HC Deb 27 July 1999 vol 336 cc156-224

[Relevant documents: Bank of England Annual Report 1999 and the Eighth Report from the Treasury Committee, Session 1998–99, on the Monetary Policy Committee—Two Years On (HC 505).]

Motion made, and Question proposed, That this House do now adjourn.—[Mr. Hill.]

5.32 pm
The Chief Secretary to the Treasury (Mr. Alan Milburn)

This extremely welcome debate allows the House the opportunity to discuss the Government's approach to modernising our economy and to modernising—

Mr. Deputy Speaker (Sir Alan Haselhurst)

Order. I apologise to the Chief Secretary; I should have said at the outset that Madam Speaker has decided that there should be a 15-minute limit on Back-Bench speeches in the debate.

Mr. Milburn

I, too, shall bear that in mind, Mr. Deputy Speaker, and I am sure that my hon. Friends and other hon. Members will be immensely relieved to hear it. The Government are pursuing twin objectives: the creation of an enterprise economy and the creation of a fair society. Creating wealth is the way to create jobs, opportunity and prosperity, but an enterprise economy requires a society in which the talents of all our people are deployed to the full. When we came to office, we inherited failures in both the economy and our public services. They in turn reflected outdated means of making economic and public spending policy. Modernisation of both is the key to creating a dynamic economy capable of sustained growth and reliable public services capable of meeting modern needs.

On 1 May 1997, we set ourselves two key objectives to help to build a stronger economic future for Britain: first, the establishment of a new economic framework to secure long-term economic stability and to put an end to the damaging cycle of stop-go and, secondly, to begin to strengthen Britain's productive potential by tackling the long-standing weaknesses of the British economy with policies to increase employment opportunities, to raise Britain's productivity performance and to build a fairer society. We had to do that against a background of mounting uncertainty and instability in the global economy. The economy that we inherited from the previous Government was set to repeat the cycle of boom-bust that has been the British disease for the past three decades or more.

Mr. Andrew Tyrie (Chichester)

Does the Chief Secretary think that the economy is in an upswing or a downswing, or have the Government abolished the business cycle?

Mr. Milburn

I shall come to the details of where we are—[Interruption.] If the hon. Member for East Worthing and Shoreham (Mr. Loughton) would calm down for a moment, I shall have a word or two to say to him before too long. I shall come to the detail of where we are in the economic cycle in a moment.

As the hon. Member for Chichester (Mr. Tyrie) is aware, we have been creating a form of economic stability that this country has long longed for: low inflation, low interest rates and employment growth. Most outside commentators now accept the forecast of between 1 and 1.5 per cent. growth, which the Government made in the pre-Budget report last November. At the time, the Conservatives and many independent commentators pooh-poohed that, but thankfully, independent commentators are coming round to the Government's way of thinking.

Mr. John Bercow (Buckingham)


Mr. Milburn

I spy an hon. Gentleman who is coming round to the Government's way of thinking.

Mr. Bercow

I fear that it is a case of the right hon. Gentleman seeing pigs fly before his very eyes.

While the Chief Secretary mulls over the question of whether the economy is in an upswing or a downswing, may I ask him another question? What assessment has he made of the European Commission's proposal, in February 1999, for the imposition of lower rates of value added tax on labour-intensive industries?

Mr. Milburn

I know that the hon. Gentleman is obsessed with Europe. Indeed, the Conservative party has increasingly become a one-issue party: its sole obsession is Europe. I remind the hon. Gentleman that this debate is about economic stability and public finances, which is precisely what my speech will be about.

Mr. Geraint Davies (Croydon, Central)

Does my right hon. Friend agree that the Conservative party's muddled position on Bank of England independence given yesterday—that the issue should be referred to a commission to look at the workings of the Monetary Policy Committee—shows that, had the Tories been in power, we would have had two years of muddle? We would not have had the lowest short-term interest rates for 30 years and the lowest long-term interest rates for 40 years, inflation would have been out of control and the economy would have been in chaos.

Mr. Milburn

My hon. Friend is absolutely right. The shadow Chancellor is not even at first base on those issues. I presume that he aspires one day to be Chancellor of the Exchequer, but he cannot even answer the most basic question about monetary policy: is he in favour or against independence for the Bank of England? We do not need a review; we simply need him to answer yes or no. I am happy to give way to Conservative Members now if they can confirm the Conservative party's position on this. Apparently, they cannot.

The Conservative party's record speaks for itself. When we came to power, consumer spending was growing at an unsustainable rate, inflation was set to rise sharply above target once again, and there was a large structural deficit in public finances. By no stretch of even the most fevered of Conservative Members' imagination could that be described as a "golden economic legacy". Rather, we inherited an economy flawed by serious and fundamental weaknesses.

During the 18 years in which the Conservative party was in government, Britain's growth was substantially below the G7 and European Union average and we suffered two deep and damaging recessions. During those 18 years, Britain had lower investment levels than any of the member states of the Organisation for Economic Co-operation and Development. We also had higher average inflation than any other major industrialised country, with one exception—Italy.

When this Government took office, our first priority had to be to secure long-term economic stability. The events of the past two years demonstrate beyond all doubt that, in a world of ever more rapid international financial flows, monetary and fiscal stability is the precondition for economic success. We achieved that by setting clear objectives, establishing proper rules and requiring openness and transparency in the way in which we do business.

On clear objectives, price stability through a pre-announced inflation target—a symmetrical target, I remind the House—and sustainable public finances through tough fiscal rules—

Mr. Robert Sheldon (Ashton-under-Lyne)

Obviously, the Government are to be congratulated heartily on controlling inflation. That has been quite splendid and fully successful. However, there is the problem of house prices. Although there is an attempt to include an aspect of that in the retail prices index, it is not very successful and the matter is becoming increasingly serious. Will my right hon. Friend say something about that problem?

Mr. Milburn

I understand my right hon. Friend's concerns about these issues. In pursuing and creating economic stability, we also want to achieve a stable housing market. I have listened carefully to what some of the major lenders have to say about the current state of the market. My right hon. Friend may be interested to know that the Halifax has said: The current favourable affordability position will continue to underpin a healthy housing market over the remainder of 1999, we see no evidence to suggest that the market is returning to a 1980s style boom. We have been pursuing policies for economic stability by setting out clear objectives. The golden rule is that over the cycle we balance the current budget. The sustainable investment rule requires that, as we borrow for investment, debt is held to a prudent and stable level.

There should be well-understood rules. We have a new system of monetary policy making, at the heart of which is the independence of the Bank of England and its open letter system, and an equivalent and equally important set of fiscal procedures that are legally enshrined in the code of fiscal stability.

We must also have transparency in policy making, with an open system of decision making in monetary policy through the publication of minutes, a voting system and full reporting to Parliament. We should have the same openness and disclosure in fiscal policy, with key fiscal assumptions independently ordered.

Those are the new rules of the game. They are especially important for Britain, which, more than most nations, has been subject to boom-bust cycles and changing policies.

Mr. Nick St. Aubyn (Guildford)

The Minister says that those are the new rules of the game. Will he confirm that those rules fail to satisfy the Maastricht treaty in the degree of independence given to the Bank of England?

Mr. Milburn

The hon. Gentleman should direct that question to his right hon. Friend the shadow Chancellor—Maastricht man—because he is the man who signed the Maastricht treaty.

Giving operational independence to the Bank of England for setting interest rates is at the heart of the new framework that we have established. Before the House today is the Bank of England's first annual report to be published under the new monetary policy framework. The new style accounts are welcome. They contribute to the greater accountability and transparency that we envisaged when the Bank of England was reformed. For the first time, the Bank's annual report is on a statutory basis. It is particularly welcome to have a clear statement of the Bank's objectives and strategy, to have a director's report reviewing the Bank's performance against its objectives, and much more information on how the Bank uses its own resources.

The aim of the new financial framework established by the Bank of England Act 1998 is to provide proper incentives for the Bank to make efficient use of its resources in pursuit of its functions, and to make it more transparent and more accountable, especially to Parliament, for what it does. It is still early days, but we believe that the Bank is on the right track. Indeed, that view is confirmed by the report of the Select Committee on the Treasury on the work of the Monetary Policy Committee, which was issued yesterday. I thank my right hon. Friend the Member for North Durham (Mr. Radice) and his colleagues on the Committee for their hard work in producing it.

The Committee's report underlines the success of the new framework. The Government will respond to the points raised in the usual manner. The report agrees that the Chancellor's decision to reform the monetary policy framework has been vindicated over the past two years. I particularly welcome the Committee's agreement with the Chancellor on two key points. First, that maintaining the same inflation target for a period of time adds to the credibility of our inflation policy. Secondly, that the symmetrical inflation target adds important flexibility to ensure that deviations of inflation below the target are taken just as seriously as deviations of inflation above the target.

Mr. Crispin Blunt (Reigate)

The Chief Secretary says that he welcomes those changes. The Bank of England's report states that one of the objectives is to manage the Bank's resources responsibly. How can he square that with the Government's enforced sale of the Bank's gold reserves?

Mr. Milburn

That is an extremely tired old tune—a tune that, unfortunately, was partially interrupted during our last Treasury questions. Perhaps that is why the hon. Gentleman wants to return to it.

Mr. Bercow

He wants to return to it because it is valid.

Mr. Milburn

We are happy to debate these issues, but the fact is that, like other major industrialised nations— both in Europe and elsewhere—we are determined to give the United Kingdom a balanced portfolio of reserves, and that is precisely what we have done. We held too much stock in gold, and not enough in other currencies. We balanced the portfolio, and I would have expected the hon. Gentleman, and other Conservative Members, to welcome that.

Mr. Blunt


Mr. Geraint Davies


Mr. Milburn

I give way to my hon. Friend.

Mr. Davies

As my right hon. Friend is no doubt aware, the report of the Select Committee on the Treasury says that the activities of the Monetary Policy Committee staved off recession. Does it not follow that, had we not advocated the independence of the Bank of England under the Conservatives, we would not have staved off recession—a quarter of the world is in recession now—and would have returned to the Tory years of unemployment, spending cuts and higher taxes?

Mr. Milburn

My hon. Friend puts his case—and indeed, the truth—very succinctly.

The Committee's report underlines the success of the new framework. As I have said, the Government will respond to the points raised in the usual manner, but the key point is this. Despite some of the reservations expressed in the report, now, for the first time, interest-rate decisions are made in the long-term interest of the British economy rather than for short-term political reasons.

There were doubts at the outset about the rightness of this approach, many of which were expressed in the House at the time. It is now clear, however, that it is delivering the goods. As my hon. Friend the Member for Croydon, Central (Mr. Davies) just said, inflation is low, and is expected to remain close to target. What is more, for the first time in generations we can look forward to a period of sustained low inflation.

Interest rates peaked at 7.5 per cent., and the Bank of England has been able to cut them seven times in just 10 months. Short-term interest rates are now at their lowest for over 20 years, long-term interest rates are at their lowest for over 30 years, and mortgages have not been cheaper for a generation. We have been steering a course for stability in what are uncertain and troubled times for a global economy.

Of course we cannot build a modern enterprise economy overnight. With a quarter of the world in recession, trading conditions have been difficult for many firms, and we know that that is especially the case for manufacturers. But, as we indicated in last year's pre-Budget report, the economy is set to grow by between 1 and 1.5 per cent. this year, and by between 2.25 and 2.75 per cent. next year. Nor should we lose sight of the fact that, even now, employment continues to grow. It has risen by 400,000 since the general election, and more people are in work than ever before. Long-term unemployment—I hope that Conservative Members in particular will welcome this news—has fallen by more than 50 per cent., and youth unemployment by more than 60 per cent. Conservative Members' constituencies, among others, have been net beneficiaries of those dramatic improvements in the fortunes of many thousands of people.

Mr. Oliver Letwin (West Dorset)

Why, in that case, did the Chief Secretary—along with his colleague the Chancellor of the Exchequer—decide to tighten the fiscal screws by £40 billion, necessitating those low interest rates in an attempt to rescue the economy from the downturn that he thereby created?

Mr. Milburn

As I explained to the hon. Gentleman during the early part of my speech, when we came to power we inherited an economy that was structurally flawed and, moreover, in which inflation was clearly back in the system—not surprisingly, perhaps, given that the previous Government had ignored all the Bank of England's advice about interest rate policy. They made the classic error which, I am afraid, has been repeated time and again over the past 20 or 30 years. Short-term political considerations forced changes to the economy which, in the long and indeed the medium term, did not prove beneficial for the economy or for other people.

Everyone now sees that Bank of England independence is working—everyone, that is, with one exception. Conservative Members have never supported Bank of England independence. [Interruption.] Oh, some did. They are about to come out of the closet on the last day of the parliamentary Session. That is very welcome. A last-minute conversion is better than no conversion at all.

Mr. Tyrie

As I made clear in a speech when the Bank of England Bill was going through, I have been sympathetic to Bank of England independence for many years. Indeed, I was involved in the working up of a proposal for a measure of Bank of England independence in the mid-1980s, when the Labour party vigorously opposed any form of Bank of England independence. It did not even have the courage to put it clearly in its manifesto before the people at the last election.

Mr. Milburn

The only small piece of advice that I have for the hon. Gentleman is to keep his head down if he wants promotion in today's Conservative party, because the policies that he advocates will not find favour. The Conservative party's position was to vote against the Bank of England Bill; it voted against Bank of England independence. It has restated its opposition on countless occasions since then. Last October, the shadow Chancellor, the right hon. Member for Horsham (Mr. Maude), said: We would not have given up control of interest rates in the first place". The Leader of the Opposition said: They"— the Government— have given up control of interest rates when they should have kept hold of them. The right hon. Member for Wokingham (Mr. Redwood), who is always forthright in his views, said: We think it was a big mistake, we opposed it at the time, we said no good would come of it". Now they say that they are having second thoughts about it.

The truth is that the Conservatives are at sixes and sevens on Bank of England independence. They can see Bank of England independence working, delivering the goods and providing the economic stability that our country needs, but they still yearn to scrap it. They hanker for the days when it was politicians who set interest rates—the days of the late 1980s and early 1990s when they decided to put up interest rates to 15 per cent. and when inflation was in double figures.

Today's Conservative party has learned nothing from those past failures. Making the Bank of England independent has helped Britain to steer a course for stability. The Conservatives would put all that at risk by returning us to the era of stop go, which was so damaging to the long-term interests of the British economy.

Mr. Barry Sheerman (Huddersfield)

Will my right hon. Friend give way?

Mr. Milburn

I will give way one more time and then I must make some progress.

Mr. Sheerman

Is my right hon. Friend being a little unfair to the Conservative Opposition because at least there is some fancy footwork going on? Does he not agree that they have realised what a terrible mistake they have made in opposing independence of the Bank of England? They have realised that they must change their mind and have set up some committee, which will report that they should change their mind and let them off the hook. They do not have the guts to say that they made a mistake and were wrong.

Mr. Milburn

My hon. Friend is right.

Mr. Howard Flight (Arundel and South Downs)

Under the present arrangements, does fiscal policy, or monetary policy have priority? My understanding is that the brief to the Bank of England is to set monetary policy in the light of the Government's fiscal policy. Therefore, in that sense, the Bank does not operate independent monetary policy.

Mr. Milburn

The hon. Gentleman, who claims to know something about these issues, should make a much more serious point than that. He knows fine well that, unlike in the late 1980s and early 1990s, fiscal policy and monetary policy are working together. That is right for this stage in the economic cycle. I presume from his remarks that he continues to oppose—

Mr. Flight

indicated dissent.

Mr. Milburn

Oh, the hon. Gentleman does not continue to oppose Bank of England independence. He had better confer with the right hon. Member for Wells (Mr. Heathcoat-Amory) because I suspect that he might have a different view. Certainly, the hon. Member for Grantham and Stamford (Mr. Davies) has a contrary view to the right hon. Gentleman, so those on the Front Bench had better get their position sorted out.

Precisely because we now have a more transparent, more open and more accountable system of running both fiscal and monetary policy, we can get the two working together. It is not the late 1980s and early 1990s, when monetary policy and fiscal policy clashed, with all the damage that that did to the British economy, but a period when fiscal policy and monetary policy are working together. The results are clear: low inflation, low interest rates, unemployment down and employment up.

Mr. St. Aubyn


Mr. Milburn

Have I given way to the hon. Gentleman?

Mr. St. Aubyn

indicated assent.

Mr. Milburn

In that case, I will make some progress.

Mr. Barry Gardiner (Brent, North)

Will my right hon. Friend give way?

Mr. Milburn

I will.

Mr. Gardiner

My right hon. Friend has said that those on the Opposition Front Bench must get their policy right, but does he not agree that they do not have one policy—in fact, they have three policies? As he has pointed out, the hon. Member for Grantham and Stamford (Mr. Davies) is clear. He has gone on record many times. He has a good track record on the issue. He agrees with the Government. Why he is on the Opposition Front Bench, goodness only knows, but that is not my right hon. Friend's responsibility. The hon. Member for Arundel and South Downs (Mr. Flight) is clearly maintaining the party line on the issue—he says that it should not change—and there are those who want to kick it into touch with the commission, so there are three different party lines on the issue.

Mr. Milburn

If only my hon. Friend were right—I suspect that it is many more than just three. That is just the Front Benchers. As we have heard, there are many different positions among those on the Conservative Back Benches. I hope that that review of the policy on Bank of England independence continues for many months.

Mr. Edward Davey (Kingston and Surbiton)

May I ask the Chief Secretary a hypothetical question? If there were a danger of the Conservative Opposition returning to government, would not their lack of clarity on what is a key issue threaten economic stability in Britain?

Mr. Milburn

I was going to call the hon. Gentleman my hon. Friend because he was so nearly on-message. He is absolutely right. The Conservatives' stated policy is to return us to the bad old days of stop go, boom bust. That is precisely what we have taken out of the equation by giving, rightly, operational independence to the Bank of England. That is not a decision just for today or tomorrow. It should be a decision that all parties can agree on in perpetuity.

Meanwhile, the Government are determined to go on making decisions for the long term. Frankly, we have had too much of short-termism. It has brought instability to companies and uncertainty for taxpayers. In the modern world, creating a platform of economic stability is the essential pre-condition for long-term economic success.

That is what the Government have been doing in the past two years: getting the fundamentals in place for lasting long-term prosperity. However, stability is a necessary, but not a sufficient condition for a successful economy. Our challenge is to raise the trend rate of growth in the UK. To do that, we are taking action to improve productivity, investment and skills.

We have done so by cutting tax rates for businesses, by investing in science and in research and development, by encouraging competition, by investing in and reforming our education system, by creating employment opportunities and by making work pay through the new deal, the minimum wage, the working families tax credit and the 10p starting rate of income tax.

All those are policies that will benefit Britain both now and in the long term. They represent a decisive break from the failures of the past, yet they are all opposed by the Conservative party. It has simply failed to understand that the old ways of economic policy making simply will not do in the new global economy. Similarly, the old ways of public spending policy have passed their sell-by date.

I say that for three reasons. First, in today's global economy, any country that ignores the need for fiscal responsibility will soon be punished. Secondly, the old annual cycle of public spending produced a mirror reflection in the public sector of the short-termism that bedevilled much of the private sector in the British economy for many decades.

Thirdly, the old ways of making public spending decisions did not focus properly on what really counts for the public—not the level of expenditure, but what we get out for what we put in.

Today, after two years of reforms to get the fundamentals right, we have re-organised how public service is conducted, and we are changing the way in which public services are run. We have made three major changes.

First, we have established clear and transparent rules for the conduct of fiscal policy. The golden rule and the sustainable investment rule mean that fiscal policy will operate in a manner that keeps borrowing under firm control and requires current taxpayers to pay for current spending, because they benefit from it.

Mr. Tyrie

Will the right hon. Gentleman give way?

Mr. Milburn

No; I shall push on.

A stable and prudent debt ratio will ensure that fiscal policy is run responsibly and does not threaten the stability of the economy or impose an undue burden on future generations.

As I said, we inherited a situation in which the national debt had doubled and public finances were running out of control. However, our prudent and decisive action has cut public borrowing by £32 billion in the past two years and brought public debt down towards 40 per cent. of gross domestic product. The current Budget is in balance, and, in the next five years, total net borrowing will be lower than in any single year in the previous Parliament.

