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European Convergence Criteria: Deficit Assessment

4.50 p.m.

Lord McIntosh of Haringey rose to move, That this House approves, for the purposes of Section 5 of the European Communities (Amendment) Act 1993, Her Majesty's Government's assessment as set out in the Financial Statement and Budget Report July 1997.

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The noble Lord said: My Lords, in a sense this debate is the fault of the Labour Party. The Section 5 amendment to the European Communities Act was put forward by Andrew Smith, MP, from the then Opposition Front Bench. Its purpose was to make clear the importance we attached to a full interpretation of Article 2 of the Maastricht Treaty. Article 2 of the treaty sets out the Community's objectives which include a balanced development of economic activities and sustainable and non-inflationary growth respecting the environment. The amendment also strengthens government accountability to Parliament.

The noble and learned Lord, Lord Rodger of Earlsferry, the then Lord Advocate, clarified the implications of the amendment. During the Third Reading of the Bill in the Lords, he explained that it requires the Government to secure parliamentary approval of a report under Section 5 before the information can be submitted to the Council or Commission for the purposes of Articles 103 and 104c of the Maastricht Treaty. These articles relate to multilateral surveillance and the excessive deficits procedure respectively.

The Financial Statement and Budget Report--the Red Book--published earlier this month provides an appropriate assessment. It describes the Government's tax and spending plans and develops a comprehensive set of policies which meet the broad economic, social and environmental assessment required by Section 5. This framework of new policies begins the task of equipping Britain for our long-term future. Taken together these policies will allow us to tackle the UK economy's fundamental past weaknesses: repeated cycles of boom and bust, inadequate levels of investment and high unemployment.

More specifically, the Chancellor announced policies designed to: improve the underlying rate of growth and employment by creating economic stability and improving the environment for long-term investment; modernise the welfare state so it provides an effective way of supporting people back into work rather than trapping them in poverty; ensure high quality public services are delivered in the most effective way; develop a fair tax system; and ensure that economic development takes place in a way which is consistent with high standards of environmental protection.

In order to create the conditions for economic stability, the Budget contained measures for long-term fiscal stability. This followed the earlier announcement of giving the Bank operational responsibility for setting interest rates, which removed the perception that monetary policy decisions are driven by short-term political factors. The Chancellor has set out clear rules which ensure a historic break from the short-termism and expediency that have characterised the recent fiscal policies of our country. As with our monetary policy, our fiscal policy will be the more credible for being open and accountable.

Ensuring economic stability will create a healthy climate for investment. The Chancellor also announced specific measures to encourage investment in business,

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people and infrastructure. For example, corporation tax was cut by 2 per cent. from 1st April 1997 producing generally the lowest small companies' rate in the EU.

By sending information from the Red Book to the Commission and the Council the Government are participating in multilateral surveillance of economic policies and performance across the European Union. This is sensible. Sharing this information helps promote the adoption of sound policies. An excellent example of taking a positive and co-operative approach is the Chancellor's initiative to increase the job creating potential of the European Union's economies: Getting Europe to Work. The Chancellor's action plan for Europe involves the ECOFIN Council focusing on how to use best practice to cut unemployment across the Community. By evaluating new ideas and projects we can learn how best to combat high and unacceptable levels of unemployment in Europe and by playing a proactive role Britain can lead the debate on the economy.

Turning more specifically to Section 5, this approval of the FSBR as the "report" allows us fully to participate in multilateral surveillance. Under this procedure the broad economic guidelines are drawn up each year and adopted by the Council. They facilitate the surveillance procedure by providing a basis from which economic developments in the member states can be monitored. The Government's central economic objective is high and stable levels of growth and employment. This is fully consistent with the 1997 guidelines. They highlight the need to reduce the Community's rate of unemployment and the need to progress towards price stability and sustainable public finances.

The multilateral surveillance procedure also involves member states submitting convergence programmes to the Commission on their medium-term economic objectives. This is another mechanism whereby information on economic performance can be shared and successful economic policies can be promoted. The Stability and Growth Pact, agreed by member states at the Amsterdam European Council in June, sets out more formally the information which member states should submit in their programmes. This agreement demonstrates the importance that the Community attaches to promoting sound economic policies among its members.

Section 5 also allows us to contribute to the excessive deficit procedure. This procedure maintains pressure on European Union member states to adopt sound public finances. We are of course in the happy position of expecting the relevant deficit and debt ratios to be well within the reference values of 3 per cent. and 60 per cent. respectively. Moreover, as the Red Book makes clear, the Chancellor's deficit reduction plan ensures the sustainability of the fiscal position.

