Clause 1 — initial duties

Oral Answers to Questions — Prime Minister – in the House of Commons at 1:35 pm on 20th January 2010.

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Photo of David Gauke David Gauke Shadow Minister (Treasury) 1:35 pm, 20th January 2010

I beg to move amendment 1, page 1, line 3, after '2016', insert 'the structural element of'.

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Photo of Alan Haselhurst Alan Haselhurst Deputy Speaker and Chairman of Ways and Means

With this it will be convenient to discuss the following: amendment 2, page 1, line 5, after '2014,', insert 'the structural element of'.

Amendment 3, in clause 5, page 3, line 28, after 'expressions "', insert 'the structural element of'.

I should say to the Committee at this stage that in view of my selection of amendments in relation to clause 1, I am not minded to have a stand part debate on that clause.

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Photo of David Gauke David Gauke Shadow Minister (Treasury)

It is a great pleasure to be here this afternoon. I shall bear in mind your comment, Sir Alan.

The first clause goes to the heart of the Bill. It is clear from the recent Second Reading debate that this is a pretty lousy Bill. It is conceptually flawed. Nobody from the Labour Back Benches spoke in favour of the Bill on Second Reading. On the Government Back Benches today I see two hon. Members. If I am not much mistaken, both voted against the Bill on Second Reading. It is not a Bill that excites much support or interest, and there is probably very little that can be done with it to save it from itself. Mr. Clarke put it well when he described the Bill as vacuous and irrelevant. That did not stop him voting for it, but perhaps he does not have high expectations of the Bills that his Government introduce for him to support.

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Photo of John Redwood John Redwood Conservative, Wokingham

Does my hon. Friend think that Labour Back Benchers are not present because the Bill says that they must cut public spending by about £100 billion a year by the end of the four-year period? Presumably that means that they do not think they will be in government, so that is not their problem.

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Photo of David Gauke David Gauke Shadow Minister (Treasury)

That might be one explanation. It is probably a better explanation than the one we heard in the winding-up speech on Second Reading from the Exchequer Secretary, who speculated that the absence of Labour MPs supporting the Bill was a result of the weather and that they were stuck in the snow. I suspect that my right hon. Friend makes a better stab at answering the question. In the course of the afternoon, we may get an explanation. As there appear to be no Back Benchers who are prepared to speak on the Bill, perhaps we will hear from the Front Bench.

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Photo of Ian Pearson Ian Pearson Economic Secretary, HM Treasury

Let me have a stab at an answer. Perhaps my hon. Friends realise that I do not have any difficulty in dealing with the sloppy, incoherent and often conflicting amendments tabled by the Opposition, so I do not need any help from them.

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Photo of David Gauke David Gauke Shadow Minister (Treasury)

We shall see whether the Minister requires any help, but it is good to see such confidence early on. We shall see whether he can keep that up.

Having said what nonsense the Bill is-a view that the Minister is unlikely to persuade us to change-we are, through amendments 1, 2 and 3, attempting to be helpful. We are trying to bring some coherence to the Bill. They would not make it a good Bill, because it is still conceptually flawed and we do not support it, but one issue, which emerged on Second Reading, is worth exploring a little further.

My right hon. Friend Mr. Redwood first made the point in an intervention on the Chancellor of the Exchequer. My right hon. Friend raised the question of what would happen if there were a recession over the period that the Bill covers. The first duty, contained in subsection (1), is that of lowering the public sector net borrowing every year from 2011 onwards to 2016; the second duty, in subsection (2), deals with halving public sector net borrowing from 2010 to 2014; and my right hon. Friend asked, "What about automatic stabilisers? What happens in the course of a recession-were one to happen?" I appreciate that the Government are not predicting a recession, but then again they did not predict the most recent recession, either.

That point was pursued by Dr. Pugh, who intervened later in the debate, again on the Chancellor, and essentially asked, "What would have happened if this legislation had been in place over the last few years? Would the Chancellor have been free to bail out the banks?" Let us remember that this Bill represents a flagship policy: this is how the Government are to acquire credibility on the issue, because they are legislating to reduce borrowing. The Chancellor, in response to the question about whether he would be free to bail out the banks or be hamstrung by the legislation, said:

"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."-[ Hansard, 5 January 2010; Vol. 503, c. 70.]

That seems to be a reasonable answer, but it entirely undermines the legislation that the Chancellor was advocating. Not only is it quite striking that the only people to speak in support of the Bill on Second Reading were Ministers, it seems fairly clear that even they were not exactly enthusiastic about its terms.

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Photo of Jeremy Browne Jeremy Browne Shadow Minister (Treasury)

I strongly support the hon. Gentleman's sentiments. Does it not appear that the Prime Minister, having boasted that he had abolished boom and bust and then having been proved emphatically wrong, has decided that he has now abolished boom and bust for the next six years?

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Photo of David Gauke David Gauke Shadow Minister (Treasury)

The hon. Gentleman makes an excellent point. That is exactly right. We do not accept the argument that declaratory legislation in these circumstances is of value, or that the Bill adds something to the credibility of the UK's fiscal position, but if we were to be sympathetic to the Government and accept those points, we would discover a difficulty, because the Government have set themselves a target that does not get to the heart of the issue-the structural deficit.

The point that the hon. Member for Southport made when he raised the bank bail-out issue might be regarded as a reductio ad absurdum argument, but it was helpful. If there is a crisis, the targets do not apply. That is the Chancellor's position. However, that does not quite answer the question, "What would happen if there was something not of the scale of the bank bail-out that we saw a couple of years ago, but a substantial slowing of the economy and, perhaps, a recession?" Clearly, the targets would become much harder to hit. Unemployment would go up and tax receipts would fall; and, if we look at borrowing as a percentage of GDP, we find that GDP falls so the percentage of borrowing would go up.

The Opposition recognise the need for automatic stabilisers-our argument has never been about that-but I find it hard to see how anyone who has argued consistently, as the Government have, for a discretionary fiscal stimulus when the economy slows down, can support this Bill on reading it, because the targets are focused on public sector net borrowing, not on the structural or cyclically adjusted element.

Of course, that argument works the other way, too. If the economy exceeds the Government's growth expectations-admittedly, that is fairly unlikely given that their expectations are somewhat greater than that of most independent forecasters-those targets may well be met either without imposing significant discipline at all or, certainly, by imposing much less than the Government have in mind. The focus must be not on public sector net borrowing, but on the structural element.

I read the Chancellor's lengthy interview in the Financial Times at the weekend, and the full transcript was placed on the paper's website. There was an interesting section on whether the Chancellor had tried to remove the Prime Minister over the past few weeks, but the interview focused primarily on matters of fiscal responsibility. The Chancellor referred three times to getting the structural deficit down, but interestingly at no point in that lengthy interview did he refer to the Bill-suggesting that it is not exactly at the heart of his strategy to restore credibility to the public finances. Even the Chancellor does not appear to believe in it. The Bill is so discredited that he does not pray it in aid during a lengthy interview.

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Photo of Andrew Pelling Andrew Pelling Independent, Croydon Central 1:45 pm, 20th January 2010

The hon. Gentleman is making an excellent contribution. Is this not a treacherous debate for all political parties, because of the creation of this straitjacket? It appears from what he is saying that he believes that any incoming Conservative Government should also have the greatest flexibility, and that they might yet not go down the-unwise-route of a significant and quick cut in public expenditure.

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Photo of David Gauke David Gauke Shadow Minister (Treasury)

I am grateful to the hon. Gentleman for his kind words and for raising that issue, because I want to make it absolutely clear that we believe that the structural deficit must be brought down and that a significant part of it must be brought down very quickly. We have said-and it remains our position-that we want to go further and faster than the Government on bringing down the deficit, and we would move earlier.

The hon. Gentleman does not agree, and he is perfectly entitled to that position, but wherever we are in the debate about trying to reduce the deficit, we should focus on the right measure. Whether one takes the view that Governments should spend and borrow more when the economy is slowing down, or that the automatic stabilisers should apply, the wrong measure is to aim at public sector net borrowing. We should focus on the structural element. Indeed, if we read what the Chancellor told the Financial Times, we find that he focuses on the structural deficit. So if the Bill is supposed to reflect Government thinking and, essentially, be Government policy, and the Chancellor talks about the structural deficit, why does the Bill not deal with the structural deficit? Instead, it includes non-cyclical elements.

I should point out that this is not in any way meant as some sort of Government trap. The projections that the Government have made in the pre-Budget report for public sector net borrowing and cyclically adjusted public sector net borrowing suggest that, in both cases, they should meet the targets that they have set out. Borrowing should fall in every year from 2010-11 to 2014-15. In both cases, the deficit will halve from 2009-10 to 2013-14. That does not make the duties more onerous or less onerous, as in both cases they should be met under the Government's own projections. We can have a debate about why we might need to be sceptical about those, but that does not fundamentally change the position.

Of course, the Bill still has huge weaknesses that we will debate over the course of the afternoon, including its lack of an enforcement mechanism and the fact that it is, in many respects, a fig leaf to cover the Government's failure to set out credible spending plans to address the deficit. However, we could at least introduce a relevant measurement, which would partly address some of the concerns about the Bill. We have some scepticism about the Government's actions, but if they are trying to do what they say they are, the amendments would assist them.

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Photo of Jeremy Browne Jeremy Browne Shadow Minister (Treasury)

The lead amendment in the next group, amendment 4, stands in my name and that of my colleagues, so I may take the opportunity then to speak slightly more broadly about clause 1 given that we are not having a stand part debate. At this point, I will limit myself briefly and narrowly to amendments 1, 2 and 3.

I share the views of the Conservative spokesman in two regards. First, as was discussed on Second Reading, the Bill is inherently flawed and there are all kinds of problems with it. Just over a week ago, I took part in a radio debate with a Labour MP who, when I raised the issue of the deficit, said, "Of course we, the Labour party, are serious about the deficit. We're legislating to reduce it-how much more serious can one be than that?" She appeared to believe that that was a sensible argument to advance, and it is, essentially, the root cause of the Government's problems-their belief that they can solve a financial problem by passing a law saying that they have solved it even if they are not taking the necessary financial measures to address the difficulties that they find themselves in. That is the inherent flaw in the Bill, and what makes it so utterly preposterous.

However, given that we are where we are, and that the Government, despite the complete lack of enthusiasm and support from their own Back Benchers, are determined to plough on with this Bill in the final days of this Parliament, we might as well, as a responsible Opposition party, try to save them from the most masochistically bad parts of it. One of those parts relates to a point that has been raised by Mr. Redwood and others. Why would the Government wish to bring in legislation that prevents the operation of the automatic stabilisers, which we all accept and which the Prime Minister routinely boasts about, or champions, in relation to Government intervention to protect some of the most disadvantaged people in society? Why would they wish to impose on themselves a straitjacket that prevents such measures from being implemented to help the people who are hit hardest in a recessionary environment? That is not only an unintelligent position to take but, potentially, a very socially divisive one. It seems to Liberal Democrat Members that it is worth specifying that, even if one accepts the basic premise of the Bill that we should concern ourselves with the structural element of the deficit. Therefore, we would support Mr. Gauke were he to press the amendment to a Division.

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Photo of John Redwood John Redwood Conservative, Wokingham

I rise to support the amendment tabled by my hon. Friend Mr. Gauke. I am grateful to him for considering the problem that I, and others, posed on Second Reading.

It beggars belief that a Government who have spent so much time claiming credit for the automatic stabilisers that all Governments have always used-it is something that happens naturally-should now try to legislate to stop their operation. They seem to be doing so in the spirit of a Government who think that their days are numbered and that it would be very amusing to pre-empt all the Budgets of the next Parliament by laying down in law what the overall shape of those Budgets should be. Moreover, they are doing so in such a way that if they leave a mess that results in a further downturn, or even a period of very disappointing growth, which is a possibility, the automatic stabilisers would not come into effect on the scale that they naturally would otherwise, so there would have to be offsetting action. I hope that the Minister shows, for once, that he is master of his brief, as he boasted at the beginning of the debate, and that he can understand this point and therefore wishes to support his Prime Minister's previous position, which was that the automatic stabilisers are a very good thing, and does not wish in any way to pre-empt their operation through the clause.

Clause 1, which we are seeking to amend, is the kernel of this miserable piece of legislation. It says, correctly, that the excessively large deficit that the Government have built up has to be curbed. As my hon. Friend said, we object to it for two principled reasons. First, a deficit is curbed not by legislation but by changing one's spending and/or taxing plans so that one controls the budgets properly and sets them sensibly.

Our second objection is that the profile of the reductions is wrong. It is not essential to cut the deficit in every year over a long period-not least, as we have heard, because of the need to look at the state of the economy-but it is terribly important to get on with cutting the deficit much more quickly than the Bill demands or the Government are requesting.

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Photo of Jeremy Browne Jeremy Browne Shadow Minister (Treasury)

My understanding of the Bill is that the deficit does not need to be cut in every year until 2014 but merely needs to be cut by half by 2014. There is then a provision for it to be cut on an annual basis for the following two years. However, it is possible, I suppose, that were Labour to be re-elected, it could dramatically cut the deficit next year and then be inactive for the following three years.

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Photo of John Redwood John Redwood Conservative, Wokingham

That is set out right at the beginning of clause 1, which clearly states that

"for each of the financial years ending in 2011 to 2016"- a five-year period-

"public sector net borrowing expressed as a percentage of gross domestic product is less than it was for the preceding financial year."

Unless growth suddenly takes off at a rate that no one is forecasting or expecting, that means, in effect, that every year there will have to be cuts. That is how most people read the clause, and that is why we object to it. It imposes a very long and substantial straitjacket that may be difficult to implement in individual years, and it sets too relaxed a timetable for the immediate task.

Why have some of us been growing hoarse saying to the Government that they need to cut this deficit more rapidly than they are proposing? It is not because we are masochists who came to this place to cut public spending, but because we are deeply afraid that the Government are losing the confidence of the financial markets, and that if they do not take this issue more seriously, more quickly, they could lose that confidence in a very big way. Why does that matter? It matters because it means higher mortgage rates and higher loan rates for small and big business, and because it will lead to lost jobs and lost dreams for people who want to make a living or make a go of something in this difficult economic situation. We are thinking ahead.

The Government need not take my word for it. All that they need do is follow the financial markets. If they examine what has been happening even during this extraordinary period of over-borrowing and money printing to offset it, they will see that the cost of credit has been rising. Small businesses are having to pay many times the 0.5 per cent. minimum lending rate. The Government themselves are now having to pay eight to nine times their preferred short-term interest rate if they wish to borrow for 10, 20 or 30 years.

The Government should heed the warnings. They do not need to believe the Opposition or the commentators; they should just examine what is going on. Clause 1 is lamentably too little, too late to deal with what has already happened. Once their quantitative easing stops and they stop printing money to pay wages in the public sector, which looks as though it will happen within a few weeks, they may well find that there is another surge in the cost of borrowing, which will be another direct hit against the productive economy, people's aspirations, small businesses and those who wish to gain a mortgage and own their own home.

I hope that the Economic Secretary will accept the amendment that my hon. Friend the Member for South-West Hertfordshire moved, because it is a necessary correction to this ill-begotten clause. I hope that he will also reflect further on the wording of subsection (1), which states that the process should take place at a fairly relaxed pace but very mechanically, and see that what we need is a Government who know how to govern and craft a budget for the economic circumstances of the day. We need a Government who know that sometimes we need to go faster in reducing the deficit-now is one of those times-and that sometimes we cannot follow the formula in the Bill because of economic circumstances. All the Prime Minister's previous rhetoric points in the direction of accepting the amendments, so I hope that the Economic Secretary will do so.

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Photo of Andrew Tyrie Andrew Tyrie Chair, Tax Law Rewrite Bills (Joint Committee) 2:00 pm, 20th January 2010

There is an Alice in Wonderland quality about the Bill, and particularly about clause 1. One particular passage from that book is apposite. I shall not linger on it for long, but it is the passage in which a large white rose tree in the garden is being painted red. Alice goes up to the gardeners timidly and asks why they are painting the roses. The answer comes:

"Why the fact is, you see, Miss, this here ought to have been a red rose-tree, and we put a white one in by mistake; and if the Queen was to find it out, we should all have our heads cut off".

I shall come later to the penalty for misbehaviour under the Bill. As you may remember, Sir Alan, nobody does get their head cut off in "Alice's Adventures in Wonderland" because there are in fact no real penalties, as there are none in the Bill. All that will happen is that Government Members will find themselves sitting on this side of the House quite shortly. The Bill has failed to convince the public of its intended purpose, perhaps because it will change nothing and cannot have any meaningful impact because it is just rhetoric. It is designed to create an impression that something has changed when nothing has, just like the coat of paint on those roses, and to make a Government who are bereft of ideas look as though they had a meaningful exit strategy from the economic crisis.

In fact, clause 1 is even more pernicious than that. It begins with a statutory commitment requiring the deficit to be lower in each year than in the previous one. That is a very dangerous notion, as my hon. Friend Mr. Gauke and my right hon. Friend Mr. Redwood pointed out. Of course, having a policy to reduce the deficit is sensible, and it is Labour's failure to provide such a policy in the detail required to get us out of the fiscal hole we are in that has so troubled analysts. It has also troubled the Treasury Committee, which berated the Government only a few weeks ago for their failure to add greater detail and clarity to the plan for cutting the deficit. However, having a statutory requirement to reduce the deficit is truly ridiculous, as my hon. Friend and my right hon. Friend illustrated.

What will happen if there is another downturn during the five years covered by the Bill? Just as the recession or downturn starts to bite, the Government will be required to tighten fiscal policy even further, sucking yet more demand out of the economy. The effect of the clause will therefore be to deepen that recession or downturn. We will be implementing the economic policy of President Hoover-at least, that is what he was criticised for.

The effect of the clause is to tear up the centrepiece of our economic orthodoxy of recent decades. As my hon. Friend the Member for South-West Hertfordshire pointed out, it will mean the abandonment of the economic stabilisers, which allow tax receipts to fall and public expenditure to rise in a recession. I shall come to the structural deficit in a moment.

