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The hon. Gentleman is, of course, right about debt. The issue here is the size of the deficit, and the speed with which we are increasing our debt. Ultimately, all of us in this place can talk as much as we like about the debt and the deficit, but what matters is what the people who must finance that deficit, and must continue to finance that debt, believe about the situation and whether we are moving fast enough to deal with it.
Mr. Byrne: Will the hon. Gentleman give way?
Mr. Hammond: I will, but then I must make some progress.
Mr. Byrne: I am enormously grateful to the hon. Gentleman. He will know that our projection is a reduction in the cyclically adjusted deficit from 9 per cent. in 2009-10 to 8 per cent. in 2010-11, but he seems to be saying that it should be falling still faster. What figure does he propose?
Mr. Hammond: I am afraid that I am not going to oblige the Chief Secretary. In fact, I think I will adopt the strategy that he adopted in response to the question put to him by my hon. Friend the Member for Stone (Mr. Cash). The day before yesterday, the shadow Chancellor answered the precise question that the Chief Secretary has just asked. I will do what he did in response to my hon. Friend, and refer him to that answer.
Mr. Cash: Will my hon. Friend give way?
Mr. Hammond: Very briefly; then I must make some progress.
Mr. Cash: We seem to be going in circles. Does my hon. Friend agree that, contrary to the assertion made by the Chief Secretary, my hon. Friend the Member for Tatton (Mr. Osborne) made it clear that in our estimates of net debt we would include matters such as the private finance initiative, Network Rail and public pensions? Is it not the Government's failure to arrive at the truth of this matter that is undermining their arguments about what the deficit is, and thereby undermining the credit risk rating and the bond markets?
Mr. Hammond: My hon. Friend has made a good point, although it is a slightly different point from the one that the Chief Secretary was making to me. Issues relating to definition of the net debt are indeed part of what is undermining the United Kingdom's credibility in international markets.
Divided Governments are weak Governments. In the run-up to the pre-Budget report we saw acrimony and division within this Government, and since the PBR some may have noticed a degree of continuity in that trend. We have observed the Schools Secretary and the Chancellor playing cat and mouse with each other in public over the education budget, the Work and Pensions Secretary accusing the Chancellor of "astonishing" mistakes-I wonder where she got that idea from-the Health Secretary insisting that his budget would be protected, the Transport Secretary implying that he would resign if railway capital spending was cut; and,
all the time, the Chancellor's options being narrowed by the manoeuvring of the Prime Minister and his allies-or perhaps I should say "ally"-intent on creating political dividing lines rather than solving the underlying fiscal problem.
Yesterday the Deputy Prime Minister, in what was billed as a speech reasserting his support for the Prime Minister, instead comprehensively undermined the Prime Minister's economic strategy, making it clear that he, at least, understands that economic recovery cannot be built on more borrowing and more public spending-hence his decision to let it be known that he was "incandescent" about the content of the pre-Budget report.
Following those internal semi-public debates within the Government may be great fun for Opposition politicians and journalists in the Westminster village as they seek to identify the winners and losers of each round, but the real losers are the people of Britain and the only winners are the hedge funds, which are quick to spot weakness and indecision and which are now openly speculating against our currency and our sovereign debt.
Kelvin Hopkins: I thank the hon. Gentleman for giving way again. Is it not the case that the massive cuts proposed by the Tories would simply drive up unemployment and make the crisis worse?
Mr. Hammond: I wonder whether the hon. Gentleman has made a mistake, and intended to address that question to the Chief Secretary.
There is a fact here that we must all face: whoever is in government after the next general election will have to cut public spending. Surprisingly, even the Prime Minister on a good day- [Interruption.] The hon. Member for Luton, North (Kelvin Hopkins) does not agree that it will be necessary to cut public spending after the next general election. I think that puts him in a very small minority in the House. We will leave him with his thoughts and perhaps those of the little group around him, but he is well out of the mainstream of current thinking.
Mr. Hammond: I will give way in a moment.
The fact is that this Government are being driven not by the needs of the economy and the medium and long-term best interests of the British people, but by the needs of the Labour party and the insistence of the Prime Minister and the Schools Secretary that the scale of the fiscal problem, the challenge of dealing with it and the true price of not dealing with it are to be concealed at all costs from the British public until after polling day. No price is too high to pay, provided the bill does not arrive until 7 May. No burden is too heavy to bear if it is the Prime Minister's successor who will bear it.
