1 Nov 2010 : Column 1415

House of Lords

Monday, 1 November 2010.

2.30 pm

Prayers-read by the Lord Bishop of Gloucester.

Elections: Fraud


2.35 pm

Asked By Baroness Royall of Blaisdon

The Minister of State, Ministry of Justice (Lord McNally): My Lords, my reference to "specific complaints" referred to paragraph 2.58 of the Electoral Commission's report on the administration of the 2010 UK general election, which says:

"Because many of the cases of alleged malpractice are still under active investigation by police forces, it is not possible at this time to give any definitive figures for the number of cases which relate to the 2010 UK general election".

Baroness Royall of Blaisdon: My Lords, I thank the Minister for that reply. In essence, the noble Lord has confirmed that these cases have now been referred to the police, which is absolutely the correct procedure. However, in October, it was stated in the BBC "Newsnight" programme that two of the constituencies concerned were in Halifax and Oldham. I understand that the police are now quite properly involved, but can the noble Lord confirm the BBC's claim? Many people are in a state of perplexity and extremely worried because they do not know what the situation is.

Lord McNally: I would not want to verify or otherwise many of the claims that are made by "Newsnight". I can say that the police are investigating and that, as the noble Baroness rightly says, the Electoral Commission will report in January. We have to be patient. It may be difficult for the individuals concerned in the constituencies where complaints have been made, but the due process has to be gone through and we just have to be patient.

Lord Rennard: My Lords, does the Minister agree that as only around one in 20 of the crimes committed in this country is thought to be reported to the police, there is probably far greater prevalence of electoral fraud than we are generally aware of? Does he further agree that if many more people were aware of how easy it is to commit fraud under the present system, it would be even more prevalent? Could he indicate what steps the Government may be taking with the parties and the Electoral Commission to reduce the possibility of such fraud?

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Lord McNally: I am not sure that I agree entirely with my noble friend. Most of the inquiries about the conduct of our elections show a good performance in complying with the law. Many colleagues in this House must feel, as I do, that we went through most of the 20th century with the integrity of our voting system unquestioned. We were very confident about it. It is only in the past 10, or perhaps 20, years that we have become concerned about it. We are bringing in various measures to make it more difficult to perpetrate fraud in our elections, as did the previous Government. We have made it clear that, whatever the party, anybody who commits fraud will be prosecuted and may well face jail for that fraud.

Lord Touhig: In answer to my noble friend Lady Royall on 5 October, the Minister said:

"The Government do not have information and neither is this the Government's direct responsibility in these matters".

Then, in answer to my noble friend Lord Hughes, he said:

"As far as I understand it, specific complaints have been made in a range of constituencies and are being investigated".-[Official Report, 5/10/10; col. 10.]

At that time, did the Government have information-yes or no? I refer the noble Lord to the Ministerial Code. Part 1.2(d) says:

"Ministers should be as open as possible with Parliament and the public, refusing to provide information only when disclosure would not be in the public interest".

Why is it not in the public interest to tell Parliament if there is an investigation into fraud?

Lord McNally: I think that is straining things a little. What I said was that I am not directly involved: the police and the Electoral Commission are involved. There would be a lot more questions from that side of the House, and probably from this side too, if Ministers were directly involved in investigating electoral fraud.

Noble Lords: Oh!

Lord McNally: It is a matter for the Electoral Commission; it is going to produce a report in January, and my recommendation, as an elector and a citizen-never mind being a Minister-is that all three political parties study that report very carefully and then see if we can come together to try to tighten it up still further. Nothing I said either the last time or today suggests any impropriety as far as I am concerned. I am leaving it to the Electoral Commission, the police and the returning officers in the constituencies concerned, which is exactly as it should be.

Lord Naseby: Is my noble friend aware that he is absolutely right in the position he takes-not least as someone who has sat through a fair number of recounts? However, is he not also correct in saying that, when the police have investigated, they do report? We have the case of Bristol East, where the newly elected Labour Member has been cautioned by the police for the use she made of-it is reported- the postal votes on her Twitter, and, rightly, that is fraud under Section 63 of the Elections Act 1983.

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Lord McNally: I am not going to make comments on individual constituencies at the Dispatch box. I note what my noble friend says.

Baroness Taylor of Bolton: Would the Minister agree that probably everybody in this House would acknowledge that Ministers should not investigate electoral fraud? However, is there not a responsibility on the part of Ministers and, indeed, all of us, to acknowledge that we should not be fanning the flames and making wild accusations as has happened in the past?

Lord McNally: I agree with that, but after a general election, when there are close fights-we have all been through this-comments are made. What is important is that all parties co-operate in ensuring that the machinery we put in place works. Let us see what the Electoral Commission recommends, and then, if further action is needed, further action will be taken.

Lord Wright of Richmond: I note that the Minister referred to himself as an elector. Does the coalition have plans to allow Members of the House of Lords to vote?

Lord McNally: I regularly vote in local elections and I am particularly looking forward to voting in the AV election in May next year.

Lord Teverson: Is not the real electoral fraud that a party that gets 23 per cent of the vote gets only 8 per cent of the Members of Parliament?

Lord McNally: I think that is undeniable, and I noticed that there were nods from all around the House in response to my noble friend.

Banking: Bonuses


2.44 pm

Asked By Lord Myners

The Commercial Secretary to the Treasury (Lord Sassoon):My Lords, the Government have taken action to tackle unacceptable bonuses in the banking sector. The Financial Services Authority is updating the remuneration code, which will ensure that bonuses are deferred and aligned with the underlying risks, and significant portions of any bonus will be paid in shares or other securities. Employees in this industry will no longer receive all their bonuses in cash while leaving their shareholders, and potentially the taxpayer, exposed to the long-term consequences of the risks they take.

Lord Myners: My Lords, the Minister said that the Government have taken action to deal with unacceptable bonuses. Can we therefore conclude that, as far as this Government are concerned, all future bonuses declared are deemed to be acceptable?

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Lord Sassoon: My Lords, what I said was that we have indeed taken action, including, among other things, requesting the Financial Services Authority to take certain factors into account in its consultation on the remuneration code. We have said that we will look at-and we are looking at-the costs and benefits of a financial activities tax, consistent with, among other things, not driving banks abroad. The banking sector remains an extremely important part of this country's economy.

Baroness Williams of Crosby: Does the Minister agree that, while undoubtedly a commendable degree of restraint has been shown by small businesses in the past year, the position of FTSE 100 company executives is very different, with, we now learn, a 55 per cent increase in bonuses last year? Will he consider, first, adopting the proposals in the Walker report on the buying out of bonuses, which is an increasing and troubling practice? Secondly, does he agree that we should consider taxing share-based bonuses, even if they are delayed for a couple of years, to be paid at the same rates that the rest of us are obliged to do?

Lord Sassoon: My Lords, the Walker report, which was commissioned by the previous Government and reported in November 2009, made a number of important recommendations, some of which have already been incorporated by the Financial Reporting Council in its governance code. Sir David Walker made other recommendations on disclosure which remain to be considered. As for taxation, I have already said that we are considering the costs and benefits of a financial activities tax in relation to banks and remuneration. We are doing that by working with our international partners to make sure that, if we produce proposals along those lines, they are consistent with international practice and with keeping the banks operating in this country.

Lord Dubs: Even if the bankers say that they will leave the country if they are taxed more heavily, will the Minister assure us that that outcome might be a good thing rather than a bad one?

Lord Sassoon: My Lords, lots of people threaten to do all sorts of things when they are in the middle of a negotiation. Whatever we continue to do to tackle unacceptable bonus structures in banks, we want to ensure that, among other things, they are incentivised to align their remuneration structures with the reduction of risks that bankers entail, and that we continue to have an important banking sector in this country.

Lord Hamilton of Epsom: My Lords, does my noble friend accept that one reason why there is so little finance for people to buy houses, and for small businesses, is that during the financial crisis many of the foreign banks took their money back to where they came from? They are not returning to London because they regard it as highly taxed, they regard certain members of the Government as extremely hostile to bankers, and they are worried about the degree of regulation. We must get these people back-contrary to what the

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noble Lord, Lord Dubs, said-because otherwise we will not have enough finance in this country to get the economy moving again.

Lord Sassoon: I certainly agree with my noble friend that we need a vibrant banking market to underpin the economy's recovery. The action that the Government have taken to make sure that interest rates remain low is absolutely critical. We welcome the first steps taken recently by the British Bankers' Association task force, which made a range of proposals that go to the heart of tackling the need for a continued flow of credit to British business.

Lord Barnett: My Lords, would not the straight answer to the Question on the Order Paper have been to say that the Government do not have any plans whatever to deal with future bonuses?

Lord Sassoon: My Lords, I have said that we have already taken action and are continuing to consider other possible actions in this area.

Lord Eatwell: My Lords, I was intrigued by the Minister's identification of remuneration with risk taking. Are not bonuses usually paid to bankers for taking risks with other people's money?

Lord Sassoon: My Lords, that is precisely why we want to make sure that there is a better alignment between the way that remuneration is paid and the mitigation of risk that should be there. It is precisely to get a better alignment with the risks that are incurred that we are supporting the measures that are being taken globally-limiting the amount of bonus taken up front in cash and deferring a significant proportion of bonuses in line with the proposals of the G20.

Lord Brooke of Sutton Mandeville: My Lords, can my noble friend remind me which Administration were in power when this problem developed?

Lord Sassoon: My noble friend is completely right that this problem arose under the watch of the last Administration, who implemented a one-off bonus tax that is now widely regarded to have been a failure-so we have to take the time to find a better way of dealing with this in the medium term.

Lord Brooke of Alverthorpe: In considering other possible action, as he mentioned, will the Minister have a look at the Private Member's Bill which was promoted by my colleague the noble Lord, Lord Gavron, last year to try to get all companies, including banks, to put on the front page of their annual accounts the proportion of the highest paid compared with the lowest paid? A good deal of cross-party support was given to that and, while the Minister was not in the House at the time, would he go back and have a look at it again?

Lord Sassoon: My Lords, I am always up for looking at good ideas; this sounds a bit extreme, but disclosure of remuneration for bankers is indeed unfinished business.

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Food: Labelling


2.50 pm

Asked By Baroness Seccombe

The Parliamentary Under-Secretary of State, Department for Environment, Food and Rural Affairs (Lord Henley): My Lords, the Government have made a commitment to clear and honest food labelling. Through negotiations on the proposed EU food information regulations and national initiatives, the Government are working to improve the accuracy of origin labelling. We are also discussing with the food industry ways that food businesses can provide clearer information on the origin of food and food ingredients, particularly for meat and dairy products.

Baroness Seccombe: I thank my noble friend the Minister for his reply, but what irritates me is that when one goes into a supermarket, one sees our luscious British fruits packed in containers identical to others, and similarly priced, so that shoppers very often do not realise that they have bought foreign goods until they get home. This year, British raspberries have been excellent; our plums are in a different league from their foreign cousins; and there is nothing that can be said about British apples except that they are superb. Therefore, can encouragement and guidance to stores be given so that they promote our wonderful British home-grown fruit?

Lord Henley: I echo the "Hear, hears!" from around the House and congratulate my noble friend on paying tribute to the UK food industry, in particular to United Kingdom fruit. We are, as I said, trying to facilitate a number of voluntary industry agreements to try to encourage more labelling of food. On this front, we want to pursue-dare I say it?-a stick-and-carrot approach in terms of encouraging greater development. The stick, as it were, is being provided by the EU food information regulations; the carrot will be by food industry voluntary agreements.

Lord Borrie: Does the Minister agree that one of the major problems with food labelling, especially in supermarkets on tins and packages, is that there is a superfluity of it in very tiny print, which is impossible to read-and that it is impossible there and then, in the supermarket, to distinguish what is important, what is significant, and what is not?

Lord Henley: I agree that very often there can be too much information. That, too, is why it is far better to try to pursue a lot of these matters through voluntary agreements, whereby a simpler process can be developed that is of greater use-to, for example, the noble Lord-than something more complicated and more bureaucratic that ends up producing too much information which the noble Lord, and many others, find rather difficult to read.

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Baroness Finlay of Llandaff: Are the Government considering using clearer labelling on food that contains nuts, as was recommended by the committee on allergy which I chaired, given the number of cases of anaphylaxis that occur when people are unaware that there is a nut content in food?

Lord Henley: My Lords, I understand that work is being undertaken in this area. I also understand that all packets of nuts have a serious health warning on them saying, "Warning-this packet might contain nuts", which should be of help to noble Lords as well as to others. More seriously, the noble Baroness makes a very important point, as nut allergies are increasingly common and that needs to be addressed. We need to make sure that any food that contains nuts has the appropriate warning on it.

Baroness Trumpington: My Lords, I agree with the noble Lord on the opposition Benches, but I ask the Minister not for an increase in the number of words on packages but simply for words, such as "Boil for five minutes", to be in big print.

Lord Henley: My noble friend always has the best suggestions. I did not say that we should increase the number of words on packages but, rather, that we should make sure that the wording on any package is user-friendly and can be accessed by as many people as possible. That is why we believe that voluntary, rather than compulsory, agreements are often the better way of addressing this issue.

Baroness Quin: My Lords, given that labelling is the subject of European as well as national decision-making, and given that the Government, like the Opposition, have said that they are in favour of clear labelling and a colour-coded traffic-light system, can the Minister tell me why Conservative MEPs voted not only against such a traffic-light system for Europe but against continuing such a system here in the UK? Should not the Government be consistent in pursuing policies in the interests of Britain and our consumers?

