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Angus Robertson (Moray) (SNP) rose—
Mr. O'Neill: I shall not give way because I have almost finished.
The Budget, which I heard about in headline form when I was out of the country and whose details I read when I returned, is evidence of the tremendous achievements of this Government and particularly of my right hon. Friend the Chancellor. With his grit and determination, he has refused to be deflected from his purpose. We know that he can be an awkward so-and-so at times, and he is certainly determined, but he has built up a foundation for the British economy that is envied across the world. It is certainly envied in Europe, and it has been built up on the basis of the shrewdness, grit and courage that we know that he and his colleagues posses.
I hope that next year, we will have the opportunity to have a Budget of a similar order. As I said earlier, it meets the challenges set down by John Smith of social justice and economic efficiency. If we can sustain that effort, we can sustain the unity of our people and our sense of purpose, and move towards the achievement of the knowledge-based economy that will ultimately be the cornerstone of Britain's future economic success.
2.35 pm
Mr. Kenneth Clarke (Rushcliffe) (Con): I begin by referring the House to the register of my business interests, which I have placed in the Register of Members' Interests. My interests do not include the Scotch whisky industry, except as a satisfied consumer,
and I wish the hon. Member for Ochil (Mr. O'Neill) well in looking after the best interests of that great British industry. However, I do not otherwise agree with him, and my judgment on the Budget contrasts rather starkly with his.The Budget poses one overriding question to the British public and to this House: when will the Chancellor next raise taxation rates, as he will be forced to do if he and his party stay in office? The public and the House should also ask what the impact of the next stage in the raising of the tax burden and our tax rates would be on this country's medium and longer-term performance. Those questions are left open, and the Chancellor deliberately avoided them in his presentation to this House. Not only are we right to press the question of tax; recent opinion polls suggest that the public are realising that that is the big question facing the country after this Budget.
The Chancellor used all kinds of means to try to obfuscate that question, such as crazy attempts to open differences between the parties, suggesting that there would be a tremendous cornucopia of goodies for the public sector if he stayed in office and ruthless and appalling cuts if he did not. Those matters are not the issue at all. The question is how we should now address the problem in public finances, which, above all, is what a Budget should be concerned with. What is the responsible and prudent way of proceeding if we are to keep intact the long period of sustained growth with low inflation? The Chancellor is so proud to preside over the last two thirds of that achievement, although unless he is very careful, he will find that he is presiding over its smouldering embers.
The Chancellor has misrepresented the background. He is actually going in for the toughest spending round that new Labour has ever experienced, and has decided that the extraordinary rate of growth in public spending that we have seen since 2000 is not sustainable, as some of us on this side of the House have been repeatedly pointing out to him for the past few years. He is therefore slowing the rate of growth in public spending to a level that new Labour Ministers have never experienced before. He is, however, exempting health and education from that, largely because, in the case of health, he has already recklessly committed himself to enormous further increases for the period ahead; and, in the case of education, because he read an article, I think in The Independent, that pointed out that he was in danger of reducing the share of gross domestic product spent on education unless he announced something rapidly in the Budget.
In my judgment, the Chancellor is going to find that there is blood all over the carpet in the Departments of Whitehall between now and this summer, when the House will hear his most important decisions about the allocation of priorities among the Departments. There is not a new Labour Minister in office who has any experience of having to restrain the demands of his Department or resist the more left-wing and compelling single-issue lobbies, but that is what many of them will now have to do. I see that the Chief Secretary to the Treasury is looking enigmatic, as Chief Secretaries always must at this stage of the operation.
To say that there is no problem on the Labour side but that there is a huge problem on ours is to create an artificial divide. The actual difference between us is that
the Chancellor claims that it is good enough to reduce the public spending growth rate to about 3.2 per cent. a year in real terms, while my right hon. Friend the shadow Chancellor suggests that it is desirable to reduce the continued growth in public spending to a somewhat lower figure. Both methods pose certain difficulties.
Mr. Watson: Will the right hon. and learned Gentleman give way?
If the current Chancellor were still a prudent Chancellor, and if he truly could not slow down the growth in public spending beyond his projection, he should—if he were behaving responsibly—have increased taxes in this Budget. That is what the Finance Minister of a benign dictatorship would do—if he accepted the Chancellor's proposition that it is impossible to slow down the growth in public spending below his proposed envelope. Opposition Front Benchers say that the slowdown must go further, although even doing that will still not prevent public spending from growing. My right hon. Friend the shadow Chancellor, should he take office—I wish him well if he does—thereby hopes to avoid the tax increases that would otherwise inevitably be forced upon him by the current Chancellor's legacy.
