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“basis on which...people have seen this Government as competent”—
The issue is not only for academics. Fiscal sustainability matters to us all—to mortgage holders, who may face higher interest rates, to pensioners and others on fixed
incomes fearful of higher inflation and to future generations, who will have to pay tax for what we borrow today. As Mervyn King, the Governor of the Bank of England, told the Treasury Committee last month:
“The long-term risk is a fiscal framework that is not perceived by financial markets to be credible”,
“pressure on inflation expectations because it undermines the market’s belief in the credibility of both the monetary and the fiscal framework”.
“And that will make our life more difficult if inflation expectations were to remain higher than we would wish”.
What of the then Chancellor’s proposals? In 1997, he described the rules as providing a new discipline, openness and accountability. However, if they provide a new discipline, why do we have the highest borrowing figures for any major economy apart from Hungary, Egypt and Pakistan? If the rules provide financial discipline, why, according to the Institute for Fiscal Studies, have 19 out of 21 comparable industrial country Governments done more than the UK Government to improve their structural budget balances, and why have 16 of them done more to reduce their debt burdens? What sort of financial discipline is it that allows consistent borrowing in good years, leaving us nothing spare in the bad years? The International Monetary Fund, the European Commission, the OECD and just about every independent commentator advised the Government that their fiscal policy was reckless, and yet the fiscal rules did nothing to prevent that from happening.
Have the rules provided more openness and accountability? The Government’s assessment of their fiscal rules has been characterised by a litany of self-serving definitional changes, which invariably assist them in meeting their own rules. Dates of economic cycles have been altered and public sector contracts have been pushed off balance sheet.
David Taylor: Does the hon. Gentleman agree that sustainable fiscal rules include sustainable taxation? Is he surprised to learn that in the 11 and a half years between May 1979 and November 1990 when the now Lady Thatcher was Prime Minister, the proportion of GDP to taxation was five full percentage points above the level that the current Prime Minister achieved in his 10 years as Chancellor? Surely the current Prime Minister’s actions were more sustainable than those of the Lady, whom the hon. Gentleman no doubt admires.
Mr. Gauke: I am well aware that taxes initially increased under Lady Thatcher’s Government. However, the Conservative Government at that time were reducing debt and borrowing at a faster rate than in the first 10 years of this Government. If the hon. Gentleman is making an argument for fiscal conservatism, I fully endorse it. However, the problem is that the Government increased taxes at a time when the economy was growing. Margaret Thatcher was able to get the public finances in a good position and then reduce taxes through the 1980s.
Kelvin Hopkins: I am sure that the hon. Gentleman will remember that Mrs. Thatcher’s first act in Geoffrey Howe’s first Budget was to switch the burden of taxation from income tax, which is progressive and fair, to indirect taxes by substantially raising VAT. That was a direct shift of income from the poor to the rich.
Mr. Gauke: At the time, that reduced direct taxes, because we had 98 per cent. tax on unearned income and a standard high-rate income tax of 80 per cent. It was vital to get incentives back into the British economy. It was only by returning incentives to this country that we saw the economic growth from which we have benefited ever since.
To return to the fiscal rules, so fiddled have they been, to use the word that the hon. Member for Great Grimsby used, that the IFS has said that they
“are now regarded by most informed observers with scepticism at best and cynicism at worst”.
I challenge the Minister to name a single reputable commentator who now believes that the rules are taken seriously or, indeed, anyone who has taken them seriously for the past three years. Even the credibility of the Treasury’s fiscal forecasts has been badly tarnished. For seven consecutive years, the Treasury has made over-optimistic Budget forecasts, underestimating the size of the Government’s deficit and overestimating how quickly it would shrink, as the hon. Member for South Derbyshire has pointed out.
