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Pre-Budget Report

3.55 p.m.

Lord McIntosh of Haringey: My Lords, with the leave of the House, I will now repeat a Statement which is being made in another place by the Chancellor of the Exchequer. The Statement is as follows:

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    levels; holds to tough fiscal rules over the cycle; and is thus designed not just for times of high growth but for a global contraction with all its attendant difficulties.

    "And it is because the Bank of England has established credibility through year after year meeting our 2½ per cent symmetrical inflation target that it has been able, supported by fiscal policy, to sustain growth.

    "And it is this same symmetrical inflation target, designed to prevent both deflation and inflation, which explains why the Bank of England is not only rightly vigilant about the continuing weakness of equities, trade and investment, and G7 current account imbalances, but also vigilant about domestic risks, including the need for a sustainable housing market and for affordable pay settlements across the economy—public and private sector.

    "We will continue to give steadfast backing to the Bank of England and the Governor, Sir Edward George, who retires next June, in all the difficult decisions that have to be made.

    "And it is because we are determined both to have stability and value for money in reformed public services that—just as in the private sector—public sector pay rises must be set at a sustainable rate and justified by productivity. When inflation is around 2 per cent, we should not put our hard won stability at risk by yielding to inflationary and unaffordable pay settlements—whether they are in the private or public sector—that would put low inflation and low interest rates in jeopardy and damage the wider economy. To continue to steer a steady course we must hold firm in our demand for discipline in pay setting across the economy.

    "Let me give the detail of the economic forecasts. I can report that inflation will meet our target of 2½ per cent this year, and we now forecast inflation to be 2¼ per cent next year and 2½ per cent from 2003 for every subsequent year of our forecast period—having met our inflation target in each of the last five years, continuing to do so in the future.

    "With this platform of domestic stability and an expected world trade recovery, rising next year by an expected 5½ per cent, we can forecast consumption to grow in 2003 at a sustainable pace of 2¼ to 2½ per cent with the housing market slowing, and we forecast manufacturing output rising by 1¾ to 2¼ per cent and business investment by 2¾ to 3¼ per cent to make for more balanced economic growth.

    "Across the industrialised world, including in Britain, since the further slowdown since this spring, forecasts for growth this year have been downgraded. In the euro area GDP growth is forecast to be 0.8 per cent; in France 1 per cent; in Italy 0.4 per cent; in Germany just 0.4 per cent; and in Japan minus 0.9 per cent. For the UK, GDP

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    growth is forecast to increase by 1.6 per cent this year, rising to 2½ to 3 per cent next year, rising again to 3 to 3½ per cent in 2004.

    "Some have argued that Britain is least well placed to cope with global slowdown. In fact, taking growth last year, this year and next year together, Britain is not the weakest but the strongest of all the major economies. And while Japan, America and Germany have all been in recession, Britain has now grown consistently in every quarter for the last five and a half years.

    "As with monetary policy, so also our fiscal policy is designed to help sustain growth at every stage in the economic cycle, with our fiscal rules set for the long term and based on deliberately cautious assumptions, including for revenues.

    "These assumptions, which are independently audited by the National Audit Office, mean that when stock market values fall we take this fully into account, not just in assessments of the current year's stamp duty, capital gains tax revenues and corporate tax returns, but build these falls fully into revenue projections for future years.

    "And the assumptions include not only a cautious view of tax receipts from growth, of oil prices and of the impact of revenue gains from, for example, our VAT anti-fraud strategy, but cautious assumptions about unemployment, where we claim no social security savings when unemployment is forecast to fall.

    "From 1997 we also took decisions to freeze spending for the first two years, achieving surpluses of 30 billion; to cut debt from 44 per cent of GDP to 36 per cent; to then use the 22 billion spectrum auction to repay even more debt; and to regularly achieve not only a current balance but a large surplus; in each year since 1997 meeting our two fiscal rules—with surpluses worth a cumulative 58 billion—and with debt far below 40 per cent of GDP and with debt interest payments 7 billion a year lower, consuming a smaller share of national income this year as last year than at any time since 1915.

    "So while some have, in the past, criticised this long-term and deliberately cautious approach, we are, with current surpluses and historically low debt, able at every stage of the economic cycle to meet our fiscal rules, including in the cautious case.

    "Let me provide the detailed figures. Figures for our current budget for this year, 2002–03, and for the five years to 2007–08, are minus 6 billion, minus 5 billion, plus 3 billion, plus 5 billion, plus 8 billion, and plus 10 billion. So we meet our golden rule over the cycle—not just achieving a balance but with an estimated surplus of 46 billion. And we meet the golden rule on the cautious case. Taking the full economic cycle into account, the current surplus for each year is forecast to be 0.2 per cent of GDP this year, 0.3 per cent next year, 0.6 per cent, 0.5 per cent, 0.6 per cent and 0.7 per cent.

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    "Our second rule—the sustainable investment rule— is that over the cycle net debt should be kept below 40 per cent of GDP. Debt this year is 41 per cent of GDP in the USA, rising to 43 per cent in France, 45 per cent in Germany, 54 per cent in the euro area, 68 per cent in Japan, and in Italy to almost 100 per cent. I can tell the House that in Britain net debt this year and in future years will be at 31.0 per cent, 32.1, 32.4, 32.6, 32.7 and 33.0, comfortably meeting our sustainable investment rule, doing so over the cycle and in every year.

