§ The Parliamentary Under-Secretary of State, Department for Culture, Media and Sport (Lord McIntosh of Haringey)
rose to move, That this House takes note with approval of Her Majesty's Government's assessment as set out in Budget 2004 for the purposes of Section 5 of the European Communities (Amendment) Act 1993.
The noble Lord said: My Lords, this debate gives us the opportunity to discuss the information provided to the European Commission. Each year, the Government report information to the Commission on our main economic policy measures. The procedure is set out in Articles 99 and 104 of the EC treaty, which relate to the broad economic policy guidelines, convergence and stability programmes and the excessive deficits procedure. The objective is to ensure that the economic policies of member states are consistent with the goals of the treaty, including non-inflationary economic growth, a high level of employment and social protection, and better living standards for citizens across both the UK and the European Union. Those goals are consistent with the Government's own approach to economic policy.
Section 5 of the European Communities (Amendment) Act 1993, usually known as the Maastricht Act, requires Parliament to approve the information sent by the Government to the Commission for this purpose. We had a debate under Section 5 on 16 December 2003 to discuss the UK's 2003 convergence programme, which was submitted to the Commission late last year. That report set out in some detail the Government's economic and fiscal policies. This debate focuses on the data transmitted to the Commission under the excessive deficit procedure, which is a more technical procedure for ensuring the Commission has the most up-to-date information, and is not accompanied by the full report, as the convergence programme is.
To help to facilitate this debate, we therefore need to look to the Government's strategy for economic policy which is, most recently, set out in the Budget, both published earlier this year. That material forms the basis of the forecasts that we send to the European Commission and is subject to the usual parliamentary scrutiny and approval. The background for this debate is one in which the United Kingdom has successfully weathered the recent global economic downturn, and is enjoying unprecedented macro-economic stability. More specifically, not only is the UK experiencing its longest expansion since records began, with sustained 544 growth for 48 consecutive quarters, but it managed to maintain this record during the recent downturn, while all other G7 economies experienced at least one negative quarter of growth. Alongside that impressive growth record, the UK is also enjoying the longest period of sustained low inflation since the 1960s and, at the same time, interest rates remain low by historical standards.
As a result of the strong macro-economic framework, the Government have been able to deliver record high rates of employment, and record low rates of unemployment, with 1.8 million more people in work now than in 1997. As always, we will continue to maintain the fiscal discipline that is always at the heart of our strategy for long-term stability. In the Budget, the Chancellor announced that we were on track to meet our fiscal rules. Debt this year is forecast to be just over 34 per cent of national income compared to 44 per cent in 1996–97, and well below the 40 per cent ceiling of the sustainable investment rule. Because of this, the Treasury is able to afford all of our existing commitments abroad and at home, and yet to release extra resources for the nation's priorities in the years leading up to 2008.
Historically, the UK's productivity performance has lagged behind that of other major economies, with a sizable gap compared with the United States, France and Germany. The Government's approach is to raise productivity centres around maintaining macro-economic stability to allow firms and individuals to invest for the future and implementing micro-economic reforms to remove the barriers which prevent markets from functioning efficiently. The Government have examined the challenges and pressures that face the nation and are determined to make the right long-term spending plans for Britain. From our position of economic stability and growth, we are in a position to invest more, not less. This summer's spending review set departmental spending plans up to 2007–08, locking in the step change in resources delivered in the three previous spending reviews and announcing extra resources to be delivered to our priorities.
In the competitive global economy of the future, it will be the intellectual capital of our country that will drive its economic growth. It is therefore imperative that we invest in our children's education, in adult skills and training, and in science, innovation and enterprise. These are the investments that will enable us to reach our potential as individuals and as a nation, and to make Britain a world leader of the future global economy. That is why the plans we have announced in the 2004 spending review focus extra resources on delivering that investment in the drivers of our future prosperity.
§ Lord Sheldon
My Lords, I regret that I shall be unable to take part in this debate, because I cannot stay for my noble friend's winding-up speech. One particular matter that concerns me, however, is the state of the economic cycle. It looks as if we are well on course to meet the target, and the rest of the programme has been very good. But while we know the beginning of the economic cycle, we do not know 545 when the end will be. Will it be 2005–06, or is it adjustable? We do not know the future, and we cannot say when the end of the economic cycle will come.
§ Lord McIntosh of Haringey
My Lords, we have discussed that matter in the House in the past week or so, and I told the House that the Government's estimate is that the current economic cycle will end in the year 2005–06. There is nothing prescriptive about that, however. It is simply an estimate of something not entirely precise. In that sense, the noble Lord is entirely right.
Our decisions in the spending review mean that we can confirm new resources for vital public services, including increased resources for health, crime and justice and affordable housing. To support those spending plans for the future, the public sector will seek, as always, to deliver value for money. That will allow the Government to release additional resources to the front line without compromising our ambitious programme of public service delivery.
Sir Peter Gershon has worked with us to identify how changing work practices, better technology and better procurement can help to free up the resources that we need to allocate to front-line services. In addition, the Government have made it clear that our policies to invest in education, skills, science and innovation are not bought at the price of fairness. They are underwritten by policies for achieving full employment and tackling child and pensioner poverty. As a result of our measures, employment has risen to record levels and unemployment remains close to its lowest since the 1970s.
