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Mr. Darling: I shall come on to that point, but as I was saying before I gave way, all Governments have rules and objectives. Up until 1997, those were simply statements made by the Chancellor in a Budget or at some other fiscal event. Since 1998, we have had the code for fiscal stability and two rules that have guided fiscal policy for the past 10 years. The hon. Gentleman is right: it is open to any Government and Chancellor to say that circumstances have changed and so we need to change policy. I have been a Minister for the past 12 years and I can tell the hon. Gentleman that the discipline created by rules, so the Chancellor can tell Departments that they cannot have any more funds because it would breach a particular rule, is important. I daresay that that was also important for previous Governments. Today we are legislating to put on the statute book a requirement to reduce the deficit by half. Of course, it will not be a question of going to jail if we do not do it, but having to come back to the House to seek further legislation will be a discipline for future Governments. It is not uncommon for Governments in other parts of the world to have similar strictures on them.
The two rules that the Government operated between 1997 and 2007, before the current financial crisis hit us and hit other countries, were to balance the budget, excluding public investment, over the economic cycle and to keep Government debt at a prudent level. Those two rules were appropriate to the challenges of the time. We wanted to increase public investment, and at the time there was a consensus in this House-certainly in the latter part of the 1990s and the early part of the last decade-that our public services did need more money spent on them, including the health service and schools. Those rules were designed to enable us to do that. Over that 10-year economic cycle, which ended in 2007, we were able to balance the budget and borrow to invest, which is something that previous Governments of both political colours had not been able to do previously. We were able to increase significantly investment in public services, tripling it from 0.6 per cent. of GDP in 1996-97 to 2 per cent. in 2006-07, its highest level since 1979. We also saw a continuous expansion in the economy, while reducing Government debt as a share of GDP, from 42.5 per cent. in 1996-97 to 36 per cent. in 2006-07.
Those rules stood our economy and the country in good stead during that period, but events towards the end of 2007 and in 2008 fundamentally changed the economic situation for the entire global economy, because we experienced the worst economic conditions seen in more than 60 years. We were operating in a completely different environment, and policy, here and in other countries, needed to adapt to reflect that. No one could have foreseen the sheer scale and spread of the global financial recession that hit economies all over the world in 2007 and at the beginning of 2008. The result is that borrowing and debt have risen in most countries, ours included.
Mr. Mark Harper (Forest of Dean) (Con):
In his opening remarks, the Chancellor made much of the need not to reduce the deficit too fast. However, his written statement to the House on 2 December reported on ECOFIN-I presume that either he or the Chief Secretary attended and agreed with the recommendations -which called on the UK to reduce its budget deficit below 3 per cent. of GDP, or half the level in this Bill,
by the 2014-15 financial year. He suggests that the approach in the Bill is prudent, but in another context he suggests that we go twice as fast. Can he account for that disparity?
Mr. Darling: The hon. Gentleman refers to the Finance Ministers' meeting in Brussels at the beginning of December, which I most certainly attended, and the rules that pertain to countries in general. The Commission can make recommendations, but as we are not in the euro, we are not obliged to follow them. We have no plans to change our current policy on that issue. The measures that I have announced in the pre-Budget report and before are sensible and, at this stage and when there is still so much uncertainty as countries emerge from the global recession, it is sensible to reduce the deficit in a way that does not damage our economy.
The recession has had a substantial impact on the public finances, here and in every country. With economies weakening, tax revenues have fallen. In this country, we have seen falls in corporation tax, especially from the financial services industry, but also in income tax. Higher unemployment inevitably and rightly means that more has to be spent supporting people and families. There has also been a cost to continuing to maintain and support the economy and stabilising the banking system. However, both sides of the House agree that stabilising the banking system was necessary. It was not an optional extra, because it would have been calamitous not to have done so. But there is a difference in our policies on support for the economy. Had we not maintained spending to support the economy, the pain and cost of the recession would have been far greater. I do not accept the argument of those who claim that we should have started to cut back on expenditure two years ago. That would have been extremely damaging to the economy and would have made it even more difficult for people.
As we emerge from this global downturn, we need to cut our borrowing, as other countries are doing. To try to meet the fiscal rules put in place for the previous economic cycle would be perverse. Not to allow borrowing and the deficit to rise to help people and businesses would have meant greater pain and more job losses, as we saw in the recessions of the 1980s and 1990s, and would have meant increased costs in both human and economic terms.
