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However, it is the present Chancellor who has had the boldness to carry through the revolution in monetary and fiscal policy needed to achieve stability. He gave operational independence in monetary policy to the Bank of England, and set up the Monetary Policy Committee.
My right hon. Friend the Chancellor has also introduced fiscal rules. The golden rule states that borrowing should not finance current expenditure but investment only, while the sustainable debt rule holds that public sector debt should be kept at a stable and prudent level. That level was originally thought to be 40 per cent. of gross domestic product, but it is now much lower.
Earlier, I challenged the shadow Chancellor from a sedentary position about his fiscal rules, and he said that he would give them to me later. He has not done so because he does not have any. The shadow Chancellor criticises my right hon. Friend the Chancellor for his golden rule, but he has no rules at all of his own. That is a weakness in his argument.
There is no doubt that the two innovations introduced at the beginning of this Parliament have produced impressive economic results, which my right hon. Friend was able to announce in his Budget--the lowest inflation for 30 years, the lowest long-term interest rates for 35 years, and the lowest unemployment since 1975.
Mr. St. Aubyn: The right hon. Gentleman says that the Opposition have no rules, but has he not noticed that we have a spending rule? We will increase spending in line with what the economy can afford. That rule means
Mr. Radice: I hope that the hon. Gentleman does not mind my saying so, but that was a pretty feeble intervention. All Governments and Chancellors hope to increase spending in line with what the economy can afford. The question is whether the rules governing a Chancellor's actions are sharp enough to enable that to happen. I believe that this Government's rules are sharp enough for that.
Mr. St. Aubyn: Surely there is all the difference in the world between saying that spending will be increased in line with growth in the economy, and increasing spending above the economy's sustainable growth rate. The latter is what the Chancellor proposes to do, and in the long run it will not be sustainable without massively higher taxes.
Mr. Radice: The Government had a two-year period in which they stuck to the Conservative spending targets. Even the previous Chancellor of the Exchequer, the right hon. and learned Member for Rushcliffe, said that those targets were merely illustrative and that he would not have implemented them. In that period, public spending was massively below growth in the economy. We are now moving into a period when it is above growth in the economy. The level evens out over a period. I am sure that the Government will want to have public spending in line with the growth in the economy over a period of, say, 10 years. That would be sensible. In any case, the Government's golden rule and sustainable debt rule will ensure that, even if spending does rise above economic growth, the necessary discipline will be in place.
In addition, stability has produced steady economic growth--of 3.5 per cent. in 1997, 2.6 per cent. in 1998, 2.3 per cent. in 1999, and 3 per cent. in 2000. The forecast is for growth of 2.25 to 2.75 per cent. in 2001. In other words, throughout this period, the economy has been growing close to trend. I admit that it was growing under the previous Chancellor as well, so we have had a long period of economic growth which has been extremely good for this country. It has helped to create room for substantial increases in education and health spending--contrary to what the hon. Member for Truro and St. Austell implied, without quoting any figures. I would like to have him before the Treasury Committee--we would soon take him apart. We have also made a sustained attack on child poverty. All that has been done without putting the public finances at risk.
The announcements in the Budget and the measures previously announced by the Chancellor amount to a 1 per cent. stimulus. We have to ask: how risky is it and will it stoke up inflation? The Treasury Committee put those questions to expert witnesses this morning. It is true that some of them would have preferred less stimulus, but none thought that this was particularly imprudent. Indeed, there was a sub-text: they thought that it was quite surprising that the Budget was so restrained in the run-up to an election.
The experts are right to say that such a stimulus is not imprudent because the background is one of very low inflation, below the target. We are still running substantial budget surpluses and we face the possibility of a United States downturn. It may be necessary to have some
There is general agreement that there is little point in running budget surpluses indefinitely. It makes sense, therefore, to spend above trend for a period and then run small deficits by the end of the forecast period, provided that those deficits support public investment and not current spending, and that they are affordable in terms of public debt. I note that the public debt is now down to 30 per cent. of gross domestic product.
The hon. Member for Truro and St. Austell made the point that the Treasury has consistently underestimated its surpluses. That is partly because its assumptions, particularly of growth, are extremely cautious and conservative. That gives the Treasury a strong position because there is always a margin of error. That is why the Chancellor has been able to announce some of these increases.
To sum up, in the Government's fourth year, the Chancellor is in an enviable position. If any Conservative Members doubt that, they should consider how much they would like to have a Chancellor who is about to face the voters with the lowest inflation for 30 years, steady economic growth--I quoted the figures--and the lowest unemployment figures since 1975, as well as rising investment in health and education. That is not a bad position to be in, and if Conservative Members were honest they would agree.
