministers to receive yet another devastating blow. If Conservative Members doubt that, they should have seen the Ministers' faces when my right hon. and learned Friend was speaking. They tried to obtain advice from their non-existent advisers, but clearly the message came back to them, "You are on your own." No answer was given to my right hon. and learned Friend, and they were unable to deny any of the statistics that he gave.

I shall consider two issues. First, I shall follow my right hon. and learned Friend the Member for Monklands, East and examine the Government's policy of reducing public spending as a proportion of gross national product. Secondly, I shall analyse the Government's related policy of forswearing fiscal policy as a short-term instrument and confining its use only to the medium-term. Both issues are important to the running of the economy.

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We heard from the Chief Secretary about what happened in the 1970s. It is important to disentangle some of the realities from the fantasy that the Government put across. We must look behind the myths that they are trying to create. It is true that there was a surge in public spending in 1974-75. Social spending increased by 9 per cent. over that period, chiefly because of increases in pensions and subsidies on food and rents and especially because of the massive increases in public sector pay, which occurred mostly as a consequence of the threshold agreements introduced by the previous Conservative Government, which were triggered off by increases in inflation. Public spending was not matched by growth in the economy because it coincided with the shock to the economy caused by the quadrupling of oil prices, which amounted to as much as 2 per cent. of GDP. In other words, it removed 2 per cent. of our growth. Without growth, the share of public spending jumped dramatically from 41 per cent. in 1973 to 48 per cent. in 1975.

Conservative Members often forget that, faced with rapid growth in borrowing, the Labour Government acted swiftly and effectively to control public spending. Contrary to the myth put about by Conservative Members, especially the Chief Secretary, the initiator of the policy of restraining public spending was not the IMF but the Labour Government.

Mr. Major indicated dissent.

Mr. Radice : The right hon. Gentleman was not in Parliament at that time. The decision was taken by the Labour Government as early as 1975, when cash limits were introduced. They were very effective, and, as a consequence, the share of public spending fell from 48 per cent. in 1975-76 to 46 per cent. of GDP in 1976-77 and to below 43 per cent. in 1977-78. So effective were the controls that in 1977-78 public spending fell 7 per cent. below the level of cuts demanded by the IMF. The IMF cuts were not necessary, because the controls were already biting. I was a member of the General Sub-Committee of the Expenditure Committee and followed that blow by blow.

Sir Peter Hordern : The hon. Gentleman rightly says that cash limits were a notable improvement on the previous presentations of public expenditure figures, which had been couched in funny money--there were no figures at all. That does not account for the fact that substantial cuts were made by the Labour Government, which were imposed by Dr. Witteveen's letter in 1976. The real cuts followed closely afterwards.

Mr. Radice : The hon. Gentleman is wrong. I have looked carefully at the facts. At that time, the Government thought that the public sector borrowing requirement was £6 billion, but it had already been reduced to £4 billion as a consequence of the cash limits. Public spending had been brought under control. As a member of General Sub-Committee, I assure the hon. Member for Horsham (Sir P. Hordern) that those are the facts.

The lesson to be drawn from the 1974-75 experience, which was quickly learnt by the Labour Government, is that it is unwise to increase public spending faster than growth in national output.

Mr. Major : Hear, hear.

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Mr. Radice : Wait a moment. It is a sensible rule of thumb to increase public spending only in line with growth in national output. But the policy of expanding public spending in line with what the economy can afford is very different from the policy being pursued by the Government, which is of deliberately reducing the share of public spending as a matter of principle regardless of the circumstances. That is the point that my right hon. and learned Friend the Member for Monklands, East has been trying to get across. Continuing to reduce public spending as a proportion of GDP has no economic justification.

The Treasury and Civil Service Select Committee makes a good technical point in its report when its says that focusing on the overall ratio of public spending to GDP can be misleading because it does not distinguish between direct claims on resources and the transfer of claims between groups of individuals. It is only when transfer payments are excluded that one gets a true measure of the claim of public spending on resources, which is why we recommend that a ratio of public spending to GDP excluding transfer payments should be published.

