Economic and Fiscal Strategy

HL Deb 28 July 1998 vol 592 cc1409-28

7.27 p.m.

Lord McIntosh of Haringey rose to move, That this House approve the Government's assessment as set out in the Economic and Fiscal Strategy Report 1998 and Comprehensive Spending Review for the purposes of Section 5 of the European Communities (Amendment) Act 1993.

The noble Lord said: My Lords, this debate is being held to satisfy Section 5 of the Maastricht Act. Parliament has to approve the government reports on economic policy that contain the information that is sent to the Commission or the Council for the purposes of Articles 103 and 104c of the Maastricht Treaty. The Act requires that Parliament approves an assessment of the medium-term economic and budgetary positions, including public investment expenditure as well as social, economic and environmental goals. These are the aspects of the Economic and Fiscal Strategy Report and the Comprehensive Spending Review upon which I will focus.

This will be the second Section 5 debate this year. After the Financial Statement and Budget Report was published, a Section 5 debate was held in the House of Lords so that we could send the information in the Budget to the Commission. However, the public finance projections are now out of date. The Economic and Fiscal Strategy Report and the Comprehensive Spending Review are a major statement on fiscal policy, setting out the Government's latest fiscal projections based on new spending plans. It is appropriate that these form the basis of submissions to the Council and the Commission. We must have Parliament's approval before we send information taken from these documents to fulfil our obligations under Articles 103 and 104c, the broad economic guidelines and excessive deficit procedure respectively.

The Economic and Fiscal Strategy Report outlined a new regime in public spending control and the Comprehensive Spending Review set out new priorities for public spending and investment. This strategy combines prudent and stable public finances with investment and reform in public services.

The Economic and Fiscal Strategy Report also helps to pave the way for the introduction of resource accounting and budgeting, which represents a landmark change in the way that the Government undertake financial planning and reporting. The first set of resource accounts are on track to be published in 1999–2000. These will be accruals-based accounts similar to those prepared for private sector companies but with two additional features—a statement showing use of resources approved by Parliament, and a statement analysing spending by objective.

Resource accounting and budgeting will underpin the Government's golden rule by making a clear structural distinction between current and capital spending, which will no longer be treated as though they are equivalent economic categories. It will also lead to improvements in the efficiency of public spending and underpin the drive towards better stewardship of public assets so that they are used as productively as possible. Thus RAB is integral to the strategy of investment, reform and modernisation that underpins the Comprehensive Spending Review.

Within a stable fiscal and macroeconomic framework, the Government can fulfil their objectives of promoting growth and employment, enhancing opportunity and fairness, tackling social exclusion and providing an efficient and modern public sector.

The EFSR shows that public sector net borrowing is expected to fall from 1 per cent. of GDP in 1997–98 to zero in 2000–01 and net debt is projected to decline to below 40 per cent. of GDP over the Parliament. Nonetheless, net public sector investment is projected to rise from less than 1 per cent. of GDP in 1997–98 to stabilise at around 1½ per cent. of GDP per annum.

This public investment will allow the renewal and modernisation of the United Kingdom's infrastructure and public services by increasing the level of public investment within the fiscal rules. It will be used in the most cost-effective way, with departments having to set out in detail how the resources will deliver the Government's objectives, provide the best value for money, and ensure positive social returns.

The CSR and EFSR, especially the increase in public investment, show how the Government will tackle their social objectives. This investment will help the Government fulfil their manifesto commitment of reducing class sizes to 30 or less for children between five and seven. The past under-investment in council housing will be alleviated by extra investment of £3.6 billion.

In the year of its 50th birthday, the NHS is being allocated an extra £21 billion over the next three years. Spending in England will increase by an average 4.7 per cent. in real terms over this period. This will provide real improvements in services, including a reduction of 100,000 in the waiting list that we inherited.

The CSR will help us meet our environmental objectives. A doubling of resources for the revised home energy efficiency scheme, and an increase of 300 per cent. of resources for local authority public transport to tackle car congestion and pollution will help us to meet our legal obligations under the Kyoto Protocol to cut UK emissions of greenhouse gases by 12½ per cent. on 1990 levels by 2010.

Sending details about our economic policies set out in the EFSR and CSR to the Commission and the Council is not merely an obligation under the Maastricht Treaty. The Government are committed to the sharing of information. And we support this type of multilateral surveillance in different organisations such as the IMF and OECD.

Sharing information will help to promote the adoption of sound economic policies throughout the Community. Only if we play our full part in these discussions can we influence the way Europe solves its economic problems which will be particularly important at the launch of the single currency.

Our achievements during our presidency show what can be done by working closely with the other member states of the European Union. We have established a new European way for economic reform, examining how to improve labour markets, product markets and capital markets. We have begun to address the reforms necessary for successful enlargement to the east. In our presidency the single currency was successfully launched.

As your Lordships know, the Government have decided not to participate in the single currency at its launch in 1999. However, we want the single currency to be successful as we will be affected whether we participate or not. Most of our trade is with the EU, and our economic future is bound up with Europe. Sharing information will help ensure that the single currency is a success.

Approving this Motion will enable the UK to meet our treaty obligations, to provide information and to participate fully in the important process of multilateral surveillance and economic co-operation as provided for in Article 103 and 104c of the treaty. I hope that the House will support the Motion. I beg to move.

Moved, That this House approve the Government's assessment as set out in the Economic and Fiscal Strategy Report 1998 and Comprehensive Spending Review for the purposes of Section 5 of the European Communities (Amendment) Act 1993.—(Lord McIntosh of Haringey.)

