I beg to move,
I welcome the opportunity to debate the information provided to the European Commission under section 5 of the European Communities (Amendment) Act 1993. Each year, the Government report to the Commission on the UK's economic and budgetary position and our main economic policy measures, in line with our commitments under the stability and growth pact, by formally sharing information from the pre-Budget report.
A year ago, as the world economy faced crisis, the European Council agreed a European economic recovery plan, which rightly called for a fiscal stimulus from member states equivalent to about 1.5 per cent. of gross domestic product. The Council encouraged member states to allow borrowing to rise to support the economy, acknowledging that this would lead to a deepening of deficits in the short-term and that the stability and growth pact should be applied in a manner that reflects the current exceptional circumstances.
We welcome the publication of the European economic recovery plan, which showed that the Government were right to take bold action in the 2008 PBR to support the economy through a fiscal stimulus and to provide further support for actions to frontload public expenditure and assist small and medium-sized businesses.
Last year, the global economy is forecast to have had the longest period of sustained negative growth in 60 years. It was against that backdrop that the pre-Budget report was delivered last year. That PBR is reported on in this document to the Commission.
Does the Minister accept that, having regard to the crisis in Greece and in the eurozone as a whole, as has been widely reported, the reality is that the stability and growth pact is simply not working and that the words contained in the pre-Budget report indicate that all the Government are doing is shunting the whole issue on on the basis of wishful thinking?
I do not agree with the hon. Gentleman. We have gone through exceptional times in the global economy and that has affected all European economies. As he will be aware, according to the figures, 20 countries are in what would be called the excessive deficit procedure-that is, they have a deficit of above 3 per cent. of GDP. There are good reasons for that. The matter has been debated extensively at the European Council and there is a commitment across Europe to co-ordinate economic policies and to ensure sustainable public finances in all member states over the medium term. Everybody in Europe has recognised, however, that we have had to do some pretty exceptional things and that has affected all our economies.
The hon. Gentleman will know the figures well. It is true that the budget deficit in the UK has increased-it has increased in pretty much every member state. Later in my speech, I shall talk more about it.
It is widely recognised by most commentators that Government action has helped to limit the impact of the recession. Indeed, the initial figures released last month show that the economy posted growth of 0.1 per cent. in the final quarter of 2009, reflecting my right hon. Friend the Chancellor's forecast in the PBR that growth would return at the end of the year. As hon. Members will be aware from the pre-Budget report, growth is expected to pick up progressively to 1.25 per cent. in 2010 and 3.5 per cent. in 2011-12. I believe that that will be supported by net exports and investment, with the adjustment of the UK's flexible labour markets helping to bring spare capacity back into use.
It is also clear that the Government have been right to be cautious about the prospects for the economy, and it is right that we should continue to support it. The shocks that this economy and economies around the world faced were entirely unprecedented. Withdrawing support that has helped us to get to this point would be exactly the wrong policy. I believe that we now face two challenges: securing the recovery and promoting long-term growth. They will both be essential in ensuring sound public finances, which will be necessary for the investment that we need in the future.
My right hon. Friend the Chancellor announced in the PBR a plan for reducing the deficit by half within four years. As world economic prospects are still fragile, however, the PBR also announced the maintenance of support until recovery is secured. We have had this debate many times in the Chamber, and it is a matter of judgment when action should be taken to cut the deficit. We have always maintained that failing to offer support to the economy would risk the recovery and would damage the economy in the long term. That is why we have offered support to business to ease problems with cash flow and with access to bank lending, and that is why we have deferred tax rises and extended tax allowances. That includes the time to pay scheme, which has helped businesses to spread £4.8 billion-worth of tax payments over a timetable that they can afford. That is why we have frozen small companies' tax rates next year to help 850,000 businesses.
We announced in the PBR that support for mortgage interest would provide cover for mortgage interest payments for those who have lost their jobs. That has been extended for a further six months. To date, the scheme has helped more than 220,000 people. It is important that families receive the help that they need through the tax and benefit system, and through the downturn, tax credits have provided extra help to 400,000 families whose income has fallen.
The retail prices index was negative in September. That could have meant a reduction, or no increase, in benefits, because many benefits and tax credits are linked to September's RPI. We responded as a Government, however, and my right hon. Friend the Chancellor announced that the basic state pension will rise by 2.5 per cent. in April. Other benefits, such as child benefit and some disability benefits, will rise by 1.5 per cent., giving real-terms increases to those who need them most.
Let me make some progress.
To ensure that we will not have a repeat of the financial crisis, the Government have, as the House is well aware, introduced wide-ranging reforms to the financial sector. As well as strengthening financial regulation, we will do all we can to ensure that banks pay due regard to risk and that remuneration policies are focused on the long-term health of the relevant institution. Again, we have already debated a number of these issues.
We have put in place support to secure the recovery, but we have also taken action to meet the other challenge-the direction and long-term growth of the economy. The recession has had a marked impact on the labour market, but unemployment has risen by far less than was expected by independent forecasters. Indeed, the latest Office for National Statistics figures show that International Labour Organisation unemployment figures have fallen for the first time since 2008. In addition, the claimant count has fallen for the second consecutive month and by more than market expectations. None the less, certain groups, such as young people, have been particularly hard hit. That is why we announced in the PBR that every 18 to 24-year-old will be given work or training when they have been out of the labour market for six, rather than 12, months. I believe that investing in the skills of young people will not only prevent a lost generation of youth unemployment, which we have seen in previous recessions, but will also promote our long-term growth as an economy.
I accept, as many reasonable-minded people would, that Government intervention can play a part in preventing unemployment from becoming worse than it otherwise would be. Does the Minister accept, however, that changing labour markets-the very flexible labour markets that he has just mentioned-also have a part to play? It might well be that 20 years ago, a fifth of a company's work force would have been sacked or would have resigned in such a situation, whereas now all of that work force might go from working a five-day week to working a four-day week. Under such an arrangement, nobody would lose their job, but the number of hours worked by that company would fall by 20 per cent.