More fundamentally, the idea that public spending must decline as a proportion of GDP has no economic justification. The share of public spending is already lower in the United Kingdom than in most European countries. All the evidence shows that continuing to plan for a declining proportion will harm the economy. My right hon. and learned Friend the Member for Monklands, East has made that case very lucidly indeed. Industry will be deprived of improvements in the vital infrastructure projects that it needs and could have. The Confederation of British Industry made that point very clear at its annual conference. As my right hon. and learned Friend so eloquently said, industry will be deprived of extra investment in education and training and the support for innovation and investment in research and development that it needs and could have. The regions will be deprived of assistance in regional support and aid that they need and could have.

As an hon. Member representing a northern constituency, I must say that the Government's attitude to regional aid has been extremely short-sighted. We are now spending the same over three years in regional assistance as we were in 1978-79. There are welcome signs of recovery in parts of the northern economy, but perhaps the hon. Member for Crawley should venture a little further north than the Watford gap to get a good idea of what is happening.

Mr. Soames : No good is done in the House by absurd remarks from one hon. Member to another about whether he knows the north. All hon. Members spend a great deal of time travelling and I spend a great deal of time in the north. The caricature of the north as against the south as it is portrayed by Labour Members does the north no good. It is a false picture of an area of the country that is beginning to take off. The north--whether Newcastle or the north midlands--has had its whole economy transformed. It is taking off and there are real opportunities, which people are taking. The hon. Gentleman does those people no good by running them down, even though he does not mean to.

Mr. Radice : I know that the hon. Gentleman has been shooting throughout the length and breadth of the British

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Isles and I respect him for that. Yes, as I have already said, there are signs of recovery in the northern economy, but it is only just starting to happen. I am sure, however, that the hon. Gentleman will bear me out when I say that the southern economy is greatly overstretched and overheated. But, as we know from experience, it is precisely when the national economy is expanding generally that firms are more easily encouraged to expand in the assisted areas. As the European Commission has pointed out, a vigorous regional policy is essential not only for the regions themselves, but, equally importantly, for a balanced and sustained national growth. More generally, if Britain is to maintain a balanced and healthy economy, it needs a substantial level of public investment in line with the growth in the economy and the growth of output. Britain needs investment in such basic infrastructure projects as roads, as the hon. Member for Crawley agrees, transport, on which he again agrees, lighting and sewerage. My right hon. and learned Friend the Member for Monklands, East was right when he said that foreigners coming to this country say that we are a dirty country and do not invest in public utilities.

Mr. Soames : We do not say that.

Mr. Radice : The hon. Gentleman may not have done enough shooting on the continent. If he had, he might have seen the investment there. He might have seen how different matters are in West Germany, France or Scandinavia. One can see the difference with the naked eye, because the Government here have not been investing in the basic infrastructure.

Mr. Brazier : I am having a little difficulty in following the hon. Gentleman's argument. A moment ago, he said that the best condition for growth in the assisted areas was to have a good overall growth rate. That condition is being satisfied now. He then said that there was insufficient investment in the regions and he quoted statistics that related only to direct grants to the regions. He is saying that the infrastructure is the key factor. That is precisely the reason why so many companies are relocating to the north and why companies coming from the outside choose to go to the north. The reason is precisely that there is a higher level of investment in the infrastructure of the north than the south.

Mr. Radice : That is true. When a Labour Government were in power in the 1960s and 1970s, there was a large investment in the infrastructure of the northern economy. We are partly benefiting from that now. One of the reasons why Nissan came to the north-east was that some of the infrastructure was good, but we must continue to invest in the infrastructure.

Mr. Soames : We are.

Mr. Radice : We are not doing enough. If we brought our public spending up to the national growth rate, as is done in every other economy, then, with the growth that we had in the economy, we would be able to invest in projects not only in the north but in the south, where there is overcrowding. That is the burden of my case and I am glad that the hon. Member for Canterbury (Mr. Brazier) has given me the opportunity to say that yet again. I hope that he now understands the point.

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The only substantial argument produced by the Chief Secretary to the Treasury for Government policy was that it was needed to free resources for the private sector and private individuals. My right hon. and learned Friend the Member for Monklands, East and I have already demonstrated clearly the ways in which private industry needs sustained public investment. For individuals, the idea that it is necessary to reduce rates of direct taxation as a matter of principle regardless of circumstances has no economic justification. After last year's Budget, the Chancellor's tax cuts stimulated an already over-vigorous consumer boom and that should be a warning that reducing taxation is not always the prudent option.

