Pre-Budget Report 2004

– in the House of Lords at 12:05 pm on 16th December 2004.

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Photo of Lord McIntosh of Haringey Lord McIntosh of Haringey Parliamentary Under-Secretary, Department for Culture, Media & Sport, Parliamentary Under-Secretary (Department for Culture, Media and Sport) (Media and Heritage)

My Lords, I welcome this opportunity to open this debate on the information provided to the European Commission under Section 5 of the European Communities (Amendment) Act. Each year, the Government report information to the Commission on our main economic policy measures.

The procedure is set out in Articles 99 and 104 of the European Community treaty, which relate to the broad economic policy guidelines, convergence and stability programmes and the excessive deficits procedure. The objective is to ensure that member states' economic policies are consistent with the goals of the treaty, including non-inflationary economic growth, a high level of employment and social protection, and better living standards for citizens across both the UK and the EU.

Those goals are consistent with the Government's own approach to economic policy. Section 5 of the European Communities (Amendment) Act 1993, usually known as the Maastricht Act, requires Parliament to approve the information sent by the Government to the Commission for that purpose. The Government's strategy for economic policy is, most recently, set out in the Pre-Budget Report, published earlier this month. This material forms the basis of the information that we send to the European Commission and is subject to the usual parliamentary scrutiny and approval. Sharing the information in the Budget with our European partners allows us to influence the development of the EU, bringing enhanced employment and growth to Britain and other member states.

The background for this debate is one in which UK gross domestic product has grown strongly over the year and the global recovery has gathered momentum, despite higher world oil prices. Although a number of risks continue to surround the international outlook, the sound macroeconomic fundamentals in the United Kingdom will help to support continued growth and stability. More specifically, not only is the United Kingdom experiencing its longest expansion since records began, with sustained growth for 49 consecutive quarters, but it managed to maintain that record during the recent downturn, while all other G7 economies experienced at least one negative quarter of growth.

Alongside that impressive growth record, the UK is also enjoying the longest period of sustained low inflation since the 1960s and, at the same time, interest rates remain low by historical standards. As a result of this strong macroeconomic framework, the Government have been able to deliver record high rates of employment and record low rates of unemployment; with 1.9 million more people in work now than in 1997.

Setting employment records is not possible without an environment that promotes business development and growth. That is why the Government have taken steps in every Pre-Budget Report, Budget and Comprehensive Spending Review to support enterprise in the United Kingdom. As a result of those policies, there are 300,000 more new small businesses in the UK than in 1997.

As always, we will continue to maintain the fiscal discipline that is at the heart of our strategy for long-term stability. In the Pre-Budget Report, the Chancellor announced that we were meeting our fiscal rules. Debt this year is forecast to be just over 34 per cent of national income, compared to 44 per cent in 1996-97, and well below the 40 per cent ceiling of the sustainable investment rule.

The Chancellor also announced that we are meeting the golden rule over the economic cycle, with a surplus in this cycle of £8 billion, including the annually managed expenditure margin. Therefore, the Treasury is able to afford all of our existing commitments abroad and at home, and yet to release extra resources for the nation's priorities in the years leading up to 2008.

Central to the Government's economic objectives is building a strong economy and a fair society where there is opportunity and security for all. The strategy set out in this year's Pre-Budget Report highlights our determination to take long-term decisions by entrenching macroeconomic stability and by building a flexible, enterprising economy with a highly skilled, high-productivity workforce and a strong science and innovation sector.

The challenge is to combine our macroeconomic stability and our new-found confidence in our economic potential with the resolve to make the right long-term choices. The challenge is to secure and maintain the stability and growth of the economy, and yet to invest more in the education, skills, science, and innovation that will drive the growth and prosperity of our future. It is to invest, also, in our vital health service and transport infrastructure, increasing the well-being and prosperity of individuals, as well as delivering for UK business; to invest, in an uncertain world, in law and order, security and defence in order to protect our citizens at home and our interests abroad; and to meet, too, our global responsibilities to others, by investing in international development and the achievement of the millennium development goals.

Productivity growth, alongside high and stable levels of employment, is central to long-term economic performance. As a result of macroeconomic stability and market failures, the UK has historically experienced low rates of productivity growth compared to other major economies. The Government's strategy to close this productivity gap focuses on five key drivers of productivity performance: improving competition; promoting enterprise; supporting science and innovation; raising UK skills; and encouraging investment.

Building on reforms and initiatives already introduced, the Pre-Budget Report set out the next steps. These include: giving employers access to free and flexibly delivered training for their low-skilled employees through a national employer training programme; establishing an independent review to examine future skills needs of the United Kingdom economy; reforms to reduce the regulatory burden on business; publication of the interim report of the Hampton review consulting on improvements to the current system of regulatory inspection and enforcement to reduce the regulatory burden on business; setting out the vision of how significant reductions in compliance burdens for small businesses will be delivered through integration of Her Majesty's Customs and Excise and the Inland Revenue; the implementation of the changes recommended by the Graham review of the small firms loan guarantee by the end of 2005; and implementation of the 10-year science and innovation investment framework, through strengthening the partnership with business to raise investment in UK research and development, and taking forward the recommendations of the Lambert review on business/university collaboration, including through the northern science and industry initiative.

The UK is making progress in closing the gap with France and Germany measured in output per worker. In 1995, the gap was 22 per cent with France and 8 per cent with Germany. Latest Office for National Statistics data show that the gap with France has narrowed to 13 per cent and the gap with Germany has now closed.

The Government have examined the challenges and pressures that face the nation and are determined to make the right long-term spending plans for Britain. From our position of economic stability and growth, we are in a position to invest more, not less. This summer's spending review set departmental spending plans up to 2007–08, locking in the next step change in resources delivered in the three previous spending reviews and announcing extra resources to be delivered to our priorities.

In the competitive global economy of the future, it will be the intellectual capital of our country that will drive its economic growth. It is therefore imperative that we invest in our children's education, in adult skills and training and in science, innovation and enterprise. Those are the investments that will enable us to reach our potential as individuals and as a nation, and to make Britain a world leader of the future global economy. That is why the plans we announced in Spending Review 2004 focus extra resources on delivering that investment in the drivers of our future prosperity.

To support those spending plans for the future, the public sector will be seeking, as always, to deliver value for money, to maximise efficiency and minimise waste. This will allow the Government to release additional resources to the frontline without compromising our ambitious programme of public service delivery. The Government, building on Sir Peter Gershon's review of efficiency, are taking further steps to identify and implement more efficient business planning and management in the public sector. The Pre-Budget Report outlines further work to secure efficient delivery of public services. That includes the publication of Sir Michael Lyons's recommendations on asset management, calling for detailed asset disposal plans.

In addition, the Government have made clear our policies to promote fairness alongside enterprise, so that everyone can take advantage of opportunities to achieve their full potential in an outward-looking, flexible economy. The reforms of the welfare state introduced since 1997 reflect aims of eradicating child poverty, supporting parents to balance their work and family life, promoting saving and ensuring security for all in old age.

The Pre-Budget Report sets out the next steps the Government are taking to support these aims, including: a 10-year strategy for childcare, setting out the Government's long-term vision of affordable, flexible, high-quality childcare and providing parents with real choices in balancing work and family life; an extension of paid maternity leave from six months to nine months from April 2007; further steps to encourage saving and asset ownership through ISAs, the Saving Gateway and stakeholder products; and a package of measures to promote financial inclusion by increasing access to banking services, affordable credit and face-to-face money advice.

The Government want all children to have the best possible start in life, with opportunities to deliver their full potential and lead a fulfilling life. We have set an ambitious long-term goal of halving child poverty by 2010 and eradicating it by 2020. Significant progress has already been made in reversing the long-term trend of child poverty.

The Government are on course to meet our target of reducing the number of children in low-income households by at least a quarter between 1998–99 and 2004–05. The most recent data show that, by 2002–03, there were about 500,000 fewer children in relative low-income households than in 1998–99.

The Government also believe that a fair society guarantees security in old age and ensures that all pensioners can share in rising national prosperity. As a result, a £50 payment will be made to households including someone over 70 in addition to the winter fuel payment in 2005, to help meet the costs of council tax and other living expenses.

Our hard-won economic stability and sustained growth allow the Government to commit to more investment in the areas that matter to this country—not less, as noble Lords opposite would have it. That investment will enable Britain to develop into a world economic leader of the new global age.

That is the programme set out in the 2004 Pre-Budget Report, and that, with the approval of the House, is the basis on which we will send updated information to the European Commission. We are fulfilling our commitment under the Maastricht Act to report on our main economic policy measures and are maintaining the position developed by this Government at the heart of the EU policy process.

