This morning, for the first time in British history, we have opened up the Treasury books and allowed the publication of an independent and comprehensive assessment of the public finances. From now on, Governments will have to fix the budget to fit the figures, instead of fixing the figures to fit the budget. I should like to thank Sir Alan Budd, the members of the budget responsibility committee and all their staff for the impressive work that they have done in short order. A copy of their report has been placed in the Vote Office and in the Libraries.
There has been some interest in whether the OBR would publish all the relevant underlying assumptions and judgments driving the forecast. Today's report does more than that: there are more than 70 pages of detailed material, much of which has never been published before. For the first time ever, the Government are publishing the assumptions that lie behind the estimates for average earnings, property prices, interest rates and financial sector profits, and, crucially, a five-year forecast for annually managed expenditure. That includes a forecast for the amount of debt interest that we as a country will pay over the coming years.
The creation of the OBR has already impressed the international community and been praised by the International Monetary Fund and the G20. We will now move to put the OBR on a statutory footing with legislation that was included in the Queen's Speech. From now on, Members of Parliament sent to this House to scrutinise how the Government spend taxpayers' money will have access to honest and independent figures.
Let me now turn to those figures and what the OBR has uncovered. First, there are the forecasts for growth in the economy. The OBR is forecasting that growth will reach 1.3% this year and 2.6% next year. In future years, the OBR's forecast is for growth of around 2.8% in 2012 and 2013, and then 2.6% in 2014. Sadly for our country, the forecasts for growth are lower in every single year than the figures announced by the previous Chancellor at the time of the last Government's Budget in March. He told us that growth would soar to 3.25% in 2011, and then to 3.5% in 2012. When those forecasts were given, neither the Bank of England nor 28 of the main 30 private institutions producing forecasts for the UK were offering such an optimistic central view of the economy; we can only speculate as to why such rosy forecasts for a trampoline recovery were produced only weeks ahead of a general election.
I turn to the OBR's forecasts for the public finances. The latest outturn data show that public sector net borrowing for last year was £156 billion. The OBR is forecasting that it will be £155 billion this year. It is the highest budget deficit of any country in the European Union with the exception of Ireland. It is £10 billion less than the forecast given only a month before the end of the last fiscal year, but I can tell the House that, based on the OBR's figures, that £10 billion advantage that we start with decreases to only £3 billion by the end of the Parliament.
The reason for that is that the cyclically adjusted current balance, commonly known as the structural deficit, is forecast to be higher in every single year than what this House was told in March. That is perhaps the most important figure in the report, because the structural deficit is the borrowing that remains even when growth in the economy returns. It is the structural deficit that is a key determinant of whether the public finances are sustainable. This year, the structural deficit is forecast to reach 5.2% of GDP-that is, £9 billion higher than we were told in March. Next year, the structural deficit will be £12 billion higher than we were told before the election.
The OBR's forecast sees debt rising as a share of GDP throughout the Parliament-and the interest on that debt, which we as taxpayers have to pay, also grows every year. Let me be the first Chancellor in modern history to give Parliament those numbers for the coming years. The OBR forecast is that this is what Britain will have to pay for its debts: £42 billion of debt interest this year, rising to £46 billion next year, then £54 billion, then £60 billion and reaching £67 billion in debt interest payments by 2014-15. Over the course of this Parliament, more than a quarter of a trillion pounds will come from the pockets of taxpayers simply to service the debts left by the previous Government.
The figures produced by the OBR also give us a new insight into the spending plans that we inherited as a Government. They show that, given the OBR's assumptions, the previous Government would have had to find £44 billion of spending cuts in departmental budgets to deliver their published plans. I can confirm that I have found no evidence at the Treasury for how even a single pound of that £44 billion was ever going to be achieved.
There are two other very important considerations that relate to these pre-Budget forecasts and understate the situation that we inherited. First, these are central forecasts with a fan chart around them to represent the great uncertainty that exists, rather than Treasury forecasts based on an arbitrary reduction in the trend level of output. As a result, they understate the increase in the structural deficit and the reduction in growth. Secondly, and crucially, these projections have been based on recent market interest rates, which are about a third of a percentage point lower in Britain than at the time of the general election. As is widely acknowledged, that in part reflects investors' confidence that the new coalition Government will take action to deal with the deficit. As a result, as Sir Alan points out in his report:
"In present conditions the likely result is that these economic forecasts are biased upwards".