Bob Spink (Castle Point) (Ind): Before the Chancellor moves too far from the banking system, would he agree that in order to build public confidence it might be worth considering linking Ministers' pay to performance? If the Government failed to meet the target, Ministers' pay could be cut.
Mr. Andrew Pelling (Croydon, Central) (Ind): Or increased.
Mr. Darling: I think that the latter proposition is probably a remote possibility in the current climate, but the hon. Member for Castle Point (Bob Spink) makes an interesting proposition.
The vital point-one to which I shall return later-is that it is important that Ministers and Governments are accountable to the House, which they are of course. Each and every one of us who are privileged enough to be Ministers of the Crown are answerable to the House,
and if we do not come up to the mark, one way or another it is open to the House to do something about it. That remains the case, and it is perhaps a more draconian system than simply modifying that week's pay packet.
Kelvin Hopkins (Luton, North) (Lab): My right hon. Friend has emphasised the importance of trying at least to moderate, if not reduce, borrowing. However, would not the most sensible course of action be to maximise the tax take by minimising tax avoidance and evasion and ensuring that the tax gap is closed?
Mr. Darling: I agree with my hon. Friend. I, too, want to reduce borrowing. We have to do more than moderate it-it has to come down. He is right also that part of what we must first do is close the tax gap and ensure that HMRC does everything possible to ensure that it collects every penny due to it. That is not always possible-people go bankrupt and so on-but we must do that. It is also necessary for us to be vigilant about closing tax loopholes when they emerge. One of the successes of the G20 meeting last year was at long last to get international agreement to begin to open the doors on some of the tax havens, such as Lichtenstein for example, so that we can get access to the records of people who live and do business in this country but avoid paying tax here. That is grossly unfair and inefficient. I agree with him on that.
We have a duty to support the economy during the downturn, and that has resulted in higher borrowing, and indeed such measures are still supporting the economy. Not to have put in place the discretionary measures that we have introduced since the end of 2007 would have had disastrous consequences for the economy-I accept that is a minority view, although held by those on one side of the House-because failure to support the economy would have meant higher, not lower, debt and higher, not lower, long-term borrowing.
I have always made it clear that support for the economy during the downturn goes hand in hand with steps to rebuild our fiscal strength once recovery is established. That is necessary to get the growth that we need. However, it is also imperative that we get our borrowing down in a way that supports growth, because growth itself will help us to reduce our borrowing and debt. The alternative is to consign ourselves to a decade of austerity, low growth and low employment, which I do not think would be the right thing for this country.
As I said, in the past, there have been many and varied fiscal objectives under successive Governments. Since 1997, however, our fiscal objectives have remained in the medium term, to ensure sound public finances so that spending and taxation impacts fairly between generations, and in the short term, to support monetary policy and to help to smooth the path of the economy. Despite the disruptions of the past couple of years, those objectives remain important, and to get back on that course we need to get borrowing down on a reasonable time scale.
The Bill requires the Government to set out a fiscal plan for delivering sound public finances, which must be approved by Parliament, and places a duty on the Government to meet that plan. As I said earlier, it gives Parliament a clear role in setting and monitoring the
Government's medium-term fiscal plans. Parliament must approve those plans before they become law, so this Bill gives the House a new opportunity to scrutinise the Government's plans. Over the past few months, there has been an understandable desire to reassert the authority, in particular, of the House, and I believe that the Bill is one way in which we can do that. It represents a substantial strengthening of the fiscal policy framework in response to the challenges we face while enabling the House to exercise greater scrutiny, not just through Select Committees, but through the House sitting in this Chamber.
Gregory Barker (Bexhill and Battle) (Con): Does the Chancellor believe that, had the Bill been in force earlier in his term of office, or during the Prime Minister's term of office as Chancellor, the public finances would be in a less ruinous state and that we would not be the only economy in Europe still in recession?
Mr. Darling: No, I do not accept that. As I said earlier-the hon. Gentleman might not have been here-prior to 2007, when this crisis began, our debt levels came down to the second lowest in the G7. We have been reducing debt while spending more on infrastructure. The hon. Member for Stone (Mr. Cash) mentioned the railways. I know, having been Transport Secretary for four years, what happens when a Government inherit a transport system starved of investment, as it had been in the 1990s-literally, things come off the rails. That is why I make no apology for the fact that the Government spend more on the railways and infrastructure. Our transport system needed the investment.
