Pre-Budget Report

– in the House of Commons at 3:33 pm on 27th November 2002.

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Photo of Gordon Brown Gordon Brown The Chancellor of the Exchequer 3:33 pm, 27th November 2002

Last year, of the major economies, the British economy was the fastest growing. This year, 2002, amid the worst global slowdown for almost 30 years, the British and north American economies will grow faster than all other major economies. I can report that next year, in 2003, Britain and north America are now forecast, even in a still uncertain and unstable world, to continue to be the fastest growing of all the major economies.

Today, as I examine in turn world and British growth, the balance of the economy, including the housing market and the position of manufacturing, and the fiscal figures now and for the future, I will report that with the lowest inflation for 40 years and long-term interest rates also the lowest for 40 years, Britain's monetary and fiscal framework is meeting the challenges of each stage of the economic cycle, and we will tolerate nothing that will put that hard-won stability at risk.

As Britain meets the challenges of the wider global economy, the pre-Budget report will also outline further labour market, capital market and product market reforms to improve British science, skills and enterprise, and I will outline proposals for continuing public service reform and tax and benefit modernisation showing that, both in Britain and abroad, strong economies and fair societies advance together.

I start with the international economic outlook. Twenty of the world's biggest economies, accounting for 60 per cent. of the world's output—the United States, Japan, much of Europe and Latin America—have been or are in recession after what has been the sharpest slowdown in global economic activity for almost 30 years, indeed the biggest contraction in industrial output in the world's major economies since 1975. World trade growth, which held up through both world recessions of the early 1980s and 1990s, fell 12 percentage points last year, and while trade growth resumed early this year, it has faltered yet again. It is one of the many reasons why, at an international level, the British Government are working for an early resumption of the world trade talks and why, at a European level, we must curb industrial and agricultural protectionism.

While the present political and economic uncertainties—the continuing aftermath of 11 September, unfolding events in Iraq, the impact on oil prices, concerns about equities and corporate standards, continuing trouble in the IT sector and current account imbalances—have all caused business investment to fall sharply since 2000 in every major continent, the challenge for the British economy in this more uncertain and unstable world has been to steer a stable course, combining low and stable inflation with sustained demand growth and with high levels of employment.

I can report that 175,000 more people are in employment in the British economy this year than last year and in total 1½ million more work force jobs have been created since 1997. Our unemployment rate is lower than in Japan, America and the euro area for the first time for 50 years.

Our monetary and fiscal foundation, which is based on the independence of the Bank of England, imposes a symmetrical target for inflation, requires debt at low levels, holds to tough fiscal rules over the economic cycle and is thus designed not just for times of high growth, but for a global contraction with all its attendant difficulties. 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 in our economy. It is that same symmetrical inflation target, which was designed to prevent both deflation and inflation, that explains why the Bank of England is rightly vigilant not only about the continuing weaknesses of equities, trade and investment and of G7 current account imbalances, but about domestic risks, including the need for a sustainable housing market and for affordable pay settlements across the economy—public and private sector alike. We will continue to give steadfast backing to the Bank of England and the Governor, Sir Eddie George, who retires next June, in all the difficult decisions that have to be made.

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 in the private or public sector. That would put low inflation and low interest rates in jeopardy and damage the whole 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 full detail of the economic forecasts. I can report that inflation will meet our target of 2½ per cent. this year. 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 past five years, we will continue to do so in the future.

With that platform of domestic stability and an expected world trade recovery, to rise next year by an estimated 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. 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, gross domestic product 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 it will be minus 0.9 per cent.

For the UK, GDP growth is forecast to increase by 1.6 per cent. this year. It will rise to 2½ per cent. 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 the major economies. And while Japan, America and Germany have all been in recession, Britain has now grown consistently in every quarter for the past five and a half years.

As with monetary policy, so our fiscal policy is designed to help sustain growth at every stage in the economic cycle. Our fiscal rules are 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 that fully into account, and not just in assessments of this year's current revenues from stamp duty, capital gains tax and corporate tax—we also build such falls fully into revenue projections for future years. 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, anti-fraud strategies, 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., and then to use the £22 billion spectrum auction to repay even more debt; and regularly to achieve not just a current balance but a large surplus. In each year since 1997, we have met our two fiscal rules, with current surpluses worth a cumulative £58 billion, and debt far below 40 per cent. of national income. With debt interest payments £7 billion a year lower than in 1997, debt interest consumes 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 at £46 billion. We meet the golden rule on the cautious case, too. 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, then 0.6 per cent., 0.5 per cent., 0.6 per cent. and 0.7 per cent. in the four years to follow.

Our second rule is the sustainable investment rule—that over the cycle net debt should be kept below 40 per cent. of national income. Debt this year is 41 per cent. of GDP in the US. It is rising to 43 per cent. in France, to 45 per cent. in Germany, to 54 per cent. in the euro area, to 70 per cent. in Japan and it is almost 100 per cent. in Italy. I can report to the House that, in Britain, net debt this year and in future years will be at 31 per cent. this year, then 32.1 per cent., 32.4 per cent., 32.6 per cent., 32.7 per cent. and 33 per cent. So we will comfortably meet our sustainable investment rule, and we shall do so over the cycle, and in every year.

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

I have said that our fiscal framework is designed not only so that we make the right decisions when the world economy is growing, but so that it is robust so that at all times we meet our fiscal rules. An alternative approach has been put: that, instead of our holding firm to this 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 familiar boom-and-bust approach—[Interruption.] Oh yes. It would lead to the old familiar boom-and-bust approach of capital investment in infrastructure that is vitally needed being slashed, and hard-won stability would be put at risk.

In the last world downturn 10 years ago, Britain was bound into such a position, when inflation was high, debt was rising fast and the fiscal disciplines were not being met. But 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 made, we can comfortably meet our fiscal rules, we can fulfil our spending plans, and we can borrow for investment across the economic cycle.

Figures for net borrowing for this year and for future years are £20 billion, £24 billion, £19 billion, £19 billion and £20 billion—that is, 1.9 per cent., 2.2 per cent., 1.6 per cent., 1.6 per cent., 1.5 per cent. and 1.5 per cent. of gross domestic product. That 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. in the early 1990s.

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 the assessment of the five tests on the euro by June next year.

If we take the full economic cycle into account, net borrowing—which is forecast this year, cyclically adjusted, to be 2.7 per cent. in the United States, 2½ per cent. in France, nearly 3 per cent. in Germany and 7 per cent. in Japan—is, in Britain, just 1.2 per cent. this year, and 1½ per cent., 1.3 per cent. and 1½ per cent. for the next three years.

So, in both monetary and fiscal policy, with the lowest inflation and the lowest long-term interest rates for 40 years, as well as the lowest unemployment for 25 years—and we are able to meet our spending plans in full—the right approach is to hold firm to our long-term course.

As I conclude this section on monetary and fiscal policy, I wish 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 of England independent in 1997. 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. 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 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 challenged by a long-term global restructuring of industry—low value-added production shifting from the highly industrialised to the industrialising countries; competitive advantage in manufacturing and services increasingly coming from high value-added technology-driven products.

In the next wave of globalisation, which is now upon us, it is the flexibility of our product, capital and labour markets, the strength of our science base, the level of British research and development and the scale and dynamism of knowledge transfer from our universities to business that will drive our productivity growth and thus future prosperity.

Building on the independence of our 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 this test, and the investment that we make must be matched by continuing reform. First, in central Government contracts worth £14 billion a year, the Office of Government Commerce will maximise competition and encourage bids from the widest range of companies, small as well as large. Secondly, the Office of Fair Trading will scrutinise proposed public sector regulations to assess their competitive effects. Thirdly, we will use the discipline of the market to deliver value for money through private finance initiative projects worth £30 billion, which will include large-scale regeneration projects, while recognising the limits of markets in areas such as health care, education, defence and policing. Fourthly, 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 having consulted business on further corporate tax reform, we are considering detailed proposals to reform the tax treatment of capital assets, the use of losses and of trading and investment companies. To stop tax avoidance, measures announced today will root out abuse of the VAT regime, and we will be tightening 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 19 per cent. and the cut in the starting rate from 10 per cent. to zero, the Secretary of State for Trade and Industry is today announcing the extension of eligibility to the small firms loan guarantee scheme to include businesses with turnovers of up to £3 million a year in a wider range of sectors. Some 400,000 businesses in all are now eligible.

