Broad Economic Guidelines

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Ruth Kelly: It is important that there is a prudent interpretation of the stability and growth pact. Three different elements of that interpretation need to be taken into account, one of which is the state of the economic cycle. It is sensible to take that into account when considering whether the 3 per cent. limit needs to be strictly adhered to in the stability and growth pact.

Other important elements are the sustainability of public finances and whether the debt ratio of the country concerned is, for example, on a downward or an upward trajectory. Another critical element, which the hon. Gentleman mentioned, is whether, as in the case of the United Kingdom, for example, there has been chronic under-investment in public services. When taken together, we argue that the UK needs to interpret those elements in a sensible way and to recognise that it must address that historic under-investment. This country has a sustainable fiscal position and that, too, should be taken into account when interpreting the stability and growth pact.

Mr. Kelvin Hopkins (Luton, North): I am interested in my hon. Friend's answers to the previous questions on the stability and growth pact. The statement by the Council on the budgetary situation in Germany suggests that the 3 per cent. will be rigidly adhered to. There has recently been a difference of view between French and German spokespersons about the degree of flexibility allowed in the stability and growth pact. The French suggested that flexibility would be a good thing—I can understand why they would want that to be so—and the Germans said that it should be rigidly adhered to and there should not be any flexibility. Indeed, the words of a German banker were that a flexible stability and growth pact would be a disaster.

Ruth Kelly: It is perhaps not surprising, as the Germans were the authors of the stability and growth pact, that there will be a divergence of opinion within Germany on the interpretation of the pact, how rigid it should be or how flexibly it should be interpreted. However, as the hon. Gentleman is aware, the issue

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came up for discussion in an earlier ECOFIN meeting this year. The Commission had proposed to the Council that an early-warning letter should be sent to Germany, stating that it was in danger of reaching the 3 per cent. limit laid down in the stability and growth pact. There was a political discussion at ECOFIN on how the pact should be interpreted. It was recognised that Germany had been suffering from the state of the economic cycle and that its debt ratio was on a downward trajectory, and it was therefore decided not to issue the early-warning letter. Clearly, there will be differing views about the interpretation, but the United Kingdom continues to argue that it should be interpreted in a prudent manner.

Matthew Taylor: The figures on which the commentary is based for the UK are based on the previous Government's growth projections of 2.25 per cent. Since then, the Government have raised their growth projections. The commentary specifically refers to believing that Governments like to come within their targets, partly because of the cautious estimates on growth. Has there been any response from the Commission or elsewhere in European Union institutions to the Government's decision to raise their growth targets and the effect that that may have on their ability to meet either the conditions of the pact or wider Government objectives?

Ruth Kelly: The hon. Gentleman is aware that Heads of Government discuss the broad economic policy guidelines once a year. Those guidelines must be based on figures that are not—let me put it this way—the most up-to-date and accurate available. However, the Treasury stands completely behind this assessment of the trend rate of growth. It is still a conscious interpretation of the trend rate of growth, while recognising different factors such as net migration in the calculation. As far as I am aware, there has been no discussion of that point at European level.

Mr. Hopkins: I am interested in my hon. Friend's answer to an earlier question about Germany, which suggested that its current difficulties are a feature of the economic cycle. Does she agree that a major problem for Germany is that it pushed the deutschmark into the single currency at too high a level, which is an inherently deflationary factor in its economy? Does she also agree that its situation was aggravated still further by the weakening of the dollar, which is sometimes interpreted as a strengthening of the euro?

Ruth Kelly: I am well aware of my hon. Friend's views on the euro as, I am sure, are other members of the Committee. I am not going to get into a debate here on the merits or otherwise of the euro. The hon. Member for Buckingham (Mr. Bercow) also knows, and the Treasury's position makes it clear, that we will have an economic assessment based on all the relevant criteria in due course. However, I agree that the German deficit was made worse by the worsening of the economic situation throughout Europe.

Dr. Palmer: The report of the European Scrutiny Committee raised the question of whether the system of warnings was working satisfactorily, given that the

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Council has not implemented the two suggested warnings for Germany and Portugal, possibly because the Governments concerned made several commitments. Does the Minister think that the system is optimum, or can it be improved?

Ruth Kelly: We have an effective system, and the UK supports the broad economic guidelines. We also support the stability and convergence programme, which is a component of those guidelines. It is implemented through peer discussion of budgetary policies throughout the European Union and, in certain circumstances, through the issuing of an early warning letter to those member states who risk reaching the 3 per cent. limit. As my hon. Friend points out, that was discussed at length at an ECOFIN meeting earlier this year. In two cases, the Commission proposed that the Council consider whether to send an early warning letter. As members of the Committee are aware, it is up to the Commission to initiate proposals, but decisions on whether the proposals are sensible and should be carried out are taken after a political discussion between member states. Certain commitments were made in the course of such a discussion, in which my right hon. Friend the Chancellor took an active part. Germany and Portugal gave certain assurances, including one that they would reach budgetary balance over the next few years. It was also recognised that their debt ratios were on a downward trajectory. The process works well. This was clearly a highly sensitive and emotive issue in Germany. I am convinced that the process of peer review is important and adds to policy co-ordination at a European level. The fact that no early warning letter was issued to Germany does not undermine the operation of that system in any way.

