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I am sure that the hon. Gentleman is sincere in his concern for the statistics in the Red Book. He was a Back-Bench supporter of the previous Conservative Government, who, as he will be fully aware, distorted, manipulated and changed unemployment statistics over a long period, which was reflected in each successive Red Book. Is he trying to
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draw a parallel between the spin doctoring of that time and whatever errors and omissions he might perceive in the Red Book today?
Mr. Davies: I was a frequent but not an invariable supporter of the previous Conservative Government. I voted against that Government on one or two occasions. One occasion was in relation to the Scott report, when the issue was the integrity with which information was made available to the public. I hope that the hon. Gentleman will give me credit for that. It would be depressing, in any democracy, if he were to feel that an effective and full explanation for any bad conduct by a Government is that the previous Government were equally or almost equally bad. Is that really the basis on which he feels that he can go proudly to his constituents and say, "This is the wonderful democracy in which we live. This is the standard of conduct to which I subscribe, and the measure that we should set as to how effective the Government whom I support are." Is that really his message this afternoon? If so, I will give way to him again, and he can expand on it.
I said that there was one matter that was even more serious than the issues that I have already raised, which are themselves pretty serious. We move beyond simple omission of awkward facts into technical incompetence, which is a serious charge to deliver against Her Majesty's Treasury. I hesitate to say it, but the alternativea deliberate attempt to misleadis even worse. I am referring to the way in which the balance of trade and balance of payments figures are presented in the document.
I invite the hon. Member for Western Isles (Mr. MacDonald) and other colleagues to look at page 237 and the pages that immediately follow. The balance of payments and balance of trade are important aspects of economic policy. The balance of trade is a major aspect of the balance of payments, which represents the import of capital, which is relevant to fiscal policy as it is one way in which the Government can fund their deficit in the absence of substantial domestic savings.
Trade in goods and services is set out on page 237 in table B7, which, for 2004, refers to a deficit of £35¾ billion. If the hon. Member for Bexleyheath and Crayford turns to page 241, he will see the breakdown of gross domestic product and its components. For the sake of time, I shall refer again to 2004, but the same distortion runs through other years. The hon. Gentleman will see that export of goods and services amounted to roughly £286 billion and imports were roughly £332 billion. Even I can do simple arithmetic and work out that the gap, the trade balance, is £46 billion. The figure four pages earlier showed the trade balance to be a deficit of £35¾ billion; there is a significant discrepancy.
A third table adds to the confusion; the one to which I have referred that is the only source in the document of the current account balance. The Government are obviously embarrassed by this as well. The current account balance is buried; one never sees it in a table. The figure is never mentioned in the prose and one must read it off a graph in chart B8. For 2004, the figure is roughly minus 3 per cent. of GDP. That is roughly
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£30 billion, which is probably the accurate figure. Slightly below that, one can see the goods and services deficit, which is about £30 billion. That is inconsistent with the other figures.
There are only two ways to view this. It could be a matter of incompetence, which certainly could be the case if the figures were put together on a different technical basis. There is no such explanation in the document, so there is no way for anyone to see whether the figures are not comparable because the methodology of calculation was different. If one did that in an undergraduate essay, a red line would be put through it; it would be torn up.
The other possibility I leave to the imagination of the House because I do not want to use epithets that would be unparliamentary. I hope that that is taken account of. I repeat; this goes to the heart of the integrity of the document and therefore the integrity and credibility of fiscal policy, which is extremely important for stability and investor confidence, things that we all hold dear.
My two other points go to the heart of the policy issues behind the Budget. The first has been made clearly by my right hon. and hon. Friends on the Front Bench over the past few weeks; the Government are spending too much, taxing too much and, above all, borrowing too much. We can see the borrowing figures in the white book, as I call it. In view of the differences in the standard of production of the white book from the old Red Book, perhaps it is a good thing that it should have a different cover. It is probably inappropriate, however, that it is white. The white book makes it clear that borrowing this year is £37.5 billion.
As my right hon. and hon. Friends have said, that is a significant increase in total public debt, which will have to be paid for through future taxes. The Government are very coy about that. I should have thought that Ricardian equivalence was one of the most venerable, tried and tested, and uncontroversial concepts in economic science. I do not think that there is any scope at all for arguing that borrowing is anything other than deferred taxation, but I notice that the Government are always coy about that and will not come clean. They should come clean, in the interests of open government, and explain to the British people that that money has to be repaid and is deferred future taxation. It is the liability of the taxpayer, and £37.5 billion is a serious increase in that liability.
Let us just take the interest charge on that figure, quite apart from the capital sum. If the gilt rate is slightly less than 5 per cent.I do not know exactly what it is, but it is probably about 4.7 or 4.8 per cent.we can easily work out that, in broad-brush terms, the interest charge on £37.5 billion is slightly less than £2 billion. Every year from now on, we will pay nearly £2 billion, just to service one year's increase that this Government have made in the debt.