That is absolutely crucial to understanding today's figures, because if we followed the fiscal path set out by the previous Government, that would, again in Sir Alan's words in the report,
"lead to higher interest rates and so lower economic activity" than forecast today.
Let me conclude with this point. The independent report published today confirms that this coalition Government have inherited from their predecessor one of the largest budget deficits in the world, forecasts for growth lower than the country was told at the time of the election, a larger structural deficit than had been previously admitted, and a debt interest bill larger than the schools budget.
It is indeed worse than we thought. The public would not have known any of this if we had not set up the Office for Budget Responsibility. Next week, I will return to the House to explain what we will do about it. In the meantime, I commend this statement to the House.
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I thank the Chancellor for his statement. My thanks would be more heartfelt had I not received it just 25 minutes ago. There was a time when statements were supposed to be in the hands of the Opposition an hour before the statement was made, and then 45 minutes. I do accept, before the Chancellor says it, that in my time there were occasions when he did not get as much notice as he wanted. All I would say, in the nicest possible way and in the spirit of consensus, is that if we could try to get these statements in the Opposition's hands rather earlier, that would be very helpful.
Turning to the substance of the Chancellor's statement, I welcome the measured approach taken by Sir Alan Budd, and his colleagues in the Office for Budget Responsibility, in presenting his report this morning. Higher borrowing by the Government, as the OBR acknowledges today, continues to support the economy. Indeed, without it, there was a grave risk that a recession could have tipped into a depression; that is why the expenditure was necessary in this country and in other countries across the world. However, as I have said repeatedly, borrowing needs to come down as the economic recovery is established. Has not the OBR forecast that borrowing will be £30 billion lower than I anticipated in my Budget, and does not that flatly contradict the Prime Minister who said last week that
"the overall scale of the problem is even worse than we thought"?
Does not the report say that borrowing is lower not just this year, for which the OBR forecasts borrowing at £8 billion lower than I did, but in each and every one of the next five years? Borrowing is down by more than £30 billion in total. Can the Chancellor confirm whether he and the Prime Minister knew what the OBR's borrowing forecasts were prior to the Prime Minister making his speech last Monday? If he did not, he was just plain wrong; if he did, he owes us an apology. At the election, the Chancellor and the Prime Minister said that they had no need to raise VAT. Now that borrowing is in fact lower than they thought, is that still their policy?
Turning to growth, the OBR has confirmed my forecast for this year, but it has set out a lower growth forecast for future years-just 2.6% next year. This change is driven partly by what Sir Alan has today labelled "recent events", particularly events in Europe, where growth is sluggish at best. Is it not the case that what is happening in Europe, our largest export market, will impact on growth here in the UK? Does not that reinforce the need to put in place measures to secure growth here and in other countries in Europe? Does not the Chancellor agree that the impact of action taken across Europe to reduce deficits runs the risk of depressing demand and setting back the recovery unless accompanied by measures to stimulate growth? Does he not accept that growth is essential to cut borrowing? Japan provides an example of what happens if one gets this wrong-recovery is choked off, growth becomes stagnant, and debt rises.
It was because the private sector was weak as the global crisis hit that the public sector stepped in to support our economy. Sir Alan Budd and his colleagues understand that point, because Sir Alan says in his report, at paragraph 3.20:
"Private sector demand contracted sharply in the recession, while government spending contributed positively to GDP growth."
So much for the claim that our spending was irresponsible and unnecessary. In the same paragraph, he goes on to say:
"For this year"-
"it is government consumption and inventory accumulation that make the largest contribution to growth."
In other words, without it there would not have been growth this year. The risk of taking large sums out of the economy is that the recovery will be derailed. Is it not also the case that confidence is being affected by the scaremongering that we see from the Prime Minister and the Chancellor? The Chancellor will have noticed the survey of business confidence this morning showing a reduction in business confidence. That shows that what he is saying is, unfortunately, having a very real impact on the economy.
The Chancellor asked us to focus on the structural deficit. However, he will have read Sir Alan's very clear statement, at paragraph 4.40 of the report, that
"forecasts of cyclically-adjusted aggregates are subject to particular uncertainty."
