"the overall scale of the problem is even worse than we thought"?
Does not the report say that borrowing is lower not just this year, for which the OBR forecasts borrowing at £8 billion lower than I did, but in each and every one of the next five years? Borrowing is down by more than £30 billion in total. Can the Chancellor confirm whether he and the Prime Minister knew what the OBR's borrowing forecasts were prior to the Prime Minister making his speech last Monday? If he did not, he was just plain wrong; if he did, he owes us an apology. At the election, the Chancellor and the Prime Minister said that they had no need to raise VAT. Now that borrowing is in fact lower than they thought, is that still their policy?
Turning to growth, the OBR has confirmed my forecast for this year, but it has set out a lower growth forecast for future years-just 2.6% next year. This change is driven partly by what Sir Alan has today labelled "recent events", particularly events in Europe, where growth is sluggish at best. Is it not the case that what is happening in Europe, our largest export market, will impact on growth here in the UK? Does not that reinforce the need to put in place measures to secure growth here and in other countries in Europe? Does not the Chancellor agree that the impact of action taken across Europe to reduce deficits runs the risk of depressing demand and setting back the recovery unless accompanied by measures to stimulate growth? Does he not accept that growth is
essential to cut borrowing? Japan provides an example of what happens if one gets this wrong-recovery is choked off, growth becomes stagnant, and debt rises.
It was because the private sector was weak as the global crisis hit that the public sector stepped in to support our economy. Sir Alan Budd and his colleagues understand that point, because Sir Alan says in his report, at paragraph 3.20:
"Private sector demand contracted sharply in the recession, while government spending contributed positively to GDP growth."
"For this year"-
"it is government consumption and inventory accumulation that make the largest contribution to growth."
In other words, without it there would not have been growth this year. The risk of taking large sums out of the economy is that the recovery will be derailed. Is it not also the case that confidence is being affected by the scaremongering that we see from the Prime Minister and the Chancellor? The Chancellor will have noticed the survey of business confidence this morning showing a reduction in business confidence. That shows that what he is saying is, unfortunately, having a very real impact on the economy.
"forecasts of cyclically-adjusted aggregates are subject to particular uncertainty."
In other words, there is a great deal of uncertainty about what the structural deficit is. But if the Chancellor does take the estimate of structural borrowing from today's forecasts as the barometer of success, he needs to be clear with people what that means. Will he confirm that it is still his policy to remove the entire structural deficit over this Parliament? If so, will he confirm that, on the numbers published today, he would need to find £118 billion by 2014-15? That is £118 billion of spending cuts, tax rises or both, which will affect millions of people and businesses in this country.
Since the Budget, there has been slightly faster growth at the beginning of this year. There is lower borrowing as tax receipts have come in higher than previously thought. Far from providing political cover for the Conservatives and Liberal Democrats for cuts and tax rises next week, does not the report remind us that growth is still fragile, the recovery is not yet secured and growth is essential, not only to cut borrowing but to secure jobs and a lasting recovery?
Let me deal with the right hon. Gentleman's points. First, I apologise that he received the statement only 25 minutes before it was delivered. I was following the normal practice that had been established in the Chancellor's private office. Despite having been on the wrong end of that for three years, I note his complaints about the very first statement, and I will look into that.
Let me answer directly the right hon. Gentleman's question, towards the end of his remarks, about the
fiscal mandate. It will be set in the Budget. There is no credible fiscal mandate in place in Britain because we have inherited from the previous Government a commitment, which most of the rest of world does not believe is a serious and credible effort to reduce the deficit. The fiscal rules never amounted to very much either when the crisis came, but we will put in place new fiscal architecture.
