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The Earl of Dartmouth: My Lords, I submit that the fact of greater importance is that our cycle mirrors that of the United States and not the continental economies. I suggest that the noble Lord might address that point.
Lord Newby: My Lords, in looking at the progress of economic variables over any time period, rather too much is often made of the past than of what is desirable in the future, or indeed what is likely to happen in the future. If one had said to the noble Earl last year that there would be so many EU member states joining the single currency at the outset, I am almost certain he would have said that was impossible. If he had looked at the debt ratios of member states and their inflation performance, I think he would have said that the likelihood of 11 being able to get within a mile of joining was negligible. However, economies change. The nature of our trade has changed fundamentally since we joined the EU. Simply to project forward from the past is a misleading approach to economic analysis.
Lord Newby: My Lords, it is common practice in this country that when another EU member state does something which one did not expect it to do, but which is in itself desirable, instead of saying, "There is joy in the sinner that repenteth", one may say that he has not repented at all and he is really on the bottle behind the arras. The assumption that all this is fudged is, in my view, a gross exaggeration.
Lord Desai: My Lords, does the noble Lord agree that the markets have judged that, whatever the fudging, they value the debt in such a way that there is a convergence in the bond yields across the 11 countries? That is a true test of convergence.
I return to the position in the United Kingdom. I think that, given the uncertainty with which the Government are approaching this issue, it is hardly surprising that many firms in the United Kingdom are still unprepared for EMU. Whatever happens with regard to current policy, we shall not join for at least four to five years. We obviously welcome attempts by the Government to disseminate information about the euro, but we hope that when we have this debate again in a year's time the Government will have made real progress in telling us how they intend to move from the current unsatisfactory position towards a clear process and timetable of entry.
I have talked about two areas where I believe that more action is needed on the part of the Government. However, the one area of major uncertainty which in a sense hangs over all our economic debates is whether the Government will hit their targets on inflation and borrowing. The Chancellor is gambling that the level of inflation will hit his target, even though for the first two years of this Government it will clearly overshoot that target. Of course higher inflation would wipe out much of the big increases promised by the Chancellor in real terms for health and education and leave the Government with a record on public services which will be significantly worse than that of the previous government, and certainly will not correspond with the impression that the Chancellor tried to portray last week.
Borrowing depends crucially on growth rates which, according to the Government's projections, already look decidedly optimistic. By setting firm spending plans for the next three financial years, which in reality takes us to March 2002--a long way ahead on any view--the Government are committing themselves far into the economic future. The degree of uncertainty in forecasting is acknowledged in the Government's own economic and fiscal strategy report which states that,
The report argues that by adopting a prudent approach in relation to the golden rule and the level of public debt, such errors should not accumulate to the point where they constitute a threat to the fiscal position. I hope very much that the Treasury is right. But even within a matter of weeks of the production of the report, the projections are already looking rather shaky. The National Institute of Economic and Social Research suggested last week, for example, that a fall in profits and slower than predicted economic growth could lead to a deficit on the current balance which would drive a coach and horses through the golden rule. Research undertaken by the House of Commons' Library for my colleagues in another place also shows the vulnerability of the Government's plans to the economic cycle. A
No one should take any pleasure from such gloomy forecasts. We certainly hope that they do not become a reality. We do, however, believe that the Chancellor has made life unnecessarily difficult for himself by failing to tighten fiscal policy on the consumer last year, by having a negligible contingency reserve--much lower than his predecessors--and by ruling out as a matter of principle any possibility of income tax increases during the lifetime of this Parliament, whatever happens to the economy. His scope for manoeuvre is now tightly circumscribed and his ability to stick to the golden rule is thrown into question by his own actions.
We shall debate the Government's fiscal stance in more detail tomorrow in our debates on the Finance Bill and therefore I do not propose to detain the House any longer this evening. However, as I have made clear, we have concerns about the Government's economic assessment and we shall watch with great interest to see the extent to which it is realised in the coming months.
Lord McIntosh of Haringey: My Lords, I am grateful to all noble Lords who have taken part in this short debate. I wish to add my tribute to my noble friend Lord Alli. He made a most impressive maiden speech. He is only starting on his business and political life. I spent 40 years in business with nothing like his financial success. I recognised in his remarks the kernel of business success, and I admire it without having any hope whatever at my stage in life of emulating it. I am grateful to my noble friend for the contribution he made to our debate.
The noble Earl, Lord Dartmouth, made a very effective pre-election speech in his campaign for the European Parliament. I hope that he will use Hansard appropriately in his election material next year. I am sure that he will. I was very interested in the noble Earl's remarks about our relationship with Europe and the United States. It occurs to me to ask a rather naive question. If the noble Earl seriously thinks that in 1998 or 1999 we should be tying our economy to the dollar rather than the euro, there are a large number of questions to be asked to which he did not refer. If that had been possible, perhaps it should have been achieved a long time ago.
