I inform the House that I have selected the amendment in the name of the Prime Minister.

I beg to move,

That this House notes with concern the successive criticisms by the IMF, the EU and the OECD of the state of the UK’s public finances; further notes that the Government are reviewing the fiscal rules and calls on the Government to announce the outcome of that review first to this House; further calls on the Government to clarify whether or not the Sustainable Investment rule will be met and to implement a full and independent review of the public finances, including off-balance sheet liabilities under the private finance initiative and public sector pension schemes; and further calls for the fiscal rules to be scrapped and replaced with a forward-looking fiscal framework with an independent mechanism for monitoring and assessing the sustainability of the Government’s fiscal position.

The global financial markets crisis is dominating the news agenda, and of course presents an immediate and pressing challenge to policy makers, first to maintain the liquidity of the banking system in the face of an unprecedented squeeze in the inter-bank market, and then to ensure that the conditions are right for its recapitalisation, not in order to facilitate a return to the lending practices of the past decade—practices that the Prime Minister has rightly categorised as belonging to the age of irresponsibility—but simply to allow the restoration of the normal workings of the wheels of commerce, through the supply of overdrafts and loan facilities to businesses large and small, the extension of consumer credit to households wishing to finance the purchase of capital goods, and the resuscitation of new mortgage lending, which the latest figures show has almost completely ceased.

This is a national threat that requires a cross-party response. There will be time enough later to debate the causes and the failings of the past, and to identify the guilty and to hold them to account. The challenge now is to work together to support the tough decisions that may be necessary to preserve the banking system on which we all depend, and to protect the long-term interests of the taxpayer. We have made it clear that we will give the Government that support—not uncritically or unconditionally, but so that they know that any steps that are necessary to protect the integrity of our financial system will not be blocked or delayed by the kind of partisan posturing that we have seen in the United States Congress. That is our duty as a responsible Opposition.

Beyond the immediate financial markets crisis and the paralysis in our banking system, however, the UK economy faces other, longer-term challenges that leave it less well prepared than many of its competitors to deal with an economic downturn and likely to recover more slowly from that downturn. Those problems will remain to be addressed long after the financial crisis is resolved.

It is, and remains, our duty to hold this Government to account for leaving the nation so ill-prepared to face the challenges that the credit crunch has precipitated, and to deal with the weaknesses in our economy that it has so brutally exposed. It is our task to put forward an alternative framework that will ensure that future Governments do not repeat the mistakes of the past decade.

The supply side problems that this Government claim to have identified—the skills gap, the productivity gap, the infrastructure deficit, and the need for reform in public services and in our welfare state—all remain largely unaddressed, so that during a decade in which the world’s economy has grown at an unprecedented rate, the UK has slid down all the league tables of international competitiveness. Over that period, our economy has become more unbalanced, losing more than 1 million manufacturing jobs and coming to depend on financial and business services for more than half our economic growth since 1997. That leaves us more vulnerable and less resilient than our better balanced competitors.

Does the hon. Gentleman not remember that, under the previous Administration, unemployment in my constituency was virtually double what it is today? That was when the Tories were in power, not us. As a result of all that we have done in terms of jobs and the re-skilling of the work force in my constituency, the level of unemployment has reduced, and the level of employment has increased. Does he not understand that that is the reality of the life that we are living?

The hon. Gentleman might want to hold on for a few months before he starts talking about the level of unemployment in his constituency. I remind him that the previous Conservative Government were clearing up the economic mess and chaos created by the previous Labour Government—a scenario that looks likely to repeat itself yet again.

In 1992, 13 years after the Conservatives came to power, inflation was at 12 per cent., interest rates were at 15 per cent., unemployment was at 3 million, and record numbers of homes were being repossessed. Was that a good financial strategy?

I remind the hon. Gentleman that in 1997 his party inherited an economy in which growth was rising strongly, unemployment was falling substantially and inflation was at less than half its current level. What have the Government done with that legacy? They have squandered it.

Does my hon. Friend share my concern about the situation of pension scheme members? Obviously, pension schemes have been badly hit by the falls in the stock market, and someone purchasing an annuity is in a very difficult situation. Has not the Government’s £5 billion-a-year raid on the pension funds been masked to an extent by the rises in the stock market over recent years? Are we not now paying the price?

My hon. Friend is absolutely right. He draws attention to an important point, and I hope that the Chief Secretary is listening. Given what has happened in the stock markets over the past few weeks, people who are obliged to annuitise in the immediate future potentially face a lifetime of poverty or at least a substantially reduced expectation of income. Will she consider the challenge that that presents and see whether anything can be done immediately about it?

Will the hon. Gentleman give way?

I will make a little progress first.

The greatest structural weakness in our economy, however, is the absence of effective fiscal discipline, which, along with the explosion of consumer debt and the asset price bubble, has been the root cause of the age of irresponsibility, of which the Prime Minister has spoken so eloquently. We have been living beyond our means, both as a nation and individually, and now the day of reckoning is coming. As we look to rebuild our economy on a stable, sustainable basis for the future, it is clear that Governments of all political persuasions will have to embrace the practice, not merely the rhetoric, of fiscal discipline.

Fiscal discipline was supposed to have been delivered by the Prime Minister’s much-vaunted fiscal rules, but they have failed to protect us from this Government’s fiscal irresponsibility. The Prime Minister said in 1998 that

“our fiscal rules have been specifically designed to preclude party political manipulation of the public finances for electoral purposes.”

Tell that to the people of Crewe and Glasgow, East. Those rules failed to constrain fiscal policy during the years of growth, and that failure is directly responsible for Britain entering this period of economic turmoil with the largest fiscal deficit of any nation in the world except Egypt, Hungary and Pakistan. They did not stop this Government borrowing right the way through the top of a boom, at a time when many of our neighbours were running budget surpluses, paying off debt, and getting themselves leaner and fitter to confront whatever the future held for them—fixing their roofs while the sun shone. A third of OECD countries are now debt-free. At the end of an unprecedented period of world economic growth, however, the UK has net debt at a higher proportion of gross domestic product than in 1997—without taking account of the billions salted away through Enron-style accounting practices, off the balance sheet, out of sight and out of mind.

It was not that the incoming Labour Government did not recognise the issue in 1997, or that they denied the importance of fiscal discipline. Far from it—the then Chancellor placed his fiscal rules at the heart of his economic strategy, alongside Bank of England independence, as one of the key building blocks in his claimed commitment to fiscal and economic stability. However, like the debt-fuelled boom, the fiscal rules have turned out to be an illusion. They failed. They did not do what a set of fiscal rules had to do to be credible: they did not prevent borrowing at the peak of a boom. On that there is now widespread consensus.

The journey of the fiscal rules from robust central pillars to widely derided and discredited rhetorical devices has been long and painful. It has been like watching a car crash in slow motion. It began in 2005, when the then Chancellor avoided breaching the golden rule by the skin of his teeth with an eleventh-hour announcement of a reassessment of the timing of the economic cycle. From that point on, reputable commentators and publications have progressively ceased to refer to the fiscal rules as a serious measure of Government performance on the public finances. By 2007, a Financial Times survey of independent economists found:

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

The final nail in the coffin came in July this year, when the Government announced that the rules were “under review” specifically to create room for additional borrowing, tacitly admitting that these were good-time rules only. Now we simply await the formal burial of the body.

The comprehensive failure of the fiscal rules leaves Britain’s public finances extremely vulnerable, at the mercy of a weak and divided Government operating without effective fiscal constraints, guided by political pressure rather than fiscal discipline. It was precisely the traditional practice of loosening fiscal policy at the first sign of political trouble that the fiscal rules were supposed to avoid. They were intended to be a constraint on Government, a discipline that would ensure that something was put aside in the good years so that Government would be able to support families and businesses when more difficult times arrived. Instead, once again we are watching a Labour Government running out of money and being singled out by the International Monetary Fund for fiscal irresponsibility.

My hon. Friend is explaining his case extremely cogently. He mentioned businesses. Does he agree that while the recent European package of £12 billion to help small businesses is welcome as far as it goes, the EU should be using this as an opportunity to reduce the amount of red tape and regulation being piled on small businesses and enterprise?

I believe that the £12 billion had already been committed, and that its provision is merely being brought forward. We await with interest, as I am sure do thousands of small businesses across the country, details of how the money will get from the press conference in Paris into their bank accounts. If it is real money, it will be very welcome, but my hon. Friend is right: red tape is a real cost of business, and reducing the burden of red tape is as much of a boost to business as reducing the taxes that businesses must pay.

Will my hon. Friend give way?

I will happily give way to my hon. Friend, who is an expert on this matter.

I think that my hon. Friend does me too much credit. Does he agree that, in truth, small business is in serious trouble, and that the Chancellor could do much more by attaching conditions to the support we are giving the banking sector—conditions such as treating small businesses fairly, ensuring that they are not lumbered with very heavy interest rates, and ensuring that the overdraft facilities on which many rely are not cut unnecessarily?

My hon. Friend has drawn attention to a crucial part of the mechanism by which the financial markets crisis, the credit squeeze in the banking sector, is transmitting itself to the real economy. Up and down the country small businesses are having overdraft facilities withdrawn, and those that can still obtain them are being asked to pay interest rates at what might be described as extortionate levels. My hon. Friend the Member for Tatton (Mr. Osborne) referred to this week’s announcement that one of the big high street banks is charging 15.8 per cent. to some of its small business customers. There are real problems in the small business sector, and we are beginning to see the fallout from the financial crisis directly affecting that sector.

In these difficult times, does the shadow Chief Secretary welcome the moves made by the enterprise Minister in the Scottish Government and the economy Minister in the Welsh Assembly Government to cut business rates so as to provide at least some breathing space for the vital small business sector, which in many of our communities is the backbone of our economy?

Well, of course, at a time like this what Government should be doing is helping businesses and families under pressure. That brings us to the central point of this debate today: if the fiscal rules had not so comprehensively failed—if they had constrained Government policy so that we were putting something aside during the good years—then this Government would be able to intervene to help companies and families under the pressure they are feeling.

Tomorrow, the Chancellor will deliver his Mais lecture at the Cass business school. According to widespread reports, he will use the occasion to

“clear the way for sweeping aside the Government’s self-imposed rules on public spending”

using the credit crunch for cover, tacitly admitting that the Government have broken their own fiscal rules, and burying with a whimper, away from this place, the system that the Prime Minister announced with such great fanfare here just a decade ago.