In other words, there is a great deal of uncertainty about what the structural deficit is. But if the Chancellor does take the estimate of structural borrowing from today's forecasts as the barometer of success, he needs to be clear with people what that means. Will he confirm that it is still his policy to remove the entire structural deficit over this Parliament? If so, will he confirm that, on the numbers published today, he would need to find £118 billion by 2014-15? That is £118 billion of spending cuts, tax rises or both, which will affect millions of people and businesses in this country.
Since the Budget, there has been slightly faster growth at the beginning of this year. There is lower borrowing as tax receipts have come in higher than previously thought. Far from providing political cover for the Conservatives and Liberal Democrats for cuts and tax rises next week, does not the report remind us that growth is still fragile, the recovery is not yet secured and growth is essential, not only to cut borrowing but to secure jobs and a lasting recovery?
The report reminds us of the complete mess that the economy was in when there was a change of Government.
Let me deal with the right hon. Gentleman's points. First, I apologise that he received the statement only 25 minutes before it was delivered. I was following the normal practice that had been established in the Chancellor's private office. Despite having been on the wrong end of that for three years, I note his complaints about the very first statement, and I will look into that.
Let me answer directly the right hon. Gentleman's question, towards the end of his remarks, about the fiscal mandate. It will be set in the Budget. There is no credible fiscal mandate in place in Britain because we have inherited from the previous Government a commitment, which most of the rest of world does not believe is a serious and credible effort to reduce the deficit. The fiscal rules never amounted to very much either when the crisis came, but we will put in place new fiscal architecture.
The right hon. Gentleman talks about borrowing and economic growth. I remind him that the whole point about the structural deficit is that it is not the part of the deficit that reduces as growth returns. According to the OBR report, it is increasing above the estimates that were given in the March Budget. That is striking given that the out-turn for borrowing last year was, indeed, lower than the Chancellor forecast just three or four weeks, as far as I can tell, before he received the out-turn numbers. He gave a figure in the Budget and out-turn numbers were lower. It is therefore all the more striking that the structural deficit-the crucial part of the numbers: the black hole in the public finances-is higher by a significant amount than he forecast. Of course, we are all concerned about the situation in the eurozone, but 28 out of 30 independent bodies that look at the British economy did not believe that the figures that he gave in the March Budget were accurate. Indeed, we pointed that out at the time. [Hon. Members: "You haven't answered a single question."] I did not think that the right hon. Gentleman asked many questions; I have answered both of them.
The right hon. Gentleman makes a point about spending cuts and so on. He pencilled in £44 billion of spending cuts. Until a single member of the Opposition provides us with a clue as to how they would even have begun to achieve those £44 billion of cuts, they will not be taken seriously. The leadership contenders are busily taking their party leftwards into the margins of British politics. They are not addressing the central issue about their fiscal plans, which were not credible. Where would the spending cuts have come from? We are prepared to answer that question. Until they do, they are not contenders for being taken seriously in British politics.
Let me remind the right hon. Gentleman of what one of his Ministers, Paul Myners, said. This was the man whom he appointed-or at least agreed to have appointed-to the Treasury, and the man who sat with him in all those meetings over the years. He said:
"There is nothing progressive about a Government who consistently spend more than they can raise in taxation, and certainly nothing progressive that endows generations to come with the liabilities incurred by the current generation."-[ Hansard, House of Lords, 8 June 2010; Vol. 719, c. 625.]
That is the truth about the Labour party's position.
The right hon. Gentleman says, "Apologise". He is the person who should apologise. More to the point, Mr Brown, wherever he is, should come here and apologise for the complete economic mess in which he left the country.
May I congratulate my right hon. Friend on this unprecedented increase in transparency and openness on economic forecasting? Is it not the case that the increase in the structural deficit as a percentage of gross domestic product means that a robust deficit reduction plan is needed now more than ever?
If the Chancellor accepts Sir Alan Budd's estimate that around three quarters of the current deficit-about £120 billion-is structural, and if he intends to eradicate that entirely during this Parliament through public spending cuts and tax increases, where does he expect the growth to come from to prevent unemployment from increasing to 3 million and staying there for the next five years?
The fiscal mandate will be set out in the Budget. I am disappointed that the right hon. Gentleman was not elected as Chair of the Public Accounts Committee, but perhaps from his current position he will begin to propose cuts-as I said, cuts were even pencilled in to the previous Government's plans-before concerning himself with our proposals.