That is the most systematically reckless, cynical and dishonest strategy for dealing with a fiscal crisis that anyone in the House will be able to recall. It compares very unfavourably with the stance of my right hon. and learned Friend the Member for Rushcliffe (Mr. Clarke), who as Chancellor in 1995 and 1996 insisted on pursuing the policies that were right for Britain's long-term economic health, not those that would deliver short-term illusions of success, however tempting that may have been electorally.
Britain's fiscal history over the past decade and a half is pretty simple. My right hon. and learned Friend created the golden legacy of low inflation, stable growth and falling unemployment, a legacy that the current Prime Minister inherited in 1997. He exploited that legacy to create a formidable image as a "prudent" Chancellor even while he was pumping up the bubble that was the root cause of the fiscal crisis that we now face. However, when the legacy ran out, he carried on spending, focused as always resolutely on the short term, spending the proceeds of his unsustainable bubble and then borrowing some more-spending and borrowing his way through the illusion of a boom. Apparently, that is his idea of building an economy that is best placed to withstand the slow-down and ready to lead the world out of the recession.
Paul Farrelly (Newcastle-under-Lyme) (Lab): The reality is that the so-called golden legacy was an accidental consequence of sterling's ejection from the European monetary system in the early 1990s after a previous unsustainable bubble. The hon. Gentleman wants to deal with facts and figures. What estimate has he made, given that the Conservatives want to cut faster, of the effect of that on domestic demand and therefore on the recovery of our economy?
Mr. Hammond: We come to the crux of the disagreement between us and the Government. If there were no factors other than the level of demand implied by fiscal stimulus, the hon. Gentleman would have a point, but the fact is that what has kept Britain going through this recession and what will see Britain grow in the recovery are continued low interest rates and relatively loose monetary policy. We do not have an automatic option of maintaining a fiscal deficit at the level that the Government would like to maintain and still being able to keep monetary policy as loose as it is now. That is the crux of the disagreement between us. In my view, there are many members of the Government who understand that perfectly well, but the Prime Minister has chosen, for electoral reasons, to ignore those voices and to insist that he maintains his fiscal stance until after the general election.
Phil Wilson (Sedgefield) (Lab): The Government say that we will cut the deficit over four years. Under the Tory policy, how long would it take to cut the deficit in half?
Mr. Hammond: I have indicated to the hon. Gentleman that we would expect to start the process of cutting the deficit, or of reducing Government spending, in 2010-11. This Government are proposing to go on increasing Government spending. The cumulative impact of starting early, even in a modest way, is quite significant. Of course, Labour Members want to try to reduce this to a very simple issue. It is a complex balancing act. I totally accept that. Reducing the deficit is going to have to go on over many years until we get ourselves back into balance. It can go a little bit faster if the economy is growing more strongly. It needs to be mindful of the monetary policy position that the Bank of England is able to offer at any given time. It needs to be mindful of wider macro-economic circumstances.
Mr. Pelling: Will the hon. Gentleman give way?
Mr. Hammond: I will in a minute. I must make a bit of progress and then I will give way to a few more Members.
Mr. Michael Meacher (Oldham, West and Royton) (Lab): Will the hon. Gentleman give way?
Mr. Hammond: I want to make a bit of progress and then I will happily give way again in a few moments. The Chief Secretary has wrong-footed me by being so surprisingly brief and I do not want to spend all my time taking interventions.
We have ended up where we are today: the only country in the G20 not yet out of recession-the Chancellor confirmed that on Tuesday-running the biggest deficit in the industrial world, unemployment at nearly 2.5 million and, as I said earlier, with the highest number of young people out of work on record. We are in the longest and deepest recession in our history, with more companies going bust in this downturn than in any other. After 13 years of Labour Government, the poorest are getting poorer.
Most importantly, confidence in the Government's economic management, both at home and abroad, already shaky, has crumbled since the PBR. It is no exaggeration to say that it is only the prospect of a change of Government that has prevented an even more marked negative reaction in market sentiments since the PBR. [Interruption.] The right hon. Member for Holborn and St. Pancras (Frank Dobson) finds that amusing. I know that he is a great expert on financial markets.