What is not sustainable is the Chancellor's current position. He says that he can maintain the growth in spending, and simply denies that that poses any tax-raising problems. Let me be fair to him: he seems to believe what he says, and he has acquired from the Prime Minister the technique of firing himself up with—in his case—sincere passion. But I find it surprising that he believes what he says, which is why I say that the true question is: when will he face up to the fact that he is heading firmly on a course that will require further increases in the rate of taxation? I shall now give way to the hon. Member for West Bromwich, East (Mr. Watson), who has been waiting patiently.
Mr. Watson: I am grateful to the right hon. and learned Gentleman, for whose experience I have great admiration, for giving way. The shadow Chancellor said that he will match our spending commitments in respect of health and schools, but he also said:
- "I have agreed with my Shadow Cabinet colleagues that the baseline for spending across all of these departmental budgets will be 0 per cent. growth for the first two years".
Mr. Clarke: It is, and as I understand it, an envelope has been proposed that aims at a cash freeze. My right hon. Friend the Member for West Dorset (Mr. Letwin) was teased earlier about what such a cash freeze would mean for particular Departments. In my opinion, which is based on some experience of public spending rounds, one has to get below cash in some Departments in order to achieve real-terms growth in others. I do not know how far the current Chief Secretary will be allowed to go in the run-up to an election, but my personal preference—subject to the qualification that I have not seen the documents or heard the arguments advanced by the various Departments—would be to go straight to
the Department of Trade and Industry, which is spending vast sums at little benefit to trade and industry. The £2 billion budgets—and rising—of the regional development agencies are of questionable value, and there are other parts of Whitehall that could benefit from a zero-based budget. They should be asked to begin by justifying why we are engaging in public expenditure on this scale in the first place. Instead, for next year we should return to those policies that appear to be achieving in practice a worthwhile and measurable benefit to the general public.
Mr. Oliver Letwin (West Dorset) (Con): I hope that my right hon. and learned Friend will note that we shall seek his advice on these matters, and that the advice he is giving to the House is music to the ears of some of us.
Mr. Clarke: I look forward to my right hon. Friend and his colleagues having a go at a public spending round, because that will certainly be needed.
The reason why the Chancellor will not answer these questions is obvious. Not surprisingly, the Blair Government are following exactly the same course as the Bush Administration, albeit a few months behind. Both are allowing a somewhat unsustainable period of economic growth to run, with their fingers crossed. The Bush Administration are trusting that they will be re-elected in November, and it is a matter for American politicians, rather than for me, as to how one then begins to sort out the fiscal mess.
In the Chancellor's Budget speech, this Government signalled more clearly than ever before that they hope that the economy will get them to May or June 2005, that they will still be being praised in the terms used by the hon. Member for Ochil, and that they will win the election. They hope then to sort out the mess, but I hope my right hon. Friend the Member for West Dorset will have the chance to do so, because mess there certainly will be as a result of such irresponsibility.
The Chancellor is very selective in his use of history, in that the only historical comparisons that he ever makes are with the late 1980s. That is his benchmark for everything, and he blames our party interminably for everything in that context. The entire history of economic policy since the war shows that once the public finances start to deteriorate—once we start sliding into debt that appears unsustainable—the longer one delays the necessary remedy, the more powerful the later consequences. That is exactly what this Chancellor is experiencing.
Total disaster has not hit the Chancellor because he got his economic growth forecasts right. I said that he would be lucky if he achieved them, and he has. As the Government keep their fingers crossed and move towards the finish line in June, it is a case of "So far, so good." Growth has held up better than practically every independent expert in the country expected, but it is neither healthy nor sustainable growth. Although we have been doing quite well, such growth is still not as balanced as it ought to be.
Everybody in the House knows that we are sustaining our current level of economic growth because the consumer is still spending heavily. On average, consumers are increasing spending faster than their incomes are rising; indeed, real incomes have declined
slightly recently, as a result of the increase in national insurance contributions. Household borrowing is reaching record-breaking levels that are quite unsustainable. As the Bank of England has confirmed, that needs gently to be slowed down.Economic growth is also being sustained by the amazing increase in public expenditure. That is injecting a deal of growth in the short term, not least because most of it is being spent on increased payrolls and rising levels of public sector pay, which increases some people's consuming power. But one cannot base an economic recovery on that. The private sector in general, and manufacturing in particular, is not doing so well. As the Red Book shows, business investment actually fell by 1 per cent. last year. Our productivity record in the private service sector and the manufacturing sector is deplorable—indeed, it is worse in the public sector—and it certainly is not comparable with that of our chief private sector rivals. That is not a sustainable basis for recovery. Of course, the actual rate of growth will depend on unknown factors in respect of the global economy, which is currently being sustained by a pre-election boom in the United States and a bubble in China. Otherwise, there are some signs of healthy cyclical recovery, but there remains considerable risk.
