HL Deb 16 December 2003 vol 655 cc1120-42

6.59 p.m.

Lord Mclntosh 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 2003 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 Commission on our main economic policy measures. The procedure is set out in Articles 99 and 104 of the European Communities 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, including non-inflationary economic growth, a high level of employment and social protection and better living standards for citizens across both the UK and the EU. Those goals are consistent with the Government's own approach to economic policy. The Government's strategy for economic policy is set out in the 2003 Pre-Budget Report, published last week.

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. It is subject to the usual parliamentary scrutiny and approval under Section 5 of the European Communities (Amendment) Act 1993.

Following the sharpest deceleration in both world growth and world trade growth for 30 years in 2001, world recovery began to pick up in early 2002, but lost momentum in late 2002. At the beginning of 2003, significant global uncertainties continued to weigh heavily on short-term prospects for the world economy with confidence and demand dampened by: geopolitical tensions, including the Iraq conflict; volatility on financial and exchange rate markets; and uncertainty regarding growth prospects—in particular in the euro-area.

However, the Pre-Budget Report presents a positive outlook for the UK economy, with British inflation at its lowest for 30 years, averaging 2.4 per cent since 1997; interest rates at their lowest since 1955, at 3.75 per cent; more people in work this Christmas in Britain than at any time in our history; and economic growth that is now strengthening.

So the UK is well placed to benefit from the strengthening global recovery. Gross domestic product is forecast to grow by 2.1 per cent in 2003— within the Budget forecast range—and by 3 per cent to 3.5 per cent in both 2004 and 2005. External forecasters continue to expect the UK economy, together with that of the United States, to continue leading the major economies this year and next. The Treasury growth forecasts for 2003 and 2004 are within the range of independent forecasts.

I now turn to public finances. Sound economic fundamentals, coupled with the Government's cautious approach, mean that the Government remain on track to meet the fiscal rules over the economic cycle and that public finances are sustainable in the long term. The average surplus on the current budget is projected to be positive over the cycle, meeting the golden rule. Net debt is set to stabilise at 35½ per cent of GDP—well below 40 per cent, to meet the sustainable investment rule. The UK now has the lowest level of net debt to GDP ratio in the G7.

When the economy was especially strong, we took tough decisions in 1997 to put money aside and reduce public debt when many of our critics were saying that we should spend it. It was that prudence during the years of strong global growth, building a safety margin through cautious assumptions and reducing debt when other countries were spending, that means that Britain is in a position to borrow to invest in our schools, hospitals and transport; successfully to support monetary policy to smooth the path of the economy during a period of global uncertainty; and fully to meet our international commitments.

Our commitment to meeting our fiscal rules is, moreover, for the long term, so we have also published a report—the 2003 long-term sustainability report— which examines the sustainability of Britain's fiscal position decade by decade and compares our position with that of 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 to other countries.

The key pre-Budget announcements also included: setting out reforms that will promote business and enterprise across the UK by improving access to finance for small business, reducing red tape and promoting a culture of enterprise; taking further steps to extend employment opportunity for all, through measures which focus help on disadvantaged groups and deprived areas; tackling child and pensioner poverty, raising the child tax credit by £180 per year and providing further help with childcare and ensuring security in retirement; promoting fairness in the tax system by ensuring that everyone who can do so contributes to the extra investment in public services; and introducing further measures to improve the environment, including proposals to tackle climate change, reduce waste and protect Britain's natural resources.

On the basis of this Pre-Budget Report, we have a success story to report to the European Union. 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 2003 for the purposes of Section 5 of the European Communities (Amendment) Act 1993.—(Lord Mclntosh of Haringey.)

7.6 p.m.

Baroness Noakes

My Lords, I draw attention to the entries in my name in the Register of Members' Interests. I thank the Minister for moving the Motion. It is right that the House takes the opportunity offered by it to have a proper debate on the Pre-Budget Report. The Motion might be regarded by some as something of a formality, but we certainly welcome the fuller consideration that your Lordships can give to the Pre-Budget Report in a debate such as this.

Lord Mclntosh of Haringey

My Lords, I rather teased the Opposition last week for not asking for a repeat of the Statement on the Pre-Budget Report. I did so in ignorance of the fact that it was to be debated today; I apologise to those whom I teased.

Baroness Noakes

My Lords, it is courteous of the noble Lord to say so; I was not going to mention it.

I look forward especially to the speeches from my noble friends Lord Higgins, Lord Northbrook and, of course, Lady Wilcox, who will wind up for those of us on these Benches.

As the Minister explained, the context of our debate is not the Pre-Budget Report itself but the report under Section 5 of the European Communities (Amendment) Act 1993. The Minister explained what that report is about. It is appropriate to pause here to ascertain the relevance of the report to the European Community to our affairs.

It is clear that the Government have no current intention to take us into economic and monetary union—this side of a general election, at least; and the Chancellor's body language would suggest that some time beyond that would be an appropriate time scale. Doubtless, much will depend on the fight to the death going on between Nos. 10 and 11 Downing Street. We are promised a referendum Bill on the euro this Session, but we all know that that is simply to appease the Europhiles in the Cabinet and has no immediate importance.

The stability and growth pact is now in tatters. Only a few weeks ago, France and Germany collectively confined that pact to history. It does not apply to them; they will manage their economies as they choose without regard to treaty obligations.

It is a mystery why we bother to send a letter to Brussels about our economy. Will the Chancellor listen to what Brussels says, or will he join the Franco-German camp and tell Brussels to get its tanks off his economic lawn? I put my money on the latter. Indeed, the letter of 10th December that the Chancellor sent to Mr Pedro Solbes Mira at the Commission owned up to a deficit next year of 3.3 per cent—which is above the 3 per cent limit. But in the next breath, the Chancellor stated that that was within a prudent interpretation of the stability and growth pact. That is, Mr Brown is making up his own European compliance rules, just like the French and the Germans.