That brings me to my second and final point, which is about the Chancellor's fiscal strategy. He has continued to stress that the Government's fiscal policy is set in the medium term and is not used as a short-term instrument. If one has a commitment to reducing public spending as a share of gross domestic product as a matter of principle and one also has a commitment to reducing taxation as a matter of principle, regardless of circumstances, it is true that that rules out the use of fiscal policy as a short-term instrument. The problem with that strategy, as many commentators have pointed out, is that the Chancellor is forced to run the economy with an instrument too few and with one hand tied behind his back. It would help in the running of the economy if the Chancellor were able to use fiscal policy in a counter-cyclical fashion--by increasing public spending or reducing taxation when demand needs boosting, or increasing taxation and decreasing spending when demand needs reducing. An example of the first type of counter-cyclical fiscal action is the 1987 Japanese budget, when the Japanese Government, in contrast to what happened in this country in 1987 and 1988, both increased public spending and reduced taxation to boost the economy in a balanced and sensible way. That is different from what happened here. An example of the second type of counter -cyclical fiscal action would be if the Government decided that they should increase taxation levels on the better-off in the coming Budget. That would be helpful because there is now an overwhelming case for using all the instruments available to run the economy, including fiscal policy. If we are to meet the justified social needs that we have in this country to assist our regional problems and to achieve balanced economic growth--which even the Government do not pretend that we have at present--the Government should first abandon their commitment to reducing and continuing to reduce public spending as a percentage of GDP. Secondly, if we are to manage the economy more effectively, we need to be able to use all the economic instruments, including fiscal policy, when necessary.

6.18 pm

Sir Peter Hordern (Horsham) : Let me start by welcoming the right hon. and learned Member for Monklands, East (Mr. Smith) back to his place. If I may say so--I hope it does him no harm--he made an excellent speech in full and good vigour.

I want to say a few things about the efficiency of public expenditure. Last week, we had the National Health Service review. I think that hon. Members will agree that

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it was devised to promote efficiency within the Health Service. The idea of costing pharmaceutical preparations, drugs and general practices, leads to that supposition. One must look more widely at public expenditure to see where else such an approach can be taken. I cannot help but remark on the leading article in The Times today about the common agricultural policy. My attention was first drawn to that matter by a report of the European Court of Auditors, which explained that there had been a leakage of payments to unknown parties of about £4 billion. But recently the fraud inspectors, who have just been appointed, in evidence to the European Parliament worked out that the zone of shadows, as they described it, amounted to between 10 and 20 per cent. of the entire EC budget--£6 billion. All that had been spent on phoney export certificates and compensation claims.

I had not supposed that the CAP was a form of outdoor relief for the Mafia, but that plainly is what it has become. My right hon. Friend the Prime Minister has given the clearest instructions to our Ministers that when they go to Brussles next Monday they are to put that matter at the top of the agenda. But, with the best will in the world, I cannot help thinking that the weakness of the CAP is that it is in nobody's particular national interest to do very much about it. If the leaks and squandering of money stopped, it would mean a net repayment by a particular country to the European funds. There will not be enormous enthusiasm to stop such misdoings.

That points to, and has pointed to for a considerable time, the weakness of the CAP and the need to put it right. We must find some better way of compensating farmers by some kind of income support better than the CAP. It does grave damage to the Third world by producing and exporting food and produce which discourages them from producing their own. Moreover, and perhaps more seriously, it is a threat to trade with the United States of America, as has been shown by the recent ructions in the GATT negotiations.

This topic has arisen before, but I urge my right hon. and hon. Friends to believe that the weakness in the CAP, despite all their efforts to stop it, is a fundamental one which needs to be addressed by changing the form of income support for those who live on the land, not through this method, which has now become completely disreputable.

There is one other aspect to which I want to draw my right hon. Friend's attention, and that relates to defence procurement. The only figure that we have for defence is £20.1 billion, which is the total defence expenditure this year. We have a figure for expenditure on defence personnel and, by a process of deduction and a fortunate glance at the Public Accounts Committee's report, I see that we now spend some £8.5 billion a year on equipment. I regret to say that in the part of the public expenditure White Paper dealing with defence there is not a single mention of cash figures. There are plenty of percentages, plenty of mishmash and guff about efficiency, but no cash figures. Here again, this is a serious matter which should have been addressed a long time ago.