The right hon. Gentleman talks about borrowing and economic growth. I remind him that the whole point about the structural deficit is that it is not the part of the deficit that reduces as growth returns. According to the OBR report, it is increasing above the estimates that were given in the March Budget. That is striking given that the out-turn for borrowing last year was, indeed, lower than the Chancellor forecast just three or four weeks, as far as I can tell, before he received the out-turn numbers. He gave a figure in the Budget and out-turn numbers were lower. It is therefore all the more striking that the structural deficit-the crucial part of the numbers: the black hole in the public finances-is higher by a significant amount than he forecast. Of course, we are all concerned about the situation in the eurozone, but 28 out of 30 independent bodies that look at the British economy did not believe that the figures that he gave in the March Budget were accurate. Indeed, we pointed that out at the time. [Hon. Members: "You haven't answered a single question."] I did not think that the right hon. Gentleman asked many questions; I have answered both of them.
The right hon. Gentleman makes a point about spending cuts and so on. He pencilled in £44 billion of spending cuts. Until a single member of the Opposition provides us with a clue as to how they would even have begun to achieve those £44 billion of cuts, they will not be taken seriously. The leadership contenders are busily taking their party leftwards into the margins of British politics. They are not addressing the central issue about their fiscal plans, which were not credible. Where would the spending cuts have come from? We are prepared to answer that question. Until they do, they are not contenders for being taken seriously in British politics.
Let me remind the right hon. Gentleman of what one of his Ministers, Paul Myners, said. This was the man whom he appointed-or at least agreed to have appointed-to the Treasury, and the man who sat with him in all those meetings over the years. He said:
"There is nothing progressive about a Government who consistently spend more than they can raise in taxation, and certainly nothing progressive that endows generations to come with the liabilities incurred by the current generation."-[ Official Report, House of Lords, 8 June 2010; Vol. 719, c. 625.]
The right hon. Gentleman says, "Apologise". He is the person who should apologise. More to the point, the right hon. Member for Kirkcaldy and Cowdenbeath (Mr Brown), wherever he is, should come here and apologise for the complete economic mess in which he left the country.
Margot James (Stourbridge) (Con): May I congratulate my right hon. Friend on this unprecedented increase in transparency and openness on economic forecasting? Is it not the case that the increase in the structural deficit as a percentage of gross domestic product means that a robust deficit reduction plan is needed now more than ever?
Mr Michael Meacher (Oldham West and Royton) (Lab): If the Chancellor accepts Sir Alan Budd's estimate that around three quarters of the current deficit-about £120 billion-is structural, and if he intends to eradicate that entirely during this Parliament through public spending cuts and tax increases, where does he expect the growth to come from to prevent unemployment from increasing to 3 million and staying there for the next five years?
Mr Osborne: The fiscal mandate will be set out in the Budget. I am disappointed that the right hon. Gentleman was not elected as Chair of the Public Accounts Committee, but perhaps from his current position he will begin to propose cuts-as I said, cuts were even pencilled in to the previous Government's plans-before concerning himself with our proposals.
Mr Julian Brazier (Canterbury) (Con): While sharing my right hon. Friend's dismay at the inheritance he has acquired-the picture is even worse than it once appeared-may I urge him to accelerate the plans that the Conservatives set out at election time to encourage lending by the banks, especially to small businesses, because the money supply figures are at an almost unprecedented low, and there is a real danger that we could see a further downturn?
Stewart Hosie (Dundee East) (SNP): I thank the Chancellor for his statement and the early advance sight of it. That is different from what happened under the previous Government, when such statements tended to come in very late indeed.
There is no doubt that the OBR forecasts show that the previous growth forecasts were too high and the deficit forecast, which is now £155 billion, was also too high. Will the Chancellor reflect that that is not simply a green light to tax and cut more, but that it demonstrates the imperative for sustained and sustainable above-trend growth, which is the real solution to tackling the structural deficit?
My point to the hon. Gentleman is that the threat to the United Kingdom at the moment is, in part, our very large budget deficit. Indeed, the Governor of the Bank of England identified it as the single greatest economic challenge that we face. Whether we are Scots or English, and wherever we live in the UK, we must deal with that deficit. I would welcome engagement with the Scottish Government in moving forward and identifying sensible savings, so that we can reduce the budget deficit and give our country and future generations a bright future.