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

My hon. Friend hits on a very good point. Has he noticed the fatuity of clause 1? It states that the Treasury "must ensure" something, but clause 3 then states that it must

"report on the progress which has been made towards complying" with that duty. The Treasury either must ensure something or not. The Bill's drafting is lamentable.

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Photo of Andrew Tyrie Andrew Tyrie Chair, Tax Law Rewrite Bills (Joint Committee)

Of course the Bill is gibberish, and it is very difficult to examine clause 1 without examining clauses 3 and 4. We will come to clause 4 later, but it is worth my reading out the relevant part of it in response to my hon. Friend. It states that the fact that

"any duty in section 1...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."

What kind of serious statutory requirement provides such a get-out clause?

To return to the structural deficit, if the economy were in structural balance, the stabilisers could be allowed to operate over the cycle, providing deficits in years of below-trend growth and surpluses in years of above-trend growth. Let us set aside for the moment the ghastly truth that by the Government's own estimate, three quarters of the unprecedentedly large deficit-by the way, it is the largest in peacetime history, as far as I know-was caused by Labour's mishandling of the public finances. That is to say, it is structural. Clause 1(1) dismantles the stabilisers, which is why amendment 1 is absolutely essential if we are to make any sense of the Bill at all. It would enable it to address the right measure, which has to be the structural deficit.

Of course, restricting the application of the Bill to the structural deficit might require an alteration of the targets in order to get the same level of desired reduction. I hope that the Government will take it for granted that the Opposition accept the need for that, and that when the Economic Secretary speaks, we will not hear the absurd objection that that somehow implies that we will be less tough on the deficit than the Labour Government.

It is clear to me that we cannot leave the Bill as it is, if it is to be taken seriously at all. As it stands, if the UK had another downturn we would be plunged into a downward spiral of economic decline. Nobody believes that any Government would allow that, so something else would be done. None of the major economies have made the mistake that the Bill does in any downturn in recent history. They have all remembered the lessons of the 1930s, yet incredibly, the Government are suggesting that we forget those lessons if there is another downturn in future.

My hon. Friend the Member for South-West Hertfordshire has already pointed out that when the Chancellor was challenged on exactly that point on Second Reading-I took a look at Hansard and I believe he was challenged three times, although it might have been twice-he repeated the same phrase each time: "We will come back". I presume that he meant "We will come back to the House", and that that is a euphemism for saying that if the Bill were tested in a downturn, he would repeal it and scrap it. As I tried to say at the time, he clearly does not believe in his own Bill. The first time that it is tested, he wants to put it into the shredder.

Of course, I think I know the answer that is really at the back of the Chancellor's mind-he thinks that the Bill is nonsense. The Economic Secretary is an intelligent man and I am pretty sure that he, too, thinks it is a load of nonsense. We are all here debating it because the Prime Minister wants to continue with the strategy that served him well for many years in opposition and for some years as Chancellor: announcing good intentions, putting them on the statute book and taking credit with the public for doing that.

Clause 1 is only one provision in a decade's worth of such Blair-Brown speak, of which there is a huge volume. The Financial Times commented on that recently, stating that that

"approach to managing change seemed to be based on a mythical version of heroic leadership, popularised by some of the management magazines. 'Announce it and it will happen'".

That is exactly what we have here: announce that we will reduce the deficit, and somehow, magically, it is supposed to happen. It will not necessarily happen. Much more detail on the measures required to plug the deficit is needed. The cancellation of the spending review in the pre-Budget report is the crucial giveaway. Failure to produce detail is crucial to the collapse of confidence in Labour's economic policy.

The Bill was designed to be a legislative distraction and, as my right hon. Friend the Member for Wokingham said, the clause is its kernel. However, this time, the Prime Minister's luck has run out. Far from distracting the commentators and the public, the measure simply confirms what many Members of Parliament have known for a long time-Labour's economic policy is bankrupt of ideas. When a Government run out of ideas, they should go.

It is an open secret that it took all the combined efforts of the Deputy Prime Minister and the Chancellor to persuade the Prime Minister to make at least some attempt to give an indication of the public expenditure challenge facing the country. The Prime Minister apparently insisted on the fig leaf of a measure, of which clause 1 is a crucial part.

The Prime Minister seems, for the most part, to have retreated into a parallel world, articulating the mantras that worked in his younger days, such as "Tory cuts" and "Labour investment", as well as other nonsense. That is the Prime Minister's looking-glass world, where political battalions-an accumulated surplus from the 1990s-remain on the table to move around. Unfortunately, the accumulated surplus has all gone-it has all been spent.

The economy is in crisis, the Government are in crisis and Parliament is in crisis. At the heart of each crisis is the sort of legislation that we have seen time and again; it is embodied in clause 1. Such legislation makes the public cynical-even more cynical, if possible, than they are already are about politicians. People do not need to know economics; they need no more experience than managing their pocket money to know that clause 1 and the Bill are content free.

Content-free legislation makes this place worse off. It has the same corrosive effect as unfulfilled manifesto promises. However, the Government have an appetite for it: we have had the Child Poverty Bill, the Climate Change Bill-with even more absurd targets-and now the heart of economic policy is to be subjected to the same treatment.

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Photo of Andrew Tyrie Andrew Tyrie Chair, Tax Law Rewrite Bills (Joint Committee)

I will not give way, if the hon. Gentleman will forgive me, because I am about to finish.

Clause 1 in particular was designed as a political trap. The Prime Minister hoped that we would either have to support the Bill and clause 1, and thus be bound into a reckless policy of tightening if and when we won the election and found ourselves faced with a downturn, or we would oppose it, in which case he could say, "Ah well, the Conservatives are against all fiscal responsibility." The trap has been sprung, but the Prime Minister, not us, has been caught. The measure does no more then illustrate that there is nothing left to the economic policy of this Labour Government worth the name.

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Photo of Bill Cash Bill Cash Conservative, Stone 2:15 pm, 20th January 2010

I am pleased to follow the excellent speech of my hon. Friend Mr. Tyrie, and those of all other Conservative Members who have spoken so far. We are talking a great deal of sense and seeking the truth about the fiscal irresponsibility that has permeated the Government's programme since 1997 but has now come home to roost.

I, too, will quote from Lewis Carroll:

"When I use a word, it means just what I choose it to mean... The question is...which is to be master-that's all."

That is said to Alice. We have a perfect illustration of that in the Bill, not only in all the examples that my hon. Friend so cogently gave of the hypocrisy that lies behind the attempt to make us fall into a trap, which was sprung the wrong way from the Government's point of view, but because, as I said on Second Reading, at its heart is a travesty of the truth or an inability to identify the truth about net borrowing.

My right hon. Friend Mr. Redwood, my hon. Friend Mr. Newmark and I repeatedly raised the matter on Second Reading because it is impossible to form a judgment about what constitutes public sector net borrowing or the deficit. I entirely endorse amendment 1 to include the words "structural element of". Such judgments cannot be made unless one knows what public sector net borrowing, expressed as a percentage of gross domestic product, means.

Clause 5 states that we will be given a definition in the code for fiscal stability, which was produced in 1998. It has taken the Government from 1997-98 to the present day to undermine our finances completely. Moreover, if one examines all the golden rules, the nonsensical stability and growth pact and its application, and the criteria under the Maastricht treaty for public expenditure, and tries to form a calculation about what our economy is and what our debt levels are, one simply cannot make any responsible decision in the absence of a proper definition of public sector net borrowing. That completely undermines the purpose of the Bill.

It is nonsensical to introduce a Bill on fiscal responsibility without defining net borrowing. It is rubbish. The explanatory notes refer to the golden rule, the second fiscal rule-the sustainable investment rule-and I ask the Economic Secretary to acknowledge the nonsense that all that represented in the first place, and the complete failure even to fulfil the criteria that the Government set for themselves. It is a dreadful indictment of the Government-and, indeed, their epitaph-that they have buried our finances under a mountain of debt. They have totally failed to manage the British economy in anything like a responsible manner. The very notion of a Bill on fiscal responsibility flies in the face of everything that they have done.

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Photo of Andrew Tyrie Andrew Tyrie Chair, Tax Law Rewrite Bills (Joint Committee)

When trying to assess the credibility of this measure, is it not worth bearing in mind what happened to those fiscal rules? The first time they were tested, the goalposts were moved and their credibility was undermined, and they were withdrawn altogether at the first sound of serious gunfire.

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Photo of Bill Cash Bill Cash Conservative, Stone

Absolutely. I would simply add that the House is sometimes accused, by the public, on the "Today" programme and by Jeremy Paxman or whoever it may be-I saw my right hon. Friend the Member for Wokingham on his programme only yesterday-of Punch and Judy politics, of engaging in an absurd charade or piece of theatre in the Chamber, and of simply trying to knock the other chap off the perch. However, the Bill demonstrates that the public most urgently need this House to examine legislation. The complete failure of the Government to meet their responsibilities is demonstrated by the production of a Bill of this kind.

We must look at what the Prime Minister did from 1997 onwards, when he was Chancellor of the Exchequer.

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Photo of Bill Cash Bill Cash Conservative, Stone

I will in a moment.

Every single thing the Government have done by way of fiscal activity is down to the Prime Minister, whether as Chancellor of the Exchequer or Prime Minister. The failures of the British economy and the failure to be fiscally responsible lie very largely at his door.

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Photo of John Redwood John Redwood Conservative, Wokingham

My hon. Friend makes a very powerful case. Does he agree that one problem with the Government is that they quote only one fifth of the state's debt and obligations that they have built up, ignoring the other four fifths, which includes the banks, private finance initiatives, nationalisations and pension liabilities, which they seem to think will vanish?

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Photo of Bill Cash Bill Cash Conservative, Stone

I was waiting for that. My right hon. Friend and I, and my hon. Friend the Member for Braintree-I wish more people would join our chorus-have demonstrated over and over again that the figures the Government produce are simply not true, basing what we say on Office for National Statistics figures, evidence and material from House of Commons researchers, who are quite brilliant and who understand such things perfectly, and our own researches. That is the problem.

It is essential for the British public to know the truth when they cast their votes in individual constituencies at the next general election. That is why my right hon. Friend the Member for Wokingham, my hon. Friend the Member for Braintree and I-doubtless my hon. Friends the Members for South-West Hertfordshire (Mr. Gauke) and for Runnymede and Weybridge (Mr. Hammond) will be doing this as well as we get nearer the general election-will be telling them the truth. In that way, when they cast their votes and exercise that freedom of choice, they will know they are making a decision about the Government's past record and what will be required to put things right after the general election. Putting things right is a question not merely of fiscal responsibility as set out in the Bill, but of the bottom line regarding the country's finances, which Standard & Poor's and Moody's will be looking at in order to make a judgment about the Government's credit rating.

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Photo of Bill Cash Bill Cash Conservative, Stone

I will certainly give way to the very honourable Gentleman.

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Photo of Kelvin Hopkins Kelvin Hopkins Labour, Luton North

I thank the hon. Gentleman for his comment but he may not think I am so honourable when I have made mine.

Conservative after Conservative seems to be trying to drive the Government to cut public spending and drive us further into recession, simply to help them at the election. When people go into the ballot booth at the coming general election, they will want to know which party will cut spending and cut their jobs. Could the hon. Gentleman not suggest that fiscal responsibility may mean ensuring that public expenditure is not cut, so that jobs are not lost?

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Photo of Bill Cash Bill Cash Conservative, Stone

I am extremely grateful to the hon. Gentleman for that. He is a good friend and we have a lot in common, despite what he just said. The differences between us can be encapsulated quite simply. The words "cuts in public expenditure" give him a nervous twitch. He does not like them under any circumstances-that is an understatement.

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Photo of Bill Cash Bill Cash Conservative, Stone

Let me finish my reply to Kelvin Hopkins.

It is not that we Conservatives do not think that cuts are necessary, because we know they are. However, we emphasise that the fiscally and economically literate and responsible course to adopt is to engage in policies that will generate growth. It is only through the growth of small, medium-sized and bigger business that we will be able to find the money to pay for the public expenditure and resources-health, education and other things-that the British people will, quite rightly, be voting on. Without that growth, it will not be possible to have those things.

If the Government try to rig and distort the economic data on which economic judgments are made, for the reasons my right hon. and hon. Friends and I have given, we will not get the true picture. Therefore, we will end up with greater public expenditure problems, because we will not be facing the truth. It is essential that we do not put all our emphasis on theoretical rubbish such as stability and growth pacts, which have been broken in every country in Europe, subject to sanctions that nobody has ever applied-that is all Euro junk. Rather, we must have an absolutely crystal clear assessment, on proper accounting principles, of what will enable our economy to function efficiently, with real fiscal responsibility, and not a piece of paper and the vague rubbish with which we are dealing. We must have real bottom lines, accounting principles and responsibility.

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Photo of Andrew Pelling Andrew Pelling Independent, Croydon Central

Just before the hon. Gentleman responded to Kelvin Hopkins, he was referring to rating agencies. Is the artificial construct of the Bill more likely to create a crisis if the targets within it are not met? Would that further undermine the prospect of retaining the triple A rating?

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Photo of Bill Cash Bill Cash Conservative, Stone

The hon. Gentleman is absolutely right. I could not emphasise that more strongly. What my right hon. Friend and I have been saying about debt is directly related to our credit ratings. If we lose that status in the international bond market, we are in very dangerous waters. That is why it is so essential that the underlying truth of the overall debt-net debt-is explicit, that we concentrate on it, that we get the figures right, and that we tell the British people the truth.

The 2009 pre-Budget report, which sets out the Treasury's forecasts, is the basis on which our economy is being run, but it is like 'Alice in Wonderland', as my hon. Friend the Member for Chichester said. The crucial point is that public sector net borrowing is forecast to peak at 12.6 per cent. of GDP in 2009-10 before falling in every subsequent year, reaching 4.4 per cent. in 2014-15. The crucial point is that public sector net borrowing is forecast to peak at 12.6 per cent. of GDP in 2009-10 before falling in every subsequent year, reaching 4.4 per cent. in 2014-15. Of course, Labour will not be in government then-at least, I sincerely trust that it will not. The public sector net borrowing-based on those invented figures, which bear no relationship to the truth of the economy and are certainly not fiscally responsible-for 2008-09 is shown as 6.6 per cent of GDP or £95 billion, which jumps to £177.5 billion or 12.6 per cent. of GDP in 2009-10, which is the general election year. For 2010-11, the figures are almost the same and then-dramatically, as if to try to convince the British people, although they are unlikely ever to read this garbage-they fall suddenly to 9 per cent., then to 7 per cent., then to 5 per cent. and finally to 4 per cent. by 2014. That is a Houdini-style attempt to try to prove something that simply cannot be proved.

According to the Government's figures, they will pledge to halve public sector net borrowing from £177 billion in 2009-10, without any reference to the actual performance of the economy, the facts or the figures, to £82 billion. However, the Government's difficulty, as my right hon. Friend said, is that the actual figures are dramatically more. He rightly mentioned Network Rail, the public sector pensions, which will cost £1 trillion, and nuclear decommissioning. The latter figure has not yet been identified, but we know that it will be substantial, especially if we go down the nuclear route, as we will have to do for the sake of our energy supply. Then there is the whole question of the bank borrowing.

So for 2008-09, net borrowing as a percentage of GDP is shown as 6.6 per cent. or £95.1 billion, but the actual amounts of net debt are £617 billion or 43.9 per cent. of GDP. We are told that the source of the Government's figures is the ONS, but a note is added that says that the figures exclude

"the...effect of...financial interventions".

Imagine if company accounts were written up in the same way, for example, by Cadbury, which is owned by sort of cousins of mine. It was a fantastic company for many years. Indeed, it has been a bad week, because the Abbey National, which was founded by my great-grandfather, has now had its name excised and is called Santander. Now Cadbury is disappearing. I do not know what is happening to this country, but many sound businesses, through which we have prospered for generations, seem to be in trouble. But that is nothing compared to the trouble of this Government.

By excluding these so-called financial interventions, the Government are presenting a completely distorted picture. I challenge the Minister to deny that. I have asked other Treasury Ministers, including the Chancellor of the Exchequer, and the Prime Minister, if they can give us a definition of net debt and come clean on the total borrowing by this country. Financial interventions seem to mean lying to the British people about the real level of debt, so we cannot possibly endorse this Bill. It is not fiscally responsible: it is fiscally irresponsible.

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Photo of Mark Todd Mark Todd Labour, South Derbyshire 2:30 pm, 20th January 2010

I had not expected to catch the Chair's eye this afternoon, but someone suggested that I might have something to say- [ Laughter. ] I do not have huge sympathy with legislation based on rhetoric, but as Mr. Tyrie drew attention to the precedent of the Climate Change Bill, it is worth reflecting that that was passed virtually unanimously by this House. He may have been one of the honourable exceptions who did not stride through the Lobby to endorse it. I was not, as I felt that my constituents had made their feelings clear. I expressed my doubts about legislation using targets for which a Government could not possibly be accountable and for which no obvious answerability could be provided. I sometimes bow to the views that are expressed to me by constituents and I did so on that occasion. The hon. Gentleman may have done that, or he may have held his nose-

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Photo of Mark Todd Mark Todd Labour, South Derbyshire

In that case, I congratulate the hon. Gentleman on his consistency. However I would be surprised if other Conservative Members did not vote for it.

I am puzzled by the reasons for using legislation in this way, so I have considered what value it might have. I can see some value in at least facilitating an orderly debate on a subject, which is something that a Bill will achieve. We are at least discussing the goal of reducing our debts, the possible targets that might be set and the time frame in which that goal might be achieved. That is the substance of clause 1, which we are now discussing. That is worth while, and whatever emerges from this process-although I would be surprised if the Bill were to make it to the statute book before the election-might have garnered some value from the process itself, as opposed to the eventual outcome.

The second element is the discussion of the framework for reporting on this important subject to Parliament and thus to the public at large; that comes up in a later clause. Discussion of how best that might be done has some value too, because I suspect that there is a degree of consensus that how we do it now is not perfect.

I shall not dwell on some of the flaws in the Bill, one or two of which have been touched on already. There is no common view of the data set on which we base our understanding, and it is useful to have the debate on that issue, although I do not agree with some of the views that have been expressed, most notably by Mr. Newmark, who is not in his place today. His sweeping view of the public sector borrowing figures is not one that I share.

