Broad Economic Guidelines

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Mr. Bercow: I am grateful to the hon. Gentleman for giving way. Will he confirm that he and the Liberal Democrats endorse the breaking of the link between pensions and earnings?

Matthew Taylor: We have no intention of restoring the link, but that is not the point. The point is that where that link is broken in the general pension provision—there is a good argument for breaking it because it provides a substantial Government resource to people who do not need it as well as to those who do—it needs to be replaced with a system that provides either the support for those who do not make that investment for themselves or incentives to make that investment. Our proposed alternative increases the incentive and, as the hon. Member for Luton, North (Mr. Hopkins) suggested, involves a required second state pension, but with support for those who cannot afford to make that investment for themselves. There would be means-testing during people's working lives. Means-testing at the point of retirement fails to give many individuals the support that they need, either because they feel that it is wrong to claim or because they cannot work their way through the system.

At a time when other European countries are wrestling with the problem and looking for alternatives that provide that protection, there is an unfunded liability for the nation as a whole here. It does not appear in the balance books because it is not a Government liability. Ultimately it becomes a Government liability if many pensioners are too poor to support themselves in the future and the savings systems do not provide the incentives to make that investment. With many companies now ending pension schemes tied to earnings themselves, with returns on investments lower and likely to be lower in the future, ironically, because of the Government's success in part in dealing with inflation, there is a growing issue for this country to tackle. We must not simply feel that we have avoided the problem because it is does not appear on the Government's long-term balance sheets.

The second issue, which I touched on when I asked the Minister a question, is the welcome recognition by the Commission of the need for the UK to invest, that there has been long-term under-investment and that that impacts on the issue of the Government's borrowing, especially given the overall low debt-to-income ratio in the UK for Government. There is a specific reference to the matter in article 104 of the treaty, and page 65 of the Commission report notes that levels of public sector net investment are

    ''addressing the low level of government investment'',

which is welcome, but, that said, the Minister would acknowledge that in the first five years of this Government, Labour increased the problem with an historically extraordinary low level of public sector net investment of only 0.6 per cent. of gross domestic product, compared with 1.5 per cent. in the last five years of the Conservative Government, which was itself historically low. Clearly, we have a long way to go.

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As the Government are clearly concerned that the constraints of the treaty might have an impact on the matter and have welcomed the flexibility that I referred to, perhaps the Minister will say what the Government believe needs to be done in terms of future public sector investment. Even the Government's latest projections are not historically high; for example, it will take, at best, many decades to tackle the transport problem, and the projections are, arguably, still so low, despite the increases that the Government plan, that they are unlikely to do anything to tackle the problem and reverse many decades of historic under-investment. One way or the other, that has considerable implications for the Government's position in terms of taxation or borrowing.

Thirdly, I welcome the recognition of the importance of cyclical adjustments to Budget estimates, which is a point of criticism for those who cast doubt on the growth and stability pact. In practice, the Commission has been far more realistic than some suggested that it would be and I hope that the Minister will agree that it is sensible to see how the pact is interpreted in practice rather than considering some of the wild assumptions that have been made in the past. In practice, the Commission has shown that it works with a degree of realism and prudence about what is going on in the real world, although some suggested that it would not. That needs to be built on. Perhaps the Minister will elaborate on how the Government see the latest responses from other countries and the Commission in terms of that interpretation.

On a point of caution, there is an extraordinary statement in the Commission report that a successful economy requires lower taxes. To some degree that is true; there is a level of taxation that is unsustainable. Budget decisions should be taken to ensure long-term growth and stability in the economy and the real issue is the balance between tax and spend. Whether that is a few per cent. higher or lower compared with other countries is not fundamental. The Conservative party, particularly the Thatcherites, argued that low expenditure was good in itself, and we now have to deal with the consequences: under-investment in health, education and transport. I hope that Ministers will use their influence to steer the Commission away from a view that I suspect they do not have, but which, if they are suggesting that they have it, will potentially weight things in a way that would be highly undesirable.

Mr. Bercow: Does the hon. Gentleman have a view about the proportion of national income that should be spent by the state? Would he place a limit on that share?

Matthew Taylor: We have set out our views in two respects: first, in our alternative Budget. The hon. Gentleman labours under a difficulty as his party currently has no alternative Budget and no alternative policies. That gives wide scope for criticism, but it allows little room to make any proposals. We have drawn up an alternative Budget year by year for more than a decade, which will show the hon. Gentleman

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exactly what we believe in any given year. In the longer term, some eight or nine years ago we proposed tests of Government spending in respect of long-term balance and not borrowing except to invest, which the Government now adopt in their policies. We share that view. I am pleased that the Conservative party recently adopted the policy, but it previously objected to it.

Mr. Hopkins: I thank the hon. Gentleman for that point. Some economies have high levels of public spending and the state has a much larger slice of the economy than here, yet they remain healthy economies doing extremely well. With appropriate fiscal and monetary policies, cannot a much higher level of public spending be sustained?

