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I have always envied the so-called experts--especially those in the Monetary Policy Committee--who argue that you need to increase interest rates by a quarter of 1 per cent. to be able to say with any certainty that in two years' time inflation will be 2.5 per cent. I find it odd that anyone can know with such certainty what will happen. I confess to being what might be called a "don't know" because I do not know what will happen tomorrow, let alone in three years' time. Nevertheless we have to manage an economy. That is the Chancellor's job. If he is to meet the golden rule to which my noble friend referred again today--I agree
I know my noble friend will say that that is a hypothetical question. He will say that that will not happen and we shall not really have that problem. I hope he is right. However, as he has shown since yesterday's "shuffle", he is prepared to be rather more open and not just read his brief, and tell us the truth. Will he tell us--I hope he can--that the Government have not ruled out the possibility of increasing tax or borrowing if the revenue growth is not as high as forecast in the Government's plans? I know that my noble friend will be able to answer those two small questions.
To sum up, I believe that the Chancellor has over-stated the modest annual growth in expenditure. I note that even that is subject to performance targets, which are to be overseen by the new Cabinet committee chaired by the Chancellor, not the Chief Secretary to the Treasury. I am beginning to wonder, and to worry somewhat, about what job the new Chief Secretary will do. So far as I can see, there is not much left for him to do. I thought that the reshuffle might remove the post of Chief Secretary to the Treasury. I put that question to my noble friend the other day. He replied effectively that the Chief Secretary will have plenty to do. So the post of Chief Secretary has been retained. I gather that the new occupant of the post is very bright--even if he cannot do his multiplications.
Inevitably, the figures are uncertain when we are talking about a period of three years. But they are clearly set out. This is not a matter of creative accounting. Indeed, it is to do a disservice to creating accounting to call it such. The plain fact is, all the figures are there. They may be wrong, but they are there, as are the assumptions behind them.
If my right honourable friend the Chancellor has over-stated the position, as is clearly possible, the critics over-state the consequences even more. If the Chancellor has been too optimistic, he will still achieve a modest growth in expenditure with a borrowing requirement well below any crisis levels on any kind of historic comparison. So, on balance, it is more likely than not that the growth targets will be met. Indeed, I should have preferred even higher growth targets; and I should have been prepared to accept a 1 per cent. higher borrowing requirement. If my noble friend takes the inflation figures for the European Union, this country is already well below 2.5 per cent., because a different method is used to calculate inflation, and quite a nice one. The figure for this country is about 1.7 per cent.
The Bank of England Act as it stands requires a change in the way the so-called independent Bank of England and the Monetary Policy Committee are able to work. I should have preferred to amend the Act itself, but it is now too late. I ask my noble friend to pass on
Lord Marlesford: My Lords, in the early months of this Government being in power, one was quite often asked whether or not it really was a "New Labour" Government. My answer used to be: I do not think, frankly, we can judge them on the first Budget, but we should judge them on the second Budget. I believe that the Government have passed the test so far on that second Budget. The Government are doing pretty well on most of the major economic policies for which they have been responsible.
I have a worry, not unlike that expressed by the noble Lord, Lord Barnett. I shall turn to it presently. First, I issue a reminder to the noble Lord, Lord McIntosh of Haringey. During debate on the Statement on the Comprehensive Spending Review I mentioned the inheritance of this Government, and the noble Lord began attacking the Conservatives for wasting North Sea oil revenues. I would remind the noble Lord, and colleagues on both sides of the Chamber, of the astonishing legacy inherited by this Government. The exciting thing was that for the first time in my life, and perhaps in the lives of all of us, socialism was off the political agenda in this country. We had actually elected a Government who believed in capitalism and sought to make it work. That is a huge and enormously encouraging change.
I return briefly to the Government's inheritance: taxation down from top rates of 75 per cent. on earned, or 98 per cent. on investment, income to a top rate of 40 per cent. on all personal income; corporation tax down; a much more sensible structure for capital taxation; and trade unions, which used to run the country, now relegated to the much more important job of trying to improve the lot of their members. Privatisation has been a huge success. Had it not been thought a huge success, there would have been attempts to reverse it, which is not the case.
I remind the noble Lord, Lord McIntosh, of the extent of the restructuring which took place in the British economy over the 18 years of Conservative government. I shall take as examples eight major industries in this country in which the number of jobs has fallen by 1½ million. The most dramatic fall is in the vehicle manufacturing industry, where, in 1978, 755,000 people were employed, and in 1996, 200,000. Yet with half a million fewer people half a million more vehicles were produced.
