Broad Economic Policy Guidelines

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Dr. Palmer: The Minister answered a mischievous question from the Opposition about why we agreed to a framework for energy taxation at a European level. However, does she agree that what is in fact proposed is a framework for the use of market-based instruments at Community level—in other words, a framework to make it easier for each Government to set their own policies, rather than a harmonised rate of tax, for which I might wish but I am sure that she would not?

Ruth Kelly: That is exactly the sort of process to which I was referring. When general objectives are agreed at a European level it is then up to member states to implement the processes that they consider appropriate for their own environments. We can all benefit from that process and I hope that it will be developed further. It has an important role to play.

John Barrett (Edinburgh, West): The Minister mentioned that current Government policy closely follows the broad economic guidelines outlined in the paper before us. Bearing that in mind, how soon does the Minister expect the Chancellor's economic tests, which must be satisfied before there is a referendum on the euro, to be completed?

Ruth Kelly: The hon. Gentleman will be well aware that the Government are committed to carrying out a thorough assessment of the five economic tests within the first half of this Parliament. When the assessment is carried out it will be robust and comprehensive and consider all the relevant economic issues. It would clearly be inappropriate for me to speculate now on

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what the outcome of that assessment will be, but we are fully committed to conducting that assessment in the first half of this Parliament.

Mr. Hopkins: I have raised the matter of the five economic tests with the Minister before. However, there has been more press comment on the possibility of a sixth economic test, which is, I would suggest, the most important of all—to get the exchange rate right before one goes in. If we ever decided to enter the euro, that rate would have to be considerably lower than at present.

Ruth Kelly: I thank my hon. Friend for his comments. As he is well aware, the five economic tests will be comprehensive and rigorous and they will include all relevant economic issues.

Mr. Wilkinson: As the Government, in endorsing the guidelines, have signed up to sustainable growth and enhanced entrepreneurship, can the Minister say whether the drive towards capital accumulation in the guidelines will lead the Government to enlightened policies such as a reduction in, if not an elimination of, capital gains tax and inheritance tax? In the context of the energy taxation framework, will the Minister take the hauliers' strictures to heart and move to harmonise motor fuel duties in line with those on the continent?

Ruth Kelly: The Government take access to capital very seriously, which is why we have introduced capital allowances, and why we are committed to making it as easy to invest as possible, particularly by providing a stable macro-economic environment. If one considers the financial services forum, one can see that opening up capital markets across the European Union is one of our priorities, and the basis of an argument in which we are continually engaged at the European level. For example, we have argued for the prospectus directive, which would open up the possibility of raising capital in different parts of the EU and could, if it were properly implemented, reduce the cost of capital across the EU. That is one reason why the Chancellor committed himself to a deadline of 2003 for implementing the risk capital action plan.

Capital accumulation is a long-term project, to which the Government are committed. Since we came to office in 1997, we have made a start on it in the public sector, as well as creating the right environment for the private sector to invest.

Motion made, and Question proposed,

    That the Committee takes note of European Union Documents Nos. 8261/01 and 9326/01 on the Broad Economic Policy Guidelines; and supports the Government's welcome for the publication of the Guidelines in giving operational content to the conclusions of the Lisbon and Stockholm summits, in reflecting the importance of structural reform in tackling successfully the challenges of globalisation and competitiveness, and in promoting employment and social inclusion.—[Ruth Kelly.]

11.31 am

Mr. Lidington: I start by taking up the point made by the hon. Member for Luton, North about the long delay in arranging this debate. I checked when the broad economic policy guidelines for 2000 were

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debated, and discovered that they were debated in European Standing Committee B in June of that year—much closer to the time at which the documents were considered by the European institutions and endorsed, or otherwise, by the Government. Admittedly, on that occasion the debate centred on one document alone, which contained the recommendations from the Commission before they had been amended by the Council. However, the time scale on this occasion, even if one makes allowance for the general election, gives cause for concern over the effectiveness of parliamentary scrutiny. It also calls into question the relevance of some of the assumptions contained in the documents, bearing in mind what has happened in the European and world economies in the nine months since the Commission published its original draft.

The Commission's recommendations were submitted to the Council on 27 April 2001, considered by the Council on 30 April and sent by the Treasury to the Scrutiny Committee after the general election, on 20 June. The Council recommendations were made on 15 June 2001, but the Treasury did not send them to the Scrutiny Committee for a month after that, on 19 July 2001. The Government then decided to send the House into recess for three months last summer, which meant that there was no opportunity to debate the documents in that period. The Scrutiny Committee considered the documents on 17 October; three months after that debate, the House finally has an opportunity, through this Standing Committee, to consider the guidelines, which are now out of date.

The Minister is entitled to say that the Scrutiny Committee might have considered the documents earlier, but even the three months that have elapsed since that Committee debate in October 2001 gave the Government plenty of time to bring forward the guidelines for debate. My suspicion is that the Government did not want to discuss the Commission document alone, because it contained embarrassing recommendations about the level of Government debt, which they wanted to sort out with the Council before allowing Parliament to have a say. I suspect, too, that the pre-Budget report rather than the events of 11 September accounts for that three-month delay.

