Budget Report

HL Deb 10 December 2002 vol 642 cc111-51

3.13 p.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 Pre-Budget Report 2002 for the purposes of Section 5 of the European Communities (Amendment) Act 1993.

The noble Lord said: My Lords, each year the Government report information to the European Commission on 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 objective is to ensure that member states' economic policies are consistent with the goals of the treaty, as set out in Article 2: non-inflationary economic growth; respect for the environment; a high level of employment and social protection; and raising the standard of living and quality of life for citizens across the United Kingdom and the entire European Union.

These goals are consistent with the Government's own approach to economic policy. Section 5 of the European Communities (Amendment) Act 1993, usually known as the Maastricht Act, requires Parliament to approve the information sent by the Government to the Commission for this purpose.

The Government's strategy for economic policy is set out in the 2002 Pre-Budget Report, published on 27th November. This material will form the basis of the information that we send to the European Commission. Sharing the information in the Pre-Budget Report with our European partners allows us to influence the development of the European Union, bringing enhanced employment and growth to Britain and other member states.

In this Pre-Budget Report, we have shown that last year, of the major economies, the British economy was the fastest growing. This year and next year, Britain and North America are now forecast, even in a still uncertain and unstable world, to grow faster than all other major economies.

As the Chancellor set out in his Statement to the House on 27th November, with the lowest inflation for almost 40 years and long-term interest rates also the lowest for almost 40 years, Britain's monetary and fiscal framework is meeting the challenges of each stage of the economic cycle. We have made very dear that we will not let anything put that hard-won stability at risk.

In the Pre-Budget Report, we have also outlined further labour, capital and product market reforms to improve British science, skills and entrepreneurship, and proposals for continuing public service reform and tax and benefit modernisation showing that, both in Britain and abroad, strong economies and fair societies move forward together.

Twenty of the world's biggest economies, accounting for 60 per cent of the world's output—the United States, Japan, much of Europe and Latin America—have been or are in recession alter what has been the sharpest slowdown in global economic activity for almost 30 years and the biggest contraction in industrial output in the world's major economies since 1975.

The challenge for the British economy in this more uncertain and unstable world has been to steer a stable course, combining low and stable inflation with sustained demand growth and with high levels of employment. Our monetary and fiscal foundation, which is based on the independence of the 13an k of England, imposes a symmetrical target for inflation, requires debt at low levels, holds to tough fiscal rules over the economic cycle and is thus designed not just for times of high growth, but for a global contraction with all its attendant difficulties.

Because the Bank of England has established credibility through year after year meeting our 2½ per cent symmetrical inflation target, it has been able, supported by fiscal policy, to sustain growth. So while, against the background of the international slowdown, the euro area is forecast to grow by 0.8 per cent, France by 1 per cent, Germany by just 0.4 per cent and Japan by-0.9 per cent, for the UK, GDP growth is forecast to increase by 1.6 per cent this year, rising to 2½ to 3 per cent next year, rising again to 3 to 3½ per cent in 2004.

I turn to the public finances. As the Chancellor set out in his Statement, with this Government's long-term and deliberately cautious approach, we are, with current surpluses and historically low debt, able at every stage of the economic cycle to meet our fiscal rules, including in the cautious case. We meet our golden rule over the cycle, not just achieving a balance, but with an estimated surplus at £46 billion. And we meet the golden rule on the cautious case. Taking the full economic cycle into account, the current surplus for each year is forecast to be 0.2 per cent of GDP this year, 0.3 per cent next year, then 0.6 per cent, 0.5 per cent, 0.6 per cent and 0.7 per cent.

Our second rule—the sustainable investment rule—is that over the cycle net debt should be kept below 40 per cent of GDP. Net debt this year and in future years will be at 31 per cent, 32.1 per cent, 32.4 per cent, 32.6 per cent, 32.7 per cent and 33 per cent—comfortably meeting our sustainable investment rule, doing so over the cycle and in every year.

Our commitment to meeting our fiscal rules is, moreover, for the long term, so we have also published a report which examines the sustainability of Britain's fiscal position decade by decade and compares our position with other countries. It shows that, taking account of population changes and the cost of ageing on public spending, the British fiscal position in this period is sustainable and in a strong long-term position compared with other countries.

Because we have built sound foundations of low debt and low inflation and are today meeting our fiscal rules in every phase of the economic cycle, we have rejected the view that we should cut back our spending plans. So we have confirmed that we will fund our planned investments: by 2006, £8 billion more a year for local authorities; £15 billion more a year for education; £63 billion more a year for public services as a whole; and by 2008, for health alone £41 billion more a year, paid for by our national insurance rise.

I turn to productivity in the United Kingdom. If stability is the precondition for economic progress, enterprise is the driving force. Britain today is challenged by a long-term global restructuring of industry. In this next wave of globalisation, now upon us, it is the flexibility of our product, capital and labour markets, the strength of Britain's science base, the level of British research and development, and the scale and dynamism of knowledge transfer from our universities to our businesses that will drive our productivity growth and thus future prosperity.

This Pre-Budget Report continues the Government's programme of microeconomic reform, targeting historic weakness in five key drivers of productivity performance: strengthening the competition regime through the Enterprise Act; promoting enterprise by modernising the UK's business tax regime, and promoting an entrepreneurial culture, including for small and medium-sized businesses, local economies and high-unemployment communities; supporting science and innovation through the Government's comprehensive science strategy, and two complementary reviews into business innovation and university-business links; improving UK skills through measures to support the expansion and improvement of the modern apprenticeship scheme, and by continuing to pilot new measures to improve access to training for adults; and promoting investment by reforming the planning system.

Our policy is to combine enterprise with fairness. As the Chancellor announced in his Statement, to continue to make work pay more than benefits, we are, from April, extending the principle of the working families tax credit to single adults and couples aged 25 and over without children. Couples with wages less than £280 a week, or £14,000 a year, and single people with wages less than £200 a week, or £10,500 a year, stand to receive more money, taking forward our belief that an enterprising economy and a fair society advance together.

A flexible, efficient labour market must not only promote employment, but also be fair to parents. Next month, a joint Treasury-DTI report will publish proposals for enabling parents to make real and effective choices on balancing work and family life. Building on our increase, from April, in maternity pay to £100 a week, on the first ever paternity and adoption pay, on the new tax credits, and on the first ever national childcare strategy, we will consider further reforms including new tax and national insurance incentives to expand employer-supported childcare; paying the childcare credit for approved home childcare by carers who are not already childminders; and increased flexibility in parental time off, including giving fathers time off to attend antenatal care.

Our goal, stability and prosperity for all, also means fulfilling our objectives of tackling child and pensioner poverty. The child tax credit based on support for all, and on most support for those who need it most, will become the most powerful weapon in tackling family poverty. The levels of the new pension credit from next October will reward, instead of penalising, modest savings and small work pensions.

In conclusion, we have been tested by world events and have resolved to steer a steady course. That steady strength of purpose will continue, and we will honour our commitments to invest in public services, to advance enterprise and fairness, and to meet and master the global challenges. That is the programme set out in the Pre-Budget Report, and that, with the approval of the House, is the programme that we will send to the European Commission. We are fulfilling our commitment under the Maastricht Act to report on our main economic policy measures, and maintaining our position, developed by this Government, at the heart of the EU policy process. I beg to move.

Moved, That this House takes note with approval of Her Majesty's Government's assessment as set out in the Pre-Budget Report 2002 for the purposes of Section 5 of the European Communities (Amendment) Act 1993.—(Lord McIntosh of Haringey.)

3.23 p.m.

Lord Saatchi

My Lords, I am grateful to the Minister and to the usual channels for allowing what is usually a formality to be the occasion for a full debate in your Lordships' House. As the Minister said, the Motion invites noble Lords to note "with approval" the national accounts as set out in the Pre-Budget Report. Looking at the most distinguished list of speakers—which is another tribute to the expertise of your Lordships' House in economic affairs—it is clear that there will be a thorough analysis of the Motion and of the financial situation it describes. Therefore, although the report may contain many figures which are wrong by accident, I shall, if I may, concentrate on the figures which seem to be wrong by design.

Since the report was laid before Parliament, a pall of gloom has descended over the economy and the country. There are, however, some bright spots. The report shows extra effort going into manufacturing—the manufacturing of figures. The Government are also pouring investment into engineering, of the financial kind, and giving a big boost to the creative industries, especially accounting. What is the Government's motive for all this? It is simple: they are running out of money, and they would rather that we did not know it. This year, government spending is up by 7.5 per cent on the most favourable measure, but GDP growth is up by 1.5 per cent. That means that the Government now have five times more money going out each month than they have coming in.

Consequently, last year, the Government told us that they would need to borrow £34 billion over the next four years. Then, in April, they said that they would need £72 billion. Now, in the report, they say that they need more than £100 billion. Sadly, however, that is not the end of it. The £100 billion figure arises before taking into account another £100 billion in two additional forms of borrowing, neither of which is mentioned in the report. This invisible £100 billion of borrowing has increased dramatically from just £10 billion five years ago. Yet not one penny of that huge sum appears on the Government's balance sheet, because the Government have found a way to make £100 billion of public sector capital expenditure vanish. That is why the noble Lord, Lord Barnett—who I am delighted to see in his place—asked the Government: to say conclusively that the reason they are borrowing in this way is that the Treasury understandably wants to take the percentage of borrowing" [out of the percentage of GDP].—[Official Report, 23/10/02; col. 1330.] In order to explain, I ask noble Lords to put themselves for a moment in the Government's position. Let us say that we wished to build a road, although this could apply also to a school or a hospital. We would go to a private company and say, "We haven't the money for this road. You build the road for us. When it is finished, we will pay you every year for the next 25 years". That is what they call the PFI. There were 450 such contracts in place in April, and the Government have signed another 300 in the past six months. The value of all these liabilities to pay under PFI has now reached £73 billion.

Lord Radice

My Lords, I wonder whether the noble Lord is aware that the PFI policy was invented when his own party, the Conservative Party, was in government. That government accounted for PFI in exactly the same way as the current one.

Lord Saatchi

My Lords, I am aware of both points. My comments are not on the validity of PFI as a method of building roads and schools, but on the validity of the Government's accounting method. In Kenneth Clarke's last Red Book, in 1996, the value of PFI contracts amounted to £10 billion. The Government have expanded that figure from £10 billion to £100 billion in five years. That is precisely the point that I am getting at.

Lord Barnett

My Lords, the noble Lord knows why I cannot be here later to make a fuller reply. He seems to be saying that he would account differently for these expenditure items. How would he do that?

Lord Saatchi

My Lords, that point is the main thrust of my speech, and I shall deal with it in more detail later. In a few words, however, that stream of liabilities and obligations to pay under PFI should be included on the face of the Government's balance sheet as government debt.

PFI is the first form of invisible borrowing. The second form works as follows. Imagining ourselves in the Government's shoes, we tell the company, "You borrow the money to build the road and we will guarantee your loans for you". That is called PPP, on which the Government have at least £27 billion of further liabilities. So, adding together the £73 billion of the present value of PFI liabilities and the £27 billion of PPP liabilities, we arrive at a total of £100 billion of understated liabilities.