Mr. Hopkins: I have one more question. Given the current economic difficulties inside the eurozone, particularly for Germany and France, where threats to public spending are on the cards, does my hon. Friend agree that the Chancellor's extreme caution about Britain joining the euro is absolutely right?

Ruth Kelly: My hon. Friend and I are at one. We must take a hard-headed economic look at the issues surrounding the euro and whether it is in Britain's national interest to join, which is what my right hon. Friend the Chancellor is committed to doing. We will have that economic assessment within the first two years of this Parliament, and I am sure that we will have a vivid and enjoyable debate when it is published.

The Chairman: Order. If no more hon. Members want to ask questions, we shall proceed to the debate on the motion.

Motion made, and Question proposed.

    ''That the Committee takes note of European Union Document No. 8389/02, Commission Recommendation for the 2002 Broad Guidelines of the Economic Policies of the Member States and the Community; and supports the Government's welcome for the publication of the Commission's Recommendations for the Guidelines, as giving operational content to the conclusions of the Lisbon and Stockholm summits, reflecting the importance of structural reform in tackling successfully the challenges of globalisation and competitiveness, and promoting employment and social inclusion; also takes note of European Union Documents Nos. SN 1107/02, 1108/02, 1109/02, 1111/02, 1112/02, 1113/02, 1319/1/02 REV1, 1320/1/02 REV1, 1321/02, 1322/02, 1323/02, 1324/1/02 REV1, 1325/1/02 REV1, 1361/02, 1382/1/02 REV1, 1383/1/02

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    REV1 and 2002/C 51/06, Council Opinions and Statements on the 2001 Stability and Convergence Programmes; and welcomes these Opinions and Statements as promoting the objective of sound government finances as a means of strengthening the conditions for price stability and for strong sustainable growth conducive to employment creation.''—[Ruth Kelly.]

10.51 am

Mr. John Bercow (Buckingham): Thank you and good morning, Mr. Hurst, and I welcome you to the Chair. We look forward to you chairing the remainder of our proceedings with a combination of firmness, fairness and humour. I should also like to congratulate the Financial Secretary, as this is my first public opportunity to do so, on her promotion within the Treasury. It is richly deserved, she is a popular figure throughout the House and I wish her well in her new and elevated post.

Matthew Taylor: But.

Mr. Bercow: The hon. Gentleman knows me only too well. He will therefore know that I shall make a relatively brief speech, in conformity with my usual practice, unless I am provoked to do otherwise.

I should like to pick up on the Minister's opening statement and pose a series of questions. I understand her comments about the Government's view that the European Commission's stance on the state of public finances is too mechanistic, but she went on to say that discussions with the European Commission would continue. My first point is that I have no objection to discussions taking place with the European Commission if, and only if, there are matters usefully to discuss. On the specific question of whether the UK's budgetary position should be close to balance or in surplus, will the Financial Secretary confirm that the Government's objection to the Commission's stance is such that they will not, under any circumstances or as part of a compromise, agree either to reduce public expenditure or raise taxes simply to fulfil the Commission's wish of bringing the UK budget closer to balance in 2003–04? Will she confirm that such a move will not be entertained?

Secondly, the broad economic guidelines call on member states to take action

    ''to strengthen incentives for people to take up work''.

How does the Financial Secretary square that position with the Government's decision to increase national insurance contributions? If the Government believe that not raising income tax is designed to reward work, as the Chancellor told the Treasury Committee on 11 December 2001, does she not accept that the logical corollary is that to increase taxation by way of national insurance contributions acts as a disincentive to work?

Thirdly, the Minister will know that the guidelines say that during the medium term, macroeconomic policy

    ''should contribute to the establishment of the framework conditions that promote adequate levels of saving and investment''.

The Treasury projects that the savings ratio will be 3.75 per cent. this year, which is the lowest on record and a mere 40 per cent. of the level that the Government inherited from the Conservative party.

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In the light of that, what plans are there to bolster the savings ratio?

Fourthly, the Financial Secretary will be aware of the guidelines' observation about the need for member states to create a business-friendly environment. She will also be conscious of and, I hope, reasonably concerned about the CBI's verdict on the Budget. Immediately after the Budget, Digby Jones declared:

    ''Business certainly feels very aggrieved. It feels let down. Many of the businesses that have engaged with various initiatives to raise productivity and so on are beginning to say: Is this Government really engaged with the business agenda, or is it reverting to type?'''

Will the Minister undertake to assess the total costs of regulation on British businesses and produce a plan for limitations on—or, better still, a reduction of—the burden of regulation on business in the coming years? Can she pledge that the Government's record of introducing one regulation every 26 minutes of the working day will improve in 2002–03?

Fifthly, the guidelines state that member states should ''promote the quality'' and enhance the efficiency of public expenditure. Curiously, while endorsing that sentiment, the Government refuse to look with an open mind at lessons that could be learnt from abroad about the provision of public services and about the ways in which countries with different structures and systems from our own are able more effectively to translate care from a word to a deed. The Minister will know that work published by the Office for National Statistics last month showed that productivity in the national health service has fallen under the present Government. What does the Minister propose to do in respect of economic policy to promote the quality and enhance the efficiency of public expenditure?

I might add a further question under the fifth heading. Are the Government sufficiently concerned about the extent of Departmental underspends that they propose to change the operation of their end-year flexibility rules, the better to avoid excessive underspends given that there is unmet demand in several public services?

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