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Photo of John Redwood John Redwood Conservative, Wokingham

It is wonderful that one Labour Back Bencher does have the time to talk about the odd £100 billion in cuts that are the subject of this Bill. As one who has done some work on this issue, I can tell the House that I simply applied company accounting principles, laid down by the Government, to the state's accounts. Why should they not apply to the country's accounts as much as to the companies that are made to follow them?

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Photo of Mark Todd Mark Todd Labour, South Derbyshire

The most obvious answer is that a country is not a company. One of the difficulties in company accounting is the assumption that the company might not exist in perpetuity- [Interruption.] Well, this particular Government might not, but who knows? It is for the electorate to judge. However, this country, and its governing system, will continue to exist. Some assumptions have to be made in company accounting-for instance, when valuing pension liabilities-and one of those assumptions is that the company might cease to exist. That is perfectly reasonable. However, to apply that to public sector pensions is unrealistic and assumes somehow that this country might cease to exist at some point in the future and that all the liabilities would be paid up. If this country ceased to exist, that might be the least of our problems.

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Photo of John Redwood John Redwood Conservative, Wokingham

If that is the case, why does the public sector decide to fund some of those liabilities inadequately? On the hon. Gentleman's argument, it should not be funding any of them.

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Photo of Mark Todd Mark Todd Labour, South Derbyshire

That is a fair point, but it is not quite the methodology that is to be used, although I do not want to be drawn into a lengthy discussion about something that I am not sure is directly germane to the clause.

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Photo of Mark Todd Mark Todd Labour, South Derbyshire

I have not answered the previous question yet.

The principles of how we fund public sector pensions were established many years ago. Many have pondered on how to change the system, because many of us recognise-I think-that many of the pensions are paid on the basis of those who are retired now, so there is a major generational problem within the current methodology, which it would be good to confront. I do not think, however, that the Bill is intended to confront that problem, so I shall not discuss the matter further. However, perhaps Mr. Cash will tell us more.

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Photo of Bill Cash Bill Cash Conservative, Stone

I am extremely grateful to the lone white knight who has come forward from the Labour Benches-as was the case on Second Reading as well. Clearly the Government and their Back Benchers are deeply embarrassed by the Bill, but I will not belabour that point. I admire the hon. Gentleman for coming forward so late on to try to defend the situation. However, on the point made by my right hon. Friend Mr. Redwood, we come back to the problem of applying proper accounting principles, to which I referred. I am also glad that my hon. Friend Mr. Newmark has come in at this crucial moment, because his figures have just been questioned by Mr. Todd. However, we have touched on an important question. I know that the hon. Gentleman understands that-

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Photo of Sylvia Heal Sylvia Heal Deputy Speaker

Order. I wonder whether the hon. Gentleman could get to the point of the intervention, which, as he knows, is meant to be brief. May we have the intervention?

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Photo of Bill Cash Bill Cash Conservative, Stone

I accept your strictures, Mrs. Heal.

Proper accounting principles are based on the truth-that is what accountancy is about. The question is whether that is being done in the Bill under the definitions given.

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Photo of Mark Todd Mark Todd Labour, South Derbyshire

I am not an accountant, but I have never considered accountancy to be purely about the truth or facts. In the companies that I have served, and at times helped to run, I never regarded accountancy as an art form. I certainly felt that a significant amount of interpretation and working out of reasonable assumptions are built into the process of accountancy-it is not based purely on hard data.

Having pointed out that difference, however, perhaps I can return to the core of my remarks. I did not want to dwell on some of the flaws that might be in the Bill, but I shall touch briefly on one final one, although it will probably set off some further interventions. I have been a bit puzzled about how the Bill relates directly to the economy at large. The targets and time frames are set without a direct relationship to economic cycles or events-the classic example of the latter being 9/11. Such events can have a major effect on our economy, and have to be taken into account when using economic instruments to achieve appropriate outcomes. Public sector debt is an important part of our economy, as is public spending on an ongoing basis, but I am puzzled about the methodology of fitting the Bill into the management of the economy on an ongoing basis. However, wiser minds than mine have decided that that is the right way to proceed.

As I said, the Bill provides a reasonable basis on which to hold reasonably intelligent debates on some of these matters.

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Photo of John Redwood John Redwood Conservative, Wokingham 2:45 pm, 20th January 2010

I would like to assure the hon. Gentleman that the minds to which he refers might be more powerful, but they are clearly not wiser.

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Photo of Mark Todd Mark Todd Labour, South Derbyshire

How kind of the right hon. Gentleman to say so. Others have judged otherwise, though.

I shall turn to the historical backdrop to the elements in the clause. Others have referred to the fiscal rules of the late 1990s, which stayed in being until the onset of the crisis. As has been accurately described by the hon. Member for Chichester, those rules were first tweaked and bent to show apparent continuing adherence, and then abandoned when the crisis hit full force. The question of why the rules were there in the first place touches on part of the reason why we are having this debate now. First, there was a short-term political issue: the first Labour Government for 18 years needed to produce some evidence of solidity and a framework for decision making that could reassure outside observers about how they would behave.

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Photo of Mark Todd Mark Todd Labour, South Derbyshire

The right hon. Gentleman is nodding. That was a perfectly reasonable political objective and one that I supported, because of the problem of reassurance and-as much as anything else-unfamiliarity. The fiscal rules provided at least some framework for reassuring the wider financial community that the new Labour Government would follow a clear structure and not make ad hoc and irresponsible decisions.

The design of the rules, however, was imperfect even then. The difficulties with them were exposed when the crisis hit, but to be honest, as those who have looked at the Treasury Committee's comments on such matters over the years will know, many felt that they had imperfections even before the crisis hit. Part of the problem is that they tend to look in the rear view mirror. One is constantly looking at the past rather than setting public spending and economic priorities based on the future and projections. The past has some value in informing us, but it throws up difficulties, for instance with defining where economic cycles begin and end. We started to get into that in the middle of this decade. That could have been addressed using a better tool set, focusing more on the future.

Any Government ought to be thinking about that. I say "any Government" because there was a second reason for having the fiscal rules in place that had nothing to do with the arrival of a Labour Government-the memory of a Conservative Government that went through vast levels of deficit and borrowing in the early 1990s. As much as anything else, the measures were meant to demonstrate a difference and send out the message that we would pursue our economic policies within a published framework, within a clearly understood reporting mechanism, and within a set of rules that appeared to have been set with a degree of objectivity.

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Photo of Andrew Pelling Andrew Pelling Independent, Croydon Central

The hon. Gentleman's comments are useful and instructive. I imagine that at the time the Labour Government wanted to establish credibility. However, in some ways is not such legislation damaging politicians' credibility, because the message being sent is that our promises are not of real value unless they are legislated for?

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Photo of Mark Todd Mark Todd Labour, South Derbyshire

I suppose that point goes back to my initial remarks about whether such matters are best addressed through legislation. I have my doubts about whether that is the most appropriate way; nevertheless, with our set of fiscal rules effectively destroyed in the crisis, it is reasonable to suggest that a replacement is required. The Opposition have proposed a different model to replace our method of dealing with fiscal responsibility, so there is a consensus that we have to produce a framework.

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Photo of John Redwood John Redwood Conservative, Wokingham

The hon. Gentleman is making a valuable contribution. The reason why things went wrong in the early '90s was that there was a bipartisan policy of basing all the fiscal rules on the exchange rate mechanism-something that I personally opposed, but which most people seemed to think was a good idea. The destruction of that bipartisan approach led to the search for a better answer that he is describing.

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Photo of Mark Todd Mark Todd Labour, South Derbyshire

I was in no position of responsibility at that time, so I cannot disagree with the right hon. Gentleman more authoritatively, but I would say that there were more factors behind the difficulties of the early '90s than that, although we all recognise that there is some truth in what he has said.

I suspect that there is a consensus on the purpose of having something like what is proposed in the Bill. The exact mechanism, and whether we do things through a legal framework, are fair subjects for dispute. However, the need to build a clearer relationship with the wider economy in whatever we attempt to do in managing our fiscal future is essential. I have some doubts about whether the Bill does enough on that. The time frames within which we attempt to challenge the mountain of debt that we face also need to be debated. There is a genuine difference in policy on that. I take a firm view that rapid reductions in public spending have particularly deleterious effects in two ways. First, it is my experience that cutting rapidly means cutting badly. People cut the easy things; indeed, there is an argument that, in part, the Government too might be making that mistake. Capital expenditure has taken much the heaviest hit in the projections of where savings might be made, but it might not be the wisest place to do so.

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Photo of Bill Cash Bill Cash Conservative, Stone

The hon. Gentleman is making a thoughtful speech, as my right hon. Friend Mr. Redwood has just said. Mention was made of the exchange rate mechanism, which is related to the stability and growth pact, and which is also part of the thinking embedded in the golden rules and the other rules, as well as the question of whether we can manage to get a responsible economy. I very much agree with the hon. Gentleman's sense of direction, but I would ask him to bear in mind that, although I do say so myself, a lot of these matters are conditioned, if not governed, by the criteria set down in the Maastricht treaty.

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Photo of Mark Todd Mark Todd Labour, South Derbyshire

Which the Government have sought to distance themselves from, at least in part, by not joining the common European currency. Without hinting at my slightly dubious reputation on the Government Benches for being a Euro-realist, as opposed to a Eurosceptic, I start from the view that the Government made the right decision about that, and one that has stood us in good stead.

My instinct is that the House probably shares more common ground on many of the subjects that we are discussing than will be conceded in a debate of this kind. The areas of genuine debate are partly to do with the speed with which we proceed. It would be wise to see clear evidence of economic recovery-certainly beyond today's encouraging unemployment data-before rapidly reducing public spending. However, public spending reductions also need to be approached using a rather more robust methodology produced over a period of time, rather than simply taking out the razor blade as rapidly as we can. My instinct is that some of the steps that the Opposition have suggested fit into the category of saying, "Let's make some headline cuts that sound dramatic," but which are ill considered when set against a wider portfolio of policy making.

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Photo of Brooks Newmark Brooks Newmark Opposition Whip (Commons)

I apologise for missing the beginning of the hon. Gentleman's speech. I am sure that this point has been made, but he has made two important points about identifying where the fiscal responsibility lies, one part of which is about halving the amount that is out there. However, surely one important benchmark is where we start from. Neither the transparency of what is on balance sheet-obviously, that is what the Government go on about-nor the transparency of what is off balance sheet, which is what I, along with my hon. Friend Mr. Cash, my right hon. Friend Mr. Redwood and everybody else on the Conservative Benches, go on about, is clear. It is important that we understand what the starting point is, and then think about where to go, rather than simply halving what is out there on balance sheet.

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Photo of Mark Todd Mark Todd Labour, South Derbyshire

I, too, am sorry that the hon. Gentleman missed the start of my speech, because I touched on that point. We do not have a common data set that we can all share. Although there are areas of dispute-I am not sure whether this happened before or after the hon. Gentleman arrived, but I had an earlier exchange about one of them with the right hon. Member for Wokingham-there are also areas where intelligent people can probably largely agree. On such an important subject, it would be helpful to try to find as much common understanding as possible of what our difficulty is before deciding how to tackle it, which partly relates to the point that I was making before the hon. Gentleman intervened. Simply naming cut figures and headline items is a simplistic approach to tackling a long-term strategic problem for our country.

Finally, the other useful aspect of this debate is the suggestion that what we are discussing is a problem that needs to be confronted. There are people-both in this House, to some extent, and certainly in the country at large-who would be prepared to accept a debt of roughly the scale that we confront now. They have equated our situation with that of others and said, "Well, the Italians managed perfectly well with a debt of that kind. Why shouldn't we just adjust our economy to deal with those changed circumstances?" I profoundly disagree with that position. Therefore, one of the values of this discussion is to expose that side of the debate and say, "No, that isn't the kind of economy that we would wish to run on in this country into the future." We are simply not equipped to achieve that, and trying to do so would have a thoroughly undesirable drag-anchor effect on private enterprise in any country where that took place. That aspect of the debate is of value in a discussion of a Bill of this kind.

As we go through the afternoon, I hope that I may catch your eye-if you are still in the Chair, Mrs. Heal-to discuss some other elements of the Bill. However, clause 1 has some value, and with those reservations, I commend it to the House.

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Photo of Ian Pearson Ian Pearson Economic Secretary, HM Treasury

We have had a wide-ranging debate. I agree with those hon. Members who said that clause 1 is a crucial part of the Bill. However, I have found it difficult to agree with most of the other things that hon. Members have said about the Bill. That is a shame, because there are some strong arguments that can be made about focusing on structural borrowing, but they were not made by the Opposition. I will come to the amendments in a short while, but given the instruction that this should also be a stand part debate, let me say something broader about the economic and fiscal context. I shall do so briefly, because all Members will be aware of the events that have taken place over the past 18 months to two years, the actions that the Government have taken to stabilise the economy, and the situation that we now face, with a pressing necessity to reduce the overall national debt.

I want to focus first on the areas on which we can all agree. There is wide agreement across all political parties that we need to see fiscal consolidation in this country. One of the big issues between us is the pace of that consolidation. If we strip away the political rhetoric, we find that there are two judgments: one that has been made, and one that needs to be made.

Going into the recession, it was quite clear that the Conservatives would have spent less. They opposed the fiscal stimulus, so they would not have spent money on it. We wanted to see investment in public services, and we believed that the fiscal stimulus was necessary. We also believe that debt would be higher now if we had not taken the action that kept people in work. I think that every political party agrees on the need to use automatic stabilisers.

The second judgment relates to the speed at which we get the debt down. The difference between the parties relates to whether we cut immediately or wait until we are sure that the recovery is locked in before we take action. The Government's view is that we should do the latter. We want to ensure that the recovery is in the bag. We do not want to jeopardise the economy or risk falling back into recession by taking precipitate action.

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Photo of Stewart Hosie Stewart Hosie Shadow Chief Whip (Commons), Shadow Spokesperson (Treasury) 3:00 pm, 20th January 2010

The Minister has mentioned reducing the debt. However, at the end of this deficit-consolidation phase, the annual deficit will still be 5.5 per cent. of gross domestic product, which will definitely be above trend and almost certainly above annual growth. When do the Government intend to start paying the debt down, as opposed merely to reducing the level of the deficit?

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Photo of Ian Pearson Ian Pearson Economic Secretary, HM Treasury

I will go through all those areas in my speech.

Before that, I want to refute suggestions that the Government are not doing anything to reduce borrowing. We 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 measures in the pre-Budget report of 2008, the 2009 Budget and the pre-Budget report of 2009 will make a difference. Sometimes, the Opposition like to pretend that we are doing nothing to cut the deficit and that we have no plans to do so. Well, what is the 50p rate of tax? What is the 1 per cent. increase in national insurance contributions? What is the action that we are taking to create savings from smarter procurement, from the pay cap and from public sector pensions reform? Action is already being taken, and that is important if we are to achieve our fiscal reduction plans.

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Photo of David Gauke David Gauke Shadow Minister (Treasury)

The Minister says that the Government are taking action now and already addressing the problem. May I quote to him what the Governor of the Bank of England said in a speech in Exeter last night? He quoted the chairman of the Federal Reserve, Ben Bernanke, as saying of the similar fiscal position in the United States that

"near-term challenges must not be allowed to hinder timely consideration of the steps needed to address fiscal imbalances. Unless we demonstrate a strong commitment to fiscal sustainability in the longer term, we will have neither financial stability nor healthy economic growth."

The Governor of the Bank of England then went on to say:

"The Chancellor has made it clear that the Spring Budget provides the opportunity to do precisely that."

It is implicit in what the Governor has said that the Government have not yet demonstrated a strong commitment to fiscal sustainability in the longer term. Is that not correct?

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Photo of Ian Pearson Ian Pearson Economic Secretary, HM Treasury

I have read the Governor's speech as well, and I agree with him: we do need to take action to cut the debt. However, if the hon. Gentleman were to ask him whether the Government had taken action through the pre-Budget report of 2008, the 2009 Budget and the pre-Budget report of 2009 to ensure that fiscal consolidation took place in our economy, I am sure that the Governor would agree that we had done so.

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Photo of Ian Pearson Ian Pearson Economic Secretary, HM Treasury

I will give way again, but if the hon. Gentleman is just going to make selective quotations, he will not be doing justice to his own side; he is not being fair to what the Governor is saying. It is clear that we need to take further action, and we shall need to do so at the time of the Budget. We need to hit the targets that we are proposing in the Bill, and I want to go on to explain why it is important to legislate for those plans. I think that it is the right thing to do. This is not gesture politics; it is an important measure in which we can ensure that there is public and market confidence that we mean what we say and that we are going to deliver on our plans. I shall happily give way to the hon. Gentleman again, but I hope that he will do a bit better this time.

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Photo of David Gauke David Gauke Shadow Minister (Treasury)

The Minister worries about my making selective quotations, but I think that all quotations are selective, by definition. He also said that he agreed with the Governor of the Bank of England. Does he agree that the spring Budget will provide an opportunity to demonstrate a strong commitment to fiscal sustainability?

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Photo of Ian Pearson Ian Pearson Economic Secretary, HM Treasury

I am not going to tell the House what will be in the Budget. We are working on it at the moment, but I would be absolutely amazed if it did not say something very strongly indeed about the overall fiscal situation and the Government's plans. The hon. Gentleman will have to wait until that is all made clear in the Budget, however.

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Photo of Ian Pearson Ian Pearson Economic Secretary, HM Treasury

Let me get on and make the point about why we are here today discussing this legislation; then I will give way to the hon. Gentleman.

In the Bill, we are embedding into legislation the deficit reduction that was announced in the three fiscal events that I have just mentioned. We are also setting further targets for reducing the deficit in each year to 2015-16, and for halving the national debt falling in that year. These plans contribute to ensuring sustainable public finances in the medium term. I believe that legislating will provide certainty and stability for businesses and individuals in relation to the future path of fiscal policy. It is right that we should set out those long-term plans.

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Photo of Ian Pearson Ian Pearson Economic Secretary, HM Treasury

I will give way in a moment.

