My Lords, I am pleased to be able to follow the noble Lord, Lord Myners. It is many years since he and I used to share a floor in a bank giving investment advice. He was much more talented at it than I was and went on to have a very distinguished business career. He has now become a robust defender of the Government.
Welcome as the Minister is, I cannot say quite the same about the PBR, although I have to say that I have great sympathy with the Chancellor of the Exchequer, who has found himself in a position in which no one would want to be, and not one at all of his making. The basic arithmetic in the PBR was very similar to that outlined in the Budget-so much so that one wondered what was the point of the PBR. Indeed, I had to be reminded on Sunday by Andrew Rawnsley that the PBR was a device originally introduced by Mr Gordon Brown when Chancellor of the Exchequer so that he could lord it twice a year over colleagues, so that he could announce the same public expenditure increases twice a year and so that he could boast about having abolished boom and bust twice a year.
The fatal weakness of the PBR is that it gives no clear message. It tries to be all things to all people, and thus satisfies nobody. Core Labour voters may have been pleased by the increases in public expenditure and benefits, yet they can hardly have been unaware of the conclusions of those who have studied the detailed tables in the PBR that very severe cuts in public spending are in course down the line on a dimension that has not been seen in this country since the IMF bailed out Britain in the 1970s.
At the same time, those who are worried about the sustainability of the public finances will hardly have been satisfied either because all they can find in the documentation is generalised totals of public expenditure, with no details for departments. We have references to efficiency cuts, but why have they not been realised in the past? Why should we believe them now? It has taken the Institute for Fiscal Studies to devil out the detail and reveal that for departments that are not ring-fenced, there will be cuts of something like 6 per cent a year, getting close to 20 per cent in total for departments dealing with higher education, transport and defence. Can these total figures be believed when the Government are so unwilling to publish them themselves?
The Chancellor of the Exchequer says that he cannot publish detailed expenditure plans because the future is so uncertain but, if the future is so uncertain, how can he lay out total figures for headline expenditure at all? The subdivision between departments will be much less affected by economic events than the totals for public expenditure. If the economic future is so very uncertain, how can the Chancellor be so absolutely confident that Britain will enjoy the surprisingly high figure for growth of 3.5 per cent the year after next? That is the key assumption on which all his shaky arithmetic about halving the deficit in four years depends.
One wonders in what world Ministers are living when the Chancellor of the Exchequer allows himself to say that Britain faces the future from a position of strength. Lewis Carroll once wrote that if he said something three times, it must be true, but nobody can deny that we lag behind France, Germany, the eurozone as a whole, the United States and Asia in coming out of recession. At 12.5 per cent, we have one of the highest budget deficits among industrialised countries.
According to the IMF's statistics, the increase in Britain's total debt to GDP ratio will be, apart from Iceland and Ireland, the largest among 21 advanced industrialised countries between 2007 and 2014. Of course it is true, as the Chancellor said in his Statement, that Britain's stock of debt in total is not much out of line with some countries such as Italy, Greece and the United States, but we have shot up the table from a very advantageous position. Even if we are not at the very top of the table, the critical, and worrying, point is that our annual deficit is so large that if the forecasts for growth prove optimistic, we will shoot right up to the top of the table of total indebtedness.
Indeed, the most serious and worrying point about the budgetary position is that such a large part of the deficit is now acknowledged by the Treasury to be structural. In the previous Budget, the Treasury increased its estimate of that part of the budget deficit that was structural by more than 6 per cent, so that the structural deficit is now more than 9 per cent of GDP, a highly alarming figure. A structural deficit is, by definition, one that will not go away when the economy recovers and tax revenues get back to the point where they were before. A structural deficit, by definition, requires a structural response. The longer the delay in addressing the structural deficit, the more it will go on growing. Interest payments will become embedded in it and it will become larger and larger. There is also a risk that interest rates will go up during this prolonged period, as they are almost certain to do. That is without taking account of the fact that growth may not achieve the 3.5 per cent that the Chancellor has forecast for the year after next. Those are the risks and they are very much personified in the deficit that we will experience in 2013-14. The deficit remains in 2013-14-after three years of 3.5 per cent growth, as forecast by the Chancellor-at 5.5 per cent of GDP, which is not a sufficiently small deficit to stabilise the ratio of debt to GDP. In other words, debt will still be increasing at this point.
The origins of this structural deficit do not lie, as the Government like to say, only with the banking crisis. They lie also in the consistent overspending by the previous Chancellor and his attempts to justify it with the much discredited golden rule. The previous Chancellor of the Exchequer followed two years of prudent public expenditure plans with 10 years in which the growth of public spending vastly exceeded the long-term trend rate of growth of the economy. It is not as though the Chancellor was not repeatedly warned that, if there was a slow-down in our economy or the world economy, we would face a severe crisis.
The Government talk a lot about their countercyclical, Keynesian stimulus policy-their so-called stimulus. In reality, much of what the Government call stimulus is just a continuation of their previous overspending, which they have decided to label a stimulus. The argument today is less about stimulus versus no stimulus than about how long the Government should take to correct their own past mistakes of overspending. There will be some who say that it is much the same thing-to cut spending still runs the risk of endangering the recovery. That is to ignore the point that our deficit is largely structural and needs action to eliminate it before we get into further trouble.
