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Lord Bruce of Donington: My Lords, I am grateful to the noble Lord for giving way. Will he agree that the Chancellor did have a reserve to which the noble Lord has not referred, in that the coming into operation of self-assessment meant that over £10 billion came in six months earlier than it would have done under the normal tax arrangements? That was never discussed by anyone, but it constituted a reserve upon which he could lean.

Lord Skidelsky: My Lords, I am talking about the forecasts over the next three years on which the spending plans are based, not about the current position of the revenue.

It is worth reminding ourselves that surpluses do not actually exist until they turn up in the Treasury's coffers. They are predictions based on guesses. The Shadow Chancellor, Mr. Francis Maude, rightly called them "fantasy forecasts". Why? Because the Chancellor expects the economy to expand faster than most independent forecasters do. He seems to believe that he has abolished the business cycle single-handedly. He entirely discounts the effects of new Labour taxes and regulations on the costs of doing business, notably the windfall tax, the minimum wage and the working time directive. Has the Chancellor considered that those measures might worsen the supply side of the economy during the period of his forecast and therefore raise the natural rate of unemployment?

The truth is that the Government have taken a fearful gamble with taxpayers' money. The iron rods with which the Chancellor bound himself have turned into elastic bands. The gamble may come off; after all, gambles sometimes do. But if the downturn is deeper than he estimates, his present spending plans will land him seriously in the red.

Using more sombre estimates, the National Institute of Economic and Social Research predicts that the Chancellor will fail to meet his "golden rule" by £23 billion over the lifetime of this Government. The whole point of the golden rule is to ensure that over the cycle surpluses and deficits balance. By committing himself to spend his surplus before he has earned it, he has consumed his deficit before he needs it. The surpluses vanish in the fog; the debt remains.

The gamble is doubly reckless because it jeopardises the very credibility that the Chancellor has been at such pains to build up. There will be another opportunity to

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explain why I do not think the golden rule is a satisfactory fiscal rule, but at least he should have stuck to it so soon after announcing it.

The Chancellor's policy also jeopardises the operational independence of the Bank of England. Our party opposed that policy because it provided neither for proper ministerial responsibility nor for full independence. The Bank carries the blame for high interest rates without any statutory right to criticise government policy that may have brought them about. Ministers talk up the Bank's independence while pressing it in public to reduce interest rates. The danger in the future is that loose fiscal policy will drive interest rates up just at the moment when we need them to come down. The Bank will then be left in a politically exposed position.

I wish to put a question to the Minister who will reply to the debate. When the Bank was given its mandate to maintain price stability, did it request, or secure, any assurances from the Chancellor on fiscal policy?

These rather dry technical matters conceal a fundamental political reality. The Chancellor has to gamble with the public finances because he has to feed unrealistic expectations about what public spending can achieve. His prudence, which I believe is genuine, and his party's belief in high public spending pull him in opposite directions.

Our party believes in lower taxes, lower spending and a smaller state. We do not delude ourselves that those are easy goals to achieve, but we made a start and will go further in future. The Labour Party believes in the exact opposite. It exists to spend people's money, but dare not openly avow the need for higher taxes. The technical question of how to balance the national accounts is thus bound up with the philosophical question of how large the state should be and what it should do.

We on these Benches believe that the more freedom we give people to make their own choices, the easier it will be to stick to prudent finance and the better it will be for our economy and our country. I very much look forward to joining battle in that cause.

6.47 p.m.

Lord Shore of Stepney: My Lords, I find this Queen's Speech a rather difficult subject with which to grapple. There is plenty of material on a whole range of matters, certainly on constitutional alleged reforms and changes to the welfare state. Those will no doubt be discussed at great length as Bills come forward.