We all know that such restructuring is the product of two factors: international competitive forces and the opportunities provided by technology. It may all seem so easy, obvious and necessary now, but in 1978 it was not. At that time people were fighting to preserve those jobs.
The second biggest change I have identified is in retailing where there are 426,000 fewer people. Has the efficiency of the service that retailing offers to the people of this country declined over that period? The third is in textile manufacturing with 300,000 fewer people employed.
I have always thought that underground coal mining was the most awful job and that the sooner people could be liberated from it, the better. The numbers employed in coal mining have gone down by 260,000. In the steel industry there are 200,000 fewer people; on the railways, 170,000 fewer; and even in agriculture, where there have been huge increases in productivity, there are 83,000 fewer employed. In the ports and docks there are 34,000 fewer people.
We have wonderful docks such as Felixstowe. It has to be compared with the old docks of east London. I remember that the first time I went there I saw dockers loading baked beans in small cartons which they were wedging together with motor car tyres. So there has been a huge change. The noble Lord, Lord McIntosh, said that North Sea oil revenue was wasted. The revenue from North Sea oil was used to make that structural unemployment tolerable. There could not have been a better use for that revenue.
Turning to today's problems, first, one must not forget that this Government presently appear to regard inflation as the number one economic priority, in the way the previous government did. That is very important. Inflation is a systemic problem in this country in a way that it has not been in other countries. There is an expectation here, and has been for generations, that no one should suffer from inflation, and that income should always be made up to compensate for it. As we all know, that merely leads to more inflation. It is a wholly unsustainable approach. The Government are doing right in keeping inflation as their top priority.
I agree with the noble Lord, Lord Barnett, that it is basically a good thing that monetary policy has been delegated to those splendid men and women on the Monetary Policy Committee of the Bank of England. It is the right policy. Given the particular problem that Britain has in regard to inflation, it is very hard for politicians to be brave enough to do the right thing about interest rates. To remove those temptations must be a good thing. My noble friend Lord Boardman said that he could think of differences between the United States and the Fed. and the Bundesbank and our system. But the paramount requirement to control inflation through the central bank is a greater similarity than whatever differences there may be.
We are now facing a real problem. There are recessionary forces facing us, yet we must keep interest rates high. And the high pound is a serious problem for British industry. Unemployment is now arguably too low in quite a lot of areas in the country. In November 1944, when Beveridge produced his Full Employment in a Free Society, he defined full employment as 3 per cent. or less. That was to allow for the structural problem. Every month, a document is produced, available in the Library, giving unemployment by
I am however somewhat worried about the rate of increase of earnings. It is currently about 6 per cent. When earnings rise as a result of more overtime being worked, it is good because it probably means more efficient use of labour. What I am not sure about is how much of that 6 per cent. is due to unit wage costs and how much to increased use of labour through overtime. So it is a difficult figure to examine.
I wish to refer to two other points: first, EMU. I think the Government have taken the right line. I must admit that I am basically a sceptic on EMU for the simple elementary reason that the exchange rates take the strain. If we lose the ability of the exchange rate to take the strain, it means we must have either unemployment or cross-subsidisation. We know the difficulties that the Italians have in being prepared to subsidise the south and the difficulties west Germany has in being prepared to subsidise east Germany. There may be built-in problems which will emerge with the single currency. I hope they do not; I hope it is all a great success. But we are right to wait until we see how it works before we consider joining. It may be a cliche, but the decision that we will join when it suits Britain to do so is a sound position to take. I wish my own party would take a similar position. There would be no loss in doing so, in my opinion.
We must remember that we have the big advantage of having restructured our country in a way that France, for example, has not done. The French economy has still not been restructured. Every time they try to do it and people take to the streets, French governments tend to give in. That is unlike Britain where, when people take to the streets, public opinion tends to support the Government in power. It does not like people making nuisances of themselves on too big a scale on the streets. Sometimes that does not apply--with the poll tax, for example--but it did with the miners' strike. Public opinion in Britain seems to fall in behind the Government when they are trying to do something sensible. In France, I suppose it is because they do not have a parliament which will protect their citizens in the way our House of Commons is seen as protecting the individual. It is a different scene.
