§ 3.32 p.m.
§ Lord Peston
rose to move, That the Grand Committee do report to the House that it has considered the report of the Select Committee on 182GC Economic Affairs on Monetary and Fiscal Policy: Present Successes and Future Problems (3rd report, Session 2003–04, HL Paper 176).
The noble Lord said: As always, we, the Economic Affairs Select Committee, are pioneers. We are the first committee to agree that its report should be debated in the Moses Room. I volunteered us on the grounds that doing it this way gave us a convenient day and time and an acceptably short gap between publication date and debate. It is still my view that this is a good way of doing things.
There is one slight downside; namely, that in this Room there is no TV relay. When we debated the matter in the Chamber itself I understood that this particular problem would be rectified soon—I assumed during the summer. Just for the record, I must say that were we not in due course to have a television relay in this Room I would cease to support the pioneering trail that we have currently set out on. That has to be available in the normal way.
I now turn to the report. I must of course thank both our special adviser Professor Mike Wickens of York University and Robert Graham-Harrison our Clerk. I have to say more definitely than usual that without their help we would have made little or no progress in this very difficult area of economic policy.
None the less, I can also say that we have stuck to the tradition of the Economic Affairs Committee; namely, that we have an agreed report; we have had no votes—so I have served my six years as chairman without a single vote; and we had no party division whatever. That does not mean that we abandoned our political views, but we did not let that permeate the serious consideration of matters of this kind.
Everything we have done—and I think that your Lordships will accept that that is true of this particular report—is evidence-based; every part of it is fully argued and is fully transparent. In particular, where the evidence is not decisive, one way or another, or the theoretical argument is finely balanced, we have recognised the resulting difficulties and therefore do not pretend that there is only one right way of doing things. If only that were true of the governments that we have had for the past quarter century, our country would be a rather more successful place, successful though it is.
I will concentrate on two topics and hope that the other Committee Members taking part will choose those topics if they like and also deal with one or two of the others. In doing that, I must say at the outset that I am extremely disappointed by the Government's reply to our comments on fiscal policy. The Government's reply has a defensive and "we are above criticism" tone, which I find unattractive, particularly because your Lordships' committee was supportive of the Government's commitment to a well articulated fiscal framework just as we were the first serious body to support the independence of the MPC. I find the Government's reply unattractive and quite distasteful given how much work we did and the fact that the Government did not feel that it was their duty to give 183GC us a properly reasoned set of answers. That is not to say that we are always right, but we deserve proper consideration.
As I said, our analysis and recommendations were intended to be helpful. We did not say that the broad approach used by the Government was not good. We simply asked what could be done by way of independent scrutiny to make it better. That was our approach. To be told in the Government's reply that the job of scrutiny is well done by independent commentators is quite absurd given that the independent commentators demonstrate quite clearly that they cannot agree themselves on any of the important matters. They cannot agree on the date or length of the cycle or the distinction between capital and current expenditure and matters of those kinds. The notion that the job is done well by them is ridiculous.
In addition, serious economists—and there are plenty in the Treasury—are well aware of the complications that arise in this area and therefore well aware of the need to argue these matters. I also note what the Government tell us about the effective job that the Treasury Select Committee does in scrutinising fiscal policy. I am afraid that my deep respect for the other place prevents me from commenting on the work of the Treasury Select Committee, but I reflect sadly that the Treasury itself finds it impossible in its reply to your Lordships' committee's report to say what a good job your Lordships' committee does.
§ Lord Peston
If I may say so, no it is not, although it may come to that in due course. It is the job of the Treasury, given what we did, at least to start by saying, "We thank your Lordships for all that you have done and our arguments are as follows".
At the very least, we would have expected in the Government's response to your Lordships' report something representing an argument not least to our suggestion that the relevant distinction between permanent and temporary changes in public expenditure are a better way of looking at these matters than the rather old-fashioned current-versus-capital-expenditure approach. I am not saying that we are right, although I believe that we are, but when we put forward an argument, we would like to hear the actual view of the Treasury.
Also, over a long period in a non-inflationary environment, in broad terms our view was that pretty well all public expenditure must be tax financed bearing in mind that borrowing must be repaid and interest charges must be met. I say in broad terms, because relative to GDP, there may be a long-term demand for bonds that only the public sector can meet. In that case, of course, there can be a permanent issue of bonds keeping, say, the ratio to GDP constant, but solely in order to meet the demands of financial 184GC markets for those assets. So far as I understand the economics, everything else must be tax financed, one way or another. Subject to that, the rest of the budget will always be balanced, in the long run.
The Government tell us that lying behind their approach is the notion of intergenerational fairness. They see that as part of the argument. I shall forbear from dwelling on the old joke of, "What has posterity done for us?"—although I am well aware that our successors on the Economic Affairs Committee, as they look at the topic that they have chosen, will be stuck with answering that question at some time or other. I shall ignore that for the moment. The notion of intergenerational fairness, whether derived from philosophical or economic views, is fraught with difficulties. If we started from the concept of intergenerational fairness, we would be hard put to show how it led us to the Treasury's view on the current versus capital distinction, especially as set in the national accounts.
We can be pretty sure, however, that our successors will be richer than we are. Therefore, on progressive tax grounds alone, they will be better placed to meet any financial burdens than we are. If you believe in intergenerational fairness, you might well believe in pushing the burden forward, rather than keeping it within the generation. I agree that those are technically difficult matters. Earlier today, I reflected on what Keynes argued in 1929 when he said, with Sir Hubert Henderson in a very famous pamphlet, that—looking, say, 50 or 100 years forward—domestically held debt if repaid will be repaid by posterity to posterity. He totally denied the notion that there was a forward-looking burden. That has always been worth thinking about.
I hasten to add that, in reminding Members of the Committee of Keynes's view of 75 years ago, I shall not go on to say that there is no such thing as sound finance or that we should abandon fiscal rules—quite the contrary. However, my view is that the fiscal guidance that the report gives to the Treasury is well worth following.
My second topic is the switch to the CPI. We argued, inter alia, that that switch had not been properly thought through. I am bound to say that the Government's response only confirms that opinion. They tell us that the CPI,has a number of distinct advantages — for monetary policy purposes".They also cite with approval the view of the Governor that it does not have major significance for economic policy. I have to ask a question as a matter of elementary logic. How can something be a better measure, and yet at the same time make no difference to what happens? My definition of a better measure is something that enables you to operate more efficiently or better in some way.
The illogicality is worse than that, as the Government also cite with approval the IMF's view that the change in the inflation target was well communicated and well understood by financial markets. If the change was insignificant, especially to 185GC measurement and on to policy, what was there to communicate to financial markets or for them to understand? You really cannot have it both ways. Either the move was very important, in which case we would like to see it justified, or trivial, in which case there is no problem.
The point holds a fortiori on the Government's response to our comment on the effect on the labour market. The Government say that the switch has no direct implication for the labour market and again cite with approval the Governor, who believes that wage bargaining should be unaffected. Does that mean that the level and rate of rise of nominal wages will stay the same, so that real wages will appear higher when nominal wages are deflated by the CPI rather than the RPIX? None the less, although real wages will appear higher on one index than another, that will lead to no change in bargaining behaviour or what happens in the labour market. As a minimum, one would again like a full analysis of how you can have two indices that are both not significantly different, and are significantly different, but have no effect on the labour market.
When it comes to index-linking more generally, in either the public or private sectors, will no attempt be made anywhere in the economy to try to use the CPI in future? One at least has to ask the Treasury if it will tell us the answer to that question. Is there no possibility that confusion could arise in the labour market because of the existence of the two indices? I have never been a union leader, and I do not see myself becoming one, but if I were bargaining I would always choose whichever index got me the best rate of rise in nominal wages. I absolutely could find an economist who would tell me whichever one I was choosing was the right one—until the next week, when I would find a different economist and be told something different. When Ministers make speeches referring to inflation, what are we to assume they have in mind by way of the relevant index? Will they never show any preference for one index over another?
Those are my main points, and I am keen to leave room for my colleagues to make their points. I reiterate my view that your Lordships' Economic Affairs Committee, over my six years, and now under the leadership of my successor, the noble Lord, Lord Wakeham, works enormously hard on these matters and we do take them seriously. It is about time that the Government, through the Treasury, responded in an appropriate way. I beg to move.
Moved, That the Grand Committee do report to the House that it has considered the report of the Select Committee on Economic Affairs on Monetary and Fiscal Policy: Present Successes and Future Problems (3rd report, Session 2003–04, HL Paper 176).—(Lord Peston.)
§ 3.47 p.m.
§ Lord Wakeham
I congratulate the noble Lord, Lord Peston, not only on his speech today, which was more forthright and more critical of the Government than my speech is going to be, but I agreed with a great 186GC deal of what he had to say. Also, I congratulate him on his remarkable time as chairman of the Economic Affairs Select Committee. He was also chairman of its predecessor, the Monetary Policy Committee. In all, his service of over six years is probably unique, and it has been of greatest value to the House of Lords, to Parliament, and to the nation more widely. The reports produced under his chairmanship, before I was on the committee, were always evidence-based, authoritative and much respected. Nevertheless, they also had his personal style about them, and they were the better for that. It is a great honour for me to succeed the noble Lord as chairman of the Select Committee, and I hope to keep up the high standards that he maintained.
One thing that I noted in his speech—I do not know whether it was an aside or a main point—was that he asked, "Why do we not put things off to the future?". For good reason—I was reading articles this morning about some of the nation's pension liabilities. If there was ever a case of putting things off to tomorrow, either in the private sector or public sector, the pension liabilities that will be left to future generations— maybe to us for a bit to have to receive the pensions but for future generations to have to pay for them—is a massive problem for whoever will be in government for the next 25 years or so.
