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The retail prices index was negative in September. That could have meant a reduction, or no increase, in benefits, because many benefits and tax credits are linked to September's RPI. We responded as a Government, however, and my right hon. Friend the Chancellor
announced that the basic state pension will rise by 2.5 per cent. in April. Other benefits, such as child benefit and some disability benefits, will rise by 1.5 per cent., giving real-terms increases to those who need them most.
Mr. David Gauke (South-West Hertfordshire) (Con): Will the Minister confirm to the House that the real-terms increases in pensions will be clawed back from the following year's pension settlement?
Ian Pearson: I do not think that the situation is as the hon. Gentleman characterises it. As he will be aware, we make decisions at fiscal events. We have a Budget coming up in about six weeks' time, when we will make the Government's position clear.
Mr. Gauke: Will the Minister give way on that point?
Ian Pearson: Let me make some progress.
To ensure that we will not have a repeat of the financial crisis, the Government have, as the House is well aware, introduced wide-ranging reforms to the financial sector. As well as strengthening financial regulation, we will do all we can to ensure that banks pay due regard to risk and that remuneration policies are focused on the long-term health of the relevant institution. Again, we have already debated a number of these issues.
We have put in place support to secure the recovery, but we have also taken action to meet the other challenge-the direction and long-term growth of the economy. The recession has had a marked impact on the labour market, but unemployment has risen by far less than was expected by independent forecasters. Indeed, the latest Office for National Statistics figures show that International Labour Organisation unemployment figures have fallen for the first time since 2008. In addition, the claimant count has fallen for the second consecutive month and by more than market expectations. None the less, certain groups, such as young people, have been particularly hard hit. That is why we announced in the PBR that every 18 to 24-year-old will be given work or training when they have been out of the labour market for six, rather than 12, months. I believe that investing in the skills of young people will not only prevent a lost generation of youth unemployment, which we have seen in previous recessions, but will promote our long-term growth as an economy.
Mr. Jeremy Browne (Taunton) (LD): I accept, as many reasonable-minded people would, that Government intervention can play a part in preventing unemployment from becoming worse than it otherwise would be. Does the Minister accept, however, that changing labour markets-the very flexible labour markets that he has just mentioned-also have a part to play? It might well be that 20 years ago, a fifth of a company's work force would have been sacked or would have resigned in such a situation, whereas now all of that work force might go from working a five-day week to working a four-day week. Under such an arrangement, nobody would lose their job, but the number of hours worked by that company would fall by 20 per cent.
The hon. Gentleman is right to point to some of the benefits of having flexibility in the labour market. Indeed, there is already some evidence that what we have seen during this recession is not only far
greater flexibility on the part of employers, but far greater flexibility on the part of employees than has been the case in previous recessions. Some companies have decided that they want to keep people on but that they will have to pay them less, and their work forces have agreed to that, and some companies have decided that some of their staff need to go on to short-time working. That flexible response has been to the benefit of many companies and the people who work in them.
Ian Pearson: I see that the hon. Gentleman agrees. That flexibility is one of the great strengths of our actions. In the past 12 years, Labour Governments have also introduced changes to help people back into work, and those measures are another great strength at the current time. As a result of active Government support via labour market support to the unemployed, month after month, hundreds of thousands of people have found new job opportunities.
The Government have also announced investment in key industries of the future, such as digital, bio and low-carbon technologies, in order to build a strong and more diverse economy and to help to drive long-term sustainable growth. In the PBR, we announced measures to support innovation and enterprise, such as introducing a patent box-a reduced rate of corporation tax on income that will be derived from patents from April 2013-to strengthen the incentives to invest in innovative industries and to ensure that the UK remains an attractive location for such innovation. Further, an additional £200 million-worth of funding for the strategic investment fund will support advanced, innovative industrial projects of strategic importance.
It is vital to our future growth that investment is made in our infrastructure. We announced in the PBR further plans for rail electrification between Liverpool, Manchester and Preston, and we want to continue to ensure that our work force are equipped with the right skills for the future by giving financial support to up to 10,000 undergraduates from low-income backgrounds to take up short internships in industry, business and the professions.
Mr. Vara: Given the Minister's optimistic tone, is he confident that the anaemic growth that we had in the last quarter will be bettered in this quarter?
