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

[back to previous text]

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—
Mr. Newmark: Carry on.
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.
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