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Baroness Bonham-Carter of Yarnbury: I thank my noble friend for repeating the Statement. As so often, I find myself echoing my noble friend Lord Fowler. Does the Minister agree that this affair demonstrates that there should be safeguards to ensure that no one organisation should be in a position to own a disproportionate share of the British media-which, by the way, is possible thanks only to the Communications

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Act 2003 and despite prescient warnings by my noble friend Lord McNally and the noble Lord, Lord Puttnam-and finally, as my noble friend said, that decisions on media mergers should not be taken by politicians but openly and transparently by an appropriate and independent regulatory body?

Baroness Garden of Frognal: I entirely agree with my noble friend. As I mentioned in my reply to my noble friend Lord Fowler, these measures are under way. We are not intending to delay taking this forward. We recognise that in the past the Murdoch empire was an enormously powerful factor for both the Labour Party and the Conservative Party. The coalition Government have now set up a thorough inquiry into those matters, which we hope will come up with some really good answers.

Lord Puttnam: My Lords-

Lord Prescott: My Lords-

The Minister of State, Ministry of Justice (Lord McNally): Perhaps we may hear from the noble Lord, Lord Puttnam, first.

Lord Prescott: Why is that?

Lord Puttnam: My Lords, while entirely agreeing with the noble Lord, Lord Fowler, that the situation must change, many of us worked in this Chamber for two years on the Enterprise Act 2002 and the Communications Act 2003 to ensure that no Secretary of State was ever placed in the position in which Jeremy Hunt placed himself. We thought that we had achieved that. I agree with the noble Lord, Lord Fowler, that we need to find another way forward.

However, I have a greater concern that I will put to the noble Baroness. On 9 July 2009, David Cameron, who was then the Leader of the Opposition, made a speech that became known as the "bonfire of the quangos" speech. He mentioned only two quangos but picked out Ofcom as one that needed to be trimmed back and to have its powers curtailed. I do not think that there is anyone in this Chamber or in the other place at the moment who would suggest that this is a moment for Ofcom's powers to be curtailed. Three months later, the Sun came out in support of the Conservative Party. Was this a coincidence, and could politicians of all parties think twice before they start talking about reducing the power of regulators and regulation?

Baroness Garden of Frognal: The noble Lord makes a very powerful point. What he said about Ofcom was of course proven to be absolutely valid in the light of the events that unfolded. The sequence of events unfolded fairly rapidly, and the power of the regulator and the respect in which regulators are held have been enhanced by what has happened. We certainly see that Ofcom still has a role to play in matters such as this.

On the matters concerning my honourable friend the Prime Minister, I cannot comment directly.

Lord Smith of Finsbury: My Lords, as a former Secretary of State I re-emphasise the point made by the noble Lord, Lord Fowler. Matters relating to

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media ownership, public interest and plurality are surely matters to be determined by Ofcom or by the Competition Commission, not by any Secretary of State, however honourable.

Baroness Garden of Frognal: My Lords, we are hearing consensus from all sides of the Chamber on that, and I entirely agree with the noble Lord.

Lord Cormack: My Lords, is there not another issue we should be considering: the exact role of special advisers? I cast absolutely no aspersions on Mr Jeremy Hunt, for whom I have a very high regard, but it seems to me that while special advisers have an understandable role in liaising with party politicians and so on, they should not usurp the role of the career civil servant. I believe-I raised this as long ago as the early 1970s in another place-that Governments of all parties have tended to be careless in the way in which they have used special advisers. This is not the first example we have had in the past 12 months. Could we have a review of the exact role, position and duties of special advisers within government departments?

Baroness Garden of Frognal: My understanding is that in this case the special adviser was one of a number of people, including officials, who had particular roles in respect to the BSkyB bid-but I hear what my noble friend says and if there are matters I can write to him on, I will do so.

Lord Myners: My Lords, while the House has very many concerns about plurality and media ownership, the issue here is a very narrow and precise one. It is about ministerial accountability and compliance with ministerial regulations and the code. This is not to be left to Leveson, who will take a long time and no doubt do a very good job. This is a Secretary of State whom I hold in high regard-I have been very impressed by the way in which Mr Hunt has conducted his affairs, particularly in support of arts institutions-but the simple fact is that there was a complete breakdown of control within DCMS and for that the Secretary of State, who appointed the special adviser, must take entire responsibility. I cannot believe that there was not daily contact between Mr Adam Smith and the Secretary of State and, as we have seen from the e-mails, decisions to be announced by the Minister were disclosed to News Corporation in advance-textually precisely accurately. This is also a breach of Financial Services Authority regulations, which the Permanent Secretary of DCMS should immediately investigate and report to the FSA. Will the noble Baroness confirm that that will be done, and explain why the Secretary of State is not taking responsibility for the people he appointed and who reported to him?

Baroness Garden of Frognal: My right honourable friend in the other place this morning pointed out that he had a number of people in the department working for him to whom he gave responsibility for particular tasks, and he did not then monitor them in precise detail-but I hear what the noble Lord says.

Lord Martin of Springburn: I put it to the noble Lady that the impression I got when I listened to the Secretary of State and the Prime Minister was that

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they were far keener to allow this matter to go to Leveson than to speak to the House. Perhaps she could convey to the Prime Minister that in my experience, if a Prime Minister or a Minister of the Crown in some way feels that they can hedge the situation over to Leveson, it is highly likely that my successor, the Speaker, will allow an Urgent Question and even, in a very serious case, put aside the business of the House. Only two or three years ago, when Mr David Cameron and the Cabinet were in opposition, they put the case that Ministers must come to the House and be accountable. They cannot have it both ways.

I will ask another question on the point that has already been raised about special advisers. I am deeply concerned at their behaviour. Is it the case that special advisers have a code of conduct? If they do, then the young man, Mr Smith, would have known that he was in breach of that code by breaking a confidence and giving information before it was conveyed to the House. Today the name of Damian McBride was shouted out. It is alleged that Mr McBride, as a special adviser, was keen to blacken the name of the Prime Minister and the Chancellor when they were in opposition, and of the honourable Nadine Dorries. It is sad situation when the taxpayer has to pay for people who are not only incompetent but prepared to blacken the name of decent men and women.

Baroness Garden of Frognal: The noble Lord asked a number of questions. I was in the Chamber during Prime Minister's Questions and while the Secretary of State was making his Statement. On his point about the Secretary of State being accountable to the House, I say that my right honourable friend was doing just that in coming to the House to take questions in great detail for well over an hour from Members of the House. I hope that he proved himself accountable to the House on that front.

The noble Lord asked about the role of spads and whether they have a code of conduct. My understanding is that they do. They perform an incredibly useful function, as successive Governments have discovered-but obviously, if something has gone wrong, that needs to be looked into on an individual basis. He also mentioned some of the evidence that we saw in the media today. We need to be somewhat cautious about taking at face value all the reports that appear in the media. This is the very aspect that we are discussing today, and it might be wiser in some respects to wait until the evidence has been fully investigated so that we know which parts of the reports of the media are true and which are somewhat creative.

Lord Davies of Stamford: For the avoidance of doubt, will the noble Baroness confirm to the House that what the Government are asking us and the country to believe is that a special adviser, whose office was no doubt next door to that of the Secretary of State, who saw him several times a day, who worked in close collaboration with him and had been appointed by him as a person of trust, without any instruction from the Secretary of State, without any encouragement, without any connivance, took it upon himself to become deeply complicit with one particular party to a highly controversial decision that the Secretary of State was

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going to have to make, got into the business of leaking documents, talking about tactics and substance, exchanging views, and never thought to tell his Secretary of State what was going on, to check with him that he was happy with that or to report to him on any of the content of those exchanges? Is that actually the story that the Government is inviting the House and the country to believe?

Baroness Garden of Frognal:Once again, the noble Lord is fielding reports from the media that have not necessarily been substantiated, and it would be wise to wait to see which of them are true. All I can say on the question of Adam Smith's role is to refer to his letter of resignation in which he states that,

Lord Inglewood: Does my noble friend agree, first of all, that the allegations made about the Secretary of State are extremely serious; and, secondly, that the Secretary of State's Statement in the House of Commons was an explanation of what occurred but what we need to see is the evidence on which the explanation was based so that Parliament and the public can make up their mind about the events that have occurred?

Baroness Garden of Frognal: Yes, my Lords, what my noble friend says is probably right.

Lord Bates: Are we not missing something of the big picture here? The questions over News International have not appeared only in the past 18 months. They have run beneath the surface, at the core of public life in this country, for some 15 years. Now what we have is an inquiry that is tasked to look at this. I, too, looked at the terms set out for the Leveson inquiry. The case has been made that they are not relevant, but they are exactly relevant. What is being considered now is the relationship between press and politicians and, specifically, the extent of unlawful or improper conduct within News International and other media organisations. That is highly relevant. We now have an inquiry that is two-thirds of the way through its consideration, which should be allowed to consider this important issue in the round-and which this Government actually set up.

Baroness Garden of Frognal: I agree with my noble friend that that is the position, and that a lot of lessons will come out of the Leveson inquiry that could range very much wider than the remit that was set for it. We certainly hope that the end of the inquiry will not be the end of the matter and that these various disturbing cases will be taken forward and we will reach a resolution.

Lord Storey: Where are we up to on the Government's commitment to a statutory register on the lobbyists of public affairs committees, and when are we likely to see legislation enacted?

Baroness Garden of Frognal: My noble friend is quite correct that in January the Cabinet Office announced that it was looking actively at a statutory register of lobbyists. It was interesting that we saw in the debate

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just before this one support for the positive power of lobbyists to make valuable changes to things going forward. On the actual dates, I am afraid that I do not have the answer, but I will write to him.

Lord Beecham: Will the Minister say whether the Government think it right that they should seek from the most interested party in an application of the kind that has precipitated this affair a comment on the submission of another interested party opposing that application?

