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Lord Newby: My Lords, Prudence for a purpose is the title of this year's Budget report. It is a phrase by which this Chancellor of the Exchequer will probably be best remembered, not least because he has used it so often.
What does the Chancellor mean by "prudence"? More than anything else, he has defined prudence by his ability to keep to the two key rules which he has establishedthe sustainable investment rule and, more importantly, the golden rule. The principle of the golden rulethat current expenditure should balance over the economic cycleis a good one, but for this Chancellor it is more than that. It is the single most important measure by which he has chosen to define his own success in office.
The Budget report is optimistic about the Government's ability to meet the golden rule over this cycle and into the future, but, since the Budget, this optimism has increasingly been questioned. Within the past fortnight, the Institute of Fiscal Studies has claimed that the Government are on course to break the golden rule. The National Institute of Economic and Social Research said last week that the chances of meeting the rule are at best 50:50 and, depending on when the cycle is deemed to have ended, it could be a lot less. Last week, the chief UK economist at Barclays Capital said that the rule had been broken and that the Chancellor was "lying and cheating" if he claimed otherwise.
What are the areas of dispute? First, when does the cycle run to? That question was asked earlier in the debate by the noble Lord, Lord Sheldon. The working assumption, confirmed by the Minister, is that it will run to the end of the next financial year. It is important that we have clarity on that issue; otherwise, there will be a deep suspicion that moving the end of the cycle for political reasons will make all the difference to whether or not the golden rule is met.
The second problem is how one measures the deficit to determine whether the golden rule has been met. The Government have chosen to do that on the basis of the average current surplus over the cycle as a share of GDP. Martin Weale at the National Institute of Economic and Social Research believes that to be "plain wrong" in terms of methodology. But the effect of this choice of methodology, complicated though it is, is actually rather clever for this Government at this point because it gives greater weight to the early years of the cycle. That was very convenient, given that, at that point, the Government were building up surpluses. It will be far less convenient if they maintain this methodology into the next cycle because at the beginning of the cycle they are jolly well not going to
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have surpluses and, given their own bias in the rules to end up with a balance over the next cycle as a whole, they will find it much more difficult.
Another issue which is undermining people's faith in the ability to meet the golden rule is that current expenditure appears to be rising faster than expected in the Budget. In the first six months, it rose by 6.6 per cent, whereas it was anticipated to rise by 5.2 per cent. I should be interested to know whether the Minister thinks that the Government will be increasing current expenditure over the second six months at a significantly slower rate so that that overall annual increase of 5.2 per cent is met.
There is also considerable doubt about whether the Government's optimistic assertions in the statement on taxes and tax revenue will be metnot least in terms of corporation tax, which, indeed, rose significantly over the first six months of the year by some 15 per cent. However, given that the Government had pencilled in 22 per cent for the year as a whole, the projection clearly runs the risk of being missed.
What all these disputes show is that, far from being a clear rule, the golden rule is increasingly a muddy rule, with suggestions of murky redefinitions in the Treasury to keep the figures looking good. Given the importance of the issue and, more generally, of the reliability and basis of government tax and expenditure estimates, we on these Benches have suggested that a new body at arm's length from the Government should be established to audit the assumptions underlining the Government's tax and expenditure proposals.
At present, the NAO audits some of the assumptions, but the Government decide which and then use this partial audit as the basis for claiming that the whole Budget has been subject to rigorous external scrutiny. When, a couple of weeks ago, I suggested to the Minister across the Floor of the House that this function might be performed by a new fiscal policy committee, he said that there were plenty of committees already and that we did not need another.
As the Minister knows, we on these Benches always do our best to accommodate his concerns, and therefore my suggestion today is a variant of my earlier one; namely, that the National Audit Office should establish a separate unit which has as its sole function the analysis and audit of government taxation and spending assumptions.
Such a unit should be charged by Parliament, to which it would be accountablebut with government blessingwith the task of reporting formally at the time of the Pre-Budget Report and the Budget itself on the Government's fiscal performance and their plans. Its economic expertise would need to be strengthened and its line of reporting would be the Treasury Select Committee in another place. However, unlike at present, the NAO would be free to review whichever Budget assumptions it considered appropriate and make fully independent overall assessments of performance against the fiscal rules.
It is a suitably modest suggestion; it does not involve setting up a new quango or a group of highly paid wise men or women; but it would provide a genuinely
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independent assessment within an established framework of parliamentary accountability. The Chancellor is in serious danger of losing economic credibility, and his reluctance so far to entertain such a modest degree of independent scrutiny feeds the suspicion that the Government have something to hide.
One of the other key assumptions underlining the Budget projection was that the Government would be able to achieve 2.5 per cent savings in expenditure through efficiency savings identified by the Gershon report, leading to annual savings of some £20 billion by 200708. That is an extremely bold programme. How is it to be achieved?
What does all that mean? Will the change agents be more James Bond or Johnny English? Gershon said that all will be revealed by the end of October, when all departments would publish on their websites efficiency technical notes explaining exactly what they were going to do to achieve the desired savings.
I suspect that not many Members of your Lordships' House have yet had the chance fully to examine the efficiency technical notes which duly appeared last week. I thought that it was appropriate to draw to noble Lords' attention merely those that were produced for the Treasury. Many of the principles which apply to the efficiency technical notes published by the Treasury apply across other departments.
The notes set out, or purport to set out, in great detail exactly how these savings are to be met. The Treasury, being a relatively small department, is due to make savings of some £11.9 million per annum by 200708. How is that to be done? Workstream 3 of the notes talks about procurement, which is clearly a very big item. Two areas are covered: information services (IT) and accommodation. Information services is the most difficult area of procurement, as every government IT project has demonstrated. So here we expect to find an absolute example of how this knotty issue of keeping costs under control is to be resolved. The notes state:
If there were ever a case of being able to count the paper clips but not seeing the big picture, those two paragraphs exemplify it. And the one consolation that one can draw from this statement is that Sir Humphrey is, indeed, alive and well in the Treasury.
The final element of the efficiency savings is to be found in the response of the Treasury to the Lyons report in terms of decentralising staff. Originally, the Treasury had a bold ambition to relocate 19 staff from central London to the regions. However, the efficiency technical notes say the following:
We agree with the Government that any well run organisation should seek continuously to make efficiencies and the government machine obviously falls within that category. But what the Chancellor has produced is a bold claim for savings which, to date, looks more like a pipedream than a bankable promise. As a result of today's Motion, the EU will formally receive the Government's estimates for the economy for government taxation and expenditure. I hope that it will take at least some of it with a big pinch of salt.
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