Does my hon. Friend think that while the Prime Minister is doing this he will accept and acknowledge that he was wrong to say that he had abolished the boom and bust cycle?

I doubt that the Prime Minister will acknowledge that, but I suspect that he is deeply regretting those words, not only because they will come back to haunt him politically, but because the message that he sent out for years that he had abolished boom and bust and that, therefore, there never would be a rainy day—with no need to put something aside or for consumers to prepare for the worst; they had only to look for the best—has in fact led to the precise behaviour that he himself now describes as “the age of irresponsibility”, and he must reflect long and hard on where the responsibility for that lies.

rose—

I shall give way shortly.

The abandonment of the centrepiece of the Government’s economic policy, referred to by the Prime Minister in 2003 as

“the basis on which I think people have seen this Government as competent”,

is undoubtedly a political humiliation for them, but it is also an opportunity for this country to put in place a more credible, sustainable and independent framework for fiscal discipline. Our purpose in calling this debate today is not merely to draw attention to the failure of the fiscal rules and the absence of fiscal discipline or to the contribution that that failure has made to the situation we are now in and the Government’s lack of room for manoeuvre in responding to it. Our purpose is to look to the future and to put forward an alternative framework to try to ensure that we collectively never allow ourselves to do this again—to borrow through a boom, to spend money we have not got, to pile up debt we cannot afford and to mortgage our future and the future of our children with the borrowing today that will inevitably become the taxation of tomorrow.

Further to the comments of my hon. Friend the Member for Broxbourne (Mr. Walker), does my hon. Friend the shadow Chief Secretary believe that the Prime Minister’s claim to have ended boom and bust contributed to the fact that people in this country cut their rate of saving at first in half and then just to a fraction of its level in 1997, leaving homes and families throughout this country in a much worse position to face the bust that is now coming at the end of the Brown boom?

My hon. Friend is absolutely right. The message that went out was that low interest rate easy credit would be with us for ever, and that it was safe to borrow far larger multiples of income and to draw equity from one’s house in a way that, with the benefit of hindsight, was incredibly imprudent and ill-advised, and the Prime Minister will have to bear the responsibility for that message.

Step one in developing an alternative framework to the discredited fiscal rules was to understand why the current fiscal rules so comprehensively failed to deliver, and step two was to analyse whether they could be fixed. The sustainable investment rule is the simpler of the two rules to deal with. It says that in every single year, net Government debt should remain below 40 per cent. of GDP. That is a rather unambitious target in the face of our rapidly ageing population and the Government’s own long-term fiscal projections show that if we do nothing, public spending will rise simply because of the demographic profile. The target takes no account of the need to put money aside for the future, and it has simply been broken, with current net debt at 43.3 per cent. of GDP and set to rise, and, as important, the use of off-balance sheet financing to conceal billions of pounds of private finance initiative debt alone makes it meaningless. Worse, the Government’s determination to avoid being seen to breach the rule for as long as possible has led to a hugely costly distortion in public procurement as more and more projects have been forced into PFI structures, not because risk is being genuinely transferred, but so that capital spending can be financed off-balance sheet.

The golden rule says that, over the cycle as a whole, borrowing should fund only capital expenditure, with current spending paid for from tax receipts. That is a perfectly sensible proposition, but it has not been delivered.

On a technical point, the hon. Gentleman refers to the definition of projects within PFI, but I think he recalls that the Office for National Statistics normally carries out the task of reviewing whether a project should be placed on-balance sheet or off-balance sheet. Is he questioning the judgment that has been exercised in that respect?

The hon. Gentleman will recall that the Government committed to bring a large amount of this PFI liability back on-balance sheet from this year and then, apparently for technical reasons, pushed things back by a year. It will now be next year that some, at least, of this stuff comes back on to the balance sheet. When we examine these large numbers—these large percentages of GDP—it is important to remember that we are seeing only part of the picture; another bit of the picture remains off the balance sheet at the moment.

The golden rule has not been delivered on because, this Government have consistently overestimated since 2001, tax receipts and underestimated the deficit, because the Chancellor has been allowed to mark his own scorecard and, crucially, because measuring compliance with the rule depends on the precise dating of the economic cycle, and that can be known only after the event—sometimes long after the event. In other words, the rule is backward-looking, while any credible judgment of fiscal sustainability must be forward-looking.

Mervyn King has observed:

“If you change your view of what happened seven or eight years ago”—

that is to say, in the dating of the economic cycle—

“it doesn’t change the underlying fiscal position”.

Yet, such an approach may fundamentally change the apparent performance against the golden rule. So the golden rule is flawed not only in its implementation; it is flawed in principle. The Prime Minister’s fiscal rules have failed the practicality test, because just as no sensible set of fiscal rules would suggest that Government borrowing and net public debt should not rise at a time of economic slowdown, so no sensible fiscal rule would allow us to arrive at such a time with borrowing bumping up close to the ceiling, leaving no room for counter-cyclical responses to the economic downturn and no room to help hard-pressed families and businesses, never mind for any additional measures that may be necessary to deal with the financial sector crisis.

We have a failed fiscal framework, and we urgently need a replacement for the discredited fiscal rules if we are not to see the broader macro-economic policy framework undermined and the battle to contain inflation compromised. The Governor of the Bank gave a warning to the Treasury Committee:

“The long-term risk…is that a fiscal framework that is not perceived by financial markets to be credible does put upward pressure on inflation expectations because it undermines the market’s belief in the credibility of both the monetary and the fiscal frameworks.”

The evidence of the failure of the fiscal rules is here for all to see. That empirical evidence is consistent with the emerging academic consensus against rules-based systems on the basis of the empirical observation that, in practice, rules either tend to be too loose to be effective or so inflexible that Governments break them. While it might be possible in theory to design a rule that suggested the right response in all circumstances, such a rule would inevitably be too complex to operate in practice. So after careful consideration and consultation, our preference is for institutional reform to entrench fiscal stability. Last week, my hon. Friend the shadow Chancellor put forward our proposals for a new fiscal responsibility framework, as part of our plan for a strong economy.

The framework will be at the heart of our economic policy. Its starting point will be that Governments, like the rest of us, must live within their means, not only because economic stability requires it, but because intergenerational fairness requires it. That will ensure that collectively we never make the same mistakes again, and in future all British Governments will be forced to fix the roof while the sun is shining. They will have to acknowledge that Governments cannot abolish the economic cycle, whatever Chancellors might like to claim, and will be forced to put something aside for the rainy day that will periodically come around.

For anybody who has not studied the detailed proposals—I am sure that the Chief Secretary has done so—I will spell out what the next Conservative Government will do, in the event that this Government have not already adopted our policy. First, we will scrap the discredited fiscal rules, which are neither use nor ornament and, with the benefit of hindsight, never were.

Secondly, we will introduce a tough, new, forward-looking mandate for the public finances at the end of a forecast horizon, with falling debt as a percentage of GDP and a balanced current budget, after adjusting for the economic cycle. Thirdly, and crucially, for the first time in Britain we will create an independent body accountable to Parliament, the office of budget responsibility, to publish independent forecasts and to assess the performance of Government against the outcomes it has specified.

Surely it is the job of Parliament to monitor and assess the Government’s fiscal policies and performance? After all, Parliament has Select Committees and professional advisers to inform them. This solution is yet another quango of unelected, unaccountable people, and it is a bad policy. It is certainly not a Tory policy. Has the hon. Gentleman really thought this through?

If the hon. Gentleman will forgive me, I will decide what is a Tory policy, not him. I reject his criticism, although he is right in one respect. Parliament has to hold the Executive to account, and the office for budget responsibility will give it the tools to do so. The OBR will be answerable to Parliament, delivering independent forecasts and an assessment of the Government’s Budget proposals. I shall explain how it will work.

The OBR will be staffed by economists and tax experts, and it will focus exclusively on the medium and long-term sustainability of the public finances. At its inception, it will be tasked with a full independent audit of the nation’s debt; a cleaning of the Augean stables; and a bringing back onto the balance sheet of all the dodgy accounting that this lot have hidden in nooks and crevices such as the private finance initiative, Network Rail and under-recognised depreciation on military equipment. That should appeal to a Prime Minister who I saw on the telly last night calling for more transparency—except that of course he was calling for it from someone else, not from his Government.

Let me explain, for the benefit of the hon. Member for Castle Point (Bob Spink), how the OBR will monitor the health of the public finances and hold Governments to account on an ongoing basis. First, the Chancellor will set the mandate for the public finances. This will remain his responsibility, just as the inflation target is set by him within the monetary policy framework. Then, every year, in advance of the Budget, the OBR will present its fiscal forecast, which will include a judgment of the sustainability of the public finances against the mandate it has been given. It will also include the OBR’s best independent estimate of the true scale of all future Government liabilities. The judgment will state how much fiscal loosening or tightening the OBR thinks is needed by the end of the forecast horizon in order for its central forecast to meet the Chancellor’s mandate. Crucially, however, the mix of any tightening or loosening between tax revenues and spending—a political decision—will be explicitly outside the OBR’s remit. That will remain the responsibility of the Chancellor of the day, who will deliver in his Budget his judgment of the required net loosening or tightening of fiscal policy against the backdrop of that OBR-published report. If for any reason he or she does not agree with the OBR judgment, he or she must explain why to Parliament.

Finally, the decisions taken in the Budget would be taken into account in the OBR’s next report and the OBR would comment on the likely medium and long-term fiscal consequences of any significant deviation from its recommendation.

The hon. Gentleman does not seem to have covered this question: who will appoint the members of the OBR?

I can offer to send the hon. Gentleman a copy of our plan for a strong economy. Members of the OBR will be appointed by the Chancellor for a single term—[Interruption.] The Exchequer Secretary says, “Ticking his own box”, but it will be like the Chancellor appointing the members of the Monetary Policy Committee. We will put in place a mechanism for scrutiny by the Select Committee on Treasury and by Parliament of appointments not only to the OBR but to the Monetary Policy Committee, enhancing and strengthening the independence of both institutions.