Baroness Garden of Frognal: My Lords, there were many aspects of the matter that need more inquiry and further looking into. On the issue that the noble Lord raised, we need to look at exactly what happened and who was told what, and why. There may well come out of that lessons about what we could learn to do better in future. But he is right that that is certainly an area of concern.

Lord Stoneham of Droxford: I congratulate the Minister for handing these questions in difficult circumstances on behalf of the coalition Government. Would she like to join in congratulations to the Department for Business for the way in which it conducted itself during these troubles? Also, while we have had a number of attacks on the role of special advisers, we should also congratulate the behaviour of the special adviser in that particular department during this time.

Baroness Garden of Frognal: I thank my noble friend. We can see that there was much that went correctly in the Department for Business-but as we all know, the matter was transferred to the DCMS. On all these things we need to look and see what went right and what went wrong and try to do it better next time. This is definitely not the end of this particular matter.

European Communities (Amendment) Act 1993

Motion to Approve

6.24 pm

Moved By Lord De Mauley

Lord De Mauley: My Lords, I welcome this opportunity to debate the information that will be provided to the Commission this year under Section 5 of the European Communities (Amendment) Act 1993. As in previous years, the Government report to the Commission on the UK's economic and budgetary position in line with our commitments under the EU's stability and

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growth pact. The Government are to submit their convergence programme by 30 April. It explains our medium-term fiscal policies as set out in the Autumn Statement, Budget and OBR forecasts, and is drawn entirely from previously published documents that have been presented to Parliament. It makes clear that this year's Budget reinforces the Government's determination to return the UK to prosperity, and it reiterates our number one priority-tackling the deficit and restoring economic stability.

Last month's Budget builds on the foundations laid in the 2010 Budget to safeguard our economic stability; to create a fairer, more efficient and simpler tax system; and to drive through reforms to unleash the private sector enterprise and ambition that are critical to our recovery. As my right honourable friend the Chancellor of the Exchequer said in his Budget speech, Britain will earn its way in the world.

Today's news that UK GDP fell 0.2 per cent in the first quarter is, of course, disappointing. We face a very tough economic situation. It is taking longer than anyone hoped to recover from the biggest debt crisis of our lifetime, even taking account, for example, of the recent fall in unemployment. But over many years this country has built up massive debts, which we are having to pay off, and it is made much harder when so much of the rest of Europe is in recession, or heading into it. The one thing that would make the situation even worse would be to abandon our credible plan and deliberately add more borrowing and even more debt. You cannot borrow your way out of a debt crisis.

We can succeed only if we continue to safeguard our economic stability. But because of actions we had already taken, we were able to put forward a Budget this year that has a neutral impact on the public finances, implementing fiscal consolidation as planned, and keeping us on course to achieve a balanced structural current budget by 2016-17, with debt falling as a percentage of national income in 2015-16. Fiscal sustainability is the vital precondition for economic success, but there is much more that we are doing to catalyse growth. First and foremost, we are undertaking far-reaching reform to ensure that our tax system is simple, predictable, fair and supports work. We are committed to creating the most competitive tax system in the G20, cutting, for example, the rate of corporation tax to 22 per cent by 2014, the lowest rate in the G7, fourth lowest in the G20. But as well as creating the right and competitive conditions for business to flourish, we will continue to invest in our future.

We have announced that we will take forward many of Alan Cook's recommendations for roads and developing national road strategy. We have confirmed investment to provide ultrafast broadband to 10 cities across the UK, with a second wave of cities to follow, and we will continue to support the establishment of a new pension infrastructure platform to unlock an initial £2 billion of investment by as early as 2013.

Of course, a return to prosperity depends not only on what we do here in the United Kingdom, but on events beyond our shores. As the Office for Budget Responsibility said in its March report,

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to the UK's economic forecast. More than 40 per cent of our exports are to the euro area. In that regard, it is encouraging that progress has been made over the last year. The European Central Bank's monetary loosening has helped stabilise the banking system. There has been progress in stabilising Greece, and a number of countries have announced economic reforms.

6.30 pm

As well as these short-term measures, important longer term reforms have been made since your Lordships last debated the convergence programme-reforms which include a stronger, more effective stability and growth pact, following agreement in December 2011 of the six-pack of European Commission legislative proposals, which provide a stronger focus on preventive measures and debt developments, along with sanctions at an earlier stage of the process for euro area countries. A new macroeconomic imbalances procedure is in place to provide an assessment of potential economic risks across Europe, with sanctions for euro area countries that fail to take action. Importantly, the Commission has put forward proposals to improve co-ordination of budgetary processes between euro area countries. The Treaty on Stability, Coordination and Governance, signed in March by 25 member states, also has the potential to embed stronger rules on financial discipline. Together, these reforms represent a stronger, reinforced system of economic governance for the EU and the euro area in particular.

In case there is any misapprehension, I reassure your Lordships that following these reforms the UK will remain not subject to sanctions under the strengthened stability and growth pact. The EU treaty is clear that they apply only to euro area countries. The EU can give its opinion on our Budget, along with other international organisations such as the OECD and the IMF, but, crucially, we are under no obligation to take action. It will be up to the Government, not Brussels, to decide what action to take in the UK. Of course, as the euro area moves closer towards integration, we must and will remain vigilant to protect the UK's interests. Where matters are, rightly, for discussion or agreement by all 27 member states, for example on the single market or financial services, they must be agreed by all 27 member states.

In case there is any doubt, I also reassure your Lordships that the UK remains at the heart of the EU's economic debate. It is because of the Prime Minister's recent letter, along with 11 other heads of state or government, ahead of the March European Council that the European Council's conclusions were agreed with a commitment to ambitious structural reforms at the EU level. These conclusions include commitments on strengthening the single market and its governance; completing the digital single market by 2015; making further progress in reducing administrative burdens; and boosting trade by removing trade barriers and ensuring better market access and investment conditions. We will be pushing for even more ambition. A return to sustainable growth is the only way for EU member states to pay down their debts and emerge from the current crisis. It is essential that the European Commission uses EU-level policy levers fully to support

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growth, and member states must continue to take tough decisions to prioritise the most growth-enhancing reforms.

The Budget information we are providing to the Commission in the convergence programme is a key step in the European semester process, now in its second year. The Commission will examine the document in parallel with the UK's national reform programme. It will propose an opinion on the convergence programme, with possible country-specific recommendations. These recommendations will be agreed by heads of state or government at the June European Council. This is an important process, because it generates critical member state ownership of reforms. We are fully committed to sharing information from the Budget with our European partners, helping to maintain an appropriate and effective level of economic policy co-ordination and contributing to stability and growth across the economic union. This year's Budget builds on our ambition to have a sustainable and prosperous economy. It shows our commitment to fiscal consolidation and economic growth and, along with the OBR's forecast, forms the basis of the UK's convergence programme. I beg to move.

Lord Eatwell: My Lords, on the day that the British economy has fallen back into recession, it might have been expected that the Treasury spokesman would take the advantage of this economics debate to explain himself to the House. Apparently, he prefers to stay away and avoid the embarrassment. I am sure we are all grateful to the noble Lord, Lord De Mauley, for valiantly throwing his body into the breach.

We have learnt over the past couple of years that quarterly GDP figures should be taken with several grains of salt, but the figures released this morning are consistent with all the revised numbers over the two years that the coalition Government have been in office. Basically, the economy has ground to a halt and growth is negligible, and because of this the rate at which government borrowing is being reduced has also slowed down. Indeed, the deficit in March this year was higher than in March a year ago. No one can doubt that these dismal results are the consequence of the coalition policy of austerity. As the Financial Times has pointed out:

"Official figures on Tuesday showed five more years of grinding austerity were in prospect".

Tightening your belt to pay back a debt is becoming painfully familiar to many households in this country, so simple arguments about austerity being the price of excess borrowing resonate with daily experience. Yet the analogy is false; coalition austerity is impoverishing not only the borrower but the lender too, for from whom have the UK Government borrowed this money? None other than our pension funds, our insurance companies and our investment trusts, all of which are suffering from the recession created by coalition austerity policies.

The Budget documents before us reveal the true dimension of the failure of the coalition policy of general impoverishment. It is that general failure that I wish to concentrate on today, rather than pick over the decaying bones of the Budget itself. I remind the

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House of the state of the economy that the coalition inherited; it was growing at 2 per cent per year, an almost inconceivable figure today. The coalition's actions on taking office reduced that to zero in just a few months, primarily, as has been so effectively argued time and time again by the noble Lord, Lord Skidelsky, by destroying business confidence. They followed this by imposing the coalition one-club policy: austerity as the cure for all economic ills. Also, as is made clear in the Budget report, 90 per cent of planned government cuts are still to come-squeezing the life out of the British economy.

The Government also inherited an economy in which the public sector was running a fiscal deficit unprecedented in peacetime. That deficit inheritance is well illustrated in Chart 2.5 of the convergence programme report. Noble Lords will note that at the beginning of 2008 the deficit was about 2.5 per cent of GDP and was falling, as it had been doing for the previous two years. Then, in mid-2008, the Government's finances were engulfed by a veritable tsunami as the financial crisis resulted in rapidly falling tax revenues and rapidly rising expenditure, such that the deficit rose to over 11 per cent of GDP by 2010. The question before us today is simple: is austerity securing recovery? Is it securing an effective elimination of that deficit and building strong foundations for future growth?

The answer to these vital questions can be found in the OBR report that accompanied the Budget, and indeed is embodied in the convergence report. The OBR points out that the austerity programme does not simply result in loss of output over the next five years or so, but results in a permanent loss of output as the productive potential of the economy is reduced, undermined by the lack of investment in productive capacity and the erosion of skills among a lost generation of the unemployed. The OBR could not be clearer in stating that,

The permanent loss of potential output also results in a permanent loss of potential revenue for the Government and hence worsens the deficit, prolonging the age of coalition austerity. As the OBR argues,

that means greater productive potential-

As chart 6.7 in the report shows, the output gap is being narrowed, productive potential is being reduced by the recession itself. So according to the OBR, the policy of austerity is itself reducing the beneficial impact that growth can later have on the elimination of the deficit. Put another way, if the growth rate of the economy were to be stimulated now, if the policy of austerity were to be abandoned, not only would growth be higher now, but the long-term output of the economy would be permanently higher, and the potential for cutting the deficit would be strengthened.