So it is that the Government are exploiting accounting technicalities to keep these PFI schemes, the guarantees, letters of comfort, government-backed bonds and underwriting of various PPP schemes off the books. The PFI liabilities are mentioned only in the hiding place of creative accountants through the ages—the notes to the accounts. The PPP obligations, including £21 billion for Network Rail, are not mentioned at all, not even as a note. As the national institute said: You can already smell the fudge being cooked up in Great George Street". As the report does not make clear, for our Government today the total of all such future obligations to pay is a staggering £100 billion. That is 10 per cent of UK GDP. By not including these sums the Government are understating their liabilities and misleading us all.

In his introduction to the Motion the Minister spoke of historically low debt. Now we come to a matter of the greatest economic significance. In introducing the report in another place the Chancellor of the Exchequer said: Countries such as ours with low levels of debt … are in a position to borrow, whereas others are not". If you or I went to the bank to borrow money, we would present our balance sheet setting out our assets and our liabilities so that the bank manager could determine whether or not, in the Chancellor's phrase, we are "in a position to borrow". The bank manager would ask some pertinent questions, as bank managers do, such as: what obligations do you have? If you revealed that you owed a stream of payments over future years, as the Government do with PFI, would that be considered part of your debts? Of course it would. If you had also guaranteed your mother-in-law's mortgage, the hire purchase payments on your sister's car and your nephew's school fees for life—as the Government do with PPP—would the bank manager say that that affected your borrowing position? Of course he would. This means that the Government have already breached their borrowing limits. Their debt is not 31 per cent of GDP, as stated in the report; it is 41 per cent of GDP. On the Government's own rules they should not undertake the extra borrowing described in the report.

I am hardly an impartial observer so perhaps my figures are wrong too. Normally you would call the auditors and ask them. But who do you call? There are three of them: the Comptroller and Auditor-General; the Office for National Statistics and the Statistics Commission. That is two too many, obviously, for a true and fair view but just right to give the Government a chance to divide and rule.

The relevant accounting standard for dealing with such transactions—I turn now to the question of the noble Lord, Lord Barnett, in more detail—is Financial Reporting Standard No. 5 entitled, Reporting the Substance of Transactions, which forms part of the generally accepted accounting practice in the UK.

The accounts of central government bodies are prepared under UK GAAP and are audited by the Comptroller and Auditor-General. They are intended to give a true and fair view of the income and expenditure of the relevant government body and of its state of affairs at the balance sheet date. This is similar to the basis on which the accounts of commercial or private sector entities are prepared and audited.

Meantime, a second body, the Office for National Statistics, produces most of the UK's official economic statistics, including the national accounts. That second body is under the supervision of a third, the Statistics Commission.

The Government have woven a tangled web around these three organisations which last week happily began to unravel. I bring your Lordships up to date. In a letter to the Statistics Commission, which, as I said, supervises government accounts, the Department for Transport's chief accountant, Alan Beard, revealed that he, could not support the view that £21 billion of Network Rail liabilities could be left out of the national accounts. He was responding to Treasury claims that he had advised it that the £21 billion could be left out. Mr Beard denied it and wrote: Indeed, had I been asked, I would not have done so". The Statistics Commission chief executive, Gill Easterbrook, then wrote last week to the Cabinet Secretary, Sir Andrew Turnbull, saying her body believed that there was a need for, greater transparency over Network Rail". Her letter said that the Government, must provide a clear statement of the position and risk to the taxpayer". The Statistics Commission chairman, Sir John Kingman, backed her in a separate letter, warning that the Treasury view was "based on a misinterpretation". Three cheers for them and for Sir John Bourn, the Comptroller and Auditor-General, who last week also threw his weight behind calls for the loan guarantees to Network Rail to appear on the Government's balance sheet. Appearing last week before the Commons Treasury Select Committee, he said: The Government is providing security to the providers of debt and it is acting as a lender of last resort … If this had been in the private sector and I had been auditing this I would have expected it to be put on the balance sheet". Sir John said that he hoped that Ministers would accept his advice. I do too but I am not confident that that will be the case.

I remind your Lordships that the Government have already had to climb down once over their attempt to mislay £15 billion of expenditure on tax credits. We should remember that the Government had argued that tax credits were a tax reduction and had accordingly lowered the UK tax burden by around 1 per cent by that accounting method. However, it emerged during the Committee stage of the Tax Credits Bill in your Lordships' House that 90 per cent of all tax credit payments actually exceed the tax liability of the recipient. So the credits were not credits after all. They were not relieving any tax because there was no tax to relieve in the first place.

I conclude by saying that there is an enormous need for much greater clarity of presentation in the public accounts. The mood of the times is for openness, transparency and full disclosure. We need a clear, complete and comprehensible set of public accounts. We need them to be composed under standards of accounting practice so that people have at least a chance of doing the detective work to find out what is really happening. That is democratically proper and a matter of common sense. We do not have it. By its extensive use of misleading statistics, its suppression of negative facts, and its many errors of omission and commission, the report ignores the duty of care owed by the compiler of a set of accounts to its readers and therefore does not merit the approval of your Lordships' House.

3.37 p.m.

Lord Howe of Aberavon

My Lords, I begin by echoing my noble friend's thanks to the Minister for his exposition of the Government's case in words faithful to those of his master in the other place. I congratulate my noble friend Lord Saatchi on his extremely interesting analysis which I have to confess takes me beyond the state of comprehension I achieved as Chancellor of the Exchequer when I struggled to solve this very problem for some time. I was unable at that time to find any suitably acceptable accountancy device to square the circle. Therefore, I have some sympathy with the analysis presented to the House by my noble friend.

I feel that sympathy perhaps with some reluctance because former Chancellors are almost bound to feel a sense of fellow feeling for their successors. Those of us who have grappled with these problems are reluctant to embark on fierce criticism of the holder of the office. I have refrained from doing so on any scale in this House until this time. It is now 20 years since I left the Treasury so I am all the more reluctant to do so.

But a former Chancellor also has an advantage in that he can intuitively begin to recognise some of the danger signs and warning symptoms of Chancellors who arc going astray from economic virtue. One can begin to see the symptoms of self-satisfaction, of over optimism, of hubris, even sometimes, as I shall suggest, of elephantiasis. As I listened to the noble Lord, Lord McIntosh, reeling off his figures predicting into the indefinite future the precise size of the public sector deficit to one decimal point and other precise figures I began to detect those symptoms.

In my own case, the Treasury did not do well enough during my time there for me to develop those symptoms, although I laid the foundations. By the time I was Foreign Secretary and travelling the world, I was making speeches about economic policy that made it sound as if we had learned to walk upon the water.

I detect similar symptoms when looking at the nature of the self-publicity in some of the documents accompanying the Pre-Budget Report. In my last year at the Treasury, we considered producing something like the neat little leaflet that the Government have provided. We felt that it was necessary to instruct the populace as to the wisdom of our activities in simple terms that they would understand. However, we rejected the idea as an implausible operation. The leaflet is full of the most generalised statements. It never anywhere suggests that any taxes will increase and it gives opinions to the world that are enormously exhilarating.

The title of that modest publication, the Pre-Budget Report, is Steering a steady course: Delivering stability, enterprise and fairness in an uncertain world. There is uncertainty all around us but here is stability, enterprise and fairness in enormous quantities. The contents page is also pretty revealing, because it reads like the chapter headings of a manifesto. The chapters arc called: "Overview", "Maintaining macroeconomic stability", "Meeting the productivity challenge", "Increasing employment opportunity for all", "Building a fairer society", "Delivering high quality public services" and "Protecting the environment". There are two annexes; annex A is titled "'The economy" and annex B "The public finances".

The report is an extraordinary exercise. I have one other comment to make about it: it costs £45 and runs to 225 pages. In 1982, I introduced the first Autumn Statement. The document that I produced was 32 pages long and cost £3.80. This document is only the half of it, because alongside these 225 pages, there are 300 further pages of supplementary documents.

I turn to the particulars of the Pre-Budget Report. For example, pages 8 and 9 are full of declamatory statements with which I shall not trouble the House. However, tucked away among those great achievements is the statement, publishing On 17 December a Green Paper on pensions setting out proposals to help those of working age plan more effectively for their retirement". We are still awaiting that marvellous document. The report does not suggest, as most people acknowledge, that the pensions industry is in deep crisis as a result of a £5 billion raid on the industry's funds in the Chancellor's very first Budget.

That is not simply a frivolous point, because it shows the extent to which the Chancellor has been carried away by euphoric insights into his own performance.

Another feature is worth commenting on. Noble Lords will remember that, earlier this year, the Chancellor introduced—or reintroduced—what used to be called the national insurance surcharge. That is a comprehensive and across the board imposition on employers' pay bills. When I looked at the document that I produced in 1982, I noticed a contrasting section: one modest little page headed, "Proposed changes to the national insurance surcharge". It described how the surcharge was introduced in 1977 at the rate of 2 per cent. The noble Lord, Lord Barnett, will know all about that. When we arrived in office in 1979, the surcharge was running at the rate of 3.5 per cent. In my Autumn Statement in 1982, I was able to reduce it by 1.5 per cent and, in 1984, my noble friend Lord Lawson was able to sweep it away altogether. We recognised it for what it was: a tax on jobs. That is the undisclosed item in this Autumn Statement. The Government are going in the old direction again.

I am distressed at the way in which the report is so comprehensive in its coverage of almost every aspect of human activity. If one goes through from beginning to end, there is not a sector of any social service, economic or business activity that is not described enthusiastically, if not in eulogistic terms. One wonders if, when the Chancellor sits there generating hundreds of pages of wisdom, anything is left for other Ministers to decide. I have an impression that, in a remarkable way, the Government are coming to match that which the less than exhilarated people of Iran have to tolerate. The system seems to he that we elect a Prime Minister—or in their case, a president—and it is up to the ayatollah who lives next door to tell the president exactly what he can and cannot do. That is not much of an exaggeration of the way in which the Government seem to operate. Other Ministers hardly get a look in at all.

That is amusing, serious and important. It tell; us something about the quality of the Chancellor's judgment. Can it really be the case that everything in this country is for the best in the worst of all possible worlds? That is the impression that one seems to get. He acknowledges the increase from £11 billion to £20 billion, which almost doubles the public sector net borrowing in the year ahead, as my noble friend Lord Saatchi pointed out with great clarity. That is a rise up to 2.2 per cent of GDP. The Chancellor is confident beyond doubt that he will be able to manage that year after year, well within the limits set by the stability pact and other factors.

If I were in the Chancellor's position and looking out on the world as it is today, I would seriously wonder whether the plans that I had proclaimed. So proudly had really immunised us against all that. It is a world in which, curiously, when one tries to identify a locomotive economy that will take us out of trouble, one can identify only two. They are relatively modest vehicles: Russia and China. They are the only two identifiable locomotive economies in a world in which the Chancellor is so confident of surviving.

When looking at the realism of the Chancellor's prospects, one must consider the factors working against fiscal recovery along the lines for which he hopes. The top half of income tax is paid by the top 10 per cent of earners. Those are the people who face substantial sacrifices, with the impact of austere world conditions on the City of London and financial industries generally. I am doubtful whether income tax revenue levels can be maintained even at their present level, against that background. Stamp duty receipts are also likely to fall substantially and to continue to do so as the housing market almost certainly turns downwards. If one looks at the day-to-day news, one can see that corporation profits are shrinking rather than expanding. All those areas more than justify the warning given by the IMF and reported in The Times today, of the hazard that the Chancellor may fail to come anywhere near fulfilling his expectations.

