HC Deb 30 June 1998 vol 315 cc207-24 '.—For the purposes of sections 152 and 153— The "National Debt" shall be taken to include the principal amount of any non-governmental debt to the extent that such debt is guaranteed by the Government or by any organisation under its effective control or management and the amount of Government borrowing in any one year shall be calculated accordingly.'.—[Mr. Heathcoat-Amory.]

Brought up, and read the First time.

Mr. Heathcoat-Amory

I beg to move, That the clause be read a Second time.

The new clause attempts to incorporate into the Bill a tighter definition of what the Government mean by national debt. The matter has assumed greater importance since the publication, some two weeks ago, of the Government's public expenditure plans, which signal a marked increase in public expenditure under a smokescreen of fiscal rectitude.

The talk has been about imposing a discipline on the national account, but the reality underneath is that public expenditure is signalled to rise from next year and in every subsequent year by at least 2.75 per cent. in real terms. We estimate that the figure will be greater than that, once account is taken of all the changed definitions at the margin.

Thus, the question of definitions is important, particularly the frontier between capital and current expenditure. Those of us who have laboured in one of the professions thought that we understood the distinction between capital and revenue expenditure, but I do not think that the Government do. I tabled a simple question to the Chancellor of the Exchequer about whether he plans to classify expenditure on hospital repairs as current or capital spending. Any first-year accountancy student can answer that. Repairs are revenue, whereas alterations or additions are capital expenditure. However, the Chief Secretary answered, after some delay: Expenditure on hospital repairs will follow the classification rules for the national accounts."—[Official Report, 29 June 1998; Vol. 315, c.29.] Therefore, either he does not know or it is still to be determined. A simple question received a very muddled response.

Mr. Barry Gardiner (Brent, North)

Will the right hon. Gentleman inform me—I am genuinely ignorant about this—on whether exchanging the old shadow Chancellor for a new one is considered a repair or an alteration?

Mr. Heathcoat-Amory

If the hon. Gentleman wants to make a better attempt at a witty intervention, I hope he will catch your eye, Mr. Deputy Speaker, so that we can hear him develop that point, because it will obviously be very humorous. I am attempting to ask a serious question.

Are the Government adhering to normal accountancy rules in classifying expenditure? Judging by the reply that I have elicited, they have not made up their mind. That is a pity, because they have put enormous weight on the so-called golden rule under which the Government promise to borrow only for capital expenditure. If they are able to capitalise expenditure, they can meet that golden rule with almost any increase in overall public expenditure.

We tabled the new clause, which is modest in intent, to urge the Government to ensure that any off-balance-sheet lending is properly classified as national debt, if they extend a guarantee. The best example that we can think of is the channel tunnel rail link. Perhaps the Paymaster General can enlighten us, but it appears that the Government have extended a guarantee so that no risk, or not sufficient risk, has been transferred from the public sector. If so, the borrowing should surely be classified as national debt. The Government have every incentive to remove borrowing from the national debt so that they can, in effect, engage in public expenditure without it showing up in debt or breaching the golden rule, or the secondary rule, which places a limit on the ratio of debt to gross domestic product.

There is much confusion in this area. Changing a definition does not make something different. In the space of only three months, the Government have given up their objective of repaying national debt. The Red Book, which is only three months old, shows that, even under the most lax option of public expenditure, they had a clear intention of repaying debt. On page 121, it refers to the fact that the Government's calculations reflect the projected debt repayment over the medium term. In the expenditure statement issued less than three months later, all that was gone. There is now no provision for repaying national debt.

In government, things can move quickly. Promises and intentions made perhaps in good faith at Budget time are abandoned a few months later under the impact of a few broken promises. The Government are in difficulty over class sizes, they have broken their promises on hospital waiting lists, they have been panicked into taking the brakes off public expenditure, and they are reverting to tax and spend policies. The principles of national accounting should remain sacrosanct. They should not be able to manipulate the picture by changing definitions, particularly the definition of capital expenditure and revenue expenditure, simply to suit the political imperative.

New clause 7 would at least ensure that any debt guaranteed by the Government, or by any organisation under their control, would be classified as national debt. I do not seriously see how the Paymaster General can object to that, and I await his reply with interest.

Mr. Cranston

We had the usual trip around the houses with the right hon. Member for Wells (Mr. HeathcoatAmory). He spoke about the Government's confusion, but I think that he is totally confused. He moved a new clause that proposes a change in the definition of national debt to include the principal amount of any non-governmental debt … guaranteed by the Government". I suggest that that is incoherent.

If a guarantor guarantees an amount, there is a contingent liability, which depends, for example, on the risk of default by the principal debtor. One certainly does not attribute to the guarantor a debt for the full amount guaranteed. It is a contingent liability.

Mr. Gibb

If a bank guarantees a loan, it is obliged to account for the full extent of that guarantee as a liability on its balance sheet.

Mr. Cranston

We are talking about the definition of national debt, which is an entirely different concept.

The new clause would include in the definition of national debt any debts incurred by any other organisation under the Government's control or management. There is a legal argument as to whether the Export Credits Guarantee Department gives guarantees or grants insurance. The ECGD is under the control of the President of the Board of Trade. Is any debt guaranteed by ECGD to be taken into account in the national debt? That would be ludicrous.