Only today, I have published provisional outturn figures showing that the control total for 1998–99 was more than £2.7 billion below plan. By getting control over the public finances, the Government are now living within our means. Yet, we have also been able to commit significant extra investment for our key public services: £40 billion extra for health and education; £3.6 billion extra for housing; and £1.7 billion more for transport. Each of those sums is an investment in the future and creating a fair and decent society.

Secondly, we have been able to plan for the long term. Our three-year spending plans give Departments and public services the certainty and stability that they need to plan beyond the one-year time horizon. Departments have been given firm multi-year spending limits within which they are able to prioritise resources and plan ahead, providing a more stable foundation for managing those public services. The new control regime we have established allows underspends to be carried forward and spent on Government priorities, rather than forcing Departments to waste public money on pointless end-of-year spending splurges.

Consistent with the fiscal rules, we have also made a clear distinction between capital and current expenditure, to ensure that worthwhile capital investment is not squeezed out by short-term pressures, as it has been in the past. We are doubling public sector capital investment to modernise Britain's infrastructure.

Since the general election, we have turned the private finance initiative around. We have signed £4 billion-worth of PFI deals, and we have PFI working in sectors, such as health, in which it has not worked before.

Mr. Nick Gibb (Bognor Regis and Littlehampton)

If the right hon. Gentleman has, as he says, developed firm three-year spending plans, why was the Chancellor reported, in The Times of 7 June 1999, as saying that he would relax the spending plan for year three and allow Departments to submit new bids for spending in 2001–02—which just happens to be the probable year of the next general election?

Mr. Milburn

I have a very small tip for the hon. Gentleman: he should not always believe what he reads in the newspapers, not even The Times.

Precisely the same warning applies to the hon. Member for Grantham and Stamford—who, a moment before the debate started, was twittering on about individual savings accounts and the House being misled. The truth—as he would know, if he had bothered to read the report in the Financial Times—is that the figures to which he alluded represent only one section of the savings industry and were only an early snapshot. The Association of Unit Trusts and Investment Funds represents only ISA managers who are unit trust firms. The AUTIF figure, therefore, does not paint the whole picture. I therefore advise the hon. Gentleman to believe what he hears from the Government, rather than what he reads in the Financial Times.

Mr. Quentin Davies (Grantham and Stamford)

I am grateful to the right hon. Gentleman for responding to my earlier point of order. Does he agree that he could clarify the position—and prevent any misunderstanding at all—simply by providing the comparative figures for ISAs and personal equity plans on the basis of comparing tax-exempt special savings accounts with cash ISAs, and PEPs with equity ISAs? If he would do that, we should be absolutely clear on the real position and on the record of the new vehicle—the ISA—as compared with the PEP, and there would be no basis for misunderstanding.

As I said in my point of order, the trouble with the Government is that they are obsessed with all types of spin-doctoring, but will not present to the House clear facts or clear, comparable statistics.

Mr. Milburn

I am extremely disappointed in the hon. Gentleman—I really am. I am very, very disappointed in him. Before the debate, he rang me, asking me to explain the position. I tried to do so, and even faxed him a copy of the press release issued by my hon. Friend the Economic Secretary to the Treasury. However, he has sought to ignore all that. The figures that I gave to the House last week were exactly those that my hon. Friend issued only a few weeks ago in her press release.

We know that the hon. Member for Grantham and Stamford and other Conservative Members do not like ISAs, but savers do—and they are voting with their wallets.

Mr. Tim Loughton (East Worthing and Shoreham)

Will the right hon. Gentleman give way?

Mr. Milburn

No, I shall not.

In the first two months since ISAs were launched, savers invested £4.2 billion in them, which is more than was invested in PEPs and TESSAs, put together, in the corresponding period last year. That is what I said then, and it is what I say now. I say it because it is the fact.

Mr. Quentin Davies


Mr. Milburn

The hon. Member for Grantham and Stamford has made a fool of himself, and I shall not give him an opportunity to do so again—[HON. MEMBERS: "Give way."] No, I will not.

Thirdly, all of that is built on a new approach that emphasises that public spending on our public services is investment in exchange for reform. It is money for modernisation.

Government today are judged on whether their services achieve their core objectives: educating children, treating patients and catching criminals. Therefore, our focus now is quite rightly on outputs, not on inputs—on the products of our spending, not only on the scale of our investment.

The Government's public service agreements are at the heart of the new approach. Published in December 1998, PSAs are a contract with the people—a promise of lasting improvements in their public services. PSAs establish 350 policy targets and 175 efficiency targets that Whitehall Departments will deliver in exchange for the extra investment that we are making. Therefore, although we are making extra—record—investment in our hospitals and schools, £40 billion of extra investment has to result in £40 billion of improvements.

No one is pretending that the Government are able simply to wave a magic wand to transform our public services—transformation will take time, effort and investment. Equally, however, no one should doubt our determination to do so, or the progress that we are already making.

Some hon. Members do not believe in providing our public services with the investment that they need. When we announced our public spending plans, the Leader of the Opposition said: The Government has been reckless with Government spending". The shadow Chancellor—who is not in the Chamber today—said: These are extremely irresponsible reckless commitments that you shouldn't commit the country to". He also said that It was madness to embark on this public spending programme".

The shadow Chief Secretary, the right hon. Member for Wells, said that our spending plans represent a very substantial and dangerous increase in public spending.

There we have it: reckless, madness, dangerous. That is the Tory's verdict on our spending plans. Now, however, Conservative Members say that they want to match our plans. Their position simply does not add up. I say that not only because of what they have said about our public spending plans, but because of what they have done. In debates on the past two Finance Bills alone, they have proposed to take billions of pounds from the self-same services that they now say that they support.

The truth is that Conservative Members are as much at sixes and sevens on public spending policy as they are on policy for Bank of England independence. Try as hard as they might, they simply cannot escape their past.

This debate throws into very sharp relief the key differences between the Labour Government and the Conservative Opposition. The Government have made the Bank of England independent, creating a platform of economic stability. The Conservatives would remove that independence, and take Britain back to the old days of boom and bust.

The Government have introduced the new deal and helped more than 100,000 young people back into the world of work. The Conservatives would scrap the new deal, and turn their backs on a whole generation of unemployed young people. This Government are introducing the minimum wage and the working families tax credit precisely in order to make work pay. The Opposition would scrap both and would land 1.5 million of the poorest families in the land with a £24 a week tax rise. Finally, the Government are investing an extra £40 billion in our schools and hospitals—£40 billion that the Tories would cut if they ever got back into office.

The Labour Government are building a stronger economic future for our country, but the Conservatives would put all that at risk. At the next general election the British people will be faced with a clear choice between today's Conservative party, which is the most extreme in living memory, and this new Labour Government who are working to create an enterprise economy and a fair society that benefits low and middle income Britain alike.

6.10 pm
Mr. David Heathcoat-Amory (Wells)

As the House knows, we recently passed the Finance Bill, which received Royal Assent earlier this afternoon and is now an Act of Parliament. Its contents are depressingly familiar; it is a massive tax-raising measure that the country regrets. This afternoon, we have an opportunity to debate public expenditure, the other side of the equation.

Of course there is a direct connection—almost a symmetry—between taxation and expenditure, because Governments raise taxes in order to spend and spend what they raise in taxation. However, in this case there is a particular symmetry that the Government may regret and that certainly breaks the promises that they made before the general election. I refer to the fact that there is a huge cumulative tax increase and burden on the country, which by chance is almost exactly matched by the increase in social security expenditure that the Government have announced and is already under way.

Mr. Geraint Davies

Will the right hon. Gentleman give way?

Mr. Heathcoat-Amory

No. I shall give way to the hon. Gentleman later, but I want to develop this point.

It is extremely difficult to get to the bottom of the tax figures in the Government's documents, so we turn to the House of Commons Library which uses figures from Government sources, but strips away the camouflage and gives the true unvarnished picture. The Library has produced a useful table which takes each of the Government's three Budgets so far and analyses the tax increases in the year in question and the continuing increases each year. Thus, we have from an authoritative source a cumulative figure for the tax increases already announced by the Government amounting to a staggering £40.7 billion over the lifetime of this Parliament. That is only an interim figure. If the Government keep to their record it may increase in next year's Budget, but it represents a huge cumulative burden. I refer to facts, not speculation.

The very helpful table that has been assembled for us by the House of Commons Library includes the ending of mortgage interest relief, the increase in stamp duty, the abolition of the married couple's allowance, the insurance premium tax increase and the withdrawal of dividend tax credits that are costing pension funds £5 billion a year and rising.

Mr. James Plaskitt (Warwick and Leamington)

The right hon. Gentleman expresses a preference for Library source tables. Will he confirm that there is a Library table that shows that when the previous Conservative Government first came to office, the share of taxes paid by United Kingdom residents represented 34 per cent. of gross domestic product, and when they left office the figure was 37 per cent.?

Mr. Heathcoat-Amory

No. We had a proud record of reducing the burden of taxation and the Government are putting it into smart reverse. I understand the hon. Gentleman's attempt to avoid the record, but I am afraid that it exists. I notice that he did not even respond to the point I made, so perhaps he agrees with the cumulative figure of £40 billion. Perhaps he supports it.

Mr. Bercow

We all noticed the attempt by the hon. Member for Warwick and Leamington (Mr. Plaskitt) to distract attention from the uncomfortable facts of the Government's stewardship. Does my right hon. Friend agree that what he has just told us and what the House of Commons Library figures confirm testify to the uncharacteristic prescience of the noble Lord Hattersley, who observed as long ago as 13 March 1995 in The Guardian: Labour now has a clear choice. It can either be the party of higher taxation and proud of it, or it can be the party of higher taxes which it is afraid to admit, ashamed to describe and incapable of calculating with any accuracy. It cannot be the low taxation party.

Mr. Heathcoat-Amory

I have already given the House the evidence that Labour is a high taxation party. Some Labour Members choose to welcome it, some choose to criticise it, some choose to admit it and some choose to disguise it—but nothing can alter the facts.

Mr. Geraint Davies

Will the right hon. Gentleman give way?

Mr. Heathcoat-Amory

No. I know that the reshuffle is imminent and the hon. Gentleman wants to catch everyone's eye, but I want to fill in a little bit of the other side of the equation.

I mentioned social security expenditure, but again the figures are opaque. Nowhere in the Budget report is a clear description of social security expenditure. For instance, it excludes the large item under the title "Working families tax credit". Initially the Government pretended that that was not a tax measure at all. They called it a tax credit and pretended that it was a tax cut, but even they had to admit that it is actually an item of expenditure. We find on page 178 of the Red Book that income tax credits score as public expenditure under national accounting conventions. So they came clean on that one, but they did not include it in the table that lists social security expenditure. Instead, they put it in under an intriguing item called "Accounting and other adjustments", which amount to almost £13 billion a year.

When we add in, as we must, those accounting adjustments, we find that social security expenditure will rise during this Parliament by £38.2 billion. That is what I mean by neat symmetry. Tax is up by £40 billion and social security expenditure by £38 billion. It contrasts starkly with what the Prime Minister promised before the general election, when he said: as we get the welfare bills down … then we can release more money into education and health and the services where we really want them. He also said: By the end of a 5-year term of a Labour Government, I vow that we will have reduced the proportion we spend on the welfare bills of social failure … This is my covenant with the British people. Judge me upon it. The buck stops with me. It is perhaps unfortunate that the House of Commons Library has provided us with the percentage increase every year. It is quite interesting that in the three years ending in March this year—in other words the last year under the Conservative Government and the two years of expenditure that we left behind—social security expenditure fell by 0.2 per cent. a year in real terms. That has now been converted into an increase of 3.2 per cent. a year. So the Prime Minister is well on his way to breaking his pre-election promise.

It is also odd that there is no reference to that in the very interesting work of fiction entitled, "The Government's Annual Report". One would have thought that, as it was not just a promise by the Prime Minister but a vow—which, presumably, is even stronger—it would have found its way into the Government's report on their own performance. I thought that the Government understood that regulators must be independent. If they wanted someone to write such a report, they should have got someone else. There is not a word in the report about this vow or covenant—despite the fact that the figures show that social security expenditure, instead of being cut, is rising by 3.2 per cent. a year in real terms.

Ms Sally Keeble (Northampton, North)

If the right hon. Gentleman is so keen on talking about the cumulative costs of social failure, how does he justify the £158.8 billion extra that the Tories spent on unemployment during their term of office?

Mr. Heathcoat-Amory

We had unemployment benefit and, when people came out of work, they received social security expenditure. However, we got unemployment down. Part of the golden economic legacy that we handed to this Government was falling unemployment. All the measures that we undertook to achieve that were opposed by the whole Labour party—all the supply-side measures, privatisations and public sector reforms were resisted by Labour. I am proud that we created an unemployment record in this country which was the envy of the EU. [Interruption.] Labour Members do not like the facts about social security.

I remind the Government that they had a solution. The right hon. Member for Birkenhead (Mr. Field) was put in to think the unthinkable about public expenditure. He did so, and he was sacked for it. By the end of this Parliament, every taxpayer in the country will be paying £17.50 to the social security budget every day, a rise of £70 a week for every taxpayer. That is the price of Labour failure.

Mr. Christopher Leslie (Shipley)

As well as cutting the working families tax credit, would the right hon. Gentleman cut child benefit or disability benefit if he were back in the Treasury today?

Mr. Heathcoat-Amory

Many reforms are necessary to the social security budget. We achieved an annual cut in social security expenditure by the time we left office, so we are not suggesting that the Labour Government do anything that we did not—we delivered, and we put the money into other expenditure items, such as health and education. The Labour Government have promised to bring down the costs of the welfare state and then spend the money on education. They have failed to do that, and the figures that I have quoted show that beyond dispute.

Mr. Sheerman

I know the right hon. Gentleman to be, at heart, an honest man. In his speech, will he address the reality of the Government's fine economic record in terms of inflation, employment and interest rates? Will he say that the Government are doing a pretty good job? The right hon. Gentleman is describing the great success of his Government, who suffered the worst defeat since 1828, whereas we are riding high in the opinion polls because we are delivering economic success day after day. I know that it hurts the right hon. Gentleman and his colleagues to be in opposition. Every day they must get up and hope that something bad happens to the Government. However, it is all good news, and it is hard being in opposition in those circumstances.

Mr. Heathcoat-Amory

Let us get on to some of the other issues. What about expenditure on the Passport Agency? The hon. Gentleman wants us to move away from social security, which clearly embarrasses the Labour party. The Chief Secretary mentioned the importance of efficiency targets and public service agreements. How come, therefore, the Passport Agency—to take one example—is such a shambles?

We read in the Budget report that there is to be an important-sounding, high-level Cabinet Committee—with the codename "PSX"—to be chaired by the Chancellor to ensure that the performance of Departments measures up to their targets. What went wrong with the Passport Agency? What are the Government going to do about it? They have taken away the charter mark, but will they take away the money? Will the Home Office be punished—or will it get more money—for the demonstrable failure of that part of the Government's service?

What about London Underground? It is a fiasco. Under the efficiency targets, and the tutelage of that important-sounding Committee, will transport get more money, or will it be punished by receiving less?

What about waiting lists? People now must join a waiting list to get on a waiting list. That is a failure—another broken promise. Will the Department of Health get more money, or less? Let us hear from the Government about that Cabinet Committee—or does it meet in secret?

I am willing to refer to other items of Government expenditure, but the overall picture is of a tax-and-spend Government. They have erected two huge pillars—extra taxation and extra expenditure on all the wrong things. [HON. MEMBERS: "Ah!"] That was an interesting response from Labour Members, who apparently believe that an extra £38 billion for the welfare state is the way in which money should be spent. Why did the Prime Minister not tell us that before the election? Why did he promise to cut expenditure? There is some explaining to be done by Labour Members—who must hurry if they are to be in time for the reshuffle tomorrow—of whether they believe in what the Prime Minister promised before the election or not.

Siobhain McDonagh (Mitcham and Morden)

Would the Opposition scrap the working families tax credit and reverse the tax changes that the right hon. Gentleman has mentioned?

Mr. Heathcoat-Amory

I am coming to the working families tax credit, which is a good example of the churning from taxation to expenditure that is so inefficient. In many cases, the same people who will receive the benefit will be paying the taxes to finance it. People will get the benefit if they have an income of up to £38,000 a year. Those people will be paying taxes to the Chancellor, who will give it to the social services system. The money will be churned round the system, and they will receive back some of the money that they have paid in tax. That is inefficiency and waste.

There is also a direct effect from the massive transfer of money from taxation to expenditure by way of the additional burden on businesses. The British Chambers of Commerce has calculated that, over the lifetime of the Parliament, British business will be paying a cumulative extra tax of £30 billion. Last week, we debated the energy tax. We asserted that the tax would not just be no good for the environment, but would be bad news for manufacturing industry. Industry will be paying the taxes and will receive back only a fraction in the offsetting cuts in national insurance contributions.

We did not know during that debate how quickly we would be proved right by an independent report, published by Business Strategies, which stated that, far from creating jobs, the long-term effect of the energy tax will be to lose 156,000 jobs to the British economy. According to the same independent report, it will widen the north-south divide, and productivity in the British economy, as a consequence of the energy tax, will decline by 0.8 per cent. That is a terrifying indictment of what is admittedly a draft tax, but it is a tax that the Government are committed to—they have already written the £1.75 billion of extra revenue into their Budget estimates.

Taxes are not the only problem; there is also the administrative and regulatory burden. Even Lord Haskins, the Labour peer who heads the regulatory task force, has complained that small businesses are being turned into benefit offices for the Government and will not be compensated. The Institute of Directors estimates that the regulatory burden alone will cost British business £5.047 billion a year. That will cost jobs, profit and investment.

The Prime Minister talked about a new partnership between Government, business and industry to improve competitiveness, and called it a new pledge. I do not know whether that is new for the Parliament or for the millennium, but I know that it has coincided with Britain dropping from fourth to eighth in the world league of competitiveness.

The Government's response is a series of gimmicks. To contrast with the £30 billion of extra taxation on business, they announced in the Budget that they were setting up a venture capital fund to give back to industry £20 million through an administratively complex and interventionist measure, whereby civil servants pick the lucky beneficiaries. That is a completely trivial response to a serious problem.

The Government have treated savings in exactly the same way. They say that they want to boost savings as an alternative to spending on welfare, but they put up the taxes on savings. There was a £5 billion a year raid on pension funds and then we had the administrative fiasco of replacing PEPs and TESSAs with ISAs. The Chief Secretary's response to my hon. Friend the Member for Grantham and Stamford (Mr. Davies) was completely inadequate. The industry is recording a drop in the amount going into ISAs, but the Government deny reports from the people who are actually selling the products.

It is not surprising that the savings ratio has fallen. It has fallen all the way through this Parliament and continues to fall. The Government are damaging the wealth-creating process on which all their expenditure plans depend.

Mr. Andrew Love (Edmonton)

The hon. Member for Buckingham (Mr. Bercow), in a typically in-your-face contribution, told us that the Conservative party was the only low tax party. The other side of that equation is that it is also the low public expenditure party. Will the right hon. Gentleman think the unthinkable and tell us where the cuts in public expenditure should fall? If he is suggesting the social security budget, perhaps he will tell us which social security expenditures he wants to cut.

Mr. Heathcoat-Amory

I do not know whether the hon. Gentleman was listening when I described the Government's failure to control welfare expenditure. We did it; they failed. I am asking them to return to the path of expenditure that we laid down. I have also made clear some of my criticisms of the working families tax credit, which is disguised in the Budget report and perversely goes back to many of the people who pay the taxes in the first place.

The Conservative party has always believed in properly funded public services and we supported the Government's expenditure on health and education in so far as it actually went to the classroom and to patient care, but we maintain our opposition to the overall total of Government expenditure, precisely because of the £38 billion extra welfare expenditure, which, interestingly, the Government do not even deny.

