I beg to move,
That this House
has considered the balanced budget rule.
It is a pleasure to serve under you chairmanship, Mr Stringer. I am extremely pleased to have secured this debate to consider an issue that has slipped down the agenda in recent years, namely that of fiscal responsibility and the actions the state can take in order to uphold and, in some cases, guarantee it.
I am delighted to see so many right hon. Members and hon. Members here today. It is packed to the rafters and standing room only, which demonstrates the level of interest in the subject. I hope that, by holding such debates in Westminster Hall, and by dragging so many hon. Members to them to volunteer contributions, we can slowly raise this important issue back up the agenda and draw attention to it.
The particular issue I want to discuss is the principle of the United Kingdom adopting a balanced budget rule as a way to improve its finances, and the underlying responsibility of Members in this place to ensure that the country pays its way in the future. The idea, which though simple is not universally liked, is that over an appointed period, within an agreed timeline, Governments should follow the novel concept of living within their means and not spend more than they can afford. Crucially, that commitment goes beyond words and there should be consequences if there is a failure to adhere to it.
To some, that is dramatic news; to others, such as myself, it just makes sense that Governments should not seek to balance the books on the back of the nation’s children and grandchildren. The principle of the never-never is, with appropriate structuring, just as apt for the Exchequer as it is for the average household in towns such as Dronfield, Eckington, Clay Cross and Killamarsh in my North East Derbyshire consistency.
It was James Madison, one of the US founding fathers, who said in 1790 that he went
“on the principle that a Public Debt is a Public curse.”
We would do well to take heed of such sentiments.
I have prepared a long speech, because I did not think that so many Members would be here. Before I begin, I will frame the discussion to ensure that the next few minutes can be constructive and useful. The debate could easily, quickly and seamlessly descend into the usual tit-for-tat and back-and-forth on the current state of our national finances, who got us to where we are and why we are there. I am sure that that may happen during the debate. I will say a few words about that in a moment, but I hope we will not dwell on it too much. The idea is to take a broader and longer-term look at where we are, and how we ensure that we leave our country safer, more secure and more resilient than we found it. That resilience should stretch to the nation’s finances as much as it does to its borders and national security.
I declare this debate, in so far as I am able, a Brexit-free zone. That is not because Brexit will not have repercussions or implications for the issue at hand, because it blatantly will, given that the Government’s deficit elimination target has been revised in recent years. I hope my hon. Friend Damien Moore will still have a speech to make after those comments. This debate is about a time beyond Brexit, if we can possibly imagine such a nirvana, and about the day when headlines talk about police, health and education again, rather than backstops, Juncker and tariffs. I have been in this place less than two years, and I would say that at least 90% of what we talk about is Brexit. It sucks the oxygen out of the room, and I say that as committed Brexiteer. It also looks likely to continue to do so for much of the next year, so I hope that for the next few minutes we can try to avoid it.
My proposition is simple: that the United Kingdom considers over the long term the adoption of the balanced budget rule, set in statute, which requires Government to spend only as much as they raise, over a set agreed period, and that there will be consequences if they fail to do that. That would not be an aim or an ambition, but a hard rule, which would be flexible only inasmuch as anything can be flexible when it is set down in law. To be provocative, if we were so minded we might even consider tying any attempt to change future legislation—presumably by a spendthrift Government eager to give out sweeties or goodies to buy votes—to a referendum of the people themselves, given that we have become so adept at referendums in recent years. That would certainly focus minds.
What is the point of legislating on this issue? First, we should all have a moral problem with excessive Government debt. The United Kingdom’s general Government gross debt in September 2018 was, according to the Office for National Statistics, about £1.8 trillion, which is equivalent to about 85% of our country’s GDP. Last year we borrowed, and therefore added, about £40 billion to that figure. In the last couple of decades, our debt as a proportion of GDP has risen from approximately 40% to more than 80%. Those may be just numbers, but they have real-life and real-world implications.
I acknowledge the challenges that the Government have had in trying to get the country’s deficit under control. My party remains resolutely of the view that the Administration prior to 2010 both mismanaged the country’s finances and failed to prepare for the inevitable recession, which could not be avoided given that mere mortals cannot abolish the cycle of boom and bust, and given the well-recited failure to mend the roof when the sun was shining. I support the Government’s deficit strategy and the work they continue to do to manage it down. It has proved a difficult issue to resolve, but we should acknowledge the important milestone that we hit this year, which is that debt as a proportion of GDP is falling for the first time in many years.
Even with the acknowledgement of the good work that has been and continues to be done, the reality is that we are going to run a deficit for a good number of years to come. Even when we eliminate that deficit, which I hope will be as soon as possible, we are merely returning to a place that stops us piling on any more problems for our children and grandchildren, without really having a way to cut down the problem that has already been created in absolute terms. What is the long-term strategy for cutting that debt pile in absolute rather than relative terms? How do we avoid the current position becoming the baseline and the place we start from when the next recession comes? That place would, by default, reduce our firepower to deal with those hard times.
It is worth dwelling on the moral case for not running a deficit and for keeping debt low. The debt that we run up, for whatever good or bad reason, needs to be paid back, and if we cannot pay it back, we need to service it or pay for it. That limits the headroom of future generations to make decisions about what they spend their taxes on, because some of their taxes will go on servicing the debt. It mandates that spending that benefits one generation will be dealt with by another, which is an intergenerational unfairness that we should reflect on much more deeply than we do today, as ever-eager politicians dream up another opportunity to spend.
Reducing our firepower or fiscal space in the event of a recession is the worst kind of lack of planning, and one that will hamstring our ability to pull ourselves out of those recessions, when they inevitably come. As Ryan Bourne of the Cato Institute pointed out in his excellent recent paper on the subject, at least some of the literature that has reviewed the issue highlights that when Government debt gets too high for too long, it tends to reduce growth rates overall, meaning less economic activity, less growth and less prosperity in the long run. [Interruption.]
Before we went to vote I was talking about the moral case for low debt and ensuring that the servicing of that debt was as minimal as possible, to retain and support our ability to ensure economic activity in the future. It was not for nothing that Herbert Hoover intoned sarcastically:
“Blessed are the young, for they shall inherit the national debt.”
In this context, perhaps we can bestow a few less blessings on them in the future.
Putting aside the morality of debt, the key issue, which should drive all politicians regarding the accretion of Government debt, is the year-on-year cost of servicing and holding it, as mentioned earlier. The proponents of unfunded spending may highlight how the markets are not that concerned with relatively high borrowing so long as it can be funded. That may be the case. Let us hope, for all of our sakes, that we do not enter a period of high interest rates in the coming decades when national debt is to be rolled over.
The opportunity cost of that funding, on an ongoing basis, is much less understood in this place than in public discourse. It comprises a tax, year on year, on today’s generation for yesterday’s spending. Unlike the total debt-to-GDP ratio, which has oscillated wildly in the last century due to wartime spending, the cost of servicing the UK’s debt has been on an upward trajectory for the last century. Adjusted for inflation, the cost of servicing that debt has risen from an average of £12 billion per annum between 1900 and 1960, to nearly £30 billion at the turn of the 21st century. Since 2009, that average has hit £43 billion every year. In total, since 1900 the UK has spent something like £2.5 trillion just on servicing its debt. About half of that has been spent since I was born—I still like to think of myself as being relatively young.
