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Mr. Nigel Beard (Bexleyheath and Crayford) (Lab): The first thing to emphasise about this Budget, and the Finance Bill that gives effect to it, is that it satisfies the discipline that the Chancellor has imposed on public finances for the past seven years through the fiscal rules: the golden rule and the sustainability rule.
Adherence to fiscal self-discipline has brought about an unparalleled period of stability in the economy. At the same time, a fair distribution of financial liabilities has been achieved between the generations. Disciplined fiscal policy has been complemented by the Bank of England's independent conduct of monetary policy, which has given the financial system confidence that interest rates are fixed for economic reasons and not for political expediency. The consequence has been an unprecedented period of national prosperity, resulting in record low levels of inflation, interest and mortgage rates and unemployment, a stable economic climate that encourages businesses to invest and plan ahead and a resilience internationally that enabled the British economy to keep growing when the rest of the world moved into recession. On top of that, we are maintaining record investment in health, education and training to remedy 18 years of wanton neglect and to secure the foundations of the future.
None of that has been achieved at the expense of a fundamental commitment to social justice, which has been maintained through the working and child tax credits, the minimum wage and state pension increases that far surpass what would have been gained by linking pension increases to incomes.
Those are historic achievements that this Budget and Finance Bill continue. Yes, there are questions for debate, which are raised in the Treasury Committee's report, about regulation, whether consumer debt is too high, the significance of rising house prices, the impact of the falling dollar and future tax revenues. I recognise all that, but those issues are the pimples and scratches on the great edifice of the country's economic achievement. They are real issues, but they must be kept in proportion. Above all, we must not accept what the Opposition would no doubt like the country to believe—that the present prosperity and fair prospects for the future depend not on the policy of the Government but on astrology or the position of the planets in certain constellations. This country's prosperity does depend on Government policy, it will depend on it and it could be wrecked by the ideological folly of the Conservative party. After determined opposition, and some kicking and screaming, they have now accepted the Bank of England's independent role in framing monetary policy.
The dog that did not bark in the night is the Conservatives' unwillingness to accept the Chancellor's fiscal rules. They are within two years of a general election, but they will not say that they accept these rules or, indeed, any other rules. All they will say is that, whatever the economic circumstances, they will reduce taxes. We know what impact that would have on public spending, and Labour Members will ensure that the public at large understand the local and national impact on the national health service, schools, universities, public transport and roads.
The other question is what the impact will be on the overall management of the economy when the Conservatives do not accept the discipline of any
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guiding rules. What will be the impact on jobs, on industry, on interest and mortgage rates and on training? What is there in the golden rule and the sustainability rule that a modern political party cannot accept? The golden rule secures fairness between generations. It says that the Government—on balance, over the five or six years of the economic cycle—should borrow only for capital spending: spending that will benefit the next generation and perhaps beyond. In other words, people who enjoy benefits now and in the future will pay for them. The opposite approach is to borrow for immediate current spending, which benefits only those who are around today but leaves much of the payback to future generations who do not benefit at all.
The sustainability rule ensures that even if borrowing is for capital investment, the burden of debt now and in future does not build up disproportionately. In other words, it prevents people today from investing in capital projects to such an extent that the next generation is so burdened by inherited debt that they are prevented from investing for their future.
It is important to stress that the golden rule, whereby borrowing equates to capital spending, does not apply to any one year, but to the whole economic cycle. Thus, when economic activity is at a low ebb and, consequently, Government tax income is low, borrowing may provide for some current expenditure, which then stimulates economic activity, but when the high tide of economic activity comes along again and tax revenue to the Government is high, that revenue must be used to repay the excess borrowing when the economic tide was low.
Although the Conservative party is reluctant to sign up to the Chancellor's fiscal rules, its economic performance in the past came nowhere near this Government's achievements. It cut public spending when tax revenues declined as the tide of general activity receded; thus, it deepened the recession. As an alternative, when the high tide of economic activity came along and tax revenues increased, the Conservatives cut taxes for the better off and so overheated the economy as to create runaway inflation. They penalised low-income families on the downturn of the economy through unemployment and rewarded the top 10 per cent. or so with tax reductions when the economy improved.
Mr. Jack: Does the hon. Gentleman not recall that when the higher rate of tax was reduced to 40 per cent., the cash take to the tax system increased?