The Earl of Dartmouth: My Lords, my point is that, de facto, it is already. In order to tie it to the euro, the economy has to be put in a straitjacket, as it was during the years when Britain was in the ERM.
Lord McIntosh of Haringey: My Lords, I admire the noble Earl's adherence to the tenets of his party. I do not think that he will find much reassurance from business or economists in relation to such a policy. You do not have to like it but it is the case that our economy and our fiscal and monetary policies are closely linked
My noble friend Lord Alli made reference in his excellent maiden speech to the fact that the Chancellor has abjured short-term decision-making. As one who lived for 30 years running a company, for most of the time not knowing where the wages bill would come from three months hence, I very much appreciate the force of his remarks. It is possible--indeed, most governments have done so--to panic at short-term changes in economic indicators. One of the reasons why we delegated decisions about short-term interest rates to the Bank of England was the danger of the kind of panic that is perfectly possible when those who are assiduous, as some of us are, in reading financial and economic comments in the broadsheet press are too inclined to listen to the wise men or women and pay attention to what they say. One of the great things about the British people is that, on the whole, they listen to the wise men, pay due obeisance to them, and then go away and do something else. That is what I hope we shall do. I hope that we shall not respond to day-to-day pressure. It is certainly my impression that the Chancellor has a steely determination to adhere to long-term policies and that he will not be swept aside by short-term pressures.
The noble Lord, Lord Howell of Guildford, in a typically thoughtful speech, gave a welcome for which I am most grateful to the introduction of accounting practices in government. As he said, they have been common practice in business for many years. The noble Lord was right to say that it is a dangerous time to assume that we can extrapolate from the past to the future. However, if the noble Lord does not mind my saying so, when has there been a time when it was not dangerous to do so? It has always been the case that past experience cannot be taken as a guide to the future. If the noble Lord is asking for predictability in economic policy, he is asking the impossible. There is no such thing.
I detected in the noble Lord's resistance to three-year budgeting, which we are determined to introduce and shall be introducing, a Civil Service attitude; namely, he does not like the commitment we are making to the medium-term or longer term future, and he is afraid that there might be changes which would make our predictions over a three-year period unsustainable. That may be the case. We may be wrong about all sorts of things. But the public service, like private business, needs a degree of security in relation to the way in which it will be treated by government. What we have achieved by moving towards research accounting and budgeting is exactly that degree of security. There may be marginal adjustments to be made, and there will be possibilities for such adjustments. But proper investment decisions are not made on a 12-month basis. Anyone who has ever been in business knows that that is the case.
The noble Lord, Lord Newby, seemed to back up the fears of the noble Lord, Lord Howell. I was disappointed to hear that from the Liberal Democrats. I thought that they were just that much more adventurous in relation to public finance policy. The noble Lord quoted the National Institute of Economic and Social Research. I read the NIESR comments very carefully. Although they differ marginally from our forecasts, on the whole they come to the conclusion that, even if the result is a deficit in GDP of 1 per cent. rather than the break-even which is involved in the forecast, none of that affects the validity of our fiscal projections and therefore none of it affects the validity of our expenditure projections. There have been perhaps 45 independent economic forecasters' predictions of the future of the various indicators in the economy. I do not claim that the Government are the most cautious. That would be absurd. However, I am certainly claiming that we are in line with the general trend of independent economic forecasting and that therefore our predictions for growth, public expenditure and revenue are prudent and cautious rather than what the most pessimistic, doom-laden predictions would lead us to expect.
The noble Lord, Lord Howell, also referred to the difficulty of distinguishing between capital and current spending. That is a counsel of despair. It has existed for something like 50 years, during which the Treasury insisted--it does not now insist--that £1 of revenue plus £1 of capital equals £2. Of course there are difficulties at the margin. But the determination to make that distinction--which is made year by year, week by week and day by day by every public business--is an essential determination. I do not for a moment resile from our determination to do that. If from time to time we get the difficulties of definition wrong, the independent Office for National Statistics is there to put us right. It will simply not allow us to say, for example, that expenditure on skills training is an investment. Although we all know that in one sense it is, we are not allowed to count it in the accounts as an investment; we have to include it as current expenditure.
The noble Lord, Lord Higgins, made a brief warning intervention and I know that he will speak at greater length and to equal effect tomorrow. But he talked as if the objective of the exercise were to reassure our European partners about the economy. It is no such thing. In this debate and in the submission we shall make to our European partners, our intention is to share information about our economy with those who share information with us. That in turn will be valid. If it is called "multilateral surveillance" so be it. I do not care for the long words, but it is legitimate. We are not trying to put anything over on our European partners.
The noble Lord, Lord Higgins, asked about accounting adjustments and gave warning that he would raise the matter tomorrow, so perhaps I should deal with it tomorrow. The Government have provided the Treasury Select Committee in another place with further detail on the category of accounting and other adjustments, to be published in due course as part of the Treasury Committee's report.