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Pre-Budget Report 2007

Volume 696: debated on Tuesday 20 November 2007

rose to move, That this House takes note with approval of the Government’s assessment as set out in the Pre-Budget Report 2007 for the purposes of Section 5 of the European Communities (Amendment) Act 1993.

The noble Lord said: My Lords, each year the Government report information to the Commission on the economic and budgetary position and our main economic policy measures. By formally sharing information from the Pre-Budget Report with our European partners, we can help to ensure a proper, accurate and effective EU system and meet our commitments, contributing to enhanced employment and growth. This information was set out in the Pre-Budget Report last month and this material forms the basis of what we are sending to the Commission.

The background to this year’s report and spending review is a time of increased international economic uncertainty and a more fragile global environment, which has already seen turbulence in America, Asia and Europe. As the Chancellor set out in his speech on 9 October, provided that we maintain the course for economic stability that we have set, we can respond to this global environment. We will do so by taking no risks with stability and no risks with unaffordable promises that put public finances at risk.

The full impact from turbulence in the international financial markets is as yet unclear, but the IMF has said that this international uncertainty will have an effect on growth right across the world. Independent forecasters expect growth next year in America and the euro area to fall to 2 and 2.5 per cent. In these circumstances, it is right that we, too, should be cautious. The forecast for growth next year is also of 2 to 2.5 per cent. However, because of the strength of our economy, our commitment to openness and liberalised trade across the world and our flexibility and dynamism here at home, the forecast for growth in 2009 and 2010 is 2.5 to 3 per cent, in line with the economy’s trend rate of growth and in line with the forecast in the Budget.

Against the backdrop of recent events, in the UK decisive action has brought inflation down to around our target of 2 per cent, with it forecast to be on target next year and the year after, employment is at a record level and productivity is growing strongly, up 2.7 per cent in the past year. While growth in America this year is expected to be 2.1 per cent, in Japan 2 per cent and in the euro area 2.6 per cent, in Britain—with exports and investment rising—growth is expected to be 3 per cent. Britain is the fastest-growing advanced major economy in the world.

The strength of the UK economy is the direct result of the monetary and fiscal policy framework that we have introduced. This Government’s monetary policy framework seeks to ensure low and stable inflation. The framework has delivered the longest period of low and stable inflation since the 1960s, along with low interest rates. This has provided the platform for record employment levels, higher investment and economic growth.

Our two fiscal rules are, first, the golden rule that, over the economic cycle, the Government will borrow only to invest and not to fund current spending and, secondly, the sustainable investment rule that net debt should be held over the economic cycle at a stable and prudent level. We are meeting our first fiscal rule, with the current budget in surplus over the cycle. In the last economic cycle—1986 to 1997—that rule was missed, with a deficit of £240 billion. Over this cycle, with a current budget deficit last year lower than forecast, we have a surplus of £18 billion and are, therefore, meeting our first fiscal rule. We will also meet our second rule that net debt should be at a sustainable level. In America, debt is 44 per cent; it is 49 per cent across the euro area, 86 per cent in Japan and 94 per cent in Italy. In Britain, debt is 37.6 per cent this year and below 40 per cent in every year of the projection period, so we are meeting our second fiscal rule. Debt interest was 3.5 per cent of national income in 1997. Next year, it is expected to be just 2 per cent. That low debt allows more investment in front-line services.

We can afford sustained investment in our priorities only because of our two fiscal rules, which ensure sound public finances. The rules have protected an historically unprecedented increase in public net investment, while debt and borrowing remain low and stable. Last year, borrowing was 2.3 per cent of national income—£4 billion less than forecast. Over the 10 years of this economic cycle, borrowing and debt in Britain have been lower than in Japan, the euro area, America and the OECD as a whole. Net borrowing is forecast to fall from 2.7 per cent this year to 1.3 per cent in 2012, compared to a peak in 1993 of almost 8 per cent—the equivalent of about £110 billion today. The UK also continues to meet the reference value on the treaty deficit throughout the projection period, with the deficit reaching 1.6 per cent of GDP by 2012-13.

The projections that the Chancellor set out are also consistent with the Government’s prudent interpretation of the stability and growth pact. A prudent interpretation takes account of country-specific factors including the long-term sustainability of the public finances, the economic cycle and the important role of public investment. The reforms to the stability and growth pact agreed in March 2005 rightly place a greater focus on the avoidance of pro-cyclical policies and on reducing and maintaining low debt, with the flexibility for low-debt countries, such as the UK, to invest in the provision of public services.

The challenges of the decade ahead require a balance to be struck between delivering further investment in public services to equip the country for change and entrenching the macroeconomic stability that is essential in the increasingly global competitive economy. Therefore, the spending review is tighter for many departments and the Government remain committed to ensuring that public spending delivers the public’s priorities and value for money for the taxpayer. The spending review has identified substantial savings that can be made by departments. The resources released through the ambitious value-for-money programme, together with the increased spending delivered in the Comprehensive Spending Review, will enable the Government to sustain the pace of improvement in public services and focus additional resources on their long-term priorities. That will be matched with reform and clear objectives set out in new public service agreements defining the Government’s top 30 priorities for the coming period.

The key priorities are, first, to meet the challenge of globalisation by investing in the human and physical capital that will keep the UK economy competitive over the long term, with education spending in England growing by 2.8 per cent a year in real terms, investment in science and university research rising to over £6 billion a year in three years’ time and transport investment doubling to £14.5 billion a year by 2011-12. The second priority is to make the UK a better place to live by continuing to improve the NHS, with investment in health in England rising from £90 billion this year to a total of £110 billion in 2010, and by progressing towards the Government’s objective of decent and affordable housing for all, with total spending on new housing of at least £8 billion over the next three years.

Thirdly, we intend to protect the nation from external and internal threats, with total spending on counterterrorism and intelligence rising from £2.5 billion in 2007-08 to £3.5 billion in 2010-11; we are also continuing the longest period of sustained real increases in defence expenditure in over 20 years. Fourthly, we intend to tackle climate change and protect the countryside, with Defra’s budget to increase to £4 billion by 2010-11 and a new environment transformation fund with a three-year budget of £1.2 billion. Fifthly, we intend to help to tackle international poverty. By growing DfID’s budget by 11 per cent a year over the Comprehensive Spending Review period and enabling total UK official development assistance to reach over £9.1 billion a year, we will be on course to meet our European commitment of 0.56 per cent of national income devoted to development aid by 2010, and then to meet our commitment to achieve, for the first time, the long-established United Nations goal of 0.7 per cent, which we intend to reach by 2013.

