House of Commons
|Session 2007 - 08|
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Public Bill Committee Debates
Governments assessment as set out in the pre-Budget report for the purposes of Section 5 of the European Communities (Amendment) Act 1993
The Committee consisted of the following Members:
Annette Toft, Committee Clerk
attended the Committee
Fifth Delegated Legislation Committee
Thursday 6 December 2007
[Mr. Eric Illsley in the Chair]
Governments assessment as set out in the pre-Budget report for the purposes of Section 5 of the European Communities (Amendment) Act 1993
Mr. David Gauke (South-West Hertfordshire) (Con): On a point of order, Mr. Illsley. First, may I welcome you to the Chair?
Today, we shall be debating the Convergence Programme for the United Kingdom: submitted in line with the Stability and Growth Pact, as part of our obligations under the European Communities (Amendment) Act 1993. That document was available in the Vote Office only from yesterday lunch time. My office picked up a copy of it later in the afternoon. I went to the Vote Office a week ago today to ask for the documentation for this debate and was just given a copy of the European Communities (Amendment) Act. No mention was made of the convergence programme. I am not criticising the Vote Office; it had not been provided with the document.
I went again to the Vote Office on Monday because I was sceptical that that was all the documentation available, but it had no more information. Only yesterday, having spoken to the Baroness Noakes, was I aware that there was, in fact, an additional document. I went again to the Vote Office, but it had no copy of it. We contacted the Treasury, but was told that it did not have a hard copy, but that it could e-mail us a copy. It was only some time later in the afternoon that an e-mail from the Clerk arrived with a copy of the document.
I have had a chance to look through the document, but not with the detail that I would have wished. We have been given inadequate time to study it, especially since it was published in November. I accept that the Treasury is having a difficult time at present, but it is not unreasonable to expect such papers to be made available in the Vote Office in advance of todays sitting. I should be grateful for your guidance, Mr. Illsley, about whether the position is acceptable and whether it is appropriate for us to continue this mornings debate.
On a further point, the House of Lords debated the matter on 20 November. The Government were keen to hold the debate on that date so that they could submit the report to the European Commission before the end of Novemberas they told Members in another place. I should be grateful for clarification as to whether the report has already been submitted to the European Commission and that we are debating a fait accompli. It seems odd that we are having to debate a document to decide whether it should be submitted, when it might have already been submitted and was only made available
The Chairman: I will deal with the hon. Gentlemans latter point first, mainly because it is not a point of order for me. However, he can raise it in debate with the Minister to determine the status of the document and whether it has been submitted to the Commission.
I am advised that the document was available in the Library from yesterday lunch time or thereabouts. Its late availability is not sufficient reason to delay this mornings proceedings. However, I can reflect the hon. Gentlemans views back through the usual channels and the House authorities to ensure that, in future, documents of this size are more readily available in a timely manner to enable hon. Members to digest fully the information available to the Committee. I am also advised that the information in the document is sourced from the pre-Budget report and could have been available from that source. As I have said, I will take his views on board and reflect them back.
That the Committee has considered the Governments assessment as set out in the pre-Budget report for the purposes of section 5 of the European Communities (Amendment) Act 1993.
Thank you for your guidance, Mr. Illsley. I welcome this opportunity to debate the information provided to the European Commission under section 5 of the European Communities (Amendment) Act 1993. Each year, as hon. Members know, the Government report information to the Commission on our economic and budgetary positions and our main economic policy measures. By formally sharing information from the pre-Budget report with our European partners, we can help to ensure that there is a proper, accurate and effective EU system and meet our commitments to contributing to enhanced employment and growth.
The information was set out in the pre-Budget report in October and that material forms the basis of what we are sending to the Commission. The background to this years report and spending review is a time of increased international economic uncertainty and a more fragile global environment, which has already seen turbulence in America, Asia and Europe. As the Chancellor set out to the House on 9 October,
provided we maintain the course for economic stability that we have set, we can respond to that global environment. We will do so by taking no risks with stability and no risks with unaffordable promises that put the public finances at risk.[Official Report, 9 October 2007; Vol. 464, c. 167.]
The full impact from turbulence in the international markets is as yet unclear, but the International Monetary Fund has said that the international uncertainty will have an effect on growth across the world. Independent forecasters expect growth next year in America and the euro area to fall to 2 per cent. and 2.5 per cent. In these circumstances it is right that we, too, are cautious. The forecast for growth next year is also of 2 to 2.5 per cent. However, because of the strength of our economy, our commitment to openness and liberalised trade across the world, and our flexibility and dynamism at home, the forecast for growth in 2009 and 2010 is 2.5 to 3 per cent. That is in line with the economys trend rate of growth and with the forecast in the Budget.
Against the backdrop of recent events, decisive action in the UK has brought inflation down to around our target of 2 per cent. and it is forecast to be on target next year and the year after. Employment is at a record level. Productivity is growing stronglyup 2.7 per cent. in the past year. While this year, growth in America is expected to be 2.1 per cent., in Japan 2 per cent., and in the euro area 2.6 per cent., growth in Britainwith exports and investment risingis expected to be 3 per cent. Britain is the fastest-growing major economy in the world.
The strength of the UK economy is the direct result of the monetary and fiscal policy framework that we have introduced. First, the Governments 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. It has discretion to decide when and how to react to events and has a clearly defined remit to maintain price stability, subject to supporting the Governments objectives for growth and employment. The monetary policy framework has delivered the longest period of low and stable inflation since the 1960s, along with low interest rates. That has provided the platform for record employment levels, higher investment and economic growth.
Our two fiscal rules are the golden rule that over the economic cycle the Government will borrow only to invest and not to fund current spending, and the sustainable investment rule that net debt should be held over the economic cycle at a stable and prudent level. We are meeting our first fiscal rule with a current Budget in surplus over the cycle. In the last economic cycle from 1986 to 1997, that rule was missed, with a deficit of £240 billion. Over this cycle, with a current budget deficit last year lower than forecast, we have a surplus of £18 billion. We are therefore meeting our first fiscal rule.