However, let us put aside that European irrelevance and concentrate on the Pre-Budget Report. The Chancellor inherited an extremely strong economy in 1997. I shall not argue that the economy is now weak, as it is not, but it has the seeds of weakness firmly sown within it. We now fear for the economy, or rather we fear for the citizens of our country, who will have to pay the price in higher taxes.

The Chancellor may well make it to the next election without an explicit tax hike, but he will have to continue with his relentless programme of stealth taxes. This Pre-Budget Report is no exception to the Chancellor's practice of hiding stealth taxes in the small print. One example is the freezing of the working tax credit and child tax credit limits, which will impose an extra burden of around £240 million, according to the Institute for Fiscal Studies. We can see in the aggregate figures that the fiscal burden will steadily increase, with the tax-to-GDP ratio reaching over 38 per cent and still rising by 2008—the highest level since 1984–85. With 60 tax rises since 1997, taxes are just short of £400 billion this year, already nearly 50 per cent higher than when Mr Brown became Chancellor.

Let us now examine whether the Pre-Budget Report really shows that the Chancellor has a firm grip on the economy or whether it is starting to slide away from him. Mr Brown invented some golden rules as part of creating the aura of the prudent and trustworthy Chancellor. Those rules are under severe pressure, and, when we strip away some smoke and mirrors, we will find that the Chancellor may indeed be breaking his own rules.

Rule number one is that over the economic cycle the Government will borrow only to invest and not to fund current spending. Today I shall not get into the issue of the flexibility, which the Chancellor created, of defining when the cycle begins and ends. I shall take as read the Chancellor's interpretation that the cycle began in 1999 and will end in 2005–06. Mr Brown calculates that that will mean that he will have an average annual budgetary surplus over the cycle of 0.2 per cent, which, according to him, translates as headroom of £14 billion. But not only is that £14 billion down from £46 billion only eight months ago, it is calculated in a new way intended to deceive. It focuses on an average rate of surplus and thus, in effect, uprates the surpluses in the early years by inflation. The Institute for Fiscal Studies calculates the headroom on a correct basis as only £4 billion.

But the story does not end there. If one looks at the other assumptions affecting the calculations, the only conclusion that can be drawn is that the Chancellor must be crossing his fingers very tightly. I shall give just a couple of examples of the heroic assumptions lying behind those figures. First, there is a GDP growth rate of 3 to 3.5 per cent for the next two years— above trend, above independent consensus forecasts and heavily dependent on a recovery in business investment. Secondly, the figures include a bounce-back in tax revenues next year, after £5 billion of extra income tax and national insurance failed to materialise this year.

There are some unanswered questions. The rail regulator has just announced his determination of access charges, which will add another £1.5 billion or so a year to the Strategic Rail Authority's costs. I do not believe that allowance has been made in the Chancellor's calculations for those costs, which must be met under the terms of the franchise agreements. Will the Minister confirm the budgetary impact?

A detailed examination of the explanatory forecast shows that the totals are flattered by a staggering £14 billion turnaround in pension costs—from a cost in the 2003 Budget to a credit in the Pre-Budget Report—over the period 2002–03 to 2005–06. Can the Minister explain what is happening here? There are strong grounds for believing that the first of the golden rules may well be bust over the next couple of years. But there is also another golden rule: borrowing must not exceed 40 per cent of GDP. We already know that the Chancellor's forecasting record on borrowing is tarnished. At the last election he told us that he would borrow £10 billion this year. That figure has been revised upwards at every opportunity, and last week the Chancellor admitted that it would be over £37 billion.

In the Chancellor's figures, the percentage of GDP rises to 35 per cent by around 2005–06. Superficially, that looks okay, but we know that his figures exclude Network Rail's borrowing, as that day of reckoning has been deliberately deferred until 2007. We know that they exclude most PFI liabilities; we know that they exclude liabilities attached to meeting public sector pension obligations; and we know that they exclude the effect of all eligible people claiming means-tested benefits, including the one-third who the Government estimate will not claim their pension credit entitlement. We know that if we included all those figures, the borrowing percentage would be well over 35 per cent and, more importantly, we would see a much stronger rising trend.

All that glistens is not gold. The rules invented by the Chancellor seem to glisten and seem to be gold, but when we get close to them they look less bright, less consistent and less durable. Perhaps they are not gold after all. Perhaps they are no more than the alchemist's dream.

This Pre-Budget Report does nothing to reverse the continuing decline of manufacturing industry. It does nothing to raise activity rates, especially among work-less households. It does nothing to restore the rate of productivity growth to the levels in 1997. It does nothing to stop the dangerously high level of growth in household debt. Instead, we have rising public sector employment in unreformed and non-delivering public services.

We do not believe that the Chancellor will break his not-so-golden rules in the short term, but there will come a time when his optimistic assumptions catch up with him and he runs out of ways of fiddling the books. He will then have to raise taxes. He will eventually run out of ways to do that in a stealthy way and will have to raise income tax, or national insurance rates. If he is to avoid that outcome, he will need a miracle. I believe in miracles, but I do not believe that they are a sound basis for planning the finances of this country.

7.18 p.m.

Lord Higgins

My Lords, this is a traditional annual occasion, and the Minister, in his opening remarks, was traditionally optimistic—not as optimistic as the Chancellor in his Statement, which went way over the top. It seems that the Chancellor was more optimistic than the Bank of England Monetary Policy Committee. He forecasts for next year an increase in growth from 2 per cent to 3 or 3.5 per cent, a very substantial increase. But the Bank of England raised interest rates in November, which suggests that it is not as optimistic as the Chancellor. I ask the Minister whether the assumptions that the Bank of England Monetary Policy Committee uses in making its decisions are the same ones as the Chancellor uses— the so-called audited assumptions? If so, how do we account for the apparent difference in approach between the Bank of England Monetary Policy Committee and the Government?

