I beg to move,

That this House has considered the matter of the Pre-Budget Report.

I welcome the chance to open today’s debate, the first on the pre-Budget report. I welcome it because decisions as significant as these should be tested in debate, so that the House and the public whom we represent can see clearly where each party stands and, amidst the arguments that we have in the media and elsewhere outside, where the policy of each party really rests.

We on the Government Benches are very clear about where we stand. We stand on the side of workers, businesses and home owners, who need protection from the worst global recession in 60 years, and for locking in recovery. We stand for taking the difficult decisions that will be needed to halve the deficit over the four years to come, while protecting our priorities for public services. We also stand for investing in growth, new jobs, new industries and new infrastructure that together will be vital in balancing our economy better in the years to come.

I hope that the crispness and clarity of our position in this debate will be matched, especially by the Opposition. This week, policy pose after policy pose has given way to position after position, sometimes with up to three difference stances in one afternoon. However, credit where credit is due: the Opposition are nothing if not nimble, as they hop madly between constituencies that they are so desperate to please. We will have none of that on this side of the House, so let me use the few minutes allotted to me this afternoon to set out some of the measures that my right hon. Friend the Chancellor presented before Christmas.

To reinforce the points that my right hon. Friend has just made, has he seen page 24 of The Guardian today, which says, “Demand for gilts at its highest for nine months,” and “Service sector recovery raises hopes of end to UK recession”? The Government must be getting something right, and the Tories must be completely wrong.

I am grateful to my hon. Friend for bringing page 24 of The Guardian to the House’s attention. I will address some of those points shortly.

Will the right hon. Gentleman give way?

I will give way in a moment.

The first objective of our policy as set out in the pre-Budget report is, of course, to secure the recovery. When we look back over the year that has passed, we are glad that we ignored the idiosyncratic advice proffered by the Opposition and, instead of doing nothing, as they suggested, chose to act: to rescue the banking system from the brink of collapse; to cut VAT; to invest £5 billion in jobcentres, which have helped 3 million people out of unemployment in the past year; to introduce measures to allow families to stay in their homes, helping to ensure that repossessions are two times lower than in the 1990s recession; and to set up the Time to Pay scheme, which has helped more 160,000 businesses to spread their tax payments over a timetable that they can afford, helping to keep insolvency rates three times lower than in the 1990s.

In the pre-Budget report, the Chancellor forecast a return to growth, but as we know, over the next period unemployment may continue to rise in the short term. So to lock in the recovery, the Chancellor said that he was able to do more: by extending the Time to Pay scheme for as long as it is needed; by deferring the proposed increase in corporation tax for smaller companies, leaving the 2010 tax rate unchanged for nearly 900,000 small businesses; by freezing support for mortgage interest at 6.08 per cent. for six months more, to help people who are worried about their mortgage payments; and, perhaps most importantly, by ensuring that every 18 to 24-year-old who has been out of work for more than six months is offered the chance of a job, training or community service.

However, the second point made by the Chancellor in the pre-Budget report is about looking ahead—to the years beyond 2010 and the return to growth and prosperity in the years to come. I am afraid that those years of growth will not be years without difficult decisions—indeed, they will be full of them—and especially not without the decisions needed to halve the deficit and protect our priorities in public services. We have said that, in our judgment, the right time frame over which to execute this difficult decision is the 48 months up to the end of 2013-14.

I want to ask the Minister about the exchange on this subject during Prime Minister’s Questions yesterday. The Prime Minister said:

“We have published a deficit reduction plan”.

He went on to say:

“It includes cuts in some of the major Departments”.—[Official Report, 6 January 2010; Vol. 503, c. 162.]

Can the Chief Secretary tell us where in any published Treasury document we can find details of those departmental cuts?

Let me explain that in detail in a moment.

It is fair to say that the Conservatives have questioned our judgment that four years is the right time frame over which to halve the deficit, but their questioning has been in the style and manner of rather open-ended, slightly ponderous thinking aloud. They have not offered an alternative proposition, such as reducing our four-year time frame to three. They know what the price of such a move would be, and they seem unsure whether they want to pay it.

It is not only the Opposition who are questioning the Government’s debt reduction plans. The bond markets around the world are also doing so, and I was alarmed to read yesterday that the world’s biggest bond house, PIMCO, which is based in the United States, has said that there is an 80 per cent. chance of Britain losing its triple A sovereign debt rating. That would result in increased mortgage and borrowing costs for the whole UK economy.

That is an important point that I will address directly in a moment.

First, let me return to the question of the level of detail, because the House is right to ask how the sums will add up in 2013-14. In framing my remarks, I should like to draw on the excellent report from the Treasury Select Committee and the evidence presented to the Committee by the Chancellor and by Her Majesty’s chief economic adviser.

Our judgment is that the deficit must fall from £178 billion this year to £96 billion in 2013-14, a fall of £82 billion. We anticipate that £25 billion of that sum will come from growth, and the return to business as usual, including the reversion of the VAT rate, but, as the Chancellor said to the Treasury Committee, £57 billion must come from discretionary action—in other words, decisions. As the chief economic adviser said to the Committee, we have decided to deliver two thirds of that sum through spending, and one third through new taxes. On decisions on tax, we have set out plans to raise £19 billion from new taxes, which we have sought to introduce in a fair way by ensuring that 60 per cent. of them are paid by the top 5 per cent. of earners in this country. That leaves £38 billion to be secured from spending cuts.

Capital investment must fall, as it safely can, from today’s historically unprecedented level. In the 2008 pre-Budget report and the 2009 Budget, we announced substantial reductions to the overall capital spending budget, and that is set out on page 189 of the pre-Budget report book. Yes, Departments will have to cut back, which is why we have reduced our plans for current expenditure from 2011 onwards.

That is why this pre-Budget report, together with the command paper “Putting the Frontline First”, announced £20 billion of cuts and efficiencies. If the House will bear with me, I think that it will be helpful if I run through them. They include: £8 billion to be delivered by 2012-13, identified across the public sector through cutbacks in Whitehall through the operational efficiency programme; £600 million from the greater use of online systems to deliver public services; £650 million from cuts in consultancy, marketing and communication spending across government; £550 million from cutting back on quangos and arm’s-length bodies; £550 million from local government, including reducing the costs of inspection; £140 million from cutting senior civil service costs by 20 per cent.; £1.4 billion from ending temporary employment measures as unemployment falls; £850 million from delaying things that can wait, or from cutting back systems such as the NHS IT programme; £900 million from asking businesses and students to pay a little more for training; £360 million from reforming the criminal justice system and legal aid; and £730 million from focusing regeneration and transport spending on areas where it is needed most.

Of course, to this sum may be added the windfall of lower unemployment. For the purpose of the PBR, we made the extremely cautious assumption that unemployment would not fall. In fact, if unemployment does indeed come down, as we expect it to, the benefits bill will be billions of pounds lower. It is also possible that, as the economy grows faster—as the Bank of England has projected—there will be further fruits of growth in the years to come.

The House will rightly ask how such windfalls will be put to use. I will state the position bluntly, by repeating what the Chancellor said to the Treasury Committee. He said that, in the event that growth turns out to be more robust than in his forecast, borrowing would naturally fall faster, and that it would then be possible to reduce the structural deficit further in the medium term.

I received some figures this morning from my local authority. They show that, in August 1985, the youth unemployment rate was 19.1 per cent. My right hon. Friend has made a good point about people getting back into work and no longer claiming benefit. We have to have cuts and efficiency savings, but we do not want to go back to those unemployment rates. I urge him to ensure that we have continual growth to provide jobs, particularly for our young people.

My hon. Friend is absolutely right. The fact that unemployment is so much lower now is a result of many of the actions that we took to ensure that businesses had flexibility over cash flow and that there was guaranteed new help for young people after nine months. We were, however, conscious of the need to do more than that, which is why we said in the pre-Budget report that no young person should be out of work for longer than six months without being offered a job, training or community service.

I want the Government’s plans to succeed and the economy to grow, but will the Minister now deal with the question most appropriately put by my hon. Friend the Member for Kettering (Mr. Hollobone)? Would not the plans that the Minister has announced be derailed if our huge deficit caused a loss of confidence in the international monetary market and our credit rating was reduced, with all the horrors that would result from that? Will the Minister now deal with that question, because it is critical to what he is saying now?

I am going to ask for the hon. Gentleman’s patience for just a minute or two longer while I make one further point.

Will the Minister give way?

I will address this point before I give way.

The pre-Budget report set out plans to rebalance our economy in the years to come. In the Budget, we said that we would do this through fair tax increases and the tighter control of public spending, to ensure that long-term interest rates were kept low. That point has often been made by the hon. Member for Runnymede and Weybridge (Mr. Hammond). There are now great strengths on which we can build in the years to come. We have low interest rates and low inflation. We also have the most flexible labour market in Europe, the lowest rate of corporation tax in the G7 and a competition regime that is among the best in the world. That is why we are judged to be one of the best places in the world in which to do business and to attract inward investment.

The pre-Budget report develops those strengths. It sets out how we will maintain our leadership in the low-carbon sector, how we will boost investment in our national infrastructure and skills, and how we will support our world-class high-tech industries. Over the next year or two, we will extend by £500 million the amount of lending available to small and medium-sized enterprises, through a 12-month extension of the enterprise finance guarantee scheme. We have created a new growth capital fund, with a new £325 million. We have created Infrastructure UK, which will help to accelerate private sector investment in new infrastructure. We are proposing to introduce a patent box, which is a reduced rate of corporation tax applying to income from patents from April 2013. We have also proposed £200 million for the strategic investment fund, of which £150 million will be routed to support low-carbon investment. We are doubling the UK’s commitment to funding carbon capture and storage demonstration sites from two to four. We are increasing support for low-carbon vehicles and setting out additional funding for low-carbon industries and energy efficiency, including Warm Front. Those are all policies—indeed, all ambitions—in which the Conservative party has little interest.

The Minister has moved swiftly on from the question that the hon. Member for Halton (Derek Twigg) asked him, but, before we lose the point, will he confirm that youth unemployment in Britain is now at a record high level?

Youth unemployment, in my view, is too high, but the hon. Gentleman will recognise that something like 200,000 to 250,000 of the numbers in the current count provided by the International Labour Organisation include those in full-time education who may be looking for part-time work. The hon. Gentleman is wrong to bandy around figures in headline terms in a debate such as this without setting out some of the detail.

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Let me deal with the points about bonds, which were raised by the hon. Member for Kettering (Mr. Hollobone), after which I will give way again.

I hope that over the hours to come, we get a chance to explore some of the myths thrown around during the last week, starting perhaps with the most important question of whether our plan to cut the deficit is fast enough. Is it fast enough, for example, for the people who buy our bonds? We have heard a lot about the intentions of PIMCO and some of the quotations bandied around the House to date have, of course, been a bit selective and one-sided, if I may say so. PIMCO, reflecting on the flight to safety that brought buyers to UK bonds and brought gilt rates so low is naturally thinking about divestment into riskier assets as the world economy returns to its former state. This is not a new notion, as that was said last July.

Is the plan fast enough for the Governor of the Bank of England? The shadow Chancellor is fond of quoting the Governor. The shadow Chancellor is not in his place.

Neither is the Chancellor.

No, indeed. In fact, the full answer from the Governor of the Bank of England on this question paints a very different picture. He gave his answer in evidence to the Treasury Select Committee, saying:

“It is certainly true that if you eliminate the deficit too aggressively it will have an adverse consequence.”

He went on to say:

“You have to take action to bring down the deficit of the size we have—it is a very large structural deficit—but to do so at a rate that is consistent with the restoration of growth in the economy”.

That is why we propose to reduce the structural deficit from 9 per cent. to 3.6 per cent. in the space of just one Parliament.

Is our deficit reduction plan fast enough for the ratings agencies? Again, their views are sometimes traduced in this House, but the reality is that in Moody’s analysis published last month, both the US and the UK triple A ratings are described as “resilient”; all three rating agencies have acknowledged the UK has access to particularly deep and liquid capital markets; and on perhaps the ultimate test of demand, gilt auction performance remains strong. Ten-year gilt yields averaged over 11 per cent. in the 1980s; they are now around 4 per cent. I hope that all these arguments and more are debated this afternoon.

If I were forced to characterise this pre-Budget report, I would say that the sweep of its ambition is matched by the depth of its detail. In the debates that we have had—not only in this place, but in the media and elsewhere, and particularly in the debates the hon. Member for Runnymede and Weybridge and I have had late at night in TV studios around London since 9 December—I am sure that you, Mr. Deputy Speaker, will have been struck like me by the sheer contrast between 212 pages of detail on specific, pressure-tested proposals and the vacuous nonsense of the Conservative party.

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Before I conclude, I will give way to hon. Members.

Because of the impact on the economy, I applaud the Government’s cautious approach towards reducing the fiscal deficit, but what is the estimate of the reduction in economic growth that will result from the proposed reductions in spend in the pre-Budget report?

The growth forecasts that we have set out are the basic answer to that question. There is, of course, a degree of uncertainty about the future path of growth for our economy. The independent forecast is different from the forecast that the Chancellor presented, while his forecast is rather lower than that presented by the Governor of the Bank of England. It would be difficult, especially this afternoon, for me to decouple these projections for the public finances and those presented for growth.

The Treasury Select Committee criticised the temporary operating rule, which in turn, in line with the pre-Budget report of 2009, has been followed by the Fiscal Responsibility Bill, debated yesterday, to implement those provisions. That includes the code for fiscal stability, the principles of which are set out—including the principle that

“the Government shall publish sufficient information to allow the public to scrutinise the conduct of fiscal policy”.

This includes debt, and provision is made for the definition of debt. I am sure that the Minister will understand it when I say that organisations such as PIMCO and others that are working out the degree of credibility they can ascribe to the Government’s position will take account of whether the definitions and the actualité, as they say, of net borrowing are actually true. The Minister knows that we do not agree on that, so is he prepared to spell out the definition of net borrowing? I asked his Front-Bench colleague the same question yesterday and she did not or could not answer. Will he do so now? What is net borrowing?

I seem to remember that the hon. Gentleman intervened on the Chancellor earlier in the week, so it will not surprise him to learn that I have nothing to add to the Chancellor’s excellent answer provided to the hon. Gentleman at that time.

Give me an answer.

The hon. Gentleman asks me to go further than the Chancellor’s position, which was set out—

Order. I am sorry to interrupt the right hon. Gentleman, but the hon. Member for Stone (Mr. Cash) should not pursue the answer that he has been given by calling from a sedentary position—irrespective of whether or not he is satisfied with that answer.

Thank you, Mr. Deputy Speaker.

Given that the earlier intervention was not answered at all satisfactorily, the Chief Secretary must be able to tell the House what the suppression of gross domestic product growth will be as a result of £57 billion being taken out of the economy—£20 billion as a result of tax rises and £40 billion as a result of spending cuts. To homogenise it altogether in a global growth figure is really not good enough. That is a heck of a lot of money out of the economy, so surely the Government must know the impact of it on the suppression of GDP growth.

I am trying to avoid taking the House through what would be a quite complicated economic equation, which no one will be surprised to hear I have not brought with me this afternoon. The hon. Gentleman is looking at only one side of the argument. He will know that when we have such a large structural deficit because of the action we have taken to protect the country from the worst of the economic storm, it is vital to set out for members of the public and for taxpayers, as well as for people who buy our bonds, exactly how we plan to reduce that deficit. We have set out the fastest deficit consolidation plan in the G7. Without that clarity in place, it would be quite possible for long-term interest rates to begin to rise, which would also be damaging to the success of investment in this country in the years to come. The Chancellor has thus set out a central scenario, clarifying what we think is the right judgment to make on public finances and what the consequences for growth will be.

I wonder whether part of the disagreement between us is definitional. The Chief Secretary has said that some of the structural deficit we face is the result of the actions taken by the Government to protect people and citizens from the effects of the recession. In my definition, that is part of the cyclical deficit we face, not the structural deficit. Can we be clear about that?

I apologise for mis-speaking earlier, but the point I was making is that the plan we have presented involves a rapid—indeed, the most rapid of any G7 country—reduction in the cyclically adjusted deficit: from 9 per cent. this year to 8 per cent. next year and then down to 5.8 per cent. in 2011-12, when we anticipate the economy growing above trend.

I conclude by saying that I feel very strongly that this pre-Budget report constitutes 212 pages of great detail, which is in complete contrast to the plan—if it can be so characterised—presented by the Conservative party. The truth is that the Conservatives have been love-bombing every audience they can find within easy reach of a press conference, and with that love-bombing has come a new lexicon of ambiguity. Thus, instead of a straight “promise”, we now have a “pledge”, an “aspiration”, a “commitment” or a “No. 1 priority”.