The hon. Gentleman is right to point to some of the benefits of having flexibility in the labour market. Indeed, there is already some evidence that what we have seen during this recession is not only far greater flexibility on the part of employers, but far greater flexibility on the part of employees than has been the case in previous recessions. Some companies have decided that they want to keep people on but that they will have to pay them less, and their work forces have agreed to that, and some companies have decided that some of their staff need to go on to short-time working. That flexible response has been to the benefit of many companies and the people who work in them.
I see that the hon. Gentleman agrees. That flexibility is one of the great strengths of our actions. In the past 12 years, Labour Governments have also introduced changes to help people back into work, and those measures are another great strength at the current time. As a result of active Government support via labour market support to the unemployed, month after month, hundreds of thousands of people have found new job opportunities.
The Government have also announced investment in key industries of the future, such as digital, bio and low-carbon technologies, in order to build a strong and more diverse economy and to help to drive long-term sustainable growth. In the PBR, we announced measures to support innovation and enterprise, such as introducing a patent box-a reduced rate of corporation tax on income that will be derived from patents from April 2013-to strengthen the incentives to invest in innovative industries and to ensure that the UK remains an attractive location for such innovation. Further, an additional £200 million-worth of funding for the strategic investment fund will support advanced, innovative industrial projects of strategic importance.
It is vital to our future growth that investment is made in our infrastructure. We announced in the PBR further plans for rail electrification between Liverpool, Manchester and Preston, and we want to continue to ensure that our work force are equipped with the right skills for the future by giving financial support to up to 10,000 undergraduates from low-income backgrounds to take up short internships in industry, business and the professions.
Given the Minister's optimistic tone, is he confident that the anaemic growth that we had in the last quarter will be bettered in this quarter?
I am not going to speculate on that. The Treasury's policy has always been to make financial projections at our major fiscal events-the Budget and the pre-Budget report-and we will do so shortly when the Chancellor announces the Budget. When the hon. Gentleman looks at the comments of independent commentators who provide forecasts, he will see that there has been a gradual increase in optimism about how the UK economy is likely to perform in 2010. That is welcome. As the Chancellor has said on many occasions, we are not out of the woods yet. That is why we have taken a deliberate policy decision to continue to support companies through what remain difficult economic times-by extending the enterprise finance guarantee, for example, as well as the time to pay arrangements that I have mentioned. It is clear that we must not only provide support for companies in the downturn, but that we must also take measures to rebuild our fiscal strength when recovery is firmly established. I shall go on to say something about that.
Sound public finances are vital to our investment in the future and to ensuring that there are no further ramifications due to a crisis down the line. It is imperative that we consolidate in a way that supports growth, because, in turn, growth will make it easier to lower the deficit and to pay down debt. The Fiscal Responsibility Bill that we have already discussed in the House will enshrine in legislation the Government's plans to halve public sector borrowing as a share of gross domestic product by 2013-14. Other countries have taken similar approaches in terms of legislating, and some others are considering doing so. Indeed, the IMF regards giving fiscal consolidation a legislative backing to be one option that is worth pursuing.
To maintain our fiscal sustainability, the PBR has already announced tax rises for those with the greatest ability to pay, while ensuring that those on the lowest incomes are protected. The restriction of pensions tax relief announced in the Budget will apply only to those with gross incomes of £150,000 and over, where gross income includes all pension contributions. There will be an additional 0.5 per cent. increase in employee, employer and self-employed national insurance contributions for those earning over £20,000, but we also recognise that slower spending growth will be essential if we are to reduce borrowing.
We will work to eliminate waste, and we will cut some budgets and stop some programmes altogether. It is important to recognise that the PBR has already announced that £12 billion will be saved from greater efficiency, £5 billion from scaling back or cutting lower priorities, and £4.5 billion from reducing the cost of public sector pay and pensions.
We must ensure investment in our future, but at the same we must protect our most important front-line services, the ones that people rely on-such as our schools, health care and the police. In the past, cutting public spending has led to long-term damage, and we do not want that to be repeated. That is clearly taken into account in the PBR, and the decisions that we have taken.
The EU has many benefits. I shall not list them, but having a home market of 500 million people is a significant one. Also, the level of the pound against the euro means that UK businesses have strong opportunities to export into the home market of other member states.
My hon. Friend Mr. Drew asked specifically about tax havens, and he will be aware that a lot of work has been going on, in the EU and at G20 level, to ensure greater tax transparency. A number of initiatives have been launched in this area: he is right to highlight the issue, as it has been and will remain on the global, and not just the European, agenda.
In the EU, we are taking the appropriate co-ordinated action to reduce deficits, in line with the recovery of the European economy. Twenty member states are reducing their deficits broadly in line with recommendations from the Council under the excessive deficit procedure. The recommendations adopted by the ECOFIN Council in December 2009 provide a co-ordinated path towards sustainable public finances. They utilise the flexibility provided for under the stability of growth pact, while rightly taking national circumstances into account.
These have been testing times, and people all around the world have been affected. All economies have been hit, to a greater or lesser extent, and the actions taken by this Government have helped our economy to start to emerge from the crisis.
Now is not the time to engage in rash cuts, as the Opposition propose. A judgment has to be made as to when to make the fiscal consolidation that will be needed to ensure that we have sustainable public finances. There will be more to be done, not just now but over the next few years.
As I have said on previous occasions, that will involve some pretty painful decisions on public spending, but it is right that the Government face those decisions. The PBR sets out actions to secure the recovery and build our future, and also to ensure that we have the means to do so by delivering controlled public finances.
That is the programme set out in the 2009 PBR. With the approval of the House, it is the basis on which we will send updated information to the European Commission. I look forward to the contributions that hon. Members will make to this debate, and I commend the motion to the House.
I beg to move amendment (a), at end add:
'but regrets that the assessment does not demonstrate that the Government has a credible plan to deal with the United Kingdom's deficit.'.
As the Minister said, the report that we are debating is published in accordance with our obligations under the European Communities (Amendment) Act 1993 to inform the European Commission of our economic and budgetary position. I want to begin by making a point that appears to be traditional at the commencement of these debates-that the Government have been reluctant to publish the report and make it available to hon. Members.