    "Our commitment to meeting our fiscal rules is not just for this year and this economic cycle but for the long term and so I am also publishing today a report which examines the sustainability of Britain's fiscal position decade by decade and compares our position with other countries. It shows that taking account of population changes and the cost of ageing on public spending the British fiscal position in this period is sustainable and in a strong long-term position compared to other countries.

    "I have said that our fiscal framework is designed so that we not only make the right decisions when the world economy is growing but that it is robust so that at all times we meet our fiscal rules.

    "An alternative approach has been put to us—that, instead of holding firm to our long-term course, this stage of the economic cycle would be the time to cut spending and borrowing. I have examined such an approach. It would lead directly to depressed demand, rising unemployment and the old boom and bust approach of capital investment slashed, with hard won stability put at risk.

    "In the last world downturn 10 years ago, Britain was bound into such a position when inflation was high, debt rising fast and the fiscal disciplines were not being met.

    "Today, in this world downturn, with a foundation of historically low levels of inflation and debt, such an option would be neither competent nor prudent because, after the decisions we have taken, we can meet our fiscal rules, fulfil our public spending plans and borrow for investment across the economic cycle.

    "Figures for net borrowing for this year and future years are 20 billion, 24 billion, 19 billion, 19 billion, 19 billion and 20 billion—that is, 1.9, 2.2, 1.6, 1.6, 1.5 and 1.5 per cent of GDP. This compares with a deficit 10 years ago of 8 per cent, equivalent to an 80 billion deficit today, and to an average deficit of 6 per cent over the early nineties.

    "I can confirm that this year and each year in our forecast period we are well within the Maastricht criteria and that the Treasury will publish its assessment of the five tests on the euro by June next year.

    "Taking the full economic cycle into account, net borrowing which is forecast this year, cyclically adjusted, at 2.7 per cent in the USA, 2.5 per cent in France, 2.7 per cent in Germany and 7.1 per cent in

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    Japan is—in Britain—just 1.2 per cent this year and in future years 1.5 per cent, 1.3 per cent, 1.5 per cent, 1.5 per cent and 1.5 per cent of GDP.

    "So, in both monetary and fiscal policy, with the lowest inflation and long-term interest rates for 40 years, the right approach is to hold firm to our long-term course.

    "And as I conclude this section on monetary and fiscal policy, I want to thank Sir Edward George, whose period of office as Governor of the Bank of England ends in June next year, for the steady hand he has consistently shown in the leadership of the Monetary Policy Committee since we made the bank independent in 1997.

    "And in welcoming the announcement this afternoon of the appointment by Her Majesty the Queen of the new Governor of the Bank of England—the Deputy Governor for the last five years, Mr Mervyn King—I can assure the House that the same steady grip will continue.

    "And it is that steady hand, that long-term strength of purpose in monetary and fiscal policy, that in testing times is keeping our economy stable and growing to meet our long-term goal of rising prosperity for all—and we will do nothing to put that steady approach and our hard won stability at risk.

    "If stability is the precondition for economic progress, enterprise is its driving force.

    "And Britain today is also challenged by a long-term global restructuring of industry—low value added production shifting from the highly industrialised to the industrialising countries, but competitive advantage in manufacturing and services increasingly coming from high value added technology driven products.

    "And in this next wave of globalisation, now upon us, it is the flexibility of our product, capital and labour markets, the strength of Britain's science base, the level of British research and development, and the scale and dynamism of knowledge transfer from our universities to our businesses that will drive our productivity growth and thus future prosperity.

    "Building upon the independence of the competition authorities, the surest route to British companies becoming global champions is to extend competition and open up new markets at home.

    "The public sector must also meet the competition test and the investment we make must be matched by continuing reform. So, first, in central government contracts worth 14 billion a year, the Office of Government Commerce will maximise competition, encouraging bids from the widest range of companies, small as well as large; second, the Office of Fair Trading will now scrutinise proposed public sector regulations to assess their competitive effects; third, we will use the discipline of the market to deliver value for money through PFI projects worth 30 billion—now including large-scale regeneration projects—while

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    recognising the limits to markets in areas such as healthcare, education, defence and policing; and, fourth, to maximise efficiency in dealing with the Government's own businesses, we are announcing today the creation of a new shareholder executive.

    "In January, we will receive and respond to the Higgs report on the role of non-executive directors.

    "Having cut corporation tax to 30p and consulted business on further corporate tax reform, we will now consider detailed proposals to reform the tax treatment of capital assets, use of losses, and trading and investment companies. To stop tax avoidance, measures announced today will root out abuse of the VAT regime and tighten rules governing employee benefit trusts, industrial building allowances and profits on sales of extended warranties.

    "I turn to measures to help small and medium-sized businesses. Following our cut in small business corporation tax to l9p from April and our cut in the starting rate from 10p to zero, the Secretary of State for Trade and Industry is today announcing the extension of eligibility to the small firm loan guarantee scheme to include businesses with turnovers of up to 3 million a year in a wider range of sectors: 400,000 businesses in all.

