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Mr. Letwin: I had not realised that we could attribute so many of the Chancellor's mistakes to the Liberal Democrats. Will the hon. Gentleman reflect on the comments of the Economic Secretary when she was specifically asked by one of my hon. Friends about the so-called hypothecation of fuel duties and she said that she would give him "no assurances" one way or the other? Does the hon. Gentleman accept that the Government do not appear to have accepted the Liberal Democrats' view on the hypothecation of fuel duties?
Mr. Davey: The hon. Gentleman is right to suggest that the Government have not been clear about how they will take the policy forward, but the fact that it was contained in the pre-Budget report is a step in the right direction. I am disappointed that the hon. Gentleman feels that giving independence to the Bank of England was a mistake, because I thought that the Conservatives were coming round to that policy.
The good news is that the Chancellor is apparently reconsidering some other Liberal Democrat policies on public expenditure. We have had an inkling that we may see a change in the Government's policy on public expenditure. It may have escaped the notice of some hon. Members, but the Government have paved the way for a major change on spending. The Government told the House that the three-year departmental limits of the comprehensive spending review were set in stone, but they are now less sure. The Chief Secretary seemed to think that the Government had not changed their approach to the CSR, but he should talk to the Chancellor. According to the uncorrected minutes of the Chancellor's evidence to the Select Committee on the Treasury last week, which are now available to all on the internet, the Government have changed their position.
The key question that the Chancellor and I were debating in the Committee involved spending in 2001-02, which will be the third year of the existing CSR, when much of the extra £40 billion that the Government motion mentions will be put in place. It will also be the final year of this Parliament before the general election, and the first year of the new comprehensive spending review. I challenged the Chancellor to say whether the Government would stay within their published expenditure limits in that year. The Iron Chancellor's rather limp reply was that it was the Government's "aim" to meet those limits. He did not say, with his usual robust determination, that the Government would meet the limits.
The impression is of a Chancellor giving himself room to manoeuvre and an escape clause that did not exist when the comprehensive spending review was announced. At that time, he told us how generous he was being and how he would not need to go beyond the spending limits. The Chancellor's reply to the Select Committee was therefore a real shift in position.
I pressed the Chancellor in the Select Committee to say whether he would stick to his comprehensive spending review plans come hell or high water. He could reply only that there was now a "presumption" of doing that, and he went on to say that he wanted to do more for health and education; so we have a Chancellor who is only presuming that he will hit his targets.
Liberal Democrat Members welcome that change and the evident weakening of the Government's position on spending, even though today's motion does not refer to it. The Government have room for an injection of money into our public services, but three matters must be considered. First, will there be a macro-economic effect? Will increased expenditure have a knock-on effect on interest rates? Clearly, no one would want the Bank of England to have to take up the slack and increase rates.
Secondly, what is the fiscal position? Can decisions on tax and spending be afforded? Are the public finances strong enough to take any extra expenditure? Thirdly, what are the politics of the situation? Does the Chancellor want to produce a rabbit out of a hat to please the voters, or does he want to do something to shoot Tory foxes and tease the no-hopers on the Conservative Benches?
Mr. Geraint Davies: Now that it has been disclosed that Neil Hamilton has lost his case, how much more money would the Liberal Democrats lift out of a brown paper envelope to spend in addition to what my right hon. Friend the Chancellor has promised?
Mr. Davey: I am delighted to tell the hon. Gentleman that we shall publish our alternative budget just before the Chancellor publishes the real Budget, as we have for the past decade. My hon. Friend the Member for Truro and St. Austell (Mr. Taylor) and I are already working on it, so we will be able to give a very detailed reply to that question in a few months. I hope that the hon. Gentleman will bear with me until then. [Interruption.]
Mr. Deputy Speaker (Mr. Michael J. Martin): Order. The hon. Member for Croydon, Central (Mr. Davies) should not talk across the Chamber. Also, the question of Mr. Hamilton has nothing to do with the proceedings today.
Mr. Davey: I return to the three constraints that I listed earlier. The first is very important, although to my knowledge it has not been debated in the House in recent times. The question is whether the Chancellor's loosening of the fiscal stance would cause a knock-on effect on inflation. The answer to that question depends on how one sees growth and inflation over the next few years.
One may anticipate that growth will slow down, as the Chancellor does in his pre-Budget report, and that inflation will stay fairly low. Just yesterday, a member of the monetary policy group said that it was possible that
the target may be undershot. If one therefore believes that the outlook is benign, there would be no problem about loosening fiscal policy quite significantly, as the Bank of England would not be forced to take up the slack.However, I believe that the outlook is not so benign, and that there is real concern about what will happen. I think that the Government have underestimated growth and that the economy is ticking along quite well. The world economy is picking up, the housing market here is very strong and there is strong growth in real incomes--all factors suggesting that the Government's growth forecasts are underestimates. The almost certain corollary is that inflation has also been underestimated.
Mr. Tyrie: That sounds like a boom.
Mr. Davey: The hon. Member for Chichester (Mr. Tyrie) mentions the word "boom", and I am glad that he did. I agree that the danger is that we could return to boom and bust. That would be a real mistake, as there was far too much of that when we had a Conservative Government.
It is very important that we do not let a boom occur, so we need some discipline about the extent of any fiscal loosening that might take place. There is some room to loosen the fiscal restraints but, although we do not have a runaway economy at present, there is clearly insufficient room for a massive tax-and-spend giveaway.
The second constraint on the Chancellor is the state of the public purse. How big is Gordon's war chest? That is the question. Gordon claims that--
Mr. Deputy Speaker: Order. I think that I have spoken to the hon. Gentleman on previous occasions about this matter, but he should know the rules of the House. He should refer to the right hon. Gentleman either as the Chancellor of the Exchequer or as the right hon. Member for Dunfermline, East.
Mr. Davey: I am grateful for that instruction, Mr. Deputy Speaker.
In the pre-Budget report, the Chancellor seemed to think that his war chest was rather healthy, as he predicted a cumulative surplus of £67 billion over the next five years. Earlier, we heard allegations about fiddled figures, and closer inspection of the details shows that the war chest is in fact much larger than that. Adding in reserves and the margins in the departmental expenditure limits gives a cumulative surplus over the next five years of £102 billion.
That is the strength of the fiscal position, even before account is taken of the need for a higher growth forecast, given the likelihood of higher growth. Clearly, the public finances would be even stronger if growth turned out higher than forecast. There is no doubt that the Government could afford to loosen fiscal policy to some extent, but how would that be done? Should the extra money be spent on tax cuts, or on public expenditure increases?
The third constraint on policy is politics. All Chancellors are naturally concerned about the politics of the decisions that they take, so how might politics affect this Chancellor's thinking? On the face of it, this constraint is also rather weak. The Government have a huge majority and a huge lead in the opinion polls.
The Tory party is falling apart, so perhaps the last thing that the Chancellor needs to do is worry about the political implications of his decisions. The Chancellor has at least some cash to spare and is free to decide whether his priority should be tax cuts or extra funding for schools, hospitals and the police.The Chancellor has met Labour's headline manifesto promises on tax, so he could decide to deliver on the public service investment that is needed so desperately. However, I fear that he will not do so. The Chancellor was very uncomfortable when questioned on the tax burden by the Select Committee. It would be a gross exaggeration to suggest that Conservative Members laid any punches on him, but there is no doubt that the Chancellor is hyper-sensitive. He is paranoid about attacks on his policies and is obsessed with disproving all counter- arguments. It is therefore extremely likely that he will succumb to political temptation and cut taxes before the next election, so shooting the last remaining Tory fox.
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