Our task is to meet and master the global economic challenge, making the critical decisions to secure Britain’s long-term economic future. The Pre-Budget Report drives forward the great economic mission of our time: to meet the global challenge, to unleash the potential of all British people and to deliver security, prosperity and fairness for all. That is the programme set out in the 2007 Pre-Budget Report and Comprehensive Spending Review and that, with the approval of the House, is the basis on which we are sending updated information to the European Commission. I beg to move.

Moved, That this House takes note with approval of the Government’s assessment as set out in the Pre-Budget Report 2007 for the purposes of Section 5 of the European Communities (Amendment) Act 1993.—(Lord Davies of Oldham.)

My Lords, I am not sure whose spirits the noble Lord was whistling such a cheerful tune to keep up—obviously not the packed Benches behind him. There are more people on this side. I salute the noble Lord who is loyally going to join in in support of the Minister.

We have had some good economic news over the past decade or so. I shall pay tribute to that in a moment. One of the big problems is that trust in politicians generally, and I am afraid in this Government in particular, has declined very sharply in recent years. It is declining perhaps more sharply at the moment than at any time since 1997. I will illustrate that at the end of my remarks with one simple example, which we can all take on board. I believe that we are approaching something of a financial crisis for the Government. Growth estimates for next year have had to be reduced sharply to a shaky 2 per cent. As things always take longer when they are moving in a particular direction, I very much doubt whether 2009 will be better than 2008—unlike what the Minister has told us and unlike what the Treasury would like us to believe.

Tax yields are likely to fall sharply, at least in the short run. The expenditure implications of Northern Rock are unclear, but could be significant in the overall budget arithmetic. The level of debt in the UK is worrying. Over 18 per cent of adults have unsecured debt of more than £10,000. Can the Minster give us what he regards as the key personal debt figures?

To a Burkeian conservative such as myself, the main role of government should be to protect vulnerable groups from ill treatment or exploitation. In the economic field that obviously covers employees, consumers and investors, I suggest that the Government consider whether new methods are needed to protect borrowers from irresponsible and unscrupulous lenders. In this, I include particularly some bankers, credit card companies, mortgage companies, insurance companies, hire-purchase suppliers and sellers of financial instruments of all sorts. There is clearly scope for the problems of debt and borrowing to enter the school curriculum at an early age. I offer that thought to the Minister and the Government.

Management of public debt lies at the heart of the Government’s economic policies. We should therefore reappraise the two rules which the noble Lord made much of—they are always made much of—and which, since 1997, have governed public finance in Britain: the golden rule and the sustainable investment rule.

The present Prime Minister has never tired of trumpeting his success with the golden rule, which requires over the economic cycle borrowing only for investment rather than current spending. The sustainable investment rule says that the debt must be kept below 40 per cent of GDP. It is currently some 38 per cent of GDP, which leaves no great margin for error. In fact, it represents a mere £26 billion—the sort of figure, I am afraid, that people have been discussing in the context of Northern Rock alone.

A really serious question is the extent to which off-balance-sheet liabilities of the Government arise. It is rather curious that at this particular time the same phrases which have become central to the world credit crisis apply to the Government’s own finances. The Centre for Policy Studies has estimated that if the public finance initiative liabilities, public sector liabilities and Network Rail debt were included in the debt, it would amount to £1.34 trillion—some 103.5 per cent of GDP, which is roughly the same as in Italy. Do the Government recognise or accept that figure? If not, what figure would they use instead?

Are the Government worried about the growing rate of inflation? We had 14 successive years in which the inflation rate measured by the RPI did not reach 4 per cent. The situation started to deteriorate in 2006 and, as of now, the RPI is still above 4 per cent. I prefer the old retail prices index, which is how ordinary people observe the pound in their pocket because it includes housing costs. I believe that it is superior to the EU harmonised index of consumer prices introduced in December 2003, which is now targeted by the Bank of England and is currently 2.1 per cent—only half the level of the RPI.

I should at once give credit where it is due to Mr Blair and his then Chancellor. Fortunately for the country and the Labour Party, they did not seek to reverse the crucial economic reforms introduced under my noble friend Lady Thatcher, who rolled socialism off the political map of Britain. Of course, a touchstone of the new incentive society, on which our economy depends, is the 40 per cent top tax rate, introduced by my noble friend Lord Lawson in his 1988 Budget. That, amazingly, has survived for 20 years.

But, sadly, in so many other ways the economic policies of the Government are starting to unravel. It is not just the failure to get effective efficiency measures throughout Whitehall. That seems to be going in reverse, and we had an example of it today. It is not just the failure to stem the avalanche of Brussels regulations, always covered with 24-carat gold plate by the ladies and gentlemen in Whitehall, accompanied with a huge rise in British bureaucracy, which itself somewhat masks the true level of unemployment. And it is not just the failure to tackle the wholly unsustainable absurdity of continuing, to this day, to hire civil servants with an inflation-proofed pension at the absurdly young retirement age of 60. Even President Sarkozy is trying to tackle that one, and frankly we know how difficult it is to change anything in France when the mob gets going. The British are much more placid and, had we had real leadership over the question of the retirement age, much progress could have been made. The tax system is getting more and more complicated with well intentioned but inadequately prepared changes, such as those on CGT, announced in the pre-Budget statement. Sadly, the quality of British government is deteriorating.

Perhaps I may end with an example which I believe exposes our new Prime Minister as both a negotiator and a man of his word. It is his announcement of the raising from £145 to £1,000 of the duty free allowance available to travellers. I shall simply quote from two of Mr Gordon Brown’s Budget speeches. On 16 March 2005, to loud cheers, he said:

“I have today written to the European Commission proposing that the tax-free limit on goods brought into the UK from outside the European Union should rise from £145 to £1,000”.—[Official Report, Commons, 16/3/05; col. 264.]