Moved, That this House takes note with approval of the Government's assessment as set out in the Pre-Budget Report 2004 for the purposes of Section 5 of the European Communities (Amendment) Act 1993.—(Lord McIntosh of Haringey.)

Photo of Viscount Trenchard Viscount Trenchard Conservative

My Lords, I am grateful to the Minister for introducing the debate. I tend to feel that the ostensible reason given by the Minister for the debate has little real point. We do not believe that the Chancellor cares much what Brussels thinks about our economic policy and performance, and, as my noble friends Lady Noakes and Lord Pearson of Rannoch said in our debate on 5 November, we do not care much either.

It is a great honour to speak immediately after the Minister, but I fear that to speak immediately ahead of the noble Lord, Lord McKenzie of Luton, is foolhardy. I feel rather like a marked man; he always has the last word.

It is true, as the Chancellor stated in his report to the House of Commons on 2 December, that Britain will,

"extend the longest period of uninterrupted growth in the industrial history of our country".—[Hansard, Commons, 2/12/04; col. 781.]

It is also right that we should recognise the Chancellor's wisdom in his decision to give operational independence to the Bank of England. The successful management of an independent monetary policy by the bank is one of the reasons for the basically sound state of our economy and for our continuing economic growth. However, the market reforms carried out by the governments led by my noble friend Lady Thatcher have provided a legacy of an efficient and lean economic structure that, as Anatole Kaletsky pointed out in the Times on 3 December, should enable any reasonably competent Chancellor to maintain healthy public finances and decent economic growth.

Mr Kaletsky also mentioned our third major advantage: we have an economy that is specialised in services, whereas global competition is shifting most manufacturing activity to the Far East. The French and German economies, in contrast, are more heavily dependent on manufacturing. I do not believe that it is likely that we can maintain our strong economic position indefinitely, if we withdraw completely from manufacturing. The Chancellor is right to say that Britain must invest in high value-added, high technology manufacturing, as well as services, and take the tough decisions to achieve American levels of business creation.

The Government's policies, however, seem to be designed to ensure that the state will absorb too great a proportion of our national resources. I will not dwell on the massive waste of resources resulting from the Government's obsession with the regions and regional government; I shall look only at national government. The massive increase in Civil Service numbers to 520,000 illustrates the point.

The Minister often talks about the Government's success in reducing unemployment, yet I have not heard him tell the House in which sector the Government have been most successful. I can tell your Lordships that it is the public sector. The large increase in public sector jobs has been paid for by the taxpayer. Tax revenues, which have already risen by £16 billion since the Government took office, are set to rise by a further £26 billion by 2006. The Chancellor optimistically predicts that, of that sum, £12.7 billion will be raised as a result of corporation tax receipts increasing by 44 per cent over the level seen in the previous fiscal year. He also believes that income tax receipts will be 16 per cent higher, national insurance 32 per cent up and stamp duty 27 per cent above last year's level.

The Chancellor needs to be unrealistically optimistic—if that is the right word—about the Government's projected tax receipts, in order to continue to claim that he will not break his golden rule. There is already a deficit of £17 billion in the current fiscal year, in spite of the Chancellor's having received a windfall of £4 billion from higher oil prices. The Chancellor believes that that will be reduced to £12.5 billion by April, but the Institute for Fiscal Studies predicts that it will have increased to £23 billion, breaking the golden rule with a year still to run.

Further, it is hard for us to be optimistic that the Chancellor will be correct in his assessment of future tax revenues. In the fiscal year ended last April, tax revenues were £9.6 billion less than the Government's forecast. Most observers predict that further substantial tax rises will be necessary in the next fiscal year.

Against that background, I fear that it will be difficult for the United Kingdom to achieve American levels of business creation. The necessary levels of corporate and personal taxation will make this country a progressively less attractive location for business investment. Another negative factor is the relentless increase in regulation emanating from Brussels. The overall share of GDP taken by net taxes and national insurance contributions by 2009–10 is stated to be 42 per cent, predicating a significant rise in the average tax rate.

There are points on which the Government deserve congratulation. Their decision to freeze fuel tax was helpful, as was the announcement that the winter fuel allowance of £200 for pensioners would be increased to £250. However, the allowance of £100 last year, to help pensioners meet their council tax bills, will not be paid in the current fiscal year. What the Chancellor gives with the left hand, he takes away—indeed more so—with the right.

The Chancellor has met his target on economic growth, but he has again missed his optimistic projections on revenues. Given the strength of sterling, he may not achieve the growth of 3.25 per cent that he expects for this year and next year. In that case, borrowing may need to be higher than £35 billion this year. That £35 billion is itself £8 billion—nearly 30 per cent—higher than the £27 billion that he projected in the 2003 Budget.

The truth is that fat government costs money. The taxpayer will have to pay for it in the end. Our national debt rises relentlessly, and the interest alone on the increase on the debt expected over the next three years will cost the Exchequer another £8 billion.

It is no wonder that the Chancellor is forced to drag more and more people into the higher income tax bands and more and more estates into the inheritance tax net. The Government's failure to adjust the inheritance tax threshold to reflect rising house prices has resulted in five times as many estates being subject to inheritance tax as was the case in 1997.

I must be a glutton for punishment to return again, for the third time in six weeks, to a subject on which I was severely chastised by the Minister in his winding-up speech on 25 November. The Government still refuse to reverse or even acknowledge the serious harm done by the abolition in 1997 of dividend tax credits previously received by pension funds and charities. The noble Lord was mistaken in his claim that dividend tax credit was double-counted. The effect of the Government's act was to increase the underlying taxes suffered by bodies that are otherwise exempt from paying taxes. The current system discourages investment in UK equities by pension funds.

Furthermore, the Government's action has resulted in a vicious circle of a badly underperforming stock market and a serious pensions deficit, about which your Lordships' House is all too aware. The Minister claimed that the pensions crisis was caused in part by companies taking pension holidays. But companies were entitled to assume that their pension funds would continue to receive the dividend tax credits. The unexpected and sudden abolition of those credits directly weakened the ability of pension funds to meet expected future liabilities. Companies that took pension holidays, on the other hand, were acting responsibly. It is possible that in the event that stock markets rise significantly in future, they will again be able to do so.

The Minister, in rejecting my argument, claimed to rely on the answer given to me on 5 November by his noble friend Lord McKenzie, who always follows me in these debates. I would not wish to suggest that the noble Lord deliberately misled the House in his assertion that the previous government had anyway reduced the value of the imputation credit from £43 to £25 on every £100 of dividend received by a pension fund. However, the noble Lord omitted to mention that for every £100 of gross income distributed by a United Kingdom company by way of dividend to a pension fund, the net amount received by the fund increased over the same period by 22 per cent, whereas it has correspondingly decreased by 17 per cent under this Government. That is after taking account of the modest decrease—2 per cent—in the rate of corporation tax claimed by the noble Lord, Lord McKenzie, as a justification for the Government's action.

The noble Lord cannot have it both ways. The Government reduced corporation tax by 2 per cent but abolished the whole tax credit worth 25 per cent at the net level. The Conservative governments reduced corporation tax by 19 per cent—from 52 to 33 per cent—over the period and reduced the value of the tax credit by 18 per cent—from 43 to 25 per cent. Incidentally, I would also mention that the principal cause of the Treasury's current raid on other government departments—in part leading to the need to scrap four infantry battalions about which we heard this morning—to provide the £1 billion necessary to avert the need for massive council tax increases at this politically sensitive time, was that councils' mushrooming pension fund debts would otherwise have necessitated large increases.

However, we should give praise where it is due. We must welcome the Chancellor's decision not to apply his threatened further penalty on savers in the reductions in the amounts that can be invested annually in ISAs. No doubt he has been persuaded in part by the lobbying on this point over the past year and more by investors' representative bodies. But why cannot the Chancellor admit his mistake and just get on with it? Why waste time and money with another consultation exercise?

In the debate on 25 November, the Minister seemed to dismiss as unimportant the pains of stock market investors. Rather, he claimed that a,

"hugely successful series of government policies, over a period of seven years [have made] . . . this a better country in which to live".—[Hansard, 25/11/04; col. 254.]

It may be that the Government delude themselves and in their arrogance believe this.

