Financial Statement and Budget Report

HL Deb 23 July 2001 vol 626 cc1825-34

12.5 a.m.

Lord McIntosh of Haringey rose to move, That this House takes note with approval of Her Majesty's Government's assessment as set out in the Financial Statement and Budget Report 2001 and the Economic and Fiscal Strategy Report 2001–02 for the purposes of Section 5 of the European Communities (Amendment) Act 1993.

The noble Lord said: My Lords, the House will know that each year the Government are required to send information to the European Commission setting out our main economic policy measures. The procedure is set out 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 purpose of these reports is to help to ensure that member states' economic policies are consistent with the goals of the treaty. Those are set out in Article 2 of the treaty and include 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, consistent with the Government's approach to economic policy.

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 this purpose.

The Government's strategy for economic policy is set out in the Economic and Fiscal Strategy Report and the Financial Statement and Budget Report, brought together in the government report Budget 2001. Tonight we have the opportunity to debate this document, since this material will form the basis of the information that we send to the Commission. Sharing the information in the Budget documents with our European partners allows us to influence Europe, bringing employment and growth to Britain and other member states.

The Budget describes the Government's strategy to raise Britain's national economic potential and achieve high and stable levels of growth and employment, with rising living standards for all. Budget 2001 will help build a stronger economic future for Britain through reforms that will put work, enterprise and families first. The key elements of the Government's economic strategy as set out in the Budget report are: to deliver macroeconomic stability to provide a platform for long-term sustainable growth and employment; to meet the productivity challenge through promoting competition, enterprise and innovation, skills, investment and public sector productivity; to increase employment opportunity for all; to ensure fairness for families and communities; and to ensure a better quality of life for everyone, now and for generations to come, by protecting the environment.

The Government's first economic priority when coming into office in 1997 was to deliver stability for the long term, recognising that economic stability is a precondition for achieving our objectives of high and stable levels of growth and employment. They therefore introduced the new macroeconomic policy framework, based on the principles of transparency, responsibility and accountability, and which is already promoting economic stability by delivering low inflation and sound public finances.

We are already seeing the rewards of the new macroeconomic framework. The UK economy grew by 3 per cent last year, in line with our forecasts, RPIX inflation averaged just over 2 per cent and unemployment fell to its lowest levels since the 1970s. Inflation in the UK has been significantly less volatile since 1997, lower for longer than at any time since the 1960s, and in line with our target. Now, long-term interest rates are at around their lowest levels for 35 years, reflecting a sustained reduction in the level of inflation expectations.

Since the Budget, growth in the US economy has slowed, broadly in line with our expectations, and industrial production is falling across the world's major economies. The National Institute for Economic and Social Research recently noted that in the first quarter of this year, imports actually fell in five of the G7 economies. The exceptions were Italy and the United Kingdom. As a highly open economy, the United Kingdom cannot expect to remain immune from these global developments.

But the Government's new macroeconomic policy framework leaves the United Kingdom better placed than before to cope with developments in the world economy. The Government are building a stronger economic future for Britain. It gives a better deal for the people of Britain. It will help us to meet our objectives of high and stable levels of growth and employment, and a fairer society for all. These are the right economic polices 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 cooperation, as provided for in Articles 99 and 104 of the Treaty. I hope that the House will support the Motion. I beg to move.

Moved, That this House takes note with approval of Her Majesty's Government's assessment as set out in the Financial Statement and Budget Report 2001 and the Economic and Fiscal Strategy Report 2001–02 for the purposes of Section 5 of the European Communities (Amendment) Act 1993.—(Lord McIntosh of Haringey.)

Lord Newby

My Lords, whatever the hour of day or night, it is always a pleasure to hear the Minister describe the economic Nirvana which will be Britain after a few more years of a Labour Government. However, I am sure that even he will accept that, if that desirable goal is to be achieved, the Government will need to meet their expenditure targets. I should like to ask the noble Lord today whether the Government are on target for meeting their expenditure targets for the current financial year, or whether they will underspend. If, as I fear the answer may be, they will underspend, what will be the extent of that underspend.

There are major imponderables in regard to the Government's expenditure plans for the future. First, as was teased out during the election campaign, it is unclear what the Government's expenditure plans will be for the second half of the Parliament. After the growth which is currently envisaged, will the public services have reached such a pinnacle of perfection that no further significant increases will be necessary? If further increases in expenditure are thought to be desirable—not least in order to meet European averages in some areas—how will the Government fund any such further increases?

