HL Deb 11 December 2001 vol 629 cc1291-300

6.24 p.m.

Lord McIntosh of Haringey

rose to move, That this House takes note of the Government's assessment as set out in the Pre-Budget Report 2001 for the purposes of Section 5 of the European Communities (Amendment) Act 1993.

The noble Lord said: My Lords, each year the Government are required to send information to the European Commission setting out our main economic policy measures. The procedure is described in Articles 99 and 104 of the EC Treaty, which relate to the broad economic policy guidelines, convergence and stability programmes and the excessive deficits procedure.

The Government's strategy for economic policy is set out in the Pre-Budget Report 2001. That report will form the basis of the information that we send to the European Commission setting out our main economic policy measures. Section 5 of the European Communities (Amendment) Act 1993, usually known as the Maastricht Act, requires Parliament to approve the government report sent to the Commission for that purpose.

The function of the reports is to help ensure that member states' economic policies are consistent with the goals of the treaty. Those goals are non-inflationary economic growth respecting the environment; a high level of employment and social protection; and raising the standard of living and quality of life. They are consistent with the Government's own approach to economic policy.

The key elements of the Government's economic strategy, as set out in the PBR, are to maintain macroeconomic stability to provide a platform for long-term sustainable growth and employment; meet the productivity challenge through promoting competition, enterprise and innovation, skills, investment and public sector productivity; increase employment opportunity for all, to ensure fairness for families and communities; deliver high-quality public services; and ensure a better quality of life for everyone—now and for generations to come—by protecting the environment.

The Pre-Budget Report describes the Government's strategy to rise to the global economic challenge facing our country and to set out how—on a foundation of stability and growth—we can and will build a stronger, fairer Britain even in an uncertain world. For the first time in three decades, each region of the world has slowed at the same time and more sharply than before. In addition, no one can yet judge the full and final impact of the traumatic and tragic events of September 11th.

In the period ahead, there are of course real risks for both Britain and the world. Because of the decisive action taken on monetary and fiscal policy, we remain cautiously optimistic about the prospects for the British economy. Interest rates have been cut seven times in nine months. Britain's interest rates are now the lowest for nearly 40 years. With public spending and public investment rising this year, our fiscal policy is complementing and reinforcing monetary policy and thus stability and growth.

The Government's first economic priority on coming to office in 1997 was to deliver stability for the long term, recognising that economic stability is a precondition for achieving our objective of high and stable levels of growth and employment. We introduced the new macroeconomic policy framework, which is promoting economic stability by delivering low inflation and sound public finances. We are already seeing the rewards of the new structure.

Throughout 2001, the British economy has continued to grow. Over the past two years, Britain has had the lowest annual inflation since 1963. Our average inflation has been lower than that of any other comparable country in Europe. Employment has risen by more than 1.2 million since 1997 and unemployment has been at its lowest levels since the 1970s. The new fiscal framework has brought public finances to a healthy and sustainable position. The Government inherited public finances that were in poor shape, yet since 1997 they have been transformed. Since coming to power, we have repaid £51 billion of the national debt. This year, debt has been brought down to 31 per cent of British national income. Britain's debt is now the lowest share of national income in the G7 and the lowest of all our major European partners.

We also set tough long-term fiscal rules that demand fiscal discipline by a tighter approach in the best of times and which allow automatic stabilisers to work fully at a time such as this—in both cases, fiscal policy supporting monetary policy. Because of our prudence, debt is lower and debt interest payments are lower. Even in these testing times it has been possible to maintain our three-year spending plans for hospitals, schools and public services and to respond to emergencies that have arisen, all the while still meeting the fiscal rules that we have set over the economic cycle, even on cautious assumptions.

This platform of stability provides the basis for raising productivity. Meeting the productivity challenge offers the prospect of higher growth and increased employment opportunities, with low inflation and low interest rates, and is a key route to raising living standards in society as a whole.

The Government are working to deliver employment opportunity for all—the modern definition of full employment—and to build a fairer and more inclusive society by tackling child poverty, helping pensioners, rewarding saving, investing in public services and ensuring a fair tax system.