The Government want all children to have the best possible start in life, with opportunities to develop their full potential and lead fulfilling lives. We have set an ambitious long-term goal to halve child poverty by 2010 and eradicate it by 2020. The Government also believe that a fair society guarantees security in old age and ensures that all pensioners can share in rising national prosperity. As a result of measures introduced since 1997, the Government are spending around £10 billion extra on pensioners. Building on the foundation of support for retirement income provided by the basic and additional state pensions, the Government launched the pension credit in October 2003 to tackle pensioner poverty and reward savings.
Our hard-won economic stability and sustained growth allows the Government to commit to more, not less, investment in the areas that matter to this country. It is investment that will enable Britain to develop into a world economic leader of the new global age. That is the programme set out in the 2004 Budget and, with the approval of the House, that is the basis on which we will send updated information to the European Commission. We are fulfilling our commitment under the Maastricht Act to report on our main economic policy measures, and are maintaining our position, developed by this Government, at the heart of the EU policy process. I beg to move.
546 Moved, That this House takes note with approval of Her Majesty's Government's assessment as set out in Budget 2004 for the purposes of Section 5 of the European Communities (Amendment) Act 1993.—(Lord McIntosh of Haringey.)
§ 11.15 a.m.
§ Viscount Trenchard
My Lords, I am grateful to the Minister for introducing the debate, and honoured to have been selected to speak immediately after him, an ordeal that I have not previously suffered in your Lordships' House.
I did not at first understand what the debate was about. I understand that parliamentary approval is required for the information that the Government submit to the European Commission regarding their economic policy measures and that, as the noble Lord explained, the information is based on the financial statement and Budget published in March this year. Is he happy with a situation whereby the House only has an opportunity to debate the Government's submission seven months after publication?
When the matter was debated in another place, Mr Stephen Timms, the Financial Secretary to the Treasury, explained that,the UK has successfully weathered the recent global economic downturn and is enjoying unprecedented macroeconomic stability".—[Official Report, Commons First Standing Committee on Delegated Legislation, 19/10/04; col. 3.]The noble Lord said much the same today. He also spoke about our improving productivity performance but acknowledged that, compared with the United States, the gap remains stubbornly large. However, the European Commission is responsible for the introduction of a great amount of complicated regulations, bureaucracy and red tape which make it so very difficult for us to achieve productivity levels close to those of America.
I should be interested to hear the noble Lord's opinion on why the budget deficits of both France and Germany have increased since the introduction of the euro, and what he thinks would be the effect on our historically relatively low levels of borrowing should this country eventually decide to adopt the single currency. I also wonder how important he considers the submission to be, given that the stability and growth pact is now totally discredited following the Commission's inability to apply sanctions against France and Germany following their breaches of the 3 per cent budget deficit limits.
It is widely believed across the country that Her Majesty's Government are a conservative government. Although many deplore the expensive, piecemeal, asymmetric constitutional reforms that have been implemented, many of the same people are prepared to defend the Government's record in economic management. The Minister displayed a good measure of confidence and satisfaction with the economy, as he is habitually disposed to do. Indeed, he has previously said that he considered it his,privilege to present a Budget which is a tribute to the guardianship of our economy of the Chancellor of the Exchequer over a period of seven years".—[Official Report, 20/7/04; col. 212.]547 The noble Lord is very plausible and persuasive, and what he says about the economy is commonly believed to be the truth, even among many of those who are not natural allies of the Government. But after seven years, the real position is becoming clearer. The spinning is no longer convincing. People are finally becoming aware that the Government are taking for themselves an increasing proportion of their income and giving nothing in return. There is no perceptible improvement in public services. The noble Lord said that:Rather than saying that there is no jam today people always say that there will be disaster tomorrow" .—[Official Report, 20/7/04; col. 208.]But people are now saying that the jam jar is already empty, and that certain aspects of the economy which looked good in 1997 now look rather less satisfactory.
Today is not the day for another debate on pensions. However, an assessment of the economy would be defective if it did not cover that. As people live longer and the ratio of those engaged in the productive economy to those who are not deteriorates, a healthy pensions sector and savings culture become ever move crucial. As the Economist pointed out in its leader on 16 September, Britain's pension system was in good health when this Government came to power in 1997. The article stated:
British politicians pointed disparagingly at the problems in continental Europe, and prided themselves on how well things had been managed over here".Now, as your Lordships are well aware, our pension system is in a mess. The Government should recognise their serious error and abolish the stealth tax of £5 billion a year that they applied through the abolition of advance corporation tax credits on UK dividends, so that our pension funds no longer have to pay tax on funds that have already been taxed. The real effects of the abolition of ACT credits is actually greater than £5 billion a year because of the cumulative effects of pension fund managers reducing their weightings in UK equities, leading to large-scale selling of shares, lower share prices and a depressed under-performing stock market. This has produced a disadvantageous capital markets background for British companies competing in an increasingly global and international market.
I earnestly hope that if this Government will still not recognise the disastrous consequences of one of their significant early acts, a future Conservative government will restore pension funds and charities to the proper advantageous position that they deserve to enjoy. I speak also as a former trustee of the Royal Air Force Benevolent Fund whose ability to provide direct charitable assistance has been reduced by some £1 million each year since the implementation of the tax.