The report should have been published before the end of December, but in fact was published only on
It was also very difficult to locate the report. I obtained a copy last week, but it was not available in the Vote Office yesterday. This is a point that has been made many times before: my hon. Friend Mr. Hands made it in the equivalent debate last year, and I did so the year before. It may not be entirely surprising that the Government do not want to make the report widely available, given the state of the public finances, but it is a pity and I hope that the problem will be rectified in future,
Before I turn to the contents of the Treasury's report and the state of the UK's finances, I want to touch briefly on the issue of Greece, which was raised by my hon. Friend Mr. Cash earlier this afternoon. It was also raised by my hon. Friend Mr. Carswell and Ms Stuart in the course of Prime Minister's questions.
This report is part of the multilateral surveillance procedure under articles 121 and 126 of the European Union treaty. One suspects that multilateral surveillance is somewhat to the fore in the Treasury's mind at the moment.
The Government will be aware of the widespread speculation about the fiscal situation of some members of the eurozone, and of Greece in particular. Will the Minister tell the House what the Government's opinion is about providing external assistance for Greece, if that becomes necessary? Does he consider that to be a matter for eurozone countries alone, or is it an international matter for members of the IMF and the G20? Does he think that there is any role for the EU as a whole, including non-eurozone members? If UK taxpayers are to be involved in any way in bailing out another country, will he give an undertaking that this House will be kept informed?
I am sure that my hon. Friend is aware that a brand new Commission for the whole of the EU has been established today. Does he have any information about whether the requirements under the section of the Act that we are debating have been referred to the previous Commission, or the present one?
My hon. Friend makes an interesting point. I am not in a position to answer him, but perhaps the Minister will have an opportunity to do so later.
"The recent performance of the UK economy has been rather alarming."
The UK has suffered the largest fall in activity, relative to its pre-crisis trend, of any G7 economy. It is the slowest of the G20 economies to emerge from recession, and it is borrowing more than at any time in our peacetime history. We are borrowing more than any major economy. Our credit rating is under threat. In those circumstances, the credibility of the plans to get us out of this mess is crucial.
It is worth examining the comments made by those who have held positions of responsibility during the Government's term of office and their views on the credibility of the Government's position. Howard Davies, the former head of the Financial Services Authority, stated:
"The major risk is the loss of confidence in the government's ability to get the public finances back under control."
Sir John Gieve, appointed as deputy governor of the Bank of England, stated that the Government's plan
"will be hard to sustain politically and eliminating the structural deficit more quickly in 2011 and 2012 looks a better course."
"History tells us that these are really difficult nettles to grasp but if you grasp them in a clear and bold way, then the pain lasts for a shorter period than if you just limply grab hold of them... Our strong instincts are that the risks of going too soon are less than the risks of waiting too long... Two full parliaments of chancellors being responsible just seems too much to expect."
"the longer there is not a credible plan that sets out what actions will be taken the more" a downgrade to the credit rating
"is a risk. I do not believe there is any impediment to the UK putting in place a credible plan which will convince financial markets."
I think it would be fair to interpret those remarks as suggesting that no credible plan was in place. To confirm that impression, on
"demonstrate a strong commitment to fiscal sustainability in the longer term", again suggesting that that commitment had not previously been demonstrated.
"I saw three tests. First, did it enhance immediate prospects for economic recovery-which is mainly about the availability of credit to business. Second, did it set out a credible path to fiscal and monetary balance. Third, did it enhance the economy's long term growth prospects. It did a little on the first and was a bad miss on the second and third."
Sir Steve Robson went on to state:
"If the Government lacks credibility on fiscal matters, there can be severe consequences-as Greece has just found out."
We have heard warnings about the credit rating agencies from the likes of the Governor of the Bank of England and former senior civil servants. Today Brian Coulton, head of sovereign rating at Fitch, stated:
"The UK, among the triple As is one of the most vulnerable, with Spain and France."
Fitch has previously warned of the need for an aggressive programme of fiscal tightening after the election.
Standard and Poor's has already downgraded the outlook for Britain's credit rating from "stable" to "negative". I could list a number of economists, all of whom express their concern about the credibility of the UK's fiscal position. Bill Gross, managing director of the leading bond investor Pimco rather alarmingly stated:
"The UK is a must to avoid. Its gilts are resting on a bed of nitroglycerine. High debt with the potential to devalue its currency present high risks to bond investors."
If our credibility is at risk, as it clearly is, we will have to pay more for our debt, and interest rates will rise unless something is done to address the issue.
My hon. Friend Mr. Osborne, the shadow Chancellor, has stated that the first benchmark on which we, the Conservatives, would ask to be judged if we are in power in the next Parliament, is maintaining our triple A credit rating. Is the Minister prepared to be judged on that criterion as well? Perhaps he will tell us in his remarks later.
With all the resources at their disposal, the Government have obfuscated on setting out any spending details. There is no comprehensive spending review. It has been kicked into the long grass. The Institute for Fiscal Studies estimates cuts of up to 24 per cent. in some Departments, but the Government refuse to give us any numbers. The Minister is partially exempt from some of these criticisms. He said today that some of the cuts will be pretty painful. He has previously said that they would be extremely painful.
The Government have done everything they could to prevent the numbers being available. In the report that some of us have before us, we see a further example of that. Last year, in the equivalent report, Government interest paid as a percentage of GDP was set out for all the years up to 2013-14. This year-I thank my noble Friend Baroness Noakes for highlighting this-one would expect interest percentage to be provided for an additional year. Instead we have the figures only up till 2010-11. When the point was raised in the equivalent debate in the other place last week, Lord Myners responded that
"the Treasury does not publish an AME"- that is, annual managed expenditure-
"forecast beyond the current spending review period, given the uncertainty and volatility inherent in forecasting this far ahead."-[ Hansard, House of Lords, 4 February 2010; Vol. 717, c. 406.]
Why there is more volatility and uncertainty this year than last year is not entirely clear.
The Treasury Committee, a Labour-dominated Committee, said:
"There is a sense that the Treasury are using uncertainty to suit themselves".
Such a lack of openness and candour does nothing for the credibility of the Government or for the public finances of this country.