Lord Henley: The noble Baroness will be aware that, although I was formerly a Chief Whip in this House, I have no responsibility for Conservative MEPs on the other side of the channel. However, we are continuing to negotiate on the EU food information regulations and will ensure that they are as user-friendly as possible. We will also try to ensure, for example, that it is made quite clear where meat comes from. Therefore, even if, for example, the labelling says that bacon is British when the meat itself comes from Denmark, it will also say that the primary product, the pork, comes from another country-that is, Denmark.

Baroness Parminter: My Lords, can the Minister inform the House how, without compulsory labelling on egg products, consumers do not unwittingly purchase eggs from Spain's illegal battery cages and undermine British producers, who will comply, unlike those in Spain, with the deadline for phasing out battery cages?

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Lord Henley: My Lords, my noble friend is right to draw attention to the very serious problems relating to animal welfare. They are concerns that have always been at the forefront of our mind in negotiations on the EU food information regulations, and we will certainly take them on board in those continuing negotiations.

Lord Tomlinson: Will the noble Lord reflect on his earlier answer that the conduct of MEPs has nothing to do with him, particularly when he reflects that the leader of his party forced Conservative MEPs to leave the Christian Democrat group where they were and join every odd-bod racist, right-wing group, losing all influence that they had in Europe?

Lord Henley: My Lords, the noble Lord makes a point but it is a pretty silly point. He knows perfectly well that I-and, for that matter, the Prime Minister-have no influence over what they do. In the end, they will decide what they do, and the noble Lord knows that perfectly well.

Foreign and Commonwealth Office: Educational Allowances


2.59 pm

Asked By Lord Campbell-Savours

The Minister of State, Foreign and Commonwealth Office (Lord Howell of Guildford): My Lords, we contribute only towards the education costs of children of staff who are required to work in posts overseas. These officials pay UK tax wherever they work and are entitled to have their children educated at public expense. In 2009-10, we spent £13.3 million on children educated in the UK and £11.5 million on children at schools overseas. The ceiling on the amount that parents can claim towards boarding schools is reviewed annually and was reduced in September this year.

Lord Campbell-Savours: Is it not true that excellent quality, state boarding-school education is available in the United Kingdom at an average price of around £9,000 per annum, plus a £3,500 contribution towards tuition by the state as against public school fees of between £22,000 and £30,000 a year? Why cannot the Foreign Office save tens of millions of pounds by capping the amount of money that a Foreign Office official can claim to the level of state boarding-school fees?

Lord Howell of Guildford: I am grateful to the noble Lord. It is true that state boarding-school places are excellent, but unfortunately it is not true that they are available. Diplomats with children who need to be educated when they go abroad to places where they

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cannot take their children-I have a list of 48 countries to which children are not allowed to be taken-need to find places quickly. However, they find that they are not at the top of the queue for the 5,000 boarding places available in state schools in this country. I appreciate very much the point that the noble Lord makes but it does not add up if you are trying to find a place for your child.

Lord Deben:Does my noble friend agree that it is a very important part of keeping the best people in the Foreign Service that we provide this service for their young children, as without it we would not have the quality people whom we expect? It is about time that people stopped sniping at the Foreign Service on this issue.

Lord Howell of Guildford: I am grateful to my noble friend for that support. He is absolutely right but I shall correct him on one thing, if I may. It involves not only senior staff as 75 per cent of the children helped are of parents with quite junior salaries. The Foreign Office sends junior people to very difficult posts and they may have young children who need to be educated.

Lord Wright of Richmond: My Lords, I declare two interests. First, I was a beneficiary of these allowances for a large part of my career. Secondly, 19 years ago I gave evidence to the noble Lord, Lord Sheldon, and the Public Accounts Committee in support of these allowances, so I am somewhat biased. Does the Minister agree that the continuation of these allowances is essential as members of the Diplomatic Service are often posted abroad with very little notice and such allowances are necessary for the uninterrupted education of their children? Does he also agree that they are very much in line with those given by practically all international companies, and so are essential if recruitment and retention in the Diplomatic Service is to be preserved?

Lord Howell of Guildford: I agree with the noble Lord, who obviously speaks with enormous authority on this subject. I would just add, referring back to my Answer to the noble Lord, Lord Campbell-Savours, that we are looking at ways of bringing the cost of this operation down. However, the basic requirement is that these children are educated; we do not want only childless diplomats. Therefore, we have had to make the provision that the noble Lord has just described. I believe that it should continue and that it is essential for an effective diplomatic effort by this country.

Lord Harrison: Further to his first Answer, will the Minister say in simple pounds, shillings and pence what is the annual maximum tax-free contribution that can be made to the education at a secondary school of a child of a Foreign Office official? Secondly, will he rebut in their entirety articles in the Daily Mail and the Telegraph suggesting that this Government will abolish the continuity of education allowances which are so important to our Armed Forces and, indeed, the Foreign Office?

Lord Howell of Guildford: There is no suggestion, as I made clear, that these allowances will be discontinued for the Diplomatic Service. I cannot comment on other branches of the Crown service or other public

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services because that is another question for which a rather different set of arrangements apply. The figures for which the noble Lord asks are that the ceiling for junior boarders in the current year is £7,239 per term and £8,236 for senior boarders, which is a reduction of £100 since last September. The figures are considerably lower for those attending as day pupils.

Baroness Falkner of Margravine: Will my noble friend comment on whether, given the large sums involved and these rather austere financial times, there are any efforts to have negotiations with DfID and the Ministry of Defence for a collective purchase agreement at a limited number of schools so that the costs might be constrained in that way?

Lord Howell of Guildford: That is a very valuable thought. As far as Foreign and Commonwealth Office is concerned, the numbers are rather small. We are talking about a maximum of 2,000 children, of which only 500 are being educated in the United Kingdom. Given the circumstances of where these children go-whether to be near their grandparents or to where an available space is found-it is very difficult to concentrate on a single discount operation. This is slightly outside the question, but I believe that the Armed Forces are large enough to have a kind of discount arrangement, but we do not have the numbers or the weight to engineer that kind of system for the Foreign Office.

Lord Campbell-Savours: My Lords, if the cap were to be reduced from over £25,000 per annum to the £13,000 to £14,000 that I am suggesting, surely that would create the demand in the state boarding school sector that the Minister said in his first reply is missing?

Lord Howell of Guildford: My Lords, the difficulty that the noble Lord must appreciate is that although there are state boarding-school places, and perhaps there ought to more, they tend to be filled up very rapidly with children with real boarding needs from domestic households and families. Diplomats inevitably come along at the last minute, because postings sometimes have to be on an emergency basis, and they find that those places are filled. If the sums were reduced to the levels that the noble Lord is talking about, parents who are already on fairly modest salaries and are paying a contribution to meet the total requirements of the school where their children are being educated would simply not be able to afford it and the children would not be educated. We have to face it: if we want good diplomacy, we have to allow the children to be educated.

Deputy Chairmen of Committees

Membership Motion

3.06 pm

Moved By The Chairman of Committees

Motion agreed.

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Arrangement of Business


3.07 pm

Baroness Anelay of St Johns: My Lords, at a convenient point after 4.30 pm, my noble friend Lady Neville-Jones will repeat a Statement entitled "Statement on Aviation Security Incident". Grand Committee will be adjourned for the Statement because it is involved in Home Office matters and it will resume five minutes after the end of the Statement.

Terrorist Asset-Freezing etc. Bill [HL]

Main Bill Page
Copy of the Bill
Explanatory Notes

Third Reading

3.08 pm

Clause 2 : Treasury's power to make final designation

Amendment 1

Moved by Lord Lloyd of Berwick

1: Clause 2, page 2, line 28, at end insert-

"( ) For the avoidance of doubt, "person" in subsection (1)(a)(i) means-

(a) United Kingdom nationals as defined in section 33(2);

(b) A body incorporated or constituted under the law of any part of the United Kingdom;

(c) Persons or entities within the territorial jurisdiction of the United Kingdom."

Lord Lloyd of Berwick: My Lords, the purpose of Amendment 1 is to clear up an ambiguity that emerged only during Report on the Bill. The amendment thus falls within the type of amendment that is normally allowed on Third Reading.

The question is whether Clause 2, which gives Treasury Ministers the power to designate a person and freeze his assets, has extra-territorial effect. On Report, the noble Lord, Lord Sassoon, argued that Clause 2 has such effect; indeed, that was a crucial step in his argument generally, as it was in the argument of the noble Lord, Lord Bach. The noble and learned Lord, Lord Wallace of Tankerness, made the same point in Committee when he told us that the Treasury had designated many individuals outside the jurisdiction in the past. I do not know whether they were British subjects, but the fact that something has happened does not necessarily mean that it was lawful. My argument was that Clause 2 does not have extra-territorial effect, so "person" in Clause 2 means a British subject or foreigners within the territorial jurisdiction. Whether I am right or wrong about that, I had hoped that we could have cleared up the point before the Bill went to the Commons. I had hoped the Treasury might table an amendment to say what its understanding of Clause 2 is. After a longish discussion on Friday morning, the Treasury failed to do that so I felt obliged to table this amendment late on Friday afternoon.

What does "person" in Clause 2 mean? The noble Lord argues that it includes foreigners outside the jurisdiction. Of course, Parliament can legislate to cover foreigners outside the jurisdiction; there is no question about that. However, the presumption is that Parliament does not intend to do so unless very clear words are used. That presumption has been around

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for a very long time, as I hope to show. It is stated in section 130 of Bennion's Statutory Interpretation. The presumption has also been applied in so many cases that it is difficult to know which to pick, so let me choose one case-about the meaning of the word "debtor" in the Bankruptcy Act of 1869-that I think illustrates the point.

The case concerns two Chilean subjects who carried on business in Liverpool. They had assets here within the jurisdiction and they incurred debts within the jurisdiction but they were not resident here. An English creditor wished to start bankruptcy proceedings against the Chileans. It was argued that the general word "debtor" in the 1869 Act should be given a wide meaning so that it included debtors all over the world, just as it has been argued that "person" in Clause 2 covers persons everywhere. That argument was, however, decisively rejected by the Court of Appeal. It was held that "debtor" covered only British nationals or foreigners within the jurisdiction, which of course the Chileans were not. That case-I refer to ex parte Blain, decided in 1879, volume 12, Chancery Division, at page 522-has been followed on innumerable occasions ever since. There is no doubt that the presumption to which I refer exists and is applied as a matter of course.

What is the reason for the presumption? The answer was given by Lord Justice James in the same case when he said that it rests on the broad general principle of comity, the comity which should exist between independent states. Applying that to the facts here, I ask whether, if the French authorities were to designate a British subject resident in England and freeze his assets because they believed him to be a terrorist, we would regard that as a friendly act. Clearly, we would not. The same must also apply the other way round. If the noble Lord, Lord Sassoon, is right and Clause 2 has the extra-territorial effect that he suggests, the Treasury could designate a French subject, freeze his assets here in London and require him to come to London in order to appeal against the designation under Clause 26. If a Treasury Minister did that, how would it play in France? It may be argued that in the real world we would never dream of designating a French subject. That might be right-I hope it is-but it is the power to designate contained in Clause 2, if the noble Lord's construction is right, that is repugnant to comity. There is no doubt that the presumption exists and it is based on a sound principle of international law.

3.15 pm

The presumption is reinforced on the facts of this particular case by what is contained in other provision of the Bill. Clause 33 gives extra-territorial effect to offences committed under Clauses 11 to 15 but not to Clause 2. That is a strong indication that Clause 2 was not intended to have extra-territorial effect. Clause 3 provides for notification and it works well in the case of foreigners within the jurisdiction, but how does it work in relation to foreigners in Afghanistan? How does Clause 17, "Licences", work in relation to foreigners resident abroad? Quite apart from the presumption, which is what my argument rests on, all the indications in the Bill are that it was not intended to have extra-territorial effect.

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How does the noble Lord, Lord Sassoon, put his case? He cannot say that the presumption is excluded by clear language because there is no such language in the Bill. Instead, he says that the presumption is excluded by necessary implication as it is incompatible with our international obligations under Security Council regulation 1373 of 2001. With respect, that is where the basic error lies. The presumption is not incompatible with regulation 1373-quite the contrary-as one can see from what the regulation says. Regulation 1373 imposes an obligation on all states individually to criminalise the provision of funds by their nationals or in their territories-that must mean foreigners in their territories as you cannot criminalise a fund. Exactly the same applies to the freezing of assets. Each state is responsible for designating its own subjects and freezing their assets. Each state is responsible for designating foreigners within its jurisdiction and freezing their assets. Nowhere is it provided that states should designate foreigners outside their territorial jurisdiction. Indeed, there is nothing to suggest that that was ever the intention.

I accept that an increasing number of international conventions confer what is called "universal jurisdiction", but no one suggests that regulation 1373 has that effect. If the Treasury has reason to believe that a fund in London is held by a French terrorist who is not resident here, it must simply inform the French authorities who, if they agree, will take the necessary action by designating the individual and freezing his assets. It is as simple as that. I accept that some countries are unwilling to designate their subjects as terrorists, but that cannot affect the meaning of the word "person" in Clause 2. I beg to move.