What one has to remember—and I remember this well—is that when the economic tide starts running against you, it often comes in faster than you might have expected. The Chancellor has had it very lucky so far. I look back to the period in the winter of 1980 and spring of 1981, when we tried to determine the likely size of the public sector borrowing requirement in 1981–82. We knew from the outset of that analysis that it would be far in excess of that for 1980, which was £8.5 billion. We expected it to be £11.5 billion when we started to work it out at the beginning of 1982. By February, one month later, our forecast suggested £13 billion. By the time of the Budget, one month after that, it had risen to £14.5 billion. That is what happened in the three months before the Budget came to be made. My fear is that, if something of the same kind happens now, many of the optimistic expectations will not be fulfilled.

I do not want to take up more of your Lordships' time. I could go on to a number of other topics, but I feel that I must spare my colleagues. My contribution is a serious one. Taking account of the analysis of my noble friend Lord Saatchi, there is a real potential flaw in the foundation of optimism. I am sorry that we shall not be able to hear the noble Lord, Lord Barnett, on this occasion. It is a pity that he is unable to take part in the debate, but I understand the reason why. Aside from that, the other foundations of the Chancellor's optimism give cause for great anxiety, which could begin to erode the confidence on which he counts so heavily.

3.49 p.m.

Lord Higgins

My Lords, I declare an interest as the chairman of a company pension fund. I am very glad to follow my noble and learned friend Lord Howe of Aberavon. I agree with what he said about the huge mass of documentation—it is probably a record amount—that has descended on us. It exceeds the limit that the Printed Paper Office imposes if one wants to post copies to anyone. It is not all propaganda, as my noble and learned friend said. But a great deal of it is. A number of very important points are made in the documents. I shall comment on one or two.

The Government said early on in their period in office that they had brought an end to boom and bust. That will probably have a rather hollow ring with the many investing in the Stock Exchange or with many pensioners. The economic cycle continues; it is not the case that the Government have in some miraculous way brought it to an end, although its current amplitude is somewhat less than it has been in other periods. The reality is that the Government's forecasts, made only a few months ago, appear now to be substantially wrong.

It is unfair to try to put responsibility for the assumptions that the Chancellor makes on the National Audit Office. The NAO fulfils many useful functions but asking for its imprimatur on these issues is of no great advantage. It has produced some extremely good reports, not least one published recently entitled, Tackling pensioner poverty: Encouraging take-up of entitlements. It states: Over 20 per cent of pensioners do not take up all their entitlements". We are getting to the situation in which the Chancellor of the Exchequer constantly says that he will spend more on this, that and the other in terms of social security, but the reality is that it is so means tested and so complicated that the shortfall in terms of the amount expended is very great. Will the Minister tell us, taking last year as an example, what the difference was in pounds between the amount the Chancellor said he would spend and the amount actually spent?

Many of the Chancellor's objectives, in particular the golden rules for prudence, are related to the economic cycle. It would be helpful if the Minister could clarify exactly where we are in that regard. Page 22 of the Pre-Budget Report gives some indication. It states that, the Government's provisional judgment has been that the economy completed a full, albeit short cycle between the first half of 1997 and mid-1999. The current economic cycle therefore began in mid-1999". I presume that that means the Government regard that as the bottom of the present cycle; perhaps the Minister will confirm whether that is so. What measures are there of where we are in the current cycle? If we are to appraise the Government's policy correctly, it is very important, since it is all related to smoothing over the cycle, that we have a clear statement from the Government about exactly where we believe we are with regard to the cycle. There are many references to traditional economic stabilisers and so on. It is appropriate for us to allow them to operate fully.

A fascinating paper in this vast mass of documentation is entitled Long-term public finance report: an analysis of fiscal sustainability. The amount of algebra contained in Technical Annex A of that report must surely be unprecedented. It reminds me of the period when I was teaching economics at Yale. The econometricians went absolutely berserk at times. There appears to be some sort of cross-infection with this document.

Having said that, I welcome very much what is suggested in the document. Traditionally, so far as economic performance is concerned, it is said that we must achieve a low level of inflation, high employment, economic growth and a balance of payments equilibrium. The document introduces what is called "inter-generational balance". That is tremendously important. It is very easy for a government to run up their liabilities or to run down their assets for a considerable period, giving the impression that all is well when in fact they are putting a burden on future generations. I hope—I say this in a co-operative mood that is typical of the House of Lords—that the Government will agree that we should have an additional objective; that is, that there should be inter-generational balance.

The algebra in the document is incredibly complicated. However, at the end of the day, the whole issue turns on the balance sheet. The question is whether or not—from generation to generation and spread over time—there is a deficit on the balance sheet and whether that is going up or down. The noble Lord, Lord McIntosh of Haringey, and I have debated that previously. The Government came close to producing the outline of a balance sheet. They produced a huge document showing the assets but they have been reluctant to conduct a real appraisal of the liabilities, perhaps the largest of which is paying the basic national insurance pension to future generations.

That links, without any degree of co-ordination, with the comments of my noble friend on the Front Bench. The genuine balance sheet, taking into account what are being treated as off balance sheet items as well as those on it, really indicates how things stand. It is tremendously important for us to have, at least so far as economic analysis is concerned—I leave strict accountancy to one side—an idea of where we are 'with regard to the Government's balance sheet and how they project that through time. The so-called inter-generational balance—economists, I am afraid, always fall into jargon—is important and I hope that on an all-party basis we can make some progress in relation to it. We must rely on honesty so far as the figures are concerned and not shuffle off some items into a side track. I agree with my noble friend Lord Saatchi in that regard.

A noticeable point in last weekend's Sunday papers was the extent to which commentators—the more serious commentators, such as Mr Peston, Mr David Smith and others—felt that we should consider the implications of the Pre-Budget Statement in relation to whether we should join the euro. That is not surprising because the Government have said what they propose to do with regard to decision-taking in that regard.

I want to make a number of further points but I do not wish to detain the House for longer than necessary so I shall proceed very much in shorthand. The first point about our joining the euro is that the five tests imposed—or selected—by the Chancellor are a charade. They are far too ambiguous and vague for anyone not to be able to fiddle them one way or the other. I do not believe that they are a helpful way of looking at the matter. Whether they are related to the political ambitions of the Prime Minister or Mr Gordon Brown to go down in history as the person who joined the euro, I know not. In all events, those tests are not what this is really about.

The crucial question is whether we give up for all time the main means of allowing for differential movements and prices within the broader European Community; the question is the same so far as those within euro-land are concerned. That would be an irrevocable move and it is crucial to decide whether the size of the area and the relative importance of different countries is such that it is not wise to give up that major means—that is, changes in the exchange rate—of adjusting in terms of economic changes.

It is important to differentiate interest rate policy from monetary policy. It is interesting that the Government gave control over interest rates to the Bank of England while, at the same time, clawing back the ability to exercise influence on monetary policy—that is, control over the money supply. But, at all events, the euro-land system of one-size-fits-all interest rates clearly imposes considerable strains on those in the Community. Further strains have been imposed by the Stability Pact, which even some of the more enthusiastic individuals in the European Community have described in fairly critical terms.

The fact is that, over the centuries, the whole basis of parliamentary or House of Commons power in this country has depended on the control of money, whether it be taxation or expenditure. While clearly some degree of balance is required in relation to fiscal policy, it would be very unwise to go for a rigid system of the kind that now exists in euro-land. From the Chancellor's own statement before us, I believe it is clear that, from time to time, it is necessary to use fiscal policy in order to manage the economy, not least when control over interest rates, if not the money supply., has been handed to some other independent body.

I shall make two final points. The first concerns convergence. At present, it is absolutely clear that, far from converging with the euro-land economies, we are moving in a different direction. Therefore, that does not suggest that this is an ideal moment for a referendum to be held. That is an important point.

I also want to make a longer-term point. I remember that, years ago, the Canadian dollar was worth more than the United States dollar. Both economies now appear to have converged closely together. However, at that time, had those countries adopted a single currency and had the two economies developed as they have since then, the effect on the Canadian economy would have been traumatic, given, for example, its present exchange rate with the dollar. I believe 'that the idea of convergence over a large area must be given considerable scrutiny.

My final point is that, according to the Prime Minister, we are moving into a period in which this issue will soon become live. In the context of the European Union, the statement that we have before us today is most important. I spend much of my time travelling between here and Holland. Generally speaking, the Dutch are enthusiastic about our joining, and I can understand that. Having said that, we must also consider that, if we were to join, even at a sensible, or what appears at the time to be a sensible, exchange rate, then the strains in the current euro-land situation are such that our joining could result in the break-up of the whole system. It is possible that at some point in the future these matters will need to be reconsidered.

For the reasons that I have set out and against the background of the documents we are considering—there is much about Europe in them—I do not believe that it would be appropriate for a referendum to take place in the near future. That view seems to have been held fairly widely in the press in recent days.

4.4 p.m.

Lord MacGregor of Pulham Market

My Lords, I am grateful to the government Front Bench for giving us this opportunity to talk about the Pre-Budget Report. I rise to do so with some diffidence, given the expertise in your Lordships' House.

I want to comment briefly on four issues. The first follows on from what my noble and learned friend Lord Howe said in relation to the increase in public sector net borrowing. In all fairness, and in order to give my comments balance, I believe that in his earlier years the Chancellor was a very good and conservative—with a small "c"—steward of the nation's economy and the nation's finances, although, in doing so, he benefited from a very sound economic Conservative—with a large "c"—legacy.

But we are now entering far choppier economic waters—in particular, internationally, but also at home. I believe that the Chancellor made a great mistake in throwing prudence out of the window in his Budget in April this year. Here, I follow very much what my noble and learned friend Lord Howe said.

I can recall as a Chief Secretary, as can my noble and learned friend Lord Howe as Chancellor—other former Chief Secretaries are, and have been, present in the Chamber—exactly the point that he made about how the figures in relation to borrowing changed substantially within a three-month period because of international events. In that case, it was due to a change in oil prices. That is because the fiscal deficit is the residual of two enormously large sums of expenditure and income.

I shall come later to what I consider to be the unrealistic borrowing figure that the Chancellor is giving and which my noble friend Lord Saatchi brought out so brilliantly. However, I fear that, even taking into account the increase that he included, the Chancellor is basing his calculations for borrowing on very optimistic assumptions. Given that this is a small figure in relation to two very large sums, that can change at enormous speed.

There is of course the international situation. At present, many people are pessimistic about the prospects of a recovery in many parts of Europe, in the United States and elsewhere in the world. I am concerned about our own situation here in relation to household debt. It seems fairly clear to me that a large part of current consumption spending, which is keeping the economy at its present growth position, is based on the calculation that people can continue to borrow substantially—in many cases on the equity in their house—because of low interest rates. People believe that that can continue. If it does, then, frankly, there will be a risk that at some point the Bank of England will have to put up interest rates. At that point, there will be a remarkable change in the gearing effect. I believe that that could have a dampening effect on consumer expenditure in the next year or two or beyond. In addition, as my noble and learned friend pointed out, receipts from corporation and incomes taxes may be over-optimistic at present.

Therefore, I simply believe that the Chancellor has taken a great risk in engaging upon the current levels of high public spending. Whereas, at present, most people are talking about the need to increase borrowing or possibly change taxation should the growth figures not be reached, it is possible that public spending will have to be cut. That will have to be another option. A former Chief Secretary, who, until a few moments ago, was in the Chamber, will remember when that happened under his government's stewardship.