The Government's tax-and-spend policy threatens employment. Part of our golden economic legacy was almost the lowest unemployment rate in Europe: the envy of the European Union. It was difficult to achieve, but we did it by understanding that it is a matter not of spending money, but of creating the right conditions for employment to thrive—in other words, lower taxes and fewer regulations.

The Government's new deal is a very expensive way of achieving not very much. The cost per job is more than £11,000. The money is wasted and would get a better return, even in the narrow sense of extra employment, if it were returned to the businesses and the people who create it in the first place.

Mr. Flight

My right hon. Friend spoke of the risk to employment created by the fall in savings. Is not the real risk that investment cannot be sustained to support the type of stable growth to which the Chief Secretary refers if our economy has a lower rate of savings?

Mr. Heathcoat-Amory

My hon. Friend underlines my point about the failure of the savings culture. The Government came in with a professed aim of encouraging savings, and have done everything to reduce them, so the consequence that he mentioned will follow as surely as night follows day.

Sometimes the Government's rhetoric shows some understanding of the issues. The Prime Minister is apparently envious of the job creation record of the United States. When he is there, he seems to realise that lower taxes and fewer regulations are at the root of the United States Government's awesome ability to generate prosperity and employment. The Government cannot do the same here, because they are hooked on the wrong economic model. Instead of converging on the United States economy, they are converging on the European Union economy.

Will the Government now, for the first time, give the figures for the national changeover plan, under which public money is being used to prepare for the euro? Unspecified amounts have been allocated to fund unspecified items on an unspecified time scale. The time scale is in the hands of either the Prime Minister or the Chancellor—I cannot remember which—who are in dispute over whether to hold a referendum. Meanwhile, money is being spent without parliamentary or public sanction to create an impression of inevitability.

Earlier today, we had the hilarious spectacle of a Minister privatising the air traffic control network without using the word "privatisation". Where does that fit into the Government's fiscal arithmetic? The Budget report has a figure of £4 billion a year inked in for asset sales. Is some or all of that to come from air traffic control? If not all, what else do the Government intend to privatise, or is the figure simply based on hope? The privatisation has nothing to do with improving the performance of the British economy; it is all about dressing up the revenue figures.

The Government should come clean about where they will get their revenue from and how they will spend it. The picture presented in the Red Book is the opposite of the clarity and openness that was promised. The Government have changed most of the definitions that the public understand. The public sector borrowing requirement was a term familiar to the House for many years, but it is now called the public sector cash requirement. The control total, another term familiar to the House, has been abolished. Privatisations are called public-private partnerships and, as I mentioned earlier, expenditure on social security is now dressed up as accounting and other adjustments.

How will the public come to understand the taxes that are being paid and their application unless the Government bring clarity to their documents? Those documents cannot disguise the fact that the Government's instincts and habits, demonstrated over their three Budgets, are to raise taxes. It is also clear, from this and other debates, that they cannot be trusted with the resulting public expenditure.

6.41 pm
Mr. Giles Radice (North Durham)

Giving the Bank of England operational independence as part of the new framework for economic stability was a bold and courageous move by the Government. The report from the Select Committee on the Treasury was published yesterday and is one of the documents relevant to this debate. It shows that the move is paying off already.

The arguments for the Bank of England's operational independence—for an independent monetary policy—were strongly supported by two former Conservative Chancellors, and by the hon. Member for Grantham and Stamford (Mr. Davies), my former colleague on the Select Committee. He will remember that the arguments for the change were that it would bring greater credibility, more transparency and accountability, greater stability and a better inflation record—after all, most countries with independent central banks have a better inflation record than those without.

The report concludes that it is probably too soon to reach a definitive judgment on the record of the Monetary Policy Committee, because it takes 18 months to two years for the full impact of the committee's decisions to work through to inflation outcomes. However, the Committee was able to say with confidence that the MPC had made a highly successful start. It has established its credibility, judged by inflation expectations. Long-term interest rates have fallen sharply, and gilt yields have also fallen. According to independent forecasters, public expectations have not kept pace with the new environment, but the MPC has achieved credibility.

In addition, inflation has been on target, or near it, throughout the period, with the worst outcome only 0.7 per cent. above target. The MPC has managed that without tipping the economy into recession. That major success was achieved because the MPC took prompt action when recessionary dangers loomed by cutting rates swiftly and sharply, by 2.5 per cent. We should also praise my right hon. Friend the Chancellor of the Exchequer for setting a symmetrical target. That has given the MPC far greater flexibility to use rates to bring inflation down and to do so in a way that protects employment.

Finally, the MPC's record on transparency is also very good. We know the voting records of its members and, although it is not yet possible to associate individuals with arguments or opinions, that is a matter to which we shall return. The publication of the minutes is now very prompt, thanks to a request from the Select Committee. Also, members of the Monetary Policy Committee have answered questions with openness and frankness when they have come before the Select Committee, and in public as well.

That is totally new. I remember Lord Lawson, when he was Chancellor, coming before the Select Committee in the 1980s. When he was asked about his policy on interest rates, he said that he put up interest rates when he wanted to, and lowered them when he wanted to: further than that he would not go. Nowadays, the arguments behind decisions are exposed to public debate.

The Monetary Policy Committee has responded to other suggestions from the Select Committee. It has reduced the time taken to publish the minutes of its meetings, as I said. The Select Committee asked the MPC to explain the transmission mechanism—the effect on interest rates of changes in interest rates. That is the sort of question that ordinary people ask, and the MPC gave an explanation. We also asked the committee to survey what the public think about inflation, and to determine people's inflation expectations. Such innovations are very useful.

As I have shown, the Select Committee found that the Monetary Policy Committee had made an excellent start in terms of transparency, credibility and adherence to inflation targets, while at the same time avoiding recession. Although it cannot be denied that those achievements have been accomplished against a benign inflationary background, the MPC had to take into account last autumn's major shock to the world economy. It has not been entirely plain sailing for the MPC, but it has responded quickly and well.

The Monetary Policy Committee has also learned by experience. It has been argued that too many small steps have been taken, moving interest rates 12 times in a period during which the US Federal Reserve moved them only three times. There has been some argument to the effect that the increase in rates in June 1998 was not the right move, and that the MPC was working from faulty information. Even so, the committee's record is good.

The Select Committee report contains some suggestions for improvement. To make the process more predictable, the MPC should consider adopting the policy of the US Federal Reserve bank's open market committee of announcing a bias in future policy after each meeting. That might be a useful innovation.

The Select Committee also noted a problem with the status of the inflation forecast—a criticism levelled by the International Monetary Fund. Given that the Monetary Policy Committee is now responsible for monetary policy, it should assess its inflation forecasts regularly. Also, greater emphasis in the MPC's inflation report on external inflation forecasts would allow comparison with the Committee's own forecasts.

The Select Committee report also identifies an important role for the Court of the Bank of England. It is right that the members of the Monetary Policy Committee should be experts, but the Court of the Bank of England represents regional and sectoral interests. As well as overseeing the MPC, it should represent those interests effectively.

I turn now to the question of accountability. Without blowing the Select Committee's own trumpet excessively, I should like to put it on record that the Committee has managed to establish a credible system of accountability. The system used to be pretty poor—there was no golden age of accountability before the Monetary Policy Committee was set up. Leading academic and City experts now give on-the-record briefings. Those experts include Charlie Bean, David Miles, David Walton, Roger Bootle and Bridget Rosewell, to whom I pay tribute. There are regular hearings on the inflation reports, at which members of the MPC are questioned closely about their thinking and decisions.

Reports are made to Parliament, and today I am talking about the sixth such report that has been compiled. Candidates for membership of the MPC are first sent questionnaires and are then subject to confirmation hearings to assess their suitability, competence and independence. I understand that the Opposition are worried about this last requirement, but I can assure the House that it is checked as part of the confirmation process to which all members of the MPC are subject.

Although there has been one reconfirmation hearing, the Select Committee has been commended by the Bank of England and the Treasury for the conduct of the confirmation hearing process. I should like the hearings to be given a statutory basis, but that is an argument for the future. We shall continue to make the MPC accountable by requiring it to explain its decisions and the thinking behind them.

Mr. Sheldon


Mr. Radice

I shall give way because I have injury time.

Mr. Sheldon

I should put it on the record that the confirmatory hearings pursued by my right hon. Friend have been a source of considerable gratification to all Select Committees. He introduced the hearings himself, and they have been extremely valuable. The reconfirmation hearings that he has mentioned today will be of even more value in the years to come.

Mr. Radice

I thank my right hon. Friend for those remarks, although it is not I but the Committee, some of whose members are in the Chamber, who deserves his remarks.

We want to make judgments on the decisions and actions of the MPC where appropriate. We shall put forward constructive suggestions for improvement where necessary, and we shall report to Parliament, the Bank of England and the Government. It is welcome that the Opposition are considering our policy, and I hope that they will use the evidence that we have collected about the process over the past two years.

Mr. Tyrie

May I give the right hon. Gentleman a little more injury time? Does he agree that it would be a good idea to have more outsiders on the MPC, and fewer people from the Bank? Does he think that MPC members should be given longer terms, and that terms should be non-renewable so that members cannot be subject to influence or the concern that they may not be reappointed?

Mr. Radice

The hon. Gentleman's final two points are worth considering and we have made suggestions on them. The balance is about right at present, but those are matters for consideration.

The House of Commons is often criticised—usually by the press, whose members, naturally, are not listening to this debate. Select Committees also come under fire from the press, although journalists—particularly from the specialist press—at least attend them more often. However, the Select Committee on the Treasury has played an important and constructive role in expanding accountability, and will continue to do so.

6.52 pm
Mr. Edward Davey (Kingston and Surbiton)

I congratulate the right hon. Member for North Durham (Mr. Radice) and his Committee on an excellent report, much of which the Liberal Democrats entirely agree with. The right hon. Gentleman rightly touched on the need to put confirmatory hearings on a statutory basis. A former Chief Secretary to the Treasury—he is now the Secretary of State for Social Security, though we do not know whether he will remain so after today—promised that a Minister would discuss with the House confirmatory hearings for all public appointments once there had been a chance to review their role. Some time has passed since then, and the Government should produce a full report on whether hearings have a role to play in our democracy.

I agreed with what the right hon. Member for North Durham said in reply to the hon. Member for Chichester (Mr. Tyrie). There is a need for greater independence for the Bank of England, and I hope that the Select Committee on the Treasury will continue to push for it.

I was disappointed by the speech of the right hon. Member for Wells (Mr. Heathcoat-Amory), who seems to favour recycling, since much of what he said was very familiar. It would have been nice to hear about the Conservatives' alternative economic policy, or at least about whatever policy review the party is setting up now.

He failed to address the key issue in today's debate—economic stability. How would the Conservatives promote it?

The Government are right to make economic stability a key objective of macroeconomic policy. Ending boom and bust—to coin a soundbite—is incredibly important if we are to raise the trend rate of economic growth, to ensure a clear framework for investment for the private and public sectors and to increase economic growth and reduce unemployment.

The Government have been vague about their definition of economic stability. Presumably they use some key variables—interest rates, exchange rates, investment and inflation—but they have never been clear about what they mean by economic stability, and we must try to analyse their performance by examining those variables. The right hon. Member for Wells mentioned the Government's annual report, which was published yesterday, and which rightly referred to the Government's success on inflation and interest rates.

By building on the independence that they gave to the Bank of England, the Government have achieved a good record on inflation and interest rates. Risks remain on inflation, such as the possibility—receding and less strong than it was a few months ago—that the pound might collapse, thus importing inflation. House price and asset price inflation are possible worries, but the Government's record is broadly good, and the forecasts are good. The inflation position is certainly better than that achieved by the Tory Government.

The Government are right to say that both long-term and short-term interest rates are low, historically speaking. However, when compared with those of our competitors in Euroland, Japan and the United States, the record is not quite so good. The Government must be aware that both nominal and real interest rates are key factors in business investment and our ability to compete in the world. A question remark remains over the Government's record on interest rates.

The growth record is also not as good; growth has been relatively low. The Government, with the help of the Monetary Policy Committee, have avoided recession, but as much by good fortune as good management, with some helpful developments in the international economy.

Much of the success has been built on the independence of the Bank of England, an idea borrowed from the Liberal Democrat manifesto. However, how can the Bank's independence and accountability be improved? Our view—established for a long time, and without the need for any review in the middle of a Parliament—is that greater independence is needed, along with longer, possibly non-renewable, terms for MPC members. Allowing the Bank to set the inflation target itself would be a strong move towards independence, and it would reassure markets of the Bank's credibility.

As the Government promote convergence and prepare, through the changeover plan, to move towards the single currency, they will be required to change the statutory framework for the independence of the Bank of England, as the hon. Member for Guildford (Mr. St. Aubyn) said in an intervention that was neatly sidestepped by the Chief Secretary to the Treasury. Perhaps we could set up a cross-party committee to consider how to meet our Maastricht obligations—including Conservative Members, now we know of their greater interest in these matters.

I shall turn to the Conservative position, as the new review is extremely interesting. [HON. MEMBERS: "Which one?"] The one mentioned in The Independent yesterday and promoted by the shadow Chancellor. We are halfway through a Parliament, but the official Opposition—astonishingly—do not know what their policy on the key macroeconomic issue is. The players in the game are the former deputy leader of the Conservative party, who toured Britain to hear about Tory policy, and the shadow Chancellor, who signed the Maastricht treaty. They know all the issues. After a long time in the House debating the issues, they should know their minds—but apparently not. They cannot set out a clear position, and that beggars belief.

Perhaps it is all because the Tories have to do such a massive U-turn. The Chief Secretary to the Treasury stole some of my quotes from Conservative Members about their previous position, but fortunately I still have one from the hon. Member for Bognor Regis and Littlehampton (Mr. Gibb), whom I am pleased to see in his place. In the Bank of England Bill Committee, he said: The Treasury should have the power to give direction to monetary policy."—[Official Report, Standing Committee D, 25 November 1997; c. 90.] He was clearly against the Bank's independence then. I wonder whether he and his colleagues still hold that position.

As I said to the Chief Secretary, this is a crucial issue. As we approach the next general election, the markets, the people and business will need to know the position. If the official Opposition really believe that they have a chance of returning to power, they need to assure the markets that there will be economic stability under Conservative economic management. If they cannot answer such a basic question, the markets will be concerned about the prospect, even though it seems rather dim today.

The Government's record on economic stability is not completely positive and rosy. One indicator gives many people inside and outside the House concern: the exchange rate and its impact on manufacturing industry. The Treasury Committee mentioned in its report the problems that the strength of sterling is causing our exporters. That aspect of stability and economic management was not mentioned in the annual report published yesterday. There was no mention of the Government's support for a stable and competitive pound, which we have heard in many other contexts. There was no indication of progress towards that. It is worrying, because the strength of sterling is creating such imbalances in the economy, with the manufacturing sectors and some regions being severely squeezed by its strength while others are not.

The Governor of the Bank of England's evidence to the Treasury Committee made it clear that the strength of sterling causes him and his colleagues on the Monetary Policy Committee great difficulty in setting monetary policy. The two-speed economy that its strength has created is a problem, but so far we have heard little from the Government about how they intend to tackle it.

This is a major failing in the Government's macro-economic record. They could act by changing the fiscal policy mix and promoting a debate on what they believe to be the sustainable level of sterling. That will be important in the run-up to sterling joining the single currency. As my hon. Friend the Member for Twickenham (Dr. Cable) has said in other debates, unless we ensure that sterling enters monetary union at a competitive rate, we could lock in uncompetitiveness for years. That would be a strategic error. Unless the Government start tackling the issue and at least promote a debate, there is no way that that instability can be addressed.

Mr. Peter L. Pike (Burnley)

The hon. Gentleman makes an important point about manufacturing industry. Obviously, the pound is a problem for exports, but is sufficient emphasis put on imports? The value of the pound means that raw material and component prices are relatively low. Industry gains with one hand but is at a disadvantage on the other.

Mr. Davey

I take that point, but manufacturers and exporters are unambiguous about their concern over the high pound. Often business is not at one, as we know too well from the euro debate, but it is at one on its problems with the pound.

I hope that the Minister will give some sign of what the Government are planning and how they will tackle this cause of instability. Will they turn over to the committee dealing with the national changeover plan the task of debating the sustainable rate of sterling? That way forward could have a real impact on the level of pound in the market.

It may be that the Government have not been clear on exchange rate policy because of their difficulty with euro policy. If so, there is a danger that exchange rates will be a source of future instability. The Government need to tackle that. The prospects for sterling are worrying. It is uncompetitive with respect to the euro. It is odd that some hon. Members think that a weak euro shows what a disaster the single currency is. German, French and Italian exporters are delighted that it is weak. It is not that weak historically: it has returned to the level of member currencies on a trade-weighted basis two or three years ago. The level of the euro is helping Euroland and disadvantaging our exporters. Many businesses in this country would give their hind legs to have such a competitive exchange rate and interests rates as low as they are in Euroland.

The prospects for the pound faced with a weak euro are worrying, but in the next few months there may be problems with a weakening dollar. It is not inconceivable that the bubble on Wall street will burst in the summer. Such crashes have often occurred in summer or early autumn. That would probably be accompanied by a fall in the dollar. A depreciating dollar would be super-competitive, and with a super-competitive euro, how much greater would the squeeze on our exporters be?

Mr. Radice

If the dollar weakens, the euro is likely to strengthen. We would benefit from that, as the hon. Gentleman rightly noted. The nightmare scenario is unlikely.

Mr. Davey

The right hon. Gentleman may be right, but as cross-currency variations are difficult to predict, my scenario is all too likely. The current level of sterling means that this country is not in a good position to face that possibility.

There is a paradox in the Government's position on the euro. They say that their economic policy is successful in promoting convergence, but press briefings and the lack of clarity in their position on the timing of referendum on the euro show that they are not prepared to say when it will be. That is odd. If they are saying that they have a successful policy on convergence, they should be able to be clear about the timing of the referendum. When do they expect their policy on conversion to succeed? Will it be in two, three or four years? I hope that they will come clean. Instead of allowing it to gain currency that they may be ready to rule out a referendum in the next Parliament, they should be more forceful and set out a timetable for it.

Mr. Letwin

The hon. Gentleman is making an intelligent, serious speech. Can he explain what he understands by the term "convergence"?

Mr. Davey

There are the Maastricht convergence criteria, but unfortunately the House is not judging the Government's performance on convergence by them; we have the five tests. And the problem with them is that they are very elastic.

Mr. Letwin

They are meaningless.

Mr. Davey

They are potentially meaningless, as the hon. Gentleman says. That does not get the Government off the hook on which I am trying to impale them: the need to be clear on the timing of the referendum. Some Labour Members would like their Front-Bench colleagues to be clearer.

Mr. Bercow

Further to the hon. Gentleman's reply to my hon. Friend the Member for West Dorset (Mr. Letwin), on what basis would he be satisfied that the five economic tests had been met not temporarily but permanently? What would satisfy him that convergence was anything more than a meeting of ships that pass in the night?

Mr. Davey

The Liberal Democrats do not share the Government's adherence to those five tests. We do not believe that they are the correct five tests, so we reject them as the measures of true convergence. We believe that the Maastricht criteria, which other countries view as the correct measures of convergence, are still correct. I expected that when I started to bring the euro into the debate I would get a few interventions from Conservative Members.

I turn now to public services. If the Government are trying to remove boom and bust from macro-economic management, they are enhancing it in the management of public services. Their adoption, for the first two years of this Parliament, of the Conservatives' spending plans, followed by the introduction of the comprehensive spending review to try to increase expenditure, is not a sensible way to plan investment in public services. We are witnessing the legacy of that error of judgment early in this Parliament.

One of the Government's three key objectives is to deliver efficient and modem public services and to raise standards and quality. However, if they cannot achieve greater coherence and long-termism in their public expenditure planning, they will fail to meet that objective.

The Government say that they are using two tools to improve public services: public spending itself, and the management and focus of that spending. There have been a few small improvements. In certain areas, there has been a slight increase in spending compared to what we might have expected if the Conservatives had been returned in 1997. However, in general, the Government's record on public services is not very good. There is a lack of sustained high spending on key services such as the police, education and the health service, but the Government are also failing to ensure that the money is spent properly.