We need a fresh start, a proper recognition of the extent of the nation’s liabilities, a clear plan for dealing with them and a mechanism for holding Governments to account for irresponsible borrowing. There will be no more marking by the Chancellor of his own exam papers and no more backward-looking targets that cannot be determined until years after decisions are made. Instead, there will be a system that delivers a constraint throughout the cycle based on the independent assessment of the office for budget responsibility, holding the Government publicly to account for their performance. That will call time on the repeated fantasy forecasts of jam tomorrow that we have seen in successive Budgets from this Government, with hopelessly overestimated tax receipts justifying hopelessly unsustainable levels of spending.

Like the hon. Member for Castle Point (Bob Spink), I think that another quango is surely being set up. Is it not the case that holding the Government to account is a job for Parliament? Would the hon. Member for Runnymede and Weybridge (Mr. Hammond) not also agree that when the European Union tries to interfere in our economic strategy policies, we object to that, too? We already have the Institute for Fiscal Studies, the Audit Commission and the National Institute of Economic and Social Research; a number of bodies look at the way in which Government finances work and how they operate. Surely it is the job of Parliament, using all that information, to keep the Government held to account.

The office of budget responsibility will give Parliament an official independent-of-Government report, a series of projections of the fiscal position and, crucially and unlike the Congressional Budget Office, policy recommendations that will allow Parliament to hold the Government to account. The next Conservative Government are committed to implementing that fiscal responsibility framework. The need is urgent and we would welcome it if the Government, who have already cherry-picked their way through our last year’s conference announcements, adopted the key elements of this year’s.

The changes that I have reiterated and that my hon. Friend the Member for Tatton set out last week would give the UK the most credible and responsible fiscal policy framework in the world. Alongside the independent Bank of England—with the enhanced responsibilities that we have proposed, now included in the banking reform Bill, and the additional powers that we propose to give it under our debt responsibility mechanism to respond to the threat of excessive debt being created in the system as a whole—the UK will have the strongest, most independent and most credible fiscal and economic stability framework of any nation in the world.

It is very kind of the hon. Gentleman to give way again. I simply want to remind him that his motion makes a brief reference to public sector pension schemes. Since he did not mention how that issue might be addressed, I should be very interested to hear what his approach would be.

The point about public sector pension schemes is that they represent another large, unrecognised liability that currently sits off the balance sheet. We need transparency in our public finances. The people of this country need to know in a transparent way the scale of their obligations to public sector pensioners who have already accrued those rights.

The Prime Minister talks of the age of irresponsibility, and he is right. It was an age when the creation of credit was mistaken for the creation of wealth, when public sector spending was concealed off the balance sheet, and when future revenues were systematically overestimated to conceal the scale of deficits. The clear lesson of the credit-fuelled mirage of a boom and the reality of the bust that is following it is that there are no free lunches. Prosperity is built on hard work, not easy credit. We can rebuild Britain’s economic future, but to do so we must rediscover, and then never again lose sight of, the fundamentals of a strong economy—sound money, fiscal discipline and living within our means. We must earn our keep rather than putting everything on the nation’s credit card for our children and our children’s children to pay. Just as our banks are rediscovering the hard way the value of traditional prudent banking practices, so the British Government have to rediscover the enduring truth that long-term prosperity is built on sustained fiscal and economic discipline, and not on the back of a debt-fuelled bubble.

So let us hope that we do not have to wait for a new Government for that to happen. Let us hope that a chastened Chancellor, having finally buried his discredited fiscal rules, will soon come to this House to announce a new fiscal framework based not on rules, but on a new independent institution similar to the OBR that we are proposing. Critically, that institution should have powers to make policy recommendations so that this Parliament can hold Government to account. It can grow in stature to develop the strength and credibility of the independent Bank of England and become, in time, one of the twin pillars of independent oversight that will deliver long-term stability and freedom from short-term political manipulation to the management of Britain’s economy.

It is, of course, too late to fix the roof for the storm that is already blowing up around us, but we owe it to the country and to future generations to ensure that we live within our means and that the age of irresponsibility in Government is now buried for ever.

On a point of order, Mr. Speaker. I understand from the House of Commons Library that the Department for Communities and Local Government has just announced that it will delay the English local government elections to coincide with the European elections on 4 June next year. I wonder whether we are going to have a statement from those on the Government Front Bench on this matter and whether we can have a debate on it.

That is not a matter for me. I must deal with the business of the day.

My apologies to the hon. Member for Runnymede and Weybridge (Mr. Hammond), but has he finished moving the motion?

I have, Mr. Speaker.

Thank you. I call Yvette Cooper to move the amendment.

Thank you, Mr. Speaker. I beg to move, To leave out from “House” to the end of the Question, and to add instead thereof:

“notes that the purpose of the fiscal framework is to smooth the path of the economy in the short term, to secure sustainable public finances in the medium term and to ensure that spending and taxation impact fairly between generations; recognises the success of the framework over the past decade, reversing historical under-investment in the infrastructure of public services, reducing debt from 43 per cent. of GDP in 1997 to below 37 per cent. last year and allowing borrowing to increase this year in order to support the economy; welcomes the £4 billion of tax cuts helping families and businesses this year; further notes the turmoil in the world economy and financial markets; recognises that Government is rightly focused on the turbulence in the financial markets and helping families and businesses with the twin shocks of the credit crunch and high commodity prices; and welcomes the Government’s commitment to take whatever steps are necessary to protect the stability of the financial system.”

This is the first Opposition day debate since the House returned after the events of the summer. Given the wider economic events that we have seen, it is perhaps a surprise that the Opposition have chosen to focus on the fiscal rules rather than on the overall events in the world economy. The House will have a chance on Thursday to discuss more widely the events in the economy, and we have also had yesterday’s statement from the Chancellor.

The fiscal position is of course affected by those major world events. The Chancellor’s statement made it clear that we are continuing to see significant turbulence in the global financial markets, and there is also continuing pressure on financial institutions across the world. That pressure has been evident in Iceland today, and in other countries too.

We have already provided support across the system, such as through the special liquidity scheme and the actions of the Bank of England, and we have also taken action on individual banks that have got into trouble—for example, in the cases of Bradford & Bingley and Northern Rock. It was unfortunate that Conservative Members opposed and continue to oppose the action on Bradford & Bingley and Northern Rock. Had we not stepped in to support those two institutions and to take action, there would have been massive consequences for the financial stability of the British banking system and serious problems for the economy, for the public finances and, in particular, pressure for individual savers across the country. It was right that we should step in to support them.

As the Chancellor said yesterday, there has been considerable speculation about capital and the banking sector in recent days. In examining options for restoring stability to the banking sector, it is right that we look at every aspect—liquidity, capital and regulation—with other countries and, of course, with the financial sector itself. That process is continuing and we will update the House at the appropriate time.

Does the Chief Secretary now accept that liquidity rules were too loose in previous years, and that any changes made to those rules in future must ensure that they are not tightened at the wrong time?

In fact, the action being taken by the Financial Services Authority is to look at the need for regulation on liquidity and not simply on solvency. Its report in the light of the events of last summer made that clear, and it is right that it should do so. We have needed to provide considerable additional liquidity support across the system. It is probably also right to say that there were not sufficient assessments of liquidity risks internationally and between countries, as well as of the work that has been done by the FSA. Members on both sides of the House will recognise that events in the world financial markets have the potential to make a significant impact on the world economy, not just for the next few months but in many ways for years to come.

In the circumstances, it is perhaps bizarre, and certainly irresponsible, for Opposition Members to try to pretend that the world economic events we are witnessing are simply a result of UK Government borrowing. In a recent interview, the shadow Chancellor said:

“The causes of the problem are not the financial markets.”

The hon. Member for Runnymede and Weybridge (Mr. Hammond) has just told the House that lack of fiscal discipline is the root cause of the problems we face. That is economic illiteracy. Forget sub-prime lending in the US mortgage markets; forget the collapse of Lehman Brothers or the hugely complex bundling of toxic assets from the US; and forget the volatility in the money markets or the responsibility of international bankers. According to Opposition Members, the problem in the international markets is simply the level of UK Government borrowing and debt. I have to say that that view is utterly irresponsible and if Opposition Members do not understand the problem, they cannot be trusted to take the right decisions on how we deal with it and how we solve it to go forward.

If the right hon. Lady looks up the last three Budget debates, she will find that I always pointed out that the level of growth we were still enjoying was sustained by a bubble of Government and household debt, and that it was unsustainable. She will see that the reply of Ministers was to treat that with total disdain. Indeed, they claimed credit for the prosperity that was flowing from the boom, which was the product of their own remarkable economic policies. They denied the need to take action against such things as 140 per cent. lending on the value of houses or six times earnings when people certified their own earnings. They took credit for the boom, but they never saw the bust coming and circumstances in the UK are as bad as they are in the United States because of the Government’s complacency.

I have to point out to the hon. Gentleman—[Hon. Members: “Right hon.”]—the right hon. Gentleman—[Hon. Members: “And learned”.]—the right hon. learned and hugely fantastic Gentleman. I have to point out that in the 11 and a half years since he was Chancellor of the Exchequer, a lot of things have changed in Britain. In particular, our country was bottom of the G7 when it came to national income per head of population when he left office, but it is now the second in the G7 as a result of decisions that the Government took and the investment and economic stability that we experienced. We face significant world economic problems as a result of the dodgy lending that started in the US mortgage markets, the bundling of assets round the world and back again, and a lack of understanding of where risks lay, not just in the banking sector but among credit rating agencies and regulators.

Will the Minister give way?

I am conscious of the fact that the debate is on fiscal rules, and I am trying to get on to the subject, but I give way to the hon. Gentleman.

The Chancellor yesterday told us that a number of building societies had unsustainable business models, and now had to be bailed out. Why was that allowed to happen? Why did not the Government, or a regulator in Britain, do anything about it? Why is the OECD saying that we have over-borrowed? Surely the Government have made some mistakes. Can the Minister not point to just one mistake that they have made?

The hon. Gentleman misunderstands the issues to do with the economy, either deliberately or otherwise. He is confusing different kinds of borrowing and different kinds of debt. I understand that he has a political interest in doing so. He simply wants to muddy the waters and pretend that the private-sector credit crunch is somehow the result of public-sector debt. That is economic illiteracy, and it is simply not the case. The problem is not simply inexperience on the part of the Opposition. I do not think that their misjudgments in the cases of Northern Rock or Bradford & Bingley are simply the result of inexperience; opportunism and ideology are also involved. They want to claim that market problems are all the result of failure on the part of the Government, but that blinds them to the fact that sometimes we need Governments to step in to deal with the failure of markets, just as this Government did in the cases of Bradford & Bingley and Northern Rock. The hon. Gentleman’s party repeatedly opposed our doing so, despite the serious risks that might have resulted for the financial system and the economy.

