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Session 2006 - 07
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European Standing Committee Debates

Stability and Convergence Programmes

The Committee consisted of the following Members:

Chairman: Mr. David Marshall
Atkins, Charlotte (Staffordshire, Moorlands) (Lab)
Breed, Mr. Colin (South-East Cornwall) (LD)
Cable, Dr. Vincent (Twickenham) (LD)
Creagh, Mary (Wakefield) (Lab)
Cunningham, Tony (Workington) (Lab)
Devine, Mr. Jim (Livingston) (Lab)
Gibson, Dr. Ian (Norwich, North) (Lab)
Hoban, Mr. Mark (Fareham) (Con)
Malins, Mr. Humfrey (Woking) (Con)
Moss, Mr. Malcolm (North-East Cambridgeshire) (Con)
Newmark, Mr. Brooks (Braintree) (Con)
Smith, John (Vale of Glamorgan) (Lab)
Ussher, Kitty (Economic Secretary to the Treasury)
Emily Commander, Committee Clerk
† attended the Committee

European Standing Committee

Monday 16 July 2007

[Mr. David Marshall in the Chair]

Stability and Convergence Programmes

4.30 pm
The Economic Secretary to the Treasury (Kitty Ussher): It is an honour to serve under your chairmanship, Mr. Marshall. This type of debate seems to be a regular occurrence; this is the second time in as many weeks that some of us have been here, although not under your chairmanship.
The rather large stack of papers before the Committee represents the opinions agreed by the EU Council of Ministers on the stability and convergence programmes of the member states. They are the product of the peer review process that forms part of the workings of the so-called preventive arm of the stability and growth pact, which, as hon. Members will know, is the framework introduced in the late 1990s for the co-ordination by member states of their fiscal policies. Much of the material is very detailed, but I hope that our debate will be an opportunity to consider the workings of the stability and growth pact more generally and the role that it plays in supporting employment and growth in the EU economy.
By way of introduction, I shall say a few words to remind hon. Members of the origins and intentions of the stability and growth pact and how it has developed. Strong macro-economic frameworks are essential for achieving and sustaining high and stable levels of growth and employment, and for maintaining long-term economic stability. An effective framework is characterised by credibility, flexibility and legitimacy.
A credible framework is one in which the policy makers’ commitment to long-term sustainability commands trust from the public, business and markets. That means that agents will not expect policy makers to sacrifice their long-term goals to short-term pressures. A robust framework will also provide appropriate short-term flexibility to allow policy makers to respond to shocks. That flexibility must, however, be delivered while maintaining a credible commitment to long-term objectives. Legitimacy can be achieved by building a consensus on the appropriate goals and institutional arrangements by which they can be delivered.
It goes without saying that, since 1997, the Government have established a fiscal framework for the UK, which of course has all three of those characteristics. Since the stability and growth pact’s introduction, the UK has argued for the development of a similarly credible, flexible and legitimate framework that can help to provide Europe with the macro-economic stability that it needs. The UK has argued for a prudent interpretation of the stability and growth pact that takes account of the economic cycle, the sustainability of public finances and the importance of public investment.
The stability and growth pact has two elements. First, there is the so-called preventive arm, which is effectively a peer review process that looks at the national fiscal policies and plans of each member state, although of course national fiscal authorities retain autonomy over their own fiscal policy. Secondly, there is the so-called corrective arm, which embodies the excessive deficit procedures that can be imposed where a member state breaches the obligations of the pact. Given our opt-out from economic and monetary union, the punitive elements of the excessive deficit procedure cannot be applied to the UK, but we recognise our European commitment and believe that by continuing to meet our own fiscal rules, we continue to respect a prudent interpretation of the pact.
