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Mr. Ruffley: The public know that the tax burden has increased after last week's Treasury shenanigans and the truthful reporting that followed the Chancellor's dismal performance. However, the full magnitude and range of stealth taxes--on personal pensions, mortgage tax relief, married couples allowance--will become known and the public will gradually understand that they are paying more tax across a range of activities. The full force of our argument will be developed in the weeks and months ahead.
It would not be so bad if the tax burden figures in the pre-Budget report told the whole story, but they do not. The tax burden is greater than the published figures suggest for two reasons. The first is the fiddling of the working families tax credit and the way in which it is scored. Under the European system of accounts 95, working families tax credit--which is simply rebadged family credit--scores as public expenditure. The only way in which working families tax credit could be scored as negative taxation is if the benefit to individuals did not exceed the amount of tax that they pay. The scoring of negative taxation by the Chancellor cannot be justified under ESA 95. It should be scored in the Red Book and the PBR as public spending. Yet, in contravention of ESA 95 procedure, the Chancellor scores it as negative income tax. That has the effect of making the tax burden appear to decrease. That is the first fiddle, which artificially deflates an increasing tax burden.
The second fiddle relates to the assumption that the Chancellor makes about excise duty increases. With a great fanfare, he said that he would not increase excise and road fuel duty by 6 per cent. annually--it could be anything less than that. When I asked him in the Treasury Committee what assumptions he had made in his projections for increases in road fuel duty, he said that they related to the retail prices index and inflation only. The problem is that if an increase is anything over inflation, we are looking at an even bigger tax burden than that published in his November pre-Budget report.
That raises another interesting technical issue, on which I genuinely seek the views of the Chief Secretary and those on the Treasury Bench. The code for fiscal stability, which was published in November 1998, is an important document--do not get me wrong--and page 9 clearly states:
- "Every economic and fiscal projection"--
- "contained in any report published under this Code"--
- "so far as reasonably practicable . . . a material impact on the fiscal outlook"
- "b. where the fiscal impact of these decisions and circumstances cannot be quantified with reasonable accuracy by the day the projections are finalised, these impacts should be noted as specific fiscal risks."
Mr. Geraint Davies: Will the hon. Gentleman give way?
Mr. Ruffley: I am more than happy to give way to the hon. Gentleman, who is an assiduous intervener, although not to much effect these days.
Mr. Davies: On fiscal risk, the hon. Gentleman is in favour of the tax guarantee of reducing the burden of taxation year after year. When we debated the Finance Bill, the Tories voted essentially for £6 billion of tax cuts. How would he fund those cuts? Which services would he cut? He has mentioned welfare. Would he cut welfare benefits for the disabled or the unemployed? Where would he make the cuts, or are his remarks simply hot air?
Mr. Ruffley: Conservative Members would attempt to cut social security spending where it is clearly wasteful and fraudulent--a promise that the Labour party has signally failed to honour. The hon. Gentleman will find that, in the previous financial year, the departmental budget for social security spending was about £97.3 billion. By the end of this Parliament--in the last full financial year, which is 2001-02--it will be about £113 billion. That is a real-terms increase. To make it simple for the hon. Gentleman, social security spending in real terms has gone up and his party said that it would go down. We are talking about waste and fraud and there is a lot of meat on that particular bone, although it is not the only example for which we would have a proper audit to find savings that could be used to run a prudent fiscal policy.
I shall conclude because I want to comply with your polite request, Mr. Deputy Speaker, that we speak only for so long as is absolutely necessary. That will give other hon. Members the chance to answer some of the unanswerable questions that have been put by my hon. Friends. The Government's fiscal policy lacks not only clarity, but honesty: £40 billion of stealth taxes have been heaped on to hard-working families and businesses,
and that is why the tax burden has gone up. Those are facts that the public will be made increasingly well aware of over the next few months in the run-up to the general election and the Government will pay a price for playing fast and loose with those facts. We can say, without any doubt at all, that Conservative Members will be working hard to prosecute the case against the Labour party. That case is that it is making a great lie of its fiscal policy.5 pm
Mr. Nigel Beard (Bexleyheath and Crayford): I want to concentrate on the capital investment aspect of public investment.
The Victorian era produced immense investment in public works, incomparable with anything that had gone before. Investment in schools, hospitals, prisons, town halls, universities, government buildings, bridges, viaducts and roads was mostly as a result of public expenditure. Much of the result of that expenditure is still with us, but for most of the century this country has been negligent about maintaining and replacing its public assets.
Many schools and hospitals have fallen prey to self-evident dilapidation; action has been postponed for a long time, and is overdue. Public servants are working in accommodation that is drab and unkempt and inferior in quality, decoration and convenience to that experienced by their counterparts in the private sector. Public patience is running out with roads and railways that have not been developed to satisfy modern demands. There is now a huge backlog of investment, which will present a major challenge in the new century.
The economist Professor J. K. Galbraith decried America, describing it as a country of private affluence and public squalor. That has also become true of Britain in the second half of the 20th century. It is tempting to denounce the current state of affairs as fecklessness on a grand scale, but it is worse than that. For 18 years, starting in 1979, a Conservative Government made it a deliberate act of ideology to propound "Public spending bad, private spending good". Boom-and-bust management was also popular during that period. Whenever savings in public expenditure were necessary, the politically expedient way of cutting capital spending was chosen. What people had not had they would not grieve over--or would not grieve over as much as they would if they had lost what they had.