The right hon. Lady said that the Government would take action at the appropriate time, but a growing number of people are beginning to ask, “When is the appropriate time?” Are we just waiting for events to take hold of the agenda, while asset prices carry on falling, because the banks remain incapable of resuming normal business? Is not the urgent priority to recapitalise the banks? That will not happen on its own. It will require some form of Government intervention. When is the appropriate time? When will the Government be in a position to make an announcement?

As the Chancellor said yesterday, we are, and have been, looking at a wide range of options for support of the banking system, and we will continue to do so. We have rightly already taken action across the board with the special liquidity scheme, and are dealing with particular pressures that arise. When we think that further action is needed and further measures must be introduced, we will say so, but it is irresponsible for people to speculate on the pros and cons of particular measures. It is right that we should take measured judgments and do the right thing to support the markets, given the instability and turbulence that we have seen.

My right hon. Friend is quite right to say that at times of great crisis, the Government should take a major role in the economy and in the financial sector. Does she agree that one great success has been the nationalisation of Northern Rock—so much so that people cannot make new deposits, as it has ceased to take them? People on television are saying, “I want to put my money into a publicly owned bank because it is secure.” Would it not be wise to spread nationalisation across the whole banking sector?

Certainly, when I was first appointed to the Treasury at the beginning of the year, I did not expect that the first parliamentary Act that I would take through the House would nationalise Northern Rock. I think that it was the right decision to take. It would have led to considerable financial instability if we had not taken it, and that would have jeopardised confidence right across the banking system. It was the right thing to do. Faced with the unprecedented events that we have seen right across the globe, Governments have had to be prepared to take unprecedented action. That is the right thing to do under the circumstances.

The debate is about the fiscal framework and I shall make a few points about that. Before 1997, there was no fiscal framework in place at all. Decisions were taken from Budget to Budget according to no clear and consistent approach. To the extent that principles were set to guide fiscal policy, they tended to change from one year to another. In 1992, the objective was a balanced Budget over the medium term. In 1993, the proposal was to move back towards balance over the medium term and borrow no more than net capital spend. In 1994, as the right hon. and learned Member for Rushcliffe (Mr. Clarke) will remember, the position changed again and there was no reference to borrowing. Such change from one year to another provided fiscal instability that was bad for the markets, as well as for the approach to the public finances.

In 1997, we introduced a new fiscal framework and legislated for the code for fiscal stability, based on the five principles of transparency, stability, responsibility, fairness and efficiency. Within it we set two fiscal rules to cover borrowing for investment and the level of debt. The consequence of that framework is that between 1997 and 2007, borrowing peaked at just 3.3 per cent. and ran at an average of only 1 per cent. Compare that to the previous 10 years, when borrowing peaked at 7.8 per cent. of GDP and averaged 3.1 per cent., and the 10 years before that, when borrowing peaked at 5.1 per cent. and averaged 3.6 per cent. Over the previous two economic cycles, average borrowing was more than three times as high as it was over the last economic cycle.

So if the fiscal rules are so effective, can the right hon. Lady confirm that they are not about to be junked?

As I am due to say, we will set out the position on the fiscal framework at the pre-Budget report, as the my right hon. Friend the Chancellor has already said. It is worth recognising again the impact that the fiscal framework has had. The discipline imposed on the public finances by the framework has seen debt cut from 43.3 per cent. in 1996-97 to 36.6 per cent. in 2006-07. Debt in the UK is lower than in every country in the G7 bar Canada, so we are the second lowest in the G7 in terms of our public debt, and it is lower than the EU average as well. That is precisely why we can borrow more now, and why it is right to borrow more now in order to get our economy through the tougher times ahead.

I am not sure whether I suffer from the economic illiteracy to which the right hon. Lady so often refers, but perhaps she could help me out. As The Times editorial pointed out yesterday, most independent commentators are predicting for the financial year beginning 2010 borrowing between £90 billion and £100 billion. Even the Institute for Fiscal Studies is quoting a figure of £60 billion, which is twice the figure that the Treasury is still maintaining. Surely the collapse in corporate tax receipts, which is an inevitable outcome of problems in the financial services sector, should be factored in, or is there something that I do not understand.

The hon. Gentleman is right to say that the economy has an impact on the public finances, so, for example, the reduction in receipts from stamp duty or from the financial sector will, of course, have an impact on tax revenues this year. We will set out the next forecast for borrowing and for the public finances at the pre-Budget report. As he knows, we do so twice a year as part of the Budget and as part of the pre-Budget report. That is the normal practice for reporting to the House and for ensuring that we have appropriate forecasting and fiscal stability in place.

It is worth recognising, too, that the fiscal framework has protected public investment. Under the previous Government public investment reached a low of just 0.3 per cent. of GDP in 1988. As many of us know from our constituencies, that left a legacy of decaying public services and infrastructure. I remember that on one of my first visits to a primary school in my constituency, staff showed me where they put the buckets to catch the leaks from the Victorian roof, and I remember talking to the residents of one of the council estates in Pontefract, where they showed me the metal windows that rattled and the tiles that had blown off the roof—part of the £19 billion backlog of repairs and maintenance to Britain’s council houses.

The Conservative party did not fix the school roofs, the council house roofs or the hospital roofs. Under this Government, investment has grown by more than three times the 1997 level to 2.2 per cent. of GDP this year, and that sustained investment has allowed us to invest in the council homes, new hospitals, schools and transport infrastructure that we badly need. That is not just about mending the roof in the sunshine; it is about being still up there mending the roofs through rain, wind and stormy weather as well.

Will the Chief Secretary tell the House whether borrowing today is lower or higher than the borrowing level that she inherited when the Government came to power in 1997?

It is important that we should increase borrowing this year as a result of the need to support the economy in difficult times, and it is right to do that. Opposition Members who call for cuts in borrowing when the economy is under such pressure from international problems frankly misunderstand the nature of the economic pressures that we face and the serious problems that it would cause for the hon. Gentleman’s constituents if we were to cut borrowing at such a time in the way that he seems to be advocating.

We have said clearly and repeatedly that the fiscal rules should be reviewed at the end of the economic cycle. Most commentators believe that the cycle ended in 2006, and we will provide detailed analysis of the fiscal position in the pre-Budget report. But as I have made clear, it is right to increase borrowing this year and next to respond to the economic shocks that we have faced. These are unparalleled in scope and scale because we have had the commodity price shock and the credit crunch at the same time. Who would have thought that the US Government would need to step in and end up backing half the mortgage assets in America through Fannie Mae and Freddie Mac. That alone is the equivalent to the national income of France and Italy put together.

The Chief Secretary has just referred to debt and mentioned the figure for 2006-07 as being 36 per cent. In fact, on 30 September, the Office for National Statistics, which is now independent, issued its own assessment, and it says that the amount in question is a minimum of 43 per cent. and that if Northern Rock is included, which is about to be rerouted under new rules, at the end of 2007, it would be 46 per cent. Is not the right hon. Lady’s estimate not out by something of the order of 10 per cent.?

As I have made clear, it is right that we should take unprecedented action to support the financial stability of the economy. We have done so with Northern Rock, and the ONS has made it clear that it is right to look at public sector borrowing and public sector debt, including Northern Rock, but also separately from Northern Rock. All sensible economic commentators have done exactly the same. The position of a temporary nationalised bank, which will be returned to the private sector with the assets that it has to back that lending, is clearly very different from the kind of current expenditure that we deal with in public services on a day-to-day basis. If the hon. Gentleman is arguing that that should be treated differently, again, he misunderstands the economic consequences.

The hon. Member for Runnymede and Weybridge took some time to present to us what he said would be his alternative framework, and he claimed that it would be the most credible and responsible in the entire world. That is simply not true. The Opposition’s proposals are far from clear. They have proposed an office for budget responsibility to apply a mandate. The trouble is that they have not been clear about what that mandate would be. It is not clear whether this is about a fixed end-of-forecast period or a rolling end-of-forecast period, and that makes a huge difference. It is not clear whether this means borrowing goes up or down or that debt goes up or down. The mandate that they have set out could mean any of those things. Either the office for budget responsibility will have an awful lot of power to decide what in practice fiscal policy should be, or it will be extremely confused. I suspect that the answer might be the latter, because it is hard to understand what Conservative Members are calling for. They have said that they want to share the proceeds of growth, but also that that means simply sticking to the Government’s spending plans, which their leader has repeatedly called “very tough”. They say that they want to rein in borrowing—they used the phrase repeatedly last week—yet at the same time they say that they want to cut taxes and increase spending.

If we consider the Conservatives’ pronouncements of even the past seven days, we see that they have been arguing for a discretionary fiscal loosening to the tune of tens of billions of pounds, which would come in addition to the consequences of the current economic circumstances on the public finances. Only last week, the shadow Chancellor published a document that included tax cuts for millionaires’ estates, which would cost £2 billion; ending the so-called couple penalty, which would cost £3 billion; measures on stamp duty that would cost £400 million; a council tax proposal, which would cost a further £1 billion; high-speed rail links, which would cost £1 billion a year; 4,000 extra health visitors; and 1,000 new academies. However, the number of identified ways in which the Tories would cut spending or cut borrowing was zero.

Within 24 hours of proposing an office of budget responsibility, the party of the hon. Member for Runnymede and Weybridge had spent, we reckon, an extra £200 million an hour in increased borrowing on top of what is happening at the moment. So much for budget responsibility. The Leader of the Opposition and the shadow Chancellor have been keen to tell us all about their undergraduate education in economics. However, even with that education they cannot see that their sums just do not add up. Such fiscal irresponsibility would be bad for the economy and the markets.

I agree with the tenor of what my right hon. Friend is saying. If there comes a choice between a serious rise in unemployment and a rigid, formulaic approach to the fiscal stance, will she make sure that unemployment—and not the fiscal stance—are her priority?

We are clear about the need to support jobs in the economy and it is important to do so. It is also important that we run sound public finances, and that is what we have done and will continue to do. That includes being able to increase borrowing this year, exactly because we have cut debt in the past 10 years as a result of the decisions that we have made. It is because we have one of the lowest levels of public sector debt in the G7 that we are able to increase borrowing this year, and that is the right thing to do to support the economy.

