§ Motion made, and Question proposed, That this House do now adjourn.—[Jane Kennedy.]
§ 12.5 am
§ Mr. Ken Livingstone (Brent, East)I am especially happy, so close to the Budget, to raise one or two issues about the Government's finances, which were-oddly enough—touched on in the debate on handguns. An Opposition Member pointed out that there is a black hole, as it has become known, in Government finances. We did not hear an apology from any Opposition Member for leaving us that happy legacy, but the Government face several major problems in clearing up the mess that we inherited.
We saw a tremendous burst of enthusiasm and publicity for the decision to set the Bank of England free to set interest rates. Much play was made of the fact that, in the days immediately following the decision, long-term interest rates declined. On 6 May, when the Chancellor made his announcement, long-term interest rates—by which I mean United Kingdom 10-year Government bonds—were running at 7.1 per cent. By the end of that week, they had declined to 6.95 per cent. and everybody welcomed that. It was not mentioned that by 29 May and throughout that week the rate had crept up by 0.5 per cent., which more than compensated for the initial decline.
The rate increased by 0.25 per cent. over the rate before we gave the Bank of England freedom to set interest rates. That shows that the international money markets do not judge the management of the British state's finances and our economic health by whether the Chancellor or a Central Intelligence Agency agent—I understand that such a person is one of our new appointments—makes the decision on interest rates. I did not notice in Labour's manifesto a promise to appoint former CIA agents to determine Britain's interest rates, but we all live and learn. However, that is not the issue.
What determines long-term interest rates is the assessment that the money markets make about the long-term health of the British economy. On the key indices, for all the flim-flam and nonsense during the election campaign, we have serious problems. When the money markets set long-term interest rates, they assess the balance between savings and consumption in the British economy. Part of the problem for our economy is that we have saved far too little for decades—the problem was accelerated during the Thatcher regime when tax cuts led to a further structural imbalance in public finances—and we have invested far too little. That problem was exacerbated under the previous Government.
I was struck by the then Chancellor's performance during the run-up to the election and by his constant emphasis on the golden rule. That is the idea that over an economic cycle we should not borrow. We might borrow during the downswing, but the borrowing must be repaid during the upswing. If we apply that golden rule now, we should have repaid Government debt in each of the past three years. We should see a reduction in the public sector borrowing requirement and in total Government debt. Instead, it has crept up from about 25 per cent. of gross domestic product, when the previous Prime Minister took office in 1990, nearly to the 60 per cent. limit that will cause problems with the Maastricht criteria. I do not believe that Governments can borrow their way out of recessions.
920 I expect to see the Government carry out the commitment to the golden rule, which means that we should not continue borrowing this year. There should be substantial tax increases so that we do not continue to pile up the burden of debt. At this stage in the cycle, we should have been repaying for about two to three years.
There has recently been a rather bizarre green budget from Goldman Sachs and the Institute of Fiscal Studies. There has been talk in glowing terms of Government debt reducing to about zero by the turn of the century. That, however, is wildly optimistic. So many of the assumptions in that green budget are optimistic. I hope sincerely that no one on the Government Front Bench will pay much attention to the predictions that are contained within it.
It is true that the level of Government spending has reduced—we might assume that it will reduce dramatically over the next few months given a dramatic increase in tax revenues coming to the Government as more is spent in the consumer boom that is building up—but dis-saving in the corporate sector has more than matched that improvement in Government finances.
I know that "dis-saving" is a ghastly term, meaning the reverse of saving, but let us consider the second quarter of 1996. As a proportion of gross domestic product, the dis-saving by Government was 4 per cent. By the fourth quarter of that year, only six months later, it had fallen to 1.3 per cent. Goldman Sachs and the Institute of Fiscal Studies, for example, were saying, "This is a dramatic 2.7 per cent. improvement." But that was more than matched by a worsening in the corporate sector of 2.9 per cent. Company savings over that period dramatically declined.
Once again, we are seeing a reduction in savings and an increase in consumption. It is like pressing one side of a mattress and seeing the other side rise. Until we tackle the underlying imbalance in the economy, an impact on reducing Government debt could be wiped out by a reverse effect in the corporate sector or even in personal savings.
