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Mr. Steve Webb (Northavon) (LD): I do not want to interrupt my hon. Friend's characteristic slavish adoration of the Government's economic policies, but does he accept that there are many people who do not feature in the official figures? Perhaps he was going on to say that. Among young people, for example, the number who are not in paid work or on a training course, or who have dropped out of education and so on, is basically the same as it has always been. Far too many do not show up in the headline figures, and there is a lot of wasted talent out there that the Government have failed to do anything about.
Mr. Laws: I assure my hon. Friend that I have dealt with the good news part of my speech so far as the Government are concerned, and I am extremely conscious of the point that he makes. Many fall outside the labour market statistics altogether, and such people—particularly those on long-term incapacity benefit, for example—should be of great concern to the Government. I hope that they are.
There are two clouds on the economic horizon—the shadow Chief Secretary has referred to them—and they both relate to debt. The first problem concerns consumer debt and the valuation of housing assets, and the second public sector borrowing. Both should be of great concern to the Government, not least because although, as the Chancellor has observed, we have enjoyed an unprecedented number of years of positive economic growth, it is in the nature of history that such periods always come to an end. We should therefore try to anticipate what could bring these benign circumstances to an end.
One of our greatest concerns, which has been expressed by my hon. Friend the Member for Twickenham (Dr. Cable), is the accumulation of consumer debt and the appreciation of house prices in particular. House prices have risen by at least 100 per cent. across most of the country in the past four years or so. That speculative bubble in the housing market could burst at some stage, leading to a decline in consumer expenditure, which might be over-extended as a consequence of the high level of consumer debt. I do not get the impression that the Government believe that there could be a problem with consumer debt and the housing market, or that there is a pin out there that will burst the speculative bubble.
The Treasury Committee touched on the issue in a relatively fair way in its Budget report. It is true that a number of the reasons for the increase in house prices and in consumer borrowing are related to fundamental economic factors, which might give less cause for concern than some of the speculative pressures. We have enjoyed relatively strong growth of real incomes, and low unemployment. The increase in house prices
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perhaps constitutes an adjustment for the fact that interest rates are at a very low level historically. It is probably reasonable to assume that they will stay low for the foreseeable future; at least, that is what the financial markets are saying.
Some speculative house buying is taking place as people switch their investments from other classes of assets that have not performed well recently, including the share market. That should give us pause for thought, as should the extraordinarily high level of house prices compared with earnings across the country. Since I became Member of Parliament for Yeovil, the price of houses at the bottom end of the market in my constituency has at least doubled. Properties in Chard—a town marked by very low-paid employment—that were going for £45,000 to £50,000 in 1999 are now on the market for £115,000 to £120,000. It is incredible that the lowest priced houses in a town with such low pay should be that highly priced, and constitute so many multiples of average earnings.
The Government might be aware of recent statistics produced by financial commentators such as Barclays bank. According to a Barclays bulletin, the major factor that pushed up the value of lower priced properties in the past couple of years was not first-time buyers, but a huge explosion in the speculative market for buy-to-let properties. In the past couple of years, the growth in the number of such properties far outweighed the decline that was otherwise taking place in the number of mortgages taken out by first-time buyers.
The Government may feel that they can afford some complacency at present, and that even if there might be an overstretched housing market there is no obvious factor on the horizon to end the current position—no pin to burst the bubble. However, we cannot easily anticipate an increase in inflation, not only in this country but overseas, perhaps as a consequence of loose monetary policy in several countries. If, as a consequence, there is a significant rise in UK interest rates, the house price bubble might burst significantly, and that might accumulate in its effect as a result of the amount of speculative buying in the housing market. That seems to be a real risk to the economic outlook, which the Government should take more seriously. They should encourage regulators to police very carefully the way in which lenders are dealing with the property market in particular, and continue to support the Monetary Policy Committee in taking early action on interest rates.
The second controversy and other cloud on the economic horizon is the borrowing problem and fiscal deficit that the Government face. There has been a significant increase in public sector borrowing and the projections for it over the past few years. As the Select Committee report pointed out, that has happened despite the Government's success over the past year in achieving their growth forecast—something that a year ago many of us felt was somewhat unlikely.
The Select Committee also pointed out that the Chancellor's problem with public borrowing over the past few years has been a consequence of a shortfall not in growth, but largely in tax revenues per pound of economic growth. Commentators are still expressing considerable scepticism about whether the Chancellor's forecast for increasing tax revenues over the next few years will be borne out. If they are not, we will face the
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serious risk of public borrowing rising significantly above 3 per cent., which has for a long time been the benchmark with which both the present Government and their predecessors have been comfortable.
I am not sure yet that my forecast would be as gloomy as those of the shadow Chief Secretary and the shadow Chancellor. After all, the figures on potential deficit and excess in the borrowing forecast mentioned by the Institute for Fiscal Studies and others are of the order of only £10 billion to £12 billion—the average error from looking one year ahead on the public finances. No Government should necessarily be proud of that, but it remains the case. If the Government are lucky and the position turns out to be more benign than the forecast, the deficit could disappear very quickly indeed. However, if they are wrong in the opposite direction, the deficit will be even greater than that expected by the IFS, which should give the Government serious cause for concern.
