§ The Economic Secretary to the Treasury (Ruth Kelly)
I beg to move,That this House takes note with approval of the Government's assessment as set out in the Financial Statement and Budget Report 2001–02, and the Economic and Fiscal Strategy Report 2001–02 for the purposes of section 5 of the European Communities (Amendment) Act 1993.I am delighted to be here, but I am even more delighted to see the hon. Member for West Dorset (Mr. Letwin) sitting on the Opposition Front Bench. I thought for a minute or two that the Labour party might have to put up another "Wanted" poster while the Whips desperately tried to find him, but luckily, here we are, face to face.
Each year, the Government are required to send information to the European Commission setting out our main economic policy measures.
§ Ruth Kelly
Nevertheless, it is the case.
It is important that we provide the information. The procedure is set out in articles 99 and 104 of the EC treaty, which relate to the broad economic policy guidelines, convergence and stability programmes and the excessive deficits procedure. The purpose of the reports is to help to ensure that member states' economic policies are consistent with the goals of the treaty. Those goals are set out in article 2, and include non-inflationary economic growth that respects the environment, a high level of employment and social protection, and raising the standard of living and quality of life, as is consistent with the Government's approach to economic policy. Section 5 of the European Communities (Amendment) Act 1993, which is usually known as the Maastricht Act, requires Parliament to approve the Government report that is sent to the Commission for that purpose.
The Government's strategy for economic policy is set out in the "Budget 2001" report. Today we have the opportunity to debate that document, as it will form the basis of the information that we send to the Commission. Sharing the information in the Budget documents with our European partners allows us to influence Europe, and to bring employment and growth to Britain and other member states. "Budget 2001" describes the Government's strategy to raise Britain's national economic potential and to achieve high and stable levels of growth and employment along with rising living standards for all. The Budget will help to build a stronger economic future for Britain, through reforms that will put work, enterprise and families first.
The key elements of the Government's economic strategy, as set out in the Budget report, are to deliver macro-economic stability to provide a platform for long-term sustainable growth and employment; to meet the productivity challenge through promoting competition, enterprise, innovation, skills, investment and public sector productivity; to increase employment opportunity for all; to ensure fairness for families and communities; and to ensure a better quality of life for everyone, now and for generations to come, by protecting the environment.
106 The Government's first economic priority on coming to office in 1997 was to deliver stability for the long term, with the recognition that economic stability is a precondition for achieving our objective of high and stable growth and employment. We therefore introduced the new macro-economic policy framework, which is based on the principles of transparency, responsibility and accountability. The framework is already promoting economic stability by delivering low inflation and sound public finances.
We have introduced an open and transparent monetary framework to deliver low and stable inflation; a new fiscal framework based on a prudent approach to the public finances and underpinned by two strict fiscal rules; and a new public spending framework, which is integrated into the fiscal framework, to provide for better long-term planning and ensure a greater focus on the quality of public service provision. We are already seeing the rewards of the new macro-economic framework.
§ Mr. Edward Davey (Kingston and Surbiton)
Will the Economic Secretary remind the House of the Government's policy for the exchange rate within that new macro-economic framework?
§ Ruth Kelly
The Government want a long-term, stable and competitive exchange rate, and that is exactly what we are working towards, as we seek to provide a foundation of stability based on low inflation and prudent public finances. That is the best way of delivering a platform for stability.
Inflation in the United Kingdom has been significantly less volatile since 1997—lower for longer than at any time since the 1960s, and in line with our target. Now, long-term interest rates are about the lowest for 35 years, reflecting a sustained reduction in inflation expectations.
The new fiscal framework has put public finances in a healthy and sustainable position. The Government inherited public finances that were in poor shape, yet since 1997 they have been transformed. The Government have cut borrowing by more than £44 billion since 1996–97. Building on that achievement, the Budget underpins the spending plans set out in the 2000 spending review, and locks in the fiscal tightening of the previous Budget.
The Government have ensured that we remain on track to meet our fiscal rules, while releasing resources for sustained investment in key public service priorities. Public sector net investment will more than double to 1.8 per cent. of gross domestic product by 2004–05. The spending review allocations included real average growth of more than 5 per cent. a year from 2000–01 for education, more than 5 per cent. a year for health, 20 per cent. a year for transport spending in England, and 4.2 per cent. a year for the criminal justice system in England and Wales.
In the Budget we have been able to allocate an extra £1 billion for education, an extra £1 billion for health and an extra one third of a billion pounds to help to tackle drugs. That is over and above the sustained investment announced in last year's spending review. The Government can provide those resources because of their prudent handling of the economy. Even under the most cautious assumptions, our projections show surpluses on the current Budget in each of the next five years.
Public sector net debt has fallen from 44 per cent. of GDP in 1996–97 to 31.8 per cent. at the end of 2000–01. It is projected to stabilise at about 30 per cent. of GDP 107 for the remainder of the projection period covered in the Budget. That compares with a doubling of the debt burden in the 1992–97 Parliament. Our prudent approach to the management of public finances means that the debt ratio can be combined with rising public sector investment, thus tackling years of neglect of the public infrastructure.
A sound and credible platform of economic stability has been achieved under the Government's new frameworks for monetary and fiscal policy. Our commitment to stability and prudence is for a purpose: unemployment is now the lowest since the 1970s; since the 1997 election, employment has risen and unemployment has fallen in every region. Employment has risen by more than 1.2 million since the 1997 election, with more people in work than ever. The United Kingdom is enjoying the longest period of sustained low inflation since the 1960s.
Growth of 2.5 per cent is expected this year, and inflation is expected to remain close to the Government's target in the period ahead. Independent forecasters agree with our assessment.
The Budget responds to the challenge of meeting the fiscal rules over the economic cycle and underpinning the 2000 spending review by continuing to lock in stability for the long term. The platform of stability provides the basis for raising productivity. Meeting the productivity challenge offers the prospect of higher growth and increased employment opportunities, with low inflation and low interest rates. It is a key route to raising living standards. It is a moment of opportunity for the UK, and a challenge to everyone involved.
The Government's long-term ambition is to close the productivity gap between the UK and its main competitors. To that end, we have identified five key topics for action: strengthening competition, encouraging enterprise and innovation, creating incentives for investment, investing resources in skills, and working to improve public sector productivity.
§ Mr. Swayne
Does increasing productivity apply to the public as well as the private sector? The Economic Secretary said that competition was one of the methods of achieving that. Why, therefore, is competition excluded from the public sector?
§ Ruth Kelly
If the hon. Gentleman had listened to me, he would have noted that I specifically spelled out that we were taking steps to improve public sector productivity. They must go hand in hand with improving our overall competitive position.
