I beg to move, That the Bill be now read a Second time.
We are debating the pre-Budget report more fully on Thursday, so this evening I will confine my remarks to the Bill. Every country in the world has been hit by a severe financial crisis, resulting in the worst global economic recession for decades. Inevitably, borrowing and debt levels have risen as revenues have fallen. We are affected by that;
so is every other major economy in the world. Like other countries, we are now taking steps as we emerge from the recession to secure growth while reducing the deficit, but as I have said on a number of occasions, we have got to do that in a way that does not risk wrecking the recovery and damaging the economy, and our ability to secure growth over the medium and long term.
The deficit reduction plan to halve the deficit over a four-year period is a very important part of that strategy. The Bill will set out obligations to cut the deficit at an appropriate and sensible pace, and it will allow us to protect the economy and maintain public services, upon which growth and members of the public depend. That is an important part of what we are trying to do.
Whatever the economic circumstances under whatever Government, we need rules and objectives to govern fiscal policy. Between 1979 and 1997 during the previous Conservative Government, there were many different targets. Between 1980 and 1997, monetary policy targets changed 14 times and there were at least five different fiscal policy objectives. In fact, I believe that there was no clear and consistent objective of fiscal policy. The result was the lack of a clear objective and overall coherence, which meant, among other things, that we had interest rates peaking at 15 per cent. in 1990, instead of half of that, recorded over the 12 years since 1997.
In 2015 and 2016 under the Bill, if national income rises, the Government can put borrowing up and still meet the requirements. However, if national income fell, they would have to cut. Is not that the very opposite of the natural stabilisers the Chancellor normally recommends?
No. It is important that the right hon. Gentleman recognises that the Bill requires the Government, in line with the proposals I set out in the Budget and the pre-Budget report, to halve our borrowing over a four-year period, which I believe is absolutely essential. The measures I have set out will enable us to do that, but it is important that we do it in a way that supports and does not damage the economy. Indeed, this is one of the differences between the Government and the Opposition. One reason why we should not go further at the moment is that going further and faster, and bringing forward that deficit reduction, would be damaging to the economy. We are supporting the economy now because we are not yet out of recession. We need to ensure that we have the support of public expenditure, which is keeping the economy going, and supporting the public, businesses and families.
I will give way, but I shall first finish dealing with the point made by Mr. Redwood. It is important that we have that discipline. As I was saying, every Government must have a discipline in relation to their fiscal policy and the discipline I set out is important.
I have said so-we have not yet had the figures for the fourth quarter of last year. I have said before on many occasions that I believe we will come out of recession at the turn of the year, but we will not have those figures until later this month. Had I said otherwise, the hon. Gentleman would be the first to jump up and say that we do not have the figures, which we do not.
As the Chancellor knows, I have raised the question of the true state of the debt on many occasions. I have never had a straight answer, so I would be grateful if I could have one now. When one aggregates the amount, including public pensions, private finance initiatives, Network Rail and bank bail-outs, one reaches the figure of £2.220 billion, which is 158.8 per cent. of gross domestic product. Is that the case? The figures are from the Office for National Statistics. Will the Chancellor also tell my why, in relation to Royal Bank of Scotland and Lloyds, the £62 billion that he announced before the rise of the House for Christmas, was not disclosed to either the Public Accounts Committee or the ONS? Is it the case that Sir Martin Scholar is taking that matter up with him right now?
I think that the hon. Gentleman means Sir Michael Scholar, who is the chairman of the ONS. I have explained that point before to the House. This was money that was made available by the Bank of England as emergency support to ensure that RBS and the then HBOS could get through the crisis that we faced in October 2008. I have been asked about that and explained the position before. As I have told the Chairmen of the two relevant Select Committees, I am reflecting on how we deal with such matters in the future.
With regard to the other question, the hon. Gentleman is adding together all sorts of things, including future pension liabilities. The correct thing to do is to look at our position in relation to our debt and compare that with other countries. Even though our debt is going up, by 2014 it will still be below the G7 average.
While the Chancellor's intention to reduce the public debt significantly through specific targets is unquestionably laudable, my concern is that if he-or someone else, if a different party has taken the reins of Government-misses the target, what is to prevent him from introducing an amendment to the Bill to alter the target? This is a policy statement rather than a binding objective, because it could be changed by statute in the future.
I shall come on to that point, but as I was saying before I gave way, all Governments have rules and objectives. Up until 1997, those were simply statements made by the Chancellor in a Budget or at some other fiscal event. Since 1998, we have had the code for fiscal stability and two rules that have guided fiscal policy for the past 10 years. The hon. Gentleman is right: it is open to any Government and Chancellor to say that circumstances have changed and so we need to change policy. I have been a Minister for the past 12 years and I can tell the hon. Gentleman that the discipline created by rules, so the Chancellor can tell Departments that they cannot have any more funds because it would breach a particular rule, is important. I daresay that that was also important for previous Governments. Today we are legislating to put on the statute book a requirement to reduce the deficit by half. Of course, it will not be a question of going to jail if we do not do it, but having to come back to the House to seek further legislation will be a discipline for future Governments. It is not uncommon for Governments in other parts of the world to have similar strictures on them.
The two rules that the Government operated between 1997 and 2007, before the current financial crisis hit us and hit other countries, were to balance the budget, excluding public investment, over the economic cycle and to keep Government debt at a prudent level. Those two rules were appropriate to the challenges of the time. We wanted to increase public investment, and at the time there was a consensus in this House-certainly in the latter part of the 1990s and the early part of the last decade-that our public services did need more money spent on them, including the health service and schools. Those rules were designed to enable us to do that. Over that 10-year economic cycle, which ended in 2007, we were able to balance the budget and borrow to invest, which is something that previous Governments of both political colours had not been able to do previously. We were able to increase significantly investment in public services, tripling it from 0.6 per cent. of GDP in 1996-97 to 2 per cent. in 2006-07, its highest level since 1979. We also saw a continuous expansion in the economy, while reducing Government debt as a share of GDP, from 42.5 per cent. in 1996-97 to 36 per cent. in 2006-07.
Those rules stood our economy and the country in good stead during that period, but events towards the end of 2007 and in 2008 fundamentally changed the economic situation for the entire global economy, because we experienced the worst economic conditions seen in more than 60 years. We were operating in a completely different environment, and policy, here and in other countries, needed to adapt to reflect that. No one could have foreseen the sheer scale and spread of the global financial recession that hit economies all over the world in 2007 and at the beginning of 2008. The result is that borrowing and debt have risen in most countries, ours included.
In his opening remarks, the Chancellor made much of the need not to reduce the deficit too fast. However, his written statement to the House on
The hon. Gentleman refers to the Finance Ministers' meeting in Brussels at the beginning of December, which I most certainly attended, and the rules that pertain to countries in general. The Commission can make recommendations, but as we are not in the euro, we are not obliged to follow them. We have no plans to change our current policy on that issue. The measures that I have announced in the pre-Budget report and before are sensible and, at this stage and when there is still so much uncertainty as countries emerge from the global recession, it is sensible to reduce the deficit in a way that does not damage our economy.
The recession has had a substantial impact on the public finances, here and in every country. With economies weakening, tax revenues have fallen. In this country, we have seen falls in corporation tax, especially from the financial services industry, but also in income tax. Higher unemployment inevitably and rightly means that more has to be spent supporting people and families. There has also been a cost to continuing to maintain and support the economy and stabilising the banking system. However, both sides of the House agree that stabilising the banking system was necessary. It was not an optional extra, because it would have been calamitous not to have done so. But there is a difference in our policies on support for the economy. Had we not maintained spending to support the economy, the pain and cost of the recession would have been far greater. I do not accept the argument of those who claim that we should have started to cut back on expenditure two years ago. That would have been extremely damaging to the economy and would have made it even more difficult for people.
As we emerge from this global downturn, we need to cut our borrowing, as other countries are doing. To try to meet the fiscal rules put in place for the previous economic cycle would be perverse. Not to allow borrowing and the deficit to rise to help people and businesses would have meant greater pain and more job losses, as we saw in the recessions of the 1980s and 1990s, and would have meant increased costs in both human and economic terms.
Before the Chancellor moves too far from the banking system, would he agree that in order to build public confidence it might be worth considering linking Ministers' pay to performance? If the Government failed to meet the target, Ministers' pay could be cut.
I think that the latter proposition is probably a remote possibility in the current climate, but Bob Spink makes an interesting proposition.
The vital point-one to which I shall return later-is that it is important that Ministers and Governments are accountable to the House, which they are of course. Each and every one of us who are privileged enough to be Ministers of the Crown are answerable to the House, and if we do not come up to the mark, one way or another it is open to the House to do something about it. That remains the case, and it is perhaps a more draconian system than simply modifying that week's pay packet.
My right hon. Friend has emphasised the importance of trying at least to moderate, if not reduce, borrowing. However, would not the most sensible course of action be to maximise the tax take by minimising tax avoidance and evasion and ensuring that the tax gap is closed?
I agree with my hon. Friend. I, too, want to reduce borrowing. We have to do more than moderate it-it has to come down. He is right also that part of what we must first do is close the tax gap and ensure that HMRC does everything possible to ensure that it collects every penny due to it. That is not always possible-people go bankrupt and so on-but we must do that. It is also necessary for us to be vigilant about closing tax loopholes when they emerge. One of the successes of the G20 meeting last year was at long last to get international agreement to begin to open the doors on some of the tax havens, such as Lichtenstein for example, so that we can get access to the records of people who live and do business in this country but avoid paying tax here. That is grossly unfair and inefficient. I agree with him on that.
We have a duty to support the economy during the downturn, and that has resulted in higher borrowing, and indeed such measures are still supporting the economy. Not to have put in place the discretionary measures that we have introduced since the end of 2007 would have had disastrous consequences for the economy-I accept that is a minority view, although held by those on one side of the House-because failure to support the economy would have meant higher, not lower, debt and higher, not lower, long-term borrowing.
I have always made it clear that support for the economy during the downturn goes hand in hand with steps to rebuild our fiscal strength once recovery is established. That is necessary to get the growth that we need. However, it is also imperative that we get our borrowing down in a way that supports growth, because growth itself will help us to reduce our borrowing and debt. The alternative is to consign ourselves to a decade of austerity, low growth and low employment, which I do not think would be the right thing for this country.
As I said, in the past, there have been many and varied fiscal objectives under successive Governments. Since 1997, however, our fiscal objectives have remained in the medium term, to ensure sound public finances so that spending and taxation impacts fairly between generations, and in the short term, to support monetary policy and to help to smooth the path of the economy. Despite the disruptions of the past couple of years, those objectives remain important, and to get back on that course we need to get borrowing down on a reasonable time scale.
The Bill requires the Government to set out a fiscal plan for delivering sound public finances, which must be approved by Parliament, and places a duty on the Government to meet that plan. As I said earlier, it gives Parliament a clear role in setting and monitoring the Government's medium-term fiscal plans. Parliament must approve those plans before they become law, so this Bill gives the House a new opportunity to scrutinise the Government's plans. Over the past few months, there has been an understandable desire to reassert the authority, in particular, of the House, and I believe that the Bill is one way in which we can do that. It represents a substantial strengthening of the fiscal policy framework in response to the challenges we face while enabling the House to exercise greater scrutiny, not just through Select Committees, but through the House sitting in this Chamber.
Does the Chancellor believe that, had the Bill been in force earlier in his term of office, or during the Prime Minister's term of office as Chancellor, the public finances would be in a less ruinous state and that we would not be the only economy in Europe still in recession?
No, I do not accept that. As I said earlier-the hon. Gentleman might not have been here-prior to 2007, when this crisis began, our debt levels came down to the second lowest in the G7. We have been reducing debt while spending more on infrastructure. Mr. Cash mentioned the railways. I know, having been Transport Secretary for four years, what happens when a Government inherit a transport system starved of investment, as it had been in the 1990s-literally, things come off the rails. That is why I make no apology for the fact that the Government spend more on the railways and infrastructure. Our transport system needed the investment.
We have spent more on schools and hospitals too. We owe a great deal to the Victorians, but I do not think that they expected us to be relying on their hospitals at the back end of the 20th century. We spent that money while reducing borrowing. Now let us consider what happened to us in 2007-08-this has a bearing on the point made by Gregory Barker about the recession. We have a very large financial services sector-I think that we are, in most people's view, the main financial services sector in the world-so the recession has had a far greater effect on us than on others.
I would like to ensure that we have a major financial centre here in the future. That is why we have to toughen up regulation and work with the industry to ensure that we achieve that. However, the idea that when we entered the downturn, we had not been running the economy efficiently and effectively is nonsense. Yes, we were spending more money on public services, but not a day or week went by when people on the Conservative Benches did not ask for even more money-not less-for schools and hospitals. On some days, they even outdid the Liberal Democrats in calling for more expenditure on services, so for them to say now that they did not want that spending is nonsense.
The Chancellor appears to be rewriting history as he goes along. He is trying to give the impression to the House that the Government were repaying debt until the economic crisis hit, but that is clearly not true. The Government were borrowing money each year in many years before the crisis hit. Is it not a fact that, unlike the impression that he is trying to give, my hon. Friend Mr. Osborne is right that the Chancellor was not fixing roof when the sun was shining?
When the hon. Gentleman has a chance to think about these things, he might realise that Governments borrow money. There was a time, early in the last decade, when Government borrowing was going down, but then we started to hear concerns from the pensions industry that the Government were not borrowing enough-the pensions industry actually requires borrowing.
The hon. Gentleman makes an extremely flippant remark.
From time to time, Governments need to borrow money to ensure, for example, that we have infrastructure, schools and hospitals. At times like these, were a Government to shut down spending and so put even more people out of work, or were they to get into the absurd situation, like the Government in the early 1930s, of trying to cut benefits and spending, they would make a difficult situation even worse. So I do not accept the point made by Philip Davies.
No, I want to make some progress. Perhaps I will give way later.
Clause 1 of the Bill imposes three duties on the Treasury: first, to ensure that Government borrowing as a share of GDP falls in every year to 2015-16; secondly, to ensure that Government borrowing is at least halved as a share of GDP over a four-year period to 2013-14; and thirdly to ensure that Government debt as a share of GDP is falling by 2015-16. The latest forecasts for the public finances, which I set out at the pre-Budget report last month, are consistent with these duties: in the next financial year, 2010-11, Government borrowing will start to fall and continue to do so each and every year after that; borrowing will reach 5.5 per cent of GDP by 2013-14, so that we will more than halve the 12.6 per cent. of GDP reached this year; and with further consolidation thereafter, debt as a share of GDP is projected to fall in 2015-16. I have announced measures that will allow us to more than halve the deficit as a share of GDP over four years-from 12.6 to 5.5 per cent. That is the sharpest reduction in the budget deficit for any G7 country.
In relation to the points raised by some hon. Members earlier, there are no powers to amend those duties. They can be changed only through new primary legislation. In other words, the Government would have to return to the House were they not meeting the obligations.
I believe that the changes are manageable, and they are the right thing to do. The hon. Gentleman might want to make his point to those on the Conservative Front Bench, who as I understand it want to go further and faster. There is a risk of damaging the economy if that happens. Inevitably, these are matters of judgment, but I am very happy to justify why we have had to borrow so much at the present time. However, if we are going to get sustainable growth in future, it is important that we get that borrowing down. To halve it over a four-year period is a reasonable thing to do and a reasonable rate at which to do it. To go further than that-and to make that judgment at the present time, when there is so much uncertainty-would be hugely damaging to the economy and would present a terrible risk, especially when the Opposition are contemplating spending even more money on top of that.
Following on from a previous question about what would happen if the legislation had been in place earlier, if it had been in place, would the Chancellor have been free, as he was free, to bail out the banks as promptly as he did? Is he not hampering the range of movement of a subsequent Chancellor?
No, because the Chancellor would quite obviously have to come back to the House if circumstances were as severe as those that pertained a couple of years ago. I do not think that anybody would argue for getting ourselves into a position through legislation where the Government were completely hamstrung and could not effectively govern the country. That would be nonsense. However, it is important that there should be a discipline and a clear sense of direction on reducing the deficit.
Clause 2 sets out a duty that the Government must continue to have a fiscal plan after 2016. That will be done by order, so the Government can decide what is appropriate. Again, the matter has to come back to the House. There is also a provision in clause 2 to give the Treasury the power to add further duties to the Government's fiscal plan. We have illustrated how we do that. For example, a draft order was published on the day of the pre-Budget report requiring the Government to ensure that borrowing as a share of GDP came down to 5.5 per cent., which is more than halving the deficit. As we look to the future, if we can get growth that is more robust than in my forecast, borrowing will naturally fall faster. It would then be possible to reduce that borrowing further in the medium term. However, at this stage, I believe that the course that I have set out is the right one.
Clause 3 sets out various reporting requirements, so that the House has an opportunity to see what progress is being made. The Treasury must report on whether it has succeeded in fulfilling the duty that is imposed upon it-that is, on whether borrowing as a share of GDP is lower-and also ensure that debt is falling. If the targets are not met, the Treasury has to explain to Parliament why that is not the case. Again, that is subject to scrutiny by Parliament. There will be a revised code for fiscal stability, which I shall make available before Committee, so that there can proper scrutiny of it.
Clause 4 makes it clear that it is to Parliament that the Government are accountable for approval of, progress towards and compliance with their fiscal plans. I see that the reasoned amendment calls for the creation of a new independent body to monitor and demand fiscal action, but I believe that Parliament should hold the Government to account for their fiscal policy, not a quango, an external body or, indeed, the courts. The Government are accountable to Parliament and, through Parliament, to the people.
When the Prime Minister was shadow Chancellor and originally set out his plans for fiscal rules, he said that they should be monitored independently by an independent office. Does the Chancellor know when the Prime Minister changed his mind?
My recollection was that when the then shadow Chancellor set out his plans, he set out proposals that we subsequently enacted. The hon. Gentleman asked about independent verification. Again, my recollection is that we said that we thought that there should be a role for the National Audit Office, and there was indeed a role for the NAO, which is independent of the Government.
I agree entirely with the Chancellor that Parliament should hold the Government to account, on this and many other matters. So why have we not had a comprehensive spending review, so that we can understand precisely what the impact of the cuts will be and hold the Government to account on the plans that they are already putting forward?
