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House of Lords

Wednesday, 26 June 2013.

3 pm

Prayers—read by the Lord Bishop of Bristol.

Payday Loans


3.07 pm

Asked by Lord Kennedy of Southwark

To ask Her Majesty’s Government what further action they plan to take to tackle the issue of payday lending.

The Parliamentary Under-Secretary of State, Department for Business, Innovation and Skills (Viscount Younger of Leckie): As I highlighted in last week’s debate, the Government are deeply concerned at the evidence of consumer harm in the payday loans market. That is why the Government and regulators have jointly announced a strong action plan, with both immediate and longer-term measures. Tough enforcement and compliance action by the OFT now, combined with a move to a new regulatory regime equipped to deliver robust consumer protections in the future, will tackle the real concerns about this market.

Lord Kennedy of Southwark: My Lords, the most reverend Primate the Archbishop of Canterbury and I both called for a summit on payday lending in the debate last Thursday, so on the face of it the Government’s announcement is very good news. Then we get the announcement in the CSR today of the seven-day waiting period for benefits. That must have Wonga and the rest of the payday lenders jumping for joy. What assurance can the noble Viscount give the House that the summit is not a sham exercise and that something will actually come out of it?

Viscount Younger of Leckie: I welcome the noble Lord’s mention of the summit and am delighted that this will be an opportunity for the Government and regulators to take stock of progress in delivering on actions set out on 6 March. It will provide a firm forum for discussion of what more is needed to address the outstanding concerns, and I look forward the results. The announcement was made by my honourable friend Jo Swinson.

Baroness Gardner of Parkes: My Lords, is the Minister aware that there is a great lack of financial understanding among a lot of ordinary people, such as me, as to exactly what rates of interest are being charged? I then read in today’s paper of the worry about the shortfall that might occur with all the young people getting mortgages. The reason is the same: if interest rates go up they will find that they are out of pocket. Does he not think that it is terribly important for us to try to see that everyone has a degree of understanding of what they are letting themselves in for? People get terrible shocks with this payday lending in particular.

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Viscount Younger of Leckie: My noble friend makes a very good point. This is precisely why the summit will, I hope, be helpful in highlighting the concerns. However, I stress that the Government have been taking some tough action and have given 50 firms—90% of the market—12 weeks to change their business practices or risk facing legal requirements or the loss of their licences. Two have already told the OFT that they are surrendering their licences. Since 6 March, the OFT has revoked the licences of three firms engaged in payday lending and has three further investigations open.

Lord Mitchell: Noble Lords will be as horrified as I was yesterday to discover that the leading online payday lending company has raised the interest rate on its loans from 4,214% to 5,853%. Religious leaders, community leaders and Members of both Houses of Parliament have begged the Government to cap interest rates, but they continue to refuse. Why is this? Could it be that some of the shareholders in some of the payday lending companies are also some of the donors to the Conservative Party?

Viscount Younger of Leckie: The Government remain very concerned by the evidence of harm in the payday loan market, but we do not think that the current evidence points to a cap on the cost of credit as a solution at this time. The Bristol report on high-cost credit indicates that a cap could have unintended consequences and risks harm, such as reducing consumers’ access to credit and leading to crime, lenders imposing new charges outside the cap, and less understanding shown to customers. Therefore, we do not agree that this is right or, indeed, that a ban would be right.

Lord Elystan-Morgan: My Lords, I will raise a purely legal point. Does the Minister accept that under the Consumer Credit Act 2006 there is substantial protection—potentially, at any rate—for a debtor who would otherwise suffer injustice? Under that Act, a judge is entitled, where he considers that there are unfair provisions in the loan contract or that the lender has acted in an unconscionable way, to deprive that creditor of relief or to rewrite the contract to make it fairer. Can the Minister show the House that such matters are brought constantly to the attention of judges, particularly district judges, who deal with these matters, so that such cases of gross unfairness are properly dealt with?

Viscount Younger of Leckie: The noble Lord is right to raise the issue of continuous payment authorities. The Government have real concerns about the way in which payday lenders can access money from their customers’ bank accounts. We have been pressing the industry on further transparency, and payday lending codes commit lenders to explaining clearly what a CPA is, how it works and how to cancel a CPA.

The Lord Bishop of Bristol: My Lords, given the Government’s racing willingness to import financial expertise from Canada, can my noble friend tell your Lordships’ House whether he has any plans, in the

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light of the forthcoming payday loan summit, to appraise and learn from the very good, robust and helpful code of practice developed in Canada, which covers such important issues as the non-rollover of loans, no multiple loans, and a responsible policy towards advertising such loans?

Viscount Younger of Leckie: The right reverend Prelate is right to point out that we can learn, as ever, from other countries. In the debate last week, my noble friend Lady Kramer made a valuable point about community development finance institutions. In the UK, the Prime Minister announced the co-operatives consolidation Bill in January 2012, and work on drafting the legislation has begun. The focus should be on credit unions and community-based credit access.

Baroness Kramer: My Lords, I am one of those who believe that a cap is workable. Can the Minister give me his assurance that at the summit that issue will be thoroughly discussed and considered and that the Government will not come to a judgment in advance on such a crucial question?

Viscount Younger of Leckie: I am very certain that it will be part of the discussions. I can give no guarantees, but the whole point of the summit is to discuss these important matters further.

Baroness Lister of Burtersett: My Lords, what action will the Government take to ensure that the monthly payment of universal credit on top of benefits now being delayed for a week does not send more people in poverty into the hands of payday lenders, as has been predicted?

Viscount Younger of Leckie: The noble Baroness makes a valuable point on the transition to universal credit. When it is complete, we estimate that there will be approximately 8 million universal credit claims. My colleagues in the DWP and the Treasury are working together to produce the right sort of advice, and they have made clear that some claimants might need additional help to budget. We are working with the advice sector to provide the appropriate advice.

Legal Aid


3.15 pm

Asked by Lord Bach

To ask Her Majesty’s Government whether, as a result of their plans to reform legal aid, defendants will be able to choose their own lawyer; and, if not, why not.

The Minister of State, Ministry of Justice (Lord McNally): My Lords, the reasoning behind the proposed changes is that they will ensure that contract holders have enough certainty about work volumes so that

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efficiencies and economies of scale are achievable. However, we are carefully considering the consultation responses to this proposal.

Lord Bach: My Lords, I thank the Minister for his Answer and confess to being somewhat—a little—encouraged by it. The choice of lawyer is an essential part of our criminal justice system, as of course is the presumption of innocence. Does the Minister agree with his right honourable friend the Lord Chancellor’s justification of the proposal to abolish choice of lawyer, given in a recent interview in the Law Society Gazette? That seemed to be based on the absurd principle of “too thick to pick”. Or, does he agree with his right honourable friend the Deputy Prime Minister and leader of his own party, who is quoted as saying last weekend that it would be “perverse” to go ahead with this proposal? He cannot agree with both. What is the Government’s position?

Lord McNally: The Government’s position is that we put forward a model for competition, as proposed in our transformed legal aid consultation. That said that the client would generally have no choice in the provider allocated to them but that, in exceptional circumstances, a client might be permitted to change their provider. We put that matter out for consultation. As I indicated in my Answer, we are now considering the responses to the consultation and will come forward with further proposals.

Lord Lloyd of Berwick: My Lords, does the noble Lord remember a letter that appeared in the Telegraph about a month ago signed by some 70 or more QCs? It said that the denial of choice in representation would lead to what they called a rapid and probably irreversible deterioration in the standards of representation. Does he accept that analysis? If so, is he happy with those consequences?

Lord McNally: No, my Lords. When one gets into one of these processes, those kinds of letters are sent to various distinguished newspapers and of course we take note of them. We are doing two things. We have never hidden the fact that part of what we are doing is because of financial constraints. The legal aid budget has to take its share of the burden of our spending cuts but we are trying to do that in a way that retains the fundamental access to justice. We have consulted very thoroughly. We have had some 16,000 responses, which we are working through. We will try to come back with constructive proposals, so long as the legal profession recognises that we have to make the savings that are necessary for the taxpayer.

Lord Marks of Henley-on-Thames: My Lords—

Baroness Scotland of Asthal: My Lords—

The Chancellor of the Duchy of Lancaster (Lord Hill of Oareford): It is the Lib Dems and then we will come to the noble and learned Baroness.

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Lord Marks of Henley-on-Thames: My Lords, it was a Labour Question to begin with. If the responses to the consultation demonstrate that there are savings to be made in other areas, particularly in the resource-hungry high-cost criminal cases, will my noble friend’s department use those savings to mitigate the harshness of the legal aid cuts in other areas where the effect of the proposed cuts is most serious?

Lord McNally: We are certainly looking across the piece and making decisions. Our current thinking is not to compete crown court advocacy and very high-cost crime cases. We have made separate proposals to reduce fees in this area, which are set out in the consultation. However, my noble friend is right. Under the current system, the most expensive single criminal legal aid case in 2010-12 cost the taxpayer £8.5 million. Under our present system, this would reduce to £6 million. The total cost to the taxpayer of just the top three cases in 2011-12 was £21 million.

Baroness Scotland of Asthal: My Lords, I understand that the Minister is able to disregard what 70 QCs have said in a newspaper, but will he tell the House whether the Government intend to disregard their current Attorney-General, who has expressed concerns and who remains the guardian of the public interest and the rule of law? Will they disregard him, too?

Lord McNally: On the contrary. The Attorney-General’s advice, which is invariably wise and measured, is taken fully into account in this consultation. I say again: we are going through a consultation and 69 QCs and 300 economists are part of this kind of exercise. Of course there is a free press, but in the end I hope that the legal profession will engage with us in a constructive dialogue. This will allow us to meet the realities of the economic situation in which we find ourselves, but also to meet the realities that were referred to about access to justice and the rule of law. These are important issues and sometimes they can be trivialised by wild statements about their implications.

Noble Lords: Shocking.

Lord McNally: Shocking? The last Labour manifesto said the party would cut legal aid. For three years, all that I have heard from the Opposition Benches is: “Not this bit of legal aid” or, “Not that bit of legal aid”. No wonder they got into the economic mess they did, because they are frightened of making a decision. We are not.

Lord Phillips of Sudbury: My Lords, my noble friend talked about economies of scale. Will he accept that there is an iron law in the legal profession: the bigger the firm, the bigger the fees? Will he have regard to local justice and the cost to somebody accused of a crime of having to travel miles away in order to see his or her nominated lawyer?

Lord McNally: These are extremely important issues. They have been raised in the consultation and we are considering them.

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Flooding: Insurance


3.23 pm

Asked by Lord Knight of Weymouth

To ask Her Majesty’s Government what agreement they have reached with the insurance industry to ensure that owners of homes at risk of flooding can obtain affordable home insurance.

The Parliamentary Under-Secretary of State, Department for Environment, Food and Rural Affairs (Lord De Mauley): My Lords, we are at an advanced stage in discussions with the insurance industry about the future of flood insurance. We aim to conclude those discussions and announce future measures as soon as possible to ensure that households can continue to access affordable flood insurance in the future.

Lord Knight of Weymouth: My Lords, the Secretary of State is currently struggling to agree a fair deal on CAP reform for UK farmers, and his department has one of the worst settlements in Whitehall in today’s CSR. I hope that he does a lot better for 200,000 householders in this negotiation with insurers. This House rises on the deadline for concluding the negotiation. Given the persistent interest from noble Lords on all sides, can the Minister therefore guarantee us an opportunity to question him in here on the conclusion of the negotiations before we break for the Recess?

Lord De Mauley: My Lords, I had hoped we might have a constructive debate about this. However, since the noble Lord has raised the common agricultural policy, perhaps I should say that it was Labour’s leadership in the last round of CAP reform that cost us €550 million in disallowance and led us to the disastrous administration of the single farm payment. We, by contrast, are tackling another immensely complex negotiation on flood insurance in a measured and sensible way. We have to balance the interests of those at high risk of flood, wider policyholders and taxpayers, while the ABI is a membership organisation with a lot of interests to represent. The noble Lord asks about an opportunity to debate the eventual outcome. I would be pleased about that; it is not my role to guarantee it, but I am sure that we will have a chance to do that.

The Earl of Selborne: My Lords, to bring the question back to flood insurance, has my noble friend looked at the precedent in America, and are there lessons to be learnt as to how to deal with flood insurance from the treatment of vulnerable homeowners in America?

Lord De Mauley: My Lords, that is something to which we have given considerable thought. However, international comparisons provide no clear model. The state-backed national disaster insurance system in the US was in debt to the taxpayer by $17 billion even before Hurricane Sandy struck. Emergency legislation was required in January 2013 to increase the fund’s borrowing by $9.7 billion when the scheme was days from running out of money, to enable claims to be paid. So we have considered it, but it has its limitations.

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Lord Dubs: My Lords, given that previous deadlines have already been missed, as regards bringing the negotiations to a conclusion, what assurance can the Minister give that this will not be announced some time in the middle of August or September, when there is no chance for us to scrutinise the detail? Further, the Question uses the wording “affordable insurance”. Will he comment on the fact that after the Cockermouth floods, my insurance company for my house in Cumbria increased my premium more than sixfold?