It is important that all member states manage to achieve sound public finances. Stable public finances are a key requirement for long-term economic stability. The Government have made clear in the Red Book that their fiscal policy will be guided by rules which ensure that borrowing is kept under firm control. Without this stability, and the confidence of future stability,

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businesses cannot plan effectively for the long term; and the environment to promote investment, productivity and growth is damaged.

I have already talked about the Government's central economic objective and the importance of stability in this respect. However, I also said that economic development needs to take place in a way that is consistent with high standards of environmental protection. We are committed to explore the scope for using the tax system to deliver environmental objectives by increasing the incentives to reduce environmental damage in combination with other mechanisms such as regulation. The Budget began this process by increasing road fuel duties by 6 per cent. in real terms as a means to reduce C0 2 emissions. I also spoke of the need to ensure high quality public services and to develop a tax system which is fair and seen to be fair.

We need to target spending in priority areas and ensure public resources are being spent efficiently. Within the unchanged control total, the Chancellor announced an extra £1.2 billion for the NHS and £1 billion for schools, allocated from part of the reserve to meet our priorities in these areas. A comprehensive spending review is also under way. This will examine every item of spending to ensure that it contributes to the Government's objectives as effectively and efficiently as possible.

On taxation, the Government are committed to a system which reflects the principles of fairness, rewarding work and encouraging savings and investment. These principles were set out clearly in the Budget and it was in this context that the Government kept to their commitment to cut the rate of VAT on fuel to 5 per cent.

These policies I have spoken of today are set out in the Red Book and are an essential foundation if Britain's full potential is to be realised.

Turning to Europe, we shall have most influence resolving the economic problems which face Europe if we play our full part in European Union discussions. Sensible policies in the rest of Europe will foster higher European growth and employment and a larger and more buoyant market for the UK's exports. Approving the FSBR, as the report under Section 5 provides, and participating in the EU surveillance procedures is one way in which we can influence Europe's economic agenda in this direction. I beg to move.

Moved, That this House approves, for the purposes of Section 5 of the European Communities (Amendment) Act 1993, Her Majesty's Government's assessment as set out in the Financial Statement and Budget Report July 1997.--(Lord McIntosh of Haringey.)

5 p.m.

Lord Taverne: My Lords, I have looked at previous debates under this section and they seem to be slightly odd occasions. They are partly a review of economic policy and partly a review of progress under the Maastricht Treaty. But it is a suitable kind of debate for these matters in which there are few speakers and not an overwhelmingly large audience. So I shall be very brief.

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As regards the Maastricht criteria, it seems clear that the Government will not fail to meet them. These criteria are the least of their difficulties. They present much greater difficulties for our German and French partners. But the criteria are not the most important factors. They are guidelines but they have acquired a rather spurious symbolic significance because the real question is whether the future members of monetary union can sustain low inflation. If one looks at the prospects for sustaining low inflation, the UK may have slightly greater difficulties.

I find it very hard to assess the Budget judgment. Many people have firm views that it was too mild, that it has not been tough enough or that it has gone too far. Frankly, I do not know. I fear that whatever the Chancellor might have done in the Budget, a great deal of the strain of containing inflation would still have fallen on interest rates. Inevitably in present circumstances that is so. I suspect that we will keep the inflation targets and that we will be able to contain it. Nevertheless, that is one of the crucial factors that needs watching.

Our real problem about joining monetary union is the exchange rate. I am not sure that there is much that one can do about it. However, it is quite clear that whatever one's views are generally about monetary union, we cannot possibly join at an exchange rate of 3 deutschmarks to the pound. Perhaps there is something that we could do: we could announce that we will rejoin the new, much more liberal exchange rate mechanism when it is possible to do so at a central rate of 2.5 deutschmarks to the pound. In effect that means that as soon as the pound has fallen, as in due course it no doubt will, to a relationship of £2.875 to the mark. That will bring us just within the permitted 15 per cent. range, with a central rate of 2.50 marks.

The last thing we can do is to follow the central recommendation of the CBI and declare ourselves at an early stage as being in favour of the principle of joining monetary union--that is if monetary union starts, as I expect it will. I do not know whether it will start on time or not. We suffer from the instability of the pound and from its recent high rise. We would gain enormously from the stability of being in the monetary union. We would probably gain a measure of stability in the period before we join monetary union if we were "pre-ins" and if we were part of the exchange rate mechanism. I cannot firmly forecast, but I suspect that if we announce that that is our intention, it would of itself have a favourable effect on the pound and our exporters might face a rather more attractive prospect than they do at the moment.