This is a significant occasion, being the first debate of a Select Committee report to be held in the Moses Room. I am aware that not all committee chairmen think it is a good idea. My view is that given the competing pressures for time on the Floor of the House, it represents a pragmatic and sensible step. When I was consulted, I made it clear that it had my agreement provided that it represented additional debating time and that each time it was proposed the relevant Select Committee agreed. The fact that it is additional time begs the question: what is normal? It is easier to say what is not acceptable than what is absolutely acceptable. As an example, the delay in debating our previous report on ageing, when almost a year had elapsed, was clearly unacceptable. What the Government will not be able to do is to shuffle off Select Committee reports to the Moses Room as and when it suits them. They have assured me that they have no intention of doing so, and that is to their credit.
The report that we are debating today has made some important points on monetary policy and, for the first time, we have made some points on fiscal policy. My comment may appear rather inadequate when I say that the Government's response is somewhat thin. The noble Lord, Lord Peston, put it rather stronger than that and I think that he may have made the point better than I have done. On some points the Treasury did not comment at all, leaving it to the Governor. So I look forward to hearing from the Bank, and perhaps later in the year the committee will ask the Governor whether he would like to come back to see us again.
With regard to other points that we made in the report, I want to comment briefly on three of them. They are separate points but, to some extent, they may have a common theme. We noted that, in assessing the 187GC inflation outcome in recent years, the outcome was nearly always below target. We also noted that interest rates remain high in the United Kingdom relative to the US and the euro-zone. There may be some connection. The view of some may well be that the MPC might have been too conservative in its forecasts and, as a result, we have had interest rates somewhat higher than would be strictly necessary. On the other hand, some might feel that it is an innate sense of caution by the committee, perhaps not having quite as much confidence in the economy as emanates from the Treasury.
Secondly, we were interested in the concern and public emphasis that the Monetary Policy Committee has given to housing when house prices are not even included in the new consumer price index. That appears to be a concern that the Bank has over financial stability more generally, even though financial stability itself is not included in the Bank of England Act as one of its tasks. One might well ask what takes precedence in the eyes of the MPC—the inflation target or financial stability.
All those who serve on the Monetary Policy Committee are distinguished and erudite persons, but we wonder whether there has not been a subtle change in the membership of the MPC. The Bank of England Act and the Chancellor's statement of May 2004 mention relevant knowledge and experience. It has always been understood that that referred particularly to knowledge and experience in monetary policy. Indeed, the Bank itself has resisted claims for appointments from unions and business on just that basis. We wonder whether any widening in the selection of membership of the MPC has dangers for the standing of the MPC and whether it needs to be watched.
Those three points are not in any sense minor ones but, even taking them into account, it is very important that I end by stressing that the Governor and the MPC have been hugely successful in achieving the inflation target, even though that target has changed, and I congratulate the Governor and his team on that achievement.
§ 3.54 p.m.
§ Lord Barnett
I add my personal congratulations to the chairman of the Select Committee, my noble friend Lord Peston. I believe that, from the quality of the reports, anyone on the committee and, indeed, anyone who over the years has read our reports will recognise that he has been an excellent chairman. The report was all party and unanimous on the difficult subject of the economy.
I am sure that, at the present time, some Members of the Committee will seek to make the odd party-political point. If I am looking at the noble Baroness, Lady Noakes, I am sure she will forgive me. For my part, I shall not be party-political, other than to agree with my noble friend Lord Peston in virtually everything that he said about the lack of response from the Government or the Treasury to our report.
188GC I shall say a few words about monetary policy. As the noble Lord, Lord Wakeham, rightly said, it is difficult to criticise the Monetary Policy Committee in respect of its achievement of its target level of inflation, which was 1 per cent up or down. I know it can be argued that it inherited a marvellous situation or that there are other reasons for its success, but the fact is that it achieved the target that it was set. However, I have always worried whether the MPC needed to set interest rates at the level it did in order to achieve that target. In paragraph 90 of our report, we were explicit and stated:Evidence … in recent years [is that] monetary policy has been too tight. This implies that UK interest rates should be lower than at present, possibly by as much as 50, or more, basis points".That was the unanimous view of the committee—all our recommendations were unanimous—and we did not receive a response to it. Indeed, that applied throughout the Government's response in which there was no serious attempt to argue one way or the other.
The Chancellor gave the Monetary Policy Committee a second remit with three famous words, "subject to that"—that is to say, subject to achieving the inflation rate—it should go on to consider the Government's economic policy. Reading the latest minutes, or indeed, any other set of minutes, one is hard put to find that the Monetary Policy Committee ever considered—except for the facts—what, having achieved the inflation rate, it could or could not do to help the Government achieve their economic policy and, indeed, to help the country to achieve even better, sustainable rates of economic growth.
It is not sufficient for the Government to reply, as they did in paragraph 4 of their response to the report, that they have no comment at all because they believe in the operational independence of the Monetary Policy Committee. It is unbelievable that the Treasury does not have a view and does not express it to the Monetary Policy Committee. The Governor and the Chancellor of the Exchequer no longer have lunches; they apparently have breakfasts. One assumes that, other than discussing the weather, the Chancellor says a word or two about the economy to the Governor of the Bank of England. Maybe the Minister can tell us that he does not. I do not know what they talk about. A senior Treasury official is present at every Monetary Policy Committee meeting. Can my noble friend tell us whether he opens his mouth? Does he ever give the Treasury view of what it should or should not be considering? I find it incredible that it never discusses anything remotely concerned with the remit given to the Monetary Policy Committee.
Like my noble friend Lord Peston, I shall concentrate on fiscal policy. Again, it would be difficult to disagree with the argument that the Chancellor has been successful—whether because of luck or because of a great inheritance—in maintaining the level of growth. Given the way that the economy has gone of the past eight years, is difficult to say that he has not done an excellent job. I would be the first to concede that, although I do not often speak about my noble friend in that way, as the Minister will recognise. 189GC But when I asked a Question recently about the golden rule, which is central to the Chancellor's policy, I was told by my noble friend:Certainly I agree that it would not be right to jump into drastic action as the result of very minor changes".Later, during the same Question, he went on to talk about this crucial area of investment in relation to the golden rule. He told us that,investment by itself is not an unmitigated good or bad. There are good investments and bad investments".—[Official Report, 31/1/05; col. 6.]So one assumes that the Chancellor has chosen only good investments for the purposes of his golden rule.
A recent decision by the Office for National Statistics, which, frankly, I found incredible, was that the maintenance of the public rail system should be classified as capital investment. I recognise that the Opposition will wish to make something of that, but I suppose that it is libellous or slanderous to say that the ONS deliberately changed its definition of capital investment in order to suit the Chancellor. But frankly, if it is cheating—as Oliver Letwin said and as the noble Baroness will no doubt repeat using different language—and fiddling the figures, one needs to cut borrowing even more. However, instead, the Opposition propose to cut taxes. That is the only party-political point that I shall make.
We are dealing with a serious problem here—the achievement and success of the golden rule, which the committee and I very much support as opposed to the European Union's policy in relation to managing these problems. But, frankly, what is an unmitigated "good" or "bad"? Apparently, whether investment is good or bad, it is still to be included in the golden rule. That issue is well covered in paragraph 67 of our report. The essential point that we made was that if investment, however it is counted, does not yield revenue, that is a serious matter. We did not receive a single reply on that central problem.
As I said, the Select Committee is unanimous and all-party, and there was never any question of trying to be clever with the Treasury. We sought to help to analyse how the golden rule could be made even more effective than it has been, but we never had a single comment from the Treasury on that point.
Therefore, the question arises of whether fiscal policy should be treated like monetary policy and assigned to some kind of independent agency. Rightly in my view, in paragraph 83 of the report the Select Committee said that that should not be done. However, importantly, in that paragraph we went on to say that,we respond more positively to the idea of having an independent assessment by experts of whether fiscal policy is being conducted within the fiscal framework".We did not recommend a major change; all we asked was that the Treasury should review it. We could not have been more moderate. We asked the Treasury—we were trying to be helpful—at least to review the possibility. It might come up with the answer that it is not the sensible way forward. That is okay, but 190GC perhaps the Minister will tell us because in the Treasury's reply there was no good reason why that matter should not even be reviewed.
Finally, I move on to the whole question of the ONS reclassification. Indeed, it is not only reclassification but classification generally of what should be treated as capital investment. I should be glad to hear my noble friend's view of what should be treated as capital investment here. It is central to the golden rule and we cannot just ignore it and say whether it achieves any form of revenue and whether interest and depreciation should be counted. All those points we raised in a sensible way in the report. As I said, we did not have a response. I hope that my noble friend will be able to give us one now.
I hope that this debate and the Select Committee report will give a general message loud and clear to the Treasury. I should plead guilty as, some years ago, when I was in the Treasury, I could not have cared less what happened in the House of Lords and what it said or did not say. That was my view then, before I came to this place and saw for myself how a Select Committee—one I chaired myself at times—sought not to make party-political points, but to help any government to achieve better results. It does not deserve to be dismissed out of hand, as happened on this occasion. The House of Lords committee has done an excellent job. It sought to help, not to hinder or to be party political. It deserves a better response than we have had so far. I hope that we will see it today.
§ 4.6 p.m.
§ Viscount Trenchard
I thank noble Lords who serve on the Select Committee for their report, and the noble Lord, Lord Peston, for introducing the debate. I feel somewhat nervous as the first of a small number of speakers who have not put the hours in or done the work that noble Lords on the committee have. I also hesitate to disturb the comfortable and apolitical atmosphere that guides the committee's proceedings—which I entirely welcome. As those who have spoken have already pointed out that the Government appear to pay little attention to the committee's neutral and cross-party approach, I think that I may be forgiven for making some rather more party-political points than I would have done had I been bound by the framework of the processes and modus operandi of the committee.
The greater part of the committee's report deals with the performance of the Monetary Policy Committee of the Bank of England. As the noble Lord, Lord Peston, commented, the committee's proceedings have been largely free of party-political division. However, would it be so easy to achieve that if the balance of the committee's work shifted to examining questions of fiscal policy?
The committee was surely right in its view that the potential significance of the change from the RPIX to the CPI has not yet been sufficiently explained by the Treasury. Given the importance of housing-related costs such as council tax and buildings insurance to the average household budget, it is perhaps surprising that 191GC the Government have changed to a measurement system that takes no account of housing costs. It is also true that, as noted in the report, with the CPI being below and the RPIX being above their respective target levels—hence inflation appearing to have shifted from overheating to underheating—the Bank has a difficult and confusing communications exercise.
