[Relevant documents: Correspondence between the Treasury Committee and the Chancellor of the Exchequer, relating to Office for Budget Responsibility forecasts, dated
I beg to move,
That the Charter for Budget Responsibility: Autumn 2022 update, which was laid before this House on
Before I start my remarks, I pay tribute to my predecessor, Mr Robert Key, the former Member for Salisbury, who sadly died on Friday. Robert was a Member of Parliament for 27 years, a distinguished parliamentarian and former Minister, and a dedicated Anglican. I put on record my affection for him; my thoughts and prayers are with his wife Sue and the rest of his family.
The charter for budget responsibility is, at its heart, about how we chart a course for growth. It is a blueprint for managing the public purse responsibly. It is a path to cement stability in our economy and invest in public services. It is, in the current economic climate, about acknowledging that public finances remain vulnerable and knowing the risks that arise from debt being close to historic highs. This Government take these risks extremely seriously and believe that stable public finances are a key ingredient in the success of our economy, both today and in the future, in the south and the north, for the elderly and our youngest. This charter sets out this Government’s approach to managing the nation’s money so that everyone can see we are being prudent with the nation’s finances.
We debate this charter today in the face of difficult economic times. Like many countries, the UK faces the twin challenges of a recession and high inflation, as global energy prices have been exacerbated by Putin’s war in Ukraine. We have turned the corner in the fight against inflation that has plagued nations across Europe. Inflation has now started to fall, with inflation in the UK lower than many EU countries. A warmer winter has helped keep a lid on energy prices that jolted upwards following Putin’s illegal war in Ukraine. There is, however, a challenging road ahead. The International Monetary Fund says that 90% of advanced economies are predicted to see a decline in growth this year, and that is why we are taking action to support the economy through these extremely challenging times.
Does the Minister not think there is some difficulty in trying to steer the economy on the basis of a five-year forward debt forecast when the official forecasters have been more than £100 billion out in two of the last three years, and £75 billion out this year with a one-year forecast?
I will address the provisions of the charter and my right hon. Friend’s point directly in a few moments. As the Chancellor set out last week, we have a credible plan to generate economic growth by getting people back into employment, reinvigorating a culture of enterprise and continuing to drive up standards in education, and ensuring that that happens everywhere. The Chancellor’s plans to generate growth need to be underpinned by sustainable public finances, but the global economic shocks we have faced mean that borrowing remains high. We are expected to borrow £177 billion this year—double pre-pandemic levels. That is contributing to ever larger public debt.
Along with high debt in a time of rising inflation and interest rates comes the £120.4 billion we are projected to spend this year on debt interest alone. Let me remind the House why that is. For almost two years, in the face of a historic pandemic, we took unprecedented, bold, decisive action to support people, jobs and the economy. We rolled out vaccines at a world-leading pace, we paid 80% of people’s wages, and we gave grants to businesses to help cover their bills. The costs of inaction in the face of covid-19 do not bear thinking about. I am proud to represent a Government who took the big decisions to keep the public and the economy healthy.
As inflation rose to figures we have not seen in more than 40 years, led primarily by increasing energy prices, we again took action to safeguard the nation by contributing to people’s bills. Nobody in this Government would argue that that is not money well spent, but we are also cognisant of the facts. At nearly 100% of GDP, public debt is at its highest level since the early 1960s. It would not be sustainable to continue to borrow at current levels indefinitely. If debt interest spending were a Department, its departmental budget would be second only to the Department of Health and Social Care. Not only does that direct our resources away from vital public services, but for those of us who have paid attention to the economy, it is clearly unsustainable in the long run. It is unsustainable because increasing debt leaves us more vulnerable to changing interest rates and inflation. For every percentage point increase in interest rates, the annual spending on debt will increase by £18.2 billion. That is money we could be using to invest in schools or hospitals and in the transition to net zero.
Aside from investing in the services that we need and that so many rely upon, there is another important moral point to debt. Letting our debt increase is simply racking up debt on the nation’s credit card and handing the bill to our children and grandchildren. We are not alone in our ambition to reduce debt as a share of GDP over the medium term—Germany, Canada and Australia have made similar commitments. It is not just numbers on a spreadsheet; it will have a material impact on the lives and living standards of those who have not yet been born.
Instead, we choose a responsible, fair approach. We are demonstrating fiscal discipline, which will support the Bank of England in bringing inflation down. That is carefully balanced against the need to support the most vulnerable and to protect vital public services. At the autumn statement we announced a series of difficult decisions worth around £55 billion to get debt down, while ensuring that the greatest burden falls on those with the broadest shoulders.
All Members will hope that, having faced the pandemic, war in Europe and a bout of rising prices, we will have seen the worst of this economic storm. The truth, however, is that we do not know exactly what lies ahead, and we need to create the room to respond comprehensively in the future, should another shock occur. Last year my right hon. Friend Mr Clarke came to this place to approve rules to guide us on a path to strengthen the public finances after the worst of the pandemic had passed. By the third year of the forecast, in 2025-26, those rules require underlying debt—that is, public sector net debt excluding the impact of the Bank of England—as a percentage of GDP to be falling and everyday spending to be paid for through taxation by the same year.
