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"A duty imposed by an order under this section must be consistent with the key principles as applied by the code for fiscal stability."
It is impossible for the objective that the hon. Member for Dundee, East (Stewart Hosie) wisely advocated-that there should be a proper report-to be achieved in line with those principles unless, under the code for fiscal stability, there is a definition of net debt. We have been over all that so we do not need to go into it again, but the internal contradictions and the combustible apparatus that the Government have created will blow up in their face. However, we need not go any further down that route for the time being, as there are other matters to be discussed.
Ian Pearson: I do not know whether it was because of something that hon. Friends of the hon. Member for South-West Hertfordshire (Mr. Gauke) knew he would say, or whether they were frightened off by something I said in the previous debate, but it will not have escaped the attention of the Committee that there were no Opposition Back-Bench Members supporting the hon. Gentleman during his contribution. I am pleased to welcome back belatedly the hon. Member for Stone (Mr. Cash), who has just made a contribution. The regular awkward squad was not present to support him.
This group of amendments and new clauses relate to two things-first, flexibility in fiscal targets, which we discussed to some extent on the previous set of amendments, and secondly, to the reports that the Treasury must produce before parts of the Bill come into force. I shall deal with those topics separately, starting with amendment 4, which is about flexibility. In essence, it would insert get-out provisions in the Bill.
I note the points that the hon. Member for Taunton (Mr. Browne) made in his speech, but I do not believe that his approach is the right one to take. It would weaken the position. I shall set out some points about flexibility, particularly in respect of future growth prospects. The fall in output following the global financial crisis has been the biggest factor in the increase in the deficit, so the return of strong and sustainable growth will be crucial in cutting the deficit over the medium term and restoring fiscal balance. Our forecast, as hon. Members know, is GDP growth of 1.25 per cent. in 2010, rising to 3.5 per cent. in 2011. As is the usual practice, revised forecasts will be produced at the time of the Budget.
In response to the hon. Member for South-West Hertfordshire, let me say that Government forecasting is a complex and detailed process. As far as I am aware, it is a process in which the Prime Minister is not involved in the slightest way. It is a very technical exercise. The UK forecasting expertise that we have in the Treasury stands comparison with independent forecasters.
The hon. Member for Taunton quoted figures relating to our forecasts in spring 2008. I know that he has spotted that things have been going on in the UK economy since spring 2008, and, like every other independent forecast, the Government's forecasts have not proved to be as accurate as we would have wished, but that is because we have had an unprecedented
financial crisis that has led to the biggest global downturn in the world economy for 60 years. Everybody's forecasts have been out, and there is nothing exceptional about that.
Mr. Pelling: I assure the Minister that this will be my only turn during this section of our proceedings. He is right to talk about the international context and the problems that the Government faced, but I was concerned to read in The Irish Times yesterday that the banks that we control through Government investment have given €6 billion of support to their Irish subsidiaries. Surely that should not be the Government's responsibility. In terms of the stresses and strains that are put on our own finances, it will impact on whether this Fiscal Responsibility Bill is required.
Ian Pearson: I must confess that I have not read The Irish Times, but the hon. Gentleman will be aware of the interconnected nature of the banking system in the global economy. We rightly took action to stabilise the banks in the United Kingdom-the Irish Government, as the hon. Gentleman is very well aware, have taken significant action to stabilise their banking system-and, indeed, to cut the deficit in Northern Ireland. The Bill proposes a set of measures that we believe are appropriate to the UK's specific circumstances.
Ian Pearson: I think that it was Francis Bacon who talked about dreams and predictions being subjects only for a chat by the fireside, so I do not want to get into the differences between the two. What I do want to say is that forecasting is not an exact science; it is particularly prone to error when there are major global shocks, as we have seen over the past couple of years, so it is not surprising that the Treasury's forecasts, along with all other forecasts, have not proved accurate.
As the Chancellor said, the Government are cautious but confident about growth, and that assessment of growth has been used when judging the appropriate pace by which to reduce the deficit. We have discussed the appropriate pace before, and the Government want to ensure that the recovery is locked in. I believe that the economy is growing as we speak, but we do not want to jeopardise it. If we take action too early, we could put in danger the recovery that I believe is taking place this year.
If growth proves stronger than we are currently forecasting, the priority should be a further reduction in structural borrowing. The Bill allows for that by setting fiscal ceilings, not floors, and it sets targets that the Government judge appropriate, because it is deliberately drafted to allow for overachievement. The ceilings are binding and designed to provide certainty that the Government will deliver their consolidation plans.
