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Lord Radice: My Lords, I wonder whether the noble Lord is aware that the PFI policy was invented when his own party, the Conservative Party, was in government. That government accounted for PFI in exactly the same way as the current one.

Lord Saatchi: My Lords, I am aware of both points. My comments are not on the validity of PFI as a method of building roads and schools, but on the validity of the Government's accounting method. In Kenneth Clarke's last Red Book, in 1996, the value of PFI contracts amounted to 10 billion. The

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Government have expanded that figure from 10 billion to 100 billion in five years. That is precisely the point that I am getting at.

Lord Barnett: My Lords, the noble Lord knows why I cannot be here later to make a fuller reply. He seems to be saying that he would account differently for these expenditure items. How would he do that?

Lord Saatchi: My Lords, that point is the main thrust of my speech, and I shall deal with it in more detail later. In a few words, however, that stream of liabilities and obligations to pay under PFI should be included on the face of the Government's balance sheet as government debt.

PFI is the first form of invisible borrowing. The second form works as follows. Imagining ourselves in the Government's shoes, we tell the company, "You borrow the money to build the road and we will guarantee your loans for you". That is called PPP, on which the Government have at least 27 billion of further liabilities. So, adding together the 73 billion of the present value of PFI liabilities and the 27 billion of PPP liabilities, we arrive at a total of 100 billion of understated liabilities.

So it is that the Government are exploiting accounting technicalities to keep these PFI schemes, the guarantees, letters of comfort, government-backed bonds and underwriting of various PPP schemes off the books. The PFI liabilities are mentioned only in the hiding place of creative accountants through the ages—the notes to the accounts. The PPP obligations, including 21 billion for Network Rail, are not mentioned at all, not even as a note. As the national institute said:

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

As the report does not make clear, for our Government today the total of all such future obligations to pay is a staggering 100 billion. That is 10 per cent of UK GDP. By not including these sums the Government are understating their liabilities and misleading us all.

In his introduction to the Motion the Minister spoke of historically low debt. Now we come to a matter of the greatest economic significance. In introducing the report in another place the Chancellor of the Exchequer said:

    "Countries such as ours with low levels of debt . . . are in a position to borrow, whereas others are not".

If you or I went to the bank to borrow money, we would present our balance sheet setting out our assets and our liabilities so that the bank manager could determine whether or not, in the Chancellor's phrase, we are "in a position to borrow". The bank manager would ask some pertinent questions, as bank managers do, such as: what obligations do you have? If you revealed that you owed a stream of payments over future years, as the Government do with PFI, would that be considered part of your debts? Of course it would. If you had also guaranteed your mother-in-law's mortgage, the hire purchase payments on your

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sister's car and your nephew's school fees for life—as the Government do with PPP—would the bank manager say that that affected your borrowing position? Of course he would. This means that the Government have already breached their borrowing limits. Their debt is not 31 per cent of GDP, as stated in the report; it is 41 per cent of GDP. On the Government's own rules they should not undertake the extra borrowing described in the report.

I am hardly an impartial observer so perhaps my figures are wrong too. Normally you would call the auditors and ask them. But who do you call? There are three of them: the Comptroller and Auditor-General; the Office for National Statistics and the Statistics Commission. That is two too many, obviously, for a true and fair view but just right to give the Government a chance to divide and rule.

The relevant accounting standard for dealing with such transactions—I turn now to the question of the noble Lord, Lord Barnett, in more detail—is Financial Reporting Standard No. 5 entitled, Reporting the Substance of Transactions, which forms part of the generally accepted accounting practice in the UK.

The accounts of central government bodies are prepared under UK GAAP and are audited by the Comptroller and Auditor-General. They are intended to give a true and fair view of the income and expenditure of the relevant government body and of its state of affairs at the balance sheet date. This is similar to the basis on which the accounts of commercial or private sector entities are prepared and audited.

Meantime, a second body, the Office for National Statistics, produces most of the UK's official economic statistics, including the national accounts. That second body is under the supervision of a third, the Statistics Commission.

The Government have woven a tangled web around these three organisations which last week happily began to unravel. I bring your Lordships up to date. In a letter to the Statistics Commission, which, as I said, supervises government accounts, the Department for Transport's chief accountant, Alan Beard, revealed that he,

    "could not support the view"

that 21 billion of Network Rail liabilities could be left out of the national accounts. He was responding to Treasury claims that he had advised it that the 21 billion could be left out. Mr Beard denied it and wrote:

    "Indeed, had I been asked, I would not have done so".

The Statistics Commission chief executive, Gill Easterbrook, then wrote last week to the Cabinet Secretary, Sir Andrew Turnbull, saying her body believed that there was a need for,

    "greater transparency over Network Rail".

Her letter said that the Government,

    "must provide a clear statement of the position and risk to the taxpayer".

The Statistics Commission chairman, Sir John Kingman, backed her in a separate letter, warning that the Treasury view was "based on a misinterpretation".

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Three cheers for them and for Sir John Bourn, the Comptroller and Auditor-General, who last week also threw his weight behind calls for the loan guarantees to Network Rail to appear on the Government's balance sheet. Appearing last week before the Commons Treasury Select Committee, he said:

    "The Government is providing security to the providers of debt and it is acting as a lender of last resort . . . If this had been in the private sector and I had been auditing this I would have expected it to be put on the balance sheet".

Sir John said that he hoped that Ministers would accept his advice. I do too but I am not confident that that will be the case.

I remind your Lordships that the Government have already had to climb down once over their attempt to mislay 15 billion of expenditure on tax credits. We should remember that the Government had argued that tax credits were a tax reduction and had accordingly lowered the UK tax burden by around 1 per cent by that accounting method. However, it emerged during the Committee stage of the Tax Credits Bill in your Lordships' House that 90 per cent of all tax credit payments actually exceed the tax liability of the recipient. So the credits were not credits after all. They were not relieving any tax because there was no tax to relieve in the first place.

