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4.57 pm
Mr. James Plaskitt (Warwick and Leamington) (Lab): The real and important background to the Budget is that we start from the position of being better placed than any other economy in the G7. The International Monetary Fund delivered that verdict in its article 4 report, which states that the United Kingdom has
- "weathered the global slowdown well".
The second factor that contributes to our strong starting position is the degree of stability in the economy. Between 1997 and 2004, the growth range has been between 1.7 and 3.7 per cent.—in other words, a range of no more than two percentage points. That contrasts sharply with the years between 1989 and 1997, under the previous Administration, when the growth rate fluctuated from -1.4 to 5 per cent.—a six percentage point growth range. We are now seeing more balanced growth in the economy, which is a key contributor to
our current stability. One of the fruits of that is the recovery in manufacturing output. We also have a strong construction sector, and service sector growth is steadier. In fact, the overall profile of growth looks much more stable than it has for some years.Such stability is also evident in employment. Again, our situation contrasts very favourably with that in other G7 countries. We have the lowest unemployment for 30 years and 1.8 million new jobs have been created—1.3 million in the private sector. We have a healthy level of new business creation as well as sharp growth in self-employment.
We also see stability reflected in inflation. Since 1997, inflation has not moved outside its target, set by the Chancellor way back then, of one percentage point variation either way. It has never got to the limits of that target. Contrast that with the variation in inflation rates over the previous eight years under the previous Government, when the range was seven percentage points. There was no sign of stability in the economy then. Moreover, we now enjoy interest rate stability, with a range since 1997 of four percentage points. Contrast that with a range of six and a half percentage points under the previous Administration: not only is the range smaller, but the trend is steadily downwards.
What matters now—this is how we have to assess the Budget—is the extent to which that stability is confirmed and secured going forward. Since 1997, we have moved from having the highest unemployment in Europe, under the previous Administration, to having the lowest, and we have the longest period of continuous economic growth in over two centuries. The prize is to lock that in to banish the boom-and-bust failure of the past, but are there any risks to the growth and the stability that have been secured?
The Opposition think, apparently, that there are some risks. The first that they emphasised—certainly, the Leader of the Opposition did so in his reply to my right hon. Friend the Chancellor—is the public finances. I am interested to see the Opposition much excited about whether the Chancellor will meet the golden rule. That is an interesting preoccupation for the party that doubled the national debt while in office and that in one year alone clocked up a deficit equivalent to 8 per cent. of GDP.
Of course, the Conservatives never had a golden rule. That is just as well, because they would have come nowhere near meeting it. They remind me of drivers who have been caught doing 100 mph. They have had their licence taken away and been banned, which is why they are sitting on the other side of the Chamber, but now they are greatly excited because we have been caught doing 31 mph in a 30 mph limit.
The first part of the golden rule requires that net debt be held under 40 per cent. of GDP. I should remind the Opposition that we inherited net debt of 43.7 per cent. It is down to 33 per cent., thanks to our disciplined approach to handling the Government's finances. It is forecast to grow from that, rising to 36.4 per cent. in 2009, but that is still substantially below what we inherited. As the Institute for Fiscal Studies said in its green budget:
- "The government's debt remains modest by international and historic standards."
A small variation in performance can have a big impact on the bottom line and just a 1 per cent. change either way in the spending or income figures has a £12 billion consequence. It has always been difficult to forecast those figures with complete accuracy; it was difficult under the previous Administration, whose borrowing and spending forecasts also often ended up way off their original mark.
The right hon. Member for Charnwood (Mr. Dorrell) reminded us that we can look back over Red Books and see a forecast total surplus over the cycle of £100 billion, which of course is now down to the much lower figure of £14 billion. That, too, has caused a fair degree of excitement among Opposition Members. Again, they need to bear in mind what the Institute for Fiscal Studies said:
- "Aiming to overachieve the golden rule by a large amount early in the cycle might be regarded as prudent, given the considerable uncertainties in forecasting the path of public finances over a number of years."
