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Preparing Britain's Economy for the Future

When the Government's business managers tabled today's debate, I do not suppose they expected it to take place immediately after a very public spat between the Chancellor of the Exchequer and the Governor of the Bank of England. At last night's Mansion House dinner there was more back-stabbing than back-slapping. The Governor made clear that""fiscal policy… will have to change"." Very wisely, Mervyn King pointed out that in five years the national debt would be more than double its current level of around 40 per cent. of GDP. He said, without any ambiguity,""it is also necessary to produce a clear plan to show how prospective deficits will be reduced during the next Parliament"." The spat was all the more stark as a result of the Prime Minister's very strange performance yesterday at Question Time. He seemed to find it impossible to give a straight answer on budget deficits, an issue to which I shall return shortly. I am vice-chairman of the all-party parliamentary group on China, and last week I attended a conference about Hong Kong which had been organised by the Hong Kong trade office here in London. The message—the same message that we hear from the excellent Chinese ambassador to London—is that China is moving out of recession. Similar signals are coming from India. Some confidence is beginning to return to the London stock exchange, although it is probably too early to assert that the worst economic storm since the 1930s is over. Professor Robert Shiller was in London a couple of weeks ago. It was Professor Shiller who predicted the end of the dotcom boom in March 2000. He was also one of the first to warn that the United States housing market was seriously over-valued, and that its collapse would have a huge impact on the world's largest economy. When he was in London, he warned that the recent stock market bounce should be treated with caution. He and others think that we could be in for a W-shaped recession, with recovery so fragile that we could be plunged into another slowdown as soon as we emerge from the present one. There are still a number of issues that threaten any long-term recovery for the British economy. Rising unemployment, mortgage defaults and a possible further wave of company failures could surprise us yet. Today's unemployment figures make grim reading. The ranks of the unemployed are now swollen to 2.26 million, the worst figure for 13 years. We seem to be losing jobs at a rate of 100,000 a month. There is every indication that unemployment will continue to rise, and will end up a great deal higher: an unemployment rate above 10 per cent. is almost certain. To put it more bluntly, unemployment may well reach more than 3 million. As a result of the recession, Jobcentre Plus is becoming bigger by the day. It now has 70,000 employees. It is already the Government's biggest agency, and it is seeking to employ an extra 10,000 staff. Even if the economy does start to turn up, the prospects for the jobless do not immediately look good. In my constituency, local unemployment is at a 13-year record high. The number of jobseeker's allowance claimants continues to increase, a number of major local employers have had to make redundancies, and the local unemployment rate has trebled since March 2008. Locally, as a community, we are determined that no one should be left behind in the recession. We have set up two job clubs, one in Banbury and one in Bicester, to give every possible support to those who have lost their jobs: to support them while they are out of work, and to help them back into the world of work as soon as possible. If the economy is starting to show some signs of sunshine, the clouds have yet to pass. As The Economist noted last week,""another cloud already looms on the financial horizon: massive public debt."" The simple truth is that our budget deficit is the highest in our peacetime history, and the highest in any G20 country. The reality is that we face a debt crisis. As I made clear in the debate on this year's Budget, the reality is that existing Government plans show that whoever wins the next general election, Government spending will have to be cut. The figures are all there in this year's Budget Red Book. The Institute for Fiscal Studies says that the Government's plans imply a cash freeze on Government Departments for three years from 2011 after debt interest and other unavoidables. Allowing for inflation, that becomes a 2.3 per cent annual real-terms cut, or 7 per cent over three years. Both the Conservatives and the Government have said that they want to protect health spending; that is obviously appropriate as we have a fast-growing population. As a former chairman of the International Development Committee, I am glad that we have made it clear that we will honour the promise we made to increase the development budget to 0.7 per cent. of gross national income. Given the reality of the Government's Budget figures, and given the bills of rising unemployment and the huge interest costs of soaring national debt, many Departments will inevitably face budget cuts. I think that everyone is now pretty much agreed that we have reached the limits of our abilities to take on ever more debt without risking the economy as a whole. ""We need"" said The Independent in a recent editorial""this acceptance of economic reality so that our political system can move on to the serious debate about where those public sector cuts should or should not fall. If there is to be a reshaping of the public realm, it must be enacted with serious thought."" In short, the debate that we need to have for the foreseeable future is how we tackle the debt crisis and deliver quality public services when spending is tight. Ministers—in particular the Prime Minister—seem incapable of acknowledging that reality. Let me give one example. Even in the Department of Health things will be tough. Nobody is more respected on NHS research than the King's