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Mr. Bercow: Say that name again.

Mr. Brown: Ronald Reagan, the American President. The problem is that Ronald Reagan is too right-wing for Conservative Members, and they will not adopt the policy of tax credits. [Hon. Members: "Not too right-wing for you, then."]

Mr. Brown: Absolutely. The Opposition's response is interesting. The working families tax credit has worked in getting thousands of people back into jobs. The new employment tax credit will help single people and couples back to work, but for ideological reasons the Conservative party continues to refuse to support not only something that is a good idea on paper but a policy that works and gets people into jobs. Why do not

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Conservative Members support measures such as the working families tax credit and the employment tax credit?

Mr. Howard: A million people are waiting.

Mr. Brown: The shadow Chancellor refers to the child tax credit, for which, Conservative Members claimed, no one would apply. They said that it was too complicated and that there would be no applications, yet 5.5 million people are receiving it. Conservative Members know that if they reject measures that help to tackle family poverty and get money to lower and middle-income families, they will pay a heavy price at the general election. I reiterate that 5.5 million families are receiving a benefit that helps family prosperity in this country.

We want to improve the working families tax credit and the related employment credit. With a national framework of fairness in place, it makes sense to acknowledge that a more considered approach to local and regional pay conditions, including in London and the south-east, where the low-paid in particular have lost out, offers the best modern route to full employment. In future, we will not only publish data on regional prices and inflation, but by next year we will ensure that almost all pay remits for public sector bodies, including the civil service, can incorporate a regional or local pay dimension within their nationally determined frameworks.

Today, we are publishing amended remits for the health service and Prison Service. We shall shortly publish the remits for schoolteachers and senior salary review bodies, taking account of local and regional conditions. At the same time, the Secretary of State for Work and Pensions will introduce reforms to improve labour market mobility, including housing benefit reform to remove disincentives to work or to move from one place to another.

Those measures, which will be introduced in the coming year, will make Britain, which already has the lowest unemployment of the main industrialised countries and has created 1.5 million more jobs than existed in 1997, the most employment-friendly country. The changes that we have had to make in Britain to render our labour market more flexible would, if applied through economic reform of labour markets in Europe, yield extra jobs.

The other form of flexibility is fiscal. Just as we in Britain are examining the way in which we advance in monetary policy, and the European Central Bank is reviewing its monetary policy strategy, European Governments, as I said in reply to the hon. Member for Yeovil, are rightly examining the way in which the stability and growth pact can become more effective. There is growing agreement that the fiscal rules of the stability and growth pact should be sufficiently flexible to make the right fiscal adjustments at every stage of the economic cycle. Several countries are setting up or considering new domestic procedures for faster and more effective adjustments to change.

In the principles that we have applied to British monetary policy, we insisted on clear, symmetrical rules, well understood procedures and enhanced transparency. We believe that the same principles

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should apply to any new arrangements for British fiscal policy if we were part of economic and monetary union. To ensure stability in the euro area, we are consulting, as a result of the publications on 9 June, on the case for an open letter system on fiscal policy and a new, additional fiscal rule. We propose a regular fiscal stability report, which is published to Parliament according to a preannounced timetable, thus ensuring that fiscal decisions are fully transparent and accountable. The report will contain an assessment of the gap between actual and trend output in the economy. When actual output materially diverges from its trend, we propose an open letter by the Treasury to Parliament, setting out the Government's response. In that way, in EMU, the principles that underpin our monetary policy regime and have successfully provided stability would be mirrored in a similar fiscal policy regime. However, we will not rejoin the exchange rate mechanism.

Our resolve to implement far-reaching reforms is the practical and best expression of our intent. In answer to an earlier question, I said that we would report on progress in next year's Budget. We can then consider the extent of progress and determine whether we make a further Treasury assessment of the five tests. If it were positive next year, that would allow us to put the issue before the British people in a referendum.

In line with our policy of prepare and decide, we are stepping up our preparatory work, expanding the membership of the UK preparation standing committee and establishing regional and national committees. A draft referendum Bill will be published in the autumn. We are considering paving legislation to finance the changeover and issuing a detailed report on euro preparations in Government. We shall publish that report later this year. We shall undertake a programme of consultation with all sectors of the economy throughout the UK. At every point, the national economic interest will be the deciding factor. There will be no fudge or short cuts, as happened with the Conservative Government's disastrous judgments between 1990 and 1992. There must be rigour at every point.