We should start from the basis that the Ministry of Defence should look at the original cost of the equipment that it now has and what was finally paid for it, and ask whether that money would have been spent in that way if it had had the opportunity to do otherwise. That leads me to ask what plans we are making for much closer collaboration with our European partners in defence.

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We must accept that the time has now come when national research and development expenditure on enormously expensive articles of defence equipment can no longer be justified. We have at least three different kinds of torpedoes, each of which has cost well over £1,000 million so far. I do not know why it is necessary to have three different kinds of torpedoes, but I recollect that when the subject came up in the Public Accounts Committee there was an American torpedo in use which we could have bought for £300 million. Those are enormous figures by any standards. Whether it is torpedoes or other forms of equipment, it is high time that EC Defence Ministers got together and decided what kind of equipment they wanted and did it to a common standard. The defence industries would have to gear themselves towards producing that equipment. Much-needed European collaboration would take place, and we would see a marked improvement. It is no longer possible to go it alone on important defence equipment procurement. I hope that that will be noted. I notice that the Public Accounts Committee's report last November showed that the profit due to contractors engaged on non-competitive risk between 1982 and 1984 was £600 million and that a significant number of contracts were priced after they had started. We become concerned about figures of £20 million or £300 million and we have debates in the House. But for hundreds of millions of pounds for defence equipment we do not appear to have any debate at all. Finally, I want to say a word about what are called the Ryrie rules--I think that hon. Members know what I mean--the financing of public projects by private expenditure and the innate Government guarantee that lies within it. That relates to something that the hon. Member for Durham, North (Mr. Radice) said earlier about the desirability of public expenditure on capital projects.

I shall not discuss for a moment the share of GDP because the Government are right in reducing the percentage of GDP take-up by public expenditure. But we have an entirely new position today. We have a large public sector debt repayment programme, which is almost unique. I think that it happened once under Roy Jenkins for one year, but that was very much under the influence of Dr. Witteveen. Apart from that, we have seldom been in the position of repaying public sector debt, certainly not to the extent that we are now doing. If we have too much consumer demand in the private sector, which appears to be the case, a position that we rightly tackle with high interest rates, is it right not to look at the public sector separately? We have a large public sector suplus and we are buying in gilt- edged securities at the long end of the gilt market. I simply mean by that that the Government are repaying debt by buying long-dated gilt-edged securities.

The effect of that is to reduce interest rates for a debt which is 15-years -old or more, with the result that we are now buying that debt at an interest rate of about 10 per cent. I am surprised that more companies are not borrowing long-term at that rate. Essentially, it means that the Government are in the position of a company which decides that, rather than invest in a capital project, it will repay its debt or retire its ordinary shares. That is a perfectly good option for a company to take, but it is somewhat unusual. We must look specifically at the public sector and ask whether the repayment of debt which gives a return of 10

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per cent. is as good a return as that which may be got by investing more in British Rail or British roads. I say that because the White Paper on transport has made a rather good analysis of the cost of building new roads, and trunk roads in particular, which shows a substantial advantage--I think about 20 per cent.--if expenditure on roads is proceeded with. I believe that the same is true for British Rail.

I defer to nobody in my admiration of what the Government are doing in public expenditure--the extra money that British Rail is spending and the extra that is being spent on British roads. However, such has been the prosperity in Britain that the increase in motor traffic has been far faster than anybody predicted. The result has been the snarl-up on the motorways, of which we are all aware, which has a direct economic cost to the country. What we should do is to look carefully at the marginal cost and the benefit of repaying debt in the public sector, as opposed to spending rather more and allowing, perhaps, British Rail to borrow on a 15- year basis the money it requires for a further major capital expenditure programme. My right hon. Friend the Secretary of State for Transport plans to privatise British Rail. If it were privatised, as British Gas is, it would have no hesitation in going to the capital market and getting the money that it needed. One only has to look at British Gas's capital expenditure and the money that it raises to know that that is the case. We must look at it sensitively and consider whether it makes sense to refuse British Rail the opportunity to mount a higher investment programme, given the difficulties which are arising and will arise still more in the future. If one goes to France, one can see the effect of the high-speed trains and the volume of traffic because of the better communications. My right hon. Friend the Member for Old Bexley and Sidcup (Mr. Heath)--I should have perhaps given him notice of this--is enormously in favour of our making further progress within the European Community, except when the railway goes through Bexley and Sidcup, which is understandable.

