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The abandonment of the centrepiece of the Government’s economic policy, referred to by the Prime Minister in 2003 as

is undoubtedly a political humiliation for them, but it is also an opportunity for this country to put in place a more credible, sustainable and independent framework for fiscal discipline. Our purpose in calling this debate today is not merely to draw attention to the failure of the fiscal rules and the absence of fiscal discipline or to the contribution that that failure has made to the situation we are now in and the Government’s lack of room for manoeuvre in responding to it. Our purpose is to look to the future and to put forward an alternative framework to try to ensure that we collectively never allow ourselves to do this again—to borrow through a boom, to spend money we have not got, to pile up debt we cannot afford and to mortgage our future and the future of our children with the borrowing today that will inevitably become the taxation of tomorrow.

Mr. Graham Stuart (Beverley and Holderness) (Con): Further to the comments of my hon. Friend the Member for Broxbourne (Mr. Walker), does my hon. Friend the shadow Chief Secretary believe that the Prime Minister’s claim to have ended boom and bust contributed to the fact that people in this country cut their rate of saving at first in half and then just to a fraction of its level in 1997, leaving homes and families throughout this country in a much worse position to face the bust that is now coming at the end of the Brown boom?

Mr. Hammond: My hon. Friend is absolutely right. The message that went out was that low interest rate easy credit would be with us for ever, and that it was safe to borrow far larger multiples of income and to draw equity from one’s house in a way that, with the benefit of hindsight, was incredibly imprudent and ill-advised, and the Prime Minister will have to bear the responsibility for that message.

Step one in developing an alternative framework to the discredited fiscal rules was to understand why the current fiscal rules so comprehensively failed to deliver, and step two was to analyse whether they could be fixed. The sustainable investment rule is the simpler of the two rules to deal with. It says that in every single year, net Government debt should remain below 40 per cent. of GDP. That is a rather unambitious target in the face of our rapidly ageing population and the Government’s own long-term fiscal projections show that if we do nothing, public spending will rise simply because of the demographic profile. The target takes no account of the need to put money aside for the future, and it has simply been broken, with current net debt at 43.3 per cent. of GDP and set to rise, and, as important, the use of off-balance sheet financing to conceal billions of pounds of private finance initiative debt alone makes it meaningless. Worse, the Government’s determination to avoid being seen to breach the rule for as long as possible has led to a hugely costly distortion in public procurement as more and more projects have been forced into PFI structures, not because risk is being genuinely transferred, but so that capital spending can be financed off-balance sheet.

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The golden rule says that, over the cycle as a whole, borrowing should fund only capital expenditure, with current spending paid for from tax receipts. That is a perfectly sensible proposition, but it has not been delivered.

Mr. Todd: On a technical point, the hon. Gentleman refers to the definition of projects within PFI, but I think he recalls that the Office for National Statistics normally carries out the task of reviewing whether a project should be placed on-balance sheet or off-balance sheet. Is he questioning the judgment that has been exercised in that respect?

Mr. Hammond: The hon. Gentleman will recall that the Government committed to bring a large amount of this PFI liability back on-balance sheet from this year and then, apparently for technical reasons, pushed things back by a year. It will now be next year that some, at least, of this stuff comes back on to the balance sheet. When we examine these large numbers—these large percentages of GDP—it is important to remember that we are seeing only part of the picture; another bit of the picture remains off the balance sheet at the moment.

The golden rule has not been delivered on because, this Government have consistently overestimated since 2001, tax receipts and underestimated the deficit, because the Chancellor has been allowed to mark his own scorecard and, crucially, because measuring compliance with the rule depends on the precise dating of the economic cycle, and that can be known only after the event—sometimes long after the event. In other words, the rule is backward-looking, while any credible judgment of fiscal sustainability must be forward-looking.

Mervyn King has observed:

that is to say, in the dating of the economic cycle—

Yet, such an approach may fundamentally change the apparent performance against the golden rule. So the golden rule is flawed not only in its implementation; it is flawed in principle. The Prime Minister’s fiscal rules have failed the practicality test, because just as no sensible set of fiscal rules would suggest that Government borrowing and net public debt should not rise at a time of economic slowdown, so no sensible fiscal rule would allow us to arrive at such a time with borrowing bumping up close to the ceiling, leaving no room for counter-cyclical responses to the economic downturn and no room to help hard-pressed families and businesses, never mind for any additional measures that may be necessary to deal with the financial sector crisis.

We have a failed fiscal framework, and we urgently need a replacement for the discredited fiscal rules if we are not to see the broader macro-economic policy framework undermined and the battle to contain inflation compromised. The Governor of the Bank gave a warning to the Treasury Committee:

The evidence of the failure of the fiscal rules is here for all to see. That empirical evidence is consistent with the emerging academic consensus against rules-based
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systems on the basis of the empirical observation that, in practice, rules either tend to be too loose to be effective or so inflexible that Governments break them. While it might be possible in theory to design a rule that suggested the right response in all circumstances, such a rule would inevitably be too complex to operate in practice. So after careful consideration and consultation, our preference is for institutional reform to entrench fiscal stability. Last week, my hon. Friend the shadow Chancellor put forward our proposals for a new fiscal responsibility framework, as part of our plan for a strong economy.