The new clause is a typically incoherent amendment moved with the usual rhetoric by the right hon. Member for Wells. It signifies nothing, and I am sure that it will be rejected.

Mr. Gibb

The new clause is important, because the Government have consistently and deliberately attempted to manipulate the national accounts. On the private finance initiative, for example, there is a dispute between the Treasury and the Accounting Standards Board about exposure draft FRS5. The Government claim that the liability should not be on their balance sheet, but on the private sector.

The Accounting Standards Board accept that the liability should not appear on the Government's books, but only if the risk is transferred to the private sector. It is right. If it were to give in to pressure from the Treasury, the same accounting standards would apply to the private sector, and a swathe of debt would disappear from private sector balance sheets, which would lead in due course to company bankruptcies. The people to blame for that would be the auditors who had not applied sensible accounting methods to those companies' accounts.

Mr. Cranston

I should like to ask the hon. Gentleman a question about banking, as he invited me to do so earlier. Is not the aim of securitisation to get assets off the bank's balance sheet? It is a typical commercial practice.

Mr. Gibb

Yes—and it is important that, when securitisation takes place, there is a genuine transfer of the risk. That is why the integrity of organisations such as the ASB is so important, and why it is wrong for the Treasury to put pressure on the ASB to change its rules simply to suit the Treasury's convenience in getting debt off its own balance sheet.

That is the first way in which the Government are manipulating the accounts. We have also seen the accounting treatment of family credit. There has been almost a deliberate decision to replace family credit with working family tax credit, in order to take £1 billion from Government expenditure by reclassifying an element of a benefit as a tax credit. Its classification as tax forgone rather than expenditure wipes £1 billion, with one sweep of the pen, from the Government's accounts.

7.30 pm

The third element, to which my right hon. Friend the Member for Wells (Mr. Heathcoat-Amory) alluded, involves the debate about capital versus revenue, and about what those words mean. The Government have set great store by the introduction of the golden rule that states that they can borrow only to finance capital expenditure; but what is capital expenditure? My right hon. and hon. Friends have sought to discover the definition, but have been rebuffed by the Government in all quarters, because the Government cannot provide a definition enabling us to be certain about what they mean by capital.

Does a repair to a school, for example, count as revenue expenditure, or does it count as an improvement to the school, and therefore as capital? In the private sector, a repair is treated as revenue for accounting purposes, but, responding to a question, the Paymaster General said that it would depend on the level of repair. If the repair improved the building, it would be treated as capital; if it merely repaired the building, it would not. That is too uncertain a definition. We must have certainty in national accounts; we cannot allow such a level of subjectivity.

David Clementi, one of the Government's representatives on the Monetary Policy Committee of the Bank of England, said in evidence to the Treasury Select Committee: It can be quite hard to decide what counts as investment and what is current expenditure. It is difficult—which is why William Buiter, another member of the Monetary Policy Committee, has dismissed the golden rule altogether as a method of assessing the correct level of debt for a Government. In evidence to the Select Committee, he said that many countries that supposedly operate the golden rule—as Germany has to do under its constitution—find creative accounting ways of emasculating it when this needs to be … you can always reclassify 'current' as 'capital' if you twist the arms of your accountants". That is precisely what the Government are seeking to do. We have seen it with the ASB, and we are seeing it with the golden rule. The new clause would put into legislation a definition of what is capital and what is not—of what is debt and what is not.

The fourth area in which we have seen manipulation of the accounts is the guarantee. We saw it with the guarantee of the loan that the channel tunnel rail link consortium needs to finance the link—a £3.8 billion Government guarantee. Yes, it is a contingent liability; it has not been drawn down on the Government. But, even under the Government's current rules, in assessing whether an item ought to be included as a liability or debt, the Government must consider the level of risk. If the Government consider it sufficiently likely that the debt will be drawn down, under their current rules that debt will be regarded as part of Government debt.

In a parliamentary question, I asked about the guarantee. The Chief Secretary to the Treasury replied: The Government believe that the amount of finance required for the Channel Tunnel Rail Link is such that the financial markets would have been unable to provide the credit support which Government are to give."—[Official Report, 29 June 1998; Vol. 315, c.28.] The Government are providing a guarantee, not to reduce the cost of finance, but to provide a loan that no one in the private sector is prepared to give. If that is not an admission that this is a very risky venture, I do not know what is. Even according to the Government's own current definition, they should include the channel tunnel rail link guarantee as part of debt.

We have seen four examples of the way in which the Government are manipulating the accounts. It is vital that that element is removed.

Mr. Love

The hon. Gentleman has referred to the difficulty and complexity of decisions of this type. He has mentioned the ASB and the Government. He will know that earlier this year, during discussions on the rules on a true and fair view, the ASB was able to persuade the Treasury to accept that element in the new accounts. Does he agree that such complex and difficult issues should be left to those who can negotiate and discuss them, rather than our trying to deal with them in a catch-all clause such as this?

Mr. Gibb

The "true and fair view" debate was about the Government's imposing on small businesses all the paraphernalia of statements of standard accounting procedures, which has never been done before. SSAP 9, for example, requires an element of overheads to be included in the valuation of stock. That imposes an unbearable burden on small businesses.