This morning the Leader of the Opposition continued his careless whispers, reassuring listeners to the “Today” programme. He said that he would have to be tough and pull back from the Conservatives’ guarantee of 45,000 single rooms in the national health service. It could not be a pledge, he said, but he told the listeners not to worry, because “it is an aspiration”. It seems that the Conservatives now cannot stop adding to their now famous “queue” of commitments. We all remember what a Tory queue looks like. We used to call them waiting lists, and they were so long that people often expired before they reached the front.

The Conservatives’ “all things to all people” policy has left them with a £34 billion credibility hole that they cannot airbrush away. If the Shadow Chancellor spent more than 40 per cent. of his time on economics, perhaps the hon. Member for Runnymede and Weybridge would not be in such an embarrassing position this afternoon; but he is, and the whole House is looking forward to seeing whether he can climb out of the hole in which his party leaders have left him.

I shall try to match the Chief Secretary’s brevity, although I came prepared for Members of the House to be a bit thinner on the ground. Evidently not all experienced the same difficulty that some of us encountered in battling through the snow to get here.

This is the first opportunity that the House has had to debate the pre-Budget report, the last important economic statement made by the Government before a pre-election Budget which markets will rightly discount. Given the critical state of the public finances, the huge borrowing requirement that must be met, and the fragility of confidence in the United Kingdom economy and United Kingdom Government debt in particular, we would have expected the Government to use this opportunity to send a powerful and unambiguous signal to investors and lenders alike of their determination to get the deficit under control.

Listening to the Chancellor and the Prime Minister yesterday, and to the Chief Secretary, one would think that the global financial crisis caused the meltdown in Britain’s public finances, but that is not what has happened. According to the Treasury’s figures, the economic recession accounts for about a quarter of Britain’s deficit—that is the cyclical part of the deficit, which economic recovery will eventually eliminate—but three quarters of it is structural, and requires a structural response. The truth is not that the financial crisis has caused the fiscal crisis, but that for many years the global financial boom masked the scale of the underlying fiscal problem as this profligate Government spent the tax receipts that were the proceeds of a series of bubbles in financial assets, and property in particular, as if they were permanent features of the economic landscape. The real structural crisis that needs to be addressed is not caused by the Government’s support for the banking system, as they like to imply. In fact, none of this year’s £178 billion deficit is directly attributable to support provided for the banks.

The pre-Budget report was the Government’s last chance to set out a credible path to fiscal stability, to put our economy back on the road to sustainable growth and enduring prosperity, and to ensure our triple A credit rating. They blew that chance, and now the country knows beyond doubt that only a change of Government can deliver the economic change that Britain needs. The present Government have shown themselves to be unfit for office by shirking their task in the nation’s hour of economic need.

I am following the hon. Gentleman’s remarks with great interest, and I am grateful to him for giving way so early in his speech. He appears to have changed tack slightly in his critique. For some months he has been saying that we should move faster in reducing the deficit. Is he now accepting that four years is the right time frame within which to halve it?

It sounds as though the Chief Secretary has not been listening over the last few months. We have consistently said that we need to start earlier: we need to start reducing the fiscal deficit in the coming year. As he will know, if he has his calculator with him, starting earlier would have a compounded effect throughout that four-year period, and would make a greater impact on the deficit.

Will the hon. Gentleman give way?

I will, but then I must make some progress.

The Conservatives are constantly harping on about borrowing and debt, but the truth is that our gross national debt is still below that of France and Germany, and about half that of Italy and Japan. There is no need for panic. May I suggest that the Tories are trying to make the Government panic simply for electoral advantage, rather than for the benefit of the country?

I think that if anyone is running policy for electoral advantage, it is to the Chief Secretary that the hon. Gentleman should address himself.

The hon. Gentleman is, of course, right about debt. The issue here is the size of the deficit, and the speed with which we are increasing our debt. Ultimately, all of us in this place can talk as much as we like about the debt and the deficit, but what matters is what the people who must finance that deficit, and must continue to finance that debt, believe about the situation and whether we are moving fast enough to deal with it.

Will the hon. Gentleman give way?

I will, but then I must make some progress.

I am enormously grateful to the hon. Gentleman. He will know that our projection is a reduction in the cyclically adjusted deficit from 9 per cent. in 2009-10 to 8 per cent. in 2010-11, but he seems to be saying that it should be falling still faster. What figure does he propose?

I am afraid that I am not going to oblige the Chief Secretary. In fact, I think I will adopt the strategy that he adopted in response to the question put to him by my hon. Friend the Member for Stone (Mr. Cash). The day before yesterday, the shadow Chancellor answered the precise question that the Chief Secretary has just asked. I will do what he did in response to my hon. Friend, and refer him to that answer.

Will my hon. Friend give way?

Very briefly; then I must make some progress.

We seem to be going in circles. Does my hon. Friend agree that, contrary to the assertion made by the Chief Secretary, my hon. Friend the Member for Tatton (Mr. Osborne) made it clear that in our estimates of net debt we would include matters such as the private finance initiative, Network Rail and public pensions? Is it not the Government’s failure to arrive at the truth of this matter that is undermining their arguments about what the deficit is, and thereby undermining the credit risk rating and the bond markets?

My hon. Friend has made a good point, although it is a slightly different point from the one that the Chief Secretary was making to me. Issues relating to definition of the net debt are indeed part of what is undermining the United Kingdom’s credibility in international markets.

Divided Governments are weak Governments. In the run-up to the pre-Budget report we saw acrimony and division within this Government, and since the PBR some may have noticed a degree of continuity in that trend. We have observed the Schools Secretary and the Chancellor playing cat and mouse with each other in public over the education budget, the Work and Pensions Secretary accusing the Chancellor of “astonishing” mistakes—I wonder where she got that idea from—the Health Secretary insisting that his budget would be protected, the Transport Secretary implying that he would resign if railway capital spending was cut; and, all the time, the Chancellor’s options being narrowed by the manoeuvring of the Prime Minister and his allies—or perhaps I should say “ally”—intent on creating political dividing lines rather than solving the underlying fiscal problem.

Yesterday the Deputy Prime Minister, in what was billed as a speech reasserting his support for the Prime Minister, instead comprehensively undermined the Prime Minister’s economic strategy, making it clear that he, at least, understands that economic recovery cannot be built on more borrowing and more public spending—hence his decision to let it be known that he was “incandescent” about the content of the pre-Budget report.

Following those internal semi-public debates within the Government may be great fun for Opposition politicians and journalists in the Westminster village as they seek to identify the winners and losers of each round, but the real losers are the people of Britain and the only winners are the hedge funds, which are quick to spot weakness and indecision and which are now openly speculating against our currency and our sovereign debt.

I thank the hon. Gentleman for giving way again. Is it not the case that the massive cuts proposed by the Tories would simply drive up unemployment and make the crisis worse?

I wonder whether the hon. Gentleman has made a mistake, and intended to address that question to the Chief Secretary.

There is a fact here that we must all face: whoever is in government after the next general election will have to cut public spending. Surprisingly, even the Prime Minister on a good day—[Interruption.] The hon. Member for Luton, North (Kelvin Hopkins) does not agree that it will be necessary to cut public spending after the next general election. I think that puts him in a very small minority in the House. We will leave him with his thoughts and perhaps those of the little group around him, but he is well out of the mainstream of current thinking.

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I will give way in a moment.

The fact is that this Government are being driven not by the needs of the economy and the medium and long-term best interests of the British people, but by the needs of the Labour party and the insistence of the Prime Minister and the Schools Secretary that the scale of the fiscal problem, the challenge of dealing with it and the true price of not dealing with it are to be concealed at all costs from the British public until after polling day. No price is too high to pay, provided the bill does not arrive until 7 May. No burden is too heavy to bear if it is the Prime Minister's successor who will bear it.

That is the most systematically reckless, cynical and dishonest strategy for dealing with a fiscal crisis that anyone in the House will be able to recall. It compares very unfavourably with the stance of my right hon. and learned Friend the Member for Rushcliffe (Mr. Clarke), who as Chancellor in 1995 and 1996 insisted on pursuing the policies that were right for Britain's long-term economic health, not those that would deliver short-term illusions of success, however tempting that may have been electorally.

Britain's fiscal history over the past decade and a half is pretty simple. My right hon. and learned Friend created the golden legacy of low inflation, stable growth and falling unemployment, a legacy that the current Prime Minister inherited in 1997. He exploited that legacy to create a formidable image as a “prudent” Chancellor even while he was pumping up the bubble that was the root cause of the fiscal crisis that we now face. However, when the legacy ran out, he carried on spending, focused as always resolutely on the short term, spending the proceeds of his unsustainable bubble and then borrowing some more—spending and borrowing his way through the illusion of a boom. Apparently, that is his idea of building an economy that is best placed to withstand the slow-down and ready to lead the world out of the recession.

The reality is that the so-called golden legacy was an accidental consequence of sterling’s ejection from the European monetary system in the early 1990s after a previous unsustainable bubble. The hon. Gentleman wants to deal with facts and figures. What estimate has he made, given that the Conservatives want to cut faster, of the effect of that on domestic demand and therefore on the recovery of our economy?

We come to the crux of the disagreement between us and the Government. If there were no factors other than the level of demand implied by fiscal stimulus, the hon. Gentleman would have a point, but the fact is that what has kept Britain going through this recession and what will see Britain grow in the recovery are continued low interest rates and relatively loose monetary policy. We do not have an automatic option of maintaining a fiscal deficit at the level that the Government would like to maintain and still being able to keep monetary policy as loose as it is now. That is the crux of the disagreement between us. In my view, there are many members of the Government who understand that perfectly well, but the Prime Minister has chosen, for electoral reasons, to ignore those voices and to insist that he maintains his fiscal stance until after the general election.

The Government say that we will cut the deficit over four years. Under the Tory policy, how long would it take to cut the deficit in half?

I have indicated to the hon. Gentleman that we would expect to start the process of cutting the deficit, or of reducing Government spending, in 2010-11. This Government are proposing to go on increasing Government spending. The cumulative impact of starting early, even in a modest way, is quite significant. Of course, Labour Members want to try to reduce this to a very simple issue. It is a complex balancing act. I totally accept that. Reducing the deficit is going to have to go on over many years until we get ourselves back into balance. It can go a little bit faster if the economy is growing more strongly. It needs to be mindful of the monetary policy position that the Bank of England is able to offer at any given time. It needs to be mindful of wider macro-economic circumstances.

Will the hon. Gentleman give way?

I will in a minute. I must make a bit of progress and then I will give way to a few more Members.

Will the hon. Gentleman give way?

I want to make a bit of progress and then I will happily give way again in a few moments. The Chief Secretary has wrong-footed me by being so surprisingly brief and I do not want to spend all my time taking interventions.

We have ended up where we are today: the only country in the G20 not yet out of recession—the Chancellor confirmed that on Tuesday—running the biggest deficit in the industrial world, unemployment at nearly 2.5 million and, as I said earlier, with the highest number of young people out of work on record. We are in the longest and deepest recession in our history, with more companies going bust in this downturn than in any other. After 13 years of Labour Government, the poorest are getting poorer.

Most importantly, confidence in the Government’s economic management, both at home and abroad, already shaky, has crumbled since the PBR. It is no exaggeration to say that it is only the prospect of a change of Government that has prevented an even more marked negative reaction in market sentiments since the PBR. [Interruption.] The right hon. Member for Holborn and St. Pancras (Frank Dobson) finds that amusing. I know that he is a great expert on financial markets.

Mark Schofield of Citigroup, for example, said:

“Unless we get a credible set of measures put in place quickly, which seems unlikely unless we get a Conservative government with a clear majority at the next election, we think the UK’s Aaa rating will be right up on the radar screens in a very short space of time.”

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I will give way in a moment.

This is how the Institute for Fiscal Studies summed up the situation:

“Arguably, with the Conservatives well ahead in the opinion polls, financial markets may be more influenced now by whether the Opposition’s policies are consistent with long-term fiscal sustainability than those of the government.”

The hon. Gentleman quoted someone from Citigroup as a person we should take seriously. Would the hon. Gentleman care to tell us how much Citigroup lost in the banking crisis? Was it $10 billion, $20 billion or $30 billion?

The right hon. Gentleman makes his point. Mark Schofield and Michael Saunders, whom I shall quote later, are respected economists in the City. Their comments are widely circulated and noted.

Will the hon. Gentleman give way?

I will not at the moment.

The pre-Budget report was, as I said, the Government’s last chance to turn this situation around and to restore Britain's reputation and credit-worthiness. It needed to do two things: first, to put in place a credible plan to restore fiscal balance, and secondly to demonstrate the political courage to implement it, instead of merely talking about it. The Government failed on both tests. The plan that the Chancellor set out has reassured no one. It was immediately attacked by business leaders, economists, market analysts and commentators. Richard Lambert, director general of the CBI, said on 9 December:

“The Chancellor has made a serious mistake imposing an extra jobs tax at a time when the economic recovery will still be fragile…He has also missed the opportunity to increase the UK’s credibility by reducing the public deficit earlier.”

David Frost, of the British Chambers of Commerce, said that the national insurance rise is

“Terrible news...It’s an additional cost for business when they can least afford it.”

The PBR was slammed by economists for being driven by politics, not by economics, with widespread agreement that the failure to produce a credible plan to tackle the deficit leaves Britain vulnerable to higher interest rates and a downgrade of the sovereign debt rating, which I assume is something that the Government will be concerned about.

The right hon. Member for Holborn and St. Pancras will be pleased to hear that I am going to quote Michael Saunders at Citigroup, who is one of the City's most respected economists:

“The PBR appears to be aimed at reviving Labour’s core support rather than seriously tackling the UK’s medium-term fiscal problems…These measures do little or nothing to alter the medium- and longer-term fiscal outlook.”

Let me give the right hon. Gentleman a few more examples. Barclays said:

“The PBR is unlikely to dispel concerns about the UK's public finances…The government has demonstrated that it is willing to raise taxes to fund extra spending, but not that it is willing to project a more aggressive overall tightening in policy”.

Nor were analysts impressed by the Chancellor’s forecasts, upon which even his modest plans for fiscal consolidation depend. BNP Paribas said:

“The Chancellor’s new forecasts also continue to look massively over-optimistic”.

Morgan Stanley said that

“the Treasury’s forecasts for GDP growth, particularly beyond the next couple of years, still look optimistic to us.”

Citigroup, again, said:

“The revenue forecasts…look over-optimistic.”

RBS said that the Treasury has been consistently too optimistic on how much tax revenue

“a given amount of GDP growth generates”.

All this leaves us exposed to higher interest rates, of course. Citigroup has said:

“We suspect that as this budget is digested, gilts and sterling will react badly.”

RBS said:

“Issuance remains at historically highly elevated levels and this is seen forcing yields higher in a post QE environment.”

The soaring national debt threatens a credit rating downgrade.

Will the hon. Gentleman give way?

I will give way to the right hon. Gentleman shortly, after I have finished reading out these reactions and responses to the PBR.

On the afternoon of the PBR, Barclays said that

“the UK’s triple-A sovereign credit rating and the currency are likely to remain vulnerable.”

BNP Paribas said:

“Given that the Government has decided to ignore the opportunity to take steps to remove the risk of a sovereign rating down grade we expect sterling to remain under pressure over the medium term.”

The bond-rating agency, Moody’s, said that the PBR plans

“stretch to the limit…what is consistent with a top rating.”

rose—

I shall give way first to the hon. Member for Taunton (Mr. Browne).

The Government’s deficit reduction plan relies on increased taxation, reduced public spending and, crucially and perhaps least discussed, very optimistic forecasts for economic growth, well above trend forecasts. Does the hon. Gentleman accept the Government’s forecasts for economic growth in the years ahead, which are part of the plan the Chief Secretary has outlined this afternoon?

It is clear from what I have just said that the qualified commentators’ view is that the Government’s forecast of trend economic growth beyond 2011 appears optimistic.

rose—

I know what the Chief Secretary wants to say now; he wants to talk about the Bank of England. The forecast appears optimistic, however. We are not an economic forecasting organisation, but we do look at the consensus of forecasts made by independent commentators, and I think it is fair to say that the Government’s forecasts are at the top of the optimistic end of the spectrum.

rose—

rose—

rose—

I shall give way first to the right hon. Member for Holborn and St. Pancras (Frank Dobson).