Lord De Mauley: Yes, my Lords. In answer to the noble Lord’s first question, the ABI, in its letter to which we referred when we last debated this subject a month ago, has expressed confidence that we will be able to conclude this before the end of July, and I have every confidence in that. We need a solution that provides affordable insurance, as the noble Lord said, for those at risk, but that does not place unsustainable costs on wider policyholders or the taxpayer. Obtaining insurance might involve some householders shopping around or going through specialist brokers if flood risks are significant. In terms of help for householders, in July last year, we published a guide to obtaining flood insurance in high-risk areas in collaboration with the National Flood Forum and industry representatives.

Lord Greaves: My Lords, I heard this morning a rustling in the undergrowth, and it was not oncoming water: it was a suggestion that an agreement has actually now been reached between the Association of British Insurers and Defra—the Government. I do not know whether the Minister is able to confirm that, because it has perhaps has not been signed, sealed and delivered yet, but the agreement is there. When that news arrives—perhaps tomorrow—will it be given by an Oral Statement? That would then allow the Opposition in this House to have the Statement taken here, which would be the normal procedure, but can happen only if it is an Oral Statement?

Lord De Mauley: My Lords, my noble friend is unique among your Lordships in that he seems to have both ears to the ground at the same time. As I said, we are at an advanced stage in discussions with the insurance industry about the future of flood insurance. We aim to announce future measures shortly to ensure that households can continue to access affordable flood insurance.

Lord Campbell-Savours: My Lords, why should not all policyholders carry the risk? It would mean a very marginal difference in premiums.

Lord De Mauley: Yes, my Lords. We are trying to arrange a system where those at the highest risk who have difficulty affording the insurance effectively have a continued cross-subsidy from wider policyholders. It is a very complicated negotiation, as I think that the noble Lord is effectively pointing out, and we have a lot of interests to keep in mind here.

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Lord Elton: Would the negotiations be made easier if the Government decided and announced that any agreement to insure flood-risk property would not extend to any property on flood plains for the building of which planning permission had been given after, let us say, today’s date?

Lord De Mauley: My noble friend is persistent in raising this issue. The Environment Agency provides advice to local planning authorities on the flood risk associated with new developments, which is used to develop strategic flood-risk assessments. During 2012-13, 99% of planning objections raised by the Environment Agency were amended in line with the advice of the NPPF. Where development is allowed because the risk is low, the proposed development should be designed to ensure that it is safe even in a one-in-1,000-year-scale flood.

Genetically Modified Crops


3.30 pm

Asked by Lord Taverne

To ask Her Majesty’s Government what progress they have made in seeking to reform the regulations regarding the commercial cultivation of genetically modified crops.

The Parliamentary Under-Secretary of State, Department for Environment, Food and Rural Affairs (Lord De Mauley): My Lords, the EU has robust and comprehensive regulations governing GM crops. These regulations were designed to provide fair and predictable market access for products that have undergone a rigorous, case-by-case safety assessment. In practice, polarised views across EU member states mean that the scientific evidence is often ignored and crops remain stuck in the system. It is therefore difficult to make progress on this issue.

Lord Taverne: I should declare an interest as founder of the charity, Sense About Science. Over 14 years ago, several reports from the Royal Society, supported by every single national academy of sciences in the world, concluded that GM crops were no danger and caused no harm to human health or the environment. Since then, the enormous expansion in the cultivation of GM crops outside Europe and especially in emerging countries has strongly reinforced that conclusion. Will my noble friend convey to the Secretary of State congratulations on basing policy on evidence? Will he assure us that the Government will stand firm against the scaremongering of the Daily Mail, our leading anti-science paper, and recognise that its attacks on GM crops have no more evidence to support them than its disgraceful and scandalous campaign against MMR vaccines?

Lord De Mauley: My Lords, first, let me say that my noble friend has a great deal of knowledge in the area of science and GM specifically. His science-based approach is very welcome. I agree with what he says. That is why, despite the difficulties, we will work to unblock the situation. As my right honourable friend

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the Secretary of State says, we are going to need all the tools in the box to feed the rapidly growing world population. As he also says, we want the United Kingdom to have a leading role in feeding the world and increasing the resilience of global food supplies, and not to stand by watching others take the lead and forge ahead. The UK is the natural home for scientific research. We want companies and research providers to know that the UK is the best place for them to carry out their work.

Lord Winston: My Lords, I am sure that it will not have escaped the Minister’s attention that a number of Members of your Lordships’ House are genetically modified. When it comes to plants, does he not agree that there is colossal evidence that, given the shortage of water in the world and of food in many countries, the need for genetically modified plants is ever increasing and that this is an important technology to help many people who are starving?

Lord De Mauley: Yes, my Lords, yes and yes.

Lord Walton of Detchant: My Lords, as the noble Lord, Lord Taverne, has said, there is no shred of scientific evidence to suggest that GM foods carry any risk to human health. All talk in the media of “Frankenstein foods” is nonsense. Many GM crops have been cultivated with improvement in the quality of the crops and in their yields in many countries across the world. Is it not now perverse and misguided for the European Union, for instance, to have imposed a ban on the cultivation of GM crops? Can we do better?

Lord De Mauley: The noble Lord makes a really important point. My right honourable friend the Secretary of State and I have discussed this issue with Commissioner Borg in order to emphasise the importance of finding a solution that gets the current system working. The commissioner has signalled that he wants to try to resolve the problems at European level and we look forward to further discussions on this issue.

Viscount Ridley: My Lords, can my noble friend explain why, for 20 years, a group of environmental activists has been allowed to deny the British consumer choice in this matter: the choice to buy GM crops if they prefer them because they think they are good for human health and the environment?

Lord De Mauley: My noble friend is quite right that there are groups—interests—that have been successful in creating controversy around GM which has devalued the public debate and means that people have not been able to reach a balanced view of the pros and cons. We will strive to change that.

Baroness Hayman: My Lords, will the Minister undertake to express to his right honourable friend the Secretary of State the strength of support in this House for the science and evidence-based approach

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that he is advocating and wish him luck in the European Union in taking that forward? Would it not be truly irresponsible, given the need, as he has said, to cope with a rapidly expanding and often malnourished and starving population, not to take the opportunities offered by GM and by the independent scientific expertise in this country to move forward and save lives, as GM cotton manufacture has saved the lives of agricultural workers across the world?

Lord De Mauley: I agree with the noble Baroness. I am extremely grateful to her and other noble Lords who have spoken positively today, and I will certainly take her words and the words of other noble Lords back to my right honourable friend.

Baroness O’Cathain: My Lords, in all this euphoria about GM crops—and I think it is wonderful that at last we have some positive news—let us not forget that there are areas in the world that are going to be badly affected by this because the plants do not produce seeds on the same basis as current crops. I suggest that in all discussions that go on about this, particularly with the European Union, steps should be taken to ensure that the people who are going to make a lot of money out of these GM crops, such as seed merchants, do something to help those people in other areas in the world who will not be able to do the usual agriculture they have at the moment. We just cannot lose sight of that. I would like him to make sure that that will happen.

Lord De Mauley: My noble friend raises an issue that is known as “terminator technology”; that is, the concept that seeds may not reproduce. Terminator technology is a concept rather than something that is being applied in practice. There are no GM crops in existence, to my knowledge, that produce sterile seed and no plans to market such crops.

Water Industry (Specified Infrastructure Projects) (English Undertakers) Regulations 2013

Motion to Approve

3.37 pm

Moved by Lord De Mauley

That the draft Water Industry (Specified Infrastructure Projects) (English Undertakers) Regulations 2013 laid before the House on 15 May be approved.

Relevant documents: 2nd Report from the Joint Committee on Statutory Instruments, 3rd Report from the Secondary Legislation Scrutiny Committee, considered in Grand Committee on 12 June

Motion agreed.

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Spending Review


3.38 pm

The Commercial Secretary to the Treasury (Lord Deighton): My Lords, I refer the House to the spending review Statement made earlier in another place by my right honourable friend the Chancellor of the Exchequer. Copies of the document have been made available in the Printed Paper Office and its text will be printed in full in the Official Report. I commend my right honourable friend’s Statement to this House.

“This coalition came into office with a commitment to address with firmness and resolve one of the biggest economic crises of the post-war era. The action we have taken, together with the British people, has brought the deficit down by a third, helped a record number of people into work, and taken our economy back from the brink of bankruptcy; and it allows us to say that, while recovery from such a deep recession can never be straightforward, Britain is moving out of intensive care, and from rescue to recovery.

Today we announce the latest action to secure the recovery. We act on behalf of every taxpayer and every future taxpayer who wants high-quality public services at a price our country can afford. We act on behalf of everyone who knows that Britain has got to live within its means. We have applied three principles to the spending round I will set out today: reform, to get more from every pound we spend; growth, to give Britain the education, enterprise and economic infrastructure it needs to win the global race; and fairness, making sure we are all in it together by ensuring those with the broadest shoulders bear the largest burden and making sure the unfairness of the something-for-nothing culture in our welfare system is changed.

We have always understood that the greatest unfairness was loading debts on to our children that our generation did not have the courage to tackle ourselves. We have always believed, against much opposition, that it is possible to get better public services at lower cost—that you can cut bureaucracy and boost enterprise by taking burdens off the back of business. In the face of all the evidence, the opposition to these ideas has collapsed into incoherence. We have always believed that the deficit mattered—that we needed to take tough decisions to deal with our debts—and the opposition to that has collapsed into incoherence too. Today I announce the next stage of our economic plan to turn Britain around.

Let me start with the overall picture on spending. In their last year in office, the previous Government were borrowing £1 in every £4 that they spent. It was a record for a British Government in peacetime and a calamitous risk with our economic stability. As the note we saw again this week from their outgoing Chief Secretary put it,

“I’m afraid there is no money”.

So we acted immediately. Three years ago, we set out plans to make savings and to reduce our borrowing. Instead of the £157 billion the last Government were borrowing, this year we are set to borrow £108 billion pounds: that is £49 billion less in borrowing. That is virtually the entire education budget.

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So we have made real progress, putting right what went so badly wrong. But while we have been acting, the challenges from abroad have grown: a eurozone in crisis, rising oil prices, and the damage from our own banking crisis worse than anyone feared. The truth is that we have to deal with the world as it is, not as we would wish it to be, so this country has to continue to make savings. I can report to the House that the biggest single saving we have made in government is the £6 billion a year less we are paying to service our debts than the previous Government budgeted for. Bear that number in mind when you hear the Opposition complaining about cuts.

The deficit has come down by a third, yet at over 7% it remains far too high, so we must continue to take action—not just because it is wrong to go on adding debts to our children’s shoulders, but because we know from the global turbulence of the past few years that the economic risks are real and the recovery has to be sustained. If we abandoned our deficit plan, Britain would be back in intensive care. So the figures today show that until 2017-18, total managed expenditure —in other words, the total amount of government spending—will continue to fall in real terms at the same average rate as it is falling today.

The task before us today is to spell out what that means for 2015-16. Total managed expenditure will be £745 billion. To put that huge sum into context, consider this: if government spending had been allowed to rise through this Parliament at the average rate of the past three decades, that total would have been £120 billion higher. This Government have taken unprecedented steps to achieve that expenditure control. Now we need to find £11.5 billion of further savings. I want to pay a personal tribute to my right honourable friend the Chief Secretary for the huge effort that he has put into delivering them. Finding savings on that scale has not been easy. These are difficult decisions that will affect people in our country, but there never was an easy way to bring spending under control. Reform, growth and fairness are the principles. Let me take each in turn.

I will start with reform and the obligation that we all have in this House to ensure that we get more for every pound of taxpayers’ money that we spend. With the help of my right honourable friend the Minister for the Cabinet Office, we have been combing through Whitehall, driving out costs, renegotiating contracts and reducing the size of government. Cutting money that the previous Government were spending on marketing and consultants, reforming government IT and negotiating harder on behalf of the taxpayer have already saved almost £5 billion. In this spending round, we will find a further £5 billion of efficiency savings. That is nearly half of the total savings we need to achieve.

We are reforming pay in the public sector. We are holding down pay awards, and public sector pay rises will be limited to an average of up to 1% for 2015-16. However, the biggest reform that we will make on pay is to automatic progression pay. That is the practice whereby many employees not only get a pay rise every year, but automatically move up a pay grade every single year, regardless of performance. Some public sector employees see annual pay rises of 7%. Progression

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pay can at best be described as antiquated; at worst, it is deeply unfair to other parts of the public sector that do not get it and to the private sector that has to pay for it. So we will end automatic progression pay in the Civil Service by 2015-16, and we are working to remove automatic pay rises simply for time served in our schools, NHS, prisons and police. The Armed Forces will be excluded from those reforms.

Keeping pay awards down and ending automatic progression pay means that, for every pound we have to save in central administration, we can better limit job losses. I do not want to disguise from the House that there will be further reductions in the number of people working in the public sector. The Office for Budget Responsibility has forecast that the total number of people working for the Government will fall by a further 144,000 by 2015-16. I know that for those who are affected that is difficult. That is the consequence of the country spending far beyond its means.

When I presented the spending round three years ago, I said that about half a million posts in the public sector were forecast to have to go. That is indeed what has happened, and we are saving £2 billion a year, with a Civil Service now smaller than at any time since the war. I also said three years ago that I was confident that job creation in the private sector would more than make up for the losses. That prediction created more controversy than almost anything else at the time, including with the Opposition. The shadow Chancellor called it “a complete fantasy”. Instead, every job lost in the public sector has been offset by three new jobs in the private sector. In the past year, five new jobs have been created for every job cut in the public sector. The central argument of those who fought against our plan is completely demolished by the ingenuity, enterprise and ambition of Britain’s businesses. I pay tribute to the hard-working people of this country who proved their pessimism wrong.

