Motion to Approve
My Lords, I welcome this opportunity to debate the information provided to the European Commission under Section 5 of the European Communities (Amendment) Act 1993.
Each year, the Government report to the Commission on the UK’s economic and budgetary position and our main economic policy measures, in line with our commitments under the stability and growth pact. By formally sharing information from the Pre-Budget Report with our European partners, we can help to maintain an appropriate and effective level of macroeconomic policy co-ordination in the European Union, contributing to stability and growth.
A year ago, as the world economy faced crisis, the European Council agreed a European economic recovery plan, which rightly called for a fiscal stimulus from member states equivalent to around 1.5 per cent of GDP. The Council encouraged member states to allow borrowing to rise to support the economy, acknowledging that this would lead to a deepening of deficits in the short term and that the stability and growth pact should be applied in a manner which reflected the current circumstances.
We welcomed the publication of the European economic recovery plan, which showed that the Government were right in taking bold action in the PBR in 2008 to support the economy through fiscal stimulus. Furthermore, it provided support for actions to front-load public expenditure and assist small and medium-sized businesses.
The Pre-Budget Report was delivered during a year in which the global economy is forecast to have had the longest period of sustained negative growth in 60 years. The crisis first took most economists by surprise but has since brought about a huge debate and interest in the subject, even if a lot of that has been with the view that the dismal science has become even more dismal.
However, the overriding commentary centred first on the role of the market and then on the role of the Government as we took decisive action to stimulate the banking system, stabilise the economy and provide support for future growth. This action has helped to limit the impact of the recession and, as figures released last week showed, the economy posted growth of 0.1 per cent in the final quarter of 2009, reflecting the Chancellor’s forecast in the PBR that growth would return by the end of last year.
Growth is expected to pick up progressively to 1.25 per cent in 2010, as credit conditions ease and the macroeconomic stimulus conditions continue to feed into the economy. Thereafter, growth is forecast to rise to 3.5 per cent in both 2011 and 2012, supported by net exports and investment, with the adjustment of the UK’s flexible markets helping to bring into use the significant spare capacity available. However, the latest estimate makes clear that we must tread carefully and although the prospects for the economy are improving, markets are not up to full running speed. The economy faced a monumental shock. There are encouraging signs that recovery is under way but it is at this stage fragile. The challenge we now face is securing the recovery and promoting long-term growth while ensuring fiscal sustainability.
The Chancellor announced in the PBR a plan to more than halve the deficit over four years. But with the uncertainties that remain and growth still delicate, the PBR provided for continued support until recovery is secured with the focus of fiscal policy shifting towards consolidation from 2011-12, when the economy should be better placed to support necessary fiscal tightening. I have said before that failing to offer the support that the economy requires could damage the recovery and incur unwelcome and long-lasting damaging effects. That is why further support is being offered to business to ease problems with cash flow and access to bank lending by deferring tax rises and extending tax allowances. This has included the extension of the Time to Pay scheme. To date, it has helped 160,000 businesses to spread £4.8 billion of tax payments over a timetable that they can afford. The small companies’ rate of corporation tax will be frozen this year to help 850,000 businesses.
Our support has entailed that the number of business failures has been running at about half what it was in earlier Tory recessions. For home owners, the PBR announced that the Support for Mortgage Interest scheme, which provides cover for mortgage interest payments for those who have lost their jobs, has been extended for a further six months. I am pleased to say that our actions are working. The latest Council of Mortgage Lenders figures show that the rate of repossessions is half what it was in the last recession. More than 220,000 home owners are receiving direct support to avoid repossessions, through schemes such as Support for Mortgage Interest, the mortgage rescue scheme and Homeowners Mortgage Support.
The tax and benefits system is also providing important help to families, with the tax credits system having provided support to 400,000 families whose income has fallen during the downturn. Many benefits and tax credits are linked to the September RPI, which was negative. This would have meant no increase in those benefits. Instead, we announced that the basic state pension will rise by 2.5 per cent in April. Child benefit and some disability benefits will also rise by 1.5 per cent. These measures provide real help to the vulnerable in our society.
To ensure that we will not see a repeat of the financial crisis, the Government have insisted on wide-ranging reforms to the financial sector. As well as strengthened regulation we have been very clear that there must be an end to the short-term bonus culture in the banking sector. It is important that remuneration policies encourage a prudent long-term approach to performance, risk and value creation, and do not incentivise excessive risk-taking. For that reason we announced in the PBR a one-off levy on banks of 50 per cent on any individual discretionary bonus above £25,000.
In the US, President Obama was clear in his recent announcements that the fierce lobbying against regulatory improvements was one reason he felt compelled to introduce proposals to limit the size and scope of US banks. Here in the UK, our fears that banks were not moving quickly enough to reform their pay and bonus policies was also one of the reasons we decided to introduce a bank payroll tax.
The Chancellor has put in place support to secure economic recovery but we have also taken action to meet the other challenges of maintaining the long-term growth of the economy. The recession has had a marked impact on the labour market, but unemployment has risen by far less than expected by independent forecasters. The latest ONS figures this month show that ILO unemployment fell for the first time since 2008. That is coupled with the claimant count having also fallen for the second consecutive month and by more than market expectations. But the impact on the labour market has been significant for young people, so the PBR announced that every 18 to 24 year-old will be given work or training after six months out of the labour market, rather than after the previous limit of 12 months. Investing in the skills of young people is vital to ensure that we do not repeat the experiences of the 1980s and 1990s, which saw whole generations of young people lost to unemployment.
The Chancellor also announced investment in key industries of the future—in digital, bio and low-carbon technology—to build a stronger and more diverse economy and to help drive long-term sustainable growth. This has included an additional £500 million of lending available to small and medium-sized enterprises through a 12-month continuation of the enterprise finance guarantee and the creation of a new growth capital fund, along with the £325 million UK innovation investment fund.
We also introduced a “patent box”—a reduced rate of corporation tax applying to income from patents from April 2013—to strengthen the incentives to invest in innovative industries. We set out additional funding for low-carbon industries and energy efficiency, including the Warm Front programme. It was important to provide support to the economy when it needed it; policy, here and in other countries, needed to adapt to the extraordinary global situation. Not to allow borrowing and the deficit to rise would have led to greater costs in the long term—costs and consequences which would have damaged the pace and scale of recovery and future growth.
It is also important that support in the downturn must go hand-in-hand with steps to rebuild fiscal strength once recovery is firmly established. Setting a credible consolidation path to ensure the sustainability of the public finances is a critical element of the Government’s macroeconomic strategy and is essential to the long-term health and prosperity of the economy. Sound public finances will support investment and growth by helping to maintain low, long-term interest rates and a stable economic environment.
Sound public finances are necessary to get the growth we need, so it is imperative that we consolidate in order to provide the conditions for future growth, and that we do so in a way that supports growth because, in turn, growth will make it easier to lower the deficit and pay back debt.
At ECOFIN in October last year, Finance Ministers agreed to start unwinding fiscal stimulus measures as soon as possible, and by 2011 at the latest. That is exactly what the Government have committed to do in the PBR. Indeed, we have already begun to reverse the temporary fiscal stimulus, as planned, while maintaining support for the economy as it enters recovery.
As a result of the combined effect of lower revenues resulting from the economic shock and our commitment to provide extra support to the economy during the downturn, borrowing will rise to £178 billion in 2009-10, 12.6 per cent of GDP. As the economy recovers and the deficit reduction plan starts to take effect, this will fall to £176 billion in 2010-11; to £140 billion in 2011-12; to £117 billion in 2012-13; to £96 billion in 2013-14; and then to £82 billion in 2014-15. That £82 billion compares with £178 billion for 2009-10.
Excluding public sector investment or capital spending, and taking into account the economic cycle, the budget deficit is expected to fall by around two-thirds to 1.9 per cent of GDP by 2014-15. The Fiscal Responsibility Bill, which will have its Second Reading in this House next week, will enshrine in legislation the Government’s plans to more than halve public sector borrowing as a share of GDP by 2013-14. This will ensure that the Government’s commitment to fiscal consolidation is backed by the force of law.
We have set out a clear plan of consolidation over the medium term, taking a judgment on the appropriate pace of adjustment in 2010-11 and beyond. Tightening fiscal policy aggressively in 2010-11 would present risks, but we will be able to support much more rapid tightening from 2011-12. Clearly, in the event that growth turns out to be more robust than forecast, borrowing will naturally fall faster and it will then be possible to reduce the structural deficit further in the medium term.
To secure consolidation, the Pre-Budget Report announces tax rises for those with the greatest ability to pay, while ensuring that those on the lowest incomes will be protected, including the restriction of pensions tax relief for those with gross incomes of £150,000 or more a year, and an additional 0.5 per cent increase in employee, employer and self-employed national insurance contributions for those earning more than £20,000.
