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9 Apr 2003 : Column 367—continued
Madam Deputy Speaker (Sylvia Heal): Order. A number of Members are hoping to catch my eye. If those who speak can be concise in their remarks, all might be successful.
6.40 pm
Malcolm Bruce (Gordon): I shall not comment on the speech made by the hon. Member for Brent, North (Mr. Gardiner), but I think that it is more valuable if people who contribute to the debate have actually taken part in it, rather than just turning up halfway through, or even three quarters of the way through.
Mr. Gardiner: Will the hon. Gentleman give way?
Malcolm Bruce: No, I will not.
Those of us who have been here have taken part in a good debate, in which the general consensus from both sides of the House has been that the Chancellor has produced a Budget of extreme modesty in terms of its material content and the extent to which it has changed the background situation. Indeed, one of my colleagues has said that, in spite of the fact that the Chancellor spoke for an hour, the content of his speech was less substantive than some written answers.
The problem that the Chancellor faces is that he is presiding over a severely imbalanced economy in which, although the overall macro-indicators look good, there are fundamental weaknesses and a very fragile foundation to economic confidence. Manufacturing is in serious recession, and has been for a significant amount of time. We also have a serious balance of payments deficit, which has become the dog that does not bark, in current economic terms, but nevertheless ought to be recognised as a constraint. That deficit also illustrates that, wherever one might be coming from in the argument over the euro, there is something artificial about the exchange rate for sterling, because if the
balance of payments is an indication of the overall performance of the British economy, the sterling rate should clearly be lower.We now face a situation in which the EU is likely to enlarge in circumstances that will aggravate that position. In an intervention on the hon. Member for Dumbarton (Mr. McFall), I made the point that it does not require rocket science to understand—indeed, it is common sense—that, with 10 new members coming into the EU, all of which are committed to signing up for the euro and have very low labour costs, the reality will be that much of the new investment generated within the new, enlarged EU is likely to go to those countries in almost any circumstances. The United Kingdom will also become the most disadvantaged member of the European Union if we do not resolve the uncertainty about our future relationship with the EU. This will involve not only a failure to attract inward investment but British investment relocating to more competitive parts of the European market.
As is traditional with the Chancellor, the Budget was full of all kinds of complex initiatives and undertakings on which he will report back in due course. Some might yield positive results; some will probably be little more than gimmicks that might never be heard of again. We must accept, however, that consumer spending, which has sustained the economy and kept the UK growth rate performing relatively well, is fundamentally based on the inflation of our internal property values. There are two problems with that. One involves the extent to which our trading partners will indefinitely allow us to trade with the world on the basis of simply rebasing our own property values. The second involves the extent to which internal confidence will be maintained. People might have borrowed against the increased value of their property and, in the situation that we are approaching, in which the property market is levelling off or might turn down, that confidence will no longer be there.
Two further problems will result from that. People who have borrowed in that way will find it difficult to maintain their payments, and people who would have borrowed will be discouraged from doing so. That will take some of the growth pressure away from the economy. All of that could lead to what everyone agrees are rather optimistic forecasts by the Chancellor being proved to be extremely optimistic. We could then find ourselves in difficulties. We are not there yet, which is why my right hon. and hon. Friends acknowledge that the level of borrowing has had to be increased compared with the previous forecast. That is significant and the trend is worrying, but we accept that in the current year it is legitimate to operate on that basis. It may be more difficult to do so in the years that follow.
The Chancellor mentioned regional policy. He listed a number of initiatives but they did not seem to be radical or substantive. He said that he would try to persuade public agencies to disperse jobs from London. He talked of the potential of 20,000 jobs. He was clearly indicating that there is no darned way in which Government Departments will do that, so he will try to persuade the next line of public agencies to take that course.
We need a dynamic within the United Kingdom to encourage private investment to go to the regions. I think that the methods of the 1960s would be
unacceptable to Members on both sides of the House. We need no directions and no penalties, but a positive dynamic that encourages investment in the nations and regions.I say as a Scottish Member that when we examine the forecast for Scotland we see with considerable alarm that the population projections are falling extremely sharply. Many of us who live in Scotland and represent Scottish constituencies feel that the quality of life is extremely good. However, it seems to many of us that the more that we train people in Scotland, the faster they leave. We are looking to the Government to provide a dynamic. Devolution is part of the process, but there are United Kingdom policies that are necessary, especially investment in infrastructure and communications, which in a small island can enable people to operate effectively and can encourage growth.
The idea of regional cost indices seems to be rather odd. Presumably it is the precursor to regional weightings based on local costs, which means that market forces will effectively be nullified. That may well meet the social needs of communities but it will discourage redistribution.
In many ways, the home counties are overheated and under enormous pressure. Regions of England, Scotland and Wales are under-invested and do not have constraints. It seems logical for everybody that if we can take away the pressure from London and the home counties and provide dynamic growth in the regions, we shall liberate the entire economy. It behoves the Chancellor to lead that debate in a way that I fear he has not.
