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9.8 pm
Mr. Andrew Tyrie (Chichester): The hon. Member for Northampton, North (Ms Keeble) made a thoughtful speech. If I had plenty of time, I would take issue with her on a few points, but I do not intend to speak for as long as some hon. Members. On the crucial issue of savings, the hon. Lady said that some of the comments made by Conservative Members had been destructive of the climate in which savings take place.
The savings culture in this country was badly damaged in the 1960s and 1970s--particularly the 1970s--and it took a huge effort to restore it in the 1980s and 1990s. That is why the savings ratio took a long time to recover. It eventually recovered: PEPs were introduced as part of an attempt to restore it.
It is important to bear in mind the fact that, although the Conservative party did not say so at the time, when PEPs were introduced they were a bit of a flop. It took several years of reforms and adjustments to the PEP regime for them to become part of the mass savings culture. What is destructive of savings is constant change to the regulations.
What the Government have done is to remove a brilliant brand. A successful part of the savings culture has been replaced with something that many people do not understand, and I fear that we will see a further dip in the savings ratio as a consequence.
My main theme is the macro-economic background, the fiscal and monetary judgment, that underpins the Finance Bill. I will briefly address three questions. First, do the Finance Bill and the Budget judgment make early entry into monetary union more or less likely? My hon. Friend the Member for South Dorset (Mr. Bruce) touched on that issue earlier. Secondly, does the growth forecast support the overall fiscal position? Thirdly, are the measures in the Budget likely to encourage growth?
Let me first, in a short digression, pick up on the points made by my hon. Friend the Member for West Worcestershire (Sir M. Spicer). I was in the Treasury when the Germans and the French made their previous great push for the withholding tax. I well remember a lunch I attended with Nigel Lawson and Pierre Beregovoy, when he was French Finance Minister. He leaned across the table at a crucial point in the discussions and said, "Look, unless we can have our withholding tax, all bets are off on this capital liberalisation directive." That was being discussed at the time. I thought that that had upped the ante. Lawson replied, "As a matter of fact, all those capital controls you have are great news for the City and we would prefer you to stick to them." That is how we fended off the withholding tax in the late 1980s. However, we must grasp the fact that the pressure for the withholding tax is relentless and remorseless, and it will not stop. If we fend it off this time with only a partial protection, we face the risk of erosion of the protection, in ways that are not always easy to foresee. That is why it is very important that the Government stick to what they have said and veto any measure for a withholding tax.
Unusually, the judgment in the Budget statement and Finance Bill was overshadowed by an earlier statement by the Prime Minister in which he changed the mood on EMU. He appeared to say that he wanted Britain to join economic and monetary union. The right hon. Gentleman came off the fence. In fact, his words were more equivocal than that, but that was the briefing given to the press. That was the background to the Budget.
If policy has changed, the Government will have to agree, sooner or later, to abide by the terms of the stability pact, which require a balanced budget or a surplus over the cycle. In the short term, of course, revenue is pouring into the Treasury, and the Government will not have too much of a problem. However, the Government are currently committed to a looser fiscal stance than contained in the stability pact, because they have formulated the golden rule for the public finances. That gives the Government licence for substantial borrowing. They can borrow almost as much as they like by reclassifying it as capital--although so far they have only done that to the tune of £7 billion, or a little less than 1 per cent. of GDP. The fact that the capital- current distinction is virtually meaningless--as everybody who has considered the issue agrees--means that the Government have enormous scope for flexibility. The Government will have to find a way to abandon that and tighten their fiscal stance, if they are to agree to the stability pact. But there was nothing about that in the Budget.
Then there is the issue of cyclical convergence. Our interest rates are nearly twice as high as those in the eurozone. Early entry to EMU would imply either tighter fiscal policy or, even more implausibly, a higher exchange rate than we have at present. Faced with a worse problem of the same type, the Irish did a bit of both, revaluing the punt just before entering EMU, and tightening fiscal policy. If the UK were to consider early entry, we would have to follow a similar course. We would not be able to allow the currency to depreciate. We would have to tighten fiscal policy. There is no mention of that issue in the Budget, even by implication.
The Government's exchange rate policy is the most important for EMU. Whatever the legal requirement--and there is some dispute over it--there will have to be a period of exchange rate stability before rates are locked. The Budget says nothing about that, and nor has any Government statement suggested that the Government believe that the Monetary Policy Committee should start to take the exchange rate into account as a target. The MPC will be told to stick to its last and to stabilise the internal value of the currency, not its external value.
The fact that the Budget and the Finance Bill virtually ignore EMU tells us that the Prime Minister's statement may have been little more than mood music. Furthermore, buried away in that statement was a new get-out clause from his euro enthusiasm. He added a sixth economic test that must be passed before the UK is prepared to join EMU.
What the Prime Minister said was scarcely noticed, but it is very important. He said that he understood the worries of those who were
There is a gap between the Government's mood music and the reality of policy on EMU. Nothing has been done over the past year that would not have been done in any event. Policy has not been altered in any way to take account of monetary union. If any hon. Member can think of a way in which it has been changed, I shall gladly give way to him or her.
