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Lord Howell of Guildford: My Lords, I thank the noble Lord for giving way, but he is slightly parodying what I said. I said that a campaign or philosophy of higher taxesand, it is to be hoped, higher revenue and higher spending to produce high quality public services was not the right doctrine. The proposition that one will spend less does not follow from that. Indeed, I should like to see many more resources go into our health, transport and education systems. I am simply questioning whether the best way to do it is to tax people, shove it through the usually rather centralised government service and deliver not very satisfactory results. That is what I am saying, which is different from what the noble Lord is saying.
Lord Newby: My Lords, I am pleased that we agree that first-class provision of health and education is desirable. I suspect that where I part company with the noble Lord, Lord Howell, is that he would probably want to see more of those resources come directly from the individual to the provider, through private provision, rather than collective provision. I agree with him that over-centralised direction as to how that money is spent is a major problem now and one that this Government have added to, rather than detracted from.
The purpose of the debatein normal times, at any rateis to note and approve the Government's assessment of the economy and public finances as set out in the Pre-Budget Report. Usually, we do not spend much time commenting on specific measures either included or missing from the report. Therefore, I shall avoid the temptation to do so, except in one respect.
That poses a major dilemma to the Chancellor because his plans require continuing high levels of consumer expenditure. Given what is happening elsewhere in the economy, the only likely source for those continuing high levels of consumer expenditure is if people continue to take out high levels of additional mortgage equity. However, that growth is completely unsustainable. When the bubble bursts there is likely to be a sharp downward correction in consumer spending, which could then remain depressed for a prolonged period.
For a number of years, the Chancellor has aggressively claimed as one of his great policy achievements that he has engineered an end to boom and bust. As regards consumer spending, we now see the boom. At some point, quite possibly during the next financial year, we shall see the bust. The unwillingness of the Government to accept that that is a problemfar less to give active thought to what might be done to mitigate itshows a degree of complacency which will come back one day to haunt them.
Devotees in your Lordships' House of "Yes Minister" will remember the episode about a Civil Service pay review. One of the main conclusions was that permanent secretaries should receive a disproportionately high pay increase. In order to slip this past the Minister, the relevant figures are hidden in the middle of a submission some hundreds of pages thick, where the permanent secretary hopes that that particular increase will remain unnoticed. In some respects, I fear that the Pre-Budget Report, along with its flotilla of supporting glossy documents, follows the same principle.
In its overviewthe part that people with nothing to do on long winter evenings are likely to read firstit conveniently omits to mention the headline figure of public sector net borrowing altogether, even though the increase in that figure to £20 billion this year and £24 billion next year is arguably the most significant single change included in the Pre-Budget Report since the Budget Report itself was published. But in order to find this figure one has to look at page 24, and by that stage all but the most assiduous reader of the document will have turned to the football.
Trying to hide away a figure such as this and other important aspects of the report is one of the Chancellor's least attractive features. He spends a lot of time extolling the virtues of what he is doing with the fiscal rules, but on key matters one has to look at the detailed parts of the Pre-Budget Report, to which the casual readeror, indeed, anyone except the most assiduous readerwill not get.
It is a great demerit for this Government to claim that the Pre-Budget Report has the full support and audit of the Comptroller and Auditor General. On page 23, the Comptroller and Auditor General has audited the assumptions in relation to oil prices, anti-tobacco smuggling measures and VAT that underpin the public finances prediction. All three were deemed to be reasonable and to incorporate caution. Everything else has been left unaudited. Therefore, to claim the Comptroller and Auditor General's imprimatur on the whole document, as I fear the Government have, is completely misleading.
But the bigger picture is whether the projections for the economy and the public finances are prudent and realistic. For example, is it realistic to expect business investment to change from a decrease of 10½ per cent this year to a 2¾ to 3¼ per cent increase next year? Is it realistic to expect manufacturing output to rise by up to 2¼ per cent next year from a fall of 4 per cent this year? Is it realistic to expect growth to rise to between 2½ to 3 per cent next year? Is it realistic to expect tax revenues to bounce back from the falls of the current year? Is it prudent to assume that a crackdown on indirect tax avoidancelaudable as it iscould yield an extra £4 billion by 200506? Finallythis is an issue which troubles a number of noble Lordsis the exclusion of billions of pounds worth of public sector liabilities, notably on the railways and the Tube, from the Government's borrowing figures either prudent or realistic? I do not believe that it is.
