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Mr. Quentin Davies (Grantham and Stamford) (Con):
It is a pleasure to follow the right hon. Member for Llanelli (Denzil Davies). I am sorry to infer from his closing remarks that he does not expect to be in the House much longer. I was not aware that he would not be standing again, and he will certainly be a great loss to the House. He is one of the few remaining Members who refer to Karl Marx with some respect. Incidentally, I must correct him slightly: Karl Marx was, in fact, a great admirer of Adam Smith, whose theories he did not see as contradicting his own. Indeed, he saw himself as building on Adam Smith's theories, and produced the
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absurdities of his own theory of surplus value by extrapolating from the one fallacy in Smith's "Wealth of Nations", his theory of value. However, I did not rise to deliver a lecture on Marxian or, indeed, Smithian economics. I want to talk about something much closer to home, much closer to the feelingsand, for that matter, the pocketsof all our constituents: the Chancellor's Budget.
One thing can be said about the Budget with absolute certainty and conviction. It is not a prudent Budget, and it is not the work of a prudent man. We should not be borrowing more than £30 billion when the economy is growing above trend. That is not balancing the budget through the cycle; that is not being prudent at all.
It was clear from the statistics given by my right hon. and learned Friend the Leader of the Opposition that this is not the first time that the Chancellor has been losing control. His projections for growth of revenues, for spending and therefore for deficits have been consistently wrong. He has been wrong about both revenues and expenditure so far. Members who have the Red Book to hand will note from page 250 that revenues have been considerably more buoyant than he expected. The Chancellor took risks, and to an extent he has got away with them because the revenues have been above his expectations. Had they been in line with his expectations, the borrowings would have been a great deal more serious than the £34 billion or so for which the Red Book provides in the coming financial year. We read on page 250 that the outturn for 200304 in terms of current receipts was £418 billion, the estimate for 200405 was £449 billion and the projection for 200506 is £486 billion.
Mrs. Liddell: The hon. Gentleman is contradicting himself. One reason for the increase in receipts is the improving performance of the economy, which is forecast to continue for some time. I think that he has been rather churlish, and I am surprised that someone with his experience should reach such conclusions.
Mr. Davies: Perhaps the right hon. Lady should have listened rather more carefully. The fact that the country is enjoying more buoyant revenues than the Chancellor originally predicted shows not that he is prudent, but that he is imprudent. He or his officials madeone hopesthe best possible estimate of the likely levels of revenues in the economy. He then set a level of expenditure. What has happened in practice is that we are running a considerable deficita much larger deficit than he expected. Last year's projections have been revised by £6 billion this year. The position would have been a great deal worse had his own revenue projection been accurate, which it clearly was not.
I have just given way to the right hon. Lady; I might give way to her again a little later, but perhaps she will allow me to make some progress. I notice that during her intervention she in no way quarrelled with my basic thesis concerning the approach to be taken when the economy is growing at or above trend. The Chancellor used to think that the trend rate
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of economic growth was 2.5 per cent. Last year he increased the estimate to 2.75 per cent., so perhaps he thinks that it is still 2.75 per cent. In the coming financial year, the economy is projected to grow by 3 to 3.5 per cent., according to the Red Book, and next year by the trend rate of 2.5 per cent. So at this point in the cycle, we should not be borrowing at all. Rather, we should be running a surplus, because the economy is growing above the trend rate, and has been for two years. I now give way to the right hon. Lady.
Mrs. Liddell: The hon. Gentleman is being very generous in giving way. I seem to remember that when he was in government and I was in opposition criticising his Administration for their attitude to borrowing, they were borrowing for failure. However, the point that the Chancellor is making is that we are borrowing to invest.
Mr. Davies: I am pleased that I have convinced the right hon. Lady of the arguments that I have been adducing. She has now changed the subject altogether and is talking about the Major Administration of the 1990s, of which I was not a member. Although I did support them most of the time, I carried no particularly convinced brief. So much has she endorsed my arguments that I feel able to move on to my next point.