It is also right that Parliament should be given a role in setting and monitoring our fiscal plans. It is enshrined in the Bill that Parliament must approve the plans before they become law, which represents a significant development of the extent to which the Government are held to account for their medium-term fiscal policy. Again, I think that that is the right thing to do. Mr. Tyrie was jumping up and down a moment ago. I saw him first, so I shall give way to him first.

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Photo of Andrew Tyrie Andrew Tyrie Chair, Tax Law Rewrite Bills (Joint Committee)

It is very kind of the Minister finally to give way. I want to take him back to his suggestion that the Government have credible plans to deal with the deficit. He and the rest of the Government are virtually on their own if they really believe that. Goldman Sachs says:

"The plans laid out by the UK government...do not represent a credible fiscal consolidation plan."

Citigroup says that the pre-Budget report

"does not produce credible and detailed plans to return the UK to a sustainable fiscal stance in coming years".

On the key point that the Minister made earlier that we were advancing our cuts faster than the Government would do, I should like to quote Richard Lambert:

"Our strong instincts are that the risks of going too soon are less than the risks of waiting too long".

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Photo of Ian Pearson Ian Pearson Economic Secretary, HM Treasury

I am tempted to say that perhaps the hon. Gentleman should look at the amendment that those on the Opposition Front Bench will want him to support. That would result in going at a slower pace than the Government are proposing. I shall explain that in a moment, and I will happily give way to him again when I do so. First, I shall give way to Stewart Hosie.

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Photo of Stewart Hosie Stewart Hosie Shadow Chief Whip (Commons), Shadow Spokesperson (Treasury)

The Minister has been very generous in giving way. I hope that it was a slip of the tongue when he said that there were plans to halve the national debt. Will he confirm, for the sake of accuracy, that the national debt in 2010-11 will be 65 per cent. of GDP and will rise every year until 2014-15-to 71.7 per cent., 75.4 per cent., and 77.1 per cent.-reaching £1.47 trillion, or £1.7 trillion according to the treaty calculation? Will he also confirm that the Government have precisely no plans to reduce the level of the national debt?

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Photo of Ian Pearson Ian Pearson Economic Secretary, HM Treasury

It may have been a slip of the tongue. The figures that the hon. Gentleman has read out sound very familiar. However, he will be aware of what the Bill does to reduce the deficit as a percentage of GDP year on year, which I think is important.

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Several hon. Members:

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Photo of Ian Pearson Ian Pearson Economic Secretary, HM Treasury

Let me make some more progress. I have already given way a good many times.

As I have explained, Parliament has a key new role in holding the Government to account for their medium-term fiscal policy. We think that that is the responsible thing to do. The Conservatives seem to imagine that it is something that only the United Kingdom is doing, and that no one else has even dreamt of doing it because it is such a strange idea, but a number of other countries have introduced legislative fiscal targets. For instance, in June 2009 a new debt break was enshrined in the German constitution-and the Germans are not known for their gesture politics-to underpin fiscal consolidation over the coming years. That rule will become effective in 2011, and will require a steady reduction in the structural deficit from 2011 until 2016. According to the International Monetary Fund, moves to strengthen medium-term frameworks, including fiscal responsibility laws, should help to support the fiscal adjustment that will be necessary in most economies following the financial crisis.

We are not alone in wanting to legislate to bring about market confidence, and public confidence, in our actions. Germany is doing likewise, and the IMF has suggested that what we are doing is right.

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Several hon. Members:

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

I am most grateful to the Minister. He has been generous in giving way. May I return to the subject of clause 1? If the initial duty is needed so urgently, why is it not enforceable-or how is it enforceable?

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Photo of Ian Pearson Ian Pearson Economic Secretary, HM Treasury

Let me explain what we are trying to achieve through the clause, and through the rest of the Bill, before I deal with the amendments. The hon. Gentleman will be aware of his party's views on the reinforcement of sanctions. I believe that the best way in which to hold Governments to account for their action in this regard is through Parliament, and that is what we are seeking to achieve. Trying to fine a Chancellor or a Treasury team does not strike me as sensible, and it has not been proposed by other legislatures that have adopted a similar approach.

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Several hon. Members:

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Photo of Ian Pearson Ian Pearson Economic Secretary, HM Treasury

I want to address the points about pace and flexibility before I give way again. First, however, I want to respond to some of the comments made by Mr. Cash-and, indeed, by Mr. Newmark-about Government accounting. I shall not go into a huge amount of detail, as the issue is not directly relevant to the clause. As is well known, however, following our moves towards a system of resource accounting and budgeting, we have been operating in accordance with new international financial reporting standards. We also report under the Maastricht treaty-the hon. Member for Stone does not like the treaty, but we have a legal responsibility to report under it-using the ESA95 rules. There are differences between those rules and international financial reporting standards. Rather than trying to put the two together and say that there can be only one right set of accounts, we should ensure that there is proper transparency and that information is available, so that those who examine these matters closely can understand what is going on. The hon. Member for Stone referred to public sector net borrowing. It is defined in the code for fiscal stability. A revised code was published yesterday, a copy of which is in the Library of the House.

Finally, let me deal with the question of whether financial interventions should be included in the Government's accounts. I ask the Committee to consider for a moment whether it is realistic to include all the assets and liabilities of Royal Bank of Scotland in the Government's accounts, perhaps on a line-by-line basis, or whether it is better to treat them as a separate entity. When I was running an investment company with investments in a range of companies, I found that, if one owned more than 50 per cent. of the shares, line-by-line consolidation produced a very distorting picture of the overall financial position of the organisation.

I believe that clarity and transparency are important, and we in the Government are very clear about what we are doing. We expect the financial interventions that we have made to be temporary. We have no desire to own Royal Bank of Scotland for a long period; we want, over a sensible period and when it means value for the taxpayer, to divest ourselves of our stake in it. It simply does not make sense to take some of the actions that Opposition Members have suggested in terms of accounting treatment, and the same applies to pensions. My hon. Friend Mr. Todd made several good points in rebutting some of the arguments advanced by the hon. Member for Braintree.

We can probably argue about different definitions of national accounts until the cows come home. What is important is proper transparency, enabling those who examine financial accounts under different accounting conventions to understand what is going on. These matters can be quite confusing for the public. However, it is important for us to meet our legal commitments under the Maastricht treaty by reporting under the ESA95 rules, and also important for us to apply international financial reporting standards.

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Several hon. Members:

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Photo of John Redwood John Redwood Conservative, Wokingham

Does the Minister accept that the Government, like a rake, have taken out the biggest ever mortgage and declared that, then taken out a second mortgage which they have not declared, and then taken out lots of hire-purchase agreements which they have also not declared? They have maxed out on a dozen credit cards which they should not have had and which they have not declared, and now they want to go off to the pawnbroker. We need an honest statement, and then we need a cut in the amount of the deficit, not a cut in the rate of increase. We need to get the deficit down.

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Photo of Ian Pearson Ian Pearson Economic Secretary, HM Treasury

The right hon. Gentleman is merely engaging in political rhetoric. It is clear that different accounts were prepared on different bases, and also that information is available and is publicly disclosed. The right hon. Gentleman knows that that information is available. He is trying to use it for his party's political ends, and I cannot blame him for wanting to do that. I am simply making the point that those who understand accounting principles and the way in which these things operate know very well the differences, understand perfectly what is going on here and find no difficulty with it.

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Photo of Ian Pearson Ian Pearson Economic Secretary, HM Treasury

I give way to the hon. Gentleman, who will undoubtedly engage in another political point-scoring exercise.

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Photo of Brooks Newmark Brooks Newmark Opposition Whip (Commons)

I beg to differ. I think that the Minister, whom I know to be an intelligent and thoughtful individual, will have gone to the Corporate Project Solutions website at www.cps.co.uk and seen three excellent pamphlets written by yours truly-one called "Simply Red", one "The Price of Irresponsibility" and the other "The Hidden Debt Bombshell". Through these, we have called for greater transparency. The Minister mentioned the word "transparency", but he knows as well as I do that generally accepted accounting principles today say that if one acquires any other company or bank with a more than 50 per cent. stake, one has to consolidate the balance sheet. That means that the Government must be much more honest about the debt they acquire when they acquire those banks. In addition, there is the rule that the pension liabilities of companies have to be shown on balance sheet; the Government should do likewise.

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Photo of Ian Pearson Ian Pearson Economic Secretary, HM Treasury

The hon. Gentleman heard what I said when I recounted my experiences before I entered the House. I do not think that including all the financial interventions on balance sheet would give a particularly helpful picture.

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Photo of Ian Pearson Ian Pearson Economic Secretary, HM Treasury

I give way to Mr. Pelling, but then I really want to make some progress, as I have already given way to everyone else who wanted to intervene.

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Photo of Andrew Pelling Andrew Pelling Independent, Croydon Central

I am grateful to the Minister and I shall not make a party political point. In reality, the Government have taken on the bad debt of the banks; there has been a socialisation of bad debt. Is it not therefore dangerous to have this straitjacket when the Bank for International Settlements is putting on pressure to increase capital reserves, leading to less lending by banks? When we have to deal with a huge deleveraging of the economy, is it not also dangerous to straitjacket ourselves in this way, which risks sending the economy down into another recession?

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Photo of Ian Pearson Ian Pearson Economic Secretary, HM Treasury

I am not sure whether the hon. Gentleman is arguing that we should not have intervened as we did with the Royal Bank of Scotland or the Lloyds Banking Group- [Interruption.] He says that we should have intervened. Well, those actions have consequences: we have major shareholdings in RBS and Lloyds Banking Group so we have to determine the appropriate accounting treatment. There is obviously disagreement among Conservative Members who I think really want to make political mischief of these issues rather than understand the fact that they are accounted for in a number of different ways according to different accounting conventions.

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The First Deputy Chairman:

Order. Before the hon. Member intervenes, I repeat that interventions should be as brief as possible.

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Photo of Bill Cash Bill Cash Conservative, Stone

Is the Minister aware that arguments about RBS demonstrate that what the Government are doing now is what RBS was doing, which is what led to all the trouble for RBS in the first place?

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Photo of Ian Pearson Ian Pearson Economic Secretary, HM Treasury

I do not want to go over the history of the Royal Bank of Scotland, but I do not believe that the hon. Gentleman's suggestion is right; we are not making the mistakes that RBS made, but have taken the action that was necessary to ensure financial stability in the UK economy and to help protect jobs, consumers and savers. I believe that this was fundamentally the right thing to do.

On the speed of consolidation, it is a difficult assessment to make and there is a clear difference of political opinion between us. Our judgment, as the Chancellor made clear, is that taking steps to reduce the deficit while securing group growth-that is what the clause requires-is the right approach to take. In turn, growth will make it easier to lower the deficit and pay back debt, which is also required by the clause. Our judgment is that tightening fiscal policy too quickly in 2010-11 would present risks, and it is not just the Government who think that. The Governor of the Bank of England has said:

"It is certainly true that if you eliminate the debt too aggressively, it will have an adverse consequence."

The managing director of the IMF agrees, in saying:

"Unwinding the stimulus too soon runs a real risk of derailing the recovery, with potentially significant implications for growth and employment."

Our judgment is, as I said, that acting too quickly in 2010-11 would present risks to the economy, but the economy will be in a better place to support a more rapid tightening in 2011-12.

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Photo of Kelvin Hopkins Kelvin Hopkins Labour, Luton North

I am pleased that my hon. Friend has pointed out the dangers of dealing with debt too rigorously. Does he accept that the best way to reduce the debt, in the medium to long term in particular, would be to ensure that public expenditure is not savagely cut and that jobs are maintained so that we have tax revenues coming in and minimal benefits being paid out? That is the way to get the deficit down over the longer term-by maintaining employment, which means sustaining public expenditure in the short term.

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Photo of Ian Pearson Ian Pearson Economic Secretary, HM Treasury

I believe that growth is the best way to cut debt, which is why we should not jeopardise the recovery. We need to ensure that the public finances are on a sustainable footing and that is what we are trying to achieve. We are forecasting GDP growth to accelerate, predicting it will be 1.25 per cent. in 2010. I simply note that the latest average prediction of independent forecasters is that it will be about 1.4 per cent. and that their estimates are creeping up. We predict that it will be 3.5 per cent. in 2011 and 2012. In those circumstances, there is greater space for the Monetary Policy Committee to use interest rates to support demand as well.

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Photo of Ian Pearson Ian Pearson Economic Secretary, HM Treasury

I have given way to all the hon. Members who are standing up. Given that the next group of amendments covers pretty much the same ground, they will have opportunities to make speeches when we discuss those provisions, and I shall therefore make progress.

I do not want the Committee to take the view that what the Government are proposing is anything other than tough; it is probably the toughest action of any G7 country. The average annual reduction in the Italian budget deficit over the next four years is 0.1 per cent. The corresponding percentages are 0.4 for Japan, 0.9 for France, 1 for Canada and 1.2 for Germany and America, whereas the UK's figure is 1.9 per cent. That shows the significant consolidation that will be required.

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Photo of Ian Pearson Ian Pearson Economic Secretary, HM Treasury

My hon. Friend is the exception to the rule, because she has not yet made an intervention, so I am happy to give way to her.

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Photo of Katy Clark Katy Clark Labour, North Ayrshire and Arran

My hon. Friend must accept that many of us feel that this approach is simply far too radical a response in cutting the deficit; cuts of about 16 or 17 per cent. on essential services-that is what the Financial Times has reported-will have a massive impact on the British people. Surely this is not necessary. We need to examine other ways to deal with this deficit and pay it off over a long period.

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Photo of Ian Pearson Ian Pearson Economic Secretary, HM Treasury

I understand what my hon. Friend says. As a Government, we have to make a judgment as to what is in the country's best interests overall, and what we are proposing will clearly be extremely painful. I think it will be tougher to deliver than almost all of us in this House really understand. She is right to point out the difficult circumstances that it could create in many communities in this country. The Government must be extremely mindful of that when calibrating policy and taking decisions. As I said, growth is what is important. The more we can secure growth, the more we will be able to achieve the reductions that are required to meet the targets in this Bill. She is right to point out that this is very difficult, but I do not think that extending things over a longer period of time would be in the country's best interests. We have to strike what we think is the right balance in taking action to ensure that we have sustainable public finances over the medium term-that gives the markets confidence to want to continue to invest in the UK economy. Our judgment is that the pace that we are proposing is appropriate and right for the circumstances, but we cannot pretend that it will be anything other than very difficult indeed.

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Photo of Kelvin Hopkins Kelvin Hopkins Labour, Luton North

With respect, may I say to my hon. Friend that what he is suggesting is contradictory? If, as he is suggesting, this tightening of belts and cutting is going to be painful, that will have the opposite effect to promoting growth, because it will reinforce the recessionary tendencies in the economy. It is having a more relaxed approach to public expenditure in the short term that will help to promote growth and keep employment high, and that will reduce benefits payments and increase tax revenues. That will solve the problem.

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Photo of Ian Pearson Ian Pearson Economic Secretary, HM Treasury

Again, I understand my hon. Friend's point. However, we still need to take action to ensure that we have fiscal consolidation in this country. The more that we can have growth, the better it will be as it will give us the opportunity to reduce the deficit still further. He is right to say that if we see public sector job reductions as a result of the measure, that will have consequences in communities and for our economic output. We need to consider all that in the round in making our decisions about how best to act, and I want to reassure my hon. Friend that it is certainly the Government's intention that we should do so.

Let me move on briefly to address the issue of flexibility. A number of hon. Members sought to suggest that there was no flexibility in the Government's consolidation plans. That is not correct. In the event of a significant and sustained economic shock on the scale of that which we have seen over the past 18 months to two years, we would quite obviously want to consider what path of fiscal policy would be appropriate for the economy. Subject to progress being made in reducing borrowing every year, there is flexibility on the profile for halving the deficit by 2013-14. So, for example, if growth is lower and the impact of the automatic stabilisers is greater, there is the flexibility to accommodate that so long as there is progress on reducing borrowing.

On the amendments, I first want to agree that the structural deficit is an important fiscal aggregate, so Mr. Gauke has a point. One of the key ambitions of the Bill is to provide certainty, as he knows, about the future path of fiscal policy, and targeting a structural measure of the deficit when there is such uncertainty about the position of the economy and the size of the output gap runs counter to that ambition. We are trying to target overall borrowing, which is a directly observable national statistic that is measured independently by the Office for National Statistics. Not even the hon. Member for Stone disputes that.

Furthermore, amendment 2 would reduce the extent of the plans to tackle the deficit. The hon. Member for South-West Hertfordshire needs to think very carefully about pressing the amendment to a vote. The pre-Budget report forecasts-on the basis of the forecast for overall borrowing falling to 5.5 per cent. of GDP in 2013-14, which is the Government's target-that cyclically adjusted borrowing will fall by almost two thirds, far more than the Opposition's amendment requires. Opposition Members are saying that they want to move faster, but amendment 2 would not do that. That is not to say that I would advise my hon. Friends to support it, either-I do not think that that is the right course of action.

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Photo of Andrew Tyrie Andrew Tyrie Chair, Tax Law Rewrite Bills (Joint Committee)

I am grateful to the Minister for giving way-he is being extremely generous. In my remarks, I said that once we had won on amendment 2, it would have consequential implications for the targets that we in the Opposition would want to follow were we to be foolish enough to end up with this Bill on the statute book. The Minister knows very well that his point is disingenuous, and so his point about thinking seriously about voting for the amendment is nonsense.

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Photo of Ian Pearson Ian Pearson Economic Secretary, HM Treasury

The Opposition can decide what they want to do and whether they want to force a vote. Amendment 2 is very clear, and its implications would be that the deficit would be cut more slowly than the Government propose. That runs counter to the Opposition's policy. That is why they seem to me to be confused and muddled in their thinking and in what they are trying to achieve with their amendments.

Given the profound impact of the global financial crisis on the deficits and the national debt in all major economies, it is right to focus on reducing the deficit and stabilising debt. That is what the Government are trying to do, and it is what we are proposing to do through clause 1. The amendments are confusing and muddled, and although I do not disagree with the overall principle of wanting to get structural borrowing down-that is, of course, a right and sensible thing to do-I do not think the amendment is helpful, and I hope the hon. Member for South-West Hertfordshire will withdraw it. If he does not, I strongly advise my hon. Friends to resist it.