The Chancellor sought to justify his optimism by two kinds of comparison—historic and geographic. In his research he might well have gone back to 1066, when perhaps a slight blip caused inflation, due, no doubt, to a Conservative government at the time. The Minister went further today. He said that on the population side of things it would be higher than at any time in our history.

But while it is absolutely right, as my noble friend said, that the present Government inherited a very benign situation—which has generally been taken to mean at the stage in the economic cycle that had been reached when the Government changed—that was fairly unusual. The reality is, as Mr Anatol Kaletsky has pointed out, that the improvements for which the Chancellor is taking so much credit started 10 years ago and reflect the improvements in the structure of our economy brought into operation by successive reforms under Mrs Thatcher. I was not a member of her government; I was chairman of the Treasury Committee at the time and responsible for holding her to account. But there is no doubt that the longer-term benefits of those changes are something from which the Chancellor and the entire economy are gaining. So one needs to take that into account as far as the historic comparisons are concerned.

As to geographic comparisons, the Chancellor referred to a number of comparisons with Germany, France and other countries. Of course this was justified because those countries have not carried out the kind of structural reforms introduced here under the previous government. More specifically, they have been suffering very much indeed from the fact that euro-land is now very much in an interest rate straitjacket. We are told that they have an interest rate where "one size fits all".

But it is blatantly obvious that the one size does not fit all. In fact, apart from three countries, the Netherlands, Portugal and Finland, which are more or less in line with the European Union's interest rate, for countries such as Germany, Austria, France and Belgium the 2 per cent rate is clearly too low; for Spain, Greece, Italy, Ireland and so on it is too high. These differences, as a UBS study using the well-known Taylor rule to calculate them has pointed out, are very substantial and countries in the euro-zone are suffering greatly as a result of the fact that the interest rate imposed on them—the straitjacket in which they are suffering—is under strain. This is an important reason for the Chancellor being able to point out that our performance in this country has been significantly better than in other European countries.

Following the break-down of the European summit, there has been some talk in the press during the past few days that we are moving towards a two-tier Europe. My personal view is that, while I am strongly in favour of our being a member of the European Union, there is a strong case for having a two-tier Europe in the sense that there will be countries in the euro-zone and countries outside it. For the reasons I have mentioned, the one-size-fits-all problem will become bigger and bigger as the size of the area covered by that policy widens.

This will be so, to some extent, with the new accession countries. Although the total of their economies, in economic terms, is probably only about the size of that of Belgium, nevertheless they will have difficulties. We would certainly have them. Indeed, I believe that, were we to join, the unbalancing effect—given the problems with interest rates and monetary policy generally— would put the system under such strain that it might well break down, despite the immense problems once one has got a single physical currency in operation.

For those reasons I believe that this is a relevant consideration in the context of the report that we are making to the European Union related to Section 5 of the European Communities (Amendment) Act 1993, the side heading of which refers to convergence, excess deficit and so on.

I leave on one side the fiasco over the stability pact and the fact that what is supposed to be a binding agreement has been broken completely by both Germany and France, and turn to the question of the Government's borrowing. The figures can be put in a more dramatic context than they were by my noble friend on the Front Bench a moment or two ago. At the time of the general election the Chancellor was anticipating that this year he would borrow £10 billion. In fact, the increase over the past eight months has been £10 billion, the size of borrowing that the Chancellor expected previously to be the total. This raises very serious questions.

When he first became Chancellor, he was anxious to stress that the burden of national debt imposed a considerable cost in terms of interest rate payments by the Treasury. Can the Minister tell the House how much extra will be paid in interest rates by the Government as a result of the increase in borrowing from the originally expected £10 billion to the now expected £37 billion or more?

There are real problems as far as financing the debt is concerned. You cannot borrow £37 billion at the same interest rate at which you can borrow £ 10 billion. While the Chancellor has given the Monetary Policy Committee control over short-term interest rates, at the time he did so he clawed back to the Treasury the responsibility for long-term interest rates in the sense that the Treasury would be responsible for funding, which in turn determines long-term interest rates. Can the Minister tell the House—I hope he can give a very clear answer—whether it is the Government's intention to fully fund the £37 billion deficit or whether they will not do so? Whether or not they do so is extremely important in terms of future inflation.

Although it is true, as Keynes often pointed out, that fashions in economics change, we used to be obsessed by the money supply. That of course is determined to a large extent by how the Government deficit is funded. I have searched in vain through this enormous tome to find any reference whatever to the money supply. But it is still not unimportant. It may be that I have missed it and the Minister can point me to the appropriate page, but certainly it is not exactly a headline in the way that it used to be.

I fear the prospect for interest rates as a result of the Government having to fund or attempting to fund this enormous deficit. It will have a serious effect on those who have borrowed money. One only has to look at the mass of headlines which refer to, Spending on credit cards to go up 38%", and, Christmas debt crisis", to realise how important this is. The combination of these two things—the immense borrowing by the Chancellor, on the one hand, and the extent to which borrowing has been extended in the private sector, on the other—is potentially a very serious time-bomb indeed. I do not think that the conjunction of those two things can be ignored. To a large extent, it undermines the confidence with which the Chancellor put forward the proposals in the pre-Budget speech.

One could speak about many other issues. It is always helpful to have this debate. I merely say that, in many respects, the Chancellor's obsession with the five tests on the euro on the one hand and the golden rules on the other, combined with the absolute obsession about multiple tax credit schemes of one type or another is not a helpful way of managing the economy.

Finally, I pick up a phrase that the Minister used in his speech. He said that they were "ensuring security in retirement". That is profoundly untrue. I fear that the generation of pensioners about to retire will be significantly worse off as a result of the Government's policies than those who are retired at the moment. That is a tragic situation and reflects the way in which the Government have managed the economy.