The Government have not only harmed the environment for pension funds, they have seriously damaged the savings culture through their progressive removal of the incentives which had been provided by PEPs and TESSAs. The reduction of the maximum amount that can be invested annually in an ISA, coupled with the abolition of the 10 per cent tax credit, has also caused further damage to the stock market.
548 One of the hallmarks of this Government is to make everything more complicated and difficult than it need be. To some extent this is because they do not like to admit their mistakes and adopt U-turns. The introduction of the new 19 per cent corporation tax, or "charge on non-corporate distribution", as I believe it is called, is a case in point. It takes up four pages of the Finance Act and is so difficult to understand that many chartered accountants are unable to explain when it is payable and when it is not. It would have been so much simpler and would have had the same effect if the Chancellor had been prepared to admit his mistake and adopt a U-turn. With one line only in the Finance Act, not four pages, he could have reduced the recently-introduced nil rate band of corporation tax from £10,000 to, say, £5,000—or to whatever figure would produce the same net effect as his new tax. It is ironic that the real victims of this tax increase are small companies earning less than £50,000 a year, which need the most help in building thriving businesses on which our future prosperity so crucially depends.
The Minister said that the Government's aims include the achievement of better living standards for all our citizens. I do not think that this new tax or, indeed, the many other tax increases introduced by the Government will do anything to achieve their declared aims. I thank your Lordships for listening and I look forward to the speeches of other noble Lords.
§ 11.24 a.m.
§ Lord McKenzie of Luton
My Lords, I rise to support my noble friend the Minister on the Motion. He has explained the economic objectives of the Government to build a strong economy and a fair society, and has rightly asserted their strong performance in delivering those objectives.
I propose to concentrate most of my remarks on the issues of achieving social justice and maintaining investment in public services, recognising, as does Budget 2004, that their attainment must be founded on a strong economy. Before I do, however, perhaps I may comment briefly on the withdrawal of the imputation credit to pension funds. It is a bit rich to concentrate on the Government's act in 1997 without recognising that that act was accompanied by a reduction in the rate of corporation tax. Furthermore, previously, in 1979, the imputation credit was worth £43 to a pension fund on every £100 of dividend. In successive measures the preceding government reduced that until we inherited a rate of 25 per cent. I do not say that those reductions were by stealth, but the previous government withdrew almost the same amount as this Government have, but over a longer period.
Much has been made of the pressure on public finances, but it is easy to forget how far we have come in establishing a robust framework for these matters. Contrast our current situation with the Government's inherited position, where between 1990–91 and 1996–97 net public sector debt rose from 27 per cent to 45 per cent of GDP. Government receipts for 1996–97 stood at 38 per cent of GDP.
549 The Government's record on tax stands strong comparison with our counterparts in Europe. Information from Eurostat in July this year shows that for the latest year for which figures have been analysed, as a percentage of GDP, the UK's tax burden was the 17th lowest of the enlarged 25 EU members and the 14th lowest of the 15 old EU members. In 2004, the UK's top personal income tax rate and its effective top statutory tax rate on corporate income were below the average for the 15 EU states.
Budget 2004 demonstrates how our economic strength has enabled progress in delivering higher quality public services; none more so than in education. Education spending has been funded to grow at an average of 4.4 per cent in real terms across the spending review. By 2007–08, it will amount to 5.6 per cent of GDP.
Investing in education lies at the heart of tackling inequality and exclusion and is an essential prerequisite of a future healthy economy. If I look away from the macro numbers in the Red Book to the practical effect of that on a single local authority, Luton—on which I still serve and in which I disclose an interest—I see that the impact has been enormous. In 1996–97, our education revenue budget was £76 million. For the current year, it is £122 million. Capital spending on local schools over this period has topped £60 million, with more to come from Building Schools for the Future.
Improving educational attainment and achievement is not only about money. However, this investment by this Government is helping in a dramatic way to improve the life chances of our young people. What is happening locally in Luton is being mirrored across the country. This is not spin. It is real investment, real progress and real delivery.
Budget 2004 reported explicitly on the strategy for building a fairer society, particularly the steps being undertaken to tackle child and pensioner poverty. Tackling child poverty requires action on a range of fronts, but it certainly requires measures to tackle income poverty in households with children. As the Minister said, the Government have set themselves clear targets in this regard to halve child poverty by 2010 and eradicate it by 2020.
We know that by the mid-1990s the UK had one of the highest proportions of children living in low-income households among the member countries of the OECD. It had more than doubled since 1979. It was a national scandal. We also know that children living in low-income households during their lives are more likely to experience low educational attainment, low self-esteem and aspirations, higher risks of social exclusion and engagement in crime and significantly lower lifetime earnings. It is a cycle of disadvantage which has to be broken, and it is being broken.
By universal measures such as the national minimum wage and targeted measures such as the working families tax credit—now the child and working tax credit—the strategy is working. By the end of the current year, support for children, through a variety of means, will have increased by £10.4 billion 550 in real terms from its 1997 level; a rise of 72 per cent. The poorest 20 per cent of families have received over 40 per cent of the additional provision. Tax credits are benefiting 10.4 million children in 6 million families.
The Institute for Fiscal Studies has independently reviewed the Government's progress on their near-term target of wanting child poverty to fall by a quarter of its 1998–99 level by 2004–05. Its conclusion is that this target, when measured both before and after housing costs, will be met. That is a proud achievement, but there is still more to do.
