House of Commons
Thursday 12 June 2003
The House met at half-past Eleven o'clock
PRAYERS
[Mr. Speaker in the Chair]
Oral Answers to Questions
TREASURY
The Chancellor of the Exchequer was asked—
Economic Growth
1. Angela Watkinson (Upminster): What changes there have been to his projections for economic growth since (a) the 2002 Budget and (b) the 2002 pre-Budget Report. [118657]
The Chief Secretary to the Treasury (Mr. Paul Boateng): In the 2002 Budget, United Kingdom GDP growth was forecast to be 3 to 3½ per cent. in 2003 and 2½ to 3 per cent. in 2004. In the 2002 pre-Budget report, growth was forecast to be 2½ to 3 per cent. in 2003 and 3 to 3½ per cent. in 2004. In this year's Budget, our forecasts are growth of 2 to 2½ per cent. in 2003 and 3 to 3½ per cent. in 2004.
Angela Watkinson: The Chancellor of the Exchequer downgraded his economic growth predictions in his statement last autumn and again in April. Even his new figures are out of step with those of the Institute for Fiscal Studies. Why should we believe he has got it right now?
Mr. Boateng: What we have got right in these uncertain times, when America, Germany and Japan have been in recession for the past two years, is sound economic fundamentals: low interest rates, low inflation and a record number of people in employment—all things that the Conservatives got terribly wrong.
Roger Casale (Wimbledon): May I tell my right hon. Friend on behalf of households and businesses in my constituency that the most remarkable thing about the 2002 forecast was that, despite global recession, we were able to predict and to deliver economic growth? Is it not the case that the business cycle in the UK previously worked in such a way that shocks from the outside world were amplified, often with disastrous consequences for investment, jobs and growth in the
UK? Now, those external shocks are mitigated, exactly because of the framework for macro-economic stability that we have put in place.
Mr. Boateng: My hon. Friend is right. We took the hard decisions in the early days to set the Bank of England free, opposed by Conservative Members, and to establish the new deal, opposed by Conservative Members. We took the decisions that were necessary in order to create the climate of stability that is the best news that business can have. That is why we are succeeding in creating jobs. Currently, we are doing better than the other G7 countries on employment and indeed doing increasingly well on investment and productivity.
Mr. John Redwood (Wokingham): Given the importance of rising house prices to confidence, consumption and growth in the UK, what lower growth forecast will be needed given the Chancellor's decision to tax the housing market into submission and to try to stop house price rises? When will the capital gains tax and higher stamp duty come in?
Mr. Boateng: There is no such intention. That is a bit rich coming from the right hon. Gentleman, who served in a Government under whom Britain suffered two of the deepest and longest recessions since the second world war, during which unemployment rose to 3 million, inflation rose to almost 10 per cent., interest rates hit 15 per cent. and negative equity hit an all-time high. We will take no lessons from Conservative Members on economic stewardship. Our record is one to be proud of. His was one to be ashamed of.
Mr. Bob Blizzard (Waveney): Has not the substantial level of investment by the British oil and gas industry made a major contribution to economic growth over many years? Is my right hon. Friend concerned about the low level of exploration that we have had for the past two years, which threatens that continued investment at that level? I welcome the announcement in the Budget that that matter was being looked at, but will he undertake to complete that review speedily so that some proposals can be brought forward for the pre-Budget report in the autumn?
Mr. Boateng: I thank my hon. Friend for all the efforts that he puts in on behalf of the oil industry and of those in his constituency who benefit from it. It was as a result of representations such as his that my right hon. Friend the Chancellor took the actions that he did in the last Budget to encourage and support new investment in the oil industry. Those steps are specifically designed to promote research and development, to promote the exercises in modernisation and exploration that are the best hope for his industry and offer the most to UK plc.
Sir Peter Tapsell (Louth and Horncastle): Why does the Chief Secretary think that the introduction of the euro has so much reduced economic growth in Germany, with inevitable knock-on effects in this country? Do Treasury Ministers agree that the unwise
monetary policies of the European Central Bank have increased the risk that the German recession will have an adverse effect on our economy?