I said—ironically, of course—that I was most impressed by these qualified commentators, and, as usual, I was not exaggerating. Citibank, which provides one of the highly qualified commentators quoted by the hon. Gentleman, lost £60 billion, and it bought up Merrill Lynch, which had lost £52 billion, so this brilliant person is working for an organisation that lost £110 billion. The hon. Gentleman quoted Morgan Stanley, which lost almost £16 billion. Barclays losses were, admittedly, a mere bagatelle in comparison; it lost only £7.9 billion. We are expected to give credence to the prognostications of these idiots, however, including Moody’s, which had given triple A ratings to all the lunatic procedures those organisations were following.

Clearly, there is nothing like a financial crisis to bring the old dinosaurs out of their caves—and I know the right hon. Gentleman takes great pride in being a dinosaur. I say this to him, however: I do not think anyone cares tuppence whether he gives credence to what these City economists are saying. The important point, however, is that the people who will have to lend us the hundreds of billions of pounds that this Government want to borrow do take notice of them, and they make their judgments about where to lend, and where not to lend, on the basis of them.

rose—

I shall give way to the Chief Secretary.

The hon. Gentleman is enormously kind in giving way. Does he acknowledge that Standard & Poors has said:

“We believe that the ratings on the UK continue to be supported by its wealthy, diversified economy”?

He will also recognise that Fitch said “The UK’s triple A rating remains supported by its high value added, diversified economy.” He will recognise, too, that Moody’s has said that “the outlook for the UK Government is stable. Her Majesty’s Government is deemed a resilient triple A issuer.” The hon. Gentleman’s presentation would be incomplete without such an acknowledgement. Would it not be incomplete, too, without an acknowledgement of the Governor of the Bank of England’s growth forecast for 2010-11 of 4.1 per cent., which is much higher than the rate the Chancellor offered?

I predicted the last bit of that intervention, and I am happy to agree with the first bit: I am extremely kind. It is the bit in the middle that we have to talk about. If I really thought that it was done and dusted and that the UK’s triple A credit rating was a lost cause, I probably would not be applying for the job I am applying for. I also hope, however, that the right hon. Gentleman similarly agrees that there is no scope at all for complacency about the triple A credit rating. That credit rating has not even been in question for decades, yet it is now right on the radar screen; it is being talked about in analysts’ notes, and we need to be extremely careful. I understand that the right hon. Gentleman is under great pressure from the Prime Minister to create political dividing lines and to focus on the very short term, but he and his boss need to be extremely careful about how they present themselves to the people who decide these things, who ultimately will be the arbiters of our fate.

We need balance in this debate. We have heard a great deal from the Government, but will my hon. Friend describe to the House the scenario that would arise if the United Kingdom lost its triple A credit rating? It is important to know about the consequences that would flow from losing that rating—the implications of that on taxes and everything else that affects the country and the people of this country.

If my hon. Friend will wait a moment, I shall come on to a part of my speech that deals specifically with that issue. If he wants to intervene on me again then, I will be very happy to give way.

In the plethora of quotes my hon. Friend gave us from the outside experts, one of the key points to consider—which is very much in tune with the wishes of the hon. Member for Luton, North (Kelvin Hopkins) and even the Government—is the need to stop the huge rise in unemployment. Does it not strike my hon. Friend as counter-intuitive to raise national insurance when one is trying to increase employment and reduce unemployment?

It is very clear that the increase in national insurance tax will have a negative impact on the capacity of the economy to create jobs, and I would have thought that creating jobs in the recovery would be one of the principal focuses of attention for the Chief Secretary and his colleagues.

Several minutes ago, the hon. Gentleman said that it was a mainstream view that there should be a reduction in the deficit through large and early public expenditure cuts, and he rather condescendingly rejected the opinions of those who took a different view. How does he explain the case of Japan in the 1990s? It followed exactly that policy. When recovery started, it raised the sales tax and reduced expenditure, and it went into a double-dip recession. How does he also explain that Roosevelt through the new deal expanded the economy, and as it began to come out of the slump, as a result of increasing taxes and reducing public expenditure, it went into a further slump that did not end until the war? Is the hon. Gentleman not pursuing exactly those wrong policies?

The right hon. Gentleman has, in fact, very neatly made my point for me, because in both cases the problem was an increase in interest rates too early in the cycle, which then choked off the recovery. What I have been arguing and what the Conservatives have been consistently arguing is that the most important determinant of the strength of the recovery will be the level of interest rates and the looseness of monetary policy.

Whatever Labour Members might think, it is clear to Conservative Members that the credibility and creditworthiness of Britain requires a plan to deliver what the Governor of the Bank of England has called

“a really significant reduction in the deficit…over the lifetime of a Parliament”,

which is the period for which a Government are elected. Surely the point is that common sense tells us that for as long as the Chancellor is publicly failing to propose something that meets the minimum requirements set out publicly by the Governor of the Bank of England, markets will be unsettled and they will mark the Government down. Demonstrating political commitment to fiscal consolidation means starting work on the task, not talking about it; it means putting one’s money where one’s mouth is.

rose—

I am going to make a bit of progress before I give way.

At the time of the pre-Budget report, the Chancellor told us:

“For as long as extraordinary uncertainties remain in the world economy, this is not a time for a spending review.”—[Official Report, 9 December 2009; Vol. 502, c. 368.]

However, to be credible the pre-Budget report needed to be accompanied by a comprehensive spending review or at least by a clear allocation of departmental spending totals for 2011-12 and 2012-13. Having told us that he could not provide that, he went on to tell us that he was guaranteeing most of the NHS budget, the schools budget and the police budget.

The Chief Secretary to the Treasury has recently refined this argument, with the proposition that the Government can confidently predict that we will come out of recession at the turn of the year and that economic growth will be 1.25 per cent. in 2010 and 3.5 per cent. in 2011 and every year thereafter, and can set an overall envelope of public spending in specific budgets for health, for schools and for the police—that is about 40 per cent. of resource departmental expenditure limits—but cannot allocate spending totals to the remaining Departments because they do not know what the level of unemployment will be.

Yesterday, the Labour-dominated Treasury Committee said the following about that astonishingly selective forecasting capability:

“It may be difficult for any current consolidation plan to command universal support. It will therefore be very important to add greater detail and clarity to the plan sooner rather than later.”

It went on to say:

“There is a sense that the Treasury are using uncertainty to suit themselves”—

by producing some forecasts as far as 2017-18 but no spending details beyond 2011. The Committee Chairman, the right hon. Member for West Dunbartonshire (John McFall), from whom we will hear later, added his thoughts in the covering press release, saying:

“We consider clarity, even if it is clarity about the degree of uncertainty surrounding the forecasts, as essential to strengthening this crucial credibility.”

In addition, the Committee stated that it could

“see no good reason for the Treasury failing to produce”—

more detailed—

“illustrative figures for future expenditure”.

We are being asked to accept that the Treasury can forecast growth, set spending totals and allocate funding to Departments that will grow, but that there are compelling and overriding reasons why the Government cannot allocate funding to the Departments that will shrink—and shrink they certainly will. It has been widely reported that there is an internal Treasury analysis showing that those Departments not fortunate enough to enjoy the political patronage of the Prime Minister will face a 17 per cent. real-terms spending cut over three years. That would confirm the analysis of the Institute for Fiscal Studies suggesting a 16 per cent. cut—or 19 per cent. if the ring-fencing is extended for a third year.

That contrasts sharply with the Chancellor’s words on the “Today” programme on 10 December, when he said:

“Spending is going to be pretty much flat...Broadly speaking…we’re assuming for the non-protected services it’s going to be pretty much flat”.

That was in nominal terms, but even after allowing for inflation, it is a long way from a 17 per cent. real-terms cut. He was asked on Monday to deny the existence of that Treasury paper setting out the reality of 17 per cent. cuts in all other Departments, and I asked the Chief Secretary twice on Tuesday to deny the existence of that internal paper, but neither of them could do so. Instead, they got their civil servants to engage in producing costings of a bunch of fantasy policies, which Labour party officials then worked into a dodgy dossier—that fell apart even more quickly than the pre-Budget report did.

So let me ask the Chief Secretary now—I will happily give way to him—whether the Government are going to address the biggest gap in their credibility by publishing a comprehensive spending review or departmental spending allocations for 2011-12 and 2012-13 before the general election. Will the electorate be told how the Government plan to deliver the fiscal consolidation that they have set out in aggregate in this pre-Budget report and that they claim is the proof of their commitment to restoring fiscal discipline? Or will we have to guess?

Let me deal with the hon. Gentleman’s second point first. I have set out clearly in my presentation to the House this afternoon how we see £82 billion of deficit reduction taking place. Some £25 billion will come from growth measures and £57 billion from discretionary measures—tax will account for £19 billion of that and the rest will have to come from cuts and efficiencies in public spending. As he will recall from 1998, when comprehensive spending reviews were introduced, the whole point of them is about certainty; they are designed to give public service leaders and managers certainty about budgets for a period of three years. If a £4 billion or £5 billion margin of error remained because one cannot be clear about how fast unemployment will fall, that would be bigger than the budgets of four or five different Departments. If one cannot provide certainty about how much money is available, that defeats the object. We are happy to provide certainty, where that is possible. We know that the Conservative party is more than happy to provide four or five different positions on departmental budgets over the course of a day, but that is not an example that we wish to emulate.

So, as I said, we are expected to believe that it is possible to be absolutely precise about the protected budgets but not about the budgets that will be sacrificed. In addition, I did not hear the Chief Secretary answer the question about the paper on 17 per cent. cuts. That is important because in terms of defence, a 17 per cent. cut is equivalent to more than the entire pay and pensions bill for all the armed forces or a staggering 150 new Chinook helicopters every year. In terms of transport, it represents the entire budget for London and the south-east: for trains, roads, bus subsidies and the tube. For the Ministry of Justice, a cut of 17 per cent. of the budget is the equivalent of 50,000 prison places—that is 60 per cent. of the UK’s total gone. No wonder the Chancellor thinks that this is not a time for a spending review. The Chief Secretary may not like my examples, but if he will not spell out the consequences of his plans, it will fall to us to do so. The Government want the political gain of setting budgets in certain Departments without taking the political pain of recognising the consequences of that ring-fencing for other Departments. That is dishonest and disreputable, and it will ultimately backfire on them.

I regularly hear the right hon. Member for Witney (Mr. Cameron) saying to the press that he is being open and honest with the British people. In that context and spirit, can the hon. Gentleman tell us by what date he will want the deficit halved?

We have made this point emphatically and repeatedly: we will make an earlier start than the Government have proposed to do and we will go further than they have proposed to do within the course of the next Parliament, as the Governor of the Bank of England has suggested. Exactly how far and how fast we go must, of course, depend on the economic circumstances and on the context of the monetary policy with which we find ourselves dealing.

With respect, the hon. Gentleman has just talked about clarity, openness and honesty, so, given that we have already said what we are going to do, when will the Conservatives have halved the deficit. What is his plan? Does he have no plan for the date by which it will be halved?

What matters at the moment is what is going to happen immediately. We have made it very clear that we will start in 2010-11 to reduce public spending. The current Government have made it clear that they will continue to increase public spending in the face of all the evidence that they are taking unacceptable risks with the UK’s credit rating, creditworthiness and reputation in the markets by doing so.

rose—

I have to make a little progress or there will not be any time left for the rest of the debate.

If the Chancellor was in any doubt about the market reaction after the pre-Budget report and the immediate reactions to it, he should be in absolutely no doubt now. The UK 10-year gilt spread against the German bund, which is the benchmark, has widened alarmingly since the pre-Budget report. In less than a month, there has been an 18 per cent. rise in the spread—up to 62 basis points—and a rise of one third of a per cent. in the cost of servicing our national debt. The Government now need to find £5 billion more in spending cuts to balance the books than they did on the day that the Chancellor stood up to deliver his pre-Budget report.

At the end of 2008, the cost of insuring UK gilts against default was twice as expensive as the cost of insuring McDonald’s corporate debt. At the time, a Government spokesman said that there was “obviously something odd” going on in the credit default swap market. Perhaps it was not so obvious—a year later, credit default swaps on 10-year Government bonds still trade at a 70 per cent. premium compared with those on 10-year McDonald’s bonds.

Nearly half the economists polled by the Financial Times in a new year study cited the fiscal crisis as a key threat to the economy. We have already heard about the statement from PIMCO. Not only does it expect a credit rating downgrade, which it says is more than 80 per cent. likely, but it has announced that it will reduce its holding of UK Government bonds during the coming year. There might be all sorts of reasons why PIMCO has chosen to reduce its holding of UK Government bonds, but even the Chief Secretary would have to concede that it is not particularly helpful at a time when a country needs to issue £200 billion of new bonds over the course of a year to have the world’s biggest holder of Government bonds saying that it intends to reduce its holding of that Government’s paper.

rose—

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I shall give way one more time, then I must finish.

I am grateful to the hon. Gentleman for giving way. Will he clarify a point in his position that I do not understand? The Government say that they wish to halve the structural deficit by 2014. He says that he will have to take account of factors along the way. For example, growth might not be as strong as the Government anticipate, or there could be another recession—I hope that there is not, but there could be. There might be other unforeseen circumstances. Perhaps we will have additional military commitments, for example. Given that his position is that we must be flexible—I think that he is sensible to have that position—will he concede that it is possible that the Conservative party, were it to win the general election, would fail to reduce the structural deficit by half by 2014? In other words, the Conservatives might reduce it more slowly than the Government plan to reduce it.

I would not presume to give the hon. Gentleman a lesson in economics, but it seems to me that the possibility of growth’s being slower or faster will not affect the evolution of the structural deficit, although it might affect the cyclical deficit. The difference between us is that we have consistently talked about targets for reducing the structural deficit, which is what the Governor of the Bank of England has suggested, whereas the Government talk about the total deficit, not differentiating between the structural and cyclical deficits.

I have talked a great deal about markets and some hon. Members are inclined, I think, to take a view of “Markets be damned.” However, when one needs to borrow £200 billion over the course of the coming year, one needs to listen to what the markets are saying. When borrowing capacity depends on one’s credit rating—

Will the hon. Gentleman give way?

I am going to have to do so eventually, so I shall do it now.

As the hon. Gentleman is surely going to be in charge of these issues in May, how will he approach the issue of the triple A rating? What will he be willing to sacrifice in the Budget to defend the triple A rating? Does he think that there are some things that he will definitely want to keep, even if the rating were to be downgraded to double A plus or double A1?

I am grateful to the hon. Gentleman for his vote of confidence. Of course, sending a signal to the markets that restores confidence is a delicate business. We are in a party political debate, but I think that everyone understands that it is very difficult for a Government, at this point in the cycle with the opinion polls where they are and with the Prime Minister insisting on his ridiculous dividing lines, to send reassuring signals to the market. The trick—the task for an incoming new Government—will be to reassure the markets sufficiently to finance the debt and keep interest rates low and to do the absolute minimum that is necessary to maintain interest rates at that level. That is a constant balancing act, which requires constant trimming and tacking.

Will the hon. Gentleman give way one final time?

No, I shall definitely make some progress.

I have talked about the markets, and it is important to say—this answers the point made by my hon. Friend the Member for Macclesfield (Sir Nicholas Winterton) earlier—that although market confidence matters for Governments, it also matters for our public services. We must not lose sight of that point. Next year, we will spend £44 billion on interest payments on the national debt. By 2013, that figure will have risen to £63.7 billion if interest rates stay as they are. But interest rates on British Government debt have already started to rise. By 2013, for every extra 1 per cent. of interest cost that we face, another £14 billion of public spending cuts will be needed to finance it. We are already spending more than the schools budget on debt interest, and by 2013 we will be spending double that budget on debt interest. Britain plc has a huge vested interest in maintaining low interest rates and in maintaining the credit rating to support them.

This all matters to ordinary people, too—to home owners, families and businesses. Many people who faced this recession fearing that they would lose their homes and their jobs have been bailed out by the Bank of England’s prompt action in reducing short-term interest rates to the lowest possible level and pumping liquidity into the economy. It is low interest rates that have kept Britain going through this recession, not the Chancellor’s much-vaunted fiscal stimulus.

Will the hon. Gentleman give way?

I shall in a moment, because the hon. Lady has not intervened before. However, let me make a bit more progress.

Low interest rates must sustain the economic recovery, allowing businesses to invest and to create jobs and allowing home owners to refinance mortgages at affordable costs. Anyone whose interest in the economy is focused on a horizon that stretches further than the next five months can see the huge risks that the Government are taking with Britain’s future.

The hon. Gentleman has been very fond of quoting the Treasury Committee’s report. Will he acknowledge that the report attributes in substantial part the fact that unemployment is lower than one would otherwise have expected and that repossession rates have been lower than would normally have been expected precisely to the Government’s intervention?