We must make a much more careful analysis than we have been accustomed to doing of the new conditions which arise from having a surplus in the public sector and consider whether it makes sense to repay debt or to have a further scale of investment. The extra traffic on the roads and on British Rail leads me to believe that, unless we take further action shortly, we shall have a serious snarl-up. The Ryrie rules are in need of a revision.

Such a long-term analysis should follow a strategic assessment of all our public expenditure programmes, rather than simply allowing a rolling programme for each Department each year three years ahead. I have argued before that there needs to be some form of body, such as the "Star Chamber," which comes together once a year to consider whether public expenditure really matches what our political and national aims are five or 10 years ahead. I feel that there would be some important strategic decisions made which would be different from our present ones.

Are we sure that we are making the best use of the information technology which is having such a profound effect in the private sector? I need only say that I understand that in the Social Security Department it is

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hoped to make payments--such as income support payments--through the local offices simply by tapping through the information to the computer at Newcastle and then telling the benefit recipient the position. It should be possible to have a plastic card with the information written upon it, thus making it unnecessary to go to some of those sordid social security benefit offices. That scheme should, of course, be voluntary, but the task would be made much easier if the recipient allowed the Inland Revenue to give what figures it felt were necessary to get the recipient's precise position and speed up the payment. Information technology can do a great deal in this respect. One of the advantages would be that it would speed up payments, make them more certain and make collecting them a good deal more agreeable than it is now.

I hope that when my right hon. Friend and his colleagues consider the public expenditure programme later in the year they will give some thought to the question of investment in the public sector, and consider the damage that has been caused to our communications by the large volume of traffic on our roads and railways.

6.34 pm

Mr. Charles Kennedy (Ross, Cromarty and Skye) : This, by definition, is an extremely wide-ranging debate and I hope that the hon. Member for Horsham (Sir P. Hordern) will understand if I do not follow specifically the number of routes or avenues he explored in his interesting speech. In the context of the points which have already been made by the hon. Member for Durham, North (Mr. Radice), I would say that I believe that the speech of the hon. Member for Horsham bears a great deal more resemblance to economic reality than the speech of the hon. Member for Crawley (Mr. Soames). The concept of the hon. Member for Crawley that there is no such thing as a north-south divide, of which so many Opposition Members frequently speak, is astonishing. It shows how fortunate he is in being able to boast that he represents the constituency with the lowest percentage level of unemployment. I believe he said that it was the lowest in western Europe. I wish that we could spread a bit more of it around. The hon. Gentleman's constituency being the jewel in the crown of employment opportunities in western Europe should be for him the most convincing argument yet in favour of the reality of the north-south divide.

There have been many friendly statements made about the right hon. and learned Member for Monklands, East (Mr. Smith). I have made mine in print north of the border--perhaps he has seen them on Saturday mornings--so I will not embarrass the right hon. and learned Gentleman now, but it is nice to have him back.

On behalf of the Social and Liberal Democrats I would first like to give our views about the current economic position and the public expenditure related to that. Secondly, I would like to suggest one or two changes of policy which the Government could pursue. Thirdly, I would like to take the opportunity of this public expenditure debate to make a constituency point which has arisen during the past 48 hours. Hon. Members on both sides of the House may know of the weather problems in the Highlands of Scotland during the past few days and the damage that has been caused.

There is no doubt that the overheating of the economy during the past year has resulted in the usual symptoms--severe trade deficit and increasing inflation. The higher

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demand in the economy has not been met by domestic suppliers, so prices have risen to ration demand and imports, too, have filled the gap. The cause was the £40 billion credit boom about which the Chancellor is taking action through high interest rates. The Chancellor also had an encouraging, if not benign, influence on that credit boom with the tax cuts in the Budget. The wringing-out within the economy that the Chancellor is now trying to achieve--it is the mortgage holders especially who are feeling the most squeezed--has been mainly encouraged not just by his earlier economic decisions, but by the positive political inducements which were put before the taxpayers and the public generally.

