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David Wright: Of course, these new bodies are not new. In respect of housing, we are bringing together inspection regimes that are currently in place, so the hon. Gentleman's comment is false.

Mr. Davey: I was quoting what the Government were saying. I am sorry if their spin was new; the hon. Gentleman's spin is not new, but I can only quote from what the Government say in their own press release.

My second point concerns the extent of the independence of the "new"—that is a Government word—quango audit bodies. The status of the NAO and the Audit Commission were carefully debated in this House in the past. The NAO has genuine independence from Government Departments, and while it has independence from this House too, it is, in statute, a creature of Parliament, working for the Public Accounts Committee.

This plethora of new auditors will not be based on the NAO system. They will have a degree of independence but there will be no parliamentary involvement in agreeing who should head them up, as there is for the NAO. They will not report to or work closely with the Public Accounts Committee in the way that the NAO does. These independent bodies will have their budget set by the Treasury, not the House of Commons Commission, in the way that the NAO does. So these independent bodies will not have the independence of the existing audit bodies, which perhaps explains why they have been set up.

There is a third question, which is perhaps more politically profound. Will this panoply of new central auditors make any real difference? Will they not simply soak up many talented individuals who would be better employed in the front line? Will they not soak up large amounts of cash to duplicate controls on auditors elsewhere? Will they not waste the time and efforts of the professionals? We do not have to look far to see their future. Local government is already subject to an equivalent audit exercise through the comprehensive performance assessment. Anyone in local government will say what a waste of time and money that exercise is. It disrupts the work of the Audit Commission, not to mention councils around the country. The exercise looks set to waste more than £100 million. People in local

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government say that the Audit Commission's increasing concern is simply to avoid the danger of a council judicially reviewing the report made on it because of the link to future freedoms and future cash.

The comprehensive performance assessment is just a taste of things to come. Whitehall regulators, auditors and inspectors will have to be trained in their thousands to do a job best done by existing national bodies and, at regional and local level, through existing and new democratic structures.

James Purnell: The same point applies to the comprehensive review by the Audit Commission, the whole point of which is to bring together previous reviews by different sector-specific auditors in local government such as social services, education and others. In that way, we can reduce the burden of auditing for very good councils and concentrate on those which have problems. That is all about reducing the burden of auditing. Does the hon. Gentleman worry that the Tories appear to be opposing the spending while the Liberal Democrats appear to be opposing reform? Will he make any positive recommendations about reform, which is a good tradition in his party?

Mr. Davey: The hon. Gentleman anticipates what I am about to say. He should talk to local authorities in his area regarding the comprehensive performance assessment. The message that I am getting clearly is that the burdens are being increased, not reduced.

The Government talk about new localism and new local discretion while at the same time setting up new quangos, new central bid funds and new central targets. I think that their approach on new localism lacks credibility.

Liberal Democrats are concerned that far too much of the welcome increase in public spending could be wasted because of how the Government intend to manage that spending. The Government are trying to reassure us that we can trust them to spend this money wisely because they have these PSA targets but the targets are a real cause for concern. The Government also try to reassure us that value for money is guaranteed because they are establishing these new bodies. We do not believe that these bodies are a necessary or sensible way of auditing public services. We do not see how creating a new army of central auditors and regulators will help turn round public services.

Liberal Democrats have a positive alternative to ensure that we get value for money from these welcome billions. Rather than making contorted attempts to win trust for the Treasury, the Government should trust others. They should trust the people on the front line—the professionals; they should trust local communities. Above all, the Government should trust local voters. Huge tracts of public spending need to be devolved, not to quangos, for which the Treasury set a multitude of PSAs, but to democratic bodies responsible to the communities they serve. With the Conservatives against the extra spending, and given their history of destroying local government and opposing regional government, the Liberal Democrats, who welcome the money, will be the only party capable of arguing for the democratic way to better public spending.

Mr. Deputy Speaker: Order. Before I call the next speaker, may I make a plea for shorter contributions to

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the debate? An awful lot of hon. Members are seeking to catch my eye, and unless contributions are considerably shorter, an awful lot of hon. Members will be disappointed.

7.47 pm

Denzil Davies (Llanelli): I shall be brief, Mr. Deputy Speaker. I welcome the Chancellor's public expenditure review and the extra resources that will be put into public services. I do not think that any sensible person can believe that money alone will reform our public services, but without the money, there would be no hope. As the Chief Secretary to the Treasury said, we must see that reform goes hand in hand with the money that is put into the services. That will not be easy, but I believe that if it happens, the money will eventually find its way into the improved services we all want.

Ever since the Chancellor announced the totals of public expenditure in his Budget, various financial commentators have tried to cast doubt on the Government's ability to fund the totals without, in some cases, hefty increases in taxation. However, as my hon. Friend the Member for Dumbarton (Mr. McFall), the chairman of the Treasury Select Committee pointed out, the Chancellor's forecasts of growth for the next three years, for the purpose of the public expenditure totals, are reasonable and conservative. The forecast is a growth of 2.5 per cent. That is a prudent figure and the Chancellor has probably been more successful in the difficult art of forecasting than many in the private sector, certainly over the past few years. Therefore I believe that there is a good chance of achieving the 2.5 per cent. growth on which the public expenditure totals are based.

However, as the Chief Secretary said, nothing is certain in the kind of global economic system with which we have to live. Growth could still, for external reasons, fall short of that 2.5 per cent., although I hope that it will not. If it were to fall short of 2.5 per cent., the response should certainly not be to put up taxes, as some commentators seem to imply. Nothing could be worse for an economy. One need not be an economist, like the hon. Member for Kingston and Surbiton (Mr. Davey), to realise that an increase in taxes against the background of a lower growth rate would merely do damage and reduce growth even further.