I am quite prepared to make an acknowledgement to the Minister. Having been a member of such a Committee for five years, between 1992 and 1997, I concede that the sin of delay has not been freshly minted by the present Administration. However, whether we have a Labour or a Conservative Government, it is wrong for the convenience of the Executive to be put before the opportunity of Members of Parliament to scrutinise important European documents. I hope that matters will be improved in future.

That delay is of more than passing importance because it raises serious questions about the relevance of many of the assumptions made by the Commission and the Council in these papers.

As I mentioned during Question Time, the Commission forecast that growth in the eurozone for 2001-02 would be about 2.75 per cent. However, the

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most recent edition of the EU economy review of 2001, published by the Commission on its website, argues that there has been a rapid and continuous deterioration in short-term economic prospects in the second half of 2001. The review states:

    ''Growth in both 2001 and 2002 is foreseen to be considerably below potential. The unexpectedly sharp downturn and the lack of resilience pose important policy challenges.''

It adds that, in the second quarter of 2001,

    ''GDP growth came to a virtual standstill''

and predicts that

    ''growth can be expected to be disappointingly low in 2002.''

Those statements were made by the Commission, and they must have some impact on the policy prescriptions embodied in the guidelines that we are discussing today. I therefore, hope that in her response to the debate the Minister will be more forthcoming in explaining how the Government and our partners in the European Union plan to respond, perhaps by amending the guidelines in the light of dramatically changed economic circumstances, because the Government themselves have admitted that things have changed markedly. The pre-Budget report states, on page 141 that

    ''economic activity in the euro area has been much weaker than expected at Budget 2001.''

Table A4 on the same page of the pre-Budget report shows that the British Government have reduced their own forecasts for GDP growth in the eurozone for both 2001 and 2002. Whereas, at the time of the last Budget, when the guidelines were drafted in Brussels, the British Government were predicting eurozone growth of 2.7 per cent. in 2001 and 2.9 per cent. in 2002, by the time of the pre-Budget report the Government had shaded down those forecasts to 1.5 per cent. growth in each of those two years—a significant decrease.

Recent figures suggest that matters may have deteriorated further. The Economist of 5 January 2002 referred to growth forecasts of 1.5 per cent. for 2001, falling to 1 per cent. in 2002. One immediate likely impact of that deteriorating growth is a worsening in the budgetary positions of different countries, which will, in turn, affect considerably their ability to comply with their commitments under the stability and growth pact. We only have available to us the projections for UK borrowing in the pre-Budget report, but I find it interesting to compare the projections for UK borrowing as a percentage of GDP that the Government have published in the pre-Budget report with the equivalent predictions embodied in these guidelines, which date back some nine months and were presumably supplied to the Commission by the Treasury.

The forecasts for public finances have grown worse during the intervening period. I shall not test your patience, Miss Widdecombe, by reciting the figures for each of the six years but, to take two examples, nine months ago the guidelines documents projected a British borrowing requirement of 0.1 per cent. for 2002-03. The figure in the pre-Budget report is 1.1 per cent. of GDP. For 2003-04 the forecast borrowing requirement has risen from 0.9 per cent. to 1.3 per cent. of GDP. I could give other illustrations.

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The worsening of the economic climate has implications that go beyond the domestic economy and the levers of policy available to the Government in Westminster. We are discussing a community of countries that includes our major trading partners. If their economies run into serious difficulties, that is bad news for British business, particularly our exporters. The difficulties over growth, in Germany in particular, bode ill for the economic prospects of the whole EU and therefore for the British companies that rely upon trade with those countries.

A broader concern about Germany is pointed out in a recent report on the introduction of the euro, published by The Economist on 5 January. It quotes Commission forecasts that Germany's budget deficit will be 2.7 per cent. of GDP in 2002. That is very close to the 3 per cent. ceiling beyond which Germany might face the lunatic prospect of being fined for failing to keep its public finances in order. There are serious questions about the stability of the pact, and what the implications of that might be for British economic prospects this year.

Of course, there is much in the broad economic policy guidelines that my hon. Friends and I would be happy to accept as embodying sensible economic policies. We still disagree with the Government over the extent to which those policies should be worked out at a supranational rather than at a national level. However, I am clear that structural economic reform in the major economies of continental Europe would be in Britain's interests. We have seen an example of some of the problems that arise from restrictive German retail laws in the last couple of days. The Minister spoke of the need to develop a single market in financial services, and she is right to stress that. I also support her call for labour markets to be further liberalised, although I question whether that fits well with the Government's support for the social chapter system and the fact that, for example, the working time directive is likely to be extended to the offshore industry within the next year or so.

I agree with the Minister's remarks about the need to reinforce competition. The Government have signed up to a commitment to reinforce competition by accelerating liberalisation in the railway industry, among others. That could lead to heartache among several of the Minister's right hon. and hon. Friends.

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Prepared 9 January 2002