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Mr. John Townend: Does the right hon. Gentleman agree that one reason why the pound has risen in recent months is the growing scepticism in the markets about whether--because of the difficulty and the fudging of the convergence criteria--the euro, when it comes into being, will be weaker than the deutschmark? As a result, because we are seen as a currency that will not join the euro, the pound has risen.
Mr. Sheldon: Interest rates have risen, and they have had the greatest effect on the pound. Because they may
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rise still further--particularly following the meeting between the Governor of the Bank of England and the Chancellor of the Exchequer--that expectation will push the pound up further.
I must mention an innovation in the Red Book. As my right hon. Friend the Member for Kingston upon Hull, East said, it gives the forecast for unemployment right up to 2000. I recall many years of Treasury excuses that I and others gave for not providing forecasts of the number of people out of work. We do not need to look very far for the reason for changing such a long-standing custom. This exercise is not an excursion into open government. The Chancellor hopes to produce acceptable figures for the public sector borrowing requirement that either are based on optimism or presuppose that the next few Budgets will be introduced by my right hon. Friend the Member for Dunfermline, East.
It may be acceptable to provide forecasts of unemployment for a year ahead, but to presume a knowledge of the labour market, the competitiveness of our industry and the impact of international financial changes suggests not a forecast, but a piece of opportunism so as to produce the required Budget figures.
Much of the Red Book is used for such justification. Its key passages seem designed to meet the objective of a favourable economic assessment. Steps are taken to quantify the different elements to fit that assessment. At the end of it all, we see the doubtful optimism of the PSBR forecast, the future inflation rate, the private finance initiative successes, the levels of unemployment, the level of growth and the large revenues from the "spend to save" policy. So many of those figures are derived from the hopes of a Chancellor facing an early election.
The "spend to save" policy for the revenue departments belatedly echoes the strictures of the Select Committee on Public Accounts over the years. Frequent cuts in staffing are the reverse of that policy, because we have lost the people who could have produced such savings. It is a pity that we have had to wait so long for the Committee's suggestions to be implemented. I look forward to savings being made, but I believe that the assessment has been too generous, and the optimism has been too great.
Mr. Matthew Carrington (Fulham):
It is always a great pleasure to follow the right hon. Member for Ashton-under-Lyne (Mr. Sheldon). His contributions to debates on the economy are always thoughtful, if somewhat gloomy. He manages to paint a picture that is at variance with some of the facts by concentrating on the figures that he decides are capable of a sad interpretation.
I agree with the right hon. Gentleman on the private finance initiative. It is a technical matter, but as he raised it, I shall deal with it in my opening remarks. I am not concerned that the PFI will fail to be a success--I am convinced that, in time, it will be attractive to many private sector investors. My hon. Friend the Financial
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I am, however, slightly concerned about the way in which the PFI is reported in the public accounts. The Government are committing themselves to a long stream of payments. It is not traditional for tables in the Red Book to take account of commitments that extend for many years. As the PFI grows, it will be necessary to find a mechanism to reflect the Government's contingent liabilities--the guarantees of future payments--in the borrowing figures. Resource accounting--when it is introduced--may deal with that problem, but the figures will be distorted unless a way is found to reflect PFI commitments in the borrowing figures.
I am grateful to have the opportunity to welcome the Budget and the Chancellor's announcements. As my right hon. Friend the Member for South Norfolk (Mr. MacGregor) said, this is not a spectacular Budget. Indeed, it is better for not being spectacular. It was not intended to be a Budget that would set the world on fire. The tax cuts are welcome, even if all they do is to ensure that the fiscal drag on the economy--the natural growth of the economy, and therefore the natural growth of tax revenues--is returned to taxpayers in some form.
My right hon. and learned Friend's proposal to increase the threshold for paying tax by more than the rate of inflation is particularly welcome. That removes 410,000 more people from tax paying than would have been removed if the threshold had merely been indexed. That will help many people on lower incomes.
This is not a tax-cutting Budget, and it was not designed to be. For some people, it may be a tax-raising Budget, especially if Labour and Liberal Democrat councils irresponsibly raise the council tax. It is clear from the rhetoric that we have heard during these debates that that is the likely plan. It is a vain attempt to blame the Government for the huge rise in council tax. Even before this year's settlement, my council managed to raise the council tax by 40 per cent. in two years, which is well above any figure that could conceivably be necessary, given the sums provided by central Government.
The Budget is finely judged, because, by doing little, it is designed to encourage the economy at a critical moment. The challenge that we face is to prevent inflation from rising, and to ensure that the public sector borrowing requirement decreases, both of which are vital objectives. There are already signs that inflation is on the increase, and that consumer spending is rising. Hon. Members have only to see the volume of sales that are being transacted in the great department stores in London to realise that consumer spending, although not booming, has strongly recovered.
House prices are rising sharply. As in most parts of central London, house prices in Fulham are rising unsustainably fast. It is estimated that they rose by 20 per cent. this year and last year. Anecdotal evidence suggests that, in reality, house prices in central London are rising faster than that. We are seeing the return of gazumping and sealed bids for properties that are then sold for a sum well above the asking price. That may be an inner-London problem, but I suspect that it will filter through to the rest of the economy fairly soon.
M4 is growing at 10 per cent., which is alarmingly fast. There are technical reasons for some of that growth, such as changes in M4 itself, and in the speed of circulation of
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It would also not have been right to raise taxes sharply, because that would not have had the possibly necessary damping down effect on the economy. Raising taxes is not a good way in which to control inflation; that is much better done through monetary policy, by raising interest rates.
My right hon. and learned Friend recently made an obvious move towards increasing interest rates when he raised the rate from 5.75 to 6 per cent. That rise is very small, and it is certainly not large enough to take out from the system a large amount of excess money. Such a rise is a good thing, because one of the characteristics of a strong economy, which is noticeable in Germany, is that a very small rise in interest rates sends an--often psychological--signal that has a damping down effect on the economy that goes well beyond the purely monetary effect of an interest rate rise alone.
In Germany, the Bundesbank can produce, by a very small movement in interest rates, a very large change in spending patterns and the way in which the economy moves. Our economy would greatly benefit if we could adopt an arrangement in which a small interest rate change produces a big change in how money is spent and circulates in the economy. Nevertheless, a small rise in interest rates now is vastly better than a large rise later, after we have won the next general election.
The key problem that we face is the public sector borrowing requirement. The PSBR is sharply falling, and I very much welcome the fact that, next year, it will be below the level set by the Maastricht criteria. However, a problem remains from the estimates in last year's Red Book and in the summer economic forecast, deriving from the mysteriously missing value added tax receipts. We are missing perhaps some £6 billion in VAT receipts, although an attempt was made, in the table on page 69 of the Red Book, to account for them. The account is far from convincing. I suspect that the Treasury and, particularly, Customs and Excise do not yet truly know what is happening with VAT, and I strongly recommend that greater efforts be made to produce a more convincing explanation for the gap.
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