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If, as the Bill implies, it will not be possible to use the fiscal levers from 2011 to 2016, that would appear to signal the complete collapse of the Government's position, which is that fiscal levers are a very important element of what a Government can do. One might ask why the born-again Keynesians on the Labour Benches will be walking through the Lobby in support of the Bill given that that is what it says, as they would know if they
actually read it. To be fair to the hon. Member for North Ayrshire and Arran, she has read the Bill and she will not be walking through that Lobby; I wonder whether many of her colleagues will be joining her.
Alternatively, perhaps, as ever with Labour Governments, fiscal discipline will be there for as long as it is absolutely expedient, as in the case of the abandoning of the fiscal rules at the point at which they prove to be a constraint. The Chancellor gave us the answer earlier today when he stated that if there were a recession and difficulties in the economy, the Chancellor would simply have to come back and explain to us that the target was not going to be met. If that is really the case, then we have to ask what on earth is the point of the Bill.
If the Government genuinely wanted to increase the institutional pressures to reduce the deficit, they could have followed our policy and established an office for budget responsibility that could publish its own fiscal forecasts. We have heard several times today about the Treasury's failures in its own fiscal forecasts. It could make recommendations as to whether the Government would meet their stated objectives in reducing the deficit or whether further action was necessary, and of course it could be a much more sophisticated instrument than the targets set out in the Bill. As my hon. Friend the Member for Stone (Mr. Cash) pointed out, the difficulties that exist and the use of the private finance initiative and other off-balance-sheet mechanisms have done little for the Government's credibility in this area.
Truth be told, whatever the Government propose at this stage, there is nothing that they can do to restore their credibility. This Government are to fiscal responsibility what Tiger Woods is to marital fidelity. The Chancellor had his chance to set out a credible path to fiscal responsibility-indeed, we read the leaks suggesting that he fought to put forward proposals that would have delivered something close to credibility-but the man whom we thought was unsackable was still too weak to stand up to the Prime Minister and the Schools Secretary, and yet again we had a pre-Budget report that did nothing to address the Government's lack of credibility.
The Chancellor could have set out spending plans that would have reassured the markets, and in doing so perhaps protected his own legacy, but he failed to do so. Instead we have this pathetic excuse for a Bill. As the right hon. Member for Norwich, South (Mr. Clarke) has pointed out, it is vacuous and irrelevant. At a time of crisis in the public finances, we need leadership that will rise to the occasion. We need a man with a plan, not a man with a stunt. If the UK is to have fiscal credibility again, there is one necessary condition. It is not this Bill, it is a change of Government.
The Exchequer Secretary to the Treasury (Sarah McCarthy-Fry): In 1997 the Government established two clear fiscal objectives, which have been maintained since and will remain in place. The first is, over the medium term, to ensure sound public finances and ensure that spending and taxation have a fair impact within and between generations. The second is, over the short term, to support monetary policy to help smooth the path of the economy.
The financial crisis and the global recession have had a profound impact on the public finances, resulting in a significant increase in Government borrowing and, as a
result, increasing public sector net debt. Those major economic shocks have hit every country in the world, and we have had to be flexible in our response to changing circumstances. As my right hon. Friend the Chancellor set out, our first priority was to provide support to the economy, which is why the Government undertook a fiscal stimulus to provide support when the economy was weakened. That stimulus and the effect of the automatic stabilisers are providing fiscal support totalling about 5 per cent. of GDP this financial year, which has helped limit the severity of the downturn and its impact on businesses and individuals.
The Government estimate that as a direct result of the fiscal stimulus announced in the 2008 pre-Budget report, GDP growth in 2009 will be about half a percentage point higher than it would otherwise have been. There were costs to stepping in, but not to have intervened would have been even more costly and burdened the economy over a much longer horizon. We have always been clear that the initial support must be followed by steps to secure sound public finances. Our fiscal stimulus was deliberately time-limited to increase its impact during the downturn and ensure sound public finances over the medium term.
Timing is all, and much of today's debate has centred around the timing of the consolidation. There have been contributions from my right hon. Friend the Member for Birkenhead (Mr. Field), the hon. Member for Chichester (Mr. Tyrie), the right hon. Member for Wokingham (Mr. Redwood), my hon. Friend the Member for North Ayrshire and Arran (Ms Clark) and the hon. Members for Dundee, East (Stewart Hosie), for Croydon, Central (Mr. Pelling) and for Ludlow (Mr. Dunne). Some hon. Members complained that we were not going fast enough, and others that we were going too fast.
