The Rt. Hon. Sir John Major KG CH

Prime Minister of Great Britain and Northern Ireland 1990-1997

Chief Secretary (1987-1989)

Mr Major’s Commons Statement on Public Expenditure – 9 February 1989

The text of Mr Major’s Commons Statement on Public Expenditure made on 9th February 1989.

The Chief Secretary to the Treasury (Mr. John Major) I beg to move,

“That this House takes note of the White Paper on the Government’s Expenditure Plans for 1989–90 to 1991–92 (Cm. 601–609, 611–619 and 621).” Perhaps I may be permitted to say at the outset that I am sure that hon. Members will be extremely pleased to see the right hon. and learned Member for Monklands, East (Mr. Smith) in his place for this debate. We warmly welcome him and look forward to hearing his remarks.

This is the tenth year in which the Government have published a public expenditure White Paper. In those 10 years, the advance in our economic prospects has been mirrored by great improvements in the management of public expenditure. At the same time, the format, coverage and content of the White Paper have improved beyond recognition.

My right hon. Friend’s Autumn Statement revealed that we now have the strongest fiscal position of any major nation. That is due in no small measure to the policy of firm control over public expenditure that we have followed consistently for several years. That policy has played an important part in the revival of our economic prospects and in the growing strength of our economic performance.

I have no doubt whatsoever that firm expenditure control is necessary. It is the right policy for the economy, and it is the right policy for the taxpayer, too.

Public spending has a central role to play in the provision of services that we all care about. But it differs from private spending in one important respect. It involves spending money, compulsorily extracted from the taxpayer, and then spent on his or her behalf by the Government on priorities that the Government determine and that, by and large, the taxpayer must accept. I believe this means, therefore, that the Government have two clear responsibilities. First, spending other people’s money must be justified on merit. That means that it must meet a social or economic goal effectively and efficiently. Secondly, total spending must be no more than the taxpayer can bear.

Our policy is controlled growth of public spending – growth that we know we and the taxpayer can afford. The practical effect of being prudent is that, in the long run, we do more for services.

Within the parameters that I have set, public spending has an essential role to play; beyond them, it can be an unsustainable drain on the nation’s resources, as the Opposition proved between 1974 and 1979, when borrowing reached over £110 billion in today’s terms, and inflation soared. The House will recall that public expenditure then had to be savagely and swiftly slashed – most notably, capital spending. We are determined that will not happen again.

Firm control of the total level of public expenditure and the right choice of public spending priorities are absolute prerequisites of proper economic management. That has proved to be true in the past, and it will remain true in the future. There should be no expectation in any part of the House or beyond that a fiscal surplus will encourage additional expenditure that cannot be justified and cannot be sustained.

This year, we have made two important changes to the White Paper. First, we brought forward much of the material on the public expenditure totals to the Autumn Statement in November. The House has already debated that statement and considered the Government’s overall policies for public expenditure. The White Paper now before us focuses on the detailed composition of our spending plans.

The second change is that we have split the White Paper into separate volumes for each Department. This makes it much more accessible and easier to use. For example, from now on, someone interested in the cost of Scottish roads needs to buy only the Scottish volume. Departmental Select Committees will find this approach much more convenient. [Interruption] It is an attractive colour, as Opposition Members may have noticed. There is none of that nasty red.

It also moves towards the creation of separate departmental reports which, from 1991, will be published with each Department’s main Estimate. This will improve clarity and assist the House in its scrutiny of departmental programmes and Estimates.

These changes reflect helpful recommendations, for which I am most grateful, from the Treasury and Civil Service Select Committee, and from the Committee of Public Accounts. I am sure they will be welcomed by everyone who uses the document.

I am grateful also to the TCSC for recognising the vast improvements in recent years in both the quality and quantity of the information provided in the White Paper. It has expanded dramatically from a single slim volume in 1979 to 19 volumes in the present year, although the House will be relieved to know that expenditure itself has not grown at the same rate. Nor is it a dry document. It is a detailed and comprehensive account of our stewardship of public expenditure. It provides more and better information than ever before both on how we spend the nation’s money and the value that the public get from that expenditure – [Interruption] Opposition Members may not think that the value that we get is important, but we do. That may be one of the distinctions between us.

The wealth of material in the White Paper reveals beyond any doubt that we pay the same close attention to the detail of expenditure as we do to the overall totals. But it is the substance of the White Paper, rather than its presentation, that is important. [Interruption] As bedside reading, I would much rather read these White Papers than the notes from the IMF that the Labour Government used to get. This White Paper illustrates deep changes in the level of public expenditure and its distribution to priority services.

In the decade to 1978–79, the average real growth in public expenditure was nearly 3 per cent. In the decade since 1978–79, we have halved that growth so that it is now comfortably within the growth of the economy. The growth in the ratio of public spending to national income, which had been rising since the mid-1950s, has been halted and reversed. The past seven years have seen the largest and most sustained fall in the ratio since the unwinding of the wartime economy. It is now at its lowest level for over 20 years. and it is set to fall still further. We are now living within our means and not beyond them, and we propose to keep it that way.

Mr. Neil Hamilton (Tatton) Talking of living within our means, will my right hon. Friend confirm that of the £170 billion national debt today, the equivalent of £110 billion was incurred by the Labour Government from 1974 to 1979? If we did not have to pay the interest burden on that debt, we could spend much more on other programmes or carry on with tax reductions.