Finally, I will say a word about public spending. It is a little unclear exactly what rate of growth has been assumed. I remember when it was raised, the noble Lord, Lord McIntosh, said that it was a rate significantly below some of the predictions. I fear that we may be going into a more rapid decline, but not because of our situation. I suppose Japan is the biggest single worry: no one knows who runs Japan. Probably it is no one; its prime ministers certainly do not. Possibly the civil servants do, but they do not do it well. They thought they could keep the Nikkei at 30,000 when it had fallen from 40,000, by intervening, but the Japanese ignored the axiom of my noble friend Lady Thatcher, "You can't buck the market". These are real worries and will be a problem.
I wish to conclude by underlining two questions which the noble Lord, Lord Barnett, asked the Government. Given that they have decided to put in these three years' expenditure figures, which may be dangerously high--the cash limit is an important point--I would hate to go back to Plowden. The noble Lord will remember that in 1953 there was invented the brilliant Plowden system which would allocate expenditure in resource terms. That led to Parliament being asked, year after year, for more and more supplementary estimates automatically because it had been agreed. That led to the situation in 1976 when the noble Lord, Lord Barnett, helped by the great Treasury mandarin, Sir Leo Pliatzky, realised the need to introduce cash limits. Those limits are still important and I hope that the expenditure pattern will be subject to them. Perhaps most important I hope it will also be subject to the growth rate which is actually achieved.
Lord Northbrook: My Lords, the Chancellor's Budget was delivered against the background of uncertainty of the overall effect on the world of the Asian crisis and in the UK, particularly over the health of the manufacturing sector. The Treasury forecasts of GDP growth that accompanied the Budget suggested a slower rise of 2 per cent. to 2.5 per cent. in calendar year 1998 compared with 3 per cent. in 1997 and 1.75 per cent to 2.25 per cent. in 1999, followed by 2.25 per cent to 2.75 per cent. in 2000.
More recent government forecasts such as those contained in the Economic and Fiscal Strategy Report 1998 show that the forecasts for 1999 and beyond have been brought back to the low end of the range. I believe they may yet have to be revised lower still.
Meeting the inflation target of 2.5 per cent. remains the Government's key priority. However, I have to disagree with the two previous speakers, in that the Monetary Policy Committee has in my view failed to take properly into account that the economy is slowing of its own accord, especially affected by the Asian crisis, and has continued to raise interest rates unnecessarily. To support my view, I note that the respected London Business School holds a similar opinion in a report published today stating that the MPC has greatly underestimated productivity improvements
Turning to more detail in the Budget, there were sensible measures to abolish advance corporation tax, to reduce mainstream corporation tax by 1 per cent. from April 1999 and to increase capital allowances for businesses in the first year in certain cases. The national insurance increases were, however, unwelcome, especially for service industries as they raise costs for employers in a sector where employment costs can be high anyway and the break-even point of £23,000 is not particularly generous.
Turning to personal tax, there was a pleasant surprise that income tax was broadly unchanged, although on the indirect tax front the increase in fuel taxes was an unnecessary additional blow to rural communities already suffering from hardship in other areas.
While at first glance the capital gains tax proposals were welcome, once the details were revealed it made an already complex tax a nightmare. Consider, briefly, a situation where an investor has held a share at 1982 and bought further shares since. If that share has a rights issue now and the shares are then sold subsequently to 6th April 1999, the calculation of the tax becomes immensely complex. First, you have to divide the shares into different pools pre-1982 and post-1982. Then you allocate the rights issue to those different pools and index them separately up to 5th April 1998. Finally, you apply tapering relief according to a complex sliding table--different of course between a business and non-business asset--not forgetting of course the free bonus year. If you do not know whether you are a basic or higher rate taxpayer you really are in trouble. The only beneficiaries of this complexity are the accountants, for whom it will be a dream. This desire to confuse can only be due to general ignorance of the mechanisms of the tax. It is certainly not simpler than the previous regime.
With regard to inheritance tax, I wish to make a comment on the plans to give the public better access to heritage assets which are currently available to be seen by written appointment. I have to declare an interest in that I am the owner of some heritage assets. It is apparent that the new access proposals will be a burglars' charter, since they may be able to gain access to a house under false pretences. It is my belief that the current regime is perfectly adequate for heritage assets access, especially as very full details are already available on the Internet which fulfils the need for security without deterring the genuinely interested person from locating and seeing the items concerned. In addition, wherever possible I encourage all interested local societies to visit. However, having recently been a victim of a burglary where heritage assets were lost, I feel I speak with experience on the problems of unlimited access. The proposal could well encourage the
An event which has taken place since the Budget but which will affect future government financial calculations is the Government's Comprehensive Spending Review. As a recent editorial in the Economist magazine stated, while growth rates of GDP cannot be predicted, one thing can. The Comprehensive Spending Review will mean comprehensively higher spending.