The Government's case, as we heard today, is essentially that unemployment is not as high as expected and that repossessions are not as high as expected. It is worth highlighting the remarks of the Association of Business Recovery Professionals, which stated that after the last recession in the early 1990s, the peak of corporate liquidations occurred five quarters after the return of growth, and the peak of personal insolvencies was 18 months after the return of growth. In the recession in the early 1980s, the lag was even greater, so let us hope that we are not going to see a high number of insolvencies and liquidations, but the historic precedents suggest that the worst is still to come.
Does my hon. Friend not think it is the most curious defence from a Labour Government facing the figures of unemployment and bankruptcies that we have, simply to say, "Oh well, it's not as bad as it might be. The bruising might be tough, but it could have been so much worse"? There has been a 118 per cent. increase in unemployment in my constituency since 1997, the 15th worst in the United Kingdom. My constituents do not take kindly to being told, "We've handled your affairs badly, but it could have been so much worse."
I am grateful to my hon. Friend for that excellent intervention. We should remember that all Labour Governments leave unemployment higher than they inherited, and they therefore judge themselves by those standards. Even by those standards, the situation is pretty appalling. There was a moment of consensus about the importance of a flexible labour market. Mr. Browne was right. The reason why unemployment has not gone up as much as it might have done is that more people are working part-time, which partly compensates for the smaller number of people working full-time. The number of people in full-time employment has gone down by about 600,000; the number of people in part-time work has gone up by 280,000. That is welcome flexibility. I am glad that the Minister welcomed it, but I am not sure that the trade unions that fund the Labour party do.
"the non-accelerating wage rate of unemployment (or 'natural' rate of unemployment) is set to rise markedly-perhaps by 3 percentage points, to around the 9 per cent. mark at end-2015."
Interestingly, the IFS went on to state:
"A government that tightens fiscal policy aggressively, and relies more upon spending cuts than tax hikes to do so, is likely to experience a lower rise in the NAWRU"- the non-accelerating wage rate of unemployment-
"other things being equal."
Let us look at the growth projections on which the Government rely for their public finance projections. Generally, the IFS says that the UK is poorly placed; specifically, the "Green Budget" states:
"Most likely it will therefore suffer a further, and marked, deterioration in its productive capacity, and one that leaves the total decline in potential GDP greater than the 5 per cent. that the Treasury has assumed when making its projections."
The IFS has a central estimate of a 7.5 per cent. fall in productive capacity. It goes on to state:
"More worryingly still, the growth rate of potential GDP will probably also be significantly reduced. Rather than the 2.75 per cent. per annum that the Pre-Budget Report suggests as a central estimate, it is more likely that potential GDP growth will run at something close to 1.75 per cent. per annum."
That has a significant knock-on effect on the credibility of the public finance projections.
In support of the IFS view, which is broadly consistent with that of the OECD, we have the McKinsey report "Debt and Deleveraging: the global credit bubble and its economic consequences". It states that slow economic growth is the inevitable consequence of high relative indebtedness, and in that context it is interesting to examine McKinsey's calculations. It added up the debts of households, companies and Government and financial institutions and compared them with GDP. It found that the UK debt ratio was 466 per cent. That is slightly lower than Japan's 471 per cent., but they are far and away the two biggest ratios among the major economies. Even if one strips out the banks, and to be fair there is an argument for doing so, one is left with the UK as the second most indebted major economy.
On projections, the IFS is more optimistic than the Government about the borrowing number for 2009-10. It thinks that £178 billion may be overly pessimistic, but that is the end of the good news. It anticipates weaker growth than the Treasury in tax revenues for a given economic outlook, and it sets out Barclays bank's growth forecasts. Even under Barclays' central scenario, the fiscal forecast suggests that borrowing will persist at a higher level than the Treasury forecast.
Given the crisis in the public finances, what do we have from the Government? Their fiscal consolidation has been deferred until long after the general election, and there are no specific details about departmental spending. In fact, the Government have been downright evasive. There is no consistent willingness to level with the British people about what will be necessary; and, as for institutional change in order to enhance the UK's credibility, rather than create the widely welcomed office for budget responsibility, they have introduced the universally derided Fiscal Responsibility Bill.
The Opposition are optimists: we believe that this country can do better and can address the long-term challenges. But the fact is that we must be realistic about our situation. The Prime Minister promised an end to boom and bust; he has given us the worst bust since the depression. He said that Britain was best placed to withstand the recession; he has given us the worst recession of any country in the G7 and the longest of any in the G20. The Government promised us sustainable public finances; we have the worst budget deficit in our history, and our credit rating is under threat.
We have a boom built on debt-a burden that will hold back growth and drive up unemployment if we do not do something about it. The Government will not accept their responsibility for the disastrous state of the public finances, and they are not fit to accept responsibility for our public finances after the general election. The pre-Budget report reveals a Government who have a legacy of failure and no plan for the future. This country can afford this Government no longer. It is time for a change.
I shall seek to be reasonably brief, because others wish to contribute to our deliberations and our time is limited.
Mr. Gauke, the Conservative spokesman, concluded his speech by summarising the Government's position, and summarising it well. The Prime Minister appeared to make his reputation on the basis that he was an iron Chancellor who had golden rules in place to prevent our total national debt from rising above 40 per cent. of GDP; and on the basis that he had, uniquely in the history of capitalism and human endeavour, abolished the cycle of boom and bust. Now in these debates we find that none of that was true at all. Indeed, the very basis on which the Labour party decided unanimously to make the right hon. Gentleman the leader of their party and the Prime Minister has been undermined absolutely, and his credentials are mere dust.
If we compare today's economy with the boasts that the right hon. Gentleman made as Chancellor and as Prime Minister, we find that in 2009 Britain's GDP fell by almost 5 per cent., our biggest fall in a single calendar year in peacetime since 1921, and that our national debt is increasing by £500 million every single day. The ready reckoner has always been that a deficit of more than 10 per cent. of GDP puts a country in dangerous territory; we will have a deficit of more than 12 per cent., not only this year, but next year. Throughout this period, Government forecasts have been hopelessly wrong, but in debates with me and others the Chancellor keeps denying that.