While the introduction of the stability and growth pact as part of the preparation for economic and monetary union in Europe represented a step forward in recognising the importance of long-term budgetary discipline, initial experience with the operation of the pact highlighted a number of issues. First, debt consolidation appeared to have stalled. Secondly, the stability and growth pact does not appear to have supported counter-cyclical policies. Thirdly, there was not sufficient recognition of the importance of measures that would bring long-term gains. Fourthly, over-mechanistic targets were applied that did not take account of the economic circumstances of individual countries.
A series of reforms to the stability and growth pact was therefore agreed in March 2005, which rightly placed a greater focus on the avoidance of pro-cyclical policies and on achieving low debt levels, thereby enhancing the long-term sustainability of public finances, with the flexibility for low-debt countries to invest in the provision of public services. However, the success of the reforms depends on how they are implemented. It is important to ensure that an inappropriately mechanistic approach is not reintroduced, but that there is proper consideration of the economic cycle, sustainability and public investment.
The Government work closely with member states and EU institutions, and will continue to do so. We will continue to emphasise the need for a prudent interpretation of the pact, taking account of country-specific factors including debt sustainability, the economic cycle and public investment.
On the fiscal situation, public finances have improved materially in the EU in recent years. The headline deficit in the EU declined to 1.7 per cent. of gross domestic product—down from 2.4 per cent. of GDP in 2005, 2.7 per cent. in 2004 and 3.1 per cent. in 2003. For example, in Germany, following significant fiscal consolidation efforts on revenue and expenditure, the fiscal deficit fell from 3.2 per cent. in 2005 to 1.7 per cent. in 2006 and is expected to moderate further to 0.6 per cent. in 2007. Projections by the European Commission show that the fiscal deficits are expected to ease further, reaching about 1.2 per cent. in the EU and 1 per cent. in the euro area by the end of the year.
Since last year, the Commission and the Council have taken action on eight member states concerning the excessive deficit procedure. They considered that Cyprus, France, Germany, Greece and Malta had corrected their excessive deficits, bringing the number of excessive deficit procedures down to seven countries from 12 in 2005. Those developments took place against the backdrop of a cyclical improvement in overall economic conditions with growth in the EU of 3 per cent. in 2006. However, debt levels remain high, averaging around 70 per cent.
There is, therefore, some way to go in improving long-term sustainability, particularly against the backdrop of demographic change. In addition, further progress is needed in terms of structural reform and addressing public investment needs. The Government argue the importance of the need for public investment to support growth. That is particularly important for some of the new member states, which have relatively poor infrastructure. Currently, for example, the Czech Republic, Hungary and Poland have public investment in excess of 4 per cent. of GDP.
There is clearly more to be done and, as I said, the UK will continue to emphasise the need for a prudent interpretation of the pact that takes account of country-specific factors such as debt sustainability, the economic cycle and public investment. Indeed, that was the position underpinning our discussions with our European partners in the Council on the opinions before the Committee. I reaffirm the Government’s support for the process of peer review that the opinions represent and the importance of proper parliamentary scrutiny of those and all aspects of the stability and growth pact. I am pleased that we have the opportunity to debate these issues.
The Chairman: We now have until half-past 5 for questions to the Minister. I remind hon. Members that questions should be brief and asked one at a time. There is likely to be ample opportunity for all hon. Members to ask several questions, should they wish to do so.
Mr. Mark Hoban (Fareham) (Con): I thank the Economic Secretary for her introductory remarks. In the documents, the Council’s opinion of the UK programme implies that the UK was subject to the excessive deficit programme. Will she confirm that as she did not mention it?
Kitty Ussher: No, I did not mention it, but I had a funny feeling that it might come up. Yes, the UK is currently subject to the excessive deficit procedure. However, the Office for National Statistics recently confirmed that the relevant figure for 2006-07 is 2.7 per cent. I therefore expect those proceedings to draw to a close shortly.
Mr. Humfrey Malins (Woking) (Con): I was recently in Berlin talking to a number of business men who are concerned that they cannot match Polish prices. Poles are coming to Berlin and working for a quarter of the price, and jobs are being taken away from Berliners in huge numbers. On the question of convergence, does the Economic Secretary have something to say about the severe problem facing East Germans in particular?