Tax and benefit systems impact in an even more significant way on the incomes of retired households. In its June 2004 Economic Trends 607, the Office for National Statistics demonstrates, not surprisingly, that the disparity of "original incomes"—that is, incomes before government interventions—is much wider than disparities of post-tax incomes for retired households; that is, measured after benefits, retirement pensions and direct and indirect taxes. That is to say, for retired households, the tax and benefit system produces a larger reduction in inequality of income than for non-retired households.
We know that the result of government initiatives is that the number of pensioners living in absolute poverty has reduced by two-thirds, from 2.7 million to 0.9 million. When noting with approval the Budget 2004 assessment, we should applaud the fact that as a direct result of measures included therein and prior changes to the tax and benefit system introduced since 1997, pensioner households will, on average, be £1,350 per year better off, with the poorest one-third being on average £1,750 better off in real terms. The poorest third will be £600 per year better off on average than if the equivalent amount had been spent on raising the basic state pension.
Notwithstanding the challenges of take-up levels for measures such as the pension credit, this approach of targeting resources has made a significant change to the lives of many. Those who argue to reverse it will be distributing resources from the poor to the less poor and to the rich. There is generally a tension between equity and complexity in the design of tax and benefit systems, but I would not support a more simple system for simplicity's sake which disadvantaged the poor.
So Budget 2004 marks further significant progress in tackling child and pensioner poverty. The challenge of tackling wider issues of income and wealth inequality have yet to be overcome. Income inequality in the UK rose dramatically during the 1980s and has remained fairly static since 1993. The measures of inequality improved in 2002–03, but data for later years will be needed to be sure that there is a downward trend. What the research shows is that income inequality would have widened significantly without the measures, including those in Budget 2004, undertaken by the Government.
The most recent comparative data for the EU—it does not reflect changes to the UK tax and benefit system since 2001, which would have improved our position—show that on measures of income equality we are the fourth most unequal country in the erstwhile EU 15. So there is much to do.
551 Building and sustaining a fairer society cannot only be about redistributing current income. It must be about promoting a strong and growing economy and enabling all who can to participate in its success. It is about removing barriers which would otherwise consign people to the status of unemployment or of low pay. This is what the Government's strategy is about and why we should support it.
§ 11.35 a.m.
§ Lord Pearson of Rannoch
My Lords, I rise to oppose this Motion, because, in common with a growing majority of the British people, I do not think that we should be reporting subserviently to Brussels about the state of our economy at all, let alone that we should be doing so with approval.
Noble Lords will doubtless be aware of the most recent poll published by the Mail on Sunday showing that some 60 per cent of respondents now support leaving the European Union and continuing our free trade with it. "Aha!", the Government and our dwindling band of Euro-philes will doubtless bleat, "but how are you so sure that we could continue our free trade with the single market if we left the political construct of the EU"? The answer is of course because we are the EU's largest client. It sells us very much more than we sell to it; indeed, our trade deficit with it is at record levels and growing.
It is really quite amusing to see how the Government attempt to avoid the obvious conclusion which flows from this situation—most notably in a Written Answer as recently as two days ago at col. 33 of Hansard. That conclusion is that the euro-zone has many more jobs dependent on its trade with us than we do on our trade with it. And so if we left the political construct of the EU, it would be very keen to secure a free trade agreement with us. Could I take this occasion to ask the noble Lord, Lord McIntosh, whether he would be good enough to confess and confirm this obvious state of affairs today?
There is of course another reason why the British people support leaving the EU and thus the need for this demeaning debate. This is that they are starting to see through the Government's principal piece of euro-propaganda, which goes as follows: "Sixty per cent of our trade and 3 million jobs depend on our membership of the EU". End of propaganda. They are starting to realise that in fact only some 10 per cent of our economy supports our trade with EU countries; that none of it would be lost if we left the EU and continued our free trade; and that Brussels diktats apply to and strangle the whole 100 per cent of our economy, including the 80 per cent which stays in our domestic economy and the remaining 10 per cent which supports our other overseas trade.
It is not only British euro-sceptics who are starting to see through the whole European dream. The penny appears to be dropping even with the much respected German Bundesbank. So I conclude by asking the Minister to comment on the Bundesbank's recent statement that it can find no evidence that either the euro, or indeed the single market, have proved to be of 552 any benefit to the German economy. The same presumably goes for the other euro-zone countries and indeed for our own economy as far as the single market is concerned.
I look forward to the noble Lord's answers to the two questions I have put to him. I have to say that that would make a pleasant change.
§ 11.38 a.m.
§ Lord Newby
My Lords, Prudence for a purpose is the title of this year's Budget report. It is a phrase by which this Chancellor of the Exchequer will probably be best remembered, not least because he has used it so often.
What does the Chancellor mean by "prudence"? More than anything else, he has defined prudence by his ability to keep to the two key rules which he has established—the sustainable investment rule and, more importantly, the golden rule. The principle of the golden rule—that current expenditure should balance over the economic cycle—is a good one, but for this Chancellor it is more than that. It is the single most important measure by which he has chosen to define his own success in office.
The Budget report is optimistic about the Government's ability to meet the golden rule over this cycle and into the future, but, since the Budget, this optimism has increasingly been questioned. Within the past fortnight, the Institute of Fiscal Studies has claimed that the Government are on course to break the golden rule. The National Institute of Economic and Social Research said last week that the chances of meeting the rule are at best 50:50 and, depending on when the cycle is deemed to have ended, it could be a lot less. Last week, the chief UK economist at Barclays Capital said that the rule had been broken and that the Chancellor was "lying and cheating" if he claimed otherwise.