But it is now clear to all that new Labour is the same as old Labour, that this Government's misguided belief that they know best, their wasteful appropriation of an ever-increasing proportion of our national resources, their failure to defend our national interests in Brussels or the freedoms and rights of minorities at home, their arrogant misuse of transitory power to destroy checks and balances in our constitution through ill-thought and ill-conceived reform and their incompetence in wrecking our pensions system and savings culture, will surely ensure that they take their place in history as a government who may have intended, as the noble Lord likes to claim, to make this country a better place to live, but were successful only in making the public sector a better place to work.

Photo of Lord McKenzie of Luton Lord McKenzie of Luton Labour

My Lords, it is a particular pleasure, now in accordance with established practice, to follow the noble Viscount, Lord Trenchard. I did not want to return extensively to imputation credits and rates of corporation tax and their reduction. But that must be looked at in the round with what happened in the earlier period of the Conservative government with the reduction of first-year allowances, accompanied by reductions in rates of corporation tax, to see the effective rate of tax that companies then bore.

I welcome the Pre-Budget Report, which is a robust account of the impressive economic record of the Government. It is a record that has underpinned the substantial improvement in our public services. I should like to concentrate my remarks on certain taxation issues, particularly bearing in mind the charge of "66 stealth tax rises", which was reiterated in another place by the Shadow Chancellor, Oliver Letwin. Curiously, it was referred to in the debate on the previous Bill about half an hour ago. In doing so, I am mindful that the setting of taxes is the prerogative of that other place, although the impact of taxation policy and the manner in which it is interpreted and portrayed is reasonably within our purview.

I have been bemused by this stealth taxes charge for a little while, so I sought out this list of 66 to better understand what is included. It can be found in a document that is promoted on behalf of the Conservative Party. It makes interesting reading. I shall comment on some of the items shortly.

We have heard before, and will doubtless hear today, the clamour for an independent review of Government projections, but sight of this list should cause us to call perhaps for the policy statements of opposition parties to be subject to impartial scrutiny to determine whether they are objective and fair.

If we are to have an objective discussion about taxation policy and the performance of the Government, we should look at those matters in the round. Surely that should recognise where taxes have been reduced as well as where the burden has been increased. It is not possible in the time available to chart all of the tax reductions introduced since 1997, but we might remind ourselves of some of them.

The legacy from the outgoing Conservative government was a corporation tax rate of 32 per cent, which is now 30 per cent; a small companies rate of 24 per cent, which is now 19 per cent; a basic rate of income tax of 24 per cent, which is now 22 per cent; and a lower rate of income tax of 20 per cent—there is now a starting rate of 10 per cent.

We have seen under this Government the introduction of the child tax credit, the working tax credit and the pension credit. R&D tax credits have been introduced for a range of companies and expenditure, including R&D spend on drugs and vaccines. Tax relief by way of enhanced capital allowances has been introduced in a range of circumstances, including investment in environment-friendly technologies and low-emission cars.

VAT has been reduced on such items as children's clothing, vehicles adapted for people with disabilities, the clearing of contaminated sites and the installation of energy-saving measures. Stamp duty has been abolished on property transactions in enterprise zones and for certain intellectual property transactions. The introduction of the taper has significantly reduced the capital gains burdens, particularly for business assets. There is more, but none of this is acknowledged by opposition parties in juxtaposition to their list of alleged tax increases.

So what is on the list? A raft of the so-called stealth tax increases are in fact anti-avoidance measures. For example—it is on the list—the denial of the opportunity for some, typically the wealthy, to escape UK capital gains tax by a temporary period of non-UK residence may well increase the tax burden for a few, but I doubt whether the voting public would consider this to be an imposition they would wish to see reversed. Perhaps the noble Baroness, Lady Noakes, will tell us whether this is a change of which she approves or disapproves.

Next the withdrawal of the ability of some professions to report profits on a cash rather than on an accruals basis shut down a major tax planning opportunity for some and created a level playing field, particularly for those carrying on a trade. Is it Conservative Party tax policy to reinstate this privilege for these professions?

Several references are made on the list to proposed tax increases arising from changes to controlled foreign companies legislation, but those changes are targeted at preventing UK companies sheltering profits in tax havens or low-tax territories. As these changes are clearly deprecated by members of the Opposition, do they propose to reverse them? And what about the measures aimed at stopping certain tax advantages from manufacturing dividends and the abuse of double tax relief provisions? Would they really say that these are fairly characterised as stealth taxes? Where do they stand on legislation enacted to prevent the avoidance of VAT and stamp duty? Would they challenge the Government, or do they see such provisions as measures of fairness which protect the boundaries of the tax system and which should be applauded?

The inclusion on the list as a stealth tax of provisions relating to landfill tax and the escalator is especially shoddy. These have been emphatically declared as a key part of the strategy to improve waste management. There has been no lack of transparency on the part of the Government on this matter.

Similarly, as a matter of public policy, in successive Budgets the Government have increased tobacco duties in real terms. This policy has been stated explicitly on numerous occasions. Why, therefore, does the Conservative Party claim that people are let down by Labour on this matter? Would a Conservative government, should there ever be one, continue with this approach, or not? Would they promote real increases in tobacco duty, or not? It is clear that, even on a cursory analysis of the list, this is a gross distortion of the Government's record on taxation.

The Pre-Budget Report sets out the data on tax, and in particular tabulates net taxes and national insurance contributions as a percentage of GDP. These are 35.6 per cent for last year, an estimated 36.2 per cent for the current year, and 37.1 per cent for next year. This puts the current year's projected outturn on this indicator better than half of the years of the previous Conservative government. But not only is it at least comparable, it is also a fairer system because this Government have been tough on anti-avoidance whereas their predecessors often looked the other way. It is fairer because some tax reductions and reliefs have been general and some targeted.

Changes to the tax and benefits system since 1997 have resulted in families with children being on average £1,300 per year better off, with the poorest one-fifth of the population being £3,000 per year better off. A single earner family on half average male earnings with two children is £3,700 per year better off. The latest available data for the EU shows the UK to levy taxes as a percentage of GDP that are significantly below the average, both for the enlarged EU and the predecessor 15 countries. All in all, this is a record of which the Government can be proud.

I should like to raise one further point. I applaud the announcements in the Pre-Budget Report relating to the settlement for local government, and in doing so should disclose an interest as a continuing member of Luton Borough Council. The settlement includes the additional £1 billion for which local government lobbied and builds on impressive levels of support in previous years. Since 1997 we have seen cumulative increases in revenue support grant of more than 30 per cent in real terms. I have no doubt that this year Labour-controlled councils will once again lead the way with the lowest council tax increases across the country.

We all acknowledge that reform of local taxation is necessary and no doubt we will have an opportunity next year to consider these matters further. It has always been the case that finding fault with successive local government tax systems has not been difficult, whether the rating system, the poll tax—particularly that tax—and now the council tax. The challenge is to determine how the system should be supplemented or replaced.

Certainly any change should proceed only after careful deliberation and analysis, and it is in this regard that I register great concern about the simplistic notion of a local income tax based on the ability to pay. A comprehensive local income tax system would have huge practical ramifications and potential costs for employers both in the public and the private sector. A non-comprehensive, watered-down system has implications for equity. I note that the example of a system promulgated by CIPFA did not include investment income as part of the tax base. Such a system might well be practical, but certainly could not be said to relate properly to the ability to pay. It would favour the rich at the expense of the poor.

If the British people are shortly to be asked to make a judgment about these matters, we are entitled to inquire of those who promote the concept about its broad parameters. Perhaps we may hear today from the noble Lord, Lord Newby, whether the tax base for the Liberal Democrat local income tax will in principle include investment income and capital gains in the tax base. Simplistic slogans will not suffice at this juncture.

Photo of Lord Northbrook Lord Northbrook Conservative

My Lords, first, I declare an interest as an investment fund manager. I do not know whether it is going to become standard practice for me to speak after the noble Lord, Lord McKenzie of Luton, but I have to declare a measure of astonishment at some of his words on the Government's taxation policy, particularly as he seemed to ignore the huge increases in national insurance contributions that have taken place since the Government came to power. The Government had said that they would not increase rates of taxation at all, but national insurance should be considered part of the tax system, particularly when such contributions affect middle England, policemen, nurses and so forth. The other area where stealth taxes are particularly apparent is in the increases in stamp duty, which again hit middle England on the house-buying front. So I am slightly surprised.

As the BBC News website puts it:

"This was the Chancellor's final performance before the election and he was even more of a conjuror than normal. Despite large and growing deficits, he managed to give money away to children, council tax critics", and to curb fuel tax increases to motorists. He also changed his mind on cutting savings limits, of which more later.

