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'(4) The initial duties as set out in subsections (1) to (3) above shall have no effect if a Minister certifies at the end of each financial year that fiscal policy has been conducted over the relevant period in accordance with section [Principles] and in compliance with orders made under section [Duties for securing sound public finances]'.
The Second Deputy Chairman of Ways and Means (Sir Michael Lord): With this it will be convenient to discuss the following: amendment 9, in clause 3, page 2, line 21, leave out 'duty in section 1(1)' and insert 'principles in section [Principles]'.
Stewart Hosie: I hope to speak to the amendments and new clauses in a fashion that makes sense in the short time available. Apart from amendment 6, which I shall describe separately, this is a package of amendments and new clauses that seeks fundamentally to replace the duties that the Government sought to impose on themselves with a set of principles, according to which the deficit and then the debt would be tackled and reduced.
Amendments 9 to 14 would amend the section on progress and compliance reports to align them with the principles that I have set out in new clause 14. Amendment 15 would remove the requirement to report on the duties in clause 1(3), as I am seeking to replace those duties with principles. Likewise, amendments 16 and 17 would remove references to "duties in section 1". New clause 15 would allow duties to be imposed, but only in so far as they are framed with reference to the principles set out in new clause 14, which is the key new clause, as it lays out the principles that I believe should be adhered to, rather than having the arbitrary political dividing lines, cuts and time scales-the straitjacket to which others have referred-set out in the Bill.
However, before I address that point more fully, let me briefly describe amendment 6. It was tabled with the purpose of preventing the Government from taking any action or imposing any further duties-or damaging cuts, as we call them-if the principles of fiscal responsibility set out in new clause 14 are already being adhered to. In a sense, amendment 6 is a stand-alone amendment. Because of the way in which amendments can be debated and called in this place, it made sense, if I chose to press it to a vote, to table it in such a way that it could stand alone.
The key provision in the group, however, is new clause 14, and that is what I should like to concentrate on. It contains five principles, which, as I said on Second Reading, are closely based on the principles that the New Zealand Government introduced in their Fiscal Responsibility Act 1994. The first principle is about reducing debt to a "prudent level". It is important that we should allow the Government of the day to specify what is or is not prudent, depending on the circumstances that they face. There must be a degree of flexibility, which is a theme running through all our debates today.
"maintain a balanced budget on average over the medium to long term."
That would not prevent any Government from implementing the steps that they believed were necessary to achieve the long-term objective of having a prudent level of deficit and prudent debt levels, but it would
mean that that would happen, on average, over the medium to long term, rather than arbitrarily specifying one economic cycle or one Parliament, which is what the Bill does and what everybody in the House-and, I suspect, everybody viewing this debate from the outside-knows is simply an artificial dividing line.
"achieve and maintain a level of net worth that provides a...buffer against unforeseen future factors."
That point is vital and takes us back to our earlier debate about how the Government will use the statistics to measure their performance. They have talked about public sector net borrowing and public sector net debt, or PSNB ex and PSND ex, and state in the draft fiscal stability code that that
"excludes temporary effects of financial interventions but accounts for any permanent costs to the taxpayer."
The fourth principle calls on the Government to "manage fiscal risks prudently". That is common sense-one would not have imagined that we needed a piece of legislation to do that, but then nor would one have imagined that we needed a fiscal responsibility Bill to tell the Government that the deficit and debt levels are too high. The fifth principle is that the Government must
"pursue policies...consistent with a reasonable degree of predictability about the level and stability of tax rates".
Those principles are important, because we need to have a prudent level of debt, as well as a prudent level of deficit, which feeds the debt. However, they might vary depending on the circumstances, and the flexibility that I have described will almost certainly be required.
Kelvin Hopkins: I am interested in what the hon. Gentleman says. He talks about a prudent level of debt, but in fact our gross debt is reasonable compared with many other countries. Most countries have higher debt levels. The annual borrowing figure is relatively high in the short term, but I would suggest that we already have a prudent level of debt, and it is not going to get much higher than anything that we would regard as prudent.
Stewart Hosie: It is forecast to grow; the Minister conceded that earlier. It will go up to about 77 per cent. of GDP in 2014-15, according to the Government's figures, and according to the treaty calculation that we heard so much about earlier, it will go up to £1.7 trillion, which is about 91 or 92 per cent. of GDP. The hon. Member for Luton, North (Kelvin Hopkins) has been present at many of the debates on the Bill, and he will know that other measures of debt take those figures higher still.
The key point is that the level of debt is determined by the annual level of deficit. We have high levels of deficit, and we need to bring them down to a prudent level. We also need the flexibility, which I am about to describe, to take cognisance of circumstances so as not to make the situation worse. Many have said today and on Second Reading that, if growth rates are not as the Government expect, or if we enter another downturn
before the deficit targets have been reached-a real danger, if the Labour Government back-load the cuts and we hit another downturn with no room to manoeuvre-we might be unable even to invoke the automatic stabiliser, let alone to use the proper fiscal stimulus package that could well be necessary to prevent the situation from deteriorating further.