The following year, on 22 March 2006, Mr Brown said:

“Last year, I proposed that the European Union should raise the duty free allowance for bringing goods into this country from outside the EU. This year, the European Commission has proposed to increase it from £145 to £340, but I am submitting proposals today for a further increase to £1,000”.—[Official Report, Commons, 22/3/06; col. 297.]

What is the duty free allowance today, two and a half years after Mr Brown’s first announcement and one and a half years after he repeated it? It remains at £145. I hope that a traveller who is challenged for going through the green channel with purchases worth £1,000 has the confidence to reply, “The word of my Chancellor is good enough for me”. I just hope that it will be good enough for the courts as well.

My Lords, it is not very often that we have a chance to debate Treasury matters, so I thank my noble friend for moving this Motion. Apart from the Minister, all the speakers in this debate spoke last Wednesday and so we may go over some of the same ground, but I am sure that it is ground worth repeating.

I largely agree with my noble friend’s analysis of the economy but I am a little more sanguine than he is about the rate of growth. Since the Pre-Budget Report on 9 October, the clouds on the horizon have perhaps become a little darker, but I certainly do not agree with the description of the economy that we had from the noble Lord, Lord Marlesford. We are not going to slide into financial recession because of problems in the financial sector; the rest of the economy is working. According to the FT/Harris poll yesterday, business is surprisingly optimistic. Yes, credit may be harder to come by but there is life outside the financial services sector, and life outside that sector seems to be going pretty well.

Last week, I congratulated the Government on maintaining a free and open economy since they came to power more than 10 years ago. Indeed, I think it is one of the triumphs of the Labour Government that they have managed to do this over the entire period that they have been in power. We can maintain a free and open economy only if we stick to the fiscal rules—that is why we have them. The Minister reminded us that, if our budget was not in balance and our debt affordable, there would be the same calls for protectionism that we are beginning to see in the United States and elsewhere. This free and open style of economy has to be supported by a strong monetary and fiscal regime, as described by my noble friend, and we also have to have a high degree of competitiveness.

In his speech of 9 October, the Chancellor said that our competitiveness—that is, our ability to compete and succeed in this global age—will depend on our continuing investment in the economy. He went on to say that, in today’s knowledge economy, this investment is not just in physical capital assets but also in skills, innovation and intellectual property. The Minister reminded us of that and I agree. In a modern knowledge economy as well as investing in buildings and machinery we also have to invest in design, training, branding, responding to customers’ needs and all the related software and services. This is how you remain competitive in a modern knowledge economy. With the Pre-Budget Report my right honourable friend the Chancellor published a paper explaining how this kind of intangible investment relates to our competitiveness and productivity and how we actually seem to be doing rather well. I found the paper pretty convincing. The Chancellor is right to promote this kind of knowledge business in the Pre-Budget Report. Good jobs come out of it—jobs that are highly paid with a low carbon footprint and attractive working conditions. Skills training, investment in science and transport and support for local investment and local economic development will all help this kind of economy, as will the 2p reduction in corporation tax for next year.

Compared with all this support for business, the outcry against the taper relief on capital gains tax seems to me to be out of all proportion. When I started my business, capital gains tax was either 60 or 80 per cent. It was such a long time ago I cannot remember. People starting up businesses do not think about this sort of thing. People who look upon a business as a financial commodity to be packaged and bought and sold from one to another may take a different view. I hope my noble friend will bear this in mind and not let it distract him. A tax rate for economic stability is what is important for us all.

There is a distraction but it is not a distraction of tax. The distraction comes from the United Nations Intergovernmental Panel on Climate Change and its meeting in Valencia. The panel tells us that the climate is changing more rapidly than we thought. There was practically unanimous agreement that the change was man-made but it agrees with the Stern report that there is still time to do something about it.

The Minister spoke about investing in the environment. This means less time to spread out our investment. If we accept what the Joint Committee on the Draft Climate Change Bill said, there would be less time to spread out investment in flood defences, in carbon capture and storage, in the next generation of cleaner cars and in cleaner energy. It means bringing forward the rise in the climate change levy and reducing VAT on energy-efficient products. It means expanding the European Emissions Trading Scheme more quickly to other organisations on the ground and in the air. I wonder if the Minister has given any thought to this. If the realities of climate change demand more of our budget in the near future, how will this activity affect economic stability? If the environment becomes more of an economic imperative, what will be the social effects? What will be the budgetary effects? These are the kind of questions my noble friend will have to address between now and the Budget next April.

My Lords, each year Section 5 of the European Communities (Amendment) Act 1993 requires Her Majesty's Government to report to Parliament for its approval on an assessment of the medium-term economic and budgetary position in relation to public investment expenditure and the social, economic and environmental goals set out in Article 2. This report will form the basis of any submission to the Council and Commission in pursuit of their responsibilities under Articles 103 and 104C. These responsibilities relate first to broad economic policy guidelines, secondly to convergence and stability programmes and thirdly to excessive deficit procedures. The objective here is to ensure that the economic policies of the member states are consistent with the terms of the treaty, including non-inflationary economic growth, a high level of employment and social protection, and better living standards.

The first of the three responsibilities I will look at in detail is that relating to broad economic policy guidelines. The UK's public finances, as the Minister said, are governed by two overall rules. The first is the golden rule which states that over the economic cycle the Government will borrow only to invest and not to finance current spending. This rule was just met over the last economic cycle. However, its credibility has been severely damaged because the Chancellor has changed either the start or the end date of the economic cycle no fewer than three times. After surveying academics and City economists the Financial Times concluded:

“Almost none use the Chancellor’s fiscal rules any more as an indication of the health of the public finances”.

The second overall rule referred to by the Minister was the sustainable investment rule. This states that the debt ratio must be kept below 40 per cent of the GDP ceiling. The 2007 PBR shows that over the next few years the public sector net deficit keeps within the limit. However, as the noble Lord, Lord Marlesford, has already stated, the Government’s figures exclude Network Rail, the private finance initiative and public sector pension liabilities. Does the Minister agree that if you take all these into account government debt would be well over 40 per cent? Does he also agree with the Centre for Policy Studies’ paper of September 2007 which says that if you include all these government debt would be £1.34 trillion, equivalent to 103.5 per cent of UK GDP?