The bad news is not likely to stop there. With the continuing running of deficits until well into the 2020s, the annual cost of servicing that debt is projected by the Office for Budget Responsibility to hit more than £50 billion by the start of the next decade. In this Parliament alone, debt servicing costs are projected to be about a quarter of a trillion pounds over the five years. The sums are huge and growing. They represent a significant opportunity cost to the UK as a whole.
My hon. Friend is making a powerful point. To put it into sharp focus, does he share my concern that the annual cost of servicing the United Kingdom’s national debt is more than we spend on schools? As a matter of morality, we need to keep debt under control so that we can truly allocate resources where they are most valued.
I could not concur more with my hon. Friend, as I will address in my next paragraph. Putting this into context, about 8% of all current Government spending is diverted towards debt servicing. In 2015, that made interest payments the joint fourth largest proportion of spending by the UK after health and welfare, and on a par with defence. Spending on education, the police and transport pales in comparison with the budget allocated to debt interest. That budget could be used, as my hon. Friend has just outlined, for myriad other more socially useful activities, such as paying for a hospital to be built every four days, or for approximately 2,500 nurses, police or teachers to be hired every day throughout the year. For those of us with a more centre-right political outlook, the £45 billion spent on interest costs in 2015 could even have been used to reduce the size of the state through tax cuts, perhaps as large as 8% or 9% in the standard rate of income tax. If the populace actually knew that such a significant chunk of the taxes they paid every year was being used to pay for spending chalked up 20, 30 or 50 years ago, would they be content doing the same or worse for their children, given the sacrifices and opportunity costs involved?
We know what the problem is, so why do we not just do something about it? Why do we need a legislative solution for this issue? The problem is that we as a country are not that good at stopping adding to our debt. Our Labour friends—who have temporarily deserted the Chamber—have a tendency to spend money without a huge amount of regard for the implications. My party usually ends up having to clean up the mess. Even on my side, there is a not insignificant number of people who cannot resist the temptation to spend when it comes down to it.
Our parliamentary system and representative democracy are excellent at pushing the cause of individual spending requirements, many of which, I do not contest, are no doubt noble. Yet there are few people who will exercise proper restraint or promote proper fiscal responsibility to ensure that all of these myriad pots of money are truly paid for. It is always tomorrow’s problem. Mañana, mañana, as they say. The numbers show just that: over the last century, the United Kingdom has consistently increased its national debt and its deficit spending. Both in absolute terms and as a proportion of GDP, the UK’s debt burden has grown significantly since the turn of the 20th century. The recent political consensus in the UK demonstrated a clear disregard—if we are honest—for the consequences of deficit spending.
Prior to the second world war, deficit spending tended to be closely correlated with war and national defence. In more than half the years between 1900 and 1939, the UK ran an absolute surplus, including during much of the late 1920s, during economic crisis. Since 1945, however, the achievement of a surplus in the UK’s national spending has been relatively rare. Only 13 out of 71 years saw the deficit being reduced, and on only two separate occasions—the late 1980s and the late 1990s—has the UK run surpluses for more than a couple of years at a time.
If all that sounds like one long criticism, it is not intended that way. It is just a statement of fact. Whether poverty or plenty, feast or famine, there is one almost universal constant: the Government spend more than they take in. That is not unique to the United Kingdom, but a feature of western democracy: red ink reigns supreme. The main variable in western liberal democracies is whether they overspend by a little or a lot. France has never run a Government surplus as a proportion of GDP since the 1970s, nor has Italy. The United States has managed to do so only once since 1960. Even Canada, one of the more enlightened in tackling public debt, has only managed to run surpluses in less than one third of financial years since the 1970s. The Maastricht protocol on excessive debt procedure says that countries should not exceed a 3% borrowing ceiling. Just think on that for a moment: there is a protocol that automatically sets an expectation of overspending—just that it is not excessive. And we wonder why debt has significantly increased in most western democracies over the past 30 years. There is an urgent requirement, over the long term, to address this inherent deficit bias in democracies.
The idea that we need to take more drastic legislative solutions is not that new; it is just that we have never properly applied it to national spending before. Sure, the Government have their charter of budget responsibility and an equivalent office creating the data and watching what is happening. Yet the charter requires people only to identify that they are changing policy. It does not really hold people to account or limit them.
On changing policy, I am very aware of where we are at this moment in time. Does the hon. Gentleman agree that a post-Brexit economy will provide an incredible opportunity to expand and invest, that the Government must be prepared to invest in our own people, and that if we must borrow to do so, it must be done in a reasonable and controlled fashion? As he has said, we must be prepared to back our own people. I hope that the Minister will respond positively and say that he will ensure that there will be Government investment in our businesses. That is very important.
I completely agree that we have a big job to do after Brexit, in terms of ensuring that our infrastructure works and that our country is well prepared for the future and has the necessary flexibility to take the opportunities that will come our way in the coming decades. If, from a Government perspective, we need to spend in order to do that, we should do so. I am not here to disregard Government spending—it is a force for good. However, it has to be done properly, it must have a clear outcome and we have to pay for it.
Sitting suspended for a Division in the House.
I was talking about how legislative solutions are applied, what is already in place and the charter for budget responsibility. My point was that in non-financial areas of Government activity, we are happy to bind ourselves to long-term targets, because there is the political will. The most obvious instance in recent years was the Climate Change Act 2008, which created an explicit legal requirement for future Governments to reduce greenhouse gases by 80%. If a political consensus can be built for protecting the country against such a danger to our children, why cannot the same be done to prevent economic problems for future decades?
That is where a balanced budget rule could really make a difference, with a legislative requirement to balance our budget over a period, minimising the growth of the debt to be left for following generations to deal with. It is not all that innovative. The OECD estimates that about 100 countries have some kind of fiscal limiting framework. Those can be voluntary or compulsory, and they vary in strictness and the degree to which they are adhered to. None is perfect, but it is at least arguable that over time the focus on fiscal rectitude focuses minds and attention on delivering better outcomes.
Perhaps the most obvious example of a budget rule, and the best known, is Chile’s. In the 2000s, Chile adopted a rule requiring structural surpluses to be run, so that the national debt could be reduced significantly. Broadly, under the structure it created, an estimate was made of the country’s economic potential over future years, and spending was allowed only to match the anticipated growth and revenue.
What was the result? There was a sharp reduction in net debt, surpluses as high as 8% in the years leading up to the economic crisis, and the upgrading of the country’s credit rating. Admittedly, some of that was possibly because of the commodity boom. None the less, the rule permitting appropriate balance to be given to both revenue and spending was important. Even today, after the rule has been challenged and battered a bit more through experience and difficulty, Chile’s debt remains significantly below that of many other countries. It is about 20% of GDP, rather than the 80% that we are grappling with.
Switzerland is another example where a legislative solution has focused minds and improved overall fiscal discipline. The Swiss “debt brake” was introduced in 2001, having been approved in a referendum—something that that country is wont to use for important national policy questions. Integration into the national constitution followed. There is a requirement for structural balanced budgets, through the capping of annual spending with tax revenues, plus or minus some flexibility. Again, the change had a significant impact. A nation whose debt-to-GDP ratio had significantly increased—from around 15% of GDP in the early 1990s to 45% at the time of the referendum—saw a rapid reduction over the succeeding years. Debt to GDP is now about 25%, and is projected to fall.