In this spending round, the Treasury will, as one would expect, lead by example. In 2015-16, our resource budget will be reduced by 10%. The Cabinet Office will also see its resource budget reduced by 10%. However, within that we will continue to fund support for social action, including the National Citizen Service. Ninety thousand places will be available for young adults in the citizen service next year, rising to 150,000 by 2016. It is a fantastic programme that teaches young people about their responsibilities as well as their rights, and we are expanding it.

Local government will have to make further savings too. My right honourable friend the Communities and Local Government Secretary has set an example to all his colleagues in reducing the size of his department by 60% and abolishing 12 quangos. He is a model of lean government, and has agreed to a further 10% saving in his resource budget. But we are committing to more than £3 billion capital investment in affordable housing and we will extend the troubled families programme to reach 400,000 more vulnerable families who need extra support. We are proving that it is possible to save money and create more progressive government. That is the right priority.

Here is another of the Government’s priorities: helping families with the cost of living. Because we know that times are tough, we have helped to keep

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mortgage rates low, increased the personal allowance, cut fuel duty and frozen council tax. That council tax freeze is due to come to an end next April. I do not want that to happen, so I can tell the House today that because of the savings we have made we can help families with their bills. We will fund councils to freeze council tax for the next two years. That is nearly £100 off the average council tax bill for families, and brings savings on these bills for families to £600 over this Parliament. That demonstrates our commitment to all those who want to work hard and get on.

There is one more thing that we can do to help with the cost of living in one part of the country. For years, Members from the south-west of England have fought on behalf of their constituents who face exceptionally high water bills. Nothing was done until we came to office. Now we have cut those water bills by £50 per household every year until 2015. My honourable friend the Member for Camborne and Redruth and many others have campaigned to extend that rebate beyond 2015. I am happy to confirm today that we will do that. Taking money out of the cost of government and putting it in the pockets of families—that is what we mean by reform.

Local government has already taken difficult decisions to reduce staff numbers, share services and make savings. I pay tribute to Sir Merrick Cockell for all he has done in showing how this can be achieved. We were told by the scaremongers that savings in local government would decimate local services. Instead, public satisfaction with local council services has gone up under this Government. That is because, with our reforms, communities have more control over their own destiny. That is because we have devolved power and responsibility to manage budgets locally. That is because we have let councils benefit from the tax receipts that come when the local economy grows. Today, we give more freedom, including greater flexibility over assets, and we will drive greater integration of local emergency services. I thank my honourable friend the Member for Bournemouth East for his fresh thinking in this area, which has helped to inform us.

We are also embarking on major reforms to the way we spend money locally through the creation of the single local growth fund that Lord Heseltine proposed. This will be £2 billion per year, which is at least £10 billion over the next Parliament. Local enterprise partnerships can bid for that sum, and the details will be set out tomorrow. Our philosophy is simple: trust people to make their own decisions and they will usually make better decisions. But in return for those freedoms, we have to ask local government for the kind of sacrifices central government are making. The local government resource budget will be reduced by 10% in 2015-16, but when all the changes affecting local government that I will set out are taken into account, including local income and other central government funding, local government spending reduces by around 2%.

I set out today the block grants to the devolved Administrations. Because we have prioritised health and schools in England, this feeds through the Barnett formula to require resource savings of about 2% in Scotland, Wales and Northern Ireland. The Scottish

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resource budget will be set at £25.7 billion, and Scotland will benefit from new capital borrowing powers of almost £300 million. Being part of the UK means that Scotland will see its capital spending power increase by almost 13% in real terms in 2015-16. It is rightly for the Scottish Parliament to decide how best to use it. That is devolution within a United Kingdom delivering for Scotland.

The Welsh resource budget will be £13.6 billion, and we will shortly publish our response to the Silk commission on further devolution of taxation and borrowing. When we do so, we will be able to say more about the impressive plans to improve the M4 in south Wales that my honourable friend the Member for Vale of Glamorgan and others have been campaigning for. The Northern Ireland resource budget will be £9.6 billion. We have agreed to provide an additional £31 million in 2015 to help the Police Service of Northern Ireland tackle the threat posed by terrorism. Those police officers do an incredibly brave job on our behalf, and we salute them. Separately, we will make 10% savings to the Scotland, Wales and Northern Ireland Offices.

We believe that the cultural heritage of our nations is not just an economic asset, but has intrinsic value. When times are tough, they too must make a contribution to the savings this country requires. The Department for Culture, Media and Sport will make savings of 7% in its resource budget. Elite sports will be protected and the funding of community sports, arts and museums will be reduced by just 5%, but because we recognise the value of our greatest museums, galleries and English Heritage, we are giving them much greater freedom from state control, which they have long called for, applying our reforming principles across the board and empowering those on the front line who know best—what the director of the British Museum called:

“good news in a tough economic climate”.

And while we are at it, we will make sure that the site of the Battle of Waterloo is restored in time for the 200th anniversary to commemorate those who died there and to celebrate a great victory of coalition forces over a discredited former regime that impoverished millions.

We still have the finest Armed Forces in the world, and we intend to keep it that way. The first line of national defence is sound public finances and a balanced defence budget, and my right honourable friend the Defence Secretary is helping to deliver both. He and his predecessor, my right honourable friend the Member for North Somerset, have filled the £38 billion black hole they inherited in the finances of the Ministry of Defence. We will continue to ensure we get maximum value for money from what will remain, which, at over 2% of our GDP, is one of the largest defence budgets in the world. The defence resource budget will be maintained in cash terms at £24 billion, while the equipment budget will be £14 billion and will grow by 1% in real terms thereafter. We will further reduce the civilian workforce and their allowances; renegotiate more of the hopeless private finance initiative contracts signed in the past decade; and overhaul the way we buy equipment.

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My right honourable friend the Prime Minister has rightly been clear throughout, however, that he is not prepared to see a reduction in Britain’s military capabilities. This spending round not only protects those capabilities, but enhances them with the latest technologies. We will not cut the number of soldiers, sailors or airmen—we need them to defend our country—and we will give them the best kit to do that job: new aircraft carriers, submarines, stealth fighters, destroyers and state-of-the art armoured vehicles. We also make a major commitment to invest in cyber. It is the new frontier of defence and a priority for the Government.

We will look after families who have lost their loved ones and those injured protecting us long after the wars they fought in are over. We previously committed to fund the military covenant for five years, and today I commit to funding the Armed Forces covenant permanently. We will do that with the money we have collected from the LIBOR fines, so those who represented the very worst values will support those who represent the very best of British values. Our veterans will not be forgotten.

The intelligence services are on the front line too. Silently, and often heroically, these fellow citizens protect us and our way of life, and so we will protect them in return, with a 3.4% increase in their combined resource budget. The Foreign Office is the public face of our diplomacy, and my right honourable friend the Member for Richmond (Yorks) is quite simply the best Foreign Secretary we have had in a generation. He, too, has demonstrated how we can make our taxpayer pound go further. While making savings in his budget, he has managed to expand our network of embassies in the emerging world and focus his diplomats on British commercial interests. There will be further savings in that budget of 8% in 2015, but he is still committing to strengthen our embassy network in high-growth markets, from Shanghai to Abuja.

The Foreign Office projects our values abroad, and the Home Office protects our values here in Britain. Police reform is a model of what we can achieve across Government. Police forces are more accountable to the public, with modern working practices, the latest equipment and democratic oversight, and all that on a smaller budget. What was the Opposition’s prediction? They said that crime would rise, and what has happened instead? Crime has fallen by more than 10%. Thanks to the hard work of police officers up and down this country, crime is at its lowest level for 30 years. What was their prediction about our borders? They said that because of cuts we would not be able to control immigration, and what has happened instead? Net immigration is down by more than one third.

This Home Secretary is demonstrating that responsible budgets and reform can deliver better services for the public. In 2015, she will work with a resource budget of £9.9 billion, which is a saving of 6%, but the police budget will be cut by less than that. There will be further savings in the central department, police forces will be encouraged to share services and some visa fees will go up, but protecting Britain from the terrorist threat remains a top priority, so I can confirm that the police counterterrorism budget will not be cut at all.

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For the police to do their job, they need a criminal justice system that works a lot better. A case of common assault can take 240 days to pass through the courts and involves five separate sets of case papers generated on three different computer systems. In some prisons, the cost of keeping a prisoner is £40,000 a year, but in others, it is one third of that, while the cost of legal aid per head is double the European average. My right honourable friend the Lord Chancellor is reforming all these things, and by doing so will make savings of 10% in his departmental budget—and he will do that while for the first time offering probation services for those who have served short sentences to help to end the revolving door of crime and reoffending.

That is an example of the reform we are bringing in across Government, and every step of the way, every penny saved, every programme reformed, every entitlement reduced, every difficult choice taken, has been opposed by vested interests and those who got Britain into this mess in the first place. We will not let up. I will not let that happen. The reform will continue.

Government spending does not alone create sustainable growth; enterprise does, and the job of the state is to provide the schools, science, transport links and reliable energy that enable business to grow. Britain was once the place where the future was invented, from the railway to jet engine to the world wide web. We can be that country again, and today we set out how to get there. A huge amount of innovation and discovery still goes on, but successive Governments, of all colours, have put short-term pressures over long-term needs and refused to commit to capital spending plans that match the horizons of a modern economy. Today we change that. We commit now to £50 billion of capital investment in 2015. From roads to railways, bridges to broadband, science to schools, it will amount to more than £300 billion of capital spending guaranteed to the end of this decade.

Today, we raise our national game. That means that Britain will spend on average more as a percentage of its national income on capital investment in this decade, despite the fact that money is tight, than in the previous decade, when government spending was being wasted in industrial quantities.

My right honourable friend the Chief Secretary to the Treasury will tomorrow set out the next stage of our economic infrastructure plan, with specific plans for more than £100 billion of infrastructure projects. Here is what that will mean for the departments. The Department for Transport will make a 9% saving in its day-to-day resource spending, bearing down on the running costs of Transport for London and on rail administration, but its capital budget will rise to £9.5 billion —the largest rise of any part of Government—and we will repeat that commitment for every year to 2020.

We are already massively expanding investment on major road schemes, but we will do more. We are announcing the largest programme of investment in our roads for half a century. We have already expanded our investment in the railways, but we will do more. We are committing to the largest investment in our railways since the Victorian age, and with the legislation before this House today, we should give the green light

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to HS2, which will provide a huge boost to the north of England and a transformation of the economic geography of this country.

Here in London, we are digging Crossrail, the largest urban infrastructure project in Europe, but we will do more. We are looking now at the case for Crossrail 2, linking London from north to south. We are going to give the mayor almost £9 billion pounds of capital spending and additional financing power to the end of this decade.

Investing in our economic infrastructure also means investing in energy, so we will provide the certainty that investors are crying out for in western countries. This country is already spending more on renewables than ever before. Now we will provide future strike prices for low carbon. We are restarting our civil nuclear programme when other countries are unable to continue theirs, and now we are providing guarantees for new nuclear. Our exploitation of gas in the North Sea is already second to none. Now we are making the tax and planning changes that will put Britain at the forefront of exploiting shale gas. We will provide our country with the energy of the future at a price that we can afford. Taken together, this should support over £100 billion of private sector investment in energy.

The Department of Energy and Climate Change will do this while reducing its resource budget by 8%. The Department for Environment, Food and Rural Affairs will see a 10% reduction, but we will set out plans for a major commitment to new flood defences for the rest of this decade. Again, we are prioritising long-term capital through day-to-day cost savings, which is exactly the tough choice that Britain should be making.

It is not enough to have roads, power stations and flood defences. That is just the physical infrastructure we need to compete in the 21st century. We need the intellectual capital, too. This country needs to invent, pioneer and export around the world. That means backing the Department for Business, Innovation and Skills, which helps us to do that. And it means taking tough decisions about what we should support. My right honourable friend the Secretary of State for Business, Innovation and Skills has agreed to a reduction of 6% in the cost of the department. That means that we are making savings to student maintenance, keeping grants but not increasing them, and the cost of the central department will also be cut further. That means that, within the reduced budget, we can put more money into apprenticeships and continue with the dramatic increase in support that we have provided to exporters through UK Trade & Investment.

We are not going to shift medical training and research out of that department, because they are working well where they are. And in that department too, we can shift from day-to-day spending to a huge 9% increase in capital investment. That includes a huge investment in science. Scientific discovery is first and foremost an expression of the relentless human search to know more about our world, but it is also an enormous strength for a modern economy. From synthetic biology to graphene, Britain is very good at it and we are going to keep it that way. Today, I am committing to maintaining the resource budget for science at

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£4.6 billion, to increasing the capital budget for science in real terms to £1.1 billion, and to maintaining that real increase to the end of this decade. Investment in science is an investment in our future. So yes, from the next generation of jet engines to cutting-edge supercomputers, we say: keep inventing, keep delivering; this country will back you all the way.

We have infrastructure and we have science, but we still need an educated work force to make it happen. Because of our ongoing reforms to our universities, they are now better funded than before. People will remember that the reforms to higher education were bitterly contested in the House. We remember the scaremongering about fees, and the claims that they would destroy social mobility and put off students from poorer communities applying. And what has happened since? We now have the highest ever proportion of students from the most deprived neighbourhoods applying to universities. We should all welcome that.