For the reason stated in the pre-Budget report. I said that there was still a lot of uncertainty about. We still do not know what unemployment will be this coming year. We had some good news just after the PBR, in that employment rose and unemployment fell, but we still think that unemployment will rise during the course of this year, so there is a lot of uncertainty about, and we still have the current spending plans, which run through until April 2011. That is why we have not done a spending review just now, and that remains the case.
There is no doubt that we face a huge challenge as a country. There will be difficult judgments over the next few years. I have said before that some tough decisions will have to be taken, but the real judgment is this: we should recognise that what the Government do and what they spend can make a difference to the future rate of growth, and they can certainly make a difference to the quality and availability of public services, upon which many people who send us here rely. However, what the Government do and what they spend will also set the direction of this country for the next 10 or 20 years. That is why it is important that we get it right. I believe that my judgment of bringing borrowing down in a way that is manageable and deliverable and, at the same time, does not damage the social and economic fabric of this country is the right one. This Bill will help us to achieve that. I commend it to the House.
I beg to move an amendment, to leave out from "That" to the end of the Question and add:
"this House declines to give a Second Reading to the Fiscal Responsibility Bill because it does not establish an independent mechanism for ensuring the publication of credible fiscal forecasts and assessing the effectiveness of Government fiscal policies in achieving stated fiscal objectives;
because the duties imposed by the Bill are not accompanied by any corresponding sanctions;
because in the absence of spending plans which set out a credible means by which public sector net borrowing is to be reduced, legislating to secure sound public finances is irrelevant and a distraction;
and, consequently, considers that the Bill is inadequate in achieving the objective of securing sound public finances."
Although this piece of legislation consists of only six short clauses, it must be the biggest load of nonsense that this Government have had the audacity to present to Parliament in this Session. Quite frankly, I do not think the Bill is the idea of the Chancellor of the Exchequer or any of his Treasury Ministers, or indeed of any official in the Treasury. It was dreamt up by the Schools Secretary and the Prime Minister when they were trying to think of something to say on the "Andrew Marr Show" on the eve of the Labour conference, so now we all have to go through the rigmarole of debating it in Parliament. The Bill was a completely feeble stunt, a fact that is revealed when we look at the clauses.
"Fiscal responsibility acts are instruments of the fiscally irresponsible to con the public."
That was the man whose economic judgment the Prime Minister trusted so much that he put him on the Monetary Policy Committee of the Bank of England, but no one is conned. If the Bill was supposed to reassure the markets, it has failed. This is what one of the City's leading economists, Michael Saunders of Citibank, says:
"the government's plans for legislation to cut the deficit are not convincing and are probably just camouflage-a sort of 'fiscal figleaf'-for the lack of genuine action".
"I'm certainly not satisfied with the government's plans. It's going to be publishing in the next few days legislation which says it is going to halve the deficit within the next four years, but it's a bit like me saying I'm going to join the gym and that means I'm fit already."
The Bill was also supposed to convince the independent economic commentators, but this is what the Institute for Fiscal Studies says about the legislation that the Chancellor has brought to the House today:
"it is far from clear why investors and voters should be any more impressed by this"- the Bill-
"than they were by the Code for Fiscal Stability, which was enshrined in statute with much fanfare in 1998."
The Bill has failed to con even the Labour party. This is what Mr. Clarke says- [ Interruption. ] The Chief Secretary to the Treasury laughs, but I seem to remember that the right hon. Gentleman is the former Home Secretary-not the former Home Secretary who says that the Labour party has a big charisma problem; I am talking about the other former Home Secretary, who says that this piece of legislation is "vacuous and irrelevant". As with so much that the right hon. Gentleman says about the leadership of the Labour party at the moment, he is absolutely right, because when we go through the Bill clause by clause, we see what complete nonsense it is.
Let us start with clause 1, which deals with the duties on the Treasury. Here we read:
"The Treasury must ensure that...public sector net borrowing expressed as a percentage of gross domestic product is less than it was for the preceding...year."
We are also told that the law will require net debt to be falling by the end of five years. Saying these things, and putting them into statute, will not actually make them happen, however. Every Budget and pre-Budget report produced by this Chancellor and his predecessor since 2003 has promised falling net debt at the end of a five-year horizon, and every one of those borrowing forecasts has been wrong, in times of boom and of bust.
The present Chancellor has got his total borrowing forecasts wrong to the tune of £560 billion since he entered No. 11. It is now four times higher than when he announced his forecasts for the PBR in 2007, after the credit crunch had begun. So why would anyone believe his latest forecast, just because he writes it into the clause of a Bill instead of publishing it in the Budget Red Book? Does the fact that it is printed on green paper, given a solemn title and passed through Parliament after being looked at by a Committee of the House make it any more likely to happen, or any more real, than when he stood at the Dispatch Box on Budget day and told us that these things were going to happen?
Clause 2 relates to "Further duties for securing sound public finances". In it, we find a stunning extension of state power. We discover that
"The Treasury may make an order imposing...a duty or duties" and that these duties are
"imposed for the purpose of securing sound public finances."
We also find that these duties
"must be consistent with the key principles as applied by the code for fiscal stability."
This is the same code for fiscal stability, by the way, that allowed the Prime Minister to run massive deficits in the middle of a boom, but never mind that. We shall have an order that will impose a duty to secure sound public finances, and it will have to be laid before Parliament and approved by resolution of the House of Commons.
Who is to be on the receiving end of this great order that will descend from on high, from Her Majesty's Treasury, to use the full authority of Parliament to impose a duty to secure sound public finances? Which public body will be quivering in fear, wondering whether it is to be the Treasury's chosen victim? Well, it turns out that that public body is the Treasury itself. Under clause 2, the Treasury will have the power to make an order that imposes a duty on the Treasury. That will make it sit up and take notice, will it not?
On the question of duties, does my hon. Friend agree that the point he is making could equally be applied to the Government Departments on which Parliament has imposed a series of duties that drive levels of public expenditure ever upwards? Does he not agree that, to get the whole question of public expenditure right, we would have to amend or repeal many of the duties imposed on public bodies in order to reduce the overall level of public expenditure?
I take the point that my hon. Friend is making.
The Chancellor said in his speech that the great sanction would be that, if the existing code or Act were broken, the Chancellor would face the humiliation and embarrassment of coming to Parliament to introduce a new piece of legislation. I guess that he is in a position to know what that feels like. From what I can see of his behaviour today, however, that is not a huge sanction.
Does the hon. Gentleman agree that legislation without sanctions is not worth the paper it is written on?
I agree with my-I was about to say "my hon. Friend", but that would be to get ahead of ourselves, would it not? We are all being very nice to the Liberal Democrats these days. I agree with the hon. Lady. I take it from what she said that she will be joining us in the Division Lobby tonight; I certainly hope she will.
Hon. Members might be hoping to find something a bit more impressive in clause 3, but in it we discover that the Treasury will be required to tell us whether it has met its borrowing forecasts. The last time I checked, I found that that happens in every single Budget statement and pre-Budget report. However, we now need legislation to turn what has been the standard practice of Chancellors, at least since the second world war, into the law of the land. And when will the Treasury be required by law to tell us whether it has succeeded in performing its duty to secure sound public finances? According to clause 3(5), this will have to happen
"during the financial year ending with
We shall not have long to wait, then, for the Government's assessment of how well they are doing. They cannot get their borrowing forecasts right from one month to another, yet they now expect us to believe a commitment written in statute relating to 2016. They are living in a completely parallel universe.
Let us look at clause 4, which relates to accountability. Let us see what terrible fate will await the Treasury if it fails to comply with the order imposed on it by the Treasury. Will the Chancellor be hauled off to the Tower? Will he be forced to hand in the great seals of his office? Will his pay be docked for poor performance? Will he at least have to apologise? No. Clause 4 states that the fact that any duty imposed as a result of the Bill
"has not been, or will or may not be, complied with does not affect the lawfulness of anything done, or omitted to be done, by any person."
This is an absolutely ridiculous clause. There are no penalties. This must be the first law introduced in Parliament that contains absolutely no legal sanction whatever for those who break it.
We have only two more clauses to consider. Clause 5 is about interpretation, and states that the Treasury will be required to "explain the meaning" of such terms as "public sector net borrowing" and "public sector net debt". It is a shame that the meaning of those terms was not explained to the previous Chancellor when he was in office. As far as I can see, the clause does not require a proper explanation of the state of the national accounts that takes into account the private finance initiative liabilities that are kept off-balance sheet, and public sector pension liabilities.
Finally, clause 6 deals with the short title of the Bill, and tells us that the legislation will be known as the Fiscal Responsibility Act 2010. We will have to see whether it ever becomes an Act. This clause confirms a time-honoured principle in this place: the greater the claims that are made by a Bill's title, the less substance it usually contains.
Of course we have to debate this vacuous and irrelevant legislation, but why did the Chancellor feel the compelling need to introduce it? Why is he the first Chancellor in history to feel that he needs an Act of Parliament on top of a Budget statement? There can be only two explanations: either he does not trust himself to secure sound public finances, or he knows that the public do not trust him to secure them. Neither is exactly a ringing endorsement; both are a reflection of the catastrophic, disastrous state to which this Government have reduced the finances of this country.
I have searched far and wide to find another country that has introduced a fiscal responsibility Act, and I have found one. It is that shining example of fiscal rectitude, Nigeria. That is where the Chancellor appears to have got his inspiration from. It was no doubt sent to him in one of those e-mails that we all get from Nigeria. Perhaps it said, "Dear honoured sir, I am a former finance Minister of this country, and I have a plan to reduce your debts. Please send me your bank account details and I will forward the money by return." [ Laughter. ] Of course this would be funny, if this were not such a fundamentally dishonest piece of legislation, and if this were not such a fundamentally serious time, in which the credibility of our nation and its ability to pay its way in the world are being questioned by markets, investors and credit rating agencies around the world.
A poll in yesterday's Financial Times found that a fiscal crisis was the biggest single risk facing the British economy at the moment. The managing director of Moody's Global Sovereign Risk group is now warning of the danger of
"an abrupt increase in long term interest rates" in the UK. The former Deputy Governor of the Bank of England, Sir Howard Davies, whom the Prime Minister appointed to be the first head of the FSA, said this week that
"the major risk" to the British economy
"is the loss of confidence in the government's ability to get the public finances back under control".
And today we hear that the world's biggest bond investor, PIMCO, has announced that it will be selling off UK Government bonds this year. It says that this is a "significant policy statement" prompted by concerns about rising borrowing levels in this country. It has just issued a statement saying that the question is when, not if, Britain's credit rating will be downgraded.
Has my hon. Friend noticed that during the period in which the Bank of England has been buying a quarter of the total Government debt in issue to try to keep the price up, the price has been falling so the long-term rate of interest has been rising? That has happened even though the Bank is buying a quarter of the issue, so what is going to happen when it stops buying?
My right hon. Friend makes an extremely telling point, and I am going to come on exactly to the threat to interest rates posed by the Government's policy. Before I move on from Pimco, I cannot help noticing that the head of the European arm of PIMCO, one Mr. Andrew Balls, is the brother of the Schools Secretary. Clearly, the Balls family's confidence in the Chancellor's ability to do his job runs across the brothers.
My right hon. Friend Mr. Redwood makes a very important point about gilts and the fact that we are now in a period when the Bank of England is pursuing a policy of quantitative easing, but with £200 billion of gilts to get away next year, we need buyers, not sellers of those gilts. Here, however, we have the world's largest bond investor saying that it is going to be selling gilts next year. Of course gilt yields are rising-up 1 per cent. last year and up 0.5 per cent. in the last month, which is twice the rate of increase in countries like Germany.
Rising gilt yields, of course, mean in the end rising interest rates, so a central objective of policy for recovery must be to allow the Bank of England to keep interest rates as low as possible for as long as possible, which requires a credible fiscal plan. The absence of such a plan from the Labour Government is pushing up the yields that will push up the interest rates and the mortgage rates, causing businesses to fail and jobs to be lost. The Chancellor, however, remains paralysed by inaction. He seems to see the storm clouds gathering, but he is doing nothing. We know the reason why. The Prime Minister and Schools Secretary-the man whom the Prime Minister wanted to be the Chancellor-will not let him. The disagreements between them are now an open secret. They are on the front page of The Financial Times and are being read across Europe. The Chancellor is at least vaguely aware, I think, of the seriousness of the debt crisis this country faces, but the Prime Minister is in complete denial. The Chancellor at least uses the word "cuts", but the Prime Minister could not bring himself to use that word in the first big interview he gave in the new year.
I believe that the Chancellor wanted to accelerate the reduction in the deficit and he wanted to do so in the pre-Budget report, but he was overruled by the Prime Minister who accelerated the spending instead. That is the problem-the Chancellor keeps losing this argument in Downing street and the result is that Britain's credibility in the world markets is further undermined. Britain's credit rating is for the first time in our history at serious risk and British interest rates are set to rise in a recovery.
The answer surely is to deal more decisively with the deficit. As the Chancellor well knows, that is the view of British business and the CBI. The Labour party used to parade the CBI as one of its great supporters, and I believe that in 1997 the CBI was invited into Downing street before the trade unions were. Now the Labour party dismisses the views of the organisation that speaks for many British businesses, but this is what Richard Lambert, the man who was also appointed to the Monetary Policy Committee by the Prime Minister, says:
"History tell us that these are really difficult nettles to grasp but if you grasp them in a clear and bold way, then the pain lasts for a shorter period than if you just limply grab and hold of them... Our strong instincts are that the risks of going too soon are less than the risks of waiting too long... Two full parliaments of chancellors being responsible just seems too much to expect."
Here is the view of the OECD expressed in the last few days:
"Major fiscal consolidation is needed" in the UK
"and more concrete plans should be developed and communicated as early as possible."
That is the OECD's view expressed after the pre-Budget report.
Here, now, is the view of the international markets. BNP Paribas says:
"The UK's public finances are in such a poor state that delay could lead to a loss of confidence, a downgrade of the UK credit rating and a crisis in the public finances."
Sir John Gieve, another former deputy governor of the Bank of England appointed by the Prime Minister, stated that the Government's plan
"will be hard to sustain politically and eliminating the structural deficit more quickly in 2011 and 2012 looks a better course."
I am just coming on to my view, which is exactly the same as that of the Governor of the Bank of England, the person who is in charge of monetary policy. The Chancellor is in charge of fiscal policy in this country; the Governor of the Bank of England is in charge of monetary policy. It is the view of the Governor that we should eliminate a large part of the structural deficit in the next Parliament and that is precisely my view as well.
That is what we are proposing to do, but in addition, the Governor of the Bank of England said in the same interview in response to a series of questions that he recognised the difficulties that could arise from going too fast and too much further. Let me ask the shadow Chancellor again: if he thinks we should go further and faster, will he tell the House how much further and how much faster? Especially in the light of what has happened in the last 24 hours, some further detail would be very welcome.
The Chancellor says that he has the same view as the Governor of the Bank of England-he has just said that-but when asked by the Treasury Committee what he thought about the risk of a credit downgrade to the UK, the Governor said that we needed "a credible plan", which by implication does not currently exist, and that such a plan should consist of the elimination of a large part of the structural deficit in the next Parliament. That is a view I share with the Governor of the Bank of England and it is clearly not the view that the same Governor believes is being pursued currently-or else he would not have referred to the need for a credible plan.
Let me ask the hon. Gentleman a last time, as it does not seem that I am going to get an answer. If he read the whole of the Governor's reply, the hon. Gentleman would know that he was talking about countries across the world, not just this country. But why will the hon. Gentleman not answer the question? He quite clearly hints that he would like to go further and faster, so why will he not tell us exactly how much? Does he want to reduce the deficit a year earlier than we do? If so, how does he intend to do it? If he does do that, it might mean taking another £26 billion or so out of the economy. Is that his intention?
This is what the Governor of the Bank of England said when asked- [Interruption.] I know that it comes as a complete surprise to Labour Members that the Conservative party agrees with the Governor of the Bank of England and the Chancellor of the day does not seem to agree with him. When asked to comment on the plan that the Chancellor had set out, the Governor said this, and I have it before me:
"I think" the plan
"has to be something where a really significant reduction in the deficit, the elimination of a large part of the structural deficit, takes place over the lifetime of a parliament, which is the period for which a government is elected. Beyond that"- commenting on the Chancellor's plan- is a statement of intent and hope rather than a plan for which someone can be held accountable."
That is what he said in evidence to the Treasury Committee on
It is increasingly clear, by the way, that virtually every independent and respected opinion in this country agrees with us rather than with the Government of the day. Such opinion is also in agreement with our approach towards creating a fiscal framework in which we can be held accountable. What we are going to do if we are elected to power in the next few months is create a proper and independent office for budget responsibility. Indeed, we publish today draft legislation- [Interruption.] Well, I am not sure what Liberal Democrat policy is on independent fiscal accountability-although, of course, I must be careful.
Let me explain the very significant difference between what we are proposing and will implement and what the Government are presenting to Parliament today. The first striking difference is that while this Bill leaves the Treasury in charge of forecasts and gives the Chancellor the room to fix the forecasts in order to fit the Budget policy-as we know, a practice that has developed in recent years-our Bill would for the first time ever put the forecasts of the nation's finances in independent hands. In other words, it would not be the Chancellor of the Exchequer of the day who published the borrowing and debt forecasts; it would be an independent office for budget responsibility, properly resourced and accountable to Parliament.
Secondly, while this Bill leaves the Chancellor as judge and jury on whether he is sticking to his fiscal strategy, our Bill would subject the Chancellor to the independent verdict of an independent panel of experts in the office for budget responsibility. While this Bill tells us nothing about the true state of the nation's finances, our Bill would give the country a statutory independent audit of the true cost of public sector pension liabilities and the dodgy off-sheet accounting of PFI contracts, and give us a proper national audit of the nation's finances.
Might not the arrangement be strengthened further if the body sat in Parliament, mimicking the Congressional Budget Office in some respects? I know the Opposition feel strongly that it is important to enhance the effectiveness of Parliament, and I may have misunderstood what the hon. Gentleman is proposing. Perhaps he intends the body to sit in Parliament.
It would be rather like the Monetary Policy Committee. It would be independent, but accountable to Parliament. Its members would, I assume, appear before the Treasury Committee, and it would be asked to make a technical judgment in publishing the nation's borrowing and debt forecasts.