7.31 p.m.

Lord Northbrook

My Lords, I declare an interest as an investment fund manager. I will concentrate on examining the detail of the Pre-Budget Report, and will try to demonstrate how this is not, in several ways, helping the economy. I will then examine the broader economic picture.

As usual, there were some positive details in the 2003 Pre-Budget Report, but this year I had to look a lot harder to find them. The Chancellor said that he would look at ways of widening existing tax breaks on research spending by businesses and would enhance tax relief on North Sea oil exploration, which I welcome. He also announced moves to make it easier for small and medium-sized businesses to claim tax relief on investment in new facilities and machinery. The Chancellor said that that would provide a £400 million boost to small firms over the next three years, which is welcome.

I also welcome the additional encouragement to the venture capital industry by proposing to raise the annual limit for trust and enterprise schemes to £200,000 and the increasing, for two years, of income reliefs for VCT investments to 40 per cent. I also welcome the launch of enterprise capital funds that are designed to bridge the gap for smaller businesses seeking capital in the £250,000 to £2 million range and the Government's decision to contribute up to two thirds of the capital of funds established to target this segment.

Plans to simplify the audit requirements for smaller companies are also welcome. The initial reaction of the head of the CBI, Digby Jones, was similar to my own. He said: This was a positive pre-budget report for business … but we remain concerned about the outlook for the public finances". However, as usual, the small print of the speech needs subsequent examination. I have unearthed an interesting example of the Chancellor seeking to take back with the other hand what he gives to smaller businesses with the one hand. In its Pre-Budget coverage on 11 th December, the Financial Times states on page 10: Gordon Brown unveiled plans to crack down next year on owner-managers of smaller businesses avoiding tax. The Treasury said. The Government will bring forward specific proposals for action in Budget 2004 to ensure that the right amount of tax is paid by owner-managers of small incorporated businesses on the profits extracted from their company'". The article continued: The Government is concerned by the scale of individuals who have taken advantage of big tax cuts in corporation tax rates for small businesses and exploited different tax rates on dividends and earnings". But hold on, who introduced all those measures? Yes, it was the Government. In 2000, the Government introduced a 10 per cent corporation tax rate for small businesses, cutting it to zero in 2002, both of which I applaud. As the Financial Times continues, not surprisingly: This encouraged thousands of self-employed owners of small businesses to incorporate their businesses and", quite legally, roll up their profits without paying tax and pay themselves in the form of low tax or tax-free dividends". The Government are intent on closing the loophole which they created. How helpful is that to a small business? How can small businesses plan ahead when the Chancellor offers them incentives that he removes only a year or so later?

Is the Treasury statement true? Will the Chancellor make a national insurance charge on dividends withdrawn from those companies? That would come as a nasty sting in the tail for those small businesses that decided to incorporate.

In another area—company regulation—the Chancellor trumpets how the Cabinet Office is planning to scrap 147 regulations under its regulatory reform action plan. How does that square with the huge extra administrative burden that will be inflicted on businesses by changes affecting two very technical areas—transfer pricing and thin capitalisation? That may seem esoteric, but firms of accountants are getting very excited about the proposals in the Budget. According to the Financial Times on 1lth December, Grant Thornton the accountants have warned that the moves represented a stealth tax as they would restrict the ability of businesses to take advantage of some £70 billion of historical losses within UK group companies". PricewaterhouseCoopers director, Lyn Young, stated: The Government has ignored pleas for more time by businesses to adjust to what is going to be a significantly increased administration burden". David Nixon, tax partner at Ernst and Young, stated: There will be a significant increase in red tape with little apparent benefit for the UK economy. UK business is footing the bill for the incompatibility of— tax law with the rest of Europe". Will the Minister persuade the Chancellor to consult closely on this issue before the deadline of 10th February?

On the whole issue of red tape, I echo the comments of the shadow Chancellor, who said that repealing 147 regulations would not compensate for a big increase in red tape since the Government came to power. He said that: At his present rate, it would take [the Chancellor] 10 days to add that many regulations to the burden on business". I now turn to the economy as a whole and to the Chancellor's forecast for GDP growth and borrowing. As has been stated, GDP growth for 2003 is predicted at 2.1 per cent. Although that is within the Budget forecast of 2 to 2.5 per cent, it is well below the forecast made at the time of the previous 2002 Budget of 3 to 3.5 per cent. How much of that 2.1 per cent growth figure will come from the public sector?

I repeat my caution expressed in July for the 3 to 3.5 per cent growth targets made for 2004 and 2005. The Minister said that the 2004 forecast was within the range. Actually, it is at the top of the range, because the average forecast quoted in the Pre-Budget Report is 2.6 per cent for 2004. I continue to be concerned about the rate of increase in the Budget deficit. In reply to my Question on 5th February 2002 about the importance of the stability and growth pact as a discipline for the UK economy, the Minister stated: The stability and growth pact is an additional criterion to which we pay considerable attention".—[Official Report, 5/2/02; col. 502.] Does the Minister retain that view now that the upper limit of 3 per cent of GDP will be broken?

The Chancellor now expects the Government to borrow £37 billion in the financial year ending next March—up from a forecast of £27 billion in April and £13 billion in his 2002 Budget. The Treasury forecasts that annual borrowing will be about £30 billion in each of the next two financial years, until spring 2006, although the respected economic team at DrKW forecasts £41 billion and £40 billion for 2004–05 and 2005–06.

The Chancellor justifies his increased borrowing by saying that the Government are still on target to meet his two fiscal rules. The first is the golden rule that the Government will borrow only to invest, not to fund current spending. The second is that net public debt will be held at prudent and stable levels, which, as has been said, the Treasury has defined as being less than 40 per cent of GDP. Crucially, both are assessed over the economic cycle.

