Skip to main content

Economy: Monetary and Fiscal Policy

Volume 703: debated on Thursday 17 July 2008

asked Her Majesty’s Government:

What steps they are taking to co-ordinate monetary and fiscal policy.

My Lords, monetary and fiscal policy are conducted within a clear and transparent framework. The Government set the Monetary Policy Committee’s operational target and the fiscal rules. In addition, there is a regular exchange of information between the Treasury and the Bank of England.

My Lords, I thank the Minister for that reply. Is it not painfully obvious that giving the Bank of England independence and a target to control inflation with only short-term interest rates as a weapon cannot work unless fiscal policy is used as well? If we are to continue with the charade of the Governor having to write to the Chancellor of the Exchequer to say why he has failed, should there not also be letters to the Governor of the Bank of England from the Chancellor explaining why he has made the Governor’s task impossible? Is not fiscal policy out of control, with massive increases in borrowing, subsequent to the Budget, due to changes in tax and expenditure policy? How much has borrowing increased above the amount projected at the time of the Budget, and will this be funded from the public, not the banks?

Well, my Lords, borrowing will of course be funded from the public, but the International Monetary Fund passed a judgment on the Budget and considered it to be fully operational and effective against what we all recognise to be a difficult international situation. Importantly, the Bank of England has responsibility for inflation. That is a very difficult task, given the pressure of world prices at present, and we will go through a period—a short period—in which inflation will be above the target rate. However, it is quite clear from our predictions and those of independent forecasters that in 2009 the policies being pursued will return inflation to within the framework, where it has been for a decade under this Government.

My Lords, is it not wrong to pretend that massive increases in oil and food prices will not mean a cut in living standards? Would it not be better and easier to co-ordinate fiscal and monetary policy if there were either a cut in public expenditure and/or a tax increase? I am not sure that that is what the noble Lord, Lord Higgins, or the Opposition Front Bench are suggesting, but no doubt they will tell us.

Of course there is a challenge at present; the whole world recognises that. The difference is that the British economy is almost uniquely well placed to meet this challenge. We start off with a low inflation rate. I note that one or two noble Lords opposite are regarding these comments with less than the approval I would seek. Let me make it clear that our inflation rates both now and predicted are below those in Germany, France and the United States, and historically, even at their highest, they are only half of what was the norm under the previous Administration in the 1980s.

My Lords, does the Minister agree that the slow-down will inevitably lead to a fall in tax revenues and an increase in expenditure, particularly on unemployment benefits? On their current policies, the Government are set to break their own fiscal rules. Do they intend to follow the advice of the noble Lord, Lord Barnett, by raising taxes or reducing expenditure elsewhere, or do they accept that they simply have to break the rules?

My Lords, the noble Lord, as ever, accurately identifies the difficulties. He will have to wait to see what our solutions to these difficulties are. We will again look at these matters and comment further on them in the Pre-Budget Report, which is not asking the noble Lord to wait a great deal of time in parliamentary terms. There are challenges to the public finances at this stage, but the noble Lord will recognise the mass of contradictions that could emerge from all sides. One side will suggest, as he does, a substantial cut in government revenues, while the other will suggest that there are windfall benefits from the higher oil price. The Government will reach a judicious position in due course.

My Lords, why are the Government refusing to disclose the amount, which is clearly substantial, that is being provided to the banks in increased liquidity, and why is that amount being treated as off balance sheet?

My Lords, the noble Lord will recognise that the Government’s liquidity position with the banks is being adopted by all significant economies. He will be all too well aware of the extent to which the United States Government have been greatly concerned to increase liquidity for their banking structure as well. I recognise that the noble Lord is very much in favour of transparency —probably more so when this Government are in office than when his own side might be. Let me emphasise on the issue of transparency that the concern is to preserve confidence in the banking structure when we all recognise that there are significant shocks both internally and externally. He will know the magnitude of the problems that the American economy is wrestling with. I am not sure that his preferred remedy of complete transparency meets the seriousness of the situation.

My Lords, does the Minister agree that the oil price increases need to be dealt with over a fairly shortish period? That means that there must be either some reduction in public expenditure or tax increases, maybe for a limited time only, but it is a solution that may be available to us.

My Lords, of course, my noble friend is wise in these matters, and he is right that that may be one of the solutions available to us. The strength of the British economy means that the methods that we have to adopt will be considerably less drastic than they would be if we were operating with significant deficits and high unemployment. My noble friend will have to join the noble Lord, Lord Newby, and the whole House in awaiting the Pre-Budget Report, which is not too far distant.