The Economic Secretary to the Treasury (Ed Balls): I beg to move,

It is a great honour to serve under your chairmanship, Mr. Amess, for what I believe is the first time in my case. The subject for debate is the information that is provided to the European Commission under section 5 of the European Communities (Amendment) Act 1993—the Maastricht Act, as it is better known. As you were Parliamentary Private Secretary to the Chief Secretary to the Treasury during the Maastricht negotiations, I know that you will understand the sensitivities that arise out of such matters.

Committee members will be aware that one result of the debate on the Maastricht negotiations is that the Government submit a report to the Commission each year that contains information on the UK’s economic and budgetary position and on the Government’s main economic policy measures. By formally sharing information from the pre-Budget report with our European partners, we can help ensure a proper, accurate and effective EU system that contributes to enhanced employment and growth. A copy of the December 2006 convergence programme for the UK has been placed in the Library today, and one has also been provided to the hon. Member for Chipping Barnet. By holding today’s debate, we fulfil our commitment under the Maastricht Act.

The report to the Commission sets out our economic record and the way in which we are addressing the challenges that are faced in delivering stability, rising prosperity, and opportunity and fairness for all. The document sets out how the UK economy has now expanded for 57 consecutive quarters—the longest unbroken expansion since quarterly national accounts began, and the longest ongoing expansion among all member countries of the Organisation for Economic Co-operation and Development. The document also sets out that, in the past five years, the UK has enjoyed the second lowest rate of inflation in the G7 after Japan and growth rates that are significantly stronger than those in the euro area.

In preparing the document, however, the Government have also had to deal with the challenges that have been faced over the past year, including those found in the global economy—global imbalances, exchange rate instability, the stalling of trade talks, and high and unstable oil and commodity prices. Against that backdrop, the report shows that growth is expected to be 2.75 per cent. this year, rising to 2.75 to 3.25 per cent. next year. We expect inflation to reach its 2 per cent. target level by mid-2007 and to remain there in 2008. Productivity in the last economic cycle—to 1997—grew at 1.9 per cent., but growth has averaged 2.4 per cent. since then.

This year alone, 200,000 more people are in employment, and there are now 2.5 million more jobs in the economy than in 1997, resulting in the highest ever figure for the number of men and women in work in our country. The document makes it clear that the strength of the UK economy is the result of the tough decisions that the Government have taken, along with the macro-economic framework that we have put in place since 1997.

The Government’s monetary policy framework seeks to ensure low and stable inflation. The Bank of England Act 1998 gave full operational independence to the Monetary Policy Committee, which has the discretion to decide when and how to react to events to meet a clearly defined inflation target. As I said, the framework has delivered the longest period of low and stable inflation since the 1950s. It ensures that the Bank of England can take a forward-looking approach to the setting of interest rates.

In recent years, there has been some suggestion that we should reform the monetary policy framework. It has been suggested, for example, that we should hold an annual vote in Parliament on the inflation target, and that we should change the rules and appoint a majority of external members to the MPC. Having considered those suggestions, we believe that they would put stability in the economy at risk, and that holding such an annual vote would put the monetary framework at risk of influence by short-term political considerations. That would take us back to the bad days, pre-independence, and we have no intention of allowing that.

The report shows that fiscal policy is sound. As the Chancellor of the Exchequer reported in the pre-Budget report on 6 December, we are meeting both of our fiscal rules. We have two such rules: the golden rule—

Mrs. Theresa Villiers (Chipping Barnet) (Con): It is a pleasure to serve under your Chairmanship, Mr. Amess. Is the Economic Secretary concerned about the fact that the credibility of the golden rule has been so significantly undermined by the Chancellor having twice changed the dates of the economic cycle?

Ed Balls: I shall set out the position on the fiscal rules and then answer the hon. Lady’s question. As she knows, the golden rule states that current spending is paid for by current revenues, rather than by borrowing. The sustainable investment rule states that debt is held at a prudent and stable level during the economic cycle. In the pre-Budget report, the Chancellor announced that we are meeting those rules, with an overall surplus of £8 billion in this economic cycle and, indeed, that we are also on course to meet the rules in the next cycle.