There will be further constraints in future, however, and lower spending will be essential. That is why we must continue to press for efficiency and clarity in setting our priorities. The Pre-Budget Report announced £12 billion of savings from greater efficiency, £5 billion from scaling back on or cutting lower priorities, and £4.5 billion from reducing the cost of public sector pay and pensions. Our priority is to protect the most important front-line services on which people depend—schools, healthcare and police. Callous cutting of public spending in the past led to long-term damage to the economy and society. It will not be repeated under this Government.
I have noted the amendment tabled by the noble Baroness, Lady Noakes. In the EU, many countries have experienced a profound shock to their public finances as a result of the global economic downturn. Some 20 member states are currently in the excessive deficit procedure process. The recommendations adopted by the ECOFIN Council in December 2009 provide a co-ordinated glide path towards sustainable public finances, which utilises the flexibility provided for under the stability and growth pact while, rightly, taking into account national economic circumstances.
These have been testing times, and people all around the world have been affected, but the actions taken by this Government have helped our economy to start to emerge from the crisis without sustaining profound and long-lasting damage. There will be more to be done—not just now, but over the next few years. That is why the Pre-Budget Report was looking not backwards but forwards. It sets out action to meet the challenges to secure the recovery, to build our future and to ensure that we have the means to do so while controlling public finances. That is the programme set out in the 2009 Pre-Budget Report and that, with the approval of the House, is the basis on which we will send updated information to the European Commission.
I look forward to your Lordships’ contributions to this important debate and beg to move.
Amendment to the Motion
As an amendment to the above Motion, at end to insert “but regrets that the assessment does not demonstrate that the Government have a credible plan to deal with the United Kingdom’s deficit and that the United Kingdom’s debt and deficit ratios will remain outside the limits set by the stability and growth pact throughout the period to 2014-15”.
My Lords, I thank the Minister for moving the Motion and shall speak to the amendment standing in my name.
The convergence report that we are debating is based on the Pre-Budget Report, as the Minister said. That report was received with no acclaim whatsoever. I have not heard one businessman say that it inspired confidence. Expert commentators, such as the Institute for Fiscal Studies, took no time at all to expose its weaknesses.
The report we are now considering should have been submitted to Europe by the end of December. Indeed, our PBR debate in December had been arranged before the Christmas Recess to allow the House to debate the appropriate Motion of approval, but the report did not appear in time. It appeared only late last Thursday. Noble Lords may well have noted that although it is dated January 2010, it was clearly written last year. For example, at paragraph 4.11, it states that the VAT reduction “will” expire on 31 December 2009. Why was it not published in December? My money is on the Government hoping against hope that the Q4 GDP figures could be flourished as proof of the extraordinary statement in paragraph 2.6 which says:
“The Government’s action has been successful in averting the more severe downside risks to the economy”.
The Minister knows full well that the debt-fuelled policies of the Prime Minister were responsible for the longest and deepest recession in this country since the 1930s. The UK was the last country in the developed world to emerge from recession, and then with a puny 0.1 per cent growth in Q4. It is clear that we cannot be confident at this stage that we are yet out of the woods.
Staying with paragraph 2.6, it states that the Government’s action,
“has limited the severity of the downturn and its impact on businesses and individuals”.
Unemployment has already gone up to nearly 2.6 million and could well rise further, as the Minister’s right honourable friend Ms Cooper said last week. Beneath the surface, increasing part-time work masks a larger decline in full-time employment, and 20 per cent of young people are without a job. There is evidence that more people are now leaving the workforce, as more than 8 million people are economically inactive. It is also far too early to reach a judgment on business insolvencies, as the Association of Business Recovery Professionals pointed out last week. Previous recessions have shown a marked insolvency lag, and it expects insolvencies to peak in 2012, assuming the recession has finished, and to continue at a high level in 2011.
The UK has signed up to the stability and growth pact, which allows the EU to monitor the medium-term budgetary strategy of member states. Thanks to the only sound economic decision made by the Prime Minister when he was Chancellor, the UK remains outside the eurozone, and hence we do not fall within the penalty regime that applies to eurozone countries, but we have agreed to abide by the same budgetary rules, which require us to keep our budget deficit below 3 per cent of GDP and to keep debt below 60 per cent of GDP.
Two years ago, when the Government submitted their convergence report on the back of the 2007 PBR, they asserted that they were well within the debt and deficit rules, but we all remember that the 2007 PBR was cobbled together at high speed in October 2007 for the purposes of the election that the Prime Minister bottled. That PBR showed an unbelievably rosy picture of growth in order to frank some unrealistic public expenditure plans. The previous PBR had already resulted in the European Commission criticising the UK for having the largest structural deficit in the EU, and noble Lords will recall that this was the era when the Prime Minister regularly redefined the rules on cycles and deficits in order to justify carrying on borrowing to fund yet more public expenditure.
It is all so clear now that we have suffered more than other countries in the EU because of the Prime Minister’s policies. The Government produced their financial projections back in 2007 because they suited their political ambitions rather than to be honest about the nation’s finances. A few months after that PBR, and despite continuing optimistic growth forecasts and assertions about meeting the golden rule, the budget for 2008 showed that the UK would incur a deficit greater than the 3 per cent treaty limit, with the result that the Commission evoked the excess deficit procedure for the UK. By PBR 2008, the Government could conceal no longer the fact that the UK was headed for recession and that deficit and debts would be way outside the treaty limits for the whole period up to 2012-13. The Commission, recognising the global recession, as the Minister explained, recommended, inter alia, that we reduce our deficit to below 3 per cent in 2013-14 and do more in 2010-11. As the Minister said, in December last year, the EU Council formally recommended that the UK take corrective action by June this year and reduce the deficit below 3 per cent in 2014-15. The PBR does not do that.
Although several other countries are in the same boat, as the Minister said, we are clearly the sick man of Europe—and we have the longest recovery period allowed to any country in Europe. If we read the convergence report, it is as if none of this had happened. There is no reference to the excess deficit procedures or to the EU Council’s recommendations. I dread to think what the Commission and the Council will make of this document. The PBR projections are set out as if it is the most natural thing in the world to have a treaty deficit ratio of 12 per cent. that is four times the norm, and to reduce it to 4.6 per cent—this is still 150 per cent of the norm—by 2014-15. The treaty debt ratio, which is expected to finish this year at 73 per cent, will carry on rising—peaking on a treaty basis at 92 per cent.
There are two important issues behind the forecasts in the Pre-Budget Report that are being submitted with the convergence report. First, the forecasts are only as good as the assumptions that lie behind them. This is a truism, of course, but I remind the House that they rest on growth that will rise to more than 3 per cent in 2011 and then stay there. I will say no more; there is a considerable risk to this assumption. The Minister also reminded us that behind the forecasts are some heroic assumptions about efficiency. Given that the Government do not have a good track record in delivering what they have promised, that too is a risk to the forecasts.
Secondly, and more importantly, the forecasts suffer from the Government’s refusal to be clear about tackling the deficit. We believe that they should start to reduce public expenditure in 2010-11 and should go further by 2014. If we form the next Government, we may not be able to do much in the first year, but at least we will make a start. That is more credible than putting it off for another year. The CBI, the Governor of the Bank of England, the OECD and an increasing number of people share our views. Reading between the extensive redactions in the paper that was released this week in response to our freedom of information request, it looks as though Treasury officials are in our camp, too.
The Government’s sins are multiplied by the deferral of a Comprehensive Spending Review. The Institute for Fiscal Studies, in its green budget this week, has calculated that the public expenditure in departments other than those in a protected category will face unprecedented levels of cuts of up to 24 per cent. The Government’s paper-thin excuse is that there is too much uncertainty for there to be a CSR, but as the Labour-dominated Treasury Select Committee wryly observed in its report on the PBR:
“There is a sense that the Treasury are using uncertainty to suit themselves”.
It might suit the Treasury, but it will make it much harder for departments to plan for the difficult period beyond 2010-11 if the CSR process is delayed.
The Government’s failure to get to grips with expenditure will not impress the Commission when it studies the documents that we are being asked to approve today. More importantly, it will not impress financial markets. We have great concerns about the huge volume of new debt that needs to be financed. As my noble friend Lord Hamilton of Epsom pointed out in your Lordships’ House earlier this week, when quantitative easing ends—we heard today that it now has, if only for the time being—it is not clear how the usual annual capacity for government debt will expand to the much larger figure of £200 billion or so which the PBR implies at the beginning of the forecast period. Even at the end of the forecast period, the sums are significant.
