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Mr. Clarke: I apologise to the hon. Lady if I am giving one of my more bipartisan speeches. I had obviously failed to get across the fact that, on the whole, I disapprove of the strategy lying behind the Budget. She asked a very direct question, and I shall deal with the two reasons that have been given.
The issue of the black hole has not really been pursued very much recently. The National Audit Office, to which the whole matter was turned, rather killed it off when asked to look at it. It was an ingenious idea to ask the NAO to test the assumptions. I congratulate Sir John Bourne and the NAO on the very high standards of public service that they maintained by giving a perfectly
straightforward factual reply to the assumptions that they were given, which did not do any good to the Government's case at all.
Mr. Stephen Timms (East Ham):
Will the right hon. and learned Gentleman give way?
Mr. Clarke:
I should like, first, to deal briefly with the NAO and wait to see whether anybody on the Government Benches puts any weight on the issue.
The Government put to the NAO the Chancellor's own fresh assumptions and asked it to comment on them. The NAO did not criticise my Budget assumptions or my figures, and it did not say that there was a black hole in my Red Book in November.
Mr. Timms:
Will the right hon. and learned Gentleman give way on that very point?
Mr. Clarke:
If the question is on the Government's new assumptions, I shall.
Mr. Timms:
Does the right hon. and learned Gentleman accept the view that the NAO took about the potential savings from the spend-to-save initiative, given that the amounts that he claimed that he would save from that initiative were very much greater than those that have now been confirmed by the NAO?
Mr. Clarke:
I cannot in the middle of a debate look up the precise words, but the NAO accepted that, as we had predicted, there would be a deterrent effect over and above the direct changes that we were making in the spend-to-save proposals. The NAO said that the amounts were difficult to estimate, and therefore left it at that. The fact is that that initiative will save more than the Chancellor is now saying and that the deterrent effect which we calculated was a cautious assumption--I think that the NAO confirmed that when commenting on the Inland Revenue figures concerning the knock-on effect as people become more compliant once they are tackled. The NAO otherwise merely commented that such an approach was one way of approaching the whole problem.
Some of the other assumptions that the Chancellor put to the NAO in order to say that there was a black hole are quite astonishing. He is insisting that this country's trend rate of growth is 2.25 per cent. only--the average for the past 40 years. After 20 years of supply-side changes and the criticism of our decline in the league tables--I thought the Chancellor was implying that we would leap up them once we had a Labour Government--he is back to 2.25 per cent., abandoning my reckless 2.5 per cent., to which I had persuaded the Treasury to move. That is totally out of line with the rhetoric of the Labour party that fought the election recently, when it said that Britain was growing too slowly compared with our competitors.
The Chancellor has gone back to a flat-rate assumption of unemployment, which was much criticised by the Treasury Select Committee. The assumptions that I made were very cautious--we are already doing better than the assumptions that I made in November. The Chancellor effectively said, "We are not going to reduce unemployment as a Labour Government. We will return to a flat-rate assumption."
I will not go on, because the real problem about going to the NAO was that, by the time that it had finished, the Chancellor still could not find much of a black hole, even after adding up the difference between his pessimistic conclusions and mine, because the economy by then was doing so much better and tax receipts were rising. He could find a difference of only £500 million for this year, even if his deliberately pessimistic assumptions were right. There was no black hole; it is a myth to say that there was--barring one factor.
We had pointed out that, if a Labour Government stopped privatisation, they would not have our privatisation receipts. I have given up working out where we are on national air traffic control, which I think is one of the subjects under review, like so many others under the Government. The assumption now, as we said, is for nil privatisation receipts--and that is the most expensive part of the black hole that the NAO was trying to discover. That part exceeds any other. If one translates the last paragraph of the NAO's conclusions, it is basically: "It is up to you if you wish to make these pessimistic assumptions." The Chancellor has done that, and it does not really make his case.
