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Lord Roberts of Conwy: My Lords, we are all grateful to the noble Lord for moving this Motion to resolve in the masterly way that we have come to expect of him on these occasions. The noble Lord is very practised in such debates and probably he can anticipate what each of us is going to say. Our viewpoints on the state of the British economy and its prospects are well known and range from the Chancellor's one of being "cautiously optimistic", a phrase he used again in his Mansion House speech on 26th June, to my own rather more pessimistic but still hopeful stance, which is shared by many on both sides of the Atlantic.
That comment reminds me that today is 4th July. Were it not for this debate, some of us might be helping the American Ambassador to celebrate the independence of his great country and the liberty that accompanied it. But, whatever else the Americans will be celebrating today, they will not be celebrating the state of the New York stock market, which is a fair but gloomy indicator of investors' assessment of the mighty economy of the United States and its prospects. The current depressed mood of the market appears to be very reluctant to change for the better in spite of low interest rates, and of course we see that mood reflected in the ebb tide of share prices in our own stock market and in other markets across the world. The FTSE 100 was at its lowest yesterday since April 1997. This has knocked on the head the Prime Minister's claim of 19th June that the market is,
- "massively up on where it was five years ago".—[Official Report, Commons, 19/6/02; col. 272.]
I do not need to belabour the inter-dependence of the United States economy and our own, and, indeed, that of the euro zone. The euro zone, too, seems to catch cold when the American economy sneezes. That is not surprising bearing in mind the importance of the American export market to the euro zone as well as to the UK.
The economic clouds over us all have darkened even since April when the Budget Report was published. Economic growth is proving very elusive. We all hope that growth will pick up as the year progresses, but it is clearly possible that the slow-down will continue and that the Government's target of 2 to 2.5 per cent growth for this year may not be achieved.
The questions that arise in that event are obvious, but they must still be asked. If government revenue falls below the Chancellor's expectations and cautious optimism is dashed, how will the situation be remedied? Will the spending plans to which the Minister referred be curtailed, or borrowing and/or taxation increased? I suspect the latter alternatives will be favoured. The increase in national insurance contributions is still to come. I hope that the Government do not forget that a rising tax burden will retard economic growth still further.
The Budget Report is disarming in its assurance that,
- "with sound public finances and low inflation, policy is well placed to respond to continuing risks".
If the current economic doldrums persist, they must affect the Government's thinking about joining the euro. The unemployment rates in the euro zone are not enticing. Neither are the spats between Italy, France and Germany and the European Commission over their lack of respect for the budget deficit constraints of the stability pact. Incidentally, can the Minister say whether the Government have to make a separate submission to the Commission under the pact?
While the major countries appear able to resist the Commission's strictures, smaller countries such as Portugal are not so fortunate. My understanding is that Portugal faces austerity measures imposed by Brussels under threat of punitive sanctions, so becoming the first country to lose control over tax and spending policy as a result of joining the euro. That must give the Government pause.
It was reported in February this year that the United Kingdom, too, has come under fire from the Commission for its spending plans. That was before the budget report and even though we have not yet joined the euro.
I accept that this is an extremely difficult time to make an economic assessment which carries the hallmark of certainty. It is a time of global instability, disappointing corporate earnings, accounting scandals and uncertainties and continuing terrorist threats. Nevertheless, so far as the Official Opposition are concerned, we are content to take note of the Government's Motion.
Lord Oakeshott of Seagrove Bay: My Lords, in following the noble Lord, Lord Roberts, I hope that the House will not know exactly what I am going to say. We shall see.
The financial statement in April in the Budget Report was bold. It expected the economy to grow by 2 to 2.5 per cent a year. This now looks a fairly heroic assumption after two consecutive quarters when GDP grew by only 0.1 per cent. Certainly very few independent forecasters, in the City or elsewhere, now look through the same rose-tinted spectacles as the Chancellor of the Exchequer on this central forecast, the one on which his public spending plans will stand or fall.
No economy is an island. I agree with both the Minister and the noble Lord, Lord Roberts, that we could be vulnerable to another slow-down in the United States. But the international economic outlook is far from being all black. Confidence and activity across much of the euro zone have turned up noticeably since budget time. We must face the hard fact that many of our economic problems are home made and getting worse.