One measure of this uncertainty was dismissed by the Secretary of State for Work and Pensions earlier today. He talked about the current account deficit, but I can remember the days—they were pretty mad days—when the political debate in this country was determined entirely by the balance of payments figures. The newspapers used to be full of them daily, and the Wilson Government fell, I am glad to say, in 1970 because of one month's balance of payments figures, which proved to be not that bad in retrospect—after the electorate had given their judgment. What we used to call our balance of payments—the balance of trade and the current account deficit—is at staggering, record-breaking levels. That matters because it shows how far our consumption is outrunning our capacity to produce, and to meet that consumption. Such a situation is totally unsustainable. It may be "so far, so good" on growth, but we should not rely on that.
The Chancellor left all those matters untouched in his Budget. He delivered his Budget speech with as much élan, self-confidence and robustness as he ever does, but I do not remember him or any other Chancellor delivering a speech with less content in terms of measures. I have never heard a Budget speech with so few tax changes of any significance to announce. The Chancellor filled up the available time, still managing to take up an hour—commendably brief by the standards of most Chancellors of the Exchequer—with a rant saying that he had been right all along and that because he was right on growth, there were no real problems with public expenditure.
In his conclusion, he returned to the political points to kill time, referring to a series of horrendous suggestions that had been made to him. It was not too subtly implied that they had been suggested by my right hon. Friend the shadow Chancellor and the Conservative party. None of it was true. The Chancellor said that it was his patriotic duty to reject all those outrageous solutions. In
between all that, there was supposed to be a Budget, but long gone are the days when we used to hear about monetary aggregates and be told about tax changes. There were not many of them; they did not fill up much time.What is important to me is the Chancellor's claim that he had no problems whatever. As I said, whatever party is in office after the next election—this is my key point—it will probably find itself having to deal with a fiscal crisis early in the next Parliament. That is the background that we should all have in the back of our minds, even if it is not in the forefront of our speeches when we seek to get re-elected. The country has had a more than 10-year run of growth with low inflation, but I believe that, unless we are either very lucky or adopt the right measures, it will come to an end in a traditional British fashion.
The Chancellor always boasts about that long run and his only reference to his predecessors is to what happened during the late 1980s and to the interest rates of 1990 before we went into the European monetary system. In fact, I was responsible for about a third of the period: I had four Budgets; the Chancellor has had eight. However, it is extremely reckless of Chancellors to claim credit for any of it. Much depends on what is going on in the world. The only duty of a Chancellor is to provide the stable and predictable circumstances in which other people deliver the wealth and jobs.
Much of the credit should go to Lord Lamont, whose reputation is less high than mine and—sometimes—the Chancellor's, because his introduction of inflation targeting in 1992 started the whole thing off and brought us back to a stable basis of policy: monetary policy based on achieving stable prices and low inflation, and fiscal policy based on achieving healthy public finances. The Chancellor's neglect of the latter is, in my opinion, the cause of our problems today.
Monetary policy worked well since Norman Lamont's inflation target setting, and the Chancellor has slightly improved the target. The Chancellor also reinforced it against all the political pressures from the social democrats around him in the Government by making the Bank of England independent and leaving it to carry on. At the moment, however, the Chancellor is not making the task of the present Governor of the Bank of England very easy, because I am sure that the Governor wants to set limits to how far he will have to put up interest rates, and that fiscal indiscipline will make the problems even worse.
The Chancellor has never had a consistent or sensible approach to fiscal policy—the tax and spending problems that he should tackle. At first he did nothing, saying that he was relying on my figures. As a result of doing nothing, he got carried to a balanced Budget very rapidly—within a couple of years. He overdid it on the spending front and by introducing many stealth taxes, including a shocking one that affected the tax treatment of pension funds. Quite unexpectedly and contrary to forecasts, he then began to run up massive surpluses in the public finances, which he now clings to like a life raft. He is trying to demonstrate that, because he did that in the past, he is entitled to run massive deficits now.
It all changed in the year 2000. Governments are ever-nervous running up towards elections, and the Prime Minister lost his head on the Frost programme,
promising health spending up to the levels of European averages. Before we knew where they were, they had become an old tax-and-spend Government with vast outpourings of public expenditure across all Departments, with which we have had to live ever since. The Chancellor forecast how much it would cost and how it could be financed. From 2000–01 onwards, those forecasts have been consistently wrong. That is the problem we have to deal with now.The Governor of the Bank of England is tackling his part of the problem responsibly, which means that interest rates are already rising—a background worth reflecting on. I know very few people who do not believe that interest rates are going to carry on rising. The more the markets react to what is perceived to be the irresponsibility of the Chancellor, the more the upward pressure on the monetary authorities. The current account deficit in our balance of payments might, if the markets suddenly panic about it, even cause a sharp fall in the value of sterling, which will drive interest rates up further. That much is already happening, but taxes will have to go up after an election as well.
