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Session 2001- 02
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Delegated Legislation Committee Debates

Government's Assessment as set out in the Pre-Budget Report 2001 for the Purposes of Section 5 of the European Communities (Amendment) Act 1993

First Standing Committee on

Delegated Legislation

Monday 10 December 2001

[Mr. James Cran in the Chair]

Government's Assessment as set out in the Pre-Budget Report 2001 for the purposes of Section 5 of the European Communities (Amendment) Act 1993

10.30 am

The Economic Secretary to the Treasury (Ruth Kelly): I beg to move,

    That the Committee has considered the Government's Assessment as set out in the pre-Budget Report 2001 for the purposes of Section 5 of the European Communities (Amendment) Act 1993.

I welcome you to the Chair, Mr. Cran. The Government's strategy for economic policy is set out in the pre-Budget report 2001. The report will form the basis of the information that we send to the European Commission in which we set out our main economic policy measures. Section 5 of the European Communities (Amendment) Act 1993, usually known as the Maastricht treaty, requires Parliament to approve the Government's report that is sent to the Commission for that purpose. Sharing the information in the pre-Budget report document with our European partners allows us to influence Europe, bringing employment and growth to Britain and other member states.

The procedure is set out in articles 99 and 104 of the European Communities treaty, which relate to the broad economic policy guidelines, convergence and stability programmes and the excessive deficits procedure. The purpose of such reports is to ensure that the economic policies of member states are consistent with the goals of the treaty. These goals are non-inflationary economic growth in respect of the environment, a high level of employment and social protection, and raising the standard of living and quality of life. They are consistent with the Government's approach to economic policy.

The key elements of the Government's economic strategy, as set out in the PBR, are to deliver macro-economic stability to provide a platform for long-term sustainable growth and employment; to meet the productivity challenge through promoting competition, enterprise and innovation, skills, investment and public sector productivity.

Mr. John Bercow (Buckingham): I join the Minister in welcoming you to the Chair, Mr. Cran.

Unless I misheard the hon. Lady, she said that the procedure under section 5 of the European Communities (Amendment) Act 1993 enabled Britain to influence Europe. What is the nature and extent of the influence to which she referred?

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Ruth Kelly: I am always delighted to respond to the hon. Gentleman. Being part of the European Union and having an input in the broader policy guidelines throughout the member states enables us to have our say in respect of not only our economic policies, but those of our European partners. It is in that process of consultation and debate that we have influence.

The other key elements of the Government's economic strategy are to increase employment opportunity for all; to ensure fairness for families and communities; to deliver high quality public services and to ensure a better quality of life for everyone now and for generations to come by protecting the environment. The PBR describes the Government's strategy to rise to the global economic challenge facing our country and sets out how, on a foundation of stability and growth, we can—and will—build a stronger, fairer Britain, even in an uncertain world.

America and Japan are in recession and the euro area is slowing rapidly. For the first time for three decades, each region of the world has slowed at the same time, and more sharply than before. In addition, no one can yet judge the full and final impact of the traumatic and tragic events of 11 September. In the period ahead, there are real risks for Britain and the rest of the world, but it is because of the decisive action taken on monetary and fiscal policy that we remain cautiously optimistic about the prospects for the British economy. Interest rates have been cut seven times in nine months. They are now the lowest for nearly 40 years. With public spending and public investment rising this year, our fiscal policy is complementing and reinforcing monetary policy and, thus, stability and growth.

Last year, we forecast that British growth in 2001 would come in at a range from 2.25 per. cent to 2.75 per cent. We based our public finance projections on 2.25 per cent. Our expected growth figure is exactly that—at 2.25 per cent. So while some pre-Budget representations claimed that Britain was worse placed of any to withstand the global slow down, the Organisation for Economic Co-operation and Development and the International Monetary Fund have both forecast that, this year, Britain will have the highest growth of any of the G7 countries.