Secondly, what is the Government's latest view about the effects of the slowing down of the economy, to which the noble Lord, Lord McIntosh, referred, on revenue receipts? If, as is highly likely, receipts fall below, or do not grow in line with, projections, how will such a shortfall be made up? What combination of tax increases, increased borrowing or cuts in public expenditure would the Government have in mind? We know, again from the election campaign, that they have ruled out the fairest form of tax increases—namely, income tax— but if they are not to do that, what other options are the Government contemplating?

I should like to speak briefly about the fact that this debate is taking place now. It is clearly highly unsatisfactory. The documents under consideration were published in March. We should have debated them then, or soon after their publication, or, frankly, not at all. The way in which this House debates the Government's tax and expenditure plans is ludicrous. We tend to debate the Finance Bill for a desultory hour just before the House rises for the summer. We are now doing the same with this debate. I trust that we may see some improvement in the next Session, with a debate on the broad principles of the Budget—possibly on the lines of the Motion that we are debating tonight—shortly after the Budget itself. Having failed to achieve that in this Session, it is perhaps not surprising that not a single Back-Bencher—nor even the principal Opposition spokesman—is willing to stay to debate it so late in the day. We must do better next time.

The Earl of Northesk

My Lords, I thank the Minister for his customary courtesy in delivering the Government's assessment of the state of the United Kingdom economy. Before turning to the substance of the debate, I hope that your Lordships will allow me one small indulgence. I believe that this is the first formal opportunity that we have had in this House to congratulate the Chancellor upon his impending good news. I hope therefore that the Minister will convey to his right honourable friend our warmest best wishes and heartiest congratulations.

The hour is late. It is the penultimate day of the Session. Much as I enjoy our verbal jousts, it is a little rum that those on the respective Front Benches are the only speakers in the debate. Indeed, other than the virtuous patience of the Deputy Speaker and the noble Baroness the Government Whip, there are no other noble Lords in the Chamber to appreciate our efforts.

I make no apology for repeating what has been a constant refrain from these Benches in recent years. Here, I echo the resentments—I interpret them as such—of the noble Lord, Lord Newby. Why do the Government persist in scheduling these debates in the inconvenient backwaters of the parliamentary schedule?

Having got that off my chest, I wish to focus on three issues in the context of the Motion. First, the Government's continued rosy assessment of the economy, notwithstanding ever-increasing warnings of an economic slow-down, possibly even a recession, is troubling—the more so given the curiously mixed messages that seem to be emanating from the Treasury.

We are here today, in theory, to approve the government report that is sent to the European Commission for the purpose of ensuring that member states' economic policies are consistent with the goals of the Maastricht Treaty. I say "in theory" because there is something of a credibility gap between the terms of the Motion and the text of the speech of the noble Lord's colleague in another place only a week or so ago. Perhaps I may be forgiven for imagining that that had little enough to do with the European Communities (Amendment) Act 1993? Indeed, far from taking advantage of the opportunity—as the Minister failed to do tonight—to comment on the Chancellor's five economic tests for entry to the euro, the speech in another place was in terms a regurgitation of the Red Book. This is bizarre. The Budget was debated extensively in another place with no formal chance for this House to contribute. Yet here we are, in the dog days of the Session, working to an entirely different heading, and the Minister in terms invites us to focus on the Budget. Bizarre!

On page 1 of the Budget report, the Government state the aims of their economic strategy as: delivering macroeconomic stability; meeting the productivity challenge; increasing employment opportunity for all; ensuring fairness for families and communities; and protecting the environment That is all good and well. We on these Benches do not dissent from this. These aims are not in question. What is at issue are the means by which they are to be delivered and understanding where the UK economy stands as of this moment. Too often, the picture painted by the Treasury is one where all is glowing and golden in the UK's economic garden. There is nothing wrong.

However, the Chancellor of the Exchequer was quoted in the Sunday Times last week as saying—and the noble Lord repeated it tonight: There are risks in the world economy at the moment. The downturn in the world economy has not reached its bottom. It is in many ways far more severe than we expected a few months ago because it has spread from America, in particular to Germany, and, of course, we have no growth at all in Japan We should perhaps be thankful for small mercies. At least Mr Brown is indulging in a little more economic realism instead of repeating the mantra that boom and bust has been banished.

In the same vein, the Ernst & Young Item Club has said in its latest report that, Unless the pound falls back and there is a general improvement in profitability, employment will be the next to turn down. If that happens, the housing market and the High Street will follow the rest of the economy into recession In the meantime, contradictory messages continue to spew forth from the Treasury.