The second of the three responsibilities relates to convergence and stability programmes. Despite steady economic growth, UK productivity continues to lag behind many of its EU counterparts. According to the ONS 2006 international comparison of productivity, Britain’s impressive economic growth over the past decade has unfortunately been fuelled by substantial growth in government and consumer debt. In 1996 net public sector debt was £343 billion. By September 2007 it had reached the staggering figure of £516.9 billion. Total UK personal debt has also tripled since 1993 from £400 billion to £1,380 billion and in the past 12 months growth has been 10 per cent. The PBR total borrowing forecast for this financial year alone is predicted to be £4 billion higher than predicted in the Budget. Government borrowing over the next five years is expected to increase by £16 billion more than predicted at the time of the Budget.

The third responsibility I will discuss relates to the excessive deficits procedure. Under the stability and growth pact all EU countries must ensure that their government borrowing is less than 3 per cent of GDP. According to the OECD, the UK Government have the largest structural budget deficit of the 15 members to have joined the European Union before 2004. According to the IFS, after a decade of Labour Government the UK still has a relatively big structural deficit by international standards and remains mid-table when comparing the size of government debt across countries.

I will now look at the UK's performance against the terms of the treaty. First, have we achieved non-inflationary economic growth? ONS figures show that inflation was kept well in check in Labour’s first and second terms but, as my noble friend Lord Marlesford has already noted, since 2006 it has generally been on a rising trend. Last week’s October inflation figures showed that the CPI had increased above its target from 1.8 to 2.1 per cent, thus exceeding the Government’s 2 per cent target. The RPI had accelerated from 3.9 to 4.2 per cent. Can the Minister explain why the Government's preferred index of inflation is half the old preferred measure? Does he not believe that the RPI represents a better measure of inflation? Also, does he agree that it is going to be very difficult to make the public sector accept 2 per cent pay rises when the real rate of inflation is over 4 per cent?

The 2008 growth forecast in the PBR has been reduced from 2.5 to 2 per cent; I question the figure mentioned of 2.5 to 3 per cent for 2009. Given that the economy is so reliant on financial services—which are estimated to provide 30 per cent of taxes paid by the financial sector, according to Richard Jeffrey of Ingenious Securities—the current sub-prime crisis could mean that even 2 per cent growth is too high. Here I am much more cautious than the noble Lord, Lord Haskel; the problem could well continue for some time. I therefore ask the Minister if he believes that the sub-prime crisis is only temporary, or if he believes that, partly due to it, the UK is now entering a period of stagflation, where we have stagnant economic growth with continuing inflation.

I am not an economist, but I can see the trend of higher commodity prices continuing, as evidenced by higher oil and food prices. It also seems to me that we have been bailed out on the inflation front for several years by the disinflationary impact of China and the import of cheaper European labour, both of which may be becoming less significant. I note that Chinese inflation has recently been on a strong upward trend. The Chinese October inflation figure was 6.5 per cent, the highest rate since 1996. Why is that important? It is important because our low inflation in recent years has been helped by the cheap price of imported goods, many of which have been made in China. If Chinese inflation keeps going up, its workers will want higher wages and that will make China's exported goods to us more expensive and thus contribute to our inflation.

Thus, particularly in the past year, we are failing in the goal of non-inflationary growth. Have we achieved the second goal of the treaty, a high level of employment and social protection? The employment level reached 74.4 per cent in the three months to September, below the Government's 80 per cent target. However, within the employment total, the number of Britons in work has fallen sharply over the past two years. An estimated 540,000 foreigners have found work in the UK in the past 18 months but, at the same time, the indigenous workforce has shrunk by 270,000. Does the Minister agree that the problem of the indigenous workforce needs to be looked at much more carefully?

On social protection, a UNICEF report published in February 2007, An Overview of Child Well-being in Rich Countries, brought together comparative research on the material, educational and emotional state of childhood in 21 developed nations. Britain came bottom of the list overall. Particularly depressing was the view that British children have the highest rate of underage drinking and teenage pregnancy. Does the Minister agree with the UNICEF report? What action should be taken, and should it be by government?

The final goal of the treaty is better living standards. Several recent reports show this not to have been achieved. In March 2007, the IFS calculated that absolute poverty rose in the UK in 2005-06, child poverty rose by 100,000 before housing costs to 2.8 million, and 200,000 after housing costs to 3.8 million in the same year. Between 1996-97 and 2004-05 the number of people living in severe poverty increased by 410,000 before housing costs. Excluding bonuses, incomes have fallen for every month in 2007. Research from the Institute for Fiscal Studies shows that, since 1997, the tax burden has increased by £1,300 for every family in the UK.

I am tempted this year to resist the Motion due to the uncertainty of government finances, with off-balance-sheet liabilities and now the Northern Rock situation. I will return to the issue next year.

My Lords, it must be a pleasure for the Minister to be able to introduce a broad policy debate such as this, compared with dealing with the travails of Northern Rock and the incompetence of HM Revenue and Customs. I congratulate him on the gusto with which he did so.

I alone of the speakers in today’s debate did not participate in last Wednesday’s debate, so, whether or not other noble Lords agree with what I say, they will not have heard it before—at least, not within the past week. The starting point of the Pre-Budget Report is, of course, the outlook for growth. The report forecasts that growth will fall from more than 3 per cent this year to between 2 and 2.5 per cent next year. This is already looking rather optimistic. The Bank of England is now predicting growth of no more than 2 per cent, and the governor has identified a number of risks which might undermine even this figure. The most serious he described as:

“Further tightening of credit conditions and disturbances in financial markets”.

Whether these risks materialise will crucially depend on developments in the US economy. Earlier in the autumn, Alan Greenspan said that the likelihood of a recession in the US was approaching 50 per cent and described the financial markets there as moving from euphoria to panic with barely a pause for breath, a process which I suspect we also recognise here. The US faces the twin problems of a credit crisis brought about by reckless lending to the sub-prime market and a balance of payments imbalance which is only sustainable so long as the US can finance it through the sale of government bonds. Faced with a weakening dollar, it is increasingly unclear that investors from the Far East will continue to put their money in the US. Only yesterday, the Chinese premier, speaking in Singapore, expressed concern about how to preserve the value of China’s reserves, which are largely held in dollars. If the US economy falters, it will undoubtedly be bad news for world growth, not least in China. Here in the UK, it could exacerbate the credit crunch and our own balance of payments deficit.