The hon. Gentleman is right to say that the ASB should not be bullied by Government. It should not be forced to change its principles and procedures simply to accommodate the Government's desire to shift debt from the balance sheet. That is why the new clause is so vital: it will give the world outside the Government—the City of London, and people who read Government accounts—certainty about what constitutes repair, what constitutes capital and what constitutes debt.

I hope that the Government will either accept the principle of the new clause, or set out the precise definitions of capital, revenue and what they regard as debt. I hope that they will also explain why the channel tunnel rail link guarantee of £3.8 billion is not being included in the balance sheet as a liability, notwithstanding the Chief Secretary's admission that it is such a risky venture that no one in the private sector would lend us money for it.

Dr. Vincent Cable (Twickenham)

It is difficult to see anything objectionable in the new clause. I consider it a matter of general public interest for the public accounts to feature as much transparency as possible. That is desirable not just for public scrutiny purposes, but because the markets increasingly require exacting standards in regard to both public and private borrowing.

I do not think, however, that we should become too excited. It is not at all clear that the new clause constitutes an enormous advance in our understanding of the problem of public debt. The real problem—as has been revealed by the crisis in Asia over the past year—is not the difference between guaranteed and non-guaranteed debt, but the difference between implicit and explicit debt. In Asia, enormous amounts in private loans have been raised by private agents, and the markets chose not to believe that those were purely private transactions. There was an implicit assumption that the Governments would underwrite them. Similarly, the British economy has a large amount of implicit debt that is not guaranteed, and would never be picked up by a measure of this kind.

I am sure that Conservative Members are well aware of an obvious instance. I refer to the legacy of privatisation of the utilities. If, for example, a highly geared water utility were to make itself insolvent as a result of mismanagement, it is difficult to believe that the Government of the day—whatever their politics—would allow taps to be turned off for months on end while the question whether guarantees were implicit or explicit, and the relationship with creditors, were sorted out. It would be a Government responsibility to act immediately, and an implicit guarantee would be associated with that utility because it was a utility. Simply having explicit guarantees does not take us forward very far. Inevitably, there is a vast murky area in which the Government effectively underwrite the liabilities of large parts of the private sector.

None the less, the new clause has taken us forward a little. It also enables us to raise a few more fundamental questions about what the Government hope to achieve with their debt objectives. In a sense, they have only themselves to blame for the fact that they are now being caned for a lack of precision on debt, because they have chosen to elevate their public debt target to such a high level.

It is not clear why public debt has become such an obsession for them. It can be seen from the latest relative public-debt ratios achieved by countries in the Organisation for Economic Co-operation and Development that we have a lower gross debt ratio to gross domestic product than any other G7 country—lower even than the United States—and that our net debt-to-GDP ratio, which we are now targeting, is lower than that of any other OECD country except Japan, which has the special problems of pension funding. We do not have a seriously aging population, so why is there this preoccupation with public debt?

The Government's reasoning is that they have a problem with interest payments, but the reason why we have an interest problem on public debt is because of the extremely high rate of interest on long-term debt, which is the highest in the G7. That is in large part because of the inflation expectations of the market, which now rates Britain as a greater inflation risk than Italy; it has done so for some time, not just under this Government. Therefore, the issue about public debt seems to have been grossly inflated.

I should like to pose one question, and I hope that the Minister will deal with it in his answers. What is the implication—the hon. Member for Bognor Regis and Littlehampton (Mr. Gibb) has already touched on this—of the two rules that the Government have set for themselves: the golden rule and the public debt rule? How do those two things interact?

At first sight, the golden rule is—I disagree with the hon. Gentleman on this—sensible. It provides for balanced budgeting, but allows the Government to borrow up to whatever the limits are in terms of viable projects producing a good social return, but the question arises: supposing the Government do follow the golden rule and borrow heavily for good, useful public sector projects and that drives public debt upwards, how do the Government reconcile what would then be inconsistent objectives? What takes priority—the golden rule or the debt target, and why should the golden rule be overridden if there were a particular worry about public debt that is created by good public sector projects?

I pose that question, which might seem a little academic, in the context of two specific industries: the Post Office and the London Underground. Those are two good examples of seriously under-capitalised utilities that clearly need to borrow substantial amounts for investment. It would almost certainly be economically sensible for them to do so. It would produce good returns for the public sector. In our view and in, I think, that of most Labour Members, they should remain within the public sector, so why should they not borrow, and why would it matter if that drove up to a modest level the debt-to-GDP ratio?

I thank Conservative Members for raising this issue; it does seem important. I do not think that they take us enormously far forward, but this seems a useful addition to the collection of statistics. Perhaps it is a good opportunity to help the Minister to take us a little forward in debating his thinking on public debt management.

Mr. Flight

The new clause is extremely important because it airs an issue, in a changing world, about which Governments, of both political complexions, have scarcely thought. In the past, the general principle has been that any material liabilities that were being guaranteed should be covered by the reserves, but I think it is correct to say that there have not been clear rules on the matter to date.

The issue is important for the reasons referred to by the hon. Member for Twickenham (Dr. Cable) and my hon. Friend the Member for Bognor Regis and Littlehampton (Mr. Gibb). As we move out of an age in which much—particularly in the utility and other sectors—was within the Government sector anyway, and into an age of many more private finance initiative deals and many more Government-private partnerships, it is inevitable that the amounts that are explicitly guaranteed by Government will grow—before we even reach the more difficult issue of what is implicitly underwritten by Government.