Mr. Major My hon. Friend is right. He anticipates the direction in which my remarks will turn in a few moments.

We want, and now have, fiscal prudence and lower taxes. We have it because of stable planning, value for money and sound finance. This firm control means that we need no panic cuts of the sort we saw under the Labour Government in the 1970s, which damaged so many services.

The most notable programme to benefit from the firm public expenditure control that we now have is the National Health Service, which we made a top priority in the last survey. I shall ask a question of the right hon. and learned Member for Monklands, East. Is he content with the resources that we have made available to the National Health Service, compared with previous plans? There has been an unprecedented increase of £2 billion next year and £2.5 billion the year after. I remind him that those record sums are more than what he said were necessary at this time last year. At his pre-Budget press conference, the right hon. and learned Gentleman said: We believe the minimum extra provision which should be made in the Budget is £2 billion. The right hon. and learned Gentleman had his answer in the Autumn Statement, and it exceeded his demands.

Real resources for health care have been increased by over 37 per cent. since 1978–79. As a result, in England alone, there are now 77,000 more hospital doctors, nurses, and other staff directly caring for patients than there were in 1978. They are better paid and better equipped.

But that increase in resources, massive though it is, is only part of the story, for better value for money is important too. And the number of patients treated has increased faster even than the level of resources. The National Health Service in England is now treating 1.25 million more in-patients, 2.6 million more out-patients and 440,000 more day cases than in 1978. The number of coronary artery bypass grafts has quadrupled, cataract operations have more than doubled and bone marrow transplants have increased 15 times. Better performance by the National Health Service has meant better health for the nation. What a shame that the Opposition so frequently run it down by saying that it is under-resourced and unable to cope.

Mr. Rhodri Morgan (Cardiff, West) If that is true, how is it that I was told last week by the Brompton national heart hospital that the number of coronary bypass operations rose by 100 per year, from 600 to 1,200, over the six years up to 1984 and then stuck at that level, because it simply did not have the resources to increase it further although the demand was there, and that this year it is going down by 100? That is very far from the picture the right hon. Gentleman has given me of what is happening in the National Health Service.

Mr. Major I have given the picture of what is happening in the National Health Service across the whole of the country. It is not a question of whether those figures are right; those figures are right, and that is what is happening in the NHS. I will tell the hon. Gentleman what else is happening, for it is relevant, and even he, I suspect, will welcome it. In all age groups the mortality rate fell between 1979 and 1987, partly, of course, as a result of the growing excellence of the National Health Service. For children under one and aged from five to nine, death rates have fallen by about one third. That is a staggering improvement that everyone will welcome – everyone, it seems, except perhaps the hon. Member for Cardiff, West (Mr. Morgan). The proposals that we announced last week will produce a still better, more responsive and more efficient Health Service.

Let me make it absolutely clear that we are not privatising the National Health Service as the hon. Member for Livingston (Mr. Cook) – who I am sorry to see is not here – absurdly suggested. His leak on that matter was as inaccurate as his leak on the level of community charge reimbursement some months ago. I say to the hon. Gentleman “Better luck next leak”. He has been wrong on each occasion so far. We are modernising the National Health Service, making it more efficient and better resourced. Perhaps the Opposition had better do the same for the hon. Member for Livingston, for his leaks are deeply inaccurate and, as he is the same age as the NHS, I suspect that he is just as much in need of reform as it is

Mr. Max Madden (Bradford, West) Just as the Chief Secretary seems to be wrong about heart operations at the Brompton hospital, so he is wrong about the National Health Service being safe in the Prime Minister’s hands. Is he aware that the Bradford royal infirmary, according to yesterday’s Telegraph and Argus, is to have a new private clinic within the hospital, and that the general manager for Bradford has already announced that the three biggest hospitals in the Bradford health district are going to opt out of the National Health Service? He seems to be wrong about Brompton; he is definitely wrong about Bradford.

Mr. Major The hon. Gentleman is wrong on both counts. If there is a private wing to be added to provide a better health service for the community, I am delighted. Those hospitals are not going to opt out of the National Health Service; they remain within the NHS but with proper local community management as NHS trust hospitals. The trouble is that the hon. Gentleman lives I n the blinkered world of the 1940s and has not noticed that it has moved on.

One further area of priority that I know is of interest to Members of the Opposition is capital expenditure.

Mr. John Smith (Monklands, East) Before the right hon. Gentleman leaves the subject of the Health Service and the plans to reorganise it announced recently, can he tell us, since he must have been consulted about this, what will be the cost to the taxpayer of subsidising private health care for pensioners?

Mr. Major It will entirely depend upon the take-up at some future stage, but the net saving to the National Health Service as a whole brought about by the fact that people will be able to exercise choice – which I appreciate the right hon. and learned Gentleman does not like – may be substantial.

Mr. John Smith I take it from the Chief Secretary’s reply that he cannot give an answer to my question – what is the cost of the subsidy? Am Ito understand that this was agreed without understanding the public expenditure consequences of the decision?

Mr. Major I can assure the right hon. and learned Gentleman that the sum is modest and that in due course it will be available to him. Something else will be available to the right hon. and learned Gentleman in a few moments: that is, information on public expenditure to correct some misinformation which the hon. Member for Dunfermline, East (Mr. Brown) gave some time ago.