Since then the context has changed yet again. To continue protecting the most vulnerable and investing in public services, the Chancellor updated the fiscal rules at the autumn statement, and we are updating the charter for budget responsibility. It will give everyone the confidence and certainty that we are going to repair our public finances. It will provide the foundation for long-term growth. In following them, we will be able to get debt down while protecting the public services upon which we all rely. The rules require that we reduce the deficit so that debt falls as a share of the economy in five years’ time. Expenditure on welfare will continue to be contained within a predetermined cap and margin set by the Treasury unchanged from the level set in 2021. I am pleased to say that the Office for Budget Responsibility confirmed in November that we are on track to meet all our rules, with debt falling and the deficit below 3% GDP in the target year of 2027-28.
Aside from the fiscal rules, the charter remains unchanged. We continue to be at the forefront of financial management through our monitoring and management of the broader public sector balance sheet. The independent Office for Budget Responsibility provides transparency and credibility via its economic and fiscal forecasts. Many colleagues have remarked on the important principle that our fiscal plans are transparent, fully costed and accompanied by an independent assessment of the economic and fiscal implications. The Government agree with this principle. There may of course be extraordinary circumstances where that cannot be the case, as we saw during the pandemic, and it was right not to delay announcing critical help for households and businesses, but in normal times major fiscal announcements should be made with one of the OBR’s two forecasts. As is usual, the spring Budget on
This updated charter puts stability first. It sets a credible plan to deliver on the Prime Minister’s key promises to get debt falling and to halve inflation, and it fosters the conditions for growth. It continues our historic support for households, as it allows us to increase the national living and minimum wage and pensions. It maintains gross investment at record levels in innovation, infrastructure and education. We have protected the most vulnerable and vital public services, and we are protecting the economy. After making the difficult decisions at the autumn statement, today we have a choice: we can sit idly by and let our economy slip into disrepair, or we can secure the foundations of our future by protecting the foundations of our economy. For those reasons, I commend this motion to the House.
It does feel like this is the time of the year when we have the annual George Osborne tribute debate. This exercise began in his period as Chancellor, but little did we know—and, I suspect, little did he know—that when he started this exercise more than a decade ago, he would end up being denounced as part of the left-wing economic establishment. The purpose of the exercise has always been more political than economic. It was to show that no matter how much the Government had set everything on fire, they could turn up here and portray themselves as paragons of fiscal rectitude—a little bit like angelic choirboys smelling strongly of petrol. The trouble for Ministers is that since this exercise was first conceived over a decade ago, there is now a long economic record for everyone to see and, perhaps even more seriously, a bitter economic reality and present that people are living through.
The UK is the only G7 country not to recover its pre-covid economic position, under the stewardship of the Conservative party. Controlling debt was supposed to be a big part of this exercise. Debt used to be numbered in the billions. It now stands at £2.4 trillion. So successful has this exercise in controlling debt been that we need a whole new word to describe it; it is now counted in trillions. Of course covid added to this, as it did in all countries, but lest Government Members claim this is all about covid, let us remember that most of the increase was built up before the pandemic.
There really is a gulf—one the size of the Grand Canyon—between the statements of fiscal probity and sound financial management, and the reality of the economic performance. When we look to the future, we see that this Government have earned the very dubious distinction of the UK being downgraded by the International Monetary Fund in its growth forecast, while the rest of the world has been upgraded. It is one thing to move in line with others, but to move in the opposite, downward direction is an achievement we should not want.
I would like to know the Labour position. The European Central Bank is not selling debt at a loss into the market because it does not want the losses. The Americans are selling debt into the market at big losses, but they do not send the bill to the taxpayer. Only the Bank of England insists on both making huge losses and sending the bill to the taxpayer for immediate payment. Who is right?
I suspect that the Bank of England will not be the only institution attacked by the right hon. Gentleman tonight, but I remind him that part of the purpose of the charter is to restore our faith in the economic institutions, after what happened less than six months ago.
The IMF has forecast that the UK will have the lowest growth among developed countries for the next two years: bottom of the league on the record and bottom of the league on the forecast. And yet still the Government come along tonight and table a debate supposedly designed to enhance their economic credentials.
Well, what will the effect on those credentials be of the re-emergence of the former Prime Minister at the weekend? I have to give her 10 out of 10 for timing. What better time to write an article saying that her mini-Budget was right all along than the day before the Chief Secretary has to come here and stand up for the Government’s fiscal stability record? What better moment for her to say to members of pension schemes that had to be put on life support as a result of her mini-Budget that it was not her fault? No contrition for trying to borrow from my constituents in Wolverhampton South East in order to pay for a tax cut for people earning over £150,000 a year; not a word of apology to the millions of mortgage holders left paying a Tory mortgage penalty because of the reckless irresponsibility of the Conservative party. Just when the Government were trying to bury the memory of that mini-Budget under 10 feet of concrete, up she pops—like one of those hands coming out of the swamp at the end of the film—to tell us it was all someone else’s fault.