I conclude by saying that there is an enormous need for much greater clarity of presentation in the public accounts. The mood of the times is for openness, transparency and full disclosure. We need a clear, complete and comprehensible set of public accounts. We need them to be composed under standards of accounting practice so that people have at least a chance of doing the detective work to find out what is really happening. That is democratically proper and a matter of common sense. We do not have it. By its extensive use of misleading statistics, its suppression of negative facts, and its many errors of omission and commission, the report ignores the duty of care owed by the compiler of a set of accounts to its readers and therefore does not merit the approval of your Lordships' House.

3.37 p.m.

Lord Howe of Aberavon: My Lords, I begin by echoing my noble friend's thanks to the Minister for his exposition of the Government's case in words faithful to those of his master in the other place. I congratulate my noble friend Lord Saatchi on his extremely interesting analysis which I have to confess takes me beyond the state of comprehension I achieved as Chancellor of the Exchequer when I struggled to solve this very problem for some time. I was unable at that time to find any suitably acceptable accountancy device to square the circle. Therefore, I have some sympathy with the analysis presented to the House by my noble friend.

I feel that sympathy perhaps with some reluctance because former Chancellors are almost bound to feel a sense of fellow feeling for their successors. Those of us who have grappled with these problems are reluctant to embark on fierce criticism of the holder of the office.

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I have refrained from doing so on any scale in this House until this time. It is now 20 years since I left the Treasury so I am all the more reluctant to do so.

But a former Chancellor also has an advantage in that he can intuitively begin to recognise some of the danger signs and warning symptoms of Chancellors who are going astray from economic virtue. One can begin to see the symptoms of self-satisfaction, of over optimism, of hubris, even sometimes, as I shall suggest, of elephantiasis. As I listened to the noble Lord, Lord McIntosh, reeling off his figures predicting into the indefinite future the precise size of the public sector deficit to one decimal point and other precise figures I began to detect those symptoms.

In my own case, the Treasury did not do well enough during my time there for me to develop those symptoms, although I laid the foundations. By the time I was Foreign Secretary and travelling the world, I was making speeches about economic policy that made it sound as if we had learned to walk upon the water.

I detect similar symptoms when looking at the nature of the self-publicity in some of the documents accompanying the Pre-Budget Report. In my last year at the Treasury, we considered producing something like the neat little leaflet that the Government have provided. We felt that it was necessary to instruct the populace as to the wisdom of our activities in simple terms that they would understand. However, we rejected the idea as an implausible operation. The leaflet is full of the most generalised statements. It never anywhere suggests that any taxes will increase and it gives opinions to the world that are enormously exhilarating.

The title of that modest publication, the Pre-Budget Report, is Steering a steady course: Delivering stability, enterprise and fairness in an uncertain world. There is uncertainty all around us but here is stability, enterprise and fairness in enormous quantities. The contents page is also pretty revealing, because it reads like the chapter headings of a manifesto. The chapters are called: "Overview", "Maintaining macroeconomic stability", "Meeting the productivity challenge", "Increasing employment opportunity for all", "Building a fairer society", "Delivering high quality public services" and "Protecting the environment". There are two annexes; annex A is titled "The economy" and annex B "The public finances".

The report is an extraordinary exercise. I have one other comment to make about it: it costs 45 and runs to 225 pages. In 1982, I introduced the first Autumn Statement. The document that I produced was 32 pages long and cost 3.80. This document is only the half of it, because alongside these 225 pages, there are 300 further pages of supplementary documents.

I turn to the particulars of the Pre-Budget Report. For example, pages 8 and 9 are full of declamatory statements with which I shall not trouble the House. However, tucked away among those great achievements is the statement,

    "publishing on 17 December a Green Paper on pensions setting out proposals to help those of working age plan more effectively for their retirement".

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We are still awaiting that marvellous document. The report does not suggest, as most people acknowledge, that the pensions industry is in deep crisis as a result of a 5 billion raid on the industry's funds in the Chancellor's very first Budget.

That is not simply a frivolous point, because it shows the extent to which the Chancellor has been carried away by euphoric insights into his own performance.

Another feature is worth commenting on. Noble Lords will remember that, earlier this year, the Chancellor introduced—or reintroduced—what used to be called the national insurance surcharge. That is a comprehensive and across the board imposition on employers' pay bills. When I looked at the document that I produced in 1982, I noticed a contrasting section: one modest little page headed, "Proposed changes to the national insurance surcharge". It described how the surcharge was introduced in 1977 at the rate of 2 per cent. The noble Lord, Lord Barnett, will know all about that. When we arrived in office in 1979, the surcharge was running at the rate of 3.5 per cent. In my Autumn Statement in 1982, I was able to reduce it by 1.5 per cent and, in 1984, my noble friend Lord Lawson was able to sweep it away altogether. We recognised it for what it was: a tax on jobs. That is the undisclosed item in this Autumn Statement. The Government are going in the old direction again.

I am distressed at the way in which the report is so comprehensive in its coverage of almost every aspect of human activity. If one goes through from beginning to end, there is not a sector of any social service, economic or business activity that is not described enthusiastically, if not in eulogistic terms. One wonders if, when the Chancellor sits there generating hundreds of pages of wisdom, anything is left for other Ministers to decide. I have an impression that, in a remarkable way, the Government are coming to match that which the less than exhilarated people of Iran have to tolerate. The system seems to be that we elect a Prime Minister—or in their case, a president—and it is up to the ayatollah who lives next door to tell the president exactly what he can and cannot do. That is not much of an exaggeration of the way in which the Government seem to operate. Other Ministers hardly get a look in at all.

