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Lord Desai: My Lords, does the noble Lord agree that what goes down must come up?

Lord Howell of Guildford: Yes, my Lords, but when? We are talking about timing and about a situation in which the Government of this country have tried in response to perfectly legitimate business interests--the kind that we have just heard about--to plan three years ahead. Let us suppose that what goes down comes up in 10 years. Let us suppose that what went down in Japan in 1989, and has not yet begun to come up eight years later, has another six years to go. I believe that timing is everything. Those are some of the reasons why I believe that the three-year plan is well meaning but full of dangers. It may be simple in business, but it is very complicated in government.

In this short debate I have only one other point to make about the dangers of extrapolation and in support of my, I hope not too dismissive, comment about the slightly old-fashioned nature of the documentation. The claim in the documents is that new forms of performance control are to be installed to ensure that, even if the world remains uncertain, public expenditure plans will somehow remain on the railway tracks. A great deal is made of the fact that this is a tremendous break with the past--a tough new regime--and that it has never been tried before. Indeed, I believe that it actually says somewhere in one of the documents that nothing like this has happened since 1961. I find the

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latter worrying because it is not true. It has obviously been written by people who either have very short memories or who are perhaps rather young. There is no criticism of that, except that, if you are not fully informed about the past because you did not live through it, it sometimes pays to read the history books.

All this has been tried before. In 1970, the government of the day learned from the American programming, planning and budgeting systems (PPBS) and decided to instal throughout Whitehall a gigantic system of programme analysis and review with precisely the intention of forward planning expenditures in the spending departments so as to remove some of the uncertainties. The same problems that damaged that cause then, and eventually undermined it, are still extant today. I hope that those who are carrying out this planing and devising these new ideas in the Treasury here in London are at least aware of some of the snags. However, I must say that the document shows little sign of awareness that they are treading a very dangerous path and one full of traps.

When we installed programme analysis and review in the early 1970s, which was intended to deliver performance in return for expenditure allocations by the Treasury and to secure analysis by outputs rather than inputs--in other words what we were trying to achieve rather than the resources needed to achieve it; for example, not how many paperclips you had been using but how many were needed and why they were needed at all--we did so with very high hopes. We were full of good intentions; but the project failed. Why did it fail? It failed because it became absolutely impossible in the political milieu, unlike the business milieu, to analyse how to define the outputs. Was an output really just a question of how many more houses were built or how many more miles of road were built? Or was an output some political achievement, some gain in the political and social sphere? Such gains are legitimate for governments and yet cannot be measured as outputs as businessmen would. We rapidly got into a quagmire of disputes in those days on how you define the outputs and whether they are just managerial or political as well.

The second difficulty we ran into--and these papers run straight into it again--was that of defining what is capital and what is current spending. A great deal is made in these papers of the golden rule. It is proclaimed as a gigantic new insight, something that has sprung up from the brow of some Treasury guru or even from the Chancellor himself.

We have all been thinking about the golden rule for four decades. Everyone has been saying, "Why can't the Government somehow define capital and current spending, just cover the capital spending with borrowing and never borrow for current spending?" That sounds simple common sense to a businessman. However, I have to say to your Lordships that in the government sphere every aspect of that proposition is under constant and continuous dispute. No one will ever agree on what are the capital spending items and what is current spending. Is capital spending that goes wrong and does not produce a return, current or is it capital? Nobody knows.

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The situation has been made worse by the attractive device--but it is pure "spin doctoring"--of calling all spending investment, or nearly all public spending, investment. Of course it is not; a great deal of it is consumption. Nobody has ever managed to establish whether even issues like building hospitals or army barracks are capital spending and investment, or current spending. That debate will go on and will drive a coach and horses straight through this golden rule which is paraded as such a virtue. That is really all I wish to say.

I leave aside the other points that have been made in another place and are fair game. So far, the hope that one could reduce part of the welfare budget to pay for other excellent things such as education does not seem to have worked too well. The Minister concerned seems to have walked out on the whole project, which is a pity.

I leave aside the reflection that the public sector unions, once they see that there is talk about locking in and money certainly coming, will say, "Let's have substantial wage increases to overcome the disparities with other earnings in the private sector". I am quite sure that we shall see enormous erosion of the benefits of this public spending--even if it can be sustained and even if the GDP projections are right--by union pressures.

The real hazard is that we are now at the classic point of the trade cycle where deterioration begins. It is perfectly normal that it should, and the economy will slow and probably shrink over the next two years. That is even if we did not have the Asian turmoil, which, to my mind, will make it certain. The trade cycle is deteriorating, revenues will be lower than the estimates in these books and public spending will be higher. That is what happens when the economy slows down. It is not just a question of the revenues falling away; all the social expenditures increase, so the gap widens at a geometric pace. The platform of stability which we all hope for, and which the noble Lord as a businessman of authority has just spoken about, will turn out to be a platform made of quivering jelly.

I believe that if the Chancellor and some of his advisers had the kind of business experience of the noble Lord, Lord Alli, and others, they would realise that it is not that simple. Although these are good aspirations, it is dangerous to raise hopes too high for things that cannot in practice be achieved.

8.3 p.m.

Lord Higgins: My Lords, I intervene briefly in what is rather inelegantly known in your Lordships' House as "the gap". Many of the issues which might otherwise have been appropriate to comment on in relation to the Economic and Fiscal Strategy Report or the other major public expenditure strategy reviews are perhaps more appropriately made tomorrow when the House will have the opportunity of debating the Finance Bill, rather unusually, I understand, on a Wednesday. For the last three years, at least, it has been on a Friday. So I hope the House will understand if I do not go into any great detail.