The Chancellor announced that, for the first time, he has a deficit reduction programme. Alas, I did not have the slogan, but I had the deficit reduction programme. The previous Government were reducing the public sector borrowing requirement every year without fail and we were continuing to act in order to do so. Looking at the books, the Chancellor has no explanation of why the Labour Government are suddenly dramatically speeding up that process.
I turn to the overheated economy argument. The economy is certainly running very strongly--better than my cautious assumptions. It is certainly right that, as I repeatedly said more often than I can remember throughout my time as Chancellor, we want no return to boom and bust. We spent four years being committed to stability, creating the conditions that really encourage investment, growth and new jobs, and that has to be maintained.
There is, however, a new departure. I would never have begun--nor, I think, would any Conservative--turning to fiscal measures to control overheating of the economy. I attribute the system that I put in place and my approach to economic policy to Nigel Lawson, particularly in his earlier years after his Mais lecture. The control of demand and activity is largely a function of monetary policy, and one sets interest rates to hit inflation targets and produce stability in the financial markets. The aim of fiscal policy is to produce healthy public finances. Over the cycle, one aims to ensure that there is not excessive borrowing. Fiscal policy is all about tax and is linked to public spending and borrowing. We should not go back to fiscal fine-tuning to control demand.
It is extremely dangerous to lurch back to such ideas and start turning to features of taxation to react to inflationary dangers which one sees coming along. The weakness of the argument--the average member of the public can realise it--is that it is no good pretending that one is putting up taxes on cigarettes and petrol and cutting away at mortgage interest relief because one thinks that the economy might be overheating and running out of hand. That might be credible if anybody thought that, if demand ran down, taxes on fuel or cigarettes would be
cut and mortgage interest relief at source would be reinstated, but I do not think that any of that will come forward.
What this Budget is doing is raising revenue. Interest rates have to be used to control demand. They have to be set high enough to deliver the inflation target, but they should also be kept as low as possible to permit growth, job creation and rising prosperity, consistent with hitting the inflation target.
If the Chancellor genuinely disagrees with me and says that, in the present circumstances, he needed to raise taxation to control the overheating of the economy, and if he really agrees with the Confederation of British Industry--which I do not, because I think that it was mistaken to demand the raising of taxation and to think that it was an alternative to interest rate increases--then he has failed, because he has not satisfied the people who advocated rises in taxation. Such a policy was too difficult politically, and he chickened out in the end. He has not done enough on cigarettes, fuel or MIRAS to satisfy the people who were making those demands.
The Chancellor has gone for the biggest hits on pension funds and the corporate sector. I can only say that, when I was raising taxation on behalf of the previous Government, we did not go for pension funds and savings. We deliberately avoided loading taxes on the corporate sector, precisely because we were trying to produce growth, stability and continuity, which has been disturbed by what has been done.
As I have said, the Government have failed to use fiscal policy to control consumer demand. I happen to think that one of the difficulties of setting interest rate policy at the moment is that much of the consumer demand is slightly one-off. The difficulty about this year is in trying to predict what will happen to all the one-off money coming out of building societies. How much will be spent and how much will be saved? Together with the strength of sterling, to which I shall turn in a moment, that creates a particular problem in setting monetary policy.
The Chancellor has chosen this moment of all moments to hand away responsibility for monetary policy. He has given complete freedom to the Governor of the Bank of England, with the sole objective of hitting the inflation target. That is against the background of a Budget in which the Chancellor said that he was trying to control excessive consumer spending, but he has not demonstrably done so.
We all expect that the Governor of the Bank of England will raise interest rates. Alongside a tough tightening of fiscal policy, we will have the tightening of monetary policy. On that basis, the outlook for inflation is good, and I will concede that yearly forecasts of 2.5 per cent., 2.75 per cent. and then 2.5 per cent. again look possible. Unfortunately, we are responding to a sudden flurry of excitement about overheating now and consumer demand this year, but we will see the effects of the Gordon and Eddie show in only two years' time. That is when we will see the combined effects of a tax-raising Chancellor and an interest-rate-raising Governor, and we will see whether they have gone too far.
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