As the White Paper shows, we have increased provision for next year by a massive £2.75 billion, bringing total public sector capital spending to a record £27 billion. Within that sum is substantial extra investment in roads and public transport. An extra £220 million is being provided next year for motorways and trunk roads in England, with a further £250 million in 1990–91. There is, in addition, substantial extra investment in London transport, including improved safety standards and refurbishing the Central line.

The Opposition are often critical of our record on capital spending, though I am bound to say that they are the last people in the world with any right to be so. For example, in the 10 years since 1979, real spending on motorways and trunk roads in England has gone up by 30 per cent.; it fell by 40 per cent. under Labour. Our plans provide for a further 20 per cent. increase by 1991. The record is the same for capital spending in the National Health Service: up by 30 per cent. in England, in real terms, since 1979; down by over 30 per cent. under the last Labour Government. Prison spending fell by 60 per cent. under Labour; it has increased by over 200 per cent., to provide modern and necessary prison facilities, under the present Government. And so on. The record of successive White Papers speaks for itself. When the right hon. and learned Gentleman speaks for the Opposition perhaps he will acknowledge that record and not misinterpret it.

Last month my right hon. Friend the Chancellor of the Exchequer asked the hon. Member for Dunfermline, East by how much he would increase public expenditure. We still await an answer from the hon. Gentleman, and I look forward to it. Nor am I optimistic that we shall get one today because the hon. Gentleman plainly has no idea what his public expenditure costs would be. He is into promises but not into costing them. Let me help him with some of the more recent promises that I have seen – [Interruption] It is a clear indication that the Opposition do not like it when they will not listen, but, whether they like it or not, they are going to get it.

The right hon. Gentleman the Leader of the Opposition came back recently from his trip to Botswana – I hope without the difficulty that he has had on other occasions – with a pledge to increase aid spending by £1.9 billion. The hon. Member for Motherwell, South (Dr. Bray) is reported – I hope the right hon. and learned Gentleman will tell me whether this is accurate – to have pledged a further modest £4,000 million boost for research and development. Health charges, we are told, would be abolished, depriving the NHS of half a billion pounds in revenue. How would it help Bradford if that sum disappeared from the Health Service? But that is just a dipstick sample of the Opposition’s spending promises. I understand very well why the right hon. and learned Member for Monklands, East, who is a wise politician on occasion, said on 22 January: I will be keeping a careful eye on commitments. He knew his colleagues only too well. After the last few weeks he will keep a fairly careful eye on the hon. Member for Dunfermline, East as well, if I am any judge.

In the meantime, in a spirit of helpful inquiry, perhaps I can add another question on capital spending as this is an important issue to hon. Members on both sides of the House. The question is simple and the right hon. and learned Member for Monklands, East and his hon. Friends will undoubtedly wish to respond to it. Which would the Opposition prefer, this Government’s record on investment or that of their predecessor, the Labour Government?

Before Opposition Members answer, perhaps I can help them out a little – [Interruption] I will come to statistics in a moment. The hon. Member for Dunfermline, East complained last month that general Government investment was falling. I thought that that was a fishy claim so I investigated it. It is a very fishy claim. I push aside the fact that general Government investment is a very selective measure because it excludes much of public sector capital. However, even on the selective measure which the hon. Member for Dunfermline, East chose, he made his claim on the basis of a misunderstanding or misrepresentation of the figures. His figures were not the figures for total gross investment. His were net figures, net of receipts. Effectively, they were net of council house sales. – [Interruption] Obviously the hon. Member for Dunfermline, East does not understand what he said, or he would not be chortling now. By being net of receipts, the hon. Gentleman’s figures effectively excluded the new investment made possible by those receipts.

By that logic, if I sell my house and use the proceeds to build a new one, my contribution to investment is zero even though there is another home and another home owner. That is why the figures quoted by the hon. Member for Dunfermline, East are fishy. Last month I said that the hon. Gentleman was a purveyor of more dodgy material than Arthur Daley. I am now bound to say that I realise how unfair I was to Arthur Daley, now that I have had a chance to examine the figures.

If the hon. Gentleman had got his figures right, he would have realised that general Government investment is now 10 per cent. higher. [Interruption] The right hon. and learned Member for Monklands, East should listen and then he might not make the same mistake as his hon. Friend the Member for Dunfermline, East. I know that the right hon. and learned Gentleman does not like it, but he should listen.

If the hon. Member for Dunfermline, East had got his figures right, he would have realised that general Government investment was nearly 10 per cent. higher in real terms in 1987 than in 1979 and was not falling. The indications are that 1988 will show a further increase, not a reduction.

By contrast, between 1973 and 1978, Government investment fell by more than 30 per cent. In that period the Government’s investment figures fell by that percentage on either basis, gross or net, because council house sales were not permitted by the Labour Government and so the availability of receipts to add to spending did not arise.

When the right hon. and learned Member for Monklands, East has finished giggling with his hon. Friends, I hope that he will acknowledge that his hon. Friend the Member for Dunfermline, East wittingly or unwittingly misled the House. I hope that the right hon. and learned Gentleman will spare us lectures based on the wrong figures and answer my straight question. Whose investment record does he prefer, ours with more investment or the previous Labour Government’s with declining investment? The country knows very well which is the better. [Interruption] I can see that the right hon. and learned Gentleman does not want to answer and I know why. He has no answer to that question.