We will also meet our second rule that net debt should be at a sustainable level. Debt is at 44 per cent. in America, 49 per cent. across the euro area, 86 per cent. in Japan and 94 per cent. in Italy. In Britain, debt is 37.6 per cent. this year and below 40 per cent. in every year of the projection period, so we are meeting our second fiscal rule.
Mr. Brooks Newmark (Braintree) (Con): Does the Economic Secretary not share my concerns, notwithstanding the Governments definition of debt to gross domestic product, that perhaps more than £1 trillion is now held off balance sheet? That is £2 for every £1 that is on balance sheet. Is that a concern for her?
Kitty Ussher: I am grateful for the question, but that is not a concern because off balance sheet is nothing new and it is up to the auditorsthe Office for National Statistics and othersto determine whether it is correct that a liability should be on or off balance sheet. Some things are on, some things are off and we have no concerns about the definitions. Indeed, it is right that it is independently scrutinised in that way.
Mr. Newmark: I will be persistent because, at the end of the day, the taxpayer has to foot the bill. Public sector pension liabilities today are more than £700 billion, if you add the private finance initiative and other costs. All those liabilities must be paid for by the taxpayer. The Prime Minister, when he was Chancellor, called for greater transparency in Government accounts, but we have not seen that in the past 10 years.
Kitty Ussher: That is precisely why we comply with international best practice with regard to what is on or off balance sheet. Our net debt remains below 40 per cent. It is up to the auditors to judge whether we account correctly for those liabilities. I am perfectly satisfied that there is sufficient transparency.
I have been talking about net debt. Debt interest was 3.5 per cent. of national income in 1997. Next year, it is expected to be just 2 per cent. That low debt allows more investment in front-line services. We can afford sustained investment in our priorities only because of the two fiscal rules that ensure sound public finances. The rules have protected a historically unprecedented increase in public net investment, while debt and borrowing remain low and stable. Last year, borrowing was 2.3 per cent. of national income; which was £4 billion less than forecast.
Over the past 10 years of this economic cycle, borrowing and debt in Britain have been lower than in Japan, the euro area, America, and in the countries of the Organisation for Economic Co-operation and Development as a whole. Net borrowing is forecast to fall from 2.7 per cent. this year to 1.3 per cent. in 2012, compared with a peak in 1993 of almost 8 per cent.the equivalent of £110 billion today.
The UK also continues to meet the reference value on the treaty deficit throughout the projection period, with the deficit reaching 1.6 per cent. of GDP by 2012-13. The projections the Chancellor set out are also consistent with the Governments prudent interpretation of the stability and growth pact. Such an interpretation takes account of country-specific factors including the long-term sustainability of public finances, the economic cycle, and the important role of public investment. The UKs public finances remain sustainable.
As I set out earlier, the UKs debt level compares favourably with other EU member states and we continue to meet the EU treaty reference value for general government gross debt60 per cent. of GDPby a significant margin. The reforms to the stability and growth pact agreed in March 2005 rightly place a greater focus on the avoidance of pro-cyclical policies and on reducing and maintaining low debt, with the flexibility for low-debt countries such as the UK to invest in the provision of public services.
The challenges of the decade ahead require a balance to be struck between delivering further investment in public services to equip the country for change, and entrenching the macro-economic stability that is essential in the increasingly competitive global economy. The
Mr. Newmark: I appreciate the Economic Secretarys point about investing in public services, but is it the Governments intention still to use PFI as a means of doing that and, therefore, put those liabilities off balance sheet again? Are there not double standards when the Governments new standards require that private and public companies must account for their pension liabilities on balance sheet now, yet the Government persist in holding public sector liabilities off balance sheet?
Kitty Ussher: The hon. Gentleman does not seem to have listened to what I said earlier. Some PFI liabilities are on balance sheet and some are off, depending on the definition of the ONS. We comply with international best practice in that regard. It is a bit rich for a party that starved our public sector of the investment that it required over time to start quibbling in this way. I would be more interested in looking at its books to find out exactly how its public-spending black hole is to be filled, rather than continuing along this line. [Hon. Members: Gaping hole.] A gaping hole, as my hon. Friends point out.
Having assessed the future investment needs of the country, the continued strength of the UKs public finances, with net debt remaining below 39 per cent. throughout the forecast period, enables the Government to announce an additional £2 billion to total public sector net investment in 2010-11, with total public spending increasing by 2.1 per cent. in real terms. We are extremely proud of that. Within that envelope, current spending grows by 1.9 per cent. a year in real terms and net investment rises to 2.25 per cent of GDP.
It is no secret that this spending review is tighter for many Departments, and the Government remain committed to ensuring that public spending delivers the publics priorities and value for money for the taxpayer. The spending review has identified substantial savings that can be made by Departments. Building on the £20 billion already achieved, Departments will save a further £30 billion by 2010, and that money will be available for reinvestment in public services. Departmental plans are being published, setting out in detail how those savings will be achieved.
The resources released through that ambitious value-for-money programme, together with the increased spending delivered in the CSR, will enable the Government to sustain the pace of improvement in public services and focus additional resources on their key long-term priorities. That will be matched with reform and clear objectives set out in new public service agreements defining the Governments top 30 priorities for the coming period.
Those key priorities include: meeting the challenge of globalisation by investing in the human and physical capital that will keep the UK economy competitive over the long term; education spending in England growing at 2.8 per cent. a year in real terms; investment in science and university research rising to over £6 billion a year in three years time; and increasing transport investment to £14.5 billion a year by 2010-11.
Other key priorities include: making the UK a better place in which to live by continuing to improve the NHS, with investment in health in England rising from £90 billion this year to a total of £110 billion in 2010; progressing towards the objective of decent and affordable housing for all, with total spending on new housing of a least £8 billion over the next three years; protecting the nation from external and internal threats, with total spending on counter-terrorism and intelligence rising from £2.5 billion in 2007-08 to £3.5 billion in 2010-11; continuing the longest period of sustained real increases in defence expenditure in over 20 years; and helping to tackle climate change and protect the countryside, with the budget of the Department for Environment, Food and Rural Affairs set to increase to £4 billion by 2010-11 and the creation of a new environmental transformation fund with a three-year budget of £1.2 billion.
