Economic Governance: European Semester and Macroeconomic Imbalances

The Committee consisted of the following Members:

Chairs: †Mr George Howarth  , †Miss Anne McIntosh 

† Ashworth, Jonathan (Leicester South) (Lab) 

† Clark, Greg (Financial Secretary to the Treasury)  

† Doughty, Stephen (Cardiff South and Penarth) (Lab/Co-op) 

† Hands, Greg (Chelsea and Fulham) (Con) 

† Heaton-Harris, Chris (Daventry) (Con) 

† Hemming, John (Birmingham, Yardley) (LD) 

† Hopkins, Kelvin (Luton North) (Lab) 

† Leadsom, Andrea (South Northamptonshire) (Con) 

Leslie, Chris (Nottingham East) (Lab/Co-op) 

Love, Mr Andrew (Edmonton) (Lab/Co-op) 

† Mowat, David (Warrington South) (Con) 

† Reckless, Mark (Rochester and Strood) (Con) 

Shannon, Jim (Strangford) (DUP) 

Sarah Petit, John-Paul Flaherty, Committee Clerks

† attended the Committee

The following also attended, pursuant to Standing Order No. 119(6):

McKinnell, Catherine (Newcastle upon Tyne North) (Lab) 

European Committee B 

Monday 17 June 2013  

[Mr George Howarth in the Chair] 

Economic Governance: European Semester and Macroeconomic Imbalances

[Relevant documents: 26th Report of Session 2012-13, HC 86-xxvi, Chapters 3 and 6; 1st Report of Session 2013-14, HC 83- i , Chapter 4; and 5th Report of Session 2013-14, HC 83-v, Chapter 2.]  

4.34 pm 

The Chair:  Does a member of the European Scrutiny Committee wish to make a statement? 

Chris Heaton-Harris (Daventry) (Con):  It is a pleasure to serve under your chairmanship, Mr Howarth. I was expecting a different Chair, but thank you very much indeed for coming along. 

On behalf of the European Scrutiny Committee, it may be helpful if I take a few moments to explain the background to the documents before us and the reason we recommended them for debate. The annual European semester is an EU-level framework for co-ordinating and assessing member states’ structural reforms and fiscal budgetary policy, and for monitoring and addressing macro-economic imbalances. The European semester cycle begins with an annual growth survey by the Commission, which is followed by a series of overarching and country-specific documents from the Commission. The process culminates in an examination by the European Council of the overall situation and the country-specific situations. 

Our debate concerns some of the documents for the 2013 European semester prior to the European Council of 27 and 28 June. The annual growth survey sets out the Commission’s priorities for action at national and EU levels to support economic growth and employment. The 2013 alert report mechanism assesses the potential development of problematic macro-economic imbalances in member states. An accompanying Commission staff working document gives the background to a new indicator for the alert mechanism concerning the financial sector. Following on from the alert report mechanism, the Commission reports 13 in-depth reviews. That report and a much more detailed account of the Commission’s review of the United Kingdom are part of the debate. Finally, preparatory to the European Council, the Commission publishes draft country-specific recommendations. The recommendation for the UK and the overarching Commission assessment of the 2013 European semester to date, and of specific policy challenges at both EU and national level, are also part of the debate. 

In recommending those documents for debate, the European Scrutiny Committee suggested that Members, while addressing the full range of the Commission’s assessments and proposals, might wish to examine particularly the Commission’s analysis of the UK situation; to consider whether the Government’s responses match that analysis; and to examine the European Commission’s recommendations for the United Kingdom. 

4.36 pm 

The Financial Secretary to the Treasury (Greg Clark):  We are relieved to see you in the Chair, Mr Howarth, so that we can proceed with our debate. Members will be aware that the June, September and October 2010 European Councils considered and endorsed measures to increase the co-ordination of EU economic governance. Those measures included strengthening the stability and growth pact, and introducing a European semester to tie together the consideration of national reform programmes, which report on the progress and plans on structural reforms under the Europe 2020 strategy, and stability and convergence programmes, which report on fiscal policy under the stability and growth pact. 

[ Miss Anne McIntosh in the Chair] 

As the Prime Minister said in a recent speech on Europe, 

“there is a crisis of European competitiveness as other nations across the world soar ahead.” 

We need a sustained period of successful reforms across the European Union, and we have done for many years. As long ago as 1997, the Foreign Secretary made a similar point when he said that unless Europe tackled its social cost and freed up its labour markets, it would be out-priced and outperformed by the rest of the world and there would be unacceptable levels of unemployment. He said that the real danger for Europe was that it could be left behind by the rest of the world.  

We are debating a set of issues that have, unfortunately, characterised the situation for many years. The European economy is forecast to shrink this year, and in the last quarter of 2012, EU GDP contracted by 0.5%. Recent economic indicators suggest that that contraction has carried over into 2013, with growth of minus 0.4% expected in the eurozone this year. 

The European semester is mostly focused on the measures that individual member states are putting in place to restore stability and growth to their economies. It encourages them to tackle overall low productivity, barriers to entry and lack of flexibility in many of their markets. The annual growth survey presents the Commission’s view of EU policy priorities for the coming year. It highlights five broad priority areas for reform in EU member states for 2013: pursuing growth-friendly fiscal consolidation, restoring lending to the economy, promoting growth and competitiveness, tackling unemployment and modernising public administration. Those priorities are broadly consistent with the Government’s fiscal reform strategy. The Government’s approach to growth is to pursue supply-side structural reforms while maintaining the importance placed on fiscal consolidation as set out by the Chancellor in autumn statements and Budgets. 

The macro-economic imbalances procedure is a new EU-level mechanism for identifying and correcting potentially problematic macro-economic imbalances. The alert mechanism report finds that the UK exceeds pre-determined threshold values for three of the 11 indicators: public debt; private debt; and export market shares. However, it is important to bear in mind that the figures are for 2011 and that the export market share figure is averaged over a period of five years, in other words from 2006 to 2011. We know mathematically that the UK’s figures will start to look much more positive from 2015 as a result of the recent much-improved export performance and the positive contribution that exports are now making to the UK’s trade balance. 

Andrea Leadsom (South Northamptonshire) (Con):  Will the Minister give way? 

The Chair:  Order. There are no interventions, so would the Minister please continue according to the procedure of the European Committee? 

Greg Clark:  Of course. In terms of the private debt indicator, of course the UK has a much higher level of home ownership than the rest of the EU, and that difference is not appropriately taken into account when the Commission compiles the scoreboard. 

The UK, along with 12 other member states, was therefore subject to the next phase of the procedure, that is to say an “in-depth review” carried out by the European Commission. The results of this study were issued on 10 April. I can confirm that the Commission’s findings from this in-depth review are that the UK does not have an “excessive imbalance”. That review notes that the Government are taking the right action to address imbalances in the UK economy. The Commission has recognised that 

“The UK authorities have sought to address constraints through a diverse set of policy measures”. 

Furthermore, the Commission has noted that 

“The Government’s focus on broader actions to improve access to finance are appropriate given that credit constraints are contributing to low investment and weak growth.” 

The strengths of the UK economy have been recognised, in particular the competitiveness that is obtained from “a business-friendly environment” and an economy that 

“is comparatively flexible with respect to both product and labour markets.” 

The UK is not subject to sanctions at any stage in the macro-economic imbalances procedure, or indeed in any other part of the European semester. 

