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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The Chairman: It may be helpful to the Committee if I explain that whether the Minister takes interventions is a matter for him; it is not a matter for the Chairman. 2.59 pmDr. Vincent Cable (Twickenham) (LD): I welcome you to the Chair, Mr. Pope. I share the regret of the hon. Member for Rayleigh that we do not have a document to discuss beyond the pre-Budget report, and that we are therefore reduced to rehearsing many of the arguments that we made a week or so ago about that report—in my case, before the House. I will try to avoid too much agony and will not repeat all the arguments in great detail. I was surprised, and a bit disappointed, that the Minister repeated some of the more hackneyed and weaker arguments about economic growth performance. The Government could make perfectly reasonable points about British economic growth over the past eight years, but they have fallen back on this rather feeble excuse for a halving of British growth this year: it is all because of the oil shock. Coming from a country that is largely self-sufficient in oil and is therefore not affected by any of the terms of trade effects that would come from higher oil prices, that argument completely neglects the way in which most other industrial countries, notably the United States and Japan, have ridden out the oil shock without any impact on their growth whatsoever. It ignores the experience of other European countries, such as Sweden, Spain and the countries in eastern Europe, which have apparently been unaffected. Of all the industrial countries, Britain is the one that has to downgrade its expectation of growth—more than all of the other developed countries. Oil is not an explanation for that. It is disappointing that the Minister keeps rolling out that hackneyed argument. As for the rest of the European Union, it is often said—the Conservatives probably make this point more than others—that there is disappointing growth in the euro area. Of course, that situation is very uneven. As I recall it, if we look back over the past decade or so, we will see that Britain’s growth is
Mr. Francois: Has the hon. Gentleman heard rumours—I put it no stronger than that—that over the past few years the Treasury has carried out a number of confidential analyses and reports about the possibility of a European country withdrawing from the European single currency? I will not name the country, but my mother was born there. Dr. Cable: It has been openly debated in the national press in the country concerned. I think it is highly improbable that Italy would want to return to the scala mobile, the days of devaluation and so on. I discount the stories greatly, but I do not criticise the Treasury for doing contingency planning. It is entirely proper and is partly what it is paid to do. My second point relates to other aspects of macro-economic performance. The Conservatives made reference to the monetary policy regime, as did the Minister. I have always argued that what the Chancellor did eight years ago in setting up the Monetary Policy Committee of the Bank of England was admirable and successful. It was one of the more successful policy innovations in modern times. None the less, there is a danger of complacency overwhelming that success. I will make two points on that issue. The first is that although our inflation rate is relatively low, which is creditable, it is so low because it almost entirely excludes housing from the inflation indicator. If the housing market had in some form been included over the past five years, the situation would have looked a good deal less healthy. I have a specific and technical question for the Minister. I know that the Government have been in discussions with Eurostat about the possibility of a new index for inflation that properly incorporates housing costs. Will he tell us what stage those discussions have reached, and whether Britain is likely to introduce a modified measure of inflation that captures changes in the housing market? The Chancellor acknowledged in response to a question from me about a year ago that the discussions were taking place. I would be interested to know what stage they have reached. The second point is a simple one on the success of the policy. It is true that we have had economic stability and low inflation. British real interest rates—in other words, interest rates less inflation—are significantly higher than in the rest of the European Union. Although the European Union and the European Central Bank are sometimes criticised, over
Thirdly, on fiscal policy, the questions that the— Mr. Francois: I have tried to do some homework for this debate and I have read previous debates in which the hon. Gentleman pointed out that, historically, British long-term interest rates have been somewhat higher than those of some of our European partners. I remember his pressing the Government for an explanation, which was not entirely clear. As the hon. Gentleman has made that point before, will he explain why he thinks it is the case? Dr. Cable: The general explanation is that despite the changes in policy, which have been for the better, markets, which are rather cruel and look at objective reality, are not fully persuaded that the British Government have entirely conquered previous long-term weaknesses in British economic policy. Long-term interest rates, bond yields and things of that nature partly reflect the market’s judgment about budget deficits, to which I am coming now. The question posed by the hon. Gentleman a few moments ago is the correct one: where are we in respect of the 3 per cent. Maastricht target? As my hon. Friend the Member for Eastleigh pointed out a few moments ago, the estimated deficit is something of the order of 3.5 per cent.