Ed
Balls: If the hon. Member for Braintree wants to
intervene, he will have to stand up. This is not the Treasury
Committee; here we play by different rules.
The hon. Gentleman will know
that the definition of the golden rule has stayed unchanged since 1997.
As I said, this is the longest period of stability in fiscal rules in
the post-war period. The rules have not changed, but the detailed facts
about the economy have changed. As Keynes said, “When the facts
change, I change my mind—what do you do, sir?” However,
when the facts change, it is not our decision, because we have
independently audited the trend rate of growth through the National
Audit Office. Although the hon. Gentleman tries to make political
points, the fundamental economic point is that we have had stability in
the public finances and have been meeting the golden rule, and that is
what we will report to the
Commission. On the
point about off-balance sheet budgeting, we are using the same rules
for what is on and off-balance sheet that we inherited in 1997. Such
decisions are made by the independent Office for National Statistics,
not by the Government. The ONS has in recent years moved more private
finance initiative debt on balance sheet, which is reflected fully in
our figures today. The hon. Gentleman could have shared any concerns
about off-balance sheet liabilities with the House before 1997. I am
personally content with the fact that we are in line with best European
accounting practice in respect of on and off-budget
liabilities.
Mrs.
Villiers: Is the Economic Secretary aware that, in
February, Sir John Bourn expressed concern to the Public Accounts
Committee that the line was not being drawn sensibly between on and
off-balance sheet figures, because PFI liabilities remained off-balance
sheet despite the public sector bearing the majority or all of the
risk?
Ed
Balls: We will be debating these matters in the House in
early January, when we discuss our decision to make the ONS
independent. With respect, such judgments are for the ONS. The ONS has
considered these things in detail and concluded that some three
quarters of PFI liabilities are now on balance sheet. However, there is
some risk transfer going on in the PFI, and where that is so, it does
not make sense for those liabilities to be on the balance sheet. That
is a matter for the ONS, by which we are fully guided. We apply tougher
rules than those that we applied in 1997. On that basis, I think that
the figures that we are producing today are
sound. Although net
debt is 47 per cent. of national income in the US, 55 per cent. in the
euro area and 90 per cent. in Japan, in the figures that we are
presenting to the Commission this week, it is just 37.5 per cent. here.
It is a fact that we have lower debt in our
economy.
Mr.
Newmark: Will the Economic Secretary give
way?
The fact that we
have lower debt in our economy means that we can sustain borrowing for
investment, as we are doing, meet our fiscal rules and continue to
double the investment that we are seeing in education,
transport and in the health service, as we set out in our pre-Budget
report. The hon. Gentleman will know that we also publish a long-term
public finance report on future decades that considers underlying
trends in demographics and their likely impact on the public finances.
We still conclude that, on that basis, our public finances are strong,
sound and sustainable. Within those
rules, we are able to release far more money for front-line public
services than in the past, because we have cut the amount of money
going to unemployment and debt interest. Those decisions mean that the
fiscal and monetary positions are sound and that is guaranteeing
stability and rising employment in our economy and allowing us to
borrow for investment while meeting our fiscal rules. That is why we
reject the third fiscal rule, which would impose on our economy cuts in
public spending year on year. Compared with our plans, that would
involve a £27 billion cut this year alone. That is not the way
to strong education, health or transport systems for the
future.
Mr.
Robinson: Would my hon. Friend the Economic Secretary care
to be specific about what the cuts proposed by the Tories would amount
to, either in relation to the health service—doctors and
nurses—or to teachers in respect of
education?
The
Chairman: Order. Just before the Economic Secretary is
tempted to reply, I know that it is Christmas, but I remind the
Committee that we are discussing section 5 of the European Communities
(Amendment) Act 1993. I am sure that anyone can sort of make things
relevant, but I appeal to hon. Members to focus their remarks on the
order.
Ed
Balls: Mr. Amess, I understand your advice,
which is well taken. Let me deal quickly with why the projections that
we are discussing are consistent with a prudent interpretation of the
stability and growth pact and with our view of how the pact should
operate. As I said
earlier, the UK’s debt level compares favourably with that of
other EU member states. We continue to meet the EU treaty reference for
general gross debt by a significant margin. We have argued in recent
years that the operation of the stability pact should take into account
both debt in the long term and the needs of investment and the economic
cycle. Viewing fiscal rules over the economic cycle is important,
because that enables us to have a growing economy and, during periods
when growth is slower, not to have to raise taxes or cut public
spending to meet year-by-year fiscal targets. That is why I am
concerned—like my hon. Friend the Member for Coventry,
North-West—about a rule that would allow the proportion of
public spending to fall in the economy year by year, which would take
us back to the bad old days of cuts in public spending, year by year.