Emerging from these figures is a great worry about the situation of the nation's finances. We have enjoyed high rates of growth in the past few years, but they have been associated not only with very substantial Government spending, but with greater Government deficits than the Chancellor himself originally anticipated. They have also been accompanied by a complete collapse in private savings. The savings ratio has virtually halved in only eight years, which is a very worrying development. As I recall, when Labour took office the savings ratio was some 9 per cent.; now it is approximately 5 per cent., which is a massive reduction. That dissaving by the household sector has been accompanied by massive dissaving by the public sector, which, as I just explained, has also been borrowing above its own expectations in the past few years.
Of course, those two factors combined contribute to very buoyant demand. It is not surprising that an economy grows fast in those circumstances, but one has to ask oneself where the motor of growth is coming from now. If demand has been fuelled during this period by massive, above-expectation borrowingI believe it to be excessiveand a collapse in household saving that amounts to substantial dissaving, where will such growth come from during the next period? Do the Government plan to run up even bigger deficits? Are they going to borrow £100 billion a year instead of the current £50 billiona figure which includes the refinancing of gilts falling to maturity, involving some £35 billion net? Is the household savings ratio going to collapse to zero? I do not think it possible for it to collapse to a minus figureat least, not for a sustained period.
That is a big and worrying question about the economy, but I do not suppose that it worries the Chancellor. It sounded to me this afternoon as though he simply wanted to win the next electionif he can
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and that it does not matter what happens afterwards. "Après moi le déluge" is the motto, according to this Government's current economic policy. I have been waiting to see whether the Paymaster General, or somebody else, is going to answer my question about where growth will come from in the next few years. That is a crucial question to ask about any economy, and the silence of Ministers on it is extremely eloquent.
The Chancellor made much of the economy's stability over the past few years. Of course, that stability is very welcome indeed. The question is whether we should confine ourselves to self-congratulation about it, as the Chancellor did earlier. It is perfectly true that we have had low inflation, high and rising employment and very low unemployment, all of which is very welcome. My constituents are pleased about that, naturallyeveryone should be pleased about itbut it would be sensible for hon. Members to ask again what lies behind it, how it has been achieved and whether it is sustainable.
There is no question but that the economy's stability, as shown in a low and pretty stable inflation rate, is largely the result of turning over the management of the monetary side of our economy to an independent Bank of Englandor rather, to the Monetary Policy Committeea policy of which I was always in favour and for which I argued consistently in the 1990s. When the new Government came to power, I refused to join my Front-Bench colleagues in voting against that measure, because I thought it absolutely right.
I am glad that the Government did that. Indeed, I pay tribute to the Chancellor for that treatmentit was a very sensible thing to doand it would be extremely churlish and dishonest of me to say otherwise, because I have always advocated that move. It is splendid, but there is more to it than that: one must ask oneself how it has been possible to run the economy with high demand, high employment, low unemployment and low inflation.
Ten years ago no one, myself included, would have supposed it possible to run an economy with high demand, getting unemployment below 3 per cent. of the economy, and very low inflationsomewhat under 2 per cent. on the basis of the harmonised index, which we now take as the measure. The right hon. Member for Llanelli was moving in the direction of the same analysis. I do not often agree with him, but I do agree on that.
There is no doubt that the reason is international competition. The manufacturing sector of our economy has been consistently undercut by competition, particularly from the newly developed economies of India and China. There have been enormous, dramatic structural changes in the economy over the past few years. Swathes of manufacturing have disappearedthey are no longer economicand either the companies have gone broke or, in time, they realised the way the wind was blowing and set up manufacturing capabilities in or entirely contracted out to India, China and, in certain cases, eastern Europe or other places where labour rates are much cheaper.