    "Following our deregulatory measure for flat rate payment of VAT, under which from April 650,000 firms are no longer required to report on each VAT transaction, the Pre-Budget Report will consult small businesses on extending and improving this scheme. And following the exemption for 200,000 firms of the requirement for a statutory audit we will consult next year on the same deregulation for medium-sized firms.

    "To help small and medium-sized manufacturers export and build modern manufacturing strength, the Secretary of State for Trade and Industry is also ensuring that, from today, the special manufacturing advice service will now extend to every region of the country; and in response to concerns about rising insurance costs, the Department for Work and Pensions will also now undertake a formal review of the operation of employers' liability insurance.

    "To build stronger local economies in each region and devolve decision-making out of Whitehall, in the North West, East Midlands and West Midlands we are devolving business support services from Whitehall to the regions; and in the North East, North West, South East and East, devolving management of skills budgets.

    "Because the enterprise culture starts in our classrooms, the Education Secretary is, following the Davies report, announcing, over three years, 75 million to promote enterprise education in our schools and colleges.

    "To encourage local initiatives in enterprise, we will consult on allowing local authorities to keep additional rates income from the creation of new businesses in their area.

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    "And to match the proposed greater flexibility in the planning system with measures to increase the numbers and affordability of houses, the Deputy Prime Minister will publish his communities plan in January.

    "And for high unemployment communities, where the answer is more economic activity and enterprise as the route to more jobs, we are today—jointly with the Small Business Service—publishing details of 2,000 new enterprise areas in which we will not only—following state aids clearance which we expect in January—abolish, from Budget Day, stamp duty for all business property transactions in these areas and—with the 25 per cent community investment tax credit—cut the cost of investing; but also give local authorities powers to relax requirements for detailed planning permission. And in pilot projects in high unemployment areas we will test a more intensive estate by estate approach of interviews, training and job search services, matched by benefit sanctions to help the long-term unemployed back to work.

    "I have two further announcements on business taxes. From January 1st we will abolish all royalty taxes on North Sea oil and gas. And following the consultation I began in my last Budget on the future of bingo tax on player stakes and whether to replace it with a tax simply on bingo companies' profits, I am sure that my decision to abolish in the Budget bingo duty will be welcomed on all sides of this House.

    "Our charity tax reliefs are worth an additional 2 billion a year and I can announce today that I will extend for one more year the government supplement on payroll giving. To match our initiatives on giving with initiatives encouraging volunteering, the Home Secretary and I will consult business on a new corporate volunteering initiative; and, based on the success of the United States' "Americorps", pilot a financial scheme to help British young volunteers from lower income backgrounds taking a year out after school to undertake community service.

    "We have a commitment to protect the environment for our children and future generations and so we are publishing today a detailed paper setting out our approach to the environment. We will now consult on a revenue neutral proposal—to raise the landfill levy by 3 per tonne per year from 2005–06. And on environmentally based fuels I can announce we will, for bioethanol road fuel, reduce the duty rate by 20p per litre.

    "The modern route to competitiveness also demands that Britain's most innovative companies work ever more closely with Britain's most enterprising research universities.

    "Today the Secretary of State for Trade and Industry is beginning a review of government support for innovation and she and I have also asked the former editor of the Financial Times, Richard Lambert, to examine how building on the research and development tax credit and our

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    successful University Challenge and Higher Education Innovation Funds, the long-term links between British business and British universities can be strengthened to the benefit of the British economy.

    "While in our first five years the New Deal has been helping the young, lone parents and many disabled people move into work, the priority now is to focus also on how we help young people and adults move up the skills ladder. So I can announce that we will use the remaining surplus from the windfall tax and, at a cost of 130 million, extend to around a quarter of local learning and skills council areas the new employer training pilots: government support for wage and training costs in return for employers providing time off for training.

    "To spearhead the expansion of modern apprenticeships to nearly a third of young people aged between 16 and 22 by 2004, a new modern apprenticeship task force will be headed by the chief executive of Centrica and chairman of Manchester United Football Club, Sir Roy Gardner.

    "And following the success of our new University for Industry, with, already, half a million students, and talks with the banks, we will now consult in detail on how we expand training and management courses for small businesses.

    "To further increase flexibility in Britain's labour markets, we will continue the expansion of work permits for managed migration begun by the Home Secretary. He and I are extending the highly skilled migrant programme, and through a new unit at Work Permits UK we will help small firms seeking to recruit skilled workers from overseas.

    "Our policy is to combine enterprise with fairness. To continue to make work pay more than benefits, we are, from April, extending the principle of the working families' tax credit to single adults and couples aged 25 and over without children. I can now state that couples with wages less than 280 a week, or 14,000 a year—and single people with wages less than 200 a week, or 10,500 a year—stand to receive more money—taking forward our belief that an enterprising economy and a fair society advance together.

    "A flexible, efficient labour market must not only promote employment, but must also be fair to parents. Next month a joint Treasury-DTI report will publish proposals for enabling parents to make real and effective choices on balancing work and family life.

    "Building on our rise from April in maternity pay to 100 a week and the first ever paternity and adoption pay, the new tax credits, and the first ever national childcare strategy, we will consider further reforms: new tax and national insurance incentives to expand employer-supported childcare; paying the childcare credit for approved home childcare by carers who are not already childminders; and increased flexibility in parental time off, including giving fathers time off to attend ante-natal care.