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The essence of the OBR's powerful case against the Government's austerity policy is the starting point of a case for a policy of fiscal stimulation put forward by Professor Larry Summers of Harvard University, the former US Secretary of the Treasury. In an important paper, co-authored with Professor DeLong of the University of California, Berkeley, delivered at the Brookings Institution on the very day before the Chancellor presented his Budget, Professor Summers provided empirical estimates of the long-term impact of austerity, and of the alternative policy of fiscal stimulation. He demonstrated that under current depressed conditions, a fiscal expansion would pay for itself by enhancing the permanent potential output of the economy-the OBR's point-and producing higher long-term revenues for the Government. As Summers put it,

What if the Government were to take up the Summers policy, and undertake "temporary expansionary fiscal policies" that are self-financing in the long run? Where would the money come from to pay for such policies today?

Fortunately, the Chancellor himself has provided the answer. If the nation can afford to lend £10 billion to the IMF, then it can afford to lend to £10 billion to a national infrastructure bank directly to attack the decline in productive potential that the austerity policies have produced. Mr Osborne said the IMF loan would come from the UK's reserves, was not money that would otherwise have been available for public spending, and would not add to the national debt. Okay, let us perform the trick again, but this time at home.

However, it might then be argued that the rating agencies-to which the Chancellor regularly pledges allegiance-and the bond markets may not be convinced by the Summers argument, resulting in a loss of confidence in Britain with knock-on effects on interest rates. Summers presumes no increase in risk premia, resulting in no increase in interest rates. His point is that the expansion would be self-financing and therefore an increase in risk premium would be irrational. However, perhaps it is too much to expect rational behaviour from Mr Osborne's friends in the ratings agencies. After all these are the clowns who told us that securitised sub-prime mortgages were as safe as Uncle Sam. How might we protect Britain from their irrationality? May I offer two proposals that have been floated elsewhere?

First, it has been suggested in the United States that austerity policies-cuts in spending or increases in taxes-should be contingent on the economy reaching predefined goals in terms of growth and/or employment. Legislation would commit the Government to cutting the deficit when the growth target had been hit. The potential flaw in this proposal is obvious. Cuts in demand might stifle a recovery before it had properly begun. But at least this idea of contingent deficit reduction provides some escape from coalition austerity.

Secondly, the fact that the 2010 deficit was unprecedented should have prompted some thought. Coalition austerity might have been appropriate if we were facing normal cyclical swings in the economy, rather than the most severe economic shock since the

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Second World War. And it is the funding of World War II that is instructive. The war was a severe economic shock, and Britain borrowed heavily to pay for it. We finally paid off our borrowing to pay for the war in 2006, 61 years after the war ended. That is a sensible way of dealing with unique financial shocks, with important lessons for economic management. Even though the debt to GDP ratio in 1945 exceed 250 per cent, rather than the 70 per cent of today, this did not stop the Government creating the NHS, introducing major educational reform, expanding the welfare state and starting the difficult process of rebuilding the postwar economy.

Given that we are facing an extraordinary event, why not place the excess debt created by the circumstances of the global crisis into a sinking fund? The fund could be financed by selling the long-term bonds that the Chancellor has suggested be issued, and bond redemption could be tied to a dedicated revenue stream. The repayment of the debt could then be extended over, say, 20 years-it need not be 61-and the Government could pursue a sensible growth strategy managing the normal residual debt on an annual basis. Neither of those proposals is a perfect solution. There is no perfect solution. But at least they are alternatives to blindly following coalition austerity. Of course, these rational responses to a unique event may not convince the irrational ratings agencies, but we cannot allow Britain's future to be dominated by their irrationality.

The failure of the policy of austerity is becoming more evident day by day, not only here in Britain, but in Europe, too. Even Germany is coming to realise that impoverishing your own customers may not be a wise policy. Only the coalition fails to recognise reality. A source close to Mr Osborne is quoted by the Financial Times as arguing that, with respect to low growth in the eurozone:

"It's not too much austerity: it's too much debt and not enough competitiveness".

That is how out of touch they are. They have not understood the OBR's case that austerity is weakening competitiveness and making debt reduction more difficult. However, abandoning the austerity policy will require a new framework, within which to construct a sensible fiscal and monetary platform. The OBR and Professor Summers have provided the necessary framework. Their demonstration that austerity is permanently destroying future production, and hence future government revenue, is the starting point for a sensible new policy debate both in Britain and in the eurozone. Policy must be changed now, before coalition austerity does yet more permanent damage to the UK economy.

Lord Skidelsky: I take it that the question for debate this evening is not whether Britain is on track to meet the Maastricht budget criteria, but why, nearly four years after the economic collapse of 2008, our country finds itself officially back in recession.

Since July 2010, the policy for recovery has been set by the coalition Government. The main plank of that policy has been an accelerated programme of deficit reduction. Since the coalition came to office, recovery has gone into reverse. In 2010, Britain's economy grew by 2.1 per cent. In 2011 it grew by 0.8 per cent. With

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today's figure showing a fall of 0.2 per cent in the last quarter, the OBR forecast of 0.8 per cent growth this year has been exposed as a fantasy. I feel sorry for the Treasury official who wrote in paragraph 6.1 of the convergence report, just published:

The truth is that the economy is smaller now than it was in September 2010. According to the latest NIESR report, the present slump is the longest in British history. Naturally, the Osborne Treasury denies that its recovery policy was in any way responsible for the non-recovery. A correct policy, it claims, was derailed by external shocks such as the rise in import prices, the euro crisis, the structural impact of the financial crisis, and so on. Now the extra bank holiday for the Diamond Jubilee will apparently be a further impediment to growth this year, so the Queen joins the list of shocks. No, these are excuses, not explanations. The policy was wrong from the start and would therefore never have got us out of the hole into which we had fallen.

The eurozone crisis, for example, which has now spread from the Mediterranean to Holland and France, results from exactly the same austerity policy that is being implemented in this country. I never believed that the policy would work, either to promote recovery or to meet the Government's own deficit targets. Speaking in this House on 1 November 2010, I said:

"I have never been able to understand how cutting the budget deficit in present circumstances is supposed to help employment and growth".-[Official Report, 1/11/10; col. 1501.]

I still await enlightenment.

Chart 2.4 of the convergence report shows that the ballooning of the Budget deficit in 2009-10 was almost entirely caused, as the noble Lord, Lord Eatwell, has pointed out, by the collapse of national output. This ballooning was quite common, and there is a good comment on it dating from 1931, penned by none other than Keynes, who remarked that the rise in the deficit was,

It has always seemed bizarre to me to believe that the best way to eliminate a deficit caused by the collapse of output is to pursue a policy that retards the recovery of output. The OBR itself estimated in 2010 that every 1 per cent of GDP decline in current government spending knocks 0.6 per cent off economic growth. It believes that without the Osborne cuts in government spending, GDP in 2016 would be 2 per cent higher than forecast-that is, nearly £50 billion higher. Translate that into extra jobs and houses, schools and hospitals that will not be built as a result of current policy.

That brings me to a second bizarre feature of the Treasury document, which is almost too arcane to discuss in polite society. Most people understand the notion of the deficit; it is the gap between what Governments spend and the revenues that they raise in taxes. The task that the Chancellor set himself in his first Budget was to liquidate not the deficit but the "structural" deficit-the deficit that would remain after the economy had recovered and actual output

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was again equal to potential output. Unlike the actual deficit, the structural deficit depends on estimates of such things as potential output, the output gap and the trend rate of growth-all intellectual constructs to which a high degree of uncertainty attaches, yet the Government have tied their programme to this particular shaky mast.

One might suppose that the actual deficit would shrink as the economy recovered. The structural deficit, though, has to be eliminated by policy; that is the argument. The latest OBR forecast shows it on track to fall from 7 per cent of GDP in 2010-11 to 0.7 per cent in 2016-17. En route to this mandate that the Government set themselves, something very mysterious happened. The structural deficit, which had been chugging along at about 2.5 per cent in the Brown years without causing any alarm or increasing the national debt, suddenly turned into a structural deficit of 8.9 per cent in 2009-10, with the threat of large permanent additions to the national debt. How did a deficit mainly caused by the cyclical downturn mutate into a structural deficit that threatened the Government's long-term solvency? That was the mutation that caused alarm bells to ring and anathemas to be rained down on the Brown chancellorship for having left his successors such a horrendous mess to clean up.

The Treasury report suggests two interesting reasons for the mushrooming of the structural deficit. The first, in chart 6.2, is that the pre-recession economy had been growing above trend. The actual level of output, it claims, was 2 per cent above the potential level consistent with inflation in the long term. Since the inflation rate was almost always below the target of 2 per cent between 2000 and 2007 and the Treasury's current assumption of the sustainable level of unemployment, at 5.25 per cent is exactly the same as the rate that prevailed in the Gordon Brown years, it is difficult for me to understand why the Treasury thinks that the pre-recession level of output was too high.

The second explanation, in paragraph 2.8 of the report, is something that the noble Lord, Lord Eatwell, referred to: that the crisis itself has left potential output 11 per cent below its pre-crisis trend. In other words, the economy will emerge from the slump permanently smaller than it was before the recession. Again, no explanation is given for this assertion. Of course, if your policy closes down capacity, it is quite likely that you will get that result. It is on this mixture of assertion, slippery definitions, and dodgy calculations that the logical foundation of the present policy is built. The Government and Treasury clearly believe in the power of incantation-if they say often enough that their policy is restoring confidence and credibility, that will make it true.