Kitty Ussher: I do not think that it is for a UK Minister to comment on an issue of German policy. However, the implications for migration flows were considered by all national Governments when considering EU enlargement at a European Council level.
Mr. Malcolm Moss (North-East Cambridgeshire) (Con): Perhaps the Economic Secretary will answer a more direct question on matters relating to this country. The problem highlighted by my hon. Friend affects constituencies such as mine where large numbers of migrant workers are coming in from states that joined recently, particularly the Baltic states of Latvia and Lithuania, and Poland. These people work for around the minimum wage in the agricultural, food processing and packaging industries. Of course, when they translate it into their local currency—zlotys—it is worth a lot of money because of the exchange rate differential. We all signed up to this EU ideal of the free movement of goods and capital, but we now have a situation in which large numbers of member states—
The Chairman: Order. Questions should be brief. Speeches will follow question time.
Mr. Moss: I beg your pardon, Mr. Marshall.
Why did the Government not take account of the fact that there would be huge differentials in currency exchange rates, as a result of which we are now receiving a large number of migrant workers, which is destabilising jobs in this country?
Kitty Ussher: The hon. Gentleman may have his own views on EU enlargement, but significant analysis both here and in the EU, which was discussed at the highest level, showed that it would benefit from enlargement, and it was certainly the Government’s view that it should be implemented. As for undercutting UK workers, that was fully taken into account, providing that they were paid the minimum wage and were not being exploited. In terms of the macro-economic effect, preliminary studies showed that the effect of inward migration would be positive for the UK economy. When it comes to the stability and growth pact, implementation has not given rise to any concerns.
Mr. Colin Breed (South-East Cornwall) (LD): Paragraph (9) of the Council’s opinion states:
“Consolidating the public finances by strengthening the budgetary position further than planned in the convergence programme would thus contribute to reducing risks to the long-term sustainability of public finances. Overall, the UK appears to be at medium risk with regard to the sustainability of public finances.”
We hoped that we would have had the comprehensive spending review by now, but it has been delayed. It might have made it easier to understand whether public finances were indeed to be more consolidated. Are the Government happy with the opinion that the UK appears overall to be at medium risk with regard to the sustainability of public finances? Do they believe that that ought to be improved on when the CSR is delivered?
Kitty Ussher: The Government do not consider there to be anything amiss with our long-term financial sustainability. Our assessment of the situation is set out in the 2006 document “Long-term public finance report”, which we believe gives a more comprehensive assessment.
Two points may help the hon. Gentleman. First, assessing the UK as being at medium risk is not an absolute statement, but a relative one comparing our situation with that in other member states, some of which are extremely small and have a different structural make-up. Secondly, it may be relevant in this regard that our analysis in the 2006 report takes full account of the Government’s announcements and decisions, including some long-term issues to do with the sustainability of public finances resulting from changes in the Pensions Bill, as a result of the pensions White Paper and changes to the retirement age. It takes as its starting point the projected fiscal position over the next couple of years rather than the absolute 2006 starting point taken by the Commission. We believe that our analysis is superior and that there is, therefore, no risk to the economy.
Mr. Hoban: The Economic Secretary accepted in her first answer to me that the UK was in the excess deficit procedure. Given that she has said on several occasions that we run a prudent fiscal course, why were we in the excess deficit procedure? Clearly, if we had run prudent policies, we would not have run up such a large deficit.
Kitty Ussher: We believe our policies to be prudent. As I said, the stability and growth pact should provide a prudent interpretation of an individual country’s economic situation and avoid taking an overly mechanistic approach. We believe that we are investing the correct amount in long-term public services. Indeed, an historic backlog needed to be addressed. When that is taken into account, together with the low levels of debt under our Administration and our overall position across the cycle, there is nothing in the UK fiscal position that should give any cause for concern. It went briefly just over 3 per cent. and now it is back down again.