The Government believe in our membership of the European Union and reject the semi-detached policy for Europe that would be disastrous for jobs, business and trade. We also believe that engaging with an enlarged, reforming European Union is in the national economic interest and that we have a vital role in helping to shape the changing Europe as we move from the Europe of the trade bloc era to that of the global era. We believe that it is possible to build in our country a deeper, wider, pro-European consensus. It is time that sensible Conservatives united behind a pro-European consensus. Our approach is at odds with that of those who would rule out euro membership, even if there were a clear and unambiguous case for it and joining was shown to be in the national economic interest.

All our decisions will be made in the national economic interest. We have said that we support the principle of membership of the euro; we have told hon. Members the conditions that will have to be fulfilled; we have given hon. Members the measures that we will take and the reporting mechanism that we will use. I commend the Government's assessment to the House.

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2.15 pm

Mr. Michael Howard (Folkestone and Hythe): I draw hon. Members' attention to my entry in the Register of Members' Interests.

I welcome the debate, not least because we have had revealed to us this afternoon the hitherto secret identity of the Chancellor's economic guru: it was not Balls after all; it was Ronald Reagan. It is a great shame that the Chancellor did not make that clear to Labour Back Benchers when he introduced his policies on tax credits. I wonder whether he will attribute to Ronald Reagan the authorship of the new policies on regional pay that he announced this afternoon, which caused such joy among Labour Members.

The Chancellor began his speech in Monday's debate by claiming that the documents from which he quoted were neither "sexed up" nor based on a PhD thesis. He repeated that claim this morning at Treasury questions. He is obviously keen to distance himself from claims that any document to which he refers is "sexed up" or based on a PhD thesis. I am sure his next-door neighbour will scrutinise those remarks carefully— although I do not wish to enter into that debate.

The conclusions on the euro that we are discussing this afternoon are so sexed up and dodgy that even the Chancellor has not been able to repeat his claim again. His conclusions come from a single source and I am afraid they cannot be backed up. But the source is far from anonymous; indeed, he is sitting directly opposite me, although of course whether the words are those of the Chancellor or of the Prime Minister is a different matter.

This is the second time in a month that the Chancellor has come to the House to explain the Government's position on the euro. Given the extent of the open warfare in the Cabinet that preceded his first outing, I was a little surprised to see him volunteer a second. But now of course it is quite clear that, compared with the splits on foundation hospitals, Iraq and top-up fees, going back to euro factionalism is a nostalgic exercise—a welcome break, which, by contrast, almost presents a picture of unity. And on this issue at least the battle lines have been drawn for some time. They know who is on which side, who briefs against whom and who wants the other's job.

But policy on the euro is not an issue that should be determined according to factions in the Cabinet. The conclusions that the Chancellor reached on 9 June and put before the House again this afternoon were simply not supported by the evidence that he published. As the Treasury's analysis states,

"the EMU decision is irreversible".

So the burden of proof lies with those who would seek to take such a momentous and irreversible step. In the oft-repeated words of the Chancellor, the economic case has to be clear and unambiguous.

Yet far from there being a clear and unambiguous case in favour of euro entry, any objective reading of the Treasury's own evidence, published by the Chancellor on 9 June, leads to the opposite conclusion. As the Chancellor himself said when he set his tests six years ago, the

"first and most critical

test

"is convergence".—[Official Report, 27 October 1997; Vol. 299, c. 584.]

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Unless that test is met, clearly and unambiguously, he conceded that jobs, prosperity and the national economic interest would be damaged if we joined. The evidence that the Chancellor himself published shows how far that test is from being met. The evidence shows that our economic cycle is

"strongly correlated with that in the US, somewhat more so than with those in Europe".

The evidence shows that, if we abandon the ability to set our interest rates to meet our own economic needs and instead adopt a one-size-fits-all interest rate for the whole of the eurozone,

"real interest rate movements in the UK might prove destabilising".

Those are the words of the Treasury documents themselves. And the evidence shows that, since 1997, the UK has had a weaker correlation of business cycle to the euro area than Germany has had. So all the problems that Germany has faced through having the wrong interest rates for its needs would be magnified here. Germany has 4.3 million people out of work. Its Economics Minister has said that recent interest rate cuts were "overdue", and that there was

"scope for further cuts yet"

while acknowledging that

"of course, the European Central Bank has to take account of the economies of all the member states, and so that sometimes leads to certain delays in its interest rates move in comparison with what would be required by the situation in Germany."