The green budget is quite glowing about our prospects, but, in reality, total savings within the economy, as a proportion of GDP, declined from 16.4 to 16.1 per cent. How does that relate to investment? If we cannot increase the level of savings, we cannot increase the level of investment. It is especially significant and disturbing that the level of investment in the economy as a proportion of GDP is lower than it was during Mrs. Thatcher's first recession. That is stunning. In the midst of that devastating recession, the then Government presided over a higher level of investment than was achieved after five years of sustained growth in the economy.
The long-term implications are devastating. If we make a simple comparison between ourselves and Germany, we should be aware that the latest figure for the UK for the first quarter of this year is 15.2 per cent. of GDP savings while in Germany, for the last quarter of last year—the latest figure that is available—the proportion is 21 per cent. Until we close that gap, we shall continue to decline in relation to the strength of the German economy. Any question of being able to join monetary union or even re-enter the exchange rate mechanism would be extremely painful.
I shall conclude by spelling out what we should do. We need to tackle the so-called black hole in Government finances with a set of policies that improve the level of 921 investment. A clear and obvious approach would be a tax on dividends. That would immediately bring in billions of pounds to the Government, thus eliminating borrowing problems. At the same time, we would create a climate in which business would be encouraged to invest rather than to consume profits. That would put us more in the frame of mind of, for example, German and Japanese corporate leaders.
The second obvious option is the utilities tax, which the Government are committed to introducing. How much better it would be if we were to pitch the tax at a realistic level of £10 billion. I do not take that figure simply on the basis of saying that that is twice what we think that we shall get from my right hon. Friend the Chancellor of the Exchequer. It is the figure which every independent City analyst of what the utilities could sustain has said is possible. If the utilities can sustain it, we should encourage them to make a major contribution to the restoration of sanity in our public finances and the increase in investment.
If either of those options were too radical, I can think of many other areas. We could have a higher rate of capital gains tax on short-term profit-taking—once more, bringing money into government, but encouraging long-term investment by British industry. Certainly, we should think in terms of halving the rate of advanced corporation tax relief from 20 to 10 per cent.
Between all those, we can get the money from the corporate sector to restore some semblance of balance. I suppose that some people would criticise that as quite a monetarist approach, but those are radical measures which need to be taken. I would not want to be divisive in these days of harmony, but it struck me as odd that the cost of keeping British troops in Germany is between £2 billion and £3 billion. Given that the Russians have gone home and could not fight their way across Chechnya, I do not think that they are going to sweep across the central European plain. It seems barmy that we are paying between £2 billion and £3 billion a year to keep British forces in Germany.
Finally, we must consider what the individual should be contributing. At a time when we have major problems with financing and under-investment, we look as though we are set for another mini consumer boom of the same sort that was orchestrated by Nigel Lawson in the 1980s, although on a smaller scale. Look at the pattern. Consumer spending is already increasing and outstripping the growth of gross domestic product—an unsustainable position. Also, £30 billion in windfalls is about to land in the pockets of people throughout the country from the flotation of insurance companies and building societies, all of which could fuel a massive consumer boom. We are already starting to see the impact of that in London and the south-east, where house prices have started to rocket again, particularly those at the top end of the market.
I see some Opposition Members nodding enthusiastically at the return to the lunacies of Lawson. The trouble is that those sort of lunacies have to be corrected by a savage recession to restore the damage—a recession of the sort that we lived through in the late 1980s and 1990s. Therefore, there would be a boom that mainly benefited the well-off in the south-east, but the 922 consequences would fall on industry and the population in general, once again wiping out a substantial proportion of our industrial base.
While we should tackle the underfinancing of the state by the corporate sector, we also need to consider what the individual should be putting in. It is clear that we cannot go back on our commitment not to raise the basic or top rate of tax, but we should remove the loopholes because they are almost exclusively used by the very well-off. We should consider a substantial increase in stamp duty for the more expensive end of the homes market. I certainly hope that we will consider eliminating mortgage tax relief—anything that removed this obsession that we have with investing in our housing, rather than in industry, would be well worth doing.
Finally, what of national insurance contributions? We were rather vague about those during the general election campaign, thank God. We have left ourselves the freedom to remove the cut-off on those contributions. I do not want to be unpleasant to anyone who is struggling on a middle income, but why not have national insurance contributions paid on all earnings over £50,000? Why not a double levy on all earnings over £100,000, so that those who have done best in the past 18 years, can make a bigger contribution now to resolving the mess that we have inherited?