Some time last year the penny started to drop and the Chancellor produced his Plan for Growth, a belated admission that deficit reduction is not itself a growth policy and that the Government cannot just stand back and wait for the private sector to spontaneously ignite. There were a lot of measures designed to stimulate growth: lower corporation tax, bigger capital allowances, enterprise zones, green investment and so on, and now a £20 billion credit guarantee for bank loans. The measures are useful but too small, and will hardly

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offset the 25 per cent reduction of public capital spending this year alone. So much for the Treasury's claim that the Government have been,

That claim is simply wrong.

It is clear that the main plank in the Government's growth strategy is what the report calls "monetary activism", defined as,

There was £200 billion of it in 2009-10, and the Chancellor has recently authorised another £125 billion. Studies have shown that this is useful; it has raised GDP growth by between 1.5 per cent and 2 per cent more than it would have been in its absence. And yet the effectiveness of additional quantitative easing is far more limited-there are fewer bonds left to buy and less scope to move bond yields-so this source of growth is, at best, highly uncertain.

We are sure to get out of this recession; we always do. If, however, we are to escape from semi-slump in a reasonable period of time, we have to break free from Angela Merkel's strategy of bringing Europe to a standstill and take some initiatives of our own. The noble Lord, Lord Eatwell, has made some suggestions, and I add three of my own. First, in its April world economic outlook, the IMF advocated "balanced budget fiscal expansion"-that is, tax increases matched by increases in government spending, a fragment of forgotten wisdom from the Keynesian era. Secondly, we could follow the example of Ireland and set up a bad bank to buy illiquid assets from the banks at fair present value, aiming to minimise losses to the taxpayer from their later realisation. That would address one cause for the much noted breakdown in bank lending. At least Ireland is growing, which is more than we are. Thirdly, I have long been an advocate of setting up a national investment or infrastructure bank to afford institutional investors such as pension funds a higher yield than they can earn on gilts. I believe that we will be driven to one or other of these unorthodox measures in the end-so why not act now, without wasting more time on excuses?

7 pm

Baroness Bakewell: My Lords, I wish to address a small example of what has so far been elucidated in highly theoretical and impressive terms. In the course of this austerity Budget, the Government imposed what they hoped was an unnoticed small adjustment to taxation, but it was not unnoticed. It made the headlines and became known as the granny tax-a misnomer that was joked about on several television programmes in which I took part to discuss this move.

What was interesting about the days subsequent to the Budget and the discussion of the granny tax was the implication that pensioners had done well by the Budget. One segment of the population had been treated better than the rest. I wish to challenge that; I have on record that this is by no means the situation and that the Budget missed an opportunity to improve the economy among consumers. Some 50 per cent of pensioners pay no tax because they earn so little. The increase in the pension, which the Chancellor boasted

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about, was £5 for each pensioner and was merely a catch-up with inflation that had gone before; 4.5 million pensioners lost out, but not by very much. It allowed Age UK to refer to the Budget change as "small beer", by which I think it meant small sums of money. Small sums of money for people who do not have very much are far more significant than large sums of money for people who have plenty. Those turning 75 were hit more by this Budget change than the 4.5 million who had the small loss.

Pensioners are suffering and they suffered from the Budget. They suffer because VAT affects all they consume; they suffer from the inflation in food, fuel and heating prices. I simply want to make the point that 10 million people over 65 are spending all they earn and all they get from their pension because they need to. Small adjustments in their favour would have increased spending across a large segment of the population and helped to boost the economy. This was a missed opportunity and the pensioners noticed.

Lord Pearson of Rannoch: My Lords, I trust that the noble Lord, Lord De Mauley, knows that he has my sympathy in his very difficult, some might say impossible, task. I trust he will forgive me if I start by asking whether it is not surreal, even grotesque, that we have to submit anything, let alone our Budget, to the corrupt, expensive and now pointless outfit in Brussels, which has not been able to have its own accounts signed off for the last 17 years in a row. In the background, and as a related matter, is it not even more absurd that this outfit in Brussels now presumes to tell us how to reorganise our own accounting standards, how much our banks and insurance companies should reserve and much other mischief that is actively designed to diminish the City of London and our vital financial services generally?

Could the noble Lord tell us what exactly the United Kingdom's convergence programme is? With what are we converging and to what benefit? We are told that we are doing this in pursuit of the EU's stability and growth pact. Surely even the Government must now acknowledge that this is a dead duck: that the whole EU adventure has not brought any stability or growth but merely civil unrest, unpayable debt and slump. The countries of the future sail on, including the Commonwealth, while we stay on the "Titanic", with the iceberg obvious in front of us.

The European Communities (Amendment) Act 1993 was the Act that put the destructive Maastricht treaty into our national law. Perhaps the worst aspect of that treaty, at least for our friends in Europe, was that it paved the way for European economic and monetary union, or the EMU, the bird that cannot fly. It came complete with its attendant single currency, the euro, which is now causing so much havoc among its members and elsewhere. The United Kingdom was of course right to avoid that part of the treaty, and credit for this is often given to the then Prime Minister, Mr John Major, and later to Mr Gordon Brown when he was Chancellor of the Exchequer. However, I understand from friends in the Civil Service that neither of these gentlemen deserves much credit for this fortunate deliverance. The credit should instead go to the bureaucrats in the Treasury and the Bank of England, who disliked

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the EMU because it would have passed much of their power to the European Central Bank in Frankfurt. The Treasury would no longer have been top dog in the British pecking order. That position would have passed to the Foreign Office-perish the thought.

Be that as it may, it seems that our proceedings today have their justification in the failed process of European economic and monetary integration. I cannot see, therefore, why we should have anything to do with it. Why should we submit anything at all to Brussels, let alone our Budget? It is true that the Government have rightly refused the insolent demand by Brussels that they should submit our Budget to Brussels before the House of Commons sees it. They are to be congratulated on that small show of defiance. However, I come back to the question: why are we doing this at all? I fear the noble Lord's answer will be that it is a treaty commitment, that we take our treaty commitments seriously and that we will be fined by Brussels in the Luxembourg Court if we do not do it.

I conclude with some advice for the Government, which I have attempted to give before but which I do not think has quite sunk in yet: that there is no way in which the EU can enforce a fine against a donor member state such as the United Kingdom. EU fines can be enforced against individuals and companies in the national courts where they reside. Recipient nations can have their fines deducted from the money Brussels sends to them. This, however, does not work for donor nations such as us or Germany or, dare I mention it, Holland.

Perhaps the Minister could pass this advice on to his right honourable friend, Mr David Lidington, the Europe Minister, who I learned from today's Daily Telegraph does not want us to pay the extra £890 million now being demanded by the Commission into the bottomless pit of Brussels. A senior EU official has apparently told the Daily Telegraph that we could be sent to the Court and fined if we did not pay up. So what? Just knock the fine off the £10.2 billion in net cash we sent Brussels last year-and it is more this year. Just knock it off and see whether they dare to do it again. If Mr Cameron and his Conservative colleagues started to behave like this, they might even win the next election. So it should be with this insulting Motion before us, which I oppose.

Lord Davies of Stamford: My Lords, I will come back to the Budget, if I may, and not take up the very challenging, provocative and frankly misconceived points that the noble Lord has been talking about in the European Union context. I do not want to come back to the macroeconomic stance represented by the Budget for more than two very brief remarks, because that matter has been thoroughly dealt with by my noble friend Lord Eatwell and the noble Lord, Lord Skidelsky. I also want to talk about two particular tax proposals in the Budget, the significance of which has unfortunately not been sufficiently understood so far.

Before I do that, I have those two brief comments on the macroeconomic debate. First, it is clear that the Government are committed to the Pigouvian idea, which was discredited in the 1930s and is clearly being discredited now, that if the Government cut borrowing

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and spending, then the reduction in aggregate demand following from that would be automatically compensated by an equal and opposite increase in borrowing by the private sector to finance consumption or investment spending. That is a very hoary doctrine that, as I said, has been proved to be wrong in the past. The Government seem to continue to be committed to it. It has become a sort of Panglossian piece of self-deception on their part.

The phrase that the noble Lord from the Treasury used this afternoon-I heard the Prime Minister use exactly the same phrase earlier today in another place-that the solution to a borrowing crisis cannot be more borrowing reflects the preference of this Government to fall back into PR slogans rather than to think through matters carefully. It is a completely nonsensical statement. Clearly, if you have a deficit, you cannot get rid of it overnight. If you are going to continue with a deficit, you are going to continue to increase borrowing. We are merely talking about the rate at which you continue to increase borrowing. There is no doubt that the solution, whatever it is-whether it is the one we on this side of the House propose, or the one to which the Government opposite are committed-would involve more borrowing. We want more clarity, a bit more analysis and perhaps a little more straightforwardness with the public, and rather less of the generation of PR slogans to disguise reality from the public.

The two particular points emerging from the tax proposals in the Budget which I want to highlight this evening are not matters which will rouse great passion around the breakfast tables of millions of families in this country. They might even seem, at first glance at least, rather technical and esoteric but they are extremely important in terms of the vibrancy of the supply side of the economy, the ability of the economy to respond to opportunities, and the willingness of people to risk their money-to invest in new or expanding businesses, to generate wealth and employment in the future. I have already raised in the earlier Budget debate the first measure that I am concerned about. I was given a one-sentence response by the noble Lord, Lord Sassoon, which made me feel that the Government either did not want to or could not be bothered to engage seriously with the issue. This concerns the introduction of a general anti-avoidance rule. I am in favour of the introduction of a general anti-avoidance rule, with the important condition-I always make this clear in any debate on the subject-that, to avoid doing considerable damage to the economy, it must be accompanied by a provision under which HMRC would provide pre-transaction rulings to taxpayers.