Earlier this week, the Minister dismissed the view of the major bond trader PIMCO, and showed a shocking amount of complacency. Last week, Standard & Poor’s said that the UK was no longer among the most stable and low-risk banking systems. The possibility that the UK itself will lose its triple-A status has been put at even money or worse.
All this points to the rising cost of servicing government debt, which is already more than the schools budget. I was disappointed to note that the Government are withholding information on this from the convergence report. Last year’s convergence report gave forecasts of interest paid as a percentage of GDP for all years up to 2013-14. This year’s report should have run to 2014-15, but the detailed analysis for interest runs out in 2010-11. Will the Minister explain why the Government are withholding interest on the debt burden that they expect to be incurred in the forecast period?
I shall refrain from commenting on the way in which the convergence report spins the Fiscal Responsibility Bill as a key part of the Government’s responsible approach to economic management. We will gather next week to debate that useless legislation. I shall merely say that I should be absolutely staggered if Europe were taken in by such flim-flam.
This document does not make me feel proud of the economic management of our country. As noble Lords will know, I am not a fan of the EU, but it grieves me to see this document go forward to Brussels without a credible plan to reduce the deficit and with such prolonged departures from the prudent norms which the stability and growth pact requires. I hope that the House will support my Motion of regret. I beg to move.
My Lords, these are weighty issues. When we speak about our public finances we have to be careful and prudent. Given today’s circumstances and the fact that expert bodies, such as the National Institute of Economic and Social Research and the Institute for Fiscal Studies, disagree about the immediate prospect in the next six months, we have to be cautious. It is like driving in heavy fog in the rain and the road is slippery. You cannot dictate that driving must be at the maximum speed. We know that we have a destination and a timeframe in which to get there. As did the PBR, we have to be cautious until the fog clears and speed thereafter.
It is no good saying that we know what to do and that we will do it immediately. Even the noble Baroness and the Bullingdon boys—if I may call them that—have rightly retracted from the hard stance of last December. I respect them for that. That was after they had seen the fourth-quarter figures, by which we were all disappointed. Who knows what the revisions may show? They may show 0.1, 0.3 or even -0.2. Errors go like that in economics. It is not called a dismal science for nothing. There is uncertainty. The economically rational and cautious thing to do is to go in a measured way, which is at the centre of the piece.
How soon will we grapple with the serious fiscal situation? We have been here before. This recession was one of the deepest. A table of output gap can be seen on page 10 of the convergence programme. Output gap was much more severe in the 1980-81 recession than it is even now. The 1980-81 recession lasted longer than it looks like this one will.
I am glad to see the noble Lord, Lord Lamont, is in his place because he had to grapple—
I am interested to hear the noble Lord, Lord Desai, make the point about the output gap. The output gap is in a sense the other side of the structural deficit. One reason why it might have been greater in 1980-81 is that, rather oddly, this recession has had the effect of reducing the long-term potential of the economy. The Treasury has increased the underlying structural deficit as a result of the recession, presumably because of the impact of the recession on the banking sector which it is not expecting to go back to its previous potential.
That is true, but I contrast it with something else. The same document in front of the noble Lord shows that between 1997 and 2006 the trend for output had been growing in the British economy faster than before. It is therefore from a higher level that the output gap has been downwardly revised. If I was to compare the shock of 1980-81, when it took a long time for the economy to recover, with this time, it is that this time it has been a sharper but shorter recession.
I was about to pay the noble Lord a compliment. I remember when he had to struggle with a large debt in 1992. I commended to everyone that he was boldly innovative by pre-announcing tax rises and keeping to his promise. I recall paying him tribute in the New Statesman—which got me into trouble, but that is another story. What that showed is that we have to have the determination to tackle a deficit when the time is right. The Government have shown in the Pre-Budget Report that once the uncertainty of 2010-11 is over, we will have a pathway to halve the deficit by 2014-15.
One could perhaps debate that after 2010-11—the noble Baroness admitted as much—if her party comes to power, it will not be able to do much immediately, except maybe make a gesture. Eventually, all the cuts will be made from 2011-12 onwards. There is no difference between us on that. We may exaggerate on this side of the election, but in truth there is no difference. The economy is in a very uncertain state, we cannot do anything definite, and therefore the drastic decisions will be postponed until next year. In that context, the only argument one can make is that perhaps the party opposite should tell us whether it is going to go faster between 2011-12 and 2014-15. If so, by how much? Let us see the numbers; otherwise it should accept our numbers. It is very simple. If that party has better numbers or harder numbers, if it has plans to abolish the Navy or whatever, let us see them.
It is in all our interests, and in the interests of the country, to agree that today we cannot do very much and tomorrow we must do quite a lot. I therefore commend the assessment to the House because the Pre-Budget Report has laid down a pathway. One can only quarrel about the speed at which we are going to proceed over the coming four years. All we know about forecasts and predictions, we knew before, but we know with even greater certainty now that long-term forecasting, even four years ahead, is likely to be wrong. We do not know at what rate the economy is going to grow. We have our projections and combined growth rate calculations, but we do not know. So even if the party opposite comes to power, when it gets into trouble I promise that I will say, “I told you not to be so confident. I have sympathy with you now that you are in trouble, but that is the way life is”.
We have to lay down our best forecast, and hopefully we will have a national consensus with whichever party is in power on what to do from 2011-12 onwards. For the time being, one cannot say better than what is in the document in front of us. If noble Lords opposite feel that they have something better and more drastic to present, I would be delighted to discuss it.
My Lords, it is always a great pleasure to follow the noble Lord, Lord Desai, and quite appallingly tempting to follow the exchange between him and my noble friend Lord Lamont. On page 11 of the document the concept of a negative output gap is introduced, and I find that concept difficult to grasp. The productive potential of the country has suffered a once-and-for-all significant and substantial reduction and the line of growth from then on will go from that lower point, not from where the trend line was. This is discussed on page 11, but I shall resist the temptation to say more.
We are debating the document submitted in line with the stability and growth pact. This is an annual event. However, year after year the stability and growth pact becomes more and more farcical. On page 5, the document states:
“EU leaders have agreed that the flexibility provided in the Stability and Growth Pact should be used”.
It goes on to point out, as the Minister said, that something like 20 countries are now outside the limits they have been set and are relying on flexibility. Can the Minister say what limits there are on such flexibility? As I said, we are discussing this document in relation to a growth pact which has itself become virtually meaningless, albeit there are appalling consequences for those in the single currency of not sticking to the limits which were originally proposed.
I wish to pursue a somewhat different point. In an excellent article in the Financial Times of 12 January, Mr Philip Stephens wrote a piece which is relevant to the debate today. It is headed, “Threadneedle Street makes a power grab”. He deals, first, with the relationship between the Chancellor and the Prime Minister—in which, as he rightly points out, as on many previous occasions, there is tension—and then, more particularly, with the tension between the Chancellor of the Exchequer and the Governor of the Bank of England. He makes these points in terms of personalities rather than anything else but it is important to look at the underlying structure of that relationship, which has altered significantly and now gives considerable cause for concern.
Mr Stephens poses the question: “Who runs Britain’s economy?”. It is important to ask whether it is the Chancellor or the governor. We were told way back when Mr Brown first became Chancellor that he had transferred the control of monetary policy to the Bank of England. As the Minister and I have discussed on previous occasions, that is not what happened. It is important to distinguish between monetary policy concerned with the supply of money, and interest rate policy concerned with the price of money. A degree of control over interest rates was transferred—but not by any means all interest rates; only a single interest rate.
The Bank of England did not take over control of monetary policy until, apparently, the issue of quantitative easing arose. At that point the Bank of England gained control of monetary policy up to a point. The trouble is that there is a degree of division of responsibility as far as that is concerned between the Treasury, the Debt Management Office and the Bank of England. The reality is that when Mr Brown transferred so-called control of monetary policy to the Bank of England, he set responsibility otherwise for the Debt Management Office. While my noble friend is absolutely right to stress in her amendment the appalling extent to which debt has got out of control, there is also the crucial issue of the extent to which that deficit is being funded. Whether it is underfunded or overfunded has a crucial effect on the money supply. The Bank of England has apparent control over the money supply, but only to a degree, because the other point is the policy on funding.
There is an interesting passage in the document before us which says that there is an exchange of view between the Bank of England and the Debt Management Office, but there is no reason to suppose that people in the Debt Management Office have the remotest idea about economic management. Perhaps the Minister could tell us how many experts in economic management reside there. He smiles, but this is part of the situation into which we have got ourselves. It is important that this structural change is sorted out as soon as possible, because we really do not know who is running matters. In that context, we have some serious problems.