What are the areas of dispute? First, when does the cycle run to? That question was asked earlier in the debate by the noble Lord, Lord Sheldon. The working assumption, confirmed by the Minister, is that it will run to the end of the next financial year. It is important that we have clarity on that issue; otherwise, there will be a deep suspicion that moving the end of the cycle for political reasons will make all the difference to whether or not the golden rule is met.
The second problem is how one measures the deficit to determine whether the golden rule has been met. The Government have chosen to do that on the basis of the average current surplus over the cycle as a share of GDP. Martin Weale at the National Institute of Economic and Social Research believes that to be "plain wrong" in terms of methodology. But the effect of this choice of methodology, complicated though it is, is actually rather clever for this Government at this point because it gives greater weight to the early years of the cycle. That was very convenient, given that, at that point, the Government were building up surpluses. It will be far less convenient if they maintain this methodology into the next cycle because at the beginning of the cycle they are jolly well not going to 553 have surpluses and, given their own bias in the rules to end up with a balance over the next cycle as a whole, they will find it much more difficult.
Another issue which is undermining people's faith in the ability to meet the golden rule is that current expenditure appears to be rising faster than expected in the Budget. In the first six months, it rose by 6.6 per cent, whereas it was anticipated to rise by 5.2 per cent. I should be interested to know whether the Minister thinks that the Government will be increasing current expenditure over the second six months at a significantly slower rate so that that overall annual increase of 5.2 per cent is met.
There is also considerable doubt about whether the Government's optimistic assertions in the statement on taxes and tax revenue will be met—not least in terms of corporation tax, which, indeed, rose significantly over the first six months of the year by some 15 per cent. However, given that the Government had pencilled in 22 per cent for the year as a whole, the projection clearly runs the risk of being missed.
What all these disputes show is that, far from being a clear rule, the golden rule is increasingly a muddy rule, with suggestions of murky redefinitions in the Treasury to keep the figures looking good. Given the importance of the issue and, more generally, of the reliability and basis of government tax and expenditure estimates, we on these Benches have suggested that a new body at arm's length from the Government should be established to audit the assumptions underlining the Government's tax and expenditure proposals.
At present, the NAO audits some of the assumptions, but the Government decide which and then use this partial audit as the basis for claiming that the whole Budget has been subject to rigorous external scrutiny. When, a couple of weeks ago, I suggested to the Minister across the Floor of the House that this function might be performed by a new fiscal policy committee, he said that there were plenty of committees already and that we did not need another.
As the Minister knows, we on these Benches always do our best to accommodate his concerns, and therefore my suggestion today is a variant of my earlier one; namely, that the National Audit Office should establish a separate unit which has as its sole function the analysis and audit of government taxation and spending assumptions.
Such a unit should be charged by Parliament, to which it would be accountable—but with government blessing—with the task of reporting formally at the time of the Pre-Budget Report and the Budget itself on the Government's fiscal performance and their plans. Its economic expertise would need to be strengthened and its line of reporting would be the Treasury Select Committee in another place. However, unlike at present, the NAO would be free to review whichever Budget assumptions it considered appropriate and make fully independent overall assessments of performance against the fiscal rules.
It is a suitably modest suggestion; it does not involve setting up a new quango or a group of highly paid wise men or women; but it would provide a genuinely 554 independent assessment within an established framework of parliamentary accountability. The Chancellor is in serious danger of losing economic credibility, and his reluctance so far to entertain such a modest degree of independent scrutiny feeds the suspicion that the Government have something to hide.
One of the other key assumptions underlining the Budget projection was that the Government would be able to achieve 2.5 per cent savings in expenditure through efficiency savings identified by the Gershon report, leading to annual savings of some £20 billion by 2007–08. That is an extremely bold programme. How is it to be achieved?
The Gershon report is a masterpiece of management-speak. It states that, to quote one example,back office change agents will",among other things,develop meaningful metrics and support bench marking".What does all that mean? Will the change agents he more James Bond or Johnny English? Gershon said that all will be revealed by the end of October, when all departments would publish on their websites efficiency technical notes explaining exactly what they were going to do to achieve the desired savings.
I suspect that not many Members of your Lordships' House have yet had the chance fully to examine the efficiency technical notes which duly appeared last week. I thought that it was appropriate to draw to noble Lords' attention merely those that were produced for the Treasury. Many of the principles which apply to the efficiency technical notes published by the Treasury apply across other departments.
The notes set out, or purport to set out, in great detail exactly how these savings are to be met. The Treasury, being a relatively small department, is due to make savings of some £11.9 million per annum by 2007–08. How is that to be done? Workstream 3 of the notes talks about procurement, which is clearly a very big item. Two areas are covered: information services (IT) and accommodation. Information services is the most difficult area of procurement, as every government IT project has demonstrated. So here we expect to find an absolute example of how this knotty issue of keeping costs under control is to be resolved. The notes state:Information Services—Review options to reduce costs associated with procurement of software and IT consultancy and equipment";that is, we are going to scratch our heads, look around and see what we can find. There is nothing there of any substance.