I say to Conservative Members that to cut borrowing this year and next, as the hon. Member for Runnymede and Weybridge seemed to suggest, would simply be irresponsible. While private sector borrowing is under such pressure, it is right that the public sector take some of the strain to support the economy through the difficult period.

I just want to nail that one. If the Minister checks Hansard tomorrow, she will see that I specifically said that no sensible set of fiscal rules would suggest reducing borrowing at this point of the cycle.

The hon. Gentleman may wish to make that point to his party leader, who has continually called for borrowing to be reined in and reduced, at a time when it would irresponsible to do so. Perhaps Conservative Front Benchers should get their own house in order and their story straight about what they think about borrowing. They call for a reduction in borrowing, but at the same time they call for big increases in tax cuts and big increases in spending. It does not stack up. The hon. Gentleman may want to put forward a sensible position, but he ought to persuade the rest of his party’s Front Benchers.

Sensible Governments across the world are increasing borrowing to support the economy this year; it is right, then, to bring borrowing down to ensure that public finances remain in a responsible and sound position. We are cutting tax by £4 billion to support the economy this year. We are freezing duty below inflation, increasing tax allowances and tax credits and providing the winter fuel allowance to pensioners. That also means fiscal discipline on public spending in the short and medium terms—being prepared to cut waste, improve efficiency and take tough decisions about priorities.

In the end, we have to take sensible, serious decisions about fiscal policy just as we need to take sensible and serious decisions about financial stability. That requires serious judgment and a recognition of the cause of the problems and of how we need to respond. The opportunism of Conservative Members, along with their inexperience and, ultimately, ideology and hostility to the role of Government at a time when it may well be critical to support the financial stability of the system, mean that they still do not have the judgment to get the issues right.

The Conservative motion seems eminently sensible, and I am perfectly happy to support it, although the Conservative spokesman somewhat spoilt it with an unnecessary political rant. However, I was worried not by that—we always get that on an Opposition day—but by the dogmatic certainty with which he presented his alternative. Setting fiscal frameworks is very difficult, as experience all over the world teaches us. One can either have a very rigid structure such as the European Union’s Maastricht rules, which are inflexible and pose all kinds of problems about how to enforce them, or a very loose structure that is more like the American model of politically driven fiscal policy, but with independent scrutiny. As I understand it, the Conservatives would like to move towards the American model. However, the problem with that system, as the Bush Administration have demonstrated, is that it can lead to extreme fiscal incontinence, with enormous deficits that make our Government look positively miserly. The structure does not fundamentally change the nature of the policy.

There is a crucial difference, which I thought that I had drawn out. The Congressional Budget Office is barred from making policy recommendations, whereas our office for budget responsibility would be charged with making such recommendations.

It is not making the recommendations but following them through that is the politically difficult bit. I accept that there is a slight difference between the Conservative proposal and the American system, but it is open to exactly the same objections.

The Government’s problem with their fiscal framework is that it was not clear from the outset whether it was a set of rules or vague guidelines—it is gradually degenerating from the first to the second. The other problem—this is where the Conservatives are right—is that there has never been a proper system of independent assessment. I have said on many occasions that if I could claim intellectual property royalties on soundbites, I would be very rich as a result of the flows coming from the Conservative Benches. I remember standing here five years ago and talking about the Government marking their own exam papers and the need for a fiscal Ofsted, which is what the Conservatives are now talking about.

As regards the precise structure that the Conservatives propose, I share the reservations expressed by the hon. Member for Castle Point (Bob Spink), who is no longer here, and by the hon. Member for Luton, North (Kelvin Hopkins) as to why it is necessary to set up a quango of this kind. The National Audit Office is the obvious body to carry out such independent scrutiny. It would perhaps need reinforcing with a few more technical staff, but it has the great advantage of independence and respect, and it connects Parliament with the process through the Public Accounts Committee. Surely, if we are to have a proper independent system of auditing fiscal policy while retaining democratic accountability, that is the way to do it. Although I entirely agree with the Conservatives that we need an independent structure, the quango approach would be completely the wrong way of achieving it.

I have listened to what the hon. Gentleman has said not only today but over a long period, and he often hits the nail on the head. He just referred to the inflexibility of the Maastricht system. As he knows, there are legal complexities and it does not work—for example, in the case of the stability and growth pact. Is the Liberal party now reviewing its commitment to the one-size-fits-all policy that comes from the European Union?

We have said on many occasions that the Maastricht approach needs to be developed. The system of imposing fines on countries that deviate from targets is clearly not practical in a world of sovereign states, and I would certainly not defend the system in its present form.

There are reports that some of the southern European members of the eurozone will find it very hard to stay within it. Apparently, Italy is having to introduce a premium on interest on Government borrowing. Is it not the case that the eurozone is on the verge of break-up, let alone that we need to choose new rules that might work?

Since everybody is queuing up to have a go at the European Union, I must point out that despite all the predictions—including those of the two hon. Members who have just intervened—the eurozone still exists and has stayed together. Almost all the Governments involved have stayed pretty close to the 3 per cent. guideline, although there have been some breaches. This is not a debate about the European Union, however.

The question raised by the Opposition motion is whether the Government have observed their own fiscal rules—the golden rule and the rule on sustainable investment. On the first, we simply do not know, because we have not had an independent assessment of the cycle, so we are having a pointless debate about whether the test has been met. It seems likely that the test has not been met, because independent bodies such as the Institute for Fiscal Studies and the National Institute of Economic and Social Research have estimated that during the past five years the Government have been running a structural deficit of £5 billion to £10 billion. I think that that is what the hon. Member for Runnymede and Weybridge means when he talks about the roof not being mended. There has been a persistent and substantial—we are talking about 0.5 per cent. of GDP, which is not mega—structural deficit that has remained year after year without being corrected. Any system that does not acknowledge that failing, and that does not have a mechanism built in to acknowledge and correct it, is clearly not working well.

The second rule, on sustainable investment, will be broken, and the Government are clearly gearing themselves up to tell us that it will be broken. It is worth breaking down the reasons, because the sustainable investment rule is being broken for a mixture of good and bad reasons. One of the bad reasons is the cumulative effect of all the structural deficits. The amount of £5 billion to £10 billion a year over five years adds up to a substantial sum, which all adds to Government debt. That is not acceptable policy, but there are other respects in which public debt is increasing for understandable reasons. We want good public investment that earns a decent social return and ultimately repays the taxpayer. The purpose of having a public investment rule is not to choke off sensible public investment.

The most important reason why the rule has been broken relates to asset acquisitions. Two banks have been nationalised—Northern Rock and more recently the £30 billion for Bradford & Bingley. I am not sure how the £200 billion liquidity facility is accounted for in the public rules, but perhaps we will have an explanation of that. Later this week, if all the rumours in the press are correct, we will have a rescue plan for the banks involving recapitalisation that could involve £30 billion or £50 billion—who knows? On that point, the Conservatives would do well not to be too self-righteous because they—and we—have argued for that facility, which will add very substantially to Government public debt.

Asset transfers are, of course, completely different from cumulative structural deficits. They are a different economic animal, and they need to be presented quite separately. The fact that the investment rule is being broken on account of nationalisation is completely different in character from where it is being broken because of cumulative structural deficits over time. The two concepts need to be presented and analysed separately.

On where we go from here, I agree with quite a lot of what the hon. Member for Runnymede and Weybridge has said. I wish that he had not presented his argument in such a completely inflexible and rigid way, however. I think that he said that he disagreed with the golden rule, but he defined a hypothetical Conservative Government’s objective as being the same as the golden rule, did he not? He referred to balancing the current Budget over the cycle. That is what the golden rule is, and the hon. Gentleman stated that that is what a Conservative Government would aim to do, and I am not quite sure what is different. The idea is clearly forward-looking, as it has to be, but the objective is the same—it is a sensible objective, but it is the same as the one that the current Government aspire to. The matter will be extremely difficult, which is what worries me about the hon. Gentleman’s rather dogmatic way of presenting it. It is all very well to use the phrase “forward-looking”, but none of us can predict the future.

I remember arguing strongly that over-borrowing and debt in the private sector would lead to the sort of recession that we are now in. I seem to remember that Conservatives, as well as Ministers, scoffed at that analysis. We cannot predict the future—none of us can—so a forward-looking measure of the Budget is open to an enormous amount of uncertainty and risk for any future Government, just as it is for the present one. The approach is sensible, but let us not be over-confident that the rule can be met. There will be an enormous increase in the budget deficit this year, partly because of structural factors and partly for the entirely justified reason of the workings of the stabilisers—the fall in income tax, corporation tax and national insurance. That must be allowed to happen; indeed, it would be foolish to stop it happening.

The second element in forward-looking fiscal policy is the investment rule. Again, I am not sure how the Conservatives would deal with that. The Conservative spokesman is quite right that the investment rule is important for two reasons: first, because we have to protect future generations from over-borrowing; and, secondly, because the Government need to be careful about their borrowing due to the effect on bond markets and yields and the cost of capital in the long term, which is, of course, important. However, if the figure is not 40 per cent., what should it be? What are the criteria? The Chief Secretary has already said that if we take out the nationalisations, Britain’s performance against the 40 per cent. rule is not bad, so what should we be arguing for?

My view—this is just an ad hoc response—is that a much more sensible solution than defining a figure would be to have complete transparency about what the public debt is, and then the markets can make up their mind about whether there is a sustainable level of debt. We do not need the Government or even an independent body to do that. If everything is out there—if the private finance initiative debt and pension liabilities are declared—the markets can form a judgment when the Government sell bonds about how sustainable the debt is. That is a more sensible way of going about things than being overly prescriptive.

We have seen in the past day or so what happens if the Government are too cavalier about public debt. One country seems literally to be going bust—the Icelandic Government may well be unable to place their paper overseas—and I gather from the news bulletins that we are seeing the interesting phenomenon of the Russians taking over rather like Lloyds taking over Halifax Bank of Scotland, which has all kinds of interesting implications. When we see a developed country going bust, we see the end product of extreme carelessness with fiscal policy. That has to be the ultimate brake on what Governments do.

Just to recap, the motion is perfectly sensible, and I have no hesitation in supporting it. However, I caution against the idea that there is a simple way of defining what fiscal policy should be. Clearly, we need balance over the current cycle and an open, transparent system of declaring Government debt, but beyond that I am not sure that there is a perfect model and do not think that the Conservatives have found it.