Kelvin Hopkins: We could have a debate about what is or is not a prudent level of debt, but we should all focus on how we bring down the deficit. The way to do that is surely to maintain public investment, particularly in job creation and the sustaining of jobs, in order to maintain tax revenues and minimise the level of benefits payments. That is the way forward, which means that a prudent level of public spending might be rather higher than most people are implying.
Stewart Hosie: The hon. Gentleman's last point is absolutely right. That is why I have been critical of the Labour Government's £800 million cut to the Scottish budget, and why the Scottish Government and the Scottish National party have argued for a further year's re-profiling of capital expenditure to protect the economic recovery and not allow it to be threatened in any way. I have argued time and again that we must have a sustained and sustainable recovery before we start the fiscal consolidation. As I have said, if people think that tackling the deficit and, subsequently, the debt will be difficult from a position of sustained economic growth-and it will be-it will be impossible from a fragile position of weak recovery, of no recovery at all or of a double-dip recession. So the hon. Gentleman's last point is absolutely right.
Another reason that I have specified principles and flexibility in my proposals is to encourage a debate. Other countries have been through this, and I have cited the New Zealand example because it was successful. It allowed flexibility but it gave that country a clear direction of travel. When it was considering all the options, New Zealand's finance and expenditure committee looked at the fixed, straitjacketed, time scale-driven approach that the UK Government are taking. The committee said:
"There is no solid theoretical justification for any particular fiscal target that can be maintained over a period of time. Judgements on the appropriate level of fiscal aggregates vary over time and depend on the economic circumstances currently prevailing."
"Other countries' experience of legislated targets suggests that there are substantial risks attached to their use. In particular, rigid adherence can seriously distort decision-making and, unless carefully handled, minor variations from target can result in significant but unnecessary damage to credibility."
That is a very real danger with this Bill. If the Chancellor or a future Chancellor were to come back at some point and say, "It didn't work, so we're just going to ignore it," their credibility would disappear completely.
"makes it difficult for fiscal policy to respond appropriately to the inevitable volatility of economic circumstances."
That reflects precisely my argument about the inability to use either the automatic stabilisers, which would be
ludicrous, or, more significantly, an additional fiscal stimulus, should the economy deteriorate and the situation worsen to the point at which a fiscal stimulus was required.
We need the flexibility for a simple reason, which is also the reason why I think that a principles-based approach is much better than the rigid approach adopted by the Government. If we faced a significant downturn and any Government were determined to stick rigidly to what they had planned, it would not simply be a question of the absence of automatic stabilisers or of a fiscal stimulus. Any adherence to the Government's short-term, fixed-time-scale approach would involve an absolute requirement for deep, savage, real-terms cash cuts there and then.
I hope that I have argued, briefly, the case for a principles-based approach that works, that takes seriously the issue of deficit and debt, and that would remove the political dividing line which, as we know, this is all about. I look forward with interest, although with no great expectation, to the Minister's response.
Ian Pearson: I am grateful to the hon. Member for Dundee, East (Stewart Hosie) for tabling the amendments, because I think it important for us to debate the framework of the Bill. As the hon. Gentleman explained, his amendments seek to replace the target-based duties in the Bill with duties to comply with broad principles very similar to those used in the New Zealand Fiscal Responsibility Act. In general, those principles relate to prudent management of the public finances. There is then the flexibility for the Treasury to impose further duties on itself, framed by reference to the principles. The amendments would also give Ministers power to disapply the targets in clause 1. Legislative principles are, of course, useful. That is why the Government already have a set of them; they are enshrined in the Finance Act 1998, and underpin the Government's fiscal policy and framework.
I believe that specific quantitative targets for deficit and debt reduction are most helpful to supporting consolidation at the present time. Those targets will deliver the Government's objectives in a manner that accords with their principles. As I explained earlier, the Government have set out their key principles in the Finance Act 1998 and the code for fiscal stability. A revised version of the code was published yesterday, and copies are available in the Library. Those key principles are stability, transparency, responsibility, efficiency and fairness. Section 155 of the Act states:
"It shall be the duty of the Treasury to prepare and lay before Parliament a code for the application of the key principles to the formulation and implementation"
Let me briefly run through each of the principles that the hon. Member for Dundee, East outlined. I think it is possible to demonstrate that the Government's framework, strengthened by the Bill, covers each of those principles.
Mr. Pelling: I am grateful to the Minister for helpfully elucidating some of those principles. One of the principles that he mentioned was that of transparency. Surely it would be particularly transparent to respond to the questions that have been posed this afternoon about the analysis that the Government must surely have conducted of the impact on economic growth of the specific targets for reduction in the rate of Government spend. Is it possible for the Minister to give us some confidence by telling us what he expects to be the impact of the first two years of the proposed rate of reduction?
Ian Pearson: I think the hon. Gentleman is in danger of returning to the debate that we have just had. As I said then, the fiscal consolidation plans that the Government have announced, involving £57 billion, have already been taken into account in the growth forecasts produced at the time of the Budget and the pre-Budget report.
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