A balanced Budget was always round the corner. In 2003, the Budget would be back in balance by 2005. In 2004, that date was 2007; in 2006, it was 2008; in 2007, it was 2009; and in 2008, it was 2011. I predict that in 2009 the date of the balanced Budget will be moved on again from 2011. However, at least then the Government will have the defence that there is an economic slow-down. The previous years were the good years. If the rules allowed the date to be moved in the good years, there is something flawed in the rules. As Robert Chote of the IFS has put it, given that record of forecasting, the Treasury has engaged in a
“sustained display of conviction forecasting”.
We must do better. It is time for a new approach that is not based on subjective dating of the economic cycle. As the Treasury Committee has consistently said, we must be forward looking, with a Government who concentrate on bringing down debt rather than evading their own rules. We will introduce an office of budget responsibility. It will assess independently the sustainability of the Government’s finances. It will no longer allow a Chancellor to profess prudence on the one hand, but to borrow recklessly on the other. It will give Parliament the opportunity to hold the Government to account.
Our proposal has been criticised on the grounds that such an office would be a quango and would diminish the role of Parliament. That point was made by the hon. Member for South Derbyshire. He will know that, as a former member, I have a great deal of respect for the Treasury Committee. However, I see our proposal as a way of improving accountability. Let me give one example. In March 2006, I was a member of the Committee and wished to question the then Chancellor about the change in date of the economic cycle for the purposes of the golden rule—I am sure that the hon. Gentleman recalls that occasion. I asked whether the golden rule would have been met but for the change in date. The then Chancellor consistently refused to answer. Indeed, he provided a host of technical arguments that were difficult for the Committee to engage with.
Let us imagine circumstances in which forecasts and assessments were produced by a body as part of the Red Book. That body would therefore be independent, so
we would not face the problem of conviction forecasting. It is not for us to determine how a Select Committee decides to take its evidence, but members of the office of budget responsibility would be able to give evidence to the Treasury Committee as part of an inquiry by that Committee. The Treasury Committee would potentially have an important role in appointments to that body, reviewing appointments and taking evidence from potential members.
Mr. Graham Stuart: To pick up on the issue of ensuring the office’s independence, I wonder whether Conservative Front Benchers will consider giving the Treasury Committee the right of veto over appointments to the office.
Mr. Gauke: I am grateful to my hon. Friend for that. There will certainly be confirmatory hearings. The precise powers are something that we can look into, but he has raised an important point.
Mr. Cash: Does my hon. Friend agree that in the formulation of such ideas it is important to bear in mind the role of the National Audit Office—and therefore to try to integrate the thinking with it, to ensure a degree of responsibility and transparency—and the role of the Public Accounts Committee, which has not been mentioned so far? If evidence were given to the Treasury Committee, that would be a powerful reason for giving evidence to the Public Accounts Committee, too, and for subjecting such a body to cross-examination.
Mr. Gauke: I am grateful to my hon. Friend, because he has brought me on to a point that I was going to make. The hon. Member for Twickenham (Dr. Cable) also touched on the Public Accounts Committee and the National Audit Office. Our view is that the National Audit Office does not have the expertise on fiscal matters. It provides a sterling service in scrutinising Government expenditure, but it is not a specialist body, and we are talking about a specialist task. We therefore think that a separate body would be better placed to perform that task. Given that, my view is that the Treasury Committee is in a better position to do so.
I hope that I have addressed the concerns that have been expressed about parliamentary accountability. The proposal is about providing a rod for our own back. It is about providing an external discipline that will work, rather than rules that can be fiddled. It will be an essential part of the framework whereby we restore trust into politics.
The fiscal rules have failed and, in many respects, they sum up the Prime Minister. At first, they appeared a bit complex and rather technical, but worthy, prudent and reassuring. Then came the realisation that the complexity and technical details were there more to baffle and confuse than to assist. Finally, there came the recognition that the fiscal rules—perhaps like the Prime Minister—were not as worthy, prudent or reassuring as was once thought, and that they were in fact entirely ineffective in achieving their objective. They were there only for political show—a PR gimmick, in the words of the hon. Member for Great Grimsby—and when it came to substance, there was nothing there. We must do better, and we will.