The golden rules turn slippery under inspection. Although the Government are spending £19 billion more on current outlays than they will receive this financial year, the rule says that that is all right, as the conditions must be met only over the economic cycle. I shall not go into detail, but it seems rather arbitrary for the Treasury to have decreed that that started in 1999 and will end in 2005. Conveniently, that allows the Chancellor to count the big surpluses amassed when revenues were buoyant in the dotcom boom against the deficits now being run.

The interpretation of the rule is shaky on two fronts. First, it is far from obvious when the present economic cycle started, let alone ended. Secondly, the procedure of adjusting for the cycle is legitimate only if it strips out the impact of temporary shocks. It simply becomes an excuse for inaction when there is a permanent deterioration in the public finances, as seems to have occurred in the UK. Many independent commentators believe that the Chancellor will have to raise £10 billion in taxes but that such a move will be conveniently postponed until after the next general election.

Fiscal rules that have that level of expediency are not worth having. Voters would benefit from an independent watchdog like America's Congressional Budget Office to assess the health of the public finances. That would protect taxpayers more than the fiscal rules set by the Chancellor—the very person whom they are supposed to constrain.

The final area that I will comment on is the way in which public money is spent and whether it is spent effectively. Extra money spent on health and education is welcome but only if not wasted. The headline in the Financial Times on 12th December suggested the opposite. The paper revealed that Britain's army of regulators was costing the taxpayer £12 billion a year. It went on: The level of spending is likely to lead to accusations of excessive bureaucracy and waste". It is no wonder that a Populus opinion poll last week showed clearly that a majority of voters believed that higher taxes were making no improvement to the public services, particularly to the health sector. Government statistics also prove the point. They show that, from 1999–2000 to 2001–02, health spending increased by no less than 37.5 per cent but that activity in hospitals was up only 5 per cent.

That conveniently brings me to my conclusion. Although I have no objection to increased government spending on health and education, I believe that, more and more, the general perception is that a great deal of the extra spending is unproductive. How will the Minister ensure that spending in those areas is more carefully monitored, so that it can be reported to Europe next year?

7.43 p.m.

Lord Taverne

My Lords, I was going to say something about macro-economic management, but quite a lot of it has been said and I do not want to repeat it. I start by saying that the Chancellor has been successful in his macro-economic management. However, I sometimes think that he should pay a little more generous regard to the foundations that were laid beforehand. The fact is that much of our steady progress was due to the actions of Chancellor Lamont, who curbed consumption at a time when that was an unpopular policy. That policy was also followed by Chancellor Clarke. Nevertheless, he has been a successful Chancellor.

I too was going to ask questions about the golden rule. There were some pertinent questions and criticisms in this week's Economist, but, as they have been put effectively by the noble Lord, Lord Northbrook, I will leave them aside. Forecasts are always uncertain. I have no idea whether the situation will improve next year. I see no particular reason why the deficit should disappear. It may be that, in due course, the Chancellor will face the uncomfortable choice between cutting spending and raising taxes. I shall say no more about macro-economic management, as it has all been said.

It seems to me that the weak spot in the Government's economic record has been their disappointing record on productivity. We must remember that, although we boast about how much more successfully we manage the economy than the wretched French or Germans, our productivity is 23 per cent below productivity per hour in Germany and, for that matter, the United States and 25 per cent per hour less than that of France. Incidentally, those figures show that the sclerotic European model of enterprise is not that sclerotic, when compared to the United States. The only reason why productivity per man is higher in the United States is that they are uncivilised about holidays and working hours. They work much longer hours and have ridiculously short holidays. The Europeans are far more civilised about hours and holidays, and their productivity is just as high—in many cases, it is higher. We fall behind it.

The Chancellor has sought to improve our productivity through a large number of tax incentives. The Government have also provided subsidies. They have not worked. The whole philosophy and approach is mistaken. One may be able to justify a particular measure by saying that it works. However, the Government's approach has made the tax system more complex—it has been distorted by the subsidies—and the overall result has been not beneficial but adverse. The Chancellor would have done better to concentrate on simplifying the tax system, instead of immensely complicating it.

That is only part of a general disease. We are the most over-regulated advanced industrial country. We have developed a mania for regulation in any number of spheres. The targets set by the Chancellor are part of the reason for that. Doctors, teachers and—most certainly—small businesses will say that there is no question but that we are grossly over-regulated. I have come across the problem running a charity concerned with drug treatment. The rules for residential care have been ridiculous. Nobody benefits from that. It is part of the no-risk society, with civil servants seeking to justify themselves and protect themselves against criticism. It is done by Ministers trying to protect themselves against criticism and avoid blame.

The Chancellor claims that he has made the tax system fairer. I am not sure that he can claim such a marvellous outcome, when the richest 20 per cent pay 34 per cent of their income in tax and the poorest 20 per cent pay 42 per cent of their income in tax. Apparently, there is a general revolt against taxation. I am not sure how deep it goes. Probably one of the most unpopular taxes is the council tax. I must say that I applaud the Liberal Democrats' approach to the matter.

Baroness Harris of Richmond

Good.

Lord Taverne

My Lords, I do not always necessarily agree with the Liberal Democrats. I am speaking from the Front Bench now, so I have to.

The Liberal Democrats propose that the council tax should be replaced with a local income tax. Ever since the Layfield report, I have been strongly in favour of a local income tax. That is not because it will be more popular. If the Liberal Democrats think that a local income tax will be more popular than the council tax, they may be mistaken: any new tax is unpopular. However, the great advantage of a local income tax is that it gives more independence to the local council to make a reality of local government and removes some of that centralised control, of which we have an excess in this country. In fact, one could put the same argument in favour of top-up fees, if they lessen, to some extent, the dependence of universities on centralised control. However, I would not dream of advancing that argument in my present position, speaking temporarily as a member of the Front Bench team.