For me, the best bit in the article was when, in a long list of culprits, other than the Government that actually introduced the mini-Budget, the former Prime Minister blamed the Treasury civil servants for not warning her about the impact on pension schemes. I had to ask myself, were these the same Treasury civil servants that she had spent the whole summer scorning and disparaging? Were they the same Treasury civil servants whose boss was shown the door on the first day of her premiership? In what world are we expected to believe that the former Prime Minister, her Chancellor and the Government would have listened to a word those civil servants said, when all along she defined them as being part of the problem and not part of the solution?
The real problem for the Prime Minister, the Chancellor and the Treasury is that this is not going away. The last Prime Minister is not a lone voice, and the more that Conservative Members realise the Government have nothing left in their tank and are resigned to managing decline, the louder the drumbeat will become; and it will be cheered on by the same newspapers that gave such a warm welcome to that mini-Budget in the first place. The Prime Minister, demonstrating the sureness of touch with which we have come to associate him by now, has labelled those on the Government Benches calling for tax cuts “idiots”. That is his phrase, not mine—about those on his own side. And yet today, fearful of them, the Prime Minister now says he will listen. Which is it? Are they idiots or is he listening? This weekend’s intervention, and those who cheer its argument, will have the Prime Minister and the Chancellor looking over their right shoulders every day between now and the election, when they should be focused on the needs of the country.
This debate is supposed to be about all of us swearing fealty to fiscal rules, but there is another problem: since this Government came to office, they have broken their fiscal rules 11 times. They have had even more sets of fiscal rules than they have had Chancellors and Prime Ministers over the past year. If you don’t like one set, don’t worry—there will be another one along in a while! The Chief Secretary himself outlined how these rules were different from the ones we debated this time last year in the George Osborne tribute debate of 2022, and each time we are expected to treat the new rules as though they were the ten commandments.
The second part of this is about respecting the role of the Office for Budget Responsibility. The document before us is very clear about that. It talks in great detail about the importance of that role. Indeed, when it was first launched, the Economic Secretary to the Treasury of the time set out the benefits of the OBR, making clear the value of its
“strong, credible, independently conducted official forecasts”—[Official Report,
Vol. 523, c. 747.]
She said that the establishment of the OBR and its independence from the Treasury meant that
“Governments will be reticent about introducing policies that seem to take them off course”—[Official Report,
Vol. 523, c. 749.]
Well, there was not much sign of that reticence last year as the Government crashed the economy, caused a run on the pound, caused mortgage rates to rise and put pensions on life support. Indeed, we had a real-time lesson in the cost of disparaging our institutions—institutions that the Conservative party used to care about. But tonight, even after that experience with chapter 4 of the charter, we are back to a hymn of praise for the OBR.
The real problem here is not just inconsistency, but credibility. I am afraid that the many-year record since the idea of this charter was first conceived a decade or more ago has meant that the Conservative party has now forfeited the right to call itself the party of sound management; it has forfeited the right to call itself the party of growth, because the record on growth has been abysmal; it has forfeited the right to call itself the party of low debt, because debt has rocketed; it has forfeited the claim to careful stewardship of the public finances, with billions lost in bounce back loan fraud, personal protective equipment waste and tawdry stories of one dodgy contract after another; and it has forfeited the right to call itself the party of low tax, because the tax burden is at its highest for decades.
What, after all that, has this been for? We have record waiting lists, trains that people cannot rely on, and delays and backlogs everywhere. In fact, there is not a single public service that runs better now than it did 13 years ago, when the Tories took office. Low growth and high tax for a worse outcome—that is the record. When people are faced with the question, “Are you and your family better off?”, the answer is no.
Two weeks ago, we had the Chancellor’s speech on the way forward. He had four Es, and more than one person said that the biggest E was for empty, because the real problem for the Conservatives is that, when it comes to growth, the only policy they reach for is unfunded and untargeted tax cuts, and when they tried that in September, it blew up in their faces. Growth is the right question for the country, but it does not come from the discredited idea of trickle-down economics. It comes from the efforts of all of us—from every businessperson with a new idea and the drive to make it happen, and from making sure we use the UK’s strengths to make the most of the green transition that is coming, rather than standing back and allowing those investments to go elsewhere. It comes from every teacher equipping a pupil with new skills and knowledge, and from not having 7 million people on NHS waiting lists, keeping many of them out of the labour market. Talking of former Prime Ministers, it does not come from saying “F*** business”, but from a modern partnership with business that brings in the long-term investment the country needs. Most of all, in a knowledge economy like today’s, growth has to come from everyone, not just from a tiny proportion of people at the top.
Fiscal stability is an essential foundation for what we have to do—I agree with the Chief Secretary on that—but it is not an end in itself. It has to be the foundation for meeting the challenges the country faces and for giving people a more prosperous future. After many years of this debate, we look less at the latest version of the rules and more at the gap between claim and reality, because after crashing the economy and leaving the British public to pay the bill, the Government have no credibility to come forward and claim to be the champions of fiscal stability.