The UK submitted a convergence programme and a national reform programme to the Commission on 30 April. Following that, on 29 May the Commission addressed draft country-specific recommendations to member states, including an analysis of the economic situation and recommendations on measures to adopt in the coming 12 months. Again, it is important to emphasise that these are non-binding on the UK. For the UK, these recommendations are to continue with fiscal consolidation, to make reforms to the housing market, to improve the employability of young people, to reduce worklessness, to increase access to finance and to improve network infrastructure. These recommendations will now be discussed in Council in advance of discussion and confirmation by the Heads of Government on 27 and 28 June. For the record, I can say that, given these recommendations are non-binding, we will not be following the draft recommendations of the Commission, for example to increase the VAT base, which have been proposed. 

We agree that structural reform is important and more urgent than ever before, both in individual members states and at the EU-wide level. In our view, the responsibility for implementing structural reforms lies with individual member states, and the UK will continue to lend its voice to those who support the EU returning to strong and sustainable economic growth by its member states. 

The Chair:  I apologise to the Committee for my delay, which resulted in the late start. We now have until 5.34 pm for questions to the Minister. May I remind Members that those questions should be brief? It is open to a Member, subject to my discretion, to ask related supplementary questions. 

Catherine McKinnell (Newcastle upon Tyne North) (Lab):  It is a pleasure to serve under you as Chair, Miss McIntosh; I believe that it is for the first time. It is also a pleasure to be here in my first European Committee in place of my hon. Friend the Member for Nottingham East (Chris Leslie). I trust that you will keep me in order, Miss McIntosh, if I do not proceed in the correct way. However, I have a number of questions that I want to put to the Minister, and I wonder if you could give me some guidance as to whether I should put them all in one go, or would you prefer me to put them one at a time? 

The Chair:  If it is agreeable, you can ask two or three, grouped together. I may alternate if the questions go on for a long time. 

Catherine McKinnell:  Thank you very much for that clarification. 

Obviously, I welcome the report and the useful information that has been collated relating to the performance of the UK economy and the macro-economic imbalances, which have not been judged to be excessive. Could the Minister therefore comment on some of the assertions and comparisons that have been made by the Chancellor since 2010 to suggest that the macro-economic balances were greater than they have been assessed to be in this report? A comparison has been made between the UK and countries such as Greece, for example. What light has been shed by the report in terms of those EU comparisons? What fiscal multiplier do the Treasury think should be applied? How much growth does it estimate has been stifled in the UK and across the EU as a result of the scale of the spending cuts? The document makes many references to infrastructure, so can the Minister clarify how the Government’s policies on infrastructure, skills and access to finance have boosted external competitiveness in the way that has been suggested by the Commission? I have more questions but I will leave it there for now. 

Greg Clark:  I welcome the hon. Lady to the European Committee and I welcome you to the Chair, Miss McIntosh. 

First it is important to point out that while the excessive deficit procedure has not been invoked to criticise the UK, that is because the Commission has drawn some confidence in the measures that are being taken to tackle the deficit. However, the hon. Lady and the Committee should not draw false comfort from the lack of censure because the Commission recommends that the correction of our deficit, which has already been brought down by a third from that which we inherited from the previous Government, should be accelerated. If the hon. Lady looks at the projections that the Commission makes, she will see that it calls for it to be corrected by 2014-15, which would make a rate of consolidation of around 1.75% per year rather than the 1% planned. We have taken the view, as the

hon. Lady knows, that we should allow the automatic stabilisers to operate and to continue with our plans for consolidation in line with what has been achieved already. There is no room for complacency. Our deficit, even after being paid down by a third, follows only Spain in terms of its severity and so it is essential that we stay on course. 

The hon. Lady asked about the fiscal multipliers. I think that behind the question was a suggestion that in some ways we should slow down the pace of consolidation because a consolidation somehow damaged growth. She should be aware that the whole thrust of the documentation is precisely the opposite. It is in fact very necessary to have the credible plan for consolidation if we are to recover economically. On that point she should be aware that the Commission has singled out in its assessment through the annual growth survey that the alternative scenario of postponing fiscal adjustment would prove more costly than the measures that we have taken. That is in the 2013 annual growth survey. I am afraid that I have forgotten the hon. Lady’s third point, but no doubt she will make it the first question of her next set. 

Catherine McKinnell:  My final question was to ask which Government policies on infrastructure, skills and access to finance have boosted external competitiveness in the way suggested by the Commission. I refer in particular to page 18 of the report. To what extent has the funding for lending scheme boosted economic growth, which is also specifically referenced? Given the Prime Minister’s much-stated desire for an export trade-led recovery, will the Minister clarify what the current position is on British embassies and consular buildings that have closed since 2010? That policy has caused some concern, and it may be counterproductive to the Government’s aim. Finally, given the concerns about overvalued housing markets that the Commission expressed in the report, will the Minister provide us with the most recent annual figures for affordable housing completions in Britain? 

Greg Clark:  I will start with the hon. Lady’s questions on the policy measures. The funding for lending scheme is widely acknowledged to be a timely and important intervention in the markets in which lenders access funds for both personal and corporate lending. Last summer, the cost of borrowing was steadily rising, which was occasioned by the difficulty that UK borrowers faced in international markets because of the uncertainties across the world, in particular in the eurozone. 

The Bank of England and Treasury scheme to get funds reliably to lenders was designed in the first instance to stop in its tracks the deterioration of credit availability and the escalating price of credit. It has been very successful. All observers recognise, and the figures show, that there was an almost immediate reduction in the cost of credit for businesses and mortgage lenders. That extends to a rate reduction of as much as 1%, which is a valuable reduction in outflow and expenses that have to be met. The Bank of England forecast that the first phase would be to reduce the price of credit, and the second phase would be to increase the availability of credit. So far, we have seen an increase in the availability of credit for borrowers as mortgages, especially for first-time buyers and those at higher loan-to-value rates. 

We have recently seen what the Bank of England described as an “improvement in credit conditions” from the last quarter of last year for corportates generally. However, we want to increase the incentives available for small business lending. As the hon. Lady will know, a few weeks ago we announced a major expansion of the incentives available for small business lenders in particular—I am sure she and the Committee will agree that that is particularly important for the recovery—as well as making them available to lenders to small businesses who are not in the traditional banking category, such as invoice finance specialists. Funding for lending has played a valuable role in that, and is in line not only with the recommendations addressed to us but with the priorities for the annual growth survey. 

On infrastructure, the hon. Lady will know that in the previous Budget and autumn statement we increased the level of investment in infrastructure, consistent with the requirement to continue fiscal consolidation, which is in line with the recommendations addressed to us, so there will be £18 billion of extra infrastructure investment by the end of this Parliament. Indeed, investment as a share of GDP will be higher on average between 2010-11 and 2020-21 than it was under the whole of the previous Government. 

On skills, we have seen a major expansion of apprenticeships, as the hon. Lady will know. Further reforms include £270 million of capital investment to improve further education colleges. We expect that skills will be a major part of the city deals and the local growth deals that will be entered into following the Michael Heseltine report. 

On the important role of overseas embassies in trade promotion, the first thing to say is that the contribution of UK Trade & Investment has been notable. I held a seminar in my constituency for exporters, who have benefited from UKTI’s services. Funding for UKTI has been increased despite the difficult conditions that we find ourselves in. The feedback and appraisals that it gets on the help that it gives is first class and we want to build on that. It works closely with our posts overseas and the collaboration between the Foreign Office and the Department for Business, Innovation and Skills is key. Often, it is not the case that a particular building is key to that; always and everywhere, we look to make sure that the right skills and availability of advice is there. Our representation there, however, is clearly important. 