Of course there are no miracles, and certainly no economic miracles. There is no doubt that despite what the Government are doing with regard to productivity, we have a long way to go before we catch up with the United States, Germany and even France. Under this Government, many extra people have been taken back into work. Such people are, by definition, likely to be less productive in the short term than other workers, so the slowing of productivity growth is not surprising. Most experts expect an increase in the years ahead, and so do I.
There are no economic miracles, and although the Government have created the conditions for stability, I am able to announce this afternoon that the economic cycle has not been abolished: there are still risks on the inflationary side, and especially on the recessionary side.
Critics say, of course, that the Chancellor has been lucky, in that on the whole--excepting the late part of 1998--economic conditions have been relatively benign. It may be true that he has been lucky, but he has also made his own luck. It was his decision to give the Bank of England independence and to stick by his predecessor's spending plans for the first two years. It was also his decision to keep to the fiscal rules that he had devised. His courage has yielded the results that I mentioned.
The Chancellor's boldness of conception and his determination in implementation have put the United Kingdom economy in a strong position to continue on its path of stability and to take advantage of opportunities that may arise--including, if I may say so so late in my speech, entry into the euro. I salute him for his achievement and I wish him and the Government well in the coming months and years.
I am delighted to follow--not for the first time in a Budget debate--the right hon. Members for North Durham (Mr. Radice) and for Ashton-under-Lyne (Mr. Sheldon). I say with some sorrow that it is probably the last time that I shall follow either of them in such a debate as they both propose not to stand for the next Parliament. I propose to throw myself at the mercy of the electors of Rushcliffe once more. If they do me the honour of returning me to this House, I shall miss the contribution of the two right hon. Gentlemen and the chance to debate with them. Neither of them are Blair's babes and they do not use the sillier slogans to describe economic policy to which we have become accustomed in the House. Also, they do not use too many of the extremely dodgy figures that the Chancellor is inclined to produce for the House. Alas, we will no doubt have a touch more orthodoxy in the next Parliament from those who defend the Government's record.
I cannot get very excited about the Chancellor's fifth Budget. In the overall context of macro-economic management, it is not very important. He did not do a great deal and it is not of huge significance for the coming election either. He took his last important decisions in the so-called pre-Budget judgments last autumn, when he set us on the course of a massive proposed increase in public spending in the next three or four years
I suppose that I should be grateful that the Chancellor did not get carried away. I, too, faced the pressures--I had to deal with a pre-election Budget and some people felt that I ought to do something spectacular to win the election. Various previous Chancellors faced the same problem. This Chancellor would have made matters far worse for his successor had he given in to that sort of pressure and made the problem even worse by making serious tax cuts or spending increases on top of those he has already made.
I wish that the Chancellor would not keep on saying that Tory predecessors did not show such restraint. It is 50 years since we had a pre-election Budget that showed the slightest irresponsibility, and I doubt whether we will see one again. Today's electorate are too sophisticated to be bribed with their own money a few weeks before a general election. This electorate know that the present Chancellor has been a tax-increasing Chancellor on a substantial scale. The fact that he will not admit that the burden of tax has risen under his chancellorship is a blemish on his presentation of policy, but he will have to go into the next election as someone who has raised taxes.
On the details of the Budget and the micro-economics of the tax and other changes, the Chancellor has continued, in a not very spectacular way, his overriding policy of mild redistribution of income by stealth without being very clear about it. I am glad to say that he has continued the policy of welfare to work, which he inherited from the previous Government: it was not only a slogan but a policy direction, too. I welcome the family element of the policy, whose effects are beneficial.
The Chancellor has persisted in his attempts to combine the tax and benefits systems, developing ever more tax credits. I admit that I was attracted by the idea of combining those systems. One has to go back to a Government of 30 years ago to discover Conservative Chancellors toying with the idea of a tax credit system.
First, the system is so complex that the electors do not understand it--that is why the Budget has little electoral appeal. More important, many of the people who should be claiming the benefit of those tax credits will not actually do so.
The second problem is the worst; it is one that most of us foresaw when the Chancellor embarked on the working families tax credit. The system is appallingly complex for the employer. It is one of the worst burdens imposed by the Government on those responsible for small business. That burden gets worse and worse as he further complicates the system. It is a pity that he proceeds with it.