Briefly, what a general anti-avoidance rule-a GAAR-means is that every taxpayer is exposed to the risk that HMRC will suddenly challenge his or her tax return and say, "We are not accepting this particular structure or bottom line of taxable income because we think that you have engaged in some artificial practice for the purpose of tax avoidance. Therefore we are going to see through this structure and tax you on a completely different basis". Under a GAAR regime, you never quite know when you may be exposed to such a risk. I suppose that it is true to say that if you always make sure that you adopt structures which cost

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you the most tax of any structure that you could adopt to solve a particular problem or to arrange for a particular transaction, you would not be exposed to a revenue challenge of this kind. That, of course, would mean that there would be an enormous increase in the tax burden. That would be a very undesirable thing. It is not something that the Government have ever thought of, I am quite certain. If, in fact, you have a reasonably tax-efficient structure which you have adopted for totally respectable operational, strategic or other reasons, you are always exposed to the Revenue saying, "No, no; you only did this in order to avoid tax, so we are going to attack you with the GAAR". The only way around this is to have a system under which you can ask HMRC in advance whether or not it would accept a particular structure and, if it does, you know that you are safe. The IRS regularly provides pre-transaction rulings, and there is no reason whatever why HMRC should not do so. I will come on to that in one moment.

The first proposition that I put to the Minister is that the effect of introducing a GAAR without a pre-transaction ruling facility is greatly to increase tax uncertainty in this country, or to reduce tax certainty. I do not think that he will argue with that, but he will argue with my second proposition, which is that tax certainty is an important factor in the determination of willingness to exist and the location of investment decisions. That decision process which sometimes may be more intuitive and sometimes may be an explicit equation will always include certain key factors. Of course, these include political stability, the real output cost of labour, access to markets, availability of skills and monetary stability. All these things are important, but tax rates are important and tax certainty is extremely important. Therefore, if you change the variable of tax certainty, or produce a greater degree of tax uncertainty, you will change the outcome of that particular equation. You will have less investment. That is a very undesirable thing to do.

7.15 pm

I had to ask myself, because the noble Lord, Lord Sassoon, would not tell me, why the Government have decided not to introduce a rule that taxpayers can receive pre-transaction rulings from HMRC. I can hardly believe that the Chancellor did not raise this matter with HMRC. If he did not do so, he is even more incompetent than the media in this country are currently making him out to be. I assume that he did raise this issue, and that HMRC simply turned around and said, "No, we don't like it", and he weakly rolled over under this bureaucratic pushback and decided not to push forward with that idea. Of course, anybody could have predicted that HMRC would try to turn this down. There is nothing in it for HMRC. It obviously does not welcome the responsibility. It does not want to be criticised, like Mr Hartnett has been criticised over the Vodafone decision, for example. It does not want the extra work. There is a host of the normal bureaucratic reasons why they would not particularly want to take this on. However, it was quite wrong of the Chancellor simply to accept that bureaucratic pushback. He should have insisted. That is what a good Minister must be prepared to do. By not doing

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that he has done a very bad day's work. He has introduced, as I said, a significant deterioration-a degradation-of the climate for investment in this country.

My second point on the tax proposals in the Budget is not one that I raised in the previous debate on the subject, because none of us knew about it. It was not mentioned in the Budget speech at all. It only came out in the subsequent revenue announcements and press releases. Apparently the Government intend to try to introduce something which has been in the air for some time, of which I am once again very much in favour in principle. That is the concept of a minimum tax rate for high earners, so that it should not be possible that someone earning millions of pounds a year ends up with an effective tax rate of perhaps even less than 20 per cent, which is the minimum rate for people who are earning very modest sums of £10,000 or £15,000 and so forth. I have always thought that that was a good idea, but it should be based on a clear concept of the taxable income involved. The taxable income involved-the pre-tax disposable income, if you like-must be the money which is actually available to that taxpayer, with which he can pay the tax bill. It stands to reason that if he has given away part of that money to a charity it is not part of his income any more. He is not getting any benefit from it. He has given it away, and cannot get at it to pay any tax. Equally, it is quite clear that if, in the course of an individual's activities he or she has some profits from some activities and losses from others, he or she cannot get away with those losses. Losses are a fact of life. The income which should therefore be subject to taxation, in all common sense and fairness, is the net income. That has always been the rule in our tax system.

The Government have confused two things. They have confused the special tax shelters which are available and much used by those with higher incomes-SIPs, for example; EISs are a big one-on the one side, and actual losses, or gifts to charity which actually reduce income, on the other. Tax shelters do not reduce income. If you put money into a tax shelter, you retain beneficial ownership of that money. The money becomes subject to certain conditions in exchange for the tax shelter but, nevertheless, you gain from the particular profit from the investment that you are making in the EIS, SIP or whatever it happens to be. That matter is quite different, and I am totally in favour of saying that there should be not just a limit to SIPs or EISs, which there is, but an aggregate limit so that the total benefit that people get from tax shelters cannot ever drive their total taxable income down below a certain level.

The Government have got into a complete muddle. That is a very dangerous thing to do. Why? In fact, they are destroying, above the £50,000-a-year limit, the whole concept of tax consolidation. In other words, an individual who is looking to make an investment in an existing or different business has until now always been able to take the view that if there are losses-and there often are losses in investments, of course-they would be net losses. If you abolish tax consolidation, as the Government now propose to do, then for somebody investing in a new business the potential losses are no longer net. They are gross, and are going to be very

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much more substantial. It follows that the potential reward from these investments will be less, the risk will be much higher and, all other things being equal, people will require a higher threshold rate of return in order to engage in the same investment. If they require a higher threshold rate of return in order to make a particular investment because the risk of the investment has been enhanced by a government change in tax policy, they will not make as many investments, because fewer investments will achieve the prospective higher rate of return. Automatically, as a mathematical fact, you will be reducing the propensity of the economy to invest. That is a very unfortunate thing.

I put it to the Government that, while they were right initially in principle both in introducing the GAAR and in introducing something like a minimum tax rate for high earners, the way that they have done these things has introduced gratuitous damage to our supply side. I hope that they will look at these matters again, and in particular that the Chancellor will stand up a little better to HMRC. I am sure that he is quite sincere when he says that he wants to produce-as we do on this side of the House-a successful enterprise economy, and to encourage investment by British residents, by existing businesses and by overseas investors. However, he happens to have done two things which go in exactly the opposite direction.

Lord Myners: My Lords, I hesitated for a moment to rise to speak because I was assuming that there would be contributions from the other side of the House. However, not only has the Minister, the noble Lord, Lord Sassoon, decided to desert the House on what is a particularly important day for an economic announcement and debate, but we have not had a single speech from the other side, and, as far as I can see, not a single Member on the other side of the House is even trying to speak in this debate.

Let me suggest that the Government's proposal to accord with our obligations under Article 121 of the European Union Treaty on Functioning could be achieved in a better way than by submitting 500 pages of documents, as is proposed. I suggest that the Chancellor instead write a shorter letter to Commissioner Barroso, as follows.

"Dear Manuel, here is our annual submission on convergence. The news is good. We are converging with Europe on policies-austerity is the byword for everything we talk about now here at Horseguards-and we are converging on outcomes: we are back into recession, just like most of Europe.

"We are now officially into recession. In fact, output at the moment is 4.5 per cent below the previous high. We are seeing a contraction in output capacity. We are contemplating the inevitability of the longest recession for over 100 years. I have had to reduce my growth forecasts, or those produced by my Office for Budget Responsibility, on five occasions, and increase my debt forecasts each time. Between you and me, Manuel, I am beginning to lose confidence in Mr Chote and his two colleagues. To put it at its mildest, they have made an absolute Horlicks of their economic forecasting. Now I am afraid that they are going to tell me that

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lower growth and taxes will mean even greater public sector spending cuts in order to meet the fiscal policy constraint that I have imposed on myself.

"I also suspect that they are going to tell me very shortly that the output gap is even smaller than they previously believed it to be and accordingly the cyclically adjusted deficit and the adjustments that I will have to make in public expenditure are going to be even greater. You may remember that I was able to tell Parliament during the last Budget that we were still on course to meet my fiscal objectives. I did rather fudge the issue, as I pushed out the target date, and, importantly, pulled the wool over the eyes of my Liberal Democrat colleagues by pointing out that I was going to make a further £16 billion of unidentified public expenditure cuts in the two years after the general election-cuts which the Liberal Democrats will presumably have to reflect in their own manifesto at the time of the next election.

"I am loath to admit that perhaps Vince Cable and Andrew Tyrie were on to something when they said we needed a credible and coherent strategy for growth. I have promised Parliament on many occasions that I will produce a strategy for growth, but somehow I have not been able to find one. But needs must: I have painted myself into a corner with a policy of expansion through fiscal contraction. By the way, if you can give me any examples of where this has worked elsewhere in the world, or some academic sources, to rebut the evidence that comes at me from the Opposition Benches and Cross Benches in the House of Lords, that would be most welcome.

"I take some comfort from the fact that you in Europe are, on the whole, following the same policy. By the way, how is it going for you fellows-do you see any light at the end of the tunnel? Things have not been helped here in the UK by inflation. The Bank of England appears to have got this completely wrong: in all the time I have been Chancellor it has never hit the inflation target for a single month. Now the inflation figure is rising again. This is really squeezing consumption, particularly for the poorest in society, who, regrettably, have had to bear the largest burden of the fiscal adjustments I have announced to date. I must not, of course, be too critical of the Governor of the Bank of England. The governor keeps reminding me that he is older, wiser and more experienced than me, and writes me regular letters-one every three months-explaining that, when it comes to inflation, everything will be fixed before he leaves next year. By the way, he appears fixated now with his legacy.

"We continue to do this QE thing. I am damned if I can really understand it, but the governor says that it will be easier to reverse than to implement. I cannot see that myself, but I cannot risk asking him about how he has reached this conclusion, in case he does not know the answer, or I will not like it.