When it comes to the housing market, we all know that the previous Government’s legacy was the lowest level of housing completions since the 1920s, so there was an important job to do to improve the functioning of the housing market on both the supply side and the demand side. The hon. Lady knows, and I am familiar with, the reforms we made on planning, which I took through under my previous incarnation as Planning Minister. We considerably simplified a planning system that had become excessively complex and bureaucratic, which was certainly contributing to the dearth of new homes being built. Although it is early days, in the year since the national planning policy framework was published we have already seen a substantial increase in planning applications being made and approved. On the demand side, the policies outlined in the Budget, such as Help to Buy, have already been well received; in fact, I have just

come from a round-table meeting with lenders and consumer representatives and the consensus was that the demand-side schemes are already having a major impact. 

Andrea Leadsom:  Does my right hon. Friend not think that it is ludicrous that we have the independent Office for Budget Responsibility, the independent Bank of England, the IMF, the OECD and even Her Majesty’s loyal Opposition, yet the European Commission still sees the need to review macro imbalances and advise us on what we could do to improve matters? Does he not agree that we would much better to use those undoubtedly clever and worthy individuals in the European Commission to focus on negotiating the EU-US trade deal and, indeed, a bilateral arrangement between the EU and China? 

Does my right hon. Friend welcome the enormous steps that our right hon. Friend the Foreign Secretary has made on refocusing the efforts of our embassies overseas towards trade? I have had the great pleasure of visiting a number of them in recent months; they all have these fabulous posters up that talk about Great Britain, and they spend their time marketing British-built Minis, owned by BMW, with Union Jacks on them. Is that not exactly the sort of thing that we should focus on, rather than reporting on stuff that everybody else has already reported on? 

Greg Clark:  I have considerable sympathy with my hon. Friend, who, as ever, puts her finger on a particular problem. The measures that we are taking are consistent with what is being recommended, but there are areas where there is a difference, such as the proposal, which the Commission seems keen to give, that we increase VAT. We think that that would be injurious to the interests of the economy. Therefore, we are content to follow the successful strategy that we are following in this case. 

My hon. Friend knows that, unfortunately, under articles 121 and 126 of the treaty, all member states are required to report on the functioning of their economies and on their financial positions. If the interest in fiscal rectitude that seems to be discernible in some of the reviews that take place across the EU injects a concern for taxpayers’ money into the Commission and other parts of the EU, it may have some benefit in terms of the culture. We had in this Committee last week a debate in which we considered the various staffing regulations affecting the EU. A concern for taxpayers’ money and a sense of the value of taxpayers’ money would be very welcome, but I agree very much with the thrust of my hon. Friend’s position. 

When it comes to trade and to free trade, my hon. Friend is absolutely right. That should be the prime focus of the institutions of the EU. I was privileged to be at a meeting in Brussels organised by the group that our party belongs to in Europe—the European Conservatives and Reformists Group—that was promoting the signing of a transatlantic trade and investment partnership; it is called TTIP. That seems to me to be exactly what is needed to boost the growth prospects of not only this country, but other European countries. My hon. Friend also mentions China—a very fast-growing market. 

Our recent performance as a country is, I think, impressive when it comes to moving away from dependence on EU markets. UK goods exports to China grew by 96% between 2009 and 2012. We need to see more of that, and that is absolutely the focus that should be required of the EU institutions. 

Kelvin Hopkins (Luton North) (Lab):  It is a pleasure to serve under your chairmanship again, Miss McIntosh. A considerable number of documents are being considered today. I was one of those on the European Scrutiny Committee who would have liked to see them debated individually in separate European Committees, because I think that each one of them is sufficiently important to warrant an individual debate. Indeed, many of these items are much weightier than many of the other issues that we have seen debated. Why was so much pressure put on by Government to meld all of these into one debate? I know that the Committee acquiesced in the end. Nevertheless, there was obviously a reason for the Government’s wanting to debate them all together. 

Greg Clark:  The hon. Gentleman, as ever, makes a very reasonable point. There is a connection that he will see and he will know between these documents. One follows another and triggers another, so there is sense in bringing them together. The annual growth survey informs the alert mechanism review, which then triggers an in-depth review, which then triggers country-specific recommendations. They are a set of consequential documents, and there is some merit in dealing with them together. 

The other aspect, which the hon. Gentleman will also be aware of, is that the notion of the semester is that these things should be grouped and considered towards the first half of the year, so they come in relatively quick succession, from between November and the early spring. These are not documents that are evenly spaced out across the year; they come very quickly. One of the downsides to debating them individually, although personally I am perfectly open to that and will reflect on what the hon. Gentleman has said for next year’s consideration, is this. The danger is that by the time a debate is scheduled for one, there is information in the public domain about the next stage that would be germane to that debate, but I will very much take into account what the hon. Gentleman says, and if he would find it convenient next year not to group them but to consider them separately, we will certainly consider that. 

John Hemming (Birmingham, Yardley) (LD):  I am pleased to serve under your chairmanship, Miss McIntosh. May I disagree with the point just made? Would the Minister not agree with me that, actually, considering issues such as growth and deficit separately to the macro-economic imbalances would be a mistake? Although there are problems with the growth report—it does not give the tables—there are some difficulties with table A2. The key drivers are not in that table; the key drivers of deficit and, obviously, growth are not in table A2. Would the Minister not agree that we cannot consider those things separately? Perhaps the European process is flawed in the way the hon. Member for South Northamptonshire has suggested: it looks at things far too late and really is just repeating the work of other people, but not in a properly joined-together manner. 

Greg Clark:  My hon. Friend makes a reasonable point. One of the other frustrations is that the data that we are debating refer to 2011. We know that a lot can happen in an economy in two years, so the data are out of date relatively quickly, which is one of the frustrations of the procedure. As they referred to and followed each other, there was some logic in grouping them together, but I will reflect on what my hon. Friend said and come to a view, perhaps by correspondence with the Committee, before we get to timetabling the debates next year. 

Kelvin Hopkins:  To pursue my earlier theme, many of the documents were referred several weeks or months ago and some have been kicking around for six months or so. The referrals were made individually, but the documents are now grouped together and just in the nick of time, because they are to be considered at the ECOFIN meeting on 21 June, which is in four days’ time. Will the Minister confirm that the Treasury was not dragging its feet because it did not want all the documents to be debated individually and too much focus to be placed on them? Is there another explanation for why they have been grouped together at the very last minute? 

Greg Clark:  There is certainly no lack of appetite from me or my Treasury colleagues to debate such matters. We have a good story to tell and, as we heard in the debate on the Floor of the House on the overall assessment of the UK economy, we are keen to discuss it. There are, however, problems with the timing. We, along with other member states, have written to the Commission to ask whether the process is too tight to allow for proper parliamentary scrutiny in the way that the hon. Gentleman says. His point seems to be that if the documents are debated as soon as they come in, one aspect of scrutiny can be discharged, but the documents inform each other. They are not freestanding or self-contained. The annual growth survey ultimately triggers the country-specific recommendations. The tightness is really at this end, because we received the recommendations only in the last few weeks. I hope that the hon. Gentleman will concede that we have moved as quickly as possible given that the recommendations were published on 29 May. Given that the ultimate objective and outcome of all the documents is the creation of the country-specific recommendations, the fact that we have been able to schedule the debate within a few days of them being published will reassure the hon. Gentleman that we do have closely in mind the importance of scrutiny by the Committee. 