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Photo of David Gauke David Gauke Shadow Minister (Treasury)

This has been a useful debate, and I thank the following right hon. and hon. Friends for their contributions: my right hon. Friend Mr. Redwood and my hon. Friends the Members for Chichester (Mr. Tyrie) and for Stone (Mr. Cash) for their speeches, and my hon. Friends the Members for Sevenoaks (Mr. Fallon) and for Braintree (Mr. Newmark) for their interventions. It is also noteworthy that, clearly after the Government Whips had trawled through the Tea Rooms and the Palace in general, we have had a contribution from the Labour Back Benches. However, in the speech of Mr. Todd, his thoughtfulness, as always, got the better of him, and his remarks were hardly the ringing endorsement that the Government would have wanted. To paraphrase his argument, what he said was, "I'm not sure this Bill will ever become legislation, but it does at least give us an orderly process for discussing the matter." That is a reasonable point, but I am not sure that the big moment the Government have been waiting for was a Back-Bench Member speaking in support of the Bill in such a fashion. There have also, of course, been a number of other Back-Bench contributions questioning the Government's proposed policy, such as that from Kelvin Hopkins.

I shall not enter into a wider debate about clause 1, as we will have opportunities to exchange selective quotations again when we move on to a future group of amendments. I shall, however, talk briefly about the Minister's remarks. I am grateful for two points that he made. First, he accepts that all political sides agree on the need for automatic stabilisers. Sometimes, Government Ministers-and in particular the Prime Minister-are less careful in their characterisation of Opposition policies than the Minister, and it is right that he said that. It is also welcome that the Minister displays a degree of honesty as to the difficult future choices the country faces; at least there was none of the "cuts versus investment" nonsense that has so characterised the Prime Minister's utterances on this matter over the last few months.

On fiscal targets, the Minister made the point that Ministers should be accountable to the House, which raises the question of why we need to put all this in legislation in the first place. It is entirely otiose-to use a word of which the Minister is fond-to do this. He also fully accepts that the structural deficit is a valuable measure, but he brings into question certainty in that regard. This Government have, of course, relied on cyclical measures for most of the time that they have been in power, and I know that that is not necessarily the strongest argument in favour of cyclical measures and targets, given how they were abused. However, the Minister did not say anything that got to the heart of amendments 1, 2 and 3, which is that, even if we accept that there is a need for a straitjacket-which we do, although we are doubtful about the need for a legislative straitjacket-it is important that we have the right straitjacket. This is the wrong straitjacket. Given that the Chancellor has said that if there was another banking crisis, he would just have to come back to the House and ignore the Bill, it does nothing for the credibility of these targets, and the Government's policy on the deficit, to have in place the wrong measure.

I remain confused about the Minister's argument that our proposal suggests cutting the deficit more slowly than the Government propose in both cases. He referred particularly to amendment 2, which relates to subsection (2). We end up with the relevant measure of borrowing by 2014 being half of what it was in 2010. I look at the numbers in the pre-Budget report, and the Government's projections show public sector net borrowing falling from 12 per cent. to 5.5 per cent. and the cyclically adjusted PSNB falling from 8 per cent. to 3.6 per cent. The ratio of those numbers in both sets is almost identical, so I do not think that that is right. It enables the Bill to take into account economic growth and the economic cycle. If economic growth turns out to be faster than the Minister anticipated, it would mean reducing borrowing by even more, and there will be scope to do so.

Clause 1 misses the main target and nothing that the Minister said today addresses that. I say to Labour Members, some of whom, I hope, will have listened to the debate, that ours is a more sensible and pragmatic approach. Let there be no doubt that we are very serious about the deficit and we think the Government are taking too long to address it.

In conclusion, I intend to press amendment 1 to a Division. Were that to be successful-on the balance of the debate in the Chamber, it should be-I shall press amendments 2 and 3. For the moment, I shall press amendment 1 to test the mood of the Committee.

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Question put, That the amendment be made.

The Committee divided: Ayes 200, Noes 286.

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Division number 49 Prime Minister — Clause 1 — initial duties

Aye: 200 MPs

No: 286 MPs

Ayes: A-Z by last name

Tellers

Nos: A-Z by last name

Tellers

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Question accordingly negatived.

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The First Deputy Chairman:

I have now to announce the result of the Division deferred from a previous day on the question relating to Adjournment (February). The Ayes were 248 and the Noes were 194, so the Ayes have it.

[The Division list is published at the end of today's debates.]

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Photo of Jeremy Browne Jeremy Browne Shadow Minister (Treasury)

I beg to move amendment 4, page 1, line 14, at end add-

'(4) The Chancellor of the Exchequer may, for the purpose of securing sound public finances, by order made by statutory instrument disapply this section in relation to any period of not more than one year beginning with the coming into force of the order.

(5) The Chancellor of the Exchequer must not make an order containing, with or without other provision, any provision disapplying this section in relation to any period unless a draft of the order has been laid before Parliament and approved by a resolution of the House of Commons.'.

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The First Deputy Chairman:

With this it will be convenient to take the following: amendment 5, page 1, line 14, at end add-

'(4) This section shall not come in to force until the Treasury has laid before the House of Commons a review of the accuracy of the projections of public sector net borrowing contained within-

(a) The Budget 2008,

(b) The Pre-Budget Report 2008,

(c) The Budget 2009, and

(d) The Pre-Budget Report 2009.

(5) A review under subsection (4) is subject to approval by resolution of the House of Commons.'.

New clause 1- Commencement-

'(1) This Act comes into force on such day as the Treasury may by order made by statutory instrument appoint.

(2) No such order may be made unless a draft of the statutory instrument containing it has been laid before Parliament and approved by a resolution of the House of Commons.

(3) No such draft may be laid until the Treasury has conducted a consultation on the contents of this Act and laid before Parliament a report setting out a summary of responses.'.

New clause 16- Commencement-

'(1) Section 2 comes into force when the Treasury has laid before Parliament a report containing an estimate of the impact on economic growth that will result from the fulfilment of the duties set out in that section.

(2) The remaining provisions of this Act come into force on Royal Assent.'.

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Photo of Jeremy Browne Jeremy Browne Shadow Minister (Treasury)

I and my colleagues tabled amendments 4 and 5. To follow on from the observations of Mr. Tyrie on the last group of amendments, there is indeed an Alice in Wonderland quality to the Bill-it is extraordinary that we are all being invited to spend a whole day discussing it.

I said in my last contribution that when I was doing a radio interview recently a Labour MP said to me, "What do you mean we don't take the deficit seriously? We are bringing in a law to deal with the deficit," as though passing legislation and having a positive set of policies and a desire to implement them were one and the same. Clearly they are not. The very same Labour MP, in the same radio debate, maintained that the principal party of opposition to the Iraq war was hers as well. The whole Labour party is now in a state of complete denial about its position in politics, and nowhere is that more true than with regard to the enormous budget deficit that it has presided over. It told us that it had abolished boom and bust, that Britain could enjoy continuous economic prosperity and growth, and that the normal economic cycle that had applied throughout history no longer applied under the current Prime Minister. That has now emphatically been proven not to be the case.

Clause 1 has three specific duties. In an intervention a couple of hours ago on Mr. Redwood, I perhaps caused some confusion by mentioning the aspect of the Bill that has attracted the greatest attention-halving the deficit in what people assume will be the lifetime of the next Parliament, if it runs a typical length of time. However, there is the added inflexibility of the requirement to reduce the deficit year on year, through to 2016. There is therefore no scope for making adjustments based on exceptional circumstances. That should concern us all.

On Second Reading, I raised a matter with the Chancellor, and I am afraid that I did not get a good response. His response was evasive-I do not mean that he was disrespectful to the House, simply that he followed the logical consequences of his position. I gave two examples. First, I asked what we would do in the case of a massive additional threat to our national security. I hope that that is unlikely, but it is not impossible-we must have some sort of contingency plan and provision for an event of that magnitude.

At the end of the second world war, Britain's cumulative debt was 250 per cent. of GDP. Our public finances were in a truly frightening position, but the judgment was made-I suspect that everybody agrees that it was the right judgment-that it was worth putting ourselves in such straitened circumstances because the prize of winning the war was so great and the downside of losing so immense. We had to put normal economic considerations to one side to protect the freedom and independence of our country and all the values that we hold important. Obviously, I hope that nothing that serious happens between now and 2016-or, indeed, ever-but were something serious to happen to us as a country, how could we possibly proceed with the assumption in the Bill that the deficit would be cut year on year, and cut in half by 2014?

My other example, which is perhaps more likely, was about re-entering recession between now and 2014 or 2016, depending on which of the two time scales in the Bill applied. What would happen? Plenty of eminent economists believe that there is a risk of a so-called double-dip recession-that we will not recover as the Government forecast, that there is genuine potential for the structural damage to our economy to prove lasting, and that growth will be weak and even negative. If there were some wider international dimension-we all acknowledge the international dimension to the recession out of which the world is now pulling-that caused shock waves throughout the developed world and economies, it is possible that, even if the Government or any subsequent Government acted with great fiscal restraint, we would still be thrown into another recession, due not to the decisions made in the House or by Ministers, but perhaps to seismic events in one of the big economies elsewhere. In that case, the measure, which requires us to halve the deficit-not simply the dimension covered by amendment 1, which the Government defeated-would put us in a ruinous position if we abided by it while trying to grapple with serious world events.

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Photo of Andrew Love Andrew Love Labour, Edmonton 4:00 pm, 20th January 2010

Does the hon. Gentleman agree that a double-dip recession is most likely if we remove the fiscal stimulus in 2010, when growth is forecast to be a very sluggish 1 to 1.5 per cent, and when no one could consider the recovery secure?

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Photo of Jeremy Browne Jeremy Browne Shadow Minister (Treasury)

The hon. Gentleman makes a slightly different point-he is talking about the timing. As there is a reasonable consensus in the Committee, including all but one or two Labour Members, that we would like the deficit to be lower than it is at the moment, the debate ends up being about timing, rather than whether we aspire to cut the deficit.

There is a range of views on timing. For what it is worth, the Liberal Democrats' view is that it should not be political-it should not take account of the requirements of a general election campaign in the next few months. We need to bear in mind a range of economic factors, including Britain's creditworthiness and unemployment, before we can make meaningful decisions about the appropriate speed with which to reduce the deficit. On that basis alone, we are uncomfortable with, and opposed to, this legislation, leaving aside the Alice in Wonderland nature of the deliberations.

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Photo of Lembit Öpik Lembit Öpik Liberal Democrat, Montgomeryshire

Is my hon. Friend basically saying that there is no way we can legislate for unforeseen circumstances? Does it strike him as somewhat ironic that the very reason why we are having this debate in the first place is that the Government did not see the recession coming?

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Photo of Jeremy Browne Jeremy Browne Shadow Minister (Treasury)

I am put to shame by my hon. Friend's brevity, because that is what I have basically been saying for the past 10 minutes. He sums up the situation brilliantly.

I cited the examples of a huge threat to national security or a double-dip recession, but we could doubtless think of other exceptional but nevertheless imaginable circumstances in which the straitjacket of this legislation would simply not be in our interests. When that problem came up on Second Reading, the Chancellor, with a waft of his hand, said, "Oh well. In those circumstances, we'd just ignore it." I am paraphrasing, but I should have the exact quote-it might have been still more casual, something like, "Of course we wouldn't be bound by this legislation in such circumstances." That prompts the question why we have been invited to spend hours in the Chamber when the legislation, as I understand it, is in practice a set of guidelines to which Ministers can adhere if they find that convenient, but ignore if that is a preferable option. Of course, the Government can do that in any case. If the Bill can be discarded on a whim, and if there are no sanctions for doing so, why have it at all?

On that basis, I tabled amendment 4, which would allow the provisions to be suspended for one year, which could of course happen repeatedly if that was felt necessary. I have sought to introduce a procedure that would give the Chancellor's casual observance a legal basis. I am not in favour of the Bill-I think it is utterly absurd-but if we are going to have it on the statute book, and if the Labour Members packing into the Chamber to weigh up the arguments cannot be persuaded of the case that I and others are making, we might as well have a measure that works and that is at least vaguely credible in terms of its practical application.

To have no contingency, which is the case at the moment, seems ridiculous. My hon. Friend alluded to the fact that that is particularly so because the Prime Minister who claimed to have abolished boom and bust has now presided over the biggest peacetime deficit in our history, or certainly for a very long time-I have actually been told that our deficit might have been greater in 1921. He is now introducing legislation that seems to be predicated on the assumption that, despite all evidence to the contrary, boom and bust has been re-abolished and there is no danger we will encounter it again.

Of course, that is not the Government's position in practice. The Chancellor announced in 2008 that he would break the Government's much championed golden rule, and when he was asked why he was doing that, he replied:

"To apply these rules rigidly in today's changed conditions would be perverse."

That is precisely the point I am making. It would be perverse to apply this Bill, were it to become an Act, in the scenarios that I have been discussing.

Amendment 5 would require the Treasury to report on, and the House to approve, the accuracy of the public sector net borrowing projections that the Chancellor made in the Budget 2008, the pre-Budget report 2008, the Budget 2009 and the pre-Budget report 2009. The amendment may appear, on first inspection, to be somewhat tangential, but I tabled it to emphasise the incompetence of the Government in their forecasts and management of public sector net borrowing, and ask the valid question why the Government expect us to have any faith or confidence in their ability to make these projections through to 2016.

In previous debates, the Chancellor has said-I paraphrase slightly-that although the forecast for borrowing for this year was £175 billion and has now gone up to £178 billion, he has always made it clear that the figure would be roughly of that order and nothing surprising has happened. But that is not the case. The latest estimate for the deficit for this financial year, which ends in a few months, is £178 billion. In the Budget in 2008-less than two years ago-the Chancellor predicted that borrowing this year would be £38 billion. He was out by £140 billion. He then revised the figure upwards in the PBR at the end of 2008 to £118 billion. In the Budget 2009, only a few months later, it was up to £175 billion-a £57 billion increase in only a few months. Then it went up again by another £3 billion in the PBR only a few weeks ago.

My point is that the Government's projections for the public finances were emphatically wrong, out by £140 billion. In the Budget 2008, less than two years ago, the Government prediction for borrowing in 2010-11 was £32 billion. They are now predicting that it will be £176 billion. For 2011-12, the Government predicted £27 billion of borrowing, and now they predict £140 billion. The Government's estimates are way off beam. They underestimate our borrowing requirements by almost £3 billion a week. Now they seek to give us a projection of their intentions right through to 2016 and invite us to take that seriously.

As I said on amendment 4, we do not know what will happen between now and 2016. We must have a plan in place with some intelligent, sensible guidelines that take account of the state of the economy and the need to reduce our huge deficit as quickly as we can, consistent with not damaging the economic recovery or economic growth and with maintaining the level of public services that people in this country want. It is a balancing act. A quarter of public spending is unfunded at present. There are no simple solutions and we are in a very difficult position, but the idea that there is some magic formula that can be put forward in a six-clause Bill, when the Government cannot even work out two years in advance their borrowing requirement, is entirely fanciful.

On that basis, I hope that the Committee will debate with enthusiasm, and support, amendments 4 and 5. Depending on what the Minister and others say, I might seek permission to press amendment 4 to a Division.

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Photo of David Gauke David Gauke Shadow Minister (Treasury) 4:15 pm, 20th January 2010

It is a pleasure to speak on this group of amendments, which essentially brings together various ways of delaying the Bill's implementation and assessing it in the light of various matters. Mr. Browne set out his thinking behind amendments 4 and 5, and I will say a word or two about that in a moment. The grouping also includes new clause 16, tabled by Stewart Hosie, and new clause 1.

Amendment 4 proposes to delay the operation of the Bill. I have much sympathy with the thinking behind the amendment as it was set out by the hon. Member for Taunton, although I am not entirely sure whether it would necessarily work as he would like and allow the disapplication of the Bill for a year. I will be interested to hear what the Minister has to say about that. I was confused by the words,

"beginning with the coming into force of the order."

Given that the targets and duties set out in the Bill will not apply immediately, I am not sure how effective that would be. Perhaps that can be clarified during the debate.

On amendment 5, I have a lot of sympathy with what the hon. Member for Taunton said about the need to review the accuracy of the forecasts provided by the Treasury in recent years. That was a well-made point. I suspect that the Minister will say in response to many of the hon. Gentleman's remarks that the recession threw everything out; that borrowing therefore rapidly increased; that we did not anticipate the recession, or at least the depth of the recession; and that that is why we are in this position.

The problem, however, goes deeper and goes back further. It is worth noting the various budget estimates of when the country would next have a balanced budget. In 2003 it was estimated in the Budget that we would have a balanced budget by 2005; by 2004 that had moved to 2007; in 2005-I do not know whether this is a coincidence, but that was the pre-election Budget-the estimate was still 2007; by 2006 it had moved to 2008; by 2007 it had moved to 2009; and by 2008 it had moved to 2011. And that was before we started to get into the real horrors of the recession and the significant downgrading in the 2009 projections.

Robert Chote, of the Institute for Fiscal Studies, put it nicely when he described the Treasury's record on projections of public finances as

"a sustained display of conviction forecasting".

There is a long-standing inaccuracy, and it all goes the same way. As far as the public finances are concerned, the Treasury has consistently underestimated the scale of borrowing and consistently taken an optimistic approach.

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Photo of Andrew Love Andrew Love Labour, Edmonton

In the forecasting business, it is easy to look back at previous forecasts and point out the inadequacies of those contained in the Budget and pre-Budget documents. However, the hon. Members for South-West Hertfordshire (Mr. Gauke) and for Taunton (Mr. Browne) speak as if there were a magic formula, or a forecaster who has been getting it right all the time. Yet all the private forecasters have been just as bad, or indeed even worse. Although the IFS has been critical of Government forecasts, it has not exactly been an accurate forecaster itself. Does the hon. Gentleman accept that there are difficulties in forecasting, and that all that his figures do is reflect those difficulties?