There is no greater long-term investment a country can make than in the education and skills of its children. Because of the tough decisions that we have taken elsewhere, we have been able to invest in education and accelerate school reform. When we took office, our country’s education system was falling behind other parts of the world. Now, thanks to the brilliant programme of reform by my right honourable friend the Secretary of State for Education and the Minister for Schools, my right honourable friend the Member for Yeovil, we are once again leading the way.

We have applied our reform principles in education too, freeing schools and teachers to concentrate on teaching and turning the majority of secondary schools into academies. In this spending round, that momentum of reform will grow. The Department for Education’s overall budget will increase to £53 billion and schools spending will be protected in real terms, fulfilling the pledge we made at the beginning of this Parliament, for all of this Parliament. We will transfer power and money from town halls and central bureaucracy to schools, so that more of the money for education is spent on education. So, while grants to councils and spending on central agencies are reduced, the cash going to schools will go up.

I can announce today that schools spending will be allocated in a fairer way than ever before. School funding across the country is not equally distributed; it is distributed on a historical basis with no logical reason. The result is that some schools get much more than others in the same circumstances. That is unfair and we are going to put it right. Many MPs on both sides of the House have campaigned for that. My honourable friend the Member for Worcester has been a particular champion in this Parliament. Now, the lowest-funded local authorities in this country will at last receive an increase in their per-pupil funding as we introduce a national funding formula to ensure that no child in any part of our country is discriminated against. We will consult on all the details so that we get this historic reform right. The pupil premium that we have introduced also ensures that we are fair to children from low income backgrounds. It will be protected in real terms, so that every poor child will have more

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cash spent on their future than ever before. The capital budget will be set at £4.6 billion in 2015-16, with over £21 billion of investment over the next Parliament.

We will also tackle the backlog of maintenance in existing schools and we will invest in new school places. We will fund 20 new studio schools as well as 20 new university technical colleges, as they are outstanding new vocational institutions. Free schools are giving parents the opportunity to aspire to a better education for their children. The Opposition have said that they want no more of them, but we will not allow such an attack on aspiration to happen. Instead, we must accelerate the programme and bring more hope to more children. That is why I can announce that we will fund an unprecedented increase in the number of free schools. We will provide for 180 great new free schools in 2015-16.

The schools budget will be protected, there will be fairer funding across the nation, the pupil premium will be extended to more students than ever before and there will be a transformation in the free school programme. We will not make our children pay for the mistakes of the past. We will give them every chance for the future, because that is the single best investment we can make for Britain.

Our education settlement is also consistent with the third and final principle of this spending round—fairness. It is not possible to reduce a deficit of this size without asking all sections of the population to play their part, but those with the broadest shoulders should bear the greatest burden. The Treasury’s distributional analysis shows that the top fifth of the population lose the most after this spending round, and the independent Institute for Fiscal Studies is unequivocal that the richest 10% have paid the most. In every year of this Parliament, the rich will pay a greater proportion of income tax revenues than they did in any one of 13 years under the last Labour Government.

When it comes to Her Majesty’s Revenue and Customs, despite the fact that this department will see a 5% reduction in its resource budget, we are committed to extra resources to tackle tax evasion. The result is that we expect to raise over £1 billion more in tax revenues from those who try and avoid paying their fair share.

Fairness also means refusing to balance the budget on the backs of the world’s poorest. I know that not everyone believes we should fulfil our commitment to spend 0.7% of our national income on development—but I do. I am proud to support a Government who are the first in our history to meet our pledge and meet it not only this year, but next year and the year after that. Of course, overseas development is about more than just the Department for International Development budget, and we comply with internationally policed rules. The DfID budget is, however, the lion’s share, and it will be set at £11.1 billion in 2015-16. Even in these tough times, the decisions we make mean we keep to our commitments.

That includes our commitment to the National Health Service—an institution that is the very embodiment of fairness in our society. The NHS is much more than the Government’s priority; it is the people’s priority. When we came to office, the health budget was £96 billion; in 2015-16, it will be £110 billion—and capital spending

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will rise to £4.7 billion. New medical treatments and an ageing population mean that the demand for NHS services is rising, so we have not spared in also demanding reform and value for money in this service. This will not insulate the health service from tough choices; there are already 7,000 fewer managers, and the NHS will continue to make efficiency savings. Those savings will, however, enable new investment in mental health and funding for new treatments for cancers such as prostate and breast cancer. Let me respond directly to the breast cancer research campaign in which so many have taken part. We will continue to back the charity research support fund and look into making it easier for these organisations to benefit from gift aid.

Many older people do not just use the NHS; they also use the social care system. If we are honest, they often fall between the cracks of the two systems, being pushed from pillar to post, not getting the care they should. None of us here would want that for our parents or grandparents, and in a compassionate society, no one should endure it. It is a failure that also costs us billions of pounds: Britain can do better.

We said in the 2010 spending review that the NHS would make available around £1 billion a year to support the health needs of people in social care. It worked, and saved hundreds of millions in the process. Last year, these improvements meant almost 50,000 fewer bed days were lost to the NHS. So today, I can announce that I will bring together a significant chunk of the health and social care budgets. I want to make sure that everyone gets a properly joined-up service where they will not have to worry about whether a service is coming from the NHS or the local council.

Let us stop the tragedy of people being dropped in A&E on a Friday night to spend the weekend in hospital because we cannot look after them properly in social care. By 2015-16, over £3 billion will be spent on services that are commissioned jointly and seamlessly by the local NHS and local councils working together. It is a huge and historic commitment of resources to social care, tied to real reform on the ground, to help end the scandal of older people trapped in hospitals because they cannot get a social care bed. This will help relieve pressures on A&E, help local government to deliver on its obligations and will save the NHS at least £1 billion. This is integrated health and social care—no longer a vague aspiration, but a concrete reality transforming the way we look after people who need our care most.

So these are the three principles that guide the spending round: reform, growth and fairness. Nowhere could these principles be more clearly applied than in our approach to welfare. Two groups of people need to be satisfied with our welfare system: those who need it who are old, vulnerable, disabled or have lost their job, whom we as a compassionate society want to support. Then there is a second group: the people who pay for this welfare system who go out to work, pay their taxes and expect it to be fair on them, too.

So we have taken huge steps to reform welfare: changing working age benefits with universal credit so that work always pays; removing child benefit from the better off; capping benefits so that no family out of work gets more than the average family gets in work.

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And we have been making sure that benefit payments do not rise faster than wages. The steps we have taken will save £18 billion a year—and every single one of them was opposed by the welfare party on the Opposition Benches.

Now we propose to do three further welfare reforms. First, as I said in the Budget, we are going to introduce a new welfare cap to control the overall costs of the benefits bill. We have already capped the benefits of individuals, and now we cap the system as a whole. Under the system we inherited, welfare spending was put into a category called annually managed expenditure, but the problem was that it was not managed at all. The cost of welfare went up by a staggering 50%—even before the crash. Our welfare cap will stop that happening again. The cap will be set each year at the Budget for four years. It will apply from April 2015 and will reflect forecast inflation, but it will be set in cash terms. In future, when a Government look to breach the cap because they are failing to control welfare, the Office for Budget Responsibility will issue a public warning. The Government will then be forced to take action to cut welfare costs or publicly breach the cap and explain it to Parliament.

We will exclude a small number of the most cyclical benefits that directly rise and fall with the unemployment rate to preserve the automatic stabilisers: housing benefit, tax credits, disability benefits and pensioner benefits will all be included—but the state pension will not. I have had representations that we should include the basic state pension in the welfare cap. That would mean that a future Government could offset a rise in working age benefits by cutting the pensions of older people. That penalises those who have worked hard all their lives. Cutting pensions to pay for working age benefits is a choice this Government are certainly not prepared to make. It is unfair; we will not do it and we reject those representations completely.

The new welfare cap is proof that Britain is serious about living within its means: controlling spending, protecting the taxpayer and being fundamentally fair. Today we are introducing a limit on the nation’s credit card. The principles enshrined in the cap apply to our second reform today. We will act to ensure that we stop the cost of paying the winter fuel payments made to those who live abroad from rising in a way that no one ever intended. EU law now says that people living in the European Economic Area can claim winter fuel payments from us, even if they did not get them before they left the UK. Paying out even more money to people from all nationalities who might have worked in this country years ago, but no longer live here is not a fair use of the nation’s cash. So from the autumn of 2015, we will link the winter fuel payment to a temperature test; people in hot countries will no longer get it. It is, after all, a payment for winter fuel.

The third welfare reform I announce today is about making sure we do everything to help people get into work. My right honourable friend the Secretary of State for Work and Pensions has changed the national debate about welfare, and has comprehensively won the argument. He has committed himself to finding a further 9.5% of savings in his department’s running

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costs. That will require a difficult drive for efficiency, and a hard-headed assessment of underperforming programmes.

However, welfare reform is about much more than saving money, vital though that is. It is about reducing dependency and changing people’s lives for the better. I am determined to go further to reduce worklessness with all its social consequences. Where is the fairness in condemning people to a life on benefits because the system will not help them to get back into work?

Today we are introducing Upfront Work Search. We are going to make sure that people turn up with a CV, register for online job search, and start looking for work. Only then will they receive their benefits. Thanks to this Government, lone parents who are out of work can now receive free childcare for all their three and four-year-olds, so it is reasonable to ask that they start regularly attending jobcentres and preparing to return to work.

We are announcing further changes today. Half all jobseekers need more help with looking for work, so we will require them to go to the jobcentre every week rather than once a fortnight. We will give people more time with jobcentre advisers, and proper progress reviews every three months. We will also introduce a new seven-day wait before people can claim their benefits. Those first few days should be spent looking for work, not looking to sign on. We are doing those things because we know that they help people to stay off benefits, and help those who are on benefits to get back into work faster.

Here is a further change. From now on, if claimants do not speak English, they will have to attend language courses until they do. That is a reasonable requirement in this country. It will help people to find work, but if they are not prepared to learn English, their benefits will be cut.

As a whole, this new contract with people on benefits will save more than £350 million a year, and all that money will enable us to afford extra support to help people to get into work. Help to work, incentives to work, and an expectation that people should do everything that they can to find work: that is fair to people who are out of work, and it is fair to those in work who pay for them. Together, these reforms bring the total additional welfare savings in 2015 up to £4 billion.

Step by step, this reforming Government are making sure that Britain lives within its means. The decisions that we make today are not easy, and these are difficult times; but with this Statement, we make more progress towards an economy that prospers, a state that we can afford, a deficit coming down, and a Britain on the rise. I commend this economic plan to the country”.

3.39 pm

Lord Davies of Oldham: My Lords, as the Minister indicated, we are considering a spending review that the Chancellor of the Exchequer said represents reform, growth and fairness, but there is little in the Statement to back up any of those assertions. In fact, the real reason we are here today is because of this Government’s economic failure. They have been forced back, begging for more: more cuts to the police, more cuts in the

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defence budget and more cuts to local services. This Government have failed on living standards, growth and the deficit, and families and businesses are paying the price. We have been told—in fact, it has even been boasted by the Government—that there was no intention for it to turn out like this. The Chancellor told the other place in his first Budget in the halcyon days of 2010 that the economy would grow by 6%, but in fact the economy has grown by 1%.

The Government pledged to get the banks lending, but at this stage lending is still down, month by month. There has been no reform of the banking industry, and competition and lending to individuals and small and medium-sized enterprises has gone backwards. The Government made keeping the AAA credit rating the No. 1 test of their economic credibility. However, on its watch Britain has been downgraded not once but twice. The Government promised that living standards would rise, but they have fallen year on year. They said that they would balance the books, but the end to austerity is being pushed further and further into the future, way beyond the next general election, which of course was their original target date. This is all because of failure. What a legacy to leave. What a straitened inheritance for the next Labour Government to sort out—and we will sort it out, in a fairer way.

Plan A has failed. The need for this Statement today could not demonstrate that more clearly. However, where is the change of course? Where is the plan for growth and jobs that we—and, of course, the International Monetary Fund—called for? It does not have to be this way. Instead of planning cuts in 2015, two years ahead, surely the Government should be taking bold action now to boost growth this year and the next—investment that would get our economy going and bring in the tax revenue to get the deficit down. More revenue would mean that our police, Armed Forces and public services would not face cuts. Housebuilding is at the lowest level since the 1920s, so where do the Government plan to build 400,000 affordable homes this year and the next? There is no point in the Government boasting about infrastructure investment in five or seven years’ time when we need action now.

What a boast that is. The Green Book reveals that capital expenditure by departments will actually be cut. So much for the Prime Minister’s assurances at this morning’s Question Time that a great deal of progress is being made in this area. Year on year, real departmental capital budgets have been cut. Where do we see these figures? The book shows, in black and white, a 1.7% cut. If I am not believed, PricewaterhouseCoopers surely will be, because it said the same thing. There is a pattern here. Investment has fallen in real terms under this Government. It fell an astonishing 50% in the first three months of this year. Projects such as Labour’s successful Building Schools for the Future programme have been cancelled, and developments promised by the Government have never materialised. Just seven projects have been completed and 80% of projects have not even been started.