As a distinguished hon. Member and an assiduous attendee of such Committees, the hon. Gentleman will know that the volume of documents that come out of Brussels and are quite rightly referred to the Committee for debate increases all the time. In recent weeks, the various interruptions in the parliamentary timetable due to Prorogation, the Queen’s Speech and recess meant that the earlier scheduling of the some of the recommendations that emerged during the spring was rather difficult, but there is logic in bringing them together today. 

Chris Heaton-Harris:  It is nice to see you and to serve under your chairmanship, Miss McIntosh. 

Looking at the recommendation from the European Commission on the United Kingdom’s convergence programme for 2012-17, what does the European Commission want us to converge into? 

Greg Clark:  We had a full debate about that on the Floor of the House. The Commission does not specify with what or with whom the United Kingdom should converge. The question is existential and it foxes the debates on such matters. The stability and growth pact requires member states to submit either a stability programme if they are in the eurozone or a convergence programme if they are not. That might be a clue to the thinking of people in European institutions. I referred to the speech my right hon. Friend the Foreign Secretary made to the CBI conference in 1997. It considered very particularly the question of convergence and what it meant in practice. Even if the statistics and assessments indicated that there had been some sort of convergence with other European economies in a single year, it is unlikely to be a permanent state of affairs. It could be simply a crossing of the ways, which in no way indicates some kind of permanent synchronisation of the economy. I very much share my hon. Friend’s quizzical approach to the language. 

Kelvin Hopkins:  I thank the Minister for his previous answers. I have a third and final question on this theme. He rightly said that we may have a good story to tell because we have been wise enough to stay out of the euro and keep control of our own macro-economic policy, which is very sensible. Does he not agree that these matters are so important—nothing is more important than the economy, and the economy in the eurozone in particular is in serious trouble—that they would, if they were to be grouped, warrant a debate on the Floor of the House? I suggest a three-hour debate. That would be better than having them all grouped together in an important but nevertheless not so significant debate in this Committee. 

The Chair:  I am sure that when he replies, the Minister will wish to keep to the matters before the Committee this afternoon. 

Greg Clark:  Indeed, Miss McIntosh. I simply observe that I agree with the hon. Gentleman’s expert diagnosis of part of the salvation that we have had by not joining the euro. I hope his Front-Bench colleagues will attend to his remarks because I think that they are still committed in principle to joining the euro, which would be a grave mistake. None the less, we have had other problems to contend with, including the deficit that was left to the economy by the previous Government, which we have been taking measures to correct. 

As for having a debate on the Floor of the House, we had a full and interesting debate on the convergence programme, which, as my hon. Friend the Member for Daventry mentioned necessitates consideration of both the UK economy and the economy of the rest of Europe. Let me say to Members who are aficionados of such matters that we have an opportunity to discuss the important matter of economic and monetary union and the proposed financial transactions tax on the Floor of the House, and I hope that they will participate. I dare

say that it will not be the last time that Members have the opportunity, either in Committee or on the Floor of the House, to debate such important matters. 

Chris Heaton-Harris:  On the question of convergence, where do European competences lie when discussing the matters in these documents? I note that the documents talk about the decentralisation of council tax benefit, spatial planning reform and housing supply policy. Those are not competences of the European Union, so what do the European Commission proposals and thoughts mean and how much weight should we give them when it comes to final decisions? 

Greg Clark:  We note the recommendations, but they are non-binding. In some respects, they are sensible. What they have to say about getting credit to small businesses is what we are doing. In other areas, such as the extension of VAT, we think they are nonsensical, so we will take our own view and our own counsel as to the measures that we pursue. I very much share my hon. Friend’s concerns about what might be described as mission creep in these matters. It is one thing to make an assessment, as required under the treaty, of member states’ economies, but it is another to get into areas that have been particularly regarded as the sole competence of member states, such as matters of taxation, where we rightly take our own view. 

Mark Reckless (Rochester and Strood) (Con):  I note the Minister’s remarks about mission creep and the VAT base. Having just bought a second pair of shoes for our one-year-old, I am pleased that the Treasury has no plans to expand the VAT base to children’s clothes and shoes. 

The Minister said that this will not be our last opportunity to examine documents such as these. However, the Council recommendation delivers an opinion on the UK’s convergence programme for 2012 to 2017. Given that the Prime Minister has promised a referendum on our membership of the EU by the end of 2017, is it not possible that this will be the last document that will be applicable, even on a take-note basis, in full? 

Greg Clark:  I suspect that my hon. Friend might welcome such a scenario. However, he will know from the previous debate, in which he participated, that in the interests of the economy and administrative efficiency, which my hon. Friend the Member for South Northamptonshire commended, the convergence programme is largely a rewrite of the Chancellor’s Budget and the report of the Office for Budget Responsibility. That is our forward look—our plan for the future—and we will continue to operate in that way and to set our policies in this country according to our own use. 

Chris Heaton-Harris:  I have a question about public procurement in relation to page 38 of the Council recommendation on delivering a Council opinion on the convergence programme. The Commission states: 

“The UK does, however, have scope to improve public procurement, particularly in facilitating the participation of SMEs.” 

We aim to double central Government procurement from SMEs from 12% to 25%. Central Government and local government use European public procurement directives as an excuse, almost, not to procure from

SMEs. It seems as if there has been a bit of a green light, or a moving of ground, from the European Commission as to whether we can slightly amend things, or send a signal to both central Government and local government that they can change how they procure. Has any consideration been given to that and have further inquiries been made? 

Greg Clark:  I share my hon. Friend’s view that we should be looking to make more flexible and accessible public procurement from SMEs. I know, having talked to a business just last week, how frustrating it is to be excluded from tendering processes. If this is a reflection of the reforms within the EU, and its rules and regulations, which are addressed in the annual growth survey—it is important to emphasise that, although they result in country-specific recommendations, they also give advice to the institutions themselves—and a step in the right direction, I will commend it and will draw it out and bring it to the attention of other member states in the Commission, when these matters are discussed in the Councils in the months and weeks ahead. 

The Chair:  We will now proceed to debate the motion. 

Motion made, and Question proposed, 

That the Committee takes note of European Union Documents No. 16669/12 and Addenda 1 and 2, a Commission Communication: Annual Growth Survey 2013, No. 16671/12 and Addenda 1 and 2, a Commission Report: Alert Mechanism Report 2013, prepared in accordance with Articles 3 and 4 of the Regulation on the prevention and correction of macroeconomic imbalances, No. 16513/12, a Commission Staff Working Document: Completing the scoreboard for the Macroeconomic Imbalances Procedure: Financial Sector Indicator, No. 8660/13, a Commission Communication: Results of in-depth reviews under Regulation (EU) No. 1176/2011 on the prevention and correction of macroeconomic imbalances, SWD(2013) 125, a Commission Communication: Results of in-depth review for the United Kingdom in accordance with Article 5 of Regulation (EU) No. 1176/2011 on the prevention and correction of macroeconomic imbalances, COM(2013) 378 and Addendum, a recommendation for a Council Recommendation on the United Kingdom’s 2013 national reform programme and delivering a Council opinion on the United Kingdom’s convergence programme for 2012-17, and COM(2013) 350, a Commission Communication: 2013 European Semester: Country-Specific Recommendations: Moving Europe beyond the crisis; recognises the five priorities of the 2013 Annual Growth Survey; supports the Government’s view that it is important to focus on implementation of existing reform commitments; takes note of the results in the In-Depth Review; takes note that the European Commission’s draft Country-Specific Recommendations to the UK stress the importance of tackling the deficit, pursuing ambitious structural reforms and prioritising investment in UK infrastructure; and acknowledges that these are already the priorities of the Government.—(Greg Clark.)  