We also have the terribly difficult problem of understanding what is going on. At the same time as the Bank of England is buying back debt as part of quantitative easing, the Debt Management Office is issuing it. It is virtually impossible—the Minister will no doubt be able to tell us otherwise—to decide what is happening overall. It is worrying that the situation is so confused and that it is difficult for anyone to work out what is happening.
Of course, there has been a great division of opinion over the years between monetarists and Keynesians, and sometimes one is more fashionable than the other. I have always gone along with the view of Paul Samuelson—alas, recently deceased—that there is a neo-classical synthesis. We should really take both views into account in deciding these matters. However, at the moment and at all events, one would hope that rather more attention is given to the money supply.
There is a reference to M4 in paragraph 3.30 of the document, but I am worried about the overall effect of what the Government have been doing on the money supply. I understood from a newspaper article the other day, although I have not been able to verify it, that the money supply has been going down. Perhaps the Minister could tell us whether that is true. I gather from what he has just said that it is. If that is so, it is surely of considerable importance in the present circumstances, where we are looking for a recovery. The trouble with the Minister nodding is that it does not appear on the record, so let me write it into the record that the Minister has nodded at my saying that the money supply is going down. That is despite all the quantitative easing, which one suspects has been overcome to a significant extent by the way in which it is funded. There must be a case for restoring to the Bank of England responsibility for funding policy. Otherwise, whatever it tries to do may be offset in a way that is counterproductive to the Government’s overall objectives. An incoming Conservative Government will need to give that careful attention.
Part of the problem with Mr Brown’s sudden announcement about switching the control of the money supply to the Bank of England was that he did it immediately on coming into office, before he had really had a chance to look at what the issues were. I very much hope that the incoming Conservative Government will manage to do that; the argument for restoring the control of the funding arrangements to the Bank is very strong.
That is the main point that I wish to make. There are many other points in the document that it would be interesting to pursue, but I fear that I am out of time.
My Lords, I support my noble friend Lady Noakes’s amendment to the Minister’s Motion.
I congratulate the Minister on a veritable tour de force. He was so fluent that perhaps, if he had been Chancellor, the Government’s problems would not have happened. He claimed, as usual, that it is the world recession that is the problem and that everything is going to be fine. While the noble Lord, Lord Desai, said that we are driving in the fog, the Minister seemed to be on a much clearer road altogether. He knows exactly the debt situation for the next six years: there is going to be a glide path—I have noticed that he has used that phrase twice recently—to salvation. The trouble is that he seems to have conveniently ignored several facts that make the situation much worse than he states.
I shall initially discuss why, like my noble friend Lady Noakes, I cannot approve of the Government’s assessment. Then I am going to discuss one of the proposed government remedies. Next, I will look at government measures to revive the economy. Lastly, I will examine an example of one costly measure that will not revive the economy but has been done to get extra votes from a section of the elderly, and I shall look at one further major example of poor control of government spending.
It is clear from table 1.A of the January Treasury document on the convergence programme that the treaty deficit and the treaty debt ratio fall well outside the convergence programme stipulations. While I take on board what the Minister said about the flexibility of the stability and growth pact, in the table the treaty deficit is still well above 3 per cent, at 4.6 per cent by 2014-15. The treaty debt ratio should be below 60 per cent of GDP but in the table it is still 91 per cent by that time, so the situation is far from being in control. The Government blame the world economic downturn for all the problems, but the truth is that we entered the recession in far too much debt. The Government overspent and thus squandered the golden legacy left to them by our party. First, they sold a considerable part of our gold reserves at exactly the wrong moment, losing the Exchequer an estimated £4 billion. Then their two early disciplines that they set great store by, the golden rule and the sustainable investment rule, were tossed aside when times got difficult.
A particular concern that I have about government debt is that forecasts of economic growth are too optimistic. For 2011 and 2012 the Government are assuming that the economy will grow by 3.5 per cent each year. The convergence programme Treasury document runs an ingenious argument that the economy is going to recover in the same way as after the recessions in the early 1980s and 1990s. However, the Institute of Fiscal Studies endorses the Barclays Capital forecasts of less than 2 per cent growth for 2011 and 2012.
What would PSNB be if growth were only 2 per cent? It is appalling enough as forecast, at £175 billion for this year and next, and the top-of-the-range independent forecasts monitored by the Treasury predict it at £200 million for each of those two years. Indeed, there has been no budget surplus since 2001. The IFS has highlighted a further problem. The tax increases and cuts in spending announced in the 2008 PBR, the 2009 Budget and the 2009 PBR together amount to a fiscal tightening of £57 billion in today’s terms between 2010-11 and 2015-16. The IFS says that in order to reassure investors that the public finances will be repaired promptly and because the structural damage to the public finances may be more than the Treasury anticipates, it would be sensible to be somewhat more ambitious.
The IFS also says that a further £13 billion of tax increases or spending cuts are needed by 2015-16 on top of those necessary to achieve the plans on the PBR. By the way, Stephanie Flanders of the BBC stated in her blog yesterday that the IFS is saying that Conservative plans on the basis of current forecasts would preserve market confidences in the UK. There are other uncertain matters on the economy that I do not have time to go into today such as the effect of the aftermath of quantitative easing, which I understand is ending for the moment. There is also the problem of inflation which, while very low, looks to be increasing quite sharply. Those both need to be watched very carefully.
“Do not worry”, the Minister says, “all will be well because there is the remedy of the Fiscal Responsibility Bill”. Independent commentators are not impressed. First, the Institute for Fiscal Studies said that,
“it is far from clear why investors and voters should be any more impressed by this”—
“than they were by the Code for Fiscal Stability, which was enshrined in statute with much fanfare in 1998”.
Next, one of the commentators, Willem Buiter, who the Prime Minister himself appointed to the Monetary Policy Committee, said:
“Fiscal responsibility bills are acts of the fiscally irresponsible to con the public”.
Finally, one of the leading city economists, Michael Saunders of Citibank, said that,
“the government's plans for legislation to cut the deficit are not convincing and are probably just camouflage—a sort of ‘fiscal figleaf’—for the lack of genuine action”.
It is particularly worrying that the Bill contains no corresponding sanctions if the targets are not met. First, there has been no Comprehensive Spending Review to show in detail how spending would be cut and there is unlikely to be one ahead of the election. Secondly, Clause 1 of the Bill says that the law will require public sector net debt expressed as a percentage of GDP to be falling by the end of five years. Saying those things and putting them into statue will not make them happen. Every Budget and Pre-Budget Report produced by the Chancellor and his predecessors since 2003 promised falling net debt at the end of a five-year horizon, and every one of those forecasts has been wrong in times of boom and bust.
The present Chancellor, according to our shadow Chancellor in the other place, has his total borrowing forecast wrong to the tune of £560 billion since he entered 11 Downing Street. It is now four times higher than when he announced his forecast for the PBR in 2007 after the credit crunch began. How can we believe his latest forecast just because he writes it into the Bill instead of publishing it in the Budget Red Book?
Then there is a very strange Clause 2, which enables the Treasury to make an order imposing on itself certain duties. That does not seem a very daunting imposition that will make the Treasury sit up and take notice. In short, the Bill makes no sanctions if targets are not met. Coupled with the lack of a Comprehensive Spending Review, we are left in the dark about how the reductions will be achieved.
I now move to government measures to support businesses. In a debate earlier today, the noble Lord, Lord Davies of Abersoch, praised the take-up on the enterprise finance guarantee scheme, with which I agree. I also praised the Government in a recent speech for the vehicle scrappage scheme and would like to know the take-up on that. I also commended the Business Payment Support Service, although I hear that HMRC is being much tougher on this. However, I have unanswered questions from two previous debates for which I would be grateful for a response. I asked for take-up figures for the working capital scheme apart from the £2 billion taken up by the Royal Bank of Scotland and Lloyds. I would also like to know how much of the capital enterprise scheme of £75 million has been invested and in what.
The automotive assistance programme also seems to have been a bit of a mystery. Will the Minister let me know how much money has actually reached firms? The trade credit insurance top-up scheme promised £5 billion but take-up by firms by the end of October was only £13 million. What are the latest figures and does the Minister believe the scheme’s conditions are too tight and its charges are too high?
To give government money to pump-prime the economy at a difficult time can be sensible. What is less sensible at a time of economic crisis is to spend an extra £670 million on personal care at home for the elderly. That is a laudable aim, but not when the government coffers are so bare. The measure is not even agreed by former Labour Front-Bench health spokesman the noble Lord, Lord Warner. In the autumn, he said that there had been no proper impact assessment and no data to show how this would work. The noble Lord, Lord Lipsey, a former member of the Royal Commission on Long-Term Care, also said that the plans amounted to a demolition job on the national budget and that the Bill was like firing an Exocet into your own warship. They both spoke on Monday at Second Reading of the Personal Care at Home Bill. The noble Lord, Lord Warner, said:
“When the public finances face what the Institute of Fiscal Studies has described as ‘two Parliaments of pain’, the Prime Minister decides to tell the world that we can afford more free personal care at home, a few months after he signed a … Green Paper with seven other Cabinet Ministers acknowledging that we cannot afford to pay for free personal care”.