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    "Our goal—stability and prosperity for all—also means fulfilling our goals to tackle child and pensioner poverty. And following last week's annual social security uprating, the starting level for the new child tax credit taken with child benefit and now paid direct to the mother will be: 1,400 a year for those with incomes below 50,000; between 800 and 1,400 a year for those with incomes of 50,000 to 58,000; and for two million lower income families, 2,800 for one child and 4,800 for a two-child family as the child tax credit based on support for all, most support for those who need it most, becomes the most powerful weapon in tackling family poverty.

    "The same progressive principle underlines our proposal that all children have a child trust fund that builds up year by year to be drawn upon at age 18. We will now proceed to detailed discussions with a range of providers—banks, building societies and friendly societies—on the fund and on incentives for lower income families to save for their children's future.

    "Now that the Secretary of State for Work and Pensions has announced the pension rise next April from 75.50 to 77.45, and in April 2004 by at least 2½ per cent to 79.40, the Government can also announce the levels of the new pension credit from next October that, instead of penalising modest savings and small work pensions, will reward them. In the typical Member's constituency, 7,000 pensioner households—couples with total incomes of 200 a week or less and single elderly people with 139 a week or less—stand to benefit from this 2 billion extra paid out in pensions. Let me give the House the figures: a pensioner couple with income of 150 a week will receive 21.50 extra, 1,100 more a year. On an income of 160 a week: 17.50 extra, or 900 a year more. With an income of 170 a week: 13.50 extra, or 700 more a year. A single pensioner with 110 a week income will receive 11.60 a week, or 600 a year, more on top of their pension rise. And those on 120 will receive 7.60 extra. For 5 million pensioners, this will be the biggest increase in pensions since the old age pension was introduced. I can also announce that the minimum income guarantee for single pensioners will be 102.10 a week as we seek security and dignity in retirement for every pensioner in our country.

    "When next month the Secretary of State for Work and Pensions publishes the Government's Green Paper on pensions, this will include our proposals to simplify the tax treatment on pensions. I can confirm that the tax-free lump sum payment to retirees will remain. Existing tax reliefs for pension contributions for employees, the self-employed and employers will also remain.

    "I have two more announcements to make. Because we have built sound foundations of low debt and low inflation, and are today meeting our fiscal rules in every phase of the economic cycle, we have rejected the view that we should cut back our spending plans at home and abroad. So I can not

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    only confirm that we will fund our planned investments—by 2006, 8 billion more a year for local authorities; 15 billion more a year for education; 63 billion more a year for public services as a whole; and, by 2008, for health alone 41 billion more a year paid for by our national insurance rise—we can also, amid global uncertainty, do more to meet our international obligations.

    "So it is right, in the new figures presented today, consistent with past Treasury practice, to set aside our international defence responsibilities, a provision of 1 billion to be drawn on if necessary. But, we must not only meet the global security challenge; there is today not only a new imperative, but also a new opportunity to meet the global poverty challenge. In the past five years, through the Prime Minister's Africa initiative, and through the tireless work of the International Development Secretary, Britain has spearheaded the fight for debt relief and social justice for the poorest countries. I can tell the House that, having already agreed 62 billion dollars of debt relief for 26 of the poorest countries, our aim is now 100 billion dollars for the 38 countries in total that stand to benefit from the cancellation of debt. I thank Members on all sides of the House, and all Churches, faith groups and non-government organisations in our constituencies for their tremendous work.

    "Because at this critical time we must move forward, I have held discussions over recent days with finance Ministers from America, France, Germany, Italy and other European countries, as well as the heads of the IMF and the World Bank. I can tell the House that Britain is proposing a new international finance facility, with public finance leveraged up by long-term international commitments to raise the amount of development aid for the years until 2015, from 50 billion dollars a year to 100 billion dollars a year, so that by 2015 we can meet the millennium development goals—including that poverty be halved, that child mortality be reduced by two thirds and that every child has the right to primary education.

    "Having written as chairman of the International Monetary and Finance Committee to all fellow finance Ministers, the World Bank and the United Nations, I can tell the House that, as a Government, we will be prepared to provide a British commitment to help underpin this plan. The Secretary of State for International Development and I are now asking other countries to join with us. I believe all parties in the House will wish to support this British initiative for global justice, so that we can not only win the fight against terrorism but also win the peace.

    "So, in conclusion, tested by world events, resolved to steer a stable course, that steady strength of purpose will continue, honouring our commitments to invest in public services, to advance enterprise and fairness, and to meet and master the global challenges ahead. I commend this Statement to the House".

My Lords, that concludes the Statement.

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4.27 p.m.

Lord Saatchi: My Lords, I am most grateful to the Minister for repeating the Chancellor's Statement in your Lordships' House and to the usual channels for arranging for us to hear it so promptly. May I be the first to echo the Minister's gratitude to Sir Edward George, and to be among the first to congratulate Professor King on his appointment as Governor? Between them, Sir Edward and Professor King have made Britain the model of central bank governance, and, as the Minister said, we all owe them a great debt.