The fact is that the world in which we live is economically risky and difficult at present. We must therefore ask ourselves whether the UK economy is structured to resist these risks and difficulties. Is it not time to stop being—dare I say it?—somewhat complacent about the condition of our economy and to start addressing some of the problems that it would be wholly unwise to continue to ignore? This would be a much more responsible way to respond to the requirements of Section 5 of the 1993 Act.

I turn to my second point; namely, the continuing growth of imbalances in the UK economy. In April this year unemployment levels in the UK as a whole averaged 5 per cent. But we should bear in mind that this disguises vast regional differences. By way of example, unemployment in the south-east was 3.3 per cent, while in the north-east it was more than double, at 7.7 per cent. Disparities like this were repeated throughout the regions. These may not, of themselves, be too worrying in economic terms. However, it has been a long-established Treasury doctrine that a principal purpose of regional policy is to even out these imbalances, rather than to create wealth in itself. That being so, it has to be the case that the Government and Treasury Ministers should be deeply concerned, if only because the evidence is that regional policy is not working adequately in economic terms. Perhaps I may put it in another way: how can it be credible for the Treasury to maintain a policy that is delivering an effect that is the reverse of its intention?

Regrettably, the current imbalances in the economy are not limited to regional variation. We also have a two-speed, perhaps even multi-speed, economy. Production industries grew in the last quarter by 0.7 per cent, at a time when, as the Economic Secretary to the Treasury made clear in another place as recently as 16th July, the economy as a whole is growing at more than 2 per cent and the service sector by 3.7 per cent; in other words, the manufacturing sector could be interpreted as being perilously close to recession. Delving into this a little more deeply, the Government have presided over—I do not necessarily say "contributed to"—a decimation in the new economy in recent months. Try telling a farmer or a guesthouse owner that their businesses are vibrant pictures of health at the moment.

In that context, the Ernst & Young Item Club predicts that the manufacturing "rot"—its word not mine—will spread to the rest of the economy if the pound stays at its high levels against the euro. As I have already mentioned, the club suggests that, in such circumstances, unemployment would rise, hitting the housing market and shops, thereby dragging down the whole economy. And yet, exchange rate adjustment brings with it very serious risks of rampant inflation.

As a form of confirmation, Ruth Lea of the Institute of Directors argues that there will be a "further slowdown in the economy" and that, manufacturing looks pretty grim and the economy is deteriorating quite concerningly and worryingly The fact is that there are huge, and dangerous, imbalances within the constituent parts of the economy. The relevance of the comments made by the noble Lord, Lord Newby, in this respect should not be underestimated. We on these Benches do not suggest that the panacea for these problems is easy. We do maintain that they exist and that the Government should, at the very least, begin to address them.

I turn to the third issue that I wish to examine. The state of the UK economy in the context of the euro is, or rather should be, the underlying purpose of the Minister's Motion. An immediate question comes to mind. In so far as the analysis that I have outlined thus far is correct—and, after all, far from being derived solely from these Benches, it is supported by a number of highly reputable sources—should not the Government be delivering a report to the European Commission in like terms? I should not anticipate the noble Lord to concur with every dot and comma that I have said. But, on the admission of the Chancellor of the Exchequer, and, indeed, the noble Lord, everything is not all sweetness and light. Is it not important that our European partners be made aware of this?

Perhaps more importantly, as I have already said, this should have been an opportunity to have a serious, informative and grown-up debate about our economy in relation to the euro, about convergence or otherwise, and about where we stand in relation to the five economic tests. Indeed, the thought occurs to me that the Section 5 provision was introduced as a eurosceptic amendment to the 1993 Act. As such it was, I believe, actively supported by the party of the Benches opposite. In other words, at that time, the noble Lord and his colleagues welcomed the opportunity to air these matters not only in another place but also more widely, specifically in this House. That, in terms, argues in favour of your Lordships having a more pro-active role to play in scrutiny of economic matters. Why, I wonder, has the Government's position changed so dramatically? Indeed, why—I return to the point—do we persist in debating these matters at such inconvenient times?

I conclude with one small thought. Far be it from me to offer unsolicited advice to the Chancellor of the Exchequer. None the less, if his impending bundle of joy happens to be a son, he might wish to call him Andrew, in honour of the Minister. However, in the circumstances, I really do suggest that, if a daughter, he resists any temptation that he may have to call her Prudence.

12.24 a.m.

