Mr.
Newmark: Does the hon. Gentleman share my concern that we
might be at a tipping point because, excluding bonuses, regular pay is
not even keeping pace with inflation at the
moment?
Dr.
Cable: That is a good economic point. Perhaps that problem
will accelerate if the labour market results in wages trying to catch
up with inflation. However, I am making the simple point that, if we
consider inflation in a more holistic way, the position is nothing like
as comfortable as the Economic Secretary
suggested. I picked up
another point a few moments ago, looking through the PBR. The
comparative productivity measures are also quite revealing. A table on
page 39, which the Economic Secretary cited, shows how Britain has done
relatively well in recent years in terms of productivity per worker.
That is true and it is quite a good outcome. However, as he knows,
there are two different ways of measuring productivity: the other way
is to measure productivity per hour, in which Britain lags way behind
France and Germany, which is not mentioned. It is important that we
just look at the figures as they are, not as we want them to be. It is
in that spirit that I mention the fiscal indicators, on which the
convergence criteria should centre. Again, the Economic Secretary is
right: on any fair measure of the Maastricht convergence
criteria as they apply to the two key fiscal measures, Britain is
compliant and our performance is relatively good. However, the key
point is whether we believe the numbers. Several interventions have
been made along those lines, in relation to the economic cycle, the
golden rule and the debt
measure. The point
that I have made to the Chancellor and his colleagues for about five
years is that these figures become credible only if they are fully
independently audited. The Economic Secretary today demonstrated that
the Government are at least half hearing that message and have asked
the NAO questions about how valid the convergence criteria are in
relation to debt and the golden rule. I am glad that they are doing so;
this is real progress. However, I am still puzzled about why the
Government cannot go the whole hog and allow the NAO to ask its own
questions, rather than wait for the Treasury to pose them. Under a
sensibly
independent fiscal assessment policy, the NAO would be told, “We
would like you to make a judgment as to whether we as a Government have
met our own fiscal rules”; then it could pose specific,
subsidiary questions about whether that has happened, without the
Treasury asking leading questions. The Government have moved some way
in that direction but, to have complete credibility in fiscal policy,
they should be much more wholehearted about giving responsibility for
assessment to the NAO. In a very revealing comment,
the Economic Secretary said that of course we must believe what has
been said about debt because the ONS confirms it and the ONS is
independent. If the ONS is independent, why are we coming back on 8
January to pass legislation to make it independent? Of course, it is
partly operationally independent; the whole purpose of the new and,
indeed, welcome legislation that has been proposed is to make it
independent. So the Economic Secretary is claiming just a little bit
too much. In
conclusion, I return to my introductory remarks. I am still a little
puzzled about what the Government hope to achieve by this exercise. If
the intention is simply to have a gentle canter around the main
economic debating points, we can all happily spend an hour doing so.
However, if this is a serious analysis of our convergence criteria, I
am afraid that it dismally fails that
test. 5.10
pm
Ed
Balls: Let me respond to some of the points that have been
made. Let me first respond to the final point made by the hon. Member
for Twickenham. As I explained at the beginning of my speech—I
think he was present for last year’s debate, so he will know
this from my predecessor’s contribution—we are required
to hold a debate in Parliament each year under the Maastricht Act, an
Act of our Parliament, before we make our submission to the European
Commission. That submission is not simply about meeting the convergence
criteria, but more broadly about the performance of our economy. The
document for our discussion is, in fact, the PBR, which makes it clear
on the opening pages that it
forms “the basis of
submissions to the European Commission under Article 99...and
Article 104...of the Treaty establishing the European
Community.” So that is
the text. We have produced a slimmed-down version of the PBR document,
which we will submit, but the hon. Gentleman can rest assured that
there is nothing that he has not had sight of in the broader PBR
document. The hon.
Gentleman asks about independence and audit. We have often debated
productivity and the right way to measure it, and I am happy to do so
again now or in the future. I also understand his point about inflation
tensions. It is inherent in the making of monetary policy that there
are tensions between what is happening today in the economy and what
will happen one month, six months or two years ahead. That is why we
have an independent Bank of England to make those judgments, and it has
done an exceptionally good
job so far in managing those tensions to keep to the inflation target.
Indeed, we have never had an open letter since 1997, which would be
triggered only if inflation went more than one percentage point outside
the target
range. The
hon. Member for Braintree wonders whether we are at a tipping point,
and he and other Opposition Members have been predicting doom, gloom
and disaster month by month since 1997.
Mr.
Newmark: Will the Economic Secretary give
way?
