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More significant was what it did not mention. There was no mention of investment, which is down 10 per cent. on the year and has fallen faster over the past year and a half than that in the United States of America, France, Japan or Italyyes, faster even than in the sluggish, depressed economy of Japan.
There was no mention of the longest manufacturing recession since the second world war, the deepest recession since 1981 and the loss of 500,000 manufacturing jobs since Labour took office. There was no mention of the problems in tourism, with visitors down 2.5 million on the 2000 level. There was no mention of lower productivity growth in this cycle than in previous cycles. Output per job has increased at an average annual rate of 1.4 per cent. since the mid-1990s, and output per person by just 1.2 per cent., compared with average productivity growth of just over 2 per cent. since the 1960s. Let us not forget that the Chancellor used to say that productivity is his first test.
There was no mention of the fact that growth is sustained by an unsustainable consumption boom while manufacturing withers. Between 1995 and 2002, the economy expanded by 20 per cent. and services by 28 per cent., but manufacturing fell by 1 per cent. Returns in manufacturing are now down to only 4 per cent. compared with 14.1 per cent. in services. In the same period, consumption grew by 4.2 per cent. per annum, while gross domestic productthe wider economygrew by only 2.6 per cent. Consumption has consistently been rising 1.5 per cent. faster than growth. How long does the Chancellor believe that that is sustainable? How much personal debt can people build before it all goes bust?
We intend to say what we think the Government's fiscal and monetary stance should be, even thoughperhaps unsurprisingly, a week before the pre-Budget reportthe Chancellor did not give much away. The Conservative shadow Chancellor had nothing at all to say on the subject, which is rather more surprising from someone who supposedly offers an alternative to the Government position. Despite the speculation, we do not believe that, with an economy facing the current risks, with the record that I have spelled out, this would be an appropriate moment, economically or in any other respect, to have further tax rises or cuts in spending.
Indeed, the present spending plan, before the Chancellor had any idea of the economic situation that would unfold, has fortuitously proved to be the best timed piece of counter-cyclical spending that any Government have introduced. It always used to be said that Governments never step on the accelerator at the
Chris Grayling: The hon. Gentleman said that his party does not believe that there should be any further tax increases. What, then, is the status of its spending commitments made in recent years, and most notably the intention to abolish tuition fees? Does that commitment remain, and if so, how will it be financed?
Matthew Taylor: As the hon. Gentleman knows, the Chancellor has announced substantial extra spending on both education and healthmore than enough to fund the programme for which we argued. As yet, the Government have not told us how they will allocate that spending. We will press them to abolish tuition fees. We await delayed announcements early in the new year. We would not now need to argue for the penny on income tax for education for which we argued in the past because the money is there, but if the Government mis-spend the money, as they may well do, we will be honest enough to say, in the approach to the election, whether a tax rise may be necessary. Certainly, that would not be right for the economy now, and we have spelled that out.
Perhaps the hon. Gentleman can clarify the position of Conservative Front Benchers, who have said that they do not believe in the extra spending for the health service and have voted against it, while announcing a series of spending policies to give tax breaks to those who already have private health insurance. Perhaps he will explain how they intend to pay for thatalthough if he did he would get into trouble with the shadow Chancellor, who assiduously avoids giving any clue to his tax or spending plans.
Mr. Martin O'Neill (Ochil): Will the hon. Gentleman take me back two steps? As I understand it, he told the House that there is sufficient money in the notional budget afforded to education by the Chancellor to pay for tuition fees. If that is the case, surely it must be at the expense of something else in the education budgetor has the Chancellor, with his characteristic generosity, afforded even more largesse than we had anticipated?
Matthew Taylor: When the Chancellor tells us how the money is to be spent, I will be able to answer that question, but as any answers on higher education have been delayed until at least the new yearthey are now two years overduewe are no more able than the hon. Gentleman is to second-guess how the Government intend to spend that money.
While the Conservative shadow Chancellor has been reticent about Conservative plans for the economy, his party leader has been somewhat more forthcoming. In a recent speech to the Institute of Directors, he backed our view that this was a moment for neither tax increases nor spending cuts. We agree that it is perfectly reasonable for the Chancellor to plan his spending on the long-term growth potential of the economy, not on fluctuations around the trend.
The Conservative leader described the Chancellor's penny national insurance increase as a tax on jobs, which contradicts what he told BBC Online on 19 April and shows that the right hon. Gentleman has more than one policy of his own. In addition, those competing to lead the Conservatives all offer different interpretations. The Conservatives voted against the tax increase, which comes as no surprise, given that tonight we have already heard Conservative Back Benchers calling for across-the-board tax cuts. Perhaps the hon. Member for Epsom and Ewell (Chris Grayling) would like to tell us with which faction of the Conservative party and which leader he aligns himself.