The noble Lord said earlier in his speech:
“This is a seriously flawed Bill that has been inadequately discussed and scrutinised, and it takes us down an unaffordable path”.—[Official Report, 1/2/10; col. 37.]
He believes that the costs are likely to be much more than £670 million and said, at col. 38, that the Association of Directors of Adult Social Services reckons that the costs could be at least £1 billion. That is a great deal more than the Government’s estimate. The noble Lord, Lord Lipsey, also spoke in the debate. He said that he believed the Bill was even worse than the poll tax or the Dangerous Dogs Act, that it totally contradicted the Green Paper and was being rushed through unnecessarily.
I have devoted some time to this subject to show how, at a time of crisis, the Government are prepared to throw money around in a way that cannot help the economy to recover. If this continues to be the case, I cannot see how, under Labour, we are ever to get back within the convergence programme.
My final example of the Government’s lackadaisical budgetary attitude—this contrasts with the Minister’s remarks about the need for greater efficiency in the Government—concerns key public capital contracts. According to a TaxPayers’ Alliance survey of 20 November, there has been an overrun of no less than £19 billion on 240 key government contracts—a sum equivalent to £750 per family.
In conclusion, I shall support the amendment of my noble friend Lady Noakes when she tests the opinion of the House, as it clearly summarises the facts of the economic situation.
My Lords, I had not intended to speak in this debate until I saw the amendment in the name of the noble Baroness, Lady Noakes, which I read with increasing amazement and bewilderment, especially the part where she regrets,
“that the United Kingdom’s debt and deficit ratios will remain outside the limits set by the Stability and Growth Pact throughout the period to 2014-15”.
Indeed, in her speech she went further and called the figures in the growth pact “prudent norms”. There is a delicious irony in all that because it comes from the party that constantly rails against the EU and all its works at every opportunity; from the party that fought a general election on the spurious issue of saving the pound; and from the party which seeks to repatriate as many powers as possible from Brussels. Now we have that very same party praying in aid not just any old bit of EU policy in its attack on the Government but the stability and growth pact, which is a concept that lies at the heart of and underpins the euro. Therefore, that party had better be a little wary of the arguments and concepts that it wishes to advance to serve its case. Do we now assume, therefore, that the party opposite has signed up to the entire economic architecture of the EU, or should we just take it as further confusion at the heart of Conservative economic policy?
Fortunately, at a time of global crisis, the Government have had the good sense and prudence not mechanistically to apply the constraints—the noble Baroness’s so-called prudent norms—of the stability and growth pact, which, if applied, would have deepened and lengthened the recession. That is the point. As we have seen, the European Council some time ago confirmed that the stability and growth pact should be applied in a manner that reflected the exceptional economic circumstances. In the European economic recovery plan there is recognition that budgetary expansion which may lead to some member states breaking the 3 per cent GDP limit is justified in the current extraordinary circumstances and, significantly, that corrective action will have to be taken in a timeframe that is consistent with the recovery of the economy. That is the important and essential issue. It is the matter that was dealt with by my noble friend Lord Desai and my noble friend on the Front Bench, and it is there that the Opposition have been grossly irresponsible.
I say that because it seems to me that throughout this crisis, the policies advocated by the Conservative Party have been those which would have had the effect of making the recession longer and deeper—the failed polices of the 1930s. The noble Baroness could help all of us by clearing up some confusion and clarifying her party’s planned expenditure cuts for 2010-11. There is clear uncertainty there, but we deserve to know how much and where from. At the moment the rhetoric is still being used of immediately introducing major cuts in public expenditure, while actually only specifying minor adjustments—some £700 million from tax credits and child trust fund projects. What is the policy of the Opposition in 2010-11? That the critical period. If you come out too early you will do irreparable damage to the recovery. That is the responsibility resting upon the Opposition’s shoulders. Will they go ahead with the rhetoric and implement swingeing cuts from day one, will there be moderation or will there be just window dressing?
My Lords, I am grateful to the Minister for introducing this debate and for giving us what is effectively a second chance to debate the PBR. He said that the PBR looked forwards not backwards. I am not surprised that the PBR did not look back at 10 years of missed targets and excessive public spending—10 years of economic growth, but 10 years of failure to put anything by for a rainy day.
Of course the divergence of our debt and deficit ratios from EU requirements continues to increase, but happily our non-membership of the eurozone means that we cannot be fined. However, I find it extraordinary that the Government mind so little about breaking Mr Brown’s so-called golden rules, about which we have heard so much over the past 13 years. Indeed, “breaking” is an understatement. Total abandonment would be a more apt description. The former golden rules seem already to be completely forgotten and I have heard no mention of them since the financial crisis hit us. Of course, the crisis would always have placed intolerable strain on the rules, but it is surprising that there is no urgency to reapply them.
Since our debate in December, we have received the 2009 fourth-quarter statistics, showing that GDP has returned to positive territory by the smallest margin: growth of 0.1 per cent. In December we were still the only G20 member in recession. Now we need to secure the recovery. That will not be easy, given the Government’s serious miscalculation of the deficit. We hear much about the growth and job creation that the Government claim to their credit; but the growth is built on debt. The total of public and private sector gross debt now amounts to 475 per cent of GDP, approximately double the level when the Government took office. Furthermore, public sector net debt will reach 76 per cent of GDP in 2013-14. The job creation is mostly in the non-productive public sector, and even now the Government are planning to create new quangos such as the consumer financial education body that your Lordships’ House will have an opportunity to debate next week or soon thereafter.
The Economist last week pointed out that the state's share of GDP has risen from 37 per cent in 2000 to 48 per cent in 2008 and 52 per cent now. The Government's biggest mistake has been to carry on increasing public spending against the background of rapidly disappearing tax revenues, particularly from the financial services sector, and to pretend that nothing has changed much. It will not be easy to restore or replace the lost tax revenues. The combination of the new 50 per cent tax band and the payroll levy will have a negative effect on the total tax take. As the Minister acknowledged, the Treasury has significantly reduced its estimate of the revenue to be raised from the higher tax band. It is clear that the raising of the top rate of tax was politically rather than economically inspired. It should be no surprise that it has backfired.
Many people in the financial services industry are asking to be transferred overseas, or deferring their return to the UK. International financial services companies are already choosing to locate high-paid personnel outside the UK who might otherwise have been located here. It is not just the financial services industry, either. The British chief executive of the European subsidiary of a major Japanese manufacturing company told me this week that the tax increases had pushed him to relocate to Japan, which is not normally known as one of the world’s low-tax countries. However, even in Japan you have to earn more than £62,000 over and above personal allowances to start paying income tax at 43 per cent, including local taxes.
The Minister said that in these difficult times, those with the greatest ability to pay should bear the greater share of the tax burden: but they already do. However, if you make the burden so heavy that you drive people away, it is not just the Government that will lose revenue. High-paid people spend more money, creating more employment and economic activity in communities around the country. A marginal rate of 52 per cent, including national insurance, is too high—and that is forgetting the loss of the personal allowance for those earning more than £100,000, which produces a marginal rate of some 63 per cent, 20 per cent higher than someone earning the same amount in high-tax Japan. The Institute for Fiscal Studies has stated that the next Government will have to cut spending or raise taxes by £13 billion a year to get Britain's finances back on track. As my noble friend Lady Noakes suggests, the convergence report—that is, the PBR—does not offer a credible plan to reduce the deficit.
Of course, the ring-fencing of expenditure on health and education makes it much more difficult to make cuts elsewhere because health spending accounts for such a large share of the cake. It is absolutely right and necessary that spending on front-line health services must be protected and maintained, but I find that people are dismayed that this Government’s increased health spending has produced so little in terms of improved access to doctors. They have wasted an enormous amount of money in their failed attempt to impose the wrong IT system on an unwilling NHS and in the burgeoning costs of administrators rather than medical practitioners.
The Government’s own optimistic predictions envisage borrowing £178 billion this year—that is, more than 12 per cent of GDP—the highest level since the war. However, this Government have always underestimated their spending and overestimated their revenues, and we will not be surprised if the actual figure turns out to be even worse than that. According to Treasury figures, the Government will spend £63 billion on debt interest in 2013-14, more than twice the current level of the dedicated schools grant.