Switzerland and Chile are not alone. Sweden is another country that learned from overspending, this time in the 1990s, and it has been relatively successful at maintaining surpluses. The Germans have introduced in their constitution a cap of 0.35% on structural deficits. It is not exactly a surplus, but it is a way to prevent large consistent deficits. Other examples that the OECD has highlighted include Argentina, Belgium, Denmark, Estonia, Hong Kong and the Netherlands, although their arrangements vary with respect to their legislative teeth and their success. Even the French, who have not been able to balance a budget for decades, have made tentative steps in that direction, with the transposition of their fiscal compact in 2012. The fact that that has not gone anywhere is a topic for another conversation, but at least they were moving in that direction for a time.
Of course, legislation is not the only solution, and it does not necessarily guarantee a positive outcome against politicians determined to get around it. The United States’ periodic fights over the debt ceiling—a mechanism that was designed to stop overspending—always have one outcome. In the 1980s, the attempts in the States to balance the federal budget under the Gramm-Rudman-Hollings Act, through mandatory sequesters—automatic cuts in spending in the event that politicians could not agree a budget that would fit—were unsuccessful, as resets and changes occurred when the going got tough. Nothing is infallible if we do not want it to be. Creative accounting, redefinition of spending as investment or capital, direct appeals and canny political manoeuvring can all undermine fiscal responsibility if politicians want that to happen.
I do not argue that a balanced budget rule would be a panacea. In Chile in recent years, there have been issues when estimates have not been realised and projections have been undershot. Switzerland also exempts elements of spending, such as social services, from the rules. If people want to get around this stuff they will, and no Parliament can truly bind the hands of a future one. Yet the idea of fiscal responsibility being formally codified beyond aspirations that can be amended by mere ministerial statements creates an impetus and a legal framework that focuses the political mind and public discourse on ensuring that we do something as basic as spending only as much as we raise.
What kinds of solutions should we consider? That depends on the political will and the desire to focus on the issue at hand. First, it is right to fix our immediate problem and finish the job of eliminating the deficit. I support what the Government are doing about that and want to give them gentle encouragement to accelerate it where possible. That is the first step. There is the potential to legislate in the future once we have reached a surplus, or perhaps even when the point is reached at which the deficit is relatively small, which we are starting to get to.
There are various options. We could try to act voluntarily. That, to some extent, is what we have done already, and it is absolutely better than nothing, but we can in truth see that that approach has shortcomings—for some of which there are good reasons. I shall not provide a running commentary on Government policy, which, as I have said, has been positive overall. Plans are moved, for good and bad reasons. The conveyor belt of politicians calling for more spending and pushing their own hobbyhorses—holding Westminster Hall debates—continues. Many such ideas have merit and value, but we have effectively created a pressure cooker in Parliaments such as ours, with a desire just to ask for more and do more, and seek out new ways to spend money on fixes. When one parliamentarian does it, others follow suit. We remain addicted to spending and voluntarism goes only so far.
How, then, can we formalise the approach I am outlining? We could, as happens in the United States, make it a formal requirement to vote on increasing debt when it approaches established ceilings, or when there is a question of its exceeding them. The Government debt is fixed and capped and politicians have to make a clear decision in front of their electorate to change it. That is useful but probably, as in the US, it would not focus the minds of politicians too much. Often people’s eyes glaze over when they see big numbers. That is one of the reasons why my party should stop trying to win the public services spending arms race with the spendthrifts on the Opposition Benches and focus instead on what the money is actually doing to improve outcomes. A debt ceiling has limitations, but it would send a clear signal.
Taking things further, we could establish a simple balanced budget rule that we would not spend more than we took in over a defined year or over the course of a few years. That could be done through adept forward estimating or by linking spending to the trajectory of past revenue growth. The Government would have a formal responsibility not to overspend, and to set out their plans clearly, on a short-term basis, showing how they intended to avoid overspending. In some ways, that would be the simplest solution—a clear understandable position and a clear understandable requirement to ensure that the budget is balanced. It might also improve public understanding of and support for the proposal.
Such rules, however, are often clunky and inflexible. Absolute requirements to budget on an annual or near-annual basis will significantly reduce headroom and the flexibility to deal with short-term shocks and recessions when there is at least an arguable case for fiscal stimulus in certain circumstances. That is probably one reason why such strict rules do not apply in many places around the world.
Alternatively, we could think about a more flexible approach that achieves the overall objectives, but that relies more heavily on estimating being correct, and on the Government not delaying hard decisions through a lack of political will. The requirement to balance a budget over an economic cycle would seem a strong starting point, although identifying the start and end point of that cycle will be difficult and reliant on guesswork that would no doubt not be correct in a number of cases.
Flexibility could be introduced through various mechanisms. For example, the Swiss debt brake accepts that at times the Government will need to amend their approach due to external factors. To accommodate that, it applies a model of debits and credits, so if a Government fail to achieve a balanced budget in one year, they carry over that failure to another year through a fiscal debit that needs to be made up. Similarly, fiscal credits can be built up in a bank in readiness for future problems. To avoid future debts being run up too heavily, once debits exceed 6% of total Government spending, an automatic requirement kicks in to eliminate them within three years. An exceptional rule also applies so that in times of genuine emergency or need, both Houses of the Swiss Parliament can approve spending on an exceptional basis that breaks the rules. Even then, however, the Swiss have found a way to accommodate that, and automatic amortisation of that exceptional spending must be dealt with within six years.
The challenge of the Swiss model is its relative complexity—try explaining that down the pub after a few pints or during hustings at the next election—but its beauty is that bygones cannot be bygones, which is often the flaw in attempts to regulate deficit spending and debt growth. If Chile gets its estimates wrong, it tries harder next time. If the Swiss get them wrong, they have to find a way to compensate, and all the while the cost of servicing debt remains low and does not threaten the financial health of the next generation.
Despite Brexit sucking the oxygen out of the room, and despite the challenges that the UK faces in the coming years—including from that B-word—we have to make a choice. The Government have been consistent and clear that they believe in fiscal responsibility and discipline. We have had success in restoring the UK’s financial health after such difficult times 10 years ago, and the trajectory continues—albeit a little slowly for my liking—to get us back to balance. Nevertheless, we need to talk about what we do when we get there. As some politicians occasionally point out, dealing with the deficit does not mean that we have dealt with the debt, and the conversation needs to move on to that.
Balanced budgets, fiscal rules and the promotion of fiscal discipline will be the weapons and constraints—perhaps we could call them the backstops—for when the next generation of politicians, whoever they are, are tempted to spend, spend and spend again. Indeed, some of the current generation are quite tempted to do that at the moment. Having balanced budget rules and the codification of fiscal discipline is one way to do that. It is not a perfect solution, but the status quo is far from perfect in this regard. Perhaps as a nation we should start to think more about how we create frameworks for future success, and how we address the fundamental challenge in western democracies of celebrating the money we want to spend—whether necessary and virtuous, or inefficient and virtue signalling—while not paying sufficient attention to the cost of it all. We cannot and must not keep spending today on the backs of our kids and grandkids tomorrow. If politicians are not willing voluntarily to adopt restraint, perhaps it is time to harden our resolve.