Between the financial year 1993-94 and the election year 1996-97, current departmental expenditure rose from £135 billion to £148 billion, but capital spending plummeted from £21 billion to £13 billion in the same three-year period. The Treasury's statistical analysis reveals a similar pattern in regard to capital spending by both local authorities and public corporations. As the 1997 general election approached, current spending for immediate effect was boosted, while capital spending that no one would miss immediately was axed. Nor could it be argued that the need to cut taxes lay behind the demise of so much capital spending. In the financial year 1996-97, capital spending amounted to only 8 per cent. of departmental expenditure.
As a result of the ups and downs in capital spending, commitment to the planning of investment programmes is fitful. Schemes that have long been expected are postponed and there is no definite date for their start; alternatively, an organisation is suddenly galvanised into frenzied activity to spend money that has unexpectedly
become available. That unpredictability of public works means that complementary private investment that depends on it is delayed, and takes place afterwards rather than alongside the investment. That has happened in the case of the docklands development here in London, and is now happening in the case of the Thames gateway development.I am not sure whether this is another aspect of uncertain financial backing. What is definite is that many public capital projects have a very bad reputation for being over budget and overdue. The Jubilee line extension-- £1.5 billion over budget and 18 months overdue--is but the latest in a series of public projects that have been inadequately controlled. No modernising Government, faced with today's tidal wave of demand for investment in public infrastructure, could or should tolerate the inadequate scale, the fluctuation and the poor control of capital investment in the public sector. We have--like a farmer eating his own seedcorn--long lived off a legacy of Victorian capital, but a consistent approach to updating and replacing that legacy is now urgently required.
Perhaps it is not surprising that public capital investment is out of sight and out of mind when public expenditure is examined. Unlike a private business's accounts--which account clearly for the business's assets, their depreciation, and new investment--Government accounts barely distinguish between capital and current account spending. Government accounts paint a picture which is, on a large scale, the equivalent of a small shopkeeper living out of the till. They are concerned with incoming and outgoing cash, regardless of whether that cash is spent on capital projects, with benefits continuing for many years, or on immediate consumption.
The confusion between capital and current expenditure makes financial markets suspicious of large-scale Government borrowing. The financial markets have no means of knowing whether borrowing will go on current expenditure, to get a Government out of a political hole, or to provide a valuable long-lasting capital asset. The consequent limit on public borrowing--the point at which the confidence of the financial markets tends to lapse--has in itself led to underfunding of public infrastructure.
The Government's code for fiscal stability--which has already been mentioned in the debate, and was approved by the House a year ago--will go some way towards ending the ambiguity about Government borrowing. In particular, the golden rule--that borrowing will go only for investment--and the sustainable investment rule, which will keep net debt as a percentage of GDP at prudent levels, should both reassure financial markets as they are seen to be applied by the Government.
Another consequence of Government accounting is the lack of any allowance for the depreciation of capital assets, so that there is no systematic allowance for maintenance expenditure. There is also no financial penalty for keeping assets, once acquired, idle or underused. Therefore, across the country, Government land and buildings continue to sit unused for years.
The broad inadequacy of public accounts, and the consequences flowing from it, is being dealt with in the Government Resources and Accounts Bill, which recently received its Second Reading. The Bill will ensure that each Department provides the equivalent of a profit and
loss account, a cash flow statement covering current spending, and a balance sheet accounting for the value of assets, depreciation and investment. Additionally, there will be a statement of resources used against specific departmental objectives which will clarify the relative allocation of resources.Those reforms will potentially enhance the transparency and accountability of public spending and highlight the adequacy of capital investment. In doing so, they will also focus the debate and go a long way towards eliminating some of the inadequacies of public sector investment that I mentioned.
The reform of Government accounts--when taken with public service agreements, which give individual Departments detailed efficiency targets--should lead to a major increase in public sector effectiveness and productivity. The changes may also make possible a better debate on the adequacy of capital investment and on the purposes for which it is allocated.
Taken alone, however, the changes will not increase the amount of investment capital available to the Government, and they will not improve the record of management control of public sector projects. The aim of public-private partnerships--and, more particularly, of private finance initiatives--is to accomplish both those goals.
With the private finance initiative, the investor knows the exact purpose--which could be assessed as a specific project--of the investment. Moreover, the private partner is able to exert control over management of the project in return for shouldering some of the inherent risks. Generally, the private partner has expertise and experience in a particular type of project, and is therefore well qualified to exert project management control.
The traditional alternative to such investment has been for investors to provide money by way of bonds or a similar device, but that requires the public sector agency to shoulder all the risks of overextended budgets and overruns in time. Above all, the private finance initiative provides someone with a vested interest in ensuring that a public asset, whether a hospital or a bridge, is properly maintained during the lifetime for which it is designed.
Following a traditional route for public sector capital projects--that is, Treasury borrowing and a project controlled entirely in the public sector--would not allow adequate investment overall. It would mean the public purse taking all the risks and would not necessarily attract private sector expertise and experience in management.
Alternatively, privatisation means sacrificing public operational control, and potentially some public interests, just to raise the initial capital for the project.
Public-private partnerships and private finance initiatives are a third way. They retain public operational control while lifting the ceiling on public sector investment and overcoming the inadequacy of public sector asset maintenance.
The old ideological fixations must die away in favour of arrangements that work. People want not a contest between public and private, but a cross-fertilisation of the best of each. Their instinct is right.
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