For 2002, we forecast British growth of from 2 per cent. to 2.5 per cent. and then rising in 2003 to 2.75 per cent. to 3.25 per cent. as the economy returns to trend in 2004. In past downturns, interest rates have come down too late, too little or, because of high inflation, not at all. Similarly, excessive debt or deficit can make it difficult for fiscal policy to play its proper role.

The Government's first economic priority, when we came to office in 1997, was to deliver stability for the long term and to recognise that economic stability is a precondition for achieving our objective of high and stable levels of growth and employment. That is why we introduced the new macro-economic policy framework that is promoting economic stability by delivering low inflation and sound public finances. We already see the rewards of that new structure. Throughout 2001, the British economy continued to grow. Over the past two years, Britain has had the

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lowest annual inflation since 1963. Indeed, our average inflation has been lower than that of any comparable country in Europe. Employment levels have risen by over 1.2 million people since 1997, and unemployment is now at its lowest level since the 1970s.

The new fiscal framework has brought public finances to a healthy and sustainable position. The Government inherited public finances that were in poor shape. However, since 1997, those finances have been transformed. From 1997, we tightened fiscal policy by 4 per cent. of national income and, therefore, we have been able to reduce net debt to below 40 per cent. in not only one year, but across the economic cycle.

Since the Government came to power, we have repaid £51 billion of the national debt. In 1996-97, debt was 44 per cent. of British national income. Two years ago, that was reduced to 36 per cent., and this year it has reduced to 31 per cent. Britain's debt is now the lowest share of national income in the G7, and is the lowest of all our major European partners.

The Government also set tough long-term fiscal rules that demand fiscal discipline by a tighter approach in the best of times and allow automatic stabilisers to work at a time such as this. In both cases, fiscal policy supports monetary policy. Our cautious assumptions include deliberately cautious forecasts for equity prices, oil prices, interest rates and economic growth. My right hon. Friend the Chancellor of the Exchequer reported in his speech to the House that even though we project significantly lower tax revenues for this year and next, we are well within our golden rule this year—and every year—to balance to current budget over the cycle.

This year, the current budget is projected to be in surplus by £10 billion and, in future years, by £3 billion, £4 billion, £7 billion and £8 billion. Net public borrowing is projected to be £2.5 billion and, in future years, £12 billion, £15 billion, £13 billion and £13 billion. We are well within our sustainable investment rule, which is that debt should be at or below 40 per cent. of national income, with debt projected to be 31 per cent. in every one of the next five years. The monetary and fiscal figures that were published in the pre-Budget report show that we are well within the Maastricht criteria. In order to be consistent with our policy on the euro, we are undertaking the preliminary and technical work that is necessary to allow our assessment of the five economic tests.

With economic stability as a foundation, coupled with a steady and prudent approach to the public finances, I believe that we have the strength to take the right decisions and to build a stronger, fairer Britain.

Mr. Bercow: This is not the first time that I have heard a reference to the preliminary and technical work that is being undertaken prior to—presumably—the commencement of the assessment. Will the Minister tell the Committee when the technical work is expected to conclude?

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Ruth Kelly: The Government have said that we will undertake the assessment within the first two years of the beginning of this Parliament. The preliminary and technical work will underpin the assessment when it occurs.

Due to the Government's prudence, debt is lower and debt interest payments are lower. Even in these testing times, it has been possible to maintain our three-year spending plans for hospitals, schools and public services and to respond to emergencies. However, the Government still met the fiscal rules that we set over the economic cycle, even on cautious assumptions. Additionally, we are releasing an extra £1 billion for the national health service next year. United Kingdom health spending in the coming year will rise by £6 billion, which is 9.6 per cent. in cash terms and 7 per cent. in real terms.

The terrible events of 11 September have resulted in spending decisions. An additional £100 million has been given to the Ministry of Defence for new equipment and immediate operational requirements. The Government have given £20 million to cut off the supply of finance to terrorists and to fund further anti-terrorism measures. A further £30 million has been made available to the Metropolitan police and other police forces to meet the need for additional policing since 11 September. Britain is also contributing an extra £100 million to fund humanitarian assistance in Afghanistan and elsewhere, and to meet new international development obligations.