Mr. Moss: I thank the Economic Secretary for her initial replies, but I would like to follow that up and try to get some more detail.
The convergence report is fundamental for the new countries joining the euro. The currency differential makes it attractive for workers from Poland and the Baltic states to come here and work for minimum wage rates. That must and, I can assure the Economic Secretary, does displace local workers because they cannot afford to live on minimum wages with all the knock-on effects of taxation. The Economic Secretary said that the Government thought that through, but they did not. The estimate was that 160,000 migrant workers would come. The latest count of Poles alone is 600,000, and I would say that the figure is nearer 1 million. Will the Government either help some of those states to converge more quickly and join the euro, or put in place measures to prevent widespread and large-scale migration?
Kitty Ussher: The hon. Gentleman persists with his point and I congratulate him on raising a constituency issue, but I must disagree with him on a number of things. I would be interested in seeing his analysis that migrant labour is causing unemployment in the UK. Employment is at record highs: 29 million people are in work. That is the highest number ever; it is about 2.6 million more than in 1997. In addition, employment has grown by 222,000 in the past year. I also point out gently that his party opposed the introduction of the minimum wage, from which presumably his constituents now benefit.
Mr. Breed: Does the Economic Secretary consider that the Government’s recent public sector pension arrangements have improved or undermined the projected sustainability of public finances?
Kitty Ussher: I am not sure that that is completely relevant to the subject under discussion. However, as I said in a previous answer to the hon. Gentleman, we are perfectly comfortable with the analysis set out in our projections for the long-term stability of public finance.
Mr. Hoban: Will the Economic Secretary explain why Italy’s structural balance is better than the UK’s?
Kitty Ussher: I am not sure that it is up to me to comment on the individual position of other member states. However, I note that the Council’s report considered that the programme put forward by Italy is consistent with correcting the excessive deficit by 2007. Italy is required to correct the deficit, subject to the full and effective implementation of its 2007 budget. As we are part of the European Council, perhaps that is as far as I should go on the matter.
Mr. Malins: Does it remain the Government’s ambition to join the euro?
Kitty Ussher: The Government’s ambition is set out clearly in the Chancellor’s assessment of the five tests in June 2003. It states that there are benefits to it in principle, but, in practice, we do not think that the time is right. That is reviewed with every Budget. It was reviewed at the Budget for 2007, and no doubt it will be reviewed in the next Budget as well.
Mr. Hoban: I am slightly surprised by the Economic Secretary’s response. I know that she is not in a position to comment in detail on Italian policy, but does she not find it strange that a Government who are allegedly notorious for being profligate have a better structural balance position than the UK Government, who are apparently so prudent?
Kitty Ussher: The hon. Gentleman is making assumptions which are, perhaps, based on stereotypes about the Italian Government. However, I note that positive forces seem to have been exerted on Italian policy makers as a result of their participation in the stability and growth pact process.
Mr. Moss: It was interesting to hear in response to the question asked by my hon. Friend the Member for Woking that there are no immediate plans for this country to join the euro. Given the convergence report that we are discussing, can the Economic Secretary give the Committee any comfort in respect of the time scale for the convergence of eastern European countries and, indeed, for them to join the euro?
Kitty Ussher: My understanding is that tentative dates have been pencilled in for each of the eastern European countries, depending on their situation and the desires of their national Governments. I cannot, off the top of my head, give the hon. Gentleman the precise date for each one, but they are in the public domain and I will be happy to write to him on the matter.
Mr. Hoban: I do not know whether the Economic Secretary has the seen table from the Library that was published to coincide with the debate. It shows that the budget deficit of the euro area decreased in the period from 2002 to 2008 by about 1.7 per cent. At the same time, although we are told that the UK economy grew faster than the euro zone, the UK budget deficit has gone up by 0.7 per cent. Can she explain why the euro area seems to be much more prudent than the UK in the management of its budget deficit?