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

To help small and medium-sized firms export and build modern manufacturing strength, the Secretary of State for Trade and Industry is also ensuring that from today the Manufacturing Advisory Service will extend to every region of the country; and in response to concerns about rising insurance costs, the Secretary of State for Work and Pensions is undertaking a formal review of the operation of employers' liability insurance.

To build stronger local economies in each region and to 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, we are devolving to the regions management of the skills budgets.

Because the enterprise culture that we want to see starts in our classrooms, the Secretary of State for Education and Skills is following the Davies report, announcing, over three years, £75 million to promote education in enterprise in our schools and colleges. To encourage local initiatives in enterprise, we are consulting on allowing local authorities to keep additional rates income from the creation of new businesses in their area.

To match the proposed greater flexibility in the planning system with measures to increase the affordability and numbers of houses, the Deputy Prime Minister is publishing the communities plan in January.

For high unemployment areas, where the answer is more economic activity and more 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, following state aids clearance which we expect in January, not only will we 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 in these areas, but we will give local authorities powers to relax requirements for detailed planning permission. In pilot projects in high unemployment areas, we will test a more intensive approach, estate by estate, of interviews, training and job search services, matched by benefit sanctions so that we can help the long-term unemployed back into work.

I have two further announcements on business taxes. From 1 January, we will abolish all royalty taxes on North sea oil and gas. Following the consultation that 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— having covered all the numbers in this area—to abolish in the Budget bingo duty will be welcomed on both sides of the House.

Our charity tax reliefs are worth an additional £2 billion a year, and I can announce today that we 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. Based on the success of the United States Americorps, we will pilot a financial scheme to help British young volunteers from lower-income backgrounds take a year out after school to undertake community service.

We also have a commitment to protect the environment for future generations, so we are publishing today a detailed paper setting out our approach to the environment. We will consult on what will be a revenue-neutral proposal to raise the landfill levy by £3 per tonne per year from 2005–06. On environmentally based fuels, I can also announce that, for bioethanol road fuel, we will 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 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 asked the former editor of the Financial Times, Mr. Richard Lambert, to examine how, building on our research and development tax credit and the 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 whole British economy.

Since 1997, the new deal has been helping the young, lone parents and many disabled people back into work. The priority now is to focus, too, on how we help young people and adults to move up the skills ladder. I can therefore announce that we will use the remaining surplus from the windfall tax and, at a cost of £130 million, extend to a quarter of local learning and skills council areas the new employer training pilots, in which the Government support wage and training costs in return for employers providing time off so that employees can get proper training.

To spearhead what I believe the whole country wants—the expansion of modern apprenticeships so that nearly a third of young people are covered by 2004—a new modern apprenticeship taskforce will be headed by someone who knows a great deal about training and skills, the chairman of Manchester United football club and chief executive of Centrica, Sir Roy Gardner. In addition, following the success of our new university for industry, with half a million students already, and talks with the banks, we are now going to consult in detail on how we expand training and management courses for small businesses.

We will also continue the expansion of work permits for managed migration, which was begun by the Home Secretary. He and I are extending the highly skilled migrant programme, and through a new unit 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. Couples with wages of less than £280 a week, or £14,000 a year, and single people with wages of less than £10,500 a year will stand to receive more money from the new working tax credit, 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 be fair to parents. Next month, in a joint Department of Trade and Industry-Treasury report, we will publish new 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, the first ever paternity and adoption pay, the new tax credits that we are introducing and the first ever national child care strategy, we will consider further reforms: first, new tax and national insurance incentives so that we can expand employer supported child care; secondly, paying the child care credit for approved home child care by carers who are not already childminders; and, thirdly, increasing flexibility in parental time off, including giving fathers time off to attend antenatal care.

Our goal—stability and prosperity for all—means also fulfilling our goals to tackle child and pensioner poverty. Following last week's social security uprating, the starting level for the new child tax credit, taken with child benefit and now to be 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 2 million of our lower income families, £2,800 for the first child and £4,800 for a two-child family as the child tax credit, based on support for all and most support for those who need it most, becomes the most powerful weapon for tackling family poverty.

That 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 the age of 18. We are now proceeding to detailed discussions with a range of providers—the banks, building societies and friendly societies.

Now that the Secretary of State for Work and Pensions has also announced the pension rise next April from £75.50 to £77.45, and to £79.40 at least by 2004, the Government can also announce the levels of the new pension credit. From next October, instead of penalising modest savings and small work pensions, it will reward savings.

In the typical constituency of Members of the House, 7,000 pensioner households will benefit. That is couples with total incomes of £200 a week or less, and single elderly people with £139 a week or less. They stand to benefit from what is £2 billion extra that is being paid out in pensions. Let me give the House the figures: a pensioner couple with income of £150 a week will receive £21.50 a week extra. That is £1,100 more a year. On an income of £160 a week, it is £17.50 a week or £900 a year. With an income of £170 a week, it is £13.50 a week or £700 a year. A single pensioner with £110 a week will receive £11.60 a week, or £600 a year on top of their pension rises. 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 single 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 of 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, we have rejected the view that we should cut back our spending plans at home and abroad. So I can not only confirm that we will fund our planned investments: by 2006, there will be £8 billion more a year for local authorities; £15 billion more a year for education; £63 billion more a year for public services; and by 2008, for health alone, there will be £41 billion more a year to be paid for by our national insurance rise—all to be matched with reform.

But we can also, amid global uncertainty, do more to meet our international obligations. It is right in the new figures presented today, consistent with past Treasury practice, to set aside to meet our international defence responsibilities a provision of £1 billion to be drawn on if necessary. We must not only meet the global security challenge; there is today not only a new imperative but, I believe, a new opportunity to meet the global poverty challenge.

In the last five years, through the Prime Minister's Africa initiative and 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 of debt relief for 26 countries, our aim is now $100 billion for the 38 countries in total that stand to benefit from the cancellation of debt. I thank all Members on both sides of the House and all churches, faith groups and non-governmental organisations in our constituencies for their tremendous work.

But because at this critical moment 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 with the heads of the International Monetary Fund and the World Bank. I can inform the House that Britain is now proposing a new international development finance facility, with public finance leveraged up by long-term international commitments, so that we can raise the amount of development aid for the years to 2015, with a step change from $50 billion a year to $100 billion a year, so that we can meet by 2015 the millennium development goals, including that poverty be halved, that child mortality be reduced by two thirds, and that every single child has the right to primary education.

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

In conclusion, we have been tested by world events and have resolved to steer a steady course. That steady strength of purpose will continue, and we will honour our commitments to invest in public services, to advance enterprise and fairness and to meet and master the global challenges. I commend this statement to the House.

Photo of Michael Howard Michael Howard Shadow Chancellor of the Exchequer

I begin by drawing attention to my declaration in the register and express my gratitude to the Chancellor for advance sight of part of his statement, blank pages and all—a total of eight minutes of it.

I start on a note of consensus. I welcome what the Chancellor said in his closing remarks about the relief of global poverty. He said that he welcomed the support that that would receive from all quarters of the House, and he was absolutely right. We support those measures.

I must congratulate the Chancellor on something else. Up to now, he has been overshadowed by the Prime Minister, but at last he has come into his own. He is being paid the supreme accolade of having a song dedicated entirely to him. It is written by Kenny Jones and Robert Hart. [Interruption.] The song is released later this week, and I can give the House a preview. [Interruption.] It is called XMr. Brown, You're Robbing Me" and its lyrics include the lines:

XGiving with one hand, taking with the other.

Shatter your dreams. Then you run for cover".