The Government are building a stronger economic future for Britain. We are meeting our objectives of high and stable levels of growth and employment, and a fairer society for all. These are the right economic policies for Britain. They are also in line with the objectives of the European Union.

Approving the Motion will enable the United Kingdom 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 Articles 99 and 104 of the treaty. I commend the Motion to the House.

Moved, That this House takes note of the Government's assessment as set out in the Pre-Budget Report 2001 for the purposes of Section 5 of the European Communities (Amendment) Act 1993.—(Lord McIntosh of Haringey.)

6.31 p.m.

Lord Roberts of Conwy

My Lords, we have heard a glowing account of the economy from the noble Lord. He will be relieved to know that I certainly do not intend to call a Division on the Motion, but there is another view about the state of the economy.

The Pre-Budget Report has some extra words in its title. It states: Building a stronger, fairer Britain in an uncertain world". Some might say that that is an almost impossible task, a contradiction in terms, because Britain cannot be isolated economically from that uncertain world which began to surround us before 11th September. Noble Lords will agree that the events of 11th September have exacerbated the situation.

The precarious state of the major world economies and their failing growth are well known to us, and it is hard to believe that Britain will not be similarly affected. But, as the noble Lord said, the Chancellor is cautiously optimistic. He is forecasting growth at 2¼ per cent this year, 2 to 2½ per cent next year and 2¾ to 3¼ per cent in 2003. He was careful to add that this progress will be "as global growth recovers".

However, there is a great deal of uncertainty about the pace of global recovery. In spite of the successive falls in American interest rates—if they are reduced again today it will be the eleventh reduction—there are no signs of recovery in the United States as yet. It may be that the recession will be deeper and more prolonged than cautious optimists believe. Lower interest rates may indeed have lost their traction, as one American put it. Japan's decade of troubles—low growth despite minimal interest rates—should be a lesson to us all.

These are certainly not the circumstances in which to talk about increasing taxes, which will be inevitable if the Government's revenue declines—as it has done—as a result of disappointing growth and falling company profits. Yet the Pre-Budget Report is quite specific about the Government's increased expenditure plans, amounting to £50 billion more in 2003–04 compared with the current year. There are to be real terms increases of 5.6 per cent each year on education, 5.7 per cent on health and 14 per cent on transport.

I am not questioning whether such increases are necessary or desirable, but I do ask how they can be afforded. How are these increases in spending to be met? Such growth in spending, if it is to be sustained, must be accompanied by substantial) growth in the economy, for which we all wish, but I am far from certain that that will be the case. The Government are overly optimistic. Of course the Government can take a bigger slice of GDP—as Labour governments have done in the past—but that is a very dangerous path to follow because the slice taken tends to get bigger every year. It will, of course, weaken the private sector at a time when it needs all the effort and resources it can muster to recover from this global recession.

I find it very difficult indeed to judge the effect of the different possible economic scenarios on convergence. I can only sympathise with the Government, who cannot find it easy either. What worries me—this is my final point—is that the Government seem to be blinkered and can take only this cautiously optimistic view when they should remember that other, more difficult, scenarios may lie ahead.

6.36 p.m.

Lord Newby

My Lords, it is always a pleasure to speak in a debate on the economy opened by the noble Lord, Lord McIntosh, because he always sets out the Government's stall with such obvious enthusiasm, even though the statement he has made is a précis of the speech he made a fortnight ago.

I, too, echo some of the concerns expressed by the noble Lord, Lord Roberts, in respect of the forecast. The forecast of 2 to 2½ per cent growth next year is, by virtually all estimates, on the high side. Over the past month, after talking to people in the real world, whether in the service or manufacturing sectors, I cannot find many who seem to think that over the next 12 months—or the 12 months starting from next April, because that is the year we are talking about—we will see such a rosy picture.

We have to remember that the Government are pinning their hopes in large measure for the financial year 2002 and subsequent financial years on the increase in public expenditure. If, as I suspect, growth in the private sector is significantly diminished, at least in the Pre-Budget Report the Government are expecting and planning for substantial increases in health, education and transport. Again, I have severe doubts as to whether these plans and projections will prove to be the reality.