7.35 p.m.

The Earl of Dartmouth

My Lords, first, I should declare an interest to the House. I have the honour to be standing for my party in my home area of Yorkshire in the Euro elections next year. Of course, I doubt whether the electors have as strong an interest in the Government's assessment as set out in the Economic and Fiscal Strategy Report 1998 and Comprehensive Spending Review for the purposes of Section 5 of the European Communities (Amendment) Act as I have. However, as the noble Lord, Lord McIntosh, has ably demonstrated, this seemingly innocuous proposal addresses some of the key issues which face our country in the years to come: namely, the Maastricht criteria; our adherence to the criteria; cycle convergence; and the possibility of our entry into the euro. These are issues of great importance for the House, for the electors of Yorkshire as well as elsewhere, and I crave the indulgence of the House to address them for a few minutes.

I should like to start from the proposition that it is a very tall order for a central bank to achieve the correct interest rate, however correctness is defined, for 11 countries with 11 differing economies. By way of illustration, Mr. Eddie George and his very able advisers at the Bank of England find it hard enough to come up with the right interest rate for only this economy in this country. Perhaps I may give your Lordships a further illustration. The reality is that the current level of interest rates in Britain is probably about right for, let us say, the housing market in SW1. But arguably—and I believe it—interest rates are much too high from the point of view of manufacturing industry in the North West, the Midlands and in Yorkshire.

The 11 countries joining the euro on day one have set themselves a massive task. I should like to make it clear—and in so doing I echo the words of the noble Lord, Lord McIntosh—that we wish them well. We want the euro to work. It is in our national interest that the euro should work. However, confidence in the eventual success of the euro is hardly helped when one observes the way in which the politicians of continental Europe have systematically evaded treaty obligations and the Maastricht criteria have been comprehensively fudged as the British president stood by. That is why the fact of this submission to the European Communities has an almost Salvador Dali surrealist quality.

I wish to make the important point, which is hardly ever made, that the British economy is different both in cycle and in structure from the continental economies. It is different in cycle precisely because it is different in structure. I do not wish to impose too much on your Lordships' patience, but perhaps I may give four lightning examples of how our economy differs in structure from the continental economies. We have a bigger services sector; we have a much bigger financial services sector; we have a housing market financed almost entirely by variable mortgages as opposed to fixed-rate mortgages; and we are an oil exporter while continental Europe is not. I could continue. Our economy significantly mirrors the economic cycle of the United States. If one had to choose a country for Britain's economic cycle to mirror, the objective choice would have to be the world's largest, most dynamic, most job-generative economy; that of the United States.

Furthermore, the current exchange rate of the pound and our interest rates, to which I alluded earlier, are much more aligned with the dollar and interest rates in the United States than with the deutschmark and the current level of interest rates in continental Europe. How bizarre, therefore, that so many of the political establishment regard it as a desirable aim in itself, needing no logical justification, for Britain's economy to converge with the stagnant, high-employment economies of continental Europe. The material problem facing the 11 countries entering the euro in phase one is not the number of currencies but the number of unemployed. That is very largely because of high taxes, high costs and unnecessary regulation.

My final and most substantive point is that in the Thatcher/Major years, Britain painfully restructured and began to become competitive in the world economy. Until and unless the 11 follow that example, whatever the convergence may appear to be and whatever this government assessment may purport to give, it will be folly for this country to enter the euro.

Baroness Nicholson of Winterbourne

My Lords, before the noble Earl sits down, since he pointed in my direction at some point in his speech, perhaps he will answer a small question. When he talks about continental Europe, does he exclude Eire from membership of the European Union or does he look both ways?

The Earl of Dartmouth

My Lords, I should be delighted to answer a very large question from the noble Baroness, not just a little question, which she asks with her customary charm. I am conscious of imposing on the good will of the House. I could have listed all 11 countries, 10 of which are in continental Europe and one of which is not. Continental Europe is simply a shorthand term for all 11 countries. But on another occasion, if the noble Baroness is in the Chamber, I shall enumerate all 11 countries, mentioning Eire first.

7.43 p.m.

Lord Alli

My Lords, I rise during the dinner hour to make my maiden speech on the Motion standing in the name of my noble friend Lord McIntosh about the Government's Economic and Fiscal Report and their Comprehensive Spending Review. I shall speak in support of the Government's actions in respect of those matters.

I was offered two main observations about your Lordships' House before being introduced last Tuesday. The first was that your Lordships' House is a friendly and extremely courteous place. I am pleased to say that I have found that to be so. The second observation was that your Lordships' House is a quiet place. Since I was introduced, it has certainly not been that. We have debated the Northern Ireland (Sentences) Bill, the National Minimum Wage Bill, the Scotland Bill and the Commons amendments to the Crime and Disorder Bill, which contained at least one issue of great interest to the press. I do not complain; I feel honoured.

As many of your Lordships will know, I cut my teeth in business. I run a large media company which I founded with two partners several years ago. I welcome the Government's stated economic objectives of, high and stable levels of growth and employment, and sustainable public services, built from a platform of long term stability". As a businessman and company director, I can say that a stable economic environment helps long-term planning and avoids short-term decision-making. I strongly endorse the measures which the Government have outlined towards achieving those objectives, some of which have already been implemented, particularly as many of those measures have been standard practice in business for many years.

As your Lordships know, the process of reform outlined by the Chancellor of the Exchequer took place through a two-stage process. I should like to pay particular tribute to the Chancellor for his achievements in relation to those reforms and both his Budgets.