I have spelt out more than enough tax increases to close the gap in Government financing. We should also restore substantially the contingency fund because I suspect that in the next year we will find that we have been left many crises by the outgoing Government, for example, in the funding of the health service and education.
If we restore the public finance and stop borrowing this year to fund revenue spending, we should create the climate and the markets in which long-term interest rates come down. My only worry is that the mindset of many people on the new Monetary Policy Committee may mean that we have to do something incredibly radical to break them out of their fixation with increased interest rates.
Perhaps when Eddie George retires and the shadow Chancellor has finally been worked over by his own party, we could do a lot worse than appoint him as Governor of the Bank of England, as he obviously had the right approach as Chancellor, of favouring the needs of industry over those of the City
§ The Paymaster General (Mr. Geoffrey Robinson)I congratulate my hon. Friend the Member for Brent, East (Mr. Livingstone) on securing the debate. He will be aware that he has provided me with a unique occasion on which to make my ministerial debut in front of a tense, crowded and excited House. If the debate does not entirely fulfil his expectations, he might reflect on the subject that he has chosen and its timing—the public sector borrowing requirement, a few weeks ahead of the Budget. I crave his indulgence, as I fear that I may not rise to his expectations.
The Government's central economic objective is high and stable levels of growth and employment, so that we may improve the living standards of all, and not just the few. That can be achieved only with monetary and fiscal stability, as the essential framework for reviving long-term economic performance.
923 The Chancellor's announcement of 7 May, giving the Bank of England responsibility for setting interest rates, will go some way towards providing the low inflation and stable interest rates necessary for a successful economy. My hon. Friend referred to the fact that the Chancellor showed exceptional boldness in moving within a few days of taking office to provide the Bank of England with the necessary autonomy to set interest rates, while—this is an important point that my hon. Friend did not make—retaining for the Government the essential responsibility for setting the inflation target.
My hon. Friend made light-hearted reference to the establishment of the Monetary Policy Committee, which is a further important step towards providing the stability that we need. If one thing is clear from the 18 years of Tory rule, it is that the biggest enemy of growth is the boom and bust economy that the Tories created.
We had the two deepest recessions in the post-war period, with unsustainable booms occurring intermittently between them. That is the biggest enemy of the investment in skills, infrastructure, education and industry that my hon. Friend wishes to see. That view is shared by all Labour Members. Unless we can get that stability and that long-term view of the management of economic policy, we shall not get the investment and savings that he referred to as the essential basis on which to build our economic policy.
My hon. Friend rightly made much of the mismanagement of the PSBR under the Tories. At its peak, in 1993–94, the PSBR was more than £45 billion, or 7 per cent. of gross domestic product—more than twice the Maastricht criterion to which my hon. Friend referred. The previous year, 1992–93—not coincidentally, the year of the general election—it was more than 6 per cent. of GDP. Traditionally, as we know, the Tories manage to engineer a pre-election consumer boom in an election year, and that year was no exception.
§ Ms Diane Abbott (Hackney, North and Stoke Newington)If allowing the Bank of England to ratchet up interest rates untrammelled is such a good idea for industry, why have the Confederation of British Industry, the Engineering Employers Federation and other broad-based groups speaking for industry complained so bitterly about the trend in interest rates and the overvalued pound that is a consequence?
§ Mr. RobinsonI thank my hon.. Friend for her intervention. She overlooks the fact that the CBI welcomed the steps that we took to give the Bank of England independence, to establish the monetary committee and to separate regulation from the Bank so that it can concentrate on its core function, the delivery of the inflation target set by the Government. It is no good trying to get away from the central basis for what we need: stability and steady, sustainable growth. There is no solution other than growth to our economic problems, but growth must be sustainable, and it can be sustainable only if we get away from the stop-go economics of the past.
Of course, the Conservatives saw the error of their ways immediately after the 1992 general election and predicted in every subsequent Budget that the public finances would be put back on a sound footing with the PSBR getting back to balance "over the medium term", to quote the former Chancellor. That has not happened. The projected 924 date for balance has been pushed back year after year, and the underlying problem of public finances has not been addressed. In fact, the burden of public debt has risen, as my hon. Friend the Member for Brent, East rightly said, by almost two thirds since 1990–91. Six years into the recovery, the Budget deficit is still high.