Does the right hon. and learned Gentleman prefer the efficient and effective public services that exist now to the impoverished services which we inherited? We look forward to his reply because we could not get an answer to that from his hon. Friend the Member for Dunfermline, East last month.

Mr. Tim Smith (Beaconsfield) Is not the Treasury’s presentation of the figures partly responsible for the misunderstanding under which the Opposition seem to be labouring? Why does the Treasury persist in deducting the proceeds of the sales of privatisations and council houses from capital spending? Would it not be better to show the gross capital spending and the proceeds separately?

Mr. Major If my hon. Friend was to consider chapter 21 of the White Paper – I know that he is an accountant and I hope that that is not a disadvantage for him – he will see that the figures are perfectly clear for anyone who chooses to read them.

The figures produced by the hon. Member for Dunfermline, East for investment also neglect investment by public corporations. Perhaps he believes that investment in water or railways is unimportant. The Government do not, as the White Paper shows – [Interruption] If the hon. Member for Dunfermline, East believes that to be so, perhaps for the first time in his life he will listen to me.

How much higher does the hon. Member for Dunfermline, East think that British Rail’s investment in railways will he in 1991 in comparison with investment in 1978–79? He does not know. Will it be 5, 10, 15, 20, 30, 40 or 50 per cent.? What does he think? Investment in railways is set to be more than 75 per cent. higher in real terms by 1991. That is the biggest renewal programme in rail since the switch from steam to diesel. It will be 75 per cent. higher than at the end of the last Labour Government’s period of office. That is a “cut” which most people would like to see.

As the hon. Member for Dunfermline, East referred to cuts, between 1973–74 and 1978–879 investment in railways hardly increased at all in real terms. That is the record which the hon. Gentleman tries to forget. A similar story applies to water. The volume of investment is half as high again this year compared with 10 years ago. There is a £1 billion programme to improve sewage treatment work over the next four years. That must be compared with the chronic under-investment during the 1970s. Investment in water was cut by the Labour Government by 25 per cent. in the five years to 1979–80. That led to an outdated and overloaded sewerage system which we are now renovating.

The lesson is clear. A successful economy can invest, and we are. An unsuccessful one cannot and cuts investment. That is what the Labour Government did. [Interruption] I think that the right hon. and learned Member for Monklands, East said, “Wicked.” I did not quite catch the word he used. There is nothing wicked about it. It was simply incompetence which led the Labour Government into that position.

I must tell the right hon. and learned Gentleman and his colleagues that a successful economy can do something else that an unsuccessful one cannot. [Interruption] I was intrigued to hear about interest rates. Purely by chance, 10 years ago today, the bank rate increased to 14 per cent. because the Labour Government could not control credit. I do not need to be told about interest rates.

A successful economy can repay debt. An unsuccessful economy cannot do that. The stock of Government debt has built up virtually without interruption since the war, reaching £171 billion two years ago. As a result, this year we will pay £18 billion in interest on that debt. That is equivalent to over 10p on the basic rate of income tax. That is dead money for today’s taxpayer. It does not build roads or railways, improve the National Health Service, education or defence. It simply pays the interest on past debts.

Our policy on that debt is clear. We will maintain a balanced budget. However, we are going further than that. We are repaying debt. As my right hon. Friend the Chancellor of the Exchequer set out in the Autumn Statement – [Interruption] If the hon. Member for Durham, North-West (Ms. Armstrong) would like to intervene, I will of course give way.

Ms. Hilary Armstrong (Durham, North-West) Will the Chief Secretary to the Treasury tell us about the redistributive effect of repaying the national debt in terms of the poor from the rich?

Mr. Major I am not sure that it was wise to invite the hon. Lady to make an intervention.

As my right hon. Friend the Chancellor set out in the Autumn Statement, in the last fiscal year we repaid £9 billion and in the current year we expect to pay a further £10 billion. That is equivalent in two years to one twelfth of the outstanding stock of debt which has built up over the past two centuries. This is the largest sustained debt repayment for over a generation, which is of relevance to the hon. Lady’s question. It also means that the debt interest projections in the White Paper fall from £17½ billion in the current year to £15½ billion in 1990–91. Our reduced debt burden will be available, therefore, either to improve services or to reduce taxation, or indeed to further reduce debt.

One of the most striking changes over the past 10 years has been the dramatic fall in public expenditure resources spent on the nationalised industries – hon. Members should note that I said, spent “on” the nationalised industries, not spent “by” the nationalised industries – on improving services or new capacity. The fact is that since 1978–79 the total external finance required by those industries has fallen in real terms by nearly £5 billion. That means a saving to public expenditure which we have available to reallocate to other higher priority programmes.

Those savings have come about as a result of the transformation in the performance and productivity of the nationalised industries, which has been dramatic. In aggregate, today’s nationalised industries have increased their productivity by an average of 7¼ per cent. a year in recent years. Last year they made a profit of £¼ billion. The White Paper forecasts a larger sum this year.