5.19 pm 

Catherine McKinnell:  Of course, it is vital that the eurozone continues its measures to cut sovereign deficits and boost growth across the single currency area, and across the wider EU as well. As the Minister pointed out, the nations highlighted by the European Commission as the greatest causes of concern are France, Spain and Slovenia, due to their rising debt and modest economic growth. However, members of the public who are no doubt watching this Committee will be concerned by what seems quite a complacent tone from the Minister and an almost chipper approach to concerning times for the UK and the economy. 

The European Commission said that the banking union, including the single supervisory mechanism, is crucial to strengthening the eurozone, but it will not include Britain, which is very much thanks to the previous Labour Government’s decision to keep Britain out of the euro. As my hon. Friend the Member for Luton North rightly pointed out in response to the Minister, that decision to retain sovereignty over monetary policy has enabled us to adopt an active interest rate policy to counteract some of the economic challenges that we have been facing, an option that is less available to others in the eurozone. 

The Commission, however, has highlighted much slower than expected progress on fiscal consolidation in Britain due to low levels of economic growth. 

Greg Clark:  I am interested in the hon. Lady’s speech. Does she support the Commission’s suggestion that fiscal consolidation should be sped up and completed two years earlier? 

Catherine McKinnell:  The report focuses on measures taken to date and, in relation to the Minister’s somewhat complacent attitude towards the lower than forecast economic growth that we have experienced, the important thing to take from it is that the Government will be borrowing £245 billion more than originally anticipated. More attention needs to be given to the fact that the Government’s plans to date have not gone as they expected, as they hoped or as they promised. 

Greg Clark:  I am intrigued by the hon. Lady’s concern for reducing the deficit, and indeed borrowing. Is her view that her party would want to increase borrowing by having a temporary VAT cut, which I think would cost £12.5 billion a year? Is it her view that we should be making matters worse? 

Catherine McKinnell:  It is interesting that once again the Minister refuses to focus on what the report is saying in its review of the performance of the UK economy to date, which is that the Government are set to borrow £245 billion more than they planned. We are in the middle of the slowest recovery in a century and, throughout the EU, there is an extremely worrying number of people out of work, young people in particular. 

Kelvin Hopkins:  Does my hon. Friend agree that if we made serious efforts to close the tax gap, which is arguably £120 billion a year, we could not only afford the cut in VAT but a whole lot else as well? 

Catherine McKinnell:  My hon. Friend makes a strong and timely point, given the G8 meeting that is taking place at present. We very much support tax transparency, and for tax avoidance to be high on the agenda, as it is part of a strategy to challenge the deficit and to counteract the failed policies followed so far by the Government to reduce the deficit at the rate they promised. 

Greg Clark:  I am interested in the hon. Lady’s endorsement of the recommendations that the documents make. Does she agree with the recommendation that we

should cancel—get rid of—zero-rated VAT items in order to reduce the deficit? That is one of their proposals for us to go faster—does she agree with it? 

Catherine McKinnell:  It is interesting that the Minister seems focused on shifting attention from what the report clearly sets out and what jumped out at me from the page—that investment in the UK has remained consistently among the lowest throughout the years. More importantly, desperate concern about the skills gap, mainly in manufacturing, is expressed. The Minister is ignoring the point that I am making on behalf of Opposition Members in the Committee about the desperately worrying number of people out of work, in particular young people who cannot find permanent work and instead end up in temporary work or unemployment. 

Stephen Doughty (Cardiff South and Penarth) (Lab/Co-op):  I want to ask my hon. Friend’s opinion on another part of the motion. The Government acknowledge that, in terms of the recommendations, their priority is already to prioritise investment in UK infrastructure. Does she not, like me, find that extraordinary when we have seen only six or seven of nearly 600 projects in the national infrastructure plan actually go forward? 

Catherine McKinnell:  My hon. Friend hits the nail on the head, because, given the Government’s record, we take issue with the motion’s acknowledgement that UK infrastructure has been prioritised. That is not just our view but the view of the Public Accounts Committee, which said in its report of 29 April 2013: 

“The Treasury’s Infrastructure Plan is a list of projects, not a real plan with a strategic vision and clear priorities. We are not convinced that a plan requiring £310 billion of investment in infrastructure is credible given the current economic climate, the cutbacks in public finances and the difficulty in raising private finance for projects on acceptable terms.” 

The Government should listen to those concerns and the concerns set out in the report, rather than making empty, hollow assertions that infrastructure is a priority; the reality bears out a very different result. 

Ultimately, unemployment figures are the barometer for the many individuals and communities across the country blighted by its effects. There are now 500,000 people who have been looking for work for two years, which is the highest level since May 1997. Obviously that not only devastates the lives of the individuals affected but sets out a worrying course for our future prosperity given the scarring effects of long-term unemployment. 

Greg Clark:  I am sure the hon. Lady has studied the rates of youth unemployment in continental countries such as France and Spain, and I am sure she has drawn a contrast between their economies and our economy, which has created more than 1 million jobs since the general election and in which youth unemployment has fallen in the past year. Perhaps that contrast will influence how she makes her assessment. 

Catherine McKinnell:  Once again, we are met with incredible complacency from the Government on the devastating effect and cost of youth unemployment and long-term unemployment. Last year, youth unemployment

cost the Treasury £5 billion, which is obviously hampering not only the lives of individuals who cannot get work but the Government’s efforts to reduce the deficit. 

Greg Clark:  It is the very opposite of complacency. By sticking to the path of fiscal rectitude, we are guarding against precisely the conditions prevailing elsewhere on the continent. If we pursued the policies that the Labour party pursued in office, which damaged the standing of the economy by impeding the functioning of the labour market, we would have continental levels of unemployment, rather than having, as the Commission acknowledged, the more flexible and responsive labour market that we have in this country. That is why it is important that we pursue our current policies. 

Catherine McKinnell:  It is important to undertake cross-European comparisons—although many Government Back Benchers would probably dispute that as a worthwhile activity for the European Scrutiny Committee. It is also important to analyse UK unemployment levels. It is difficult to understand how the Government can believe that youth unemployment in the UK is at an acceptable or reassuring level, which the Minister seems to indicate. 

Kelvin Hopkins:  Greece, Spain and other countries have catastrophic levels of unemployment, but 2.5 million unemployed is still an enormous figure compared with the figure when I was a young man. I am the oldest person in the room, and I remember the world when we had unemployment of 500,000 or even 250,000, when young people, particularly young men, could walk out of school or college on a Friday and get a job on the following Monday with ease. That can no longer be done in most parts of the country, which of course is a major factor in street crime. 

Catherine McKinnell:  My hon. Friend makes an important and impassioned response to the very real challenge we face in this country. The Labour Opposition have suggested the real jobs guarantee to provide work for under-25s who have been unemployed for 12 months or more, funded through a tax on bank bonuses. The Government could make a real difference now, if they were brave enough to take such action or if they deemed it important enough to do so. 

Greg Clark:  How much would the proposed bank bonus tax raise? 

Catherine McKinnell:  We have debated at length the figures that might derive from a bank bonus tax. We appreciate that the Government dispute the figures, but it is for them to come up with a proposal about what action to take. The Government have the power to make a difference to young people and to create real job opportunities for them. At the moment, the results produced by the Government’s jobs scheme are worse than those from doing nothing. 