Of course, the spending review will help us tackle international poverty by increasing the budget of the Department for International Development by 11 per cent. a year over the CSR, enabling total UK official development assistance to reach over £9.1 billion a year, which will put us on course to meet our European commitment of having 0.5 per cent. of national income devoted to development aid by 2010double what it was under the Tories. It will help us to meet our commitment to achieving for the first time the United Nations goal of 0.7 per cent. by 2013.
I hope that I have summarised our task, which is to meet and master the global economic challenge, making the critical decisions to secure Britains long-term economic future. The pre-Budget report, which has been before the House since early October, drives forward the greater economic mission of our time: to meet the global challenge, unleash the potential of all British people and deliver security, prosperity and fairness for all. That is the programme set out in the 2007 pre-Budget report and comprehensive spending review, and that is, with the approval of the Committee, the basis on which we are sending updated information to the European Commission. I welcome the opportunity to debate it this morning and look forward to the contributions that will follow.
Mr. Gauke: Once again, Mr. Illsley, I welcome you to the Chair. It is a great pleasure to serve under your chairmanship.
I shall return briefly to the issues that I raised in my earlier point of order. I am grateful for the clarification that the convergence programme essentially reiterates the figures contained in the pre-Budget report. Perhaps the Economic Secretary, in her closing remarks, could confirm that there has been no change to the numbers contained in that. I expected an apology for the failure to provide a copy of that document to the Vote Office before an intervention by the Clerks and, indeed, by my own office, but there we go. I also seek clarification on what the Economic Secretary has just said with regard to the sending of the report to the Commission. The implication of what she was saying is that the report has not yet been sent.
Kitty Ussher: I apologise to the hon. Gentleman; I meant to include in my opening remarks that the report has been submitted because there was a deadline of 1 December. However, it has been submitted subject to
Mr. Gauke: I am grateful for that. The statement may well have said that copies were available in the House, but the fact is that they were not available in the House; that is the point that I was raising.
The figures contained in the convergence report are based on what is in the pre-Budget report. The timing of the PBR was somewhat unusual. In recent years, the PBR has tended to occur in early December; this year it was in early October, in part to combine with the comprehensive spending review, which had been delayed. It was originally due in the summer but it got delayed and could not be delayed any further, so the decision was made to combine it with the PBR in October. Indeed, the PBR was moved back a further week to provide a springboard for a crushing general election victory for the Government. That was just two months agohow distant that time appears.
The submission is normally submitted after 1 December, but given that there was an early PBR, I understand why the Government were keen to submit it before the beginning of December, in accordance with the code of conduct that applies in these circumstances. However, it raises the question of whether the information contained in the PBR is as up to date as it might be. Normally these matters are debated shortly after the PBR is published, but because we have had a two-month gap, which has been a particularly eventful two-month gap as far as the economy is concerned, there are reasons to question some of the numbers contained in the PBR. I will do that in a moment.
Even on the PBR figures, the Governments borrowing figures are distinctly unimpressive. Looking at the position for 2007-08 and the predictions that the Government made for the borrowing figure in the PBR of 2006a year agothe prediction was that borrowing would be £31 billion. In the Budget of March 2007, the figure was £35 billion. By the time we got to the PBR in October, the figure had gone up to £38 billion and the projection for borrowing over the next five years was increased in the PBR by £16 billion. We must remember that we have gone through 15 years of economic growth and this year our growth of 3 per cent. and possibly above is at the top end of, or above, our trend rate of growth. This is a period in which we should be running a comfortable surplus. These are the good years in an economic cycle, but we should prepare ourselves for the slowdown that we may be about to enter. However, we enter more difficult times at a time when the Government have little flexibility as far as the public finances are concerned. They are running a deficit and borrowing far more than they planned to or should do. We have the worst structural deficit of any major western economy, which is not something to be proud of.
I turn to the fiscal rules that the Economic Secretary referred to and, first, to the sustainable investment rule that net public debt as a proportion of GDP will be held
I raise that point given the concern expressed by my hon. Friend the Member for Braintree this morning and on numerous other occasionshe is tireless in making the pointthat some areas of public sector indebtedness, such as some PFI liabilities, some public sector pension liabilities and Network Rail, are not included within the tests. I would be grateful if the Economic Secretary could confirm that. I think that it was implicit in her remarks that there was no intention to reform either the definition of public debt or, presumably, the 40 per cent. test, but I would be grateful for clarification.
I turn to the other fiscal rule, the golden rule that Governments should borrow only to finance capital spending. It is widely acceptedalthough I do not expect the Minister to accept itthat the frequent changes of dates of the cycle made by the Treasury have undermined confidence in that golden rule. The Financial Times carried out a survey of economists and institutions, and said:
Almost none use the Chancellors fiscal rules any more as an indication of the health of the public finances.
Kitty Ussher: The hon. Gentleman expresses scepticism about the dates of our cycle. Does he not believe that the National Audit Office was correct when it audited our cycles and said that they were correct?
Mr. Gauke: It would be helpful if the economic cycles could be not just audited but determined by an independent body. The fact that almost every change to the economic cycle has made it easier for the Government to comply with the golden rule leads to suspicion. We can talk to economists and to economic commentators, and none of them take the golden rule as seriously as they should do. That is a pity because the objective behind the golden rule is laudable, but it is not delivering. It does not provide confidence to the economy as a whole by acting as a genuine restraint upon the Government, because of the frequent changes in the economic cycle.
Mr. Gauke: No, I do not suggest that, but the NAO takes a subsequent look at events, and that is not that same as determining what the economic cycle is.