The committee is not convinced that the change of inflation target was properly thought through, and that its effect on the labour market was adequately analysed before the change was decided. I hope that the Minister will tell us whether the Treasury will accept the committee's recommendation that it should provide an early statement of explanation and clarification beyond the brief and inadequate response contained in the report published on 7 February.
The report shows that the Select Committee examined in detail the importance given by the MPC to developments in the housing market, such as the recent surge in mortgage borrowing through equity withdrawal. The committee expressed its concern that for the MPC to undertake short-term stabilisation of the real economy takes it some distance from its statutory remit. However, that is not necessarily true, unless pursuing the second objective set for the Bank in the Bank of England Act—to support the economic policy of Her Majesty's Government—conflicts with the first objective—to maintain price stability. I would expect that these two objectives would not normally conflict with each other and could normally be pursued in tandem.
The committee makes a good point in paragraph 82, which is particularly relevant in view of the Treasury's habit of reclassifying current expenditure as capital investment. When we debated the pre-Budget report on 16 December, I was joined by many noble Lords in predicting that the Chancellor was on course to break his golden rule; there was already a deficit in the public finances of £17 billion in the current fiscal year, despite higher oil prices having delivered a windfall bonus of some £4 billion. It is no surprise that January has turned out to be an excellent month for the Treasury; with self-assessment income tax receipts and a quarter of the year's corporation tax revenues due. A surplus achieved at £9.2 billion was some £3.5 billion greater than a year ago. However, the cumulative deficit for the year at £19.2 billion is only £2.5 billion less than the equivalent at the same time last year.
The global economy and the UK economy have had a good year, and Britain's companies have done commensurately well. Increased national insurance contributions and increased income taxes earned as a result of the Government having increased the threshold of the 40 per cent higher rate band in line with inflation but not earnings, account for a part of the increase; so do higher oil prices. The structural reforms of the 1980s and early 1990s have left an enduring, benevolent economic framework, which is still yielding good, continuous economic growth despite this Government's wasteful diversion of our resources towards the public sector, which has become an increasing problem in recent years.
192GC In December, the Chancellor forecast that the current account deficit for 2004–05 would be £12.5 billion. In order to achieve that, he needs a further surplus of £6.7 billion in the last two months of the financial year. The pre-Budget report forecast that the golden rule would be met by a margin of only £8 billion, nearly the same amount, so it is clear that there is no room for complacency. Against this background, it is no surprise that the Government have decided to fudge the figures for the third time in two years. I would not go along with the noble Lord, Lord Barnett, in saying that we cannot blame the Treasury for this. As I understand it, under the current structure the Office for National Statistics reports to the Treasury.
In 2003, the Department for Transport asked the Rail Regulator to reclassify rail subsidies as grants, ensuring that they would be treated as capital rather than as current expenditure. That change alone accounts for £6 billion out of the £8 billion margin for the golden rule claimed by the Chancellor. Then there was the change by the Treasury last year in the method of calculating budget balances from absolute amounts to percentages of GDP. The effect is to increase the relative weightings of past surpluses as compared with current deficits in assessing the degree of adherence to the golden rule. In earlier years, the legacy of the last government's sound economic management ensured that the Treasury could operate well inside the limit, but now every £1 billion is crucially important to the Chancellor's credibility. Perhaps that explains why the Office for National Statistics, after taking advice from the Treasury, has now decided to reclassify a substantial amount of current spending on roads as capital expenditure.
As Mr Richard Alldnit, Chief Executive of the Statistics Commission, has observed,The timing issue looks potentially uncomfortable so we will be asking the Office for National Statistics what triggered it and to clarify why some of this spending was treated as current in the past. We reiterate the need for demonstrable independence in official statistics".
I think that the Committee would like to know what is the opinion of the Select Committee on the need for an independent national statistics office and I would hope that the committee might address that question in the future. I would certainly agree with the committee that there should be an independent assessment by experts of whether fiscal policy is being conducted within the fiscal framework. I would like to hear from the Minister whether the Treasury still believes that the current arrangements work well in the light of the comments by respected observers, reported over the weekend, following the Government's decision on the reclassification of road maintenance expenditure.
The Government's response has also failed to address the committee's recommendation that the Treasury should review the feasibility and advantages of setting up a body like the Council of Economic Advisers in the United States. It is becoming clearer that the committee is also right in its view that parliamentary scrutiny of macroeconomic issues should be increased. 193GC Many experts consider that it will still be touch and go as to whether the Chancellor will be able to claim that he has observed the golden rule, despite the Government having moved the goal post three times and to no small extent. The Treasury has consistently been overly optimistic in its forecasts of budget surpluses, which have been reduced every year since 1999–2000. Its own forecast that the next economic cycle will start in 2006–07 with a virtually neutral budget, the position is therefore not at all encouraging. Even if through a combination of luck and the residual effects of the economic policies of the previous government and sensible monetary management by the Bank of England, this time the Treasury should turn out to be accurate in its budget forecasting, independent observers such as the Institute of Fiscal Studies still believe that £11 billion of tax rises will be needed after the general election.
Perhaps the Minister will tell us whether that money will come from further increases in national insurance contributions or from income tax by continuing to draw more and more taxpayers into the higher rate band or from where? This Government have increases and are increasing the proportion of GDP taken by taxes and national insurance contributions in any case. This does nothing to improve this country's deteriorating position in the world competitiveness league, down from fourth to 15th place or more by some methods of assessment.
Members of the Committee may have seen reports over the weekend that one in four jobs is now in the public sector. These are the only new jobs which carry defined benefit, final-salary-linked pension schemes. Only 18 per cent of those currently employed in the private sector are contributing members of defined benefit pensions schemes, whereas 78 per cent of public sector workers still enjoy such schemes.
Watson Wyatt, the financial consultants, estimate that the unfunded public sector pension liability has soared to £700 billion, more than 60 per cent higher than the Government's estimates. This huge liability is growing all the time. Every week, you can see advertisements placed in the appointments sections of the major newspapers inviting applicants for senior positions in new quangos on attractive terms, including inflation-linked final salary defined benefit pension schemes.
Mr Brown must now rue the day he stripped pension funds of their tax-free status in 1997. I would urge my right honourable friend Mr Oliver Letwin to waste no more time in committing firmly to restore the dividend tax credit to pension funds and charities. Such a move is logical and fair and I believe will be entirely self-financing in the medium term because it will provide a much-needed boost to savings, raise the stock market, reduce companies' pension deficits and increase their profits and contributions to the Exchequer.
I know the Minister's views on this matter, but I look forward to hearing the views of other Members of the Committee. I believe that it is an obvious, sensible step to take and I earnestly hope that my colleagues on these Benches will adopt it as policy.
§ 4.21 p.m.
§ Lord Sheldon
My first task is to thank my noble friend Lord Peston for his chairmanship of the Select Committee over a longer period of time than we might expect in future. I also want to acknowledge his success in handling the committee and producing the valuable reports. It has been a great advantage to be a member of the committee. I have taken a great deal of pleasure from our discussions and the conclusions we reached. The noble Lord, Lord Wakeham, is a worthy successor.
Although the past informs us in the actions that we take and the views we reach, in the House of Lords it does not rule us in quite the same way. We in this part of the Palace are therefore able to look at these things perhaps a little more dispassionately. I am sorry that the Government's response was negative. They may not happily agree with everything we say, as one might expect, but the committee has the experience and expertise without the political past which must be overcome. That is an advantage for the committee and it should therefore have been treated with greater seriousness.
The report is not party-political; it does not even avoid a political relationship. It tries to be helpful and to produce results which will help the Government and the country generally.
If we look at the economic achievement of the Government, the defining economic decision of the Chancellor of the Exchequer was the wholly unexpected handing over to the Bank of England the responsibility for the control of interest rates. This was held to be the great financial power of the Chancellor of the Exchequer—it dominated so much of his life. The Prime Minister was also always involved in such matters and the political realities of the time tended to distort some of the economic involvements in which they were engaged. The handing over of this power showed a confidence that with his management of the economy it was not going to be a power that he felt he would need. This was a level of confidence which was surprising but which proved to be justified and successful.
Although there was the reservation that in exceptional circumstances when the national interest demanded it, the Government would have the power to give instructions to the Bank on interest rates for a limited period, it was not a power that he was expected to exercise and in eight years it has never come near to being used.
The Bank's Monetary Policy Committee is made up of the Governor, deputy governors, the Bank's Chief Economist, the Executive Director for Market Operations and four external members appointed directly by the Chancellor. The members appointed directly by the Chancellor were well chosen. It was a body of great expertise. More recently, some new appointments have not been quite so well focused on monetary economics. It is necessary that the reputation of the MPC, which was not easily won, is maintained.
The MPC meets on a monthly basis and the Treasury has the right to be represented in a nonvoting capacity. As my noble friend Lord Barnett 195GC asked, will the Minister say how it works in practice? Who attends and what kind of contribution does he or she make? Members do not go there just to listen—they must speak up. What do they say and what demands do they make? If not demands, what contributions do they make?
Decisions are made by a vote of the committee on a one-person-one-vote basis, with the Governor having the casting vote if there is no majority. Will my noble friend say how often that casting vote is used? That is an important point. Does the committee reach arrangements easily, or does it have to wait until such time as it is necessary?
The quarterly inflation report published by the Bank looks at the prospects for inflation in the light of the inflation target. It examines the economic and monetary factors throughout industry and commerce which the MPC reckons will have a bearing on inflation over the future. That is usually about two years, being the time it considers it takes to work all these things through. Taking all that into account, it decides on the interest rate and the Bank carries this through by operating in the financial markets.
That has worked well and is a tribute to how the system was set up and is working. What I would like to hear from my noble friend is the extent to which the Treasury is informed and involved in the process. Are its comments invited? Does any Treasury Minister make any contribution to the final decisions?