6.41 pm
The Financial Secretary to the Treasury (Mr. Stephen Timms): I agree that we have had a good debate, and I thank the hon. Member for South-West Hertfordshire (Mr. Gauke) for his kind welcome to me on my fourth arrival at the Treasury. I echo his tribute to my predecessor.
The fiscal rules are a key element of the framework introduced in 1997 for long-term macroeconomic stability, which has ushered in the longest period of success in the economy that we have ever seen in the UK. Before it was introduced, fiscal policy frequently amplified, rather than dampened, the fluctuations of the economic cycle, and fiscal policy decisions were made against vague and shifting objectives. We all vividly remember the consequences of that: 3 million unemployed, twice; 15 per cent. interest rates; and record levels of repossessions and bankruptcies.
The framework introduced in 1997 therefore marked a genuinely radical change. The code for fiscal stability, underpinned by legislation, sets out the principles for fiscal management enunciated by my right hon. Friend the Chief Secretary to the Treasury earlier in the debate, along with new reporting requirements and the role of the National Audit Office in the independent audit of key assumptions behind the forecasts. It promotes openness, transparency and accountability, just as the framework for monetary policy did after the Bank of England Act 1998. It puts better information in the public domain, the lack of which was one of the reasons for some of the past severe policy mistakes.
Today’s global economic challenges are certainly unprecedented, but the framework has made a big contribution to growth and stability in the UK economy over the economic cycle that began in 1997, with inflation and interest rates over the past 10 years averaging around half what they were in the previous two decades. The International Monetary Fund said recently that
“for over a decade, the United Kingdom has sustained low inflation and rapid economic growth—an exceptional achievement...the fruit of strong policies and policy frameworks, which provide a strong foundation to weather global challenges”.
The fiscal framework has served our economy well. Net debt is lower as a percentage of gross domestic product in the UK than in all the other G7 countries except Canada, and in the euro area. During the economic cycle that started in 1996-97, net borrowing has averaged 1 per cent., compared with more than 3 per cent. in the previous economic cycle under the Conservative Government. The framework has improved transparency and increased the regularity of fiscal reporting. Fiscal policy has supported monetary policy, helping to smooth the path of the economy, which represents a break from the pro-cyclical fiscal policy of the past; and the golden rule has played an important part in breaking the bias against capital investment that so damaged public services. My hon. Friend the Member for South Derbyshire (Mr. Todd) made that important point earlier. Public sector investment is over three times higher as a share of the economy than it was in 1997-98, having risen from 0.6 per cent. of GDP then to 2 per cent. this year.
Mr. Cash:
I note the Minister’s advocacy of the idea of maintaining a relatively low percentage of debt to GDP. Taking into account Northern Rock and Bradford & Bingley, what other proposals might the Government
have that might increase the amount of indebtedness? Would the Minister resist such proposals from the Dispatch Box?
Mr. Timms: Contrary to the views expressed by the Conservatives, what we have done for Northern Rock and, indeed, Bradford & Bingley was absolutely the right thing to do. I do not think that it would be right to include the Northern Rock figure in the comparison for the sustainable investment rule, and that view is shared by the CBI, the Institute for Fiscal Studies and others. We will talk about the position in regard to the Bradford & Bingley figures in the pre-Budget report.
It is absolutely right to focus on sustainable investment and prudent levels of debt, and we remain committed to that, and to the other fiscal policy objectives that we have pursued consistently since 1997. The objectives are: in the short term, to support monetary policy and smooth the path of the economy; and, over the medium term, to ensure sound public finances and fairness between generations.
Mr. Graham Stuart: The Minister has waxed lyrical about the positive impact of the fiscal rules. Will he reassure the House of Commons today that there will not be an announcement outside Parliament tomorrow of any great change to the rules—perhaps to dump them?