Following the Northern Rock debacle, it is surely inevitable that banks and building societies will in any event be less willing to make risky loans to households, and that such an attitude is likely to extend to businesses with weak balance sheets or risky assets. Like the noble Lord, Lord Marlesford, I have been extremely critical of the banks undertaking risky lending, and such a move to restrict these forms of risky lending will undoubtedly be largely beneficial. More worrying, however, is the decline in the availability of credit more generally, which will slow not only mergers and acquisitions activity, but also investment to good-quality projects. The banks and private equity companies are simply facing a credit crunch which will affect all those bodies in which they might otherwise invest.

As for the balance of payments, the Governor of the Bank of England has recently called for a rebalancing of the economy from consumer spending to exports in an attempt to deal with our long-term, huge balance of payments deficit. That is only possible if we see a fall in the value of sterling vis-à-vis the dollar. Indeed, there now seems to be a consensus among world financial leaders that the level of the dollar is a major problem. That view has been expressed by the leaders in China, the EU and the US itself in recent times, and I wonder whether the Government agree with that assessment. If so, do they plan to press our international partners for discussions that might have some long-term effect on the value of the dollar? I am somewhat sceptical about the efficacy of such discussions, but to the extent that Governments talking up or talking down currencies can be beneficial, now is surely a good time to be talking up the dollar.

Within the overall economic outlook the situation facing many individuals is increasingly grim. They face a squeeze on their real income brought about by the increased level of taxes, about which the noble Lord, Lord Northbrook, has just spoken, and by RPI growth, which is above earnings growth in many cases, with food and fuel rising quite steeply. In both those cases, and particularly in the case of food, I suspect that prices will continue to rise, and they are certainly unlikely to diminish in the short, medium or long term. People are also, in many cases, facing higher mortgage rates, particularly those whose fixed-rate mortgages are coming to an end and who are having to remortgage at a higher rate. The likely consequence of all this is that consumer expenditure will fall, as has already been evidenced by a small fall in retail sales last month. There are therefore many uncertainties about the future path for the economy. It is important at this point that the Government should not add to them by dithering, for example, on Northern Rock. I do intend to repeat all the arguments that we debated yesterday on Northern Rock. The only point I would make is that during the course of the day the Northern Rock share price has plummeted further as the market realises what noble Lords on most sides of the House accepted yesterday, which is that Northern Rock has no value but for the support that it is getting from the Government and therefore it would surely be sensible for the Government to recognise that by bringing it into temporary public ownership.

Moving from the macro economy to the overall fiscal stance, we—and I in particular—remain sceptical about the Government’s forecasts. Each year, the Chancellor shows that for each of the following five years there will be a steady, relentless reduction in net borrowing, and each year the figures have to be adjusted upwards. I am afraid that, along with the golden rule, these projections have diminished credibility with each succeeding year. The main excitement generated by the Pre-Budget Report was in relation to the Government’s proposals on tax, particularly in relation to the lesser taxes, in terms of revenue at least, capital gains tax and inheritance tax and the position of non-doms. Here I have to acknowledge that George Osborne’s speech to the Conservative Party conference on inheritance tax and non-doms had an extraordinary, electrifying effect on the Government. I say the Government rather than the Chancellor because I believe that the Government’s actions on these two taxes emanated not from No. 11 Downing Street, but from No. 10. On inheritance tax, it is surely right to increase the threshold because the tax was increasingly being paid by modest, middle-class families who were benefiting from the recent, very rapid rise in house prices. The main problem now with inheritance tax is that it is still far too easy to evade by the very wealthy who can use expensive tax advisers to minimise their eligibility. I accept that this is an extraordinarily difficult issue to resolve, but as someone who strongly believes in the principle of inheritance tax, I hope very much that he will keep trying.

On non-doms, we now have a rough-and-ready proposal to ensure that they do at least pay some tax. However, three further measures are needed in relation to non-doms to make the position fairer and less open to abuse. First, they should be required to pay capital gains tax on the sale of their properties in the UK; secondly, there should be a review of the different tax treatment of various forms of investment in the UK and US and amendments to our tax treaty with the US to avoid double taxation; and thirdly, the rules for qualifying for non-dom status should be tightened. I recently met a City banker of Irish extraction who explained to me that although he had lived in the UK all his life and intended to spend his remaining days in the UK, he was now being advised by his accountant that because his father had been born in Ireland he could qualify for non-dom status here. It seems to me that that is not the purpose of having a non-dom rule, and in respect of those who have lived here all their lives with no intention of moving elsewhere, the rules could beneficially be tightened.

The third contentious tax change was on capital gains tax where taper relief is to be abolished. We support the principle of abolishing taper relief. It gave too great a benefit to those in the private sector who could organise their affairs so as to qualify for it, and I do not simply mean private equity bosses. I do not believe that 18 per cent will prove to be a penal rate, or that it will have a significant, or even discernible, impact on entrepreneurialism in the UK. What I think is sometimes forgotten is that taper relief was the creation of the current Prime Minister. Previous Conservative Governments clearly did not find it necessary.

Some amendments may be needed to the Government’s current bald proposals, and I would mention just two. It is a mistake to reduce capital gains tax on second homes from 24 per cent to 18 per cent. Given the current status of the market in housing, particularly in parts of the country such as Cornwall, any measure that makes the ownership of second homes more attractive seems to me to be mistaken. I also think that there is an argument for a tax-free band for proprietors and working directors on retirement. That existed in the past, and it should be reinstated. On the general principle, I hope that the Government will not succumb to too much industry lobbying to reverse their position on taper relief. The lobbying at the moment reminds me very much of the lobbying on the minimum wage, when the CBI and others argued that the introduction of the minimum wage would lead to at least a quarter of a million job losses. The truth was that it led to no such thing.

One area of the Government’s tax proposals that is extremely unsatisfactory relates to local government finance. The Pre-Budget Report proposes that council tax should continue to rise by 5 per cent per annum. This tax bears particularly hard on low-income families and pensioners. Each passing year without a revaluation creates more anomalies and brings opprobrium on local government that is simply unjustified. I do not expect the Minister to defend council tax—I think the Government have long since stopped attempting that impossible job—but I wish that he would give some encouragement to the thought that the Lyons report might be resuscitated. I think that Jonny Wilkinson would be impressed by the distance that the Government have kicked it into the long grass. Although we do not agree with all of it, that is highly unfortunate.