In the previous financial year, the Government underspent on relatively modest projections of growth by about £700 million, which, fortunately for poor mathematicians like myself, for last year at least worked out at about 0.7 per cent of GDP. For the next financial year, 2002–03, education and health expenditure are expected and planned to grow by about 5½ per cent in real terms, and transport expenditure is set to grow by between 14 and 15 per cent in real terms. It is on these figures that the Government's expectation of growth in the economy overall is, in part, based. Having failed to meet their expenditure targets by underspending in the previous financial year, the Government will find it extremely difficult to meet their expenditure targets in the coming years, given that those targets are much more optimistic.

Unlike the noble Lord, Lord Roberts, I welcome the fact that there are very significant increases in expenditure and believe that they can be paid for. I am completely unconvinced that the Government have the ability to spend the money. When one looks at the current chaotic situation in Railtrack where there is now an impossibility of making a decision, far less in committing the hundreds of millions of pounds that are needed and expected for the forthcoming financial years, I have very severe doubts whether that target will be met.

As regards health and education, the key questions are whether there will be enough doctors and nurses prepared to work in terms of salary and other working conditions relating to both professions. Evidence to date suggests that the Government will have their work cut out to meet their own targets.

Therefore, I have very significant questions about whether the projections for 2002 and subsequent years will be met. But as our purpose this evening is simply to note them, we do so from these Benches.

6.41 p.m.

Lord Saatchi

My Lords, I begin by thanking the Minister for accommodating this debate this evening. I am aware that he has another engagement so I shall try to keep him no longer than necessary to provide your Lordships with what my noble friend Lord Roberts legitimately called "another view". I am sure that the Minister will not mind me reminding him that this amendment to the Maastricht treaty was the inspiration of his noble friend Lord Robertson, who was then Shadow Foreign Secretary.

In accepting this Motion on behalf of the Opposition, I make it clear to the House that we are not approving the contents of the assessment. I shall be grateful to the Minister if he would confirm, perhaps in his remarks at the end, that the wording used in the Motion does not imply approval of the content, it merely implies approval of the selection of documents which will be used for the purposes of Section 5.

A great event took place in Downing Street last week. The Chancellor held a book launch. I was one of the low obliged to press my face to the windowpane for want of an invitation. It was a party to celebrate the first book ever produced by the Treasury, complete with a foreword by the Chancellor of the Exchequer himself.

One former Monetary Policy Committee member said, I thought rather cruelly, "It won't fill many stockings this Christmas". But I am not so sure. This is a very useful and important book for all students of British economics and politics.

It describes the structure of monetary and fiscal rules and practice—what the Minister called "the fiscal framework"—which has been developed by this Government since 1997 and which led to the documents which are before your Lordships' House this evening.

The book says that the pre-1997 Treasury was a failure. That is its stark conclusion. It says that because, monetary and fiscal policy for a long time failed to make an adequate contribution to higher and stable levels of growth and employment. Indeed monetary and fiscal policy were sometimes a source of instability". The book makes it clear that in the opinion of the radical reformers of the current Treasury team a happy resolution of the age-old problems of the British economy did not occur until the present Government arrived on the scene in 1997. I believe that the Minister said as much in his statement.

In this book the Chancellor fairly takes credit for his great innovation in monetary policy granting operational independence to the Bank of England. But he then proceeds from that premise to the conclusion that the entire monetary and fiscal framework that he has created is a modern miracle, banishing recession in the way that we banished whooping cough.

For example, a key point he makes in the book is that although inflation came down to current rates well before 1997, it was only after the introduction of the MPC that inflationary expectations fell into line with the actual inflation rate. In that context the Treasury team is especially proud of the symmetry of the inflation target. I quote them: If the target was two per cent or less they say, policy makers could have an incentive to drive inflation as low as possible … even if this had detrimental consequences for output and employment". I hope that these extracts give your Lordships a flavour of the mood at the Chancellor's party. It was described by one guest as "Panglossian" and by another as "self-congratulatory". They really thought that they had found the best in this best of all possible worlds. For a moment those of us looking on these champagne revellers from the outside thought we saw a Harry Potter world where our Prime Minister and Chancellor only have to wish for something for it to come true.