What about accommodation? This is a much more fruitful area. It states that economies of scale are going to be achieved through,sharing of services with partners (e.g. Post Room and Goods Inward with [Her Majesty's Revenue and Customs])".555 If there were ever a case of being able to count the paper clips but not seeing the big picture, those two paragraphs exemplify it. And the one consolation that one can draw from this statement is that Sir Humphrey is, indeed, alive and well in the Treasury.
The final element of the efficiency savings is to be found in the response of the Treasury to the Lyons report in terms of decentralising staff. Originally, the Treasury had a bold ambition to relocate 19 staff from central London to the regions. However, the efficiency technical notes say the following:This technical note also includes our relocation plans in response to the Lyons review. We are planning to relocate 11.5 [full-time equivalents] to a shared accounting function in Norwich".So, the total Treasury contribution to Lyons is elevenand-a-half accountants who are moving to Norwich. If it were not so important, it would simply be laughable.
We agree with the Government that any well run organisation should seek continuously to make efficiencies and the government machine obviously falls within that category. But what the Chancellor has produced is a bold claim for savings which, to date, looks more like a pipedream than a bankable promise. As a result of today's Motion, the EU will formally receive the Government's estimates for the economy for government taxation and expenditure. I hope that it will take at least some of it with a big pinch of salt.
§ 11.50 a.m.
§ Baroness Noakes
My Lords, the Minister was, as usual, scrupulous in introducing the Motion before us today, but I hope that he will forgive me if I cannot work up my usual enthusiasm for engaging in the debate. This day 399 years ago, Guy Fawkes tried to blow up the Houses of Parliament. I venture to suggest that if he dropped by today to find us engaged in a largely pointless piece of parliamentary procedure, he would have another go.
It is pointless because we are debating the Budget that the Chancellor announced nearly eight months ago. Your Lordships' House has already debated the Budget and the subsequent spending review in July of this year. It is also pointless because the Motion seeks approval for the Budget Statement in accordance with the European Communities (Amendment) Act 1993, which introduced a process without meaning. My noble friend Lord Trenchard forcefully made the point about the growth and stability pact being in a mess. I do not believe that the Chancellor cares much about Brussels' view of our economic policy and neither do we. In that respect I am with my noble friend Lord Pearson, although I am not necessarily with everything else that he said in his interesting intervention.
Lastly, parliamentary approval of this Motion is pointless. I understand it is required because the Labour Party forced its inclusion in the 1993 Act. Whatever Labour's motives were at the time, I am sure that the Minister now regrets that he has been dragged away from his day job on gambling, which surely needs his attention, to debate this.
I feel a lot better now that I have unburdened myself about the lack of purpose to our procedure. But as I am here, I shall not let the opportunity pass without 556 saying a few words on the economy, particularly in the light of developments since the Budget Statement in April. In doing so, I am conscious that I am in fact warming up for our debate on the upcoming Pre-Budget Report. In fact, if the Minister can share any intelligence on when we can expect the PBR, that would be very helpful. I am sure that the noble Lord, Lord Newby, and I would like to earmark a lot of time in our diaries for a debate on that.
The Minister, as usual, made it sound as though he were submitting the Budget Statement to Brussels with some pride. I have ceased to be amazed by the bullish tone that the Minister adopts when speaking about the Government's handling of the economy. He is very good at it. But I respectfully suggest that the Minister does not fully align style with underlying substance. Things are not as good as he would have us believe.
The regulatory burdens on business now amount to £100 billion on the Government's own figures; 15 new regulations a day since 1997 are squashing British business. The UK has slipped from fourth to 11th in the World Economic Forum's competitiveness league table, and is an appalling 22nd in the one produced by IMD. Productivity growth has fallen by over a third since 1997 and is the lowest in the English-speaking world. Our performance has been only half of that in Ireland in the past seven years.
Our productivity performance overall is held back by the truly appalling performance in the public sector. The Office for National Statistics has, I am sure, tried its hardest to help the Government out. But the truth is that the very best interpretation of the NHS shows that, despite all the money being poured in, productivity has fallen by at least 1 per cent each year. If the Minister tries to say again that, of course, that does not measure all the good things achieved by this Government, I will simply remind him that 5,000 people die each year from hospital-acquired infections—more than die on our roads.
We can see many signs of fat government. Promising Civil Service cuts, which the Chancellor did in July, sounded like a good start on turning the ship around. But we know that the Government have no form when it comes to delivering savings. The fact that sickness absence levels are among the worst in Britain and that in the last financial year another 12,000 civil servants were added to the Government's payroll are proof that the Government do not have a clue about managing public services. I enjoyed the critique by the noble Lord, Lord Newby, of the Civil Service's latest attempt to prove that it can become more efficient. We have no confidence that the Government will deliver on that.
As has already been referred to, in 1997 the Chancellor invented some rules to prove how good he was, the linchpin of which was the golden rule. The noble Lord, Lord Newby, has given an excellent critique of that. The Treasury, on its own too-clever-by-half rules, says that the current plans are within the rule by £11 billion. That is only 0.1 per cent. We hope that he will stay within the golden rule because, if he does not, he will start the next cycle, whenever it begins, with a deficit that will increase the certainty that taxes will be raised.
557 The noble Lord, Lord Newby, has already pointed to the growing chorus of serious commentators who believe that the golden rule will not be met, or will be met only if taxes are raised. The noble Lord, Lord McKenzie of Luton, may like to know that this morning his former firm, PricewaterhouseCoopers, joined that club of commentators.