No. That is absolutely wrong—

That is what the report said.

The facts are right, but that has happened precisely because of the intervention that has been made by the Monetary Policy Committee of the Bank of England in lowering interest rates very rapidly to unprecedentedly low levels and in keeping them there. I look forward to hearing what the Chairman of the Select Committee has to say on that in due course.

I fully understand the hon. Gentleman’s point on interest rates, and he will appreciate that point because the Conservatives have made major mistakes on interest rates—during the 1990s, for example. Does he accept that his answers to interventions from Members from all parties have been rather simplistic and old-fashioned in reflecting the monetarist versus Keynesian arguments of the past? I am sure that a respected former economist from Shell might have something to say on that very shortly.

Does the hon. Gentleman accept that the implication of what he says is that any fiscal stimulus or any measures that the Government have taken to help the economy are not only not worth while but counter-productive, and that the Conservatives would therefore not have undertaken them? Is that his position? Is it also his position that they will protect health and overseas aid—that they will have their cake and eat it—without spelling out what departmental cuts they will make under a Conservative Government?

The hon. Gentleman will recall that it was the leader of my party who first told the public that cuts would be required—six months before the Prime Minister was finally dragged kicking and screaming to that admission. It was our party that first started to spell out specific cuts that would have to be made—

indicated dissent.

For the hon. Gentleman to shake his head is simply disingenuous.

On the big test of the PBR—that is, the restoration of economic and fiscal credibility—it was a resounding failure. Markets were dismayed, the deputy Prime Minister was incandescent and it was not much of a crowd pleaser either. I shall spare the House the list of quotations from various newspapers on the day following the PBR. It is astonishing that the Chancellor not only failed to begin the process of cutting spending but announced a further increase in public spending and financed it by slapping an extra tax on everybody who earns more than £20,000 a year by raising employee national insurance contributions. They will now go up by a total of 1 per cent., costing someone on £30,000 an extra £200 a year and someone on average earnings an extra £60 a year.

There is a similar burden on employers at a time when we are trying to create jobs. The Institute for Fiscal Studies has made the obvious point that employee and employer NICs are the same tax. Both are incidental on wages, so anyone who earns £14,000 or more a year will be hit by Labour’s double tax whammy on employer and employee NICs. The Prime Minister is determined to fight the coming election on a class war battlefield, but it seems rather strange to start by feeding the Chancellor’s spending addiction with a tax that impacts on the millions of decent, hard-working people in this country who earn £14,000, £15,000 or £20,000 a year. If we win the general election, our No. 1 priority will be to try to avoid Labour’s new national insurance tax increases on the many.

On that point, does my hon. Friend agree that many of the couple of hundred thousand—no doubt, young—people who are now unable to get part-time employment will be students who use part-time employment to fund themselves through university? Does he agree that the worst hit will be low-income students who have to do such work because it is the only way that they can afford to get their degree?

I am sure that my hon. Friend is absolutely right. She has identified just one of the many groups who will be hit by this Labour tax on the many.

There were a couple of other noteworthy points in the PBR. A Labour PBR would not be complete without some spectacularly unjustified rhetorical flourish and some sleight of hand that comes out only when we analyse the small print—and we did, indeed, get both. Some hon. Members, perhaps on both sides of the House, have not recovered from their mirth at the Chancellor’s assertion that he was taking these decisions from a position of strength. There was a sleight of hand: an unannounced reduction in the NHS budget, which was caused by the £446 million that the Treasury will claw back from the national insurance tax hike. That means that Britain’s biggest employer faces a real-terms budget cut rather than the maintenance in real terms that the Chancellor announced.

There was also a shockingly cynical pre-election bribe. We have got used to some of those. The Chancellor said in his pre-Budget report speech that there would be above-inflation increases for benefits, including disability living allowance and child benefit, but it later transpired, when the IFS started crunching numbers, that the Government’s published plans include a 1.5 per cent. real-terms cut in benefits in 2011. The Prime Minister could not bring himself to be any more honest about that cut than he has been about others. The following day, he was reported on Sky News to have denied the charge by claiming:

“Benefits will continue to go up”.

If the Chief Secretary wants to put the record straight and confirm that benefits will continue to go up in 2011, I would be happy to take an intervention from him. Some of my hon. Friends might remember the council tax rebate for pensioners in the Budget of 2005, which was, surprisingly, discontinued in the Budget of 2006.

I am grateful to the hon. Gentleman for giving way, and I look forward to responding to his points at more length later. On the benefit increases that he has just mentioned, what has happened is that increases have been brought forward. There will be no reduction subsequently. That is quite wrong.

I see. So, increases have been brought forward. That means that benefits will go up this year and go down again next year, so that is not a reduction. I will remember that for the future.

This pre-Budget report is the dying gasp of a weak, divided and incompetent Government. [Hon. Members: “Here we go.”] Yes, here we do go. This is a Government led by a Prime Minister who has betrayed the office he holds by blocking the tough action to deal with the deficit that the Treasury has advised is necessary. He is placing the prosperity of millions of British people in jeopardy for the sake of his wretched dividing lines, and he is gambling on their jobs to try to save his own. There will be £789 billion-worth of extra borrowing over the next six years, doubling the national debt again to nearly £1.5 trillion. There is no credible plan for dealing with the deficit, no honesty on spending and certainly no spending review. There will be a higher deficit in 2013-14, as a percentage of gross domestic product, than when Denis Healey went to the International Monetary Fund.

As Labour is too weak to take the action necessary to tackle the deficit, it has had to admit in the PBR that a Labour victory in the general election would mean, as has already been announced, an extra £7.8 billion-worth of taxes, which is £370 per family. The vast majority of that money will come from the national insurance tax increase, which will affect everyone who earns more than £14,000. It would also mean a further £30 billion-worth of tax increases, which are shown in the figures but unexplained. That is another £925 per family being hidden from view until after the election.

Despite the Government’s best efforts at obfuscation, this PBR has made crystal clear the reward that the people of Britain would get if they were to re-elect this Government: higher taxes and higher interest rates. The PBR is an admission of surrender; it is the capitulation of new Labour. Labour is abandoning any pretence of being serious about restoring the public finances to health and getting Britain back on the road to prosperity. It is abandoning all those who are working, striving and saving for a better future for themselves and their children. It is retreating to its core support and turning its back on aspiration. It is failing the country in its hour of economic need. If the Prime Minister does not have the courage or the competence to deliver the change that Britain needs, let him at least do the decent thing and call an election at the earliest opportunity and let somebody else try to undo the damage that this wretched Government are doing to Britain’s credibility and creditworthiness, before it is too late.

I strongly welcome the Government’s decision to accept the Treasury Committee’s recommendation to hold a full day’s debate on the pre-Budget report. That is an important step in parliamentary scrutiny of public finances. In that respect, I thank the staff of the Treasury Committee. We took evidence from the Chancellor, his officials and experts in the last week before the Christmas recess, and work was done to write the report during the Christmas recess. The report was agreed only on Tuesday and printed on Wednesday. I thank both the staff and my colleagues on the Committee for that.

The main issue that we considered was the macro-economy, which is best described by the word “uncertainty”. Uncertainty is certainly present in the economy, whether in bank lending, the future path of unemployment or even GDP growth. We noticed that that is causing some businesses to delay making important decisions that could benefit the economy, such as investing and hiring staff. Mention has been made of the scepticism among some economists about the 2011-12 growth forecast, given the considerable degree of uncertainty. It is therefore critical that the Treasury should provide more quantitative information on the risks in relation to its forecasts, especially on economic output.

As has been mentioned, there has been some good news. Unemployment has been substantially lower than was expected for such a severe recession, and there have been fewer repossessions than expected. Business insolvencies are also far lower than would have been expected in previous recessions, and the recent manufacturing statistics show promise. Much of that is due to the Government’s policy of supporting households and businesses through the recession with fiscal measures. It is obvious that the fiscal input has worked in such cases; without them, the recession would most certainly have become a depression.

However, we must be vigilant about a further weakening in the labour market. As we feared, young people in particular have been hit by the recession. In November, youth unemployment in the UK reached a record high of 943,000, or 19.8 per cent. So, I welcome the Government’s measures to support youth employment, but I urge them to do more to ensure that young people who are unemployed have the opportunity to get into the labour market, because statistics show that if young people are unemployed for a considerable time, their life chances are impaired as a result.

House prices have also settled, but at a historically high loan-to-income ratio that may be unsustainable, especially if monetary policy eventually tightens. The concern over repossessions means that the Government must remove support in this area very carefully. The Committee urges them to report in this year’s Budget on the housing market’s sensitivity to future fluctuations in employment and interests rates.

As we have known for quite a long time, bank lending, sadly, remains uncertain. As a Committee, we do not want a return to easy credit, but neither do we want the economy to be crippled by a lack of access to credit. That is particularly important for those businesses that still cite the lack of finance as their most pressing problem. I still receive communications on a regular basis from businesses telling me about their difficulties with the banks in that respect. There is a danger, therefore, that bank lending may not support recovery in the private sector, and the Treasury has assured the Committee that it will remain vigilant in this regard.

The Government have put in place measures to improve businesses’ access to finance, and that is commendable. However, I would like future measures to be aimed at encouraging non-bank sources of finance for businesses, and especially for small and medium-sized ones, so that they are not so dependent on the banking sector in the future.

Adam Posen, a recent member of the Monetary Policy Committee, appeared before the Treasury Committee and said that the UK lacked a spare tyre for when the banking sector goes into crisis—a lack that means that any future recovery will be threatened. Posen compared the UK to Japan, saying:

“The closer one looks, the more worrisome this specific parallel becomes”,

due to the concentration of banking in a few large firms, and the comparative lack of non-bank sources of finance for companies. The UK’s banking structure, he said,

“could impede the return of trend growth in the UK to its previous rate, and…could if things worsen put on persistent deflationary pressure”,

as the ongoing banking structural problems did in Japan.

Economies with up-to-date banking systems, or which have alternatives to bank lending, are the ones that recover faster and stronger. The need to reform our banking system is hugely important. We cannot continue with just five or six big companies: that spare tyre is needed, and it is needed urgently.

Going forward, we need to rebalance the economy away from consumption. Before the crisis, there was a steady decline in the household saving ratio, from over 14 per cent. in 1981 to zero in 2007. The recent bounce in the saving ratio up to 8.6 per cent. must be maintained if we are to have a strong economic recovery. Increasing household saving may not be achieved through macro-economic policy alone. I believe that we will need to widen access to savings products, and introduce new products appropriate for groups who were not targeted before.

The Treasury Committee has welcomed a number of Government measures in this area, such as the Saving Gateway, and I hope that further measures will be brought forward. I well remember the report that we published in 2004-05 on restoring confidence in long-term savings, in which we said that savings was a middle-class industry. A lot of people do not have access to savings and are not being encouraged to save, and that is an issue for the Government to take up.

On the public finances, there is a fine judgment to be made over fiscal consolidation, especially given the macro-economic uncertainty. The Committee said that withdrawing fiscal support too early could plunge the country back into recession, with dire consequences for growth and employment that would cost the Exchequer more in the long run.

The Governor of the Bank of England told the Committee that we needed to act “at the right time” but, as we all know, there is no consensus on what the right time for fiscal consolidation is. The Committee pored over that very question, but more clarity will be required to achieve that consensus.

Does my right hon. Friend recall that, when the Committee considered the scale and speed of fiscal consolidation, all the experts from whom we took evidence agreed that faster or deeper fiscal tightening would hit support for pensioners? Would that not be the unacceptable price of tighter spending cuts?

I do recall that being mentioned, but I also recall that youth unemployment was mentioned as well. Like the pensioners, that is a really big issue for us.

The Treasury Committee also felt that the PBR did not provide enough information on how the structural deficit will be reduced. Because of that, we believe that the Government must bring forward a clearer and detailed plan. As has been mentioned, that should happen sooner rather than later, and this issue certainly needs to be tackled after the next election. We also feel that the Treasury could provide more quantitative information on the public finances. As the shadow Chief Secretary to the Treasury has said,

“there is a sense that the Treasury are using uncertainty to suit themselves.”

The PBR gives some forecasts to as far ahead as 2015, and illustrative projections to as far ahead as 2018, despite any worries about uncertainty. It could therefore be considered arbitrary that the Treasury fails to produce projections of future expenditure, or at least of the split between departmental expenditure limits and annually managed expenditure.

The Treasury must also provide more quantitative information on the risks around its forecasts for the public finances, given the degree of uncertainty surrounding them. We realise that the Fiscal Responsibility Bill will tie the Government into a fixed time scale for managing the deficit. The fact that that will require close parliamentary monitoring makes transparency all the more important.

The Committee notes the risk, however small, of another uncovered gilt auction and yields rising. Quantitative easing is slowing, and there will still be large gilt auctions in 2010-11. However, we also note the methods now employed by the Government to reduce the risk of uncovered auctions, and welcome the fact that there have been no further uncovered auctions since our Budget 2009 report.

The Treasury Committee report, like many earlier reports, also mentions child poverty. As a Committee, we remain convinced of the continued importance of the commitment to eradicating child poverty, despite the difficult economic circumstances.

Given the recent slow-down in progress on the child poverty targets, and the likelihood that this year’s target will be missed, it is vital that the Government set out a credible plan to tackle child poverty, going forward. It is vital that the Government set out the steps that they propose to take to achieve the 2010 target, and to achieve the elimination of child poverty by 2020—a very bold but also a very proud manifesto commitment in 1997.

I turn now to the question of the bank payroll tax. The Treasury Committee has been at the forefront in calling for change in the culture of banking, but estimates suggest that the Treasury now expects to receive about £3 billion or £4 billion from the tax when it originally expected only £500 million. That shows that the banking culture has not changed—that banks have simply gone ahead and paid out the bonuses. That is hugely important, because there is public anger about this matter. People are not fooled, and they realise the extent of the bank bail-out. I made that point yesterday to the Economy, Energy and Tourism Committee of the Scottish Parliament, when I was giving evidence to its inquiry. It is important that we remind ourselves of that.

The Treasury purchased £37 billion of shares in RBS and the Lloyds Banking Group; it gave indemnity to the Bank of England for £200 billion of quantitative easing; it has also agreed to guarantee up to £250 billion of wholesale borrowing by banks; it provided about £40 billion of loans and other funding to Bradford & Bingley and the Financial Services Compensation Scheme; and it insured banks’ assets to the tune of £280 billion. The National Audit Office, in a recent report, suggested that the net cash outlay for the purchase of shares in banks and the lending to Northern Rock will be about £117 billion, with a gross outlay of £131 billion. As a result, the Government’s commitment to banks is 60 per cent. of GDP, and the value of that is 83 billion working days. The consequences for the UK are stark, but so are the consequences for the world. The International Monetary Fund says that 10 per cent. of global GDP will be lost for ever as a result of the banking crisis.

The banking crisis, which prompted the financial crisis, is at best halfway over. The IMF estimates the total non-performing assets in the world to be worth $3.4 trillion, of which only $1.7 trillion has been written down. So a second bank bail-out will not be tolerated in the United Kingdom or in other European countries. I have visited Germany, Austria and Belgium in the past few weeks, and I got that message. It will also not be tolerated in the United States, which I visited, too. Now is the time to fix the banking system, and I think that we have four to five years to change the financial architecture. That is why the Treasury Committee announced a few weeks ago that it would be undertaking an exercise on the “too big to fail” issue, which seemed to be brushed under the carpet last March, but has since been revived.

The right hon. Gentleman is making a powerful point about the action that would need to be taken either to reduce the size of banks or to ensure that they were not too big to fail. Why does he think that, despite his Committee’s report last year, his many comments and his input over the past year, the Government have not taken any action to deal with the issue that he highlights?

The Government have taken some action, but the issue is complex nationally and internationally. We see that from the tax on bank bonuses, whereby we have had a kick-back from the City, because some companies have said that they want to relocate. However, there is an international dimension, too. Given that we exist in a globalised world, we need to fix the matter globally, and that is a very difficult job. Like the Treasury Committee, others have taken to the stage and commented for a considerable period.

For example, the Governor of the Bank of England, who has appeared before our Committee, has been explicit on the issue. When we visited America, we met Paul Volcker, a former chairman of the Federal Reserve, who said that there was an issue that needed to be tackled. Indeed, he went further than any of us by saying that he wanted sound evidence from the banking sector that any financial innovation in the past 20 years had led to economic growth. The only financial innovation for which he gives the banking system credit is the ATM. There is deep scepticism.