Mark Schofield of Citigroup, for example, said:
"Unless we get a credible set of measures put in place quickly, which seems unlikely unless we get a Conservative government with a clear majority at the next election, we think the UK's Aaa rating will be right up on the radar screens in a very short space of time."
Frank Dobson (Holborn and St. Pancras) (Lab) rose-
Mr. Hammond: I will give way in a moment.
This is how the Institute for Fiscal Studies summed up the situation:
"Arguably, with the Conservatives well ahead in the opinion polls, financial markets may be more influenced now by whether the Opposition's policies are consistent with long-term fiscal sustainability than those of the government."
Frank Dobson: The hon. Gentleman quoted someone from Citigroup as a person we should take seriously. Would the hon. Gentleman care to tell us how much Citigroup lost in the banking crisis? Was it $10 billion, $20 billion or $30 billion?
Mr. Hammond: The right hon. Gentleman makes his point. Mark Schofield and Michael Saunders, whom I shall quote later, are respected economists in the City. Their comments are widely circulated and noted.
Mr. Pelling: Will the hon. Gentleman give way?
Mr. Hammond: I will not at the moment.
The pre-Budget report was, as I said, the Government's last chance to turn this situation around and to restore Britain's reputation and credit-worthiness. It needed to do two things: first, to put in place a credible plan to restore fiscal balance, and secondly to demonstrate the
political courage to implement it, instead of merely talking about it. The Government failed on both tests. The plan that the Chancellor set out has reassured no one. It was immediately attacked by business leaders, economists, market analysts and commentators. Richard Lambert, director general of the CBI, said on 9 December:
"The Chancellor has made a serious mistake imposing an extra jobs tax at a time when the economic recovery will still be fragile...He has also missed the opportunity to increase the UK's credibility by reducing the public deficit earlier."
David Frost, of the British Chambers of Commerce, said that the national insurance rise is
"Terrible news...It's an additional cost for business when they can least afford it."
The PBR was slammed by economists for being driven by politics, not by economics, with widespread agreement that the failure to produce a credible plan to tackle the deficit leaves Britain vulnerable to higher interest rates and a downgrade of the sovereign debt rating, which I assume is something that the Government will be concerned about.
The right hon. Member for Holborn and St. Pancras will be pleased to hear that I am going to quote Michael Saunders at Citigroup, who is one of the City's most respected economists:
"The PBR appears to be aimed at reviving Labour's core support rather than seriously tackling the UK's medium-term fiscal problems...These measures do little or nothing to alter the medium- and longer-term fiscal outlook."
Let me give the right hon. Gentleman a few more examples. Barclays said:
"The PBR is unlikely to dispel concerns about the UK's public finances...The government has demonstrated that it is willing to raise taxes to fund extra spending, but not that it is willing to project a more aggressive overall tightening in policy".
Nor were analysts impressed by the Chancellor's forecasts, upon which even his modest plans for fiscal consolidation depend. BNP Paribas said:
"The Chancellor's new forecasts also continue to look massively over-optimistic".
"the Treasury's forecasts for GDP growth, particularly beyond the next couple of years, still look optimistic to us."
"The revenue forecasts...look over-optimistic."
RBS said that the Treasury has been consistently too optimistic on how much tax revenue
"a given amount of GDP growth generates".
All this leaves us exposed to higher interest rates, of course. Citigroup has said:
"We suspect that as this budget is digested, gilts and sterling will react badly."
"Issuance remains at historically highly elevated levels and this is seen forcing yields higher in a post QE environment."
The soaring national debt threatens a credit rating downgrade.
Frank Dobson: Will the hon. Gentleman give way?
Mr. Hammond: I will give way to the right hon. Gentleman shortly, after I have finished reading out these reactions and responses to the PBR.
On the afternoon of the PBR, Barclays said that
"the UK's triple-A sovereign credit rating and the currency are likely to remain vulnerable."
"Given that the Government has decided to ignore the opportunity to take steps to remove the risk of a sovereign rating down grade we expect sterling to remain under pressure over the medium term."
The bond-rating agency, Moody's, said that the PBR plans
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