There is no doubt that in this country we are over-centralised. It is a weakness of the Chancellor that he has tried to control too much. He has not achieved his goal of increasing productivity by his various efforts at target setting. He has not increased them by complicating the tax system. If we decentralised by, for example, abolishing council tax, we would do a great deal more for effectiveness and productivity in this country.

7.50 p.m.

Baroness Wilcox

My Lords, I am pleased to participate on one of the few occasions that we have in this House to debate money matters. It is a great shame that the huge wealth of experience and expertise to be found down this end is not mined more often. Whenever it is, the ensuing discussion is, without exception, of the highest quality. Tonight is no exception. We have covered a broad range of issues. I shall neither manage to mention them all nor delve too deeply into the detail of the proposals set out last week. Suffice to say that I am delighted to follow the noble Lord, Lord Taverne, who spoke interestingly and eloquently on simplifying the tax system. I am sure that we agree with him on much of that.

My noble friend Lord Higgins asked some important questions, to which we will be interested to hear the Minister respond; in particular, the questions about the Bank of England and the monetary committee. My noble friend Lord Northbrook asked questions about small businesses and growth in the public sector, which I shall not cover, but to which I shall be interested to hear answers.

Perhaps I may outline some of the issues that are most important to us in the debate. The Chancellor painted a very rosy picture in his Pre-Budget Report. But I would suggest that he should take a closer look at the situation on the ground. The Government's record of "tax, spend and fail" is one of the most depressing truths of our present time. One could perhaps forgive—or at least see some justice in relation to—a government who taxed aggressively, but spent money wisely to the benefit of high-performing schools, hospitals or transport systems of which we could be proud. Equally, we may feel more sympathetic to a government who rigorously pursued a low tax policy and, as a consequence, had less tax revenue to inject into public services. But it seems that with this Government we are caught with the worst of both worlds.

As my noble friend Lady Noakes said, there has been 60 per cent tax rises under Labour, but what has been achieved? There are more National Health Service hospital administrators than there are beds. There are endless bureaucrats generating targets and more bureaucrats, as my noble friend Lord Northbrook outlined so well.

My noble friend Lady Noakes gave an excellent and full account of the Chancellor's "golden"—or, as we have learnt, not so "golden"—rules, to which he referred in his Pre- Budget Report. The first rule of borrowing—only to invest and not to fund current spending—is met only when dubious assumptions are made. As we have heard tonight, independent forecasts suggest that Gordon Brown's £14 billion annual surplus figure is out by a significant margin. As my noble friend Lord Northbrook rightly said, those golden rules have turned awfully slippery under inspection.

The Pre-Budget Report included an announcement that the measure of inflation will change from the old RPIX to the harmonised consumer prices index. It is claimed that that will give a better indication of spending patterns. That seems to be yet another attempt at creative accountancy by the Chancellor, given the fact that the harmonised consumer prices index fails to take account of housing costs, such as council tax. I was very interested to share with the noble Lord, Lord Taverne, what were, I think, his party's views on the subject, as well as his own, which I hope are coincidental.

Surely, it is not coincidental that in the same year as some people have experienced council tax rises well into double figures—such as the Telford and Wrekin council rises of 25 per cent—the Treasury tweaks its measure of inflation to ensure that those hikes are not included in the calculation.

As other noble Lords have mentioned, the occasion for our debate today is Section 5 of the European Communities (Amendment) Act 1993. This calls on Parliament to assess the extent to which we are meeting the convergence criteria, especially those set out in Article 2. It states: The Community shall have as its task, by establishing a common market, an economic and monetary union and by implementing the common policies … the promotion, throughout the Community … a high degree of convergence of economic performance". All the while—as has been aptly brought to the attention of the House by my noble friend Lady Noakes—the growth and stability pact is being made a mockery of by France and Germany. How are we expected to endorse ever-closer integration while an agreement at the very heart of it is being so openly flouted? It certainly does not help to boost confidence in the system that we are being asked to put our faith in.

The Pre-Budget Report that we heard last week drew a picture of the British economy that few of the listening public would recognise. The Chancellor seems to be over-optimistic in his forecasts, in denial about failures of the Government's public sector policy and oblivious to the dangers ahead that are being consolidated with every new stealth tax rise. He would do well to be more cautious or we all shall be paying the price for years to come.

7.56 p.m.

Lord Mclntosh of Haringey

My Lords, this certainly has been a wide-ranging debate, which is quite remarkable and admirable considering how few noble Lords have taken part. I congratulate the Official Opposition Benches on the way in which they have clearly considered their speeches, avoided duplication and covered the waterfront in a very effective manner. That has not always been the case, but it was tonight. I am not saying that in anything other than admiration for a professional Opposition. It was excellent. I was also glad to hear the intervention made by the noble Lord, Lord Taverne.

There are three major sections of the debate to which I must reply: first, the issues about the economy; secondly, the issues about our public finances; and, finally, the issues which relate to the stability and growth pact. I made a note that the noble Baroness, Lady Noakes, made almost no reference to the wider economy, except to say that there were seeds of weakness in the wider economy. I must say that the Opposition and Liberal Democrat Front Benches have been saying that for six-and-a-half years. They have been proved wrong on every occasion. I wish that I had political researchers available to me who could show that from Hansard and I could expound it in some detail. But I do not. However, if anyone looks back he will see that it has always grudgingly been said, "Yes, the Chancellor's doing quite a reasonable job now, but it's all going to come to grief in the next 12 months". It has not.

Lord Taverne

My Lords, I have not said that.

Lord Mclntosh of Haringey

My Lords, the noble Lord has not done so from the Front Bench, but the noble Lords, Lord Newby and Lord Oakeshott, have done it on many occasions.

Baroness Noakes

My Lords, with respect, I said that in the short term I did not think that there would be a problem. I was referring to more than 12 months.