What is surprising is that the Opposition tend to describe those savings as cuts. In a debate last month the hon. Member for Dunfermline, East criticised cuts in spending next year on industry and energy programmes. To do so yet again is completely to miss the point on why spending by the taxpayer on energy next year is lower. The answer is above all because of the improved performance that I have just described. For instance, the electricity industry will generate more internal resources so that it can at one and the same time repay more borrowing next year than this, and invest £200 million more – a point which the hon. Gentleman did not mention last month. That is not a cut in investment. The hon. Gentleman has not acknowledged it; he clearly did not understand it and I hope that he will now acknowledge it. In any event, what he said on that issue in the debate on the Autumn Statement was wholly misleading.

Spending on industry will also be lower next year, but not because of so-called cuts. The reduction is the result of the fact that Rover will no longer be a drain on the Exchequer now that it has been successfully restored to full and profitable private ownership.

Mr. Stuart Holland (Vauxhall) With a Honda badge on it.

Mr. Major The hon. Gentleman had an extremely expensive education. I am not sure that it was money well spent. I, alas, did not have an extremely expensive education. I had the undoubted privilege of paying taxes in order to keep the hon. Gentleman at a university for many years. Frankly, I would like my money back.

Over the last decade the taxpayers coughed up over £3 billion for Rover. From next year the need will have gone. No doubt the Opposition will describe that as a public expenditure cut as well.

The position on employment is similar. Spending by the taxpayer is lower. But that reflects the longest period of falling unemployment since the war. That fall too has led to savings in unemployment benefit of over £1½ billion a year over the next three years. That clearly illustrates the savings which result from the success of our economic policies. Indeed, the fall in unemployment illustrates dramatically the contrast between our policies and those of the Opposition. They said that we should spend more to reduce unemployment; in fact, we are spending less because we have reduced unemployment. There is a clear distinction.

Over the years in the public expenditure debates we have had many lectures from the Opposition on the case for higher public expenditure. Their old, favourite theme is that more public spending is the only way to reduce unemployment. What has happened? Unemployment has fallen by over 1 million and for 29 months in succession. And not just in the south-east. In the past year unemployment has fallen in every region, and has fallen fastest in Wales, the west midlands and the north-west. The rate of unemployment is now lower than that of France, Belgium, the Netherlands and Canada. And the number of people in work is at the highest level ever, even after excluding those on community schemes and training programmes. It could be done only by public expenditure, the Opposition said, yet we have done it without boosting public expenditure but by creating an enterprise economy that is generating 1,000 new net firms a week. When did that happen under their public expenditure plans when the Opposition were in government? When unemployment benefit spending falls as a result, the Opposition no doubt will yet again point to cuts. If those are cuts, they are cuts which we are proud to secure, and I hope and expect that there will be more of them.

The Government who knew about cuts were the last Labour Government. Between 1973–74 and 1974–75 they increased spending by 12 per cent. in real terms. Inevitably the brakes had to be slammed on, the International Monetary Fund appeared and spending was cut by 8 per cent. in real terms. Although Opposition Members have still not learnt it, the fact is that control of public spending is a fundamental part of a credible economic strategy. It is inescapable, as every Government in every country must eventually recognise.

Mr. David Lightbown (Lords Commissioner to the Treasury) Even Russia.

Mr. Major: “Even Russia,” says my hon. Friend. Even the Politburo is ahead of the Opposition in learning that lesson. Purely by chance I want to quote to the Opposition from Tass: Bearing in mind the great difficulties in financing public expenditure, and the growing budget deficit, which leads to unbalancing the country’s economy, the Government requires drastic measures to reduce public expenditure and cut down capital investment”. What an echo of the 1970s for Tass to understand what the Labour party did not. The Government of the Soviet Union understand. Perhaps the Opposition Treasury team should follow their colleagues who deal with foreign policy and go to Moscow to get up to date with Socialist thinking – [Interruption] For an intelligent man, the hon. Gentleman is very loud. As for us, we need no such advice. We know that economic disaster is the inevitable result of unsustainable growth in spending. Allowing public expenditure to grow inexorably is easy. Saying yes to every pressure group is easy. Forgetting about priorities or affordability is easy. It is plain wrong, but the Opposition do not understand that. Such recklessness inevitably brings a fearful reckoning, as it did for them. That is the legacy which we inherited and which we firmly rejected.

We believe the first economic duty of government is to safeguard the value of the currency; to protect the taxpayer and to be prudent and responsible with the nation’s finances. Those principles are at the heart of our management of public expenditure. The plans in this White Paper are sustainable and affordable. They select priorities and they rest on a sound and strong economy. They are the right way ahead, and I commend them to the House.

Mr. John Smith (Monklands, East) I beg to move, to leave out from “House” to the end of the Question and to add instead thereof regrets the continuation of inadequate investment in public services, in the infrastructure, in education and training, in research and development, and in the regions; urges the Government to end its dogmatic insistence on reducing the level of public expenditure as a proportion of national income; and condemns the Government’s failure to invest in the nation’s essential public services, which further exacerbates the already seriously unbalanced economy, and will do nothing to bring down the level of unemployment, reduce the growing North-South divide, or improve the capacity constraints which currently impair the nation’s economic performance. In the first debate since I have returned from my illness, may I be permitted not only to thank the Chief Secretary for his kind remarks but to take the opportunity to express my appreciation to right hon. and hon. Gentlemen in all parts of the House for their warm good wishes and encouragement, expressed to me so generously and frequently during my illness and since my return. I should also like to thank my hon. Friend the Member for Dunfermline, East (Mr. Brown), who was precipitated into undertaking my responsibilities at short notice and who showed his calibre and courage by a relentless and most effective critique of the Government’s economic policies.