I was formerly a member of the Treasury Select Committee. That all-party Labour-dominated Committee has advocated on a number of occasions that we should look again at the determination of the golden rule. There seem to be two possible ways of doing that. One would be for an independent body to determine what the economic cycle is; the second approach might be a forward-looking rule. I would be grateful if we could look at whether there is any indication of what approach we could take.
Earlier in the summer, there were hints about a possible reform of the golden rule. It was area in which the new Chancellor might have struck out boldly. He would perhaps not have been as attached to the existing rule and he could have set out his independence by making a reform in this area. Sadly, that does not appear to have happened, which is a great pity and perhaps we should consider the matter. From what the Economic Secretary has said, it would appear that there are no plans for reform, and I regret that.
Mr. Newmark: I appreciate what my hon. Friend says, but notwithstanding the points made by the Economic Secretary, the goalposts of the golden rule have been shifted not once, not twice, but three times. It smacks a little of reverse engineering. That is the point that we are concerned with.
Mr. Gauke: I am grateful to my hon. Friend. We both served on the Treasury Select Committee and particularly recall how the then Chancellor, the current Prime Minister, steadfastly refused to answer when I asked him whether, but for the changes in the economic cycle that he introduced in December 2005, he would have succeeded in meeting his golden rule over that particular economic cycle. I suspect that my hon. Friend will recall that occasion too.
I turn now to the two European tests. The first is for general Government net borrowingthe Government deficit. According to the figures contained in both the PBR and the convergence programme, the treaty deficit for 2007-08 is 2.9 per cent. of GDP. The cyclical treaty deficit stands at 3 per cent, which is the reference value for an excessive deficit, so we are very close to being in breach of that. It would be fair to sayI acknowledge the point that the Economic Secretary madethat we are well below the threshold for the other test, which is the general Government gross consolidated debt. However, that is rising quite rapidly and is up to 45 per cent. Clearly there is concern about general Government net borrowing.
That brings me to a point about what has happened since October, given that we have this relatively long period between the figures being determined by the Treasury and the submission to the European Commission. The decline in public finances in that period is striking. On 20 November, the ONS published the public sector finances for October 2007, so we now have the figures for seven of the 12 months of 2007-08. The Institute for Fiscal Studies projects that the public sector net borrowing figure will not be the PBR figure of £38 billion, let alone the £35 billion or the £31 billion that had previously been predicted by the Government, but £42 billion. That is more or less 10 per cent. higher than the figure that the Government predicted just two months ago.
Essentially that is because capital spending is growing at almost twice the rate predicted by the Government in October. Moreover, corporation tax receipts are not performing quite as well as they might do. The PBR forecast for 2007-08 was that they would be 4.5 per cent. more than 2006-07 but, for the first seven months of this year, there has been no increase at all. The figures do not tally exactly, but an increase in deficit of 10 per cent. would result in a 10 per cent. increase in the deficit ratio too. That would take us up to 3.2 or 3.3 per cent. on the European test, which would clearly be an excessive deficit as defined under the stability and growth pact.
Notwithstanding the figures that we already have, there is also reason for concern about the future figures for the economy. We all hope that there will not be a substantial slowdown, but Members on both sides of the House recognise that there are concerns that it may occur. As the Economic Secretary said, the growth forecast issued by the Government has been downgraded from 2 to 2.5 per cent. However, one can simply look at the comments that Mervyn King, the Governor of the Bank of England, made to the Treasury Select Committee last week. He referred to the slowing of growth in public finances. That is a concern because it will have an impact on corporation tax receipts in particular, but on other tax reliefs too.
The UK may be vulnerable to a slowdown in the financial services market. We all know that it is a difficult time for banks. Their profits are down substantially. We have a major financial centre in London and a large financial services industry, which is welcome but it may make us slightly more vulnerable to a downturn within this sector. Figures announced yesterday by the Halifax show house prices falling for the third month in a row, with the sharpest decline for a long time over the last month, which suggests that there is a concern recognised by all parties about the slowing of the economy. Will the Economic Secretary confirm whether the Government remain confident that the 2 per cent. figure that they have predicted, which is at the bottom of the range that they suggest for growth, is realistic? I do not dispute whether it is or not, but I would be grateful for the Governments views on whether that figure is right.
Additional demands on the Exchequer have emerged over the past two months and should be discussed in the context of this debate. First, on the issue of Northern Rock, with which I know the Economic Secretary has been closely involved, the Government have provided a guarantee for the liquidity of Northern Rock, which in itself is a contingent liability. We are notor at least I confess that I am notclear about how that liability will feature in Government accounts.
We must also consider that, according to yesterdays business section of The Daily Telegraph, there is a possibility that Northern Rock will be nationalised. In those circumstances, the public sector net deficit would be increased to the extent to which the Governments financial liabilities are increased by more than the Governments financial assets. As I have said, there is talk that that may happen in February. In addition, reports in The Daily Telegraph say:
Downing street has opened talks with the Conservatives over the nationalisation bill.
That came as a complete surprise to Conservative Front-Benchers. In September, my hon. Friend the Member for Tatton (Mr. Osborne), the shadow Chancellor, wrote to the Chancellor offering cross-party support to protect taxpayers, but he has not yet had a response. Certainly, no approach has been made to us about a nationalisation Bill. If the Economic Secretary would like to open talks immediately after this sitting, I will listen to what she has to say and pass it on to my colleagues. None the less, I would be grateful for clarification about whether there are any potential costs to the Exchequer, as they would be relevant to the information that we have provided to the European Commission on this subject.
Another subject about which we have had some uncertainty is the changes to capital gains tax announced by the Chancellor in his pre-Budget report, when he declared the abolition of taper relief. We all know that that is a revenue-raising measure, which will raise £350 million in 2008-09; £750 million in 2009-10; and £900 million in 2010-11. However, there has been an enormous outcry about the measure and business organisations, such as the CBI, the Institute of Directors, the British Chambers of Commerce, and the Federation of Small Businesses, have been in uproar about it. We know from a breakfast meeting that the Prime Minister, who is the First Lord of the Treasury, had with the editor of The Sunday Times that the Government are considering introducing some kind of retirement reliefperhaps up to £100,000. To be fair, I do not yet know whether the Treasury has been informed of the First Lord of the Treasurys proposals on that matter, but the Treasury did not seem to be aware of them on the day concerned. I do not know to what extent the First Lord talks to the Second Lord about such things, but the Second Lord of the Treasury said in his speech to the CBI on 27 November that plans will be revealed
in the next three weeks.