On overall levels of spending, the comprehensive spending review's only real achievement is to stop Labour Members whingeing on about levels of public expenditure. They can parrot, like a mantra, the figures of £19 billion and £21 billion. However, they are not focusing sufficiently on how those resources are being spent, and to what effect. In so doing, they are making a serious political mistake.

Education has, according to many criteria, received more money than any other service. There has been a real-terms increase in education spending of 3 per cent. per annum. Historically, that is not bad. However, if one is ambitious for our children and our schools and one wants to highlight the importance of education, one finds that figure tame, rather than impressive. It is only slightly higher than the 2.6 per cent. real-terms increase achieved in the first five years of the Government led by the right hon. Member for Huntingdon (Mr. Major).

The annual report published yesterday reveals that in the fourth year of this Parliament, there will be an increase of 0.1 per cent. in the share of national income devoted to education. That follows a fall of 0.1 per cent. in the first two years of this Parliament. It is not a good record.

Mr. David Ruffley (Bury St. Edmunds)

By how much would the hon. Gentleman increase education expenditure in real terms, and how would he pay for it?

Mr. Davey

No one can criticise the Liberal Democrats for not being clear about our spending proposals and how we intend to pay for them. We have published alternative Budgets and costed manifestos. If the hon. Gentleman's party would explain its public spending proposals, he would have a leg to stand on.

We need far more money to ensure that the size of primary school classes for all ages falls to 30 or below. We need to ensure that teachers are properly paid so that we can attract more highly qualified graduates into teaching. I visit primary and secondary schools in my constituency, and it is clear that we still have major cash problems. There is a desperate need for urgent investment in modern information technology equipment. Schools where class sizes for five, six and seven-year-olds are falling are losing money from their revenue budget, so the Government are not making good the effect of their reduction in class sizes on schools' annual budgets. That is creating problems and schools are having to lay off staff.

My constituency experience leads me to believe that the Government are not treating different areas fairly. They continue to view areas such as Kingston as uniformly leafy, as if there are no problem areas or pockets of deprivation within the constituency. I can assure the House that there are such areas in Kingston, and unfortunately when so little cash is going around, places such as Kingston are the last to receive any.

Other public services are experiencing significant cuts. The police are the most obvious example in my constituency. The Government said that they would improve policing. In many of their pre-election statements, they said that there would be more bobbies on the beat. However, the number of officers in England and Wales has been slashed by more than 1,000 since the general election.

If Labour Members are in any doubt about whether that cut has had an effect, they should come to my constituency, where there is a rash of vandalism and graffiti because there are not enough beat officers. We have lost more than 50 such officers in the past four years, so that was partly under a Conservative Government, but also under this Government. The police are unable to respond as quickly to 999 calls, to walk the beat, to get to know young people and to try to deter crime. In Chessington, Malden Rushett and Hook in the south of my constituency, there is now one beat officer for a population of more than 10,000. Clearly that is wrong.

It is not only the amount of spending that is important, but how that money is managed. The Chief Secretary to the Treasury made much of the public service agreements that the Government published last December, but it is odd that even though those agreements are an important part of the way in which the Government want to manage public services, we have had no statement about them. There has been no debate about that so-called revolution in the management of public services. Are we expected to take those agreements seriously? Were they just an afterthought in the comprehensive spending review—they were introduced six months later—or a fundamental part of it? If the Government and Parliament are not taking those agreements seriously, we cannot expect civil servants to take them seriously.

We were promised an annual report on public service agreements. When will that happen? We want to know whether those agreements were negotiated between spending Ministers and Treasury Ministers or whether they were a diktat from the Treasury. Were they signed? What status do they have? If they are to be the crux of future public expenditure decisions, we need to know what role they will play in budget setting. Will budgets be determined by those targets for outputs and outcomes, or will they be determined after the budget-setting process? If the agreements are not completely integrated with that process, they will have no effect on the way in which money is spent.

The only analysis of public service agreements that the House has seen has come from the Select Committee on the Treasury, which published a useful report last month. The Chief Secretary gave evidence to the Committee, and when we read what he said about public service agreements, we begin to realise how crucial Ministers perceive them to be: Public Service Agreements have different definitions. If you like, they set out agreements within Government, first of all, about the level of improvements that we want to see in our public services, in exchange for the extra investment we are making in those services". Those agreements are therefore central to the Government's policy of improving public services. However, it is evident from the Treasury Committee's report that those agreements were almost written on the back of an envelope, as an afterthought.

The Committee said that insufficient attention was paid to building quality of service into targets". It recommended that targets should be published in draft", so that there can be a proper debate. It said also: We disagree with the Chief Secretary's view that the setting of targets is solely the responsibility of central Government"; in other words, local government and other agencies need to be involved. The Committee also recommended external auditing of those targets and the progress in achieving them. It said that there should have been publication of a set of principles establishing the ground rules for those targets. The Committee is absolutely right. If public service agreements represent a fundamental change in public expenditure, far more thought needs to be given to them.

Liberal Democrat Members do not disagree with the notion of public service agreements. The movement to output and outcome budgeting would be extremely sensible. We would be much clearer in our minds about what we were trying to get from the money that we take in taxes. There could even be a beneficial effect on spending; Conservative Members might well be interested in that. If we can have greater clarity about the targets that we are trying to achieve with public money, public money may be focused more effectively, and we may need less of it.

Public service agreements are a great tool for increasing the accountability of the civil service to Ministers, and of Ministers to Parliament, because they create far greater openness about what public expenditure is intended to achieve.

However, if the Government are not prepared to debate public service agreements in the House, we must question what role they envisage for those agreements. There are many problems with public service agreements, and it is important that they are got right. I mentioned the domination of the Treasury in the setting of the agreements. We need to know whether the correct targets have been set.

The Government said in their annual report, published yesterday, that they had published 600 targets. Where was the debate in Parliament on those 600 targets? Are they the right ones? Have MPs had an input into the setting of those targets? Can we be sure that there will be continuity and consistency in the targets? How do they relate to previous targets that the civil service has been given in setting public expenditure? Those crucial questions need to be answered if we are to improve public services.

We need to know what penalties will result from failure to meet performance indicators. Will cuts in the funding of public services result? I believe that, if so, hon. Members will be very worried, because if something is failing and the automatic penalty of a cut is imposed, we may get a vicious circle, resulting in a continuing degradation of public services. Those are key questions, on which the House has not deliberated before today.

My hon. Friend the Member for Gordon (Mr. Bruce) and I were privileged enough to travel to New Zealand to find out how output and outcome budgeting worked in practice. [HON. MEMBERS: "Oh."] I hear some remarks from Labour Members. I declared that trip in my annual report, which I published to my constituents last year, so I have no concern about that.

On that trip we learned, as a result of talking to politicians and chief executives of the various departments in New Zealand, that although the system focused attention on the efficiency of spending, there were many dangers, such as the mis-specification of contracts and of targets. In addition, we learned that if one tried to include absolutely everything in specified measures, one could miss out on things such as the public service ethos—on the way the public service serves the whole population. Those problems have not been debated.

We hope that public service agreements will deliver what the Government say that they are intended to—the modernisation of public services and reform. However, the Government made a serious mistake by depriving Parliament of its ability to contribute to ensuring that the PSAs are right.

Mr. David Kidney (Stafford)

Can the hon. Gentleman confirm, to complete his very fair summary of the Treasury Select Committee report on public service agreements, that the Committee also recommends that Select Committees review the public service agreements of the Departments that they supervise?

Mr. Davey

I can confirm that, and I hope that Select Committees will act on that recommendation. I also hope that they will act on a recommendation made by the Select Committee on Procedure, on which I serve. Just this week we published a report entitled "Procedure for Debate on the Government's Expenditure Plans". It is a very radical report, and it would also place on Select Committees more obligations to examine expenditure.

On entering the House, I was amazed by how poorly we analyse public expenditure; it is a real sham. The Conservative Euro-sceptics talk about the importance of parliamentary sovereignty. I am afraid that, under their stewardship, Parliament has not performed its key role in terms of parliamentary sovereignty—that of scrutinising Government expenditure.

The information that we are given is poor. It will improve with resource accounting and budgeting, but it is still fairly abysmal. The resources of Members in their offices, and of the Select Committees, are tiny. In its report, the Procedure Committee recommends that each Select Committee have more financial advisers attached to it, to give it support in analysing spending plans.

However, the key point of our report is that the procedures of the House do not allow hon. Members really to hold the Government to account on motions. We say: we consider that when motions are directed to future plans, motions recommending that 'in the opinion of the House' increases in expenditure or transfers between certain budgets are desirable, should be permissible. If we could pass such motions, we could significantly improve the quality of debate on public expenditure.

The House can play a major role in improving public services. I ask the Government—I hope that the Minister will give some hint of this when she winds up—to allow hon. Members on both sides of the House to play a role in improving public services, and to help us to contribute our experiences from our constituencies to the debates and enable—

Mr. Letwin

What the hon. Gentleman is saying now is of great interest. Is he saying that the Liberal party is at least beginning to move towards being in favour of line by line appropriations?

Mr. Davey

I do not see how the hon. Gentleman read that into my remarks. What I am in favour of is a radical revolution in public expenditure management, in terms of resource accounting and budgeting, in terms of three-year planning and in terms of the ability of the House to pass motions to change the Government's Budget. That would be a radical change. I hope that Ministers will accept the Select Committee's report.

7.27 pm
Ms Sally Keeble (Northampton, North)

I welcome the debate, which deals with two of the biggest challenges facing any Government—the management of the economy and the financial management of public services. I am sure that the hon. Member for Kingston and Surbiton (Mr. Davey) shares many of the aspirations that Labour Members share about public services. Unfortunately, the Liberal Democrats have not yet produced financial plans that match their aspirations, or plans for service delivery that would deliver what they say that they want to achieve for the country.

The management of the economy and the financial management of public services are two of the challenges that this new Labour Government have met. We have provided economic stability, we have managed public finances, we have ensured that public funds are not wasted on the consequences of economic failure and we have put public money into the public priorities—health, education, the eradication of child poverty and the ending of youth unemployment. Those were the challenges that the last Tory Government so disastrously failed to meet. I want to consider some of the consequences of their failure, and of the leaden—not golden—legacy that they left to the present Government to sort out.

First, I want to consider the Tories' record on the economy, especially the number of unemployed and the unemployment rate. I was astonished by the remarks made by the right hon. Member for Wells (Mr. Heathcoat-Amory); I can only assume that he has not studied the unemployment figures for a while. I have in my hand a list—produced not by the Labour party but by the Library—of the unemployment rate for each of the years since 1978. It shows that, in the last full year of the Labour Government—1978—the unemployment rate was 4.3 per cent. In the first full year of the Tory Government, it was 5.1 per cent. In the last full year of the Tory Government, it was 7.3 per cent., and in the first full year of the present Labour Government, it was 4.7 per cent. That shows fairly clearly that it was the Tories who produced record levels of unemployment and who failed to deal with unemployment, and that Labour has consistently supported policies to deal with unemployment.

I also want to consider the costs of unemployment. The global figure for the Tories' 18 years was £158.8 billion. Under the last Tory Government alone, the cost was £48.9 billion. It astounds me that the Tories seem to gloss over the fact that they spent that sum on unemployment, yet they begrudge the £40 billion that we propose to spend on education and health.

Mr. Gibb

Is the hon. Lady aware that, in one year alone, 2003–04, her Government will spend £118 billion on social security?

Ms Keeble

I have been careful to speak about particular areas of spend. Certain areas are worth spending on as an investment, but to spend on unemployment, as the Conservative Government did, was a disgrace. It cost the country a huge amount in lost skills, and cost many members of the public a huge amount in lost life potential.

Mr. Bercow

Will the hon. Lady give way?

Ms Keeble

I shall deal first with incapacity benefit. That cost was also an outrage. Between 1979–80 and 1994–95, the number of people on incapacity benefit almost trebled, at a cost of £8.4 billion. In an era when health standards were generally going up, and when there was a drop in the number of people employed in manual labour which produces the industrial injuries that would be expected to lead to incapacity benefit, it beggars belief that the number of people incapacitated should increase so dramatically. All of us who studied the figures knew that incapacity benefit was simply being used as a way to get people off the unemployment register or as a form of early retirement.

Behind the statistics, the human misery was immense. I shall give one example of that, and of the Tories' failure to deal with it. In Birmingham during the early 1980s, when thousands of people were being made redundant, the Tory Government so spectacularly failed to think about the consequences of that, that the Department of Health and Social Security offices in the city all closed down for six to nine months.

Not only were highly skilled people who had engineered much of the country's wealth thrown into the dole queue with no hope of retraining, but for a long time they could not even get the social security benefits that would have kept them out of abject poverty. That is an example of the way in which the Tories failed to think in the short or the long term about the management of public services to deal with the economic mess that they had made.

Various Opposition speakers said that they supported spending on the NHS. Some areas of public spending are entirely justifiable and are investments, but the Tories' crocodile tears over the NHS are not to be believed. At the end of their period of office, in 1996–97, 137 trusts and 72 health authorities were in deficit. The trust deficit totalled £50.5 million, and the total health authority deficit was £238.2 million.

Within months of a general election, my health authority in Northamptonshire was passing a deficit budget of £2 million, with an underlying deficit of £4 million. That was financial management of the public services on the never-never. It was done purely for electoral purposes and not with a view to the sound management of services on which many people rely for their well-being and, in the case of the NHS, for their lives.

When Labour came to power, we faced the consequences of Tory mismanagement not only of the economy, but of the finances for our public services. Sound financial management is the first pillar of good public services. I am delighted that the Government are sorting out many of the deficits that built up in the health authorities and trusts.

A further problem was the disrepair of schools, as local education authorities struggled to deal with the consequences of the erosion of education budgets. There was also the chaos of London Underground, which had been starved of investment for many years. The same applies to the national rail network, which was privatised without regard for good regulation or service development. That is why the introduction of the Strategic Rail Authority is so important for the sound management of that service.

Our record has been to ensure economic stability and the sound financial management of our public services, to provide the economic framework for financial security for our constituents and to provide the organisational and financial framework for the development of public services. Earlier today, we heard the proposals for the air traffic control service, and on other occasions we have heard the plans for London Underground. At every step, we have been opposed by the Conservatives.

I shall set out briefly what we have done. We provided independence for the Bank of England and established the Monetary Policy Committee, which has delivered the lowest interest rates for a generation. The Tories opposed that. I know that many of my hon. Friends give the Opposition the benefit of the doubt and suggest that they take a variety of views, but almost all the speeches that I have heard from the Opposition have consistently opposed the steps that we have taken.

The Tories opposed many of our measures to boost wealth creation and investment, including the dividend tax credit, which was clearly designed to ensure that money was reinvested in businesses and not just paid out in dividends.

We embarked on the new deal, an ambitious programme to combat unemployment, which would have dealt with the problems of Birmingham in the 1980s, for example. The Tories opposed that. The programme deals with unemployment not just among young people, but among single parents, people with disabilities and the older long-term unemployed.

Mr. Bercow

I am grateful to the hon. Lady for giving way. Given her admirable concern for fiscal probity, what assessment has she made of the effect of the changed rules for the use of capital receipts from the sale of council houses on the level of interest repayments on local authority debt?

Ms Keeble

I am grateful to the hon. Gentleman for raising that. I shall answer briefly, as I want to deal with other matters.

There must be careful management of public finances. Although I welcome extra money for housing, I believe that it is right for that to be phased. If a disproportionate amount of a council's budget is tied up in servicing debt rather than running services, that does no service to the public who provide the finance. [Interruption.] The hon. Gentleman may laugh, but having dealt with such matters in real life, I understand a wee bit about it.

Single parents, people with disabilities and the older long-term unemployed were the three particular categories that the Conservative Government kept in a state of welfare dependency. I am particularly pleased that those people are being given the targeted attention that is needed to get them back into work. We are also breaking the welfare dependency culture by making work pay, specifically through the working families tax credit, which will benefit 1.3 million people. The Tories opposed that, too. I sometimes think that they used the welfare state to replace religion as the opium of the masses. They certainly failed to stimulate people to rebuild their lives and be financially independent.

Our economic measures will ensure that there is more money—£40 billion—in education and health over the next three years, but of course the Tories oppose that. In their last five years, they were happy to spend £48 billion on unemployment, but not on health, education or the measures needed to combat unemployment.

Labour has been the party of sound management of the economy and of the public sector finances. I am sure that my constituents and many other people throughout the country for generations to come will reap the benefit of the Government's prudent financial management.

7.39 pm
Sir Richard Body (Boston and Skegness)

The Chief Secretary to the Treasury opened the debate with appalling complacency. He trotted out a list of favourable statistics, but surely he has been at the Treasury long enough to know that there is a considerable time lag—never less than 18 months, seldom less than two years, but often as long as three years—before a decision made in Whitehall permeates all the way down to the economy. At least three quarters of the favourable facts that he gave us are therefore attributable to what the previous Government did. None the less, he spent the rest of his time attacking Conservative Members. Attack may be the best form of defence, but he will be blown off course before long. We are just beginning to realise that some rather ugly facts are just round the corner.

Most of us have tried to put out of our minds in the past few weeks what has gone on in Yugoslavia, but we now know that the cost of reconstructing that sorry country will not be just a billion or two, but an incalculable number of billions. Mr. Ian Milne recently tried to make an approximate calculation, but all that he could say was that it would cost billion upon billion upon billion. Who will pay for that? In that country, 30 per cent. of people are out of work and vast areas of infrastructure have gone.

We all know why the situation came about, but it is now leaking out that, on 23 March, soon after the bombardment began, the Parliament in Belgrade announced counter-proposals to Rambouillet, which have now proved to be substantially the same as those which were agreed on 3 June. If that is true—it undoubtedly seems to be true—that bombardment of some 10 weeks was obviously unnecessary.

Who, then, will pay? There is a heavy moral duty upon those Governments who were responsible for that decision. The United States Government have given a broad hint that they will now wash their hands of Yugoslavia; that they have done all that they need. The major countries of the European Union, France and Germany in particular, are in the eurozone. They cannot increase expenditure without increasing taxation. No one could possibly believe that either of those countries will be willing to increase taxation to pay for what has happened, so that leaves Britain. We shall be called upon to make a major contribution to the cost of reconstruction.

How will that be paid for? It is unrealistic to add to our tax burden. We heard from my right hon. Friend the Member for Wells (Mr. Heathcoat-Amory) some appalling figures—a £40 billion increase in taxation. My hon. Friends will repeat that over and over again as a measure of how dishonest the Government have been in pretending that there would be no increase in taxation. It is only thanks to the Library that we have been able to discover that figure. Labour Members will have to defend that £40,000 million and, in particular, the added burden that will now be placed upon virtually every business in Britain. Such businesses will not be able to pay the extra taxes and at the same time invest or pay a larger wage bill. In that respect, unless we are careful, we shall see a contraction of the economy.

The hon. Member for Northampton, North (Ms Keeble) spoke about our public services. I wonder whether she realises how serious are the prospects for the long-term future of some of our public services. If we are to increase expenditure without increasing taxation, we shall have to borrow money, and that means increasing the national debt.

Ms Margaret Moran (Luton, South)

Does the hon. Gentleman agree that, under the previous Government, between 1990 and 1996, the public sector borrowing requirement—the national debt—doubled at a cost to the average family of about £5,500, while, at the same time, investment in education was going down and the cost to the Government of unemployment was increasing? That is hardly the golden economic legacy that the hon. Gentleman and his colleagues describe.

Sir Richard Body

Had the hon. Lady been a Member of the House at that time, she would have known that the Government had one or two critics. I repeatedly complained about the rise in the national debt under the previous Government. Rightly or wrongly, I was independent during some of that time. I am well aware of those figures. The situation was far worse when my right hon. Friend the Member for Old Bexley and Sidcup (Sir E. Heath) was Prime Minister when the figures rocketed. I was a strong critic at that time. I was co-author of the monetarist papers which set out the pitfalls if the Government carried on on those lines. I can assure the hon. Lady that I am well aware of that history.