However, there is one conspicuous omission--economic policy and the economy. Indeed, apart from two bland references to the general objective of stability and growth, it earns no elaboration in terms of policy or measures. That is almost unique in my experience, which is now considerable. It accounts for the fact that the economy, instead of having a whole Queen's Speech day allotted to it, is jammed in the middle of industrial policy, and the entirely different, though very important, subject of social policy and welfare.

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I therefore ask: why are the economy and economic policy not being discussed? Is it because all is going well with the economy? Is it because affairs are working out so splendidly that we really have no reason to look again in any detail at economic policy or the way in which it is unfolding?

Like the noble and learned Lord, Lord Fraser, who led for the Opposition, I, too, looked at some recent publications. There are plenty to choose from, as he and I well know. I looked at the latest CBI bulletin and the latest government statistics. It is true that this last month has recorded the largest ever deficit in the gap between the export and import of goods that this country has recorded in the whole of its history. That includes the terrible year which I know well, 1974, when without warning we were faced with the quadrupling of world oil prices before we had a drop of our own indigenous oil to set against it. It was greater even than that. Something was happening.

When we look a little more closely at other economic factors, what do we find? The CBI Forecast, which is a regular publication, with its strengths and weaknesses, nevertheless forecasts the growth of the economy at no more than 0.7 per cent. in the forthcoming year, 1999. Its forecasts for manufacturing output is minus 1.2 per cent. For the following year, 2000, it forecasts a growth of 0.2 per cent.

We are all sufficiently familiar with economic statistics not to be overwhelmed by them. However, at least we can interpret them to some extent. My interpretation is that we face a growth in unemployment of not less than half a million over the next 12 to 18 months. I add to that a matter of considerable importance which may throw a little light on why we are doing so badly. I have in my hand the monthly statistics on trade which state that in September total exports of goods fell 3 per cent. while total imports of goods rose 5 per cent. Exports to EU countries--that zone of stability and prosperity--fell 1.5 per cent. Those to non-EU countries fell 5.5 per cent., a good deal more. Imports from EU countries rose 4.5 per cent., those from non-EU countries rose 6 per cent.

That serious deterioration of export performance and the propensity to import, as regards the rest of the world, can be substantially explained by the appalling collapse of the economies of so many parts of the world, beginning in south-east Asia and extending much more widely, including Russia and elsewhere.

The fall of our exports to Europe and the substantial increase in our imports from the European Union are not due to the collapse of economic activities inside the EU. In my view, they are the direct effect of the folly of allowing the British exchange rate to be decided by interest rates and by allowing those interest rates to be decided independently by the Bank of England. We have no control over our exchange rate because we have abandoned the only way of influencing the exchange rate, which is through interest rate policy. The first thing the Chancellor did, as we were cogently reminded from the Benches behind me not long ago, was to abandon what we had for 50 years; control over the Bank of England and interest rates.

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I return to my question: why are we not having a serious debate on the economy and economic policy? Certainly not because the economy is doing well, so we can put that on one side. I believe that I know the answer to the question. We are not debating economic policy because there is no United Kingdom macro-economic policy. We do not have one. To have a macro-economic policy, we must have at least three capabilities: first, an ability to influence interest rates, the bank rate; secondly, an ability to influence the exchange rate; thirdly, an ability to influence the volume of demand as a whole by operating on the balance between taxation and expenditure.

Lord Skidelsky: My Lords--

Lord Shore of Stepney: My Lords, I shall give way in a moment. It is not an accident, it happened deliberately. The Chancellor abandoned those things out of conviction, because he does not believe that any British government should in future even attempt to manage the economy in the interests of Britain and the British people. He believes and is ensuring that we should hand it over--he believes in macro-economic policy, yes; but not British macro-economic policy, European macro-economic policy instead. So he is happy to have the discipline of interest rates, provided only that it is a European central bank which determines them and not a bank based on London. He is happy indeed to have the Chancellor's judgment about the Budget and about the balance between expenditure and income decided by treaty, by Maastricht, by 3 per cent. of GDP. I shall now give way.

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