My second concern is in relation to large increases in public spending in individual departments over the next three to five years. To many, that has been a clear signal that it is open court for bidding for higher wages in the public sector. I acknowledge readily that in some areas that is desirable. In cases where a clear difficulty exists in recruiting people to key jobs, as is the case with long-term career teachers in London at present, then there is a need to spend more in that area. But there are many other areas where there is no difficulty in recruitment and where it will now be very difficult for the Government to resist higher wage demands.

The signal of higher public expenditure has opened the doors. However much the Chancellor tries to resist it, it will always be present. That is why I believe that it would have been right to put larger sums into the contingency funds in years two, three, four and five, as was done previously, and not to have placed everything into higher departmental expenditure on the assumption that it would not be leaked away in higher wage demands.

My next point concerns PFIs and PPPs. My noble friend Lord Saatchi was absolutely devastating in his criticism of the current situation with regard to the accountancy for public borrowing. Of course, it is not only an arcane accountancy point. In the corporate world, we are learning that what appeared to be arcane accountancy points in the United States very rapidly turned into real issues affecting the corporate economy.

If the Chancellor is underestimating the real extent of future public borrowing, that could have a real impact on the economic situation. I noted that the noble Lord, Lord McIntosh, referred with some pride to the 32 to 33 per cent proportions of GDP for borrowing, but in my view that depends on an inaccurate assumption as to what the borrowing figure is. I do not just refer to the black hole in the way in which Network Rail's position has been treated, and the figure there of £21 billion. It seems to me that by all previous standards of government accounting—certainly those that applied when I was Chief Secretary—that should have been classified as borrowing. I hope that the current dispute between the three bodies to which my noble friend referred will come to that conclusion.

I am much more concerned about another aspect of PFI, on which I should like to spend a few minutes. I fully understand the management and risk advantages of the PFI concept, provided that risk really does transfer. That is why, as Secretary of State for Transport, I introduced some forms of PFI, which was then called Design, Build, Finance and Operate. I introduced four road projects under DBFO because I recognised that there were considerable management and risk advantages in dealing with them in that way.

However, that was on the assumption that motorway tolling, which I also advocated at the time, would in due course be implemented so that real cash would flow in future years, not from the Government but from the user for that borrowing. Indeed, the Dartford bridge, which was one of the first PFIs, reflected precisely that. It has been a huge success. It was built much faster than if it had been kept in the traditional road programme, but was financed by charges not by future taxation. That is an important point to bear in mind, because real cash flowed.

Now, as we see PFIs grow to the £77 billion to which my noble friend referred, we are in a situation where PFIs arc being used all the time as an alternative means of financing, as well as a better management approach, in order to avoid those figures appearing in the government borrowing statistics. As all those PFIs are being financed by future contributions from Government year by year, that is a form of financial leasing and comes very close to borrowing through gilts or whatever else. As the burden grows, so the future commitment to pay off that borrowing also grows. That is why I believe that these PFIs, the expenditure on them and the future payment flows that will follow should be clearly shown. They are effectively a form of borrowing. That is why I conclude that the Chancellor's figures for borrowing as a proportion of the GDP are a considerable underestimate.

Next, I turn to transport. The record of this Government on transport has been—I fear I must use these words—an unmitigated disaster. It started with integrated transport planning which, in my view, was a slogan and a substitute for action. No road project had been designed in previous years without taking account of the impact on transport, rail, air and everything else. So, there was effectively a form of integrated transport planning in the planning of the road programme. But the result of integrated transport planning is that we have had multi-modal planning schemes as a substitute for action on the ground in the past five years. Many of those have not yet come through. Road schemes which could have been started some years ago are still not even on the running board. That is why in transport we need decisions, action and concrete work on the infrastructure, not paperwork at the desk, which, frankly, is what we have seen.

That stemmed from John Prescott's view that he would reduce the amount of car travel in the United Kingdom and that he would be judged a failure unless he managed to achieve that over five years. Clearly, the figures speak for themselves. I do not think that that was a realistic, practical or wise course of action to take, and I shall give two reasons.

First, 90 per cent of all transport is by road. Therefore, that is inevitably a significant figure. Even if we managed to double the amount of freight and passenger transport by rail, which I was keen to do, it would have only a small impact on the growth in car and road transport generally over the years ahead because of the growth of the economy. Secondly, for a variety of reasons into which I need not go at this stage, with their modern lifestyles and aspirations, people want to use their cars. Such reasons include travel to work, taking children to school, and just-in-time deliveries for many goods which cannot satisfactorily be dealt with by rail. Therefore, it is inevitable that if one is to have a modern transport system one still has to invest heavily in the roads.

We shall not stop people from using their cars by refusing to spend any money on roads, thereby letting them deteriorate and fall into chaos. But that is what has happened in the past five years. There has been a total moratorium on all road projects. It takes dime between the decision to go ahead and the completion of the road; and because of the moratorium in the past five years, over the next five years we shall be in a devastating position. In my last year as Secretary of State for Transport we spent £2.7 billion on the roads; £1.4 billion of which was new construction on national roads; that is, on widening and improving. The new construction projects completed in that year numbered 37, of which 12 were bypasses. We had 65 bypasses in five years. We now hear the Government talk again about bypasses but none has been started in the past five years.

I am delighted and relieved at the complete U-turn, as I understand it, of the Secretary of State for Transport in the Statement he is making today on the road programme. He is right to start to reinstitute some of that programme. However, the cost to the economy and the nation has been substantial in the complete moratorium in the past five wasted years. I hope that that will not happen again.

I conclude by turning to pensions. I declare an interest as a non-executive director of a pension company, as declared in the Members' Register. I was chairman of the House of Commons pensions fund for five years before I left the House. I am still a trustee of other funds. In other capacities as a non-executive director I am seeing the impact of pensions on company performance. In my view, this will be one of the biggest political issues in the coming years but it has received little attention in the Pre-Budget Report. Incidentally, I could find hardly a reference to the word "road" in the Pre-Budget Report, which indicates the neglect by this Government of that area.

However, this is another area in which the situation has deteriorated substantially over the past five years. We can all recall how five years ago we said that we in the United Kingdom had one of the best positions on pensions in the whole of the European Union; more funds in occupational pension schemes than the whole of the rest of the European Union put together, and so forth.

We still compare fairly well with most, but our position has weakened considerably since then. Not everything can be laid at the Government's door. Clearly, one substantial factor is the current position in the equity market. Another is the new accountancy system, FRS 17, which again is having a real impact on the ground and which is forcing many companies to move from defined benefit schemes to defined contribution schemes.

However, in other areas the Government are at fault. I believe that the withdrawal of tax credits from the pension funds in 1997 was a massive mistake—£5 billion per year cumulatively rising, and therefore substantially reducing the cash flow of the pension funds. But there is another point. The Chancellor at that time—I remember this clearly in our debates in the other place—said, "Well, it doesn't really matter because you can now judge pension funds by the capital value of the equities and they are all doing fairly well". That is not a point which I think I would hear anyone make today. We all knew then that that could change.

I do not believe that the stakeholder pension is working in the way that the Government planned and said that it would. The take-up is still low. I fear that the level of charges allowed means that not enough people are promoting and advocating the stakeholder pension and running it in the way which, with some relaxation of those charges, they would. The cost of mis-selling, which is now substantial, and the cost of compensation, falls on the other policyholders and the shareholders. That, too, is an inhibiting factor at present. One matter on which we probably all agree is the role of the state pension. Clearly, that is now very small in comparison to the encouragement of occupational pensions. That, too, is the Government's position.

Looking several decades ahead at the funding of state pensions, I believe that the time will come when we shall need to raise the state pension age for everyone, as over a period we have equalised the state pension age for women. That will be the only way that we shall be able to fund future pensions.

However, I recognise that a government document will be issued on 17th December. A great deal hangs on that. I hope that we shall have other debates in the House once we have had time to absorb it. Unless there are major changes in this area I believe that pensions will seriously adversely affect lives, just as roads have done in the past five years.

4.20 p.m.

Lord Howell of Guildford

My Lords, after the superb opening analysis by my noble friend Lord Saatchi, I am pleased to be following my noble and learned friend Lord Howe and my noble friends Lord Higgins and Lord MacGregor. It is really quite like old times. Perhaps some of the problems are all too similar to those from the past and require the same clarity of thought as has been addressed in the previous speeches.

I was propelled into this debate by a single illuminating sentence from the noble Lord, Lord Barnett, who said that, since its inception, the euro-zone has gone very well indeed".—[Official Report, 4/12/02; col. 1134.] That is a point with which the noble Lord, Lord McIntosh, concurred or indicated his agreement.

I am not sure whether the noble Lord, Lord Barnett, was being, as he often is, very entertaining. I have known him down the years to be extremely witty and indeed sardonic about the ways in which economies work. Incidentally, I told him that I intended to quote his intervention. He explained that the reason he is sadly not here—which I am sure we all understand—is that he has gone to interview the new Governor of the Bank of England, who, incidentally, believes that it could take hundreds of years to prove UK convergence with the euro. We miss the noble Lord in this debate.

This is not a debate, or perhaps we should not make it yet another debate about the contentious issue of the euro. Nevertheless, if the Government believe—as, from the Front Bench's reaction, that exchange seemed to indicate—that things are marvellous in the euro-zone and that everything is going extremely well, then we need to start worrying about the robustness of all the Government's views and forecasts, as my noble friend Lord Saatchi has rightly suggested.

The reality is very different. The euro-zone is doing extremely badly. The very day that we were told that it was doing very well, it was announced that German unemployment had risen to four million and was due to rise further. A leading German industrialist said that the conditions were the, worst since the end of the War". At the same time, the European Commission issued a forecast that the euro-zone economy will contract in the first quarter of next year. Today Portugal faces huge budget cuts, plus a recession and strikes, and is caught inside the euro-zone trap. I am advised that today one-tenth of the entire population is on strike.

Meanwhile, the stability pact, which has already been mentioned in the debate, has clearly become—whether or not it is stupid, I do not know—the instability pact for the following very obvious reasons: those countries with high real interest rates and deflation—of which Germany is the prime example—need lower ones; and those with inflation and low real rates—Spain, Ireland and Greece for a start—need higher ones. Of course, within the euro-zone system they do not have that choice; it is the same nominal rate for all. That means that the whole system is working perversely. Those countries that should have higher real rates have been forced to have lower ones and vice-versa.

I do not want to exaggerate the impact of interest rates on growth. Economists and monetarists always tend to do that. The truth is that we have reached a point in euro-economics where "one size fits nobody" and we are dealing with a dangerously unstable system. If we now had to join and cut our rates to that set by the European Central Bank, one trembles to think what that would do to our already deeply unbalanced economy, to the housing boom, which is already out of control, and to the sea of personal debt that my noble friend Lord MacGregor has mentioned, which I understand is now running at the staggering figure of £800 billion.

I do not want to overplay the relevance of a stagnant and struggling euro-zone to the UK. The truth is that less than half our exports, including invisible receipts, go there. Anyway, as we have now learnt, the dollar is much more important to us. According to the Bank of England's website, dollar-denominated trade is 1.6 times that of euro-dominated trade. In fact, some of us are still waiting for a correction of the very puzzling information given to us in February by the noble Lord, Lord McIntosh, when he relied on the trade weighted sterling index for a reply—when all are agreed that that index is completely unreliable and out of date. I know that he will apply his mind to that in a fair way as always.

