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Orders of the Day — Finance Bill

Part of the debate – in the House of Commons at 2:56 pm on 20th April 2004.

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Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary to the Treasury 2:56 pm, 20th April 2004

Perhaps the hon. Lady might like to take a lesson in basic economics. The simple point is that if an economy is at full capacity and public spending is then in significant deficit, there is a risk that that will lead to inflation. Of course it is a good thing for economies to run as close as possible to full capacity, but it is unwise to operate a structural deficit at that stage of the cycle. Indeed, that is the very principle behind the Chancellor's fiscal rules.

The shame revealed by the Government's own Office for National Statistics figures is that the massive increases in taxation and public sector spending since 2000 have failed to deliver the improvements in public services that were promised. Rather, the spending has gone on public sector inflation, which has risen to nearly 10 per cent. this year compared with just 1.6 per cent. in 1997. Hon. Members may care to note that the ONS data also showed that productivity in the public sector fell by 5 per cent. during the past two years.

The Chancellor himself now admits to the waste in public spending that his policies have produced. No longer can he or his colleagues make silly assertions that those seeking to make the public sector more efficient have to cut front-line services. Conservative Members hope that the Chancellor will achieve his plans for public sector savings of £20 billion a year and that the Gershon review will be more successful than the Chancellor's discredited targets regime. But like the Treasury Committee, we await further details and explanations as to how the 2.5 per cent. annual efficiency savings will be achieved.

The working draft efficiency review paper, which I have read, is a highly theoretical analysis. It highlights four main cross-cutting ways in which savings efficiencies can be achieved, but its conclusions on 2.5 per cent. savings do not follow from those four main areas. It looks as though one person wrote the first half of the report and another person wrote the second. Gershon's review is based primarily on benchmarking. It has set targets and leaves it to each Department to determine how they will be achieved. The work that is now being done by the James committee on our behalf is looking much more specifically at each Department and each area of the public sector to determine where and how improved efficiency and improved delivery can be achieved. We have also set six targets by which we will evaluate the Government's efficiency savings plans, as well as our own.

May I give the Chief Secretary a little lesson in arithmetic in relation to his earlier comments? First, he should be aware that it is delivery that matters, not spending. One can have huge increases in spending, but if delivery does not improve, it is a waste of time. Secondly, if one achieves a situation whereby inflation is 2.5 per cent., which is roughly the Government's target; efficiency savings of 2.5 per cent. are achieved, which is the Government's target; and the amounts spent are frozen, the result is that there is no actual cut in services, because the effective real spending save of 2.5 per cent. is compensated for by the efficiency gains of 2.5 per cent. That is precisely what my City Circle paper was getting at. The Chief Secretary would be welcome to join us so that he can learn a little more about the public finances and improve on the way in which he does his job.

The Chancellor's general-election-campaigning Budget speech not only failed to address the key issues facing the British economy, but omitted any reference to 48 per cent. of the measures contained in the Bill. As the Chancellor well knows, but dare not say, all his contrivances and changes to the bases of calculations in order to claim that he has met his fiscal rules avoid facing up to the fact that growth has been sustained by consumption growth well in excess of gross domestic product growth and financed by a growing mountain of personal debt; and that will now be added to by another £150 billion of Government debt by 2007, as set out in the Red Book. But the productivity growth that is needed if that is to be sustainable has declined and is half that achieved under the previous Conservative Government. The savings rate has similarly fallen to half what the Labour Government inherited from us in 1997.

The Chancellor had nothing to say about addressing those issues. With interest rates now rising, and the Government themselves predicting zero slack capacity in the economy by next year, any prudent Chancellor—particularly one who believes so passionately in micro-management—might have sought at this stage in the cycle, in this Finance Bill, to have increased the savings rate; but the Bill contains no incentives for savers. Rather, as contrived outside the Bill, individual savings accounts will be considerably less attractive for the 12 million ISA savers as a result of the loss of tax credits on equity dividends and the reduction in the limit from £7,000 to £5,000 a year—from £3,000 to £1,000 for cash ISAs. As the Treasury Committee commented, those measures appear to run counter to any policy of encouraging people to save. In particular, the major reduction in the limit for cash ISAs is bad news for lower income and younger savers. We will table a new clause to address those problems.