In fact, we have been destroying employment in a very important sector of the economymanufacturingand it has been absorbed largely in the public sector, by all those people who are directors of communication, co-ordination and something else who organise conferences for health service workers and so on. Those
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completely new jobs have arisen in the public sector. Hon. Members can read about them in The Guardian. [Interruption.] I am sure that the hon. Member for Wolverhampton, North-East (Mr. Purchase) regularly reads The Guardian. I do not know whether he ever feels tempted to apply for any of those jobsmost of them are very well paidbut he can read about them every Thursday. That is not a cheap point.
In fact, on a quantified basis, twice as many jobs have been created in the public sector as in the private sector over the past eight years. I do not think that that has ever happened before, except under Labour Governments. It has always been a very bad feature of Labour Governments. Of course it is not sustainable, because the role of those people is regulatoryand, some of us would say, parasitical in many cases. They are certainly extremely expensive. They are therefore a burden on the productive sector of the economy. People who are working profitably and productively must pay taxes to support the burgeoning public sector. That reduces the return on investment and the return from effort, work and risk taking and so on in the rest of the economy; it is a major burden.
There is no doubt that in the past few years a combination of those factors has caused the running down of household savings almost to nothing, the borrowing of large sums and, given the impact of international competition, a certain freeing upalthough that seems a rather brutal way to describe what is, of course, a traumatic change in the circumstances of an individual and his or her family. If someone is a skilled worker in engineering or another traditional manufacturing industry and finds that there are no more jobs in that field, and no more opportunity to deploy their skills, that is very traumatic.
Nevertheless, on an aggregate basis, it is perfectly true that the unemployment that has been created in one sector of the economy has been counterbalanced by employment created in other sectors, particularly the public sector. That is not sustainable, which is my theme this afternoon. We can have a lovely ride and get away with it for a long time, as the Government have done, but it is not sustainable. How long can one get away with borrowing? One cannot borrow for ever; even Governmentseven this Governmentcannot do that. We must think about these matters very carefully.
Instead of reflecting, as a sober, responsible and prudent Chancellor would do, on the way in which these favourable outcomes have been achieved, on the risks attached to the policies that have been pursued, on the potential threats to those policies continuing to be successful and on whatever changes might be requiredthat is the sort of sensible and sophisticated discussion we ought to have in the House on these occasionsthe Chancellor went in for an orgy of self-congratulation. I do not believe that people who do that can ever be described as prudent. They may or may not succeed in deceiving other people, but they are clearly running a considerable risk of deceiving themselves. Once someone has deceived himself into a state of complacency about the world, he is not prudent and responsible, and not a person to be entrusted with the management of anybody's finances, let alone the country's finances.
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That was an unattractive and frankly problematic attitude adopted by the Chancellor. He is not a Chancellor who has not made any mistakes. One might have thought that, for a second's genuflection in the direction of modesty and humility, he might have referred to an absolutely devastating misjudgment and mistakethe destruction of our pensions system. The right hon. Member for Birkenhead (Mr. Field) and many others have used similar words in different places, including in the media, when speaking about this matter. The words I will use are cautious, sober and not in any way exaggerated.
In 1997 we had a pensions system in this country, including very substantial defined benefit pension funds in the private and public sectors, that was the envy of the world. It was the envy of the whole of the European Union, except for the Netherlands, which had a similar system to ours and has managed to preserve it. In eight short years, the system has been completely destroyed.
The Government try to pretend that factors beyond their control destroyed that system. They say that the stock market collapsed, but we have had far worse stock market collapses before. I remember one very well, because it was in the year that I started work in the City1974, when the index went down to 100. I wish that I had had some money at the time; I would be a rich man now if I had been able to buy at that stage. We had a bad recessionalthough not as bad as that of 1974 under the Labour Governmentat the beginning of the first Thatcher Administration; Labour Members will surely remind me of that if I do not mention it. There was a stock market collapsealso, I am afraid, under the Conservativesin 1987. But none of that undermined the steady growth of the defined benefits pensions system in this country.
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