Mr. Beard: It might well have done, but it did not satisfy the Conservatives' macro-economic conditions. Such action led to the crisis that Mr. Lawson created, which resulted in interest rates of 15 per cent.
Boom and bust was not just an historical economic accident that came along while the Tory party happened to be in power: it was the result of the Conservatives' own feckless, ideologically driven policies, which they appear inclined to repeat in 2050, or whatever future date thereafter when they next take power.
To lift a major part of the country's economic policy out of political controversy, I appeal to the Conservative Front Bench spokesman to say at the end of the debate that the Conservatives accept the
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Chancellor's fiscal rules as a basis for future economic policy. If that commitment cannot be given, can the House please be told why not?
I turn to some of the more specific issues that were brought out during the Treasury Committee's consideration of the Budget. The current economic cycle is considered to have started in the financial year 1999–2000 and to end in the financial year 2005–06. On the basis of cautious assumptions, the average annual surplus over that period will be 0.1 per cent. of gross domestic product, so the golden rule will be properly satisfied. However, tax receipts for the past three years have been overestimated and the outturn has been lower than forecast. In the next two years, tax receipts from income and corporation tax are forecast to bounce back.
Some of the Treasury Committee's external advisers have questioned whether the extent of the forecast increase in tax revenue will be achieved. That question was put to Treasury officials when they gave evidence on the Budget to the Committee. Their answer was that the forecasts are grounded in confidential information from the Inland Revenue and Customs and Excise about how taxes are paid, which feeds into the methods of forecasting tax revenues. Given that that information is so central in assessing whether the golden rule is likely to be satisfied, I emphasise the Committee's recommendation that the Treasury should consider ways of sharing with outside forecasters as much aggregate data on the way in which taxes are paid as possible. That would lead to a more fully informed debate on the extent to which the fiscal rules are likely to be satisfied.
The Treasury forecasts that the economy will grow at 3 to 3.5 per cent. during the next two years but will then return to a trend growth rate of 2.5 to 3 per cent. The fiscal projections are in line with that economic projection. However, if growth should continue above trend, it is important that the increased fiscal surpluses are retained and not spent, so that fiscal and monetary policy work in the same direction at that point in the economic cycle and so that fiscal flexibility for the next cycle is ensured.
Now that we can contemplate continuing conditions that are favourable to economic growth and prosperity, to full employment and to major improvements in our public services, the productivity of the United Kingdom economy increases in significance as a factor that could restrain the wealth of this country during the 21st century. In terms of output per hour, the UK is far behind France, Germany and the United States. Between a third and a half of that deficiency is due to a lack of investment in plant, machinery and other physical assets. As a more predictable economic climate takes hold and takes away uncertainties, attitudes to new investment might change. Indeed, the Chancellor's various means of encouraging business investment are to be welcomed.
What is astonishing, however, is that two thirds of the productivity gap between Britain and the United States exists because Britain lags behind in innovation. This country is one of the most ingenious and inventive in the world, but we do not follow through to gain the economic benefits. Too often, something is invented in Britain but commercialised in America or Japan. In that context, I am pleased to see improved tax incentives for
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research and development on top of the Government's increased budget for scientific research, and their commitment to excellence in our universities.
Governments can only enable, however, and there is also a need for a culture change in boardrooms and business schools to give far greater emphasis to business renewal. That is vital not only to catch up with the United States but if we are to hold our own in competition with the rising economic power of China, India and south-east Asia.
There is another dimension to productivity, which is not a concept that should apply only to market-driven sectors of the economy but to the public sector, too. There must be developed an agreed measure, equivalent to productivity, for health, education, public transport and local authorities. Sir Peter Gershon's recent report addresses the issue, but it is only a snapshot. With increasing resources committed to public services, there must be systematic accountability for what is being achieved.
Productivity in one form or another will be a major economic issue in the first half of the 21st century and beyond. The Treasury Committee is embarking on an inquiry into United Kingdom productivity and its regional variations. The resulting report may provide the occasion for a much fuller debate on these issues in the Chamber.
The peacetime history of the past 100 years has been about developed countries learning how to manage their economies in order to mobilise the energy and abilities of the people to increase their own wealth and opportunities. It is a continuing process to which this country has made a major contribution. That contribution has never been greater than what this Government have achieved over the past seven years. It is not at an end. Indeed, the prosperity and temperament of Britain in the 21st century depend on progress continuing. This Budget and this Finance Bill are a further step towards achieving that.
6.31 pm
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