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Ian Pearson: It may have been a slip of the tongue. The figures that the hon. Gentleman has read out sound very familiar. However, he will be aware of what the Bill does to reduce the deficit as a percentage of GDP year on year, which I think is important.
As I have explained, Parliament has a key new role in holding the Government to account for their medium-term fiscal policy. We think that that is the responsible thing to do. The Conservatives seem to imagine that it is something that only the United Kingdom is doing, and that no one else has even dreamt of doing it because it is such a strange idea, but a number of other countries have introduced legislative fiscal targets. For instance, in June 2009 a new debt break was enshrined in the German constitution-and the Germans are not known for their gesture politics-to underpin fiscal consolidation over the coming years. That rule will become effective in 2011, and will require a steady reduction in the structural deficit from 2011 until 2016. According to the International Monetary Fund, moves to strengthen medium-term frameworks, including fiscal responsibility laws, should help to support the fiscal adjustment that will be necessary in most economies following the financial crisis.
Mr. Fallon: I am most grateful to the Minister. He has been generous in giving way. May I return to the subject of clause 1? If the initial duty is needed so urgently, why is it not enforceable-or how is it enforceable?
Ian Pearson: Let me explain what we are trying to achieve through the clause, and through the rest of the Bill, before I deal with the amendments. The hon. Gentleman will be aware of his party's views on the reinforcement of sanctions. I believe that the best way in which to hold Governments to account for their action in this regard is through Parliament, and that is what we are seeking to achieve. Trying to fine a Chancellor or a Treasury team does not strike me as sensible, and it has not been proposed by other legislatures that have adopted a similar approach.
I want to address the points about pace and flexibility before I give way again. First, however, I want to respond to some of the comments made by the hon. Member for Stone (Mr. Cash)-and, indeed, by the hon. Member for Braintree (Mr. Newmark)-about Government accounting. I shall not go into a huge amount of detail, as the issue is not directly relevant to the clause. As is well known, however, following our moves towards a system of resource accounting and
budgeting, we have been operating in accordance with new international financial reporting standards. We also report under the Maastricht treaty-the hon. Member for Stone does not like the treaty, but we have a legal responsibility to report under it-using the ESA95 rules. There are differences between those rules and international financial reporting standards. Rather than trying to put the two together and say that there can be only one right set of accounts, we should ensure that there is proper transparency and that information is available, so that those who examine these matters closely can understand what is going on. The hon. Member for Stone referred to public sector net borrowing. It is defined in the code for fiscal stability. A revised code was published yesterday, a copy of which is in the Library of the House.
Finally, let me deal with the question of whether financial interventions should be included in the Government's accounts. I ask the Committee to consider for a moment whether it is realistic to include all the assets and liabilities of Royal Bank of Scotland in the Government's accounts, perhaps on a line-by-line basis, or whether it is better to treat them as a separate entity. When I was running an investment company with investments in a range of companies, I found that, if one owned more than 50 per cent. of the shares, line-by-line consolidation produced a very distorting picture of the overall financial position of the organisation.
I believe that clarity and transparency are important, and we in the Government are very clear about what we are doing. We expect the financial interventions that we have made to be temporary. We have no desire to own Royal Bank of Scotland for a long period; we want, over a sensible period and when it means value for the taxpayer, to divest ourselves of our stake in it. It simply does not make sense to take some of the actions that Opposition Members have suggested in terms of accounting treatment, and the same applies to pensions. My hon. Friend the Member for South Derbyshire (Mr. Todd) made several good points in rebutting some of the arguments advanced by the hon. Member for Braintree.
We can probably argue about different definitions of national accounts until the cows come home. What is important is proper transparency, enabling those who examine financial accounts under different accounting conventions to understand what is going on. These matters can be quite confusing for the public. However, it is important for us to meet our legal commitments under the Maastricht treaty by reporting under the ESA95 rules, and also important for us to apply international financial reporting standards.
Does the Minister accept that the Government, like a rake, have taken out the biggest ever mortgage and declared that, then taken out a second mortgage which they have not declared, and then taken out lots of hire-purchase agreements which they have also not declared? They have maxed out on a dozen credit cards which they should not have had and which they have not declared, and now they want to go off to
the pawnbroker. We need an honest statement, and then we need a cut in the amount of the deficit, not a cut in the rate of increase. We need to get the deficit down.