Nicholas Brady, a former US Treasury Secretary under Ronald Reagan, had an article in the Financial Times this week, in which he said explicitly that the “banking system is unsound.” Core reforms are essential if we are to provide the system with safety and soundness. People want safe deposits. One of the hardest questions that I asked the bank chief executives when they appeared before the Committee was, “Do you agree with the ‘Oxford English Dictionary’ definition of a bank, which is an institution for the safe keeping of people’s money? If you do, you have screwed up.” That is the issue: the consumer wants trust and confidence in the banking system to be restored.

My point was, given everything that the right hon. Gentleman says, which people widely recognise, the Government are responsible for ensuring that the banking system works better than he describes. My question was simply: why have the Government not taken action in that area over the past 12 or 13 years?

I am saying that the Government have taken some action in that area. I am sure that the hon. Gentleman, who sits on the Conservative Benches, believes in markets and free markets, but does he want Governments interfering in every single decision? I do not think that he does, so philosophically he will have to come to terms with the issue.

It has been proved that there is now no such thing as a free market, particularly in the banking sector. The Governor of the Bank of England came before the Committee and made this very point. It is a one-way bet for the banking system: if people do well, they get big rewards; if they do badly, they get big rewards. The Government need to go further on the issue of incentives in the banking system, because the incentive structure has distorted the long-term health of the banking institutions. People have had short-term returns but long-term instability. That is why we have joined all these eminent people such as Mervyn King, Paul Volcker and Nicholas Brady; no doubt I will add the hon. Member for Windsor (Adam Afriyie) to that list next time I speak on this issue.

The truth is that nothing would militate more against recovery than for the Government to try to interfere in the banking system. However incompetent banks have been, that would be nothing to the levels of gross incompetence that would accrue were Governments to get involved in banking.

The hon. Gentleman should take his colleague, the hon. Member for Windsor, for a quiet tutorial and make that point to him. The banking community has been absent from this debate; people have put their heads under the radar. If they do not want inappropriate legislation and heavy regulation, they will have to engage in this issue and ensure that we get a system that works—that we go back to a market system that operates in the interests of everyone in society. If the hon. Member for Gainsborough (Mr. Leigh) can join me in calling for that, I will be very pleased for him to do so.

Volatility and instability are at the core of the financial system at the moment. That is why the Treasury Committee has set up this inquiry. We are not saying that we should go back to the United States Banking Act of 1933 in its purest form; we are asking how we can make the system more stable and less volatile, and ensure that trust and confidence in the system is restored and that banks act in their own interests and those of their shareholders, the public, their customers, and society as a whole.

One aspect that has been missing from this debate is the public—the debate has been between the City and the political community. That is why, along with my colleagues, the right hon. Member for Haltemprice and Howden (David Davis) and the hon. Member for Twickenham (Dr. Cable), we have established the Future of Banking Commission, which has been supported by Which? and eminent economists such as Roger Bootle, John Kay and others. That is intended to give the public a voice so that their interests are looked after and safeguarded and we end up with an appropriate banking system that serves the interests of society—nothing less than that. Only by ensuring that that happens will we restore the trust and confidence in the system that we all desire.

We have had two debates on the economy this week. I judged, wrongly, that this would be the centre of attention, but the Chancellor and the shadow Chancellor clearly took a different view. Nevertheless, I persist in my belief that this is an important debate, for several reasons. First, it centres on the pre-Budget report, which was a very important event, however we judge it. As the Chairman of the Treasury Committee pointed out, the debate represents an advance, albeit a small one, in parliamentary accountability, because it represents an acceptance that the PBR should be subject to debate. Moreover, we now have access to the Treasury Committee’s review of the PBR, which we did not have on Tuesday. There is therefore a lot to discuss today that we were unable to discuss properly then.

I want to say something about the deficit and the controversies surrounding it; something about the issue that dominated the PBR but has now largely been forgotten—the banking tax, and what has happened to it; and something about the long term, because we are very preoccupied with the short-term fiscal position. There was an interesting half one-liner in the PBR about the creation of an infrastructure bank and a vision of how the economy could develop in the very long term, and we need to refocus some of our attention on long-term structural issues.

I start with the deficit. This debate has been a good deal less emotional than bits of the one that I heard on Tuesday, in which the right hon. Member for Birkenhead (Mr. Field) among others proclaimed that the fiscal crisis was comparable to the crisis in 1940. Other speeches were at a similar level of emotion. Today everybody has been a little bit calmer, but we clearly have a serious problem and it is helpful to start by stating what the deficit problem is.

There are two linked problems: a deficit or borrowing problem and a debt problem—a cash-flow problem and a balance sheet problem. The problem of debt and the balance sheet is clearly serious, because the situation is deteriorating rapidly. However, as is often pointed out from various parts of the House, as things stand the level of British public debt in relation to the economy is actually one of the lowest in the developed world and much lower than at various periods historically.

Will the hon. Gentleman give way?

Perhaps I can anticipate the hon. Gentleman’s intervention. I know he believes that there is a measurement problem, and that if we measured public debt differently, we would come up with much higher figures. I am merely citing the international conventions of the OECD and the International Monetary Fund; he might have something to add.

The figures on which I rely are from the Office for National Statistics, and indeed the researchers in the House of Commons Library have confirmed them. They illustrate the point that I, my right hon. Friend the Member for Wokingham (Mr. Redwood) and my hon. Friend the Member for Braintree (Mr. Newmark) have made that the figure is not £850 billion, as is suggested. The true figure, which I believe is now endorsed by our Front Benchers—it certainly appears to be—is nearer £3 trillion, and maybe more. If the measurement is out by a factor of three or four, does the hon. Gentleman not agree that that underlines all the difficulties about what the deficit is and what the definition of net debt should be?

I am sure it does but, equally, other developed countries have the same problem of incorporating public sector pensions. However, I accept the hon. Gentleman’s broad point that there is clearly a problem. A more acute one is the borrowing problem. Some 13 to 14 per cent. of GDP is currently being borrowed, and it is being done in a very artificial way because the Government are buying up their own debt in the current strange monetary circumstances. The level of borrowing is unprecedented, I believe, and it is the highest in the developed world except possibly the United States, which is in the rather different position of being able to borrow in its own currency. There is a serious cash-flow problem, which we must take seriously and which is at the heart of the debate.

Two policy issues come out of that problem, both of which have been touched on. There is the historical problem of how we got into this situation and who is to blame, and the forward-looking problem of what we do next and how we manage what we all accept to be a difficult balance. The hon. Member for Runnymede and Weybridge (Mr. Hammond) summarised in numbers how we got here and why we have our public financing problem. Roughly a quarter of the problem is accounted for by the cycle, the ups and downs of the economy and the recession, and three quarters is structural. The problem is that the word “structural” is bandied around, but it is never terribly clear what people actually mean when they use it.

I know that the Conservative argument has always been that the structural problem is the “hole in the roof” showing the neglect of the budget over many years. That argument is partly true, but the problem with it is that the hole in the roof was actually quite small. I have been doing this job for five or six years now, and I remember debating the matter with the predecessors of the hon. Member for Runnymede and Weybridge, the right hon. Member for West Dorset (Mr. Letwin) and the former Member for Arundel and South Downs, who had an unfortunate slip-up at the last general election. When we talked about the structural deficit then, we were talking about roughly 1 per cent. of GDP. Now we are talking about something rather different—an over-dependence of the economy on the banking sector and to some extent on the ups and downs of the housing market as a source of revenue. It is quite right that we now talk about how to adjust the level of public spending down to one that relates to stable sources of revenue. That is what we mean by the structural debate.

In the wider context, it is a little disappointing that although we are talking about that very real problem, which we have to face, there is little discussion of how we can make the British economy much less dependent on banking in the long term. The Chairman of the Treasury Committee touched on this, but it is a fact that in the British economy, the balance sheets of the banks together account for about four times gross domestic product, which is about four times as large as in France or Germany, and much more than in the United States. We cannot sustain that position and it must be changed. Equally, our economy has become highly over-dependent on people’s belief that property prices rise and rise, which we also need to address. That is the real structural debate, but we are not having it.

On the background and the history, it is certainly true that the bulk of the problem we are now dealing with is structural rather than to do with the cycle of recession. It is almost unique to Britain and it is not shared by the US and other countries. That takes us to what we do next and how we manage the situation. I was struck that in the more temperate passages of the speeches from the Government and Conservative Front Benchers, there was an acknowledgement that that is a very tricky balancing act.

It is certainly true that unless action is taken quickly, or at least unless action is seen to be taken quickly, there is a real risk of a sovereign debt crisis, with all the consequences that that brings—higher interest rates and the downgrading of credit worthiness, which is a real issue, not just a hypothetical one. On the other hand, we must balance that against the fact that precipitant action before private consumption and private investment get going risks aggravating and prolonging the recession, which in turn would make the public financing problem even worse. Getting that balance right is incredibly difficult, and nobody should pretend that there is any simple dogma that gives the correct solution.

The Government and Conservative Front Benchers quoted economists on various sides of the argument. The hon. Member for Runnymede and Weybridge cited the Financial Times survey of 80 economists that was taken over the new year period. The result was rather predictable: they were roughly divided 50:50 on what we do about the problem. Some were predictably in the half who argued that we should just get on with the job and start slashing the deficit—it included Professor Patrick Minford and Ruth Lea, and Philip Booth of the Institute of Economic Affairs, who have an ideological dislike of the public sector. However, it is fair to say that that half also included sensible, balanced people, of no obvious ideological inclination, who believe, for perfectly good economic reasons, that we must get on with the job.

The other half, who were equally reputable, interesting and varied, said, “Actually, we have got to be very careful, and it would be rather foolish to embark on big cuts in public spending before 2011.” It is worth while going through some of the names in that half: David Blanchflower and Sushil Wadhwani, former members of the Monetary Policy Committee; Julian Le Grand of the London School of Economics; George Magnus of the UBS bank; Sir Samuel Brittan; John Philpott of the Chartered Institute of Personnel and Development; Andrew Hilton of the Centre for the Study of Financial Innovation; and Peter Spencer of the Ernst and Young ITEM Club. I have no idea of the politics of many of those people, but they are all arguing on good economic grounds that it would be dangerous to embark too rapidly on slashing public spending. The argument is therefore finely balanced.

It is worth looking at what Ian McCafferty, the chief economist of the CBI, who is taken very seriously, says. He has probably got the balance about right. He said:

“Whoever wins the next general election, fiscal consolidation is unlikely to start much before 2011. The exact starting point is less important than the credibility of the medium term plan, which requires…a clear direction of travel and sufficient detail on quite how the headline borrowing targets will be achieved.”

That summarises what the central issue is and takes us to the Treasury Committee report.

The hon. Gentleman is making an excellent speech, but I think it would be useful at this point in the debate, since we have heard from Government and official Opposition Front Benchers on this subject, to ask him whether in his judgment the reduction in the deficit in the first year of the Government’s plan should be faster, or whether the Government have broadly judged it right?

I do not think we should rush into rapid cuts. One of my areas of disagreement with the hon. Member for Runnymede and Weybridge is that I do not think there is a strong case for that. It is a difficult issue and there is a balance to be struck, but rushing into expenditure cuts in 2010-11 would carry a greater risk of precipitating deeper recession. My party takes the view that the Government’s eight-year plan, with a four-year halving of the deficit, is a reasonable starting point. My judgment is that we will probably discover that it is not enough, but we have to start somewhere, and it is a reasonable working assumption.

I agree that precipitate cuts would be foolish and weaken the ability of the economy to recover. What does the hon. Gentleman make of the Government’s already announced £800 million cut to the Scottish budget, which will start in the spring of 2010? Those cuts are already under way. Does he think they should be overturned or some other course of action taken?

I do not think that Scotland is fundamentally different from the rest of the UK. We all face the same problem and we are all experiencing the beginning of cuts. For example, I am meeting the Minister for Science and Innovation in a few days’ time about the impact of cuts in that sphere. We cannot have an indiscriminate approach to public spending reduction, and my argument is not that the cuts should not happen, in Scotland or anywhere else, but that they have to be much more carefully thought through and targeted. That is the approach that I would adopt.

The Select Committee’s report, although expressed guardedly as it represents a cross-party consensus, contains some serious implied criticisms of the pre-Budget report, which take two forms. The first is the acknowledgement that the Government have been nowhere near detailed enough in spelling out how they will approach future cuts in spending. The key conclusion reads:

“However we note that although the Treasury believe the Pre-Budget Report contains sufficient detail about the way in which the structural deficit would be reduced, our expert witnesses all criticised the document for not providing enough information about how this will be achieved.”

The Committee does not say that it agrees with the expert witnesses, but that is implied.

The second criticism is of excessive optimism about economic growth in the future. The report states:

“There is, however, considerable scepticism among economists around the Government’s growth forecasts for 2011-12.”

That is a hedged-around comment, but its drift is clear. The criticisms have been made and need to be taken seriously. I would add the additional, and most serious, criticism that the Government have mobilised to raise taxes—£113.5 billion over four years—but instead of using that money to consolidate the budget, as they will surely have to do as they themselves acknowledge, they have committed it to additional spending. That is surely wrong and has sent all the wrong signals.

The hon. Gentleman will accept that a judgment has been made about the right level of deficit in the next financial year when the economy will still be growing at a rate below trend. In the subsequent year, there will be a sharp fiscal tightening, but that will be at a time when the economy will be growing at above trend. There is an element of judgment involved, and the Government have made a decision about the right level of deficit commensurate with the forecast level of growth in the economy.

I am sure that that is right: the extent and timing of the fiscal contraction have to reflect the state of the economy. I have suggested five tests that might be used to ensure that, one of which is—obviously—the rate of growth. Another is the growth of unemployment. Another one has to be the state of the borrowing markets.

I hope that the Government are right about the expectations of economic growth. I hope for rapid economic growth because hundreds of thousands of people’s jobs hinge on it, but one has to be realistic: an awful lot of factors are holding back growth, and are likely still to be doing so in a year. Private consumers are unlikely to embark on another spending splurge when they are heavily in debt. We have an underlying problem that British consumer debt in relation to the economy is the largest in the developed world, and certainly the largest in our history for a very long period. It would be surprising—and probably unwise, in many cases—were people to rush out and start spending.

Private sector business investment is unlikely to take off rapidly. There is an enormous amount of spare capacity, but as the Chairman of the Treasury Committee just reminded us, there is a severe credit squeeze. That will be even more the case once we enter a period of expansion, because the banks are over-reacting to the crisis and not lending to sound British companies. We will not get any growth from public spending, whether consumption or investment. The entire expectation of economic growth rests on exports, but actually they are a relatively small part of the British economy. It will require a near miracle to achieve the kind of growth for which the Government, and indeed all of us, hope. Frankly, we have to be realistic about that.

I want to comment on two other aspects of the PBR that have not today received the attention they probably should have done. One is the Government’s tax on bank bonuses, which was put together in a hurry. Given that it is a fairly short-term tax, I hope that, in the conclusion to the debate, the Chief Secretary or his colleague, having had a month’s reflection, can summarise what, in their judgment, has been the impact of the tax. Furthermore, how are they meeting some of the criticisms that have been thrown at the tax, of which there have been several? The first was advanced from the Liberal Democrat Benches. We were very sceptical about the ability of the tax to capture bank bonuses because of the numerous opportunities for potential avoidance, through multiple payments of bonuses, payments in salary and payments in kind, and it would be useful to have an assessment of how far the Government think they have plugged those various potential holes.

Secondly, the Government themselves argued that the main purpose of the tax was to change the behaviour of the banks, to discourage them from paying out bonuses and to encourage them to build up their capital reserves. Are the Government in a position to estimate how much capital reserves will be changed—improved, from the Government’s standpoint—as a result of the measure? It was all done in a hurry and we did not get much analysis at the time. Can the Government now tell us what they think?

Thirdly, we are being told by the banks themselves, rightly or wrongly, that they are all now stumping up the money, that they are paying it and that the Government will receive a lot more than £500 million. What is the current estimate of the amount of money that will be raised? Finally, over the holiday period, we heard many rumours and much speculation about banks running off to Switzerland and other places because they object to paying this high tax and other things. I suspect that much of that is rhetoric and an attempt to blackmail the Government.

While we are on the subject of high salaries, does the hon. Gentleman agree that the public sector must set an example? There is understandable public anger about the fact that 50 people who work for Transport for London earn more than the Prime Minister and that 50 people who work for the BBC earn more than the Prime Minister. Would he support any proposal that would limit salaries in the public sector to what the Prime Minister earns?