Lord Pannick: My Lords, to achieve its purpose this Bill needs to confer powers in relation both to persons and to assets within the jurisdiction. I understood the Minister to assure the House on Report that the Bill, as currently drafted, covers both categories of case. I do not understand that to involve extra-territorial effect, although the descriptive term may be less significant than the substance. My concern is where we find in the Bill a clear statement to the effect that a person may be the subject of a designation order because he has assets in this country even though he otherwise has no connection with this country. I hope the Government will give further thought to that matter as the Bill proceeds through the other place.

Baroness Hamwee: My Lords, I cannot bring the same academic knowledge to this debate as the noble and learned Lord and the noble Lord, Lord Pannick, but I start with the question of what this Bill aims to achieve and what it is directed at. As I understand it, it deals with assets that are in the UK. For me, other questions flow from that. I agree with the noble Lord, Lord Pannick, that if there is a query over the scope of the Bill, it should be clarified. One would hope not to have an argument such as this repeated either in the other place or, indeed, in court. However, having been involved with this Bill and its predecessor, I do not have the anxieties that have been expressed this afternoon.

Lord Davies of Oldham: My Lords, on behalf of the Opposition, I too would not dream of seeking to put myself in the same category of argument as the

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noble and learned Lord and the noble Lord who have spoken on these issues. The Minister has an argument here that he will need to respond to effectively. We in the Opposition thought that most of these issues were covered effectively on Report by the Minister. Like the noble Baroness, Lady Hamwee, who has expressed her reservations about other aspects of this Bill in the past, we see no argument for this amendment at present. Therefore, if we were to move to a Division, the Opposition would support the Government if, as I anticipate, they present an accurate and effective case for the rebuttal of this amendment.

Lord Wallace of Tankerness: My Lords, I am grateful to the noble and learned Lord, Lord Lloyd of Berwick, for introducing this debate. I am also grateful to other noble Lords for their contributions. I am particularly grateful to the noble Lord, Lord Davies, and my noble friend Lady Hamwee for indicating that, subject to what I may say, they are generally satisfied with the position which the Government have adopted.

This amendment goes back to the debate we had on Report about the scope of Clause 2 and whether it should allow the Treasury to designate non-UK persons who are outside the United Kingdom. We are grateful to the noble and learned Lord for having written to my noble friend Lord Sassoon, following our debate on Report, to explain his concerns with the clause as drafted, and for having taken the opportunity to discuss the matter in some detail with officials before he tabled his amendment. I readily recognise that this amendment stems from the noble and learned Lord's very strong belief, which he clearly expressed in moving his amendment, that it is the right and responsibility of each country to make laws that affect their nationals and those within their jurisdiction. Generally, we would not dissent from this principle but, if the House will permit me, I will explain why we cannot accept the noble and learned Lord's amendment.

The noble and learned Lord referred to United Nations Security Council Resolution 1373, which requires that states shall,

"Prohibit their nationals or any persons ... within their territories from making any funds, financial assets or economic resources or financial or other related services available, directly or indirectly, for the benefit of persons who commit or attempt to commit or facilitate or participate in the commission of terrorist acts".

I think it is clear that a key aim of Resolution 1373 is to prevent acts of terrorism anywhere in the world. To that end, the definition of terrorism in this Bill is borrowed from the Terrorism Act 2000 and is used in other legislation. The definition makes it clear that terrorist activity anywhere in the world against persons or Governments falls within the scope of the legislation.

It is also clear that Resolution 1373 puts an obligation to prevent terrorist finance not only on the state where particular terrorists and terrorist groups reside but on the states from which the funding of those terrorists may originate. If, for example, a foreign terrorist holds assets within the United Kingdom or relies on funding coming from the United Kingdom, it is not only right but essential that the United Kingdom should be able to freeze those assets and prevent funds being transferred for terrorist purposes. That is what the language of United Nations Security Council Resolution 1373, which I have just quoted, clearly requires.

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Relying purely on the country where the terrorist resides to take action has two fundamental drawbacks. First, that country cannot control funds or other assets that may be available for use overseas by the terrorist. This is why the Security Council resolution is worded as it is. Secondly, we know, as was acknowledged in our short debate, that terrorists are often based in countries where the authorities cannot or will not take action: for example, in failed states or in states where the authorities turn a blind eye to terrorism.

Clause 2 therefore provides the Treasury with a power to identify those whom we consider to be terrorists, based on activities that could take place anywhere in the world. The effect of the designation is twofold. First, any funds and economic resources within the United Kingdom of such persons are required to be frozen. It will be a criminal offence for anyone in the United Kingdom to deal with such assets without licence from the Treasury.

Secondly, persons in the United Kingdom will be prevented from providing any funds or economic resources to designated persons. I shall try to make it clear; the fact that some persons designated by the Treasury are ordinarily not in the United Kingdom does not give extra-territorial effect to the provisions. The effect of listing such a person is to freeze only their United Kingdom assets and prevent persons within the United Kingdom or United Kingdom citizens abroad assisting them. It has no further effect.

The noble and learned Lord, Lord Lloyd, asked what would happen if we were to designate a terrorist who was in France. He suggested that it might lead to a breakdown of international comity. That we are taking these measures in pursuance of a United Nations Security Council resolution indicates where the balance of international comity may lie; it is in United Nations member states taking the resolution and implementing it. We have not so far designated a French national. However, if we were to do so, I would certainly expect close co-operation between United Kingdom and French authorities in such a matter. The French might indicate to the United Kingdom that a French national was a terrorist of concern to them, whose assets they wanted to freeze. Working with French counterparts, the United Kingdom's law enforcement agencies would identify whether that suspected terrorist held assets in the United Kingdom that the French Government then wished to be frozen. The French would provide United Kingdom authorities with the relevant evidence to support a UK designation, showing that there was at least a reasonable suspicion that person X was involved in terrorism and that a UK asset freeze was necessary for protecting the public from the risk of terrorism.

Finally, a Treasury Minister will consider the case and, if the legal test that is set out in this Bill is met, will designate person X, with the Treasury taking the necessary steps to inform the financial sector and to freeze person X's assets within the United Kingdom. We accept that other countries may use domestic asset-freezing powers to designate United Kingdom nationals, but again we would expect this to be done in co-operation with United Kingdom authorities.

The power in Clause 2 relates to designated persons, including non-UK nationals; it is not a radical departure.

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Sanctions legislation is by its very nature often targeted at persons outwith the United Kingdom, but the prohibitions bite only on those in the United Kingdom or when United Kingdom nationals are elsewhere. An example is the prescription regime under the Terrorism Act 2000 and this legislation. There is a list of prescribed groups, almost all of which operate outside the United Kingdom, but the effect of proscription is to prohibit persons in the United Kingdom from membership of such groups or from providing material support to such groups. As with our Bill and sanctions legislation generally, the target is outwith the United Kingdom but the prohibitions apply solely in relation to persons in the United Kingdom or UK citizens operating abroad. That accords with the fundamental jurisdictional principle that the country should normally legislate to criminalise only acts committed within its territory or by its citizens abroad. Here the acts that are being criminalised are the provision of finance for the purposes of terrorism.

I understand the noble and learned Lord to be concerned about interfering with the sovereignty of other states. I hope that he can see from an indication of how we might act in the event of getting intelligence or representations from France that this measure would not offend another state but would promote co-operation. At the risk of repeating myself, the effect of a designation is to freeze only those assets of a designated foreign national that are within the United Kingdom, and we believe that that is the sensible way in which to proceed.

Clause 1(b) refers to persons listed in Council Regulation 2580/2001. This regulation is the means by which the European Union implements Resolution 1373; it does so by requiring member states to identify persons against whom the state has taken action, for example by way of a domestic asset freeze. Persons put forward and included on the list are then subject to financial sanctions throughout the EU. The reference to "persons" here cannot be confined to those within the UK and the same term cannot have different meanings in the same clause. The EU regime emphasises, I think, the essential territoriality of an individual member state's actions, and the need for each member state to take action against assets in their country and to prevent those in the country from providing material support to terrorists.

The noble and learned Lord referred to Clause 33, which provides for cases in which UK nationals and UK incorporated bodies commit an offence outside the UK. This is not an unusual extension of the application of a statute, and I do not think-nor did he suggest-that it is in any way controversial. The purpose is straightforward-to prohibit UK nationals and companies from committing acts abroad that would be offences under the Bill if committed here.

The noble Lord, Lord Pannick, asked whether we should be able to designate overseas persons only if they hold assets in the United Kingdom. I have answered that. The asset-freezing regime not only freezes assets but prevents persons in the United Kingdom making payments to a designated person. That is why we need to be able to designate overseas persons, even if they do not hold funds in the UK, so that we can prevent people in the United Kingdom or UK persons overseas providing designated persons with funds.

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In summary, we believe that Clause 2 does not limit the Treasury to designating only persons who are in the UK, and nor should it. While we have listened carefully to the noble Lord's arguments today, on Report and in the exchanges that he has had with my noble friend, we are satisfied that the wording of Clause 2 as it stands is sufficiently clear in this regard. It does not make the provision extra-territorial. Clause 2 merely identifies those persons involved in terrorism whose assets persons in the UK cannot deal with and whom persons in the UK cannot assist by providing funds or economic resources.

For this reason, the Government cannot support the amendment, and I urge the noble and learned Lord to withdraw it.

Lord Lloyd of Berwick: My Lords, I am extremely grateful for that full response. The problem remains, I fear, the meaning of the word "person" in Clause 2. Somehow underlying the Minister's reply is the idea that a Treasury Minister has a power to designate assets, but of course the power can designate only persons. The Minister dealt with that clearly in relation to the example of us suspecting a French terrorist; indeed, he gave the same answer as I did. The way that it is meant to work is as follows: if we suspect someone in France of being a terrorist, we approach the French authorities and ask them in the spirit of co-operation-as the Minister rightly says, that underlies all this-to look at this, and the French will agree. If they come back and say, "Yes, we think you're right", they will designate the terrorist in France. There is nothing wrong with that. That is what Regulation 1373 envisages. What it does not envisage is us, without consulting the French, simply designating a Frenchman resident in France. All the cases show that a general word such as "person" in this clause, whatever may have been the Government's intention, does not mean-I respectfully suggest-what they think that it means.

I will look closely at what the Minister has said and, more important, I hope that others will look closely at what the Minister has said and what I have said. I hope that in due course they will reach what I believe to be the correct result, which would require only a small amendment to Clause 2. That having been said, I beg leave to withdraw the amendment.

Amendment 1 withdrawn.

Clause 23 : General power to disclose information

Amendment 2

Moved by Lord Sassoon

2: Clause 23, page 11, line 28, leave out "or Guernsey" and insert ", Guernsey or the Isle of Man"

Lord Sassoon: My Lords, I hope that this will be a little briefer. In Committee, I tabled, and this House accepted, a minor amendment to remove any doubt that disclosure of information obtained under Part 1 of the Bill to the law officers of Jersey or Guernsey is permitted. I said at the time that the ability to share this information is essential to the maintenance of an effective asset-freezing regime. The Government have

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tabled a further amendment to Clause 23 to make it clear that the disclosure of information obtained under Part 1 of the Bill can also be to the law officer of the Isle of Man. This is a minor amendment, which is intended to ensure that Clause 23 achieves its original intention. I hope that your Lordships will support me in making this technical amendment to the Bill.

Amendment 2 agreed.

A privilege amendment was made.

Bill passed and sent to the Commons.

Comprehensive Spending Review

Spending Review 2010

Motion to Take Note

3.39 pm

Moved By Lord Sassoon

The Commercial Secretary to the Treasury (Lord Sassoon): My Lords, in another place, my right honourable friend the Chancellor of the Exchequer set out the conclusions of the Government's spending review. This represents a clear plan to tackle the nation's deficit and demonstrates the Government's commitment to investment in growth, in jobs and in the future of the British economy. It is a plan that has at all times been guided by three core principles: growth, fairness and reform. These are the right priorities for making some of the most difficult decisions that any modern Government have had to make. We should never forget the financial position that we inherited when we came to office. Our country was borrowing £1 for every £4 that we spent. We had the largest budget deficit in our peacetime history and interest payments on our debts will total £43 billion for this year, or £120 million a day.

We need to take control of our country's finances and put them back on a sustainable path because, if we lose that control, our priorities will be determined no longer by the needs of our people but by the demands of our debtors. This loss of control would threaten higher interest rates, rising inflation and more cuts in the future. Indeed, failing to restore credibility to our finances is the most fundamental threat to the recovery, to our jobs and to the growth of our economy. Therefore, I dispute the claim, which some have made, that there is a choice between fiscal discipline and supporting growth. That could not be further from the truth. The choice is between a sound platform to support growth and a lack of control that would undermine it.

In June's emergency Budget, the Government therefore set out the road map to recovery. The independent Office for Budget Responsibility looked at these plans and forecast the economy growing and unemployment falling in every year. It has also assessed that we are on course to eliminate the structural current deficit and see debt falling by the end of this Parliament, one year ahead of our mandate. The emergency Budget set out the Government's credible plan to balance the books, while the spending review has shown how we will deliver on it and find £81 billion of savings by 2014-15.

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The Chancellor's Statement set out the levels of departmental budgets for the next four years. I will not repeat every decision here. Instead, I want to focus on our priorities: growth, fairness and reform. They have guided our every choice. We are a pro-growth Government who have focused our capital resources on key infrastructure projects in transport and green energy. We are a Government with fairness at our heart and we are a reforming Government who leave no stone unturned in the search for waste, while devolving power and funding away from Whitehall. I shall address each of these principles in turn, starting with growth.