The new clause makes the explicit, transparent requirement that anything that is guaranteed by Government, Government agency or body related to Government, should be included within the national debt total. That could logically be interpreted as meaning that two different lots of figures should be produced: the national debt total ex such guarantees, and the national debt total cum such guarantees, with such liabilities as have been guaranteed potentially being classified by their assessed risk.

The Government's present posture seems to be somewhat cavalier, particularly in relation to the £3.8 billion-worth of London and Continental Railways bonds that have been guaranteed. I believe that I am correct in saying that the view of the Deputy Prime Minister was, "There is less than a 20 per cent. chance that the liability will be called, so forget it." That is not at all adequate, for the reasons to which my hon. Friend the Member for Bognor Regis and Littlehampton drew attention. Whatever the risk, the money could not have been raised without that Government guarantee. If the Government are going to move forward with their private sector partnerships and with PFI activities, the issue is going to come up much more.

As has been pointed out, this touches on wider issues—for example, what do the Government mean by their definition of the factors underlying the golden rule? It is also correct to make comparisons with the private sector. As has been pointed out, in looking at a bank's capital adequacy, contingent liabilities, where guarantees have been given, have to be taken into account. In relation to any other financial services business that has capital adequacy requirements, the same is true, although, interestingly, contingent liabilities are given weightings, depending on the degree of risk involved.

7.45 pm

This is an issue in regard to which there may be scope for pan-European clarification. Certainly, the statistics that are kept by the countries of Europe—indeed, by EU member states—seem to be all over the place. If this country simply ignores this important issue, we move into what I refer to as Italian-Franco territories. Much though I love both countries, they are notorious for fiddling their national statistics, so that we do not know what the real situation is.

I was astonished to discover that the famous Italian debt ratio, on which the whole of the EMU went ahead, is not, in fact, based on the official Italian national income—the national income has been inflated by an estimate of Italy's black economy, thus serving to reduce the debt ratio from what would otherwise be about 150 per cent. to close to 110 per cent. I repeat: there is much to be said for having pan-European, agreed rules on what Government statistics should comprise, what should be published and what the divisors for certain ratios should be.

The hon. Member for Twickenham rightly raised the important issue of implicit as well as explicit potential liabilities. I think that it is impossible to define rules for the quantification of that, but it is a fair point that, in relation to the problems in Asia, the expectation that there was implicit Government support has been an important cause of some of those problems. The point at issue is not so much the explicit wording of the new clause as the fact that there need to be agreed, clear rules on this issue. Pan-European rules would be useful in enabling us to understand the true financial situation of all EU member states.

In addition to dealing with the extent to which Governments' liabilities that have been guaranteed should be set down and there should be transparency, the new clause raises the issue of future unfunded Government liabilities, which should also be explicitly quantified. What are the unfunded pension liabilities of Germany? What are the potential liabilities of the UK's national insurance arrangements? Without such data, any comparison of economies is meaningless.

Given the combination of the change in definition from the public sector borrowing requirement to the public sector net cash requirement; the issue of how to define capital and current expenditure to implement the golden rule; and the wider issue of whether we are going to organise expenditure wholly within the state sector or within privat and state allowances, I fear that the Government are deliberately seeking to ensure that the statistics can be manipulated to suit whatever story they want to be told. The current economic situation means that that is easier to do than it has been in the past.

I strongly support the new clause and all that goes with it. If the Government do not accept it, I hope that they will come forward with sensible proposals on how the true figures of our national accounts can be recorded, and on the possibility of having a pan-European standard.

Mr. Nick St. Aubyn (Guildford)

I, too, welcome this debate. Viewers of the parliamentary channel may be debating whether they dare switch over to watch the match at 8 pm. We are debating a vital issue that will affect all our futures, so I hope that viewers will stay with us.

As this is a debate about the national debt, I should like to put to rest once and for all the canard that we have heard so often from Labour Members—I hope that we will not hear it again tonight—that the previous Government doubled the national debt. That is totally misleading. The previous Government halved the national debt in their first 10 years in office.

I am grateful to the authors of the Chancellor's fiscal strategy report for pointing out that, during the first 10 years of the previous Government, the level of debt fell from 49 to 27 per cent. of gross domestic product. It is true that, in the following recession, it rose again to 45 per cent. of GDP, but that was still below the level that we inherited from the profligate previous Labour Government. However, there was a benefit even there, because one of the effects of the recession, difficult though that period was, was that it delivered a very low sustainable rate of inflation and, with that, a much lower rate of Government borrowing on Government bonds, of which, of course, this Government have been the beneficiary. This Government really did have a golden inheritance. Unfortunately, not all that glitters is gold.

Mr. Christopher Leslie (Shipley)

The spectre of the golden legacy stirred me into action again. If the legacy was so golden, what explanation would the hon. Gentleman give to his constituents of the £25 billion used to pay interest charges on the national debt which still hang around the necks of all taxpayers in this country? Does he not realise that many people feel that the previous Government should be surcharged for such profligacy?

