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Session 2005 - 06
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Standing Committee Debates

Government’s Assessment as set out in the Pre-Budget Report 2005 for the purposes of Section 5 of the European Communities (Amendment) Act 1993

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Sixth Standing Committee
on Delegated Legislation

The Committee consisted of the following Members:


Mr. Greg Pope

†Cable, Dr. Vincent (Twickenham) (LD)
Curtis-Thomas, Mrs. Claire (Crosby) (Lab)
†Fabricant, Michael (Lichfield) (Con)
Fallon, Mr. Michael (Sevenoaks) (Con)
†Flello, Mr. Robert (Stoke-on-Trent, South) (Lab)
†Francois, Mr. Mark (Rayleigh) (Con)
Green, Damian (Ashford) (Con)
†Huhne, Chris (Eastleigh) (LD)
†Lewis, Mr. Ivan (Economic Secretary to the Treasury)
†McCafferty, Chris (Calder Valley) (Lab)
†Mitchell, Mr. Austin (Great Grimsby) (Lab)
†Murphy, Mr. Denis (Wansbeck) (Lab)
Ruffley, Mr. David (Bury St. Edmunds) (Con)
†Tami, Mark (Alyn and Deeside) (Lab)
†Taylor, Ms Dari (Stockton, South) (Lab)
†Watson, Mr. Tom (Lord Commissioner of
Her Majesty’s Treasury)

†Wright, Mr. Iain (Hartlepool) (Lab)
Libby Davidson, Committee Clerk
† attended the Committee

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Wednesday 14 December 2005

[ Mr. Greg Pope in the Chair]

Government’s Assessment as set out in the Pre-Budget Report 2005 for the purposes of Section 5 of the European Communities (Amendment) Act 1993

2.30 pm

The Economic Secretary to the Treasury (Mr. Ivan Lewis): I beg to move,

    That the Committee has considered the Government’s assessment as set out in the Pre-Budget Report 2005 for the purposes of section 5 of the European Communities (Amendment) Act 1993.

It says “Mr. Speaker” at the beginning of my notes, Mr. Pope. I do not know whether that is a prediction, but you were my first Whip, and if you are any bit as good a Chairman as you were a Whip, this will be an excellent sitting.

I am delighted that the hon. Member for Rayleigh (Mr. Francois) has survived the turmoil in his party and remained on the Opposition Front Bench—not many others in the Conservative Treasury team were able to do that. It was interesting to hear the hon. Member for Eastleigh (Chris Huhne) on the “Today” programme this morning, making all sorts of pronouncements on the leadership of his party. As he has been a Member for only six months, he is obviously a very brave man indeed. However, I suppose that I ought to get on with our business, Mr. Pope. Given the time of year, everybody is desperate for me to do that.

I welcome this opportunity to debate the information provided to the European Commission under section 5 of the 1993 Act. So that those who might ask why we are required to present such a report to the European Union do not instigate a long debate on that matter later, it may be worth mentioning at this stage that we are required to do so because that was signed up to by the Conservative party under the Maastricht treaty. Therefore, let us close down now any debate about whether we should be providing this information to the EU in the first place. As a consequence, each year the Government report information to the Commission on our main economic policy measures. Each year, we aim to ensure that each member state’s economic policies are consistent with the goals of the treaty.

Mr. Mark Francois (Rayleigh) (Con): The Minister talks about the provision of information. He knows that two years ago, this Committee, or its equivalent, was given the chance to view the formal submission to be sent to the European Commission. In effect, that is what the Act asked for. Where is that submission?

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Mr. Lewis: It is not quite ready yet. What we are submitting to the Commission is simple—it is the pre-Budget report. Every Member had the opportunity to study that report, and to participate in the debate on it when the Chancellor made his statement only last Monday. Therefore, we could have a ping-pong discussion on this issue. I am sorry that the submission is not ready—I am not pleased about that—but I can assure the hon. Gentleman that the document that will be sent to the Commission is essentially the content of the pre-Budget report.

Chris Huhne (Eastleigh) (LD): Is the Minister confirming that he intends to send the pre-Budget report to the Commission? There have, of course, been developments since it was produced—the Government have made proposals in respect of the future budgetary situation of the EU. Will those be taken into account? Will the figures given to the Commission be duly adjusted?

Mr. Lewis: No. The pre-Budget report took best account of the situation in respect of those ongoing negotiations, and I am not going to give a running commentary on them. It is highly irresponsible of opposition parties to seek to get involved in what they know are sensitive negotiations that are at a very delicate stage. That is undermining and extremely unhelpful.