While the Chancellor and the spending Ministries have been bingeing after their 15-month fast, behind them is drifting the smell of the books being lightly sauteed. As alluded to in the short debate in this House last night on the Government's Economic and Fiscal Strategy Report 1998, the Comprehensive Spending Review is full of accounting tricks which may permit departments to raise spending by more than the overall figures suggest; for example, by allowing them to net off extra spending against fees and levies they collect. For instance, as mentioned in yesterday's debate, family credit--which currently amounts to around £2 billion of the social security bill--is to be replaced with a more generous subsidy called the working families tax credit. But because the working families tax credit is a tax relief, the Government argue that it should not count as social security spending. Thus it is presented as a £2 billion cut in benefit bills.
Potentially more seriously, the Government are changing the rules about dealing with departments' outside income. At the moment, if a department makes money from, say, renting land, the income is handed over to the Treasury. That will change. In future, many departmental receipts from rents, levies, fines and dividends will be for departments to keep and spend. And because the receipts will count as negative public spending, the extra money can be spent on top of the budgets agreed with the Treasury and will not show up in spending plans. The Government are therefore taking a gamble that buoyant economic growth will compensate for this departmental largesse which could be a dangerous policy if we face a serious slowdown.
The Chancellor earmarked £21 billion more to be spent on health and £19 billion on education over the next three years. There will be more for pensioners, more for scientific research, more for the poor in the Third World and more for the BBC World Service. It was difficult to think of a deserving cause that the Chancellor missed out.
The Chancellor promised to deliver big spending increases without sharp increases in taxation or borrowing. He stated that, although public spending would rise by 2.75 per cent. in real terms between 1999-2002, he will nevertheless keep the books in balance throughout the period. Can that be a correct assumption?
While last March the Chancellor's economic assumptions could have been called sensible, the subsequent actions by the MPC and the Comprehensive Spending Review now mean that there is a serious danger that his sums will not add up. By setting out his
In summary, the Finance Bill contained several sensible measures for businesses. It is what has happened since in terms of loosening the purse strings that may well make future Budgets much more unpalatable. To pay for all the promises in the Comprehensive Spending Review must involve higher taxes if my analysis of the slowing economy is correct, or higher borrowing, returning us to the "stop-go" economy that the Chancellor is so anxious to avoid.
Lord Bruce of Donington: My Lords, if there is one thing that the country may be grateful to the present Government for, it is their vitality. I have been in politics for a long time and have seen governments come and go. I have watched the vicissitudes of Ministers, some of them high and some of them low. But this much I know about Her Majesty's present Government. They have brought a new vitality to the whole of government. It involved and is still involving a detailed investigation into most areas of our national life. In my experience, this is the first time that it has happened in this way and on such a scale.
The Government appointed--and correctly appointed, though sometimes one may query their composition--various task forces, committees and bodies with vastly different terms of reference, granting them every facility to go into practically every aspect of the affairs of the country as a whole. And that is most welcome. Of course, it sharpens the responsibilities of those--fortunately or otherwise--who have been around for quite a time. It makes it extremely difficult to do anything that will in any way inhibit the terrific vitality of the present Government.
The Government are going to need every bit of that vitality. Ministers have had only one year to accomplish detailed reviews of their departments; to be able to know and become more certain of the way in which the whole system of administration works. That presented them and will continue to present them with considerable difficulties. Therefore I applaud the production--albeit in sketchy form; albeit heavily reliant on figures, not all of which are reliable--of a three-year forecast. That should commend itself to the country as a whole because the difficulties facing the Government are enormous. They reflect perhaps the difficulties of our country.
The Government may be optimistic--sometimes they have to be--even though they may know that there are what are called "dangers impending". Nevertheless they are right to express as favourable a view as they can and to put the best possible construction upon events that are taking place not only in the British economy but in the world as a whole.