First was the Economic and Fiscal Strategy Report, which was published on 11th June. That report set out the Government's four main objectives for fiscal and monetary reform: first, prudence and responsibility and the golden rule that over the cycle, current spending will be covered by revenues—for all business, that is an essential principle and for the business of government it is a good principle that is well heeded; secondly, redefining the role of government through spending priorities so that, where the Government should act, they do so vigorously and, where government interventions are unnecessary or restricted, they do not act at all; thirdly, not taking a dogmatic or ideological stance on publicly-owned assets but applying a new test to meet the public interest; and finally, investing for reform by linking departmental spending to the Government's modernisation and reform programme.

The report outlined also the underlying principles which underpin the Comprehensive Spending Review; namely, breaking the short-termist climate. Short-term decisions made by government or in a board room lead inevitably to long-term problems. I welcome the abolition of the annual spending round and its replacement with departmental plans and fixed budgets for three years. I welcome also the division between revenue and capital budgets, which for many companies has been standard practice for many years. I welcome also the promotion of new public/private partnerships to pay for the Government's investment programme. There are many people in the private sector who can help the Government to achieve their objectives while furthering their own commercial aims.

I welcome also the review's commitment to promoting opportunity and fairness and to providing efficient and modern public services. I also welcome the announcement of a substantial investment programme for our public services—£19 billion for education. Before the general election, the Prime Minister made clear that his top priority was education. As a board member of the Teacher Training Agency, the government organisation responsible for the recruitment and retention of teachers, I welcome the Government's commitment to education. Investment in education is not only an investment in our young people; it is an investment in the future of us all. Our young are our future. However, I accept that education is not only for the young.

Another area which I am particularly keen to highlight is investment in the arts, media and sport. I am also a member of the Government's Creative Industry Task Force. I welcome the extra £290 million announced last Friday by my right honourable friend the Secretary of State for Culture, Media and Sport. I pay particular tribute to the Secretary of State for securing that investment when so many before him have failed. All that extra investment in our public services is to be welcomed. The Government are to be congratulated.

Since this is my first opportunity to comment on the Government's economic policy, I should like, with the indulgence of your Lordships, to comment on one other reform. I welcome most strongly the Government's decision on independence for the Bank of England. Given that one's maiden speech is not supposed to be controversial, I think it particularly appropriate to mention independence for the Bank of England since that courageous decision took the politics out of monetary policy.

To conclude, I strongly support the Motion, for the reasons that I have outlined. I am gratified to have made my maiden speech. I can now get on with the job that I was appointed here to do. No, that is not to vote in the Lobby which the Government Chief Whip tells me to, although I shall certainly expect to, but my job is to call to account the executive, to scrutinise legislation and to contribute to the very high standard of debate in your Lordships' House.

7.49 p.m.

Lord Howell of Guildford

My Lords, it falls to me to congratulate the noble Lord, Lord Alli, which I do most warmly. It was an excellent contribution. I can think of scarcely anything in it with which I disagree. That means that it must pass the standard test of non-controversiality, although one must always read the small print nowadays to work out exactly what is controversial. That is not the same as it used to be. The noble Lord speaks with great authority on these matters. He will be a huge asset to our debates. As he rightly said, the issues that we are discussing this evening in the two government documents—the Economic and Fiscal Report and the Comprehensive Spending Review—are matters which have been common practice in business almost forever. Some of us have been campaigning over many decades to see those perfectly sensible ideas incorporated, so far as possible, in the vastly more complex area of government.

Therefore. I repeat my sincere congratulations to the noble Lord. What I say to him is not just the natural form of words, although, as he will discover, everyone is quite uncannily polite to each other in this place most of the time. He has spoken a lot of excellent good sense.

I cannot resist commenting that it is a little odd that we should find ourselves debating such gigantic strategic issues in the dinner hour and not in "prime time", as in the world of television scheduling. I do not quite understand why. However, it is one of the features and consequences of the Maastricht Treaty that the Government have to gain the approval of both Houses for these proposals. I suppose that that is a small mercy and one of the better outcomes of the much-criticised and, in my view, deeply flawed Maastricht Treaty. It is very hard to cover these colossal issues in a few minutes. My remarks will be directed mainly to the technicalities of trying to lock in public spending for some years ahead and create what is called "a platform of stability", a "tough new regime", or all the other nice phrases with which one could not disagree. Indeed, they are like motherhood: they are excellent aspirations.

However, having said all that, I must strike a critical note. If one examines all the statements in the two documents, while the aspirations are excellent there is, in my book, a slightly old-fashioned tone about the whole approach and some signs of inexperience or, shall we say, total unawareness of what has happened in the past. This is not the first time that government have attempted to cover this ground and produce such solutions to meet the ambitions which businessmen share by trying to bring more certainty into an uncertain world.

The first criticism that I have to make is that extrapolating from the recent past is at the best of times a dangerous business, as indeed is assuming that things will always go on in the future as they have in the past. We must think of our economy operating in a global and not just a European context. It is operating under global forces which are very complex and very volatile. One can safely say, with no more controversy than that contained in the excellent maiden speech that we have just heard, that there never was a more dangerous time to assume that what went on before will go neatly on in a straight line into the future. It is never more likely that one will draw the wrong conclusions than if one attempts that sort of extrapolation and concludes that, because the economy has grown at such a rate during the past two or three years, it will carry on in exactly the same way.

