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"stretch to the limit...what is consistent with a top rating."
Mr. Hammond: I shall give way first to the hon. Member for Taunton (Mr. Browne).
Mr. Jeremy Browne (Taunton) (LD): The Government's deficit reduction plan relies on increased taxation, reduced public spending and, crucially and perhaps least discussed, very optimistic forecasts for economic growth, well above trend forecasts. Does the hon. Gentleman accept the Government's forecasts for economic growth in the years ahead, which are part of the plan the Chief Secretary has outlined this afternoon?
Mr. Hammond: It is clear from what I have just said that the qualified commentators' view is that the Government's forecast of trend economic growth beyond 2011 appears optimistic.
Mr. Hammond: I know what the Chief Secretary wants to say now; he wants to talk about the Bank of England. The forecast appears optimistic, however. We are not an economic forecasting organisation, but we do look at the consensus of forecasts made by independent commentators, and I think it is fair to say that the Government's forecasts are at the top of the optimistic end of the spectrum.
Mr. Hammond: I shall give way first to the right hon. Member for Holborn and St. Pancras (Frank Dobson).
Frank Dobson: I said-ironically, of course-that I was most impressed by these qualified commentators, and, as usual, I was not exaggerating. Citibank, which provides one of the highly qualified commentators quoted by the hon. Gentleman, lost £60 billion, and it bought up Merrill Lynch, which had lost £52 billion, so this brilliant person is working for an organisation that lost £110 billion. The hon. Gentleman quoted Morgan Stanley, which lost almost £16 billion. Barclays losses were, admittedly, a mere bagatelle in comparison; it lost only £7.9 billion. We are expected to give credence to the prognostications of these idiots, however, including Moody's, which had given triple A ratings to all the lunatic procedures those organisations were following.
Mr. Hammond: Clearly, there is nothing like a financial crisis to bring the old dinosaurs out of their caves-and I know the right hon. Gentleman takes great pride in being a dinosaur. I say this to him, however: I do not think anyone cares tuppence whether he gives credence to what these City economists are saying. The important point, however, is that the people who will have to lend us the hundreds of billions of pounds that this Government want to borrow do take notice of them, and they make their judgments about where to lend, and where not to lend, on the basis of them.
Mr. Hammond: I shall give way to the Chief Secretary.
Mr. Byrne: The hon. Gentleman is enormously kind in giving way. Does he acknowledge that Standard & Poors has said:
"We believe that the ratings on the UK continue to be supported by its wealthy, diversified economy"?
He will also recognise that Fitch said "The UK's triple A rating remains supported by its high value added, diversified economy." He will recognise, too, that Moody's has said that "the outlook for the UK Government is stable. Her Majesty's Government is deemed a resilient triple A issuer." The hon. Gentleman's presentation would be incomplete without such an acknowledgement. Would it not be incomplete, too, without an acknowledgement of the Governor of the Bank of England's growth forecast for 2010-11 of 4.1 per cent., which is much higher than the rate the Chancellor offered?
Mr. Hammond: I predicted the last bit of that intervention, and I am happy to agree with the first bit: I am extremely kind. It is the bit in the middle that we have to talk about. If I really thought that it was done and dusted and that the UK's triple A credit rating was a lost cause, I probably would not be applying for the job I am applying for. I also hope, however, that the right hon. Gentleman similarly agrees that there is no scope at all for complacency about the triple A credit rating. That credit rating has not even been in question for decades, yet it is now right on the radar screen; it is being talked about in analysts' notes, and we need to be extremely careful. I understand that the right hon. Gentleman is under great pressure from the Prime Minister to create political dividing lines and to focus on the very short term, but he and his boss need to be extremely careful about how they present themselves to the people who decide these things, who ultimately will be the arbiters of our fate.
Sir Nicholas Winterton: We need balance in this debate. We have heard a great deal from the Government, but will my hon. Friend describe to the House the scenario that would arise if the United Kingdom lost its triple A credit rating? It is important to know about the consequences that would flow from losing that rating-the implications of that on taxes and everything else that affects the country and the people of this country.
Mr. Hammond: If my hon. Friend will wait a moment, I shall come on to a part of my speech that deals specifically with that issue. If he wants to intervene on me again then, I will be very happy to give way.
Mr. Brooks Newmark (Braintree) (Con): In the plethora of quotes my hon. Friend gave us from the outside experts, one of the key points to consider-which is very much in tune with the wishes of the hon. Member for Luton, North (Kelvin Hopkins) and even the Government-is the need to stop the huge rise in unemployment. Does it not strike my hon. Friend as counter-intuitive to raise national insurance when one is trying to increase employment and reduce unemployment?