But the Chancellor has not been able to run for cover today. This is a moment of humiliation for him. [Interruption.]

Photo of Michael Martin Michael Martin Speaker of the House of Commons

Order. The Chancellor was heard and the right hon. and learned Gentleman has to be heard.

Photo of Michael Howard Michael Howard Shadow Chancellor of the Exchequer

I quite understand, Mr. Speaker, if Labour Members do not want to listen to this.

The Chancellor was forced to admit that his forecasts on growth were wrong; his forecasts on revenue were wrong; his forecasts on borrowing were wrong; and his forecasts on his deficit were wrong. These are the downgraded forecasts of a downgraded Chancellor. For weeks on end, he and his spin doctors have been trawling around looking for alibis. In the words of the Financial Times, he has been Xrehearsing his excuses".

Everyone is to blame for the fact that the Chancellor got his forecasts wrong except the Chancellor himself. In Thursday's Financial Times he blamed it on the fall in world trade between 2000 and 2001, but in his Red Book, at the time of his Budget forecasts, he said that world trade was estimated to have contracted in 2001 and grown only slowly in 2002. At the CBI and in the House last week he said that we are seeing the sharpest contraction in world economic growth since 1974, and he is wrong about that too. We had world growth of 2.2 per cent. in 2001, and the rate is expected to be 2.8 per cent. in 2002, but in the early 1990s we had three years when world growth averaged just 1 per cent. a year.

The Red Book made it clear that independent forecasters took a much more realistic view of prospects than did the Chancellor. His central forecast for 2002 was for growth of 2¼ per cent., but independent forecasters said that it would be 1.9 per cent., and so did the OECD just eight days after the Budget. What were those independent forecasters telling the Chancellor at the time?

XEconomists were surprised by the strength of the forecasts", noted The Independent. Growth projections in the next year or two were Xvery ambitious", said Deutsche Bank. XIt is not prudent," said HSBC economists. Everyone knew about this—except, apparently, the Chancellor. Indeed, far from heeding any of that independent advice, the Chancellor increased his forecast for growth in 2003 and for longer term trend growth. He thought that everyone else was wrong and he was right.

Today the Chancellor announced a borrowing figure of £20 billion for next year. Does not that demonstrate how dramatic is the deterioration in the public finances? His forecasts for borrowing over five years have risen 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.

The Prime Minister looks surprised; the figures obviously take him unawares. We know that the Red Book is not his favourite reading but he ought to take a little more interest. There they sit—what a shambles, what a shower. XBrown and Blair, the posturing pair." They are very good at taxing the people of this country; they are very good at spending the people's money; they are very good at wasting the people's money and they are very bad at delivering the improvements that the people want.

The Chancellor said that none of that matters as long as borrowing balances over the cycle, but will he comment on the view of the Ernst and Young item club that half the expected revenue shortfall for this year could be structural rather than cyclical? Will he comment on the view of the Financial Times that he took Xthe most unusual years" as the basis of his calculations, something that the newspaper says Xseems daft"? What is more, he cannot even say when his much vaunted cycle starts and ends. When I ask him about that he refers me to the Red Book, but the Red Book says that these things are very difficult to judge. It says that the start date for the cycle is provisional and that it is an assumption. Why on earth has the Chancellor spent the past five years claiming that his fiscal rules are rock solid when he cannot even tell us the start date of the cycle on which they depend?

Is not the end of the cycle even harder to predict, and is not that rather convenient for the Chancellor? Does he agree with the National Institute of Economic and Social Research that the current cycle will end early next year or early in 2004 and that he will not then be able to balance future deficits against past surpluses? That seemed to be the Treasury's view in the spring.

Is the Chancellor planning to do what has been suggested and try to make the cycle last longer? Why did the Treasury brief the press, first, that the cycle was about to end and then that it would end as late as March 2005? He told the House last week that the Government's fiscal policy

Xcan adjust to the economic cycle".—[Hansard, 18 November 2002; Vol. 394, c. 388.]

Is not the truth that he is trying to adjust the economic cycle to suit his fiscal policy? What does he say to the national institute, which said of his golden rule:

XYou can already smell the fudge being cooked up in Great George Street"?

What of the Chancellor's sustainable investment rule? If he had not, Enron-style, 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. Will he confirm that the extra borrowing he has announced today takes us over that limit? Is not a black hole now emerging in the public accounts—a hole entirely of the making of this Chancellor of the Exchequer?

As we have constantly pointed out, the growth of public spending under the present Government is far faster than the growth in the economy. Is not the heart of the problem that the Chancellor is following his present course because without reform, his spending is not leading to the improvements to the public services that we all want? His only answer now is to spend more. How far he has come from his view in 1997, when Labour's manifesto stated:

XThe level of public spending is no longer the best measure of the effectiveness of government".

By spending more without reform, he has locked himself on an unsustainable course, and if spending keeps rising faster than the growth rate of the economy, he will have to put up taxes again.

There were, as usual, plenty of promises on the public services in the Chancellor's statement, but every year he makes those promises and every year he breaks them. The Government are already taking almost £40 a week more in tax for every man, woman and child in the country. Yet while spending is indeed up on the NHS, patients are waiting longer in accident and emergency departments, and now, for the first time, there are more bureaucrats than beds. Although spending on law and order is up, crime and the fear of crime are on the increase—street crime has gone up by 31 per cent. in the past year. Although spending is indeed up on education, we were told yesterday that reading standards in our primary schools have actually declined in the past two years, and one in every four children leaves primary school unable to read, to write or to count properly. In fact, the Government have failed or are failing 40 per cent. of the targets that the Chancellor set in 1998, and 75 per cent. of those he set two years later. Every year he makes those promises and every year he breaks them.

We shall study with care what the Chancellor said about pensions, but it is a great pity that he did not answer the questions which my right hon. Friend the Leader of the Opposition put to the Prime Minister, but which the Prime Minister was so palpably unable to answer. Why does the Chancellor not start by getting the basics right—by encouraging people to save for their pensions, rather than discouraging them? How has his £5 billion a year pensions tax helped those who want to save for their retirement?

Photo of Ronnie Campbell Ronnie Campbell Labour, Blyth Valley

Pay for the rich and the gap will get bigger.

Photo of Michael Howard Michael Howard Shadow Chancellor of the Exchequer

Will the Chancellor say also whether any provision has been made for—[Interruption.]

Photo of Michael Martin Michael Martin Speaker of the House of Commons

Order. Mr. Campbell, please be quiet.

Photo of Michael Howard Michael Howard Shadow Chancellor of the Exchequer

Will the Chancellor say what provision he has made for public sector pay rises? Is it not the case that the Government have been in a complete mess and muddle on that issue, with the Chancellor, the Deputy Prime Minister and other Ministers all contradicting each other by the hour? This week, the Prime Minister entered the fray. On Monday, he was indulging his thespian fantasies, trying to play Margaret Thatcher. Well, I know Margaret Thatcher, and this Prime Minister is no Margaret Thatcher. [Hon. Members: XHear, hear!"]

In the statement, where was the announcement of action to reduce the burdens on business that the Government have imposed? Are not those burdens stifling the wealth creation on which we all depend? Does not yesterday's news that business investment has suffered the sharpest fall for 35 years—a fall significantly greater than that in Germany or the United States—represent a devastating vote of no confidence in the Chancellor and his policies?

What does the Chancellor have to say about the causes for concern in the UK economy, such as savings? We are now saving less than we have practically ever saved before. Borrowing is at record levels, and house prices are rising at an unsustainable rate. The newly appointed Governor of the Bank of England is now warning of the risk of a large negative demand shock at some point in the future. There are concerns about the world scoreboard of competitiveness, where we have been relegated from the top 10; about productivity growth, which has halved; about business investment, which has now fallen for seven quarters in a row; about the trade deficit, which we have run nearly every single month for five years; about manufacturing, where 15,000 jobs were lost in September alone and half a million since Labour came to office; and about the stock market, which has fallen disproportionately in comparison with the United States, hitting people with savings, pensions and mortgages. Does the Chancellor agree with The Independent, which said last week that he should face up to the severe imbalances in the economy? We have seen no sign of that today.