Instead of the Chancellor of the Exchequer, on Budget day or pre-Budget report day, standing up and saying "We predict that the country will borrow X, Y and Z over the coming years", this independent body, accountable to Parliament, would make the judgment. It is a technical judgment, and we do not need an elected politician to make it. We need elected politicians to be informed by a proper, independent judgment of the nation's finances; then we shall all be able to make the decisions on tax and spending for which we are held democratically accountable. It is clear from what has happened over the last few years how misled Parliament has been by the borrowing forecasts announced by the present Chancellor and his predecessor, which have turned out to be completely wrong and have led to decisions that were not in the interests of the country.
The shadow Chancellor is rightly puzzled about the issue of sanctions that the Treasury might be able to impose on itself, but can he explain what sanctions the new independent body would be empowered to impose on the Treasury if the targets set by the body were not met?
At or around the time of the Budget, and the pre-Budget report, the body will publish not just the forecasts but its view on whether the Government are on course to fulfil the mandate set by the Chancellor-in other words, the elimination of a large part of the structural deficit over the Parliament-and an independent report. Obviously, if the Government were shown to be off course, that would be hugely embarrassing for the Chancellor of the day.
I do not think that a Chancellor who regularly disagreed with the independent body could survive for long, so it would pose a challenge to him. This would constitute a proper, serious sanction. In extremis, the Chancellor of the day can overrule the Monetary Policy Committee or the independence of the Bank of England, although of course the question never arises. In this case, the Chancellor of the Exchequer would face a very difficult time if, after he or she had said, "We will achieve this fiscal result over the coming years", the independent body, at the time of the Budget, said, "Actually, they will not."
Is not the truth that the sanction contained in both the Bill and the hon. Gentleman's proposal is the bond market? If a Chancellor of the Exchequer came to the House and said that he wanted to change, in primary legislation, the arrangement that we are discussing today, or if a future Conservative Chancellor said that he was ignoring what the new body was saying about the danger to the economy, we would very soon find our credit ratings lost or further downgraded, and long-term interest rates would rise. That suggests that the real discipline now is not in the House or even in the banking community. We are now subject to the requirements of credit agencies and the bond market for us to start behaving properly.
The right hon. Gentleman has made a very good observation, which is, in fact, true of government through the ages. Even in mediaeval times, kings and Parliament in its then form were subject to the ability to raise money on what were then the international money markets.
Something interesting has happened in this country's politics. We used to regard Budget day, and pre-Budget report day, as the moment when the Chancellor, whoever it was, would come from on high and hand out the goodies. We were all supposed to be incredibly grateful, and then the Chancellor would disappear for another six months. Of course, things are very different now. The House of Commons is subject to the economic pressures imposed on it by, in part, the bond market.
I recently read an interview with the Swedish Prime Minister of the 1990s, Göran Persson, who said that no Prime Minister wanted to find himself in the situation in which he had found himself. He was spending more time in the City of London giving presentations to young bond market traders than talking to the Swedish people about the fiscal problems the country faced. The House should take very seriously the fact that the world's largest bond investor said today that next year it would sell gilts rather than buy them, the fact that all the credit ratings agencies have put the United Kingdom on a warning and will decide later in the year whether it should face a credit downgrade, and the fact that our gilt yields are rising at twice the rate of Germany's. Even if the Prime Minister is in complete denial about the economic situation and the fiscal problems that the country faces, I do not think that that is an excuse for the rest of us to ignore those problems.
I agree with Mr. Field about the discipline of the bond market, but I believe that an independent office for budget responsibility would help Members of Parliament to hold Chancellors and Prime Ministers to account for their promises, and would give Members proper information on Budget day so that they could challenge what the Chancellor and the Prime Minister of the day were saying. It would also discipline the Government internally, and would help Chancellors to achieve their and the Government's stated goals.
Our proposal has been welcomed by many different people, including independent economists. The Institute for Fiscal Studies has said that a new independent body of the kind that the Conservatives propose
"could help keep the interest rates at which the government is able to borrow low", because it would enhance the confidence of the bond markets in the Government's ability to deliver on their objectives. It has been supported by the CBI and many other organisations. That is why we have published our legislation in draft today. It means proper accountability, a real set of national accounts, lower interest rates, economic stability, and the restoration of Britain's credibility in the world markets. That is what a Conservative Government will bring to this country as we consign this Government and this nonsense of a Bill to the dustbin of history.
That is true, and it is a sadness for me, but clearly not a big enough sadness to the hon. Gentleman, who is now leaving the Chamber.
Given the Chancellor's ability to present such thin gruel to the House, I am surprised that his party did not claim to see the signs of joined-up government. Yesterday they announced that in future all five-year-olds in our schools would be taught the dangers of debt, how not to fall into debt, what to do if they fell into debt, and how to get out of debt as quickly as possible. Bright, or perhaps not so bright, five-year-olds might suggest that the lessons could start here rather than in the classrooms.
I want, however, to inject a note of seriousness, if not horror, into the debate. I want to compare our present position with the phoney war that led up to world war two. Although those on all three Front Benches now talk of the need to lower the deficit, they are all also talking about spending more. I do not believe that our voters-the voters of this country-have any idea how serious the financial position of the country is, or how massive the cuts will have to be if we are to return some semblance of order to our national accounts.
Let me illustrate that first by looking at the payments on the new debt. Let us suppose that we could not roll that debt over, but had to close Government Departments. The cost of the debt in the first year of bailing us out-I am ignoring past debt, which we have to service as well-would be the loss of the Department for Culture, Media and Sport, the Department for Environment, Food and Rural Affairs, the Department for business and enterprise, the Law Officers' Department and the Northern Ireland Office. In the second year-we are not concerned only with the new tranche of debt; there would be two years of debt-we would have to lose, in its entirety, the Department responsible for innovation, the universities and skills. In the third year, the debt repayments would be greater than the budgets for defence, the Cabinet Office and some other Departments of State. It would decimate what we do as a Government if we had to pay for the money that we intend to borrow by closing Government Departments and the programmes that go with them. I do not believe that the people of this country yet have any idea about the seriousness of the position that we face.
Does the right hon. Gentleman agree that part of the problem is that the Government also seem to have no idea about the seriousness of the situation?
I am critical of all the Front Benchers. In the past few days, the official Opposition have been talking about spending new money. It is bizarre beyond belief to think that the health budget can be ring-fenced. It is one of our biggest budgets, and commitments have been given from Government and Opposition Front Benchers about the sanctity of such budgets. It will be impossible for us to balance the books even at the rate that the Chancellor is talking about-I shall discuss in a moment whether that level would be adequate or quick enough-if we decide that some of the largest departmental expenditures will somehow be saved from cuts.
The right hon. Gentleman is talking a great deal of sense. Does he agree with my earlier point that the approach of addressing these issues without having regard to the duties that are imposed on local authorities by Parliament is part of the problem? We have to deal with the question of whether legal liabilities are being raised to a level that cannot be supported by public administration.
I accept that, but we face something far more immediate than that, as I tried to make plain in my intervention on the shadow Chancellor. We keep hearing contributions in this place that sound as though we are now in charge of our affairs and our future, but we are mere pawns on the chessboard of the credit agencies and the bond market. It is to their tune, sadly, that we now have to dance. My worry is that even in the next few months we are going to have difficulty in floating the amount of debt required to see us up to and through the election, let alone the next umpteen years.
I usually agree with much of what my right hon. Friend says, but I am alarmed by what he says about the level of cuts that he believes we face. He is talking only about the expenditure side, and not the income side, of the problem, but we should be looking at income and not expenditure. If we cut spending now, we will just make the problem worse.
In my view, if we do not cut enough and soon enough, we will not have a currency. The debate about whether we should have taxation or cuts is to some extent academic. The plea about tax evasion and avoidance that my hon. Friend has made ever since he has been in the House-ever since I have enjoyed listening to him-is one that I was pleased to hear the Chancellor pick up in such a positive way, but that alone is not enough.
I return to the central issue of whether we are going to see ourselves through to the general election. We have been living in a cloud cuckoo land partly because all the political parties have been saying that they are going to spend more, so that nobody would think that things will be all that tough. The economic crisis was said to be the most serious since the 1930s, but when improvements in programmes are announced, people think, "Well, it can't be all that bad, can it?" What has added to that illusion is the fact that the Government have been printing money, between 98 and 99 per cent. of which has been buying the Government debt. What we do not know is what the markets will do when there is no more funny money to use to buy that debt. We know that there is £25 billion more; presumably, that money is being spent now and will, one hopes, take us up to February-but then things will hit the fan. Of course, the Government are taking proper actions such as saying to the banks, which behaved so irresponsibly in that earlier period, that they need to restructure their liabilities and assets so that they have a more stable basis from which to carry out their trade. Surprise, surprise, one of the assets that the Government say that the banks should have more of are Government gilts. The danger is that if the international markets do not believe us, those gilts might not be much better than the American mortgage bonds that were floated a few years ago and that got us directly into this mess.
I want to make a plea to the Government. The point of maximum danger will certainly come when we cannot, or are not going to, print any more money to buy our own debt. Earlier, I made a comparison between the current situation and the phoney war-the lead-up to the war. The comparisons are chilling. In 1938, people came to the House and to the Dispatch Box and told us that there was no real threat from the international situation and certainly not from Germany. Recently, there has been an unwillingness across the whole House to get to grips with the size and extent of the debt. That unwillingness has been equivalent to the denials about the dangers of Nazi Germany. Back then, when the Government started to lose support, they were forced to give a pledge to Poland. An equivalent pledge today is the Bill before us, which the Government would not have introduced willingly, but they know that they need to introduce it if they are to increase the confidence of the markets. In 1939, the then Prime Minister said to Montgomery when visiting the British Expeditionary Force, "I don't think the Germans have any intention of attacking us. Do you?" Montgomery soon put him straight on that. The bizarre denial of that time culminated in the Norway situation, when we all learned just how grave and perilous the position of this country was.
I want to end by making a plea to the Government. The Conservative party did not have a terribly good record on Munich, so I am not trying to make party political points here; it is far more serious than that. It is a big regret of mine that in the lead-up to the Iraq war-and I am probably the only person in Christendom who still believes that the Iraqis did have weapons of mass destruction-I did not ask the then Prime Minister an obvious question about the plan for day two. I did not ask about the plan for ensuring that the country did not descend into chaos after the Government had been toppled. I therefore make a plea to the Chancellor, knowing that no one will be able to stand up and say that they have taken the relevant precautions. What defences have the Government thought through if long-term interest rates do not rise in the way that the shadow Chancellor has described, but start to gather pace? What will our response be? What will be our defence to prevent further deterioration if we lose our credit rating? What do the Government have in the cupboard to ensure that we do not face a gilt strike when the Debt Management Office at the Treasury reports to the Prime Minister that it has not been able to garner enough funds that week to buy up the Government debt? Margery Allingham wrote a brilliant diary on the horrendous drift into war from 1938 to 1939. When the Norway disaster engulfed the country, she wrote of the then Prime Minister, Chamberlain, that he was a "vain old man with nothing up his sleeve." Please, God, I hope that this Government have a lot up their sleeve.
Thank you, Mr. Deputy Speaker, for giving me an opportunity to contribute to this pressing and important debate. As we have just been hearing from Mr. Field, we gather at a time of great economic risk for our country. The first signs of tentative economic growth may be appearing, but we are far from out of the woods.
The economic backdrop to the Bill is dire, as the right hon. Gentleman has just said. In 2009, the British economy contracted by almost 5 per cent. That is worse than in either of the Conservative recessions of the early 1980s and 1990s, and worse even than 1978 and the winter of discontent. Remarkably, it is even worse than the year of the Wall street crash or any of the subsequent years during the great depression.
Our economy contracted by more in 2009 than in any peacetime year since 1921, and the impact on our public finances has been truly devastating. One quarter of British public spending is now unfunded. We have a low-tax economy, not because ordinary people and households around the country pay less tax but because of a collapse in corporation tax. At the same time, however, we have a high-spending Government. The money coming into the Treasury's coffers is comparable to that in an American-style society, but the money going out of those coffers is more comparable to that in a Scandinavian-style society. The long-standing ready-reckoner suggesting that any country borrowing more than 10 per cent. of gross domestic product in a given year has entered basket-case territory has been breached. In this financial year, we in Britain will borrow more than 12 per cent. of our GDP, and the proportion will be well over 10 per cent. again next year.
What will be the effect on public services-the local schools, the police, the hospitals-in our individual consistencies? One quarter of those services are unfunded, and we are plugging that gap this year with public borrowing. As a country, we are borrowing an extra £500 million every single day, which equates to more than £20 million extra every hour or £1 million extra every three minutes. We have borrowed about £25 million extra since this debate started. Our currency has been massively devalued, and we are now printing extra money.
It is often said by the Government that other countries have experienced recession too, and that is of course true. When those countries were growing, however, we never heard from the Prime Minister that Britain's rising prosperity was due to international factors that had nothing to do with the policies of his Government. Instead, all his plans were predicated on the best-case scenarios, and that left Britain dangerously over-exposed. When this Prime Minister boasted that we had abolished boom and bust on his watch, he was half right-he just got the wrong half.
I want, however, to turn to where the Prime Minister has a valid story to tell. It has been said-and the Chancellor said it again today-that our borrowing is at a level similar to that of other comparable countries, and that is broadly true. We were told by our iron Chancellor that we would not let our debt rise above 40 per cent. of GDP, but it is now doubling to 80 per cent. Even so, it remains lower than the debt level in Italy-although by some measurements Italy's economy is now bigger than ours, and our total debt is still rising faster than Italy's.
It is also true-and in this the Chancellor, the Prime Minister and others have a point-that by historical standards Britain's debt looks manageable. It may be rising to 80 per cent. now, but we have just been hearing from the right hon. Member for Birkenhead about the consequences of 1945, when our total debt as a percentage of GDP stood at a terrifying 250 per cent.
The second world war is always rightly portrayed in terms of the human casualties that were suffered, but until I saw that figure I had not fully appreciated the terrifying scale of indebtedness that we as a country faced at that time. We may be broke now, but we have been three times more broke in the past.
Given my earlier remarks about the true level of debt, would the hon. Gentleman be surprised to hear that aggregating the bank bail-outs-never mind the cost of the RBS-Lloyds deal that was never even disclosed-would put the actual liabilities in the region of £3.84 trillion? He has just given the figures for 1945, but that sum is equivalent to 274 per cent. of GDP.
Does the hon. Gentleman agree that there is another very big difference between 1945 and now? In 1945, it was decided by common acclaim to get the deficit down by sacking, through demobilisation, almost 1 million public officials who were in the Army or serving the Army. The Government are not about to do the equivalent now.
There is another, slightly more obvious difference between now and 1945. Then, we had run up a spectacular debt that changed Britain's place in the world, in many ways for the worse. It left us vulnerable and led to years of rationing and hardship for households right across the country, but we had something pretty spectacular to show for that greater debt-we had defended ourselves against an unprecedented threat to our freedom and independence. Sixty-five years later, it is somewhat harder to work out what the current Prime Minister's monumental achievement from our rising debt is.
Instead, our Prime Minister today stands metaphorically on the observation deck of the new Burj Khalifa skyscraper. Lifted high on a mountain of debt and hubris, he surveys a scene of economic depression and endless desert.
The hon. Gentleman is right to follow Mr. Field in emphasising the severity and seriousness of the current situation, but the big difference between 1945 and today is that then the war was over and the expenditure on it had finished. In contrast, the unsustainable level of expenditure that we have today has not finished, and there does not appear to be any credible offering from the Government as to how they are going to bring that expenditure under control. We just have this Bill, which halves not the overall debt but just the rate at which we will increase it. That is no real solution at all.
The hon. Gentleman is right that our debt-to-GDP ratio fell, in a good way, quite markedly after the second world war. Nevertheless, it is still true that we have previously been in territory where that ratio has been well over 100 per cent. We are not in that position at the moment.
I am glad that the hon. Gentleman has referred to 1945, because we had a wonderful Labour Government who brought us out of that terrible time. Does he agree that, instead of deflating our way out of the massive problems that we faced at that time, we grew our way out of them? We did not spend our time talking about what we had to cut: in fact, we created a national health service, for example, in which we spent more.
Perhaps I should avoid a protracted historical discussion, although I always thought that the hon. Gentleman's favourite Labour Government were in office during the period of achievement from 1976 to 1979. However, we have managed to identify another one whom he holds dear to his heart.
I was talking about the Prime Minister standing on deck looking at the consequences of his policies. In that economic desert, we find before us this Fiscal Responsibility Bill-a pathetic and dangerous piece of legislation.
It is pathetic, because we should not need a new law to make the Government do their job. We just need the Government to do their job. The Chancellor is like a man with a new year's resolution to lose weight. He knows that he desires the outcome, but he doubts his ability to make the disciplined decisions that are necessary. He therefore passes a law requiring himself to lose weight, confident in the delusion that he can now tuck into a diet of endless doughnuts and pork pies. As people across the country are daily discovering to their dismay as they examine their discarded gym memberships and low-fat cookery books, there is a world of difference between resolving to do something and having the fortitude to see it through.
The Chancellor has flunked the difficult decisions at every turn. The media were briefed that December's much delayed pre-Budget report would be bristling with tough choices. It did contain an announcement from the Chancellor on pay restraint, as well as the bizarrely counter-intuitive set of higher taxes on employing people, but it then emerged that the extra spending in the PBR added up to more than the extra revenue that would accrue. As in the Prime Minister's Labour conference speech, the goodies kept on coming, but these really were empty promises.
What was the result of the PBR? Having previously said that the deficit this year would be £175 billion, and after announcing a slew of supposedly tough choices in the pre-Budget report, the Chancellor was able to announce that the deficit would now be £178 billion, falling next year-during a period when the economy is forecast to grow in all four quarters-to £176 billion. That is why, speaking as a man still just in his 30s, I know that our national debt will not reach 40 per cent. again until I am in my 60s. The Chancellor's legacy is a burden that blights an entire generation.
It is not an enviable record, but the Chancellor has at least one partial admirer. I was reading The Economist over Christmas. Its edition of
"By stubbornly keeping his job, Alistair Darling, the unfortunate Chancellor, probably prevented a desperate fiscal plight from becoming even worse under a putative successor."
His biggest legacy, his entry to the new Labour hall of fame, is to have prevented Ed Balls from making a bad situation even worse. We are all genuinely grateful, but the Chancellor's hopes must have been so much greater as he walked into this Palace as a new Member of Parliament many years ago.
