Rt Hon Lord Lilley

    Mr. Peter Lilley (Hitchin and Harpenden) (Con): I am a supporter of annual Budgets, with all the drama that we associate with them. However, one of the dangers of Budgets is that they give the illusion that economic performance is primarily the result of short-term decisions?that performance in the current year has been largely the result of decisions taken in last year‘s Budget, and that performance in the coming year will be largely the consequence of decisions taken in this one. That is nonsense. In fact, economic performance is primarily the result of the cumulative impact of budgetary, tax, spending, regulatory and other policies, which ideally move only in the direction of improving performance, although, in other circumstances, sadly, they may move in the other direction and cumulatively undermine performance.

    I was one of those involved in developing and subsequently implementing the reforms introduced in the 1980s and early 1990s. I learned two things that I did not expect from that experience. The first was that the cumulative impact of those reforms exceeded our expectations; they did more to transform the performance of the British economy than we had dared hope. However, the second was that they took rather longer to have that impact than we had expected. The cumulative impact of reforms of trade unions, taxation, nationalised industry, the competitive environment and the regulatory framework took longer than we had expected to feed through to an improvement in our performance relative to that of other countries. We should thus bear in mind the fact that policy is long term and cumulative when we assess the Chancellor‘s performance in this and previous Budgets.

    The Chancellor undoubtedly deserves his share of credit for the relatively strong performance of the British economy in recent years. However, I submit that that share of credit is relatively small. The strong performance is largely due to the fact that, unlike his predecessors, the Chancellor has not rapidly undermined the reforms and the strength of the economy that he inherited. None the less, he should also be held to account in due course for the long-term changes that will?as they already are undermining?cumulatively undermine the long-term performance of the economy. They may take longer to feed through than some people anticipate but they will steadily and surely, as night follows day, reduce the performance of our economy relative to what it could have been.

    The greatest single change that we made in the relative advantage of doing business in this country compared with other countries was the reduction of our tax burden relative to that of other countries. Before I spoke to the French equivalent of the CBI recently, I looked up the figures for the tax burden as a share of national income in this country since 1979 compared with that in our continental EU partners. In 1979, the share of national income going to tax and public expenditure was almost the same for all of us; at the beginning of the 1980s, it was marginally higher in the UK than on the continent. By 1997, however, partly because we had somewhat

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    reduced its share of national income at a time when other countries had seen that share rise substantially, the gap between the share of our national income going to tax and that of our continental competitors had risen to nearly eight percentage points of gross domestic product. That was a substantial relative advantage for businesses working in this country. It meant that our cost burden was lower, so people‘s incentives to work, invest, save and take risks were higher, and the size of the competitive economy relative to the less competitive public sector was improved.

    I have delivered a series of speeches on that topic in France, as it is of much concern there and, sadly, each time I speak the gap between us and our continental partners, in terms of the share of GDP going to taxation, seems to diminish. There are two reasons for that. In part, it is because the Chancellor has reverted to tax and spend and, in recent years, has increased expenditure taken in taxation faster than national income, after pausing for the first couple of years when he implemented the savings plans that he had inherited from us. However, it is also because other countries have followed our example of the 1980s and early 1990s and begun to reduce the share of their national income taken in tax, and done so without destroying their public services. Indeed, they have continued to improve their public services by adopting the time-old Dickensian recipe of increasing their public expenditure marginally less than their national income so that they can reduce tax rates, while we have been increasing our public expenditure somewhat faster than national income and have thus had to increase the tax burden. Public expenditure has increased on both sides of the channel, but the moderation of the increase on the continent has enabled those countries to reduce the share of national income going into taxes, thereby somewhat eroding our relative advantage. Sadly, this Budget continues the damage.

    Mr. James Plaskitt (Warwick and Leamington) (Lab): If the right hon. Gentleman is preaching the virtue of the French approach to taxation as a share of income, can he explain why our economy has been growing so much faster than the French economy and why unemployment is falling in the UK but rising in France?

    Mr. Lilley: I am sorry that the hon. Gentleman clearly was not listening to the early part of my speech. The consequences of tax, regulatory and policy changes do not follow immediately, in the same year or the next year; there is a cumulative impact. Just as the changes that we made in the early 1980s did not show their full fruits until the early 1990s, one would not expect changes made in the UK or France to show up as an immediate impact on economic performance in the same year, or even necessarily in the same half of the decade. That is a lesson that we need to learn. We must start thinking long term instead of short-term manipulation each Budget for a quick headline, despite the damage that that may do in the longer term.

    The Government were originally elected on a pledge that they would improve public services without increasing the burden of taxation. Instead, they have increased the burden of taxation without substantially improving public services. I shall explain how they have

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    achieved that and how we can have better services without increasing tax rates, and in due course reduce them.