This is a Chancellor who clung like King Canute to his economic forecasts in the face of all the evidence. Today's statement shows him to have been wrong on all counts. His fiscal rules are not as rigorous as he claimed, and he has missed the very targets that he described as cautious and prudent. How mortifying that he, of all Chancellors, should have got it so badly wrong. On top of all that, we have still not seen the improvements in public services that he promised. Has not the time come for an end to the policy of taxing and spending and failing? Does the Chancellor not think that the people of this country deserve better?

Photo of Gordon Brown Gordon Brown The Chancellor of the Exchequer

The shadow Chancellor is making exactly the same economic policy mistakes as those made by the Conservative Government and every previous shadow Chancellor. He said that our spending is unsustainable and tried to say that the national insurance tax rise should not go ahead. He refuses to match our spending on the public services, but his solution is to cut spending this year, next year and in future years. Cutting spending during a world downturn would depress demand, put up unemployment and put stability at risk. His colleagues have said that he would continue to spend on the Home Office and on defence, so the major spending cuts that he proposed would hit the health service and education. He must tell us which schools and hospitals, and how many teachers, nurses and doctors would lose out as a result. Like his party, he is making exactly the same economic policy mistakes that the Conservatives made in the early 1990s.

We will take no lectures from a shadow Chancellor who was Employment Secretary in the early 1990s. Inflation is 2 per cent. in this country, but under him, it was 10 per cent. Interest rates are 4 per cent., but under him, they were 15 per cent. The deficit is 1 per cent., but under him it was 8 per cent. Unemployment is below 1 million but, worst of all, during his term as Employment Secretary, it was above 2 million. We will therefore take no lectures from the Conservative party.

It is not only me who is criticising the shadow Chancellor's record, but the current leader of the Conservative party. In The Sunday Telegraph, 6 October 2002, the leader of the Conservative party talked about the economic mistakes of the shadow Chancellor when in government in the 1990s. XBusinesses," he said,

Xwent to the wall. We broke our pledge on taxes, there was negative equity in homes."

This is the current leader of the Conservative party talking about the work of the current shadow Chancellor. He continued:

XThe public felt hurt. Then we lectured them, and we seemed arrogant."—


The Opposition do not like it because it is true.

Photo of Michael Martin Michael Martin Speaker of the House of Commons

Order. I do not like it either. The Chancellor must answer the questions that he was asked—[Interruption.] Order. Divisions within the Conservative party are nothing to do with me and nothing to do with the Chancellor in the Chamber.

Photo of Gordon Brown Gordon Brown The Chancellor of the Exchequer

When the shadow Chancellor refers to his record in the early 1990s, let us look at what he is proposing today. First, on—[Interruption.]

Hon. Members:

Sit down.

Photo of Michael Martin Michael Martin Speaker of the House of Commons

Order. I have called the Chancellor back to the Dispatch Box. There is only one Speaker in the Chamber.

Photo of Gordon Brown Gordon Brown The Chancellor of the Exchequer

First of all, the right hon. and learned Gentleman says that we should not have gone ahead with the ACT dividend tax credit. Let me remind the Conservative party that it cut it by half during its period in office. Then he said that we should be concerned about burdens on business. I have the report of the World Economic Forum from which he was quoting. It says that the improvement in the UK's position is particularly remarkable with its jump from seventh to third this year. It is the Conservatives who must look at their record on regulation.

As for the burden on small business, we are removing the burden on small businesses of having to account for every item of VAT. We are removing the audit requirement, and the right hon. and learned Gentleman should have noticed in the pre-Budget report the consultation that is now being carried out on all the other items.

On the question of public services, which the right hon. and learned Gentleman also raised, does he not know that literacy and numeracy results, A-level results and the numbers of people who are able to go to university are the best that have been recorded in this country?

As for the right hon. and learned Gentleman's other points—[Hon. Members: XMore, more."] As for his other points—[Interruption.]

Photo of Michael Martin Michael Martin Speaker of the House of Commons

Order. We must have order in the House.

Photo of Gordon Brown Gordon Brown The Chancellor of the Exchequer

As for the right hon. and learned Gentleman's other points about manufacturing, it is growing in the third quarter of this year and business investment is 25 per cent. up on 1997, but we are facing exactly the same problems that businesses are facing around the world.

As for the right hon. and learned Gentleman's further point on crime, he should recognise that crime is down under this Government. As for his point on savings ratios, he should understand that we have the lowest savings ratio—[Hon. Members: XYes."] The lowest savings ratio was recorded in 1988, under the last Conservative Government.

As for the right hon. and learned Gentleman's points about the downturn in world activity, let me point out to him that in 1991, the world economy was growing by 0.9 per cent. in the G7 countries and in 2001, unfortunately, it was growing by 0.6 per cent. That is the point—in far worse world conditions, Britain was first in and last out in the last recession. It is now growing and has a stable economy, and we can meet our public spending plans and have the lowest inflation and interest rates for 25 years and the lowest unemployment. That is a record that Labour Members are proud of.

Photo of Matthew Taylor Matthew Taylor Liberal Democrat Spokesperson (Treasury)

At least the Chancellor, unlike the Conservative party, knows how much he wants to tax and spend. The problem for him is that he is running out of money and ideas. It is noticeable that while he used to claim credit for everything that was going right, he now ducks any blame for anything that is going wrong.

The announcement made today involved the Chancellor in doubling borrowing to more than £100 billion over the next five years, compared to his plans in the Budget. His borrowing to cover a short-term problem is one thing—the right response to a temporary setback—but his Budget will go bust in the long term unless he tackles the collapse in British industry and stops relying on an unsustainable boom in consumer debt to keep his growth figures up.

Does the Chancellor even recognise that UK business investment has now crashed faster than in Japan, the United States, France, Italy and even, on the latest figures, Germany? It has crashed faster than at any time since records began and his latest figures today predict that it will stay lower. Even the Government's own investment in schools and hospitals is 25 per cent. below the level that they planned.

Those are not world problems. Does he know that our share of inward investment into Europe has collapsed from 28 per cent. to only 16 per cent. in a mere four years? Those are not the problems of the world economy.

Is the Chancellor proud of a manufacturing recession that is the deepest since 1981 and the longest since 1945? Is he proud of the fact that 500,000 people have lost manufacturing jobs in this country when such employment has increased in the European Union? Those are not world problems.

Is it not true that record household debt is the only reason that UK growth has held up? Does the Chancellor agree with the Bank of England that increasing debt and booming house prices are not sustainable? They are not the basis for sustainable long-term plans for investment in education and health.

Today, the Chancellor has again provided further tax complication and red tape for business. He has no new ideas for tackling the exchange rate problem that British business faces, the recession in manufacturing and the collapse of investment in this country that is far greater than that of our competitors.

What exactly is the Chancellor's assessment of the additional risk from any war with Iraq? He said that he would have to make such an assessment. We are not simply considering a world downturn. The scale of our manufacturing problems is unique to Britain and it has been engineered in 11 Downing street by meddling, red tape, tax complication and a lack of action on the exchange rate.

Unlike the Conservatives, we do not believe that the Government should cut education and health spending. [Interruption.] The Conservative party does not believe in anything. It has no policy on tax or on spending. Indeed, it has no policies at all, so we will take no nonsense from Conservative Members.

The Chancellor needs to mend his ways and stop passing the buck. He must cut red tape and simplify the tax system. He has to tackle the exchange rate issue or devise an alternative solution. If he does not, his long-term plans for investment in health and education cannot be realised. He risks that today with his complacent approach of refusing to accept that a single problem in the British economy can be laid at his door.

