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Session 1997-98
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Standing Committee Debates
Finance (No. 2) Bill

Finance (No. 2) Bill

Standing Committee E

Thursday 18 June 1998

(Afternoon)

[Mr. John Butterfill in the Chair]

Finance (No. 2) Bill

(Except Clauses 1, 7, 10, 11, 25, 27, 30, 75, 119 and 147)

Clause 151

Code for fiscal stability

Amendment proposed [this day]: No. 146, in page 138, line 12, after "policy", insert

    "(such that public borrowing over the economic cycle shall be for the purposes of investment only)". [Mr. Fallon.]

4.30 am

Question again proposed, That the amendment be made.

Mr. Nick Gibb (Bognor Regis and Littlehampton): Before lunch, Labour Members were discussing the debt level that the Government have decided to run up in the period to 2003-04. The amendment would incorporate into the legislation a definition of the golden rule that the level of debt should not exceed the amount of investment undertaken by the Government. The Government claim that during the next four or five years they will reduce the level of debt as a proportion of gross domestic product. This is the only Government who would simultaneously increase debt while claiming to be reducing it. On page 43 of the document, "Stability and Investment for the Long Term", it is clear that in real cash terms, after adjustment for inflation, the public service net cash requirement the new jargon for the public sector borrowing requirement will increase. It will be £4 billion in 1998-99, then £2 billion, then £4 billion, then £5 billion, then £5 billion, then £4 billion in 2003-04. In all common understanding of the language, that is an increase in debt in real terms, but the Government are claiming that they are reducing it because they are reducing it as a proportion of GDP. That is a recipe for profligate and continued public spending. The raison d'\ketre of the document is to allow the Government to continue to increase public spending while claiming, falsely in my view, that they are being prudent and sensible with public spending.

Mr. Edward Davey (Kingston and Surbiton): Can the hon. Gentleman tell the Committee when the previous Conservative Government reduced net public debt in real terms?

Mr. Gibb: The hon. Gentleman and Labour Members must distinguish between the propaganda that the Labour party wields to win elections, and the economic reality necessary to make economic decisions. The average level of debt during the 18 years of the previous Conservative Government was lower at 39 per cent. than all the figures in the document. That is a fact. The reality is that the Government are using accounting techniques to disguise large increases in public spending, and that will come home to roost when the economy takes a downturn.

I have tried in vain to extract from the Government a definition of capital spending because on that definition will depend how effectively and properly the so-called golden rule is implemented. I have tabled parliamentary questions and was referred to annex B of the Red Book. I searched annex B for a definition of capital spending, but the nearest I could find was in paragraph B.62 which states:

    "Public sector capital expenditure ... includes ... gross domestic fixed capital formation (ie expenditure on fixed assets schools, hospitals, roads, computers, plant and machinery etc)".

That appears to be the only definition, other than that on page 20 of the Government's new glossy document, "Stability and Investment for the Long Term", in which spending on capital is defined as spending which

    "creates assets which support services and benefit taxpayers in future years as well as now."

The definition is unclear, but it is crucial, because on that definition will depend whether the golden rule is valid. For example, do repairs to a school building constitute capital spending or revenue? Can the Paymaster General answer that specific question this afternoon? Do repairs to roads constitute capital spending or revenue? The definition in paragraph B.62 includes roads, hospitals and schools. Repairs constitute only capital spending under the Government's definition. No accountancy definition of capital spending would include a repair to a building. It is current spending and should be regarded as such by the Government.

Mr. Edward Davey: The hon. Gentleman may have a point, but surely what matters is whether the Government's definition of capital expenditure is different from that used by the previous Government?

Mr. Gibb: No, because under the previous Government it was irrelevant whether something was capital spending or revenue spending because no distinction was made in the accounts. The key point is that the level of debt was not determined by a notional figure of how much would be spent on capital spending. When it comes to Government expenditure, the distinction is difficult to draw. Indeed, many people outside this place regard the distinction as false because it is so dependent on the definition of the term. Many economists believe that the level of Government debt should be determined by the economic cycle. For example, when the economy is in a down cycle, the Government should be permitted to go into deficit.