The Bill is not only pathetic but dangerously wrong-headed. How can we know what the world will face in 2016? We may confront the scale of threat to our national security that demands the wholesale economic sacrifice that helped us to win the second world war, which we have discussed in this debate. What are we meant to say if that happens-"Sorry, we are not fighting. We can't due to our obligations under clause 1 of the Fiscal Responsibility Act 2010"? We may face another recession-it is entirely possible; the so-called double dip scenario. We all hope that it is unlikely, but it is entirely possible. What then? What are we meant to do? Are we meant to say, "Sorry, all the hospitals are going to have to close. That is our obligation under clause 1 of the Fiscal Responsibility Act 2010"? The Chancellor said today that that would not happen because the Chancellor of the day would come to the Dispatch Box, rip up the Act and say, "Don't worry, I never meant it in the first place." That raises the question why we are all here pretending that this is a serious piece of legislation.
We need real determination to plot a path to sustainable recovery, and that requires real political leadership. So how dispiriting it is that the so-called official Opposition woefully fail to match the scale of the task before us. The Conservative shadow Chancellor, in his speech to his own conference, made a virtue of his supposed resolution. It was an interesting speech, but as he confirmed his intention to target big tax cuts on the very richest households, he told us:
"We are all in this together."
As I watched the television and listened to his speech, I was initially reminded me of the immortal question asked to Debbie McGee-to paraphrase: "What first made you sceptical about the shared austerity message of millionaire George Osborne?"
The shadow Chancellor went on to say that he had identified £7 billion-worth of savings. Let us leave aside for a moment the fact that some of those were costed in 2020 prices and failed to match any sustained scrutiny. This is the crucial bit. The Conservative shadow Chancellor went on to say:
"Anyone who tells you these choices can be avoided is not telling you the truth."
But that was not really the truth. We have a structural deficit of about £85 billion, so what the Conservative shadow Chancellor told us was perhaps at best one 12th of the truth. It might have been up to a point the truth, but it certainly was not the whole truth and it certainly was not nothing but the truth. Instead, just yesterday we had the Conservatives splashing £400,000 on posters claiming that they would aggressively cut the deficit, but they gave no specific proposals except a single pledge to spend more.
Those of us who were listening carefully to my hon. Friend's speech at that party conference will know that he stated that we did not claim that we had set out a full policy. What he announced was not going to address the full structural deficit, but we had provided an indication. Given the criticisms made by the hon. Gentleman, does he have a full plan to address an £85 billion structural deficit?
Given that 70 per cent. of the deficit is structural, and therefore pre-dates the current financial turmoil, does my hon. Friend think that a Bill that provides no detail about how the Government intend seriously to tackle the problems with the public finances demonstrates any fiscal responsibility at all?
I accept my hon. Friend's point. The Bill is near to worthless, but it is a valid point that the Conservatives have just spent a lot of money on a poster campaign across the country that does two things: says that they will try to tackle the deficit and identifies one measure that does nothing to tackle the deficit. That is the point that the right hon. Member for Birkenhead was making. If anything, the deficit would be even greater were the Conservatives' proposal to be implemented. This is the new, cool Steve Hilton-aroma Conservatism, pointing in different directions at the same time. It is what Tony Blair called triangulation and the third way, what fashionable Cameroons call red Toryism and the rest of us call an abdication of leadership. I do not doubt that the Conservative leader's greatest priority is the NHS, but he does not mean the national health service; he means the Notting Hill set.
The only interpretation that anyone can put on the hon. Gentleman's remarks is that the Liberal Democrats propose a huge cut in spending on the NHS. By how much does the hon. Gentleman's party think that the NHS budget should be cut? Everyone would be interested in that.
We are getting to the interesting nub of the argument. We are saying that there is not a good reason to ring-fence Departments. That does not necessarily mean that the Department of Health would be cut, but the implication of the Conservatives' policy- [ Interruption. ] Hon. Members should hear me out; I am doing the hon. Gentleman the credit of taking him seriously. The implication of his party's policy is that the cuts in schools, police and our soldiers in Afghanistan would be greater, deeper and more fundamental than they would be if all the Departments took the burden of the deficit reduction. That has got to be the case. If the Conservatives would make the cuts across a smaller number of Departments, the cuts would have to be deeper to make up for the fact that some had been ring-fenced. That is a serious question that the Conservative party will have to explain to teachers, police officers and many other public servants and people who use our public services.
I know that the hon. Gentleman is getting dreadfully angry. There is a big fight between the Liberals and the Tories in his seat in the south-west, and it is all dreadfully vexed. Lorely Burt said that 70 per cent. of the deficit was structural. That comes in at about £125 billion. Scotland's share of that would be about £11 billion-the total cost of the NHS in Scotland. How many nurses and teachers does the hon. Gentleman plan that the Scottish Government should sack in order to meet the Liberals' version of cutting the debt?
My understanding is that the Scottish National Party aspires to be in coalition with the Conservatives after the general election, so they may be able to come up with a joint plan at that stage. Let me get to our deficit reduction proposals. The straightforward answer is that we are not saying that Departments should be ring-fenced. In the mind of some Members, the right hon. Member for Birkenhead may have exaggerated in his speech the scale of the threat we face, but he rightly warned of the scale of the problem, as I tried to do in the introduction to my speech. Our economy is 5 per cent. smaller than it was a year ago. We cannot carry on with all this "share the proceeds of growth"-with a robe of feel-good Conservatism, without wearing a tie-saying that there are no hard choices to be made. It is not a realistic way forward.
I will tell you if you listen. I said that no Department is ring-fenced. I have said not that there would automatically be cuts in every Department, but that we should not have a policy of ring-fenced Departments. I will give way to any Conservative Member who will say that all the extra money that Labour has spent on the NHS has been spent 100 per cent. efficiently and that there is no scope for finding efficiencies in the national health service. If there is scope for finding efficiencies in the NHS, the question Conservative MPs have to ask themselves is why they would cut efficient parts of schools, the Army or the police beyond a point they would otherwise need to do, to support inefficient parts of the national health service. That is a valid question, which the Conservative party, due to marketing reasons, is unable to answer.
No, I want to make some progress.
I want the deficit cut, which is why my party has consistently made bold and eye-catching contributions to our national debate on that subject. That is why in the past months we have called for pay restraint, which protects those on low incomes but would make significant savings of billions of pounds over two years. As I have just said, Britain is almost 5 per cent. poorer than it was a year ago and we cannot afford a national wage bill that pretends nothing has happened.
We have led the way in saying that some major capital spending proposals are unaffordable. We have said that households with incomes that would be the envy of the majority of people should not also be topped up with unaffordable extra tax credits. We have identified specific projects that we believe can no longer be financially justified. That is why in a Statutory Instrument Committee in February-less than a year ago-I argued against both Labour and Conservative Front Benchers that the so-called baby bonds were no longer affordable.
There was great unity among the Front Benchers of the two old parties; they were committed to the old policies, as though the deficit had never happened, but later in 2009 the Conservative shadow Chancellor, to his credit, belatedly caught up, telling his conference that baby bonds are
"a luxury we can no longer afford."
Where the Liberal Democrats lead, others in the House follow. [Hon. Members: "Hear, hear."] It is true.
I am constantly looking for new savings. I realise the enormous challenge that a deficit of £500 million extra every day poses. I was looking through Hansard a couple of weeks ago and I found a question from the Member who is known to the Conservative shadow Business Secretary as Philip Holland, but is better known to the rest of us as Mr. Hammond. Anyone anxious about the Conservatives' plans for deficit reduction needs to understand how seriously they are taking the task. I shall read out that brief question to give the House a flavour of the magnitude of the Conservative approach to the task. The question is headed "Christmas":
Mr. Hain: In the last 12 months, my Department spent £385 on Christmas cards and £1,054 on receptions. We did not purchase any Christmas decorations."-[ Hansard, 10 November 2009; Vol. 499, c. 178W.]
The shadow Chief Secretary's job is not just to clear up the mess left by his leader; he is also asking the brave deficit reduction questions that can transform our country's prospects. I have done the calculations, and the savings identified by the hon. Member for Runnymede and Weybridge equate to 0.26 seconds of national debt-the gap between Usain Bolt and the man who finished second, with the Conservatives left on the starting blocks.
I thank the hon. Gentleman for giving way, as I indicated a little while ago that I wanted to intervene.
The core of the hon. Gentleman's rather rambling round-about speech is squeezing public expenditure-wages, capital investment and other spending programmes. Surely that will deflate the economy and raise the level of unemployment, which will make the problem worse by reducing tax revenues and increasing benefit payments.
I have acknowledged in the past, and will acknowledge again, that the Chancellor is right to be concerned about debt. He is also right to warn that it is possible to cut too deep and too quickly. Navigating a course from our current dire position to calmer waters is a real challenge for the Chancellor and for whoever is in government over the next decade or more, but it is a great political and economic challenge that requires great political and economic skill from the Chancellor, the Prime Minister and the rest of the Government. It does not require legislation of the sort that is before us this evening.
Does my hon. Friend share my concern that although the Government have a model of the economy written in Fortran, which they will provide, they will not provide the data that go into the model? Proper scrutiny of what the Government are doing is, therefore, difficult, as is making the right judgments, such as whether we are going too deflationary. Would it not be better if the Government were to release the data that go into the Treasury economic model, to enable people to make such judgments more effectively?
It would inform the debate, although one is sceptical about the accuracy of some of the data. Recently I told the Chancellor that he had revised upwards his borrowing figures for this year. He appeared to imply that that had not happened, but I have gone back through the figures. In his 2008 Budget-less than two years ago-the Chancellor announced that borrowing for the year 2009-10 would be £38 billion. At the time, some commentators were shocked at the scale of our predicament. Later in 2008-the pre-Budget report just over a year ago-the figure for this year was revised up to £118 billion. In the 2009 Budget, we were told that instead it would be £175 billion, and now the latest estimate for the year that is about to finish is £178 billion. That gap-between the £38 billion forecast less than two years ago and the £178 billion forecast today-represents the Chancellor's credibility in forecasting and deficit reduction. We are borrowing £140 billion more this year than the worst-case scenario forecast less than two years ago.
Anyone wanting to know the worth of the legislation need only look at the helpful explanatory notes provided to us all. One line, on page 5, sums it up perfectly:
"There are no significant financial effects of the Bill."
Never has anything been said with such brevity and accuracy in an explanatory note, or with such devastating political insight in a document that does not normally verge into that territory.
The cupboard is bare, and too much of the political debate is empty. No wonder that Labour and the Conservatives, in the initial skirmishes of the general election campaign, now both look to the Liberal Democrats for leadership and inspiration.
I did not think it would be possible for anyone's credibility to emerge from this debate weaker than the Government's, but after that speech I am beginning to wonder whether it is not the Liberal Democrats who have damaged themselves more in our discussion tonight. That really was a speech that missed the target entirely, if I may say so, yet it is a target that is pretty easy to hit.
The language that others have used about the Bill is overwhelmingly condemnatory-a con trick, vacuous, irrelevant; I will not go through all the quotations that my hon. Friend Mr. Osborne read out. The one bit I agreed with the Liberal Democrat spokesman about was when he described the Bill as a dangerous and pathetic piece of legislation.
The Bill will make bad law. It is declamatory. No explanation has been given about how it will be enforced. It will carry no credibility in the markets. Indeed, it could further erode credibility in the markets, as it may appear no more than a rhetorical substitute for the action we need. In other words, it will appear to be what it really is-mere words.
But it is not just the confidence in the markets that I am worried about and that could be eroded. Legislation such as the Bill erodes confidence in Governments and gives politicians and Parliament a bad reputation. It is corrosive of respect for the rule of law and our institutions. The Bill is, of course, a political document designed to substitute for the markets' lack of credibility for the numbers in the pre-Budget report and the Red Book about how the deficit will be filled.
That credibility deficit has three main causes. The first and immediate cause is that three quarters of the gap between spending and tax is now acknowledged, even by the Government, to be structural-that is to say, it will remain even after the effects of the recession on the deficit have been unwound. It has been created largely by explicit mistakes of Government policy in recent years, not by the crisis. The policy in question is the Brown spending binge that fuelled the boom and aggravated the bust. The Government increased public spending by much more than the economy was growing, and for many years.
Spending has increased from 37 per cent. of GDP to 48 per cent. of GDP. In some ways, that is the most dramatic change in the structure of the UK economy since the wartime measures were unwound. Many of us on the Conservative Benches warned that such rapid spending increases posed a danger for fiscal policy. When I was shadow Paymaster General, I gave several warnings myself. I pointed out that
"we could be heading for a serious financial threat to our fiscal position".
It is, I said,
"extremely worrying that we should be facing that threat at this point in the cycle."-[ Hansard, 17 March 2005; Vol. 432, c. 487.]
The second cause of the credibility deficit-I said that there were three-is the sustained lack of transparency in the Government's accounts. If the markets cannot be sure of the Government's figures, they will fear the worst. Examples of the impenetrability of the accounts are legion. What really is the scale of the Government's liabilities? We cannot be sure. We have had some discussion of that this afternoon. It will fall to an incoming Conservative Government, aided by the office of budget responsibility, to find out.
The third main cause of the collapse of credibility has been the emphasis in presentation on language rather than substance, and spin before action in the conduct of fiscal policy over a substantial period. The Bill is just one further illustration of that phenomenon-a phenomenon that we have had to endure for years. For example, we now know that the so-called fiscal rules were mere words. Their credibility was shot when the Prime Minister, who was then the Chancellor, fiddled his start date for the business cycle in July 2005, immediately after the election, in order to avoid admitting that he was breaking his own fiscal rule. Empty economic rhetoric has been the Prime Minister's stock in trade for a long time. It was, after all, the Prime Minister who, as Chancellor, as late as 2007 said in the House that
"fiscal discipline is the foundation of the strength of Britain's finances."-[ Hansard, 21 March 2007; Vol. 458, c. 816.]
Handing the assumptions in the Red Book to the Comptroller and Auditor General of the National Audit Office for supposed vetting was another gesture that eroded credibility. It sounded good but it was an insubstantial thing to do, as the markets soon discerned and as the Comptroller and Auditor General more or less admitted in evidence in public session in a Committee. In the end, it has only made Labour's credibility problems even worse.
I said at the beginning that the three main causes of the credibility deficit-the structural origins, the lack of transparency, and the empty rhetoric-cannot be addressed by Labour's current measures, but they can be assuaged by other practical steps. First, on the structural gap between spending and tax, the obvious answer is to set out how the gap will be plugged. That is what we have just been discussing with the Liberal Democrats.
In practice, that means explaining how public spending will be cut. It means reversing a proportion of Labour's spending binge. But Labour have done the opposite. They have announced increases in spending of £3.5 billion and they have even cancelled the spending review. That leaves a gaping hole in the credibility of Labour's overall financial policy.
Members of the Conservative Front-Bench team have been courageous in coming forward with a number of tough measures in recent announcements and have talked of an age of austerity. It is fair to say that the Conservative party has gone further than either of the other two in making a clear case for the reality of the situation-the reality that we will have years of very difficult fiscal policy before we can get overall financial policy back on an even keel.
More will need to be done by us from within Government, where I hope we soon will be, to find out the true scale of the deficit and to make it fully transparent. Then an analysis of the relevant merits of various additional measures can be done with full civil service support. I cannot stress too strongly that it is only by working with civil servants, drawing on their expertise and reviving a Whitehall culture of thrift, which has sadly been lost, that we can hope to restore Britain's public finances. The main reason for the binge was political, but a major subsidiary reason has been Labour's failure to mobilise Whitehall to the cause of the efficient use of public money.
The second point that I want to make in this respect is on the credibility of the numbers on the basis of which decisions will be taken. Have Labour really been cooking the books? Perhaps scarcely at all. Perhaps a lot. We do not know. Twenty years ago I left the Treasury and went to spend a very enjoyable year at Nuffield college, Oxford. There, among other things, I wrote a short book on public expenditure and fiscal policy. Two of the suggestions in that book, eventually published in 1996, were to create an independent national statistical office and to create a fiscal policy committee charged with the task of producing the forecast and thereby bolstering the credibility of the Government's accounts.
From the Front Bench a little over five years ago, I worked up those proposals at the request of the then shadow Chancellor, my right hon. Friend Mr. Letwin. They were subsequently published as "The Independent Fiscal Projection Committee" and "A Framework for Statistical Independence". The Government responded to the first after the election by giving independence to the Office for National Statistics, but the second pillar of the plan was wholly ignored by the Government.
I was delighted when my hon. Friend the Member for Tatton took up the latter idea. His proposed new body, which he has called the office for budget responsibility, goes further than I proposed in 1996-a good way further-and further than my right hon. Friend the Member for West Dorset suggested in that document. I believe that what my hon. Friend has proposed will contribute to the economic credibility needed to reduce the deficit in one crucial respect, which he mentioned in his speech. It will put the Government at one remove from the forecasting business, with all the temptations to fiddle the forecasts that can come with that.
Those two measures that I spoke about earlier, a credible plan to reduce public spending and a credible, independent, depoliticised and verified forecast, will act on the credibility deficit. That is important because, as Mr. Field, who is no longer in his seat, pointed out, the credibility issue is not about mere words. It comes with a price tag, potentially huge in terms of loss of market confidence in plans to fund the deficit and service the debt stock. It is the Governor of the Bank who told us that the deficit, at nearly 13 per cent. of GDP is "truly horrendous". The debt stock will have doubled as a percentage of GDP to nearly 80 per cent. shortly, as the spokesman for the Liberal Democrats, Mr. Browne pointed out.
Even if credibility is eroded only to the extent that it represents, say, 50 basis points on debt servicing costs, we are talking about billions and billions of pounds in higher taxes or lower public spending for a generation. Even more perilously, the loss of credibility could manifest itself in a collapse in people's confidence in the currency.
I congratulate my hon. Friend on his prescience and look forward to reading the pamphlet that he produced at Nuffield college, Oxford, because it sounds very interesting. He mentioned thrift, but the issue is not just about efficiency. Does he agree that however much we develop models and look at the bond market, at credit risk and at the rest of it, until real change is made, the scale of the problem will require an adjustment on the statute book to the duties that are imposed on all public authorities? That is a serious and difficult problem, but it is one that we will have to address. We cannot go on imposing legal duties, with which local, national and public auditors are required to comply, and at the same time step up the amount of legal liability that we impose on all of those public authorities.
