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Nearly half the economists polled by the Financial Times in a new year study cited the fiscal crisis as a key threat to the economy. We have already heard about the statement from PIMCO. Not only does it expect a credit rating downgrade, which it says is more than 80 per cent. likely, but it has announced that it will reduce its holding of UK Government bonds during the coming year. There might be all sorts of reasons why PIMCO has chosen to reduce its holding of UK Government bonds, but even the Chief Secretary would
have to concede that it is not particularly helpful at a time when a country needs to issue £200 billion of new bonds over the course of a year to have the world's biggest holder of Government bonds saying that it intends to reduce its holding of that Government's paper.
Mr. Philip Hammond: I shall give way one more time, then I must finish.
Mr. Browne: I am grateful to the hon. Gentleman for giving way. Will he clarify a point in his position that I do not understand? The Government say that they wish to halve the structural deficit by 2014. He says that he will have to take account of factors along the way. For example, growth might not be as strong as the Government anticipate, or there could be another recession-I hope that there is not, but there could be. There might be other unforeseen circumstances. Perhaps we will have additional military commitments, for example. Given that his position is that we must be flexible-I think that he is sensible to have that position-will he concede that it is possible that the Conservative party, were it to win the general election, would fail to reduce the structural deficit by half by 2014? In other words, the Conservatives might reduce it more slowly than the Government plan to reduce it.
Mr. Hammond: I would not presume to give the hon. Gentleman a lesson in economics, but it seems to me that the possibility of growth's being slower or faster will not affect the evolution of the structural deficit, although it might affect the cyclical deficit. The difference between us is that we have consistently talked about targets for reducing the structural deficit, which is what the Governor of the Bank of England has suggested, whereas the Government talk about the total deficit, not differentiating between the structural and cyclical deficits.
I have talked a great deal about markets and some hon. Members are inclined, I think, to take a view of "Markets be damned." However, when one needs to borrow £200 billion over the course of the coming year, one needs to listen to what the markets are saying. When borrowing capacity depends on one's credit rating-
Mr. Pelling: Will the hon. Gentleman give way?
Mr. Hammond: I am going to have to do so eventually, so I shall do it now.
Mr. Pelling: As the hon. Gentleman is surely going to be in charge of these issues in May, how will he approach the issue of the triple A rating? What will he be willing to sacrifice in the Budget to defend the triple A rating? Does he think that there are some things that he will definitely want to keep, even if the rating were to be downgraded to double A plus or double A1?
Mr. Hammond:
I am grateful to the hon. Gentleman for his vote of confidence. Of course, sending a signal to the markets that restores confidence is a delicate business. We are in a party political debate, but I think that
everyone understands that it is very difficult for a Government, at this point in the cycle with the opinion polls where they are and with the Prime Minister insisting on his ridiculous dividing lines, to send reassuring signals to the market. The trick-the task for an incoming new Government-will be to reassure the markets sufficiently to finance the debt and keep interest rates low and to do the absolute minimum that is necessary to maintain interest rates at that level. That is a constant balancing act, which requires constant trimming and tacking.
Paul Farrelly: Will the hon. Gentleman give way one final time?
Mr. Hammond: No, I shall definitely make some progress.
I have talked about the markets, and it is important to say-this answers the point made by my hon. Friend the Member for Macclesfield (Sir Nicholas Winterton) earlier-that although market confidence matters for Governments, it also matters for our public services. We must not lose sight of that point. Next year, we will spend £44 billion on interest payments on the national debt. By 2013, that figure will have risen to £63.7 billion if interest rates stay as they are. But interest rates on British Government debt have already started to rise. By 2013, for every extra 1 per cent. of interest cost that we face, another £14 billion of public spending cuts will be needed to finance it. We are already spending more than the schools budget on debt interest, and by 2013 we will be spending double that budget on debt interest. Britain plc has a huge vested interest in maintaining low interest rates and in maintaining the credit rating to support them.
This all matters to ordinary people, too-to home owners, families and businesses. Many people who faced this recession fearing that they would lose their homes and their jobs have been bailed out by the Bank of England's prompt action in reducing short-term interest rates to the lowest possible level and pumping liquidity into the economy. It is low interest rates that have kept Britain going through this recession, not the Chancellor's much-vaunted fiscal stimulus.
Ms Sally Keeble (Northampton, North) (Lab): Will the hon. Gentleman give way?
Mr. Hammond: I shall in a moment, because the hon. Lady has not intervened before. However, let me make a bit more progress.
Low interest rates must sustain the economic recovery, allowing businesses to invest and to create jobs and allowing home owners to refinance mortgages at affordable costs. Anyone whose interest in the economy is focused on a horizon that stretches further than the next five months can see the huge risks that the Government are taking with Britain's future.
Ms Keeble: The hon. Gentleman has been very fond of quoting the Treasury Committee's report. Will he acknowledge that the report attributes in substantial part the fact that unemployment is lower than one would otherwise have expected and that repossession rates have been lower than would normally have been expected precisely to the Government's intervention?