We have spent more on schools and hospitals too. We owe a great deal to the Victorians, but I do not think that they expected us to be relying on their hospitals at the back end of the 20th century. We spent that money while reducing borrowing. Now let us consider what happened to us in 2007-08-this has a bearing on the point made by the hon. Member for Bexhill and Battle (Gregory Barker) about the recession. We have a very large financial services sector-I think that we are, in most people's view, the main financial services sector in the world-so the recession has had a far greater effect on us than on others.
I would like to ensure that we have a major financial centre here in the future. That is why we have to toughen up regulation and work with the industry to ensure that we achieve that. However, the idea that when we entered the downturn, we had not been running the economy efficiently and effectively is nonsense. Yes, we were spending more money on public services, but not a day or week went by when people on the Conservative Benches did not ask for even more money-not less-for schools and hospitals. On some days, they even outdid the Liberal Democrats in calling for more expenditure on services, so for them to say now that they did not want that spending is nonsense.
Philip Davies (Shipley) (Con):
The Chancellor appears to be rewriting history as he goes along. He is trying to give the impression to the House that the Government were repaying debt until the economic crisis hit, but that is clearly not true. The Government were borrowing money each year in many years before the crisis hit. Is it not a fact that, unlike the impression that he is trying to
give, my hon. Friend the Member for Tatton (Mr. Osborne) is right that the Chancellor was not fixing roof when the sun was shining?
Mr. Darling: When the hon. Gentleman has a chance to think about these things, he might realise that Governments borrow money. There was a time, early in the last decade, when Government borrowing was going down, but then we started to hear concerns from the pensions industry that the Government were not borrowing enough-the pensions industry actually requires borrowing.
Mr. David Gauke (South-West Hertfordshire) (Con): So it's their fault now?
Mr. Darling: The hon. Gentleman makes an extremely flippant remark.
From time to time, Governments need to borrow money to ensure, for example, that we have infrastructure, schools and hospitals. At times like these, were a Government to shut down spending and so put even more people out of work, or were they to get into the absurd situation, like the Government in the early 1930s, of trying to cut benefits and spending, they would make a difficult situation even worse. So I do not accept the point made by the hon. Member for Shipley (Philip Davies).
Dr. John Pugh (Southport) (LD): Will the Chancellor give way?
Mr. Darling: No, I want to make some progress. Perhaps I will give way later.
Clause 1 of the Bill imposes three duties on the Treasury: first, to ensure that Government borrowing as a share of GDP falls in every year to 2015-16; secondly, to ensure that Government borrowing is at least halved as a share of GDP over a four-year period to 2013-14; and thirdly to ensure that Government debt as a share of GDP is falling by 2015-16. The latest forecasts for the public finances, which I set out at the pre-Budget report last month, are consistent with these duties: in the next financial year, 2010-11, Government borrowing will start to fall and continue to do so each and every year after that; borrowing will reach 5.5 per cent of GDP by 2013-14, so that we will more than halve the 12.6 per cent. of GDP reached this year; and with further consolidation thereafter, debt as a share of GDP is projected to fall in 2015-16. I have announced measures that will allow us to more than halve the deficit as a share of GDP over four years-from 12.6 to 5.5 per cent. That is the sharpest reduction in the budget deficit for any G7 country.
In relation to the points raised by some hon. Members earlier, there are no powers to amend those duties. They can be changed only through new primary legislation. In other words, the Government would have to return to the House were they not meeting the obligations.
Mr. Pelling: Can the Chancellor give a judgment on just how deflationary those changes in public spending could be? Is there not a danger from the straitjacket that is being introduced through this legislation?
Mr. Darling:
I believe that the changes are manageable, and they are the right thing to do. The hon. Gentleman might want to make his point to those on the Conservative Front Bench, who as I understand it want to go further
and faster. There is a risk of damaging the economy if that happens. Inevitably, these are matters of judgment, but I am very happy to justify why we have had to borrow so much at the present time. However, if we are going to get sustainable growth in future, it is important that we get that borrowing down. To halve it over a four-year period is a reasonable thing to do and a reasonable rate at which to do it. To go further than that-and to make that judgment at the present time, when there is so much uncertainty-would be hugely damaging to the economy and would present a terrible risk, especially when the Opposition are contemplating spending even more money on top of that.