Ian Pearson: The right hon. Gentleman is merely engaging in political rhetoric. It is clear that different accounts were prepared on different bases, and also that information is available and is publicly disclosed. The right hon. Gentleman knows that that information is available. He is trying to use it for his party's political ends, and I cannot blame him for wanting to do that. I am simply making the point that those who understand accounting principles and the way in which these things operate know very well the differences, understand perfectly what is going on here and find no difficulty with it.
Mr. Newmark: I beg to differ. I think that the Minister, whom I know to be an intelligent and thoughtful individual, will have gone to the Corporate Project Solutions website at www.cps.co.uk and seen three excellent pamphlets written by yours truly-one called "Simply Red", one "The Price of Irresponsibility" and the other "The Hidden Debt Bombshell". Through these, we have called for greater transparency. The Minister mentioned the word "transparency", but he knows as well as I do that generally accepted accounting principles today say that if one acquires any other company or bank with a more than 50 per cent. stake, one has to consolidate the balance sheet. That means that the Government must be much more honest about the debt they acquire when they acquire those banks. In addition, there is the rule that the pension liabilities of companies have to be shown on balance sheet; the Government should do likewise.
Ian Pearson: The hon. Gentleman heard what I said when I recounted my experiences before I entered the House. I do not think that including all the financial interventions on balance sheet would give a particularly helpful picture.
Mr. Pelling: I am grateful to the Minister and I shall not make a party political point. In reality, the Government have taken on the bad debt of the banks; there has been a socialisation of bad debt. Is it not therefore dangerous to have this straitjacket when the Bank for International Settlements is putting on pressure to increase capital reserves, leading to less lending by banks? When we have to deal with a huge deleveraging of the economy, is it not also dangerous to straitjacket ourselves in this way, which risks sending the economy down into another recession?
Ian Pearson: I am not sure whether the hon. Gentleman is arguing that we should not have intervened as we did with the Royal Bank of Scotland or the Lloyds Banking Group- [Interruption.] He says that we should have intervened. Well, those actions have consequences: we have major shareholdings in RBS and Lloyds Banking Group so we have to determine the appropriate accounting treatment. There is obviously disagreement among Conservative Members who I think really want to make political mischief of these issues rather than understand the fact that they are accounted for in a number of different ways according to different accounting conventions.
Ian Pearson: I do not want to go over the history of the Royal Bank of Scotland, but I do not believe that the hon. Gentleman's suggestion is right; we are not making the mistakes that RBS made, but have taken the action that was necessary to ensure financial stability in the UK economy and to help protect jobs, consumers and savers. I believe that this was fundamentally the right thing to do.
On the speed of consolidation, it is a difficult assessment to make and there is a clear difference of political opinion between us. Our judgment, as the Chancellor made clear, is that taking steps to reduce the deficit while securing group growth-that is what the clause requires-is the right approach to take. In turn, growth will make it easier to lower the deficit and pay back debt, which is also required by the clause. Our judgment is that tightening fiscal policy too quickly in 2010-11 would present risks, and it is not just the Government who think that. The Governor of the Bank of England has said:
"It is certainly true that if you eliminate the debt too aggressively, it will have an adverse consequence."
"Unwinding the stimulus too soon runs a real risk of derailing the recovery, with potentially significant implications for growth and employment."
Kelvin Hopkins: I am pleased that my hon. Friend has pointed out the dangers of dealing with debt too rigorously. Does he accept that the best way to reduce the debt, in the medium to long term in particular, would be to ensure that public expenditure is not savagely cut and that jobs are maintained so that we have tax revenues coming in and minimal benefits being paid out? That is the way to get the deficit down over the longer term-by maintaining employment, which means sustaining public expenditure in the short term.
Ian Pearson: I believe that growth is the best way to cut debt, which is why we should not jeopardise the recovery. We need to ensure that the public finances are on a sustainable footing and that is what we are trying to achieve. We are forecasting GDP growth to accelerate, predicting it will be 1.25 per cent. in 2010. I simply note that the latest average prediction of independent forecasters is that it will be about 1.4 per cent. and that their estimates are creeping up. We predict that it will be 3.5 per cent. in 2011 and 2012. In those circumstances, there is greater space for the Monetary Policy Committee to use interest rates to support demand as well.