Mr. Boateng: The hon. Gentleman parades the prejudices and misconceptions of his party in relation to the euro. His analysis of the German economy is a little simplistic. He will agree that we need to ensure that we implement the reforms in relation to the growth and stability pact and the European Central Bank outlined in the Chancellor's statement earlier this week. Allied with the reforms in our own economy, those can only be good news for our economy and that of Germany and the rest of the eurozone.
Manufacturing
2. Mr Tony Lloyd (Manchester Central): If he will make a statement on the impact of his economic policies on manufacturing. [118658]
The Chancellor of the Exchequer (Mr. Gordon Brown) : Manufacturing output is expected to grow by between ¼ and ¾ per cent. this year, and by between 2¼ and 2¾ per cent. in 2004. Of vital importance to manufacturing in every region of this country is our commitment to pursue policies for economic stability.
Tony Lloyd: I thank my right hon. Friend, because under this Government manufacturing has been seen as a vital part of the whole economic balance. That is in contrast with previous Governments, who gave manufacturing such a hard time. Does he accept, however, that, with the recent recession in manufacturing, which has seen cuts in employment and production, we need to restate the importance of growth and the fact that a consistent manufacturing base is at the very centre? Does he agree that now that the economy is getting into balance, the preoccupation with the financial services sector—a constant feature of previous Governments—is not something that we should pursue?
Mr. Brown: I thank my hon. Friend for the efforts that he puts in for manufacturing in his constituency and the wider north-west. He will have noticed that manufacturing output was rising last month, and that our policies are designed to give this country modern manufacturing strength. In contrast to the previous Government, who preferred services to manufacturing, we want that modern manufacturing strength, and that is why we are introducing the research and development tax credit, through which £200 million has already gone to small businesses; regional venture capital funds, which manufacturing in his region is benefiting from; and permanent capital allowances, which benefit manufacturing in particular. Most important of all, interest rates in this country, which averaged 10.5 per cent. under the Conservatives, have averaged 5 per cent. under this Labour Government, and that is why we have the economic stability on which we can build. No one is complacent, but we will build on this.
Mr. Michael Howard (Folkestone and Hythe): Does not the future of our manufacturing base depend crucially on trade? Will the Chancellor now answer one
of the many questions that he did not answer on Monday? Will he confirm that his figures for increased trade if we were to join the euro are based on studies of currency unions involving Angola and Mozambique; Burkina Faso and Chad; Vatican City and San Marino; and Tuvalu and Tonga?
Mr. Brown: What the study says—[Hon. Members: "Answer."] What the study says, and I shall read it directly, is that those conducting it discount industrialising and non-industrialised countries and that they have looked at the experience of the euro over its first few years, and whether there has been an increase in trade in the euro area. The idea that, in a single currency area, with the exchange rate barriers removed and a far freer flow of trade, no benefits are produced is quite ridiculous. If the Opposition are going to peddle the idea that somehow, with sustainable convergence, there are no advantages in trade, that reveals exactly where the Shadow Chancellor wants to take his party today, and that is against the European Union altogether.
Mr. Howard: No, no. That will not do, I am afraid. Let us look at the Treasury documents. Will the Chancellor confirm that paragraph 3.36 on page 35 of "EMU and business sectors" expresses concern that, far from trade increasing,
- "In the absence of an independent nominal exchange rate, and if wage growth exceeded that in other EU countries without an offsetting productivity gain, UK export levels could fall and firms would have to reduce output and employment"?
Mr. Brown: The right hon. and learned Gentleman should turn to the conclusion on what EMU could mean for UK trade, where what he has been going on about for the past few days—comparisons with industrialising areas—is discounted, and it is stated very clearly that there have been gains in trading in the euro area identified by all the studies that have been carried out, which he cannot deny. Of course the issue is sustainable convergence, because we are not going to make the mistakes of the exchange rate mechanism era with which he is associated. [Interruption.] Oh, so we are to blame for the Conservatives' decision, and an apology from the shadow Chancellor is enough! It was this shadow Chancellor who said that we must punish the people who made mistakes.
