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6.2 pm
John Howell (Henley) (Con): I want to return to the fiscal rules themselves. One of the basic lessons that I learned from business and helping to run a large public sector organisation was the need to ensure that there was a clear and honest framework with which to measure progress and success, and to which one could be held accountable while retaining flexibility in the means of delivering against it. What gave confidence to investors and regulators was not only that the framework and criteria were measurable and robust, but that the underlying assumptions were realistic, consistent and quantifiable and that the flexibility in delivery did not undermine the stability of the business or the ability to stick to the plans that had been drawn up. On that level, I have problems with the Government’s fiscal rules, which, it seems to me, are the precise opposite of what I have described. There is a lack of flexibility over the layers of control and a series of rules the underlying basis of which allows for considerable discretion in determining how they are measured.
The Treasury talks of having introduced significant steps to strengthen the framework for fiscal policy based on strict rules, but the more we drill down, we see how less strict and more flexible the underlying assumptions behind those rules become. Rather than strengthening openness, transparency and accountability in fiscal policy as the code envisaged, the Government have built in large opportunities for each rule to be undermined. I should like to refer to four issues, some of which have already been referred to in this debate.
The first relates to the time frame in which the Government’s rules are set. The fiscal rules adopt the time frame of an economic cycle. We know from the Treasury that a full economic cycle includes one period in which output is above potential and one in which it is below potential. However, given that economics
is not an exact science, there is considerable scope for different interpretations. I would go further than the hon. Member for South Derbyshire (Mr. Todd) did, if I understood him correctly. Given that the definition of the economic cycle is so crucial to the Government’s golden rule, it is hardly surprising that the rule itself becomes discredited if, during a cycle, the interpretation of it becomes influenced by political considerations. My hon. Friend the Member for Gosport (Sir Peter Viggers) and others have referred to the difference of opinion about the end date for the current cycle.
As I have said, economics is not an exact science, but the time frame needs to be put on a robust footing—we need at least to make sure that in the age of responsibility that is to follow, the ambiguities are taken out so that there is a clear indication that the Government will, after all, do the simple thing of defining what they are going to do and stick to it.
The second and third elements of the underlying assumptions that give me concern relate to the sustainable investment rule, which is stated as the relationship between the amount of net debt and GDP. If we cannot do anything about the amount of debt and are stuck with an accumulated mountain of debt—which many commentators believe will exceed the 40 per cent. barrier with or without the effects of the financial crisis—the only variable is the size of GDP. Here, too, we have seen considerable ambiguity: the revision of how the financial services sector was measured added £20 billion to the size of the economy, but caused great surprise because it was less than had been originally hoped for. Such ambiguity was not helpful.
However, if that is worrying, surely more worrying is the other side of the equation in respect of the definition of debt. We have seen that debt cannot today be measured by what goes on the balance sheet. We have had many references to the realms of accounting for private finance initiative liabilities and the valuations of the long-term service contract elements. However, it cannot any longer be in the interests of transparency to maintain significant amounts of liability off balance sheet and to allow significant ambiguity in valuation.
My last cause of concern is about investment, which is a central part of the golden rule: the Government will borrow only to invest and not to fund spending. I am aware that the economics and business definitions of “investment” can be slightly different, but even under the broader, economics definition, there is an expectation that money spent as an investment will generate some new or additional outcome or produce a result that will be used to give benefit in future.
When one looks at statements by Ministers on their spends, it is often difficult to determine what the investment element is. Actually, I have considerable sympathy with them on that, because the issue is complex. When looking at IT spend, for example, I have seen for myself that it is sometimes difficult to know whether software development should be characterised as investment or current spend. The only point that I would make on that is that under the regime imposed on local government, there is a much stricter and clearer definition of what is and is not capital.
We have two choices: first, we tighten the rules so that the investment criteria of any spend characterised as investment are richer. If the distinction has become irrelevant or there is a problem with transparency, or
accounting rules will not allow that, the current criteria clearly do not deserve to be at the centre of fiscal policy. We have ended up in the worst of all worlds: we have a system of fiscal rules that now constrict flexibility in how the economy can be managed, but are themselves so full of holes that they provide less credible help in the management of the economy.