Building on previously announced provisions, the Budget contains a package of measures to help small businesses, including implementing the pre-Budget report proposals to reduce the impact of VAT, reduce their administrative burden and improve their cash flow. Consultation will take place on proposals for a new research and development tax credit for large firms and there will be full financial flexibility for regional development agencies from 2002–03, matched by increased accountability through objectives and targets to meet their strategic goals.
We shall be working to make capital markets more efficient by taking forward all the recommendations of the Myners review, addressing distortions in decision making 108 by institutional investors and expanding the scope of enterprise management initiatives. Meeting the challenges of raising productivity and closing the gap with our main competitors will help to raise living standards in the economy as a whole. However, we need to do more to build a fairer society by making work pay, giving families a better deal, and protecting the environment.
The Government are working to deliver employment opportunity for all—the modern definition of full employment—thereby tackling a significant underlying cause of poverty and deprivation. Our strategy is based on helping people to move from welfare to work, easing the transition to work, making work pay and securing progression once people are in work. Our goal is that by the end of the decade there will be a higher proportion of people in work than ever before.
The Government have already taken significant steps towards achieving that objective. To help make work pay and to improve work incentives, they have introduced the national minimum wage and a new 10p rate of income tax, cut the basic rate of tax to 22p, and reformed national insurance contributions. For low and middle income families with children, the introduction of the working families tax credit has made a significant difference to family incomes.
The Budget took action to increase employment opportunities by enhancing the new deal, which has already helped more than 270,000 young people from welfare into work. In the new deal for lone parents there will be further help with training, with starting up in self-employment, and with child care costs. Resources will also be allocated to enhance the new deal and other programmes over the coming three years, focusing on employer needs, on the hardest to help, and on the most disadvantaged areas.
To help make work pay, the Budget increased the basic credit in the working families tax credit by £5 on top of indexation, and extended the 10p rate of income tax by £300 over and above indexation, helping 2.5 million taxpayers. There is no better time to encourage the long-term unemployed, and those who have become particularly detached from the labour market, back to work. It is estimated that there are 1.2 million vacancies in the economy as a whole.
The Government continue to work on building a fairer and more inclusive society—in particular by tackling child poverty, helping pensioners, rewarding saving, investing in public services and ensuring that the tax system is fair. Everyone should have the opportunity to fulfil their potential and enjoy the benefits of high, stable economic growth.
§ Mr. Edward Davey
On the Minister's point about reducing child poverty, the Government claimed at the last election that they had taken 1.2 million children out of poverty. However, the latest statistics in a survey published this week showed that those claims were incorrect, and that the Government's measures have taken less than 500,000 children out of poverty. Will the Minister tell the House what extra measures the Government are now proposing to tackle the problem that they have so far failed to address?
§ Ruth Kelly
I have just been outlining the Government's approach to tackling child poverty. The best way to do it is 109 to provide families with a route into employment, to make work pay and to provide a ladder of opportunity for families so that people can continue to progress once they are in work. That is the simplest and best way to tackle child poverty at its root, and it is what we are doing.
The Budget takes further steps towards creating a fairer society. The Government are taking action to boost the incomes of hard-working families, and helping families when their children are very young. Building on record increases in child benefit, the Government introduced the children's tax credit, worth up to £520 a year for about 5 million tax-paying families, and, recognising the additional costs of a new child in the first year, in April 2002 we will increase that to £20 a week for families in the year of a child's birth. All those measures will have a significant impact on tackling child poverty.
The Budget also includes a package of measures on maternity pay and parental leave, including increases in the flat rate of statutory maternity pay and maternity allowance, paid adoption leave from 2003 and a doubling of the threshold for small employer relief, so that about 60 per cent. of all firms paying statutory maternity pay each year can reclaim their costs in full, plus compensation. There will also be a further increase in the sure start maternity grant from April 2002.
The Budget includes a major package of measures to boost pensioner incomes, acting to end pensioner poverty and ensuring that all pensioners share in the rising prosperity of the nation.
As well as the measures announced in the pre-Budget report, from April 2003 the Budget raises the age-related income tax personal allowances over and above indexation, and through the remainder of the Parliament will raise those allowances by reference to rises in earnings rather than prices. About 1 million savers, many of whom are pensioners, will benefit from the widening of the 10p income tax band, which will apply to savings income. From April this year, the average pensioner household will be £600 a year better off than in 1997 as a result of the personal tax and benefit changes introduced during the last Parliament.
The Government are building a stronger economic future for Britain. That gives a better deal for the people of Britain. It will help us to meet our objectives of high and stable growth and employment and a fairer society for all. Those are the right economic policies for Britain. They are also in line with the objectives of the European Union.
Approving the motion will enable the United Kingdom to meet its treaty obligations, provide information and participate fully in the important process of multilateral surveillance and economic co-operation, as provided for in articles 99 and 104 of the treaty. I hope that the House will support the motion.
§ Mr. Oliver Letwin (West Dorset)
I begin by welcoming the Economic Secretary to the Dispatch Box and her new post. There is a distinct risk, which worries some on this side of the House, that she might prove to be a distinguished occupant of that post, but time will tell.
The motion is highly misleading. It has hardly anything to do with the European Communities (Amendment) Act 1993, but much to do with the Red Book. It is a bizarre 110 feature of our constitutional arrangements that, having debated the Budget for I do not know how many days, we return to it for a 90-minute debate when most good folk are asleep and nobody is paying the slightest attention. That probably explains why the Economic Secretary, despite her world-renowned intellectual prowess, chose to re-read a speech that has undoubtedly been concocted on other occasions.
§ The Chief Secretary to the Treasury (Mr. Andrew Smith)
It is a good speech.
§ Mr. Letwin
It is an excellent speech. It was good first time round and it will be good next time round, but unfortunately it told us little that is new. As you, Mr. Deputy Speaker, will probably be the only person in England who is listening to me by the time that I finish my remarks, I hope that you—
§ Mr. Letwin
I shall eschew that pleasure. I hope that you, Mr. Deputy Speaker, will bear with me if I depart from the norm and make an argument about the real subject of the motion—the assessment of the UK economy that is in the Red Book. I should correct myself immediately: I want to make an argument about the assessment of the UK economy that is not in the Red Book.
It is a strange feature of our world that the old Budget report was renamed when the 1993 Act was passed. It is now called the Economic and Fiscal Strategy Report and Financial Statement and Budget Report. The reason for that is to enable us to conform to the need to report to the European Communities on our economic and fiscal strategy and, indeed, the background to it—hence the assessment. Alas, however, only the name changed, not the contents. There never was a real assessment of the economic scene in those documents and there is not now.
Let me begin at the beginning with points of agreement. We share aims, but that is a turn up for the books. There was a time when we did not share aims. There was a time when Labour Governments and Labour Oppositions had other aims that led to gross inflation, the ownership of the means of production by the state on an increasing scale, the prevalence of trade unionism and I know not what other "glorious and golden goals".