We need action now, not more empty promises for the years ahead. The Chancellor in his Statement insisted that we must plan for the long term, look to

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the future and secure a recovery for future generations. However, there is no substance to these statements. Where is the proper British investment bank that business clearly needs and wants? Where is the 2030 decarbonisation target to give energy companies the certainty they need to make their long-term investment for the future? Where is the backstop power to break up the banks, which the parliamentary commission called for? What happened to the plan of the noble Lord, Lord Heseltine, and its much-heralded £49 billion single-pot growth fund for the regions? A measly £2 billion is all that has been announced today.

Instead of action to boost growth and long-term investment, all we have today is more of the same failing plan and more of the same on social security and welfare spending. We have had plenty of tough talk and divisive rhetoric, but on the Chancellor’s watch the benefits bill is still rising. Social security spending is £21 billion higher than he planned. This is because the Government have failed to get growth going and to get people back into work—work that pays decent wages and does not discriminate, work that holds a compulsory job guarantee, paid for by a tax on bank bonuses. We hear the call for a cap on social security spending. Will the Minister enlighten the House with a few more details on this and how it will be administered? Why not get our housing benefit bill down by tackling high rents and the shortage of affordable homes? Why not stop the winter fuel allowance for the richest 5% of pensioners, while keeping the triple lock for basic state pensions? Why not make work pay with a 10% tax rate paid for by a mansion tax, instead of huge tax cuts for millionaires?

This Government are making the wrong choices on growth and social security spending—decisions that are unfair and do not reflect the sort of society we want to live in. The Government are also making the wrong choices on departmental spending. When thousands of front-line police officers are being cut, why are they spending more on police commissioners than on the old police authorities? Why have the Government wasted £3 billion on a reckless reorganisation of the NHS, when there is a crisis in our social care system that needs to be addressed, and which they are now somehow going to spatchcock by transferring resources? Why are they funding new free schools in areas with enough school places, while parents in other areas cannot get their children into a local school? Will this spending review mean fewer police officers in 2015-16, on top of the 15,000 we have lost in this Parliament? Will it mean fewer nurses on top of the 4,000 we have lost from the NHS? Will it mean fewer Sure Start children’s centres on top of the 500 that have already closed?

It is clear that the Government will continue to impose deeper cuts on local authorities in areas with the greatest need. It is the areas with the greatest need that continue to suffer the deepest cuts. People up and down the country need to know about this Government’s real intentions. The Government have comprehensively failed on living standards, on growth and on the deficit. That is why the Chancellor was before the House of Commons earlier today. We see prices rising

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faster than wages, families worse off, long-term unemployment up, welfare spending soaring, the economy flatlining and the slowest recovery for a century. The result of this failure is not balancing the books as promised, but in 2015 a deficit of £96 billion. That is why there is a need for more borrowing to pay for the coalition’s economic failure. That is why the Government have been forced to make this Statement and impose these cuts on our public services.

Two years ago, when the intake of breath was so severe at the cuts at that time, the Chancellor said that,

“we have already asked the British people for what is needed, and … we do not need to ask for more”.—[

Official Report

, Commons, 23/3/11; col. 951.]

—another broken promise.

3.48 pm

Lord Deighton: My Lords, I should like to put both the spending review and the comments of the noble Lord, Lord Davies, into context. He said a great deal about a failed economic strategy. We inherited one. Any of us who have worked with the management challenges of a significant budget would recognise that in 2010, when this Government came into power, spending was out of control. This spending round represents a continuing exercise in getting our public finances back into shape. This Government and the officials working in this area should absolutely be commended. They laid out a very clear plan in 2010 to deliver £80 billion of savings through to 2014-15. Sixty-five per cent of that—just over £50 billion—has already been delivered and the rest is on target. Therefore, the purpose of this spending round is to make a further £11.5 billion of savings, which have been thoughtfully and effectively made based on the criteria, as the noble Lord pointed out, of reform, growth and fairness. Within that £11.5 billion of savings, we have of course made some extremely tough choices. There are no easy choices in this current environment. We have protected the priorities that we promised and laid out at the election—those relating to health, schools and overseas aid.

The principles underlying how we have dealt with each department have revolved around making sure that the departments work and operate on a highly efficient basis with the right number of people, with the right degree of automation, with the right degree of procurement, and with commercial skills being brought to the purchasing decisions they make so that we can get our costs down and operate efficiently. That is true right across the departments and it is where those savings have come from.

I shall give an example of reform. Probably the most significant reform laid out in this programme is that we are establishing a new £3.8 billion health and social care pot to be shared between the National Health Service and local authorities to make sure that the services between hospital and the home are much better delivered and so that we can take care of people who need that help. We do not want the situation where somebody is delivered into a hospital bed on a Friday night because there is nowhere else for them to go and they are sent home again on a Monday because we cannot take care of them over the weekend. That is

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the kind of service reform that we have been talking about, and that has been the basis on which this £11.5 billion saving has been made.

Where does that take us? It will mean that by 2015-16 we will be well down the path of taking public expenditure as a proportion of total expenditure back to a sensible level. It should be back to just over 43% from the 30-year high of 47% or 48% in 2009. By the end of our consolidation in 2017-18, it will be back to 40%. That is the repair that this Government have had to undertake because of the spending profligacy that took place under the previous regime.

The deficit has fallen by a third as a percentage of GDP and is set to continue falling to below the pre-crisis level by the end of this Parliament. Most interestingly, the biggest saving that we have made is on our debt interest costs because we have got borrowing under control. Those costs are £9 billion lower than was forecast in the Budget of 2011. For me, that is probably the most telling statistic. Of course, we introduced savings on welfare bills through the Autumn Statement decisions.

We have talked about the situation with respect to capital spend and perhaps I may exchange some statistics. Effectively, through each of the fiscal events, the Government have saved money on current spending and invested it in capital spending. That is how we have chosen to do it; we are not doing it by increasing borrowing, and that is absolutely the right strategy to pursue. The sum involved is £10 billion over this Parliament. Public investment will be higher on average over 2010-11 to 2014-15 than it was under the previous Government. We are investing more in roads than at any point under the previous Government—and that is now. We are building more school places than at any time under the previous Government, and next year we will be building more affordable houses than at any point in the past 20 years.

There will be much more detail about this tomorrow, when the Chief Secretary comes out with details on the capital plan. Accompanying that will be a document called Investing in Britain’s Future, which will lay out how we will spend £100 billion on infrastructure investment over the next Parliament. We all want it to happen quicker. I am here today because the Chancellor and the Prime Minister wanted some help in making it happen quicker. We have an urgent and focused plan to deliver on that, and the Chief Secretary will lay it out in detail tomorrow.

In summary, we currently have the largest investment in railways since the Victorian age. Crossrail, which is being dug at the moment, is the largest urban infrastructure project in Europe. In this spending round, we are funding the case for Crossrail 2, which would link London from north to south. We have given the mayor almost £9 billion of capital spending. We have completed Kings Cross station. We are funding science at higher levels than ever before, with a long-term commitment. We are developing our intellectual as well as our physical infrastructure.

The noble Lord talked a little about where we were in delivering on the Government’s infrastructure programme. He said about 20% of it was under way.

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By next year, half will be under way. That is the whole point of a pipeline. The Government can really add value by getting through the difficult early stages of choosing the project, finding the funding and dealing with planning and environmental considerations. We are focused where we should be—dealing with ideas and getting them through to the “shovel in the ground” stage. That is really the hard bit in any project. It is right that the projects we are focused on are the ones that have not started yet. Our record in this country, once we start, for delivering things on time and on budget—I have been part of some of it—is extremely good.

3.56 pm

Lord Forsyth of Drumlean: My Lords, can my noble friend confirm that at the end of the previous Government’s period of office the national debt had doubled, and that on the figures presented today the national debt will have doubled again by the time of the election? Can he explain what the effects would be of a rise in interest rates of, say, 1% on the repayments which the Government will have to make on their borrowings and on the value of the government gilts held by the Bank of England? How will that hole be dealt with? He mentioned that interest rates have been held down, but we are already seeing rates beginning to rise, so what contingency plans are in place? Should we not be very much more concerned about the future of the economy, given that the outgoing Governor of the Bank of England has today warned our youngsters about the possible impact on mortgages and on the balance sheets of the bank themselves? Where is the contingency planning for that eventuality in the Government’s Statement today?

Lord Deighton: I thank my noble friend for raising, as he has done on many occasions before, everyone’s awareness of the fact that when we discuss the deficit we are talking about the annual addition to our stock of borrowing. Until that deficit turns into a surplus we will not reduce our stock of borrowing, and the increased stock of borrowing leaves us with a significant exposure. My noble friend Lord Newby informs me that a 1% increase in interest rates will have an economic effect of approximately £4 billion, but we will review that number.

The way to provide for the contingency to be able to cope with any additional expenditure, whether it is interest, overseas issues or events that crop up, is to continue to drive down our deficit to give us as much flexibility as possible to handle whatever events face us in the future.

Lord Wigley: My Lords, can the Minister address the question of fairness with regard to the devolved Administrations? Under the title of fairness, the Green Paper refers to the Barnett formula going on until the end of 2016 at least. Surely, as a committee reported to this House—the noble Lord, Lord Barnett, himself has been involved in this—whatever the situation is with regard to Scotland and Northern Ireland, the Barnett formula is patently unfair to Wales and is

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underfunding the Welsh Assembly for essential services. When are the Government going to get to grips with this?

Lord Deighton: We do not have any proposals to adjust the Barnett formula in this Parliament. As I understand it, the Welsh resource budget will be approximately £13.6 billion, and we will publish our response shortly to the Silk commission on the further devolution of taxation and borrowing.

Lord Myners: My Lords, the Minister has said a number of things that I think are significantly challengeable. First, his maths in response to the noble Lord, Lord Forsyth, are clearly substantially deficient and lead one to ask how much a Treasury Minister really knows about the state of government finances.

Secondly, the Minister said that debt as a percentage of GDP will be below pre-crisis levels by the end of this Parliament. I would like to see the evidence on which the Minister makes that statement. Clearly, it is not consistent with the OBR’s forecast.

My question, however, is about the relationship between monetary policy and fiscal policy. The Government have consistently talked about an accommodative monetary policy linked to a tighter fiscal policy. They now own £325 billion of their own debt through the QE programme. Why do they not simply cancel the debt that they have bought for fair value in the markets from banks and pension funds with the proceeds that they have in the QE portfolio on the asset purchase scheme?

Why do the Government not recognise that they can manage a pretty low inflation risk through using sterilisation techniques in the money markets and adjusting reserve ratios, and acknowledge that, despite QE, monetary growth is not increasing and inflation risk is low? That would be a simple answer that would at a stroke reduce debt as a percentage of GDP by 30%.

Lord Deighton: The question of how we unwind QE is a matter for the Monetary Policy Committee. It is not for me to give advice here.

Baroness Kramer: My Lords, when it comes to not understanding, I have to say that from the conversations that I have had in the media today with members of the Labour Party and listening to today’s speech, I am unclear whether they want different cuts or more borrowing, but it seems to be one response or the other to this particular spending round. I am very pleased with many aspects of this spending round, particularly the emphasis now on future growth.

Will the Minister confirm that the decision to put more money into schools, thereby protecting the schools budget as well as being a real-terms increase in the pupil premium, is because they have proven to be successful and effective programmes? On the infrastructure area, which is his area of specialty, will he assure me that although there is the Heseltine pot for local areas, the big national infrastructure expenditures will be

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co-ordinated with local activity so that we can maximise the opportunities that spin off from this very substantial increase in infrastructure?

Lord Deighton: I thank my noble friend for her observations about the education programme being a prime example of investing in the success of an effective programme. That is absolutely right. On the local pot and infrastructure spend, it is absolutely our intention to make sure that there is a strong relationship between the regional plans—ultimately, all infrastructure operates at a local level—and that we co-ordinate those at a national level to ensure that we get the maximum leverage from the money that we are spending at both ends.

Lord Martin of Springburn: My Lords, I noted when I listened to the Chancellor that he made a commitment to apprentice training. My thoughts go back to the 1980s when there were many closures, particularly in engineering. No one was taking on apprentices. Within 10 years, employers were calling out for trained journeymen. There were complaints sometimes that skilled labour had to come from abroad. I am on my feet today to say that I hope that the Chancellor and the Government keep their promise to take on apprentices. Not only does that help the apprentices, but it gives a great source of pride to the family when a young person is taken on for skilled work.

Lord Deighton: I thank the noble Lord for raising this important issue. It is the Government’s intention to implement the recommendations of the Richard review, which will see through the apprentice programme. It sits very neatly alongside the success that we have seen over the past four years, with the private sector picking up and generating employment to compensate for the small number of losses in the public sector. A strong apprentice programme sits very nicely with that.

Lord Morris of Aberavon: My Lords, will the Minister comment on whether the Government have fulfilled all their statutory obligations, in particular the Public Bodies Act 2011, in their spending review decisions?

Lord Deighton: My Lords, I am working on the assumption that we have fulfilled those, but I am sure somebody will tell me very quickly if we have not. It is not a stipulation I am familiar with.

Lord Higgins: My Lords, when the coalition was formed, I stressed that it would be far more difficult to reduce the deficit than was generally supposed. Having been involved in spending cuts in previous Governments, I would certainly not underestimate the task facing the Chancellor. None the less, there is a danger that we are underestimating what still needs to be done. The Government keep repeating the mantra, “Oh well, we have reduced the deficit by a third”. Actually, this means that we are borrowing more at two-thirds of the rate that we inherited from the previous Government.