The framework will be at the heart of our economic policy. Its starting point will be that Governments, like the rest of us, must live within their means, not only because economic stability requires it, but because intergenerational fairness requires it. That will ensure that collectively we never make the same mistakes again, and in future all British Governments will be forced to fix the roof while the sun is shining. They will have to acknowledge that Governments cannot abolish the economic cycle, whatever Chancellors might like to claim, and will be forced to put something aside for the rainy day that will periodically come around.

For anybody who has not studied the detailed proposals—I am sure that the Chief Secretary has done so—I will spell out what the next Conservative Government will do, in the event that this Government have not already adopted our policy. First, we will scrap the discredited fiscal rules, which are neither use nor ornament and, with the benefit of hindsight, never were.

Secondly, we will introduce a tough, new, forward-looking mandate for the public finances at the end of a forecast horizon, with falling debt as a percentage of GDP and a balanced current budget, after adjusting for the economic cycle. Thirdly, and crucially, for the first time in Britain we will create an independent body accountable to Parliament, the office of budget responsibility, to publish independent forecasts and to assess the performance of Government against the outcomes it has specified.

Bob Spink (Castle Point) (UKIP): Surely it is the job of Parliament to monitor and assess the Government’s fiscal policies and performance? After all, Parliament has Select Committees and professional advisers to inform them. This solution is yet another quango of unelected, unaccountable people, and it is a bad policy. It is certainly not a Tory policy. Has the hon. Gentleman really thought this through?

Mr. Hammond: If the hon. Gentleman will forgive me, I will decide what is a Tory policy, not him. I reject his criticism, although he is right in one respect. Parliament has to hold the Executive to account, and the office for budget responsibility will give it the tools to do so. The OBR will be answerable to Parliament, delivering independent forecasts and an assessment of the Government’s Budget proposals. I shall explain how it will work.

The OBR will be staffed by economists and tax experts, and it will focus exclusively on the medium and long-term sustainability of the public finances. At its inception, it will be tasked with a full independent audit of the nation’s debt; a cleaning of the Augean stables; and a bringing back onto the balance sheet of all the dodgy accounting that this lot have hidden in nooks
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and crevices such as the private finance initiative, Network Rail and under-recognised depreciation on military equipment. That should appeal to a Prime Minister who I saw on the telly last night calling for more transparency—except that of course he was calling for it from someone else, not from his Government.

Let me explain, for the benefit of the hon. Member for Castle Point (Bob Spink), how the OBR will monitor the health of the public finances and hold Governments to account on an ongoing basis. First, the Chancellor will set the mandate for the public finances. This will remain his responsibility, just as the inflation target is set by him within the monetary policy framework. Then, every year, in advance of the Budget, the OBR will present its fiscal forecast, which will include a judgment of the sustainability of the public finances against the mandate it has been given. It will also include the OBR’s best independent estimate of the true scale of all future Government liabilities. The judgment will state how much fiscal loosening or tightening the OBR thinks is needed by the end of the forecast horizon in order for its central forecast to meet the Chancellor’s mandate. Crucially, however, the mix of any tightening or loosening between tax revenues and spending—a political decision—will be explicitly outside the OBR’s remit. That will remain the responsibility of the Chancellor of the day, who will deliver in his Budget his judgment of the required net loosening or tightening of fiscal policy against the backdrop of that OBR-published report. If for any reason he or she does not agree with the OBR judgment, he or she must explain why to Parliament.

Finally, the decisions taken in the Budget would be taken into account in the OBR’s next report and the OBR would comment on the likely medium and long-term fiscal consequences of any significant deviation from its recommendation.

Mr. Adrian Bailey (West Bromwich, West) (Lab/Co-op): The hon. Gentleman does not seem to have covered this question: who will appoint the members of the OBR?

Mr. Hammond: I can offer to send the hon. Gentleman a copy of our plan for a strong economy. Members of the OBR will be appointed by the Chancellor for a single term— [ Interruption. ] The Exchequer Secretary says, “Ticking his own box”, but it will be like the Chancellor appointing the members of the Monetary Policy Committee. We will put in place a mechanism for scrutiny by the Select Committee on Treasury and by Parliament of appointments not only to the OBR but to the Monetary Policy Committee, enhancing and strengthening the independence of both institutions.