I say to the public that they should reflect on the consequences of that sort of policy. When interest rates are going up because monetary policy is tightening, and when taxes are going up because fiscal policy is tightening, it leads to a severe slowdown in economic activity and growth—and the prospects for growth and jobs are undoubtedly damaged.
The Chancellor says that all that is wrong: he will not break his rules, because he is still a man of fiscal discipline with the golden rule and the debt rule, so all is well. I do not believe that. He produces yet more forecasts, but they have been wrong year in, year out. His forecasts for borrowing are £10 billion more than they were 12 months ago. In 2001, he was predicting that total borrowing between 2001 and 2006 would be £30 billion; but it now seems likely to be close to £150 billion. Many of my right hon. and hon. Friends have rightly suggested that his forecasts for further in the future are unreliable.
In fact, the Chancellor is already rejecting some of the discipline rules and saying that they do not matter. He entirely rejects my rule—he regards me as a fiscal conservative—of maintaining a balanced budget over the cycle. I accept that there are wobbly bits even to that rule; it is possible to move the cycle a bit, but I opted for a balanced budget over the cycle that is tougher than the present Chancellor's rule. He says that terrible things would happen if we did that, and that only wicked people like the International Monetary Fund recommend that approach to fiscal policy.
The Chancellor also rejects the Maastricht criteria. I am not going to debate the single currency—I shall avoid it like the plague—but I will use the Maastricht criteria as an example, because the Chancellor and I used to be in fond agreement on them. I used to defend the growth and stability pact as a Tory, even to my Eurosceptic friends, saying, leaving aside the single currency, no responsible Chancellor in the UK is going to want a deficit of more than 3 per cent. of gross domestic product in any one year. This Chancellor used to agree with me; he used to point out how he was complying with all that. Now, it is all wrong, but the only reason it is wrong is that the British Chancellor, in
common with the French and German Finance Ministers, lacks the political clout, will and ability to hit the fiscal objectives to the rules.The Chancellor relies on his own golden rule and he is apparently going to visit the continent to explain why it is the best approach to which all should move. His golden rule is not a golden rule, in my opinion, but merely gilded with a touch of EPNS about it. It all depends on what is defined as investment and it assumes that all public investment is essential and of high value so that future generations of taxpayers should be happy to pay for it. I regard public investment, unfortunately, as invariably less efficient—sometimes very much less efficient and valuable—than other forms. In any case, the Chancellor is now close to the golden rule. As many have pointed out, he has had slightly to redefine how the golden rule is calculated, to provide himself with a further tiny cushion.
I have the Red Book with me, so let me sum up how the Chancellor can claim that he can still hit the golden rule without tax increases. It is by making more implausible forecasts. The most implausible forecast is the Chancellor's estimate of revenue growth. His estimate of GDP growth as a whole remains as optimistic as ever, but he was right this year and might be right again. We shall see whether the global economy will continue to revive, but the forecast has to be right for the Chancellor to have any chance at all.
The revenue growth forecasts are quite implausible, however. I do not understand how corporation tax revenues are meant to rise faster than the growth of the economy as a whole. I do not think that that has ever happened. When briefing the newspapers about income tax returns, the Chancellor's unfortunate officials seem to have been reduced to pointing to recent City bonuses. The suggestion has been that they reinforce the notion that income tax returns are about to recover very rapidly. Because the Chancellor has had to deny that there will be any increase in tax rates, he has claimed that measures to tackle tax avoidance will produce £925 million a year. I do not believe that. In recent years, the thinking has been that a structural problem affected what Governments received from corporation tax and income tax. I therefore do not think that the Chancellor's proposals are at all plausible, or that he will hit his golden rule. I think that he is being irresponsible, and that he should raise taxes.
Not only is the Chancellor failing to control public spending, he will not even admit that the slowdown for which he is heading will have any effect on the Government's plans. He has suddenly discovered that it is necessary to try to make public spending more efficient. He chose to win headlines by saying that he would cut more than 50,000 civil service jobs, 40,000 of them in the Department for Work and Pensions. Sacking bureaucrats is supposed to ensure that more money goes to front-line services. I regard that as extremely lightweight and ridiculous politics.