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We are still living way beyond our means, in part because we are paying for Gordon Brown’s proposals, for which there was no money then and for which no money is available now, except by borrowing. Does my noble friend agree that we really have to press on with much more determination in tackling this whole issue and that it would be wrong to say that we are all right just because we reduced the deficit by a certain amount?

Lord Deighton: I agree with my noble friend that managing the public finances responsibly will be a continuing exercise of considerable discipline. On managing current spending, we have introduced the welfare cap on the overall budget as well as the cap on specific benefits that we saw in the previous Budget. Departmental budgets are being managed with discipline. There has also been a real focus on switching from current expenditure to capital expenditure, which should support the enhancement of the productive capacity of the economy and thus help us with tax revenues. Those components should continue to be an urgent and aggressive focus of the Government’s fiscal management.

Lord Christopher: Page 5 of the Printed Paper Office version of the speech says:

“We will end automatic progression pay in the Civil Service by 2015-16”.

That is a very serious breach of faith. Quite apart from anything else, how are the Government going to do it?

Lord Deighton: We are going to do it simply by implementing it in 2015-16. As I understand it, many of the structural changes to Civil Service pay have already been made in many departments. This is just equalising the system right across the service.

Lord Barnett: My Lords, I start by acknowledging the very difficult economic situation that every Government are going to face. People are living longer and I am the last person in the world to complain about that.

Given that every forecast made by the Chancellor since 2010 has had to be adjusted, how do we know that we need exactly £11.5 billion of cuts in 2015? What was his economic forecast for that year? We now know that no economic forecast by anybody can be expected to be accurate, even if it is based on next year. Perhaps the Minister will tell us why we should assume, when every forecast that the Chancellor has previously made has been wrong, that a forecast based the economy in two years’ time will do precisely what he said. In one line, he says:

“We commit now to £50 billion of capital investment in 2015”.

That is rather a lot of money for one year. How long a period is that planned to be spent over? The cuts are going to take place after 2015. When will that £50 billion of capital expenditure be spent: this year, next year or only after 2015? We all know that we need it now. Why is he delaying it?

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Lord Deighton: I absolutely share the noble Lord’s experience that economic forecasting is a hazardous art form. However, if done thoughtfully, it gives us the basis for creating a long-term plan against which we can make the best decisions possible, given the information we have. One of the things that I have been working on with the Chancellor is to take a longer-term perspective, particularly of our capital budget, and to have that budget as a foundation for our long-term fiscal management rather than being the bit that gets added on at the end. That is what results in the stop-go approach to investment which has plagued us for many years. For me, what it rather reflects is a shift in priorities to deal with the things for which you need to create a longer-term planning horizon, so that we can get the investment side of what we are doing sorted out over the right kind of horizon.

Lord Stoddart of Swindon: My Lords, to get back to a point raised by the noble Lord, Lord Forsyth, about quantitative easing, or the printing of money, there is of course the fact that the Government have saved £9 billion because of low interest charges. Those savings have been made at the expense of interest rates on savings, particularly those on pensions. Pensioners have been very badly hit because their expectations, and indeed their pensions, have been lowered for the future. Is it not a shame that some of the most vulnerable people in our society, such as the pensioners, have been made very much poorer in order to finance government spending, which is still far too high?

Lord Deighton: I of course accept that one of the consequences of lower interest rates is lower returns to savers. That absolutely follows on and it is a consequence in part of our current monetary policy, and indeed the monetary policy of every major nation. One compensating comment I would make is that of all the constituencies which this Government have striven to protect, looking at the triple-lock protection on pensions the basic state pension has clearly been kept in very good shape during this period of economic challenge.

Lord Marlesford: My Lords, the Chancellor said:

“EU law now says that people living in the European economic area can claim winter fuel payments from us, even if they did not get them before they left the UK”.

When on earth did that start and what are the Government doing to persuade the Europeans to change it? When the Chancellor suggests that he will deal with it by linking,

“the winter fuel payment to a temperature test”,

from 2015, what will that save? If it is worth doing it in 2015, why should he not do it in 2014, if not autumn 2013?

Lord Deighton: I thank my noble friend for pointing out this unfortunate anomaly in European legislation, which puts us in that position. The Chancellor’s position is that he has dealt with that anomaly in the best possible practical way to reduce that payment, given the timing of its introduction and the form of the obligation we have on us.

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Lord Brooke of Alverthorpe: My Lords, the Chancellor said in his Statement:

“The first line of national defence is sound public finances”.

Following the theme of the noble Lord, Lord Higgins, why can the Chancellor then go on to boast that we have one of the largest defence budgets in the world? Here, I do not speak on behalf of my party but as an individual member of the community in this country. However, I suspect that I represent a fair point of view when we hear about the possible incursions into Syria and read of the Prime Minister saying that he is not prepared to see a reduction in Britain’s military capabilities. If we are to take truly tough decisions, is it not time that we really faced up to our position in the world—what we can do, what we cannot do and what we can afford?

Lord Deighton: That is a very broad question. In terms of the spending review, over time we have already taken some very difficult decisions with the Ministry of Defence. The focus of this particular spending round was to ensure that we put in place some economies in the support areas, but kept our front-line capability and made absolutely sure we had an equipment budget that could support our troops and the work that they were called on to do. That was the policy decision behind which the spending decisions fell into line.

Lord Cormack: My Lords, what is there in the Statement to boost our very important tourism industry? Cultural and heritage attractions, the things that tourists come to our country to enjoy, are going to suffer. What are we doing to boost tourism?

Lord Deighton: If noble Lords look across the contributions to the spending reduction, it is evident that the Department for Culture, Media and Sport, which oversees tourism, had one of the milder settlements, with cuts of something like 7%. In addition, museums in particular have been given some flexibilities in how they manage their finances and organise themselves, in order to help them cope with any changes in their grants. That is the sum total of specific points with respect to tourism.

The Economic Implications for the United Kingdom of Scottish Independence

The Economic Implications for the United Kingdom of Scottish Independence

Motion to Take Note

4.17 pm

Moved by Lord MacGregor of Pulham Market

That this House takes note of the Report of the Economic Affairs Committee on The Economic Implications for the United Kingdom of Scottish Independence (2nd Report, Session 2012–13, HL Paper 152).

Lord MacGregor of Pulham Market: My Lords, we launched our inquiry in February 2012, when it seemed likely that there would be a referendum on independence in Scotland in autumn 2014. Since then this has, of course, been confirmed. We did so because we were concerned that, on what was widely recognised as an

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issue of momentous consequences not only for the people of Scotland but for the rest of the UK, it was vital that such a vote should be based not only on sentiment and patriotic fervour but on a full understanding of all the implications. At that time, these consequences had simply not been fully analysed, let alone widely exposed to public debate. We did not make the case for or against independence. We did not go into the constitutional or legal issues on the referendum process. We focused entirely on the economic implications, primarily for Scotland, but which are just as important for the rest of the UK as well.

The need for a properly informed debate before the referendum seemed to us to be all the greater as it became clear that if there were a yes vote for independence, it would probably take years to separate the Scottish economy from the rest of the UK and for it to negotiate entry into the EU as a new state. This would cause great economic uncertainty and possibly damage to Scottish businesses in the mean time. In our view, all the key issues and consequences needed to be fully explored beforehand, and not left to negotiations afterwards.

We heard from 44 witnesses in all, including British and Scottish Ministers, academics, trade unions and local authorities, with a wide range of opinions on business, finance and politics. We heard evidence in Glasgow and Edinburgh, a first for the committee. One disappointment was that some Scottish companies from which we would have liked to have taken evidence declined to do so. One witness described there being a possible “climate of fear”, with witnesses having fears about the impact on their business of speaking out. Another disappointment was the First Minister’s declining to give evidence himself before the Committee, much as we pressed him to do so.

I would like to stress yet again that our report is based on the evidence that we received. I thank all our witnesses, and on behalf of the committee express especially warm thanks to our specialist adviser, Dr Angus Armstrong of the National Institute of Economic and Social Research, for his most helpful contribution to our deliberations. As always I thank Bill Sinton, clerk to the committee, and his staff, for the huge amount of work they undertook. I am also most grateful to all my colleagues, who gave a great deal of their time to this inquiry and contributed greatly to the lengthy discussion that we had on the final report.

As our inquiry progressed, it helped to shine increasing light on the economic implications of a yes vote and what they might entail. As we reached the drafting stage of our report, the British and Scottish Governments have each started to publish their own analyses of the various economic implications, which we warmly welcome. Much more needs to be done, however, if the Scottish voters are to make a fully informed choice in October 2014, and the wider British public—and I do mean the wider British public—are to understand the implications for them. As the UK Government say in their response to our report:

“It is crucial that the referendum debate is properly informed”.

I turn to some of the main issues and, given the time available, can only highlight the key ones. Some are already much clearer than when we embarked on

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our report. For example, it became apparent during our inquiry, not least because of the exchanges that we had with the President of EU Commission, President Barroso, and then of the UK Government’s own analysis, that in the event of a yes vote Scotland would become an entirely new state and that the continuing UK would retain the rights and obligations of the UK as it currently stands. This is important particularly in the context of the EU, but, for Scotland, it would also apply to many other international bodies and treaties. Indeed, it was during our visit to Scotland that the Scottish Government’s claim to have legal advice to the contrary was blown apart.

Given the complexities in particular of negotiations with the EU and the need for unanimity of all member states in the EU in accepting a new member, it must be extremely unlikely that these negotiations would be completed by the spring of 2016, as some hope, and there is no certainty of outcome. Meanwhile, there would among other things be great uncertainty for Scottish companies operating internationally, for inward investment to Scotland and for other sectors of the Scottish economy.

One particular impact is on international trade. Most of our business witnesses spoke of the importance of being within the EU. One particular advantage was stressed by some chief executives of Scottish-based international companies, who spoke of the benefits of international trading deals done by the EU for their companies. The significance of this is underlined by the launch of the negotiations for an EU-US trade agreement at the recent G8 summit.

I turn next to currency choices. Our analysis is very similar to that of the UK Government. After some toing and froing, the Scottish Government seem to have settled for continuing to use sterling in a sterling currency union. The UK Government state in their Scotland Analysis document:

“A formal … currency union is very different to the current arrangements and would be a profound economic change for both states … the economic rationale for the UK to agree to enter a formal sterling union with a separate state is not clear”.

We in our report are even more specific, as we state:

“A monetary union as advocated by the Scottish Government would require robust and credible limits on borrowing and indebtedness by both member states. So far the Eurozone has found this problem intractable”—

a point acknowledged also by the UK Government in their document. We continue:

“We believe that it would be difficult for any such agreements to be made binding in all circumstances”.

On Bank of England and monetary policy, again our report and the Government’s analysis are similar. The Government’s conclusion is that,

“the economic rationale for the UK to agree to enter a formal sterling union with a separate state is not clear”,

and that it is likely that economic and fiscal plans of a separate Scottish state would be subject to rigorous oversight by continuing UK authorities. We agree with that but are rather more direct. We do not see how the UK Government could extend central banking services to an independent Scotland, since the UK Government would lack control over its tax and spending policies. Crucially, we argued that this, along with the continued use of sterling by an independent Scotland in monetary

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union with the rest of the UK, could only come about, if at all, on terms agreed by the UK Government and that—a point to which I will return—arrangements should be clear before the referendum. We add that,

“the proposal for the Scottish Government to exert some influence over the Bank of England, let alone the rest of the UK exchequer, is devoid of precedent and entirely fanciful”.

I note that in his letter to me, the Chief Secretary to the Treasury quotes the Chancellor of the Exchequer as saying that,

“it is highly unlikely that the rest of the UK would agree to enter into a formal sterling currency union with an independent Scotland”.

We entirely agree with that and believe that it should be confirmed before the referendum.

I turn now to the other paper that the UK Government have so far produced, published last month, on financial services and banking. Time prevents me from going into detail—others may wish to do so—but, again, we are in broad agreement. We agree on the significance of Scotland’s financial sector to its economy and the fact that 90% of its customers are located in the rest of the UK; on the need for a separate Scottish financial regulator for an independent Scotland, adding to compliance costs and complexity for Scottish financial institutions; and on the fact that the assets of the whole UK banking sector, including Scotland’s banks, are around 492% of total UK GDP whereas, by contrast, Scottish banks would have assets totalling around 1,254% of an independent Scotland’s GDP, with all the implications for financial shocks such as we have experienced in recent years.

All of these are key considerations for the Scottish electorate. As the Chief Secretary points out, that proportion of GDP is massively greater than was the case with Iceland, Ireland and Cyprus. The problems that would face Scottish banks, savers and depositors in the event of a financial crisis in an independent Scotland could be immense and need to be thought through in advance. We await government papers on assets and liabilities in defence, all of which are substantially covered in our report.

On North Sea oil and gas, there is a broad equivalence between Scotland’s gain on North Sea oil revenues and what it would lose from abolition of the Barnett formula. I notice that the noble Lord, Lord Barnett, is in his place, and this is interesting for many of us in your Lordships’ House who have been arguing, one way or another, that the Barnett formula needs to be resolved in the near future. An independent Scotland, curiously, would resolve the question, although we would still have to worry about it if the independence vote did not say yes. However, that is not an answer to the Scottish issues. One of our witnesses, Professor McCrone, said that, on the expected geographical division, which we in our committee accept, about 90% of revenues would accrue to an independent Scotland. On the other hand, there is substantial volatility in oil prices, uncertainty over future oil revenues and the need to deal with substantial North Sea oil decommissioning costs. It is no long-term panacea.