It is a pleasure to serve under your chairmanship, Mr Stringer, and to take part in this debate. I congratulate Lee Rowley on securing this debate, not least because we all want the debt, deficit and borrowing to come down to sustainable levels—there is no disagreement about that objective. At the end of his speech, he spoke about flexibility and not harking back to the debates of 10 years ago. We supported the New Zealand model that allows for maximum flexibility for a shock, while trying to reduce the debt and deficit, and we still think it has considerable merit.
While not wishing to be at all partisan, I must take issue with the hon. Gentleman in one regard, which is that one generation’s spending paid for by the next is not a characteristic of much of our investment. Roads, rails, bridges, water, sewerage, long-term health improvement, education and even paying the state pension to those who have already contributed are intergenerational investments, and I would not characterise them as being a burden on, rather than an investment for, the next generation. The hon. Gentleman and Alex Chalk spoke about morality, but there is nothing inherently immoral about borrowing if it is to fund that intergenerational investment.
I wish, rhetorically, to ask a series of questions. How do we do this? How do we run a balanced budget? What would the mechanism be? It strikes me that there are three ways that one could begin to do it. First, we could set hard targets, but if the downturn comes unexpectedly, if the revenue yield is lower than anticipated or if the money runs out, there are a number of options. We could simply stop spending, leaving a half-built bridge, road or railway, with unpaid pensions and cuts to welfare, but that would be socially, economically and politically undesirable. We could ignore the failure and carry on spending, or we could have a hybrid rule akin to the welfare cap, and the poor Minister would have to report to Parliament on why they are going to make those cuts or ignore the rule and keep on spending.
In any event, there are likely to be in-year budget changes. In-year budget cuts in Westminster had an immediate impact and drove a coach and horses through the already set, voted on and agreed Scottish Parliament budget. If that is multiplied across the Welsh Assembly, Northern Ireland, and every local authority and other public body, an in-year change has a sudden and profound cascading effect on every recipient of public cash in the country—again, that is politically, economically and socially damaging.
As we have seen, the setting of a hard budget creates a perverse disincentive to hoard cash. No politician has not struggled to get cash from one public body or another in June, July, August or September, but then found a huge splurge of cash towards the end of the financial year. I bet my bottom dollar that if money is spent in that way it results in—how can I put this gently?—not quite optimum value for money.
To get round that, we currently budget against future forecasts, but if GDP is lower—for whatever reason—or if the tax yield is lower, or if the public finances and fiscal numbers are not what they might be, we are left again with a number of options. We can stop spending, which is bad. We can have in-year changes, which are undesirable. We can also allow automatic stabilisers to take their course. That normally happens for a good reason, but the budget rule is then breached. We could introduce a corollary to the Bank of England failing to meet the inflation target, with some kind of letter or report to the House of Commons. If that happened too often, it would become rather meaningless; even worse, it could become a fiscal event in its own right. Watch how the markets would respond to that, rather than a sensible automatic implementation of the automatic stabilisers.
To avoid such difficulties—as the hon. Member for North East Derbyshire said, we have seen this in the past—we can have a balanced budget over the economic cycle. I am long enough in the tooth to remember my friends in the British Labour party changing the start and end dates of the economic cycle to make the numbers fit. It was not very credible, so I would rule that out, however superficially appealing.
All those mechanisms—all of them—depend on accurate forecasts. If there is optimism bias, our fiscal numbers and tax yield will be lower than anticipated on day one. We have seen, year after year, and even with substantial depreciation of sterling, that the contribution of trade to GDP growth was far lower than expected, or even zero or negative.
Secondly, it requires those doing the forecast to have comprehensive access to all of the information. The Office for Budget Responsibility has told us that it did not have access to some Government policy changes before it produced its report in advance of the Budget, and even the most recent Red Books make precisely no consideration of the impact of Brexit on the fiscal numbers —zero—or of the impact of a reduction in immigration, which could have a profound impact on GDP growth and tax yield.
We then have the issue of having to identify in advance—although it is impossible to do so, particularly in the case of certain sorts of external shocks—the precise implications for the fiscal numbers and revenue yield of both cyclical and structural flaws in the economy.
I say to the hon. Member for North East Derbyshire that we all want to see the debt come down, the deficit come down and borrowing come down—all of us want to see that. However, in addition we all want to maintain investment and to ensure that we do not punish those with least, who are dependent on public expenditure.
I also say to the hon. Gentleman, keep pushing. Let us see if we can get an answer from the Minister, and let us see if a flash of inspiration comes over all our heads at some point. If he can identify solutions to those problems—the optimism bias, the lack of information from the forecasters or to the forecasters, and information in advance about the precise impact of both a cyclical and a structural change to the economy—I suspect that I will be the first one to put him up for a Nobel prize for economics. However, in the absence of answers to those questions, I suspect that this issue will remain something that we will have to work at and something that is unlikely to be implemented, or at least implemented quickly.
It is a genuine pleasure to serve under your chairmanship, Mr Stringer, and it is a pleasure to take part in this debate. I congratulate my hon. Friend Lee Rowley on securing it. It is a pleasure to see Peter Dowd in Westminster Hall. As I go through my speech, no doubt he will not agree with the things I say, but that aside, I have tremendous respect for him.
The balanced budget rule is an important one, as it takes seriously the principle of responsible spending and enshrines it in a fiscal policy. It forces Governments to think through their spending priorities and decisions, and it contributes to more open, transparent and affordable budgeting. Countries across the world have adopted this approach, and with the exception of periods of war, economic crisis or natural disaster, they have maintained that decision.
Of course, there are different types of balanced budget rule and some Governments allow for different types of spending, or adjust their spending, depending on where they are in the economic cycle. When designing such rules, it is key that they are simple enough to be understood, followed and monitored, but flexible enough to be durable against the unforeseen economic shocks that can temporarily derail attempts to meet the goal. Indeed, if there is any short-term economic shock to the United Kingdom from, say, leaving the European Union, the Government should have the space to cut taxes in order to boost growth. The balanced budget rule also prevents profligacy, which Governments may choose to deploy to obtain votes.
One of the things that a balanced budget rule does help to do is to reduce waste. My hon. Friend the Member for North East Derbyshire referred to cheap political points, but some of the numbers that I am about to give are by no means cheap. I am referring, of course, to the last Labour Government. Although I will not give an exhaustive list of what they did, I will mention just a few things: £26 billion wasted on computer blunders; £18 billion wasted on ID cards; and £50 million wasted on an Assets Recovery Agency that only recovered £8 million in assets. The list goes on, and of course vanity projects can happen on either side of the political argument and under either party, so at all times there must be checks and balances.
However, incompetence also has a lot to answer for and I believe that the balanced budget rule would, more than our current system, prevent incompetence. Under the last Labour Government, Gordon Brown described himself as the “Iron Chancellor”. Well, he may have known a lot about iron, but he did not know much about gold, given the fact that he sold it at the worst possible time, wasting billions.
The last Labour Government talked about benefits, as does the Labour party now. Of course, as Stewart Hosie said, people who do not have an income of their own and rely on the Government for benefits to exist deserve to be supported. What Labour does not like to talk about when it comes to benefits is the £2.6 billion that was wasted on benefit fraud and errors. If anyone thinks that is bad, £57 million of that money was wasted on paying benefits into the accounts of people who were dead.