I continue to suspect that the Chancellor likes to plunge further into tax credits because they help him and his Chief Secretary to present the figures in the slightly bewildering way that they use in the Red Book. To keep down the tax burden as presented to the general public, tax credits are still treated as though they were tax reductions when they merely transfer payments that should emerge as benefits. They should be accounted for more clearly. The Chancellor has not solved the problem that, as soon as one uses the Inland Revenue to make such transfer payments, it produces complication, cost and a great propensity for evasion and misuse.
I should have liked to see the proposals on taxation and savings made by my right hon. Friend the Member for Kensington and Chelsea (Mr. Portillo) adopted in the Budget. I wondered whether the Chancellor would have had the wit to steal that extremely good pre-election idea from my right hon. Friend; it is a sensible way to encourage saving by people of modest means. We need to get the savings ratio up.
I regret the fact that the Chancellor has not tackled the problem of annuities for those who have made provision for their own retirement. That must be tackled, but he has done nothing. He should also have had the political courage--there are no votes in the matter--to raise the starting threshold for the 40 per cent. higher rate of tax. During the Labour Government's period of office, 700,000 more people have become higher-rate taxpayers, by a process of pure drift. I agree that that was also happening under the Conservative Government, but it is now out of hand. There is nothing wrong with a 40 per cent. tax rate for people on high incomes, but people of above average yet perfectly ordinary incomes now have a 40 per cent. marginal tax rate. That should not be allowed to continue.
I shall not go further into the detailed provisions, but I regret that the Chancellor felt forced to go back to widening the 10p income tax band--to trivial effect for most taxpayers. The 10p band was a mistake; we do not need three bands of income tax. The 10p band was a silly political promise made before the previous general election. It is a pity not only that the Chancellor stuck to it, but that he has started widening it.
The Budget is not of great consequence. It is the least interesting of the five produced by the Chancellor. Perhaps he is running out of steam--who knows? He may be preparing to leave office--perhaps for the Opposition
I now turn to the consequences of the Budget for economic performance. The background is that the Government say that the country's economic performance has been good, as indeed it has. However, that has nothing to do with the Chancellor; I shall return to that point in a moment. The Chancellor's management of the balance between tax and spending has been positively eccentric. There is no consistency.
The hon. Member for Truro and St. Austell (Mr. Taylor) rightly pointed out that the first three years of the Parliament were years of rigour beyond anything we expected. At the previous general election, as a Conservative, I tried to alarm the public about the forthcoming risk of a Labour Government by talking about the black hole in their finances. That black hole vanished because they raised taxes at a rate about which they had warned no one. They squeezed spending to an extent that no Government--even those led by Mrs. Thatcher--had ever achieved. That is how they filled the black hole during the first two or three years.
The Government began with a stringent iron Chancellor period; they go out with promises of fat years to come. Were they to win the general election, the next Parliament would, apparently, be handled quite differently, with a hugely expansive approach to public spending during the first two or three years. Perhaps, if the right hon. Member for North Durham is right and the Government find that they cannot afford that, they will have to make cuts before a general election. However, if they are returned and continue to follow this strange pattern and get into difficulty, it is more likely that they will be taxing but trying to deny it.
This rollercoaster is unwise and unnecessary. Too often in the past, the public services have had the painful experience of thin years followed by fat years, although never on the present scale. It is unnecessary, because the Government took over healthy public finances. At the opening of the debate, the Secretary of State for Health was talking nonsense when he referred to public finances and debt spiralling out of control. Debt was on a sharp downward path.
My figures contained a mistake that benefited my successor: we underestimated the revenues that came in. We gave the present Chancellor economic growth, with buoyant revenues. We gave him the particular gift of self-assessment of income tax, which produced tax revenues on a scale that we had underestimated. The public finances were perfectly healthy.
I do not know why the Chancellor felt it necessary to go in for the undesirable taxes that this Budget has not reversed--taxes on pension funds and on business. He continued to add to them, even though he was well on the way to the balanced Budget to which he had committed himself. Sometimes, I think that it was because he wanted to create a good reputation in the City; he thought that there might be alarm in the financial markets that a Labour Government would be soft, so he had to be a tough iron Chancellor.
The Government were somewhat consumed by the record of previous Labour Governments, who had spent like mad during the first half of a Parliament and been in a mess during the second half. Perhaps the Prime Minister
I suspect, however, that it was all a bit of an accident. The Government found that they had been tighter than they had intended. The Prime Minister panicked and after Lord Winston complained, we found that billions were on offer. There was a sudden splurge of public spending in the run-up to the general election, to avoid upsetting the Labour movement. But that is no way to run the country's finances.
