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Mr. Julian Brazier (Canterbury) (Con): I am most grateful to my hon. Friend for the powerful oration that he is giving us. Does he agree that there is a certain irony in the Government moving in that direction a generation or so after the private sector started to put more emphasis on cash flow?

Mr. Flight: I thank my hon. Friend for his comment; he is precisely right. Members may have looked at the OECD's analysis of the UK economy. Extraordinarily, it says that the public sector now consumes 45 per cent. of GDP, not 40 per cent., and that the deficit is 3.4 per cent. Those figures are very different from those that the Chancellor reports. The main reason is that they are calculated on the same basis as they are calculated in other European countries and without the distortions.

What are some of the little tricks that have been got up to? Significant changes in depreciation have made the figures look better. Members may have noted that the odd £2 billion has come from something strange going on in relation to the Office for National Statistics and the treatment of expenditure by the Highways Agency. I have been in contact with the National Audit Office, which is looking into it but still does not have a full explanation. Some of it seems to be genuine—there was double counting of depreciation—but the NAO told me that most of it resulted from transferring revenue expenditure to capital expenditure. We all know about the business of balancing over the cycle. I always understood that this would take the sensible approach of having a cumulative total of deficits and surpluses, but no—we re-base every year as a percentage and produce some theoretical figure that nobody understands and is no longer a measure of the net deficit over a cycle.

We heard the wonderful news that inflation is down to 1.6 per cent., but that is under the new measure of inflation. In fact, RPI minus X is now 3.5 per cent. and, if anything, rising. There were arguments for having the same measure as Europe—we know of the Chancellor's great fondness for Europe—but people are being misled when they are told that inflation is 1.6 per cent., because the true measure, comparable with the recent past, is 3.5 per cent.

During the past three years, I have found it very interesting going up the learning curve in relation to private finance initiative and public-private partnership deals. The way in which they are accounted for and when they are on balance sheet and when they are not is a mystery rather like the Schleswig-Holstein question. The head of the Accounting Standards Board could not explain it to me. I once succeeded in understanding it for about two days, then I lost it and had to go back again. In truth, a dickens of a lot of public expenditure is off
 
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balance sheet. Whether PFI and PPP projects are on balance sheet or off balance sheet is amazingly arbitrary and random. The Government themselves, having gone to such lengths for a rather bad PPP for London Underground, were surprised that they had to put that on balance sheet. The structuring of Network Rail is completely ludicrous—it is a renationalised rail service provider and the only reason why the £21 billion debt is not on balance sheet is that the situation has been fudged by having a body of 100 council people who are supposed to be consulted. In describing meeting the debt and borrowing ratios, it would be much fairer and more meaningful to have a figure that included all the Government's off-balance-sheet liabilities. I was surprised to learn that for some reason, contributions to the EU are not included in Government expenditure figures.

I want to return to the current account. We have all been lulled into the belief that that no longer matters. Those of us who have been around for a long time remember when Governments won or lost elections on £300 million balance of payments deficits. It is currently running at £57 billion and approximately 2.5 per cent. of gross domestic product. That is nowhere near as bad as America, where it is more than 5 per cent., but America has to run a current account deficit because the dollar is the main reserve currency and it has to put more dollars into foreigners' pockets in order to finance growing trade. If one takes that factor out, the effective levels of current account deficit are fairly similar. That is no problem as long as the direct inflows are there, but they are reducing quite significantly. Indeed, the number of jobs that have resulted from foreign direct investment in this country is down 20 per cent. on the 1997 figure.

The danger in all that is that if sterling yet again came under pressure, as the dollar has in the past year, there would be obvious implications for interest rates. It is all very well to say that it is fine for Governments and citizens to borrow more because everything is stable and lovely and interest rates will be low for ever, but the whole edifice is vulnerable to anything that results in interest rates rising more than modestly.