    How is it that Labour is spending more and getting less? In terms of the NHS, the Organisation for Economic Co-operation and Development‘s recent report clearly spelled out the situation. I recommend that right hon. and hon. Members on both sides of the House read it. The report states that, since 1999, when the Chancellor took his foot of the brake and put it on the accelerator?expenditure has been increasing rapidly in health and other public services?we have seen a slow-down in the rate of improvement in those services compared with the previous 10 years when there was growth, but it was moderate and within the capacity of the economy to provide it and for services to absorb it and respond to it.

    In the 10 years up to 1999, when my right hon. Friend the Member for Charnwood (Mr. Dorrell), among others, was responsible for the NHS?he did a very good job?we saw an increase in the number of operations performed of 2.9 per cent. every year, on average. Since 1999, when the brakes have been off and expenditure has been pouring in, the increase has slowed to only 1.9 per cent. per annum.

    The Government say that that relates to operations and that they have shifted the emphasis to day care. Figures for day care come from the same source, the OECD. They show that in the 10 years up to 1999, the number of treatments on a day-care basis was rising by 3.9 per cent. per annum. That growth has slowed even more since 1999 to an increase of only 2.4 per cent. per annum. It will not do for the Prime Minister to say that this has gone up and that has gone up. It has been going up since time immemorial. The point is that the rate of improvement has slowed, and the concerns of patients have increased.

    The Prime Minister hopes that he can appeal to personal experience and the public perception. I tried that during the 1980s. Whenever I had a public meeting, I would ask everyone who grumbled about the health service whether anyone present had had any experience first hand or second hand through their families or friends of the health service. Many hands would go up. I would then ask how many of them thought that the experience was good. Exactly the same number of hands would go up. My next question would be, “Why do you all think that it is getting worse?” The answer would be, “We read in the newspapers that it is getting worse.” [Interruption.] That was during the 1980s.

    If we read the complaints that are registered now by patients?not just those in newspapers?we see that the numbers are increasing. Expressions of concern about cleanliness in hospitals are rising. Is that merely a perception? No. According to the EU, the problem of infections in hospitals is greater in this country than elsewhere. Nearly one in 10 patients have an infection in hospital that they did not have when they entered. Nearly 10 per cent. of beds are occupied by people who got their ailment in hospital. That demands a huge share of our resources. The rate is higher in the UK than any other country in western Europe, and it is getting worse faster than in any other country in western Europe.

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    Mr. Barry Gardiner (Brent, North) (Lab): Does the right hon. Gentleman appreciate that the privatisation of cleaning services in hospitals, which his Government introduced, precipitated the crisis, which as he said has a long-term tail on policy?

    Mr. Lilley: We are talking about a problem that kills between 5,000 and 20,000 people a year. It is not the sort of problem about which we should make party political points. If the cause were what the hon. Gentleman suggests, I would support any change that would solve the problem and thereby cure it. However, the Government have decided that that is not the cause, and they have been in power for seven years. Why is that? Ministers go to other countries, as the Conservative Government‘s Front-Bench health team did, accompanied by the BBC. They went to Germany and saw sparkling, pristine hospitals. They said, “I bet you don‘t contract out your health care to private cleaners.” They replied, “Of course we do. We want specialists involved in cleaning while we specialise in health.”

    The BBC journalist said, “We have had privatisation and all the unions say that that is the cause of all our problems. They say that the contractors do not keep things properly clean.” The German official replied, “Why don‘t you change the contractors?” The benefit of the process is that, if it is not good enough, an improvement can be made, which would be more difficult if the system were run in-house.

    If that analysis is mistaken and the hon. Gentleman is correct, let us all agree to change the system, but let us not make silly party political points when lives are at stake. It must be a silly party political point, otherwise he would have raised it with his right hon. and hon. Friends and urged them to make changes, and condemned them for tolerating something for seven years that he thinks is the cause of 5,000 people dying each year.

    Mr. Stephen Dorrell (Charnwood) (Con): I entirely agree with every word that my right hon. Friend has said in response to the point made by the hon. Member for Brent, North (Mr. Gardiner).

    Is not the fundamental argument that my right hon. Friend is advancing that our health structures are not as efficient as they need to be to deliver the services that patients require and that taxpayers are entitled to see for their money? Is not that argument exactly the one that the Chancellor made two or three years ago, when he said that the extra money that he intended to provide for the health service must be conditional on fundamental reform of the delivery mechanism? The basic point to be made against the Government is that they have made the money available but forgotten about the conditionality that the Chancellor understood at the beginning of the process was fundamental for success.

    Mr. Lilley: My right hon. Friend is absolutely right, and I shall address that point. Undoubtedly, the Government have increased the level of spending more rapidly than happened on a sustained basis under the previous Government, but they have seen a slow-down in performance improvement, and deterioration in some key areas. That is partly because they have intensified the central problem that the NHS and other public services face in achieving improvements: centralisation.

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    We know that centralisation does not work. We have seen its failure on a massive scale in the Soviet Union, in the former eastern bloc and in centralised services in this country. We have seen it even in centralised companies in the private sector. An attempt to run a large organisation from the centre, top down, with command and control does not work. The resources that are thrown in never seem to filter through to the sharp end. Mr. Gorbachev, a well-intentioned man, thought that he could transform the Soviet Union without changing its fundamental structure just by setting targets, urging people to do better and sacking them if they did not.