Thank goodness—I mean this genuinely, thank goodness—we now live in a world that is more difficult for Conservative politicians because there is much in it that we share. That is well expressed in the new article 2 of the treaty on European Union, which, as the Economic Secretary said, specifically states that we are to seeka harmonious and balanced development of economic activities, sustainable and non-inflationary growth respecting the environment … a high level of employment and of social protection, the raising of the standard of living and quality of life, and economic and social cohesion".Who in their right mind could conceivably object to that?
§ Mr. Eric Forth (Bromley and Chislehurst)
I thought that at this point I would ask my hon. Friend what, on the face of it, may seem a banal question. If the economic indicators of most of our continental European partners were heading in the wrong direction, would we still want 111 our economy to converge with them? The words that my hon. Friend has just read out imply convergence at any price. Surely my hon. Friend does not believe that we should readily mould our policies with the aim of converging in an adverse direction. Will he make that quite clear?
§ Mr. Letwin
I completely agree with my right hon. Friend, although I disagree with him about the interpretation of the words that I read out. As the record will show, I specifically left out a phrase in new article 2, which speaks ofa high degree of convergence of economic performance".I did not read out that phrase, because I do not believe that that is a shared aim. However, the rest of the article that I read out is a shared aim. I do not believe that a high degree of convergence of economic performance is a shared aim because I do not believe that economies converge—they sometimes cross like ships in the night, as the economies of the north-east and the south-east of Britain have from time to time. Moreover, I do not believe it is a shared aim for the very reasons that my right hon. Friend gave. Convergence is good only if performance converges on the good.
We also agree with the Government about aims. On page 1 of the Budget report, the Government state that the aims of their strategy aredelivering macroeconomic stability;meeting the productivity challenge;increasing employment opportunity for all;ensuring fairness for families and communities; andprotecting the environment.Those could have been the stated aims of any Conservative Administration in the past 40 years, and we share those aims. The problem we are discussing is not about aims: it is a problem about means and about our understanding of where we stand today.
The picture that the Economic Secretary painted of the economy was not so much glowing as utterly golden—a Midas picture in which nothing was wrong and nothing was worrying. In her description, we benefited from sustained and permanent growth, with low inflation, ever higher productivity and greater employment. From her description—I know that she does not believe this—one might have thought that the world around us was rosy in every respect.
That is odd, because her colleague, the Chancellor of the Exchequer, was quoted in The Sunday Times as saying:There are risks in the world economy at the moment. The downturn in the world economy has not reached its bottom. It is in many ways far more severe than we expected a few months ago because it has spread from America, in particular to Germany and, of course, we have no growth at all in Japan.The Chancellor was right about that.
A week later, in the same journal, Stephen Roach, chief economist at Morgan Stanley, put it rather more bluntly:We have been warning of this possibility since the start of the year. but now it's time to make it official. The world is in recession.There is a great difference between the surroundings of the United Kingdom and the United Kingdom itself, which, as the Economic Secretary rightly said, is not in recession. However, the world as a whole is in dreadful difficulties.
112 Last year, the economy of the United States grew by 5 per cent., whereas this year it is expected to grow by less than 2 per cent. US manufacturing is in recession, retail sales have slowed, capital investment is way down, US trade figures are down and there is all the reason in the world to suppose that those effects will be exported. The Chancellor was absolutely right about Japan, whose growth is unlikely to exceed 1 per cent. for the next two or three years. Germany is afraid that growth may plunge to zero in the second quarter of this year. Growth in the euro zone in the past 12 months is down a full percentage point on the previous year, and industrial production has slowed. That is why the European Central Bank has had to revise its growth forecast downwards, and Euro-inflation at 3 per cent. is well above target. Meanwhile, we have the oil problems. If the Economic Secretary had not read that speech, but had chosen to take another one off the shelf, she would have recognised all those phenomena.
The fact is that the world in which we live is risky and difficult economically at present, and we must ask ourselves whether the United Kingdom economy is structured to resist the difficulties. Can we be not just confident but—if I may be somewhat impolite, as the Economic Secretary was—almost complacent about our economy's condition, or have we problems of our own that need attention?
The Economic Secretary's view on that was in line with the Red Book. It is possible to comb the Red Book repeatedly and endlessly—as Labour Members will know, during the election I had a bit of time in which to ponder things repeatedly and endlessly—but nowhere in the palimpsest is it possible to find a description of the real difficulties facing the British economy. That may have nothing to do with the fact that it was produced by Her Majesty's Government, or again it may have something to do with that. One way or another, however, the problem is that it does not reveal the current state of affairs.
I want to dwell on a specific phrase in article 2 of the treaty, which will not upset my right hon. Friend the Member for Bromley and Chislehurst (Mr. Forth). Article 2 refers toa harmonious and balanced development of economic activities".We are meant to agree to report tonight that the House accepts that the assessment of the British economy in the document referred to is right, and shows that there is a harmonious and balanced development of economic activities in this country. I wonder whether, on reflection, the Economic Secretary would want to advance that argument. I should be very surprised if the hon. Member for Kingston and Surbiton (Mr. Davey) wanted to do so, and I certainly do not. I want to advance the opposite argument, because I think it fairly clear that the UK economy currently suffers from some serious imbalances. Many of them have been obscured over the past four years by the Government's undoubted achievements in macro-economic, monetary and fiscal control; but, beneath that, there is a worrying picture of imbalance.
Let me explain—at rather tedious length, to get the thing on the record—what I mean by imbalance. First, there are the regional imbalances. In April this year, unemployment levels in the UK as a whole averaged 5 per cent. That is not a good record in comparison with those of one or two other countries, but it is much better than has sometimes been the case. Nevertheless, 113 it disguises vast regional discrepancies. At the same time, unemployment in the south-east of England was 3.3 per cent., and in the north-east it was 7.7 per cent.—more than double the level in the south-east. Indeed, it is clear that the averages in the north-east, London, Wales, Scotland and Northern Ireland are completely different from those in—if I can put it this way—the rest of England.
Such a regional imbalance may not be deeply worrying in itself, although I suppose it would be difficult for the Government to maintain that they were not somewhat worried, because they continue their regional policy. It is a long-established doctrine that the main purpose of regional policy is to even out regional imbalances, rather than to create wealth in itself: that has been a Treasury doctrine for many years. If that is the case, it must also be the case that the Government have some worries about regional imbalance, because they clearly cannot be operating a policy aimed at removing a problem that they do not consider to be a problem.
But alas, regional imbalances are not the only or, indeed, the most serious imbalances that the economy currently suffers. A much more serious issue is the trade imbalance. I am sure that inside the Treasury the Economic Secretary and her colleagues spend much time discussing the trade imbalance; it would be unusual were they not to do so. However, I did not hear much reference to the trade imbalance in the Economic Secretary's speech. That is surprising, because the trade imbalance is not a small matter. It is not even a medium-sized matter. It is enormous.
