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The hon. Gentleman may wish to make that point to his party leader, who has continually called for borrowing to be reined in and reduced, at a time when it would irresponsible to do so. Perhaps Conservative Front Benchers should get their own house in order and their story straight about what they think about borrowing. They call for a reduction in borrowing, but at the same time they call for big increases in tax
cuts and big increases in spending. It does not stack up. The hon. Gentleman may want to put forward a sensible position, but he ought to persuade the rest of his partys Front Benchers.
Sensible Governments across the world are increasing borrowing to support the economy this year; it is right, then, to bring borrowing down to ensure that public finances remain in a responsible and sound position. We are cutting tax by £4 billion to support the economy this year. We are freezing duty below inflation, increasing tax allowances and tax credits and providing the winter fuel allowance to pensioners. That also means fiscal discipline on public spending in the short and medium termsbeing prepared to cut waste, improve efficiency and take tough decisions about priorities.
In the end, we have to take sensible, serious decisions about fiscal policy just as we need to take sensible and serious decisions about financial stability. That requires serious judgment and a recognition of the cause of the problems and of how we need to respond. The opportunism of Conservative Members, along with their inexperience and, ultimately, ideology and hostility to the role of Government at a time when it may well be critical to support the financial stability of the system, mean that they still do not have the judgment to get the issues right.
Dr. Vincent Cable (Twickenham) (LD): The Conservative motion seems eminently sensible, and I am perfectly happy to support it, although the Conservative spokesman somewhat spoilt it with an unnecessary political rant. However, I was worried not by thatwe always get that on an Opposition daybut by the dogmatic certainty with which he presented his alternative. Setting fiscal frameworks is very difficult, as experience all over the world teaches us. One can either have a very rigid structure such as the European Unions Maastricht rules, which are inflexible and pose all kinds of problems about how to enforce them, or a very loose structure that is more like the American model of politically driven fiscal policy, but with independent scrutiny. As I understand it, the Conservatives would like to move towards the American model. However, the problem with that system, as the Bush Administration have demonstrated, is that it can lead to extreme fiscal incontinence, with enormous deficits that make our Government look positively miserly. The structure does not fundamentally change the nature of the policy.
Mr. Philip Hammond: There is a crucial difference, which I thought that I had drawn out. The Congressional Budget Office is barred from making policy recommendations, whereas our office for budget responsibility would be charged with making such recommendations.
Dr. Cable: It is not making the recommendations but following them through that is the politically difficult bit. I accept that there is a slight difference between the Conservative proposal and the American system, but it is open to exactly the same objections.
The Governments problem with their fiscal framework is that it was not clear from the outset whether it was a set of rules or vague guidelinesit is gradually degenerating from the first to the second. The other problemthis is
where the Conservatives are rightis that there has never been a proper system of independent assessment. I have said on many occasions that if I could claim intellectual property royalties on soundbites, I would be very rich as a result of the flows coming from the Conservative Benches. I remember standing here five years ago and talking about the Government marking their own exam papers and the need for a fiscal Ofsted, which is what the Conservatives are now talking about.
As regards the precise structure that the Conservatives propose, I share the reservations expressed by the hon. Member for Castle Point (Bob Spink), who is no longer here, and by the hon. Member for Luton, North (Kelvin Hopkins) as to why it is necessary to set up a quango of this kind. The National Audit Office is the obvious body to carry out such independent scrutiny. It would perhaps need reinforcing with a few more technical staff, but it has the great advantage of independence and respect, and it connects Parliament with the process through the Public Accounts Committee. Surely, if we are to have a proper independent system of auditing fiscal policy while retaining democratic accountability, that is the way to do it. Although I entirely agree with the Conservatives that we need an independent structure, the quango approach would be completely the wrong way of achieving it.
Mr. Cash: I have listened to what the hon. Gentleman has said not only today but over a long period, and he often hits the nail on the head. He just referred to the inflexibility of the Maastricht system. As he knows, there are legal complexities and it does not workfor example, in the case of the stability and growth pact. Is the Liberal party now reviewing its commitment to the one-size-fits-all policy that comes from the European Union?
Dr. Cable: We have said on many occasions that the Maastricht approach needs to be developed. The system of imposing fines on countries that deviate from targets is clearly not practical in a world of sovereign states, and I would certainly not defend the system in its present form.
Kelvin Hopkins: There are reports that some of the southern European members of the eurozone will find it very hard to stay within it. Apparently, Italy is having to introduce a premium on interest on Government borrowing. Is it not the case that the eurozone is on the verge of break-up, let alone that we need to choose new rules that might work?
Dr. Cable: Since everybody is queuing up to have a go at the European Union, I must point out that despite all the predictionsincluding those of the two hon. Members who have just intervenedthe eurozone still exists and has stayed together. Almost all the Governments involved have stayed pretty close to the 3 per cent. guideline, although there have been some breaches. This is not a debate about the European Union, however.