Indeed, I think I was the first person to advocate that, and I am certainly willing to go along with other people who say the same thing. Our view on the public sector pay freeze that came in was that it should perhaps have been more progressive and there should have been a fixed cash award for everybody, rather than a percentage increase. However, I take the point that the public sector has to show similar discipline.

When considering the performance of the banks, is it also important to focus on how the additional liquidity provided by the authorities can be used most effectively? There are issues and dangers of a return to the high-risk culture that drove the banks before in terms of performance. I understand that the Department for Business, Innovation and Skills has summoned many senior bankers to discuss that very issue.

Yes, although I think the hon. Gentleman is making several different points. The short-term intervention in the form of the bank tax must not obscure the much bigger issue of how bank bonuses will be regulated in future in such a way that banks do not take excessive risks. That is the important long-term question. However, I would like to ask a final question about the bank tax. In view of what appears to be its rather greater success in raising revenue than some of us predicted, do the Government now intend the tax to be a permanent feature or, as was implied at the time, does it merely cover the period up to the end of March this financial year?

My final point relates to a small detail in the PBR, but none the less an important one in the long term, which is the concept of an infrastructure bank. We must not constantly be sucked into negative thinking about cuts in the short run, overlooking the problem of how we create a more viable and balanced economy in the longer term. Several serious people—not just in the engineering industry, but in the insurance industry—have surfaced in the past few weeks to indicate that this area represents both a big challenge and a big opportunity. The chief executive of Legal and General, for example, has pointed out that he has hundreds of billions of pounds sitting in his institution in annuity funds, much of which is currently going into buying American corporate bonds. He has asked, “Why can’t I put this money into British infrastructure?”, to build railways, barrages or other forms of useful infrastructure on a commercial basis, albeit with some Government pump-priming.

Although the Government’s proposal is modest—there is a suggestion of a co-ordinating body in the Treasury—I wonder whether the Financial Secretary could set out in his conclusion to this debate how they envisage what seems to me a constructive and sensible idea evolving in future years. What scale of operation are we thinking about? What might the Government’s role be financially? The insurance companies are not asking for guarantees; they are asking for Government equity in any funding. How can that be done on a sufficiently large scale to make a difference and help to create a more balanced economy?

In the light of the disaster that we have just experienced on the economic front with the banks, just as we did in the 1850s, does the hon. Gentleman not agree that his line of reasoning perhaps leads to the idea of companies similar to the water, gas, electricity and even railway companies of the 19th century, which were supported by debenture stock, so that the elements of loan that he has mentioned are in place, but focused on companies that are not exclusively under Government control?

That is exactly the idea being promoted. The problem that we start from is that it is not now possible to envisage making large-scale investments in British infrastructure. The banks will not do it, because they are de-leveraging, and the stock markets will not do it, because of their short-term perspective in most cases, while private equity companies are worried about over-borrowing. The only mechanisms are likely to be what we now think of as new ideas, but which have a precedent in the 19th century, as the hon. Gentleman said. It would be interesting to see how far that idea can be pursued.

With that, I would like to listen to the remainder of the debate.

Once again, the Tory party appears to be in full swing in its campaign to convince the people of this country that the only function of Government after the forthcoming general election will be to cut public investment to reduce the current deficit. Needless to say, the Tories have been backed up in that by their friends in the news media and their friends in the finance industry, whose bail-out caused most of the problems in the first place. The deficit needs to be reduced. However, it should not be allowed to take priority over the continuing duties of Government to ensure that the people of this country have jobs and homes, schools and hospitals, pensions and policing, and transport and other local services at home, and peace and security abroad. However, this debate is substantially about the deficit, so I shall concentrate on that.

There were three main causes of the present financial crisis. The first was the need to find the money to bail out and prop up the banking system. I would remind the hon. Member for Runnymede and Weybridge (Mr. Hammond) that most of those people whom he has described as wise and wonderful and able to prognosticate the future would not have a job if the taxpayer had not bailed out their businesses and propped them up to prevent them from collapsing.

Just for clarification, may I remind the right hon. Gentleman that not one penny of the deficit projected for the coming year will be used for direct financing support for the banks? The money that the Government have put into the banks is of course cash, but it does not form part of the revenue deficit that the Government face.

I do not think that we needed that explanation, and I did actually understand it.

The second cause of the crisis was the cost of the measures to counter the recession that the banking crisis has brought about. The third was the loss of tax income that resulted from the recession, which was caused by the bankers. So it all goes back to the bankers. This is all the inevitable result of the worldwide banking crisis, and it is no use the Tories and their friends, or the bankers and their apologists, trying to blame this Government in general or the Prime Minister in particular. It is also true to say that, at almost every stage in this crisis, those on the Tory Front Bench have opposed the crucial measures that the Government have taken to save the banking industry from catastrophe, to protect jobs, homes and businesses from a deeper recession, and to get recovery under way. The Tories have opposed them all. It might be the duty of the Opposition to oppose, but surely there are limits. A bit of common sense would not go amiss now and again.

The recession caused by the bankers has led to unemployment, repossessions and business failures, but those outcomes have been nothing like as bad as the City analysts whom the Tories keep quoting were predicting. One reason for that is that, unlike the hysterical analysts in the City, most people running businesses live in the real world and are level-headed. They are trying to keep their firms and their work forces together so that they will still be in business when demand for their goods and services rises again. Their efforts have been backed up by the Government’s determination to keep pumping money into the economy to make up for the damage caused by the bankers. This included bringing forward investment projects, the public purchasing of goods and services from the private sector, and the quantitative easing that has poured money into the economy. It also included the temporary reduction in VAT, which was derided by those on the Tory Front Bench and their analyst friends when the Government introduced it, although it is now acknowledged as having been a considerable help.

We all have to recognise, however, that the effects of the recession are far from over. The recovery is under way, but it is quite fragile. Yet this is the moment that the Tories are choosing to demand massive, immediate cuts in Government spending. They claim that this would reduce the Government’s deficit, but it would not, because it would involve more people being thrown out of work. Throwing people out of work does not reduce the deficit. Quite the reverse: throwing people out of work increases it. Every job lost is a triple whammy for the taxpayer. First, the taxpayer has to go without the goods and services that the job-losers used to produce. Secondly, the taxpayer has to fund the benefits needed to keep the jobless and their families. Thirdly, the taxpayer has to do without the tax that the job-losers would have paid if they were still in work.

Will the right hon. Gentleman give way?

No, I must get on.

Even without counting the reduction in economic activity, keeping someone out of work costs at least £12,000 in benefits paid out and tax not taken in. That is £12,000 per person that is added to the deficit. To put it another way, throwing someone out of work is like turning a useful member of a ship’s crew into a passenger who then has to be looked after by the remainder of the crew.

The right hon. Gentleman is rightly concerned about the prospects for employment. Given that concern, does he support the Government’s proposal for a 2 per cent. increase in national insurance contributions, and what does he think that that will do to the job market?

It will not help the job market—[Interruption.] Unlike the Tory Front-Bench team, I am not living in a world of fantasy. It will not help the job market, but it is a better proposition than what we have heard from the Tories. There should be no question, in my opinion, of making cuts in public investment until the economy is well on the way to recovery and the joblessness rate is way down from what it is now.

Apart from the cost of bailing out the bungling bankers, the main cost of the recession is the result of the reduction in economic activity. We are not producing all the goods and services that we are capable of producing. The economy is not fully operational and the best way to clear the deficit is to get the economy working at full capacity again. The only way to do that at this stage is to keep on pumping public money into the system until the private sector recovers.

No doubt prompted by the recent disclosure of the official papers covering the first days of the Thatcher Government, the Tories, their media friends, the bankers and auditors and the infamously incompetent ratings agencies and their friends have started saying, “Well, yes, Mrs. Thatcher’s policies may have been tough, but they worked. She transformed the economy.” This myth—and it is a myth—is sadly subscribed to even by many people who should know better. The fact is—and it is a fact—that the average annual economic growth under the Wilson-Callaghan Governments who preceded Mrs. Thatcher was higher than the growth in the Thatcher years, so revered by the Tories and their City analysts.

The Thatcher Government succeeded in creating a feel-good factor by spending the massive tax takings from North sea oil and gas and the huge capital receipts from the privatisation of electricity, gas, telecommunications and other industries. These one-off assets were squandered: they were not put into a sovereign wealth fund; they were not used for long-term investment in the country’s future in new manufacturing industry, in science, in research or in education; and the money was certainly not invested in training, as apprenticeships were abolished. The Tory Government used it to fund tax cuts with massive tax benefits going mostly to the rich, which appears to be the Tory policy still. Contrary to free market economic theory, the Thatcher Government did not increase economic growth; they actually reduced it.

rose—

I give way to my hon. Friend and neighbour.

On that same point, does my right hon. Friend agree with me that during those years and as a consequence of the particular employment policies he outlined, the number of children living in poverty increased threefold? The Institute for Fiscal Studies has calculated that if the policies in place in 1997 when the Tory Government were last in office had continued until the present day, 2.1 million more children would be living in poverty than are now and that as a result of the Government’s policies, including those in the pre-Budget report last week, a million children will have been lifted out of poverty by the time of the election.

I agree with my hon. Friend’s point.

When the Tories went into that general election 30 years ago, of course, they had an election manifesto. Needless to say, they did not keep to it. I have been reading it and it should be filed under fiction. The fact is that they did not keep their promises. They promised to honour the pensions system they inherited, yet practically the first thing they did was to cut the link between pensions and earnings. They promised, and I quote,

“a competitive and efficient coal industry”,

yet they closed it down. They promised to simplify the tax system and came up with the poll tax. They promised to make better use of training resources; they closed down the Training Agency and abolished apprenticeships.

The Tories promised, and again I quote, “to master inflation”; under them, inflation ripped to record levels. In one Thatcher year, inflation hit 18 per cent. while over her whole period as Prime Minister, it averaged 7.6 per cent. a year and never fell below 3.4 per cent. They promised to make better use of NHS resources, yet they gave tax breaks for private medical insurance and left the NHS with decrepit hospitals and staff shortages. That is only a sample of what happened in response to the Tories’ famous manifesto.

History lessons are sometimes very useful. When expert witnesses appeared before the Select Committee, they said that in the event of a faster fiscal tightening, what would certainly have to go would be our proposal to bring back the index-linking of pensions to earnings.

Again, one of my hon. Friends has made a valid and important point.

That Tory manifesto was soft soap. The Tory reality was hard-faced. The Tories’ real policies were not in their manifesto, but they were being advocated by think-tanks and pressure groups, and they were then put into practice when the Tories came to power. I believe that they are trying the same trick again. The Tory leadership present their party as reformed and rehabilitated, but it cannot be trusted. To find out what the Tories really intend, we need look no further than what the Tory think-tanks and supporters’ groups are saying. That way, we find out what the real Tory policies are.

The TaxPayers’ Alliance—a real Tory outfit if ever there was one—and the Institute of Directors are jointly advocating all sorts of slashing attacks on services that make life decent for millions of our fellow citizens. They are threatening the elderly with a freeze on the basic state pension and the income guarantee, the withdrawal of free bus passes, and the abolition of free television licences. They are threatening children and young people and their parents with the abolition of Sure Start, the ending of the education maintenance allowance, the abolition of child benefit and the child trust fund, and the ending of the interest subsidy on student loans. They are even threatening a 25 per cent. cut in spending on the arts and theatre. Furthermore, they are threatening people in the impoverished third world with reductions in aid.

Will the right hon. Gentleman give way?

As long as the hon. Gentleman promises not to mention Brussels.

I give the right hon. Gentleman that guarantee. What I do want to ask him is this. I suspect that he is keeping his prescription to himself until the end, if indeed he is going to produce it at all, but he has said many times in the past that it would be far better if we resorted to a policy of nationalisation. Does he think that that would be the right thing to do in the light of the present crisis in our banking and economic circumstances?

As far as I can make out, even bankers are in favour of nationalisation provided that it nationalises them and saves their bacon. I am not fanatically in favour of it, although I accept the point made earlier by my hon. Friend the Member for Morley and Rothwell (Colin Challen)—who is no longer present—that it would probably be a good idea to keep the east coast main line in the public sector rather than handing it back to the collection of incompetents who were running it before.

It is not just the TaxPayers’ Alliance that is advocating cuts in services. Reform, which portrays itself as another influential Tory pressure group, advocates penalising pensioners for the banking crisis by abolishing the winter fuel allowance, free television licences and concessionary bus fares, and ending retirement pensions, council tax and housing benefit, widows’ and war widows’ pensions, carer’s allowance and disability living allowance for people receiving considerably less than average pay. It is also urging the Tories to impose the same eligibility threshold for maternity pay and child benefit, and to scrap the employer-supported child care scheme, the health in pregnancy grant, the Healthy Start scheme, the Sure Start maternity grant and the education maintenance allowance.

We should beware the Tories’ claims to have changed. Their supporters and paymasters have not changed. The people who will be paying for their forthcoming advertising blitz have not changed. We should resist their attacks on pay and pensions. This crisis was not caused by the potential cost of pensions for postal workers or teachers. It has not come about because social workers or nurses or bank clerks are overpaid, or because refuse collectors or shop assistants or factory workers or people gritting roads today are not working hard enough. It has come about because the overpaid bankers and their auditors could not distinguish between an asset and a liability, and the famous rating agencies could not have spotted a wrong ’un even if they had been trying.

I believe in accountability and responsibility. The banking industry and its hangers-on caused the crisis. They should have to meet the bulk of the cost of clearing it up. It is simple. It is the “polluter pays” principle. The bankers polluted the world economy. The bankers should have to pay for clearing up their pollution. Therefore, I welcome the new top rate of income tax and the bankers bonus tax. I support the proposal for a tax on all international financial transactions. I urge the Prime Minister to continue to press for a Tobin tax in collaboration with his French and German counterparts and, hopefully, shame the Americans into accepting it.

The only way we can get out of this recession and create a fairer and more equal society is if the bankers meet their fair share of the costs that they have imposed on the rest of us. The bankers have shown no signs of reining back on their excessive rewards. If the self-rewarding excess of the bankers continues while everyone else has to tighten their belts, it will lead to bitterness and social unrest. As the bankers and their public relations machines deploy their wealth and influence to scapegoat others for the consequences of the banking crisis, we are already seeing a major campaign to lay the blame on hard-working people providing vital public services. Once that sort of irrationality takes hold, once scapegoating becomes acceptable, there is no knowing where it will end. It could set loose forces that set one part of the country against another, one generation against another. It could risk giving right-wing extremists such as the British National party a hell-sent opportunity to promote petty nationalism and the politics of race and religion.

I believe deeply that our response to the recession that the bankers have created will not just determine the future of public finances. It will determine whether the second decade of the new millennium is faced by our people united in the pursuit of fairness and prosperity, or whether we are to be torn apart by strife that could threaten our very democracy.

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 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.

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 rather 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.

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?

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 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 on improving confidence of action to get the deficit under control far outweighs the impact of the loss of Government expenditure feeding into the economy if the fiscal contraction and consolidation take 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 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.

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.

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.

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 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.

Better than the Government.

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, 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.

Will my right hon. Friend give way?

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.

What has been rather depressing about listening to the speeches of Opposition Members is how exclusively they seem to be concerned about the interests of the financial markets and how little concern they appear to have about the wider interests of the people of this country. All this is rather like a double-take of the Geoffrey Howe Budget of 1981, to which the right hon. Member for Hitchin and Harpenden (Mr. Lilley) has just referred. That Budget decimated the industrial economy and, as my right hon. Friend the Member for Holborn and St. Pancras (Frank Dobson) has said, produced a lower rate of growth over the relevant period than in the preceding period of the 1970s, which was extremely difficult because of hyper-inflation due to oil prices. It is rather tragic that minds seem to be closed to the idea that there are alternative ways of dealing with the deficit that will not be so socially destructive and that could be more effective in the long run. That is what I want to discuss.

I shall focus on one crucial aspect of the pre-Budget report, which has had a little attention today but which has not been properly faced up to: the Treasury’s assumptions about growth over next year and the year after. The Chancellor’s view, as he expressed it, was that the worst is over. As we all know, the contraction of 4.75 percent. in 2009 is a post-war record and borrowing this year is on course to reach a peacetime record of 12 to 13 per cent. of GDP, yet the economy is forecast to rebound by 1 to 1.5 per cent. this year, rising to 3.5 per cent. in 2011-12. That would enable the Government to achieve their target of halving the deficit within four years, without the savagery of the full cuts that the Tories are clearly planning if they were to win the election. That projected growth is absolutely crucial to the PBR strategy but where is it going to come from? That is my question.