The general argument against that kind of approach and that kind of economic modelling is now very strong and it arises from the globalisation of the economy. The predictability that economists used to need to make those models and make such assumptions and projections is just not there any more. Indeed, not even a market can absorb the vast complexity and quantity of information in the global economy in order to make safe judgments. Certainly planners in a national economy cannot do so. That really explains why no models are safe and why public interest in all this modelling—for example, the Swedish, the Japanese, the German, the French and all the Anglo-Saxon models—has declined and the credibility of economists (of whom I used to be one) has also slid down to zero. Economists are really not able to make sense of these conditions in the global economy. People sense that, when they try to predict such outcomes for even a few years ahead, they are not really on very sound ground.

That is one reason why I would question whether this is the right time to start locking in public expenditure plans for three years ahead as a government, however much businessmen may want it and however sensible it may sound. My second reason is more immediate; namely, the Asian turmoil. I know that there is a fashion for saying that it is all right here in Western Europe and in the transatlantic area—in other words: "We are all right as regards the Asian turmoil. After all, we don't export very much to Asia when all is said and done and, anyway, they are getting themselves straight again". That is a total and complete underestimate of what is happening in both the South-East Asian economies and on the Pacific Rim.

I have tried not to bore the House, but I did suggest to your Lordships some months ago—in fact, well before Christmas—that the Asian turmoil had only just begun; that it would get worse and would last for many years. I believe that more strongly today. Indeed, we are just about to enter a new and more horrific round of instability in the Asian economies which will have a far greater effect on the Western economies and on the British economy than mere export or import figures may suggest. The yen will go down; the Chinese bubble which, in a way, is as bad as the Japanese bubble, will burst. The Chinese economy will get into increasing difficulties and be dragged down. There will be political difficulties there, which I believe will undermine the Hong Kong situation. All the economies struggling to get off the floor, without success at the moment—like Malaysia and Indonesia, which is on the verge of civil collapse—will fall back into the quagmire out of which they have been trying to struggle.

Those developments will have colossal effects on our GDP projections; indeed, much greater than people realise. It will not only be a question of no export markets because they are already shrinking, as the poor Chinese are finding as their markets wither away; at the same time, there will be a considerable amount of cheaper imports coming in from Asia, although there is a constraint, in that many of the excellent, competitive Asian firms cannot get export finance or working capital at present. However, that may change.

The flow of capital and the savings coming in from Asia will wither, as has already begun to happen. However, more than that, investment and growth are about confidence and the sort of psychology of the promise and possibilities ahead. The Eastern promise has evaporated. The whole glittering hope of the past 10 years of growth and investment—in other words, the hope that, at the end of the corridor, even if it had risks, there was this shining area of the new Asia which could produce colossal returns for the more adventurous and those not too averse to risk-taking has gone. I give way to the noble Lord.

Lord Desai

My Lords, does the noble Lord agree that what goes down must come up?

Lord Howell of Guildford

Yes, my Lords, but when? We are talking about timing and about a situation in which the Government of this country have tried in response to perfectly legitimate business interests—the kind that we have just heard about—to plan three years ahead. Let us suppose that what goes down comes up in 10 years. Let us suppose that what went down in Japan in 1989, and has not yet begun to come up eight years later, has another six years to go. I believe that timing is everything. Those are some of the reasons why I believe that the three-year plan is well meaning but full of dangers. It may be simple in business, but it is very complicated in government.

In this short debate I have only one other point to make about the dangers of extrapolation and in support of my, I hope not too dismissive, comment about the slightly old-fashioned nature of the documentation. The claim in the documents is that new forms of performance control are to be installed to ensure that, even if the world remains uncertain, public expenditure plans will somehow remain on the railway tracks. A great deal is made of the fact that this is a tremendous break with the past—a tough new regime—and that it has never been tried before. Indeed, I believe that it actually says somewhere in one of the documents that nothing like this has happened since 1961. I find the latter worrying because it is not true. It has obviously been written by people who either have very short memories or who are perhaps rather young. There is no criticism of that, except that, if you are not fully informed about the past because you did not live through it, it sometimes pays to read the history books.

All this has been tried before. In 1970, the government of the day learned from the American programming, planning and budgeting systems (PPBS) and decided to instal throughout Whitehall a gigantic system of programme analysis and review with precisely the intention of forward planning expenditures in the spending departments so as to remove some of the uncertainties. The same problems that damaged that cause then, and eventually undermined it, are still extant today. I hope that those who are carrying out this planing and devising these new ideas in the Treasury here in London are at least aware of some of the snags. However, I must say that the document shows little sign of awareness that they are treading a very dangerous path and one full of traps.

When we installed programme analysis and review in the early 1970s, which was intended to deliver performance in return for expenditure allocations by the Treasury and to secure analysis by outputs rather than inputs—in other words what we were trying to achieve rather than the resources needed to achieve it; for example, not how many paperclips you had been using but how many were needed and why they were needed at all—we did so with very high hopes. We were full of good intentions; but the project failed. Why did it fail? It failed because it became absolutely impossible in the political milieu, unlike the business milieu, to analyse how to define the outputs. Was an output really just a question of how many more houses were built or how many more miles of road were built? Or was an output some political achievement, some gain in the political and social sphere? Such gains are legitimate for governments and yet cannot be measured as outputs as businessmen would. We rapidly got into a quagmire of disputes in those days on how you define the outputs and whether they are just managerial or political as well.

The second difficulty we ran into—and these papers run straight into it again—was that of defining what is capital and what is current spending. A great deal is made in these papers of the golden rule. It is proclaimed as a gigantic new insight, something that has sprung up from the brow of some Treasury guru or even from the Chancellor himself.