Mr. Gauke: As the Exchequer Secretary runs through the various contributions to the debate, can she recall any other occasion on which the flagship measure in the Queen's Speech has not attracted a single voice of support from the Government Back Benches?
Sarah McCarthy-Fry: I cannot speak for Back Benchers who may not have been able to get here in time to speak in the debate. [Interruption.] The proof of the parliamentary Labour party's support will be in the votes for the measure.
The Government will not withdraw support too quickly. Tightening fiscal policy too quickly risks jeopardising the recovery, which would result in the deterioration of the fiscal position. The Government will therefore ensure that fiscal policy continues to provide support to businesses and individuals in the early stages of recovery.
When the economy is better placed to support a more rapid tightening, fiscal policy will shift towards consolidation. Well-timed and planned fiscal consolidation
will support economic growth during the recovery. In line with fiscal objectives, the Government's fiscal strategy is threefold.
First, we will base policy decisions on a realistic fiscal forecast, based on a range of assumptions, some of which are designed to provide caution for uncertainty. Secondly, we will ensure that the fiscal policy framework is set to deliver the Government's fiscal policy objectives. To that end, the Government have introduced the Bill. Thirdly, we will set out a credible plan to deliver sustained consolidation in the medium term to ensure sound public finances in a time frame that is consistent with economic recovery and growth. In line with that, the pre-Budget report outlines plans to more than halve the deficit in four years, and the fiscal consolidation plan included in the Bill embeds the deficit reduction. That is the sharpest reduction in the budget deficit of any G7 country.
Mr. Graham Stuart: I sympathise with the Exchequer Secretary's plight this evening. She says that the Government aim to have a credible policy. How credible can it be when a heavily whipped parliamentary Labour party cannot produce one Back Bencher to speak in favour of it? No wonder the Chancellor is desperately whispering in her ear. It is a night of humiliation for him and for the Government.
As the economy emerges from recession, and exceptional uncertainty recedes, the Government believe that it is appropriate to strengthen the fiscal framework. That will support the recovery and is in line with international action. As Governments around the world work together in response to the downturn, many other countries are now choosing to strengthen their fiscal frameworks. Indeed, the International Monetary Fund has highlighted fiscal responsibility laws as a way in which to buttress fiscal adjustment following the financial crisis by strengthening institutional arrangements. The Government have chosen to enhance the fiscal framework through the Bill. The measure will help businesses and investors make long-term plans with confidence about the future fiscal position and the financing environment.
The Government have set out measures to reduce borrowing by £57 billion by 2013-14 and to contribute to more than halving the deficit over four years. The Bill embeds the deficit reduction in legislation and also sets
further targets to reduce the deficit in each year to 2015-16 and to have the national debt falling in that year.
Mr. Gauke: Will the Minister explain what would happen if she were in government in 2012 or 2013 and there were a recession? Would the target of reducing borrowing year in year out, as set out in the Bill, still apply? Is that the Government's position?
Sarah McCarthy-Fry: I cannot remember whether the hon. Gentleman was here for the Chancellor's opening speech, but he dealt with that point quite closely- [ Interruption. ] I will repeat it if the hon. Gentleman wants me to. If there were an unprecedented situation, the matter could be looked at again, but we are setting out a plan for a reduction in the deficit and further targets to reduce the deficit in each year.
The plans contribute to ensuring sustainable public finances in the medium term, and I do not think that placing them on the statute book is a distraction. Legislation provides certainty and stability, and we are giving Parliament a new role in both setting and monitoring the Government's fiscal plans. In particular, Parliament must approve fiscal plans before they become law, which is a significant evolution of the extent to which the Government are held to account for their medium-term fiscal policy.
Sarah McCarthy-Fry: I was going to come to that later in my speech, but given the number of interventions, I might not get there. The legislation requires explanation of key terms to be set out in the code for fiscal stability. The Chancellor has stated that that will be published in draft in advance of Committee to allow for scrutiny. All definitions and fiscal aggregates used in the Bill will be national statistics, produced by the independent ONS, using European and internationally accepted methodologies.
The International Monetary Fund has set out that the strengthening of medium-term frameworks, including through fiscal responsibility laws, should help to support the fiscal adjustment that will be necessary in most economies following the financial crisis. The Bill is therefore a crucial part of our fiscal strategy, binding the Government to deliver on the tough decisions we are taking to more than halve the deficit over four years and to get debt falling.