Over the years, a large number of economists have urged another way of making up the budget deficit. When we issue short-term gilts and Treasury bills, they are effectively IOUs, and they bear interest. When they mature, there is almost invariably a further issue for the same amount plus the interest. That is essentially why the national debt tends to rise year after year. The appalling fact is that, if we continue on that course, within about 20 years from now, the national debt will, according to the estimate of those who study the matter, have risen to £1,000 billion.

The hon. Member for Northampton, North talked about public services, as she did so eloquently earlier, I beg of her to bear in mind what the interest on that national debt will be in 20 years' time if we carry on as we are doing now. We will not then be able to talk about increasing expenditure on this, that or the other; on all the good things about which she spoke and on all the goods things that Conservative Members would like to see spending on increase. That will not happen because we will have to pay the interest on the national debt.

One does not have to be a mathematical genius to work out what the interest is likely to be in 20 years' time if that forecast is right. One has only to look at the latest Budget statement to see that we are on the upward path again. If one looks at some of the other figures, one sees that the proportion of debt-free money in circulation is in steady decline. Some 30 years ago, it was 17 per cent. and it has been dropping ever since. We now have what I might call a 3 per cent. Chancellor, because only 3 per cent. of our money stock now is directly in his hands. Next year, it will almost certainly be 2 per cent. One cannot go below 1 per cent. I beg the hon. Lady to bear in mind what will happen, almost in the lifetime of this Parliament, if we do not put on our thinking caps and consider how we will cope with the decline in debt-free money.

For some half a century on and off, a number of distinguished economists have argued that the Government have exclusive control of debt-free money. Only the Government are in charge of the Royal Mint. Only the Government can authorise the manufacture of notes or coinage. Therefore, they should be using that mechanism—MO—to pay off an increasing amount of the debt. However, if they go on, as they have done for far too long, merely reissuing those IOUs on which interest has to be paid—that may benefit the banks, some of the pension funds and some of the other institutions, but it certainly does not benefit those who are arguing for improved public services—there are bound to be severe and unjust cuts in public services. I cannot believe that any hon. Member on either side of the House would want that to happen. We should all be agreed on that, but I fear that we must change direction in this respect.

We must also recognise what so many distinguished economists have said. I do not know whether I ought to mention Milton Friedman. That name does not always appeal to Labour Members, although the Treasury has imbibed every syllable that he uttered about monetary policy, which is very good. He is one of the many distinguished economists who have argued that the Government should increase the amount of debt-free money to pay for that deficit, particularly when it is caused by an increase in capital expenditure. That is not inflationary. The issuing of gilts and bills is inflationary because they are used as a deposit by the banks to enable them to re-lend, often by a multiple of 10.

My plea to Treasury Ministers is that they should look again at those forecasts for a steady rise in the borrowing requirement. It was clear in the Budget statement that it will increase again next year and the year after, but, in the meanwhile, we may have to accept our moral duty to play a part in the reconstruction of Yugoslavia, if what I said about the Yugoslav Government proposal of 23 March is correct. In all events, I believe that the Government will be blown off course, and when the Chancellor of the Exchequer has to speak on this subject again—next year or perhaps in years hence—he will have no cause to be complacent.

Mr. Deputy Speaker (Mr. Michael J. Martin)

I call Mr. Blizzard. I am sorry; I call Mr. Rammell.

7.52 pm
Mr: Bill Rammell (Harlow)

Thank you, Mr. Deputy Speaker. That is not the first time that that mistake has been made.

We heard from the hon. Member for Boston and Skegness (Sir R. Body) wishful thinking similar to that which we heard in last year's debate. Labour Members will remember that Conservative Members told us that we were heading towards a deep and damaging recession. Those fears have not been fulfilled and I am certain that the fears to which he has referred today will not be fulfilled either.

I am happy to participate in the debate and it is no exaggeration to say that the macro-economic framework that the Government have set in place and the strong public finances that they have established are the best for many years. That does not mean that we will not continue to face dilemmas, that there will not be objectives that we wish we could achieve more quickly and that there will not always be greater demands on public expenditure than we can meet at any particular time. Such stresses and strains are inherent in any developing or changing society. However, their singular achievement, in contrast to what occurred previously, is that the strong state of public finances means that our electors will have a right to expect steadily improving public services and steadily increasing expenditure on them year on year.

We have been able to achieve that because of the way in which the Government have managed the economy during their two years in power, and I make no apology for saying that. The whole of my adult life before 1 May 1997 was spent under Conservative Governments and they and supposedly well-informed media commentators constantly told us that the Tory party was the party of sound financial management and that the Labour party was emotionally, psychologically and ideologically incapable of running the economy sensibly.

Given the previous Government's record, it is puzzling that that caricature was allowed to be established: in their 18 years in power they presided over the two worst recessions since the second world war, the heart of manufacturing industries was ripped out and a huge productivity deficit was established between this country and the European Union and our American competitors. Their management of the public finances meant that, steadily and proportionately over their period in office, more and more money was spent on the cost of social failure—paying unemployment and social security bills—and less was left for education.

The way that the Government have managed the public finances in their first two years in office has put that shocking Tory record into its proper economic and political context and they have received a lot of independent support for it. [Interruption.] From a sedentary position, the hon. Member for West Dorset (Mr. Letwin) mocks what I say. He should look at what the independent commentators have said about the Government's management of the economy. They have a very impressive record, setting in place the framework for economic stability and granting operational independence to the Bank of England, which established greater confidence for investors and the belief that decisions would be taken for sound economic reasons, not for short-term party political gain. The immediate benefit of that—longer-term interest rates—is there for all to see.

The long-term monetary framework is based on clear rules and open procedure. We took tough action at the beginning of this Parliament to deal with the fiscal deficit that we inherited and we established clear rules to borrow only to invest over the course of the economic cycle. All those changes were designed to create a climate of confidence and to generate stability and a base from which we could make progress on public services and public expenditure. It is fair to say that the results of that strategy are remarkable in terms of any historical comparison. Interest rates and mortgage rates are at a 20-year low and, although inflation is at its lowest since 1993, unemployment is still falling. Hon. Members should think back to the 1980s: the Conservative party achieved low inflation, but always at the price of extraordinarily high unemployment. Almost uniquely, the Government have brought inflation down while steadily reducing unemployment and for the first time in a generation, in what is still termed a downturn in the economic cycle, we will not have gone into a formal recession. That is no mean achievement.

In the early 1990s, a different economic strategy had an impact on the lives of ordinary people in my constituency: interest rates were 15 per cent., people had negative equity, houses were repossessed and businesses went bust every day. In contrast, our achievements have benefited the lives of real people. Crucially, they have also created the conditions for steady improvement in our public services. We have made £40 billion extra available for investment in schools and hospitals. Although that figure has been mocked, that £40 billion constitutes substantial rises above and beyond the rate of inflation for the coming three years and there will be a significant boost to public transport and other areas.

In terms of overall economic policy and attitude to the public finances, people want a Government to achieve steady, year-on-year improvements that give confidence to the consumer and to the providers of public services so that they can plan for the long term, not dramatic, unsustainable changes that cannot be sustained in the longer term.

Mr. Letwin

As a matter of genuine curiosity, how does the hon. Gentleman respond to the facts brought out by the hon. Member for Kingston and Surbiton (Mr. Davey), who said that, at the end of the Government's term in office, the proportion of gross domestic product spent on health and education will be broadly identical to that which they inherited?

Mr. Rammell

I do not accept those figures. If hon. Members consider the full five-year term, they will see an improvement. However, on all the available evidence the Government will not be in power for only five years; we will go beyond that. I am confident that we will roll forward the three-year spending review to achieve further significant increases in the key areas of public expenditure.

Against the background of macro-economic stability and sustainable increases in public spending that Labour has created, we have to judge the Conservative's party critique. I think that it wholly lacking in credibility. Conservative Members exhibit the salient features of an Opposition who have yet to come to terms with the fact that they are in opposition. Conservative Members always know which tax rises they are against. They are against the fuel escalator, despite the fact that they introduced it in the first place, and against increases in stamp duty. As they pointed out in a debate on the Finance Bill, they are even against capital gains tax. They also always know what extra spending they are in favour of. As we discovered from the comments of the right hon. Member for Wokingham (Mr. Redwood), a Conservative Government would spend more on roads. What they never do, however, is square the circle and say how they would balance the public finances.

During the passage of the Finance Bill, Conservative Members proposed amendments that would have created multi-billion pound holes in the public finances, yet they never said that they would make good those holes, apart from general unspecified cuts in social security expenditure. That is an abdication of serious politics in government.

Mr. Gibb

Was not the Labour party elected on the pledge that it could fill the hole—the extra spending on health and education—by cuts in social security spending? What we were doing on the Finance Bill Committee was opposing the tax rises, which the Labour party said, during the election campaign, they had no intention of introducing.

Mr. Rammell

The Labour party has fulfilled its election manifesto pledge to balance the Budget in a way that has sustained public confidence. That is borne out by any election that takes place—it was certainly borne out by the by-election in Eddisbury last week—and by public opinion polls. People trust the Government to manage the economy and the public finances.

Sir Richard Body

I am sure that the hon. Gentleman has read carefully the Budget statement and has seen the figures. There was a balanced budget for two years, but as I sought to explain earlier, that was the result of a time lag and of policies pursued by the previous Government. We are now embarking on a borrowing requirement, because we have a major deficit, which must be made good by issuing gilts and Treasury bills. Next year that will not be the case. That is in the Chancellor's statement.

Mr. Rammell

This Government have removed the structural fiscal deficit that we inherited from the Conservative party and created conditions that give the City and the financial markets confidence that our increased expenditure plans are sustainable. That view is held in the City and elsewhere, even if it is not held within the Conservative party. Thus far, we have substantially won that argument.

The other element of the Conservative party critique that needs to be brought into the open is the clear difference between what Conservative Members say they would do if they were re-elected to government and what the Labour Government are doing. The Conservatives say that they would abolish the national minimum wage. Does the House remember the national minimum wage—the measure which, when it was debated during the election campaign, was to cost a million jobs? The Conservatives also say that they would abolish the working families tax credit and the new deal. Those are all measures designed to help people back to work and to make work pay.

We should not be surprised that that is the Conservative party's attitude. When it was in power in the 1980s and 1990s, it showed scant regard for the interests of people on low and middle incomes. It must be remembered that the only people who were paying less tax in 1997 than they were when the Tories came to office in 1979 were those earning more than £64,000 a year. The only reason that they were paying less tax was that everybody else was paying more. That was the reality for people at the bottom of the income scale under the previous Government: a higher tax burden; higher marginal tax rates for those coming off benefits and going into work; and other barriers that prevented people from taking up work.

With such a record, it is hardly surprising that the Conservative party opposes this Government's proposals to make work pay and to tackle poverty. The Conservative party's critique lacks credibility. It is holed below the waterline, so it is hardly surprising that it is receiving so little support. We have made an enormously positive start.

I wish to comment on two other areas. The first is an area of public expenditure where the Government have made significant progress but where we need to go further—public housing. With the release of capital receipts at the start of the Government's term in office, we produced an enormous boost for housing investment—a 33 per cent. increase over the first two years of this Parliament, and a further 50 per cent. in the three years of the comprehensive spending review. However, we must remember that we started from a low base. During the 18 years of Conservative Government, no area of public expenditure was hammered as hard as public sector housing.

Based on 1997–98 prices, in 1979 expenditure on public housing was £8.8 billion; by 1997, when the Tories left office, it was £2.1 billion. That is a 75 per cent. cut, and the cost of that cut in public expenditure can be seen by every Member of the House when we undertake our weekly constituency surgeries and hear of the ever-lengthening housing waiting list, the chronic disrepair and the human cost of such a policy. We have made a good start. I hope that, as we go beyond the comprehensive spending review, we can invest even more money in public sector housing.

The second area that I want to comment on was picked up in the Treasury Committee report on the Monetary Policy Committee. It is described as the "EMU dilemma"—the dilemma between aiming for a 2.5 per cent. inflation target and reaching an exchange rate parity with the euro to enable Britain to join the single currency. I share the Government's analysis that, if we pursue the correct economic policies in the medium term, we shall tackle that problem. However, the price for non-participation, in EMU terms, is of a higher exchange rate vis-a-vis the 11 Euroland countries. Moreover, those 11 countries are already beginning to see price reductions as a result of price transparency, a huge growth in the eurobond market and the removal of exchange rate fluctuations, which facilitate trading between those countries. Given those advantages, which I believe will increase over time, I am pleased that, in the past few days, the Government have reiterated their policy that, if and when the criteria that we have set for entry are met, we shall recommend to the British people that they should join the single currency. That is the right policy.

The wrong policy would be that recommended by the Conservative party: whatever the circumstances and whatever the national economic interest, the people will not be allowed to decide this issue for an arbitrary period of 10 years.

Mr. Edward Davey

Does the hon. Gentleman support the idea that there must be a referendum on this issue in the next Parliament?

Mr. Rammell

I shall not give an arbitrary commitment on when the referendum should take place. The tests that the Government have set are meaningful, and if we do not meet those criteria it would be wrong to hold a referendum. As I have said to the hon. Gentleman before, given that, on any available polling evidence, those who are most hostile to the single currency are those who say that they would vote Liberal Democrat at a general election, his time might be better spent convincing his supporters of the merits of the single currency instead of constantly lecturing the Government that they are wrong on this issue.

We have put the right conditions in place, in terms of both macro-economics and public services. It used to be said that the prospect of a Labour Government would put the wind up the City and the financial markets. In the current circumstances, the only prospect that would create such a fright in the City and among investors is an opinion poll showing a narrowing of the Labour party's lead and the possibility of the Conservative party being elected at the next general election.

8.9 pm

Mr. Crispin Blunt (Reigate)

I am disappointed to follow the speeches of the hon. Members for Harlow (Mr. Rammell) and for Northampton, North (Ms Keeble). Theirs were the sort of speeches that give Labour Members who entered the House in 1997 a bad name. They did not stand back and analyse the wider position, which was eloquently put by my hon. Friend the Member for Boston and Skegness (Sir R. Body). That is what I hope to do in the few minutes available to me.

If we look at the economic position in which our country is in today, we see that we are in a historically benign economic position. We do not have to deal with an inherited debt to pay for a world war. We no longer have to support the armed forces and the military posture that was required to sustain freedom and peace in Europe during the period of the cold war. We do have to deal with the historic retreat from empire that cost this country so much during the 1940s, 1950s and 1960s, and with the debt overhang that was faced by the Governments that followed.

In the 18 years of the Conservative Government, there was an enormous change in the conduct of economic policy in the United Kingdom. It was a victory of the ideas of liberal markets. That was mirrored in the victory of the west in the cold war, and in the changes in the Labour party. It was not until 1997 that the electorate was prepared to entrust Labour with the government of the country. Its reputation for economic competence had been undermined by its previous performance in office. The Prime Minister, as Leader of the Opposition, had to undertake a three-year exercise to reassure the electorate that his party was fit for government and would not ruin the state of the economy that it would inherit.

Mr. John Cryer (Hornchurch)

The hon. Gentleman talked about economic competence. Does he recall that on Black Wednesday in 1992 a huge gap of about 20 per cent. was opened up between the Labour party and the Conservative Government, which to this day has never closed? What does that tell him about economic competence?

Mr. Blunt

I agree with the hon. Gentleman's analysis. That was a seminal event, and it destroyed public confidence in the Conservative Government. However, the picture was not as straightforward as some would like to believe. Everyone advocated going into the exchange rate mechanism when we did so in 1990—the Labour Opposition, the trade union movement, industry and the City. There was an enormous and overwhelming sea of support. Everyone thought that the right thing to do was to join the ERM, and it had some beneficial effects. It bore down heavily on inflation. The danger of inflation in our economy was eliminated in the two years that we were members of the ERM.

The then Prime Minister and Chancellor of the Exchequer staked their credibility on the United Kingdom staying in the ERM, but the markets and speculators took us out because our position was unsustainable, given the level of our economy as against those of our European partners. That destroyed public confidence in the Conservative Government. However, that does not alter the fact that the macro and micro changes to the economy in those 18 years—which have been adopted and taken forward by the present Government, who have gone even further on privatisation in some areas than I would support—show the victory of the ideas of liberal economies in an era that is economically benign.

In the time since coming out of the ERM, we have seen how much more similar our economy is to the economic cycle of the United States than it is to that of our European partners. On all the indicators, the trend of our economy since 1992 when we left the ERM is towards the United States, particularly on unemployment rates.

Another reason why the economic situation is so benign is the extraordinary motor, which the world has relied on, of this unprecedented period of growth in the United States. That is probably explained by the internet and the new technology of e-commerce, in which the United Kingdom has more involvement than any of our European partners, thus accentuating the link between us and the United States. In that context, we must examine the conduct of Government policy and how we are to deal with our public services.

If we consider the wider economic position and tie that to Government expenditure on public services, we realise that things have not really changed. When we consider how much expenditure on the health service has risen under the Government, we have to admire the presentational coup of giving the whole figure for the Parliament in a oner, and continually repeating it so that it is lodged in the public mind as an increase in investment in health. The increase in expenditure on health in real terms is less than it was in the Parliament of 1992–97, and is almost exactly the same as the real increase in health expenditure over the 18 years of Conservative government.

The challenges that the Government must face in dealing with the health service are precisely the same as those faced by previous Governments. The Government have handicapped themselves by abolishing the internal market. They will handicap themselves further by the creation of primary care groups, and by getting rid of the advantages of fundholders and the ability of individual doctors to find the right treatment for their patients. They will have to deal with the ageing population, as we had to, and with an increasing drugs budget. Those issues make the delivery of increased health outputs, as the Chief Secretary told us—it is now all about outputs—as difficult for this Government as it was for previous Governments, with no significant change in the real increase of expenditure on health.

The position is the same for education. My colleagues from Surrey and I went to see the Under-Secretary of State at the Department for Education and Employment, the hon. Member for Norwich, South (Mr. Clarke), about what has happened to the schools' budgets in Surrey. My constituents are enormously confused. They hear the Government talk about education, education, education, and they ask the head teachers and governors of their schools why cuts are being made if the Government are giving all that money. When we analyse what has happened, we realise that the Government have given a 5.9 per cent. real increase in spending on education, but 4.8 per cent. of it has gone into teachers' pay and 1 per cent. has to be added to the pay bill because of incremental drift.

Ms Keeble

Does the hon. Gentleman accept that it is not just the total amount of money that matters, but where it is spent? We took the money spent on the assisted places scheme and put it into getting down class sizes in primary schools, which is a much more cost effective way of driving up standards and providing better education for more children. It is about where we spend the money, not just about how much we spend.

Mr. Blunt

Unlike the hon. Lady, I do not claim a monopoly of wisdom. I would far rather leave the expenditure of money in schools to the governors, parents and teachers, and let them decide the priorities for their school. That was one of the complaints made to me and other Surrey Members, and I am sure that it is echoed in discussions that other Members have with teachers' representatives. They have to make ridiculous, time-consuming, bureaucratic bids to get hold of the money that is controlled by Ministers in their pet schemes, such as the political target of reducing class sizes for five to seven-year-olds. That is the headline target that the Government set themselves, never mind the fact that class sizes for every other age group are increasing.

That situation is mirrored in the Government's handling of the health service. Clinical priorities are overturned to meet the targets for cutting waiting lists. Health and education professions are beginning to lose faith, because the Government's rhetoric departs significantly from reality. They have built up expectations that will be impossible for them to meet, because they have to deal with the same realities in the public services that every other Government have faced.

I want to offer a way forward. My right hon. Friend the Member for Wells (Mr. Heathcoat-Amory) talked about churning taxes into social security expenditure: people pay their taxes and receive them back in benefit. That same churning of taxes is happening in health and education. People working in the health service and in education will wake up to the fact that it is the teachers, doctors and nurses who bear the burden of providing services in the public sector.

In fact, a nationally provided health service probably provides quite a good deal. Spending on health as a proportion of our gross domestic product is artificially depressed, because the Government must deal with a number of competing priorities, and do not want to increase taxation more than is necessary. In a sense, they are denying individuals a choice in regard to how much they will spend on health. Certainly we spend far less on health services than other developed countries, because our health services are in the public sector. The Government demand output from doctors and nurses, and they are the people who bear the pressure.