The trade in goods in 2000 as a whole was in deficit by £28.8 billion. In the first quarter of this year, it was in deficit by £7.4 billion. Even when the surpluses in services are taken into account, the total trade in goods and services was almost £18 billion in deficit last year and almost £5 billion in deficit in the first quarter of this year. Those are large numbers that have persisted for some time and have been growing. The imbalance has existed for almost five years now. I checked earlier today and it is not since 1870 that a trade imbalance has afflicted the UK economy for so long.
§ Mr. Forth
Does my hon. Friend agree that the existence of a regulatory mechanism between economies—such as a variable exchange rate—has always been the mechanism by which, over the long term, trade imbalances can be corrected? He will know that that was the case for historic variations between the pound sterling and the dollar, or the yen or the continental currencies. Has he given any thought to the significance of the possibility that we will join the euro and our possible inability then to correct the trade imbalance that he is discussing?
§ Mr. Letwin
My right hon. Friend is right that one of the ways in which the trade imbalance traditionally corrects itself is through an improvement in the terms of trade—through exchange rate differentials. If the hon. Member for Kingston and Surbiton were right, and his party could achieve a reduction in the exchange rate, through a miracle of some sort, followed by a locking-in at a lower exchange rate, that would help to cure the imbalance. However, if we were forced to lock in at a higher exchange rate, as I suspect would happen, we would lock in the imbalance for some time.
114 The trade imbalance that we face is not likely to be cured by a shift in the exchange rate in the near future. It might be, but I doubt that the Economic Secretary would claim that that will happen. When the hon. Member for Kingston and Surbiton asked a genuine question in the middle of her brilliant but old-fashioned speech, she was unwilling to engage in debate with him about the right level of exchange rate. That was, I suspect, because the Government have eschewed the idea of targeting a specific exchange rate. The hon. Gentleman will no doubt raise that subject later, if he catches your eye, Mr. Deputy Speaker, and we may yet hear that fascinating debate. However, I suspect that the Government are probably wary, as they have been for the past four years, of trying to set an exchange rate, which, as my right hon. Friend says, makes it odd that they are nevertheless talking about trying to join the euro.
§ Mr. Edward Davey
When does the hon. Gentleman think that the floating exchange rate that we now have in the UK will start to address those imbalances, and when does he expect the depreciation before the automatic adjustment on which the right hon. Member for Bromley and Chislehurst (Mr. Forth) is so keen?
§ Mr. Letwin
The answer is that I, like the hon. Gentleman, do not know. I suspect that there will have to be a restraint of domestic demand, which I will come to shortly, rather than a change in the exchange rate. We will see. Nevertheless, I hope that the hon. Gentleman agrees with me, because it is true and a matter of fact, that there is a major trade imbalance, which has persisted for an extraordinarily long period. Trade imbalances can last for extraordinarily long periods if they are financeable and, at present, ours is. I am not seeking to make any apocalyptic statement—that would be quite false. Our trade imbalance is being happily financed, but markets are fickle and moods change. Whether one can continue to finance that kind of trade imbalance for very much longer is open to question.
If we merely had a regional and a trade imbalance, the situation would be noteworthy but not as serious as the real one. We face another kind of imbalance, more serious in many ways than either of those. We have a two-speed economy. Production industries grew in the last quarter, the first quarter of the year, by 0.7 per cent., at a time when, as the Economic Secretary made clear, the economy as a whole is growing at more than 2 per cent. and the service sector—so-called—at more than 3.7 per cent. There is a huge imbalance between two major parts of our economy.
I am making my case stronger by making it weaker in the sense of not taking into account the exceptional cases, such as those that affect my constituency. A recession is going on in agriculture; the industry has seen negative growth for a very long time. There has been a minor recession in the construction industry for a rather shorter period.
There is a massive imbalance between various sectors of the economy. In fact, I suspect that it is understated by the figures that are typically used. The term "service", as the Economic Secretary will be aware from her previous work with the Bank of England, which has done some noteworthy work in this field, is widely abused in the sense that it covers a multitude of things. Some are really other forms of industrial production such as telecoms 115 software manufacture, while some are pure services in the sense of human beings looking after one another. I suspect, although I do not know, that disentangling the one from the other would show a further imbalance that accentuates the nature of the imbalances across the economy as a whole. I suspect that the pure services sector is growing even faster than 3.7 per cent., because some things classed as services, such as software, are, if not in positive decline, nevertheless growing very slowly.
The Economic Secretary painted a picture of continuous and unalloyed bliss across the economy. Instead, the economy suffers from marked and continuing regional imbalances, from a growing, prolonged and unprecedented trade imbalance and from significant discrepancies between various sectors of the economy in their rate of growth or decline.
If that were all, the situation would be bad enough, but it is not all. The economy is afflicted by another very serious imbalance—that between the corporate and domestic sectors. It is quite a striking imbalance. Over the past five years, output has risen by 14.7 per cent.; domestic demand has risen by 20 per cent. We have a major problem with profits. It is affecting, and previously prospectively affected, the stock market. James Hall, the managing partner of Accenture, the strangely named management accountancy firm, says:What we are seeing is a slowdown in both manufacturing and service sectors that depend on demand from businesses.At the same time, figures from Experian, an information service company, show that the United Kingdom is experiencing its longest period of falling profitability since the early 1990s.
Profitability measured by the average return on capital has fallen for seven successive quarters. In the business sector, therefore, and the business-to-business sector, which depends on business, there are major problems with profitability, whereas domestic household demand remains high. To be tedious about the matter and to remind you, Mr. Deputy Speaker—I am sure that, by now, you are the only one awake—we have regional imbalances, trade imbalances, an imbalance of services versus industrial production and a significant and sustained imbalance of the corporate sector versus the domestic sector.
I regret that the tale does not end there, because we also have a serious imbalance in domestic savings, which is the flip side of the coin of strong domestic demand. I fear that we have made that point on numerous occasions, but it remains true. In the first quarter of this year, the savings ratio in this country dropped to 4.1 per cent. Last year, in the previous Red Book, the Treasury correctly noted that there were problems ahead if the savings ratio remained low; it has remained extremely low by historical standards and today is less than half what it was in 1997. We therefore have regional imbalances and trade imbalances; we have imbalances between production and service industries, between the corporate and domestic sector, and between saving and household expenditure.
That is not a balanced development of economic activities. When one thinks about it, it is astonishing that the Economic Secretary—one of the few people to occupy such a post who understands these matters—made a speech about the 2001 Red Book and the governance of 116 the United Kingdom economy without mentioning those five vital and worrying features of our current economic circumstances. That worries me because, if she and her colleagues are not attending to those imbalances, they may become more, rather than less, worrying.