First, as always I should like to praise one or two measures in the Budget. The decision to give pensioners aged over 70 and 80 additional payments as part of the winter fuel allowance is welcome, as are the measures to extend the child trust fund scheme at birth and age seven, with certain caveats which I shall mention later.

I am also pleased that the Government are to consult on a fairer and more coherent tax system for the 300,000 smaller businesses. The Chancellor must have read my Budget speech last July, when I complained about the effect of IR 591 on smaller companies. To recap, the story is as follows.

Since 1997, the Government have encouraged the incorporation of businesses by lowering the rate of corporation tax from 23 per cent to 20 per cent. In 1999 they created a starting rate of 10 per cent, which was lowered to zero in 2002. The Government then panicked in the 2004 Budget because they felt that too many companies were taking advantage of the new system and slapped a tax on any distributions out of smaller companies, thus causing alarm and upset to those who had converted from sole traders to limited companies because they thought that the Government were promoting incorporation to favour business. Hence the promise in the Pre-Budget Report to make life easier for smaller companies, while welcome, needs to be treated with caution because the Government's record in this area is not good.

The Chancellor must also have read my comments in the same speech in July on ISAs, when I complained that the Government were planning to lower the ISA limit from £7,000 to £5,000 from April 2006. I said:

"ISAs should be at the centre of their strategy to encourage long-term savings".—[Hansard, 20/7/04; col. 193.]

Lo and behold—I am sure not as a consequence—the Government are considering extending the £7,000 limit until 2009. But why only until then? Why not make it more permanent?

This still does not make up for the damage that new Labour has done to savings since 1997. First, as my noble friend Lord Trenchard said, the Government raided pension funds and deprived them of dividend tax credits of £5 billion a year, hoping that no one would notice. Secondly, they cut the individual tax-free savings limit from the total of £10,800 available in 1997 through a combination of general PEPs, single company PEPs and TESSAs, reducing it to £7,000 a year. Thirdly, they removed the 10 per cent tax credit available on ISA dividend income. How does that encourage people to save?

This action is reflected in the decline of the savings ratio since 1997. In the six years from 1998 to 2003, the household savings ratio has never been higher than 6.7 per cent. In the previous six years to 1997, it was never lower than 9.3 per cent.

As for the child tax credit, which I praised earlier, I see from the Times today that there may be a problem with sufficient providers in the administration system. In view of the small sum involved, I wonder whether it would not have been better to have cut tax rates.

If people are not saving, they are certainly spending. The build-up of household debt to a figure of £1 trillion is a cause for concern. The deputy chairman of the Bank of England, Sir Andrew Large, said last March that he was conscious of the build-up in household debt and,

"in particular the possibility that the potential vulnerabilities stemming from higher debt levels do in fact crystallize at some point and trigger a sharp demand slowdown that could have an impact on monetary stability".

Not only is personal debt a problem but the Government's borrowing situation is getting worse and is in danger, as has already been stated by my noble friend Lord Trenchard, of breaching the golden rule. The Institute of Fiscal Studies states that by increasing the current budget deficit forecast by £2 billion for this year and £1.4 billion next year, the Treasury cuts the margin of error in meeting the golden rule to only £8 billion, including £3.9 billion in the reserve for unforeseen spending needs.

In its press release, the IFS highlighted the Chancellor's reliance on strong tax revenues to meet his forecasts. It stated:

"Whether the improvement in the current budget balance materializes on the desired scale depends in large part whether tax revenues rebound as strongly in the medium term as the Chancellor continues to hope".

As has been stated by my noble friend Lord Trenchard, this relies mainly on a substantial increase in corporation tax receipts, which the Chancellor conceded will once again be lower than expected this year. The IFS agrees with the shadow Chancellor that if tax receipts do not meet the Chancellor's projections he will have to raise taxes.

The IFS continued:

"The Chancellor is predicting that the tax burden will rise by 2.2 per cent of national income over what is likely to be the next parliamentary term. This represents an increase in taxation equivalent to £26 billion in today's money, compared to the £16 billion seen since Labour came into office. Voters may not be so happy with these further increases in tax".

The IFS told the Financial Times on 4 December that there is only a six in 10 chance of the golden rule being met. Carl Emmerson, the IFS deputy director, said:

"At best the Chancellor has a 62 per cent chance of success. If the trends of the first seven months of this financial year were continued the Chancellor would have only a 34 per cent chance of keeping government borrowing inside the golden rule limit".

City institutions also believe that the Chancellor has been too optimistic in his forecasts. The investment bank, Morgan Stanley, stated in its Pre-Budget Report commentary that:

"Given the current outcomes this year for spending and tax receipts there are upside risks to the Treasury's projections for borrowing in 2004–5 and 2005–6".

Credit Suisse First Boston goes further. It states:

"The authorities are nothing if not consistent. The Pre-Budget Report again asserts that the public finances are on course to improve and to satisfy the fiscal rules. The problem with these forecasts is that they simply haven't been right. The Pre-Budget Reports of two or three years ago were more than 1% of GDP out on the following year's current balance. On current trends last year's forecast looks set to go more or less the same way . . . Last year's budget report forecast that this year's current balance would be a deficit of some £8 billion. This year's budget raised that forecast to £11 billion and the Pre-Budget Report has now raised it to £12.5 billion. The fact is however that more than half way through the year the twelve month running total is over £12 billion higher than that and hasn't been falling at anything like the required rate".

So, in effect, that is the missing £10 billion that the authority's forecast depend on.

Even normally sympathetic newspapers such as the Times are starting to question the Chancellor's figures. Gary Duncan, its economic editor, writes:

"The red ink grows darker and deeper. So does Gordon Brown's woes over the deteriorating state of public finances . . . The extra red ink comes as tax revenues continue to defy the Chancellor's optimistic projections".

The OECD, in its economic outlook for the UK written just before the Pre-Budget Report, also expresses caution. It states:

"The Government deficit is likely to be above 3 per cent of GDP in 2004"— contrary to the figures stated in the Pre-Budget Report—

"and in the absence of a spontaneous rise in taxes, additional action may be required to achieve a decisive and sustainable reduction".

In summary, I cannot approve the Government's assessment as set out in the Pre-Budget Report for the purposes of Section 5 of the European Communities (Amendment) Act 1993. I am concerned in particular about the increasing budget deficit and, contrary to the Minister, I do not believe that the extra money being spent in health and education, in particular, is being spent wisely or well.

Photo of Lord Stevens of Ludgate Lord Stevens of Ludgate Conservative Independent

My Lords, I thank the noble Lord, Lord McIntosh for arranging this debate today. It is also a great pleasure to follow my noble friend Lord Northbrook.

On the whole, I congratulate the Chancellor of the Exchequer on the accuracy of his economic forecasts. To forecast GNP growth to within 1 or 2 per cent is a pretty good achievement. Admittedly, the figures over his period as Chancellor have changed, but many of these were deliberate policy decisions. Despite the reservations expressed by myself, to most City journalists and economic commentators the economy has continued to expand much in line with the forecast by the Chancellor.

However, there have been fundamental changes within it and here—the Minister could not expect this praise to go on for much longer—I agree with our new European Commissioner, Mr Mandelson, that,

"we should not exaggerate our economic achievements".

After all, the Chancellor's borrowing record is pretty poor. At this stage of the business cycle one would be entitled to expect the budget to be in surplus, not in deficit. Public spending as per EU rules is rising at 6 to 7 per cent, including tax credits, and in the third quarter of this year government expenditure accounted for two-thirds of economic growth. Our trade deficit is at record levels, and with the EU our exports are lower and imports higher at a time when sterling has weakened against the euro.

Let us look at some of the main economic commitments set out in the 1997 Labour Party election manifesto: The first is to raise the rate of economic growth. Growth has slowed in relation to the last years of the Conservative government, being below 3 per cent versus 3.2 per cent then, but there has been growth. The second is to achieve economic stability. This has probably been achieved, but let us not forget a 20 per cent fall in import prices offset by a 30 per cent increase in the cost of government services. However, inflation has been controlled. The third is to broaden the UK industrial base. Manufacturing is still declining, for example, textile production is down one-third. But I have to say that I doubt whether any government could have done any better. The world is changing at a rapid pace. The fourth is to keep the tax burden as low as possible. Tax is now 38.5 per cent against 35 per cent of GDP under the last Conservative government.

The fifth is to promote savings—save to invest, not to spend. Household savings are down from 10 per cent to 5 per cent. Personal debt levels have risen by 80 per cent in the past seven years and the economy is now much more sensitive to interest rate changes than previously. More than 80 per cent of the debt is on flexible rates.