This country was ill-prepared for the 2008 financial crash and the situation was summarised quite succinctly by the former Chancellor, George Osborne, who said that Labour’s problem was that it failed to fix the roof while the sun was shining. The difficult decisions that this country has had to make since 2010 are due in part to the policies of that Labour Government. With the greatest of respect to the hon. Member for Bootle, I would have thought that Labour would by now have learned that lesson, but it has not. Instead, hundreds of billions of pounds of unfunded spending commitments are being made by the Opposition, even now.
My colleagues have worked hard to provide the successes in our economy today, but I urge them and the Minister to look at balancing the books with a balanced budget rule.
It is a pleasure to say a few words in this debate, Mr Stringer, and I begin by congratulating my hon. Friend Lee Rowley on securing it.
This is such an important issue, yet looking around this Chamber—in which there are only a few people—we could be forgiven for thinking that it is somehow a dry, bookish or niche issue. However, the reality is that what Governments of all stripes do in respect of the public finances resonates in people’s lives, including the lives of people who might be some of the most vulnerable in our community. If we lose control of the public finances, it is not the rich and the powerful who suffer, but the poor, the sick and the vulnerable. That is why it is so important that we engage with this issue, and I congratulate my hon. Friend on doing so.
However, part of the problem with discussing this issue is that we as a political generation fail to communicate about it properly. That is because if people are anything like me, once a figure gets above, say, £50 million or so, it just sounds like a very big number, and what we sometimes fail to do is to put these figures in context. How many Members of Parliament would be able to tell people the total budget that we spend every year as a nation? I suspect fewer than half. As a matter of fact, it is something in the region of £840 billion. That is an important figure to keep in mind, because it puts in context what has happened to our national debt over the last 10 years. Back in 2007, our total national debt—the total pile that we had to service as a nation—was about £500 billion or so. Now it is £1.8 trillion, and as my hon. Friend indicated that debt burden has to be serviced in some way.
Again, it is all very well to say, “Oh well, it costs roughly £50 billion a year to service that debt pile”, but that is a meaningless figure unless we place it in some sort of context. As has already been said, that sum is higher than the total schools budget. People like me, who represent places like Cheltenham, go and speak to headteachers about the pressures they face in their schools, where they might be looking to increase the high-needs budget, which is about £6 billion. However, the reality is that we spend about eight times more on debt interest than we do on high-needs funding, which supports special schools in our country, and more indeed than we spend on defence.
To put things further into context, the mighty United States is currently in shutdown because of the inability to agree on how to pay for the US President’s border wall. The sum required is about $6 billion. To put things another way, every year we spend, on debt interest alone, a sum equivalent to about 10 of Trump’s border walls. It is a huge sum of money.
The reason this issue is important is because it has an impact on people’s lives. Here are two things that I think are axiomatic. First, there is no national security without economic security. In other words, unless we live within our means, we cannot be sure that our military and indeed our intelligence agencies, such as GCHQ, which is in my constituency, can rely on the knowledge that they will have the resources they need to keep our country safe into the future. Secondly, we cannot have economic security without fiscal security. In other words, unless we keep control of our finances, when economic shocks come, which they will, the nation will be ill-prepared to deal with them. Put bluntly, the cupboard will be bare.
That is precisely what happened in Greece. That nation had a debt to GDP ratio of about 90% to 100%, and when the storm came it was unable to deal with it. As a result, as I indicated before, it was the poor, the sick and the vulnerable who suffered, with Greece’s equivalent of NHS funding being slashed by half. The reason why that is so sobering is that the UK’s debt to GDP ratio is in the high 80s; it is not a million miles away from where Greece was 10 years or so ago. That is an important point to raise, and as a political group we need to do better in explaining its impact, but I say respectfully to Peter Dowd that the Opposition need to be straight with people as well. It is easy enough to say, “We are going to spend £1 trillion”, but in the same sentence, Labour ought to explain the costs that will entail each and every year so that people can understand what that offer means.
The reality is that if Labour wants to spend another £1 trillion, that is absolutely fine for my generation—no doubt there will be more money for the NHS, and so on and so forth—but the next generation will suffer, because before they can pay for a single soldier, nurse, doctor or teacher, they will have to pay vastly more in debt interest. If that argument is made, people can make their choices, but everyone who does so has to be straight with the British people. I regret to say that that has not always been quite as transparent as it might be. There is a moral case for living within our means, and my hon. Friend the Member for North East Derbyshire has done an important service by making that case today. I am grateful to have had the opportunity to say these few words.
It is a pleasure to serve under your chairmanship, Mr Stringer, for what I believe is the first time. I congratulate Lee Rowley on securing this important debate, and I thank all Members for their input and their erudite performances. They have caused me to think quite clearly, and at length, about what they were saying.
[Steve McCabe in the Chair]
The hon. Gentleman is passionate in his beliefs about balancing budgets, and used one quote that I find particularly apposite: that according to President Madison,
“a Public Debt is a Public curse”.
I do not think we need to go back that far to see the difficulties with balancing budgets. The hon. Gentleman wants a hard rule, and at some point he mentioned a referendum that could take place if that hard rule were broken; he also promised not to refer to Brexit. Unfortunately, I am going to break that rule: I think Brexit is important, as it has huge implications for the direction of our budget process. He also spoke about inter-generational fairness, a matter that is close to my heart, and I take his point. He is many years younger than I am, and I think I am allowed to say that he has the passion of youth in his ideology, which I do not always agree with.
My hon. Friend Stewart Hosie made an erudite speech, especially in his description of the difficulties of forecasting when trying to get a balanced budget. He is absolutely right that past performances have shown how difficult it is to make accurate forecasts, and about how that will impact on this idea in its entirety. He referred to the New Zealand model, and we have also heard about models from the United States, Canada and Chile, as well as Greece, mentioned by Alex Chalk. There are lots of models and lots of places we could look to when considering this idea, but none seems to have the absolute answer.
The hon. Gentleman spoke briefly—for which I am grateful—but appositely. I have not forgotten Damien Moore, but as he mainly went on the attack against the Opposition, I will leave it to Peter Dowd to sum up what he said.
The Tories keep imposing deadlines for balancing budgets which they are missing. As far as the Scottish National party is concerned, their only interest is ideological cuts. Those cuts have not taken full account of circumstances at any given time, and in order to balance the budget, it has been impossible not to hurt those people whom some Members have already mentioned as needing the most from the public purse.
The Institute for Fiscal Studies has warned that wages have still not recovered to pre-crisis levels, and annual earnings are more than 3% lower than in 2008, with millennials the worst hit. Median earnings fell to £23,327 last year, 3.2% lower than in 2008, when the average wage was £24,088. People in their 20s and 30s have taken the biggest hit: those aged 30 to 39 have seen their earnings fall by 7.2%, to an average of £26,442, but I am not going to go on ceaselessly producing numbers. My children are affected by what has happened. It has not been a good idea to balance the budget on the backs of those people, and it is even more difficult for the Government when folk like Jonathan Cribb, a senior economist at the IFS, and Paul Johnson, director of the IFS, say as they did last year:
“The UK economy has broken record after record, and not generally in a good way: record low earnings growth, record low interest rates, record low productivity growth, record public borrowing followed by record cuts in public spending.”