We need a fresh start, a proper recognition of the extent of the nation’s liabilities, a clear plan for dealing with them and a mechanism for holding Governments to account for irresponsible borrowing. There will be no more marking by the Chancellor of his own exam papers and no more backward-looking targets that cannot be determined until years after decisions are made. Instead, there will be a system that delivers a constraint throughout the cycle based on the independent assessment of the office for budget responsibility, holding the Government publicly to account for their performance. That will call time on the repeated fantasy forecasts of jam tomorrow that we have seen in successive Budgets
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from this Government, with hopelessly overestimated tax receipts justifying hopelessly unsustainable levels of spending.

Kelvin Hopkins (Luton, North) (Lab): Like the hon. Member for Castle Point (Bob Spink), I think that another quango is surely being set up. Is it not the case that holding the Government to account is a job for Parliament? Would the hon. Member for Runnymede and Weybridge (Mr. Hammond) not also agree that when the European Union tries to interfere in our economic strategy policies, we object to that, too? We already have the Institute for Fiscal Studies, the Audit Commission and the National Institute of Economic and Social Research; a number of bodies look at the way in which Government finances work and how they operate. Surely it is the job of Parliament, using all that information, to keep the Government held to account.

Mr. Hammond: The office of budget responsibility will give Parliament an official independent-of-Government report, a series of projections of the fiscal position and, crucially and unlike the Congressional Budget Office, policy recommendations that will allow Parliament to hold the Government to account. The next Conservative Government are committed to implementing that fiscal responsibility framework. The need is urgent and we would welcome it if the Government, who have already cherry-picked their way through our last year’s conference announcements, adopted the key elements of this year’s.

The changes that I have reiterated and that my hon. Friend the Member for Tatton set out last week would give the UK the most credible and responsible fiscal policy framework in the world. Alongside the independent Bank of England—with the enhanced responsibilities that we have proposed, now included in the banking reform Bill, and the additional powers that we propose to give it under our debt responsibility mechanism to respond to the threat of excessive debt being created in the system as a whole—the UK will have the strongest, most independent and most credible fiscal and economic stability framework of any nation in the world.

Mr. Todd: It is very kind of the hon. Gentleman to give way again. I simply want to remind him that his motion makes a brief reference to public sector pension schemes. Since he did not mention how that issue might be addressed, I should be very interested to hear what his approach would be.

Mr. Hammond: The point about public sector pension schemes is that they represent another large, unrecognised liability that currently sits off the balance sheet. We need transparency in our public finances. The people of this country need to know in a transparent way the scale of their obligations to public sector pensioners who have already accrued those rights.

The Prime Minister talks of the age of irresponsibility, and he is right. It was an age when the creation of credit was mistaken for the creation of wealth, when public sector spending was concealed off the balance sheet, and when future revenues were systematically overestimated to conceal the scale of deficits. The clear lesson of the credit-fuelled mirage of a boom and the reality of the
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bust that is following it is that there are no free lunches. Prosperity is built on hard work, not easy credit. We can rebuild Britain’s economic future, but to do so we must rediscover, and then never again lose sight of, the fundamentals of a strong economy—sound money, fiscal discipline and living within our means. We must earn our keep rather than putting everything on the nation’s credit card for our children and our children’s children to pay. Just as our banks are rediscovering the hard way the value of traditional prudent banking practices, so the British Government have to rediscover the enduring truth that long-term prosperity is built on sustained fiscal and economic discipline, and not on the back of a debt-fuelled bubble.

So let us hope that we do not have to wait for a new Government for that to happen. Let us hope that a chastened Chancellor, having finally buried his discredited fiscal rules, will soon come to this House to announce a new fiscal framework based not on rules, but on a new independent institution similar to the OBR that we are proposing. Critically, that institution should have powers to make policy recommendations so that this Parliament can hold Government to account. It can grow in stature to develop the strength and credibility of the independent Bank of England and become, in time, one of the twin pillars of independent oversight that will deliver long-term stability and freedom from short-term political manipulation to the management of Britain’s economy.

It is, of course, too late to fix the roof for the storm that is already blowing up around us, but we owe it to the country and to future generations to ensure that we live within our means and that the age of irresponsibility in Government is now buried for ever.

Bob Spink: On a point of order, Mr. Speaker. I understand from the House of Commons Library that the Department for Communities and Local Government has just announced that it will delay the English local government elections to coincide with the European elections on 4 June next year. I wonder whether we are going to have a statement from those on the Government Front Bench on this matter and whether we can have a debate on it.

Mr. Speaker: That is not a matter for me. I must deal with the business of the day.

My apologies to the hon. Member for Runnymede and Weybridge (Mr. Hammond), but has he finished moving the motion?

Mr. Hammond: I have, Mr. Speaker.

Mr. Speaker: Thank you. I call Yvette Cooper to move the amendment.

4.13 pm

The Chief Secretary to the Treasury (Yvette Cooper): Thank you, Mr. Speaker. I beg to move, To leave out from “House” to the end of the Question, and to add instead thereof:

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