"Consumer demand in the UK economy has not been helped by unemployment. The news is not too bright here. We now have the highest level of unemployment since we were last in office. We have 1 million young people out of work, and the figure is increasing. We have the highest level of female unemployment for over 30 years. Business investment

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is also a bit in the doldrums. They say it is all about confidence. I do not understand that myself. There is some better news on manufacturing and exports, which are up. But this is largely due to trade with Europe, which rather pulls the rug from beneath my feet when I say that our economic problems are caused by the difficulties currently being experienced in Europe.

"Things would obviously be lot easier if the banks lent more. The Bank of England has just produced a credit report showing a further very substantial contraction in lending to SMEs. You may remember we tried that Merlin thing last year. Quite frankly, it did not work at all: the banks lent less in the end than they did before it started. We are now working on something called credit easing, although between you and me, it has all gone rather quiet on that front, and the banks do not seem very keen on it at all. Of course, it does not stop the bankers taking huge bonuses. Mr Diamond at Barclays is about to trouser another £20 million. There is very little prospect of any of that ending up in the accounts of HMRC, as he is a non-dom. In any case, he seems to have negotiated a deal under which his tax is paid for him by the bank.

"However, I must not get too annoyed about the bankers: it is not as if they got us into this problem in the first place. Nor must I get upset with the pension funds, which seem to be remarkably loath to step forward and support any of the infrastructure investment that I so proudly announced in my Autumn Statement last November.

"By the way, I am going to have to adjust the words in my speeches about the fact that the Government are increasing capital expenditure, because I realise that we confused a negative figure with a positive figure and, in fact, we are reducing public expenditure at a time when we have excess capacity.

"Interest rates, of course, are low. I claim this as one of our successes, and I have precious few others to offer in competition. But I recognise that this is largely because of QE, where we are buying back our own debt, and the generally recessionary tone of our economy. The consequence of low interest rates is hugely damaging to savers and pensioners. Please don't mention to me the Japanese experience, where low interest rates had no positive impact on economic growth.

"I mentioned the poor earlier in my letter. I have just given 10,000 or so bankers, and others who are earning over £1 million a year, an extra £50,000 in tax benefit. Fat chance that they will give me any thanks for that. In fact, I am finding it increasingly difficult to get business people to speak up in favour of the Government's economic policy now. All those people who signed letters just before the last general election seem reluctant to come to our kitchen suppers.

"House prices continue to fall-although fortunately not here in Notting Hill. We have introduced a new scheme, regarding which some people tell me I will be legged over by house builders, but at least we are seen to be doing something positive in encouraging new house building.

"You probably know that my opposite number, Ed Balls, is having a rather good run at the moment. Quite frankly, I find him very frustrating. But that hand gesticulation he makes about flat-lining is beginning

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to look as though it is right. Mr Balls has come up with a five-point plan for growth. Some of the ideas are quite good. In fact, one for abolishing or reducing VAT on housing improvements and repairs is rather a good one to me, although the house builders tell me that it isn't. But I can't really reduce VAT on repairs to domestic houses when I have just put VAT on repairs to cathedrals.

"Well, there we are. We are converging. We are tightening our buckles. We are tightening our belts. I even had to tell my father, after that rather injudicious interview he gave to the Financial Times' How to Spend It magazine, that it really wasn't sensible to say that my next ambition is to spend £19,000 on buying a desk. Yours ever, George.

"PS-it is going to be like a hole in the head if that Frenchman Hollande gets elected. How are we going to cope with that? By the way, can you please make sure that the IMF and the OECD don't go through a further change of mind and begin to say that perhaps my fiscal policy is wrong and I should be doing something to encourage growth because that is the best way of reducing the deficit and the debt.

"As you know, Manuel, I have got to keep my distance from you because that is our policy as far as Europe is concerned. However, my colleague Jeremy Hunt says that you can always call me on the mobile".

Lord Stoddart of Swindon: My Lords, I should like to join the noble Lord, Lord Myners, in pointing out that the Benches opposite are virtually, but not quite, empty. The one occupant is from the junior partner of the coalition. I have to sympathise with the Minister who is to reply, the noble Lord, Lord De Mauley, because his party has completely deserted him. It is a very serious matter for a Government when a Minister is confronted by so many erudite speeches from the Labour Benches and, indeed, the Cross Benches. The last speech that we heard was very amusing indeed. This has enabled the Opposition to make a concerted attack on the Government's Budget, and their economic policy, without one criticism or speech of reply from the Benches behind the Minister. That is quite shocking and I hope that in future the Whips, or whoever else is in charge, will ensure that the Minister is far better supported than he has been this evening.

This debate is,

As I have already said, what we have had, except for the excellent speech of the noble Lord, Lord Pearson of Rannoch, is a debate on the Budget and economic policy. I have to say that I congratulate all those who have spoken, because the speeches have in some ways been superior to those made in the House of Commons. That is something that noble Lords and people who read Hansard might care to consider when we debate, perhaps in the next Session, the future of this House.

First of all, I support what my noble friend, if I can call him that, Lord Pearson raised-the matter of Europe and whether we should be having this debate at all tonight. When I saw the item on the agenda, my mind went back to 1992 when the Maastricht treaty was before Parliament, having been signed by the then

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Foreign Secretary, who then said, "Perhaps I had better now read what it says". We had a long debate about what was going to happen with regard to the Maastricht treaty. At that time, people such as me and the noble Lord, Lord Pearson, warned that what was contained in that treaty would eventually lead to many powers reverting from this House and the Government to the institutions of the European Union. So it has happened. As the noble Lord, Lord Pearson, rightly said, it is absurd and outrageous that we, the Government and Parliament, should have to send our economic policy and our Budget over to Brussels to be supervised by the Commission and 26 other countries. That is not self-government, if I can put it that way; it represents being governed from abroad by bureaucrats who are completely unaccountable and insensitive to what our own nation state requires, or what is required by the other nation states in the European Union.

The document I am holding here is the Convergence Programme for the United Kingdom, but convergence with whom and for what purpose other than to create a single European state? Why would we wish to be concerned with the basket-case countries on the brink of default and collapse? The Conservatives say that they want to be in Europe but not governed by Europe, but convergence is about government, and about European governance. As I have already said, it is outrageous that this country should be obliged to submit its plans to Brussels bureaucrats for oversight by 26 other countries, many of which are very much smaller and less important than us.

What if Parliament refuses to agree? We could have a vote tonight. Probably everyone has gone home, so we might even win it. What if Parliament refuses to agree to submit the convergence criteria? What then? The noble Lord, Lord Pearson, raised this matter. He told the House that it was impossible for the Commission-or the Community or the Union, as it is now called-to fine, but we have been amazed at the sort of things that the European Union and its institutions can do, so I am not at all certain that he is right that no attempt would be made to fine this country if we refuse to submit our economic policy under Section 5.

Lord Pearson of Rannoch: My Lords, I did not say that no attempt would be made to fine us. It is certain that an attempt would be made to fine us. A fine would indeed be issued by the Luxembourg so-called court of so-called justice. All I said was that there is no way that Brussels and Luxembourg can force a donor nation to pay a fine.

Lord Stoddart of Swindon: I hope the noble Lord will be able to answer that question. They could not send troops over here to enforce their will. I do not want to keep the House for much longer, although there have been some long speeches tonight, but people in this country are getting quite disillusioned with politics. The Hansard Society published its latest figures today, which show that only 42 per cent of the electorate are interested in politics-a 16 per cent drop since the 2011 figures. Their disillusionment is understandable because they have realised that the United Kingdom is increasingly governed not by its own elected Parliament but by the EU and other international institutions. No

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wonder percentage turnouts at elections are now so low because people see no point in voting for a Parliament in which EU treaties hand decisions and governance to the EU and its institutions.

Lord Layard: My Lords, I agree with every criticism that has been made, and I note that this is not wisdom in hindsight, because all these criticisms were made before the policy was embarked on after the election.

The basic problem, which is making the policy not work, is that it is based on a misdiagnosis of the underlying issue. This is exactly the same situation as we have in Europe. The policies which are not working there are based on the same misdiagnosis. That misdiagnosis is that Governments have been behaving irresponsibly and that is why we have a problem. That is not why we have a problem. One or two Governments have-Greece, certainly-but most countries have not had irresponsible behaviour by their Governments. The irresponsible behaviour was by the private banks. That produced the economic collapse, and the economic collapse is what produced the government deficits. The government deficits were not produced by the Governments; they were produced by the misbehaviour of the private sector.

These deficits sprung up because tax receipts had collapsed. Corresponding to that there was the increase in the surpluses of the private sector as private households and companies were trying to retrench. As for how the public deficits could be financed, they would be financed by private savings. That is how it works, and it could work perfectly well provided that private savers had some assurance that they were putting their money in a safe place. What did that require? It required only two things. First, it required some guarantee by the Governments of our own country and other European countries that there would be no increase in government expenditure until tax receipts had come back up as a result of the return of growth. That was a perfectly reasonable requirement from investors. The other thing which was required was some underwriting of the public debt by the central banks.

7.45 pm

What happened? If we start with Europe, the problem was that the central bank was prevented from underwriting the debt. If it had promised to buy the debt at a reasonable price, if necessary, it would not have had to buy it at all in most cases. Instead, because it did not do that, it has had to buy a lot of it. It has also had to turn out money for private banks to buy more of it. And still the market is uneasy. This is a total policy failure based on a failure to understand the problem. Instead, Europeans have had to invent a fiscal regime to try and reassure private investors and make them willing to buy government bonds. So you have this draconian fiscal policy with these targets which are quite unreasonable and impractical. Everybody knows that there will be many European countries that will not be able to reach 3 per cent of GDP by 2015. It is an extraordinary situation. This is the rule and everybody knows that it cannot be achieved.

Even our own country in 2015, if you look into our documents, is going to be where? Wait for it-it will be at 2.9 per cent. Somebody must have done some nice

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figuring to make it come out that way. After that we are meant to be moving on to a regime of universal zero budget deficits indefinitely. That has the extraordinary implication that the public debt would eventually shrink to zero per cent of GDP. What on earth could be the sense in a requirement of that sort? So Europeans have the problem of monetary failure. We have had quite reasonable behaviour by the monetary authorities. The problem has been our fiscal policy.