It is excellent that the Bank of England was given autonomy to manage monetary policy. I argued strongly in the 1980s for privatising the Bank of England. However, the recent monetary growth figures show that, alarmingly, M4 is growing at 10 per cent., which is entirely incompatible with an inflation rate of 3.5 per cent. RPIX or 1.6 per cent. under the new measure. Not surprisingly, Lombard Street Research, the main monetarist economist, has warned that interest rates will soon be 5.5 per cent. if that M4 growth is not addressed.

I believe that it was the leader of the Liberal Democrats who drew attention to the big increase in private credit and borrowing; hon. Members are aware that the amount borrowed by individuals is now well over £1 trillion. An excellent recent study by Edward Chancellor—an acknowledged expert on the history of financial bubbles going back over 300 years—points out, although it overdoes it, that, by any measure, there has been an unsustainable surge in personal borrowing and credit, that the growth rates of personal borrowing are unsustainable at present levels, and that we are acutely vulnerable to any material increase in interest rates.
 
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The big issue, which the general election will be about, is the effectiveness of public spending. The data are produced by the Office for National Statistics and the figures can be slightly different depending on what measure is used, but they show in the round, that in cash terms public spending has risen 70 per cent. since 1997. The ONS measure of what is included to calculate public sector inflation and of what is and is not output was attacked by the Government, but it reveals that only 16 per cent. of that spending has got through to front-line delivery services. According to its calculations, public sector inflation is up from 1.6 per cent. to 10 per cent. and public sector productivity is down by 10 per cent.

What is public sector inflation? It is a mixture of higher bureaucratic costs, higher pay, higher pension costs and more people. How many more people are working in the public sector? The aggregate, including universities, to last autumn is 862,000 people. Since the autumn another 70,000 can probably be added, so the total is of the order of 930,000 people. It is possible to work out that many of those people are doctors, nurses, teachers and policemen—front-line people—which gives us a figure of approximately 144,000. So what is everyone else doing? Are they adding to productivity? I am afraid that the great splurge in public sector spending has not worked, and the complete change from the prudent Chancellor in 2000 to one who has turned on the public spending taps in dramatic fashion since then has not worked because the resources have not got through to front-line delivery.

There were arguments for increasing the pay of nurses and some other public sector workers, but the ONS figures show that pay levels in the public sector are now 20 per cent. higher, layer by layer, than in the private sector. The figures show that median pay in the public sector is £10.50 per hour. It is £8.71 in the private sector. The pensions of people in the private sector are suffering badly from all that has happened, but people in the public sector still have their inflation-proof pensions, although they may have to pay a little more towards them.

When I was an economics student many years ago I asked my schoolmaster why people earned less in the public sector than in the private sector. He told me that it balances out because those in the public sector have greater security of employment and better pension deals. That stuck with me. It may be a generalisation, but much of the public sector spending has simply increased pay levels in the public sector to 20 per cent. above those in the private sector.

A general point—I have just referred to it and hon. Members may be aware of William Keegan's excellent book on the subject—is that, by any measure, we had an extraordinarily prudent Chancellor from 1997–2000, but we have had a very different Chancellor since then. Along with that public sector expenditure, growth in this country has been largely puffed up in reality by higher public borrowing, an unsustainable growth in public sector jobs and unsustainable private sector consumer borrowing. The legacy of that is likely to be five years of sluggish performance.

It is interesting that the Red Book forecasts lower growth beyond next year to the end of the decade. I am deeply concerned that—this is probably the last thing
 
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the Chancellor wants—convergence with Europe will mean convergence with sclerotic European growth rates.

The Chancellor and others have talked about the challenge from Asia. I spent the 1970s in China and India, and I know something about those countries because of my 25-year involvement with them. In China, the proportion of GDP spent by the Government is between 22 and 24 per cent., depending on which measure is used. Business in China is not shackled with regulations that make it a nightmare to do anything. What is happening in China is, to an extent, unacceptable old capitalism, which we had in this country 100 years ago. That is part of the competitive threat.


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