Broad Economic Policy Guidelines

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Mr. Hopkins: The hon. Gentleman has touched on a point that I hope to raise. Has railway liberalisation in Britain been a total disaster, and are successful railways state-owned and unified systems? It would be a disaster for European countries to be persuaded to follow our route, just as the process has been disastrous for us.

Mr. Lidington: The hon. Gentleman is entitled to make his criticisms, although I draw his attention to the fact that passenger numbers and investment increased significantly following privatisation, whatever the flaws in the method that was adopted. However, his Government have signed up to the

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objective of reinforcing competition in the railway industry and accelerating liberalisation. I get the impression that while the Minister will be attending Council meetings and agreeing objectives, the hon. Gentleman will be warming his hands on the brazier outside.

Mr. Hopkins: I hope that my hon. Friend the Minister will attend European meetings and say, ''Hang on, we've tried this and it doesn't actually work. Shouldn't we put it to one side?''

Mr. Lidington: I would be astonished if a European country examined what the Government have done to the rail industry over the past couple of months and regarded it as an example that they wished to emulate.

Paul Farrelly (Newcastle-under-Lyme): In the past, one country did examine what happened in the United Kingdom—namely Germany—and promptly shelved its plans to privatise its railways because of the experience that the Conservative Government inflicted on this country.

Mr. Lidington: If the hon. Gentleman is arguing for railway renationalisation rather than the reorganisation of a private system, he is entitled to make that case. However, the present Government do not appear to be persuaded of it and they have signed up to broad economic policy guidelines from Europe that would be breached if they were tempted down the route that is advocated by several of their Back Benchers.

I shall concentrate my remarks on the various references in the documents to taxation and expenditure, while allowing time for other hon. Members to speak. The references show clearly that despite the soothing words that we hear from Treasury Ministers, the ambition of the Commission and the open and honourable objectives of a fair number of our EU partners are that taxation, borrowing and public expenditure should be treated not only as matters for peer review—to use the Minister's phrase—but matters for which policy should be set at a European rather than national level.

The Minister spoke with great pride about the Government's success in putting the Commission back in its box and removing the reference to the particular borrowing figures for the UK economy from the broad economic policy guidelines. However, the Minister did not explain to the Committee the full scope of the Commission's ambitions. It is interesting to examine the imperative tone of the original Commission document in respect of not only the United Kingdom but several other member states, and to compare those original Commission recommendations with the document that was subsequently agreed by the Council.

The Commission said that Britain should ensure that the

    ''ratio of public sector current expenditure to GDP should not exceed . . . 37.3 per cent''.

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It told Denmark that it needed to reduce the real growth in Government consumption to 1.9 per cent. of GDP in 2001, and to ensure

    ''that primary expenditure falls to a level that is not more than 49.5 per cent of GDP''

in 2002.

Sweden was told that it had to continue the strategy of reducing taxes on lower and medium wage earners to

    ''achieve in 2001 a general government surplus consistent with the 2000 updated convergence programme projection of 3.5 per cent of GDP''.

Ireland was told to

    ''remove the inconsistency with the 2000''

broad economic policy guidelines, and to

    ''prepare a budget for 2002 that contributes to an orderly easing of the pace of demand''.

Even a country as loyally signed up to the European project as Austria was informed that it had to

    ''reduce the high tax burden'',

to review benefit levels and invalidity pensions, and to implement

    ''additional and permanent expenditure savings''.

Spain was told to

    ''increase the public pension fund at least 1 per cent of GDP by 2004''.

Italy—and there have been a couple of disagreements between its Government and the Commission recently—has been asked to

    ''achieve in 2001 a general government deficit of 0.8 per cent of GDP'',

and to

    ''match any loss of revenue stemming from additional reductions of taxes and social security contributions with offsetting expenditure cuts''.

That list makes it clear that the Commission now sees itself as the driver of economic policy in the new European community that is emerging following the introduction of the single currency.

The Council amended some—but not all—of those recommendations. It made the change in relation to the United Kingdom to which the Minister has referred, and it removed references to specific borrowing figures for Denmark and Sweden. It is instructive to note that the Commission was either prepared or forced to change its original draft most dramatically in respect of the three countries that have not signed up to the euro, and which, no doubt, it hopes can be persuaded to sign up to it.