We are already feeling the cuts but, as the noble Lord, Lord Eatwell, said, we have not seen the half or even the quarter of it. Real government expenditure in the book is to fall by 1 per cent per annum for the next five years, which will do massive damage to our social fabric and our social capital. And will it really reduce the deficit to the Maastricht level, to the 2.9 per cent? I very much doubt it. I have great regard for the Budget Responsibility Committee but there are some very optimistic assumptions in its model. To quote a few of them: oil will be priced at $95 in 2016, and there will be a 25 per cent rise in the FTSE all-share index, which many people consider to be already overvalued. These things are pushing up the forecast to levels which are pretty unlikely.

That is the problem. What should we be doing? I want to make a simple proposal, because this is the central issue which should be discussed. The classic answer provided in every sensible textbook is that you have a fiscal expansion financed by money, so you have a less contractionary fiscal policy, in our context, which would lead to a higher deficit in the short term, although not in the longer term, and then you fund it through the central bank. Up goes the public debt, but who buys it? The central bank. The amount of debt that has to be held willingly by the private sector does not change. Therefore there does not have to be any change in interest rates. That is a basic thing that you find in first-year textbooks. It is so important, and I find it extraordinary that that is not the centrepiece of current debate, not what everybody is debating; they certainly should be.

Of course, the main objection that people will come up with is that you are printing money and that that might be inflationary, but it does not have that effect in a recession. We have only to look at the basic underlying trend which determines our inflation rate, which is the rate of earnings growth, to see how depressed that has been because of the recession. It is currently only about 2 per cent, which is way below the inflationary level. Inflation is not the worry now. Of course, when we get unemployment down to a reasonable level, inflationary pressures can develop and then we can sterilise the excess money which we have created in order to get ourselves out of the recession.

We should be seriously discussing a fiscal stimulus financed by printing money, which was, incidentally, proposed by, among others, Milton Friedman, at one point. There is nothing wrong with that. We already have the central bank holding something like 30 per cent of public debt. In that sense, the public debt figures cited are completely unrealistic. They do not represent the debt of the rest of the world to the British Government, a lot of it is simply debt within the government sector. That should be pointed out over and over again.

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We must escape from the straitjacket which has been based on thoroughly bad economic theory which has no evidential base in support of it. The argument put by the Chancellor many times is that if you cut government expenditure, you can stimulate growth because you increase confidence and that reduces interest rates. That is what he says over and over again. The IMF has looked at that argument and 80 cases where there have been cuts in government expenditure which, it was hoped, would have those results. It found only two cases in which you could possibly think that that result came about.

There is nothing to support the Government's view in theory or in empirical evidence. It really is time to rethink and, I would say, to go back to the elementary textbooks.

Lord Lea of Crondall: My Lords, like the noble Lord, Lord Stoddart, I have not failed to notice the empty Benches opposite. I think that the view of members of the Conservative Party is that they do not need to worry about things such as this because they do not support the Maastricht treaty and perhaps do not support the present economic policy of the Government, although they have not been able to produce anybody to say so tonight.

Contrary to what the noble Lord, Lord Stoddart, said, I have no doubt that the Minister will have no difficulty at all in waving aside all the points made from this side with his Etonian insouciance. It is obviously tempting to have a vote, but I think, on balance, the fact is that for many years-10 or 15-we have been committed to this procedure and Labour Governments, as well as Conservative Governments, have thought it right to make a proper contribution to the debate about the EU stability and growth pact. That includes the input of the social partners, the trade unions and employers. That has been to the good.

On this occasion, I think that the future environment of the stability and growth pact is a big question, and I am surprised that the Treasury, with its excellent syntax and arithmetic, has not addressed any of the bigger issues which confront us at what I think is the end of one chapter in Europe and the opening of a new one.

I am referring, among other things, to the fact that we have a presidential election in France. As the Prime Minister said that he supports President Sarkozy, I will take this opportunity to give my maximum support to our comrade over the other side, François Hollande, and wish him well in 12 days' time, or whatever it is. I shall sketch out a hypothetical scenario to which the Treasury should pay some attention. If and when President Hollande is in place and has his first meeting, as he will, with Chancellor Angela Merkel and they reach some agreements and then, one way or another, our Prime Minister meets him in Paris or London, what is he going to say? Is he going to say, "Bingo, the French and the Germans have reached a good agreement"? Have we nothing to contribute to their implicit complete relook at the stability and growth pact? Of course, there is not a word in this document, but I do not know whether any thinking is going on in the Treasury at all. I do not think that it has had any green light from Mr Osborne to do any such thinking, but it had better start in the next 10 days.

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Where do we start from? The position of the incoming President Hollande, to take that hypothesis, would be-as he has said pretty consistently-not to undermine the fiscal pact but to but to add a big dimension of growth to the stability and growth pact. So this is the time to examine how on earth they would, without some highly innovative banking ideas, square the circle of getting out of a general slump. It is different from when the Maastricht treaty was created. We were there at its creation and there was a relatively good level of employment. At that phase of the economic cycle, with the underlying position at that stage, it was not unreasonable to have the figure of 3 per cent. By the way, there was a quite separate debate as to whether Greece should not have been treated much more stringently in inquiring about its position when it joined the euro. Allow me to say that that discussion has got totally mixed up with our discussion now, although in principle it is not central to it.

The circle is impossible to square unless we recognise that the arithmetic entails at least 4 per cent economic growth in Europe per annum for a few years to get the 2 per cent underlying growth of productive potential. That is to do with new technology, productivity, science and so on. I have no reason to believe that in Europe generally, one should put the underlying productive potential at less than 2 per cent growth per annum.

8 pm

We then have to add something to bring down unemployment. The only way to increase income tax revenues and reduce social expenditures, with the revenue side going down and expenditures on unemployment benefit, social housing and general poverty measures going up, is to reduce unemployment to a labour market optimum, whatever figure you would like to take, in five or six years' time. With that arithmetic in mind, it is quite correct for an incoming, left-of-centre French President to discuss with Angela Merkel how to do it, without the knee-jerk rejection from the City of London and the financial markets, which are highly political. Markets, by the way, are not inanimate; they are led and steered by highly political people. That is why we on this side believe in social democratic economics. I emphasise the social democratic as well as the economic aspect of our governance of the economy.

Historically, it has been very interesting that French socialist presidents have tended to get along very well with German CDU chancellors. Those of us who have been around a bit, meeting these heads of government every year, remember very well the very good meetings that we had with François Mitterrand at the Elysée, and the equally good meetings with Helmut Kohl in Bonn, as it was in those days. They had a good working relationship. There was no confusion about a French socialist President acknowledging the legitimacy of a German CDU Chancellor or about a Chancellor recognising the legitimacy of a French socialist President. I predict that that will happen in 10 days' time. I could be wrong, but in that scenario the Treasury had better do some thinking. That was the relationship at the time of Maastricht; it was Kohl-Mitterrand. That was the trade-off, but at that time we did not have this position of a 1920s or 1930s slump. What would they have done and what would we do now?

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The fiscal rules that were designed for a time of relatively full employment and equilibrium are not fine for the zero growth, high-unemployment equilibrium caused by the banking crisis of four years ago, which is where we are now. My question to the Minister is: what plans are the British Government making to make a constructive contribution if there is a new French President in 10 days' time? If he cannot answer straight away, perhaps he will write and put a copy in the Library because it would be worth studying that assessment.

We know that we cannot carry on as we are. Fiscal consolidation and setting the public finances on a sustainable path in terms of the present construct may just lead to the death of the patient. I would ask the Minister why he feels so confident that the government strategy will avoid that sad outcome. The interesting OBR report that accompanies the Budget document and this document always has figures for four or five years ahead. But each year you get the next OBR report-it has been going for only a couple of years-and in the Red Book, and so on, there is always a nice rosy picture for three or four years ahead. I shall give you a rather striking statistic, which is the extraordinary downward adjustment in this year's OBR from last year's OBR of seven percentage points, from 8 per cent to 1 per cent, in the growth in investment for 2012. That is a devastating figure. I was not surprised to hear any of the figures that came out today in the light of that OBR figure published two months ago.

I strongly support the remarks made by the noble Lord, Lord Skidelsky, and the other excellent speeches from this side. I regret that we have had no constructive input from the Conservative or Liberal Democrat Benches. Does the Minister agree that the input into the stability and growth path makes it incumbent on the Government to be ready very soon to step up to the plate with a far more constructive contribution to the scenario that I have presented for the very near future?

Lord De Mauley: My Lords, I am grateful to all noble Lords for their contributions and for the opportunity to do my best to reply. Following this debate, as I said earlier, the Government are required to report to the European Commission their assessment of the UK's medium-term economic and budgetary position as they have done since the stability and growth pact came into operation.

There has been a large number of questions, so let me make a start on them. I cannot guarantee that I will have time-I have as much time as I like, but your Lordships may tire. I will do my best. The noble Lord, Lord Eatwell, suggests that the Government's economic policy is not working. I acknowledged in my opening remarks that it is taking longer than anyone hoped to recover from the biggest debt crisis of our lifetime, even after the recent fall in unemployment. Over many years, this country has built up massive debts, which we are having to pay off. That is made much harder when so much of the rest of Europe is in recession, or heading into it. Fiscal consolidation is critical for the UK to maintain confidence and minimise risks. International institutions and credit rating agencies

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support the Government's fiscal strategy, with, for example, the IMF recently saying that it had,

That is why Standard & Poor's recently reaffirmed the UK's AAA credit rating. Reversing the historic rise in public debt will strengthen the UK's medium-term growth prospects. A recent OECD study showed that high levels of debt damage growth but, with respect to the noble Lord, Lord Eatwell, considerable action is being taken to stimulate growth. We are supporting investment in energy. The Government will introduce a package of oil and gas tax measures to secure billions of pounds of additional investment in the UK continental shelf and publish a strategy for gas generation in the autumn of 2010, recognising that gas-fired electricity generation will continue to play a major role in UK energy supplies over the next decade and beyond.