Division of assets and liabilities will be complex, including for PFI and public sector pensions. Indeed, the subject of pensions as a whole needs detailed consideration, including the need for a Scottish pension

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regulator for private sector pensions, a pension protection fund and a separate financial services compensation scheme for Scottish financial institutions. An independent Scotland will need to handle the difficult questions of the ensuing public sector debate as a consequence of looking at the division of assets and liabilities, with volatile tax revenue, the loss of risk-sharing with the rest of the UK and no record of issuing debt to global lenders. Those are all issues that the Scottish Government will need to spell out for the comfort of the Scottish electorate before the referendum.

I turn next to defence, which is an absolutely key issue, particularly for the rest of the UK. We were disappointed that Defence Ministers refused to give evidence to us and we had to rely on others. We are particularly grateful to the noble Lord, Lord West, who gave some very compelling evidence to our committee. The UK Government’s position is that it is for the Scottish Government to set out for the Scottish people how the defence of an independent Scotland would be arranged and, for the rest of the UK, the UK Government cannot prenegotiate the deals of independence ahead of the referendum. We certainly recognise the security aspects and are clear that any post-referendum negotiation would be huge, lengthy and complex on defence issues. We are also clear that the defence implications, not least cost, are immense for the rest of the UK, and we hope that substantial contingency planning is already under way in the Ministry of Defence. Others may wish to comment on defence in greater detail today. I certainly welcome the fact that the Government are planning a detailed paper on shared defence and security services, and I hope that it will cover the issues that we have raised, on which we have so far not had a proper government response.

This leads me to my final point. There is general agreement that this will be a momentous decision for the people of Scotland, but it is not so well recognised that this will also be a momentous decision for the rest of the UK. There are huge implications for the rest of the UK—over 90% of those affected.

Lord Steel of Aikwood: This excellent report is full of questions, some of which are directed to the UK Government—but mainly they are directed to the Scottish Government. As they have known for two years that they will have a referendum, does not the noble Lord find it extraordinary that these questions have not yet been approached?

Lord MacGregor of Pulham Market: I cannot speak for my committee as a whole—although I suspect I am doing so—but that exact point occurred to us as we went through all the evidence. Many of the responses that we were getting, or not getting, did not deal with the points that I am raising now. I put my emphasis on the UK Government’s position today because we are in the UK Government’s Parliament, but I hope that many of the issues that we have raised—and, incidentally, that have been raised by Scottish business and some Scottish local authorities, such as the Glasgow City Council—will get a better answer than we have had so far.

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As I was saying, we have spelt out many of the consequences of Scottish independence in our report. On defence in particular, there are potentially huge cost implications. Also included are such major issues as the division of assets and liabilities, negotiations on sterling and monetary policy, and so on. That is all very well. On the other hand, so much hinges on the subsequent negotiations. It is not enough, it seems to us, to leave it to those advocating independence to make the case, as the Chief Secretary to the Treasury has argued. He argued the case on our questions on the need to have the negotiations clarified as follows:

“The UK Government believes that people in Scotland will vote to remain part of the United Kingdom and therefore is not making plans for Scottish separation from the UK. This is not complacency but rather based on a strong belief that the UK works, and works well. Scotland contributes to, and benefits from being part of the UK”.

He goes on to say:

“It is for those advocating independence to set out a clear and well evidenced case to people in Scotland about what the implications of leaving the UK would mean for them—including some of the unavoidable choices that will have to be made”.

We do not think that that is a sufficient response because, in fact, the implications for the rest of the UK are very substantial as well. That is why we have argued the particular point that I stress now. We have argued in our report that:

“Scotland needs and deserves a fully informed debate, based on fact and free from rancour, well before the referendum vote”.

It continues with the following key point:

“To help bring it about the Scottish and British Governments should be more open about how they see the outcome of negotiations after a ‘Yes’ vote; each should indicate the ‘red lines’ of its negotiating stance on such crucial issues as currency, defence, division of assets and debts and negotiations with the EU before the referendum so that voters can make an informed choice”.

I regard this as a critical point. The debate is becoming much clearer and better informed, particularly since we took evidence and completed our report. The UK Government have produced very helpful and detailed analyses of some key issues and we look forward to more. However, there is still this issue about not discussing the negotiations in advance of the referendum. One argument has been that that should wait until after the negotiations, but one problem is that could make it very easy for many of the people intending to vote in the referendum to vote “yes”, on the assumption that all the negotiations would take place afterwards and that there would then be a second vote afterwards, once they were completed. That is not satisfactory and it is not the way it should operate. That is why we have urged—

Lord Forsyth of Drumlean: I am most grateful to my noble friend. Does he not think that the Government are facing two ways on these issues of referenda? On the one hand, on Scotland they say that we should have the referendum and then look at the detail afterwards, whereas on Europe the argument is that we must have the negotiations first so people know what they are voting for.

Lord MacGregor of Pulham Market: Well, yes. That is exactly why we must be much clearer about the negotiations before the vote takes place. I have explained the UK Government’s position on this and we do not think that that is sufficient. That is why we made the

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recommendation for the red lines to be clearly established beforehand so that no one is in any doubt as to where both Governments, but particularly the UK Government, would stand firm on some key issues.

To conclude, since we took evidence and completed our report, the UK Government have produced very helpful and detailed analyses of some key issues and we look forward to more. But it is critical that they also address this issue of the red lines and they should undertake to do so well before the referendum. That is the upshot of our report. There is some very helpful analysis in it and it will continue to stand the test of time as we get towards the end of the negotiations. It is on the point of the red lines, which the Government in their response to our report have so far sidestepped, that I would particularly welcome the views of the noble and learned Lord on the Front Bench in the wind-up. I commend the report to the House.

Lord Kerr of Kinlochard: Had I managed to ask the noble Lord before he sat down, I would have asked—

Lord Gardiner of Kimble: The noble Lord may ask him at the end.

4.38 pm

Lord McFall of Alcluith: My Lords, it is a pleasure to follow the noble Lord, Lord MacGregor, in this debate. I am open to intervention if need be on that issue. I thank him for his chairmanship. Allied to the question asked by the noble Lord, Lord Steel, the committee deliberately visited both Edinburgh and Glasgow, and spoke to the leaders of every party, including the former Chancellor, to the leader of Glasgow City Council and to business people. The only person missing was the First Minister. He would not come along to engage in the debate. That was an omission from the Scottish Government on this very important issue.

The debate in Scotland will centre around two themes: identity and economics. On the issue of identity, there is an assumption that if one feels intensely Scottish one will vote for independence. The paradox is that the debate in Scotland will not be about how Scottish one feels but how British the people of Scotland still regard themselves. That is according to the Scottish Social Attitudes survey. So it is about the degree to which people in Scotland still share some sense of fellow-feeling with those living elsewhere in the United Kingdom. That will be central to the choice that is made. It is important that we highlight that in the debate in this Chamber today. It will come down to whether Scots feel that they can assert their Scottishness by parting with the unionist part of their soul.

Michael Ignatieff, the UK journalist and leader of the Liberal Party in Canada, has a number of cautionary words for us in that area, because he took part in a referendum in Quebec. He said:

“We learnt the strongest argument for leaving countries as they are turns out to be that most people don’t want to choose between different parts of their identity”.

He added that post-referendum in Canada,

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“Canadians were able to joke that what Quebeckers really wanted was an independent Quebec inside a united Canada. I suspect a majority of Scots want something similar”.

I was interested to see the Early Day Motion put down in the House of Commons on Dundee’s bid to become the UK City of Culture in 2017. It stated:

“That this House welcomes the decision of Dundee City Council to bid to become UK City of Culture in 2017… and wishes the city of Dundee every success in its bid to become UK City of Culture in 2017”.

It was signed by two prominent SNP Members of the House of Commons. Maybe there was an element of identity confusion there, along with the rest of the Scots.

The conclusion on identity is that both sides need to engage. If this is about a sense of Britishness, we cannot stand back; there has to be full engagement. The letter to which the noble Lord referred was from the Chief Secretary to the Treasury on 10 June. I commend every noble Lord to read paragraph 9 of that letter, because more pressure needs to be put on the British Government. Otherwise they will seem to be complacent, since the evidence shows that we must demonstrate that sense of Britishness.

What has characterised the debate in Scotland and elsewhere to date is the lack of good information. That is why it was wise of the Economic Affairs Committee, under the chairmanship of the noble Lord, Lord MacGregor, to start this debate. At the beginning, there was a sparsity of information, indeed a reluctance to talk, on the part of business. Rupert Soames, the chief executive of Aggreko, which was based in my former constituency and started life as a very small company—a two-man business—and is now a FTSE 100 company, built his new headquarters in Dumbarton. It was the last thing he did before I stood down from the House of Commons. He told the committee that if business opens its mouth, “bile and ire” rains down on people, the language is intemperate and business people feel that there are better things to do than be hauled over the coals.

The situation is now changing, and one thing that we have to remember is that the tone of the debate will matter greatly. Michael Ignatieff said that the referendum in Quebec produced fracture and division. We want to minimise that, because we have to live with each other after this referendum. That tone is still very important, but the uncertainty remains and I am glad to see that the CBI, the Scottish Council for Development and Industry and universities have been participating in this debate in asking the question.

Along with lots of others, I have no doubt that if Scotland decides to become a politically independent nation, it can do that, but the crucial question is how much economic independence Scotland will achieve. Jim Sillars, a former leader of the SNP, says, “Not very much”. That is why he rejects the proposals by the present SNP Government. Professor Gavin McCrone, a most esteemed economist for the Scottish Government over the years, has said that currency choice is the most important economic decision that Scotland will make.

Over the past 25 years, the Scottish National Party has adopted the stance of supporting an independent Scottish pound, then the euro and now the pound

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sterling, but the First Minister is on record as saying that the pound is a millstone around the Scottish neck. That is a most inauspicious start to a monetary union between Scotland and the rest of the United Kingdom. If we go ahead with this, it will raise the most complex problems of cross-border monetary policy, taxpayer exposure and multiple financial regulators. We have only to remember the crisis in the financial services in Scotland in 2009, when both our major banks, RBS and the Bank of Scotland, were bailed out to the tune of 211% of the GDP of Scotland. That is the extent of the issue if problems arise as a result.

Any monetary union can come about only on terms agreed by the UK Government. The question then will be: who will provide the lender of last resort facilities to an independent country if there is little control over the tax and spending risk to which the larger entity is exposed? The committee put it in very straight language—language with which I agreed—when we said that,

“the proposal for the Scottish Government to exert some influence over the Bank of England, let alone the rest of the UK exchequer, is devoid of precedent and entirely fanciful”.

We have to go back to square one in how we approach monetary union. It is for the Scottish Government to come up with proposals, vague as they are at the moment.

Another area that affects us is the issue of the single market in both domestic and European terms. If the integrity of the domestic single market has to be maintained, a lot of thought must go into the relationship between manufacturing and the financial sector on both sides of the border. I mentioned Aggreko. The chairman of Aggreko said that for his FTSE 100 company, it would impose a permanent layer of additional complexity, with headquarters and manufacturing in Scotland and listing elsewhere. We received a lot of evidence from the financial services community, particularly in Edinburgh, on that point, because 96% of its financial products are sold elsewhere in the United Kingdom, with 4% being sold in Scotland.

The issue of the single market in Europe will also matter. I know that the noble Lord, Lord Kerr, has written extensively on the subject and made very wise comments on it. We have to assume that there will be a smooth entry, but there are big question marks over whether there will be. That smooth entry might provide some reassurance, but it will not provide much if the EU imposes tougher membership conditions relative to those of the rest of the United Kingdom in, say, financial regulation and employment law. The question that that sparks is: will that weaken Scottish competitiveness with the rest of the United Kingdom?

One could say that that being the case, the Scottish Government might soft-pedal the negotiations on EU entry to delay such problems, but that would be a mistake. It would also be a mistake for the British Government not to come out with further information, as we have required. Professor John Kay, in giving evidence, said that post the referendum, that will entail years of complex negotiations. We must face up to that. We should not minimise the complexity of the negotiations but start to understand what the issues and problems are.

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Is there a climate of fear and uncertainty in Scotland today? Yes, there is an element of that. That was articulated by the leader of Glasgow City Council. It is for us to reduce that climate of fear and uncertainty and speak to one another in a civilised tone in this debate.

Lord Kerr of Kinlochard: I thank the noble Lord warmly for his reference to me. On the EU angle, does he agree that if an independent Scotland applies for membership of the European Union, the one thing that it cannot possibly obtain as an applicant from outside is a rebate on its budget contribution? Does he agree that if/when an independent Scotland becomes a full member of the European Union, all Scots will pay more into the budget than all English people?

Lord McFall of Alcluith: Absolutely. Mention has been made of the letter that President Barroso sent to the committee on 10 December 2012. I will quote two parts of that. First:

“If part of the territory of a Member State would cease to be part of that state because it were to become a new independent state, the Treaties would no longer apply to that territory”.

This means a renegotiation of all these treaties. The letter continued:

“In other words, a new independent state would, by the fact of its independence, become a third country with respect to the EU and the Treaties would no longer apply on its territory”.

The notion of a rebate, on that point, is really out the window.