We have the presidency, and we are in the most crucial stage of it in respect of sorting out future financing. It would do no good at all to get involved at this stage in giving a running commentary. It is clear that we will either achieve an outcome on future financing during our presidency—that remains our objective, and we are still optimistic that we can do it—or we will not, and the information on that will be entirely transparent.

As I have said, each year we aim to ensure that each member state’s economic policies are consistent with the goals of the treaty. They include non-inflationary economic growth, high employment and social protection, and better living standards for citizens—both in the United Kingdom and across the EU.

Those goals are consistent with the Government’s approach to economic policy. Section 5 of the 1993 Act—or the Maastricht Act, as it is better known—requires Parliament to approve the information sent by the Government to the Commission for this purpose. We set out such economic information in the pre-Budget report earlier this month, and that material also forms the basis of what we send through to the Commission.

I am sure that Members appreciate the importance of that. By formally sharing information from the pre-Budget report with our European partners, we can help to ensure a proper, accurate and effective EU system, contributing to enhanced employment and growth.

The background to this debate is the need to meet and master the global economic challenges; it is about our duty to make the critical decisions that will secure Britain’s long-term economic future. By combining our enterprise with investment in skills, science,
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infrastructure and housing, and by matching that with reform, Britain can lead the world’s most wealth-generating and dynamic sectors, from science and modern manufacturing, through finance and capital markets, and across education and the creative industries.

With fiscal discipline and by matching investment and reform in welfare and our public services, we can genuinely bring together a strong economy with real opportunity and security for hard-working families and our citizens in general.

To put the matter in context, we must look at some economic circumstances that have emerged. The last year has seen a virtual doubling of global oil and commodity prices, and while all countries have faced global inflationary pressures, the British economy has also had to deal with domestic inflationary pressures. Despite that wider environment, we are on course to meet our inflation target of 2 per cent.—not just for this year, but for the next two years.

Mr. Francois: I thank the Minister for his courtesy in giving way. He has mentioned oil, which is the Chancellor’s big excuse for our growth having halved this year. Is he aware that the National Institute of Economic and Social Research has said that the effect on growth of the rise in oil prices was “negligible”?

Mr. Lewis: The hon. Gentleman has a very short memory. Hon. Members should consider the consequences of what has happened to oil prices, combined with a slow-down in the domestic housing market and the slow, sluggish growth in the European Union. Any one of those factors would, historically, have put this economy of ours in recession. More to the point, the Conservatives know full well about recession, because they are the masters of boom-and-bust economics.

We have put in place a stable macro-economic framework, which means that in the good times and the not-so-good times, the British economy is strong and can emerge, and we can continue to have the resources available to invest in our public services and public infrastructure. We will not take any lessons from the Conservative party on economic performance. The hon. Gentleman knows that the facts speak for themselves.

Chris Huhne: The Minister makes the point that the figures going to the Commission are the same as those in the pre-Budget report. He will no doubt remember his officials and other Ministers making the point, in the context of the review of the medium-term economic and financial strategies for the member states, that Finance Ministers have an uncanny knack of becoming less and less accurate with their forecasting the more difficult the public finances become.

Given that there is a budget deficit of 3.5 per cent. of GDP, which is over the 3 per cent. limit under the Maastricht criteria, will the Minister confirm that the Commission will not be opening an excessive deficit procedure against the United Kingdom and that the forecasts that will be submitted are of the same quality
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as the ones we have come to expect in good years, even though there are more challenging circumstances in current years than hitherto?

Mr. Lewis: I cannot predict what the Commission may do. That is for it to decide, after which it will be obliged to report to Finance Ministers and decisions will have to be taken in that respect. I am not in a position to comment on whether the Commission will take that course of action.

As for accuracy, the information that we have provided in the pre-Budget report is as up to date and accurate as it can be, and we believe that it represents a good predictor of the performance of our economy in the years ahead. To be fair, I think that the hon. Member for Eastleigh would acknowledge that although there was variance in terms of the growth projections and what has subsequently happened in the most recent period, until that point, the Treasury was accurate in its projections and predictions on the performance of the British economy.

Mr. Francois: The Minister is crowing about the Treasury’s ability to predict accurately. He knows that, back in 2001, the Chancellor, as usual, projected the amount of money that he would borrow over the next five years. We are now, fortunately, in a position to look back and see how much he projected he would borrow and how much he actually borrowed. Will the Minister confirm that the Chancellor was more than £100 billion out?