Ian Pearson: I have given way to all the hon. Members who are standing up. Given that the next group of amendments covers pretty much the same ground, they will have opportunities to make speeches when we discuss those provisions, and I shall therefore make progress.
I do not want the Committee to take the view that what the Government are proposing is anything other than tough; it is probably the toughest action of any G7 country. The average annual reduction in the Italian budget deficit over the next four years is 0.1 per cent. The corresponding percentages are 0.4 for Japan, 0.9 for France, 1 for Canada and 1.2 for Germany and America, whereas the UK's figure is 1.9 per cent. That shows the significant consolidation that will be required.
Ms Clark: My hon. Friend must accept that many of us feel that this approach is simply far too radical a response in cutting the deficit; cuts of about 16 or 17 per cent. on essential services-that is what the Financial Times has reported-will have a massive impact on the British people. Surely this is not necessary. We need to examine other ways to deal with this deficit and pay it off over a long period.
Ian Pearson: I understand what my hon. Friend says. As a Government, we have to make a judgment as to what is in the country's best interests overall, and what we are proposing will clearly be extremely painful. I think it will be tougher to deliver than almost all of us in this House really understand. She is right to point out the difficult circumstances that it could create in many communities in this country. The Government must be extremely mindful of that when calibrating policy and taking decisions. As I said, growth is what is important. The more we can secure growth, the more we will be able to achieve the reductions that are required to meet the targets in this Bill. She is right to point out that this is very difficult, but I do not think that extending things over a longer period of time would be in the country's best interests. We have to strike what we think is the right balance in taking action to ensure that we have sustainable public finances over the medium term-that gives the markets confidence to want to continue to invest in the UK economy. Our judgment is that the pace that we are proposing is appropriate and right for the circumstances, but we cannot pretend that it will be anything other than very difficult indeed.
Kelvin Hopkins: With respect, may I say to my hon. Friend that what he is suggesting is contradictory? If, as he is suggesting, this tightening of belts and cutting is going to be painful, that will have the opposite effect to promoting growth, because it will reinforce the recessionary tendencies in the economy. It is having a more relaxed approach to public expenditure in the short term that will help to promote growth and keep employment high, and that will reduce benefits payments and increase tax revenues. That will solve the problem.
Ian Pearson: Again, I understand my hon. Friend's point. However, we still need to take action to ensure that we have fiscal consolidation in this country. The more that we can have growth, the better it will be as it will give us the opportunity to reduce the deficit still further. He is right to say that if we see public sector job reductions as a result of the measure, that will have consequences in communities and for our economic output. We need to consider all that in the round in making our decisions about how best to act, and I want to reassure my hon. Friend that it is certainly the Government's intention that we should do so.
Let me move on briefly to address the issue of flexibility. A number of hon. Members sought to suggest that there was no flexibility in the Government's consolidation plans. That is not correct. In the event of a significant and sustained economic shock on the scale of that which we have seen over the past 18 months to two years, we would quite obviously want to consider what path of fiscal policy would be appropriate for the economy. Subject to progress being made in reducing borrowing every year, there is flexibility on the profile for halving the deficit by 2013-14. So, for example, if growth is lower and the impact of the automatic stabilisers is greater, there is the flexibility to accommodate that so long as there is progress on reducing borrowing.
On the amendments, I first want to agree that the structural deficit is an important fiscal aggregate, so the hon. Member for South-West Hertfordshire (Mr. Gauke) has a point. One of the key ambitions of the Bill is to provide certainty, as he knows, about the future path of fiscal policy, and targeting a structural measure of the deficit when there is such uncertainty about the position of the economy and the size of the output gap runs counter to that ambition. We are trying to target overall borrowing, which is a directly observable national statistic that is measured independently by the Office for National Statistics. Not even the hon. Member for Stone disputes that.
Furthermore, amendment 2 would reduce the extent of the plans to tackle the deficit. The hon. Member for South-West Hertfordshire needs to think very carefully about pressing the amendment to a vote. The pre-Budget report forecasts-on the basis of the forecast for overall borrowing falling to 5.5 per cent. of GDP in 2013-14, which is the Government's target-that cyclically adjusted borrowing will fall by almost two thirds, far more than the Opposition's amendment requires. Opposition Members are saying that they want to move faster, but amendment 2 would not do that. That is not to say that I would advise my hon. Friends to support it, either-I do not think that that is the right course of action.
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