The evidence that the Chancellor himself published shows that the effect of the euro would be all too real in Britain, as it has been in Germany. It shows what the real effect would be on pensioners, for whom the Treasury concludes that

"overall the environment would be one of greater uncertainty."

It also shows what the real effect would be on homeowners, whom the Treasury evidence warns of

"particularly large swings in the housing market",

and on companies and employees, for whom the Treasury's evidence warns of cuts in output and jobs if wages grow without offsetting gains in productivity.

The Chancellor knows full well what the economic evidence—including that in the 18 volumes that he published—says. Yet on 9 June, he refused to put forward that case. He refused to put forward what he knew to be an honest assessment of the evidence. His statement on that day was not based on the national economic interest, or on economics at all. It was not even based on the perceived political needs of the country. Instead, it was based on the narrow partisan interests of a faction-ridden Cabinet and of a Chancellor of the Exchequer trying to keep in with both sides. The result was a ludicrous compromise that was cobbled together to try to satisfy the Labour party's factions, and which makes no sense whatever.

The Chancellor admitted that four of the five tests had been failed, yet he said that he and his colleagues would anyway go round the country saying how wonderful euro membership would be. The Labour party's eNews, which goes to all the party activists, put it perfectly:

"The Euro only met one of the government's five tests . . . and failed others on jobs and investment. However, the government made clear that ministers and others will mount a nationwide tour explaining how the single currency will benefit the people of this country".

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So there we have it. How wonderful it will be to join the euro, they say, if only we can just resolve the minor matters of lack of convergence, absence of flexibility, the negative assessment of the effect on investment, and the euro's adverse effects on growth, stability and jobs. The score in 1997 was 4-1 against; the score now is 4-1 against. And the Government's conclusion? What a great victory for the euro!

The Chancellor and his colleagues are reduced to following the example set by the hon. Member for Leicester, East (Keith Vaz)—I am delighted to see him in his place this afternoon—and spending taxpayers' money travelling round the country extolling the virtue of a currency which few people want and which the Treasury's own evidence shows is not in the national economic interest. This will be the first 4-1 defeat in history to lead to a nationwide victory tour in an open-top bus.

On 9 June, the Chancellor was reduced to distorting the Treasury's own evidence in order to try to keep all the factions in the Cabinet happy. In his statement, he said that

"since 1997 there has been significant progress in achieving cyclical convergence."—[Official Report, 9 June 2003; Vol. 406, c. 410.]

But the evidence is that not a single region in the United Kingdom is strongly associated with the European cycle. In that, we are unique in Europe. The Chancellor said that the City test had been passed, but the evidence is that

"to date the euro has not affected London's ability to compete in international wholesale markets."

The Chancellor said that homeowners in continental Europe had "consistently" had the benefit of lower interest rates. But the evidence is that mortgage rates in the United Kingdom average 5 per cent., compared with an average of 5.4 per cent. in the euro area. If inflation is taken into account, the gap is even wider.

The Chancellor said that we could gain up to 50 per cent. more trade by joining the euro and that national income could grow by 0.25 per cent. a year as a result. But the evidence supports

"the view that euro membership would not increase UK euro area trade by much."

On 9 June, I said that the Chancellor's figures on trade were based on studies of currency unions involving Angola and Mozambique, Burkina Faso and Chad, Vatican City and San Marino, and Tuvalu and Tonga. Some have claimed, as I think the Chief Secretary may be doing from a sedentary position now, that I presented a distorted impression of the Chancellor's analysis—that I gave too much prominence to those particular currency unions. Some might think that those were not the only countries that the Chancellor and his colleagues looked at. I have to confess that they would be right. There are indeed other countries included in that analysis. In the heat of the moment on 9 June, I am afraid that I did not mention the other currency unions that were studied—the currency unions involving Christmas Island and Kiribati, Anguilla and St. Vincent and the Grenadines, French Polynesia and Guadeloupe, and Gabon and Guinea-Bissau.

Why is the Chancellor reduced to presenting such a ludicrous case? Why is his analysis so distorted? It is, of course, because his statement was based not on the national economic interest but on trying to keep all the Cabinet's factions happy.