My noble friend Lord Northbrook has already referred to the noble Lord, Lord Lipsey, but I shall do so as well. I was most interested to see that in his article in the Times on Tuesday he wrote that bad laws enacted by past Governments,
“pale into insignificance beside the grotesque folly of the Personal Care at Home Bill”,
now before your Lordships’ House. This will cost at least another £1 billion. It is outrageous that, ahead of the general election, the Government are still finding new ways to increase public spending and are avoiding even making a start on the marathon task of cutting spending down to size. I doubt that this will achieve much in political terms, as the people are not as stupid as the Government believe. The people will elect a Government who will protect our country’s credit rating, tackle the huge difficulties involved in reducing our public sector as a proportion of GDP and restoring fiscal balance, while protecting our front-line public services and eliminating bureaucratic waste in the public sector.
I strongly support my noble friend Lady Noakes in her amendment to the Motion and I look forward to the Minister’s reply.
My Lords, I thank the House for giving me the opportunity to intervene in the gap today to make two or three brief points. I was looking forward to the opportunity of having a go at the Minister representing the Government in this debate on a number of points if time had allowed. However, I am unable to do so not only because of lack of time but because the Minister has been saved—I think that he probably arranged it personally—by the foolish article that has appeared in the business section of today’s Times, with similar comments in earlier pages. The article contains whingeing, selfish and greedy City comments—I say this advisedly and deliberately as a City person myself, having had a career there over many years—saying that they have got it wrong. Once again, it represents narrow, vested interests, which annoy so many people in the nation. As the Minister has been saved by those comments, I do not need to go into any of that.
Looking back on these matters since 2008 and considering the current difficult circumstances, everyone objectively has to admit—it needs to be said—that, from the United Kingdom’s point of view, the Government have handled this global crisis reasonably well. They have co-ordinated with other Governments—not only with America but with European Governments as well—in so doing and have also had the approval of EU machinery, allowing for some differences regarding percentages and amounts of money. That is the basic fact that we have to register today, and it was the reality when this first started. We know that when the global financial crisis began, politicians of other parties left their party conferences and rushed back to London to support the Government in dealing with a crisis that this country had not known since before the war. Since then, of course, all politicians from other parties are entitled to disagree on many details, and they have done so. The basic fact remains that objectively speaking, most professional people observing and dealing with the global financial crisis would say that the Administration have done what any Government probably would have done in the circumstances.
That includes quantitative easing. It may be that that should have gone on for a bit longer; only time will tell. Between now and the general election, there is the artificial period of pretending not to say too many harsh things that is the prerogative of all the parties presenting themselves for the general election whenever it may come, up to the beginning of June if that is the maximum period. Many differences will come out later, but the basic reality is that the public needed the confidence of knowing that there was general business community support for the Government’s measures and a willingness to accept an overlarge and extravagant deficit for the time being, provided that there would be subsequent measures to reduce it as time went on.
I also agree very much with the comments of the noble Lord, Lord Sewel, because the amendment tabled by the Conservatives is nonsensical. What other Government would have been able to do anything different from that which was done by this Government since the crisis broke in 2008? I end by saying—one of my favourite themes—that there is only one coy little reference to membership of the euro in that little box on page 34. The most important subject, which is not really mentioned in the report, is given a brief glancing reference. It has not been dealt with in more than 10 years of hesitation and procrastination. We are missing out in joining the most successful and strongest currency in the world, despite the crisis now affecting certain individual members—some people say “fringe” members, meaning geographically rather than other. That will be resolved, as the collective strength of the eurozone is massive, as are the physical and financial services available both in assets and revenue to deal with these matters.
Perhaps the Minister could enhance his reputation today in this way, allowing for the fact that I praised him on the Times article, when I was currying favour for this purpose. With his body language, perhaps he can give us a few indications that the review, which was last done in 2003, will be carried out in 2010 in a positive note, even if it takes a few years to achieve the objective of becoming a member of the eurozone.
My Lords, in more than 10 years of being the Treasury spokesman for the Liberal Democrats, I have never read, nor looked at the convergence programme. The reason, as with this convergence programme document, is that it is a cut-and-paste version of the Pre-Budget Report. The noble Baroness alluded to that by pointing out that the Treasury did not even take the trouble to change the tense. We have had a debate on the PBR—and it was an exceptionally good one, as always—so I am slightly surprised that we are having this debate at all.
I was then even more intrigued by the terms of the amendment tabled by the noble Baroness, which makes two points. First, it,
“regrets that the assessment does not demonstrate that the Government have a credible plan to deal with the United Kingdom’s deficit”.
A number of phrases went through my mind thinking about that, but certainly “pot calling the kettle black” was high among them. If ever there was a group with no credible plan to deal with the deficit it is the Conservative Party. We have had months of the Conservatives allegedly sabre-rattling about what they will do about public expenditure in the forthcoming year, yet earlier this week in an interview in the Financial Times, Philip Hammond, whose job it is to wield the knife, on being asked about the degree of cuts were envisaged said a billion and a half “or something like that”. Apart from seeming to be unsure of what he was talking about, these are negligible amounts. The Conservative Front Bench says that the Government have no credible plan, and perhaps they do not—but it certainly does not have one either.
The second interesting point was that the deficit remained outside the limit set by the growth and stability pact. The noble Lord, Lord Sewel, made the principal point that I was going to make about that. It is absolutely the first time that the noble Baroness has prayed in aid any European Act, financial or otherwise, in an argument in your Lordships’ House.
The economic difficulties we have seen in recent months have demonstrated that no fiscal rule works in exceptional circumstances. The noble Lord, Lord Northbrook, talked about the Government tossing aside the golden rule and the sustainable investment rule. The noble Viscount, Lord Trenchard, talked about their total abandonment. It was not a question of the Government tossing them aside or abandoning them; they were faced with a tsunami which meant that they could not apply them, just as they could not apply the stability and growth-pact rules. What does anyone think you can do in those circumstances? It is completely inconceivable that in the circumstances we faced you could take action to try to make those rules apply. If you are going to have such rules, it would be sensible to acknowledge that there are limits in which you envisage them working and that there are cases in which they will clearly be breached.
However, the Minister, in referring to the EU discussion of this, described extraordinary language being used by the EU on the other side of the argument. He talked about the co-ordinated glide path that would now be followed by EU member states in getting out of the crisis. That is an extraordinarily reassuring metaphor of a fleet of planes gliding happily back to base, having flown through a thunderstorm. That clearly is not what is happening within the EU or internationally—I wish that it were—and it is slightly crying for the moon.
I could not agree with the noble Baroness, Lady Noakes, in her description of the UK as the sick man of Europe. Tell that to the Greeks, or the Irish, or the Portuguese, or the Spanish. I do not believe that that argument stands up. The truth is that Europe is grappling with an unprecedented problem. Whatever the shortcomings of the approach and the difficulties people are encountering in dealing with that, we must remember that one thing that has not happened but was confidently predicted by a number of people—if not by the noble Baroness then certainly by Members on her Benches—is that this crisis will break up the euro. This has not broken up the euro and it will not do so. A major feature of the crisis—not a consequence—is that the eurozone, despite all the stresses and strains, has survived and almost certainly will do so.
The key dilemma which the debate has been grappling with is how to guide the economy safely between the Scylla of restive bond markets if the deficit is not reduced and the Charybdis of negative growth if we cut too quickly. The green budget produced by the IFS yesterday, in its description of the problems, summed up the dilemma extremely well. The economists from Barclays said that their central forecast showed that growth would average less than 2 per cent a year over the next five years compared to the PBR forecast averaging 3 per cent. For that and for other reasons, they go on to say that it would be sensible if the Government were somewhat more ambitious than their current plans to cut public expenditure over the next five years. However, they go on to say:
“Given the likelihood of a slow and tentative recovery, the IFS authors caution against significant further tax increases and spending cuts during 2010-11”.
That summarises the dilemma. The key question, as the noble Lord, Lord Desai, described, was how, when driving in a fog, you decide which way to steer and the extent to which the brakes should be applied.
There is no science to knowing what the right answer is. My honourable friend in another place, Vince Cable, suggested applying five tests together to try to determine the rate of reduction of public expenditure and possibly tax increases. His five tests were to consider the growth rate, unemployment, the provision or availability of finance to companies, the cost of government borrowing and the international context—what is happening everywhere else.
Applying those tests in combination—attempting to take the very narrow path between the need to cut and the need to avoid cutting too quickly—when it comes to the two arms of those scissors, and taking taxes first, one thing that the Government through their recent action demonstrated is that there are some places where you can raise more money very easily. They imposed a tax on bankers’ bonuses, which they said, with a bit of luck, might raise £500 million. It now looks as if it could raise as much as £4 billion, and the banks are very relaxed about that. They are not squealing about that any more.