5.4 p.m.

Lord Burnham: My Lords, in opening this debate in February my noble friend Lord Mackay of Ardbrecknish said:

    "This is an annual debate. The cast does not seem to vary".--[Official Report, 19/2/97; col. 757.]

It does not seem to be quite a year since 19th February, but the cast has varied and so indeed has the director of the play.

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The noble Lord, Lord Taverne, said that this debate is rather a curious affair. Last time it was longer and more complicated than some previous debates because that day there had been what those who were sitting on these Benches saw as a marginal disagreement on the question of the European currency between my right honourable friends the Chancellor of the Exchequer and the Foreign Secretary. That gave those who were then in Opposition a good opportunity to make pointed remarks at our expense, and very effectively they did so.

I have been told that this Motion is purely formal. However, my friends in both Houses have failed to see the necessity for this recent emergency Budget. It would seem that Her Majesty's Government's assessment which is contained in the Financial Statement and Budget report can be summed up as, "Aren't we clever. We have got there". Her Majesty's Government can reasonably look at the convergence criteria and appreciate that this country is virtually the only one that has got there.

However, the recurrent theme throughout the report demonstrates that since 1992 or so the economy has gone ever upward. Even this Government are forced to admit that the former Conservative Government left the country in a very strong economic position. That emphasises that the recession of the late 1980s presented many problems but that a remarkable recovery has been effected, particularly in the past year, with consumer spending growth at 3.5 to 4.5 per cent. since last autumn and with an inflation forecast of 2.4 per cent., although that, as the report says rather ominously, may rise temporarily in 1998. In addition, the Public Sector Borrowing Requirement for 1996-97 was £23.1 billion, which is £3.3 billion less than the £26.4 billion forecast, with a PSBR of £4 billion in the first two months of 1997-98 compared with £6.2 billion for the same period last year.

All this comes from the fact that the previous Government left the public finances in good shape, as I have said. The effect of just one factor--higher than expected corporation tax yields from higher profits--cuts an extra £2.1 billion off the PSBR forecast for this year.

The Chancellor prepared the ground for a tax-raising Budget this summer by introducing five new assumptions on which to base his forecasts of the public finances. These assumptions have a direct impact on the Government's forecast of the PSBR, pushing it up by £3.25 billion in 1998-99 and by £4 billion in 1999-2000. These assumptions are at best speculative.

There was of course no financial need for the emergency Budget at all except to demonstrate the way in which the new Government keep their electoral promises. They introduced only 17 new taxes as they did not wish to exceed in one go the figure of 22 new taxes which they accused the Conservatives of bringing in in five years.

But what the Minister has said is true. The Government can go to the European Commission and with confidence give an assurance that their assessment of the medium-term economic and budgetary position shows that it is healthy. At the same time the

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Government must make hay while the sun shines and, mixing my metaphors horribly, while they are still in the honeymoon period. The Government's crest would seem to be best seen as a cloud no bigger than a man's hand. Who, for instance, as the noble Lord, Lord Taverne, has said, is going to welcome this country flirting with a single currency with the franc at 10.20 to the pound and the deutschmark at over three?

The noble Lord, Lord McIntosh, spoke of a more buoyant export market. He is perhaps an optimist, bearing in mind the figures which manufacturers and exporters already view with dismay. They will pile this Pelion onto the Ossa of increased costs which must arise as a result of the introduction of the Social Chapter. Even now manufacturers can have little confidence in their ability to make their goods cheaply or to sell them when they have made them. Add to this the temporary increased inflation forecast--which may well be more than temporary when these factors are borne in mind--and we have a potential wrecker of the current healthy economy.

Today we can approve the assessment. When we come to the same debate next year it may not be so easy if the Government maintain the fiscal policy that they have introduced in this emergency Budget.

5.10 p.m.

Lord McIntosh of Haringey: My Lords, I am grateful to both noble Lords for their contributions to this debate. I note that both of them did what I did and referred back to the preceding debate on 19th February of this year. I remind the noble Lord, Lord Burnham, that not only are the personnel different but that the noble Lord, Lord Mackay of Ardbrecknish, in winding up the preceding debate said:

    "I look forward to a repeat performance with us in exactly the same positions next year".--[Official Report, 19/2/97; col. 771.]

A few things have changed since then.

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