    The Prime Minister is perhaps Gorbachev‘s last remaining disciple on earth, because the Government have made centralisation worse. Though they have given up socialism, their belief in it has been replaced by a belief in spin and press manipulation. The whole public sector is run for good headlines. If a Government are trying to get good headlines about the health service, there must be centralised initiatives announced from Downing street that determine how money is spent. Ultimately, that means that decisions about how money is being spent that should be taken by individual hospitals or by people who are aware of clinical priorities are taken by Alastair Campbell or someone who is aware only of newspaper priorities.

    Centralisation in the health service has been intensified in all respects because the Government want to take credit at the centre for everything that the NHS does that is good and for any initiative that they can think up that will win the next day‘s headlines. When I visited a hospital, I was told that the Government had set a waiting list target, which made a good headline. They then announced, to get another good headline, that they were appointing a waiting list manager in every hospital, which was duly done. Finally, they announced that they were going to set a centrally allocated waiting list budget for every hospital. In the hospital that I visited, the waiting list manager, to meet his waiting list target, had used his waiting list budget, ring-fenced from everything else, to introduce operations on a Sunday performed by locum consultants. That was more expensive but, in theory, should have reduced the waiting lists. However, the hospital did not employ extra sterilisation teams, so by the end of Sunday all the equipment had to be sterilised and no operations could take place on Monday. However, money to deal with that came out of the hospital‘s general budget, which was not ring-fenced. There was therefore an absurd procedure that resulted in no net improvement in the number of operations but an increase in cost.

    That is just a micro-example of the consequences of centralised decision making. The other problem that we face in the health service, which my party is working to remedy, is the fact that the NHS and other public services tend to lack the dynamic forces that drive up quality and efficiency in most areas where choice prevails. If the user of a service can choose between providers, those providers must compete to be at least as good and efficient as the alternative, and that dynamic force of choice determines where resources go. Providers get the extra resources only if they satisfy more customers or users leading to a constant dynamic to improve quality and efficiency.

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    We therefore need three things in the NHS. First, patients need to be given choice again. We should not forget that one of the early decisions that the Government made for the first time in the history of the health service was to remove the right of patients referred by their GP to go to the hospital of their choice. They can no longer do so, except under the reintroduction of patient choice, when they must grow through an incredibly bureaucratic procedure with appointed choice advisers. The Government have removed that choice, and we must restore it. Secondly, we must make taxpayer‘s money follow that choice. In the NHS, if a patient goes to hospital A rather than hospital B, hospital A should get the extra money to provide the resources to treat that patient and reward it for doing so. If hospital B is not getting enough patients, it must take action to remedy the situation. That does not mean closing down or starting a spiral of decline?indeed, there is usually a pattern of improvement. If a hospital realises that people are not coming because, for example, it has a reputation for dirty wards, it will clean those wards. If it has a reputation for not washing hands between operations, it will remedy that practice.

    Those things do not cost any extra money. A hospital‘s consultants may not be performing as well as they should, and may need to be retired and replaced by new consultants. It may cost less to employ a relatively young but extremely able consultant instead of a senior consultant who is past his prime. Those things do not cost extra money, but they drive up quality if we have choice and the taxpayer‘s money follows that choice. Thirdly, patients must have the information on which to make informed choices if that dynamic is be reintroduced in the health service.

    The same applies to schools and elsewhere. The Government deserve some credit for not undermining the long-term benefits that began with the reforms of the 1980s, and for introducing improvements such as the independence of the Bank of England and so on. However, they have started a policy of tax and spend which will undermine our relative advantage and, in due course, our economic performance. It is already undermining our productivity. I remind the House of an issue that I raised in the Budget debate last year. The Chancellor claims credit for a growth rate of 2.3 per cent. this year. Growth is made up of two things?growth per head of those employed and the number of people employed. The number of employed people is rising quite rapidly, partly because we are continuing to reduce unemployment, which is excellent and to the great credit of all those policies that brought it about. The big increase, however, stems from net immigration. I have asked the Chancellor what share of our growth rate is due to net immigration?it is 0.4 per cent. of that 2.3 per cent. Without net immigration, the growth per head of the indigenous or resident population is less than 2 per cent.

    We should recognise that it is only if output per head rises that income per head will rise, along with our well-being and the standard of living throughout the economy. The Chancellor should not pretend that growth that comes from increasing our population will necessarily increase net wealth per head. Indeed, it can create problems, which show up on the other side of the equation?housing problems, congestion and increased use of all the public services, to which people who come

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    to work here naturally have the right of access. That does not show up in the Chancellor‘s figures, but it shows up in the demands on his Budget. The Government have therefore pursued policies that reduce productivity growth per head, and unless and until those policies are changed, there will not be an improvement in the average wealth or the growth of wealth per head, which everyone in this country wants.

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