Let me remind the House that in the 2008 Budget, less than two years ago, the Government forecast that the deficit for this year, 2009-10, would be £38 billion; instead, it is £178 billion. The Government's forecast was wrong by exactly £140 billion. The figure is even worse for 2010-11: less than two years ago the Government forecast a £32 billion deficit; now they forecast a deficit of £176 billion.
As the hon. Member for South-West Hertfordshire said, our recession compares very badly to those of other countries in the G7 and the G20. Even now, when we are out of recession, the anaemic growth figure, as Mr. Vara put it, of 0.1 per cent. means that there remains the genuine possibility that we may not be out of the woods. The economy may yet re-enter recession. I hope that it will not, and on the balance of probability I suspect that it will not, but the risk nevertheless remains real.
We have a Chancellor and a Prime Minister in a state of complete denial. We had, shortly before Christmas, the absurd spectacle of the Chancellor, in his pre-Budget report, coming before us to tell us of all the tough measures that he was taking in order to get to grips with the deficit, and then announcing additional spending programmes that exceeded in value the amount of money that he was saving through the austerity measures that he was bringing before us. We had the Prime Minister, in his speech to the Labour party conference, coming up with a shopping list of new spending commitments as if none of this were happening-as if the good times were rolling on and on, the golden rule was being adhered to, and we were still repaying debt. He came up with this proposal here and that proposal there-presumably all designed to try to make the Labour party's appeal greater at the general election, but based on absolutely nothing. There was no credibility and no funding available for any of those proposals.
Now, finally, we have the utterly preposterous Fiscal Responsibility Bill, which represents a desire by the Government to say that if they wish something to happen, it will happen by magic. They do not have the measures in place to bring about the 50 per cent. cut in the deficit over the lifetime of the next Parliament to which they say that they are committed. They cannot credibly show how they will achieve that objective.
It is a very sorry situation that the Government find themselves in. I therefore looked at the Conservative amendment with keener interest than I might have done in other circumstances, trying to find a credible alternative to what is clearly an incredible Government. I note that the Conservative shadow Chancellor has wisely left his name off the amendment, which calls for a "credible plan", presumably on the basis that associating himself with something that was credible would lead to a lot of scorn in this House. It has been a truly dreadful week and a bit for the credibility of the shadow Chancellor and for some of his team, although I suspect that the hon. Member for South-West Hertfordshire has done his best behind the scenes to try to keep his party on track. Last week, the shadow Chancellor set out his eight benchmarks, saying at the British Museum, "This is my plan for Britain." I will not read out lots of quotes, but this is directly relevant to whether we should take the Conservative amendment seriously. City AM said of the shadow Chancellor's proposals:
"The report is a damp squib. A few of the proposals are great; most are fluffy; some are downright bad; none are new."
"At one moment, the Opposition says it will be swift in making cuts; at another, that it will make them in due course".
"The problem for Cameron is that his wobbling is not confined to the economy. There's a pattern here".
He goes on to cite other examples of where the Conservatives are wobbling in terms of policy and of credibility.
It is difficult for the Conservatives to argue that they have a credible plan to deal with the United Kingdom's deficit. According to the Government's figures, in 2010-11, Britain is projected to have a deficit of £176 billion, yet to deal with that deficit the Conservatives have offered in their last round of measures £1 billion-worth of "examples". In other words, a deficit that the Government clock up over a single weekend is the amount by which the Conservatives may reduce the deficit over the course of an entire year through finding a few examples of reductions.
The shadow Chancellor told us that this was the new age of austerity and that anybody who did not believe that tough measures were necessary right now was not telling the British public the truth. Then, only a few weeks and months later, we find out that that is no longer his analysis at all-that in fact the Conservatives do not have any meaningful proposals to reduce the deficit and are not even sure whether that is something to which they wish to turn their attention in the immediate future. No wonder there is widespread anxiety about the suitability of the shadow Chancellor and his party to assume the responsibilities of government.
Where does that leave us? The situation in this country is very serious. The Conservative spokesman and others are right to warn that our deficit is not sustainable in anything like the medium to longer terms. We cannot go on living so much beyond our means that we are having to fund through borrowing something in the region of a fifth to a quarter of all public spending. That is why my party and I have put forward a series of proposals that, as I readily accept, do not go as far as we would need to go in order to deal with this problem in its entirety, but go a lot further than any other party has been willing to go in putting forward concrete proposals to get to grips with the truly dreadful deficit that the Government have left this country. The Conservatives have acquiesced in keeping that debate and the full consequences from the public.
At the same time, we readily acknowledge that one does not switch off the life support machine until one is certain that the patient is dead. The patient that is the British economy is in an extremely sickly state at the moment. It is still not at all certain, until we see the growth figures for the first quarter of 2010, that the patient is functioning in anything like the healthy state that we would wish it to. On that basis, there is a reasonable economic consensus that it would be a mistake to cut too quickly. There is a danger of cutting too fast, as well as a danger of cutting too slowly. I am afraid that the Conservatives, by trying to ride both those horses at once, no longer have a credible alternative plan in place; and the Government's credibility has disappeared altogether. We will need a tough, disciplined, intelligent approach to trying to get our deficit under control once we have tried to get the economy back into growth and on a stable footing again.
Order. If hon. Members wish to hear a short reply by the Minister, there is limited time for those who wish to contribute from the Back Benches. I hope that there will be a certain amount of co-operation between those hon. Members.
The issue before us goes rather deeper than the pre-Budget statement and the report, and, if I dare say so, rather beyond even the very sensible amendment that has been tabled by my hon. Friends. I say that because the origin of section 5 has to be observed if we are to know exactly what we are talking about in terms of the British economy in the context of the European Union.
"The Community shall have as its task, by establishing a common market and an economic and monetary union and by implementing the common policies...to promote throughout the Community a harmonious and balanced development of economic activities, sustainable and non-inflationary growth respecting the environment, a high degree of convergence of economic performance, a high level of employment and of social protection, the raising of the standard of living and quality of life, and economic and social cohesion and solidarity among Member States."
That is what article 2 states, and of course it is now in the Lisbon treaty, which consolidated all the existing treaties.