I will not speak for very long. Much nonsense has been spoken about economics in recent times. Bretton Woods and the sensible framework of economic policy established after the second world war were abandoned in the early 1970s, since when we have suffered four major economic crises, the latest of which is set to be by far the worst.

What is happening now will surely sweep away the supposed golden rules and delicately constructed monetary and fiscal policy frameworks. Indeed, it will probably see the annihilation of the euro into the bargain. One small mercy is that Britain is not part of the eurozone and can at least decide its own interest rates and fiscal policy, and choose its own value for its currency, suited to our needs.

The Opposition have raised this debate about the Government’s fiscal rules, yet they have been a collaborator in the neo-liberal nonsense that has led us into the current crisis. It became clear that unregulated financial markets and free market capitalism are inherently unstable and lead to mass unemployment, inequality and political crisis. It was the interventionist policies of Roosevelt in America, including a large programme of public works, that led to recovery from the depression.

I do not think that I have ever heard anyone in the Chamber suggest that there should be free markets without any regulation. Surely we are now seeing the consequences both of a failure of regulation and of the quality of regulation, rather than of any neo-liberal experiment. There has been a failure of Governments and regulators throughout the world to use prudential standards and ensure that they are enforced.

The underlying philosophy of recent economic policy has been deregulation and free markets. Even though there has been some regulation, particularly of monetary policy, it has been nothing like the regulation that we have needed or that we saw after the second world war. Indeed, after the second world war, no one seriously suggested going back to the arrangements that precipitated the 1929 crash and the subsequent depression.

However, there was one potty ideologue who wanted to turn back history—Friedrich von Hayek. Like hypnotised joiners of a religious cult, our leaders followed Hayek and led us to today’s nightmare—Milton Friedman, Keith Joseph, Nicholas Ridley and, of course, Margaret Thatcher. When history is written, the terms of today’s motion and the amendment will surely inspire incredulity at their triviality in the face of the global crisis that is now unfolding.

I never believed that there was anything golden about the Government’s borrowing rules. Picking a figure for Government debt as a proportion of GDP was always arbitrary. It could have been 50, 60 or 70 per cent., provided that Government revenues were sufficient to pay the interest. It was just like a mortgage: what one could borrow depended on one’s income. At least, that was the case until the sub-prime catastrophe.

If the Government wish to help the less well off, they could simply collect more taxes from the very rich and substantially increase the basic state pension and child benefits, which I recommend. Successive Governments have resisted returning to anything like the tax rates that existed in the 1970s. Perhaps those rates were rather extreme, but if we were even to inch in that direction, it would be welcome.

The credit crunch, the crisis in bank borrowing and the coming recession have killed off neo-liberalism, and it is now time to accept that capitalism can be made to work at all only with heavy regulation, a substantial state sector and the use of all the levers of macro-economic policy on a continuing basis. That is my view, and I hope to elaborate on it in more detail in subsequent debates, but I wanted to get it on the record today.

I have never risen to speak with more diffidence. This situation is extremely difficult, and I am anxious not to make it any worse. I went through the secondary banking crisis in the 1970s as a director of a merchant bank, and I am now on the Treasury Committee, having previously been a Parliamentary Private Secretary at the Treasury. Given that background, I want to make a contribution, and I hope that some of what I have to say is of some use or value.

First, we must look at the background. The present Prime Minister, as Chancellor of the Exchequer, got three things right in 1997: first, we did not join the euro; secondly, he created the Monetary Policy Committee; and, thirdly, he decided to follow for some years the spending plans of my right hon. and learned Friend the Member for Rushcliffe (Mr. Clarke), the previous Chancellor of the Exchequer. He also introduced the fiscal rules.

The first fiscal rule is the golden rule that, over the economic cycle, the Government will borrow only to invest and not to fund current spending. The second is the sustainable investment rule, which states that public sector debt must be kept at a stable and prudent level and that, in most circumstances, net debt should be maintained below 40 per cent. of gross domestic product over the economic cycle.

When I made my maiden speech in the House in the spring of 1974, I urged something even more extreme. I was a former director of an oil company with interests in the oil industry, and I proposed that the oil and gas reserves in the North sea were minerals and therefore a capital investment, and that any depletion of a capital investment should be made only if it were matched by spending. In other words, I argued that we should regard the oil and gas money not as revenue but as a depletion of capital. To that extent, I was even drier than the two fiscal rules introduced by the Chancellor of the Exchequer in 1997.

There were two bad judgments in 1997. The first was the creation of the tripartite arrangements between the Treasury, the Financial Services Authority and the Bank of England, which were insufficiently clear and allowed the banking crisis to come upon us without sufficient recognition by the FSA. The removal of the supervisory role from the Bank of England was, in my opinion, a mistake. Through the Treasury Committee, I have urged that we should try to distinguish between the regulation of banks, which is the responsibility of the FSA, and the supervision of banks, which in my opinion should be the responsibility of the Bank of England, because only the Bank of England has the necessary close, hands-on ability to deal with banking problems. We are talking about the movement of the Governor of the Bank of England’s eyebrows, and the quiet persuasion that the Bank is capable of exercising.

The second bad decision taken in 1997 was the tax of a net £3 billion on pension funds imposed by the Chancellor of the Exchequer. Some of my colleagues call it a £5 billion impost, but in fact it was a £3 billion impost, and it was not the main cause of the problem in the pensions industry. In order, the causes were, first, increased longevity, which was not recognised by the actuarial profession, secondly, stock exchange weakness and, thirdly, the tax imposed by the Chancellor of the Exchequer. That led, however, to the closing of many final salary schemes, which in turn led to many people thinking that instead of saving through a pension, they could save through house values. They looked to house prices as a store of money, which, in due course, they could rely on to fund their standard of living in retirement. I am afraid that that will prove a very serious problem, because people in their 40s and 50s cannot begin to hope for the standard of living in retirement that many pensioners currently enjoy.

Those were the mistakes of 1997, but things really began to go wrong in 2000, when the Chancellor of the Exchequer gave up on prudence and loosened the spending taps. Spending was up, and much of it was financed through stealth taxes—the definition of which is that they are concealed from individuals, who are not meant to notice them—which have a distorting effect on the economy. The weakness that was building up was masked by an extraordinary world tailwind of prosperity caused by globalisation. The prosperity of the Asian tiger economies, followed by the so-called BRIC economies—Brazil, Russia, India and China—combined with the benefits of globalisation, led to the symptoms of our problems being masked, and we did not realise how bad the situation was becoming.

Even so, it became necessary for the Government to fudge the figures on the fiscal rules, which depend on the economic cycle. In July 2005, we were told that the cycle began in 1997, not 1999. In 2005, in the pre-Budget report, we were told that the cycle would end in 2008-09, not 2006. Later, in the 2006 pre-Budget report, we were told that the end date would be 2007, not 2008-09.

The fiscal rules are intended to take into account the difference between generations. In the 1999 Budget, I think, the Chancellor defined what that meant: the Government do not pass on the costs of services consumed today to the taxpayers of the future—each generation is expected to meet the current cost of the public services from which they benefit. That is a laudable intention, but it does not work, and it is distorted by two factors. First, private finance initiatives are not taken into account in expenditure, and expenditure is treated as coming from future revenue, not current capital. Secondly, public sector pensions are largely unfunded, and that huge liability is also regarded as a duty of future revenue streams. In addition, Northern Rock is not included in public debt, and personal household debt in this country is 177 per cent. of disposable income—the highest in the world—which shows that there are problems to come.

What do we do now? I am not an enthusiast for Government initiatives, but the situation surely needs a lead. My first principle is that this is no time for laissez-faire. My second principle is that initiatives must be on an international basis, so I welcome the international meetings taking place today. It is obvious that we cannot find our way out of this by ourselves, especially as the economy in this country is in a less good position to cope with the problems than those of many other countries. Therefore, we must have international co-operation.

My third principle derives from what happened with Lloyd’s of London, which I think is the nearest analogue to the present situation. I was very much involved in the Lloyd’s of London rescue—I was one of the four members of the Lloyd’s audit committee. What we did then was draw a line between bad and good assets, and I think that, somehow or other, the same needs to be done now. That is why I am so opposed to the Paulson plan in the United States. Henry Paulson proposed a $700 billion fund to buy toxic assets at more than their market value, thus pumping money into the banking system. I think that that is completely wrong, because it goes against the principle of moral hazard and also leads to the impression that there is a rescue fund of $700 billion.

During the discussions on the Paulson plan, we heard many Congressmen say that they wanted some of the $700 billion for people in their constituencies. That is completely the wrong attitude. There is not a fund to be shared out; rather, there is pain to be shared. We must find ways of coming together and establishing how that pain can best be shared between those who can afford to share it and those who should bear it, because my next principle is that we must respect the importance of moral hazard—those who have taken the risk must bear a proportionately higher share of the pain.

My fifth principle is that, as we all know, borrowing short and lending long is sustainable only if there is confidence. That confidence must be restored, and I see no reason why it should not be restored. There is much that is good in the economy—we must bear in mind that even Hitler could not stop the daffodils growing. What we must do, having cauterised the toxic elements, is move on, restore confidence and work with the good elements in the economy.

I agree with much of what the hon. Gentleman is saying. There are some good elements in the economy. Is not one of our problems the fact that we have allowed the manufacturing sector to decline and now have a gigantic balance-of-trade deficit in manufactures and goods in general? We must rebuild that sector of the economy, rather than relying wholly on the financial sector, as we have for so long.

I am aware of that argument, but it is actually very difficult to distinguish between the manufacturing and service sides of industry. For instance, as a result of CAD/CAM—the integration of computer-aided design and computer-aided manufacturing—much of what was manufacturing has been taken over by people sitting at desks with computers.

I remember taking part in exactly those discussions in the Treasury when Nigel Lawson, then Chancellor of the Exchequer, did not want to know about the distinction between the manufacturing and service sides. The point was made most effectively at a CBI conference, when one of the delegates said “People talk all the time about the service sector—servicing what?” Manufacturing is, at root, the dynamo of the economy, but, given globalisation, the distinction matters less. If there are jobs that have value added greater than the manufacturing sector, it is logical that manufacturing should stay in the lower-paid parts of the economy. I do not think many people would suggest that we should try to repatriate heavy shipbuilding from Korea and China. The hon. Gentleman has made a good point; an allied point relates to our independence and our ability to remain independent without being sucked too much into global markets.