My hon. Friend returns to a point that he made in an earlier intervention. I listened to it carefully, and I probably agree. The Americans deal with the same issue using their distinction between discretionary and non-discretionary funding in the federal budget.
This debate takes place against the backdrop of an election. The respective claims of the major parties on the public finances will come to the fore, and the danger is that there will be a bidding war. Each party will claim that it can do more than its opponent to tackle the deficit, with less pain than its opponent. That will not make for an enlightening election. It could lead to a further erosion in the credibility of politics and politicians, to which I alluded at the beginning of my remarks.
I am grateful to my hon. Friend for mentioning my book. In it I suggested a way out of the problem-a way that might bolster rather than erode the credibility of respective claims of the parties, particularly at election times. My proposal was quite straightforward: in addition to creating a fiscal policy committee, which is similar to the proposed office of budget responsibility, I suggested that to bolster the credibility of the Government and Opposition parties' policies on tax and spending in the months prior to an election, that body should examine all their pledges and come to a view about the bottom-line effect on the deficit.
It would be quite reasonable to ask that institution to undertake that work for any party registered under the Political Parties, Elections and Referendums Act 2000 and to publish the assumptions on which it came to its conclusions about the scale of the parties' pledges and their implications for public borrowing. If it did that it would concentrate the minds of politicians when they make exaggerated claims on economic and financial policy, especially at election time. Such a measure would raise the quality of debate in elections and of public discourse about economic matters between elections, giving the public greater confidence in the statements of politicians.
A major Opposition party might be reluctant to subject itself to such scrutiny, but what credibility would such a party have? It might supply inadequate information about its policies, thereby preventing meaningful costings to be made by the office of budget responsibility. If it did, the OBR should say so and let the electorate draw its own conclusions. At election times, such a measure is still achievable, even if things have to be done in more of a rush. The Government's costings would be largely straightforward: after all, one function of the OBR would be to have a firm grip on Government pledges. In any case, before the Government went to such a committee, they would have available to them the full resources of Whitehall in order to cost any additional pledges that they wished to unveil in their manifesto.
As for the Opposition parties, any party worth its salt and challenging seriously for power would want the credibility of its economic plans endorsed by the OBR. The party would be likely to engage with the office well before it published its manifesto, and it should be permitted to do so confidentially. In Committee I intend to table an amendment to give effect to this proposal, and I very much hope that it secures cross-party support.
The agenda of British politics has been set by Labour: it is to repay Labour's debts. That will be a huge and painful undertaking, affecting the entire British population. Labour's only hope of restoring confidence in itself would have been to set out the spending measures required to plug the deficit. That is Labour's duty, after all: it is still in government. But even if it had done so, I am not sure how much weight it would have carried with the markets or with the public at this stage, because the canker at the heart of Labour economic policy derives not just from its credibility on fiscal policy, but from a deeper collapse in confidence: confidence in the Government's ability to take any correct decisions for the country-the confidence that can, in turn, be built only on the sound foundations of economic competence.
When the economic history books are written, the writers' pens will above all linger not on the Government's intentions but on their incompetence. How was it that a Government inheriting such a strong economic legacy could have so easily squandered it? How was it that so little could have been bought with so much extra public spending? Even two years into this crisis, Labour still tries to return to the tactics of the past decade-the tried and failed tactics of rhetorical devices, which we have in this Bill, as a substitute for something solid. The Bill's title could usefully serve in one of those history books as the heading for a final chapter. It could read: "All credibility gone: the Fiscal Responsibility Bill is brought to the House." It would describe willing the end without the means and yet another addition to the catalogue of gesture politics.
The decision to postpone the spending review has been crucial. Those who argue that the Bill is merely a cheap political trick to avoid disclosing the pain that Labour would have to inflict on the electorate get at only half the truth. The Government appear to have no notion of how to implement the measures required to give effect to the good intentions of the Bill, and that is symptomatic of so much policy making over the past decade. Their response to any problem has all too often been to seek to legislate it out of existence, and, when disappointment has inevitably followed, the tendency has been to blame others, especially Whitehall officials, and the wider public service, for a so-called "failure to deliver". We have therefore had a succession of initiatives, most of them equally misguided, seeking to deal with the problem through efficiency units, a succession of studies, the tsars and so on.
Ministers hoped that those measures would compensate for Whitehall's alleged shortcomings, when the shortcomings that mattered were really much closer to home. It is the bankruptcy of ideas and, above all, of understanding how to translate intentions into action, more than the financial bankruptcy, which this Bill illustrates.
I remind the House that I have business interests with a multinational industrial company and an investment management company.
I rise to remind the House that the big financial crisis through which we have been living was in origin a crisis of borrowing too much. The Government now admit that their regulators were asleep on the watch, and that banks borrowed too much. It is clear that individuals and families borrowed too much. They felt that they had to because the erratic and expansionary monetary policy followed on both sides of the Atlantic fuelled a house-price boom and took houses and flats ever more beyond people's reasonable expectations of being able to service a mortgage. They were dragged into borrowing too much to meet those giddy house prices based on the monetary excess that the Government and their agents had unleashed.
Industry and commerce also borrowed too much, and in some cases, particularly under the private equity model, the levels of leverage for companies were very high and made it difficult for them to trade profitably and successfully. Yet the Government, who tell us that the private sector sinned and borrowed too much, now seem to believe that the way to correct the problem is for the state to borrow too much in its turn.
My first message for the Government is that we cannot solve a crisis of over-borrowing by borrowing too much in the state sector. We cannot resolve the British state finances by underwriting every bad debt and every bad loan throughout the banking system-we have to get the banks to sort it out and to take more of the hit. This Government have dragged the taxpayer and the state into accepting far too much risk and far too much debt obligation. That is why we are now on the verge of another nasty phase to this long and tragic financial crash: the phase when the state is made to realise that it is borrowing too much, and the markets and others force the state and its agents-the Government of the day-into getting their own house in order because otherwise they will find that they cannot borrow at anything like a sensible rate, if at all, or on the scale that they wish.
I think it is agreed ground between the three largest parties in this House that the deficit is too large, that it is growing too quickly, and that it needs to be controlled within the next four to five years. It seems that the principal disagreement remains between the Government and the rest of us about the timing of when to start to control borrowing. It is less painful to start to control borrowing now than to leave it for another year. It will do less damage not to have borrowed another £200 billion before deciding to give up the bad habit. If someone is an alcoholic, the time to stop drinking is today-it is not a good idea to have another year of drinking very heavily and damaging their liver. They know they have to tackle the issue, so why not start now? They may then discover that they have a longer and happier life, because there is life after alcoholism, as all those of us who are not alcoholics are pleased to report to anyone who might be in doubt.
We have to say exactly the same thing to this Government about borrowing. There is life for a Government after borrowing too much. It can be a very good life where the economy will function better, not worse-a situation where the public services are better run, not worse run, and where if they put quality, efficiency, productivity and performance into their vocabulary when managing the public services, they may well discover that they can run them better and provide more for considerably less input than the current costs. As my hon. Friend Mr. Tyrie remarked, one of the extraordinary things about this Government is how they managed to spend so much money to so little effect; that is the tragedy that we have to tackle. Unfortunately, the Bill is not the means to do that, as my hon. Friend Mr. Osborne pointed out with great humour and aplomb in noting that it sets out to have the Treasury controlling the Treasury. Why should the Treasury need to control itself? Why can it not run self-disciplined budgets in the normal way? Why can it not use the existing mechanisms of pre-Budget reports, Budgets, forecasts and economic reports to this House to provide the discipline that is required?
I should like to pause for a little on the details of the Bill, which I hope will be substantially amended if we have to go through the rigmarole of legislating it at all. It is bizarre in its own terms and seems to be against the run of the advice that the Chancellor has regularly given us on how to run an economy in trouble. Clause 1 tells us that in
"each of the...years 2011 to 2016, public sector net borrowing expressed as a percentage of gross domestic product" has to fall compared with the preceding year. To ensure that it falls by a reasonable amount, there is the added rider in subsection (2) that it needs to halve by 2014. That means, as I reminded the Chancellor when he was here earlier, that in any given year borrowing could go up. That is even true in the period when one is trying to halve borrowing, because one could leave it all to the end and suddenly have very big cuts in the last year or do it all earlier and then have greater freedom. Because it is expressed as a proportion of income, there could be individual years when borrowing was going up, assuming that the economy was growing. Perversely, however, if in that period we had another unfortunate year when the economy was not growing, it would be necessary to reverse and to cut borrowing in cash terms. That is the exact opposite of the natural stabilisers that the Chancellor has always told us are very important, as Conservative Members have accepted. We agree that the natural stabilisers are important if one gets into a position where there is such a big fall in output as this Government have presided over. The Government should change this and come up with a formula that recognises that it is necessary to take into account the state of the economic cycle.
The second part of clause 1 contains the most important part of the whole proposition-that borrowing should be halved as a proportion of gross domestic product. Given that under current economic policy we are not going to get much growth, that means that it is necessary, roughly speaking, almost to halve the current cash deficit, so we are talking about somewhere between £80 billion and £100 billion of spending cuts, tax increases or some combination of the two. There is always a temptation among those on the Labour Benches to believe that tax increases are the better option, but if they choose the wrong tax increases they could make the position worse. If enterprise is taxed too much, there will be less of it and they may end up with less revenue. They also like to tell themselves that if only they could at last get to grips with tax evasion and avoidance all our problems would be solved, whereas after 12 years of their trying to do that, all the evidence shows that it does not solve the problem as it is a very small part of a much bigger problem.
We cannot get away from the fact that in order to cut the deficit by this magnitude, even under a Labour Government with some strange tax plans, most of the burden would have to fall on public spending, and trying to cut public spending by £80 billion to £100 billion has proved to be difficult in the past. The Government clearly find it impossible because they have produced a Bill for the House of Commons demanding that we do this, yet there is not a single item in the supporting papers or speeches to tell us how they would achieve it. Worse than that, they have cancelled the normal public expenditure review setting out detailed plans for the future because they clearly find it too difficult, too embarrassing, or both, to have to admit that the large chunks of money that they have committed in the past are no longer affordable and perhaps discover that some of those chunks of money are indeed very wasteful.
My right hon. Friend is making an excellent speech. Does he agree that there is another factor apart from having to review legislation, which imposes the duties to which I have referred-that is, the need to emphasise the necessity for enterprise and small businesses from which one can generate the growth that is required in order to fill the gap? After all, not one penny of public expenditure comes from anything other than the tax revenues from private enterprise, and if we do not put our emphasis on the growth of small businesses and enterprise companies, we will not be able to close the gap, which makes complete nonsense of this ridiculous Bill.
My hon. Friend is absolutely right. We clearly need a lot more growth; I think that that is also common ground between the main parties in this House.
The evidence of our past successes and failures as a country is very clear. When a Government have had the courage to cut the marginal rates of income tax on people of enterprise and investors and to cut the rates of profits tax and other taxes on employment in small businesses, there has been a proportionate improvement in the growth rate and an increase in the tax take from those sectors. Governments who have gone for extremely high penal rates of tax on the rich, the successful and the potential investors who might do something to improve our economy have had the reverse experience. They have discovered that growth has slowed or gone into reverse, and that lots of bright and talented people have gone abroad because they do not wish to pay such tax at all. That would be even more true today in this extremely footloose globalised world. Surely we should learn the lessons of the '70s, when Governments had high taxes and it did not work, and the '80s, when they summoned up the courage to cut the taxes and it started to work rather well with the enterprise policies that were introduced. The same has been true all around the world. Wherever a country has had the courage to set very competitive tax rates on enterprise, business, success and investment, it has found that it gets a lot more revenue in.
As I always try to tell the Labour party, the best way to tax the rich-I would like to tax the rich more as well-is to cut the tax rates, because we then have more rich people in this country who pay more tax, because it is less worth while to pay for all the accountancy advice to get around it, and venture more of their money. This morning I spoke to a successful entrepreneur who told me: "I'm on strike. I was a successful entrepreneur. I sold my company because the climate was becoming so hostile in this country. I managed to sell up before the crash. I have no intention of going back in because they're making the climate even more hostile-I'll sit on my backside and do nothing for a bit."
I have made a clear statement about what I believe is the way that works best, and I trust that a future Government will be wise and will want to set competitive rates of tax on enterprise, success and rich people so that we tax them more in the way that I have described. That is clear advice that I am sure will not fall entirely on deaf ears, because it works and has worked in the past and elsewhere in the world.
In clause 1, after the extraordinary claims and strange wording that I have mentioned, we go on to be told that in due course net debt has to start to fall as a proportion of gross domestic product, but only in the final year of the period. The Chancellor effectively confirmed that the Bill is drafted in that way because the Government do not believe they have any chance of getting net debt down as a proportion of our national income until 2015-16. That could well be after the next election but one, in two Governments' time rather than one. It is remarkable that they can be that precise in thinking that that will be possible by that stage. For once, I agree with their realism that, with their policies, they will not get net debt down any time soon, and not before 2015.
My hon. Friend Mr. Cash rightly pointed out that the debt is grossly understated in the figures that the Government use. The Office for National Statistics has got nearer to the truth. I have always cited a figure of £3 trillion-plus for the true level of debt and obligations of the British state. Now that the Government have gone to the aid of banks in difficult situations and allowed the pension deficits to build up so colossally, that is the kind of figure that we would come up with if the British state account were put on the basis on which the British state puts any reputable company account. I see no reason why it should be treated differently. Clause 1(3) is pretty meaningless, because the Government will clearly carry on using definitions of net debt that no one else believes. Everybody else knows that they greatly understate the position.
That brings me to another problem with the Bill. The part about interpretation, definitions and so forth is one of the slenderest that I have ever seen in a piece of legislation. I presume that that is intentional and designed so that were there to be a future Labour Government in the time period in question, they could play all sorts of games with the definitions of net borrowing and net debt if things went wrong, just as Labour played all sorts of games with the cycle and the definitions of the golden rule in its earlier years in Government. The Bill is shoddy and unacceptable because there is no professionally and internationally agreed definition of the debt and borrowing that they are trying to measure. Doubtless they would want to leave quite a lot out by anybody else's standards of financial reporting.
My hon. Friend the Member for Tatton made mincemeat of the Treasury imposing a duty on itself and of the fact that there are absolutely no sanctions on anyone involved in this sorry charade. It is not so much a case of Ministers giving themselves a "get out of jail free" card in case something goes wrong as giving themselves a card that says that no Minister ever goes to jail or suffers any other penalty of any kind, however bad, grotesque and wrong their implementation of the policy.
The Bill is a worthless piece of paper and an unnecessary intrusion into what should be a serious debate. It will not take a trick with the bond markets in the City or with anybody in this place other than a few Labour loyalists. It is a political prank, an expensive press release. It is wasting the time of the House and it is completely unsubstantiated by any plans.
My hon. Friend tries to tempt me to be a bit more outspoken, but the House knows me all too well-I am not characteristically outspoken.
I return to the divide on the timing of the reductions that the Bill requires. The Government's case is that they should delay the reductions for about another year. That is felicitous, because it will get them through the general election period and put all the burden of the cuts on to a future Government, but perhaps they actually believe what they are saying. Maybe they believe this neo-Keynesian nonsense that they have come up with that the only thing that is sustaining the economy is the excess public spending and borrowing, and if they started to reduce it now, it would plunge the economy back into a nasty recession. I have some simple questions for them about that. If all this public spending and borrowing is so good, why is our economy still in recession, as the Chancellor admitted from the Dispatch Box? Why is it the only main economy in the world that is not out of recession? As they have made so much more of the matter and are borrowing so much more as a proportion of national income than most competitor and comparable countries, one would have thought from their analysis that we would be romping out of the recession ahead of the others. Instead we have been mired in it for all too long. Let us hope that we are now coming out of it. There is evidence of some revival in the private sector, which is most welcome.
Another problem that the Government have with their punk Keynesianism is the idea that all this spending is somehow not getting in the way of borrowing and spending in the private sector, which of course it is. The only individuals and institutions in this country that can borrow on the scale that they want to at the moment are public sector ones. The Government have developed a sort of recycling machine whereby money is lent to the banks, who lend it back to the public sector, and the Bank of England prints the money just to ensure that the Government can afford to buy all the debt that they are creating to route through the public sector.
The Government have a public financing system on a merry-go-round of borrowing and buying debt, particularly using the publicly owned banks, at the expense of everybody else. The small business people I speak to in my constituency and elsewhere tell me that it is still a nightmare trying to get the borrowing that they need to carry out their business, let alone expand it. Individuals are still finding it extremely difficult to borrow money that they might want to start up a business or buy an asset that they could productively use.
My right hon. Friend stresses the importance of small businesses, which create local jobs for people who are unemployed. Once people are employed they pay tax, which goes into the Treasury, instead of living on benefits that come out of the Treasury, so it is a double whammy and a double benefit to the Treasury and the community.
I wish the Government would consider seriously the people who are unemployed and would like to set up a business of their own. They need access to bank credit, which they clearly do not have at the moment because of the distorted and broken banks and the regulation that is reinforcing that distortion. Those people also have a problem with the benefits system, and a good reform would be to make it easier for people to use the cover of benefit to get started. As my hon. Friend rightly says, we could then have a double win, because they would go off benefit altogether at a certain point and we would have tax revenue coming in as they started to pay themselves a salary or an income from their business. I hope that that point will be considered.
The Government are in a hole with their argument that all this public spending and borrowing is sustaining the economy, and that it would relapse without it. They have against them the problem of international comparisons, but also that of historical comparisons. If we look at recoveries from previous, rather shallower recessions in this country, we notice a certain common characteristic. Usually, the recovery got under way when the Government of the day admitted that they had a budget problem and took action to control the budget deficit through a combination of tax increases and spending cuts. In 1981, famously, quite big reductions were made in spending to curb the budget deficit, and from the day of the announcement of those cuts the economy accelerated away into one of its long and successful periods of growth. Something similar happened after the exchange rate mechanism disaster of the early 1990s. Again, it was when the Government got a grip on the deficit that we ushered in a very long period of expansion under two different parties.
Does my right hon. Friend agree that, in addition to the Government's historical problems, they have a current difficulty in that they seem incapable of securing the support of a single Back Bencher for the vital debate on the most pressing problem that faces this country? Only those Back Benchers who support the Opposition, not the Government, have spoken.