The Bill builds on, and significantly enhances, the existing legislative underpinnings of the fiscal framework. It requires the Government to set out at all times a legislative fiscal plan for delivering sound public finances. That must be approved by Parliament before it becomes law, and the Bill places a binding duty on the Government to meet the plan.
Mr. Jeremy Browne:
Given that less than two years ago the Chancellor forecast that the deficit this financial year would be £38 billion, and that instead it has turned
out to be £178 billion, why is the Minister so confident that her right hon. Friend is able to predict what the economic circumstances will be in 2016?
The fact that the fiscal plans cannot be changed except with the approval of Parliament through new legislation also demonstrates the importance the Government place on action to ensure sound public finances in the medium term. The Bill makes the Government accountable to Parliament for meeting their fiscal plans and creates a new scrutinising role for Parliament in relation to both progress towards and compliance with them. That is a significant evolution of the extent to which the Government are held to account for their medium-term fiscal policy. Parliament is the right body to hold the Government to account for their plans for tax, spending and borrowing.
The Government are required to account to Parliament through regular progress and compliance reports, which will be produced alongside Budgets and pre-Budget reports. Progress reports must set out the progress that has been made towards compliance with the plans. If targets are not met, the Treasury must set out for Parliament why not. The revised code for fiscal stability will set out that the Treasury must also report on what it will do to remedy the situation if targets are not met. These measures represent a significant evolution of the extent to which the Government are held to account for their medium-term fiscal policy.
As the Chancellor noted, the Government do not consider that an office for budget responsibility-as proposed by the Opposition-is the right solution to the challenge we face. Establishing a new quango would not enhance the fiscal framework. Instead, it would risk undermining the role of Parliament in scrutinising the Government's fiscal plans. Introducing blurred lines of responsibility for forecast and policy-making functions risks damaging accountability: policy-makers would be acting on forecasts for which they were not fully responsible. It is Parliament and Parliament alone that is best placed to hold the Government to account for their plans. They should have ultimate say in matters of tax, spending and borrowing.
Further, evidence does not suggest that outsourcing the forecast would improve its accuracy. The Treasury's fiscal forecasts since 1997 have been marginally more accurate than the forecasts for the UK made by many independent international organisations, such as the OECD, the IMF and the European Commission, and no more or less cautious than the range.
Instead, the Government's approach is to strengthen the existing fiscal framework and enhance accountability to Parliament rather than outsource it to an external body. Parliamentary scrutiny has been bolstered by the
steps the Government have taken since 1997 to improve fiscal transparency. In addition, the independent National Audit Office will retain its existing role in auditing key forecasting assumptions.
Parliament should have the ultimate say in matters of tax, spending and borrowing. The Bill will give Parliament a new role in holding the Government to account for their medium-term fiscal policy and meeting the targets of the fiscal consolidation plan. The legislation includes clear targets, and will create a transparent reporting process for assessing progress and compliance against fiscal plans. If the Government are not on track it will be obvious, and if plans are not achieved the Government will have to set out why not.
The Government have made it clear that reducing spending accounts for two thirds of the action the Government are taking to reduce the deficit following the crisis-measures that will reduce the deficit by £57 billion in 2013-14. This is shared between current and capital spending. Specific savings that we have already set out include £12 billion of savings from the smarter government reforms to the public sector; £4.5 billion from slowing increases in public sector pay and pensions; and £5 billion from cuts to lower priority programmes, as well other efficiencies across all Departments, where £10 billion value-for-money savings have been found already.
The Government have already set out clear plans for fiscal consolidation. In April in the Budget, my right hon. Friend the Chancellor set out plans for consolidation and the recent pre-Budget report confirms these. These plans include more than halving the deficit in four years. The Bill enshrines these plans in law, through the Government's first fiscal plan, the fiscal consolidation plan.
The Government are committed to sound public finances and have set out clear plans for consolidation. We will not withdraw support too quickly and jeopardise recovery. The annual pace of consolidation set out in the 2009 pre-Budget report is faster than the pace of deficit reduction forecast by the IMF for all other G7 economies in the period up to 2014. Further, the Government will return with legislative targets beyond 2015-16 at an appropriate time. The pre-Budget report projects that the deficit on the cyclically adjusted current budget will be eliminated by 2017-18.
We are now at the turning point in the global recession and at a time when we need to start building and planning for the future. As growth picks up, we must ensure that we have sustainable public finances. Through enhancing the fiscal framework, the Fiscal Responsibility Bill will support that task. I commend the Bill to the House.
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