It is true, of course, that there are some real signs of recovery. They include the unprecedentedly fast turnaround of financial markets, which some say has never happened so quickly in 300 years. The assumption is that somehow that will drag the real economy up behind it, but that remains to be seen. Other factors are the slowing in the increase in unemployment, which is very welcome, the lower rise in home repossessions than in previous downturns, and the greater support for youth employment brought about by the Government’s present expenditure of £5 billion on job placements for 18 to 24-year olds and the increase in training and apprenticeships. However, my question remains: all that is important and useful, but will it add up to a huge surge in growth to 3.5 per cent. within two years?

In the boom years before the crash in 2007, household consumption contributed 1.75 per cent. of growth each year, with business adding about another 0.25 per cent. for a total of 2 per cent. That, of course, was in the fat years but now—after the worst recession since the war, the collapse of large elements of the banking industry, a big drop in house prices, a record fall in investment and with tax rises and spending cuts being promised by all parties—the Treasury is looking to household spending contributing 2 per cent. to growth in 2011-12, and to business adding another 1 per cent. I simply ask again whether that is credible.

Unemployment is still expected to rise to 2.8 million, and family budgets remain tight. Pay cuts, pay freezes and short-shift working are still spreading across the country. I ask again: where is growth on a sufficient scale going to come from?

In my view, the essential element missing from the PBR is a major injection of demand in the public sector. The private sector will not provide that demand, because there is no prospect of profitability until there is a much more visible turnaround in the real economy. Quantitative easing even of £200 billion has not provided the necessary level of demand up to now, as the banks have used the money not to increase lending to struggling businesses but rather to consolidate their balance sheets. In any case, we understand that the Bank of England seems minded to call a halt to quantitative easing once gilt purchases hit £200 billion in February.

Moreover, the injection of demand that we need will certainly not come from private consumption because, as we all know, the level of consumer debt is not far short of the whole of GDP. So the only way to inject the necessary demand into a very weak and fragile economy is through massive public investment in job creation: not £750 billion, which was spent bailing out the banks; and not £200 billion of quantitative easing, which has been much less effective than expected. A fraction of that could be used to underpin large-scale job creation in sectors where it is desperately needed, such as house building.

There are 12,000 people in my constituency alone on the waiting list for a house, and I am sure that the situation is much the same throughout the country. House building is at its lowest ebb for 80 years, and with a recession that is an extraordinary combination. We need such investment for the restoration of our creaking infrastructure and to blaze the way for the new green and digital economy, which I think all Members agree is where the future lies.

Why do the Government not make that investment? I suspect that it is because they came into office committed, after the Thatcherite monetarist years, to a complete repudiation of Keynesian demand management. The Opposition absolutely share that view, but I had rather higher hopes for the Government. We certainly heard that view in the speech from the Opposition Front Bencher, the hon. Member for Runnymede and Weybridge (Mr. Hammond). The story is well known, but I am embarrassed to recall that in 1997 the then Chancellor, the current Prime Minister, said that he was pursuing a regime of neo-classical endogenous growth theory. Shorn of the unfortunate terminology, it means that demand should be generated by the enhancement of supply within the economic system: from education, improvements in training, increased research and development, which is necessary, the commercialisation of science and so on. That, combined with Friedman’s quantitative money theory, which was prevalent in the 1970s, certainly provided the basis for Mrs Thatcher’s macro-economic policy. It is a quixotic, old-fashioned and perverse Tory theory, and regrettably—very regrettably—new Labour took it over wholesale in 1997.

The policy works fine when other vigorous, external sources of demand such as strong export demand from other countries, major technological breakthroughs or continuing private sector investment are in place to drive the economy, as they were in the boom years of 1994 to 2007. The policy works disastrously when there are no strong external sources of demand, as there were after the infamous 1981 budget, which over the next four years pushed unemployment up to 3.2 million; and as there are now, after 2008, when unemployment is still heading towards 3 million and when even the type of fiscal expansion that in 2000 countered the downturn from the dotcom collapse is not possible because of the budget deficit. If there was ever a time for Keynesian measures to restore demand in a very fragile economy, it is now.

The black hole in the PBR is not the opaqueness about where the cuts will fall, as the Opposition have repeatedly taunted, but the lack of any action to create the 500,000 to 1 million jobs that the economy desperately needs. Of course, the enormous budget deficit must come down; we all agree about that. But it is far better to do so by getting people off unemployment and housing benefits and back into work, where they start contributing to income tax, national insurance and VAT. The alternative, of rapidly making drastic cuts in public expenditure, clearly appears once again to be Conservative policy—but probably on a greater scale than any of us have yet realised. However, that could well have the opposite effect of turning a deep recession into a vicious spiral of decline, and prompt an even worse double-dip slump.

That is exactly what happened in Japan in the late 1990s, when after a lost decade the Government increased public expenditure but also increased taxes. They did that prematurely and suffered the consequences of another lost decade. It was the same when Roosevelt came to office. He was a balanced-budget man, but he saw the plight of the country and got expansion going with the new deal. By 1935, two years later, there was an improvement—an expansion—in the economy, but at that point he started to raise taxes and the United States went into a fairly serious further decline from which it did not escape until the war.

Of course, it will be objected that with the deficit as high as it is, we cannot afford to increase it any further, but that is simply not true. Our current debt-to-gross domestic product ratio is 61 per cent.—slightly higher, I agree, than that of France and Germany, but less than in the United States, where it is 69 per cent., or Italy, which is perhaps not the best example, where it is 102 per cent., with Japan still on 107 per cent.

Surely the right hon. Gentleman must realise, first, that our indebtedness is rising incredibly quickly, which is in itself a cause for alarm; and secondly, that the savings rate in countries such as Italy and Japan, as opposed to our utterly anaemic domestic rate, makes that comparison a very difficult one. If we had the savings ratio of Japan or Italy, perhaps we would not be as alarmed as we all are and should be.

If we are looking at Japan and Italy, that is a perfectly fair point. The hon. Gentleman says that our indebtedness is rising quickly, and I accept that, but the question continues to be what is the best way of reducing it. The point that I was about to make—he did not give me a chance because he intervened a bit too quickly—is that the best comparison is with Britain’s position during the second world war, when our debt-to-GDP ratio reached 250 per cent.—two and a half times our entire GDP. What happened after the war—did we tackle the situation with gigantic cuts in public expenditure? No, it was tackled in exactly the opposite way with large public expenditure programmes of just the kind that I am talking about to get the economy working again and to get unemployment down. I hate to say this but, in some says, that inaugurated the golden age of capitalism between 1948 and 1976. [Interruption.] I say that ironically. The fact is that that was a highly successful policy.

Let us not forget that, under the Thatcherite policies of the 1980s, we had not just one collapse, but two. It is all very well to talk about Geoffrey Howe’s Budget producing a great deal of growth—it did in the end, of course, because of growth in other countries and the rise in exports, and the end of the oil inflation of the 1970s, but it then produced another collapse in the early 1990s.

I should make it clear that I am not at all opposed to public expenditure cuts where they are justified. We should always be looking to see whether public expenditure is justified. I think—a significant number of very senior military chiefs, if not most, agree with this—that the £75 billion planned over the next 30 years for continuing with Trident is not justified. I also think that the £10 billion or so for identity cards cannot be justified on a cost-benefit rationale, and that one cannot justify expenditure running into tens of billions of pounds on massive Government Department IT super-computers, which is pretty wasteful given all the experience we have had.

Let me say to the Conservatives, who may agree with some of what I have said, something that they may not agree with—that taxes on the wealthy should be boosted so that they pay their fair contribution at a critical time for the nation. The Government are beginning to do that, but in my book nowhere near to the degree that is justified given that the wealthy and the bankers have produced the problem and that the rest of the country are expected to pay for it. That simply cannot be justified—that is the bottom line.

We should crack down much harder on tax evasion, which is reckoned to cost the economy something like £25 billion every year, and significantly increase the penalties for those who are caught. We should end the non-dom abuse, as it is insufferable that it has carried on for so long in this country, and we should certainly introduce a Tobin tax on financial transactions. We should raise capital gains tax to the level— dare I say it?-—at which Nigel Lawson left it at the end of the 1980s of up to the 40 per cent. that is the higher rate of income tax. It is only fair that there should be a rate of 50 per cent. on incomes over £100,000 and 60 per cent. on incomes over £150,000. If the situation is as critical as many people believe, such rates are fair and equitable.

We need public expenditure cuts where justified, tax increases where necessary but above all a massive public investment programme in job creation to swing the economy out of recession and decline and back into growth and expansion. There is no other realistic foundation for the Government’s prognosis of 3.5 per cent. growth by 2011-12. I trust that the Government will make that the highlight of their last pre-election Budget in March. It would be thoroughly good for the economy and extremely popular in the country, so I ask my right hon. Friend the Financial Secretary whether we can have that assurance.

I congratulate the right hon. Member for Oldham, West and Royton (Mr. Meacher), who asked exactly the right questions—how can we stimulate demand and get confidence back into the economy? We differ, however, on how to resolve it. A bloated public sector, which is already extended, is certainly not the way forward, but his central point was correct.

There are two groups of key questions that must be asked when considering the pre-Budget report. First, what is the present and future state of the economy, is it acceptable to the capital markets and what are the threats that are facing it? Secondly, does the PBR do anything to resolve the economic mire into which we have fallen? The answers are that the economy is in a far more perilous state than the Chancellor indicated in the PBR, and that the PBR has if anything made matters worse.

Our whole economic system is based on confidence—confidence that the currency will be stable and that what we can buy today will be the same tomorrow, confidence that a job will not be taken away and confidence that an overdraft or bank loan will be there when it is needed. That confidence keeps money flowing around the economy and keeps people in work, businesses alive and factories producing. The central question is whether the PBR has done anything to improve that confidence. Has it dealt with the real risk of a strike by the purchasers of our debt, and what would that do to our economy? Equally, has it dealt with what will happen if and when interest rates begin to rise in both nominal and real terms as quantitative easing comes to an end? Of course the £4 billion that was sold yesterday in the gilt markets for 2015 and that fact that that went well is undoubtedly good news, but investor sentiment will be tested again next week for the year 2049 and far beyond, so there is still much to be concerned about in that regard.

At the heart of the answer to all those questions is whether the fiscal policy for the next 12 months will be credible. Our ability to borrow is the key to the market’s judgment about that and will determine the outcomes in the economy, from how much and in what terms we can borrow to how much individuals can spend. The whole object of policy should be to keep the fiscal reins sufficiently restrained so that interest rates can stay as low as possible for as long as possible. That is not what we received in the PBR—it is as simple as that.

In the PBR, the Chancellor talked about the deficit as a percentage of GDP rising to 12.6 per cent. this year. Very regrettably, that may be an underestimate. The Economist Intelligence Unit believes that the figure will be more like 14.5 per cent., by far the highest in the list of 43 countries that it monitors each week. The Government’s ambition is to cut their deficit in half. When viewed in the context of any borrowing record before 1997, that makes the current forecast look unrealistic in the medium term, because it is based on some very optimistic growth assumptions. On top of that, the Treasury Committee yesterday said that

“although the Treasury believe the Pre-Budget Report contains sufficient detail about the way in which the structural deficit would be reduced, our expert witnesses all criticised the document for not providing enough information about how this will be achieved.”

The same report expressed concern about the Chancellor’s growth projections, which are fundamental.

Why is that so fundamentally important? Owing to the huge amount of money that we have to borrow and raise each year and roll over, even relatively small changes in the interest rates offered on Government bonds could punch huge holes through our finances in future. That is the key point. That is what will make investors—at best—more cautious.

Investor confidence in our yawning fiscal chasm remains crucial. If that fails, two things may well happen: we would have to fund the deficit through further cuts in spending or increases in taxes elsewhere, or we would regrettably find ourselves heading towards the situation that Ireland and Greece face. There is a vicious cycle of deteriorating confidence: worsening confidence leads to a further deterioration in fiscal problems, which leads in turn to a further deterioration in confidence, and so on, until we are forced to take actions that would be wholly unattractive and unacceptable to all hon. Members.

How large are the holes that could be punched through the national finances? The Debt Management Office said that it needs to sell £225 billion of gilts this year to cover the Budget deficit, and that debts need to be rolled over. A rise in the borrowing rate, for example from 3 per cent. to 4.5 per cent., would certainly cause difficulties. As it is, the Treasury is forecasting paying more than £60 billion a year to meet interest charges on the national debt. How would the Chancellor do that? If his plans for taxation and national insurance contributions are anything to go by, he would raise taxes on jobs and undermine that very employment so as to protect unsustainable levels of spending. I hope my hon. Friends agree that it would be good if he did not get the chance to do that for electoral reasons, but there is always the risk that he will.

That may well be the consequence of a steadfast refusal to plan for the future reduction of the deficit for the short term. In essence, that is what makes the PBR so unacceptable. The Government are refusing to publish their predictions of future interest rates costs on Government debt or say what they are likely to be. When challenged by the Treasury Committee on why that information was not provided, the Chancellor said that

“at the best times there is a degree of uncertainty, now there is a great deal of uncertainty.”

The Government make other projections on many other key variables in the economy, but not on that most crucial one, though it is at the heart of our ability to borrow. The Chancellor confirmed that

“within the Treasury we have estimates”.

Frankly, he should let us hear what they are.

Many will be asking themselves what is going to happen when the Bank of England asset purchase facility stops buying gilts. The supply and demand relationships in the gilts market will alter markedly. If next year the Debt Management Office tries to sell a similar amount to the £225 billion of gilts it sold this year, what will be the price with a £200 billion buyer effectively missing from the market? David Scammell, the fund manager at Schroders, said:

“With the Bank of England seemingly set to phase out its quantitative easing buying programme—which has seen it effectively fund the Treasury to the tune of £200 billion over the last nine months—the supply/demand imbalance will clearly tilt towards higher yields…A ‘buyers-strike’ would accentuate the move. This would be bad news not just for gilt investors, but also for the economy, the banks and the government”.

That is at the heart of the dilemma.

Since the publication of the PBR, it is becoming progressively more expensive for the country to finance its deficit. The PBR failed to achieve the credibility that the markets were expecting, which is what led to the view that the Government are currently able to hold down the cost of servicing the nation’s debt only because those who are buying our gilts expect a change of Government in the very near future, and a Government who inspire confidence in their competence. Frankly, after the shambles of their management of the economy in the last few years, it is hardly surprising.

We have heard a lot about PIMCO, the important American investment group. It has said that there is an 80 per cent. chance of Britain losing its triple A rating if the Government do not move swiftly. Scott Mather, head of global portfolio management, told Dow Jones Newswires that the current debt reduction plan

“is lacking in conviction and lacking in details”.

When asked about a downgrade, he said:

“I think so...it’s just a question of when...not if. Based on what we know today about the debt trajectory and about the inability to adjust that, I think it’s greater than a 50 per cent. likelihood. Call it more like 80 per cent.”

This comes a day after PIMCO, which is the world’s largest bond fund manager, decided to cut back on UK gilts—yet another buyer missing from a market where the Debt Management Office is desperately trying to sell our national debts.

A clear measure that can be used to underline this erosion of confidence is how much someone would have to pay to insure themselves against losses suffered by holding our nation’s debt. The figures are as revealing as they are shocking. As of last month, the annual cost of insuring $10 million of British debt for five years is $72,000. This is in the same league as Malaysia and Chile and $2,000 more than it costs to insure Slovakia’s debt. How do we compare to countries such as France and Germany? One would hope that Britain would be in a similar fiscal position to such countries, but we compare extremely badly. It costs just $22,000 per year to insure $10 million of Germany’s debt, and $24,000 to insure France’s—a third of what it costs to insure ours. That is a clear judgment by outside markets on the risks caused by the fiscal situation in this country.

Does my hon. Friend agree that investments in German or French bonds in the last two years have borne far less currency risk than a sterling-denominated investment, which makes our task even more difficult?

My hon. Friend is right. We have had a dramatic devaluation of our currency, although I suppose it will ultimately be helpful to the recovery. The markets have made a judgment on our currency based on their view of our economy, and it is not exactly an A-plus judgment.

Other statistics are also revealing. Not only are we a considerably less acceptable risk than other countries, but we are less creditworthy in fact than many firms and private companies. On the same basis as I mentioned a moment ago, it would cost $11,000 per year more to insure our debt than Vodafone’s, $15,000 more than McDonalds’, $32,000 more than BP’s and an astonishing $35,000 more than Gap’s. The sad fact of the matter is that the finances of large numbers of companies, in the midst of the biggest recession in living memory, are considered more creditworthy than those of the United Kingdom. That is an incredible judgment.