That is amusing, serious and important. It tells us something about the quality of the Chancellor's judgment. Can it really be the case that everything in this country is for the best in the worst of all possible worlds? That is the impression that one seems to get. He acknowledges the increase from 11 billion to 20 billion, which almost doubles the public sector net borrowing in the year ahead, as my noble friend Lord Saatchi pointed out with great clarity. That is a rise up to 2.2 per cent of GDP. The Chancellor is confident beyond doubt that he will be able to manage that year after year, well within the limits set by the stability pact and other factors.

If I were in the Chancellor's position and looking out on the world as it is today, I would seriously wonder whether the plans that I had proclaimed so

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proudly had really immunised us against all that. It is a world in which, curiously, when one tries to identify a locomotive economy that will take us out of trouble, one can identify only two. They are relatively modest vehicles: Russia and China. They are the only two identifiable locomotive economies in a world in which the Chancellor is so confident of surviving.

When looking at the realism of the Chancellor's prospects, one must consider the factors working against fiscal recovery along the lines for which he hopes. The top half of income tax is paid by the top 10 per cent of earners. Those are the people who face substantial sacrifices, with the impact of austere world conditions on the City of London and financial industries generally. I am doubtful whether income tax revenue levels can be maintained even at their present level, against that background. Stamp duty receipts are also likely to fall substantially and to continue to do so as the housing market almost certainly turns downwards. If one looks at the day-to-day news, one can see that corporation profits are shrinking rather than expanding. All those areas more than justify the warning given by the IMF and reported in The Times today, of the hazard that the Chancellor may fail to come anywhere near fulfilling his expectations.

What one has to remember—and I remember this well—is that when the economic tide starts running against you, it often comes in faster than you might have expected. The Chancellor has had it very lucky so far. I look back to the period in the winter of 1980 and spring of 1981, when we tried to determine the likely size of the public sector borrowing requirement in 1981-82. We knew from the outset of that analysis that it would be far in excess of that for 1980, which was 8.5 billion. We expected it to be 11.5 billion when we started to work it out at the beginning of 1982. By February, one month later, our forecast suggested 13 billion. By the time of the Budget, one month after that, it had risen to 14.5 billion. That is what happened in the three months before the Budget came to be made. My fear is that, if something of the same kind happens now, many of the optimistic expectations will not be fulfilled.

I do not want to take up more of your Lordships' time. I could go on to a number of other topics, but I feel that I must spare my colleagues. My contribution is a serious one. Taking account of the analysis of my noble friend Lord Saatchi, there is a real potential flaw in the foundation of optimism. I am sorry that we shall not be able to hear the noble Lord, Lord Barnett, on this occasion. It is a pity that he is unable to take part in the debate, but I understand the reason why. Aside from that, the other foundations of the Chancellor's optimism give cause for great anxiety, which could begin to erode the confidence on which he counts so heavily.

3.49 p.m.

Lord Higgins: My Lords, I declare an interest as the chairman of a company pension fund. I am very glad to follow my noble and learned friend Lord Howe of Aberavon. I agree with what he said about the huge

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mass of documentation—it is probably a record amount—that has descended on us. It exceeds the limit that the Printed Paper Office imposes if one wants to post copies to anyone. It is not all propaganda, as my noble and learned friend said. But a great deal of it is. A number of very important points are made in the documents. I shall comment on one or two.

The Government said early on in their period in office that they had brought an end to boom and bust. That will probably have a rather hollow ring with the many investing in the Stock Exchange or with many pensioners. The economic cycle continues; it is not the case that the Government have in some miraculous way brought it to an end, although its current amplitude is somewhat less than it has been in other periods. The reality is that the Government's forecasts, made only a few months ago, appear now to be substantially wrong.

It is unfair to try to put responsibility for the assumptions that the Chancellor makes on the National Audit Office. The NAO fulfils many useful functions but asking for its imprimatur on these issues is of no great advantage. It has produced some extremely good reports, not least one published recently entitled, Tackling pensioner poverty: Encouraging take-up of entitlements. It states:

    "Over 20 per cent of pensioners do not take up all their entitlements".

We are getting to the situation in which the Chancellor of the Exchequer constantly says that he will spend more on this, that and the other in terms of social security, but the reality is that it is so means tested and so complicated that the shortfall in terms of the amount expended is very great. Will the Minister tell us, taking last year as an example, what the difference was in pounds between the amount the Chancellor said he would spend and the amount actually spent?

Many of the Chancellor's objectives, in particular the golden rules for prudence, are related to the economic cycle. It would be helpful if the Minister could clarify exactly where we are in that regard. Page 22 of the Pre-Budget Report gives some indication. It states that,

    "the Government's provisional judgment has been that the economy completed a full, albeit short cycle between the first half of 1997 and mid-1999. The current economic cycle therefore began in mid-1999".

I presume that that means the Government regard that as the bottom of the present cycle; perhaps the Minister will confirm whether that is so. What measures are there of where we are in the current cycle? If we are to appraise the Government's policy correctly, it is very important, since it is all related to smoothing over the cycle, that we have a clear statement from the Government about exactly where we believe we are with regard to the cycle. There are many references to traditional economic stabilisers and so on. It is appropriate for us to allow them to operate fully.

A fascinating paper in this vast mass of documentation is entitled Long-term public finance report: an analysis of fiscal sustainability. The amount of algebra contained in Technical Annex A of that

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report must surely be unprecedented. It reminds me of the period when I was teaching economics at Yale. The econometricians went absolutely berserk at times. There appears to be some sort of cross-infection with this document.

Having said that, I welcome very much what is suggested in the document. Traditionally, so far as economic performance is concerned, it is said that we must achieve a low level of inflation, high employment, economic growth and a balance of payments equilibrium. The document introduces what is called "inter-generational balance". That is tremendously important. It is very easy for a government to run up their liabilities or to run down their assets for a considerable period, giving the impression that all is well when in fact they are putting a burden on future generations. I hope—I say this in a co-operative mood that is typical of the House of Lords—that the Government will agree that we should have an additional objective; that is, that there should be inter-generational balance.