Stephen Doughty:  People in my constituency, and indeed in that of my hon. Friend, would find the figures that the Government keep trotting out about private sector job creation extraordinary, particularly the young long-term unemployed who are now benefiting from

schemes such as Jobs Growth Wales, introduced by the Welsh Government, in contrast to the failure of the Work programme that is simply not getting people into work. 

Catherine McKinnell:  Indeed. The Government could do much more. The complacent attitude that they seem to display on unemployment, and their failure on growth and reducing the deficit, send fear through many young people who worry that there is no hope. 

Andrea Leadsom:  I am slightly confused. Why does the hon. Lady think that 1.25 million new private sector jobs since the last election is a failure of this Government to look at issue of unemployment? 

Catherine McKinnell:  I never stressed that the 1.25 million jobs were a failure of this Government. We all know that the reality is that that those jobs are not reducing unemployment or tackling youth unemployment, which was my point. As we have often argued, many of those jobs are part-time ones—not enough hours are available for people to pay even their rent and food bills—and are not the real jobs that could meet the challenge facing people of getting into real work and could ultimately get the deficit down. That is why the social security bill is rising. Given the Government’s supposed success on job creation, will the Minister explain why the social security bill is rising due to the levels of unemployment benefit that they have to pay out? Is he willing to intervene to provide clarification? 

Greg Clark:  I am very willing to intervene, and I am grateful for the chance to do so. I want to go back to the question of youth unemployment. Does the hon. Lady agree with her erstwhile neighbour in South Shields, David Miliband, who said that youth unemployment was a problem that started during the Labour Government, under whom it increased by 40%, but is falling under this Government? 

Catherine McKinnell:  I dispute the figures, given that long-term youth unemployment has been on a very worrying trend under this Government. This country has obviously faced the challenge of youth unemployment for years, but our point is that this Government are not taking the action necessary properly to challenge that situation and bring down those numbers. 

I want to focus on the points made in one of the documents that not only sheds light on the current situation of youth unemployment, but highlights concerns about future skills and skill shortages. It states: 

“Evidence suggests that UK producers are confronted with a significant skills gap, namely in manufacturing, where the required intermediate technical skills are not always available.” 

Huge concern has been expressed that Government investment in skills has been slashed, that many sectors—such as engineering—have been undermined, that work experience opportunities have been cut and that independent careers advice has been virtually ended, while there are many concerns about standards in further education colleges. Ultimately, we are not only hampering growth today, but storing up problems for the future. I know from businesses in my constituency that alongside access to funding and lending, the skills challenge and shortage

is a key issue that is hampering economic growth. I hope the Government will take on board some of the concerns highlighted in the report and some of the recommendations 

I referred to access to finance, which is one key challenge highlighted. It seems that the situation is getting worse, not better, for many small and medium businesses particularly. Banks cut lending to British businesses and households for the second consecutive quarter in the three months to March 2013. The stock of loans made by the 40 banks participating in the funding for lending scheme fell by 300 million following a large contraction in the final quarter of 2012. That is hampering not only today’s growth, but tomorrow’s growth, and seems to be counter-intuitive to the Government’s aim of reducing the deficit. 

According to estimates by the International Monetary Fund, the scale of the Government’s deficit-cutting programme will have sucked £76 billion more out of the economy than expected by 2015. I have raised with the Minister the comments of Christine Lagarde, managing director of the IMF, but did not receive a clear response. She said in October 2010 that the impact of spending cuts was greater than previously thought. The Office for Budget Responsibility had at that stage used a fiscal multiplier of 0.5 to estimate the impact of the coalition’s tax rises and spending cuts, but after examining the records of many countries that have embraced austerity since the financial crisis, the IMF has said that the true multiplier is far higher, ranging from 0.9 to 1.7. Perhaps the Minister will comment on the impact of the austerity measures on growth, removal of money out of the economy and the consequent slowing and stagnating deficit reduction that has resulted in the Government borrowing more during this Parliament than they promised and the deficit reducing at a much slow rate than they intended. 

John Hemming:  I have listened to the Opposition’s usual innumerate and irrational whinge. These debates are interesting because we have the opportunity to compare different countries. To some extent, the scheme is futile because it looks at data that are massively out of date. We are talking about figures from 2001. There is an obsession in Europe about ever-closer union, and I am not sure what that means. The A2 table looks at quartiles, and says that countries should be with in the quartile, but there is no logic in that, as there is no logic in the Opposition’s position. They whinge about the fact that we are borrowing more than was planned and then suggest that the solution is to borrow even more. Frankly, that is innumerate and irrational. If the problem is borrowing too much, it is not solved by borrowing even more. 

I agree that the unemployment issue is important. The great thing about table A2 is that it shows how much better we are doing than other countries in Europe. One of the great advantages of these reports, even if they are out of date, is that they are produced on similar bases. Another opportunity now is being able to compare François Hollande’s policies in France with those of the Government here, and we are doing reasonably well. The Opposition drove the country off a cliff financially by creating a deficit close to that of Greece. We have

managed gradually to turn that round and to improve the situation. Other countries tried Labour party policies and France is a good example of how the Labour party could drive the country off the cliff yet again. 

This debate is useful because it compares international policies, but I would prefer the Government to go back to the European Commission and say that there is no sense in trying to do this sort of thing, so far out of date, with information that is invalid because it is a year and a half beyond that, and that there should be a better approach. It is useful to compare various countries, but it would be much more useful to use figures from the last quarter than from six quarters ago. 

5.40 pm 

Kelvin Hopkins:  Talking about economic illiteracy, I wish that John Maynard Keynes was here; he would talk about economic illiteracy, because there is a lot of it about at the moment. 

We are talking about macro-economic imbalances and how to address them. In my terms, macro-economic imbalances mean things such as trade imbalances and differences in unemployment, growth rates, living standards and poverty. They are all macro-economic measures of economic performance. 

The European Union—the eurozone in particular—is going in precisely the wrong direction. Years ago, it used to talk about convergence, but it is seeing divergence at the moment, not convergence from the richest to the poorest. As far as Britain is concerned, I do not want to converge with countries in the eurozone, because, while we may have our problems, theirs are much greater than ours. They have those problems because they literally have no control over their macro-economic levers—interest rates, exchange rates, the fiscal stance, the tax and spend balance, and the ability to intervene directly in their economies. None of those things are now open to those countries because they give up those freedoms—the freedom to have an exchange rate—when they all live in one currency governed by one interest rate. It is nonsense. 

If I were a Greek person, I would simply argue for the re-creation of the drachma and a substantial devaluation so that we can no longer buy German BMWs and Audis, and spend a lot more money directed to our own economy, generate demand, and reduce unemployment and poverty. A simple effect is that Greek holidays would become even cheaper. We would all go on holiday in Greece and help the Greeks recover—very sensible. That is what exchange rates should be about. 

Interest rates are still too high in some areas. I think Japan has had negative interest rates, which is bizarre, and it has had such deflationary problems for a long time. I think the reason for that is that it became hooked on a substantial trade surplus, which eventually started to disappear because it outsourced a lot of its production to cheaper-wage countries. Then it suddenly found that it was not producing enough itself and was having trade problems. 