Mr. St. Aubyn

I am surprised that the hon. Member for Shipley (Mr. Leslie) is not embarrassed by his own question. At this stage in the previous economic cycle, the Conservative Government repaid Government debt and reduced Government interest charges. This Government have changed their tune within a year of being in office and have no intention of repaying a single pound of debt. The debt is going up year on year. That will be the tarnished legacy that we will inherit in a few years' time. The Paymaster General may smile, but we have to ask what the golden rule means.

I re-examined the figures in the Chancellor's report. It is interesting that capital expenditure under the last Labour Government accounted for more than four fifths of the level of their borrowing. We all know that borrowing under that Labour Government was at an absurdly high and unsustainable level, yet most of it was what this Government would call capital expenditure and would therefore come close to their golden rule. As my hon. Friend the Member for Bognor Regis and Littlehampton (Mr. Gibb) pointed out, it is no wonder that the golden rule is next to meaningless when it comes to judging how truly prudent a Government have been.

We have heard about the bonds in respect of the new rail link to the channel tunnel. Only this morning, the Financial Times pointed out how imprudent it is of the Government not even to count that guarantee as a contingent liability, let alone subject it to the more rigorous system that we are proposing, whereby the sum would be stated up front, as it were, on the Government's balance sheet.

Let us consider the Export Credits Guarantee Department. We all support the idea of guarantees for exports. It is a thoroughly sound idea, and it underpins the strength of the economy that we bequeathed to the present Government. However, there is always room to consider the cost of what we are doing for exports. If we know the true figures, we can get clearer information and a better idea of that cost.

Of course, there is a cost associated with all the guarantees that the Government are giving. They mean that the paper in the market is effectively Government paper. As we know, the more Government paper there is in the market, the higher will be the cost of raising additional funds for the Government. There is a cost to all taxpayers for the guarantee of the channel tunnel link funding, and that cost will be in the form of higher interest rates or all Government debt. Again, the hon. Member for Shipley should have been too embarrassed to get out of his seat.

My hon. Friend the Member for Arundel and South Downs (Mr. Flight) alluded to another problem. I am grateful to the Library for coming up with some information from the International Monetary Fund on pension fund liabilities. The IMF report states: For many industrial countries, net pension liabilities exceed current overall national debt. In fact, in Japan, Germany and France—according to the IMF figures—the level of unfunded pension debt alone is more than 100 per cent. of GDP. In other words, as my hon. Friends have said, there are myriad ways of measuring the obligations of Governments.

We should not be blinded by the fact that the Minister will no doubt allude to the Maastricht definition. The Maastricht definition makes no reference to the level of unfunded pension liabilities which are so high in Germany and France but which, according to the same report, are less than 5 per cent. of GDP in this country. There is a dramatic difference between the strong Government debt position inherited by the Labour Government and that in any other country in Europe—and, indeed, in almost any other country in the world.

The new clause is simple and would have a very clear effect. Above all, if the Government accepted it, it would show that they took their liabilities seriously. It would show that they did count the cost, and merely by demonstrating that, would go some way to mitigating the profligacy that we have already witnessed on the part of the Government, in respect not only of the channel tunnel funding but of student loans.

By the end of this Parliament, there will not only be £3.5 billion-worth of guarantees of channel tunnel funding but about £6.5 billion-worth of student loans guaranteed by the Government. That debt will be in the market, and the Government are ultimately responsible for it. The Government are using guarantees as a way to supplement their borrowing powers in every way they can. In the process, they are undermining the very claims to prudence set out in the report that we received from the Chancellor earlier this month.

Mr. Geraint Davies (Croydon, Central)

New clause 7 is a clear example of Conservative Members' financial illiteracy. The obvious point about the £400 billion national debt has already been made in this debate, as has the point about the cost of paying for that debt. The basic point that I want to make is one of financial literacy—that a contingent liability is not borrowing.

The Export Credits Guarantee Department has been mentioned in the debate. In simple terms, that department gives a guarantee—to Midland Bank, for example—to underpin a credit facility for an exporter, who in 99 per cent. of cases will later be paid by an importer. Therefore, that contingent liability never becomes borrowing. The idea of including such a liability on the balance sheet is therefore wrong. It is a situation in which a contingent liability never becomes a debt.

8 pm

I can see the hon. Member for Bognor Regis and Littlehampton (Mr. Gibb) thinking about that, and about the fact that it is facile and stupid to include contingent liabilities with borrowing. That liability will not become debt, although it is risk.

Mr. St. Aubyn


Mr. Flight


Dr. Cable

Will the hon. Gentleman give way?

Mr. Davies

I shall give way in a moment.

We therefore cannot simply club together those items, which are apples and pears. A comparison of that prescription with private sector practices, in companies and in balance sheets, would reveal that—although a company would have company borrowing on its balance sheet—a contingent liability, such as a guarantee to an associated company, would be in the footnotes of the accounts and not in the balance sheet. The reason for the practice is that that contingent liability may not be realised as a borrowing or debt obligation.

The Government issue Treasury bills and are obliged to pay for them; that is borrowing. Converely, if they give various guarantees but there is no real prospect of having to pay out on them—a contingent guarantee—it would be completely irrational to add contingent liabilities to actual borrowing to come up with a concept of debt.

