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11.36 pm
Mr. Nick St. Aubyn (Guildford): Conservative Members have been sceptical as to whether the code for fiscal stability" will achieve anything. In the hope that it
might, I remind the Chief Secretary to the Treasury that paragraph 19 of the code mentions an economic and fiscal strategy report and promises that it should
- "present illustrative projections of the outlook for the key fiscal aggregates for a period not less than 10 years into the future, based on a range of plausible assumptions."
- "an analysis of the risks surrounding the economic and fiscal outlook, including Government decisions and other circumstances that have still to be quantified".
- "The financial statements shall also include any other such indicator as is required to judge . . . the Government's European commitments".
I wonder whether the Treasury is aware of a study undertaken by Oxford Economic Forecasting last December, which used the Treasury forecasting model to study what would happen if we joined the euro in 1999. It clearly showed that, because of the dramatic cut in interest rates that would be required for us to join, there would have to be a corresponding increase in general taxation, equivalent at that time to a rise of 3p in the standard rate of income tax.
The stability of our economy is not provided for by a code; it is rooted in the balance and structure of our economy. As that report pointed out last year, in this country, mortgage debt is nearly 60 per cent. of gross domestic product, compared with only 40 per cent. in Germany and 24 per cent. in France. In this country, 80 per cent. of all mortgage debt is on a variable, as opposed to a fixed rate, of interest. According to that research, the comparable figures for Germany and France are only 5 per cent. and the rest of their mortgage debt is on a fixed rate.
Clearly, not only would a cut in interest rates within the euro have a different impact on the stability of our economy, but the sudden reduction that would occur if we joined in the early years, would have a dramatic impact on the stability of our economy. That is why, according to that research, there would have to be a significant increase in general taxation if we joined.
Has the Treasury done a study and will the Chief Secretary's forward projections under the code include an analysis of what will happen if the Government join the euro in the near future? Will he show us the honesty for which the hon. Member for Kingston and Surbiton (Mr. Davey) asked, and tell us by how much taxation would have to increase?
I asked the Library to undertake further research, in the light of the current economic environment, 12 months after the Oxford research was published. According to the Library, we would now be contemplating a 3 per cent. change in short-term interest rates if we were to join the euro at its start. The analysis clearly shows that general taxation would have to be increased by the equivalent of
5p in the pound on income tax, or nearly £10 billion a year in total, for every single year of the projection. That extra taxation would be money taken out of the economy, not to be spent by the Government.
Will the Chief Secretary undertake to make his own analysis, within the terms of the stability code, and tell us what his corresponding figures are?
Mr. Cousins:
The hon. Gentleman cited some interesting figures on the impact on mortgages of a hypothetical interest rate if we joined the euro. How much better off would the average mortgage payer be if we were to have those interest rates? Frankly, my appetite is being somewhat whetted by his argument.
Mr. St. Aubyn:
Surely hon. Members are familiar with the low fixed-rate mortgages offered by many mortgage brokers. As the "Money Box" programme on Radio 4 has been telling its listeners, the catch comes in the long term, when one tries to renegotiate the terms of the mortgage and finds that there are high penalties for withdrawal. The problem with the cheap offer available from the euro is that the penalty for withdrawal is totally excessive and that, later, when the penalties have to be paid, there may indeed be no withdrawal and no exit.
That is the problem with the euro. At least, under the code, the Government are now duty bound to admit that any benefit to be gained from lower mortgage rates, even in the short term, would be offset by higher taxation. Many retired people on fixed incomes, part of which depends on deposit interest, will be hit by a double whammy. The retired would not only have lower interest on their deposit savings but would have to share the burden of higher taxation.
Mr. Nick Gibb (Bognor Regis and Littlehampton):
It is clear from this debate that the code is vapid and meaningless, full of airy phrases that can be interpreted to mean exactly what the Government want them to mean. However meaningful they may be, and there are considerable misgivings about that, the Government's two fiscal rules--the golden rule and the sustainable debt rule--are not even incorporated in the code.
The explanation of the code, published in March, said that
What of the two fiscal rules? The golden rule involves splitting out current expenditure from capital expenditure and declaring that borrowing should not exceed capital expenditure. As my hon. Friend the Member for West Worcestershire (Sir M. Spicer) correctly said, the distinction between capital and revenue in this context is false. Willem Buiter, a member of the Government's Monetary Policy Committee said, "It has no merits" as a guide to optimal borrowing. The Ernst and Young Item Club in its summer report said that borrowing to fund capital expenditure has exactly the same effect as borrowing to fund current expenditure. They both increase the pressure of demand.
Not only is the golden rule meaningless but it is dependent on the definition of capital expenditure. That is open to abuse by Governments. They can change those definitions. There is nothing in the code about not manipulating the definition of capital expenditure. Indeed, the reason why Willem Buiter is so opposed to the golden rule is just such manipulation that occurs in other jurisdictions such as Germany. That is why my hon. Friend the Member for Chichester (Mr. Tyrie) was right to say that Germany had decided to abandon a golden rule. But this Government are perpetrating that manipulation here.
On page 124 of the November 1998 pre-Budget report published just a few weeks ago, paragraph B28 says:
How is it transparent to introduce a new and bogus concept of a surplus on current budget, which the Chancellor, the Prime Minister and the Chief Secretary again this evening have tried to shorten, in an outrageous attempt at obfuscation, to current surplus? They give the impression that the Government are running a budget surplus, whereas the reality is a budget deficit.
The current surplus is merely a sub-total of revenue less current expenditure before taking into account the so-called capital expenditure. Once the capital expenditure is included, as it should be, the result is a budget deficit. It is a wholly bogus concept--opaque, not transparent.
It gets worse. After the July comprehensive spending review, the Chancellor trumpeted his £30 billion current surplus. That figure was cobbled together by adding up the next three years of so-called surpluses on current budget of £7 billion, £10 billion and £13 billion, equalling £30 billion.
"to embrace the Government's two fiscal rules in the code would be unduly restrictive."
How strange then that the Government's consultative document on a proposed code, published six months earlier, said that
"the code needed to be restrictive so as to rule out the possibility of profligate fiscal behaviour."
Just six months later, the Government have changed their minds. No longer do they want to be restricted. No longer do they want to rule out profligate fiscal behaviour,
perhaps because in July this year they engaged in profligate fiscal behaviour with their public spending plans for the next three years.
"Some expenditure that was previously classified as current--chiefly dual-use military equipment and computer software--has been redefined as capital."
Here we come to the nub of the debate--the pretensions in the code to transparency, which is the first of the five principles of fiscal management.
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