I turn to a separate issue. The reflections on the past of my noble and learned friend Lord Howe prompted me to comment on this. At the moment taxation is rising. In particular that is through national insurance additions, but it is also through the vast increases in borrowing about which we have heard today. Today, as was the case 30 years ago, a widespread belief seems to have crept back that higher taxation is the answer to failing public services. It sounds simple, but it seems to lie at the centre of a great deal of comment from the Government and many other sources.

That contains a double fallacy: first, that higher taxing and spending will deliver improved high-quality public services—that was repeated in the Pre-Budget Statement and again this afternoon; and, secondly, that higher taxes leave the economy somehow undamaged and generate more revenue. If we have learnt one thing over the past 30 years through bitter experience, it is that higher taxes and higher spending lead to wasted resources and, indeed, to inflated pay increases and pay demands—as we see every day in the newspapers—and also, and this is the double whammy, to lost output and slower growth. Serious academic studies are beginning to prove that a tax pound withdrawn from the private sector not only buys far less in the way of services than a pound, but also distorts and weakens economic performance. So there is a double-engine at work, which is making things more and more difficult for both the Chancellor and for the rest of us.

All the evidence shows that the biggest losers from that process are the less well off. The latest figures from the Office for National Statistics confirm that, while last year there was a 6 per cent spending increase in the public services, that led only to a 3 per cent volume increase. The other 3 per cent evaporated in a sea of inefficiencies and channels of bureaucracy, as is inevitable in the translating of all tax pounds or tax dollars into the public sector.

The IMF made the same point. In its very interesting warning to the Chancellor, it stated: It remains to be proved whether public funds may be spent without incurring significant inefficiencies". It certainly does remain to be proved. The proof seems to be leaning heavily the other way. That is not entirely a party point because it extends right across the political spectrum. Even in my own party it is sometimes forgotten that a low tax economy results in a richer and much more caring economy—not just through trickle down, which tended to get discredited, but through direct benefits to the poorest households. That has been argued in great detail in report after report from the World Bank, the MF, the United Nations and many others.

Therefore, when I hear everyone say, "It's all right, we must go with high taxation and high spending; that will be the answer to higher quality public services" and everyone is agreed on a line, I am reminded, as many noble Lords must be, of that wonderful book by the late Barbara Tuchman called the March of Folly, when she described those amazing moments in history when everyone was agreed on a certain line and everyone was fundamentally wrong. That situation is developing now, especially among the economics profession.

The insight of 1979, which my noble and learned friend Lord Howe of Aberavon understood with such perception and determination, was that if low taxation could be achieved, that was the key to innovation and enterprise—more key than all the things listed in the Pre-Budget Statement by the Chancellor and by the noble Lord, Lord McIntosh, this afternoon. It was that insight above all that led to the huge turn-around in the United Kingdom economy and changed us from being a passenger in Europe in the 1970s to being the pace-setter in the 1990s.

I hope that all my colleagues have got that message again now, although it is sadly clear that the Chancellor has not. We are beginning to move on a march of folly and there will be much suffering and disappointment unless we change direction soon. Higher taxes are not the way out; lower taxes are.

4.31 p.m.

Lord Stevens of Ludgate

My Lords, I listened with interest to the noble Lord, Lord McIntosh. I thought that he did a good job of defending the report—single-handed, if I may say so.

Last year, we were told by the Chancellor that the UK economy was so strong that it could insulate itself from world events, completely ignoring the fact that 30 cent of gross domestic product is represented by trade and more than 50 per cent of manufacturing industry's profits are export-related. Now we are told that the UK economy cannot insulate itself from world events. The Chancellor has at last revised downwards his forecasts for growth in 2002–03, but he has increased them for 2004 by 0.5 per cent and in 2005 by 0.25 per cent. According to him, the economy will grow somewhat more quickly over the period than before and, more importantly, thanks to increasing his growth estimates for 2004 and 2005, his numbers over the period of the cycle are in accordance with his golden rule.

The Chancellor downgraded his growth forecast for 2003 by 0.5 per cent, blaming everyone but himself. His original economic predictions last April included a deterioration in world trade. He got that right, but now he is using it to explain slower than predicted UK growth. He blames the world economy but ignores the fact that the United States of America—by far the largest world economy and our largest trading partner—expanded by 2.25 per cent this year. Others did as well; only parts of Europe and Japan did less well.

The Chancellor is relying for his growth on an increase in government consumption. That will rise by 4.25 per cent next year, falling to 3.75 per cent and then 3 per cent. So that is where his growth is to come from, although even that growth is slowing down and, in the meantime, he has increased his growth forecasts for 2004 and 2005. Where will the growth come from? Investment and exports. Investment fell by 12 per cent this year—the biggest fall on record—but will rise, or is due to rise, by 7 per cent in 2003. Exports, down by nearly 2 per cent this year, are due to rise by 4 per cent in 2003 and by 8 per cent in 2004. The Chancellor has given up trying to manage the UK economy and has handed it over to the world economy. So consumer spending can slow down and the world economy will pull us up.

However, consumer spending will still rise by 2.5 per cent next year, although that is less than previously. Let us pause there for a moment. The housing price boom has encouraged consumer spending. The gross value of UK residential property is more than twice GDP. Seventy per cent of households are owner occupiers. Of total personal debt, 80 per cent is borrowed against housing and it is increasing rapidly. House prices are not stable. For example, between 1989 and 1995, they fell by almost 40 per cent, leaving them only 10 per cent higher than 14 years before. They are now rising at 30 per cent a year. House buyers and owners are taking out bigger mortgages to finance their current expenditure and the savings rate has fallen to only 4 per cent of income.

Last week, the noble Lord, Lord McIntosh, told us that although household debt had risen, interest charges accounted for only 7.3 per cent of personal disposable income. They had peaked at 15 per cent in 1990. The statistic is worrying. If interest rates rise to 6 per cent, that 7.3 per cent becomes 11 per cent of personal disposable income and we potentially have a massive decline in consumer spending that cannot be financed by higher mortgages, as house prices will fall, or by savings, because there are none. The stock market has already fallen by 40 per cent. To put it another way, every 1 per cent rise in interest rates is, give or take, 1 per cent of GDP.

Last summer, the Chancellor told us that he would spend billions of pounds—£15 billion—on education, £40 billion more on health over the next three years and more on other public services without increasing public borrowing. In the Pre-Budget Report, he told us that even after the adjustments that I mentioned and the Treasury's optimistic assumptions, he will borrow only an extra £20 billion over the next two years. His borrowing will total £100 billion over the next five years. What is happening to that extra spending? As we all know, public sector inflation is 5.4 per cent, two-and-a-half times the economy's overall inflation rate. So it is going into higher wages and prices, not better services.

Since the Government were elected, we have been told that there will no return to Conservative boom and bust. But the economy has become more unbalanced. We have a booming house economy financed by debt, a fall in net exports and a fall in corporate investment. If house prices fall, consumer expenditure cannot sustain its rate of growth—or, indeed, any growth. There is more to come, as usual, in the fine print. But, fair enough, it is there.

In the Pre-Budget Report, we note that productivity growth is to rise from 2 per cent to 2.25 per cent. On what basis is that assumption made? At present, productivity growth is less than 1 per cent and profitability—or return on capital in industry—has been falling almost continuously since Labour came to power. Although it peaked at 14 per cent at the end of 1998, it is now just below 8 per cent—lower than 10 years ago. The result is lower corporation tax revenues—now running almost £4 billion below the Government's estimate of last April.

Why cannot the Chancellor give us the facts up front rather than putting them in the notes? Robin Hood was a popular figure. He took from the rich and gave to the poor. The Chancellor does the same, but he also takes from the not-so-rich, so why not come clean and admit it? At page 9, the report mentions, increased transparency about what is being achieved". As my noble friend Lord Saatchi said, a start on transparency would be to include the £100 billion of private finance initatives.

Tax revenues have fallen further than expected. That is blamed on the collapse in financial services, but if the recovery in financial services predicted by the Treasury does not occur, the deficit will be even greater. As I mentioned, productivity is falling—we are moving down the league table—but the Chancellor heaps regulation after regulation on British industry. That is quietly crippling productivity growth. I fear that we must face more borrowing and higher taxes. The Chancellor not only taxes and spends but borrows.

I close with three simple examples of what is wrong. First, there is even a health and safety regulation closing golf courses if there is fog. It is too dangerous for the greenkeepers and players. Even if the greenkeepers leave the course, it is still too dangerous, but not too dangerous to drive a 15-tonne lorry down the M4. Secondly, the tax credit system is so complicated that the Government have to advertise on television to ask taxpayers—or non-taxpayers, as the case may be—to claim it. Thirdly, due to a change in licensing requirements in October 2001, the price of gas for some residential users is to rise by 8 per cent in January 2003.

4.40 p.m.

Lord Brooke of Sutton Mandeville

My Lords, it is a pleasure immediately to follow my noble friend Lord Stevens of Ludgate, to whom I shall return in a moment. It is also a pleasure to be the most junior infantryman in the platoon of noble friends that my noble friend Lord Saatchi has assembled today.

To a degree, even if the debate, for which I join my noble friends in thanking the Government, fills a necessary constitutional slot in the European Union and parliamentary calendar, it is as much a coda to the Pre-Budget Report as the hybrid debate on the economy, industry, culture, media and sport: on 20th November, which was part of the series of debates held on the gracious Speech, was an overture. In both cases, we had the pleasure of seeing the noble Lord, Lord McIntosh of Haringey, conducting the orchestra—in this case, he is opening and winding up the concert. The one minor discrepancy between the two events is that the earlier debate was graced by a series of germane speeches by noble Lords in the Labour interest. I see the noble Lord, Lord Haskel, in his place today; he spoke in the earlier debate.

My noble friend Lord Stevens of Ludgate has, like myself, supported our noble friend Lord Saatchi and his excellent speeches in both debates. He will recall that, in the earlier debate when, as today, he came in at the end of the batting order, four of the last six speeches before the winding-up speeches were made from the Labour Benches and that those noble Lords were, by no means, the first Labour Peers to speak. Since then, we have had the Pre-Budget Report, and, yet, no Labour Peer chose to speak on it in this debate, even if the words "with approval" are formal, rather than significant. I see that the noble Lord, Lord Haskel, is anxious to intervene.

Lord Haskel

My Lords, I thank the noble Lord for giving way; he did mention my name. I must explain that two Select Committees are sitting this afternoon—the Select Committee on Economic Affairs and the economics sub-committee of the Select Committee on the European Union. Many of the people on the Labour Benches are on ',hose committees, which is why they are not here. Other people have other engagements. As the noble Lord will see, if one cannot be here for the winding-up speech, one is advised not to speak.

Lord Brooke of Sutton Mandeville

My Lords, I am sure that that admirable explanation does not apply to any of my noble friends who have managed to speak, but I am grateful to the noble Lord, Lord Haskel, for giving it.