The difficulties are indeed formidable. They are set out in terms and from sources that should command considerable attention. For example, according to Dun and Bradstreet, business confidence has sunk to a five-year low in the wake of the Bank of England's unexpected decision to raise interest rates and to go on raising them. The group's survey of 1,400 finance and managing directors showed that confidence is falling in the service, retail and wholesale sectors as well as in manufacturing. Expectations of profits are at their lowest since 1993 and confidence in export prospects at its lowest since the survey began 10 years ago.
I speak of matters which your Lordships know, which you have read and which you may or may not have discounted. Oxford Economic Forecasting expects that business investment will fall from a growth of 10 per cent. in 1997 to 5.5 per cent. this year and less than 1 per cent. in 1999. Moreover, it will not have escaped your Lordships' attention that the balance of payments, the balance of trade, is once again in deficit--mainly of course involving our trade with the European Union countries. This is not at all comforting.
Today's CBI survey called upon the Bank of England to cut interest rates as manufacturing and business confidence fell to its lowest level for seven years. This is on page 8 of the Financial Times; it is not an irresponsible source. The survey also found that domestic orders in manufacturing fell in the last quarter for the first time in more than two years, while export orders dropped at the fastest rate for 12 years. The strength of sterling has worn down exports.
These are not matters of imagination. It is clear that opinion is virtually unanimous in the business circles that matter that the slow-down in the economy, which is now manifest and cannot be denied, is due to the high level of the pound, which squeezes exports, and a slowing of domestic demand from consumers following last year's rise in interest rates.
There are dangers ahead. I venture to suggest that when these vigorous and wholly admirable inquiries which are now in progress are complete there will be changes in policy. There have to be changes in policy. To hope to keep down inflation by slowing down growth is the silliest proposition that can ever be put. Yet there is an apparent acceptance of the inevitability of growth going down, not up. Surely any accountant knows perfectly well that the higher your output the greater the overhead recovery; the lower therefore the relative cost. If you start lowering production, the first thing you get is a rise in costs. This is known to all accountants--certainly it is well known to my noble friend Lord Barnett, who is an eminent accountant to my certain knowledge.
How do we deal with these problems? Certainly not by ignoring them. We will not be helped in any way until we get a more accurate presentation of the figures. At the moment--as my noble friend Lord Barnett will confirm--the figures are presented as a mixture of cashflow figures on the normal cash-in, cash-out basis, plus, but only partially so far, the introduction of resource accounting. That, as my noble friend well
I have read through the papers on resource accounting and how it will be introduced. It is clear that for a time our figures will not be as reliable as we would like. Nowhere is this better illustrated than by our reliance on completely unreliable unemployment figures. The noble Lord, Lord Marlesford, referred to 2 per cent. and 3 per cent. unemployed. He is quite right of course. In the coalition White Paper of 1944, 3 per cent. unemployment was reckoned to be full employment. It is much higher than that now.
On the basis of the claimant count, unemployment was low at 1,400,000. When it came to the ILO category, which covers people who had looked for work in the past four weeks, the figure was 1,807,000. If you take into account the Labour Force Survey as carried out by the Government, the total number who are economically inactive, which is the official definition for people who wanted a job but had not looked for one in the past 12 weeks, was 2,387,000, giving a total without a job of somewhere near 4 million.
Over the past few years--and everybody knows it--I have taken the liberty, without contradiction from many sides of the House, of putting forward the accurate figures produced by the Royal Institute of Statistics. These have not been queried. We are not dealing with a situation in which there is any leeway on the question of unemployment. We are dealing with an economy which, whatever people in the City think--and they tend to think that they are the whole economy; that if they are doing well everybody else is--is doing very badly indeed. We have to do something about it.
I repeat that the Chancellor referred to taking monetary policy "out of party politics". But what are the politics of the bankers? My experience not only in this House but also in another place has indicated to me that bankers tend to have politics of their own and that they are most certainly non-party. Party politics as such are vital in a democracy. Democracy is exactly about dissent, about putting forward proposals and having them criticised. One need only consider the way in which the debating Chambers of this House and another place are set out to realise the truth of that. Our Chambers anticipate the clash of progressive argument.
Was the Chancellor saying to himself, "I must put temptation behind me. I fear that I might be weak enough to produce a Budget which favours one party or another. Am I confident in my judgment?" If he was really saying, "I don't trust myself. I don't trust my judgment", that was grossly insulting to himself because I am sure that he is a man of considerable intelligence
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