Economic Growth

– in the House of Lords at 2:57 pm on 24th October 2001.

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Photo of Lord Northbrook Lord Northbrook Conservative 2:57 pm, 24th October 2001

asked Her Majesty's Government:

To what limit they would be prepared to allow a budget deficit to expand to maintain economic growth in the United Kingdom.

Photo of Lord McIntosh of Haringey Lord McIntosh of Haringey Deputy Chief Whip (House of Lords), HM Household, Captain of the Queen's Bodyguard of the Yeomen of the Guard (HM Household) (Deputy Chief Whip, House of Lords)

My Lords, sound public finances are essential for economic stability and growth. The Government's fiscal rules have put the public finances on a sound footing to allow them to support growth in the face of adverse shocks. Fully consistent with the fiscal rules, the 2001 Budget projections showed modest borrowing of 1 per cent of GDP in the medium term to finance capital investment in priority public services.

Photo of Lord Northbrook Lord Northbrook Conservative

My Lords, I thank the Minister for his reply. In the short term, the Government's surplus will weaken due to the weakening UK economy prior to 11th September, foot and mouth, and after the terrorist outrage of 11th September. In the longer term--

Noble Lords:

Question!

Photo of Lord Northbrook Lord Northbrook Conservative

--the finances will weaken because of independent projections. City projections are forecasting a deficit by 2004-5. The golden rule--

Noble Lords:

Oh!

Photo of Lord Northbrook Lord Northbrook Conservative

--restricts the Government's level of borrowing.

Noble Lords:

Question!

Photo of Lord Northbrook Lord Northbrook Conservative

My Lords, the Home Secretary stated that he wishes for decreased spending. The Prime Minister has asked for higher taxation. This is very confusing. Can I ask which approach the Minister favours?

Photo of Lord McIntosh of Haringey Lord McIntosh of Haringey Deputy Chief Whip (House of Lords), HM Household, Captain of the Queen's Bodyguard of the Yeomen of the Guard (HM Household) (Deputy Chief Whip, House of Lords)

My Lords, we have never pretended that public finances in this country are immune from economic changes, either in our own economy or in the world economy. When we come to the Pre-Budget Report next month the noble Lord will have an answer to his Question. What I shall not do is to give a running commentary on the public finances of this country.

Photo of Lord Taverne Lord Taverne Liberal Democrat

My Lords, if the so-called war leads to extra expenditure which may be a temporary strain, do the Government agree that the key answer will be borrowing at the lowest possible terms? Will the Government look again at Keynes's work, How to Pay for the War, which the noble Lord, Lord Skidelsky--I do not think that he is here today--described as perhaps his greatest achievement?

Photo of Lord McIntosh of Haringey Lord McIntosh of Haringey Deputy Chief Whip (House of Lords), HM Household, Captain of the Queen's Bodyguard of the Yeomen of the Guard (HM Household) (Deputy Chief Whip, House of Lords)

My Lords, I have great pleasure in agreeing with the noble Lord, Lord Skidelsky, in his absence. The general theory has a good deal to be said for it and I believe that the noble Lord, Lord Taverne, referred to it in the introduction to his question. Of course borrowing is one of our options, but it would depend on what kind of expenditure is involved as regards both military and humanitarian aid for Afghanistan.

Photo of Lord Peyton of Yeovil Lord Peyton of Yeovil Conservative

My Lords, can the noble Lord reflect on the contribution or otherwise made to national productivity by the Inland Revenue? The noble Lord, Lord Rooker, referred to the Revenue in a response to the previous Question.

Photo of Lord McIntosh of Haringey Lord McIntosh of Haringey Deputy Chief Whip (House of Lords), HM Household, Captain of the Queen's Bodyguard of the Yeomen of the Guard (HM Household) (Deputy Chief Whip, House of Lords)

My Lords, the noble Lord, Lord Peyton, has couched his question in uncharacteristically neutral terms and thus I do not know whether he is referring to the malign influence of the Inland Revenue or its benign influence. Perhaps we should discuss this point at some other time because it does not follow on from the Question tabled on the Order Paper.

Photo of Lord Stoddart of Swindon Lord Stoddart of Swindon Independent Labour

My Lords, if we were to enter a serious recession, would the Government feel constrained by the 3 per cent rule imposed under the Maastricht Treaty, which would prevent our public borrowing from exceeding 3 per cent of GDP?

Photo of Lord McIntosh of Haringey Lord McIntosh of Haringey Deputy Chief Whip (House of Lords), HM Household, Captain of the Queen's Bodyguard of the Yeomen of the Guard (HM Household) (Deputy Chief Whip, House of Lords)

My Lords, the Stability and Growth Pact, to which I believe my noble friend Lord Stoddart has referred, requires that the United Kingdom, as a member of ECOFIN, should submit a convergence programme. We are committed to avoiding excessive deficits. In return for that commitment, we take part in the surveillance programme, both at official meetings and in ministerial meetings at ECOFIN. Furthermore, the commitment that our public finances should be held close to balance or in surplus would be our policy whether or not we were members of the European Union.

Photo of Lord Peston Lord Peston Labour

My Lords, can I ask my noble friend to remind noble Lords that the Chancellor is committed to a fiscal policy which balances current expenditure with current income over the cycle? That means that, in a recession, the finances can go into deficit as long as an equivalent surplus is achieved during a boom. Incidentally, that is precisely Keynes's view of the matter.

Photo of Lord McIntosh of Haringey Lord McIntosh of Haringey Deputy Chief Whip (House of Lords), HM Household, Captain of the Queen's Bodyguard of the Yeomen of the Guard (HM Household) (Deputy Chief Whip, House of Lords)

My Lords, I am grateful to my noble friend Lord Peston for reminding us of what was Keynes's opinion and what is the Government's position. As he has rightly pointed out, both say the same: the Government will use the public finances as appropriate; that is, to boost demand when the economy falls below trend and to dampen demand when the economy rises above it. That Keynesian principle is sensible and is reflected in government policy.

Photo of Lord Saatchi Lord Saatchi Conservative

My Lords, perhaps I may offer the Minister a slightly different interpretation of the public finances. During the Government's first term of office, when they largely followed the inherited economic plans of the previous administration, they generated a surplus of around £34 billion. However, is it not right that during the Government's second term--the current term--they are planning to borrow £34 billion? Those plans were made before the events of 11th September. Does the Minister agree that that is a good definition of boom and bust?

Photo of Lord McIntosh of Haringey Lord McIntosh of Haringey Deputy Chief Whip (House of Lords), HM Household, Captain of the Queen's Bodyguard of the Yeomen of the Guard (HM Household) (Deputy Chief Whip, House of Lords)

My Lords, I do not accept the premise set out by the noble Lord, Lord Saatchi. During the first two years of our administration, we did not follow the previous government's economic plans; rather, we followed their spending plans. That is quite different. Over that time, we made plans for and began to increase expenditure on essential public services, paying particular attention to capital expenditure and investment, which had been so sadly neglected by the Conservative government.