If the UK Government genuinely wanted a balanced budget, they would not be giving a major tax cut to high-income earners. In sharp contrast with the Scottish Government, who are helping those on low and modest incomes, the Tory Budget gave a tax cut to the better off: it gave basic rate taxpayers £21 a year, compared with £156 for those on higher rates. Where the SNP has powers over tax in Scotland, it has introduced a progressive tax system, and 70% of all income tax payers will pay less tax this year on a given income than they did in 2017-18. If that were carried out across the UK, that surely would be something.
Scotland continues to have the fairest income tax of anywhere in the UK, with 55% of taxpayers paying less in Scotland than they would elsewhere in the UK. The draft 2018-19 Scottish budget aims for 99% of income tax payers in Scotland to pay the same or less than last year. Polling found that the public supported the SNP’s progressive tax changes for this year by 2:1—not something that we often hear stated in the Chamber. Conversely, it is not acceptable that the UK’s 2018 Budget gave the better off tax cuts at a time when those on low incomes continue to face tax squeezes on their income. Interestingly, the Government have rowed back on some of their proposed cuts. The UK Government fail to meet the Resolution Foundation’s test of spending £31 billion more to end austerity by 2022-23.
Scotland’s fiscal position is comparable to other parts of the UK, and revenue per head is the fourth highest among the UK’s countries and regions—£913 higher per person than the UK average, excluding London. Scotland’s fiscal deficit relative to its population is also better than that of Wales, Northern Ireland, and north-east and north-west England. The majority of advanced economies run a deficit; Scotland is not unusual in that regard, nor is the UK. Twenty-four out of 36 OECD countries ran a deficit in 2016, including the UK. The UK’s deficit stood at £40 billion in 2017-18, and as has already been mentioned, it has been in deficit for 53 of the past 60 years. I know that the hon. Member for North East Derbyshire wants to put an end to that, but we cannot put an end to it at the expense of the poorest and most vulnerable in our society. Scotland also has a deficit, but that has fallen by £1 billion in the past year alone, and is projected to fall further in the coming years, from 7.9% of GDP in 2017-18 to 7.4% of GDP in 2022-23.
It is difficult for this Government to talk about balancing budgets when they have not included Brexit in many of their forecasts. The Governor of the Bank of England, Mark Carney, says that Brexit has cost households £900 on average already and the Fraser of Allander Institute estimates that leaving the single market and customs union would cost 80,000 Scottish jobs.
Tough times lie ahead. Even if the UK signs a free trade agreement with the EU, Scotland’s GDP will be 6.1%—£1,610 a person—lower by 2030. It is clear that cuts to public services have markedly reduced life expectancy, with an even more significant impact in disadvantaged communities. Office for National Statistics figures show that the Tories have presided over a slowing of life expectancy increases. Between 2011 to 2013 and 2014 to 2016, improvements in a measure of life expectancy were the smallest seen in the 21st century. Is that what their ideology should lead us to?
The destruction done to the UK economy will have lasting effects on poverty and child poverty rates. The only way to avoid economic catastrophe is to stay in the single market and customs union permanently, and the UK Government have rejected that outcome. The Joseph Rowntree Foundation said last September that while child poverty rates are set to increase in spite of Brexit, many of the worst hit areas are
“highly exposed to change in trade with the EU and any loss of regional funding.”
According to the JRF, the benefits freeze will make a couple with two children £832 a year worse off by 2020. In those circumstances, can we continue to cut public spending to balance the budget?
UK private sector debt is staggeringly high, which will be a major risk in the next recession. It is now 5% of GDP. That is the largest percentage in the G7. The debt is 60% funded by capital real estate and the buying of leveraged loans. It is entirely reliant on external input. With tariffs and barriers, it is not sustainable. The Finance Committee heard last week that we face a painful adjustment post Brexit. The Bank of England has noted that personal unsecured debt now accounts for 40% of risk in its stress tests. As a nation, we are spending more than we earn. I know that is the point the hon. Member for North East Derbyshire made, and we would all like to see a balanced budget, as my hon. Friend the Member for Dundee East said, but we cannot continue to do that on the backs of the poorest and most vulnerable members of our society.
It is a pleasure to serve under your stewardship, Mr McCabe. I thank Lee Rowley for securing this debate, which gives us an opportunity to brush aside some of the myths that he referred to. I also thank Damien Moore, Stewart Hosie, who spoke eloquently and sensibly, and Alex Chalk, who referred to the Greeks. I remind him that Thucydides said that
“while the strong do what they will, the weak suffer what they must.”
That is precisely what the Tories have done. They talk about the poor all the time, but it is the strong that they stick up for, and they do it time after time.
The hon. Member for North East Derbyshire forgot to mention that the global financial crisis that the Tories use time and again started in the United States. [Interruption.] The hon. Member for Cheltenham can sit there and pretend to snore, but that is the reality: until the Tories accept that fact, we will not be able to move on. There is a danger that there could be accusations of dishonesty and disingenuousness—I am not making those accusations, Mr McCabe—until those on the Government Benches begin to acknowledge that.
The issue is not just about fixing the roof before the rain comes through; we were all in it together at the time, and we all know that we have not been in it together under Tory policies. The poor have been getting a stuffing year in, year out. The Tories have also missed every target they have set. Talk about a moving target! The situation was supposed to be sorted out years ago. The hon. Member for Cheltenham said there was a debt of £800 billion, but the Tories have doubled the debt since they came into power. They have borrowed more money than Labour ever has.
We have this extraordinary situation where on the one hand Labour complains that the national debt has gone up too much, and on the other it complains that the Conservatives are not spending enough. That kind of illogicality would embarrass a 10-year-old. Surely the hon. Gentleman can do better.
Of course I will do better. At the end of the day, it is about priorities. As Marion Fellows said, the Tories have spent the money in the wrong way. The hon. Member for Southport effectively accepts that. We have had £15 billion wasted on the introduction of universal credit by the Tory party, so let us get a little bit real.
I am sick to death of talking about how useless the Tory party is, so I will speak about Labour’s fiscal credibility, which I am sure will get a certain amount of unanimity in the Chamber, and the issue of balancing. [Interruption.] I am happy to deal with it. We could have discussed the issue in a mature and grown-up way with adults in the room. Yanis Varoufakis wrote a book called “Adults in the Room”, but there are not many in the Chamber today. I suggest Members have a read of that book; it will show them what happened to Greece.
Following discussions with our advisers, including Professor Joseph Stiglitz, on
Fourthly, we committed to giving the Monetary Policy Committee of the Bank of England the power to suspend the rule if it determines that interest rates are not having their usual effect due to the lower bound. That would allow stimulus action to step in when monetary policy is ineffective. Fifthly, we would shift the reporting requirements of the Office for Budget Responsibility so that it reports to Parliament, rather than the Treasury, and ensures ongoing Government compliance, to which the hon. Member for Dundee East referred. All the facts are there, so let Parliament have them. The elements of the rule mean that a Labour Government would not need to borrow to fund our day-to-day expenditure.
