|Government's Economic and Financial Assessment
Alan Howarth: If I understood correctly the exchange between my hon. Friend the Financial Secretary and the hon. Member for Orpington (Mr. Horam), the principal question before us is whether to approve the Red Book as the basis for a report that the Government will make to the European Commission. I submit that we should do so.
The hon. Member for Buckingham (Mr. Bercow) is both generous and pessimistic. His pessimism is to some extent tongue-in-cheek, but, as he said, it is his job to be a pessimist. He may not find that temperamentally congenial, but he makes a good show of it.
On a basis of cautious assumptions, the plans and forecasts set out in the Red Book demonstrate a strong economy and show that we can look forward to low inflation, growth, prudent increases in public expenditure and a corresponding improvement in public services. The Government are to be congratulated on the achievement of sound finances, which are described as such by reference to the rules that they have promulgated and invited us to test them against. Two rules are set out in the code for fiscal stability: the golden rule that on average over the economic cycle the Government will borrow only to invest and not to fund current spending; and the rule of sustainable investment, whereby public sector net debt as a proportion of gross domestic product will be held over the economic cycle at a stable and prudent level, which the Government advise us should be not more than 40 per cent.
Mr. Redwood: I have declared my interests in the register. Will the right hon. Gentleman tell me, having read the complicated Red Book, whether we have converged with our European partners in the past five years? The point of filing the report should be to see whether we are getting closer or further away from meeting the tests, and I find it difficult to work out that from the Red Book.
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Alan Howarth: The right hon. Gentleman asks a good question, and I shall come back to it in a moment.
The markets at least appear to be relaxed about the Treasury's plans. We have seen no discernible twinges in long-term interest rates or pressure on sterling. Parliament has already approved the plans, and I believe that the Committee should approve them again. However, there is a further question: will the European Commission and European Central Bank approve of the Government's plans? After all, the Committee should consider the likely response of the recipients before approving the report.
On the stability and growth pact, there are different requirements. As the right hon. Member for Wokingham suggested to the Committee, the EC uses different definitions and has somewhat different preoccupations. Under its rules, member states must maintain budgets that are on average in balance or surplus to comply with the rule that at no stage of the cycle should the budget deficit be more than 3 per cent. of GDP.
Furthermore, the EC's definition of a budget deficit for purposes of the excess deficits procedure includes both current and capital spending. So the Government are plainly in breach of the EC's requirements. According to the Red Book, UK public sector net investment is targeted to rise from 1.8 per cent. of GDP in 2003–04 to 2 per cent. by 2005–06. My right hon. Friend the Chancellor has rightly no intention of conforming to the growth and stability pact, at least as interpreted by its high priests Professor Prodi and Mr. Solbes.
A further rule is that the gross debt to GDP ratio should not be more than 60 per cent., but as no one seems to pay too much attention to that, I do not propose to detain the Committee with a discussion of it. It is not a useful measure, and I note that the Government hardly use it. They allude to it only when they need to in ritual genuflection to the EC requirements.
One further difference between the standards set by the Government of the United Kingdom and those set by the European Commission and European Central Bank is of the greatest importance. The ECB sets itself an inflation target, adopted on its own authority and not endorsed by the European Parliament, of 0 to 2 per cent., which is significantly less than our 2.5 per cent. target. EU policies on budget deficits and inflation are different from ours and the key difference is that they are severely deflationary by comparison.
The Government are in breach of the deficit rules: conforming to them would require bringing the deficit down by 2 per cent. of gross domestic product. What would that mean in practice? If we achieved it through taxation, it would mean a tax increase of £20 billion; if through expenditure, a cut of £20 billion. Those policies would be massively deflationary and destructive.
Even more extraordinarily, the authorities in the European institutions continue to insist that member states conform to the rules in circumstances when national and global balance sheets are, given the
Column Number: 019problems of the stock market, shrinking day by day. Moreover, if we were to conform to the requirements of the growth and stability pact, we would repudiate all the pledges that my party made at the general election last year. We would dishonour our obligations to the British people who elected the Labour Government on the basis that they would invest in the improvement of public services—exactly as the Government propose.