The Maastricht rebels, for whom I had the honour of leading many of the debates, took a strong position and refused to support the arrangements in question. I am glad to be able to inform the House that Mr. Hain, no less, the current Secretary of State for Wales, made a powerful speech in which he condemned the wishful thinking of the arrangements, and went on to vote against the Maastricht treaty on Third Reading. He was joined by a number of Labour Members, but not enough.
This is not just about history, it is about the present. Based on our predictions, all the Maastricht rebels, including my hon. Friend Mr. Chope, who is sitting next to me today, declined to vote for the proposal on the grounds of the impracticability of what was contained in article 2. Now, as is becoming increasingly obvious in this context and many others, the European Union simply is not working. I refer to what section 5 of the 1993 Act actually states, which is:
"Before submitting the information required in implementing" the provisions of the treaty that I have just mentioned,
"Her Majesty's Government shall report to Parliament for its approval an assessment of the medium term economic and budgetary position in relation to public investment expenditure and to the social, economic and environmental goals set out in Article 2".
Over an extended period, particularly in relation to the Fiscal Responsibility Bill-I referred to it as the fiscal irresponsibility Bill-those of us on the Conservative Benches have made one attack after another not only on the United Kingdom's performance, as set out in the pre-Budget report, but on the performance of the eurozone countries in complying with those provisions. I spoke about that only last week in the debate about financial management in the European Committee. We have also made the point, as I did earlier, about the absurdity of the no-growth, no-stability, no-pact arrangements in the so-called stability and growth pact, which was introduced by my right hon. and learned Friend Mr. Clarke in those heady days.
We are caught up in the failure of the European Community and European Union on their economic policies, which are simply not realistic. We need only examine article 2 to realise how much wishful thinking lies behind it. It does not work, because of the failure of the Lisbon agenda, because of over-regulation and because of the degree to which the report of the European Court of Auditors does not stack up, as I mentioned in Committee the other day. I do not have to repeat all that, because it is already on the record.
With regard to fiscal stability, the Government have failed woefully. I have said before that they have lied on the question of the actual debt, and that is why Standard & Poor's, PIMCO and other organisations that have great control and influence over both credit ratings and the bond market are looking so nervously at the underlying weakness of the British economy. The plain fact is that we are in serious difficulties and the Government are doing nothing about it. That is part and parcel of the problem that comes from attempting to subscribe to principles laid down in the Maastricht treaty, as endorsed by the Lisbon treaty, that simply do not work.
I have not advocated the idea of outright withdrawal, just like that. However, what is going on in the eurozone at the moment, as evidenced by a number of important articles that have been written over the past few days, has demonstrated the seriousness of the situation. It is simply astonishing that here we are in a virtually empty House, with nobody at all on the Labour Back Benches other than the Parliamentary Private Secretary to the Minister, when the eurozone is in deep trouble and may even be beyond crisis and when an economic summit meeting to deal with the matter is proposed for Thursday.
Wolfgang Münchau stated in the Financial Times in an article written on
"advocates of an IMF-led bail-out conveniently ignore the disastrous signal that this would send to the financial markets about where the eurozone is heading in the future."
I strongly recommend that anybody who reads these debates should also read that article. It continued:
"It would be so much better if the eurozone were to sort out its own problems."
That was certainly not what the Prime Minister said at Prime Minister's questions today.
There is deep concern that the International Monetary Fund may be called in to sort out the problem, but equally France and Germany might do so. As I have said repeatedly, it will be yet another prescription for danger in the EU if some counties, including ourselves as a net a contributor, are called upon to bail out others. It will not just be Greece, because as we have seen reported in the newspapers regarding Spain, the next step will be the same as on
"have reminded me of the speculative attacks on sterling and the Italian lira in September 1992."
He based his whole article on that analogy, and he is right, because it will not just be Greece. Whether or not Greece is bailed out, there will then be Spain, and then Italy, Ireland and Portugal, not even mentioning countries such as Romania and Bulgaria that are outside the eurozone for the time being and should never have been brought into the EU by accession. As everybody outside this place knows, we have a serious crisis for the eurozone as a whole. I do not say that with any great satisfaction or gloating, but I wish people had listened to us back in 1993.
Apart from voting against the mad arrangement that is now creating all the problems, in 1993 I said that we needed to ensure that we did not return to the dark forces of the past, with massive unemployment and the consequences of a failed economic system. That is what we predicted would happen, and we said that it would lead to the rise of the far right. That is exactly what I said in an article that I wrote in 1993, and I stand by it, because next to my constituency in Staffordshire the British National party is beginning to emerge.
There is a particular problem in Germany, because there is still an unemployment rate of more than 20 per cent. in the eastern part. The unity of the Deutschmark and now the euro has not solved the problems of eastern Germany. If the Germans are asked to bail out Greece-that is basically what is happening, because the French are just bystanders in this, and it is just a bit of political fixing-do we seriously believe that Angela Merkel and the German Government, not to mention the German people as a whole, will accept the prospect of bailing out all those other countries as well? That is what is in prospect.
I am genuinely curious as to what solution the hon. Gentleman would suggest for Greece's problems if it was not a member of the European Union or the eurozone. Alternatively, for the sake of an illustrative debate, how would Greece address its severe budgetary problems if the EU did not exist at all?
That is a good point, and it applies, as things stand, to the UK. It is precisely because those of us who campaigned against going into the euro won the battle in the Maastricht debates-that was at huge political cost, but necessary in our vital national interest-that we are out of the euro. The Prime Minister has no credit for that whatever. He just kept the debate going because he knew we were right-that is all there is to it. The plain fact is that we were right. Regrettably, we had to fight a Conservative Government over a long period on that issue. If Greece were not in the eurozone, it too could do what the UK can do, which is keep afloat even though that means devaluation-we must recognise that there is an international financial crisis, but it is being made much worse.
"Bailing out Greece is not the answer".
There is another exceptionally good article in that paper as well. The plain fact is that the analysis in the City is clear. There is deep worry, and every reason why people should be worried.
"requires improved competitiveness and buoyant external demand" but that
"At present, none of this is available."