Before I do, among all the contributions to today's debate I will be particularly keen to hear what principles the party opposite would apply to spending reductions and what specific measures it would propose. I will also be listening with particular attention to the maiden speeches of the noble Baronesses, Lady Nye and Lady Healy of Primrose Hill, and to that of my noble friend Lord Allan of Hallam.

On growth, I have already said how our plan as a whole will deliver macroeconomic stability, which is crucial to restoring growth and giving businesses the confidence to invest. However, we are not standing on the wayside waiting for growth to happen. We have prioritised spending on the areas that will deliver the best returns to growth. Over the spending review, capital spending will be higher than that planned by the previous Government. With investment in transport capital across the country, more cash will be spent over the next four years than the past four. We will maintain, in cash terms, resource spending on science. A new green investment bank will lead the way to the economy of the future. Last week, we also published our Local Growth White Paper, which included a £1.4 billion regional growth fund, focusing our resources on the areas that need them most. These actions, and many others, form a major part of our strategy to secure and support sustainable economic growth.

Our second priority is fairness. Fairness means that, across the entire deficit reduction plan, those with the broadest shoulders will bear the greatest burden. It means that, even in tough times, we focus our resources on extending the ladder of opportunity. It means that we look carefully at whether we are doing right by those who receive welfare, as well as by those working families whose taxes pay for it. These are our aims and we have met them in full. We have published distributional analysis that clearly demonstrates that those on the highest incomes will contribute more towards the consolidation. This is not just in cash terms but also as a proportion of their income and consumption of public services combined.

Our progressive approach also places responsibility on the banks to make their fair contribution. We will continue pressing banks to do more and bring forward reforms that improve our financial system. That is why we have introduced the bank levy. Because banks need to follow the spirit, not just the letter, of the law, we have engaged in a concerted effort to get our banks to sign up to the code of practice on taxation by the end of November.

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We must ensure that everyone pays their fair share. That has been the motive behind agreeing a new £900 million package for HMRC. This investment will fund a clampdown on criminal behaviour, bringing in £7 billion each year by the end of the Parliament. There is no place for tax cheats in our society and there is no place for people who cheat the benefit system.

That brings me to welfare, with a budget that accounts for nearly £1 in every £3 that we spend. It is certainly right that the Government should help those who need it most. However, in many cases, the current approach has trapped people in a system where it simply does not pay to work. These are people who have been dumped on benefits by the previous Administration and then left there, indefinitely, with no prospects for improving their position. That is not fair on them and it is certainly not fair on the taxpayer. The case for reform is clear; the real question is how we can strike the balance.

Our approach has been this: we are moving to a universal credit system over the course of two Parliaments to do away with the complexity of the current system, ensuring that work always pays. We will introduce a new work programme to provide personalised support to those who need the greatest help back into employment, with private and third sector providers paid on the basis of the additional benefit savings that they secure. We will fund significant increases to the child tax credit to ensure that this spending review has no measurable impact on child poverty over the next two years.

Through the welfare reforms in the spending review, we will find £7 billion net savings on top of those identified at the Budget. Some £2.5 billion comes from removing child benefit from households with a higher-rate taxpayer. This is the most progressive welfare measure in the spending review, but we are making other reforms, too. For instance, we will cap household welfare payments at the average earnings for working households. This has to be right. The welfare system should provide an effective safety net, but it should not pay some workless families far more than the amount that most working families earn. Our reforms mark a historic shift from state dependency to independence.

Throughout this review, we have been clear on one thing: our decisions need to be fair and, in being so, to improve the chances of the poorest and most disadvantaged in our society. Fairness is about opportunity-a chance for a better life, especially for the next generation. Therefore, we have chosen to invest in our children. We have introduced a new pledge for 15 hours' childcare for disadvantaged two year-olds. Cash spending on Sure Start services will be maintained, with a renewed focus on life chances. Although it has meant a greater challenge for other departments, the schools budget will not just match but outstrip inflation in each of the next four years. When you factor in reduced pressures from pay restraint and back-office savings, that amounts to a very significant boost for the classroom. A new £2.5 billion pupil premium will target additional resources on those with the most to gain, because fairness runs through the very heart of this spending review.

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I now move on to our third principle: reform. It manifests itself in three separate ways. The first is by bearing down on back-office costs. Each main government department has found at least 33 per cent in administrative savings. We have announced our plans to share services, cut down on waste and abolish unnecessary quangos.

Secondly, we will oversee a massive devolution of power from the centre. Apart from in schools and public health, we will end the ring-fencing of all government grants to local authorities from April next year. We will reduce the number of separate core revenue grants to councils from 90 to fewer than 10. Our new tax increment financing borrowing powers will allow councils to fund key projects and, last week, we announced that we are considering options to enable local authorities to retain locally raised business rates. This puts more power into the hands of local government-the people who know best what is needed in their own towns, villages and cities.

Finally, reform means recognising where the old ways of doing things were not working, so we will overhaul the failed system of social housing. The terms for existing tenants, and their rent levels, will remain unchanged, but some new tenants will be offered intermediate rents nearer to market levels. Together with capital investment, that will enable a more flexible and responsive model, enabling the Government to deliver up to 150,000 new and affordable homes over the next four years.

There will be reform, too, in the justice system. We have a prison population that has been steadily rising out of control. This is not right, let alone affordable. The guilty must be punished, but rehabilitation should not be ignored. In fact, it should be the priority.

I conclude by saying that the coalition Government faced the worst economic inheritance in modern history. The debts that we were bestowed threatened every job and every public service in the country. Our response has seen us make some tough choices on spending, but we have protected health, schools and investment in growth. We have cut welfare and waste, pulled the country back from the brink of bankruptcy and put it on a more stable footing. Ours is the right plan and it is a plan that will help to build the more dynamic, prosperous and sustainable economy that this country deserves.

3.52 pm

Lord Myners: My Lords, I congratulate the Minister on mastering something which it took me a long time to understand as a Minister: when you have to convey unpalatable messages or to spin messages, it is best to keep your eyes firmly fixed on the notes in front of you and avoid any eye contact with those opposite through fear of not being able to maintain a straight face. I congratulate the Minister on maintaining a straight face throughout that speech.

I appreciate that we have more than 50 contributions today, so I shall endeavour to make my remarks as brief as possible. Like the Minister, I look forward to the maiden speeches from the noble Baronesses, Lady Nye and Lady Healy of Primrose Hill, and the noble Lord, Lord Allan of Hallam, who are all significant and important additions to your Lordships' House.

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The structure of my response is very similar to the structure of the Minister's speech, which is perhaps not altogether surprising as his speech was almost certainly written by the same people who were writing speeches with completely opposite views for me when I was a Minister, barely a few months ago. I recognise the structure.

We need to ask ourselves the following questions. Are the cuts necessary in scale and in terms of pace and are there alternatives which are worthy of consideration? Are the proposed cuts fair? Are they progressive? Do they fall on the broadest shoulders? I will not speak specifically to that issue, as I am sure that a number of my noble friends on these Benches will wish to do so. It is quite clear from the Institute for Fiscal Studies that the broadest shoulders are not bearing the greatest burden in terms of these cuts. To the extent that this programme can in any way be described as progressive-that is, limited to the top 2 per cent of all income earners-that is specifically as a consequence of the tax changes which the previous Government introduced in their Budget. This is not a fair programme; it is not a progressive programme; and I am sure that others will speak to that effect later in the debate.

Next, I ask myself whether the proposal is, to use parliamentary language, well put. Finally, are the issues of growth sufficiently addressed? The Chancellor presented cutting the fiscal deficit and the share of public spending as a proportion of gross domestic product as unavoidable. It is simply not true. There is a choice in terms of the target and the pace-whether the focus should be on expenditure or taxation and whether the expenditure cuts should fall most heavily on welfare. It is the Government's decision to make cuts on this scale, at this speed and with the greatest burden bearing on the poorest, the most deprived and the most vulnerable in the community. The Minister nodded his head for most of my statement until he saw the consequences of what he was nodding in agreement with.

There was no risk of national bankruptcy. I can say that with confidence, having been a Treasury Minister in May. There was no talk in the Bank of England or the Treasury about national bankruptcy. It is a complete figment of the imagination-a convenient truth that is now peddled by the Government. Let us remind ourselves that the average maturity of funding for government debt is 14 years. Let us remind ourselves that the Government are borrowing at the lowest interest rates for 40 years. That was true before the general election, as it is now. Interestingly-I am sure the Minister would point to this as being a sign of confidence in government-the spread of gilt yields over US dollar yields has expanded. I am afraid the Minister is wrong. His hand movements went in the wrong direction. He will no doubt wish to check the facts and find that I am correct. The spread has widened, so this is not a positive response to the Government. It is a very clear statement from the markets that there is now a real risk of recession. That is the consequence of the policy that the Government are pursuing.

We went into the global financial crisis with the second lowest debt as a percentage of GDP in the G7 countries. It was 36.5 per cent of GDP in 2007-08,

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which was lower than 42.5 per cent when the party opposite was last in government in 1996. Borrowing as a percentage of GDP in 2007-08 was only 2.4 per cent. That was largely being used for capital investment-for schools, hospitals and infrastructure. Let us remember that the Opposition were committed to the public expenditure programme as late as 2008. Indeed, David Cameron endorsed it as a tough approach. However, we then had a global crisis. It was absolutely right in those circumstances, when we saw a significant reduction in demand in the economy, for the Government to step in to create that demand in a typical Keynesian response.

However, the deficit needs to be addressed. We not only made a clear commitment to address the deficit-to halve it as a percentage of GDP within four years-but had already made a significant start on it. Remember that the deficit was lower at the end of our period in government than was forecast 12 months earlier and economic growth was stronger than had been forecast 12 months previously. Again, the Government's argument now that the crisis they confronted was far greater than they had imagined or envisaged simply is not borne out by the truth. The deficit as a percentage of GDP was lower than we were forecasting, as confirmed by the OBR. Economic growth was faster than had been forecast 12 months earlier. Of course the deficit needed to be addressed but we had a programme to do that. We had a programme to reduce the deficit from 11.1 per cent of GDP in 2009-10 to 5 per cent in 2013-14. The Government's own Office for Budget Responsibility has endorsed the fact that the programme we outlined would have achieved that degree of reduction.

One of the fallacies of the Government's thinking is that, somehow, borrowing is wrong. The family budget analogy-a good family always lives within its means-is used here. The Government miss the point entirely. Borrowing is sensible from a government perspective in a situation where there is endemic, pervasive overcapacity, as there clearly is at the moment; or when there is underutilisation of capacity and higher unemployment of people and capital than would otherwise be available. It is equally sensible to borrow for investment. The Government miss this point because their analysis of the economy is based solely on liabilities, not on assets.

It is absolutely sensible to pass on to future generations the benefits of capital investment-in education, hospitals, roads and infrastructure-and the costs of that investment in a fair and proportionate way. This Government, in fact, are slashing capital investment at precisely the time when we should be increasing capital investment because of the existence of surplus capacity. Now is the time to commission new building work because there is excess capacity in the building and construction industry. I should like the Minister, in his closing speech, to confirm that, under the Government's own economic forecasts, the economy will still be producing at 10 per cent below theoretical productive capacity at the end of the CSR period. If that is, as I believe, correct, then I think it underlines the fact that the Government's policies are pushing us back into a recession and not ensuring that the economy recovers in the way it should.

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On the issue of fairness, the Minister has spoken about children. He says that the Government have chosen to invest in children and that investment in children will outstrip inflation. However, we know from public statements that there will actually be a significant reduction in investment and expenditure per pupil in the education system. We know the pupil premium is a sleight of hand-a deception played by one of the coalition partners on the other. We have seen a fairness programme that is going to put the greatest burden on young families, on women, on the disadvantaged, and on local authorities. The Minister talked in a straight-faced way about devolving responsibility from central government to local authorities, but the only thing they have devolved is the axe for cutting, because they have not had the guts to make the cuts themselves; they have passed most of these cuts on to local authorities. I fail, for the life of me, to see how that squares with the big society.

Thirdly, I ask whether the CSR was well put. There were presentational tricks. I will be the first to admit that the current Chancellor is not the first to use presentational tricks: the mixture of numbers and percentages, the combination in single statements, paragraphs and sentences of cash amounts and inflation-adjusted amounts. We had more on the widening of the A11 in Norwich than we had on the loss of half a million jobs in the public sector. I hope that the Office for Budget Responsibility will be asked to look at ministerial statements on the economy to ensure that, in the future, they meet certain minimum tests for veracity, balance, and completeness.

What was most striking about the Chancellor's Statement-this is my fourth and final point-was that there was no compelling supply-side narrative and no macroeconomic analysis at all. There was no evidence to support the contention that crowding out was working, or that there was some form of Ricardian Equivalence. There was no acknowledgment at all of what was necessary for the private sector to grow. The absence of a growth narrative was the most significant deficiency from an economic perspective of the Chancellor's Statement. What we do know is that the proposed cuts will reduce economic activity by something in the region of 0.5 per cent per annum through the CSR period. I believe it will be more when one takes into account the multiplier effect. I am confident that the OBR will shortly reduce growth assumptions significantly. That is because we are seeing more unemployment; consumption will be affected by the increase in VAT; demand for credit remains low; the export outlook does not look at all encouraging; and investment by business in the private sector is clearly going to be curtailed until a more certain economic future can be seen.

