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Session 2002 - 03
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Delegated Legislation Committee Debates

The Government's Assessment as set out in the Pre-Budget Report 2002 for the purposes of Section 5 of the European Communities (Amendment) Act 1993

Third Standing Committee on Delegated Legislation

Tuesday 10 December 2002

[Mr. Eric Illsley in the Chair]

The Government's Assessment for the
purposes of section 5 of the European
Communities (Amendment) Act 1993

4.30 pm

The Financial Secretary to the Treasury (Ruth Kelly): I beg to move,

    That the Committee has considered the Government's assessment as set out in the Pre-Budget Report 2002 for the purposes of section 5 of the European Communities (Amendment) Act 1993.

I look forward to serving on the Committee under your chairmanship, Mr. Illsley.

Each year, the Government report information to the European Commission on our main economic policy measures. The procedure is set out in articles 99 and 104 of the EC treaty, which relate to the broad economic policy guidelines, convergence and stability programmes and the excessive deficits procedure. The objective is to ensure that member states' economic policies are consistent with the goals of the treaty, as set out in article 2: non-inflationary economic growth; respect for the environment; high employment and social protection; and raising the standard of living and quality of life for citizens throughout the United Kingdom and the entire European Union. Those goals are consistent with the Government's approach to economic policy.

Section 5 of the European Communities (Amendment) Act 1993, usually known as the Maastricht Act, requires Parliament to approve the information sent by the Government to the Commission for this purpose. The Government's strategy for economic policy is set out in the 2002 pre-Budget report, published on 27 November. That material will form the basis of the information that we send to the European Commission.

Sharing the information in the pre-Budget report with our European partners allows us to influence the development of the EU, bringing enhanced employment and growth to Britain and other member states. In this pre-Budget report we have shown that, last year, the British economy was the fastest growing of all the major economies. This year and next year, Britain and north America are now forecast, even in a still uncertain and unstable world, to grow faster than all other major economies. As the Chancellor set out in his statement to the House on 27 November, with the lowest inflation and long-term interest rates for almost 40 years, Britain's monetary and fiscal framework is meeting the challenges of each stage of the economic cycle, and we have made it very clear that we will not let anything put at risk that hard-won stability.

In the pre-Budget report we have also outlined further labour, capital and product market reforms to

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improve British science, skills and entrepreneurship, proposals for continuing public service reform and tax and benefit modernisation, showing that, both in Britain and abroad, strong economies and fair societies move forward together.

Twenty of the world's biggest economies, accounting for 60 per cent. of the world's output—the United States, Japan, much of Europe and Latin America—have been or are in recession after what has been the sharpest slowdown in global economic activity for almost 30 years, the biggest contraction in industrial output in the world's major economies since 1975.

The challenge for the British economy in this more uncertain and unstable world has been to steer a stable course, combining low and stable inflation with sustained demand growth and with high levels of employment. Our monetary and fiscal foundation, which is based on the independence of the Bank of England, imposes a symmetrical target for inflation, requires debt at low levels and adheres to tough fiscal rules over the economic cycle, and is thus designed not only for times of high growth but for times of global contraction, with all its attendant difficulties. Because the Bank of England has established credibility by meeting our symmetrical inflation target of 2½ per cent. year after year, it has been able, supported by fiscal policy, to sustain growth. Against a background of international slowdown, with the euro area forecast to grow by just 0.8 per cent—France is forecast to grow by 1 per cent., Germany by 0.4 per cent., and Japan is forecast to contract by 0.9 per cent.—GDP growth in the UK is forecast to increase by 1.6 per cent. this year, rising to 2½ to 3 per cent. next year, rising again to 3 to 3½ per cent. in 2004.

Mr. Mark Prisk (Hertford and Stortford): Could the hon. Lady say something about the comments on those forecasts made by the International Monetary Fund, especially its worry that the growth forecast to which she just referred has significant risks?

Ruth Kelly: Of course we acknowledge the risks from the vast growth on the upside as well as on the downside. The hon. Gentleman will find that the Treasury's forecasting record has significantly improved since 1997 compared with that in the previous period.

I shall move on to public finances. As the Chancellor set out in his statement, with this Government's long-term and deliberately cautious approach we are, with current surpluses and historically low debt, able at every stage of the economic cycle to meet our fiscal rules, including in the cautious case. We meet our golden rule over the cycle, not just achieving a balance but with an estimated surplus at £46 billion. We also meet the golden rule on the cautious case. Taking the full economic cycle into account, the current surplus for each year is forecast to be 0.2 per cent. of GDP this year, with 0.3 per cent. next year, and other figures of 0.6 per cent., 0.5 per cent., 0.6 per cent. and 0.7 per cent.