According to the House of Commons Library, the Treasury has, in the past 10 years, been at least as good at accurately forecasting growth as independent forecasters. The background work on the new projections has actually been done by a secretariat provided by the Treasury, and according to Sir Alan, the changes are
"within the normal range of uncertainty".
Mr Osborne: I am always against unnecessary point scoring. I say this to my hon. Friend: I think the new process is a big departure in how Budgets are put together. It is worth reflecting for a moment on what I did in this statement. I have read out what would normally be the first part of the Budget. Everyone now knows the forecasts and the assumptions behind them. He says that the forecasts were produced with the help of Treasury people, but Sir Alan Budd is an enormously respected independent person, and I do not think his independence can be questioned. We now have a set of accurate national accounts. Indeed, when the OBR is on a statutory footing, I want it to do more work on the true state of the national accounts, with regard to private finance initiative liabilities and the like. The big difference is that I must now fit the Budget to the figures, rather than fit the figures to the Budget.
Page 11 of the OBR forecast has an illuminating table about the contribution that various elements of spending-in this case, Government investment-make to GDP growth. For 2011, it shows a potential minus 19% effect in one year. Will the Chancellor confirm that his Budget and the spending review will not worsen that contribution to GDP, and will the OBR report on an analysis of the Budget and the spending review in terms of those components shortly after they take place?
Mr Osborne: I will set out measures in the Budget, and the hon. Gentleman will have to wait for that. He highlights the point that I was making-that the forecast is based on the plans inherited from the previous Government. It identifies huge spending cuts, but they never told us where those cuts would fall. I am sure that he wants a future in the Labour party, so perhaps he can take a lead over some of the leadership contenders and tell us what those cuts would be.
Dr Thérèse Coffey (Suffolk Coastal) (Con): Will my right hon. Friend support the work of the OBR in assessing offsheet balance liabilities, including such things as PFI and unfunded public sector pension liabilities? I hope that he will recognise that it is important that we put all the debts that Labour has generated over the years on the balance sheet once and for all so we know how we can pay for them.
My hon. Friend is right. On page 58 of the report, Sir Alan and the fellow members of his committee set out some of the liabilities that need to be
factored into longer-term fiscal forecasts, which include an ageing population, unfunded public service pension liabilities and the PFI contracts. They point out that some £43 billion of PFI contracts are off the national balance sheet.
Jack Dromey (Birmingham, Erdington) (Lab): In the real world of the real economy, last Friday I met a dozen world-class machine tool manufacturers at their annual exhibition in Birmingham. They were unanimous in their view that the Government were right to borrow to invest in the economy to boost it and their order books. Are they wrong?
Mr Osborne: If they are similar to the machine tool manufacturers I have met in Birmingham in recent months, they are also very concerned about the size of the budget deficit and that, unless we get a grip on it, there will be an ever higher spiral of tax rises and interest rate increases that would do enormous damage to them and to the people whom they employ.
Nicky Morgan (Loughborough) (Con): I note that the former Chief Secretary who left that infamous note for his successors is in his place. Surely the establishment of the OBR heralds a transparency and openness that we have not seen before, and will mean that such a note could never be left again.
As I noted from the remarks of the shadow Chancellor, it is interesting that we have not actually heard from the Labour party about whether it supports an independent OBR. It opposed that when in government-
Mr Osborne: It was repeatedly opposed by Treasury Ministers when I proposed it. Indeed, one of the most vocal and eloquent opponents was the shadow Education Secretary-I know that the shadow Chancellor has not always got on with him-who put the arguments on why Labour was opposed. If the Labour party wants to change its mind, we are all ears.
Mr Osborne: For the first time, the OBR has published five-year projections of unemployment and employment. The projection for the coming year, for example, is that employment will fall and unemployment will rise-based, of course, on the pre-Budget measures.
Charlie Elphicke (Dover) (Con): In Dover and Deal, people tell me time and again that they want more jobs, more money and more economic growth, so it is a real shock to come to the House and see the table in today's report showing that economic growth has been revised downwards, by between 0.5% and 1%. How can that have happened in the three short months since the Budget? Were the Budget numbers fiddled? What has been going on?