The algebra in the document is incredibly complicated. However, at the end of the day, the whole issue turns on the balance sheet. The question is whether or not—from generation to generation and spread over time—there is a deficit on the balance sheet and whether that is going up or down. The noble Lord, Lord McIntosh of Haringey, and I have debated that previously. The Government came close to producing the outline of a balance sheet. They produced a huge document showing the assets but they have been reluctant to conduct a real appraisal of the liabilities, perhaps the largest of which is paying the basic national insurance pension to future generations.

That links, without any degree of co-ordination, with the comments of my noble friend on the Front Bench. The genuine balance sheet, taking into account what are being treated as off balance sheet items as well as those on it, really indicates how things stand. It is tremendously important for us to have, at least so far as economic analysis is concerned—I leave strict accountancy to one side—an idea of where we are with regard to the Government's balance sheet and how they project that through time. The so-called inter-generational balance—economists, I am afraid, always fall into jargon—is important and I hope that on an all-party basis we can make some progress in relation to it. We must rely on honesty so far as the figures are concerned and not shuffle off some items into a side track. I agree with my noble friend Lord Saatchi in that regard.

A noticeable point in last weekend's Sunday papers was the extent to which commentators—the more serious commentators, such as Mr Peston, Mr David Smith and others—felt that we should consider the implications of the Pre-Budget Statement in relation to whether we should join the euro. That is not surprising because the Government have said what they propose to do with regard to decision-taking in that regard.

I want to make a number of further points but I do not wish to detain the House for longer than necessary so I shall proceed very much in shorthand. The first

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point about our joining the euro is that the five tests imposed—or selected—by the Chancellor are a charade. They are far too ambiguous and vague for anyone not to be able to fiddle them one way or the other. I do not believe that they are a helpful way of looking at the matter. Whether they are related to the political ambitions of the Prime Minister or Mr Gordon Brown to go down in history as the person who joined the euro, I know not. In all events, those tests are not what this is really about.

The crucial question is whether we give up for all time the main means of allowing for differential movements and prices within the broader European Community; the question is the same so far as those within euro-land are concerned. That would be an irrevocable move and it is crucial to decide whether the size of the area and the relative importance of different countries is such that it is not wise to give up that major means—that is, changes in the exchange rate—of adjusting in terms of economic changes.

It is important to differentiate interest rate policy from monetary policy. It is interesting that the Government gave control over interest rates to the Bank of England while, at the same time, clawing back the ability to exercise influence on monetary policy—that is, control over the money supply. But, at all events, the euro-land system of one-size-fits-all interest rates clearly imposes considerable strains on those in the Community. Further strains have been imposed by the Stability Pact, which even some of the more enthusiastic individuals in the European Community have described in fairly critical terms.

The fact is that, over the centuries, the whole basis of parliamentary or House of Commons power in this country has depended on the control of money, whether it be taxation or expenditure. While clearly some degree of balance is required in relation to fiscal policy, it would be very unwise to go for a rigid system of the kind that now exists in euro-land. From the Chancellor's own statement before us, I believe it is clear that, from time to time, it is necessary to use fiscal policy in order to manage the economy, not least when control over interest rates, if not the money supply, has been handed to some other independent body.

I shall make two final points. The first concerns convergence. At present, it is absolutely clear that, far from converging with the euro-land economies, we are moving in a different direction. Therefore, that does not suggest that this is an ideal moment for a referendum to be held. That is an important point.

I also want to make a longer-term point. I remember that, years ago, the Canadian dollar was worth more than the United States dollar. Both economies now appear to have converged closely together. However, at that time, had those countries adopted a single currency and had the two economies developed as they have since then, the effect on the Canadian economy would have been traumatic, given, for example, its present exchange rate with the dollar. I believe that the idea of convergence over a large area must be given considerable scrutiny.

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My final point is that, according to the Prime Minister, we are moving into a period in which this issue will soon become live. In the context of the European Union, the statement that we have before us today is most important. I spend much of my time travelling between here and Holland. Generally speaking, the Dutch are enthusiastic about our joining, and I can understand that. Having said that, we must also consider that, if we were to join, even at a sensible, or what appears at the time to be a sensible, exchange rate, then the strains in the current euro-land situation are such that our joining could result in the break-up of the whole system. It is possible that at some point in the future these matters will need to be reconsidered.

For the reasons that I have set out and against the background of the documents we are considering—there is much about Europe in them—I do not believe that it would be appropriate for a referendum to take place in the near future. That view seems to have been held fairly widely in the press in recent days.

4.4 p.m.

Lord MacGregor of Pulham Market: My Lords, I am grateful to the government Front Bench for giving us this opportunity to talk about the Pre-Budget Report. I rise to do so with some diffidence, given the expertise in your Lordships' House.

I want to comment briefly on four issues. The first follows on from what my noble and learned friend Lord Howe said in relation to the increase in public sector net borrowing. In all fairness, and in order to give my comments balance, I believe that in his earlier years the Chancellor was a very good and conservative—with a small "c"—steward of the nation's economy and the nation's finances, although, in doing so, he benefited from a very sound economic Conservative—with a large "c"—legacy.

But we are now entering far choppier economic waters—in particular, internationally, but also at home. I believe that the Chancellor made a great mistake in throwing prudence out of the window in his Budget in April this year. Here, I follow very much what my noble and learned friend Lord Howe said.

I can recall as a Chief Secretary, as can my noble and learned friend Lord Howe as Chancellor—other former Chief Secretaries are, and have been, present in the Chamber—exactly the point that he made about how the figures in relation to borrowing changed substantially within a three-month period because of international events. In that case, it was due to a change in oil prices. That is because the fiscal deficit is the residual of two enormously large sums of expenditure and income.