Clearly, the fiscal rules were designed for an economy completely different from the one that we now face. Many of the benchmarks must have been seen at the time to be in no way stretch goals or stretch targets that should be kept to, and that must at least have contributed to the imprudence of the years in between. It is time that the rules were abandoned and that a new framework that sets a more rigorous prospectus for the public finances—with comprehensive definitions of measurement criteria that are less susceptible to political interference—was introduced.
6.9 pm
Mr. Austin Mitchell (Great Grimsby) (Lab): I am slightly surprised that this is an Opposition day debate, because I would not have thought that any sensible Opposition would want to create an opportunity to display their ignorance of basic economics in such a way. My right hon. Friend the Secretary to the Treasury—I mean Chief Secretary; it is difficult to keep up with her meteoric rise, on which I congratulate her—was right to attack the economic illiteracy that lies behind the Opposition’s motion. I wondered whether the idea came from New Zealand’s Fiscal Responsibility Act, in which they have been displaying considerable interest, but I concluded that it could not have done because that imposes duties on the Opposition in the shape of a requirement to say, if they propose an increase in expenditure, what they are going to cut or where the money is going to come from to sustain that increase. We could do with that in relation to our Opposition, who are proposing all sorts of things without telling us how they will be paid for or how they will be combined with the programme of cutting public spending and taxation.
The motion represents an attempt to shackle the Government by imposing inflexible rules on their borrowing. The hon. Member for Henley (John Howell) criticised some of our golden rules for borrowing. I have sympathy with him on that, because I never thought that they were anything more than a public relations exercise to show how respectable and responsible we are; they were not a serious framework of rules to abide by. The strength of the golden rule was that it was subject to interpretation in terms of when the cycle began, when it ended, and whether the money was going to investment or to spending. That is how rules have to be—politically flexible and subject to political interpretation. I went along with that because I did not regard it as a serious exercise but as just a PR exercise to show ourselves to be respectable and disinclined to borrow on a large scale.
The Conservatives propose a greater degree of inflexibility on Government borrowing, with hard and fast rules. That is unacceptable. The only rule for borrowing is that there is no rule. It is impossible to impose rules on borrowing. First, there is no basis in economic theory for doing so. The rules proposed today are based on classic neo-liberalism—on Friedmanite economics. That is totally unrealistic, because that theory is totally
discredited. The world has moved on, but the Opposition have not. They have a responsibility for bringing themselves up to date on how economies function and whether there is an intellectual basis for the Friedmanite approach—in my view, there certainly is not.
The second argument against rules is that they do not change—they handcuff a Government when circumstances have changed. We are now in a situation where we need to borrow substantially in order to stimulate the economy. That is nothing but simple Keynesian economics. Borrowing must suit the circumstances of the time. In a recession or depression, it is necessary to borrow and to spend. We cannot therefore be shackled by the kind of rules that the Opposition, out of their intellectual ignorance of economics, want to impose on Government. I am sorry that they have been so slow to catch up with the current circumstances given that they announced at their conference that they want to co-operate and work with the Government. It is impossible to work together other than on the same intellectual basis. If the Opposition are going to insist on rules that are inflexible and cannot be operated in the present circumstances, there is little basis for co-operation. They have to bring themselves up to date and modify their thinking by looking at the actual state of the economy and what the solutions are.
Adam Price: I entirely agree with the hon. Gentleman’s trenchant critique of the Opposition’s analysis. However, is not part of the problem, and the reason we have got to this stage, the fact that the spectre of neo-liberalism has been haunting not only the Conservative Benches but the Labour Benches?
Mr. Mitchell: The hon. Gentleman has a point. It is certainly true that we have been too insistent on markets, which is worrying, but there is no possibility of maintaining that approach in the circumstances that we are now trying to deal with. We are grappling with an entirely unprecedented situation that is completely different from the one that has prevailed over the past 11 years. The good years are over. In that situation, neo-liberalism must be completely relegated because it is a shackle on how Governments approach a crisis. It has certainly been junked big style in America by the first socialist President, who is going round nationalising everything in a way that surprises me but probably surprises Republican supporters even more. However, that is a diversion. My point was that rules fixed for one set of circumstances cannot work in another, and circumstances have changed drastically.