While sharing my right hon. Friend's dismay at the inheritance he has acquired-the picture is even worse than it once appeared-may I urge him to accelerate the plans that the Conservatives set out at election time to encourage lending by the banks, especially to small businesses, because the money supply figures are at an almost unprecedented low, and there is a real danger that we could see a further downturn?
I thank the Chancellor for his statement and the early advance sight of it. That is different from what happened under the previous Government, when such statements tended to come in very late indeed.
There is no doubt that the OBR forecasts show that the previous growth forecasts were too high and the deficit forecast, which is now £155 billion, was also too high. Will the Chancellor reflect that that is not simply a green light to tax and cut more, but that it demonstrates the imperative for sustained and sustainable above-trend growth, which is the real solution to tackling the structural deficit?
I thank the hon. Gentleman for thanking me for the early sight of the statement-we are trying to improve on things in the Chancellor's office.
My point to the hon. Gentleman is that the threat to the United Kingdom at the moment is, in part, our very large budget deficit. Indeed, the Governor of the Bank of England identified it as the single greatest economic challenge that we face. Whether we are Scots or English, and wherever we live in the UK, we must deal with that deficit. I would welcome engagement with the Scottish Government in moving forward and identifying sensible savings, so that we can reduce the budget deficit and give our country and future generations a bright future.
May I welcome you to your role, Mr Deputy Speaker?
According to the House of Commons Library, the Treasury has, in the past 10 years, been at least as good at accurately forecasting growth as independent forecasters. The background work on the new projections has actually been done by a secretariat provided by the Treasury, and according to Sir Alan, the changes are
"within the normal range of uncertainty".
Therefore, in all honesty, ought we to regard the new independent forecast as a simple downgrade of Treasury forecasts, and avoid unnecessary point scoring on what is a matter for the whole nation?
I am always against unnecessary point scoring. I say this to my hon. Friend: I think the new process is a big departure in how Budgets are put together. It is worth reflecting for a moment on what I did in this statement. I have read out what would normally be the first part of the Budget. Everyone now knows the forecasts and the assumptions behind them. He says that the forecasts were produced with the help of Treasury people, but Sir Alan Budd is an enormously respected independent person, and I do not think his independence can be questioned. We now have a set of accurate national accounts. Indeed, when the OBR is on a statutory footing, I want it to do more work on the true state of the national accounts, with regard to private finance initiative liabilities and the like. The big difference is that I must now fit the Budget to the figures, rather than fit the figures to the Budget.
I welcome you to the Chair, Mr Deputy Speaker.
Page 11 of the OBR forecast has an illuminating table about the contribution that various elements of spending-in this case, Government investment-make to GDP growth. For 2011, it shows a potential minus 19% effect in one year. Will the Chancellor confirm that his Budget and the spending review will not worsen that contribution to GDP, and will the OBR report on an analysis of the Budget and the spending review in terms of those components shortly after they take place?
I will set out measures in the Budget, and the hon. Gentleman will have to wait for that. He highlights the point that I was making-that the forecast is based on the plans inherited from the previous Government. It identifies huge spending cuts, but they never told us where those cuts would fall. I am sure that he wants a future in the Labour party, so perhaps he can take a lead over some of the leadership contenders and tell us what those cuts would be.
Will my right hon. Friend support the work of the OBR in assessing offsheet balance liabilities, including such things as PFI and unfunded public sector pension liabilities? I hope that he will recognise that it is important that we put all the debts that Labour has generated over the years on the balance sheet once and for all so we know how we can pay for them.
My hon. Friend is right. On page 58 of the report, Sir Alan and the fellow members of his committee set out some of the liabilities that need to be factored into longer-term fiscal forecasts, which include an ageing population, unfunded public service pension liabilities and the PFI contracts. They point out that some £43 billion of PFI contracts are off the national balance sheet.
In the real world of the real economy, last Friday I met a dozen world-class machine tool manufacturers at their annual exhibition in Birmingham. They were unanimous in their view that the Government were right to borrow to invest in the economy to boost it and their order books. Are they wrong?