Fund, and in its briefing on the Budget it says that""from 2011 this period of growth will end. Treasury forecasts issued with the Budget suggest that the NHS is set to receive low or zero real growth in funding after 2011. The Institute for Fiscal Studies' forecasts suggest real term reductions from 2011 are a strong possibility…the poor state of the public finances means that the NHS must prepare at best for very low or zero growth in funding from 2011 onwards. The government's forecasts for annual real increases in total government spending on public services and benefits from 2011/12 were 0.7 per cent. However, the Institute for Fiscal Studies has calculated that once debt pressures and growth in spending such as unemployment benefits are taken into account, this 0.7 per cent. growth translates into an average real reduction of around 2.3 per cent. a year between 2011 and 2014 for the public sector as a whole…the scale of the challenge is magnified further by rising demand for health services with an ageing population and a higher incidence of chronic disease. Recent falls in NHS productivity are also a concern. Productivity must rise significantly if the NHS is to sustain and improve performance."" David Nicholson, the NHS chief executive, put it even more starkly last week when addressing senior NHS managers. He told them to plan for spending cuts even more drastic than those already suggested. He says that NHS trusts will have to deliver between £15 billion and £20 billion-worth of financial savings over the three years from 2011 to 2014. Such cuts will be the equivalent of up to 6 per cent. of the current NHS budget. That is of very real concern to my constituents and myself. The most serious constituency campaign that I have had to wage during my time as a Member of Parliament in North Oxfordshire is to keep the Horton hospital a general hospital, to maintain all key services at the Horton and to ensure that we continue to have 24/7 maternity and children's services. I put the King's Fund points to the then Health Secretary, the right hon. Member for Kingston upon Hull, West and Hessle (Alan Johnson), on 12 May. I asked:""The King's Fund advises that the poor state of the public finances means that the NHS must prepare, at best, for very low or zero growth in funding from 2011 onwards. I would like to know what the Secretary of State is doing to advise strategic health authorities that they must now start planning for zero or very low growth within the NHS from 2011 onwards"." The answer from the right hon. Gentleman, who some say may be the next Prime Minister, was one of complete denial. He said:""What we have done since the allocations that took place last December—it was a two-year allocation of 5.5 per cent. each year and included the ability to draw down £800 million of surplus—is ""to say that there is a message here. It comes from the chief executive of the NHS as well, and it is that the NHS has to prepare for a time when we will not have such spectacular increases in growth…We cannot say at this stage what the expenditure will be in the NHS but we can say that it will continue to be our absolute priority. As the Prime Minister told the Royal College of Nursing yesterday, we hope very much to ensure that there are real-terms increases over the coming years, although they may not be at the same levels as in the past."—[Official Report, 12 May 2009; Vol. 492, c. 678.]" One wonders what sort of planet the right hon. Gentleman is on. I cannot believe that the Secretary of State for Health had not at least read the research from the King's Fund. I am sure that the Secretary of State must have been talking to the chief executive of the NHS. It is depressing that when everyone is talking about more honesty from politicians, there seems to be collective denial from Ministers because at best this is waffle and, at worst and in reality, it is a collective denial by the Prime Minister and Ministers to face up to the facts. According to the Government's own figures, public spending in 2011 will see only a 0.7 per cent. increase. We have to start talking now in an adult and responsible way about how we can deliver more with less. We need some basic honesty, otherwise we know from experience what happens. We get a Treasury-led salami-slice approach to departmental budgets. Every Department regardless is told that they will simply have a smaller budget. We have been there before. All that happens is that it tends to harm front-line services as managers and mandarins push the pain away from them to those who are delivering services. There are a number of ways in which we can make some easy savings. We certainly do not need to waste billions of pounds on ID cards. We need a sensible and grown-up debate on defence. We need to ask, importantly, how our public services can be made more efficient. Recent figures from the Office for National Statistics show that productivity levels across the public sector have fallen over the past 10 years. A cause for concern is that average public sector output in 2007 was 3.2 per cent. lower than in 1998. We have had increases in public spending but falling productivity from the public sector. I have a simple plea. I suspect that, whoever wins the next general election, the next Parliament will be the hardest, toughest, most difficult and grimmest that any of us have lived through, but can we please have an honest and grown-up debate about how our public services do more with less, and can we please have an honest and grown-up debate about what the real figures are? Please can we cease this insane and mindless denial by the Prime Minister that what the Government have said in their Budget is the reality and the truth? If we can all acknowledge that, perhaps the public policy will be all the better for it. Otherwise all that will happen is that the country will waste a year between now and the general election. That is not in the country's interest and it is certainly not in the interests of our constituents.