Rt Hon Lord Lilley


    Mr. Peter Lilley (Hitchin and Harpenden) (Con):
    It is always a pleasure to follow the right hon. Member for Holborn and St. Pancras (Frank Dobson), if only because it reminds us how far the rest of us have moved on over the past couple of decades. I hope that he will forgive me if I do not return to fight the old battles, which he enjoys fighting even though he lost. I see no need to re-fight them, because we won.

    I have found that I can begin almost any speech on any subject, and I do, by reminding people of the slogan that Bill Clinton used to have above his desk to remind him of what was really important: “It’s the economy, stupid.” As we are focused on the economy today, we need another sign above our desks saying, “It’s the deficit, stupid” and below that perhaps another one saying “It’s public expenditure, stupid.” Unless we focus on getting a grip of public expenditure and on eradicating the deficit more rapidly than the Government want, we will not get the economy of this country right. The supreme weakness of the pre-Budget report-some of us may have forgotten that we are supposed to be debating that today-is that it does not focus on those things. One has to get more than halfway through the overview at the front before there is even the coyest of mentions of the deficit:

      “The Pre-Budget report announces action to maintain the path of fiscal consolidation”.

    It goes on to say that the three measures that maintain the path of fiscal consolidation are all tax increases. That is how the Government see the priority of solving the deficit. The report refers to public expenditure only in the last sentence, when it mentions that the Government plan is to embed

      “in legislation through the Fiscal Responsibility Bill”

    their measures to halve the deficit. The substitute for action, as far as the Government are concerned, is the deficit-reduction Bill. We debated that at length on Tuesday. I did not have a chance to participate then, so I hope I will be forgiven for saying now why I consider that Bill to be a mistake.

    First, it is obnoxious in principle to try to bind future Parliaments. That cannot be done in practice by passing a law, but time and again this Government try to bind future Parliaments by passing legislation that has a bearing on what future Governments must and must not do. Secondly, the Bill is a nonsense. It is not even legally enforceable. It is not even judiciable; it is one of those rare Bills that actually has a clause that effectively says that the courts may not take note of the law incorporated in it. It is imprudent, too, because it seeks to bind, albeit unenforceably, future Governments to follow a particular path when we cannot be sure what things will be like over the next four years-let alone the next eight or 10 years, as the Bill envisages. I think that we should probably pursue a fairly ambitious path, but it is foolish to try to lay down a law on what needs to be done in future. The Bill is also a displacement activity; it is a substitute for action because the Government want to avoid action and facing reality.

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    What is most wrong with the Bill, however, is that it is a recipe for delay. St. Augustine said, “Make me chaste, O Lord, but not yet” and St. Alistair says, “Make me fiscally responsible, but not until 2011.” At least St. Augustine saw himself ultimately becoming chaste, but the Chancellor and the Prime Minister are probably passing on the task of fiscal responsibility to their successors, rather than to themselves.

    I believe that it is better to act sooner than later, because there is a positive benefit in doing so. If we act sooner in taking steps to get the deficit under control, that will restore confidence; and with confidence, growth will come-and with growth, jobs will come, not least for our young people who are currently languishing on the dole queues at the very start of their careers.

    There is also danger in deferring action on the deficit in that every month we do so the risk increases of our having a sovereign debt crisis and a financial collapse. That would mean higher interest rates, which would not only make controlling the deficit less easy, but hit all those people with mortgages. One thing about this economic downturn is that at least there is a section of the community that is reasonably well off, and in some cases better off, because interest rates are low: the mortgage payers of this country. They face the greatest threat from this Government’s refusal to tackle the deficit speedily and strongly, because it is their interest rates that will increase.

    Justine Greening: Does my right hon. Friend agree that because other countries have already come out of recession, our taking a long time to get our public finances back into shape will be a double disadvantage-both domestically and globally in competition with other countries?

    Mr. Lilley: My hon. Friend is absolutely right. If we leave this too late and as a result there is a crisis, we will have to take much more brutal action: instead of companies simply not recruiting, they will have to sack people; instead of voluntary redundancies, there will be compulsory redundancies. That will be the inevitable consequence of taking too long over implementing the measures that we need to take to bring the deficit under control.