Having heard the Statement, I wonder whether any noble Lords share the need for a translation of it into plain English. I shall offer one: the Government are running out of money. However, one would be hard pressed to notice that among the barrage of micro changes, initiatives, schemes, pilots, reports, papers, consultations, reviews, and, of course, units and task forces, all brought to bear in the service of another passionate recommitment to endlessly worthy aims and objectives.

The simple fact, admitted in the Statement, is that the Government have got their figures wrong. Fact: in April, the Chancellor of the Exchequer said about growth,

    "Britain will achieve growth from 2 to 2 1/2 per cent this year".

Then he added for emphasis,

    "rising in 2003 to growth of 3 to 3 1/2 per cent".

He said that those were based on,

    "cautious assumptions . . . the cautious case".—[Official Report, Commons, 17/4/02; cols. 578-79],

with, he said, a margin of prudence. He missed that forecast by a quarter.

Fact: in April this year he said that tax revenues this year would rise by 4.5 per cent. That has been missed by three quarters. Fact: this time last year, he said he would borrow 34 billion over the next four years. Then, in April this year, he said that he would need 72 billion. We have just heard that he now needs over 100 billion. Why? Because there is one area in which the Chancellor is hitting his targets month in, month out, and that is spending. Here, he pursues his targets with all the zeal of the convert.

Your Lordships may remember how the triumphant Labour Party manifesto for the 1997 general election condemned the myth that the solution to every problem is increased spending. It said:

    "The level of public spending is no longer the best measure of the effectiveness of government action in the public interest".

Yet today, after his conversion, as we have just heard from the Minister, the Chancellor wears his spending as a badge of honour and denounces anyone too hard-hearted to match it. So this year, government spending is up by 7.5 per cent on the most favourable measure that I could find from the Government's viewpoint. That is against GDP growth at the reduced level of 1.5 per cent, as we have just heard. On my maths, that means that the Chancellor has five times more money going out each month than he has coming in.

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Last week the Government admitted that they had missed 75 per cent of their departmental targets. As many of those hundreds of targets were for things like the rate of truancy among teenage mums in 2010, we did not take them very seriously and we all had a jolly good laugh. This time it is different. I see few smiles around your Lordships' House today. This time, the Government's failure to meet their target threatens us all. While wearing his heart on his sleeve about caring for schools and hospitals, the Chancellor seems to have overlooked a stubborn and inconvenient fact: caring that works costs cash. Where can he get it?

Your Lordships will remember that the Government had a foolproof method—invisible tax rises. However, the media, mainly, sniffed that out and now the pensioners are in revolt and so are the businesses. They then tried visible tax rises. "National insurance contributions for the public services" was the cry. That was too daring, particularly if half of them are on strike. Then they had the thought of reducing their outgoings by charging for things that were previously free, such as a good university education. That is a political nightmare for them, with accusations of a two-tier system and others—the subject of the debate initiated by my noble friend Lord Baker.

Then, the Government hit on the big idea. What if they could reduce their spending by making it vanish? Stealth spending from the people who brought you stealth taxes. Would your Lordships forgive me if I take you into the arcane world of PFI and PPP? I regret having to do this, but I hope your Lordships will agree that it is essential. These are items on which total spending at net present value was 8 billion when this Government came to power. Today, it is an estimated 100 billion. I say "estimated" because there are no published data on the current figure. How did that huge rise come about? I should like to put your Lordships into the position of the Government for a moment. Let us say that you wish to build a road, although the same might apply to a school or a hospital. You would go to a private company and say, "I haven't the money for this road. You build me the road and when it is finished I will pay you every year for the next 25 years". Today, that conversation accounts for 73 billion of future government liabilities. Or you might say to the private company, "If you have to borrow to build the road, I will guarantee your loans for you". That is another 27 billion, making a total of 100 billion. Bingo. The company get their profit, the Government get their road and everyone is happy. Best of all, not a penny appears on the Government's balance sheet.

I ask your Lordships to put aside questions about whether it is a good road or a bad road or, as the noble Lord, Lord Barnett, often asks, whether it would have been cheaper for the Government to have built the road themselves. Let us pause and ask ourselves how those future liabilities of 100 billion should be shown in the government accounts. The Government are currently financing, outside their balance sheet, 100 billion of public sector capital expenditure through the private finance initiative and through

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guarantees, letters of comfort, government-backed bonds and underwritings of one kind or another in PPP schemes. The PFI liabilities are mentioned only in the hiding place of creative accountants through the ages—the notes to the accounts. The PPP obligations are not mentioned at all—not even as a note.

Here we come to a matter of the highest economic significance in relation to the Statement that your Lordships' House has just heard. In another place last week, in the Queen's Speech debate, the Chancellor said:

    "countries such as ours with low levels of debt . . . are in a position to borrow, whereas others are not".—[Official Report, Commons, 18/11/02; col. 390.]

Did not your Lordships find it extraordinary that, in saying that again today—I think that the Minister said that the foundation is low debt—he did not mention that the single item that has changed most as a result of this Statement is government borrowing? That was not mentioned in the Statement—not a word.