The idea for this charter was born in another political time, as I said at the start, and if it did have a purpose, events since have rendered it an unconvincing exercise to say the least. It certainly has not kept the Government to their fiscal rules, which have been broken many times, and it is unlikely, particularly after recent months, to convince anyone outside this Chamber that the Government have got the economy back on track.
If I may slightly abuse my position in this Chair, let me say that I only heard from the Minister on the Treasury Bench at the start of this debate of the death of Robert Key. He was a dear personal friend, an excellent and dedicated constituency Member of Parliament, and a first-rate Transport Minister. I know that those in the House who knew him will wish to share their thoughts with Sue and his family.
I call the Chair of the Treasury Committee.
Thank you very much, Mr Deputy Speaker, and may I associate myself with those passionately expressed words from the Chair?
I did think there might be a few more people here this evening to talk about the charter for Budget responsibility, after we have had so much debate across the country about the Office for Budget Responsibility and its forecasts over the last year or so. This was the year when the Office for Budget Responsibility made it into the headlines on numerous occasions, so I thought there might have been a bit more of a heated debate. I listened to the words of Mr McFadden, and I am not sure I understand at the end of his speech whether the Opposition are in favour of tonight’s motion and of the charter. I am not sure whether they are in favour of Budget responsibility. In fact, I did not hear any suggestions at all for solutions to the criticisms that he raised.
This evening, I reiterate, for those who were not here in early 2010, the rationale for the setting up of the Office for Budget Responsibility. It was because, in the Treasury of 2008, 2009 and early 2010, it was far too easy for the Government simply to make their own forecasts and to mark their own homework. I think there is merit in having someone external to the Treasury and oblivious to ministerial pressure come up with a set of forecasts. We all acknowledge that none will be perfect, or have perfect foresight about the future, but that externality means there is a way of marking the Treasury work and the Treasury projections. A Chancellor can certainly make an argument about why they may take issue with some of the elements going into the forecast, and there is often a more dynamic quality to tax revenues than is perhaps put into some of the external forecasts referenced this evening. A Chancellor can certainly have a debate about the numbers, but we do need to remind ourselves of the importance of this process and its external nature.
The other point I want to raise is about the fiction, which the Treasury Committee highlighted in one of our recent reports, that clouds the Office for Budget Responsibility forecasts for fuel duty. Again, this practice goes back many Chancellors and many Governments, and it is about putting into the projections for future tax revenue a ratchet up every year of fuel duty, yet for the last 12 or 13 years, every Chancellor coming to the Dispatch Box has decided not to implement it. It would be astonishing—I note that the Chief Secretary gave me a little cheeky smile—to see what is currently projected for fuel duty in the Office for Budget Responsibility forecast, which is for an extra 12p to go on to fuel after the Budget if the Chancellor does nothing. I think we can all agree that that is fiction. I cannot see the Chancellor coming to the Dispatch Box on
I just wanted to highlight that there is some element of a work of fiction in the Office for Budget Responsibility forecast. It would be healthier for all concerned if a more realistic approach could be taken to the forecast for fuel duty not just in the short term, but in the medium term, because I think we all recognise that there will have to be a change, as more and more people are buying electric cars, in how we tax transport and drivers. I also wanted to publicise how our Committee has come together on a cross-party basis to make that point.
May I also offer my condolences to Robert Key’s family at this terribly sad news?
I say to the Chair of the Select Committee, Harriett Baldwin, that I was a big supporter of the creation of the OBR, and I very much agree with her that an independent look at Government economic plans, when it is in full possession of all the information, remains a very sensible thing to do.
I start by thanking Richard Hughes, David Miles and Andy King at the OBR for their autumn 2022 “Economic and fiscal outlook”. However, it is worth noting, as they did, that this particular forecast, with its seven forecast rounds, was under three Prime Ministers, three Chancellors and three official forecast dates. I suspect that at least part of the reason why the numbers and forecasts in the report are so gloomy is the sclerotic and, one could argue, rather shambolic way in which the Government—the last set and the one before that; Prime Minister and Chancellor—have played fast and loose with the UK’s economic health over the past year.
What does the OBR tell us about the health or otherwise of the UK economy as measured against the new fiscal rules? Before I say a little about that, I point out that there are many ways in which one can have fiscal rules: forward-looking ones against forecasts, like this one, will tell us something; backward-looking ones measured against outturns will tell us something else; measing over a fixed timescale, or in this case a five-year rolling timescale, also is useful, as of course is a measurement over an economic cycle. Unfortunately, however, that tends to be a moveable feast, as it is not always clear when the cycle actually starts and ends. I am sure those on the Labour Front Bench will remember many happy debates over that particular set of circumstances in the past.