There are two interpretations of what Mr Holmes identified as the silence of the dog in the night, in the case of' the racehorse Silver Blaze, which was as much a thoroughbred as the present Chancellor. I acknowledge the points that the noble Lord, Lord Haskel, made, but I must say that the first interpretation might be less charitably—if metaphorically—compared with Churchill's verdict, given in his life of his great ancestor the 1st Duke of Marlborough, on the Margrave of Baden, of whom he said that his military epitaph for all time must he that the two greatest captains of his age thought that his absence from a crucial battlefield was well worth the loss of 15,000 men. The second, more charitable, interpretation is that the Minister's colleagues have such confidence in him, especially when he speaks twice—his winding-up speech in the first debate, embracing culture, media and sport, as well as the economy and industry was a tour de force—that they feel that they can safely leave the entire field to him alone.

I spoke in the earlier debate and deliberately avoided second-guessing the Chancellor, in advance of the Pre-Budget Report. Therefore, I shall limit my contribution today to one point most easily made by someone who was present for both debates. The noble Lord, Lord McIntosh of Haringey, will recall that, in the first debate, the noble Lord, Lord Roll of Ipsden, who has, characteristically, been in his place today already, and the noble Lord, Lord Skidelsky, spoke most generously of the Chancellor's macro-economic management. Both noble Lords were confident that it would continue in any difficult times that lay ahead. The noble Lord, Lord McIntosh of Haringey, will also recall that he prayed both of them in aid in his winding up speech, especially the noble Lord, Lord Roll of Ipsden, as he was wholly—if gratefully—entitled to do.

There was, however, one admission from the Minister's winding-up speech on 20th November. I do not hold it against him, for he made it clear at the start of his speech that he was hard put for time to answer even a significant proportion of' what he described as the valuable points that were made. However, I shall remind him of the omission, so that he can rectify it on this occasion. After the noble Lord, Lord Skidelsky, had praised the Chancellor's macro-economic management, he went on to say that the Chancellor had developed serious symptoms of delusion in micro-policy. He said that the Chancellor was, always tweaking this tax or that tax, this target or that target, thinking up this or that clever wheeze". The noble Lord went on to say that it was, the reverse of the admirable trend towards simplicity set by the noble Lord"— my noble friend— Lord Lawson, when he was the Chancellor, and the reverse of what British industry requires".—[Official Report, 20/11/02; col. 433.] In the event, the noble Lord's advice came too late before the Pre-Budget Report, which included another addictive dose of micro-economic meddling.

By chance, I raised the same broad point in the small business debate that we held last summer, to which the admirably ubiquitous noble Lord, Lord McIntosh of Haringey, also replied. I was nothing like as eloquent as the noble Lord, Lord Skidelsky, but I paid tribute to my noble friend Lord Lawson of Blaby and my noble and learned friend Lord Howe of Aberavon for the way in which, in the 1980s, they moved us to the point at which businessmen made decisions for their essential worth and for themselves and not because there was a dedicated tax distortion in their favour.

In his winding-up speech in the small business debate, the noble Lord, Lord McIntosh of Haringey, gently chided me for not applauding the Chancellor's efforts to be the businessman's friend. However, he did not respond to the central point, nor did he respond to the similar argument made on 20th November by the noble Lord, Lord Skidelsky. I have acknowledged that the Minister was short of time on 20th November, and I recognise that it would have been churlish of the Minister, after expressing gratitude to the noble Lord, Lord Skidelsky, for his macro-economic approval, to bite the hand that had fed him by taking issue with the noble Lord's micro-economic criticism. However, I hope that tonight, on this less time-constrained occasion, the Minister will do proper justice to the argument made by the noble Lord, Lord Skidelsky, and, incidentally and more modestly, to mine.

4.47 p.m.

Lord Stoddart of Swindon

My Lords, I apologise for speaking in the gap. I would have put my name on the list to speak, but I did not expect to be here for the beginning of the debate. I am happy to say that the situation changed, and I was able to hear the opening speech of the noble Lord, Lord McIntosh of Haringey. I have listened attentively to the debate. It is unfortunate that there have been no speakers from the Labour Benches to support the noble Lord, Lord McIntosh of Haringey. Perhaps, I am the next best thing, as a Labour expellee.

The noble Lord needs a little support, as all the speeches so far have been antagonistic. The case that he put was very reasonable. The British economy has had sustained growth, coupled with high employment and low inflation. That is altogether good. Monetary policy, coupled with fiscal policy, has produced a good outcome over the past five or six years. We cannot deny that. As the noble Lord said, Britain's performance has been better than that of the major economies in Europe. That is something we should applaud; I applaud it very much.

The noble Lord, Lord McIntosh of Haringey, said that the British fiscal position was stable and better than that of other countries. We are able, therefore, to expand expenditure on our public services, which have been run down for a long time. That has been done by a government who have fiscal freedom and a Bank of England that can run monetary policy in accordance with the needs of the country. The Bank has done that well and in public, not in private or in secret. The British people have been able to see how and why the Bank has taken its decisions and have, therefore, supported it.

The outline given by the noble Lord, Lord McIntosh, was good and I support it. He said that the Government, pestered by world events, were resolved to pursue a steady course. That is what we want them to do, is it not? That is precisely what governments should be doing. I agree with the Government's borrowing policy. It is when there is a recession in prospect that we should be borrowing to ensure that it does not affect us. That is the good Keynesian economics on which I was raised.

Why put all that at risk by playing around with the proposition of abandoning our currency and, with that currency, the ability to run our own economy? The noble Lord, Lord Howell, instanced what happened in Portugal. Indeed, I believe that this morning the Portuguese Foreign Minister was urging Britain to join while 1 million people in his own country were protesting against the impositions of the single currency. As the noble Lord, Lord Howell, noted, the German economy is in deep trouble and its banking services are on the brink of collapse. Why should we want to join a failed system such as that?

If our economy is stable, satisfactory and on the right road, why should we want to join? The message I give to the Chancellor of the Exchequer is, "Carry on Gordon. Don't let the Prime Minister grind you down".

4.51 p.m.

Lord Newby

My Lords, follow that! Although "European Communities" appears as part of the title of the debate, traditionally, as far as I can recall, it has not been about Europe, and far less about the euro. Today has been an exception in that we have had significant speeches on the issue by the noble Lords, Lord Howell and Lord Higgins. Even the Minister felt—I believe, because of the title—that he had to include in his peroration a reference to the fact that all this economic activity was taking place because Britain is in the centre of Europe.

The noble Lord, Lord Stoddart, referred to the Portuguese Prime Minister, whose comments, as reported today, pose a challenge to both sides of the House. If I heard him correctly, the Portuguese Prime Minister said that Britain would not, and could not, exercise its full potential in influencing the future of Europe as long as it remained outside the principal project within the European Community at the moment; namely, the single currency. Those who argue—the noble Lord, Lord Stoddart, probably does not argue this, but many would, including the Prime Minister—that on the one hand we can exercise a major influence on the direction of Europe and, on the other hand, stand aside from its single biggest project—the euro—fly in the face of political reality. It is a challenge to both of them.

It is not my role—it is that of the Minister—to answer all the points made today. However, I could not let one comment by the noble Lord, Lord Howell, pass. He argued that public expenditure was running out of control and that there was no link between the level of public expenditure and the quality of public services. Clearly, there is no linear link if one were to increase public expenditure to infinity. However, if the noble Lord, Lord Howell, argues that the provision of public services at the end of this Government's cuts in 1999–2000 was not leading to poor provision of public services in schools, hospitals and other areas, I do not believe that he could have been in a school or hospital, or talked to a teacher, doctor or nurse at that time.

None of us would argue that opening a tap marked "public expenditure" solves all the problems. Equally, to argue that first-class public services can be provided on a pittance, as the noble Lord seemed to imply, is flying in the face of reality.

Lord Howell of Guildford

My Lords, I thank the noble Lord for giving way, but he is slightly parodying what I said. I said that a campaign or philosophy of higher taxes—and, it is to be hoped, higher revenue—and higher spending to produce high quality public services was not the right doctrine. The proposition that one will spend less does not follow from that. Indeed, I should like to see many more resources go into our health, transport and education systems. l am simply questioning whether the best way to do it is to tax people, shove it through the usually rather centralised government service and deliver not very satisfactory results. That is what I am saying, which is different from what the noble Lord is saying.

Lord Newby

My Lords, I am pleased that we agree that first-class provision of health and education is desirable. I suspect that where I part company with the noble Lord, Lord Howell, is that he would probably want to see more of those resources come directly from the individual to the provider, through private provision, rather than collective provision. I agree with him that over-centralised direction as to how that money is spent is a major problem now and one that this Government have added to, rather than detracted from.

The purpose of the debate—in normal times, at any rate—is to note and approve the Government's assessment of the economy and public finances as set out in the Pre-Budget Report. Usually, we do not spend much time commenting on specific measures either included or missing from the report. Therefore, I shall avoid the temptation to do so, except in one respect.

My concern is one which a number of noble Lords have raised. The Pre-Budget Report does nothing to acknowledge that Government and their out-posts—the FSA and the Bank of England—can do anything to address the extremely worrying growth in mortgage equity withdrawal. It is now anticipated that total spending on consumer goods funded by mortgage equity withdrawal will exceed 5 per cent of GDP this year, and the levels of withdrawal are continuing to increase at an extraordinary 25 per cent per quarter.

That poses a major dilemma to the Chancellor because his plans require continuing high levels of consumer expenditure. Given what is happening elsewhere in the economy, the only likely source for those continuing high levels of consumer expenditure is if people continue to take out high levels of additional mortgage equity. However, that growth is completely unsustainable. When the bubble bursts there is likely to be a sharp downward correction in consumer spending, which could then remain depressed for a prolonged period.

For a number of years, the Chancellor has aggressively claimed as one of his great policy achievements that he has engineered an end to boom and bust. As regards consumer spending, we now see the boom. At some point, quite possibly during the next financial year, we shall see the bust. The unwillingness of the Government to accept that that is a problem—far less to give active thought to what might be done to mitigate it—shows a degree of complacency which will come back one day to haunt them.

Devotees in your Lordships' House of "Yes Minister" will remember the episode about a Civil Service pay review. One of the main conclusions was that permanent secretaries should receive a disproportionately high pay increase. In order to slip this past the Minister, the relevant figures are hidden in the middle of a submission some hundreds of pages thick, where the permanent secretary hopes that that particular increase will remain unnoticed. In some respects, I fear that the Pre-Budget Report, along with its flotilla of supporting glossy documents, follows the same principle.

In its overview—the part that people with nothing to do on long winter evenings are likely to read first—it conveniently omits to mention the headline figure of public sector net borrowing altogether, even though the increase in that figure to £20 billion this year and £24 billion next year is arguably the most significant single change included in the Pre-Budget Report since the Budget Report itself was published. But in order to find this figure one has to look at page 24, and by that stage all but the most assiduous reader of the document will have turned to the football.

Trying to hide away a figure such as this and other important aspects of the report is one of the Chancellor's least attractive features. He spends a lot of time extolling the virtues of what he is doing with the fiscal rules, but on key matters one has to look at the detailed parts of the Pre-Budget Report, to which the casual reader—or, indeed, anyone except the most assiduous reader—will not get.

It is a great demerit for this Government to claim that the Pre-Budget Report has the full support and audit of the Comptroller and Auditor General. On page 23, the Comptroller and Auditor General has audited the assumptions in relation to oil prices, anti-tobacco smuggling measures and VAT that underpin the public finances prediction. All three were deemed to be reasonable and to incorporate caution. Everything else has been left unaudited. Therefore, to claim the Comptroller and Auditor General's imprimatur on the whole document, as I fear the Government have, is completely misleading.