Does it matter? The European Commission has no power to require the United Kingdom to comply with its rules. It can only lecture us, as it did in April 2001 and again in February 2002. I submit that it does matter, because the member states of the eurozone are our trading partners and the eurozone is an important force in the global economy. If that important component of the global economy continues to be subjected to the sort of deflationary bias in evidence since the adoption of the Maastricht criteria and to be reinforced by the stability and growth pact, the prospects for growth and for other good things to which we aspire in Europe will be much less.
As a result of the adoption of the Maastricht convergence criteria, eurozone growth was slower in the 1990s than in the 1980s. Between 1992 and 1999 the average growth in national income of member states of the eurozone was 1.7 per cent. compared to UK growth of 2.5 per cent. Average unemployment in the euro zone is now running at 8.5 per cent., whereas UK unemployment has been continuously below the eurozone average since 1993. The European Commission rejects the use of automatic stabilisers.
The Minister said that our participation in the multilateral surveillance process has the virtue of placing us in a better position to influence economic thinking within the European Union, but there is little sign that we are achieving the influence that we would like in that regard. The European Commission and the ECB are hectoring Germany, France, Italy and Portugal to cut their deficits. Those countries are all wriggling to try to avoid the obligation.
The French are committed to cutting taxes, which is what their electors voted for in the recent elections, but because of the admonitions of the European Commission, France will have to frame plans for cuts in public expenditure. Portugal is perhaps in the most acute predicament. It has already been obliged to raise value added tax from 17 to 19 per cent. and to postpone corporation tax cuts, even though its economy is struggling. Portugal may face the nuclear penalty—the requirement to lodge a non-interest bearing deposit on a large scale, which amounts to a fine imposed by the European Commission. All this time, Professor Prodi is insisting on the strict interpretation of the growth and stability pact and calling for greater powers for the European Commission in economic policy making.
The stability and growth pact is destructive of economic growth, trade, investment and jobs. Conservative Members spoke earlier about productivity, but they neglected to note that one chapter in the Red Book is devoted to ''Meeting the
Column Number: 020Productivity Challenge''. They should take account of the fact that we can achieve improved productivity comparatively readily in circumstances of economic growth, but it is very difficult in any system that has a deflationary bias, which, under the rules of the European Union, eurozone economies do.
It has been noted—not infrequently—that the European Central Bank seems to be run by monetarist flat earthers. Only the other day on 2 July, Mr. Duisenberg expressed anxiety to the European Parliament about the outlook for inflation. I yield to no one in my belief that all countries should pursue rigorous policies to ensure that they do not suffer endemic inflation. I also believe that we should have a balanced budget over the cycle. But the primitive interpretation of what those mean that prevail at the European institutions is dangerous. It is dangerous to existing members of the eurozone and it is dangerous for us, too.
Let us consider the contrast with how this country has handled such matters. The Red Book notes with some satisfaction at paragraph 2.16 that last year the monetary policy committee responded to global slow-down by cutting interest rates seven times and by 2 per cent. The Red Book also notes at paragraph 2.60 that fiscal policy reinforced that action. It does matter that misguided policies are adopted by the institutions of the European Union, but it would matter even more if we took the pound into the euro because the stability and growth pact would be binding.
Mr. Bercow: On a point of order, Mr. Pike. I genuinely apologise for interrupting the speech of the right hon. Member for Newport, East (Alan Howarth) because it is extremely good and informative. I overheard the Minister say to the Treasury Whip that, if there were one more speaker after the right hon. Gentleman—she said that whistling relief in the process—there would not be time for her to reply to points that have been made. Can you confirm that it would demonstrate commitment to the exchange of ideas if the hon. Lady guaranteed that, if there was not sufficient time for her to respond to the debate this afternoon, she would respond in writing to all of the points that have been raised?
|©Parliamentary copyright 2002||Prepared 8 July 2002|