If the hon. Gentleman listens to what I have to say, he will find out in due course. [Laughter.] The hon. Gentlemen laugh and snigger. Meanwhile, millions of people suffer under their policies. They should stop their sniggering and listen. I know that the Tories think they have some divine right to rule and some divine economic ability, but they have not. They need to show a little humility occasionally and listen to other people.
Unlike the Conservatives’ different, haphazard and unsuccessful attempts to achieve fiscal credibility, our fiscal credibility rule has three criteria for good economic policy. I know that economic good in economic policy is an alien concept to the Tories, but they might learn one or two things if they listen to what I have to say. The three criteria are: responsibility in economic management; recognition of the value of long-term public investment; and flexibility for changing economic circumstances. A Government trying to bind themselves into a model that has palpably failed all over the world are not particularly helpful. There has to be some flexibility.
Is the irony not that that model would look like Greece? It is running a current account surplus, but the pain of a decade of even more brutal austerity than was faced here will be felt for generations to come. That would be success according to Lee Rowley.
The hon. Gentleman is spot on. I do not want to misquote the Secretary of State for Transport, but when East Coast went bottoms up he said that that just proved that the market works. That is the sort of economic approach that the Tories take to our country.
Let me go through the three criteria one by one. We are a party that, first, takes seriously the mantle of being guardians of a sustainable economy. We fully costed our election promises in our grey book, “Funding Britain’s Future”. The Conservative party, by contrast, gave no costings whatever in its manifesto. As the shadow Chancellor said, the only numbers in the Conservative party manifesto were the page numbers.
Meanwhile, Carl Emmerson of the Institute for Fiscal Studies said in his election briefing that Labour’s
“forward-looking target for current budget has much to commend it”.
The IFS also estimated that we would have met our deficit target with £21 billion to spare, and that we would meet our debt target.
Secondly, we recognise that Government spending is not something to be scared of, or to have a phobia about, and that some economic metrics do not fully capture the benefits of the gradual build-up of public assets, as Stewart Hosie mentioned. That is why we distinguish between day-to-day spend and investment in our fiscal credibility rule, because investment is a different kind of Government activity that contributes to a stock of public assets, providing benefits over time. A country is not a house, or an individual who has a lifetime; it goes on, as we know, for a long time. Comparing us to a household might be a soundbite, but it is economic fantasy.
Given the hon. Gentleman’s point about us binding our hands, can he explain why, in 2006, I think, his sister party in Chile not only determined that it was going to adopt the kind of policies that he just described, but codified them into law?
I am not here to explain what sister parties anywhere do. I could quote sister parties for the Tories all over the place. The hon. Gentleman should be careful what he is wishing for when he starts to make those sorts of comparisons.
The Conservatives have been unable to appreciate this point in their words and in their actions: the Government’s fiscal target of cutting borrowing to less than 2% of GDP by 2021 does not exclude investment, or distinguish between spending and investment. In so doing, the Government overlook, and undervalue, the special character of investment. They do that time after time.
Their austerity programme, the mythical end date of which was in 2018—previously, it was before that—was more a signal of the Government’s failure than of any actual shift in approach. It has done lasting damage to our economy and society, and has left us with rough sleeping up by 169% since 2010, stagnant wage growth—the worst since Napoleonic times—and few examples of public infrastructure being patiently built up and supported.
The third aspect is flexibility when thinking about sound economic policy. The Tories’ austerity programme arises from, as the hon. Member for North East Derbyshire has reaffirmed today, a rigid ideological belief—not always reflected in practice, I have to say—that a smaller state is always better, notwithstanding good evidence of the state’s entrepreneurial capacity and the human costs of austerity. Such rigidity in approach is something that we have avoided in our fiscal credibility rule.
The zero bound knockout that we proposed, which would allow the Bank of England to change course in times of impending crisis when interest rates can do only so much, shows our willingness to adjust economic policy frameworks in the light of circumstances. Any sensible Government would do that—not bind themselves into a failed ideology and process. That knockout is informed by lessons learned after the global financial crisis—lessons that the Conservative party seems incapable of learning—when it became clear that continual cutting of interest rates was having little impact on spending habits and aggregate demand.
More was needed from fiscal policy, and that zero bound knockout—the fourth element of the fiscal credibility rule—acknowledges that that will sometimes be the case. Professor Simon Wren-Lewis writes that if that part of the rule
“had been in operation in 2010, we would have seen further stimulus in this and perhaps subsequent years, leading to a much quicker recovery from the GFC.”
Wren-Lewis describes that part of the rule—the part that allows a reversion to expansionary fiscal policy in times of crisis—as the part that makes the rule
“unique, and brings it up to date with current macroeconomic thinking.”
Is it not part of the problem, although we are moving slightly away from a balanced budget, that there has not been a comparable fiscal response to the substantial monetary response that we have seen over the last decade?
That is a perfectly reasonable comment. Time and again the Conservative Governments whom we have had to endure—I choose to use the word “endure”—over the last nine years have failed to take a wider view on policy-making in the country. Petty infighting over Brexit has put us on a precipitous, catastrophic no-deal path. They failed, through austerity, to see, and to care about, how an ideological commitment to cutting apart Government would have ripple effects across the country on rough sleeping, indebtedness, demand and productivity, which is virtually the worst in Europe under this Government.
Our fiscal credibility rule, and economic policy in general, takes a wider view, which is important. We understand how fiscal and monetary policy have to interrelate for the economy to function well in different times, and we understand how principles of economic management such as our fiscal credibility rule have to fit into a broader vision of an economy that serves society, and not just those with the strongest voices.
Thank you, Mr McCabe—it is a pleasure to serve under your chairmanship. When I saw that so few colleagues from both sides of the House had attended this debate, I thought that my hon. Friend Lee Rowley had rather made his point without having had to get to his feet. Of course, he continued with his speech for an hour, in three parts—a structure that all the best screenwriters tell people to use. He made some important points, and I do not demur from many, if any, of them.
Like my hon. Friend, I came to this House with the conviction that this country must live within its means, that it is the responsibility of our generation to be more fiscally responsible than those who came before us, that it is a moral imperative to do so, and that we must not leave the country in a weaker state, saddled with debt for the next generation to cope with. That is the task that the Chancellor, like his predecessor before him, and all of us at the Treasury have to take forward.
As my hon. Friend eloquently said, that task will also preserve what we care about in this country’s democracy. This is not unique to the United Kingdom; it is a feature of almost all liberal democracies that, unchecked, the constant desire of politicians to promise more and more and to borrow more and more may turn out to be one of those democracies’ gravest weaknesses. We want to leave the next generation a strong country, not one that is saddled with debt. The latter course would leave our economy, as my hon. Friend said clearly, at an unacceptable level of risk were there another macro- economic shock, which inevitably there will be. The Office for Budget Responsibility sensibly predicts that there is a 50% chance of one within the next five years.
As my hon. Friend also said, that latter course would leave us in an unacceptable position in terms of our competitiveness, our ability to invest in public services and in the economic infrastructure that will drive the economy forward, and our ability to reduce taxes—all of which we want to do.
Of course there was a macroeconomic shock in 2008, but what I think the hon. Gentleman is asking is whether the then Government had prepared for that shock. Of course they had not: all the estimates and analysis suggest that public spending significantly overran growth in the years leading up to the macro- economic shock. That is exactly what this Government have set out to avoid.