What an impossible decision the Monetary Policy Committee of the Bank of England had to face today in trying to set a one-size-fits-all interest rate for our two-speed economy. The Bank's latest estimates of consumer lending show that it is now back to its late 1980s peak as a proportion of gross disposable income. I received two letters pushing unsolicited new credit cards on me this morning, and we must have had 20 aggressive letters pushing credit through our letterbox over the past month. Is the Minister surprised that we have a debt-financed consumer boom, with both the main house price indices showing this week that over the whole of the UK—not only the South East—house prices have risen by 19 per cent over the past 12 months and are showing a dangerous acceleration, with prices up 11 per cent in the first half of this year and 2.3 per cent in the single month of June?
Meanwhile, we have a massive balance of payments deficit, with most of manufacturing in deep recession and manufacturing employment down from almost 4.2 million when the Government took office to 3.7 million today. The Minister is right that unemployment in total remains low, but that is only because of rising employment in two sectors—building and the public sector—which has been masking job losses everywhere else over the past year.
So imprudent economic policy is producing a lop-sided economy. With so much of industry and the service sector sluggish or in decline, how can the few remaining pockets of growth make the Chancellor's growth and spending forecasts add up? Someone or something substantial will have to ride to the rescue soon. Can the Minister see help on the horizon?
This inevitably has been rather a mouse of a debate. The Budget and the economic and fiscal strategy reports are old news by now. But next year will be different. The Economic Affairs Select Committee of the House will be able for the first time to examine the Finance Bill in detail. We look forward to constructive discussion and informed debate with, dare we hope, the Treasury taking some notice of the improvements and amendments that our committee will propose. We will not roar; we will not have teeth; but we will speak with authority and relevant practical experience, and we will be heard.
8.30 p.m.
Lord McIntosh of Haringey: My Lords, I am grateful to both speakers for their responses. There are different views about the United Kingdom economy, although I have shown that the views of the noble Lord, Lord Oakeshott, are in the outer range of most
forecasts and informed opinion. Apart from the general observations made by the noble Lord, Lord Roberts, three particular points deserve attention.As to the stock market, of course we must remain vigilant but the facts underlying the UK economy are the same. It has low inflation, low interest rates, low unemployment and low tax burdens for business. Whatever the view of the markets in this country—the situation is more serious in other western countries—we have the right conditions in place to ensure that the impact of turbulence on equity markets is limited.
The noble Lord asked whether we have to submit evidence for the stability and growth pact. Member states in the single currency must submit stability programmes while non-participating members submit convergence programmes for annual examination by ECOFIN. They outline the country's medium-term fiscal strategy. The UK submitted its last convergence programme based on the contents of the pre-Budget report in December 2001.
The noble Lord, Lord Roberts, asked also about the convergence programme early warning system. In the last round of stability and convergence programmes, the Commission recommended that Germany and Portugal should receive early warning letters and formal recommendations advising the member state concerned to take prompt measures to prevent divergence of its budgetary position from one close to balance or in surplus, which is the requirement. The council decided at its last meeting that such early warnings would be inappropriate. The German and Portuguese Governments instead issued statements expressing their commitment to fiscal discipline over the coming years. No early warning letters have been issued.
I find it more difficult to respond to the noble Lord, Lord Oakeshott, because although he casts general gloom he does so in general terms and is somewhat at the edge of informed opinion. The growth assumptions underlying the budget forecasts were cautious and realistic. Government forecasting recently has an excellent record—rather better than the average of independent forecasters, against which we constantly compare it.
Our statistics are that following the latest revisions, the level of GDP in the first quarter of this year is higher than anticipated. We made upward revisions to growth in 1999-2000 and the last two quarters, which more than offset the downward revisions of growth in 2001. We made upward revisions to GDP growth in 2000 and the last quarter of last year and the first quarter of this year show more momentum in the economy than was previously estimated.
The noble Lord, Lord Oakeshott, referred to the problems of manufacturing industry. We recognise the difficulties being experienced because of the slowdown in the world economy. The noble Lord did not make a point on this occasion about interest rates and the weak euro—so often a theme of debates in your Lordships' House. The most important thing for manufacturers and other businesses is that the Budget maintains economic stability and takes action to
encourage enterprise. Manufacturers will benefit from the research and development tax credit; the new zero corporation tax rate; the cut to 19 per cent in corporation tax for small firms; and the measures to boost training and skills.I can only disagree with the noble Lord, Lord Oakeshott. Independent forecasts have been too pessimistic. Our forecasting record is good. We are conscious that the outturn for the past year of
2.25 per cent was in line with our pre-Budget reports and Budget statements on every occasion since 1999. That is a good record and we are confident that the forecasts contained in the Budget reports that are to be submitted to the European Commission in conformity with Section 5 of the European Communities Act 1972 are valid and realistic.
On Question, Motion agreed to.
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