We believe in lower taxes, but we are sure that the Government, if re-elected, will have to raise taxes. Tellingly, the Chancellor and his fellow Treasury Ministers have refused to rule out tax rises in a third term.
The most recent economic news is certainly not encouraging. Tax receipts, as we have heard, have continued to be soft. The Chancellor was particularly optimistic about that in the Budget and so far he looks to be wrong. He might be saved on tax receipts due to the rise in oil prices, but it is not looking good. The Government have to lose only one or two of the major tax cases queuing up at the European Court of Justice to expose another big hole.
The Chancellor told us in the Budget that he would borrow £33 billion this year—a lot—but the borrowing figures at the end of September—half way through the year—showed that he had already borrowed £23 billion, or two-thirds of that amount. As the noble Lord, Lord Newby, has already pointed out, current spending is well ahead of forecast, being compensated only by weaker investment spending. It beggars belief to think that the second half of the year will make up for the first half. The golden rule appears ever more fragile.
The trade deficit is another sign that things are not right. Records do not go back as far as Guy Fawkes's time but they go back to 1697, and we have the largest deficit ever recorded since records began. It is persistent—a deficit every single month since the beginning of 1998.
We have not said—and we will not do so today—that the economy is in crisis, but we believe that there are many warning signs of trouble ahead. The boastful Budget Report did not give a balanced picture of our economy in April and it certainly does not do so today. If we thought that sending it to Brussels mattered, we should be very concerned. It is not the custom of this House to vote against Motions such as the one before us today, and on that basis we shall not oppose it. But, on behalf of these Benches, we shall not add to the approving nods when the Motion is put formally for approval.
§ Lord McIntosh of Haringey
My Lords, I am grateful to all noble Lords who taken part in this short debate. I am slightly taken aback by the profound disagreements on this matter that have been evidenced by the contributions from the Conservative Benches. The noble Viscount, Lord Trenchard, thought that we had too little consideration of these matters in this House and the noble Baroness, Lady Noakes, thought that we had too much. I leave it to them to sort themselves out on these matters just as I think it would 558 be intruding on private grief if I allowed myself to get involved in the difference between the noble Baroness, Lady Noakes, on the Front Bench and the noble Lord, Lord Pearson, whose Back Bench seems to be getting further and further back as the years go by. His distance from his own party is now immeasurable. I wonder whether the United Kingdom Independence Party, which he surely must join in due course, should find itself a place on the Benches in this House. Otherwise, he is in an impossible position and his Whips must be in an even more impossible position. By the way, on the question of why we are having this debate, it was indeed a Labour Motion on the Maastricht Bill in 1993, but I blame the Conservative Whips for allowing it through.
Several interesting points have been raised in this debate and I will try to deal with as many of them as possible. The first series of points referred to the stability and growth pact and the 3 per cent deficit rule. The noble Viscount, Lord Trenchard, seems to think that the stability and growth pact has been discredited. Our view is that the stability and growth pact was excessively rigid. We have always argued for a prudent interpretation of the pact that takes account of the economic cycle, sustainability and the important role of public investment. With Budget 2004 we published a discussion paper on the stability and growth pact.
Since then there have been some promising signs. First, there is the European Court of Justice decision about the application of the pact's provisions and proposals for strengthening and clarifying the implementation of the pact. Secondly, there are the Commission's own proposals published on 3 September, which we welcome. We welcome the references and emphases in the Commission's report on the sustainability of public finances, and in particular on taking greater account of public debt. Things seem to be moving in our direction and it may well be that we will have more effective, realistic and prudent stability and growth than we have at present.
The issue of the golden rule understandably attracted a good deal of attention. First, the noble Lord, Lord Newby, mentioned the possibility of us moving the anticipated end of the cycle for political reasons, but there would he no benefit in that even if we wanted to or could. Budget 2004—the document that we are debating today—states that over the current economic cycle, estimated to run from 1999–2000 to 2005–06, the average current surplus on the current budget is forecast to be 0.1 per cent of GDP, which has been correctly quoted, meaning that,the Government is therefore on track to meet the golden rule".However, even if we were to change the estimate of the end of the cycle, it would not make any difference, because over the period 2005–06 to 2008–09, the average surplus on the current budget is forecast to be—guess what—0.1 per cent of GDP, meaning that the Government are on track to meet the golden rule beyond the end of this cycle.
The noble Lord, Lord Newby, then moved on to attack the method of calculation of the golden rule. However, we have been consistent in the way that we 559 measure progress against the golden rule. We have measured it as a ratio to GDP, which has been accepted by the Treasury Committee in the House of Commons which concluded that:The substance of the golden rule has not changed".I know that Martin Weal and other well respected outside commentators take a different view, but Parliament has not taken that view.
The noble Lord then had a modest proposal for the National Audit Office, and I am grateful to him for rowing back on his suggestion of another committee. As I understand it, he is suggesting that there should be a separate unit in the National Audit Office that would audit the assumptions over the projection period, both in the Budget and the Pre-Budget Report. I remind him that we publish both with the Budget and the Pre-Budget Report the NAO's assessment of all of the assumptions that are included in these forecasts.