—perhaps 4 per cent.—this year, significantly above the level that we are required to observe in the European Union. In the past, the Chancellor has always said that having a 3 per cent. target every year is too rigid and that things need to be judged over the cycle. The problem is that the concept of the cycle has become almost a joke, because the Chancellor himself defines what the cycle is. That is one of the areas in which our economic policy framework is now weaker than that of the rest of the European Union. At the very least, for all its rigidities, the economic and social pact provided a framework within which there was some kind of objective peer review of other countries’ fiscal policies. We have no such objective measure. The Chancellor marks his own exam papers, in effect, so there can be no confidence that the targets have been met. I am sure that the hon. Gentleman was tongue-tied rather than confused when he mixed up debt and deficits; we shall gloss over that. The technical point about debt is that the European Maastricht measure is 50 per cent. of GDP, rather than the 40 per cent. that we apply domestically. That is partly because of the difference between gross and net debt. We need assurances from the Minister on how well Britain is doing on the European, as well as the British, measure of debt. [Interruption.] I am sorry—the European
I agree with the hon. Gentleman about some of the hidden debt. I am talking not about deception, but differences in measurement. We know, for example, that the private finance initiative will have to be reclassified by the Government statistician fairly soon. If we take that into account, as some of the independent institutes such as the IFS tell us we should, we could approach both the 40 per cent. British measure and the 60 per cent. European measure within the next year or so. There is an important question about what the Government should do when they get to the debt limit. What will happen? They could simply disregard it or move the goalposts, but we shall assume that they do not do that. Will the Government have to cut the rate of Government investment? Government investment is growing quite rapidly at the moment and that is creating the rising level of debt in relation to GDP. How will the Government respond to that if it occurs? The argument is primarily about macro policy and how we report the matters under discussion to the European Commission. The hon. Gentleman made a point about the budget settlement, which I am sure will be debated ad nauseam next week. I happen to agree with his basic point. We could come out of the negotiations with an extremely bad settlement, from every point of view—a settlement in which the British Government have surrendered the rebate. Although I do not regard the rebate as inviolate, because it is there to be negotiated, the British Government may be surrendering a substantial sum of money—perhaps £1 billion a year—but the eastern European countries, whose membership we actively encouraged, will be frustrated and disappointed because they will receive less than they were led to expect, and the main negotiating objective, which was to make further liberalisation progress in relation to the common agricultural policy, will not even have been re-opened, let alone negotiated. The reason is that the Government made a massive miscalculation in announcing that a policy that they agreed in 2002 could be renegotiated. Why the Prime Minister agreed to that is one of the mysteries that historians will no doubt exhume in due course. He may have done so because he was otherwise preoccupied with the war in Iraq and other things. Nevertheless, that mistake was allowed through. Why have the Government been encouraging us over the past few months to believe that it is possible to unpick the agreement and make large savings in the agricultural spending budget, when it was clear that they had already agreed to it and it was, in practice, non-negotiable? We have an unholy mess, which is unsatisfactory. Even those of us who believe in the European project, think that it has achieved much and could do much more and think that we should be an active part of it,
3.11 pmMr. Lewis: This has been an interesting debate. I shall do my best to deal in detail with the important issues and specific questions that have been raised, although I am not sure that I can answer some of the hypothetical questions—nor do I know whether it is desirable to answer them. I apologise to the hon. Member for Rayleigh for saying that he survived the reshuffle. Clearly, he has been promoted if he is now shadow Paymaster General. I congratulate him on his promotion. On the single European currency, I do not think that the Foreign Secretary said what he is alleged to have said in the Chamber. The five tests most definitely apply. The Government did not propose that a euro assessment be initiated at the time of the Budget 2005. The Treasury will review the situation at Budget time next year. That is a clear, unequivocal statement of the position. The hon. Gentleman asked whether we are breaching the Maastricht treaty deficit limit. I will try to help hon. Members with a number of elements in my response. Nominal general Government net borrowing on the treaty definition is projected to fall from 3.3 per cent. of GDP in 2004–05 to 3 per cent. in 2005–06, 2.7 per cent. in 2006–07 and, further, to 1.5 per cent. in 2010–11. With regard to the treaty deficit of 3.3 per cent. in 2004–05, adjusting for spending on public sector net investment would leave the deficit at just 1.7 per cent. of GDP. In cyclically adjusted terms, the 2004–05 deficit is 2.9 of GDP and falls to 2.2 