We are continuously told by the Government that cutting spending or putting up taxes will endanger the recovery, but they still introduced the 50 per cent rate of income tax for 2010. They do not seem to think that that endangers the recovery. They are still going to put VAT up to 17.5 per cent again in 2010; they do not think that that will endanger the recovery. Yet when they cut VAT, they thought that it was a tremendous stimulus to the recovery. Now, when they put it up, they think it will have no effect on the recovery.
The worst decision in the PBR was to put up national insurance by another 0.5 per cent to a 1 per cent increase-a move which is widely disliked and described by industry as a tax on jobs. It is an increase that will affect anyone earning more than £20,000 who pays national insurance contributions. Of course, the Government put it up not for a good reason, to reduce the deficit; they put it up to increase spending.
Then we have the curious business, to which the Minister referred, of the increase in child benefit and tax credits, which the IFS has described as an increase to be followed by a cut. I refer Members of the House to paragraph 5.19 on page 79 of the Pre-Budget Report, which indicates that mandarins in the Treasury can still write pretty impenetrable prose. For those who can decipher it, it appears to mean that the Government will increase child benefit and tax credits by 1.5 per cent this year, but that next year-when the rise for 2011 is to be determined on the basis of the RPI in October 2010-the increase will be less than the RPI. It will have subtracted from the RPI the increase that is being given this year, and the increase will be only any increase over and above that rate of inflation, as the Government are expecting inflation to increase in 2011.
I would never accuse the House of having been misled, but it is not quite as simple as it appears. For those of us who are sceptical about the arithmetic and the intention of this Budget, appearance and reality do not seem to match very closely in the case of the increase in tax credits and child benefit.
I am sure the Minister has enjoyed putting a tax on bankers' bonuses. That was a good part of the bread and circuses element of the PBR. However, I doubt whether its effect will be quite as dramatic and far-reaching as people think. It applies only to bonuses up to April 2010 and, with any ability to move bonuses, it may be offset by falls in the income tax take. I agree with the noble Lord that many bankers have been living on another planet and that bankers have contributed to this crisis. However, to say that only bankers are responsible for this crisis is not correct. So, too, were regulators and so, too, were central banks, which allowed interest rates to be too low and created a bubble that went on for a long time, particularly in the United States when interest rates were at 1 per cent for a long period, and in this country, when the inflation target was altered from a broad definition of inflation that included housing to a narrower definition. They also excluded the requirement for the Bank of England to pay consideration to the growth of money and the growth of credit. That resulted in the targeting of too narrow a definition of inflation and created conditions in which it was almost impossible not to make money. Saying it was all the fault of bankers is rather like saying pâté de foie gras is immoral and the fault lies with the geese who have been force-fed.
We are encouraged to believe that good things will continue to drop on us from above like dates from a palm tree in some Pacific island. We are told that the growth rate the year after next will be 3.5 per cent. Of course that may happen, but I notice the noble Baroness, Lady Vadera, when speaking in the Far East but reported in some newspapers in this country, drew our attention to the continued fragility of the banking system and the danger that banks have not recognised all the bad debts on their books. Add to that the disappearance of the shadow banking system, the process of de-leveraging, which has hardly begun, as indicated by the troubles over Dubai's debt. For those reasons, many people expect that we will face not 3.5 per cent growth, but somewhat less. It may well turn out that it will be 3.5 per cent, but this very gradual approach to reducing the deficit is heavily based on achieving a rapid return to above-trend growths.
In my view, this is a timid PBR. It encourages the fiction that our fiscal deficit problem can be resolved painlessly and that difficult decisions can be put off for several years. The Government say that to act now is to endanger the recovery, but there are many examples, not just from my noble and learned friend Lord Howe's Budget in the early 1980s, but from all around the world-from countries such as Canada and Sweden in the early 1990s-when Governments have taken decisive action even though the economy was experiencing a slowdown. A noted example was the famous budget of Manmohan Singh in India, who cut spending and tightened policy during an economic slowdown in the early 1990s. From that moment, the Indian economy began to grow at a rate that left it able to challenge China as an Asian tiger.
On the very day when the Pre-Budget Report was delivered, another budget was delivered across the Irish Sea in Dublin by the Finance Minister of the Republic, Mr Lenihan. Ireland has a deficit that is proportionately rather similar to our own. Mr Lenihan told the Dáil:
"We cannot tax our way"- to growth. Ireland could not afford to wait to cut its deficit; the risks were too large. He took the step of cutting some taxes, notably VAT, and reduced civil service numbers by five per cent. He also reduced civil service pay and cut total spending by 7 per cent.
That was a brave budget, in contrast with the PBR, although they have something in common; they both received a critical reception from the press. Mr Lenihan's budget, however, will stand the test of time, and I wager that in three years' time Ireland not only will be in a sounder fiscal position but will probably experience higher growth than this country will. We have postponed decisions, and it will be left to the real Budget after the election before we face up to the problems.