What is £2 billion? I can give an immediate comparison: it is exactly the yield from capital gains tax. In my view, that is the most economically damaging tax of all. It is a direct tax on risk taking and on capital mobility, and we should not have it at all. It is a disaster, and we certainly should not have long-term capital gains tax. I have argued that for many years, but we could dispense with the whole thing if only we did not have this additional incremental interest charge. I am not talking
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about the deficit, just about the interest charge that the Government have piled on the taxpayer's back as a result of this Budget.
That is a serious matter, but I am coming to more serious ones. The figures in the white book make it clear that the Government have lost control of fiscal policy, on their own measure. What is that measure? The Government came to power saying that they were going to be fiscally prudent, and they had two rules. The golden rule is that the deficits and surpluses should balance out over the cycle, and the sustainable debt rule is that debt should not exceed 40 per cent. of gross domestic product. There is a quirk, however, because the golden rule excludes investment spending. When the Government borrow to spend for investment purposes, that is excluded from the golden rule, so the fiscal policy stance was always going to have an expansionary bias. The Government were always going to be borrowing more than was required simply to have a neutral fiscal effect on demand through the cycle.
"The golden rule is set over the economic cycle to allow fiscal policy to support monetary policy in maintaining stability through the operation of the automatic stabilisers."
In plain language, those automatic stabilisers mean that the Government should run a surplus when the economy is expanding above trendabove the level that is sustainable without incurring risks of inflationand that there should be a corresponding deficit when the economy is running below trend. In other words, when there is an excess of demand from other sources in the economy, such as consumption, investment and exports, the Government will compensate by taking demand out of the economy through running a surplus; and vice versa.
That is a simple principle which makes complete sense. A fiscal policy conducted on that basis does indeed support monetary policy, which now has an inflationary target, in preventing the economy from expanding or declining excessively. That is very sensible and means that the Government act as a kind of cushion.
That principle, however, is not being followed. According to the Government, the economy has been expanding roughly on trend over the past year, at 2.5 per cent., which is the Treasury assumption for a sustainable non-inflationary rate of growth. Furthermore, the projection for this year and next is that it will run substantially above trend, at 3.5 per cent., so if the Government were sticking to their policy, one would expect a Government surplus; but in fact, as the figures in the white book show, borrowing for the past financial year was £37.5 billion, and it is projected to be £32.9 billion in 200405 and £30.6 billion in 200506. The Government are financing a deficit of £30 billion even with the economy expanding substantially above trend.
I repeat that the Government's prudence is only half prudent, because they apply the golden rule in relation to current but not investment spending, so it would be fair to consider the borrowing required to finance the current deficit, which should indeed follow the golden rule. In 200304, with the economy growing on trend, the current deficit was £21.3 billion; in the current
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financial year it is projected to be £10.5 billion; and in the next, £5.5 billion. That is assuming, incidentally, that the Government have got their projections right and do not yet again, as they have consistently done over the past few years, substantially overrun their spending and borrowing estimates.
On the current deficit, by their own measure, the Government have completely lost control of fiscal policy. With the economy growing a whole percentage point above trend, far from there being the surplus that they say there should be, there is a significant deficit, which continues to 200506, which is where their projections come to an end. That is not allowing
"fiscal policy to support monetary policy in maintaining stability through the operation of the automatic stabilisers."
That is going in the opposite direction and destabilising the economy. Far from supporting monetary policy, Government spending and borrowing are creating a burden on the Bank of England's Monetary Policy Committee to compensate for the excess demand contributed to the economy by the Government themselves when demand from other sources is also above trend. It is the exact reverse of their stated policy. That is why I say advisedly that fiscal policy is out of control, on the Government's own measure. We should all reflect carefully on that.
The Government expect to hold an election next year, and they hope that the chickens will not come home to roost before then and that they will get away with it. We understand that calculation, but for anyone who pays taxes or is concerned about the economy and about stabilitythat wonderful word that the Government love usingit is a matter of considerable anxiety.
As I have said, it is clear from the white book that the Government are very embarrassed about the subject of savings. It contains no figures on the subject, except for the current savings ratiothe proportion of household disposable income savedwhich is 5 per cent. The blatant and very important fact that the savings ratio has halved in the past seven or eight years is completely disguised in the white book, which remains entirely silent on the subject.
Does it matter at all if savings fall? It is clear that the Government do not want to address that question. I suppose that the textbooks will say that savings are important to the economy because they provide the resources for investment. However, I am not concerned about that. In any case, the British economy is not investing enough. As I have pointed out, business investment has been falling. Firms are currently very liquid and we live in a world of open capital markets. If they need to, businesses can borrow from abroad; indeed, we already have a significant current account deficit. We are already importing capital to the tune of £30 billion, or whatever the real figure is. We do not know because the Government have fudged their presentation of it in the white book.
If British business wants to start investing again and to increase the proportion of gross domestic product represented by business investmentI hope that the Government share that objective, at least in their more responsible momentsand if households are saving very little and the Government are borrowing a great deal, such borrowing will have to be done at the expense of the current account. We shall have to import that
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money from abroad, thereby building up foreign liabilities. That is an arithmetical certainty, given the situation we are in, but that is not my main concern about savings.