Mr. Hammond: No. That is absolutely wrong-
Ms Keeble: That is what the report said.
Mr. Hammond: The facts are right, but that has happened precisely because of the intervention that has been made by the Monetary Policy Committee of the Bank of England in lowering interest rates very rapidly to unprecedentedly low levels and in keeping them there. I look forward to hearing what the Chairman of the Select Committee has to say on that in due course.
Paul Farrelly: I fully understand the hon. Gentleman's point on interest rates, and he will appreciate that point because the Conservatives have made major mistakes on interest rates-during the 1990s, for example. Does he accept that his answers to interventions from Members from all parties have been rather simplistic and old-fashioned in reflecting the monetarist versus Keynesian arguments of the past? I am sure that a respected former economist from Shell might have something to say on that very shortly.
Does the hon. Gentleman accept that the implication of what he says is that any fiscal stimulus or any measures that the Government have taken to help the economy are not only not worth while but counter-productive, and that the Conservatives would therefore not have undertaken them? Is that his position? Is it also his position that they will protect health and overseas aid-that they will have their cake and eat it-without spelling out what departmental cuts they will make under a Conservative Government?
Mr. Hammond: The hon. Gentleman will recall that it was the leader of my party who first told the public that cuts would be required-six months before the Prime Minister was finally dragged kicking and screaming to that admission. It was our party that first started to spell out specific cuts that would have to be made-
Paul Farrelly indicated dissent.
Mr. Hammond: For the hon. Gentleman to shake his head is simply disingenuous.
On the big test of the PBR-that is, the restoration of economic and fiscal credibility-it was a resounding failure. Markets were dismayed, the deputy Prime Minister was incandescent and it was not much of a crowd pleaser either. I shall spare the House the list of quotations from various newspapers on the day following the PBR. It is astonishing that the Chancellor not only failed to begin the process of cutting spending but announced a further increase in public spending and financed it by slapping an extra tax on everybody who earns more than £20,000 a year by raising employee national insurance contributions. They will now go up by a total of 1 per cent., costing someone on £30,000 an extra £200 a year and someone on average earnings an extra £60 a year.
There is a similar burden on employers at a time when we are trying to create jobs. The Institute for Fiscal Studies has made the obvious point that employee and employer NICs are the same tax. Both are incidental on wages, so anyone who earns £14,000 or more a year will be hit by Labour's double tax whammy on employer and employee NICs. The Prime Minister is determined to fight the coming election on a class war battlefield,
but it seems rather strange to start by feeding the Chancellor's spending addiction with a tax that impacts on the millions of decent, hard-working people in this country who earn £14,000, £15,000 or £20,000 a year. If we win the general election, our No. 1 priority will be to try to avoid Labour's new national insurance tax increases on the many.
Justine Greening (Putney) (Con): On that point, does my hon. Friend agree that many of the couple of hundred thousand-no doubt, young-people who are now unable to get part-time employment will be students who use part-time employment to fund themselves through university? Does he agree that the worst hit will be low-income students who have to do such work because it is the only way that they can afford to get their degree?
Mr. Hammond: I am sure that my hon. Friend is absolutely right. She has identified just one of the many groups who will be hit by this Labour tax on the many.
There were a couple of other noteworthy points in the PBR. A Labour PBR would not be complete without some spectacularly unjustified rhetorical flourish and some sleight of hand that comes out only when we analyse the small print-and we did, indeed, get both. Some hon. Members, perhaps on both sides of the House, have not recovered from their mirth at the Chancellor's assertion that he was taking these decisions from a position of strength. There was a sleight of hand: an unannounced reduction in the NHS budget, which was caused by the £446 million that the Treasury will claw back from the national insurance tax hike. That means that Britain's biggest employer faces a real-terms budget cut rather than the maintenance in real terms that the Chancellor announced.
There was also a shockingly cynical pre-election bribe. We have got used to some of those. The Chancellor said in his pre-Budget report speech that there would be above-inflation increases for benefits, including disability living allowance and child benefit, but it later transpired, when the IFS started crunching numbers, that the Government's published plans include a 1.5 per cent. real-terms cut in benefits in 2011. The Prime Minister could not bring himself to be any more honest about that cut than he has been about others. The following day, he was reported on Sky News to have denied the charge by claiming:
"Benefits will continue to go up".
If the Chief Secretary wants to put the record straight and confirm that benefits will continue to go up in 2011, I would be happy to take an intervention from him. Some of my hon. Friends might remember the council tax rebate for pensioners in the Budget of 2005, which was, surprisingly, discontinued in the Budget of 2006.
The Financial Secretary to the Treasury (Mr. Stephen Timms): I am grateful to the hon. Gentleman for giving way, and I look forward to responding to his points at more length later. On the benefit increases that he has just mentioned, what has happened is that increases have been brought forward. There will be no reduction subsequently. That is quite wrong.
Mr. Hammond: I see. So, increases have been brought forward. That means that benefits will go up this year and go down again next year, so that is not a reduction. I will remember that for the future.