Mr. Hammond: It is very clear that the increase in national insurance tax will have a negative impact on the capacity of the economy to create jobs, and I would have thought that creating jobs in the recovery would be one of the principal focuses of attention for the Chief Secretary and his colleagues.
Mr. Meacher: Several minutes ago, the hon. Gentleman said that it was a mainstream view that there should be a reduction in the deficit through large and early public expenditure cuts, and he rather condescendingly rejected the opinions of those who took a different view. How does he explain the case of Japan in the 1990s? It followed exactly that policy. When recovery started, it raised the sales tax and reduced expenditure, and it went into a double-dip recession. How does he also explain that Roosevelt through the new deal expanded the economy, and as it began to come out of the slump, as a result of increasing taxes and reducing public expenditure, it went into a further slump that did not end until the war? Is the hon. Gentleman not pursuing exactly those wrong policies?
Mr. Hammond: The right hon. Gentleman has, in fact, very neatly made my point for me, because in both cases the problem was an increase in interest rates too early in the cycle, which then choked off the recovery. What I have been arguing and what the Conservatives have been consistently arguing is that the most important determinant of the strength of the recovery will be the level of interest rates and the looseness of monetary policy.
Whatever Labour Members might think, it is clear to Conservative Members that the credibility and creditworthiness of Britain requires a plan to deliver what the Governor of the Bank of England has called
"a really significant reduction in the deficit...over the lifetime of a Parliament",
which is the period for which a Government are elected. Surely the point is that common sense tells us that for as long as the Chancellor is publicly failing to propose something that meets the minimum requirements set out publicly by the Governor of the Bank of England, markets will be unsettled and they will mark the Government down. Demonstrating political commitment to fiscal consolidation means starting work on the task, not talking about it; it means putting one's money where one's mouth is.
Mr. Hammond: I am going to make a bit of progress before I give way.
At the time of the pre-Budget report, the Chancellor told us:
"For as long as extraordinary uncertainties remain in the world economy, this is not a time for a spending review."-[ Official Report, 9 December 2009; Vol. 502, c. 368.]
However, to be credible the pre-Budget report needed to be accompanied by a comprehensive spending review or at least by a clear allocation of departmental spending totals for 2011-12 and 2012-13. Having told us that he could not provide that, he went on to tell us that he was guaranteeing most of the NHS budget, the schools budget and the police budget.
The Chief Secretary to the Treasury has recently refined this argument, with the proposition that the Government can confidently predict that we will come out of recession at the turn of the year and that economic growth will be 1.25 per cent. in 2010 and 3.5 per cent. in 2011 and every year thereafter, and can set an overall envelope of public spending in specific budgets for health, for schools and for the police-that is about 40 per cent. of resource departmental expenditure limits-but cannot allocate spending totals to the remaining Departments because they do not know what the level of unemployment will be.
Yesterday, the Labour-dominated Treasury Committee said the following about that astonishingly selective forecasting capability:
"It may be difficult for any current consolidation plan to command universal support. It will therefore be very important to add greater detail and clarity to the plan sooner rather than later."
"There is a sense that the Treasury are using uncertainty to suit themselves"-
by producing some forecasts as far as 2017-18 but no spending details beyond 2011. The Committee Chairman, the right hon. Member for West Dunbartonshire (John McFall), from whom we will hear later, added his thoughts in the covering press release, saying:
"We consider clarity, even if it is clarity about the degree of uncertainty surrounding the forecasts, as essential to strengthening this crucial credibility."
In addition, the Committee stated that it could
"see no good reason for the Treasury failing to produce"-
"illustrative figures for future expenditure".
We are being asked to accept that the Treasury can forecast growth, set spending totals and allocate funding to Departments that will grow, but that there are compelling and overriding reasons why the Government cannot allocate funding to the Departments that will shrink-and shrink they certainly will. It has been widely reported that there is an internal Treasury analysis showing that those Departments not fortunate enough to enjoy the political patronage of the Prime Minister will face a 17 per cent. real-terms spending cut over three years. That would confirm the analysis of the Institute for Fiscal Studies suggesting a 16 per cent. cut-or 19 per cent. if the ring-fencing is extended for a third year.
That contrasts sharply with the Chancellor's words on the "Today" programme on 10 December, when he said:
"Spending is going to be pretty much flat...Broadly speaking...we're assuming for the non-protected services it's going to be pretty much flat".
That was in nominal terms, but even after allowing for inflation, it is a long way from a 17 per cent. real-terms cut. He was asked on Monday to deny the existence of
that Treasury paper setting out the reality of 17 per cent. cuts in all other Departments, and I asked the Chief Secretary twice on Tuesday to deny the existence of that internal paper, but neither of them could do so. Instead, they got their civil servants to engage in producing costings of a bunch of fantasy policies, which Labour party officials then worked into a dodgy dossier-that fell apart even more quickly than the pre-Budget report did.