Photo of Gordon Brown Gordon Brown The Chancellor of the Exchequer

I am grateful to the hon. Gentleman for asking about the direction and balance of the economy. However, he must bear it in mind that our economy is stable and growing, while other economies have been in recession. He cannot claim that manufacturing job losses have not hit the German, French, Italian and other economies in Europe. Unemployment in Germany has again increased beyond 4 million, and the German economy is barely growing.

The hon. Gentleman cannot disguise the fact that the slowdown and contraction of industrial activity have been happening throughout the G7 countries. A feature of that is the IT slowdown that has occurred in America and Japan as well as in Europe. That is a major reason for our difficulties because business investment in IT was a critical factor in the late 1990s. He cannot therefore ignore the world factors and the global restructuring of industrial activity.

On the balance of the UK economy, as I said earlier, we expect industrial production and manufacturing output to increase and business investment to recover next year when the housing market slows down and the pace of consumer demand is sustainable. However, I remind the hon. Gentleman that business investment is 25 per cent. higher than in 1997, and that it increased from 11 per cent. to 14 per cent. of GDP. That was partly because we changed the dividend tax credit, cut corporation tax and rewarded corporations for their investments.

The hon. Gentleman complained about the domestic balance of the British economy. We are taking steps to consult about more investment incentives for business. We shall continue to do that, and he should support us.

Photo of John McFall John McFall Chair, Treasury Committee, Chair, Treasury Committee

I associate myself with the Chancellor's congratulations to Sir Edward George, the Governor of the Bank of England, on his wise stewardship of the Bank and the Monetary Policy Committee over the years. I also welcome his worthy successor, Mervyn King.

We accept that this country cannot escape the consequences of a downturn in a global economy. My right hon. Friend should not listen to the Jeremiahs in the Conservative party. The shadow Chancellor not only knew Margaret Thatcher, but, like a lap dog, implemented her disastrous policies. May I suggest that the Chancellor stands fast on the macro-economic objectives that have provided high employment, low mortgage rates, a stable environment and, more than anything, have utilised the previously unused talents of young people?

Photo of Gordon Brown Gordon Brown The Chancellor of the Exchequer

I agree about using the talents of young people. I hope that my hon. Friend will welcome the work that we are doing, especially my right hon. Friend the Secretary of State for Education and Skills, on modern apprenticeships and training, not just college and university training, but industrial and workplace training for young people.

On the monetary and fiscal rules, I hope that hon. Members in all parts of the House will agree that the monetary and fiscal rules that were established after 1997—rules that apply over the cycle, but rules that are disciplined and which must be met—are the best rules for the British economy. I hope that the House will agree that by keeping to those rules, not only shall we establish credibility, but we shall be able to keep interest rates lower than they would otherwise be.

Photo of Kenneth Clarke Kenneth Clarke Conservative, Rushcliffe

I add my congratulations to Sir Eddie George and welcome the appointment of Mervyn King.

Will the Chancellor stop pretending that his present situation is the result of some careful Keynesian counter-cyclical planning on his part, when in fact he has come to the House to talk his way through the collapse of those absurd forecasts that he gave us only six months ago, at the time of his Budget? When he looks back, as he keeps doing, will he realise that he runs the risk of adding his name to the list of Chancellors who, first of all, gave way to political pressure to increase public spending, then claimed that it would all be affordable by making ridiculous estimates of future growth of the economy, then pretended that there was no problem when unexpected borrowing suddenly surged, and claimed that that could all be accommodated, and then did nothing effective on fiscal policy until the problem turned into a crisis?

The mistakes of which the Chancellor speaks are the mistakes made by Chancellors in the 1960s, the 1970s and the 1980s, and not repeated by the Major Government, which is why he inherited a stable economy already achieving growth with low inflation. That economy is now being sustained by a housing boom, household debt and public spending at an unsustainable rate. Will he come back to the House, recognising the existence of the problems to which he pretends to be blind, and present some substantial measures that might tackle them and restore stability to the British economy?

Photo of Gordon Brown Gordon Brown The Chancellor of the Exchequer

I am always interested to hear the words of the former Chancellor, but they would carry more weight if he had not left debt at 44 per cent. of GDP and forced us to cut it, and if he had not left an inflationary problem that had to be dealt with by raising interest rates in the first days after we came into government. I must therefore look at his record in the context of high debt, his failure to make the Bank of England independent, and the high inflation that he left us. [Interruption.] That rising inflation had to be met by rising interest rates when we came into government.

On the right hon. and learned Gentleman's comments about forecasts, our forecast was 2 to 2.5 per cent. The eventual outcome that we are forecasting now is 1.6 per cent. That is a long way from Conservative Governments in the early 1990s saying that there was no recession, when there was a recession.

Photo of Mr Martin O'Neill Mr Martin O'Neill Chair, Trade & Industry Committee, Chair, Trade & Industry Committee

I congratulate my right hon. Friend on his statement. Many of us who have been in the House for a wee while remember the conditions in which other economic difficulties were confronted by Governments. Given the present state of our economy and the health of our public finances, we do not need to take any lectures from the Opposition. However, I point out to my right hon. Friend that manufacturing industry looks for more assistance than it has received this afternoon. I should like to think that by the time of the Budget we will have had a proper review of the climate change levy, and I look towards an indication of a more rational form of carbon taxation in relation to energy. Finally, will my right hon. Friend try and hurry up some of the officials in his Department so that they complete the long-awaited review of the taxation of foreign nationals in this country?

Photo of Gordon Brown Gordon Brown The Chancellor of the Exchequer

I am grateful to my hon. Friend. The review on foreign nationals is continuing and we shall publish the documentation later.

On my hon. Friend's main points about manufacturing—I understand his long-term interest in the matter as Chairman of the Select Committee on Trade and Industry, and his constituency interest as well—the measures that we have taken include a research and development tax credit to help future manufacturing, 100 per cent. capital allowances, and venture capital funds in the regions, which are of assistance to manufacturing and therefore to investment. The main contribution that we can make with regard to the costs of investment for industry is to keep interest rates and inflation low.

The issue for us is not that we stand by and do nothing when manufacturing is in difficulty; we have done what we can in terms of capital allowances and investment allowances, and of providing a stable macro-economic environment to help manufacturing industry. Of course, the changes in manufacturing industry are taking place right across the industrial world. So far as the climate change levy is concerned, we froze it this year.

Photo of Michael Fallon Michael Fallon Chair, Treasury Sub-Committee

The Chancellor announced the endorsement of his pre-Budget assumptions by the Comptroller and Auditor General. Will he confirm that this is the same Comptroller and Auditor General who threw out his claim that Network Rail was a private sector company? Is it not typically disingenuous of the right hon. Gentleman to take credit for the former but to take no account of the latter?

Photo of Gordon Brown Gordon Brown The Chancellor of the Exchequer

Yes, but the Office for National Statistics makes the recommendations about off and on-balance-sheet matters. We have operated in exactly the same way as the previous Conservative Government did. If the shadow Chancellor is accusing us of Enron-style activity, which is a suggestion of corruption rather than of getting things wrong—[Interruption.] He is saying that Enron is not an example in which corruption was involved. If he is accusing us of such activity, he must also accuse his own Government, because we are operating under exactly the same rules. With regard to Network Rail—the case in point regarding the National Audit Office—we rigorously pursued the recommendations of the Office for National Statistics. Those are the same as the recommendations of the EUROSTAT office, and we have acted in accordance with all those rules. The same rules applied under the last Government.

Photo of Mr Tam Dalyell Mr Tam Dalyell Labour, Linlithgow

The Chancellor will hardly be astonished if I press him on what he said in his opening statement about the unfolding events in Iraq. What exactly are the assumptions about oil prices? Will he also clarify the reference that he made towards the end of his statement to £1 billion for terrorist contingencies? Is that supposed to cover a military operation against Iraq? Are there not two jokers in this pack? The lesser may be the cost of the war; the greater will be the consequence for oil prices of the middle east going up in flames. It would be sheer folly—in terms of all sorts of things, not least the economy—to set the middle east on fire.