If you or I went to the bank to borrow money, we would present our balance sheet, setting out our assets and liabilities so that the bank manager could determine our borrowing capacity. The bank manager would ask—as bank managers do—some pertinent questions. How much do you owe? If you revealed that you owed 100 billion, would that reduce your borrowing capacity? Of course it would. If you had also guaranteed your aunt's mortgage, the hire-purchase payments on your sister's car and your nephew's school fees for life, would the bank manager say that that reduced your borrowing capacity? Of course he would.

For our government today, the total of all such future obligations to pay is 100 billion. That is 10 per cent of GDP. By not including these sums, the Government are understating their liabilities and misleading us all. It means that the Government have already passed their borrowing limits. Their debt is not 31 per cent of GDP, as we heard in the Statement; it is 41 per cent of GDP, which means, on the Chancellor's own rules, that he should not undertake the extra borrowing he announced today.

Your Lordships will rightly say that I am hardly an impartial observer, so perhaps my figures are wrong, too. Normally you would settle the matter by calling the auditors and asking them, but whom do you call in this case? There are three of them: the Comptroller and Auditor General, the Office for National Statistics and the Statistics Commission. That is two too many for a true and fair view. As the Minister pointed out last week, two of those three have agreed to disagree. So we are keeping two sets of books. Try that on your bank manager. As the National Institute said last week:

    "You can already smell the fudge being cooked up in Great George Street".

When the Chancellor took office, he promised a clear set of national accounts. This was the first of his five principles of fiscal management, which he said would bring,

    "transparency . . . in the publication of the public accounts".

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The mood of the times in accounts as in every other aspect of life is for openness, transparency and full disclosure. I dare to hope that in the debate following the Statement, the Government will support this call from our Benches—I choose my words carefully here—that the borrowing forecast should be subject to an independent audit by people outside the Treasury. That is not much to ask, is it? Particularly as the words that I have just used—the call for independent scrutiny—are from Hansard on 18th April 1996 and are the Chancellor's own.

4.39 p.m.

Lord Newby: My Lords, I join the noble Lord, Lord Saatchi, in congratulating Mervyn King on his appointment as the next Governor of the Bank of England. So far as I am aware, it will be the first time that a fanatical supporter of Aston Villa FC has been governor. One can only hope that he brings a greater sense of stability to the economy than his team has managed to achieve in the Premier League. We must also express our appreciation for the extraordinary success of Sir Edward George during his time as governor. He presided over a period of low inflation, the like of which we have not seen in our political lifetime.

At this point last year, I accused the Chancellor of the Exchequer of being extremely complacent. To avoid repeating myself, perhaps one could categorise this Pre-Budget Statement as being based on the principle of "steady as she goes"—a principle that I believe was first enunciated publicly by James Callaghan while serving as Chancellor of the Exchequer in 1966 immediately before the sterling crisis. My worry about the Statement is that the whiff of complacency appears not to be matched by the facts.

One aspect is clear. Given that the Chancellor of the Exchequer has been able to accumulate some 50 billion of surplus during his time in office, he can afford to spend some of it in the short term by means of borrowing without breaking his own rules. There is also the fascinating question of when cycles begin and end. It is the great advantage of being Chancellor that you can determine when cycles begin and end. Notwithstanding when this cycle ends, we shall be faced, as the figures given earlier demonstrate, with very significant cumulative borrowing a year or two down the track. Without having had the chance to study the assumptions in the Statement in any detail, I believe that there must be severe question marks over whether even the borrowing figures announced today are likely to be met.

The Chancellor of the Exchequer achieved a major surplus in his first years because of a number of issues, some of which were cyclical although others were not. The 3G Telecom licences were not cyclical benefits; they were one-off gains. Arguably, the increases in corporation tax and those in income tax that flowed from huge bonuses were both associated with the most extraordinary bull market on the Stock Exchange.

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They are not features of the economy that are likely to be replicated in the next cycle—certainly not to the same extent. Therefore, we must question whether in two or three years' time the figures produced today by the Chancellor will not look "prudent", as he will claim, but far too optimistic. That has major implications for the management of public expenditure, to which I shall turn shortly.

In the short term, the Statement is amazingly complacent about the imbalances in the economy. We have seen the most extraordinary boom in the house market. It may be coming to an end, but it has left house prices at extremely high levels and caused difficulties in terms of mobility of labour, especially as regards public service workers. In his second Statement, the Chancellor of the Exchequer said that he would deal with housing later. But then, no doubt because it was too difficult an issue, he did not refer to it at all.

The implication and the express content of the Statement is as follows: to the extent that there are difficulties, it is, frankly, because other countries are in a mess and we, who are virtuous, are having to deal with the problem. I wonder whether the Minister can explain how the global economic downturn has been responsible for an unsustainable housing boom. Can he say how it has been responsible for record and unsustainable levels of equity withdrawal, and for record levels of personal borrowing? Those are problems that have been generated at home and upon which the Chancellor of the Exchequer has been silent.

Another major problem facing the economy is the low level of business investment. Today's figures show that investment is down by 12.4 per cent on a year ago. In his Statement, the Chancellor says that he expects that the situation will only have improved at the end of the year to the extent of being 10.5 per cent down from what was already a level that needed to be improved. Yet, for next year, the Chancellor is predicting that investment will increase by between 2.75 per cent and 3.25 per cent, which, almost certainly, is spurious accuracy. As business investment fell dramatically both this and last year, can the Minister tell us what objective grounds the Treasury has for believing that it will suddenly rebound next year? All the recent conversations I have had with people in business suggest to me that that is very unlikely to be the case.