In the first 35 pages of the Pre-Budget Report, one sentence is repeated five times: talk about red tape. The sentence is:

"The UK is in a strong position relative to many other countries to meet the challenges of an ageing population".

"Relative" is not explained, but the Chancellor seems to be quite happy just to say that the UK is relatively better able. Let us examine that. It will cost taxpayers nearly £600 billion to pay unfunded pensions already promised to people on the public payroll. That is more than the national debt. The younger generation does not save for pensions and probably never has. They either need to spend their income or they choose to do so. The decline in the stock market and savings scandals have discouraged others, and most companies have closed defined benefit plans.

The UK stock market is one of the worst performing of the major European stock markets over recent years for the reasons clearly given by the noble Viscount, Lord Trenchard. However, the deficits in company pension schemes are not all of the Government's making. In the 1980s many companies took pension holidays, mine included, based on actuarial assumptions supported by accounting standards that have turned out to be a bit of a nonsense. For the average individual, it is too complicated and too risky to save for pensions. We must reverse the £5 billion raid on pension fund assets and make saving simpler and more tax effective.

The Chancellor talks about the need for 3 million more people to open bank accounts but, since one needs two utility bills to open one, how does he propose that those without their own accommodation do so? I would love to have an answer to that question.

Another point made in the manifesto is that there is too little investment. Increased investment is the key to future economic success. Growth slackened from 4 per cent in 1993–97 to 2.3 per cent in 1998–2002, although it is now rising.

A further point is early action to get people off welfare and into work. Our employment rate now, if you include those on benefit, is the same as most members of the EU. It is not lower. Even yesterday, the Minister for Work said that the Government have done almost nothing until recently, which is seven years later, to encourage people to return to work. However, the number of those in employment has consistently risen and the uncontrolled immigration policy—if it can be called a policy—has undoubtedly helped to stimulate the economy.

Another manifesto point was to raise productivity. Limited progress has been achieved. We are still basically slipping down the league tables, but what about the future? The UK has dropped heavily down the world education league according to the Programme for International Student Assessment. The UK dropped in the past three years from fourth to 11th in science and from eighth to 18th in maths, which is not a great prospect for productivity improvement in the future. Where did we hear, "education, education, education"?

Another point is to cut red tape. The general view now is that red tape is costing the UK economy £100 million a year. Most recent reports on EU directives are interesting. The British Chambers of Commerce calculate that for every 100 pages of regulation coming from Brussels, our civil service adds another 234. Defra manages to turn a 1,167-word EU directive into more than 27,000 words. What encouragement is all that to business, and to small business in particular? The World Bank is reported as saying that seven of the top regulation cutting countries last year were European, but the UK was not one of them.

The Government keep on forming new bodies to review this, as we have just heard from the noble Lord, Lord McIntosh. Every day since 1997, 15 new regulations have come into effect. For every job lost last year in the private sector, two were created in the public sector. The best way to cut red tape is to reduce the number of people who do it. The Chancellor announced last summer that he would cut the civil service by 100,000 staff—100,000 staff put on by him, incidentally. The Pre-Budget Report has a full page that tells us how 8,000 people have gone, but what about the 92,000 that have not? So far, he has relocated less than 4,000 of the 20,000 jobs in the Treasury relocation review published this summer.

Is it correct that the more civil servants a mandarin has under him, the more he is paid so that, if he cuts costs, he gets paid less? I quote from the manifesto:

"The myth that the solution to every problem is increased spending has been comprehensively dispelled under the Conservatives . . . The level of public spending is no longer the best measure of the effectiveness of government action in the public interest".

Enough said, I think. What encouragement is it for any business to hear from Treasury officials in a House of Commons committee that they did not know what a 40 per cent increase in their own department's running costs had been spent on?

Now to consider the Golden Rule, which most commentators think will be broken. The Chancellor's assumptions are just too optimistic. For example, he expects a growth in exports this year of 7 per cent against a growth of 2 per cent last year and zero the year before. He also expects a substantial increase in corporation tax revenue. The golden rules have already changed. While we, in our ignorance, thought that surpluses or deficits would be added up in billions of pounds and that, on this basis, the rule would be broken, the Treasury now states that the rule had always been perceived as a percentage of GDP. By doing this, of course, the earlier surpluses have a higher percentage.

The Chancellor agreed to a change in the way the Treasury calculates the depreciation of government assets, which cut several billion pounds off the current deficit. Lastly, the Chancellor could, in order to meet the rule, change the timing of the economic cycle by saying that there is more spare capacity in the economy than he originally thought. But does it really need to be met? Missing the rule slightly has no economic significance, but it still leaves the next government with an annual deficit of approximately £40 billion. The Chancellor has succeeded in turning a budget surplus into a deficit of 3 per cent of GDP, and that in a period of economic expansion. So much for the 1997 manifesto comment:

"National debt has doubled under John Major".

What he has done is better, but not enough.

Much as I wish to thank the noble Lord, Lord McIntosh, for the opportunity to have this debate, I wonder why, at this time, it is couched only in the terms,

"for the purposes of section 5 of the European Communities (Amendment) Act 1993".

It says so at a time when other countries are flagrantly breaking the stability and growth pact, which even Mr Prodi regards as a nonsense. France and Germany are in breach of the growth pact after some sleight of hand (for example, bringing in future revenues early—shades of Associated Fire Alarms some years ago), Greece is being sued by the European Commission for disguising its true deficit, and the Italian and Portuguese figures are generally regarded as unreliable.

Now the Europe Minister in another place is quoted as saying that entering the euro system is "economically irrelevant" and that Downing Street is "making a fetish" of the currency. I agree with him. Let us not make too much of a fetish of satisfying the European Union on our economic policies.

Photo of Lord Newby Lord Newby Shadow Minister, Treasury

My Lords, in at least two respects, the Chancellor has been true to form with the Pre-Budget Report. I refer first to the sheer volume of material that has been produced. In addition to the 250 pages of the main document, noble Lords will, no doubt, like me, have staggered under the great bulk of other documents produced on the same day. I wonder whether the Chancellor regularly watches "Yes, Minister". It reminds me of the marvellous episode in which a key increase in Permanent Secretaries' salaries was buried in the 75th annexe of a series of documents several inches thick which Ministers were being expected to approve on the trot. I wonder what nuggets there are in some of the other documents we have not yet had time to read, far less debate. No doubt, we will all be enlivening our Christmases by reading them.

The Chancellor made the Statement with absolute certainty regarding every assertion. He is very fond, as we know, of setting economic tests for matters European. I have 10 tests which I suggest the Commission might apply to aspects of this Pre-Budget Report in order to assess the credibility and robustness of the assumptions the Chancellor makes.

First, as a number of noble Lords have said, the Chancellor states that the deficit on the current Budget will be £12.5 billion this year. Two thirds of the way through the year, it is already some £17 billion, and most commentators expect it to be significantly greater rather than smaller by the end of the year. The noble Viscount, Lord Trenchard, mentioned the IFS estimate of a deficit of £23 billion. This week the British Chambers of Commerce suggested that it might be £20.4 billion. Either way, only the Chancellor and his Treasury officials believe that it will be anything near as low as £12.5 billion.

The second issue is tax take. There are a number of severe question marks against the assumptions, but I think that the corporation tax take projections take the biscuit, as the noble Viscount, Lord Trenchard, mentioned. They assume, as he said, that for this year, the take will be 25.5 per cent higher than for last year—twice the level of increase we have seen so far this year, so there is a long way to go. They also assume that this will rise to a staggering £41.3 billion in 2005. That is not just staggering, it is incredible.

Looking forward, I hope that the Commission will look very seriously at the third issue, the Chancellor's growth forecast for next year. He predicts growth of between 3 and 3.5 per cent—again, significantly higher than many other forecasters. Again, the British Chambers of Commerce this week suggested that it would be 2.4 per cent—very significantly less.

Let us look at where this growth might come from, because there is a series of other uncertainties and questions in the fourth area of consumer expenditure. In the next year, will consumer expenditure be the motor of growth as it was this year and last year? Consumer expenditure fell in October, and with static or falling house prices, my view is that it is likely to be static or falling in the medium term.

The fifth issue is industrial output. In October, industrial output was down for the fifth successive month. Why does the Chancellor think that there will be a big turnaround?

