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Mr. Howard Flight (Arundel and South Downs) (Con): Tomorrow, one way or the other, I believe that we shall hear the Chancellor's last pre-Budget statement. Today, we have heard the Chancellor being, a little unwisely, as complacent and boastful as ever. If he, like me, had got on his bike in the past few weeks and visited the financial community, on which so much of our earnings for our imports depend, he would have found it increasingly concerned about the deterioration in our public finances.

If I may put it simply, our economy is close to full capacity. The norms of Government borrowing are: borrow when an economy is well below capacity to keep it afloat, but that it is sensible when an economy is at full capacity to be in balance or even in surplus. However, our borrowings this year approach £40 billion. We have an external current account deficit that is likely to be around £40 billion. That is not a balanced, well positioned economy. It is irrelevant whether the Chancellor fudges the figures to fulfil the golden rule because the position is the wrong way round. The golden rule makes sense over a cycle if one borrows when there is slack in the economy and moves into surplus when it is at full capacity. Doing it the other way round leaves matters positioned wrongly for the future.

Estimates of the black hole that would have to be filled by additional taxation if the Government were re-elected vary between £11 billion and £20 billion. The latest City estimates have continued to increase. Again, on the golden rule and the true underlying position, it is disappointing that the Chancellor had to resort to cooking the depreciation figures to squeeze another few billion pounds in his favour. As we all know, instead of treating the cumulative deficit on a numbers basis—adding the pluses and minuses—the Chancellor resorted to a bogus method of average in relation to gross national product, giving a figure that is not the actual monetary cumulative deficit over the cycle.

My right hon. Friend the Member for West Dorset (Mr. Letwin) went through the wider issues that make it clear that the economy is no longer as well placed as it has been. We have dropped from fourth to eleventh in the world's competitiveness league. We have underperformed when compared with the other English-speaking economies, especially Ireland. Our productivity growth is a third down on what it was under the Conservative Government and below the EU average, when the Chancellor is perhaps among the most critical of EU economic performance.

The savings ratio is down not only because of the cycle; it has been down by a third on average in the past six or seven years. That presents considerable problems for pension accumulation and investment.

We still have a stock market, although the Government have done their best to wreck it. They appear to believe that long-term investment can be financed by cashing bonds. A sad disappointment may be encountered. This country's stock market has underperformed by 35 per cent. when compared with the United States and France. It has even underperformed by 10 per cent. when compared with Germany. I do not claim that the stock market
 
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constitutes a full measure of the position of an economy but it is ignored at peril. There are serious imbalances in the economy.

Paul Farrelly (Newcastle-under-Lyme) (Lab): Have the hon. Gentleman's City friends ventured an opinion on how the shadow Chancellor's figures stack up? He proposes tax cuts on top of spending cuts.

Mr. Flight: I am pleased to tell the hon. Gentleman that they understand perfectly well what we are saying and that they are surprised that neither the Chancellor nor Labour Members seem to understand. I shall summarise it very simply; perhaps the hon. Gentleman will be able to understand. We have set out our spending strategy, which, instead of the Government spending 42 per cent. of gross domestic product, will result in us getting the figure down to 40 per cent. over the period to 2008. The amounts have been set out bit by bit.

I and various colleagues set up the taxpayer value review in which 60 people under David James have considered each area of Government. It is not quite complete, but there will be savings significantly in excess of the Gershon savings. Now, let us take those two together. We have made it clear that in some areas additional spending will be needed—for example, in defence, and for our policies of choice in health and education—but the resulting overall position will clearly permit some scope to reduce taxation by a significant amount over the next period of government.

Mr. O'Neill: I appreciate that the James study has not been completed, but there must obviously be some overlap between Gershon and James. Can the hon. Gentleman give us any indication of its extent, because surely any additional money over and above James is all the Conservatives would have to offer as a tax cut?

Mr. Flight: Again, I am grateful for the intervention. First, there is the question of how much of both is cash for real and how much accounting entries. The hon. Gentleman will no doubt be aware that roughly half of Gershon is accounting entries, not for real. If he reads our announcements, he will see that we have got up to a figure of, if I recollect correctly, approximately £24 billion and covered about 70 per cent. of the territory. He can make his own estimates as to where we will get to in the fullness of time.