So let me ask the Chief Secretary now-I will happily give way to him-whether the Government are going to address the biggest gap in their credibility by publishing a comprehensive spending review or departmental spending allocations for 2011-12 and 2012-13 before the general election. Will the electorate be told how the Government plan to deliver the fiscal consolidation that they have set out in aggregate in this pre-Budget report and that they claim is the proof of their commitment to restoring fiscal discipline? Or will we have to guess?
Mr. Byrne: Let me deal with the hon. Gentleman's second point first. I have set out clearly in my presentation to the House this afternoon how we see £82 billion of deficit reduction taking place. Some £25 billion will come from growth measures and £57 billion from discretionary measures-tax will account for £19 billion of that and the rest will have to come from cuts and efficiencies in public spending. As he will recall from 1998, when comprehensive spending reviews were introduced, the whole point of them is about certainty; they are designed to give public service leaders and managers certainty about budgets for a period of three years. If a £4 billion or £5 billion margin of error remained because one cannot be clear about how fast unemployment will fall, that would be bigger than the budgets of four or five different Departments. If one cannot provide certainty about how much money is available, that defeats the object. We are happy to provide certainty, where that is possible. We know that the Conservative party is more than happy to provide four or five different positions on departmental budgets over the course of a day, but that is not an example that we wish to emulate.
Mr. Hammond: So, as I said, we are expected to believe that it is possible to be absolutely precise about the protected budgets but not about the budgets that will be sacrificed. In addition, I did not hear the Chief Secretary answer the question about the paper on 17 per cent. cuts. That is important because in terms of defence, a 17 per cent. cut is equivalent to more than the entire pay and pensions bill for all the armed forces or a staggering 150 new Chinook helicopters every year. In terms of transport, it represents the entire budget for London and the south-east: for trains, roads, bus subsidies and the tube. For the Ministry of Justice, a cut of 17 per cent. of the budget is the equivalent of 50,000 prison places-that is 60 per cent. of the UK's total gone. No wonder the Chancellor thinks that this is not a time for a spending review. The Chief Secretary may not like my examples, but if he will not spell out the consequences of his plans, it will fall to us to do so. The Government want the political gain of setting budgets in certain Departments without taking the political pain of recognising the consequences of that ring-fencing for other Departments. That is dishonest and disreputable, and it will ultimately backfire on them.
Derek Twigg: I regularly hear the right hon. Member for Witney (Mr. Cameron) saying to the press that he is being open and honest with the British people. In that context and spirit, can the hon. Gentleman tell us by what date he will want the deficit halved?
Mr. Hammond: We have made this point emphatically and repeatedly: we will make an earlier start than the Government have proposed to do and we will go further than they have proposed to do within the course of the next Parliament, as the Governor of the Bank of England has suggested. Exactly how far and how fast we go must, of course, depend on the economic circumstances and on the context of the monetary policy with which we find ourselves dealing.
Derek Twigg: With respect, the hon. Gentleman has just talked about clarity, openness and honesty, so, given that we have already said what we are going to do, when will the Conservatives have halved the deficit. What is his plan? Does he have no plan for the date by which it will be halved?
Mr. Hammond: What matters at the moment is what is going to happen immediately. We have made it very clear that we will start in 2010-11 to reduce public spending. The current Government have made it clear that they will continue to increase public spending in the face of all the evidence that they are taking unacceptable risks with the UK's credit rating, creditworthiness and reputation in the markets by doing so.
Mr. Hammond: I have to make a little progress or there will not be any time left for the rest of the debate.
If the Chancellor was in any doubt about the market reaction after the pre-Budget report and the immediate reactions to it, he should be in absolutely no doubt now. The UK 10-year gilt spread against the German bund, which is the benchmark, has widened alarmingly since the pre-Budget report. In less than a month, there has been an 18 per cent. rise in the spread-up to 62 basis points-and a rise of one third of a per cent. in the cost of servicing our national debt. The Government now need to find £5 billion more in spending cuts to balance the books than they did on the day that the Chancellor stood up to deliver his pre-Budget report.
At the end of 2008, the cost of insuring UK gilts against default was twice as expensive as the cost of insuring McDonald's corporate debt. At the time, a Government spokesman said that there was "obviously something odd" going on in the credit default swap market. Perhaps it was not so obvious-a year later, credit default swaps on 10-year Government bonds still trade at a 70 per cent. premium compared with those on 10-year McDonald's bonds.
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