I shall come later to what I consider to be the unrealistic borrowing figure that the Chancellor is giving and which my noble friend Lord Saatchi brought out so brilliantly. However, I fear that, even taking into account the increase that he included, the Chancellor is basing his calculations for borrowing on

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very optimistic assumptions. Given that this is a small figure in relation to two very large sums, that can change at enormous speed.

There is of course the international situation. At present, many people are pessimistic about the prospects of a recovery in many parts of Europe, in the United States and elsewhere in the world. I am concerned about our own situation here in relation to household debt. It seems fairly clear to me that a large part of current consumption spending, which is keeping the economy at its present growth position, is based on the calculation that people can continue to borrow substantially—in many cases on the equity in their house—because of low interest rates. People believe that that can continue. If it does, then, frankly, there will be a risk that at some point the Bank of England will have to put up interest rates. At that point, there will be a remarkable change in the gearing effect. I believe that that could have a dampening effect on consumer expenditure in the next year or two or beyond. In addition, as my noble and learned friend pointed out, receipts from corporation and incomes taxes may be over-optimistic at present.

Therefore, I simply believe that the Chancellor has taken a great risk in engaging upon the current levels of high public spending. Whereas, at present, most people are talking about the need to increase borrowing or possibly change taxation should the growth figures not be reached, it is possible that public spending will have to be cut. That will have to be another option. A former Chief Secretary, who, until a few moments ago, was in the Chamber, will remember when that happened under his government's stewardship.

My second concern is in relation to large increases in public spending in individual departments over the next three to five years. To many, that has been a clear signal that it is open court for bidding for higher wages in the public sector. I acknowledge readily that in some areas that is desirable. In cases where a clear difficulty exists in recruiting people to key jobs, as is the case with long-term career teachers in London at present, then there is a need to spend more in that area. But there are many other areas where there is no difficulty in recruitment and where it will now be very difficult for the Government to resist higher wage demands.

The signal of higher public expenditure has opened the doors. However much the Chancellor tries to resist it, it will always be present. That is why I believe that it would have been right to put larger sums into the contingency funds in years two, three, four and five, as was done previously, and not to have placed everything into higher departmental expenditure on the assumption that it would not be leaked away in higher wage demands.

My next point concerns PFIs and PPPs. My noble friend Lord Saatchi was absolutely devastating in his criticism of the current situation with regard to the accountancy for public borrowing. Of course, it is not only an arcane accountancy point. In the corporate world, we are learning that what appeared to be arcane

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accountancy points in the United States very rapidly turned into real issues affecting the corporate economy.

If the Chancellor is underestimating the real extent of future public borrowing, that could have a real impact on the economic situation. I noted that the noble Lord, Lord McIntosh, referred with some pride to the 32 to 33 per cent proportions of GDP for borrowing, but in my view that depends on an inaccurate assumption as to what the borrowing figure is. I do not just refer to the black hole in the way in which Network Rail's position has been treated, and the figure there of 21 billion. It seems to me that by all previous standards of government accounting—certainly those that applied when I was Chief Secretary—that should have been classified as borrowing. I hope that the current dispute between the three bodies to which my noble friend referred will come to that conclusion.

I am much more concerned about another aspect of PFI, on which I should like to spend a few minutes. I fully understand the management and risk advantages of the PFI concept, provided that risk really does transfer. That is why, as Secretary of State for Transport, I introduced some forms of PFI, which was then called Design, Build, Finance and Operate. I introduced four road projects under DBFO because I recognised that there were considerable management and risk advantages in dealing with them in that way.

However, that was on the assumption that motorway tolling, which I also advocated at the time, would in due course be implemented so that real cash would flow in future years, not from the Government but from the user for that borrowing. Indeed, the Dartford bridge, which was one of the first PFIs, reflected precisely that. It has been a huge success. It was built much faster than if it had been kept in the traditional road programme, but was financed by charges not by future taxation. That is an important point to bear in mind, because real cash flowed.

Now, as we see PFIs grow to the 77 billion to which my noble friend referred, we are in a situation where PFIs are being used all the time as an alternative means of financing, as well as a better management approach, in order to avoid those figures appearing in the government borrowing statistics. As all those PFIs are being financed by future contributions from Government year by year, that is a form of financial leasing and comes very close to borrowing through gilts or whatever else. As the burden grows, so the future commitment to pay off that borrowing also grows. That is why I believe that these PFIs, the expenditure on them and the future payment flows that will follow should be clearly shown. They are effectively a form of borrowing. That is why I conclude that the Chancellor's figures for borrowing as a proportion of the GDP are a considerable underestimate.

Next, I turn to transport. The record of this Government on transport has been—I fear I must use these words—an unmitigated disaster. It started with integrated transport planning which, in my view, was

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a slogan and a substitute for action. No road project had been designed in previous years without taking account of the impact on transport, rail, air and everything else. So, there was effectively a form of integrated transport planning in the planning of the road programme. But the result of integrated transport planning is that we have had multi-modal planning schemes as a substitute for action on the ground in the past five years. Many of those have not yet come through. Road schemes which could have been started some years ago are still not even on the running board. That is why in transport we need decisions, action and concrete work on the infrastructure, not paperwork at the desk, which, frankly, is what we have seen.

That stemmed from John Prescott's view that he would reduce the amount of car travel in the United Kingdom and that he would be judged a failure unless he managed to achieve that over five years. Clearly, the figures speak for themselves. I do not think that that was a realistic, practical or wise course of action to take, and I shall give two reasons.

First, 90 per cent of all transport is by road. Therefore, that is inevitably a significant figure. Even if we managed to double the amount of freight and passenger transport by rail, which I was keen to do, it would have only a small impact on the growth in car and road transport generally over the years ahead because of the growth of the economy. Secondly, for a variety of reasons into which I need not go at this stage, with their modern lifestyles and aspirations, people want to use their cars. Such reasons include travel to work, taking children to school, and just-in-time deliveries for many goods which cannot satisfactorily be dealt with by rail. Therefore, it is inevitable that if one is to have a modern transport system one still has to invest heavily in the roads.