Returning to these debates, I am struck by how little has changed. The Chancellor certainly has not changed. He is as bulky as ever, even if things have changed a little on this side of the Dispatch Box. The balance of payments deficit is worse. Interest rates are even higher, causing, as a direct result of Government action, savage increases in mortgage payments which have wiped out for several million, by a factor of several times, any tax benefits which they got from last year’s Budget. Inflation keeps rising and is heading towards 7 per cent., having doubled in about a year.

Mr. Julian Brazier (Canterbury) rose –

Mr. Smith I shall give way to the hon. Gentleman, because he may keep bobbing up if I do not.

Mr. Brazier I am grateful to the right hon. and learned Gentleman for giving way. Will he tell the House how many letters he has received from his constituents complaining about the rise in mortgage rates? I have received only one, and my constituents enjoy average living standards.

Mr. Smith The hon. Gentleman’s intervention says a lot about him and his relationship with his constituents. If it is true that the hon. Gentleman has received only one letter about the increase in mortgage rates, in a week or two he will be singing a different tune. He will receive a pile of letters from his constituents when they realise that he has expressed no concern about the increased burdens that they now have to shoulder.

I have received a substantial number of letters and have had time to read them carefully. What is more, I agree with what they say. The writers complained volubly that they were told that they would receive substantial tax cuts as a result of the Budget, but instead received monthly mortgage increases of £38, £50 or £60 which are several times what they were supposed to receive as a boost to the supply side. I hope that, when the hon. Gentleman receives the avalanche of letters that I trust his intervention will provoke, he will read them carefully and pay attention to the needs and desires of his constituents.

There is not much change between the Government’s approach to public expenditure as revealed in the Autumn Statement that we debated some months ago and how it appears in the White Paper that we are debating today. Their attitude has three main characteristics. First, they continually make the dogmatic assumption that the amount of public expenditure, as a proportion of national income, should be consistently and constantly reduced. Secondly, they consistently seek to mislead in their presentation of statistics. Thirdly, they almost invariably have the wrong priorities.

Another feature has been revealed by the Chief Secretary’s response to my intervention earlier. The Government clearly enter into commitments without fully understanding what they are doing. The Chief Secretary was asked a straight question about the cost of subsidising private medical services by giving tax relief to pensioners who use them. He said that he did not know, and that it would depend on demand. That means that it is open-ended. The Chief Secretary to the Treasury. who is responsible for controlling our public finances, has agreed to a change in our taxation system without knowing the consequences in terms of public expenditure. [Interruption] If that is an example of the Chief Secretary’s prudence, it is not one that we wish to emulate.

Mr. Major The right hon. and learned Gentleman clearly does not realise that it is a tax incentive and does not concern public expenditure.

Mr. Smith The Chief Secretary has made an even more interesting point. He knows perfectly well that to give a tax incentive such as that – to people who are already using private medical services – means a loss in another direction. The revenue will receive less money. There is little intrinsic difference between giving people a tax subsidy and giving them an absolute grant. The two are the same in terms of public expenditure. I do not know whether the Chief Secretary thinks that it does not matter, but it will matter to many people who will say, “Why should I pay taxes when I use the National Health Service to subsidise others who use private medicine?” I hope that the Chief Secretary receives a few letters from his constituents about the reply that he has given to the House.

It is not good enough to proceed in this way. When the Government announce such important changes, the costs and implications should be clearly stated to the House. When the Chief Secretary, of all people, cannot answer a simple question directly, it says a great deal about the way the Government approach the House.

We had to listen to quite a lot of lecturing from the Chief Secretary, who seems to find public expenditure White Papers exciting bedtime reading. He seems to think that Opposition Members regularly read Tass reports. In the previous debate, Pravda was quoted, and in this debate Tass. I am not surprised that Treasury Ministers prefer alternative sources to the Treasury’s own statistics. That is a matter of taste for them, but it is not a taste that Opposition Members share. We are more sceptical about Pravda and Tass than the Treasury Ministers.

The first major difficulty about the Government’s approach to public expenditure is that they assume that it is necessarily good constantly to drive it down as a proportion of gross domestic product. A leader in the Financial Times of 16 November 1988 tackled the matter very well. It was headlined: “Risk of public squalor”. The Government’s approach was described by the leader writer as follows: the simple-minded assumption that a reduction in the share of GDP that goes on public expenditure must be a ‘success’ is indefensible. That was what the Chief Secretary kept telling us throughout his speech, yet the Financial Times thinks it is indefensible.

The leader continues: It is quite unlikely, for example, that parents would regard their ability to pay for a cheap holiday on the Costa del Sol as adequate compensation for the Government’s refusal to spend more on their children’s education. That is a sentiment that many of my constituents – whether or not they write to me – would share. The leader goes on: Public spending cannot be intrinsically bad” – that is a view that we would all share and its reduction as a share of GDP cannot be intrinsically good. One would think that was mere common sense. In a number of cases public spending ought to rise substantially faster than national income. Perhaps even the Government would agree with that. Success in the management of public spending consists in providing people with services of the quality and quantity they would demand if they had the choice. If the Government is unable to give them the choice, it should not disguise this failure in a cloud of rhetoric about successfully reducing public spending to its lowest share of GDP for 20 years. I imagine that all reasonable hon. Members would agree with that. The approach to public expenditure should be simple. Claims should be assessed on their merit and necessity. If they are meritorious and necessary, the money should be spent. To confine public expenditure within a necessary and constantly declining proportion of GDP is a very wrong-headed approach.