As we have already heard today, a great deal of progress has been made in that respect. Of course there is more to do, but we have to recognise the considerable progress that we have made. In 2010, as my hon. Friend the Member for North East Derbyshire said, we inherited a very severe situation: debt had nearly doubled in two years and was snowballing, while the deficit soared to a near record level—the highest in 50 years. Of course the financial crisis had contributed to that, but so had poor management of the public finances in the years leading up to it. We have made progress, and we are nearing a turning point in the public finances. Debt has begun its first sustained fall in a generation and the deficit has been reduced by four fifths—from 9.9% of GDP to 2% at the end of 2017-18. That is an important step forward, but there is a great deal more to do.
Does the Minister not accept that his party has any responsibility for slowing down the recovery? Does he not recognise that in 2010 the UK was one of only two countries—the other was Argentina—to completely end the fiscal stimulus, weakening the recovery and ensuring that the downturn lasted far longer than it ought to have?
No, I do not accept that for one minute. It is exactly as a result of this Government’s fiscal responsibility in that period that the public finances have now improved, credibility has been restored in the market and business has continued to invest. For those reasons and others, we now have continued record levels of employment, record low levels of unemployment and an economy that remains remarkably resilient. Let us not forget that public spending is £200 billion higher today than it was in the last year of the last Labour Government.
We are not complacent about the debt or the deficit. The fiscal outlook may be brighter, but the need for fiscal discipline continues, as my hon. Friend the Member for North East Derbyshire made very clear. The debt is still more than 80% of GDP, which is equivalent to approximately £65,000 per household, and we want to reduce that figure, for a number of reasons. We are concerned to ensure that if there is a future economic shock, the economy is resilient, and we want to improve fiscal sustainability. In the most recent Budget, the Chancellor set aside £15 billion of headroom for economic shock, out of concern for any further uncertainty that might arise as a result of Brexit.
There is a broader point, however: servicing debt is costly. If our spending on debt interest were a Ministry, it would be the third largest, after health and education. Our spending merely on servicing our debt is equivalent to what we spend on the police and the armed forces. As my hon. Friend made clear, that has an opportunity cost, because that spending has no economic or social value and reduces our ability to spend on our priorities and keep personal and corporate taxes as competitive as possible. The debt burden of interest is merely being passed to future generations.
The foundations of the Government’s approach are our fiscal rules: first, to reduce the cyclically adjusted deficit to below 2% by 2020-21, and secondly to have debt fall as a percentage of GDP in the same year. Sticking to those rules will guide the UK towards a balanced budget by the middle of the next decade. The OBR’s economic and fiscal outlook, which was published in October and was quoted from earlier, shows that the Government are forecast to have met both our near-term fiscal targets in 2017-18, three years earlier than predicted. Sensibly, given uncertainties in the fiscal outlook, the Chancellor took the view that we should retain the £15 billion of headroom against the fiscal mandate in the target year and £73 billion against the target of getting debt to fall. The forecast also shows that borrowing will fall to 0.8% of GDP by 2023-24, its lowest level since 2001.
The hon. Gentleman rather makes the point that my hon. Friend Alex Chalk made. He cannot have it both ways. Either the hon. Gentleman supports debt falling—in which case he should support continued fiscal responsibility, which is one of the Government’s guiding missions—or he wishes to spend more and more. His speech argued that we should spend even more, getting us into further debt and making the situation more difficult for future generations.
First, I did not make the latter point. The Tories can make up their own policies on the hoof—but don’t make up ours. Secondly, the Minister still has not answered the question. It has nothing to do with the outcome; it is about why the Government, if they are so economically capable and confident, have missed all their targets.
I have tried to answer. We are meeting our fiscal rules, as the OBR states—in fact, we are meeting them three years early. That has given us room in the Budget to invest at record levels, with £20.5 billion a year for the NHS, for example—its largest injection—and reserve headroom in the event of fiscal shock. However, the hon. Gentleman is arguing for £500 billion of additional public spending. As my hon. Friend the Member for Cheltenham said, that makes no sense whatever.
In the little time I have left, let me answer the question asked by my hon. Friend the Member for North East Derbyshire about how we can create better architecture to ensure that we and future Governments can be more fiscally responsible. We have done so in a number of ways. Our greatest step was the creation of the OBR, an institution that is now maturing and respected and will be retained on a cross-party basis in the future. It has enabled commentators and Members to have greater confidence in the figures—of course, there may be more that could be done in that respect. This year, we will institute the first zero-based spending review, which will look at all Government spending. We have taken account of the parallel with Chile, which has adopted that model in that past.
On longer-term spending, we have created the National Infrastructure Commission, which was designed to ensure that the Government think about the long-term challenges and invest appropriately within a defined spending envelope, guiding investments in our infrastructure according to a clear economic strategy. We have also taken action to ensure that our public accounts are among the world’s most transparent—they have been certified as such by the International Monetary Fund, for example. Most recently, the Chancellor announced the retirement of private finance initiatives, so that we continue to ensure that when our accounts are scrutinised, they are as clear and transparent as possible and we are always seeking to derive the greatest value for money for the taxpayer.
We have also sought to distinguish clearly between day-to-day consumption—important though such investment is for the future of the economy, whether it is in the police, in education or in the health service—and the long-term economic infrastructure investments that will really drive the economy forward. Over this Parliament, we will make the greatest investment in such economic infrastructure—our roads, our railways, our digital infrastructure—by any Government since the 1970s.
I thank my hon. Friend the Member for North East Derbyshire for his remarks. This is an extremely important and timely debate. He made his case in his usual eloquent way, as one of the great champions in this House of smaller Government, lower taxes and fiscal responsibility. If only there were more colleagues who followed his example.
I thank everyone who came to the debate—word clearly got out and everyone came in towards the end to hear its quality. I thank my hon. Friend Alex Chalk, the hon. Members for Strangford (Jim Shannon), for Dundee East (Stewart Hosie), for Motherwell and Wishaw (Marion Fellows) and for Bootle (Peter Dowd), and my hon. Friend Damien Moore for their contributions.
I will end with a few points. First, I say to the hon. Member for Bootle, whose constituency I have the greatest affection for, having spent most of the decade before I joined this place working there, that it is possible to conflate austerity with this discussion, but the point was to go one step further and say that, whatever the political decisions we choose to make—we can have a debate about that—we should pay for them at the same time. Some of the people I have respected the most in fiscal and financial terms over the past 30 years have been social democrat and Labour Chancellors, including Roger Douglas in New Zealand and Michelle Bachelet in Chile, which, as I have said, codified a rule.
Secondly, in my view there is nothing ideological to living within one’s own means, over an appropriate cycle and with appropriate stabilisers and appropriate flexibility. The hon. Member for Dundee East is absolutely right to say that there is no absolute answer, but I know what the answer is not. It is not continually increasing debts, running a deficit continually or semi-continually in the long run, with the costs of servicing that debt approaching and about to exceed £50 billion. If that is the passion of youth, I apologise, but perhaps when we meet again to talk about this issue—and I hope we do—and we figure it out, the hon. Gentleman might nominate us all for the Nobel peace prize.
Question put and agreed to.
That this House
has considered the balanced budget rule.