The sixth issue is export growth. As the noble Lord, Lord Stevens of Ludgate, pointed out, the Chancellor is assuming a 7 per cent growth in 2005 against export markets growing by 8 per cent. Yet in this year, export markets grew by 9 per cent, but our exports will grow by only 2 per cent. Somehow, the Chancellor expects a very significant change to take place in our ability to export between this year and next. However, October's trade figures bring the first 10 months to a shortfall of £48.8 billion, the worst since records began in 1697.

The Chancellor is rightly proud of some aspects of our economic performance, and tends to refer back to how we are doing better than when records first began. Amazingly, the trade deficit, or the trade situation, has escaped his eagle gaze. But the trade deficit is now equivalent to 5.5 per cent of our GDP, almost as big a proportion as in the US. We worry about the US trade deficit. Over the past decade, we have hardly worried at all about our trade deficit, but as it is growing significantly, year on year, I fear we may need to start worrying about it again.

It is a particular worry to me that the Government appear not to be putting the effort into promoting trade in the fastest growing markets. Our European partners, France and Germany, have been sending their Prime Ministers to China with huge trade delegations in recent times. I believe that the Chancellor has never been to China, yet it is a massive potential market which, all the evidence suggests, Britain is doing relatively little to develop.

My seventh question for the Commission is about exchange rate volatility. This is not discussed in the Pre-Budget Report. Do the Government have a view on whether exchange rates matter? The fall in the dollar will almost certainly depress export opportunities further. There are also signs that the flow of Far Eastern funds into the US may be reversing with the euro-zone and sterling being seen as better opportunities against the falling dollar. So the degree of volatility we have seen up to now is, I suspect, far from coming to an end.

My eighth concern relates to inward investment, which we have discussed in your Lordships' House a number of times. The latest figures show a further fall, so we now have a pattern of falling inward investment over a number of years. I suspect that the noble Viscount, Lord Trenchard, will put this down to growing red tape, bureaucracy and high taxation. I also suggest that the fact that we are not in the euro-zone might also be relevant.

My ninth thought relates to the risks associated with the rise in household borrowing. The Bank of England warned this week that the continuing rapid rise in household borrowing poses a potential threat to the economy in the longer term. It is now 140 per cent of income. It is a higher level of borrowing than in the US, for example, and much of Europe. Unsecured borrowing is rising particularly rapidly. This appears to be a risk. Does the Chancellor agree?

My final area of uncertainty relates to efficiency savings, on which the Chancellor places great store. The question is whether these are real. Of the £2 billion allegedly saved so far through efficiency savings, apparently 40 per cent has been saved because IT projects have been delayed. How is that an efficiency saving? According to John Oughton, it is an efficiency saving because it has avoided cost overruns. This is wonderful logic—Lewis Carroll is alive and living in the efficiency unit.

Further proposals for efficiency and their definitions look equally dodgy. I particularly like the idea that if the MoD reduces the number of submarines and patrol vessels in operation, that counts as an efficiency saving. The Commission might like to have a look at that.

If there are all these risks, how should they best be assessed? As far as the Government's tax and expenditure is concerned, as your Lordships know, we have proposed introducing a new requirement on the National Audit Office to review them. I am delighted that the Conservatives have belatedly come to the same conclusion and I hope that the Minister does not repeat his canard that the NAO can do that already. He knows that the NAO audits only a few carefully selected variables—carefully selected by the Government—and leaves most of the contentious issues untouched. Given the particular uncertainties about the future of corporation tax take, it would be appropriate for the Chancellor to ask the NAO to look at corporation tax assumptions in the next Budget. I hope that he will do that.

I have a further suggestion for the Chancellor which I hope that he will pass on to his Treasury colleagues. The Government are in the process of introducing operating and financial reviews for all quoted companies, with the purpose of enabling shareholders and other stakeholders to assess the companies' strategies and potential to succeed. The OFRs will require companies to list the risks they face that could jeopardise their plans. The Chancellor, by contrast, almost completely ignores the risks associated with his policies. To listen to the Pre-Budget Report, noble Lords would think that he lived in a risk-free sunlit upland. The one paragraph on risk in the Pre-Budget Report refers only to risks caused by rising oil prices and comes to the satisfying conclusion that the downside risks may well be balanced by offsetting benefits.

As we are clearly facing such significant risks, I suggest that the Chancellor introduce a proper risk assessment into the Budget Report next spring. If he does not know where to start, I suggest that he looks at the Accounting Standard Board's exposure draft on the reporting standard for the operating and financial review.

The noble Lord, Lord McKenzie of Luton, asked me a specific question about the council tax. I hope that we will have the opportunity to discuss council tax again as part of the debate of the noble Lord, Lord Blackwell, on taxation in early January, not least because I would like to probe with him why the Chancellor decided to make a panic raid on a whole raft of departmental budgets to inject £1 billion into local council expenditure next year in order to avoid an electorally disastrous increase in council tax.

There are clearly growing uncertainties facing the economy and the Government's taxation estimates. The Chancellor would be doing a great service by acknowledging the uncertainties rather than, as in this document, ignoring them.

Photo of Baroness Noakes Baroness Noakes Shadow Minister, Economic Affairs

My Lords, I have enjoyed this debate. In particular, I have enjoyed the continuing exchanges between the Benches opposite and my noble friend Lord Trenchard on the tax raid on pension funds. I am persuaded by my noble friend's forensic analysis and I hope that the usual channels will ensure that my noble friend gets to speak after the noble Lord, Lord McKenzie of Luton, next time, so that he has the contemporaneous right of reply.

Here we are again debating a Maastricht Motion. My noble friend Lord Trenchard has already said that we do not think that this is a meaningful activity. One of the few things on which we agree with the Chancellor is the folly of the UK joining the economic and monetary union. Of course, the Chancellor does not publicly say that it is folly, but he has been especially skilful—and I pay tribute to him—in preventing any serious moves by the UK to join the euro-zone. He knows, as we do, that the UK economy will prosper better outside the clutches of the European Central Bank and all the other trappings of euro entry, and long may that remain.

Let me be clear: I shall not be arguing that there is a crisis in our economy. My noble friend Lord Trenchard has already noted the excellent legacy left by my party and the current Government have so far continued to achieve a stable and growing economy. However, I say four things: first, that the Government have wasted taxpayers' money to an unacceptable degree; secondly, that they have increased taxes, largely by stealth and will continue to do so; thirdly, that they have over-regulated the business sector and thereby damaged our international competitiveness; and, lastly, that the figures presented by the Chancellor are at best optimistic and at worst misleading.

I will start with waste. The Chancellor has ramped up public expenditure without ensuring that the money was well spent. He has often claimed that he would give extra money only in return for reform in public services, but in practice he has scattered taxpayers' money regardless of the value for money return and bureaucracies have thrived. In the NHS, far more administrators have been added to the payroll than nurses. In our schools, only one quarter of the extra staff since 2000 are in frontline teaching jobs. Public sector sickness absence is on average 40 per cent worse than the private sector and in some cases twice as bad. Therefore, public sector productivity has fallen in the past five years—on any measure yet produced—and we have a Civil Service the size of Sheffield.

Sir Peter Gershon's analysis is that over £20 billion of waste exists in the public sector. We believe that that is a conservative estimate. The independent analysis undertaken by David James for my party shows a higher figure. However, the crucial question is whether this Government will deliver the £20 billion. So far, the omens are not good. For example, the CBI has described the detailed plans as "confusing and vague".

The noble Lord, Lord Newby, has already referred to the smoke and mirrors of the money that has already been claimed to have been saved in 2003–04, but not a single job has been reported as being cut. In the July spending review, the Chancellor announced job cuts of 84,000, but they were really only 70,000 because some were re-allocations. But 70,000 would be better than nothing if they were ever realised. I invite the Minister to tell the House precisely when we can see these reductions occurring in terms of fewer civil servants overall.

Turning to the question of taxes, there is no doubt that the Chancellor has been raising taxes since he came to power. We have identified 66 stealth taxes to date and only a U-turn late last week prevented the 67th in relation to the taxation of orphan assets. I listened carefully to the critique of the noble Lord, Lord McKenzie, but my noble friend Lord Northbrook rightly cited the national insurance increases and stamp duty increase. I would add council tax increases and, of course, the pension fund raid. The plain fact is that the average household is now paying £5,000 more in taxes than in 1997.

Photo of Lord McKenzie of Luton Lord McKenzie of Luton Labour

My Lords, would the noble Baroness still contend that each of the 66 items on the list that her party has produced are properly characterised as stealth taxes, especially given some of the points that I made earlier?