The Chancellor has already taken action to strengthen fiscal stability. The announcement that the conventions and assumptions underlying the current economic forecasts are to be examined by Sir John Bourn, the head of the independent National Audit Office, shows that the Government are determined to improve the credibility of the public finances. The Government's willingness to be more open and accountable in probing our fiscal projections is an impressive innovation. However, we must also have clear guidelines on how the public finances are to be managed.
Although the PSBR has fallen from the very high levels of a few years ago, we would still like significant further improvement before we can be confident that the public finances are on a sound long-term footing. To achieve that, the Government have promised to take a tough approach to the public finances. We have two clear principles on how they should be managed. First, and my hon. Friend made some telling points on this, we shall enforce the golden rule. That means that over the economic cycle, we shall borrow only to finance public investment and not current expenditure. Secondly, over the economic cycle we shall ensure that public debt as a proportion of national income is at a stable and prudent level.
To achieve those aims, the Government will need to have firm control over public spending. We have committed ourselves to existing public spending plans for 1997–98 and 1998–99. That will help to bring the public finances under control and give Departments the time that they need to undertake the comprehensive spending review announced by the Prime Minister. The review will examine how the Government's priorities can best be met within available resources and will focus on the medium term.
The Government will be a wise spender, not a big spender. The myth that spending is the solution to all problems has been well and truly dispelled by the Conservative Administrations. Under the Conservatives, spending rose and average spending was a higher proportion of national income than it was when the previous Labour Government left office. Those higher levels of spending have not succeeded in bringing about greater fairness or less poverty. The number of people of working age dependent on social security benefits has increased over the past 18 years. Almost one in five households of working age contain no one in work. Eighteen years of Tory government have shown that the overall level of public spending is neither the best, nor a particularly good, measure of the effectiveness of government in meeting the public interest.
Under this Government, public spending decisions will be guided by three principles. First, the Government do not have to act on their own in every area. The public interest can be met by the Government setting standards for the private sector—by the public sector working with the private sector to meet shared objectives. Labour pioneered the idea of public-private partnerships. Labour local authorities have done most to create such partnerships at local level. Since we took office, we have announced a review of the private finance initiative to investigate what obstacles stand in the way of bringing 925 projects to fruition and how the process can be streamlined. We have already ended universal testing, which has been a recipe for frustration and delay. We have set up the review that is being undertaken by Malcolm Bates to find out how we can further streamline the process in the centre of government, to ensure that the PFI is much more effective. We have also asked each Department to come forward with its own priorities and to have a general plan against which we can judge where we can best bring those priorities forward in the public interest.
Secondly, we believe that efficiency and value for money are of prime importance. Every penny of public spending must be justified by its objectives and efficiency.
Thirdly, public spending decisions must be based on clear priorities. The Government aim to shift public spending away from welfare arising from economic failure and towards spending on public investment, including investment in education and skills. By justifying public spending decisions with reference to those priorities, we shall ensure that public funds are put to the best use.
As with public spending, the Government have clear principles by which tax policy will be guided. Our manifesto stated:
There will be no return to the penal tax rates that existed under both Labour and Conservative Governments in the 1970s.926 I was pleased to hear my hon. Friend the Member for Brent, East endorse that. I did not always think that I might live to see that day after his performance in a certain other distinguished role that he played at about the same time that I was also running a different sort of organisation, but there we are.Instead of a return to such penal tax rates, the Government will shape tax policy to encourage employment opportunities and work incentives for all and to promote savings and investment. It will also be designed to be fair and to be seen to be fair. The windfall tax comes within that framework. It also allows us to fulfil an important manifesto pledge to take 250,000 young people and long-term unemployed off benefit and give them the opportunity of work, education and training.
Those principles also lie behind the Government's intention to reduce VAT on fuel to 5 per cent. in the forthcoming Budget, and our pledge not to extend VAT to food, children's clothes, books, newspapers and public transport fares.
Those are the policies for the way forward for the current Government, to bring our borrowing down to acceptable levels, to ensure growth, and to achieve our economic objectives.
§ Question put and agreed to.
§ Adjourned accordingly at twenty-nine minutes to One o'clock.