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Geraint Davies: Does the hon. Gentleman accept that the reason why productivity growth is low but rising is simply that in recent years we have experienced a massive influx of unskilled labour, which is reducing average productivity? The pattern of average productivity in the United States is of very low growth, below that in the

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United Kingdom, which has risen now that it has reached a high threshold of employment. That is a sound foundation on which to build productivity that is accelerating.

Matthew Taylor: I do not accept the hon. Gentleman's view, on two counts. First, the history of investment in manufacturing under Labour has also been poor: the investment that might deliver later higher productivity growth has not been adequate. Secondly, one factor above all characterises the United States--a continuing large influx of low-skilled labour into employment. In fact, one of the real attributes of the United States economy has been its ability to encourage people into employment, something at which this country has historically been rather poor.

At its latest meeting, the Bank of England pointed out that the strength of sterling and the weakening world economy would lead to lower interest rates in the medium term, except that that might worsen the imbalances in the British economy that I have described. It drew attention to the very problem that I have illustrated, which it rightly described as a key policy dilemma. This is not something that the Bank of England, through interest rate policy, can resolve alone; Government policy is needed to address it, and we believe that it can be addressed only if we recognise that there is currently a real problem with the exchange rate with the euro. Government policy needs to take that into account, and I share the concern of the hon. Member for Ochil (Mr. O'Neill) in that regard.

I have argued here in the past that if the Government made clear their exchange-rate targets in connection with our joining the euro--the levels at which they believe joining could be sustainable--that in itself would drive us towards a more sustainable exchange rate, as it drove every other European country that joined in the first round. That is exactly what we saw happening after the election, when the markets believed that there might be an early move to the euro. As soon as that happened, they started to focus on a long-term sustainable exchange rate rather than on short-term speculation.

Mr. Fallon: I am grateful to the hon. Gentleman for giving way yet again.

The hon. Gentleman has asked the Government to clarify the exchange-rate target that they should be pursuing. Perhaps he could clarify what he thinks the target should be.

Matthew Taylor: We have published a document that examines the conditions for joining, which includes an exchange rate in the range from 1.25 to 1.45 euros to the pound. That document is now nearly a year old. Clearly, any Government will have to look at the position at the time when they join, but we could hardly be clearer than we have been. Indeed, ours is the only party that has been willing to provide any answers. Some Labour Back Benchers have made the case, as have many outside, but few Front-Bench Members have made it here.

Mr. O'Neill: I do not want the hon. Gentleman to confuse me with others. I think it very dangerous for Governments to think aloud about exchange rates. Only when other decisions are made should such an eventuality be considered. I consider it foolhardy of those on the

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Government side to start talking in an airy-fairy way about an exchange rate two, three or four years away from the possibility of a referendum. We should be very careful: we would see serious problems in the money markets if we went down that road. I hope that only when we were near to offering the country a choice would the Chancellor and the Cabinet arrive at an appropriate range of figures. No one worries about what the Liberals say, but a lot of people depend on what the Government say.

Matthew Taylor: The former Chairman of the Select Committee on the Treasury might disagree with the hon. Gentleman. In the previous debate on the matter in the House, the former Chairman took exactly the position that we take. Since 1997, 500,000 people in manufacturing industry and nearly 80,000 people in farming have lost their jobs. That was closely associated with the problems of the exchange rate. They might beg to differ with the hon. Gentleman. Certainly, many in British industry would.

Mr. Edward Davey (Kingston and Surbiton): Did not my hon. Friend find it odd that, when the pound was beginning to go towards competitive levels, which was taking some of the pressure off our manufacturing, agricultural and tourism industries, Her Majesty's Treasury started to talk up the pound, making the imbalances in the economy to which he has rightly referred even worse?

Matthew Taylor: My hon. Friend is right. We must understand that the history of the Labour party--the devaluations in the 1960s--may make it difficult for it to address those real issues, but real they are for those in the manufacturing and farming industries who are attempting to make exporting pay. The sooner those taking responsibility for our economy acknowledge the fact that jobs are draining away day by day with the present exchange rate, the better it will be.

Geraint Davies: Will the hon. Gentleman give way?

Matthew Taylor: I have given way to the hon. Gentleman and I shall make a bit of progress.

I do not want to give the impression that the problems in farming and rural communities are to do merely with the exchange rate. The problems in those communities are severe. There is a crisis there. Any hon. Members who campaigned in rural areas during the general election cannot fail to be aware of that--Labour Members as well as others. I hope that those Labour Back Benchers who represent some of the more rural communities will, as we will, vigorously press the Government for more effective action to tackle the crisis in rural areas--the absence of measures to do so was one of the worst omissions from the Queen's Speech. It was as if a crisis were not happening. I assure Ministers that that crisis is happening: it is there strong and hard for all those in rural communities who have lost services, jobs and homes--for many farmers, the farm is their house as well as a source of income.