The third problem with such rules is that Government will always evade them. There will always be fiddles. Just as the banks have been fiddling their reserve requirements by off-balance sheet transactions on a considerable and very damaging scale that has brought them into jeopardy, so the Government have been fiddling their golden rules by off-balance sheet accounting through the private finance initiative.
David Taylor (North-West Leicestershire) (Lab/Co-op): Will my hon. Friend give way?
Mr. Mitchell: I should not have mentioned PFI—I might have known that it would bring my hon. Friend into the debate.
David Taylor: I am reluctant to interfere with my hon. Friend’s comprehensive demolition of this miasmic mess of a motion, but he mentioned PFI. Is it not rather nauseating and perverse of the Conservatives to draw attention to PFI, which was bequeathed to us as the result of a love affair between John Major and the private sector and which our first Chancellor picked out of his waste paper basket and made work in an odd sort of way, the cost of which we will grapple with over the next 25 or 30 years? How can they criticise that?
Mr. Mitchell: I am most grateful to my hon. Friend for his criticism of PFI. I agree. PFI was a way of moving things off balance sheet so that Government borrowing figures were not affected. It was a more expensive way of doing things and, as he says, we will pay for the consequences over the next 20 years. Certain health authorities, in particular, have been shackled by it. In its favour, it got the hospitals and schools built and open, but more expensively than would have been the case had it been done through public borrowing at a lower rate of interest. That is an example of my point—if we have rules, they get fiddled by private banks and institutions and by Governments. PFI is like the tax farms in the ancien régime—it results in selling off chunks of Government revenue, which is a dangerous thing to do. However, I will go no further down that road in case I excite my hon. Friend even more.
The proposal on rules is worrying because, as I said, the only rule is that there are no rules. That point has something in common with Bank of England independence. We imposed a rule that it was to manage inflation only, which tied us to something like a one-club approach to golfing, and we are now in a different situation where we need the flexibility that the Fed has in the USA. It has a requirement to maximise employment. We should have that, too. I am glad that the Liberal Democrats have caught up with the proposal that I put to the Treasury Committee during last year’s review of 10 years of the performance of Bank of England independence, which was that the rubric should be widened. They always get there in the end, and I hope that they read more of my ideas on my website. We should reduce interest rates to the American level, and the 2 per cent. rule—the rubric—is a shackle on the Government. We cannot have a recovery unless we get interest rates down to American levels. In Japan, a failure to reduce interest rates at the onset of depression in the early 1990s meant that it languished for a whole decade in recession. I shall not continue with that line of argument, but it is an indication of the danger of rules.
The present need is not only to reduce interest rates, but to borrow and spend to stimulate the economy. The rules in question would shackle us in that regard. The only economics on which I would base rules is Keynesian economics. If the Government do not borrow, the private sector and private individuals have to borrow more. Government borrowing is necessary now to stimulate the economy to return us to a pattern of growth. That is the only way forward, and it makes the Opposition’s motion even more ridiculous.
6.21 pm
Mr. David Gauke (South-West Hertfordshire) (Con):
It is a pleasure to make the winding-up speech for the Opposition in this debate. I begin by welcoming the
Financial Secretary on his return to the Treasury; this is the second day running where I have had the opportunity to welcome a new Treasury Minister. I think that this is the right hon. Gentleman’s fourth spell as a Treasury Minister. I do not know whether that is some sort of record, or what precisely he has done to deserve constantly being put back into the Treasury, but we welcome him. I know that he is well regarded by Members throughout the House. I would like to mention briefly his predecessor, the right hon. Member for Liverpool, Wavertree (Jane Kennedy) who has moved on to the Department for Environment, Food and Rural Affairs. She distinguished herself in the role of Financial Secretary.
We have had an interesting and wide-ranging debate. The hon. Member for Luton, North (Kelvin Hopkins) started the Back-Bench contributions, declaiming the end of neo-liberalism. If anything, he was being slightly restrained; I think that he wanted to go further and declaim the end of capitalism.