The right hon. Gentleman makes an interesting point about recovery from the 1980-81 recession. He will of course recall that, even after its technical end in 1981, unemployment continued to rise for three full years.
That is a sad truth. All of us who lived through that were miserable about it, but it was good that we started to recover. The evidence shows that cutting public spending did not impede, but enabled the recovery. I remind Labour Members of Conservative Front Benchers' main claim on that point: we do not recommend spending cuts because we want to cut spending; we have come into politics because we want good public services-obviously, all politicians like to be involved with success in public services-but we believe that cuts are now essential because of the interest rate threat, which my hon. Friend the Member for Tatton correctly identified.
The reason that Governments had to make cuts-and, in some cases, provide for tax increases-to get out of previous recessions was that, if they had not controlled the deficit, the deficit would have controlled them. If we do not control the deficit, it will exact an extremely high price on the rest of the British economy in the form of much higher interest rates and rationed credit, when we need low interest rates for longer and a more plentiful supply of credit from the private sector to get the productive economy moving again.
Our problem is that we have a banking crisis and a crisis of over-borrowing. If we persist in over-borrowing in the public sector, we will not strengthen, but undermine or weaken the recovery. We will make progress more difficult, delay the necessary action and when the cuts-forced by market crisis, collapse of sterling or a bond crisis- eventually come, they will be more rapidly administered, more brutal and less well thought through. It is far better to plan and start to take action now so that the markets begin to say, "Ah, they are serious; they understand it. We can give them a bit of time because we now know that they want to get on with it."
If we constantly repeat, "Tomorrow, tomorrow-mañana, mañana", the markets will not believe a word we say, our interest rates will continue to rise, as they have done in the past year, and our currency will continue to fall, as it has done in the past year. The Economic Secretary appears to think that that is funny. He should wake up to the reality over which the Government are presiding. Interest rates should remain low-we do not want them driven higher by market movements. Our currency is being driven lower, and we need a floor in sterling before the situation gets out of control. I hope that the Treasury sees the need for that. It would be good if it could persuade the Prime Minister-the First Lord of the Treasury-that he also has some duties, and that he does not fulfil them by tarting up a few words as a Fiscal Responsibility Bill. He has the power to instruct the Government to start to tackle the problem.
Apart from the absence of Labour speakers, the interesting point about the Government is the absence of any commentary on how they might start to control the deficit by controlling public spending. Let me begin with an observation and then make an unpopular comment. A substantial reduction can be made in the number of people employed in the public services while delivering a good level and quality of public service in crucial areas. We currently do too many things badly. The Government have recruited another million public sector employees in the past 12 years and they have not always chosen well the roles into which to put those people. Often, they have complicated and made the process of public service delivery less efficient by over-recruiting in the wrong areas.
The first thing I would do to try to tackle the deficit is put a control on all new recruitment. Every year, 5 to 10 per cent. of public employees leave, find better offers, retire, go off to have children and do not want to return to work. That means that the work force can be reduced quite rapidly over four or five years without compulsory redundancies and the costs and disruption they bring. If one has a strongly enforced natural wastage policy, one can give one's existing public employees much better chances of promotion and career development because some posts will need filling. They tend to be more interesting and better posts, so people can be accelerated into them and that can create a better life for them. We need to control our costs and do more with less. The biggest cost throughout the public services is that of labour.
Of course, we need all the teachers, nurses, doctors and uniformed personnel that we have-I am not talking about those front-line jobs. However, most public employees are not in those jobs. We can introduce better processes, ensure that we do more with less and simplify the tasks. If we simplify the regulatory system, we need fewer regulators; if we simplify the tax and benefit system, we need fewer people clerking and administering those systems. That is what we need to do. Any company would do it when faced with the need for cuts on a proportionate scale that the Government face.
Companies do not immediately ask, "How can I cut my most important service to the public?" or, "Can I close down all my shops to show that I'm in a financial mess?" or, "Can I get rid of all the key personnel so that I can do a really bad job?" Companies ask, "Which people can I do away with so that it's least damaging to the business? To whom can I give more authority and promote, who can then do more for less? How can I win more business with fewer people?" A company has to work like that, particularly in a global marketplace. For example, every year, manufacturing companies are normally asked by their leading customers to cut their prices because of the power of global competition. They therefore have to get on with delivering more for less. They cannot do that by skimping on quality; they must also improve their quality every year, otherwise competitors will do better for less.
My unpopular point is that Members of Parliament must show that we ourselves can do what I have outlined. As I understand it, the current expenses system budgets for every Member of Parliament to have three full-time staff. I think we can do our work with two. I do not want to be unkind to current colleagues, so I believe that we should say to all new Members of Parliament that they will get an allowance for only two full-time staff. Those who are already here can carry on with three-I do not know whether you, Mr. Deputy Speaker, employ three staff, but I do not, so I know that the work can be done with fewer-but when one leaves, the Members should move on to the system of two full-time staff. That is a minimal sacrifice that we should make to show the public sector that more can be delivered for less. A Member of Parliament can do a perfectly good job with two rather than three staff, and that makes a contribution. Armed with that moral authority, we can then approach the big parts of the civil service and say, "Look, this is what we're doing; this is our contribution, and now we'd like you to do something similar. We don't want you to take out one in three-perhaps one in 10-but we need to act to make an impact on this huge deficit."
Let us consider pensions. Members of Parliament, unbeknown to the public and unbeloved by them, have already worsened the terms of our pension scheme for everybody who is here. We have to make bigger contributions and there has been some dilution of the benefits-rightly so because the costs were large and the deficit was getting out of control. We are therefore contributing to tackling the deficit. I think we need to go further, and to say to new MPs that like all private sector schemes, the MP scheme is closed to new Members. We have to work our way through our pension problem in exactly the same way that people are working their way through many private sector problems-they have realised that they are not affordable any more, and that they have to make cheaper arrangements for new staff. We are going to have to do the same in many public sector pension schemes that are far bigger and more important than the MP scheme, but it is important to do it first for that scheme, so that we lead by example and have some moral authority when we come to tackle the problem.
There are many other ways in which we could start to curb the deficit. I have no intention of repeating speeches that I have made in the House before and of naming individual programmes and areas of work that I would like to see discontinued, such as the identity card and regional government agenda and so forth, which we could simply abolish and scrap. I am pleased to say that there are many such schemes that could be scrapped, which would start to fight the deficit.
The issue of process is terribly important. The public sector in Britain must learn to do more for less. It must learn to raise quality every year and to cut the price every year, which is what organisations in the private sector must do year after year if they wish to be successful. It is not impossible. Indeed, one of the joys for any new Government is that they will inherit such an inefficient mess that the early improvements in efficiency will be relatively easy. It is far more difficult to take over a company that has been through 10 or 20 years of such processes because the obvious, low-hanging fruit will have been taken-as private sector people would say, the obvious inefficiencies will have been squeezed out. A new Government will have many inefficiencies to squeeze out. They will have to be bold and strong and do such things in a sensible time scale and in a way that does not disrupt the rights and loyalties of existing staff. I think that can be done, and it will begin to curb the deficit.
This afternoon and this evening is, I am afraid, a waste of time and money. Parliament stands ready to do something serious, and the Government deliver a nonsensical Bill to bind themselves or their successor in a way that is not binding and incurs no penalties. What we need is a Government who know how to run the public sector. We need a Government who understand that the world does not owe us a living and that it is moving on rapidly. We need a Government who understand that industry and Governments elsewhere are far more efficient and smart, and far more able to do more for less. This Government seem not to understand that.
If we do not wake up soon, we could have a currency crisis, a bond crisis and a public financing crisis. We might then have a public sector management crisis because cuts done in panic, on a big scale and too quickly, could be very damaging. If we put the processes in place now, we might start to get confidence back and we would begin to curb the deficit earlier, which is what we need to do.
It is a pleasure to have the opportunity to contribute to this debate. I suspect that many of the speeches that we have heard so far will be the kind of thing that we will be hearing in debates over the coming months as we go towards the general election.
I will not be able to support the Government in a Division on Second Reading this evening, but for very different reasons than those others have outlined. I agreed with much of what my right hon. Friend Mr. Field said. He made a powerful speech and articulated very clearly the scale of cuts that we are facing, which I do not think the British people really appreciate at the moment.
In his helpful contribution, my right hon. Friend highlighted one powerful issue that we need to be aware of: the influence of market. Mr. Redwood and a number of others on the official Opposition Benches spoke about the influence of the market on decisions that Governments will make over the coming period, but the irony, which seems to have been lost, is that the markets put us in this position-there was a failure to regulate, but a completely irresponsible approach by the free market put us in this situation. In my view, the Government had no alternative but to take the type of action that they have taken in the past two to three years. The Chancellor was correct that there was no alternative to taking banks into public ownership and bailing them out, and to the fiscal stimulus.
One problem is that there is an over-skewing of our economy in favour of the financial sector. In Britain, much of the financial stimulus has gone towards the financial sector. Our manufacturing base has not had the type of financial injection it has had in some other countries. Perhaps they did not go through some of the experiences that we had in the 1980s and 1990s, when we saw the demise of so many traditional industries and the flourishing of the City and the financial sector. Obviously, at times, that has had benefits for us. I am not in any way trying to minimise the huge financial input that the City and the financial sector have had into this country, but they have put us in difficult situations in the recent period.
I cannot support the Bill because of the scale of public sector cuts that will be required if it is implemented. I am simply not willing to vote to cut essential services for some of the poorest people in this country. We need to have a massive debate not only on why we got into this situation and how we ensure that it does not happen again, but on how we deal with the deficit that we face. In peacetime, Britain has never before faced such a deficit. We have only had to deal with such situations during times of war.
I do not defend every penny that the public sector spends. Anyone with an ounce of sense realises that the public sector does not do everything in the most efficient way, and some things could be done more cheaply, although in some cases more money needs to be spent to provide a better service.
Each situation needs to be looked at on its merits. With the banking sector, there was no alternative, because if the banks had collapsed, the economic situation would have been much worse, given that the economy depends on them. I would have welcomed greater support from the Government for the manufacturing sector, and I will support any such provision in the times to come. The retail sector is in a slightly different situation. There is a long-term argument for retaining a steel industry and other parts of the manufacturing sector, because we will rely on them in years to come. Once we lose those sectors, they will be very difficult to recreate. Those of us from the north and Scotland-the more industrialised areas-know of the proud industrial traditions of this country. We were at the forefront of manufacturing and development, but that is no longer the case in many sectors of the economy.
Mr. Redwood talked about substantial reductions in public sector jobs. If we are to follow the advice of all the Front-Bench teams, especially of the official Opposition, we will see substantial cuts in public sector employment, which will have massive economic implications, especially in those parts of the country that are more heavily reliant on public sector jobs. As has been pointed out, if jobs are lost in the private sector, tax revenue is lost and we no longer have the benefit of the production by that individual. But the same is true in the public sector. There is a huge cost to the state in the loss of employment in the public sector and, at a time when we have to be alert to the risk of growing unemployment, any solution that involves cuts in public sector jobs is a very short-term approach.
In recent months we have had much debate about the possibility of a double-dip recession, and that is a genuine risk. It is difficult to predict when we can start to consider how to reduce the deficit, and that is one reason why I feel it would not be helpful for any Government to have the restraints in the Bill placed on them. No Government, of any political persuasion, would have been able to predict some of the economic experiences that we have had in the past three years. As a Labour MP, I do not want to see my Government constrained in that way. I want Ministers to be able to respond to events, use their judgment and do everything that they can to protect the British economy and the British people. Therefore, as a matter of principle, I am not convinced that a Bill is the most helpful approach.
However, the real reason why I feel unable to support public spending cuts of this nature is the types of cuts that they will likely mean to some essential services. I have voted against various Government proposals that have amounted to substantial public expenditure, including Trident replacement and the identity cards scheme, and I believe that there will be a range of other Government initiatives, such as the NHS computerisation programmes, that perhaps we should look at as well.
I am not saying that there are not areas of public spending that very legitimately we need to look at. Of course, we are currently embroiled in overseas armed conflict. I have never voted in the House on those issues because there have not been any votes since I was elected in 2005, but before I became an elected representative in this place I marched against those conflicts. We need to have a serious discussion about our society's priorities and values. My concern about the Bill is that yet again the poor will pay the price when those who have the power and run the show make mistakes. Bizarrely, over the past one and a half to two years, the debate has gone from being about the mistakes made by those running the banks to how we can most effectively and severely cut public spending, and of course it will be my constituents and those of every Member in this House who will pay the price.
I understand the reasons for the Government's stance. However, over the coming months we must be extremely careful in our approach towards the public sector, particularly education, health and the other essential public services on which the most vulnerable in society rely. Many of those services have been fought for by individuals and communities generation after generation, and if we start down the path of closing community halls, libraries and other services, they will not come back easily. I would like injected into this debate a discussion about not just cuts, but our society's values, and we need to say very clearly that it is not those at the bottom of the heap who have got us into this mess. As we move forward, we must also say that it is our role as elected representatives to ensure that they are not the people who pay the price.
I do not want to repeat what anyone else has said, but this is a profoundly pointless piece of legislation, because one would have imagined that the job of any Government at any time would have been to ensure fiscal responsibility and sound public finances all the time. One would not imagine that the Government would need a law to tell them to do that, and certainly not a law that will enshrine on the statute book, if it gets that far, deep and savage cuts-cuts that this Labour Government have already planned. An £800 million budget cut has already been announced for Scotland.
Only this Government, I suspect, could be so foolish as to lay out very broad and deep public spending cuts before we have a sustained and sustainable economic recovery from the recession. Only this Government, I suspect, would carve them into stone on the statute book, at a stroke sucking out the consumption and demand that has propped up the economy in the past little while and which is almost certainly necessary to ensure a further and sustainable economic recovery.
At its heart, the Bill is also dishonest. Although it is fundamentally about deep cuts-as I said, an £800 million cut to the Scottish budget has already been announced-the Government have refused to publish or carry out a comprehensive spending review. That means that we do not yet know the implications for every single one of the UK's spending Departments. We are therefore having this debate in a vacuum, without knowing the implications for ordinary people and ordinary services or for the economy more widely-the very point that Ms Clark made. It may be those at the bottom of the pile who will pay the price for this Government's economic failure.
The absence of both a comprehensive spending review and an understanding of what the cuts really mean make a mockery of the explanatory notes. Mr. Browne, who speaks for the Liberals, mentioned this earlier, but paragraph 31 says:
"There are no significant financial effects of the Bill."
He seemed to agree with that, but I disagree entirely. There are massive financial implications for every UK spending Department and, potentially, for almost every piece of public investment. There are also implications for, in the first instance, the incomes of tens of thousands or hundreds of thousands of public sector employees who will lose their jobs and, in the second instance, private sector employees, as expenditure in local communities is reduced, as the cuts begin to bite on public sector income and the spending power in local communities. There are also massive financial implications arising from the increased social protection costs as people are paid off as a direct consequence of the cuts.
Do the Government not understand that it was only increased Government consumption-up 2.2 per cent. last year, at a time when household expenditure fell by 3.6 per cent., when total business investment was down by 22 per cent. and when gross fixed capital formation was down by 17 per cent.-that kept the economy afloat at all? Do they not understand that to begin the process of deep and savage cuts now, before the private sector has the confidence to spend and invest, and when credit for businesses and individuals remains incredibly difficult or expensive, is economically stupid? That is the economics of the madhouse. The measures-the Labour cuts-therefore not only put faltering economic recovery at risk but, as the hon. Lady said in her speech, run the risk of pushing the economy into a double-dip recession, which is something that I know the Treasury is concerned about. I am therefore at a loss to explain why they are introducing the measures today.
As an aside, I am also at a loss to say where the Chancellor is. There were only two, very modest financial measures in the Queen's Speech: the Financial Services Bill and the Fiscal Responsibility Bill. Both are small and modest-indeed, this one really does not matter-yet the Chancellor is not even here to listen to this short debate, on one of only two financial measures in the Queen's Speech.
Before embarking on this political dividing line of a Bill-that is all it is-this Labour Government should have learned the lessons of fairly recent history: the recessions of the 1980s and 1990s. The recessions of 1980-81 and 1990-91 lasted for five quarters. This recession has already lasted for six. The declines in GDP then were 4.7 and 2.5 per cent. respectively. This recession has already taken our GDP down by 5.9 per cent. The economy took two full years after the technical end of those earlier recessions to reach the point at which the GDP recovered to pre-recession levels. As I said earlier to Mr. Redwood, it took three years before unemployment stopped rising after the technical end of the recession in 1981 and two full years before it stopped rising after the technical end of the recession in 1991. In the absence of the clarity that a comprehensive spending review would give, the scale of the cuts envisaged by the Bill and the PBR run the risk of replicating, or worse, the human cost, as well as the economic danger, of the 1980s and 1990s recessions.
I have been a critic of the deficit and the debt levels since before the recession and before the banking crisis. Going into the recession, I said that there was nothing in the tank, because our debt at that point was around £500 billion and due to rise. I want the deficit and the debt to be reduced, but there are alternatives to what the Government propose in the Bill. When the New Zealand Government introduced their Fiscal Responsibility Act 1994, they did so on the basis of five important principles. I shall go through them briefly. The first was that Government debt would be reduced to a "prudent" level. That principle acknowledged that the existing level of Government debt was too high-as it is here-and that the Government needed to run operating budget surpluses for a period of time to reduce the outstanding debt and the annual deficits. They talked about a "prudent" level, not about an arbitrary 50 per cent. cut in order to be able to afford an artificial political dividing line.
The second principle was that, once debt was reduced to a prudent level, the New Zealand Government would seek to maintain a balanced budget on average over the medium to long term. They did not seek to do so over one economic cycle, in which the Government would change the start and end dates to make the cycle fit the numbers, or over a single Parliament. They sought to achieve their aim using an average over the medium to long term. That was very sensible. If the Government here were to adopt that principle, they would still be able to invoke counter-cyclic measures in the midst of an ongoing debt and deficit reduction programme, if we were to hit a further significant downturn. The automatic stabilisers would kick in safely, and we would have the ability to use fiscal stimulus measures, if they were required, while we stuck to a medium to long-term objective of bringing the debt and deficit down to a prudent level.