Ian Pearson: I am not going to speculate on that. The Treasury's policy has always been to make financial projections at our major fiscal events-the Budget and the pre-Budget report-and we will do so shortly when the Chancellor announces the Budget. When the hon. Gentleman looks at the comments of independent commentators who provide forecasts, he will see that there has been a gradual increase in optimism about how the UK economy is likely to perform in 2010. That is welcome. As the Chancellor has said on many occasions, we are not out of the woods yet. That is why we have taken a deliberate policy decision to continue to support companies through what remain difficult economic times-by extending the enterprise finance guarantee, for example, as well as the time to pay arrangements that I have mentioned. It is clear that we must not only provide support for companies in the downturn, but that we must take measures to rebuild our fiscal strength when recovery is firmly established. I shall go on to say something about that.
Sound public finances are vital to our investment in the future and to ensuring that there are no further ramifications due to a crisis down the line. It is imperative that we consolidate in a way that supports growth, because, in turn, growth will make it easier to lower the deficit and to pay down debt. The Fiscal Responsibility Bill that we have already discussed in the House will enshrine in legislation the Government's plans to halve public sector borrowing as a share of gross domestic product by 2013-14. Other countries have taken similar approaches in terms of legislating, and some others are considering doing so. Indeed, the IMF regards giving fiscal consolidation a legislative backing to be one option that is worth pursuing.
To maintain our fiscal sustainability, the PBR has already announced tax rises for those with the greatest ability to pay, while ensuring that those on the lowest incomes are protected. The restriction of pensions tax relief announced in the Budget will apply only to those with gross incomes of £150,000 and over, where gross income includes all pension contributions. There will be an additional 0.5 per cent. increase in employee, employer and self-employed national insurance contributions for those earning over £20,000, but we also recognise that slower spending growth will be essential if we are to reduce borrowing.
We will work to eliminate waste, and we will cut some budgets and stop some programmes altogether. It is important to recognise that the PBR has already announced that £12 billion will be saved from greater efficiency, £5 billion from scaling back or cutting lower priorities, and £4.5 billion from reducing the cost of public sector pay and pensions.
We must ensure investment in our future, but at the same time we must protect our most important front-line services, the ones that people rely on-such as our schools, health care and the police. In the past, cutting public spending has led to long-term damage, and we do not want that to be repeated. That is clearly taken into account in the PBR, and the decisions that we have taken.
Mr. David Drew (Stroud) (Lab/Co-op): One of the putative benefits of the EU, if there are any, is that it could take joint action against tax havens. What action are the British Government proposing to take with their EU partners to make sure that everyone is paying the right level of tax?
Ian Pearson: The EU has many benefits. I shall not list them, but having a home market of 500 million people is a significant one. Also, the level of the pound against the euro means that UK businesses have strong opportunities to export into the home market of other member states.
My hon. Friend the Member for Stroud (Mr. Drew) asked specifically about tax havens, and he will be aware that a lot of work has been going on, in the EU and at G20 level, to ensure greater tax transparency. A number of initiatives have been launched in this area: he is right to highlight the issue, as it has been and will remain on the global, and not just the European, agenda.
In the EU, we are taking the appropriate co-ordinated action to reduce deficits, in line with the recovery of the European economy. Twenty member states are reducing their deficits broadly in line with recommendations
from the Council under the excessive deficit procedure. The recommendations adopted by the ECOFIN Council in December 2009 provide a co-ordinated path towards sustainable public finances. They utilise the flexibility provided for under the stability and growth pact, while rightly taking national circumstances into account.
These have been testing times, and people all around the world have been affected. All economies have been hit, to a greater or lesser extent, and the actions taken by this Government have helped our economy to start to emerge from the crisis.
Now is not the time to engage in rash cuts, as the Opposition propose. A judgment has to be made as to when to make the fiscal consolidation that will be needed to ensure that we have sustainable public finances. There will be more to be done, not just now but over the next few years.
As I have said on previous occasions, that will involve some pretty painful decisions on public spending, but it is right that the Government face those decisions. The PBR sets out actions to secure the recovery and build our future, and also to ensure that we have the means to do so by delivering controlled public finances.
That is the programme set out in the 2009 PBR. With the approval of the House, it is the basis on which we will send updated information to the European Commission. I look forward to the contributions that hon. Members will make to this debate, and I commend the motion to the House.
Mr. David Gauke (South-West Hertfordshire) (Con): I beg to move amendment (a), at end add:
'but regrets that the assessment does not demonstrate that the Government has a credible plan to deal with the United Kingdom's deficit.'.
As the Minister said, the report that we are debating is published in accordance with our obligations under the European Communities (Amendment) Act 1993 to inform the European Commission of our economic and budgetary position. I want to begin by making a point that appears to be traditional at the commencement of these debates-that the Government have been reluctant to publish the report and make it available to hon. Members.
The report should have been published before the end of December, but in fact was published only on 28 January. However, it is written as though it had been published last year, referring as it does to the VAT reduction that "will" expire on 31 December 2009. I hope that the Minister will explain why there was a delay, and why that detail was not picked up.