That delay increases uncertainty for businesses that do not know whether to dispose of their assets before April 2008.
It is unfortunate that there is such a delay, but any measures introduced may well have a fiscal cost. If that is the case, the numbers that we are submitting are already out of date, unless any changes to capital gains tax, the introduction of retirement relief, or whatever plans will be introduced over the next couple of weeks to reduce the strong opposition to these proposals, are fiscally neutral. I would be grateful if the Economic Secretary could confirm whether the further changes to capital gains tax to be announced will be fiscally neutral. If they are going to have a cost to the Exchequer, we need to know about it today, and we ought to know about it when we are debating our submission to the European Commission. If the Government have plans that they have not yet announced, which are going to incur further costs, we ought to be aware of them, and the figures should be reflected within the convergence programme for the United Kingdom.
I would like to touch on two further issues where the report may be out of date. A further cost may be related to the missing discs from Her Majestys Revenue and Customs. First, there will be the cost of reimbursing the banks for the various checks that they made over the weekend of 17 to 18 November to record that no fraud had occurred. Although I do not believe that the
There is also the huge potential liability for the Government from any identity theft. Although they say that no fraud has yet occurred, it is very difficult for them to establish that. Perhaps there has been a slight failure of imagination. If these discs are in the hands of fraudsters, they are not likely to undertake a big-bang approach to try to steal billions in one day; they will do it gently.
If the banks see any increase in identity theft over the next few months and, in particular, if they can identify any statistical increase relating to families with children, they are likely to go knocking on the Governments door quickly and say that the Government are responsible for that and that they are going to have to cough up. That could be an expensive cost to the Government, and I would be grateful for the clarification as to whether the Economic Secretary accepts that.
Mr. Newmark: There is an additional cost. As my hon. Friend may know, I have five children and my wife has received several letters, so there is the additional cost of postagenot once, but two or three timesthat has to be taken into account.
Mr. Gauke: I am grateful to my hon. Friend. There will be various possibilities. We read in the newspaper today that HMRC will reimburse the Metropolitan police some £500,000 for the additional costs of searching for the discs, and for sending police officers into rubbish tips throughout the length and breadth of the country in the hope that they will find a couple of computer discs. He makes a good point about the costs of the letters, but an overall cost will be incurred here. Potentially, the more substantial one is if we start to see evidence of fraud, because it would appear that the Government are clearly going to be liable in those circumstances.
There is one final point about how matters have changed. To be fair, it is acknowledged within the convergence programme, at the top of page 47, in paragraph 5.4. It refers to the fact that the ONS published a new set of population projections on 23 October, and that it is too late to be included in an assessment of the long-term sustainability at the time of the October 2007 PBR. Those were very important figures, and the Economic Secretary will remember that there was considerable press attention given to the projections of a substantial increase in the population of this country. Those figures are not taken into account within this document for the perfectly good reason that they were not available when the PBR was drawn up, but of course, those figures are available now. Again, that underlines my point that we are sending a document that is somewhat out of date.
I know that one point addressed in the convergence programme document and that I could not find in the PBR is close to the Economic Secretarys heartcompliance with criteria to join the euro. I was not aware whether since the change of Prime Minister, the Government have restated their policy on that, but they say in this document that they remain in principle in favour of Britains membership of the euro subject to
There is reference to plans to reassess the economic tests for the Budget of 2008. I would be grateful to know how many people are currently working in the Treasury on the reassessment or whether it will essentially involve a couple of people sitting down over a cup of coffee, saying Should we do this? No, dont be silly, and then leaving it for another year. Also, how seriously do the Government still believe that, in principle, it would be in Britains interest to join the euro?
In conclusion, this PBR revealed that public finances have not been prepared for the difficult times that may lie ahead. The evidence since it was prepared reveals that times may indeed become difficult and confirms how ill prepared the Government have made the public finances of the UK. I am afraid that it is a demonstration of a degree of irresponsibility and, at times, of incompetence that we find ourselves in this position and that, after years of strong economic growth, our public finances are in the mess that they are. This PBR and, indeed, this convergence programme for the UK inadequately reflect the situation that faces the UK.
John Thurso (Caithness, Sutherland and Easter Ross) (LD): May I begin, Mr. Illsley, by saying what a pleasure it is to appear under your chairmanship? However, I must confess that I am not entirely certain why I find myself here this morning, or what I have done to my Whips Office to find myself temporarily catapulted from the quiet, sylvan pastures of the Back Bench into a spokesmans position. I can assure the Committee that it will not happen terribly often if I have anything to do with it.
Not having a clue what the procedure was for this morning, I therefore thought that I would start by looking at the documents. I must confess that I had much the same problems as the hon. Member for South-West Hertfordshire, so I thought that I would go back to last years debate and have a look at that. I got out the record of last years debate and I must say that I have an awful feeling of groundhog day at the moment, not least in witnessing the terrier-like tenacity of the hon. Member for Braintree, which is clearly undiminished across the year. I read the comments of my own colleagues and find myself none the wiser for reading them. [ Laughter. ] Thatll teach them to let me loose.
The ostensible purpose this morning is clearly to consider the Maastricht Act provisions and to look at the convergence programme for the UK, as the document before us is entitled. Clearly, there is not a convergence programme of any significance. There is no real, active debate about our joining the euro. I think that, at this precise moment, all parties are quite clear that joining
I would like to make one point about the euro. Curiously, over the last year the euros importance in world economic affairs has increased. I was in Zurich last week, speaking to a number of people responsible for investments for a charity. It was quite striking that they really had no regard for what was happening in Great Britain; it was a matter of supreme indifference to them. They were far more interested in the euro, in its strength and in ensuring that their euros were properly invested. We should at least take note that the euro is maturing and strengthening, and a time will come when we shall look at it again. It is not quite the basket-case currency that some people suggested it might be at the beginning.