The point is that in his proposals on the European Union, my right hon. Friend Mr. Cameron has made it clear that his imperative is to increase British competitiveness, and it is absolutely essential that we do so. We need to get rid of unnecessary over-regulation, most of which comes from the EU. We must follow up those proposals, but how will we do it?
That is where there is a serious and important decision to be taken. The decision hinges on my gold-standard-if I may dare to call it that-United Kingdom Parliamentary Sovereignty Bill, which has been debated in the House and which is strongly supported by a significant number of Conservative Members. My right hon. Friend has accepted it in principle, because he has stated that there will be a sovereignty Bill.
What is the relevance of that Bill to this debate? There are economic crises in the Europe and the UK, and we cannot separate the European issue from economic questions. The two things are absolutely interwoven on reacquiring growth and competitiveness, as my right hon. Friend said, and on the applications of the stability and growth pact and the Maastricht criteria, to which I have referred.
Rather than take issue with Conservative Front Benchers on that subject, I will simply say that it would be a great mistake to attempt to deal only with the economy in our manifesto going into the general election. We must deal with the European dimension at the same time. Therefore, we should deal with both the European issue-in spades-as well as the economic issue, because they are interdependent. To achieve that, we must repatriate powers to the UK Parliament, Government and people to ensure that we have a working, stable democracy that achieves for the UK the objectives of stability and competitiveness, to enable us to secure jobs and move forward.
On that basis, my Bill would provide the template to enable us to repatriate powers where there is any conflict between the requirements set out in the old Maastricht treaty and now in the Lisbon treaty, or the requirement for competitiveness-there is a stack of stuff that I will not now go into to deal with that. When it comes to repatriation of powers, we must be in a position to require the judiciary to take note of, follow and obey the Westminster legislation that is needed to override the European legislation. That is the solid template. That is what it is all about.
Absolutely none whatever. I was asked that question several months ago, and I said that I would make no apology for so-called "banging on" about Europe, because I am realist. The Bill is exactly what we need to get the European issue and the economic questions running together. My right hon. Friend the Member for Witney has on three separate occasions supported that Bill by providing Tellers for my proposals on the supremacy of Parliament. We are running together on the Bill. It is just a question of how clear and categorical that measure is.
This is a crucial debate, because it is about the future of the British economy and achieving an association of nation states. Everybody needs to wake up and understand that.
That was as usual an extremely interesting speech from my hon. Friend Mr. Cash-apart from the fact that I have heard it before and so have had time to think about it. I agree with three quarters of it, and there are just a few slivers that keep jutting in that I find difficult to go along with in full. Rather than answer my hon. Friend's speech, I will have a go at making my own in the time remaining.
We are debating fiscal fig leaves today-the European fiscal fig leaf is called the growth and stability pact; and our own is called the fiscal rules which, of course, lie in a heap of rubble. The stability and growth pact was a sop to the Germans, who wanted some protection against exactly what has now happened, which is Greece behaving highly irresponsibly. The Germans got nothing more substantive than the pact. When he was Chancellor of the Exchequer, the Prime Minister clearly wanted a fiscal fig leaf to convince the markets that there was something substantial to buttress his idea that he was able to abolish boom and bust. We know what happened to that.
I was going to say a few words about how much worse or better off we would have been in the eurozone, but I dare not, given present company, so I will move on swiftly. We are none the less subject to what is known as the excessive deficit procedure. That is what we are debating today. Under the procedure, we are required to deliver an explanation to the Council, and we have that 112-page document today, although it was difficult to get hold of. I got a copy from the Library this morning and it is just a cut and paste job of the pre-Budget report, which is why some of the phraseology reads like something that was published some time ago.
Like the PBR, the document is a fitting product from a fag-end Government at the end of their parliamentary term. The main elements of the document-and the PBR-are a forecast that carries very little credibility, a plan to deal with the fiscal crisis, which nobody believes, and proposals for a Fiscal Responsibility Act to replace the shattered fiscal rules. That Act is now on the statute book and was so absurd that not a single Labour Member outside the Government was prepared to speak in its defence. What we should have had was, first, a forecast with some independent verification and, therefore, some credibility. Secondly, we should have had a plan to close the deficit supported by credible numbers on public spending cuts. Thirdly, we needed something along the lines of an office for fiscal responsibility to support the credibility of the Government's fiscal policy in the longer term. Those three measures would have given some substance to our submission to the Council on how we would remedy the fiscal crisis under the excessive deficit procedure.
The UK agreed in December 2009, at a meeting of the Council, to a deadline of 2014-15 to correct our non-compliance under the rules. Of course, that deadline will have to be completely ignored. If the Government were to be re-elected, compliance would rely entirely on the PBR which is, as we know, virtually content-free. The condemnation of the PBR was so severe that I cannot remember anything like it. I shall not rehearse all the quotations now, but anything produced by Goldman Sachs, Barclays, Citigroup and a host of others will confirm my point.
Does it matter that we are living in this Alice in Wonderland world of fiscal policy, and how does it affect our constituents? The first respect in which it matters is a highly political one. Make-believe documents-for that is what we have before us-give the impression of a more benign medium-term environment than actually exists. Unless we tell the electorate the truth about the public finances, the next election will take place on the basis of a false prospectus, and that erodes the credibility of politicians, politics and this institution. It eats away at the moral authority of any Government trying to deal with the crisis, just as the false prospectus on Iraq did at the time of that crisis. In the end, the whole nation suffers as trust in Government atrophies. Unless we are careful, that is what awaits us on economic policy. That is where we were in the dark days of the 1970s, for those of us who can remember them, and it is important that we never let that happen again.
A second respect in which it matters that this document lacks real substance is that the vacuity of the PBR costs money, including higher public spending. To the extent that markets lose confidence in Government plans, the cost of Government borrowing rises, and we all pay for that. That is why it is worth considering the effects of the Government's fiscal plans from the perspective of the bond markets.