    The Chief Secretary said that worries about major holders of Government bonds selling their bonds were overstated. He said that PIMCO was selling bonds because it was looking for riskier assets elsewhere. He must be the only person who thinks that PIMCO and other bond holders are selling UK bonds because they think that they are not risky enough-because they think that the Government’s finances are not putting us in sufficiently great danger of bankruptcy. The truth is that they are selling them because they think that the price does not yet fully reflect the risks and dangers of financial collapse. They know that if that happens there will be higher interest rates, and they would prefer to buy them back then rather than experience the collapse in the price and rising interest rates while still holding them.

    The Government argue that withdrawing the fiscal stimulus too soon will risk provoking a double-dip recession. That is wrong for several reasons. The first reason is that it is an argument for never taking action. If withdrawing the supposed stimulus has a negative impact, it will do so next year, the year after or the year

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    after that; after all, it was several years after the recovery had begun that the double-dip recession occurred in the United States in the 1930s. That was not because action was taken in the first or second year of the recovery; the action was taken three or four years later, in 1937. Like a lot of the arguments that the Government put forward on many of their policies, it is an argument for not doing anything.

    The second reason is that the stimulus effect of a deficit is grossly exaggerated. This country has a bigger deficit than almost any other comparable country in the world, yet it is the last to come out of recession, so there has not been a vast stimulative effect. Likewise, its removal will not have a vastly depressive effect.

    The third reason is that the Government’s argument ignores the fact that the effect of action to get the deficit under control on improving confidence far outweighs the impact of the loss of Government expenditure feeding into the economy if the fiscal contraction and consolidation takes place sooner. The fourth reason is that we are dealing with a structural deficit, and the way to tackle that is to make structural changes, which takes time. If we do not start thinking them through and implementing them now, we will not get the benefits until it is too late.

    So, there are sound reasons in principle for disagreeing with the Government’s view that there is a great danger in starting the process of fiscal consolidation at the first possible opportunity, and there is plenty of evidence in practice. We have seen Governments do this before. This country has previously started the process of fiscal contraction before the recovery has been long established. In 1976, the Labour Government did just that-they had to, because the International Monetary Fund told them to do so. At a recent seminar in the City, players in those past crises revealed that Jim Callaghan was quite keen to do it anyway and found what the IMF said to be a useful excuse. Lord Donoughue, the head of his policy unit at the time, said that having argued internally and with the IMF about whether they could avoid taking such action, they were struck by the fact that when they did so renewed growth in the economy came much more rapidly and strongly than they had anticipated and that the effect was positive, rather than negative.

    In 1981, the Conservative Government took such action. Some 364 economists wrote to The Times saying that any attempt to reduce the deficit at the bottom of the recession would turn that recession into a continuous downward spiral from which there would be no hope of recovery. Almost from the day that their letter was delivered and published in The Times , and, simultaneously, Geoffrey Howe-now Lord Howe-introduced his Budget, the economy started to recover. The effect on confidence outweighed the direct Keynesian effect.

    Plenty of evidence from overseas supports what I am saying. An excellent study that I have mentioned before in this House-I have still seen no evidence to suggest that the Government have yet read it-has been produced by the European Central Bank. Its occasional paper series No. 38 “Economic reactions to public finance consolidation: a survey of the literature” is very revealing. It reveals that on many occasions the effect of reducing Government spending, and even sometimes of raising taxes, in order to produce fiscal consolidation is positive. It states:

      “The issue attracted much renewed interest in the light of the experiences of fiscal consolidation in Denmark (1983-86) and

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      Ireland (1987-89). In spite of the severe restrictive policies pursued in the two countries during the periods concerned, their rates of growth showed significant increases on previous years.”

    There was also a study of some 18 OECD countries over the last 30 years of the previous century which showed a range of expansionary and contractionary episodes. The conclusion was:

      “The effect of fiscal policy therefore becomes non-Keynesian”-

    that is to say that a contraction of the deficit produces expansion of the economy-

      “when large and persistent budgetary adjustments are implemented.”

    That is precisely the circumstance that we find ourselves in today. By contrast, another study mentioned in the document considered five rather similar OECD countries: Australia, Canada, Germany, the United Kingdom and the United States. It concluded that

      “the effects of fiscal policy on GDP and its components”

    have tended to

      “become substantially weaker over time”

    and that since 1980, the

      “effects have been mostly negative”.

    In other words, a contraction in the deficit produces a sufficient return in confidence to produce expansion in the economy.

    So, we have the evidence to know that we ought to be taking action now. The sad truth is that we have a Government who are unable and unwilling to face up to reality, who are putting their party political interest before national interest, who are using tired economic dogma against actual experience that has been studied and seen to operate on the ground, and who make easy promises before the election, leaving tough choices until afterwards.