The rest of our debate allows us to have another look at the Governments policies for the economy. I do not want to spend a great deal of time doing that, but there are one or two points that I would like to pick up. I was interested in the debate on the point of order raised by the hon. Member for South-West Hertfordshire in respect of the timing of the document. In fact, I believe that the vast bulk of what we needed to see can be found in the pre-Budget report, but the fact that there is a document and that it is dated November but was printed some time ago shows how fast things have been moving in the economy and in the City in recent weeks. Indeed, if one reads the opening paragraph of the convergence programme, one might see a hint of complacency, frankly. It mentions the tremendous robust and sustainable growth. It also states:
The UK economy is experiencing an unprecedented period of growth,
which is a dangerous claim to make in the light of what is happening in the capital markets and other areas.
Later today, the Monetary Policy Committee will make a decision on interest rates. It will be one of the most difficult it has had to make since the inception of an independent Bank of England because, probably for the first time, there are a set of circumstances in which a politically motivated Chancellor might have come to a different decision from that of an independent MPC. It is therefore a testing time for the MPC, and I hope and trust that with its independence and collective knowledge, it will make the right decision. The Treasury Committee, on which I have the honour to serve, will doubtless quiz the MPC as to the reasons for its decision, and the report will make interesting reading.
The Economic Secretary was good enough to say in her opening remarks that the Government will take no risks with stability, which is, of course, an admirable objective. The problem with risk is that we need to know what it is and we do not at the moment know where the risks are. That is what the turmoil in the capital markets is all aboutpeople do not have a clue where the ultimate risk lies. It could lie with an investment company or with an insurance company, or
The level of consumer debt is a critical element of that. A large part of consumer debt is secure debtmortgagesand should therefore not be too much of a problem. However, we are now learning, by the example of Northern Rock and other things, that mortgages in excess of 100 per cent. are based on a 95 per cent. mortgage with the balance of some extra 25 per cent. given by way of an unsecured loan. We have no idea how much such loans are worth. As has been mentioned, the housing market has been in retreat for the third consecutive month, which must build pressure. We do not know how the situation will pan out, so I would suggest that consumer debt is a major risk, as is the housing market.
Credit must be given when credit is due: in many ways, the Government have managed the economy well in the past 10 years. I am therefore not attacking the Government, but merely urging caution at a time of what is clearly extreme difficulty that has been brought about by events in other countries. Clearly, the direction of the housing market is cause for concern. The fundamentals are stronger today than they were in 1991, 1992 and 1993, and there is good reason to hope that we will not have the same level of problems, but we would be complacent if we believed that they will definitely not happen.
We can learn the lesson from the example of Northern Rock. Interestingly, I asked the Governor what he thought might happen as regards the general level of the financial markets in May, and he told me that all the fundamentals were in order and that there was no reason why anything would go wrong. That remained truethere was nothing fundamentally wrong with Northern Rock, other than that nobody wanted to take its paper when it needed that. Subsequently, there was a liquidity crisis, which was the one event for which it had no plan. A major cause was sentiment and emotionthe one thing that we do not enter into our calculations about the future economy. There was a run on the bank because the man and woman in the high street decided that there was a problem. It was not about economics; it was about sentiment.
I want to say a word about the PFI and being off balance sheet. I come back to the lessons that we are learning. If we had talked to the banks about their special investment vehicles and their off-balance sheet vehicles three months ago, they would have said that they were absolutely sound. Today, one bankCitigroupis publishing £141 billion of exposure, so it has gone from nothing to £141 billion in two months. I am not suggesting that that will happen to the Government, but what we have seen of auditing in the past is not necessarily how to look at the future.
Everything we are looking atwhether growth or productivityand all our aspirations for the country are wrapped up in where the current problems in the economy will go. It is a testing time. I want all those with responsibilities, whether they be in the Government, independent governors of banks or other members of the tripartite arrangements, to conduct themselves in a way that will lead us to come out with the best possible
Mr. Newmark: I am delighted to see the Government Members out in full force for this important debate. I know that the Government Whip is particularly keen to hear what I have to say. I congratulate the Economic Secretary on her commitment to ensuring that the Treasury is run as a paperless office. Indeed, a copy of the UK convergence programme was, of course, made available on the Treasury website, but as my hon. Friend the Member for South-West Hertfordshire said, paper copies did not reach the Vote Office. I was a little amused to hear that, when my office requested a paper copy from the parliamentary unit at the Treasury, the response was that a copy would be sent over immediately, but that unfortunately it was the only copy available. Perhaps the other copies had already been forwarded to Brussels in anticipation of the Committees approvalor perhaps it is the pre-Christmas post.
The Government notes at paragraph 1.7 of the report that the
disruption in global financial markets has meant economic prospects have become more uncertain,
before emphasising that they believe the economy to be resilient enough for the impact to be minimal, and that
growth could slow by less than expected.
Is that judgment in accord with the Governor of the Bank of Englands statement to the Treasury Committee that conditions are not only highly uncertain, but rather uncomfortable? Is a revision of emphasis in the programme required in light of those comments?
Paragraph 2.4 states:
Stability allows business, individuals and the Government to plan more effectively for the long term,
but how is stability being reinforced by the Chancellors shilly-shallying, for example, on capital gains tax rates since the pre-Budget report?
Paragraph 2.7 makes another equally confident claim, and states that the
most recent assessment, published in the 2006 Long-term public finance report, shows that the UK fiscal position is sustainable over the long term. The UK is in a strong position relative to other developed countries
the point made by the Economic Secretary
to face the challenges of an ageing society.