Photo of Gordon Brown Gordon Brown The Chancellor of the Exchequer

The setting aside of £1 billion in the reserve is in line with previous practice, and it is to deal with eventualities if or when they arise. I know that my hon. Friend takes a detailed interest in what is happening in the middle east. As he will know, oil prices have risen partly as a result of the uncertainty. They rose quite high, then they came down a bit. A great deal of the activity surrounding oil prices is related to that uncertainty. Our assessments of what oil prices are likely to be are independently audited by the National Audit Office. The price that we assume for oil tax revenues, for example, as well as for economic activity, is the one that is audited by the NAO. I will send my hon. Friend details of that.

Photo of Peter Tapsell Peter Tapsell Conservative, Louth and Horncastle

Does the Chancellor deny that, at the time of his Budget last April, many Conservative Members told him that his growth forecasts were over-optimistic and unreliable? Does he also deny that we have been proved right, and that he has been proved wrong? Why should we now believe his projections for future years? Is it not the case that he has now reverted to his political ancestry of spend, tax and borrow, that he is frantically trying to weaken the European stability pact, and that he has thrown away his capacity to dominate monetary policy? In these circumstances, would it be helpful if I sent him an e-mail giving him an up-to-date telephone number on which he can get in touch with the International Monetary Fund?

Photo of Gordon Brown Gordon Brown The Chancellor of the Exchequer

I thought that the hon. Gentleman was one of the few Keynesians left on the Conservative Benches. Clearly that is not the role that he is playing today. So far as the changes since the Budget in April are concerned, I think that he would agree with me that a stock market fall of 25 per cent. in Britain, and a 40 per cent. fall in France and Germany, are significant events that not even he, with his prescience, could have predicted in April. He must realise that those events have a bearing not only on the value—[Interruption.] The shadow Chancellor says that the hon. Gentleman did predict this; I would be very surprised if he had actually done so in practice.

A 25 per cent. stock market devaluation must be taken into account in our calculations of corporate tax, capital gains tax, stamp duty and other matters. That is one change that has taken place since April. On other changes since April, I do not think that the hon. Gentleman would have seen the German forecast at that time. Germany was forecasting far higher growth, but growth is now only 0.4 per cent.

Photo of Mark Hendrick Mark Hendrick Labour/Co-operative, Preston

I commend my right hon. Friend's plans to devolve the training and skills budget down to regional level, which will be welcomed in the north-west. I also commend his plans to ensure that a third of young people go into modern apprenticeships. May I bring to his attention the excellent schemes going ahead at the BAE Systems training plant in Preston whereby 300 young apprentices are getting excellent apprenticeships, which have recently received an award for excellence? That can act as a model for training and apprenticeships throughout the north-west.

Photo of Gordon Brown Gordon Brown The Chancellor of the Exchequer

I am grateful to my hon. Friend. I know that he takes an interest in the BAE development and the work being done on industrial training. Apprenticeships were virtually dead a few years ago, but there are now 200,000 modern apprenticeships, and that number will continue to rise to 300,000. We believe that it can rise substantially further, but we need to invest in modern apprenticeships and we need to encourage small firms in particular to take an interest. That is the purpose of the modern apprenticeships taskforce, which I hope will have a regional representation, which he seeks.

Photo of Rt Hon David Trimble Rt Hon David Trimble Leader of the Ulster Unionist Party

Among the papers published by the Chancellor today is one on protecting indirect tax revenues. I welcome the fact that it includes detailed information on the extent of oil fraud in Northern Ireland, and I hope that it conveys to Members and the general public here the extent of the revenue loss, which is given as £370 million in 2001.

I draw the Chancellor's attention to the Northern Ireland Affairs Committee report published today, entitled XThe Impact in Northern Ireland of Cross-Border Road Fuel Price Differentials". Will he look carefully at the report and, in particular, consider the fact that it urges the Government to study and

Ximplement a separate lower rate of fuel . . . duty in Northern Ireland, by derogation if necessary"?

Will he consider also corporation tax rates and the significant cross-border differential between Northern Ireland and the Republic of Ireland, which has a distorting effect on investment in Northern Ireland and limits significantly our ability to attract inward investment?

Photo of Gordon Brown Gordon Brown The Chancellor of the Exchequer

I am grateful to the right hon. Gentleman. We have discussed that a number of times, and he kindly brought a delegation to see me and other Ministers on the matter. We understand the scale of the problems of oil fraud in Northern Ireland, cross-border fraud and trafficking, which is why the report has been published today. I look forward to discussing with him what it says and what we can do to take things forward. We share his aim of reducing the revenues that are lost and we are looking for solutions, which we shall discuss with him and the Northern Ireland Administration, once re-established.

On the question of corporation tax relief, I visited Northern Ireland with the Prime Minister and we made a number of proposals to inject additional resources into the Northern Ireland economy. We recognise that there is a long way to go for business to grasp the opportunities that are potentially available, but we shall continue to do what we can. The right hon. Gentleman should consider some of our proposals—for example, the extension of the business loan guarantee scheme—and I look forward to talking to him again about how we can help to expand take-up of some of those schemes in Northern Ireland.

Photo of George Mudie George Mudie Labour, Leeds East

I congratulate the Chancellor on the pension credit. He knows that the minimum income guarantee was much resented by those who had worked hard but received only a small pension that took them above pension credit level. Therefore, they did not get the benefit.

I should like to do the shadow Chancellor's job on that issue, because strangely he left the figures alone. I must press my right hon. Friend on the figures in his speech, because they are too good to be true. I seemed to catch him saying that 5 million people—almost half the pensioners in the land—will get about £2 billion between them under that benefit. Why did the shadow Chancellor leave those figures alone—out of generosity to my right hon. Friend or because my right hon. Friend deserves double congratulations on those acts?

Photo of Gordon Brown Gordon Brown The Chancellor of the Exchequer

I am grateful to my hon. Friend for mentioning the importance of the pension credit. The figures are indeed accurate. We shall ensure that pensioners throughout the country are aware of the benefits available to them, just as we shall make people aware of the child tax credit. I believe that the take-up will be high once people realise the benefits that will flow from this measure. The figure is indeed large—5 million pensioners.

I agree with my hon. Friend about the minimum income guarantee for pensioners, but our first job was to ensure that we did all that we could to eliminate or reduce pensioner poverty. That is why we tried to lift the poorest pensioners, particularly widows in their 80s or over, out of the income support system that existed under the previous Government, with a far higher minimum income guarantee. I am pleased that it is now £102; it has risen by 30 per cent. in real terms since we came into office.

We can now build further. This measure rewards savings—the works pensions and the modest savings that people have. Given that 7,000 households will benefit from the measure, I am sure that hon. Members will want to make all those pensioners who can benefit aware of it.

Photo of Nicholas Winterton Nicholas Winterton Conservative, Macclesfield

I compliment the Chancellor on his robust presentation. However, he would expect me to say that I am rather suspicious of its content. He failed to respond properly to the question put by his hon. Friend who chairs the Trade and Industry Committee, Mr. O'Neill, about the impact of Government policy on manufacturing industry in particular. The hon. Gentleman also mentioned the climate change levy, which damages industry even if it might assist banks, insurance companies and building societies.

Will the Chancellor direct his attention at the red tape, bureaucracy and regulation that he has imposed on British manufacturing industry, because it is making matters harder and harder? He will appreciate my lifelong commitment in this place to manufacturing industry. The Confederation of British Industry, the chambers of commerce and the Institute of Directors are not enamoured with much of what he has done.

Photo of Gordon Brown Gordon Brown The Chancellor of the Exchequer

I am grateful for the first set of remarks from the hon. Gentleman. He is indeed a supporter and defender of manufacturing industry, and throughout the time in which we have been in the House together, he has spoken up for the needs of manufacturing.

The hon. Gentleman must remember that the climate change levy was a revenue-neutral measure as far as business was concerned. We froze the levy this year. We want to meet our environmental commitments nationally and internationally in the long term.