If there were a funding deficit—I do not believe that it will happen—I suppose that public expenditure could be cut, but that is not easy either. It is not easy in practical terms when one sets out a programme for three years, and cutting public expenditure against a background of reducing growth or a reduced rate of growth would make matters worse. Therefore the point that I wish to make to my right hon. Friend the Chancellor is that, as I am sure he is well aware, the only sensible way of funding a shortfall in growth and funding the present public expenditure totals—I have to say it, although perhaps it is not fashionable these days—would be to increase Government borrowing.

The Chancellor, in the Red Book, proceeds on the assumption that what I will call the old PSBR—public sector borrowing requirement—will be about 1.2 per cent. of gross domestic product over the next three years, should the growth rate be 2.5 per cent., the basis of the public expenditure assumptions. There is a new, fashionable phrase for PSBR these days—it is not

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borrowing but a cash requirement, I believe, but let us just call it the old PSBR. Those of us who have been in this place for a long time, at least, should be allowed to call it the old PSBR.

A PSBR of 1.2 per cent. is not, I suggest, very high, so I would suggest to the Chancellor that if growth were to fall there is plenty of room to increase the PSBR as a percentage of GDP, bearing it in mind that the chances are that, with a lower growth rate, inflation would be very low, so the inflationary consequences of borrowing an increased percentage in respect of a PSBR would not have an inflationary effect.

In my view the main threat to growth, should it come, would be a fall in the rate of inflation into what I would describe as the danger zone of deflation, caused by the relentless pressure of the global economic system—call it global capitalism, if you like—on prices, then on costs, and ultimately on profits. Over the past few years, this pressure has been going on and on. Perhaps we have underestimated it, or perhaps economists prefer to turn a blind eye to it, but those of us who have constituencies where a substantial proportion of the work force—in my case about 30 per cent.—is still employed in manufacturing industry, producing goods, can see clearly, after talking to employers and employees, that the pressure is relentless. Prices cannot be increased; they must be reduced. If prices must be reduced, costs must be cut, but eventually a point comes where they cannot be cut further and profits are squeezed relentlessly. That is what has been happening, and is happening, especially in manufacturing industry.

Recently I read in one of the American newspapers that an American commentator was predicting a profitless growth over the next few years. I am still trying to work out what sort of concept a profitless growth is and I do not suppose that it really means very much. However, talking of the United States, we are obsessed with the scandals of Enron and WorldCom. Now Dr. Alan Greenspan—that wizard of central bankers, apparently—has come up with a new soundbite. A few years ago it was "irrational exuberance" when the stock market was going up. Now that the stock market is going down, it is "infectious greed" that is causing all these problems. Perhaps so; perhaps Enron, WorldCom and some other companies are going into liquidation because of the original sin of human venality, and no doubt that is there.

However, we should not forget—this is not to excuse any of these scandals or any of the people involved—the relentless pressure on profits, because prices are squeezed and costs cannot be reduced any further. The relentless pressure on prices is making people overturn or short-cut what could be called, if this is not a contradiction, the orthodox rules of accountancy. It seems quite easy for central bankers to point to original sin as the reason, but perhaps there is a problem with the system. I do not want to say it too loudly, but perhaps the present capitalist system can no longer cope with capitalism. I do not know. It is a very real difficulty, which we shall have to face.

In Britain in the last month, one of the two inflation rates—I am never quite sure whether it is headline or underlying—was 1.5 per cent. The other was 1 per cent. but let us focus on the 1.5 per cent. While reading American newspapers, I noticed that in the United States in the last two months—this is not an annualised figure—consumer price inflation, or the consumer price index, was increasing by just over 1 per cent. That is a very low

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level—almost as low as, perhaps lower than, what we have in this country, and of course in Japan it is lower still.

I return to the British figures. Given that private sector services in Britain are very prone to inflation because the service industry—or parts of the service industry—does not have to face the kind of competition that manufacturing has to, it has been estimated that, again taking the annualised figure for last month, private sector services inflation was about 4 per cent. in Britain. Public sector inflation is probably also about 4 per cent. While we have an underlying rate of 1.5 per cent., then clearly, over a whole range of manufactured products, prices must have actually fallen. That creates this enormous pressure, especially on manufacturing industry, but ultimately on the rate of growth if the trend continues, because we could move into the danger zone of deflation.

The Chancellor, when this matter is raised—I make no criticism of my right hon. Friend—tells us that the Bank of England's target is asymmetrical. It is one of those words that I have some difficulty with, but I think I understand what is meant: that if inflation is increasing—getting worse—one increases interest rates, but if inflation is falling, or falling too far, one reduces interest rates. I am not sure whether we are comparing like with like, because I suspect that when an economy moves towards very low inflation, or deflation, cuts in interest rates possibly have very little effect. I do not know how effective interest rates are anyway. I suspect that for certain major, or multinational, companies the cost of money is not a major factor, although I accept that the situation is very different for small companies. In any case, it has been clearly shown that if inflation is falling, and approaching zero, the efficacy of reducing interest rates becomes less and less.

I suspect that in a world of deflation, Dr. Alan Greenspan and many other central bankers would be redundant. The British economy, with its sadly declining manufacturing base, which is producing fewer goods domestically, with a growing—still inflationary, I think—private services sector and with the public expenditure boost that the Chancellor has now given the economy, may be able to withstand that sort of global pressure, which is driving economies towards deflation. Indeed, the Chancellor and our services sector may be able to put enough inflation back into the system to stop us getting to the danger zone of deflation. I do not know.

In that case, however, and I hope that it is the case, the Chancellor will be able, through the measures that we are debating today and his totals, not only to lay the foundation for the improvement in public services but, perhaps as a side effect, to stave off recession and deflation in the British economy.


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