Countries in the eurozone have all but given up their power over their domestic economies. I think that they were utterly foolish to do so, and we were very wise to stay out of the euro. We would be mad ever to join it. Strong currencies arise from strong economies. We do not make a strong economy by imposing a strong currency on it. The example used constantly is

West Germany in the post-war era. It invested massively in its economy in a collaborative way between Government, management and unions. It also sustained a low parity for the deutschmark. That is how the German economic miracle occurred, and on that basis, the deutschmark became a strong currency. That is how strong currencies arise. Inflicting a strong currency on Greece was complete nonsense. 

Austerity and deflation are precisely the wrong ways of going about solving the problems. After the second world war, Britain had a gross debt of more than three times what we have now. Yet, over a period of 20 to 30 years, it dropped like a stone because we ran a full employment economy. The Government effectively spent—they taxed and spent—and drove the economy forward. Living standards rose like never before. Working people had a better standard of living and quality of life than they had ever dreamt of, with a welfare state for employment, good jobs and homes. We built millions of council houses in which people could bring up their children. We did the right things in the post-war era, and we are doing the absolute wrong things now. 

In order to illustrate the point about the balance of trade, there is a little graph on page 114 of the documents. Graph 20 shows the UK exchange rate and trade balance performance. It shows that after 1992, when, sensibly, we left the exchange rate mechanism and devalued, the economy started to recover, and the trade balance improved. For some reason, the pound was then allowed to appreciate again, very strongly, in about 1997. It stayed high for a long time and the trade balance got worse. After the crisis of 2008, we had a pretty substantial depreciation and the trade balance started to improve again slightly. The recovery was not as marked, but it was there. Now, we are seeing a severe trade deficit. I believe that the only real answer to that is a substantial depreciation of the currency again to give ourselves a competitive edge, and behind that barrier, we should start investing in the things that we have to invest in, such as manufacturing, in particular. It is a nice little table, which illustrates some points that I am making. 

I mentioned Keynes at the beginning of my speech. At the 1944 Bretton Woods conference, Keynes was the guiding spirit and the great genius—if I may say, he was a genius; even Bertrand Russell said that he was intimidated by Keynes’s intelligence, which suggests that he was pretty bright. Keynes said some very sensible things about managing economies. He essentially believed in capitalism, but that it could only survive if it was heavily managed and controlled; the more laissez-faire and unfettered it becomes, the more unstable it becomes, which is precisely what has happened in recent years. 

Keynes said that although currencies had fixed parities, these were parities between currencies, and in extreme circumstances, with big trade deficits, countries should be able to devalue their currencies. That is what we should see in the European Union now. We devalued our currency in 1949, 1967, and there was a big depreciation during the 1980s, when the Conservative Government presided over a depreciation of more than 30%, between about 1982 and 1988. The economy recovered in that time and unemployment went down. It was a very sensible thing to do—that Government did other things that I do not agree with, but that was right. 

Keynes also said that countries should be required to revalue their currencies if they were sustaining big trade surpluses. Why did we not do that with West Germany? I was suggesting that 20 or 30 years ago. I met some Germans, who did not like me saying it—[ Interruption. ] There is a document I recently remembered and refound called “The German Surplus”, on how that trade surplus was sustained. However, if countries deliberately undervalue their currencies and use that as a competitive edge to punish other countries, that is not sensible. They should be required to revalue. Having appropriate parity for one’s currency is absolutely fundamental for success in the economy. 

If we are to get rid of such imbalances of every kind, which are all, in the end, related to trade, we have to go back to a world with separate currencies, our own interest rates and where each country can adjust those to their own needs. If a country starts to behave badly or has a trade surplus—unfortunately, the Americans refused to allow Keynes and Bretton Woods to have their way when it came to revaluation, because they might have been in the firing line, as they were a very strong economy, but nevertheless, that was what Keynes suggested. However, at the least, devaluations or depreciations should be a basis for having a proper, sensible macro-management of one’s economy, whether one is a Greek, a German or a Briton. With those few words, I shall conclude. 

5.48 pm 

Greg Clark:  The hon. Gentleman made a powerful speech quoting Keynes. I think I am right in recalling—I am sure that he is a student of Keynes—that at the beginning of Bretton Woods, which was a time of deep controversy, very far from any optimism that a way out of difficulties could be found, Keynes said that it was better that their deliberations began in disillusionment than end in them. That has some relevance today, because the problems facing the European economy, which are set out in the annual growth survey and the documents before us, are clearly profound. On both sides of the House, we would hope for and have an ambition that all the countries referred to in the documents stage a recovery. 

However, there is, if not a consensus, a degree of recognition, even on the part of EU member states and the EU institutions, that the basis for any long-term recovery must be to correct the imbalances that many hon. Members have described. It is simply not possible to enjoy a prosperous economy if there are underlying imbalances so extreme that they throw it off beam. In this country—and I accept my hon. Friends’ points—we have taken the responsibility on ourselves. We are making progress in difficult circumstances, having paid down by one third the deficit that we inherited. 

The hon. Member for Luton North is right to say, and my hon. Friends were right to remind us, how important it is that we have not been saddled with membership of the euro. That would certainly have added to our woes; however, I am afraid that the problems we contend with are all the more egregious because they were self-imposed. Despite the flexibility of the exchange rate that we had—and matters would have been much worse had we not maintained our own currency—and despite a more flexible labour market, we managed to get the worst structural deficit in the

G7, so that even when reduced by a third it still makes us one of the worst performers in Europe. Such was the scale of the challenge. 

Kelvin Hopkins:  I would like to debate some of the points that the Minister has made; however, on the matter of joining the euro, I wonder if he saw an interesting speculative article in The Guardian, by Larry Elliott, suggesting that had we joined the euro at the parity then obtaining, by now, like Greece writ large, we would have crashed out of the euro, which would have been brought down, and Nigel Farage would now be challenging to be Prime Minister. It is an interesting article, and at least we avoided that. 

Greg Clark:  That is right, although I noticed an article by, I think, Will Hutton, responding to that and saying that in fact it would have been the making of the British economy. I have never read an article with which I disagreed so profoundly: it would have been a disastrous plan. However, there is a serious point there, because I think that the Labour party is still committed in principle to joining the euro. It grasped the nettle at some point in getting rid of an equally ludicrous nostrum in its constitution—clause IV; I cannot think what, after that experience, stays its hand from finally slaying the present one. 

Kelvin Hopkins:  I voted to keep clause IV. 

Greg Clark:  The hon. Gentleman says he voted to keep clause IV. I would not want to intrude on the private grief of the Labour party. 

We have a serious structural deficit to deal with, left by the Labour party. We have been bequeathed the largest structural deficit in the developed world, and endured for the past three years suggestions that we have gone too far and too fast in fiscal consolidation, so I find it breathtaking that the hon. Member for Newcastle upon Tyne North now aligns herself with some of the recommendations of the European Commission—in particular the suggestion that we should in effect increase VAT, by bringing into it, presumably, children’s clothes, making it more expensive for my hon. Friend the Member for Rochester and Strood to get shoes for his child. 

Catherine McKinnell:  Will the Minister clarify at which stage during the sitting I aligned myself with or endorsed the recommendations of the report? 

Greg Clark:  I think the thrust of the hon. Lady’s speech was that we should pay closer heed to the recommendations. My point to the Committee was that the Government will take our own view and pursue the policies we intended to, and report them to the Committee. The hon. Lady upbraided me for not taking the recommendations seriously. I should be interested to know whether she endorses the one that I cited. 