I am also rather surprised to see that manufacturing output, which fell by 2.5 per cent last year and 4 per cent this year, is due, according to the Chancellor, to increase by 1.75 per cent to 2.25 per cent next year. Again, can the Minister give the House some basis for believing that those figures are not just wishful thinking? On the issue of domestic imbalances, the Statement is very weak.

The other area where the state of the public finances raises issues which the Statement barely covers is the way in which public expenditure is delivered. One matter is absolutely clear in my mind from the Statement and from what we know about the economy in the short to medium term. Even if the Government maintain their expenditure targets, the new levels of

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public expenditure that we envisage at the end of the current spending round are likely to be the highest that we shall see for a considerable time. Therefore, questions about how more effectively public expenditure can be used to deliver public benefit are even more important.

I strongly agree with the statement by the Chancellor of the Exchequer that public sector pay must be set at sustainable rates. We have been supportive of the Government on that issue in respect of current industrial action. But if the Government were to allow greater local flexibility in terms of public sector pay, does the Minister agree with me that it would persuade staff to move and work in high-cost areas as well as filling unattractive jobs? Those are major problems that the Government's current policies are failing to address.

More specifically, noble Lords on these Benches have very serious problems with the Government's view about who takes decisions on public services. The Government are undertaking some selective devolving of decision making to the best performing schools, hospitals and councils. But, in our view, they have failed to devolve decision making to local—and, increasingly, to regional—areas on a coherent basis so that all the units that are producing educational or health services can plan at local and regional level. Instead, a few have been plucked out for special treatment, with the rest being left in the lurch.

I have a few specific questions for the Minister on this extremely detailed Statement. On PFI, the Chancellor of the Exchequer says that the Government recognise,

    "the limits to markets in areas such as healthcare, education, defence and policing".

We have discussed this issue many times in the House. Can the noble Lord explain what those limits might be in the Government's view? I very much agree with what the noble Lord, Lord Saatchi, said in terms of dodgy accounting rules for PFI; indeed, we have been pressing for greater clarity in that respect. However, I am now completely confused as to whether or not the Conservative Party supports PFI. Perhaps it would prefer that the investment, which the Government believe is possible only through PFI, should not take place.

There is one aspect of the Statement that I find intriguing; it is something I have never heard of previously. I am sure that it will transform something, although I am not quite sure what that will be. I refer to the new "shareholder executive". In his Statement, the Chancellor explains that,

    "to maximise efficiency in dealing with the Government's own businesses, we are announcing today the creation of a new shareholder executive".

I hope that the Minister can explain to us what the "shareholder executive" is and how it is going,

    "to maximise efficiency in dealing with the Government's own businesses".

I am not sure what is meant by that.

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There is no doubt that the UK economy, and therefore the public finances, face greater challenges today than at any time since the Government came to power. Frankly, however, there is nothing in the Statement to tackle the manufacturing recession, the strength of the pound, collapsing investment and runaway personal consumption. Nor is there anything that deals with the overwhelming problems of red tape and an unbelievably complicated tax and tax credit system. The business community and the country as a whole were looking today to the Chancellor to explain how he was going to tackle these problems. I fear that he has completely failed to do so.

4.50 p.m.

Lord McIntosh of Haringey: My Lords, in the light of the length of the Statement—which, however fast I read it, came to 31 minutes—I wonder whether the House will permit me to go beyond the minus three minutes which I have in theory to respond to the very valuable contributions by the noble Lords opposite. I think that I would be failing in my duty if I took advantage of the strict time limits that normally apply to Statements.

I am grateful to the noble Lords, Lord Saatchi and Lord Newby, for their appreciation for the service of Sir Edward George over such a long period and for their welcome for the appointment of Mervyn King as the new Governor of the Bank of England.

The noble Lord, Lord Saatchi, quite rightly, immediately moved on to the attack, quite justifiably drawing attention to the contrast between the forecast which we made at the time of the Budget and the forecasts now being made. He is right that our forecasts both for the G7—in other words, largely for the global economy—and for this country have been reduced. They have, however, been reduced in parallel. The change in the forecast for this country is very largely dependent on the forecasts for the global economy.

Our forecasts at that time were very much in line with the average of independent forecasts, and they were not, as far as I remember, challenged at that time by the party opposite. I should add that all the assumptions behind these forecasts are audited by the National Audit Office which, as noble Lords will know, is not a government body. The NAO reports not to the Government but to the Public Accounts Committee in another place.

There have been very significant changes in the global economy since we last made our forecasts—particularly in a renewed decline in business investment, partly because of a lack of confidence in accounting standards in large parts of industry in the developed world. Consequently, there have been very substantial reductions in equity prices. I do not want to exaggerate the importance of equity prices in the economy, but I think that the types of forecast changes reflected in the Pre-Budget Report are very much in line with informed opinion around the world. Table 1.1 on page 4 of the Pre-Budget Report shows the extent to which it is possible to argue—as we do

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argue—that as we were long protected in the downturn, so we will be protected and helped by the recovery in the world economy in the years to come.

