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.
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.
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?
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.
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.
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.
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.
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.
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?
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.