By attempting to cure or dampen demand by means of high interest rates, the Chancellor is arguing that credit has become more price elastic as the private sector has become a net debtor. The rise in the exchange rate, which results from the high interest rates, is considered a good thing because it encourages foreigners to lend us money to finance our trade deficit, thus forestalling a sterling crisis in the short term, such as we have seen previously. It is argued, too, that it exerts a downward pressure on wages because exporters and import competitors must control unit labour costs more tightly to remain competitive internationally. Therefore, two direct economic and political implications of the policy have favourable or acceptable resonances from a Conservative viewpoint--especially the dry one, which is currently in vogue at the Treasury. The Chancellor is also dampening demand by keeping a tight fiscal policy, and allowing a fiscal surplus to build up.

Against that backdrop, we have heard Conservative Members and the Chief Secretary to the Treasury argue that public expenditure must be controlled and not increased further, because of the inherent dangers that it would carry for further excess demand. As I have said, the Chancellor cannot be absolved of the responsibility for the position in which we now find ourselves. To get out of it, others will have to pay a price.

The economy must be slowed down. Interest rates are an essential component of any strategy that any Chancellor must use, but they are not the sole component. They should not be as blindly and slavishly followed as the Chancellor has done in recent times. He is relying too much on interest rates, and that is generating difficulties elsewhere in the economy.

In what other ways can inflation be curbed or its rate of upward movement kept in control and excess demand cooled? First, given our problems with savings levels, to which the Chief Secretary referred, although not convincingly, there must be further incentives for personal savings to aid interest rates and cool the credit boom. Anything that the Chancellor can do in his next Budget will be of assistance.

I do not recall whether the shadow Chancellor referred to the European monetary system, but, secondly, I repeat the argument that if we are interested in exchange rate stability within tolerable bands and an anti- inflationary regime which goes beyond the borders of this country, it makes eminent sense for Britain to join the exchange rate mechanism of the European monetary system. When trade figures are bad, we would not necessarily need to hike up interest rates to protect the pound. Membership of the EMS would give credibility to a stable level for the pound in the medium term.

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We are now into the first decade of this Government--this premiership--and we are still waiting for the magical, mystical and impossible-to-attain circumstances in which Britain may enter the EMS. The Prime Minister is increasingly seen at home and abroad either to be isolated or in a rapidly shrinking minority in her implacable hostility to the EMS. I hope that the arguments of the Governor of the Bank of England, the Chancellor, the former Chancellor, the former Home Secretary and many others will win the day. They would add considerable momentum to the policies for which the Chancellor, in aiming for his objectives, could command general political support.

Thirdly, the Government should drop many of the proposed increases in public sector prices. They are inflationary and injustified, except by the Government preparing certain industries for privatisation. That is thoroughly irresponsible, even by the Government's own economic yardstick, and it should be abandoned. Fourthly, we must increase public expenditure to tackle underlying inflationary pressures--here I endorse the remarks of the right hon. and learned Member for Monklands, East and the hon. Member for Durham, North--such as skill shortages, regional economic imbalances, and a crumbling infrastructure. Any loosening of fiscal policy in the coming weeks must be directed at that kind of expenditure and not at tax cuts. Expenditure to tackle those problems would be less inflationary than tax cuts, and it would also help to solve the underlying problem.

I am sorry that the hon. Member for Crawley is not present to hear the comments that I am about to make. The Town and Country Planning Association --not a hotbed of militant reactionary thought--recently produced a positive and constructive report on the north-south divide. It refers to attracting higher order corporate functions, "Promoting local and regional businesses"


"Improving the development framework".

Under those headings it has some sensible proposals to improve the situation. It concludes by stating :

"Finally, to give credibility to any policies for dealing with the North/South Divide, the government must put its own house in order both politically and administratively. There should be a senior minister appointed with responsibility for coordinating all central government action concerning the regions, and the regional offices of central government should be strengthened with teams representing all relevant departments who can make decisions with regard to public investment, funding approvals etc. on the spot."

I do not necessarily endorse the need to create yet another Ministry or to appoint yet another Minister to oversee it, but that conclusion demonstrates a genuine feeling in the regions, and the further north one goes, the more pronounced it becomes. Various squeezes have taken place on local authority capital expenditure. There is a lack of development agencies in the regions in England, in contrast with the number in Scotland and Wales. There is a stifling of local economic and planning initiatives to come up with schemes that will be sensitive to local circumstances and capable of making a local economic impact. Therefore, I hope that the Government will recognise and respond to the validity of that criticism.

In terms of the need for greater investment, I refer to a commentary on the Government's current economic plans--the White Paper--by the Federation of Civil Engineering Contractors, dealing in particular with roads

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