Kitty Ussher: The hon. Gentleman is trying to create the perception that we in the UK are profligate in our spending, but it is clear that that is absolutely not the case. We exercise a prudent approach, as we hope all our European partners do. I note what he says about the reduction in the deficits of the euro area, which serves to make the point that effective peer group pressure can be effective in that regard.
Mr. Malins: I am no economist, but I am sure that the Economic Secretary is. Will she explain why the euro is so strong against the pound at the moment, and getting stronger?
Kitty Ussher: I am delighted to have a macro-economic question, although I am not sure that it is strictly within the terms of the debate. Given that the euro is freely floating, it is more a matter for the vagaries of the international financial markets.
Motion made, and Question proposed,
That the Committee takes note of European Union Documents Nos. 6801/07 to 6809/07, 6812/07 to 6819/07 + Corrigendum 1, 6820/07 to 6821/07, 6823/07 and 7863/07 to 7867/07, Council Opinions on the updated Stability and Convergence Programmes of each Member State except Austria and the Czech Republic; and supports a prudent interpretation of the Stability and Growth Pact which takes into account the level of debt, the economic cycle and public investment.—[Kitty Ussher.]
4.52 pm
Mr. Hoban: I was remiss earlier in not saying how much I welcome the opportunity to serve under your chairmanship for the first time, Mr. Marshall. The Economic Secretary, the Government Whip and I are veterans of this Committee. This is the second Monday that we have spent discussing an aspect of European finance; my hon. Friends may, or may not, wish to come along to our next debate on this matter.
I want to reflect on the Economic Secretary’s response to the questions. She said that I should not respond to national stereotypes when we were talking about the Italian Government, but this Government have created their own stereotype and stressed the prudence of their budgeting arrangements and how cautious they are in managing their finances. However, it would appear that the countries in the euro zone are being much more prudent and cautious than the UK, despite our apparently enjoying higher rates of economic growth than the euro zone, on average, in the past few years.
Demonstrated in part by the fact that the UK Government have been in the excessive deficit procedure, it strikes me that we have been through a period in which there has been some profligacy on the Government’s part during the public spending feast. If the Government stick to their 1.9 per cent. growth in Government spending perhaps, when the CSR is published in October, we will see not so much a famine but a period of dieting for the public services.
As the Economic Secretary said, this is a timely debate, as the ONS last month published the report indicating that the deficit is below the Maastricht criteria. Perhaps in her winding-up speech, she will elaborate on the Government’s view of their categorisation as medium risk. I sensed that she felt that that was unfair given the broader picture, which the EU Council had not properly taken into account. What steps might the Government take to move themselves from medium risk to low risk? Do they think that that is a worthwhile policy objective?
Whether the UK Government continue to achieve their forecasts and meet the various Maastricht criteria depends on a series of factors, and I want to mention a few of them in this debate. There are two key areas of concern. First, are we measuring Government debts correctly? Secondly, what are the future risks associated with meeting the Government’s public expenditure targets?
On the measurement of Government debt, I want briefly to mention two issues, the first of which is the private finance initiative. I do not want to get into the old arguments about whether the PFI should be on or off balance sheet, because I think that Members on both sides of the House have heard enough of that debate in recent years. I want to ask the Economic Secretary about the changes to the accounting of PFI that are planned by the Government. The Financial Reporting Advisory Board, which is supported by the Treasury but is independent of it, advocated the scrapping of the technical note for accounting for PFI. Most people interpreted that statement to mean that more transactions have been off balance sheet than was strictly necessary according to normal accounting practice. Does she expect the move to international financial reporting standards to change significantly the proportion of PFI liabilities represented on the counterfoil as on balance sheet, as opposed to off balance sheet? That was the direction in which the Financial Reporting Advisory Board’s report said that the Government should go. Have the Economic Secretary and the Treasury quantified the potential impact of that?