We have all been thinking about the golden rule for four decades. Everyone has been saying, "Why can't the Government somehow define capital and current spending, just cover the capital spending with borrowing and never borrow for current spending?" That sounds simple common sense to a businessman. However, I have to say to your Lordships that in the government sphere every aspect of that proposition is under constant and continuous dispute. No one will ever agree on what are the capital spending items and what is current spending. Is capital spending that goes wrong and does not produce a return, current or is it capital? Nobody knows.

The situation has been made worse by the attractive device—but it is pure "spin doctoring"—of calling all spending investment, or nearly all public spending, investment. Of course it is not; a great deal of it is consumption. Nobody has ever managed to establish whether even issues like building hospitals or army barracks are capital spending and investment, or current spending. That debate will go on and will drive a coach and horses straight through this golden rule which is paraded as such a virtue. That is really all I wish to say.

I leave aside the other points that have been made in another place and are fair game. So far, the hope that one could reduce part of the welfare budget to pay for other excellent things such as education does not seem to have worked too well. The Minister concerned seems to have walked out on the whole project, which is a pity.

I leave aside the reflection that the public sector unions, once they see that there is talk about locking in and money certainly coming, will say, "Let's have substantial wage increases to overcome the disparities with other earnings in the private sector". I am quite sure that we shall see enormous erosion of the benefits of this public spending—even if it can be sustained and even if the GDP projections are right—by union pressures.

The real hazard is that we are now at the classic point of the trade cycle where deterioration begins. It is perfectly normal that it should, and the economy will slow and probably shrink over the next two years. That is even if we did not have the Asian turmoil, which, to my mind, will make it certain. The trade cycle is deteriorating, revenues will be lower than the estimates in these books and public spending will be higher. That is what happens when the economy slows down. It is not just a question of the revenues falling away; all the social expenditures increase, so the gap widens at a geometric pace. The platform of stability which we all hope for, and which the noble Lord as a businessman of authority has just spoken about, will turn out to be a platform made of quivering jelly.

I believe that if the Chancellor and some of his advisers had the kind of business experience of the noble Lord, Lord Alli, and others, they would realise that it is not that simple. Although these are good aspirations, it is dangerous to raise hopes too high for things that cannot in practice be achieved.

8.3 p.m.

Lord Higgins

My Lords, I intervene briefly in what is rather inelegantly known in your Lordships' House as "the gap". Many of the issues which might otherwise have been appropriate to comment on in relation to the Economic and Fiscal Strategy Report or the other major public expenditure strategy reviews are perhaps more appropriately made tomorrow when the House will have the opportunity of debating the Finance Bill, rather unusually, I understand, on a Wednesday. For the last three years, at least, it has been on a Friday. So I hope the House will understand if I do not go into any great detail.

I should like, first of all, to congratulate the noble Lord, Lord Alli. We shall look forward with great interest to his expert comments on various aspects, particularly of the micro-economic situation, in the future.

I hope my noble friends will forgive me if I do not comment on either of their extremely cogent and knowledgeable speeches. I should like to put a couple of simple questions to the Minister, who rightly pointed out that this matter is before the House in relation to the commitments under the Maastricht Treaty and in particular to Articles 103 and 104.

The object of the exercise is, in effect, to reassure our Community partners that all is well in the British economy, in particular with regard to public borrowing. In that context, it seems to me to be appropriate that one should consider carefully what is in the figures and particularly, perhaps, to enclose with the covering letter, which presumably is written with these documents, a health warning.

I had occasion on 14th July to ask the noble Lord who is due to reply to this debate whether or not the extraordinary use of the so-called "accounting adjustment" had the approval of the Office for National Statistics. He said that its views had been taken into account. However, my understanding is that it does not approve of the way in which something like £5 billion of expenditure on social security—in particular the working families tax credit—suddenly disappears into a black hole of the accounting adjustment. In total, I think that something like £15 billion is disappearing into it. That is not merely a margin of error; that is really quite important.

Can we have an assurance that if it is indeed the case that the Office for National Statistics does not like the way the figures are presented, at least our European Community colleagues will have that drawn to their attention?

The other relevant point is that the documents seek to assure our community partners and other members of the European Union that the level of borrowing, and so on, is appropriate and not something about which we should be concerned. The Minister provided a particular set of statistics. But he also said that we are debating these matters this evening—they have been debated once before—because the figures have been overtaken by events; the figures are out of date. He can certainly say that again. There has been a very significant change.

At the time when the figures were last produced we were told in the Budget Red Book, for example, that there would be a budget surplus over the period covered by the Red Book. Is it not the case that this is no longer so? If that is so, surely the Chancellor, at least, ought not to be satisfied with the way in which the public finances are going.

Secondly, we were told at that time—and presumably that is what the House debated in that context—about a reduction in national debt. My understanding is that, again, that will not be the case. The figures, as the Minister has rightly said, are out of date. Thirdly, we were told that there would be a reduction in the percentage of national income taken by the state.

I understand that in many ways the figures which the Minister quoted may well give our friends elsewhere in Europe a feeling that all is well. But surely it cannot be the case that the Chancellor is as happy with the situation now as he was at the time when the House last debated the matter. That is surely a matter of considerable concern.

I hope therefore that on each of these two points which I have made we can have a response from the Minister. I shall certainly look forward to going into the matter in greater detail tomorrow, should I have the opportunity.

8.8 p.m.