On public services, the problem that the Government now face is that there is a gap between the amount of money that has gone in and the public’s view of the benefits that have emerged. I do not believe that the way forward or the way in which this will be dealt with is the Government’s current approach of seeking major additional so-called savings. The single major reason why increased public expenditure has not produced the results that people expected is that the Government from the centre have been too prescriptive in the way in which they have wished their policies to be implemented, with the result that teachers, nurses and police staff are spending far too much time on the bureaucracy imposed on them from the centre. When someone such as the nurse of the year resigns from the NHS in frustration with the paperwork and the bureaucracy with which she is confronted, it is a telling indictment on the way in which the Government have sought to reform—or, rather, not reform—the public services.

We are entering a period of uncertainty tinged with apprehension. It will require decisiveness and a sure touch to steer us through it. The Prime Minister was, in one sense, fortunate to leave the Chancellorship when he did. He will not, however, be able to escape the political consequences of the Government’s uncertain economic management.

My Lords, we have had a short but very interesting debate and I thank my noble friends for coming out, as the noble Lord, Lord Haskel, pointed out, for the second week running to talk about the economy.

The Motion refers to the Pre-Budget Report which was announced in another place on 7 October this year. As I said in my speech on the humble Address last week, we on these Benches pressed hard for a debate on the PBR before prorogation but the Government refused. It has not been our custom to require that Budget Statements, Pre-Budget Statements and Comprehensive Spending Reviews are repeated in your Lordships’ House. While they are clearly Statements of public importance within the terms of the Companion, they are generally long and often complex and we have judged that the convenience of the House is better served by a debate. But that is predicated on a debate being allowed on a timely basis, which this debate is not. The Government have forced us to re-examine our stance, and we may well in future wish to take such Statements in the House on the same day.

Once the Government had got past Prorogation and avoided a timely debate on the PBR, they suddenly discovered a passion for a debate on it before the end of this month. But this is only to dance to the tune of an obscure European code of conduct and not because the Government believe that it is important that this part of their policies should be debated in your Lordships’ House. We do not believe that this reflects well on the Government’s approach to your Lordships’ House.

One of the few benefits of debating the PBR so late is that we have had an opportunity to reflect on the impact that it has had. It was a copycat PBR. Our abiding memory is that it was cobbled together at the last minute in order to launch a general election campaign, which the Prime Minister called off when he saw that his popularity was evaporating as a result of my party’s highly successful conference.

We have heard from a number of sources that the very late decision by the Government—almost certainly in No. 10, as the noble Lord, Lord Newby, said—to introduce additional inheritance tax relief was only because of the outstanding success of the announcement made by my honourable friend Mr George Osborne the previous week. On the other side of the equation, they copied us by tackling the long-running issue of non-doms.

They also sprang some capital gains tax changes without any consultation. These penalise investment in business and enterprise. I am glad to say that this was all down to the Government; we would not have been so inept.

The Government’s successive forecasts generally show a deteriorating pattern. We were thus not surprised to find in the PBR that the Government would stay longer in budget deficit than in the earlier reports. A return to surplus is now put off until 2009-10. In consequence, the Government will be borrowing more than they previously estimated—£16 billion over the next five years more than the last Budget forecast, to be precise. Net debt as a percentage of GDP rises to nearly 39 per cent, which is within a whisker of the Government’s own rule of 40 per cent, as my noble friends Lord Marlesford and Lord Northbrook have already pointed out. As my noble friends have also pointed out, that figure excludes considerable amounts of off-balance-sheet debt and also excludes amounts for unfunded pension liabilities.

The Government have revised their growth figures down for next year, blaming the turmoil in credit markets. The Bank of England made it clear last week that the UK will see a “sharp slow-down” in 2008 and the detail of the Bank’s central forecast suggests growth of only 0.3 per cent in the first two quarters of next year.

For the first time in a very long time the “R” word has crept back. The noble Lord, Lord Newby, reminded us of Alan Greenspan’s comment on the likelihood of a recession in the US. But the Bank of England’s chief economist last week said,

“there’s a substantially higher probability of a recession”,

in the UK next year.

We would not wish on our economy slow or even negative growth coupled with inflation. The big question is whether our economy has real resilience built into it. The Government’s policy of high debt and budget deficits may well have left our economy vulnerable to external shocks. We obviously have to ask whether we can actually achieve the PBR’s growth forecast of 2 to 2.5 per cent next year, followed by a bounce back to trend the year after.

As the noble Lord, Lord Newby, has pointed out, household consumption has been a big driver of GDP growth in recent years and there are very significant areas of uncertainty around that. We do not know what path interest rates will take as there may well be inflationary pressures in our economy which could well defer a move in rates downwards and, as a highly indebted nation, interest rates are critical. As we heard earlier, personal debt is now nearly £1.4 trillion, largely secured on property but with a significant unsecured element. Recent surveys suggest that 2.1 million adults are struggling with repayments.

The Government have often asserted that people save when they feel insecure and they spend when they feel secure. “Oh, people feel good about life under new Labour so they do not bother to save” is a paraphrase of Ministers’ responses to our questions about the plummeting savings ratio. The truth is that their spending was holding up economic growth, which the Chancellor rather liked. In the first quarter of this year, the savings ratio fell to 2.1 per cent, the lowest level since 1960. If that ratio starts to swing back to its pre-Labour levels of around 10 per cent, that will suck a considerable amount of spending out of the economy.

That would add to other strains on household spending capacity. The Government have steadily increased the tax burden since they came to power, often through the use of stealth taxes, and we can see a continuation of this pattern in the Pre-Budget Report, including the rising proportions of income tax and national insurance. The net disposable income of individuals as a percentage of gross income has been falling as a consequence and this seems set to continue.

To this must be added the undoubted pressures on inflation, with food and fuel prices on an upward trend, as the noble Lord, Lord Newby, pointed out. He also pointed out that wage growth is overall less than RPI at the moment, which means that there is a real squeeze on the value of pay packets. People on very low incomes—for example, a large number of pensioners—experience even higher levels of inflation than the average shown in the RPI and will feel the pinch even harder.