It is worth noting that, subject to making progress on reducing borrowing every year, there is flexibility in the profile over which the deficit is halved by 2013-14. As I said earlier, there is the flexibility to accommodate lower growth and the greater impact of the automatic stabilisers as long as progress is made on reducing borrowing. It is important to recognise that.
The issue is not just about economic growth. The hon. Member for Taunton pointed out that significant shocks to the public finances could come from a natural disaster or other actions, and my general point is that, in extremis, the Government would have to come back to Parliament if it were necessary to amend the targets in the Bill. However, the Bill has been designed so that, rightly, the duties in clause 1 can be changed only through new primary legislation. That is a higher hurdle than the procedure in his amendment; and our approach allows for greater parliamentary scrutiny than his amendment, which would make it a lot easier to disapply the duties.
We think it right and proper that new primary legislation should be required in order to divert from the course set out in the Bill. The difficulty and seriousness of doing that should underline the Government's commitment to meeting the Bill's targets. I agree with the hon. Member for Taunton that it is important to consider alternative circumstances and scenarios. However, his amendment would make it too easy to change the targets when it is important that they are seen by everyone to be hard targets that could be changed only by going through the full parliamentary procedures required for new primary legislation.
Amendment 5 is the first of three amendments that would require the Treasury to produce a report before commencing certain parts of the Bill. It seeks to impose on the Treasury a requirement to lay before the House a review of the accuracy of recent forecasts. I understand the comments that have been made by the hon. Member for Taunton-I have referred to some of them-and by the hon. Member for South-West Hertfordshire. I accept, of course, that it is important to account for past forecast differences and to explain them in an open and transparent way; that is why, since 2002, the Treasury has published an end-of-year fiscal report. That report is underpinned by the provisions of the code for fiscal stability, which require the Government to provide an indication of past forecast errors for public sector net borrowing. The report provides retrospective reporting and analysis of fiscal issues, and it builds on the information that is already available and published in the Budget and the pre-Budget report. It is a comprehensive analysis of forecast performance, and many fiscal commentators find it a useful source of information. In addition to the regular analysis of changes from forecast to outturn in the end-of-year fiscal report, each Budget and PBR analyses changes from forecast to forecast made at the previous fiscal event and provides a discussion of these developments. A lot of information is available out there on a regular basis. The Treasury reviews the accuracy of its forecasts, in the way that I have outlined, and its forecasts compare well with those of other forecasters such as the OECD, the International Monetary Fund and the European Council. The amendment is therefore unnecessary.
New clause 1 would require the Treasury to carry out consultation on the Bill and to lay before Parliament a summary of the responses. I do not believe that that is necessary. We have already set out and explained our consolidation plans on more than one occasion. At Budget 2009, we clearly set out fiscal plans to secure sound public finances. At that time, the fiscal judgment
was to more than halve borrowing to 5.5 per cent. of GDP in 2013-14. That judgment was confirmed in the PBR forecast, and through powers in the Bill it has been put into legislation. The path for consolidation has remained stable, and it has been public for some time. There has been significant discussion of these plans by financial commentators; and indeed, many discussions have been held in this House. A range of views have already been expressed. We have heard lengthy quotes from the hon. Member for South-West Hertfordshire and from a wide range of stakeholders.
There are already mechanisms in place that allow for the policy to be scrutinised. In particular, after each Budget and PBR the Treasury Committee takes evidence, not only from Treasury Ministers and officials but from expert witnesses. The Treasury also receives a large number of representations in advance of each PBR and Budget. Introducing a late-stage consultation process and similar requirements would risk creating unnecessary uncertainty about plans that have already been extensively discussed and are in the public domain.
Mr. Gauke: Has the Treasury received any representations telling it what a good idea the Bill is? In particular, have any financial institutions or credit rating agencies commented favourably upon it?
Ian Pearson: Germany has already introduced similar legislation, and the IMF, in a report that I believe was published in December, stated that legislating on fiscal frameworks can make good sense, so what we are doing is not exceptional. That is the point that irritates me slightly about the Opposition. They pretend that what we are doing is bizarre and unusual and that no sensible Government would do it, but the German Government have already done it and the IMF says it is sensible, so it is nothing other than good practice. It can help to ensure that there is greater market confidence that the Government will carry out credible plans for fiscal consolidation.