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But the result of the compromise that the Chancellor has been forced to cobble together is more serious than just the propaganda and the deception. He intends to make real and lasting changes to economic policy in this country merely to satisfy the Cabinet's factions. Six years ago, the Chancellor said that Britain could join the single currency only when we could demonstrate a "settled period of convergence" with the eurozone. He said that this would come about only after a "period of stability" for the economy.

On 9 June, however, the position changed. The Chancellor can no longer sit back and wait for convergence of the UK and eurozone economies to occur naturally. The Cabinet's factions will not let him. Instead, he has set out measures that aim to shoehorn our economy into the structure that he thinks will fit the euro. Now, he is hell-bent on achieving convergence artificially when it would not occur naturally. No longer will he sit back and wait; he is going to try to wrench our economy into the euro straitjacket, whether it fits or not.

First, the Chancellor said that there would be changes to the housing market. This is not because the housing market needs changing, but because one faction in the Cabinet needs pleasing. So he will be trying to encourage fixed-rate mortgages. But was the former Governor of the Bank of England not right when he said that

"there are long-term fixed-rate mortgages if you want to take them up . . . the question is, is there an appetite for them?"

But to please the Cabinet's factions, the Chancellor wants to force-feed them to us, whether we have the appetite for them or not. He will be pursuing this course in advance of a euro referendum. The Bank of England's chief economist told the Treasury Committee what that would mean:

"you would certainly have to move interest rates more than you would otherwise have to do, to have the same impact on demand".

I am sorry that the hon. Member for Linlithgow (Mr. Dalyell) is not here to listen to that.

So, the result of the Chancellor's policy of cajoling people into taking out a mortgage product that they do not want will be more violent swings in interest rates. Despite all that, when the Chancellor's study is complete and the changes have been made, the evidence suggests that even then he will not achieve what he wants. His reforms will not change the fact that, as his own evidence shows, we have higher mortgage debt and more home ownership than France or Germany, more equity withdrawal, and house prices that have risen at double the rate in France and Germany. That will be true even after the Chancellor has messed around with the mortgage market.

That is not all that the Chancellor has in mind on housing to please the Cabinet's factions. He also has planning policy in his sights, as he reminded us this afternoon. His assessment talks of

"tough and credible measures, including intervention, where local authorities are not delivering housing numbers in high demand areas; and exploring whether, in the medium term, achieving the Government's objective will require a system of binding local plans".

The Campaign to Protect Rural England has warned that Government proposals could cause a further erosion of greenfield sites.

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The Chancellor also plans the most significant change in inflation targeting for a decade—not because he thinks that monetary policy needs changing, but to please one faction in the Cabinet. He plans to make changes before a single vote is cast in a referendum, and irrespective of whether people want the euro or not. Monetary policy will no longer be based on the current measure of inflation, the retail prices index excluding mortgage interest payments; instead, we will adopt the eurozone's favoured measure, the harmonised index of consumer prices or HICP.

The Chancellor tries to justify that in two contradictory ways. First, he says that the new measure will be better, although apparently we shall have to wait until the decision is implemented to see a comprehensive list of what he considers to be its advantages. Normally when people propose a new policy they set out its advantages at the time. Secondly, he implies that it will not make much difference anyway. In his 246-page assessment of the five economic tests, just one paragraph is devoted to the issue. It states that over the long term the current inflation target corresponds to around 2 per cent. for HICP. Yet had the Bank of England been set in January 2000 the HICP inflation target that the Government now suggest, it would have missed that target repeatedly. On 12 occasions since then, HICP inflation has been below 1 per cent. Each time, the governor would have needed to send the Chancellor a letter explaining the reasons for the failure.

Had the Government set the inflation target that they now suggest, monetary policy over the last three years would have been significantly looser than it has been. In fact, the latest figures show that RPIX exceeded HICP by the widest margin for 14 years.

Where is the Chancellor's analysis of the effects of this change? Where are the pros and cons of excluding housing costs from a price index in a country where those costs are so important? Where is the estimate of what such a change would mean for interest rates when the gap between the two measures of inflation was widening? What will be the effect if, in future, policy based on HICP is loosened at a time when RPIX is rising? The Chancellor's only analysis has been of the effect on the factions in the Cabinet, because that is the only test he cares about now.

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