We need a supply-side agenda, which is simply not being produced by this Government. The Government are fixated on cutting, cutting, cutting and reducing the size of the state. They have no alternative other than keeping fingers crossed and assuming that if the state consumes less, the private sector will somehow more than make up for that-something that is clearly at odds with the fact that we currently have considerable excess capacity in the economy. Cutting back on investment at a time such as this is a tragedy.

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The Government have created further uncertainty for the banking industry. They have slashed spending on business support programmes and have abolished the RDAs, replacing them with mere shadows. They are cutting investment programmes in innovation and applied research. Some of the consolations offered in terms of a green investment bank or a carbon-capture demonstration model are, frankly, trifling by comparison. Instead, the Government are increasingly relying on monetary policy. I strongly advise them to avoid compromising the independence of the Bank of England in this respect. I also urge the Bank of England to be very careful about introducing further quantitative easing until it can produce clear evidence that existing quantitative easing has worked. Certainly, the scale of existing quantitative easing exceeds anything which we envisaged was likely when it was first introduced by the Monetary Policy Committee as a possible response to low interest rates.

I have already said that Labour would have taken decisive action to reduce the deficit. What else would we have done? We should have introduced a much more activist programme to support industry and new investment by facilitating investment in innovation and, importantly, putting in place better infrastructure and making sure that private capital was increasingly available to support public needs in terms of infrastructure. I am pleased to read in the Sunday newspapers that the Minister has been travelling the world making the case to sovereign wealth funds for investment in infrastructure. If those reports are correct, that is sensible, although it is slightly at odds with the Chancellor feeling that paying interest on borrowings to non-domestic lenders is somehow unpatriotic, while giving ownership of infrastructure to non-nationals is acceptable. I should like to believe that the Government would invest in and create a new national investment bank. There are important opportunities here to use private capital from interested pension and insurance funds that would give fixed and predictable returns to support investment in infrastructure. However, to date, we have seen very little original thinking from the Government on that.

Finally, what I found shocking about the Chancellor's presentation was the waving of Order Papers and the cheering at the end of his speech. This was deeply insulting to those who will have to bear the burden of this cutting programme. To see the Chief Secretary demoted to a position of being glass filler in chief-filling the Chancellor's glass of water from time to time until he received a note telling him that it would perhaps be sensible if he shuffled up the Bench a little, so he was not as visible to the television cameras, and sat immediately behind the Chancellor-speaks volumes about the discomfort that those on the Liberal Benches must now be feeling. The Chief Secretary said he did not come into politics to cut government expenditure and public funding of needy services. That is what he has done; that is what the Government have done; and in doing that, they have completely failed to put forward a clear growth strategy that is fair and reasonable and which would ensure that the country delivers to its full potential.

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4.08 pm

Lord Newby: My Lords, no doubt the CSR makes me, like many other noble Lords, angry and frustrated-angry that the US and British banking systems landed us in a major financial and economic crisis; angry that the previous Government had been spending like there was no tomorrow, with big government deficits in every year since 2002; and angry and frustrated that in attempting to clear up the mess we have often been portrayed, as the noble Lord has just done, as latter-day scrooges who take a perverse delight in reducing public expenditure, when nothing could be further from the truth.

There is no doubt that the deficit had to be tackled decisively. We can argue whether the aim should be to eliminate it over the lifetime of this Parliament or over a slightly longer timescale. Labour argues that the timescale that we have adopted is a gamble. Perhaps it is, but Labour's policy-to the extent that we can discern it-is simply a gamble of a different sort. The noble Lord today failed yet again to spell out how Labour would save even £1 of the tens of billions of pounds which it is committed to cut from public expenditure. Frankly, until it does, it has no credibility with me.

These arguments are, however, in my mind now secondary to the main challenges facing the British economy and the operations of the state when it comes to taxation and expenditure. There are two principal challenges which I believe we face and against which this CSR should be judged. First, almost every aspect of our taxation and expenditure systems is no longer fit for purpose. Secondly, we have not responded effectively to the fundamental change in the world economy that is now in full swing.

Take the way we do things. Almost wherever one looks, our public expenditure and regulatory systems have become so complex that they cannot deliver effectively the outcomes that they seek. We have a benefits system that makes the Schleswig-Holstein question look like child's play; we have a pensions system that is confusing and obscure; we have a tax system that is now the most complex in the world and which almost certainly no one-literally no one-fully understands; and we have a regulatory system that stifles initiative in almost every area of public life.

Because we have to cut public expenditure, we are being forced to look afresh at the way we do all these things. This is long overdue and can lead to positive outcomes. I shall give examples. The Building Schools for the Future programme is being cut, but not before another 600 new schools are built. It has been announced that these schools will have to be built at 40 per cent less cost than has been the case until now. This sounds an impossible aim, until you read the document produced by Balfour Beatty that explains how it thinks it can save 30 per cent on new-build schools, and a massive 60 per cent on non-structural refurbishment, simply by being more efficient in the process.

In social care, Sandwell healthcare, a social enterprise, was able literally to halve the costs of delivering services previously run directly by the local council, with no loss of pay or other conditions for the staff, by among other things being able to reduce the number of sick

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days per employee from 32 to one. The challenge now is to ensure that this kind of saving is identified and delivered across the whole range of public spending.

On benefits, the Government have embarked on fundamental reforms. I welcome the plans to introduce a universal benefit and the plans for a citizens' pension, as they are major simplifications of the system and will mean that many people who currently lose out-in the case of the citizens' pension, principally women who stayed at home to have children-will for the first time get the benefits they deserve.

The second challenge we face is how to rebuild the economy in circumstances where the main drivers for growth are the emerging economies and not simply, or even primarily, the US and Europe.

Analogies are often drawn between the current crisis and the 1930s. They are largely misconceived because they ignore the fact that large parts of the world economy are booming and are likely to continue to grow strongly, whatever happens in Europe and the US. Emerging markets now account for a third of the world economy and two-thirds of its growth, which helps to explain why the world economy is now larger than before the financial crisis. All the evidence shows that companies are planning for further cross-border growth. A recent study by BDO showed that 95 per cent of ambitious mid-cap companies are confident about international growth for the year ahead. This is a far cry from the 1930s.

The high levels of growth in the BRICs and the appetite for international expansion by companies offer the UK huge opportunities, but ones that under the previous Administration were simply not adequately exploited. This is not simply or even primarily a matter for government, but government has a crucial part to play. The new Government appear to recognise this potential and have taken some positive steps towards realising it. The early visit of the Prime Minister to India was a good start. However, there is much more to be done. For a start, we must stop making things more difficult for those wanting to trade with or invest in the UK.

Over recent weeks, we have exhaustively discussed the immigration cap, but the current policy, which among other things denies multinational companies with large-scale operations here the opportunity to bring in the highly skilled staff they need to expand their activities, is highly damaging and must change soon.

We must also create the conditions that help companies to grow. We need, for example, a 21st-century infrastructure. In this area, the transport infrastructure announcements are highly welcome, but they deal with only part of the need. The establishment of the green investment bank is also a welcome development, but it needs to attract significantly more capital if it is really to bring our infrastructure up to speed. This should be possible as pension funds, other fund managers and sovereign wealth funds are all looking for long-term, secure vehicles in which to invest. Like the noble Lord, Lord Myners, I was pleased to read of my noble friend's success in discussions with sovereign wealth funds in this area.

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We also need a more highly skilled workforce. Here the Government's announcements on the science budget, on funding part-time higher education students on the same basis as their full-time equivalents and on expanding funding for apprenticeships are welcome developments. However, the new system for the bulk of university students needs to include incentives for those of modest backgrounds to attend all our universities if we are to make the best use of the talent which we as a country possess. We also need to do more to reduce the level of functional illiteracy among school leavers and the adult population as a whole.

Regional development is clearly going to be crucial if we are to get a more balanced overall economy. The Government have introduced the regional growth fund but, with less than half the funding of the RDAs and an apparently weak bias towards spending outside London and the south-east, it will struggle to make much of an impact. Indeed, it was rather depressing to see that the initial local enterprise partnerships announced last week covered nearly all the south-east, including some counties already doing extremely well economically, but not large parts of the north. It is hoped that those gaps will be filled, but it is crucial that the limited money available goes to the parts of the economy with the largest amount of spare capacity.

In the CSR, the Government have set out a clear programme for this Parliament. If they meet their stated aims of making the delivery of our public services more effective and efficient and of creating the conditions for businesses to grow, they will deserve to succeed.

4.17 pm

Lord Bilimoria: My Lords, I have always believed that a wise person learns from other people's mistakes, a sensible person learns from his previous mistakes, and a fool makes the same mistake over again. The question before us is: is the Government's spending review wise, sensible or foolish?

As regards past mistakes, it is widely held that it was Franklin D Roosevelt's failure to provide prolonged stimulus during the great depression, combined with fiscal tightening, that prolonged the slump and was responsible for the double dip during that period. On the other hand, the Canadian and Swedish examples of making severe cuts in the 1990s that led to their economic recovery are cited as examples of why a country in our position should take similar measures by having our own "bloodbath budget". Well, we have had our "Axe Wednesday".

However, the world was very different in the 1990s. Canada was able to make those cuts, first, because the rest of the world was emerging into a prolonged boom time-a sharp contrast to today-and, secondly, because Canada is a country with enormous natural resources whose exports have accounted for 45 per cent of GDP. Sweden had, 50 years ago, the same level of public sector expenditure as a percentage of GDP as the United States-at 30 per cent of GDP-but, by the 1990s, the figure was well over 60 per cent. However, when those countries began wielding their axe to public expenditure, they were surrounded by a benign and increasingly booming global economy. Furthermore,

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both countries had the flexibility to use fiscal and monetary measures to compensate for huge public spending cuts.

Just look at the world situation over the past four years. In 2006, the sub-prime crisis started to unfold. In 2007, there was the credit crunch. In 2008-09, there was the great recession. By 2010, we had the sovereign debt crisis. In the same year, we now have the potential global currency crisis, increasing economic protectionism and beggar-thy-neighbour policies around the world. That is a classic domino effect, with one thing leading to another. What is next?

Here in Britain, there is no question that the previous Government squandered away an economy in excellent shape that was handed to them on a silver platter in 1997. They used that period of prolonged growth and low interest rates to take public expenditure to well over 50 per cent of GDP, from the 40 per cent level that it had historically been. I am delighted to see that the comprehensive spending review plans to bring public expenditure as a percentage of GDP back to 40 per cent by 2014. I would appreciate hearing the Minister confirm that that is the Government's target.

Today, we have the non-dom levy and the 50p high rate of tax, both of which are driving people away and deterring the best talent from coming into this country. On top of that, the current Government have introduced a madcap immigration cap. In addition, the forthcoming VAT increase will hit every man, woman and child in this country. Those things combined with interest rates of 0.5 per cent-how low can we go?-mean that as a country we have boxed ourselves into a corner, with no room for manoeuvre. We have high levels of unemployment, especially youth unemployment; our housing market has come to a standstill; the spectre of inflation looms; our people have low levels of confidence and high levels of uncertainty; and our banks are not lending. We have to prevent not just the danger that we bump along the bottom for the next few years but the risk that we become another Japan-in the doldrums for two decades.

Our only hope is to play to our strengths and to address our weaknesses. Our weaknesses include nearly £200 billion of welfare and pensions expenditure. I am delighted to see the measures in the CSR to deal with this head on. As much as we all appreciate and love the NHS, there are still tens of billions of pounds of efficiency savings to be made.

With 500,000 public sector jobs predicted to be lost over the coming years, are the Government doing enough to encourage the private sector to provide those jobs? Are they doing enough to promote growth in the economy today? I welcome the £1.5 billion fund and the £200 million enterprise fund to help businesses in this country, but by comparison with the United States, which has created a $30 billion loan fund along with $12 billion in tax breaks specifically for small business, we seem to be falling very far short of the mark. The proposed measures are even more piffling when compared to the hundreds of billions of pounds spent on bailing out the banks, given that it is the small and medium-sized enterprises that will lead the charge to recovery in this country.

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Our strengths include our higher education sector, but we are cutting that by 40 per cent over the next four years to try to save £3 billion. Our higher education is the cornerstone of our competitiveness and is one of our biggest export earners through the foreign students that we attract. Surely such a cut is foolishness.

We have had a hastily rushed-through defence review when our brave troops are making the ultimate sacrifice in Afghanistan-a war that is almost 10 years old-and despite the uncertainties that the world throws our way all the time. We did not predict the Falklands war, but it happened. We did not predict 9/11, but it happened. We do not know what is going to happen next, so to skimp on our defence at this time is foolishness.

Our creative industries, our design capabilities and our tourism are strengths, yet we are planning cuts in those. That is foolishness indeed.

I am president of the UK India Business Council, which is funded by UK Trade & Investment, which in turn is funded by the Foreign and Commonwealth Office and the Department for Business, Innovation and Skills. Surely to cut funding that helps UK firms to go global is folly. The Indian economy is booming even in these times. The Goldman Sachs BRICs report predicts that China and India will become the world's two largest economies by 2050, yet Gerard Lyons, who is the chief economist of Standard Chartered Bank, told us yesterday that Britain exported more to Ireland in 2009 than it did to Brazil, India, Russia, China and South Africa combined-countries that have a population of 3 billion. Instead of encouraging the spirit of global enterprise, we make cuts. "Penny wise and pound foolish" seems to be the mantra of the comprehensive spending review.