I accept much of what the hon. Gentleman has said, but does he not agree that a strong comparison can be made with Germany, which has retained much of its manufacturing and a balance-of-trade surplus in manufactures, but whose economy is, in other respects, very similar to ours—it is of a similar size, for instance? Would it not have been better to go some way in the German direction and retain some of our manufacturing base, rather than letting all—or much—of it disappear?

How do we retain our manufacturing base? Do we impose import duties to prevent the import of cheap products? We have been served exceptionally well by globalisation, and we have been served very well by the ability to import products from other countries that can manufacture them more cheaply than us. We have concentrated more on the financial sector than on manufacturing—and I think that the Germans would be deeply envious of our financial sector, which has also served us exceptionally well. This is part of a much broader discussion. The hon. Gentleman makes a good point, but I do not go very far along the road with him. I reiterate, however, that there is much of good in the economy.

My sixth point is a minor one, but it is significant in some circles. The Government must use their influence to ensure that the remuneration of anyone working within banking and other sectors is proportionate to their duties. They must use their influence to ensure that banks and other financial institutions set their remuneration at levels that do not affront other people, because there is a lot of anger out there among people who see that bankers have got them into this mess and now bankers are being rescued. Levels of remuneration should be set at tactful levels.

I am interested to hear my hon. Friend’s arguments, but I do not know what he means when he refers to the Government trying to influence the City. Does he not fear that if they were to intervene in such a way that the highest earning bankers and financiers in the world did not see London as a suitable place in which to base themselves, the bankers and financiers would not cease to earn astronomic sums but would simply earn them elsewhere, with a great loss to the British Exchequer?

Indeed, but bankers and others must realise that the levels of remuneration are causing offence in some areas, and they must be more tactful about the manner in which they handle their remuneration. That would be my solution.

My seventh point is a minor one, which is not to make things worse. That follows Denis Healey’s rule on holes, “When you’re in a hole, stop digging.” Yesterday, the House in its wisdom passed on Second Reading the proposals on dormant accounts. Those proposals will actually result in banks’ capitalisation being reduced, which is exactly the worst thing that we could possibly do at this particular moment. I hope that the Dormant Bank and Building Society Accounts Bill makes extremely slow progress, and if it should founder at some point, or be delayed indefinitely, that would cause me no distress.

My final point is that I heartily concur with the main thrust of the comments of my hon. Friend the Member for Runnymede and Weybridge (Mr. Hammond) from the Front Bench about the office for budget responsibility. The Chief Secretary sat down before I had a chance to do so, but I was going to ask her whether she had read the carefully researched and heavyweight report of the Treasury Committee entitled “Banking Reform”, because the Treasury Committee, having taken detailed evidence over a long period and given this matter considerable thought, came to the conclusion that there should be a financial stability committee, which is very similar to the Conservative proposal.

I was going to ask the Chief Secretary whether she had read the report and concurred with the Treasury Committee’s views on this point. However, the Financial Secretary has now rejoined us—he has recently rejoined the Treasury Front-Bench team, where he has served before with great distinction and a great knowledge of the subject. I would be most interested to hear from him the answer to the question that I was going to ask the Chief Secretary. Has he had a chance over the past few days to read the Treasury Committee’s report, and does he agree with the conclusion that there should be a financial stability committee? If so, why does he agree with that idea and not with the ideas of the Conservative party?

My age means that I reflect back on some of these subjects with perhaps more distance than the hon. Member for Runnymede and Weybridge (Mr. Hammond), who spoke for the Opposition. I am not sure whether he is in fact younger than me; perhaps he is, but his memory certainly seems shorter.

It is worth reflecting on the original purpose of the fiscal rules when they were drawn up in 1997. They, together with the step of providing independence to the Bank of England, were intended primarily to provide reassurance to the market of the discipline of an incoming Labour Government. That was then reinforced by a variety of actions. The right hon. and learned Member for Rushcliffe (Mr. Clarke) has departed, temporarily one hopes, but he will bear out the rigid adherence to the previous Government’s spending plans—which he, I think, confessed he would never have attempted to adhere to himself. Thus, the first two years of this Government were a landmark of hairshirt discipline, which many Labour Members found uncomfortable to wear. That bears some relevance to the history lesson that the hon. Member for Runnymede and Weybridge gave us, because this Government started with a rigid adherence to both of the rules that we are supposedly discussing this afternoon and to the tight controls on Government spending imposed by an election pledge. That was in place for a purpose, which I believe most Labour Members bought: we needed to make clear our intentions to a wider community than just the Labour party, and I think our approach worked.

If a further message were needed about that stern discipline, it was sent in the decision to set aside the one-off benefit from the sale of mobile telephony licences to pay off a proportion of the national debt, instead of using that money—as undoubtedly the previous Government would have, given their approach to the disposal of national assets—to fund ongoing expenditure. Although the decision that that extraordinarily large sum should not be used to fund any current expenditure or infrastructure investment but instead be set aside purely to reduce ongoing debt obligations was again greeted with concern by some Labour Members, the message was clearly understood, both in this House and outside: this Government were serious in their endeavour to maintain tight control over spending and over the uses they made of any proceeds of assets sale.

That message was clearly understood by the markets at large. I do not want to be too partisan, and I shall address some of the unfortunate elements touched on in the hon. Gentleman’s speech, but it is fair to say that the approach was also intended to be a counterpoint to the virginal approach to fiscal discipline of the previous Government. I mean “virginal” in the sense that such discipline was wholly absent, not that it was guarded with some determination. The previous Government’s approach led to record borrowing in the early 1990s, which, to be fair to him, the right hon. and learned Member for Rushcliffe sought to address over his chancellorship—the Prime Minister continued the task in the early years of this Government.

That absence of a fiscal framework, or any framework that one could speak of with any authority, was of course mirrored in the previous Government’s approach to monetary policy. I cannot remember the details because they change so frequently, but quite what measurement of monetary expansion we were supposed to be following at any time appeared to vary according to the whim of the Chancellor, Prime Minister or Prime Minister’s adviser. The firm intent in 1997 was to set some of this experience behind us and to demonstrate a purpose and a clarity that had been wholly absent from the past.

However, one must then explain a subsequent period—somewhere between 2000 and 2005—when it is fair to say that there was a significant loosening of discipline. I am retiring from this House at the next election, so I can probably be fairer than others sometimes might be. I had to pop out of the Chamber towards the end of the contribution of the hon. Member for Twickenham (Dr. Cable), but I noted what he said about the structural deficit that emerged during that time, and I agree with him. I shall go on to explain why that happened, but the trend was clearly emerging during that period and was not addressed. There is no doubt that the failure to address it was partly a political choice. My right hon. Friend the Chief Secretary set out the priorities of the Government during that time, and I too had classrooms held up by pit props, infant children having to use outside toilets and other horrors of public provision that are, thank goodness, behind us—certainly in my constituency and, I imagine, virtually every other constituency. The imperative for change was evident, and I can well understand the pressure on the Government to deliver higher public spending, together with the public pledge that had been made to respond to relatively low levels of health service spending set against the European model.

I stand to be corrected, but it is my opinion that the difficulty that occurred in that period was more due to over-optimistic projection of revenue than to poor controls on public spending. The Treasury Committee has noted on several occasions that revenues, and especially tax streams, tended to be overestimated consistently, without anyone analysing properly why. I do not have an immediate explanation, although oil revenues tended to show huge variances. People said that they could be explained by this or that happening out in the North sea. I shall not venture into that territory, as I am ignorant about it, but one area that deserves further scrutiny is income from corporation tax. I suspect that this country faced increased competition in corporate taxation over a long period.

Both under the previous Conservative Government—to some extent—and certainly in the first years of the Labour Government, this country had significant advantages in the taxation of corporate bodies. We have not lost those advantages, but the balance has shifted over time and some of those subject to corporation taxation—depending on the business model adopted—suited other environments better. We have not studied carefully enough how that has happened and the effect that it has had on the underlying revenue streams on which we must rely.

That underlying deficit was perhaps made more acceptable by its occurring during a period of above-trend economic growth, but it was not acceptable to say that because the economy was growing strongly—as it certainly was at that time—we would just live with the unexplained deficit. In one of the many good reports it produces every year, the Treasury Committee gives tables that show the steadily changing forecasts for each revenue year over a long period, and the consistent trend is that the figures deteriorate. The reality does not come anywhere near the projection: it is almost uniformly worse. That should have rung alarm bells. It did so in the Committee, but perhaps we did not set the alarm bells ringing loudly enough. It is certainly true that the Government received regular reminders of the emerging picture of poor performance against projections in public sector discipline.

We have also had—this has been debated pretty extensively already—a situation in which the two published fiscal rules have been increasingly forced around the realities before us. I would not say that the rules have been bent, but we have certainly taken the evidence that is sitting in front of us and said, “Well, if you look at it this way, that way and then the other way it looks as if we are still just about there.” To some extent, there was a desire to fool ourselves, rather than using what the fiscal rules provide, and I shall come back to the value of those rules.

The fiscal rules are more of a prompt for scrutiny of the underlying issues in the economy than anything else. I personally do not think a 0.5 per cent. variation in one of the rules makes any material difference in economic terms, and obsession with a precise 40 per cent. figure does not help us a great deal. However, the rules should prompt people to ask questions about what the trends are and in what direction we are travelling. I do not think that those questions were asked robustly enough during this period. The difficulty with this tweaking approach and of tying the rules to economic cycles is that one relies incredibly on data that are provided to us on economic performance.

The other consistent message I have seen throughout this period is that quite sharp changes in data are frequent—for example, changes in the projection of what happened in terms of economic growth are not at all uncommon through this period. Those are often changes not merely of the odd 0.1 per cent. but of quite material amounts. That is true in other areas of data related to the targets.

Let me turn to the picture presented by the Opposition, because I have possibly earned a few hits by being fairly candid about what I think some of the problems have been. I honestly cannot see the merit—I confined my interventions to two rather narrow technical issues, because I was not going to question the politics—of the “wise men” proposal as it has so far been set out by the Opposition. Without any idea of the mandate that those people will have, the approach is of little value. One of the other critical points is how the body will interface with the parliamentary systems of scrutiny and with the role of the Office for National Statistics, which, as I sought to remind the hon. Member for Runnymede and Weybridge, makes objective judgments about the placing of investments on or outside the balance sheet of our nation. There was little development of that idea from which one could hope to make a reasoned judgment about whether it would be a valuable initiative.