On business taxes, as the hon. Gentleman should know, we reduced corporation tax from 33p to 30p. Small businesses will benefit from that even more this year, with the 19 per cent. rate and the 10 per cent. rate abolished so that the first £10,000 of profit are exempt from tax, so we are doing our best to encourage small businesses.

On manufacturing industry, the research and development credit has been widely welcomed. Equally, the measures that we announced today to expand the advisory service for manufacturing industry in every region, are welcomed too. The hon. Gentleman knows that what manufacturing industry wants most are favourable trading conditions, low interest rates and low inflation. We have low inflation and low interest rates; we want to create favourable trading conditions for that industry.

Photo of Tom Clarke Tom Clarke Labour, Coatbridge and Chryston

Does my right hon. Friend accept that the Government's achievements and objectives in international development are outstanding in every sense? Could that be why the shadow Chancellor and the former Chancellor, Mr. Clarke, did not say a word about the Government's policies?

Will my right hon. Friend, based on his successes and those of my right hon. Friend the Secretary of State for International Development, continue with those policies, particularly in debt relief, humanitarian aid and fair trading? Will they find themselves in a position, if not today then later, to tell us when we might achieve the United Nations targets?

Photo of Gordon Brown Gordon Brown The Chancellor of the Exchequer

I am grateful to my right hon. Friend. He has been a lifelong proponent of greater aid and investment in the poorest countries of the world so that we can tackle their poverty. The whole House knows his contribution.

I believe that we can have the support of all parties in the House for the policies that we are now pursuing, and I appreciate the fact that all Opposition parties have said that they wish to support that initiative. Our aim is 0.7 per cent. The initial measures that we are putting forward for a £50 billion increase to £100 billion of development aid by the developed world involves a compact whereby, in return for the developed countries insisting on corruption-free policies for stability, better conditions for trade, which require the Doha talks to have been successful, and a more conducive environment for investment, we should in return be prepared to put in the additional development aid. That is why we are proposing the new international finance facility. I believe that the response from other countries will encourage us to move ahead. I chose to end the pre-Budget statement with international development aid. If we are to tackle the insecurities and inequalities of globalisation, we as developed nations will have to do far more.

Photo of Michael Spicer Michael Spicer Chair, Conservative Party 1922 Committee

Why has the enterprise culture, which the Chancellor inherited, been replaced by one that is dominated by trade union activity, regulations and high taxation, and why in particular has investment collapsed?

Photo of Gordon Brown Gordon Brown The Chancellor of the Exchequer

The enterprise culture is being encouraged in the schools with the measures that we are putting forward today, in high unemployment communities with the 2,000 new enterprise communities, in our work with Young Enterprise, the inner city 100 and all the enterprise agencies, which we have tried to encourage over the past few years. The hon. Gentleman should recognise that, if an enterprise culture can be built in each region and in each community, from the school classroom to the boardroom, it can make a huge difference to the chances of creating businesses and jobs. I should have thought that he would have been at one with us on that.

Photo of Mr Nigel Beard Mr Nigel Beard Labour, Bexleyheath and Crayford

I congratulate my right hon. Friend on the robust strength of the economy, despite the uncertainties and difficulties in the rest of the world. What steps have been taken to encourage business investment and innovation, particularly in manufacturing industry?

Photo of Gordon Brown Gordon Brown The Chancellor of the Exchequer

I am grateful to my hon. Friend, who is a member of the Treasury Committee and is extremely interested in that matter. As he knows, the main measures that have been taken over the past few years are the research and development tax credit and the raising of capital allowances for small and medium businesses, but in addition the creation of regional venture capital funds, where the European Union has given approval to go ahead, provides additional funds that are put at the service of business. The university challenge fund and the higher education innovation fund are a means by which to link ideas coming out of universities to the creation of new businesses. In each region, we can see more opportunities for business to benefit from new ideas and new insights. If we are to win in respect of the high value-added, technology-driven products of the future, it must be part of the Government's job to encourage science, innovation and research, and to put that more at the service of successful businesses.

Photo of Alex Salmond Alex Salmond Scottish National Party, Banff and Buchan

The Chancellor knows that he will get support from these Benches on international aid initiatives, but can he confirm that his growth forecasts are down, his borrowing forecasts are up, he has created a bust out of boom in the oil industry and is now trying to repair the damage, and he has scuppered a settlement in the firefighters' dispute because of pressure on the public finances? Given that for five years in a benign international environment he claimed the credit for every single success, is there any measure—even one—that, on reflection, he will want to point to that may have contributed to him being blown off course?

Photo of Gordon Brown Gordon Brown The Chancellor of the Exchequer

On the oil industry, we were right to raise the supplementary corporation tax for an industry that had made very substantial profits, but in return for that we increased investment allowances to 100 per cent. and we have now abolished North sea royalties. The hon. Gentleman's political party opposes the tax rise for North sea oil but has no means of raising revenues for the measures that it is proposing in every other sector. On the economy, I think that he would agree that the Scottish National party could never deliver low inflation, low interest rates, high employment, stable growth and continuing investment in public services.

Photo of Alan Simpson Alan Simpson Labour, Nottingham South

I congratulate the Chancellor on being open about the downturn in the global economy and the dangers of accelerating the problems were we to cut public spending. I come back to some of the key points in his statement. There are dangers in cutting benefits to the young unemployed who are most marginalized—it is more likely to turn them towards drugs and crime than jobs and prospects. The schemes that have worked have stuck with the most marginalised long term, rather than sought to penalise them short term.

For the past 20 years, the problem for public services has been the absence of real structural investment, rather than a shortage of private tendering. We must be careful about going down that path, and trying to sell to the electorate the virtues of a tax credit in exchange for a pay cut. In relation to the £20 billion of borrowing—

Photo of Sylvia Heal Sylvia Heal Deputy Speaker

Order. The hon. Gentleman must conclude his remarks.

Photo of Gordon Brown Gordon Brown The Chancellor of the Exchequer

Long-term youth unemployment reached nearly 500,000 at one stage in the 1980s, but is now around 5,000. My hon. Friend will acknowledge that that is a singular achievement, which was made by giving young people rights, responsibilities and opportunities. Those opportunities involved a lot of expense in training and advisory services, and young people had an obligation to take them up. I hope that my hon. Friend will agree that that is the right way to proceed.

My hon. Friend the Member for Nottingham, South is right to say in connection with the PFI that there has been a low level of public investment in our vital public services. We are trying to correct that. However, the need to ensure better value for money and more investment in the short term in our hospitals and schools has required us to use the private finance initiative.

Photo of John Maples John Maples Conservative, Stratford-on-Avon

According to figures from the House of Commons Library, the tax burden next year will be £153,000 million more than it was when Labour came to power. If my calculations are right, that means that on average every man, woman and child in the country will pay £2,600 a year more in tax. Are those figures correct?

Photo of Gordon Brown Gordon Brown The Chancellor of the Exchequer

The figures that we are publishing today show that the tax burden is 37.1 per cent. of national income, which compares with the peak under the Conservatives of 38.9 per cent.

Photo of Nick Palmer Nick Palmer Labour, Broxtowe

The House will have enjoyed the shadow Chancellor's efforts at singing, and will wish him a great career on XPop Idol". He criticised my right hon. Friend the Chancellor for excessive public spending, but the Governor of the Bank of England told the Treasury Committee yesterday that the contribution of public spending to the economy at this point is very important to stability and growth in Britain. Does my right hon. Friend agree?

Photo of Gordon Brown Gordon Brown The Chancellor of the Exchequer

I am grateful to my hon. Friend for reminding us of that. Like the rest of us, the shadow Chancellor may wish to thank the Governor of the Bank of England for the work that he has done. However, the Governor pointed out yesterday that the best way forward for the economy is borrowing. That contrasts with the policy of cutting public spending put forward by the shadow Chancellor, who has absented himself from the House.

Photo of John Bercow John Bercow Conservative, Buckingham

Why have the Government failed to meet 40 per cent. of the public service agreement targets set in 1998? Why does the Chancellor not recognise that, while failing to meet targets set by independent experts would be disappointing, failing to meet his own requires incompetence on a truly spectacular scale?