We have a serious problem with the productivity and value for money achieved by the huge surge in public spending since 2000. Opposition Members warned the Chancellor that sudden and massive public spending increases would not produce value for money. To get
proper value from public spending, reform is essential. The reform that has been applied, belatedly, has been confined to matters such as foundation hospitals and top-up fees. Those policies have been so messed about by political campaigning that they are valueless, or worse.The 40,000 civil servants are symbolic victims. By the most generous calculation, those staff reductions will save about £2 billion a year. The Chancellor assumes that he will save about £20 billion, and is silent about where the balance will come from. I would tell the civil servants not to fear: as my right hon. Friend the Member for West Dorset has said, we have heard the same thing many times before.
The Government do not have many targets these days. When the time comes to see whether any target was ever achieved, no one will remember. In three or four years' time, I have no doubt that some Minister will ask, "Did the 40,000 jobs go?" Sir Humphrey will say, "Oh, yes, Minister. The 40,000 jobs went." The Minister will then ask, "So why are there still so many people in the building?" The answer will be, "Minister, 38,000 of them have been moved to new tasks and new Government initiatives. They are no longer administrators, they are now deliverers."
At any rate, the people will still be there. That is not how to achieve the value for money in public expenditure that we need. Productivity in the public sector is difficult to measure, but it has been falling like a stone in recent years. The money that has been put in has gone largely on increased pay rates and on hugely increased payrolls. There are 500,000 more state employees than there were in 1997, yet many public servants have reduced work loads and the best job security and pension schemes in the country. In those circumstances, it is very difficult to drive up productivity.
We must reform the delivery of health care, education, social care and welfare benefits. In that way, productivity improvements can be achieved, but the Government's record in that respect is woeful.
Although I have celebrated the fact that there was no time limit on speeches on this final day of the Budget debate, I now come to my conclusion. Overall, the Chancellor's target that the state should take 42 per cent. of gross domestic product is too high. It is not healthy for the long-term good of the economy, even if the Chancellor were to succeed in stabilising the proportion taken at that level. The Opposition target is 40 per cent. of GDP, and that is undoubtedly the maximum that can be afforded over the next two or three years. I think that even that is a bit on the high side, but I am a little old fashioned. My target was 35 per cent. of GDP, and I managed to get the level down to 38 per cent.
When he was prudent, the present Chancellor took the level down to 37 per cent. He now tells us that the level can be 42 per cent., and that that is still prudent. What is actually happening is that the state is getting bigger and is consuming more wealth, while the private sector is getting smaller, as a proportion of the whole. Yet the private sector is what creates wealth, and it will be damaged by the Chancellor's policies.
The Chancellor should have tackled some other long-term problems. He said nothing on savings, and that is a disgrace. Pensions will benefit from the simplification of the tax system, but nothing is being done to tackle the pensions crisis that all hon. Members know exists.
Our problems in the housing market stem from more than merely supply and demand: they have arisen because the British have gone back to believing that their houses are the only form of savings that they trust. People buy houses and borrow money on them for financial reasons, not just to meet accommodation needs. They think that their pensions will be worthless, they do not trust insurance companies and they do not want to go to the stock market. They have had enough of fund managers, and their individual savings accounts are losing their tax advantages. As a result, people have piled into property in a dangerous way.
Something must be done to boost other forms of saving. In an earlier exchange, the Minister claimed that the savings ratio was lower in 1988 than it is now. That is true, and it was one of the many problems that we faced in that disastrous year. Since the Government came to power, the savings ratio has halved. It was at 10 per cent. when the Chancellor took over in 1997, and it is a disgrace that the Budget contained no proposals on savings that would have addressed that problem.
The first duty of any Chancellor of the Exchequer is to provide the stable economic conditions in which entrepreneurs, managers and those who work in business and commerce at every level can create wealth for the nation. This Chancellor is failing in that duty. In my opinion, the proposals of my right hon. Friend the Member for West Dorset are the minimum necessary to get us back on course and to return the economy to growth. The Chancellor has shot none of my right hon. Friend's foxes, nor those of anyone else.
So far, the Chancellor has been lucky. He had a very good inheritance, and then lived through a period of American boom, when the dotcom nonsense and the concomitant bubble made the world economy grow to a staggering extent. He has got as far as he has by limping along on with his plans for public spending and for borrowing, while relying on a very dangerous bubble in private consumption and debt.
The bubble is coming to an end. If we are not very careful, we will enter a fiscal crisis, and this Chancellor is not being careful at all. I hope that the reckoning at the next election will be his: if he is not removed then, the reckoning will come thereafter, when a more responsible Government will have to sort out the mess that he is very likely to leave.
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