Chris Grayling: I am intrigued by the hon. Gentleman's use of the word Xmuddle", because he has just told the House that as of today he does not believe in a tax increase or a tax cut, but he may well change his mind before the next election. In my view, that constitutes a muddle.
Matthew Taylor: What I said was perfectly coherent. I said that given the state of the economy, the Government do not have to either raise taxes or cut spending; it would be inappropriate to do so and it would worsen the risk of recession. Conservative Front Benchers have failed to give any indication of whether they believe that that is true, or whether they want to cut spending or increase taxes. Because they have no policy that they are prepared to make public, the shadow Chancellor instead read out a long section from The Times todaypresumably that is a replacement for a policy position of his own. However, he should be wary of reading from The Times because it has a lot to say about the Conservative party. I will not read out the full
We are concerned about the long-term strategy being followed by the Chancellor. In the last Budget and the comprehensive spending review, he built his whole programme around his belief that there would be an increase in long-term growth from 2.5 per cent. to 2.75 per cent. We now know that that was optimistic. It is one thing to even out fluctuations in the economy over time in one's spending plans, but it is quite another to assume that long-term growth will continue to be strong when one's policies are consistently weakening it and one has thrown prudence to the wind in one's assumptions about increased growth.
To be fair to the Chancellor, he built his spending projections around a figure of 2.5 per cent. growth, not the 2.75 per cent. that he thought the economy would deliver. He called the difference the margin of prudencethe margin for error. However, the Government's own figures reveal that that margin has entirely evaporated. The Chancellor increased his growth forecast on the basis of population growth, yet the Government Actuary's latest estimate of the British population is 1.2 million less than the Treasury figure, and the Government Actuary says that the population is growing by 65,000 fewer people a year than the Treasury assumes in its fiscal projections. At the end of the current spending period, that difference will account for a loss of income for the Chancellor of some #5 billion a year.
Worse still, the Chancellor appears to have known that by using those figures, he was flattering himself. On the very day that he published the assumption of increased population growth, he published in the Wanless report on the national health service another assumption of population growth that was some 1 million lower. That figure, too, flattered the right hon. Gentleman, because a lower population reduces the amount he has to spend on the national health service, whereas the figure used for the wider economy flattered him by suggesting that growth and therefore Government income would be higher.
The latest Government Actuary's Department figures suggest that matters will worsen for the Treasury, because they predict that there will be more than 2 million fewer people by 2020. No wonder that those figuresunlike most Government assumptions of that sortwere never put to the National Audit Office for its comments. The Treasury's increased growth estimate increases tax revenues by #1 billion in the first year, rising to #5 billion in 200607. There has therefore been a significant loss of the room for error that the Chancellor had built into his projections. I hope that he will put that right in the pre-Budget report. My argument is based entirely on the Government's own figures and the assumptions that he used in the detail
That leaves us the entirety of the Government's spending plans balanced on a tightropethe assumption of 2.5 per cent. growth. That brings me to the underlying structural problems that raise serious questions about the Government's ability to deliver their plans[Interruption.] That is one Back Bencher who might also have difficulty delivering.
The underlying structural problem in the economy is the over-valuation of the pound driving a booming consumer sector and a depressed tradeables sector. Services growth is at more than 2 per cent., whereas manufacturing is suffering the deepest recession since 1981. The trade deficit was almost #40 billion last year, and it is on course to be #35 billion this year. Demand is driven by Government spending and consumers while exports fall and investment slumps. Investment accounts for a lower proportion of national income than it has done for five years, manufacturing profitability stands at less than half that of services, and services price inflation is 6 per cent. higher than goods price inflation.
Those are fundamental imbalances in the economy. I believe that the Chancellor knows that, but he has failed to come to grips with them. He talks about increasing productivity, but productivity growth has been lower than in the past. He talks about increasing investment, but investment is slumping. He talks about our success compared with other economies, but the truth is that success in the British economy is now built almost entirely on a consumption boom and increasing levels of consumer debt, house prices and house equity withdrawal. The Governor of the Bank of England, the Monetary Policy Committee and all serious commentators know and have argued that that is unsustainable. Unless the Chancellor can pull a rabbit out of the hat and turn manufacturing around, he faces a long-term problem with his spending and tax plans, not the short-term problem with which we are all familiar.