The hon. Lady is quite right that the dating of the cycle is very important indeed. That is why we have asked, for the first time since 1997, the independent National Audit Office to audit our underlying assumption of the trend rate of growth. That is the key number in determining the economic cycle and, with our economic forecasts, the relationship between the economy and the economic cycle. Clearly, when the information from the Office for National Statistics changes, the dating of the cycle will also change. That happens in a clear, open, audited and objective way, which the NAO endorses through its assumption of trend growth. Additionally, we have asked it to audit the end date of the economic cycle.

Since 1997, we have had two fiscal rules. We have kept to the same fiscal rules every year, year by year, and for the first time, we have asked the NAO to play the role of auditing the cycle and the other assumptions. In the previous period, the fiscal rules changed year by year, according to the state of the economic cycle. When the economy was strong, the commitment was to a Budget surplus. When the economy was weaker, the commitment was to a balanced Budget.

Mrs. Villiers rose—

Ed Balls: I will finish that point.

When the economy moved into recession, the commitment was to move back to balance in the medium term. There is nothing that more undermines fiscal policy in our country than changing the rules year by year, as the economy changes. We have kept to the same rules, with an independent audit. There is more openness, transparency and scrutiny of fiscal policy in the UK now than ever before in our history. That is why we still have a strong and credible record on fiscal policy.

Mrs. Villiers: Effectively, you are not sticking to the same rules when you can randomly turn up at the Treasury Committee one day and change the date of the cycle, which is one of the key underlying assumptions. The Economic Secretary may be talking about the NAO making a limited auditing of assumptions now, but when the Chancellor turned up at the Treasury Committee and made the first change to the underlying assumptions, no such audit had taken place.

Ed Balls: The hon. Lady does not deny that the assumptions of the rules are audited by the NAO; they were not before 1997. [Interruption.] We have kept the same fiscal rules, year by year, since 1997. Our record under those fiscal rules is that, although we have had a current surplus of £8 billion in this cycle, there was no such surplus in the previous cycle, between 1986 and 1997; there was a deficit of £240 billion. That deficit was concealed by the fact that there was no transparency, independent audit or the clarity that comes from having a fiscal rule against which to be judged. The hon. Lady can ask those questions precisely because we have been very clear and public with our rules. We have also been transparent in the way in which we have operated the system.

Mr. Geoffrey Robinson (Coventry, North-West) (Lab): Will the Economic Secretary confirm whether the Conservative Government’s record on deficits was so poor that they ran a record deficit of more than £50 billion in 1992, when they won that year’s general election, and that they had hardly got it down much below £30 billion when he was elected in 1997, when Labour took office?

Ed Balls: I remind my hon. Friend that, unfortunately, I was not elected until 2005, and therefore that I served unelected in the previous period. It is true, however, that the Labour Government was elected in 1997, and that, as my hon. Friend said, we inherited borrowing of around £30 billion and a position in which we were told by officials that, if we did not move immediately, inflation was set to rise not above 3 per cent., but actually to 4 per cent.

Mr. Brooks Newmark (Braintree) (Con) rose—

Ed Balls: The hon. Gentleman should hold on a second.

That was why it was so important to act immediately, to take the decisions on interest rates to get the economy back on to a path of stability and low inflation and to make the Bank of England independent, so that we could lock in that stability of monetary policy for the medium term. That decision was opposed by Opposition Members, who would now seek to change the rules of the game on monetary policy to take us back to the very instability that we all want to put behind us.

The Chairman: Order. Before the Economic Secretary takes an intervention, I remind the Committee to make remarks entirely relevant to the matter that we are discussing.

Mr. Newmark: I hope that my questions to the Economic Secretary are relevant. First, how many changes to the golden rule are acceptable? We have had not one, but two changes and possibly three—even in the PBR—in defining the golden rule. Secondly, the Government have rightly insisted on greater transparency in our accounting—hon. Members mentioned debt in the country—but is it not best to have transparency with off-balance sheet as well as on-balance sheet financing, so that we know the true state of the nation’s debt?

Ed Balls: Those points are relevant, because we are talking about whether we report to the European Commission on a strong, credible regime for decisions made in Britain on interest rates and fiscal policy, or whether we return to the mistakes of the past. That is why it is right that we analyse the submission that we are putting forward. The hon. Gentleman’s first point is wrong. The definition of the golden rule has remained unchanged since 1997.

Mr. Newmark: Why have the goalposts been moved twice?

The Chairman: Order.