That is not to say that there is not more to be done in future. Clearly there is, and we will want to make further announcements in the Budget. We are engaged in a long haul, but it is right that we are clear about the direction of policy and that we set out our policies for the medium to long term. That is exactly what we are doing.
New clause 16 would require the Government to report on the effect of our consolidation plans on economic growth. I wish to make it clear that we assess the impact of our policies on economic growth as a matter of course. That is part and parcel of what we do-it is the day job of the Treasury to consider such matters. The Government have judged that the pace of consolidation required in the Bill is consistent with supporting growth in the early stages of recovery and the need to ensure sound public finances in the medium term. The hon. Member for Dundee, East (Stewart Hosie) and I happen to disagree on the pace of consolidation. He thinks we are going too fast and the official Opposition think we are going too slow. We think that we have got it right.
Obviously growth will be the most important thing in the coming period. We need our economy to grow again as fast as possible and in a way that maximises employment opportunities. If it is clear that the cuts in public spending are having an impact on economic growth, will the Treasury reconsider the matter?
Ian Pearson: The Treasury will always be concerned about the impact of public spending on growth. As part of its normal Budget and pre-Budget report process, it will need to examine the economy as a whole and public sector spending plans in order to set out credible and sustainable plans for the future. My hon. Friend is absolutely right to point out the sensitivities that exist.
I have to be absolutely blunt-we will have to make some tough choices about public expenditure in future. We have already made some tough decisions, as my hon. Friend and other Members well know. We have taken measures to introduce a fiscal consolidation of already about £57 billion, including measures that will raise tax, such as a 50p tax rate and increased national insurance contributions, and we have made efficiency savings through schemes such as the smarter Government programme and the operational efficiency programme. Those measures will make a significant difference.
My hon. Friend is right to point out the central importance of economic growth. The more we can get growth going in the UK economy again, the better the public finances will be in the longer term. Our forecast for GDP growth was set out in the pre-Budget report and shows growth accelerating to above trend rates in 2011. It takes account of the consolidation plans that we have in place and of previous Budgets and pre-Budget reports, which is why I do not believe a separate report is required.
I think that I have dealt with the amendments. Amendment 4 would make it easier for any Government to get out of their fiscal framework targets, and that is not the right approach to take. Similarly, I think that I have given some good reasons for not accepting the other amendment and new clauses, and shown that the information is already available, so the proposed reports are not needed.
Mr. Jeremy Browne: When talking about amendment 4, the Economic Secretary recognised that there were circumstances-he cited natural disaster, but the most obvious example is another recession in the next few years-whereby it would be impossible or at least extremely difficult to stay within the Bill's parameters. The Chancellor has acknowledged the same point, but there is no provision, save for getting rid of the Bill, for the necessary procedures to take account of issues of great budgetary consequence, whether natural disaster, another recession, a war and so on.
That rigidity is a failing of the Bill. I can understand the Economic Secretary's point that too much flexibility means that the Bill loses worth. In my view, it has little worth anyway. However, if targets are to be set, even
though they are based on forecasts that get harder to project with any accuracy as we go into the future, such an approach must make some provision-as the Chancellor and the Economic Secretary acknowledged-for events overtaking the predictions. That is why amendment 4 tries to include some flexibility that would not mean ripping up the Bill.
The amendment would provide for a suspension for one year, which would take effect when the Bill came into force. The Conservative spokesman was anxious about that, but the provision must take effect from day one. The amendment would provide for suspending the Bill for a year if the situation were sufficiently grave. Of course, it could be suspended for a second or subsequent years, but that could be done only by an order laid before Parliament-it could not therefore be done by Executive fiat-and a positive resolution of the House. We would have to make a conscious decision if the Chancellor came to the House and said that he or she was unable to continue following the timetable in the Bill because of factors so grave that it would not be in our national interest to abide by it.
Mr. Browne: The amendment would allow the Bill's suspension for a year. I am all in favour of not having the Bill-I voted against it on Second Reading and intend to vote against it on Third Reading. However, if we are to have it-Labour Members are in the majority and show no inclination to vote it down-we, as a responsible Opposition party, will try to make it as workable as possible.
It is perverse to have no provision between now and 2016 for exceptional events when, two years ago, the Government were unable to predict the current exceptional budget deficit. For that reason, I will press the amendment to a Division.
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