Mr. Ian Taylor (Esher) Conservative Members are finding it difficult to follow the right hon. and learned Gentleman’s reasoning. Is he objecting to the fact that public expenditure is actually rising? The percentage of GDP has clearly confused him. The GDP has been rising at an extremely fast rate under this Government.

Mr. Smith I understood clearly what the Government were saying, as did the Financial Times. I repeat to the hon. Gentleman, who cannot have been listening, that the Government constantly make the proposition that it is desirable and meritorious to reduce public expenditure as a percentage of GDP. I challenge that assumption: there are occasions when we may want to increase the amount of money spent, and when it is justified, it should be done.

Mr. David Shaw (Dover) Will the hon. Gentleman say why page 7 of the Autumn Statement shows that general Government expenditure under the Labour Government fell from 48.25 per cent. of GDP to 43.25 per cent.? Even the last Labour Government thought that GDP expenditure, as a percentage, ought to fall. The key point was that the gross domestic product did not grow enough under the Labour Government.

Mr. Smith If I had asked someone to make a helpful intervention in my speech, I would have written that question for the hon. Gentleman. It shows clearly that the last Labour Government assessed public expenditure needs according to the individual case made and did not keep to a constant proportion. [Interruption] It is clear in this case – I hope the hon. Gentleman will try to comprehend – that the Government are always saying that it is desirable constantly to reduce the percentage. Why on earth is it desirable to do so? The trouble is that the Conservative Party has a deep-seated prejudice against public expenditure. It aims to squeeze public expenditure whatever the economic circumstances, and trumpet the fact when it can do so.

The Government say that their objective is to hold the rate of growth of public expenditure below that of the economy. There used to be another rationale for that. The rationale given by the Chancellor of the Exchequer and others, in the earlier years of the Government, was that we had to cut public expenditure to avoid the crowding out of savings, which forced up interest rates. We have had a few years of the Government’s policies, and recent events may have dented this analysis somewhat.

British interest rates are now the highest of the major industrial countries, after the Government have had their way with public expenditure for nearly 10 years as the Chief Secretary was boasting, and the personal savings ratio has fallen dramatically, from almost 14 per cent. in 1980 to under 2 per cent. today. So much for the theory of crowding out. No wonder; perhaps the Chief Secretary, who constantly wants to intervene, could tell us whether the Government still believe that the crowding-out theory obtains in the circumstances of today.

The Government have none the less been operating under the assumption that there ought to be such a constant reduction. They fight shy of putting the case for public expenditure – [Interruption] Now that the Chief Secretary has received the latest information from today’s report from Tass, I shall give way to him if he wishes to communicate it to the House.

Mr. Jacques Arnold (Gravesham) rose –

Mr. Smith I have hardly developed this point, so it is difficult to give way on it. But I shall give way to the hon. Gentleman if it will allow me to get on with the debate, and then perhaps I can proceed with my speech.

Mr. Arnold Is not the right hon. Gentleman yet again confusing the difference between net and gross? Is there not a considerable increase in gross savings which is offset by the vast increase in home ownership, and therefore do not two rights very much make a right?

Mr. Smith I shall be dealing with those matters later, but the hon. Gentleman should have a better sense of topicality, and intervene at an appropriate point.

The Government constantly fight shy of putting the case for public expenditure; it is always presented in terms of savings in public expenditure. Public expenditure is a crucial element in the proper development of our economy and society. If we do not have necessary and sufficient public investment, at least at the level of growth overall, the economy’s key public services are likely to be diminished, overstretched and under-resourced. In any sustained economic expansion, the growing demands of society, and the private sector in particular, will increase, and the public sector will be called upon to provide more.

If growth is unbalanced, as we would argue, and public investment is neglected, then the result will be bottlenecks that choke the opportunity for sustained expansion. The public squalor that I fear is occurring in some instances will strangle private affluence. Exactly these errors have been made by the Government, who have pursued the goal of reducing public expenditure below the overall level of growth in the economy. Public expenditure is running at only about 7 per cent. below the GDP growth par. A deliberate strategy of under-investment and neglect will result in this country being burdened well into the 1990s.

I take, for example, expenditure on transport, and especially roads, to which the Chief Secretary drew attention. The right hon. Gentleman said that an increase of £240 million will be made in the next financial year. We welcome the extra funds, but we recall that, over the past five years, investment in roads has fallen by 4 per cent. while the growth of traffic has averaged more than 25 per cent. and motorway use has increased by more than 60 per cent. That is a classic example of public investment failing to grow in parallel with increased demand.

Against such an investment shortfall, it is hardly surprising that the CBI recently demonstrated that Britain has the most congested road system in Europe; that this congestion alone costs an estimated £5 per household per week; and that the overall costs of distribution in the United Kingdom are about £40 billion in a year. The cost of road congestion should have been eased by public investment. The case for such investment should have been self-evident, and should have been undertaken years ago, before congestion became the major economic and environmental problem that it is today. But the Government’s obsessive public expenditure squeeze has denied the road system of the resources that it needs.