The amounts involved in those cuts to our areas of strength are tiny compared to the big-ticket items in our areas of weakness, but the effect of destroying our abilities and competitiveness is potentially catastrophic. We are shooting ourselves in the foot. Our Nobel Prize-winning economist Christopher Pissarides has said:

"Unemployment is high and job vacancies few. By taking the action that the chancellor outlined in his statement, this situation might well become worse".

No one denies that cuts need to be made, but the timing, severity, pace and priorities of the cuts and their indiscriminate nature are a cause for worry not just here but in the United States and all over the world.

We are still in the eye of the storm and the global uncertainties continue to whirl around us. Our only chance of getting through depends on our strengths. I implore the Government not to hamper this country's great and special strengths. Help us unleash our strengths and play to them. Then, and only then, will we get through this nightmare and come out stronger than ever.

4.26 pm

The Lord Bishop of Leicester: My Lords, I must crave the indulgence of the House for speaking to your Lordships with laryngitis, but my presence is an earnest of the Church of England's profound concern about the issues before us today.

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There are aspects of the comprehensive spending review that we on these Benches would be happy to acknowledge and applaud, not least the commitment to protect overseas aid spending, the re-emphasis on the rehabilitation of prisoners and the proper commitment to prevent structural and personal debt running out of control. However, noble Lords will not be surprised to hear that, like most bishops, I am hearing a great deal of genuine anxiety and concern in my diocese among serious people-vice-chancellors, local authority chief executives, health managers and businesspeople-since the Chancellor sat down after delivering his spending review Statement. Local government chief executives express profound concern about the termination of the so-called specific grants and are deeply concerned about the £2 billion black hole in local authority support that was reported in last week's MJ.

I cannot help coming to the conclusion that there is a gap between a London-centred debate about debt reduction and a different debate in the regions about the extremely painful consequences that are having to be managed by those not privy to the initial decisions. There is genuine fear among some of the most vulnerable people that their already difficult lives are to be made effectively impossible by the assault on benefits. As we all know, there is a growing sense of indignation, which I do not necessarily condone but which I certainly understand, that in the City of London and in the boardrooms of too many companies, it is business as usual with inflated salaries, enormous bonuses and apparent disregard for the Government's rhetoric that we are all in this together.

I am not an economist, but I am well aware that professional economists by no means agree that the Government's approach to the deficit is necessarily the right one. Where the discipline of economics is divided, we expect the Chancellor to be light on his feet and ready to change direction if the impact of his policies turns out to be dramatically different from what is predicted. The Treasury does not know, any more than I do, which group of economists is correct, but the well-being of millions of our fellow citizens depends on the Chancellor getting this right and having the courage to change direction if necessary.

I want to make one key point that is not dependent on economic expertise but is about the kind of society that we think that we are building. How on earth is the so-called big society vision of stable, mutually supportive communities to be enhanced by changes to housing benefit that will drive poorer people into what amount to townships in the undesirable areas of our towns and cities? That is the inexorable logic of capping housing benefit. More than that, how will limited tenure of social housing help us to build the big society? It is precisely the long-standing residents whose family commitments have begun to recede who are the linchpins that bind a neighbourhood together. The very people who will be the foundation of a bigger, more mutual and caring society are being told that they cannot take security of tenure for granted. The importance of stable populations in neighbourhoods and communities appears to count for nothing. I am led to suspect that any money saved by moving people out of their homes will have to be spent many times

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over on supporting and managing the problems that follow when formerly stable communities become home to transient populations of insecure tenants who have no incentive to act as though they belong to their neighbourhood. Why should they try to belong when successive governments' housing policies have created, not a big society, but a very thin, rootless society among those who rely on social housing?

The reason why people rely on social housing is, basically, not fecklessness or inadequacy but simply because our mismanaged housing market has fallen out of step with our deeply unequal labour market. When hard work does not pay enough to pay for decent housing, we had better act to raise wages or create more houses to bring their price down. On both counts, successive governments have been too shy of acting. The present belief that cutting housing benefit will depress the market and reduce private sector rents might just work if there were more houses to meet the demand. As it is, all the risk is being borne by the vulnerable, not the comfortable.

Lord St John of Fawsley: My Lords, what the country now needs is not blame for the deficit-we all know who is responsible for that. What we want is hope for the future, which is the second of the theological virtues faith, hope and charity. Anybody listening to the Minister's speech will note a very subtle but clear change in what he was saying. It was shot through with hope for the future, and also flexibility. Congratulations to him for doing so.

The Lord Bishop of Leicester: My Lords, it seems to me that hope for the future depends on ensuring that those who are most vulnerable, those who are most excluded and those who most depend on the state for any kind of security are made secure by these changes. Hope for the future depends on recognising the widespread damages to society and to social justice from ever-widening inequalities, which have been widely researched and established by many authorities. We do not create a fair society-let alone a big society-by placing some of our fellow citizens beyond the reach of social solidarity. I hope that such is not the intention of the Chancellor but I fear that it may be the effect of some aspects of the review. I hope that the indignation of many people in my diocese turns out to be uncalled for, but I fear that this may be just the beginning, for the cuts have not yet begun to bite deeply.

I trust that the Chancellor will prove quick to turn again if the harm caused by his policies becomes a price not worth paying for merely economic rather than fully social recovery. The Church of England remains committed to work with government and with others to respond to the vision of the big society, but I fear that the comprehensive spending review has made that vision much harder to realise and even more necessary.

4.34 pm

Lord Lamont of Lerwick: My Lords, I welcome the comprehensive spending review. The noble Lord, Lord Myners, made a point of saying that there were choices open to the Government. Indeed there were. I particularly

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welcome the choice that they made to stick more or less to the ratio of 75 to 25 per cent in the balance between expenditure cuts and tax increases. I believe that the emphasis had to be on public expenditure cuts in order to correct at least part of the overspending of recent years.

Undoubtedly this was a bold set of announcements, for which praise is therefore due. Bold it may have been, but the idea that this was the biggest fiscal consolidation since the dissolution of the monasteries seems somewhat overdone. We are cutting spending by 7.4 points of GDP, which, as the noble Lord, Lord Bilimoria, said, compares with what Canada did in the early 1990s. Sweden, after its banking crisis in the early 1990s, reduced expenditure by nearly 15 per cent, as did Finland. Spain and the Netherlands at the same time reduced spending by much the same amount as the Government are reducing it today. The early 1990s were not at that time a benign environment internationally. Indeed, there had been other fiscal consolidations, such as that of my noble and learned friend Lord Howe in the early 1980s, of a similar magnitude. In this country, from 1993 onwards, we moved from a deficit of 7 per cent of GDP in five years to a surplus. All these fiscal consolidations were achieved without Armageddon arriving.

Of course there are risks, but there are risks also in not acting. The Government were for several reasons right to move more quickly than the previous Government to reduce the deficit. First, the sovereign debt crisis in Europe has altered the balance between the merits of delay and the merits of action. Secondly, as the Minister said, Britain has one of the largest structural deficits in the world. It is true, as the noble Lord, Lord Myners, said, that we compare quite well with other countries in terms of the stock of debt, but the size of our annual deficit means that we are adding considerably to the stock of debt each year. Indeed, the predictions have been that this would top off somewhere at 80 or 90 per cent of GDP. However, if we go on adding at a rate of 10 per cent-or, if it is modified, at a rate of 7 or 5 per cent-we shall increase it considerably, at great risk.

As the Minister said, debt interest is taking an increasing proportion of total public expenditure. After the CSR, there will be savings in debt interest payments, but debt interest is to go on rising during the whole of the expenditure period. With an uncorrected deficit, we would see more and more public expenditure silted up with interest payments. Ken Rogoff, the former chief economist at the IMF, has argued that the relationship between interest rates and debt is not a linear one. Interest rates can rise quite suddenly when a country hits its debt ceiling and he has demonstrated in his work time and again that, when a stock of debt reaches a certain point, it is a dampener on the growth of that economy. We have been running a deficit that is something like one and a half times the level of deficit run by Franklin D Roosevelt in the 1930s, which his own Treasury Secretary at the time confided to his diaries had not done much good or made much difference.

These cuts will not come into effect until next year and they will take four years in total to implement. How long do noble Lords opposite think we can take?

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What are their criteria for when we should act? One answer that is often given is that we should act when the economy is showing signs of recovery and that recovery is firmly established. It is not easy to say what "firmly established" means, but so far the economy has recovered remarkably quickly. Growth in the past three quarters has been 0.4 per cent, 1.2 per cent and 0.8 per cent, which surprised the markets in general. The ONS has said that the difference between the first and second quarters in underlying growth was much the same, implying that the economy is growing at an annualised rate of 3.2 per cent, which is above its long-term trend rate of growth of 2.35 per cent as found by the previous Government. I am the first to say that there are risks to this growth rate-it may well slow down-but the recovery is faster than that following the recessions of either the 1980s or the 1990s. We have recovered 40 per cent of the loss between the first quarter of 2008 and the third quarter of 2009.

An answer that we sometimes get to the question how we should judge when it is appropriate to tighten policy is that we should wait until the output gap is closed-that is, the difference between output as it is now and where it would have been had there been no recession and the economy had grown during that period at the long-term rate of growth. But how does anybody know what the output gap is? It is a concept that is extremely difficult to measure precisely. Also, it might take years to close the output gap, in which case we would go on adding to the structural deficit by 10 per cent or 5 per cent, or whatever the chosen rate was each year.

There is much concern, understandably-the noble Lord, Lord Myners, referred to this-about the loss of 490,000 jobs in the public sector. That is to be spread over four years but it also has to be seen in the context of a labour market of nearly 30 million people. That labour force increased by over 315,000 in the period between December/February and June/August. If the economy continues to grow-and of course there are risks and huge uncertainties in this-there is every prospect that this sort of redundancy in the public sector can be absorbed.

The noble Lord, Lord Myners, seemed to see the cuts ideologically as part of the desire for a smaller state. Indeed, there have been a lot of headlines about rolling back the state. However, they seem somewhat wide of the mark when one realises that public expenditure in money terms is going to go on rising every year to the end of the survey period and that, at the end of that period, spending in real terms will be where it was two years ago. Spending as a proportion of GDP is going to fall from 47 per cent back to 41 per cent, where it was for much of the 1980s and 1990s. With all due respect, that does not seem to be a radical restructuring of the state but rather a common-sense reversal of part of the overspending that we have seen in recent years.

The right reverend Prelate talked about fairness. There never will be consensus on fairness; fairness is in the eye of the beholder. Some noble Lords opposite think that the entire burden should be shouldered by the better-off, but any objective person will see that the Government have laboured long and hard to try to

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spread the misery and the pain around. Any cuts proposed in welfare would lead the Opposition to say that this was unfair. Perhaps they should remember what James Purnell said when he was Secretary of State for Work and Pensions, specifically about housing benefit, which was that he wanted to consult in order to see that

This has been a difficult package to assemble. I believe that it will gain acceptance by having been assembled by a coalition Government of two parties and that the exercise of doing it has strengthened the coalition. I welcome the CSR. After a decade of recklessness, the Chancellor of the Exchequer and the coalition have laid the foundations for a decade in which we could earn our prosperity in the future rather than borrowing it.

4.43 pm

Lord Peston: My Lords, my contribution is based on three premises: this is the most reactionary economic statement of modern times; the proposals will do serious damage to our economy; and, to echo the remarks of my noble friend Lord Myners, there is no immediate crisis and the Government should have adopted a much more deliberative approach.

The first sentence of the spending review Statement by the Chancellor said:

"Today is the day when Britain steps back from the brink".-[Official Report, Commons, 20/10/10; col. 949.]

There was no brink; there is no brink. Britain is not, and never was, on the verge of bankruptcy. There was no financial catastrophe. The Chancellor's reference to financial catastrophe merely indicates something that I deeply fear-namely, that he has entered into fantasy land. As one sees from reading the whole Statement, he never leaves it. As a devoted watcher of the "The Wizard of Oz", I deeply appreciate his frame of mind, but I thought that this was a serious matter of economics confronting the country and that fantasy is not what the Chancellor really does. I regard his document, despite the damage that it does, as intellectually frivolous.

My noble friend Lord Myners referred to the alleged burden on future generations. Are the Government suggesting that we should have fought the Second World War on a no-borrowing principle? We have all gained from the defeat of the Nazis. The period did not strike me as being terribly bad, although I was only a child. We paid taxes then to finance the national debt that resulted. If we are now to defeat terrorism, are the Government asking us to believe that, if necessary, we should not borrow to finance the resources that we need to do so? The Government are in fantasy land. As my noble friend pointed out, we donate so many good things to future generations that there is, as far as I know from my limited knowledge of economics, no reason not to place a bit of the burden on our children. They will thank us for what we gave them.

The noble Lord, Lord Lamont, referred to recent GDP figures. There have been three good quarters. However, it has been overwhelmingly established by

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all the economic research that I know that what happened in that period was determined during the previous two years. Not a single bit of the recovery that we observe is remotely attributable to this Government. I looked in vain for the Chancellor in his Statement to thank his predecessor for the legacy that had been left him. He did not even have the courtesy to admit that that was the foundation that was given to him.

The Chancellor devoted a whole hour to a speech that, apart from being reactionary, was one of the most uninteresting of all time. He referred to the IMF. The IMF and the European Central Bank are the two last repositories of completely outdated and erroneous monetarism. They, too, believe in the doctrine, "Private expenditure good, public expenditure bad". The noble Lord, Lord Lamont, et al tell us that this is not ideological; I tell them that it is entirely ideological. It is all about the kind of society in which we would like to live. We cannot avoid that.