We rule that out in our document. We make our fiscal rules over the
economic cycle and ensure that they are consistent with a prudent
interpretation of the stability and growth pact, so we are confident
that we will avoid the return to short-termism and
instability.
Mr.
Newmark: The Economic Secretary is keen to move on.
However, although I appreciate that the Government, to meet the
targets, are using PFI as a
device to help finance such measures—they are off balance
sheet—would he not agree with the Chancellor, who claimed, as
shadow Chancellor, that PFI was
“a cynical distortion of public
finance”?
Ed
Balls: I have had occasion to spend a number of hours in
discussion with hon. Members on these and other matters. I urge the
hon. Member for Braintree to consider that, to be effective in such
debates, we need to listen to the answers before asking supplementary
questions. I said that, under the arrangement that we inherited in
1997, the bulk of PFI liabilities were off balance sheet, but now three
quarters of PFI liabilities are on balance sheet. We pursue PFI not to
have off-balance sheet liabilities, but because it leads to better
outcomes for education, transport and health capital spending. It was
the previous Government who were distorting the public finances by
having so many PFI liabilities off balance sheet. If the hon. Gentleman
had listened to my answer, he would have heard me making that point
clearly.
Mr.
Robinson: On that specific point, my hon. Friend the
Economic Secretary said that we had toughened up the rule on risk
transfer post-1997. The rules were being applied in a lax fashion in
previous years, although essentially they remained the same, because
the Tory Government, owing to their huge deficit, tried to get more off
balance
sheet.
Ed
Balls: The hon. Gentleman is right. The work that he did
in opposition and then in government to expose that reality led to the
reforms. I commend him for that work. We have moved to a position in
which PFI is playing its proper role in the economy—delivering
more efficiency. At the same time, there is rising public investment
year by year, because our fiscal rules allow us to borrow for
investment. When she speaks, the hon. Member for Chipping Barnet may
wish to indicate whether, if she were making the report, she would make
a submission in support of those rules, or return to a balanced budget
rule. She may also wish to say whether she would report a third fiscal
rule—that of having a falling share of public spending
in GDP. I look forward to her questions, so that we can see whether she
reveals more about her attitude to such
matters. It is on the
basis of the platform of stability and economic strength in monetary
and fiscal policy that the Government can meet the long-term challenges
that face the economy. The pre-Budget report and the report to the
Commission both indicate that we have been responding to the Leitch
review of skills, the Eddington review of transport, the Barker review
of planning and the Stern review of climate change. By keeping the
platform of stability and by responding to the long-term challenges, we
can meet and master those challenges, and ensure not only security and
prosperity, but fairness for all. We set out that programme in the 2006
pre-Budget report, which, with the approval of the House, will form the
basis of the report to the Commission. I welcome this opportunity to
debate such
matters.
4.52
pm Mrs.
Theresa Villiers (Chipping Barnet) (Con): May I welcome
you to the Chair, Mr. Amess, and apologise for inadvertently
addressing the Economic Secretary directly a few moments
ago? Both the Economic
Secretary and the report seek to paint a rosy picture of the state of
the economy and of public finances. I feel strongly, however, that the
report glosses over some serious danger signs that we should not
ignore. It is also a matter of concern that the Government chose to
sign away more than £7 billion of taxpayers’ money on
reducing the UK rebate. I also question why they continue to spend
taxpayers’ money on assessing five meaningless and irrelevant
economic tests for preparing to join a currency that, so far as I can
see, very few people in this country are interested in joining. We
would certainly welcome it were the Economic Secretary to join the
cross-party consensus that believes we should keep our currency and
retain control over our own
economy. On the state
of the economy, the Chancellor may have revised upwards his growth
forecast for this year, but growth continues to lag behind that of 21
other EU countries. In the PBR, he has downgraded his growth forecast
for 2008. Of grave concern—I am surprised that the Economic
Secretary did not mention it—is the fact that retail prices
index inflation is now outstripping the increase in average earnings,
so that take-home pay is now falling in real terms. For a Government
who once claimed to have abolished youth unemployment, it is scandalous
that we have seen a 40 per cent. increase in the number of 16
to 18-year-olds who are not in education, training or
employment—an increase that has happened since 1997. According
to the right hon. Member for Darlington (Mr. Milburn),
poverty has become more entrenched under Labour, and research has shown
that there are now more people in deep poverty and on less than 40 per
cent. of median earnings than in 1997.