Catherine McKinnell:  The Minister may be slightly confused. I was pointing out some of the concerns that the policy document sets out, in relation to infrastructure

spending and support for skills. The Minister may be reading more into my quotations from the report than I actually said. 

Greg Clark:  It is true that any policy contribution or speech from the Labour party is seen through a glass darkly. It is impossible to discern its policy on the matter in question; but the hon. Lady seemed to say we should take heed of the recommendations. One of those recommendations was the opposite of what the Labour party has been arguing, which is that the Government have been going, as it puts it, too far and too fast, and that we should go faster and make an accelerated contribution to deficit reduction, specifically including extending the scope of VAT. We are clearly against that. I have not had a clear statement from the Labour party that it would reject it in similar emphatic terms, but I leave that on the record, unsaid. 

Jonathan Ashworth (Leicester South) (Lab):  The Minister says that he rejects a proposal to extend the scope of VAT. Can he confirm that that will be Conservative party policy at the general election and in its manifesto? 

Greg Clark:  We have no plans whatsoever to extend the scope of VAT. 

Jonathan Ashworth:  No plans whatsoever? 

Greg Clark:  Absolutely none whatsoever. I am amazed that the hon. Gentleman does not take the opportunity to condemn, as we have, the suggestion that we should do that. 

In terms of the deficits that we have inherited, of course we need to pay them down. We are paying them down in a prudent way, recognising that the automatic stabilisers should kick in and that they should be able to moderate the pace of reduction according to the benefits to the economy of having some buoyancy in the contributions that are made through that. When it comes to the other recommendations that were mentioned, I should be interested to hear whether the hon. Lady accepts that funding for lending has been a positive move for the UK economy and whether she would recognise that it has been an imaginative scheme that has improved the growth prospects for the economy. When it comes to infrastructure spending she will know that infrastructure spending has been increased. We will have £18 billion further investment in infrastructure by the end of the Parliament following the policies of this Government, which is to replace some of the current spending with greater spending on capital. So we will increase the expenditure on infrastructure compared with the Labour party’s plans. 

The hon. Lady asked earlier about the estimate of the fiscal multiplier and I did not give her a clear answer. The Office for Budget Responsibility is responsible for estimating the size of the fiscal multiplier in the UK. Its estimate is for a multiplier ranging from 0.3 to 1, depending on the tax and spending measure. It made it clear in its evaluation report that the main shortfall between the forecast and the outturn is not from Government consumption but from private consumption, private investment and net trade. When it comes to unemployment, and in particular youth unemployment,

the fact that in this country we have been creating jobs in the private sector at a time when other countries have been experiencing very large rises in unemployment is a tribute to the confidence that investors have in the UK economy and in the flexibility of the labour market. 

I remind the hon. Lady that under the previous Government, youth unemployment rose by 40%. David Miliband, the hon. Lady’s former colleague, said: 

“The current Government did not invent the problem of youth unemployment”—[Official Report, 30 November 2011; Vol. 536, c. 1003.] 

Youth unemployment started rising in 2004. The initiatives that we have taken—increasing dramatically the number of apprenticeships available, improving the contribution that businesses make— 

John Hemming:  On the important point about youth unemployment, does the Minister agree with Tony Blair’s statement that 

“from 2005 onwards Labour was insufficiently vigorous in limiting or eliminating the potential structural deficit”? 

Even though Labour overspent, it still did not resolve the problem of youth unemployment, so the problem with youth unemployment is not about spending more and more money. 

Greg Clark:  When the Opposition were in government, they tested to destruction the idea that a prosperous sustainable economy can be generated by simply spending and taxing more. The problems that my hon. Friend so eloquently described and alluded to are the result of many of the policies that were pursued in that way. It is clear that an economy needs to be competitive and flexible in its labour and product markets to generate jobs and good levels of income for ordinary working people. We should take those measures in our economy, and the Government are pursuing them. We also commend them to other countries in the EU. We constantly remind and draw to the attention of other member states the importance of liberalising trade, fiscal discipline and flexibility in labour and product markets. 

John Hemming:  Does the Minister also agree that not only does this Committee allows us to recognise that Labour failed to spend its way out of youth unemployment, but we can also consider the French record, where the Socialists are trying and failing to spend their way out of unemployment? 

Greg Clark:  It is a characteristic of the Opposition that when they pursue policies that rely on taxing, spending and borrowing more, there will be a reckoning. That lesson extends throughout history and around the world, and it is why we on this side of the House have always promoted, in every council possible, the idea that the free market and fiscal rectitude are the way to go. 

Kelvin Hopkins:  There are many points that I would like to debate, but it would take a long time, so I will focus on one. The Minister refers to taxing and spending,

but in fact taxes were substantially reduced from the Thatcher era. The basic rate of income tax was 25p under Margaret Thatcher and it finished at 20p under Labour. I did not necessarily agree with that policy, but that is the truth. The VAT rates were cut and all sorts of business taxes were cut. It is not true that it was tax and spend. It may have been spend—a bit— but if it was not sufficiently covered by taxation, we should have raised taxes and collected a bit more. 

Greg Clark:  The hon. Gentleman makes a point that would, I fear, engage us in debate for longer than the time we have remaining in this debate. In response, I will say two things. First, the overall burden of taxation increased, largely as a result of the stealth taxes that were introduced in most of the Budgets of the right hon. Member for Kirkcaldy and Cowdenbeath (Mr Brown). 

Secondly, to return to the imbalances that we are debating today, one of the principal imbalances is the gap between income and expenditure—the yawning deficit. The Committee will recall that the head of the International Monetary Fund said that when she contemplated the scale of the deficit it caused her to shiver. We are closing that deficit in this country, to restore our economy to health. It is a difficult road to tread, but we are making progress, and the documents we are considering provide a commentary on that. I say to my hon. Friends that we will continue to pursue the policies that the Government have determined, and we will submit the documents as we are required. 

Question put and agreed to.  

Resolved,  

That the Committee takes note of European Union Documents No. 16669/12 and Addenda 1 and 2, a Commission Communication: Annual Growth Survey 2013, No. 16671/12 and Addenda 1 and 2, a Commission Report: Alert Mechanism Report 2013, prepared in accordance with Articles 3 and 4 of the Regulation on the prevention and correction of macroeconomic imbalances, No. 16513/12, a Commission Staff Working Document: Completing the scoreboard for the Macroeconomic Imbalances Procedure: Financial Sector Indicator, No. 8660/13, a Commission Communication: Results of in-depth reviews under Regulation (EU) No. 1176/2011 on the prevention and correction of macroeconomic imbalances, SWD(2013) 125, a Commission Communication: Results of in-depth review for the United Kingdom in accordance with Article 5 of Regulation (EU) No. 1176/2011 on the prevention and correction of macroeconomic imbalances, COM(2013) 378 and Addendum, a recommendation for a Council Recommendation on the United Kingdom’s 2013 national reform programme and delivering a Council opinion on the United Kingdom’s convergence programme for 2012-17, and COM(2013) 350, a Commission Communication: 2013 European Semester: Country-Specific Recommendations: Moving Europe beyond the crisis; recognises the five priorities of the 2013 Annual Growth Survey; supports the Government’s view that it is important to focus on implementation of existing reform commitments; takes note of the results in the In-Depth Review; takes note that the European Commission’s draft Country-Specific Recommendations to the UK stress the importance of tackling the deficit, pursuing ambitious structural reforms and prioritising investment in UK infrastructure; and acknowledges that these are already the priorities of the Government. 

6.3 pm 

Committee rose.