Therefore, new clause 7 underlines a fundamental misunderstanding of public accounts.

Several hon. Members


Dr. Cable


Mr. Davies

I wonder why, if the new clause is such a good idea, the previous Government did not introduce such a measure during their 18 years in office. There seems to be a whole queue of hon. Members waiting to get involved in the debate.

Dr. Cable

Does the hon. Gentleman include the World bank in his definition of financial illiteracy? As a matter of course, that bank regards publicly guaranteed private debt as part of external public debt for the 130 countries that it reviews.

Mr. Davies

I was simply saying that one cannot combine borrowing with contingent liability and come up with a figure. No one is saying that we should not assess the level of the Government's exposure to risk. If one has, for example, a credit guarantee for £100 million here and one for £100 million there, and if one of them is a very highly geared, high-risk guarantee whereas the other is as safe as houses, we simply cannot add together the two and produce a meaningful figure. The idea that we can then add on to that figure an actual borrowing liability is ridiculous.

Those who tabled new clause 7 are trying to suggest that we should enrich our understanding with a more detailed breakdown of the different types of our exposure—which would include the private finance initiative, for example. If that were really the objective of the new clause, we would be having quite a different debate. However, it is facile seriously to expect the House to pass such a simplistic new clause.

Mr. St. Aubyn

It is evident that both a guarantee and a loan are a use of credit and a use of the Government's good name. They are very similar uses of credit, and we therefore need a common measure of both of them.

Mr. Davies

That is ridiculous. If the Government borrow money, they borrow money and have an obligation to repay it, underpinned by taxpayers' money. Conversely, it is a quite different kettle of fish if they give a guarantee covering, for example, a credit failure by an exporter, or by an importer to pay an exporter in a foreign market. If the hon. Gentleman cannot understand that difference, he should not have served on the Committee considering the Bill.

Sir Michael Spicer (West Worcestershire)

I had not planned on speaking in this debate, but was inspired to do so by the final remarks of the hon. Member for Croydon, Central (Mr. Davies). He said that borrowing is borrowing—which I totally agree with—but he should speak to the Chancellor of the Exchequer about that. The Chancellor has invented a new definition of borrowing, which is that it has to be related to capital expenditure and not to current expenditure.

I caught only the end of the speech by my hon. Friend the Member for Guildford (Mr. St. Aubyn), when he mentioned the golden rule. The golden rule is constantly being mentioned—I think mistakenly—as some act of great prudence.

Mr. Geraint Davies

Will the hon. Gentleman give way?

Sir Michael Spicer

I shall finish these comments—I might forget them—and then I shall certainly give way.

The golden rule breaks the point that the hon. Member for Croydon, Central made about borrowing being borrowing. It is quite wrong to try to disguise that fact.

Secondly, somehow or other, the golden rule has been used as some type of fig leaf for prudence. Yesterday, the Chief Secretary to the Treasury argued in the House with my hon. Friend the Member for Bognor Regis and Littlehampton (Mr. Gibb) about evidence given by Professor Buiter—one of the members of the Monetary Policy Committee—to the Treasury Select Committee, of which I am a member. Professor Buiter argued effectively—for very much the same reasons given by the hon. Member for Croydon, Central—that the golden rule was rubbish. The Chief Secretary said that that was not quite true, because the Government were actually interested in prudence. However, prudence—which is related to a second completely false conception, that I shall deal with now that I am speaking in the debate—is meaningless.

It is mistaken to argue that the golden rule, which is a new definition of borrowing, is somehow more prudent than a belief—as the hon. Member for Croydon, Central seemed to argue—that all borrowing is related to prudence.

Mr. Davies

I should like to make it clear that the golden rule is not a definition of borrowing, but a prescription for sound and prudent financial management. One borrows only against capital investment and not to pay for consumption. That is very sensible practice and is not a definition of borrowing. We all know that borrowing is simply taking money and spending it on whatever. The golden rule is a quite different proposition. I commend and support wholeheartedly the Chancellor's actions on debt management, the golden rule and separating capital and revenue. However, I completely reject new clause 7.

Sir Michael Spicer

I think that the hon. Gentleman and I agree on some points. The problem is that, as a definition of prudence, the golden rule is not a very good one. All precedent in public spending has shown that any increase in capital spending is usually accompanied by a pretty massive current expenditure commitment, even if it is argued that it is for capital expenditure. The relationship between capital expenditure and current expenditure has been well established as an economic concept.

Mr. Davies

Surely the point is that the revenue costs of capital investment should be paid from revenue and not from borrowing. One can borrow to invest in capital expenditure. Although there will be a knock-on revenue cost, that should be paid for out of tax. The points are quite consistent.

Sir Michael Spicer

As the hon. Gentleman said, all borrowing is borrowing. The fact is that there is not such a thing as "distinct borrowing for capital expenditure" that can somehow be identified as different from borrowing for current expenditure, in terms not only of prudence, but of practical fact.

I do not understand why there is such a fuss about the new clause. I should say, partly in response to a comment by the hon. Member for Croydon, Central, that one of the reasons why the previous Government did not make such practices particularly explicit is that there was never any doubt that attaching some type of public sector guarantee—as there would be, for example, if a company had a Government stake of more than 50 per cent. as some form of guarantee and, therefore, there was a distortion in how it was allowed to borrow in the market—should attract the application of public sector borrowing requirement rules.