The OBR tells us that inflation is set to peak at a 40-year high and that wages and living standards are set to be squeezed by 7%, wiping out all of the growth for the past eight years. So the combination of external shocks, inflation, poor economic management and a series of policy decisions—some good, like the energy price support that the Minister mentioned; some bad, like the medium-term fiscal loosening, almost all of which has been reversed; and some modest, like the medium-term fiscal tightening, most of which was necessary—have led to an increase in borrowing of over £100 billion this year and next, and an additional £420 billion in debt by ’26-’27. The consequence for the economy is likely to be the central bank rate being higher than the March forecast, the exchange rate lower than the March forecast, and gilt yields, which are the real driver of the cost of borrowing, higher than the March forecast.
The good news from the OBR is that inflation is due to fall steadily until the end of 2024, but with mortgage rates on average still close to double where they were less than a year ago, constant vigilance from the central bank, the Financial Policy Committee and the Treasury is still required.
However, even with that it will be a long, hard road to recovery. The OBR reports that real household disposable income has seen the largest fall since ONS records began in 1956. As to what needs to be done to grow the economy, again the OBR tells us that it expects capital deepening to contribute only 0.3% to potential output growth over the next two or three years, lower than in the March forecast. It says that that reflects weaker business investment, which it expects to persist over the coming years.
So while, for example, the maintenance of the annual investment allowance at £1 million was welcome, there is still much more to do to attract big investment into the economy. This is one the most troubling things that the OBR reports. The output gap is not even expected to return to the March 2022 levels until 2027, towards the end of the forecast period. It is equally troubling that the trade current account balance is forecast to “widen sharply” from 2.2% of GDP in 2021 to 5.8% in 2022. That is the highest full-year deficit since ONS records began, and is mainly driven by a widening trade deficit.
Yet the Government appear to be in denial about the self-inflicted economic harm of Brexit, and it is against that backdrop that the Government have introduced the new fiscal charter: net debt falling as a share of GDP in 2027-28, the fifth year of the rolling programme, and public sector net borrowing not to exceed 3% of GDP in the same year. While the OBR reports that both of those are to be met, the truth is that both are only just met: public sector net debt by 0.3% of GDP; and public sector net borrowing by 0.6% of GDP—from memory, £9.5 billion and £18.6 billion. At the end of the forecast period GDP will be almost £3 trillion—that is 12 zeros.
There is no fiscal headroom; the margins are absolutely tiny. So one missed step, one missed calculation, one policy error—my goodness, we saw plenty of those two Prime Ministers and two Chancellors ago—or one external shock, and that either renders the targets unmet again or requires new targets to be put in place, or, frankly, means that the brutal cycle of cuts and austerity starts all over again simply in order for the Government, to meet a target irrespective of the consequences for the real economy.
I will end with this, which is said in sadness more than anger because I like the OBR and I like the idea of fiscal rules: we have no target for growth, for job numbers, for increased living standards, or for a boost in exports; rather, success will be measured by a Government avoiding a debt target by 0.3% of GDP. That is not, as the Minister said earlier, charting a path to growth; that simply demonstrates a crushing lack of ambition.
I have seen many displays of nerve in this Chamber over the last seven years, but I congratulate the Labour Front-Bench shadow, Mr McFadden, on his sheer chutzpah this evening. He was part of a Government who exploded the deficit under Gordon Brown, having been bequeathed a golden financial legacy, and then drove us off an economic cliff with a crash the like of which this country had not seen since the second world war. I draw attention to my entry in the register, because I still own the business that almost went to the wall during that crash, and I determined then, as I do now, to make sure that the right hon. Gentleman and his party never have stewardship of the economy of this country for fear of what they may repeat.
Before the Minister panics, I will say that I am here this evening to support the motion and the charter. While others have mentioned the renewal and the evolution of the charter over the years, it is a useful instrument that George Osborne introduced, albeit that I think he probably did so in contemplation of uncertain victory in 2015, wanting to jam an otherwise profligate and untrustworthy Labour party into a little more discipline for the future. But it is useful in giving guidelines to the wider world, and indeed the markets, about the Government’s intentions in the short and medium term. However, I have some questions for the Minister on this year’s mandate.
The first is about the independence and role of the OBR. As the Minister knows, there has been a lot of concern in the media and elsewhere about the role the OBR has played in the financial turbulence over the last few years, and in particular I want to talk about independence, accountability and its role in the formation of fiscal policy.
On independence, I must express to the Minister, an old friend and constituency neighbour, some concern about the evolution of the role of the OBR. The charter points out at paragraph 3.13:
“The government has adopted the OBR’s fiscal and economic forecasts as the official forecasts for the Budget Report.”
That means the Treasury is not now making its own forecasts; it is relying entirely on the OBR’s forecasts. In my view, that creates an element of conflict. I would hope that the Treasury would produce its own forecast driven by what the Chancellor wants to do, and the OBR would produce a parallel forecast, and then differences between the two could be highlighted and justified or argued about. Then those of us who rely on forecasts for policy making or investment decisions could decide where the fan chart of growth or of debt was likely to go. I am sure the Minister has the charter in front of him. It says in this paragraph that the Treasury still retains the analytical capability to produce those forecasts and reserves the right to disagree with the OBR, but in truth, because it is not producing a forecast, it does not and cannot.