Lord Newby

My Lords, it gives me great pleasure to congratulate the noble Lord, Lord Alli, on his excellent maiden speech. I know that in only 10 days in this House he has had the opportunity of seeing it at its worst, at its least generous. But I am pleased that he has also experienced its more customary generosity of spirit. I have to say that when his appointment was announced I felt a slight twinge of jealousy. I believe that until he was appointed I was the youngest Life Peer in your Lordships' House. I rather enjoyed this completely meritless distinction. However, I have enjoyed it only for a few months. We on these Benches warmly welcome the noble Lord to our debates and look forward to hearing him speak regularly in the future.

The debate this evening is really about the medium-term prospects for the British economy. In our view the Government have quite rightly placed great importance on moving from the boom and bust approach towards a more stable and sustainable economic environment. The Government have undertaken a range of measures which have moved us in that direction. I refer to the operational independence of the Bank of England, the institution of the golden rule and the sustainable investment rule, and the code of fiscal stability. All these measures are welcome, as indeed is the Government's more positive attitude towards Britain's EU membership.

However, we believe there are two areas where more needs to be done. The first relates to environmental goals in relation to sustainable growth, which is still very much in the embryonic process. The documents that we are discussing tonight refer to the ongoing work to produce environmental accounts and indicators and to produce a sustainable development strategy before the end of the year. In our view such a strategy is long overdue. I agree with the conclusion of the Commons Environmental Audit Committee that, reviewing the Government's leadership as a whole, there appears to be some failure to grasp the overarching nature of sustainable development and apply it.

The value of such a strategy is that it will not only give us a much better assessment than the current accounting conventions of the environmental sustainability of economic performance, but it will also help decide on medium-term taxation priorities. We on these Benches have for some time advocated shifting the balance of taxation towards environmental "bads" and away from employment. Having a more credible set of environmental indicators will assist in this process. I welcome anything that the Minister can say about the likely timing of the publication of that sustainable development strategy.

The second area where we believe further action is needed relates to the exchange rate and EMU membership. It will come as no surprise to the House to learn that. After inflation the one variable which has caused British governments most grief in the past 30 years is the exchange rate. It continues to do so today. Since the equivalent debate last year, the large majority of our EU partners have committed themselves to joining EMU at the outset for the stability it will bring in the exchange rate with their principal trading partners. We, along with all our EU trading partners, trade about 60 per cent. of our goods intra-Community. There may be differences but that single vital fact remains at the heart of our trading position. This is of crucial importance in looking to our medium-term prosperity.

The Earl of Dartmouth

My Lords, I submit that the fact of greater importance is that our cycle mirrors that of the United States and not the continental economies. I suggest that the noble Lord might address that point.

Lord Newby

My Lords, in looking at the progress of economic variables over any time period, rather too much is often made of the past than of what is desirable in the future, or indeed what is likely to happen in the future. If one had said to the noble Earl last year that there would be so many EU member states joining the single currency at the outset, I am almost certain he would have said that was impossible. If he had looked at the debt ratios of member states and their inflation performance, I think he would have said that the likelihood of 11 being able to get within a mile of joining was negligible. However, economies change. The nature of our trade has changed fundamentally since we joined the EU. Simply to project forward from the past is a misleading approach to economic analysis.

The Earl of Dartmouth

My Lords, I bring to the noble Lord's attention the fact that the whole point about the debt ratios is that they were systematically fudged.

Lord Newby

My Lords, it is common practice in this country that when another EU member state does something which one did not expect it to do, but which is in itself desirable, instead of saying, "There is joy in the sinner that repenteth", one may say that he has not repented at all and he is really on the bottle behind the arras. The assumption that all this is fudged is, in my view, a gross exaggeration.

Lord Desai

My Lords, does the noble Lord agree that the markets have judged that, whatever the fudging, they value the debt in such a way that there is a convergence in the bond yields across the 11 countries? That is a true test of convergence.

Lord Newby

My Lords, I am grateful to the noble Lord. I agree with his comments. I think that what the markets are doing is judging the extent to which those governments who have made those strides—which, fudge or not, have been extremely painful in some cases—have shown a commitment to the kind of fiscal rectitude which underpins the Maastricht agreement. The markets are judging that.

I return to the position in the United Kingdom. I think that, given the uncertainty with which the Government are approaching this issue, it is hardly surprising that many firms in the United Kingdom are still unprepared for EMU. Whatever happens with regard to current policy, we shall not join for at least four to five years. We obviously welcome attempts by the Government to disseminate information about the euro, but we hope that when we have this debate again in a year's time the Government will have made real progress in telling us how they intend to move from the current unsatisfactory position towards a clear process and timetable of entry.

I have talked about two areas where I believe that more action is needed on the part of the Government. However, the one area of major uncertainty which in a sense hangs over all our economic debates is whether the Government will hit their targets on inflation and borrowing. The Chancellor is gambling that the level of inflation will hit his target, even though for the first two years of this Government it will clearly overshoot that target. Of course higher inflation would wipe out much of the big increases promised by the Chancellor in real terms for health and education and leave the Government with a record on public services which will be significantly worse than that of the previous government, and certainly will not correspond with the impression that the Chancellor tried to portray last week.