The second issue that I want to address is public sector pension liabilities, to which the hon. Member for South-East Cornwall alluded in one of his questions. Will the Economic Secretary update us on the Treasury’s figure for those liabilities? As the liabilities unwind, they will place a cost on the taxpayer, which I suspect will have an increasingly large effect. What is her assessment of the rate of discount that is applied in valuing those liabilities? I think that it is currently 2 or 3 per cent. If it was increased, the liabilities could have a higher valuation. Given that those liabilities will impact on the Government’s future ability to converge with the Maastricht criteria, what actions will they take to mitigate overall public sector pension liabilities?
Forecasting is another area of interest in the achievement of the public spending target. The Government have a patchy track record when it comes to forecasting things such as the public sector borrowing requirement. We regularly hear restatements on such matters, usually in the upward direction. Between the pre-Budget report 2006 and this year’s Budget, for example, the current surplus to 2010-11 decreased by £6 billion and forecast net borrowing decreased by £10 billion. What impact will such revisions have on whether the Council assesses the UK as medium-risk and as having achieved its Budget projections? Will the Government address the accuracy of their forecasting?
I appreciate that we are talking about big numbers, in both tax revenue and expenditure. As the Economic Secretary knows, there was a significant downgrading of the tax on oil revenues in PBR 2006. The Council’s report identified two areas of weakness in the forecasting of tax revenue: one was oil tax revenues, and the other, which is closer to my heart and to that of the Economic Secretary, was the fortunes of the City. The report suggested volatility in the forecasting of revenues from the financial services sector in relation to the buoyancy of the stock market, the bonuses declared by major employers, the volume of share trading and stamp duty. Is the Economic Secretary confident that the Government’s ability to forecast revenues from sectors such as oil and the financial services industry reduces the risk of forecasting errors? What more can be done to identify those flows?
The other side of the deficits equation relates to public spending. Will the Economic Secretary confirm whether the Government intend to increase the rate of spending in the next CSR period at below the rate of growth in the economy as a whole, at 1.9 per cent.—what the former Chancellor referred to as the third fiscal rule? Is it the Government’s intention to grow public spending at less than the trend rate of growth of the economy as a whole and to therefore adopt our policy?
Is the Chief Secretary to the Treasury keeping a careful note of the spending commitments made by Ministers during the past few months, as they seem to be clocking up with abandon? Last week, £100 million was promised for school sport; there was an announcement by the Secretary of State for Innovation, Universities and Skills about increases in spending for student support, and I believe that there was also an announcement about prison places. There seem to be a lot of spending commitments, but no sense of where the money is coming from and whether it is being diverted from other spending priorities within the 1.9 per cent. envelope, or whether that sum will increase. In that context, will the Minister confirm that there will be no changes to spending figures that have already been agreed with Departments and announced in the 2007 Budget, the 2006 PBR, or even the 2006 Budget?
In terms of convergence, I am keen to understand where the Government stand on those spending issues, and whether they are going to disappoint the Council of the European Union by suddenly coming up with spending increases, at a time when it is looking forward to further fiscal consolidation.
We have not yet touched on the Gershon review of efficiency on public spending, which affects overall public spending and ties into the amount that can be spent on front-line services. The proceeds of the review are meant to be recycled into front-line services. There is a concern, which has been expressed by the National Audit Office, about the accuracy of the gains, which has an impact on the ability of the Government to meet their spending targets. The NAO said in its most recent report that the gains carry a
“significant risk of inaccuracy... As a result of our most recent examination we conclude that of the £13.3 billion now reported: £3.5billion...fairly represent efficiencies made; £6.7 billion...represent efficiency but carry some measurement issues and uncertainties; and £3.1 billion...may represent efficiency, but the measures used either do not yet demonstrate it or the reported gains may be substantially incorrect.”
I think that that means that they are wrong and perhaps should not have been claimed in the first place a part of the £13.3 billion. Will the Economic Secretary confirm what progress has been made on the Gershon review and the Government’s ability to audit properly the claimed efficiency savings? What sensitivity is there in their projections for not achieving those expenditure saving targets?