The question raised by the Opposition motion is whether the Government have observed their own fiscal rulesthe golden rule and the rule on sustainable investment. On the first, we simply do not know, because we have not had an independent assessment of the cycle, so we are having a pointless debate about whether
the test has been met. It seems likely that the test has not been met, because independent bodies such as the Institute for Fiscal Studies and the National Institute of Economic and Social Research have estimated that during the past five years the Government have been running a structural deficit of £5 billion to £10 billion. I think that that is what the hon. Member for Runnymede and Weybridge means when he talks about the roof not being mended. There has been a persistent and substantialwe are talking about 0.5 per cent. of GDP, which is not megastructural deficit that has remained year after year without being corrected. Any system that does not acknowledge that failing, and that does not have a mechanism built in to acknowledge and correct it, is clearly not working well.
The second rule, on sustainable investment, will be broken, and the Government are clearly gearing themselves up to tell us that it will be broken. It is worth breaking down the reasons, because the sustainable investment rule is being broken for a mixture of good and bad reasons. One of the bad reasons is the cumulative effect of all the structural deficits. The amount of £5 billion to £10 billion a year over five years adds up to a substantial sum, which all adds to Government debt. That is not acceptable policy, but there are other respects in which public debt is increasing for understandable reasons. We want good public investment that earns a decent social return and ultimately repays the taxpayer. The purpose of having a public investment rule is not to choke off sensible public investment.
The most important reason why the rule has been broken relates to asset acquisitions. Two banks have been nationalisedNorthern Rock and more recently the £30 billion for Bradford & Bingley. I am not sure how the £200 billion liquidity facility is accounted for in the public rules, but perhaps we will have an explanation of that. Later this week, if all the rumours in the press are correct, we will have a rescue plan for the banks involving recapitalisation that could involve £30 billion or £50 billionwho knows? On that point, the Conservatives would do well not to be too self-righteous because theyand wehave argued for that facility, which will add very substantially to Government public debt.
Asset transfers are, of course, completely different from cumulative structural deficits. They are a different economic animal, and they need to be presented quite separately. The fact that the investment rule is being broken on account of nationalisation is completely different in character from where it is being broken because of cumulative structural deficits over time. The two concepts need to be presented and analysed separately.
On where we go from here, I agree with quite a lot of what the hon. Member for Runnymede and Weybridge has said. I wish that he had not presented his argument in such a completely inflexible and rigid way, however. I think that he said that he disagreed with the golden rule, but he defined a hypothetical Conservative Governments objective as being the same as the golden rule, did he not? He referred to balancing the current Budget over the cycle. That is what the golden rule is, and the hon. Gentleman stated that that is what a Conservative Government would aim to do, and I am not quite sure what is different. The idea is clearly forward-looking, as it has to be, but the objective is the sameit is a sensible objective, but it is the same as the one that the current
Government aspire to. The matter will be extremely difficult, which is what worries me about the hon. Gentlemans rather dogmatic way of presenting it. It is all very well to use the phrase forward-looking, but none of us can predict the future.
I remember arguing strongly that over-borrowing and debt in the private sector would lead to the sort of recession that we are now in. I seem to remember that Conservatives, as well as Ministers, scoffed at that analysis. We cannot predict the futurenone of us canso a forward-looking measure of the Budget is open to an enormous amount of uncertainty and risk for any future Government, just as it is for the present one. The approach is sensible, but let us not be over-confident that the rule can be met. There will be an enormous increase in the budget deficit this year, partly because of structural factors and partly for the entirely justified reason of the workings of the stabilisersthe fall in income tax, corporation tax and national insurance. That must be allowed to happen; indeed, it would be foolish to stop it happening.
The second element in forward-looking fiscal policy is the investment rule. Again, I am not sure how the Conservatives would deal with that. The Conservative spokesman is quite right that the investment rule is important for two reasons: first, because we have to protect future generations from over-borrowing; and, secondly, because the Government need to be careful about their borrowing due to the effect on bond markets and yields and the cost of capital in the long term, which is, of course, important. However, if the figure is not 40 per cent., what should it be? What are the criteria? The Chief Secretary has already said that if we take out the nationalisations, Britains performance against the 40 per cent. rule is not bad, so what should we be arguing for?
My viewthis is just an ad hoc responseis that a much more sensible solution than defining a figure would be to have complete transparency about what the public debt is, and then the markets can make up their mind about whether there is a sustainable level of debt. We do not need the Government or even an independent body to do that. If everything is out thereif the private finance initiative debt and pension liabilities are declaredthe markets can form a judgment when the Government sell bonds about how sustainable the debt is. That is a more sensible way of going about things than being overly prescriptive.
We have seen in the past day or so what happens if the Government are too cavalier about public debt. One country seems literally to be going bustthe Icelandic Government may well be unable to place their paper overseasand I gather from the news bulletins that we are seeing the interesting phenomenon of the Russians taking over rather like Lloyds taking over Halifax Bank of Scotland, which has all kinds of interesting implications. When we see a developed country going bust, we see the end product of extreme carelessness with fiscal policy. That has to be the ultimate brake on what Governments do.