The situation is worse than being merely imbalanced. The next item on which we, the Government and all right-thinking people agree is that, in the words of article 2 of the treaty on European Union, we wish to achieve and maintaina high level of employment".We have a high level of employment; we have had rising employment and falling unemployment—worthy things of which the Economic Secretary was proud and made much. Alas, when one looks behind the current statistics and tries to get a sense of what is going on in the real economy, again, there are worrying signs.
The average earnings index in the first four months of this year for the whole economy showed year-on-year percentage changes starting at 4.5 per cent. in January and rising to 5.2 per cent by April; the Economic Secretary may well have more up-to-date figures at her command. Over the whole of 2000, annualised average rates of 4 to 5 per cent. were in evidence. To a moderate degree, wage inflation is with us. However, the marginal utility of labour, which will critically affect the long-term propensity of the economy to generate employment or otherwise is not just affected by wage rates. As the Economic Secretary is clearly aware, it is also affected by on-costs, the social costs of labour, the effects of productivity—which, alas, has not risen nearly as fast as we had hoped—and the ability of firms to be more productive in their use of labour and to find ways of making more from their labour. It is in that last respect that the biggest worries arise, and I shall come to them in a moment.
The particular employment problems that we see over the horizon are more likely to arise in small and medium firms than in large firms. Our economy is out of balance in another respect: the effects of Government action, which I shall describe in a moment, on the largest firms have almost certainly been less accentuated than on the small and medium firms, and it is in the small and medium-firm sector that we would expect to find sustained growth of employment.
In fact, over the past few years, the rate of increase in employment and the rate of decrease in unemployment have not been as sparkling as we might have hoped, given the overall growth in demand. They have not been as sparkling as they had been in the previous few years under the previous Administration at an earlier point in the economic cycle and not as sparkling as in many other countries.
Not only is our economy imbalanced in many ways, but it is not showing the growth of employment and the reduction of unemployment that we would have hoped for under such apparently benign economic circumstances. We must now ask ourselves whether the Government are doing something about all this. Does the Red Book, which does not describe any of what I have just described, or the Economic Secretary, who did not describe any of what I have just described, have a strategy to deal with those matters?
Is there something in the Red Book or was there something in the Economic Secretary's speech to address those imbalances? I have to say that I may have gone to 117 sleep—that is unlikely because the Economic Secretary's mellifluous tones are always sufficient to keep me awake—but I did not notice anything in her speech about a strategy to deal with those problems. It is not surprising, as she did not mention the problems, that she did not mention the solutions, but the fact is that there was no such strategy. Search as I might, with however much leisure the Chief Secretary may have been able to give during the election, I was unable to find in the Red Book any strategy for solving those problems there either.
The fact is that we have a Government of elegant ostriches; they are hiding their head in the sand of their own achievements; hence they do not see the problems to which I have alluded and, as a consequence, they do not even begin to have developed a strategy to deal with them. They are officially unproblems, thus there are unsolutions for them. However, the situation is worse than that because, at least in respect of the level of employment, the Government are taking active, well formulated, strategically designed steps to accentuate the problem.
The comments of external observers are extremely instructive. In March this year, Herr Bernd Atenstaedt of the German Industry Association in the United Kingdom said:we see the first signs of an increase in regulations, which will make Britain less attractive as a location".He means, of course, as a location for investment, hence for the generation of jobs.
§ Geraint Davies (Croydon, Central)
Does the hon. Gentleman accept that the slight reduction in the rate of increase in employment is matched by an increase in the growth and productivity that would be expected as we approach full employment? On the point about German growth, does he accept that the International Monetary Fund's latest forecasts show a 40 per cent. reduction in German growth and a halving in United States growth and that, in fact, our growth is holding up very well at about 2.6 per cent., compared with Treasury forecasts of 2.5 per cent.? The basic point is that we are very strong indeed in the world scenario and that we need no lectures from the Germans.
§ Mr. Letwin
I shall soon come to some lectures, given by some Englishmen, although I do not share the hon. Gentleman's xenophobia. Had he been present at the beginning of my remarks he would have heard—
§ Mr. Letwin
Had the hon. Gentleman not been moving between the one and the other, he would have heard me acknowledge the truth of his remark that there has been a huge slowdown in many other parts of the world and that, so far, we have been remarkably insulated. The whole tenor of my arguments is that there are worrying signs that we may not sustain that magnificent isolation from world events. I do not predict that we cannot; we do not know. I hope that we can and, as the hon. Gentleman suggests, we have so far. I am portraying the worrying signs.
Mr. Bernd Atenstaedt's remarks about our economy were not made because he is a German but because he 118 is an educated economist. The British Chambers of Commerce—hardly a group of Germans—says about the United Kingdom economy:The bottom line is that the sheer quantity of red tape on business is damaging our economy, stifling enterprise, job creation and economic growth.In June 2000, Ruth Lea of the Institute of Directors said:If this Government is interested in strangling business in red tape, it is succeeding. Some bosses are having to give up a day a week to cope with all the regulations.I could go on rather tediously quoting such sources.
§ Mr. Swayne
Is not the opinion of the Germans, whom the hon. Member for Croydon, Central (Geraint Davies) mentioned, important in so far as foreign opinion is currently financing the trade imbalance?
§ Mr. Letwin
My hon. Friend is right and, to be serious about the issue of xenophobia, the UK has always depended heavily on a large amount of external investment. It is one of our proudest achievements that, in our period in office, we reached the stage that more was invested externally in the UK than in the whole of the rest of continental Europe. I do not know, but I suspect that that may still be the case. We certainly depend on external investment.
This country also depends on internal investment and what attracts the external investor attracts the internal investor—the entrepreneur within the UK—and vice versa. The regulations and red tape that have been introduced are beginning to have a serious effect in eroding confidence in small and medium-sized enterprises and the people who are thinking of investing in them. That is a worrying sign. That problem is not being imposed on us from without nor has it grown within the market or the private sector. It has been imposed on the market by the Government.
There are many other sources from which one can glean the same picture. In the past year, the House passed 3,865 new regulations which, I think, is the highest figure on record. In March this year, an edition of Forbes contained a damning article on the present Government's fondness for regulation under the title "Tony Blair's Red Tape Factory". In a survey of Institute of Directors' members after the pre-Budget statement, 90 per cent. said that the Chancellor had not done much to reduce the regulatory burden on business and 44 per cent. of companies cited the regulatory burden as a barrier to growth. One can go on and on.
What the Government have done, continue to do and—from all one cam tell from the Economic Secretary's remarks—are happy to do is to continue regulating ever increasingly the small and medium sector, which is the sector that gives rise to employment growth. They ignore regional and trade imbalances and imbalances between production and services, between the domestic and corporate sectors and between savings and the creation of extra jobs. They adopt no strategy to deal with the imbalances but a positive strategy to worsen the difficulties that small firms face in generating new jobs at the rate that we require.