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Photo of David Gauke David Gauke Shadow Minister (Treasury)

Of course there are difficulties in forecasting, but when it comes to forecasts for the public finances, it would be fair to say that the Treasury's record is not good. I am being generous in not focusing on the spectacular inaccuracies of the past couple of years-a point made by the hon. Member for Taunton-because, as the Minister will no doubt say, there was the recession. However, there is another significant point to be made, which is that those inaccuracies are starting to undermine the credibility of the Government-by that I mean government in general; I am not necessarily making a partisan point-in that there is an apparently systemic bias in the Treasury's projections. We can run through the past six or seven years, but the Treasury constantly gets it wrong the same way, year after year.

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Photo of Andrew Love Andrew Love Labour, Edmonton

I thank the hon. Gentleman for giving way a second time. Let me take a specific example. It is well understood in the forecasting business that forecasts for six months or a year ahead can be relatively accurate, but as the forecast moves forward in years, the inaccuracy increases exponentially. Let us take the forecast for 2010-11. A year ago, when the Government made the forecast that growth would be 1 to 1.5 per cent., they were widely ridiculed, on the specific basis that the hon. Gentleman mentioned, for being biased in an over-optimistic way. We now discover that the consensus of forecasters is that growth this year will be 1 to 1.5 per cent. Does he admit that sometimes the Treasury gets it right?

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Photo of David Gauke David Gauke Shadow Minister (Treasury)

I do not think that the hon. Gentleman has accurately characterised where the debate was a year or so ago. I remember making speeches about the issue at the time, and the Treasury forecast was at the upper end of forecasts, but it was not that out of line. The criticism-I remember hearing this point made, and I even made it myself-was more of the forecasts for 2011 and onwards, which predicted a trampoline recovery, with growth at 3.5 per cent. year after year.

The Treasury might prove to be right about that. However, if the hon. Gentleman wants to highlight the success of the Treasury's growth forecasts, I would also remind him what the growth forecasts were for the economy at the time of last year's Budget. The forecast was for a much shallower recession than we have actually had. If I remember rightly, the Treasury predicted a recession of the value of about 3 per cent. of GDP, which is significant enough, but the figure turned out to be 4.5 per cent. Taken over those two years, the Treasury was not bang on the money; it got it wrong. However, when it comes to the public finances, the Treasury has consistently got it wrong the same way.

That could be just one of those things, but there is a certain perception out there. This is an important point that I want to put directly to the Minister, but there have been reports that the Prime Minister has on a number of occasions tried to interfere with the Treasury to ensure that its figures were better than they would otherwise have been, whether for growth or borrowing numbers. That accusation has been published on a number of occasions. It is a very serious accusation, so if the Minister could provide some reassurance to the House that there has been no interference from the Prime Minister in such matters, that would be welcome.

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Photo of Jeremy Browne Jeremy Browne Shadow Minister (Treasury)

I am interested in the point that the hon. Gentleman has just made. During my speech, I spoke of the massive disparity between the initial forecasts and the revised forecasts that appeared later. Of course economic circumstances change, and my point was that this is so difficult for the Government precisely because the circumstances are always evolving in that way. Is the hon. Gentleman also saying that there is another factor at play-that improper political pressure is being brought to bear on the statisticians, and that the figures with which everyone in the House is working, and which are presented to the public at large, are not a faithful representation of what the Government believe the actual picture to be?

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Photo of David Gauke David Gauke Shadow Minister (Treasury)

Those are the allegations that have been made, and I hope that the Minister will be able to dispel them and put a categorical statement on the record that, as a Treasury Minister, he is not aware of any interference coming from the Prime Minister in this area. We will all be much happier as a consequence, and we shall not have to wait until the Chancellor publishes his memoirs.

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Photo of Angus MacNeil Angus MacNeil Shadow SNP Spokesperson (Scotland), Shadow Spokesperson (Culture, Media and Sport), Shadow Spokesperson (Environment, Food and Rural Affairs)

According to the PBR, the United Kingdom is going to be borrowing £403 million each and every day over the next six years. Given what the hon. Gentleman is saying about forecasts, does he think that that figure is likely to increase over that period?

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Photo of David Gauke David Gauke Shadow Minister (Treasury)

I am not going to get into the business of making forecasts on these matters-

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Photo of David Gauke David Gauke Shadow Minister (Treasury)

Thank you very much. I am grateful to the hon. Gentleman for that intervention; he shows good judgment.

It is important that we have a credible system. We are not going to get into a full debate on this now, but our proposal for the establishment of an office of budget responsibility, whereby the powers to make such forecasts would be transferred to an independent body outside the Treasury, would address a number of issues, including the concern that political interference might drive some of the numbers produced by the Treasury. Mr. Love was right to say earlier that forecasting was difficult. We are talking about two very big numbers here-expenditure and receipts-and getting them exactly right is not something that we can necessarily expect. However, the bias-by which I mean the tendency of the Treasury to look at this always from an optimistic point of view-is a concern. Certainly, the reports-which do not come from my party-that the Prime Minister has tried to interfere in this are really important.

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Photo of Katy Clark Katy Clark Labour, North Ayrshire and Arran

The hon. Gentleman keeps referring to accusations made by other people, and to reports. Is he making these very serious accusations himself? Is he suggesting that there has been some kind of interference with statistics from the Treasury or from the Office for National Statistics? If he seriously believes that, he should bring the evidence to the House.

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Photo of David Gauke David Gauke Shadow Minister (Treasury)

I am choosing my words carefully. I do not have the evidence that that has happened, but there have been various media reports-I am not going to list them all here-that it has happened. We are not talking about the Office for National Statistics; these figures are produced, as I understand it, directly by the Treasury. If the Minister could address that particular point, we would all be happy. I am not claiming to be bringing evidence of this to the House, but I think that it would be helpful, given that this discussion does exist, if it was addressed.

New clause 1, tabled in my name and that of my hon. Friend James Duddridge, deals with consultation on the Bill. It is worth reminding the House of the purpose of the Bill. It is to provide greater credibility for the Government's fiscal policy. It was published at the time of the pre-Budget report, and it represents a policy that was heavily flagged at the Labour party conference last autumn.

The intention behind the Bill is clearly to persuade those who lend to this country that it is a fiscally responsible country, and that the Government are a fiscally responsible Government. If the Bill is worth having, it might be worth knowing whether the argument is succeeding and whether those who are supposed to be persuaded that the Government will be fiscally responsible are, in fact, persuaded. The current evidence suggests that they are not persuaded. If I may, I shall provide a few quotations. The Minister is entitled to say that they are selective, but as we agreed earlier, all quotations are selective.

William Buiter, a former member of the Monetary Policy Committee, has said:

"Fiscal responsibility acts are instruments of the fiscally irresponsible to con the public."

Michael Saunders, one of the City's leading economists, has said that

"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".

Richard Lambert, the head of the CBI and also a former member of the Monetary Policy Committee, has said of the Bill that

"it's...like...saying I'm going to join the gym and that means I'm fit already."

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Photo of Katy Clark Katy Clark Labour, North Ayrshire and Arran 4:30 pm, 20th January 2010

The hon. Gentleman has quoted a number of people who have no doubt made statements for their own reasons, but does he accept that many other economists and financial institutions do not take the same view? For example, HSBC's global head of fixed income strategy has said that the chance of the UK's defaulting on its debt is zero. Does the hon. Gentleman not accept that the repeated accusation from the Opposition Benches is ill founded, that we are at no risk of losing our triple A status, and that Britain is still very stable? Does he not accept that by continually trying to run Britain down and suggest that our economic position is worse than it is, Opposition Members are doing no service to anyone?

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Photo of David Gauke David Gauke Shadow Minister (Treasury)

No, I do not agree with the hon. Lady. She quoted HSBC. Let me quote what was said by a representative of HSBC:

"The greater the uncertainty over fiscal consolidation, the greater the danger that businesses and households will become risk averse...leading to atrophying economic activity".

It should be remembered that the Bill was part of what the Government published at the time of the pre-Budget report. According to Goldman Sachs,

"The empirical evidence from the UK and elsewhere suggests that successful fiscal consolidations share two features: i) decisive action and ii) a focus on cutting public expenditure rather than tax increases...The plans laid out by the UK Government in the PBR have neither feature and, as such, do not represent a credible fiscal consolidation".

According to Citibank,

"The PBR fails to establish a credible and detailed route back to fiscal sustainability for the UK in coming years".

I could go on.

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Photo of Jeremy Browne Jeremy Browne Shadow Minister (Treasury)

Was not Ms Clark talking about two separate issues? There is a discussion to be had about Britain's creditworthiness and about whether the Conservative party is talking down our economic recovery prospects, but that bundle of issues is completely separate from the issue of whether a Fiscal Responsibility Bill is desirable.

It is possible to decide to be fiscally responsible without the need for a Fiscal Responsibility Bill, and it seems to me that it is desirable to be fiscally responsible, although not in the way that the Conservatives suggest. I believe that we, as a country, need to demonstrate a desire and an ability to get to grips with the deficit. However, the question of why on earth the Treasury needs to establish a legal framework rather than just getting on with doing the job that it is paid to do is completely separate from that.

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Photo of David Gauke David Gauke Shadow Minister (Treasury)

The hon. Gentleman makes a helpful intervention; there are two separate points there. If the Bill is intended to provide reassurance to those institutions that lend to us, or to the advisers to whom they listen, the evidence so far is pretty clear: it will not work. Have the Government set out a credible fiscal policy? Again, I think the evidence is pretty clear that they have not provided anything credible.

I return to the remarks of the Governor of the Bank of England last night, particularly his quoting of Ben Bernanke stating the need to set out a strong commitment to fiscal sustainability in the long term. The Governor went on to say that the Chancellor had made it clear that the spring Budget provides the opportunity to do precisely that. Implicit within that is the fact that the Government have not so far set out a strong commitment to fiscal sustainability. The whole point of the Bill is, supposedly, for the Government to demonstrate such a strong commitment, but nobody is convinced.

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Photo of Katy Clark Katy Clark Labour, North Ayrshire and Arran

The hon. Gentleman has provided a range of quotations from different individuals and organisations, many of which were directly responsible for getting us into this mess in the first place. There is an irony in the fact that what is being said here today, and what was said on Second Reading, revolves around what the market demands, but as a result of that, ordinary people in this country will have their services slashed.

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Photo of David Gauke David Gauke Shadow Minister (Treasury)

I am grateful for that intervention, which repeated a point made on Second Reading by Frank Dobson. Let me go through this carefully in a way that the Government may find helpful.

At the moment, we are spending a lot more than we are receiving in tax receipts. I assume that the hon. Lady does not believe that we should stop the borrowing, but we cannot simply confiscate people's assets; we have to persuade them that if they are going to lend to us, they will get their money back. If we do not have credible fiscal policies, the markets-I know that the hon. Lady is not a fan of the markets-will either not be prepared to lend to us or will do so only at a higher rate because of the perceived risk. It is one of the great ironies of those on the left that they are so dismissive of international finance yet pursue policies that make this country so dependent on such finance to fund their very high levels of public spending. So there is an issue about fiscal responsibility. My point is that the Bill does not persuade the markets; if it does not do so, what is the point of it?

Perhaps I am wrong. Perhaps if we had a consultation, as new clause 1 suggests, some people might come along and say, "This is a jolly good idea; we are much happier to lend to the British Government because they have a Fiscal Responsibility Bill." I am somewhat sceptical about that happening, but perhaps it would.

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Photo of David Gauke David Gauke Shadow Minister (Treasury)

Before I go on to discuss the parliamentary procedure, I shall give way to the hon. Gentleman.

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Photo of Andrew Love Andrew Love Labour, Edmonton

An important point has to be made here. I think that the public will agree with the view of Government Members and some Opposition Members that if we were to cut off the fiscal stimulus, the best that could be expected is that it would undermine future growth prospects, increasing our deficit. The worst-case scenario, however, is that it would throw us into a double-dip recession. Either way, we will increase the amount of debt that we have to fund into the future.

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Photo of David Gauke David Gauke Shadow Minister (Treasury)

The hon. Gentleman makes an interesting point. It is not particularly relevant to the argument that I am trying to make, but I shall respond by making two comments. He presumably supported the withdrawal of the VAT cut at the beginning of the year. That cut was the big part of the Government's discretionary fiscal stimulus and they consider that withdrawing it was the right thing to do. We did not support the cut in the first place, as he knows. I simply make that point to him before he expresses too much certainty on the issue of the withdrawal of fiscal stimulus measures.

My second point relates to where the real risk lies. The Conservatives' view is in line with what a number of commentators have said and what the spokesman for one of the credit rating agencies, Fitch, said this morning. We think the real risk is that if this country does not have credible fiscal policies, it runs the risk of its credit rating being downgraded-that is clearly being looked at-and of paying more for its debt. If we pay more for our debt, we will end up with interest rates rising, and that will choke off the economy. So, there is a relationship between fiscal policy and monetary policy-this is exactly the point that the Governor of the Bank of England was making last night-and a judgment has to be made as to when one withdraws the fiscal stimulus and when one tightens these things. Our view is that we need to get on with it.

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Photo of Stewart Hosie Stewart Hosie Shadow Chief Whip (Commons), Shadow Spokesperson (Treasury)

There is indeed a question as to when one withdraws the fiscal stimulus, but this debate is taking place within a vacuum. The International Monetary Fund is clear about this matter: the UK is the only G7 country to be fully withdrawing its fiscal stimulus package in 2010. Irrespective of the view taken by the Conservatives or the Labour Front-Bench team, the idea that the stimulus package is still in place is completely false.

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Photo of David Gauke David Gauke Shadow Minister (Treasury)

The hon. Gentleman is right to caution against a simplistic understanding of the fiscal stimulus, but I should point out that the UK is borrowing more than any other G7 country and is in a worse position than any other G7 economy. We need to do more to rectify that.

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Photo of Katy Clark Katy Clark Labour, North Ayrshire and Arran

The hon. Gentleman referred to the Fitch report that has just been published. Does he accept that it also acknowledged that the UK has exceptional access to long-term financing and that the UK started from a lower debt base than most triple A-rated countries?

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Photo of David Gauke David Gauke Shadow Minister (Treasury)

But the report still warns that if no credible cuts in public spending are made after the next general election, our triple A credit rating is at risk.

Let us consider the reasons why we need consultation on this matter. Normally, we begin our scrutiny of a Bill with evidence sessions; if proceedings were not being taken on the Floor of the House, we would be able to invite along representatives of the credit rating agencies, City economists and other economists to find out what they thought about the Bill. Given that this Bill is so much about trying to move the perception of Britain's public finances in a more positive direction, hearing what those witnesses had to say would be hugely valuable and extremely helpful. We opposed the programme motion because of that, and I suspect that Ms Clark might have done so, too. I think that a great opportunity has been missed.

The fact that we have tried to rush through this Bill in the course of one day-we have only an hour and a quarter left of the Committee and we are still dealing with the second group of amendments on clause 1, notwithstanding the limited number of contributions from Government Members-demonstrates that we are not able fully to do it justice. Is the Minister able to tell the Committee whether the Government consider this to be a money Bill? If that is the case, the House of Lords will not have the opportunity to give it the full level of scrutiny that it requires.

This Bill has not had sufficient parliamentary scrutiny. It is important to know what the wider world thinks about it. All the evidence so far suggests that it is a waste of time. New clause 1, which would give an opportunity for full consultation on the Bill, for a report summarising those consultation responses to be put before the House, and for Members to be given the opportunity to debate in Committee of the whole House whether to bring in the Bill, would be a valuable addition. It would ensure that we do not implement legislation that serves no purpose, that persuades nobody and that undermines the credibility of this place and the Government's policy on addressing our deficits. I hope that we will get the chance to vote on new clause 1.

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Photo of Stewart Hosie Stewart Hosie Shadow Chief Whip (Commons), Shadow Spokesperson (Treasury) 4:45 pm, 20th January 2010

It is instructive that 18 new clauses and 21 amendments have been tabled to this six-clause Bill. That speaks volumes for the attempts made by all parties to make this hopeless Bill into something that is useable and desirable and that might deliver some end result from whatever perspective people look at it. Many more of my amendments and new clauses are in the next group, so I shall be brief on new clause 16. I shall also keep any general remarks for the debate on Third Reading, if we have time for one, as I hope then to catch Mr. Speaker's eye.

New clause 16 is specifically concerned with commencement. It is extraordinarily important that, before any duties imposed by order by the Treasury on the Treasury are carried out, there is absolute clarity about their impact, particularly on GDP growth and, frankly, public services and jobs. It is important that that should be in the Bill, because the Government, in the shape of the Chief Secretary to the Treasury, have failed to give us the information that we have asked for in previous debates, not least in the debate on the pre-Budget report on 7 January. He was asked questions that were directly related to the impact of the measures in this Bill and the duties that will be imposed to achieve the swingeing cut of £40 billion in 2013-14. Mr. Pelling asked,

"what is the estimate of the reduction in economic growth that will result from the proposed reductions in spend in the pre-Budget report?"

The Chief Secretary replied:

"The growth forecasts that we have set out are the basic answer to that question."

He said that, of course, there was

"a degree of uncertainty about the future path of growth for our economy", and so on, and so forth. Of course, the basic answer to the question asked by the hon. Member for Croydon, Central was not the growth forecasts that had been set out-they are, if they are to be believed at all, the result of the combination of all the measures announced over a number of Budgets and pre-Budget reports that will impact on the total public finances in the next few years.

I followed up the hon. Gentleman's question by trying to get more out of the Chief Secretary. I asked him if he could

"tell the House what the suppression of gross domestic product growth will be as a result of £57 billion being taken out of the economy-£20 billion as a result of tax rises and £40 billion as a result of spending cuts."

He replied:

"I am trying to avoid taking the House through what would be a quite complicated economic equation, which no one will be surprised to hear I have not brought with me this afternoon. The hon. Gentleman is looking at only one side of the argument."-[ Hansard, 7 January 2010; Vol. 503, c. 303-4.]

I have no doubt that it would have been a complicated formula, but I suspect the answer would have been very straightforward. The Chief Secretary ought to have been-and I hope that tonight the Minister will be-in a position to say that removing £40 billion from the economy by 2013-14 will result in suppression of GDP growth of 0.25 per cent. or 0.5 per cent., or perhaps that the formula reveals that that is the right thing to do and that that action alone will have a positive impact on GDP growth and jobs and services, although frankly, I doubt that.