We shall not stop people from using their cars by refusing to spend any money on roads, thereby letting them deteriorate and fall into chaos. But that is what has happened in the past five years. There has been a total moratorium on all road projects. It takes time between the decision to go ahead and the completion of the road; and because of the moratorium in the past five years, over the next five years we shall be in a devastating position. In my last year as Secretary of State for Transport we spent 2.7 billion on the roads; 1.4 billion of which was new construction on national roads; that is, on widening and improving. The new construction projects completed in that year numbered 37, of which 12 were bypasses. We had 65 bypasses in five years. We now hear the Government talk again about bypasses but none has been started in the past five years.

I am delighted and relieved at the complete U-turn, as I understand it, of the Secretary of State for Transport in the Statement he is making today on the road programme. He is right to start to reinstitute some of that programme. However, the cost to the economy and the nation has been substantial in the complete moratorium in the past five wasted years. I hope that that will not happen again.

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I conclude by turning to pensions. I declare an interest as a non-executive director of a pension company, as declared in the Members' Register. I was chairman of the House of Commons pensions fund for five years before I left the House. I am still a trustee of other funds. In other capacities as a non-executive director I am seeing the impact of pensions on company performance. In my view, this will be one of the biggest political issues in the coming years but it has received little attention in the Pre-Budget Report. Incidentally, I could find hardly a reference to the word "road" in the Pre-Budget Report, which indicates the neglect by this Government of that area.

However, this is another area in which the situation has deteriorated substantially over the past five years. We can all recall how five years ago we said that we in the United Kingdom had one of the best positions on pensions in the whole of the European Union; more funds in occupational pension schemes than the whole of the rest of the European Union put together, and so forth.

We still compare fairly well with most, but our position has weakened considerably since then. Not everything can be laid at the Government's door. Clearly, one substantial factor is the current position in the equity market. Another is the new accountancy system, FRS 17, which again is having a real impact on the ground and which is forcing many companies to move from defined benefit schemes to defined contribution schemes.

However, in other areas the Government are at fault. I believe that the withdrawal of tax credits from the pension funds in 1997 was a massive mistake—5 billion per year cumulatively rising, and therefore substantially reducing the cash flow of the pension funds. But there is another point. The Chancellor at that time—I remember this clearly in our debates in the other place—said, "Well, it doesn't really matter because you can now judge pension funds by the capital value of the equities and they are all doing fairly well". That is not a point which I think I would hear anyone make today. We all knew then that that could change.

I do not believe that the stakeholder pension is working in the way that the Government planned and said that it would. The take-up is still low. I fear that the level of charges allowed means that not enough people are promoting and advocating the stakeholder pension and running it in the way which, with some relaxation of those charges, they would. The cost of mis-selling, which is now substantial, and the cost of compensation, falls on the other policyholders and the shareholders. That, too, is an inhibiting factor at present. One matter on which we probably all agree is the role of the state pension. Clearly, that is now very small in comparison to the encouragement of occupational pensions. That, too, is the Government's position.

Looking several decades ahead at the funding of state pensions, I believe that the time will come when we shall need to raise the state pension age for

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everyone, as over a period we have equalised the state pension age for women. That will be the only way that we shall be able to fund future pensions.

However, I recognise that a government document will be issued on 17th December. A great deal hangs on that. I hope that we shall have other debates in the House once we have had time to absorb it. Unless there are major changes in this area I believe that pensions will seriously adversely affect lives, just as roads have done in the past five years.

4.20 p.m.

Lord Howell of Guildford: My Lords, after the superb opening analysis by my noble friend Lord Saatchi, I am pleased to be following my noble and learned friend Lord Howe and my noble friends Lord Higgins and Lord MacGregor. It is really quite like old times. Perhaps some of the problems are all too similar to those from the past and require the same clarity of thought as has been addressed in the previous speeches.

I was propelled into this debate by a single illuminating sentence from the noble Lord, Lord Barnett, who said that,

    "since its inception, the euro-zone has gone very well indeed".—[Official Report, 4/12/02; col. 1134.]

That is a point with which the noble Lord, Lord McIntosh, concurred or indicated his agreement.

I am not sure whether the noble Lord, Lord Barnett, was being, as he often is, very entertaining. I have known him down the years to be extremely witty and indeed sardonic about the ways in which economies work. Incidentally, I told him that I intended to quote his intervention. He explained that the reason he is sadly not here—which I am sure we all understand—is that he has gone to interview the new Governor of the Bank of England, who, incidentally, believes that it could take hundreds of years to prove UK convergence with the euro. We miss the noble Lord in this debate.

This is not a debate, or perhaps we should not make it yet another debate about the contentious issue of the euro. Nevertheless, if the Government believe—as, from the Front Bench's reaction, that exchange seemed to indicate—that things are marvellous in the euro-zone and that everything is going extremely well, then we need to start worrying about the robustness of all the Government's views and forecasts, as my noble friend Lord Saatchi has rightly suggested.

The reality is very different. The euro-zone is doing extremely badly. The very day that we were told that it was doing very well, it was announced that German unemployment had risen to four million and was due to rise further. A leading German industrialist said that the conditions were the,

    "worst since the end of the War".

At the same time, the European Commission issued a forecast that the euro-zone economy will contract in the first quarter of next year. Today Portugal faces huge budget cuts, plus a recession and strikes, and is caught inside the euro-zone trap. I am advised that today one-tenth of the entire population is on strike.

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Meanwhile, the stability pact, which has already been mentioned in the debate, has clearly become—whether or not it is stupid, I do not know—the instability pact for the following very obvious reasons: those countries with high real interest rates and deflation—of which Germany is the prime example—need lower ones; and those with inflation and low real rates—Spain, Ireland and Greece for a start—need higher ones. Of course, within the euro-zone system they do not have that choice; it is the same nominal rate for all. That means that the whole system is working perversely. Those countries that should have higher real rates have been forced to have lower ones and vice-versa.

