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3.22 pm

Mr. Stephen Dorrell (Charnwood): I begin by declaring an interest as a director and shareholder of a manufacturing business—a subject that has cropped up during the debate.

The big story about the Budget and the Chancellor's record in office is that he has been an almost unprecedentedly lucky Chancellor whose luck is now clearly and demonstrably running out. The reason why I think that he was lucky is that he inherited a set of circumstances in 1997 that he himself described today as being a key element in the record for which he is responsible. After all, he stressed in his Budget statement today the importance of the fact that he has been able to build his record as Chancellor on—to use his words—the foundation of low inflation.

I concede, of course, that the establishment of the independent MPC was a decision taken by Labour in 1997, but what the MPC has done is to consolidate the essential discipline of low inflation that was put in place despite huge opposition from Labour during the Conservative years. So the Chancellor was right to stress the importance of low inflation as the essential foundation on which economic success can be built.

Later in the Budget statement, the Chancellor also stressed the importance of flexible markets. He lovingly went through the importance of flexible labour markets, flexible markets for goods, flexible markets for services and markets able to respond to customers. He made the point that our markets in this country are more flexible than most equivalent markets elsewhere in Europe, and he made the point further that we are still less flexible than the United States.

I look forward to the day when a British Chancellor and his supporters, instead of saying, "Well, of course we are not as good as the United States, but we're better than Europe", will start to say, "We're well ahead of Europe and our objective is to make our markets as flexible, as competitive and as successful as the American domestic and international markets." All of that was clear in the Chancellor's rhetoric today. If we are to build a successful economy in this country, we have to recognise the importance of those essential disciplines—sound money and flexible markets.

The problem with the Chancellor's record and the reason why I believe that his luck is now demonstrably running out is that, whereas the importance of those messages is increasingly understood elsewhere in Europe, where the drive is to lower taxes and to make markets more flexible, we in this country are marching resolutely in the other direction. The Government use the rhetoric of the importance of flexible markets, but they make decisions at every step to introduce new elements of red tape and new regulatory burdens, furring up the flexible markets to which they claim to attach importance.

Furthermore, the central problem with the Budget is that the Government are not only re-imposing regulation on the economy when our European competitors are looking for ways to remove it, but increasing the tax burden when our European

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competitors are understanding the importance of the excessive tax burden that they suffer, which is holding back their economies. So the core problem with the Budget as the Chancellor presented it today is that the public finances that he is asking the House to endorse for the years ahead demonstrate the fact that, although he recognises all the stuff about flexible markets, disciplined public finances and so forth, he is undermining by his actions precisely the thing to which he says he attaches great importance.

To highlight the central problem of the public finances, I want to draw the attention of the House to two aspects of the borrowing figures that the Chancellor announced today. First, I remind the House that, two years ago, when the Chancellor projected borrowing for the financial year just started, he said that it would be £10 billion. Since then, he has imposed an extra £8 billion in tax this year, so the equivalent figure should have been £2 billion. He was projecting that the figure for this year would be £10 billion, but he has since put an extra £8 billion into the revenue side of the account for this year. So, everything else unchanged, his projected borrowing for the current year would have been £2 billion. His actual figure is £27 billion—so two years and £25 billion out. That is material mistake.

Mr. Howard Flight (Arundel and South Downs): £35 billion.

Mr. Dorrell: Sorry, £35 billion. That is also a material mistake. The Chancellor is £35 billion out.

Mr. Redwood: My right hon. Friend was right first time.

Mr. Peter Luff (Mid-Worcestershire): I think that he was, too.

Mr. Dorrell: Yes, I was right first time.

I want to draw the attention of the House to a second set of figures. The House will remember that the Chancellor read out a string of numbers that he clearly did not want us to understand the significance of. The string of numbers was for projected borrowing over the next five years. I am not absolutely certain of the numbers because he read them so fast that I could not write them down—I do not do shorthand—but I think that they were 27, 24, 23, 22 and 22. The important point that the House was supposed to take on board was that they showed a downward trend, albeit a marginal one. The House's reaction to the numbers might have been slightly different if the Chancellor had instead read out the Institute for Fiscal Studies' figures for the same period. Its projected figures are 25, 28, 31 and 35. If independent forecasters suggest—

Mr. Plaskitt: One of them.

Mr. Dorrell: It is the consensus of independent forecasters. If the hon. Gentleman wants to set himself up as an expert witness to argue the case against the IFS before some committee, I shall be in the audience. I would want to witness such a blood sport. The Chancellor is engaging in wishful thinking.

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Mr. Barry Gardiner (Brent, North): Does the right hon. Gentleman acknowledge that the IFS goes on to say that it expects

"the government to overachieve the golden rule over the current cycle by around £31 billion"?

Mr. Dorrell: I am trying to focus the minds of hon. Members on the question of whether borrowing will go down, as the Chancellor projects, or up, as the IFS projects. Given the Chancellor's track record on forecasting and the fact that one of his forecasts was £25 billion out over two years, it is likely that he will not deliver his objective of achieving a declining trend in total cash borrowing during the period of the forecast unless he takes further action. I shall explain why that is likely in a moment.

Mr. David Laws (Yeovil): Does the right hon. Gentleman agree that we need not rely on only the IFS? We could rely on the Treasury's published average of all independent forecasts, which forecasts £31 billion of borrowing in 2004–05.

Mr. Dorrell: The hon. Gentleman is entirely right. I thought about using that figure when I was considering what to say because it is an independent figure. I wanted to draw the House's attention to figures from the IFS because it has published a run of forecasts over four years, which is comparable with that reported by the Chancellor today. The consensus and the IFS forecast suggest that the underlying position of the public finances is unstable and that borrowing continues to have an upward trend, despite the Chancellor's attempt to give the opposite impression this afternoon.

Mr. Love: Assuming that the figures produced by the IFS are correct—a big assumption given the difficulties of forecasting—does the right hon. Gentleman believe that we must take corrective action, and should that be to increase taxes or to reduce public expenditure? What level of public expenditure does he believe to be consequent on getting public finances back on to a reasonable path to the future?

Mr. Dorrell: That brings me neatly to an attempt to identify why the public finances are unstable and, by implication, what should be done, as the hon. Gentleman asked. No one should be surprised that independent forecasters think that public finances are unstable, because the Chancellor published figures in the pre-Budget report that show that, in the first three years that he was Chancellor, public expenditure—measured in funny money of constant value pounds—decreased fractionally as a total level of spending. In those three years, expenditure fell by 1 per cent., went up by 0.2 per cent. and then went up by 0.7 per cent. The growth of public expenditure was securely slower than that of the rate of the economy as a whole. In the next two years for which the funny-money number is published, public expenditure started to grow by 4.5 per cent. a year. As we know, the projected figures for the current year and the out years suggest an 8 per cent. cash growth of public expenditure. If the brakes are let off public expenditure to such an extent against the background of slow world trade and disappointing

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growth compared with what was expected, it is hardly surprising that the public finances turn into a deep black hole. That is precisely what is happening.

The figures that my right hon. Friend the Leader of the Opposition cited in his reply to the Chancellor about growth forecasts might have seemed to be rather dry statistics, but it is not dry statistics to point out that if public expenditure grows by 4.5 per cent. in a year when the economy grows by 1.8 per cent., sooner or later taxes will have to rise. That is simple arithmetic.

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