Discover more from Peter Hain
Welsh Grand Committee
Mr Peter Hain MP (Neath): Can I begin by welcoming the news that the Prince of Wales is soon to become a father-in-law and that the happy couple intend to live in North Wales where I know they will receive a warm welcome, not least by their new MP, my Hon friend Member for Ynys Mon.
She will have noticed the letter to the Prime Minister by three former Secretaries of State for Wales – my Rt Hon Friends the Member for Cardiff South and Penarth and for Torfaen, and myself. In it we argue that the state that the current occupants of the Wales Office are presiding over a period when relations between our countries, and their now separate administrations, are at rock-bottom. We express our concern to the Prime Minister that your administration appears ignorant of, or indifferent to the needs of Wales.
Her speech today showed a curious combination of Welsh wizardry, Irish folk lore and Greek mythology. She has been telling tall stories about the British economy and Labour’s record in office. The government keeps pointing its finger at Ireland and Greece and muttering, there but for the grace of God – and of course the genius of George Osborne – goes the UK. When the truth is that Britain’s position is as different from Ireland and Greece as chalk is from cheese. The much lower yields on UK government bonds since the credit crunch bear eloquent testimony to that.
Ministers love repeating their mantra about pulling Britain back from the brink of bankruptcy. It’s a nice line, but not true. If it ever had been true, the yields on UK government bonds would have been sky high because of the risk of default. In fact they have been remarkably low ever since the global financial crisis erupted.
Ministers claim that the economic crisis was caused by the Labour government, through reckless spending and excessive borrowing. But that’s not a claim they can back up. Nor is the coalition’s claim that there is no alternative to the path they have embarked upon.
It’s time to tackle these myths head-on. Let’s start by looking at the picture before the global financial crisis hit.
First debt. In 2007 IMF figures show that British government debt as a proportion of GDP was below that of France, Germany, the USA, Japan and even Switzerland. In 2013 it is still forecast to be below that of France, the USA and Japan. (Source: IMF Fiscal Monitor November 2010). There was no “decade of debt”. That is a Tory myth. In fact Labour had been paying down debt. Public sector net debt fell from 42 per cent of GDP in 1996-97 to 36 per cent in 2006-07. That 6 per cent reduction is worth some £90 billion today. By bringing down government debt we effectively saved the taxpayer about £3 billion in annual interest payments. We did indeed fix the roof when the sun was shining.
Second, government spending. Coalition ministers like to pretend that Labour was the last of the big spenders. But in 2007 UK government spending as a proportion of GDP was lower than that in France, Germany, the Netherlands, Norway and Sweden. Our non age-related social spending as a proportion of GDP was lower than the European Union average. Our education spending was almost identical to the OECD average of 5.7 per cent. Our NHS spending the following year 2008 was 7.2 per cent of GDP compared to 8.7 per cent in Germany and 8.1 per cent in France. So much for ‘overspending’.
The previous government did not behave like a pools winner and go “spend and spend and spend”. If we had done, the Tories would never have accepted our spending plans. But they did. Until November 2008 they undertook to abide by Labour’s public spending plans up to 2010.(as Dennis Kavanagh and Philip Cowley confirm in their account of ‘The British General Election of 2010′ page 75). Sometimes they demanded we spend more while the Liberal Democrats demanded we spend more all the time.
Third, annual government borrowing. Britain was not a particularly big borrower before the global financial crisis. In relation to GDP government borrowing in 2007-08 was far lower than in the Tories’ last year in office 1996-97, when Ken Clarke was at the Treasury: 2.4 per cent compared to the 3.4 per cent we inherited from the Tories. And Labour’s borrowing helped to pay for a much higher level of public investment, four times as high in fact.
Before the global credit crunch Labour borrowed mainly to invest, whereas in their last year in office the Tories borrowed mainly to meet their weekly wages and benefits bills. In 1996-97 eighty per cent of what the Tory government borrowed went to pay the running costs of public services, not to finance new schools and hospitals or to develop Britain’s road and rail networks.
That was then. But what about now? Did we lose control of spending and borrowing in response to the credit crunch? The short answer is: certainly not. What we did do was boost public spending to offset the collapse in private spending as firms and households cut back on business investment and consumer spending.
This extra public spending, coupled with the loss of tax revenue – as output, profits and employment fell – led to much higher government borrowing. It is that extra borrowing – that much maligned deficit – which has kept the economy afloat in the face of the worst downturn since the 1930s. Without it the financial crisis could have led to a financial collapse and recession could have turned into depression. The IMF has acknowledged that the worldwide increase in government borrowing since the 2008 credit crunch staved off an economic catastrophe. It certainly did in Britain.
The crisis did not originate in the public sector. It stemmed from irresponsible lending by financial institutions right across the globe. When their loans began to go bad they realised that, by slicing and dicing mortgage backed securities and playing a massive game of financial jiggery pokery, they had made it impossible to say with confidence who was solvent, who was insolvent and who was simply short of liquidity. Their reaction was to conserve cash, refuse to lend even overnight, and thereby threaten a seizure in the world financial system. When banks stop lending, firms and consumers stop spending, throwing jobs into jeopardy everywhere.