In conclusion, there is a series of sensitivities in the forecasts. That is partly to do with the measurement of what is on or off balance sheets and what liabilities should be included and partly to do with the Government’s ability to forecast tax revenues correctly. There are also problems with the Government’s CSR. We have already seen two phases of the Government’s approach. During the first three years, when the Government stuck to Conservative spending plans, there was what commentators might refer to as famine; we have now been through a feast period, in which expenditure has been growing faster than the rate of the economy as a whole. I suspect that that is partly why the Government were in the excess deficit procedure, but they now seem to have sought common cause with the Opposition by agreeing to increase spending at less than the rate of growth in the economy as a whole—the third fiscal rule. That seems to be what will bring the projections back into line. I should be grateful to the Economic Secretary for her response to what I hope were helpful questions.
5.5 pm
Mr. Breed: On the face of it, the Council’s opinion looks favourable, at least compared with its opinion of many other countries. However, it also indicates that we should not be complacent. The words right at the end, where the United Kingdom is invited “to pursue budgetary consolidation”, warn against any complacency in the Government. Although the sustainability of public finances is a medium risk, looking ahead reasonably favourably at the projections there are inevitably some unknowns. On the unknown in relation to expenditure, it is difficult to see whether, under the comprehensive spending review, there will be the reduction in expenditure that will bring about greater sustainability of public finances. When the CSR is ultimately available, we will be able to judge more closely whether the Government are responding appropriately.
In terms of strengthening the fiscal position, the hon. Member for Fareham said that the revenues flowing from the financial sector and the oil sector are notoriously volatile and are difficult to project over the longer term. Although those may not be too bad to project in the shorter term, in the longer term that is much more difficult. Those two aspects underpin the opinion that there is medium risk. However, no complacency should be allowed to persist and we should ensure that we undertake some consolidation. The Government will have to take account of that.
My question on pension provision came from the feeling, which, again, is reflected in some aspects of the Council’s opinion, that the public sector pension requirement may in future impose greater expenditure than we might expect, although ours is somewhat less than other countries. In the medium to longer term that may cause difficulties in our continuing to perform as well as we might.
Overall, the Government ought to quite pleased about the opinion, but, as it indicates, there is no room for complacency. We need to pursue budgetary consolidation, both in terms of expenditure and the proper forecasting of revenues, to ensure that we do not rise above the medium-risk level and that we look further to come down to the bottom end of medium, if not the top end of low. I look forward to the Economic Secretary’s remarks.
5.8 pm
Kitty Ussher: I shall respond briefly to some of the points that have been made in this useful discussion. First, however, I am advised that our fiscal position remains sound, despite the shortfall in North sea oil revenues, with a 0.1 per cent. surplus on the current budget over the economic cycle and a net debt remaining below 39 per cent. of GDP throughout the projection period, which is below the 40 per cent. ceiling that we have set. I am sure that the hon. Member for Fareham will find that reassuring.
Mr. Hoban: It sounds reassuring, but what would the consequences would be on our fiscal position if there were a deterioration in the oil prices of, say, $5 a barrel? It is important to understand what sensitivities underpin the projections.
Kitty Ussher: I cannot give the hon. Gentleman a precise number, but I reassure him that we have expert teams looking at the risk in commodity price changes and the effect that those would have on our public finances generally.
On forecast errors, which is a related point, we continue to strive for forecasts that are as accurate as possible, as noted in our most recent end-year public finance report. The year-ahead borrowing forecasts made since introducing the new macro-economic framework that accompanied this new Government have been cautious on average and that was not the case previously. Taking a longer-term perspective, things are getting better.
Mr. Hoban: I find it hard to understand why “cautious on average” is an appropriate response given that there seems to be a bias in favour of understating deficits. As we move from Budget to PBR to Budget, it always appears that the deficit gets larger or the surplus gets smaller. That is not cautious on average but optimistic on average.