We have heard a lot about
borrowing from the Economic Secretary this afternoon, and of course we
have seen recently from the PBR that the Chancellor has revised his
borrowing forecast upwards again. He plans to borrow an eye-watering
£37 billion this year alone, and a staggering £167
billion by 2011—almost £10,000 for every family in
Britain. The truth is that the Chancellor is losing his grip on public
finances. He has predicted a budget surplus for years, but somehow it
never seems to arrive. In his 2002 Budget, he predicted a £9
billion current budget surplus for 2006-07. This year, the actual
figure will be £7.9 billion. The European Commission has
calculated that the 2007 structural budget deficit will be higher than
that for all major EU countries, including
Italy.
Ed
Balls: Does the hon. Lady think that a structural budget
deficit is a bad
thing?
Mrs.
Villiers: I can certainly see that it causes concerns.
Certainly, I am sure that the European Commission will look at it with
some concern when the convergence report is presented to
it.
Ed
Balls: Will the hon. Lady give
way?
Mrs.
Villiers: No. I have answered the question.
[Interruption.] I give way to you every
time.
Mrs.
Villiers: In his 2001 Budget, the Chancellor said that he
would borrow a total of £28 billion up to 2006. The borrowing
figure for that period turned out to be £129 billion,
so the Chancellor was only around £100 billion out. Since 2003,
borrowing has exceeded £30 billion every year—more than
the entire predicted five-year
total.
Ed
Balls: Is the hon. Lady therefore saying that her goal
would be to eliminate the structural budget
deficit?
Mrs.
Villiers: I am not
saying —[Interruption.] There are
considerable concerns relating to the size of the structural
budget deficit. It is important for the Government to look at the
consequences of the structural budget deficit, and at the impact that
that will have in the long term in adding to the nation’s
mortgage, and the debts that will eventually have to be paid off by
taxpayers. In adding such vast sums to the nation’s mortgage,
the Chancellor is not only giving technocrats at the European
Commission cause for concern but leaving millions of families with a
bill that they will be paying off for generations to come.
As we have heard, the books are
in even worse shape when one adds in the Chancellor’s
off-balance sheet, PFI and Network Rail liabilities. The capital value
of PFI has now hit £54.5 billion, according to the
Treasury’s signed projects list. A significant proportion of
those liabilities do not appear on the nation’s balance sheet.
As I stated, the on-off balance sheet dividing line should be based on
the genuine transfer of risk. If the risk is retained by the public
sector and is not transferred to the private sector, there are strong
arguments for putting the liability into the official figures for
Government debt. That point was made by the Comptroller and Auditor
General, Sir John Bourn. Last year, Network Rail had a recorded debt
of £18.2 billion. None of that appears on the
nation’s mortgage statement, but there is no doubt that the
taxpayer is bearing the financial risk of failure.
In addition, the Government
continue to understate the true extent of public sector pension
liabilities. They are simply insufficiently prudent in the assumptions
that they make of the discount rate for future liabilities. The
Institute of Economic Affairs has estimated that the genuine cost of
public sector pensions is as much as £1,025 billion. Even a
cautious estimate of the extent of off-balance sheet finance suggests
that a transparent and honest appraisal of those liabilities could push
the real size of the nation’s debts to well over £1
trillion. We need far
greater transparency, not a gradual drip feed of PFI on to the balance
sheet. The controversy surrounding the issue is a very strong argument
for giving genuine independence to the ONS, rather than the
watered-down attempt to give it independence contained in the
Statistics and Registration Service Bill.
The Economic
Secretary also discussed the Chancellor’s fiscal rules. The
grave problems surrounding the public finances mean that the
Chancellor has twice had to shift the goalposts for his golden rule. As
I said, back in July it was looking increasingly likely that his rule
would be broken, and he turned up out of the blue at the Treasury
Committee and suddenly shifted the date of the economic cycle. There
was no auditing or external assessment of that decision. The Institute
for Fiscal Studies described the change as convenient and the timing as
fortuitous. Such distinguished commentators as Mervyn King and the
Ernst and Young ITEM Club have questioned the validity of the changes
to the economic cycle. The National Institute of Economic and Social
Research has expressed concern that the rule has been discredited by
the changes made by the Chancellor. As we have heard, even the
convenient change to the dates of the cycle left open the possibility
that the Chancellor might even break the new, fiddled golden
rule. The
Chancellor was at it again in the PBR when he shifted the date of the
economic cycle back to early 2007. This change significantly undermined
the credibility of the fiscal rules. We think that the rules and the
assumptions that underlie them should be properly and independently
audited, something that we do not believe the Government are doing at
the moment. On page
64 of the convergence report there is a reference to the Gershon
process regarding value for money. However, the NAO and the PAC have
expressed serious concerns about the methodologies and data used to
measure and verify Gershon savings. They have concluded that savings
amounts have not always been based on clear audit trails or subject to
sufficient challenge by the Office of Government Commerce, and in a
number of cases the baselines from which to measure savings were not
properly established and assessed. Even more worryingly, the Select
Committee on Education and Skills accused the Department for Education
and Skills of redefining the concept of money in the methods it has
used in reporting Gershon savings. The hon. Member for Huddersfield
(Mr. Sheerman) warned the Secretary of State for Education
and Skills that he risked laying himself open to the charge that the
DFES was claiming “fantasy savings” to try to meet its
Gershon targets. Most seriously of all, the Select Committee on Work
and Pensions slated the Gershon process as having been a major factor
in what it called catastrophic failures at Jobcentre Plus and
“truly appalling service levels”, which let down very
badly some of the most vulnerable people in our community.
