Government's Economic and Financial Assessment

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The Chairman: That is not a point of order for the Chair. I shall call the Minister at the end of the debate if there is time for me to do so. I certainly intend to call her.

Alan Howarth: I will conclude my remarks, which was one of the implications of the point of order. In response to the earlier intervention of the right hon. Member for Wokingham, I will say that, given the rules and disciplines that the eurozone has established for itself, convergence would be at the cost of the values and objectives of the centre left in this country for the betterment of our society. We would not be able to achieve the values and purposes that are so well set out in the Red Book at paragraph 1.31.

I congratulate my hon. Friend the Minister on the elegant irony of the prose in box 2.5 on page 39 of the Red Book, which refers specifically to the stability and growth pact. Under that section, Ministers take the proponents of that pact very usefully to task. Time is

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short so I shall not offer my own gloss on what is so well said there. We have found in this country our own ways to stability and growth. We are controlling our key economic decisions in our democracy.

The Committee should approve the Government's plans, but we can hardly hope that those in the European Commission to whom the Government report will approve of what we have approved. Whether we approve of them will be decided initially by the Treasury, which will assess the tests for euro entry; then by the Government, who must decide whether joining the euro will produce unambiguous economic benefits. Ultimately—perhaps—the people will decide in a referendum.

5.35 pm

Mr. Edward Davey (Kingston and Surbiton): I welcome you to the Chair, Mr. Pike. I also congratulate the right hon. Member for Newport, East (Alan Howarth) on giving a thoughtful speech. It was also an unusual speech, because it actually addressed the issues at hand—and I say that as a veteran of section 5 debates. Therefore, he deserves a double congratulation.

To keep my remarks brief, so that other hon. Members can contribute, I refer the Committee to my last speech on section 5, which I made on 16 July 2001—I think that it is recorded at column 119 of the relevant volume of Hansard. The remarks that I wish to make today are similar to those that I made in that speech, so I will not repeat every single word of it.

The section 5 debates have an alarming similarity, and Conservative and Government Members seem to make similar speeches each year—although there are always some differences, and I want to focus on them. I wish also to make three points, about whether the document should be approved, that were also germane last year. If the Government are going to send a document such as this to the European Commission, one would have thought that it might have one of three rationales: first, that it might contribute to the debate about the economy in euroland and in the wider European Union; secondly, that it might contribute to the debate about the UK economy, so that it informs the European Commission and our EU partners about the opportunities that the UK economy offers, and its problems; and thirdly, that it might enhance the UK's position in future negotiations.

Last year, I said that the document failed all three tests. That is also the case this year. First, it hardly mentions the EU economy: it talks about the G7 and the wider international economy, but it does not really focus on euroland. Secondly, it is out of date on our economy, because it was written several months before today's debate, and hon. Members have pointed out that some of the figures have already changed. Thirdly, it does a bad job of enhancing the UK's position, by trying to spin that the Government's economic policy is fabulous and that there is nothing so good as the UK economy—the Panglossian image that has been referred to in this debate, and in the Third Reading debate on the Finance Bill. That is far too optimistic, and gives our partners in future negotiations—about,

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for example, the entry rate of the pound into the single currency—a weapon to hit us with, because they might say, ''Well, you've been sending us documents all these years that tells us how wonderful everything is, so you clearly don't need to negotiate a competitive entry rate for sterling.'' Therefore, as last year, it fails to meet any of those three basic reasons for why we might want to send documents to the European Commission.

In some early exchanges during the Minister's speech, she talked about the fact that the figures that were required by the EC were embedded in the report, and she referred hon. Members to table C2. That was not convincing, because if we were going to send a document to meet section 5 requirements that was a genuine contribution, and that would add to a future negotiating position for the UK, it would not be this one. She talked about the fact these embedded figures relate to a convergence programme, but we have seen nothing concrete about that programme. As last year, this is not a helpful document.

However, there is a slight improvement on last year's document. As in last year's document, there is a box 2.2 that talks about preparations for EMU. That is similar to last year's box; it is not terribly informative, but it is brief and to the point, which is possibly an advantage. However, as the right hon. Member for Newport, East said, there is a new box—2.5—which talks about the stability and growth pact, and points up the fact that the Chancellor has a different interpretation from the many strict ones that we were led to believe were held by the people at the European Commission.