The recent evidence of what is happening in the real economy and the views of independent economists also question these over-optimistic assumptions. For example, the figures for manufacturing and output fell to their lowest levels for eight years, the third successive monthly fall. Trading statements in recent days from companies in sectors as diverse as engineering, hotels, banking and computer software have contained warnings about worsening anticipated trading conditions in 2003. In all these sectors, investment decisions are being delayed, not brought forward as the Pre-Budget Report implies. Until the threat of military action against Iraq recedes, the likelihood is that uncertainty will remain at a very high level for those taking long-term investment decisions.
These downbeat assessments of many companies have been matched by the views of many independent economists. Even leaving aside suggestions in the weekend media that the Treasury misquoted a number of independent forecastersall in the same direction, incidentallyto enable it to argue that their predictions were in line with the Government's own, the Chancellor's figures have now been deemed imprudent by economists appearing before the Treasury Select Committee last week and the IMF now admits that they contain more uncertainties than in the past.
I should like to be able to both note and approve the projections in the Pre-Budget Report. In a number of previous years under this chancellorship I would have done so with relative equanimity. This Pre-Budget
Baroness Wilcox: My Lords, I join my noble friend Lord Saatchi in thanking the Minister for once again setting out the Government's fiscal strategy and approach to managing the economy and for allowing us this opportunity to debate the subject in your Lordships' House. As always in this House, we have had a fascinating debate and have been privileged to hear the contributions of some very distinguished speakersall from the Opposition side of the House. I am sorry that that is the case. Although we were told that there were two Select Committees running, I have sat on Select Committees for the past six years and I do not ever remember there being a three-line Whip which prevented Members speaking in a very important debate.
Lord Haskel: My Lords, I thank the noble Baroness for giving way. These committeesthe Economic Affairs Select Committee and the economic sub-committee of the European Union Committeeare dealing with these very matters. That is why most of their members are not here.
Baroness Wilcox: My Lords, I support my noble friend Lord Saatchi in expressing disapproval at the fact that up to £100 billion has been omitted from the UK economy balance sheet. My noble friend summarised why this is potentially damaging and misleading and how, in the light of recent international accounting issues, now is the time for full disclosure and transparency. Many noble Lords also expressed their concern on this issue.
It is my pleasure and an honour to follow the noble Lord, Lord Newby. Speaking for the Liberal Democrats, he started by saying that we do not normally debate this report. I thought he was not going to do so, but he then proceeded into great depths of analysis. He agreed with many noble Lords who had spoken of their worries about mortgage equity withdrawals, which he felt was completely unsustainable. He is concerned about the consumer expenditure boom now and fears that we will see a bust all too soon. He is worried that the Chancellor's high degree of complacency will come back to haunt him in the future. I shall be interested to hear the Minister's response to the questions posed by the noble Lord.
We heard from my noble and learned friend Lord Howe of Aberavon, a distinguished former Chancellor of the Exchequer. He took us on a tour of the Government's optimistic document and spoke about "steering a steady course in an unsteady world". He informed us that the document cost £45, so we are awfully lucky to have been given a copy. He feared that the Chancellor may have been carried away by his own performance. My noble and learned friend said that
My noble friend Lord Higgins spoke about pensions, his area of expertise. My noble friend said that he had taught economics at Yale at one stage, so I shall look at him with a new degree of respect. He asked various questions which I am sure the Minister will wish to answer. For instance, where are we in the cycle? He also spoke about the intergenerational balance in pensions and how he would like to see work carried out cross-party.
My noble friend Lord MacGregor of Pulham Market, a former Chief Secretary of the Treasury, congratulated the Chancellor on being prudent in his early days, albeit having inherited a good economy. He agreed with my noble and learned friend Lord Howe in expressing worry about the optimistic assumptions in the document. My noble friend Lord MacGregor was particularly worried about PFI and PPPas was my noble friend Lord Saatchiand heartily supported the analysis we have heard of the troubles ahead. My noble friend also referred to transport and pensionsissues with which I am sure the Minister will deal.