I welcome the Chancellor's proposals on petroleum revenue tax, which I think will help to promote investment in the oil and gas industries and offset the damage that the right hon. Gentleman did last year by imposing additional taxes on them. I welcome also the freeze on spirits duty. I remind the House that Scotland produces not only whisky but the majority of gin that is distilled in the United Kingdom. The Chancellor has been confronted by necessity. He knows that extra tax will result in a loss of revenue.
The Chancellor has had a run of luck, and he may still have a further run of luck. All of us wish the economy to succeed, so we do not wish the Chancellor to fail. However, he needs to come clean and to recognise that there are imbalances and structural weaknesses in the economy that he cannot get away with indefinitely. He would be better advised to act now to ensure that we maintain investment and to address the imbalance. If not, he will find that he has an economy that is struggling and will not provide the revenue to fund health, education and public service improvements and the redistribution that all of us want. It is a warning. The Chancellor must do more than he did today to show that he understands that.
6.49 pm
Mr. Andrew Tyrie (Chichester): The key question is whether the economy is better placed or less well placed than it was in 1997 to weather what could be quite a bumpy international economic ride, with a lot of macro-economic adjustments that need to take place in the
American economy over the next few years. American consumption as a proportion of disposable income is more than 100 per cent. There is a need to retrench and consolidate, and the American economy may not be such a great engine of growth for the next year or two as it was in the 1990s.It is clear that the economy is in much worse shape than in 1997. Borrowing is rising, and it will more than double in the projections for 2003–04: an increase from £13 billion to £24 billion. Spending is high, rising and probably running at unsustainable levels. Most significantly of all, taxes and the tax burden will continue to rise throughout the planning period, which will erode incentives for wealth creation.
I am particularly struck by an absolutely crucial graph on page 261 of the Red Book, which for the first time shows that Labour intends to increase the tax burden year on year throughout the planning period for the seven years to the end of the decade. Every other Red Book that Labour has published showed that there would be a blip up, arguably to pay for a little extra investment in the public services, and that that would plateau and then start to fall. This time, Labour has been unable to use that trick; this time, it has to admit, as the whole British public will get to know, that the tax burden is to rise every year. Labour has told us so, and now we know.
The story of how we reached this state of affairs, which although not quite disastrous represents a much weaker position, can be told in three phases. The first was the new Labour phase—the first two years of the Chancellor's Budgets when he kept public expenditure under control, the only major tax grab being the abolition of advance corporation tax, and when monetary policy was farmed out to the Bank of England.
We also had a lot of plausible-sounding economics with the golden rule and the sustainable investment rule, which we all now know are virtually meaningless. The golden rule is meaningless because, of course, it is impossible to distinguish between current and capital spending in the public sector. How can capital spending be defined in an area in which no income stream is secured? The sustainable investment rule has been rendered virtually meaningless by the fact that a huge amount of off-balance-sheet finance is taking place. The private finance initiative is running at massive levels and there are also huge contingency liabilities off balance sheet in the back of the Red Book. The last plank of the original phase 1 economics put forward by the Chancellor was the "neoclassical endogenous growth" theory. The language has disappeared, but the policy is still with us. Successive Budgets have contained one micro-management measure after another, which tried to achieve a bit of research and development here and a bit of internet investment there. That absolutely crazy policy is exactly the way to waste public money and, in the end, burden businesses rather than set them free.
Phase 2 was the two years after the 2000 Budget, which brought about a huge spending increase. It seemed that taxes did not have to rise. That was because the tax yield unexpectedly rose very quickly. There were also windfall gains from sales in the spectrum and one or two other areas. That was a nirvana for Labour. Middle
England was happy because taxes were not rising and Labour heartlands were happy because the Government were able to spend more money.Of course, that did not last. The spending will turn out to be unsustainable, as everything was based on overoptimistic growth assumptions. Even a slight blip in the growth forecast leads exactly to the content of phase 3, which started last year. Phase 3 is the national insurance contributions increase and the decision sharply to raise taxation, which has been continued in this Budget. Allowances have been frozen. That has not been mentioned much in the debate, although it represents another sharp increase in taxation. There is a graph sitting in the Red Book that tells us that, year on year, the tax burden will go up. Who will pay for that? Middle England.
Those three phases of the Chancellor's economics amount to a move from new Labour economics to old Labour economics. We used to have new Labour; now we just have the Labour party. We have what we have always had in this country: a spending binge, which is paid for initially by a bit of taxation, and then, when things do not work out as expected because there is so much complacency about growth, a collapse in revenues as growth tails off. Finally, there have to be massive increases in borrowing. That is what we could be on the edge of now.
The next few months or possibly year or two will be determined by the relationship between No. 10 and No. 11. As far as I am aware, No. 10 still thinks that there is something called new Labour economic policy. The Prime Minister even said a few years ago that he wanted to get taxes down. There is a war on of course, so he probably has not looked at page 261 of the Red Book. Whether new Labour eventually prevails and the Chancellor ends up being put back in his box or moved to some other post, or whether the Chancellor prevails from No. 11 and imposes that new policy on a longer-term basis, will determine not only the prosperity of the country, which will go down the tubes if these policies are maintained, but British politics in the years ahead.
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