At paragraph 4.11 the charter states that
“the OBR will provide independent scrutiny and certification of the government’s policy costings.”
Certification is an interesting word in this context, because it means that the OBR is basically approving the Government’s policy costings, which implies an element of negotiation and justification rather than assessment and opinion.
Paragraphs 4.20 and 4.21 on page 16 then say that there will basically be an iterative process between the OBR and the Treasury—and presumably the Chancellor—over the formation of the forecasts. That implies an element of negotiation—that the Chancellor will go to the OBR and say, “This is what we’re planning to do. What do you think?” and the OBR will say, “Well, we’re not sure this is going to produce quite the number you need.” So policy is formed in an iterative process.
I might have expected the Chancellor to ask his analysts in the Treasury what the impact of certain policies might be on forecasts. However, doing that directly with the OBR, which is supposedly independent, draws it into the policy formation process in a way that may not be helpful to its sense of independence or, indeed, to our sense of its assessment of the Treasury rules. Effectively, that imbues the OBR with an authority that should, in theory, bring with it an element of accountability.
Forecasts that should and could be produced by the Treasury would be produced under the name of the Chancellor, so if they are proven to be wildly wrong, there is direct accountability in this House through him or—hopefully in time—her. However, that is less the case with the OBR. It will appear periodically in front of the Treasury Committee, which is ably chaired by my hon. Friend Harriett Baldwin, who is here this evening and who has spoken. Other than that, however, the House will have no opportunity to properly scrutinise, test and understand why the OBR thinks the way it does.
My hon. Friend puts it in a pithy way, as he often does. It is not so much that there is some kind of trap or problem here; it is that a situation has evolved—probably more by accident than by design—whereby the OBR has been drawn into the machinery of the Treasury and therefore acquired an authority and an effective veto, in a way that is perhaps not helpful.
The reason that is a problem is that economics is an inexact science—if we put three economists in a room, we will have five opinions. Economics is not delineated in the way chemistry is; it is as much an art as it is a science, and much of it is actually psychology. So if the OBR is to be so involved in policy making, it is important that we understand the economic basis of its assessments. For example, do the people who produce these now Treasury —but actually OBR—forecasts appreciate, understand and believe in the Laffer curve? Do they think that if we reduce taxation, income will rise? That sits at the heart of the argument the Conservative party has had over the last few months about corporation tax. If we cut it, will we collect more money? Seemingly, the forecasts say not. Those are the kinds of judgment that anybody forming economic and fiscal policy must make.
There are also more fundamental issues—about, say, the operation of capital. If the head of the OBR is going to be so involved in policy formation—if there is to be a negotiation between the Chancellor and the OBR on an iterative basis—will that person be operating on the same ideological basis in terms of capital versus labour? Are they a Keynesian? Are they a monetarist? What is the impact of those kinds of belief system? Drawing the OBR into the Treasury machine therefore creates some difficulty for an organisation that, as I know the Minister will agree, has value because of its independence and its alternative view of what the Treasury is trying to do.
The second issue I want to raise is about the mandate. The previous charter contained a point about balancing the budget within three years; that is omitted from this charter. As the Minister said, things have changed, so that has been dropped. When we are effectively chasing a ratio as measured against GDP, we are chasing a moving number, which may make our lives more difficult. For example, if we are chasing a debt-to-GDP ratio, and our GDP is falling, we have to work ever harder to hit our target. The things we have to do to hit that target may also, paradoxically, reduce GDP even further, so we end up chasing ourselves down a spiral against a moving target. That is why, in last year’s charter, which has changed, the idea of balancing the budget within three years, and ensuring that our expenditure did not exceed our income, was quite helpful; it meant that there were two absolute numbers over which we had some control.
Fortunately, in its February forecast, the Bank of England says that if there is a recession, it will be shallower than we thought, which is good. That is not least because last year’s Budget represented a mild fiscal loosening in its initial stages, although not so much later on, with the energy price cap and all the rest of it. That may have helped with aggregate demand, making the recession less severe. However, if GDP does fall, the ratio that the Treasury is chasing will worsen, unless there are significant spending cuts or yet more tax rises, both of which may exacerbate the fall in GDP. That is why I am nervous about the mandate. The objective of reducing debt against GDP is absolutely right, but I ask the Minister to guard against the issue that I have raised.
Finally, I want to say something about the longer term. As politicians, we often focus naturally on a three to five-year horizon. We do that because, guess what, there are elections in a three to five-year horizon, and it is a horizon that is understandable and controllable. However, as the Minister will know, there are significant long-term issues for this country, which are driven by demographics and the nature of our economy. He will know that there are alarming reports that look way into the future, and if he has looked at the significant work done by my hon. Friend Mr Baker before he was a Minister, he will know what I am talking about.
To take an example, the Government Actuary’s quinquennial review of the national insurance fund basically says that it will run out of money in about 20 years’ time. Indeed, the rise in the pension age that we have just put through may mean that that period will be shorter, unless there is significant Government intervention in the form of more money going into the fund, which will basically mean tax rises. In addition, the OBR’s financial stability report from last year—it now does a long-term financial stability report—forecasts that, on the current trajectory, although our debts will start to fall in the short term, by the time we get to the middle of the century, they will be well above 200% of GDP and heading towards 270%, and we will be running at a deficit of 10% of GDP.