The difference between the Government's position and that of President Prodi and others adds to the debate and is perhaps welcome. Again, the right hon. Gentleman is to be congratulated on focusing on that. The House should have a wider debate about the stability and growth pact and how it is interpreted. As he said, in recent months we have seen some flexibility in the Commission's view of that pact—particularly in relation to other countries—and in ECOFIN debates. Indeed, there seems to be a growing feeling, not only within this country, but across euroland, that the time may have come to reform the strictures that were originally enshrined in the stability and growth pact.

A real problem when considering fiscal rules—whether the Government's rules, those embedded in the stability and growth pact, or those embedded in the medium-term financial strategy—is that it is difficult to say, ''Here is the optimum fiscal rule that any economy or group of economies should follow at any one time.'' There is instead a genuine debate about whether the Government's fiscal rules or those in the stability and growth pact are right, or whether there should be a third way. That might be attractive to the Government.

Mr. Redwood: The hon. Gentleman's party has, I believe, set out a policy that seeks a devaluation of 10 to 15 per cent. from current levels before entry to the euro. I understand that, although I disagree with it. Does he think it surprising that the Government have not used this opportunity to set out their preferred rate for euro entry? How can we make any sense of

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convergence if we do not know the price of the currency with which they are trying to converge?

Mr. Davey: First, may I correct the right hon. Gentleman? The Liberal Democrats commissioned experts to look into what might be a sustainable long-term rate, and they suggested a rate of 1.25 to 1.45 euros to the pound. At current rates, that would not involve a 10 per cent. depreciation, but several months ago, it would have. There has been a welcome depreciation in the pound. He asked whether I was surprised that the Government had not set out their position. The answer is no: they have not done so in the past, and although we keep hearing that they will, we do not know quite when the five economic tests will be judged. I shall not develop that point, because I want to keep my remarks as brief as possible.

I was talking about the stability and growth pact, which the Government interpret differently from how we thought they would. The Commission is moving on that issue, which is welcome, but we need a proper debate, so I hope that the Minister will say that the Government will allow that in due course.

The Chancellor made an important statement to the House several months ago about the competitiveness of the European economy. Will that statement, and the paper that was laid before the House, be sent to the Commission along with the Red Book and financial report? It said an awful lot more and gave greater detail about the Government's thinking on that wider issue and would contribute far more than the book before us.

Do the Government also intend to send a copy of the Chancellor's Mansion House speech? That said far more about the five economic tests and how the Government would approach them in relation to issues of convergence and sustainable exchanges rates than anything that we had previously seen from the Government or that had been laid before the House. The Mansion House speech was incredibly informative. It seemed to many observers to add more tests. Indeed, some observers counted five new tests, creating a total of 10.

At the time of the Budget, a supplementary document entitled ''Trend Growth: Recent Developments and Prospects'' was published. Will that be sent along with the Red Book? The document is important because it justified quite a major change in the underlying forecast for trend growth. I have raised this point on several occasions, but I have yet to receive an answer from the Minister.

I remind right hon. and hon. Members that the key point announced by the Government in the Red Book and justified in the accompanying document was raising trend growth from 2.5 to 2.75 per cent. per annum. Let us consider the justification for that. The Government used a Government Actuary report that showed that population growth—both from within and from net immigration—was faster than previously expected. They used that change in population forecasts to justify most of the change in underlying growth. What is interesting about the fact, which is

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mentioned in box B3 on page 192 of the report, is that the Government did not use the central forecast from the Government Actuary. I quote directly from the Red Book:

    ''Assumed growth in the population of working age is based on the latest population projections published by the Government Actuary's Department (GAD). However, the 'principal' GAD projection for net migration appears excessively cautious in the light of recent experience. Net migration has been consistently under-predicted in recent years, and the Treasury projection for the population of working age presented in Table B3 therefore assumes a level of net migration half-way between the GAD's 'principal' and 'high' migration projections.''

One might have thought that reasonable, but it goes on to say:

    ''This is close to the average level of net migration for the latest three years of published data (1997–1999), although rather lower than the average for the latest two years.''

Through box B3, the Government are supposedly trying to justify the change in the underlying growth forecast behind all the public finance numbers, and yet the box shows that, in the past two years, the population projections have not fitted in with the projection that the Government have chosen to justify the increase in underlying growth. That means that we should question the figures closely, as should the Commission. If the Government are being over-optimistic about underlying growth, their public finance projections and economic strategy could be knocked out. Growth of 0.25 per cent. might not seem a lot, but when compounded, it becomes a huge amount. I hope that the Minister will at long last reply to that point, and will try to justify that major change in Parliament.

5.47 pm

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Prepared 8 July 2002