Mr. Lewis: The economy of this country is unprecedentedly healthy. We have low inflation, low interests rates and low unemployment, and a record number of successive quarters of economic growth. Therefore, whatever happens with individual elements from time to time, the state of this economy is robust and healthy by any global standard. That means that Britain is in a strong position to respond to the challenges that globalisation undoubtedly presents. I will now make some progress, because hon. Members will have the opportunity to ask questions when I have finished my opening statement.

My right hon. Friend the Chancellor stated to the House—I have just said this—that the strength of a monetary and fiscal regime is its performance not just in the good years, but in the more difficult ones. As I said, this is the toughest and most challenging year for the economy for some time. Yet, as a result of the strong macro-economic framework that we have created, we have delivered record high rates of employment, with the economy generating some 6,000 new jobs every week. As always, we will continue to maintain the fiscal discipline. I am sure that all Members of the House would expect no less.

In the pre-Budget report, the Chancellor announced that we were meeting our fiscal rules. We are also meeting the golden rule in this economic cycle by more than £16 billion. Central to the Government’s economic objectives is the need to build a strong economy and a fair society, where there is opportunity and security for all. We must to do that if we are to face up to the challenges of globalisation, which we must face together as a society. Businesses must seize the
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moment and embrace transformed markets and new opportunities, and Government must establish the right environment for business to prosper.

There is also little doubt that, in the long run, continued economic growth depends on our enhanced productivity. The pre-Budget report sets out further reforms to support the UK’s response to globalisation, including plans to increase the supply and improve the affordability of housing, to strengthen the planning system, to reduce further the regulatory burden on business, and to create a world-class environment for scientific research and development, helping to improve the skills of the nation.

Let hon. Members have no doubt—this Government’s strategy is to meet the productivity challenge by focusing on five key drivers of productivity performance: improving competition, promoting enterprise, supporting science and innovation, raising UK skills, and encouraging investment.

In the pre-Budget report, we set out our next steps to achieve all that. The first is to take forward the goals of the 10-year science and innovation investment framework, including measures to create a world-class environment for health research specifically. The second is to set out our strategy for tackling the long-term lack of supply and responsiveness of housing. The third is to launch a review, again led by Kate Barker, to consider how planning in England can better deliver sustainable economic development in a timely and transparent way.

The fourth step is to make progress in implementing the Hampton review recommendations to reduce the costs on business of administering regulations. The fifth is to introduce measures to reduce costs on business by removing unnecessary regulatory burdens, including those originating in Europe. The sixth is to announce an independent review to ensure the UK’s intellectual property framework is appropriate for the digital age. The seventh is to publish the interim report of Lord Sandy Leitch’s review of skills. The eighth is to provide additional support for higher education export, which will sustain the UK’s world-leading position and attract more highly-skilled overseas students.

Mr. Francois: I thank the Minister for his courtesy in giving way again. Given that all this is occurring in relation to productivity, why has productivity growth slumped from 2.5 per cent. a year in 1997 to 0.5 per cent. a year now?

Mr. Lewis: If one looks at our record on productivity year on year, one will see that it compares exceptionally favourably with the record of the Government that the hon. Gentleman supported during that long period between 1979 and 1997. The productivity situation in this country is healthy. Taking account of record employment and low unemployment, we cannot be complacent in this context, but we can be pleased with the progress we have made.

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A flexible and high-productivity economy has to be underpinned by high-quality public services too. We are determined to deliver world-class public services through sustained investment and continuous reform. We are on course to meet the targets set out in the 2004 spending review, which also included efficiency targets for all Departments. As part of the figures we published with the pre-Budget report, the Chancellor recently confirmed that the first £4.7 billion of savings identified by the Gershon review have been achieved this year. That exceeds by £1 billion our initial target of £3 billion in procurement savings—and a year early at that. There have also been on-target reductions and relocations of posts across the civil service. Ahead of schedule, £5.7 billion of assets have been sold, and in the coming year we will conduct a zero-based asset review.

Our task is to meet and master the global economic challenge, making the critical decisions to secure Britain’s long-term economic future. By combining our enterprise with investments in skills and science, and in infrastructure and housing, at every point matching investment with reform, Britain can lead in the world’s most wealth-generating and dynamic sectors—science, modern manufacturing, finance, capital markets, education and the creative industries.

With fiscal discipline, and by matching investment and reform in welfare and our public services, we can combine and continue to combine a strong economy with opportunity and security for all. That is the programme that we set out in the 2005 pre-Budget report and that—with the approval of the House—is the basis on which we will send updated information to the European Commission.