The Chancellor has kept quiet on the specifics of the pain to come. That is of course simply naked politics. He steadfastly refused to go into the detail of how and where he would cut spending, or how and where he would raise more money, and therefore how, in reality, he would go about dealing with the crisis that the country faces. The IMF says that $36 billion needs to be cut from Department budgets by 2013-14 to meet the borrowing requirement.

The few measures that the Chancellor did announce included an increase in national insurance contributions. That is a tax on jobs and affects everyone who earns as little as £20,000 a year—hardly progressive politics. That is why Richard Lambert, director general of the CBI, wrote in his editorial page in the CBI’s magazine:

“The Chancellor managed to annoy almost everybody with his Pre Budget Report. Yet despite imposing higher taxes on business, he failed to show how he would restore the public finances to health.”

He continued:

“Put simply, the extra taxes he announced are being used mainly to support current spending for the next couple of years, rather than to reduce borrowing.”

That view can only be reinforced, because the Prime Minister has claimed that, if there is better than expected economic news in the next few years, some of the extra money could be used to sustain public spending rather than to reduce the deficit. And of course the Chancellor has disagreed with him. That is part of the problem of a disunited and dysfunctional Government.

As the right hon. Member for Oldham, West and Royton effectively said, the key issue is what effect these policies have had on consumer confidence in the UK. According to the most recent survey by the Nationwide building society, in December consumer confidence suffered its biggest fall in more than a year. The proportion of consumers who thought that the economic situation would be better in six months fell to 34 per cent.—down from 41 per cent. the month before. The proportion of consumers who felt that now was a bad time to make a major purchase rose by 4 per cent. to 38 per cent. last month.

Expectations for employment also worsened in December, with the proportion of people who thought that there would be many or some jobs available in six months falling to 25 per cent. from 27 per cent. Nationwide’s chief economist said that although it is still early days, those lower expectations might foreshadow a more sluggish consumer outlook in 2010 as stimulus measures are withdrawn—we certainly hope that is not the case, but it does not look good. Consumer confidence, which is at the heart of our system, is one of the fundamental elements that the Government should be working to improve. It is what keeps money flowing around an economy and people in work. In that, I am afraid, they are clearly failing.

When we look at these statistics, we have to ask ourselves whether any of this is in the least surprising given that since last year the Government have been borrowing at the fastest rate ever and the Bank of England has printed enough money to purchase the economic output of Denmark. People are crying out for somebody to show the way out of this mess. Regaining the confidence of the British people should be the job of the Government now. That is what will decisively break the country out of this vicious cycle of debt and decline. That is what will keep interest rates in this country as low as possible for as long as possible. In turn, that will help to lead to a sustainable economic recovery. We are now borrowing net nearly £500,000 per minute. It is simply not sustainable.

I accept some of the points made by Labour Members—of course this debate might be arid, and I accept that we have to relate what we say to the reality of people’s lives. Of course it is a matter of some satisfaction that, for a variety of reasons—not least the growth of the public sector, but also flexibility in the labour markets—unemployment has not reached the levels that some had forecast. Ultimately, however, we simply cannot deal with problems of employment, confidence or interests rates if we do not grasp that particular nettle—borrowing. However, that simply is not being dealt with.

The whole picture of chaos and contradiction in this Government was truly exemplified by the Prime Minister on Sunday talking about his pursuit of aspiration—one could not make it up—while attacking the Conservatives for wanting to make cuts. Absurdly, the next day, the Chancellor, and indeed the Chief Secretary, launched a document attacking the Conservatives for excessive spending promises. One need not have graduated from a kindergarten class to know that that is completely contradictory and shows that the Government have no clue how to respond.

When the Government leave office this year, we will have seen a decline in our international competitiveness and relative educational achievement, the longest ever recession and our international reputation in tatters. How dismissive our European partners are of a country whose tripartite regulatory system so failed us that we now have so little credibility in influencing the key area of European financial services regulation! We have been led not by Presbyterian frugality, but by the most profligate Chancellor in history. When this tired, broken-down, dysfunctional and disunited Government leave office, this PBR will simply be a milestone on the path to the electoral oblivion that they deserve.

This opportunity to debate the pre-Budget report is an excellent innovation. It should have produced an interesting debate—indeed, a compelling one—on the state of the economy, but all that it has produced are a lot of sterile platitudes about the interests of finance, which caused the recession in the first place, through risk-taking and excessive lending, as against the concerns that we on the Labour Benches have been trying to express about jobs, employment, production and the real economy of this country.

Nowhere was that contrast more typified than in the speech by the hon. Member for West Suffolk (Mr. Spring), who has just sat down. What he was saying, essentially, is that the problem is confidence. How do we get confidence? Only by returning a Conservative Government. How do we return a Conservative Government? By creating such a state of fear, alarm, panic, depression, horror and misery about this country’s economic prospects that we just have to have one. That is a political strategy of knocking Britain and knocking our financial future. Frankly, it is damaging to the economy and to the jobs and the real people out there, and it is unworthy of the Opposition. What we should be debating is how to keep the economy going at a high level in the face of a recession that has been produced by the irresponsibility of the financial sector.

This pre-Budget report is a difficult one, because it is difficult to predict the future, as the right hon. Member for Hitchin and Harpenden (Mr. Lilley) said. Indeed, we cannot predict the future—he went on to predict it in the gloomiest possible terms, but his essential point was that we cannot predict it. We are probably out of the recession now, in the technical sense of several quarters of negative growth, but its effects will linger on, in more closures, more unemployment and more economic difficulties. That is what we must combat. We cannot now know how long we will have to do that; therefore, it is difficult to make firm assumptions about the economic future in the pre-Budget report.

The other problem with the pre-Budget report is that, because the Government feel obliged to look at the prospects for debt repayment and cutting the deficit, it predicts action in those areas. That has the result of moving the debate on to Conservative ground and the ground of a financial sector concerned with deficits and borrowing. However, in a recession, deficits and borrowing are not the problem; they are the solution. They are the only way of keeping the economy going at an effective level. In opposing deficits and borrowing, as they have done consistently for the past year, the Tories are preaching a system of economics that is not pre-Keynesian, but pre-Cro-Magnon.

In my view—it is a personal view, but it is echoed by several Members who have spoken, or are yet to speak, on the Government Benches—the big problem in the economy is this. Although we have provided it with a stimulus, which has undoubtedly saved about 500,000 jobs—if we had not given the economy that stimulus, unemployment would now be at Tory levels, which they achieved twice in their period of government—that is not enough. The stimulus has to continue—indeed, we need a bigger stimulus—because that is the only way that we will get back to growth. The only way to deal with deficits and borrowing is through economic growth. With economic growth, those problems fade away.

Let us look at the amount of debt that the incoming Labour Government paid off in the first three years of their existence, in a very powerful performance. That happened because of growth. With growth now, we can achieve the same results. That is why we must stimulate the economy to get back to the level of growth that will pay off those debts as quickly as possible. That is the crucial issue: not moaning about debt and creating imaginary threats to our credit rating to frighten the City into supporting the Conservative party financially, which is essentially what the Opposition have done, but getting back to growth as soon as possible.

In the light of that, it is disappointing that the pre-Budget report does not envisage a stronger building performance, or a bigger spend on housing. The big expansion in housing was the main means of recovering the economy in the 1930s, before we moved on to the stimulus from rearmament. The housing drive in this country built many houses. I am sorry to say that this Government’s performance on housing has been pathetic. The house-building rate is lower than it was in the 1950s; it is back at the 1920s level.

I apologise to my hon. Friend for not being here for the beginning of his contribution. Does he agree that the Government would be well advised to concentrate their spending on direct job creation, and not just on reflating demand?

Absolutely. That is why I am arguing for a big housing programme. Housing means jobs; it stimulates demand. People need to buy carpets and furniture to put in their houses, although, in the main, the stimulus benefits employment in the construction industry. The kind of housing that we need to build is public housing for rent, because that is where the demand is now. That is what the 1.8 million people on council waiting lists around the country need. They cannot afford to buy, even after the fall in prices during the past year or so. We need a big housing drive, particularly for council housing, which has been the main area of inadequacy in our performance.

One fifth of the population have a standard of living that is not adequate. They are, in a sense, deprived, and they need public housing. We have not built enough of it, but that is the only way of providing for the future. It is also a guarantee that, when the economy begins to recover, all the money does not go into escalating house prices as it did before. If we build a strong public housing sector, people will not be forced to buy when they cannot afford to maintain a mortgage. They will not be pushed into sub-prime ownership. What they really want and need is public housing for rent, and we provided that in the past through a housing drive. We now need a bigger housing and construction drive than the pre-Budget report proposes.

In America, a useful measure has been introduced whereby construction projects that are shovel-ready can be financed to go ahead. That is eminently sensible in a recession. In this country, 140 college building programmes were cancelled as a result of the debacle at the Learning and Skills Council. Most of those programmes were shovel-ready, including the £150 million project for the rebuilding of the Grimsby institute. That project should have been started. It would provide jobs and an economic stimulus. Why are we not doing it? The allowance for housing and construction in the pre-Budget report is inadequate. We need both in order to boost the economy, particularly in the construction industry, which is stalled everywhere.

There is also a need in this debate on the pre-Budget report to grapple with another issue that is more basic than the deficit and borrowing—namely, the need to rebalance the economy, which has been lop-sidedly developing a huge financial sector on a shrinking manufacturing and production base. No economy can function efficiently or generate growth and jobs when it is unbalanced in that way. The process of rebalancing it will be painful, but it must be started. I had hoped that the pre-Budget report would place a greater emphasis on this matter.

We cannot pay our way in the world now, because manufacturing has shrunk so much. It has been decimated in this country over the past few decades. It has been weakened partly by the rise to dominance—even to hegemony—of the financial sector and the City of London, under whose spell I am afraid the Government fell for far too long. The rise of the City has been damaging to the real economy of manufacturing for three reasons. The first is that the City and the financial sector would rather invest in Dubai than in Doncaster. They were never concerned with the industrial needs of this country. Secondly, the City does not exercise enough long-term thinking to support the manufacturing sector, while thirdly, of course, it always wants a high and stable exchange rate. Why? So it can manipulate money around the world to acquire assets overseas. The interests of manufacturing, however, lie in a low and competitive exchange rate, which allows more exports and the selling of products on the world markets.

Does my hon. Friend also agree that it is a remarkable irony that despite the massive growth in financial services to the disadvantage of manufacturing industry, manufacturing industry still provides a bigger proportion of our overseas earnings than the much-vaunted lot in the City?

Over the last decade or so, manufacturing has provided an average of about 60 per cent. of our overseas earnings, but it cannot now support the economy or jobs in the way it did in the past—unless it is expanded, unless it is rebuilt and unless we shift the balance in the economy back to production and away from financial manipulation. That is our future, which will be bleak unless we do that; it will be a future of increasing debt in order to pay for imports that we are not currently paying for.

For a couple of years our trade deficit has been higher than that of the Americans—a deficit that caused such a panic and alarm in the US. We should be alarmed and concerned about ours. All the experience of developing countries is that it is possible rapidly to develop a strong manufacturing sector if policy is focused on that by having a low and competitive exchange rate. That is what all the developing countries—starting with Germany, now finishing with China—have done. They started from a low exchange rate, which makes exporting profitable, building up a powerful internationally traded sector, which then achieves economies of scale and follows a process of continuous causation and improvement.

My hon. Friend correctly emphasises the importance of manufacturing. Is it not also worrying that if manufacturing is allowed to dwindle even further, recreating the necessary skills in manufacturing will be much more difficult?

That is absolutely true. We have networks of skills and surviving skills, which have been thrown on the scrapheap, but they could and should be mobilised for any expansion. It is true that we need a big training programme, as this is one of the bottlenecks in the expansion of manufacturing that needs to be cleared. That can be done through an industrial policy, which we have fought shy of for far too long, but which is necessary.

As I was saying, the big expansion overseas, based on a competitive exchange rate in overseas countries, shows that manufacturing can expand and rebuild. It can do so by having a lower competitive exchange rate. We now have the opportunity for a 25 per cent. devaluation, which would make industry and investment in this country profitable again, which it has not been for the last few years. It was certainly not profitable under Thatcherism, which was based on the policy of destroying manufacturing to weaken the trade unions and the power of the country’s workers. It was based on the assumption that as a phoenix rises from ashes, the more ashes created in manufacturing areas, the better would be the future of this country.

I am afraid, I have to say, that that destructive process was continued under Labour because our concern was to fight inflation, which was done by keeping the pound high at an uncompetitive level, which subsidises imports. That also forces industry to cut its costs and shed labour in a pathetic and almost doomed attempt to stay competitive. This destruction continued and manufacturing shrank—to our shame, while we were in power—from 20 per cent. of GDP to perhaps 12 or probably 11 per cent. now in this recession. We must revive manufacturing and get it back to what it was.

But as I look at the policies we have adopted up to now, I see that we are not effectively achieving that. We have “saved the banks”, but our treatment of the banks defies belief. Whatever happened to moral hazard? The Governor of the Bank of England goes on about it, but as soon as moral hazard is affected by the banks, which were brought by their own follies and excesses into a disastrous situation, we rush in with money to pour into them. Manufacturing does not get that money. We poured money into the banks—that is a large part of the borrowing that we are arguing about—and we probably had to do so to save the banks, but nothing is going to, for instance, the steel industry in Teesside. What has gone to Vestas on the Isle of Wight, which is the country’s only remaining wind turbine producer? What has gone to the manufacturing firms that are closing down and shedding labour, making people redundant? What is happening to them? We shall need their production, skills and output if there is to be any recovery of manufacturing and the economy, but we are allowing them to close down without Government support.

The Government have poured money into the banks, and all that the banks have done with it is build up their reserves. They have not passed it on or relaxed their credit arrangements. Manufacturing is experiencing a double whammy. Money is being poured into the organisations that caused the crisis in the first place rather than into manufacturing, which has suffered the consequences, and the organisations that caused the crisis in the first place—the banks—are starving manufacturing of credit, refusing to tide it over until it can inherit the better times.

This is a pathetic economic policy. Even the Government’s policy of printing money—which is effectively what we are doing—does not really help manufacturing. What printing money does is, by buying back Government debt, buoy up the stock market and asset prices. It helps the financial sector, which holds the debt—primarily the hedge funds that have been selling that debt back to the Government at an inordinate profit to themselves—but it does nothing for manufacturing, the sector that we need to help and support.

All the devaluations of the past—the devaluations of 1949 and 1967, the Tory devaluation of 1972-73 and the classic devaluation of 1992, when we were forced out of the exchange rate mechanism—have boosted manufacturing. Productivity and growth have increased, and the whole economy has been stimulated. We cannot let the boost that we have provided now, with a 25 per cent. devaluation, slip away as the last few prizes of devaluation slipped away. We must maintain a competitive exchange rate.

More important, we must have an appropriate industrial policy. Exchange rate competitiveness, which means a low exchange rate, is a necessary but not sufficient condition for manufacturing revival. There has to be an industrial policy that will channel investment into manufacturing, help to see it through its difficulties, and break the bottlenecks. Whether we support planning, training, investment, research, design, development or marketing, we must help industry to move forward. We cannot wash our hands of manufacturing if we are to have a viable economy.

I am listening to my hon. Friend’s speech with great interest. Like the rest of us, he will have been pleased to hear what the Engineering Employers Federation said the other day about manufacturers bringing manufacturing back to the United Kingdom, partly for the reason that he has cited—the exchange rate change—but also because of the benefits of greater reliability and better quality. Before the events of the last couple of years, engineering employers were talking of a renaissance in United Kingdom manufacturing. I think we can afford to be optimistic about the future.

My right hon. Friend has made a valid point. I was delighted to hear the news that people who had been outsourcing—which produced a series of holes in the fabric of Britain’s industrial society—are now bringing the work back to this country, partly because of the devaluation. I want that process to continue, but the Government, and my hon. Friends in general, must bear in mind that this manufacturing recovery is starting from a low and damaged base. It must go a great deal further, and must be encouraged and supported by Government, before it can produce the effects that I have described.

We have a mountain to climb before we can again provide jobs for the people, pay our way in the world, and rebuild the manufacturing base from which innovation, productivity and national survival spring. That should have been the main message of the pre-Budget report, and because it is not, I am a little disappointed in it.

rose—

Order. No time limit was applied to today’s debate, but the average length of the speeches from the Back Benches has been about 20 minutes. On that basis, we will get only three more contributions. Speeches need to be half that length if everyone is to have an opportunity to speak. I appeal to Members to be as friendly as they can to their neighbours.