I am uncomfortable with the idea—even though I am leaving this place, and so by implication might agree with it—that the thrust of the proposal appeared to be that politicians are not of a great deal of value in the process and are not to be trusted, and that we should place economic policy very firmly in the hands of some supposed experts. If we will have to learn one thing from what has happened in the past six to nine months, it is that experts have their faults too. Forecasting the future is a pretty chancey activity and even understanding the present is pretty tough. I am an historian, and that is why I choose to look at the past. It is hard to see what those people would bring that well-informed and well-resourced support for a parliamentary system of scrutiny might not do better. I would encourage some thought in that direction.

Let me turn to some final points. One issue of difficulty has been the statistical base from which we have tried to shape our economic policy. The Government deserve huge support for the step that they have taken in that regard, and they should be encouraged to go further. They set up the independent Office for National Statistics, which has already started to cause a problem. That is good and right, as we should have a robust debate about the statistics that we prepare. Arguably, as I have said, we have suffered relative poverty in that area, with some degree of complacency. We now need to resource that independent ONS better.

I noted, and was worried by, the concerns expressed by the Bank of England about the quality of the data used for its decisions about setting interest rates. I think that my honourable colleague on the Treasury Committee, the hon. Member for Gosport (Sir Peter Viggers), will also remember those concerns, and we should listen to them very closely. I do not question the professionalism of the ONS at all, but we need to make sure that judgments about economic policy are made on the basis of information that is as up to date, robust and well founded as we can make it. I think that that has not yet happened.

Another point is that I think that we probably need a mutually agreed target, although I am not sure that rules are appropriate. As I have said, rules really exist to make us ask questions about what has happened, and we should not obsess about our adherence to them. I should prefer a system that tackles the point raised by the hon. Member for Twickenham. I do not know whether he is right honourable, although he is very honourable. He said that when we spot an underlying budget deficit, we should have a degree of discipline to address it, and that that should be a political process.

It is not a technical issue, and we need to have a robust debate about why such a thing has happened. There are choices here: if I am right in saying that one of the problems behind the current difficulty was a drift in corporate tax revenues, we should debate how that should be addressed. That is a political judgment, and we as parliamentarians collectively should accept the result of that debate as a discipline for the future.

How would that work? For example, we have seen PFI liability rise inexorably over the years to £190 billion for £60 billion of capital. We have seen the balance of trade deficit rise to £87 billion, and we have also seen a quarter to half a percent. suppression of GDP growth every year for eight years. Such matters have been highlighted and commented on by hon. Members in this House, but will he explain how we can do what he wants and consider them fully without indulging in the usual bun fight about how things are better than they were under the previous Administration?

The basic answer is that we need to act like grown-ups. Incidentally, the hon. Gentleman raises two points, to each of which I would give a different answer. I have a view about how trade deficits correct over time. We should debate in an adult way in this House an underlying budget deficit that lies relatively firmly under our control. I have no problem with the fact that there will be political disagreements about how we should tackle such a problem, but it is a subject that should at least be discussed properly so that we can attempt to agree our goal. It is not acceptable to run a budget deficit in a time of boom in the knowledge that it will not be corrected by any action taken in that time.

I was disappointed by the tone of the hon. Member for Runnymede and Weybridge. He started off the debate as a pretty familiar bun fight, and he took the opportunity to kick the Government around, but there are plenty of past errors to be shared around. There is certainly no saintly Conservative past on which we can reflect. There is plenty of hindsight to be shared around, too. Few of us spotted the terrible events that we face. We had inklings of some of the problems, but not their scale or the direction from which some of them have come, so it ill behoves the hon. Gentleman to have been apparently so arrogant and wise on these matters.

There is much more to be done in building consensus. By and large we have protected the independence of the Bank of England and the operation of the Monetary Policy Committee as an area of relative political consensus. There are some worrying signs—here I criticise the hon. Member for Twickenham, whose opinions I share on some matters—but generally speaking there is shared consensus on the merit of the decision taken and the discipline it has imposed. I wish we could extend that to more adult discussion of these matters, which is why I looked for more from the Opposition than I received this afternoon.

When we speak about financial discipline we are also talking about the confidence of the City and those who assess the relative market performance of a country. One of the things lying at the heart of the issue of confidence is whether proper financial disciplines are in operation in the financial affairs of a given country. I certainly take the view that the proposals of my hon. Friend the Member for Runnymede and Weybridge (Mr. Hammond) to achieve a financial stability framework are in principle a very good idea. In addition, I firmly endorse the fact that any such arrangements must hold the Executive to account.

When we are talking about sound money, however, we have to look at what has led us into our current situation. One of the features that intrigues me greatly, which was alluded to by the hon. Member for Twickenham (Dr. Cable) and which I followed up in an exchange with the Chief Secretary when she was in the Chamber, is the extent to which we are being sensible in relation to our indebtedness—general Government gross consolidated debt—and its relationship to gross domestic product. I referred to the Office for National Statistics figures released on 30 September and pointed out that the figure of 36 per cent. given by the Chief Secretary—I am happy to be corrected by the Financial Secretary if I am wrong—was in fact 42 per cent. at the end of March 2007, according to the independent analysis of the ONS. The ONS suggests in its report that in line with rules imposed on it from above—by which I mean EUROSTAT—Bank of England lending to Northern Rock should be re-routed through Government as from 9 October 2007:

“If the loan were re-routed via government then the debt to GDP ratio would be 46.1 per cent. at end-2007.”

That does not take into account any implications in respect of Bradford & Bingley, nor does it take into account what is in the pipeline.

One of the curious things that has not, as far as I can judge, been discussed at all in the debate is what is going on in Luxembourg at the moment between the Finance Ministers in ECOFIN and how they are addressing all these questions.

The idea of a European bail-out of the banking system was pure grandstanding by the President of France, who is currently president of the Union. It was a nonsensical notion. There is absolutely no way in which the amount of money required could possibly be provided by the taxpayers of Europe. Some of the countries of Europe would be devastated by the idea that they should contribute to a bail-out for one country. That is why Germany took a position in relation to its own vital national interests. The same applies to Ireland.

I feel strongly that one of the reasons there are jitters, deep anxiety and a sense of disturbance in the economic markets in the City is that people there witness decisions being taken that have an impact on financial discipline in individual countries. We have seen what happened to Iceland. The real question for the countries concerned is whether the system within which they operate is sensible enough for anyone to have any confidence in it.

I shall not go into the issue of derivatives, financial instruments and the rest of it, although, in a sense, that is one of the causes of the problems that have accumulated, along with a lack of moral discipline among the people running the financial companies, as I said in a letter to The Times recently. The real problem is a lack of prudence and discipline, but that has not been generated over a very short period. In fact, it is implicit in what went wrong in the arrangements developed under the Maastricht treaty, a matter that was raised by the hon. Member for Twickenham.

I do not need to go into every detail of the reasons I took such a strong position against the Maastricht treaty, but we are still living with its consequences; when we measure financial discipline, using the Office for National Statistics paper on Government deficit and debt, we see that its headline is “Government deficit and debt under the Maastricht Treaty”. That seems to have been overlooked.

I have not heard much comment today about the stability and growth pact. We really should examine how the mechanisms actually work, and the extent to which the City of London, or indeed economists internationally, can have confidence in the system used by any particular Government. Here, we are speaking of the United Kingdom, but we might also have regard to the eurozone and Europe as a whole. From the outset, it seemed to me that the stability and growth pact, rather like subsidiarity, was a con trick. It set out rules that were never going to work. When the European Union stability pact was proposed, the then Chancellor of the Exchequer wrote a letter, dated 22 November 1996, to all Members of Parliament—he obviously regarded the matter as important—setting out in detail why it was such a good idea.

The relevance of that point to the debate is that, through the whole of Europe, the question that is or ought to be on the radar screen is whether the Governments of Europe and the Government of the United Kingdom—which, because it is outside the eurozone, merely has to endeavour to comply with the rules of the stability and growth pact, whereas all the other countries are subject to the full panoply of rules—have been left dealing with funny money. There is no way that I can see for anybody to properly assess the true levels of borrowing of the member states.

I shall go through the figures, which are of some interest, though they are rather a mouthful. I shall be slightly selective as I cannot read them all out. There are eight member states with Government debt ratios higher than 60 per cent. of GDP in 2007. They include Italy, whose level currently runs at 104 per cent., and Greece, at 94.5 per cent.—and we saw what happened to Greece the other day. Belgium is running at 84.9 per cent., Hungary at 66 per cent., Germany at 65 per cent., France at 64 per cent., Portugal at 63 per cent. and Malta at 62 per cent.

Although I thought the Minister got her figures slightly wrong, according to the ONS figures, it is true to say that the United Kingdom is at only 46 per cent. I begin to get slightly nervous about the outpourings from Government sources or briefings off-side suggesting that we have room for manoeuvre to increase our level of deficit to meet some of the gravely excessive deficits of other countries. If we increased ours by 20 per cent., we would match the levels of deficit of Germany and France, but that would not be good policy and it would certainly not be in line with sensible financial discipline.

The reason why I am so concerned is that I believe that confidence in the entire system has been undermined by countries that have been running unbelievable deficits, particularly the United States. I do not have the figures at my disposal, but I know that they are unbelievably high. That is the problem.

Just as in the case of high street banking, the question arises whether individuals have over-borrowed and have been allowed or encouraged to borrow in excess of their income. In some cases borrowing has been up to 110 per cent. of income. In relation to confidence in the markets and to Governments and the European Union, a monumental amount of excessive debt has been accumulated which cannot be explained in terms of the intrinsic value of their currencies and the amount of money that they are generating by manufacturing products that are tangible and explicable. The question is whether we are effectively running on funny money.

I am worried that the enormous sums of money—again, this is a matter of financial discipline—that are being talked about will be funded only by sovereign wealth funds, over which we would have no control, or by printing money, which would make the position that much worse.

I was most interested in what the hon. Gentleman said about the historic borrowing levels, because it illustrates how the requirements for entering the euro were fiddled, particularly in favour of Italy. He is on weaker ground, however, when it comes to arguing that over-borrowing by Government is to blame for the present financial crisis. What is to blame for the present financial crisis is over-lending by banks and the financial sector.