But the bigger picture is whether the projections for the economy and the public finances are prudent and realistic. For example, is it realistic to expect business investment to change from a decrease of 10½ per cent this year to a 2¾ to 3¼ per cent increase next year? Is it realistic to expect manufacturing output to rise by up to 2¼ per cent next year from a fall of 4 per cent this year? Is it realistic to expect growth to rise to between 2½ to 3 per cent next year? Is it realistic to expect tax revenues to bounce back from the falls of the current year? Is it prudent to assume that a crackdown on indirect tax avoidance—laudable as it is—could yield an extra £4 billion by 2005–06? Finally—this is an issue which troubles a number of noble Lords—is the exclusion of billions of pounds worth of public sector liabilities, notably on the railways and the Tube, from the Government's borrowing figures either prudent or realistic? I do not believe that it is.

The recent evidence of what is happening in the real economy and the views of independent economists also question these over-optimistic assumptions. For example, the figures for manufacturing and output fell to their lowest levels for eight years, the third successive monthly fall. Trading statements in recent days from companies in sectors as diverse as engineering, hotels, banking and computer software have contained warnings about worsening anticipated trading conditions in 2003. In all these sectors, investment decisions are being delayed, not brought forward as the Pre-Budget Report implies. Until the threat of military action against Iraq recedes, the likelihood is that uncertainty will remain at a very high level for those taking long-term investment decisions.

These downbeat assessments of many companies have been matched by the views of many independent economists. Even leaving aside suggestions in the weekend media that the Treasury misquoted a number of independent forecasters—all in the same direction, incidentally—to enable it to argue that their predictions were in line with the Government's own, the Chancellor's figures have now been deemed imprudent by economists appearing before the Treasury Select Committee last week and the IMF now admits that they contain more uncertainties than in the past.

I should like to be able to both note and approve the projections in the Pre-Budget Report. In a number of previous years under this chancellorship I would have done so with relative equanimity. This Pre-Budget Report, however, reflects the continuing complacency of a Chancellor who has been happy to take credit for good economic times but who is only too keen both to blame others and to ignore warning signs about the imbalance of the economy now that times have become tougher.

5.5 p.m.

Baroness Wilcox

My Lords, I join my noble friend Lord Saatchi in thanking the Minister for once again setting out the Government's fiscal strategy and approach to managing the economy and for allowing us this opportunity to debate the subject in your Lordships' House. As always in this House, we have had a fascinating debate and have been privileged to hear the contributions of some very distinguished speakers—all from the Opposition side of the House. I am sorry that that is the case. Although we were told that there were two Select Committees running, I have sat on Select Committees for the past six years and I do not ever remember there being a three-line Whip which prevented Members speaking in a very important debate.

Lord Haskel

My Lords, I thank the noble Baroness for giving way. These committees—the Economic Affairs Select Committee and the economic sub-committee of the European Union Committee—are dealing with these very matters. That is why most of their members are not here.

Baroness Wilcox

My Lords, I support my noble friend Lord Saatchi in expressing disapproval at the fact that up to £100 billion has been omitted from the UK economy balance sheet. My noble friend summarised why this is potentially damaging and misleading and how, in the light of recent international accounting issues, now is the time for full disclosure and transparency. Many noble Lords also expressed their concern on this issue.

It is my pleasure and an honour to follow the noble Lord, Lord Newby. Speaking for the Liberal Democrats, he started by saying that we do not normally debate this report. I thought he was not going to do so, but he then proceeded into great depths of analysis. He agreed with many noble Lords who had spoken of their worries about mortgage equity withdrawals, which he felt was completely unsustainable. He is concerned about the consumer expenditure boom now and fears that we will see a bust all too soon. He is worried that the Chancellor's high degree of complacency will come back to haunt him in the future. I shall be interested to hear the Minister's response to the questions posed by the noble Lord.

We heard from my noble and learned friend Lord Howe of Aberavon, a distinguished former Chancellor of the Exchequer. He took us on a tour of the Government's optimistic document and spoke about "steering a steady course in an unsteady world". He informed us that the document cost £45, so we are awfully lucky to have been given a copy. He feared that the Chancellor may have been carried away by his own performance. My noble and learned friend said that the document seemed to cover every area of human activity and spoke about "everything for the best in the worst of all possible worlds". But despite his wonderful quotes and light-hearted tone, he is very worried. Based on his years of experience in the job, he warned us that there was great cause for concern.

My noble friend Lord Higgins spoke about pensions, his area of expertise. My noble friend said that he had taught economics at Yale at one stage, so I shall look at him with a new degree of respect. He asked various questions which I am sure the Minister will wish to answer. For instance, where are we in the cycle? He also spoke about the intergenerational balance in pensions and how he would like to see work carried out cross-party.

My noble friend Lord MacGregor of Pulham Market, a former Chief Secretary of the Treasury, congratulated the Chancellor on being prudent in his early days, albeit having inherited a good economy. He agreed with my noble and learned friend Lord Howe in expressing worry about the optimistic assumptions in the document. My noble friend Lord MacGregor was particularly worried about PFI and PPP—as was my noble friend Lord Saatchi—and heartily supported the analysis we have heard of the troubles ahead. My noble friend also referred to transport and pensions—issues with which I am sure the Minister will deal.

My noble friend Lord Howell of Guildford, speaking about the euro, was worried about interest rates and the one-size-fits-all strategy. He felt that it was to be avoided at this time of huge personal debt and staggeringly high housing costs. He reminded us that taxation is rising and said that in his experience higher taxes and higher spending led to lost output and slower growth, the biggest losers of all being the least well off.

The speech of my noble friend Lord Stevens of Ludgate was a tour de force. He spoke about the housing market. I do not feel that I can repeat all he said in a marvellous analysis. His description of failing industrial production must be a great worry for us all.

The noble Lord, Lord Brooke of Sutton Mandeville, as always, gave a most eloquent speech. He talked about being a "junior infantryman" speaking today among colleagues from another place—but I, of course, am the junior here today among giants. No one speaks more wittily than my noble friend; no one is more experienced. He made a searching point on micro-meddling.

To our surprise, the noble Lord, Lord Stoddart of Swindon, decided to speak in support of the Minister, no Labour Peer having done so. He took the opportunity to urge the Government not to throw it all away by joining the euro.

Following those wonderful contributions, perhaps I may be allowed a few words of my own to wind up from this Front Bench. Yet again, in the Pre-Budget Report the Chancellor of the Exchequer has issued a long list of measures, which are intended to deliver changes so that the Government can keep the promises they have made and meet the targets they have set. Going on the Government's performance over the past five years, we have come to expect those promises to be broken and for targets not to be met.

The area of the public services demonstrates the Government's single biggest failure. In their 1997 manifesto, they stated: The level of public spending is no longer the best measure of the effectiveness of government". Now we hear that they are to increase public spending by a further £20 billion.

How the Chancellor intended to reform public services was set out in his public service agreements. In his first spending review, in July 1998, he stated that these were an "essential change" and would help to ensure that government would do what they did "to the highest standard". Sadly, as we have heard, what has happened instead is that nearly 40 per cent of the targets the Government set in 1998 and 75 per cent of the targets that they set in 2000 have been missed. I also find it concerning that some of those are targets to set targets. For example, in 1998, the Department of Transport was given the following target: Establish in 1999 new targets for reducing road casualties from road accidents in the period up to 2010". So what we really want to hear about is why those targets have not been met and why those promises have not been kept, and the implications for those who should have been helped during that time. When we see no tangible benefits, it is even more troubling that £115 billion more is being taken every year from the taxpayers of this country—nearly £40 a week for every many, woman and child.

The Minister reminded us that the UK economy is the fourth largest in the world. While some headline indicators remain strong, we are increasingly seeing changes that give serious cause for concern. We have argued consistently that public services will not improve if they are just given more money. What is needed is genuine reform. Without reform money alone will not deliver improvements on the scale we all want and expect to see.

In announcing the Pre-Budget Report, the Chancellor was forced to admit that his forecasts on growth, revenue and borrowing were wrong. As a result—this was highlighted by my noble friend Lord Stevens—government borrowing will have to increase from £30 billion in last year's Budget to £66 billion in last year's Pre-Budget Report, to £72 billion in this year's Budget, and to over £100 billion for the next five years.

That brings me to the Chancellor's sustainable investment rule. If the Chancellor had not, as highlighted by my noble friend Lord Saatchi and other noble Lords, omitted to put £100 billion of his liabilities off the balance sheet, public sector debt would already have reached the 40 per cent limit in his own rule. Can the Minister confirm that the extra borrowing announced in the Pre-Budget Report will take us over that limit? It is this action—spending more without reform—that will be locking the Chancellor on to an unsustainable course, and that will inevitably lead to more tax rises.

In conclusion, as my noble friend Lord Saatchi and others on these Benches have stated, I find it very difficult to agree to note "with approval" financial statements that we believe omit liabilities amounting to at least £100 billion. We have concerns about the possible implications for the UK economy and for future Treasury policies.

I am keen to press the Minister on one point. If, as we estimate, the liabilities not appearing on the balance sheet do total in the region of £100 billion, it means that the Chancellor is extremely close to—if not already in excess of—the 40 per cent of GDP limit that he has set himself when it comes to public sector borrowing.

To my mind, the Chancellor has two options: he continues to borrow, and therefore most certainly exceeds this self-imposed limit; or he can stop borrowing and do what we have suspected he would do all along—namely, raise taxes. I ask the Minister: which of those two options is most likely to be followed, and what are the implications for the British economy?

Lord Stoddart of Swindon

My Lords, before the noble Baroness sits down, perhaps I may state that I am an Independent Labour Peer, not a Labour Peer.

5.17 p.m.

Lord McIntosh of Haringey

My Lords, I, too, was impressed by the experience and quality of the speeches in the debate—so much so that I did a few sums. I looked at the senior government experience of those who have taken part. The five former senior Ministers—almost all of them Cabinet Ministers—who have spoken have a total of at least 45 years of senior government experience behind them. I find that enormously impressive. In addition, we have heard from two big businessmen, the noble Lords, Lord Stevens and Lord Saatchi, from one medium-sized businesswoman, the noble Baroness, Lady Wilcox, and from one small businessman—me. So perhaps I am out on the end of the acceptable range of experience. Nevertheless, I very much enjoyed the debate.

Unusually for me, I shall attempt to deal with the points made in turn, speaker by speaker, rather than by subject. There has been so little overlap that it is possibly easier to do it that way.

I begin with the noble Lord, Lord Saatchi. I have heard the argument that he put before, but I have not had an opportunity to reply to it in detail and I am grateful for that. To summarise, the noble Lord is saying, first, that we are using the PFI and the PPP in order to disguise our liabilities and keep figures off a balance sheet, rather than because there is value for money in the PFI/PPP schemes themselves. He went on to say that this disguising of liabilities is damaging to the public accounting, indeed to the economy as a whole. Let me take those points virtually in turn.

First, let me reiterate that the decision to use the private finance initiative is entirely on value-for-money grounds and not because of the accounting procedures that are used. The value-for-money assessment includes a qualitative assessment and a quantitative assessment. The quantitative component—the public sector comparator—has been reviewed to increase its transparency. All of these reviews are carried out by independent bodies.