We are fulfilling our commitment under the Maastricht Act to report on our main economic policy measures and maintaining our position, developed by this Government, at the heart of the EU policy process. I look forward to the debate.

2.48 pm

Mr. Francois: It is a pleasure, Mr. Pope, to serve under your chairmanship this afternoon. I have not had the pleasure of experiencing your skills as a Whip—although I am sure they were considerable—but I hope to experience your skills as an affable and equitable Chairman this afternoon. It is also a pleasure to be opposite the Minister; we have sparred back and forth for nearly a year now. As this is my first formal appearance as the new shadow Paymaster General, I should like to thank him for his kind comments on my surviving the reshuffle, as he put it.

The Minister has been closely involved in the EU budget negotiations, both for 2006 and the new financial perspective for 2007–13. I suspect that we may end up touching on that briefly, but as I understand it our main purpose this afternoon is to debate section 5 of the 1993 Act, which charges the Government of the day with a particular responsibility. It states:

    “Her Majesty’s Government shall report to Parliament for its approval an assessment of the medium term economic and budgetary position in relation to public investment expenditure and to the social, economic and environmental goals set out in
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    Article 2, which report shall form the basis of any submission to the Council and Commission in pursuit of their responsibilities under Articles 103 and 104c.”

Now that we have cleared that up, I should say that I understand that this measure is traditionally debated shortly after the pre-Budget report, which in this case took place on 5 December this year. I accept the Minister’s responsibility entirely at face value; it would have been helpful to have had a copy of the formal submission that was going to the Commission. I understand that that was provided two years ago, although not last year. I take this opportunity to put down a marker for the Minister and ask that next year, if at all possible, that document should be made available to the Committee. However, I accept that much of it is sourced directly from the pre-Budget report.

My contribution this afternoon will take the form of questions that I should like to put to the Minister in the hope of eliciting information on some of the subjects on which we are required to report to the Commission. First, as the treaty largely related to the single currency, part of the purpose of this report, as I understand it from the history of debates on the treaty, was that Parliament should effectively submit a report on how we are doing—in part, at least—against the so-called Maastricht criteria, as some reassurance against the possibility of our ever joining the euro.

Has there been any change in Government policy on whether to recommend membership of the European single currency? We on the Conservative Benches would most certainly oppose that on principle. As I understand it, the Treasury’s position is that that would still be subject to the so-called five economic tests, which I have here, but do not propose to read out now. Will the Minister tell the Committee when it is next intended that the Treasury should carry out an assessment of those tests, and when the conclusions of that assessment are expected to be made public?

One reason for asking is that earlier in the Chamber, in the debate on European policy in advance of the EU summit, the Foreign Secretary appeared to change the Government’s policy when he said that the pound is safe, and he implied that any attempts by any element of the Government to force us into the euro had been given up. He was wriggling thereafter. Perhaps the Minister will confirm the Treasury’s policy on that, having had the Foreign Office’s interpretation about an hour ago.

Secondly, with regard to the so-called Maastricht criteria, a key criterion was that any country wishing to join the single currency should have a ratio of debt to gross domestic product of 3 per cent. or under.

Chris Huhne: Deficit.

Mr. Francois: Yes, the 3 per cent.

Since then, a number of major European countries have breached that guideline but have still remained in the euro. If we concentrate on the UK, because that is what we are charged to do, will the Minister confirm whether the UK debt ratio will remain below 3 per cent. of GDP this year?

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It has already been suggested in this debate that we might exceed that 3 per cent. limit. I should like the Minister to confirm whether that is so, especially now that the Chancellor’s in-year growth forecasts have been halved and the reduction in growth that we anticipate reduces the headroom with regard to the deficit. Perhaps the Minister will give us a clear estimate on behalf of the Treasury of whether the 3 per cent. limit will be adhered to, or whether it will be breached in light of the fact that our growth will be less than we anticipated.

Thirdly, will the Minister also mention the so-called 60 per cent. debt-to-GDP ratio, which is another of the so-called Maastricht criteria? The Chancellor often claims that we are safely within that 60 per cent. ratio—indeed, he likes to crow about it—but that is not necessarily so if the vast raft of off-balance-sheet items that the Government have accumulated under the Chancellor’s financial management are included in the calculation. Our preliminary estimate of that very large sum about a week ago came out at £1.3 trillion. If the off-balance-sheet debt is put back into the calculation, do we breach the 60 per cent. debt-to-GDP ratio? We should like a clear answer.