Secondly, speaking of Article 49, President Barroso went on to say:

“If the application is accepted by the Council acting unanimously, an agreement is then negotiated between the applicant state”.

I ask noble Lords whether we will have unanimity on a rebate for an independent Scotland. That notion not only vanishes; it is non-existent. I agree with the noble Lord on that.

In my peroration I said that one of the chief executives said of the debate that nothing dispels a climate of fear and uncertainty better than the sunshine of information. I thank the noble Lord, Lord MacGregor, for providing that ray of sunshine in this debate on the economic implications of Scottish independence.

4.51 pm

Lord Maclennan of Rogart: My Lords, I should like to thank the Economic Affairs Select Committee for having produced a report that raises many questions that need to be answered, some by the Scottish Government and some by the United Kingdom Government. However, some are not entirely answerable because they depend for their answers on global issues that are not necessarily predictable.

There seems to be an optimistic assumption in certain quarters of Scotland that North Sea oil will provide a base for macroeconomic management of the economy. That seems to me wishful thinking of a kind to which we should not give any sustenance. The global price of oil could fluctuate considerably. As the noble Lord, Lord McFall, remarked, the costs of decommissioning will also have to be borne in mind. It is not entirely clear how much oil there is.

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There are many other uncertainties that need to be addressed. An overarching one must be the relationship between Scotland, if it becomes independent, and the European Union. The United Kingdom cannot resolve that of itself. It seems quite likely that, this being the first time that a member country has split up since the European Union was formed, there must be a certain amount of fear on the part of other countries, such as Spain, that we could be paving the way to a disintegration of the Union.

Other issues that raise problems that cannot be foreseen, although their outcome can be discussed, are the effect of independence on the financial services industry, which is of such importance to Scotland. Some 7% of employment in Scotland depends on those services. I cannot comfortably predict that companies such as Standard Life would necessarily remain in Scotland if Scotland were controlling the domestic economy when Standard Life’s services would mostly be provided outside Scotland.

That raises another issue that has been addressed by the committee, which is the attitude to currency. We have heard, even from those who are not necessarily favourably disposed towards the European Union, that the eurozone needs to have greater regulatory authority, fiscal uniformity and acceptance of centralisation of the management of the economy. That has some lessons for those who are thinking in terms of a separation of Scotland from the United Kingdom. I do not see how the First Minister can proclaim his desire to be part of the United Kingdom currency and have some kind of currency union without accepting that we will have to have monetary policy controlled by the Bank of England. The report raises the question of whether the Bank of England could readily accept that role or a regulatory role if it does not have control over the direction of the economy and taxation. Frankly, these questions are not answerable in terms of the prediction of policy, but they are important issues that ought to be discussed by those who are considering what the future might bring.

It is disturbing that yesterday, in its main front page article, the Scotsman revealed that 60% of the members of the Scottish Chambers of Commerce have no sense of how this would all come together. That opinion exists despite the fact that the Government have brought out some very useful papers. We have to consider carefully how to get these messages across so that opinion-formers in Scotland can influence the way the debate is concluded. We also have to consider the division of debt between the two successor nations. That would weigh heavily on the independent nation of Scotland if it were formulated.

The overarching question is whether Scotland, with a population of just over 5 million, would have any influence in global governance. I think it highly improbable. The fact that it would have very little say on trade matters, particularly if it were excluded from the European Union, would seem to bear down very heavily on Scotland’s prospects. The Government have to consider how best to get their messages across. Although I am very grateful for the three policy papers that have been analytically presented, they will not be given headlines in the organs of opinion or the media

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in Scotland. They will provide ammunition for individual speakers, but will not get through to the electorate. We need to have conferences in Scotland at which these issues are discussed. Such conferences would need to be directed towards those who will have some forward thinking about the prosperity of their own companies, and towards interest groups that will also be affected.

I take the point made by the noble Lord about identity being one of the issues, but hope and fear will play a major part in the debate. We have to project a sense of hope about the British part in the improvement of the condition of the people of Scotland. It is not too difficult—we have a remarkable record. We are not unique in having this national debate about how to manage the economy at the moment; it would exist in Scotland if it were seeking macroeconomically to manage itself. However, the prosperity of the country is at grave risk if we do not resist these arguments about identity. We can—and in the modern world we should—have multiple identities.

I was very surprised to read in the report produced by the Scottish Government’s Fiscal Commission Working Group, published in February of this year:

“Under independence, the Scottish Government would be responsible for the design and implementation of its own macroeconomic framework”.

That is an impossibilist view—for a small country such as Scotland to manage its macroeconomic future by itself without acknowledgement of the influence and importance of the integration of the domestic market in the United Kingdom, the possibility of greater integration in the European Union and the possibility of having more influence on the direction of the global economy.

I beg the Government to think about how they can get their very wise messages across to the people of Scotland. If we leave it too late, arguments from identity could prevail, which would be potentially disastrous.

5.03 pm

Lord Rowe-Beddoe: My Lords, as a Welshman I have more than a passing interest in matters devolutionary. I was therefore most pleased to learn of this inquiry, which was the first subject undertaken by your Lordships’ Economic Affairs Committee at the time of my appointment.

Unlike some of the headlines that greeted our report, which suggested criticism of the UK Government’s position, in reality we did not call for or indeed suggest detailed pre-referendum negotiations. We asked both the United Kingdom Government and the Scottish Government to define clearly their respective positions on the vital matters that we have raised. By so doing, it was our wish to inform the people of Scotland and provide for them proper understanding of both the probable and possible economic consequences resulting from a 2014 referendum. Whether plans are being made for an outcome for one side or the other is not the concern, though many of your Lordships, perhaps, may well say that they are.

The Government have helpfully grouped our conclusions and recommendations into 17 sections, in which the Chief Secretary to the Treasury, in his

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response, “notes” our findings in eight sections, while “agrees” with our findings in nine sections. That is a better batting average than previous committees on which I have had the privilege to serve. I recall a question that was raised during the Chancellor’s Statement on the Barnett formula. I sat on your Lordships’ Select Committee on the Barnett formula, chaired by the noble Lord, Lord Richard, who is not in his place. The noble Lord, Lord Lawson, was also a member of that committee. We made many recommendations, but to my recollection, not one of them was accepted by the Government at that time. Of course, your Lordships can understand why, and why now even more so the question of the Barnett formula is kicked into the 2016 grass.

However, as the noble Lord, Lord MacGregor, mentioned, the Government have started the publication of “Scotland analysis”—documents dealing with devolution and its implications; currency and monetary policy; and, in May, referred to by the noble Lord, Lord McFall, the financial services and banking. They are most helpful documents, but they will serve the concerns that your Lordships’ committee has raised only if they provide proper understanding of the issues and are given wider publicity, discourse and debate. More documents are promised—two or three, I believe—and that is to be welcomed. However, I remain deeply concerned that both Westminster and Edinburgh are not being as open as they should be to inform both peoples—each side of the border—in addressing our recommendations, very importantly, on “the red lines”.

I should like to focus for a minute or two on two topics: business and the economy, and defence-related jobs. As the noble Lord, Lord McFall, mentioned, CBI Scotland remains greatly concerned with matters that it brought forward just four weeks ago. Its questions concerned anything from the meaning of a hard border between the nations, to the overseas markets in which Scottish businesses will receive consular support and how; Royal Mail, or its Scottish successor, continuing to be subject to the universal service obligation; and the transitional arrangements that are envisaged for diplomatic representation at the European Union prior to entry, the World Bank, the World Trade Organisation and so on. Its last paper lists many issues which exercised the membership. I think some noble Lords said that 60% were very unsure. All of these are, of course, exacerbated in this rather infamous phrase now “the climate of fear” that is clearly engendered—a phrase used, as your Lordships know, by one of our witnesses. Also, your Lordships’ committee gained the impression of a conspiracy of silence, by our failure—really it was a big failure—to receive evidence from many Scottish companies which we had asked, with, thankfully, four most notable exceptions which helped to inform our discussions in this area. This is not acceptable to the people and to the business enterprise of Scotland. They need and we—the rest of the United Kingdom—need good solid information. I say again in support of Westminster that this does not mean pre-referendum negotiations, but that is very different from the red lines.

In regard to defence and related employment, I am delighted that the noble Lord, Lord West, is in his place, for without him we would be most uninformed.

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As the House has already heard from our chairman, the noble Lord, Lord MacGregor, no Ministry of Defence official or Minister was prepared to talk to us. Currently, as we were informed, there are 11,000 regular Armed Forces and 4,000 Ministry of Defence personnel at some 50 sites in Scotland. By 2020, the number of regular Armed Forces is planned to rise to 12,500. In addition, as was pointed out to us, there are thousands of skilled jobs in Scotland as a result of Ministry of Defence capital spending. How will a separated Government of Scotland address that?

I was rather taken this week with a paragraph in an editorial in the New Statesman, which said that, with Mr Salmond pledged to preserve so many features of the British state—the monarchy, the pound, the welfare system and NATO membership—independence looks increasingly like a solution in search of a problem. But—and it is a big “but”—the peoples of both Scotland and the rest of the United Kingdom must not allow complacency to influence our and their approach to this most historical and significant event. Whatever the polls may say now, I remind your Lordships that in 1995 Quebec voted “no” to separation from Canada by the slenderest of margins—50.58%—despite polls showing just 12 months earlier margins of 60:40 against.

5.12 pm

Lord Forsyth of Drumlean: My Lords, it is a pleasure to follow the noble Lord, Lord Rowe-Beddoe. We have served together not only on this committee but on the Barnett committee. I also pay tribute to my noble friend Lord MacGregor, who chaired this committee absolutely brilliantly. I have never known so much work to go into producing the final draft report of any committee. I certainly enjoyed it, although I did find it a great discipline avoiding being too partisan on the committee. The report is not partisan—it sets out the issues fairly and objectively—and I hope that the House will indulge me now if I get just a little partisan, because I spent many weeks on good behaviour. My noble friend played an important part in bringing this document to bear.

I am certainly a nationalist in the sense that I give way to no one in my passion for Scotland, but if I were a Scottish nationalist, by which I mean a separatist, I would be absolutely horrified on reading this report. I would be saying, “What on earth are Mr Salmond and our leadership up to? They have had 50 years to think about the answers to some of these questions, but not only do they not appear to know the answers to the questions but it would appear that no thought whatever has been given to these issues. Yet here we are embarking headlong on a referendum, which will take place in 2014, and what are my people”—if I am a nationalist—“thinking of? How do they expect to go into a referendum for that?”. That is to show that I am fair and balanced, looking at the issue from their point of view.

The noble Lord, Lord Rowe-Beddoe, talked about the climate of fear, as did the noble Lord, Lord McFall, and my noble friend Lord MacGregor. Talking to businessmen and to the leader of the city council, we had evidence of that climate of fear. However, I do not need to tell my noble friend about it; he knows all about how Alex Salmond and the Scotland Office operate.

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The Advocate-General for Scotland (Lord Wallace of Tankerness): I hope that my noble friend will accept that it is the Scottish Government, not the Scotland Office.

Lord Forsyth of Drumlean: As my noble and learned friend knows, I am still stuck in the past on some of these devolutionary aspects. He is absolutely right. I am referring to the Scottish Government—or the Scottish Executive as they were quite rightly called until he changed that in an Act that I spent quite a lot of time opposing in this House—and the way they behave. My noble and learned friend—I am sure he will not be embarrassed if I say this—was invited to speak at, I think, the 25th anniversary—

Lord Wallace of Tankerness: It was the 50th.

Lord Forsyth of Drumlean: He was invited to speak at the 50th anniversary of Loganair. My noble and learned friend must have been a very good customer of Loganair when he represented his constituency so well. He was asked to do that but an official from the Scottish Government rang Loganair and said, “We understand that you have Lord Wallace speaking at this dinner; we think it should be a Scottish Minister”, and it withdrew the invitation. I have no doubt it was thinking about the financial support it receives for its airlines from the Scottish Government. This is the kind of brazen way in which the Scottish Government operate. Are we surprised that few businessmen were prepared to come to give evidence to the committee? The only great nationalist-supporting businessman with any credibility in Scotland who agreed to come and speak to the committee was Brian Souter, who has built a very successful business, but at the last moment—literally days beforehand—he cried off because he did not feel able to do so.

A climate of fear is operating in Scotland. It comes from having a single party dominating a Parliament, without an upper Chamber of this kind and without very much accountability from the Scottish media. Despite that, the First Minister has found it extremely difficult to get cheerleaders for his campaign. He started off with celebrities, all of whom seemed either to live abroad or pay no tax in this country. He has got so desperate to find celebrities for his cause that he is now having to recruit the dead. Only this week we heard from Alex Salmond that Robert Burns would vote yes in the referendum. He quoted these lines from Burns as conclusive proof:

“We’re bought and sold for English gold—Such a parcel of rogues in a nation!”.

The “rogues in a nation” are not in this part of the United Kingdom; I think they may be north of the border. Of course, that is a reference to how the union came into being in the first place. We should remember how that happened. It came into being because of a financial crisis: something like a quarter of the money in circulation had been invested in the Darien scheme and the Scottish economy was no longer able to sustain that level of financial shock. The Scottish economy could not get access to the single market that was England and her Commonwealth. It was a trade deal. From the English point of view, it was a way of ensuring the succession of the Protestant monarchy, which was a matter of some controversy and of great national security because of the Jacobites.

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