My noble friend Lord Howell of Guildford, speaking about the euro, was worried about interest rates and the one-size-fits-all strategy. He felt that it was to be avoided at this time of huge personal debt and staggeringly high housing costs. He reminded us that taxation is rising and said that in his experience higher taxes and higher spending led to lost output and slower growth, the biggest losers of all being the least well off.
The speech of my noble friend Lord Stevens of Ludgate was a tour de force. He spoke about the housing market. I do not feel that I can repeat all he said in a marvellous analysis. His description of failing industrial production must be a great worry for us all.
The noble Lord, Lord Brooke of Sutton Mandeville, as always, gave a most eloquent speech. He talked about being a "junior infantryman" speaking today among colleagues from another placebut I, of course, am the junior here today among giants. No one speaks more wittily than my noble friend; no one is more experienced. He made a searching point on micro-meddling.
To our surprise, the noble Lord, Lord Stoddart of Swindon, decided to speak in support of the Minister, no Labour Peer having done so. He took the opportunity to urge the Government not to throw it all away by joining the euro.
Following those wonderful contributions, perhaps I may be allowed a few words of my own to wind up from this Front Bench. Yet again, in the Pre-Budget Report the Chancellor of the Exchequer has issued a long list of measures which are intended to deliver changes so that the Government can keep the promises they have made and meet the targets they have set.
How the Chancellor intended to reform public services was set out in his public service agreements. In his first spending review, in July 1998, he stated that these were an "essential change" and would help to ensure that government would do what they did "to the highest standard". Sadly, as we have heard, what has happened instead is that nearly 40 per cent of the targets the Government set in 1998 and 75 per cent of the targets that they set in 2000 have been missed. I also find it concerning that some of those are targets to set targets. For example, in 1998, the Department of Transport was given the following target:
So what we really want to hear about is why those targets have not been met and why those promises have not been kept, and the implications for those who should have been helped during that time. When we see no tangible benefits, it is even more troubling that £115 billion more is being taken every year from the taxpayers of this countrynearly £40 a week for every many, woman and child.
The Minister reminded us that the UK economy is the fourth largest in the world. While some headline indicators remain strong, we are increasingly seeing changes that give serious cause for concern. We have argued consistently that public services will not improve if they are just given more money. What is needed is genuine reform. Without reform money alone will not deliver improvements on the scale we all want and expect to see.
In announcing the Pre-Budget Report, the Chancellor was forced to admit that his forecasts on growth, revenue and borrowing were wrong. As a resultthis was highlighted by my noble friend Lord Stevensgovernment borrowing will have to increase from £30 billion in last year's Budget to £66 billion in last year's Pre-Budget Report, to £72 billion in this year's Budget, and to over £100 billion for the next five years.
That brings me to the Chancellor's sustainable investment rule. If the Chancellor had not, as highlighted by my noble friend Lord Saatchi and other noble Lords, omitted to put £100 billion of his liabilities off the balance sheet, public sector debt would already have reached the 40 per cent limit in his own rule. Can the Minister confirm that the extra borrowing announced in the Pre-Budget Report will take us over that limit? It is this actionspending more without reformthat will be locking the Chancellor on to an unsustainable course, and that will inevitably lead to more tax rises.
In conclusion, as my noble friend Lord Saatchi and others on these Benches have stated, I find it very difficult to agree to note "with approval" financial statements that we believe omit liabilities amounting to at least £100 billion. We have concerns about the possible implications for the UK economy and for future Treasury policies.
I am keen to press the Minister on one point. If, as we estimate, the liabilities not appearing on the balance sheet do total in the region of £100 billion, it means that the Chancellor is extremely close toif not already in excess ofthe 40 per cent of GDP limit that he has set himself when it comes to public sector borrowing.
To my mind, the Chancellor has two options: he continues to borrow, and therefore most certainly exceeds this self-imposed limit; or he can stop borrowing and do what we have suspected he would do all alongnamely, raise taxes. I ask the Minister: which of those two options is most likely to be followed, and what are the implications for the British economy?
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