Fourthly, what about the planned increase in the Chancellor’s borrowing requirements? In the pre-Budget report, as is often the case nowadays, the Chancellor increased his borrowing estimates. As I said earlier in an intervention, it is often supposed that he is quite a good forecaster. Until recently, that has been true in respect of growth, but this year bust that pattern completely. The Chancellor has been appalling at forecasting his borrowing; he has been more than £100 billion out over the spread of the past five years. Those on the Liberal Front Bench assent to that proposition.

The Chancellor is a poor forecaster of borrowing. The total anticipated borrowing for the UK this year has now increased as a result of the PBR to some £37 billion, and most independent economists now agree that the figure includes a £10 billion to £12 billion structural black hole in the Chancellor’s finances. According to the PBR on 5 December, the Chancellor intends to borrow a staggering £151 billion a year over the next five years, which is a significant addition to the nation’s mortgage. Can the Minister explain how the Government intend to plug that black hole of £10 billion to £12 billion, which will not be filled even by the tax increases that were announced in the pre-Budget report that, at best, would fill about one third of that sum? Perhaps he will tell the Committee what further action the Government propose, either in terms of restraining public spending, or increasing taxation to fill that black hole.

Fifthly, I should like to ask the Minister about the interaction between the EU budget negotiations and our deficit, which I mentioned a few moments ago, because that will include our spending over the next few years, including our likely contributions to the EU. The new financial perspective that is being negotiated now will govern our contributions to the EU for the period 2007–13. The financial perspective, as the Minister will know, is broadly the EU version of
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the comprehensive spending review. It is important to know how much money we will be contributing in the rebate, or how much we will be giving up.

The Government said back in June that they would not renegotiate the British rebate at all, but it is rumoured that they are now offering up a sum of between £800 million and £1 billon per annum, to be knocked off the rebate to which we are entitled in order to try to reach a deal. That represents a total of some £5 billion to £7 billion over the medium-term period of the next financial perspective.

There were worrying press reports over the weekend that the Chancellor’s figures, as encapsulated in the PBR Green Book, do not include losing that income from the rebate if such a deal is struck in a few days. Can the Minister confirm to the Committee that the PBR does not include any potential reduction in net revenue coming to the UK from the rebate? I will gladly give way to him now, so that he can do that, if he wishes. [Interruption.] The Minister intimates from a sedentary position that he will answer that point. I will not try to coax him further to intervene on me, if he promises that when he answers that point he will allow me to intervene on him again. Is that a fair deal, Mr. Pope? I hope that I have your assent.

There is an irony to do with the whole Maastricht criteria, and the associated stability and growth pact—which, incidentally, neither ensures stability, nor encourages growth. That was partly insisted on by the northern European EU members—in particular Germany—to reign in anticipated overspending by the so-called Club Med countries of southern Europe. Those of us who served in the European Parliament before entering the House are very aware of the history of all of that. However, over the past few years, northern European countries—such as Germany and France in certain years—have been some of the biggest transgressors, and to such a degree that the stability and growth pact has largely been discredited.

The UK Chancellor likes to pay lip service to prudence, while at the same time running a ballooning budget deficit, which is now so large that he has had to manipulate his golden rule several times in order to accommodate it. The golden rule was meant to be part of the bedrock of the Chancellor’s reputation for financial prudence and for encouraging stability in the British economy. However, he has now changed it so often that the Institute for Fiscal Studies said last week:

    “The goalposts have been moved so far that they are barely still on the pitch.”

A fundamental tenet of the Chancellor’s claim to fiscal prudence has now almost been carried off the pitch because he has manipulated his own golden rule so many times that it has been undermined in both the City and the public mind.

I have five tests to put to the Minister this afternoon. First, can he explain when the Treasury intends to carry out the next assessment of the five economic tests for joining the single currency, and when will that be reported to the House and the country? Secondly, can
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he confirm whether the UK will still remain within the Maastricht 3 per cent. deficit limit this year, even with growth that is half what was originally anticipated for 2005–06? Thirdly, can he confirm what the UK ratio of debt to GDP would be if off-balance-sheet items were included in the calculation? Fourthly, how does the Treasury intend to fill the £10 billion to £12 billion black hole, and does the Minister envisage the anticipated total of £151 billion that the Chancellor now intends to borrow over the next five years being revised upwards in the spring 2006 budget, bearing in mind that that has often been the case in previous years? Fifthly—this relates to the exchange that we have just had—can he state whether the anticipated overall reduction in the UK’s rebate that is about to be surrendered in Brussels is included in the PBR figures published on 5 December? I would like a yes or no answer to that. The Committee awaits his replies to those questions with considerable interest.

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Prepared 19 December 2005