    Mr. Timms: I am listening to the right hon. Gentleman’s speech with interest. He presented the handling of the 1980s recession to us as a success. He will recall, as we all do, the fact that unemployment reached 3 million in that recession. Surely there are lessons to be learned and we should not be repeating that experience.

    Mr. Lilley: We should not. We started then from a very different situation, with massive over-manning in both the public and private sectors. Because of changes in the economy and in trade union law, that situation was seen to change. That happened in other countries that moved from a very socialised economy to a more liberal one, as a result of being too socialised and too syndicated in the first place-of having that mass over-manning. My point was that the contraction in the deficit produced an expansion in output of activity. That surely meant that there was less unemployment than there would otherwise have been, unless the Financial Secretary is saying that we should-well, I cannot see any alternative.

    Ms Keeble: I want to underline the point made by my right hon. Friend the Financial Secretary. Does the right hon. Gentleman not accept that in the early 1980s and early 1990s the social unrest created by the fiscal consolidation sparked riots in most of our inner cities? One of the telling things about this recession is that although we have seen such a level of unemployment

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    and repossessions, the country has held together-touch wood-remarkably well. There has been a sense that we are pulling together to get people through a real crisis.

    Mr. Hands: Better than the Government.

    Mr. Lilley: My hon. Friend on the Front Bench makes a valid point-the country might have been holding together, but the Government clearly are not. However, let me address directly the hon. Lady’s serious and important point. I do not want to return to the previous speaker and to re-fight the battles of the ’80s, but my point is that the Keynesians argued that that consolidation of the budget deficit would intensify the recession and they were proved wrong. That is the simple point that I want to put across. The economy, far from going into a deeper recession, began a strong and prolonged recovery. Perhaps the hon. Lady can think of other ways in which that recovery could have been made even greater and stronger, but she has not pointed out what they might be and nor has anybody else I know. I want to allow other people to take part in the debate, because I want to hear what they have to say.

    How do we cut expenditure? We want to cut expenditure in ways that do not throw people out of work and that do not undermine public services. We have to recognise that we have one of the most expensive public sectors in the EU. It is heading for, and is set to reach, more than half of our GDP. Moreover, one of the biggest impacts within the sector has been the increase in the pay budget. I draw the House’s attention to a study produced just a few days ago by the Centre for Economics and Business Research, which gives all the facts and figures and says that if the public sector pay bill had risen in line with the private sector pay bill over the past two years, then taxes, or borrowing, could have been £11 billion lower. One of the main agents of the growth in the deficit has been the fact that the public sector pay bill has been out of control in the past couple of years. It must be brought back under control in the interests both of controlling the deficit and of reducing the impact on jobs in the public sector. We do not want to lose a single job if we can help it, if those jobs are valid or if people can be moved to do something more useful.

    We must learn to say no to new ideas-that probably applies as much to Opposition parties as to the Labour party-and we must not be in the business of adding to our spending commitments. We must also learn from the private sector the lessons of lean production and how constantly to improve the value for money that one gets from any given number of people. The way to do that is not through top-down statements that we are going to change it all through a few edicts from some great man, even though we can recruit some great experts in efficiency. Ultimately, it means doing in each Department what I started to do in my Department-the Department for Social Security-and asking people at the sharp end of the Department how they could do their job more efficiently.

    It was quite difficult to get my managers to do that. They came back and told me that they had spoken to the area managers. I said, “I didn’t ask you to do that. I want you to speak to the people who actually fill in income support claims, or who help to monitor invalidity benefit claims, and ask them how they could do their job better.” No one had asked those staff that before,

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    and they came up with an enormous range of sensible ideas for improving efficiency. The target was to improve efficiency by 25 per cent.-in other words, to reduce the number of jobs by 25 per cent.-but they participated in the exercise because no one had ever asked them before how they could do their job more effectively. They knew that they were doing lots of things in very inefficient ways, and they wanted to do them better. Most people in the public sector want to do their job better and have the public interest at heart. We must do that at the micro level, through every Department, to harness the experience and expertise of the people at the sharp end of each Department.

    Mr. Cash: Will my right hon. Friend give way?

    Mr. Lilley: If my hon. Friend will forgive me, I am just drawing to a close.

    If we do that, we can make the process of fiscal consolidation less painful than it would otherwise be. However, no one should pretend that it is not going to be painful, and no one should forget who is to blame for getting us into this crisis.