How does that statement square with the fact that the Chief Secretary said last week at Treasury questions that public sector pension liabilities
should not be grossly simplified and misrepresented.[Official Report, 29 November 2007; Vol. 468, c. 424.]
I agree with the principle, but at the same time he admitted that the ONS has already released new figures, back in October, and that a revision of the long-term public finance report was now both forthcoming and overdue. Should this expected revision not be reflected in the convergence programme?
My favourite claim is in paragraph 3.4, which says:
Central banks have offered more liquidity at slightly longer maturities, including in the three-month money market, and, in some cases, against a broader range of collateral than usual.
There is no hint there of the mismanagement that caused the first run on a bank in 150 years, while the European Central Bank and banks in Europe avoided difficulty. There is no mention that one particular central bank that accepted a
broader range of collateral than usual
was Northern Rock, together with its depositors, in return for a rapidly escalating commitment of taxpayers money. There is no admission from the Government that the slightly longer maturity of the liquidity may well be indefinite. That is just a flavour of the quite remarkable optimism with which the Government intend to regale Brussels and that at least proves that Ministers are capable of keeping a stiff upper lip abroad, whatever disasters befall them at home.
I move to some specific questions about the treaty deficit and the way that it is calculated. It seems that the Treasury prefers to use the cyclically adjusted treaty deficit because that measure has, in the past, helped to push the Prime Minister in the right direction. We begin to see from table 4.1 of the convergence programme that, next year, it will push him even closer to another breach.
The figures themselves appear to move about quite a bit. Table Bl of the pre-Budget report and table 4.1 of the convergence programme note this years treaty deficit as 2.6 per cent. of GDP and the cyclically adjusted treaty deficit as 2.4 per cent. of GDP. However, in its release of 28 September, the ONS preferred to split the difference by claiming the treaty deficit for this year as 2.5 per cent. of GDP. Will the Economic Secretary comment on the difference between the figures from the ONS and those that appear in the document before us?
Furthermore, it seems to be the practice of the ONS to publish the treaty deficit figure in a different format, depending on the year in question. I have the biannual releases going back a few years. Sometimes, as in the latest release, they are based on the financial year, but on other occasions they revert to the fiscal year. Moreover, it does not seem to matter when in the year the figures are published. I have no doubt that the ONS was already fully independent of the TreasuryI think that this is the point that the Economic Secretary was makingeven before the advent of the new Statistics Board, but will she explain the methodology to me?
Misplaced optimism, the massaging of figures and a refusal to acknowledge criticism have all been hallmarks of this Government in the past. When, for example, the European Commission issued in January last year its indictment of the UKs failure to adhere to the 3 per cent. target for the second time in as many years, a Treasury spokesman said in response:
As set out in the Budget last week, the UK treaty deficit is forecast to fall to 3 per cent. in the coming fiscal year, and will reach 1.6 per cent. by 2010-11. The UK continues to have the lowest average debts and deficits of any major European economy with the public finances sustainable and increases in public investment fully affordable.
Again, that point was made by the Economic Secretary earlier.
From table 4.1 of the convergence programme, we see that the treaty deficit position for 2010-11 is predicted to be not 1.6 per cent., but 2.1 per cent. on both the adjusted and the non-adjusted measure. That is an upwards revision in forecasting of 0.5 percentage points, which is significant for two reasons. First, in January last year, the Council made a recommendation that the UK should correct its deficit by 0.5 percentage points in a credible and sustainable manner between 2005-6 and 2006-7. It looks very much as if the Councils recommended margin for improvement is exactly the same as the Governments own margin for error in forecasting. Secondly, given that the estimated deficit for 2007-08 is 2.9 per cent., or 3 per cent. when cyclically adjusted, how confident is the Economic Secretary that the latest estimate will not miss by a similar margin and result in the UK breaking the Maastricht criteria yet again? Before concluding, I would like to turn briefly to the sixth report of the European Scrutiny Committee from the last Session, which addressed the stability and growth pact and, in particular, both the Councils opinion on the UKs convergence programme and the Commission communication that arose from it subsequently. The European Scrutiny Committee had already noted the substance of the Councils dissatisfaction with the Governments data on the UK convergence programme in an earlier report. Nevertheless, the Government failed to address many of the points raised by the Committee, which subsequently had to reiterate its request for an explanation of the concerns that the Council had expressed.
Persevering, in its sixth report the European Scrutiny Committee again drew attention to both omissions of data and to the criticism that some data was being
aggregated differently from the harmonised measure.
The Committee eventually received an explanation from the former Economic Secretary to the Treasury, but it seems to have been the result of a process which reads as if it was a bit like pulling teeth. I quote from paragraph 9.6 of the Committees report:
The Economic Secretary to the Treasury writes belatedly in response to our repeated request on points related to the UKs Convergence Programme.
Later, paragraph 9.15 says:
We note the further comments the Minister makes now (and which we would have liked to have seen much more promptly) in relation to the apparent dissatisfaction with the Governments data.
What was the reason for the delay in answering the European Scrutiny Committees queries? Clearly, the Government could have done more and acted quicker to address concerns about the quality and the presentation of the data in the UK convergence programme.
There are, however, several questions that come to my mind out of all this. First, is the new version of the convergence programme up to scratch and does the new Economic Secretary feel that she can give it her full confidence? Secondly, can she confirm for the record how much importance the Government attach to the adherence to the Maastricht convergence criteria? As with so many other policy areas, the Prime Minister has in the past attached great significance to compliance with the Maastricht criteria when the going was good but, surprisingly, he became a little less interested when the rules were repeatedly breached and the Council started issuing critical missives. So, will the Economic Secretary signal whether the current Chancellor still
Kitty Ussher: I am grateful for this debate and I hope that I will be able to respond to all the remarks that have been made.
I would like to start by congratulating the hon. Member for Caithness, Sutherland and Easter Ross on his promotion, which I hope is not temporary. He is extremely welcome, and I particularly welcome his comments that we have, of course, managed the economy very well and that the economic fundamentals are much better than they were under the Conservative party. On that basis, I wish him a long and happy career on the Liberal Democrat Front Bench.