One member of the Monetary policy committee said in evidence to the Treasury Select Committee yesterday that the golden rule was wholly bogus. The level of Government debt should be determined not by their decision to invest on a wholesale spending spree throughout the country but by the economy's cycle. In a down cycle a recession tax receipts are low and cyclical expenditure on social security is high. That is when Governments should be permitted to borrow. When the economy is in an upswing, during a period of strong growth, the Government should be repaying debt. The level of debt should not be based on the arbitrary decisions of the Government to invest.

Mr. Barry Gardiner (Brent, North): In the light of the hon. Gentleman's remarks, will he clarify two points? First, if the definition is so imprecise, why does he want to incorporate it into statute so that it is a legal requirement? Secondly, he quoted the PSNCR figures, saying that they were greater than the average for the past 18 years. Does he concede that the figure from 18 years ago would have bought a great deal more? Does he accept that in real terms he has to compare like with like? It simply will not do to fudge an average over a time span of 18 years and compare it with the forecast for the next two or three.

Mr. Gibb: On the latter point, we are talking about percentages. Therefore, what the hon. Gentleman said about inflation is irrelevant. As for why I am supporting an amendment that seeks to incorporate the golden rule into statute, I believe that it is important for the Government's rhetoric to become part of law and reality. If the Government say that they are going to do something, they should be made to do it, and that stipulation should be in statute.

The problem with the Government, which will bring them down in the long run, is that there is too much divorce between what they say in public and what happens in reality. Later amendments will allow us to discuss a number of examples of the way in which the Government are seeking to fudge and manipulate the accountancy figures in the same way as they fudge and manipulate media coverage of their activities.

Mr. Geoffrey Clifton-Brown (Cotswold): Does my hon. Friend care to comment on charts B2 and B3 in the Red Book. They show that the tax to GDP ratio will increase over the planned period, but Government expenditure will decrease. Everyone in this country will be paying more tax but getting less for it. Does my hon. Friend think that that is good fiscal management of the economy?

Mr. Gibb: My hon. Friend makes a valid point. It is clear from the Red Book that the Government are predicting growth of 1.75 per cent. next year. But they intend to spend 2.75 per cent. on average during this Parliament. Almost by definition, the level of debt in this country will increase because spending will outstrip the growth in the economy. It is difficult to work out, even on percentage terms, how the figures will be sustainable. If the level of growth is not as high as the Government anticipate, the profligacy of the plan will cause the country and the economy serious problems. Yesterday, if was announced that the number of unemployed people had increased by 1,700. The Government have neither apologised for nor even mentioned that. If those figures mark the beginning of a downturn in the economy, serious economic hazards lie ahead.

Mr. Christopher Leslie (Shipley): I am curious about the contribution of the hon. Member for Bognor Regis and Littlehampton (Mr. Gibb). When I was browsing in the Library, as is my wont, I came across a document that he had written, entitled "Maintaining Momentum: a radical tax agenda for the 1990s". In it, he proposes the abolition of inheritance tax, stamp duty and the higher rate of income tax, in addition to his earlier proposal to abolish capital gains tax. How can his claim to want to reduce the national debt have any credibility?

Mr. Gibb: I have always believed in low taxation, and I will continue to advocate it.

Mr. Edward Davey: What would you cut?

Mr. Gibb: The hon. Gentleman asks a question from a sedentary position, and I shall answer it. For example, I would not spend between £1 billion and £4 billion on the working families tax credit, which is the estimate given by the Institute for Fiscal Studies.

The Government have got their priorities wrong. Some £5 billion from the windfall tax has been set aside to finance a new deal scheme that has created virtually no jobs. Such projects have proved to be worthless, and they will be proved today to be a waste of public spending. Instead, the Government should be spending taxpayers' money on the priorities that they set out during the general election campaign. They promised to reduce health service waiting and to reduce class sizes, but they have failed to keep either promise.

The debate has veered away from the subject on which I had hoped it would concentrate [Laughter,] I am happy to debate that subject, which is the Government's capital spending. The golden rule is open to wide interpretation, and it should therefore be incorporated into the statute book. Moreover, in winding up today's debate, a Minister should provide the Committee and the country with a precise definition of capital spending. To describe capital spending as spending on schools, hospitals and roads is not sufficient. A clear distinction needs to be drawn between a repair and an improvement. I would be grateful if the Paymaster General would tell us whether a repair to a school, a hospital or a road constitutes capital spending or current spending.

 
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