The Chancellor said in his Statement:

"The creation of an independent Office for Budget Responsibility has brought honesty back to official forecasts".

Since the official forecasting was done by the economists in the Treasury, who I assure your Lordships are of the highest quality, his remark is totally defamatory. If he had made it outside the Commons Chamber, I wonder what would have been said. The idea that those economists did not give a Chancellor of our time or the Chancellor of this time their best and honest views is preposterous. The Chancellor continued:

"I can confirm to the House that the OBR and its new chair"-

I always use the word "chairman"-

Is there any published documentation corresponding to that statement and, if so, where can I find it so that I can read it?

A noble Lord: It is in the document.

Lord Peston: No, it is not in there. That is not a document from the OBR; it is a document from the Government.

To what extent is the Chancellor talking to the head and other members of the OBR, who are meant to be independent? If they are meeting, were minutes taken? If so, could we have copies of them so that, for the sake of transparency, we know the nature of the argument that we are dealing with?

The Chancellor tells us that we are all in this together. I refer to the great economist Michal Kalecki, who in 1943-note the date-wrote a brilliant article in Political Quarterly. He said, apropos of exactly what the Chancellor has said:

"For here a moral principle of the highest importance is at stake. The fundamentals of capitalist ethics require that 'you shall earn your bread in sweat'-unless you happen to have private means".

I wonder whom Kalecki, if he were alive today, might have in mind. Of course, they are not laughing, because they know what this is really all about.

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Lord Marlesford: I was brought up on the great Kalecki and my recollection of one of his fundamental theses was that the only rescue and hope for capitalism was armament and war. That has not been proved true.

Lord Peston: That is not true-that was not his view. What is interesting, if I may give a lecture on the history of economics, is that we can distinguish Kalecki from Keynes, although Kalecki made the great mistake of publishing in Polish and therefore was never fully appreciated. Keynes was attacked, particularly by the American right, for being left wing, but he really believed that capitalism could be saved and advocated his policy so that we could go back to capitalist free enterprise. Kalecki believed that the ideology of capitalists was such that they would prefer to destroy the system rather than to allow Governments to intervene to save it. I am glad that the noble Lord is aware of Kalecki; the sadness is that his name still rarely appears in any of the economic textbooks.

I refer again to the problem of what we should be doing. The noble Lord, Lord Sassoon, said that none of us was telling him what he ought to do. I shall not send him a bill when I do tell him. I am a Back-Bencher so I speak only for myself. The first thing that I would do to save money, after what one of our major newspapers called the fiasco of the defence review, is to redo that review and realise that our whole future on the defence side depends on conventional weapons. We should announce immediately that we have no intention of wasting any money on the renewal of Trident; our nuclear deterrent is not a deterrent, because no one can tell us whom it deters and, in any case, it is not independent. What this country needs is a much improved set of conventional armed forces. The Government should go back and think about that.

My second recommendation to the Government is to abolish immediately the raising of VAT at the beginning of next year. It is the last thing that the economy needs. I speak only for myself; I have no idea whether others are deeply committed to raising VAT. My view is that abolishing the increase is the stimulus that the economy needs.

Thirdly, the Prime Minister, instead of looking for headlines in his attack on the European Community by telling us that he is a Eurosceptic, should realise that the biggest waste of money in the whole of Europe is the common agricultural policy. If he had any backbone, he would seek a row with the Europeans to abolish that policy. That would save us enormously more money than the trivial sums that we are talking about.

4.54 pm

Lord Oakeshott of Seagrove Bay: Well, my Lords, that was the noble Lord, Lord Peston, at his peppery professorial best. I welcome what he said about Trident. I hope he will be paying tribute to the Liberal Democrats in Government. We are not meant to brag about this too much but I am still going to mention it. By a feat of negotiation we have managed to get the renewal of Trident put off until after the next election, which, we hope, will at least give time for Labour to change its

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policy as well. So there is a really serious chance that we will not be committed to a replacement of Trident which the other two main parties were putting forward at the general election.

It is always interesting to hear from the noble Lord, Lord Lamont, with his experience. He certainly does know all about markets losing confidence in governments. I was particularly impressed by the wise words of the right reverend Prelate the Bishop of Leicester about the importance of maintaining stable communities in social housing. I am afraid the real problem about the housing benefit situation is the way the social housing stock was run down disgracefully under Thatcher, Blair and Brown. That is the real reason we are in this mess on housing today.

The Chancellor announced £81 billion of cuts in the CSR and the official estimate of the tax gap-the total of tax avoidance, evasion and fraud-is £42 billion. We must close the deficit, but to do that in a fair and sustainable way, we must repair Britain's broken tax collection machine. Volunteering is all very well, but not when it comes to paying tax. Just like any business in the real world, we must get our revenues up as well as our costs down. I declare my interest as a pension fund investment manager for the past 34 years. It is one of life's rather strange twists that I went from advising a Labour Minister, Roy Jenkins, to working for Warburgs in the City, and the noble Lord, Lord Sassoon, went from working for Warburgs to advising a Labour Minister, Gordon Brown, at the Treasury. Today he is a Conservative Minister and I am a Liberal Democrat Treasury spokesman. With all his top-level experience at the Treasury in the Brown years, the Minister will know where all the bodies are buried and be ideally placed to answer our questions and respond to our concerns in this House.

My right honourable friend Danny Alexander told Parliament last week and the Minister repeated today that there is no place for tax cheats in our society. How we deal with tax cheats will be a crucial test of fairness for us. We will never persuade the great majority of hard-working British taxpayers who pay their dues and cannot afford expensive accountants and solicitors that we are all in this together unless we make fair tax our watchwords. This is not just some airy-fairy academic issue. At the Arsenal on Saturday we were having a moan at half-time about our failure to score against West Ham, when the man behind me suddenly said:

"I liked your piece in the paper, you know. These non-doms get away with murder".

We know a fair bit about dealing with non-doms in this House. I pay tribute again to the fantastic support I have had from noble Lords sitting on all sides of this House for our long and successful battle against delaying tactics and outright opposition from the Front Benches to make all of us here pay full British tax. The House showed itself at its independent and robust best last June when we passed our amendment to the Political Parties and Elections Bill to ban non-dom and non-resident donations. That is now law and just needs a touch on the statutory instrument button. What are we waiting for?

Did your Lordships know that you inherit non-dom status from your father? Just like an hereditary peerage, it passes down the male line, and like an hereditary

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peerage, you are born a non-dom and you stay one unless you disclaim it. Leading accountants advise me that between three and four million people living in this country, most of whom have lived here all their lives, are non-doms and could claim non-dom tax status for tax purposes if they wanted. Does the Minister agree with that figure, or what is the Government's best estimate if he does not? Can he give us the latest figures for the numbers paying the £30,000 flat charge? What is the Treasury's best estimate, in its detailed review of Liberal Democrat proposals on tax avoidance, of the amount of extra tax which will be raised by limiting non-dom tax status to seven years-the Treasury always initially works these things out- in the absence of behavioural change? The really big benefit of paying no British tax at all-on your income, capital gains or inheritance tax-on all the assets and earnings that you have offshore goes, of course, to the really rich. That is because a £30,000 a year poll tax payment-a non-dom poll tax, if you can call it that-is really just a fleabite for the fat cats.

Our coalition agreement says:

"We will make every effort to tackle tax avoidance, including detailed development of Liberal Democrat proposals".

The Chief Secretary has made a good start in announcing a beef-up of the tax avoidance operation in HMRC. Yet if we can really close the tax gap, as it is suggested, by £7 billion a year in four years by investing £225 million a year in HMRC over the spending review period, why are we not investing far more? Anything like those rates-a 3,000 per cent annual return-would make Bernie Madoff blush, and if it is anything near that, we should be doing far more. If it is that easy to boost the tax take, what a condemnation that is, I am afraid to say, of Gordon Brown's long years at the Treasury, when he tried to run every department but his own.

Very rich people are also past masters at cheating the rest of us on stamp duty. Anyone who knows their way around the property market will tell you that precious few luxury houses or flats worth more than, say, £5 million today ever feature on Land Registry records with stamp duty having been paid. There is an especially abusive scheme using a loophole in the law on Islamic finance to dodge stamp duty, which is sold to Jews, Christians and atheists with no questions asked. Rich tax cheats and their advisers know no shame. More resources for HMRC will help, but the way really to boost the tax take is to simplify the system and close the loopholes. Non-dom status is an open invitation to tax avoidance on a massive scale. That is why our policy on these Benches is to make non-doms come fully onshore after seven years. That gives plenty of time for visitors and people on short-term contracts, but then we say, "If you're in our club, you pay the sub-full British tax, like all the rest of us".

The Treasury is reviewing non-dom status as our coalition promised. I asked the Minister a question 10 days ago on the non-dom review which he did not answer, so he has kindly written to me as follows:

"This is a complicated policy area involving considerations of fairness as well as competitiveness. The Government is aware of the need for interested parties to be engaged on this issue and will make a more detailed announcement about the form and timing

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of the review, including any formal public consultation, at the appropriate time. I am sorry that I am not able to provide you with a more specific answer at this time".

So am I. Who are the interested parties? Not just the non-dom bankers, we hope, who choose to be British when it suits them and foreigners when it does not. Those words are Vince Cable's, by the way, not mine; he has not changed his mind. Let us act now to limit non-doms to a seven-year free ride and make Britain a country where the rich pay their fair share of tax.

Terrorism: Aviation Security


5.03 pm

The Minister of State, Home Office (Baroness Neville-Jones): My Lords, with the leave of the House, I shall repeat a Statement made earlier in another place by my right honourable friend the Secretary of State for the Home department. The Statement is as follows.

"With permission, Mr Speaker, I would like to make a Statement on the recent airline bomb plot. The House will know that in the early hours of Friday morning, following information from intelligence sources, the police identified a suspect package on board a UPS courier aircraft which had landed at East Midlands Airport en route from Cologne to Chicago. Later during the morning, police explosives experts identified that the device contained explosive material. A similar device was located and identified in Dubai; it was being transported by FedEx to Chicago.

Since then, an intensive investigation has been taking place in this country and overseas. COBRA met on Friday to assess progress. I chaired a COBRA meeting on Saturday. The Prime Minister chaired a further COBRA meeting this morning. The House will appreciate that much of this investigation is sensitive and that the information I can give is necessarily limited. Disclosure of some details could prejudice the investigation, the prospects of bringing the perpetrators to justice, our national security and the security of our allies. But I want to give the House as full a picture as possible.

We know that both explosive devices originated in Yemen. We believe that they were made and dispatched by the organisation known as al-Qaeda in the Arabian Peninsula. This group, which is based in Yemen, was responsible for the attempted downing of an aircraft bound for Detroit on 25 December last year.

The devices were probably intended to detonate mid-air and to destroy the cargo aircraft on which they were being transported. Our own analysis of the device here-analysis which has to proceed with great care to preserve the evidential value of the recovered material-established by Saturday morning that it was viable; this means not only that it contained explosive material but that it could have detonated. Had the device detonated, we assess that it could have succeeded in bringing down the aircraft. Our forensic examination of the device continues. We are receiving valuable assistance from a wide range of partners. The analysis has some way to go.

At this stage, we have no information to suggest that another attack of a similar type by al-Qaeda in the Arabian Peninsula is imminent, but this organisation is very active. During this year, it has repeatedly attacked

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targets in Yemen. On 26 April and 6 October, it attacked and attempted to kill British diplomats based in San'a'. It continues to plan other attacks in the region, notably against Saudi Arabia.

We therefore work on the assumption that this organisation will wish to continue to find ways of also attacking targets further afield. We will continue to work with international partners to deal with this threat. We have for some years provided assistance to the Yemeni Government and will continue to do so. The Prime Minister has spoken to President Saleh to make clear our desire for a closer security relationship.

Following the Detroit incident, Ministers in the last Government took the decision to stop all direct passenger and cargo aircraft flying from Yemen to and through the UK. Over the weekend, we took the further step of stopping all unaccompanied air freight to this country from Yemen. This will include air freight from Yemen carried on both courier flights and hold-loaded in passenger aircraft. The small number of items in transit prior to this direction have been subject to rigorous investigation on arrival in the UK, and no further suspicious items have been discovered.

We are now taking further steps to maintain our security. I can confirm to the House that we will review all aspects of air freight security and work with international partners to make sure that our defences are as robust as possible. We will update the guidance given to airport security personnel, based on what we have learnt, to enable them to identify similar packages in future. From midnight tonight, we will extend the suspension of unaccompanied air freight to this country, not just from Yemen but also from Somalia. This decision has been made as a precautionary measure and it will be reviewed in the coming weeks. It is based on possible contact between al-Qaeda in Yemen and terrorist groups in Somalia, as well as concern about airport security in Mogadishu. From midnight tonight, we will suspend the carriage of toner cartridges larger than 500g in passengers' hand baggage on flights departing from UK airports. Also from midnight tonight, we will prohibit the carriage of these items by air cargo into, via or from the UK unless they originate from a known consignor: a regular shipper with security arrangements approved by the Department for Transport.

We intend that these final two measures will be in place initially for one month. During that time, we will work closely with the aviation industry, screening equipment manufacturers and others, to devise a sustainable, proportionate, long-term security regime to address the threat. Department for Transport officials are already in technical discussions with the industry and my right honourable friend the Secretary of State for Transport will chair a high-level industry meeting later this week to discuss next steps.