The third principle was that the New Zealand Government would achieve and maintain a level of net worth that provided a buffer against unforeseen future factors. That principle recognised that factors other than explicit Government debt-such as public service pension liabilities or bank deposit insurance such as the asset protection scheme-have an impact on the fiscal position.
The fourth principle was that the Government would manage fiscal risks prudently. That called for attention to be paid to all fiscal risks, such as shifts in the demographic structure of the population and off-balance sheet state guarantees. This Bill, however, is a blunt measure to camouflage risky and damaging cuts, and it says nothing about prudent financial management.
The fifth principle was that the Government would pursue policies that were consistent with a reasonable degree of predictability in regard to the level and stability of tax rates for future years. That principle recognised the importance of tax stability for private sector planning and growth. Although this Bill is called the Fiscal Responsibility Bill, it says nothing about the important matter of tax stability.
"if it's the right time", which was meaningless nonsense to avoid saying yes or no. There might be a Budget in the spring, but there will be no time for a Finance Bill to consider its tax implications. There will almost certainly be an emergency Budget closer to the summer, but that will cause further uncertainty and delay. We are already seeing further tax rises, more tax changes and more tax uncertainty, all of which risk discouraging the investment that we need in order to grow the economy. Growing the economy is the real key to tackling the deficit and ending the debt, but the Bill says precisely nothing about that.
I heard the Chancellor's rhetoric earlier, but when I looked at the Bill, I wondered whether he was talking about the same piece of legislation. I also wondered, when I heard him justifying some of the measures, whether he was on speaking terms with the Prime Minister, who said on
"you cannot cut your way out of the recession".
"The only way forward for this economy at the moment is to maintain the fiscal stimulus".-[ Hansard, 21 October 2009; Vol. 497, c. 906.]
In The Daily Telegraph on
"it would be suicidal to put recovery at risk by suddenly cutting".
"What sense does it make to withdraw the fiscal stimulus now...?"-[ Hansard, 28 October 2009; Vol. 498, c. 279.]
He is, of course, the Prime Minister of the only serious economy in the world that does not have a fiscal stimulus package any more. As recently as
"Lord Mandelson has raised the prospect of an age of austerity in Britain under Labour, with spending cuts... running right the way through to 2020."
What we are seeing today is the enabling legislation to do that.
The Government appear to be determined to risk economic recovery by withdrawing the lifeblood from the economy before we have a sustained and sustainable recovery. I believe that they will pay the price for that at the ballot box, but that will be of little comfort to the hundreds of thousands of ordinary people who will pay the real price for Labour's economic failure and this inflexible Bill.
I want to see the deficit and the debt cut, but I want to see that done from a position of a sustained and a sustainable economic recovery. I conclude my remarks by saying that if anyone thinks that tackling the deficit and then the debt will be difficult from a position of sustained and sustainable recovery-and it will be; there will be tough choices to make-it will be absolutely impossible from a position of faltering recovery or a double-dip recession or one that will require the kind of swingeing cuts that other Members have spoken about, made in a knee-jerk and panicked way. That is something that none of us wants to see.
I tell the Government that we will oppose the Bill today and bring forward amendments in future stages. The attempt to tackle the deficit and the debt must be done in a flexible way that protects genuine front-line services and allows the deficit and the debt actually to be reduced from a position of real growth, rather than having the whole economy butchered simply to create an idiotic dividing line between two parties in the run-up to an election that the Prime Minister does not even have the guts to call.
I congratulate the hon. Members for North Ayrshire and Arran (Ms Clark) and for Dundee, East (Stewart Hosie) on breaking the ice on the consensus in the debate on this cold winter evening. It is important to talk about the economic implications of the Bill.
In reality, what we have seen over the last 18 months or so has been a socialisation of the bad debts that were created on the banking books as a result of huge leverage and excess capacity within the debt markets, making it inevitable that the Government would transfer those debts into the public sector. It would have been completely irresponsible for any Government not to have acted in that way. In respect of the current Bill, however, running down that socialisation of bad debt in a compulsory fashion could lead to very significant economic damage for our country.
The dangers of having a double-dip recession are real. My own professional experience involved spending a great deal of time working for Japanese financial companies, but the last thing I would like to see is our country suffering the 20 years of economic turpitude that that country has faced. If we take away the ability to use proper fiscal stimulation, there may well be real problems.
There are many clouds over the economy. VAT is going to increase, for example, and internationally, US housing is still in great difficulties. Only last week, the US Government found it necessary to give another bail-out to GMAC. There are weaknesses in other economies. French consumer confidence was unexpectedly down today, while there are tremendous weaknesses among our European partners, particularly in Ireland and Spain. We must also remember that for our own economy, manufacturing production is down almost 11 per cent.-10.8 per cent.-over last year and the service economy has contracted by 4 per cent.
In considering the Bill, we should bear in mind the tremendous fragility in our economy. Many pressures-well-meaning pressures-were exerted for banks to be required to put a significant amount of extra capital on to their books, but in the coming years that would inevitably result in continuing severe restrictions on the ability of private sector banks to give stimulative support to our economy, and in such circumstances it is important to maintain full fiscal discretion.
There are real questions to be asked about whether quantitative easing is an appropriate tool, but there is no doubt that if we withdrew it, the need for fiscal stimulation would become ever more important. We must bear in mind just how significant the removal of credit from the economy has been as a result of the financial crisis. A substantial amount of that credit came from financial organisations that were not banks. There was a heavy reliance on short-term borrowing from the financial markets-perhaps, in the UK economy, the equivalent of £240 billion of credit stimulation. The £200 billion of heavy gilt issuance represents only one part of meeting the amount of credit creation that has been withdrawn from our economy, and a severe reduction in fiscal stimulation could lead to significant troubles for it.
Much reference has been made to history in today's debate. Members have mentioned, for instance, the crisis that followed the post-war period. It should be remembered that the success of the recovery in Europe was the result of a considerable fiscal stimulus on the part of our United States partners in terms of the recapitalisation of Europe. Members were making false assumptions when they cited that period to justify significant reductions in fiscal spending now.
I think that the danger of a crisis in the bond markets has been greatly exaggerated, in terms of their ability to absorb significant issuance of United Kingdom Government debt. Mr. Field recalled that in the 1980s the Swedish Finance Minister greatly resented having to come to speak to young people in the City, and to justify why people should buy Swedish debt. I was one of those young people in the 1980s, although I am less young now.
There is no doubt that the power of the bond markets is very important. I remember a senior financial official in the Reagan Administration saying that if he were to be reincarnated he would want to be reincarnated as the bond markets, such was their influence and strength at the time. I believe that, particularly if there is a significant reduction in Government spending, banks will be keen to buy issuance from Government-they are being pushed in that direction by regulatory change-but if we move too quickly to remove fiscal stimulation, the only productive area in which banks will invest will be gilts, because the return from them will be significantly higher than that provided by other potential investments or lending in the United Kingdom economy.
If I wanted to be particularly controversial, I would say that the UK Government's triple A rating does not really exist any longer within the capital markets, as the credit level is treated as being below that. There is a danger in us, as politicians, regarding that as absolutely totemic. This is obviously a matter of great historical departure-other than, potentially, on some war bonds, our country has never defaulted-but being rated double A-plus would not be such a severe challenge. Many other G7 countries have gone through such change.
Mr. Tyrie made the most pertinent point when he said that the debate is also about our credibility as politicians. Legislating to deliver a promise weakens the position of politicians because it implies, or even states, that any other promise that politicians give which is not backed by legislation is inevitably of a lower calibre. This highlights the way in which politics has become so debased that legislation comes to the House purely on the merits or demerits of making a particular point with the media.
Unfortunately, as the hon. Member for North Ayrshire and Arran has pointed out, the type of restriction involved could be very severe in terms of public services dislocation and the lack of discretion that politicians would have in future. I cannot see the sense in both of the main political parties, which have for so long emphasised that they like the flexibility that this country enjoys because it is not part of the euro, wanting to move on and suggest that our country can do well and prosper if our politicians are straitjacketed by a restriction on their future discretion to make judgments about appropriate economic policy. In reality, if we needed, through economic policy, to have a higher rate of fiscal stimulus than that required by the tapered approach to reduction in the annual public deficit, we would probably-as has happened in the past to meet the European 3 per cent. of gross domestic product borrowing requirements-have a system of obfuscation and using different means of private finance initiative to hide real Government borrowing. As a result, we would end up further undermining our credibility as politicians. We should have the confidence to be straightforward with the electorate about the requirements of Government and about our finances.
I agree strongly with the comments that my hon. Friend Bob Spink made in an intervention on the Chancellor. It seems reasonable that the approach to politicians' pay should be the same as that in the private sector. If the Government are determined to put the Bill through Parliament, and if they think it is important, perhaps there should be performance-related payments for the Chancellor if he hits targets. Let the Bill have real bite if they think it is important. There is no point in passing legislation with no sanction or incentive of any kind for the Chancellor regarding the proposals.
Let me address the Opposition's amendment. Initially, I decided not to support it because I think it is important that politicians should feel that they can deliver results by their actions rather than through legislation or the setting up of alternative quangos. However, I think that the amendment is written in such a way that there is sufficient flexibility to allow those of us who are not members of the Conservative parliamentary party to support it. In particular, this House would be strengthened if the opportunity were taken to set up an independent Budget office, similar to the one in Congress, to look at how the Government are performing their fiscal and debt management.
Such a body would revitalise this place's ability to hold the Government to account about their finances. This House's inability to do that on taxation issues has been a long and unfortunate tradition in this House, although the Public Accounts Committee has done extremely well in its endeavours to look at whether Government money is well spent.
In conclusion, this Bill will place our country and politicians in such a fiscal straitjacket that our very prosperity will be put at risk, and it is being done on a mere whim. The Government are playing to the media, and trying to create false division lines between the two main parties represented in this Chamber.
I am pleased to have an opportunity to contribute to this debate, on what is the first parliamentary day of the new decade. It is also the first parliamentary day of the final year of this Parliament and, I hope, of this Government. Change will undoubtedly come this year, in that it has to be an election year.
As previous speakers have noted, the election is at the heart of this Bill. That observation has not been confined to politicians in this Chamber, as it has been made by outside commentators as well. In its commentary on the pre-Budget report, Goldman Sachs wrote:
We will have to wait and see whether Goldman Sachs is right about the spring, but the sentiment reflects what the Bill is all about.
I want to add my voice to those who have spoken in the debate and declared this to be an utterly feeble Bill. The only support for it has come from those on the Government Front Bench. It is one of the thinnest pieces of legislation that I have seen since I arrived in the House nearly five years ago, and it has quite properly been ridiculed-by the shadow Chancellor in particular, but also by every speaker other than the Chancellor himself.
No other issue is more significant, or a greater plank in the Government's own election planning, than sorting out the public finance deficit that this country faces after 13 years of Labour mismanagement. There is no bigger issue facing the country, or for voters to consider at the coming election. No difference between the Government and the Opposition is more striking than their respective approaches to dealing with this matter: the Government are clearly divided, and the Opposition are clearly united.
We could not have illustrated that better had we, as the potential Government in waiting, planned today's debate and set out the approach to be taken by Labour Members to supporting their own Government's legislation. They have not followed that approach. I said earlier that, apart from the Chancellor's, only one speech had been made from the Labour Benches, but now there have been two. Both speakers have said, in terms and at the outset of their remarks, that for very different reasons they would not be supporting the Bill.
There has not been a single speech in support of the Bill. That shows more clearly than we could ourselves the truth of the shadow Chancellor's allegation in his remarks that there is division at the heart of Government over how to tackle the deficit. As we have all acknowledged, I think, that is the critical issue that the country faces at present.
So given that lack of interest, I have to ask why the Government business managers have decided to rush the Bill through the Committee stages on the Floor of the House. The obvious answer may be that they need to get the Bill through quickly to have it on the statute book ahead of a general election, which may be called in early or late spring. But that is too simplistic an answer to my question. I think the simple fact is that the Bill will not be handled in Committee, where evidence sessions could be taken, because the Government are incapable of finding anyone to call as a witness to support the Bill. The evidence sessions would merely give grist to the mill of the Government's opponents on their own Back Benches and on the Conservative Benches in pointing out what a perfectly frivolous and ludicrous piece of legislation we have before us. In short, we are not dealing so much with solutions to a credit crunch. The Government are trying to deal with solutions to a credibility crunch.
The Government have form on the issue of fiscal stability. In his famous, or should I say infamous, Mansion House speech in 1997 the present Prime Minister, then Chancellor, set out his fiscal rules-his first attempt to provide an aura of credibility for his approach to the public finances. He said:
"We will introduce tough rules for government borrowing."
A year later, he told us:
"I will never let the deficit get out of control. We will not spend money we have not earned."
Well, we all know what happened to those fiscal rules. The goalposts were moved as soon as it looked like they might be missed.
The commentators at the Institute for Fiscal Studies spelt out in their 2007 Budget briefing:
"The perception that the Chancellor has moved the goal posts and has delayed the tax raising measures and cuts in spending plans that we and other independent commentators had been saying would be necessary until after the 2005 election undermines the credibility of the fiscal framework."
The measures were obviously dropped.
What is the impact of that lack of credibility when it comes to dealing with the current state of the public finances? We have heard from other speakers this evening about the impact within the market. Mr. Field drew analogies with the run-up to the second world war, clearly with an eye to securing an impact in the media. The impact of the lack of credibility is extremely significant. It is not just the credit rating agencies, which have put the UK sovereign debt on informal credit watch. It is not just the market commentators, who are saying that the Bill will do nothing seriously to address the debt-to-GDP ratios, which must fall faster. The Governor of the Bank of England himself has said that the deficit needs to be reduced much faster than is proposed in the Bill.
Apart from the commentators, the markets themselves are telling us that we are getting perilously close to an apocalyptic scenario. Let us look at the three market measures that are most regularly used to compare this country's public debt with that of our international comparators. We can see that the UK is in a perilous position. In the gilt market-which includes the impact of currency, so the measure is not the most directly relevant-the yield on medium-term gilt is up 43 basis points since
We can look at inflation-linked bonds, which remove the differences in inflation between countries. Since
Is some of that movement in basis points to do with the market discounting the heavy prospective issuance of debt that is coming, particularly in the US and the UK? Reference was made earlier to PIMCO, which has invested heavily in Government bonds and has taken the view that the UK and the US are particularly difficult investments at this time.
That helps to explain the differential rates in different countries. I am trying to draw out the significant increase since this Bill was first referred to in the pre-Budget report, to show that the markets have no faith in it as a means of trying to reduce the public finance black hole the country finds itself in.
The third measure is credit default swaps, which take out the currency risk because they indicate the premium this country would have to pay should it raise debt in other currencies. Here again, the issue is stark. The UK credit default swap rate today is 83 basis points, up 12 since
Where does that place the UK when competing for finance internationally to fund our deficit? A table helpfully produced by the House of Commons Library showing 2009 Government borrowing as a proportion of gross domestic product for OECD countries rates the UK as third worst. Only the economies of Iceland and Greece are in a more precarious position, and the country that is closest to the UK is Ireland. We have all seen what has happened to their borrowing costs and the stark action that has had to be taken by all three of those countries to bring their public finances under control. The UK sits right in the middle of that bunch.
Quite apart from the challenges of funding the Government's spending over the coming years, given the public finance position we are in, the other significant worry is the impact the increase in rates will have on the rest of the economy-the whole private sector, whose borrowing costs are also priced off the so-called risk-free sovereign rating. There is no question but that the volume of Government debt is not allowing private sector credit spreads to contract. The simplest indicator is the continued wide spread of new mortgages. It is not the supply of credit to the household sector that is so much of a problem, but the price. The Government need to recognise that their action in failing to get to grips with the state of the public finances is spilling over and restraining growth in the private sector of the economy that they are so keen to support.
The Government's credibility is the key to understanding whether the Bill has any prospect of achieving success. We have heard from many other speakers this evening that the Government have no credibility when it comes to forecasting either their debt levels or GDP growth. The track record for their debt forecasting was well demolished by my hon. Friend the shadow Chancellor. As he said so clearly, in every Budget or pre-Budget report from the Chancellor and his predecessor, there has been a claim for debt reduction over a four-year period-as envisaged in the Bill-yet not once has it been achieved.
On the forecasting track record for GDP growth, the pre-Budget report assumes, first, that the economy will recover in a more dramatic fashion than we have experienced in any previous recession. Secondly, it assumes a consistency in growth rates that is unprecedented on two counts. It assumes a 3.25 per cent. increase in GDP for the four years starting next year. This is not only above the trend rate that the Government have presided over throughout the past 13 years, but it is a greater and more sustained increase than in any comparable four-year period of the Blair/Brown chancellorship. One can only assume that those forecasts were optimistic.
My final point on the credibility of the Government in their approach to the Bill relates to their actions. The Bill does nothing to restore faith in the Government's competence in administering the economy or to restore faith in the Treasury's competence. Let us take a recent example of Treasury competence to see whether the current Treasury team are the right people to monitor the reductions in the deficit envisaged in the Bill. Let us take the issue of the bank bonuses.
At the time of the pre-Budget report, the Government announced that they wished to get a grip on bank bonuses. Their objective, which was widely shared across the House, was to extend the period of deferral of bonuses to bank executives in particular, to ensure that they were not motivated to bet the bank's balance sheet, to put it crudely. Let us take as an example the largest financial institution over which the Government have some direct influence-the Royal Bank of Scotland, where the taxpayer is the largest shareholder.
The Government have proposed a bonus scheme for executives at the Royal Bank of Scotland that envisages payments over a three-year period-50 per cent. in year one, 25 per cent. one year later, and 25 per cent. a year after that. That is, broadly speaking, more generous than the current market norm, where deferred bonuses are typically paid equally in three instalments, rather than loaded to year one. Leaving that criticism aside, the other issue that the Government have completely failed to take into account when considering introducing a deferral scheme to Royal Bank of Scotland is that a large proportion of the senior executives at RBS who are transacting in the markets and who are therefore eligible for bonuses are former ABN bankers-the very bank that got RBS into the perilous state that it is in.
If we look at the bonus scheme that applied to those bankers-the current RBS executives who were formerly ABN AMRO executives-the Government's proposed bank bonus deferral scheme, far from extending the period over which they get paid their bonuses, will actually reduce it. Their scheme had a four-year deferral provision, whereas the proposed scheme has a three-year deferral. Not only have the Government introduced a more generous scheme in the one company over which they have some direct control, but they have exposed an issue in relation to the Bill-that is, what happens to a Government Minister who makes such a mess of an area for which they are responsible, such as the bank bonus deferral that I have just described?