Lord Mclntosh of Haringey

My Lords, that is a fair comment. The other argument that I always hear—I have heard it again from the noble Lords, Lord Higgins and Lord Taverne—is that, "It really is no credit to Gordon Brown because it was all the wonderful Thatcher government that put us in such a good position".

If anyone refers back to my closing remarks on the Queen's Speech debate on 27th November, in response to the noble Lord, Lord Marlesford, they will see how far that is from my views, but, more importantly, from the truth. Yes, I have always acknowledged that after the debacle of the fall from ERM in 1992, Chancellor Clarke, in particular, pursued policies which were continued by Gordon Brown. I acknowledge that there has been a continuity of success over a period of about 10 years.

At the same time, when one looks back at the record of the Thatcher government as a whole, all the economic indicators on which we pride ourselves now are particularly different from the failures of the Thatcher government on almost every economic indicator. Of course, we are still paying the price for under-investment in our public services over a considerable period, which is notably the period of the Thatcher government.

Nevertheless, it is the case that the United Kingdom has had 45 consecutive quarters of unbroken economic growth, which is a period of 11 years—and that is what I acknowledge. UK growth has been above that in the euro area for nine of the past 11 quarters.

We have low inflation, averaging 2.3 per cent on RPIX criteria since 1997, which is the lowest level for 30 years. Our interest rates are close to their lowest level since 1955. Unemployment is close to its lowest level for a generation at 5 per cent, while employment, as I said in my opening remarks, is at record levels. So I do believe that we are well placed to benefit from the strengthening global economy

The noble Lord, Lord Higgins, and the noble Baroness, Lady Wilcox, both made the accusation that the change to a CPI-based target for inflation was somehow suspicious. That was my impression, but if I am wrong then I apologise. However, the change to a CPI-based target is not only a precursor to joining EMU, but is worth while even outside EMU. It is a better measure of inflation for monetary policy purposes and we have always made it clear that it would not apply to other matters such as pensions. It allows us to compare the economic performance of the United Kingdom with that of the euro area and we believe that that is the right thing to do. Indeed, Mervyn King, the Governor of the Bank of England, also believes that.

I want to refer to the issue of the convergence programme, which is in a sense a slightly, if not a very, popular summary of the PBR. That is the document which was sent to the European Commission at the time of the PBR, subject of course, as the Chancellor always made clear, to the usual parliamentary scrutiny and approval. The noble Lords, Lord Northbrook and Lord Higgins, both accused the Chancellor of ignoring the 3 per cent obligation for the stability and growth pact. The forecast for the United Kingdom economy and public finances set out in the updated programme shows that the UK's public finances remain robust and sustainable. Net debt is set to rise from 32.8 per cent in 2003 and is forecast to stabilise at 35.5 per cent in 2008–09. Since the general government gross debt is forecast to stabilise at 41.4 per cent, one of the lowest levels in the European Union, the Government are demonstrating their continued commitment to long-term sustainability.

In keeping with the 2003 broad economic policy guidelines, the programme also demonstrates the Government's commitment to address the historic under-investment in public services in the United Kingdom, to which I referred. We have given figures for the rise in public investment in cyclically adjusted terms, with the result that both public sector net borrowing and general government net borrowing will be 2.4 per cent in 2003–04, falling in the following years.

General government net borrowing will be 3.3 per cent in 2004, falling to 2.6 per cent in 2004–05 and to 1.8 per cent by the end of the projection period. What I say, and what we have always said, about the stability and growth pact is that the United Kingdom continues to meet a prudent interpretation of the pact that reflects low-debt, long-term fiscal sustainability more generally, the need for public investment in the United Kingdom and takes into account the economic cycle.

Baroness Noakes

My Lords, I thank the noble Lord for giving way. Does he agree that the figure of 3.3 per cent does exceed the 3 per cent obligation under the Maastricht Treaty?

Lord Mclntosh of Haringey

My Lords, strictly speaking, we are not in EMU and so we do not have an obligation, but I do not seek to make anything other than a debating point. No, I do not agree with the noble Baroness. While I agree that if you take the imprudent interpretation of the stability and growth pact and if you ignore what we have always said to be the important considerations, which are the need for public investment, long-term fiscal sustainability and the economic cycle, then we have met the prudent interpretation, which is the only interpretation we accept.

What I add today is that we have been told by the noble Baroness, Lady Noakes, among other noble Lords that the stability and growth pact is in tatters. It is not in tatters; what has happened is that others have recognised that our prudent interpretation is right and that the rigid interpretation of the European Central Bank is wrong.

I turn now to the issues relating to public finances. I want to answer first the accusations that our public finance projections are based on unrealistic assumptions and that our forecasting has deteriorated. In fact, as noble Lords will know, at the time of the publication of the Pre-Budget Report we published, as we always do, the assessment made by the National Audit Office of the assumptions made in the report. The NAO has been asked to audit and report on the conventions and key assumptions underlying the Treasury's projections, which are submitted to the Comptroller and Auditor-General by the Treasury to ensure that they are reasonable and cautious.

The three-year rolling review of assumptions established in Budget 2000 means that the NAO can provide a check both that the assumptions remain reasonable and cautious and whether they have proved to be reasonable and cautious since they were last audited. Those who read the NAO report will see that that has been achieved.

Baroness Noakes

My Lords, I am sorry to intervene once more and I am grateful to the Minister for giving way. Does he believe that a three-year rolling review can provide in any one year a comprehensive so-called "audit" of those assumptions? In any one year, the National Audit Office reviews only some of the assumptions, not all of them.

Lord Mclntosh of Haringey

My Lords, the noble Baroness, Lady Noakes, knows far more about accountancy than I ever will. I think that is a technical question, and I will have to write to her about it. It sounds like an interesting point.