Photo of Baroness Noakes Baroness Noakes Shadow Minister, Economic Affairs

My Lords, the noble Lord, raises an interesting question. When he raised it, I asked for the list of the 66 to be sent to me, which I have received. I have not had a chance to look at it in detail, but I do not recognise what the noble Lord was saying to the House in his critique earlier, and pro tem I will stick by 66 stealth tax increases.

It is not only the tax taken to date. The Pre-Budget Report shows more tax rises. Council tax receipts are shown to go up next year by 8 per cent, which is six times the rate of CPI inflation and nearly three times the rate of increase in pensions. Income tax is expected to rise next year by 8 per cent and national insurance by 6 per cent, but earnings have recently been growing at less than 4 per cent.

Looking further forward, the rate of tax as a percentage of GDP is set to rise steadily, from 35.6 per cent last year to 38.4 per cent in 2009–10. Slowly but surely, the Chancellor plans to turn ours into a high-tax economy. There is absolutely no doubt that there will be tax rises in a Labour third turn; that is something that no Treasury Minister has yet denied. The only question is about the magnitude of tax rises. We believe that the PBR, through the use of optimistic assumptions, understates the amount of the tax raid that the Chancellor really plans.

We believe in lower taxes, not only for their own sake but because we believe that a lightly taxed economy is a healthy economy. We do not have an opportunity to examine that issue in detail today, but I am glad that my noble friend Lord Blackwell has secured a debate on the virtues of a low-tax economy early in the new year. I look forward to that.

I shall not dwell overlong on the over-regulation of British business, as my noble friend Lord Stevens of Ludgate has already dealt with that matter. He referred, for example, to the average of 15 new regulations for every working day since 1997. Normally when Members of these Benches say that, noble Lords opposite jump up and say that some of those regulations are not real burdens on business, so the ones that do affect business are all right. But it would be interesting to see what noble Lords opposite say to the fact that the daily rate of regulation shows an increase of 53 per cent over the whole period 1979 to 1997. Regulation is increasing. It is no wonder, therefore, that we have been slipping down the international competitiveness league tables, that our productivity figures lag behind those in the United States or that inward investment has slumped.

Before leaving the subject of business, I refer also to the damage that the Government have done to the manufacturing industry. Between 1993 and 1997, 179,000 manufacturing jobs were created. Since 1997, 865,000 manufacturing jobs have been destroyed. I searched the PBR for something among the plethora of views and initiatives that might address the future of our manufacturing sector. I found nothing, so I conclude that the Chancellor is indifferent to the fate of the manufacturing industry. Perhaps the Minister would like to say something about that matter.

Lastly, we come to the figures themselves. As many noble Lords have already pointed out, there are no commentators who believe that the Chancellor's figures stack up. They all believe that the "golden rule" will be broken unless there are tax rises, and that that may well occur before the end of the current economic cycle. My noble friend Lord Northbrook dealt comprehensively with that issue.

The PBR is littered with claims that the Chancellor is using NAO audited assumptions. The noble Lord, Lord Newby, referred to that area. If I were the Comptroller and Auditor-General I would be pretty angry about that. On the basis of the work that the NAO has done, no commercial auditor would allow its name to be associated as it is in this PBR. The truth is that the so-called audit of assumptions is a highly selective exercise, examining only what the Chancellor wants examined. It is carried out over a three-year cycle, and no work whatever was done by the NAO on the figures actually used in the PBR. For example, it is true that for the 2002 Budget the NAO examined the trend of GDP growth figures. But that work can in no way be taken to endorse the actual and critical GDP growth projections used in this PBR. The fact that the NAO examined something a couple of years or even six months ago is simply not relevant to figures prepared this month.

It is damaging to the standing of the UK if the Chancellor stands accused of using numbers that suit his own ends. That is why we believe that it is time for public finances to be independently forecast. My right honourable friend Mr Oliver Letwin, the shadow Chancellor, announced last week our proposals to create a fiscal policy committee within the NAO, which would take responsibility for economic forecasts and projections. Those policies, which are similar to but not the same as those of the Liberal Democrats, would put an end to the possibility that the books could be cooked and would enhance the credibility of economic analysis. It might also shed some light on issues such as exchange rates.

Earlier this week, the Minister refused to answer my question to him on what exchange rate assumptions were used in the PBR. He said that we could debate the matter today—so I would like him to tell me today what exchange rate assumptions were either input as an assumption to the Treasury model or produced as the output to the model. The figures for the dollar and euro exchange rates for the next fiscal year will be fine for today, if the Minister does not have all the data with him.

The Government might be proud of this PBR, but we are not. It tells the story of an economy which has rising but inefficient public expenditure being financed by rising taxes. It is based on some questionable figures and fails to address some wrongs already inflicted on our economy. I hope that members of the commission, when reading the PBR, will have alongside them the edition of Hansard containing today's debate, so that they can see the real story.

Photo of Lord McIntosh of Haringey Lord McIntosh of Haringey Parliamentary Under-Secretary, Department for Culture, Media & Sport, Parliamentary Under-Secretary (Department for Culture, Media and Sport) (Media and Heritage)

My Lords, have you noticed something? Have noble Lords noticed that every single speaker from the Conservative Benches has started by congratulating the Government on the economic figures in the Pre-Budget Report? They all then go on, like Lilliputians attacking Gulliver, to attack individual issues in the Pre-Budget Report. Of course, that is legitimate and, of course, I shall reply to those points. Perhaps the noble Baroness, Lady Noakes, did not congratulate us—that is not her style. But she said that she did not challenge the fact that the economy was strong.

Photo of Baroness Noakes Baroness Noakes Shadow Minister, Economic Affairs

My Lords, I said that it continued to be strong.

Photo of Lord McIntosh of Haringey Lord McIntosh of Haringey Parliamentary Under-Secretary, Department for Culture, Media & Sport, Parliamentary Under-Secretary (Department for Culture, Media and Sport) (Media and Heritage)

My Lords, "continued to be strong" will do for me.

Have noble Lords noticed something else? Every single one of the three Back-Bench Conservative speakers complained about having to speak either before or after my noble friend Lord McKenzie. They would much rather that he did not speak at all, while I would rather that he spoke before and after each one of them. On every occasion he knocks the stuffing out of their arguments in a way which is becoming familiar to those who have had the pleasure of listening to him.

The noble Lord, Lord Newby, has not quite caught up yet. He has talked about storm clouds and given dark warnings about the economy for years and years. Now the best he can say is that there are growing uncertainties. At last I can agree with him. Of course, there are uncertainties; this is an uncertain world. The global economy is full of uncertainties. We have said that in Budget speeches and Pre-Budget Reports for a very considerable time. Perhaps within the next few years the noble Lord, Lord Newby, might also recognise that the economy is strong and that the policies of this Government have contributed to the strength of the economy.

When they cannot really attack the performance of the economy, noble Lords opposite have to fall back on attacking the economic forecasts that the Government make. They claim variously that the average of the Government's forecasts is more optimistic than those of independent forecasters. Sometimes—I did not note which noble Lord said this—they say that they are more optimistic than all the other forecasters.

The noble Viscount, Lord Trenchard, may have referred particularly to forecasts of revenues. I have to point out to him that what the Government are forecasting concerns net borrowing, which is, of course, the difference between revenues and expenditure. If you do not get either revenues or expenditure right, you will not have a correct forecast of net borrowing. The Treasury's forecast differences for net borrowing have tended to be smaller than those of the OECD, the IMF and the European Commission. Our forecasts have, on average, been cautious. They have deliberately indicated a growth of 0.25 per cent below the central estimate. The result of that has been that the Treasury's growth forecasts have been very close indeed to the average consensus of independent forecasts. Those independent forecasts show that the hard-won platform of stability is expected to remain in place, confirming the credibility of the new macroeconomic framework.

It is all in the Pre-Budget Report. The record of Treasury forecasts as compared with those of other forecasters stands up very clearly. I am afraid that the selective quotations which have been used against it are not particularly effective. The result is—and this time no noble Lord has attempted to deny it—that we are meeting both parts of the fiscal rules. Because of the cautious assumptions we are making, public sector net debt is low and stable at just over 37 per cent of GDP. The average annual surplus on current budget over the whole economic cycle is projected to be 0.1 per cent of GDP, ensuring that the Government are meeting the golden rule. No other G7 country has had lower average debts and deficits since 1997.

I refer to the attack which says that the fiscal rules have been redefined. That is simply not the case. It is not just the Treasury Select Committee that says so: Martin Weale, Goldman Sachs and the Institute for Fiscal Studies have all recognised that the methodology for the fiscal rules and the methodology for dating the economic cycle—which are all in the public domain—have not changed and have not been seriously criticised.