Mr. Hopkins: I am following the hon. Gentleman's remarks with great interest and entertainment. Is he not suggesting that those countries are better at running their economies than the European Commission, because they are three of the most successful economies in the European Union?

Mr. Lidington: The hon. Gentleman made that point well. My criticism is not that the policy prescriptions advocated by the Commission in respect of member states must, necessarily, be wrong—and it is not for me to make a judgment about that with regard to any country except the United Kingdom—but that the Governments of each country, accountable to their electorates through their national institutions, should

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have the primary responsibility to take decisions about such matters, and to be held to account—and if necessary got rid of—by their electorates for the results that they deliver.

The Council document proposes the changes to which I have referred in respect of the three countries that are outside the eurozone, and its references to Ireland were toned down, but only slightly. The document still contains the message that because Ireland has signed up to the single currency, it must take fiscal measures to rein back inflation, as it can no longer use the exchange rate as a tool in its monetary policy to manage the national economy.

The references to the policies of Austria, Italy and Spain remain as originally drafted by the European Commission. They suggest that the Commission thinks that for the purposes of tax, borrowing and public expenditure, the eurozone countries are to be treated as part of a single market, with the Commission driving policy forward as it intended to in the single market as originally envisaged. That is an important revelation gained from the documents and from the contrast between the two drafts before us.

We should not pretend that the leaders of many other European countries do not share the ambitions of the Commission. When I listened to the reactions of European leaders to the introduction of euro notes and coins on 1 January, I was struck by the fact that they welcomed the currency as a great step toward European political integration. Whenever I have had conversations with politicians from Germany, the Netherlands and elsewhere, they have been open, unabashed, honest and honourable about sharing those ambitions. I wish that British politicians who are keen to join the single currency had the grace to admit that there is an important political agenda behind what is falsely presented as a purely economic decision.

We must add the scattered references to other forms of taxation to the Commission's statements about tax, borrowing and expenditure. These matters were incorporated, albeit in some instances with qualification, into the European Council guidelines. Page 21 of the Council document mentions value added tax systems. In response to an intervention from my hon. Friend the Member for Ruislip-Northwood (Mr. Wilkinson), the Minister said that it was not the Government's policy to allow British zero rating to be removed. What do the Government hope will happen as a result of their commitment to simplifying and ensuring a more uniform application of VAT systems?

The Commission is reviewing the application of VAT throughout the European Community and will perhaps produce a report in 2003. I infer from references in the guidelines that the Commission would like to scrap or reduce the scope of zero rating; it signed up to that aim some time ago. Let me accept the Minister's assurance that the Government's policy on the matter has changed. What, then, is the Government's interpretation of the commitment on VAT into which they have now entered?

A similar issue arises on energy taxation, which is mentioned on page 25 of the Council document. The Minister said that the provisions allow for sensible

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initiatives that the Government are happy to explore, such as pan-European emissions trade-offs. The hon. Member for Broxtowe (Dr. Palmer) also made reassuring comments. However, if we look at the text, rather than engaging in wishful thinking, we see that the 15 Governments have signed up to an objective of enhancing environmental sustainability, which I am sure that every member of this Committee supports, and to five specific measures, prefaced by the phrase,

    ''Therefore, it is necessary to:''.

A clear separation exists between matters such as emissions trading, on the one hand, and taxation, on the other. The second point states that it is necessary to

    ''introduce and strengthen market-based policies like taxation, user and polluter charges, insurance/liability schemes and tradable emission rights'',

which would appear to cover the Minister's point. The fourth point refers to intensifying

    ''the use of economic instruments to curb greenhouse gas emissions'',

which, too, might be relevant to the Minister's comments. However, the fifth point refers separately to the necessity to

    ''agree on an appropriate framework for energy taxation at the European level and for the creation of a single internal market for energy.''

That is the statement to which the British Government have agreed.

What do the Government think that they have signed us up to doing? I am sure that there will be other voices, not just in the Commission but in other member states, who would wish to see a common tax regime for energy throughout the European Union, and who could make a logical case for that. Such a pan-European system would mark a significant extension of EU competence over matters hitherto reserved to member states, and, if it were introduced, set an important precedent for further matters of taxation to be brought under the remit of European institutions at a later date.

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Prepared 9 January 2002