One aspect of the Budget last year, which I did not think received quite the attention it deserved, was the announcement that the measure of inflation was to be changed from RPIX, which excludes mortgage and interest payments, to the harmonised consumer price index; the HCPI or, as we now call it, the CPI. The Chancellor first mentioned this change in his Budget speech back in 1997 when he spoke of the case to move to a new measure of domestic inflation at some stage in the future.
The problem with using the RPI and the RPIX is that they are revised four times a year and are altered to take account of the way by which patterns of consumption change. That is important because people raise their standards of living over the years and consume better products. The index therefore tends to overstate the rise in the cost of living. That has an effect on pensions, which follows the RPI. It shows not only the cost of living as it has become, but it absorbs the improvements in the standards of living. So the changed RPI becomes a different measure from the cost-of-living index which allows not just the maintenance of the standard of living but also the improvement in the standard of living.
The harmonised consumer price index handles this problem in a different way. Each country in Europe has a common method of calculating the index of prices so that comparisons can be made between countries. Each country covers the categories which are over one per thousand of the national shopping basket. This method helps in comparing inflation 196GC between different countries. That is important, given the present moves for comparison between the ways in which these indices are calculated.
The Chancellor has accepted that the RPIX measure is well known and understood, but the CPI index is in line with the best international practice and is used widely in Europe and every other G7 nation, save Japan.
Both the RPI and the CPI do not deal adequately with house inflation. This is one of the big problems that we have. House inflation is a matter of enormous concern to people in this country and elsewhere, but there is no proper measure of bringing it into the RPI. It has been said that work will be done to find an acceptable measure of housing for the inflation index. My question for my noble friend is: how is this work proceeding? It seems to me that this is the holy grail of inflation indexing.
How do you index housing and join it into the costof-living index? Work is supposed to be being done. I should be most interested to hear how the Government hope to get a suitable index which includes the temperamental measure of housing.
I turn to the current account deficit, which is the most important of the three points that I wish to make. In the third quarter of last year, the current account deficit increased to £8.8 billion—equivalent to 3 per cent of GDP. This is the highest deficit since the record deficit of £8.9 billion in the first quarter of 1999. The quarterly deficit on trade in goods and services grew to over £10 billion for the first time.
Although the increasing deficit may not be an immediate problem, there must be real concerns about the longer term. Our manufacturing industry has been declining in importance for many years while low-cost countries have increased their sales of manufactured goods to us and to the markets that we had. More recently, they have benefited from increased productivity and overseas investments into their manufacturing industries. Some industries, instead of investing in this country, have invested in some of the new developing countries.
Typical of that and very important also, are the developments in China and, to a lesser extent, in India. They have what are now their advantages of large resources of cheap labour and lower tariffs than in the West. Some of the articles are now being made in China and the proportion of goods being produced and exported to the markets that we held are dominating much of the changes that are happening in this area. We have tried to counteract some of the loss of industrial exports by means of our financial and service sectors. Whether that will be enough in the years ahead is a matter of considerable uncertainty.
Undoubtedly, the loss of our industrial export markets and the imports of the replacement goods will be very difficult to turn round. The reputation of successful manufacturers is very difficult to reacquire once it is lost. Once you have lost your market, to re-engage with it is very difficult indeed. The effect of manufacturing incentives has declined for a number of years and now needs to be re-examined. The question 197GC I have to put to my noble friend is: what kind of fundamental re-examination is going on? If it means greater involvement by the Government, this may be necessary. I should like to hear his comments on that.
§ 4.33 p.m.
§ Lord Northbrook
We are all grateful to the noble Lord, Lord Peston, and his committee for their fascinating and informative report. I should also like to draw attention to the quality of the witnesses questioned. I am also pleased like other speakers that we have had a government response to the report, although, like the noble Lord, Lord Peston, I am disappointed when the Government do not in some cases reply at all to some recommendations made.
I am sorry that we are relegated to the Moses Room to discuss such an important subject. I now understand, from the noble Lord, Lord Peston, the reasons for that more clearly. Like him, I find the problem of TV relay disappointing. As one of the few speakers who did not serve on the committee, I can impartially praise the high quality of the report. I can do no better than to go down the abstract and make a few comments from a City perspective, declaring, as usual, an interest as an investment fund manager.
As the abstract states in its first paragraph, the committee was examining the performance of the MPC. I say straight away that I think the MPC has done, in general, an excellent job. Indeed, in my maiden speech in this House in 1992, I recommended that more independence should be given to the Bank of England. Now, I am glad that this has happened.
The committee's first detailed point is that it has some concerns about the Chancellor's decision to change the MPC's operational target to the CPI basis, and is not sure that the change was properly thought through. When I first heard of that change, my immediate reaction was that the Government were doing it as a means to lower interest rates. That was because the CPI index was standing at about 1.5 per cent and the new target was to be 2 per cent. When I informally asked my noble friend Lady Noakes about the matter, knowing her experience of the Bank of England, she informed me that in her view the MPC would take a careful look at the CPI target and not necessarily follow its progress alone in determining interest rate policy. How right an interpretation that has been.
It has been very surprising to me and to many in the City that the Treasury and the MPC appear to be thinking on different lines. The Treasury has produced the index—the CPI—which omits a wide range of housing costs, and asked the MPC to see that it remains below 2 per cent. On the other hand, the MPC has chosen to focus on the very area which has been left out of the CPI. Instead of cutting interest rates, it increased them last year because of its worries about the potential inflationary consequences of an over-strong housing market.
I have considered the Chancellor's evidence to the committee for the reasons for the move to the CPI but, like the predecessor committee, do not find myself 198GC convinced—although I am not an economist—that the index is as appropriate for the UK. I agree very much with the committee's opinion that the preparation for it was not enough; nor was it subject to public discussion before the final choice was made.
The switch has also made life difficult for the MPC, as the indices are behaving in different ways. As paragraph 12 of chapter 2 of the report states, the CPI has been running well below the target, and the RPIX has been above it. I acknowledge the authoritative voices in paragraph 13 who are very relaxed about the change, and note with interest the Government's response that the gap between the two will narrow to 0.5 per cent by October 2005. I wait to see how that progresses. However, I still ask the Minister, as does the report, to provide some clarification of the decision even at this stage.
The next conclusion in the abstract I have to disagree with. I do not have such reservations about the emphasis placed by the MPC on house price inflation. Nor can I agree with the opinion of Willem Buiter of the European Bank for Reconstruction and Development. He was sceptical about whether monetary policy could be used to rein in house prices. He said:It was like tackling inflation with a pea shooter".It seems that a far better way to control house prices in the long term is to alleviate the chronic shortage of supply. It is that that should be tackled by the Government, through streamlining the planning process, which will help to improve supply. As a consequence, raising interest rates is only a necessary short-term solution to the situation.
However, as the Government seem unable despite a lot of talk to do anything about the planning logjam, the MPC has no choice but to use interest rates to calm the market down. Will the Minister therefore explain why the Government have changed to an index which excludes housing costs, whereas the MPC is taking them so much into account in setting interest rates? Who is right on that? In the City we, unlike the IMF, are still confused.
On the subject of oil prices and how the MPC should react, I do not have much to say about the committee's views, except to make the point that a high oil price is not necessarily as big a problem for the UK economy as it was in the 1970s. I understand that oil prices would need to rise to $80 a barrel before we have a similar problem to the one we had then.
I now move on to one of the most important sections of the report, the MPC's forecasting record. As is well known, the MPC makes projections of inflation and GDP growth up to two years ahead on the basis of constant future interest rates and market forward rates. Recently it has announced that it will use market forward rates only, which I hope will not make it too short-termist.
Pages 15 and 16 of the Select Committee report show that the MPC has been consistently inaccurate in its forecasting of GDP and inflation, on both the upside and the downside. In the August 2004 inflation report the average forecast error of the mean value of the RPIX 199GC forecast for two years ahead was 0.3 percentage points above the average outcome, while the corresponding figure for annual GDP growth was 0.2 percentage points below actual. This shows that between 1999 and 2004 the MPC over-predicted inflation and under-predicted growth. Charts 1 and 2 on pages 15 and 16 show a very volatile MPC prediction pattern over the period. Looking at the period in detail, the MPC consistently over-predicted inflation between 2000 and 2002 and consistently under-predicted it from 2002 until the third quarter of 2004. In both cases, the margin was sometimes quite wide.
Turning to the growth of GDP. the report states that there were three different stages of inaccuracy. From 2000 to 2001 the MPC consistently underestimated, then from 2001 to mid-2003 it consistently overestimated before underestimating it once again until the end of the period, which was the third quarter of 2004. Thus, the report comes to the conclusion that, like its forecasts of RPIX, the MPC seems to have made persistent forecasting errors of GDP growth that at their worst in 2000 were more than 1.5 per cent out of line.
As a result of the overestimate of inflation, the report questions whether interest rates were kept too high between 2000 and 2003, as do I. Does the Minister agree with that? There then follows a long section in the report on GDP forecasting errors, which is rather over-technical for me. However, in paragraph 52 there is a crucial sentence:The problem we then have is to understand precisely on what basis the MPC does change interest rates".Will the Minister give me any help on the Treasury's understanding?
In paragraphs 56 to 59, there are three very useful recommendations about how the Bank can make its decision-making process clearer. First, the Bank,could be much clearer about the relation between inflation, excess demand and the way they affect the interest rate decision".I agree with the committee's recommendation that:The Bank review its presentation of these issues in its quarterly its quarterly Inflation Report and give more emphasis to (and provide a measure of) the state of excess demand than to the growth rate".Secondly, in paragraph 57 the committee recommends that the new quarterly macroeconomic model—not Beckham but the BEQM—be accessible to the public in the same way as the Treasury's model used by the ITEM club is, so that the public may have an independent assessment of future inflation and monetary policy based on it. I do not think that the Government replied to that point.