That is what happened; it is irrefutable. However, I object to the constant telling of the myth that the reason the Government were so tight at first was that they stuck to Tory figures. I know that Blair's babes produce such slogans like mad, but they seem to overlook the Government's remarkable decision, which astonished me at the time, to cancel the annual public spending rounds, in which every previous Conservative Government had engaged. Green as the Labour Government were, I cannot understand how the then Secretary of State for Health and the Secretary of State for Education and Employment could have agreed to that. Their Departments must have been in despair. All over Whitehall, people preparing for the spending round were in grief when that decision was inflicted on them. Those were not Tory figures; to hold down spending was a mad gesture.
The hon. Member for Truro and St. Austell is right; the results were spectacular. I regret that during my last year in office total managed expenditure was 41.2 per cent. of gross domestic product; I was trying to get it down below 40 per cent. That was the rule that I was aiming for. By 1999-2000, we were down to 37.7 per cent. of GDP. Public spending as a proportion of GDP was taken by this Chancellor and this Government to its lowest level since the 1960s. As the Liberals acknowledge, the Conservative posters are right. That is the history of, "You paid the taxes and you didn't get the services".
We are now faced with promises that goodies are to come. It is said that the good to come can be afforded because the economy is in such a sound state. It is indeed reasonably sound. Starting in 1992, we have experienced nine years of growth, with low inflation and rising employment. That has a cumulative effect--the country feels good and feels wealthier--so we have been able to survive some of the strange vagaries of Labour management during the past four years.
The reason is that the right hon. Gentleman has been an extremely lucky Chancellor. First, he took over a very good inheritance. He has also had the particular luck to be Chancellor, so far, through four years of the most remarkable growth in the western economy since the war. I have been quoted various times about the things that I would give my eye-teeth for. All those who hoped to be Chancellor would have given their eye-teeth to be Chancellor of the Exchequer in the past four years. The right hon. Gentleman has not faced a problem. He took over a good inheritance and, thanks to Uncle Sam going through the boom period of a classic boom-and-bust phase, the world economy has grown and grown and grown.
Of course our growth has been miles behind that of the United States, but everyone in the developed world has been enjoying growth with low inflation and rising employment. Our growth performance is below the eurozone average--below that of Ireland, the Netherlands, and France. They are already wealthier than Britain in GDP per head. The relationship of our productivity to theirs has been worsening over the past three or four years and we have not been performing well.
Before the Labour party took over, we were the fastest-growing major economy in western Europe. Why have we not been performing as well as we were? One reason has been the mistakes made by the Bank of England.
I applaud the giving of independence to the Bank of England, but I feel free to criticise the performance of the Monetary Policy Committee. I have been on the doveish side of that divided Committee throughout, and I believe that the doveish side was right. It is not the case that we have been facing higher inflationary pressures than the rest of Europe. It was a mistake when people judged that we were. No one has had inflationary pressure over the last three or four years, but our Bank gave us the highest short-term interest rates in the developed world for most of the period of the present Government. Obviously, that slowed down our growth.
The other reason is that the Government have damaged our growth--I shall not repeat the arguments of my right hon. Friend the shadow Chancellor--by adding tax and red tape on business and adding labour market regulation of a kind from which we were previously free. While the western Europeans are lectured by the Chancellor about moving to more liberal labour markets and lower burdens on business, we are narrowing the benefit of our advantage over the rest of western Europe by going in the other direction.
That luck may be coming to an end. It is no good just carrying on with the somewhat happy but chancy approach that the Chancellor has proposed. The global economy cannot carry on growing for ever. We have not solved economic cycles in free-market economics, and the United States economy is at last slowing down--and slowing down remarkably rapidly--as most European commentators have been forecasting for the past three years.
Most people involved in Wall street say that the slowdown is temporary and will soon flatten out; they say that it will be V-shaped and that the trend will go up again. Most people involved in the real economy in America are very worried. They find that consumer demand is dropping like mad, and given that the bottom has dropped out of Wall street in the last two days, once consumer confidence goes in America, there could be a very sharp downturn indeed.
I do not think that the downturn will be a disaster. A slowdown in the American economy was probably overdue. The Americans have in fact gone through boom and bust. Their economy was held up as a model by some people in this country over the last three years, as opposed to that of the lacklustre, over-interventionist socialist Europeans. But the United States has got it slightly wrong now.
The Chancellor, having entered his days of being more generous to the public services, is counting on continued growth in the British economy. He supposes that the economic cycle does not affect him here. He supposes that it will be rather as before. He forecasts 2¼ per cent. to 2¾ per cent. growth for this year. That may be right, but I would not bank on it. We will be affected by any global slowdown.