Mr. Leslie

Is the hon. Gentleman suggesting that we would be better off if everyone paid for their own health care?

Mr. Blunt

My point is that the duty of any Government is to underwrite access to good health and good education services. Until either my party or the party that is in government is prepared to face up to the situation and deal with the whole issue of "churning", and the public sector provision of those major services, we shall continue to engage in what is, in my view, a fairly sterile debate about whether real growth in health and education expenditure has amounted to 3 or 3.1 per cent. Once such matters are in the public sector, and are subject to all the demands of public-sector financial management—as long as the Government do not become reckless in regard to the use of public finances—we shall all be pursuing the same series of efficiency savings.

Mr. Love

It is now 8.21 pm. We have been debating economic stability and public services for nearly three hours, but I have yet to hear an Opposition Member make a single comment about economic stability. The right hon. Member for Wells (Mr. Heathcoat-Amory) refused to comment on the independence of the Bank of England two years on; perhaps the hon. Gentleman will give us his view.

Mr. Blunt

I should be delighted to do so. Let me add that I was saying that we are enjoying relatively benign economic circumstances, which is probably why there is relative economic stability. Personally, I consider it right for the Bank of England to be independent—not least under a Labour Government, because Labour does not believe that the markets can be trusted with the handling of monetary policy. It is probably as well, from the point of view of the United Kingdom and for prosperity generally, that Labour made the Bank independent.

There is a question mark over the make-up of the Monetary Policy Committee, and the rules that underlie it. Those who look at the rules relating to such matters as the three-year term will see just how independent the Bank of England really is, and will see what powers will be left to the Chancellor of the Exchequer in extremis. In general, however, I support the Bank's independence.

I believe that tackling the questions of public service in relation to health and education, and dealing with the whole business of "churning" in social security, is the only way of making a serious difference to our economic performance, if we are prepared to face up to the issues.

Ms Keeble

Will the hon. Gentleman give way?

Mr. Blunt

No. I want to make a final set of points.

Only by making a new contract with the people in regard to the provision of services that must be underwritten by the Government will we make a significant change in the rather sterile debate about the increase in expenditure, in terms of percentage points, while those services remain in the public sector.

Given the presence of the Chief Secretary, I want to say something about one more public sector service. The armed forces are now in crisis, particularly the Army. The strategic defence review, which took place last year, was underwritten by operational assumptions supposing the existence of an operational deployment pattern through which a coach and horses has now been driven. An unending deployment to Kosovo and Bosnia has shot down those assumptions. The Government must have another look at funding for the armed forces.

The Chief Secretary will recall that the budget was determined on the basis of a 3 per cent. efficiency savings target, and that the last 1 per cent. was added about a week before the announcement of the strategic defence review. Most of us regard those savings as impossible to achieve. The evidence is that the Army is now recruiting as many people as it can train at one time, and that people are still leaving. I hope that the Chief Secretary will deal kindly with the Secretary of State for Defence when he next approaches him asking for funds.

8.25 pm
Mr. David Kidney (Stafford)

I want to speak briefly about three issues: the Government's achievements so far, some likely future developments, and the contribution of local government to economic stability and public services.

First, I shall deal with the Government's achievements so far. It may be a short circuit to say that I entirely agree with much of what has been said today about their achievements in regard to economic stability. I am thinking particularly of what was said by my right hon. Friend the Member for North Durham (Mr. Radice)—an excellent Chairman of the Select Committee on the Treasury, on which I serve—about the independence of the Bank of England and the contribution of the Monetary Policy Committee to our current climate of economic stability.

It could be said that the time for political argument about whether the Bank's independence is a good idea is coming to an end as reality takes over. We are seeing the results of the MPC's work. Even allowing for the time lag to which the hon. Member for Reigate (Mr. Blunt) referred, it will soon be plain for all to see that the decision was right, and that the Bank's independence has been an unqualified success.

It is on the back of that success that the Government have been able to conduct the wide-ranging and comprehensive spending review that has taken place during the current Parliament. I am impressed by the way in which they have engaged in that zero-based budget building, with three-year—not one-year—programmes for Departments. The real gainers from the process have been health and education, which have received an extra £40 billion, but we should not forget the other gainers. I am thinking of crime reduction, transport and regeneration. Health and education between them, however, won more of the spoils than the other 19 Departments put together.

It should be borne in mind that the application of the comprehensive spending review only started in April this year. We are still in the first of the financial years that resulted from those decisions. I believe that the public will see a real difference as the years go by, and as consistent and cumulative extra spending takes effect.

Moreover, on top of the revenue spending unlocked by the review, the Government have made possible additional capital investment, even within the golden rule that permits borrowing only for investment rather than consumption. I also welcome—this is a rather different point—the separation of accounting for capital spending from accounting for revenue spending, which adds to the discipline involved in ensuring that capital investment goes ahead even when times are hard.

As a result of the comprehensive spending review, there are more modern hospitals, clinics and general practices. I invite hon. Members to come to my constituency, and see the new building that is taking place at Staffordshire general hospital. The review means more beds for the accident and emergency unit, more doctors and nurses—better paid—the treatment of more patients, shorter waiting lists, and more emphasis on primary care, public health and the reduction of health inequalities.

Mr. Blunt

On that point, a new hospital in my constituency, East Surrey hospital, was opened about 10 years ago by the then Prime Minister, but efforts to secure efficiencies and new buildings go on throughout the health service. In the next door constituency to mine, that of the hon. Member for Crawley (Laura Moffatt), a Labour nurse—she was advertised as such in Labour party political broadcasts—the accident and emergency department is being closed and moved to East Surrey hospital in an effort to make the efficiency savings that have to be found in the health service. The search for those savings will go on and result in new buildings opening and old buildings closing. It happened under previous Governments and it will happen under the present Government—nothing is new.

Mr. Kidney

I hope that the hon. Gentleman is saying that he approves of the efficient use of public resources, including money that is spent on our health service. I applaud the fact that we get best value for the money that we invest in health, as in any other sector of spending.

That can be said of education, where extra money from the comprehensive spending review means more new schools. Again, the hon. Member for Reigate can come to Stafford to see the new Sir Graham Balfour high school that is about to be built under a PFI scheme, or the almost completely new buildings of the Cooper Perry primary school—part of the same PH scheme. There are more repairs, renovations and extensions.

As I visit the schools of my Stafford constituency, I am pleased to see the new windows, new energy-efficiency measures, new security measures and the indoor toilets that have appeared in some schools. School staff talk about new extensions to their schools. I am impressed by the number who have seen schemes to improve the building that they occupy. There is more money for books and equipment. I accept that Stafford local education authority is a pilot for the national grid for learning, but it has made a reality of the grid, with all schools either connected, or about to be connected, to the internet, and it means more money for teachers pay.

On future development, the first thing that I hope to see—it is not in the Government's gift—is the Tories complete their U-turn on Bank of England independence. All-party agreement on that would add to the credibility of monetary policy. I would next look forward to the locking-in of the benefits of the Chancellor's fiscal action to date, the elimination of the current account deficit, and the reduction in Government debt to about 40 per cent. of gross domestic product or lower, leaving the country well placed to take advantage of changes and opportunities in future.

Those include the ever increasing opportunities from the continuing information technology revolution. We will be well placed to withstand external shocks—such as the one last autumn when Russia defaulted on its debt, and a number of south-east Asian economies collapsed—and the continuing doldrums of the Japanese economy. Those were serious shocks. Thanks to the economic stability that we have achieved in this country, we have survived all those shocks without a recession.

I would like the new public service agreements to be used as a tool to ensure that we get value for money from public spending. The public service agreements, the new accounting standards that have been set following the 1995 European standards, which we adopted last September, and the new rules for resource accounting and budgeting that will be introduced in the next few years, will mean considerable opportunity not only for the country to manage its finances more carefully, but for Parliament to have greater scrutiny over the Executive's spending plans. I echo the point that was made by the hon. Member for Kingston and Surbiton (Mr. Davey).

I move to the future of PFI. The Chief Secretary mentioned that £4 billion of spending had already been achieved through PH schemes. That will, no doubt, continue. This week, the result of the second Bates review of the PH has been announced, with a recommendation that a new partnership UK ensures that we get value for money and monitor the future development of PH. Next year, the next round of the comprehensive spending review will take place. I hope that that sees a continuation of three-year budgeting and three more years, as promised, of real increases in public service spending—real increases year after year.

I ask the House to have regard to two offshoots over coming years. The last Budget promised a review of the inter-generational effects of decisions that we make in our lifetimes and in our time in Parliament on public spending and public borrowing. What debt are we leaving to the generations to come and what assets are they getting for their money? The other offshoot is the distributional effect of our decisions. Who are the winners and losers when interest rates fall, or rise? Who are the winners and losers of a decision to increase, or to reduce direct taxes? Who are the winners and losers if we increase or reduce indirect taxation?

Thirdly, I look at the contribution of local government. Never let it be forgotten that it is a major contributor to public expenditure—more than £50 billion this year, three quarters of which comes from central Government, either in grant or in the distribution of business rates. Local government is a main deliverer of public services.

Some national issues have very important repercussions on local government. Establishment of the national assets register, requirements for asset sales and rules on private finance initiative schemes, for example, impinge on the role of local government. I call on the House to ensure that, in all those schemes, there is sufficient accountability in the decisions made by local government. Nationally, there should be sufficient access to figures on the schemes, and to information on the figures consequences on the national accounts—and, therefore, on national economic stability.

As the hon. Member for Kingston and Surbiton said, when departmental decisions on public service agreements have an impact on the performance expected of local government, it seems perfectly reasonable to allow local government to have some say in how the agreements content is decided.

Some aspects of national accounting—such as the definition of public spending—have particular importance for local government. Local government is sometimes—in borrowing, for example—very much bound by central Government's control over its spending decisions. At other times, however, those rules can be relaxed, bent or changed. At one time, for example, some local councils had a stake in regional airports and were allowed to borrow extra money that did not count as public borrowing. Another specific example is that of local authorities that still have council housing stock and want more freedom to borrow money, perhaps through local housing companies. The definition of public spending is, therefore, a very important issue for local government.

A growing issue is the earmarking of specific tax income. Hypothecation is currently a very live issue for local government, which is having lively debates on matters such as congestion charging and whether revenue from such charging might be used in implementing local transport policies. Another related issue is how fine income gained by using speed cameras might be used—an issue that I have previously championed in the House.

I should like to make one final point on local government spending. As I said, much of the money spent by local government is provided as grant from central Government, and central Government distribute that money according to standard spending assessments. For some local authorities in the south-east of Britain, SSAs include an area cost adjustment element, which is meant to deal with the assumption that, in the south-east, the costs of employing people are higher. I believe that that assumption could easily be refuted by various figures, such as those produced every month by the Reward Group.

All things being equal, a higher SSA leads to a higher level of central Government grant, thereby clearly affecting most services that local government provides to the public. A majority of local authorities, such as Staffordshire county council, lose out because of the area cost adjustment. Figures from the Library—an august and independent body—show that, for the current financial year, Staffordshire county council could have received another £28.6 million in Government grant if it had received the arithmetical mean of the area cost adjustment received by some local authorities.

Mr. Edward Davey

Does the hon. Gentleman agree that some borough councils in the south-east of England—indeed, in London—lose out from the current area cost adjustment system? One of the most authoritative analyses of reforming the ACA explains that reform would make it possible to provide some councils, such as my own council of Kingston, with significant grant increases. The analysis specifically stated that ACA reform would enable £2 million extra to be provided to Kingston council. Does the hon. Gentleman therefore accept that changes to the ACA would not only create both gainers and losers, but that the gainers and losers would be in various parts of the country?

Mr. Kidney

I currently have in my sights those who benefit from the area cost adjustment. I shall, in a moment, make some suggestions on how the ACA might be improved—although some of those suggestions might not be attractive to the hon. Member for Reigate, who did not seem to favour bidding, which I shall deal with later in my speech.

Most people realise that, in one way or another, the system of distributing central grant to local government is flawed. I think that there would have been a change in the system were it not for the fact—which was just emphasised by the hon. Member for Kingston and Surbiton—that there are so many possible ways of changing the system that the Government have found it difficult to separate a clear leader from the pack of possibilities. That is why a lengthy and detailed review is currently taking place. In answer to a written question recently, the Government said that they expected to consult publicly about possible choices early next year.

One improvement would be to build on the success of systems that recognise extra need or innovation, such as the modernisation fund for capital spending and the standards fund for education spending, and reduce the variations in the basic distribution of grant between local authorities. A more radical suggestion that could be considered on another occasion would be to allow local government to raise more of its income and become less dependent on central Government grants.

In summary, I should like to see fair funding and fair treatment for local government. That would lead to a renaissance of local enterprise. If local government was not exactly at the centre of it, it would at least be a major player. I believe that central Government deserve a bouquet for the work that they have done so far in managing the country's economy, putting the national finances in order and increasing transparency and public accountability. Over the years, the public will benefit increasingly from the Government's stewardship of the economy. It is no wonder that even the Opposition are resigned to seeing Labour in government for years to come.

8.41 pm
Mr. Nick Gibb (Bognor Regis and Littlehampton)

I certainly do not agree that the Government deserve a bouquet. However, there is a pattern to their approach to public spending and taxation involving deception, breach of promise and obfuscation.

Before the election, Labour had a problem: people did not trust Labour on tax or believe in its ability to keep public spending under control and maintain stable public finances. At the same time, Labour was making huge political capital from claiming that there was insufficient spending on the health service and education. So Labour, and the leader of the Labour party in particular, made a commitment not to raise taxes at all. There are numerous quotes from the Prime Minister and other Labour Members, including the Chancellor of the Exchequer, to the effect that Labour's spending plans involved no increases in taxation. They said that all their plans for extra spending could be funded from savings in the £100 billion a year social security budget. There are a number of quotes from the Prime Minister who said in July 1994: A large social security budget is not a sign of socialist success but a necessary consequence of economic failure. In October 1996 he said: Our priorities should be to re-order public spending so that we are spending less on welfare and more on areas like education. He made the pledge, commitment or vow to which my right hon. Friend the Member for Wells (Mr. Heathcoat-Amory) referred.

Far from cutting social security spending, it has risen by some £38.2 billion over the three years of the spending review—about as much as the increases in health and education put together. Because of that failure, the Government have been raising huge amounts of extra taxation. They have imposed tax increases by stealth.

One of the many great legacies of Margaret Thatcher's period in government is that no Government since 1979 have been able to increase the basic rate—or any rate—of income tax; so all tax increases have been through back-door methods, by stealth. The present Government are the masters of that.

The Conservative party has pledged low and honest taxation, so we will help people by revealing how much tax is being raised by other methods—from taxes on petrol, whisky and food—so that people in a mature democracy can make a conscious and informed decision about the level of taxation that they want to pay and the level of spending that goes with it.

Mr. Love

The hon. Gentleman talks about low and honest taxation. Perhaps he can tell us about low and honest public expenditure and say where the Conservatives would make savings to create that low taxation.

Mr. Gibb

I shall come to that point in a moment. The Conservative Government got social security spending under control. The Labour Government were elected on the platform that they would cut social security spending and use the savings to fund their health and education plans. In the Standing Committee considering the Finance Bill we opposed the tax rises because the Labour party made a pledge—a commitment to the British public—that it had no plans to raise taxes at all. Yet we have had a plethora of stealth taxes raised by the Government since they came to power.

There has been the £5 billion-a-year pensions fund tax from the ending of the repayment of dividend tax credits. The quarterly corporation tax payments will raise between £2 billion and £3 billion a year from business over the next four years. The fuel escalator has been increased to 6 per cent., and there have been two increases in one year. Now, £8.50 of every £10 spent on petrol goes in tax. There have been huge stamp duty increases, the abolition of MIRAS, the abolition of relief for home income plans and the abolition of the married couples allowance, even for those who turn 65 after next April. There have been increases in the landfill tax and in insurance premium tax. All of this amounts to some £40.7 billion of extra taxation over this Parliament—this from a Government who said that they had no plans to raise taxes at all.

When Labour Members are challenged, they respond by claiming that, during the election, they did not say that they would not raise taxes at all, but that they had no plans to raise income tax. However, Labour gave the impression that the promise extended to taxation as a whole, since all their attacks on the Conservatives were about "22 Tory tax rises". None of those 22 tax rises was an income tax rise—they were all non-income tax rises.

The reality was that the Government's promise extended only to income tax—but they have not even fulfilled that promise. The abolition of MIRAS and the married couples allowance means that people will pay more income tax. A married couple will pay £200 more income tax a year as a result of the Government. A newly retired couple will pay £500 more income tax than they had expected. Now, the Government's promise is diluted further—they promise only not to raise income tax rates. It all sounds like an unscrupulous salesman selling a defective product and referring to the small print of the contract.

The spinning that Labour is so good at has been applied to the public accounts. The Government claim that, despite raising an extra £40.7 billion in taxation, the burden of tax is falling. That is a huge sum of money, and it is simply not credible to say that the Government can raise that sum and not raise the burden of tax. The way in which this is presented in the Red Book is disgraceful. A series of deceptive presentations and absurd assumptions have been allowed to be put into the Red Book, such that it is almost becoming a meaningless document unless it is translated by the Library or by specialists.

The working families tax credit—the replacement for family credit—is now, to a large extent, accounted for as a reduction in tax, rather than as public expenditure. That has the effect of reducing the key figure in the Red Book—on net taxes and social security spending; the figure that people always turn to to assess whether the tax burden has risen. The remaining element of the working families tax credit—which is accounted for as spending—is not included in the social security line, but is further down the table in "Accounting and other adjustments." When commentators come to judge the Government's record on social security spending, they will see an artificially reduced figure.

The Government now accept that there have been increases in social security spending, which means that they have abandoned their claim to be decreasing it. They say that it is increasing by 2 per cent. a year in real terms. However, if one adds back the £5 billion a year of working families tax credit, the increase amounts to 3.2 per cent. from 1998–99 onwards. That figure comes from the House of Commons Library.

By contrast, the same Library produces figures for the Conservative years—including the two years of Conservative spending plans adopted by the Labour Government—up to the time of the working families tax credit, which show that social security spending fell by 0.2 per cent. a year from 1995–96 to 1998–99. As a consequence of the Government's plans, social security spending will rise to £118.5 billion by 2001–02.

Another hugely deceptive device used by the Government in the Red Book is the table on pages 112 and 113, headed "Budget Measures". This used to be used to provide a summary of the effect of the tax changes in the Budget. One could then look at the total at the bottom to see the overall effect. The Government have included in the list several items of public expenditure and classified those items of expenditure as a tax cut. Nowhere else in the public accounts are those items listed as tax cuts. For example, item 22, entitled "Sure Start Maternity Grant", a £20 million expenditure plan, is included as a £20 million tax cut. The £100 winter allowance is a £640 million public expenditure plan but it is listed as a £640 million tax cut. That makes the whole Red Book completely meaningless.

The Government have used many sleights of hand in presenting the public finances. We have already heard about current versus capital expenditure. One wonders whether such a distinction can be of any use, because little of Government capital spending generates any income and because of the difficulty of assessing what is investment: is teachers' pay an investment for the future or revenue expenditure?

The Government have ruthlessly talked of the surplus on the current budget, giving the impression that they are running a budget surplus, when in fact they are running a deficit. For example, the Red Book lists a so-called surplus on the current budget of £2 billion, £4 billion, £8 billion, £9 billion and £11 billion in the years from 1999 to 2004, but the same table—B5 on page 151—shows an overall deficit of £3 billion, £3 billion, £1 billion, £3 billion and £4 billion in those years.

In any interview or article, the Government trot out the current budget figures—total revenue less current spending—in a deliberate effort to mislead and obfuscate. The classic example is how the Government spun the lower growth forecast in the March 1999 Budget. The June 1998 comprehensive spending review report mentioned a current surplus of £7 billion, £10 billion and £13 billion, adding up to £30 billion over three years, despite the fact that there was a deficit in those three years.