When Labour left office in 1979 – I hope the Chief Secretary will listen to this – investment in transport amounted to £5.4 billion in real terms, as against the £4.8 billion that is planned by the Government for the next financial year. Labour’s investment performance in roads similarly compares favourably with that of the Government, as is helpfully revealed in the White Paper’s report on the Department of Transport, one of the documents to which the Chief Secretary has referred.

In a new departure, perhaps even a breakthrough in the Government’s presentation of facts, the Treasury has published a chart on page 17 of the White Paper relating to the Department of Transport, which analyses the road maintenance condition between 1977 and 1987. The chart usefully plots the progress of maintenance for local and national roads. It shows a sharp improvement in the maintenance standards achieved for both sectors until just after 1979, followed by a dramatic decline thereafter.

Most helpful of all, the chart is bisected by a line; above the line it is marked “better” and below the line it is marked “worse”. I am happy to confirm that, according to the Government’s own document, published as part of the White Paper on public expenditure, we see that road maintenance was constantly above the line during the period of the Labour Government and almost always below it during the time of the Conservative Government. If we are in any doubt about its meaning, the chart helpfully says “better” on the top and “worse” at the bottom.

I am sure that is what the Chief Secretary had in mind when he said he loved to read these documents when he was trying to get to sleep. I recommend, if he is dozing tonight and finding it a little bit difficult to drop off, that he looks at charts showing the better and worse positions.

I congratulate the Department of Transport – perhaps even the Treasury is responsible for this – on this newly adopted approach to presentation of Government statistics. I very much hope that other Departments will follow the Department of Transport’s lead. Perhaps the Department of Trade and Industry’s monthly trade figures could be similarly improved, perhaps with trade surpluses appearing above the line and marked “better” and trade deficits appearing below the line and marked “worse”. That might make our debates more illuminating, as well as entertaining.

Even when the Government revert to the practice of being economical with the truth, the White Paper cannot conceal the continuing decline in public investment. Even on the Government’s preferred definition of public sector capital spending, which includes defence, the White Paper reveals a decline of investment in real terms of 0.5 per cent. in the next financial year. By 1992, capital spending in the public sector, excluding the privatised electricity and water industries, will have been cut by £800 million in real terms. That is found in table 22.1.11, at page 22 of the Supplementary Analysis and Index attached to the White Paper.

The older definition of gross domestic capital formation which, in line with the national accounts excludes defence equipment spending, is declining in real terms in every year from 1984 to 1985, until 1991 to 1992. The truth is that Government spending on the nation’s infrastructure, defined as gross spending on capital formation by central and local government, excluding defence expenditure and capital grants, has not increased at all under this Tory Government in real terms today. It is more than 50 per cent. below the level of the mid-1970s, and is planned to fall by 9 per cent. in real terms between now and 1991.

Those figures show all too clearly the Government’s dogmatic hostility to the public sector. They are a recipe for stagnation and decline in living standards and in economic efficiency. I hope that the Government will understand this point, if none other made during the debate – that under-investment in the public sector harms the supply side of the economy. In the next decade, the country will face enormous challenges. After 1992, it will have to compete successfully with other countries in Europe for the single market, and with the rest of the world, including Japan, for the global market place, in which our industries must thrive and survive.

If we are to pay our way in the world and live within our means – we hear little about this from the Government – we must tackle the huge £14,000 million balance of payments deficit that is the result of Government policies, which is the major economic obstacle facing this nation in the years ahead. We must ensure that we are equipped to supply the demands of the domestic and overseas markets. If we are to enjoy a genuine supply side miracle, that will need public investment. We must invest in education and training, in research and development, and in the regions – using public resources where the market has failed to provide adequate investment, and where Tory claims of success are absurd.

I note that the Chief Secretary, both in his documents and in his speeches, refers occasionally to priority areas. I assume that, by implication, the other areas do not receive priority. The right hon. Gentleman never refers to education and training, to research and development, or to regional development as priority areas. That is because they are all classified as non-priority areas, in terms of the Government’s record and of their current viewpoint.

Education and training are the most important priority of all. Investment in education enhances the nation’s most precious resource – the knowledge and skills of our people. From the nursery to the university, our country is failing to invest. It is one of the meanest providers of pre-school education for the under-fives, and there is inadequate provision all the way through secondary and tertiary education. Government education expenditure has dropped from 5.5 per cent. of gross domestic product in 1978–79 to 4.7 per cent. in 1989–90. That under-spend is reflected in the levels of educational attainment, which are falling below those of other major industrialised countries.

Work undertaken by the National Institute of Economic and Social Research reveals that the average British student leaves compulsory education with a level of attainment in mathematics that is as much as two years behind the average German or Japanese student in the same age group. While almost half of British children leave education at age 16, in Japan and North America, 95 per cent. and 80 per cent. to 90 per cent. of children respectively stay in full-time education until age 18.

Mr. Major Whose fault is that?

Mr. Smith Most people would say that a Government who have been in power for 10 years might take a little of the responsibility.

Despite that poor performance, the Government plan to give less cash for local schools next year – even as primary school enrolment is increasing. They will make £9 million less investment in our universities. It is not surprising that a British brain drain is now enriching American universities and colleges.

Mr. Major That is nonsense.