The noble Lord, Lord Saatchi, then moved on to the issue of tax and spending and to his description of spending as a "badge of honour". However, given the options which the Statement—let alone the Pre-Budget Report—set out of spending cuts, tax increases or borrowing, and given the Chancellor's statement that he examined the alternatives to increased borrowing, what is the position of Members of the Conservative Party? Are they in favour of spending cuts? If so, they have not said so, and they are not willing to say so. They call spending a "badge of honour" for the Government, but they are not willing to suggest that it should be changed. Are they in favour of tax increases? That is implied by what they say, but they are not willing openly to say so.

In our current position in the economic cycle, both in world macroeconomic terms and in terms of the economic health of this country, borrowing is the right thing to do, and tax increases and expenditure cuts would be the wrong thing to do. Without glorifying it with the name of John Maynard Keynes, and since we got rid of the worst excesses of monetarism, I think that that is generally accepted to be the right thing to do. I do not hear the Conservative Opposition challenging that argument. All they are willing to do is make fun of it around the edges.

I was interested when the noble Lord, Lord Saatchi, then moved on to the issue of the private finance initiative. I was also interested that the figure of 100 billion—which I have heard before—has come out into the open in his speeches. The figure of 100 billion was, of course, used in the noble Lord's press release last week advertising his speech in the debate on the humble Address, when he failed to mention that figure. As he failed actually to say the figure in his speech, there was no way in which we could respond to it.

The figure is, however, entirely bogus. It is bogus because it is not possible for the noble Lord, Lord Saatchi, or for anyone else—and I have read Mr Michael Howard's press release as well, although I have not heard his speech today—to build it up into a figure. It is bogus also because it fails to recognise that all the decisions on whether liabilities under the private finance initiative are held on or off the balance sheet are taken not by the Government but by the individual auditors of the departments commissioning those private finance initiatives. In fact, a very large and increasing number of these private finance initiatives, including many of the transport initiatives and all of the prison-building programme in England, are on the balance sheet because the auditors have decided that they should be.

We have no difficulty with that. It is in no way our position that the private finance initiative and public/private partnerships are an attempt to get anything off the balance sheet. Even if they were off the balance sheet, they are all still declared each year in the Red Book, where all contingent liabilities over 100,000 are

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declared. The decisions on which investment under the private finance initiative is or is not on the balance sheet are taken by the National Audit Office, which is not a government-controlled body, and the Office for National Statistics, which has been given independence by this Government. Within the past few days, it has also been confirmed by the independent Statistics Commission that the arguments used by the ONS are sound.

So the Government are entirely open in all of the ways in which they undertake and report on the private finance initiative. They do so because it is valuable to have investment that is additional to—not instead of—increased public investment. They do so on the basis that everything that is done is open and available for inspection, audited independently and declared independently. Indeed, they are the first government to declare their fiscal stance not once but twice a year, using the opportunity of the Pre-Budget Report.

The noble Lord, Lord Newby, made reference to the private finance initiative but he was more concerned—I understand that—with the risks that lie behind the forecasts in the Pre-Budget Report. If the noble Lord looks at paragraph 29 on page 21 of the report—I realise that he will not have had an opportunity to do that—he will find that we have been more explicit in setting out the risks than has been the case in the past. We make clear that there are global risks of the sort that I have described, a fall in equity prices and a change in oil prices. There are risks in this country. There are risks of something other than a managed decline in house prices. But the conclusion we draw from this is that the risks are still manageable within our fiscal rules. Although there is clearly a range of forecasts, that range is justifiable in the light of our assessment of the risks.

The noble Lord referred to imbalances in the economy. There have been, and still are, imbalances in the economy. The Bank of England Monetary Committee has had to agonise over conflicting pressures such as manufacturing output and increasing house prices. Incidentally, the impact of borrowing for house purchase is a little exaggerated. Personal debt is very much higher but the much more important factor for households is the cost of servicing that debt. With lower interest rates that is by no means at an all time high.

We recognise that there has been, and still is, a two-tier economy but the Pre-Budget Report gives a reasoned argument for believing that that situation will diminish. There has been a lower level of business investment than we would like and a lower level of investment than we anticipated at the time of the Budget. Some of that is susceptible to government action and the fiscal and planning policies that we have undertaken. Some of it is concerned with confidence. That is much more difficult for us to affect directly although we believe that the macro-economic record of this Government and this country over the past five years provides the basis for a good deal of confidence in the future for business.

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When we talk about public services it is right to focus on delivery not just expenditure. I agree with the noble Lord, Lord Newby, on that point, as I agree with him in regard to keeping public and private sector pay at a sustainable level. The Chancellor made that point clear. However, I do not agree with the noble Lord as regards greater local flexibility for pay settlements. We much prefer to set outcome based targets for local authority and other public sector employers and to have a system of accountability to achieve the strength of negotiating power that public sector employers ought to have in order to protect the public interest.

The noble Lord referred finally to the shareholder executive. I have not had time to read about that. If the matter is not contained in the published documents, I shall write to the noble Lord on the subject.

5.4 p.m.

Lord Shaw of Northstead: My Lords, will the Minister confirm that there is to be 15 billion more a year for education? Does that mean what it says, that there will be 15 billion more for every future year? If not, then for how many years?

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