Our second rule—the sustainable investment rule—is that over the cycle net debt should be kept below

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40 per cent. of GDP. Net debt this year and in future years will be at 31.0 per cent., 32.1 per cent., 32.4 per cent., 32.6 per cent., 32.7 per cent. and 33.0 per cent., which comfortably meets our sustainable investment rule over the cycle and in every year.

Our commitment to meeting our fiscal rules is for the long term, so we have also published a report that examines the sustainability of Britain's fiscal position decade by decade. It compares our position with that of other countries. It shows that, taking account of population changes and the cost of ageing on public spending, the British fiscal position in the period is sustainable and in a strong long-term position compared with that of other countries.

Because we have built sound foundations of low debt and low inflation, and today meet our fiscal rules in every phase of the economic cycle, we have rejected the view that we should cut back our spending plans. Therefore, we have confirmed that we will fund our planned investments in the following way: by 2006, there will be £8 billion more a year for local authorities, £15 billion more a year for education, £63 billion more a year for public services as a whole and, by 2008, £41 billion more a year for health alone, paid for by our national insurance rise.

My next subject is productivity in the United Kingdom. If stability is the precondition for economic growth, enterprise is its driving force. Britain today is challenged by long-term global restructuring of industry. In the next wave of globalisation, now upon us, it is the flexibility of our product, labour and capital markets, the strength of Britain's science base, the level of British research and development, and the scale and dynamism of knowledge transfer from our universities to our businesses that will drive our productivity growth and thus future prosperity.

Mr. Prisk: Will the hon. Lady tell us what has happened to productivity growth over the past five years, as compared with the previous five years?

Ruth Kelly: The hon. Gentleman will understand that our goal is to increase the trend rate of productivity growth. If one takes into account the data from the Office for National Statistics, which have recently been revised as a result of the census, productivity is growing faster than we had expected.

Norman Lamb (North Norfolk): Is it not the case, though, that our productivity growth is about half that of most of our major competitors, and continues to perform at a lower rate than the Government would hope?

Ruth Kelly: It is absolutely the case that we intend to raise the overall long-term rate of productivity growth. That is why we are designing an agenda for enterprise as well as fairness. Given our record of increasing employment by 1.3 million since 1997, it is not difficult to understand that that would have had a short-term impact on productivity figures. However, in the long term we clearly hope that productivity growth will rise further, and that we can close further the productivity gap with the United States and our competitors in the European Union.

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This pre-Budget report continues the Government's programme of micro-economic reform. We strengthened the competition regime through the Enterprise Act 2002, and are promoting enterprise by modernising the UK's business tax regime. We are promoting an entrepreneurial culture, including for small and medium-sized businesses, local economies and high-unemployment communities. The report supports science and innovation, through the Government's comprehensive science strategy and two complementary reviews into business innovation and university-business links. The report seeks to improve UK skills through measures to support the expansion and improvement of the modern apprenticeship scheme and by continuing to pilot new measures to improve access to training for adults. Efforts to promote investment are informing the planning system.

Our policy is to combine enterprise with fairness. As the Chancellor announced, to continue to make work pay more than benefits, we are from April extending the principle of the working families tax credit to single adults and couples aged 25 and over who are without children. Couples with wages less than £280 or £14,000 a year and single people with wages less than £200 a week or £10,500 a year stand to receive more money, furthering our belief that an enterprise economy and a fair society can advance together.

A flexible, efficient labour market must not only promote employment but be fair to parents. Next month, the joint Treasury-Department of Trade and Industry report will publish proposals to enable parents to make real and effective choices on balancing work and family life. Building on our April rise in maternity pay to £100 a week and the first ever paternity and adoption pay, the new tax credits and the first ever national child care strategy, we shall consider further reforms: new tax and national insurance incentives to expand employer-supported child care, paying child care credit for approved home child carers who are not already child minders and increased flexibility in parental time off, including giving fathers the opportunity to attend ante-natal care.

Our goal—stability and prosperity for all—also means fulfilling our objectives to tackle child and pensioner poverty. The child tax credit, based on support for all and most support for those who need it most, will become a powerful weapon for tackling family poverty. New levels of pension credit from next October will reward, instead of penalising, modest savings and small work pensions.

We have been tested by world events and have resolved to steer a steady course. Our steady strength of purpose will continue and we will honour our commitments to invest in public services, to advance enterprise and fairness and to meet the global challenge. That is the programme set out in the pre-Budget report and, with the House's approval, we shall send it to the European Commission. We are fulfilling our commitment under the Maastricht Act to report on our main economic policy measures and

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retain the position developed by the Government at the heart of the EU policy-making process.

4.42 pm


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Prepared 10 December 2002