If they are similar to the machine tool manufacturers I have met in Birmingham in recent months, they are also very concerned about the size of the budget deficit and that, unless we get a grip on it, there will be an ever higher spiral of tax rises and interest rate increases that would do enormous damage to them and to the people whom they employ.
I note that the former Chief Secretary who left that infamous note for his successors is in his place. Surely the establishment of the OBR heralds a transparency and openness that we have not seen before, and will mean that such a note could never be left again.
It would probably have to be published, if it were- [ Interruption. ] Well, just the contents.
As I noted from the remarks of the shadow Chancellor, it is interesting that we have not actually heard from the Labour party about whether it supports an independent OBR. It opposed that when in government-
It was repeatedly opposed by Treasury Ministers when I proposed it. Indeed, one of the most vocal and eloquent opponents was the shadow Education Secretary-I know that the shadow Chancellor has not always got on with him-who put the arguments on why Labour was opposed. If the Labour party wants to change its mind, we are all ears.
For the first time, the OBR has published five-year projections of unemployment and employment. The projection for the coming year, for example, is that employment will fall and unemployment will rise-based, of course, on the pre-Budget measures.
In Dover and Deal, people tell me time and again that they want more jobs, more money and more economic growth, so it is a real shock to come to the House and see the table in today's report showing that economic growth has been revised downwards, by between 0.5% and 1%. How can that have happened in the three short months since the Budget? Were the Budget numbers fiddled? What has been going on?
I welcome the establishment of the Office for Budget Responsibility and the increased transparency that it brings. However, the point that today's document makes most clearly is that the economic recovery is still fragile. The Chancellor makes interesting points about the structural deficit, but does he agree that the structural deficit depends also on the level of economic growth? What are he and his Government doing to lift the economic growth rate, when there is so little about, given that the future jobs fund, the regional development agencies, and support for industry and universities are all being scrapped?
We are providing support to the economy, first, by providing a transparent account that commands international confidence, and secondly, by committing to a clear plan to reduce the budget deficit and taking in-year measures that have commanded international confidence. That has led to a reduction in market interest rates for this country and given enormous support to the economy.
The final point that I would make to the hon. Lady is this. Let us not forget the situation that we inherited: the largest budget deficit in the developed world; rising unemployment; industry that had been brought to its knees; business investment that had collapsed. That is the situation that we are trying to recover from.
Sir Alan will give evidence to the Treasury Committee when it is formed, but one of the things that the Office for Budget Responsibility will do is cost Budget measures, including the impact of tax and spending changes. That will revolutionise how Budgets are put together, as well as how the House can scrutinise them, because hon. Members will be able to see that the costings are independently verified, rather than being ones that the Chancellor has signed off.
I, too, welcome the greater transparency that today's report involves. It shows us that the recovery is genuinely fragile. When I spoke just last week to a company in my constituency in one of the sectors in which Britain leads the world-bio-pharmaceuticals-I was told that manufacturing investment had been moved to countries that were investing publicly in their companies, including from Britain, where it was not possible to secure such investments. How will the Chancellor's Government ensure that such disinvestment, caused by a lack of public support, does not continue to create more unemployment and a weaker recovery for Britain?
First, let me thank the hon. Lady for welcoming the creation of the Office for Budget Responsibility-I should have thanked Rachel Reeves for that as well. The change is a genuinely revolutionary step forward in the making of Budgets that fits with a wider agenda of trying to bring more transparency to the way that the Government do their business. On the point about investment, Fiona Mactaggart is right to point out that there was a fairly dramatic fall in investment under the Government whom she supported, but I would say this: the sustainable answer to the problem is a strong private sector recovery, and that is what we all have to work towards.
Does my right hon. Friend agree that the real significance of today's independent report is the revelation of the extent of the structural deficit, with debt interest alone forecast to rise to £67 billion, strangling growth and enterprise, and at the same time destroying new Labour's core claim to be the party of economic competence?
My hon. Friend is right- [ Interruption. ] I see one of the leadership contenders barracking from the Opposition Benches. I do not know whether Edward Miliband wrote the speech for Mr Brown in which he told the Labour party conference in 1996:
"Losing control of public spending doesn't help the poor".
That is one area in which I agree with the former Prime Minister.