What should the Government do? One action that they should consider is giving the same type of credibility to their fiscal regime—particularly transparency—that exists for the monetary policy regime. I wish that the Treasury Committee had gone a little further in its recommendations on that point. It has at least pointed out that it is unsatisfactory when the National Audit Office is called in by the Chancellor only to audit particular assumptions and not other assumptions. Problems have occurred recently in the private sector, but if we proposed a system whereby auditors were instructed to examine only certain assumptions and not others—about oil, stocks and so forth—people would be very worried.
Angela Eagle: As a member of the Treasury Committee I can tell the hon. Gentleman that we debated whether the National Audit Office would be in a better position than the Treasury somehow to oversee and audit official statistics, and we explicitly decided that that would be nonsense. We deliberately said that we should go no further than the recommendation and comments in the report.
Mr. Laws: I am grateful to the hon. Lady for making that point. I recall that debates in the Select Committee have been going on for some time and that several Members—including the hon. Member for Chichester (Mr. Tyrie) and, I suspect, my hon. Friend the Member for North Norfolk (Norman Lamb), who is in his place behind me—have argued forcefully for greater transparency.
I am not necessarily saying that giving the NAO more power to audit the assumptions is the only option. We could set up an independent body to make an assessment of the fiscal outlook, alongside the independence on monetary policy. As the Government have done so much to clarify the transparency of macro-economic policy in general, including fiscal policy, it is a pity that they seem to be nervous about going the whole hog towards proper credibility and transparency in fiscal policy. Of course, we all understand why that is: Governments, especially when a general election is coming up, do not want too much scrutiny of their figures by outside bodies. However, the price of not providing that scrutiny is a greater prospect of the Government making errors in their economic policy.
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That point naturally leads us to public expenditure. One decision that the Government have taken recently on public expenditure and the control of public borrowing has been to limit public expenditure growth in the next spending round, which will be later this year. We agree with the Government that it is appropriate to slow down the rate of growth of public expenditure, even though for many years we argued that they were too slow to increase it, which is but one of the reasons why public service improvement has taken so long to deliver.
We do not, however, support the Conservative proposal to reduce public expenditure significantly below the rate of growth of the economy, as we do not believe that that would be consistent with continuing to improve the delivery of public services. The reticence of the shadow Chancellor and the shadow Chief Secretary to spell out precisely where the proposed cuts would fall indicates some of the difficult decisions that they would face. We should not be able to rely only on public sector efficiency savings.
In another extremely fair part of its report, the Select Committee pointed out the difficulty in assessing whether such efficiency savings could materialise. It noted that the Treasury was one of the Departments that recently dumped its target for 2.5 per cent. efficiency savings on the basis that such savings could not be effectively monitored—a point that has also been made by the IFS.
The Government need to do two things to deliver their agenda for the improvement of public services. First, within that much tougher public expenditure framework, they must make hard choices about where the priorities lie. Rather than relying solely on efficiency savings—although they should always be sought, they are not always as easy to pin down as they are to claim—we believe that they need to make some hard choices within public expenditure totals. My hon. Friend the Member for Twickenham has explained how we would fund much of the health, education and other programmes that we want to be introduced by cutting specific aspects of Government expenditure, including parts of the Department of Trade and Industry budget and the child trust funds; by opening up defence procurement to greater competition; and by reducing some of the excessively wasteful programmes of the Office of the Deputy Prime Minister.
Secondly, the Government should consider whether increases in public expenditure are really delivering their intended purpose of improving health, education and policing. Earlier, the shadow Chief Secretary mentioned the poor public sector productivity figures released recently and referred to the fact that most of the money allocated to public expenditure appears, from the figures, to have gone into public sector pay and on an explosion of other public sector costs. We are aware that the Government are holding an inquiry into that matter and that additional public expenditure on such things as reducing class sizes or capital investment will not necessarily show up in the productivity figures, even though such spending is much needed.
My local experience also indicates the challenge that the Government face in delivering public service improvements from increased public expenditure. Perhaps I could draw the Paymaster General's attention to the budget figures for my local hospital—Yeovil
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district hospital—which have just been released. The hospital also covers part of the shadow Chancellor's West Dorset constituency.
It is interesting that the East Somerset NHS trust's budget for that hospital will increase from £57 million in the last financial year to £65 million in this financial year. That £8 million is a significant increase—well over 10 per cent. in cash terms. However, let us consider the cost pressures that the trust faces and where that £8 million will go. I can report to the Paymaster General that £3 million will be spent directly on pay inflation, including the funding of the consultants' contract; that about £1.2 million will fund the European working time directive; that £2.8 million will be spent on superannuation; that £1.2 million will go into a capital project to improve the hospital; and that £300,000 will go into non-pay inflation. In another words, almost all that money is accounted for by pensions, pay and a much needed capital project.
Later in the assessment of the trust's position, it is reported that the funding available for 2004–05 will be insufficient to maintain the waiting time targets set by the Government. That situation, which must be mirrored throughout the country, shows to both the Government and the Conservative party the difficulty of delivering such improvements in public services, not least after a long period in which far too little has been invested in the capital stock of our public services and in which an attempt to hold down public sector pay has created a great number of improvement projects. Those facts ought to draw the Government's attention to the need to reform public services and, in particular, to decentralise those services—to stop trying to run them all from Whitehall and Westminster.
The last issue that I want to raise is tax. The most important tax measure that we would like to have seen is not in the Bill, and we await an announcement later this year. The Paymaster General may be interested to know that my colleague the Liberal Democrat shadow Chancellor, my hon. Friend the Member for Twickenham—he is not here at the moment, but he was earlier—recently attended the Liberal Democrat conference in Southport.
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