§ 1. Mr. Michael Brown
To ask the Chancellor of the Exchequer what is the United Kingdom's budget deficit as a proportion of gross domestic product; and if he will publish equivalent figures for other states in the European Union. 
§ The Chancellor of the Exchequer (Mr. Kenneth Clarke)
The UK's general government financial deficit for 1995–96 is forecast at 4¾ per cent. of GDP. In 1995, six European Union countries had lower budget deficits as a proportion of GDP than the UK, and eight had higher.
§ Mr. Brown
I am grateful to my right hon. and learned Friend for that reply. Does that not show that Britain has 452 achieved a position at the top of the tree in relation to the budget deficit as a percentage of GDP? Will he acknowledge, however, that that is not the only statistic where we lead in the European Union? Will he confirm that, although our unemployment continues to fall, today Germany has announced that its unemployment has increased to 4 million?
§ Mr. Clarke
My hon. Friend is right. We are reducing our fiscal deficit faster than any other major European country and today Germany has unfortunately announced that its unemployment has gone above 4 billion—I mean 4 million. [Interruption.] Let the Opposition take it as a warning. One of the main reasons why unemployment has risen in Germany is that it is suffering from a social chapter and all the additional on-costs on employment that this country has avoided.
§ Mr. Shore
We know that the Chancellor of the Exchequer is hellbent on reaching the 3 per cent. of GDP borrowing requirement—one of the essential criteria—at the earliest possible moment, but what does he now say to his colleagues in the European Union, especially Germany, which has just reported a 4.1 million unemployment level? In those circumstances, will he urge it to cut its public expenditure further and to raise taxation so that it can conform next year to the 3 per cent. of GDP borrowing requirement criterion?
§ Mr. Clarke
I am a strong advocate of getting down towards a balanced budget and of low inflation. They happen to be the Maastricht criteria as well, but as we move towards achieving them it is doing no harm to this country's economy. Sound Conservative policies are giving us the fastest growth of any major European country and falling unemployment. The problems in Germany and France are that they have not made the structural changes in their economies that a Conservative Government have been making in our economy for the past 16 years. Those two countries need more privatisation, less Government intervention, no social chapter, no minimum wage, a flexible labour market and the conditions for enterprise that we have put in place.
§ Sir Michael Spicer
Will my right hon. and learned Friend confirm that convergence of budget deficits is not the key factor determining whether a single currency would work, but that much more important is a convergence of business cycles, for instance?
§ Mr. Clarke
Yes, I do. The criteria are important. I am one of the people who argue that, if economic and monetary union is to go ahead, it is important to have strict adherence to the criteria on budget deficit, inflation, GDP-debt ratio, and so on. I have also frequently said, however, that the countries should go into economic and monetary union only if they are genuinely compatible with each other in other ways and would benefit from doing so. That includes being in the same stage of the business cycles, as my hon. Friend said.
§ Mr. Malcolm Bruce
If the reports that the Government are to announce today—that public sector pay awards are to be about 4 per cent.—are correct, will the Chancellor explain how that will be funded, welcome as it may be to public sector employees whose pay has 453 been squeezed? Following, for example, the local authorities settlement, does such an award not inevitably mean that other services will have to be cut or that teachers will be made redundant? Does that not add to the crisis facing many national health service trusts, which are unable to meet their current demands, never mind such a pay award?
§ Mr. Clarke
With respect, the hon. Gentleman knows that I cannot anticipate my right hon. Friend the Prime Minister's reporting to the House on the review body's report, which he will do this afternoon, but we have had a straightforward, successful approach to pay for several years. We take the view that, in the public sector as in the private sector, pay settlements should be affordable and fair and should reflect the low inflation culture that we have created, but the hon. Gentleman must wait for the proper announcement from my right hon. Friend.
§ Mr. David Shaw
Will my right hon. and learned Friend confirm that the United Kingdom's position relative to other European countries is much better than the statistics that he has announced might suggest, because many other countries in Europe do not take unfunded pension liabilities into account when they calculate their budget deficits? If a common accounting basis were used throughout Europe, would not our budget deficit position be shown to be infinitely better than those of other countries?
§ Mr. Clarke
Actually, for the purposes of European comparisons we endeavour to compare fiscal deficits on the same basis. Where other countries' accounting methods differ—they do not differ too much—there are moves to bring them on to the same basis. But my hon. Friend is right about funded pensions. When one looks forward and tries to judge the economic potential of a country, it is important to know to what extent it faces what is known as a demographic time bomb, especially if that will turn into unfunded pension demands that future working populations will have to pay. We have anticipated that possibility, with all the changes that we have made to pensions policy through the 1980s and into the 1990s. Our occupational pensions funds exceed the pension funds available to the whole of the rest of Europe, and we shall continue to ensure that we leave our successors a pensions liability that can be afforded and is properly funded.
§ Mr. Gordon Brown
The Prime Minister has said that public spending should fall to 35 per cent. of national income; the Chief Secretary to the Treasury has said the same. Does the Chancellor agree with the Prime Minister that that should happen—yes or no?
§ Mr. Clarke
If the hon. Gentleman would do the Prime Minister the courtesy of reading the quotations from him in The Sunday Telegraph, and also read the full text of what I said to the journalists from the Financial Times, he would find that the two are indistinguishable. The Prime Minister's remarks and mine could be swapped with each other. We have a clearly stated policy, which we have both enunciated, of a 40 per cent. target, and beyond that to go as far as we can. The 40 per cent. will be hit in 1997–98. If we continue to restrain growth in public expenditure below the growth in the economy, a steadily 454 declining share of GDP will be taken by the state. The Government are achieving that, and the high-tax, high-spending policies of the Labour party would take us in the opposite direction, as they always have in the past.
§ Mr. Brazier
Does my right hon. and learned Friend agree that, although the current budget deficit figures are good in terms of international league tables, the cumulative figures are even better? If we consider the total weight of debt in accumulated budget deficits as a percentage of GDP, on which interest will have to be paid by future generations, is not this country almost the best in the developed world?
§ Mr. Clarke
I can give a short answer. My hon. Friend is exactly right and puts his point clearly. The fact that we are steadily reducing our fiscal deficit means that we shall be on target to reduce debt as a proportion of GDP, and therefore to continue to reduce the burden of debt interest, as we have done in our period in office, which leaves room for economic growth and for other public expenditure, too.
§ Following is the table:
|General government financial deficit as a per cent. of GDP in 1995|
§ Note: Estimates from "European Economy", supplement A, Economic Trends, No. 12, December 1995.
§ 1 German figure for 1995 is its latest estimated outturn.