Does the right hon. Gentleman accept that a major contributor to the reduction in the growth forecasts for next year is the increasingly gloomy situation developing in Europe? Is he at all concerned about the competitive austerity that is breaking out across Europe? Is he also concerned that, if he goes ahead with the programme that he is outlining, we might face a double-dip recession as a consequence?
I suspect that everyone in the House is concerned about the situation in the eurozone, but let us be clear what has brought that about. It is a result of market concern about the sustainability of public finances in eurozone countries such as Greece. Those countries are having to take action to reassure markets and therefore keep their interest rates lower. I think that interest rates in Greece rose to more than 10% higher than those of other eurozone countries at one point. That is what happens to countries that do not get a grip on their public finances, and I want to ensure that no question mark is ever put against the name of the United Kingdom.
The complacency of the former Chancellor of the Exchequer about the small reduction in the expected budget deficit is rather like my saying that I am losing weight because I missed breakfast. We want clear, credible plans to deal with the budget deficit, and we need to know what they are as soon as possible.
May I first welcome you to your new post, Mr Deputy Speaker? Will the Chancellor confirm that budgetary policy will remain the responsibility of the Government, who will be fully responsible to Parliament in this Chamber, and that it will not be dictated by the European Union or any of its institutions?
Before I answer the hon. Gentleman, I, too, should welcome you to the Chair, Mr Deputy Speaker. [Hon. Members: "Hear, hear!"] My several visits to Chorley during the general election seem only to have helped you to return to this place. It is good to see you here in the Chair.
In answer to Kelvin Hopkins, of course I want the elected British Government and the elected House of Commons to have complete control over the tax and spending decisions that affect our country. One way of doing that is to ensure that we never give rise to market concerns about our ability as a country to live within our means. That is the way to retain national sovereignty. We have seen what happens when other countries lose that sovereignty to the markets.
The hon. Gentleman asked specifically about the European Union, and I shall make two observations about that. First, the Budget this year and in all future years will of course be presented first to the House of Commons before being presented to anyone else. Secondly, I know that he will be interested in this and, before those in my party who are interested in these subjects get hold of this fact, I should let the House know that, under the deal negotiated by the right hon. Member for Kirkcaldy and Cowdenbeath and the other former Prime Minister, Tony Blair, the British contributions to the EU budget are set to rise from £3 billion in 2008 to £10.3 billion in 2014.
My constituents, like millions of people up and down the country, are very concerned about the direction of mortgage interest rates. Does my right hon. Friend agree that unprecedented transparency in our national finances of this kind will increase our credibility in the global financial markets and help to keep interest rates lower for longer?
My hon. Friend is absolutely right, and it is worth reminding ourselves that the OBR June 2010 pre-Budget report is based not only on the previous Government's tax and spending measures and decisions, but partly on the lower interest rates earned by the current Government in the decisions and announcements we have made over the previous month or so. That is why Sir Alan says in his forward that
"the fiscal path assumed" by the previous Government
"would lead to higher interest rates and so lower economic activity ".
"Those countries with serious fiscal challenges need to accelerate the pace of consolidation. We welcome the recent announcements by some countries to reduce their deficits in 2010 and strengthen their fiscal frameworks and institutions."
That is, of course, precisely what the OBR does.
We have demonstrated that the OBR, alongside some of the other things we have done, is a commitment to the long-term sustainability of the British public finances, and I remind the hon. Gentleman of the following words of the Governor of the Bank of England:
"The most important thing now is for the new Government to deal with the challenge of the fiscal deficit. It is the single most pressing problem facing the United Kingdom".
One of the consequences of the previous Chancellor playing fantasy forecasts with this country's growth projections is that the men and women of my constituency-and, I am sure, of elsewhere-feel they have been treated with contempt and as mere collateral damage of an election campaign. It is vital that we restore these people's trust and confidence in Treasury reporting; it is, after all, they who are going to put this country back on its feet again. What will this Treasury team do to support that?
First, I will tell the Prime Minister what I am up to, because another thing that emerged over the weekend was that the former Chancellor of the Exchequer hid the numbers not only from the rest of the country, but from his own Prime Minister.
If I heard my right hon. Friend correctly, the policies of the previous Administration will lead to us spending an incredible £67 billion on debt interest alone by the end of this Parliament. In the interests of transparency, may I encourage him to put that number in context for the wider electorate, so that we know the amount per household in relation to the amounts we spend on our NHS and school system?