It’s a fair question to ask where were the regulatory bodies while all this was going on. But it’s not fair to claim that the crisis was due to reckless spending by governments and excessive public borrowing, certainly not in the UK under Labour.
Since the financial crisis UK government spending as a share of GDP has risen by over 5 per cent. Much of that extra spending was automatic as firms cut back and unemployment rose. Some of it, under 2 per cent of GDP, was discretionary and temporary, in the form of the 2009 fiscal stimulus when the economy was at its weakest. Some of it was public sector capital investment programmes brought forward from future years. We raised net public investment from £27 billion in 2006-07 to £49 billion in 2009-10, higher than in any year over the past four decades. And some of it was the direct cost of government support for the UK financial sector, about £90 billion up to June of this year on recapitalising Britain’s banks (Source: IMF Fiscal Monitor November 2010). (That £90 billion bailing out the banks dwarfs the UK’s annual contribution towards the European Union budget of under £5 billion, by the way). This is how Labour stopped a slide into slump and how we promoted recovery from recession.
Borrowing was certainly not ‘out of control’. The Office for Budget Responsibility reckoned that borrowing last year 2009-10 would come out over £10 billion lower than we had forecast and £8 billion lower in the present year. Unemployment has stayed lower than many forecasters expected and the economy had started to grow again by the end of last year. Recovery was fragile but real, in the run-up to the general election.
There is no doubt that government borrowing must be brought down and public sector debt reduced as a proportion of GDP. Unless we do so future governments may be unable to fight any future economic shocks of the kind we are still recovering from. Labour had planned to halve the public sector annual deficit by 2013-14 which is in accord with the June 2010 G20 Toronto Declaration. The Office for Budget Responsibility has confirmed that under Labour’s plans, borrowing would have been more than halved by 2013.
But the coalition has adopted a far riskier strategy. It plans to cut the UK fiscal deficit by much more than required by the Toronto accord. The UK fiscal tightening planned for next year 2011 is twice as fast as that planned by the USA and four times as fast as Germany and Japan. Why the rush? IMF figures show that the UK’s gross financing needs as a proportion of GDP this year and next are below those of Japan, the USA, France, Canada and many others. The alarm bells are not ringing, so why risk derailing recovery by squeezing the economy at the very moment it is beginning to grow again?
IMF figures also show that the UK plans to make in the next three years about two thirds of the fiscal adjustment required in the coming ten years for the UK to be on target to reduce public sector debt to 60 per cent of GDP by 2030. Again, why the rush?
The coalition’s plans could seriously undercut growth. The IMF estimates that the cost of frontloading the squeeze on the UK fiscal deficit is a 0.3 per cent reduction in our growth rate next year. (Source: Transcript of a Conference Call on the 2010 Article IV Consultations with the UK, 9 November 2010). That cut in the growth rate may be seen by the coalition as valuable insurance against the risk of a costly loss of confidence in Britain’s public finances. But in the absence of any sign of such weakening confidence, this all smacks of giving in to your worst imaginings.
What is real is that the OECD has slashed its forecast for UK growth next year from 2.5 per cent to only 1.7 per cent. The latest CBI industrial trends survey suggests that manufacturing expectations have collapsed. Office for National Statistics retail sales figures show that households are reining back on spending. October saw a welcome fall in the unemployment rate in Wales, but the Institute of Directors has warned that such figures may give a false sense of security. They expect the economy and the UK labour market to weaken in 2011.
There is a difference between a squeeze and a straightjacket. Plenty of experts, not just the Institute for Fiscal Studies, are warning that the Chancellor may have gone too far, that his constraints on expansion are too tight, and that he may need to ease the fiscal squeeze. In short that he may need a Plan B. The latest figures for GDP growth show a fall back from the second quarter’s result. The danger is that economic recovery may lose momentum. The Chancellor’s measures are damaging what might be called the economy’s ‘bounce back ability’.
All this means that growth could stall in the new year, and slower growth means fewer jobs. Bank of England projections already point to a substantial amount of slack remaining in the economy in three years time. This week’s Office for Budget Responsibility report still expects hundreds of thousands of public sector jobs to be lost as a consequence of the spending cuts. They will be more than matched by private sector job losses, as Pricewaterhouse Cooper has already forecast. Some 60,000 of those job losses will be in Wales. The Chartered Institute of Personnel and Development reckon that Britain could lose over 1.6 million jobs across the economy by 2015-16. Over one million women are now unemployed and the number of people working part-time because they could not find full-time work reached a record 1.15 million in October, up by 67,000.
For hundreds of thousands of public sector workers the front line has become the firing line. While City bankers pocket huge bonuses, all public sector workers can look forward to is a P45 instead of a pay packet.