Mr. Hammond

Does my hon. Friend agree that the hon. Member for Croydon, Central (Mr. Davies) fails to see that almost all borrowing by public bodies could be replaced by private sector borrowing with the backing of a Government guarantee? Therefore, his position is ludicrous. The Government could wipe hundreds of millions of pounds off the PSBR at a stroke. That is why guarantees and borrowing are similar in their effect.

Sir Michael Spicer

That is certainly a very important point. Another important principle, which I thought was shared by hon. Members on both sides of the House, was that if any institution, corporate or otherwise, entered the market for money with the backing of a Government guarantee, not only would it have the effect that my hon. Friend has just mentioned, but it would be highly distorting and very unfair to others in the marketplace borrowing at their own risk. It is a fundamental principle and until now, it seemed unnecessary to spell it out in legislation.

However, a number of initiatives and pronouncements by the new Government and some of the spins that have been put on them suggest that, for instance, they might be prepared for a company with a 49 per cent. private shareholding and a 51 per cent. Government shareholding to borrow in a way that ignored the PSBR rules, that was outside the definition of public sector borrowing and that unfairly distorted the borrowing process. The fact that such a prospect is in the political air makes it necessary to spell out exactly what fits into public sector borrowing—not only by means of figures, but in respect of any potential distortion in the capital markets, which are highly important and should not under any circumstances be neglected.

The fact that, apparently, we have a new ethos, makes it suddenly necessary to spell out exactly what is within the PSBR rules and what is not. We have not had to do so in the past because no Conservative Government would have dreamed of breaking the rules. We know that to distort the marketplace in such a way would be not only unfair, but disruptive and inefficient in terms of the best use of capital. In future, however, such a definition may well be needed. The more that Labour Members talk about no premium being attached to borrowing by people who have some guarantee—either because of a public sector majority shareholding or through another guarantee—the more it becomes necessary in terms of equity and the most efficient distribution of capital.

Unless the Government can guarantee that there is no question of there being any distortion or any public sector guarantee leading to the PSBR rules being broken, the new clause is absolutely essential as part of the new regime.

8.15 pm
Mr. Geoffrey Robinson

I should make two declarations of interest. First, I am not an accountant and secondly, I have an interest in football, so I hope that we shall make some progress on what is a particularly arcane issue.

The Opposition appear to be developing a new leitmotif along the lines that, under Labour, the Inland Revenue has taken much greater licence in secondary legislation—although the figures show that the same occurred as much if not more, and on equally vital issues, under previous Tory Administrations. They are also developing the line that there has been some weakening in the standards of our national accounts classification rules. The hon. Member for Arundel and South Downs (Mr. Flight) mentioned other countries fiddling their figures. I shall ensure that his remarks are brought to the attention of the Governments of the appropriate countries where, no doubt, he will be a welcome visitor this summer. However, in our case the rules have not changed.

Some Opposition Members are succumbing to what could be described as professional recidivism. In a sense we appear to be turning into accountants instead of legislators. We made it clear in Standing Committee that we could not accept a proposal along the lines of new clause 7, as it would make the Chancellor and the Government of the day accountable to the law courts, with all that that would involve, instead of to the people of this country, as we intend to remain the case.

Mr. Hammond

Will the Minister give way?

Mr. Robinson

I shall give way in a moment. I sense that the hon. Gentleman does not share my interest in making progress.

The hon. Member for Twickenham (Dr. Cable) asked what was so wrong with building up a high level of borrowing. We would prefer a prudent level, and he should bear in mind that one cannot get complacent about borrowing. In one year—the pre-Budget year of 1992—the Conservative Government increased the PSBR by £50 billion. When we took office, the interest burden was about £25 billion a year, which is more than we spend on schools and hospitals. Having said that, if we are to invest prudently for the future, we must stick to the golden rule and balance the books over the economic cycle in revenue terms. If the burden of that investment in the future is paid for in future by those for whom we are investing—our children—it has a certain fairness and symmetry.

The hon. Member for Bognor Regis and Littlehampton (Mr. Gibb) repeatedly asks how we deal with repairs and what is the difference between substantial repairs and additions. The right hon. Member for Wells (Mr. Heathcoat-Amory) gave us quite a good definition. He said that repairs to schools were usually paid for out of revenue, but that substantial additions or improvements were partly capitalised. It is a normal accounting process. We are in no way trying to understate the need for capital investment or the required level of capital investment. We realise only too clearly the great neglect there has been under previous Governments of all colours. When there is a cash problem, the immediate solution is to cut back on capital spending and keep going on revenue. That results in under-investment in services such as London Underground, to which the hon. Member for Twickenham referred. It is clear from the current state of affairs that there has been under-investment throughout the public sector, which is a crying shame.

Several Opposition Members raised the same two or three issues, so I shall not reply to them individually. In respect of the channel tunnel rail link, instead of admitting that it was a complete mess from the beginning, having been pushed through with bad financial arrangements and for political reasons by the former Deputy Prime Minister, and saying, "We made a mess of it; thank goodness the Labour Government have managed to get it back on the rails and make a success of it," they are attempting to say that we are doing something wrong.