It has been extraordinary to hear Ministers congratulating themselves on the stability of the gilt market. They have done that during the past two debates, but we cannot let them get away with it. It is true that they are issuing huge amounts of gilts and the funding gap is truly horrendous, as the Governor of the Bank of England has said. As far as I know, it is unprecedented in peacetime. However, at the moment it is being plugged by quantitative easing. The UK Debt Management Office sells the stuff in Eastcheap and, on the Chancellor's instructions, the Bank of England buys it straight back the next day in Threadneedle street. That is a few hundred yards away and a safe round trip, so it is no wonder that we do not have a funding crisis and the gilt market is stable. Of course, eventually we will have to bring this Alice in Wonderland world to an end; quantitative easing will have to end, as no country can live on funny money for ever.
I have not heard the following point made before in the House, so I should say that the real test will be posed not only by the fact that QE will be brought to an end, but by the fact that the accumulated stock of what we have bought in under QE will have to be funded and eventually offloaded back into the markets, and that will also cost a huge sum. I was going to discuss some estimates of that cost, but I do not have time to do so now. However, I can assure hon. Members that even only modest increases in the long-run yield generate large numbers, which will result in lower public spending or higher taxes in the long run.
Withdrawing from QE and handling the consequences of QE in the long run will require very careful management, otherwise the gilt markets simply will not be able to absorb what is being offloaded. These twin issues of the funding of the deficit and the servicing of the debt will become the most salient in British politics in the next few years, just as the balance of payments was in the fixed exchange rate era of the '60s and early '70s. This will require a level of competence from the governing party that has been entirely absent in recent months. After all, it was not even able to organise a leadership coup after three attempts; one would hope to have one's ducks in a row on the third go. Everybody knows that this country needs another Prime Minister, but the Labour party seems unable to organise even that.
The bond market problem will be the same one that is confronting Greece-my hon. Friend the Member for Stone alluded to that a moment ago. Greece is struggling and it is making the same submission that we are making to the Council-the Greeks are also scribbling away trying to explain how they are going to comply with the stability and growth pact. The markets will be making their minds up about Greece too. The last time I looked at this, which was a week or so ago, I found that the long-yield premium on Greek bonds had already widened to 300 basis points. The risk for Greece is that that widens to such a point that the markets say, "We don't believe you'd ever pay it back." At that point, the country would go bust.
The Prime Minister told us what would happen in such circumstances at the Dispatch Box during Prime Minister's questions: either the eurozone would have a whip-round and bail the country out-that would be led by the Germans, who are the very people who wanted to avoid all this and who pressed so hard for something tighter and more vigorous than the stability and growth pact-or the International Monetary Fund would have to do the heavy lifting and bail Greece out.
If my hon. Friend will allow me, I will not, because I wish to conclude my remarks so as to give the Minister a moment or two to respond.
There will be many implications for inflation in the long run as a result of what has been occurring-that, too, has not been mentioned today. When more normal credit conditions in the financial sector return, as they will, and when the relatively benign international inflationary outlook deteriorates, as it might eventually, it is inevitable that the scale of the debt overhang will have at least some consequences for inflation. Therefore, whatever the state of the economy, in the long run interest rates will have to be higher than they otherwise would be, given that there is all this borrowing to service. I worry that that will become a medium-term problem for us too.
The plain fact is that right at the heart of the Government's failure was the cancellation of the spending review in the pre-Budget report and the abandonment of the fiscal rules, which destroyed the credibility of the Government's overall economic framework. I do not think that they can put that back together and I do not think that anybody would believe them even if they had got the right policies in place. Only a change in Government can now restore the credibility of economic policy in Britain.
With the leave of the House, I shall respond briefly to the debate.
First, I want to address the point raised by Mr. Gauke when he said that the report was late and copies were not available. This year, the Commission's deadline for the report was later than it was last year, which is one of the reasons why it was produced in January rather than December. As Mr. Tyrie said, the report is pretty much a cut and paste job, and he is right that it has been the practice of the UK Government to produce reports under section 5 based on pre-Budget reports. That is what this document is. I would also say to the hon. Member for South-West Hertfordshire that we laid a written ministerial statement at the time of publication, wrote letters to the Opposition to make them aware of its existence and said that it would form the basis of the section 5 debate. I cannot therefore see why he should have had any problem in getting hold of the document.
As is always the case when we discuss these issues, we have had a very interesting debate. Mr. Cash said that we should not separate the UK economy from the European economy when it comes to deciding policy, which is probably the only thing on which I agree with him. The UK economy is closely interwoven with that of Europe, and it is in the UK's strategic interests that we continue to be a full and active member of the European Union and take advantage of the fact that there are 500 million consumers in the European marketplace. It is vital that we recognise that huge numbers of jobs are reliant on our relationship with the EU-figures that I have seen suggest that about 3.5 million are directly related to EU membership.
If the hon. Gentleman will forgive me, I have a maximum of three minutes left, and rather than reopen the debate, I would like to reply to it.
It is my understanding that the Governor of the Bank of England said only today that he could not think of any reason why the UK should lose its credit rating, and he pointed out that the UK has a very good track record. Furthermore, according to the International Monetary Fund's most recent forecast, the UK's gross debt in 2010, as a percentage of gross domestic product, will be lower than that of France and Germany, certainly much lower than that of Italy and Japan, lower than that of the United States and, indeed, the G7 average, and lower than that of every G7 country except Canada.
I listened carefully to the speech made by the hon. Member for South-West Hertfordshire, but I did not hear a single word about what, if anything, the Conservative party would do were it in power. That might count as a result for him, however, given what the shadow Chancellor and some of his other shadow Treasury colleagues have said in recent weeks and then immediately had to recant. The Conservative party seems to be in a state of complete policy paralysis, which might not be bad for him, because at least he has been able to defend that position today.
The hon. Member for Chichester was completely wrong when he suggested that the PBR is a make-believe document-that is a travesty of all the hard work done by many civil servants to produce it. He will be aware that its growth forecasts for 2010 are now at the lower end of the consensus range-
One and a half hours having elapsed since the commencement of proceedings on the motion, the Deputy Speaker put the Question (
Question put, That the amendment be made.
The House proceeded to a Division.
Question accordingly agreed to.
That this House takes note with approval of the Government's assessment as set out in the Pre-Budget Report 2009 for the purposes of section 5 of the European Communities (Amendment) Act 1993.