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Mr. Kidney: While the hon. Gentleman is on the subject of the Bank of England, will he give his view on whether it should remain independent in the future?
Mr. Tyrie: Since the mid-1980s, I have held the view that Bank of England independence has many advantages. I held that view when I was in the Treasury and I made my view known publicly as soon as I left the Treasury. I also made my views known when I spoke in the House on the debates on the Bank of England Act 1998. However, I do not think that the way the Bank of England has been made independent is adequate. Further reforms
are clearly needed. The length of appointment of members of the Monetary Policy Committee is ridiculously short, at three years. Several other changes are also required before the bank's reform is adequate.The Bank of England's independence has not been tested. It will be tested only when we have a recession or the next downturn, which according to Ministers will never come. When the next downturn comes and interest rates are jacked up dramatically, that is when we shall find out whether the bank's independence is what it is cracked up to be.
I have a few more questions for the Minister. I should be interested to know whether the Government are giving any thought to the fact that borrowing is not now taking place in the spot market or the short-term interest rate market, but is increasingly taking place further down the yield curve with fixed-rate mortgages and much fixed-rate and foreign currency lending by businesses. Have the Government given much thought to whether interest rates can continue to do the job that has traditionally been accorded to them in the conduct of monetary policy and the control of inflation, in an era, to which we might be moving, when people do not think about the price of money today but about its price right across the yield curve? People with fixed-rate mortgages do not think about the matter in such terms, but they are increasingly prepared to take the risk of borrowing money at a certain rate for five or even 10 years.
Will the Government also give thought to whether their inflation target for the Bank of England is the right one? I do not mean that in terms of whether the target should be 2, 2.5 or 3 per cent. I agree that the Government were right to go for a symmetrical target and that the European central bank was mistaken in not doing that. Do the Government have a view, however, of whether asset price inflation should be taken into account in the setting of monetary policy? If they do, to what extent do they think that their view should be communicated to the Bank of England, and how do they propose to communicate it?
By asset price inflation, I mean not only house price inflation, but asset price inflation more widely, including the stock market. There is a touch of asymmetry in that regard. Whenever there is asset price inflation, central bankers talk about irrational exuberance and of how things are going a bit over the top. That is what Alan Greenspan said about Wall street some time ago, when it was at only two thirds its current value. However, central bankers do not say the opposite when asset prices are falling. They do not say that equities are absurdly cheap and that we should buy them now. There will need to be a rethink in the 21st century about how the monetary policy target should be defined.
Have the Government given any thought to the effect that new technology and the internet could have on the clearing bank system? If, as Mervyn King suggested in a recent speech, people will no longer need to use a clearing bank to achieve settlement, we could lose control over monetary policy because we would lose a crucial lever. I do not think that the Government have given any thought to that; I have not seen anything on it in the public domain. We may have created an independent central bank at just the time when central banks are becoming rather less relevant.
I wish to discuss one other subject and then I promise to sit down. Public spending control is another issue that the Government have not thought through very carefully. Globalisation will almost certainly increase income dispersal. The most successful in an economy will get even better rewarded and some at the bottom may lose out as the result of global competition. I have not heard the Government say anything on that subject, but I would be interested to know whether they have thought through the effect that globalisation will have on pensions policy and the long-term social security burden.
What is the right response to my questions? I shall not try to provide the answer to any of those major policy issues, except to say that there is a need for a more transparent economic policy than we have now. The description of fiscal policy that is given in the accounts is not adequate any more. It was difficult to understand before, but it is now frankly impossible to comprehend. I strongly advocate--and I have done for five years--the creation of a fiscal policy committee, which would be a counterpart to the Monetary Policy Committee. With assistance from the Office for National Statistics, it should have the job of policing the definitions in the accounts and the crucial task of vetting the forecasts to smoke out ropy assumptions.
The people who have considered these issues closely agree that the National Audit Office's auditing of forecasts is little more than a joke. I suspect that the NAO would privately agree. It spends £20,000 or £30,000 on the job, but countries that have such vetting of forecasts spend £500,000 or more on it. It is ridiculous that the number of man hours put in by the NAO could be considered remotely as serious vetting of the accounts.
The Government should be required to publish their estimates of where we are in the business cycle. Of course, that will be only one view, and it could be assessed by other commentators. Long-run liabilities, such as pensions, should be added to calculations of the debt stock. That would also bring much greater transparency to the accounts.
I shall conclude with a general point. If, just before Christmas, the Government have the intelligence to admit that there might conceivably be a recession one day and hence that we have not entered a world in which boom and bust have come to an end for ever, they will do themselves a huge favour. However, if the Minister tells us--I suspect that he will--that the Government are putting an end to boom and bust, Conservative Members can take heart from the fact that we know that we have been given a huge piece of ammunition for when that recession comes.
4.19 pm
Ms Margaret Moran (Luton, South): I was almost losing the will to live as I listened to the contributions of some Conservative Members--particularly when they claimed that the Labour Government are simply adapting the previous Government's policies. I should like to use the opportunity of this debate on public spending to outline one of the areas in which this Government most clearly differentiate themselves from the previous Government--our objective of using public spending to tackle the legacy of poverty and social exclusion bequeathed to us after 18 years of Tory Government.
Since 1979, poverty and inequality have increased dramatically. Almost a quarter of the UK's population live below the poverty line, and one third of those are children.
Communities are divided and workless, and in some instances have been so for two generations. The Chancellor's pre-Budget report set out clearly the principles that underpin our approach, and they could not be more different from those articulated by Conservative Members, who do not seem to be interested in poverty and social exclusion. They were certainly not interested in those problems during the 18 years of their misrule.The pre-Budget report set out the Chancellor's target of a strong and productive economy in which the potential of every individual can contribute to and benefit from growing economic prosperity. By tackling the Tory legacy of boom and bust, the Government now have borrowing under control, and we have low inflation and low interest rates. Our major achievement is that 700,000 more people are in work. We have a target of full employment, which will ensure economic opportunity for all.
Mr. Letwin: I am interested to know whether the disease of which my hon. Friend the Member for Chichester (Mr. Tyrie) spoke has spread to the Labour Back Benches. Does the hon. Lady genuinely believe that there will never be a recession under a Labour Government?
Ms Moran: I genuinely believe that we have introduced economic stability, in sharp contrast to two of the most severe recessions, which harmed people in my constituency and were responsible for one business going bust every three minutes of every working day when the hon. Gentleman's party was in power. That is not an experience that we will repeat.
As a result of the economic stability achieved by this Government which families and businesses in my constituency so desperately needed, we are now able to invest in our key public services and launch a crusade against poverty. That is already making a difference in constituencies such as mine, where youth unemployment has fallen sharply. The health action zone is targeting health resources in areas of greatest need, such as my central wards, where there are high levels of heart disease and child mortality.
In Luton, schools such as Wigmore primary, Lady Zia Wernher and Cardinal Newman have benefited from public spending and record levels of capital investment, allowing us not only to improve the fabric of the schools but to increase the number of classes and reduce class sizes. Major building works are under way at Luton and Dunstable hospital, where we will have updated wards and a new accident and emergency service. That is just a flavour of some of the effects of the additional £40 billion of spending on public services which the Government have achieved in just over two years, in sharp contrast to the dismal record of cuts during the 18 years of Tory Government.
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