That dream world is reflected in these documents. I give one example. In them one finds great emphasis laid on the need to improve Britain's public services, which is described as the "end benefit" of the prudence and skill of the framework which has been devised by this team. That is a painfully familiar refrain to your Lordships. The Government's intention is to achieve that aim by increasing public expenditure, something which my noble friend Lord Roberts thought might be unlikely because of world events. The noble Lord, Lord Newby, thought that even if it could be achieved it would only result in the Government's failure to spend properly the money they raised.

But here for the record was the Government's dream and we can consider where it stands now. Before the 1997 election the Prime Minister told us that that there were 24 hours to save the NHS. In 1998 he told us, We are delivering on our promises". In 1999 the Chancellor told us that that year would be, New Labour's year of delivery". The Chancellor's advisers claimed that the year 2000 would be, When things really started to happen". What is the reality? In the NHS, Things are in such a mess, much worse than I would have imagined possible". So said this week the President of the Royal College of Surgeons, Sir Peter Morris. As regards transport, A complete and utter mess … we are in a much worse and potentially more dangerous situation". That observation on the railways was from the chairman of the Rail Passengers' Council, Stewart Francis. He described a situation in which delays were up 45 per cent and morale of those who work in the railways had collapsed because their savings and pensions had been "stolen" by the Government as a result of the liquidation of Railtrack.

But there is one ultimate contrast between the Government's dream in this book, the documents and the reality. The Minister spoke tonight of sound public finances. I believe that he shared in the self-congratulatory mood about the Government's prudence. In fact, I am sure that the Minister will agree in a moment or two that this Government are presiding over a 100 per cent turnaround in the public finances of the country.

According to the Pre-Budget Report and the Minister's statement this evening, the Government are proud of the repayment of £51 billion of debt in the past four years. What he did not mention in the statement is that that repayment is going to be followed in the next four years by borrowing of £55 billion. It is not very prudent, is it, to repay £51 billion one day and borrow £55 billion the next?

That is not to down play in any way the work of those who have toiled long and hard to compile these documents. On the contrary, they are to he congratulated on their diligence and professionalism. Our complaint is addressed to Ministers for failing to see the enormous need for much greater openness and clarity of presentation.

These documents clearly show how the Government have fallen in love with their own publicity. For example, they attempted to reduce public spending levels by £5 billion a year in these documents by treating the working families tax credit as part of the income tax system and not social security expenditure. The system which the working families tax credit replaced, family credit, was classified as DSS expenditure.

But the reader only discovers that on the last page of the notes to the accounts in the Budget documents—the hiding place of creative accountants through the ages. The change in treatment of this one item alone accounts for a miraculous reduction in the tax burden of one half per cent in both 2001 and 2002. I hope that the Minister will shortly tell us by how much the tax credit Bill, which we shall soon have in your Lordships' House, will increase the amount of wrongly allocated sums in the public accounts.

I believe that this is the problem. The book launch, and the party attending it, reveal a group of people in government who have made the elementary but wry human error of believing their own publicity. These documents, the book and the party, all reveal a Government determinedly out of touch with rail passengers, patients and all those who look to their government for the provision of first-class pubic services. Did not the editor of the Financial Times sum up the public mood at the moment when he wrote: The enthusiasm of 1997 has congealed into sullen acquiescence. The vast reservoir of trust has been all but drained"?

6.50 p.m.

Lord McIntosh of Haringey

My Lords, perhaps I may begin by responding to the point made by the noble Lord, Lord Saatchi, about the wording of the Motion before the House. He is quite right in saying that on this occasion the Motion is: That this House takes note of the Government's assessment". There have been occasions in the past couple of years when the Motion has said, takes note with approval of the Government's assessment". I have never understood why it is sometimes "with approval" and sometimes without, but I can assure the House that it is not because sometimes we do not approve of our own assessment, but rather because there is some arcane working in the bureaucracy which leads to these changes. They have no significance.