Borrowing depends crucially on growth rates which, according to the Government's projections, already look decidedly optimistic. By setting firm spending plans for the next three financial years, which in reality takes us to March 2002—a long way ahead on any view—the Government are committing themselves far into the economic future. The degree of uncertainty in forecasting is acknowledged in the Government's own economic and fiscal strategy report which states that, over the past 10 years, the average absolute error for year ahead forecasts of the PSBR was 0.9 per cent. of GDP. Forecasts further ahead were considerably less accurate". The report argues that by adopting a prudent approach in relation to the golden rule and the level of public debt, such errors should not accumulate to the point where they constitute a threat to the fiscal position. I hope very much that the Treasury is right. But even within a matter of weeks of the production of the report, the projections are already looking rather shaky. The National Institute of Economic and Social Research suggested last week, for example, that a fall in profits and slower than predicted economic growth could lead to a deficit on the current balance which would drive a coach and horses through the golden rule. Research undertaken by the House of Commons' Library for my colleagues in another place also shows the vulnerability of the Government's plans to the economic cycle. A slowdown in the economy of the scale of the early 1990s, for example, would send public borrowing back to the £50 billion per year level.

No one should take any pleasure from such gloomy forecasts. We certainly hope that they do not become a reality. We do, however, believe that the Chancellor has made life unnecessarily difficult for himself by failing to tighten fiscal policy on the consumer last year, by having a negligible contingency reserve—much lower than his predecessors—and by ruling out as a matter of principle any possibility of income tax increases during the lifetime of this Parliament, whatever happens to the economy. His scope for manoeuvre is now tightly circumscribed and his ability to stick to the golden rule is thrown into question by his own actions.

We shall debate the Government's fiscal stance in more detail tomorrow in our debates on the Finance Bill and therefore I do not propose to detain the House any longer this evening. However, as I have made clear, we have concerns about the Government's economic assessment and we shall watch with great interest to see the extent to which it is realised in the coming months.

8.20 p.m.

Lord McIntosh of Haringey

My Lords, I am grateful to all noble Lords who have taken part in this short debate. I wish to add my tribute to my noble friend Lord Alli. He made a most impressive maiden speech. He is only starting on his business and political life. I spent 40 years in business with nothing like his financial success. I recognised in his remarks the kernel of business success, and I admire it without having any hope whatever at my stage in life of emulating it. I am grateful to my noble friend for the contribution he made to our debate.

The noble Earl, Lord Dartmouth, made a very effective pre-election speech in his campaign for the European Parliament. I hope that he will use Hansard appropriately in his election material next year. I am sure that he will. I was very interested in the noble Earl's remarks about our relationship with Europe and the United States. It occurs to me to ask a rather naïve question. If the noble Earl seriously thinks that in 1998 or 1999 we should be tying our economy to the dollar rather than the euro, there are a large number of questions to be asked to which he did not refer. If that had been possible, perhaps it should have been achieved a long time ago.

The Earl of Dartmouth

My Lords, my point is that, de facto, it is already. In order to tie it to the euro, the economy has to be put in a straitjacket, as it was during the years when Britain was in the ERM.

Lord McIntosh of Haringey

My Lords, I admire the noble Earl's adherence to the tenets of his party. I do not think that he will find much reassurance from business or economists in relation to such a policy. You do not have to like it but it is the case that our economy and our fiscal and monetary policies are closely linked to Europe, and will be more closely linked. Whether or not we join EMU, it will be there. The noble Earl will have some difficulty next year in his election campaign in the face of a single currency which works, as I believe it will.

My noble friend Lord Alli made reference in his excellent maiden speech to the fact that the Chancellor has abjured short-term decision-making. As one who lived for 30 years running a company, for most of the time not knowing where the wages bill would come from three months hence, I very much appreciate the force of his remarks. It is possible—indeed, most governments have done so—to panic at short-term changes in economic indicators. One of the reasons why we delegated decisions about short-term interest rates to the Bank of England was the danger of the kind of panic that is perfectly possible when those who are assiduous, as some of us are, in reading financial and economic comments in the broadsheet press are too inclined to listen to the wise men or women and pay attention to what they say. One of the great things about the British people is that, on the whole, they listen to the wise men, pay due obeisance to them, and then go away and do something else. That is what I hope we shall do. I hope that we shall not respond to day-to-day pressure. It is certainly my impression that the Chancellor has a steely determination to adhere to long-term policies and that he will not be swept aside by short-term pressures.

The noble Lord, Lord Howell of Guildford, in a typically thoughtful speech, gave a welcome for which I am most grateful to the introduction of accounting practices in government. As he said, they have been common practice in business for many years. The noble Lord was right to say that it is a dangerous time to assume that we can extrapolate from the past to the future. However, if the noble Lord does not mind my saying so, when has there been a time when it was not dangerous to do so? It has always been the case that past experience cannot be taken as a guide to the future. If the noble Lord is asking for predictability in economic policy, he is asking the impossible. There is no such thing.

I detected in the noble Lord's resistance to three-year budgeting, which we are determined to introduce and shall be introducing, a Civil Service attitude; namely, he does not like the commitment we are making to the medium-term or longer term future, and he is afraid that there might be changes which would make our predictions over a three-year period unsustainable. That may be the case. We may be wrong about all sorts of things. But the public service, like private business, needs a degree of security in relation to the way in which it will be treated by government. What we have achieved by moving towards research accounting and budgeting is exactly that degree of security. There may be marginal adjustments to be made, and there will be possibilities for such adjustments. But proper investment decisions are not made on a 12-month basis. Anyone who has ever been in business knows that that is the case.