I do not want to exaggerate the impact of interest rates on growth. Economists and monetarists always tend to do that. The truth is that we have reached a point in euro-economics where "one size fits nobody" and we are dealing with a dangerously unstable system. If we now had to join and cut our rates to that set by the European Central Bank, one trembles to think what that would do to our already deeply unbalanced economy, to the housing boom, which is already out of control, and to the sea of personal debt that my noble friend Lord MacGregor has mentioned, which I understand is now running at the staggering figure of 800 billion.

I do not want to overplay the relevance of a stagnant and struggling euro-zone to the UK. The truth is that less than half our exports, including invisible receipts, go there. Anyway, as we have now learnt, the dollar is much more important to us. According to the Bank of England's website, dollar-denominated trade is 1.6 times that of euro-dominated trade. In fact, some of us are still waiting for a correction of the very puzzling information given to us in February by the noble Lord, Lord McIntosh, when he relied on the trade weighted sterling index for a reply—when all are agreed that that index is completely unreliable and out of date. I know that he will apply his mind to that in a fair way as always.

I turn to a separate issue. The reflections on the past of my noble and learned friend Lord Howe prompted me to comment on this. At the moment taxation is rising. In particular that is through national insurance additions, but it is also through the vast increases in borrowing about which we have heard today. Today, as was the case 30 years ago, a widespread belief seems to have crept back that higher taxation is the answer to failing public services. It sounds simple, but it seems to lie at the centre of a great deal of comment from the Government and many other sources.

That contains a double fallacy: first, that higher taxing and spending will deliver improved high-quality public services—that was repeated in the Pre-Budget Statement and again this afternoon; and, secondly, that higher taxes leave the economy somehow undamaged and generate more revenue. If we have learnt one thing over the past 30 years through bitter experience, it is that higher taxes and higher spending lead to wasted resources and, indeed, to inflated pay increases and pay demands—as we see every day in the newspapers—and also, and this is the double

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whammy, to lost output and slower growth. Serious academic studies are beginning to prove that a tax pound withdrawn from the private sector not only buys far less in the way of services than a pound, but also distorts and weakens economic performance. So there is a double-engine at work, which is making things more and more difficult for both the Chancellor and for the rest of us.

All the evidence shows that the biggest losers from that process are the less well off. The latest figures from the Office for National Statistics confirm that, while last year there was a 6 per cent spending increase in the public services, that led only to a 3 per cent volume increase. The other 3 per cent evaporated in a sea of inefficiencies and channels of bureaucracy, as is inevitable in the translating of all tax pounds or tax dollars into the public sector.

The IMF made the same point. In its very interesting warning to the Chancellor, it stated:

    "It remains to be proved whether public funds may be spent without incurring significant inefficiencies".

It certainly does remain to be proved. The proof seems to be leaning heavily the other way. That is not entirely a party point because it extends right across the political spectrum. Even in my own party it is sometimes forgotten that a low tax economy results in a richer and much more caring economy—not just through trickle down, which tended to get discredited, but through direct benefits to the poorest households. That has been argued in great detail in report after report from the World Bank, the IMF, the United Nations and many others.

Therefore, when I hear everyone say, "It's all right, we must go with high taxation and high spending; that will be the answer to higher quality public services" and everyone is agreed on a line, I am reminded, as many noble Lords must be, of that wonderful book by the late Barbara Tuchman called the March of Folly, when she described those amazing moments in history when everyone was agreed on a certain line and everyone was fundamentally wrong. That situation is developing now, especially among the economics profession.

The insight of 1979, which my noble and learned friend Lord Howe of Aberavon understood with such perception and determination, was that if low taxation could be achieved, that was the key to innovation and enterprise—more key than all the things listed in the Pre-Budget Statement by the Chancellor and by the noble Lord, Lord McIntosh, this afternoon. It was that insight above all that led to the huge turn-around in the United Kingdom economy and changed us from being a passenger in Europe in the 1970s to being the pace-setter in the 1990s.

I hope that all my colleagues have got that message again now, although it is sadly clear that the Chancellor has not. We are beginning to move on a march of folly and there will be much suffering and disappointment unless we change direction soon. Higher taxes are not the way out; lower taxes are.

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4.31 p.m.

Lord Stevens of Ludgate: My Lords, I listened with interest to the noble Lord, Lord McIntosh. I thought that he did a good job of defending the report—single-handed, if I may say so.

Last year, we were told by the Chancellor that the UK economy was so strong that it could insulate itself from world events, completely ignoring the fact that 30 cent of gross domestic product is represented by trade and more than 50 per cent of manufacturing industry's profits are export-related. Now we are told that the UK economy cannot insulate itself from world events. The Chancellor has at last revised downwards his forecasts for growth in 2002–03, but he has increased them for 2004 by 0.5 per cent and in 2005 by 0.25 per cent. According to him, the economy will grow somewhat more quickly over the period than before and, more importantly, thanks to increasing his growth estimates for 2004 and 2005, his numbers over the period of the cycle are in accordance with his golden rule.

The Chancellor downgraded his growth forecast for 2003 by 0.5 per cent, blaming everyone but himself. His original economic predictions last April included a deterioration in world trade. He got that right, but now he is using it to explain slower than predicted UK growth. He blames the world economy but ignores the fact that the United States of America—by far the largest world economy and our largest trading partner—expanded by 2.25 per cent this year. Others did as well; only parts of Europe and Japan did less well.