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Photo of Bill Cash Bill Cash Conservative, Stone

I have enormous sympathy with the hon. Gentleman's objectives in this regard. The Chancellor has previously suggested-such as in the pre-Budget statement-that he thinks that if this Bill were enacted, it would require some adjustment in the light of future circumstances, which makes even greater nonsense of it. In light of the Chancellor's comments, does the hon. Gentleman agree that a report such as he is suggesting should be debated and voted on so that we are able to make a judgment about whether the Treasury should make an order in this regard?

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Photo of Stewart Hosie Stewart Hosie Shadow Chief Whip (Commons), Shadow Spokesperson (Treasury)

Yes, on balance I suspect that it would be right for such a report to be placed before the House, or both Houses, to be considered and voted on, but let us first take one step and secure the information before we get to the difficult bit of forcing the Government to debate and justify the information that as yet they are not even prepared to provide.

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Photo of Andrew Pelling Andrew Pelling Independent, Croydon Central

As the Government are asking us to support the Bill, is it not important that they provide information on the expected impact on economic growth? If the argument were that the impact would be minimal, we might be more inclined to support them, but we need information that will enable us to make a sound judgment on how to vote.

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Photo of Stewart Hosie Stewart Hosie Shadow Chief Whip (Commons), Shadow Spokesperson (Treasury)

That is absolutely right, and it is the fundamental case that I am trying to make. Nobody believes this Bill will deliver anything. It will not deliver the degree of fiscal consolidation that the Conservatives want, and in my view it goes far too fast and far too deep and risks economic recovery-and in so doing risks making the task of tackling the deficit and then the debt more difficult. The Bill therefore satisfies nobody. We should at least have information in advance that enables us to determine whether the duties that the Treasury wishes to impose on itself are even sensible.

The big picture is that the 2 per cent. increase in Government consumption last year provided the stimulus to the economy, while household consumption was down 3.5 per cent., business investment was down 22 per cent. and gross fixed capital formation was down 17 per cent. We may reach the technical end of a recession, but growth will be slow, faltering and fragile, and there will be huge risks, particularly from unforeseen shocks, which could occur at any time. I am certain that, before the Government take any action that could weaken the economy or its ability to recover, they must provide a proper assessment of the impact on GDP growth of the actions that they intend to take.

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Photo of Stewart Hosie Stewart Hosie Shadow Chief Whip (Commons), Shadow Spokesperson (Treasury)

I am about to finish. I am conscious that it is almost 5 pm and we are only on the second group of amendments relating to clause 1, and I have a great deal more to say on the next group.

Given that the Government have conceded that there would be a £57 billion reduction, two thirds of it in cuts to public expenditure-some £40 billion-we need to know precisely what impact the duties that the Treasury will impose upon itself when it makes those cuts will have on services, on jobs, and crucially in the context of the Bill, on economic growth.

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Photo of Bill Cash Bill Cash Conservative, Stone

I want to add one point, which I tried to make in an intervention. I am not easily put off.

Clause 2(6) states:

"A duty imposed by an order under this section must be consistent with the key principles as applied by the code for fiscal stability."

It is impossible for the objective that Stewart Hosie wisely advocated-that there should be a proper report-to be achieved in line with those principles unless, under the code for fiscal stability, there is a definition of net debt. We have been over all that so we do not need to go into it again, but the internal contradictions and the combustible apparatus that the Government have created will blow up in their face. However, we need not go any further down that route for the time being, as there are other matters to be discussed.

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Photo of Ian Pearson Ian Pearson Economic Secretary, HM Treasury

I do not know whether it was because of something that hon. Friends of Mr. Gauke knew he would say, or whether they were frightened off by something I said in the previous debate, but it will not have escaped the attention of the Committee that there were no Opposition Back-Bench Members supporting the hon. Gentleman during his contribution. I am pleased to welcome back belatedly Mr. Cash, who has just made a contribution. The regular awkward squad was not present to support him.

This group of amendments and new clauses relate to two things-first, flexibility in fiscal targets, which we discussed to some extent on the previous set of amendments, and secondly, to the reports that the Treasury must produce before parts of the Bill come into force. I shall deal with those topics separately, starting with amendment 4, which is about flexibility. In essence, it would insert get-out provisions in the Bill.

I note the points that Mr. Browne made in his speech, but I do not believe that his approach is the right one to take. It would weaken the position. I shall set out some points about flexibility, particularly in respect of future growth prospects. The fall in output following the global financial crisis has been the biggest factor in the increase in the deficit, so the return of strong and sustainable growth will be crucial in cutting the deficit over the medium term and restoring fiscal balance. Our forecast, as hon. Members know, is GDP growth of 1.25 per cent. in 2010, rising to 3.5 per cent. in 2011. As is the usual practice, revised forecasts will be produced at the time of the Budget.

In response to the hon. Member for South-West Hertfordshire, let me say that Government forecasting is a complex and detailed process. As far as I am aware, it is a process in which the Prime Minister is not involved in the slightest way. It is a very technical exercise. The UK forecasting expertise that we have in the Treasury stands comparison with independent forecasters.

The hon. Member for Taunton quoted figures relating to our forecasts in spring 2008. I know that he has spotted that things have been going on in the UK economy since spring 2008, and, like every other independent forecast, the Government's forecasts have not proved to be as accurate as we would have wished, but that is because we have had an unprecedented financial crisis that has led to the biggest global downturn in the world economy for 60 years. Everybody's forecasts have been out, and there is nothing exceptional about that.

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Photo of Andrew Pelling Andrew Pelling Independent, Croydon Central 5:00 pm, 20th January 2010

I assure the Minister that this will be my only turn during this section of our proceedings. He is right to talk about the international context and the problems that the Government faced, but I was concerned to read in The Irish Times yesterday that the banks that we control through Government investment have given €6 billion of support to their Irish subsidiaries. Surely that should not be the Government's responsibility. In terms of the stresses and strains that are put on our own finances, it will impact on whether this Fiscal Responsibility Bill is required.

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Photo of Ian Pearson Ian Pearson Economic Secretary, HM Treasury

I must confess that I have not read The Irish Times, but the hon. Gentleman will be aware of the interconnected nature of the banking system in the global economy. We rightly took action to stabilise the banks in the United Kingdom-the Irish Government, as the hon. Gentleman is very well aware, have taken significant action to stabilise their banking system-and, indeed, to cut the deficit in Northern Ireland. The Bill proposes a set of measures that we believe are appropriate to the UK's specific circumstances.

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Photo of Bill Cash Bill Cash Conservative, Stone

Is the Minister able to distinguish between forecasting and soothsaying?

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Photo of Ian Pearson Ian Pearson Economic Secretary, HM Treasury

I think that it was Francis Bacon who talked about dreams and predictions being subjects only for a chat by the fireside, so I do not want to get into the differences between the two. What I do want to say is that forecasting is not an exact science; it is particularly prone to error when there are major global shocks, as we have seen over the past couple of years, so it is not surprising that the Treasury's forecasts, along with all other forecasts, have not proved accurate.

As the Chancellor said, the Government are cautious but confident about growth, and that assessment of growth has been used when judging the appropriate pace by which to reduce the deficit. We have discussed the appropriate pace before, and the Government want to ensure that the recovery is locked in. I believe that the economy is growing as we speak, but we do not want to jeopardise it. If we take action too early, we could put in danger the recovery that I believe is taking place this year.

If growth proves stronger than we are currently forecasting, the priority should be a further reduction in structural borrowing. The Bill allows for that by setting fiscal ceilings, not floors, and it sets targets that the Government judge appropriate, because it is deliberately drafted to allow for overachievement. The ceilings are binding and designed to provide certainty that the Government will deliver their consolidation plans.

It is worth noting that, subject to making progress on reducing borrowing every year, there is flexibility in the profile over which the deficit is halved by 2013-14. As I said earlier, there is the flexibility to accommodate lower growth and the greater impact of the automatic stabilisers as long as progress is made on reducing borrowing. It is important to recognise that.

The issue is not just about economic growth. The hon. Member for Taunton pointed out that significant shocks to the public finances could come from a natural disaster or other actions, and my general point is that, in extremis, the Government would have to come back to Parliament if it were necessary to amend the targets in the Bill. However, the Bill has been designed so that, rightly, the duties in clause 1 can be changed only through new primary legislation. That is a higher hurdle than the procedure in his amendment; and our approach allows for greater parliamentary scrutiny than his amendment, which would make it a lot easier to disapply the duties.

We think it right and proper that new primary legislation should be required in order to divert from the course set out in the Bill. The difficulty and seriousness of doing that should underline the Government's commitment to meeting the Bill's targets. I agree with the hon. Member for Taunton that it is important to consider alternative circumstances and scenarios. However, his amendment would make it too easy to change the targets when it is important that they are seen by everyone to be hard targets that could be changed only by going through the full parliamentary procedures required for new primary legislation.

Amendment 5 is the first of three amendments that would require the Treasury to produce a report before commencing certain parts of the Bill. It seeks to impose on the Treasury a requirement to lay before the House a review of the accuracy of recent forecasts. I understand the comments that have been made by the hon. Member for Taunton-I have referred to some of them-and by the hon. Member for South-West Hertfordshire. I accept, of course, that it is important to account for past forecast differences and to explain them in an open and transparent way; that is why, since 2002, the Treasury has published an end-of-year fiscal report. That report is underpinned by the provisions of the code for fiscal stability, which require the Government to provide an indication of past forecast errors for public sector net borrowing. The report provides retrospective reporting and analysis of fiscal issues, and it builds on the information that is already available and published in the Budget and the pre-Budget report. It is a comprehensive analysis of forecast performance, and many fiscal commentators find it a useful source of information. In addition to the regular analysis of changes from forecast to outturn in the end-of-year fiscal report, each Budget and PBR analyses changes from forecast to forecast made at the previous fiscal event and provides a discussion of these developments. A lot of information is available out there on a regular basis. The Treasury reviews the accuracy of its forecasts, in the way that I have outlined, and its forecasts compare well with those of other forecasters such as the OECD, the International Monetary Fund and the European Council. The amendment is therefore unnecessary.

New clause 1 would require the Treasury to carry out consultation on the Bill and to lay before Parliament a summary of the responses. I do not believe that that is necessary. We have already set out and explained our consolidation plans on more than one occasion. At Budget 2009, we clearly set out fiscal plans to secure sound public finances. At that time, the fiscal judgment was to more than halve borrowing to 5.5 per cent. of GDP in 2013-14. That judgment was confirmed in the PBR forecast, and through powers in the Bill it has been put into legislation. The path for consolidation has remained stable, and it has been public for some time. There has been significant discussion of these plans by financial commentators; and indeed, many discussions have been held in this House. A range of views have already been expressed. We have heard lengthy quotes from the hon. Member for South-West Hertfordshire and from a wide range of stakeholders.

There are already mechanisms in place that allow for the policy to be scrutinised. In particular, after each Budget and PBR the Treasury Committee takes evidence, not only from Treasury Ministers and officials but from expert witnesses. The Treasury also receives a large number of representations in advance of each PBR and Budget. Introducing a late-stage consultation process and similar requirements would risk creating unnecessary uncertainty about plans that have already been extensively discussed and are in the public domain.

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Photo of David Gauke David Gauke Shadow Minister (Treasury)

Has the Treasury received any representations telling it what a good idea the Bill is? In particular, have any financial institutions or credit rating agencies commented favourably upon it?

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Photo of Ian Pearson Ian Pearson Economic Secretary, HM Treasury

Germany has already introduced similar legislation, and the IMF, in a report that I believe was published in December, stated that legislating on fiscal frameworks can make good sense, so what we are doing is not exceptional. That is the point that irritates me slightly about the Opposition. They pretend that what we are doing is bizarre and unusual and that no sensible Government would do it, but the German Government have already done it and the IMF says it is sensible, so it is nothing other than good practice. It can help to ensure that there is greater market confidence that the Government will carry out credible plans for fiscal consolidation.

That is not to say that there is not more to be done in future. Clearly there is, and we will want to make further announcements in the Budget. We are engaged in a long haul, but it is right that we are clear about the direction of policy and that we set out our policies for the medium to long term. That is exactly what we are doing.

New clause 16 would require the Government to report on the effect of our consolidation plans on economic growth. I wish to make it clear that we assess the impact of our policies on economic growth as a matter of course. That is part and parcel of what we do-it is the day job of the Treasury to consider such matters. The Government have judged that the pace of consolidation required in the Bill is consistent with supporting growth in the early stages of recovery and the need to ensure sound public finances in the medium term. Stewart Hosie and I happen to disagree on the pace of consolidation. He thinks we are going too fast and the official Opposition think we are going too slow. We think that we have got it right.

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Photo of Ian Pearson Ian Pearson Economic Secretary, HM Treasury

I know that some of my colleagues believe we might be going slightly too fast. I am happy to give way, and I hope that I can convince them otherwise.

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Photo of Katy Clark Katy Clark Labour, North Ayrshire and Arran

I look forward to that debate.

Obviously growth will be the most important thing in the coming period. We need our economy to grow again as fast as possible and in a way that maximises employment opportunities. If it is clear that the cuts in public spending are having an impact on economic growth, will the Treasury reconsider the matter?

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Photo of Ian Pearson Ian Pearson Economic Secretary, HM Treasury

The Treasury will always be concerned about the impact of public spending on growth. As part of its normal Budget and pre-Budget report process, it will need to examine the economy as a whole and public sector spending plans in order to set out credible and sustainable plans for the future. My hon. Friend is absolutely right to point out the sensitivities that exist.

I have to be absolutely blunt-we will have to make some tough choices about public expenditure in future. We have already made some tough decisions, as my hon. Friend and other Members well know. We have taken measures to introduce a fiscal consolidation of already about £57 billion, including measures that will raise tax, such as a 50p tax rate and increased national insurance contributions, and we have made efficiency savings through schemes such as the smarter Government programme and the operational efficiency programme. Those measures will make a significant difference.

My hon. Friend is right to point out the central importance of economic growth. The more we can get growth going in the UK economy again, the better the public finances will be in the longer term. Our forecast for GDP growth was set out in the pre-Budget report and shows growth accelerating to above trend rates in 2011. It takes account of the consolidation plans that we have in place and of previous Budgets and pre-Budget reports, which is why I do not believe a separate report is required.

I think that I have dealt with the amendments. Amendment 4 would make it easier for any Government to get out of their fiscal framework targets, and that is not the right approach to take. Similarly, I think that I have given some good reasons for not accepting the other amendment and new clauses, and shown that the information is already available, so the proposed reports are not needed.

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Photo of Jeremy Browne Jeremy Browne Shadow Minister (Treasury) 5:15 pm, 20th January 2010

When talking about amendment 4, the Economic Secretary recognised that there were circumstances-he cited natural disaster, but the most obvious example is another recession in the next few years-whereby it would be impossible or at least extremely difficult to stay within the Bill's parameters. The Chancellor has acknowledged the same point, but there is no provision, save for getting rid of the Bill, for the necessary procedures to take account of issues of great budgetary consequence, whether natural disaster, another recession, a war and so on.

That rigidity is a failing of the Bill. I can understand the Economic Secretary's point that too much flexibility means that the Bill loses worth. In my view, it has little worth anyway. However, if targets are to be set, even though they are based on forecasts that get harder to project with any accuracy as we go into the future, such an approach must make some provision-as the Chancellor and the Economic Secretary acknowledged-for events overtaking the predictions. That is why amendment 4 tries to include some flexibility that would not mean ripping up the Bill.

The amendment would provide for a suspension for one year, which would take effect when the Bill came into force. The Conservative spokesman was anxious about that, but the provision must take effect from day one. The amendment would provide for suspending the Bill for a year if the situation were sufficiently grave. Of course, it could be suspended for a second or subsequent years, but that could be done only by an order laid before Parliament-it could not therefore be done by Executive fiat-and a positive resolution of the House. We would have to make a conscious decision if the Chancellor came to the House and said that he or she was unable to continue following the timetable in the Bill because of factors so grave that it would not be in our national interest to abide by it.

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Photo of Jeremy Browne Jeremy Browne Shadow Minister (Treasury)

The amendment would allow the Bill's suspension for a year. I am all in favour of not having the Bill-I voted against it on Second Reading and intend to vote against it on Third Reading. However, if we are to have it-Labour Members are in the majority and show no inclination to vote it down-we, as a responsible Opposition party, will try to make it as workable as possible.

It is perverse to have no provision between now and 2016 for exceptional events when, two years ago, the Government were unable to predict the current exceptional budget deficit. For that reason, I will press the amendment to a Division.

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Question put, That the amendment be made.

The Committee divided: Ayes 203, Noes 276.

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Division number 50 Prime Minister — Clause 1 — initial duties

Aye: 203 MPs

No: 276 MPs

Ayes: A-Z by last name

Tellers

Nos: A-Z by last name

Tellers

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Question accordingly negatived.

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Photo of Stewart Hosie Stewart Hosie Shadow Chief Whip (Commons), Shadow Spokesperson (Treasury)

I beg to move amendment 6, page 1, line 14, at end add-

'(4) The initial duties as set out in subsections (1) to (3) above shall have no effect if a Minister certifies at the end of each financial year that fiscal policy has been conducted over the relevant period in accordance with section [Principles] and in compliance with orders made under section [Duties for securing sound public finances]'.

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Photo of Michael Lord Michael Lord Deputy Speaker (Second Deputy Chairman of Ways and Means)

With this it will be convenient to discuss the following: amendment 9, in clause 3, page 2, line 21, leave out 'duty in section 1(1)' and insert 'principles in section [Principles]'.

Amendment 10, in clause 3, page 2, line 27, leave out 'duty in section 1(1) applies' and insert

'principles in section [Principles] apply'.

Amendment 11, in clause 3, page 2, line 29, leave out 'duty relating to that financial year was' and insert 'principles were'.

Amendment 12, in clause 3, page 2, line 32, leave out 'duty in section 1(1)' and insert 'principles in section [Principles]'.

Amendment 13, in clause 3, page 2, line 38, leave out 'duty in section 1(1) was' and insert

'principles in section [Principles] were'.

Amendment 14, in clause 3, page 2, line 41, leave out 'duty in section 1(3)' and insert 'principles in section [Principles]'.