Finally, I can only repeat verbatim sections of paragraph 58:Errors in forecasting remain a live issue. We also reiterate our view that proper parliamentary scrutiny of the MPC requires that both the Treasury Select Committee and our Committee have full access to the Bank's models. We recommend that measures are taken to facilitate this".Again, the Government have not included a response to these paragraphs. Will the Minister make up for this by giving his response?
200GC I wish to cover three final issues in the report. First, I support, like other speakers, the concern in paragraph 61 that none of the recent external appointments to the MPC is an acknowledged expert in monetary economics in the way that previous appointments were, and that, as a result, the MPC may suffer a loss of credibility, especially when tough decisions may be required. Also in paragraph 62 the committee recommends that the Chancellor should restore his former practice of choosing external members of the MPC with acknowledged expertise in monetary economics, ensuring an appropriate balance on the committee.
Secondly, I find the idea of the possible establishment of a body like the US Council of Economic Advisers interesting and ask the Minister for his opinion on that. Thirdly, I would like to comment on the committee's view that the golden rule is a good rule of thumb but that permanent increases in government expenditure should be tax-financed and temporary increases debt-financed.
The committee then reports that in this way the fiscal framework would be flexible enough to cope with the business cycle and restrictive enough to prevent fiscal policy from becoming unsustainable. I shall not be that political here, but I would venture to disagree with the committee. The golden rule has, in my view, severe faults, the first of which is the definition of capital and current spending, as mentioned by other speakers; and the second is that the economic cycle does not seem to be very clear. The timing over which it is measured can be artificially manipulated. Also should any increases in government expenditure be deemed to be permanent?
So, in summary, I should like to congratulate the committee on an excellent report and I look forward to hearing the Minister's reply.
§ 4.46 p.m.
§ Lord Desai
I begin by saying that it is a great pleasure to take part in the debate. I particularly wanted to because my noble friend Lord Peston has been a remarkable chairman of the committee. I thought that on this final hurrah I should be present.
In the debates on these reports, people who are not members of the committee do not often speak, but I thought that I would make a moderate contribution. I had not realised that this side was going to ambush this debate—there must be an election coming.
I start by saying that my remarks will be more theoretical and general and not very practical. I have not done anything practical in my life; I am not about to start now.
First, topics such as the right measure of inflation are not settled in economics. They have not been settled for about 200 years. Therefore, what price index you choose is partly a matter of taste and partly a matter of what is available. If you choose one particular slice of commodities as a measure of inflation, something else always turns up outside that measure which causes you problems. 201GC In an ideal world, each of us would have a separate inflation index. The appropriate index for the Government to adopt is a matter of speculation. But I find the idea that measurement itself can affect outcomes somewhat peculiar. Putting the Heisenberg principle aside, I do not know why measurements as such, which are all inadequate and underlie our economic factors, should cause a problem to the extent that the Bank of England has to choose one declared index and follow it. The problem would not be so much with the index, but with the target level chosen.
There is an interesting point on what was then called HICP, but which is now called CPI. I thought that the Bank should have adopted a moving target for a while until the difference between the CPI and the RPIX converged to a normal level. It is not easy for banks to adopt moving targets —that might cause uncertainty—so 0.5 per cent was taken off the target.
The problem is that the economy is behaving so well that there is very little to complain about. That is the central message. We are doing fantastically well. Inflation is not very high and growth is good. Indeed, my right honourable friend the Chancellor has made economics a very dull subject to follow. It was very exciting in the days when the noble Lord, Lord Lawson, was Chancellor and we looked at the exchange rate every day, waiting for it to change from the morning to the afternoon. Unfortunately, those good days are gone. This is not a party-political criticism; I am an economist and I miss the excitement of following economic news.
The fact is that the Bank has not been able formally to take house prices into account. We know that house prices have been volatile either due to nominal supply or because of a short-term bubble effect. I think that the MPC has more or less got it right. We may believe that the interest rate is too high, but with a lower interest rate the housing bubble would have been much worse than it is now. Commodity prices are down due to factors such as globalisation, China entering the market and flooding it with cheap goods, and the inflation of services. Those are different factors and one has to strike a balance.
One thing that I know about my friend the Governor of the Bank of England is that he is an inflation hawk and that there is no likelihood that the Bank's policy will be too soft, as might be thought. My view is that the Bank has taken a price measure, which has to be co-ordinated with other European countries, and it has then adjusted it by taking account of the housing market in an informal way. That is good because if you follow formulae too closely, you come to grief. There must be a certain amount of discretion and a certain amount of automatic policy-making.
I have the same feeling about forecasting error. I am surprised that the committee has made so much of a two-year forecast of inflation and growth. What does it matter if two years ahead the inflation forecast is wrong? Market participants will look at the latest relevant growth forecast and, if the continued revision of growth and inflation forecasts converges on the actual, I do not think that the costs of bad forecasting will be that high. I must stop.
§ [The Sitting was suspended for a Division in the House from 4.53 to 5.4 p.m.]
§ Lord Desai
To recap briefly, I do not think that the choice of one or other measure could make that much difference to policy or that the wrong target was adopted. The MPC seems to have taken account of the CPI, but had an eye on the housing market. Therefore, the interest rate level that is now prevalent cannot be said to be too high because, had it been lower, the housing price bubble would have been worse. That is my position.
On the growth and inflation forecasts, an error in the two-year ahead forecast from actual does not have operational significance, because anyone who operates in the market would be looking at the most recently available forecast and there are ways of correcting mistakes in that respect. In any case, all forecasts are a loss-making activity and nobody should make them.
I agree with the committee's recommendation that the Bank of England quarterly model should be available to everyone, just as the Treasury model is. In a sense, the Bank should be as transparent as possible in its policy.
On fiscal policy, I am in substantial disagreement with Committee Members opposite and my noble friend Lord Peston about the reclassification of repairs and maintenance. Maintenance and repair are part of gross capital formation. It is only when we want to have net capital stock that we have to take out repair and maintenance properly. This is a private reference for my noble friend Lord Peston but, if we have an improving vintage in machinery, it is difficult to calculate net capital stock at all. The reason we have GNP rather than NNP is because to calculate net capital stock or net income takes a long time. Therefore, a prudent Chancellor would never define his rule in terms of net investment—it would always be gross investment.
This is not a trick. These are difficult issues. There is still no agreement in economics about what is capital, much less how to separate repair and maintenance from net investment. It is not as if somebody has conspired at the last minute to do this. There may be other items which might be reclassified either way. In return, I hope that some day people will say, "It is not investment; it is consumption".
Fashions also change in economics. We are all relaxed about the trade deficit. Committee Members may remember that in the 1980s everyone was up in arms about the trade deficit. Now we are completely relaxed about it because the markets have changed. You can fund any amount of trade deficit because of capital mobility. The horror of trade deficit, which hung over successive British governments, has now disappeared. I remember Lord Shore of Stepney once asking me in complete puzzlement, "What happened to the sterling crisis that used to follow a trade deficit? Where has it gone?". I said, "Look, this is a different capital market".
It is always risky when someone announces a certain rule, implements it too rigidly, and then says, "Ah! Somebody is cheating". My feeling is that the 203GC Chancellor has always been more right than not. Until the Budget, everyone thinks, "Oh God! He's going to miss it this time", but this is about the fifth year that I have heard that he will break the golden rule. Every time, somehow, Houdini-like, he escapes. I predict that, come Budget day, he will have his golden rule satisfied. We will find out on that day because he will produce not only a rabbit out of the hat but, the way that the economy is going, things will be considerably in his favour and he will probably meet the target.
I have a major disagreement, not with the report of the committee, but with the Chancellor in his pursuit of productivity growth. I agree with the committee that there is not much any government can do about raising productivity growth, although they can be remarkably effective in lowering it and many governments have succeeded in that. The mistake is that productivity is actually a misleading and difficult thing to measure. It is not what any government should focus on. What they should focus on—I have said this in the presence of the Chancellor—is whether there are enough profit-making firms in the economy. Productivity does not matter—profitability does. We want profitability.
There have to be a number of profitable firms in the economy. If there are sufficient, the economy is doing well. Profitability is a peculiar thing. With one out of four people in employment in the public sector—where productivity, by definition, does not grow—we will shoot ourselves in the foot if we go down that path. The Chancellor should really be measuring profitability in a systematic way and reporting on that and seeing how tax policy or R&D allowances would affect profitability. That is a much surer way.
I conclude by congratulating the committee on the reports that it has published this year. I am sure that the good tradition will continue with the noble Lord, Lord Wakeham, who takes over from my noble friend Lord Peston.
§ 5.10 p.m.
§ Lord Newby
I, too, congratulate the committee on the report and also on the timely nature of today's debate. It is important that debates on these reports are done in a sensible and timely way because we lose the relevance of the context to a certain extent—certainly in this kind of debate. If the price of having a timely debate is having it in this forum rather than in the Chamber, that is a price worth paying. In any event, this format works very well for this kind of debate.
I also congratulate the noble Lord, Lord Peston, on his swansong in terms of reports. There has been a remarkable series of reports and, despite all the stresses and strains, the noble Lord has been able to maintain a proper set of priorities. When we were looking at the workings of the Monetary Policy Committee a few years ago, we went to Frankfurt in Germany and visited the European Central Bank. In the afternoon, we went to the Bundesbank. The important event of the day, however, was a football match between 204GC Manchester United and Arsenal. The Clerk, who thought that he would have a day of learning about monetary policy, was sent back to the airport to rearrange our flights so that noble Lords would not have to miss the football.
The only problem was that the Bundesbank officials were being rather long-winded in their answers. The noble Lord, Lord Peston, very ostentatiously looked at his watch after proceedings had been going on for about 20 minutes and said, "Well I don't know about you, but we have a very busy schedule". He stood up and we all obediently marched out, caught our early plane and the football match was duly watched. It was a very impressive performance.