The noble Lord, Lord Stevens, seems to object to the calculation being made on the percentage of GDP. What else should it be made on? Should it be made on some out-of-date figure that does not change?

Photo of Lord Stevens of Ludgate Lord Stevens of Ludgate Conservative Independent

My Lords, I think it will be generally accepted that most people were under the impression that it was an absolute figure, such as £4 billion, £6 billion or £8 billion, and that it was not a percentage of GDP. My point is that it was generally accepted as that in my opinion. The Government now explain that it is meant to be a percentage. The answer to the noble Lord's question is that I thought it was an absolute figure, and I believe that most other commentators did as well. If you take an absolute figure, you are already in breach of the golden rule. But as I said, I do not consider the golden rule to be important. If I may correct the noble Lord, I did not comment on the noble Lord, Lord McKenzie; in fact, his name did not come into my speech.

Finally, I hate to make a speech, but regrettably I am not a Conservative Back-Bencher. I no longer take the Conservative Whip; I am a party of one called the Conservative Independent Party.

Photo of Lord McIntosh of Haringey Lord McIntosh of Haringey Parliamentary Under-Secretary, Department for Culture, Media & Sport, Parliamentary Under-Secretary (Department for Culture, Media and Sport) (Media and Heritage)

My Lords, on that final point I certainly beg the pardon of the noble Lord, Lord Stevens. I was confused by the position in which he chooses to take his seat in the House, which is, he will admit, surrounded by Conservative Back-Benchers, when there are any there, of course; there are not at the moment.

No, I do not agree with the noble Lord. It is not generally thought that the correct measure is an absolute figure rather than a percentage of GDP. If the noble Lord looks back over not just the period of office of this Government, but the previous administration, he will find that the calculation has always been as it ought to be; on the percentage of GDP. That is the basis on which we have been calculating the fiscal rules since the beginning. I am sure that Conservative Chancellors have done the same.

The noble Viscount, Lord Trenchard, thought that national debt was increasing relentlessly. Now I understand that he thought that we were talking in absolute terms rather than as a percentage of GDP. In fact, the figure of 37 per cent in 2003 is considerably lower than it has been in previous years. Now that I understand what party he belongs to, I understand why the noble Lord, Lord Stevens, queried the other member states' observance of the stability and growth pact. I hope that he will be pleased with the conclusions from the November ECOFIN, which turned out in the end to agree with what the Chancellor has been saying for many years, that you need a prudent interpretation of the stability and growth pact that takes local circumstances into account. He will agree that that is an improvement on the rather more rigid interpretation.

A number of comments were made about taxation. I have now finally solved the 66 stealth taxes. It is clear to me for the first time that the noble Baroness, Lady Noakes, is confusing tax rates with tax yield. The examples that she gave were about increased yield from taxes on which there is no increase in tax rate. If you cannot tell the difference between tax yield and tax rate, all sorts of consequences flow from that.

I suppose that is how she can get to her figure, which I deny, that indicates that the average household is now paying more in taxation than at the beginning of this Labour Government. If you take, as you should, tax and benefit together, in 2005–06 the average household will be paying £800 a year less than in 1997.

I agree with the noble Lord, Lord Stevens, that investment is never high enough. On the other hand, for the most recent year for which we have measures, there has been an increase in investment of 6 per cent. That is a welcome turnaround from far too many years of low investment.

The noble Lord, Lord Northbrook, asked me about savings ratios and what we were proposing to do about them. There are two answers to that. First, savings ratios are not the only measure of a sound and stable economy. Savings ratios tend to be lower when there are lower levels of return on savings, lower interest levels, and a more stable economy. Despite that, our stakeholder products, our individual savings accounts, our matching and saving gateway and our child trust funds are all activities designed to increase savings.

If we look at the economy as a whole and take an overview, it ought to be recognised, and it was not seriously challenged in debate, that the UK economy has benefited significantly from the improvement in global conditions because of the domestic stability that has been delivered by this Government. This year has been one of particularly fast global growth; the sound domestic economic fundamentals have allowed the economy to grow strongly and at above trend rates. Unemployment rates are at record lows; inflation is low and stable; and interest rates remain low by historical standards. The Government are meeting their strict fiscal rules under any of the assumptions that we make.

I was interested in what the noble Lord, Lord Stevens, said about exporting. Exports—and a majority of exports from this country are of manufactured goods—are up by 4.2 per cent in the last year that we can measure.

A number of noble Lords made comments about employment and the labour market, and particularly about what the noble Viscount, Lord Trenchard, called the rise in public sector employment. Well, of course there are different kinds of public sector employment and I take it that the noble Lord deplores the increase of 20,000 in the number of doctors and 70,000 in the number of nurses, just as much as he would deplore any increase in the number of civil servants. If he does not, then he should not use the public/private sector divide in the way that he does. In answer to him, the biggest feature in the increase in employment in this country has been the New Deal—1,160,000 young people have benefited from the New Deal and its effect has been a decrease of more than 75 per cent in the long-term unemployed for both those aged 25 and over and younger people.

The noble Lord, Lord Stevens, rightly drew attention to the problems of an ageing population, but he will agree that we were not saying that it was not a problem, but that we were better equipped to deal with it than some of our competitors in other countries. We have done that because we have a strong pension regime and more funded pensions than many other countries.

A number of observations were made about debt and housing finances. It is true that there has been an increase in household debt, as the noble Lords, Lord Northbrook and Lord Newby, said. But that is in circumstances of lower and stable inflation and of low mortgage rates. The result is that household balance sheets are stable, as they have seldom been before, and that interest on debt is, on average, 7.6 per cent of household income compared with the figure in 1990, for example, of 15 per cent. Under those circumstances I do not take the apocalyptic view that, in macroeconomic terms, is taken about household debt, although of course I recognise the social problems which can be brought about in individual households who are suffering from excessive debt.

A number of comments were made about the business and manufacturing sector. In a situation where, in summary, a majority of our exports are of manufacturing goods and our exports are up by 4 per cent over the past year, the decline in employment in manufacturing to which the noble Baroness, Lady Noakes referred—she is quite right and she does not get her figures wrong, merely the interpretation—is deplorable and it would be desirable to reverse it. However, on the whole, our manufacturing industry is performing well.

Regarding questions about what exchange rate assumptions would be made, I said in the rarefied atmosphere of Starred Questions, where I am supposed to respond in 75 words, that it was not appropriate to deal with the matter. The sterling exchange rate forecast in the PBR is made on the assumption that the exchange rate grows in line with an uncovered interest parity condition. As the UK currently has higher interest rates than a weighted average of other major economies, this condition results in sterling depreciating by around 3 per cent per annum in 2005 and 2006. I do not understand that and I shall find out what it means and write to the noble Baroness, Lady Noakes.

Photo of Baroness Noakes Baroness Noakes Shadow Minister, Economic Affairs

My Lords, that has saved me from intervening.

Photo of Lord McIntosh of Haringey Lord McIntosh of Haringey Parliamentary Under-Secretary, Department for Culture, Media & Sport, Parliamentary Under-Secretary (Department for Culture, Media and Sport) (Media and Heritage)

My Lords, I thought that that would save time. I have taken more time than I should, but before I sit down I wish briefly to refer to the issue of efficiency and efficiency gains.

I was asked a number of specific questions by the noble Baroness, Lady Noakes, about the timetable for the relocation of staff out of London and the gross reductions in Civil Service posts. By 2008, there will be up to 250,000 more staff in frontline services, with gross reductions of around 84,000 Civil Service posts, or about 70,000 when posts directed to the front line are taken into account—and 20,000 staff will be relocated out of London and the south-east by 2010. Those figures are forecast for a number of years' time, because the changes cannot be made quickly. However, across government £2 billion has already been saved through better procurement deals and the use of e-auctions. The Government are on course to make the necessary workforce reductions: 10,000 posts will be gone by March next year and 4,000 posts will have been relocated from London and the south-east.

I return to the fundamental issue of economic growth, on which all this depends. Recent data for the United Kingdom economy remain consistent with the Budget forecast of 3.75 per cent growth for 2004. On that independent forecasters agree. The UK is experiencing the longest period of unbroken economic expansion on record, with 49 consecutive quarters of growth. Since 1997, UK GDP growth has been more stable than in any other G7 country. By contrast, from 1979 to 1996 GDP growth in the UK was the most volatile of any country, with the exception of Canada. Under those circumstances, it is with some confidence that I commend the Motion to the House.

On Question, Motion agreed to.