Mr. Gauke: The hon. Gentleman says that that is next—perhaps it is an ambition for him to achieve. I know people who share his views have been declaiming the end of capitalism for some time. Perhaps their time will come, but I doubt it. He also called for the return of 1970s levels of personal taxation, which does not have support in my party.
Kelvin Hopkins: I said that we ought to move in that direction, not return to the levels where, as Denis Healey said, the pips squeaked. That would be too hard.
Mr. Gauke: I take the hon. Gentleman’s point and stand corrected. I assume, therefore, that 98 per cent. rates are merely a long-term aspiration, not an immediate objective.
On looking back to the 1970s, my hon. Friend the Member for Gosport (Sir Peter Viggers) gave us an historical perspective, going back to the 1970s and the benefit of his experience in the commercial world, as well as his long-standing membership of this House. In a wide-ranging speech, he addressed a number of the substantial concerns as we address financial matters.
The hon. Member for South Derbyshire (Mr. Todd) said that he could make a candid speech because he is leaving this House. As he is leaving the House, I can be candid about him: he made a characteristically thoughtful and balanced speech that raised a number of important points. I do not agree with everything that he said, but he looked back on the early years of this Labour Government, and the fiscal conservatism that existed then, with a fair degree of nostalgia. He was also open about the fiscal loosening that followed those early years. He raised an important point about corporation tax, which we are not concentrating on in this debate, and he raised fair questions about our proposal, which I hope to address during the debate.
My hon. Friend the Member for Stone (Mr. Cash) highlighted the need for sound money and the high level of debt in many eurozone countries, and the instability that may follow from that. He also highlighted dangers with the stability and growth pact. He raised concerns
that he has consistently raised in this House and outside for some years, and I expect that he will continue to do so.
My hon. Friend the Member for Henley (John Howell) made a thoughtful and intelligent speech in which he outlined, from his extensive business experience, the need for a clear and honest framework, and he called for more rigour in our fiscal rules.
The hon. Member for Great Grimsby (Mr. Mitchell) made a lively speech. I disagree with his premise—he is a long-standing advocate of Keynesian economics, and argues that as far as borrowing is concerned, the only rule should be that there are no rules. When he made the observation that he more or less went along with the Government’s fiscal rules because they were “just a PR exercise”, he hit the nail on the head, however.
The hon. Gentleman also said that the rules will always be fiddled, which raises an important point that I hope to address in my later remarks. He questioned whether our plans were based on what occurred in New Zealand. Our precise proposals are not used anywhere—they are new—but within the document that we produced setting out the plans, we referred to the experience of Belgium, Denmark, Germany, Austria, the Netherlands, Sweden and the US. If we were remiss in not including New Zealand, perhaps we should look at the document again, but to clarify, our plans are not based on what is happening there.
I would like to continue on a bipartisan note, and given the remarks of the hon. Member for Great Grimsby, I should say that by “bipartisan” I mean something on which my party and Government Front Benchers agree. It is vital that public finances are sustainable over the long term. There is a need for caution and prudence—at least that is the professed position of Government Front Benchers. When the then Chancellor of the Exchequer addressed the House in his first Budget speech in 1997, he said:
“Public finances must be sustainable over the long term. If they are not then it is the poor, the elderly, and those on fixed incomes who depend on public services that will suffer most.”—[ Official Report, 2 July 1997; Vol. 297, c. 304.]
The second point on which we agree with the position set out by the then Chancellor in 1997 is that there is a need for external discipline in order to reassure the public, the markets and Parliament itself that public finances will be run in a prudent manner. We agree that public finances must be sustainable in the long term and that an external discipline is needed to ensure prudent management. However—this is where the consensual tone ends—it is now clear that the Government have achieved neither an effective external discipline nor sustainable public finances.
The then Chancellor’s response to the need for sustainable public finances were his fiscal rules: the golden rule, which states that over the economic cycle the Government will borrow only to invest and that current spending will be met from taxation, and the sustainable investment rule, which states that public debt will be held at 40 per cent. of GDP. He put those rules at the very heart of his economic policy. He said that they were the
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