This Government’s actions have hit Wales harder than anywhere else. The CSR was a reckless gamble. Families in Wales, workers in Wales and businesses in Wales are worried stiff about their future.
Nothing can disguise the savage cuts inflicted on the Welsh budget, on top of closing the Passport Office, cutting the St Athan Defence Training College, abandoning the Severn Barrage and kicking rail electrification to Swansea into the long grass.
And while the Chancellor was still on his feet delivering the CSR, part of it was already being judicially reviewed. There are all sorts of issues with the S4C Authority, but we support S4C in seeking a judicial review of the Government’s decision on its future.
The Government have handled the whole issue very badly – showing arrogance and contempt for Wales: no prior consultation at all with the Welsh Assembly Government or with S4C themselves. Where was the Secretary of State in all this?
Small business in Wales, particularly those in the creative industries, are understandably very anxious about what this decision means for them.
Cuts on benefit levels and eligibility will be introduced under the radar – a vindictive and pernicious attack on Wales’s most vulnerable communities.
Because Wales is more reliant on public sector jobs, these savage cuts will damage Wales more than any other part of Britain.
There are already far fewer vacancies than there are unemployed people looking for work. For every job vacancy, five are unemployed. The situation will get worse as the cuts hit home. With ministers once again telling the unemployed to get on their bikes and search for a job, Britain should do well in the 2012 Olympic cycling events. The unemployed know that, like the Tour de France, the pursuit pack may be crowded but at the end of the race there is still only one yellow jersey. Unless the economy recovers from recession and growth picks up speed, their search for a job will remain a pointless quest.
Ministers say “we’re all in this together”. They conjure up an image of the British economy as if it were the Titanic, holed below the waterline by an iceberg of government borrowing that Labour had carelessly parked dead ahead of the ship of state.
What we are witnessing today, both in Whitehall and in the City, is the Ismay response. While the Titanic’s captain and crew tried to put women and children first, Bruce Ismay, the boss of the White Star Line, was quick to pinch a place in a lifeboat. Women and children appear to be expendable items in this government’s peculiar priorities for public spending, with child tax credit, child benefit, maternity grant and baby bonds amongst the first to be sacrificed.
The Government also has students in its sights. We already know that the £30 per week educational maintenance allowances for 16-19 year olds at school, in sixth form colleges or FE colleges are going – except in Wales where to their great credit Labour Ministers are keeping it. Average student debt in Wales is already over £6400 per year. Across Britain students starting at university this year are forecast to finish their studies with an average debt hanging round their necks of £25,000, before any increase in fees arising from the Browne Review. This is nearly three times today’s average household debt excluding mortgages in the UK. In October (9 October 2010) the Telegraph reported fears that under the Tory Lib Dem policies the cost of a three year degree and its associated living expenses could reach £80,000
Thankfully, in Wales the Labour led Assembly Government yesterday announced that Welsh domiciled students will not have to pay extra fees. The cost will be met by the Assembly Government. There will be variable progressive rates of interest charged depending on income; that is a fair way to fund higher education. This Government could learn a thing or two from Labour Welsh Assembly Ministers.
The Prime Minister made a pre-election promise there would be ‘no cuts’ to the NHS. And when the coalition was formed they pledged to ring-fence health spending.
However, a House of Commons Library research report on 1st November confirmed:
“Including the (social care) funding is critical to the description of the settlement as a ‘real terms increase’; without it, funding for the NHS falls by £500 million -0.54% in real terms.”
And despite massive cuts to the Welsh budget, the Tories in the Welsh Assembly have the audacity to suggest that ring-fencing the health budget in Wales is affordable! On Tuesday, 2nd November during First Ministers Questions, Nick Bourne the Welsh Tory leader, talked about how the UK Government would “safeguard the NHS budget” in England and demanded that we do the same here in Wales.
To pay for this, the Tories in Wales have said “of course” they would be happy to cut the schools budget by over 20%. This would create chaos in the education system. Schools would shut overnight.
This is an unrealistic, irresponsible and unaffordable spending commitment by the Tories in Wales. The Secretary of State should condemn it. The government says we are all in this together. But some are being gripped tighter than others by the Chancellor’s python policy. Families in Wales are feeling the pinch more than most since Welsh household incomes are over ten per cent below the UK average. Tens of thousands of working Welsh families on low to middle incomes face a triple whammy. What they gain from a higher income tax allowance they more than lose through cuts in tax credits, cuts in childcare support and cuts in benefit entitlements. Their pay is being overtaken by rises in the cost of living. They are the squeezed middle and they are hurting. Many of them are struggling to make ends meet. Small wonder that the latest figures show a sharp slowdown in household spending.
I noticed that the Prime Minister wants to build a Happiness Index to keep our spirits up during the tough times that lie ahead. Devotees of the songs of Ken Dodd may remember that his string of hits began with “Happiness” but it was followed by “Tears” and ended with “Brokenhearted”. A fitting epitaph, I fear, for this Government’s disastrous, savage public spending cuts.