These initiatives are in addition to those which we have set out in the Strategic Defence and Security Review. We are already committed to widening checks on visa applicants to this country. Following the Detroit incident, we are also committed to making changes to pre-departure checks to identify better the people who pose a terrorist threat and to prevent them flying to the UK. We are also committed to enhancing our

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e-borders programme which provides data on who is travelling to this country and is, therefore, an essential foundation for our counterterrorist and wider security work.

We have an increasingly active and important border co-operation programme with counterparts in the United States. The Detroit incident led to the introduction of further passenger scanning devices at key airports in the UK. COBRA will continue to meet throughout this week. The National Security Council will also consider this issue. We will continue to work closely with our partners overseas.

Finally, the House will wish to join me in expressing gratitude to the police and the security and intelligence agencies in this country for the work they are doing to understand the threat that we face and to deal with it so effectively"

My Lords, that concludes the Statement.

5.11 pm

Lord Hunt of Kings Heath: My Lords, I thank the Minister for repeating the Statement made by her right honourable friend the Home Secretary in the other place and for the detailed information contained in it. The whole country has been shocked by the events of the past four days and by the discovery of two concealed and hard-to-detect explosive devices, one at East Midlands Airport and the other in Dubai, and by the very serious and challenging threat that such terrorist activity constitutes to public safety and our country's security. There can be no complacency when it comes to preventing and dealing with terrorism.

The noble Baroness has said that the devices were probably intended to detonate in mid-air and that had they done so, they could have succeeded in bringing the aircraft down. Today, my right honourable friend the shadow Home Secretary, Mr Ed Balls, has commended the Home Secretary for the calm way in which she has led the response to these threats. I join him and the Minister in commending our police, intelligence and security services for the vital work that they have undertaken in the past few days, in close co-operation with our allies around the world, to save lives.

It is the job of the Opposition to ask questions, to probe statements and to hold the Government to account. We will do that but we shall also be mindful, at all times, of our wider responsibility to support necessary actions, to keep our citizens safe and to protect our national interests. In that spirit, I pose a number of questions to the Minister in three areas: first, the detailed events of the past few days; secondly, the implication of the events for airline security; and, thirdly, the implications for wider security policy.

On the first point, we all appreciate that where intelligence and international co-operation are involved, events move fast and things are always clearer in hindsight. At what point were the police, the Home Secretary and the Prime Minister first told about the potential threat? Were there delays in getting precise information to our security and police officers on the ground? Can the noble Baroness say why the device was not discovered by police officers during the first search? Would early information have made a material difference? What operational lessons will be learnt from dealing with such events in the future?

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The second area concerns the fact that these two live explosive devices were intercepted only by an intelligence tip-off after they had already been carried on a number of different planes, including passenger planes, giving rise to serious questions about the security of our airspace. Some security experts have referred to cargo security as a potential blind spot. The noble Baroness will be aware of comments made by BALPA to that effect over the weekend. I understand that the noble Lord, Lord Carlile, drew attention to the potential risks of cargo transit in his annual reports in 2007 and 2008. As a result, significant actions were taken to improve intelligence and international security co-operation, and a tougher search method-explosives trace detection-was introduced for passenger flights following the Detroit attempted attack.

I appreciate that this is a complex problem to solve, that a review has already been established and that the Home Secretary has already acted to ban unaccompanied cargo packages from Yemen. The Minister has also set out, in the Statement, a series of measures that the Government have already taken. What conclusions does the Minister draw about the reliability of current checks from the fact that the device was not spotted on first check by police experts at East Midlands Airport? Will the review consider extending explosives trace detection to cargo flights? Will the scope of the review cover cargo being carried in passenger aircraft? Are there other immediate actions that we should take now to improve the security of cargo coming into, out of or transiting through the UK while the review is being undertaken?

The events of the past few days raise wider issues for our national security and counterterrorism strategy. It is clear that terrorists operating from Yemen constitute an increasing threat. Can the Minister assure the House that the Government are in urgent discussions with the Yemeni Government and our allies around the world with a view to interrupting terrorist activities at source? Given the wider evidence of a mounting threat, the judgments that underpin the Government's current review of counterterrorism powers will be especially important. While we will reserve judgment until we see the outcome of the review, we have said that we will support the Home Secretary where we can and that consensus should be our shared goal.

I raise the issue of resources. Given that these explosive devices were intercepted through vital intelligence work, is the Minister confident that a 6 per cent real-terms cut in the single intelligence account over the next four years can be managed without compromising this vital work? Given that the device was discovered by specially trained police working closely with our security and border services, is she confident that a 10 per cent real-terms cut in counterterrorism police over the next four years, and a 50 per cent cut in capital available to the UK Border Agency, will not undermine our operational capability?

The Olympics, when the eyes of the world will be on this country, are now just two years away. With a planned 20 per cent real-terms cut, front-end loaded, in police budgets-a 6 per cent cut in the year before the Olympics and an 8 per cent cut in the year of the Olympics-can the Minister assure the House that,

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given the extra strain that police resources will face, this does not pose an unacceptable risk to fighting crime and to our national security? Finally, does the Minister agree that, in the light of the events of the past few days, the issue of resources should now be looked at again alongside the counterterrorism review?

Baroness Neville-Jones: My Lords, I am grateful to the noble Lord opposite for his willingness to support the Government in the next measures that will have to be taken in what the House will agree is a challenging task concerning the transport of freight around the world. I am sure the police and the security services are grateful for his joint commendation of them.

The noble Lord asked a number of detailed questions, and I will do my best to answer them. First, he asked when people were informed. I can say that the device was removed from the plane at 3.30 in the morning and work continued through the night. In the early morning, the information was fed to London, and Ministers began to be informed shortly after 8 o'clock. The Home Secretary was personally informed nearer lunchtime. The Prime Minister was also informed then, and at that stage they were given a significant analysis of the investigations that had taken place and the information and assessment that was then available.

The noble Lord asked about the police investigation at the airport. There are two aspects to this: the intelligence tip-off and the process of investigation of the device. He rightly remarked that these packages were looked at following an intelligence tip-off. I might say that any implication-I am not suggesting that the noble Lord was implying this-that this was somehow accidental and that we were very fortunate, as we undoubtedly were, is slightly beside the point. I think the House will agree that we pursue a multilayered approach in this, and that it is the combination of the physical measures that we take, the protective procedures that we put in place and the intelligence context that we maintain around the world that enables us to give the people of this country the security that they are entitled to receive. It is very fortunate that our security relationships worked on this occasion and that the tip-off proved extremely accurate.

The police investigation proceeded in stages. Of course, the police are extremely careful about the way in which they dismantle a device not only because it may be dangerous but because they need to retain the evidential information. It is fair to say that they did not discover the device immediately, but they were still proceeding with their investigation when information came from Dubai that it had found evidence of a device. Subsequent work done at East Midlands Airport unravelled the precise nature of the device, which was then explored in detail.

The noble Lord also asked about the precautions that may be taken for cargo security while the wider review, which I mentioned, is under way. Those regulations are pretty stringent; they require any cargo that does not come from a trusted, listed consigner known to the airport authorities and approved by the Department for Transport to undergo stringent security tests. Therefore, only those items whose origin is known have a relatively easy passage, but I can assure the House that these regulations will be enforced with the utmost stringency

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in the foreseeable period. Very clearly, we will need to look in great detail not only at the procedures that we ourselves enforce in this country, but at what happens to cargo coming towards the United Kingdom-obviously something on which we will need to consult widely. There obviously has to be international co-operation and, in co-operation with other countries, we might wish to lay down new standards.

The noble Lord also asked about the relationship between what this episode tells us and our wider counterterrorism policy. Clearly, this episode tells us that we face a threat not just to passengers but to cargo and freight, unaccompanied and accompanied. It is perfectly possible, after all, for these people to do what they were doing on the basis of accompanied freight. Therefore, the Government are not relaxed and will not confine their investigation or the measures that they take to unaccompanied freight. We will look at a number of measures that may be necessary, and the Transport Secretary's consultation and investigation will be quite wide-ranging, because we clearly need a higher level of assurance about cargo transit and transport.

On the relationship between our wider counterterrorism policies and on the Security Service, which the noble Lord asked about, I can assure the House that, based on an assessment by the head of the Security Service, we will be able to maintain, on proposed funding, the same assurance about our coverage and knowledge of terrorist activity in this country and elsewhere that we have had previously. That also applies to the role of our police in counterterrorism where we are protecting the Olympics budget and where we have confirmation from the head of counterterrorism command that he is able to carry out his duties on the basis of the funding that he will get. There is no reason to suppose that the measures that the Government are taking will in any way detract from, inhibit or prevent this country taking care of the security of the population of the United Kingdom.

5.26 pm

Lord Harris of Haringey: My Lords, I declare an interest as the Home Office appointee on the Metropolitan Police Authority, with responsibility for overseeing counterterrorism and security. I, too, am grateful to the Minister for the full account that she has given. With what degree of certainty does she feel that these devices would have been detected had they been in checked-in passenger baggage on a flight embarking in the United Kingdom? Given the variations in standards of airline security in different parts of the world, what degree of certainty does she have regarding incoming flights that such baggage would have been detected at airports elsewhere in the world? What will her answers mean in terms of current levels of aircraft security for passenger airlines in this country?

Baroness Neville-Jones: The noble Lord asks some pertinent and, I have to say, extremely difficult questions. My honest answer to his first question must be that we do not know the answer. This explosive is extremely difficult to detect. Technologies are known for detecting PETN and one consideration that we will have to take advice on is whether we should extend PETN testing

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to cargo going on board aircraft-most particularly passenger aircraft, but also other aircraft. We have to do this in a way that is consistent with assuring the public that they can travel safely, while not crippling the country's economy and international commerce. Therefore, an international effort will be needed and we shall talk not only to other operators but to those who may be able to help us technologically. Part of the Transport Secretary's review will consist of talking to the companies. Many of them are well advanced in increasing-and we will be increasing-the screening processes, including capabilities that are not necessarily at the moment distributed as a matter of course.

Baroness Hamwee: My Lords, in the wider context to which both Front Benches referred, can the Minister confirm that control orders are simply not relevant to this situation and that, had they been in place, they would not have prevented it? Would she also like to comment on the remarks made by Michael O'Leary of Ryanair, who talked today about "ludicrous" airport security? He said that,

I say this not as a cheap shot-although one might say that, if anyone knows about that, he would-but because I think that these are serious points, which should be responded to.

Baroness Neville-Jones: My Lords, I do not think that we are discussing the control orders today. As for what Mr O'Leary of Ryanair said, he does perhaps have extraordinary timing. The view that the Government take is that airport security is extraordinarily important and we cannot let our guard down. That does not mean, of course, that there is never any room for improvement, for review or for looking at those things that could constitute an assurance of greater security. My right honourable friend the Transport Secretary said the other day that he intended to look at whether procedures could be improved and, in particular, whether we could proceed to some extent by way of audit rather than by laying the emphasis on the input side and insisting on lots of layers of security. However, we will wish to proceed extremely cautiously, in the light of events, in lowering or in any way interfering with the current security precautions, which I think give the travelling public a measure of assurance about the seriousness with which these issues are taken by the Government.

Lord Clinton-Davis: My Lords, I speak as the president of BALPA. The Minister spoke about widespread consultations. Has BALPA been included in this? If not, why not? Should not BALPA be included in the review? Is it not absurd that pilots, with all their expertise, should be subjected to stringent inspection before they board the aircraft? Finally, will pilots be consulted further on the relevant rules concerning cargo?

Baroness Neville-Jones: My Lords, I am absolutely certain that the Transport Secretary will consult everyone who has a contribution to make and BALPA would certainly not be excluded from that. The noble Lord

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mentions the degree of stringent control over the pilots when they board the aircraft. The House will agree that it is important that those controls are exerted. What we clearly need, however, is to raise controls in other areas.

Lord Elystan-Morgan: My Lords, the Minister will recollect that the Statement said that the device seized at East Midlands airport "could have detonated". Am I placing too slavishly literal an interpretation on that to assume that that refers to a timing device of some nature or, indeed, that the device could have been detonated by remote control? If it could have been detonated by remote control, within what range could that have been achieved?

Baroness Neville-Jones: My Lords, we are not entirely at the stage when we can answer all those very detailed questions-and we may never be. The "could" rather than the "would" relates to a number of factors, including the precise power of the explosive material and the power of the detonator. Also relevant would be where these devices were located in the aircraft-had they been in the middle of the fuselage, they would have been less likely to cause an accident than if, say, they were near the outer skin of the aircraft. There are a number of imponderables. It is fair to say that those who put the devices on board-these were cargo routes, which can vary at the last minute-could not have known in practice where, if they were able to cause a detonation, it would have taken place. It would be hard for them to know exactly how accurate their ability to detonate was.

Lord Marlesford: My Lords, given that terrorists travel both in and out of countries, does my noble friend share my deep concern that at present only people travelling into the United Kingdom have their passports properly examined electronically? Is she aware-I assume that she must be, because any of us who travels must be-that immigration officers make very little attempt to look at the passports of those who are leaving the United Kingdom? Indeed, in April I travelled out of terminal 3 at Heathrow where there was no one at all at the immigration desk to look at one's passport. When I asked why, I was told that there was nobody available. When is the electronics border system-the e-Borders system-which is meant to record both the departure and the arrival of passengers, going to be in full effect? As a result of what is now happening, will the Minister ensure that scrutiny of people departing from the United Kingdom is properly and electronically achieved?

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