Today's report is very wide-ranging and makes a number of significant points and proposals. I join other noble Lords by beginning with a comment on the Government's reply. The noble Lord, Lord Peston, said that the attitude of the Treasury was that it was above criticism. The two words that I had written down before today's debate were "patronising" and "complacent" and that is the tone of the response. It is the typical tone of Treasury responses to reports from your Lordships' House and I do not think that it helps inform public debate when the Treasury frankly cannot be bothered to take anything that we do seriously. We had the same problem when we were looking at the Finance Bill and the Treasury refused to comment on very detailed and thoughtful proposals on completely spurious grounds. It has done the same again and it does neither the Treasury nor its political masters any justice.
Looking at the proposals in the report, the first issue covered was the change in the inflation target, which the committee said was not properly thought through. When the Chancellor changed the inflation target, I thought that the unspoken reason for doing that would be that it would make it easier for Britain to join the euro-zone and I inwardly rejoiced. The Chancellor has not had the courage of his convictions to say whether that is the case—and perhaps it is not—but it is one practical benefit of having adopted this target.
Although I agree in one sense with the noble Lord, Lord Desai, about the limited extent to which inflation measures can influence demand, there is one particular problem that may arise if different actors for different purposes look at different and diverse measures. If that is the case and the Chancellor is right when he says that wage bargaining is increasingly based on the new index, which is rising at a lower rate than the old index, if social security, pension updates and other benefit updates are based on the old index, there will be an increasing divergence between two levels of payment over time. It is an unintended consequence that over a long period, not least on pensions, that could have a very significant impact. It must only be a matter of time before all elements of government decision-making need to be based on one target, which presumably will be the new one.
I was interested to hear what the committee had to say about the impact on inflation of an oil price shock. I shared the committee's concern about the approach 205GC being adopted by the Governor and the MPC. The Governor said that a rise in oil price was a demand shock, and therefore an increase in interest rates was more appropriate than writing a letter to explain why no increase was required. That would be a reasonable response if it were a domestic demand shock, but if the demand shock were happening in China and India and the price of oil were rising for that reason, it is far from clear to me that a relevant policy response in the UK, where demand for oil is not increasing, is to put up interest rates. I was surprised at the Governor's response, and we can only hope that we do not have a significant hike in commodity prices in the short term.
I do not want to go into any great detail about the forecasting period, although I was interested in the committee's suggestion that the Treasury Select Committee and the Economic Affairs Select Committee should have full access to the Government's models. With the exception of the noble Lord, Lord Peston, and possibly other Members of the Economic Affairs Select Committee, a model would not be much good on its own. Most of us would not be able to make much of it unless we had more qualified staff working for the committee who could interpret the model and enable the committee to do something with it. Although there is a case for strengthening the staff of this and other committees, that should be a prerequisite of getting the model.
My suspicion and concern about the way that the MPC operates and looks at the figures has nothing to do with the forecasting record, but the fact that the MPC sees the inflation target as a ceiling, not a symmetrical target. If we look at the way that it approached that central figure—whether it is 2.5 per cent or 2 per cent—I do not believe that those in the MPC believe that a divergence of 0.5 per cent above the figure is the same as a divergence of 0.5 per cent below the figure. I think that they think that if there is a divergence of 0.5 per cent below the figure, that is fine and we do not need to worry, but if it were 0.5 per cent above the figure, they would worry a lot. Therefore, the way that the figure is described is misleading.
Incidentally, I am not sure that a ceiling would not be better than a symmetrical figure, but at the moment, the Bank says one thing and does another. As the committee pointed out, by acting in that way, interest rates have been at a higher level than might otherwise have been the case. I was very interested that the committee believes that there might be a difference of as much as 50 basis points—I am not sure how that figure was arrived at. It seems plausible, but I would be interested to know why the figure of 0.5 per cent, rather than 0.75 per cent or 0.25 per cent, is seen by the committee to be an appropriate figure.
The most important area of the report is that dealing with fiscal policy. We now see considerable concern about how the Government are interpreting the golden rule and fiscal policy more generally. I think the committee is absolutely correct to stress the arbitrariness of the present distinction between current and capital expenditure.
I suspect that the committee can have had no notion when the report was being written that the Treasury was about to influence the ONS to shift the definition 206GC of current expenditure on road repairs so that that became capital expenditure. The ONS had a marvellous explanation for that. It made the decision independently of the Treasury. To use its words, the Treasury had "influenced the decision" but the influence had not been improper. That is all right then. It demonstrates, among other things, that whatever else the ONS is, it is not independent of the Treasury and does not believe that its role is to be independent of the Treasury.
My concern with last week's decision is not simply that it undermines the credibility of the golden rule, but also that it opens the way in which the credibility of the golden rule can continue to be undermined. If you count road repairs as capital expenditure, why can you not count school repairs, hospital repairs, or virtually anything? I dare say that in years to come as times get tough, as undoubtedly they will, the Treasury will be influencing, not improperly, the ONS to include these other things.
It is in everybody's interest to get a measure of consensus about how the golden rule operates. All parties agree that in principle it is a good idea. There are a number of ways that it could be done. The ONS could be made more independent of the Treasury. That might be done partly by having the head of the ONS appointed by somebody other than the Chancellor. I also like the idea of having for the ONS, not the statistics commission model, but more the court of the Bank of England model—a group of people who cluster around the staff and give it support against influences, proper or improper, from elsewhere. That would help.
The other thing—and I have bored the House on this before—is that it would be helpful if the National Audit Office had a capability to look and audit the assumptions being made by the Chancellor across the piece as he makes his Budget judgment.
Finally, I should like to say a small amount about the supply side of the economy and productivity. While I agree with the noble Lord, Lord Desai, that it is a slightly slippery concept and, depending on how you measure it, you can get very different answers, I believe that it is a good proxy, possibly a better proxy than profits in many cases, for judging how well an economy is doing on international competitiveness, which is so important.
I agree with the committee that micro-managing productivity, as it were, will not work and that further tax incentives and regulation is inappropriate. The one area that I will stress even more than the committee did is the role that the Government play via the education system in increasing or retarding the level of productivity growth.
I was amazed and appalled last year to be told by the chief executive of the Learning and Skills Council in Yorkshire and the Humber that in that region 27 per cent of over 16 year olds were functionally incapable of understanding the Yellow Pages. If you have that level of basic inability, it is very difficult to pursue an effective productivity agenda up and down the skills level. It is very important, therefore, that the 207GC Government press on with reforms to the education system to improve the level and status of vocational education.
I am slightly surprised and saddened that the new Secretary of State seems to be in danger of ghettoising vocational training, even as she boosts it. I have some sympathy with the concerns expressed by the chairman of the Education Select Committee in another place about the possibility, or likelihood, of a two-tier system in education between vocational and academic being enhanced rather than removed by the Secretary of State's current plans. However, that is a debate for another day. I conclude by congratulating the committee, in particular the noble Lord, Lord Peston, for this report. I wish the noble Lord, Lord Wakeham, well for his stewardship of the committee in the year ahead.
§ 5.25 p.m.
§ Baroness Noakes
It is always a privilege to take part in making history, in this case the first time that a report of a Select Committee of your Lordships' House has been taken in Grand Committee. At this stage, I am agnostic as to whether it is a good move, especially as it is scheduled on an afternoon when there will be Divisions, which disrupts the flow of the debate. I completely see that it is better to debate Select Committee reports earlier rather than later, so that we do not get into the position that we had, both this year and last, of having a backlog of debates.
Pushing the debates into Grand Committee is only tackling the symptoms of the problem, and not the root cause, which is to do with the way in which the work of your Lordships' House is overburdened by the legislative programme clogging up what goes through this House. Of course, the Government's work must have priority, but there are a number of factors: the number of Bills; the complexity of Bills; and most importantly the way in which Bills arrive in your Lordships' House. The effect of so-called modernisation in another place is that we are not receiving Bills that have had full scrutiny there. Therefore, we get Bills that require major modification, which in turn takes up a lot of our time.
One example is the Pensions Bill, which dealt with an area on which the Government had spent several years trying to work out their policy. It had been through another place, but when it came here it still had to have 684 amendments, most of which were government amendments, to make it just about fit for purpose when it left here. I am sure that even after that some parts of the Act will be found not fit for purpose. In due course, we will judge whether these sorts of debates in the Moses Room are acceptable. I have said that I am agnostic, but noble Lords might gather that I am on the sceptical end of agnostic—I am certainly not a true believer.
Like other noble Lords, I thank the Economic Affairs Select Committee for its hard work in producing yet another stimulating report. I particularly thank the noble Lord, Lord Peston, for his final offering in his capacity 208GC as chairman of the committee. The report has all the hallmarks of his approach, which is both rigorous and challenging. We thank him for all his work. My noble friend Lord Wakeham knows that he has a hard act to follow as chairman of the committee.
It would be nice to be able to say that we welcome the Government's response to the report of the Select Committee, but the response is no exception to the general rule that government responses are disappointing. We have here a combination of avoiding the question and self-delusion, and I am also prepared to sign up to "patronising and complacent", in the words of the noble Lord, Lord Newby. The response also does one of the Treasury's favourite tricks, which is referring the committee to one of the Treasury's many other publications. So, the Treasury's response to the committee's recommendation at paragraph 91 about the trade deficit—about which the noble Lord, Lord Sheldon, spoke—did not contain a substantive reply. The Treasury said in effect, "Go away and read our Pre-Budget report". No attempt was made to answer the recommendation in terms. That is not good enough.
In several places, the Treasury's response is along the lines that it does not comment on the decisions of the Monetary Policy Committee. This arises in connection with the recommendation at paragraphs 35 and 43 about the impact of house prices and oil prices on interest rate decisions. It comes up again in response to paragraph 91, which raises concerns about the level of interest rates—my noble friend Lord Northbrook made some valuable points about those issues.
At one level, the distancing of the Government from the work of the Monetary Policy Committee seems to be consistent with the independent status of the Monetary Policy Committee in relation to interest rates, but I suggest that the Treasury's response is superficial and ignores the proper role of government. I agree that the Government should not comment on individual interest rate decisions. It would cause real difficulties if Horse Guards Road routinely blared away at Threadneedle Street when the monthly interest rate decision was announced. But the Government have a proper role in ascertaining whether their policy—as set out in the Bank of England Act 1998—is working well in practice.