The Chancellor is relying for his growth on an increase in government consumption. That will rise by 4.25 per cent next year, falling to 3.75 per cent and then 3 per cent. So that is where his growth is to come from, although even that growth is slowing down and, in the meantime, he has increased his growth forecasts for 2004 and 2005. Where will the growth come from? Investment and exports. Investment fell by 12 per cent this year—the biggest fall on record—but will rise, or is due to rise, by 7 per cent in 2003. Exports, down by nearly 2 per cent this year, are due to rise by 4 per cent in 2003 and by 8 per cent in 2004. The Chancellor has given up trying to manage the UK economy and has handed it over to the world economy. So consumer spending can slow down and the world economy will pull us up.

However, consumer spending will still rise by 2.5 per cent next year, although that is less than previously. Let us pause there for a moment. The housing price boom has encouraged consumer spending. The gross value of UK residential property is more than twice GDP. Seventy per cent of households are owner occupiers. Of total personal debt, 80 per cent is borrowed against housing and it is increasing rapidly. House prices are not stable. For example, between 1989 and 1995, they fell by almost 40 per cent, leaving them only 10 per cent higher than 14 years before. They are now rising at 30 per cent a year. House buyers and owners are taking out bigger mortgages to finance their current expenditure and the savings rate has fallen to only 4 per cent of income.

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Last week, the noble Lord, Lord McIntosh, told us that although household debt had risen, interest charges accounted for only 7.3 per cent of personal disposable income. They had peaked at 15 per cent in 1990. The statistic is worrying. If interest rates rise to 6 per cent, that 7.3 per cent becomes 11 per cent of personal disposable income and we potentially have a massive decline in consumer spending that cannot be financed by higher mortgages, as house prices will fall, or by savings, because there are none. The stock market has already fallen by 40 per cent. To put it another way, every 1 per cent rise in interest rates is, give or take, 1 per cent of GDP.

Last summer, the Chancellor told us that he would spend billions of pounds—15 billion—on education, 40 billion more on health over the next three years and more on other public services without increasing public borrowing. In the Pre-Budget Report, he told us that even after the adjustments that I mentioned and the Treasury's optimistic assumptions, he will borrow only an extra 20 billion over the next two years. His borrowing will total 100 billion over the next five years. What is happening to that extra spending? As we all know, public sector inflation is 5.4 per cent, two-and-a-half times the economy's overall inflation rate. So it is going into higher wages and prices, not better services.

Since the Government were elected, we have been told that there will no return to Conservative boom and bust. But the economy has become more unbalanced. We have a booming house economy financed by debt, a fall in net exports and a fall in corporate investment. If house prices fall, consumer expenditure cannot sustain its rate of growth—or, indeed, any growth. There is more to come, as usual, in the fine print. But, fair enough, it is there.

In the Pre-Budget Report, we note that productivity growth is to rise from 2 per cent to 2.25 per cent. On what basis is that assumption made? At present, productivity growth is less than 1 per cent and profitability—or return on capital in industry—has been falling almost continuously since Labour came to power. Although it peaked at 14 per cent at the end of 1998, it is now just below 8 per cent—lower than 10 years ago. The result is lower corporation tax revenues—now running almost 4 billion below the Government's estimate of last April.

Why cannot the Chancellor give us the facts up front rather than putting them in the notes? Robin Hood was a popular figure. He took from the rich and gave to the poor. The Chancellor does the same, but he also takes from the not-so-rich, so why not come clean and admit it? At page 9, the report mentions,

    "increased transparency about what is being achieved".

As my noble friend Lord Saatchi said, a start on transparency would be to include the 100 billion of private finance initatives.

Tax revenues have fallen further than expected. That is blamed on the collapse in financial services, but if the recovery in financial services predicted by the Treasury does not occur, the deficit will be even greater. As I mentioned, productivity is falling—we

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are moving down the league table—but the Chancellor heaps regulation after regulation on British industry. That is quietly crippling productivity growth. I fear that we must face more borrowing and higher taxes. The Chancellor not only taxes and spends but borrows.

I close with three simple examples of what is wrong. First, there is even a health and safety regulation closing golf courses if there is fog. It is too dangerous for the greenkeepers and players. Even if the greenkeepers leave the course, it is still too dangerous, but not too dangerous to drive a 15-tonne lorry down the M4. Secondly, the tax credit system is so complicated that the Government have to advertise on television to ask taxpayers—or non-taxpayers, as the case may be—to claim it. Thirdly, due to a change in licensing requirements in October 2001, the price of gas for some residential users is to rise by 8 per cent in January 2003.

4.40 p.m.

Lord Brooke of Sutton Mandeville: My Lords, it is a pleasure immediately to follow my noble friend Lord Stevens of Ludgate, to whom I shall return in a moment. It is also a pleasure to be the most junior infantryman in the platoon of noble friends that my noble friend Lord Saatchi has assembled today.

To a degree, even if the debate, for which I join my noble friends in thanking the Government, fills a necessary constitutional slot in the European Union and parliamentary calendar, it is as much a coda to the Pre-Budget Report as the hybrid debate on the economy, industry, culture, media and sport on 20th November, which was part of the series of debates held on the gracious Speech, was an overture. In both cases, we had the pleasure of seeing the noble Lord, Lord McIntosh of Haringey, conducting the orchestra—in this case, he is opening and winding up the concert. The one minor discrepancy between the two events is that the earlier debate was graced by a series of germane speeches by noble Lords in the Labour interest. I see the noble Lord, Lord Haskel, in his place today; he spoke in the earlier debate.

My noble friend Lord Stevens of Ludgate has, like myself, supported our noble friend Lord Saatchi and his excellent speeches in both debates. He will recall that, in the earlier debate when, as today, he came in at the end of the batting order, four of the last six speeches before the winding-up speeches were made from the Labour Benches and that those noble Lords were, by no means, the first Labour Peers to speak. Since then, we have had the Pre-Budget Report, and, yet, no Labour Peer chose to speak on it in this debate, even if the words "with approval" are formal, rather than significant. I see that the noble Lord, Lord Haskel, is anxious to intervene.

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