I am glad to say that I am nearing the end of my remarks. The Government are serious about their fiscal strategy and they have allowed the Bank of England to be serious about the control of the money supply. However, 119 if they were also serious about making it their business to deal with the serious structural problems that affect the economy, the Economic Secretary would have made a speech about that issue. She would not have said what I said, but she would have acknowledged the problems and told us what the strategies were for dealing with them. The fact that she has not is, I suspect, due not to her ineptitude, but to the fact that the Government do not have any such strategies. That is the most worrying trend of all.
§ Mr. Edward Davey (Kingston and Surbiton)
We need to remember the purpose of this debate, on which the hon. Member for West Dorset (Mr. Letwin) touched at the beginning of his remarks. Our job is to scrutinise the documents that the United Kingdom sends to the European Commission. The ability to do so is the result of a Eurosceptic amendment to the European Communities (Amendment) Act 1993 on the Maastricht treaty tabled by Conservative Back Benchers who were not terribly happy with their Government, who they thought were too Euro-friendly.
We must question why the amendment was tabled—it is a fairly good one—and why we should be scrutinising such documents. Presumably, we wanted to ensure that the UK's contributions to the debate about the eurozone and the European Union economy are well founded. That is an important part of what Ministers do at ECOFIN. We wanted to ensure that the information that our EU partners have about the UK economy is sound, so that we can improve their knowledge and understanding of it. One would have thought also that we wanted to ensure that the information that we send to our European partners would assist and enhance the UK's negotiating position in the different EU economic forums.
§ Mr. Letwin
Does the hon. Gentleman agree that almost certainly those who tabled the amendment did not imagine that the Red Book would be re-labelled "the assessment" and we would find ourselves debating the same item twice?
§ Mr. Davey
The hon. Gentleman, not for the first time, anticipates what I was about to say. The Red Book is certainly not written for such purposes; it is written for a domestic audience. In the last Parliament, it was not really an account of what was going on in the UK economy and public finances. Increasingly, it is becoming a document of Government spin and propaganda. The Budget 2001 document was a Panglossian pre-election propaganda sheet. It was hardly a detailed addition to economic analysis of the UK economy and public finances. That was pointed out at the time, it was a shame at the time, and to try several months later to send it off to Brussels and Strasbourg as a fair reflection of what is going on in the UK economy is total nonsense. The idea that we should approve the motion is also nonsense.
Let us consider how the document performs the three roles to which I have referred. Does it contribute to the debate on the EU economy? The EU economy is hardly mentioned in the document. We have analysis of Group of Seven activity and analysis of the United States economy, which is understandable and one of the better parts of the document, but nothing to do with the EU. 120 Box 3.2 describes European economic reform following the Lisbon summit, but that is all about micro-economics and long-term productivity issues, which are important but hardly relevant to the debate of macro-economic trends in the EU to which the UK should be contributing.
If we are bothered about influencing debates and the positions of our EU partners, surely we should be sending documents that give our view on what they are doing. This House should be debating what the Government are proposing to tell our EU partners about how their economies are performing and the eurozone is going. We are not given such information or a chance to debate a very important matter. As the hon. Gentleman said, the Government should be writing those documents, presenting them to the House and sending them to Brussels—not this absolute nonsense.
Does the document improve the knowledge of our EU partners of the UK economy? Clearly it does not, as the hon. Gentleman set out in great detail. For obvious reasons, it is out of date. Presumably it was written in January or February and many changes have taken place in the United Kingdom and the world economies since then. For example, paragraph 2.26 on page 24 of the Red Book states:Manufacturing output growth was the fastest for six years, but continued to lag behind the expansion in services.The document makes other references to how the manufacturing sector is doing quite well. However, according to national statistics for the first quarter of this year, manufacturing output fell by 0.7 per cent. That is a worrying development, but it is not mentioned in the Red Book, which is again Panglossian about an important sector of the UK economy.
The Chancellor used to go on about manufacturing when he was in opposition. An evening did not seem to go by without him appearing before a television camera telling us about the importance of that industry. He seems to have forgotten that now that he is in government. His policies do not seem to be developing the manufacturing sector—the document is clearly remiss on that.
I shall not go on about the imbalances, as the hon. Member for West Dorset (Mr. Letwin) did. I share his analysis—it is good that the Conservatives and Liberal Democrats have that in common. However, the document clearly failed to improve our EU partners' knowledge and understanding of the UK economy. At the summit after its publication, the forecasts for the UK's public finances for 2005–06 were available and the Chancellor was rapped over the knuckles by our EU partners in the Commission for running a sustained deficit of 1 per cent. of gross domestic product. His remarks when he returned were terse. He said that our EU partners had got it wrong; they did not understand that his approach was cautious and prudent and that the deficit related only to investment.
I think that the Chancellor was right. I understand why he was so annoyed by the EU partners and the UK press coverage of what they said. It goes to show that the document does not properly explain the UK position. It is not written for that purpose. If we want to ensure that our EU partners understand the UK strategy, we should write a document that tries to do that. The Government are failing in their mission.
I imagine that the Minister will say that the Commission was worried about the UK's performance not against the Maastricht criteria, but against the broad 121 economic policy guidelines. They are vague and have no binding effect if a country breaches them, and she would be right to explain that. Nevertheless, there is no mention of those broad economic policy guidelines in the document or of how the UK is performing against them. There is not even a proper analysis of how it is performing against the Maastricht criteria. The document has no intention of addressing the purpose for which it is supposed to be approved by the House. Again, it fails in its prime purpose.
The third reason why we might want to send the document to the Commission and our EU partners is to enhance the UK's position in future negotiations and discussions about what is in the interests of the UK economy, perhaps because we are thinking of negotiations in the run-up to a possible entry to the single currency. The most important negotiations in the next few years are those on UK entry, except that the document is almost silent on that. There is a box on EMU preparations taken solely by the UK Treasury within the domestic economy, but it has nothing to do with negotiations or the exchange rate. That is where the document is most lacking.
I spent an interesting 15 minutes prior to the debate trying to find references to the exchange rate. They were difficult to find. Perhaps I missed a few references in my brief flick through the document, but the first mention of the exchange rate that I found was on page 163. One might have thought that the exchange rate would be rather more important in the assessment of economic policy, but it merited no earlier mention than that.
§ Mr. Letwin
We cannot allow this golden opportunity to pass without asking the hon. Gentleman whether he would like to state—for the first time ever, I think—whether the Liberal Democrat party also has an exchange rate policy, and if so, what is the target exchange rate?
§ Mr. Davey
I am sorry to disabuse the hon. Gentleman, but in several speeches Liberal Democrats have explained our exchange rate policy. In the debate on the economic aspects of the Queen's Speech, my hon. Friend the Member for Truro and St. Austell (Matthew Taylor) set out our policy clearly, but so that the hon. Gentleman does not have to consult Hansard, I shall remind him of what my hon. Friend said.