per cent. of GDP in 2005-06. The key point is that, taking into account borrowing for investment, as specified in the EU, that is consistent with a medium-term budgetary objective, meeting the Government’s fiscal rules by maintaining the current Budget in balance or surplus over the cycle and maintaining net debt below 40 per cent. of GDP. That is also consistent with maintaining gross debt well below 60 per cent. of GDP. Mr. Francois: I appreciate that the Minister is trying to give a detailed answer to the question, but he said that in 2004–05 the deficit was 3.3 per cent. and that it would come under the 3 per cent. limit if it were cyclically adjusted—in other words, as the hon. Member for Twickenham (Dr. Cable) was saying, if we spread it over several years. However, assuming that we do not do that and if we consider that figure as un-cyclically adjusted in 2004–05, it was 3.3 per cent. and we bust the 3 per cent. limit. Can I just make sure that I have understood that? Mr. Lewis: That is exactly what I just said. The reality is that not including cyclically adjusted terms is nonsensical and not relevant to the debate. It is perfectly legitimate to take account of them. Chris Huhne: The Minister is aware, obviously, that the 3 per cent. is a non-cyclically adjusted limit. Column Number: 17 Mr. Lewis: Yes, I am aware of that. That is what I just said. May I move on to some other points that the hon. Member for Rayleigh raised? He asked questions about the deficit on the current budget. That deficit will almost halve from £20 billion in 2004–05 to £11 billion in 2005–06, which is an improvement of 0.8 per cent. of GDP. Net borrowing will drop by a smaller margin of 0.3 per cent. of GDP because of continued growth in net investment. Compared with the 2005 budget, net borrowing is expected to be £5 billion higher in 2005-06, which reflects slower than expected growth. However, in normal circumstances, the slow-down in growth would have caused a bigger fiscal shortfall than has been evident in the receipts growth so far this year. As a result, the cyclically adjusted current budget and net borrowing figures for 2005–06 have improved since the 2005 Budget and show a significant improvement from 2004–05. That structural improvement has been driven by buoyant receipts growth from North sea corporations and the financial sector. It remains that case that our financial position compares favourably with that of other major competitors. Net borrowing was lower than the G7 average in 2005, and only the UK and Canada have net debt below 40 per cent. Mr. Francois: I appreciate that the Minister is trying to give detailed replies, but he keeps talking about cyclically adjusted figures. If that is the Treasury’s answer to all things, which appears to be the case this afternoon, does he accept that those things stack up only if independent commentators, politicians and members of the public have confidence in an accurate assessment of the cycle? How can they do that when the Chancellor keeps redefining when the cycle is? Mr. Lewis: I do not accept that analysis. The reality is that the definition of the economic cycle has to be reached objectively. We believe that the objective evidence that became apparent justified the definition of the economic cycle that we reached. There are people outside the House, and hon. Members, with a different opinion. Our position is perfectly respectable and consistent with the facts about the economic cycle. There is a suggestion that we keep changing the rules. The reality is that this Government have structurally built into the economy a stability that has never previously existed, due to some of the decisions we have taken. We will never make much progress in the debate about the cycle, because the hon. Member for Rayleigh does not agree with the decision that we made on it. We believe that it is entirely consistent with the available evidence. On future financing and the comments of the hon. Member for Twickenham, let me make it clear that I will not give a running commentary on negotiations that are at an incredibly sensitive stage. It would be unhelpful to do so. On the PBR, the relevance of those negotiations and any ultimate position in terms of the PBR calculations, the forecasting was realistic, although we accept that any change to the level of
Again, we have had to make best judgments about parameters in terms of where the negotiations may end up. There is no other way that we can approach the exercise. It is fatuous at this stage of the negotiations to demand that we state our position. It will become extremely clear—in the near future, I hope—what the future financing settlement is and what the implications are for our economy and for every other economy affected by it. I do not think that we can make further progress on that point today. Mr. Francois: I listened carefully to what the Minister said, which was in fact an admission that the PBR does not account for that situation. He said that he will not give a running commentary. May I suggest that he get on the phone to the Foreign Office, because this afternoon in the main Chamber that is exactly what the Foreign Secretary did? He said that we are offering up to £1 billion per annum in terms of the negotiations that will take place later this week. He confirmed on the Floor of the House that the pre-Budget report figures do not include any amount of money that might be given up as a result of the negotiations. In the spirit of joined-up government, may I encourage the Treasury to talk to the Foreign Office? Mr. Lewis: We do not need to. Michael Fabricant (Lichfield) (Con): On a point of order, Mr. Pope. Given the interesting information that we have received, would it be in order for the Committee to