Lord McIntosh of Haringey

My Lords, I am sure that the Chancellor will be happy to read what the noble Ear], Lord Northesk, said about the impending addition to his family. I am sure that he will take extremely seriously the noble Earl's advice with regard to names.

I did not say any of the things which were imputed to me by either the noble Lord, Lord Newby, or the noble Earl, Lord Northesk. The noble Lord, Lord Newby, talked about nirvana and pinnacles of perfection. The noble Earl, Lord Northesk, talked about a rosy assessment, glowing and golden and a vibrant picture of health. I noted all those comments as they were said, but they do not correspond to anything that I said. I hope that what I said in introducing the Motion was entirely realistic and pragmatic. We do not believe that we are insulated from the world economy. We have never believed that. We do not think that there are not dangers in the slowdown, particularly in the United States, but also, more recently, in some European countries. We do believe that we have been completely realistic and accurate in our forecasts of what is likely to happen in the world economy and what the effects are likely to be on the economy of this country. I hope that I can add a little more flesh to that view.

I do not accept that it is wrong for us to present in response to our Section 5 obligations the report which we give to the British people at the time of the Budget. I should have thought we would be open to the accusation that we were speaking with forked tongues if we were to say one thing to the people of this country in our Budget documentation and another thing to the European Union. I believe that the European Union deserves no more and no less than to have the considered view of this Government as it is presented to the people of this country. This year, as in previous years, we have used the Budget documentation as the basis for our report to the European Union for the purposes of Section 5.

The noble Lord, Lord Newby, asked whether our expenditure targets were likely to result in an underspend. I am sure he knows this or he would not have asked the question. It is true that total managed expenditure in the previous financial year was £4.5 billion below the 2001 Budget projection. However, the outturns for individual government department spending in 2000–01—we do not yet have a way of describing that properly—have not yet been published. They will be published in the public expenditure White Paper. There has been some underspending by departments, but that is perfectly understandable in view of the Government's drive for value for money and to avoid the wasteful year-end spending surges which were a feature of the past. As we move to resource accounting in this and future years, the problem of year-end spending surges will be greatly reduced.

Both the noble Lord, Lord Newby, and the noble Earl, Lord Northesk, talked quite properly about the economic outlook and the uncertainties facing the UK economy in the light of changes in the world economy. I have never said that there were not risks to the UK economy resulting from the slowing of the world economy. The Budget Red Book predicted that growth in the G7 economies would halve this year and that world trade growth would slow sharply. The Red Book presented a realistic assessment of global prospects and the implications for the UK economy. We also acknowledged in the Budget, and continue to acknowledge now, that the UK cannot expect to remain immune from the weaker global outlook. But the new macro-economic policy frameworks have delivered low, stable inflation and sound public finances. I noticed that neither the noble Lord nor the noble Earl criticised what I said about the effect of our economic policies over the past four years. UK policy remains much better placed than in the past in the face of external developments. Despite falling industrial production in the world's major economies, the IMF, the OECD and the European Commission have in recent months forecast UK growth in line with the Budget projections.

The noble Earl, Lord Northesk, spoke about imbalances in the economy. I acknowledge that those are real concerns. Given the weakening of world growth this year, some widening of the current account deficit is to be expected and the Budget forecast a modest increase to 2.25 per cent of GDP this year. But the current account position is readily financeable and the forecast is small in comparison, for example, to the 4.5 per cent deficit recorded in 1989.

Within the domestic economy, record employment growth has clearly increased household wealth and high consumer confidence is increasing consumer demand. As I have said, the UK cannot insulate itself from a downturn in the world economy. But the Government will steer a course of stability through the economic slowdown, sticking to their fiscal rules and supporting the decisions of the Monetary Policy Committee in continuing to meet the inflation target. We will not repeat the mistakes of the past by running a dual inflation and exchange rate target which would threaten stability and undermine prospects for sustained economic growth.

Both noble Lords criticised the consideration of this matter and called for more debate on economic matters in the House. Of course, the formal answer is that that is a matter for the usual channels. My informal answer is that we have reached this most important debate at an absurd time and we have done so after an afternoon, if not an evening, of debate on relatively trivial matters; and I do not defend that. But it is not within the power of Government to avoid that. However, we had a full debate on economic policy in the debate on the Queen's Speech. Controlling as they do only 29 per cent of the voting power in this House, the Government do not have full control over what is debated in your Lordships' House.

I am grateful to those who have taken part. I am sorry that it is so late. I commend the Motion.

On Question, Motion agreed to.

House adjourned at twenty-seven minutes before one o'clock.