Mr. Howard: I have in fact apologised for the euro; will the Chancellor apologise for the fact that he was calling for early entry into the euro a year before we joined? Is it not true that even the Treasury's documents put what it describes as potential increases in trade—potential increases—that are critically dependent on sustained convergence in a range of between 5 and 50 per cent.? So why is the Chancellor quoting just the 50 per cent. figure? Why did he ignore the fact that the Treasury's own figure for the effect so far in the euro area, to which he has just referred, is much lower? Why did he also ignore the conclusion that the
- "potential benefit of fixed exchange rates to the traded goods sector may be less than is sometimes claimed",
-
and the further conclusion that there is some "evidence" for
"the view that euro membership would not increase UK euro trade by much"?
Mr. Brown: The party that has a problem with credibility on matters European is the Conservative party. [Interruption.] Let us recall the following: interest rates at 15 per cent., 10 per cent. inflation, 1 million jobs lost in manufacturing, unemployment up by 1 million, negative equity—[Interruption.]
Mr. Speaker: Order. The Chancellor has been asked a series of questions and he is entitled to be able to reply without shouting.
Mr. Brown: If the shadow Chancellor, who is trying to distort the Treasury summaries, were to quote fairly from these studies, he would see that the Treasury discounted all that he said about non-industrialised countries on Monday in its assessment, and that our assessment is based on real happenings within the euro area, in which trade has increased. Of course we give a range of figures, because this issue depends on sustainable convergence. But it is absolutely the case that in a single currency area such as the United States, trade between the different parts of the area increases as a result of barriers being removed.
The Conservatives want to rewrite every part of history in this matter, but the fact is that the only reason why the shadow Chancellor fails to give us a balanced assessment is that he has no interest in joining the euro. He is against it as a point of dogma, and he would be against it even if all the proof were before him that there are indeed matters in the national economic interest that commend it to us. The Conservative party had better start thinking again about these issues.
Mr. Kevan Jones (North Durham): One of the major problems facing manufacturing in the north-east is the high value of the pound against the euro. This is a particular problem in the north-east because 78 per cent. of the region's exports are to the eurozone. Does my right hon. Friend agree that one advantage of joining the eurozone would be to give a boost to manufacturing in regions such as the north-east?
Mr. Brown: Our studies set out these issues in great detail, and the fact that there is open government in this regard is in complete contrast to what happened when we entered the exchange rate mechanism, when no assessment was published or, so far as I can see, even made. We have set out the advantages in trade, the advantages in exchange rate stability and the advantages in cutting the cost of currency transactions. But we also say very clearly that these advantages and this potential are dependent on there being sustainable convergence: in other words, that we are able to live comfortably with the euro area interest rate.
We have presented a balanced picture of the national economic interest in this matter, and I agree with my hon. Friend that we should look at all the issues, particularly as they affect individual regions such as the north-east, which he represents. But it is outrageous for the Conservative party to distort one piece of information and then to use it as a case not even for rejecting the euro, but for rejecting the European Union altogether.
Matthew Taylor (Truro and St. Austell): Assuming that the Chancellor said enough on Monday to satisfy the Prime Minister on the euro, and that he therefore has no worries about the forthcoming Cabinet reshuffle, could he tell us whether he accepts the advice received in the study that he commissioned from Professor Simon Wren Lewis? Over the last few years, manufacturing has seen a slump in investment and jobs, associated with the high value of the pound, but the Government have refused to clarify what they believe the right equilibrium rate for the exchange rate would be. Professor Wren Lewis suggests Euro1.37 to the pound; does the Chancellor accept that recommendation?
Mr. Brown: Professor Wren Lewis made that estimate on the basis of the position as he saw it a year ago when he carried out his study. It was based on his analysis of the trading relationships evident at the time. However, the present Government are not going to set an exchange rate target, which is the Liberal Democrat party policy, not ours. We believe in a stable and competitive exchange rate over the medium term, and that that exchange rate will reflect fundamentals.
As to joining the euro, if a decision were taken before the point of transition, we would deal with it, but I caution the hon. Member for Truro and St. Austell (Matthew Taylor) about his over-enthusiasm for ignoring all the national economic interest questions in this matter. It is one thing to believe in the principle of the euro, but quite another to demand that we join it at every point in time, no matter what the exchange rate, interest rates and the wider economic picture. The summary of our assessment shows that, if we had taken the hon. Gentleman's advice in 1999, there would have been a stop-go cycle, leading to exactly the same problems that the Conservatives gave us in the early 90s.
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