The one concern about savings that I certainly do share is that if the British people are saving only 5 per cent. of their disposable income, they are simply not providing sufficiently for the hazards of life and for their retirement in particular: for the time when they will no longer have an income from work. We should all be concerned about that, particularly in the narrow sense of our role as taxpayers, because here there is an implied liability. If people are not providing through their own savings for the hazards of existenceunemployment, businesses going broke in a recession, retirement and so forthultimately, they fall back on the state. They say, "Well, the state has to keep me at an acceptable standard of living because this is a civilised society and I cannot be allowed to starve on the street." However, we should all recognise that, if we want a happy, successful and stable society, we need a decent level of savings.
What is a decent level of savings? I concede that that must be a matter of judgment, but in the 1980s and 1990s, when this country had a 10 per cent. savings ratio, no one said that we were saving an excessive proportion of our disposable income. Indeed, even back then, ours was the lowest savings ratio in the European Union and one of the lowest in the world. Typically, abroad, savings ratios were well into double figures, and in countries such as Japan, the figure was over 20 per cent. So there was no suggestion that 10 per cent. was a particularly high figure, yet we have halved it in seven or eight years. Is that not a worry? We should reflect on that point. It is the height of irresponsibility, frivolity and cynicism for the Government to try to close down debate on this issue altogether by disguising the figures and keeping quiet about them in the white book. That is a very bad day's work by them, and they should be thoroughly ashamed of it.
I turn to the real problem in relation to savings and the issue that concerns me most of all. What happens if one halves savings by reducing them from 10 per cent. to 5 per cent. over seven years? Enormous resources for consumption are released, and we have indeed had a consumer-led boom. As we know, in the past seven years the source of demand has been largely consumption; followed, of course, by Government spending. The Government have concealed the figure for household debtit is not in the white bookbut it is at an all-time high.
So we have had this great consumer boom and the Government are reaping the political rewards, probably congratulating themselves on how wonderful it is and aiming to maintain it until the next election, when all will be fine and dandy. There will be a feeling of general well-being in the country because of the boom, but only at the expense of enormous debtshousehold debt, Government debt, the implicit liability of households to pay off the Government debt in future, rises in taxation and so forth.
Robert Lucas won a Nobel prize for discovering the law of rational expectations, but perhaps rational expectations will not work out 100 per cent. and
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somehow people will not work it all out effectively before the next general election. The Government certainly hope that they will not, which is why they are cooking the figures in the manner that I have described.
If we have had an enormous consumption-led boom through the halving of the savings ratio from 10 to 5 per cent., what do we do for an encore? When the Government are re-elected, are we to go down to a zero savings ratio and subsequently to a negative ratio? It is not possible theoretically to have a permanently negative savings ratio, so what are the Government going to do for an encore?
Another question to focus on is what happens if the British public come to the conclusion that their savings ratio is too low and that savings in the economy should be increased. What happens if they want to get back to 10 per cent. on the grounds that that is a prudential policy for themselves and their families? What happens if they do that in response to a crisis? The hon. Member for Yeovil (Mr. Laws) has already raised the more than theoretical possibility of a collapse in the housing market and a negative wealth effect whereby people suddenly increase their desired savings level. What happens in those circumstances?
The answer is simple and absolutely clear. Just as a reduction in the savings ratio provides an enormous increase in consumer demand, so an increase in the savings ratio results in an abstraction of demand from the economy to an equally dramatic degree. How will we cope with that? Will there be a major economic crisis or a recession as a result? Will we have the opposite of the stability to which the Government claim to aspire?
There are not a dozen possible solutions. What are the possible responses? Not monetary policy, of course. If consumers reduce their spending and increase their savings, it is no use the Bank of England cutting interest rates to compensate, which would be the monetary approach of maintaining demand in the economy. If that happens, the savings ratio will not rise and the British public will be prevented from getting back to the level of savings to which they aspire.
That is not the answer, so will the Government replace the demand lost when British households decide to increase their savings ratio to a more prudent level? In that case, the golden rules and sustainable debt provisions can be thrown away entirely. My goodness, in order to provide the equivalent of the present savings in the economywe are talking about moving from 5 to 10 per cent.the whole amount currently saved by households would be abstracted in demand. We do not know what the exact figure is, because it is not revealed in the Red Book, but we could make a rough calculation and say that if the Government were to respond to that gap by some sort of deficit spending, it would amount to a substantial burden on fiscal policy. If they did that, no credible fiscal rules whatever would be left.
What is the solution? The fact of the matter is that there is no clear solution. Indeed, as a matter of fact, there is no solution at all. We have mortgaged and hypothecated the future, and critically reduced our freedom of manoeuvre in the future. All fiscal policy, whether under Labour or Conservative Administrations, will bear that burden and that loss of flexibility. The British people will bear it and we will all pay the priceand for decades to comefor the
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fundamental mismanagement of the British economy over the last seven years. I have to say that that mismanagement is made no more attractive by the attempts to conceal some of the central facts by irresponsible spin doctoring, which seems to have crept its way even into what used to be a greatly respected and independent Treasury document.
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