Ed
Balls: No, I will not give
way. I think that 1998
was the first time that we heard of the recession made in Downing
street. We have heard about doom, gloom and recession. Our economy has
been talked down year by year. In fact, inflation has been low and
growth has been strong. We have been the only major economy not to have
a recession. Unemployment is at its lowest level for 30 years. No one
wants to go back to the days of double-digit interest and negative
equity, which we all remember from the years before the Government made
the Bank of England independent—a decision opposed by Opposition
Members. So I will take no lectures nor hear any predictions of tipping
points for the future; however much the economy is talked down, the
reality is that the position is strong and will continue to be
so. I want to take
seriously the point about audit and independence made by the hon.
Member for Twickenham. We now have more scrutiny of fiscal decision
making than we have ever had, because we have transparency, stability
in the regime and all the assumptions are laid clearly and audited by
the NAO. As I explained to Opposition Members, the reason the date of
the cycle has changed is that the economic facts have changed. There
was no Government decision to cook the books; it happened because the
underlying economic position changed. That is reflected arithmetically
in the way fiscal policy is managed.
The hon. Gentleman asks us to
go a further step, however. He is saying that, rather than simply the
rules, the regime and transparency being enough, let us hand over the
decision on the economic forecasts and on where we are with the output
gap in relation to trend—therefore, the fundamental judgment
about the state of the economy—to the independent NAO. That
would be a mistake. It is right that the Chancellor of the Exchequer
and the Treasury are accountable to the House for those fundamental
decisions about the economic forecast. Every input to that forecast is
audited. We are completely transparent, but it is right that
Chancellors are accountable to the House for those judgments. There is
enormous scrutiny of them, which is a good thing, but in the end,
rather than subcontracting and then second-guessing judgments on the
forecast, which is fundamental, it is better to keep accountability in
the
House.
Dr.
Cable: Does the Economic Secretary not accept that there
is a clear distinction between Government decision making on fiscal
policy—how much to raise taxes and how much to spend, which is
clearly a political matter and must remain the remit of
Government—and the making of forecasts that can only gain
credibility from being fully independent?
Ed
Balls: I hear what the hon. Gentleman says. I am all for
independence when it is right. I have backed Bank of England
independence from the beginning, and I am in favour of strengthening
the statutory basis of independence that we are seeing with the ONS.
The reality, however, is that decisions on economic forecasts are
fundamental to judgments on priorities, performance of the economy and
the predicted distribution of other outcomes. If one goes across the
current dividing line and starts to hand the decisions over to an
independent body, one essentially hands over the Treasury’s
management of the economy and fiscal management to that body, and I
think that that would be a mistake. The right thing to do is to have
the degree of scrutiny and accountability that we have in Parliament,
with Chancellors being judged on their
performance. Our
forecasting record has been good. Around the world, everyone knows that
the last two or three years have been tough for fiscal policy making,
but we are still meeting our fiscal rules when many predicted we would
not. That is because of the tough decisions made by the Treasury in the
early years of the economic cycle. It is better that the Government are
accountable for those judgments, rather than trying to have
independence in fiscal policy, which is so sensitive and so much about
the operation of the tax system and distribution of outcomes. Those
decisions should not be subcontracted. I believe that it is right to
have independence in monetary policy decision making, but not in fiscal
policy, although I am happy to continue to debate that point with the
hon. Gentleman.
On the euro,
we had two quite different views. The hon. Gentleman said that we had a
vigorous assessment of the economic case for joining the euro in 2003,
whereas the hon. Lady said that it was meaningless. That is an
interesting difference. Ultimately, the question is whether one has
decided on principle to rule out joining the euro, come what may, in
which case, the economic assessment is meaningless and irrelevant. If
not, as the hon. Gentleman and I believe, the point is what is in the
national interest—what is best for jobs, investment and the
stability of the economy. That is what has guided our approach. It is
good politics to get the economics right, and that is what we have done
and are continuing to do in relation to the euro—we have put the
national interest first. While we are not a member of the euro zone,
that is the only way to be credible in European discussions that affect
many other issues that are of great importance to our constituents. To
believe that the five tests are meaningless—to be willing to
withdraw to the fringes of Europe in relation to the big
issues—is running a grave risk with our national interest, and
the Government will not do it.
The hon. Lady made a number of
other points, which I shall quickly address. She said that economic
growth is lower than for most other European countries. Since 1997,
however, we have grown considerably more strongly. Next year, the euro
zone is forecast to grow by 2 per cent., compared with the UK
prediction of 2.75 per cent. As the hon. Member for Twickenham made
clear, this year the UK and the euro area are growing at the same rate,
and in fact the UK rate is slightly higher, so I do not understand the
hon. Lady’s point.