We are supporting the housing market by providing an additional £150 million to the Get Britain Building fund to help to deliver more than 3,000 more homes. We are expanding private investment in infrastructure. The Government have supported the establishment of a new pension infrastructure platform, which will make the first wave of the initial £2 billion of investment infrastructure by early 2013. We are making rail investment. The Budget gives the go-ahead to Network Rail to deliver three elements of the northern hub proposal at a cost of £130 million, subject to a final value-for-money assessment.

We are supporting technology. The Government are setting an ambition to make the UK the technology hub of Europe. To help achieve this, we will extend mobile phone coverage to 60,000 rural homes and along at least 10 key roads by 2015 and will set up a new £100 million fund to support investment in major new university research facilities. I earlier referred to what we are doing in the area of ultrafast broadband.

We are reforming planning. We are supporting investment across the United Kingdom and are decentralising decision-making power away from central government. We have agreed to proposals by the Greater Manchester Combined Authority to pilot a new model that is set to unlock £1.2 billion of infrastructure investment.

The noble Lord, Lord Eatwell, suggested that the recession was the result of the Government's policy of austerity. Our credible fiscal plan has helped us maintain our top international credit rating and has lowered interest rates to record lows, making, for example, family mortgages and business loans cheaper. In fact, the one thing that would make us lose our credit rating would be a deliberate decision to increase borrowing and debt. As the noble Lord knows well, we argue that spending more would be counterproductive. It would increase the deficit and put the UK's status as a safe haven at risk. Cutting the deficit is critical to maintaining market confidence. That is why the Government's deficit reduction plan is endorsed by the IMF, the OECD, the European Commission, the credit rating agencies and UK business organisations.

The noble Lord, Lord Eatwell, proposed that long-term bonds should be issued. There has been evidence of demand for gilts with long-term maturities against the

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backdrop of historically low long-term interest rates which provide a direct benefit to the economy and help keep interest payments lower for families, businesses and the taxpayer. In 2012-13, the Debt Management Office will consult on the case for issuing gilts with maturities significantly longer than those currently issued.

The noble Lord, Lord Skidelsky, referred to a line in the convergence programme document stating an expectation that we would avoid technical recession. The Government established the independent Office of Budget Responsibility, and it is the OBR that expects a recovery in underlying growth momentum over the year and that measured GDP growth will be broadly flat in the first half of 2012. That forecast is unchanged, as is the overall OBR forecast for 2012. The noble Lord made quite a number of suggestions. I refer to the Government's focus on encouraging greater investment in infrastructure, increasing access to finance for SMEs and reforming tax policies to ensure that the UK is the best place to build finance and set up a business. I would like to consider what he said and write to him addressing the issues he raised.

The noble Baroness, Lady Bakewell, is no longer in her place, so I will leave her points.

The noble Lord, Lord Pearson, supported by the noble Lord, Lord Stoddart, asked why we are converging and who we are converging with. Those who are not members of the euro are legally obliged to submit convergence programmes to the European Commission. All the euro-outs, as they are known, with the exception of the UK and Denmark, are committed to join the single currency when they meet the relevant convergence criteria. As noble Lords well know, the UK has an explicit opt-out from joining the single currency under its protocol to the EU treaties, and the Government have made clear that we have no intention of joining or preparing to join the single currency in the lifetime of this Parliament, so we are not converging and we have no intention of doing so. However, it is a legal requirement under the Lisbon treaty to submit this document.

8.15 pm

Lord Stoddart of Swindon: I am a little puzzled by what the noble Lord has just said. He appeared to say that we do not need to converge and that there is no requirement for us to do so. Is that what he said, or have I misunderstood him?

Lord De Mauley: There is no requirement to converge, but we none the less believe that we should honour our legal commitments.

I think the gist of what the noble Lord, Lord Pearson, said is that we should not be contributing to the EU budget. The UK remains a committed member of the European Union. However, it is unacceptable for the Commission to impose an inflation-busting budget increase for the 2013 EU budget when Governments across Europe are making difficult decisions on public spending, and we will be pressing for a more realistic budget that recognises the economic reality across Europe.

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The noble Lord also suggested that there was no accountability for EU spending. For the 17th successive year, the European Court of Auditors is unable to grant an unqualified positive opinion on the EU accounts. That is entirely unacceptable. The UK Government demand concrete action by the Commission and member states to improve EU financial management.

I am just coming to the noble Lord, Lord Davies of Stamford, and perhaps he will let me have a go at his initial questions.

Lord Davies of Stamford: In response to what the noble Lord just said to the noble Lord, Lord Pearson, is it not the case that the auditors have consistently declined to sign off on those aspects of the accounts of the Union which involve money disbursed by member states-for example, structural funds and CAP funds? There have been a number of difficulties in a number of countries, but there has never been any doubt at all about the robustness of the accounts of the Commission and the institutions of the Community. Therefore, this issue is an indictment of a lack of federalism, not of too much feudalism. If the Commission were directly responsible for disbursing all these funds, there probably would be no problem. The problem is with member states that have had a lot of difficulty in keeping accounts properly.

Lord Pearson of Rannoch: Before the noble Lord rises to reply to that well known canard, it is, of course, true-is it not?-that a third of the budget is under the direct control of the European Commission. If the noble Lord, Lord Davies, would like to understand how it really works, instead of continuing to produce Europhile propaganda, I suggests he reads Brussels Laid Bare by Marta Andreasen. Then he will understand how the whole thing works, and we will no longer have these fruitless debates trying to pretend that this is not the fault of the corrupt octopus in Brussels but entirely the fault of the wicked nation states, which are also at fault, of course.

Lord De Mauley: My Lords, I am sure that both noble Lords have a point.

Lord Lea of Crondall: Is it not absolutely clear that the funds directly being disbursed in Brussels by the Brussels bureaucracy, as is often said, are the funds that have a clean bill of health in the auditing? It is the funds down to the nation states that are the reason why the auditors cannot sign off all these accounts. It is as simple as that.

Lord De Mauley: My Lords, I am not going to enter into this discussion any further.

The noble Lord, Lord Davies of Stamford, talked about the general anti-avoidance rule. I am not sure it is entirely relevant to this debate, but I can say that the Government will consult on the GAAR in summer 2012 with a view to bringing forward legislation in the Finance Bill 2013. A targeted GAAR is the right solution to tackle the persistent problem of artificial

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and abusive tax-avoidance schemes. I will take the noble Lord's specific points back to the Treasury and write to him on them.

In an amusing speech, the noble Lord, Lord Myners, referred to, among other things, IMF and OECD support. The IMF and the OECD support the Government's policy. The IMF's Madame Christine Lagarde said that under the current circumstances the policy in place is the "right thing to do", and the OECD Secretary-General said on our Budget 2012:

"The Budget announced today is another important step towards a sound fiscal position for the United Kingdom. The confirmation of the UK's fiscal consolidation programme should keep bond yields low and support the recovery".

Lord Myners: Will the Minister also acknowledge that the OECD has said that if the UK's growth performance is lower than that forecast by the OBR, it will be necessary to revisit the fiscal strategy being pursued, and to ask whether that was contributing to the problem rather than solving it? In the interests of completeness, the Minister should give the full position of the OECD rather than a highly selective summary.

Lord De Mauley: Perhaps I can come back to that in a moment. The noble Lord, Lord Layard, suggested that there were optimistic assumptions in the OBR forecast, in particular on oil prices and risks from the euro area. The OBR says that,

Renewed upward pressure from the record oil prices in recent weeks is also recognised as a risk to the Bank of England's forecast, most recently in the minutes of April's MPC meeting.

The noble Lord, Lord Lea of Crondall, spoke about what might happen in the forthcoming French presidential election. He will appreciate that it is not for me to speculate on the outcome of the French election. Of course, the UK is not a party to the fiscal compact; it does not apply to us. The SGP was strengthened last year. Any proposal for fundamental change would require treaty change and that would require the consent of all 27 nations.

Lord Davies of Stamford: Can the noble Lord tell the House why, apparently on two occasions, the Prime Minister has refused to meet with Monsieur Hollande? Are his judgment and power of prediction in political matters as bad as in economic matters?

Lord De Mauley: My Lords, no, I cannot answer that question. The noble Lord, Lord Stoddart, asked what would be the repercussions if the House voted against this Motion this evening. The result would be that the Government would not have the statutory authority to submit the information that forms the basis of the convergence programme. The UK would therefore breach its obligations under the EU treaties, which could lead to infraction proceedings brought by the Commission under Article 258 of the treaty, for failure "to fulfil an obligation". As I have said before, the Government take their legal obligations seriously.

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It is worth saying that a strong Europe is in the UK's economic interests. The Government want to contribute to a strong, prosperous Europe, while safeguarding our interests.

Lord Stoddart of Swindon: Can the Minister explain what would happen if Parliament decided that it did not want to obey this particular instruction or law under the treaty, and infraction proceedings took place? Is it possible for the United Kingdom to be fined? If it refused to pay the fine, what would then happen?

Lord De Mauley: My Lords, as I said, we would be in breach and subject to infraction proceedings and, yes, I am sure that we would be subject to a fine. I do not want to speculate on what would happen if we did not pay it.

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There were a number of questions that I have been unable to answer, including the recent question posed by the noble Lord, Lord Davies. I will, of course, write to noble Lords with answers to those questions.

It is right that we share our budgetary and economic plans with the European Commission and other member states through the convergence programme and our national reform programme. This is a key step in the European semester process. These plans are provided after the Budget is presented to Parliament, and the Budget makes clear that Britain will earn its way in the world. It shows our commitment to fiscal consolidation and economic growth and, along with the OBR's forecast, it forms the basis of the UK's convergence programme.

Motion agreed.

House adjourned at 8.25 pm.

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