The Government guarantee was examined by the Office for National Statistics, which then decided not to include it as a contingent liability. Opposition Members may disagree with the ONS; from time to time, no doubt they will. It is true that we are using the financial reporting standard—on the exposure draft. We are having a vigorous debate with Professor Tweedie and his colleagues and are trying to reach an agreement. However, that is not unusual for Governments. The idea that we are doing things that are more risqué—bending the rules and twisting the interpretations further than would be reasonable—is quite wrong.

The Conservatives hate the fact that we have found a way in which to make a success of the PFI. We have done more in our first year than they did in the previous five years. Apart from the channel tunnel rail link, which was a flop, they achieved hardly anything. We have made a success of the idea organisationally and practically. Building programmes on a Victorian scale for schools and hospitals are under way because we have got the PFI right within a year, after the Conservatives spent five years messing around and getting nowhere.

That puts the CTRL and the PH into context. We are examining ways in which to strengthen the role of the ONS and the National Audit Office. The normal accounting principles continue as before. We have not changed anything; we have been far too busy for that. Instead of congratulating the Government on moving towards welfare tax reform—a major reform that the Conservatives did nothing about in all their years of power, except intensifying dependency—

Mr. St. Aubyn


Mr. Robinson

I shall give way in a moment. If I am being unreasonable, I hope that hon. Members will understand. I should like to make progress if possible.

The Government are getting on with their plans and succeeding. Our golden rule is well understood in the country. We want a prudent level of debt, and we are publishing our code of fiscal stability. That is what is necessary. The new clause would merely make the Chancellor report through the courts for his actions and result in the Government's economic policies being judged by lawyers, who, for all their immense contribution to our national well-being, are not cut out for that role. We cannot accept the new clause. I hope that good sense will prevail all round and that the Opposition will not press the issue to a vote.

Mr. Heathcoat-Amory

The purpose of the new clause was to get some assurances from the Government that they would respect the ground rules in the presentation of the national accounts. The Paymaster General's response added to our alarm. However, we do not intend to divide the House. We are aware that there is a football match taking place somewhere else and we would not wish some team or other to score when we are otherwise engaged. Hon. Members in all parts of the Palace can relax on that score.

We had hoped for some assurances. We are fully aware that the Government have two fiscal rules, which they are proud of. We wanted to know how the rules will be policed. The golden rule is all very well, and supposedly ensures that the Government borrow only for capital expenditure. If that is the case, it is important that the Government maintain discipline in allocating expenditure to capital or revenue. There might be a natural temptation for them to allocate expenditure to capital so that they can claim to be keeping to the golden rule while letting expenditure increase almost without limit. That is why we have asked some routine questions about whether the Government will keep to normal accounting rules.

The Paymaster General has given us some assurances. His understanding of the distinction between repairs and improvements is familiar. That makes it all the odder that, when asked the same question, the Chief Secretary gave an evasive reply that amounted to little more than, "We will make up the rules as we go along." That is why we were suspicious. The Paymaster General at least gave us an outline assurance.

The second discipline is that the Government say that they will keep a limit on debt as a proportion of gross domestic product, but there is another possible fudge on that. They can reclassify debt as private rather than national debt, even if it is guaranteed by the Government, who retain all the risk. That would be a clear evasion. The Paymaster General said that the private finance initiative was now a great success. It is easy to make a success of the idea if all the risk remains with the Treasury.

As the Register of Members' Interests shows, I am a director of two companies. My fellow directors and I will take on any PFI project, borrowing enormous sums and undertaking any Government contract, if the Treasury guarantees the loan and all the risk remains with the Government. It is easy to make a success of PFI if the Government take the borrowing off their balance sheet, but retain the risk. That is the problem that we were attempting to explore and that would be prevented by the new clause.

Sir Michael Spicer

Is not what my right hon. Friend is saying particularly important in the context of the Government's macro-policy on public spending, bearing in mind that public spending may go through the roof—or at least go considerably higher than we had planned? If the Government do not raise taxes, they will have to fudge public sector borrowing, as my right hon. Friend is saying. Those are issues of the highest importance.

Mr. Heathcoat-Amory

My hon. Friend is right. Our request is simply that the published projections and the national accounts should give a true and genuine picture of the state of borrowing. My hon. Friend is familiar with the problem in other countries that have huge contingent liabilities that are not disclosed.

My hon. Friend made a notable speech in the debate on the convergence criteria and the single currency. Several of us observed that it was risky for the single European currency to start when the constituent economies did not show the true extent of public borrowing. Italy, for example, has a gigantic unfunded public pensions liability, which amounts to little more than a hope that a future generation of taxpayers will honour the promises made by the Italian Government today. We have contrasted that with the happy position in this country, where the majority of pension liabilities are represented by assets that are audited and are a visible expression of where future pensioners can expect to have their pensions paid from.

The reliability of public accounts is very important, not just domestically but in international comparisons. We are not satisfied with the way in which the Paymaster General has dealt with the issue. We shall return to it on another occasion. We greatly regret the fact that a new clause tabled in a positive and constructive spirit has not found favour, but we know that we have won the argument. I beg to ask leave to withdraw the motion.

Motion and clause, by leave, withdrawn.

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