On downgrading of growth in
2008, if one audits the trend growth rate and it then emerges that
growth this year has been stronger than expected, it is inevitable that
in order to get back to trend one has to make a downward adjustment in
the growth rate prediction for future years. That is not a matter of
judgment—it is a fact. In that situation, one will have slower
growth in future years. Grasping that point is essential to an
understanding of the way in which the economic cycle operates, and of
our judgment on fiscal rules. To believe that downgrading of the 2008
growth forecast is a bad thing is fundamentally to
misunderstand what is going on.
I hear the hon. Lady’s
point on living standards, because it concerns me too that high oil
prices have caused the RPI inflation rate to be higher. That has been
good news for pensioners because the RPI has driven up pensions this
year. Consumer prices index inflation has been lower, however. The hon.
Lady’s point is relevant if we use the RPI rate, but the fact
remains that since 1997 we have had the fastest rise in income per head
of any G7 economy.
The only way in which to be
credible when running an economy is to keep interest rates low and to
retain stability even in tough years around the world, such as this
year, when inflation is high. It is interesting that the hon. Lady did
not refer to my points about the proposals to start playing around with
the rules guiding the operation of the Monetary Policy Committee
because, believe me, playing games with the monetary or fiscal policy
regime is precisely the way to take us back to the bad old days. We are
not going to make those mistakes.
The hon. Lady made a point
about Leitch, and spoke about the 40 per cent. increase in the number
of 16 to 18-year-olds not in education or employment. She will know,
however, that the number of 16 to 18-year-olds in the population as a
whole has risen substantially in the past 10 years. The proportion who
are not in employment or education has remained broadly stable. The
figure that she cited reveals nothing other than that we have more
teenagers than we had 10 years ago. As for the idea that
poverty has become more entrenched, poverty among children doubled
between 1997
and—
Ed
Balls: I apologise to the hon. Gentleman for getting the
dates wrong, but I know my facts. Between 1979 and 1997,
poverty doubled under the Conservative Government. Under Labour, it has
fallen by 1 million, or 2 million in absolute terms. That is the
difference: poverty is falling under the Labour Government. One could
not call that entrenchment. All we are doing is entrenching lower child
poverty in our economy. I am very proud of that
record.
Mr.
Newmark: It was the right hon. Member for Darlington
(Mr. Milburn) who said
that.
Mrs.
Villiers: Yes, it was not us who said that. Take it up
with the right hon. Member for Darlington.
Ed
Balls: I shall ignore those remarks, as I have in many
other circumstances many times
before. I turn to the
fiscal policy position. This was the most interesting and revealing
part of our discussions. The hon. Lady made some points about PFI,
which I answered clearly when I took interventions during my speech and
pointed out that the percentage of PFI on the balance sheet has been
rising. We use the same rules as previous Governments. The Gershon
reforms are producing real reductions in the head count at the centre
to release resources for the front line.
The
discussion on fiscal policy was most revealing. It is true that the
borrowing numbers for this year and next year are slightly higher than
we had hoped. That is because North sea oil production and taxation
have come in lower than we had expected, which has impacted on our
borrowing numbers. That is the reality of making fiscal policy. If the
underlying tax receipts in a particular sector change, that impacts on
the borrowing numbers. We are comfortable in dealing with that because
we are meeting our fiscal rules and the net debt level is low. Since
1997, we have had average annual borrowing of £14.5 billion. In
the previous economic cycle, between 1986 and 1997, the figure was
£40.4 billion, so performance has been quite
different. The hon.
Lady made an important point that was revealing. She told us that
having a structural deficit is a bad thing and could have very bad
consequences. I must explain to her our fiscal rules. We have a golden
rule that every year our tax revenues have to cover our current
spending. That includes all the payments for salaries and current
spending. We have a second fiscal rule—the sustainable
investment rule—that it is right to borrow every year for
investment. That is why since 1997 we have been borrowing every year
for investment while meeting our golden rule. I have pointed out that
in the previous period the golden rule was broken, whereas we have been
meeting it. There is,
however, a perfectly acceptable alternative position, which the hon.
Lady set out: not to have a golden rule and sustainable investment rule
but to say that we will balance the budget each year or over the
economic cycle. Willingness to balance the budget over the economic
cycle means that there will be no borrowing, which will mean that
relative to the trend in the economy there will be no structural
deficit. That is a perfectly valid position, which many other
Governments adopt. It has never been the approach that we have taken,
which is why we have always said that the prudent interpretation of the
stability pact should allow us to borrow for investment as long as we
keep to our debt rules. That is exactly what we have been doing. That
is the reason for our borrowing every year, into the medium term, and
it is why we have been able to finance a substantial rise in investment
in our economy—public investment which is spent on schools,
hospitals and the transport system.
| 