Amendment 15, in clause 3, page 3, line 1, leave out subsection (6).

Amendment 16, in clause 4, page 3, line 16, leave out 'duties in section 1' and insert 'principles in section [Principles]'.

Amendment 17, in clause 4, page 3, leave out line 22.

New clause 14- Principles -

'(1) The Treasury must ensure that Government debt is reduced to a prudent level.

(2) Once debt is reduced to a prudent level, the Treasury must seek to maintain a balanced budget on average over the medium to long term.

(3) The Treasury must achieve and maintain a level of net worth that provides a sufficient buffer against unforeseen future factors.

(4) The Treasury must manage fiscal risks prudently.

(5) Her Majesty's Ministers must pursue policies which are consistent with a reasonable degree of predictability about the level and stability of tax rates for future years.'.

New clause 15- Duties for securing sound public finances -

'(1) The Treasury may make an order imposing on the Treasury a duty or duties framed by reference to the principles in section [Principles].

(2) A duty imposed by an order under this section must be one imposed for the purpose of securing sound public finances.

(3) A duty imposed by an order under this section may be a duty relating to fiscal policy which the Treasury consider appropriate.

(4) A duty imposed by an order under this section must be consistent with the key principles in section [Principles].

(5) An order under this section is to be made by statutory instrument.

(6) No order may be made under this section unless a draft of the statutory instrument containing it has been laid before Parliament and approved by a resolution of the House of Commons.'.

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Photo of Stewart Hosie Stewart Hosie Shadow Chief Whip (Commons), Shadow Spokesperson (Treasury)

I hope to speak to the amendments and new clauses in a fashion that makes sense in the short time available. Apart from amendment 6, which I shall describe separately, this is a package of amendments and new clauses that seeks fundamentally to replace the duties that the Government sought to impose on themselves with a set of principles, according to which the deficit and then the debt would be tackled and reduced.

Amendments 9 to 14 would amend the section on progress and compliance reports to align them with the principles that I have set out in new clause 14. Amendment 15 would remove the requirement to report on the duties in clause 1(3), as I am seeking to replace those duties with principles. Likewise, amendments 16 and 17 would remove references to "duties in section 1". New clause 15 would allow duties to be imposed, but only in so far as they are framed with reference to the principles set out in new clause 14, which is the key new clause, as it lays out the principles that I believe should be adhered to, rather than having the arbitrary political dividing lines, cuts and time scales-the straitjacket to which others have referred-set out in the Bill.

However, before I address that point more fully, let me briefly describe amendment 6. It was tabled with the purpose of preventing the Government from taking any action or imposing any further duties-or damaging cuts, as we call them-if the principles of fiscal responsibility set out in new clause 14 are already being adhered to. In a sense, amendment 6 is a stand-alone amendment. Because of the way in which amendments can be debated and called in this place, it made sense, if I chose to press it to a vote, to table it in such a way that it could stand alone.

The key provision in the group, however, is new clause 14, and that is what I should like to concentrate on. It contains five principles, which, as I said on Second Reading, are closely based on the principles that the New Zealand Government introduced in their Fiscal Responsibility Act 1994. The first principle is about reducing debt to a "prudent level". It is important that we should allow the Government of the day to specify what is or is not prudent, depending on the circumstances that they face. There must be a degree of flexibility, which is a theme running through all our debates today.

The second principle says that once debt is reduced, the Government should

"maintain a balanced budget on average over the medium to long term."

That would not prevent any Government from implementing the steps that they believed were necessary to achieve the long-term objective of having a prudent level of deficit and prudent debt levels, but it would mean that that would happen, on average, over the medium to long term, rather than arbitrarily specifying one economic cycle or one Parliament, which is what the Bill does and what everybody in the House-and, I suspect, everybody viewing this debate from the outside-knows is simply an artificial dividing line.

The third principle says that the Government should

"achieve and maintain a level of net worth that provides a...buffer against unforeseen future factors."

That point is vital and takes us back to our earlier debate about how the Government will use the statistics to measure their performance. They have talked about public sector net borrowing and public sector net debt, or PSNB ex and PSND ex, and state in the draft fiscal stability code that that

"excludes temporary effects of financial interventions but accounts for any permanent costs to the taxpayer."

It is right and proper that any Government should pay attention to the totality of the economic circumstances.

The fourth principle calls on the Government to "manage fiscal risks prudently". That is common sense-one would not have imagined that we needed a piece of legislation to do that, but then nor would one have imagined that we needed a fiscal responsibility Bill to tell the Government that the deficit and debt levels are too high. The fifth principle is that the Government must

"pursue policies...consistent with a reasonable degree of predictability about the level and stability of tax rates".

That is incredibly important, because the tax system, tax rates and tax certainty are a vital component of fiscal stability and fiscal responsibility.

Those principles are important, because we need to have a prudent level of debt, as well as a prudent level of deficit, which feeds the debt. However, they might vary depending on the circumstances, and the flexibility that I have described will almost certainly be required.

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Photo of Kelvin Hopkins Kelvin Hopkins Labour, Luton North

I am interested in what the hon. Gentleman says. He talks about a prudent level of debt, but in fact our gross debt is reasonable compared with many other countries. Most countries have higher debt levels. The annual borrowing figure is relatively high in the short term, but I would suggest that we already have a prudent level of debt, and it is not going to get much higher than anything that we would regard as prudent.

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Photo of Stewart Hosie Stewart Hosie Shadow Chief Whip (Commons), Shadow Spokesperson (Treasury)

It is forecast to grow; the Minister conceded that earlier. It will go up to about 77 per cent. of GDP in 2014-15, according to the Government's figures, and according to the treaty calculation that we heard so much about earlier, it will go up to £1.7 trillion, which is about 91 or 92 per cent. of GDP. Kelvin Hopkins has been present at many of the debates on the Bill, and he will know that other measures of debt take those figures higher still.

The key point is that the level of debt is determined by the annual level of deficit. We have high levels of deficit, and we need to bring them down to a prudent level. We also need the flexibility, which I am about to describe, to take cognisance of circumstances so as not to make the situation worse. Many have said today and on Second Reading that, if growth rates are not as the Government expect, or if we enter another downturn before the deficit targets have been reached-a real danger, if the Labour Government back-load the cuts and we hit another downturn with no room to manoeuvre-we might be unable even to invoke the automatic stabiliser, let alone to use the proper fiscal stimulus package that could well be necessary to prevent the situation from deteriorating further.

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Photo of Kelvin Hopkins Kelvin Hopkins Labour, Luton North

We could have a debate about what is or is not a prudent level of debt, but we should all focus on how we bring down the deficit. The way to do that is surely to maintain public investment, particularly in job creation and the sustaining of jobs, in order to maintain tax revenues and minimise the level of benefits payments. That is the way forward, which means that a prudent level of public spending might be rather higher than most people are implying.

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Photo of Stewart Hosie Stewart Hosie Shadow Chief Whip (Commons), Shadow Spokesperson (Treasury)

The hon. Gentleman's last point is absolutely right. That is why I have been critical of the Labour Government's £800 million cut to the Scottish budget, and why the Scottish Government and the Scottish National party have argued for a further year's re-profiling of capital expenditure to protect the economic recovery and not allow it to be threatened in any way. I have argued time and again that we must have a sustained and sustainable recovery before we start the fiscal consolidation. As I have said, if people think that tackling the deficit and, subsequently, the debt will be difficult from a position of sustained economic growth-and it will be-it will be impossible from a fragile position of weak recovery, of no recovery at all or of a double-dip recession. So the hon. Gentleman's last point is absolutely right.

Another reason that I have specified principles and flexibility in my proposals is to encourage a debate. Other countries have been through this, and I have cited the New Zealand example because it was successful. It allowed flexibility but it gave that country a clear direction of travel. When it was considering all the options, New Zealand's finance and expenditure committee looked at the fixed, straitjacketed, time scale-driven approach that the UK Government are taking. The committee said:

"There is no solid theoretical justification for any particular fiscal target that can be maintained over a period of time. Judgements on the appropriate level of fiscal aggregates vary over time and depend on the economic circumstances currently prevailing."

Having looked at the UK and other countries, the committee went on to say:

"Other countries' experience of legislated targets suggests that there are substantial risks attached to their use. In particular, rigid adherence can seriously distort decision-making and, unless carefully handled, minor variations from target can result in significant but unnecessary damage to credibility."

That is a very real danger with this Bill. If the Chancellor or a future Chancellor were to come back at some point and say, "It didn't work, so we're just going to ignore it," their credibility would disappear completely.

The committee's third observation that was of interest in this context was that the

"inherent inflexibility"- that is, of fixed targets-

"makes it difficult for fiscal policy to respond appropriately to the inevitable volatility of economic circumstances."

That reflects precisely my argument about the inability to use either the automatic stabilisers, which would be ludicrous, or, more significantly, an additional fiscal stimulus, should the economy deteriorate and the situation worsen to the point at which a fiscal stimulus was required.

We need the flexibility for a simple reason, which is also the reason why I think that a principles-based approach is much better than the rigid approach adopted by the Government. If we faced a significant downturn and any Government were determined to stick rigidly to what they had planned, it would not simply be a question of the absence of automatic stabilisers or of a fiscal stimulus. Any adherence to the Government's short-term, fixed-time-scale approach would involve an absolute requirement for deep, savage, real-terms cash cuts there and then.

I hope that I have argued, briefly, the case for a principles-based approach that works, that takes seriously the issue of deficit and debt, and that would remove the political dividing line which, as we know, this is all about. I look forward with interest, although with no great expectation, to the Minister's response.

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Photo of Ian Pearson Ian Pearson Economic Secretary, HM Treasury 5:45 pm, 20th January 2010

I am grateful to Stewart Hosie for tabling the amendments, because I think it important for us to debate the framework of the Bill. As the hon. Gentleman explained, his amendments seek to replace the target-based duties in the Bill with duties to comply with broad principles very similar to those used in the New Zealand Fiscal Responsibility Act. In general, those principles relate to prudent management of the public finances. There is then the flexibility for the Treasury to impose further duties on itself, framed by reference to the principles. The amendments would also give Ministers power to disapply the targets in clause 1. Legislative principles are, of course, useful. That is why the Government already have a set of them; they are enshrined in the Finance Act 1998, and underpin the Government's fiscal policy and framework.

I believe that specific quantitative targets for deficit and debt reduction are most helpful to supporting consolidation at the present time. Those targets will deliver the Government's objectives in a manner that accords with their principles. As I explained earlier, the Government have set out their key principles in the Finance Act 1998 and the code for fiscal stability. A revised version of the code was published yesterday, and copies are available in the Library. Those key principles are stability, transparency, responsibility, efficiency and fairness. Section 155 of the Act states:

"It shall be the duty of the Treasury to prepare and lay before Parliament a code for the application of the key principles to the formulation and implementation" of fiscal and debt management policy, and the code for fiscal stability states that the Government shall conduct their fiscal policy in accordance with those principles.

Let me briefly run through each of the principles that the hon. Member for Dundee, East outlined. I think it is possible to demonstrate that the Government's framework, strengthened by the Bill, covers each of those principles.

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Photo of Andrew Pelling Andrew Pelling Independent, Croydon Central

I am grateful to the Minister for helpfully elucidating some of those principles. One of the principles that he mentioned was that of transparency. Surely it would be particularly transparent to respond to the questions that have been posed this afternoon about the analysis that the Government must surely have conducted of the impact on economic growth of the specific targets for reduction in the rate of Government spend. Is it possible for the Minister to give us some confidence by telling us what he expects to be the impact of the first two years of the proposed rate of reduction?

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Photo of Ian Pearson Ian Pearson Economic Secretary, HM Treasury

I think the hon. Gentleman is in danger of returning to the debate that we have just had. As I said then, the fiscal consolidation plans that the Government have announced, involving £57 billion, have already been taken into account in the growth forecasts produced at the time of the Budget and the pre-Budget report.

The first principle of the hon. Member for Dundee, East is to ensure that debt is

"reduced to a prudent level".

Of course we support that intention; it is necessary for sound public finances. Indeed, this is why the Bill is all about giving the Treasury duties to secure sound public finances. I point the hon. Gentleman in the direction of the Bill's long title. It is in connection with the importance of putting debt on a sustainable path that the third duty in clause 1 is to have debt falling by the end of the plan.

The hon. Gentleman's second principle is to

"seek to maintain a balanced budget" in the medium term. Again, that is reasonable, subject to circumstances. The public finance projections in the pre-Budget report show that the cyclically adjusted current balance will return to zero in 2017-18.

The hon. Gentleman's third and fourth principles relate to fiscal insurance against unforeseen factors and managing fiscal risks. The Government agree that these are important, which is why the code for fiscal stability states:

"The principle of responsibility means that the Government shall operate fiscal policy in a prudent way, and manage public assets, liabilities and fiscal risks with a view to ensuring that the fiscal position is sustainable over the long term."

Each Budget and PBR includes a description of the key risks to the public finances, so I would argue that the hon. Gentleman's principles are already followed.

Furthermore, I would argue that the duties to secure sound public finances are consistent with the principle. Securing sound public finances is all about putting the public finances on a path such that they are able to withstand unknown future shocks. It is consistent with our medium-term fiscal objective to ensure sound public finances and to ensure that spending and taxation impact fairly within and between generations, which, again, is what the hon. Gentleman seeks to achieve.

The hon. Gentleman's final principle is all about stability of policies. Once again, I have great sympathy with it. It is reflected in the Government's key principle of stability, whereby so far as is practicable,

"the Government shall operate fiscal policy in a way that is predictable".

That is why, as part of our reforms to fiscal policy in 1997, we introduced new fiscal objectives, as required by the code for fiscal stability. The objectives we set out then remain in place today.

I very much agree with the spirit of the principles as set out in the hon. Gentleman's new clause, but I believe that they are already adequately embraced in the Government's current fiscal framework. The right approach in current circumstances is to build on those principles and to set out binding targets for consolidation that enhance certainty and confidence. Setting out quantitative targets in legislation will help businesses and investors make long-term plans, with assurance about the fiscal position and the financing environment.

I know that the hon. Gentleman believes that the balance of risks is against consolidating before the recovery is entrenched, and I suspect that that is one of the reasons why he tabled his amending provisions-to provide the Government with a greater degree of flexibility. We also accept that there are risks in consolidating too soon. That is why, as I explained before, we continue to support the economy in the financial year 2010-11. It is important to support growth, which will make it easier to lower the deficit and pay back debt. That is a key point that I have put to my hon. Friends and to the House more generally.

As the Chancellor said, however, support for the economy must go hand in hand with steps to ensure sound public finances once the recovery is established. In our judgment-it is a matter of judgment-the economy will be able to support a more rapid tightening in 2011-12. That is why we have set out plans to do that; the Bill is designed to ensure that we meet them.

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Photo of Kelvin Hopkins Kelvin Hopkins Labour, Luton North

I am pleased to hear that the Government continue to support growth to support expansion, at least for the short term-that is, next year. Does the Minister accept that the best way of doing that is to target public investment, which would have the greatest effect on maintaining and expanding employment, particularly if jobs in the public sector are kept going, thus maximising tax revenues, minimising benefit payments and achieving the Minister's objectives?

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Photo of Ian Pearson Ian Pearson Economic Secretary, HM Treasury

As my hon. Friend will be aware, we already have significant public investment plans for 2010-11, which we are not changing. We have a significant capital investment programme and we have announced initiatives such as the continuation of the enterprise finance guarantee to provide support to small and medium-sized businesses, and the extension of the time to pay arrangements to help businesses and stimulate growth. What we do not want to do is jeopardise the recovery that I believe is taking place in this country by taking precipitate action that would tip the economy back into recession; that is a real risk with the policies of Opposition parties. The judgment that we have made to focus our attention on a more rapid tightening in 2011-12, when we confidently expect the economy to be strengthening, is the right one.

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Photo of Ian Pearson Ian Pearson Economic Secretary, HM Treasury

I hope my hon. Friend will not mind my not giving way to him again, because I wish to conclude and give the hon. Member for Dundee, East the opportunity to reply to the debate.

The Government's plans do not involve consolidating too soon, and we believe that putting firm quantitative targets in legislation is the right approach in the circumstances. It is, as I have said, in line with what other countries are doing-Germany being a good example. I do not disagree with the hon. Gentleman's view that we need to have principles but, as I hope I have explained, in our code for fiscal stability and our approach, the Government are following those principles. However, we wish to build on them with quantitative targets, as we believe that that is the right thing to do in the circumstances. Given that explanation, I hope that he will be able to withdraw the amendment.

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Photo of Stewart Hosie Stewart Hosie Shadow Chief Whip (Commons), Shadow Spokesperson (Treasury)

I thank the Minister for his answer. He relied heavily on, and prayed in aid, the draft code for fiscal responsibility. I suspect that if I were to go through it in as much detail as I want to do, we would be here for some time. It talks about transparency, but as I have said, the Government seem determined to use the public sector net borrowing and debt ex figures-those excluding the contingent liability. It talks about responsibility in the management of the public finances, but then may well negate the use even of the automatic stabilisers. It remains wholly inflexible; as the Minister said, that was my main rationale for tabling the amendments. It talks about fairness, including between generations, but this Government are allowing generation after generation still to come to pay for the off-balance-sheet private finance initiative debt, which keeps going up and stands at about £2 billion.

However, to be fair, the Minister said that he recognised the risk of consolidating too soon. Given that the IMF has confirmed that the UK is the only G7 country fully to withdraw its fiscal stimulus package in 2010, and given the fact that the risks of even being able to tackle the deficit and the debt will be much greater if the economy's recovery falters or if we tip into a double-dip recession, I think that the Government, although they are cognisant of the risks, are ignoring them.

I do not intend to press amendment 6 to a vote. It is an enabling amendment and the real debate would have been about new clause 14, which will not be called-I understand and respect that. There may be an opportunity for a vote on clause 1 stand part and other items yet to come, so I beg to ask leave to withdraw amendment 6.

Amendment, by leave, withdrawn.

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Question put, That the clause stand part of the Bill.

The Committee divided: Ayes 267, Noes 201.

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Division number 51 Prime Minister — Clause 1 — initial duties

Aye: 267 MPs