Therefore, our proposal is that, in the longer term, we should impose a profits tax on the banks as a measure of recompense for the explicit and implicit guarantees that they will continue to receive from the state. That could be applied with no major difficulty and could raise a significant amount of additional revenue.
The noble Viscount, Lord Trenchard, said that if you raise taxes too highly on those who can best afford them, some people will leave. Undoubtedly, he is right, and we do not want every person who is wealthy to leave the country. On the other hand, if you have to increase taxes and cut expenditure, you must do it against a background of what kind of society you want at the end of it. As we argued last week in our debate on taxation, it is very important that any change in taxation should hit most those who can best afford it. Not only is there, in our view, a fairness argument for that approach to taxation, for a whole raft of social ailments—levels of crime, mental illness, obesity or many other things—but a more equal society reduces the problem. Therefore, that will be our approach to taxation.
By common consent, we will need to cut expenditure very significantly. Our concern about the approach of both the other parties is that they are, in effect, ring-fencing some of the largest parts of public expenditure—health, education and overseas development. They say that they will not cut them. The consequence of that is that everything else will have to be cut very significantly. The IFS suggests that the non-ring-fenced elements will be cut by almost 13 per cent in real terms by 2013.
What amazes me in the approach of the other parties is that although they are happy to ring-fence big things, they have said nothing about how they will cut, for example, the defence budget by 13 per cent in real terms, the transport budget by 13 per cent in real terms, the prison budget by 13 per cent in real terms or the environmental budget by 13 per cent in real terms. Although, obviously, it makes little sense to cut front-line services if you can possibly afford not to do so, to say that there is nothing that can be cut in the NHS beggars common sense if the cost of doing that is that you have to decimate other areas of the budget. That seems to me to be the direction in which we are inevitably going, if the current pledges by both those parties come to fruition.
Several noble Lords talked about the need for a Comprehensive Spending Review. We clearly need one; there clearly will not be one before the election, but there will after it. We look forward to those debates. Given that, and everything else that we have been discussing today, this debate is a prelude to our real debates about cutting taxes and expenditure. The reality is that we will not have any of them until after the election.
My Lords, we have had a fine debate. It has been a particular pleasure to see the noble Lord, Lord Higgins, back in his usual place and reminding me that I will need to reach out for my textbooks on monetary policy to ensure that I am as well prepared as I can be to answer his interventions in future debates.
Matters of the economy have aroused more discourse in the past couple of years than they have for many years preceding them, which is a reflection of the extraordinary events that we have experienced here and around the world. One of the divisions at the outset of the crisis was that between faith in the market to rebuild itself and the need for government intervention. Our choice was action rather than thought and we acted with other countries around the world. This was an extraordinary global crisis that required government action.
Our actions helped to stabilise the economy and to support businesses and individuals here in the UK when that was needed, but we are now at an important juncture as we see the economy moving back, somewhat tentatively, towards growth. What this estimate makes clear is that the Government are right to be cautious about the prospects for the economy and that it is right that we keep supporting the economy to maintain the momentum for the return to growth. Withdrawing support that has helped us to get to this point would be exactly the wrong thing to do. As the head of the IMF, Dominique Strauss-Kahn, said recently, if you exit too early from the stimulus steps, you risk going back into recession.
As I said earlier, policy responses had to be flexible. As markets and the economy recover, policy must continue to adapt to reflect the surrounding environment. We have increased borrowing to support the economy—indeed, these measures are still supporting the economy— but we must also reduce that debt to ensure sound public finances for the medium term. That is why we have set out a credible path of fiscal consolidation that is consistent with debt returning to lower levels. These plans ensure that public finances are on a sustainable path that will, in turn, promote long-term economic growth. It will also ensure that public finances are able to manage any unexpected economic shocks in future. The noble Lord, Lord Newby, who always makes such wise contributions to these debates, emphasised that there is no fiscal rule that can apply in all circumstances and there is certainly no set of fiscal rules that can apply to a two standard deviation event, which is what happened to the world economy during the past 18 months. He was correct to point out to the noble Lord, Lord Northbrook, and the noble Viscount, Lord Trenchard, that there is a need to reappraise those rules and their applicability in truly extraordinary circumstances.
The noble Baroness, Lady Noakes, in speaking to her amendment, accused me of producing flim-flam. I am not sure which is more or less attractive: flim-flam or flip-flops. We have certainly seen flip-flops from the opposition Bench on issues relating to the economy. Not long ago, we were being promised an age of austerity and swingeing cuts, but now we are told that in fact we will make a modest start in 2010-11. My noble friend Lord Sewel pressed for more details, as did the noble Lord, Lord Newby. It would be very interesting to hear from the noble Baroness whether she can provide more details of where cuts will be made, because the contribution earlier this week from Mr Philip Hammond had no substance at all. The numbers did not stack up and were limited to cutting advertising and consultancy fees. Making a start now appears to be the policy, according to the noble Baroness. The Tories now appear to have accepted Labour’s view that to cut too hard and too hastily risks choking off any recovery before it has started. It is quite clear that the risk of cutting too early far outweighs the risk of cutting too late.
Mr Cameron said that he had messed up on married persons’ tax. I suspect that the Conservative Party has also messed up its thinking on economic management and in so doing has succeeded only in strengthening its record of inconsistency. The Conservative Party has been all over the place on the economy, repeatedly changing tack since the financial crisis exploded in 2008. It is not altogether surprising that the ComRes survey finds that more than four out of five voters have no clear understanding of Conservative economic policy.
The noble Baroness asked whether the UK is still forecast to breach its excessive deficit procedure recommendations. EU leaders have already agreed that the flexibility that is provided for in the stability and growth pact should be used and that fiscal consolidation should be undertaken in line with economic policy. The Government have taken that judgment on the appropriate pace of adjustment in 2010-11 and beyond. Our judgment is that tightening policy too much now would be a serious risk to the economy and society and that it would be better to wait to make those adjustments. When we do make those adjustments, we must ensure that we do so in a determined fashion to reduce the scale of public sector borrowing as a percentage of GDP.
The noble Baroness also asked why the Treasury has not published its debt interest numbers or forecasts. In line with current practice, the Treasury publishes details of current expenditure, PSCE, and potential net investment, PSNI, until the end of the forecast period 2014-15. However, the Treasury does not publish an AME forecast beyond the current spending review period, given the uncertainty and volatility inherent in forecasting this far ahead. My noble friend Lord Desai was right to use the analogy of driving in the fog. Perhaps if you were one of the Bullingdon boys, you tended to be driven home by a chauffeur after a good evening out and you never experienced the difficulties of driving in the fog and the need to exercise care, but in an environment in which visibility is low it is clearly appropriate to proceed with caution.
The noble Baroness also pointed to the fact that the UK had the largest structural deficit in the EU in 2007. During the economic cycle that began in 1997-98, net borrowing in the UK averaged 1 per cent of GDP. In contrast, net borrowing in the euro-dollar area and OECD countries as a whole was more than 2 per cent of GDP, so there was an extended period of prudent economic management here that has seen us go into this incredible global recession with a rate of borrowing as a percentage of GDP that is well below the G7 average. Even towards the end of the recovery cycle, we do not envisage our borrowings as a percentage of GDP being above the G7 average.
My noble friend Lord Desai spoke about the need to proceed with caution. I absolutely agree with him that we must attack this deficit at the right time.
The noble Lord, Lord Higgins, referred to an article by Mr Philip Stephens, who is always very readable, in the Financial Times on 12 January. I think that I recollect reading it. It asked such questions as who runs the economy and perhaps suggested that the Governor was overreaching himself in wanting not only to be responsible for setting the price of money and interest rates but to have a fiscal role. I assure the noble Lord, although I am sure that he does not need me to on this point, that the Chancellor of the Exchequer and the Governor work together very constructively and there is no doubt in the minds of either as to who is responsible for what.
The noble Lord also asked how many economists there are in the DMO. I have to say that that is one of those questions where I am not sure whether the right answer is a high number or a low number. However, I am clear that the DMO does an extraordinarily good job in managing debt. If you think back to pre-1977 when we had tap issues that were not well disclosed or transparent to the market and were not subject to critical scrutiny, you see that we now have a very transparent forward-debt programme.
I have recently met a number of significant fixed-income investors and gilt-edged market makers who all spoke very positively about the quality of the staff in the DMO and the openness of our approach to debt management. I also spoke about issues related to funding in answer to a Question from the noble Lord, Lord Hamilton of Epsom, earlier this week. It would be appropriate for the Bank of England to remain responsible for its functions as far as setting the price and the quantity of money is concerned, not to be given any additional burdens to carry and certainly not to be given responsibility for the oversight of the FSA.