The noble Lord, Lord Northbrook, made the accusation that public finances forecasting has deteriorated. In fact—

Lord Higgins

My Lords, before the noble Lord leaves the other point, may I say that I was not querying the assumption, although the idea that the NAO audits these assumptions, in any accountancy sense, is, of course, absurd? It is not an accountancy exercise at all. My question was whether the Bank of England and the Monetary Policy Committee are using the same assumptions as the Chancellor. If so, given the Chancellor's expectation of growth, why did the Bank of England put up interest rates in November?

Lord Mclntosh of Haringey

My Lords, I had not attempted to answer that question but I was going to. The Bank of England Monetary Policy Committee is independent of government, and it is not up to me to query the assumptions it makes. We make the assumptions that we have to make and we submit to the Comptroller and Auditor-General for the purpose of the Pre-Budget Report. The Bank of England Monetary Policy Committee makes its own assumptions, and I would not dream of criticising it. I am certainly not saying that they are necessarily the same assumptions.

Lord Higgins

My Lords, I am sorry to come back on this point, but it would be really too silly if the Monetary Policy Committee and the Government were making different assumptions. This is supposed to be a unified economic policy.

Lord Mclntosh of Haringey

My Lords, the only point I am making is that I am not answering for the Monetary Policy Committee. I will not go any further than that.

The end of the year fiscal report which we have published makes it clear that our performance compares well internationally, with the United Kingdom forecast being consistently more cautious than other countries over the period 1998 to 2002. We published this report alongside the Pre-Budget Report, as noble Lords will know. The absolute average difference between forecast and outturn for 2001 and 2002 was 1.5 per cent of GDP for the OECD and 1.6 per cent of GDP for the European Commission, compared with 0.9 per cent of GDP for the Treasury. So I rebut the accusation that our forecasting is in any way deficient.

I repeat that we are on track to meet our own strict fiscal rules over the economic cycle on the basis of our cautious assumptions, with the public finances remaining sound and sustainable in the long term. The average annual surplus on the current budget over the whole cycle to 2005–06—in case I forget to say so, we have declared this to be the economic cycle for a number of years now; there is no sleight of hand there—is around 0.2 per cent of GDP. The Government are therefore on track to meet the golden rule. Public sector net debt is projected to stabilise at 35.5 per cent, which is £64 billion below the 40 per cent level and, again, comfortably meets the sustainable investment rule. We have been able to allow fiscal policy to support monetary policy to meet our fiscal rules and to safeguard the increase in investment in priority public services.

I was asked in particular about borrowing. Yes, public sector net borrowing has increased over earlier estimates, but as a share of GDP, it is only 3.4 per cent in 2003℃04, compared with 4.8 per cent in 1995–96 and 8 per cent in 1993–94, in the golden age of Chancellor Clarke.

The noble Lord, Lord Higgins, asked me how our finances compared with the euro-zone. I rather think that he was not particularly praising the euro-zone. He was right—our finances compare favourably not only with the euro-zone but with other G7 countries. Our deficit is below the G7 average this year and next year, and the net debt is the lowest in the G7. We are well placed to meet the challenges of a long-term ageing population, to which the noble Lord referred, and which, of course, is universal.

The question arises of whether our fiscal policy is sustainable. I referred to that in my opening speech. It is clear that our prudence during the period of strong global growth, building a safety margin through cautious assumptions and reducing debt when other countries were spending, means that Britain can now borrow to invest in schools, hospitals and transport, support monetary policy during a period of global uncertainty and meet our international commitments while still meeting our fiscal rules and maintaining a sound long-term fiscal position. That is what Keynes would have said. It makes sense to borrow in difficult times if one has already put money aside, as we have, to pay off debt in the good times. As the economy gathers pace, the public finances are forecast to improve. As the economy returns to trend, fiscal policy will need to do less to support monetary policy. As I said, the UK is forecast to have lower borrowing than the majority of major economies in 2003–04.

I shall try to deal with as many detailed points about public finances as I can, but I know that I am straining the tolerance of the House. I have dealt with the question of the economic cycle. The noble Baroness, Lady Noakes, queried our forecast of borrowing and gave figures for the increase of borrowing. Of course, those were cumulative borrowing figures over a period of time; we have sometimes been guilty of using such figures, but they can be very misleading.

Lord Northbrook

My Lords, does the Minister agree that the forecasts for Treasury borrowing have been a bit inaccurate? Could measures be put in place to improve them?

Lord Mclntosh of Haringey

My Lords, I have already made the more general point that our forecasting has been better than anyone else's. I agree that in general terms—although I shall not go further than that—forecasting borrowing is particularly difficult to do, because borrowing is the difference between two very large numbers, in receipts and expenditure. That is inherent in the issue of forecasting borrowing.

Before I leave the issue of borrowing, it is important to recognise that the short-term widening of borrowing represents our commitment to address historic under-investment in our national infrastructure and public services and to meet our international obligations, while allowing automatic stabilisers to smooth the path of the economy.

Accusations were made about taxes, and the usual accusations were made about stealth taxes. I am afraid that I shall have to repeat what I have always said; that is, that OECD figures show that the United Kingdom is a relatively lightly taxed economy. We have one of the lowest tax burdens in the European Union, far below the EU average and lower than France, Germany and Italy, for example. Those are OECD figures.

The noble Lord, Lord Northbrook, made a number of interesting but detailed points about small businesses. He referred to increased taxes on small businesses; however, business taxes in this country have been at a historic low in recent years. I was interested in his comments on transfer prices and capitalisation, but I have come to expect those comments from the tax partners whom he quotes. For the Treasury and the Inland Revenue, they are the opposition—they are the ones that we have to beat to maintain public accounts and to protect public services.

I am sure that there are other matters to which I could have responded. However, I have spoken for 21 minutes. I hope that the House will allow me to write to noble Lords about any issues that I have not covered. I shall be happy to do that. It is simply a matter of time and not, I assure noble Lords, a matter of resources that constrains me.

On Question, Motion agreed to.

House adjourned at eighteen minutes past eight o'clock.