The noble Lord, Lord Newby, seemed to back up the fears of the noble Lord, Lord Howell. I was disappointed to hear that from the Liberal Democrats. I thought that they were just that much more adventurous in relation to public finance policy. The noble Lord quoted the National Institute of Economic and Social Research. I read the NIESR comments very carefully. Although they differ marginally from our forecasts, on the whole they come to the conclusion that, even if the result is a deficit in GDP of 1 per cent. rather than the break-even which is involved in the forecast, none of that affects the validity of our fiscal projections and therefore none of it affects the validity of our expenditure projections. There have been perhaps 45 independent economic forecasters' predictions of the future of the various indicators in the economy. I do not claim that the Government are the most cautious. That would be absurd. However, I am certainly claiming that we are in line with the general trend of independent economic forecasting and that therefore our predictions for growth, public expenditure and revenue are prudent and cautious rather than what the most pessimistic, doom-laden predictions would lead us to expect.

The noble Lord, Lord Howell, also referred to the difficulty of distinguishing between capital and current spending. That is a counsel of despair. It has existed for something like 50 years, during which the Treasury insisted—it does not now insist—that £1 of revenue plus £1 of capital equals £2. Of course there are difficulties at the margin. But the determination to make that distinction—which is made year by year, week by week and day by day by every public business—is an essential determination. I do not for a moment resile from our determination to do that. If from time to time we get the difficulties of definition wrong, the independent Office for National Statistics is there to put us right. It will simply not allow us to say, for example, that expenditure on skills training is an investment. Although we all know that in one sense it is, we are not allowed to count it in the accounts as an investment; we have to include it as current expenditure.

The noble Lord, Lord Higgins, made a brief warning intervention and I know that he will speak at greater length and to equal effect tomorrow. But he talked as if the objective of the exercise were to reassure our European partners about the economy. It is no such thing. In this debate and in the submission we shall make to our European partners, our intention is to share information about our economy with those who share information with us. That in turn will be valid. If it is called "multilateral surveillance" so be it. I do not care for the long words, but it is legitimate. We are not trying to put anything over on our European partners.

The noble Lord, Lord Higgins, asked about accounting adjustments and gave warning that he would raise the matter tomorrow, so perhaps I should deal with it tomorrow. The Government have provided the Treasury Select Committee in another place with further detail on the category of accounting and other adjustments, to be published in due course as part of the Treasury Committee's report.

The noble Lord, Lord Newby, talked about the timing of the sustainable—

Lord Higgins

My Lords, as that will not be published until after tomorrow, perhaps the noble Lord could put a copy in the Library.

Lord McIntosh of Haringey

My Lords, when it is available for publication of course it will be available in the Library. A personal copy with my signature will be sent to the noble Lord and all other noble Lords who have taken part in the debate. The noble Lord, Lord Newby, talked about the timing of the sustainable development strategy. That interesting report—

Lord Higgins

My Lords, I apologise for intervening again. The point is that we need to know, either tonight or tomorrow, whether or not the figures in the accounting adjustment which are large are approved by the Office for National Statistics to which I referred. We welcome the answer, "Oh well, it will eventually appear in the report of the Treasury Committee" but it does not help us at all as regards tomorrow. If it is not possible to publish it because it is still confidential to the committee, can the Minister at least ensure that we are made aware of whether it approves of what is done?

Lord McIntosh of Haringey

My Lords, I shall respond to the noble Lord when he makes the point tomorrow, to the fullest extent possible.

The noble Lord, Lord Newby, rightly referred to environmental issues because they are referred to in Section 5 of the Maastricht Act. If the noble Lord turns to page 8 of the Economic and Fiscal Strategy Report, he will see that there is specific recognition of environmental issues in line with our obligations under the Maastricht Act. We shall publish a sustainable development strategy later this year.

I suspect that behind these more specific comments lies a general fear that the economic situation is deteriorating and that our projections for public expenditure and revenue will not be realised. We have examined our projections against all the possible alternative objections, the alternative ways of running the Treasury model. We are convinced that what we have done has been cautious, rather than adventurous. If there is any risk it is the risk that we have underestimated revenue and overestimated expenditure, rather than the reverse. The average of the Treasury's latest survey of independent forecasters shows growth expected to be 2.2 per cent. in 1998 and 1.7 per cent. in 1999. The Government's fiscal projections based on growth of 2 per cent. in 1998 and 1¾ per cent. in 1999 therefore seem to us entirely reasonable.

I understand what the noble Lord, Lord Howell, says about the dangers from the potential collapse in Asia and I do not underestimate the seriousness of it for us. It is essential that the Japanese economic management should take control of its economy and should revive demand in a way that has been discussed in your Lordships' House within the past few days. It is true that the effect of any default in the Japanese economy on Asian economies generally would be serious on economies in this country. I can only say to the noble Lord that we have taken serious account of it in the way in which we have made our projections for the future. We have not allowed for a complete meltdown in the world economy, but we have allowed for everything that it is reasonable and proper for us to do.

The noble Lord, Lord Newby, talked about sustainable convergence which provoked a response from my noble friend Lord Desai. My noble friend rightly pointed out that if the markets had not rejected the Government's thinking, then perhaps for capitalists there is no good reason to suppose that we have got things wildly wrong. I am not sure whether my noble friend Lord Desai would extrapolate his comments for all aspects of economic policy. I do not think he would, but he had a valid point because the Economic and Fiscal Strategy Report was published more than a month ago. It affected the decisions of the Monetary Policy Committee last month and it is clear that our most important decisions, about the way in which we handle, understand and present our public accounts, have been subjected to the scrutiny of the Monetary Policy Committee and of the markets. They have been supported both by the MPC and by the markets.

We have been entirely open about our economic and fiscal strategies on the basis that we are saying realistically and soberly to the European Community, to the Commission and the Council, what is our understanding of the economic situation in this country. I commend the Motion standing in my name.

On Question, Motion agreed to.