This pre-Budget report is the dying gasp of a weak, divided and incompetent Government. [Hon. Members: "Here we go."] Yes, here we do go. This is a Government led by a Prime Minister who has betrayed the office he holds by blocking the tough action to deal with the deficit that the Treasury has advised is necessary. He is placing the prosperity of millions of British people in jeopardy for the sake of his wretched dividing lines, and he is gambling on their jobs to try to save his own. There will be £789 billion-worth of extra borrowing over the next six years, doubling the national debt again to nearly £1.5 trillion. There is no credible plan for dealing with the deficit, no honesty on spending and certainly no spending review. There will be a higher deficit in 2013-14, as a percentage of gross domestic product, than when Denis Healey went to the International Monetary Fund.
As Labour is too weak to take the action necessary to tackle the deficit, it has had to admit in the PBR that a Labour victory in the general election would mean, as has already been announced, an extra £7.8 billion-worth of taxes, which is £370 per family. The vast majority of that money will come from the national insurance tax increase, which will affect everyone who earns more than £14,000. It would also mean a further £30 billion-worth of tax increases, which are shown in the figures but unexplained. That is another £925 per family being hidden from view until after the election.
Despite the Government's best efforts at obfuscation, this PBR has made crystal clear the reward that the people of Britain would get if they were to re-elect this Government: higher taxes and higher interest rates. The PBR is an admission of surrender; it is the capitulation of new Labour. Labour is abandoning any pretence of being serious about restoring the public finances to health and getting Britain back on the road to prosperity. It is abandoning all those who are working, striving and saving for a better future for themselves and their children. It is retreating to its core support and turning its back on aspiration. It is failing the country in its hour of economic need. If the Prime Minister does not have the courage or the competence to deliver the change that Britain needs, let him at least do the decent thing and call an election at the earliest opportunity and let somebody else try to undo the damage that this wretched Government are doing to Britain's credibility and creditworthiness, before it is too late.
2.16 pm
John McFall (West Dunbartonshire) (Lab/Co-op): I strongly welcome the Government's decision to accept the Treasury Committee's recommendation to hold a full day's debate on the pre-Budget report. That is an important step in parliamentary scrutiny of public finances. In that respect, I thank the staff of the Treasury Committee. We took evidence from the Chancellor, his officials and experts in the last week before the Christmas recess, and work was done to write the report during the Christmas recess. The report was agreed only on Tuesday and printed on Wednesday. I thank both the staff and my colleagues on the Committee for that.
The main issue that we considered was the macro-economy, which is best described by the word "uncertainty". Uncertainty is certainly present in the economy, whether in bank lending, the future path of unemployment or even GDP growth. We noticed that that is causing some businesses to delay making important decisions that
could benefit the economy, such as investing and hiring staff. Mention has been made of the scepticism among some economists about the 2011-12 growth forecast, given the considerable degree of uncertainty. It is therefore critical that the Treasury should provide more quantitative information on the risks in relation to its forecasts, especially on economic output.
As has been mentioned, there has been some good news. Unemployment has been substantially lower than was expected for such a severe recession, and there have been fewer repossessions than expected. Business insolvencies are also far lower than would have been expected in previous recessions, and the recent manufacturing statistics show promise. Much of that is due to the Government's policy of supporting households and businesses through the recession with fiscal measures. It is obvious that the fiscal input has worked in such cases; without them, the recession would most certainly have become a depression.
However, we must be vigilant about a further weakening in the labour market. As we feared, young people in particular have been hit by the recession. In November, youth unemployment in the UK reached a record high of 943,000, or 19.8 per cent. So, I welcome the Government's measures to support youth employment, but I urge them to do more to ensure that young people who are unemployed have the opportunity to get into the labour market, because statistics show that if young people are unemployed for a considerable time, their life chances are impaired as a result.
House prices have also settled, but at a historically high loan-to-income ratio that may be unsustainable, especially if monetary policy eventually tightens. The concern over repossessions means that the Government must remove support in this area very carefully. The Committee urges them to report in this year's Budget on the housing market's sensitivity to future fluctuations in employment and interests rates.
As we have known for quite a long time, bank lending, sadly, remains uncertain. As a Committee, we do not want a return to easy credit, but neither do we want the economy to be crippled by a lack of access to credit. That is particularly important for those businesses that still cite the lack of finance as their most pressing problem. I still receive communications on a regular basis from businesses telling me about their difficulties with the banks in that respect. There is a danger, therefore, that bank lending may not support recovery in the private sector, and the Treasury has assured the Committee that it will remain vigilant in this regard.
The Government have put in place measures to improve businesses' access to finance, and that is commendable. However, I would like future measures to be aimed at encouraging non-bank sources of finance for businesses, and especially for small and medium-sized ones, so that they are not so dependent on the banking sector in the future.
Adam Posen, a recent member of the Monetary Policy Committee, appeared before the Treasury Committee and said that the UK lacked a spare tyre for when the banking sector goes into crisis-a lack that means that any future recovery will be threatened. Posen compared the UK to Japan, saying:
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