These long-term trends are driven fundamentally by demographic issues. As a country, we are growing older. We have fewer workers per pensioner, and we are not replacing ourselves from a birth rate point of view, and that will cause an enormous problem. Other countries are in a worse situation. In Japan, on current rates, the population will have halved by the end of this century, which will be economically catastrophic for the country. Unless we start chasing our tail—raising taxes to pay more in welfare and Government spending—we will be in big trouble, which may exacerbate our GDP issues. When we put together the whole cocktail of forecasts—short, medium and long term—they scream out at us to think about the model we are operating.
The wealth of this country was built on three great leaps forward in growth. We had the industrial revolution. That was followed at the end of the 19th century and the start of the 20th century by mass industrialisation, and since the ’70s we have had the IT revolution. In some of those periods, particularly the last, growth was quite turbulent, but throughout them, there was a very high average level of growth; 3%, 4%, 5% or 6% a year was not uncommon. We stand on the verge of another technological revolution—a great leap forward with automation, artificial intelligence, the way we do things and the green economy. We are on an ellipse of scientific discovery. Life sciences are a particular passion of mine, because there are a number of companies on the verge of curing cancer.
If we are to capture this upswing in human ingenuity, we have to think about the model of our economy and the operation of capital within it, and whether we have the right fiscal measures to encourage the kind of buccaneering capitalism that took advantage of those three previous upswings. We did less of that in the third period, the IT revolution. We went through a period of what I suppose we could call centre left or socialist Governments, and it was not de rigueur until the ’80s to be an entrepreneur. We sat on the operation of capital and, as a result, we missed the swing. That is why we do not have an Apple, a Microsoft, a Facebook or a Google. We have some companies coming, and we had some nascent companies. Some Members will be old enough to remember Acorn. For a while it was going to be a great world-beating company, but it fell by the wayside.
The Minister thinks about these issues carefully, and is conscious of the need to energise capital in a way that will build the businesses, products and jobs of the future. I urge those on the Treasury Front Bench to reflect on the longer-term issues that I have raised, and to recognise the kind of straitjacket that we are putting ourselves in. That, and the debts we incurred during covid, may well mean that we miss the next upswing in the world economy, unless we are willing to take risks with the mandate. There has been much debate in this House, and certainly in the media, about going for growth, but if we miss this upswing in growth, we really will miss a huge opportunity for the next generation of our fellow countrymen.
My right hon. Friend Kit Malthouse makes some powerful points. He is right that if we cut certain tax rates, we collect more revenue, not less. The historical evidence is very clear on that, but OBR and Treasury models do not capture that. He is right that if we try to guide our economy by a debt-to-GDP ratio and we go into recession, the ratio gets worse. We are then advised to take exactly the wrong action, and intensify the downturn by trying to chase the ratio with tax rises that will push the economy lower; it is an extremely foolish thing to do.
My right hon. Friend is right that the Treasury needs its own independent forecasting, and needs to be able to say sometimes that the independent OBR forecast may be wrong. If it is genuinely independent, why should the Chancellor have to defend it? When it is as wrong as it has been at points in the last three years—for example, as wrong as it was on the deficit—it would be extremely helpful if the Chancellor was encouraged to disagree with it, because it is sending him exactly the wrong signals. For two years running, it grossly exaggerated the deficit and debt at a time when we could have done more to promote growth. This year, predictably—indeed, I did again predict it—it got it wrong; it understated what would happen, because it did not understand that its other policies would slow the economy so much. My right hon. Friend is right about the longer-term issues, but time does not permit me to go into that, as people apparently want to go home this evening.
On the control framework, I will be the one person who says that I do not think that this control framework is good. It clearly has not worked in the past, and it is fairly unlikely to work in the future. We have one extremely important control, which is not mentioned in this document: the 2% inflation target. That should be even stronger and better enforced. It is very worrying that the Bank of England, which seems to have the main responsibility for it, allowed inflation to reach over 10% when it had a clear target of 2%. It would not listen to those of us who said that if it carries on printing too much money and buying too many bonds at ever higher prices, it is very likely to have inflation. I hope that it does not cause the reverse problem, and put everything into reverse, giving us a bigger recession than we need. We do not want any recession at all, but clearly a slowdown was needed to correct the extra inflation as the Bank tried to correct its past mistakes.
It would be good to complement the 2% inflation target, which should apply to the Government as well as to the Bank of England, with a 2% growth target. We would then have the balanced model that the Federal Reserve is wisely given by our American friends and colleagues. The Fed is told both that it must keep inflation to around 2% as a priority, and that it must maximise employment in doing so. A balanced mandate of 2% inflation—it would be nice if we could do 2% growth, but the current official forecasts are way below that—would provide the right kind of signals, and give us more chance of a sensible economic policy.