Just to recap, the motion is perfectly sensible, and I have no hesitation in supporting it. However, I caution against the idea that there is a simple way of defining what fiscal policy should be. Clearly, we need balance
over the current cycle and an open, transparent system of declaring Government debt, but beyond that I am not sure that there is a perfect model and do not think that the Conservatives have found it.
Kelvin Hopkins (Luton, North) (Lab): I will not speak for very long. Much nonsense has been spoken about economics in recent times. Bretton Woods and the sensible framework of economic policy established after the second world war were abandoned in the early 1970s, since when we have suffered four major economic crises, the latest of which is set to be by far the worst.
What is happening now will surely sweep away the supposed golden rules and delicately constructed monetary and fiscal policy frameworks. Indeed, it will probably see the annihilation of the euro into the bargain. One small mercy is that Britain is not part of the eurozone and can at least decide its own interest rates and fiscal policy, and choose its own value for its currency, suited to our needs.
The Opposition have raised this debate about the Governments fiscal rules, yet they have been a collaborator in the neo-liberal nonsense that has led us into the current crisis. It became clear that unregulated financial markets and free market capitalism are inherently unstable and lead to mass unemployment, inequality and political crisis. It was the interventionist policies of Roosevelt in America, including a large programme of public works, that led to recovery from the depression.
Mr. Graham Stuart: I do not think that I have ever heard anyone in the Chamber suggest that there should be free markets without any regulation. Surely we are now seeing the consequences both of a failure of regulation and of the quality of regulation, rather than of any neo-liberal experiment. There has been a failure of Governments and regulators throughout the world to use prudential standards and ensure that they are enforced.
Kelvin Hopkins: The underlying philosophy of recent economic policy has been deregulation and free markets. Even though there has been some regulation, particularly of monetary policy, it has been nothing like the regulation that we have needed or that we saw after the second world war. Indeed, after the second world war, no one seriously suggested going back to the arrangements that precipitated the 1929 crash and the subsequent depression.
However, there was one potty ideologue who wanted to turn back historyFriedrich von Hayek. Like hypnotised joiners of a religious cult, our leaders followed Hayek and led us to todays nightmareMilton Friedman, Keith Joseph, Nicholas Ridley and, of course, Margaret Thatcher. When history is written, the terms of todays motion and the amendment will surely inspire incredulity at their triviality in the face of the global crisis that is now unfolding.
I never believed that there was anything golden about the Governments borrowing rules. Picking a figure for Government debt as a proportion of GDP was always arbitrary. It could have been 50, 60 or 70 per cent., provided that Government revenues were sufficient to pay the interest. It was just like a mortgage: what one could borrow depended on ones income. At least, that was the case until the sub-prime catastrophe.
If the Government wish to help the less well off, they could simply collect more taxes from the very rich and substantially increase the basic state pension and child benefits, which I recommend. Successive Governments have resisted returning to anything like the tax rates that existed in the 1970s. Perhaps those rates were rather extreme, but if we were even to inch in that direction, it would be welcome.
The credit crunch, the crisis in bank borrowing and the coming recession have killed off neo-liberalism, and it is now time to accept that capitalism can be made to work at all only with heavy regulation, a substantial state sector and the use of all the levers of macro-economic policy on a continuing basis. That is my view, and I hope to elaborate on it in more detail in subsequent debates, but I wanted to get it on the record today.
Sir Peter Viggers (Gosport) (Con): I have never risen to speak with more diffidence. This situation is extremely difficult, and I am anxious not to make it any worse. I went through the secondary banking crisis in the 1970s as a director of a merchant bank, and I am now on the Treasury Committee, having previously been a Parliamentary Private Secretary at the Treasury. Given that background, I want to make a contribution, and I hope that some of what I have to say is of some use or value.
First, we must look at the background. The present Prime Minister, as Chancellor of the Exchequer, got three things right in 1997: first, we did not join the euro; secondly, he created the Monetary Policy Committee; and, thirdly, he decided to follow for some years the spending plans of my right hon. and learned Friend the Member for Rushcliffe (Mr. Clarke), the previous Chancellor of the Exchequer. He also introduced the fiscal rules.
The first fiscal rule is the golden rule that, over the economic cycle, the Government will borrow only to invest and not to fund current spending. The second is the sustainable investment rule, which states that public sector debt must be kept at a stable and prudent level and that, in most circumstances, net debt should be maintained below 40 per cent. of gross domestic product over the economic cycle.
When I made my maiden speech in the House in the spring of 1974, I urged something even more extreme. I was a former director of an oil company with interests in the oil industry, and I proposed that the oil and gas reserves in the North sea were minerals and therefore a capital investment, and that any depletion of a capital investment should be made only if it were matched by spending. In other words, I argued that we should regard the oil and gas money not as revenue but as a depletion of capital. To that extent, I was even drier than the two fiscal rules introduced by the Chancellor of the Exchequer in 1997.
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