About 18 months ago, the Liberal Democrats commissioned a panel of experts to consider what preparations the UK should make—including in respect of the exchange rate—before putting the question on joining the single currency to the people. That panel proposed a range of values—1.25 to 1.45 euros to the pound—at which it thought that, if the UK entered the single currency, it would do so at a competitive rate.
That conclusion was published about a year ago, so it might now be out of date, but our aim in appointing the panel and publishing its conclusions was to start a debate in this country on what might be a sustainable long-term exchange rate for the pound against the euro. That is a debate in which we would be happy to engage and one in which we hope the Conservatives and the Government will engage as well, because it is extremely important that we start to influence our EU partners in terms of a sustainable rate.
§ Mr. Letwin
I did not ask the hon. Gentleman what rate his panel of experts—of which I was aware—thought 122 might be appropriate for entry. I asked what is the target exchange rate. Let me put it this way: would the hon. Gentleman sponsor measures to manipulate the UK exchange rate to that target rate; and if so, what measures?
§ Mr. Davey
Again, I refer the hon. Gentleman to the speech made by my hon. Friend the Member for Truro and St. Austell. Liberal Democrats have said that the very fact of the Government saying that they intend to join the single currency and putting the issue to the people will cause a market correction.
If the hon. Gentleman doubts that, I refer him to events that took place several weeks ago. After the Labour Government were re-elected, the markets assumed that it was more likely that the UK would enter the single currency and the pound-euro rate adjusted very quickly. Bizarrely, Her Majesty's Treasury and the Bank of England stepped in to stop a depreciation in the pound, even though that depreciation was welcomed by the manufacturing sector, agriculture and the tourism sector throughout the country—indeed, it was a depreciation that people had been seeking for some time.
§ Mr. Davey
Indeed, including people in the hon. Gentleman's West Dorset constituency. That was a valuable depreciation. That chain of events reinforces our argument that if the British Government could come clean and get rid of the ambiguity that surrounds their position—it is the only thing about their position that is clear—the markets would adjust. Then, we could begin a debate with the markets, with our EU partners and within the House on what would be a sustainable rate at which we might enter the single currency.
§ Mr. Letwin
I assure the hon. Gentleman that I shall not pursue this issue more than one step further, but it is important that we know the answer and we appear to be getting somewhere. If the medicine that he has just recommended did not, in his view, cure the patient—in other words, if the statement of a target rate of entry did not produce an adjustment to that rate—what other active steps, if any, would the Liberal Democrats recommend taking to manipulate the exchange rate?
§ Mr. Davey
The hon. Gentleman should talk to those of his colleagues who set the rate for sterling when we went into the exchange rate mechanism. They did not have measures to manipulate the rate; instead, the Government fixed a rate. Unfortunately, when fixing the rate, they failed to carry out proper negotiations with our EU partners and the other members of the exchange rate mechanism. Instead, in a move that caused great problems, they told our EU partners, "That's the rate we're going to go for."
To answer the hon. Gentleman, it is possible that the Government could take that line. If they did not think that the market rate was correct—that it was either too low or too high—they could set a rate by negotiation with our EU partners. Indeed, that is what several countries did in the run-up to the adoption of the euro in mainland Europe. They made clear their decisions as to which direction they wanted to take, so the markets glided into sustainable rates.
123 The problem, and the problem with the document, is that the UK Government are not attempting to do that: there is no attempt to influence the medium-term equilibrium exchange rate for sterling and to ensure that our negotiations are built on past statements. Both last year and the year before that, I made that point in Committees that were undertaking a similar function to the one in which we are currently engaged. At that time, the Red Book seemed extremely complacent about the exchange rate—worryingly so—because the rate was causing such great problems. However, the Government's pronouncements in the Red Book seemed to deny those problems. I pointed out to the Government that it was against Britain's long-term interest to send documents to Brussels and Strasbourg stating that the current rate of exchange was not a problem.
When those negotiations take place, our European partners will be able to dust down those documents, which we think are of no concern, and will say to the UK Government, "Hold on. In 1999, in 2000, in 2001, you sent us a document which said that the exchange rate was not a problem. You said that it was not affecting your tradeable sector, your agriculture and your tourism." That would weaken our hand in negotiations. It is a very silly thing to do.
§ Mr. Barry Gardiner (Brent, North)
Although I hesitate to support the hon. Member for West Dorset (Mr. Letwin), the hon. Member for Kingston and Surbiton (Mr. Davey) has still not answered the question about Liberal Democrat policy: if the markets did not glide into the appropriate exchange rate that he identifies as Liberal policy, what further active measures—if any—does he suggest that a Liberal Government would pursue in order to achieve that effect?
§ Mr. Davey
Let me surprise the House by giving the hon. Gentleman a direct answer. He was not listening properly to my reply to the hon. Member for West Dorset. We would negotiate a rate. The rate would be fixed when we decided. That rate could be higher or lower than the rate obtaining in the market at the time. We should have to see what the rate would be.
The serious point is that this document, which we propose sending to Brussels and Strasbourg, will be of no benefit for the long-term negotiating position of UK Ministers—whatever the Government. We are saying to our European partners that we are happy with sterling so over-valued. That message will come to haunt us.
When the House votes on the motion, Members on the Liberal Democrat Benches will vote against it. The document does the Government no favours in the way that it sets out the UK's economic position for our EU partners. That will prejudice the long-term interests of this country.
§ Mr. Desmond Swayne (New Forest, West)
My hon. Friend the Member for West Dorset (Mr. Letwin) was forensic in exposing the imbalances in the economy to which the Financial Secretary did not draw attention. I share one particular view with my hon. Friend: I am not too concerned about a trade imbalance, if it can be 124 financed. It is worth remembering that even when this country was at the height of its economic power, as the workshop of the world, we persistently ran a balance of trade deficit on merchandise trade. At the time, that was largely financed by services, especially shipping. Now, of course, it is financed largely by inflows of capital. With the willingness to continue to finance that will come the adjustment in the exchange rate necessary to correct the overall merchandise trade imbalance. That is the economic theory. The reality will be rather less pleasant, as the correction is not necessarily one to which we should look forward in terms of its consequences for the real economy and real jobs.
I shall concentrate on a slightly different aspect of the Minister's remarks. She set out cogently the objectives of the process—to maintain quality of life and what she called a high level of social protection. She drew attention to the Government's ability to spend, for example, £1 billion more on the health service as a consequence of the Budget.
The Government's chosen measure of that high level of social protection and high quality of life is the health service. That is reflected in the Prime Minister's words when he promised the people world-class public services. In other words, we must compare our public services with the best. In comparisons in terms of outcomes, we are way behind those in whose league we should be. The Government, however, have chosen to measure by input and throughput. The input measure that they chose was the average spend as a proportion of gross national product on, for example, health care.