The Chancellor spoke of a £30 billion current surplus, but the growth forecast was revised downwards in December 1998, and in the March 1999 Budget we saw the effect of the lower growth figures on the public finances. Lo and behold, instead of the £30 billion current surplus being reduced, as one would expect, it is now talked of as a £34 billion current surplus. How can that be? The Red Book shows a current surplus of £2 billion, £4 billion and £8 billion, which adds up to only £14 billion, but if one adds in the next two years, with a surplus of £9 billion and £11 billion, the total comes to £34 billion. The Government are now including five years instead of three, which is totally deceptive—why not six or 10 years?—and undermines the Chancellor's credibility.

I have been trying to get to grips with what is going on. I tried to clarify the effect of all the Government's tax measures by tabling a written question using almost the same words as the now Home Secretary did in 1981 when he was a humble Back Bencher. I asked how much tax, including income tax, national insurance, VAT and council tax, was paid by different types of typical households such as single people or married couples in different income groups.

That question was answered fully and honestly every year under the previous Government, but the current Government said: Estimating the impact of indirect taxes is imprecise as spending patterns vary widely between households with the same composition and income."—[Official Report, 16 April 1999; Vol. 329, c. 388.] The problem was ever thus, but the Conservative Government made reasonable and sensible assumptions and gave the figures.

When I asked for the figures on the basis of such assumptions, I received the same brush-off. When I asked for a list of the assumptions used to answer the question since 1981, I was told that they were part of advice given by civil servants to the previous Government that was not available to the public. That is absolute nonsense. I asked for a list of facts, and it is disgraceful that those facts have not been forthcoming.

Clearly, the Government are frightened to reveal the figures. For all their protestations about freedom of information, the Government know that including their stealth taxes—most of which are indirect—in figures for the tax burden will show that that burden has increased hugely.

The Government have raised taxes by £40 billion despite promising not to raise them at all. They are trying to hide those increases and how they are reported in the Red Book. The Government have lost control of social security spending, and are trying to hide that fact, too, in the Red Book.

The Government are famous for spin, and they are spinning the presentation of the public finances. I do not believe that that is acceptable behaviour for the Government of this country.

8.55 pm
Mr. John Cryer (Hornchurch)

I wish to return to matters concerning central banks, first raised in this debate by my right hon. Friend the Chief Secretary to the Treasury, who dealt with them at length.

The European central bank represents, in its most refined and powerful form, a feature central to the neo-liberal economic catechism—the independence of central banks. Two reasons are usually adduced to support that independence. The first is that, given that the matters involved are technical and concern the long term, it is much better to take them out of the hands of politicians—who think only in the short term—and hand them over to clever technocrats who understand them. The second is that the long-term economic benefits that can be achieved by economists are a fair price to pay for the loss of democratic control.

The arguments put forward in support of the first-political—reason for central bank independence can be advanced for other areas of Government policy. For example, health and social policies are notoriously complicated. Long-term decisions and considerations are involved, so why should they not be handed over to technocrats?

The same could have been said in 1939. When Chamberlain declared war on Nazi Germany, it could have been argued—in fact, it was argued—that the conflict had arisen through public pressure stemming in part from what happened in the Spanish civil war. According to that argument, foreign policy decisions should have been handed over to technocrats who had the country's long-term interests at heart, and taken away from politicians and their short-term considerations.

The evidence for the second argument—that independent central banks deliver long-term economic benefits to their economies—is patchy, at best. Even in connection with fighting inflation, the evidence is extremely thin, and the evidence for independent central banks meeting with success in fighting inflation in developing countries is non-existent. Their record is, if anything, worse than that of developing country central banks under Government control.

However, the first argument that I described—that power should be handed over to bankers and taken away from politicians—is the more important. More and more people around the planet are increasingly suspicious of globalisation and regard that process as a menace. Yet globalisation has been a key factor in persuading many Governments to give up control over monetary policy and hand it over to central banks.

Obviously, powerful financial and business elites have a much greater interest in conservative monetary policy and in price stability than workers and trade unions. Many trade unions in this country have secured conference decisions against the single currency and against the creation of the European central bank.

That is the background that enables us to see the European central bank for what it is. It is an attempt by the western European business and economic elite—and to some extent by the political elite as well—to take decisions away from ordinary voters, and hand over increasingly concentrated power to the business and financial elite.

The ability of people in the street to get hold of those who make economic decisions that affect everyone's future, to hold them to account and, if necessary, to turf them out at the next election is being removed. Democratic rights and controls are being handed over to people such as Mr. Duisenberg in his office in Frankfurt. That is extremely dangerous.

In fact, the transfer of power to the ECB is even less democratically accountable than that to the MPC and the Bank of England, where proceedings are reported and where decisions and the reasons for them are clear. In a recent interview, Mr. Duisenberg said that he would not explain which ECB members voted for what because it might subject them to political pressure at home. Such pressure is part of the process of democratic accountability. People should be able to argue their corners and explain why they have come to decisions, but, crucially, members of the ECB do not face election.

By the same token, public services should remain publicly accountable and publicly owned. I have lived in London for 17 years and I have seen a sometimes gradual, often rapid, disintegration in the quality of London Underground. Under the previous Government, there was a concerted attempt to destroy the tube. In his final Budget, the right hon. and learned Member for Rushcliffe (Mr. Clarke) announced cuts of £300 million that would have happened over two years if the Conservatives had won the 1997 election.

In November 1993, I lived in Ladbroke Grove and worked in King's Cross for Tribune, a weekly newspaper known and loved by many of my hon. Friends on the Front Bench. One day, the tube system virtually collapsed, and I walked from west London to north London. That collapse was not a result of industrial action, or of bombs planted by the IRA. A piece of cabling on the eastern section of the network, which had been due for renewal for years, had broken, bringing the system to a halt. That happened two days after the then Environment Secretary published, with no hint of irony, a consultation document titled "London: Making the best better".

At least the present Government are trying, through the public-private partnership, to get investment into the tube. However, the process is fraught with difficulties. I have increasing reservations about the possibility of success under the PPP. My right hon. Friend the Deputy Prime Minister has told us that the Government are in exclusive talks with Railtrack on the sub-surface, shallower lines. Why are we talking to a company that has such an appalling investment record? Hon. Members who have read the report of the Select Committee on the Environment, Transport and Regional Affairs will have seen Railtrack's vaunted claim to be investing £27 billion over 10 years. However, when the figures are broken down, new investment is actually £1.5 billion over 10 years. That is pathetic, but Railtrack is trying to get its clutches on the sub-surface lines.

There are also difficulties over the return that the private sector will want on investment. The Select Committee considered that 20 to 25 per cent. over 15 years would be reasonable, and would mean about £1.5 billion on the investment made, but why not directly invest public money in the tube—borrowed, if need be, at a cheaper rate than a private sector company would receive—to build the system that people want?

The fire service is also under pretty concerted attack. The London fire and civil defence authority is getting rid of one of the two fire engines in my local fire station, for example. There is no financial argument for doing so, and the LFCDA seems to have no decent reason for its action, but the authority is ploughing ahead in the teeth of local opposition amounting to thousands of people.

Nationally, meanwhile, the agreement that firefighters struggled for in the national strike of 1977 is under threat. The employers are determined to get rid of the national agreement, which safeguards firefighters' pay and conditions. Having heard the employers' side, I have no doubt that they are looking for a fight with the Fire Brigades Union. That is outrageous and disgraceful. The employers are threatening the terms and conditions of men and women who risk their lives day in and day out, week in and week out, on our behalf. I should like Labour Members to make it clear to the employers' side that we are not going to put up with this; I am sure that we all will. The employers should treat the union decently, get back round the table and stop trying to break the national agreement.

9.5 pm

Mr. David Ruffley (Bury St. Edmunds)

A precondition of economic stability is sound monetary policy, which was the subject of a report published yesterday by the Treasury Select Committee, on which I sit. I do not share the optimistic gloss put on its recommendations by the right hon. Member for North Durham (Mr. Radice). I shall therefore direct my remarks to three points relating to the operation of the monetary policy framework.

First, it is too early to say whether the existing arrangements are successful. Secondly, I want to draw attention to the structural defects in the framework set out in the Bank of England Act 1998, particularly the shortcomings in making the Monetary Policy Committee accountable. Thirdly, I want to discuss the role that the level of sterling is playing in the deliberations of the MPC.

In considering why it is too early to make a definitive or sensible judgment on the performance of the MPC, it is important to remember the muted inflationary environment over the past two years. That relates partly to the weakness in world commodity prices, partly to the strength of sterling, and partly to the Asian crisis. But we should not kid ourselves that the MPC has been tested seriously. Lord Burns, the former permanent secretary to the Treasury, has rightly noted that only when there is a serious inflationary shock—a serious upsurge in the world prices—will the House and the country be able to determine whether the MPC is up to the job. It is worth emphasising that the Deputy Governor of the Bank of England, Mervyn King, has said: the environment in which we have been working is one that has made it easier to bring inflation down and keep it close to target.

The primary test of how well the MPC is doing—how far it is able to hit the 2.5 per cent. target—is thus not something that we can judge. I am not impressed by the boastfulness with which the Chancellor talks about the target being hit within 0.7 percentage points over the two-year period, because in their paper on the mechanism of transmission, the MPC and the Bank have said that there is a lag of at least two years. That is why we cannot make sensible judgments about inflation outturns. We can only consider forward inflationary expectations.

Hon. Members have already observed that there has been a dip since the introduction of the MPC in real and nominal gilt yields, and that long-term interest rates are very low, the lowest for decades. However, that is not to say that we have entrenched a permanently low inflationary culture in this country. All we can say is that a certain initial credibility has attached to the MPC. Definitive judgments cannot yet be made.

It is too early not only to say whether the MPC has succeeded in achieving its primary objective, as set out in the Bank of England Act 1998, but to make any sensible judgment about whether it has achieved its secondary objective, which is defined in the Act as supporting economic policy, including objectives for growth and employment. The Treasury gloss on that, put forward by the Chancellor, is that the MPC should aim to achieve high, stable levels of growth and employment.

I suggest that we cannot take seriously Labour Members' views that not only have we achieved low inflation in the new monetary policy framework, but we have done so with unemployment in this country lower than in other low-inflation countries on the continent. Surely, and regrettably, we must expect unemployment to rise. We have yet to see the full effects of the social chapter on the British labour market. We have yet to see the full effects of the fairness at work proposals in the Employment Relations Bill, which has been through its final stages in the House this week. Unemployment will go up. What will the Monetary Policy Committee do then; and how will it interpret its secondary objective, as defined in the 1998 Act?

The best way to illustrate my first point about whether it is too early to tell if the MPC has been successful is to consider the reaction to the increase in base rates of 25 basis points in June 1998. At the time, commentators observed, as they still do, that it was a mistake. The distinguished economist Roger Bootle observed that the decision may in itself have contributed to a lack of confidence the following autumn. The TUC observed that the evidence simply did not support an increase at that time. William Keegan, the distinguished economic commentator, observed at the time that the MPC did not pay proper attention to business surveys; indeed, it ignored them. That is why the Treasury Committee observed: It is too early to be sure that the interest rate increase of June 1998 was not a potentially serious mistake.

My second main point is that we should ask ourselves whether the new monetary policy framework is accountable to this place and to the country at large. It is not enough for an independent monetary policy merely to hit an inflation target of 2.5 per cent. or anything else. Surely it is important for the process to have democratic legitimacy. The current system lacks such legitimacy. There is a democratic deficit.

In opposing that view, proponents of the MPC, who think that it cannot be improved at all, point out that minutes are now produced two weeks after meetings—formerly they were produced six weeks afterwards—that voting records are disclosed in those minutes, and that there can be a public debate about the contents of the minutes. That does not amount to much accountability, and it is not enough by a long chalk.

The Governor and members of the MPC said in their evidence that they are very responsive to demands for information about their activities. The Governor made the curious observation that he makes many speeches and talks to the business community a great deal. Members of the committee said that they would make sure that the Bank's regional agents got out more. Mervyn King suggested that he would conduct public opinion polls through the Bank to find out what the public thought about what was going on. That is pretty thin fare.

The Treasury Select Committee has at least made a start by agreeing to a recommendation to toughen up the accountability that is so sadly lacking in the current arrangements.

One suggestion is that the MPC hold its monthly meetings outside Threadneedle street and away from London, in towns and cities the length and breadth of the country. One hopes that it would at least make a splash in the local newspaper and with the local business community. I am making an early bid for one such meeting to be held in the town of Bury St. Edmunds. I do not see why the Monetary Policy Committee should not be exposed to what life is like in the real economy—not only in big regional centres, but in market towns and rural areas. I shall write to the Governor of the Bank of England, extending that invitation to him. It is important to emphasise that point, because the Select Committee, with cross-party agreement, remarked that it was surprising that no presentation of the differential effects of monetary policy on sectors of the economy and on regions has been made by the Bank since the MPC was formed. That is a lamentable omission.

There are other ways in which we can ensure that the MPC is more accountable. In particular, we can ensure that not only the voting record but the views of each member of the MPC are disclosed. It might be argued that if members of the committee think that all their views will be recorded and attributed to them, they will be inhibited from free decision making, but that is not a convincing argument. We look forward to the recording of individual views, so that we may judge over a period the performance of individual members of the committee, and decide whether they are good at, or bad at, their job.

Most important, we need to ensure that the confirmatory hearings, which all members of the Committee believe are a good idea, are placed on a statutory basis. Few of us were convinced by the Chancellor's view on the subject. He said that the very fact that nominees had to come before the Select Connnittee ensured that they did their homework, and that they were prepared to answer difficult questions. We need more than that. The Select Committee must have teeth—the power to veto nominees with which it is not happy. In that connection, the Select Cornmittee would be standing in the shoes of Parliament as a whole in ensuring that there was some democratic accountability on the part of the MPC and its members.

Mr. Kidney

Before the hon. Gentleman leaves the point about confirmatory hearings, can he confirm what he said about the veto? That is certainly not part of the practice of the Treasury Select Committee, or of the recommendation that it made, during the passage of the Bill that became the Bank of England Act 1998, about the procedure for confirmatory hearings.

Mr. Ruffley

I see it as a natural future extension of the request from the Select Committee this week that the confirmatory hearings be placed on a statutory basis.

My third and final point concerns the high level of sterling. We know that there is an implicit dilemma in achieving convergence on interest rates and inflation rates in preparation for joining the euro, in achieving an inflation objective of 2.5 per cent., and in getting sterling down so that it is at a level ready for entry to the eurozone. I did not find the answers that we received from the Chancellor about whether that was a future possibility convincing. He talked about his current intention. He did not rule out the—probably covert—pursuit of an exchange rate policy while aiming to achieve an inflation objective. We shall wait with interest to see how the Government get sterling down—as they will have to if they seek entry to the European single currency.

Finally, the shadow Chancellor announced this week that he would institute a commission to look at all the issues of which I speak—the absence of accountability, and the fact that we do not know whether the MPC has performed properly or not. Given that the Labour party did not tell us two days before the election about its position on an independent monetary policy, it is entirely right and proper that, two years before the next general election, we have a considered—

Mr. Deputy Speaker (Sir Alan Haselhurst)


9.20 pm
Mr. Christopher Leslie (Shipley)

Thank you, Mr. Deputy Speaker, for calling me this evening.

The hon. Member for Bury St. Edmunds (Mr. Ruffley) has been very brave this evening. He is one of the few hon. Members on the Opposition Benches who voluntarily raised the issue of Bank of England independence, and the wonderful independent commission that the shadow Chancellor has set up—under his own stewardship. The shadow Chancellor is to chair his own commission that will consider whether the Conservatives should do a U-turn on their policy on Bank of England independence. How ignominious, how humiliating for them!

In the wide-ranging debate tonight on economic stability and public services, the Conservatives had a great opportunity to oppose the Government and to show the world and the voters what their alternative would be and what their policies are. They have failed abysmally. Why? Because the Government are so successful with their economic policies, with the way in which the economy has been performing, and with the public expenditure plans that we have put in place, which leave so little to be criticised.

Most of the attacks on the Government have focused on welfare, on various statistical anomalies that the Opposition like to talk about, on whether ISAs have been sufficiently successful, and of course on the perennial subject of Europe. The Conservatives were so desperate for hon. Members to help them out that even those on the Front Bench had to intervene on each other—an unprecedented parliamentary occasion. The Clerks looked extremely perplexed at that interesting innovation. The public outside will have to realise that that was a symptom of a failure to attack a Government who have been performing so well.

Let us look at the state of the economy. Consumer spending is picking up well—2.5 per cent. in July. The growth in gross domestic product is coming into line with the Treasury prediction, coming in at 0.9 per cent. in July. Unemployment, simultaneously with low inflation, has come down from 1.58 million in January to 1.4 million in July.

Headline inflation is now very low—1.2 per cent. in July—which helps pensioners and savers in particular by stopping savings being eroded and ensures that people are rewarded for thrift and cautious planning for their future. I know that my constituents are extremely grateful to the Government for their policies, which have put in place such low inflation levels.

That is the true characteristic of a one-nation party, because inflation at its present low level helps everyone. People can plan for the future with the certain knowledge that their savings and money will not be eaten away by other external factors. Our record on inflation is highly commendable. Over the summer months, we should continue to repeat how that contrasts with the Conservative record of prolonged double-digit inflation during the 1980s.

Interest rates are extremely low, and mortgage rates are at their lowest for a generation. Home owners across the country and especially in Shipley are pleased that they have been able to plan for the future and borrow at an affordable rate.

Even manufacturing output is edging upwards. Things are looking up for the economy. We have managed to steer ourselves through difficult international times by maintaining a careful course of stability, and by focusing on getting monetary policy and fiscal policy to work together in such a clever relationship.

The monetary policy framework that we have put in place and the independence of the Bank of England have been a success. I should be interested to hear from the hon. Member for West Dorset (Mr. Letwin) his party's policy on the Bank of England's independence. I know that there are many different views, but does he agree with, for example, the shadow Chancellor who, only nine months ago, said, "We would not have given up control of interest rates in the first place", or with the right hon. Member for Wokingham (Mr. Redwood), then the shadow Secretary of State for Trade and Industry, now the shadow Minister for Transport, who called it a wrong idea and a big mistake?

Many Conservative Front-Bench spokesmen castigated the Government's policies, saying how dreadful and horrible it was that we were creating greater objectivity in monetary policy. Now, when they see the success that the policy has engendered, the only criticism that they have is exemplified by the empty Benches opposite. This is a sad and embarrassing day for them. It is degrading for the Front-Bench spokesmen. We shall watch their U-turn with great pleasure and relish during the summer months.

I shall be interested to know what will happen to the Conservative party's fiscal policy during the summer months. It has made many spending commitments. Just tonight we have heard talk of the Territorial Army, and the hon. Member for Reigate (Mr. Blunt) pleaded for more money for defence. Earlier in the day, the shadow Home Secretary asked for tax relief for donations to political parties. Apparently, the odd couple of dozen million pounds does not matter too much.

Earlier in the week, we heard the Conservatives' policy on London Underground. Instead of investing in London Underground, they want to privatise it and use the proceeds to pay for however many dozen new road schemes the right hon. Member for Wokingham recently put in his new transport policy document. London Members in particular will be curious to know whether the Conservatives intend that any proceeds from the privatisation of London Underground should be ring-fenced for reinvestment in London, or whether it is now Conservative policy to spend that money in the rest of the country. I suspect that Lord Archer, in his campaign to become London mayor, will find that a difficult circle to square.

A Conservative Front-Bench spokesman has committed himself to an extra £227 million for the police budget. Even the Scunthorpe Evening Telegraph makes it clear that the Conservatives have committed themselves to massive extra expenditure. In March, its headline was "Hague's promise of free travel" for sixth form students. Their spending commitments are being piled on top of each other.

The problem is that such commitments simultaneously undermine the Exchequer revenue. The Conservatives commit themselves to more and more expenditure, but at the same time undermine what is available for the public sector. As the Chief Secretary said earlier, on the past few Finance Bills the Conservatives opposed any changes to advance corporation tax, and they wanted to stop the changes to gambling duties. They argued in favour of retaining the foreign earnings deduction loophole. It is not clear whether that was for the benefit of Michael Ashcroft or others. A great policy is emerging to halve the rate of bingo duty. That should be at the forefront of their manifesto. They oppose the fuel and tobacco duty escalator and stamp duty. They may be only minor amounts, but they add up to a lot of lost revenue—£11 billion in this financial year. Such amounts are significant shortfalls. That money should and could be spent, and is being spent by the Government, on health and education. The Conservatives could not deliver that, particularly with all the other spending pledges that they have made.