This is our one chance to remind ourselves of the big issue of how we manage this enormous debt, bearing in mind that about a third of state debt is owned in accounts by the Bank of England, which means that it is owned by the taxpayers and by the Government. When I last looked, the Bank of England was 100% owned by taxpayers and the Government. Every pound of that debt that was bought up, was bought up on the signature of Labour, coalition and Conservative Chancellors, with this House agreeing that we would indemnify the Bank against all losses. Indeed, the Bank of England understandably put on its website that the whole of the bond portfolio is held with it acting as an agent for the state. These are joint control decisions, and the Government are clearly the senior partner, because they have to pay the bills.
It is quite wrong that we should have this uniquely difficult treatment when it comes to handling the rundown and the losses, when the European Central Bank and the Fed made exactly the same mistake of buying too many expensive bonds . There is a lot to be said for the ECB idea that the rundown should take place as the bonds naturally repay. One does not go charging into the market to undermine one’s own bond prices by selling even more of them at a loss. If we want to be ultra-tough on money, like the Fed—it probably has more of an inflation problem than we did—then if we sell the bonds into the market, why send the bill to the taxpayer? Why does the bill not rest with the central bank, which can actually stand that kind of thing? As the Fed constantly points out, the fact that it is sitting on a lot of losses does not matter, because it can always print dollars to pay its bills—it is not like a normal company. We should look again at this particularly hairshirt treatment, whereby the Bank of England expects taxpayers to send it money every time it sells a bond at a loss—and it wants to sell a lot of bonds at a loss, when there is probably no need to do so for the sake of the conduct of monetary policy.
I hope that the Government look again at those issues, because we have a very difficult nexus between decisions taken jointly, decisions taken by the Government, and decisions taken by the Bank of England. The treatment of this debt is having a big impact on the Budget judgments that the Chancellor comes to.
My final point is on the strange treatment of debt interest. As the Minister pointed out, the debt interest programme has shot through the roof to extremely high levels, but the bulk of that is, of course, the indexation provisions on the index debt, which in the UK is a rather high proportion of the total debt. None of that requires cash payments, so it is not a bill that we have to pay today. In practice, it will wash through by our simply rolling over the debt when the bonds fall due. We will re-borrow the real amount rather than the nominal amount, so we will not actually feel it. It is very odd that we put that as a cost against the accounts. The great news, however, is that as a result of that strange accounting treatment, we will have a great bonanza, apparently, because I think the forecasts are right, and that inflation will come down quite sharply over the next two years—indeed, the Bank of England thinks it will go well below 2%. The debt interest programme will absolutely disappear through the floor, given all this so-called debt interest throwing out the figures. I hope some of the proceeds will be used for a sensible policy to promote growth.
It is a privilege to close this debate on behalf of the Government. I thank those who contributed to the debate, including the distinguished Chair of the Select Committee, who highlighted some of the issues and presumptions of Government policy. I cannot comment on what will happen with fuel duty, as that will be the Chancellor’s decision. I thank Stewart Hosie for his contribution, in which he seemed to suggest more targets and a poverty of ambition on behalf of the Government, and I can assure him that that is not the case.
I would like to respond to my right hon. Friend Kit Malthouse, who made a number of observations about the independence of the OBR; its certification and validation role; and the iterative process and whether that compromised the apparent independence of the Treasury. He described economics as not just an art or a science but even psychology. I can confirm that the OBR’s remit is unchanged: it is the Government’s official forecaster. But—as he notes and I am pleased to confirm—the Treasury maintains considerable analytical capability to support the policy advice to Ministers, and it does a very good job of it too. There is a clear separation between the OBR and policymaking, but it is a matter of securing credibility for those policies, and I think he would agree with me that that is a very important point.
I guess the issue is: whose forecasts are they? If the OBR produces forecasts and Treasury officials say, “Well, Chancellor, we have looked over the forecasts and we think they are right,” that is qualitatively different, in the public’s mind, to the Treasury producing a forecast and the OBR saying to the public, “Well, we have looked over them and we think they are right.” While it does say that the Treasury reserves the right to disagree with the OBR, the nature of the iterative process presumably means that will never happen, because they agree before anything is published.
What we can agree is that the budget responsibility committee has discretion over all judgments underpinning its forecasts. Of course, there is obviously a range of views—my right hon. Friend John Redwood is always clear in his disagreements with what the OBR may or may not forecast—but what we are saying is that there is validity in and a need for an official forecast, and that is what we have.
With respect to the shadow Chief Secretary, Mr McFadden, before he gets a little too complacent he should be wary of the £90 billion of uncosted net spending commitments that his party has made since the turn of the year. I think the OBR would be very interested in what we would find there.
The charter represents our bedrock to prosperity. It will get debt falling but invest in the future. It will rebuild our fiscal buffers, bolster our economic fundamentals and deliver for the whole country. A vote for this charter is a vote for sustainable public finances, and that is why I commend the motion to the House.
Question put and agreed to.
That the Charter for Budget Responsibility: Autumn 2022 update, which was laid before this House on