Government’s assessment as set out in the pre-Budget report 2006 for the purposes of section 5 of the European Communities (Amendment) Act 1993

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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?
Ed Balls: No.
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.
The Chairman: Order.
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 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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