Kitty Ussher: The forecasts have been cautious on average. I simply make the general point that we will always be transparent about our analysis. Figures go up and down. We have set ourselves clear fiscal rules and are comfortable that the long-term public finances are sustainable, but one would expect—I am sure that the hon. Gentleman would expect—that if the world out there were to change, we would simply inform the markets through the appropriate mechanisms, and we would continue to do so. Transparency is the important thing if we are all to know where we are.
The hon. Gentleman raised a point about PFI. We do not actually know what the changes in the international accounting standards will be. As they have not yet been published and we do not have the necessary information, I cannot give him a definite answer on that front, but we will always ensure that we operate in the most open and transparent way possible in respect of the implications of changes to the accounting regime.
Turning again to the medium-risk classification, which was raised by the hon. Member for South-East Cornwall, the only thing that I can say is that it is a matter for ECOFIN. We will continue to make our annual assessment of the sustainability of our public finances. The 2006 report published alongside the PBR last year showed that the UK finances are sustainable. I explained during the question-and-answer session why we believe that to be the best assessment available.
We have undertaken various reforms to ensure that sustainability is maintained. The hon. Gentleman mentioned pensions, which is the obvious example. We are proud of the fact that we have received cross-party support for what are quite radical proposals. We will work with the Commission and other member states to ensure that the sustainability modelling takes full account of UK actions on both the revenue and the expenditure sides so that, at the least, we can hope for completely shared analysis, which I do not believe happened before. We include public sector pension projections in the long-term financial forecasts which are given in the report that is published alongside the PBR. One would expect me to say this, but we believe that the long-term report shows that our public finances are sustainable.
We discussed Italy and the UK. The figures that I have show that we had the same structural balance in 2006. Italy was a little higher than us in 2005, but perhaps that is a point of detail that we could return to later. Of course, it is not a secret that the Italian debt is much higher than ours.
On Gershon, I was a member of the Public Accounts Committee when it reviewed the NAO report that the hon. Member for Fareham mentioned. It referred to the situation a couple of years ago. We think that the Gershon process is an excellent one. I would like the Commission to do a little more of that kind of work, as I believe I said last week. Departments and local authorities have reported annual efficiency gains worth more than £15 billion to the end of December last year, and they had reduced their work force by nearly 51,000 by the end of December. That is good progress, and we want such reforms to continue.
Mr. Hoban: I hope that the Minister has not finished her remarks, because she has not answered my question about the CSR and the 1.9 per cent. envelope, and whether Departments whose settlements were previously announced would stick to the targets.
Kitty Ussher: As has been said, that is a matter for my right hon. Friend the Chief Secretary to the Treasury, but we did confirm the overall spending limit for the CSR years 2008-09, 2009-10 and 2010-11 in Budget 2007. Therefore, that is our commitment. It will ensure that the Government meet their strict fiscal rules while allowing an increase in total public spending of an average of 2 per cent. per year in real terms, with current spending increasing by an average of 1.9 per cent. per year in real terms and net investment rising to 2.25 per cent. of gross domestic product, compared with 0.5 per cent. 10 years ago—I must remind the hon. Gentleman of that—thereby locking in the step change in investment over the past decade.
Mr. Hoban: I am grateful for the Minister’s confirmation that the figure of 1.9 per cent. still holds for current expenditure. Does that mean that previously announced settlements remain in place?
Kitty Ussher: Yes.
Question put and agreed to.
That the Committee takes note of European Union Documents Nos. 6801/07 to 6809/07, 6812/07 to 6819/07 + Corrigendum 1, 6820/07 to 6821/07, 6823/07 and 7863/07 to 7867/07, Council Opinions on the updated Stability and Convergence Programmes of each Member State except Austria and the Czech Republic; and supports a prudent interpretation of the Stability and Growth Pact which takes into account the level of debt, the economic cycle and public investment.
Committee rose at fifteen minutes past Five o’clock.

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