Under the
Chancellor’s stewardship of the economy, borrowing is up, taxes
are up and inflation are up, savings are down, productivity growth is
down, red tape and tax complexity have increased hugely, the NHS and
pensions are in crisis and, according to the leaked report published
only last week, one in six young people leave school unable to read,
write or add up properly. Britain has slipped from fourth to 10th in
the World Economic Forum’s competitiveness league during the
Chancellor’s term at No. 11. Neither the PBR, nor the
convergence report, nor the statements of the Economic Secretary today
can disguise the fact that the Chancellor is furring up the arteries of
the economy and failing to equip the UK to compete in Europe or with
the new economic giants of China and India.
5.2
pm Dr.
Vincent Cable (Twickenham) (LD): I am delighted to be
serving under your chairmanship, Mr.
Amess. I am a little
puzzled as to what we are here to discuss. Earlier today, I asked about
the documentation for this meeting and was told that I needed to bring
only one particular sheet of paper as all would be explained when I
arrived. That piece of paper refers to the convergence criteria for
membership of the European Union. I thought that when we turned up we
would have at the very least some neat Treasury note to update us on
Government progress on those criteria. There was a period a few years
ago when we had very rigorous reporting, in which I know the Economic
Secretary had an enormous input.
We have had nothing today,
except for copies of the pre-Budget report. In the few minutes before
the sitting started, I had a quick flick through it—all 260
pages of it—to find out how it could help us with the discussion
today. I think that there were four pages on which there was a
tangential reference to comparative EU indicators that might help us.
We have not got a great deal of helpful background documentation, but I
understand why that is the case. There is no active, open debate on
whether we should join the economic and monetary union. I agree with
the Chancellor’s assessment on the relevance of that position at
the moment and I am not opening that debate. It is rather foolish to
take the position, as I think the hon. Member for Chipping Barnet did,
that we should rule it out for eternity, but I accept that in
practical, economic and political terms we are not talking about early
entry to EMU, so we do not need to go through the mechanics of
convergence in detail. We should at least have considered it,
however. I would like
to take up some of the Economic Secretary’s points that bear on
this debate. He started by talking about comparative growth in relation
to the rest of the EU and the rest of the OECD, all of which is clearly
relevant. He is right to say that British economic performance is by no
means bad: it is relatively good. He chose his figures in a selective
way, however, as does the PBR. During the last decade, and particularly
since the formation of the euro, Britain has consistently outperformed
the core countries—Germany, France, Italy and the
Netherlands—but the Economic Secretary did not mention that we
are outperformed by other EU countries, some of which, such as Spain,
are inside the euro. Others, such as Sweden, are outside. Britain is
outperformed by some of the smaller, peripheral countries. Some of
them, such as Ireland, are in the euro; others, such as Greece, are
outside. Britain is also consistently outperformed by the countries of
eastern Europe.
The Economic
Secretary dwelt on the forecast for the current year. He made the point
that the British forecasts for 2006 are a little better than for the
rest of euroland. I checked that against the PBR and those figures are
quoted by the Treasury, although without source. That is a minor point,
but it is illustrative of the rather didactic way in which the
Government use statistics. The OECD, which is objective in relation to
the European Union and the UK, has given the same 2.6 per cent.
forecast for growth in the UK in the current year as in the euroland
area. It is a relatively good story, but it is
worth dwelling for a few moments on the fact that countries in the euro
area and European countries outside it are outperforming the
UK. Although it is
true that Britain, like much of the developed world, has had an
impressive record of low inflation in the past decade, the Economic
Secretary did not mention the obvious problem that we have with
inflation. There is a great deal of tension between the consumer price
index measure that we now use, along with the rest of Europe, and what
would have been the case had we stuck with a retail prices index that
captured housing. That is not a problem for the other countries of the
eurozone area—particularly Germany, for example, which has not
had a housing bubble—but it is a problem for the UK. The
Economic Secretary knows that we would be approaching 4 per cent.
inflation if housing costs were included. We should at least
acknowledge that it is not a total success story in respect of
inflation at
present.
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