Like the noble Lord, Lord Barnett, I am sure that the Treasury has views on how the MPC handles interest rate decisions and the various factors that lead to them. The Government should certainly satisfy themselves that the outcome of those decisions is not systematically biased in favour of interest rates being too high or too low, because that is how well their policy is working in practice. The Government must have an ongoing responsibility for the effectiveness of their chosen method of implementing monetary policy independence.
The Government are well placed to have views because, as the noble Lord, Lord Barnett, said, a member of the Treasury's staff is present throughout the Monetary Policy Committee's deliberations. The noble Lord, Lord Sheldon, asked the Minister a number of 209GC questions about the Treasury's man in this process. I have a suggestion to make to my noble friend Lord Wakeham for when he plans the work programme of his committee: the role of the Treasury's representative in the interest rate setting process would repay careful consideration. At the moment, it is a very murky area. The Treasury's man is not mentioned in the statute, but we know from evidence that he is there throughout. We ought to be more informed about that.
The Government are saying to the Economic Affairs Select Committee that they are not prepared to have a dialogue with the committee about what happens at the MPC. That is arrogant and unsatisfactory. How the interest rate setting process works in practice and its effectiveness are legitimate areas for public debate and are certainly legitimate for a Select Committee of your Lordships' House.
Let me now turn to the Government's self-delusion in this report. In paragraph 83 of the committee's report, the committee recommends that the Treasury undertakes a review about having more independent scrutiny of fiscal policy. The Treasury does not explicitly reply to this recommendation. There is no real surprise there. Instead, we get a litany of self-praise from the Treasury. Part of it says that:The Government has put in place a transparent framework for the conduct of fiscal policy".It goes on to cite as evidence the National Audit Office's so-called audit of the assumptions underpinning the Budget.
We welcomed the involvement of the National Audit Office in reviewing the budgetary assumptions when it was originally announced. But I do not think that we would have been so effusive in our praise if we had thought that the relatively modest role of the NAO would be as magnified and over-played as it has been. The truth is that the NAO is allowed to look at only what the Chancellor says it can look at. The Treasury, not the NAO, sets the audit agenda. How independent is that?
Secondly, the NAO audit the 11 so-called "key assumptions" on a rolling basis and not every time that the assumptions are used. And so, for example, it last looked at the tax yield this time last year, but it did not look at the picture overall at the time of the Budget last year. When the Chancellor prepared his Pre-Budget report last December, it did not look at anything.
Another example is GDP growth. The NAO has in the past looked at the trend rate of GDP growth but it never looked at the GDP growth assumptions in the Chancellor's figures. Therefore, it gives no audit evidence about them. It is precisely because the current framework is not transparent and robust that my party has proposed that a fiscal policy committee be set up within the NAO and made responsible for economic modelling. The FPC would comprise independent experts appointed by the Comptroller and Auditor General. There would also be much more disclosure about the model and forecasts than the Treasury currently allows.
We completely agree with the Economic Affairs Committee that fiscal policy cannot be transferred to an independent agency. That is properly the role of 210GC government. But it is crucially important that fiscal policy is based on data which is open to scrutiny and properly validated. That does not describe the process which currently exists. I know that the committee took evidence from my right honourable friend Oliver Letwin last year. His thinking has evolved considerably since then and I hope that the committee get an opportunity to take evidence from him again.
The noble Lord, Lord Barnett, constantly reprimands me for making party political points and he did so again today. I shall therefore refrain from commenting on whether the committee should take evidence from my right honourable friend in his capacity as Chancellor or as shadow Chancellor in the future.
I had not expected the role of the Office for National Statistics in the classification of repair expenditure to be raised today. On Wednesday, we have a debate on the adequacy of national statistics which my noble friend Lord Marlesford has secured. My noble friend Lord Trenchard and the noble Lord, Lord Barnett, seem to have established a cross-party consensus on the apparent case for the Treasury, together with the ONS cooking the books in relation to roads expenditure. I hope that Members of the Committee who have spoken on that subject today will join us in that debate on Wednesday. However, I would value hearing the Minister's views on the correct treatment of road expenditure.
§ Baroness Noakes
It would be valuable if the Minister would say something today as it has arisen from the contribution of so many Members.
I conclude by repeating our thanks to the noble Lord, Lord Peston, for an excellent report and for our collective opportunity today to make history.
§ 5.38 p.m.
§ Lord McIntosh of Haringey
It is a great pleasure for me to take part in a debate on a Select Committee report in Grand Committee. Although I began as an agnostic, I have moved in the direction of a true believer rather than towards my instinctive atheism on the issue. I think it is much more important for these reports to be debated quickly than to have any minor inconveniences which might exist as a result of their being debated in the Moses Room.
When I look around me, as I have throughout the debate, I see that the attendance has been at least as high and probably higher than it often is in the Chamber. That is a tribute to my noble friend Lord Peston and his committee and also to the suitability of a Grand Committee for these proceedings. I join those who say that it is better to do it quickly here than too late somewhere else. The committee's report is already something like two months old, and the evidence goes back well over a year. I started reading the evidence over the Christmas holidays. As always, much as I admire the report, I 211GC find the evidence even better. I am sure that my noble friend Lord Peston does not take offence at that. It was fascinating, some of it for historical reasons.
Before I leave the subject of the Grand Committee, I should say that I have a lot of sympathy with what my noble friend Lord Peston says about TV cameras and a feed for it. The debate is on a specialist interest; not many people would watch it on the Parliament channel, but it would be more than you think. TV would give such debates a wider audience that would be difficult to achieve otherwise.
I have said in general terms how much I appreciate the report, but I particularly want to pay tribute to the chairmanship of my noble friend Lord Peston over the six years. He and I. and he and the Chancellor, have had some disagreements about the sub-committee concerned with the Finance Bill, but there has been no disagreement about the main work of the committee, which has been a triumph. He is to be enormously congratulated on his work, and we wish the noble Lord, Lord Wakeham, well in the task of continuing.
I wrote down that I sensed an undercurrent of disapproval at the Government's response to the report.
§ Lord McIntosh of Haringey
I crossed that out, because what started as an undercurrent became a tsunami. I recognise that there has been universal disapproval of the Government's response. Some of that is endemic; there has been disapproval of the Government's responses to all the reports of my noble friend Lord Peston. He has disapproved of all of them and— although he may not have used the words of the noble Lord, Lord Newby—has always thought them patronising and complacent. Nevertheless, that is a general thread that goes between the Treasury and the House of Lords, and there is very little that I can do about it.
I want to make a particular point, however. A very large part of the proceedings of the committee—its questioning and its report—has been about the performance of the Monetary Policy Committee and the Bank of England's execution of monetary policy. It is a centrepiece of the Government's reforms to the monetary policy framework, made in 1997, that the Monetary Policy Committee was established and that the Bank of England was given full operational independence on monetary policy from the Government.
That was the right decision. It was not always agreed at the time to be so, but it has now been recognised by all political parties as right. It has certainly proved better than what went before. It is a pivotal part of that independence that the Government do not comment on the monetary policy decisions taken by the Monetary Policy Committee.
The noble Lord, Lord Northbrook, asked whether I agreed that interest rates were kept too high between 2000 and 2003. The noble Lord, Lord Newby, asked me whether I did not think that the Monetary Policy Committee had treated the 2.5 per cent—now the 2 per 212GC cent—as a ceiling rather than a symmetrical target. I cannot possibly answer questions like that, as they know perfectly well. They know also that that applies to a very large number of the recommendations in the report, which accounts at least in part for the dissatisfaction with the Government's response.
There are things that I can say about the Monetary Policy Committee because specific questions were asked about their procedures. My noble friend Lord Sheldon and the noble Baroness, Lady Noakes, asked about the role of the Treasury representative who sits in on those proceedings. The Permanent Secretary or the managing director for macroeconomic policy and international finance indeed sits in on the proceedings of the Monetary Policy Committee, but his role is to answer questions on fiscal policy to ensure that there is proper coherence between fiscal and monetary policy—which is what we are all looking for, and which is the theme of the report, as I understand it. It is not his role to express views on monetary policy, which has been devolved to the Monetary Policy Committee. Therefore, his views will not be expressed in the reports of the Monetary Policy Committee; nor should they be.
My noble friend Lord Sheldon asked me a specific question about how often the casting vote had been used. My understanding is that it has been used only six times since 1997.
The noble Baroness, Lady Noakes, very much surprised me, because I had understood that there was general Conservative support for the independence of the Bank of England and the Monetary Policy Committee. I shall have to read carefully what she said before I make a definitive comment. I thought that she was veering back towards the "Ken and Eddie show" and the idea that there should be discussion between the Treasury and the Bank of England on the issues that had been devolved to the Monetary Policy Committee—"dialogue" was the word that she used. I am not sure that I have found that view reflected in the position of Oliver Letwin.
Having said what I can say about the work of the Monetary Policy Committee, it is important that I say more about the macroeconomic framework, which is the basis of government policy and the underlying thrust of the committee's report. The Government's macroeconomic framework is designed to maintain long-term economic stability, which allows businesses, individuals and the Government to plan more effectively for the long term, improving the quality and quantity of investment in physical and human capital and raising productivity. It is based on transparency, responsibility and accountability. It seeks to ensure low and stable inflation.
By the way, I do not think that I shall go back to the debates that we had on the then Bank of England Bill. I heard the dread phrase "subject to that" used again by my noble friend Lord Barnett. At that time, we took a decision. I am sure that it was the right decision. On the whole it has been recognised as such. We have only one primary objective for the Monetary Policy 213GC Committee, and other considerations are taken into account subject to that one objective. If you have multiple and potentially conflicting objectives, you in effect have no objective.
The monetary policy framework seeks to ensure low and stable inflation. The fiscal policy framework seeks to ensure sound public finance and to ensure that spending and taxation impact fairly and between generations—I shall come back to that in a minute—while allowing fiscal policy to support monetary policy over the economic cycle. There are two fiscal rules to that framework. The foundation of the Government's public spending framework facilitates long-term planning and provides departments with the flexibility and incentives that they need to increase the quality of public services and deliver specified outcomes. The policies work together in a coherent way.