The second task is to consider how much of our work is cashable and how much is not. The answer is that the proportion that is truly cashable is substantially higher than Gershon. The James review has covered all the territories that Gershon has covered. There are a lot of territories that Gershon has not covered; I cannot understand why the Chancellor did not give the review a full brief to consider all areas. On the figures that are available to date and in respect of what I have just said, I trust the Chancellor understands that, in cashable terms, quite a significant margin will come through in excess of Gershon.

Mr. James Plaskitt (Warwick and Leamington) (Lab): As the hon. Gentleman is referring to the James report, can he confirm that its proposals are official Conservative party policy?

Mr. Flight: I thank the hon. Gentleman, but I think that is rather a strange question. The Conservative party
 
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has made it quite clear that the David James team is an independent body that is considering the whole public sector and will report back to the Conservative party, which will make its policies very clear when our election manifesto is set out. That is perfectly clear and straightforward.

The reality is that the Chancellor has presided over a rising tide of personal debt, but he has kept the figures looking good and created hundreds of thousands of public sector jobs, although only 100,000 of the total of 600,000 mean, as he has just said, more people in the front line—more doctors, more nurses and so forth.

What lies behind what has happened is the tale of the two Chancellors; I am sure Labour Members have read it. William Keegan wrote a superb book entitled "The Prudence of Mr. Gordon Brown", which I was asked to review earlier this year. Indeed, he set it out very clearly that the Chancellor, in his first three years in office, was deliberately prudent to seek to win the longer-term confidence of middle England and the financial community. Then, he embarked on a massive public spending splurge from 2000 onwards.

It is worth focusing on the macro figures and on the Office for National Statistics figures in relation to that public sector spending. By the end of this tax year, spending and taxation in cash terms will be up by about 60 per cent. Where has all that spending gone? Every citizen knows that they do not see improved delivery of anything like 60 per cent.—[Interruption.] If Labour Members would care to pause for thought, they would realise that the ONS figures show that approximately 80 per cent. of all that spending has been consumed by public sector inflation as the ONS defines it.

What is public sector inflation? It is a mixture of several things. It is basically higher pay for those working in the public sector and more people—another 600,000. When I was a student economist, I asked my teacher why people earned less in the public sector than in the private. He said that they had greater security of employment and better pensions. That seemed a fair balance to me, but the ONS now shows that, level by level, pay in the public sector is 20 per cent. higher than it is in the private sector. Indeed, many of my friends who work in the health service have made the point to me that the money is not getting through for additional facilities, but has come through in significant pay increases.

Again, we should consider the macro data. In 1997, public sector inflation was 1.6 per cent. It is now running at 10 per cent. We should consider the productivity data. The Government try to hide the figures, but productivity in the public sector has declined by 10 per cent. This is the overall story of failure to reform the public sector, failure to deliver, excessive regulation, excessive bureaucracy and more and more costs between money at the centre and getting it down to the delivery units.

As William Keegan's book points out, this was the Chancellor's great fear: that people would say, "You've spent all the money, but the delivery is not there. You've wasted it." So, the Chancellor set up his target regime. Alas, that was based on an entirely out of date concept that had not worked in the private sector in the 1970s and 1980s—management by objectives, setting targets
 
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from on high and dictating to the people working, rather than bringing them in and getting suggestions from the coal face on how to do things better.

We have heard little or nothing of the targets regime because, in the main, it has been a failure. Targets have not been met, they have distorted priorities, and they have greatly upset and demotivated people working in the public sector.

Last summer, I think, the European Central Bank commissioned a group to consider public sector spending in this country compared with that in other countries. It found that, compared with Japan and the United States of America, our public spending was enormously wasteful, citing a figure of 20 per cent. inefficiency. We were only slightly better than France and Germany.

Now, the ECB is hardly an organ of the Conservative party, but that is the magnitude of the inefficiency of our public sector. Indeed, that is why the Chancellor was eventually obliged to set up his own Gershon review, after we had started work on our review. I have already said quite a bit about that work in answering various questions, but I repeat the point that if the Chancellor wishes to understand what we are saying, rather than ranting a lot of, candidly, gibberish, he should consider what has been announced area by area in the David James review and what the shadow Chancellor said last spring about the spending plans. He will find that the figures add up perfectly logically.

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