I will address the questions put by the hon. Member for South-West Hertfordshire, who speaks for the Conservatives. No, there have not been any changes to our forecasts since the pre-Budget report, the published forecasts of the pre-Budget report and the Budget. As I said in my opening remarks, our forecasts incorporate an assumption about various changes to economic indicators. We have indicated a downwards revision of our growth forecast for next year, although we still think that our growth will be positive and will compare well with other countries.
Do we think that the document is out of date? Quite simply, no. We had 61 quarters of growth, we are fastest growing economy in the G7 and we are very proud of our record. The IMF forecast released after the PBR has the UK as the fastest-growing economy in the G7, alongside Canada.
With regard to economic cycles, we had that debate when the hon. Gentleman was kind enough to take my intervention. I simply make the point that the judgment of when the end of the economic cycle should be is, by its nature, backward looking. There are many forecasts, including our own, about the forwards likely end of an economic cycle. To get the definitive answer, however, it has to be retrospective, and when we make a judgment on that, we will invite the National Audit Office, which is independent, to audit it.
With regard to the sustainable investment rule and whether it will apply in the next economic cycle, perhaps the best thing that I can do is state what that rule is. It states that public sector net debt as a proportion of GDP will be held over the economic cycle at a stable and prudent level. That is our rule. Other things being equal, net debt will be maintained at 40 per cent. of GDP over the economic cycle. That is our policy.
Mr. Gauke: I just seek clarification. I accept what the rule is, but the question relates to the interpretation of the rule. Is the Economic Secretary saying that the same interpretationthe 40 per cent. testwill be applied for the next cycle as has been applied in this cycle?
With regard to Northern Rock, the Chancellor of the Exchequer has made the position clear on many occasions. We are obviously committed to protecting the interests of the taxpayer as well as those of depositors and wider financial stability. It is important to realise that the liquidity support and the Treasury guarantee that have been put in place to provide the company with a period of stability and maintain those aims have had no impact on public finances. At this stage, it is a contingent liability secured against the companys assets. Obviously, we are working closely with the other members of the tripartite authority to find a long-term solution that protects the interests of taxpayers.
Mr. Newmark: I understand why the Government want to protect depositors: that is absolutely right and important. However, I am still interested in why the Government would risk perhaps £11 billion of taxpayers money to protect subordinated debt holders and the medium-term note holders, who were actually rewarded for the higher risk. I do not understand why they added potentially £11 billion plus more of such liability.
Kitty Ussher: We took the actions that we felt were necessary to protect the stability of the financial system and I believe we did exactly the right thing. On the issue of discsI remember being asked this at Treasury questions only last weekI consider any questions of cost completely hypothetical, since the banks have not said that there is any indication of fraud having taken place.
John Thurso: It might be helpful for the Economic Secretary to read the transcript of yesterdays meeting of the Treasury Sub-Committee, as the acting HMRC chairman admitted that there will be costs and he is going to write to us with the details of that.
Kitty Ussher: I was discussing costs to banks. If there are costs to HMRC, I am sure that all members of the Select Committee will look forward to the letter that they will receive on that, as, indeed, everyone in the whole country looks forward to receiving letters from HMRC.
With regard to further changes to capital gains tax, the Chancellor of the Exchequer made clear in his speech at the CBI conference on 27 November that we are listening to the views of the business community and any further proposals will be reported to Parliament before the Christmas recess. I urge Opposition Members to hold their horses for another few days.
Mr. Gauke: I am grateful to the Economic Secretary. To be fair, she is being diligent in responding to all the points raised. However, on the specific issue of capital gains tax, the Governments finances, as set out in the pre-Budget report and reiterated in the convergence programme, take into account the Chancellors announcement of changes to capital gains tax. We know that there will to be some changes to that. If it is fiscally neutral, the figures contained in the report are up to date, but if the changes are not going to be fiscally neutral, the figures contained in the report are wrong. Therefore, will the Economic Secretary tell us today whether the figures contained in the report are still up to date, because the changes in capital gains tax will be fiscally neutral?
Kitty Ussher: There have been no changes announced to the proposed change to capital gains tax, and therefore everything before us is up to date. The Chancellor has said that any further changes will be announced to Parliament before the Christmas recess. In that event, that is the appropriate forum in which to continue that debate.
The hon. Member for Braintree spoke at some length about the excessive deficit procedure and Britains performance against the Maastricht criteria. That has come up several times this morning. All that needs to be said is that the treaty deficit threshold is 3 per cent. Our forecast for the foreseeable future is below that, which I think answers his point. An excessive deficit procedure was invoked in the course of the last year and, only a few months ago, the Commission agreed that we were now back within the necessary reference level.
On the euro, the Government policy on joining the economic and monetary union has not changed. It remains as it was set out by the previous Chancellor in his statement to the House in October 1997 and again on the five-tests assessment in June 2003. We will continue to update Parliament through the Budget. I have no idea how many people are involved in our assessment of the euro.
On the question of public service pension liabilities, I am sure that the Committee will be delighted to hear that I agree entirely with the Chief Secretary to the Treasury, that it is appropriate that updated estimates for unfunded public service pension liabilities will be published alongside the next long-term finance report on the state of the PBR. That will be published later in order, as is suggested, to take account of data released by the ONS more recently.
I hope that I have answered most of the points that have been raised. If there are any gaps, I will update hon. Members in writing later. The main point to be made is that we are confident that Britain is well placed to withstand some of the international risks that are out there at the moment. We have had 61 quarters of positive growth. I believe that is a record of which to be proud. I commend the report to the Committee.
The Committee divided: Ayes 10, Noes 2.
Division No. 1 ]
Question accordingly agreed to.
That the Committee has considered the Governments assessment as set out in the pre-Budget report for the purposes of Section 5 of the European Communities (Amendment) Act 1993.
Committee rose at thirteen minutes past Ten oclock.
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