I have a series of notes about how successful monetary policy has been, but I can spare the Grand Committee that. Since the monetary policy framework's introduction, it has consistently delivered inflation close to the Government's target. It is 2 per cent for the 12-month increase in CPI inflation. Between May 1997 and December 2003, the target was for a 2.5 per cent increase in RPIX inflation. That monetary policy framework is based on four key principles.
First, there should be clear and precise objectives. Secondly, there should be full operational independence for the Monetary Policy Committee. Thirdly, there should be openness, transparency and accountability—we have only to contrast the minutes of the MPC with what comes from the European Central Bank to see that. Fourthly, there should be credibility and flexibility.
The MPC has the discretion to decide how and when to react to events within the constraints of the inflation target. If inflation deviates by more than 1 percentage point—this is where I think I start to agree with the noble Baroness, Lady Noakes, about the constraints on the Monetary Policy Committee—the Governor of the Bank of England must explain in an open letter to the Chancellor the reasons for the deviation, the action that the MPC proposes to take, the expected duration of the deviation and how the proposed action meets the MPC's remit. In the concluding statement to its Article IV mission in 2004, the IMF stated:The recent success of monetary policy stems in no small part from a strong policy and institutional framework. Credibility is underpinned by the success in achieving low and stable inflation and is reflected in well-anchored expectations".
I now come to the issue that occupies a good deal of the committee's report—the switch to the new inflation target in December 2003 and the accusation that it was not well thought out. That puzzled me. The noble Lord, Lord Newby, referred to the fact that at the time of the assessment for entry to the euro the Chancellor had foreshadowed that the target would change to what was then called the Harmonised Index of Consumer Prices. I do not think that the noble Lord had any justification for his assumption that it was being done so that it would be easier to join the euro-zone. That is a nice thought on his part, but it is not the 214GC basis on which it has been done. The National Statistician then said that it should be changed to the Consumer Prices Index. All other aspects of the monetary policy framework remained unchanged.
There were three major advantages in the new target. None of them contradict the point that was quoted from the statement of the Governor of the Bank of England about the significance for monetary policy. First, the CPI better allows for the substitution of cheaper for more expensive goods and services within expenditure categories when relative prices change. Therefore, it may be considered a more realistic depiction of consumer behaviour. It can be updated and changed rather more quickly. I do not know what to give as examples, but there are many examples of ways in which the basket of goods and services has to be changed over time. Secondly, the CPI has a wider population coverage and is more consistent with national accounts principles of consumer expenditure, so it shares a coherence with other economic statistics and gives a better picture of spending patterns in the United Kingdom. Thirdly, it is a more comparable measure of inflation internationally and represents international best practice.
How has that worked out in practice? The PBR in 2003 said that the difference between CPI and RPIX inflation was expected to narrow markedly from 1.3 percentage points in October 2003 to 0.5 percentage points two years later. That happened. In the January figures that were announced last week, the difference between the two is 0.5 per cent. Therefore, the predications that were made at the time seem to have been accurate. We expect the differential to remain broadly stable thereafter depending, of course, on a range of economic factors.
The Governor of the Bank of England indeed said that the change in target does not have major significance for monetary policy. My noble friend Lord Peston seems to think that there is an inherent conflict there. I do not. I think that the changes that were made to bring the index into line with international best practice and to give a better picture of spending patterns does not imply a change in monetary policy, particularly because for all other purposes, the RPIX is being maintained.
I am not alone in disagreeing with the noble Lord, Lord Peston. The OECD's economic survey of the United Kingdom in March last year stated:[The new inflation target] should not, however, represent any fundamental policy shift".We announced the measure well in advance and have discussed it over and again. Full details have been given in Remit for the Monetary Policy Committee of the Bank of England and the New Inflation Target, which accompanied the Pre-Budget Report in 2003. Supporting analysis was provided by the Office for National Statistics. The Bank of England has published material and the IMF, in its concluding statement to the Article IV mission in 2004, said that the change in the inflation target was well communicated and well understood by financial markets. On that issue, I rest my case.
Of course, there are matters arising that are worthy of discussion and were raised in the debate. My noble friend Lord Peston asked a perfectly reasonable 215GC question about the assumptions in movements in real wages. My answer is that such movements are affected not only by the measure of inflation—it is measured by the central bank—but also by related supply and demand, occupation, region, unemployment rates and so on. The change in the target did not change the underlying level of inflationary pressure in the economy, which feeds into wage demands. Such measures are clearly significant and have to be recalculated.
We then move on to the fiscal policy framework and co-ordination between fiscal and monetary policy. Again, the key facts are entirely favourable. The average surplus on the current budget since 1999–2000, which on our provisional judgment is the start of the current cycle, is positive in every year of the projection period. With the Treasury projecting the economy to return to trend by 2006, there is a margin against the golden rule of £8 billion in that cycle including the AME margin—that is, the demand-led part of public expenditure.
Net debt remains well below the 40 per cent ceiling set in the sustainable investment rule. It is projected to stabilise at 37 per cent of GDP by the end of the projection period—£59 billion below that implied by the 40 per cent level. The United Kingdom's public finances compare favourably with other major economies. No other G7 country has had lower average government debt and deficits since 1997 than the United Kingdom.
The fiscal framework is based on five key principles—transparency, stability, responsibility, fairness and efficiency. The fiscal policy objectives are: over the medium term, to ensure sound public finances and that spending and taxation impact fairly and between generations; and, over the short term, to support monetary policy, and in particular to allow the automatic stabilisers to help to smooth the path of the economy. Two rules underpin the fiscal framework—the golden rule and the sustainable investment rule.
Is this a time-limited debate?
§ Lord McIntosh of Haringey
Well, I am told that I have one minute, and I had not quite finished. I wanted to talk about the golden rule, which was raised by my noble friend Lord Barnett and the noble Viscount, Lord Trenchard—and, helpfully, by my noble friend Lord Desai.
§ Lord McIntosh of Haringey
I think that, in the announcement of the changes proposed by the Office for National Statistics, some spending recorded as current expenditure would instead be classified as capital investment to comply with national accounts definitions. We have the opportunity to debate that on Wednesday, in a debate to be opened by the noble Lord, Lord Marlesford, who I am glad to see in his 216GC place. Even so, on 28 February the Office for National Statistics will publish a full explanation of this change and the estimated effects. Therefore, I am afraid that the debate on Wednesday will be inadequately informed. The timing is unfortunate, but there is nothing that I can do about it.
The noble Viscount, Lord Trenchard, repeated the request for an independent statistics office and an independent body on fiscal policy, but the noble Baroness, Lady Noakes, properly answered that. In the end, fiscal policy and taxation policy is a matter for the government and must remain so. As for the independence of the Office for National Statistics, I hope that if the noble Viscount looks at the distinction and independence of Sir John Kingman and Dr David Rhind, who head the Statistics Commission, he will see that we have taken adequate steps to deal with that.
I was asked a number of related questions. I cannot remember, but it may have been the noble Lord, Lord Peston, who said that all public expenditure is tax-based; indeed it is. It is tax-based immediately if it is current expenditure, and it is tax-based if it is future expenditure by future generations. The issue of inter-generational fairness, which the noble Lord, Lord Peston, rightly raised, is important. I have always been of the view that the golden rule about not borrowing for investment, other than for investment within the economic cycle, is recognition of our requirement for inter-generational fairness and inter-generational justice. Of course, that is a crude measure, and there are times when it will go wrong. There are particularly times when provision for pensions will distort that, but fundamentally it is the correct way to move.
The noble Lord, Lord Barnett, asked me what is the definition of investment for this purpose. We use the Office for National Statistics definition, which is the measure of net investment used in the national accounts. As for value for money for investment, we assess that by the PSA targets. I am not going to comment on the issue of how the MPC deals with house price inflation, except to acknowledge that the noble Lord, Lord Sheldon, is right; there are huge fluctuations, and it must be extraordinarily difficult to deal with. I will certainly not comment on the sensible point made by the noble Lord, Lord Wakeham, about the precedence in the mind of the MPC of the inflation target and financial stability. There are many academic publications to come from such a question.
The noble Lord, Lord Newby, was the first to raise the issue of productivity, which rightly plays a part in the report. He is right to say that our skills levels are critical for productivity purposes. Our skills levels are rising; the proportion of economically active people in England with no qualifications at all dropped from 6.1 per cent to 5 per cent over the period of this Government. The proportion of people qualified to below level 2 also decreased from 24.2 per cent to 16.5 per cent. The proportion qualified to level 4 or above—in other words with higher qualifications— 217GC increased from 23.7 per cent to 30.2 per cent over this period. However, I entirely take his point about the necessity of vocational education. We agree with the report's conclusion that improvements to the supply side of the economy are highly desirable.
I have tested your Lordships' patience more than I would have wished to. I have enjoyed today's debate, and many interesting and worthwhile points have been made. It has been a pleasure to close this debate on behalf of a Government that is proud of their record of economic management, particularly of their co-ordination of economic and fiscal policy. Long may the Economic Affairs Select Committee continue to produce reports as good as this one.
§ Lord Peston
I thank my noble friend for his reply. He must find this sort of thing immensely exhausting—
§ Lord Peston
Ah. Then I will not even make my final remarks, because I do not think that we want to come back again—
§ Lord Peston
I am aware of the Division Bell, but I really think you ought to let me bring this to a close.
§ Lord Peston
It is a serious point concerning the way in which this committee will behave if we are made to stop now. It might well influence major decisions in future. I really do think that I ought to be allowed to thank all contributors to the debate, which has been excellent. There has been a good atmosphere in this rather small room. I hope that, subject to the television point, which my noble friend also made, we will have the courage to do this kind of thing again in future, bearing in mind that it is always the same group of old lags that take part in these debates anyway. It is nicer to do it in these surroundings rather than in a large, empty Chamber.
On Question, Motion agreed to.
§ [The Sitting was suspended for a Division in the House from 6.7 to 6.17 p.m.]