§ Baroness Noakes
My Lords, if the Minister will forgive me, that is not strictly correct. The NAO audits each year only a certain number of the assumptions and those assumptions are selected by the Treasury. The NAO cannot choose what it examines and it certainly does not examine the whole amount every year.
§ Lord McIntosh of Haringey
My Lords, I will not argue about that, but if the NAO and the Public Accounts Committee thought that their ability to comment on the assumptions was diminished they would say so. The Public Accounts Committee is independent of the Government. The National Audit Office reports to the Public Accounts Committee. My point is that if the National Audit Office thought that it would do better with a separate unit as the noble Lord, Lord Newby, proposes, no doubt it would do so, but we do not control the internal organisation of the National Audit Office. That is a matter for itself and the Public Accounts Committee. To my mind, none of these accusations have any particular validity.
Next we had the issue of the trade deficit and the balance of payments. The noble Baroness, Lady Noakes, quoted figures back to 1697. There has been a certain amount of inflation since then that might have made a difference. I have quoted to the House previously the bursar of an Oxford college who queried the investment policies of the college on the grounds that the past 200 years had been wholly exceptional. I suspect that the noble Baroness, Lady Noakes, has fallen into that trap. In fact, the current account deficit in 2003 on GDP was 1.9 per cent. I do not have the table that I had when we debated the matter during Starred Questions, but that figure compares with a deficit of over 5 per cent in 1989. Those figures fluctuate, but the percentage of GDP is certainly not increasing. The trade deficit was 3 per cent in 2003, which is unchanged from 2002, and is significantly lower than the 4.1 per cent seen in 1989. Our foreign income position has improved considerably in recent years.
The noble Lord, Lord Pearson of Rannoch, had a particular take on this matter when he referred to our deficits and our trade with the European Union. He 560 alleged that the euro had not given any benefit to the German economy, in particular. It is certainly true that the euro area underperformed in 2003 and that Germany experienced a small recession. Indeed, I said that in my opening speech.
Euro-area growth has picked up in the third quarter of this year. As a result of improvements in net exports, Germany emerged from a recession. Government policy on the membership of the single currency remains unchanged: the economic benefits must be clear and unambiguous. It would not be appropriate for me to enter into the wider issues which the noble Lord raised during this debate, which is about the Budget not the euro.
§ Lord Pearson of Rannoch
My Lords, the noble Lord will agree that the benefit or otherwise of the single market is crucial to this debate. Will he comment on the point that I put to him that the Bundesbank has also said that it can find no evidence that the single market has been of any benefit to the German economy or presumably the other economies of the euro-zone? That is fairly central to why we are having this unfortunate debate at all.
§ Lord McIntosh of Haringey
My Lords, first, it is not central, and, secondly, I would not comment on the Bundesbank's opinions anyway. We could swap commentaries until the cows come home, but we will simply not do that.
The noble Baroness, Lady Noakes, raised the usual accusation of regulatory burdens. Again, we could swap commentaries as she has done. Perhaps I may respond with a commentary: the World Bank, in a report published in 2004, said that the United Kingdom was seventh in the world for ease of doing business. The OECD in January this year said:Competitive pressures appear to be relatively strong in the United Kingdom, with economic and administrative regulations inhibiting competition and barriers to trade among the lowest in the OECD".We will just have to declare a truce on the matter until everybody outside agrees.
The noble Viscount, Lord Trenchard, talked about the damage done to pensions by the removal of double tax credit for the pensions industry. If he looks at the size and nature of the problems of the pensions industry—of course there are problems—he will recognise that increases in life expectancy, decreases in interest rates and continuing trends away from single-lifetime employment to a variety of employments are enormously more important than the case to which he referred. In any case, my noble friend Lord McKenzie answered very fully the noble Lord's points and the accusation of the noble Viscount, Lord Trenchard, that there had been no improvement in the public services. I shall not take up the House's time with that.
The noble Lord, Lord Newby, had an interesting and very imaginative take on Gershon by quoting the Treasury. As is appropriate, the Treasury is a very small department. He ought to have looked at the Chancellor's department, which includes, in 561 particular, the Inland Revenue and Her Majesty's Customs and Excise. If he had looked a little beyond the small focus of his investigation, he would have discovered that the Chancellor's department expects savings of around £550 million by 2007–08, a total reduction of 13,350 departmental Civil Service posts, with a further 3,500 posts deployed to the front line, at least 2,550 posts moved out of London and the south-east by 2007–08 and a further 2,500 by 2009–10. Those are serious figures but they are for a serious branch of government. The Treasury, although entirely serious, is in those terms relatively small.
The noble Lord, Lord McKenzie, adequately answered the accusations about tax burdens. I stand to be corrected, and if I am wrong I shall write to noble Lords, but I think that I have dealt with the principal matters raised.
§ Lord Pearson of Rannoch
My Lords, before the noble Lord sits down, I am afraid that he has not been good enough to answer the other, simple question that I put to him. He has agreed that the euro-zone trades in massive surplus with us. Our deficit with it is at record and growing levels. Does he agree that, because it is selling much more to us than we are selling to it, it has more jobs dependant on its trade with us than we do on our trade with it? It is a central question, and the answer must be "Yes", but I would just like the Minister to give it.
§ Lord McIntosh of Haringey
My Lords, any imbalance of trade arises because we have higher growth rates than the other European countries. That is entirely to our credit and in no way affects the basic argument that I put before the House.
§ On Question, Motion agreed to.