Dr. Pugh: Following on from a previous question about what would happen if the legislation had been in place earlier, if it had been in place, would the Chancellor have been free, as he was free, to bail out the banks as promptly as he did? Is he not hampering the range of movement of a subsequent Chancellor?
Mr. Darling: No, because the Chancellor would quite obviously have to come back to the House if circumstances were as severe as those that pertained a couple of years ago. I do not think that anybody would argue for getting ourselves into a position through legislation where the Government were completely hamstrung and could not effectively govern the country. That would be nonsense. However, it is important that there should be a discipline and a clear sense of direction on reducing the deficit.
Clause 2 sets out a duty that the Government must continue to have a fiscal plan after 2016. That will be done by order, so the Government can decide what is appropriate. Again, the matter has to come back to the House. There is also a provision in clause 2 to give the Treasury the power to add further duties to the Government's fiscal plan. We have illustrated how we do that. For example, a draft order was published on the day of the pre-Budget report requiring the Government to ensure that borrowing as a share of GDP came down to 5.5 per cent., which is more than halving the deficit. As we look to the future, if we can get growth that is more robust than in my forecast, borrowing will naturally fall faster. It would then be possible to reduce that borrowing further in the medium term. However, at this stage, I believe that the course that I have set out is the right one.
Clause 3 sets out various reporting requirements, so that the House has an opportunity to see what progress is being made. The Treasury must report on whether it has succeeded in fulfilling the duty that is imposed upon it-that is, on whether borrowing as a share of GDP is lower-and also ensure that debt is falling. If the targets are not met, the Treasury has to explain to Parliament why that is not the case. Again, that is subject to scrutiny by Parliament. There will be a revised code for fiscal stability, which I shall make available before Committee, so that there can proper scrutiny of it.
Clause 4 makes it clear that it is to Parliament that the Government are accountable for approval of, progress towards and compliance with their fiscal plans. I see that the reasoned amendment calls for the creation of a new independent body to monitor and demand fiscal action, but I believe that Parliament should hold the
Government to account for their fiscal policy, not a quango, an external body or, indeed, the courts. The Government are accountable to Parliament and, through Parliament, to the people.
Mr. Darling: I very much hope that the hon. Gentleman and I both agree that the Government are accountable to Parliament and, through Parliament, to the people.
Mr. Osborne: When the Prime Minister was shadow Chancellor and originally set out his plans for fiscal rules, he said that they should be monitored independently by an independent office. Does the Chancellor know when the Prime Minister changed his mind?
Mr. Darling: My recollection was that when the then shadow Chancellor set out his plans, he set out proposals that we subsequently enacted. The hon. Gentleman asked about independent verification. Again, my recollection is that we said that we thought that there should be a role for the National Audit Office, and there was indeed a role for the NAO, which is independent of the Government.
Stewart Hosie (Dundee, East) (SNP): I agree entirely with the Chancellor that Parliament should hold the Government to account, on this and many other matters. So why have we not had a comprehensive spending review, so that we can understand precisely what the impact of the cuts will be and hold the Government to account on the plans that they are already putting forward?
Mr. Darling: For the reason stated in the pre-Budget report. I said that there was still a lot of uncertainty about. We still do not know what unemployment will be this coming year. We had some good news just after the PBR, in that employment rose and unemployment fell, but we still think that unemployment will rise during the course of this year, so there is a lot of uncertainty about, and we still have the current spending plans, which run through until April 2011. That is why we have not done a spending review just now, and that remains the case.
There is no doubt that we face a huge challenge as a country. There will be difficult judgments over the next few years. I have said before that some tough decisions will have to be taken, but the real judgment is this: we should recognise that what the Government do and what they spend can make a difference to the future rate of growth, and they can certainly make a difference to the quality and availability of public services, upon which many people who send us here rely. However, what the Government do and what they spend will also set the direction of this country for the next 10 or 20 years. That is why it is important that we get it right. I believe that my judgment of bringing borrowing down in a way that is manageable and deliverable and, at the same time, does not damage the social and economic fabric of this country is the right one. This Bill will help us to achieve that. I commend it to the House.
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