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I should like, first of all, to congratulate the noble Lord, Lord Alli. We shall look forward with great interest to his expert comments on various aspects, particularly of the micro-economic situation, in the future.

I hope my noble friends will forgive me if I do not comment on either of their extremely cogent and knowledgeable speeches. I should like to put a couple of simple questions to the Minister, who rightly pointed out that this matter is before the House in relation to the commitments under the Maastricht Treaty and in particular to Articles 103 and 104.

The object of the exercise is, in effect, to reassure our Community partners that all is well in the British economy, in particular with regard to public borrowing. In that context, it seems to me to be appropriate that one should consider carefully what is in the figures and particularly, perhaps, to enclose with the covering letter, which presumably is written with these documents, a health warning.

I had occasion on 14th July to ask the noble Lord who is due to reply to this debate whether or not the extraordinary use of the so-called "accounting adjustment" had the approval of the Office for National Statistics. He said that its views had been taken into account. However, my understanding is that it does not approve of the way in which something like £5 billion of expenditure on social security--in particular the working families tax credit--suddenly disappears into a black hole of the accounting adjustment. In total, I think that something like £15 billion is disappearing into it. That is not merely a margin of error; that is really quite important.

Can we have an assurance that if it is indeed the case that the Office for National Statistics does not like the way the figures are presented, at least our European Community colleagues will have that drawn to their attention?

The other relevant point is that the documents seek to assure our community partners and other members of the European Union that the level of borrowing, and so on, is appropriate and not something about which we should be concerned. The Minister provided a particular set of statistics. But he also said that we are debating these matters this evening--they have been debated once before--because the figures have been overtaken by events; the figures are out of date. He can certainly say that again. There has been a very significant change.

At the time when the figures were last produced we were told in the Budget Red Book, for example, that there would be a budget surplus over the period covered by the Red Book. Is it not the case that this is no longer so? If that is so, surely the Chancellor, at least, ought not to be satisfied with the way in which the public finances are going.

Secondly, we were told at that time--and presumably that is what the House debated in that context--about a reduction in national debt. My understanding is that, again, that will not be the case. The figures, as the Minister has rightly said, are out of date. Thirdly, we were told that there would be a reduction in the percentage of national income taken by the state.

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I understand that in many ways the figures which the Minister quoted may well give our friends elsewhere in Europe a feeling that all is well. But surely it cannot be the case that the Chancellor is as happy with the situation now as he was at the time when the House last debated the matter. That is surely a matter of considerable concern.

I hope therefore that on each of these two points which I have made we can have a response from the Minister. I shall certainly look forward to going into the matter in greater detail tomorrow, should I have the opportunity.

8.8 p.m.

Lord Newby: My Lords, it gives me great pleasure to congratulate the noble Lord, Lord Alli, on his excellent maiden speech. I know that in only 10 days in this House he has had the opportunity of seeing it at its worst, at its least generous. But I am pleased that he has also experienced its more customary generosity of spirit. I have to say that when his appointment was announced I felt a slight twinge of jealousy. I believe that until he was appointed I was the youngest Life Peer in your Lordships' House. I rather enjoyed this completely meritless distinction. However, I have enjoyed it only for a few months. We on these Benches warmly welcome the noble Lord to our debates and look forward to hearing him speak regularly in the future.

The debate this evening is really about the medium-term prospects for the British economy. In our view the Government have quite rightly placed great importance on moving from the boom and bust approach towards a more stable and sustainable economic environment. The Government have undertaken a range of measures which have moved us in that direction. I refer to the operational independence of the Bank of England, the institution of the golden rule and the sustainable investment rule, and the code of fiscal stability. All these measures are welcome, as indeed is the Government's more positive attitude towards Britain's EU membership.

However, we believe there are two areas where more needs to be done. The first relates to environmental goals in relation to sustainable growth, which is still very much in the embryonic process. The documents that we are discussing tonight refer to the ongoing work to produce environmental accounts and indicators and to produce a sustainable development strategy before the end of the year. In our view such a strategy is long overdue. I agree with the conclusion of the Commons Environmental Audit Committee that, reviewing the Government's leadership as a whole, there appears to be some failure to grasp the overarching nature of sustainable development and apply it.

The value of such a strategy is that it will not only give us a much better assessment than the current accounting conventions of the environmental sustainability of economic performance, but it will also help decide on medium-term taxation priorities. We on these Benches have for some time advocated shifting the balance of taxation towards environmental "bads" and

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away from employment. Having a more credible set of environmental indicators will assist in this process. I welcome anything that the Minister can say about the likely timing of the publication of that sustainable development strategy.

The second area where we believe further action is needed relates to the exchange rate and EMU membership. It will come as no surprise to the House to learn that. After inflation the one variable which has caused British governments most grief in the past 30 years is the exchange rate. It continues to do so today. Since the equivalent debate last year, the large majority of our EU partners have committed themselves to joining EMU at the outset for the stability it will bring in the exchange rate with their principal trading partners. We, along with all our EU trading partners, trade about 60 per cent. of our goods intra-Community. There may be differences but that single vital fact remains at the heart of our trading position. This is of crucial importance in looking to our medium-term prosperity.

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