The Conservatives have a lot to answer for and, during the coming months and years in advance of the general election, the public will be less and less convinced by the Conservatives' abysmal failure to attack the Government. The risk that they pose, and the threat that the British people would face should they ever be returned to office, becomes clearer and clearer when their policies are compared with the stability and prosperity engendered by the Labour Government.

9.30 pm
Mr. Oliver Letwin (West Dorset)

It is extremely useful for the House to debate public expenditure and the economy, and the fascinating speech of my hon. Friend the Member for Bury St. Edmunds (Mr. Ruffley) provided evidence of that—it was an education for us all. I hope that the Economic Secretary will either tell us that she will induce the Leader of the House to provide another such occasion or let us into the secret of when there will be one. Clearly, we should have such debates more often.

The debate occurs against a certain background. It centres on certain facts; the causes, the concealment and the effects of those facts; and certain contrasts. What is that background? My hon. Friends the Members for Reigate (Mr. Blunt) and for Boston and Skegness (Sir R. Body) made it quite clear: over 18 years, the economy experienced probably the most radical micro-economic surgery in economic history that has ever been experienced by any sick patient. It created not only a golden economic legacy, but a fundamentally sound economy. [Interruption.] Labour Members are regaling themselves with amusements, as I rather imagined that they would, so they will be interested to know that that view is propagated by the organisation that is well known to be a mere proponent of the Conservative party—the Organisation for Economic Co-operation and Development.

Now we move on to certain facts, which have come out well in the debate. We owe a great deal to the hon. Member for Kingston and Surbiton (Mr. Davey) who, in an interesting speech, spelt out clearly what has happened in respect of the well-known vast increases in spending on health and education. In a number of speeches, my hon. Friends brought out the fact that there is an extraordinary contrast between what everybody believes is the case—spending on health and education is huge—and what we see in our schools and hospitals and what we hear. Why is there such a contrast? Because there has not been any huge increase in health and education spending.

Health and education spending will be broadly the same as a proportion of gross domestic product at the end of the Government's tenure as it was at the beginning and the rates of increase will be broadly similar to those achieved under the previous Government. That is why the shadow Chancellor, my right hon. Friend the Member for Horsham (Mr. Maude)—when all those matters were first being discussed and contrary to myths that have been propagated from time to time—said: The Chancellor hopes that we will oppose his plans to spend more money on health and education, but I am going to disappoint him."—[Official Report, 14 July 1998; Vol. 316, c. 195.] We were able to disappoint him on that score because not much more money is being spent at all, but something else is happening.

Mr. Rammell

If those expenditure plans do not amount to a great deal more than the expenditure plans of the previous Conservative Government, why were they described as reckless and unsustainable when they were introduced by this Government?

Mr. Letwin

I shall return to the reckless and unsustainable spending with a vengeance; we will get to that in a moment and the hon. Gentleman will be more than satisfied on that score.

Something else has happened and we have another fact to consider. My hon. Friend the Member for Bognor Regis and Littlehampton (Mr. Gibb), who gave us a classically forensic exposition, brought it out, as did my right hon. Friend the Member for Wells (Mr. Heathcoat-Amory) before him. There have been £40 billion of stealth taxes—£1,500 for every taxpayer in this country. People have had £40 billion extra of tax money taken from them; it has been popped into the Chancellor's coffers and there has been no noticeable additional spending on health and education compared with the previous position.

What has caused that apparent anomaly? The reckless and extravagant spending to which the hon. Member for Harlow (Mr. Rammell) referred: £70 a month for each person in this country—or £38 billion a year extra—will be spent on welfare by the end of the period. That has come out clearly in the debate, but the extent to which the future has been mortgaged has not. Post-dated cheques are being issued. Growth in welfare spending creates growth in welfare spending, the more so when the incentives that it creates are misconceived—a 69 per cent. withdrawal rate has been imposed on a huge new section of the population—and people are given incentives to behave in ways that are likely to make them more, rather than less, dependent in the future.

That is the reality of the so-called "welfare reform". It is not welfare reform; it is welfare increase. It is not even welfare increase; it is spending increase on welfare, which will diminish welfare in the true sense. My hon. Friend the Member for Boston and Skegness referred to it as a set of IOUs. It is not welfare into work—

Mr. Milburn

It is torture.

Mr. Letwin

It is certainly torture. It will be torture for large numbers of taxpayers for many years to come because they will have to continue to foot the bills not just of this Administration but of many Administrations to come.

Mr. Edward Davey

I do not agree with the hon. Gentleman's analysis. If one looks at the percentage of national income that goes into tax, expenditure and borrowing, the percentage that is taken in tax is more or less the same under this Government as it was under the previous one and the percentage on expenditure is more or less the same. The only change is the percentage on borrowing, which has gone down.

Mr. Letwin

The hon. Gentleman brings me to my next point: the figures look like that so long as one relies on concealment, which has bedevilled this whole debate recently. My hon. Friend the Member for Bognor Regis and Littlehampton brought this issue out extremely clearly. I challenge any Labour Member who cares to spend a nightmare holiday on the beach to peruse the Chancellor's ghastly document—some will have done so already—and to make sense of it. It is never easy to make sense of the public accounts of any country, but no country in the world has managed to produce quite such an obfuscation and concealment. By redefining spending as not spending, by readjusting adjustments as nothing but adjustments, which turn out to be massive expenditure, and by various other obscure means, the Government have managed to concoct so devilishly cunning a scheme that even the hon. Member for Kingston and Surbiton is, unfortunately, beguiled by it.

Mr. Blunt


Mr. Letwin

I say "even", because I fear that many Labour Members would be much more easily beguiled—and have been, as their speeches all too clearly illustrated.

The effect of the disastrous logic that we face is partly short term and partly long term. The short-term effect is that, in 1997, the colossal and probably half-conscious fiscal squeeze that the Government applied to the economy in the apparent pursuit of prudence forced a downturn to occur, which the Bank of England heroically tried to diminish through its interest rate policy. Although little unemployment is being generated, that is because of the background of the colossal micro-shifts and the vast structural changes to which I referred.

What we must worry about much more than that short-term effect is the long-term effect of what the Government are doing. The long-term effect arises not only from £30 billion of extra tax on business, but from a series of extra burdens: the working time directive; the national minimum wage; the unfair dismissal regulations; the parental leave directive; and the working families tax credit. According to the Institute of Directors, all those add up to some £5 billion of additional costs to business, on top of the business tax. That is why people such as Professor Minford forecast a net long-term increase of some 800,000 in the unemployment figures due to the Government's policies. That is even more worrying than the short-term effect.

Ms Keeble

The hon. Gentleman read out an impressive list of measures, many of which have been extremely popular with the public. Which of those would he cut?

Mr. Letwin

Once the hon. Lady sees how some of those measures have been implemented and their effects over time, she will be coming to us offering suggestions of how we can deal with them when we next find ourselves in government.

There is another item on the agenda. The problem is not just the background and the causes, concealment and effects of these disastrous facts: it is the contrasts. The contrast between reality and presentation applies not only to health and education, but across the board. Many of my hon. Friends have brought that out clearly in the debate.

There is the Prime Minister's famous statement—not yet famous enough—that we've no plans to increase tax at all.

Mr. Leslie

Income tax.

Mr. Letwin

No, he did not say income tax. In the Financial Times on 21 September 1995, he said: we've no plans to increase tax at all. The Prime Minister either said that at that time or he did not, or he changed his mind after that time. The fact is that the Prime Minister said it and has not done it. That is the contrast to which I am referring, and the hon. Member for Shipley (Mr. Leslie), alas, cannot get out of it.

That is by no means the end of the contrast. The Prime Minister has been at great pains, aided and abetted by his Chancellor, to make it seem that there are not all these dreadful stealth taxes that the Tories keep going on about. It was odd, therefore, that he said that the tax burden will increase over this Parliament".—[Official Report, 3 March 1999; Vol. 326, c. 1075-76.] There is even a contrast between what the Prime Minister tells people when he is outside the House and what he bothers to tell us when he is inside the House and is on the record, so he knows that he has to try to tell the truth.

The situation is even worse on welfare. My right hon. Friend the Member for Wells, my hon. Friend the Member for Bognor Regis and Littlehampton and several other of my hon. Friends showed the extent of the contrast between what was said about welfare and what is happening on welfare. In addition to all the items that they quoted, I quote another: a speech again by no less a figure than the Prime Minister and to no less a body than the parliamentary Labour party in Church house on 7 May 1997. He said: I have asked Ministers at the Department of Social Security"— I take it that he included the right hon. Member for Birkenhead (Mr. Field), the then Minister for so-called Welfare Reform— to look in detail at how we can make far reaching reforms that will tackle insecurity and poverty as well as reducing social security bills. He asked the right hon. Member for Birkenhead to do that, but when he had done it, the Prime Minister got rid of him, and made sure that our welfare system would go on growing from now roughly to eternity.

That is the set of contrasts that we are dealing with. It is say one thing and do another. It is talk about long-term stability, and act to undermine the economic foundations of the restructuring that we so painfully engaged in for 18 years. It is talk about a cost-free health and education expenditure boom, and act to tax by stealth to fund welfare payments. It is talk about economic transparency, and then produce probably the least transparent and most obscure set of non-accounts that have ever been produced by any Government of this country.

That is the record. It is a record that I would be ashamed of if I were in government. It is a record that the Government still have some time to put right, at least in one respect—they probably cannot undo the rest of the damage. They could at least give us an honest set of accounts next year. They could make it possible for the nation to tell whether what I am saying is right or wrong, because they could make it possible for commentators to understand what is in the Budget statement.

I beg the Economic Secretary to make us the tiny promise that, next year, the Government will offer us a Budget statement that an ordinary, moderately intelligent person can make his or her way through, so that they can work out what is spending and what is tax, and how much adds up on one side of the sheet and how much on the other. That would be a major benefit to this country, although it would not, I admit, be a major benefit to the electoral prospects of the Labour party.

9.44 pm
The Economic Secretary to the Treasury (Ms Patricia Hewitt)

This has been an extremely interesting and well-informed debate, largely due to excellent contributions from my right hon. and hon. Friends. I am afraid that I cannot say the same for the contributions of members of the Opposition Front-Bench team. That is perhaps unkind, and I recognise that we must make allowances for the fact that it is the last day of term. It is a well-known tradition that, on the last day of term, children are allowed to bring their favourite toys to school. I think that the right hon. Member for Wells (Mr. Heathcoat-Amory) brought along his favourite speech.

As my hon. Friend the Member for Northampton, North (Ms Keeble) accurately, but perhaps also unkindly, said, the right hon. Member for Wells completely avoided mentioning the Bank of England in his opening contribution. He left that extremely important issue to the hon. Member for Bury St. Edmunds (Mr. Ruffley). Perhaps the right hon. Gentleman did not want to be reminded—but I shall remind him—of what he said in the House on 26 October 1998, in response to an intervention from a Labour Member. He said: The hon. Gentleman has obviously already forgotten that we voted against the Bank of England Bill on Second and Third Reading. We also argued against its provisions in Standing Committee."—[Official Report, 26 October 1998; Vol. 318, c. 39.]

Well, we do not forget, the City has not forgotten and the country has not forgotten. The fact is that, as several hon. Members pointed out this evening, the Conservative party has persistently opposed the independence that we granted to the Bank of England, and the creation of a successful monetary policy framework that is delivering the lowest long-term interest rates and the lowest mortgage rates for more than 30 years. The Conservatives are opposed to that successful policy, and their spokesman has nothing whatever to say on the subject.

Mr. Letwin

The Economic Secretary has mentioned something that was mentioned several times by her colleagues. Would she expect interest and mortgage rates to be high at a time of significant economic downturn?

Ms Hewitt

The excellent report published by the Select Committee on the Treasury on this subject rightly reflects the success that is being achieved by the removal of politics from interest-rate decisions. We are seeing that success in the fall in long-term interest rates, and in the narrowing of differentials between our interest rates and those of our European counterparts.

My hon. Friends the Members for Northampton, North and for Stafford (Mr. Kidney) both referred, in excellent speeches, to the benefits that are already being seen in their constituencies as a result of our additional investment in schools, hospitals and housing. What did the right hon. Member for Wells have to say about that additional investment? He said that the extra money was being spent on all the wrong things. All the wrong things? The money is being spent on hospitals, schools, elderly people and the highest-ever increase in child benefit for families with children. Are those, in the eyes of the present Conservative party, "all the wrong things"?

We know, and have known for some time, what the Conservative party is now against. It is against independence for the Bank of England, the minimum wage, the working families tax credit and the new deal. Now we want to know what the Conservatives would cut. Would they cut the extra spending on hospitals and on schools, the additional money being made available to elderly people, or the record increase in child benefit?

My right hon. Friend the Member for North Durham (Mr. Radice) made, as we would all expect, an excellent speech. Like many others who spoke today, I thank him and his colleagues on the Select Committee—members of all parties—for their excellent report on the new monetary police framework. The Committee is playing an extremely valuable role in enhancing the transparency and accountability of the framework.

Mr. Blunt

The Economic Secretary speaks of transparency and accountability. Will she deal with the point made so eloquently by my hon. Friend the Member for Bognor Regis and Littlehampton (Mr. Gibb) about the questions tabled during the 1980s by the right hon. Member for Blackburn (Mr. Straw), which her Department was unable to answer when they were tabled in precisely the same form by my hon. Friend?

Ms Hewitt

I understand that the hon. Gentleman supports the independence of the Bank of England and the new monetary policy framework. I am surprised that he did not intervene to congratulate us on implementing a policy that is supported by him, but opposed by his Front Bench.

In an extremely constructive speech—it was perhaps a little long, but it was very constructive—the hon. Member for Kingston and Surbiton (Mr. Davey) referred to the new public service agreements, an important innovation in ensuring that we achieve the modernisation and results that we need from our public services. I remind him that, in December, we published in the White Paper, "Public services for the future—modernisation, reform, accountability" the first tranche of the public service agreements. They are there in the public domain for all to see—the targets that we have set for improvements in public services. They include reductions in hospital in-patient waiting lists, reductions in class sizes for five, six and seven-year-olds, and reductions in the time between arrest and sentence for persistent young offenders, who for years under the previous Government were allowed to get away with it.

The hon. Member for Kingston and Surbiton raised the Select Committee on Procedure report that was published yesterday on debates on expenditure plans. Of course, we will want to consider carefully that extremely thoughtful report and will respond to it in due course, but the report's recommendations are primarily addressed to how Parliament can use the opportunities that are already available to it, rather than a matter for the Government themselves.

The hon. Member for Boston and Skegness (Sir R. Body) raised the question of Kosovo and whether the costs of both the war and reconstruction in Kosovo and the western Balkans will threaten public finances. I assure him, as my right hon. Friend the Chief Secretary to the Treasury has assured the House on other occasions, that, because of the healthy state of public finances, there is no threat to the public finances from the demands that will be made, rightly, by reconstruction in the region.

The hon. Gentleman also raised the wider issue of the state of the public finances. He rightly criticised the record of the Conservative Administration, who, in 1993–04, raised public sector borrowing to £50 billion, the highest level that it has reached since the war. I hope that he and other Conservative Members will congratulate the Government on the fact that, in the first two years alone, they cut borrowing by £32 billion; that total net borrowing over the next five years will be lower than in any one single year in the previous Parliament; and that we are forecasting, and will deliver, current budget surpluses totalling £34 billion over the next five years, compared with a deficit under the previous Government over the previous cycle of a staggering £149 billion.

The hon. Gentleman raised in particular his fears about what would happen to the national debt. As I have said, the national debt doubled in the early 1990s under the Conservative party, but, if he looks at the projections in the financial statement and Budget report in table B6, he will find that the national debt is set to fall from a peak of over 44 per cent. of GDP in 1996–97 to under 40 per cent. this year and to under 35 per cent. in 2003–04.

Sir Richard Body

In the Budget statement, that is not the forecast. Perhaps the Minister will good enough to remind herself. The figure will go up again. It is true that there has been a small surplus in the past two years, but, as I pointed out, that was the result of a time lag following decisions by the previous Government.

Ms Hewitt

As I have already said, current budget surpluses will total £34 billion over the next five years and the national debt will fall substantially as a proportion of GDP, compared with the peak that was reached.

Mr. Gibb

The hon. Lady has trotted out the £34 billion figure that I referred to, which is the so-called current surplus over the next five years—1999 to 2003–04. Why has she chosen five years? Why not six years? Why not four years? What is the reason for the five-year period?

Ms Hewitt

It is the lifetime of this Parliament, and a perfectly reasonable period to choose.

Mr. Gibb

Will the hon. Lady give way?

Ms Hewitt

No, I shall not give way again. I am sorry, but this has been a lengthy debate, and I should like to do justice to the many speeches that we have heard.

My hon. Friend the Member for Harlow (Mr. Rammell), in a thoughtful speech, stressed again the improvement in public finances, the investment in public services, the achievement of economic stability and—underlining the point made by the Select Committee on the Treasury—the success of our new monetary policy framework in avoiding recession despite the world financial crisis.

The hon. Member for Reigate (Mr. Blunt) raised the issue of health spending. I should remind the House of the facts on health spending: over the comprehensive spending review period of 1998–99 to 2001–02, there will be real annual average growth of 4.7 per cent. in national health service spending; and, over the entire Parliament, there will be a real annual increase of 3.7 per cent. We should compare those percentages with an annual increase of 2.5 per cent. in the previous Parliament, and with an increase of a mere 3 per cent. in the 18 years of the previous, Conservative Government. On both measures, therefore, the Government are providing a significantly higher annual real increase in funding for our hospitals and the national health service.

My hon. Friend the Member for Stafford, in a typically well-informed and excellent speech, raised the extremely important issue of separating capital and revenue accounting, and stressed the importance of doing so to ensure that we achieve the levels of long-term investment that the economy needs. He was absolutely right on those points. I simply draw his attention to the Government's plans to introduce resource accounting and budgeting, which will ensure that, in the public sector, we do indeed have proper accounting for both capital and revenue.

For much of his speech, the hon. Member for Bognor Regis and Littlehampton seemed to be suffering from amnesia—he quite clearly forgot the 22 tax rises under the previous, Conservative Government. Like other Opposition Members, he also mentioned social security spending. It is worth remembering that, under this Government, social security spending will rise by a mere 2 per cent. annually—which is half the level that was achieved by the previous Government.

In contrast to the previous Government—who preached an end to the dependency culture, but locked millions of people into dependence on means-tested benefit—we are reforming the welfare system, so that it springs people out of the trap of unemployment. The success of our policy is demonstrated by the contribution that welfare to work is making to the fact that 400,000 more people are employed in the United Kingdom now than were employed at the time of the previous general election.

Mr. Blunt

Will the hon. Lady give way?

Ms Hewitt

No, I shall not give way, if the hon. Gentleman will forgive me. I have been generous in giving way, but we are running short of time.

My hon. Friend the Member for Hornchurch (Mr. Cryer) rightly mentioned the years of Conservative neglect of public transport—a neglect that we are now having to make good.

Finally, the hon. Member for West Dorset (Mr. Letwin), in a tortured speech, referred not only to health but to education. I remind him that, under the Labour Government, in the three years of the CSR period, there will be a 5.1 per cent. annual real increase in investment in our schools; and that, in the whole period of 1996–97 to 2001–02, there will be a 2.9 per cent. real annual increase. The final percentage should also be compared with the 1.5 per cent. real annual increase under the previous, Conservative Government—demonstrating that we have virtually doubled real annual growth in the United Kingdom's education budget. It is a tribute to our commitment to education, education, education.

The Government are determined to get rid of the boom and bust of the Conservative years. We are delivering low inflation, the lowest interest rates for 30 years, rising employment and a reform of the welfare system that is delivering opportunity—

It being Ten o'clock, the motion for the Adjournment of the House lapsed, without Question put.

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