This resembles the Government's policy making on many other issues. I could mention Kosovo, devolution and House of Lords reform. We have heard a soundbite, and we have seen the first steps towards a policy. But there has been no clear plan for reaching the end point on any of those issues.
To some degree, the same is true of the growth forecast, which has been given to us as a stated figure without any clear explanation of how such an adventurous forecast can be delivered. Why should we be able to obtain a higher medium-term growth rate? The Government are taking risks with the public finances. The Chancellor has spent a lot of money. The smallest ever spending reserves underpin his plans, and his Budget gave a lot of money away in various lollipop measures.
The green Budget contained some plausible forecasts, but, under the title "Alternative growth scenarios" in the Red Book, the Chancellor offers an upbeat story of 2.25 per cent. medium term growth, and a very upbeat 2.75 per cent. growth scenario. That is hopelessly adventurous. We have not achieved 2.75 per cent. growth since the 1960s. I will be surprised if it is achieved.
It is not hard to imagine how the forecast could be upset. For example, does any hon. Member think that equity prices in the United States will avoid a correction? Does anyone believe that Wall street will carry on floating along at these prices? If so, I would gladly give way. No one thinks that the US equity market can carry on like this indefinitely. If there is a sharp fall in equity prices, United States consumer demand will collapse because the household savings ratio is virtually zero. Spending and consumer demand are being sustained from the growth in equity prices.
Our growth rate would take a huge tumble if the main motor of global growth stalled, as it will if Wall street takes a tumble. If the growth forecast is not achieved, fiscal policy will be in a huge mess, and the measures in the Finance Bill will not add up. That is a serious concern. I was amazed that I could find no mention in the Red Book of the balance of risk of a sharp slowdown in the United States economy as a consequence of over- valuation of equities. A Budget judgment has been taken without the identification of any public discussion of one of the most important risks involved.
There are many other reasons why I am worried about the public finances. The contingency reserve is half the average of the previous 20 years. A war is going on while the reserve is small. The war will bear on taxes more quickly than it would have if we had had a larger reserve. Asset sales are still written in at £4 billion a year. I will be surprised if the Government achieve that. Welfare
spending is still rising faster than even the growth forecast. There is much pressure on the public finances. Everything is underpinned by the optimistic growth forecast. If it is not achieved, the whole pack of cards could collapse and there will be a sharp downturn in the fiscal position.
That brings me to the next question: will policies in the Finance Bill encourage growth? I will say something that I know Labour Members do not like. The fact is that Labour was not elected to run an alternative economic strategy; it was elected because people finally trusted it to run broadly the policies that it inherited. That is hardly surprising, because those policies had transformed our economic performance over the past 20 years. On economic matters, Labour's electoral chances will be prejudiced to the extent that policy diverges from that inheritance and the new global, free enterprise, conservative, economic consensus.
In some respects, the Chancellor has entrenched a sense of continuity with past practice. In fact, he has gone further, particularly by introducing Bank of England independence. However, bit by bit, in this Budget, he is diverging from the inheritance. Most important are the tax rises. Previous Labour Governments paraded tax rises as a legitimate instrument of social as well as economic policy, but they have learned their lesson. That was unpopular, so the Government have introduced taxes more stealthily this time.
All the same, Labour Members will have their work cut out explaining what the Prime Minister meant when he said:
Labour talks as if it has abolished the business cycle when it refers to the end of boom and bust, but the business cycle has always been with us. There will be a recession. I do not know when, but I guarantee that there will be one. It may be sooner or later, but, when it comes, the relatively incautious fiscal position that I have described will be found to be extremely vulnerable.
It is not just on tax that the Chancellor is moving away from his inheritance. The Conservatives bequeathed Labour a tax system that was still too complicated, but was vastly simpler and less distorted than the one that the Conservatives inherited. I do not suggest that the Conservatives did not introduce distortive tax policies in Finance Bills, but the principles underlying Conservative Budgets were clear. We introduced lower and less distortive taxes. What we have in this Budget is higher and more distortive taxes.
"concerned about the type of euro zone that we might be joining."
He said:
"There are real problems in the EU"
requiring
"labour market reform . . . capital market reform . . . and product market reform."
20 Apr 1999 : Column 783
Before Britain enters, he said:
In other words, the EU must reform itself. He was talking not only about UK flexibility; greater EU flexibility has been added to the five economic tests, a sixth test.
"We are determined that these must be in place."--[Official Report, 23 February 1999; Vol. 326, c. 183.]
"We have no plans to increase taxes at all."
Or when he said:
"I vow that promises we make on tax we will keep. This is my covenant with the British people. Judge me upon it."
Or what about the Chancellor? He said:
"We will not make promises that we will later break, we will not say one thing before the election and another after. Above all, we will be straight with the British people about tax."
How does all that square with the indisputable tax rises that we have seen in the past two years? It is worth bearing it in mind that those tax rises have taken place in a benign economic environment. What kind of tax rises will we see from a Labour Government in the depths of a recession? We might find out if there is a recession before long.
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