Under PFI, the private sector puts its own money on the line—that is risk transfer. It gets paid only if it delivers the service it promised for the length of the contract. It is particularly important when we move from construction contracts to extended contracts, which, to give him credit, the noble Lord, Lord MacGregor, sought to start when he was Secretary of State for Transport.

There is a real incentive to deliver on time and to budget. Jeremy Coleman, the Assistant Auditor General of the NAO, who has been quoted as being critical in the past, said: The evidence is that, on the whole, PFI deals deliver to time and to budget. You get what you want, you get it when you want it, and it costs you what you thought it was going to cost. Conventional public projects have a very bad record in that respect". That is the reason why we do it. The reason why we do more of it than the previous government is that they made a mistake. They thought that the right thing was to examine all public contracts under the system of so-called universal testing, even when it was obvious that there was not much choice for private finance. That gummed up the works so thoroughly that, as has been said, there was little effective private finance initiative under the preceding government.

The second allegation is that the obligations are concealed. I shall respond by describing how they are not concealed. First, I shall discuss PFI liabilities. Annual service charge payments—they are called depreciation in the private sector—under PFI contracts are included in departmental budgets and accounts. In the Budget, we publish a table of expected payments under PFI contracts for the next 25 years—I say that in terms of the inter-generational equity referred to by the noble Lord, Lord Higgins. The payments are counted on our fiscal plans in public expenditure, current expenditure and public sector net borrowing to fund that expenditure for the relevant year. That is done in the public sector and it will be done in the private sector.

Where a PFI deal is found to be on the balance sheet—that is to say, the asset remains in the ownership of the private sector—it is included in the public sector net investment and public sector net borrowing. It is not for the Government to decide whether a deal is on or off the balance sheet. It is for the auditors concerned. When we undertake a deal, we do not know whether or not the auditors will decide that it is on the balance sheet. But it does not matter, because we are not concerned whether it is on balance sheet or off it. We are well within our limits under any circumstances. There has been a tendency—it is not a bad thing—for more to be included on the balance sheet than in the past. That is the case for all PFI prisons in England, for example, and the London Underground PPP.

In addition to PFI liabilities, there are other liabilities. We have introduced resource accounting and budgeting. Departments must now recognise in their accounts, which all add up to the national accounts, future liabilities that are more likely than not to result in payment in their budget as provisions. Payments against these provisions score in the national accounts. They are not concealed. Contingent liabilities are those that are less likely to result in payment because they are dependent on other factors. They do not score in national or departmental accounts but are reported in most accounts.

The supplementary statement to the Consolidated Fund and National Loan Fund Accounts, which is published every year, lists all the statutory liabilities and all non-statutory, reportable liabilities. Some of those are unquantifiable. B14 of the supplementary statement shows why so many of them would be unquantifiable. The point is that many are unquantifiable because they are based on remote possibilities. For example, in the past seven days, the Secretary of State for Transport stated that he would indemnify the contractors for the London Underground contracts not against all their liabilities but against a specific one: a contingent liability that the Mayor of London might appeal against the decision of the European Commission that state aid was not involved. First, there is the judgment of whether he will go to appeal. If he does, contrary to his wishes, he will not get control of London transport for a long time. Secondly, there must be the assumption that he will win. He has lost twice, and there is no new evidence to suggest that he is doing anything other than delay.

The chance of that £1.9 million contingent liability being called in is very minimal. I give an example. A children's charity goes to the scene of an earthquake and brings home 10 orphans, planning to place them for adoption. It knows that the cost of bringing those orphans up to adulthood would be £100,000 each. Are we saying seriously that the children's charity should have £1 million in its reserves to provide for that contingent liability? Of course not. You cannot just add together in one lump liabilities that we know about and can time, those that we know about but cannot time, and contingent liabilities. But that is what the noble Lord, Lord Saatchi, has been doing. It is the entirely false basis on which he claims that there is £100 billion black hole in the accounts of the Government.

Since we introduced government accounting in this country—I do not claim credit for this Government; it was started by the previous one—we have the most transparent accounts of any developed country in the world. All our obligations and liabilities that should be declared in those accounts and taken on the balance sheet are done so. Only yesterday, the IMF confirmed that, as in the past, the Pre-Budget Report provides a transparent and comprehensive account of the Government's economic policy. I believe that to be the case. The charges of the noble Lord, Lord Saatchi, are wholly unfounded.

The noble and learned Lord, Lord Howe, made a very interesting speech. Psychologically, I am enormously sympathetic to what he says. Of course the danger is that if you have pursued what are perceived and acknowledged as successful microeconomic policies for more than five years, there is a great risk of "hubris", as he put it. But our forecasts and those of independent forecasts have been extraordinarily close. Our forecasting period is not what he calls the indefinite future. It is the specific forecasting period required for the assessment of any economic cycle. We can, and do, defend it in detail. I shall do so in response to later speakers.

Incidentally, the chapter headings that the noble and learned Lord so objects to are those laid down in Article 2 of the European Treaty. Therefore it is right that we should respond to them. The risk that we should be claiming that all is for the best in the worst of all possible worlds is one of which we are profoundly aware and profoundly wary. We know, and he knows very well, that such overconfidence is the worst crime that a Chancellor could commit.

The noble Lord, Lord Higgins, then asserted that our forecasts are wrong and that we are blaming it on the National Audit Office. Both those points are untrue. We do not blame it on the National Audit Office. Since 1997, on the whole, outturn has been under prediction—in other words, we have been under-forecasting. Our average error in forecasting growth has been of the order of 0.6 percentage points, compared with I percentage point between 1979 and 1996, under the previous government. Even the revision down since the Budget figures earlier this year is of only 0.4 percentage points, compared with a revision of a full 2 percentage points—from plus 1 per cent to minus I per cent—following the 1992 Budget. I am sorry that the noble Lord, Lord Lamont, was not available to join in the chorus today.

The noble Lord, Lord Higgins, asked about spending on tax credits and the uptake compared with the forecast. It is not easy to get statistical data on that, but we have survey data that indicate that the uptake for working families' tax credit was 62 per cent of people but 76 per cent of money. In other words, there was a shortfall in uptake, but on the whole the money was going to those most in need. Working families' tax credit is benefiting 1.3 million people, which is more than half a million more than family credit at its peak.

As to what the cycle is, the information is all in the PBR. It does not very much matter whether we take the beginning of the cycle as 1999–2000, as we do, or 1997, as some argue. Taking from either 1997 or 1999–2000 to the end of any conceivable cycle period, all the statements that we make about the golden rule and sustainable investment are still true.

Of course, the noble Lord was right to raise the point about inter-generational equity. He says that it should be an additional objective, which is an interesting thought. These implications are certainly shown on the balance sheet. That is clear from what I have said about the Budget showing obligations for the next 25 years.

Lord Higgins

My Lords, does the noble Lord agree that if one is going to get a reasonable estimate of whether the generations are in balance, one must include the liability of the national insurance pension? If he is treating that as a contingent liability, perhaps he ought to tell pensioners.

Lord McIntosh of Haringey

My Lords, unfortunately that is a theoretical point in a sense. I do not deny that it is important—of course it is important—but doing the calculation is a challenge for the public sector and for the economics profession. I do not think that challenge has been resolved.

I do not think the House would welcome me spending a great deal of time talking about the euro. I know it was raised, but it does not arise from the Pre-Budget Report. I shall say only that, although some speakers have claimed that our membership of the European Union or our entry to the euro would take over our control of taxation and expenditure, that claim cannot be sustained.

On our policy on the euro, I shall do no more than refer noble Lords to the interview with the Prime Minister in today's Financial Times, which shows that he is clear that he has nothing more to say at this time. Therefore, I have nothing more to say at this time.

The noble Lord, Lord Higgins, raised a point about pensioner poverty. We can see from the Pre-Budget Report and from the figures that I have given that even with any shortfall in take-up, following the introduction of pension credit on average pensioner households will be over £1,150 a year better off. That is a response to the requirement that we should be fair as well as successful.

The noble Lord, Lord MacGregor, made some valuable points about household debt, which require a response. The noble Lords, Lord Stevens and Lord Newby, made similar points. Our forecasts provide for a moderation in the increase in house prices—in other words, a return to trend. We have therefore provided for a change in what is generally accepted to be an unacceptable rate of increase in house prices. Household consumption growth is forecast to slow this year and to decelerate further in 2003. That is all taken into account in the forecasts. We look to a rebound in growth of real household disposable income in 2003. With that, we look to an increase in the savings ratio.

The fundamental point, which I have already made in this House, is that household finances are strong, as are net household assets. That backs up the forecast. In addition, we have policies to encourage personal saving, including individual savings accounts, which are much more successful than TESSAs and PEPs.

We recognise the need for caution in projections on public sector borrowing. We are still vigilant in the face of potential risks. Our projections are based on cautious assumptions, which have been audited by the National Audit Office, including the figures for trend growth and equity prices. They have all passed the stress tests.

I can only agree with what the noble Lord, Lord MacGregor, says about public sector pay. This is an issue for public services as a whole. I say this to the noble Lords, Lord Howell and Lord Newby, as well. First, of course it is true that more resources for the public sector do not in themselves provide better public services, but they are a necessary, if not a sufficient, condition for improvements in public services. As has been clear from our reaction to the fire-fighters' strike, we are very conscious that unless public sector pay is kept to reasonable proportions—our long-term settlement with the National Health Service is a good example of that—we will fail to meet our targets for the public sector. The idea that we can do it without the scale of resources that we are putting in is wholly fallacious. That is my response to the noble Lord, Lord Howell, who said that higher taxation is not the answer to failing public services. Of course it is not the answer, but it is an essential part of the answer.

I have already talked about forecasts, which was the focus of the arguments of the noble Lord, Lord Stevens. I agree with him that there has been a risk of an unbalanced economy. I also agree that it is by no means self-evident that there will be increases in productivity. However, we are making very modest forecasts. We are assuming that productivity will grow at the same trend rate as over the recent past. We are not assuming any outstanding changes or improvements in the forecasts that we make.

The noble Lord, Lord Brooke, has again questioned me on microeconomic management. If there were gaps in the answers that I gave this summer to the debate on small business, then I apologise, and we can find an opportunity to correct that. However, this is a debate on macroeconomic management. On that basis, I hope that he will forgive me for not going into more detail.

I think that I have already dealt with many of the questions asked by the noble Lord, Lord Newby. I hope that he will find that in the responses that I have given to other noble Lords.

I was going to sum up by giving the Government's view, but I have decided not to. Instead, I have decided to look at the concluding statements from the IMF Article 4 report that was issued yesterday and made available today. On the macroeconomic framework, including transparency, the report states: These economic achievements are due, in no small measure, to the government's sound macroeconomic policies, in the context of a policy framework that has emphasised division of responsibilities, accountability, and transparency". It goes on to state: In the past few years, fiscal policy has been managed prudently within the context of the golden rule and the sustainable investment rule. On borrowing, the report states: As to macroeconomic management, the short-term widening of the overall deficit is not a source of concern: fiscal policy can play a useful supportive role in a cyclically-weak economy when the underlying fiscal position is sustainable. On long-term sustainability, the report states: Over the long-term, the UK public finances appear to be in a better position than those of many other advanced economies". Beat that, my Lords.

On Question, Motion agreed to.