I was getting to that point. I was nodding and, as has quite rightly been said, my nods cannot easily be recorded by the excellent folk from Hansard. I was nodding to indicate that the money supply has contracted in certain areas of the market and certain forms of calculation. The Bank of England has particularly talked about a new target area of money supply, which is a broad-based money supply but excludes activities within the bank sector. That was one of the tests that Mr Charlie Bean set out for measuring the success of quantitative easing. To date, that figure has not grown. However, as the Governor emphasised yesterday, QE importantly is about the stock of additional capacity within the monetary aggregates, which we believe is having a beneficial effect on the economy.
Using the asset purchase facility, the MPC is able to ease monetary policy by injecting money into the economy—the quantity of money, as opposed to the price—through the purchase of securities issued by the private sector and the Government. That is done with central bank money rather than with Treasury bills. This policy will increase the overall level of money supply, relative to a level that it would have been if QE operations had not taken place. Of course, the noble Viscount, Lord Trenchard, has considerable experience in Japan with Kleinwort Benson. I remember meeting the noble Viscount when I was a very young fund manager based in Hong Kong. He obviously keeps a close eye on and has involvement with the Japanese banking and manufacturing sector. Japan shows us that a failure to adopt a quantitative or credit easing type policy can have a very damaging effect on the economy.
When my noble friend Lord Higgins was speaking, he asked a question, which I think was also asked by my noble friend Lord Hamilton earlier in the week. In the Minister’s reply to the noble Lord, Lord Hamilton, I was not absolutely clear whether it is the Government’s policy a period of underfunding should be offset by a period of overfunding. Or is that not the case?
If I understand the question asked by the noble Lord, Lord Lamont, it relates ultimately to the unwinding of QE, which is a matter for the Bank of England. The Bank has made it clear that it has a number of options when it comes to that point. Clearly, it is not at that point yet. In so doing, it will work closely with the DMO. QE is not a route to fund the Government’s borrowing requirement. It is being used for monetary rather than fiscal policy purposes.
In order to be crystal clear about this, quantitative easing—the purchase of assets—is underfunding. That is what it is. A full funding rule operated in the 1980s and there is some argument between economists as to whether underfunding should be off-set by overfunding, or whether the purchase of assets should just be left on its own with no off-setting action being taken.
I make it absolutely clear that the UK Debt Management Office, in meeting our funding requirements, has been issuing to the marketplace, not to the Bank of England. The Bank of England’s acquisitions have taken place in a secondary market. The fiscal needs are being properly funded in accordance with our declared strategy.
Perhaps I may move on. The noble Lord, Lord Northbrook, made a structured contribution, again evidencing how widely read and informed he is in the comments he brings to the House. He started with some seductive flattery, but I was wise enough to realise that that would not be a consistent theme of his contribution, and I was not to be surprised. I agree with the noble Lord that inflation needs to be watched. I did not make any mention of inflation in my opening speech. That was not an omission because it is important, but we can place high reliance on the Governor of the Bank of England and the Monetary Policy Committee to ensure that inflation does not return to the horrendous levels that we experienced under previous Governments. The increase in inflation that we have seen reported is due to non-structural issues. There have been adjustments to VAT and one or two other factors, but the noble Lord should rest assured that we will keep a close eye on it.
The noble Lord also asked for data on vehicle scrappage, the working capital scheme and the capital enterprise scheme. All these come under responsibility of the First Secretary, as indeed does almost everything that happens in Government. I will encourage my noble friend Lord Mandelson or one of his minions to arrange for the information to be provided if it is available.
I agree with the comments of my noble friend Lord Sewel that the Opposition are being grossly irresponsible in what they have said about how they would have approached economic management over the past year or so, and indeed in the immediate future. We look forward to hearing from the noble Baroness what actual decisions in terms of economic management would be taken by a Conservative Government if one were to be elected. This is the opportunity that the noble Baroness has been waiting for: to shine in the Treasury team in the Conservative Party by being the first person to have the courage to spell out what is going to happen.
I shall briefly pick up on one or two other points. The noble Viscount, Lord Trenchard, spoke about Japan and people leaving the country. Let me be clear on this: we do not want to see successful entrepreneurs and businesspeople leave this country. We want this country to continue to be a hospitable and positive environment for the conduct of good, profitable, responsible business. I think that the risk of people departing is low, but we have made it clear—I shall repeat what I said earlier in the week—that the 50p rate of taxation is not something to which we are ideologically committed and I and other Ministers would like to see the rate reduced, or to have the possibility of reducing it as soon as economic circumstances allow. At the time we announced the rate and the likely yield, we had made adjustments for what I referred to earlier as behavioural actions by the top 1 per cent or so of the earning population. I remind the noble Viscount that the corporation tax rate in the UK is the lowest in the EU and I hope that, if he has an opportunity to speak to his Japanese manufacturing friend, perhaps he will encourage him to reflect on whether he has been overly hasty in suggesting that he moves his activities back to Japan for corporation tax reasons alone.
The noble Lord, Lord Dykes, referred to an article in the Times today about the whingeing of unnamed fund managers. This is very important. The Times was possibly unfair to the great majority of fund managers who are now taking their responsibilities far more seriously than they did previously, with the encouragement and support of their clients. That is commendable. There are some who still do not want to do so but I say to them, “If you do not exercise the powers of ownership, who do you expect will do it? You surely cannot expect the Government to do that”. So there is still a small group from whom change would be welcome.
The noble Lord, Lord Dykes, also spoke about the euro. Of course the Chancellor of the Exchequer will update Parliament at the time of the Budget on whether he thinks it is an appropriate time to carry out another exercise of reviewing whether we should consider applying for admission. The noble Lord, Lord Newby, was right to remind us that the euro had held up very well at a time when many of those who choose to find fault with it expected it to perform rather badly.
The noble Lord, Lord Newby, also made mention of the noble Baroness’s comment about the UK being the sick man of Europe. I spot a pattern here. Having accused the Opposition of inconsistency, I see an element of consistency of talking the country down. It is not palatable and it does not reflect well on the Opposition. However, it is clearly a part of their preferred strategy, at least for the moment.
The Pre-Budget Report set out actions to secure the recovery, restore public finances and build for the future. It has done that with courage and confidence and is driven by the values of fairness and opportunity. Once again I thank all noble Lords for their excellent contributions to the debate.
My Lords, as usual, we have had a good debate on matters related to the economy. I anticipated that I would be challenged by noble Lords, and the noble Lords, Lord Desai and Lord Newby, and the Minister did not disappoint me by seeking to extract Conservative policies from this Dispatch Box. I remind noble Lords that the purpose of our debates is to discuss the Government’s policies, not those of the Official Opposition.
However, in relation to 2010-11, we have said—I said this earlier—that we will make a start. We are all aware of two things: first, that it is very difficult to get significant savings out in year one, but the sooner you start the sooner you get them; and, secondly, that with a fragile economy we have to move at a sensible pace. We have been advised by the many wise people offering advice that we should wait until we are briefed by civil servants—but start we will in 2010-11. At the end of the next Parliament we would go further than the current Government because we want to significantly and substantially eliminate the structural deficit. So we would do more and start earlier.
Noble Lords have challenged me on the use of the term “age of austerity”. If any noble Lord thinks that the period to 2014-15 is going to be anything other than an age of austerity, they are living in cloud-cuckoo-land. Significant reductions are necessary.
There were excellent contributions from my noble friends. My noble friend Lord Higgins returned to important points on money supply and the relationship between the debt management office and the Bank of England, to which he did not receive a reply today. He was joined by another of my noble friends on issues of quantitative easing and funding policy, and again we did not get full and straight answers to those questions today.
As usual, my noble friends Lord Northbrook and Lord Trenchard deconstructed the Pre-Budget Report, the impact of the higher tax rate and the Personal Care at Home Bill, with its high cost to public finances which cannot support it. The Minister did not answer the question of my noble friend Lord Northbrook about what would happen to the borrowing figures if growth was indeed in line with the 2 per cent forecast which emerged from the ISF/Barcap figures yesterday. I remind the Minister that the convergence report dealt with the whole package of support measures for industry and that the Minister stands at the Dispatch Box answering for the whole Government, not simply the Treasury. We were disappointed that he failed to answer the questions of my noble friend Lord Northbrook in relation to the status of some of those schemes of support.
I also knew that I would be teased today on the terms of my Motion, in particular relating to the stability and growth pact. I would only say that I framed my Motion in the context of the report before us. I had of course to force my word processor to accept the term “stability and growth pact”, because it normally deletes it automatically. I assure noble Lords that my use of the term conveys absolutely no intention on the part of my party to join the economic and monetary union.
We continue to believe that the PBR and the convergence report do not demonstrate a credible plan to reduce the deficit.
House adjourned at 6.47 pm.