What sanctions apply? Will such a Minister be fired or moved on? Who knows? That is highly unlikely. In this Bill no sanctions at all are proposed in the event that one of the targets is missed. As Martin Wolf suggested in the Financial Times to add to the ridicule of the Bill, a future Chancellor who failed to meet the targets might be sent to the tower of London. What chance of this Chancellor or the Minister accepting that as a suitable sanction in the event of failure of the Bill? Perhaps she might be able to tell us.
This has been a somewhat curious debate. I do not know whether there has been a precedent for such a Bill. The Bill was at the heart of the Prime Minister's party conference speech in 2009; it was the flagship economic Bill in the Queen's Speech; and it is the centrepiece of the Government's economic strategy to reduce the deficit. However, I wonder whether we have ever had such a Bill, because it has attracted not a single voice of support from Back Benchers on Second Reading.
I suppose that the Government might have hoped that in a time of crisis the country would unite around them as they set out to address the problem, but as it happens the Bill has managed to unite the House in opposition. The fact is that we have had only two contributions from Labour Back Benchers in the debate. I do not know where the rest of the parliamentary Labour party are tonight-they may be plotting, once again, if the rumours that have been reported this evening are true-but not one Labour Back Bencher could be prevailed upon to speak in support of the Bill.
Instead, we have had from Back Benchers a series of critical contributions. Mr. Field and his hon. Friend Ms Clark took somewhat different perspectives on the Bill, but they both opposed it. Stewart Hosie from the Scottish nationalists, Mr. Pelling from the independents, my right hon. Friend Mr. Redwood and my hon. Friends the Members for Chichester (Mr. Tyrie) and for Ludlow (Mr. Dunne) were all critical, too. Almost any speaker this evening could have uttered the words that we have heard used to describe the Bill, including "profoundly pointless", "frivolous", "a political prank", "an expensive press release" or "mere words", but we have not heard any words of support for the Bill.
Let us imagine the scene in the Treasury last year as preparations were made for the pre-Budget report. The public finances are in ruins and we are borrowing more than at any time in our peacetime history. For every £4 spent by the Government, £1 is borrowed. We are borrowing more than any other G20 country. The CBI, the International Monetary Fund, the OECD and the Governor of the Bank of England are all calling for a credible plan to reduce the deficit. The credit rating agencies have started to express their concerns about the UK's triple A rating, and the risks of failing to set out a credible plan are becoming clear in the markets, as my hon. Friend the Member for Ludlow so clearly set out. We even have the example of Greece, one of two OECD countries borrowing more than the UK, where confidence has been lost and it costs them an extra 2.5 per cent. on interest rates to clear Government debt. It is plain that without a credible plan, mortgage rates may go up and businesses will find credit hard to secure.
The challenge that the Treasury faced at the time of the PBR was to restore fiscal credibility, and what did we get-a clear acknowledgement of the scale of the crisis, details of departmental spending in the years ahead, a general sense of direction on how the deficit would be reduced, or even just policies to improve the dismal and discredited forecasting record of the Treasury? No, we got this Bill: a Bill that sets out targets but no enforcement mechanism-no sanctions if they are breached. That is not a credible response; it is a distraction policy.
Has my hon. Friend noticed that neither Labour Back Bencher who spoke in the debate has returned to the Chamber for the winding-up speeches as is traditional? Does he share my concern that the Labour Whips may be dealing with them at the moment-trying to re-educate them?
I am grateful for that intervention. I look forward to reading on tomorrow's blogs reports of the mobile phone conversation in which the Government's Chief Whip explains exactly what he is going to do. I believe that he has a habit of making such phone calls on trains.
This Bill is a distraction policy. The idea that the existence of a target somehow provides credibility in itself is ridiculous, even if it is a target devised by the people who brought us, and broke, the golden rule. I suppose that we should be grateful that there is some acknowledgement of the credibility problem, given that the Prime Minister is currently going through one of his bouts of total denial as to the need to address public spending in this area, but that is very little comfort.
Let us not ignore the intellectual confusion at the heart of the Bill, which has been brought out by several speakers, including my right hon. Friend the Member for Wokingham and the hon. Member for North Ayrshire and Arran-we hope that she is safe. It is not often, I suspect, that those two Members agree on much. Nevertheless, the point has to be made.
In the past couple of years, the Government have argued that nothing could be done to reduce the deficit until the recovery was well under way; that notwithstanding the record levels of borrowing, fiscal policy could continue to be used to counteract the recession; and that it was appropriate to have a discretionary fiscal stimulus through a temporary cut in VAT. Now, however, we have a Bill that means that from 2011 to 2016 borrowing must fall year in, year out, regardless of the economic circumstances and where we are in the economic cycle. Never mind the discretionary fiscal stimulus-this could preclude even the use of the automatic stabilisers, as my right hon. Friend the Member for Wokingham pointed out. Does that mean that the Government now believe that we have borrowed so much, and will continue to do so; that we do not have room for manoeuvre; and that once we are through a general election the fiscal levers will not be available for at least six years?
Does my hon. Friend recognise the problem that I have presented to my right hon. Friend Mr. Redwood and my hon. Friend Mr. Newmark? All three of us have argued for a long time that the Government's figures on net debt are simply not true. They are not giving the real picture to the British people, and they are not even giving the picture that the Office for National Statistics has given.
My hon. Friend raises an important point. One of the benefits of an office for budget responsibility would be that we could provide some credibility in exactly that area.
If, as the Bill implies, it will not be possible to use the fiscal levers from 2011 to 2016, that would appear to signal the complete collapse of the Government's position, which is that fiscal levers are a very important element of what a Government can do. One might ask why the born-again Keynesians on the Labour Benches will be walking through the Lobby in support of the Bill given that that is what it says, as they would know if they actually read it. To be fair to the hon. Member for North Ayrshire and Arran, she has read the Bill and she will not be walking through that Lobby; I wonder whether many of her colleagues will be joining her.
Alternatively, perhaps, as ever with Labour Governments, fiscal discipline will be there for as long as it is absolutely expedient, as in the case of the abandoning of the fiscal rules at the point at which they prove to be a constraint. The Chancellor gave us the answer earlier today when he stated that if there were a recession and difficulties in the economy, the Chancellor would simply have to come back and explain to us that the target was not going to be met. If that is really the case, then we have to ask what on earth is the point of the Bill.
If the Government genuinely wanted to increase the institutional pressures to reduce the deficit, they could have followed our policy and established an office for budget responsibility that could publish its own fiscal forecasts. We have heard several times today about the Treasury's failures in its own fiscal forecasts. It could make recommendations as to whether the Government would meet their stated objectives in reducing the deficit or whether further action was necessary, and of course it could be a much more sophisticated instrument than the targets set out in the Bill. As my hon. Friend Mr. Cash pointed out, the difficulties that exist and the use of the private finance initiative and other off-balance-sheet mechanisms have done little for the Government's credibility in this area.
Truth be told, whatever the Government propose at this stage, there is nothing that they can do to restore their credibility. This Government are to fiscal responsibility what Tiger Woods is to marital fidelity. The Chancellor had his chance to set out a credible path to fiscal responsibility-indeed, we read the leaks suggesting that he fought to put forward proposals that would have delivered something close to credibility-but the man whom we thought was unsackable was still too weak to stand up to the Prime Minister and the Schools Secretary, and yet again we had a pre-Budget report that did nothing to address the Government's lack of credibility.
The Chancellor could have set out spending plans that would have reassured the markets, and in doing so perhaps protected his own legacy, but he failed to do so. Instead we have this pathetic excuse for a Bill. As Mr. Clarke has pointed out, it is vacuous and irrelevant. At a time of crisis in the public finances, we need leadership that will rise to the occasion. We need a man with a plan, not a man with a stunt. If the UK is to have fiscal credibility again, there is one necessary condition. It is not this Bill, it is a change of Government.
In 1997 the Government established two clear fiscal objectives, which have been maintained since and will remain in place. The first is, over the medium term, to ensure sound public finances and ensure that spending and taxation have a fair impact within and between generations. The second is, over the short term, to support monetary policy to help smooth the path of the economy.
The financial crisis and the global recession have had a profound impact on the public finances, resulting in a significant increase in Government borrowing and, as a result, increasing public sector net debt. Those major economic shocks have hit every country in the world, and we have had to be flexible in our response to changing circumstances. As my right hon. Friend the Chancellor set out, our first priority was to provide support to the economy, which is why the Government undertook a fiscal stimulus to provide support when the economy was weakened. That stimulus and the effect of the automatic stabilisers are providing fiscal support totalling about 5 per cent. of GDP this financial year, which has helped limit the severity of the downturn and its impact on businesses and individuals.
The Government estimate that as a direct result of the fiscal stimulus announced in the 2008 pre-Budget report, GDP growth in 2009 will be about half a percentage point higher than it would otherwise have been. There were costs to stepping in, but not to have intervened would have been even more costly and burdened the economy over a much longer horizon. We have always been clear that the initial support must be followed by steps to secure sound public finances. Our fiscal stimulus was deliberately time-limited to increase its impact during the downturn and ensure sound public finances over the medium term.
Timing is all, and much of today's debate has centred around the timing of the consolidation. There have been contributions from my right hon. Friend Mr. Field, Mr. Tyrie, Mr. Redwood, my hon. Friend Ms Clark and the hon. Members for Dundee, East (Stewart Hosie), for Croydon, Central (Mr. Pelling) and for Ludlow (Mr. Dunne). Some hon. Members complained that we were not going fast enough, and others that we were going too fast.
I cannot speak for Back Benchers who may not have been able to get here in time to speak in the debate. [Interruption.] The proof of the parliamentary Labour party's support will be in the votes for the measure.
The Government will not withdraw support too quickly. Tightening fiscal policy too quickly risks jeopardising the recovery, which would result in the deterioration of the fiscal position. The Government will therefore ensure that fiscal policy continues to provide support to businesses and individuals in the early stages of recovery.
We must look at things in a wider context. We should remember that unemployment in this country is not as high as in other countries. We must examine all the factors.
When the economy is better placed to support a more rapid tightening, fiscal policy will shift towards consolidation. Well-timed and planned fiscal consolidation will support economic growth during the recovery. In line with fiscal objectives, the Government's fiscal strategy is threefold.
First, we will base policy decisions on a realistic fiscal forecast, based on a range of assumptions, some of which are designed to provide caution for uncertainty. Secondly, we will ensure that the fiscal policy framework is set to deliver the Government's fiscal policy objectives. To that end, the Government have introduced the Bill. Thirdly, we will set out a credible plan to deliver sustained consolidation in the medium term to ensure sound public finances in a time frame that is consistent with economic recovery and growth. In line with that, the pre-Budget report outlines plans to more than halve the deficit in four years, and the fiscal consolidation plan included in the Bill embeds the deficit reduction. That is the sharpest reduction in the budget deficit of any G7 country.
I sympathise with the Exchequer Secretary's plight this evening. She says that the Government aim to have a credible policy. How credible can it be when a heavily whipped parliamentary Labour party cannot produce one Back Bencher to speak in favour of it? No wonder the Chancellor is desperately whispering in her ear. It is a night of humiliation for him and for the Government.
I have no need of sympathy from the hon. Gentleman.
As the economy emerges from recession, and exceptional uncertainty recedes, the Government believe that it is appropriate to strengthen the fiscal framework. That will support the recovery and is in line with international action. As Governments around the world work together in response to the downturn, many other countries are now choosing to strengthen their fiscal frameworks. Indeed, the International Monetary Fund has highlighted fiscal responsibility laws as a way in which to buttress fiscal adjustment following the financial crisis by strengthening institutional arrangements. The Government have chosen to enhance the fiscal framework through the Bill. The measure will help businesses and investors make long-term plans with confidence about the future fiscal position and the financing environment.
We are not immediately withdrawing our fiscal stimulus package-I am sure that that will be debated further in the pre-Budget report debate on Thursday.
I want to make some progress, then perhaps I shall give way if there is time.
The Government have set out measures to reduce borrowing by £57 billion by 2013-14 and to contribute to more than halving the deficit over four years. The Bill embeds the deficit reduction in legislation and also sets further targets to reduce the deficit in each year to 2015-16 and to have the national debt falling in that year.
I cannot remember whether the hon. Gentleman was here for the Chancellor's opening speech, but he dealt with that point quite closely- [ Interruption. ] I will repeat it if the hon. Gentleman wants me to. If there were an unprecedented situation, the matter could be looked at again, but we are setting out a plan for a reduction in the deficit and further targets to reduce the deficit in each year.
The plans contribute to ensuring sustainable public finances in the medium term, and I do not think that placing them on the statute book is a distraction. Legislation provides certainty and stability, and we are giving Parliament a new role in both setting and monitoring the Government's fiscal plans. In particular, Parliament must approve fiscal plans before they become law, which is a significant evolution of the extent to which the Government are held to account for their medium-term fiscal policy.
I was going to come to that later in my speech, but given the number of interventions, I might not get there. The legislation requires explanation of key terms to be set out in the code for fiscal stability. The Chancellor has stated that that will be published in draft in advance of Committee to allow for scrutiny. All definitions and fiscal aggregates used in the Bill will be national statistics, produced by the independent ONS, using European and internationally accepted methodologies.
I am not going to give way because if I do, I will not get to the end of my speech.
The International Monetary Fund has set out that the strengthening of medium-term frameworks, including through fiscal responsibility laws, should help to support the fiscal adjustment that will be necessary in most economies following the financial crisis. The Bill is therefore a crucial part of our fiscal strategy, binding the Government to deliver on the tough decisions we are taking to more than halve the deficit over four years and to get debt falling.
The Bill builds on, and significantly enhances, the existing legislative underpinnings of the fiscal framework. It requires the Government to set out at all times a legislative fiscal plan for delivering sound public finances. That must be approved by Parliament before it becomes law, and the Bill places a binding duty on the Government to meet the plan.
Given that less than two years ago the Chancellor forecast that the deficit this financial year would be £38 billion, and that instead it has turned out to be £178 billion, why is the Minister so confident that her right hon. Friend is able to predict what the economic circumstances will be in 2016?
Maybe the hon. Gentleman missed it, but there has been a global economic crisis since then.
Fiscal plans cannot be changed except with the approval of Parliament through new legislation. That demonstrates the Government's commitment to delivering consolidation-
I think that that is the most unlikely thing in the world.
The fact that the fiscal plans cannot be changed except with the approval of Parliament through new legislation also demonstrates the importance the Government place on action to ensure sound public finances in the medium term. The Bill makes the Government accountable to Parliament for meeting their fiscal plans and creates a new scrutinising role for Parliament in relation to both progress towards and compliance with them. That is a significant evolution of the extent to which the Government are held to account for their medium-term fiscal policy. Parliament is the right body to hold the Government to account for their plans for tax, spending and borrowing.
The Government are required to account to Parliament through regular progress and compliance reports, which will be produced alongside Budgets and pre-Budget reports. Progress reports must set out the progress that has been made towards compliance with the plans. If targets are not met, the Treasury must set out for Parliament why not. The revised code for fiscal stability will set out that the Treasury must also report on what it will do to remedy the situation if targets are not met. These measures represent a significant evolution of the extent to which the Government are held to account for their medium-term fiscal policy.
As the Chancellor noted, the Government do not consider that an office for budget responsibility-as proposed by the Opposition-is the right solution to the challenge we face. Establishing a new quango would not enhance the fiscal framework. Instead, it would risk undermining the role of Parliament in scrutinising the Government's fiscal plans. Introducing blurred lines of responsibility for forecast and policy-making functions risks damaging accountability: policy-makers would be acting on forecasts for which they were not fully responsible. It is Parliament and Parliament alone that is best placed to hold the Government to account for their plans. They should have ultimate say in matters of tax, spending and borrowing.
Further, evidence does not suggest that outsourcing the forecast would improve its accuracy. The Treasury's fiscal forecasts since 1997 have been marginally more accurate than the forecasts for the UK made by many independent international organisations, such as the OECD, the IMF and the European Commission, and no more or less cautious than the range.
Instead, the Government's approach is to strengthen the existing fiscal framework and enhance accountability to Parliament rather than outsource it to an external body. Parliamentary scrutiny has been bolstered by the steps the Government have taken since 1997 to improve fiscal transparency. In addition, the independent National Audit Office will retain its existing role in auditing key forecasting assumptions.
Parliament should have the ultimate say in matters of tax, spending and borrowing. The Bill will give Parliament a new role in holding the Government to account for their medium-term fiscal policy and meeting the targets of the fiscal consolidation plan. The legislation includes clear targets, and will create a transparent reporting process for assessing progress and compliance against fiscal plans. If the Government are not on track it will be obvious, and if plans are not achieved the Government will have to set out why not.
The Government have made it clear that reducing spending accounts for two thirds of the action the Government are taking to reduce the deficit following the crisis-measures that will reduce the deficit by £57 billion in 2013-14. This is shared between current and capital spending. Specific savings that we have already set out include £12 billion of savings from the smarter government reforms to the public sector; £4.5 billion from slowing increases in public sector pay and pensions; and £5 billion from cuts to lower priority programmes, as well other efficiencies across all Departments, where £10 billion value-for-money savings have been found already.
The Government have already set out clear plans for fiscal consolidation. In April in the Budget, my right hon. Friend the Chancellor set out plans for consolidation and the recent pre-Budget report confirms these. These plans include more than halving the deficit in four years. The Bill enshrines these plans in law, through the Government's first fiscal plan, the fiscal consolidation plan.
The Government are committed to sound public finances and have set out clear plans for consolidation. We will not withdraw support too quickly and jeopardise recovery. The annual pace of consolidation set out in the 2009 pre-Budget report is faster than the pace of deficit reduction forecast by the IMF for all other G7 economies in the period up to 2014. Further, the Government will return with legislative targets beyond 2015-16 at an appropriate time. The pre-Budget report projects that the deficit on the cyclically adjusted current budget will be eliminated by 2017-18.
We are now at the turning point in the global recession and at a time when we need to start building and planning for the future. As growth picks up, we must ensure that we have sustainable public finances. Through enhancing the fiscal framework, the Fiscal Responsibility Bill will support that task. I commend the Bill to the House.