Photo of Gordon Brown Gordon Brown The Chancellor of the Exchequer

We met 87 per cent. of the targets in time. Subsequently, we have met another 6 per cent., which means that we have met 93 per cent. of our targets. The hon. Gentleman should congratulate us.

Several hon. Members:


Photo of Sylvia Heal Sylvia Heal Deputy Speaker

Order. In the time remaining, I intend to try and call all hon. Members who want to contribute to the debate. However, I urge hon. Members to ask short questions and, perhaps, offer short answers.

Photo of David Taylor David Taylor Labour/Co-operative, North West Leicestershire

In response to my hon. Friend Alan Simpson, my right hon. Friend the Chancellor mentioned the benefits of PFI. However, are they not rather short term and illusory? In the medium and long terms, will not PFI be shown to be prohibitive in cost, flawed in concept and intolerable in consequence for taxpayers, citizens and workers in our country? The figures that my right hon. Friend published in the House today show that public projects could be financed in a traditional way. We do not need the PFI. It does not wipe off figures from the public balance sheet.

Photo of Gordon Brown Gordon Brown The Chancellor of the Exchequer

My hon. Friend, who takes an interest in these matters, should look at some of the public sector projects undertaken without PFI projects. For example, the Jubilee line was two years late and 50 per cent. over budget. That was one example of the many public sector projects that did not work as well as they should have. The lesson that we learn is that it makes sense to use the private sector when one seeks to combine the transferred risk with management expertise in transport, infrastructure and the building of hospitals and schools. After all, private sector companies construct the buildings. The means by which we bind them in and ensure that the buildings are well constructed and managed is the means by which we have secured greater value for money in the public sector.

Photo of Michael Jack Michael Jack Conservative, Fylde

With falling investment in both manufacturing and, equally worrying, the service sector, it is evident that a number of the fiscal measures enunciated by the Chancellor a few moments ago, which were said to benefit business, have not been working. May I inquire, in the interests of transparency, whether the Chancellor would be willing to ask the National Audit Office to evaluate the effect that his fiscal measures for business have had, so that we might at least on that occasion see the wood from the trees?

Photo of Gordon Brown Gordon Brown The Chancellor of the Exchequer

We are continuously evaluating the effect of our measures. That is what the pre-Budget and Budget processes are for. But is the right hon. Gentleman against the 30 per cent. corporation tax? Is he against the 3 per cent. cut that we introduced? Is he against the cut in small business tax from 23p to 19p? Is he against the capital gains tax cut from 40p in the pound to 10 per cent., which is helping many companies with business assets? Is he against those measures? [Hon. Members: XAnswer."] Well, if he thinks they should be evaluated he must have some doubts about their effectiveness. I believe we have proved that those are the right tax cuts for British business.

Photo of Mr Alan Howarth Mr Alan Howarth Labour, Newport East

As he surveys the circumambient economic gloom, does my right hon. Friend share my relief that we in this country have been prudent enough not to go into the euro, and not to subject the United Kingdom economy to the deflationary pressures of the growth and stability pact? Does he endorse the calls made this week by the Governor of the Bank of England and the United States Treasury Secretary for the European Commission and the Eurozone countries to buck up, reform the system and make the contribution that they should make to economic growth?

Photo of Gordon Brown Gordon Brown The Chancellor of the Exchequer

My hon. Friend has strong views on these matters. I can remind him of what I said: the assessment of the euro will be made by June next year, and will take all such factors into account.

Photo of Tim Loughton Tim Loughton Shadow Spokesperson (Health)

Earlier this week, the Chancellor berated the Confederation of British Industry and told it to stop whingeing about the likely impact of the extra £8 billion in national insurance contributions. He said that it was the CBI's duty to make its contribution to the NHS, because healthy workers helped their businesses. What has he to say to employers who already fund more than 2 million employees with private medical insurance, which in turn is contributing £390 million in benefit-in-kind taxation to his Exchequer this year? Is it right that they should suffer a double whammy, paying to keep people away from the NHS while at the same time paying tax in the form of additional national insurance payments?

Photo of Gordon Brown Gordon Brown The Chancellor of the Exchequer

But private insurance schemes need the national health service—for accident and emergency treatment, for the training of doctors, for public health and for so many of employees' health needs.

As for business costs in health care, in America many employees cost their employers about $100 a week in health insurance charges. In France the figure is about £60 a week, and in Germany it is about £30 a week. Those are the average social insurance costs. In every industrial country employers are paying in one way or another, while health care costs are going up. I believe that the national insurance charge for employers is less than anything being paid in France, Germany or America to cover employees for health insurance.

Photo of Mr Tony McWalter Mr Tony McWalter Labour/Co-operative, Hemel Hempstead

I welcome the Chancellor's statement, which I saw as—in the words of Mr. Clarke—a cunning Keynesian plot to counter the effects of the economic cycle. I admire my right hon. Friend's surefootedness in responding quickly to pressures on huge increases in companies' insurance costs, and look forward to learning the details; but may I contrast that with the absence of any comment on the crisis in university funding? If we do not act quickly, we will further erode the science base, to which my right hon. Friend made an important reference.

Photo of Gordon Brown Gordon Brown The Chancellor of the Exchequer

The inquiry into employers' liability insurance will go ahead under my right hon. Friend the Secretary of State for Work and Pensions. I recognise, as he does, the concern that is felt.

As for universities' finance, under the spending review a considerable extra sum, about £1.25 billion—some in association with the Wellcome Trust—is being put into science in the universities, and the rebuilding and modernising of the science base. And as for university funding in general, my hon. Friend may not know that in the spending review we allocated considerable sums to education. The specific allocation for universities will be made in due course.

Photo of Crispin Blunt Crispin Blunt Shadow Minister (Business, Innovation and Skills), Shadow Minister (Trade and Industry)

From 1 May 1997 until yesterday, the British stock market underperformed the American stock market by 30.24 per cent. Why?

Photo of Gordon Brown Gordon Brown The Chancellor of the Exchequer

The hon. Gentleman knows that the balance between the companies involved in the British stock market is quite different from the American stock market. Most of what has happened has been effect of what has been happening to the IT sector. The hon. Gentleman should also know—and this is in reply to the shadow Chancellor's point—that since April there has been a 25 per cent. in the British stock market but a 40 per cent. fall in Germany and France.

Photo of Nick Gibb Nick Gibb Conservative, Bognor Regis and Littlehampton

The Chancellor gave a figure of 37 per cent. for the proportion of GDP taken in tax. Does expenditure on working families tax credit, which used to be called family credit, count as public spending, or does it reduce the figure? If it is the latter, does that not make nonsense of all the right hon. Gentleman's figures?

Photo of Gordon Brown Gordon Brown The Chancellor of the Exchequer

We use all the internationally agreed assumptions about this. The position adopted by the previous Conservative Government on mortgage tax relief was at odds with the international conventions. I have given a report on this matter to the Treasury Committee and I am happy to pass it to the hon. Gentleman.

Photo of Chris Grayling Chris Grayling Opposition Whip (Commons), Shadow Minister (Health)

Can the Chancellor rule out further rises in personal or business taxation during this Parliament?

Photo of Gordon Brown Gordon Brown The Chancellor of the Exchequer

We made our commitments in our manifesto at the general election that we would not raise the basic rate of tax or the top rate of tax, and we stand by those commitments.

Photo of Adam Price Adam Price Plaid Cymru, Carmarthen East and Dinefwr

The part of the Chancellor's statement dealing with public investment contained a tantalising reference to the importance of recognising the limits of markets in areas such as health care. Can the right hon. Gentleman tell us what he meant by that statement, and has he told the Secretary of State for Health or the Prime Minister?

Photo of Gordon Brown Gordon Brown The Chancellor of the Exchequer

We believe in the national health service, as I hope all right hon. and hon. Members do. That is what I mean about the limits of markets in health care.