All of a sudden, an economy constructed on both personal and government debt starts to look problematic. What stress testing of the impact of a further squeeze on household incomes have the Government carried out? If consumer demand, for example, is one percentage point lower than currently forecast, what does the Treasury’s model say about corporate profits, and therefore tax receipts, or about the need for additional debt?

I put some of these questions about falling consumer spending to the Government in the debate on the gracious Speech last week, when the Minister was not with us. The noble Lord, Lord McKenzie of Luton, said:

“What happens is what is already happening: there is a rebalancing of the economy whereby business investment comes more to the fore”.—[Official Report, 14/11/07; col. 565.]

I sometimes wonder whether Ministers are on the same planet as the rest of us. Business investment is at an all-time low—below 10 per cent of GDP—and the Government’s own GDP forecasts show that business investment growth will be lower than in 2006-07.

Lower consumer spending will provide an unpromising environment for some categories of investment. I ask again: what will happen to our economy if consumer demand falls further than currently forecast or fails to recover as quickly as forecast?

The Government will be judged on how well they have prepared our economy for rough waters. It does not much matter that the seas are being whipped up by forces outside their control, such as the fall-out from the sub-prime debt crisis. What matters is whether our economy can weather the storm. We have real fears about that.

Little attention has been paid to the Comprehensive Spending Review. Today’s Motion is expressed in terms of the PBR and does not even mention the CSR. Perhaps the Government are not keen on a debate on the CSR, but this appears to be our only opportunity to talk about it.

Many of the CSR07 settlements had been dribbled out in earlier announcements. We knew that the overall budgetary position made the high spending of recent years impossible, so there was relatively little new to say last month. The big picture is that the Government are planning public spending increases of 2.1 per cent during the next three years, which compare with 4 per cent for the previous nine years. Increases of 2.1 per cent will be below the expected growth in GDP, hence the Government have copied our policies; namely, that expenditure plans should share the proceeds of growth.

Some departments will get more than 2.1 per cent. For example, the settlement for health is expected to deliver 3.7 per cent. That sounds generous until it is compared with recent years, when the NHS absorbed spending increases of more than 7 per cent per annum. All the scenarios in the Wanless report needed more than 3.7 per cent.

The big question is whether the CSR07 moneys will be spent any more wisely than any of the previous CSR settlements. We know that public sector efficiency has gone backwards during the years of high spending. We know also that we have not bought enough with the taxpayers’ money poured into public services. In education, 40 per cent of 11 year-olds are unable to read, write or add up properly, and only a similar percentage get five good GCSEs. In the NHS, we have frightening levels of hospital-acquired infections; local hospitals are facing increasing threats of closure; and the Government have bungled pay settlements. Our crime rates are among the worst in the world, and rising, with prisons bursting at the seams because of inadequate planning. Despite massive increases in benefits, child poverty has been rising and the Government are missing their targets by miles. We can see nothing in the PBR or CSR which makes us think that money will be spent any better in the future. Indeed, the Prime Minister seems to be leading moves away from public service reform, which might make a difference, back towards the central, stateist policies which have never delivered.

The Motion before us is that this House “takes note with approval” of the Government’s PBR assessment. For these Benches, I am happy to take note of the PBR assessment, but I cannot bring myself to do so “with approval”.

My Lords, I am grateful to all noble Lords who have spoken in this debate. I was grateful for the generous welcome for my presence of the noble Lord, Lord Newby, and even for the rather less enthusiastic welcome from the noble Baroness. I regret that this is not my second debate on the economy and that I was not able to participate last week, but the noble Baroness will have to reconcile herself to the fact that there is much talent on the Treasury Bench and that many people are eager to participate in the major debates, whereas the Queen’s Speech offers only a limited number of opportunities. We were excellently served by my noble friend last week when he summed up the debate. I hope that she will feel that, at this second opportunity, I, too, will respond to the debate as constructively as I am able.

I rather regret the fact that she regards the debate as not being timely. The straightforward fact is that we are under an obligation to produce a response to Europe by the end of November. Due to our budgetary arrangements, we receive dispensation from time to time to present our report to Europe later than the November deadline, but in circumstances where we have produced our Pre-Budget Report, it would look quite extraordinary if we did not meet our obligations by putting it before both Houses and presenting it to Europe in good time. That is why this debate is taking place now. I hope that the House will recognise that it is an advantage for the Government to be in good standing with Europe by meeting the timetable, not least because the report is a contribution to the overall strategy which the European Union pursues with regard to the economies of the member countries. The more we are able to co-operate in those terms, the better are the returns for the United Kingdom.

I greatly welcomed the fact that the first contributor to the debate was the noble Lord, Lord Marlesford, who never fails to entertain the House with his insights into the economy. We all know his long record of participation in these economic debates and his distinguished record as an economic commentator before he arrived in this House. He and those on his Benches were perhaps overly pessimistic about the present situation. We must of course counsel some anxiety about international circumstances which present some challenges, but the British economy is strongly positioned to cope with such fluctuations. The noble Lord suggested that one of the great problems was that we have massive public and private debt. He was of course right that individual households have considerable debts—we can gross them up to the figure of £1.4 billion which he mentioned. It is also the case that households have increasing personal assets. The personal assets of households in the United Kingdom have increased by 72 per cent over the past 10 years. We must remember that when we are talking about the difficulties.

I will not follow the noble Lord, Lord Newby, down the road of discussing Northern Rock. He will forgive me for saying sufficient unto yesterday is the participation thereof. He will also recognise that when we look at the issues with regard to Northern Rock as with household debt we seek to identify those areas that are real securities against those where there is exposure. All I am suggesting to the noble Lord, Lord Marlesford, is that he is probably being somewhat unfair with regard to households when he grosses up personal debt, produces a substantial figure and suggests that that should make our flesh creep.

With regard to this situation, he generously said that the Government had maintained an income tax rate, which has now obtained over nearly two decades—a consistency that I know he applauds. The noble Lord, Lord Newby, was more explicit in congratulating the Government, but at the same time he will recognise that there is also some advantage in consistency with regard to taxation in respect of business. I know that the noble Lord, Lord Newby, has particular reservations about capital gains tax, but when we came to power, capital gains tax was running at more than twice the level than it is now. There is still a debate to be had about the increase to 18 per cent.