adjourn for a while so that a conversation might take place between the Treasury and the Foreign Office so that we can get a truthful and wholly accurate answer to the question posed by my hon. Friend the Member for Rayleigh? The Chairman: That is rather mischievous, but the Minister will have heard the hon. Gentleman’s comments. Hon. Members: Shocking! Mr. Lewis: As ever, Mr. Pope. The reality is that if we achieve our objective, which is the UK presidency—some would say against the odds, as this is a painful process—achieving a settlement on future financing in the near future, the financial and economic consequences of any such settlement for our country will become apparent and transparent. That obviously relates to the economic position outlined in the pre-Budget report. Any attempt to find out where things are going is pointless at this stage in those negotiations, but it is to be hoped that that will become apparent within a matter of days. However, if things are put off until later, we will, of course, have to wait even longer. If the hon. Member for Rayleigh will forgive me, I will now move on to other matters. The hon. Gentleman asked about off-balance-sheet debts, the sustainable investment rule and Network Rail’s liabilities. The decision as to whether a PFI
Mr. Francois: No, with respect. I acknowledge the Minister’s courtesy in having given way a number of times—I want to place that on the record—but what he has said does not answer the question I asked. I appreciate that the ONS can rule on whether such things are included, but my question was, if it were to rule that they are included, what would that do to the ratio? Mr. Lewis: I do not have that information to hand, but I can let the hon. Gentleman know. Mr. Francois: Will the Minister write to me? Mr. Lewis: I can write to the hon. Gentleman. If I can be supplied with information on that, I will certainly pass it on. The hon. Gentleman referred to a black hole in the Government’s economic forecasting. There is no black hole in terms of our forecasting, or in terms of our commitments in respect of public expenditure and reform of public services. As ever, the real black hole is in the Conservatives’ figures: based on the economic pronouncements of the new leader of the party, what sums would be available for spending on public services under a Conservative Government? Based on the new leader’s own definition of how he would split the benefits of growth, there would once again be millions of pounds of cuts, year on year, in our public services. Chris Huhne: Billions. Mr. Lewis: Billions—I thank the hon. Gentleman. That makes nonsense of any suggestion that we have a new, cuddly, friendly, modernised Conservative party. The real black hole is the one that has always existed—the commitment to use the dividend from economic success in that way. There are two issues. Which group of politicians do the people believe has the ability to manage the economy effectively? Even if it were conceded—which I am not willing to do—that the Conservatives might be able at some, illusionary, stage in the future to manage the economy effectively, what would they do with the resources? We all know what they would do: cut the taxes of the people who least need their taxes to be cut and cut investment in public services. We also know that the shadow Chancellor, who is the leading adviser and friend of the new leader of the Conservative party, is exploring the possibility of introducing the most inequitable and impractical tax in the world—the flat tax. Some would describe that as barking mad. Therefore, there is a combination of a commitment to continued policies that would lead to
The hon. Member for Twickenham made several points and asked a specific question about alternative ways of measuring inflation that include housing costs, which I shall try to address. Obviously, he knows that the ONS produces a measure of inflation that includes housing costs—the retail prices index—but for the purposes of monetary policy and international comparison, we use the statistically more advanced measure of the consumer prices index. We have no intention of changing that, as far as I am aware. The hon. Gentleman tends to be quite balanced in his analysis of the Government’s economic performance. Michael Fabricant: A leadership bid! Mr. Lewis: Well, there are lots of leadership bids going on in that party at the moment. Chris Huhne: Not in the Treasury. The Chairman: Order. Mr. Lewis: The outcome of Government policy is that we have low inflation, low interest rates and low unemployment in this country. By any standard, globally, this country has performed consistently well in the good years, and the bad, for the past eight years. Any objective analysis of the future performance of the British economy would be optimistic and upbeat, because even in those difficult years—I have acknowledged that this year has, perhaps, been the most difficult since 1997—we have maintained performance on unemployment and reassured people of the underlying stability of the economy. Consequently, we have been able to invest sustained and record resources in our great public services, while wanting to reform them. We can debate individual elements of policy and cast aspersions on the future direction of travel, but most independent, objective economists would say that the fundamentals of our economy are sound. I have attempted to address all the points that have been raised in the debate, and I have offered to write to the hon. Member for Rayleigh on a specific point. Against that background, I commend the motion to the Committee. Question put and agreed to. Resolved,
Committee rose at twenty-seven minutes past Three o’clock. |
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