It was also very difficult to locate the report. I obtained a copy last week, but it was not available in the Vote Office yesterday. This is a point that has been made many times before: my hon. Friend the Member for Hammersmith and Fulham (Mr. Hands) made it in the equivalent debate last year, and I did so the year before. It may not be entirely surprising that the Government do not want to make the report widely available, given the state of the public finances, but it is a pity and I hope that the problem will be rectified in future.
Before I turn to the contents of the Treasury's report and the state of the UK's finances, I want to touch briefly on the issue of Greece, which was raised by my hon. Friend the Member for Stone (Mr. Cash) earlier this afternoon. It was also raised by my hon. Friend the Member for Harwich (Mr. Carswell) and the hon. Member for Birmingham, Edgbaston (Ms Stuart) in the course of Prime Minister's questions.
This report is part of the multilateral surveillance procedure under articles 121 and 126 of the European Union treaty. One suspects that multilateral surveillance is somewhat to the fore in the Treasury's mind at the moment.
The Government will be aware of the widespread speculation about the fiscal situation of some members of the eurozone, and of Greece in particular. Will the Minister tell the House what the Government's opinion is about providing external assistance for Greece, if that becomes necessary? Does he consider that to be a matter for eurozone countries alone, or is it an international matter for members of the IMF and the G20? Does he think that there is any role for the EU as a whole, including non-eurozone members? If UK taxpayers are to be involved in any way in bailing out another country, will he give an undertaking that this House will be kept informed?
Mr. Cash: I am sure that my hon. Friend is aware that a brand new Commission for the whole of the EU has been established today. Does he have any information about whether the requirements under the section of the Act that we are debating have been referred to the previous Commission, or the present one?
Mr. Gauke: My hon. Friend makes an interesting point. I am not in a position to answer him, but perhaps the Minister will have an opportunity to do so later.
I turn now to the British situation, as set out in the report. We are in a very difficult position as a country. In its recent "Green Budget" document, the Institute for Fiscal Studies said:
"The recent performance of the UK economy has been rather alarming."
The UK has suffered the largest fall in activity, relative to its pre-crisis trend, of any G7 economy. It is the slowest of the G20 economies to emerge from recession, and it is borrowing more than at any time in our peacetime history. We are borrowing more than any major economy. Our credit rating is under threat. In those circumstances, the credibility of the plans to get us out of this mess is crucial.
It is worth examining the comments made by those who have held positions of responsibility during the Government's term of office and their views on the credibility of the Government's position. Howard Davies, the former head of the Financial Services Authority, stated:
"The major risk is the loss of confidence in the government's ability to get the public finances back under control."
Sir John Gieve, appointed as deputy governor of the Bank of England, stated that the Government's plan
"will be hard to sustain politically and eliminating the structural deficit more quickly in 2011 and 2012 looks a better course."
Richard Lambert, a former member of the Monetary Policy Committee, now director general of the CBI, stated:
"History tells us that these are really difficult nettles to grasp but if you grasp them in a clear and bold way, then the pain lasts for a shorter period than if you just limply grab hold of them... Our strong instincts are that the risks of going too soon are less than the risks of waiting too long... Two full parliaments of chancellors being responsible just seems too much to expect."
On the fiscal plan set out in the pre-Budget report, Mervyn King, the Governor of the Bank of England, told the Treasury Committee that
"the longer there is not a credible plan that sets out what actions will be taken the more"
a downgrade to the credit rating
"is a risk. I do not believe there is any impediment to the UK putting in place a credible plan which will convince financial markets."
I think it would be fair to interpret those remarks as suggesting that no credible plan was in place. To confirm that impression, on 19 January the Governor of the Bank of England stated in a speech in Exeter that the spring Budget provides an opportunity to
"demonstrate a strong commitment to fiscal sustainability in the longer term",
again suggesting that that commitment had not previously been demonstrated.
Sir Steve Robson, former second permanent secretary to the Treasury under the present Prime Minister when he was Chancellor of the Exchequer, said of the pre-Budget report:
"I saw three tests. First, did it enhance immediate prospects for economic recovery-which is mainly about the availability of credit to business. Second, did it set out a credible path to fiscal and monetary balance. Third, did it enhance the economy's long term growth prospects. It did a little on the first and was a bad miss on the second and third."
Sir Steve Robson went on to state:
"If the Government lacks credibility on fiscal matters, there can be severe consequences-as Greece has just found out."
We have heard warnings about the credit rating agencies from the likes of the Governor of the Bank of England and former senior civil servants. Today Brian Coulton, head of sovereign rating at Fitch, stated:
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