Our platform of stability provides the basis for raising productivity. The meeting of the productivity challenge offers the prospect of higher growth and increased employment opportunities, with low inflation and low interest rates. That is a key route to raising living standards. This is a moment of opportunity for the United Kingdom and a challenge to everyone involved.

The Government's long-term ambition is to close the productivity gap between the UK and its main competitors. To that end, we have identified five key objectives—we must strengthen competition, promote enterprise and innovation, improve our skills base, encourage investment and work directly to improve public-sector productivity.

In order to support further growth in productivity, the Government are announcing provisions in next year's Finance Bill for a new research and development tax credit for large companies. From next April, capital gains tax will be cut to 20 per cent. for business assets held for more than one year, and 10 per cent. for business assets held for two years. The Government have also announced an extension to the 20p corporation tax band, thereby cutting taxes for small companies in the next Budget.

From next April, there will be a new flat rate and a simplified scheme for payment of value added tax for small businesses. By raising productivity and closing the gap with our main competitors, we shall help to raise living standards in society. However, we need to do more to build a fairer society by making work pay, giving families a better deal, and protecting the environment.

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The Government are working to deliver employment opportunities for all—the modern definition of employment—thereby tackling a significant underlying cause of poverty and deprivation. Our strategy is to help people move from welfare to work, to ease the transition to work, to ensure that work pays and to secure progression for those in work.

It is our goal to ensure that by the end of the decade a greater proportion of people will be in work than ever before. The Government have already taken significant steps towards achieving that objective. To help make work pay and to improve work incentives, we have introduced the national minimum wage and a new 10p rate of income tax. We have cut the basic rate of tax to 22p and reformed national insurance contributions.

Britain's rate of unemployment is at its lowest since the 1970s, but new investment, new businesses and new jobs are the key to regenerating our high unemployment communities. The pre-Budget report contains measures to help the areas of Britain that have the slowest rates of growth and high rates of unemployment. These measures include a new community investment tax credit, which will match every £100 million of private investment with £25 million of additional public investment.

Stamp duty will be abolished in 2,000 wards in constituencies throughout the country for all property transactions on homes and business properties worth up to £150,000. The report also contains measures to help the newly redundant and to expand the new deal to help the long-term unemployed get back to work.

The Government are continuing to work to build a fairer, more inclusive society and are attacking child poverty, helping pensioners, rewarding saving, investing in public services and ensuring a fair tax system. Everyone should have the opportunity to fulfil their potential and enjoy the benefits of high, stable economic growth. To build a stronger economic future, society needs to invest in today's children and give a better deal to families.

The Government are taking action to boost the incomes of hard-working families and help families with young children. The children's tax credit provides up to £520 extra a year for 5 million families. As well as providing universal child benefit, we will integrate all income-related support for children into one payment as we advance towards our goal of abolishing child poverty. For the first time, all support for children will be paid to the main carer. That is the best way to strengthen families.

The pre-Budget report represents another step in our march towards a fairer society. The working families tax credit is making work pay for nearly 1.3 million families, and about 150,000 families receive help with child care. We will build on that by extending the principle of the WFTC to make work pay for those without children, too.

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Our approach in modernising welfare is to provide not narrowly targeted benefits just for those at the bottom, but the right help at the right time for hard- working families. More than 5 million families—85 per cent.—are now eligible for the working families tax credit.

The pre-Budget report includes a major package of measures to boost pensioner incomes. We are acting to end pensioner poverty and to ensure that all pensioners share in the rising prosperity of the nation. We will guarantee every pensioner an income increase of at least £100 a year in the basic state pension and a minimum income guarantee of £100 a week. We will provide free television licences for all pensioners over 75 and a winter fuel allowance of £200 for every pensioner household for every year of this Parliament. Every household that starts on the pension credit in 2003 will receive an additional sum of up to £1,000.


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Prepared 10 December 2001