The hon. Lady's £1 billion will not take us very far. The Government chose as a measure the average EU spend on health, but their method of measuring the average was a little awry. For example, according to the Government, the way to measure the average health expenditure of Belgium and Germany is to add the two together and divide by two—not a very precise measure of actual expenditure in those two economies on any weighted basis.
The other trick is to include the United Kingdom in that equation, so that our lacklustre performance brings down the average that is to be our target. If we removed those distortions from the Government's calculations, I suggest that to reach the level of gross national product spend that should be the Government's target if they adhere to the criterion of world-class public services, they would need to spend another £20 billion a year. To make that up would require much more than the £1 billion to which the hon. Lady drew attention. A 30 per cent. increase in income tax would be necessary.
The Government have ruled out the possibility of that additional resource coming from any source other than public revenue. The proportion of GNP spent by other European Governments on health is broadly the same. The difference comes from the additional resources that our economic partners get largely from private sources, which we continue to deny ourselves. On 26 June the Secretary of State for Health said in the Chamber that happily, health provision in this country is through a monopoly supplier in the form of the NHS, and so long as there is a Labour Government, that will remain.
§ Mr. John Bercow (Buckingham)
I am grateful to my hon. Friend for giving way. Surely the phenomenon on 125 the continent that he describes is not evanescent; it is enduring. Given the advances in medical science, which we welcome, and the corollary—that whenever we devise a new cure, we create a new queue—we ought properly to focus on the way in which private resources can effectively complement the role of public provision in turning care from a word to a deed.
§ Mr. Swayne
That is an important point. My concern about the Government's determination to retain a monopoly in respect of health care arose from what the Economic Secretary said about the need to increase productivity. She said that she intended to increase productivity, and to do so in the public sector in particular. That prompted my intervention, but she did not answer my question, as it concerned the role of competition. She drew attention to the fact that we needed more competition to achieve greater productivity. However, my question is this: how does that fit in with monopoly supply in the public sector? If Labour Members believe that monopoly supply is the way to produce greater productivity and a better public service, they belong in a mausoleum in Red square, rather than in a modern economy. That is what the Soviets believed, but such a system did not work or deliver.
Let me move from that particular measure to the general rationale for the debate. The decision to publish information to be supplied to the European Union as a measure of our economic performance is not made in a vacuum. It has an aim that stems from the Maastricht treaty, whose overwhelming purpose was to secure economic and monetary union. The purpose of publishing the information and supplying it to the European Union is to provide a measure of our performance in reaching the objective of economic and monetary union.
It was on that score that the Economic Secretary's speech was entirely lacking. She made not the slightest mention of such measurement, but it is especially important, as the Government will at some stage publish their estimate of how the United Kingdom economy is converging. It would have been interesting to have been given in this debate at least some measure of how that process is proceeding, but such information was entirely absent from her speech, which was the feast without Banquo's ghost in that respect.
If the purpose of the Government's policy is, as we must assume, to secure an increase in economic growth over time that is steady rather than variable—in other words, to try to iron out some of the variances in the trade cycle by providing a stimulus in the trough when unemployment is increasing and a restraint at the top when full employment is approached—the issue of convergence is vital. For that policy to continue if we have the same interest rate as our Union partners, as would happen if we were to achieve the objective of economic and monetary union, it would be vital for those economies to move in the same economic cycle, so that the troughs and peaks coincided. It would be necessary to ensure not only that the stimulus of a reduced interest rate arrived at the right moment and did not exacerbate inflation, but that the reduction in the interest rate did not arrive at the wrong moment and so exacerbate unemployment.
Those conditions are vital for any pursuance of the economic objectives of high social protection and so on to which the Economic Secretary drew our attention, 126 but she gave no measure of our progress towards such convergence. In that respect, I found her speech extraordinary.
§ Ruth Kelly
I thank the hon. Member for West Dorset (Mr. Letwin) for his kind words about my appointment and for introducing a lighthearted note into the debate. I am glad that he had sufficient time in the election campaign to consider the state of the world economy. Perhaps he had slightly more time than he anticipated.
Before considering the detailed points, many of which were interesting, it may be helpful to remind hon. Members of the motion, which asks the House to approve the Government's assessment in the Budget report of the medium-term economic and budgetary position. Passing the motion will enable the United Kingdom to make an effective contribution to multilateral surveillance in the European Union.
I shall consider some of the detailed points that were raised during the debate, and begin with those of the hon. Member for West Dorset. He was right to point out that world growth has slowed. Indeed, as we projected in the Budget, the growth rate of the world's major economies is expected to halve this year. No country can insulate itself from world economic events, but the UK policy remains well placed to respond to economic developments. We have a framework that means that we are better able to cope with any downturn in the world economy. Nearly all commentators expect continued growth with low inflation in the UK. The assessments of the European Central Bank, the International Monetary Fund and the Organisation for Economic Co-operation and Development are all in the range of 2.5 per cent. to 2.7 per cent. this year.
§ Mr. Letwin
Does the Economic Secretary accept that I did not challenge that? I asked whether current imbalances showed that the underlying economic trends were more worrying.
§ Ruth Kelly
I was about to tackle the numerous imbalances that the hon. Gentleman mentioned. There were so many that I almost lost count; perhaps he will forgive me if I forget to mention a few.
First, he mentioned the trade deficit. Perhaps he agrees that some increase is to be expected during an international slowdown. As he said, the trade deficit can readily be financed. The forecast in the Budget for the current account deficit is 2.25 per cent. of GDP this year, compared with a trade deficit of 4.25 per cent. under the previous Government in 1989. That did not prove difficult to finance. Total goods export volumes will be 5.5 per cent. higher this year than last year.
Secondly, the hon. Gentleman referred to the regional imbalance. The Government are taking action to improve regional economic growth with the new regional development agencies, which will play a key strategic role in driving economic development forward. In the 1980s, the Conservative Government stood back from promoting regional economic development. If they had a policy on the regions, it was to run down already disadvantaged areas so that they were in an even more desperate position.
127 The hon. Gentleman mentioned the two-speed economy. Record employment growth clearly increased household wealth, and high consumer confidence is increasing consumer demand. As I said earlier, we cannot insulate ourselves from a downturn in the world economy, but the answer is not to massage the exchange rate down artificially, but to steer a course of stability through the economic slowdown.
The hon. Gentleman made no suggestions for promoting a better economic policy. I was looking forward to hearing him spell out the way in which he would initiate £20 billion of spending cuts. However, he made no proposals.
It being one and a half hours after the commencement of proceedings on the motion, MR. DEPUTY SPEAKER put the Question, pursuant to Standing Order No. 16 (Proceedings under an Act or on European Union documents).