Matthew Taylor: I agree with the hon. Gentleman, but with two caveats. We live in an era of increasing globalisation, which puts pressure on countries with high levels of spending to bring it down. That often happens in European countries with historically high public expenditure through a process of tax competition. The second important caveat is that when one digs into the figures, one often finds that the real issue is whether spending on pensions is primarily directed through the state or through individual pension schemes.

Examining the breakdown of individual expenditure and taking it across the board on housing, pensions, health and so forth makes the differences much smaller than they appear in the prima facie Government expenditure figures. That applies particularly to pension expenditure. One of the reasons for the UK's relatively low GDP figures is that much of our pension spending is private. It is similar to the United States, which has low levels of Government spending because of the low levels of public health expenditure, but individuals have to pay high levels. It is possible to gain a rather distorted view of the differences between countries. At the end of the day, providing an adequate transport, health and pension system requires expenditure, and we have to make choices about whether the state is the best provider. In some cases it is, in others it is not.

As the hon. Member for Luton, North suggests, stable economic management is crucial. Another irony of Conservative attacks on the Commission's views on the stability and growth pact is that the Commission argues for precisely the same stable economic management that is implied by Conservative criticisms of the Government, which was the point of the hon. Gentleman's intervention.

Mr. Bercow: Never has an hon. Gentleman said so much, revealed so little and been in such indecent haste to blow his own trumpet—a veritable Liberal Democrat fog is now descending upon the Committee. In his initial answer to my first question, the hon. Gentleman was striving for clarity, but he did not provide it. May I press him further? If 50 per cent. of national income were spent by the state, does he agree that that would be inimical to economic efficiency and personal freedom?

Matthew Taylor: Some states in the European Union spend similar levels, and no one would

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describe them as unfree. The Liberal Democrats do not propose anything like that level of state spending, so our pensions policies do not mean returning to a much larger state pension scheme. In that sense, the hon. Gentleman may be right: we do not believe in such a shift because, as long as people make the investment, the private sector will be better at delivering pensions. We should examine the incentives and requirements on individuals, not just the vehicles of pension saving on which the Government have mainly concentrated. Their approach has failed to deliver the necessary improvements in personal pension investment.

Another serious cause for concern applies not only to the UK, but across the board, although the UK is probably further advanced in the area, if ''advanced'' is the right word, and may therefore have the greatest concern about it. I refer to the lack of commentary on the financing vehicles, and their proliferation, that are off the balance sheet, which may mean compliance with the letter rather than the spirit of the guidelines—for example, in terms of whether the treatment of private finance and PPP appear on the Government's balance sheets. We are talking about a commitment to public expenditure that affects the proportion of Government spending, and therefore the overall balance between tax and spend. However, because of the way in which the Government treat those areas, many of the figures are off the balance sheet.

The proposal may suit an individual Government's need to make their figures look good but throws into doubt the efficacy of the process of ensuring that individual countries behave in a way that is good for overall economic balance, which has knock-on consequences for other countries. The Government may trust themselves—I have greater doubts—to exercise the measure with the utmost discretion and only in the most appropriate circumstances, but I am not sure that they would trust Greece or Italy to do the same, and there is concern that what the previous Conservative Government pioneered, which was legally taken up by the Government, is spreading across Europe and may throw the process into doubt. One could comment on Italy in relation to that but it is a notable exception. By and large, the Commission has bought into the tendency to put spending off the balance sheet. I have reservations about that.

Finally, I return to my earlier point on the Government's growth figures. I hope that the Minister is right about the robustness of the Government's decision to increase their view of long-term trend growth just as the economy entered a more difficult patch than they had previously encountered, as it became increasingly evident that the Government failed to achieve all their targets on increased productivity and as business investment started falling through the floor. The Commission's commentary, agreed by Council Ministers, was based on previous, more prudent figures, and the fact that the figures have changed has a significant effect on judgments about the Government's ability to deliver. My view is that the growth figures are broadly achievable. We criticised the Government's original decision to cut the figures and said from the beginning

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that it was a way of building an election war chest—which is exactly what it proved to be. Our opposition to the Government's low spending in their early years also subsequently proved right.

The Government projections may be right but the Government have been much more inconsistent than the Liberal Democrats. It is not obvious what has changed in the period between Labour's coming into office or how that affects the long-term growth projections. The figures that would affect long-term growth have all gone in a direction detrimental to the Government's ability to achieve increased growth. The Minister may want to comment on that and will, I hope, elaborate on whether there have been discussions, with the Commission, in the Council of Ministers or with other countries, about the UK's decision to change its projections. From what the Commission says, the Government's ability to deliver on the terms of the pact would have raised eyebrows in the Commission.

11.29 am

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Prepared 18 June 2002