The noble Lord, Lord Newby, mentioned second home owners, who are the beneficiaries of this and might not be regarded as the most significant people to benefit. We will have a debate on these matters, but it does not alter the fact that when it comes to the issue of taxation with regard to business, the Government have adopted an intelligent and responsible approach. I reassure the noble Lord, Lord Newby, that we will not keel over in the face of industry pressure with regard to our proposals, but we are prepared to listen to the industry and business case. It is only right that a Government who are interested in the prosperity of our enterprise economy should do so. The Chancellor has given enough illustrations of that.

I was very grateful to my noble friend Lord Haskel; the sole contributor from my own Benches.

My Lords, I hope that my noble friend will forgive me. I had completely forgotten his elevation at this juncture in the debate so that he is actually presiding over our affairs. In that case, I shall be even more solicitous in praising him for his contribution earlier this evening. He is absolutely right. He identified the strength of the Government's position with regard to the business economy. It is far too easy for others to paint a gloomy picture when a great deal about the real economy is working very constructively indeed. I know that he is well versed and has spoken most recently in debates about the enormously significant role that we are playing in improving the skills agenda, particularly in increasing the role of science in our society and by the work of my noble friend Lord Sainsbury in contributing to the strengthening of our economy against fluctuations that confront us, as undoubtedly they will.

My noble friend was the only contributor this evening—I stand correction if I am wrong—to introduce that other dimension to which we must all have great regard: climate change. There is no doubt that it presents a significant challenge, but the Government are leading from the front on that issue. The whole House will recognise how much progress we have made with regard to the Kyoto targets, how fertile we are in ideas that promote a low-carbon economy and our intention to lead Europe in those terms. That does not alter the fact that this is a challenging agenda. I accept the point made by my noble friend that there is an element of acceleration in the air because of recent scientific insights beyond the Stern report. We must have due regard to that. It is certainly a challenge to which we need to respond.

On the question of the public aspect of debt to which the noble Lords, Lord Marlesford and Lord Northbrook, referred, it can sometimes be construed that everything to do with PFI means that you gross up the sums and then dump them on the Exchequer, which then has to respond to the challenge of meeting those costs in any one year. These are long-term projects—in terms of the rewards that they bring to the economy and in terms of the actual costs. Therefore, it is not entirely right that the noble Lord, Lord Marlesford, managed by some rather subtle arithmetic to get our debt burden above and beyond the Italian perspective. I would not accuse the noble Lord of the concept of creative accountancy, but he will nevertheless recognise that the Government beg to differ on those calculations and how we arrive at our overall position on debt.

The noble Lord, Lord Northbrook, gave a somewhat pessimistic perspective on the economy, although he would no doubt portray it as a realistic one. He is of course right that we have challenging times ahead. None of us can look at aspects of the American economy without recognising that we will have to adjust against that perspective. He first said that he did not like our index on inflation, but it is the international index—a comparator that we have with other countries, which therefore makes comparison with us internationally valid. He will also recognise the difficulty with the other measure of inflation; every time the Bank of England puts up interest rates in order to manage the economy, it automatically pushes up inflation because the other measure of that is the mortgage rate built into its actual index. Now, that is a real weakness of that other index, but while one must have due regard for the burdens that households have to bear when people pay mortgages on their housing, I assure him that when the Government use their index of inflation it is for the best reasons of international comparison. I hope that the noble Lord will accept that dimension.

My Lords, the Minister makes a stout defence of the use of CPI as the Government’s favoured measure, but said that it excluded certain items that are within the ordinary costs of individuals. Can he explain why the Government used that measure in their wage discussions with public sector employees?

Well, my Lords, we have one measure of inflation, which is the standard for the nation. I understand the enormous enthusiasm that the noble Baroness is presenting for the low paid worker, although—as with that enormous concern for pensioners and others with low incomes to whom she also referred—it was conspicuously absent when her party was in power. That is in the wake of the fact that her proudest boast this evening is that the Conservatives have introduced a proposal for helping millionaires with their taxation position. The noble Baroness cannot, on the one hand, boast of her wonderful achievement on that issue but, on the other hand, say that the Conservatives’ real interests are others in the economy whom they consider equally deserving.

My Lords, my point was: how can public sector employees be expected to be bound by the CPI when their cost of living is based on the RPI? It is difficult for them to accept 2 per cent pay increases when their rate of inflation is over 4 per cent, and could be more.

My Lords, those figures are of course those of the noble Lord and not the Government. However, we clearly stressed to public sector workers that—as the noble Lord will recognise—there is a trade-off between the people employed in the public sector, the investment that we are able to make there, and the amount that we are able to pay public sector workers. His noble friend referred to that when, in glancing at the National Health Service budget, she grudgingly recognised the enormous advances that the Government have made. The noble Baroness probably did not cover the last decade because she was grudging about the reduction in its present position as opposed to that of previous years.

Now, there is a fine analysis: a party that could not conceivably have matched the investment that we have made in the National Health Service regrets that we are reducing somewhat on the very substantial inputs that we have made over more than half a decade, and laments it while, at the same time, talking of bungled pay arrangements. I presume that what the noble Baroness meant is that some workers in the National Health Service got more than they actually deserved. The noble Lord is now berating me because he thinks that they are not getting enough. Well, such are the contradictions in some of the representations made this evening, but we are to expect that. One of the glories of the Opposition is that they can throw challenges or criticism at the Government without necessarily sustaining a narrative that itself stands up as coherent economic policy.

In this debate we have been concerned to present what represents, in fact, a very strong position for the British economy. I do not accept the excessive degree of pessimism that is being expressed about the immediate future. However, I accept the warnings that are being issued that the international economic climate will not be as benign as it has been in the recent past. That is certainly so. But, as the noble Baroness asked herself when she made her contribution, the question is whether the economy is in a position strong and resilient enough to meet the challenges that lie ahead. If we look at all the international comparators, we can see that we are in a strong position. Does that mean that we can expect to have the same rates of growth next year and the year after that as we have enjoyed in recent years? No—that is why we have scaled down projected rates of growth. We have taken into account the fact that the international climate is more challenging. What we are sure of is that we can present to the European Community a management of the economy which shows how judicious and intelligent investment in public services, born of taxation that is well judged to encourage the enterprise part of the economy, has resulted in circumstances in which the Government can put their case with confidence.

On Question, Motion agreed to.

House adjourned at 8.32 pm.