The noble Lord, Lord Roberts of Conwy, described the title of the Pre-Budget Report as a contradiction in terms: Building a stronger, fairer Britain in an uncertain world". The noble Lord is right to say that no country can insulate itself from the impact of world economic developments. No one doubts that. I spent some time in my short opening speech referring to the fact that countries in all regions of the world are experiencing a downturn at the same time—which fortunately does not happen very often.

However, I also spent some time emphasising that we in this country are better placed than we have been on previous occasions to cope with this instability and, as a result, our forecasts—whose assumptions have been audited as always by the National Audit Office—do indicate that we are able to cushion the impact on the United Kingdom this year and have a good prospect of doing so in future years. Despite the weaker external environment the United Kingdom economy is forecast to grow by 2¼ per cent. We are no longer saying that it will grow in the range of 2 to 2½ per cent quoted by the noble Lord, Lord Newby—largely because, given that we know the figures for the first three-quarters of the year, there was not very much scope for variation in the last quarter of the year. But we are, of course, giving a range for 2002 of 2 to 2½ per cent.

The noble Lords, Lord Roberts and Lord Newby, are dubious about our ability in fiscal policy in the public finances. Over the past four and a half years our forecasts have never been over-optimistic. Indeed, if they have erred at all—unlike the forecasts of previous Chancellors—they have erred on the cautious side. We are on track to meet the tough fiscal rules that we set ourselves for the cycle, including in the cautious case.

The current budget remains in surplus every year, even using cautious assumptions, ensuring that the Government meet the golden rule. Public sector net debt is stable at 31 per cent of GDP—comfortably meeting the sustainable investment rule. That is my response to what the noble Lord, Lord Saatchi, said about the contrast between debt repayment in the past four years and the forecast of borrowing.

The noble Lord was present for our brief debate on the Pre-Budget Report a couple of weeks ago. He will have heard his noble friend Lord Marlesford saying, "Borrow, borrow, borrow". Indeed, there are economists who say that this is the time in the economic cycle when it is right to borrow. We may be Keynsians but we do not borrow simply for the sake of borrowing. What we do is to ensure that we protect public spending programmes and that those public spending programmes—in particular in health, education and transport, but also in many other areas—are not only good in themselves, in that they produce good results for the British people, but they are the right thing to do in counter-cyclical policy at this time. Those who argue for an immediate increase in taxes—although I do not hear the Liberal Democrats making that point loudly at the moment—might take some pause at the effect that that would have in terms of macro-economic policy.

There have been queries in this small debate about public spending and about our long-term goal to deliver world-class public services. The noble Lord, Lord Saatchi, made the point about the inadequacy of our public services in comparison with those in other countries. Let us take the National Health Service. It is true that we have been severely criticised by the president of the Royal College of Surgeons. As I read his criticism, it sounds as if he does not deny that substantial extra resources have been put into the National Health Service, but the drying out of investment and expenditure on public health over a period—I shall not make a political point about it and say over 18 years, but probably over 20 or 30 years—has been such that all of the extra money that has gone into the National Health Service has been soaked up to deal with under-investment in the past. It is rather like the way in which you water a plant. If it has been left dry for many, many years, it is some time before you start to see an acceptable level of nourishment for the plant to prosper. I am afraid that that is the condition not only of our National Health Service but most evidently of our transport services and many other public services.

I recognise the difficulty. I even, with wry amusement, recognise the contradiction in terms suggested by the noble Lord, Lord Roberts. But we are in a strong position to say that in an uncertain world, as we describe it, we are well placed, because of the policies that we have adopted in the past few years, to survive and to prosper.

Perhaps I may say a word to the noble Lord, Lord Saatchi, about the Treasury book. I was not invited to the launch party either. I have complained about that. I missed all the champagne, just as he did. I did not even know about it until after it had happened; and I received my copy of the book only this afternoon.

If the noble Lord is right in saying that the book is complacent: If it were so, it was a grievous fault, and grievously hath Caesar answered it". However, I hope that the message that I have sought to give has not been complacent but has been realistic. I commend the Motion to the House.

On Question, Motion agreed to.

House adjourned at two minutes before seven o'clock.