- "It is reasonable that the forecast overachievement should decline as the end of the cycle draws nearer."
The second issue that has been suggested as posing a possible threat to this hard-won stability is debt. The hon. Member for Sevenoaks (Mr. Fallon) made that a feature of his speech a few moments ago, when he drew our attention to household debt. It is easy enough to find initial information that fuels lurid headlines, such as an annual rise in household debt of 14 per cent. and a ratio of household debt to income of 130 per cent. It is easy to infer from those figures that there might be a real issue. It is important to go further than those headline figures, however. The figures are largely a story of what has been happening to house prices. The fact is that the value of household net wealth has increased by 50 per cent. since 1997. That is the other side of the household debt story about which we keep hearing. In fact, the ratio of household debt to total wealth since 1997 has been absolutely stable. It is true that mortgage equity withdrawal is up—it is now 7 per cent. of post-tax income—but that is exactly the level that it reached in 1989–90, which was the last time house price inflation peaked. Untapped equity in houses is now 75 per cent. of total housing wealth. Low and permanently low interest rates mean that debt servicing costs have fallen, so it is no surprise that the total stock of debt has risen to balance that.
Back in 1990, 27 per cent. of disposable income was going to finance mortgages. The figure now is 16 per cent. Similarly, back in 1990, the proportion of disposable income going on debt servicing was 15 per cent., whereas now it is 7 per cent. Furthermore, most
consumer borrowing is secured, which is where growth has risen to 14 per cent. The rate of growth of unsecured debt over the same period, however, has slowed from 16 per cent. to 13 per cent., and unsecured debt is only 18 per cent. of the total.I do not therefore think that there is a consumer debt crisis. Most homeowners are actually acting quite rationally and prudently. The risk of instability, about which the hon. Member for Sevenoaks was concerned, would be present were there a risk of a sharp downward correction in house prices. I suggest to him and other Members, however, that a soft landing is far more likely, precisely because of the stability in the monetary climate and lower interest rates.
Nor do I accept the argument put by the Leader of the Opposition when he replied to my right hon. Friend the Chancellor that there is a savings crisis. Many Conservative Members who have spoken this afternoon have made great play of the fact that the savings ratio stands at 5 or 6 per cent. That, too, needs to be set against the net household wealth picture, which, as I just indicated, is very healthy. The savings ratio also moves in relation to inflation, and it has been at exactly this same level during previous periods of sustained low inflation. It responds to house prices, and in that regard is doing exactly the same as it did in the 1980s. When house price inflation last reached 20 per cent., the savings ratio declined to 6 per cent. While there are undoubtedly some individual horror stories about debt—including some particularly tragic ones recently—it would be an exaggeration to infer from them that there is an overall debt crisis in the economy.
The Conservatives have also suggested that a threat may be posed to our hard-won stability by the tax burden. Many of them have made much of the fact that the Chancellor's revenue stream has increased by 50 per cent. since 1997. They should bear it in mind that during their 18 years in government their revenue stream increased by 300 per cent.
There is another way of measuring the tax burden. It currently stands at 35.9 per cent. of GDP, which is lower than the level achieved during most of the 1980s. I remind Conservative Members that it averaged 36 per cent. throughout their 18 years of office. In one year, 1984–85, it was as high as 39 per cent. It is projected—in the Red Book—to rise, but only to 38 per cent. It is also worth bearing it in mind that the level is four percentage points lower here than the average across the Organisation for Economic Co-operation and Development.
There is a further way of measuring the burden. The Office for National Statistics assesses it as a percentage of gross income. Back in 1996–97, direct taxes were equivalent to 20 per cent. of household gross income. Today's figure is the same. In 1996–97, the indirect tax burden was 16 per cent. of household gross income; it is now 15 per cent.
There is yet another way of looking at the burden. I refer Members to the excellent tables produced by our Library relating to hypothetical households. Back in 1996–97, a household on 75 per cent. of median earnings with two children paid 10 per cent. of its earnings in direct tax. Today the figure is minus 6 per cent.
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