I turn to the issue that I thought might be pressed further today: the future of public services. Recession or not, the Government's cautious assumptions should mean no short-term problems for Government spending plans. Indeed, the assumption of 2.25 per cent. trend growth is

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arguably over-cautious, but just as in the general election we argued that the Government should be judged on their record on public spending over the previous Parliament as a whole, not simply by pre-election spending, the Government will be judged in the next election on their overall record over their two Parliaments.

There are serious questions. The Government's spending plans run only to April 2004 and the new ones will be announced only in June 2002, so we have no picture of Labour's plans for the second half of its term in office, but, as the Institute for Fiscal Studies has identified, if public spending were to continue to grow at the current rate of nearly 4 per cent., there would be a gap in Government income of some £10 billion. Of course, the Government have not announced that spending plan. The Conservatives were wrong when they said that there was a tax gap--a funding gap. There is actually a spending gap.

The question is not how the Government will fund their plans, but what their plans will be in the second half of the Parliament. That goes to the fundamental issue of delivery on pensions, education, health and the other public services. The issue is whether the Government believe that there is a need to fill further the pot for investment in public services, or whether their current spending proposals have gone broadly far enough. If they believe the latter, after the feast in the general election campaign, we shall see a return to famine in the second half of this Parliament.

The argument that growth will deliver all is made both by Conservative Members, who say that growth will fund tax cuts, and by Labour Members, who say that growth will fund their never-ending spending increases. However, if it were true that growth delivered all, the Thatcher years would have been a time of enormous bounty in the national health service. Year after year, the Thatcher Government used precisely the same argument: that economic growth delivered sufficient real-terms increases in health spending.

The truth, however, is that wages dominate public sector costs. Consequently, the public sector can deliver more nurses, doctors, operations and teachers only if wage growth is less than economic growth, unlike the private sector. As the figures clearly show, that is exactly what has been happening: the wages of those working in the public sector--teachers, doctors and police officers--have been held back.

In the previous Parliament, on average, real-terms private sector wage growth was more than 15 per cent., whereas it was only about 10 per cent. for doctors and teachers and about 6 per cent. for police officers. Moreover, that erosion has been not just a short-term process, as improvements have been delivered for a much longer period by restraining public service pay levels. In the 1990s, in real terms, private sector pay levels exceeded those in the public sector by almost 10 per cent., with nominal growth of 42.7 per cent. in public sector pay compared with 51.4 per cent. in the private sector.

It is the Government's misfortune that that disparity has reached such a point that they are having real problems in recruiting and retaining staff, whereas the previous Government encountered largely complaints about the disparity. The real problems of recruiting doctors, nurses, teachers and police officers are now visible to everyone, and they are one of the main reasons why the Government

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failed to deliver the improvements that they promised in the previous Parliament. Ministers have made some money available, but they have not been able to find enough people to fill even those posts because the rewards are not sufficient.

The issue is about not only pay, but conditions and the never-ending revolution in health and education that makes the job unbearable for many who simply want to get on with treating and educating people. Nevertheless, pay is now a real issue.

I should like finally to touch on the issue of bringing the private sector into the provision of public services, as if that were a panacea. The Government are offering private sector involvement as a partial solution, whereas Conservative Front Benchers seem to offer it as the only solution. However, a couple of myths need to be demolished, the first of which--it has clearly suckered the Deputy Prime Minster, although I very much doubt that it has suckered any Treasury Ministers--is that bringing in the private sector will unlock new revenue sources that would otherwise be unavailable.

On 20 June, on the "Today" programme, the Deputy Prime Minister said that, "if you can prime" transport investment

The fundamental truth, however, is that the Government have to pay for public services regardless of whether they are delivered by the private sector or the public sector. Private sector involvement is not a panacea for a shortage of public funds. As those in the public sector know, they are being forced into involving the private sector as a way of getting round Treasury rules. Local government especially is being forced down that route. However, on no basis can it be seen as free money; those services have to be paid for one way or another.

The Institute for Public Policy Research, effectively, made the case today that if the private sector is to be used in the delivery of public services, it must be on the basis that it can do something better than the public sector. In some way, the private sector must be able to get better value for money or deliver more caring services more efficiently. Whatever it is, there must be some such benefit.

The problem is that Treasury dogmatism has not allowed a level playing field in the assessment of whether the private sector brings real benefits, issue by issue. The IPPR demolishes Labour's case on National Air Traffic Services and London Underground almost as effectively as many Labour Members and the Mayor of London have already. If we are to judge use of the private sector, it must be on the basis of effective competition, with alternatives. If something can be delivered more cost-effectively and efficiently in the public sector, it can only be ideology that drives the Government into using the private sector.

Yet all the studies show that, in many cases, the decision is not taken on the basis that there is an effective public sector comparator, showing that the private option is cheaper. We need effective comparators that allow the

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public sector and other alternatives to be tested so that we ensure that the private sector is not used when it will waste public resources.

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