Mr. Timms: The hon. Gentleman is absolutely right about the benefits of the rules. Discipline through the framework saw net debt cut over the economic cycle that began in 1997-98 from 43.2 per cent. of GDP at the end of 1996-97 to 36.5 per cent. in 2006-07. That gives us the flexibility to support the economy through the current economic shocks, in particular through the automatic stabilisers and the targeted support that we have introduced for the least well off; so borrowing can rise this year to support families and businesses, while maintaining soundness in the public finances.
We will not run risks with the public finances. The pre-Budget report will set out how we are striking the right balance between supporting the economy and taking the necessary decisions to ensure that the Government live within their means. The public finances remain on a sustainable path.
The twin global shocks of the credit crunch and the surge in energy and food prices have hit every country in the world, including ourselves. The global shocks are unprecedented in their scope, their scale and the fact that they have coincided in time. We are determined to help families and businesses, supporting in particular those who most need support. Our priority is to navigate Britain through these challenges in a way that secures fairness, and we will renew our focus on economic stability.
We are certainly a great deal better placed to weather these shocks than we were in the 1970s, the 1980s or the early 1990s. There are five reasons for that.
Mr. Philip Hammond: The right hon. Gentleman claims that we are better placed than we were at some other point in time, but the claim of the Chancellor and the Prime Minister has been that we are better placed than other countries. Does the Minister still maintain that position, in the face of all the evidence?
Mr. Timms: Yes, we certainly are. For example, we have had more people in work in the UK over the past few months than we have ever had before. The growth of GDP per head in the UK has been higher than that in any other G7 country. Those are changes that put the UK in a very strong position, compared with others.
There are five reasons for this. First, Bank of England independence has given us interest rates and inflation well below the double-digit levels that we saw in earlier decades. Secondly, our labour market is the most flexible in Europe, with employment remaining high and more than half a million job vacancies. Wage pressures are subdued, thanks in no small part to our decisions on public sector pay. Thirdly, Britain remains one of the best places in which to do business and is a magnet for overseas investment. There was more foreign direct investment in this country last year than in any other country in the world except the United States. Fourthly, thanks to decisions made since 1997, public debt remains low by historical and international standards. This means that we can provide targeted support to those who need it most, and protect investment in our infrastructure. That investment was sacrificed in previous downturns, but it will in truth underpin our future growth, which is why we need to maintain it. Fifthly, we have taken the long-term decisions to boost competitiveness—on energy, planning, transport, housing, science, skills and digital technology. However, there is no ground for complacency. Britain unquestionably faces great challenges. But we are facing them from a very strong foundation.
Our immediate priority is financial stability. As my right hon. Friend the Chancellor spelled out yesterday, we will do whatever it takes to ensure that stability is maintained. We have taken Northern Rock and part of Bradford & Bingley into public ownership—overcoming opposition from the Conservative party—thereby protecting depositors and making sure that such problems did not spread. We have introduced extraordinary amendments to the competition regime so that the merger of Lloyds TSB and HBOS could go ahead quickly. We have tackled directly the problems of liquidity in the banking system. The FSA has imposed a temporary ban on short selling to help to calm market volatility—again, in the face of opposition from the Conservative party.
Mr. Cash: Is there any question in the Minister’s mind of overriding European law by using enactments passed in this place to achieve the objectives that he has described in relation to the problems of competition policy?
Mr. Timms: No. I am absolutely confident that what we have done is not only right but, given the variety of legal constraints, appropriate. We will proceed with it.
Supporting the banking system in that way is essential, not only for financial institutions but for businesses and individuals who rely on them. In the longer term, we will continue to build on the success of the UK economy over the past decade. We will work with other countries in tackling the twin global shocks, and will maintain our hard-won economic stability, supporting the economy and keeping inflation low. The principles and objectives set out in the framework remain right. We will ensure that the framework remains sufficiently flexible and robust to cope with the challenges that we face.
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